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 April 30, 2016

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 June 13, 2016, 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

THE GYMBOREE CORPORATION

TABLE OF CONTENTS

 

Part I—FINANCIAL INFORMATION

  

Item 1.

  Financial Statements      3   
  Condensed Consolidated Statements of Operations      3   
  Condensed Consolidated Statements of Comprehensive Income (Loss)      4   
  Condensed Consolidated Balance Sheets      5   
  Condensed Consolidated Statements of Cash Flows      6   
  Notes to Condensed Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      39   

Item 4.

  Controls and Procedures      40   

Part II—OTHER INFORMATION

     41   

Item 1.

  Legal Proceedings      41   

Item 1A.

  Risk Factors      41   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      41   

Item 3.

  Defaults Upon Senior Securities      41   

Item 4.

  Mine Safety Disclosures      41   

Item 5.

  Other Information      41   

Item 6.

  Exhibits      41   
  Signatures      42   

 

2


Table of Contents

Part I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     13 Weeks Ended  
     April 30, 2016     May 2, 2015  

Net sales:

    

Retail

   $ 271,276      $ 261,732   

Gymboree Play & Music

     10,094        8,648   

Retail Franchise

     3,671        5,689   
  

 

 

   

 

 

 

Total net sales

     285,041        276,069   

Cost of goods sold, including buying and occupancy expenses

     (168,585     (170,712
  

 

 

   

 

 

 

Gross profit

     116,456        105,357   

Selling, general and administrative expenses

     (114,032     (104,710
  

 

 

   

 

 

 

Operating income

     2,424        647   

Interest income

     105        19   

Interest expense

     (19,807     (21,076

Gain on extinguishment of debt

     48,804        —     

Other income (expense), net

     112        (110
  

 

 

   

 

 

 

Income (loss) before income taxes

     31,638        (20,520

Income tax expense

     (697     (1,960
  

 

 

   

 

 

 

Net income (loss)

     30,941        (22,480

Net loss (income) attributable to noncontrolling interest

     1,905        (545
  

 

 

   

 

 

 

Net income (loss) attributable to The Gymboree Corporation

   $ 32,846      $ (23,025
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

     13 Weeks Ended  
     April 30, 2016      May 2, 2015  

Net income (loss)

   $ 30,941       $ (22,480
  

 

 

    

 

 

 

Other comprehensive income:

     

Foreign currency translation adjustments, net of tax

     1,635         956   

Unrealized net gain on cash flow hedges, net of tax

     630         261   
  

 

 

    

 

 

 

Total other comprehensive income

     2,265         1,217   
  

 

 

    

 

 

 

Comprehensive income (loss)

     33,206         (21,263

Comprehensive loss (income) attributable to noncontrolling interest

     1,741         (612
  

 

 

    

 

 

 

Comprehensive income (loss) attributable to The Gymboree Corporation

   $ 34,947       $ (21,875
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

     April 30,
2016
    January 30,
2016
    May 2,
2015
 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 62,168      $ 18,164      $ 22,363   

Accounts receivable, net of allowance of $2,368, $2,043 and $2,304

     20,833        26,696        25,515   

Merchandise inventories

     198,618        206,642        208,908   

Prepaid income taxes

     2,493        2,196        2,759   

Prepaid expenses

     5,862        6,757        18,561   

Deferred income taxes

     —          —          7,263   
  

 

 

   

 

 

   

 

 

 

Total current assets

     289,974        260,455        285,369   
  

 

 

   

 

 

   

 

 

 

Property and equipment:

      

Land and buildings

     22,428        22,428        22,428   

Leasehold improvements

     197,077        199,520        199,869   

Furniture, fixtures and equipment

     131,567        130,571        125,481   
  

 

 

   

 

 

   

 

 

 

Total property and equipment

     351,072        352,519        347,778   

Less accumulated depreciation and amortization

     (200,132     (194,041     (171,378
  

 

 

   

 

 

   

 

 

 

Net property and equipment

     150,940        158,478        176,400   
  

 

 

   

 

 

   

 

 

 

Goodwill

     373,845        372,737        374,308   

Other intangible assets, net

     340,510        341,011        342,816   

Other assets

     7,331        7,795        6,089   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,162,600      $ 1,140,476      $ 1,184,982   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

      

Current liabilities:

      

Accounts payable

   $ 94,162      $ 109,193      $ 105,426   

Accrued and other current liabilities

     121,598        102,254        106,669   

Line of credit borrowings

     43,000        19,000        42,000   

Current portion of ABL term loan

     2,500        —          —     

Current obligation under capital lease

     —          605        565   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     261,260        231,052        254,660   
  

 

 

   

 

 

   

 

 

 

Long-term liabilities:

      

Long-term debt, net

     1,010,709        1,040,506        1,092,549   

Long-term sale-leaseback financing liability, net

     25,545        25,578        —     

Long-term obligation under capital lease

     —          2,245        2,704   

Lease incentives and other liabilities

     45,593        49,664        52,858   

Unrecognized tax benefits

     5,111        5,075        5,151   

Deferred income taxes

     123,567        124,244        129,865   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,471,785        1,478,364        1,537,787   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ deficit:

      

Common stock, including additional paid-in capital ($0.001 par value:

      

1,000 shares authorized, issued and outstanding)

     526,381        525,759        523,124   

Accumulated deficit

     (830,693     (863,539     (876,388

Accumulated other comprehensive loss

     (8,721     (10,822     (10,081
  

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

     (313,033     (348,602     (363,345

Noncontrolling interest

     3,848        10,714        10,540   
  

 

 

   

 

 

   

 

 

 

Total deficit

     (309,185     (337,888     (352,805
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 1,162,600      $ 1,140,476      $ 1,184,982   
  

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     13 Weeks Ended  
     April 30, 2016     May 2, 2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 30,941      $ (22,480

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

    

Gain on extinguishment of debt

     (48,804     —     

Depreciation and amortization

     10,151        10,700   

Amortization of deferred financing costs and accretion of original issue discount

     1,890        1,886   

Interest rate cap contracts - adjustment to market

     1,183        778   

Loss (gain) on disposal/impairment of assets

     648        (539

Gain on write-off of assets and liabilities due to contract termination

     (2,561     —     

Deferred income taxes

     (613     264   

Share-based compensation expense

     622        720   

Other

     345        (198

Change in assets and liabilities:

    

Accounts receivable

     4,242        (168

Merchandise inventories

     7,805        (10,958

Prepaid income taxes

     (296     (154

Prepaid expenses and other assets

     628        (11,739

Accounts payable

     (15,067     18,375   

Accrued and other current liabilities

     12,096        11,350   

Lease incentives and other liabilities

     (958     (476
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     2,252        (2,639
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (3,591     (3,140

Proceeds from sale of assets

     —          353   

Receipt of related party loan receivable

     1,741        —     

Other

     1        8   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,849     (2,779
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from ABL facility

     152,000        130,000   

Payments on ABL facility

     (128,000     (121,000

Proceeds from ABL term loan

     50,000        —     

Payments for deferred financing costs

     (3,804     —     

Repurchase of notes

     (26,198     —     

Payments on capital lease and sale-leaseback financing liability

     (47     (133

Dividend payment by VIE to its parent

     (512     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     43,439        8,867   
  

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     162        394   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     44,004        3,843   

CASH AND CASH EQUIVALENTS:

    

Beginning of period

     18,164        18,520   
  

 

 

   

 

 

 

End of period

   $ 62,168      $ 22,363   
  

 

 

   

 

 

 

OTHER CASH FLOW INFORMATION:

    

Cash paid (received) for income taxes, net

   $ 1,480      $ (3,664

Cash paid for interest

   $ 12,873      $ 10,390   

See notes to condensed consolidated financial statements.

 

6


Table of Contents

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Basis of Presentation

The unaudited interim condensed consolidated financial statements, which include The Gymboree Corporation (the “Company,” “we” or “us”) and our 100%-owned subsidiaries, as well as Gymboree (China) Commercial and Trading Co. Ltd. (“Gymboree China”) and Gymboree (Tianjin) Educational Information Consultation Co. Ltd. (“Gymboree Tianjin”) (collectively, the “VIEs”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended January 30, 2016 filed with the Securities and Exchange Commission on April 28, 2016.

The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present fairly our financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented. The results of operations for the 13 weeks ended April 30, 2016 (“first quarter of fiscal 2016”) are not necessarily indicative of the operating results that may be expected for the 52-week period ending January 28, 2017 (“fiscal 2016”) or any future period.

Certain reclassifications have been made to the condensed consolidated balance sheets as of January 30, 2016 and May 2, 2015 as a result of our adoption of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs effective during the first quarter of fiscal 2016 (see Note 2).

 

2.

Recently Issued Accounting Standards

In March 2016, the FASB issued ASU No. 2016-09, Compensation-stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, among others. This ASU will be applied prospectively and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We have not yet determined the impact of the new standard on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Although we have not yet determined the impact of the new standard, we believe this ASU will have a significant impact on our condensed consolidated financial statements due to the substantial number of leases that we have.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires all inventory to be measured at the lower of cost and net realizable value, except for inventory that is accounted for using the last-in, first-out (LIFO) or the retail inventory method which will be measured under existing accounting standards. This ASU would be applied prospectively and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We have not yet determined the impact of the new standard on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the

 

7


Table of Contents

balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance in Update 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. In August 2015, the FASB issued ASU No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which adds SEC paragraphs about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. Accordingly, the SEC staff would not object to the deferral and presentation of debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments do not affect the current guidance on the recognition and measurement of debt issuance costs. Effective during the first quarter of fiscal 2016, we adopted ASU 2015-03 and applied the provisions retrospectively to all prior periods. As a result of this adoption, the unamortized debt issuance costs associated with our long-term debt and long-term sale-leaseback financing liability are presented as an offset against the long-term debt and long-term sale-leaseback financing liability in the accompanying condensed consolidated balance sheets. The unamortized debt issuance costs associated with our line of credit under our ABL Revolving Credit Facility are included in other assets in the accompanying condensed consolidated balance sheets. The unamortized debt issuance costs associated with our long-term debt and long-term sale-leaseback financing liability, which amounted to $16.3 million and $21.6 million as of January 30, 2016 and May 2, 2015, respectively, were reclassified from being a component of our total assets to a reduction of our long-term debt and long-term sale-leaseback financing liability in the accompanying condensed consolidated balance sheets and in Notes 16, 17, and 18. Below is a summary of the changes made in the accompanying condensed consolidated balance sheets as of January 30, 2016 and May 2, 2015 due to the reclassification of the unamortized debt issuance costs (in thousands):

 

    January 30, 2016     May 2, 2015  
    As Reported     Reclassification     As Restated     As Reported     Reclassification     As Restated  

ASSETS:

           

Deferred financing costs

  $ 19,019      $ (19,019   $ —        $ 23,984      $ (23,984   $ —     

Other assets

  $ 5,044      $ 2,751      $ 7,795      $ 3,683      $ 2,406      $ 6,089   

Total assets

  $ 1,156,744      $ (16,268   $ 1,140,476      $ 1,206,560      $ (21,578   $ 1,184,982   

LIABILITIES AND STOCKHOLDERS’ DEFICIT:

  

Long-term debt, net

  $ 1,055,945      $ (15,439   $ 1,040,506      $ 1,114,127      $ (21,578   $ 1,092,549   

Long-term sale-leaseback financing liability, net

  $ 26,407      $ (829   $ 25,578      $ —        $ —        $ —     

Total liabilities

  $ 1,494,632      $ (16,268   $ 1,478,364      $ 1,559,365      $ (21,578   $ 1,537,787   

Total liabilities and stockholders’ deficit

  $ 1,156,744      $ (16,268   $ 1,140,476      $ 1,206,560      $ (21,578   $ 1,184,982   

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). Effective during the first quarter of fiscal 2016, we adopted this ASU and determined that it had no impact on our condensed consolidated financial statements.

In August 2014, the FASB issued 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, and for annual periods and interim periods thereafter, with early adoption permitted.

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). In April 2015, the FASB proposed a deferral of this ASU’s effective date by one year, to December 15, 2017. The proposed deferral allows early adoption at the original effective date. We have not yet determined the impact of the new standard on our condensed consolidated financial statements.

 

3.

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.

 

8


Table of Contents

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 April 30, 2016, January 30, 2016 and May 2, 2015, 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 weeks ended April 30, 2016 and May 2, 2015, or for the year ended January 30, 2016.

 

    April 30, 2016  
    Quoted Prices in
Active Markets for
Identical Assets
    Significant Other
Observable Inputs
    Significant
Unobservable
Inputs
       
    (Level 1)     (Level 2)     (Level 3)     Total Fair Value  

Assets

       

Money market funds

  $ 38,560      $ —        $ —        $ 38,560   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 38,560      $ —        $ —        $ 38,560   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Forward foreign exchange contracts

  $ —        $ 391      $ —        $ 391   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ 391      $ —        $ 391   
 

 

 

   

 

 

   

 

 

   

 

 

 
    January 30, 2016  
    Quoted Prices in
Active Markets for
Identical Assets
    Significant Other
Observable Inputs
    Significant
Unobservable
Inputs
       
    (Level 1)     (Level 2)     (Level 3)     Total Fair Value  

Liabilities

       

Forward foreign exchange contracts

  $ —        $ 145      $ —        $ 145   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ 145      $ —        $ 145   
 

 

 

   

 

 

   

 

 

   

 

 

 
    May 2, 2015  
    Quoted Prices in
Active Markets for
Identical Assets
    Significant Other
Observable Inputs
    Significant
Unobservable
Inputs
       
    (Level 1)     (Level 2)     (Level 3)     Total Fair Value  

Assets

       

Interest rate caps

  $ —        $ 9      $ —        $ 9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ 9      $ —        $ 9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Forward foreign exchange contracts

  $ —        $ 55      $ —        $ 55   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ 55      $ —        $ 55   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Table of Contents

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

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

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 April 30, 2016, January 30, 2016 and May 2, 2015, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our interest rate cap positions and determined that 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, line of credit borrowings, and payables 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):

 

     April 30, 2016      January 30, 2016      May 2, 2015  
     Carrying
Amount
    Fair Value      Carrying
Amount
    Fair Value      Carrying
Amount
    Fair Value  

Term loan

   $ 769,102      $ 592,209       $ 769,102      $ 399,933       $ 769,102      $ 611,436   

Notes

     210,620        104,257         287,575        71,894         346,000        166,080   

ABL term loan

     50,000        50,000         —          —           —          —     

Less unamortized discount and deferred financing costs

     (16,513     —           (16,171     —           (22,553     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,013,209      $ 746,466       $ 1,040,506      $ 471,827       $ 1,092,549      $ 777,516   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

We had no other financial assets or liabilities measured at fair value as of April 30, 2016, January 30, 2016 and May 2, 2015.

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 weeks ended April 30, 2016 and May 2, 2015, we did not identify impairment indicators for goodwill and indefinite-lived intangible assets (trade names). During fiscal 2015, we determined that there was no goodwill impairment for all of our reporting units and there was no impairment on our indefinite-lived intangible assets (trade names) (see Note 4).

During the 13 weeks ended April 30, 2016, we recorded property and equipment impairment charges of $0.3 million related to the closure of Gymboree China retail locations. These impairment charges are included in selling, general and administrative (SG&A) expenses in the accompanying condensed consolidated statements of operations.

 

10


Table of Contents
4.

Goodwill and Intangible Assets and Liabilities

Goodwill

Goodwill allocated to our reportable segments as of April 30, 2016, January 30, 2016 and May 2, 2015 is as follows (in thousands):

 

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

Balance as of April 30, 2016

       

Goodwill

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

Accumulated impairment losses

    (547,285     —          —          (547,285

Effect of exchange rate fluctuations

    (6,136     —          —          (6,136
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 333,820      $ 16,389      $ 23,636      $ 373,845   
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of January 30, 2016

       

Goodwill

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

Accumulated impairment losses

    (547,285     —          —          (547,285

Effect of exchange rate fluctuations

    (7,244     —          —          (7,244
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 332,712      $ 16,389      $ 23,636      $ 372,737   
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of May 2, 2015

       

Goodwill

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

Accumulated impairment losses

    (547,285     —          —          (547,285

Effect of exchange rate fluctuations

    (5,673     —          —          (5,673
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 334,283      $ 16,389      $ 23,636      $ 374,308   
 

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill Impairment

During the first quarter of fiscal 2016 and 2015, we did not identify impairment indicators for goodwill. During fiscal 2015, we determined that there was no goodwill impairment for all of our reporting units and there was no impairment on our indefinite-lived intangible assets (trade names).

Intangible Assets and Liabilities

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

 

    April 30, 2016  
    Gross Carrying
Amount
    Accumulated
Amortization
    Accumulated
Impairment
    Net Amount  

Intangible Assets Not Subject to Amortization:

 

Trade names

  $ 567,012      $ —        $ (229,600   $ 337,412   
 

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization:

       

Below market leases

    3,435        (2,596     —          839   

Co-branded credit card agreement

    4,000        (3,342     —          658   

Franchise agreements and reacquired franchise rights

    6,625        (5,024     —          1,601   
 

 

 

   

 

 

   

 

 

   

 

 

 
    14,060        (10,962     —          3,098   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets

  $ 581,072      $ (10,962   $ (229,600   $ 340,510   
 

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

       

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

  $ (10,461   $ 7,789      $ —        $ (2,672
 

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents
    April 30, 2016  
    Gross Carrying
Amount
    Accumulated
Amortization
    Accumulated
Impairment
    Net Amount  

Intangible Assets Not Subject to Amortization:

 

Trade names

  $ 567,012      $ —        $ (229,600   $ 337,412   
 

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization:

       

Below market leases

    3,435        (2,480     —          955   

Co-branded credit card agreement

    4,000        (3,189     —          811   

Franchise agreements and reacquired franchise rights

    6,625        (4,792     —          1,833   
 

 

 

   

 

 

   

 

 

   

 

 

 
    14,060        (10,461     —          3,599   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets

  $ 581,072      $ (10,461   $ (229,600   $ 341,011   
 

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

       

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

  $ (10,461   $ 7,435      $ —        $ (3,026
 

 

 

   

 

 

   

 

 

   

 

 

 
    May 2, 2015  
    Gross Carrying
Amount
    Accumulated
Amortization
    Accumulated
Impairment
    Net Amount  

Intangible Assets Not Subject to Amortization:

 

Trade names

  $ 567,012      $ —        $ (229,600   $ 337,412   
 

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization:

       

Customer relationships

    770        (688     —          82   

Below market leases

    4,839        (3,319     —          1,520   

Co-branded credit card agreement

    4,000        (2,727     —          1,273   

Franchise agreements and reacquired franchise rights

    6,625        (4,096     —          2,529   
 

 

 

   

 

 

   

 

 

   

 

 

 
    16,234        (10,830     —          5,404   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets

  $ 583,246      $ (10,830   $ (229,600   $ 342,816   
 

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

       

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

  $ (11,400   $ 7,196      $ —        $ (4,204
 

 

 

   

 

 

   

 

 

   

 

 

 

The decrease in the gross carrying amount of customer relationships, below market leases, franchise agreements and reacquired franchise rights, and above market leases for the period May 2, 2015 to January 30, 2016 reflects the write off of certain fully amortized intangibles.

Indefinite-Lived Intangible Assets Impairment

During the first quarter of fiscal 2016 and 2015, we did not identify impairment indicators for indefinite-lived intangible assets. During fiscal 2015, we determined that there was no impairment charge related to trade names of our retail stores segment.

Net amortization income (expense) is presented below for the periods ended (in thousands):

 

    13 Weeks Ended
April 30, 2016
    13 Weeks Ended
May 2, 2015
 

Cost of goods sold - Amortization income

  $ 238      $ 133   
 

 

 

   

 

 

 

Selling, general and administrative expenses - Amortization expense

  $ (385   $ (468
 

 

 

   

 

 

 

 

12


Table of Contents
5.

Line of Credit

In September 2015, we entered into the first amendment (the “First Amendment”) to our senior secured asset-based revolving credit facility (“ABL Revolving Facility”) to extend the maturity date of the ABL revolving commitments from March 2017 to the earlier of (i) September 24, 2020 and (ii) the date that is 60 days before the scheduled final maturity date of any tranche of the Term Loan (which is currently due to mature in February 2018) or the Notes (which are currently due to mature in December 2018), unless such indebtedness is cumulatively equal to or less than $25.0 million in the aggregate and a reserve against the borrowing base is imposed equal to the amount of such indebtedness. The ABL revolving commitment will therefore mature in December 2017 unless the Term Loan and the Notes (other than an aggregate amount of Term Loans and Notes that is equal to or less than $25.0 million) are refinanced with indebtedness having a final maturity date later than February 2018.

In April 2016, we entered into a second amendment to the ABL Revolving Facility (the ABL Revolving Facility, as so amended, the “ABL Facility” or the “Second Amendment”). The Second Amendment provides for a senior secured term loan (the “ABL Term Loan”) of $50.0 million, subject to a borrowing base (see Note 6).

The ABL Facility provides for financing of up to $225 million in a revolving line of credit. Line of credit availability under the ABL Facility is subject to a borrowing base consisting of certain 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 and the outstanding amount of the ABL Term Loan. Line of credit borrowings outstanding under the ABL Facility as of April 30, 2016, January 30, 2016 and May 2, 2015 were $43.0 million, $19.0 million and $42.0 million, respectively. The line of credit available under the ABL Facility is reduced by letter of credit utilization totaling $30.8 million as of April 30, 2016. Undrawn line of credit availability under the ABL Facility, after being reduced by outstanding line of credit borrowings, letter of credit utilization and $50 million of ABL Term Loan (see Note 6), was $90.7 million as of April 30, 2016. Average line of credit borrowings during the 13 weeks ended April 30, 2016 and May 2, 2015 under the ABL Facility amounted to $49.7 million and $54.1 million, respectively. Average line of credit borrowings during fiscal 2015 amounted to $51.9 million.

Line of credit borrowings under the ABL Facility 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. As of April 30, 2016, the weighted average interest rate on our line of credit borrowings outstanding under the ABL Facility was 3.9%. In addition to paying interest on outstanding line of credit borrowings under the ABL Facility, we are required to pay a commitment fee on unutilized commitments thereunder, which is between 0.250% and 0.375% per annum under the ABL Facility.

The ABL Facility contains covenants that, among other things, restrict our ability to incur additional indebtedness and pay dividends. The ABL Facility also contains a financial covenant (i.e., minimum consolidated fixed charge coverage ratio), but such financial covenant is not required to be tested as long as the Company’s ABL Term Loan remains outstanding (see Note 6). As of April 30, 2016, we were not required to test compliance with this covenant. The obligations under the ABL Facility 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 Facility (see Note 18).

 

13


Table of Contents
6.

Long-Term Debt

Long-term debt consists of (in thousands):

 

    April 30, 2016     January 30, 2016     May 2, 2015  

Term loan due February 2018, Adjusted LIBOR (with a floor of 1.5%) plus 3.5%

     

Principal amount

  $ 769,102      $ 769,102      $ 769,102   

Less unamortized discount

    (6,973     (7,873     (10,497

Less unamortized deferred financing costs

    (649     (732     (975
 

 

 

   

 

 

   

 

 

 

Term loan, net of unamortized discount and deferred financing costs

    761,480        760,497        757,630   
 

 

 

   

 

 

   

 

 

 

Senior notes due December 2018, 9.125%

     

Principal amount

    210,620        287,575        346,000   

Less unamortized deferred financing costs

    (5,143     (7,566     (11,081
 

 

 

   

 

 

   

 

 

 

Senior notes, net of unamortized deferred financing costs

    205,477        280,009        334,919   
 

 

 

   

 

 

   

 

 

 

ABL term loan due December 2017, LIBOR plus 10.25%

     

Principal amount

    50,000        —          —     

Less unamortized deferred financing costs

    (3,748     —          —     
 

 

 

   

 

 

   

 

 

 

ABL term loan, net of unamortized deferred financing costs

    46,252        —          —     
 

 

 

   

 

 

   

 

 

 

Total long-term debt, net of unamortized discount and deferred financing costs

    1,013,209        1,040,506        1,092,549   

Less current portion of ABL Term Loan

    (2,500     —          —     
 

 

 

   

 

 

   

 

 

 

Long-term portion of long-term debt, net of unamortized discount and deferred financing costs

  $ 1,010,709      $ 1,040,506      $ 1,092,549   
 

 

 

   

 

 

   

 

 

 

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 Facility. 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 April 30, 2016, 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 2015 operating results and concluded we are not required to make any excess cash flow payments on the Term Loan during fiscal 2016. Excess cash flow payments on the Term Loan for fiscal 2017 will be calculated with our fiscal 2016 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 (see Note 18).

Notes

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

2015

     102.281

2016 and thereafter

     100.000

 

14


Table of Contents

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 18). 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.

During fiscal 2015, we repurchased Notes with an aggregate principal amount of $58.4 million for $15.3 million in cash through open market transactions. We recorded a $41.5 million gain on extinguishment of debt, net of a $1.6 million charge related to the write-off of deferred financing costs associated with the extinguished debt.

During the 13 weeks ended April 30, 2016, we repurchased Notes with an aggregate principal amount of $77.0 million for $26.2 million in cash through privately negotiated transactions. We recorded a $48.8 million gain on extinguishment of debt, net of a $2.0 million charge related to the write-off of deferred financing costs associated with the extinguished debt.

On April 26, 2016, the Company announced a cash tender offer (the “Tender Offer”) to purchase the maximum aggregate principal amount of its outstanding Notes that it can purchase for $40.0 million, excluding accrued interest. The Tender Offer expired on May 23, 2016. During the second quarter of fiscal 2016, the Company repurchased $39.6 million aggregate principal amount of Notes for $20.6 million through the Tender Offer and will recognize $18.0 million of gain on extinguishment of debt, net of a $1.0 million charge related to the write-off of deferred financing costs associated with the extinguished debt.

ABL Term Loan

The ABL Term Loan of $50.0 million may be used to repurchase Notes, to finance the acquisition of working capital assets, for capital expenditures and permitted acquisitions and for other general corporate purposes.

The Second Amendment provides that the ABL Term Loan bears interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a 90-day LIBOR contract rate as determined by the agent for the ABL Term Loan monthly on the first day of each calendar month, plus 10.25% per annum, or, in certain circumstances, at the prime rate, plus 9.25% per annum. Interest is payable monthly. As of April 30, 2016, the interest rate under our ABL Term Loan was 10.9%.

The ABL Term Loan requires us to make quarterly payments equal to $0.6 million, with the balance due on the maturity of the ABL Term Loan, which is the same as the maturity date of the ABL revolving commitment (see Note 5).

The Second Amendment also provides for a new availability covenant, which requires the Company and its restricted subsidiaries to maintain a minimum amount of “Combined Availability” and “Availability” for as long as the ABL Term Loan remains outstanding. “Combined Availability” is equal to (a) the ABL Term Loan borrowing base minus (b) the sum of the aggregate outstanding principal amount under the ABL Facility (including the ABL Term Loan, revolving line of credit borrowings and letter of credit utilization). “Availability” is equal to the lesser of (A) (I) the revolving credit ceiling (which as of April 30, 2016 was $225.0 million) minus (II) the aggregate principal amount outstanding under the revolving line of credit and letter of credit utilization and (B) (I) the revolving line of credit borrowing base minus (II) the aggregate principal amount outstanding under the revolving line of credit and letter of credit utilization. Under the new availability covenant, the Company and its restricted subsidiaries must maintain (i) Combined Availability in excess of the greater of (x) $17.5 million and (y) 10% of the ABL Term Loan borrowing base; and (ii) Availability in excess of the greater of (X) $17.5 million and (Y) 10% of the lesser of (1) the applicable revolving line of credit borrowing base and (2) the revolving credit ceiling. The Second Amendment also provided the agent for the ABL Term Loan and the ABL Term Loan lenders with certain consent rights to amendments relating to, among other terms and provisions, the borrowing bases, the availability covenant and certain negative covenants. All other material affirmative and negative covenants and events of default under the ABL Facility remained substantially unchanged following the Second Amendment.

The obligations under the ABL 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 ABL Term Loan (see Note 18).

 

15


Table of Contents

Future minimum principal payments on long-term debt, excluding amortization of deferred financing costs of $15.9 million and accretion of original issue discount (“OID”) of $0.6 million and as of April 30, 2016, are as follows (in thousands):

 

Fiscal years

   Principal Payments  

Remainder of 2016

   $ 1,875   

2017

     54,627   

2018

     973,220   
  

 

 

 

Total

   $ 1,029,722   
  

 

 

 

 

7.

Sale-leaseback of Dixon Distribution Center

On May 5, 2015, the Company entered into an agreement to sell its distribution center in Dixon, California for gross proceeds of $26.8 million, less closing costs of $0.9 million, or net proceeds of $25.9 million, and entered into a leaseback of the property from the purchaser for a period of 15 years. Approximately $10.9 million of the net proceeds were restricted under the Term Loan to fund capital expenditures or reduce the Term Loan. The total amount of restricted funds was used to fund capital expenditures during fiscal 2015.

Under the terms of the lease agreement, the Company is required to maintain a $3.5 million unconditional irrevocable letter of credit that reduces our line-of-credit borrowing base for a period of up to 10 years. Due to the Company’s continuing involvement through the irrevocable letter of credit, the Company has accounted for the sale-leaseback as a financing liability. Payments made by the Company are allocated between interest expense and a reduction to the sale-leaseback financing liability. In the period that there is no longer continuing involvement by the Company, the distribution center and the sale-leaseback financing liability will be removed from our condensed consolidated balance sheets, resulting in a gain on the sale of the distribution center, with a portion of the gain deferred and amortized over the remaining lease term.

Payments made by the Company related to the sale-leaseback financing liability during the 13 weeks ended April 30, 2016 totaled $0.4 million, which was primarily allocated to interest expense.

As of April 30, 2016, future payments on the sale-leaseback financing liability, excluding renewals, are as follows (in thousands):

 

Fiscal years

   Payments  

Remainder of 2016

   $ 1,354   

2017

     1,822   

2018

     1,845   

2019

     1,868   

2020

     1,891   

2021

     1,915   

Thereafter

     29,452   
  

 

 

 

Total payments

     40,147   

Less amount representing interest

     (13,578

Less unamortized deferred financing costs

     (807
  

 

 

 

Total sale-leaseback financing liability, net of unamortized deferred financing costs

     25,762   

Less current portion of sale-leaseback financing liability included in accrued liabilities

     (217
  

 

 

 

Long-term portion of sale-leaseback financing liability, net of unamortized deferred financing costs

   $ 25,545   
  

 

 

 

As of April 30, 2016 and January 30, 2016, the net carrying value of the Dixon distribution center assets that are included in property and equipment on our condensed consolidated balance sheets amounted to $18.7 million and $18.9 million, respectively.

 

16


Table of Contents
8.

Derivative Financial Instruments

We enter into forward foreign exchange contracts with respect to certain purchases in United States dollars (“U.S. dollars”) of inventory to be sold in our retail stores in Canada. The purpose of these contracts is to protect our margins on the eventual sale of the inventory from fluctuations in the exchange rate for Canadian and U.S. dollars. The term of these forward foreign exchange contracts is generally less than one year. These contracts are treated as cash-flow hedges. Amounts reported in accumulated other comprehensive 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 Canada. 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 the $700 million principal of our Term Loan (see Note 6) 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 April 30, 2016 and May 2, 2015, respectively, we reclassified approximately $1.2 million and $0.8 million, respectively, from accumulated other comprehensive loss to interest expense. We estimate approximately $3.5 million will be reclassified from accumulated other comprehensive loss to interest expense through the maturity date of the caps in the fourth quarter of fiscal 2016.

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):

 

     April 30, 2016      January 30, 2016      May 2, 2015  
     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      2,694       6      5,492       3      2,343   
  

 

  

 

 

    

 

  

 

 

    

 

  

 

 

 

Total

   7    $ 702,694       10    $ 705,492       7    $ 702,343   
  

 

  

 

 

    

 

  

 

 

    

 

  

 

 

 

There were no forward foreign exchange contracts that were not designated as hedges as of April 30, 2016, January 30, 2016, and May 2, 2015.

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) (see Note 3).

 

     April 30, 2016      January 30, 2016      May 2, 2015  
     Derivative
Liabilities
     Derivative
Liabilities
     Derivative
Assets
     Derivative
Liabilities
 

Other Assets

           

Purchased interest rate caps

   $ —         $ —         $ 9       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 9       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Liabilities

           

Forward foreign exchange contracts

   $ 391       $ 145       $ —         $ 55   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 391       $ 145       $ —         $ 55   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

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 (OCI) into earnings as a result of forecasted transactions that failed to occur or as a result of hedge ineffectiveness (see Note 13).

 

    13 Weeks Ended April 30, 2016  
    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

  $ —        Interest expense   $ (1,183

Forward foreign exchange contracts

    (491   Cost of goods sold     62   
 

 

 

     

 

 

 

Total

  $ (491     $ (1,121
 

 

 

     

 

 

 

 

    13 Weeks Ended May 2, 2015  
    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

  $ (8   Interest expense   $ (778

Forward foreign exchange contracts

    (146   Cost of goods sold     165   
 

 

 

     

 

 

 

Total

  $ (154     $ (613
 

 

 

     

 

 

 

 

9.

Leases

We outsourced the fulfillment of www.gymboree.com online customer orders to a third-party fulfillment center. On February 25, 2016, the Company entered into an agreement to terminate its operating services agreement with the third party fulfillment center. The Company recognized a loss on contract termination of approximately $5.7 million during the 13 weeks ended April 30, 2016, which is included as a component of SG&A expenses in the accompanying condensed consolidated statements of operations. The loss on contract termination consists of the $8.3 million in an early termination fee, offset by a $2.6 million gain on the write-off of assets and liabilities associated with the operating services agreement during the 13 weeks ended April 30, 2016. The early termination fee liability, which amounted to $8.3 million as of April 30, 2016, is payable in two equal installments in May 2016 and August 2016 and is included in Accrued and other current liabilities in the accompanying condensed consolidated balance sheets.

During the first quarter of 2016, Gymboree China’s management made a decision to close 25 of its retail locations. Gymboree China recognized $1.3 million of expense related to the store closures, which is comprised of lease contract termination costs totaling $0.9 million and $0.4 million of other exit costs during the 13 weeks ended April 30, 2016. These costs are included as a component of SG&A expenses in the accompanying condensed consolidated statements of operations.

 

10.

Share-Based Compensation

Share-based compensation expense included as a component of SG&A expenses was $0.6 million and $0.7 million during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. We include an estimate of forfeitures in determining share-based compensation expense.

 

11.

Income Taxes

As of April 30, 2016, January 30, 2016 and May 2, 2015, unrecognized tax benefits were $6.3 million, $6.4 million and $6.8 million, respectively. We believe it is reasonably possible that the total amount of unrecognized tax benefits of $6.3 million as of April 30, 2016 will decrease by as much as $0.8 million during the next twelve months due to the resolution of certain tax contingencies and lapses of applicable statutes of limitation.

As of April 30, 2016, January 30, 2016 and May 2, 2015, the total valuation allowance against deferred tax assets was $49.9 million, $63.2 million and $67.3 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, unitary state, and Australian 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.

 

18


Table of Contents
12.

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 January 30, 2016 (see Notes 6, 7, 11 and 14), other than those which occur in the normal course of business (see Note 5 and 6).

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.

 

13.

Accumulated Other Comprehensive Loss

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

 

     April 30, 2016      January 30, 2016      May 2, 2015  

Foreign currency translation

   $ (7,765    $ (9,236    $ (6,154

Accumulated changes in fair value of derivative financial instruments, net of tax

     (956      (1,586      (3,927
  

 

 

    

 

 

    

 

 

 

Total accumulated other comprehensive loss

   $ (8,721    $ (10,822    $ (10,081
  

 

 

    

 

 

    

 

 

 

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

 

     13 Weeks Ended April 30, 2016  
     Derivatives      Foreign
Currency
     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (1,586    $ (9,236    $ (10,822
  

 

 

    

 

 

    

 

 

 

Other comprehensive (loss) income recognized before reclassifications

     (491      1,635         1,144   

Amounts reclassified from accumulated other comprehensive loss to earnings

     1,121         —           1,121   

Tax expense

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     630         1,635         2,265   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —           (164      (164
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ (956    $ (7,765    $ (8,721
  

 

 

    

 

 

    

 

 

 

 

     Year Ended January 30, 2016  
     Derivatives      Foreign
Currency
     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (4,188    $ (7,043    $ (11,231
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss recognized before reclassifications

     (17      (2,817      (2,834

Amounts reclassified from accumulated other comprehensive loss to earnings

     3,570         —           3,570   

Tax expense

     (951      —           (951
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     2,602         (2,817      (215
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss attributable to noncontrolling interest

     —           624         624   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ (1,586    $ (9,236    $ (10,822
  

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
     13 Weeks Ended May 2, 2015  
     Derivatives      Foreign
Currency
     Total Accumulated
Comprehensive (Loss)
Income Including
Noncontrolling Interest
 

Beginning balance

   $ (4,188    $ (7,043    $ (11,231
  

 

 

    

 

 

    

 

 

 

Other comprehensive (loss) income recognized before reclassifications

     (154      956         802   

Amounts reclassified from accumulated other comprehensive loss to earnings

     613         —           613   

Tax expense

     (198      —           (198
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     261         956         1,217   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income attributable to noncontrolling interest

     —           (67      (67
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ (3,927    $ (6,154    $ (10,081
  

 

 

    

 

 

    

 

 

 

 

14.

Dividends

During the 13 weeks ended April 30, 2016, Gymboree Tianjin declared cash dividends to its unconsolidated direct parent, Gymboree Hong Kong Limited, totaling $5.1 million. Gymboree Tianjin paid $0.5 million of the total amount declared in April 2016 and recognized $4.6 million dividends payable as of April 30, 2016, which is included in accrued and other current liabilities in the accompanying condensed consolidated balance sheets. The dividend was subsequently paid in May 2016.

 

15.

Related Party Transactions

Related Party Transactions –Excluding VIEs

We incurred approximately $0.8 million and $0.9 million in management fees and reimbursement of out-of-pocket expenses from Bain Capital Private Equity, LP (formerly Bain Capital Partners LLC) (“Bain Capital”) during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. As of April 30, 2016, January 30, 2016 and May 2, 2015, we had a payable balance of $1.0 million, $0.2 million and $1.1 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 April 30, 2016 and May 2, 2015, respectively. As of April 30, 2016, January 30, 2016 and May 2, 2015, we had a payable balance of $0.1 million to LogicSource.

As of April 30, 2016 and May 2, 2015, we had a receivable balance of $0.4 million and $0.2 million, respectively, from our indirect parent, Giraffe Holding, Inc., related mainly to taxes.

Related Party Transactions –VIEs

In September 2015, Gymboree Tianjin entered into an unsecured entrusted loan agreement with Lionbridge Financing Leasing (China) Co., Ltd. (“Lionbridge”), an indirect majority-owned company of Bain Capital Lionbridge Cayman Ltd., and Shanghai Pudong Development Bank (“SPD Bank”) for $1.7 million, whereby Lionbridge was the borrower and SPD Bank was the trustee. The loan had an interest of 10% per annum. The principal amount and interest were received when the agreement matured in the first quarter of fiscal 2016. The loan receivable balance was included in accounts receivable on the condensed consolidated balance sheet as of January 30, 2016.

During 2015, Gymboree Tianjin sold $0.2 million of equipment to Lionbridge who subsequently leased the equipment to Gymboree Tianjin’s Play & Music franchisees. As a result of these transactions, Gymboree Tianjin had a $0.2 million receivable due from Lionbridge as of year-end which is included in the consolidated balance sheet as of January 30, 2016. The receivable was collected during the first quarter of fiscal 2016 and there are no amounts due as of April 30, 2016.

Our VIEs incurred $0.1 million in management fees from Bain Capital Advisors (China) Ltd. for each of the 13 weeks ended April 30, 2016 and May 2, 2015 and had a payable of $0.2 million payable as of May 2, 2015.

As of April 30, 2016, January 30, 2016 and May 2, 2015, 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.

 

20


Table of Contents

As of April 30, 2016, January 30, 2016 and May 2, 2015, our VIEs had a payable balance of $0.4 million due to Gymboree Hong Kong Limited, the unconsolidated direct parent of the VIEs, related to funds used to pay operating costs of the VIEs. The Company is part of a related party group that controls Gymboree Hong Kong Limited.

 

16.

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, who is the Chief Executive Officer. 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 profit is the principal measure we consider in determining whether the economic characteristics are similar. In addition, each retail store segment has similar products, production processes and type and class of customer. Corporate overhead (costs related to our distribution centers and shared corporate services) is included in the retail stores segment.

Below is a summary of net sales and gross profit of each reportable segment for the periods ended (in thousands):

 

     13 Weeks Ended April 30, 2016  
     Retail
Stores
     Gymboree
Play & Music
     International Retail
Franchise
     VIEs      Intersegment
Elimination
    Total  

Net sales

   $ 269,069       $ 4,518       $ 3,844       $ 10,347       $ (2,737   $ 285,041   

Gross Profit

   $ 107,561       $ 3,064       $ 2,232       $ 5,324       $ (1,725   $ 116,456   

 

     13 Weeks Ended May 2, 2015  
     Retail
Stores
     Gymboree
Play & Music
     International Retail
Franchise
     VIEs      Intersegment
Elimination
    Total  

Net sales

   $ 259,924       $ 4,357       $ 5,857       $ 8,611       $ (2,680   $ 276,069   

Gross Profit

   $ 94,575       $ 2,774       $ 3,227       $ 6,384       $ (1,603   $ 105,357   

Net retail sales of the retail stores segment by brand and the VIE were as follows for the periods ended (in thousands):

 

     Gymboree (1)      Janie and Jack      Crazy 8      Total
Before VIE
     VIE      Total  

13 weeks ended April 30, 2016

   $ 170,070       $ 34,985       $ 64,014       $ 269,069       $ 2,207       $ 271,276   

13 weeks ended May 2, 2015

   $ 160,121       $ 33,573       $ 66,230       $ 259,924       $ 1,808       $ 261,732   

 

(1)

This includes the net retail sales for Gymboree Retail and Gymboree Outlet operating segments.

Interest expense, depreciation and amortization expense and capital expenditures have not been separately disclosed above as the amounts primarily relate to the retail segment. Intersegment revenues for each reportable segment were as follows for the periods ended (in thousands):

 

     Intersegment Revenues  
     Retail
Stores
     Gymboree
Play & Music
     International Retail
Franchise
     VIEs      Total  

13 weeks ended April 30, 2016

   $ —         $ 2,564       $ 173       $ —         $ 2,737   

13 weeks ended May 2, 2015

   $ —         $ 2,512       $ 168       $ —         $ 2,680   

Below is a summary of total assets of each reportable segment as of the periods ended (in thousands):

 

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

April 30, 2016

   $ 1,051,758       $ 60,236       $ 26,867       $ 26,294       $ (2,555   $ 1,162,600   

January 30, 2016

   $ 1,027,622       $ 59,701       $ 28,791       $ 25,795       $ (1,433   $ 1,140,476   

May 2, 2015

   $ 1,074,311       $ 59,916       $ 30,024       $ 22,865       $ (2,134   $ 1,184,982   

We attribute retail store revenues to individual countries based on the selling location. Gymboree Play & Music sales and Gymboree International Retail Franchise sales are attributable to the U.S. geographic segment. VIE sales are attributable to the international geographic segment.

 

21


Table of Contents

Net sales of our two geographical areas, United States and International, were as follows for the periods ended (in thousands):

 

     13 Weeks Ended
April 30, 2016
     13 Weeks Ended
May 2, 2015
 

United States

   $ 265,711       $ 258,582   

International

     19,330         17,487   
  

 

 

    

 

 

 

Total

   $ 285,041       $ 276,069   
  

 

 

    

 

 

 

Property and equipment, net, of our two geographical areas were as follows as of the periods ended (in thousands):

 

     April 30, 2016      January 30, 2016      May 2, 2015  

United States

   $ 142,740       $ 150,037       $ 166,121   

International

     8,200         8,441         10,279   
  

 

 

    

 

 

    

 

 

 

Total

   $ 150,940       $ 158,478       $ 176,400   
  

 

 

    

 

 

    

 

 

 

 

17.

Variable Interest Entities

Gymboree retail stores are operated in China by Gymboree China, while Gymboree Tianjin is Gymboree Play & Music’s master franchisee in China. Gymboree China, Gymboree Tianjin and the Company are indirectly controlled by Gymboree Holding, Ltd. and investment funds sponsored by Bain Capital. Gymboree China and Gymboree Tianjin have been determined to be variable interest entities, and we (as well as our 100%-owned subsidiaries) are a member of a related party group that controls the VIEs and absorbs the economics of the VIEs. Based on our relationship with the VIEs, we determined we are most closely associated with the VIEs, and therefore, consolidate them as the primary beneficiary. However, as we have a 0% ownership interest in the VIEs, 100% of the results of operations of the VIEs are recorded as noncontrolling interest. The assets of the VIEs can only be used by the VIEs. 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.

 

22


Table of Contents

The following tables reflect the impact of the VIEs on the condensed consolidated statements of operations for the 13 weeks ended April 30, 2016 and May 2, 2015 and the condensed consolidated balance sheets as of April 30, 2016, January 30, 2016 and May 2, 2015 (in thousands):

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)

 

     13 Weeks Ended April 30, 2016  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 277,431      $ 10,347      $ (2,737   $ 285,041   

Cost of goods sold, including buying and occupancy expenses

     (164,574     (5,023     1,012        (168,585

Selling, general and administrative expenses

     (109,145     (6,546     1,659        (114,032
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     3,712        (1,222     (66     2,424   

Other non operating income (expense)

     28,880        334        —          29,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     32,592        (888     (66     31,638   

Income tax benefit (expense)

     320        (1,017     —          (697
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     32,912        (1,905     (66     30,941   

Net loss attributable to noncontrolling interest

     —          1,905        —          1,905   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Gymboree Corporation

   $ 32,912      $ —        $ (66   $ 32,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     13 Weeks Ended May 2, 2015  
     Balance Before
Consolidation
of VIEs
    VIEs     Eliminations     As
Reported
 

Net sales

   $ 270,138      $ 8,611      $ (2,680   $ 276,069   

Cost of goods sold, including buying and occupancy expenses

     (169,562     (2,227     1,077        (170,712

Selling, general and administrative expenses

     (100,988     (5,173     1,451        (104,710
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (412     1,211        (152     647   

Other non-operating expense

     (21,157     (10     —          (21,167
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (21,569     1,201        (152     (20,520

Income tax expense

     (1,304     (656     —          (1,960
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (22,873     545        (152     (22,480

Net income attributable to noncontrolling interest

     —          (545     —          (545
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (22,873   $ —        $ (152   $ (23,025
  

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     April 30, 2016  
     Balance Before
Consolidation
of VIEs
    VIEs      Eliminations     As
Reported
 

Cash and cash equivalents

   $ 49,637      $ 12,531       $ —        $ 62,168   

Other current assets

     220,553        9,808         (2,555     227,806   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     270,190        22,339         (2,555     289,974   

Non-current assets

     868,671        3,955         —          872,626   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,138,861      $ 26,294       $ (2,555   $ 1,162,600   
  

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 241,347      $ 22,135       $ (2,222   $ 261,260   

Non-current liabilities

     1,210,214        311         —          1,210,525   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,451,561        22,446         (2,222     1,471,785   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ deficit

     (312,700     —           (333     (313,033

Noncontrolling interest

     —          3,848         —          3,848   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 1,138,861      $ 26,294       $ (2,555   $ 1,162,600   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     January 30, 2016  
     Balance Before
Consolidation
of VIEs
    VIEs      Eliminations     As
Reported
 

Cash and cash equivalents

   $ 8,541      $ 9,623       $ —        $ 18,164   

Other current assets

     232,502        11,222         (1,433     242,291   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     241,043        20,845         (1,433     260,455   

Non-current assets

     875,071        4,950         —          880,021   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,116,114      $ 25,795       $ (1,433   $ 1,140,476   
  

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 217,596      $ 14,618       $ (1,162   $ 231,052   

Non-current liabilities

     1,246,849        463         —          1,247,312   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,464,445        15,081         (1,162     1,478,364   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ deficit

     (348,331     —           (271     (348,602

Noncontrolling interest

     —          10,714         —          10,714   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 1,116,114      $ 25,795       $ (1,433   $ 1,140,476   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     May 2, 2015  
     Balance Before
Consolidation
of VIEs
    VIEs      Eliminations     As
Reported
 

Cash and cash equivalents

   $ 12,513      $ 9,850       $ —        $ 22,363   

Other current assets

     257,220        7,920         (2,134     263,006   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     269,733        17,770         (2,134     285,369   

Non-current assets

     894,518        5,095         —          899,613   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,164,251      $ 22,865       $ (2,134   $ 1,184,982   
  

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 244,625      $ 11,840       $ (1,805   $ 254,660   

Non-current liabilities

     1,282,642        485         —          1,283,127   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,527,267        12,325         (1,805     1,537,787   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ deficit

     (363,016     —           (329     (363,345

Noncontrolling interest

     —          10,540         —          10,540   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 1,164,251      $ 22,865       $ (2,134   $ 1,184,982   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

24


Table of Contents
18.

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 6). The following condensed consolidating financial information presents the results of operations, comprehensive income (loss), financial position 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.

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 13 WEEKS ENDED APRIL 30, 2016

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 696      $ 264,815      $ 11,813      $ (6,048   $ 271,276   

Gymboree Play & Music

     —          1,954        8,140        —          10,094   

Retail Franchise

     —          3,671        —          —          3,671   

Intercompany revenue

     13,919        8,365        1,011        (23,295     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     14,615        278,805        20,964        (29,343     285,041   

Cost of goods sold, including buying and occupancy expenses

     (1,765     (161,700     (12,086     6,966        (168,585
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     12,850        117,105        8,878        (22,377     116,456   

Selling, general and administrative expenses

     (21,331     (105,089     (9,845     22,233        (114,032
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (8,481     12,016        (967     (144     2,424   

Interest income

     —          1        104        —          105   

Interest expense

     (19,389     (418     —          —          (19,807

Gain on extinguishment of debt

     48,804        —          —          —          48,804   

Other income (expense), net

     73        (193     232        —          112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     21,007        11,406        (631     (144     31,638   

Income tax benefit (expense)

     8,369        (7,971     (1,095     —          (697

Equity in earnings of affiliates, net of tax

     3,470        —          —          (3,470     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     32,846        3,435        (1,726     (3,614     30,941   

Net loss attributable to noncontrolling interest

     —          —          1,905        —          1,905   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Gymboree Corporation

   $ 32,846      $ 3,435      $ 179      $ (3,614   $ 32,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE 13 WEEKS ENDED MAY 2, 2015

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 405      $ 256,083      $ 11,220      $ (5,976   $ 261,732   

Gymboree Play & Music

     —          1,845        6,803        —          8,648   

Retail Franchise

     —          5,689        —          —          5,689   

Intercompany revenue

     15,325        2,981        —          (18,306     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     15,730        266,598        18,023        (24,282     276,069   

Cost of goods sold, including buying and occupancy expenses

     (2,157     (165,573     (9,935     6,953        (170,712
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     13,573        101,025        8,088        (17,329     105,357   

Selling, general and administrative expenses

     (15,535     (97,266     (9,003     17,094        (104,710
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (1,962     3,759        (915     (235     647   

Interest income

     —          3        16        —          19   

Interest expense

     (21,000     (76     —          —          (21,076

Other expense, net

     (8     (76     (26     —          (110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (22,970     3,610        (925     (235     (20,520

Income tax benefit (expense)

     4,754        (5,745     (969     —          (1,960

Equity in earnings of affiliates, net of tax

     (4,809     —          —          4,809        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (23,025     (2,135     (1,894     4,574        (22,480

Net loss attributable to noncontrolling interest

     —          —          (545     —          (545
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Gymboree Corporation

   $ (23,025   $ (2,135   $ (2,439   $ 4,574      $ (23,025
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 13 WEEKS ENDED APRIL 30, 2016

(In thousands)

 

    The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

  $ 32,846      $ 3,435      $ (1,726   $ (3,614   $ 30,941   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments

    1,471        —          1,636        (1,472     1,635   

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

    630        —          (552     552        630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

    2,101        —          1,084        (920     2,265   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

    34,947        3,435        (642     (4,534     33,206   

Comprehensive loss attributable to noncontrolling interest

    —            1,741        —          1,741   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The Gymboree Corporation

  $ 34,947      $ 3,435      $ 1,099      $ (4,534   $ 34,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE 13 WEEKS ENDED MAY 2, 2015

(In thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net loss

   $ (23,025   $ (2,135   $ (1,894   $ 4,574      $ (22,480
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

          

Foreign currency translation adjustments

     889        —          950        (883     956   

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

     261        —          (311     311        261   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     1,150        —          639        (572     1,217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (21,875     (2,135     (1,255     4,002        (21,263

Comprehensive income attributable to noncontrolling interest

     —          —          (612     —          (612
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to The Gymboree Corporation

   $ (21,875   $ (2,135   $ (1,867   $ 4,002      $ (21,875
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     April 30, 2016  
     The Gymboree     Guarantor      Non-guarantor               
     Corporation     Subsidiaries      Subsidiaries      Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 39,730      $ 5,328       $ 17,110       $ —        $ 62,168   

Accounts receivable, net of allowance

     1,784        15,590         3,459         —          20,833   

Merchandise inventories

     —          190,386         8,978         (746     198,618   

Prepaid income taxes

     1,511        804         178         —          2,493   

Prepaid expenses

     2,885        1,180         1,797         —          5,862   

Intercompany receivable

     2,017        695,837         —           (697,854     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     47,927        909,125         31,522         (698,600     289,974   

Property and equipment, net

     15,723        126,538         8,679         —          150,940   

Goodwill

     —          363,207         10,638         —          373,845   

Other intangible assets, net

     —          340,470         40         —          340,510   

Other assets

     2,392        1,663         3,896         (620     7,331   

Investment in subsidiaries

     1,415,164        —           —           (1,415,164     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,481,206      $ 1,741,003       $ 54,775       $ (2,114,384   $ 1,162,600   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

            

Current liabilities:

            

Accounts payable

   $ 5,435      $ 87,906       $ 821       $ —        $ 94,162   

Accrued and other current liabilities

     29,196        71,466         20,936         —          121,598   

Line of credit borrowings

     43,000        —           —           —          43,000   

Current portion of long-term debt

     2,500        —           —           —          2,500   

Current obligation under capital lease

     —          —           —           —          —     

Intercompany payable

     691,292        —           7,308         (698,600     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     771,423        159,372         29,065         (698,600     261,260   

Long-term liabilities:

            

Long-term debt, net of current portion

     1,010,565        144         —           —          1,010,709   

Long-term sale-leaseback financing liability, net

     —          25,545         —           —          25,545   

Long-term obligation under capital lease

     —          —           —           —          —     

Lease incentives and other liabilities

     2,908        43,298         4,498         —          50,704   

Deferred income taxes

     9,343        114,844         —           (620     123,567   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,794,239        343,203         33,563         (699,220     1,471,785   

Total stockholders’ (deficit) equity

     (313,033     1,397,800         17,364         (1,415,164     (313,033

Noncontrolling interest

     —          —           3,848         —          3,848   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 1,481,206      $ 1,741,003       $ 54,775       $ (2,114,384   $ 1,162,600   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

27


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     January 30, 2016  
     The Gymboree     Guarantor      Non-guarantor               
     Corporation     Subsidiaries      Subsidiaries      Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 982      $ 3,001       $ 14,181       $ —        $ 18,164   

Accounts receivable, net of allowance

     1,073        21,149         4,474         —          26,696   

Merchandise inventories

     —          197,655         9,587         (600     206,642   

Prepaid income taxes

     1,511        516         169         —          2,196   

Prepaid expenses

     3,359        2,800         598         —          6,757   

Intercompany receivable

     —          673,936         1,376         (675,312     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     6,925        899,057         30,385         (675,912     260,455   

Property and equipment, net

     13,518        136,020         8,940         —          158,478   

Goodwill

     —          363,207         9,530         —          372,737   

Other intangible assets, net

     —          340,968         43         —          341,011   

Other assets

     2,899        1,200         4,107         (411     7,795   

Investment in subsidiaries

     1,410,631        —           —           (1,410,631     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,433,973      $ 1,740,452       $ 53,005       $ (2,086,954   $ 1,140,476   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

            

Current liabilities:

            

Accounts payable

   $ 10,065      $ 97,665       $ 1,463       $ —        $ 109,193   

Accrued and other current liabilities

     27,941        60,863         13,450         —          102,254   

Line of credit borrowings

     19,000        —           —           —          19,000   

Current obligation under capital lease

     —          605         —           —          605   

Intercompany payable

     668,968        —           6,944         (675,912     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     725,974        159,133         21,857         (675,912     231,052   

Long-term liabilities:

            

Long-term debt, net

     1,040,506        —           —           —          1,040,506   

Long-term sale-leaseback financing liability, net

     —          25,578         —           —          25,578   

Long-term obligation under capital lease

     —          2,245         —           —          2,245   

Lease incentives and other liabilities

     4,455        46,117         4,167         —          54,739   

Deferred income taxes

     11,640        113,015         —           (411     124,244   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,782,575        346,088         26,024         (676,323     1,478,364   

Total stockholders’ (deficit) equity

     (348,602     1,394,364         16,267         (1,410,631     (348,602

Noncontrolling interest

     —          —           10,714         —          10,714   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 1,433,973      $ 1,740,452       $ 53,005       $ (2,086,954   $ 1,140,476   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

28


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     May 2, 2015  
     The Gymboree     Guarantor      Non-guarantor               
     Corporation     Subsidiaries      Subsidiaries      Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 1,564      $ 4,557       $ 16,242       $ —        $ 22,363   

Accounts receivable, net of allowance

     892        21,996         2,627         —          25,515   

Merchandise inventories

     —          201,010         8,642         (744     208,908   

Prepaid income taxes

     1,860        427         472         —          2,759   

Prepaid expenses

     2,468        14,727         1,366         —          18,561   

Deferred income taxes

     —          15,992         804         (9,533     7,263   

Intercompany receivable

     5,035        596,966         —           (602,001     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     11,819        855,675         30,153         (612,278     285,369   

Property and equipment, net

     11,965        153,567         10,868         —          176,400   

Goodwill

     —          362,021         12,287         —          374,308   

Other intangible assets, net

     —          342,662         154         —          342,816   

Other assets

     7,799        1,254         3,856         (6,820     6,089   

Investment in subsidiaries

     1,404,444        —           —           (1,404,444     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,436,027      $ 1,715,179       $ 57,318       $ (2,023,542   $ 1,184,982   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

            

Current liabilities:

            

Accounts payable

   $ 19,712      $ 84,613       $ 1,101       $ —        $ 105,426   

Accrued and other current liabilities

     32,954        62,429         11,163         123        106,669   

Deferred income taxes

     9,656        —           —           (9,656     —     

Line of credit borrowings

     42,000        —           —           —          42,000   

Current obligation under capital lease

     —          565         —           —          565   

Intercompany payable

     597,708        —           5,037         (602,745     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     702,030        147,607         17,301         (612,278     254,660   

Long-term liabilities:

            

Long-term debt, net

     1,092,549        —           —           —          1,092,549   

Long-term obligation under capital lease, net

     —          2,704         —           —          2,704   

Lease incentives and other liabilities

     4,793        48,485         4,731         —          58,009   

Deferred income taxes

     —          136,668         17         (6,820     129,865   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,799,372        335,464         22,049         (619,098     1,537,787   

Total stockholders’ (deficit) equity

     (363,345     1,379,715         24,729         (1,404,444     (363,345

Noncontrolling interest

     —          —           10,540         —          10,540   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 1,436,027      $ 1,715,179       $ 57,318       $ (2,023,542   $ 1,184,982   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

29


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE 13 WEEKS ENDED APRIL 30, 2016

(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

   $ (29,661   $ 32,193      $ (280   $ —        $ 2,252   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (1,633     (2,087     129        —          (3,591

Receipt of related party loan receivable

     —          —          1,741        —          1,741   

Intercompany transfers

     (2,017     (27,733     1,376        28,374        —     

Other

     —          1        —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (3,650     (29,819     3,246        28,374        (1,849
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     28,061        —          313        (28,374     —     

Proceeds from ABL facility

     152,000        —          —          —          152,000   

Payments on ABL facility

     (128,000     —          —          —          (128,000

Proceeds from ABL term loan

     50,000        —          —          —          50,000   

Payments for deferred financing costs

     (3,804     —          —          —          (3,804

Repurchase of notes

     (26,198     —          —          —          (26,198

Payments on capital lease and sale-leaseback financing liability

     —          (47     —          —          (47

Dividend payment by VIE to its parent

     —          —          (512     —          (512
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     72,059        (47     (199     (28,374     43,439   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     —          —          162        —          162   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     38,748        2,327        2,929        —          44,004   

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

     982        3,001        14,181        —          18,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 39,730      $ 5,328      $ 17,110      $ —        $ 62,168   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE 13 WEEKS ENDED MAY 2, 2015

(In thousands)

 

     The Gymboree     Guarantor     Non-guarantor              
     Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net cash used in operating activities

   $ (1,611   $ (784   $ (244   $ —        $ (2,639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (291     (2,052     (797     —          (3,140

Proceeds from sale of assets

     —          —          353        —          353   

Intercompany transfers

     (1,565     5,047        720        (4,202     —     

Other

     —          (3     11        —          8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (1,856     2,992        287        (4,202     (2,779
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     (5,658     (720     2,176        4,202        —     

Proceeds from ABL facility

     130,000        —          —          —          130,000   

Payments on ABL facility

     (121,000     —          —          —          (121,000

Payments on capital lease

     —          (133     —          —          (133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     3,342        (853     2,176        4,202        8,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     —          —          394        —          394   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (125     1,355        2,613        —          3,843   

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

     1,689        3,202        13,629        —          18,520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 1,564      $ 4,557      $ 16,242      $ —        $ 22,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

31


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. 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 2016; 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 January 30, 2016, filed with the Securities and Exchange Commission on April 28, 2016 (the “Fiscal 2015 Annual Report”). We encourage you to read these risk factor 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

We are one of the largest children’s apparel specialty retailers in North America, offering collections of high-quality apparel and accessories. As of April 30, 2016, we operated a total of 1,303 retail stores, as follows:

 

     United States      Canada      Puerto Rico      Total  

Gymboree® stores

     543         48         1         592   

Gymboree Outlet stores

     174         —           1         175   

Janie and Jack® shops (including Janie and Jack outlets)

     148         —           1         149   

Crazy 8® stores (including Crazy 8 outlets)

     387         —           —           387   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,252         48         3         1,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, as of April 30, 2016, we operated online stores at www.gymboree.com, www.janieandjack.com, and www.crazy8.com. Overseas franchisees and Gymboree China operated 63 retail stores, as follows:

 

     Overseas
Franchisees (1)
     Gymboree China      Total  

Gymboree® stores

     53         6         59   

Janie and Jack® shops

     1         —           1   

Crazy 8® stores

     3         —           3   
  

 

 

    

 

 

    

 

 

 
     57         6         63   
  

 

 

    

 

 

    

 

 

 

 

(1)

Overseas franchisees operated retail stores in the Middle East, South Korea and Latin America.

In the first quarter of 2016, Gymboree China’s management made the decision to close 25 of its retail locations. During the first quarter of fiscal 2016, 21 retail locations were closed and 4 retail locations are targeted to be closed in the second quarter of fiscal 2016.

We also offer directed parent-child developmental play programs under the Gymboree Play & Music brand at 732 franchised and Company-operated centers in the United States and 43 other countries.

 

32


Table of Contents

First Quarter 2016 Highlights

Total net sales increased to $285.0 million for the first quarter of fiscal 2016 from $276.1 million in the first quarter of fiscal 2015, an increase of 3.2%, driven primarily by an increase in retail sales of $9.6 million, led by our Gymboree brand, and increased in sales in the Gymboree Play & Music business of $1.5 million, partially offset by a decrease in our retail franchise sales of $2.0 million.

Comparable store sales (including online sales) increased 4% compared to the first quarter of fiscal 2015. Below is the comparable store sales (including online sales) by brand for the periods ended:

 

     13 Weeks Ended
April 30, 2016
  13 Weeks Ended
May 2, 2015

Gymboree

   6%   -2%

Janie and Jack

   5%   5%

Crazy 8

   -2%   4%

Total comparable store sales (including online sales)

   4%   0%

Our Adjusted EBITDA increased to $24.5 million for the 13 weeks ended April 30, 2016 from $15.6 million in the same prior year period, an increase of $8.9 million or 57.0%, primarily due to a 4% comparable store sales increase and gross profit expansion. Our results in the first quarter of 2015 were negatively impacted by the west coast port slowdown.

The following table summarizes store openings and closures by brand and country for the 13 weeks ended April 30, 2016. Note that (i) all Crazy 8 stores are in the United States and (ii) retail stores operated by overseas franchisees and the VIE-operated Gymboree retail stores in China are excluded.

 

     Store Count as of
January 30, 2016
     Store
Openings
     Store
Closures
     Store Count as of
April 30, 2016
 

Gymboree US

     546         1         (4      543   

Gymboree Canada

     48         —           —           48   

Gymboree Puerto Rico

     1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gymboree

     595         1         (4      592   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gymboree Outlet

     174         —           —           174   

Gymboree Outlet Puerto Rico

     1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gymboree Outlet

     175         —           —           175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Janie and Jack (including Janie and Jack outlets)

     148         —           —           148   

Janie and Jack Puerto Rico

     1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Janie and Jack

     149         —           —           149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Crazy 8 (including Crazy 8 outlets)

     387         —           —           387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,306         1         (4      1,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

We plan to open approximately 6 new stores in fiscal 2016 (which include 1 new store opened during the 13 weeks ended April 30, 2016) and close approximately 20 to 30 stores (which include 4 stores closed during the 13 weeks ended April 30, 2016), primarily in our Crazy 8 and Gymboree brands. We expect our international franchise partners to open approximately 1 to 5 franchise stores in fiscal 2016.

Seasonality

Our business is impacted by the timing of certain holidays and key retail shopping periods in the apparel and retail industries, which generally result in higher sales during the second half of the fiscal year and lower sales during the first half of the fiscal year. Consequently, the results for any fiscal quarter are not necessarily indicative of results for the full year.

 

33


Table of Contents

Results of Operations

13 weeks ended April 30, 2016 compared to 13 weeks ended May 2, 2015

Condensed consolidated statements of operations data as a percentage of total net sales during the 13 weeks ended April 30, 2016 and May 2, 2015 were as follows (amounts in thousands):

 

     13 Weeks Ended April 30, 2016     13 Weeks Ended May 2, 2015  
     Amount      % of Total
Net Sales
    Amount      % of Total
Net Sales
 

Net sales:

          

Retail

   $ 271,276         95.2   $ 261,732         94.8

Gymboree Play & Music

     10,094         3.5     8,648         3.1

Retail Franchise

     3,671         1.3     5,689         2.1
  

 

 

      

 

 

    

Total net sales

     285,041         100.0     276,069         100.0

Cost of goods sold, including buying and occupancy expenses

     (168,585      (59.1 )%      (170,712      (61.8 )% 
  

 

 

      

 

 

    

Gross profit

     116,456         40.9     105,357         38.2

Selling, general and administrative expenses

     (114,032      (40.0 )%      (104,710      (37.9 )% 
  

 

 

      

 

 

    

Operating income

     2,424         0.9     647         0.2

Interest income

     105         —          19         —     

Interest expense

     (19,807      (6.9 )%      (21,076      (7.6 )% 

Gain on extinguishment of debt

     48,804         17.1     —           —     

Other income (expense), net

     112         —          (110      —     
  

 

 

      

 

 

    

Income (loss) before income taxes

     31,638         11.1     (20,520      (7.4 )% 

Income tax expense

     (697      (0.2 )%      (1,960      (0.7 )% 
  

 

 

      

 

 

    

Net income (loss)

     30,941         10.9     (22,480      (8.1 )% 

Net loss (income) attributable to noncontrolling interest

     1,905         0.7     (545      (0.2 )% 
  

 

 

      

 

 

    

Net income (loss) attributable to The Gymboree Corporation

   $ 32,846         11.5   $ (23,025      (8.3 )% 
  

 

 

      

 

 

    

Net Sales

Total net sales for the first quarter of fiscal 2016 increased to $285.0 million from $276.1 million in the first quarter of fiscal 2015, an increase of $8.9 million or 3.2%.

Net retail sales for the first quarter of fiscal 2016 increased to $271.3 million from $261.7 million in the first quarter of fiscal 2015, an increase of $9.6 million, or 3.6%, primarily due to an increase in comparable store sales (including online sales) of 4%. Comparable store sales (excluding online sales) increased by 5% for the first quarter of fiscal 2016 compared to the same prior year period. The 4% increase in comparable store sales was led by our Gymboree brand followed by our Janie and Jack brand. While the first quarter of fiscal 2015 was negatively impacted by the west coast port slowdown, these sales were recovered in the first quarter of 2016. We believe that the improvement in sales of our Gymboree and Janie and Jack brands from the first quarter of fiscal 2015 to the first quarter of fiscal 2016 was driven primarily by improved product acceptance and better inventory management. Total net stores decreased to 1,303 as of April 30, 2016 from 1,322 as of May 2, 2015. Total square footage was approximately 2.7 million square feet as of April 30, 2016 and May 2, 2015.

Gymboree Play & Music net sales for the first quarter of fiscal 2016 increased to $10.1 million from $8.6 million in the same prior year period, an increase of $1.5 million or 16.7%, primarily due to growth in the number of Gymboree Tianjin franchisee sites to 267 as of the end of the first quarter of fiscal 2016 from 232 at the same prior year period, combined with stronger performance of existing Gymboree Tianjin sites.

Retail franchise net sales for the first quarter of fiscal 2016 decreased to $3.7 million from $5.7 million in the same prior year period, a decrease of $2.0 million or 35.5%, primarily due to lower sales to our franchisee in the Middle East region. As of the first quarter of fiscal 2016, our overseas franchisees operated 63 stores compared to 85 stores as of the end of the same period last year.

Gross Profit

Gross profit for the first quarter of fiscal 2016 increased to $116.5 million from $105.4 million in the same prior year period, primarily driven by gross profit expansion. Gross profit for the first quarter of fiscal 2015 was negatively impacted by the west coast port slowdown. As a percentage of net sales, gross profit for the first quarter of fiscal 2016 increased by 270 basis points to 40.9% from 38.2% in the same prior year period. The 270 basis point increase was driven primarily by lower cost of goods sold (“COGS”) as a percentage of sales due to the mix of merchandise inventories sold, lower buying and occupancy costs as a percentage

 

34


Table of Contents

of sales. Gross profit for the first quarter of fiscal 2015 was lower due to the impact of the west coast port slowdown. As we record certain distribution costs as a component of selling, general and administrative expenses (“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 $15.9 million and $10.4 million during the first quarter of fiscal 2016 and 2015, respectively. Distribution costs for the first quarter of fiscal 2016 increased primarily due to a $5.7 million net expense related to the termination of an operating service agreement with a third party fulfillment center.

Selling, General and Administrative Expenses

SG&A principally consists of non-occupancy store expenses, corporate overhead, and certain distribution expenses. SG&A increased to $114.0 million for the first quarter of fiscal 2015 compared to $104.7 million in the same prior year period. As a percentage of net sales, SG&A expenses increased 210 basis points to 40.0% for the first quarter of fiscal 2016 from 37.9% in the same prior year period primarily due to a $5.7 million net expense related to the termination of an operating service agreement with a third party fulfillment center (see Note 9 to the condensed consolidated financial statements included elsewhere in this quarterly report), $1.3 million of exit costs associated with the closure of retail locations in China, and incremental marketing expenses.

Interest Expense

Interest expense decreased to $19.8 million during the first quarter of fiscal 2016 compared to $21.1 million in the same prior year period. The net decrease of $1.3 million was primarily related to the decrease in our Notes due to repurchases during the first quarter of fiscal 2016 and the fourth quarter of fiscal 2015, offset by amortization of our interest rate caps and an increase in ABL borrowings.

Gain on Extinguishment of Debt

During the first quarter of fiscal 2016, we repurchased Notes (see Note 6 to the condensed consolidated financial statements included elsewhere in this quarterly report) with an aggregate principal amount of $77.0 million for $26.2 million in cash through privately negotiated transactions. We recorded a $48.8 million gain on extinguishment of debt, net of a $2.0 million charge related to the write-off of deferred financing costs associated with the extinguished debt. We did not repurchase any Notes in the same prior year period.

Income Taxes

The effective tax rate for the first quarter of fiscal 2016 and 2015 was 2.2% (expense) and -9.6% (expense), respectively. The change in effective tax rate was due to differences in forecasted earnings between years, increased earnings from our VIEs, releases of unrecognized tax benefits and recognition of benefits from indefinite-lived assets (trade names).

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 April 30, 2016, January 30, 2016 and May 2, 2015, our valuation allowance against deferred tax assets was $49.9 million, $63.2 million and $67.3 million, respectively. The valuation allowance as of April 30, 2016 represents a valuation allowance against all net deferred tax assets in U.S. federal, unitary U.S. state and Australian 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

Overview

We finance our business with existing cash, cash from operations and the funds available under our Senior Credit Facilities, which were comprised of an $820 million secured term loan agreement (“Term Loan”), a $225 million asset-backed revolving credit facility (“ABL Facility”), and $50 million ABL Term loan (see Notes 5 and 6 to the condensed consolidated financial statements included elsewhere in this quarterly report). We had cash and cash equivalents of $62.2 million, $18.2 million, and $22.4 million as of April 30, 2016, January 30, 2016 and May 2, 2015, respectively (including amounts held by the VIEs). Cash and cash equivalents as of April 30, 2016 include $38.6 million of proceeds from the $50 million ABL Term Loan. Cash and cash equivalents held by the VIEs, of which we are the primary beneficiary, and the results of which we have consolidated into our financial statements, were $12.5 million, $9.6 million, and $9.9 million as of April 30, 2016, January 30, 2016 and May 2, 2015, respectively (see Note 17 to the condensed consolidated financial statements included elsewhere in this quarterly report). The assets of the VIEs can only be used by the VIEs. Net working capital as of April 30, 2016, January 30, 2016 and May 2, 2015 totaled $28.7 million, $29.4 million and $30.7 million, respectively (including $0.2 million, $6.2 million and $5.9 million, respectively, from our VIEs).

 

35


Table of Contents

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 that 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. We also regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. We are continuing to actively pursue various financing alternatives, including refinancing and/or repurchasing our outstanding Notes, divestitures of certain of our assets and operations, as well as other opportunities to improve our capital structure. If opportunities are favorable, we may consummate one or more of these initiatives and the amounts involved may be material.

Cash flows provided by (used in) operating activities

Net cash provided by operating activities during the first quarter of fiscal 2016 was $2.3 million compared to net cash used in operating activities of $2.6 million in the same prior year period.

The change in cash flows from operating activities during the first quarter of fiscal 2016 was primarily due to gross profit expansion, the timing of purchases of merchandise inventories, and the timing of payment of accounts payable and accrued liabilities.

Cash flows used in investing activities

Net cash used in investing activities during the first quarter of fiscal 2016 was $1.8 million compared to $2.8 million in the same prior year period.

The net change during the first quarter of fiscal 2016 was primarily due to the receipt of a related party loan receivable of $1.7 million (see Note 15 to the condensed consolidated financial statements included elsewhere in this quarterly report), partially offset by higher capital expenditures, which increased by $0.5 million to $3.6 million compared to $3.1 million in the same prior year period.

We estimate capital expenditures for fiscal 2016 will be approximately $30 to $35 million. We expect capital expenditures to be used primarily for our systems infrastructure, lease required remodels of existing stores and, to a lesser extent, new store growth.

Cash flows provided by financing activities

Net cash provided by financing activities during the first quarter of fiscal 2016 was $43.4 million compared to $8.9 million in the same prior year period. The increase was due primarily to a $50.0 million ABL Term Loan that we obtained (see Note 6 to the condensed consolidated financial statements included elsewhere in this quarterly report), partially offset by payments for deferred financing costs of $3.8 million, and an increase in our line of credit borrowings from our ABL Facility of $24.0 million. The increase was offset by a repurchase of our Notes with an aggregate principal amount of $77.0 million for $26.2 million in cash through privately negotiated transactions (see Note 6 to the condensed consolidated financial statements included elsewhere in this quarterly report).

Credit Facilities

ABL Facility

In September 2015, we entered into the first amendment (the “First Amendment”) to our senior secured asset-based revolving credit facility (“ABL Revolving Facility”) to extend the maturity date of the ABL revolving commitments from March 2017 to the earlier of (i) September 24, 2020 and (ii) the date that is 60 days before the scheduled final maturity date of any tranche of the Term Loan (which is currently due to mature in February 2018) or the Notes (which are currently due to mature in December 2018), unless such indebtedness is cumulatively equal to or less than $25.0 million in the aggregate and a reserve against the borrowing base is imposed equal to the amount of such indebtedness. The ABL revolving commitment will therefore mature in December 2017 unless the Term Loan and the Notes (other than an aggregate amount of Term Loans and Notes that is equal to or less than $25.0 million) are refinanced with indebtedness having a final maturity date later than February 2018.

In April 2016, we entered into a second amendment to the ABL Revolving Facility (the ABL Revolving Facility, as so amended, the “ABL Facility” or the “Second Amendment”). The Second Amendment provides for a senior secured term loan (the “ABL Term Loan”) of $50.0 million, subject to a borrowing base.

 

36


Table of Contents

The ABL Facility provides for financing of up to $225 million in a revolving line of credit. Line of credit availability under the ABL Facility is subject to a borrowing base consisting of certain 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 and the outstanding amount of the ABL Term Loan. As of April 30, 2016, line of credit borrowings outstanding under the ABL Facility were $43.0 million and letter of credit utilization was $30.8 million. Undrawn line of credit availability under the ABL Facility, after being reduced by outstanding line of credit borrowings, letter of credit utilization and $50 million of ABL Term Loan, was $90.7 million as of April 30, 2016. Average line of credit borrowings during the 13 weeks ended April 30, 2016 under the ABL Facility amounted to $49.7 million. We anticipate utilizing our line of credit under the ABL Facility throughout the course of fiscal 2016 to support seasonal working capital needs and expect to have borrowings outstanding at year-end.

Line of credit borrowings under the ABL Facility 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. As of April 30, 2016, the weighted average interest rate on our line of credit borrowings outstanding under the ABL Facility was 3.9%. In addition to paying interest on outstanding line of credit borrowings under the ABL Facility, we are required to pay a commitment fee on unutilized commitments thereunder, which is between 0.250% and 0.375% per annum under the ABL Facility.

The ABL Facility contains covenants that, among other things, restrict our ability to incur additional indebtedness and pay dividends. The ABL Facility also contains a financial covenant (i.e., minimum consolidated fixed charge coverage ratio), but such financial covenant is not required to be tested as long as the Company’s ABL Term Loan remains outstanding. As of April 30, 2016, we were not required to test compliance with this financial covenant.

ABL Term Loan

The ABL Term Loan of $50.0 million may be used to repurchase Notes, to finance the acquisition of working capital assets, for capital expenditures and permitted acquisitions and for other general corporate purposes.

The ABL Term Loan bears interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a 90-day LIBOR contract rate as determined by the agent for the ABL Term Loan monthly on the first day of each calendar month, plus 10.25% per annum, or, in certain circumstances, at the prime rate, plus 9.25% per annum. Interest is payable monthly. As of April 30, 2016, the interest rate under our ABL Term Loan was 10.9%.

The ABL Term Loan requires us to make quarterly payments equal to $0.6 million, with the balance due on the maturity of the ABL Term Loan, which is the same as the maturity date of the ABL line of credit commitment.

The Second Amendment also provides for a new availability covenant, which requires the Company and its restricted subsidiaries to maintain a minimum amount of “Combined Availability” and “Availability” for as long as the ABL Term Loan remains outstanding. “Combined Availability” is equal to (a) the ABL Term Loan borrowing base minus (b) the sum of the aggregate outstanding principal amount under the ABL Facility (including the ABL Term Loan, revolving line of credit borrowings and letter of credit utilization). “Availability” is equal to the lesser of (A) (I) the revolving credit ceiling (which as of April 30, 2016 was $225.0 million) minus (II) the aggregate principal amount outstanding under the revolving line of credit and letter of credit utilization and (B) (I) the revolving line of credit borrowing base minus (II) the aggregate principal amount outstanding under the revolving line of credit and letter of credit utilization. Under the new availability covenant, the Company and its restricted subsidiaries must maintain (i) Combined Availability in excess of the greater of (x) $17.5 million and (y) 10% of the ABL Term Loan borrowing base; and (ii) Availability in excess of the greater of (X) $17.5 million and (Y) 10% of the lesser of (1) the applicable revolving line of credit borrowing base and (2) the revolving credit ceiling. The Second Amendment also provided the agent for the ABL Term Loan and the ABL Term Loan lenders with certain consent rights to amendments relating to, among other terms and provisions, the borrowing bases, the availability covenant and certain negative covenants. All other material affirmative and negative covenants and events of default under the ABL Facility remained substantially unchanged following the Second Amendment.

 

37


Table of Contents

Term Loan

We also have an agreement with several lenders for an $820 million senior secured Term Loan, with a maturity date of February 2018. As of April 30, 2016, $769.1 million was outstanding under the Term Loan. 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 Facility. The interest rate for borrowings under the Term Loan is, at the Company’s 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 April 30, 2016, 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 2015 operating results and concluded we are not required to make any excess cash flow payments on the Term Loan during fiscal 2016. 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 Term Loan contains covenants that, among other things, restrict our ability to incur additional indebtedness and pay dividends.

Notes

In fiscal 2010, we issued $400 million aggregate principal amount of 9.125% Notes due in December 2018. Interest on the Notes is payable semi-annually. As of April 30, 2016, the Notes payable balance outstanding was $210.6 million.

On April 26, 2016, the Company announced a cash tender offer (the “Tender Offer”) to purchase the maximum aggregate principal amount of its outstanding Notes that it can purchase for $40.0 million, excluding accrued interest. The Tender Offer expired on May 23, 2016. During the second quarter of fiscal 2016, the Company repurchased $39.6 million aggregate principal amount of Notes for $20.6 million through the Tender Offer and will recognize $18.0 million of gain on extinguishment of debt, net of a $1.0 million charge related to the write-off of deferred financing costs associated with the extinguished debt.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates affecting the application of those policies since our Fiscal 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 28, 2016.

Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

38


Table of Contents

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

 

     13 Weeks Ended
April 30, 2016
    13 Weeks Ended
May 2, 2015
 

Net income (loss) attributable to The Gymboree Corporation

   $ 32,846      $ (23,025

Reconciling items (a):

    

Interest expense

     19,807        21,076   

Interest income

     (3     (7

Income tax (benefit) expense

     (320     1,305   

Depreciation and amortization (b)

     9,983        10,295   

Non-cash share-based compensation expense

     622        720   

Loss on disposal/impairment on assets

     370        133   

Loss on contract termination (c)

     5,689        —     

Gain on extinguishment of debt

     (48,804     —     

Acquisition-related adjustments (d)

     3,542        3,234   

Other (e)

     762        1,866   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 24,494      $ 15,597   
  

 

 

   

 

 

 

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

    

(b)     Includes the following:

    

Amortization of intangible assets (impacts SG&A)

   $ 384      $ 384   

Amortization of below and above market leases (impacts COGS)

     (239     (133
  

 

 

   

 

 

 
   $ 145      $ 251   
  

 

 

   

 

 

 

(c)     Incurred as a result of termination of a contract with a third-party fulfillment center for www.gymboree.com.

    

(d)     Includes the following:

    

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

   $ 1,784      $ 1,886   

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

     1,758        1,348   
  

 

 

   

 

 

 
   $ 3,542      $ 3,234   
  

 

 

   

 

 

 

Acquisition-related adjustments remove the impact of purchase accounting, as a result of the November 23, 2010 Merger (refer to Item 1A. Risk Factors of the annual report on Form 10-K for fiscal 2015).

    

(e)     Other is comprised of restructuring and non-recurring charges.

    

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

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