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Table of Contents

 

 

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 August 2, 2014

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

incorporation or organization)

 

(IRS Employer

Identification No.)

500 Howard Street, San Francisco,

California

  94105
(Address of principal executive offices)   (Zip Code)

(415) 278-7000

(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  ¨    No  ¨*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated Filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of September 15, 2014, the registrant had 1,000 shares of common stock outstanding, par value $0.001 per share, all of which are owned by Giraffe Holding, Inc., the registrant’s indirect parent holding company, and are not publicly traded.

 

* In order to comply with reporting covenants governing the terms of its indebtedness, the Registrant files periodic and current reports with the SEC, but is not required by law to file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Part I—FINANCIAL INFORMATION

     1   

Item 1.

  Financial Statements      1   
  Condensed Consolidated Balance Sheets      1   
  Condensed Consolidated Statements of Operations      2   
  Condensed Consolidated Statements of Comprehensive Income (Loss)      3   
  Condensed Consolidated Statements of Cash Flows      4   
  Notes to Condensed Consolidated Financial Statements      5   
  Report of Independent Registered Public Accounting Firm      32   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      38   

Item 4.

  Controls and Procedures      39   

Part II—OTHER INFORMATION

     40   

Item 1.

  Legal Proceedings      40   

Item 1A.

  Risk Factors      40   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      40   

Item 3.

  Defaults Upon Senior Securities      40   

Item 4.

  Mine Safety Disclosures      40   

Item 5.

  Other Information      40   

Item 6.

  Exhibits      40   
  Signatures      41   


Table of Contents

Part I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

     August 2,
2014
    February 1,
2014
    August 3,
2013
 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 24,879      $ 39,429      $ 26,831   

Accounts receivable, net of allowance of $1,655, $1,370 and $384

     21,129        21,882        26,916   

Merchandise inventories

     223,694        175,495        214,981   

Prepaid income taxes

     3,076        1,979        4,037   

Prepaid expenses

     19,684        18,801        18,081   

Deferred income taxes

     8,172        13,454        36,378   
  

 

 

   

 

 

   

 

 

 

Total current assets

     300,634        271,040        327,224   
  

 

 

   

 

 

   

 

 

 

Property and equipment:

      

Land and buildings

     22,428        22,428        22,428   

Leasehold improvements

     201,985        195,556        188,301   

Furniture, fixtures and equipment

     120,568        117,131        106,215   
  

 

 

   

 

 

   

 

 

 
     344,981        335,115        316,944   

Less accumulated depreciation and amortization

     (148,314     (128,807     (110,484
  

 

 

   

 

 

   

 

 

 

Net property and equipment

     196,667        206,308        206,460   

Goodwill

     758,777        758,777        898,983   

Other intangible assets, net

     558,210        559,824        577,782   

Deferred financing costs

     29,091        32,455        36,819   

Other assets

     9,835        11,700        8,293   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,853,214      $ 1,840,104      $ 2,055,561   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 112,638      $ 101,959      $ 100,794   

Accrued liabilities

     86,231        100,303        93,947   

Line of credit

     64,000        —          —     

Current obligation under capital lease

     527        503        —     
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     263,396        202,765        194,741   
  

 

 

   

 

 

   

 

 

 

Long-term liabilities:

      

Long-term debt

     1,113,893        1,113,742        1,138,595   

Long-term obligation under capital lease

     3,133        3,402        —     

Lease incentives and other liabilities

     52,664        50,432        45,529   

Unrecognized tax benefits

     6,475        6,157        8,894   

Deferred income taxes

     209,220        214,464        229,548   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,648,781        1,590,962        1,617,307   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

Common stock, including additional paid-in capital ($.001 par value: 1,000 shares authorized, issued and outstanding)

     520,201        517,932        522,461   

Accumulated deficit

     (323,842     (279,258     (88,117

Accumulated other comprehensive loss

     (4,711     (4,880     (4,888
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     191,648        233,794        429,456   

Noncontrolling interest

     12,785        15,348        8,798   
  

 

 

   

 

 

   

 

 

 

Total equity

     204,433        249,142        438,254   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,853,214      $ 1,840,104      $ 2,055,561   
  

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

1


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     13 Weeks Ended     26 Weeks Ended  
     August 2, 2014     August 3, 2013     August 2, 2014     August 3, 2013  

Net sales:

        

Retail

   $ 253,376      $ 278,944      $ 512,500      $ 559,821   

Gymboree Play & Music

     7,319        6,260        14,151        12,588   

Retail Franchise

     3,608        5,712        9,662        11,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     264,303        290,916        536,313        583,699   

Cost of goods sold, including buying and occupancy expenses

     (167,939     (183,830     (331,591     (355,640
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     96,364        107,086        204,722        228,059   

Selling, general and administrative expenses

     (107,140     (102,023     (209,430     (206,152
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (10,776     5,063        (4,708     21,907   

Interest income

     68        61        115        102   

Interest expense

     (20,455     (20,467     (40,829     (40,869

Other income (expense), net

     (134     (111     (502     (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (31,297     (15,454     (45,924     (18,962

Income tax (expense) benefit

     (1,556     6,129        (1,932     6,789   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (32,853     (9,325     (47,856     (12,173

Net loss (income) attributable to noncontrolling interest

     1,700        (25     3,272        287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (31,153   $ (9,350   $ (44,584   $ (11,886
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

     13 Weeks Ended     26 Weeks Ended  
     August 2, 2014     August 3, 2013     August 2, 2014     August 3, 2013  

Net loss

   $ (32,853   $ (9,325   $ (47,856   $ (12,173
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Foreign currency translation adjustments, net of tax

     247        (402     (150     (423

Unrealized net (loss) gain on cash flow hedges, net of tax benefit of $0, $435, $0, and $500

     (8     1,615        14        1,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     239        1,213        (136     1,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (32,614     (8,112     (47,992     (11,090

Comprehensive loss (income) attributable to noncontrolling interest

     1,530        (43     3,577        230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to The Gymboree Corporation

   $ (31,084   $ (8,155   $ (44,415   $ (10,860
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     26 Weeks Ended  
     August 2, 2014     August 3, 2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (47,856   $ (12,173

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     22,534        23,684   

Amortization of deferred financing costs and accretion of original issue discount

     3,515        3,362   

Interest rate cap contracts - adjustment to market

     932        432   

Loss on disposal/impairment of assets

     3,883        1,949   

Deferred income taxes

     36        (9,498

Share-based compensation expense

     2,269        2,974   

Other

     21        —     

Change in assets and liabilities:

    

Accounts receivable

     739        645   

Merchandise inventories

     (48,576     (16,803

Prepaid income taxes

     (1,095     (1,166

Prepaid expenses and other assets

     (174     (1,083

Accounts payable

     10,673        10,661   

Accrued liabilities

     (12,822     (456

Lease incentives and other liabilities

     3,472        8,062   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (62,449     10,590   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (16,523     (23,228

Other

     (66     (162
  

 

 

   

 

 

 

Net cash used in investing activities

     (16,589     (23,390
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from ABL facility

     218,000        —     

Payments on ABL facility

     (154,000     —     

Payments on capital lease

     (246     —     

Dividend payment to Parent

     —          (201

Capital contribution received by noncontrolling interest

     992        6,506   
  

 

 

   

 

 

 

Net cash provided by financing activities

     64,746        6,305   
  

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     (258     (2
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (14,550     (6,497

CASH AND CASH EQUIVALENTS:

    

Beginning of period

     39,429        33,328   
  

 

 

   

 

 

 

End of period

   $ 24,879      $ 26,831   
  

 

 

   

 

 

 

OTHER CASH FLOW INFORMATION:

    

Cash paid for income taxes, net

   $ 2,770      $ 1,926   

Cash paid for interest

   $ 36,112      $ 37,225   

See notes to condensed consolidated financial statements.

 

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Table of Contents

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements, which include The Gymboree Corporation (the “Company,” “we” or “us”) and our 100%-owned subsidiaries, as well as Gymboree (China) Commercial and Trading Co. Ltd. (“Gymboree China”) and Gymboree (Tianjin) Educational Information Consultation Co. Ltd. (“Gymboree Tianjin”) (collectively, the “VIEs”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. 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 fiscal year ended February 1, 2014 filed with the Securities and Exchange Commission on May 2, 2014.

The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented. The results of operations for the 13 weeks (“second quarter of fiscal 2014”) and 26 weeks ended August 2, 2014 are not necessarily indicative of the operating results that may be expected for the 52-week period ending January 31, 2015 (“fiscal 2014”) or any future period.

2. Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. generally accepted accounting principles and International Financial Reporting Standards. This ASU is effective for fiscal years and interim periods within those years, beginning after December 15, 2016, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets). We have not yet determined the impact of the new standard on our condensed consolidated financial statements.

In July 2013, the FASB issued authoritative guidance that requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective prospectively for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The adoption of this guidance in the first quarter of fiscal 2014 did not have a material impact on our condensed consolidated financial statements.

3. Goodwill and Intangible Assets and Liabilities

Goodwill

Operating income has declined $26.6 million to an operating loss of $4.7 million during the first six months of fiscal 2014 compared to the same period last year. Due to recent trends impacting our retail stores segment, we qualitatively assessed the valuation of our retail segment reporting units. This qualitative assessment resulted in a determination that it was more likely than not the fair value of these reporting units exceeded their carrying amount at August 2, 2014. If these trends continue through the remainder of the year or our forecast of future operating performance declines, there is the potential for goodwill and indefinite-lived intangible asset impairment related to our Crazy 8, Gymboree Retail and Gymboree Outlet reporting units.

In addition, other significant adverse changes to our business environment or future cash flows could cause us to record additional impairment charges in future periods, which could be material. Our annual goodwill and indefinite-lived intangible asset impairment tests are performed at the end of our tenth fiscal period (fiscal November), and as described above we monitor whether interim goodwill and indefinite-lived intangible asset tests are necessary.

 

5


Table of Contents

During the 13 and 26 weeks ended August 2, 2014 and August 3, 2013, we did not identify impairment indicators for goodwill or indefinite-lived intangible assets.

In fiscal 2013, due to weak results, particularly in the fourth quarter, we concluded that there was goodwill impairment in the Crazy 8, Gymboree Retail and Gymboree Outlet reporting units. We recorded an estimate of impairment for goodwill of $140.2 million in the fourth quarter of fiscal 2013. The impairment charges were subject to finalization of fair values, which we completed during the first quarter of fiscal 2014, with no change to the previously recorded estimate.

Intangible Assets and Liabilities

Intangible assets and liabilities consist of the following (in thousands):

 

     August 2, 2014  
     Gross Carrying
Amount
    Accumulated
Amortization
    Accumulated
Impairment
    Net Amount  

Intangible Assets Not Subject to Amortization:

  

Trade names

   $ 567,494      $ —        $ (17,000   $ 550,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization:

        

Customer relationships

     37,551        (37,119     —          432   

Below market leases

     7,055        (4,728     —          2,327   

Co-branded credit card agreement

     4,000        (2,266     —          1,734   

Franchise agreements and reacquired franchise rights

     6,632        (3,409     —          3,223   
  

 

 

   

 

 

   

 

 

   

 

 

 
     55,238        (47,522     —          7,716   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 622,732      $ (47,522   $ (17,000   $ 558,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

        

Above market leases (included in Lease incentives and other liabilities)

   $ (16,631   $ 11,012      $ —        $ (5,619
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     February 1, 2014  
     Gross Carrying
Amount
    Accumulated
Amortization
    Accumulated
Impairment
    Net Amount  

Intangible Assets Not Subject to Amortization:

  

Trade names

   $ 567,494      $ —        $ (17,000   $ 550,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization:

        

Customer relationships

     37,551        (36,803     —          748   

Below market leases

     7,055        (4,195     —          2,860   

Co-branded credit card agreement

     4,000        (1,958     —          2,042   

Franchise agreements and reacquired franchise rights

     6,632        (2,952     —          3,680   
  

 

 

   

 

 

   

 

 

   

 

 

 
     55,238        (45,908     —          9,330   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 622,732      $ (45,908   $ (17,000   $ 559,824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

        

Above market leases (included in Lease incentives and other liabilities)

   $ (16,631   $ 9,999      $ —        $ (6,632
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     August 3, 2013  
     Gross Carrying
Amount
    Accumulated
Amortization
    Accumulated
Impairment
     Net Amount  

Intangible Assets Not Subject to Amortization:

  

Trade names

   $ 567,861      $ —        $ —         $ 567,861   
  

 

 

   

 

 

   

 

 

    

 

 

 

Intangible Assets Subject to Amortization:

         

Customer relationships

     36,400        (36,400     —           —     

Below market leases

     7,055        (3,620     —           3,435   

Co-branded credit card agreement

     4,000        (1,650     —           2,350   

Franchise agreements

     6,600        (2,464     —           4,136   
  

 

 

   

 

 

   

 

 

    

 

 

 
     54,055        (44,134     —           9,921   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other intangible assets

   $ 621,916      $ (44,134   $ —         $ 577,782   
  

 

 

   

 

 

   

 

 

    

 

 

 

Intangible Liabilities Subject to Amortization:

         

Above market leases (included in Lease incentives and other liabilities)

   $ (16,626   $ 8,725      $ —         $ (7,901
  

 

 

   

 

 

   

 

 

    

 

 

 

During the 13 weeks ended August 2, 2014 and August 3, 2013, we recorded net amortization income of approximately $0.2 million and $0.4 million, respectively, in cost of goods sold (“COGS”). During the 26 weeks ended August 2, 2014 and August 3, 2013, we recorded net amortization income of approximately $0.5 million and $0.8 million, respectively, in COGS.

During the 13 weeks ended August 2, 2014 and August 3, 2013, we recorded amortization expense of approximately $0.5 million and $0.4 million, respectively, in selling, general and administrative expenses (“SG&A”). During the 26 weeks ended August 2, 2014 and August 3, 2013, we recorded amortization expense of approximately $1.1 million and $2.6 million, respectively, in SG&A.

4. Derivative Financial Instruments

We enter into forward foreign exchange contracts with respect to certain purchases in United States dollars (“U.S. dollars”) of inventory to be sold in our retail stores in Canada. The purpose of these contracts is to protect our margins on the eventual sale of the inventory from fluctuations in the exchange rate for Canadian and U.S. dollars. The term of these forward foreign exchange contracts is generally less than one year. These contracts are treated as cash flow hedges. Amounts reported in accumulated other comprehensive income (loss) related to these forward foreign exchange contracts will be reclassified to COGS over a three-month period. We also enter into forward foreign exchange contracts with respect to short-term intercompany balances between U.S. and foreign entities in Canada and Australia. The purpose of these contracts is to protect us from fluctuations in the exchange rates upon the settlement of such balances. These contracts are not designated as hedges. Consequently, changes in the fair value of these contracts are included in other income.

In December 2010, we paid approximately $12.1 million to enter into interest rate caps to hedge against rising interest rates associated with our Term Loan (see Note 7) above the strike rate of the cap through December 23, 2016, the maturity date of the caps. The interest rate caps were designated on the date of execution as cash flow hedges. The premium, and any related amounts reported in accumulated other comprehensive loss, are being amortized to interest expense through December 23, 2016, as interest payments are made on the underlying Term Loan. During the 13 weeks ended August 2, 2014 and August 3, 2013, we reclassified approximately $0.5 million and $0.2 million, respectively, from accumulated other comprehensive loss to interest expense. During the 26 weeks ended August 2, 2014 and August 3, 2013, we reclassified approximately $0.9 million and $0.4 million, respectively, from accumulated other comprehensive loss to interest expense. We estimate approximately $2.8 million will be reclassified from accumulated other comprehensive loss to interest expense within the next 12 months.

For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. Gains or losses on the derivative representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.

 

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We had the following outstanding derivatives designated as cash flow hedges (U.S. dollars in thousands):

 

     August 2, 2014      February 1, 2014      August 3, 2013  
     Number of
Instruments
     Notional
(USD)
     Number of
Instruments
     Notional
(USD)
     Number of
Instruments
     Notional
(USD)
 

Interest rate derivatives

                 

Purchased interest rate caps

     4       $ 700,000         4       $ 700,000         4       $ 700,000   

Foreign exchange derivatives

                 

Forward foreign exchange contracts

     6         7,994         6         5,029         6         7,165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10       $ 707,994         10       $ 705,029         10       $ 707,165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We had the following outstanding derivatives which were not designated as hedges (U.S. dollars in thousands):

 

     August 2, 2014      February 1, 2014      August 3, 2013  
     Number of
Instruments
     Notional
(USD)
     Number of
Instruments
     Notional
(USD)
     Number of
Instruments
     Notional
(USD)
 

Forward foreign exchange contracts

     —         $ —           2       $ 10,339         1       $ 275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents the fair value of all of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets (in thousands):

 

     August 2, 2014      February 1, 2014      August 3, 2013  
     Derivative
Assets
     Derivative
Assets
     Derivative
Assets
 

Other Assets

        

Purchased interest rate caps

   $ 42       $ 599       $ 1,187   

Forward foreign exchange contracts

     3         348         223   
  

 

 

    

 

 

    

 

 

 

Total

   $  45       $ 947       $ 1,410   
  

 

 

    

 

 

    

 

 

 

The tables below present the effect of all of our derivative financial instruments on the condensed consolidated statements of operations and comprehensive income (loss) (in thousands). No amounts were reclassified from accumulated other comprehensive loss into earnings as a result of forecasted transactions that failed to occur or as a result of hedge ineffectiveness.

 

     13 Weeks Ended August 2, 2014  
     Gains / (Losses)
Recognized in OCI on
Derivative (Effective

Portion)
    Location of Gains
(Losses) Reclassified
from Accumulated OCI
into Income (Effective

Portion)
   Gains / (Losses)
Reclassified from
Accumulated OCI into
Income (Effective

Portion)
 

Interest rate caps

   $ (391   Interest expense    $ (471

Forward foreign exchange contracts

     (23   Cost of goods sold      65   
  

 

 

      

 

 

 

Total

   $ (414      $ (406
  

 

 

      

 

 

 

 

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     13 Weeks Ended August 3, 2013  
     Gains / (Losses)
Recognized in OCI on

Derivative (Effective
Portion)
     Location of Gains
(Losses) Reclassified

from Accumulated OCI
into Income (Effective
Portion)
   Gains / (Losses)
Reclassified from
Accumulated OCI into
Income (Effective

Portion)
 

Interest rate caps

   $ 679       Interest expense    $ (249

Forward foreign exchange contracts

     312       Cost of goods sold      60   
  

 

 

       

 

 

 

Total

   $ 991          $ (189
  

 

 

       

 

 

 

 

     26 Weeks Ended August 2, 2014  
     Gains / (Losses)
Recognized in OCI on
Derivative (Effective
Portion)
    Location of Gains
(Losses) Reclassified
from Accumulated OCI
into Income (Effective

Portion)
   Gains / (Losses)
Reclassified from
Accumulated OCI into
Income (Effective

Portion)
 

Interest rate caps

   $ (557   Interest expense    $ (932

Forward foreign exchange contracts

     (74   Cost of goods sold      287   
  

 

 

      

 

 

 

Total

   $ (631      $ (645
  

 

 

      

 

 

 

 

     26 Weeks Ended August 3, 2013  
     Gains / (Losses)
Recognized in OCI on
Derivative (Effective
Portion)
     Location of Gains
(Losses) Reclassified
from Accumulated OCI
into Income (Effective
Portion)
   Gains / (Losses)
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
 

Interest rate caps

   $ 223       Interest expense    $ (432

Forward foreign exchange contracts

     404       Cost of goods sold      53   
  

 

 

       

 

 

 

Total

   $ 627          $ (379
  

 

 

       

 

 

 

5. Fair Value Measurements

We record our money market funds, interest rate caps and forward foreign exchange contracts at fair value. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. Accounting guidance prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data.

Level 3 – Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present our assets and liabilities measured at fair value on a recurring basis as of August 2, 2014, February 1, 2014 and August 3, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall. There were no transfers into or out of Level 1 and Level 2 during the 13 and 26 weeks ended August 2, 2014 and August 3, 2013, or for the year ended February 1, 2014.

 

     August 2, 2014  
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair Value  
     (in thousands)  

Assets

           

Money market funds

   $ 850       $ —         $ —         $ 850   

Interest rate caps

     —           42         —           42   

Forward foreign exchange contracts

     —           3         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 850       $ 45       $ —         $ 895   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     February 1, 2014  
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair Value  
     (in thousands)  

Assets

           

Money market funds

   $ 14,571       $ —         $ —         $ 14,571   

Interest rate caps

     —           599         —           599   

Forward foreign exchange contracts

     —           348         —           348   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,571       $ 947       $ —         $ 15,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     August 3, 2013  
     Quoted Prices in
Active Markets for
Identical Assets and
Liabilities
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair Value  
     (in thousands)  

Assets

           

Money market funds

   $ 7,253       $ —         $ —         $ 7,253   

Interest rate caps

     —           1,187         —           1,187   

Forward foreign exchange contracts

     —           223         —           223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,253       $ 1,410       $ —         $ 8,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Our cash equivalents, which are primarily placed in money market funds, are valued at their original purchase prices plus interest that has accrued at the stated rate.

The fair value of our interest rate caps was determined using the market standard methodology of discounting future cash receipts. The variable cash receipts were based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves and volatilities. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, were incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of these contracts for the effect of nonperformance risk, we have considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees.

 

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Although we have determined the majority of the inputs used to value our interest rate caps fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of August 2, 2014, February 1, 2014, and August 3, 2013, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our interest rate cap positions and determined the credit valuation adjustment was not significant to the overall valuation. As a result, we classified our interest rate caps derivative valuations in Level 2 of the fair value hierarchy.

The fair value of our forward foreign exchange contracts was determined using the market approach and Level 2 inputs. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

The carrying value of cash and cash equivalents, receivables and payables balances approximate their estimated fair values due to the short maturities of these instruments. We estimate the fair value of our long-term debt using current market yields of similar debt. These current market yields are considered Level 2 inputs. The estimated fair value of long-term debt is as follows (in thousands):

 

     August 2, 2014      February 1, 2014      August 3, 2013  
     Carrying Amount      Fair Value      Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Term loan

   $ 767,893       $ 634,509       $ 767,742       $ 692,192       $ 767,595       $ 746,029   

Notes

     346,000         207,600         346,000         308,805         371,000         358,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,113,893       $ 842,109       $ 1,113,742       $ 1,000,997       $ 1,138,595       $ 1,104,972   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We had no other financial assets or liabilities measured at fair value as of August 2, 2014, February 1, 2014, and August 3, 2013.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Our non-financial assets, which primarily consist of goodwill, other intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial assets are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering external market participant assumptions.

During the 13 and 26 weeks ended August 2, 2014, we recorded an impairment charge of $3.2 million related to assets for under-performing stores. During the 13 and 26 weeks ended August 3, 2013, we recorded an impairment charge of $1.0 million related to assets for under-performing stores. The fair market value of these non-financial assets was determined using the income approach and Level 3 inputs, which required management to make significant estimates about future cash flows. Management estimates the amount and timing of future cash flows based on historical operating results and its experience and knowledge of the retail market in which each store operates. These impairment charges are included in SG&A expenses in the accompanying condensed consolidated statement of operations.

6. Line of Credit

We have a senior secured asset-based revolving credit facility (“ABL”) that provides financing of up to $225 million, subject to a borrowing base. Availability under the ABL is subject to the assets of the Company, any subsidiary co-borrowers and any subsidiary guarantors that are available to collateralize the borrowings thereunder, and is reduced by the level of outstanding letters of credit. As of August 2, 2014, $64.0 million of line of credit borrowings were outstanding under the ABL. Amounts available under the ABL are reduced by letter of credit utilization totaling $25.3 million as of August 2, 2014. Undrawn availability under the ABL, after being reduced by letter of credit utilization and outstanding borrowings, was $95.5 million as of August 2, 2014.

Average borrowings for the 13 and 26 weeks ended August 2, 2014 under the ABL amounted to $28.5 million and $19.1 million, respectively. Average borrowings for the year ended February 1, 2014 under the ABL amounted to $4.3 million. There were no borrowings during the 13 and 26 weeks ended August 3, 2013.

 

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The ABL provides us the right to request up to $125 million of additional commitments under this facility (or, if less, the amount permitted under the Term Loan described in Note 7), subject to the satisfaction of certain conditions. Principal amounts outstanding under the ABL are due and payable in full in March 2017. Borrowings under the ABL bear interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Bank of America, N.A., (2) the federal funds effective rate plus 0.50%, and (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs (“Adjusted LIBOR”), in each case plus an applicable margin. In addition to paying interest on outstanding principal under the ABL, we are required to pay a commitment fee on unutilized commitments thereunder, which is 0.375% per annum under the amended ABL.

If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the ABL exceeds the lesser of (a) the commitment amount and (b) the borrowing base, we will be required to repay outstanding loans and/or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount. The ABL contains financial and other covenants that, among other things, restrict our ability to incur additional indebtedness and pay dividends. As of August 2, 2014, we were in compliance with these covenants. The obligations under the ABL are secured, subject to certain exceptions, by substantially all of our assets. Our 100%-owned domestic subsidiaries have fully and unconditionally guaranteed our obligations under the ABL.

7. Long-Term Debt

Long-term debt consists of (in thousands):

 

     August 2, 2014      February 1, 2014      August 3, 2013  

Term loan due February 2018, Adjusted LIBOR (with a floor of 1.5%) plus 3.5%, net of discount of $1,210, $1,360, and $1,507

   $ 767,893       $ 767,742       $ 767,595   

Senior notes due December 2018, 9.125%

     346,000         346,000         371,000   
  

 

 

    

 

 

    

 

 

 

Long-term debt

   $ 1,113,893       $ 1,113,742       $ 1,138,595   
  

 

 

    

 

 

    

 

 

 

Term Loan

We have an agreement with several lenders for an $820 million senior secured Term Loan, with a maturity date of February 2018. The Term Loan allows us to request additional tranches of term loans in an aggregate amount not to exceed $200 million, subject to the satisfaction of certain conditions, provided such amount will be subject to reduction by the amount of any additional commitments incurred under the ABL described in Note 6. The interest rate for borrowings under the Term Loan is, at our option, a base rate plus an additional marginal rate of 2.5% or the Adjusted LIBOR rate (with a 1.5% floor) plus an additional rate of 3.5%. As of August 2, 2014, the interest rate under our Term Loan was 5%.

The Term Loan requires us to make quarterly payments equal to 0.25% of the original $820 million principal amount of the Term Loan made on the closing date plus accrued and unpaid interest thereon, with the balance due in February 2018. The Term Loan also has mandatory and voluntary pre-payment provisions, including a requirement that we prepay the Term Loan with a certain percentage of our annual excess cash flow. We calculated our excess cash flow using fiscal 2013 operating results and concluded we are not required to make any excess cash flow payments on the Term Loan during fiscal 2014. Excess cash flow payments on the Term Loan for fiscal 2015 will be calculated with our fiscal 2014 annual operating results. Voluntary prepayments and the excess cash flow prepayments made in prior fiscal years were applied toward our remaining quarterly amortization payments payable under the Term Loan through fiscal 2016. Our next quarterly payment payable under the Term Loan is due in the first quarter of fiscal 2017.

The obligations under the Term Loan are secured, subject to certain exceptions, by substantially all of our assets and those of our 100%-owned domestic subsidiaries. Our 100%-owned domestic subsidiaries also have fully and unconditionally guaranteed the Company’s obligations under the Term Loan.

Notes

In fiscal 2010, we issued $400 million aggregate principal amount of 9.125% senior notes due in December 2018 (the “Notes”). Interest on the Notes is payable semi-annually. If the Company or our subsidiaries sell certain assets, we generally must either invest the net cash proceeds from such sale in our business within a certain period of time, use the proceeds to prepay senior secured debt, or make an offer to purchase a principal amount of the Notes equal to the excess net cash proceeds at a redemption price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid

 

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interest. Upon a change in control, we may also be required to make an offer to purchase all of the Notes at a redemption price equal to 101% of the principal amount of the Notes redeemed plus accrued and unpaid interest. The Notes also contain optional redemption provisions, but subject to certain exceptions, we will not be entitled to redeem the Notes at our option prior to December 1, 2014. The Notes are unsecured senior obligations of The Gymboree Corporation. The Company’s 100%-owned domestic subsidiaries have fully and unconditionally guaranteed the Company’s obligations under the Notes (see Note 16). The guarantees of the Notes are joint and several and will terminate upon the following circumstances: (A) the sale, exchange, disposition or transfer (by merger or otherwise) of (x) the capital stock of the guarantor providing the applicable guarantee, if after such sale, exchange, disposition or transfer such guarantor is no longer a subsidiary of The Gymboree Corporation, or (y) all or substantially all of the assets of such guarantor, (B) the release or discharge of the guarantee by such guarantor of the other indebtedness which resulted in the creation of the subsidiary guarantee by such guarantor under the Indenture, (C) the designation of such guarantor as an “unrestricted subsidiary” under the Indenture or (D) the legal defeasance, covenant defeasance or satisfaction and discharge of the Indenture, in each such case specified in clauses (A) through (D) above in accordance with the requirements therefore set forth in the Indenture.

Future minimum principal payments on long-term debt, excluding accretion of original issue discount (“OID”) of $1.2 million, as of August 2, 2014, are as follows (in thousands):

 

Fiscal years

   Principal Payments  

Remainder of 2014

   $ —     

2015

     —     

2016

     —     

2017

     6,502   

2018

     1,108,600   
  

 

 

 

Total

   $ 1,115,102   
  

 

 

 

Interest Expense on Long-Term Debt

Interest expense on long-term debt was $20.5 million for the 13 weeks ended August 2, 2014 and August 3, 2013. Interest expense was $40.8 million and $40.9 million for the 26 weeks ended August 2, 2014 and August 3, 2013, respectively.

Amortization of deferred financing costs and accretion of OID are also included in interest expense. Deferred financing costs allocated to the Term Loan and Notes are amortized over the term of the related financing agreements using the effective interest method. Deferred financing costs allocated to the ABL are amortized on a straight-line basis over 6.4 years. The weighted-average remaining amortization period is 3.8 years. Amortization of deferred financing costs was $1.7 million and $1.6 million for the 13 weeks ended August 2, 2014 and August 3, 2013, respectively. Amortization of deferred financing costs was $3.4 million and $3.2 million for the 26 weeks ended August 2, 2014 and August 3, 2013, respectively. Accretion of OID was not material for the 13 and 26 weeks ended August 2, 2014 and August 3, 2013.

8. Share-Based Compensation

Share-based compensation expense included as a component of SG&A expenses was $1.0 million and $1.5 million during the 13 weeks ended August 2, 2014 and August 3, 2013, respectively. Share-based compensation expense was $2.3 million and $3.0 million during the 26 weeks ended August 2, 2014 and August 3, 2013, respectively. We include an estimate of forfeitures in determining share-based compensation expense.

9. Dividends

No dividends were distributed to our indirect parent, Giraffe Holding, Inc. (“Parent”) during the 26 weeks ended August 2, 2014. During the first and second quarter of fiscal 2013, we distributed $0.2 million and $0, respectively, in the form of a dividend to Parent, which was used by Parent’s shareholders, which are investment funds sponsored by Bain Capital Partners, LLC (“Bain Capital”), to repurchase shares.

Equity investments received by the VIE as capital contributions from affiliate of Parent during the first and second quarter of fiscal 2014 was $0 and $1.0 million, respectively. Total equity investments received by the VIE as capital contributions from affiliate of Parent during the first quarter and second quarter of fiscal 2013, was $1.0 million and $5.5 million, respectively.

 

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Table of Contents

10. Income Taxes

As of August 2, 2014, February 1, 2014 and August 3, 2013, unrecognized tax benefits were $6.8 million, $6.6 million and $10.1 million, respectively. We believe it is reasonably possible that the total amount of unrecognized tax benefits of $6.8 million as of August 2, 2014 will decrease by as much as $2.2 million during the next twelve months due to the resolution of certain tax contingencies and lapses of applicable statutes of limitations.

As of August 2, 2014, February 1, 2014 and August 3, 2013, the total valuation allowance against deferred tax assets was $48.6 million, $31.9 million and $6.8 million, respectively. We establish a valuation allowance when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. We consider all available positive and negative evidence in evaluating whether a valuation allowance is required, including prior earnings history, actual earnings over the previous 12 quarters on a cumulative basis, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. We continue to have a valuation allowance against all net deferred tax assets in U.S. federal and unitary state jurisdictions, excluding indefinite-lived deferred tax assets and liabilities, and against the tax benefit on losses from our VIE’s. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

11. Accumulated Other Comprehensive Loss

The following table shows the components of accumulated other comprehensive income (loss) (“OCI”), net of tax for the periods ended (in thousands):

 

     August 2, 2014     February 1, 2014     August 3, 2013  

Foreign currency translation

   $ 778      $ 623      $ 328   

Accumulated changes in fair value of derivative financial instruments, net of tax benefit of $3,982, $3,982 and $4,483

     (5,489     (5,503     (5,216
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (4,711   $ (4,880   $ (4,888
  

 

 

   

 

 

   

 

 

 

Changes in accumulated OCI balance by component were as follows for the periods ended (in thousands):

 

     13 Weeks Ended August 2, 2014  
     Derivatives     Foreign Currency     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (5,481   $ 701      $ (4,780
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income recognized before reclassifications

     (414     247        (167

Amounts reclassified from accumulated other comprehensive loss to earnings

     406        —          406   
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

     (8     247        239   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —          (170     (170
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (5,489   $ 778      $ (4,711
  

 

 

   

 

 

   

 

 

 

 

     13 Weeks Ended August 3, 2013  
     Derivatives     Foreign Currency     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (6,831   $ 748      $ (6,083
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) recognized before reclassifications

     991        (402     589   

Amounts reclassified from accumulated other comprehensive loss to earnings

     189        —          189   

Tax benefit

     435        —          435   
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     1,615        (402     1,213   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —          (18     (18
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (5,216   $ 328      $ (4,888
  

 

 

   

 

 

   

 

 

 

 

14


Table of Contents
     26 Weeks Ended August 2, 2014  
     Derivatives     Foreign Currency     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (5,503   $ 623      $ (4,880
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss recognized before reclassifications

     (631     (150     (781

Amounts reclassified from accumulated other comprehensive loss to earnings

     645        —          645   
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     14        (150     (136
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss attributable to noncontrolling interest

     —          305        305   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (5,489   $ 778      $ (4,711
  

 

 

   

 

 

   

 

 

 

 

     26 Weeks Ended August 3, 2013  
     Derivatives     Foreign Currency     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (6,722   $ 808      $ (5,914
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) recognized before reclassifications

     627        (423     204   

Amounts reclassified from accumulated other comprehensive loss to earnings

     379        —          379   

Tax benefit

     500        —          500   
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     1,506        (423     1,083   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —          (57     (57
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (5,216   $ 328      $ (4,888
  

 

 

   

 

 

   

 

 

 

12. Related Party Transactions

Related Party Transactions – Excluding VIE

We paid Bain Capital approximately $0.9 million in management fees and reimbursement of out-of-pocket expenses in each of the 13 weeks ended August 2, 2014 and August 3, 2013. We paid Bain Capital approximately $1.6 million and $1.8 million in management fees and reimbursement of out-of-pocket expenses for the 26 weeks ended August 2, 2014 and August 3, 2013, respectively. As of August 2, 2014, February 1, 2014 and August 3, 2013, we had a payable balance of $0.3 million, $0.4 million and $0.4 million, respectively, to Bain Capital.

During the 13 weeks ended August 2, 2014 and August 3, 2013, we purchased services from LogicSource, a company owned by funds associated with Bain Capital for $0.3 million and $0.6 million, respectively. During the 26 weeks ended August 2, 2014 and August 3, 2013, we purchased services from LogicSource for $0.9 million and $1.2 million, respectively. As of August 2, 2014, February 1, 2014 and August 3, 2013, we had a payable balance of $0.1 million, $0.2 million and $0.2 million, respectively, to LogicSource.

During the 13 and 26 weeks ended August 2, 2014, we did not sell inventory to Burlington Coat Factory Investments Holdings, Inc., a company owned by funds associated with Bain Capital. During the 13 and 26 weeks ended August 3, 2013, we sold inventory to Burlington Coat Factory Investments Holdings, Inc. for $7.2 million and $8.0 million, respectively. As of August 2, 2014, February 1, 2014 and August 3, 2013, we had a receivable balance of $0, $1.0 million and $3.6 million, respectively, from Burlington Coat Factory Investments Holdings, Inc.

As of August 2, 2014, February 1, 2014 and August 3, 2013, we had a receivable balance of $0 million, $0.8 million and $0, respectively, from our indirect parent, Giraffe Holding, Inc., related to income taxes.

In April 2014, Gymboree Play Programs, Inc. (“GPPI”), a wholly owned subsidiary of the Company, entered into a 10-year master franchise agreement with Gymboree Tianjin, an affiliate of the Company and VIE. Effective April 2014, Gymboree Tianjin became the master franchisor of Play & Music centers in the People’s Republic of China (“PRC”) Territory, with the rights to operate primary Play & Music centers, award and service unit franchises in the PRC. GPPI will receive a percentage of royalties and franchise fees earned by Gymboree Tianjin. Intercompany revenues and expenses have been eliminated upon consolidation.

Related Party Transactions –VIEs

As of August 2, 2014, February 1, 2014 and August 3, 2013, our VIEs had a balance of $1.1 million, payable to their indirect parent, Gymboree Investment Holding GP. Ltd., related to funds used to pay operating costs of the VIEs. As of

 

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August 2, 2014, February 1, 2014 and August 3, 2013, our VIEs had a payable balance of $0.4 million related to funds used to pay operating costs of the VIEs, due to Gymboree Hong Kong Limited, the unconsolidated direct parent of the VIEs. The Company is part of a related party group that controls Gymboree Hong Kong Limited.

13. Commitments and Contingencies

Commitments

There have been no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of February 1, 2014, other than those which occur in the normal course of business.

Contingencies

From time to time, we are subject to various legal actions arising in the ordinary course of our business. Many of these legal actions raise complex factual and legal issues, which are subject to uncertainties. We cannot predict with reasonable assurance the outcome of these legal actions brought against us. Accordingly, any settlements or resolutions in these legal actions may occur and affect our net income in the quarter of such settlement or resolution. However, we do not believe the outcome of any legal actions would have a material effect on our condensed consolidated financial statements taken as a whole.

14. Segment Information

We have four reportable segments: retail (including online stores), Gymboree Play & Music, International Retail Franchise (“Retail Franchise”), and one reportable segment related to the activities of our consolidated VIEs. These reportable segments were identified based on how our business is managed and evaluated by our chief operating decision maker. The retail stores segment includes four operating segments (brands), which sell high-quality apparel for children: Gymboree Retail (including an online store), Gymboree Outlet, Janie and Jack (including an online store), and Crazy 8 (including an online store). These four operating segments have been aggregated into one reportable segment because these operating segments have similar historical economic characteristics and/or are expected to have similar economic characteristics and similar long-term financial performance in the future. Gross margin is the principal measure we consider in determining whether the economic characteristics are similar. In addition, each operating segment has similar products, production processes and type or class of customer. We believe disaggregating our operating segments would not provide material additional information. Corporate overhead (costs related to our distribution centers and shared corporate services) is included in the retail stores segment.

Summary financial data of each reportable segment were as follows for the periods ended (in thousands):

 

     13 Weeks Ended August 2, 2014  
     Retail
Stores
    Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

Net sales

   $ 251,793      $ 3,842       $ 3,757       $ 6,246      $ (1,335   $ 264,303   

Operating (loss) income

   $ (13,427   $ 1,863       $ 1,816       $ (1,006   $ (22   $ (10,776

 

     13 Weeks Ended August 3, 2013  
     Retail
Stores
     Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

Net sales

   $ 277,649       $ 3,654       $ 5,842       $ 4,998      $ (1,227   $ 290,916   

Operating income (loss)

   $ 1,058       $ 1,438       $ 2,825       $ (273   $ 15      $ 5,063   

 

     26 Weeks Ended August 2, 2014  
     Retail
Stores
    Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

Net sales

   $ 509,721      $ 8,891       $ 9,924       $ 11,650      $ (3,873   $ 536,313   

Operating (loss) income

   $ (13,136   $ 6,246       $ 4,888       $ (2,697   $ (9   $ (4,708

 

     26 Weeks Ended August 3, 2013  
     Retail
Stores
     Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

Net sales

   $ 557,453       $ 7,645       $ 11,527       $ 9,632      $ (2,558   $ 583,699   

Operating income (loss)

   $ 13,871       $ 3,448       $ 5,069       $ (515   $ 34      $ 21,907   

 

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Table of Contents
     Total Assets  
     Retail
Stores
     Gymboree
Play & Music
     International Retail
Franchise
     VIEs      Intersegment
Elimination
    Total  

August 2, 2014

   $ 1,746,181       $ 59,327       $ 28,210       $ 20,836       $ (1,340   $ 1,853,214   

February 1, 2014

   $ 1,728,186       $ 60,942       $ 29,256       $ 23,208       $ (1,488   $ 1,840,104   

August 3, 2013

   $ 1,950,885       $ 60,377       $ 30,363       $ 15,877       $ (1,941   $ 2,055,561   

Interest expense, depreciation and amortization expense and capital expenditures have not been separately disclosed above as the amounts primarily relate to the retail segment. The Gymboree Play & Music and Retail Franchise reportable segments recorded intersegment revenues of $1.2 million and $0.1 million, respectively, for the 13 weeks ended August 2, 2014, and $1.1 million and $0.1 million, respectively, for the 13 weeks ended August 3, 2013. The Gymboree Play & Music and Retail Franchise reportable segments recorded intersegment revenues of $3.6 million and $0.3 million, respectively, for the 26 weeks ended August 2, 2014, and $2.3 million and $0.3 million, respectively, for the 26 weeks ended August 3, 2013.

We attribute retail store revenues to individual countries based on the selling location. For Retail Franchise, all sales are attributed to the U.S. geographic segment.

VIE Play & Music sales are attributable to the international geographic segment and all other Gymboree Play & Music sales are attributable to the U.S. geographic segment (see Note 15).

Summary financial data of each of our two geographical segments, United States and international were as follows for the fiscal periods ended (in thousands):

 

     13 Weeks Ended  
     August 2, 2014      August 3, 2013  
     United States      International      United States      International  

Net sales

   $ 247,242       $ 17,061       $ 273,664       $ 17,252   

 

     26 Weeks Ended  
     August 2, 2014      August 3, 2013  
     United States      International      United States      International  

Net sales

   $ 504,570       $ 31,743       $ 550,893       $ 32,806   

Long-lived assets which include net property and equipment were as follows for the fiscal periods ended (in thousands):

 

     August 2, 2014      February 1, 2014      August 3, 2013  

United States

   $ 185,841       $ 196,990       $ 197,077   

International

   $ 10,826       $ 9,318       $ 9,383   

15. Variable Interest Entities

Gymboree China, Gymboree Tianjin and the Company are indirectly controlled by Gymboree Holding, Ltd. and investment funds sponsored by Bain Capital. Gymboree China and Gymboree Tianjin have been determined to be variable interest entities, and we (as well as our 100%-owned subsidiaries) are a member of a related party group that controls the VIEs and absorbs the economics of the VIEs. Based on our relationship with the VIEs, we determined we are most closely associated with the VIEs, and therefore, consolidate them as the primary beneficiary. However, as we have a 0% ownership interest in the VIEs, 100% of the results of operations of the VIEs are recorded as noncontrolling interest. The assets of the VIEs cannot be used by us. The liabilities of the VIEs are comprised mainly of short-term accrued expenses, and their creditors have no recourse to our general credit or assets.

 

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Table of Contents

The following tables reflect the impact of the VIEs on the condensed consolidated balance sheets as of August 2, 2014, February 1, 2014 and August 3, 2013 and the condensed consolidated statements of operations for the 13 and 26 weeks ended August 2, 2014 and August 3, 2013 (in thousands):

Condensed Consolidating Balance Sheets

 

     August 2, 2014  
     Balance Before
Consolidation
of VIEs
     VIEs      Eliminations     As
Reported
 

Cash and cash equivalents

   $ 14,195       $ 10,684       $ —        $ 24,879   

Other current assets

     272,212         4,883         (1,340     275,755   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     286,407         15,567         (1,340     300,634   

Non-current assets

     1,547,311         5,269         —          1,552,580   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,833,718       $ 20,836       $ (1,340   $ 1,853,214   
  

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 256,936       $ 7,652       $ (1,192   $ 263,396   

Non-current liabilities

     1,384,986         399         —          1,385,385   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,641,922         8,051         (1,192     1,648,781   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     191,796         —           (148     191,648   

Noncontrolling interest

     —           12,785         —          12,785   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,833,718       $ 20,836       $ (1,340   $ 1,853,214   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     February 1, 2014  
     Balance Before
Consolidation
of VIEs
     VIEs      Eliminations     As
Reported
 

Cash and cash equivalents

   $ 25,635       $ 13,794       $ —        $ 39,429   

Other current assets

     228,129         4,970         (1,488     231,611   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     253,764         18,764         (1,488     271,040   

Non-current assets

     1,564,620         4,444         —          1,569,064   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,818,384       $ 23,208       $ (1,488   $ 1,840,104   
  

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 196,631       $ 7,490       $ (1,356   $ 202,765   

Non-current liabilities

     1,387,828         370         (1     1,388,197   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,584,459         7,860         (1,357     1,590,962   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     233,925         —           (131     233,794   

Noncontrolling interest

     —           15,348         —          15,348   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,818,384       $ 23,208       $ (1,488   $ 1,840,104   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     August 3, 2013  
     Balance Before
Consolidation
of VIEs
     VIEs      Eliminations     As
Reported
 

Cash and cash equivalents

   $ 20,677       $ 6,154       $ —        $ 26,831   

Other current assets

     295,780         6,554         (1,941     300,393   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     316,457         12,708         (1,941     327,224   

Non-current assets

     1,725,168         3,169         —          1,728,337   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,041,625       $ 15,877       $ (1,941   $ 2,055,561   
  

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 189,637       $ 6,850       $ (1,746   $ 194,741   

Non-current liabilities

     1,422,337         229         —          1,422,566   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,611,974         7,079         (1,746     1,617,307   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     429,651         —           (195     429,456   

Noncontrolling interest

     —           8,798         —          8,798   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,041,625       $ 15,877       $ (1,941   $ 2,055,561   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

Condensed Consolidating Statements of Operations

 

     For the 13 Weeks Ended August 2, 2014  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 259,392      $ 6,246      $ (1,335   $ 264,303   

Cost of goods sold

     (166,259     (2,011     331        (167,939

Operating expenses

     (102,881     (5,241     982        (107,140
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (9,748     (1,006     (22     (10,776

Other non-operating (expense) income

     (20,592     71        —          (20,521
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (30,340     (935     (22     (31,297

Income tax expense

     (791     (765     —          (1,556
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (31,131     (1,700     (22     (32,853

Net loss attributable to noncontrolling interest

     —          1,700        —          1,700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (31,131   $ —        $ (22   $ (31,153
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the 13 Weeks Ended August 3, 2013  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 287,145      $ 4,998      $ (1,227   $ 290,916   

Cost of goods sold

     (182,693     (1,341     204        (183,830

Operating expenses

     (99,131     (3,930     1,038        (102,023
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     5,321        (273     15        5,063   

Other non-operating (expense) income

     (20,540     23        —          (20,517
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (15,219     (250     15        (15,454

Income tax benefit

     5,854        275        —          6,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (9,365     25        15        (9,325

Net income attributable to noncontrolling interest

     —          (25     —          (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (9,365   $ —        $ 15      $ (9,350
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the 26 Weeks Ended August 2, 2014  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 528,536      $ 11,650      $ (3,873   $ 536,313   

Cost of goods sold

     (328,697     (3,313     419        (331,591

Operating expenses

     (201,841     (11,034     3,445        (209,430
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (2,002     (2,697     (9     (4,708

Other non-operating expense

     (41,183     (33     —          (41,216
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (43,185     (2,730     (9     (45,924

Income tax expense

     (1,390     (542     —          (1,932
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (44,575     (3,272     (9     (47,856

Net loss attributable to noncontrolling interest

     —          3,272        —          3,272   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (44,575   $ —        $ (9   $ (44,584
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     For the 26 Weeks Ended August 3, 2013  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 576,625      $ 9,632      $ (2,558   $ 583,699   

Cost of goods sold

     (353,475     (2,571     406        (355,640

Operating expenses

     (200,762     (7,576     2,186        (206,152
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     22,388        (515     34        21,907   

Other non-operating (expense) income

     (41,023     154        —          (40,869
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (18,635     (361     34        (18,962

Income tax benefit

     6,715        74        —          6,789   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (11,920     (287     34        (12,173

Net loss attributable to noncontrolling interest

     —          287        —          287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (11,920   $ —        $ 34      $ (11,886
  

 

 

   

 

 

   

 

 

   

 

 

 

16. Condensed Guarantor Data

The Company’s 100%-owned domestic subsidiaries have fully and unconditionally guaranteed the Notes, subject to the customary automatic release provisions described above (see Note 7). The following condensed consolidating financial information presents the financial position, results of operations, comprehensive income (loss) and cash flows of The Gymboree Corporation and the guarantor and non-guarantor subsidiaries. The VIEs financial results are included in those of the non-guarantor subsidiaries. Intercompany transactions are eliminated.

Effective during the first quarter of fiscal 2014, our Canadian subsidiary, which is part of the non-guarantor subsidiaries, issued common shares to The Gymboree Corporation valued at $18.5 million. No cash was exchanged since we immediately net settled $15.3 million and $3.2 million of intercompany liabilities payable to The Gymboree Corporation related to business operations and to our Advance Pricing Agreement, respectively. The $18.5 million is a non-cash investing and financing activity for purposes of condensed consolidating statements of cash flows. During the second quarter of fiscal 2014, our Canadian subsidiary repurchased common shares from The Gymboree Corporation valued at $3.2 million.

 

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Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     As of August 2, 2014  
     The Gymboree
Corporation
     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 1,961       $ 6,670       $ 16,248       $ —        $ 24,879   

Accounts receivable, net of allowance

     472         18,770         1,887         —          21,129   

Merchandise inventories

     —           218,586         5,604         (496     223,694   

Prepaid income taxes

     2,348         318         410         —          3,076   

Prepaid expenses

     2,924         15,410         1,350         —          19,684   

Deferred income taxes

     —           13,458         520         (5,806     8,172   

Intercompany receivable

     —           537,455         —           (537,455     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     7,705         810,667         26,019         (543,757     300,634   

Property and equipment, net

     12,388         173,198         11,081         —          196,667   

Goodwill

     —           721,844         36,933         —          758,777   

Other intangible assets, net

     —           557,679         531         —          558,210   

Deferred financing costs

     29,091         —           —           —          29,091   

Other assets

     14,780         1,969         9,908         (16,822     9,835   

Investment in subsidiaries

     1,878,992         —           —           (1,878,992     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,942,956       $ 2,265,357       $ 84,472       $ (2,439,571   $ 1,853,214   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 8,880       $ 103,240       $ 518       $ —        $ 112,638   

Accrued liabilities

     23,526         55,650         7,055         —          86,231   

Deferred income taxes

     5,690         —           116         (5,806     —     

Line of credit

     64,000         —           —           —          64,000   

Current obligation under capital lease

     —           527         —           —          527   

Intercompany payable

     531,101         —           6,850         (537,951     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     633,197         159,417         14,539         (543,757     263,396   

Long-term liabilities:

             

Long-term debt

     1,113,893         —           —           —          1,113,893   

Long-term obligation under capital lease

     —           3,133         —           —          3,133   

Lease incentives and other liabilities

     4,218         49,541         5,380         —          59,139   

Deferred income taxes

     —           226,042         —           (16,822     209,220   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,751,308         438,133         19,919         (560,579     1,648,781   

Total stockholders’ equity

     191,648         1,827,224         51,768         (1,878,992     191,648   

Noncontrolling interest

     —           —           12,785         —          12,785   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,942,956       $ 2,265,357       $ 84,472       $ (2,439,571   $ 1,853,214   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     As of February 1, 2014  
     The Gymboree
Corporation
     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 15,479       $ 4,659       $ 19,291       $ —        $ 39,429   

Accounts receivable, net of allowance

     1,237         18,634         2,011         —          21,882   

Merchandise inventories

     —           170,126         5,823         (454     175,495   

Prepaid income taxes

     1,659         284         36         —          1,979   

Prepaid expenses

     3,538         14,095         1,168         —          18,801   

Deferred income taxes

     —           13,303         918         (767     13,454   

Intercompany receivable

     —           559,280         —           (559,280     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     21,913         780,381         29,247         (560,501     271,040   

Property and equipment, net

     14,288         182,421         9,599         —          206,308   

Goodwill

     —           721,844         36,933         —          758,777   

Other intangible assets, net

     —           558,962         862         —          559,824   

Deferred financing costs

     32,455         —           —           —          32,455   

Other assets

     15,139         2,340         10,920         (16,699     11,700   

Investment in subsidiaries

     1,870,800         —           —           (1,870,800     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,954,595       $ 2,245,948       $ 87,561       $ (2,448,000   $ 1,840,104   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 27,184       $ 73,218       $ 1,557       $ —        $ 101,959   

Accrued liabilities

     34,328         58,430         7,545         —          100,303   

Deferred income taxes

     654         —           113         (767     —     

Current obligation under capital lease

     —           503         —           —          503   

Intercompany payable

     541,397         —           18,337         (559,734     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     603,563         132,151         27,552         (560,501     202,765   

Long-term liabilities:

             

Long-term debt

     1,113,742         —           —           —          1,113,742   

Long-term obligation under capital lease

     —           3,402         —           —          3,402   

Lease incentives and other liabilities

     3,496         48,117         4,976         —          56,589   

Deferred income taxes

     —           231,163         —           (16,699     214,464   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,720,801         414,833         32,528         (577,200     1,590,962   

Total stockholders’ equity

     233,794         1,831,115         39,685         (1,870,800     233,794   

Noncontrolling interest

     —           —           15,348         —          15,348   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,954,595       $ 2,245,948       $ 87,561       $ (2,448,000   $ 1,840,104   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

22


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     As of August 3, 2013  
     The Gymboree
Corporation
     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 8,774       $ 5,757       $ 12,300       $ —        $ 26,831   

Accounts receivable, net of allowance

     406         24,267         2,243         —          26,916   

Merchandise inventories

     —           208,703         6,273         5        214,981   

Prepaid income taxes

     2,347         471         1,219         —          4,037   

Prepaid expenses

     2,994         13,572         1,515         —          18,081   

Deferred income taxes

     19,277         16,284         817         —          36,378   

Intercompany receivable

     —           490,096         —           (490,096     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     33,798         759,150         24,367         (490,091     327,224   

Property and equipment, net

     13,895         182,859         9,706         —          206,460   

Goodwill

     —           859,165         39,818         —          898,983   

Other intangible assets, net

     —           577,282         500         —          577,782   

Deferred financing costs

     36,819         —           —           —          36,819   

Other assets

     17,946         2,047         5,732         (17,432     8,293   

Investment in subsidiaries

     1,987,315         —           —           (1,987,315     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,089,773       $ 2,380,503       $ 80,123       $ (2,494,838   $ 2,055,561   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 8,563       $ 91,335       $ 896       $ —        $ 100,794   

Accrued liabilities

     29,870         57,936         6,141         —          93,947   

Intercompany payable

     478,737         —           11,354         (490,091     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     517,170         149,271         18,391         (490,091     194,741   

Long-term liabilities:

             

Long-term debt

     1,138,595         —           —           —          1,138,595   

Lease incentives and other liabilities

     4,552         43,812         6,059         —          54,423   

Deferred income taxes

     —           246,980         —           (17,432     229,548   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,660,317         440,063         24,450         (507,523     1,617,307   

Total stockholders’ equity

     429,456         1,940,440         46,875         (1,987,315     429,456   

Noncontrolling interest

     —           —           8,798         —          8,798   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,089,773       $ 2,380,503       $ 80,123       $ (2,494,838   $ 2,055,561   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 13 WEEKS ENDED AUGUST 2, 2014

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 351      $ 246,064      $ 12,961      $ (6,000   $ 253,376   

Gymboree Play & Music

     —          2,657        4,662        —          7,319   

Retail Franchise

     —          3,608        —          —          3,608   

Intercompany revenue

     14,136        1,571        —          (15,707     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     14,487        253,900        17,623        (21,707     264,303   

Cost of goods sold, including buying and occupancy expenses

     (1,650     (162,176     (10,419     6,306        (167,939
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     12,837        91,724        7,204        (15,401     96,364   

Selling, general and administrative expenses

     (14,650     (98,560     (9,306     15,376        (107,140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,813     (6,836     (2,102     (25     (10,776

Interest income

     —          3        65        —          68   

Interest expense

     (20,370     (85     —          —          (20,455

Other income (expense), net

     (138     —          4        —          (134
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (22,321     (6,918     (2,033     (25     (31,297

Income tax benefit (expense)

     811        (1,353     (1,014     —          (1,556

Equity in earnings of affiliates, net of tax

     (9,643     —          —          9,643        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (31,153     (8,271     (3,047     9,618        (32,853

Net loss attributable to noncontrolling interest

     —          —          1,700        —          1,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (31,153   $ (8,271   $ (1,347   $ 9,618      $ (31,153
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 13 WEEKS ENDED AUGUST 3, 2013

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 471      $ 270,242      $ 15,401      $ (7,170   $ 278,944   

Gymboree Play & Music

     —          2,557        3,703        —          6,260   

Retail Franchise

     —          5,712        —          —          5,712   

Intercompany revenue

     14,937        1,448        —          (16,385     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     15,408        279,959        19,104        (23,555     290,916   

Cost of goods sold, including buying and occupancy expenses

     (1,434     (178,427     (10,535     6,566        (183,830
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     13,974        101,532        8,569        (16,989     107,086   

Selling, general and administrative expenses

     (16,002     (94,098     (8,897     16,974        (102,023
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (2,028     7,434        (328     (15     5,063   

Interest income

     27        12        23        (1     61   

Interest expense

     (20,467     —          (1     1        (20,467

Other income (expense), net

     (119     (1     9        —          (111
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (22,587     7,445        (297     (15     (15,454

Income tax benefit (expense)

     12,680        (6,785     234        —          6,129   

Equity in earnings of affiliates, net of tax

     557        —          —          (557     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (9,350     660        (63     (572     (9,325

Net income attributable to noncontrolling interest

     —          —          (25     —          (25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Gymboree Corporation

   $ (9,350   $ 660      $ (88   $ (572   $ (9,350
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 26 WEEKS ENDED AUGUST 2, 2014

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 631      $ 498,661      $ 23,904      $ (10,696   $ 512,500   

Gymboree Play & Music

     —          5,281        8,870        —          14,151   

Retail Franchise

     —          9,662        —          —          9,662   

Intercompany revenue

     28,383        4,382        —          (32,765     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     29,014        517,986        32,774        (43,461     536,313   

Cost of goods sold, including buying and occupancy expenses

     (2,902     (320,832     (18,925     11,068        (331,591
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     26,112        197,154        13,849        (32,393     204,722   

Selling, general and administrative expenses

     (30,047     (192,653     (19,111     32,381        (209,430
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (3,935     4,501        (5,262     (12     (4,708

Interest income

     1        47        108        (41     115   

Interest expense

     (40,656     (173     (41     41        (40,829

Other income (expense), net

     (432     —          (70     —          (502
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (45,022     4,375        (5,265     (12     (45,924

Income tax benefit (expense)

     7,371        (8,266     (1,037     —          (1,932

Equity in earnings of affiliates, net of tax

     (6,933     —          —          6,933        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (44,584     (3,891     (6,302     6,921        (47,856

Net loss attributable to noncontrolling interest

     —          —          3,272        —          3,272   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (44,584   $ (3,891   $ (3,030   $ 6,921      $ (44,584
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 26 WEEKS ENDED AUGUST 3, 2013

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 922      $ 544,023      $ 28,365      $ (13,489   $ 559,821   

Gymboree Play & Music

     —          5,324        7,264        —          12,588   

Retail Franchise

     —          11,290        —          —          11,290   

Intercompany revenue

     33,017        3,102        —          (36,119     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     33,939        563,739        35,629        (49,608     583,699   

Cost of goods sold, including buying and occupancy expenses

     (2,954     (345,164     (19,452     11,930        (355,640
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     30,985        218,575        16,177        (37,678     228,059   

Selling, general and administrative expenses

     (34,978     (191,748     (17,060     37,634        (206,152
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (3,993     26,827        (883     (44     21,907   

Interest income

     33        23        47        (1     102   

Interest expense

     (40,869     —          (1     1        (40,869

Other income (expense), net

     (224     (1     123        —          (102
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (45,053     26,849        (714     (44     (18,962

Income tax benefit (expense)

     22,078        (14,841     (448     —          6,789   

Equity in earnings of affiliates, net of tax

     11,089        —          —          (11,089     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (11,886     12,008        (1,162     (11,133     (12,173

Net loss attributable to noncontrolling interest

     —          —          287        —          287   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Gymboree Corporation

   $ (11,886   $ 12,008      $ (875   $ (11,133   $ (11,886
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 13 WEEKS ENDED AUGUST 2, 2014

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net loss

   $ (31,153   $ (8,271   $ (3,047   $ 9,618      $ (32,853
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

          

Foreign currency translation adjustments

     77        —          249        (79     247   

Unrealized net loss on cash flow hedges, net of tax benefit of $0

     (8     —          (87     87        (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     69        —          162        8        239   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (31,084     (8,271     (2,885     9,626        (32,614

Comprehensive loss attributable to noncontrolling interest

     —          —          1,530        —          1,530   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to The Gymboree Corporation

   $ (31,084   $ (8,271   $ (1,355   $ 9,626      $ (31,084
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 13 WEEKS ENDED AUGUST 3, 2013

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
    Eliminations
Consolidated
 

Net (loss) income

   $ (9,350   $ 660       $ (63   $ (572   $ (9,325
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments

     (420     —           (406     424        (402

Unrealized net gain on cash flow hedges, net of tax benefit of $435

     1,615        —           345        (345     1,615   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     1,195        —           (61     79        1,213   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (8,155     660         (124     (493     (8,112

Comprehensive income attributable to noncontrolling interest

     —          —           (43     —          (43
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to The Gymboree Corporation

   $ (8,155   $ 660       $ (167   $ (493   $ (8,155
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 26 WEEKS ENDED AUGUST 2, 2014

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net loss

   $ (44,584   $ (3,891   $ (6,302   $ 6,921      $ (47,856
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

          

Foreign currency translation adjustments

     155        —          (120     (185     (150

Unrealized net income (loss) on cash flow hedges,net of tax benefit of $0

     14        —          (361     361        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     169        —          (481     176        (136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (44,415     (3,891     (6,783     7,097        (47,992

Comprehensive loss attributable to noncontrolling interest

     —          —          3,577        —          3,577   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to The Gymboree Corporation

   $ (44,415   $ (3,891   $ (3,206   $ 7,097      $ (44,415
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 26 WEEKS ENDED AUGUST 3, 2013

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net (loss) income

   $ (11,886   $ 12,008       $ (1,162   $ (11,133   $ (12,173
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

           

Foreign currency translation adjustments

     (480     —           (445     502        (423

Unrealized net gain on cash flow hedges,net of tax benefit of $500

     1,506        —           408        (408     1,506   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss),net of tax

     1,026        —           (37     94        1,083   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (10,860     12,008         (1,199     (11,039     (11,090

Comprehensive loss attributable to noncontrolling interest

     —          —           230        —          230   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to The Gymboree Corporation

   $ (10,860   $ 12,008       $ (969   $ (11,039   $ (10,860
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE 26 WEEKS ENDED AUGUST 2, 2014

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net cash (used in) provided by operating activities

   $ (61,495   $ 4,446      $ (5,400   $ —        $ (62,449
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (1,203     (12,362     (2,958     —          (16,523

Proceeds from sale of shares

     3,207        —          —          (3,207     —     

Intercompany transfers

     —          10,193        —          (10,193     —     

Other

     —          (20     (46     —          (66
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     2,004        (2,189     (3,004     (13,400     (16,589
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     (18,027     —          7,834        10,193        —     

Proceeds from ABL facility

     218,000        —          —          —          218,000   

Payments on ABL facility

     (154,000     —          —          —          (154,000

Payments on capital lease

     —          (246     —          —          (246

Repurchase of shares

     —          —          (3,207     3,207        —     

Capital contribution received by noncontrolling interest

     —          —          992        —          992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     45,973        (246     5,619        13,400        64,746   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     —          —          (258     —          (258
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (13,518     2,011        (3,043     —          (14,550

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

     15,479        4,659        19,291        —          39,429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 1,961      $ 6,670      $ 16,248      $ —        $ 24,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE 26 WEEKS ENDED AUGUST 3, 2013

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net cash (used in) provided by operating activities

   $ (47,077   $ 61,010      $ (3,343   $ —        $ 10,590   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (1,048     (20,449     (1,731     —          (23,228

Intercompany transfers

     —          (37,944     —          37,944        —     

Other

     —          11        (173     —          (162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,048     (58,382     (1,904     37,944        (23,390
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     38,669        —          (725     (37,944     —     

Dividend payment to Parent

     (201     —          —          —          (201

Capital contribution received by noncontrolling interest

     —          —          6,506        —          6,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     38,468        —          5,781        (37,944     6,305   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     —          1        (3     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (9,657     2,629        531        —          (6,497

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

     18,431        3,128        11,769        —          33,328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 8,774      $ 5,757      $ 12,300      $ —        $ 26,831   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company and its guarantor subsidiaries participate in a cash pooling program. As part of this program, cash balances are generally swept on a daily basis between the guarantor subsidiary bank accounts and those of the Company. In addition, we pay expenses on behalf of our guarantor and non-guarantor subsidiaries on a regular basis. These types of transactions have been accounted for as intercompany transfers within investing and financing activities.

 

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The Company’s transactions include interest, tax payments and intercompany sales transactions related to administrative costs incurred by the Company, which are billed to guarantor and non-guarantor subsidiaries on a cost plus basis. All intercompany transactions are presumed to be settled in cash and therefore are included in operating activities. Non-operating cash flow changes have been classified as investing and financing activities.

Subsequent to the issuance of the second quarter of fiscal 2013 condensed consolidated financial statements, management determined that within the condensed consolidating statements of cash flows, the intercompany transfers of the guarantor subsidiaries previously presented as financing activities should be classified as investing activities. The classification of these intercompany transfers has been corrected in the above condensed consolidating statements of cash flows for the 26 weeks ended August 3, 2013 to be presented within investing activities. This correction has no impact on the condensed consolidated statement of cash flows for the 26 weeks ended August 3, 2013. The effect is summarized as follows:

 

     26 Weeks Ended August 3, 2013  
     Guarantor
Subsidiaries
(As Previously
Reported)
    Guarantor
Subsidiaries
(As Corrected)
    Eliminations
(As Previously
Reported)
     Eliminations
(As Corrected)
 

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Intercompany transfers

   $ —        $ (37,944   $ —         $ 37,944   

Net cash used in investing activities

   $ (20,438   $ (58,382   $ —         $ 37,944   

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Intercompany transfers

   $ (37,944   $ —        $ —         $ (37,944

Net cash (used in) provided by financing activities

   $ (37,944   $ —        $ —         $ (37,944

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of

The Gymboree Corporation

We have reviewed the accompanying condensed consolidated balance sheets of The Gymboree Corporation and subsidiaries (the “Company”) as of August 2, 2014 and August 3, 2013, and the related condensed consolidated statements of operations and comprehensive income (loss) for the thirteen and twenty-six week periods then ended, and of cash flows for the twenty-six week periods then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Gymboree Corporation and subsidiaries as of February 1, 2014, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated May 2, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 1, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP
San Francisco, California
September 15, 2014

 

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Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report contains forward-looking statements. You can identify forward-looking statements because they contain words such as “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” or “anticipate” or similar expressions that concern our strategy, plans or intentions. All statements we make relating to: future sales, costs and expenses and gross profit percentages; the continuation of historical trends; planned store openings and closings, including franchise partner store openings; estimated capital expenditures for fiscal 2014; our ability to operate our business under our capital and operating structure; and the sufficiency of our cash balances and cash generated from operating and financing activities for future liquidity and capital resource needs are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we had expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

Important factors that could cause actual results to differ materially from our expectations (“cautionary statements”) are disclosed under “Item 1A, Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014, filed with the Securities and Exchange Commission on May 2, 2014 (the “Fiscal 2013 Annual Report”). We encourage you to read these risk factors disclosures carefully. We caution investors not to place substantial reliance on the forward-looking statements contained in this quarterly report. These statements, like all statements in this quarterly report, speak only as of the date of this quarterly report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

Overview

As of August 2, 2014, we operated a total of 1,344 retail stores, as follows: 625 Gymboree® stores (including 572 in the United States, 46 in Canada, 1 in Puerto Rico and 6 in Australia), 171 Gymboree Outlet stores (169 in the United States and 2 in Puerto Rico), 148 Janie and Jack® shops, and 400 Crazy 8® stores in the United States, as well as 3 online stores at www.gymboree.com, www.janieandjack.com and www.crazy8.com. We also offer directed parent-child developmental play programs at 699 franchised and Company-operated Gymboree Play & Music® centers in the United States and 41 other countries. In addition, as of August 2, 2014, third-party overseas franchisees operated 73 Gymboree stores in the Middle East, South Korea, Latin America and China, including 18 Gymboree retail stores operated by Gymboree (China) Commercial and Trading Co. Ltd. (“Gymboree China”). Gymboree China and Gymboree (Tianjin) Educational Information Consultation Co. Ltd. (“Gymboree Tianjin”) are collectively referred to as the “VIEs.” Gymboree Tianjin provides various services on Gymboree Play & Music’s behalf to Gymboree Play & Music’s franchisees in China. Third-party overseas franchisees also operated 3 Crazy 8 stores and 1 Janie and Jack store in the Middle East as of August 2, 2014.

During the second quarter of fiscal 2014, we opened 11 new stores and closed 4 stores. In fiscal 2014, we plan to continue to execute on our vision to reach every mom in America and moms around the world with our multi-tiered portfolio of brands. As part of our strategy, we plan to open approximately 50 new stores in fiscal 2014, distributed fairly evenly across the brands, and close approximately 30 to 40 stores. We expect our international franchise partners to open approximately 15 to 20 franchise stores in fiscal 2014.

Seasonality

Our business is impacted by the general seasonal trends characteristic of the apparel and retail industries. Sales from retail operations in the past several years have been highest during the third and fourth fiscal quarters, somewhat lower during the first fiscal quarter, and lowest during the second fiscal quarter. Consequently, the results for any fiscal quarter are not necessarily indicative of results for the full year. These historical quarterly trends may not continue in the future.

Results of Operations

13 weeks ended August 2, 2014, compared to 13 weeks ended August 3, 2013

Net Sales

Net retail sales for the second quarter of fiscal 2014 decreased to $253.4 million from $278.9 million in the same period last year, a decrease of $25.6 million, or 9.2%, primarily due to lower comparable store sales. Comparable store

 

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sales (including online sales) decreased by 10% in the second quarter of fiscal 2014 compared to the same period in the prior year. Comparable store sales (excluding online sales) decreased by 12% in the second quarter of fiscal 2014 compared to the same period in the prior year. Total net stores increased from 1,302 as of August 3, 2013, to 1,344 as of August 2, 2014. Total square footage increased from approximately 2.7 million square feet to approximately 2.8 million square feet from the second quarter of fiscal 2013 to the second quarter of fiscal 2014.

Gymboree Play & Music net sales for the second quarter of fiscal 2014 increased to $7.3 million from $6.3 million in the same period last year, an increase of $1.1 million or 16.9%. As of the second quarter of fiscal 2014, our VIE operated 4 Company owned Play & Music centers compared to 1 in the same period last year.

Retail Franchise net sales for the second quarter of fiscal 2014 decreased to $3.6 million from $5.7 million in the same period last year, a decrease of $2.1 million or 36.8% primarily due to lower franchise sales in the Middle East region. As of the second quarter of fiscal 2014, our third-party overseas franchisees operated a total of 77 stores compared to 62 stores as of the end of the same period last year.

Gross Profit

Gross profit for the second quarter of fiscal 2014 decreased to $96.4 million from $107.1 million in the same period last year. As a percentage of net sales, gross profit for the second quarter of fiscal 2014 decreased 0.3 percentage points to 36.5% from 36.8% in the same period last year. The decrease in gross profit as a percentage of net sales was due to deleveraging of buying and occupancy expenses associated with negative comparable store sales in the quarter, partially offset by higher average unit retail prices. As we record certain distribution costs as a component of selling, general and administrative expenses (“SG&A”) and do not include such costs in cost of goods sold (“COGS”), our COGS and gross profit may not be comparable to those of other companies. Our distribution costs recorded in SG&A expenses represent primarily outbound shipping and handling expenses to our stores, and amounted to $9.6 million and $7.5 million in the second quarter of fiscal 2014 and 2013, respectively.

Selling, General and Administrative Expenses

SG&A principally consists of non-occupancy store expenses, corporate overhead and distribution expenses. SG&A increased to $107.1 million for the second quarter of fiscal 2014 compared to $102.0 million in the same period last year. As a percentage of net sales, SG&A expenses increased 5.4 percentage points to 40.5% for the second quarter of fiscal 2014 from 35.1% in the same period last year primarily due to a deleveraging of expenses on lower comparable store sales and investments in corporate infrastructure.

Income Taxes

The effective tax rate for the second quarter of fiscal 2014 and 2013 was -5.0% (expense) and 39.7% (benefit), respectively. The change in effective tax rates was due to differences in forecasted earnings between years and from recording a valuation allowance against net deferred tax assets in jurisdictions where it is more likely than not that these assets will not be realized.

We consider all available positive and negative evidence in evaluating whether a valuation allowance is required, including prior earnings history, actual earnings over the previous 12 quarters on a cumulative basis, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. As a result of weighing the available objective evidence as of August 2, 2014, February 1, 2014 and August 3, 2013, our valuation allowance against deferred tax assets was $48.6 million, $31.9 million and $6.8 million, respectively. The valuation allowance as of August 2, 2014 represents a valuation allowance against all net deferred tax assets in U.S. federal and unitary state jurisdictions, excluding indefinite-lived deferred tax assets and liabilities, and against the tax benefit on losses from our VIE’s. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

26 weeks ended August 2, 2014, compared to 26 weeks ended August 3, 2013

Net Sales

Net retail sales for the 26 weeks ended August 2, 2014 decreased to $512.5 million from $559.8 million in the same period last year, a decrease of $47.3 million, or 8.5%, primarily due to lower comparable store sales. Comparable store sales (including online sales) decreased by 10% in the 26 weeks ended August 2, 2014 compared to the same period in the prior year. Comparable store sales (excluding online sales) decreased by 12% in the 26 weeks ended August 2, 2014 compared to the same period in the prior year. Total net stores increased from 1,302 as of August 3, 2013, to 1,344 as of August 2, 2014. Total square footage increased from approximately 2.7 million square feet to approximately 2.8 million square feet from the second quarter of fiscal 2013 to the second quarter of fiscal 2014.

 

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Gymboree Play & Music net sales for the 26 weeks ended August 2, 2014 increased to $14.2 million from $12.6 million in the same period last year, an increase of $1.6 million or 12.4%. As of August 2, 2014, our VIE operated 4 Company owned Play & Music centers compared to 1 in the same period last year.

Retail Franchise net sales for the 26 weeks ended August 2, 2014 decreased to $9.7 million from $11.3 million in the same period last year, a decrease of $1.6 million or 14.4% primarily due to lower franchise sales in the Middle East region. As of August 2, 2014, our third-party overseas franchisees operated a total of 77 stores compared to 62 stores as of the end of the same period last year.

Gross Profit

Gross profit for the 26 weeks ended August 2, 2014 decreased to $204.7 million from $228.1 million in the same period last year. As a percentage of net sales, gross profit for the 26 weeks ended August 2, 2014 decreased 0.9 percentage points to 38.2% from 39.1% in the same period last year. The decrease in gross profit as a percentage of net sales was due to deleveraging of buying and occupancy expenses associated with negative comparable store sales in the 26 weeks ended August 2, 2014. As we record certain distribution costs as a component of SG&A and do not include such costs in COGS, our COGS and gross profit may not be comparable to those of other companies. Our distribution costs recorded in SG&A expenses represent primarily outbound shipping and handling expenses to our stores, and amounted to $19.6 million and $15.0 million for the 26 weeks ended August 2, 2014 and August 3, 2013, respectively.

Selling, General and Administrative Expenses

SG&A principally consists of non-occupancy store expenses, corporate overhead and distribution expenses. SG&A increased to $209.4 million for the 26 weeks ended August 2, 2014 compared to $206.2 million in the same period last year. As a percentage of net sales, SG&A expenses increased 3.7 percentage points to 39.0% for the 26 weeks ended August 2, 2014 from 35.3% in the same period last year primarily due to a deleveraging of expenses on lower comparable store sales, partially offset by lower amortization expense of acquisition-related intangibles.

Income Taxes

The effective tax rate for the 26 weeks ended August 2, 2014 and August 3, 2013 was -4.2% (expense) and 35.8% (benefit), respectively. The change in effective tax rates was due to differences in forecasted earnings between years and from recording a valuation allowance against net deferred tax assets in jurisdictions where it is more likely than not that these assets will not be realized.

We consider all available positive and negative evidence in evaluating whether a valuation allowance is required, including prior earnings history, actual earnings over the previous 12 quarters on a cumulative basis, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. As a result of weighing the available objective evidence as of August 2, 2014, February 1, 2014 and August 3, 2013, our valuation allowance against deferred tax assets was $48.6 million, $31.9 million and $6.8 million, respectively. The valuation allowance as of August 2, 2014 represents a valuation allowance against all net deferred tax assets in U.S. federal and unitary state jurisdictions, excluding indefinite-lived deferred tax assets and liabilities, and against the tax benefit on losses from our VIE’s. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

Financial Condition

Liquidity and Capital Resources

Cash and cash equivalents were $24.9 million, $39.4 million and $26.8 million as of August 2, 2014, February 1, 2014 and August 3, 2013, respectively. Cash and cash equivalents held by the VIEs of which we are the primary beneficiary, and the results of which have been consolidated into our condensed financial statements were $10.7 million, $13.8 million and $6.2 million as of August 2, 2014, February 1, 2014 and August 3, 2013, respectively (see Note 15 to the condensed financial statements included elsewhere in this quarterly report). The assets of the VIEs cannot be used by us. Working capital as of August 2, 2014, February 1, 2014 and August 3, 2013 totaled $37.2 million, $68.3 million and $132.5 million, respectively.

 

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Cash flows (used in) provided by operating activities

Net cash used in operating activities for the 26 weeks ended August 2, 2014 was $62.4 million compared to net cash provided by operating activities of $10.6 million in the same period last year. The change in cash (used in) provided by operating activities is primarily due to an increase in merchandise inventory purchases of $31.8 million and a higher net loss.

Cash flows used in investing activities

Net cash used in investing activities for the 26 weeks ended August 2, 2014 was $16.6 million compared to $23.4 million in the same period last year. Capital expenditures were $16.5 million compared to $23.2 million in the same period last year primarily due to a decrease in the opening of new stores.

We estimate capital expenditures for fiscal 2014 will be approximately $35 to $40 million. We expect the capital expenditures to be used to open new stores, as well as to continue investment in our systems infrastructure.

Cash flows provided by financing activities

Net cash provided by financing activities for the 26 weeks ended August 2, 2014 was $64.7 million compared to $6.3 million in the same period last year. The increase in net cash provided by financing activities for the 26 weeks ended August 2, 2014 is primarily due to $64.0 million in net borrowings from ABL Facility used for working capital. The Company anticipates utilizing its ABL Facility throughout the course of the year to support seasonal working capital needs.

Our senior credit facilities are comprised of an $820 million Term Loan and a $225 million ABL Facility (collectively, the “Senior Credit Facilities”). As of August 2, 2014, $769.1 million was outstanding under the Term Loan and $64.0 million was outstanding under the ABL. Amounts available under the ABL are subject to customary borrowing base limitations, and are reduced by letter of credit utilization totaling $25.3 million as of August 2, 2014. Undrawn availability under the ABL, after being reduced by letter of credit utilization and outstanding borrowings, was $95.5 million as of August 2, 2014. The Term Loan allows us to request additional tranches of term loans in an aggregate amount not to exceed $200 million, subject to the satisfaction of certain conditions, provided that such amount will be subject to reduction by the amount of any additional commitments incurred under the ABL (see Note 6 to the condensed consolidated financial statements included elsewhere in this quarterly report). The ABL provides us the right to request up to $125 million of additional commitments under this facility (or, if less, the amount permitted under the Term Loan (see Note 7 to the condensed consolidated financial statements included elsewhere in this quarterly report), subject to the satisfaction of certain conditions. No incremental facilities are currently in effect or expected to be in effect. The Term Loan and ABL Facility contain covenants that, among other things, restrict our ability to incur additional indebtedness and pay dividends. The ABL Facility also contains financial covenants. As of the August 2, 2014, we were in compliance with these covenants. Average borrowings for the 26 weeks ended August 2, 2014 under the ABL amounted to $19.1 million.

The Term Loan requires us to make quarterly payments each equal to 0.25% of the original $820 million principal amount of the Term Loan made on the closing date plus accrued and unpaid interest thereon, with the balance due in February 2018. The Term Loan also has mandatory and voluntary pre-payment provisions, including a requirement that we prepay the Term Loan with a certain percentage of our annual excess cash flow. We calculated our excess cash flow using fiscal 2013 operating results and concluded we are not required to make any excess cash flow payments on the Term Loan during fiscal 2014. We were not required to make any excess cash flow payments on the Term Loan during fiscal 2013. Our next quarterly payment payable under the Term Loan is due in the first quarter of fiscal 2017.

We and our subsidiaries, the VIEs, and our affiliates may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

We believe that cash generated by operations, the remaining funds available under our Senior Credit Facilities and existing cash and cash equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the next twelve months. However, if we face unanticipated cash needs such as the funding of a capital investment, our existing cash and cash equivalents and net cash from operating activities may be insufficient. In addition we cannot assure you our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Senior Credit Facilities in amounts sufficient to enable us to repay our indebtedness when due, including the Notes, or to fund other liquidity needs. See “Item 1A. Risk Factors—Risks Related to Our Indebtedness and Certain Other Obligations” in our Fiscal 2013 Annual Report. We also regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. If opportunities are favorable, we may refinance our existing debt or issue additional securities.

 

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Critical Accounting Policies, Estimates and Judgments

As of August 2, 2014, we had goodwill of $758.8 million allocated to our reporting units. Goodwill is tested for impairment in the fourth quarter of each fiscal year or whenever events or changes in circumstances indicate its carrying value may not be fully recoverable, by performing a two-step goodwill impairment test. The first step of the two-step goodwill impairment test is to compare the fair value of the reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the two-step goodwill impairment test is required to measure the goodwill impairment loss. The second step includes valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount.

Calculating the fair value of a reporting unit and the implied fair value of reporting unit goodwill requires significant judgment. The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing process, such as the estimated future cash flows of reporting units, the discount rate used to discount such cash flows, or the estimated fair value of the reporting units’ tangible and intangible assets and liabilities, could significantly increase or decrease the estimated fair value of a reporting unit or its net assets.

Operating income has declined $26.6 million to an operating loss of $4.7 million during the first six months of fiscal 2014 compared to the same period last year. Due to recent trends impacting our retail stores segment, we qualitatively assessed the valuation of our retail segment reporting units. This qualitative assessment resulted in a determination that it was more likely than not the fair value of these reporting units exceeded their carrying amount at August 2, 2014. If these trends continue through the remainder of the year or our forecast of future operating performance declines, there is the potential for goodwill and indefinite-lived intangible asset impairment related to our Crazy 8, Gymboree Retail and Gymboree Outlet reporting units.

In addition, other significant adverse changes to our business environment or future cash flows could cause us to record impairment charges in future periods, which could be material. Our annual goodwill impairment and indefinite-lived intangible asset tests are performed at the end of our tenth fiscal period (fiscal November), and as described above we monitor whether interim goodwill and indefinite-lived intangible assets tests are necessary.

There have been no other material changes to our critical accounting policies and estimates affecting the application of those policies since our Fiscal 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 2, 2014.

Non-GAAP Measures

Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

In the table below, we present Adjusted EBITDA (which is defined as net income (loss) attributable to The Gymboree Corporation before interest expense, interest income, income tax expense/benefit, and depreciation and amortization (EBITDA) adjusted for the other items described below), which is considered a non-GAAP financial measure. We present Adjusted EBITDA in this quarterly report because we consider it an important supplemental measure of performance used by management and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the retail industry. Adjusted EBITDA is calculated in substantially the same manner as “EBITDA” under the indenture governing the Notes and “Consolidated EBITDA” under the agreement governing our Senior Credit Facilities. We believe the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA is appropriate to provide additional information to investors about certain non-cash items and unusual or non-recurring items that we do not expect to continue in the future and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in documents governing our indebtedness. However, Adjusted EBITDA is not a presentation made in accordance with GAAP, and our computation of Adjusted EBITDA may vary from others in the retail industry. Adjusted EBITDA should not be considered an alternative to operating income or net income (loss), as a measure of operating performance or cash flow, or as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA:

 

    does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

    does not reflect changes in, or cash requirements for, our working capital needs;

 

    does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

    excludes income tax payments that represent a reduction in cash available to us; and

 

    does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of ongoing operations.

 

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The following table provides a reconciliation of net loss attributable to The Gymboree Corporation to Adjusted EBITDA for the periods indicated (in thousands):

 

     13 Weeks Ended     26 Weeks Ended  
     August 2, 2014     August 3, 2013     August 2, 2014     August 3, 2013  

Net loss attributable to The Gymboree Corporation

   $ (31,153   $ (9,350   $ (44,584   $ (11,886

Reconciling items (a):

        

Interest expense

     20,455        20,467        40,829        40,869   

Interest income

     (14     (47     (66     (73

Income tax expense (benefit)

     791        (5,854     1,390        (6,715

Depreciation and amortization (b)

     11,018        10,662        21,804        23,282   

Non-cash share-based compensation expense

     993        1,477        2,269        2,974   

Loss on disposal/impairment on assets

     3,525        1,571        3,855        1,871   

Acquisition-related adjustments (c)

     2,963        3,899        5,907        7,992   

Other (d)

     983        1,974        188        2,463   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 9,561      $ 24,799      $ 31,592      $ 60,777   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

(a)    Excludes amounts related to noncontrolling interest, which are already excluded from net loss attributable to The Gymboree Corporation.

        

(b)    Includes the following:

       

Amortization of intangible assets (impacts SG&A)

   $ 383      $ 384      $ 767      $ 2,642   

Amortization of below and above market leases (impacts COGS)

     (240     (376     (487     (762
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 143      $ 8      $ 280      $ 1,880   
  

 

 

   

 

 

   

 

 

   

 

 

 

(c)    Includes the following:

       

Additional rent expense recognized due to the elimination of deferred rent and construction allowances in purchase accounting (impacts COGS)

   $ 2,063      $ 2,226      $ 4,131      $ 4,458   

Sponsor fees, legal and accounting, as well as other costs incurred as a result of the Acquisition or refinancing (impacts SG&A)

     900        975        1,776        2,095   

Decrease in net sales due to the elimination of deferred revenue related to the Company’s co-branded credit card program in purchase accounting (impacts net sales)

     —          698        —          1,439   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,963      $ 3,899      $ 5,907      $ 7,992   
  

 

 

   

 

 

   

 

 

   

 

 

 

(d)    Other is comprised of a non-recurring change in reserves, restructuring charges, and executive-related hiring expenses.

       

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We enter into forward foreign exchange contracts with respect to certain purchases in United States dollars (“U.S. dollars”) of inventory to be sold in our retail stores in Canada. The purpose of these contracts is to protect our margins on the eventual sale of the inventory from fluctuations in the exchange rate for Canadian and U.S. dollars. The term of the forward exchange contracts is generally less than one year. Our U.S. entity also enters into forward foreign exchange contracts with respect to short-term intercompany balances between our Canadian, Australian and U.S. entities. The purpose of these contracts is to protect us from fluctuations in the exchange rate for Canadian, Australian and U.S. dollars upon the settlement of such balances.

 

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The table below summarizes the notional amounts and fair values of our forward foreign exchange contracts in U.S. dollars (in thousands except weighted-average rate data):

 

     Notional
Amount
     Fair Value
Gain (Loss)
     Weighted-
Average Rate
 

August 2, 2014

   $ 7,994       $ 3       $ 0.91   

February 1, 2014

   $ 15,368       $ 348       $ 0.90   

August 3, 2013

   $ 7,440       $ 223       $ 0.97   

Interest Rate Risk

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the Term Loan outstanding under the Senior Credit Facilities. As of August 2, 2014, we had $769.1 million outstanding under our Senior Credit Facilities, bearing interest at variable rates. The interest rate for borrowings under the Term Loan is, at our option, a base rate plus an additional marginal rate of 2.5% or the Adjusted LIBOR rate (with a 1.5% floor) plus an additional rate of 3.5%. As of August 2, 2014, the interest rate under our Term Loan was 5.0%. A 0.125% increase in the Adjusted LIBOR rate, above the 1.5% floor, would have increased annual interest expense by approximately $1.0 million, assuming $769.1 million of indebtedness thereunder was outstanding for the whole year. The Term Loan allows us to request additional tranches of term loans in an aggregate amount not to exceed $200 million, subject to the satisfaction of certain conditions, provided such amount will be subject to reduction by the amount of any additional commitments incurred under the ABL (see Notes 6 and 7 to the condensed consolidated financial statements included elsewhere in this quarterly report). No incremental facilities are currently in effect.

In December 2010, we purchased four interest rate caps to hedge against rising interest rates associated with our senior secured term loan above the 5% strike rate of the caps through December 23, 2016, the maturity date of the caps. The notional amount of these caps is $700 million.

As of August 2, 2014, February 1, 2014, and August 3, 2013, accumulated other comprehensive loss included approximately $9.5 million, $9.5 million and $10.1 million, respectively, in unrealized losses related to the interest rate caps and forward foreign exchange contracts.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on the Company’s evaluation, the Principal Executive Officer and Principal Financial Officer concluded the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the Company’s Principal Executive Officer and Principal Financial Officer concluded as of the end of the period covered by this report that the Company’s disclosure controls and procedures are also effective to ensure information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the second quarter of the Company’s fiscal 2014, there was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II—OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. Our management does not expect that the results of any of these legal proceedings, either individually or in the aggregate, would have a material effect on our financial position, results of operations or cash flows.

Item 1A. RISK FACTORS

There have been no other material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors disclosed in Part I, Item 1A, of our 2013 Annual Report on Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. MINE SAFETY DISCLOSURES

None

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

 

10.1    Letter Agreement, effective July 24, 2014, among The Gymboree Corporation and Lynda Gustafson.
31.1    Certification of Mark Breitbard Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Lynda Gustafson Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Mark Breitbard Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Lynda Gustafson Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101      The following materials from The Gymboree Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 2, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements.

 

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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)

September 15, 2014

    By:  

/s/ Mark Breitbard

Date       Mark Breitbard
      Chief Executive Officer

 

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Exhibit Index

 

Exhibit

Number

  

Description

10.1    Letter Agreement, effective July 24, 2014, among The Gymboree Corporation and Lynda Gustafson.
31.1    Certification of Mark Breitbard Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Lynda Gustafson Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Mark Breitbard Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Lynda Gustafson Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101      The following materials from The Gymboree Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 2, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements.

 

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