Gymboree 10Q 2002 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the quarterly period ended November 3, 2001

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the transition period from to

Commission file number 000-21250

The Gymboree Corporation

(Exact name of registrant as specified in its charter)


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

700 Airport Boulevard, Burlingame, California		94010-1912
(Address of principal executive offices)		(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 þ No o

As of December 11, 2001, 28,582,917 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS


PART I -- FINANCIAL INFORMATION
	Item 1.Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.Quantitative and Qualitative Disclosures About Market Risk
PART II -- OTHER INFORMATION
	Item 1.Legal Proceedings
	Item 6.Reports on Form 8-K
SIGNATURES

TABLE OF CONTENTS


		Page
		Number

PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		2
	Condensed Consolidated Statements of Cash Flows		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		7
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		16
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		17
Signatures			18

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


			November 3,			February 3,			October 28,
			2001			2001			2000

ASSETS
Current Assets
	Cash and cash equivalents		$	2,428		$	5,306		$	1,574
	Accounts receivable			5,444			7,734			4,813
	Merchandise inventories			77,628			78,056			93,197
	Prepaid expenses and deferred taxes			10,081			9,828			7,474

		Total current assets		95,581			100,924			107,058

Property and Equipment
	Land and buildings			9,943			9,943			9,943
	Leasehold improvements			86,978			89,425			89,809
	Furniture, fixtures and equipment			114,069			107,304			110,508

				210,990			206,672			210,260
	Less accumulated depreciation and amortization			(101,613	)		(88,990	)		(83,313	)

				109,377			117,682			126,947
Lease Rights, Deferred Taxes and Other Assets				26,709			25,836			21,528

	Total Assets		$	231,667		$	244,442		$	255,533


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
	Current portion of long term debt		$	652		$	634		$	618
	Borrowings on revolving line of credit			15,557			16,225			15,518
	Accounts payable			19,149			31,152			39,675
	Accrued liabilities			25,377			19,539			20,463

		Total current liabilities		60,735			67,550			76,274

Long Term Liabilities
	Long term debt, net of current portion			8,979			9,443			9,659
	Deferred rent and other liabilities			24,574			26,333			30,233
	Term loan			7,000			7,000			7,000

	Total Liabilities			101,288			110,326			123,166

Stockholders’ Equity
	Common stock, including excess paid-in capital ($.001 par value: 100,000,000 shares authorized; 28,543,466, 28,039,553 and 27,702,409 shares outstanding at November 3, 2001, February 3, 2001 and October 28, 2000, respectively)			43,021			40,475			37,673
	Retained earnings			87,787			93,689			94,858
	Accumulated other comprehensive loss			(429	)		(48	)		(164	)

		Total stockholders’ equity		130,379			134,116			132,367

	Total Liabilities and Stockholders’ Equity		$	231,667		$	244,442		$	255,533

See notes to condensed consolidated financial statements.

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share and store data)

(Unaudited)



			13 Weeks Ended						39 Weeks Ended

			November 3,			October 28,			November 3,			October 28,
			2001			2000			2001			2000

Net sales			$	133,219		$	111,881		$	354,969		$	295,279
Cost of goods sold, including buying and occupancy expenses				(85,325	)		(76,016	)		(235,094	)		(225,254	)

		Gross profit		47,894			35,865			119,875			70,025
Selling, general and administrative expenses				(43,844	)		(43,542	)		(127,751	)		(128,775	)
Play and music income, net				226			739			1,238			1,534

	Operating income (loss)			4,276			(6,938	)		(6,638	)		(57,216	)
Foreign exchange gains (losses), net				(98	)		(72	)		(246	)		52
Net interest expense				(1,261	)		(840	)		(2,713	)		(883	)

	Income (Loss) before income taxes			2,917			(7,850	)		(9,597	)		(58,047	)
Income tax benefit (expense)				(1,123	)		3,022			3,695			22,348

	Net income (loss)		$	1,794		$	(4,828	)	$	(5,902	)	$	(35,699	)

Gain (Loss) per share:
	Basic		$	0.06		$	(0.17	)	$	(0.21	)	$	(1.36	)
	Diluted			0.06			(0.17	)		(0.21	)		(1.36	)
Weighted average shares outstanding:
	Basic			28,433			27,674			28,225			26,304
	Diluted			29,130			27,674			28,225			26,304
Number of stores at end of period				581			604			581			604

See notes to condensed consolidated financial statements.

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



			39 Weeks Ended

			November 3,			October 28,
			2001			2000

Cash Flows from Operating Activities:
Net loss			$	(5,902	)	$	(35,699	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			18,068			17,862
	Deferred income taxes			(2,024	)		(15,890	)
	Loss on disposal of property and equipment			610			636
	Change in assets and liabilities:
		Accounts receivable		2,290			107
		Merchandise inventories		48			(46,356	)
		Prepaid expenses and other assets		897			(1,936	)
		Accounts payable		(12,002	)		21,079
		Other liabilities		(3,749	)		784
		Accrued liabilities		7,827			(2,488	)

	Net cash provided by (used in) operating activities			6,063			(61,901	)

Cash Flows from Investing Activities:
Capital expenditures				(13,569	)		(8,000	)
Proceeds from sale of assets				3,195			—

	Net cash used in investing activities			(10,374	)		(8,000	)

Cash Flows from Financing Activities:
Proceeds from issuance of common stock				2,545			9,866
Proceeds from (payments on) borrowings				(667	)		22,518
Payments on long term debt				(445	)		(1,183	)

	Net cash provided by financing activities			1,433			31,201

Net Decrease in Cash and Cash Equivalents				(2,878	)		(38,700	)
Cash and Cash Equivalents at Beginning of Period				5,306			40,274

Cash and Cash Equivalents at End of Period			$	2,428		$	1,574

See notes to condensed consolidated financial statements.

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of The Gymboree Corporation and our wholly owned subsidiaries (“Gymboree”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual 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.

The results of operations for the thirty-nine weeks ended November 3, 2001 are not necessarily indicative of the operating results that may be expected for the year ending February 2, 2002.

2. Income (Loss) Per Share

Basic earnings per share are calculated by dividing net income (loss) for the period by the weighted average common shares outstanding for that period. Diluted earnings per share includes 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. The following summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method.



	13 Weeks Ended				39 Weeks Ended

	November 3,		October 28,		November 3,		October 28,
	2001		2000		2001		2000


	(In thousands)
Weighted average number of shares — basic		28,433		27,674		28,225		26,304
Add: effect of dilutive securities		697		—		—		—

Weighted average number of shares — diluted		29,130		27,674		28,225		26,304

Anti-dilutive options and warrants were excluded from the above computations of weighted average shares for diluted securities.

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					39 Weeks Ended

	November 3,		October 28,			November 3,			October 28,
	2001		2000			2001			2000


	(In thousands)
Net income (loss)	$	1,794	$	(4,828	)	$	(5,902	)	$	(35,699	)
Other comprehensive income		23		(1,053	)		(177	)		(262	)

Total comprehensive income (loss)	$	1,817	$	(5,881	)	$	(6,079	)	$	(35,961	)

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. 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.

On August 3, 2001, Gymboree amended the existing secured facility with Fleet Retail Finance, Inc. which increased the overall credit line from $75 million to $85 million. This additional increase is for working capital and has the same borrowing requirements as the original amount.

As of November 3, 2001, approximately $35.9 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%. As of November 3, 2001, the interest rate charged for the bank’s Reference Rate was 5.50%.

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 Fleet Retail Finance, Inc. credit facility and this term loan. If Gymboree elects to pay the term loan at any time prior to the maturity date, Gymboree is also obligated to pay a premium from 0.75% to 1.5% of the amount pre-paid.

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.

5. Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141,Business Combinationsand SFAS No. 142,Goodwill and Other Intangible Assets. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Gymboree will adopt SFAS No. 142 for its fiscal year beginning February 3, 2002 and does not expect the adoption to have a material impact on our financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets.This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and establishes standards for the recognition and measurement of asset impairment and disposal cost. SFAS 144 supercedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Ofand the accounting and reporting provisions of APB Opinion No. 30,Reporting the Results of Operations — Reporting the Effects of Disposal of a

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This statement is effective for Gymboree in the fiscal year beginning February 3, 2002 and adoption is not expected to have a material impact on our financial position or results of operations.


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:



		As a Percentage of Net Sales

														Percentage Change in
		Thirteen Weeks Ended						Thirty-Nine Weeks Ended						Dollar Amounts
														From 2000 to 2001
		November 3,			October 28,			November 3,			October 28,
		2001			2000			2001			2000			13 weeks			39 Weeks

Net sales			100.0	%		100.0	%		100.0	%		100.0	%		19	%		20	%
Cost of goods sold, including buying and occupancy expenses			(64.0	)		(67.9	)		(66.2	)		(76.3	)		12	%		4	%

	Gross profit		36.0			32.1			33.8			23.7			34	%		71	%
Selling, general and administrative expenses			(32.9	)		(38.9	)		(36.0	)		(43.6	)		1	%		(1	)%
Play and music income, net			0.1			0.6			0.3			0.5			(69	)%		(19	)%

	Operating income (loss)		3.2			(6.2	)		(1.9	)		(19.4	)		(162	)%		(88	)%
Foreign exchange gains (losses), net			(0.1	)		(0.1	)		(0.1	)		0.0			36	%		(573	)%
Net interest expense			(0.9	)		(0.7	)		(0.7	)		(0.3	)		50	%		207	%

	Income (loss) before income taxes		2.2			(7.0	)		(2.7	)		(19.7	)		(137	)%		(83	)%
Income tax benefit (expense)			(0.8	)		2.7			1.0			7.6			(137	)%		(83	)%

	Net income (loss)		1.4	%		(4.3	)%		(1.7	)%		(12.1	)%		(137	)%		(83	)%

Number of stores at end of period			581			604			581			604


	*Thirteen Weeks Ended November 3, 2001 Compared to Thirteen Weeks Ended October 28, 2000*


	Net Sales

Net sales in the third quarter of fiscal 2001 increased to $133.2 million from $111.9 million in the same period last year, an increase of $21.3 million or 19%. Comparable store sales for the third quarter of fiscal 2001 increased 19% compared to the same period last year. Management believes the sales increase is attributable to improvements in the overall merchandise assortments and inventory levels from the prior year. The number of stores open at the end of the quarter was 581, compared to 604 open in the same period last year. The reduction in overall store count reflects the sale of 18 and closure of 1 Zutopia stores and a net decrease of 4 Gymboree locations. As of November 3, 2001, Gymboree operated 527 stores in the United States, 23 stores in Canada, and 31 stores in Europe.


	Gross Profit

Gross profit for the third quarter of fiscal 2001 increased to $47.9 million from $35.9 million in the same period last year, an increase of $12 million, or 33.4%. As a percentage of net sales, gross profit increased 3.9 percentage points to 36% in the third quarter of fiscal 2001 from 32.1% in the same period last year. The increase in gross profit as a percentage of net sales was attributable to higher merchandise margins as a result of lower promotional rates as compared to the prior year. Additionally, the increase in sales provided operating leverage on occupancy and buying expenses, which contributed to the improved gross profit as a percentage of net sales.


	Selling, General and Administrative Expenses

SG&A, which principally consists of non-occupancy store expenses, corporate overhead and distribution expenses, increased to $43.8 million from $43.5 million in the same period of the prior year, an increase of $302,000, or .7%. As a percentage of sales, SG&A decreased 6 percentage points to 32.9% from 38.9% in the same period in the prior year, which was primarily attributable to an increase in net sales. Zutopia was sold in March 2001 and resulted in an expense reduction of $1.6 million for the third quarter of 2001 compared to the third quarter of 2000.


	Play and Music Income, Net

Play and Music income, net decreased 69.4% to $226,000 during the third quarter of fiscal 2001 from $739,000 in income for the same period last year. The decrease was related to lower enrollment levels in corporate site operations and a decline in international franchise development income.


	Foreign Exchange Gains (Losses)

Net foreign exchange losses totaled $98,000 during the third quarter of 2001 compared to a net loss of $72,000 in the third 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 $1.3 million was incurred for the third quarter of 2001 as compared to interest expense of $857,000 for the same period last year. The increase was due to higher average borrowings. Interest income decreased to $2,000 for the third quarter of 2001 from $17,000 in the third quarter of 2000. This decrease reflects a lower average cash balance.


	Income Tax

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


	*Thirty-Nine Weeks Ended November 3, 2001 Compared to Thirty-Nine Weeks Ended October 28, 2000*


	Net Sales

Net sales for the thirty-nine weeks ended November 3, 2001 increased to $355 million, from $295.3 million in the same period last year, an increase of $59.7 million, or 20%. Comparable store sales for the thirty-nine weeks ended November 3, 2001 increased 21% over the prior year. Management believes the sales increase is attributable to improvements in the overall merchandise assortments and inventory levels from the prior year. The number of stores open at the end of the quarter was 581, compared to 604 open in the same period last year. The reduction in overall store count reflects the sale of 18 and closure of 1 Zutopia stores and a net decrease of 4 Gymboree locations. As of November 3, 2001, Gymboree operated 527 stores in the United States, 23 stores in Canada, and 31 stores in Europe.


	Gross Profit

Gross profit for the thirty-nine weeks ended November 3, 2001 increased to $119.9 million from $70.0 million in the same period last year, an increase of $49.9 million, or 71.3%. As a percentage of net sales, gross profit increased 10.1 percentage points to 33.8% from 23.7% in the same period last year. The increase in gross profit as a percentage of net sales was attributable to higher merchandise margins as a result of lower promotional rates as compared to the prior year. Additionally, the increase in sales provided operating leverage on occupancy and buying expenses, which contributed to the improved gross profit as a percentage of net sales.


	Selling, General and Administrative Expenses

SG&A, which principally consists of non-occupancy store expenses, corporate overhead and distribution expenses, decreased to $127.7 million, for the thirty-nine weeks ended November 3, 2001 compared to $128.8 million, in the same period last year, a decrease of $1.1 million or .8%. As a percentage of sales SG&A decreased 7.6 percentage points to 36% from 43.6% for the same period in the prior year, which was primarily attributable to an increase in net sales. Zutopia was sold in March 2001 and resulted in an expense reduction of $3.8 million for the 39 weeks ended November 3, 2001 compared to the same period in the prior year.


	Play and Music Income, Net

Play and Music income, net decreased 19.3% to $1.2 million for the thirty-nine weeks ended November 3, 2001 from $1.5 million in income for the same period last year. The decrease was related to lower enrollment levels in corporate site operations and a decline in international franchise development income.


	Foreign Exchange Gains (Losses)

Net foreign exchange losses totaled $246,000 for the thirty-nine weeks ended November 3, 2001 compared to a net gain of $52,000 in the same period last year. 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 $2.9 million was incurred for the thirty-nine weeks ended November 3, 2001 as compared to interest expense of $1.4 million for the same period last year. The increase was due to higher average borrowings. Interest income decreased to $232,000 for the thirty-nine weeks ended November 3, 2001 from $534,000 in the same period last year. This decrease reflects a lower average cash balance.


	Income Tax

Our effective tax rate for the third quarter of fiscal 2001 and 2000 was 38.5%.

Financial Conditions


	Liquidity and Capital Resources

Cash provided by operating activities for the thirty-nine weeks ended November 3, 2001 was $6.1 million compared to cash used in operating activities of $61.9 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 used in investing activities totaled $10.4 million. This reflects capital expenditures of $13.6 million and is offset in part by proceeds of $3.2 million from the sale of assets of 18 Zutopia stores. Gymboree estimates that capital expenditures during 2001 will be approximately $15.0 million. The majority of such expenditures has been incurred in connection with the relocation and expansion of approximately 10 stores, the opening of approximately 10 new domestic and international stores, the updating of store fronts of approximately 150 stores and the upgrading and replacing information technology systems.

Cash provided by financing activities totaled $1.4 million, reflecting proceeds of $2.5 million from the exercise of warrants and stock options, offset in part by payments on debt.

Cash and cash equivalents were $2.4 million at November 3, 2001, a decrease of $2.9 million from February 3, 2001. Working capital as of November 3, 2001 was $34.8 million compared to $33.4 million at the end of fiscal 2000.

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.

On August 3, 2001, Gymboree amended the existing secured facility with Fleet Retail Finance, Inc., which increased the overall credit line from $75 million to $85 million. This additional increase is for working capital and has the same requirements as the original amount.

Gymboree anticipates that cash generated from operations, together with our existing cash resources and funds available from our current credit facilities, will be sufficient to satisfy our cash needs through fiscal 2002. If additional credit facilities are required, no assurance can be given that such facilities will be available under terms acceptable to Gymboree.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141,Business Combinationsand SFAS No. 142,Goodwill and Other Intangible Assets. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Gymboree will adopt SFAS No. 142 for its fiscal year beginning February 3, 2002 and does not expect the adoption to have a material impact on our financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and establishes standards for the recognition and measurement of asset impairment and disposal cost. SFAS 144 supercedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Ofand the accounting and reporting provisions of APB Opinion No. 30,Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This statement is effective for Gymboree’s fiscal year beginning February 3, 2002 and adoption is not expected to have a material impact on our financial position or results of operations.

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 $5.9 million, $36.9 million and $10.6 million during the thirty-nine weeks ended November 3, 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. Such capital may not be available on terms acceptable to us or at all.


	*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.


	*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 and current economic conditions affecting disposable consumer income such as employment levels, business conditions, interest rates and tax rates as well as domestic and international political unrest 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.


	*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.


	*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 of the value of such tax benefit (and the corresponding deferred tax asset) will be lost.


	*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 or 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 depends 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.


	*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.


	*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 2001, one vendor accounted for 63% 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.


	*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 sales or earnings in any period 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Gymboree enters into forward foreign exchange contracts (principally British pounds sterling and Canadian dollars) to hedge certain inventory purchases. The term of the forward exchange contracts is generally less than one year. The purpose of our foreign currency hedging activities is to protect the margin exposure that results from inventory purchases made in one currency and product sales in another currency.

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 November 3, 2001.


	Notional					Weighted
	Amount		Fair Value			Average Rate


	(In thousands)
British pounds sterling	$	6,252	$	(105	)		1.431
Canadian dollars		1,664		23			0.6368

Total	$	7,916	$	(82	)

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 the Company. For every $1 million in debt outstanding, under the Fleet Retail Finance, Inc. credit facility, an increase of 0.25% in the prime rate would result in an additional $25,000 per year.

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 originally transferred to the U.S. District Court for the District of Hawaii. The case was later transferred to the U.S. District Court for the District of the Northern Mariana Islands. 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. The court hearing on preliminary approval of the settlement is currently scheduled for February 14, 2002. There can be no assurance that the court will ultimately approve the settlement.

Item 6. Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended November 3, 2001.

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.


	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)

Date: December 17, 2001

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Gymboree (GYMB) Inactive 10-Q2002 Q1 Quarterly report

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