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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(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 29, 2000
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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 September 1, 2000:
27,655,820
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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............. 1
Condensed Consolidated Balance Sheets....................... 2
Condensed Consolidated Statements of Cash Flows............. 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 11
Item 2. Changes in Securities and Use of Proceeds................... 11
Item 3. Defaults Upon Senior Securities............................. 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 5. Other Information........................................... 11
Item 6. Exhibits and Reports on Form 8-K............................ 11
Signatures........................................................... 12
Exhibit Index........................................................
</TABLE>
i
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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 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $ 82,766 $ 99,922 $ 183,398 $ 225,633
Cost of goods sold, including buying and
occupancy expenses.......................... (69,133) (70,230) (149,238) (146,754)
-------- -------- --------- ---------
Gross profit............................. 13,633 29,692 34,160 78,879
Selling, general and administrative
expenses.................................... (41,505) (45,269) (85,233) (87,652)
Play and music income, net.................... 47 569 795 1,159
-------- -------- --------- ---------
Operating loss.............................. (27,825) (15,008) (50,278) (7,614)
Foreign exchange gains (losses), net.......... 100 (42) 124 47
Net interest income (expense)................. (93) 97 (43) 209
-------- -------- --------- ---------
Loss before income taxes.................... (27,818) (14,953) (50,197) (7,358)
Income tax benefit............................ 10,710 5,533 19,326 2,723
-------- -------- --------- ---------
Net loss............................ $(17,108) $ (9,420) $ (30,871) $ (4,635)
======== ======== ========= =========
Loss per share:
Basic....................................... $ (0.64) $ (0.39) $ (1.20) $ (0.19)
Diluted..................................... (0.64) (0.39) (1.20) (0.19)
Weighted average shares outstanding:
Basic....................................... 26,842 24,294 25,685 24,276
Diluted..................................... 26,842 24,294 25,685 24,276
Number of stores at end of period............. 600 588 600 588
</TABLE>
See notes to condensed consolidated financial statements.
1
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JULY 29, JANUARY 29, JULY 31,
2000 2000 1999
-------- ----------- --------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents................................ $ 2,609 $ 40,274 $ 41,846
Accounts receivable...................................... 3,418 4,920 5,400
Merchandise inventories.................................. 56,272 47,103 55,013
Prepaid expenses and deferred taxes...................... 5,413 7,382 8,759
-------- -------- --------
Total current assets............................. 67,712 99,679 111,018
-------- -------- --------
Property and Equipment
Land and buildings....................................... 9,943 9,943 9,943
Leasehold improvements................................... 89,298 88,019 87,436
Furniture, fixtures and equipment........................ 109,007 108,606 97,426
-------- -------- --------
208,248 206,568 194,805
Less accumulated depreciation and amortization........... (77,986) (69,123) (57,276)
-------- -------- --------
130,262 137,445 137,529
Lease Rights, Deferred Taxes and Other Assets.............. 21,719 3,794 4,492
-------- -------- --------
Total Assets..................................... $219,693 $240,918 $253,039
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt........................ $ 606 $ 583 $ 561
Borrowings on revolving line of credit................... 5,500 -- --
Accounts payable......................................... 16,066 18,596 23,029
Accrued liabilities...................................... 18,919 23,275 22,088
-------- -------- --------
Total current liabilities........................ 41,091 42,454 45,678
-------- -------- --------
Long Term Liabilities
Long term debt, net of current portion................... 10,568 10,877 11,130
Deferred rent and other liabilities...................... 30,021 29,125 31,920
-------- -------- --------
Total Liabilities................................ 81,680 82,456 88,728
-------- -------- --------
Stockholders' Equity
Common stock, including excess paid-in capital ($.001 par
value:
100,000,000 shares authorized 27,651,555, 24,401,604
and 24,337,452 shares outstanding at July 29, 2000,
January 29, 2000 and July 31, 1999, respectively)..... 37,438 27,807 27,509
Retained earnings........................................ 99,686 130,557 136,522
Accumulated other comprehensive income --
Foreign currency translation adjustments.............. 889 98 280
-------- -------- --------
Total stockholders' equity....................... 138,013 158,462 164,311
-------- -------- --------
Total Liabilities and Stockholders' Equity....... $219,693 $240,918 $253,039
======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
--------------------
JULY 29, JULY 31,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(30,871) $ (4,635)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 11,836 11,707
Impairment reserve and other write offs................... -- 3,900
Deferred income taxes..................................... (14,892) (3,501)
Loss on disposal of property and equipment................ 386 644
Change in assets and liabilities:
Accounts receivable.................................... 1,500 2,411
Merchandise inventories................................ (8,378) 19,303
Prepaid expenses and other assets...................... (1,062) (1,090)
Accounts payable....................................... (2,529) 1,188
Other liabilities...................................... 896 389
Accrued liabilities.................................... (4,357) 2,715
-------- --------
Net cash provided by (used in) operating activities....... (47,471) 33,031
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (5,039) (19,340)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock............................. 9,631 654
Proceeds from borrowings.................................... 5,500 0
Payments on long term debt.................................. (286) (309)
-------- --------
Net cash provided by financing activities.............. 14,845 345
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (37,665) 14,036
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 40,274 27,810
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,609 $ 41,846
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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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 ("Gymboree") as of and
for the periods ended July 29, 2000 and July 31, 1999 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. 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 29, 2000.
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. Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. INCOME TAX
Our effective tax rate in the second quarters of fiscal 2000 and 1999 was
38.5% and 37.0%, respectively. We have recorded a $19.3 million tax benefit of
our operating losses in anticipation of future profits. We will continue to
evaluate the necessity of a valuation allowance in light of projected operating
results.
3. EARNINGS (LOSS) PER SHARE
Basic EPS is calculated by dividing net income (loss) for the period by the
weighted average common shares outstanding for that period. Diluted EPS takes
into account the effect of dilutive instruments, such as stock options, and uses
the average share price for the period in determining the number of incremental
shares that are to be added to the weighted average number of shares
outstanding. Diluted loss per share for all periods presented is equal to basic
loss per share because the potential common shares outstanding during the
periods are antidilutive.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which includes net income (loss) and foreign
currency translation adjustments, is as follows:
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------ ------------------------------
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss......................... $(17,108) $(9,420) $(30,871) $(4,635)
Other comprehensive income
(loss)......................... 548 346 791 (80)
-------- ------- -------- -------
Total comprehensive
loss................. $(16,560) $(9,074) $(30,080) $(4,715)
======== ======= ======== =======
</TABLE>
5. FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated to U.S.
dollars at the exchange rates effective on the balance sheet date. Translation
adjustments resulting from this process are recorded as other comprehensive
income. Revenues, costs of sales, expenses and other income are translated at
average rates of exchange prevailing during the year.
During the second quarter of fiscal 2000, Gymboree continued to enter into
forward foreign exchange contracts to reduce exposure to foreign currency
exchange risk related to certain inter-company balances and inventory purchases.
The net gains and losses between the forward foreign exchange contracts and
inter-
4
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THE GYMBOREE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
company balances are included in net income. Net gains and losses on inventory
purchases are accumulated in other comprehensive income and re-classified to
cost of goods sold in the period the hedged inventory is booked to cost of goods
sold. Effective July 1, 2000, Gymboree converted $20.6 million of inter-company
balances to ten-year inter-company loans and has elected to no longer hedge
these amounts.
As of July 29, 2000, the notional amounts of Gymboree's forward foreign
contracts to hedge British pounds sterling and Canadian dollars totalled $7.0
million and $1.0 million, respectively. The fair value of the contracts was
approximately $22 thousand as of July 29, 2000.
6. 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, as amended by SFAS No. 138 issued
in June 2000, requires companies to record derivatives on the balance sheet as
assets or liabilities at fair value and was adopted by Gymboree during the
second quarter of 2000. The adoption of this statement did not have a
significant effect on the consolidated financial statements of Gymboree.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB No. 101 until the fourth quarter of fiscal 2000. Gymboree
does not expect the adoption of SAB 101 to have a material effect on our
financial position or results of operations.
7. LINE OF CREDIT
As of July 29, 2000, Gymboree had an overall credit line of $50 million
that may be used for issuance of commercial letters of credit and up to $8
million of standby letters of credit and up to $15 million for cash advances. As
of July 29, 2000, approximately $11.0 million was available pursuant to such
lines. This facility was scheduled to expire on July 31, 2000. Gymboree uses
these lines primarily to support letters of credit which fund its foreign
sourcing of merchandise inventories. The credit facility contains certain
financial covenants, which require Gymboree to maintain a minimum tangible net
worth and meet certain ratios. Additionally, the facility contains restrictions
on capital expenditures. On August 1, 2000 the bank extended the credit facility
until September 30, 2000. This extension provided for an overall credit line of
$60 million that may be used for issuance of commercial letters of credit and up
to $6.5 million of standby letters of credit and up to $15 million for cash
advances. This facility was subsequently replaced by the facility provided by
Fleet Retail Finance, Inc.
On August 24, 2000, Gymboree entered into a three-year secured facility
with Fleet Retail Finance, Inc. and a syndicate of other lenders. This facility
provides for an overall credit line of $75 million that may be used for
repayment of the existing credit line, working capital and capital expenditure
needs and the issuance of documentary and standby letters of credit. Gymboree's
maximum borrowing under the credit facility may not exceed the lesser of (a) $75
million or (b) the total of (i) the adjusted value of acceptable inventory,
including eligible letter of credit inventory (subject to advance rates); plus
(ii) 85% of Gymboree's eligible credit card accounts receivable; plus (iii) 100%
of eligible investments; minus (iv) applicable reserves. As of August 24, 2000,
$38 million was estimated to be available pursuant to such lines. The interest
rate during the term of the facility will be based on the bank's Reference Rate
plus an applicable margin of up to 0.25% or Eurodollar plus an applicable margin
of up to 2.50%. In addition, on August 24, 2000, Gymboree entered into a
three-year term loan of $7 million with Back Bay Capital Funding LLC. The annual
interest rate on the loan is 16%. Both the credit facility and term loan are
secured by a blanket lien on merchandise inventories and other assets.
5
<PAGE> 8
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 income
statement data and (iii) the number of stores open at the end of each such
period:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
--------------------------------------------
THIRTEEN TWENTY-SIX PERCENTAGE CHANGE
WEEKS ENDED WEEKS ENDED IN DOLLAR AMOUNTS
-------------------- -------------------- FROM 1999 TO 2000
JULY 29, JULY 31, JULY 29, JULY 31, --------------------
2000 1999 2000 1999 13 WEEKS 26 WEEKS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% -17% -19%
Cost of goods sold, including buying
and occupancy expenses............ (83.5) (70.3) (81.4) (65.0) 2% -2%
----- ----- -------- -----
Gross profit...................... 16.5 29.7 18.6 35.0 -54% -57%
Selling, general and administrative
expenses.......................... (50.1) (45.3) (46.5) (38.8) 8% 3%
Play and music income, net.......... 0.0 0.6 0.4 0.5 -92% -31%
----- ----- -------- -----
Operating loss.................... (33.6) (15.0) (27.5) (3.3) -85% -560%
Foreign exchange gains (losses),
net............................... 0.1 (0.0) 0.1 0.0 338% 164%
Net interest income (expense)....... (0.1) 0.1 (0.0) 0.1 -196% -121%
----- ----- -------- -----
Loss before income taxes.......... (33.6) (14.9) (27.4) (3.2) -86% -582%
Income tax benefit.................. 12.9 5.5 10.5 1.2 94% 610%
----- ----- -------- -----
Net loss.......................... (20.7)% (9.4)% (16.9)% (2.0)% -82% -566%
===== ===== ======== =====
Number of stores at end of period... 600 588 600 588
</TABLE>
THIRTEEN WEEKS ENDED JULY 29, 2000 COMPARED TO THIRTEEN WEEKS ENDED JULY
31, 1999
Net Sales
Net sales in the second quarter of fiscal 2000 totaled $82.8 million
compared to $99.9 million in the same period last year. During the second
quarter of fiscal 2000, we opened one store in Ireland and closed six U.S.
stores. Comparable store sales decreased 19% or $17.5 million in the second
quarter. The decline in comparable store sales continued to be driven by lower
average store inventory in 2000 vs. 1999 and the lack of coordinated outfits in
2000 that reduced average transaction values and units per transaction.
Gross Profit
Gross profit for the thirteen weeks ended July 29, 2000 decreased 54% to
$13.6 million from $29.7 million in the same period last year. As a percentage
of net sales, gross profit was 16.5% in the second quarter of 2000 compared to
29.7% in the same period last year. The decrease in gross profit as a percentage
of net sales was primarily due to increased markdowns taken in 2000 that lowered
our gross margin as well as a loss of leverage on occupancy expense due to a
decrease in comparable store sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") principally consists
of non-occupancy store expenses, corporate overhead and distribution expenses.
Excluding $4.9 million of special charges recorded in 1999, SG&A expense for the
second quarter of fiscal 2000 totaled $41.5 million as compared to $40.4 million
for the prior year. This increase was primarily driven by higher costs related
to new and relocated stores. The increase in total SG&A expenses, as a
percentage of net sales, was primarily attributable to the loss of leverage
associated with significant comp sales declines in 2000.
6
<PAGE> 9
Play and Music Income, Net
Play and Music income, net decreased 92% to $47,000 during the second
quarter of fiscal 2000 from $569,000 in income for the same period last year,
due primarily to lower royalties and additional start-up costs associated with
new corporate sites.
Foreign Exchange Gains (Losses)
Net foreign exchange gains totaled $100,000 during the second quarter of
2000 compared to a net loss of $42,000 in the second quarter of 1999. These
gains resulted from currency fluctuations on inter-company transactions between
our United States operations and foreign subsidiaries.
Net Interest Income (Expense)
Interest expense of $246,000 was incurred for the second quarter of 2000 as
compared to interest expense of $402,000 for the same period last year. The
decrease was due to lower average borrowings. Interest income decreased to
$153,000 for the second quarter of 2000 from $499,000 in the second quarter of
1999. This decrease reflects a lower average cash balance year over year.
Income Tax
Our effective tax rate for the second quarters of fiscal 2000 and 1999 was
38.5% and 37.0%, respectively. We have recorded a $19.3 million tax benefit of
our operating losses in anticipation of future profits. We will continue to
evaluate the necessity of a valuation allowance in light of projected operating
results.
TWENTY-SIX WEEKS ENDED JULY 29, 2000 COMPARED TO TWENTY-SIX WEEKS ENDED
JULY 31, 1999
Net Sales
Net sales for the twenty-six weeks ended July 29, 2000 totaled $183.4
million compared to $225.6 million in the same period last year. Comparable
store sales decreased 22% or $45.9 million from the prior year. The decline in
comparable store sales year over year reflected the lack of coordinated outfits
and a low level of overall inventory.
Gross Profit
Gross profit for the twenty-six weeks ended July 29, 2000 totaled $34.2
million, a 57% reduction from $78.9 million in the same period last year. As a
percentage of net sales, gross profit decreased to 18.6% for the first six
months of 2000 compared to 35.0% in the same period last year. The decrease in
gross profit as a percentage of net sales was primarily due to increased
markdowns needed to clear non-outfitted merchandise, which lowered gross margin,
as well as a loss of leverage on occupancy expense due to a decrease in
comparable store sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") principally consists
of non-occupancy store expenses, corporate overhead and distribution expenses.
Excluding special charges of $4.9 million in 1999, SG&A expense for the
twenty-six weeks ended July 29, 2000 totaled $85.2 million as compared to $82.8
million for the prior year. This increase was primarily driven by higher costs
related to new and relocated stores. The increase in total SG&A expenses, as a
percentage of net sales, was primarily attributable to the loss of leverage
associated with significant comp sales declines in 2000.
Play and Music Income, Net
Play and Music income, net decreased 31% to $795,000 during the first six
months of fiscal 2000 from $1,159,000 in income for the same period last year,
due primarily to start-up costs associated with new corporate sites.
7
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Foreign Exchange Gains
Net foreign exchange gains totaled $124,000 during the first six months of
2000 compared to $47,000 for the prior year. These gains resulted from currency
fluctuations on inter-company transactions between our United States operations
and foreign subsidiaries.
Net Interest Income (Expense)
Interest expense of $560,000 was incurred for the first six months of 2000
compared to $743,000 for the same period last year. The decrease was due to
lower average borrowings. Interest income totaled $517,000 for the twenty-six
weeks ended July 29, 2000, compared to $952,000 for the same period last year.
This decrease resulted from lower average cash balances.
Income Tax
Our effective tax rate for the first six months of fiscal 2000 and 1999 was
38.5% and 37.0%, respectively. We have recorded a $19.3 million tax benefit of
our operating losses in anticipation of future profits. We will continue to
evaluate the necessity of a valuation allowance in light of projected operating
results.
FINANCIAL CONDITIONS
Liquidity and Capital Resources
Cash used in operating activities was $47.5 million compared to cash
provided by operating activities of $33.0 million in the prior year. This change
was primarily due to the increase in net loss for the period, an increase in
deferred taxes, and changes in working capital items.
Cash used in investing activities totaled $5.0 million and was related to
capital expenditures primarily for new store openings, as well as the relocation
and/or expansion of certain existing stores. Gymboree estimates that capital
expenditures during 2000 will be between $12.0 and $15.0 million, which will
primarily be used to open approximately 10 new domestic and international
stores, to expand approximately 10 existing stores and update the store fronts
of approximately 150 stores.
Cash and cash equivalents were $2.6 million at July 29, 2000, a decrease of
$37.7 million from January 29, 2000. Working capital as of July 29, 2000 was
$26.6 million compared to $57.2 million at the end of fiscal 1999.
As of July 29, 2000, Gymboree had an overall credit line of $50 million
that may be used for issuance of commercial letters of credit and up to $8
million of standby letters of credit and up to $15 million for cash advances. As
of July 29, 2000, approximately $11.0 million was available pursuant to such
lines. This facility was scheduled to expire on July 31, 2000. Gymboree uses
these lines primarily to support letters of credit which fund its foreign
sourcing of merchandise inventories. The credit facility contains certain
financial covenants, which require Gymboree to maintain a minimum tangible net
worth and meet certain ratios. Additionally, the facility contains restrictions
on capital expenditures. On August 1, 2000 the bank extended the credit facility
until September 30, 2000. This extension provided for an overall credit line of
$60 million that may be used for issuance of commercial letters of credit and up
to $6.5 million of standby letters of credit and up to $15 million for cash
advances. This facility was subsequently replaced by the facility provided by
Fleet Retail Finance, Inc.
On August 24, 2000, Gymboree entered into a three-year secured facility
with Fleet Retail Finance, Inc. and a syndicate of other lenders. This facility
provides for an overall credit line of $75 million that may be used for
repayment of the existing credit line, working capital and capital expenditure
needs and the issuance of documentary and standby letters of credit. Gymboree's
maximum borrowing under the credit facility may not exceed the lesser of (a) $75
million or (b) the total of (i) the adjusted value of acceptable inventory,
including eligible letter of credit inventory (subject to advance rates); plus
(ii) 85% of Gymboree's eligible credit card accounts receivable; plus (iii) 100%
of eligible investments; minus (iv) applicable reserves. As of August 24, 2000,
$38 million was estimated to be available pursuant to such lines. The interest
rate during the
8
<PAGE> 11
term of the facility will be based on the bank's Reference Rate plus an
applicable margin of up to 0.25% or Eurodollar plus an applicable margin of up
to 2.50%. In addition, on August 24, 2000, Gymboree entered into a three-year
term loan of $7 million with Back Bay Capital Funding LLC. The annual interest
rate on the loan is 16%. Both the credit facility and term loan are secured by a
blanket lien on merchandise inventories and other assets.
In May 2000, Gymboree issued 3,198,670 shares at $2.97 apiece for a total
of $9.5 million, net of issuance costs. The shares are restricted from sale
until November 2000. In connection with the issuance of the shares, the
purchasers received warrants to purchase 479,803 shares of Gymboree stock at
$2.97 per share. These warrants are exercisable over three years. Total Gymboree
shares issued to related parties were 1,717,172 shares, with warrants to
purchase 257,576 shares.
We anticipate that cash generated from operations, together with our
existing cash resources and funds available from current and future credit
facilities, will be sufficient to satisfy our cash needs through at least fiscal
2000.
Factors that May Affect Future Performance
The discussion in this 10-Q report contains certain forward-looking
statements, including statements regarding future net sales and net income,
future inventory levels, future comparable store net sales, future S,G&A
expenses, future interest income, planned capital expenditures, planned store
expansions and closings, international expansion and future cash needs. Such
forward-looking statements, in particular, and Gymboree's business and operating
results, in general, involve risks and uncertainties. Actual results may differ
significantly from the results discussed in the forward-looking statements.
Future operating results will depend upon many factors, including general
economic conditions, levels of competition, growth in the children's apparel
market, our ability to meet our financing and working capital needs, the
availability of suitable new store locations, the ability to develop and
successfully source new merchandise, our ability to rebuild our historic
customer base, consumer acceptance of our products, our ability to capture
satisfactory margins on our product sales, our success in planning and
allocating appropriate inventory levels, the ability to hire and train qualified
sales associates, our success in creating merchandise displays that attract
customers and encourage them to make purchases, the level of our investment in
new concepts, the integration of our management team, and the ability to
successfully identify and respond to emerging children's fashion trends and
effectively monitor and control costs. There can be no assurance that we will be
able to effectively realize our plans for future growth.
Gymboree's sales and profitability depend upon our ability to rebuild
demand by our customers for our products and services. We believe that our
future success will depend in large part upon our ability to anticipate, gauge
and respond in a timely manner to consumer demands and fashion trends and upon
the appeal of our products. There can be no assurance that the demand for
Gymboree's apparel or accessories will be rebuilt or that we will be able to
anticipate, gauge and respond to changes in fashion trends. If demand for our
apparel and accessories does not increase or if we were to misjudge fashion
trends, our business, financial condition and results of operations could be
materially and adversely affected.
Gymboree's future profitability is critically dependent on our ability to
achieve and manage potential future growth effectively. There can be no
assurance that Gymboree will be successful in increasing net sales or gross
profit in the future or that the rate of period-to-period net sales or gross
profit, if any, will not continue to decline. If our operations were to grow, of
which there can be no assurance, there could be increasing strain on other
resources, and Gymboree may experience serious operating difficulties, including
difficulties in hiring, training, managing an increasing number of employees,
difficulties in obtaining sufficient fabric and sourcing capacity to produce its
products, problems in upgrading its management information systems and delays in
product distribution shipments. There can be no assurance that Gymboree will be
able to manage future growth effectively. Any failure to manage growth
effectively could have a material adverse effect on our results of operations
and financial position.
Gymboree has operations in Europe and Canada, which expanded in 1999. As a
result, our business is subject to the risks generally associated with doing
business abroad, such as foreign governmental regulations,
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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
Gymboree's results of operations and financial position.
During 1999, Gymboree opened 19 stores under our new Zutopia product line.
Zutopia involves risk and uncertainties, including no prior operating history,
no prior history of market acceptance, potentially higher expenses without
corresponding revenue increases, impact to earnings, ability to obtain new store
sites, ability to obtain adequate sources of merchandise, competition from other
retailers and uncertainties generally associated with apparel retailing. In
addition, Gymboree needs to support the production, merchandising and promotion
of Zutopia. Our limited experience with marketing apparel to this demographic
segment could materially and adversely affect our ability to successfully
develop this product line.
Gymboree is developing a strategy to handle the planned conversion in 2002
of the Irish punt to the Euro.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gymboree enters into forward foreign exchange contracts to hedge certain
inter-company loans and inventory purchases (principally British pounds sterling
and Canadian dollars). The term of the forward exchange contracts is generally
less than 1 year. 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 and
the dollar margins resulting from inventory purchases will be adversely affected
by changes in exchange rates.
The table below summarizes by major currency the notional amounts and fair
values of our forward foreign exchange contracts in U.S. dollars as of July 29,
2000.
<TABLE>
<CAPTION>
NOTIONAL FAIR
AMOUNT VALUE
-------- -----
(IN THOUSANDS)
<S> <C> <C>
British pounds sterling..................................... $7,040 $14
Canadian dollars............................................ 961 8
------ ---
Total............................................. $8,001 $22
====== ===
</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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Gymboree has been named as a defendant in a lawsuit relating to sourcing of
products from Saipan (Commonwealth of Northern Mariana Islands). A complaint was
filed on January 13, 1999 in Federal District Court, Central District of
California, by various unidentified worker plaintiffs against Gymboree and
approximately 25 other parties. Those unidentified worker plaintiffs seek
class-action status and allege, among other things, that Gymboree (and other
defendants) violated the Racketeer Influenced and Corrupt Organizations Act in
connection with the labor practices and treatment of workers of factories in
Saipan that make product for us. The plaintiffs seek injunctive relief as well
as actual and punitive damages. The case was initially transferred to Federal
District Court, District of Hawaii. The case is now in the process of being
transferred to the United States District Court for the district Northern
Mariana Islands (Saipan). Gymboree has agreed to a Settlement with the
plaintiffs that would require us to pay approximately $200,000; the Settlement
does not take effect until it is approved by the court.
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
The annual meeting of stockholders was held on June 2, 2000 at which time
the stockholders voted on proposals as follows:
<TABLE>
<CAPTION>
VOTES AGAINST ABSTENTIONS AND
VOTES FOR OR WITHHELD NON-VOTES
---------- ------------- ---------------
<S> <C> <C> <C>
Election of two Class I Directors:
Walter F. Loeb............................ 22,374,997 801,754 N/A
Alan R. Schlesinger....................... 22,806,067 370,684 N/A
Ratify the appointment of Deloitte & Touche
L.L.P. as independent auditors for fiscal
year ending February 3, 2001.............. 23,062,051 98,661 16,039
</TABLE>
Walter F. Loeb and Alan R. Schlesinger were elected as Class I directors at
the meeting. Continuing Class III directors are Stuart G. Moldaw, William U.
Westerfield and Deborah A. Sorondo. Continuing Class II director is Barbara L.
Rambo.
ITEM 5. OTHER INFORMATION
Subsequent to our release of earnings information on August 17, 2000, for
the quarter and year to date ended July 29, 2000, we corrected our calculation
of the weighted average shares outstanding for such periods to reflect the
correct issuance dates of the shares associated with our equity financing. This
correction has adjusted our weighted average shares outstanding from 27,617,557
and 26,009,628 to 26,841,926 and 25,684,720 for such quarter and year to date
period, respectively. In addition, net loss per share has been adjusted from
($0.62) and ($1.19) to ($0.64) and ($1.20) for such quarter and year to date
period, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
27 Financial Data Schedule
11
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(b) Reports on Form 8-K
Form 8-K, filed June 7, 2000, listing items 5 and 7 as they related to
Gymboree's press releases in connection with an equity issuance.
12
<PAGE> 15
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)
Date: September 12, 2000 By: /s/ LAWRENCE H. MEYER
------------------------------------
Lawrence H. Meyer
Chief Financial Officer
(Principal financial and accounting
officer
of the registrant)
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<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.34 Secured Credit Agreement with Fleet Retail Finance, Inc.,
dated August 24, 2000
10.35 Amended Term Loan and Security Agreement with Transamerica
Equipment Financial Services, Inc., dated August 30, 2000
27 Financial Data Schedule
</TABLE>
