1
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 31, 1998
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
incorporation or organization) Identification No.)
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 28, 1998: 24,172,134
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TABLE OF CONTENTS
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Page
Number
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations................3
Condensed Consolidated Balance Sheets..........................4
Condensed Consolidated Statements of Cash Flows................5
Notes to Condensed Consolidated Financial Statements...........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................8
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
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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)
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net Sales $ 113,991 $ 101,120 $ 316,886 $ 258,044
Cost of goods sold, including
buying and occupancy expenses (72,897) (55,261) (200,979) (142,787)
--------- --------- --------- ---------
Gross Profit 41,094 45,859 115,907 115,257
Selling, general and administrative expenses (42,132) (29,129) (112,967) (79,434)
Play program income 608 163 1,369 265
--------- --------- --------- ---------
Operating income (loss) (430) 16,893 4,309 36,088
Currency transaction gain (loss) (113) (146) 32 (159)
Interest income 114 499 490 2,231
--------- --------- --------- ---------
Income (loss) before income taxes (429) 17,246 4,831 38,160
Income tax (expense) benefit 156 (6,381) (1,787) (14,120)
--------- --------- --------- ---------
Net income (loss) $ (273) $ 10,865 $ 3,044 $ 24,040
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.01) $ 0.44 $ 0.13 $ 0.98
Diluted (0.01) 0.44 0.13 0.96
Weighted average shares outstanding:
Basic 24,172 24,570 24,148 24,589
Diluted 24,172 24,858 24,210 24,939
Number of stores at end of period 548 427 548 427
See notes to condensed consolidated financial statements.
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
October 31, January 31, November 1,
1998 1998 1997
----------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,170 $ 17,870 $ 8,413
Investments -- 18,642 37,848
Accounts receivable 11,095 5,184 6,005
Merchandise inventories 95,037 75,293 68,641
Prepaid expenses and other 6,214 4,467 2,825
-------- -------- --------
Total current assets 114,516 121,456 123,732
-------- -------- --------
PROPERTY AND EQUIPMENT
Land and Buildings 9,969 10,405 7,541
Leasehold improvements 76,379 58,082 56,164
Furniture, fixtures and equipment 85,630 66,819 62,919
-------- -------- --------
171,978 135,306 126,624
Less accumulated depreciation and amortization (42,038) (30,934) (27,649)
-------- -------- --------
129,940 104,372 98,975
OTHER ASSETS 3,864 3,372 2,980
-------- -------- --------
TOTAL ASSETS $248,320 $229,200 $225,687
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 17,450 $ -- $ --
Trade accounts payable 18,314 26,046 20,653
Accrued liabilities 16,757 15,781 15,232
Income taxes payable 2,028 8,039 5,279
-------- -------- --------
Total current liabilities 54,549 49,866 41,164
-------- -------- --------
DEFERRED RENT AND OTHER 30,336 21,624 18,418
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock, including excess paid-in capital
($.001 par value: 100,000,000 shares authorized
24,172,134, 24,015,096 and 24,642,015 shares
outstanding at October 31, 1998, January 31, 1998
and November 1, 1997, respectively) 25,115 23,109 42,491
Restricted stock deferred compensation -- (337) (337)
Unrealized change in value of investments -- 28 121
Cumulative translation adjustments 334 (32) 17
Retained earnings 137,986 134,942 123,813
-------- -------- --------
Total stockholders' equity 163,435 157,710 166,105
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $248,320 $229,200 $225,687
======== ======== ========
See notes to condensed consolidated financial statements.
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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
39 Weeks Ended
October 31, November 1,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,044 $ 24,040
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities:
Depreciation and amortization 13,755 9,516
Non-cash compensation expenses -- 416
Provision for deferred income tax (58) 1,287
Cumulative translation adjustments 366 16
Tax benefit from exercise of stock options 240 2,392
Loss on disposal of property and equipment 1,238 1,347
Change in assets and liabilities:
Accounts receivable (5,911) (1,669)
Inventories (19,744) (19,662)
Prepaid expenses and other assets (5,138) (3,194)
Accounts payable (7,732) (1,296)
Income tax payable (6,011) (1,352)
Deferred liabilities 8,712 3,847
Accrued liabilities 3,933 2,128
-------- --------
Net cash provided by/(used in) operating activities (13,306) 17,816
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40,585) (39,249)
Proceeds from sales of assets 24 --
Proceeds from sale of investments 18,614 44,414
-------- --------
Net cash provided by/(used in) investing activities (21,947) 5,165
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 2,103 7,402
Repurchase of common stock -- (29,997)
Net proceeds from short-term debt borrowings 17,450 --
-------- --------
Net cash provided by / (used in) financing activities 19,553 (22,595)
-------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (15,700) 386
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,870 8,027
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,170 $ 8,413
======== ========
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 its wholly-owned subsidiaries (the "COMPANY") as of
and for the periods ended October 31, 1998 and November 1, 1997 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 the Company believes that the disclosures are adequate
to make the information presented not misleading. It is recommended that
these financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the year ended January 31, 1998.
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 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. INCOME TAXES
The Company's effective tax rate in the third quarter of fiscal 1998 was
37%, consistent with the same period last year.
4. COMPREHENSIVE INCOME
During the first fiscal quarter of fiscal 1998, the Company adopted
statement of financial accounting standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS 130 requires the presentation, by major
components and as a single total, the change in the Company's net assets
during a period from non-owner sources. The adoption of this statement
resulted in a change in financial statement presentation, but did not have
an impact on the Company's condensed consolidated balance sheets, statements
of operations or cash flows. Comprehensive income and its components are as
follows:
13 Weeks Ended 39 Weeks Ended
------------------------------------- -------------------------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
---------------- ---------------- ---------------- ----------------
(in 000's)
Net income (loss) $(273) $ 10,865 $ 3,044 $ 24,040
Unrealized gain (loss) on investments 0 (15) (28) (98)
Cumulative translation adjustments 51 324 366 16
----- -------- ------- --------
Total comprehensive income (loss) $(222) $ 11,174 $ 3,382 $ 23,958
===== ======== ======= ========
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5. FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts to reduce
exposure to foreign currency exchange risk. These contracts are designed as
hedges of certain intercompany receivables denominated in foreign
currencies. The Company will continue to engage in these financial
instrument transactions in an attempt to reduce exposure to foreign currency
fluctuations.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes annual and interim reporting standards for
operating segments of an enterprise and related disclosures about its
products, services, geographic areas and major customers. SFAS No. 131 is
effective for the Company's fiscal years ending after January 31, 1998.
Adoption of this standard will not impact the Company's consolidated balance
sheets, statements of income or cash flows, and any effect will be limited
to the form and content of its disclosures.
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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:
As a Percentage of Net Sales
----------------------------------------------------------- Percentage Change
Thirteen Thirty-Nine in Dollar Amounts
Weeks Ended Weeks Ended From 1997 to 1998
--------------------------- --------------------------- ----------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997 13 weeks 39 weeks
----------- ----------- ----------- ----------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0% 13% 23%
Cost of goods sold, including
buying and occupancy expenses (63.9) (54.6) (63.4) (55.3) 32% 41%
----- ----- ----- -----
Gross Profit 36.1 45.4 36.6 44.7 -10% 1%
Selling, general and administrative
expenses (37.0) (28.9) (35.6) (30.8) 45% 42%
Play program income 0.5 0.2 0.4 0.1 273% 417%
----- ----- ----- -----
Operating income (0.4) 16.7 1.4 14.0 -103% -88%
Currency transaction gain (loss) (0.1) (0.1) 0.0 (0.1) -23% -120%
Interest income 0.1 0.5 0.2 0.9 -77% -78%
----- ----- ----- -----
Income before income taxes (0.4) 17.1 1.6 14.8 -102% -87%
Income taxes 0.1 (6.4) (0.6) (5.5) -102% -87%
----- ----- ----- -----
Net income (0.3)% 10.7% 1.0% 9.3% -103% -87%
===== ===== ===== =====
Number of stores at end of period 548 427 548 427
THIRTEEN WEEKS ENDED OCTOBER 31, 1998 COMPARED TO THIRTEEN WEEKS ENDED
NOVEMBER 1, 1997
NET SALES
Net sales in the third quarter of fiscal 1998 increased 13% to $114.0
million compared to $101.1 million in the same period last year. Sales for the
additional 113 stores opened in fiscal 1998 contributed $15.0 million of the
increase in net sales. Stores opened prior to fiscal 1998, but not qualifying as
comparable stores, in addition to the twenty-two stores that were relocated or
expanded in fiscal 1998, contributed $4.0 million of the increase in net sales.
Comparable store net sales decreased 6.9% or $6.1 million in the third quarter.
GROSS PROFIT
Gross profit for the thirteen weeks ended October 31, 1998 decreased 10% to
$41.1 million from $45.9 million in the same period last year. As a percentage
of net sales, gross profit was 36.1% in the third quarter of 1998 compared to
45.4% in the same period last year. The high degree of promotional activity
continued to adversely affect gross profit as a percentage of sales during the
thirteen weeks ended October 31, 1998. As the Company continues to reduce
inventories, gross profit as a percentage of net sales will remain below fiscal
1997 levels.
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RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("S, G&A"), which principally
consist of non-occupancy store expenses, corporate overhead and distribution
expenses, increased to 37.0% of net sales in the third quarter of fiscal 1998,
compared to 28.9% of net sales in the same period last year. The increase in
total S, G&A expenses, as a percentage of net sales was primarily attributable
to the decrease in comparable store sales coupled with new store additions, both
domestic and international, and startup expenses for the development of the new
retail concept. Other increases in S, G&A included continued marketing expenses
associated with direct mail and other promotional campaigns.
The Company expects total S, G&A expenses, as a percentage of net sales, to
remain above last year levels due to funding of the development of the Company's
new retail concept, increased marketing efforts in the form of direct mail,
print and television advertising. These higher expenses, combined with the
expected lower gross profit as a percentage of net sales, are expected to result
in full year net earnings growth at a level less than those achieved in recent
years.
FOREIGN EXCHANGE TRANSACTIONS
Foreign exchange transaction losses totalled $0.1 million during the third
quarter of 1998 and were consistent with the third quarter of 1997. This loss
resulted from currency fluctuations in intercompany transactions between the
Company's U.S. operations and its foreign subsidiaries.
INTEREST INCOME
Interest income decreased 77% to $114,000 during the third quarter of 1998
from $499,000 during the third quarter of the prior year. The decrease in
interest income was due to the decrease in cash, cash equivalents, and
investments during the third quarter of 1998 as compared to the same period in
1997 which was primarily the result of two stock repurchases completed during
fiscal 1997 for a total of $50.0 million. This trend of declining interest
income is expected to continue for the foreseeable future.
INCOME TAX
The Company's effective tax rate for the third quarter of fiscal 1998 was
37%, consistent with the same period last year.
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THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 1997
NET SALES
Net sales for the thirty-nine weeks ended October 31, 1998 increased 23% to
$316.9 million compared to $258.0 million in the same period last year. Sales
for the additional 113 stores opened in fiscal 1998 contributed $24.5 million of
the increase in net sales. Stores opened prior to fiscal 1998, but not
qualifying as comparable stores, in addition to the twenty-two stores that were
relocated or expanded in fiscal 1998, contributed $29.8 million of the increase
in net sales. Comparable store net sales increased 2% in the thirty-nine weeks
ended October 31, 1998. The increase in comparable store net sales was primarily
attributable to promotional pricing and contributed $4.6 million of the increase
in net sales.
GROSS PROFIT
Gross profit for the thirty-nine weeks ended October 31, 1998 increased
1% to $115.9 million from $115.3 million in the same period last year. As a
percentage of net sales, gross profit was 36.6% in the first nine months of
fiscal 1998 compared to 44.7% in the same period last year. The decrease in
gross profit as a percentage of net sales was attributable to a significant
increase in the promotional pricing of merchandise and increases in occupancy
expenses attributable to larger domestic stores and higher rents paid in Europe
during the first three quarters of fiscal 1998 as compared to the same period
last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
S, G&A increased to 35.6% of net sales in the thirty-nine weeks ended
October 31, 1998 compared to 30.8% of net sales in the same period last year.
The increase in S, G&A was primarily attributable to the funding of the
Company's international expansion into Europe and Canada, the costs associated
with a cancelled plan to enter Japan and Hong Kong, start-up expenses for the
development of the new retail concept, and increases in distribution costs due
to the opening of a new distribution center in Dixon, California and the closure
of the existing facility located in Hayward, California. Other increases in S,
G&A included marketing, expenses associated with direct mail and other
promotional campaigns and Year 2000 related professional services.
FOREIGN EXCHANGE TRANSACTIONS
Foreign exchange transaction gains were $0.03 million for the thirty-nine
weeks ended October 31, 1998 compared to losses of $0.2 million for the
thirty-nine weeks ended November 1, 1997. This gain resulted from currency
fluctuations in intercompany transactions between the Company's U.S. operations
and its foreign subsidiaries.
INTEREST INCOME
Interest income decreased 78% to $0.5 million from $2.2 million in the
prior year. The decrease in interest income was due to the decrease in cash,
cash equivalents, and investments during the first three quarters of 1998 as
compared to the same period in 1997 which was primarily the result of two stock
repurchases completed during fiscal 1997 for a total of $50.0 million.
INCOME TAX
The Company's effective tax rate in the first nine months of fiscal 1998
was 37%, consistent with the same period last year.
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FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $13.3 million compared to cash
provided by operating activities of $17.8 in the prior year. The use of cash in
operating activities was primarily due to lower net income coupled with a
decrease in working capital.
Cash used in investing activities of $21.9 million resulted from $40.6
million in capital expenditures related primarily to new store openings, as well
as the relocation and/or expansion of certain existing stores offset by $18.6
million generated from sales of marketable securities.
Cash provided by financing activities of $19.6 million was primarily due to
$17.5 million of short-term borrowings.
The combined balances of cash, cash equivalents and investments were $2.1
million at October 31, 1998, a decrease of $34.3 million from January 31, 1998.
Working capital as of October 31, 1998 was $60.0 million compared to $71.6
million at the end of fiscal 1997. The decrease in working capital was primarily
due to increases in current liabilities.
The Company estimates that capital expenditures during fiscal 1998 will be
between $45 million and $50 million, and will be principally used to fund the
opening of 128 new stores and the relocation or expansion of approximately 22 to
25 existing stores.
At the end of the third quarter of fiscal 1998, the Company had a line of
credit with Bank of America NT&SA that allowed up to $70 million in unsecured
letters of credit (of which $11 million can be used for standby letters of
credit) and up to $30 million in borrowings through the end of November, up to
$15 million in borrowings during the month of December, and no borrowings
thereafter until the expiration of the agreement on May 31, 1999. As the
borrowing capacity is reduced, the amount available for unsecured letters of
credit is increased. The interest rate for any borrowings is the Bank of America
NT&SA's reference rate or the LIBOR rate plus 0.75 percentage points, which was
6.72% on October 31, 1998. The Company uses these lines primarily to support
letters of credit which fund its foreign sourcing of merchandise inventories. As
of October 31, 1998, $12.6 million was available in borrowings. In addition,
under this same line, the Company may engage in up to $50 million in foreign
exchange contracts, of which $25.9 million was available at October 31, 1998.
The Company continues to explore a number of financing alternatives,
however, the Company anticipates that cash generated from operations, together
with its existing cash resources and funds that are expected to be available
from its current and planned future credit facilities, will be sufficient to
satisfy its cash needs through at least fiscal 1998.
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YEAR 2000
In the next two years, most companies could face a potential 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".
Gymboree's Year 2000 initiative extends throughout the entire Company and
includes all operating functions. Managing this effort on a regular basis is
Gymboree's 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 have 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. The Company has completed an
Enterprise Master Plan, Enterprise Test Plan, Configuration Management Plan, and
Quality Assurance Plan. A Test Data Center will be constructed which is being
used to remediate and test all mission critical systems. Gymboree's business
processes are organized into eleven groups of applications. The Plans call for
completing the remediation and testing phase for all groups by the end of the
second quarter 1999. Enterprise and remote site testing is scheduled for
completion by the end of the third quarter 1999. The Company currently expects
Year 2000 problems material to the Company to be corrected prior to December
1999.
COSTS
Based on best estimates, the total cost of the Year 2000 readiness
initiative which covers fiscal years 1998 and 1999 is approximately $2.0 - $3.0
million. $0.6 million has been expensed for the nine months ended October 31,
1998. There can be no assurance that these estimates will not be exceeded. All
costs will be paid from the Company's operating funds.
RISKS OF YEAR 2000 ISSUES
The area of greatest risk to the Company's 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,
seventy-one percent of our trading partners have responded with a formal plan to
be Year 2000 compliant. Failure of Year 2000 compliance by our trading partners
could result in a delay in the receipt of inventory, an inability to open
stores, and lost sales. There can be no assurance that the Year 2000 problem
will not have a material adverse effect on the Company's 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 are not Year 2000
compliant by January 1999 is to obtain alternate suppliers that are Year 2000
compliant. This plan was communicated to our trading partners during the
surveying process. However, there can be no assurance that such contingency
plans will remediate all Year 2000 issues which the Company might ultimately
encounter.
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OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
This Form 10-Q contains certain forward-looking statements reflecting the
Company's 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 the Company, inventory levels, and the ability
of the Company 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 the Company files 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 in the
United States is becoming more competitive. The Company competes on a national
level with GapKids (a part 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.). Gymboree also competes with a wide variety of local and
regional specialty stores and with certain other retail chains. The continued
success of the Company is contingent upon its ability to compete.
INVENTORY LEVELS
The Company is taking steps to reduce inventories and to pursue new
merchandising and marketing initiatives. This will cause gross profit as a
percentage of net sales to continue to remain below fiscal 1997 levels for the
balance of fiscal 1998.
INTERNATIONAL EXPANSION
During the third quarter of fiscal 1998, the Company opened one additional
store in Canada, bringing the number of stores in Canada to Fourteen and also
opened six stores in the United Kingdom and one in Ireland, bringing the total
number of stores in the United Kingdom and Ireland to twenty-one. For the
remainder of fiscal 1998, the Company plans to further its international
expansion in the United Kingdom. The success of this planned expansion will
depend upon a number of factors, including the ability of the Company to compete
internationally, the availability of suitable store locations, the ability to
provide an adequate supply of inventory and the ability to hire and train
qualified employees, of which there can be no assurance. The Company has
decided, however, to defer its expansion into Japan and Hong Kong.
NEW RETAIL CONCEPT
During the first quarter of 1998, the Company announced its plans to launch
a new retail concept. It is intended to broaden the Company's market by
introducing clothing stores targeted for children between the ages of 6 and 12
years old. This retail concept will offer apparel, footwear and accessories to
boys and girls within those ages. This new concept represents a significant
shift in concept, design and target market demographics from the Company's
traditional products. These products may have short life cycles, thereby
requiring more frequent product introductions than the Company's traditional
product line. Further, these products and the introduction of more products
could dilute the Company's image as a leading supplier of children's apparel in
the 0-7 age range and lead to a reduced demand for its existing products. The
first of these stores is expected to open in the first quarter of 1999.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company enters into forward foreign exchange contracts to hedge certain
intercompany receivables denominated in foreign currencies (principally Irish
Punts, British Pounds Sterling, and Canadian Dollars). The term of the forward
exchange contracts is generally less than 90 days. The purpose of the Company's
foreign currency hedging activities is to protect the Company from the risk that
the eventual dollar net cash inflow resulting from the repayment of certain
intercompany receivables from Gymboree's foreign subsidiaries will be adversely
affected by changes in exchange rates. However, the Company may not be able to
realize the benefits from these hedging activities due to the inherent risks
associated with fluctuation in foreign currency exchange rates.
The table below summarizes by major currency the contractual amounts of
Gymboree's 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.
BALANCE AT OCTOBER
31, 1998
($ IN MILLIONS)
------------------
Irish Punts 12.9
British Pounds Sterling 6.4
Canadian Dollars 4.8
-----
Total $24.1
=====
There were no open currency contracts at the end of the third quarter last year.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
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
a. Management Change of Control Plan
The Company adopted The Gymboree Corporation Management Change of
Control Plan (the "Management Plan") on February 24, 1998 in order to
provide key employees with certain severance benefits upon
termination of employment following a change of control. The
employees eligible to participate in the Management Plan include the
Company's Chief Executive Officer, Senior Vice Presidents, Vice
Presidents and Directors. The Company believes that such benefits
will provide these employees with enhanced financial security and
provide an efficient incentive and encouragement to these employees
to remain with the Company, notwithstanding the possibility or
occurrence of a change of control, and to maximize the value of the
Company upon a change of control for the benefit of its stockholders.
Subject to the terms of the Management Plan, the benefits provided by
the Management Plan are available to those employees who have
received and returned to the Company a signed notice of
participation. Thereafter, subject to the terms of the Management
Plan, if a participant's employment involuntarily terminates at any
time within the eighteen month period following a change of control,
then such participant shall be entitled to receive severance benefits
in accordance with the terms of the Management Plan. Such severance
benefits are determined pursuant to a formula set forth in the
Management Plan.
b. Management Severance Plan
The Company adopted The Gymboree Corporation Management Severance
Plan (the "Severance Plan") on February 24, 1998 in order to provide
for the payment of severance benefits to participants whose
employment with the Company terminates in an involuntary termination
other than in connection with a change of control. The employees
eligible to participate in the Management Severance Plan include the
Company's Chief Executive Officer, Senior Vice Presidents and Vice
Presidents. The Company believes that severance benefits of this kind
will aid the Company in attracting and retaining the highly qualified
individuals that are essential to its success. Subject to the terms
of the Severance Plan, the benefits provided by the Plan are
available to those employees who have received and returned to the
Company a signed notice of participation. The severance benefits are
determined pursuant to a formula set forth in the Severance Plan.
ITEM 6. EXHIBITS
(a) Exhibits
10.26 Management Change of Control Plan
10.27 Management Severance Plan
11 Computation of Net Income per Share
27 Financial Data Schedule
15
16
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)
December 15, 1998 By: /s/ GARY WHITE
- ----------------- --------------------------------------
Date Gary White
Chief Executive Officer
(Principal executive officer
of the registrant)
December 15, 1998 By: /s/ LAWRENCE H. MEYER
- ----------------- --------------------------------------
Date Lawrence H. Meyer
Chief Financial Officer
(Principal financial and
accounting officer of the
registrant)
16
17
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.26 Management Change of Control Plan
10.27 Management Severance Plan
11 Computation of Net Income per Share
27 Financial Data Schedule
17