<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended JULY 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________________ to __________________
Commission file number 000-21250
THE GYMBOREE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2615258
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
700 AIRPORT BOULEVARD, BURLINGAME, CALIFORNIA 94010-1912
(Address of principal executive offices) (Zip code)
(650) 579-0600
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock outstanding at August 28, 1999: 24,344,252
<PAGE> 2
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q for the period ended July 31, 1999, as filed by the Registrant on
September 14, 1999, and is being filed to reflect the restatement of the
Registrant's condensed consolidated financial statements (the "Restatement").
The Restatement reflects the adjustment of the special charge recorded during
the quarter ended July 31, 1999. A discussion of the restatement and a summary
of the effects of the restatement are presented in Note 9 of Notes to the
Condensed Consolidated Financial Statements.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations........................ 4
Condensed Consolidated Balance Sheets.................................. 5
Condensed Consolidated Statements of Cash Flows........................ 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 17
Item 2. Changes in Securities and Use of Proceeds.............................. 17
Item 3. Defaults Upon Senior Securities........................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.................... 17
Item 5. Other Information...................................................... 17
Item 6. Exhibits and Reports on Form 8-K....................................... 17
SIGNATURES ..................................................................................... 18
EXHIBIT INDEX ................................................................................... 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------- -------------------------
July 31, Aug 1, July 31, Aug 1,
1999 1998 1999 1998
---------- --------- ---------- ---------
(Restated) (Restated)
(Note 9) (Note 9)
<S> <C> <C> <C> <C>
Net sales $ 99,922 $ 99,789 $ 225,633 $ 202,895
Cost of goods sold, including
buying and occupancy expenses (70,230) (66,455) (146,754) (128,082)
--------- --------- --------- ---------
Gross profit 29,692 33,334 78,879 74,813
Selling, general and administrative expenses (45,269) (35,048) (87,652) (70,835)
Play and music income, net 569 369 1,159 761
--------- --------- --------- ---------
Operating income (loss) (15,008) (1,345) (7,614) 4,739
Foreign exchange gains (loss), net (42) (126) 47 145
Net interest income 97 147 209 376
--------- --------- --------- ---------
Income (loss) before income taxes (14,953) (1,324) (7,358) 5,260
Income tax (expense) benefit 5,533 493 2,723 (1,943)
--------- --------- --------- ---------
Net income (loss) $ (9,420) $ (831) $ (4,635) $ 3,317
========= ========= ========= =========
Income (loss) per share:
Basic $ (0.39) $ (0.03) $ (0.19) $ 0.14
Diluted (0.39) (0.03) (0.19) 0.14
Weighted average shares outstanding:
Basic 24,294 24,163 24,276 24,144
Diluted 24,294 24,163 24,276 24,221
Number of stores at end of period 588 495 588 495
</TABLE>
See notes to condensed consolidated financial statements.
3
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS July 31, January 30, August 1,
1999 1999 1998
---------- ----------- ---------
(Restated)
(Note 9)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 41,846 $ 27,810 $ 19,247
Accounts receivable 5,400 7,811 8,583
Merchandise inventories 55,013 74,396 91,355
Prepaid expenses and other 8,759 8,068 5,966
--------- --------- ---------
Total current assets 111,018 118,085 125,151
--------- --------- ---------
PROPERTY AND EQUIPMENT
Land and buildings 9,943 9,943 9,949
Leasehold improvements 87,436 79,832 70,218
Furniture, fixtures and equipment 97,426 91,551 80,014
--------- --------- ---------
194,805 181,326 160,181
Less accumulated depreciation and amortization (57,276) (46,886) (37,702)
--------- --------- ---------
137,529 134,440 122,479
OTHER ASSETS 4,492 4,180 3,778
--------- --------- ---------
TOTAL ASSETS $ 253,039 $ 256,705 $ 251,408
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt, short-term borrowings $ 561 $ 540 $ 10,000
Accounts payable 23,029 21,842 34,712
Accrued liabilities 18,385 17,424 15,967
Income taxes payable 3,703 1,965 2,466
--------- --------- ---------
Total current liabilities 45,678 41,771 63,145
--------- --------- ---------
LONG TERM LIABILITIES
Long term debt, net of current portion 11,130 11,460 --
Deferred rent and other liabilities 31,920 35,102 24,663
--------- --------- ---------
TOTAL LIABILITIES 88,728 88,333 87,808
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, including excess paid-in capital ($.001 par value:
100,000,000 shares authorized 24,337,452, 24,240,763 and
24,172,135 shares outstanding at July 31, 1999,
January 30,1999 and August 1, 1998, respectively) 27,509 26,855 25,058
Retained earnings 136,802 141,517 138,542
--------- --------- ---------
Total stockholders' equity 164,311 168,372 163,600
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 253,039 $ 256,705 $ 251,408
========= ========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
---------------------------------
JULY 31, AUG 1,
1999 1998
---------- --------
(RESTATED)
(NOTE 9)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,635) $ 3,317
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 11,707 8,755
Impairment reserve and other write offs 3,900 --
Provision for deferred income tax (3,501) 204
Tax benefit from exercise of stock options -- 240
Loss on disposal of property and equipment 644 985
Change in assets and liabilities:
Accounts receivable 2,411 (3,400)
Merchandise inventories 19,303 (15,748)
Prepaid expenses and other assets (1,090) (1,846)
Accounts payable 1,188 8,665
Income tax payable 1,738 (5,573)
Other liabilities 389 3,105
Accrued liabilities 977 (141)
-------- --------
Net cash provided by (used in) operating activities 33,031 (1,437)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,340) (27,871)
Proceeds from sale of assets -- 24
Proceeds from sale of investments -- 18,614
-------- --------
Net cash used in investing activities (19,340) (9,233)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 654 2,047
Proceeds from (payments on) debt borrowings (309) 10,000
-------- --------
Net cash provided by financing activities 345 12,047
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,036 1,377
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,810 17,870
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,846 $ 19,247
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 80 $ 7,850
Cash paid during the year for interest expense $ 743 $ 20
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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THE GYMBOREE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of The
Gymboree Corporation and our wholly-owned subsidiaries as of and for the
periods ended July 31, 1999 and August 1, 1998 have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules
and regulations, although we believe that the disclosures are adequate
to make the information presented not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K
for the year ended January 30, 1999.
The accompanying interim condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented and necessary to present fairly the results of operations, the
financial position and cash flows for the periods presented. All such
adjustments are of a normal and recurring nature except as discussed in
Notes 3 and 8. Certain prior year amounts have been reclassified to
conform with the current year presentation.
2. MERCHANDISE INVENTORIES
Merchandise inventories are recorded under the retail method of
accounting and are stated at the lower of cost or market.
3. IMPAIRMENT OF LONG-LIVED ASSETS
During the second quarter of 1999, management identified 12
underperforming stores and established an impairment reserve equal to
the carrying value of the leasehold improvements and fixtures used in
the stores. Impairment of the leasehold improvements and fixtures was
based on the lack of both current and expected future positive cash
flows of the stores. Additionally, during the second quarter of 1999, we
wrote off software applications that were not Year 2000 compliant and
did not meet our current needs. The total charge related to these items
was $3.9 million and is included in selling, general and administrative
expenses within the Statements of Operations.
4. INCOME TAXES
Our effective tax rate in the second quarters of fiscal 1999 and 1998
was 37%.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which includes net income (loss) and
foreign currency translation adjustments, is as follows:
<TABLE>
<CAPTION>
(in 000's) 13 WEEKS ENDED 26 WEEKS ENDED
------------------------------ -------------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $(9,420) $ (831) $(4,635) $ 3,317
Other comprehensive income (loss) 346 327 (80) 287
------- ------- ------- -------
Total comprehensive income (loss) $(9,074) $ (504) $(4,715) $ 3,604
======= ======= ======= =======
</TABLE>
6
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6. FOREIGN CURRENCIES
As of July 31, 1999, we had forward foreign contracts of $13.2 million
and $10.7 million to hedge Canadian dollars and British pound sterling,
respectively. The amounts represent the U.S. dollar equivalent to buy or
sell foreign currencies.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 requires
companies to record derivatives on the balance sheet as assets or
liabilities at fair value and is effective for financial statements for
fiscal years beginning after June 15, 2000. Management does not believe
that the adoption of this statement will have a significant effect on
the consolidated financial statements of Gymboree.
8. SPECIAL CHARGES
During the second quarter of 1999, Gymboree incurred special charges of
$6.9 million, $2.0 million of which is included in cost of goods sold.
These charges, which primarily resulted from the implementation of a
brand improvement strategy, include the accelerated depreciation of
store interior assets and proprietary signage assets bearing the old
trademark, expense for modifications of store interiors and removal of
certain store assets, the impairment reserve for store assets and
software write off discussed in Note 3, and the disposal of inventory
which does not meet Gymboree's new fashion direction.
7
<PAGE> 9
9. RESTATEMENT
Subsequent to the issuance of Gymboree's condensed consolidated
financial statements for the quarter ended July 31, 1999, Gymboree's
management determined that certain assets, which had previously been
written off, should have been depreciated on an accelerated schedule,
consistent with the expected retirement of the assets. In addition, the
costs to remove the assets will be expensed as each asset is removed
from use. Gymboree had previously accrued such costs. As a result,
Gymboree's financial statements as of and for the thirteen and
twenty-six weeks ended July 31, 1999 have been restated from amounts
previously reported. A summary of the effects of the restatement is as
follows:
<TABLE>
<CAPTION>
PREVIOUSLY
REPORTED RESTATED
--------- ---------
(In thousands)
<S> <C> <C>
As of July 31, 1999:
Property and equipment, net $ 134,766 $ 137,529
Accrued liabilities 22,185 18,385
Income taxes payable 1,275 3,703
Retained earnings 132,667 136,802
For The 13 Weeks Ended July 31, 1999:
SG&A expenses $ (51,832) $ (45,269)
Operating loss (21,571) (15,008)
Loss before income taxes (21,516) (14,953)
Income tax benefit 7,961 5,533
Net loss (13,555) (9,420)
Loss Per Share:
Basic $ (0.56) $ (0.39)
Diluted (0.56) (0.39)
For The 26 Weeks Ended July 31, 1999:
SG&A expenses $ (94,215) $ (87,652)
Operating loss (14,177) (7,614)
Loss before income taxes (13,921) (7,358)
Income tax benefit 5,151 2,723
Net loss (8,770) (4,635)
Loss Per Share:
Basic $ (0.36) $ (0.19)
Diluted (0.36) (0.19)
</TABLE>
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, (i) selected
statement of operations data expressed as a percentage of net sales, (ii) the
percentage change from the same period of the prior year in such selected
statement of operations data and (iii) the number of stores open at the end of
each such period:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-------------------------------------------------- PERCENTAGE CHANGE
THIRTEEN TWENTY-SIX IN DOLLAR AMOUNTS
WEEKS ENDED WEEKS ENDED FROM 1998 TO 1999
---------------------- ----------------------- ------------------------
JULY 31, AUG 1, JULY 31, AUG 1,
1999(1) 1998 1999(1) 1998 13 WEEKS(1) 26 WEEKS(1)
---------- ------- ---------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 0% 11%
Cost of goods sold, including
buying and occupancy expenses (70.3) (66.6) (65.0) (63.1) 6 15
------- ------- ------- -------
Gross profit 29.7 33.4 35.0 36.9 (11) 5
Selling, general and administrative
expenses (45.3) (35.1) (38.8) (34.9) 29 24
Play and music income, net 0.6 0.4 0.5 0.3 54 52
------- ------- ------- -------
Operating income (loss) (15.0) (1.3) (3.3) 2.3 (1,016) (261)
Foreign exchange gains (loss), net (0.0) (0.1) 0.0 0.1 67 (68)
Net interest income 0.1 0.1 0.1 0.2 (34) (44)
------- ------- ------- -------
Income (loss) before income taxes (14.9) (1.3) (3.2) 2.6 (1,029) (240)
Income tax (expense) benefit 5.5 0.5 1.2 (1.0) 1,022 240
------- ------- ------- -------
Net income (loss) (9.4)% (0.8)% (2.0)% 1.6% (1,034)% (240)%
======= ======= ======= =======
Number of stores at end of period 588 495 588 495
</TABLE>
(1) Restated, see Note 9 of Notes to Condensed Consolidated Financial
Statements.
RESTATEMENT
Subsequent to the issuance of Gymboree's condensed consolidated
financial statements for the quarter ended July 31, 1999, Gymboree's management
determined that certain assets, which had previously been written off, should
have been depreciated on an accelerated schedule, consistent with the expected
retirement of the assets. In addition, the costs to remove the assets will be
expensed as each asset is removed from use. Gymboree had previously accrued such
costs. As a result, Gymboree's financial statements as of and for the thirteen
and twenty-six weeks ended July 31, 1999 have been restated from amounts
previously reported. The effects of the restatement are presented in Note 9 of
Notes to the Condensed Consolidated Financial Statements and have been reflected
herein.
THIRTEEN WEEKS ENDED JULY 31, 1999 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 1,
1998
NET SALES
Net sales in the second quarter of 1999 were $99.9 million as compared
to $99.8 million for the same period last year. Sales for the 25 stores opened
in 1999, in addition to the 14 stores that have relocated or expanded in 1999,
provided incremental sales of $3.9 million. Stores opened, relocated or expanded
in 1998, but not qualifying as comparable stores, increased $10.5 million from
the prior year. Comparable store sales decreased 16% or $14.3 million in the
second quarter. The decline in comparable store sales was primarily due to a
large clearance sale held in June 1998 to clear excess inventory.
GROSS PROFIT
Gross profit for the thirteen weeks ended July 31, 1999 decreased 11% to
$29.7 million from $33.3 million in the same period last year. As a percentage
of net sales, the second quarter gross profit was 29.7% compared to 33.4% in the
same period last year. Included in cost of goods sold for the second quarter of
1999 was $2.0 million relating to the disposal of inventory which does not meet
Gymboree's new fashion direction. Additionally, the decrease in gross profit as
a percentage of net sales was due to
9
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the increase in the number of European stores which have a lower gross profit
than the U.S. due to higher occupancy expense, and the buying expense associated
with our recently launched Zutopia stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") principally
consists of non-occupancy store expenses, corporate overhead and distribution
expenses. For the second quarter of 1999, SG&A expenses increased to 40.4% of
net sales (excluding the special charges), compared to 35.1% of net sales in the
same period last year. Special charges totaled $4.9 million. These charges,
which primarily resulted from the implementation of a brand improvement
strategy, include the accelerated depreciation of store interior assets and
proprietary signage assets bearing the old trademark, expense for modifications
of store interiors and removal of certain store assets, and the impairment
reserve for store assets and software write off discussed in Note 3. Excluding
the special charges, the increase in total SG&A expenses, as a percentage of net
sales, was primarily attributable to the loss of leverage caused by lower
average store sales related to the comparable sales decline as well as increased
selling expenses associated with the opening of the Zutopia stores.
PLAY AND MUSIC INCOME
Play and music income increased 54% to $569,000 during the second
quarter of 1999 from $369,000 for the same period last year. The increase is
largely due to new franchise sales, enrollment growth in both franchised and
corporate centers and increased play product sales.
FOREIGN EXCHANGE LOSSES
Net foreign exchange losses totaled $42,000 for the second quarter of
1999 compared to a loss of $126,000 in the second quarter of 1998. These losses
resulted from currency fluctuations in intercompany transactions between our
U.S. operations and foreign subsidiaries.
NET INTEREST INCOME
Interest income increased to $499,000 for the second quarter of 1999
from $167,000 for the second quarter of 1998. Interest expense of $402,000 was
incurred during the second quarter of 1999 while interest expense of $20,000 was
incurred for the same period last year. The interest expense relates to long
term debt incurred in 1998.
INCOME TAX
Our effective tax rate for the second quarters of fiscal 1999 and 1998
was 37%.
10
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TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
1, 1998
NET SALES
Net sales for the twenty-six weeks ended July 31, 1999 increased 11% to
$225.6 million compared to $202.9 million in the same period last year. Sales
for the 25 stores opened in 1999, in addition to the 14 stores that have
relocated or expanded in 1999, provided incremental sales of $6.0 million.
Stores opened, relocated or expanded in 1998, but not qualifying as comparable
stores, increased $29.5 million from the prior year. Comparable store sales
decreased 7% or $12.8 million in the twenty-six weeks ended July 31, 1999. The
decline in comparable store sales was primarily due to a large clearance sale
held in June 1998 to clear excess inventory.
GROSS PROFIT
Gross profit for the twenty-six weeks ended July 31, 1999 increased 5%
to $78.9 million from $74.8 million in the same period last year. As a
percentage of net sales, gross profit was 35.0% for the first six months of 1999
compared to 36.9% in the same period last year. Included in cost of goods sold
for the twenty-six week period ended July 31, 1999 was $2.0 million relating to
the disposal of inventory which does not meet Gymboree's new fashion direction.
Additionally, the decrease in gross profit as a percentage of net sales was due
to the increase in the number of European stores which have a lower gross profit
than the U.S. due to higher occupancy expense, and the buying expense associated
with our recently launched Zutopia stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") principally
consists of non-occupancy store expenses, corporate overhead and distribution
expenses. For the twenty-six weeks ended July 31, 1999, SG&A expenses increased
to 36.7% of net sales (excluding the special charges), compared to 34.9% of net
sales in the same period last year. Special charges totaled $4.9 million. These
charges, which primarily resulted from the implementation of a brand improvement
strategy, include the accelerated depreciation of store interior assets and
proprietary signage assets bearing the old trademark, expense for modifications
of store interiors and removal of certain store assets, and the impairment
reserve for store assets and software write off discussed in Note 3. Excluding
the special charges, the increase in total SG&A expenses, as a percentage of net
sales, was primarily attributable to the loss of leverage caused by lower
average store sales related to the comparable sales decline as well as increased
selling expenses associated with the opening of the Zutopia stores and the new
initiatives.
PLAY AND MUSIC INCOME
Play and music income increased 52% to $1,159,000 for the first six
months of 1999 from $761,000 for the same period last year. The increase is
largely due to new franchise sales, enrollment growth in both franchised and
corporate centers and increased play product sales.
FOREIGN EXCHANGE GAINS
Net foreign exchange gains totaled $47,000 for the first six months of
1999 compared to $145,000 for the same period last year. These gains resulted
from currency fluctuations in intercompany transactions between our U.S.
operations and foreign subsidiaries.
NET INTEREST INCOME
Interest income increased to $952,000 for the twenty-six weeks ended
July 31, 1999 from $396,000 for the same period last year. Interest expense of
$743,000 was incurred for the first twenty-six weeks of 1999, compared to
$20,000 for the same period last year. The interest expense relates to long term
debt incurred in 1998.
INCOME TAX
Our effective tax rate for the first six months of 1999 and 1998 was
37%.
11
<PAGE> 13
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $33.0 million compared to a
cash outflow of $1.4 million in the prior year. The increase in cash provided by
operating activities was primarily due to a decrease in inventory levels.
Cash used in investing activities increased to $19.3 million in 1999 as
compared to $9.2 million in 1998. This increase resulted from the liquidation of
securities in 1998, offset by a decrease in capital expenditures in 1999. As a
result of the brand improvement strategy previously discussed, Gymboree expects
to incur incremental capital expenditures of approximately $10.3 million over
the next 9 to 12 months, which will be funded through internally generated
funds. Including the brand improvement strategy, we estimate that capital
expenditures for fiscal 1999 will be between $40.0 and $45.0 million, and will
primarily be used to open 40 to 45 new domestic and international stores and to
expand approximately 20 to 25 existing stores.
Cash and cash equivalents were $41.8 million at July 31, 1999, an
increase of $14.0 million from January 30, 1999. Working capital as of July 31,
1999 was $65.3 million compared to $76.3 million at January 30, 1999.
At the end of the second quarter of 1999, we had a line of credit with
Bank of America that allowed up to $60 million in unsecured letters of credit,
of which $8 million can be used for standby letters of credit. As of July 31,
1999, approximately $9.8 million was available pursuant to such lines. The
facility also provided a line of up to $50 million for foreign exchange
contracts. As of July 30, 1999, Gymboree and its primary bank had agreed to the
terms for a new unsecured credit facility. The new agreement dated August 25,
1999 extends the facility to May 31, 2000. The revised terms also provide for an
overall credit line of $60 million at inception then reducing to $50 million
from January 1, 2000 to the facility's expiration that may be used for issuance
of commercial letters of credit, cash advances up to $15 million and standby
letters of credit up to $8 million. Included within these terms is a
continuation of the foreign exchange facility. The interest rate will be based
on the bank's Reference Rate or LIBOR (London Interbank Offered Rate) plus a
pre-determined spread. The credit facility contains quarterly and annual
financial covenants, which requires us to maintain minimum tangible net worth,
meet certain ratios and restricts capital expenditures.
We anticipate that cash generated from operations, together with our
existing cash resources and funds available from our current letters of credit
and line of credit facilities, will be sufficient to satisfy our cash needs
through at least fiscal 1999.
12
<PAGE> 14
OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
This Form 10-Q contains certain forward-looking statements reflecting
our current expectations, including statements regarding anticipated store
openings, and future comparable store net sales, inventory, expense, earnings
and liquidity levels. There can be no assurance that actual results will not
vary materially from results projected in such forward-looking statements as a
result of a number of factors, including competitive market conditions, levels
of discretionary consumer spending, general economic conditions, the degree of
promotional pricing activity by Gymboree, inventory levels, and our ability to
successfully identify and respond to emerging children's fashion trends, to
effectively monitor and control costs, and to effectively manage anticipated
international and domestic growth. Other factors that may cause actual results
to differ materially include those set forth in the reports that we file from
time to time with the Securities and Exchange Commission.
Other factors that may affect future performance include the following:
COMPETITION
The children's apparel segment of the specialty retail business is
highly competitive. We compete on a national level with GapKids (a division of
The Gap, Inc.) and certain leading department stores as well as certain discount
retail chains such as Kids `R' Us (a division of Toys `R' Us, Inc.). We also
compete with a wide variety of local and regional specialty stores and with
certain other retail chains. Many of these competitors are larger and have
substantially greater financial, marketing and other resources than we do.
Increased competition may reduce sales and gross margins, increase operating
expenses and decrease profit margins. We may not be able to compete successfully
in the future.
INVENTORY LEVELS
The inventory level at the end of the second quarter of 1999 was down
from the prior year. We believe that with tight inventory management we will be
able to mitigate the risk that inventory overages will result in markdown
activity exceeding our plan. However, a substantial decline in our sales or in
business conditions in general could negatively impact our ability to move
merchandise through our stores and result in excess inventory on hand.
FOREIGN OPERATIONS
During the second quarter of 1999, we continued to expand our operations
by opening two additional stores in Canada. This brings the total number of
stores in Canada and Europe to 18 and 28, respectively. As a result, our
business is subject to the risks generally associated with doing business
abroad, such as foreign governmental regulations, foreign consumer preferences,
currency fluctuations, political unrest, disruptions or delays in shipments and
changes in economic conditions in countries in which we operate our stores.
These factors, among others, could influence our ability to sell our products in
these international markets. If any such factors were to render the conduct of
business in a particular country undesirable or impractical, there could be a
material and adverse effect on our results of operations and financial
condition.
ZUTOPIA
During 1999, Gymboree launched a new retail concept, Zutopia, which
introduced certain new products, and is targeted for children ages 6 to 12
years. Zutopia represents a significant shift in concept, design and target
market demographics from our traditional products. These products may have
shorter life cycles, thereby requiring more frequent product introductions than
Gymboree's traditional product line. Further, these products and the
introduction of more products could dilute Gymboree's image as a leading
supplier of children's apparel in the newborn to 7 years age range and lead to a
reduced demand for our existing products.
13
<PAGE> 15
E-COMMERCE
Gymboree sells products over the Internet, at www.gymboree.com. We
devote management and systems resources to support and expand this business. Our
success depends on our ability to offer desirable products and to fulfill web
orders efficiently. Failure on our part to conduct this business efficiently
could result in missed sales or consumer complaints.
YEAR 2000
Most companies could face a potentially serious information systems
problem because many software applications and operational programs written in
the past were designed to handle date formats with two-digit years and thus may
not properly recognize calendar dates beginning in the Year 2000. This problem
could result in computers either outputting incorrect data or shutting down
altogether when attempting to process a date such as "01/01/00".
Our Year 2000 initiative extends throughout our entire organization and
includes all operating functions. Managing this effort on a regular basis is our
Year 2000 Project Office, which reports to a member of the Executive Committee.
It is through this office that various roles and accountabilities regarding Year
2000 readiness have been established. Each of Gymboree's business units has been
directed to work on Year 2000 projects and assemble teams to identify and
implement plans to help mitigate potential problems.
STATE OF READINESS
All of Gymboree's mission critical information technology and
non-information technology systems have been inventoried, ranked in terms of
risk, and analyzed as to their Year 2000 readiness. We have completed an
Enterprise Master Plan, Enterprise Test Plan, Configuration Management Plan, and
Quality Assurance Plan. A Test Data Center has been constructed and is being
used to remediate and test all mission critical systems. Our business processes
are organized into eighteen groups of applications. The Plans call for
completing the remediation and testing phase for all groups by the end of the
third quarter 1999. We currently expect material Year 2000 problems, if any, to
be corrected prior to December 1999.
COSTS
Based on best estimates, the total cost of the Year 2000 readiness
initiative which covers fiscal years 1998 and 1999 is approximately $2.0 - $3.0
million, of which $2.1 million has been expensed to date. $0.5 million was
expensed for the second quarter ended July 31, 1999. There can be no assurance
that these estimates will not be exceeded. All costs will be paid from
Gymboree's operating funds.
RISKS OF YEAR 2000 ISSUES
The area of greatest risk to our business operations is ensuring the
readiness of our critical trading partners. We have surveyed all of our critical
trading partners to ascertain their Year 2000 readiness. To date, a majority of
our trading partners have responded with a formal plan to be Year 2000
compliant. Failure of Year 2000 compliance by our trading partners could result
in a delay in the receipt of inventory, potential lost sales, and an inability
to operate stores. There can be no assurance that the Year 2000 problem will not
have a material adverse effect on our business, operating results or financial
condition.
CONTINGENCY PLANS
Contingency plans have been developed for each mission critical
application. The contingency plan for trading partners that were not Year 2000
compliant by January 1999 was to obtain alternate suppliers that are Year 2000
compliant. This plan was communicated to our trading partners during the
surveying process. As of the end of the second quarter of fiscal 1999, we have
continued implementation of our contingency plan for trading partners that are
not Year 2000 compliant. However, there can be no assurance that such
contingency plans will remediate all Year 2000 issues which we might ultimately
encounter.
14
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gymboree enters into forward foreign exchange contracts to hedge certain
inter-company loans denominated in foreign currencies (principally British
pounds sterling and Canadian dollars). The term of the forward exchange
contracts is generally less than 90 days. The purpose of our foreign currency
hedging activities is to protect us from the risk that the eventual dollar net
cash inflow resulting from the repayment of certain inter-company loans from our
foreign subsidiaries will be adversely affected by changes in exchange rates.
The table below summarizes by major currency the contractual amounts of
our forward exchange contracts in U.S. dollars. Foreign currency amounts are
translated at rates current at the reported date. The amounts represent the U.S.
dollar equivalent of commitments to buy or sell foreign currencies.
<TABLE>
<CAPTION>
JULY 31, 1999
-------------
(In millions)
<S> <C>
British pounds sterling $ 10.7
Canadian dollars 13.2
-------
Total $ 23.9
=======
</TABLE>
In the event Gymboree has borrowings under the line of credit, a higher
interest rate would have an adverse impact on Gymboree because the interest rate
is variable.
15
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Gymboree has agreed to settle two lawsuits brought against it
relating to sourcing of products from Saipan (Commonwealth of
Northern Mariana Islands). The settlement is subject to court
approval which has not yet been granted. Under the terms of the
settlement, Gymboree will make payments for several purposes,
including to class members, and to fund an independent monitoring
program in Saipan. The new monitoring program includes the
implementation of an independent monitoring organization to ensure
that factories comply with all applicable laws. Gymboree's payment
to establish the monitoring fund is partially covered by insurance,
and is not expected to have an adverse material effect on the
company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
On September 2, 1999, the Board of Directors updated and amended
certain provisions of The Gymboree Corporation's bylaws. A copy of
the Amended and Restated Bylaws is attached hereto as Exhibit 3.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.2 Amended and Restated Bylaws of The Gymboree
Corporation(1)
10.32 Credit Agreement(1)
11 Computation of Net Income (Loss) per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 31, 1999.
- ------------
(1) Incorporated by reference to the Registrant's July 31, 1999 Quarterly
Report on Form 10-Q ("1999 Q2 10-Q") filed with the Commission on September
14, 1999.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GYMBOREE CORPORATION
(Registrant)
April 24, 2000
- -------------- By: /s/ Lawrence H. Meyer
Date -----------------------------------------
Lawrence H. Meyer
Chief Financial Officer
(Principal financial and accounting officer
of the registrant)
17
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.2 Amended and Restated Bylaws of The Gymboree Corporation(1)
10.32 Credit Agreement(1)
11 Computation of Net Income (Loss) per Share
27 Financial Data Schedule
</TABLE>
- ------------
(1) Incorporated by reference to the Registrant's July 31, 1999 Quarterly
Report on Form 10-Q ("1999 Q2 10-Q") filed with the Commission on September
14, 1999.
18
<PAGE> 1
EXHIBIT 11
THE GYMBOREE CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
----------------------------- ---------------------------
JULY 31, AUG 1, JULY 31, AUG 1,
1999 1998 1999 1998
---------- --------- ---------- -------
(RESTATED) (RESTATED)
(NOTE 9) (NOTE 9)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ (9,420) $ (831) $ (4,635) $ 3,317
========== ========= ========== =======
Weighted average number of shares
outstanding during the period:
Common Stock 24,294 24,163 24,276 24,144
Add incremental shares from assumed
exercise of stock options (1) -- -- -- 77
---------- --------- ---------- -------
Weighted average common and common
equivalent shares outstanding 24,294 24,163 24,276 24,221
========== ========= ========== =======
BASIC NET INCOME (LOSS) PER SHARE $ (0.39) $ (0.03) $ (0.19) $ 0.14
========== ========= ========== =======
DILUTED NET INCOME (LOSS) PER SHARE $ (0.39) $ (0.03) $ (0.19) $ 0.14
========== ========= ========== =======
</TABLE>
(1) Options to purchase weighted average shares totaling 209, 33, and 185
for the 13 weeks ended July 31, 1999 and August 1, 1998 and the 26 weeks
ended July 31, 1999, respectively, were not included in the computation
of diluted income (loss) per share because to do so would have been
antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> MAY-02-1999 JAN-31-1999
<PERIOD-END> JUL-31-1999 JUL-31-1999
<CASH> 0 41,846
<SECURITIES> 0 0
<RECEIVABLES> 0 5,400
<ALLOWANCES> 0 0
<INVENTORY> 0 55,013
<CURRENT-ASSETS> 0 111,018
<PP&E> 0 194,805
<DEPRECIATION> 0 (57,276)
<TOTAL-ASSETS> 0 253,039
<CURRENT-LIABILITIES> 0 45,678
<BONDS> 0 0
0 0
0 0
<COMMON> 0 27,509
<OTHER-SE> 0 136,802
<TOTAL-LIABILITY-AND-EQUITY> 0 253,039
<SALES> 99,922 225,633
<TOTAL-REVENUES> 99,922 225,633
<CGS> 70,230 146,754
<TOTAL-COSTS> 115,499 234,406
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 402 743
<INCOME-PRETAX> (14,953) (7,358)
<INCOME-TAX> (5,533) (2,723)
<INCOME-CONTINUING> (9,420) (4,635)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,420) (4,635)
<EPS-BASIC> (0.39) (0.19)
<EPS-DILUTED> (0.39) (0.19)
</TABLE>
