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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 OCTOBER 28, 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 December 5, 2000:
27,711,232
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TABLE OF CONTENTS
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PAGE
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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........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities and Use of Proceeds................... 15
Item 3. Defaults Upon Senior Securities............................. 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits.................................................... 15
Signatures........................................................... 16
Exhibit Index........................................................ 17
</TABLE>
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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
-------------------------- --------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................................... $111,881 $107,235 $ 295,279 $ 332,868
Cost of goods sold, including buying and
occupancy expenses......................... (76,016) (66,124) (225,254) (212,878)
-------- -------- --------- ---------
Gross profit............................ 35,865 41,111 70,025 119,990
Selling, general and administrative
expenses................................... (43,542) (42,851) (128,775) (130,503)
Play and music income, net................... 739 600 1,534 1,759
-------- -------- --------- ---------
Operating loss............................. (6,938) (1,140) (57,216) (8,754)
Foreign exchange gains (losses), net......... (72) (97) 52 (50)
Net interest income (expense)................ (840) 180 (883) 389
-------- -------- --------- ---------
Loss before income taxes................... (7,850) (1,057) (58,047) (8,415)
Income tax benefit........................... 3,022 390 22,348 3,113
-------- -------- --------- ---------
Net loss................................... $ (4,828) $ (667) $ (35,699) $ (5,302)
======== ======== ========= =========
Loss per share:
Basic...................................... $ (0.17) $ (0.03) $ (1.36) $ (0.22)
Diluted.................................... (0.17) (0.03) (1.36) (0.22)
Weighted average shares outstanding:
Basic...................................... 27,674 24,345 26,304 24,299
Diluted.................................... 27,674 24,345 26,304 24,299
Number of stores at end of period............ 604 602 604 602
</TABLE>
See notes to condensed consolidated financial statements.
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
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<CAPTION>
OCTOBER 28, JANUARY 29, OCTOBER 30,
2000 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................... $ 1,574 $ 40,274 $ 32,744
Accounts receivable..................................... 4,813 4,920 5,699
Merchandise inventories................................. 93,197 47,103 47,283
Prepaid expenses........................................ 3,157 3,511 3,861
Deferred taxes.......................................... 4,317 3,871 3,871
-------- -------- --------
Total current assets............................ 107,058 99,679 93,458
-------- -------- --------
PROPERTY AND EQUIPMENT
Land and buildings...................................... 9,943 9,943 9,943
Leasehold improvements.................................. 89,809 88,019 88,968
Furniture, fixtures and equipment....................... 110,508 108,606 104,437
-------- -------- --------
210,260 206,568 203,348
Less accumulated depreciation and amortization.......... (83,313) (69,123) (63,126)
-------- -------- --------
126,947 137,445 140,222
Deferred Taxes............................................ 16,540 1,096 1,580
Lease Rights and Other Assets............................. 4,988 2,698 3,260
-------- -------- --------
Total Assets.................................... $255,533 $240,918 $238,520
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt....................... $ 618 $ 583 $ 572
Borrowings on revolving line of credit.................. 15,518 -- --
Accounts payable........................................ 39,675 18,596 8,425
Income tax payable...................................... 2,852 3,176 3,657
Accrued liabilities..................................... 17,611 20,099 21,303
-------- -------- --------
Total current liabilities....................... 76,274 42,454 33,957
-------- -------- --------
LONG TERM LIABILITIES
Long term debt, net of current portion.................. 9,659 10,877 11,028
Deferred rent and other liabilities..................... 30,233 29,125 29,783
Notes payable........................................... 7,000 -- --
-------- -------- --------
Total Liabilities....................................... 123,166 82,456 74,768
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock, including excess paid-in capital ($.001
par value: 100,000,000 shares authorized; 27,702,409,
24,401,604 and 24,345,428 shares outstanding at
October 28, 2000, January 29, 2000 and October 30,
1999, respectively).................................. 37,673 27,807 27,542
Retained earnings....................................... 94,858 130,557 135,855
Accumulated other comprehensive income --
Foreign currency translation adjustments............. (164) 98 355
-------- -------- --------
Total stockholders' equity...................... 132,367 158,462 163,752
-------- -------- --------
Total Liabilities and Stockholders' Equity...... $255,533 $240,918 $238,520
======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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39 WEEKS ENDED
--------------------------
OCTOBER 28, OCTOBER 30,
2000 1999
----------- -----------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(35,699) $ (5,302)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 17,862 18,305
Impairment reserve and other write offs................... -- 3,900
Deferred income taxes..................................... (15,890) (4,225)
Loss on disposal of property and equipment................ 636 949
Change in assets and liabilities:
Accounts receivable.................................... 107 2,112
Merchandise inventories................................ (46,356) 27,108
Prepaid expenses and other assets...................... (1,936) 1,136
Accounts payable....................................... 21,079 (13,417)
Other liabilities...................................... 784 1,431
Accrued liabilities.................................... (2,488) 1,586
-------- --------
Net cash provided by (used in) operating
activities...................................... (61,901) 33,583
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------- --------
Capital expenditures........................................ (8,000) (28,935)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock............................. 9,866 687
Proceeds from borrowings.................................... 22,518 0
Payments on long term debt.................................. (1,183) (401)
-------- --------
Net cash provided by financing activities......... 31,201 286
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (38,700) 4,934
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 40,274 27,810
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,574 $ 32,744
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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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 October 28, 2000 and October 30, 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 third quarters of fiscal 2000 and 1999 was
38.5% and 37.0%, respectively. We have recorded a $22.3 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 performance against
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:
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13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- --------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss...................................... $(4,828) $(667) $(35,699) $(5,302)
Other comprehensive income (loss)............. (1,053) 75 (262) (5)
------- ----- -------- -------
Total comprehensive loss...................... $(5,881) $(592) $(35,961) $(5,307)
======= ===== ======== =======
</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.
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THE GYMBOREE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As of October 28, 2000, Gymboree had no open forward foreign exchange
contracts. For the third quarter of 2000, Gymboree converted $1.9 million of
inter-company balances to ten-year inter-company loans and has elected no longer
to hedge these amounts.
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 in 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
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 October 28, 2000,
approximately $6.3 million was available pursuant to such facility. 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 rate plus an applicable
margin of up to 2.50%. In addition, on August 24, 2000, Gymboree obtained a
three-year term loan for $7 million with Back Bay Capital Funding LLC with an
annual interest rate of 16%. Both the credit facility and term loan are secured
by a blanket lien on merchandise inventories and other assets.
Between October 4, 2000 and November 14, 2000 Gymboree entered into a
series of amendments to the existing secured facility with Fleet Retail Finance,
Inc. that increased the overall credit line to $87.5 million and reduced certain
applicable reserves. The credit line and applicable reserves have since returned
to original levels.
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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:
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AS A PERCENTAGE OF NET SALES
----------------------------------------------------- PERCENTAGE CHANGE
13 WEEKS ENDED 39 WEEKS ENDED IN DOLLAR AMOUNTS
------------------------- ------------------------- FROM 1999 TO 2000
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30, -------------------
2000 1999 2000 1999 13 WEEKS 39 WEEKS
----------- ----------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 4% -11%
Cost of goods sold, including buying
and occupancy expenses............ (67.9) (61.7) (76.3) (64.0) 15% 6%
----- ----- ----- -----
Gross profit................... 32.1 38.3 23.7 36.0 -13% -42%
Selling, general and administrative
expenses.......................... (38.9) (40.0) (43.6) (39.2) 2% -1%
Play and music income, net.......... 0.6 0.6 0.5 0.5 23% -13%
----- ----- ----- -----
Operating loss................. (6.2) (1.1) (19.4) (2.7) 509% 554%
Foreign exchange gains (losses),
net............................... (0.1) (0.1) 0.0 (0.0) -26% -204%
Net interest income (expense)....... (0.7) 0.2 (0.3) 0.1 -567% -327%
----- ----- ----- -----
Loss before income taxes....... (7.0) (1.0) (19.7) (2.6) 643% 590%
Income tax benefit.................. 2.7 0.4 7.6 0.9 675% 618%
----- ----- ----- -----
Net loss....................... (4.3)% (0.6)% (12.1)% (1.7)% 624% 573%
===== ===== ===== =====
Number of stores at end of period... 604 602 604 602
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
30, 1999
Net Sales
Net sales in the third quarter of fiscal 2000 totaled $111.9 million
compared to $107.2 million in the same period last year. During the third
quarter of fiscal 2000, we opened seven and closed three stores all in the U.S.
Comparable store sales increased 4% or $3.5 million in the third quarter from
the same period last year. The increase in comparable store sales was expected
and reflects more customer satisfaction with the desirability and quantity of
our latest offerings.
Gross Profit
Gross profit for the thirteen weeks ended October 28, 2000 decreased 13% to
$35.9 million from $41.1 million in the same period last year. As a percentage
of net sales, gross profit was 32.1% in the third quarter of 2000 compared to
38.3% 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.
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 $1.1 million of special charges recorded in 1999, SG&A expense for the
third quarter of fiscal 2000 totaled $43.5 million as compared to $41.8 million
for the same period in the prior year. This increase was primarily driven by
higher costs related to new and relocated stores. Excluding special charges
incurred in 1999, total SG&A expense, as a percentage of net sales, was flat
compared to last year.
Play and Music Income, Net
Play and Music income, net increased 23% to $739,000 during the third
quarter of fiscal 2000 from $600,000 in income for the same period last year,
due primarily to enrollment growth in corporate sites.
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Foreign Exchange Losses
Net foreign exchange losses totaled $72,000 during the third quarter of
2000 compared to a net loss of $97,000 in the third quarter of 1999. These
losses resulted from currency fluctuations on inter-company transactions between
our United States operations and foreign subsidiaries.
Net Interest Income (Expense)
Interest expense of $857,000 was incurred for the third quarter of 2000 as
compared to interest expense of $247,000 for the same period last year. The
increase was due to higher average borrowings. Interest income decreased to
$17,000 for the third quarter of 2000 from $427,000 in the third quarter of
1999. This decrease reflects a lower average cash balance year over year.
Income Tax
Our effective tax rate for the third quarters of fiscal 2000 and 1999 was
38.5% and 37.0%, respectively. We have recorded a $22.3 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.
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 30, 1999
Net Sales
Net sales for the thirty-nine weeks ended October 28, 2000 totaled $295.3
million compared to $332.9 million in the same period last year. Comparable
store sales decreased 14% or $42.2 million from the same period in the prior
year. The decline in comparable store sales year over year reflected the lack of
coordinated outfits from earlier in the year as well as lower inventory levels
during the first half of the year.
Gross Profit
Gross profit for the thirty-nine weeks ended October 28, 2000 totaled $70.0
million, a 42% reduction from $120.0 million in the same period last year. As a
percentage of net sales, gross profit decreased to 23.7% for the first nine
months of 2000 compared to 36.0% 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 $6.0 million in 1999, SG&A expense for the
thirty-nine weeks ended October 28, 2000 totaled $128.8 million as compared to
$124.5 million for the same period in the prior year. This increase was
primarily driven by higher costs related to new and relocated stores. The
increase in total SG&A expense, as a percentage of net sales, was primarily
attributable to the loss of leverage associated with comp sales declines in
2000.
Play and Music Income, Net
Play and Music income, net decreased 13% to $1,534,000 during the first
nine months of fiscal 2000 from $1,759,000 in income for the same period last
year, due primarily to start-up costs associated with new corporate sites.
Foreign Exchange Gains (Losses)
Net foreign exchange gains totaled $52,000 during the first nine months of
2000 compared to net losses of $50,000 for the same period in the prior year.
These gains and losses resulted from currency fluctuations on inter-company
transactions between our United States operations and foreign subsidiaries.
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Net Interest Income (Expense)
Interest expense of $1,417,000 was incurred for the first nine months of
2000 compared to $814,000 for the same period last year. The increase was due to
higher average borrowings. Interest income totaled $534,000 for the thirty-nine
weeks ended October 28, 2000, compared to $1,203,000 for the same period last
year. This decrease resulted from lower average cash balances.
Income Tax
Our effective tax rate for the first nine months of fiscal 2000 and 1999
was 38.5% and 37.0%, respectively. We have recorded a $22.3 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 for the first three quarters of fiscal
2000 was $61.9 million compared to cash provided by operating activities of
$33.6 million in the same period in the prior year. This change was primarily
due to the increase in net loss for the period, an increase in deferred income
taxes, and changes in working capital items.
Cash used in investing activities totaled $8.0 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 $11.0 and $13.0 million, which will
primarily be used to open approximately 10 new domestic and international
stores, to expand approximately 10 existing stores and to update the store
fronts of approximately 150 stores.
Cash and cash equivalents were $1.6 million at October 28, 2000, a decrease
of $38.7 million from January 29, 2000. Working capital as of October 28, 2000
was $30.8 million compared to $57.2 million at the end of fiscal 1999.
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 October 28, 2000,
approximately $6.3 million was available pursuant to such facility. 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 rate plus an applicable
margin of up to 2.50%. In addition, on August 24, 2000, Gymboree obtained a
three-year term loan for $7 million with Back Bay Capital Funding LLC with an
annual interest rate of 16%. Both the credit facility and term loan are secured
by a blanket lien on merchandise inventories and other assets.
Between October 4, 2000 and November 14, 2000 Gymboree entered into a
series of amendments to the existing secured facility with Fleet Retail Finance,
Inc. that increased the overall credit line to $87.5 million and reduced certain
applicable reserves. The credit line and applicable reserves have since returned
to original levels.
We anticipate that cash generated from operations, together with our
existing cash resources and funds available from current 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 planned capital expenditures, planned
store openings, expansions and renovations, future cash
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generated from operations 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 due
to a number of factors, many of which are beyond our control. The following
discussion highlights some of these factors and the possible impact of these
factors on future results of operations. Given these factors, we cannot assure
you that we will be able to effectively continue and strengthen our operations.
WE HAVE EXPERIENCED NET LOSSES IN RECENT PERIODS AND, IF SUCH LOSSES CONTINUE IN
THE FUTURE, WE MAY NEED TO OBTAIN ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS.
We incurred net losses of $10.6 million in our fiscal year 1999 and, to
date, we have continued to incur net losses in each of our quarters in fiscal
year 2000. Our losses for the quarters ended October 28, 2000, July 29, 2000 and
April 29, 2000 were $4.8 million, $17.1 million and $13.8 million, respectively.
There can be no assurance that losses will not continue in the future. If losses
do continue to occur, we will likely need to obtain additional capital to
continue our existing operations.
WE MUST MAINTAIN A MINIMUM COLLATERAL BASE TO SECURE OUR EXISTING CREDIT
FACILITY, WHICH IS NECESSARY FOR CASH BORROWINGS AND LETTERS OF CREDIT.
The amount of our credit facility for cash borrowings and letters of credit
needed for the purchase of new inventory is limited to our available collateral.
Our existing credit facility fluctuates relative to our collateral base, which
includes our inventory, cash, and other assets. This collateral base varies in
value as a result of sales, merchandise purchases, and profitability. Lack of
short-term liquidity due to reaching the limit of our collateral base could
force us into seeking alternative financing or court protection from our
creditors.
WE MAY NEED ADDITIONAL CAPITAL TO PURSUE OUR FUTURE BUSINESS PLANS.
Our growth strategies may require additional capital, should our operations
generate insufficient cash flow to expand our business. For example, we may need
additional capital to rebuild our customer base, to broaden existing product
lines and to introduce new products and concepts. To pursue this prospective
business plan, we will need to fund operations, invest in capital projects and
increase inventory levels. There can be no assurance that either internally
generated cash will be available, or that debt or equity will be available to
Gymboree on terms that are satisfactory. In addition, under the terms of our
existing credit facility, we will likely need the consent of our bank lenders
before incurring additional indebtedness, and there can be no guarantee that our
lenders will permit us to incur new debt on terms that we otherwise find
satisfactory. Also, to the extent that we raise additional capital by issuing
equity, a dilutive effect on existing stockholders will likely result.
WE MAY NOT BE ABLE TO OPERATE SUCCESSFULLY IF WE LOSE KEY PERSONNEL, ARE UNABLE
TO HIRE QUALIFIED ADDITIONAL PERSONNEL, OR EXPERIENCE TURNOVER OF OUR MANAGEMENT
TEAM.
The continued success of Gymboree is largely dependent on the personal
efforts and abilities of our senior management and certain other key personnel
and on our ability to retain current management and to attract and retain
qualified key personnel in the future. Also, because customer service is a
defining feature of the Gymboree corporate culture, we must be able to hire and
train qualified sales associates to succeed. The loss of certain key employees,
Gymboree's inability to attract and retain other qualified key employees or a
labor shortage that reduces the pool of qualified sales associates could have a
material adverse effect on our growth, our operations and our financial
position. Furthermore, we have experienced significant turnover of our
management team in recent years, and several members of our key management team
have only recently joined us or have been promoted to executive positions for
the first time. For example, our current president represents our fourth
president in the last four years, and our current chief executive officer was
appointed in February 2000. In addition to performing their regular duties, our
new managers must spend a significant amount of time devising strategies to
execute our business model. If they are unable to effectively integrate
themselves into our business, to work together as a management team or to master
their new roles in a timely manner, our business will suffer.
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<PAGE> 12
OUR BUSINESS IS SENSITIVE TO ECONOMIC CONDITIONS THAT DECREASE CONSUMER
SPENDING.
Gymboree's financial performance is sensitive to changes in overall
economic conditions that impact consumer spending, particularly discretionary
spending. Future economic conditions affecting disposable consumer income such
as employment levels, business conditions, interest rates and tax rates could
reduce consumer spending or cause consumers to shift their spending to other
products. A general reduction in the level of discretionary spending or shifts
in consumer discretionary spending to other products could adversely affect our
growth, net sales and profitability.
WE EXPERIENCE SEASONAL QUARTERLY FLUCTUATIONS IN OUR SALES AND RESULTS.
Gymboree has historically experienced, and expects to continue to
experience, seasonal fluctuations in our retail sales and net income. Our net
sales and net income are generally weakest during the first two fiscal quarters
(particularly the second quarter) and strongest during the third and fourth
quarters. Any failure by us to meet our business plans for, in particular, the
third and fourth quarter of any fiscal year would have a material adverse effect
on our earnings, which in all likelihood would not be offset by satisfactory
results achieved in other quarters of the same fiscal year. Also, any failure by
us to meet our anticipated sales volume could result in our holding excess
inventory, which may prompt us to offer our products at reduced prices and
reduce our profitability.
WE HAVE REINSTATED OUR HISTORICAL MERCHANDISING STRATEGY AND CANNOT GUARANTEE
ITS SUCCESS.
During 1999, in an attempt to expand the customer base by changing our
merchandise focus, we embarked on a re-merchandising strategy. Because the
results of the re-merchandising strategy fell well below our expectations, in
February 2000 we reinstated our historical strategies and integrated any
benefits that flowed from the re-merchandising, including a new trademark,
remodeled store interiors and updated fashions. We cannot assure you that our
revised approach will regain our core customers and re-establish our core
businesses.
BECAUSE WE PURCHASE AND SELL OUR PRODUCTS INTERNATIONALLY, OUR BUSINESS IS
SENSITIVE TO FOREIGN RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS.
Gymboree's products are currently manufactured to specifications by
independent factories located primarily in Asia, as well as the Middle East,
Central America, South America, Mexico and the United States. In addition to
Gymboree's reliance on foreign manufacturers, Gymboree has operations in Europe
and Canada. 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, natural disasters, social
or political unrest, disruptions or delays in shipments or customs clearance,
local business practices and changes in economic conditions in countries in
which our suppliers or stores are located. Gymboree cannot predict the effect of
such factors on our business relationships with foreign suppliers or on our
ability to sell our products in international markets. If any such factors were
to render the conduct of business in a particular country undesirable or
impractical, or if our current foreign manufacturing sources or mills were to
cease doing business with us for any reason, there could be a material and
adverse effect on Gymboree's results of operations and financial position.
WE WILL NOT BE ABLE TO MAINTAIN SUFFICIENT INVENTORY LEVELS IF OUR INDEPENDENT
MANUFACTURERS FAIL TO PROVIDE THE REQUIRED PRODUCTION CAPACITY.
Gymboree currently relies on unaffiliated manufacturers to produce
substantially all of our products, with whom we have no long-term contracts and
from whom we typically purchase goods on an order-by-order basis. Many of our
unaffiliated manufacturers produce goods for other companies, with which we
compete for production facilities and import quota capacity. If Gymboree
experiences significant increased demand, which cannot be foreseen, or in the
event any of our key manufacturers is unable or unwilling to continue to
manufacture Gymboree's products, Gymboree may not be able to obtain sufficient
capacity from our other current manufacturing sources or to identify and qualify
new unaffiliated sources in a timely manner. Any
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<PAGE> 13
significant delay in our ability to obtain adequate supplies of products from
our current or alternative sources would materially and adversely affect the
business and results of operations.
ZUTOPIA REPRESENTS A NEW BUSINESS FOR US, AND WE CANNOT GUARANTEE THAT WE WILL
BE ABLE TO OPERATE IT PROFITABLY.
Because Zutopia represents a new business for us, we cannot assure you that
we will be able to operate it profitably. During 1999, Gymboree opened 19 stores
under our new Zutopia product line, which offers clothing for girls between the
ages of seven and 14. We have not opened any Zutopia stores in 2000, and we will
likely review the performance of the Zutopia stores in the near future and
decide to expand the number of stores or to close or sell some or all of them.
Zutopia involves risk and uncertainties, including no operating history, no
history of market acceptance, potentially higher expenses without corresponding
revenue increases, negative impact on earnings, difficulty in obtaining new
store sites and 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. If we are unable to operate Zutopia profitably, our
aggregate losses could significantly increase which, in turn, could harm our
business and financial condition.
OUR RESULTS MAY BE IMPAIRED BY CHANGES IN FASHION TRENDS AND CONSUMER
PREFERENCES.
Gymboree's sales and profitability depend upon the continued demand by
customers for our apparel and accessories. We believe that our success depends
in large part upon our ability to anticipate, gauge and respond in a timely
manner to changing 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 not decline or that we will be able to anticipate, gauge and
respond to changes in fashion trends. If demand for our apparel and accessories
were to decline or if we were to misjudge fashion trends, Gymboree's business,
financial condition and results of operations could be materially adversely
affected.
WE CANNOT MAINTAIN AND GROW OUR SALES AND PROFITABILITY WITHOUT THE CONTINUED
DEVELOPMENT OF NEW PRODUCTS.
Gymboree's continued growth and success depend in large part on our ability
to successfully develop and introduce new products that are perceived to
represent an improvement in style, functionality or value compared to products
available in the marketplace. Failure to regularly develop and introduce new
products successfully could materially and adversely impact future growth and
profitability. In addition, in the future Gymboree may introduce certain new
products and concepts that may represent a shift in concept, design and target
market demographics from our traditional products. These new products may have
shorter life cycles, thereby requiring more frequent product introductions than
Gymboree's traditional product lines. Furthermore, these products and the
introduction of more products could dilute Gymboree's image as a leading
supplier of quality children's apparel in the newborn-to-seven age range and
lead to a reduced demand for our existing products.
THE HIGHLY COMPETITIVE BUSINESS IN WHICH WE OPERATE MAY IMPAIR OUR ABILITY TO
MAINTAIN AND GROW OUR SALES AND RESULTS.
The children's apparel segment of the specialty retail business is highly
competitive, and we may not be able to compete successfully in the future.
Gymboree competes on a national level with BabyGap and GapKids (divisions of The
Gap, Inc.), The Children's Place and Talbots Kids and certain leading department
stores as well as certain discount retail chains such as Old Navy (a division of
The Gap, Inc.) and Kids 'R' Us (a division of Toys 'R' Us, Inc.). Gymboree also
competes with a wide variety of local and regional specialty stores and with
certain other retail chains. Zutopia competes with Limited Too and with the
girls' lines of Abercrombie & Fitch and American Eagle Outfitters. We also
compete with children's retailers that sell their products by mail order or over
the Internet. Many of these competitors are larger and have substantially
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<PAGE> 14
greater financial, marketing and other resources than Gymboree. Increased
competition may reduce sales and gross margins, increase operating expenses and
decrease profit margins.
OUR BUSINESS IS SENSITIVE TO CHANGES IN SEASONAL CONSUMER SPENDING PATTERNS THAT
ARE BEYOND OUR CONTROL.
Historically, a disproportionate amount of our retail sales and a
significant portion of our net income have been realized during the months of
November and December, during the holiday season. We have also experienced
periods of increased sales activity in the early spring, during the period
leading up to the Easter holiday, and in the early fall, in connection with
back-to-school sales. Changes in seasonal consumer spending patterns for reasons
beyond our control could result in lower-than-expected sales during these
periods. Such a circumstance could cause us to have excess inventory,
necessitating mark-downs to minimize this excess, which would reduce our
profitability. Also, because Gymboree typically spends more in labor costs
during the holiday season, when we hire temporary store employees in
anticipation of holiday spending, a shortfall in expected sales during that
period could result in a disproportionate decrease in our net income.
OUR BUSINESS WILL SUFFER IF OUR INDEPENDENT MANUFACTURERS FAIL TO PRODUCE
APPAREL THAT MEETS OUR QUALITY STANDARDS.
Gymboree has occasionally received, and may in the future continue to
receive, shipments of products from unaffiliated manufacturers that fail to
conform to our quality control standards. We cannot assure you that our
independent manufacturers will continue to produce products that comply with
Gymboree's standards. In such an event, unless we are able to obtain replacement
products in a timely manner, Gymboree may lose revenue and experience related
increased administrative and shipping costs. Also, the failure of any key
unaffiliated manufacturer to supply products that conform to Gymboree's
standards could materially and adversely affect our reputation in the
marketplace.
WE MAY SUFFER NEGATIVE PUBLICITY IF ANY OF OUR PRODUCTS ARE FOUND TO BE UNSAFE.
Gymboree currently tests most toys and similar products sold in our stores.
However, we may end this practice in the foreseeable future, as we anticipate
that a larger portion of the toys and similar products we sell will be products
that we buy from market sources for resale to our customers. If these products
have safety problems of which we are not aware or if the Consumer Product Safety
Commission recalls a product sold in our stores, we may experience not only
negative publicity, which could adversely impact our sales and reputation, but
also product liability lawsuits, which could have a material adverse effect on
our reputation, business and our financial position.
WE MAY BE SUBJECT TO NEGATIVE PUBLICITY OR BE SUED IF OUR MANUFACTURERS VIOLATE
LABOR LAWS OR ENGAGE IN PRACTICES THAT OUR CUSTOMERS BELIEVE ARE UNETHICAL.
We seek to require our independent manufacturers to operate their
businesses in compliance with the laws and regulations that apply to them. Our
sourcing personnel periodically visit and monitor the operations of our
independent manufacturers, but we cannot control their business and labor
practices. If an independent manufacturer violates labor laws or other
applicable regulations, or if such a manufacturer engages in labor or other
practices that diverge from those typically acceptable in the United States,
Canada or Europe, Gymboree could in turn experience negative publicity or be
sued. Negative publicity regarding the production of our products could
materially adversely affect sales of our products and our business, and a
lawsuit could materially adversely effect our financial position.
For example, Gymboree has been named as a defendant in a lawsuit relating
to sourcing of products from Saipan (Commonwealth of the Northern Mariana
Islands). A complaint was filed on January 13, 1999 in the U.S. District Court,
Central District of California, by various unidentified worker plaintiffs
against Gymboree and approximately 25 other parties. The case was transferred to
the U.S. District Court for the District of Hawaii. That court ordered the case
transferred to U.S. District Court for the District of the Northern Mariana
Islands. The transfer to the District Court in the Northern Mariana Islands was
stayed by the Ninth Circuit Court of Appeals, so that it could review the legal
issues involved. The plaintiffs seek class-action
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<PAGE> 15
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 products for us. The plaintiffs seek injunctive relief as well as actual
and punitive damages. Gymboree has agreed to a settlement with the plaintiffs
that would require us to pay approximately $200,000, but the settlement will not
take effect until it is approved by the court, which cannot take place until the
transfer issues are decided. There can be no assurance that the court that
ultimately hears the motion to approve the settlement will approve it.
THE LOSS OF A KEY VENDOR COULD IMPAIR OUR ABILITY TO OBTAIN A SUFFICIENT
QUANTITY OF FABRIC FOR OUR APPAREL.
In fiscal 1999, one vendor accounted for a majority of our cotton knit
fabric purchases. The loss of this vendor, or a delay in obtaining fabric from
this vendor, could have a material adverse effect on our business and operating
results, though we believe that other sources could be identified to satisfy our
requirements for cotton knit fabrics.
OUR BUSINESS MAY BE HARMED BY ADDITIONAL UNITED STATES REGULATION OF FOREIGN
TRADE.
Our business is subject to the risk that the United States may adopt
additional regulations relating to imported apparel products, including quotas,
duties, taxes and other charges or restrictions on imported apparel. We cannot
predict whether additional United States quotas, duties, taxes or other charges
or restrictions will be imposed upon the importation of our products in the
future, or what effect any such actions would have on our business, financial
position and results of operations. If the U.S. government imposes any such
charges or restrictions, the supply of products could be disrupted and their
cost could substantially increase, either of which could materially adversely
affect our operating results.
OUR BUSINESS WILL BE IMPAIRED IF WE CANNOT PROTECT OUR TRADEMARKS.
We believe that our registered and common law trademarks have significant
value and that some of our trademarks are instrumental to our ability to create
and sustain demand for and to market our products. We believe that there are no
currently pending material challenges to the use or registration of any of
Gymboree's registered trademarks. There can be no assurance, however, that our
trademarks do not or will not violate the proprietary rights of others, that
they would be upheld if challenged or that Gymboree would, in such an event, not
be prevented from using our trademarks, any of which could have a material
adverse effect on Gymboree and our business. In addition, we could incur
substantial costs in defending legal actions taken against Gymboree relating to
our use of trademarks, which could have a material adverse effect on our results
of operations and financial position.
From time to time, Gymboree discovers products in the marketplace that are
counterfeit reproductions of our products or that otherwise infringe upon
trademark rights held by Gymboree. If Gymboree is unsuccessful in challenging a
third party's products on the basis of trademark infringement, continued sales
of such products by that or any other third party could adversely impact the
Gymboree brand, result in the shift of consumer preferences away from Gymboree
and generally have a material adverse effect on our results of operations and
financial position.
A DISASTER COULD SEVERELY DAMAGE OUR OPERATIONS.
Our operations depend on our ability to maintain and protect our computer
systems, on which we rely to manage our purchase orders, store inventory levels,
accounting functions and other aspects of our business. We have computer systems
located in each of our stores, with the main database server for our systems
located in Burlingame, California, which exists on or near known earthquake
fault zones. A disaster could severely damage our business and results of
operations not only by damaging our stores, but also by damaging our main
server, which could disrupt our business for an indeterminate length of time.
Although the outside facility that hosts our main server is designed to be fault
tolerant, our systems are vulnerable to damage from fire, floods, earthquakes,
power loss, telecommunications failures, and similar events. Although we
maintain insurance against fires, floods, earthquakes and general business
interruptions, there can be no assurance that the amount
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<PAGE> 16
of coverage will be adequate in any particular case. We have a disaster recovery
plan in effect and some redundant systems for our service at an alternate site.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gymboree enters into forward foreign exchange contracts to hedge certain
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.
As of October 28, 2000, Gymboree had no open forward foreign exchange
contracts.
Gymboree's current borrowings under its line of credit are subject to a
variable interest rate which, if increased, would have an adverse impact on
Gymboree.
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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 the Northern Mariana Islands). A complaint
was filed on January 13, 1999 in the U.S. District Court, Central District of
California, by various unidentified worker plaintiffs against Gymboree and
approximately 25 other parties. The case was transferred to the U.S. District
Court for the District of Hawaii. That court ordered the case transferred to
U.S. District Court for the District of the Northern Mariana Islands. The
transfer to the District Court in the Northern Mariana Islands was stayed by the
Ninth Circuit Court of Appeals, so that it could review the legal issues
involved. The 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 products for us. The
plaintiffs seek injunctive relief as well as actual and punitive damages.
Gymboree has agreed to a settlement with the plaintiffs that would require us to
pay approximately $200,000, but the settlement will not take effect until it is
approved by the court, which cannot take place until the transfer issues are
decided. There can be no assurance that the court that ultimately hears the
motion to approve the settlement will approve it.
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
Between October 4, 2000 and November 14, 2000 Gymboree entered into a
series of amendments to the existing secured facility with Fleet Retail Finance,
Inc. that increased the overall credit line to $87.5 million and reduced certain
applicable reserves. The credit line and applicable reserves have since returned
to original levels.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
10.36 First Amendment To Secured Credit Agreement With Fleet
Retail Finance, Inc. dated October 9, 2000.
10.37 Second Amendment To Secured Credit Agreement With Fleet
Retail Finance, Inc. dated October 30, 2000.
10.38 Third Amendment To Secured Credit Agreement With Fleet
Retail Finance, Inc. dated November 14, 2000.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
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<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)
Date: December 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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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.36 First Amendment To Secured Credit Agreement With Fleet
Retail Finance, Inc. dated October 9, 2000.
10.37 Second Amendment To Secured Credit Agreement With Fleet
Retail Finance, Inc. dated October 30, 2000.
10.38 Third Amendment To Secured Credit Agreement With Fleet
Retail Finance, Inc. dated November 14, 2000.
27 Financial Data Schedule
</TABLE>
17
