<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 OCTOBER 30, 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 November 27, 1999:
24,345,532
<PAGE> 2
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report
on Form 10-Q for the period ended October 30, 1999, as filed by the Registrant
on December 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 thirteen and thirty-nine weeks ended October 30, 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. An amendment
to the Registrant's Quarterly Report on Form 10-Q for the period ended July 31,
1999 has also been filed.
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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 39 WEEKS ENDED
---------------------------- ----------------------------
Oct. 30 Oct. 31 Oct. 30 Oct. 31
1999 1998 1999 1998
---------- --------- --------- ----------
(Restated) (Restated)
(Note 9) (Note 9)
<S> <C> <C> <C> <C>
Net sales $ 107,235 $ 113,991 $ 332,868 $ 316,886
Cost of goods sold, including
buying and occupancy expenses (66,124) (72,897) (212,878) (200,979)
--------- --------- --------- ---------
Gross profit 41,111 41,094 119,990 115,907
Selling, general and administrative expenses (42,851) (41,816) (130,503) (112,631)
Play and music income, net 600 608 1,759 1,369
--------- --------- --------- ---------
Operating income (loss) (1,140) (114) (8,754) 4,645
Foreign exchange gains (loss), net (97) (113) (50) 32
Net interest income (expense) 180 (202) 389 154
--------- --------- --------- ---------
Income (loss) before income taxes (1,057) (429) (8,415) 4,831
Income tax (expense) benefit 390 156 3,113 (1,787)
--------- --------- --------- ---------
Net income (loss) $ (667) $ (273) $ (5,302) $ 3,044
========= ========= ========= =========
Income (loss) per share:
Basic $ (0.03) $ (0.01) $ (0.22) $ 0.13
Diluted (0.03) (0.01) (0.22) 0.13
Weighted average shares outstanding:
Basic 24,345 24,172 24,299 24,153
Diluted 24,345 24,172 24,299 24,213
Number of stores at end of period 602 548 602 548
</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 Oct. 30, January 30, Oct. 31,
1999 1999 1998
---------- ----------- ---------
(Restated)
(Note 9)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 32,744 $ 27,810 $ 2,170
Accounts receivable 5,699 7,811 11,095
Merchandise inventories 47,283 74,396 95,037
Prepaid expenses and other 7,732 8,068 6,214
--------- --------- ---------
Total current assets 93,458 118,085 114,516
--------- --------- ---------
PROPERTY AND EQUIPMENT
Land and buildings 9,943 9,943 9,969
Leasehold improvements 88,968 79,832 76,379
Furniture, fixtures and equipment 104,437 91,551 85,630
--------- --------- ---------
203,348 181,326 171,978
Less accumulated depreciation and amortization (63,126) (46,886) (42,038)
--------- --------- ---------
140,222 134,440 129,940
OTHER ASSETS 4,840 4,180 3,864
--------- --------- ---------
TOTAL ASSETS $ 238,520 $ 256,705 $ 248,320
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt, short-term borrowings $ 572 $ 540 $ 17,450
Accounts payable 8,425 21,842 18,314
Accrued liabilities 21,303 17,424 16,757
Income taxes payable 3,657 1,965 2,028
--------- --------- ---------
Total current liabilities 33,957 41,771 54,549
--------- --------- ---------
LONG TERM LIABILITIES
Long term debt, net of current portion 11,028 11,460 --
Deferred rent and other liabilities 29,783 35,102 30,336
--------- --------- ---------
TOTAL LIABILITIES 74,768 88,333 84,885
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, including excess paid-in capital ($.001 par value:
100,000,000 shares authorized 24,345,428, 24,240,763 and
24,172,134 shares outstanding at October 30, 1999,
January 30, 1999 and October 31, 1998, respectively) 27,542 26,855 25,115
Retained earnings 136,210 141,517 138,320
--------- --------- ---------
Total stockholders' equity 163,752 168,372 163,435
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 238,520 $ 256,705 $ 248,320
========= ========= =========
</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>
39 WEEKS ENDED
---------------------------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
(Restated)
(Note 9)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,302) $ 3,044
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 18,305 13,755
Impairment reserve and other write offs 3,900 --
Provision for deferred income tax (4,225) 204
Tax benefit from exercise of stock options -- 240
Loss on disposal of property and equipment 949 1,238
Change in assets and liabilities:
Accounts receivable 2,112 (5,911)
Merchandise inventories 27,108 (19,378)
Prepaid expenses and other assets 1,136 (2,181)
Accounts payable (13,417) (7,733)
Income tax payable 1,693 (6,010)
Other liabilities (262) 8,777
Accrued liabilities 1,586 649
-------- --------
Net cash provided by (used in) operating activities 33,583 (13,306)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,935) (40,585)
Proceeds from sale of assets -- 24
Proceeds from sale of investments -- 18,614
-------- --------
Net cash used in investing activities (28,935) (21,947)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 687 2,103
Proceeds from (payments on) debt borrowings (401) 17,450
-------- --------
Net cash provided by financing activities 286 19,553
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,934 (15,700)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,810 17,870
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,744 $ 2,170
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 466 $ 8,051
Cash paid during the year for interest expense $ 814 $ 336
</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 October 30, 1999 and October 31, 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 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 in 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
for the thirty-nine weeks ended October 30, 1999.
4. INCOME TAXES
Our effective tax rate in the third 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 39 WEEKS ENDED
------------------------------- ------------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (667) $ (273) $(5,302) $ 3,044
Other comprehensive income (loss) 75 51 (5) 338
======= ======= ======= =======
Total comprehensive income (loss) $ (592) $ (222) $(5,307) $ 3,382
======= ======= ======= =======
</TABLE>
6
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6. FOREIGN CURRENCIES
As of October 30, 1999, we had forward foreign contracts of $0.7
million, $15.0 million and $12.4 million to hedge Japanese yen, 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 thirteen and thirty-nine weeks ended October 30,
1999, Gymboree incurred special charges of $1.1 million and $8.0
million, respectively, $2.0 million of which is included in cost of
goods sold for the thirty-nine weeks ended October 30, 1999. 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 October 30, 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
thirty-nine weeks ended October 30, 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>
At October 30, 1999:
Property and equipment, net $ 138,133 $ 140,222
Accrued liabilities 24,703 21,303
Income taxes payable 1,626 3,657
Retained earnings 132,752 136,210
For The 13 Weeks Ended October 30, 1999:
SG&A expenses $ (41,777) $ (42,851)
Operating loss (66) (1,140)
Income (loss) before income taxes 17 (1,057)
Income tax (expense) benefit (7) 390
Net income (loss) 10 (667)
Income (loss) Per Share:
Basic $ 0.00 $ (0.03)
Diluted 0.00 (0.03)
For The 39 Weeks Ended October 30, 1999:
SG&A expenses $(135,992) $(130,503)
Operating loss (14,243) (8,754)
Loss before income taxes (13,904) (8,415)
Income tax benefit 5,144 3,113
Net loss (8,760) (5,302)
Loss Per Share:
Basic $ (0.36) $ (0.22)
Diluted (0.36) (0.22)
</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
---------------------------------------------------
THIRTEEN THIRTY-NINE PERCENTAGE CHANGE
WEEKS ENDED WEEKS ENDED IN DOLLAR AMOUNTS
----------------------- ---------------------- FROM 1998 TO 1999
OCT. 30 OCT. 31 OCT. 30 OCT. 31 --------------------------
1999(1) 1998 1999(1) 1998 13 WEEKS(1) 39 WEEKS(1)
---------- ------- ---------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% (6)% 5%
Cost of goods sold, including
buying and occupancy expenses (61.7) (63.9) (64.0) (63.4) (9) 6
------- ------- ------- -------
Gross profit 38.3 36.1 36.0 36.6 0 4
Selling, general and administrative
expenses (40.0) (36.7) (39.2) (35.6) 2 16
Play and music income, net 0.6 0.5 0.5 0.4 (1) 28
------- ------- ------- -------
Operating income (loss) (1.1) (0.1) (2.7) 1.4 (900) (288)
Foreign exchange gains (loss), net (0.1) (0.1) (0.0) 0.0 14 (256)
Net interest income (expense) 0.2 (0.2) 0.1 0.2 189 153
------- ------- ------- -------
Income (loss) before income taxes (1.0) (0.4) (2.6) 1.6 (146) (274)
Income tax (expense) benefit 0.4 0.1 0.9 (0.6) 150 274
------- ------- ------- -------
Net income (loss) (0.6)% (0.3)% (1.7)% 1.0% (144)% (274)%
======= ======= ======= =======
Number of stores at end of period 602 548 602 548
</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 October 30, 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 thirty-nine weeks ended October 30, 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 OCTOBER 30, 1999 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
31, 1998
NET SALES
Net sales for the third quarter of 1999 totaled $107.2 million as
compared to $114.0 million for the same period last year. The 40 stores opened
in 1999, in addition to the 20 stores that have relocated or expanded in 1999,
provided incremental sales of $5.5 million. Sales for stores opened, relocated
or expanded in 1998, but not qualifying as comparable stores, increased $3.7
million from the prior year. Comparable store sales decreased 16% or $16.0
million in the third quarter. The decline in comparable store sales was
primarily due to lower average store inventory in 1999 and the transition
associated with our brand improvement.
GROSS PROFIT
Gross profit for the thirteen weeks ended October 30, 1999 was $41.1
million and flat as compared to the same period last year. As a percentage of
net sales, the third quarter gross profit increased to 38.3% vs. 36.1% in the
same period last year. This increase reflected a higher level of full price
selling accompanied by fewer markdowns, and was slightly offset by the increase
in European stores, which have a lower gross profit than the U.S. due to higher
occupancy expense, and the buying expense associated with opening our Zutopia
stores.
9
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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 third quarter of 1999, SG&A expenses increased to 39.0% of net
sales (excluding the special charges) from 36.7% of net sales in 1998. Special
charges totaled $1.1 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 and expense for modifications of store interiors and the removal
of certain store assets. 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 totaled $600,000 during the third quarter of 1999
as compared to $608,000 for the same period last year.
FOREIGN EXCHANGE LOSSES
Net foreign exchange losses decreased to $97,000 for the third quarter
of 1999 compared to a loss of $113,000 in the third quarter of 1998. These
losses resulted from currency fluctuations in intercompany transactions between
our U.S. operations and foreign subsidiaries.
NET INTEREST INCOME (EXPENSE)
Interest income increased to $427,000 for the third quarter of 1999 from
$114,000 for the third quarter of 1998. Interest expense totaled $247,000 for
the third quarter of 1999 as compared to interest expense of $316,000 for the
same period last year. The interest expense for the third quarter 1999 relates
to long term debt incurred in 1998, and the third quarter 1998 interest expense
relates to short-term borrowings.
INCOME TAX
Our effective tax rate for the third quarters of fiscal 1999 and 1998
was 37%.
10
<PAGE> 12
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1998
NET SALES
Net sales for the thirty-nine weeks ended October 30, 1999 increased 5%
to $332.9 million compared to $316.9 million in the same period last year. The
40 stores opened in 1999, in addition to the 20 stores that have relocated or
expanded in 1999, provided incremental sales of $11.6 million. Sales for stores
opened, relocated or expanded in 1998, but not qualifying as comparable stores,
increased $33.2 million from the prior year. Comparable store sales decreased
10% or $28.8 million in the thirty-nine weeks ended October 30, 1999. The
decline in comparable store sales was primarily due to lower average store
inventory and the transition associated with our brand improvement.
GROSS PROFIT
Gross profit for the thirty-nine weeks ended October 30, 1999 increased
4% to $120.0 million from $115.9 million in the same period last year. As a
percentage of net sales, gross profit was 36.0% through the end of the third
quarter of 1999 compared to 36.6% for the same period last year. Included in
cost of goods sold for the thirty-nine week period ended October 30, 1999 was
$2.0 million relating to 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 opening our 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 thirty-nine weeks ended October 30, 1999, SG&A expenses
increased to 37.4% of net sales (excluding the special charges), compared to
35.6% of net sales in the same period last year. Special charges totaled $6.0
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 28% to $1,759,000 for the thirty-nine
weeks ended October 30, 1999 from $1,369,000 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 GAINS (LOSSES)
The net foreign exchange loss totaled $50,000 for the first nine months
of 1999 compared to a net gain of $32,000 for the same period last year. These
gains and losses resulted from currency fluctuations in intercompany
transactions between our U.S. operations and foreign subsidiaries.
NET INTEREST INCOME (EXPENSE)
Interest income was $1,203,000 for the thirty-nine weeks ended October
30, 1999 vs. $490,000 for the same period last year. Interest expense totaled
$814,000 for the thirty-nine weeks ended October 30, 1999, compared to $336,000
for the same period last year. The interest expense for 1999 relates to long
term debt incurred in 1998, and the 1998 interest expense relates to short-term
borrowings.
INCOME TAX
Our effective tax rate for the first nine months of 1999 and 1998 was
37%.
11
<PAGE> 13
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $33.6 million compared to a
cash outflow of $13.3 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 $28.9 million in 1999 as
compared to $21.9 million in 1998. This increase resulted from the liquidation
of securities in 1998, offset by a decrease in capital expenditures in 1999.
Consistent with second quarter projections, Gymboree expects to incur
incremental capital expenditures related to the brand improvement strategy 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 $30.0 and
$35.0 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 $32.7 million at October 30, 1999, an
increase of $4.9 million from January 30, 1999. Working capital as of October
30, 1999 was $59.5 million compared to $76.3 million at January 30, 1999.
As of July 30, 1999, Gymboree and its primary bank had agreed to the
terms for a new unsecured credit facility. The new agreement extends the
facility to May 31, 2000. The revised terms provide for an overall credit line
of $60 million, reducing to $50 million on 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 third 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 third quarter of 1999, we continued to expand our operations
by opening one additional store in the UK and one store in Canada. This brings
the total number of stores in Canada and Europe to 19 and 29, 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. As planned we have completed
all remediation and testing of all critical systems for all groups.
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 $2.4 million has been expensed to date. $0.3 million was
expensed for the third quarter ended October 30, 1999. 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 the termination of their services. 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 third quarter of fiscal 1999, we have
continued implementation of our contingency plan for trading partners that are
not Year 2000 compliant. Further, we have developed Risk Management plans for
calendar and fiscal 2000 year end processing to ensure uninterrupted business
flow. 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 Japanese yen,
Canadian dollars and British pounds sterling). 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>
OCT. 30, 1999
-------------
(In millions)
<S> <C>
Japanese yen $ 0.7
Canadian dollars 15.0
British pounds sterling 12.4
-------
TOTAL $ 28.1
-------
</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 us
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 our
business.
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
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Net Income (Loss) per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 8, 1999 Gymboree filed a report on Form 8-K in
connection with our adoption of Amended and Restated Bylaws.
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>
11 Computation of Net Income (Loss) per Share
27 Financial Data Schedule
</TABLE>
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 39 WEEKS ENDED
---------------------------- --------------------------
OCT. 30 OCT. 31 OCT. 30 OCT. 31
1999 1998 1999 1998
--------- --------- -------- --------
(Restated) (Restated)
(Note 9) (Note 9)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ (667) $ (273) $ (5,302) $ 3,044
========= ========= ======== ========
Weighted average number of shares
outstanding during the period:
Common Stock 24,345 24,172 24,299 24,153
Add incremental shares from assumed
exercise of stock options (1) -- -- -- 60
--------- --------- -------- --------
Weighted average common and common
equivalent shares outstanding 24,345 24,172 24,299 24,213
========= ========= ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ (0.03) $ (0.01) $ (0.22) $ 0.13
========= ========= ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ (0.03) $ (0.01) $ (0.22) $ 0.13
========= ========= ======== ========
</TABLE>
(1) Options to purchase weighted average shares totaling 25, 15 and 88 for
the 13 weeks ended October 30, 1999 and October 31, 1998 and the 39
weeks ended October 30, 1999, respectively and 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 9-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> AUG-01-1999 JAN-31-1999
<PERIOD-END> OCT-30-1999 OCT-30-1999
<CASH> 0 32,744
<SECURITIES> 0 0
<RECEIVABLES> 0 5,699
<ALLOWANCES> 0 0
<INVENTORY> 0 47,283
<CURRENT-ASSETS> 0 93,458
<PP&E> 0 203,348
<DEPRECIATION> 0 (63,126)
<TOTAL-ASSETS> 0 238,520
<CURRENT-LIABILITIES> 0 33,957
<BONDS> 0 0
0 0
0 0
<COMMON> 0 27,542
<OTHER-SE> 0 136,210
<TOTAL-LIABILITY-AND-EQUITY> 0 238,520
<SALES> 107,235 332,868
<TOTAL-REVENUES> 107,235 332,868
<CGS> 66,124 212,878
<TOTAL-COSTS> 108,975 343,381
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 247 814
<INCOME-PRETAX> (1,057) (8,415)
<INCOME-TAX> (390) (3,113)
<INCOME-CONTINUING> (667) (5,302)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (667) (5,302)
<EPS-BASIC> (0.03) (0.22)
<EPS-DILUTED> (0.03) (0.22)
</TABLE>
