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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
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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
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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
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THE GYMBOREE CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
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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
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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.
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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.
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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
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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
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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
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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
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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
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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.
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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
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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,
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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.
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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.
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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.
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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