-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TefEBgXLZLMYToyCWPimJEZl9ugkKzxK/sLKuWJK1EX9fVw7/QFwvAP7W+6HPcQB TjsAy2A1wz9cxq+PLvrRmQ== 0000891618-00-002355.txt : 20000428 0000891618-00-002355.hdr.sgml : 20000428 ACCESSION NUMBER: 0000891618-00-002355 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GYMBOREE CORP CENTRAL INDEX KEY: 0000786110 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-APPAREL & ACCESSORY STORES [5600] IRS NUMBER: 942615258 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21250 FILM NUMBER: 609857 BUSINESS ADDRESS: STREET 1: 700 AIRPORT BLVD STE 200 CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 4155790600 MAIL ADDRESS: STREET 1: 700 AIRPORT BLVD #200 STREET 2: 700 AIRPORT BLVD #200 CITY: BURLINGAME STATE: CA ZIP: 94010 10-K 1 FORM 10-K 1 To our Stockholders, 1999 was a difficult year for Gymboree. We look forward in the coming year to correcting the false starts of the past year, and re-establishing our core customer base and rebuilding our profitability. We feel confident that our current strategies are correct and the improved results will be seen in the third and fourth quarters of 2000. I'd like to review the developments of the past year, and outline for you our strategy going forward. Our historic model is familiar to many of you. We created lines of coordinated items for each age range and gender, delivered these lines on a regular basis to create "events" in store, displayed the items together, marked them down on a timed basis, and repeated the process through the years. During 1999, we altered our historic model, and we made some mis-steps, in particular reducing merchandise inventories well below historic levels. By doing so, we lost the benefit of profitable markdown sales. While we believe our experiences in 1999 taught us more about our customers' taste for fashion, we were not satisfied with our sales volume. We are in the process of reinstating the majority of our old merchandising practices. We put in place a new General Merchandise Manager, Lisa Harper, a Gymboree veteran who understands our customer very intimately, who understands that our customers want coordinated outfits, want unique Gymboree details and colors, and have a keen sense of value. We plan to return to the historic delivery model, to create excitement among customers, and give us a predictable "lift" in sales volume. Importantly, the all-at-once first markdown of a line will give us another event in store, and another predictable lift in profitable sales volume. Although our retail operations stumbled in 1999, our Play & Music business expanded into new territories when we sold master franchise agreements in the United Kingdom, Ireland, and Puerto Rico. Further, we expanded our curriculum by adding music classes, designed to interest and challenge children to appreciate different styles of music and to enhance their mental and physical development. We enjoyed profits from the Play & Music business in excess of $2.3 million, our best year yet. I feel a great sense of responsibility for our stockholders, our customers and our team members. As many of you know, I am one of the founders of Gymboree and an early investor. I watched proudly as the chain expanded from a few stores in California to a national and now international presence. When I looked at the state of the business at the end of 1999, I felt I had to take a more active role charting the right course. I took on responsibility as the Chief Executive Officer determined that our people and our processes will be successful. We have a strong brand that historically delivered unique merchandise, quality and fun for our customers, profits for our shareholders, and a great environment for our team members. As we re-institute our profitable merchandise strategies in our 605 stores, we believe we will see a return of sales increases and profits during the second half of the current year. We believe that with your support we will once again be the market leader in quality, innovative children's apparel. We are looking forward to reclaiming our place in the lives of the young families we serve, and rebuilding the stockholder value inherent in Gymboree. Stuart G. Moldaw Chairman and Chief Executive Officer 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 700 AIRPORT BOULEVARD, SUITE 200, BURLINGAME, CALIFORNIA 94010-1912 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650)-579-0600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $0.001 PAR VALUE NASDAQ NATIONAL MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. 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), 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 12, 2000, was approximately $96,849,966, based upon the last price reported for such date on the NASDAQ National Market. As of April 12, 2000, 24,401,604 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 2, 2000 (hereinafter referred to as the "1999 Proxy Statement") are incorporated into Part III. THE EXHIBIT INDEX IS LOCATED ON PAGE 43 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 THE GYMBOREE CORPORATION TABLE OF CONTENTS
PAGE NUMBER ------ PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 13 Item 3. Legal Proceedings........................................... 14 Item 4. Submission of Matters to a Vote of Security Holders......... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 15 Item 6. Selected Consolidated Financial Data........................ 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 Item 7A. Quantitative and Qualitative Exposures on Market Risk....... 22 Item 8. Financial Statements and Supplementary Data................. 23 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures................................... 39 PART III Item 10. Directors and Executive Officers of the Registrant.......... 39 Item 11. Executive Compensation...................................... 39 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 39 Item 13. Certain Relationships and Related Transactions.............. 39 PART IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K...... 39 Signatures............................................................ 42
2 4 PART 1 ITEM 1. BUSINESS The Gymboree Corporation is a leading specialty retailer of high quality apparel and accessories for children. Gymboree operates an international chain of stores, primarily in regional shopping malls, and in selected suburban and urban locations. As of January 29, 2000, Gymboree operated 605 stores, including 536 Gymboree stores and 19 Zutopia stores in the United States, 19 Gymboree stores in Canada and 31 Gymboree stores in Europe, as well as an online store at www.gymboree.com. Under the GYMBOREE(RM) brand name, we design and contract manufacture children's active-wear for sale exclusively by Gymboree. Our apparel is characterized by child-appropriate, fashionable colors and prints, complex embellishment, comfort, functionality and durability. Gymboree stores offer high-quality apparel and accessories for children ages newborn to seven years. Zutopia stores offer high-quality apparel and accessories for children ages seven to 14 years. For a discussion of Zutopia operations and strategies, please refer to the Zutopia section on page 9. The Gymboree Corp. also offers directed parent-child developmental play programs for children ages newborn to four years old at 424 franchised and corporate-operated locations. Gymboree was organized in October, 1979, as a California corporation, and re-incorporated in Delaware in June, 1992. This annual report on Form 10-K contains certain forward-looking statements reflecting our current view of future events and financial performance. Our actual future performance may not meet such expectations. Factors that could cause future performance to vary from current expectations include, but are not limited to, the factors discussed in the "Business" section, and in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this annual report on Form 10-K. BUSINESS STRATEGY The business strategy for Gymboree stores consists of the following principal elements: - High Quality Apparel. We strive to offer our customers high quality apparel with an excellent price/ value relationship. We design the merchandise to be comfortable, functional, safe and durable by placing particular emphasis on high quality fabrics and detailed garment construction. - Brand Name Recognition. Gymboree has developed a clearly recognizable brand image, translating to "good things for children." This image was initially built through our Play and Music Programs, a quality experience in the lives of young families, which was the core business of Gymboree. Customers associate shopping at Gymboree with unique, high quality, appealing, colorful children's clothing and accessories sold in an attractive and friendly environment. - Integrated Operations: Design, Contract Production and Retailing. We believe that the vertical integration of our operations enables us to identify and respond to market trends, maintain rigorous product quality standards and closely monitor the distribution of our products. - Exclusive Distribution Channels. During 1999, our products were sold exclusively through Gymboree retail stores and, to a limited extent, through our play program sites. During fiscal 1999, we continued to build the Gymboree Gift Center at www.gymboree.com, which began in 1997. This web site allows customers to purchase selected items. From time to time, we may liquidate excess inventory through other channels. - Responsive Customer Service. Customer service and satisfaction are defining features of the Gymboree corporate culture. Assisting customers in merchandise selection and outfit coordination is the top priority of Gymboree team members. We believe that this customer service in combination with our merchandise encourages multiple item purchases per customer. 3 5 MERCHANDISING PHILOSOPHY Historically, Gymboree's merchandise focus contained the following key elements: 1. Items were designed utilizing classic silhouettes, bright colors and predominately cotton knit fabrics, in the context of coordinating outfits intended to incent multiple unit purchases by customers. 2. Outfits were developed within the context of lines that were delivered on a monthly basis. 3. Gymboree followed a strict policy of buying inventory at a level that would meet demand for full price selling and markdown sales, and it followed a strict markdown policy based on time in store, to ensure appropriate markdown clearance demand to make way for the upcoming delivery. 4. Lines were merchandised in-store in their entirety, at both full price and at first markdown price. Subsequent markdown items were normally housed without regard to line integrity. During 1999, in an attempt to expand the customer base by changing our merchandise focus, we embarked on a re-merchandising strategy. To facilitate this re-merchandising, among several other steps, we changed our store interiors by removing display fixtures (the "pediments"), introduced a new trademark, and took a one-time special charge. The specifics of the re-merchandising were: 1. Changing the fashion direction of our goods to be more innovative, diverse, and modern. Among the fashion changes was the decision to move away from outfit dressing into a coordinated separates offering, and to include a broader palette of color and more fabric diversity. 2. Items would be developed in the context of classifications (e.g., sweaters, woven pants, hats) and delivery was altered from discrete lines on a planned basis to ongoing flow of items as received. Each of these moves was designed to maintain freshness of product offering at store levels. 3. Inventory would be purchased with the strategy being creation of scarcity value and reduction of markdown sales in order to build margin rates on total sales. Items were to be marked down based on performance and housed in store according to price point. 4. Changing the way merchandise is displayed in our stores, from coordinated items displayed near each other to classification display (e.g., all girls' sweaters near each other or all boys' pants in one area of the store). Because the results of the re-merchandising strategy fell well below our expectations, in February 2000 we announced several changes to the re-merchandising strategy, essentially to reinstate the historical strategies while integrating any benefits which flowed from the re-merchandising, including the new trademark, remodeled store interiors, and some level of updated fashions. The changes are part of an effort to regain our core customers and re-establish our core businesses, offering child-appropriate outfit dressing, with the recognition that some level of markdown sales are profitable and necessary to drive sales volume. STORE EXPANSION STRATEGY Gymboree seeks to strategically increase our current store base by opening new stores in major metropolitan malls, certain secondary regional malls and in select downtown street locations that satisfy certain demographic and financial return criteria. In fiscal 1999, Gymboree opened 43 new stores, including 19 Zutopia stores, relocated and/or expanded 20 existing Gymboree stores, and closed two Gymboree stores. The average size of new stores opened during 1999 was approximately 2,200 square feet. We plan to open 10 to 12 new stores during fiscal 2000, and we plan to close approximately 10 stores. We have continued our international expansion by opening four additional retail stores in Canada and seven additional stores in Europe during fiscal 1999. During fiscal 2000, we are planning to open approximately two stores in Europe and one store in Canada, included in the 10 to 12 total planned stores mentioned above. Our ability to continue to expand the number of stores successfully in the future will depend on a number of factors, including the availability of suitable store locations, the negotiation of acceptable lease terms, our financial resources and the ability to control the operational aspects of this growth. 4 6 Gymboree expanded from two Gymboree stores in California in 1986 to 605 stores, including 555 stores in 50 states and the District of Columbia, 19 stores in Canada and 31 stores in Europe, as of January 29, 2000. The following table sets forth, by geographic region, the net number of Gymboree stores opened and closed during each of the periods indicated.
FISCAL YEAR ------------------------------------------------------------------------- PRIOR TO 1993 1993 1994 1995 1996 1997 1998 1999 TOTAL -------- ---- ---- ---- ---- ---- ---- ---- ----- East...................... 43 9 14 14 17 23 30 6 156 Midwest................... 17 9 12 19 25 10 24 7 123 South..................... 15 10 23 26 12 29 39 8 162 West...................... 37 12 8 11 16 7 14 9 114 Europe.................... 0 0 0 0 0 6 18 7 31 Canada.................... 0 0 0 0 5 6 4 4 19 --- -- -- -- -- -- --- -- --- Total........... 112 40 57 70 75 81 129 41 605 === == == == == == === == ===
Site Selection. In selecting new store sites, Gymboree typically looks for high traffic locations ranging from 1,500 to 3,000 square feet in regional malls, specialty centers and suburban main street locations. Our real estate department conducts extensive analysis of potential store sites and bases its selection on the performance of other specialty retail tenants, size of the market and demographics of the surrounding area. In evaluating a store location, placement of the store relative to retail traffic patterns and the number of children in the trade area are important considerations. Although our current stores are located primarily in regional malls, we have opened stores in alternative locations. In addition, we plan to relocate some higher volume stores within the same malls where we anticipate receiving a competitive advantage. There can be no assurance that Gymboree will continue to be successful in either obtaining favorable sites for our new stores or negotiating favorable lease terms for such sites. PRODUCTS AND MERCHANDISING Gymboree's merchandise has evolved significantly over time. Prior to 1988, Gymboree offered unisex apparel for children ages six months to five years and a selection of non-apparel products, including toys. Since 1989, we have broadened our apparel merchandise assortment by developing separate big boys', big girls', baby boys' and baby girls' lines, distinguishing assortments to be age-appropriate for children from newborn to seven years old, all under the Gymboree label. Gymboree currently offers customers an assortment of high quality, comfortable, coordinated lines of GYMBOREE(RM) brand apparel and accessories, consisting primarily of pants, tops, overalls, dresses, socks, hats, crib shoes, swimwear, sweaters, outerwear, underwear, "onesies," blankets and shoes. Our merchandising strategy focuses upon the quality and design of the apparel products and planned introduction of new product lines, along with a steady supply of fashion basics in seasonal colors and designs intended to satisfy customers' needs for woven overalls, knit leggings, shorts and pants, tee-shirts and "onesies" for babies. Gymboree strives to create a distinctive look for its merchandise to enhance brand recognition and stimulate repeat purchases. Except for fashion basics, Gymboree apparel is designed, manufactured, purchased and merchandised by line. Each of Gymboree's stores features 10 - 12 major merchandising lines per year. Each merchandise line generally consists of approximately 60 clothing items, encompassing matching tops and bottoms, with coordinated color palettes, patterns and designs. Additionally, each line features a wide selection of related accessories that complement the apparel, such as coordinated socks, hats, crib shoes and hair accessories. In order to maintain the freshness of its merchandise, Gymboree regularly updates the assortments by rotating each line on an 11- to 13-week selling cycle. Although Gymboree generally is unable to reorder items after a line has been purchased, we carefully monitor the rotation schedule, and we have the ability to move up the set-up of new lines based on selling demand. Merchandise in each line generally flows through a structured markdown process. Gymboree's presentation maximizes customer convenience in selection, by displaying outfits on mannequins and placing featured items in easily-found, nearby displays. Our visual merchandising effort creates an 5 7 attractive selling environment and assists team members in the process of wardrobing, which, we believe, stimulates purchases of multiple matching items. Merchandise for older children is generally displayed in the front of the store, and baby merchandise is generally displayed in the rear of the store. Boys' and girls' lines are generally displayed on opposite walls and accessories are located adjacent to the coordinated line. A typical store offers approximately 200 to 250 styles of apparel and approximately 100 to 120 accessories and other non-apparel items. Gymboree stores do not have dressing rooms. FASHION TRENDS AND CHANGING CONSUMER PREFERENCES Gymboree's sales and profitability depend upon the continued demand by customers for our apparel and accessories. We believe that our success depends in large part upon our ability to anticipate, gauge and respond in a timely manner to changing consumer demands and fashion trends and upon the appeal of our products. There can be no assurance that the demand for Gymboree's apparel or accessories will not decline or that we will be able to anticipate, gauge and respond to changes in fashion trends. If demand for our apparel and accessories were to decline or if we were to misjudge fashion trends, Gymboree's business, financial condition and results of operations could be materially adversely affected. DESIGN, SOURCING AND CONTRACT MANUFACTURING Gymboree apparel is characterized by distinctive designs, quality fabrications and construction and an excellent price/value relationship. Gymboree sources high-quality, comfortable and durable fabrics. Our merchandising and design team creates unique color combinations and original patterns for these fabrics and emphasizes durability, functionality and special detailing. Gymboree manages the production of apparel from the initial product concept, through color and pattern design, fabric development and testing, sample approval and testing and garment manufacturing. We believe that the vertical integration of operations and the coordinated efforts of our merchandising and design, production, and planning teams enable Gymboree to create distinctive offerings and control quality. The merchandising and design team determines the styles for merchandise based on an evaluation of current style trends as well as a review of the popularity of the prior year's products. This team works closely with Gymboree's merchandise planning team to select garment styles for each season. In conjunction with foreign buying agents, the production team arranges fabric sourcing and garment production while the quality team ensures that the final products satisfy Gymboree's detailed specifications and strict quality and safety standards. The process from initial product concept/design to receipt of finished product requires approximately nine months for collections, somewhat less time for fashion basic items. Fabric and production commitments are made approximately five months before receipt of the finished garments at our distribution center. Throughout the design process, Gymboree's merchandise planning team prepares financial forecasts for each line of clothing on an item-by-item basis. Certain proposed items in a line may be revised or replaced as a result of this team's financial analysis. This team also monitors inventories on a daily basis, prepares seasonal plans and develops unit production forecasts. The majority of Gymboree apparel is manufactured to our specifications by approximately 200 independent manufacturers. Key countries in the Far East include China, Indonesia, Macao, Taiwan, and Thailand. Other manufacturing regions include Central America, Mexico, South America and the United States. Gymboree sources its fabric from approximately 20 vendors. Gymboree purchases all products in U.S. dollars, and we have not historically experienced any material difficulties as a result of any foreign political, economic or social instabilities, although there can be no assurance that we will not experience such difficulties in the future. We have no long-term contracts with suppliers and typically transact business on an order-by-order basis. Gymboree's quality control team arranges with independent testing laboratories to test fabrics prior to cutting against established performance standards for quality and safety. During the prototype sampling stage and following manufacturing, the technical teams subject the merchandise to tests, which ensure that construction, workmanship and fit, as well as the style and appearance of the garments, satisfy Gymboree's 6 8 stringent specifications. Subsequently, the production and quality control teams review the garment test and bulk production inspection results to verify that the quality is consistent with Gymboree's high standards. Gymboree generally does not purchase its finished apparel products until manufacturing has been completed and the products have been approved by independent testing labs and Gymboree's quality control and production teams. DEPENDENCE ON NEW PRODUCTS Gymboree's continued growth and success depend in large part on our ability to successfully develop and introduce new products that are perceived to represent an improvement in style, functionality or value compared to products available in the marketplace. Failure to regularly develop and introduce new products successfully could materially and adversely impact future growth and profitability. In addition, in the future Gymboree may introduce certain new products and concepts that may represent a shift in concept, design and target market demographics from our traditional products. These new products may have shorter life cycles, thereby requiring more frequent product introductions than Gymboree's traditional product lines. Furthermore, these products and the introduction of more products could dilute Gymboree's image as a leading supplier of quality children's apparel in the newborn-to-seven age range and lead to a reduced demand for its existing products. RELIANCE ON FOREIGN AND UNAFFILIATED MANUFACTURERS Gymboree currently relies on unaffiliated manufacturers to produce substantially all of its products. Gymboree has no long-term contracts with its manufacturing sources, and we compete with other companies for production facilities and import quota capacity. Gymboree's products are currently manufactured to specifications by independent factories located primarily in the Far East, as well as Central America, South America, Mexico and the United States. In the event any of our key manufacturers were unable or unwilling to continue to manufacture Gymboree's products, Gymboree would have to rely on other current manufacturing sources or identify and qualify new unaffiliated manufacturers. In such event, there can be no assurance that Gymboree would be able to qualify such manufacturers for existing or new products in a timely manner or that such manufacturers would allocate sufficient capacity to Gymboree in order to meet its requirements. Any significant delay in our ability to obtain adequate supplies of products from our current or alternative sources, would materially and adversely affect the business and results of operations. Although Gymboree believes that we have good relationships with our unaffiliated principal mills and manufacturing sources and we maintain good control with respect to product specifications and quality, our future success will depend in large measure upon our ability to maintain such relationships both directly and through our independent agents, and there can be no assurance that these manufacturers will continue to produce products that are consistent with Gymboree's standards. In this regard, Gymboree has occasionally received, and may in the future continue to receive, shipments of product from unaffiliated manufacturers that fail to conform to our quality control standards. In such event, unless we are able to obtain replacement products in a timely manner, Gymboree risks the loss of revenue resulting from the sale of such products and related increased administrative and shipping costs. The failure of any key unaffiliated manufacturer to supply products that conform to Gymboree's standards could materially and adversely affect our results of operations and our reputation in the marketplace. If Gymboree experiences significant increased demand, which cannot be assured, or if an existing unaffiliated manufacturer needs to be replaced, we will need to significantly expand manufacturing capacity, both from current and new manufacturing sources. There can be no assurance that such additional manufacturing capacity will be available when required on terms that are acceptable to Gymboree. In addition, in fiscal 1999, one vendor accounted for a majority of our cotton knit fabric purchases. Although we believe that other sources could be identified to satisfy our requirements for cotton knit fabrics, the loss of this vendor, or a delay in obtaining fabric from this vendor, could have a material adverse effect on our business and operating results. Gymboree's business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, political unrest, disruptions or delays in shipments and changes in economic 7 9 conditions in countries in which our vendor mills and manufacturing sources are located. Gymboree cannot predict the effect that such factors will have on our business arrangements with foreign mills and manufacturing sources. If any such factors were to render the conduct of business in a particular country undesirable or impractical, or if our current foreign manufacturing sources or mills were to cease doing business with us for any reason, Gymboree's business and operating results could be adversely affected. Our business is also subject to the risks associated with the imposition of additional United States legislation and regulations relating to imported apparel products, including quotas, duties, taxes and other charges or restrictions on imported apparel. We cannot predict whether additional United States quotas, duties, taxes or other charges or restrictions will be imposed upon the importation of our products in the future, or what effect any such actions would have on our business, financial position and results of operations. STORE OPERATIONS The primary objective of store management is to maximize sales by providing superior customer service. Store management is principally responsible for sales training and implementing performance evaluation systems. In a continuing effort to minimize team members' time away from customers, operational procedures are reviewed and streamlined by the store operations team prior to implementation at the store level. This team is also responsible for field and store staffing, daily sales motivation and central office-to-store communications. Our merchandising team also interacts with store personnel and is responsible for developing merchandise presentation plans that can be effectively implemented at the store level. Gymboree North American store operations are managed by six Regional Business Directors through 56 operating districts. Each District Sales Manager is responsible for approximately 10 stores. Stores are staffed with a Manager, two assistant managers and several team members, which varies with store volume. During the holiday selling season, team member levels are substantially increased to accommodate peak traffic levels. The 31 stores in Europe constitute one region which is divided into three districts with similar team member staffing as in North America. The 19 Zutopia stores constitute one region, with two district managers assigned geographically. A number of programs offer incentives to both team members and managers. Team members receive compensation primarily in the form of hourly wages. Incentive structures are designed to maximize store contribution, comparable sales growth, and full-price selling as a percentage of total sales. Scheduling procedures allocate payroll hours to team members based upon sales performance rather than simple availability. Other programs provide bonuses or cash awards to high achieving team members, or to team members of a store based on store sales achievements. Regional Business Directors and District Managers receive compensation in the form of salaries, performance-based bonuses and stock options. CUSTOMER SERVICE Customer service is a defining feature of the Gymboree corporate culture. We believe that knowledgeable and enthusiastic team members have a direct impact on profitability. Gymboree places great emphasis on the selling function through consistent and on-going training and evaluation systems which are initiated by the central office and administered by field management at all levels. Our store managers are always on the sales floor assisting customers and coaching their selling teams. District Managers spend the majority of their work week on selling floors, providing leadership by inspecting the total customer experience throughout their district. Regional Business Directors develop and execute a business plan and are responsible for achieving plan numbers for their regions. Customer service is a high priority for Gymboree store team members. Our customer focus is emphasized in recruiting and, as measured by sales, is the primary component in the on-going evaluation of team members. We minimize team members' time spent on administrative functions by centrally determining merchandise display and replenishment, markdowns and basic labor scheduling. By emphasizing friendliness, product knowledge and personal attention, we believe that Gymboree and Zutopia have established a reputation for excellent customer service. 8 10 STORE ENVIRONMENT Gymboree stores are designed to create an energetic and enjoyable shopping environment. The brightly lit stores and glass store fronts allow the colorful in-store environments to attract customers from the outside. Stores are constructed in an open manner which enables customers to see virtually all product offerings from the store's entrance. We are currently considering alternatives to our current signage and storefront appearance, to match our updated logo and trademark. The current storefront includes natural wood arches supported by giant children's building blocks and brightly colored "dancing" letters. These changes would result in updating our look while at the same time attracting customer attention and inviting customers to enter. Gymboree believes creating a uniform trademark presentation is important, from storefront to packaging, hang tags and labels inside product. Inside Gymboree stores, merchandise is displayed on mannequins, fixtures, and store walls by coordinated outfits, which allows easy accessibility and provides ample floor space for customers to maneuver strollers within the store. While parents shop, children are encouraged to play with small toys throughout the store and to enjoy Gymboree videos which run continuously throughout the day. MARKETING AND PROMOTION Whereas Gymboree previously primarily relied on word of mouth advertising, in 1999 we considered expanding the effort. Our goal in all marketing activities is to expand our customer base, and in the future options may include print and electronic advertising, in-store events and planned promotions, cross- promotional opportunities, direct mail and organized telephone campaigns. We also believe that creating synergy between the stores and Play and Music Programs may help fuel effective marketing, advertising and promotional efforts. ELECTRONIC COMMERCE Gymboree launched its first web site at www.gymboree.com during fiscal 1997. This web site, also known as the Gymboree Gift Center, offers for sale Gymboree merchandise for children between the ages of newborn and seven years old. During 1999, products were selectively added to the Gift Center. We will continue to develop our web presence for corporate identification and expansion of sales. ZUTOPIA Zutopia is a concept launched in 1999. The 19 stores are generally clustered in regions, including six stores in the San Francisco Bay Area in California, two stores in the Los Angeles area, one store in the Denver, Colorado area, two stores near Dallas, two stores near Atlanta, one store in Minneapolis, and five stores in the Chicago area. The merchandise is designed to appeal to the seven to 14 year old customer, with dynamic, frequently-changing store and window set-ups intended to entice repeat visits to the store. Zutopia stores have dressing rooms, and each Zutopia store includes an area called the "Zu Lounge" created as a play area for the target customers, which include a Nintendo(C) play station, playful items for sale, magazines and other items on a rotating basis. Zutopia product design and development is primarily vertically integrated, augmented by the purchase of selected market goods. There are no plans at the current time to expand the Zutopia store chain, nor to close any of the stores. We may review the performance of the Zutopia stores at some future time, and may expand the number of stores or close some or all of them. MERCHANDISE DISTRIBUTION Gymboree's merchandise is shipped primarily via ocean carriers from foreign ports to the Port of Oakland, California, for delivery to our distribution centers located in Dixon, California, for distribution to U.S. stores, to Toronto, Ontario, for distribution to Canadian stores, and to Shannon, Ireland for our European stores. Contract manufacturers or vendors are required to complete manufacturing and deliver merchandise to 9 11 our foreign consolidator within a designated ship window. This ship window ensures timely delivery of the product to Gymboree's U.S., Canadian and Irish distribution centers using cost-effective ocean transportation. A multi-country consolidation program was established in 1997 which enables us to bring full ocean containers into those countries, thereby minimizing shipping cost per unit. Our transportation department coordinates the transportation of all purchase orders and monitors the timeliness of these shipments. Customs clearance takes place at the Port of Oakland for U.S. goods, Toronto for Canadian goods, and Shannon, Ireland for European goods. Samples of all items are reviewed by U.S. or local Customs agents prior to the actual shipment of merchandise. This process reduces the customs clearance time and speeds the delivery of the merchandise to Gymboree. Our U.S. merchandise is received, checked, processed and distributed through our U.S. distribution center in Dixon, California. This distribution center is a Gymboree-owned 300,000 square foot facility which opened on schedule in January, 1998. New lines are received at the distribution center "just in time." The merchandise is processed, packed by store and delivered on a targeted in-store date approximately once per month. Merchandise is then replenished on a weekly basis based on store sell-through. Merchandise for distribution to Europe is shipped directly from the factory to a 26,000 square foot leased facility in Shannon, Ireland, where it is processed for delivery to the stores. Merchandise destined for Canadian stores is shipped directly to a third-party distribution center in Toronto, Canada. Outbound transportation is coordinated by our transportation team. Store orders are consolidated by region and shipped via truckload carriers into the downstream terminals of regional less-than-truckload carriers. This allows Gymboree to build full trailers, thereby reducing the delivery cost per unit. MANAGEMENT INFORMATION SYSTEMS Gymboree's information systems provide integration of store, merchandising, distribution and financial systems. These systems operate on Unix and NT platforms. Sales and other inventory management information are updated daily in the merchandise reporting systems by communicating with each store's point- of-sale system. Merchandise is automatically replenished in response to the specific unit inventory requirements of each store. Gymboree evaluates information obtained through daily reporting to implement merchandising decisions regarding markdowns and allocation of merchandise. Gymboree believes that our information systems are essential in achieving our growth plans and maintaining a competitive industry position. We are committed to utilizing technology as a competitive advantage. PLAY AND MUSIC PROGRAMS As of January 29, 2000, Gymboree's Play and Music Programs included 27 Company-operated play centers in California and 397 franchisee-operated play centers, of which approximately 70% are located in the United States, and the remaining 30% are located in other countries, including Australia, Canada, France, Korea, Malaysia, Mexico, Singapore, and Taiwan. In addition to generating income, we believe that the Play and Music Programs provide attractive cross-marketing opportunities for Gymboree stores and further strengthen the GYMBOREE(R) brand name recognition with retail customers. See "Marketing and Promotion." The Gymboree Play and Music Programs are designed to enhance early childhood development through fun-filled sensory and motor activities, which engage children through sight, touch, sound and movement. Motor skill development is stimulated through physical play and exercise in an exciting, safe environment which includes proprietary, colorful, developmentally appropriate play equipment. The Gymboree Play and Music Programs involve weekly 45-minute classes offered throughout the year. Classes are designed to interest and challenge children through activities that are tailored to enhance mental and physical development as well as to provide opportunities for socializing. In addition to sliding, climbing, jumping and running, classes include music, structured play activities, games and often a finale featuring a colorful parachute, songs, 10 12 bubbles and GYMBO(R) the clown. Parents are present at play and music classes and participate in the activities with their children. Gymboree classes are offered to children ages newborn to four years old. GymBabies (for ages newborn to six months) introduce sensory play with special props and equipment. GymCrawlers (six to 12 months) develop upper-body stability, strength and coordination. GymWalkers (10 to 18 months) emphasize pre-walking and early walking skills and enhance strength, socialization, walking, balance and coordination. GymRunners (14 to 28 months) encourage exploration and build motor skills. GymExplorers (for two year olds) explore movement, stories, puppetry and songs. GymKids (three year olds) learn non-competitive skills like catching, throwing, kicking and tumbling. GymPairs classes are designed for parents with two mobile children; activities are modified to serve the needs of each participant. The Music curriculum was introduced in 1999 for children from 16 months through four years old. These courses cover various musical styles, instruments, rhythm and dance movement. Gymboree's standard franchise agreement provides for an initial term of 10 years. Upon signing the franchise agreement, each domestic and Canadian franchisee currently pays an initial fee ranging from $35,000 for the franchisee's first play center location to $20,000 for the fourth (and each subsequent) location, and each international (excluding Canadian) franchisee pays an initial fee ranging from $100,000 to $1,000,000. The franchises are renewable for 1 additional 10-year term, and Gymboree receives no fee upon the renewal of the franchise from domestic franchisees. Gymboree receives a royalty of 6% of each domestic franchisee's gross receipts from operations, and a fee of approximately $10,500 upon the transfer of a franchise from one domestic franchisee to another. Currently, Gymboree supplies the franchisees with program aids, equipment and consumer products at a cost to the franchisee and conducts initial and ongoing training programs. Gymboree will continue offering franchises for sale in fiscal 2000. TRADEMARKS AND SERVICE MARKS Gymboree is the owner in the United States of the trademarks and service marks "GYMBOREE", "ZUTOPIA", and the trademarks "GYMBO" and "GYMBABY", among others. These marks and certain other of Gymboree's marks are registered in the United States Patent and Trademark Office, and the mark "GYMBOREE" is also registered, or is the subject of pending applications, in approximately 45 foreign countries. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal. Gymboree's rights in the "GYMBOREE" mark and other marks are a significant part of the business. Accordingly, we intend to maintain the mark and the related registrations. Gymboree is not aware of any material claims of infringement or other challenges to our right to use the mark in the United States. Gymboree uses a number of trademarks, certain of which have been registered with the United States Patent and Trademark Office and in certain foreign countries. We believe that our registered and common law trademarks have significant value and that some of our trademarks are instrumental to our ability to create and sustain demand for and market our products. We believe that there are no currently pending material challenges to the use or registration of any of Gymboree's registered trademarks. There can be no assurance, however, that our trademarks do not or will not violate the proprietary rights of others, that they would be upheld if challenged or that Gymboree would, in such an event, not be prevented from using our trademarks, any of which could have a material adverse effect on Gymboree and the business. In addition, we could incur substantial costs to defend legal actions taken against Gymboree relating to our use of trademarks, which could have a material adverse effect on our results of operations and financial position. From time to time, Gymboree discovers products in the marketplace that are counterfeit reproductions of our products or that otherwise infringe upon trademark rights held by Gymboree. If Gymboree is unsuccessful in challenging a third party's products on the basis of trademark infringement, continued sales of such product by that or any other third party could adversely impact the Gymboree brand, result in the shift of consumer preferences away from Gymboree and generally have a material adverse effect on our results of operations and financial position. 11 13 COMPETITION The children's apparel segment of the specialty retail business is highly competitive. Gymboree competes on a national level with BabyGap and GapKids (divisions of The Gap, Inc.) and certain leading department stores as well as certain discount retail chains such as Old Navy (a division of The Gap, Inc.) and Kids 'R' Us (a division of Toys 'R' Us, Inc.). Gymboree also competes with a wide variety of local and regional specialty stores and with certain other retail chains. Zutopia competes with Limited Too in the girls' business, and with Abercrombie and American Eagle Outfitters for both genders. Many of these competitors are larger and have substantially greater financial, marketing and other resources than Gymboree. Increased competition may reduce sales and gross margins, increase operating expenses and decrease profit margins. We may not be able to compete successfully in the future. ECONOMIC CONDITIONS; DEPENDENCE ON CONSUMER SPENDING Gymboree's financial performance is also sensitive to changes in overall economic conditions, which have an impact on consumer spending trends. The success of our operations depends upon a number of factors relating to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and tax rates. There can be no assurance that consumer spending will not decline in response to economic conditions, thereby adversely affecting our growth, net sales and profitability. Gymboree's stores are located primarily in enclosed regional malls. Consequently, our ability to sustain the level of sales is dependent in part on a high volume of mall traffic. Mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor department stores or changes in consumer preferences, all of which are beyond our control. Shifts in consumer discretionary spending to other products or a general reduction in the level of such spending could also adversely affect Gymboree. These factors may adversely impact our business, financial position and results of operations in the future. DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT In the past year, we have made significant changes in our executive officers and management team, including appointing Stuart Moldaw as Chief Executive Officer in February, 2000, and promoting Lisa Harper to General Merchandise Manager in February, 2000. There can be no assurance that Gymboree will successfully assimilate these new executives in a timely and efficient manner. Furthermore, the continued success of Gymboree is largely dependent on the personal efforts and abilities of our senior management and certain other key personnel and on our ability to retain current management and to attract and retain qualified personnel in the future. The loss of certain key employees or Gymboree's inability to attract and retain other qualified employees could have a material adverse effect on the results of operations and financial position. NEED FOR ADDITIONAL CAPITAL Our existing business and growth strategies will likely require additional capital. Specifically, the need to profitably rebuild the existing customer base, plans to broaden existing product lines, and the introduction of both new products and concepts, such as Zutopia, may require us to fund operations, invest in capital projects, and increase inventory levels. There can be no assurance that either debt or equity capital will be available to Gymboree on terms that are satisfactory. To the extent that we raise additional equity capital, a dilutive effect on existing stockholders could result. TEAM MEMBERS As of January 29, 2000, Gymboree had over 6,500 team members. In addition, a significant number of seasonal team members are hired during each holiday selling season. None of our team members is represented by a labor union, and we believe that our relationship with our team members is good. 12 14 EXECUTIVE OFFICERS The following table sets forth information regarding our executive officers as of March 31, 2000.
NAME AGE POSITION ---- --- -------- Stuart G. Moldaw............ 73 Chief Executive Officer and Chairman of the Board of Directors Lisa G. Harper.............. 40 Senior Vice President and General Merchandise Manager Lawrence H. Meyer........... 47 Senior Vice President and Chief Financial Officer Kenneth F. Meyers........... 38 Senior Vice President, Store Operations and Human Resources Edward Wong................. 43 Senior Vice President, Supply Chain and Technology
Stuart G. Moldaw has been the Chairman of the Board of Directors of Gymboree since January 1994 and has been Chief Executive Officer since February 2000. Mr. Moldaw has served as a director of Gymboree since May 1982. Mr. Moldaw previously served as Chairman of the Board of Directors of Gymboree from January 1990 through January 1993. Mr. Moldaw is a member of the board of directors of iParty.com, an on-line party resource company. From 1980 through February 1990, Mr. Moldaw served as a general partner of U.S. Venture Partners and he is currently a special venture partner of U.S. Venture Partners, a venture capital firm. From February 1987 through January 1988, Mr. Moldaw served as Chief Executive Officer of Ross Stores, Inc., an off-price retailer, and is currently a director and Chairman Emeritus of Ross Stores, Inc. Lisa G. Harper joined Gymboree in January 1999 as Vice President of Design. She later served as Senior Vice President of Merchandising and Design, and became our General Merchandise Manager in February 2000. Ms. Harper was also Gymboree's Director of Design and Merchandising from 1992 to 1995. From 1997 to 1998, Ms. Harper was Director of Design and Merchandising for Limited Too, and was Director of Design and Merchandising for Baby Super Stores from 1996 to 1997. Prior to that Ms. Harper held senior design and merchandising positions with Esprit, Mervyn's, GapKids, and Levi Strauss. Lawrence H. Meyer joined Gymboree as Senior Vice President and Chief Financial Officer in September 1998. From 1991 to 1998, Mr. Meyer was Chief Financial Officer and later was Vice President, Business Development, of Toys "R" Us International. Prior to that, Mr. Meyer was Vice President and Chief Financial Officer of Nielsen Marketing Research from 1989 to 1991, and held several financial positions with PepsiCo, Inc. from 1978 to 1989. Kenneth F. Meyers joined Gymboree as Senior Vice President, Human Resources in March 1997. Mr. Meyers became Senior Vice President of Store Operations and Human Resources in February 2000. Previously, Mr. Meyers was Vice President, Human Resources at Walt Disney Imagineering from 1995 to 1997. Prior to Disney, Mr. Meyers held executive positions in human resources at United Technologies Corporation. Ed Wong joined Gymboree in August 1998 as Vice President of Planning and Allocation. He became Senior Vice President of Supply Chain and Technology in February 2000. From 1996 to 1998, Mr. Wong was divisional Vice President of Retail Planning for Eddie Bauer, and was Senior Director, Systems and Training at The Gap from 1994 to 1996. Prior to that, Mr. Wong held senior planning and information systems positions with Dayton Hudson Corp. (now Target Corporation). ITEM 2. PROPERTIES As of January 2000, Gymboree's corporate campus is located in three office buildings in Burlingame, California, which we occupy under leases expiring between 2000 and 2003. During 1997, we completed construction of a new 300,000 square foot distribution center on 15 acres located in Dixon, California. Gymboree has an option agreement on contiguous land for an additional six acres. Beginning in January 1998, we started distributing all products to our stores located in the United States from this facility. Gymboree leases a distribution center in Shannon, Ireland for European operations, and utilizes a third-party owned and operated distribution center in Toronto, Ontario, Canada for Canadian operations. 13 15 At January 29, 2000, Gymboree's 605 stores included an aggregate of approximately 1,047,000 square feet of space. Our stores are all leased, typically for a 10-year term. In most cases, Gymboree pays a minimum rent plus a percentage rent based on the store's net sales in excess of a certain threshold. Substantially all of the leases require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses. See Note 4 of the Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS Gymboree has been named as a defendant in a lawsuit relating to sourcing of products from Saipan (Commonwealth of Northern Mariana Islands). A complaint was filed on January 13, 1999 in Federal District Court, Central District of California, by various unidentified worker plaintiffs against Gymboree and 25 other parties. Those unidentified worker plaintiffs seek class-action status and allege, among other things, that Gymboree (and other defendants) violated the Racketeer Influenced and Corrupt Organizations Act in connection with the labor practices and treatment of workers of factories in Saipan that make product for us. The plaintiffs seek injunctive relief as well as actual and punitive damages. The case has now been transferred to Federal District Court, District of Hawaii. Gymboree has agreed to a Settlement with the plaintiffs that would require us to pay approximately $200,000; the Settlement does not take effect until it is approved by the court. The Motion for Preliminary Approval by the court is scheduled for June 2000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Gymboree's Common Stock is traded on the NASDAQ National Market System under the symbol "GYMB". The following table sets forth the quarterly high and low sale prices per share, as reported on the NASDAQ National Market System.
FISCAL 1999 FISCAL 1998 FISCAL 1997 --------------- ---------------- ---------------- HIGH LOW HIGH LOW HIGH LOW ------ ----- ------ ------ ------ ------ First Quarter......................... 12.188 6.500 23.375 18.250 27.250 21.750 Second Quarter........................ 13.875 4.875 19.031 12.000 27.625 22.625 Third Quarter......................... 7.625 4.750 10.500 4.063 27.750 23.875 Fourth Quarter........................ 7.500 4.625 8.500 4.875 28.875 23.875
As of April 12, 2000, the number of holders of record of Gymboree's Common Stock was approximately 810. Gymboree has never declared or paid cash dividends on its Common Stock and anticipates that all future earnings will be retained for development of its business. The payment of any future dividends will be at the discretion of Gymboree's Board of Directors and will depend upon, among other things, future earnings, capital requirements, our financial position and general business conditions. As of January 29, 2000, 1,112,127 shares of Common Stock had been issued upon exercise of options and pursuant to restricted stock purchase agreements, and 3,300,664 shares of Common stock were issuable upon exercise of outstanding options under Gymboree's Amended and Restated 1993 Stock Option Plan. 15 17 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data have been derived from the consolidated financial statements of Gymboree. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes thereto.
1999 1998 1997 1996 1995 --------- --------- --------- --------- ---------- (IN THOUSANDS, EXCEPT OPERATING DATA AND PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA:(1) Net sales...................... $ 437,076 $ 457,219 $ 373,440 $ 303,111 $ 259,381 Cost of goods sold, including buying and occupancy expenses.................. (281,273) (292,686) (207,630) (164,052) (149,428) --------- --------- --------- --------- ---------- Gross profit.............. 155,803 164,533 165,810 139,059 109,953 Selling, general and administrative expenses...... (176,184) (157,092) (112,443) (91,540) (69,845) Play and music income, net..... 2,324 2,013 517 74 316 --------- --------- --------- --------- ---------- Operating income (loss)... (18,057) 9,454 53,884 47,593 40,424 Foreign exchange gains (losses)..................... (55) 187 (837) -- -- Net interest income............ 877 265 2,778 3,678 2,823 --------- --------- --------- --------- ---------- Income (loss) before income taxes............ (17,235) 9,906 55,825 51,271 43,247 Income tax benefit (expense)... 6,635 (3,665) (20,655) (19,483) (16,866) --------- --------- --------- --------- ---------- Net income (loss)......... $ (10,600) $ 6,241 $ 35,170 $ 31,788 $ 26,381 ========= ========= ========= ========= ========== Basic income (loss) per share........................ $ (0.44) $ 0.26 $ 1.45 $ 1.27 $ 1.06 Diluted income (loss) per share........................ $ (0.44) $ 0.26 $ 1.41 $ 1.24 $ 1.04 Basic weighted average shares outstanding.................. 24,315 24,164 24,302 25,111 24,862 Diluted weighted average shares outstanding.................. 24,315 24,227 25,000 25,670 25,357 OPERATING DATA: Number of stores at end of period....................... 605 564 435 354 279 Net sales per average gross square foot.................. $ 417 $ 550 $ 621 $ 670 $ 827 Net sales per average store.... $ 722,000 $ 915,000 $ 947,000 $ 948,000 $1,063,000 Comparable store net sales increase (decrease)(2)....... (17)% 1% 2% (6)% 3% BALANCE SHEET DATA: Working capital................ $ 57,225 $ 76,314 $ 71,590 $ 105,190 $ 89,417 Total assets................... 240,918 255,594 229,200 216,909 160,009 Long term debt................. 10,877 11,460 -- -- -- Stockholders' equity........... 158,462 168,372 157,710 161,933 123,934
- --------------- (1) 1999, 1998, 1997, and 1996 included 52 weeks, while 1995 included 53 weeks. (2) A store becomes comparable after it is opened for 14 full months. Comparable store net sales in fiscal years 1999 through 1995 were calculated on a 52 week basis. This annual report on Form 10-K contains forward-looking statements reflecting our current expectations and there can be no assurance that Gymboree's actual future performance will meet such expectations. Factors that could cause future performance to vary from current expectations include, but are not limited to, the factors discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section. 16 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Gymboree Corporation was founded in 1976 as a provider of interactive parent-child play programs and began to franchise this business in 1979. In 1986, we opened our first retail store featuring children's apparel and accessories. During 1999, Gymboree opened a new retail concept, Zutopia, which targets children ages seven to 14. Through the end of 1999, we have grown to 605 stores, including 555 stores in 50 states and the District of Columbia, 19 stores in Canada and 31 stores in Europe. Gymboree's net sales for 1999 decreased to $437.1 million from $457.2 million in 1998 and $373.4 million in 1997. Our net loss was $10.6 million compared to a net income of $6.2 million in 1998 and $35.2 million in 1997. Comparable store net sales, all based on a 52 week period, decreased 17% for 1999, increased 1% for 1998 and increased 2% for 1997. We expect future increases in net sales and net income will be dependent on the ability to generate sales increases within existing stores, the profitability of international stores, and the success of Zutopia. Gymboree's year-end is on the Saturday closest to January 31. Fiscal years 1999, 1998 and 1997, which included 52 weeks, ended on January 29, 2000, January 30, 1999 and January 31, 1998, respectively. 1999 COMPARED TO 1998 NET SALES Net sales decreased 4% to $437.1 million for 1999, compared to $457.2 million for 1998. Sales for the 43 stores opened in 1999 provided incremental sales of $18.3 million. Stores opened or expanded prior to 1999 but not qualifying as comparable stores, including the 20 stores expanded in 1999, contributed $30.7 million in additional sales over 1998. Decreases in comparable store sales totaled $69.1 million, a 17% reduction from 1998. The comparable store sales decline resulted from an aggressive inventory reduction strategy, which caused fewer markdowns. GROSS PROFIT Gross profit decreased 5% to $155.8 million from $164.5 million in 1998. As a percentage of net sales, gross profit decreased to 35.6% in 1999 from 36.0% in 1998. Included in cost of goods sold for 1999 was $2.0 million relating to disposal of inventory, which did not meet Gymboree's new fashion direction. Additionally, the decrease in gross profit as a percentage of net sales was attributable to a loss of leverage resulting from the comp sales declines and higher occupancy expense from an increased number of European stores, increased buying expense associated with opening Zutopia, and the expansion of 20 Gymboree stores in the United States. This decline was partially offset by a higher merchandise margin in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("S,G&A"), which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, increased as a percentage of net sales to 38.6% in 1999 (excluding the special charges) compared to 34.3% in 1998. Special charges totaled $7.2 million. These charges, which primarily resulted from the implementation of a brand improvement strategy, include the accelerated depreciation of store interior assets and proprietary signage assets bearing the old trademark, expense for modifications of store interiors and removal of certain store assets, and the impairment reserve for store assets and software write off discussed in Notes 2 and 3 of the Notes to Consolidated Financial Statements. Excluding the special charges, the increase in S,G&A, as a percentage of net sales, was primarily attributable to the loss of leverage caused by lower average stores sales related to the comparable sales decline as well as increased selling expenses associated with the opening of new domestic and international stores and our launch of the Zutopia stores. 17 19 PLAY AND MUSIC INCOME, NET Play and Music income, net increased 15% to $2.3 million in 1999, from $2.0 million in 1998, due primarily to new franchise sales, enrollment growth in both franchised and corporate owned centers and increased play product sales. FOREIGN EXCHANGE GAINS (LOSSES) Net foreign exchange losses totaled $55 thousand in 1999 as compared to net foreign exchange gains of $187 thousand in 1998. These gains and losses resulted from currency fluctuations in inter-company transactions between our United States operations and foreign subsidiaries. NET INTEREST INCOME Interest income increased to $1.8 million in 1999, from $0.8 million in 1998, due to larger average cash balances. In 1999, interest expense totaled $0.9 million, as compared to 1998 interest expense of $0.5 million. The increase in interest expense relates to our long-term debt issued in 1998, discussed in Note 7 to Consolidated Financial Statements. INCOME TAXES Gymboree's effective tax rate for 1999 was a 38.5% benefit as compared to a 37% provision for 1998. See Note 8 to Notes to Consolidated Financial Statements. 1998 COMPARED TO 1997 NET SALES Net sales increased 22% to $457.2 million for 1998, compared to $373.4 million for 1997. Sales for the 129 stores opened in 1998 contributed $49.4 million of the increase in net sales. Stores opened or expanded prior to 1998 but not qualifying as comparable stores, including the 25 stores expanded in 1998, contributed $31.3 million of the increase in net sales. Increases in comparable store net sales for 1998 contributed $3.1 million of the increase in net sales. Comparable store net sales increased 1% over 1997. Comparable store sales were adversely affected by the poor consumer acceptance of boys' apparel and an overall decline in the average price per unit of merchandise sold. GROSS PROFIT Gross profit decreased 1% to $164.5 million in 1998 from $165.8 million in 1997. As a percentage of net sales, gross profit decreased to 36.0% in 1998 from 44.4% in 1997. The decrease in gross profit as a percentage of net sales was attributable to a decline in the average price per unit of merchandise sold. Such decline was primarily due to increased average markdowns per store taken to sell excess inventory. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("S,G&A"), which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, increased as a percentage of net sales to 34.3% in 1998 compared to 30.1% in 1997. The increase in S,G&A, as a percentage of net sales, was primarily attributable to the funding of our international expansion in Europe and Canada, marketing expenses associated with direct mail and other promotional campaigns, start-up expenses for the development of the new retail concept Zutopia, and loss of leverage on store selling expenses caused by lower average store sales. Other increases in S,G&A included distribution costs due to the opening of a new distribution center in Dixon, California, closure of the existing facility located in Hayward, California, and Year 2000 related professional services. 18 20 PLAY AND MUSIC INCOME, NET Play and Music income, net increased 289% to $2.0 million in 1998, from $0.5 million in 1997, due primarily to new franchise sales, enrollment growth in both franchised and corporate owned centers and increased play product sales. FOREIGN EXCHANGE GAINS (LOSSES) Net foreign exchange gains totaled $187 thousand in 1998 as compared to a loss of $837 thousand in 1997. We entered into forward foreign exchange contracts involving inter-company transactions during fiscal 1998 that resulted in a minimal gain. In the prior year, we did not hedge these transactions. NET INTEREST INCOME Interest income decreased to $0.8 million in 1998, from $2.8 million in 1997, due to lower average cash and investment balances. In fiscal 1998 interest expense totaled $0.5 million, as a result of borrowings, while the prior year's interest expense was immaterial. INCOME TAXES Gymboree's effective tax rate for 1998 and 1997 was 37%. See Note 8 to Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES During 1999 and 1998 Gymboree satisfied its cash requirements through a combination of cash flow from operations and from permanent financing as compared to 1997 when cash requirements were met exclusively from cash flow from operations and available cash balances. Primary uses of cash during 1999 and 1998 have been to finance the construction of new domestic and international stores. Comparatively, in fiscal 1997 Gymboree used cash to purchase outstanding common stock and to increase the average store inventory levels. We also purchased land and constructed a 300,000 square foot distribution center in Dixon, California in 1997, which was refinanced with debt in 1998. The combined balances of cash, cash equivalents and investments were $40.3 million and $27.8 million at January 29, 2000 and January 30, 1999, respectively. Working capital as of January 29, 2000 was $57.2 million compared to $76.3 million at January 30, 1999. The decrease in working capital was due to a decrease in inventory. During 1999, Gymboree generated $45.2 million of cash from operations primarily reflecting a reduction of inventory of $27.0 million coupled with depreciation expense of $24.9 million that more than offset a net loss of $10.6 million. Uses of cash consisted primarily of $33.2 million for capital expenditures, related largely to the opening of 22 new Gymboree stores, the expansion of 20 existing stores and the opening of 19 Zutopia stores. During 1998, we generated $27.5 million of cash from operations, $18.6 million from the sales of investments, $12.0 million of proceeds on borrowings, and $2.5 million from the exercise of stock options. Uses of cash consisted primarily of $50.7 million for capital expenditures, related largely to the opening of 129 new stores and the expansion of 25 existing stores. As of January 29, 2000, Gymboree had an overall credit line of $50 million that may be used for issuance of commercial letters of credit and up to $8 million of standby letters of credit and up to $15 million for cash advances. As of January 29, 2000, approximately $11.4 million was available pursuant to such lines. This facility is scheduled to expire May 31, 2000. Gymboree uses these lines primarily to support letters of credit which fund its foreign sourcing of merchandise inventories. The credit facility contains certain financial covenants, which require Gymboree to maintain a minimum tangible net worth and meet certain ratios. Additionally, the facility contains restrictions on capital expenditures. As of January 29, 2000, Gymboree was not in compliance with the minimum tangible net worth covenant. The bank waived non-compliance with such covenant. 19 21 On March 23, 2000, Gymboree accepted its current bank's proposal to enter into a secured credit facility, subject to the bank's audit, approval of the transaction, and the execution and delivery of a definitive agreement with the bank. This facility will expire three years after the signing of the credit agreement. The terms of the proposal provide for an overall credit line of $60 million that may be used for issuance of commercial and standby letters of credit and cash advances up to $20 million, limited to eligible receivables and inventory. The interest rate will be based on the bank's Reference Rate or LIBOR (London Interbank Offered Rate) plus a pre-determined spread. The credit facility will be secured by a lien on merchandise inventories and other selected assets. In the event a definitive agreement is not secured, Gymboree will seek alternative debt or equity financing. During 1998, Gymboree issued two promissory notes totaling $12 million both secured by our distribution center in Dixon, California. The first note of approximately $3.1 million bears interest at 7.7%. The second note of approximately $8.9 million bears interest at 7.9%. Gymboree estimates that capital expenditures during 2000 will be between $12.0 and $15.0 million, which will primarily be used to open approximately 10 new domestic and international stores, to expand approximately 10 existing stores and update the store fronts of approximately 150 stores. We anticipate that cash generated from operations, together with our existing cash resources and funds available from current and future credit facilities, will be sufficient to satisfy our cash needs through at least fiscal 2000. SEASONALITY AND QUARTERLY FLUCTUATIONS Gymboree has historically experienced, and expects to continue to experience, seasonal fluctuations in our retail sales and net income. Historically, a disproportionate amount of our retail sales and a significant portion of our net income have been realized during the months of November and December. In anticipation of increased sales activity during these months, Gymboree hires a significant number of temporary employees to bolster the store staff. In addition, we have experienced periods of increased sales activity in early spring and early fall. If, for any reason, our sales were below seasonal norms during November and December, or during the early spring or early fall, our annual operating results could be materially and adversely affected. Historically, retail sales and net income have been weakest during the second fiscal quarter, and we expect this trend to continue. Gymboree's quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, the costs and increased overhead associated with the opening and future operation of new stores. In addition, the sales contributed by new stores, advertising and marketing expenditures, merchandise mix and timing, and level of markdowns may contribute to fluctuations in operating performance. FACTORS THAT MAY AFFECT FUTURE PERFORMANCE The discussion in this annual report contains certain forward-looking statements, including statements regarding future net sales and net income, future inventory levels, future comparable store net sales, future S,G&A expenses, future interest income, planned capital expenditures, planned store expansions and closings, international expansion and future cash needs. Such forward-looking statements, in particular, and Gymboree's business and operating results, in general, involve risks and uncertainties. Actual results may differ significantly from the results discussed in the forward-looking statements. Future operating results will depend upon many factors, including general economic conditions, levels of competition, growth in the children's apparel market, our ability to meet our financing and working capital needs, the availability of suitable new store locations, the ability to develop and successfully source new merchandise, our success in updating our brand, our ability to rebuild our historic customer base, consumer acceptance of our products, our ability to capture satisfactory margins on our product sales, our success in planning and allocating store inventory levels, the ability to hire and train qualified sales associates, our success in creating merchandise displays that attract customers and encourage them to make purchases, the level of our investment in new concepts, the integration of our management team, and the ability to successfully identify and respond to 20 22 emerging children's fashion trends and effectively monitor and control costs. There can be no assurance that we will be able to effectively realize our plans for future growth. Gymboree's sales and profitability depend upon our ability to rebuild demand by our customers for our products and services. We believe that our future success will depend in large part upon our ability to anticipate, gauge and respond in a timely manner to changing consumer demands and fashion trends and upon the appeal of our products. There can be no assurance that the demand for Gymboree's apparel or accessories will be rebuilt or that we will be able to anticipate, gauge and respond to changes in fashion trends. If demand for our apparel and accessories does not increase or if we were to misjudge fashion trends, our business, financial condition and results of operations could be materially and adversely affected. Gymboree's future profitability is critically dependent on our ability to achieve and manage potential future growth effectively. There can be no assurance that Gymboree will be successful in increasing net sales or gross profit in the future or that the rate of period-to-period net sales or gross profit growth, if any, will not continue to decline. If our operations were to continue to grow, of which there can be no assurance, there could be increasing strain on other resources, and Gymboree may experience serious operating difficulties, including difficulties in hiring, training, managing an increasing number of employees, difficulties in obtaining sufficient fabric and sourcing capacity to produce its products, problems in upgrading its management information systems and delays in product distribution shipments. There can be no assurance that Gymboree will be able to manage future growth effectively. Any failure to manage growth effectively could have a material adverse effect on our results of operations and financial position. Gymboree has operations in Europe and Canada, which expanded in 1999. As a result, our business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, foreign consumer preferences, currency fluctuations, political unrest, disruptions or delays in shipments and changes in economic conditions in countries in which we operate our stores. These factors, among others, could influence our ability to sell our products in these international markets. If any such factors were to render the conduct of business in a particular country undesirable or impractical, there could be a material and adverse effect on Gymboree's results of operations and financial position. During 1999, Gymboree opened 19 stores under our new Zutopia product line. Zutopia involves risk and uncertainties, including no prior operating history, no prior history of market acceptance, potentially higher expenses without corresponding revenue increases, impact to earnings, ability to obtain new store sites, ability to obtain adequate sources of merchandise, competition from other retailers and uncertainties generally associated with apparel retailing. In addition, Gymboree needs to support the production, merchandising and promotion of Zutopia. Our limited experience with marketing apparel to this demographic segment could materially and adversely affect our ability to successfully develop this product line. Gymboree is developing a strategy to handle the planned conversion in 2002 of the Irish punt to the Euro. 21 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Gymboree enters into forward foreign exchange contracts to hedge certain inter-company loans and inventory purchases denominated in foreign currencies (principally British pounds sterling, Canadian dollars, and Japanese yen). The term of the forward exchange contracts is generally less than 90 days. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar net cash inflow resulting from the repayment of certain inter-company loans from our foreign subsidiaries and the dollar net cash outflow resulting from inventory purchases will be adversely affected by changes in exchange rates. The table below summarizes by major currency the notional amounts and fair value of our forward foreign exchange contracts in U.S. dollars as of January 29, 2000.
NOTIONAL AMOUNT FAIR VALUE -------- ---------- (IN THOUSANDS) British pounds sterling................................. $15,681 $141 Canadian dollars........................................ 15,421 17 Japanese yen............................................ (648) (11) ------- ---- Total................................................... $30,454 $147 ======= ====
In the event Gymboree has borrowings under the line of credit, a higher interest rate would have an adverse impact on Gymboree because the interest rate is variable. 22 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets................................. 24 Consolidated Statements of Operations....................... 25 Consolidated Statements of Cash Flow........................ 26 Consolidated Statements of Stockholders' Equity............. 27 Notes to Consolidated Financial Statements.................. 28 Independent Auditors' Report................................ 38
23 25 THE GYMBOREE CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
JANUARY 29, JANUARY 30, 2000 1999 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE DATA) Current Assets: Cash and cash equivalents................................. $ 40,274 $ 27,810 Accounts receivable....................................... 4,920 7,811 Merchandise inventories................................... 47,103 74,396 Prepaid expenses and other................................ 7,382 6,957 -------- -------- Total current assets.............................. 99,679 116,974 -------- -------- Property and Equipment: Land...................................................... 995 995 Building.................................................. 8,948 8,948 Leasehold improvements.................................... 88,019 79,832 Furniture, fixtures, and equipment........................ 108,606 91,551 -------- -------- 206,568 181,326 Less accumulated depreciation and amortization............ (69,123) (46,886) -------- -------- 137,445 134,440 Other Assets................................................ 3,794 4,180 -------- -------- Total Assets...................................... $240,918 $255,594 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long term debt......................... $ 583 $ 540 Accounts payable.......................................... 18,596 21,842 Accrued liabilities....................................... 23,275 18,278 -------- -------- Total current liabilities......................... 42,454 40,660 -------- -------- Long Term Liabilities: Long term debt, net of current portion.................... 10,877 11,460 Deferred rent and other liabilities....................... 29,125 35,102 -------- -------- Total Liabilities................................. 82,456 87,222 -------- -------- Commitments and contingencies Stockholders' Equity: Common stock, including excess paid-in capital ($.001 par value: 100,000,000 shares authorized; 24,401,604 and 24,240,763 shares outstanding at January 29, 2000 and January 30, 1999, respectively)........................ 27,807 26,855 Retained earnings......................................... 130,655 141,517 -------- -------- Total stockholders' equity........................ 158,462 168,372 -------- -------- Total Liabilities and Stockholders' Equity........ $240,918 $255,594 ======== ========
See notes to consolidated financial statements 24 26 THE GYMBOREE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
AS A PERCENTAGE OF NET SALES YEAR ENDED FOR THE YEAR ENDED --------------------------------------- --------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............................ $ 437,076 $ 457,219 $ 373,440 100.0% 100.0% 100.0% Cost of goods sold, including buying and occupancy expense.............. (281,273) (292,686) (207,630) (64.4) (64.0) (55.6) --------- --------- --------- ----- ----- ----- Gross profit....................... 155,803 164,533 165,810 35.6 36.0 44.4 Selling, general and administrative expenses........................... (176,184) (157,092) (112,443) (40.2) (34.3) (30.1) Play and music income, net........... 2,324 2,013 517 0.5 0.4 0.1 --------- --------- --------- ----- ----- ----- Operating income (loss)............ (18,057) 9,454 53,884 (4.1) 2.1 14.4 Foreign exchange gains (losses)...... (55) 187 (837) (0.0) 0.0 (0.2) Net interest income.................. 877 265 2,778 0.2 0.1 0.7 --------- --------- --------- ----- ----- ----- Income (loss) before income taxes............................ (17,235) 9,906 55,825 (3.9) 2.2 14.9 Income tax benefit (expense)......... 6,635 (3,665) (20,655) 1.5 (0.8) (5.5) --------- --------- --------- ----- ----- ----- Net income (loss).................. $ (10,600) $ 6,241 $ 35,170 (2.4)% 1.4% 9.4% ========= ========= ========= ===== ===== ===== Income (loss) per share: Basic.............................. $ (0.44) $ 0.26 $ 1.45 Diluted............................ $ (0.44) $ 0.26 $ 1.41 Weighted average shares outstanding: Basic.............................. 24,315 24,164 24,302 Diluted............................ 24,315 24,227 25,000
See notes to consolidated financial statements 25 27 THE GYMBOREE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED: ----------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ----------- ----------- ----------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $(10,600) $ 6,241 $ 35,170 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................. 24,909 18,776 13,549 Impairment reserve and asset write off.................... 4,325 -- -- Non-cash compensation expenses............................ -- -- 416 Loss on disposal of property and equipment................ 949 1,794 1,510 Provision for deferred income taxes....................... (7,144) 214 2,136 Tax benefit from exercise of stock options................ -- 1,596 1,217 Change in assets and liabilities: Accounts receivable..................................... 2,891 (2,627) (848) Merchandise inventories................................. 27,031 1,263 (26,346) Prepaid expenses and other assets....................... 2,049 (2,894) (1,176) Accounts payable........................................ (3,246) (4,204) 4,097 Accrued liabilities..................................... 4,997 (3,138) 2,962 Other liabilities....................................... (922) 10,456 5,067 -------- -------- -------- Net cash provided by operating activities.......... 45,239 27,477 37,754 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................................ (33,188) (50,662) (48,964) Proceeds from sales of assets............................... -- 24 117 Sale of investments......................................... -- 18,614 63,526 Acquisition of lease rights................................. -- -- (1,788) -------- -------- -------- Net cash provided by (used in) investing activities....................................... (33,188) (32,024) 12,891 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of stock........................................... 952 2,487 8,844 Repurchase of common stock.................................. -- -- (49,646) Proceeds from (payments on) borrowings...................... (539) 12,000 -- -------- -------- -------- Net cash provided by (used in) financing activities....... 413 14,487 (40,802) -------- -------- -------- Net Increase in Cash and Cash Equivalents.......... 12,464 9,940 9,843 CASH AND CASH EQUIVALENTS: Beginning of Year........................................... 27,810 17,870 8,027 -------- -------- -------- End of Year................................................. $ 40,274 $ 27,810 $ 17,870 ======== ======== ======== OTHER CASH FLOW INFORMATION: Cash paid during the year for income taxes.................. $ 699 $ 3,561 $ 16,298 Cash paid during the year for interest...................... $ 1,058 $ 537 $ 19
See notes to consolidated financial statements 26 28 THE GYMBOREE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK AND RESTRICTED EXCESS PAID-IN CAPITAL STOCK ----------------------- DEFERRED RETAINED SHARES AMOUNT COMPENSATION EARNINGS TOTAL ----------- --------- ------------ -------- -------- (IN THOUSANDS) BALANCE AT FEBRUARY 2, 1997............. 25,324,060 $ 62,694 $(753) $ 99,992 $161,933 Issuance of common stock under stock option and purchase plans............. 613,036 8,844 8,844 Stock repurchase........................ (1,922,000) (49,646) (49,646) Tax benefit from exercise of stock options............................... 1,217 1,217 Amortization of restricted stock........ 416 416 Net income.............................. 35,170 Other comprehensive loss................ (224) -------- Comprehensive income.................. 34,946 34,946 ---------- -------- ----- -------- -------- BALANCE AT JANUARY 31, 1998............. 24,015,096 23,109 (337) 134,938 157,710 Issuance of common stock under stock option and purchase plans............. 225,667 2,487 2,487 Tax benefit from exercise of stock options............................... 1,596 1,596 Cancellation of restricted stock........ (337) 337 0 Net income.............................. 6,241 Other comprehensive income.............. 338 -------- Comprehensive income.................. 6,579 6,579 ---------- -------- ----- -------- -------- BALANCE AT JANUARY 30, 1999............. 24,240,763 26,855 -- 141,517 168,372 Issuance of common stock under stock option and purchase plans............. 160,841 952 952 Net loss................................ (10,600) Other comprehensive loss................ (262) -------- Comprehensive loss.................... (10,862) (10,862) ---------- -------- ----- -------- -------- BALANCE AT JANUARY 29, 2000............. 24,401,604 $ 27,807 $ -- $130,655 $158,462 ========== ======== ===== ======== ========
See notes to consolidated financial statements 27 29 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include The Gymboree Corporation and its wholly owned subsidiaries ("Gymboree"). All significant inter-company balances and transactions have been eliminated. Nature of the Business Gymboree is a leading specialty retailer of high quality apparel and accessories for children. Gymboree operates as one reportable segment. As of January 29, 2000, January 30, 1999, and January 31, 1998, Gymboree had 605, 564, and 435 retail stores, respectively. We also offer directed parent-child developmental play programs for children ages newborn to four years at approximately 397 franchised locations and 27 Company-operated locations. Fiscal Year Gymboree's year-end is on the Saturday closest to January 31. Fiscal years 1999, 1998 and 1997, which included 52 weeks, ended on January 29, 2000, January 30, 1999 and January 31, 1998, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash equivalents consist of highly liquid investment instruments with a maturity of three months or less, at date of purchase. Estimated Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and debt approximates their estimated fair value. Merchandise Inventories Merchandise inventories are recorded under the retail method of accounting and are stated at the lower of cost or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from approximately 3 to 10 years. Leasehold improvements are amortized over the lesser of the lease term which range from 10 to 25 years, or the estimated useful lives of the improvements. Internally developed and purchased computer software is recorded at cost and is amortized using the straight-line method based on an estimated useful life of five years. 28 30 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income Taxes Gymboree computes income taxes using the asset and liability method. Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Lease Rights Lease rights are included in other assets and are recorded at cost and amortized over 10 years or the life of the lease. Deferred Rent Many of Gymboree's operating leases contain predetermined fixed increases of the minimum rental rate during the initial lease term. For these leases, we recognize the related rental expense on a straight-line basis and record the difference between the amount charged to expense and the rent paid as deferred rent. Construction Allowance As part of our lease agreements, we receive construction allowances from landlords. These allowances offset the capital expenditures associated with the expansion or construction of stores. The construction allowances have been deferred and are amortized on a straight-line basis over the life of the lease as a reduction of rent expense. Construction allowances of $1.6 million and $10.5 million were granted in fiscal years 1999 and 1998, respectively, and are included in deferred rent and other liabilities. Foreign Currencies Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at the exchange rates effective on the balance sheet date. Translation adjustments resulting from this process are recorded as other comprehensive income. Revenues, costs of sales, expenses and other income are translated at average rates of exchange prevailing during the year. In fiscal 1999 Gymboree entered into forward foreign exchange contracts to reduce exposure to foreign currency exchange risk related to our inter-company loans, which are denominated in foreign currencies. The net gains and losses between the forward foreign exchange contracts and inter-company loans are included in net income. As of January 29, 2000, the notional amounts of Gymboree's forward foreign contracts to hedge British pounds sterling, Canadian dollars, and Japanese yen were $15.7 million, $15.4 million, and ($0.6) million, respectively. The fair value of the contracts was approximately $147 thousand as of January 29, 2000. Store Pre-opening Costs Store pre-opening costs are expensed as incurred. Play and Music Revenue Recognition Initial franchise fees for all sites sold in a territory are recognized as revenue when the franchisee has paid the initial franchise fee, has received government approval in the case of international franchises, and has completed the training program. At that time, Gymboree has provided substantially all of the initial services required by the franchise agreement. 29 31 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-Based Compensation Gymboree accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Reclassifications Certain amounts for prior years have been reclassified to conform to the 1999 presentation. Income (loss) per share Basic income (loss) per share is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period plus the dilutive effect of outstanding stock options and restricted stock. Options to purchase weighted average shares totaling 75,000 for the year ended January 29, 2000 were not included in the computation of diluted income (loss) per share because to do so would have been antidilutive. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value and is effective for Gymboree in fiscal 2001. Management does not believe that the adoption of this statement will have a significant effect on the consolidated financial statements of Gymboree. 2 IMPAIRMENT OF LONG-LIVED ASSETS During 1999, management identified 14 underperforming stores and 3 Play and Music corporate sites and established an impairment reserve equal to the carrying value of the leasehold improvements and fixtures used in the stores. Impairment of the leasehold improvements and fixtures was based on the lack of both current and expected future positive cash flows of the stores. Additionally, we wrote off software applications that were not Year 2000 compliant and did not meet our current needs. The total charges related to these items was $4.3 million and is included in selling, general and administrative expenses for 1999 within the Statements of Operations. 3 SPECIAL CHARGES During 1999, Gymboree incurred special charges of $9.2 million, $2.0 million of which is included in cost of goods sold. These charges, which primarily resulted from the implementation of a brand improvement strategy, include the accelerated depreciation of store interior assets and proprietary signage assets bearing the old trademark, expense for modifications of store interiors and removal of certain store assets, the impairment reserve for store assets and software write off discussed in Note 2, and the disposal of inventory which did not meet Gymboree's new fashion direction. 30 32 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4 LEASES Gymboree leases its store locations, corporate headquarters, foreign distribution centers and certain fixtures and equipment under operating leases. The leases expire at various dates through the year 2023. Store leases typically provide for payment by Gymboree of operating expenses, real estate taxes and additional rent based on a percentage of sales if a specified sales target is exceeded. Furthermore, a majority of the leases allow us to vacate after a stipulated period. Future minimum lease payments under operating leases at January 29, 2000 are as follows:
(IN THOUSANDS) Year 2000.............................................. $ 43,720 2001................................................. 41,828 2002................................................. 41,272 2003................................................. 40,354 2004................................................. 38,833 Later years............................................ 145,998 -------- Total minimum lease commitments.............. $352,005 ========
Rent expense for all operating leases totaled $58.2 million, $46.7 million and $36.9 million, in 1999, 1998 and 1997 respectively, which includes percentage rent expense and other lease required expenses of $18.1 million, $15.4 million and $12.7 million for 1999, 1998 and 1997 respectively. 5 LINES OF CREDIT As of January 29, 2000, Gymboree had an overall credit line of $50 million that may be used for issuance of commercial letters of credit and up to $8 million of standby letters of credit and up to $15 million for cash advances. As of January 29, 2000, approximately $11.4 million was available pursuant to such lines. This facility is scheduled to expire May 31, 2000. Gymboree uses these lines primarily to support letters of credit which fund its foreign sourcing of merchandise inventories. The credit facility contains certain financial covenants, which require Gymboree to maintain a minimum tangible net worth and meet certain ratios. Additionally, the facility contains restrictions on capital expenditures. As of January 29, 2000, Gymboree was not in compliance with the minimum tangible net worth covenant. The bank waived non-compliance with such covenant. On March 23, 2000, Gymboree accepted its current bank's proposal to enter into a secured credit facility, subject to the bank's audit, approval of the transaction, and the execution and delivery of a definitive agreement with the bank. This facility will expire three years after the signing of the credit agreement. The terms of the proposal provide for an overall credit line of $60 million that may be used for issuance of commercial and standby letters of credit and cash advances up to $20 million, limited to eligible receivables and inventory. The interest rate will be based on the bank's Reference Rate or LIBOR (London Interbank Offered Rate) plus a pre-determined spread. The credit facility will be secured by a lien on merchandise inventories and other selected assets. In the event a definitive agreement is not secured, Gymboree will seek alternative debt or equity financing. 31 33 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6 ACCRUED LIABILITIES Accrued liabilities consist of the following:
JANUARY 29, JANUARY 30, 2000 1999 ----------- ----------- (IN THOUSANDS) Employee compensation................................. $ 6,445 $ 5,623 Store operating expenses and other.................... 7,724 4,263 Store credits and gift certificates................... 4,284 3,103 Sales taxes........................................... 1,292 2,113 Income taxes.......................................... 3,175 1,965 Percentage rent....................................... 355 1,211 ------- ------- Total....................................... $23,275 $18,278 ======= =======
7 LONG TERM DEBT During fiscal 1998, Gymboree issued two promissory notes totaling $12 million both secured by our distribution center in Dixon, California. The first note of approximately $3.1 million bears interest at 7.7%. The second note of approximately $8.9 million bears interest at 7.9%. Interest on the promissory notes is payable monthly. Aggregate principal payments required under the two notes are as follows:
(IN THOUSANDS) 2000................................................... $ 583 2001................................................... 630 2002................................................... 681 2003................................................... 736 2004................................................... 795 Later years............................................ 8,035 ------- Total........................................ $11,460 =======
The promissory notes contain certain financial covenants, which require Gymboree to maintain a minimum tangible net worth and meet certain ratios. As of January 29, 2000, Gymboree was not in compliance with the minimum fixed charge ratio covenant. The bank waived non-compliance with such covenant. 32 34 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8 INCOME TAXES The provision (benefit) for income taxes consists of the following:
1999 1998 1997 ------- ------ ------- (IN THOUSANDS) Current: Federal.............................................. $ (32) $3,073 $14,996 State taxes.......................................... 315 148 3,523 Foreign.............................................. 226 230 -- ------- ------ ------- Total current................................ 509 3,451 18,519 ------- ------ ------- Deferred: Federal.............................................. (5,787) 62 1,796 State................................................ (1,357) 152 340 ------- ------ ------- Total deferred............................... (7,144) 214 2,136 ------- ------ ------- Total provision (benefit).................... $(6,635) $3,665 $20,655 ======= ====== =======
A reconciliation of the statutory federal income tax rate with Gymboree's effective income tax rate is as follows:
1999 1998 1997 ------- ------ ------- Statutory federal rate................................. 35.0% 35.0% 35.0% State income taxes, net of income tax benefit.......... 4.0 4.0 4.0 Tax exempt interest.................................... -- -- (1.0) Other.................................................. (0.5) (2.0) (1.0) ------- ------ ------- Effective tax rate..................................... 38.5% 37.0% 37.0% ======= ====== =======
33 35 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carry-forwards, which give rise to deferred tax assets and liabilities, are as follows:
JANUARY 29, JANUARY 30, 2000 1999 ----------- ----------- (IN THOUSANDS) Deferred tax assets: Uniform capitalization costs.............................. $ 850 $ 1,292 Accrued reserves.......................................... 2,715 1,267 State taxes............................................... -- 187 Deferred rent............................................. 4,288 3,132 Net operating loss carryovers............................. 4,471 -- Other..................................................... 1,301 3,126 ------- -------- 13,625 9,004 ------- -------- Deferred tax liability: Prepaid expenses.......................................... (346) (1,109) State taxes............................................... (313) -- Fixed asset basis differences............................. (7,999) (10,067) Other..................................................... -- (5) ------- -------- (8,658) (11,181) ------- -------- Net deferred tax assets (liabilities)....................... $ 4,967 $ (2,177) ======= ========
Current deferred tax assets of $3.9 million and $2.9 million were included in prepaid expenses and other as of January 29, 2000 and January 30, 1999, respectively. Long-term deferred tax assets of $1.1 million were included in other assets at January 29, 2000 and long-term deferred tax liabilities of $5.1 million were included in deferred rent and other liabilities at January 30, 1999. As of January 29, 2000, Gymboree has federal and state net operating loss carryovers of approximately $11.1 million and $9.7 million, respectively. These net operating loss carryovers will expire between 2004 and 2019. Gymboree also has a federal AMT credit of approximately $1.1 million which does not expire. 9 STOCKHOLDER'S EQUITY STOCK PLANS Stock Option Plans Gymboree's 1983 Incentive Stock Option Plan (the "1983 Plan") and 1993 Stock Option Plan (the "1993 Plan") provide for grants to team members of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and for grants of non-statutory stock options and stock purchase rights to team members, consultants and non-employee directors of Gymboree. We have reserved a total of 3,600,000 shares of common stock for issuance under the 1983 Plan and 6,025,000 shares of common stock for issuance under the 1993 Plan, which includes the additional 2,000,000 shares approved during the year ended January 29, 2000. Options granted pursuant to the plans have been granted at exercise prices equal to the fair market value of our common stock on the date of grant. The options have a term of either five or ten years and generally vest over a four year period. No further options may be granted under the 1983 Plan. There were 1,612,209 and 70,095 shares available for the grant of options under the 1993 Plan at January 29, 2000 and January 30, 1999, respectively. 34 36 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following summarizes all stock option transactions for the three years ended January 29, 2000:
WEIGHTED SHARES AVERAGE PRICE OUTSTANDING PER SHARE ----------- ------------- (SHARES IN THOUSANDS) Balance, February 2, 1997........................... 1,926 $19.51 Options granted................................... 1,299 24.55 Options exercised................................. (577) 13.67 Options canceled.................................. (323) 24.42 ----- ------ Balance, January 31, 1998........................... 2,325 $22.11 Options granted................................... 1,610 17.52 Options exercised................................. (131) 13.25 Options canceled.................................. (938) 21.60 ----- ------ Balance, January 30, 1999........................... 2,866 $20.16 Options granted................................... 1,396 8.46 Options exercised................................. (41) 3.45 Options canceled.................................. (913) 19.15 ----- ------ Balance, January 29, 2000........................... 3,308 $15.57 ===== ======
The following table summarizes information about stock options outstanding at January 29, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - --------------------------------------------------- (VESTED) WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE NUMBER AVERAGE EXERCISABLE NUMBER LIFE EXERCISE EXERCISABLE EXERCISE PRICES OF SHARES (IN YEARS) PRICE AT 1/29/00 PRICE - ---------------- --------- ---------- -------- ----------- -------- $0.17 to $8.25 799,030 9.10 $ 6.72 158,738 $ 6.81 $8.38 to $9.00 866,324 9.07 $ 8.98 177,687 $ 8.96 $9.13 to $24.00 754,950 6.48 $19.87 559,098 $20.93 $24.13 to $36.63 887,401 7.50 $26.31 522,172 $26.42 - ---------------- --------- ---- ------ --------- ------ $0.17 to $36.63 3,307,705 8.06 $15.57 1,417,695 $19.87 ================ ========= ==== ====== ========= ======
1993 Employee Stock Purchase Plan We have reserved a total of 600,000 shares of common stock for issuance under the 1993 Employee Stock Purchase Plan (the "Purchase Plan"). The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable purchase period, whichever is lower. Unless terminated earlier, the Purchase Plan will terminate in 2013. There were 120,040 and 94,232 shares issued under the Purchase Plan in 1999 and 1998, respectively. Restricted Stock In 1994, we granted 100,000 shares of our common stock to our former President and Chief Executive Officer at an aggregate purchase price of $50.00. The aggregate fair market value of the shares, as measured by the stock price on the vesting commencement date, totaled $1,937,500. The shares, which were issued pursuant to the 1993 Plan, were subject to a repurchase option that originally lapsed over a period of 60 months. The difference between the purchase price and the aggregate fair market value was being amortized over this 60-month period and was recognized as compensation expense totaling $416,000 in 1997. 35 37 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Upon the resignation of this individual in fiscal 1997, the repurchase option was cancelled and no compensation expense was recognized in 1999 or 1998. Additional Stock Plan Information Gymboree applies APB Opinion No. 25 and related interpretations in accounting for our three stock-based compensation plans, described above. Accordingly, no compensation expense has been recognized for our stock option plans and our employee stock purchase plan. Compensation expense has been charged against income for our restricted stock plan. Had compensation expense for our stock option plans and the Purchase Plan been determined based on the fair value at the grant dates for awards under these plans, consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," our net income (loss) and income (loss) per share would have been the pro forma amounts indicated below:
YEAR ENDED ----------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) As reported..................................... $(10,600) $6,241 $35,170 Pro forma....................................... (14,586) 1,805 32,210 Basic income (loss) per share As reported..................................... $ (0.44) $ 0.26 $ 1.45 Pro forma....................................... (0.60) 0.07 1.33 Diluted income (loss) per share As reported..................................... $ (0.44) $ 0.26 $ 1.41 Pro forma....................................... (0.60) 0.07 1.29
The weighted average fair value of options granted during 1999, 1998, and 1997 were $8.43, $8.53, and $10.29, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
YEAR ENDED ----------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ----------- ----------- ----------- (IN THOUSANDS) Expected dividend rate............................ 0.0% 0.0% 0.0% Expected volatility............................... 73.5% 70.9% 54.4% Risk-free interest rate........................... 5.3% 5.1% 6.0% Expected lives (yrs.)............................. 3.0 3.0 3.0
Stockholder Rights Plan In March 1997, Gymboree adopted a Stockholder Rights Plan (the "Plan"). The Plan entails a dividend of one right for each outstanding share of Gymboree's common stock. The rights are represented by and traded with Gymboree's common stock. There are no separate certificates or markets for the rights. The rights do not become exercisable or trade separately from the common stock unless 17.5% or more of the common stock of Gymboree has been acquired, or after a tender or exchange offer is made for 17.5% or greater ownership of Gymboree's common stock. Should the rights become exercisable, each right will entitle the holder thereof to buy 1/1000th of a share of our Series A Preferred Stock at an exercise price of $125. Each 1/1000th of a share of the new Series A Preferred Stock will essentially be the economic equivalent of one share of common stock. 36 38 THE GYMBOREE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Under certain circumstances, the rights "flip-in" and become rights to buy Gymboree's common stock at a 50% discount. Under certain other circumstances, the rights "flip-over" and become rights to buy an acquirer's common stock at a 50% discount. The rights may be redeemed by Gymboree for $0.01 per right at any time on or prior to the fifth day (or a later date as determined by the Board of Directors) following the first public announcement by Gymboree of the acquisition of beneficial ownership of 17.5% of our common stock. Stock Repurchase In fiscal 1997, common stock repurchase programs were authorized by the Board of Directors whereby we could buy back up to $60 million of our common stock. During fiscal 1997, we repurchased 1,922,000 shares for an aggregate amount of $49,646,000. During fiscal 1999 and 1998, there were no shares repurchased by Gymboree. 10 401(K) PLAN Gymboree maintains a voluntary defined contribution 401(k) profit sharing plan (the "Plan") covering all team members who have met certain service and eligibility requirements. Employees may elect to contribute up to 20% of their compensation to the Plan, not to exceed the dollar limit set by law. Gymboree matches $0.50 to the Plan for each $1.00 contributed by a team member, up to a maximum Gymboree contribution of $500 per team member per year. Our matching contributions to the Plan were $217,000, $170,000, and $176,000 in 1999, 1998, and 1997, respectively. 11 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The quarterly financial information presented below reflects all adjustments which, in the opinion of our management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.
1999 QUARTER ENDED ---------------------------------------------------------- MAY 1, JULY 31, OCTOBER 30, JANUARY 29, 1999 1999 1999 2000 ---------- ---------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STORE DATA) Net sales...................................... $125,711 $ 99,922 $107,235 $104,208 Gross profit................................... 49,187 29,692 41,111 35,813 Operating income (loss)........................ 7,394 (15,008) (1,140) (9,303) Net income (loss).............................. 4,785 (9,420) (667) (5,298) Basic (loss) income per share.................. $ 0.20 $ (0.39) $ (0.03) $ (0.22) Diluted (loss) income per share................ $ 0.20 $ (0.39) $ (0.03) $ (0.22) Stores at end of period........................ 584 588 602 605
1998 QUARTER ENDED ------------------------------------------------------- MAY 2, AUGUST 1, OCTOBER 31, JANUARY 30, 1998 1998 1998 1999 --------- ---------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STORE DATA) Net sales...................................... $103,106 $ 99,789 $113,991 $140,333 Gross profit................................... 41,479 33,334 41,094 48,626 Operating income (loss)........................ 6,084 (1,345) (430) 5,145 Net income (loss).............................. 4,148 (831) (273) 3,197 Basic income (loss) per share.................. $ 0.17 $ (0.03) $ (0.01) $ 0.13 Diluted income (loss) per share................ $ 0.17 $ (0.03) $ (0.01) $ 0.13 Stores at end of period........................ 464 495 548 564
37 39 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of The Gymboree Corporation: We have audited the accompanying consolidated balance sheets of The Gymboree Corporation and subsidiaries ("Gymboree") as of January 29, 2000 and January 30, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 29, 2000. These financial statements are the responsibility of Gymboree's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Gymboree Corporation and subsidiaries as of January 29, 2000 and January 30, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP San Francisco, California April 12, 2000 38 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the sections entitled "Election of Directors -- Nominees" and "Additional Information -- Compliance with Section 16(a) of the Securities Exchange Act" in the 1999 Proxy Statement. See also Item 1. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the sections entitled "Election of Directors -- Compensation of Directors" and "Additional Information -- Executive Compensation" in the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the section entitled "Additional Information -- Security Ownership" in the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the sections entitled "Additional Information -- Employment Contracts and Termination of Employment and Change-in-Control Arrangements" and "Additional Information -- Compensation Committee Interlocks and Insider Participation" in the 1999 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS The following documents are filed as a part this Annual Report on Form 10-K. Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999 Consolidated Statements of Operations for each of the three fiscal years ended January 29, 2000 Consolidated Statements of Cash Flows for the three fiscal years ended January 29, 2000 Consolidated Statements of Stockholders' Equity for the three fiscal years ended January 29, 2000 Notes to Consolidated Financial Statements Independent Auditors' Report 39 41 (A)(2) FINANCIAL STATEMENT SCHEDULES Financial statement schedules have been omitted because they are not required or are not applicable. (A)(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Restated Certificate of Incorporation of Registrant.(1) 3.2 Bylaws of Registrant.(1) 3.3 Amended and Restated Bylaws of Registrant.(11) 4.1 Article III of Restated Certificate of Incorporation of Registrant (See Exhibits 3.1).(1) 4.2 Form of certificate for Common Stock.(1) 10.1 1983 Incentive Stock Option Plan, with form of stock Option Agreement.(1) 10.2 1993 Stock Option Plan, with form of Stock Option Agreement.(4) 10.3 1993 Employee Stock Purchase Plan.(1) 10.4 Amended Line of Credit Agreement with Bank of America dated October 27, 1995.(3) 10.5 Line of Credit Agreement with CoreStates Bank dated August 2, 1994.(2) 10.6 Amended Lease Agreement for 700 Airport Blvd., Suite 200, Burlingame, California.(2) 10.7 Amended Lease Agreement for distribution center.(3) 10.8 California Uniform Franchise Offering Circular, including form of Franchise Agreement.(1) 10.11 Restricted Stock Purchase Agreement with Nancy J. Pedot.(2) 10.12 Lease Agreement for 770 Airport Blvd., Burlingame, CA.(5) 10.13 Deferred Compensation Agreement.(5) 10.14 Lease Agreement for Bays 140-141, Shannon Free Zone, Shannon, Ireland, dated May 6, 1997.(6) 10.15 Lease Agreement for 111 Anza Blvd., Burlingame, CA dated January 8, 1998.(6) 10.16 Amendment No. 1 to the Amended and Restated Line of Credit Agreement with Bank of America, dated July 17, 1997.(6) 10.17 Amendment No. 2 to the Amended and Restated Line of Credit Agreement with Bank of America, dated August 11, 1997.(6) 10.18 Amendment No. 3 to the Amended and Restated Line of Credit Agreement and Waiver with Bank of America, dated January 9, 1998.(6) 10.19 Amendment No. 4 to the Amended and Restated Line of Credit Agreement with Bank of America, dated January 30, 1998.(6) 10.20 Amendment No. 5 to the Amended and Restated Line of Credit Agreement with Bank of America, dated March 9, 1998.(6) 10.21 Amendment No. 6 to Amended and Restated Line of Credit Agreement with Bank of America, dated March 9, 1998.(6) 10.22 Acquisition and Development Agreement for Dixon, California Distribution Facility with Carl D. Panattoni and Wickland Properties, dated November, 1996.(6) 10.23 Standard Form of Contractor Agreement with DPR Construction, Inc. for construction of Dixon, California Distribution Facility dated May 5, 1997.(6) 10.24 Amendment No. 7 to the Amended and Restated Line of Credit Agreement with Bank of America, dated June 26, 1998.(7) 10.25 Amendment No. 8 to the Amended and Restated Line of Credit Agreement with Bank of America, dated August 14, 1998.(7)
40 42
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.26 Management Change of Control Plan.(8) 10.27 Management Severance Plan.(8) 10.28 Term Loan and Security Agreement with Transamerica Equipment Financial Services, Inc., dated December 28, 1998.(10) 10.29 Commitment Letter for the Amended and Restated Line of Credit Agreement with Bank of America, dated March 11, 1999.(10) 10.31 Amended 1993 Stock Option Plan, with form of Stock Option Agreement, dated March 8, 1999.(9) 10.32 Employee Benefit Plan Registration Statement, dated March 11, 1999.(9) 10.33 Credit Agreement with Bank of America, dated August 25, 1999.(11) 11.1 Statement re Computation of Income Per Share. 13.1 1999 Annual Report to Stockholders. 21.1 Subsidiaries of the Registrant. 23.1 Independent Auditors' Consent. 24.1 Power of Attorney (included in Part IV of this Form 10-K under the caption "Signatures"). 27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 filed with the Commission on February 18, 1993 (File No. 33-58322), as amended. (2) Incorporated by reference to the Registrant's 1994 Annual Report on Form 10-K filed with the Commission on April 24, 1995. (3) Incorporated by reference to the Registrant's 1995 Annual Report on Form 10-K filed with the Commission on May 2, 1996. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-1 filed with the Commission on February 18, 1993 (File No. 33-58322), as amended by numbers 33-60310, 33-90452, 33-94594 and 333-10811. (5) Incorporated by reference to the Registrant's 1996 Annual Report on Form 10-K filed with the Commission on May 5, 1997. (6) Incorporated by reference to the Registrant's 1997 Annual Report on Form 10-K filed with the Commission on April 20, 1998. (7) Incorporated by reference to the Registrant's August 1, 1998 Quarterly Report on Form 10-Q ("1998 Q2 10-Q") filed with the Commission on September 11, 1998. (8) Incorporated by reference to the Registrant's October 31, 1998 Quarterly Report on Form 10-Q ("1998 Q3 10-Q") filed with the Commission on December 21, 1998. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-8 filed with the Commission on March 11, 1999 (File No. 333-74269). (10) Incorporated by reference to the Registrant's 1998 Annual Report on Form 10-K filed with the Commission on April 26, 1999. (11) Incorporated by reference to the Registrant's July 31, 1999 Quarterly Report on Form 10-Q ("1999 Q2 10-Q") filed with the Commission on September 14, 1999 and the Registrant's Form 8-K filed with the Commission on September 8, 1999. (B) REPORTS ON FORM 8-K None. 41 43 THE GYMBOREE CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE GYMBOREE CORPORATION April 27, 2000 By: /s/ STUART G. MOLDAW ------------------------------------ Stuart G. Moldaw Chief Executive Officer and Chairman of the Board of Directors POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT: That the undersigned officers and directors of Gymboree Corporation, a Delaware corporation, do hereby constitute and appoint Stuart Moldaw the lawful attorney and agent, with power and authority to do any and all acts and things and to execute any and all instruments which said attorney and agent determine may be necessary or advisable or required to enable said corporation to comply with the Securities Act, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Form 10-K. Without limiting the generality of the foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Form 10-K, to any and all amendments, and supplements to this Form 10-K, to any and all instruments or documents filed as part of or in conjunction with this Form 10-K or amendments or supplements thereof, and each of the undersigned hereby ratifies and confirms all that said attorney and agent shall do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ STUART G. MOLDAW Chief Executive Officer and Chairman of April 27, 2000 - --------------------------------------------- the Board of Directors Stuart G. Moldaw /s/ LAWRENCE H. MEYER Senior Vice President and Chief April 27, 2000 - --------------------------------------------- Financial Officer (Principal financial Lawrence H. Meyer and accounting officer of the registrant) /s/ WALTER F. LOEB Director April 27, 2000 - --------------------------------------------- Walter F. Loeb /s/ BARBARA L. RAMBO Director April 27, 2000 - --------------------------------------------- Barbara L. Rambo /s/ ALAN R. SCHLESINGER Director April 27, 2000 - --------------------------------------------- Alan R. Schlesinger /s/ DEBORAH A. SORONDO Director April 27, 2000 - --------------------------------------------- Deborah A. Sorondo /s/ WILLIAM U. WESTERFIELD Director April 27, 2000 - --------------------------------------------- William U. Westerfield
42 44 THE GYMBOREE CORPORATION EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Certificate of Incorporation of Registrant.(1) 3.2 Bylaws of Registrant.(1) 3.3 Amended and Restated Bylaws of Registrant.(11) 4.1 Article III of Restated Certificate of Incorporation of Registrant (See Exhibits 3.1).(1) 4.2 Form of certificate for Common Stock.(1) 10.1 1983 Incentive Stock Option Plan, with form of stock Option Agreement.(1) 10.2 1993 Stock Option Plan, with form of Stock Option Agreement.(4) 10.3 1993 Employee Stock Purchase Plan.(1) 10.4 Amended Line of Credit Agreement with Bank of America dated October 27, 1995.(3) 10.5 Line of Credit Agreement with CoreStates Bank dated August 2, 1994.(2) 10.6 Amended Lease Agreement for 700 Airport Blvd., Suite 200, Burlingame, California.(2) 10.7 Amended Lease Agreement for distribution center.(3) 10.8 California Uniform Franchise Offering Circular, including form of Franchise Agreement.(1) 10.11 Restricted Stock Purchase Agreement with Nancy J. Pedot.(2) 10.12 Lease Agreement for 770 Airport Blvd., Burlingame, CA.(5) 10.13 Deferred Compensation Agreement.(5) 10.14 Lease Agreement for Bays 140-141, Shannon Free Zone, Shannon, Ireland, dated May 6, 1997.(6) 10.15 Lease Agreement for 111 Anza Blvd., Burlingame, CA dated January 8, 1998.(6) 10.16 Amendment No. 1 to the Amended and Restated Line of Credit Agreement with Bank of America, dated July 17, 1997.(6) 10.17 Amendment No. 2 to the Amended and Restated Line of Credit Agreement with Bank of America, dated August 11, 1997.(6) 10.18 Amendment No. 3 to the Amended and Restated Line of Credit Agreement and Waiver with Bank of America, dated January 9, 1998.(6) 10.19 Amendment No. 4 to the Amended and Restated Line of Credit Agreement with Bank of America, dated January 30, 1998.(6) 10.20 Amendment No. 5 to the Amended and Restated Line of Credit Agreement with Bank of America, dated March 9, 1998.(6) 10.21 Amendment No. 6 to Amended and Restated Line of Credit Agreement with Bank of America, dated March 9, 1998.(6) 10.22 Acquisition and Development Agreement for Dixon, California Distribution Facility with Carl D. Panattoni and Wickland Properties, dated November, 1996.(6) 10.23 Standard Form of Contractor Agreement with DPR Construction, Inc. for construction of Dixon, California Distribution Facility dated May 5, 1997.(6) 10.24 Amendment No. 7 to the Amended and Restated Line of Credit Agreement with Bank of America, dated June 26, 1998.(7) 10.25 Amendment No. 8 to the Amended and Restated Line of Credit Agreement with Bank of America, dated August 14, 1998.(7) 10.26 Management Change of Control Plan.(8)
43 45
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.27 Management Severance Plan.(8) 10.28 Term Loan and Security Agreement with Transamerica Equipment Financial Services, Inc., dated December 28, 1998.(10) 10.29 Commitment Letter for the Amended and Restated Line of Credit Agreement with Bank of America, dated March 11, 1999.(10) 10.31 Amended 1993 Stock Option Plan, with form of Stock Option Agreement, dated March 8, 1999.(9) 10.32 Employee Benefit Plan Registration Statement, dated March 11, 1999.(9) 10.33 Credit Agreement with Bank of America, dated August 25, 1999.(11) 11.1 Statement re Computation of Income Per Share. 13.1 1999 Annual Report to Stockholders. 21.1 Subsidiaries of the Registrant. 23.1 Independent Auditors' Consent. 24.1 Power of Attorney (included in Part IV of this Form 10-K under the caption "Signatures"). 27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 filed with the Commission on February 18, 1993 (File No. 33-58322), as amended. (2) Incorporated by reference to the Registrant's 1994 Annual Report on Form 10-K filed with the Commission on April 24, 1995. (3) Incorporated by reference to the Registrant's 1995 Annual Report on Form 10-K filed with the Commission on May 2, 1996. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-1 filed with the Commission on February 18, 1993 (File No. 33-58322), as amended by numbers 33-60310, 33-90452, 33-94594 and 333-10811. (5) Incorporated by reference to the Registrant's 1996 Annual Report on Form 10-K filed with the Commission on May 5, 1997. (6) Incorporated by reference to the Registrant's 1997 Annual Report on Form 10-K filed with the Commission on April 20, 1998. (7) Incorporated by reference to the Registrant's August 1, 1998 Quarterly Report on Form 10-Q ("1998 Q2 10-Q") filed with the Commission on September 11, 1998. (8) Incorporated by reference to the Registrant's October 31, 1998 Quarterly Report on Form 10-Q ("1998 Q3 10-Q") filed with the Commission on December 21, 1998. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-8 filed with the Commission on March 11, 1999 (File No. 333-74269). (10) Incorporated by reference to the Registrant's 1998 Annual Report on Form 10-K filed with the Commission on April 26, 1999. (11) Incorporated by reference to the Registrant's July 31, 1999 Quarterly Report on Form 10-Q ("1999 Q2 10-Q") filed with the Commission on September 14, 1999 and the Registrant's Form 8-K filed with the Commission on September 8, 1999. 44 EX-11.1 2 EXHIBIT 11.1 1 EXHIBIT 11.1 THE GYMBOREE CORPORATION COMPUTATION OF INCOME (LOSS) PER SHARE
FISCAL YEAR ENDED ----------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net Income (Loss)......................................... $(10,600) $ 6,241 $35,170 ======== ======= ======= Weighted average number of shares of Common Stock outstanding during the period: Common Stock.............................................. 24,315 24,164 24,302 Add incremental shares from assumed exercise of stock options(1)........................................... -- 63 698 -------- ------- ------- Weighted average common and common equivalent shares outstanding............................................. 24,315 24,227 25,000 ======== ======= ======= Basic Income (Loss) Per Share............................. $ (0.44) $ 0.26 $ 1.45 ======== ======= ======= Diluted Income (Loss) Per Share........................... $ (0.44) $ 0.26 $ 1.41 ======== ======= =======
- --------------- (1) Options to purchase weighted average shares totaling 75 for the 52 weeks ended January 29, 2000 were not included in the computation of diluted income (loss) per share because to do so would have been antidilutive. EX-13.1 3 EXHIBIT 13.1 1 EXHIBIT 13.1 To our Stockholders, 1999 was a difficult year for Gymboree. We look forward in the coming year to correcting the false starts of the past year, and re-establishing our core customer base and rebuilding our profitability. We feel confident that our current strategies are correct and the improved results will be seen in the third and fourth quarters of 2000. I'd like to review the developments of the past year, and outline for you our strategy going forward. Our historic model is familiar to many of you. We created lines of coordinated items for each age range and gender, delivered these lines on a regular basis to create "events" in store, displayed the items together, marked them down on a timed basis, and repeated the process through the years. During 1999, we altered our historic model, and we made some mis-steps, in particular reducing merchandise inventories well below historic levels. By doing so, we lost the benefit of profitable markdown sales. While we believe our experiences in 1999 taught us more about our customers' taste for fashion, we were not satisfied with our sales volume. We are in the process of reinstating the majority of our old merchandising practices. We put in place a new General Merchandise Manager, Lisa Harper, a Gymboree veteran who understands our customer very intimately, who understands that our customers want coordinated outfits, want unique Gymboree details and colors, and have a keen sense of value. We plan to return to the historic delivery model, to create excitement among customers, and give us a predictable "lift" in sales volume. Importantly, the all-at-once first markdown of a line will give us another event in store, and another predictable lift in profitable sales volume. Although our retail operations stumbled in 1999, our Play & Music business expanded into new territories when we sold master franchise agreements in the United Kingdom, Ireland, and Puerto Rico. Further, we expanded our curriculum by adding music classes, designed to interest and challenge children to appreciate different styles of music and to enhance their mental and physical development. We enjoyed profits from the Play & Music business in excess of $2.3 million, our best year yet. I feel a great sense of responsibility for our stockholders, our customers and our team members. As many of you know, I am one of the founders of Gymboree and an early investor. I watched proudly as the chain expanded from a few stores in California to a national and now international presence. When I looked at the state of the business at the end of 1999, I felt I had to take a more active role charting the right course. I took on responsibility as the Chief Executive Officer determined that our people and our processes will be successful. We have a strong brand that historically delivered unique merchandise, quality and fun for our customers, profits for our shareholders, and a great environment for our team members. As we re-institute our profitable merchandise strategies in our 605 stores, we believe we will see a return of sales increases and profits during the second half of the current year. We believe that with your support we will once again be the market leader in quality, innovative children's apparel. We are looking forward to reclaiming our place in the lives of the young families we serve, and rebuilding the stockholder value inherent in Gymboree. Stuart G. Moldaw Chairman and Chief Executive Officer 2 Corporate Profile The Gymboree Corporation is a leading specialty retailer of high quality apparel and accessories for children. As of January 29, 2000, Gymboree operated 605 stores, including 555 stores in the United States, 19 stores in Canada and 31 in Europe, as well as an online store at www.gymboree.com. Our apparel is characterized by child-appropriate, fashionable colors and prints, complex embellishment, comfort, functionality and durability. Gymboree also offers directed parent-child developmental play programs for children ages newborn to 4 years old at more than 420 franchised and Gymboree-operated locations. GYMBOREE [LOGO] FINANCIAL HIGHLIGHTS (In thousands, except stores and per share amounts)
Fiscal Year ------------------------------------------------------------- 1999 1998 1997 --------- --------- --------- OPERATING RESULTS: Net sales $ 437,076 $ 457,219 $ 373,440 Operating income (loss) (18,057) 9,454 53,884 Net income (loss) (10,600) 6,241 35,170 Net income (loss) as a % of sales -2.4% 1.4% 9.4% Diluted income (loss) per share $ (0.44) $ 0.26 $ 1.41 BALANCE SHEET DATA: Working capital $ 57,225 $ 76,314 $ 71,590 Total assets 240,918 255,594 229,200 Long term debt 10,877 11,460 -- Total stockholders' equity $ 158,462 $ 168,372 $ 157,710 STORES OPEN AT YEAR END: 605 564 435
3 CORPORATE INFORMATION HEADQUARTERS The Gymboree Corporation 700 Airport Boulevard Burlingame, CA 94010-1912 Telephone: 650-579-0600 EUROPEAN OFFICE Gymboree First Floor Office Suite Stonecroft House, Ervington Court. Meridian Business Park Leicester LE3 2Wl England Telephone: 44-116-282-7400 WEBSITE www.gymboree.com NORTH AMERICAN GYMBOREE STORES 1-800-558-9885 ZUTOPIA STORES 1-877-DO-YOU-ZU GYMBOREE PLAY & MUSIC 1-800-520-PLAY 4 BOARD OF DIRECTORS Walter Loeb Director Stuart G. Moldaw Chairman of the Board and Chief Executive Officer Barbara Rambo Director Alan R. Schlesinger Director Deborah A. Sorondo Director William U. Westerfield Director OFFICERS Stuart G. Moldaw Chairman of the Board and Chief Executive Officer Lisa Harper Senior Vice President, General Merchandise Manager Lawrence H. Meyer Senior Vice President, Chief Financial Officer and Corporate Secretary Kenneth F. Meyers Senior Vice President, Store Operations and Human Resources Edward Wong Senior Vice President, Supply Chain and Technology STOCKHOLDERS INFORMATION ANNUAL MEETING Stockholders are invited to attend our annual meeting at 8:30 a.m. on Friday, June 2, 2000 at our corporate offices, 700 Airport Boulevard, Burlingame, California, in the 4th floor conference room. COMMON STOCK TRADING Common stock of The Gymboree Corporation is traded on the NASDAQ National Market System under the symbol GYMB.
FISCAL 1999 HIGH LOW ----- ---- 1st Quarter 12.19 6.50 2nd Quarter 13.88 4.88 3rd Quarter 7.63 4.75 4th Quarter 7.50 4.63
As of April 12, 2000, there were approximately 810 stockholders of record, excluding stockholders whose stock is held in the nominee or street name by brokers. 5 INDEPENDENT AUDITORS Deloitte & Touche LLP 50 Fremont Street San Francisco, CA 94105 Telephone: 415-247-4000 GENERAL COUNSEL Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 Telephone: 650-493-9300 REGISTRAR AND TRANSFER AGENT Inquiries from our stockholders regarding address changes and lost certificates should be directed to: Fleet National Bank c/o Equiserve P.O. Box 8040 Boston, MA 02266 Telephone: 1-800-733-5001 INVESTOR RELATIONS Copies of The Gymboree Corporation's 1999 Annual Report/Form 10-K and Form 10-Q are available from: The Gymboree Corporation Investor Relations 700 Airport Boulevard, Suite 200 Burlingame, CA 94010 Or through our website: www.gymboree.com ZUTOPIA [LOGO] GYMBOREE PLAY & MUSIC [LOGO] GYMBOREE [LOGO] (c) 2000 The Gymboree Corporation EX-21.1 4 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Gymboree Manufacturing, Inc., a California corporation. Gym-mark, Inc., a California corporation. The Gymboree Stores, Inc., a California corporation. Gymboree Retail Stores, Inc., a California corporation. Gymboree Logistics Partnership, a California General partnership, wholly owned by The Gymboree Stores, Inc. and Gymboree Retail Stores, Inc. Gymboree Play Program, Inc., a California corporation. Gymboree Operations, Inc., a California corporation. Gymboree, Inc., a Canadian and Delaware corporation. Gymboree Japan K.K., a Japanese corporation. Gymboree Industries Holdings Ltd., a Republic of Ireland Limited Company. Gymboree Hong Kong Ltd., a Hong Kong Limited Company, wholly owned by Gymboree Industries Holdings Ltd. Gymboree Industries Ltd., a Republic of Ireland Limited Company, wholly owned by Gymboree Industries Holdings Ltd. Gymboree Ireland Leasing Ltd., a Republic of Ireland Limited Company. Gymboree of Ireland, Ltd., a Republic of Ireland Limited Company. Gymboree U.K. Leasing Ltd., a United Kingdom Limited Company. Gymboree U.K. Ltd., a United Kingdom Limited Company. EX-23.1 5 EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-60310, 33-90452, 33-94594, 333-10811 and 333-74269 of The Gymboree Corporation and subsidiaries on Forms S-8 of our report dated April 12, 2000, appearing in this Annual Report on Form 10-K of The Gymboree Corporation and subsidiaries for the fiscal year ended January 29, 2000. /s/ DELOITTE & TOUCHE LLP San Francisco, California April 24, 2000 EX-27.1 6 EXHIBIT 27.1
5 1,000 YEAR JAN-29-2000 JAN-31-1999 JAN-29-2000 40,274 0 4,920 0 47,103 99,679 206,568 (69,123) 240,918 42,454 0 0 0 27,807 130,655 240,918 437,076 437,076 281,273 176,184 0 0 895 (17,235) 6,635 (10,600) 0 0 0 (10,600) (.44) (.44)
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