Gymboree (GYMB) 10-Q 2001 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period endedMay 5, 2001

OR

[   ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from _____________________ to __________________________

Commission file number 000-21250

THE GYMBOREE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 94-2615258
(IRS Employer Identification No.)

700 Airport Boulevard, Burlingame, California
(Address of principal executive offices) 94010-1912
(Zip code)

(650) 579-0600
Registrant’s telephone number, including area code

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  Yes      X    No   

Number of shares of common stock outstanding at June 8, 2001: 28,103,367

TABLE OF CONTENTS

			Page Number
Part I	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations	8
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Part II	Other Information
	Item 1.	Legal Proceedings	18
	Item 2.	Changes in Securities and Use of Proceeds	18
	Item 3.	Defaults Upon Senior Securities	18
	Item 4.	Submission of Matters to a Vote of Security Holders	18
	Item 5.	Other Information	18
	Item 6.	Exhibits	18
Signatures			19
Exhibit Index			20

Part I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and store data)
(Unaudited)

	13 Weeks Ended
	May 5, 2001		April 29, 2000
Net sales	$ 124,003		$ 100,632
Cost of goods sold, including
buying and occupancy expenses	(81,339	)	(80,105	)
Gross profit	42,664		20,527
Selling, general and administrative expenses	(43,057	)	(43,728	)
Play and music income, net	700		748
Operating income (loss)	307		(22,453	)
Foreign exchange gains (losses), net	(83	)	24
Net interest income (expense), net	(824	)	50
Loss before income taxes	(600	)	(22,379	)
Income tax benefit	231		8,616
Net loss	$      (369	)	$(13,763	)
Loss per share:
Basic	$    (0.01	)	$    (0.56	)
Diluted	(0.01	)	(0.56	)
Weighted average shares outstanding:
Basic	28,058		24,402
Diluted	28,058		24,402
Number of stores at end of period	576		605

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

	May 5, 2001		February 3, 2001		April 29, 2000
Assets
Current Assets
Cash and cash equivalents	$     5,710		$     5,306		$   23,386
Accounts receivable	7,686		7,734		4,976
Merchandise inventories	71,514		78,056		43,083
Prepaid expenses and deferred taxes	9,516		9,828		9,535
Total current assets	94,426		100,924		80,980
Property and Equipment
Land and buildings	9,943		9,943		9,943
Leasehold improvements	89,872		89,425		88,930
Furniture, fixtures and equipment	105,987		107,304		107,818
	205,802		206,672		206,691
Less accumulated depreciation and amortization	(94,576	)	(88,990	)	(72,390	)
	111,226		117,682		134,301
Lease Rights, Deferred Taxes and Other Assets	26,010		25,836		10,072
Total Assets	$ 231,662		$ 244,442		$ 225,353
Liabilities and Stockholders’ Equity
Current Liabilities
Current portion of long term debt	$        642		$        634		$        594
Borrowings on revolving line of credit	19,679		16,225		—
Accounts payable	15,507		31,152		17,168
Accrued liabilities	19,753		19,539		22,407
Total current liabilities	55,581		67,550		40,169
Long Term Liabilities
Long term debt, net of current portion	9,280		9,443		10,725
Deferred rent and other liabilities	26,258		26,333		29,517
Term loan	7,000		7,000		—
Total Liabilities	98,119		110,326		80,411
Stockholders’ Equity
Common stock, including excess paid-in capital
($.001 par value: 100,000,000 shares authorized,
28,065,582, 28,039,553 and 24,401,886 shares
outstanding at May 5, 2001, February 3, 2001
and April 29, 2000, respectively)	40,605		40,475		27,807
Retained earnings	93,320		93,689		116,794
Accumulated other comprehensive income (loss) -
Foreign currency translation adjustments	(382	)	(48	)	341
Total stockholders’ equity	133,543		134,116		144,942
Total Liabilities and Stockholders’ Equity	$ 231,662		$ 244,442		$ 225,353

See notes to condensed consolidated financial statements.

4

THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	13 Weeks Ended
	May 5, 2001		April 29, 2000
Cash Flows from Operating Activities:
Net loss	$    (369	)	$(13,763	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization	6,109		5,956
Deferred income taxes	(661	)	(7,596	)
Loss on disposal of property and equipment	84		248
Changes in assets and liabilities:
Accounts receivable	48		(58	)
Merchandise inventories	6,208		4,263
Prepaid expenses and other assets	798		(833	)
Accounts payable	(15,645	)	(1,428	)
Other liabilities	(75	)	393
Accrued liabilities	215		(868	)
Net cash used in operating activities	(3,288	)	(13,686	)
Cash Flows from Investing Activities:
Capital expenditures	(2,933	)	(3,061	)
Proceeds from sale of assets	3,196		—
Net cash provided by (used in) investing activities	263		(3,061	)
Cash Flows from Financing Activities:
Proceeds from issuance of stock	130		—
Proceeds from borrowings	3,454		—
Payments on long term debt	(155	)	(141	)
Net cash provided by (used in) financing activities	3,429		(141	)
Net Increase (Decrease) in Cash and Cash Equivalents	404		(16,888	)
Cash and Cash Equivalents at Beginning of Period	5,306		40,274
Cash and Cash Equivalents at End of Period	$   5,710		$ 23,386

See notes to condensed consolidated financial statements.

5

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The unaudited interim condensed consolidated financial statements of The Gymboree Corporation and our wholly-owned subsidiaries (“Gymboree”) as of and for the periods ended May 5, 2001 and April 29, 2000 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended February 3, 2001.

     The accompanying interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented and necessary to present fairly the results of operations, the financial position and cash flows for the periods presented. All such adjustments are of a normal and recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Earnings (Loss) Per Share

     Basic EPS is calculated by dividing net income (loss) for the period by the weighted average common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. Diluted loss per share for all periods presented is equal to basic loss per share because the potential common shares outstanding during the period are antidilutive.

3. Comprehensive Income (Loss)

     Comprehensive income (loss), which includes net income (loss), foreign currency translation adjustments and fluctuations in the fair market value of certain derivative financial instruments, is as follows:

	13 Weeks Ended
	May 5, 2001		April 29, 2000
(In thousands)
Net loss	$(369	)	$(13,763	)
Other comprehensive income (loss)	(334	)	243
Total comprehensive loss	$(703	)	$(13,520	)

4. 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 a component of other comprehensive income. Revenues, costs of sales, expenses and other income are translated at average rates of exchange prevailing during the year.

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5. Foreign Exchange Exposure Management

     Gymboree has international subsidiaries selling product in local currencies, but such product is purchased in US dollars. To protect product margins as well as foreign currency payables and receivables Gymboree’s risk management policy is to hedge forecasted and existing foreign currency risk with foreign exchange forward contracts to mitigate this risk. Hedges of forecasted transactions are designated and documented at inception as cash flow hedges and evaluated for effectiveness quarterly. The effective portion of the gain or loss on the forward contracts designated as cash flow hedges is reported in other comprehensive income and recognized in cost of goods sold based on inventory turns; the ineffective portion is recorded in earnings. A loss of approximately $175,000 is included in other comprehensive income as of May 5, 2001 and will be recognized in cost of goods sold over the next 12 months. The critical terms of the forward contract and the underlying transaction are essentially the same. As a result, an immaterial amount of ineffectiveness was recognized in the first quarter of fiscal 2001.

6. Sale of Zutopia Stores

     During fiscal 2000, Gymboree entered into an agreement with The Wet Seal, Inc. to sell 19 Zutopia stores with an estimated sales price of $3.5 million. The agreement provided for the transfer of substantially all the assets of the Zutopia stores, along with the trademark, to The Wet Seal, Inc. and the assignment of the leases of 18 of the 19 stores. The remaining store was closed. As a result of the agreement, Gymboree recognized a loss of $5 million in fiscal 2000, which includes the loss related to the property and equipment, reserve for inventory and an accrual for legal fees and severance. The assets were transferred and sale closed on March 25, 2001 and March 29, 2001, respectively.

7. Line of Credit

     On August 24, 2000, Gymboree entered into a three-year secured revolving line of credit with Fleet Retail Finance, Inc. and a syndicate of other lenders. This facility provides for an overall credit line of $75 million that may be used for working capital and capital expenditure needs and the issuance of documentary and standby letters of credit. Gymboree’s maximum borrowing under the credit facility may not exceed the lesser of (a) $75 million or (b) the total of (i) the adjusted value of acceptable inventory, including eligible letter of credit inventory (subject to advance rates), plus (ii) 85% of Gymboree’s eligible credit card accounts receivable, plus (iii) 100% of eligible investments, minus (iv) applicable reserves. Gymboree’s annual capital expenditures are limited to $15 million under this agreement. As of May 5, 2001, approximately $26.9 million was available pursuant to such facility. The interest rate during the term of the facility will be based on the bank’s Reference Rate plus an applicable margin of up to 0.25% or Eurodollar rate plus an applicable margin of up to 2.50%. On April 4, 2001, Gymboree elected to use the Eurodollar rate plus the applicable margin on $10 million of its short-term borrowings under the revolving line of credit. The rate was 7.3125% and was effective until May 3, 2001, at which time the balance reverted back to the bank’s Reference Rate plus an applicable margin. As of May 5, 2001, the interest rate was 7.5%.

     During fiscal 1998, Gymboree issued two promissory notes totaling $12 million both secured by our distribution center in Dixon, California. On April 16, 2001, Gymboree entered into an amendment that increased the interest rates and removed certain financial covenants of the two promissory notes. The first note of approximately $3.1 million bears interest at 9.5% and is due October 2005. The second note of approximately $8.9 million bears interest at 9.7% and is due January 2009. Interest on the promissory notes is payable monthly.

     In addition, on August 24, 2000, Gymboree obtained a three-year term loan for $7 million with Back Bay Capital Funding LLC with an annual interest rate of 16%. A blanket lien on merchandise inventories and other assets secure both the credit facility and term loan.

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

Results of Operations

     The following table sets forth, for the periods indicated, (i) selected statement of operations data expressed as a percentage of net sales, (ii) the percentage change from the same period of the prior year in such selected income statement data and (iii) the number of stores open at the end of each such period:

					Percentage Change
	As a Percentage of Net Sales				in Dollar Amounts
	Thirteen Weeks Ended				From 2000 to 2001
	May 5, 2001		April 29, 2000		13 weeks
Net sales	100.0	%	100.0	%	23	%
Cost of goods sold, including
buying and occupancy expenses	(65.6	)	(79.6	)	2	%
Gross profit	34.4		20.4		108	%
Selling, general and administrative
expenses	(34.7	)	(43.4	)	-2	%
Play and music income, net	0.6		0.7		-6	%
Operating income (loss)	0.3		(22.3	)	101	%
Foreign exchange gains (losses), net	(0.1	)	—		-446	%
Net interest income (expense)	(0.7	)	0.1		-1748	%
Loss before income taxes	(0.5	)	(22.2	)	97	%
Income tax benefit	0.2		8.5		-97	%
Net loss	(0.3	)%	(13.7	)%	97	%
Number of stores at end of period	576		605

Thirteen weeks ended May 5, 2001 compared to thirteen weeks ended April 29, 2000

Net Sales

     Net sales in the first quarter of fiscal 2001 totaled $124.0 million compared to $100.6 million in the same period last year. Comparable store sales for the first quarter increased 25% over the prior year and provided $23.4 million of the increase in sales. The remaining sales increases resulted from fiscal 2000 store additions and relocations ($2.3 million) and the fiscal 2001 store opening ($0.1 million), offset by a reduction in sales from 20 store closures in fiscal 2000 and 2001 ($1.5 million) and the Zutopia stores ($0.9 million). Gymboree operated 19 Zutopia stores, 18 of which were sold to The Wet Seal, Inc. on March 25, 2001. The remaining Zutopia store was closed. As of May 5, 2001, Gymboree operated 524 stores in the U.S., 21 stores in Canada, and 31 stores in Europe.

Gross Profit

     Gross profit for the thirteen weeks ended May 5, 2001 increased 108% to $42.7 million from $20.5 million in the same period last year. As a percentage of net sales, gross profit was 34.4% in the first quarter of fiscal 2001 compared to 20.4% in the same period last year. The increase in gross profit as a percentage of net sales was primarily due to fewer markdowns taken in fiscal 2001 reflecting a more desirable product coupled with comparable sales increases in 2001 due to more appropriate inventory levels. As a result of comparable sales increases, Gymboree was able to leverage occupancy and buying expenses which also contributed to the improved gross profit as a percentage of net sales.

8

Selling, General and Administrative Expenses

     Selling, general and administrative expenses (“SG&A”), which principally consists of non-occupancy store expenses, corporate overhead and distribution expenses, decreased as a percentage of sales to 34.7% in 2001 compared to 43.4% in 2000. SG&A expense for the first quarter of fiscal 2001 totaled $43.1 million as compared to $43.7 million for the same period in the prior year. Zutopia was sold in March 2001 and resulted in an expense reduction of $0.7 million for the first quarter of 2001 compared to the first quarter of 2000. Gymboree did incur higher selling expenses in 2001 primarily due to higher sales, offset by lower corporate overhead that related to management severance that was paid in 2000.

Play and Music Income, Net

     Play and Music income, net decreased 6% to $700,000 during the first quarter of fiscal 2001 from $748,000 in income for the same period last year. The decrease was due primarily to start-up costs associated with new corporate sites.

Foreign Exchange Losses

     Net foreign exchange losses totaled $83,000 during the first quarter of 2001 compared to a net gain of $24,000 in the first quarter of 2000. These losses resulted from currency fluctuations on inter-company transactions between our United States operations and foreign subsidiaries.

Net Interest Income (Expense)

     Interest expense of $923,000 was incurred for the first quarter of 2001 as compared to interest expense of $314,000 for the same period last year. The increase was due to higher average borrowings. Interest income decreased to $99,000 for the first quarter of 2001 from $364,000 in the first quarter of 2000. This decrease reflects a lower average cash balance year over year.

Income Tax

     Our effective tax rate for the first quarters of fiscal 2001 and 2000 was 38.5%.

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Financial Condition

Liquidity and Capital Resources

     Cash used in operating activities for the first quarter of fiscal 2001 was $3.3 million compared to $13.7 million in the same period in the prior year. This change was primarily due to the decrease in net loss for the period and changes in working capital items.

     Cash provided by investing activities totaled $0.3 million resulting from $3.2 million in proceeds received from the sale of Zutopia, offset by $2.9 million in capital expenditures primarily for the relocation and/or expansion of certain existing stores. Gymboree estimates that capital expenditures during 2001 will be between $12.0 and $15.0 million, and will primarily be used to relocate and expand about 10 stores, to open approximately 10 new domestic and international stores, to update the store fronts of approximately 150 stores and to upgrade and replace information technology systems.

     Cash provided by financing activities totaled $3.4 million compared to cash used in financing activities of $0.1 million in the prior year. This change reflects an increase in short term borrowings of $3.5 million.

     Cash and cash equivalents were $5.7 million at May 5, 2001, an increase of $0.4 million from February 3, 2001. Working capital as of May 5, 2001 was $38.8 million compared to $33.4 million at the end of fiscal 2000.

     On August 24, 2000, Gymboree entered into a three-year secured revolving line of credit with Fleet Retail Finance, Inc. and a syndicate of other lenders. This facility provides for an overall credit line of $75 million that may be used for working capital and capital expenditure needs and the issuance of documentary and standby letters of credit. Gymboree’s maximum borrowing under the credit facility may not exceed the lesser of (a) $75 million or (b) the total of (i) the adjusted value of acceptable inventory, including eligible letter of credit inventory (subject to advance rates), plus (ii) 85% of Gymboree’s eligible credit card accounts receivable, plus (iii) 100% of eligible investments, minus (iv) applicable reserves. Gymboree’s annual capital expenditures are limited to $15 million under this agreement. As of May 5, 2001, approximately $26.9 million was available pursuant to such facility. The interest rate during the term of the facility will be based on the bank’s Reference Rate plus an applicable margin of up to 0.25% or Eurodollar rate plus an applicable margin of up to 2.50%. On April 4, 2001, Gymboree elected to use the Eurodollar rate plus the applicable margin on $10 million of its short-term borrowings under the revolving line of credit. The rate was 7.3125% and was effective until May 3, 2001, at which time the balance reverted back to the bank’s Reference Rate plus an applicable margin. As of May 5, 2001, the interest rate was 7.5%.

     During fiscal 1998, Gymboree issued two promissory notes totaling $12 million both secured by our distribution center in Dixon, California. On April 16, 2001, Gymboree entered into an amendment that increased the interest rates and removed certain financial covenants of the two promissory notes. The first note of approximately $3.1 million bears interest at 9.5% and is due October 2005. The second note of approximately $8.9 million bears interest at 9.7% and is due January 2009. Interest on the promissory notes is payable monthly.

     In addition, on August 24, 2000, Gymboree obtained a three-year term loan for $7 million with Back Bay Capital Funding LLC with an annual interest rate of 16%. A blanket lien on merchandise inventories and other assets secure both the credit facility and term loan.

     Gymboree anticipates 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 fiscal 2001. If additional credit facilities are required, no assurance can be given that such facilities will be available under terms acceptable to Gymboree.

10

Factors that May Affect Future Performance

     The discussion in this 10-Q report contains certain forward-looking statements, including statements regarding planned capital expenditures, planned store openings, expansions and renovations, future cash generated from operations 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 due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results of operations. Given these factors, we cannot assure you that we will be able to effectively continue and strengthen our operations.

     We have experienced net losses in recent periods and, if such losses continue in the future, we may need to obtain additional capital to continue our operations.

     We incurred net losses of $0.4 million, $36.9 million and $10.6 million during the first quarter of fiscal 2001 and during fiscal years 2000 and 1999, respectively. There can be no assurance that losses will not continue in the future. If losses do continue to occur, we will likely need to obtain additional capital to continue our operations.

     We must maintain a minimum collateral base to secure our existing credit facility, which is necessary for cash borrowings and letters of credit.

     The amount of our credit facility for cash borrowings and letters of credit needed for the purchase of new inventory is limited to our available collateral. Our existing credit facility fluctuates relative to our collateral base, which includes our inventory, cash and other assets. This collateral base varies in value as a result of sales, merchandise purchases and profitability. Lack of short-term liquidity, due to reaching the limit of our collateral base, could force us into seeking alternative financing or court protection from our creditors.

     We may need additional capital to pursue our future business plans.

     Our growth strategies may require additional capital, should our operations generate insufficient cash flow to expand our business. For example, we may need additional capital to update store exteriors and interiors, broaden existing product lines and introduce new products and concepts. To pursue this prospective business plan, we will need to fund operations and invest in capital projects. There can be no assurance that either internally generated cash will be available, or that debt or equity will be available to Gymboree on terms that are satisfactory. In addition, under the terms of our existing credit facility, we will likely need the consent of our bank lenders before incurring additional indebtedness, and there can be no guarantee that our lenders will permit us to incur new debt on terms that we otherwise find satisfactory. Also, to the extent that we raise additional capital by issuing equity, a dilutive effect to existing stockholders will likely result.

     We may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team.

     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 key personnel in the future. Also, because customer service is a defining feature of the Gymboree corporate culture, we must be able to hire and train qualified sales associates to succeed. The loss of certain key employees, Gymboree’s inability to attract and retain other qualified key employees or a labor shortage that reduces the pool of qualified sales associates could have a material adverse effect on our growth, our operations and our financial position. Furthermore, we have experienced significant turnover of our management team in recent years, and several members of our key management team have only recently joined us or have been promoted to executive positions for the first time. For example, our current chief executive officer was appointed in February 2001, and our chief operating officer and acting chief financial officer joined Gymboree in March 2001. In addition to performing their regular duties, our new managers must spend a significant amount of time devising strategies to execute our business model. If they are unable to effectively integrate themselves into our business, to work together as a management team or to master their new roles in a timely manner, our business will suffer.

11

     Our business is sensitive to economic conditions that impact consumer spending.

     Gymboree’s financial performance is sensitive to changes in overall economic conditions that impact consumer spending, particularly discretionary spending. Future economic conditions affecting disposable consumer income such as employment levels, business conditions, interest rates and tax rates could reduce consumer spending or cause consumers to shift their spending to other products. A general reduction in the level of discretionary spending or shifts in consumer discretionary spending to other products could adversely affect our growth, net sales and profitability.

     Our business is sensitive to changes in seasonal consumer spending patterns that are beyond our control.

     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, during the holiday season. We have also experienced periods of increased sales activity in the early spring, during the period leading up to the Easter holiday, and in the early fall, in connection with back-to-school sales. Changes in seasonal consumer spending patterns for reasons beyond our control could result in lower-than-expected sales during these periods. Such a circumstance could cause us to have excess inventory, necessitating markdowns to minimize this excess, which would reduce our profitability. Any failure by us to meet our business plans for, in particular, the third and fourth quarter of any fiscal year would have a material adverse effect on our earnings, which in all likelihood would not be offset by satisfactory results achieved in other quarters of the same fiscal year. Also, because Gymboree typically spends more in labor costs during the holiday season, hiring temporary store employees in anticipation of holiday spending, a shortfall in expected sales during that period could result in a disproportionate decrease in our net income.

     We have reinstated our historical merchandising strategy and cannot guarantee its success.

     During 1999, in an attempt to expand the customer base by changing our merchandise focus, we embarked on a re-merchandising strategy in which we changed the look of our product offerings, delivery cadence and several other attributes of our business. Because the results of the re-merchandising strategy fell well below our expectations, in February 2000 we reinstated our historical strategies and integrated any benefits that flowed from the re-merchandising, including a new trademark. There can be no guarantee that our historical merchandising strategies will produce results similar to historic trends, or that we will be successful in regaining and retaining our core customers and in re-establishing our core business.

     We may not be able to fully utilize our federal and state net operating loss carryforwards prior to their expiration.

     Gymboree has federal and state net operating loss carryforwards which for financial reporting purposes are reported as a deferred tax asset. These net operating losses will expire between 2003 and 2020. The full realization of these losses is dependent upon Gymboree generating federal and state taxable income in such amounts and at such times that the net operating loss carryforwards can be fully utilized. However, there is no guarantee that Gymboree will generate the necessary amount of taxable income in the appropriate tax periods to realize the full tax benefit of these prior losses. It is possible that all or a portion the value of such tax benefit (and the corresponding deferred tax asset) will be lost.

12

     Because we purchase and sell our products internationally, our business is sensitive to foreign risks associated with international business.

     Gymboree’s products are currently manufactured to specifications by independent factories located primarily in Asia, as well as the Middle East, Central America, South America, Mexico and the United States. In addition to Gymboree’s reliance on foreign manufacturers, Gymboree has store and distribution operations in Europe and Canada. 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, natural disasters, social or political unrest, disruptions or delays in shipments or customs clearance, local business practices and changes in economic conditions in countries in which our suppliers or stores are located. Gymboree cannot predict the effect of such factors on our business relationships with foreign suppliers nor on our ability to sell our products in international markets. 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, there could be a material and adverse effect on Gymboree’s results of operations and financial position.

     We may not be able to maintain sufficient inventory levels if our independent manufacturers fail to provide the required production capacity.

     Gymboree currently relies on unaffiliated manufacturers to produce substantially all of our products, with whom we have no long-term contracts and from whom we typically purchase goods on an order-by-order basis. Many of our unaffiliated manufacturers produce goods for other companies, with which we compete for production facilities and import quota capacity. If Gymboree experiences significant increased demand, which cannot be foreseen, or in the event any of our key manufacturers is unable or unwilling to continue to manufacture Gymboree’s products, Gymboree may not be able to obtain sufficient capacity from our other current manufacturing sources or to identify and qualify new unaffiliated sources in a timely manner. Any significant delay in our ability to obtain adequate supplies of products from our current or alternative sources would materially and adversely affect our business and operating results.

     Our results may be impaired by changes in fashion trends and 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.

     We cannot maintain and grow our sales and profitability without the continued development of 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 other 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 our existing products.

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     The highly competitive business in which we operate may impair our ability to maintain and grow our sales and results.

     The children’s apparel segment of the specialty retail business is highly competitive, and we may not be able to compete successfully in the future. Gymboree competes on a national level with BabyGap and GapKids (divisions of The Gap, Inc.), The Children’s Place and Talbots Kids and certain leading department stores as well as certain discount retail chains such as Old Navy (a division of The Gap, Inc.), Kids ‘R’ Us (a division of Toys ‘R’ Us, Inc.) and Target. Gymboree also competes with a wide variety of local and regional specialty stores and with certain other retail chains. We also compete with children’s retailers that sell their products by mail order or over the Internet. 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.

     Our business will suffer if our independent manufacturers fail to produce apparel that meets our quality standards.

     Gymboree has occasionally received, and may in the future continue to receive, shipments of products from unaffiliated manufacturers that fail to conform to our quality control standards. We cannot assure you that our independent manufacturers will continue to produce products that comply with Gymboree’s standards. In such an event, unless we are able to obtain replacement products in a timely manner, Gymboree may lose revenue resulting from the non-sale of such products and experience related increased administrative and shipping costs. Also, the failure of any key unaffiliated manufacturer to supply products that conform to Gymboree’s standards could materially and adversely affect our reputation in the marketplace.

     The loss of our technology support service provider could impair our ability to manage various aspects of our store operations, or our ability to report results in a timely way.

     Gymboree outsources various technological support functions. If our contractor were unable for any reason to continue to provide this support, or were to suffer a sudden breakdown in capabilities, this loss of support could have a negative impact on our ability to maintain reporting from our stores to headquarters, and could prevent us from reporting sales results or earnings, or from allocating product in a timely fashion, which could impair our ability to manage our stores’ inventory.

     We may suffer negative publicity if any of our products are found to be unsafe.

     Gymboree currently tests most toys and similar products sold in our stores. However, we may end this practice in the foreseeable future, as we anticipate that a larger portion of the toys and similar products we sell will be products that we buy from market sources for resale to our customers. If these products have safety problems of which we are not aware or if the Consumer Product Safety Commission recalls a product sold in our stores, we may experience not only negative publicity, which could adversely impact our sales and reputation, but also product liability lawsuits, which could have a material adverse effect on our reputation, our business and our financial position.

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     We may be subject to negative publicity or be sued if our manufacturers violate labor laws or engage in practices that our customers believe are unethical.

     We seek to require our independent manufacturers to operate their businesses in compliance with the laws and regulations that apply to them. Our sourcing personnel periodically visit and monitor the operations of our independent manufacturers, but we cannot control their business and labor practices. If an independent manufacturer violates labor laws or other applicable regulations, or if such a manufacturer engages in labor or other practices that diverge from those typically acceptable in the United States, Canada or Europe, Gymboree could in turn experience negative publicity or be sued. Negative publicity regarding the production of our products could materially adversely affect sales of our products and our business, and a lawsuit could materially adversely effect our financial position. For example, see Part II Item 1, “Legal Proceedings.”

     The loss of a key vendor could impair our ability to obtain a sufficient quantity of fabric for our apparel.

     In fiscal 2000, one vendor accounted for 55% 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.

     Our business may be harmed by additional United States regulation of foreign trade or customs delays.

     Our business is subject to the risk that the United States may adopt additional 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. If the U.S. government imposes any such charges or restrictions, the supply of products could be disrupted and their cost could substantially increase, either of which could materially adversely affect our operating results. Unforeseen delays in customs clearance of any goods could materially impact our ability to deliver complete shipments to our stores.

     Our business will be impaired if we cannot protect our trademarks.

     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 to 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 our business. In addition, we could incur substantial costs in defending 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 products 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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     A disaster could severely damage our operations.

     Our operations depend on our ability to maintain and protect our computer systems, on which we rely to manage our purchase orders, store inventory levels, accounting functions and other aspects of our business. We have computer systems located in each of our stores, with the main database server for our systems located in Burlingame, California, which exists on or near known earthquake fault zones. A disaster could severely damage our business and results of operations not only by damaging our stores, but also by damaging our main server, which could disrupt our business for an indeterminate length of time. Although the outside facility that hosts our main server is designed to be fault tolerant, our systems are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events. Furthermore, Gymboree distributes its products from three distribution centers, located in the United States, Canada and Ireland. If for any reason any of these distribution centers were destroyed or damaged and were unable to distribute product to the stores in its areas of geographic responsibility, we could suffer a loss from the non-sale of such products. Although we maintain insurance against fires, floods, earthquakes and general business interruptions, there can be no assurance that the amount of coverage will be adequate in any particular case.

     The market price for our common stock, like other retail stocks, may be volatile.

     Our stock price, like that of other companies in the retail industry, is subject to volatility. If revenues or earnings in any quarter fail to meet the investment community’s expectations for any reason, there could be an immediate adverse impact on our stock price. The stock price may also be affected by broader market trends unrelated to our performance. Such volatility may limit our ability in the future to raise additional capital. Volatility in the market price of our common stock could result in securities class action litigation. This type of litigation could result in substantial costs and a diversion of management’s attention and resources.

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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Gymboree enters into forward foreign exchange contracts to hedge certain inventory purchases (principally British pounds sterling and Canadian dollars). The term of the forward exchange contracts is generally less than one year. 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 margins 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 values of our forward foreign exchange contracts in U.S. dollars as of May 5, 2001.

(In thousands)	Notional Amount	Fair Value		Weighted Average Rate
British pounds sterling	$  7,138	$  (71	)	1.4276
Canadian dollars	3,787	(104	)	0.6332
Total	$10,925	$(175	)

     Gymboree’s current borrowings under its line of credit are subject to a variable interest rate which, if increased, would have an adverse impact on Gymboree. For example, an increase of 1% would result in additional interest expense of approximately $200,000 per year.

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Part II — OTHER INFORMATION

Item 1.   Legal Proceedings

Gymboree was named as a defendant in a lawsuit relating to sourcing of products from Saipan (Commonwealth of the Northern Mariana Islands). A complaint was filed on January 13, 1999 in the U.S. District Court, Central District of California, by various unidentified worker plaintiffs against Gymboree and approximately 25 other parties. The case was transferred to the U.S. District Court for the District of Hawaii. That court ordered the case to be transferred to the U.S. District Court for the District of the Northern Mariana Islands. The transfer to the District Court in the Northern Mariana Islands is in progress. The 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 products for us. The plaintiffs seek injunctive relief as well as actual and punitive damages. Gymboree has agreed to a settlement with the plaintiffs that would require us to pay approximately $200,000, but the settlement will not take effect until it is approved by the court, which cannot take place until the transfer is completed. There can be no assurance that the court will ultimately approve the settlement.

Item 2.   Changes in Securities and Use of Proceeds

Not applicable.

Item 3.   Defaults Upon Senior Securities

Not applicable.

Item 4.   Submission of Matters to a Vote of Security Holders

Not applicable

Item 5.   Other Information

On March 6, 2001 Gymboree appointed Alison May as Executive Vice President and Chief Operating Officer. Subsequently, Ms. May took on the added responsibility of Acting Chief Financial Officer following the resignation of Larry Meyer. Mr. Meyer will remain with Gymboree as an advisor until July.

Item 6.   Exhibits and Reports on Form 8-K

(a) Exhibits

10.45 Third Amendment to Secured Term Loan and Security Agreement with Transamerica Equipment Financial Services, Inc. dated April 16, 2001.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended May 5, 2001.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

June 15, 2001
——————————————
Date THE GYMBOREE CORPORATION
(Registrant)


By: /s/ Alison L. May
—————————————————————
Alison L. May
Executive Vice President, Chief Operating Officer
and Acting Chief Financial Officer
(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
10.45	Third Amendment to Secured Term Loan and Security Agreement with Transamerica Equipment Financial Services, Inc. dated April 16, 2001.

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