Form 10-Q
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 November 1, 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 December 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    3  
Item 1.    Financial Statements      3   
   Condensed Consolidated Balance Sheets      3   
   Condensed Consolidated Statements of Operations      4   
   Condensed Consolidated Statements of Comprehensive Income (Loss)      5   
   Condensed Consolidated Statements of Cash Flows      6   
   Notes to Condensed Consolidated Financial Statements      7   
   Report of Independent Registered Public Accounting Firm      35   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      36   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      42   
Item 4.    Controls and Procedures      43   

Part II—OTHER INFORMATION

     43   
Item 1.    Legal Proceedings      43   
Item 1A.    Risk Factors      43   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      44   
Item 3.    Defaults Upon Senior Securities      44   
Item 4.    Mine Safety Disclosures      44   
Item 5.    Other Information      44   
Item 6.    Exhibits      44   
   Signatures      45   

 

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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)

 

     November 1,
2014
    February 1,
2014
    November 2,
2013
 

ASSETS

      
Current assets:       

Cash and cash equivalents

   $ 20,828      $ 39,429      $  19,079   

Accounts receivable, net of allowance of $2,174, $1,370 and $649

     23,377        21,882        32,485   

Merchandise inventories

     259,266        175,495        222,414   

Prepaid income taxes

     2,715        1,979        1,815   

Prepaid expenses

     21,090        18,801        19,986   

Deferred income taxes

     9,182        13,454        11,721   
  

 

 

   

 

 

   

 

 

 

Total current assets

     336,458        271,040        307,500   
  

 

 

   

 

 

   

 

 

 
Property and equipment:       

Land and buildings

     22,428        22,428        22,428   

Leasehold improvements

     200,948        195,556        199,308   

Furniture, fixtures and equipment

     122,427        117,131        108,650   
  

 

 

   

 

 

   

 

 

 
     345,803        335,115        330,386   

Less accumulated depreciation and amortization

     (154,628     (128,807     (121,119
  

 

 

   

 

 

   

 

 

 

Net property and equipment

     191,175        206,308        209,267   

Goodwill

     375,345        758,777        898,983   

Other intangible assets, net

     344,829        559,824        576,744   

Deferred financing costs

     27,338        32,455        34,067   

Other assets

     8,866        11,700        12,604   
  

 

 

   

 

 

   

 

 

 

Total assets

   $  1,284,011      $  1,840,104      $  2,039,165   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

      
Current liabilities:       

Accounts payable

   $ 146,066      $  101,959      $  87,323   

Accrued liabilities

     108,334        100,303        113,472   

Line of credit

     42,000        —          24,000   

Current obligation under capital lease

     539        503        492   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     296,939        202,765        225,287   
  

 

 

   

 

 

   

 

 

 
Long-term liabilities:       

Long-term debt

     1,113,970        1,113,742        1,113,668   

Long-term obligation under capital lease

     2,993        3,402        3,532   

Lease incentives and other liabilities

     54,129        50,432        49,772   

Unrecognized tax benefits

     6,186        6,157        12,416   

Deferred income taxes

     131,137        214,464        217,908   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,605,354        1,590,962        1,622,583   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ (deficit) equity

      

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

     521,237        517,932        516,629   

Accumulated deficit

     (845,917     (279,258     (112,102

Accumulated other comprehensive loss

     (9,255     (4,880     (5,795
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (333,935     233,794        398,732   

Noncontrolling interest

     12,592        15,348        17,850   
  

 

 

   

 

 

   

 

 

 

Total (deficit) equity

     (321,343     249,142        416,582   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 1,284,011      $ 1,840,104      $  2,039,165   
  

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     13 Weeks Ended     39 Weeks Ended  
     November 1, 2014     November 2, 2013     November 1, 2014     November 2, 2013  

Net sales:

        

Retail

   $ 304,265      $ 297,352      $ 816,765      $ 857,173   

Gymboree Play & Music

     7,744        6,821        21,895        19,409   

Retail Franchise

     4,810        5,665        14,472        16,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     316,819        309,838        853,132        893,537   

Cost of goods sold, including buying and occupancy expenses

     (190,898     (186,370     (522,489     (542,010
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     125,921        123,468        330,643        351,527   

Selling, general and administrative expenses

     (113,679     (111,199     (323,109     (317,351

Goodwill and intangible asset impairment

     (591,396     —          (591,396     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (579,154     12,269        (583,862     34,176   

Interest income

     42        41        157        143   

Interest expense

     (20,768     (20,483     (61,597     (61,352

Loss on extinguishment of debt

     —          (834     —          (834

Other (expense) income, net

     (19     853        (521     751   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (599,899     (8,154     (645,823     (27,116

Income tax benefit (expense)

     77,505        (16,244     75,573        (9,455
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (522,394     (24,398     (570,250     (36,571

Net loss attributable to noncontrolling interest

     319        413        3,591        700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (522,075   $ (23,985   $ (566,659   $ (35,871
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

     13 Weeks Ended     39 Weeks Ended  
     November 1, 2014     November 2, 2013     November 1, 2014     November 2, 2013  

Net loss

   $ (522,394   $ (24,398   $ (570,250   $ (36,571
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

        

Foreign currency translation adjustments, net of tax

     (4,940     8        (5,090     (415

Unrealized net gain (loss) on cash flow hedges, net of tax expense of $127, $501, $127, and $0

     522        (871     536        635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (4,418     (863     (4,554     220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (526,812     (25,261     (574,804     (36,351

Comprehensive loss attributable to noncontrolling interest

     193        369        3,770        599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to The Gymboree Corporation

   $ (526,619   $ (24,892   $ (571,034   $ (35,752
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     39 Weeks Ended  
     November 1, 2014     November 2, 2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (570,250   $ (36,571

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

    

Loss on extinguishment of debt

     —          834   

Goodwill and intangible asset impairment

     591,396        —     

Depreciation and amortization

     33,469        34,825   

Amortization of deferred financing costs and accretion of original issue discount

     5,345        5,112   

Interest rate cap contracts - adjustment to market

     1,441        742   

Loss on disposal/impairment of assets

     6,089        5,662   

Deferred income taxes

     (79,214     2,969   

Share-based compensation expense

     3,389        4,417   

Other

     (106     40   

Change in assets and liabilities:

    

Accounts receivable

     (1,507     4,382   

Merchandise inventories

     (84,093     (24,264

Prepaid income taxes

     (744     1,223   

Prepaid expenses and other assets

     630        (5,144

Accounts payable

     44,115        (2,807

Accrued liabilities

     8,237        17,344   

Lease incentives and other liabilities

     5,304        14,522   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (36,499     23,286   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (24,372     (35,213

Other

     (45     (235
  

 

 

   

 

 

 

Net cash used in investing activities

     (24,417     (35,448
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from ABL facility

     300,000        79,000   

Payments on ABL facility

     (258,000     (55,000

Repurchase of notes

     —          (24,760

Payments on capital lease

     (373     (78

Dividend payment to Parent

     (84     (7,475

Capital contribution received by noncontrolling interest

     992        6,506   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     42,535        (1,807
  

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     (220     (280
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (18,601     (14,249

CASH AND CASH EQUIVALENTS:

    

Beginning of period

     39,429        33,328   
  

 

 

   

 

 

 

End of period

   $ 20,828      $ 19,079   
  

 

 

   

 

 

 

OTHER CASH FLOW INFORMATION:

    

Cash paid for income taxes, net

   $ 3,677      $ 1,591   

Cash paid for interest

   $ 46,862      $ 47,948   

See notes to condensed consolidated financial statements.

 

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THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements, 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 (“third quarter of fiscal 2014”) and 39 weeks ended November 1, 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 August 2014, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to provide guidance on principles and definitions to reduce diversity in the timing and content of disclosures when evaluating whether there is substantial doubt about an organization’s ability to continue as a going concern. This ASU is effective in the annual period ending after December 15, 2016, with early application permitted. We have not yet determined the impact of the new standard on our condensed consolidated financial statements.

In May 2014, the FASB issued 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.

 

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3. Goodwill and Intangible Assets and Liabilities

Goodwill

Goodwill allocated to our reportable segments as of November 1, 2014, February 1, 2014 and November 2, 2013 was as follows (in thousands):

 

     Retail Stores
Segment
    Gymboree Play
& Music Segment
     International Retail
Franchise Segment
     Total  

Balance as of November 1, 2014

          

Goodwill

   $ 887,241      $ 16,389       $ 23,636       $ 927,266   

Accumulated impairment losses

     (547,285     —           —           (547,285

Effect of exchange rate fluctuations

     (4,636           (4,636
  

 

 

   

 

 

    

 

 

    

 

 

 
   $ 335,320      $ 16,389       $ 23,636       $ 375,345   
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance as of February 1, 2014

          

Goodwill

   $ 887,241      $ 16,389       $ 23,636       $ 927,266   

Accumulated impairment losses

     (168,489     —           —           (168,489
  

 

 

   

 

 

    

 

 

    

 

 

 
   $ 718,752      $ 16,389       $ 23,636       $ 758,777   
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance as of November 2, 2013

          

Goodwill

   $ 887,241      $ 16,406       $ 23,636       $ 927,283   

Accumulated impairment losses

     (28,300     —           —           (28,300
  

 

 

   

 

 

    

 

 

    

 

 

 
   $ 858,941      $ 16,406       $ 23,636       $ 898,983   
  

 

 

   

 

 

    

 

 

    

 

 

 

Goodwill impairment charges were as follows (in thousands):

 

     Retail Stores
Segment
    Gymboree Play
& Music Segment
     International Retail
Franchise Segment
     Total  

13 and 39 weeks ended November 1, 2014

   $ (378,796   $ —         $ —         $ (378,796

52 weeks ended February 1, 2014

   $ (140,189   $ —         $ —         $ (140,189

13 and 39 weeks ended November 2, 2013

   $ —        $ —         $ —         $ —     

Goodwill Impairment

Goodwill is allocated to our reporting units, which are the same as our operating segments: Gymboree Retail (including an online store), Gymboree Outlet, Janie and Jack (including an online store), Crazy 8 (including an online store), Gymboree Play & Music and International Retail Franchise. We evaluate goodwill for impairment on an annual basis at the end of our tenth fiscal period (fiscal November) each year and at an interim date if indicators of impairment exist.

In connection with our long-range planning process in the third quarter of fiscal 2014, we revised our growth assumptions based on estimates of future operations. The updated assumptions resulted in a plan that reflects slower growth in revenues and margins in the reporting units of our retail stores segment. As a result, we considered this to be a triggering event and performed the first step of the two-step goodwill impairment test during the quarter ended November 1, 2014. We determined that the fair value of the Gymboree Retail, Gymboree Outlet and Crazy 8 reporting units, components of our retail stores reporting segment, were below their carrying values. We performed step two of the goodwill impairment test to measure the goodwill impairment loss specific to these three reporting units. Under step two, the fair values of all Gymboree Retail, Gymboree Outlet and Crazy 8 reporting unit tangible and intangible assets and liabilities were estimated for the purpose of deriving an estimate of the implied fair value of goodwill for each reporting unit. The implied fair value of each reporting unit’s goodwill was then compared to its carrying value to determine the amount of goodwill impairment.

The goodwill impairment analysis for the reporting units was based on our projection of revenues, gross margin, operating costs and cash flows considering historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies. We based our fair value estimates on assumptions we believed to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates. The valuations employed present value techniques to measure fair value and considered market factors and reporting unit specific developments. We primarily used an income approach to value these reporting units. The discount rates used in the income approach ranged from 13.0% to 15.5%. We also considered a market approach. Assumptions used in the market approach include valuation multiples based on analysis of multiples for comparable public companies. Finally, specific weights were applied to the components of each approach to estimate the total implied fair value. These weights are estimates by management and are developed based on the specific characteristics, risks and uncertainties of each reporting unit.

During the third quarter of 2014, we concluded that there was goodwill impairment in the Gymboree Retail, Gymboree Outlet and Crazy 8 reporting units of $252.3 million, $67.2 million and $59.3 million, respectively. The impairment charge is subject to

 

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finalization of fair values, which we will complete in the fourth quarter of fiscal 2014. We believe that the preliminary estimate of impairment is reasonable and represents our best estimate of the impairment charge to be incurred; however, it is possible that material adjustments to the preliminary estimate may be required as the analysis is finalized.

During the 13 and 39 week periods ended November 2, 2013, we did not identify impairment indicators for goodwill or other 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 Gymboree Retail, Gymboree Outlet and Crazy 8 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

Indefinite-lived intangible assets Impairment

We test indefinite-lived intangible assets for impairment as of our annual test date, which is the end of our tenth fiscal period each year (fiscal November), and more frequently if indicators of potential impairment exist and indicate it is more likely than not that the carrying value of the assets may not be recoverable.

In connection with our long-range planning process in the third quarter of fiscal 2014, we revised our growth assumptions based on estimates of future operations. The updated assumptions resulted in a plan that reflects slower growth in revenues and margins in the reporting units of our retail stores segment. We considered this to be a triggering event and tested our indefinite-lived intangible assets for impairment during the quarter ended November 1, 2014. As a result, we recorded a $212.6 million impairment charge in the third quarter of fiscal 2014 related to trade names of our retail stores segment, which is included as a component of goodwill and intangible asset impairment. The impairment charge is subject to finalization of fair values, which we will complete in the fourth quarter of fiscal 2014.

We did not identify impairment indicators for indefinite-lived intangible assets during the 13 and 39 weeks ended November 2, 2013.

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

 

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

Intangible Assets Not Subject to Amortization:

  

Trade names

   $ 567,494      $ —        $ (229,600   $ 337,894   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization:

        

Customer relationships

     37,551        (37,248     —          303   

Below market leases

     7,055        (4,995     —          2,060   

Co-branded credit card agreement

     4,000        (2,419     —          1,581   

Franchise agreements and reacquired franchise rights

     6,632        (3,641     —          2,991   
  

 

 

   

 

 

   

 

 

   

 

 

 
     55,238        (48,303     —          6,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 622,732      $ (48,303   $ (229,600   $ 344,829   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

        

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

   $ (16,631   $ 11,517      $ —        $ (5,114
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     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
  

 

 

   

 

 

   

 

 

   

 

 

 
     November 2, 2013  
     Gross Carrying
Amount
    Accumulated
Amortization
    Accumulated
Impairment
    Net Amount  

Intangible Assets Not Subject to Amortization:

  

Trade names

   $ 567,494      $ —        $ —        $ 567,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization:

        

Customer relationships

     36,400        (36,400     —          —     

Below market leases

     7,055        (3,908     —          3,147   

Co-branded credit card agreement

     4,000        (1,804     —          2,196   

Franchise agreements

     6,600        (2,693     —          3,907   
  

 

 

   

 

 

   

 

 

   

 

 

 
     54,055        (44,805     —          9,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 621,549      $ (44,805   $ —        $ 576,744   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

        

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

   $ (16,631   $ 9,366      $ —        $ (7,265
  

 

 

   

 

 

   

 

 

   

 

 

 

Included in cost of goods sold (“COGS”), is amortization of below market leases and above market leases. During the 13 weeks ended November 1, 2014 and November 2, 2013, we recorded net amortization income of approximately $0.2 million and $0.3 million, respectively, in COGS. During the 39 weeks ended November 1, 2014 and November 2, 2013, we recorded net amortization income of approximately $0.7 million and $1.1 million, respectively, in COGS.

Included in selling, general and administrative expenses (“SG&A”), is amortization of customer relationships, co-branded credit card agreement and franchise agreements and reacquired franchise rights. During the 13 weeks ended November 1, 2014 and November 2, 2013, we recorded amortization expense of approximately $0.5 million and $0.4 million, respectively, in SG&A. During the 39 weeks ended November 1, 2014 and November 2, 2013, we recorded amortization expense of approximately $1.6 million and $3.0 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

 

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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 November 1, 2014 and November 2, 2013, we reclassified approximately $0.5 million and $0.3 million, respectively, from accumulated other comprehensive loss to interest expense. During the 39 weeks ended November 1, 2014 and November 2, 2013, we reclassified approximately $1.4 million and $0.7 million, respectively, from accumulated other comprehensive loss to interest expense. We estimate approximately $3.4 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.

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

 

     November 1, 2014      February 1, 2014      November 2, 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

     3         4,682         6         5,029         3         3,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 704,682         10       $ 705,029         7       $ 703,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Forward foreign exchange contracts

     —         $ —           2       $ 10,339         1       $ 380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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):

 

     November 1, 2014      February 1, 2014      November 2, 2013  
     Derivative
Assets
     Derivative
Assets
     Derivative
Assets
 

Other Assets

        

Purchased interest rate caps

   $ 41       $ 599       $ 641   

Forward foreign exchange contracts

     134         348         107   
  

 

 

    

 

 

    

 

 

 

Total

   $  175       $ 947       $ 748   
  

 

 

    

 

 

    

 

 

 

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.

 

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     13 Weeks Ended November 1, 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

   $ (1   Interest expense    $ (509

Forward foreign exchange contracts

     181      Cost of goods sold      40   
  

 

 

      

 

 

 

Total

   $ 180         $ (469
  

 

 

      

 

 

 
     13 Weeks Ended November 2, 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

   $ (546   Interest expense    $ (310

Forward foreign exchange contracts

     3      Cost of goods sold      137   
  

 

 

      

 

 

 

Total

   $ (543      $ (173
  

 

 

      

 

 

 
     39 Weeks Ended November 1, 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

   $ (558   Interest expense    $ (1,441

Forward foreign exchange contracts

     109      Cost of goods sold      329   
  

 

 

      

 

 

 

Total

   $ (449      $ (1,112
  

 

 

      

 

 

 
     39 Weeks Ended November 2, 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

   $ (323   Interest expense    $ (742

Forward foreign exchange contracts

     407      Cost of goods sold      191   
  

 

 

      

 

 

 

Total

   $ 84         $ (551
  

 

 

      

 

 

 

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.

 

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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 – Inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. Valuation techniques could include the use of discounted cash flow models and similar techniques.

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.

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 November 1, 2014, February 1, 2014 and November 2, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands). There were no transfers into or out of Level 1 and Level 2 during the 13 and 39 weeks ended November 1, 2014 and November 2, 2013, or for the year ended February 1, 2014.

 

     November 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  

Assets

           

Interest rate caps

   $ —         $ 41       $ —         $ 41   

Forward foreign exchange contracts

     —           134         —           134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 175       $ —         $ 175   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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  

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   
  

 

 

    

 

 

    

 

 

    

 

 

 
     November 2, 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  

Assets

           

Interest rate caps

   $ —         $ 641       $ —         $ 641   

Forward foreign exchange contracts

     —           107         —           107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 748       $ —         $ 748   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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.

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 November 1, 2014, February 1, 2014, and November 2, 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. These current market yields are considered Level 2 inputs. The estimated fair value of long-term debt is as follows (in thousands):

 

     November 1, 2014      February 1, 2014      November 2, 2013  
     Carrying Amount      Fair Value      Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Term loan

   $ 767,970       $ 488,380       $ 767,742       $ 692,192       $ 767,668       $ 746,029   

Notes

     346,000         110,720         346,000         308,805         346,000         332,160   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,113,970       $ 599,100       $ 1,113,742       $ 1,000,997       $ 1,113,668       $ 1,078,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We had no other financial assets or liabilities measured at fair value as of November 1, 2014, February 1, 2014, and November 2, 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 39 weeks ended November 1, 2014, we recorded $378.8 million of goodwill impairment related to our Gymboree Retail, Gymboree Outlet, and Crazy 8 reporting units and $212.6 million of impairment related to our indefinite-lived intangible assets (see Note 3). We did not recognize any goodwill or indefinite-lived intangible assets impairment charges during the 13 and 39 weeks ended November 2, 2013.

During the 13 and 39 weeks ended November 1, 2014, we recorded impairment charges of $2.0 million and $5.2 million, respectively, related to assets for under-performing stores. During the 13 and 39 weeks ended November 2, 2013, we recorded impairment charges of $0.5 million and $1.5 million, respectively, 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. Line of credit borrowings outstanding under the ABL as of November 1, 2014, February 1, 2014 and November 2, 2013 were $42.0 million, $0 and $24.0 million, respectively. Amounts available under the ABL are reduced by letter of credit utilization totaling $29.6 million as of November 1, 2014. Undrawn availability under the ABL, after being reduced by letter of credit utilization and outstanding borrowings, was $146.0 million as of November 1, 2014.

 

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Average borrowings for the 13 and 39 weeks ended November 1, 2014 under the ABL amounted to $48.5 million and $28.9 million, respectively. Average borrowings for the year ended February 1, 2014 under the ABL amounted to $4.3 million. Average borrowings for the 13 and 39 weeks ended November 2, 2013 under the ABL amounted to $10.6 million and $3.5 million, respectively.

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 November 1, 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):

 

     November 1, 2014      February 1, 2014      November 2, 2013  

Term loan due February 2018, Adjusted LIBOR (with a floor of 1.5%) plus 3.5%, net of discount of $1,133, $1,360, and $1,434

   $ 767,970       $ 767,742       $ 767,668   

Senior notes due December 2018, 9.125%

     346,000         346,000         346,000   
  

 

 

    

 

 

    

 

 

 

Long-term debt

   $ 1,113,970       $ 1,113,742       $ 1,113,668   
  

 

 

    

 

 

    

 

 

 

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 November 1, 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

 

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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 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. We may redeem the Notes, in whole or in part, upon at least 30 days prior notice, at the redemption prices (expressed as percentages of principal amount of the Notes to be redeemed) set forth below, plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of each of the years indicated below:

 

Year

   Percentage  

2014

     104.563

2015

     102.281

2016 and thereafter

     100.000

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 $1.1 million, as of November 1, 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 and ABL

Interest expense on long-term debt and the ABL was $20.6 million and $20.5 million for the 13 weeks ended November 1, 2014 and November 2, 2013, respectively. Interest expense on long-term debt and the ABL was $61.2 million and $61.4 million for the 39 weeks ended November 1, 2014 and November 2, 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 3.5 years. Amortization of deferred financing costs was $1.7 million for both the 13 weeks ended November 1, 2014 and November 2, 2013, respectively. Amortization of deferred financing costs was $5.1 million and $4.9 million for the 39 weeks ended November 1, 2014 and November 2, 2013, respectively. Accretion of OID was not material for the 13 and 39 weeks ended November 1, 2014 and November 2, 2013.

8. Share-Based Compensation

Share-based compensation expense included as a component of SG&A expenses was $1.1 million and $1.4 million during the 13 weeks ended November 1, 2014 and November 2, 2013, respectively. Share-based compensation expense was $3.4 million and $4.4 million during the 39 weeks ended November 1, 2014 and November 2, 2013, respectively. We include an estimate of forfeitures in determining share-based compensation expense.

9. Dividends

During the third quarter of fiscal 2014, we distributed $0.1 million in the form of a dividend to our indirect parent, Giraffe Holding, Inc. (“Parent”). The dividend was used by Parent’s shareholders, which are investment funds sponsored by Bain Capital Partners, LLC (“Bain Capital”), to repurchase shares. During the first and third quarter of fiscal 2013, we distributed $0.2 million and $0.6 million, respectively, in the form of a dividend to Parent, which was used by Parent’s shareholders to repurchase shares.

 

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During the third quarter of 2013, we distributed $6.7 million in the form of a dividend to Parent, which was used by Parent’s shareholders to fund their equity investment in the VIE (see Note 15).

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

10. Income Taxes

As of November 1, 2014, February 1, 2014 and November 2, 2013, unrecognized tax benefits were $6.9 million, $6.6 million and $12.1 million, respectively. We believe it is reasonably possible that the total amount of unrecognized tax benefits of $6.9 million as of November 1, 2014 will decrease by as much as $1.2 million during the next twelve months due to the resolution of certain tax contingencies and lapses of applicable statutes of limitations.

As of November 1, 2014, February 1, 2014 and November 2, 2013, the total valuation allowance against deferred tax assets was $52.4 million, $31.9 million and $25.2 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 VIEs. 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):

 

     November 1, 2014     February 1, 2014     November 2, 2013  

Foreign currency translation

   $ (4,288   $ 623      $ 292   

Accumulated changes in fair value of derivative financial instruments, net of tax benefit of $3,855, $3,982 and $3,982

     (4,967     (5,503     (6,087
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (9,255   $ (4,880   $ (5,795
  

 

 

   

 

 

   

 

 

 

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

 

     13 Weeks Ended November 1, 2014  
     Derivatives     Foreign Currency     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (5,489   $ 778      $ (4,711
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) recognized before reclassifications

     180        (4,940     (4,760

Amounts reclassified from accumulated other comprehensive loss to earnings

     469        —          469   

Tax expense

     (127     —          (127
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     522        (4,940     (4,418
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —          (126     (126
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (4,967   $ (4,288   $ (9,255
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     13 Weeks Ended November 2, 2013  
     Derivatives     Foreign Currency     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (5,216   $ 328      $ (4,888
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income recognized before reclassifications

     (543     8        (535

Amounts reclassified from accumulated other comprehensive loss to earnings

     173        —          173   

Tax expense

     (501     —          (501
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

     (871     8        (863
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —          (44     (44
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (6,087   $ 292      $ (5,795
  

 

 

   

 

 

   

 

 

 
     39 Weeks Ended November 1, 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

     (449     (5,090     (5,539

Amounts reclassified from accumulated other comprehensive loss to earnings

     1,112        —          1,112   

Tax expense

     (127     —          (127
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     536        (5,090     (4,554
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss attributable to noncontrolling interest

     —          179        179   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (4,967   $ (4,288   $ (9,255
  

 

 

   

 

 

   

 

 

 
     39 Weeks Ended November 2, 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

     84        (415     (331

Amounts reclassified from accumulated other comprehensive loss to earnings

     551        —          551   
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     635        (415     220   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —          (101     (101
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (6,087   $ 292      $ (5,795
  

 

 

   

 

 

   

 

 

 

12. Related Party Transactions

Related Party Transactions – Excluding VIEs

We incurred approximately $0.7 million and $0.9 million in management fees and reimbursement of out-of-pocket expenses from Bain Capital during the 13 weeks ended November 1, 2014 and November 2, 2013, respectively. We incurred approximately $2.3 million and $2.7 million in management fees and reimbursement of out-of-pocket expenses from Bain Capital during the 39 weeks ended November 1, 2014 and November 2, 2013, respectively. As of November 1, 2014, February 1, 2014 and November 2, 2013, we had a payable balance of $0.2 million, $0.4 million and $0.2 million, respectively, to Bain Capital.

We incurred approximately $0.5 million and $0.6 million in expenses related to services purchased from LogicSource, a company owned by funds associated with Bain Capital, during the 13 weeks ended November 1, 2014 and November 2, 2013, respectively. We incurred approximately $1.4 million and $1.8 million in expenses related to services purchased from LogicSource during the 39 weeks ended November 1, 2014 and November 2, 2013, respectively. As of November 1, 2014, February 1, 2014 and November 2, 2013, we had a payable balance of $0.2 million, $0.2 million and $0.3 million, respectively, to LogicSource.

During the 13 and 39 weeks ended November 1, 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 39 weeks ended November 2, 2013, we sold inventory to Burlington Coat Factory Investments Holdings, Inc. for $0.7 million and $8.7 million, respectively. As of November 1, 2014, February 1, 2014 and November 2, 2013, we had a receivable balance of $0, $1.0 million and $0, respectively, from Burlington Coat Factory Investments Holdings, Inc.

 

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As of February 1, 2014, we had a receivable balance of $0.8 million, from our indirect parent, Giraffe Holding, Inc., related to income taxes and none as of November 1, 2014 and November 2, 2013.

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

Our VIE incurred approximately $0.1 million in management fees from Bain Capital Advisors (China) Ltd. during the 13 weeks ended November 1, 2014 and November 2, 2013. Our VIE incurred approximately $0.4 million in management fees from Bain Capital Advisors (China) Ltd. for the 39 weeks ended November 1, 2014 and November 2, 2013.

As of November 1, 2014, February 1, 2014 and November 2, 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 November 1, 2014, February 1, 2014 and November 2, 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 stores (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 November 1, 2014  
     Retail
Stores
    Gymboree
Play & Music
     International Retail
Franchise
     VIEs      Intersegment
Elimination
    Total  

Net sales

   $ 303,166      $ 4,178       $ 4,914       $ 6,055       $ (1,494   $ 316,819   

Operating (loss) income

   $ (583,758   $ 1,981       $ 2,452       $ 172       $ (1   $ (579,154

 

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Table of Contents
     13 Weeks Ended November 2, 2013  
     Retail
Stores
    Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

Net sales

   $ 295,969      $ 3,879       $ 5,791       $ 5,395      $ (1,196   $ 309,838   

Operating income (loss)

   $ 8,786      $ 1,836       $ 2,430       $ (803   $ 20      $ 12,269   
     39 Weeks Ended November 1, 2014  
     Retail
Stores
    Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

Net sales

   $ 812,887      $ 13,069       $ 14,838       $ 17,705      $ (5,367   $ 853,132   

Operating (loss) income

   $ (596,894   $ 8,227       $ 7,340       $ (2,525   $ (10   $ (583,862
     39 Weeks Ended November 2, 2013  
     Retail
Stores
    Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

Net sales

   $ 853,422      $ 11,524       $ 17,318       $ 15,027      $ (3,754   $ 893,537   

Operating income (loss)

   $ 22,657      $ 5,284       $ 7,499       $ (1,318   $ 54      $ 34,176   
     Total Assets  
     Retail
Stores
    Gymboree
Play & Music
     International Retail
Franchise
     VIEs     Intersegment
Elimination
    Total  

November 1, 2014

   $ 1,175,445      $ 59,655       $ 28,252       $ 21,981      $ (1,322   $ 1,284,011   

February 1, 2014

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

November 2, 2013

   $ 1,924,170      $ 61,034       $ 29,403       $ 26,028      $ (1,470   $ 2,039,165   

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 $1.4 million and $0.1 million, respectively, for the 13 weeks ended November 1, 2014, and $1.1 million and $0.1 million, respectively, for the 13 weeks ended November 2, 2013. The Gymboree Play & Music and Retail Franchise reportable segments recorded intersegment revenues of $5.0 million and $0.4 million, respectively, for the 39 weeks ended November 1, 2014, and $3.4 million and $0.4 million, respectively, for the 39 weeks ended November 2, 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  
     November 1, 2014      November 2, 2013  
     United States      International      United States      International  

Net sales

   $ 296,839       $ 19,980       $ 290,962       $ 18,876   
     39 Weeks Ended  
     November 1, 2014      November 2, 2013  
     United States      International      United States      International  

Net sales

   $ 801,409       $ 51,723       $ 841,855       $ 51,682   

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

 

     November 1, 2014      February 1, 2014      November 2, 2013  

United States

   $ 179,982       $ 196,990       $ 199,156   

International

   $ 11,193       $ 9,318       $ 10,111   

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

 

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Table of Contents

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.

The following tables reflect the impact of the VIEs on the condensed consolidated balance sheets as of November 1, 2014, February 1, 2014 and November 2, 2013, and the condensed consolidated statements of operations for the 13 and 39 weeks ended November 1, 2014 and November 2, 2013 (in thousands):

 

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Table of Contents

Condensed Consolidating Balance Sheets

 

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

Cash and cash equivalents

   $ 10,653      $ 10,175       $ —        $ 20,828   

Other current assets

     310,491        6,461         (1,322     315,630   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     321,144        16,636         (1,322     336,458   

Non-current assets

     942,208        5,345         —          947,553   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,263,352      $ 21,981       $ (1,322   $ 1,284,011   
  

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 289,155      $ 8,959       $ (1,175   $ 296,939   

Non-current liabilities

     1,307,985        430         —          1,308,415   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,597,140        9,389         (1,175     1,605,354   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ deficit

     (333,788     —           (147     (333,935

Noncontrolling interest

     —          12,592         —          12,592   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 1,263,352      $ 21,981       $ (1,322   $ 1,284,011   
  

 

 

   

 

 

    

 

 

   

 

 

 
     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   
  

 

 

   

 

 

    

 

 

   

 

 

 
     November 2, 2013  
     Balance Before
Consolidation
of VIEs
    VIEs      Eliminations     As
Reported
 
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash and cash equivalents

   $ 13,743      $ 5,336       $ —        $ 19,079   

Other current assets

     273,798        16,093         (1,470     288,421   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     287,541        21,429         (1,470     307,500   

Non-current assets

     1,727,065        4,599         1        1,731,665   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,014,606      $ 26,028       $ (1,469   $ 2,039,165   
  

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 218,665      $ 7,916       $ (1,294   $ 225,287   

Non-current liabilities

     1,397,034        262         —          1,397,296   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,615,699        8,178         (1,294     1,622,583   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     398,907        —           (175     398,732   

Noncontrolling interest

     —          17,850         —          17,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,014,606      $ 26,028       $ (1,469   $ 2,039,165   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Operations

 

     For the 13 Weeks Ended November 1, 2014  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 312,258      $ 6,055      $ (1,494   $ 316,819   

Cost of goods sold

     (189,729     (1,561     392        (190,898

Selling, general and administrative expenses

     (701,854     (4,322     1,101        (705,075
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss (income)

     (579,325     172        (1     (579,154

Other non-operating (expense) income

     (20,772     27        —          (20,745
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (600,097     199        (1     (599,899

Income tax benefit (expense)

     78,023        (518     —          77,505   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (522,074     (319     (1     (522,394

Net loss attributable to noncontrolling interest

     —          319        —          319   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (522,074   $ —        $ (1   $ (522,075
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the 13 Weeks Ended November 2, 2013  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 305,639      $ 5,395      $ (1,196   $ 309,838   

Cost of goods sold

     (185,116     (1,297     43        (186,370

Selling, general and administrative expenses

     (107,471     (4,901     1,173        (111,199
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     13,052        (803     20        12,269   

Other non-operating (expense) income

     (21,140     717        —          (20,423
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (8,088     (86     20        (8,154

Income tax expense

     (15,917     (327     —          (16,244
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (24,005     (413     20        (24,398

Net loss attributable to noncontrolling interest

     —          413        —          413   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (24,005   $ —        $ 20      $ (23,985
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the 39 Weeks Ended November 1, 2014  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 840,794      $ 17,705      $ (5,367   $ 853,132   

Cost of goods sold

     (518,426     (4,874     811        (522,489

Selling, general and administrative expenses

     (903,695     (15,356     4,546        (914,505
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (581,327     (2,525     (10     (583,862

Other non-operating expense

     (61,955     (6     —          (61,961
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (643,282     (2,531     (10     (645,823

Income tax benefit (expense)

     76,633        (1,060     —          75,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (566,649     (3,591     (10     (570,250

Net loss attributable to noncontrolling interest

     —          3,591        —          3,591   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (566,649   $ —        $ (10   $ (566,659
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the 39 Weeks Ended November 2, 2013  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 882,264      $ 15,027      $ (3,754   $ 893,537   

Cost of goods sold

     (538,591     (3,868     449        (542,010

Selling, general and administrative expenses

     (308,233     (12,477     3,359        (317,351
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     35,440        (1,318     54        34,176   

Other non-operating (expense) income

     (62,163     871        —          (61,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (26,723     (447     54        (27,116

Income tax expense

     (9,202     (253     —          (9,455
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (35,925     (700     54        (36,571

Net loss attributable to noncontrolling interest

     —          700        —          700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (35,925   $ —        $ 54      $ (35,871
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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 Advanced 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.

During the third quarter of fiscal 2014, our guarantor subsidiaries distributed $3.0 million in the form of a dividend to The Gymboree Corporation.

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

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

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 2,195      $ 3,236       $ 15,397       $ —        $ 20,828   

Accounts receivable, net of allowance

     687        20,693         1,997         —          23,377   

Merchandise inventories

     —          252,102         7,684         (520     259,266   

Prepaid income taxes

     2,029        486         200         —          2,715   

Prepaid expenses

     4,461        15,164         1,465         —          21,090   

Deferred income taxes

     —          13,745         645         (5,208     9,182   

Intercompany receivable

     —          542,194         —           (542,194     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     9,372        847,620         27,388         (547,922     336,458   

Property and equipment, net

     12,063        167,676         11,436         —          191,175   

Goodwill

     —          362,022         13,323         —          375,345   

Other intangible assets, net

     —          344,436         393         —          344,829   

Deferred financing costs

     27,338        —           —           —          27,338   

Other assets

     6,992        1,673         9,140         (8,939     8,866   

Investment in subsidiaries

     1,362,644        —           —           (1,362,644     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,418,409      $ 1,723,427       $ 61,680       $ (1,919,505   $ 1,284,011   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

            

Current liabilities:

            

Accounts payable

   $ 17,823      $ 126,192       $ 2,051       $ —        $ 146,066   

Accrued liabilities

     32,221        67,963         8,086         64        108,334   

Deferred income taxes

     5,150        —           123         (5,273     —     

Line of credit

     42,000        —           —           —          42,000   

Current obligation under capital lease

     —          539         —           —          539   

Intercompany payable

     536,282        —           6,431         (542,713     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     633,476        194,694         16,691         (547,922     296,939   

Long-term liabilities:

            

Long-term debt

     1,113,970        —           —           —          1,113,970   

Long-term obligation under capital lease

     —          2,993         —           —          2,993   

Lease incentives and other liabilities

     4,898        50,056         5,361         —          60,315   

Deferred income taxes

     —          140,076         —           (8,939     131,137   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,752,344        387,819         22,052         (556,861     1,605,354   

Total stockholders’ (deficit) equity

     (333,935     1,335,608         27,036         (1,362,644     (333,935

Noncontrolling interest

     —          —           12,592         —          12,592   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 1,418,409      $ 1,723,427       $ 61,680       $ (1,919,505   $ 1,284,011   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     As of November 2, 2013  
     The Gymboree      Guarantor      Non-guarantor               
     Corporation      Subsidiaries      Subsidiaries      Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 1,438       $ 3,381       $ 14,260       $ —        $ 19,079   

Accounts receivable, net of allowance

     367         20,087         12,031         —          32,485   

Merchandise inventories

     —           216,605         6,231         (422     222,414   

Prepaid income taxes

     1,478         —           337         —          1,815   

Prepaid expenses

     4,011         14,659         1,316         —          19,986   

Deferred income taxes

     —           15,295         864         (4,438     11,721   

Intercompany receivable

     —           489,942         —           (489,942     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     7,294         759,969         35,039         (494,802     307,500   

Property and equipment, net

     13,166         185,689         10,412         —          209,267   

Goodwill

     —           859,165         39,818         —          898,983   

Other intangible assets, net

     —           576,623         121         —          576,744   

Deferred financing costs

     34,067         —           —           —          34,067   

Other assets

     21,321         2,142         13,696         (24,555     12,604   

Investment in subsidiaries

     1,985,248         —           —           (1,985,248     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,061,096       $ 2,383,588       $ 99,086       $ (2,504,605   $ 2,039,165   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 8,756       $ 77,192       $ 1,375       $ —        $ 87,323   

Accrued liabilities

     38,548         66,832         8,092         —          113,472   

Deferred income taxes

     4,363         —           75         (4,438     —     

Line of credit

     24,000         —           —           —          24,000   

Current obligation under capital lease

     —           492         —           —          492   

Intercompany payable

     468,686         —           21,678         (490,364     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     544,353         144,516         31,220         (494,802     225,287   

Long-term liabilities:

             

Long-term debt

     1,113,668         —           —           —          1,113,668   

Long-term obligation under capital lease

     —           3,532         —           —          3,532   

Lease incentives and other liabilities

     4,343         47,638         10,207         —          62,188   

Deferred income taxes

     —           242,463         —           (24,555     217,908   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,662,364         438,149         41,427         (519,357     1,622,583   

Total stockholders’ equity

     398,732         1,945,439         39,809         (1,985,248     398,732   

Noncontrolling interest

     —           —           17,850         —          17,850   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,061,096       $ 2,383,588       $ 99,086       $ (2,504,605   $ 2,039,165   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

26


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 13 WEEKS ENDED NOVEMBER 1, 2014

(In thousands)

 

     The Gymboree     Guarantor     Non-guarantor              
     Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales:

          

Retail

   $ 647      $ 296,195      $ 15,461      $ (8,038   $ 304,265   

Gymboree Play & Music

     —          2,786        4,958        —          7,744   

Retail Franchise

     —          4,810        —          —          4,810   

Intercompany revenue

     18,249        1,800        —          (20,049     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     18,896        305,591        20,419        (28,087     316,819   

Cost of goods sold, including buying and occupancy expenses

     (2,258     (185,288     (11,736     8,384        (190,898
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16,638        120,303        8,683        (19,703     125,921   

Selling, general and administrative expenses

     (17,956     (106,741     (8,657     19,675        (113,679

Goodwill and intangible asset impairment

     —          (572,422     (18,974     —          (591,396
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,318     (558,860     (18,948     (28     (579,154

Interest income

     —          7        39        (4     42   

Interest expense

     (20,568     (200     (4     4        (20,768

Other (expense) income, net

     (48     31        (2     —          (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (21,934     (559,022     (18,915     (28     (599,899

Income tax benefit (expense)

     8,306        70,407        (1,208     —          77,505   

Equity in earnings of affiliates, net of tax

     (508,447     —          —          508,447        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (522,075     (488,615     (20,123     508,419        (522,394

Net loss attributable to noncontrolling interest

     —          —          319        —          319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (522,075   $ (488,615   $ (19,804   $ 508,419      $ (522,075
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 13 WEEKS ENDED NOVEMBER 2, 2013

(In thousands)

 

     The Gymboree     Guarantor     Non-guarantor              
     Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales:

          

Retail

   $ 443      $ 287,574      $ 16,232      $ (6,897   $ 297,352   

Gymboree Play & Music

     —          2,808        4,013        —          6,821   

Retail Franchise

     —          5,665        —          —          5,665   

Intercompany revenue

     12,866        1,490        —          (14,356     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     13,309        297,537        20,245        (21,253     309,838   

Cost of goods sold, including buying and occupancy expenses

     (1,435     (180,116     (10,720     5,901        (186,370
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     11,874        117,421        9,525        (15,352     123,468   

Selling, general and administrative expenses

     (14,271     (103,254     (9,090     15,416        (111,199
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (2,397     14,167        435        64        12,269   

Interest income

     29        6        5        1        41   

Interest expense

     (20,421     (62     —          —          (20,483

Loss on extinguishment of debt

     (834     —          —          —          (834

Other (expense) income, net

     (37     (4     894        —          853   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (23,660     14,107        1,334        65        (8,154

Income tax (expense) benefit

     (2,244     (14,626     626        —          (16,244

Equity in earnings of affiliates, net of tax

     1,919        —          —          (1,919     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (23,985     (519     1,960        (1,854     (24,398

Net loss attributable to noncontrolling interest

     —          —          413        —          413   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Gymboree Corporation

   $ (23,985   $ (519   $ 2,373      $ (1,854   $ (23,985
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 39 WEEKS ENDED NOVEMBER 1, 2014

(In thousands)

 

     The Gymboree     Guarantor     Non- guarantor              
     Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales:

          

Retail

   $ 1,278      $ 794,856      $ 39,365      $ (18,734   $ 816,765   

Gymboree Play & Music

     —          8,067        13,828        —          21,895   

Retail Franchise

     —          14,472        —          —          14,472   

Intercompany revenue

     46,632        6,182        —          (52,814     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     47,910        823,577        53,193        (71,548     853,132   

Cost of goods sold, including buying and occupancy expenses

     (5,160     (506,120     (30,661     19,452        (522,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     42,750        317,457        22,532        (52,096     330,643   

Selling, general and administrative expenses

     (48,003     (299,394     (27,768     52,056        (323,109

Goodwill and intangible asset impairment

     —          (572,422     (18,974     —          (591,396
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (5,253     (554,359     (24,210     (40     (583,862

Interest income

     1        54        147        (45     157   

Interest expense

     (61,224     (373     (45     45        (61,597

Other (expense) income, net

     (480     31        (72     —          (521
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (66,956     (554,647     (24,180     (40     (645,823

Income tax benefit (expense)

     15,677        62,141        (2,245     —          75,573   

Equity in earnings of affiliates, net of tax

     (515,380     —          —          515,380        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (566,659     (492,506     (26,425     515,340        (570,250

Net loss attributable to noncontrolling interest

     —          —          3,591        —          3,591   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (566,659   $ (492,506   $ (22,834   $ 515,340      $ (566,659
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 39 WEEKS ENDED NOVEMBER 2, 2013

(In thousands)

 

     The Gymboree     Guarantor     Non-guarantor              
     Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales:

          

Retail

   $ 1,365      $ 831,597      $ 44,597      $ (20,386   $ 857,173   

Gymboree Play & Music

     —          8,132        11,277        —          19,409   

Retail Franchise

     —          16,955        —          —          16,955   

Intercompany revenue

     45,883        4,592        —          (50,475     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     47,248        861,276        55,874        (70,861     893,537   

Cost of goods sold, including buying and occupancy expenses

     (4,389     (525,280     (30,172     17,831        (542,010
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     42,859        335,996        25,702        (53,030     351,527   

Selling, general and administrative expenses

     (49,249     (295,002     (26,150     53,050        (317,351
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (6,390     40,994        (448     20        34,176   

Interest income

     62        29        52        —          143   

Interest expense

     (61,290     (62     (1     1        (61,352

Loss on extinguishment of debt

     (834     —          —          —          (834

Other (expense) income, net

     (261     (5     1,017        —          751   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (68,713     40,956        620        21        (27,116

Income tax benefit (expense)

     19,834        (29,467     178        —          (9,455

Equity in earnings of affiliates, net of tax

     13,008        —          —          (13,008     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (35,871     11,489        798        (12,987     (36,571

Net loss attributable to noncontrolling interest

     —          —          700        —          700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Gymboree Corporation

   $ (35,871   $ 11,489      $ 1,498      $ (12,987   $ (35,871
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 13 WEEKS ENDED NOVEMBER 1, 2014

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net loss

   $ (522,075   $ (488,615   $ (20,123   $ 508,419      $ (522,394
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

          

Foreign currency translation adjustments

     (5,066     —          (4,945     5,071        (4,940

Unrealized net gain on cash flowhedges, net of tax expense of $127

     522        —          142        (142     522   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (4,544     —          (4,803     4,929        (4,418
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (526,619     (488,615     (24,926     513,348        (526,812

Comprehensive loss attributable to noncontrolling interest

     —          —          193        —          193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to The Gymboree Corporation

   $ (526,619   $ (488,615   $ (24,733   $ 513,348      $ (526,619
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 13 WEEKS ENDED NOVEMBER 2, 2013

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net (loss) income

   $ (23,985   $ (519   $ 1,960      $ (1,854   $ (24,398
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

          

Foreign currency translation adjustments

     (36     —          (11     55        8   

Unrealized net loss on cash flowhedges, net of tax expense of $501

     (871     —          (191     191        (871
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (907     —          (202     246        (863
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (24,892     (519     1,758        (1,608     (25,261

Comprehensive income attributable to noncontrolling interest

     —          —          369        —          369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to The Gymboree Corporation

   $ (24,892   $ (519   $ 2,127      $ (1,608   $ (24,892
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 39 WEEKS ENDED NOVEMBER 1, 2014

(In thousands)

 

     The Gymboree     Guarantor     Non-guarantor               
     Corporation     Subsidiaries     Subsidiaries     Eliminations      Consolidated  

Net loss

   $ (566,659   $ (492,506   $ (26,425   $ 515,340       $ (570,250
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income, net of tax:

           

Foreign currency translation adjustments

     (4,911     —          (5,065     4,886         (5,090

Unrealized net gain (loss) on cash flow hedges, net of tax expense of $127

     536        —          (219     219         536   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive loss, net of tax

     (4,375     —          (5,284     5,105         (4,554
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive loss

     (571,034     (492,506     (31,709     520,445         (574,804

Comprehensive loss attributable to noncontrolling interest

     —          —          3,770        —           3,770   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive loss attributable to The Gymboree Corporation

   $ (571,034   $ (492,506   $ (27,939   $ 520,445       $ (571,034
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 39 WEEKS ENDED NOVEMBER 2, 2013

(In thousands)

 

     The Gymboree     Guarantor      Non-guarantor        
     Corporation     Subsidiaries      Subsidiaries     Eliminations     Consolidated  

Net (loss) income

   $ (35,871   $ 11,489       $ 798      $ (12,987   $ (36,571
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments

     (516     —           (456     557        (415

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

     635        —           217        (217     635   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     119        —           (239     340        220   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (35,752     11,489         559        (12,647     (36,351

Comprehensive loss attributable to noncontrolling interest

     —          —           599        —          599   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to The Gymboree Corporation

   $ (35,752   $ 11,489       $ 1,158      $ (12,647   $ (35,752
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE 39 WEEKS ENDED NOVEMBER 1, 2014

(In thousands)

 

     The Gymboree     Guarantor     Non- guarantor        
     Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net cash (used in) provided by operating activities

   $ (58,088   $ 29,216      $ (4,627   $ (3,000   $ (36,499
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (2,403     (17,798     (4,171     —          (24,372

Proceeds from sale of shares

     3,207        —          —          (3,207     —     

Intercompany transfers

     —          (9,490     —          9,490        —     

Other

     —          22        (67     —          (45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     804        (27,266     (4,238     6,283        (24,417
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     2,084        —          7,406        (9,490     —     

Proceeds from ABL facility

     300,000        —          —          —          300,000   

Payments on ABL facility

     (258,000     —          —          —          (258,000

Payments on capital lease

     —          (373     —          —          (373

Dividend to The Gymboree Corporation

     —          (3,000     —          3,000        —     

Dividend payment to Parent

     (84     —          —          —          (84

Repurchase of shares

     —          —          (3,207     3,207        —     

Capital contribution received by noncontrolling interest

     —          —          992        —          992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     44,000        (3,373     5,191        (3,283     42,535   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     —          —          (220     —          (220
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (13,284     (1,423     (3,894     —          (18,601

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 2,195      $ 3,236      $ 15,397      $ —        $ 20,828   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE 39 WEEKS ENDED NOVEMBER 2, 2013

(In thousands)

 

     The Gymboree     Guarantor     Non- guarantor        
     Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net cash (used in) provided by operating activities

   $ (52,645   $ 85,441      $ (9,510   $ —        $ 23,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (1,648     (30,438     (3,127     —          (35,213

Intercompany transfers

     —          (54,683     —          54,683        —     

Other

     —          11        (246     —          (235
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,648     (85,110     (3,373     54,683        (35,448
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     45,535        —          9,148        (54,683     —     

Proceeds from ABL facility

     79,000        —          —          —          79,000   

Payments on ABL facility

     (55,000     —          —          —          (55,000

Repurchase of notes

     (24,760     —          —          —          (24,760

Payments on capital lease

     —          (78     —          —          (78

Dividend payment to parent

     (7,475     —          —          —          (7,475

Capital contribution received by noncontrolling interest

     —          —          6,506        —          6,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     37,300        (78     15,654        (54,683     (1,807
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     —          —          (280     —          (280
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (16,993     253        2,491        —          (14,249

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 1,438      $ 3,381      $ 14,260      $ —        $ 19,079   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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.

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 third 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 39 weeks ended November 2, 2013 to be presented within investing activities. This correction has no impact on the condensed consolidated statement of cash flows for the 39 weeks ended November 2, 2013. The effect is summarized as follows:

 

     39 Weeks Ended November 2, 2013  
     Guarantor
Subsidiaries
(As Previously
Reported)
    Guarantor
Subsidiaries
(As Corrected)
    Eliminations
(As Previously
Reported)
     Eliminations
(As Corrected)
 

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Intercompany transfers

   $ —        $ (54,683   $ —         $ 54,683   

Net cash used in investing activities

   $ (30,427   $ (85,110   $ —         $ 54,683   

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Intercompany transfers

   $ (54,683   $ —        $ —         $ (54,683

Net cash used in financing activities

   $ (54,761   $ (78   $ —         $ (54,683

 

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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 November 1, 2014 and November 2, 2013, and the related condensed consolidated statements of operations and comprehensive income (loss) for the thirteen and thirty-nine week periods then ended, and of cash flows for the thirty-nine 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’ (deficit) 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

December 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 this Form 10-Q and 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 November 1, 2014, we operated a total of 1,355 retail stores, as follows: 626 Gymboree® stores (including 572 in the United States, 47 in Canada, 1 in Puerto Rico and 6 in Australia), 174 Gymboree Outlet stores (172 in the United States and 2 in Puerto Rico), 151 Janie and Jack® shops, and 404 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 702 franchised and Company-operated Gymboree Play & Music® centers in the United States and 41 other countries. In addition, as of November 1, 2014, third-party overseas franchisees operated 79 Gymboree stores in the Middle East, South Korea, Latin America and China, including 23 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 November 1, 2014.

During the third quarter of fiscal 2014, we opened 16 new stores and closed 5 stores. We plan to open approximately 50 new stores in fiscal 2014 (46 opened as of November 1, 2014), distributed fairly evenly across the brands, and close approximately 40 stores (14 closed as of November 1, 2014). We expect our international franchise partners to open approximately 20 to 25 franchise stores in fiscal 2014 (14 opened as of November 1, 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 November 1, 2014, compared to 13 weeks ended November 2, 2013

Net Sales

Net retail sales for the third quarter of fiscal 2014 increased to $304.3 million from $297.4 million in the same period last year, an increase of $6.9 million, or 2.3%, primarily due to new store growth and higher comparable store sales. Comparable store sales (including online sales) increased by 1% in the third quarter of fiscal 2014 compared to the same period in the prior year. Comparable store sales (excluding online sales) increased by 1% in the third quarter of fiscal 2014 compared to the same period in the prior year. The increase in comparable store sales was driven by an increase in transactions. Total net stores increased from 1,319 as of November 2, 2013, to 1,355 as of November 1, 2014. Total square footage increased from approximately 2.7 million square feet to approximately 2.8 million square feet from the third quarter of fiscal 2013 to the third quarter of fiscal 2014.

 

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Gymboree Play & Music net sales for the third quarter of fiscal 2014 increased to $7.7 million from $6.8 million in the same period last year, an increase of $0.9 million or 13.5%, primarily due to growth of the business in China.

Retail Franchise net sales for the third quarter of fiscal 2014 decreased to $4.8 million from $5.7 million in the same period last year, a decrease of $0.9 million or 15.1% primarily due to lower franchise sales in the Middle East region. As of the third quarter of fiscal 2014, our third-party overseas franchisees operated a total of 83 stores compared to 71 stores as of the end of the same period last year.

Gross Profit

Gross profit for the third quarter of fiscal 2014 increased to $125.9 million from $123.5 million in the same period last year. As a percentage of net sales, gross profit for the third quarter of fiscal 2014 decreased 0.1 percentage points to 39.7% from 39.8% in the same period last year due to an increase in occupancy expenses. 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 $11.8 million and $10.9 million in the third 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 $113.7 million for the third quarter of fiscal 2014 compared to $111.2 million in the same period last year, due to net store growth, benefit related expenses and an increase in marketing expenses, partially offset by a reduction in store and other tangible asset impairment charges. As a percentage of net sales, SG&A expenses were 35.9% for both the third quarter of fiscal 2014 and 2013.

Goodwill and Intangible Asset Impairment

In connection with our long-range planning process in the third quarter of fiscal 2014, we revised our growth assumptions based on estimates of future operations. The updated assumptions resulted in a plan that reflects slower growth in revenues and margins in the reporting units of our retail stores segment. As a result, we recorded goodwill impairment charges in the third quarter of fiscal 2014 of $252.3 million, $67.2 million and $59.3 million related to the Gymboree Retail, Gymboree Outlet and Crazy 8 reporting units, respectively. In the third quarter of fiscal 2014, we also recorded an impairment charge of $212.6 million related to trade names in our retail stores segment. These impairment charges do not have an effect on our business operations, liquidity or financial covenants.

Loss on Extinguishment of Debt

During the third quarter of fiscal 2013, we repurchased Notes with an aggregate principal amount of $25.0 million for $24.8 million in cash, which resulted in a $0.2 million gain on extinguishment of debt and a $1.0 million charge related to the write-off of deferred financing costs. We did not repurchase Notes during the third quarter of fiscal 2014.

Income Taxes

The effective tax rate for the third quarter of fiscal 2014 and 2013 was 12.9% (benefit) and -199.2% (expense), respectively. The change in effective tax rate as of the third quarter of fiscal 2014 was related to goodwill and trade name impairment charges. The change in effective tax rate as of third quarter of fiscal 2013 was due to recording a valuation allowance against net deferred tax assets in the third quarter of fiscal 2013 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 November 1, 2014, February 1, 2014 and November 2, 2013, our valuation allowance against deferred tax assets was $52.4 million, $31.9 million and $25.2 million, respectively. The valuation allowance as of November 1, 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 VIEs. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

 

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39 weeks ended November 1, 2014, compared to 39 weeks ended November 2, 2013

Net Sales

Net retail sales for the 39 weeks ended November 1, 2014 decreased to $816.8 million from $857.2 million in the same period last year, a decrease of $40.4 million, or 4.7%, primarily due to lower comparable store sales, partially offset by new store growth. Comparable store sales (including online sales) decreased by 6% in the 39 weeks ended November 1, 2014 compared to the same period last year. Comparable store sales (excluding online sales) decreased by 7% in the 39 weeks ended November 1, 2014 compared to the same period last year. The decrease in comparable store sales was driven by a decrease in transactions. Total net stores increased from 1,319 as of November 2, 2013, to 1,355 as of November 1, 2014. Total square footage increased from approximately 2.7 million square feet to approximately 2.8 million square feet from the third quarter of fiscal 2013 to the third quarter of fiscal 2014.

Gymboree Play & Music net sales for the 39 weeks ended November 1, 2014 increased to $21.9 million from $19.4 million in the same period last year, an increase of $2.5 million or 12.8%, primarily due to growth of the business in China.

Retail Franchise net sales for the 39 weeks ended November 1, 2014 decreased to $14.5 million from $17.0 million in the same period last year, a decrease of $2.5 million or 14.6% primarily due to lower franchise sales in the Middle East region. As of November 1, 2014, our third-party overseas franchisees operated a total of 83 stores compared to 71 stores as of the end of the same period last year.

Gross Profit

Gross profit for the 39 weeks ended November 1, 2014 decreased to $330.6 million from $351.5 million in the same period last year. As a percentage of net sales, gross profit for the 39 weeks ended November 1, 2014 decreased 0.5 percentage points to 38.8% from 39.3% 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 39 weeks ended November 1, 2014, partially offset by an increase in average unit retail prices. 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 $31.4 million and $25.9 million for the 39 weeks ended November 1, 2014 and November 2, 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 $323.1 million for the 39 weeks ended November 1, 2014 compared to $317.4 million in the same period last year. As a percentage of net sales, SG&A expenses increased 2.4 percentage points to 37.9% for the 39 weeks ended November 1, 2014 from 35.5% in the same period last year primarily due to a deleveraging of expenses on lower comparable store sales and increased expenses related to our third-party fulfillment center.

Goodwill and Intangible Asset Impairment

In connection with our long-range planning process in the third quarter of fiscal 2014, we revised our growth assumptions based on estimates of future operations. The updated assumptions resulted in a plan that reflects slower growth in revenues and margins in the reporting units of our retail stores segment. As a result, we recorded goodwill impairment charges of $252.3 million, $67.2 million and $59.3 million related to the Gymboree Retail, Gymboree Outlet and Crazy 8 reporting units, respectively. In the 39 weeks ended November 1, 2014, we also recorded an impairment charge of $212.6 million related to trade names in our retail segment. These impairment charges do not have an effect on our business operations, liquidity or financial covenants.

Loss on Extinguishment of Debt

During the third quarter of fiscal 2013, we repurchased Notes with an aggregate principal amount of $25.0 million for $24.8 million in cash, which resulted in a $0.2 million gain on extinguishment of debt and a $1.0 million charge related to the write-off of deferred financing costs. We did not repurchase Notes during the 39 weeks ended November 1, 2014.

Income Taxes

The effective tax rate for the 39 weeks ended November 1, 2014 and November 2, 2013 was 11.7% (benefit) and -34.9% (expense), respectively. The change in effective tax rates as of the third quarter of fiscal 2014 was related to goodwill and trade name impairment charges. The change in effective tax rate as of third quarter of fiscal 2013 was due to recording a valuation allowance against net deferred tax assets in the third quarter of fiscal 2013 in jurisdictions where it is more likely than not that these assets will not be realized.

 

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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 November 1, 2014, February 1, 2014 and November 2, 2013, our valuation allowance against deferred tax assets was $52.4 million, $31.9 million and $25.2 million, respectively. The valuation allowance as of November 1, 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 VIEs. 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 $20.8 million, $39.4 million and $19.1 million as of November 1, 2014, February 1, 2014 and November 2, 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 $10.2 million, $13.8 million and $5.3 million as of November 1, 2014, February 1, 2014 and November 2, 2013, respectively (see Note 15 to the condensed consolidated financial statements included elsewhere in this quarterly report). The assets of the VIEs cannot be used by us. Working capital as of November 1, 2014, February 1, 2014 and November 2, 2013 totaled $39.5 million, $68.3 million and $82.2 million, respectively.

Cash flows (used in) provided by operating activities

Net cash used in operating activities for the 39 weeks ended November 1, 2014 was $36.5 million compared to net cash provided by operating activities of $23.3 million in the same period last year. The change in cash (used in) provided by operating activities is primarily due to an increase in operating losses and merchandise inventory purchases, partially offset by an increase in accounts payable. The increase in inventory and accounts payable was largely driven by investments in holiday merchandise, earlier receipt of Spring goods as compared to last year, and to a lesser extent an increase in net new stores.

Cash flows used in investing activities

Net cash used in investing activities for the 39 weeks ended November 1, 2014 was $24.4 million compared to $35.4 million in the same period last year. Capital expenditures were $24.4 million compared to $35.2 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 (used in) financing activities

Net cash provided by financing activities for the 39 weeks ended November 1, 2014 was $42.5 million compared to net cash used in financing activities of $1.8 million in the same period last year. Net cash provided by financing activities for the 39 weeks ended November 1, 2014, is primarily due to net proceeds of $42.0 million from our ABL and a capital contribution of $1.0 million to the VIEs made by their immediate corporate parent. Net cash used in financing activities for the 39 weeks ended November 2, 2013, is primarily due to a repurchase of our Notes in privately negotiated transactions with $24.8 million in cash, a capital contribution of $7.5 million to Parent, partially offset by net proceeds of $24.0 million from our ABL and a capital contribution of $6.5 million to the VIEs made by their immediate corporate parent.

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 November 1, 2014, $769.1 million was outstanding under the Term Loan and $42.0 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 $29.6 million as of November 1, 2014. Undrawn availability under the ABL, after being reduced by letter of credit utilization and outstanding borrowings, was $146.0 million as of November 1, 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 November 1, 2014, we were in compliance with these covenants. Average borrowings for the 39 weeks ended November 1, 2014 under the ABL amounted to $28.9 million. The Company anticipates utilizing its ABL Facility throughout the course of the year to support seasonal working capital needs and expects to have borrowings outstanding at year-end.

 

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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, or if our suppliers request one or more letters of credit, our existing cash and cash equivalents and available borrowings 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.

Critical Accounting Policies, Estimates and Judgments

As of November 1, 2014, we had goodwill of $375.3 million. Goodwill is tested for impairment in the fourth quarter of each fiscal year and 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.

In connection with our long-range planning process in the third quarter of fiscal 2014, we revised our growth assumptions based on estimates of future operations. The updated assumptions resulted in a plan that reflects slower growth in revenues and margins in the reporting units of our retail stores segment. As a result, we considered this to be a triggering event and performed the first step of the two-step goodwill impairment test during the quarter ended November 1, 2014. We determined that the fair value of the Gymboree Retail, Gymboree Outlet and Crazy 8 reporting units, components of our retail stores reporting segment, were below their carrying values. We performed step two of the goodwill impairment test to measure the goodwill impairment loss specific to these three reporting units. Under step two, the fair values of all Gymboree Retail, Gymboree Outlet and Crazy 8 reporting unit tangible and intangible assets and liabilities were estimated for the purpose of deriving an estimate of the implied fair value of goodwill for each reporting unit. The implied fair value of each reporting unit’s goodwill was then compared to its carrying value to determine the amount of goodwill impairment.

The goodwill impairment analysis for the reporting units was based on our projection of revenues, gross margin, operating costs and cash flows considering historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies. We based our fair value estimates on assumptions we believed to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates. The valuations employed present value techniques to measure fair value and considered market factors and reporting unit specific developments. We

 

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primarily used an income approach to value these reporting units. The discount rates used in the income approach ranged from 13.0% to 15.5%. We also considered a market approach. Assumptions used in the market approach include valuation multiples based on analysis of multiples for comparable public companies. Finally, specific weights were applied to the components of each approach to estimate the total implied fair value. These weights are estimates by management and are developed based on the specific characteristics, risks and uncertainties of each reporting unit.