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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD
FROM _________ TO _________
COMMISSION FILE NUMBER 000-21250
THE GYMBOREE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2615258
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 AIRPORT BOULEVARD, SUITE 200, BURLINGAME, CALIFORNIA 94010-1912
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650)-579-0600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of each exchange on which registered
COMMON STOCK, $0.001 PAR VALUE NASDAQ NATIONAL MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 5, 1999, was approximately $248,725,680, based upon the
last price reported for such date on the NASDAQ National Market.
As of April 5, 1999, 24,265,920 shares of the registrant's common stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended January 30, 1999 (hereinafter referred to as the "1998 Annual Report
to Stockholders") are incorporated into Parts II and IV.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 26, 1999 (hereinafter referred to as the "1998
Proxy Statement") are incorporated into Part III.
The exhibit index is located on page 22
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THE GYMBOREE CORPORATION
TABLE OF CONTENTS
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PAGE
NUMBER
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<S> <C> <C>
PART I
ITEM 1. BUSINESS................................................................................ 4
ITEM 2. PROPERTIES.............................................................................. 13
ITEM 3. LEGAL PROCEEDINGS....................................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 15
ITEM 6. SELECTED FINANCIAL DATA................................................................. 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE EXPOSURES ON MARKET RISK................................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES... 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 16
ITEM 11. EXECUTIVE COMPENSATION.................................................................. 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.................................. 17
</TABLE>
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PART 1
ITEM 1. BUSINESS
The Gymboree Corporation is a leading specialty retailer of high quality
apparel and accessories for children ages newborn to preteen. Gymboree operates
an international chain of stores, primarily in regional shopping malls, and in
selected suburban and urban locations. As of January 30, 1999, Gymboree operated
564 stores. Under the GYMBOREE(R) brand name, we design and contract manufacture
children's active-wear for sale exclusively by Gymboree. Our apparel is
characterized by fashionable colors, charming prints, complex embroidery,
comfort, functionality and durability. Gymboree also offers directed
parent-child developmental play programs for children ages newborn to 4 years
old at 398 franchised and Gymboree-operated locations.
Gymboree was organized in October, 1979, as a California corporation, and
re-incorporated in Delaware in June, 1992.
This annual report on Form 10-K contains certain forward-looking statements
reflecting Gymboree's current expectations. Our actual future performance may
not meet such expectations. Factors that could cause future performance to vary
from current expectations include, but are not limited to, the factors discussed
in the "Business" section, and in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of the 1998 Annual Report
to Stockholders incorporated by reference in this annual report on Form 10-K.
BUSINESS STRATEGY
Gymboree's business strategy consists of the following principal elements:
- HIGH QUALITY APPAREL. We strive to offer our customers high quality
apparel with an excellent price/value relationship. We design the
merchandise to be comfortable, functional, safe and durable by placing
particular emphasis on high quality fabrics and detailed garment
construction.
- BRAND NAME RECOGNITION. Gymboree has developed a clearly recognizable
brand image through its distinctive design, merchandising and retailing.
Customers associate Gymboree with high quality and appealing, colorful
children's clothing sold in an attractive and friendly environment.
- INTEGRATED OPERATIONS: DESIGN, CONTRACT PRODUCTION AND RETAILING. We
believe that the vertical integration of our operations enables us to
identify and respond to market trends, maintain rigorous product quality
standards and closely monitor the distribution of our products.
- EXCLUSIVE DISTRIBUTION CHANNEL. Our products are sold exclusively through
Gymboree retail stores and, to a limited extent, through our play program
sites. During fiscal 1998, we continued to build the Gymboree Gift Center
at www.gymboree.com which began in 1997. This web site allows customers to
purchase selected items.
- MERCHANDISE FOCUS. Gymboree apparel is designed, contract manufactured and
merchandised by line. Merchandise is displayed in each Gymboree store in a
manner designed to enhance visual appeal and maximize customer convenience
by enabling customers to select among an assortment of coordinated apparel
items, accessories and shoes. We offer a broad range of styles, themes and
colors, as opposed to relying primarily on certain key items. To maintain
the freshness of the merchandise, Gymboree introduces between 30 and 40
new lines of boy's, girl's and infant's apparel each year.
- RESPONSIVE CUSTOMER SERVICE. Customer service and satisfaction are
defining features of the Gymboree corporate culture. Assisting customers
in merchandise selection and outfit coordination is the top priority of
Gymboree team members. We believe that this customer service in
combination with our merchandise encourages multiple item purchases per
customer.
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STORE EXPANSION STRATEGY
Gymboree seeks to strategically increase our current store base by opening
new stores in major metropolitan malls, certain secondary regional malls and in
select downtown street locations that satisfy certain demographic and financial
return criteria. In fiscal 1998, Gymboree opened 129 new stores and relocated
and/or expanded 25 existing stores. Over the past year, the average size of new
stores was approximately 1,700 square feet. We plan to open 40 to 50 new stores
during fiscal 1999. As indicated in the table below Gymboree has achieved
increasing geographic diversification within the United States in recent years.
We have continued our international expansion by opening 4 additional retail
stores in Canada and 18 additional stores in Europe during fiscal 1998. During
fiscal 1999, we are planning to open approximately 4 to 5 stores in Europe and 3
to 5 stores in Canada. Our ability to continue to expand successfully in the
future will depend on a number of factors, including the availability of
suitable store locations, the negotiation of acceptable lease terms, our
financial resources and the ability to control the operational aspects of this
growth.
Gymboree expanded from 2 stores in California in 1986 to 525 stores in 50
states and the District of Columbia, 15 stores in Canada and 24 stores in
Europe, as of January 30, 1999. The following table sets forth, by geographic
region, the net number of stores opened and closed during each of the periods
indicated:
<TABLE>
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Fiscal Year
-------------------------------------------------------------
PRIOR TO
1992 1992 1993 1994 1995 1996 1997 1998 TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
East 35 8 9 14 14 17 23 30 150
Midwest 7 10 9 12 19 25 10 24 116
South 6 9 10 23 26 12 29 39 154
West 32 5 12 8 11 16 7 14 105
Europe 0 0 0 0 0 0 6 18 24
Canada 0 0 0 0 0 5 6 4 15
TOTAL 80 32 40 57 70 75 81 129 564
</TABLE>
SITE SELECTION. In selecting new store sites, Gymboree typically looks for
high traffic locations ranging from 1,500 to 3,000 square feet in regional
malls, specialty centers and suburban main street locations. Our real estate
department conducts extensive analysis of potential store sites and bases its
selection on the performance of other specialty retail tenants, size of the
market and demographics of the surrounding area. In evaluating a store location,
placement of the store relative to retail traffic patterns and the number of
children in the trade area are important considerations. Although our current
stores are located primarily in regional malls, we have opened stores in
alternative locations. In addition, we plan to relocate some higher volume
stores within the same malls where we anticipate receiving a competitive
advantage. There can be no assurance that Gymboree will continue to be
successful in either obtaining favorable sites for our new stores or negotiating
favorable lease terms for such sites.
NEW STORE ECONOMICS. Gymboree's average cost for leasehold improvements,
furniture and fixtures for stores opened in fiscal 1998 was approximately
$250,000 per store, before landlord construction allowances. In addition,
working capital requirements on these same stores, consisting almost entirely of
inventory purchases, averaged approximately $60,000 per store. Average
pre-opening costs per store, which are expensed as incurred, were $17,000 during
fiscal 1998. Gymboree stores have typically achieved profitability at the store
operating level within their first six months of operation, although there can
be no assurance that new stores will continue to achieve the same levels of
profitability.
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PRODUCTS AND MERCHANDISING
Gymboree's merchandise has evolved significantly over time. Prior to 1988,
Gymboree offered unisex apparel for children ages 6 months to 5 years and a
selection of non-apparel products, including toys. Since 1989, we have broadened
our apparel merchandise assortment by developing separate boy's and girl's
lines, distinguishing assortments for appropriate ages: CradleGym(R) - newborn
to 12 months; GymBaby(R) - newborn to 3 years and GymKids(R) - for children ages
3 to 7 years. Gymboree currently offers customers an assortment of high quality,
comfortable, fully coordinated lines of GYMBOREE(R) brand apparel and
accessories, consisting primarily of pants, tops, overalls, dresses, socks,
hats, crib shoes, swimwear, sweaters, outerwear, underwear and shoes. Our
merchandising strategy focuses upon the quality and design of the apparel
products and planned introduction of new product lines. Gymboree strives to
create a distinctive look for its merchandise to enhance brand recognition and
stimulate repeat purchases. Gymboree apparel is designed, manufactured,
purchased and merchandised by line on a seasonal basis.
Each of Gymboree's stores features 11 major merchandising lines per year.
Each merchandise line generally consists of approximately 60 clothing items,
encompassing matching tops and bottoms, with similar color palettes, patterns
and designs. Additionally, each line features a wide selection of related
accessories that complement the apparel, such as coordinated socks, hats, crib
shoes and hair accessories. In order to maintain the freshness of its
merchandise, Gymboree regularly updates the assortments by rotating each line on
an 11- to 13-week selling cycle. Although Gymboree generally is unable to
reorder items after a line has been purchased, we carefully monitor the rotation
schedule, and we have the ability to move up the set-up of new lines based on
selling demand. Merchandise in each line generally flows through a structured
markdown process.
Gymboree's customized wall systems display each merchandise line as a
separate coordinated group. This presentation maximizes customer convenience in
selection, creates a visually attractive selling environment and assists team
members in the process of wardrobing, which, we believe, stimulates multiple
purchases of matching items. Boy's and girl's lines are generally displayed on
opposite walls and accessories are located adjacent to the coordinated line. A
typical store offers approximately 200 to 250 styles of apparel and
approximately 100 to 120 accessories and other non-apparel items.
FASHION TRENDS AND CHANGING CONSUMER PREFERENCES
Gymboree's sales and profitability depend upon the continued demand by
customers for our apparel and accessories. We believe that our success depends
in large part upon our ability to anticipate, gauge and respond in a timely
manner to changing consumer demands and fashion trends and upon the appeal of
our products. There can be no assurance that the demand for Gymboree's apparel
or accessories will not decline or that we will be able to anticipate, gauge and
respond to changes in fashion trends. If demand for our apparel and accessories
were to decline or if we were to misjudge fashion trends, Gymboree's business,
financial condition and results of operations could be materially adversely
affected.
DESIGN, SOURCING AND CONTRACT MANUFACTURING
Gymboree apparel is characterized by colorful and distinctive designs,
quality fabrications and construction and an excellent price/value relationship.
Gymboree sources soft, comfortable and durable fabrics. Our merchandising and
design team creates unique color combinations and original patterns for these
fabrics and emphasizes functional features such as grow cuffs, which allow for
extended use of tops, pants and overalls as children grow.
Gymboree manages the production of apparel from the initial product concept,
through color and pattern design, fabric development and testing, sample
approval and testing and garment manufacturing. We believe that the vertical
integration of operations and the coordinated efforts of our merchandising and
design, production, and financial planning teams enable Gymboree to create
distinctive offerings. The merchandising and design team determines the styles
for merchandise based on an evaluation of current style trends as well as a
review of the popularity of the prior year's products. This team works closely
with Gymboree's financial planning team to select garment styles for each
season. In conjunction with foreign buying agents, the production team arranges
fabric sourcing and garment production while the quality team ensures that the
final products satisfy Gymboree's detailed specifications and strict quality and
safety standards. The process from initial product concept/design to receipt of
finished product requires approximately 10 months. Fabric and production
commitments are made approximately 6 months before receipt of the finished
garments at our distribution center.
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Throughout the design process, Gymboree's financial planning team prepares
financial plans for each line of clothing on an item-by-item basis. Certain
proposed items in a line may be revised or replaced as a result of this team's
financial analysis. This team also monitors inventories on a daily basis,
prepares seasonal plans and develops unit production forecasts.
The majority of Gymboree apparel is manufactured to our specifications by
approximately 150 independent manufacturers. Key countries in the Far East
include China, Indonesia, Philippines, Thailand and Sri Lanka. Other
manufacturing regions include Central America, Israel, Mexico and the United
States. Gymboree sources its fabric from approximately 15 vendors. In fiscal
1998, our product assortment was approximately 65% knit and 35% woven. Gymboree
purchases all products in U.S. dollars, and we have not historically experienced
any material difficulties as a result of any foreign political, economic or
social instabilities, although there can be no assurance that we will not
experience such difficulties in the future. We have no long-term contracts with
suppliers and typically transact business on an order-by-order basis.
Gymboree's quality control team arranges with independent testing
laboratories to test fabrics prior to cutting against established performance
standards for quality and safety. During the prototype sampling stage and
following manufacturing, the technical teams subject the merchandise to tests
which ensure that construction, workmanship and fit, as well as the style and
appearance of the garments, satisfy Gymboree's stringent specifications.
Subsequently, the production and quality control teams review the garment test
and bulk production inspection results to verify that the quality is consistent
with Gymboree's high standards. Gymboree generally does not purchase its
finished apparel products until manufacturing has been completed and the
products have been approved by independent testing labs and Gymboree's quality
control and production teams.
DEPENDENCE ON NEW PRODUCTS
Gymboree's continued growth and success depend in large part on our ability
to successfully develop and introduce new products that are perceived to
represent an improvement in style, functionality or value compared to products
available in the marketplace. Failure to regularly develop and introduce new
products successfully could materially and adversely impact future growth and
profitability. In addition, in 1999 Gymboree will introduce certain new products
and concepts such as Zutopia, targeted for children ages 6 - 12, that 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 children's apparel in the newborn - 7
years age range and lead to a reduced demand for its existing products.
RELIANCE ON FOREIGN AND UNAFFILIATED MANUFACTURERS
Gymboree currently relies on unaffiliated manufacturers to produce
substantially all of its products. Gymboree has no long-term contracts with its
manufacturing sources, and we compete with other companies for production
facilities and import quota capacity. Gymboree's products are currently
manufactured to specifications by independent factories located primarily in the
Far East, as well as Central America , Israel, , Mexico and the United States.
In the event any of our key manufacturers were unable or unwilling to continue
to manufacture Gymboree's products, Gymboree would have to rely on other current
manufacturing sources or identify and qualify new unaffiliated manufacturers. In
such event, there can be no assurance that Gymboree would be able to qualify
such manufacturers for existing or new products in a timely manner or that such
manufacturers would allocate sufficient capacity to Gymboree in order to meet
its requirements. Any significant delay in our ability to obtain adequate
supplies of products from our current or alternative sources, would materially
and adversely affect the business and results of operations. Although Gymboree
believes that we have good relationships with our unaffiliated principal mills
and manufacturing sources and we maintain good control with respect to product
specifications and quality, our future success will depend in large measure upon
our ability to maintain such relationships both directly and through our
independent agents, and there can be no assurance that these manufacturers will
continue to produce products that are consistent with Gymboree's standards. In
this regard, Gymboree has occasionally received, and may in the future continue
to receive, shipments of product from unaffiliated manufacturers that fail to
conform to our quality control standards. In such event, unless we are able to
obtain replacement products in a timely manner, Gymboree risks the loss of
revenue resulting from the sale of such products and related increased
administrative and shipping costs. The failure of any key unaffiliated
manufacturer to supply products that conform to Gymboree's standards could
materially and adversely affect our results of operations and our reputation in
the marketplace.
Although Gymboree believes that we have good relationships with our principal
manufacturing sources, our future success is substantially dependent upon our
ability to maintain such relationships. If Gymboree experiences significant
increased demand, which
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cannot be assured, or if an existing unaffiliated manufacturer needs to be
replaced, we will need to significantly expand manufacturing capacity, both from
current and new manufacturing sources. There can be no assurance that such
additional manufacturing capacity will be available when required on terms that
are acceptable to Gymboree. In addition, in fiscal 1998, one vendor accounted
for approximately 70% of our cotton knit fabric purchases. Although we believe
that other sources could be identified to satisfy our requirements for cotton
knit fabrics, the loss of this vendor, or a delay in obtaining fabric from this
vendor, could have a material adverse effect on our business and operating
results.
Gymboree's business is subject to the risks generally associated with doing
business abroad, such as foreign governmental regulations, political unrest,
disruptions or delays in shipments and changes in economic conditions in
countries in which our vendor mills and manufacturing sources are located.
Gymboree cannot predict the effect that such factors will have on our business
arrangements with foreign mills and manufacturing sources. If any such factors
were to render the conduct of business in a particular country undesirable or
impractical, or if our current foreign manufacturing sources or mills were to
cease doing business with us for any reason, Gymboree's business and operating
results could be adversely affected. Our business is also subject to the risks
associated with the imposition of additional United States legislation and
regulations relating to imported apparel products, including quotas, duties,
taxes and other charges or restrictions on imported apparel. We cannot predict
whether additional United States quotas, duties, taxes or other charges or
restrictions will be imposed upon the importation of our products in the future,
or what effect any such actions would have on our business, financial position
and results of operations.
STORE OPERATIONS
The primary objective of store management is to maximize sales by providing
superior customer service. Store management is principally responsible for sales
training and implementing performance evaluation systems. In a continuing effort
to minimize team members' time away from customers, operational procedures are
reviewed and streamlined by the store operations team prior to implementation at
the store level. This team is also responsible for field and store staffing,
daily sales motivation and central office to store communications. Our
merchandising team also interacts with store personnel and is responsible for
developing merchandise presentation plans that can be effectively implemented at
the store level.
Store operations are managed through 46 operating districts, divided into 6
geographic regions. Each District Team Leader is responsible for approximately 8
stores. Stores are typically staffed with a team leader, two assistant team
leaders and several team members, which varies with store volume. During the
holiday selling season, team member levels are substantially increased to
accommodate peak traffic levels.
A number of Gymboree programs offer incentives to both team members and team
leaders. Team members receive compensation primarily in the form of hourly
wages. Incentive structures are designed to maximize team members' average sales
transactions. Scheduling procedures allocate payroll hours to team members based
upon sales performance rather than simple availability. Other programs provide
bonuses or cash awards to high achieving team members during contest periods, or
to all team members of a store based on store sales achievements. District Team
Leaders and Regional Team Directors receive compensation in the form of
salaries, performance-based bonuses and stock options.
CUSTOMER SERVICE
Customer service is a defining feature of the Gymboree corporate culture. We
believe that knowledgeable and enthusiastic team members have a direct impact on
profitability. Gymboree places great emphasis on the selling function through
consistent and on-going training and evaluation systems which are initiated by
the central office and administered by field management at all levels. Our store
Managers, District Team Leaders and Regional Team Directors spend the majority
of their work week on Gymboree selling floors, providing leadership by coaching
the sales staff and assisting customers.
Customer service is a high priority for Gymboree store team members.
Gymboree's customer focus is emphasized in recruiting and, as measured by sales,
is the primary component in the on-going evaluation of team members. Gymboree
minimizes team members' time spent on administrative functions by centrally
determining merchandise display and replenishment, markdowns and basic labor
scheduling. By emphasizing friendliness, product knowledge and personal
attention, we believe that Gymboree has established a reputation for excellent
customer service.
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STORE ENVIRONMENT
Gymboree stores are designed to create an energetic and enjoyable shopping
environment. The brightly lit stores and glass store fronts allow the colorful
in-store environments to attract customers from the outside. Stores are
constructed in an open manner which enables customers to see virtually all
product offerings from the store's entrance.
Customers enter the stores under natural wood arches supported by giant
children's building blocks. The dramatic archways and Gymboree logo attract the
customer's attention, even from a distance. Gymboree believes that the playful
image created by our store fronts is carried into the stores and maintained
through product presentation and enthusiastic store personnel.
Inside the store, merchandise is displayed on store walls by coordinated
apparel lines, which allows easy accessibility and provides ample floor space
for customers to maneuver strollers within the store. While parents shop,
children are encouraged to play with small toys throughout the store and to
enjoy Gymboree videos which run continuously throughout the day.
MARKETING AND PROMOTION
Whereas Gymboree previously relied on word of mouth advertising, in 1998 we
continued development through strategic marketing of the Gymboree brand. An
increased focus on synergy between the stores and Play Programs helped fuel more
successful direct marketing, advertising and promotional efforts.
Cross-promotional activities with other large strategically appropriate brands
like Gruner and Jahr's Parents Magazine were also successfully executed.
ELECTRONIC COMMERCE
Gymboree launched its first web site at www.gymboree.com during fiscal 1997.
This web site, also known as the Gymboree Gift Center, is designed to assist
customers as a one-stop shopping connection for Gymboree gift sets for children
between the ages of newborn and 7 years old. During 1998, products were
selectively added to the Gift Center. We will continue to develop our web
presence for corporate identification and expansion of sales.
MERCHANDISE DISTRIBUTION
Gymboree's merchandise is shipped primarily via ocean carriers from foreign
ports to the Port of Oakland, California, for distribution to U.S. stores, to
Toronto, Ontario, for distribution to Canadian stores, and to Shannon, Ireland
for our European stores. Contract manufacturers or vendors are required to
complete manufacturing and deliver merchandise to our foreign consolidator
within a designated ship window. This ship window ensures timely delivery of the
product to Gymboree's U.S., Canadian and Irish distribution centers using
cost-effective ocean transportation. A multi-country consolidation program was
established in 1997 which enables us to bring full ocean containers into those
countries, thereby minimizing shipping cost per unit.
Our transportation department coordinates the transportation of all purchase
orders and monitors the timeliness of these shipments. Customs clearance takes
place at the Port of Oakland for U.S. goods, Toronto for Canadian goods, and
Shannon, Ireland for European goods. Samples of all items are reviewed by U.S.
or local Customs agents prior to the actual shipment of merchandise. This
process reduces the customs clearance time and speeds the delivery of the
merchandise to Gymboree.
Our U.S. merchandise is received, checked, processed and distributed through
the new U.S. distribution center in Dixon, California. This distribution center
is a Gymboree-owned 300,000 square foot facility which opened on schedule in
January, 1998. New lines are received at the distribution center "just in time."
The merchandise is processed, packed by store and delivered on a targeted
in-store date approximately once per month. Merchandise is then replenished on a
weekly basis based on store sell-through. Merchandise for distribution to Europe
is shipped directly from the factory to a 26,000 square foot leased facility in
Shannon, Ireland, where it is processed for delivery to the stores. Merchandise
destined for Canadian stores is shipped directly to a third-party distribution
center in Toronto, Canada.
Outbound transportation is coordinated by our transportation team. Store
orders are consolidated by region and shipped via truckload carriers into the
downstream terminals of regional less-than-truckload carriers. This allows
Gymboree to build full trailers, thereby reducing the delivery cost per unit.
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MANAGEMENT INFORMATION SYSTEMS
Gymboree's information systems provide integration of store, merchandising,
distribution and financial systems. These systems operate on Unix and NT
platforms. Sales and other inventory management information are updated daily in
the merchandise reporting systems by communicating with each store's
point-of-sale system. Merchandise is automatically replenished in response to
the specific unit inventory requirements of each store. Gymboree evaluates
information obtained through daily reporting to implement merchandising
decisions regarding markdowns and allocation of merchandise.
Gymboree believes that our information systems are essential in achieving our
growth plans and maintaining a competitive industry position. We are committed
to utilizing technology as a competitive advantage.
YEAR 2000
The information required by this item is incorporated herein by reference to
page 15 of the 1998 Annual Report to Stockholders filed as Exhibit 13.1 to this
Annual Report on Form 10-K.
PLAY PROGRAMS
As of January 30, 1999, Gymboree's Play Programs included 18 Company-operated
play centers in California and 380 franchisee-operated play centers, of which
approximately 80% are located in the United States, and the remaining 20% are
located in foreign countries, including Australia, Canada, Colombia, France,
Indonesia, Korea, Mexico, Singapore and Taiwan. In addition to generating
income, we believe that the Play Programs provide attractive cross-marketing
opportunities for Gymboree stores and further strengthen the GYMBOREE(R) brand
name recognition with retail customers. See "Marketing and Promotion."
The Gymboree Play Programs are designed to enhance early childhood
development through fun-filled sensory and motor activities, which engage
children through sight, touch, sound and movement. Motor skill development is
stimulated through physical play and exercise in an exciting, safe environment
which includes proprietary, colorful, developmentally appropriate play
equipment. The Gymboree Play Program involves weekly 45-minute classes offered
throughout the year. Classes are designed to interest and challenge children
through activities that are tailored to enhance mental and physical development
as well as to provide opportunities for socializing. In addition to sliding,
climbing, jumping and running, classes include music, structured play
activities, games and often a finale featuring a colorful parachute, songs,
bubbles and GYMBO(R) the clown. Parents are present at play classes and
participate in the activities with their children.
Gymboree classes are offered to children ages newborn to 4 years old.
GymBabies (for ages newborn to 6 months) introduce sensory play with special
props and equipment. GymCrawlers (6 to 12 months) develop upper-body stability,
strength and coordination. GymWalkers (10 to 18 months) emphasize pre-walking
and early walking skills and enhance strength, socialization, walking, balance
and coordination. GymRunners (14 to 28 months) encourage exploration and build
motor skills. GymExplorers (for 2 year olds) explore movement, stories, puppetry
and songs. GymKids (3 year olds) learn non-competitive skills like catching,
throwing, kicking and tumbling. GymPairs classes are designed for parents with
two mobile children; activities are modified to serve the needs of each
participant.
Gymboree's standard franchise agreement provides for an initial term of 10
years. Upon signing the franchise agreement, each domestic and Canadian
franchisee currently pays an initial fee ranging from $35,000 for the
franchisee's first play center location to $20,000 for the fourth (and each
subsequent) location, and each international (excluding Canadian) franchisee
pays an initial fee ranging from $75,000 to $500,000. The franchises are
renewable for 1 additional 10-year term, and Gymboree receives no fee upon the
renewal of the franchise from domestic franchisees. Gymboree receives a royalty
of 6% of each domestic franchisee's gross receipts from operations, and a fee of
approximately $10,500 upon the transfer of a franchise from one domestic
franchisee to another. Currently, Gymboree supplies the franchisees with program
aids, equipment and consumer products at a cost to the franchisee and conducts
initial and ongoing training programs.
Gymboree will continue offering franchises for sale in fiscal 1999.
10
<PAGE> 11
TRADEMARKS AND SERVICE MARKS
Gymboree is the owner in the United States of the trademark and service mark
"GYMBOREE", and the trademarks "GYMBO" and "GYMBABY", among others. These marks
and certain other of Gymboree's marks are registered in the United States Patent
and Trademark Office, and the mark "GYMBOREE" is also registered, or is the
subject of pending applications, in approximately 45 foreign countries. Each
federal registration is renewable indefinitely if the mark is still in use at
the time of renewal. Gymboree's rights in the "GYMBOREE" mark and other marks
are a significant part of the business. Accordingly, we intend to maintain the
mark and the related registrations. Gymboree is not aware of any material claims
of infringement or other challenges to our right to use the mark in the United
States.
Gymboree uses a number of trademarks, certain of which have been registered
with the United States Patent and Trademark Office and in certain foreign
countries. We believe that our registered and common law trademarks have
significant value and that some of our trademarks are instrumental to our
ability to create and sustain demand for and market our products. We believe
that there are no currently pending material challenges to the use or
registration of any of Gymboree's registered trademarks. There can be no
assurance, however, that our trademarks do not or will not violate the
proprietary rights of others, that they would be upheld if challenged or that
Gymboree would, in such an event, not be prevented from using our trademarks,
any of which could have a material adverse effect on Gymboree and the business.
In addition, we could incur substantial costs to defend legal actions taken
against Gymboree relating to our use of trademarks, which could have a material
adverse effect on our results of operations and financial position.
From time to time, Gymboree discovers products in the marketplace that are
counterfeit reproductions of our products or that otherwise infringe upon
trademark rights held by Gymboree. If Gymboree is unsuccessful in challenging a
third party's products on the basis of trademark infringement, continued sales
of such product by that or any other third party could adversely impact the
Gymboree brand, result in the shift of consumer preferences away from Gymboree
and generally have a material adverse effect on our results of operations and
financial condition.
COMPETITION
The children's apparel segment of the specialty retail business is highly
competitive. Gymboree competes on a national level with GapKids (a division of
The Gap, Inc.) and certain leading department stores as well as certain discount
retail chains such as Kids 'R' Us (a division of Toys 'R' Us, Inc.). Gymboree
also competes with a wide variety of local and regional specialty stores and
with certain other retail chains. Many of these competitors are larger and have
substantially greater financial, marketing and other resources than Gymboree.
Increased competition may reduce sales and gross margins, increase operating
expenses and decrease profit margins. We may not be able to compete successfully
in the future.
ECONOMIC CONDITIONS; DEPENDENCE ON CONSUMER SPENDING
Gymboree's financial performance is also sensitive to changes in overall
economic conditions, which have an impact on consumer spending trends. The
success of our operations depends upon a number of factors relating to consumer
spending, including future economic conditions affecting disposable consumer
income such as employment, business conditions, interest rates and tax rates.
There can be no assurance that consumer spending will not decline in response to
economic conditions, thereby adversely affecting our growth, net sales and
profitability. Gymboree's stores are located primarily in enclosed regional
malls. Consequently, our ability to sustain the level of sales is dependent in
part on a high volume of mall traffic. Mall traffic may be adversely affected
by, among other things, economic downturns, the closing of anchor department
stores or changes in consumer preferences, all of which are beyond our control.
Shifts in consumer discretionary spending to other products or a general
reduction in the level of such spending could also adversely affect Gymboree.
These factors may adversely impact our business, financial position and results
of operations in the future.
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT
In the past year, we have made significant changes in our executive officers
and management team. These new senior personnel, among others, have extensive
national retail and wholesale experience and have effected certain product
development, merchandising, marketing and operational strategy changes. There
can be no assurance that Gymboree will successfully assimilate these new
executives and make strategic modifications to certain of its past operating
policies in a timely and efficient manner. Furthermore, the
11
<PAGE> 12
continued success of Gymboree is largely dependent on the personal efforts and
abilities of our senior management and certain other key personnel and on our
ability to retain current management and to attract and retain qualified
personnel in the future. The loss of certain key employees or Gymboree's
inability to retain other qualified employees could have a material adverse
effect on the results of operations and financial position.
NEED FOR ADDITIONAL CAPITAL
Various elements of our business and growth strategies, including plans to
broaden existing product lines and introduce new products and concepts, such as
Zutopia, which may require us to maintain higher inventory levels which could
require additional capital. There can be no assurance that funds will be
available to Gymboree on terms that are satisfactory. To the extent that we
raise additional equity capital, a dilutive effect on existing stockholders
could result.
TEAM MEMBERS
As of January 30, 1999, Gymboree had over 6,500 team members. In addition, a
significant number of seasonal team members are hired during each holiday
selling season. None of our team members is represented by a labor union, and we
believe that our relationship with our team members is good.
EXECUTIVE OFFICERS
The following table sets forth information regarding our executive
officers.
<TABLE>
<S> <C> <C>
Stuart G. Moldaw 71 Chairman of the Board of Directors
Gary White 46 Chief Executive Officer and Vice-Chair of the Board of Directors
Melanie Bordeaux Cox 39 President
Lawrence H. Meyer 46 Senior Vice President and Chief Financial Officer
Edward Loseman 48 Senior Vice President, Sourcing and Logistics
Kenneth F. Meyers 36 Senior Vice President, Human Resources
</TABLE>
Stuart G. Moldaw has been our Chairman of the Board of Directors since
January 1994, and has been a director of Gymboree since May 1982. Mr. Moldaw
previously served as Chairman of the Board of Directors of Gymboree from January
1990 through January 1993. From 1980 to 1990, Mr. Moldaw served as a general
partner of U.S. Venture Partners. From 1987 through 1988, Mr. Moldaw served as
Chief Executive Officer of Ross Stores, Inc., an off-price retailer, and is
currently a director and Chairman Emeritus of Ross Stores, Inc.
Gary White has been our Vice-Chair of the Board of Directors and Chief
Executive Officer since February 1999, and was Chief Executive Officer and
President and a director beginning in February 1997. Mr. White served as a
Senior Vice President and the Chief Operating Officer of Gymboree from January
1996 until February 1997. Prior to joining Gymboree, Mr. White served as
Executive Vice President of Mervyn's, a division of Dayton Hudson Corporation.
Mr. White was employed by Dayton Hudson Corporation since 1976 having served in
various positions as an officer with Dayton Hudson Corporation from 1988 to
1996.
Melanie Bordeaux Cox joined Gymboree as President in March 1999. Prior to
joining, she was General Merchandise Manager of Urban Outfitters, Inc. since
1995. Before that, Ms. Cox was Executive Vice President, General Merchandise
Manager, of Contempo Casuals from 1994 to 1995, General Merchandise Manager of
Clothestime Stores, Inc. from 1990 to 1994, and prior to 1990 was Merchandise
Manager of Product Development of The Wet Seal, Inc.
Lawrence H. Meyer joined Gymboree as Senior Vice President and Chief
Financial Officer in September 1998. Previously, Mr. Meyer was Chief Financial
Officer and later was Vice President, Business Development, of Toys "R" Us
International, from 1991 to 1998. Before that, Mr. Meyer was Vice President and
Chief Financial Officer of Nielsen Marketing Research from 1989 to 1991, and
held several financial positions with PepsiCo, Inc. from 1978 to 1989.
12
<PAGE> 13
Mr. Edward A. Loseman joined Gymboree as Senior Vice President of Sourcing
and Logistics in January 1998. Prior to joining Gymboree, Mr. Loseman was Vice
President of Sourcing for GUESS? Inc. from 1996, and Vice President of
Manufacturing Services for Polo/Ralph Lauren from 1992 to 1996.
Mr. Kenneth F. Meyers joined Gymboree as Senior Vice President, Human
Resources in March, 1997. Previously, Mr. Meyers was Vice President, Human
Resources at Walt Disney Imagineering from 1995 to 1997. Prior to Disney, Mr.
Meyers held executive positions in human resources at United Technologies
Corporation.
ITEM 2. PROPERTIES
As of January 1999, Gymboree's corporate campus is located in 3 office
buildings in Burlingame, California, which we occupy under leases expiring
between 1999 and 2003.
During 1997, we completed construction of a new 300,000 square foot
distribution center on 15 acres located in Dixon, California. Gymboree has an
option agreement on contiguous land for an additional 6 acres. Beginning in
January, 1998, we started distributing all products to our stores located in the
United States from this facility. Gymboree leases a distribution center in
Shannon, Ireland for European operations, and utilizes a third-party owned and
operated distribution center in Toronto, Ontario, Canada for Canadian
operations.
At January 30, 1999, Gymboree's 564 stores included an aggregate of
approximately 939,000 square feet of space. Our stores are all leased, typically
for a 10-year term. In most cases, Gymboree pays a minimum rent plus a
percentage rent based on the store's net sales in excess of a certain threshold.
Substantially all of the leases require us to pay insurance, utilities, real
estate taxes and repair and maintenance expenses. See Note 2 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Gymboree has been named as a defendant in two lawsuits relating to sourcing
of products from Saipan (Commonwealth of Northern Mariana Islands). A complaint
was filed on January 13, 1999 in California Superior Court in San Francisco by
the Union of Needletrades Industrial and Textile Employees, AFL-CIO; Global
Exchange; Sweatshop Watch; and Asian Law Caucus against Gymboree and 17 other
parties. The plaintiffs allege violations of California's unlawful, fraudulent
and unfair business practices and untrue and misleading advertising statutes in
connection with labeling of product and labor practices regarding workers of
factories that make product for Gymboree in Saipan. The plaintiffs seek
injunctive relief, restitution, disgorgement of profits and other damages. On
March 29, 1999, Gymboree, along with other defendants, filed a demurrer in
California Superior Court in San Francisco, seeking dismissal of the complaint.
A second complaint was filed on January 13, 1999 in Federal District Court,
Central District of California, by various unidentified worker plaintiffs
against Gymboree and 25 other parties. Those unidentified worker plaintiffs
seek class-action status and allege, among other things, that Gymboree (and
other defendants) violated the Racketeer Influenced and Corrupt Organizations
Act in connection with the labor practices and treatment of workers of
factories in Saipan that make product for us. The plaintiffs seek injunctive
relief as well as actual and punitive damages. On March 29, 1999, Gymboree,
along with several other defendants, filed a motion in Federal District Court,
Central District of California, to transfer the venue of the case to the
Commonwealth of the Northern Mariana Islands. Additionally, on April 12, 1999,
Gymboree, along with several other defendants, filed a motion to dismiss the
federal complaint.
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 8, 1999 a Special Meeting of stockholders was held to vote upon a
proposal to approve Gymboree's Amended and Restated 1993 Stock Option Plan (the
"Plan"). Specifically, the Plan was amended to:
(a) increase the aggregate number of shares of Common Stock authorized
for issuance under the Plan by 2,000,000 shares raising the number
of shares reserved under the plan since its inception to 6,025,000;
(b) impose annual limits on the number of shares subject to stock option
grants, so as to qualify the compensation associated with such
grants as "performance-based" compensation within the meaning of
Section 162(m) of the Internal Revenue Code;
(c) impose an annual maximum limit of 200,000 shares that may be issued
pursuant to Stock Purchase Rights;
(d) impose a minimum 3 year vesting schedule for all Stock Purchase
Rights;
(e) remove language from the 1993 Plan that contemplated option
re-pricings and exchanges.
The number of votes cast for the proposal was 11,885,691, the number of votes
cast against the proposal was 6, 289,356, and the number of abstentions and
broker non-votes was 117,519. The proposal was approved and the Plan was
adopted.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Gymboree's Common Stock is traded on the NASDAQ National Market System under
the symbol "GYMB". The following table sets forth the quarterly high and low
sale prices per share, as reported on the NASDAQ National Market System.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter 23.375 18.250 27.250 21.750 29.000 17.750
Second Quarter 19.031 12.000 27.625 22.625 35.750 20.125
Third Quarter 10.500 4.063 27.750 23.875 33.675 23.375
Fourth Quarter 8.500 4.875 28.875 23.875 34.750 21.250
</TABLE>
As of April 5, 1999, the number of holders of record of Gymboree's Common
Stock was approximately 764. Gymboree has never declared or paid cash dividends
on its Common Stock and anticipates that all future earnings will be retained
for development of its business. The payment of any future dividends will be at
the discretion of Gymboree's Board of Directors and will depend upon, among
other things, future earnings, capital requirements, our financial position and
general business conditions.
As of January 30, 1999, 1,111,909 shares of Common Stock had been issued upon
exercise of options and pursuant to restricted stock purchase agreements, and
2,842,996 shares of Common stock were issuable upon exercise of outstanding
options under Gymboree's Amended and Restated 1993 Stock Option Plan.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
page 11 of the 1998 Annual Report to Stockholders filed as Exhibit 13.1 to this
Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference to
pages 12 through 15 of the 1998 Annual Report to Stockholders filed as Exhibit
13.1 to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to
page 14 of the 1998 Annual Report to Stockholders filed as Exhibit 13.1 to this
Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to
pages 16 through 27 of the 1998 Annual Report to Stockholders filed as Exhibit
13.1 to this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
15
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the sections entitled "Election of Directors - Nominees" and "Additional
Information-Compliance with Section 16(a) of the Securities Exchange Act" in the
1998 Proxy Statement. See also Item 1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the sections entitled "Election of Directors - Compensation of Directors" and
"Additional Information - Executive Compensation" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
section entitled "Additional Information - Security Ownership" in the 1998 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the sections entitled "Additional Information - Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" and " Additional
Information - Compensation Committee Interlocks and Insider Participation" in
the 1998 Proxy Statement.
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following documents are incorporated by reference to pages 16 through 27
of the 1998 Annual Report to Stockholders filed as Exhibit 13.1 to this Annual
Report on Form 10-K.
Consolidated Balance Sheets as of January 30, 1999 and January
31, 1998
Consolidated Statements of Income for each of the three fiscal
years ended January 30, 1999
Consolidated Statements of Cash Flows for the three fiscal years
ended January 30, 1999
Consolidated Statements of Stockholders' Equity for the three
fiscal years ended January 30, 1999
Notes to Consolidated Financial Statements
Independent Auditors' Report
(A)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not required
or are not applicable.
17
<PAGE> 18
(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Registrant.(1)
3.2 Bylaws of Registrant.(1)
4.1 Article III of Restated Certificate of Incorporation of
Registrant (See Exhibits 3.1). (1)
4.2 Form of certificate for Common Stock. (1)
10.1 1983 Incentive Stock Option Plan, with form of stock Option
Agreement. (1)
10.2 1993 Stock Option Plan, with form of Stock Option
Agreement.(4)
10.3 1993 Employee Stock Purchase Plan. (1)
10.4 Amended Line of Credit Agreement with Bank of America dated
October 27, 1995. (3)
10.5 Line of Credit Agreement with CoreStates Bank dated August
2, 1994.(2)
10.6 Amended Lease Agreement for 700 Airport Blvd., Suite 200,
Burlingame, California. (2)
10.7 Amended Lease Agreement for distribution center. (3)
10.8 California Uniform Franchise Offering Circular, including
form of Franchise Agreement.(1)
10.11 Restricted Stock Purchase Agreement with Nancy J. Pedot. (2)
10.12 Lease Agreement for 770 Airport Blvd., Burlingame, CA. (5)
10.13 Deferred Compensation Agreement. (5)
10.14 Lease Agreement for Bays 140-141, Shannon Free Zone,
Shannon, Ireland, dated May 6, 1997. (6)
10.15 Lease Agreement for 111 Anza Blvd., Burlingame, CA dated
January 8, 1998. (6)
10.16 Amendment No. 1 to the Amended and Restated Line of Credit
Agreement with Bank of America, dated July 17, 1997. (6)
10.17 Amendment No. 2 to the Amended and Restated Line of Credit
Agreement with Bank of America, dated August 11, 1997. (6)
10.18 Amendment No. 3 to the Amended and Restated Line of Credit
Agreement and Waiver with Bank of America, dated January 9,
1998. (6)
10.19 Amendment No. 4 to the Amended and Restated Line of Credit
Agreement with Bank of America, dated January 30, 1998. (6)
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
10.20 Amendment No. 5 to the Amended and Restated Line of Credit
Agreement with Bank of America, dated March 9, 1998. (6)
10.21 Amendment No. 6 to Amended and Restated Line of Credit
Agreement with Bank of America, dated March 9, 1998. (6)
10.22 Acquisition and Development Agreement for Dixon, California
Distribution Facility with Carl D. Panattoni and Wickland
Properties, dated November, 1996. (6)
10.23 Standard Form of Contractor Agreement with DPR Construction,
Inc. for construction of Dixon, California Distribution
Facility dated May 5, 1997. (6)
10.24 Amendment No. 7 to the Amended and Restated Line of Credit
Agreement with Bank of America, dated June 26, 1998. (7)
10.25 Amendment No. 8 to the Amended and Restated Line of Credit
Agreement with Bank of America, dated August 14, 1998. (7)
10.26 Management Change of Control Plan. (8)
10.27 Management Severance Plan. (8)
10.28 Term Loan and Security Agreement with Transamerica Equipment
Financial Services, Inc., dated December 28, 1998.
10.29 Commitment Letter for the Amended and Restated Line of
Credit Agreement with Bank of America, dated March 11, 1999.
10.30 Amended 1993 Stock Option Plan, with form of Stock Option
Agreement, dated March 8, 1999. (9)
11.1 Statement re Computation of Income Per Share.
13.1 1998 Annual Report to Stockholders.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (included in Part IV of this Form 10-K
under the caption "Signatures").
27.1 Financial Data Schedule.
</TABLE>
19
<PAGE> 20
(B) REPORTS ON FORM 8-K
None.
- ------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed with the Commission on February 18, 1993 (File No.
33-58322), as amended.
(2) Incorporated by reference to the Registrant's 1994 Annual Report on Form
10-K filed with the Commission on April 24, 1995.
(3) Incorporated by reference to the Registrant's 1995 Annual Report on Form
10-K filed with the Commission on May 2, 1996.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed with the Commission on February 18, 1993 (File No.
33-58322), as amended by numbers 33-60310, 33-90452, 33-94594 and
333-10811.
(5) Incorporated by reference to the Registrant's 1996 Annual Report on Form
10-K filed with the Commission on May 5, 1997.
(6) Incorporated by reference to the Registrant's 1997 Annual Report on Form
10-K filed with the Commission on April 20, 1998.
(7) Incorporated by reference to the Registrant's August 1, 1998 Quarterly
Report on Form 10-Q ("1998 Q2 10-Q") filed with the Commission on
September 11, 1998.
(8) Incorporated by reference to the Registrant's October 31, 1998 Quarterly
Report on Form 10-Q ("1998 Q3 10-Q") filed with the Commission on
December 21, 1998.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed with the Commission on March 11, 1999 (File No.
333-74269).
20
<PAGE> 21
THE GYMBOREE CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE GYMBOREE CORPORATION
April 26, 1999 By: /s/ Gary White
- ------------------ ---------------------------------
(Date) Gary White
Vice-Chair,
Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT:
That the undersigned officers and directors of Gymboree Corporation, a
Delaware corporation, do hereby constitute and appoint Gary White the lawful
attorney and agent, with power and authority to do any and all acts and things
and to execute any and all instruments which said attorney and agent determine
may be necessary or advisable or required to enable said corporation to comply
with the Securities Act, and any rules or regulations or requirements of the
Securities and Exchange Commission in connection with this Form 10-K. Without
limiting the generality of the foregoing power and authority, the powers granted
include the power and authority to sign the names of the undersigned officers
and directors in the capacities indicated below to this Form 10-K, to any and
all amendments, and supplements to this Form 10-K, to any and all instruments or
documents filed as part of or in conjunction with this Form 10-K or amendments
or supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorney and agent shall do or cause to be done by virtue hereof.
This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
21
<PAGE> 22
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Stuart G. Moldaw Chairman of the Board of Directors April 26, 1999
- --------------------------------------------
Stuart G. Moldaw
/s/ Gary White Vice Chair, Chief Executive Officer and April 26, 1999
- --------------------------------------------
Gary White Director
/s/ Melanie B. Cox President April 26, 1999
- --------------------------------------------
Melanie B. Cox
/s/ Lawrence H. Meyer Senior Vice President and Chief Financial April 26, 1999
- -------------------------------------------- Officer (Principal financial and
Lawrence H. Meyer accounting officer of the registrant)
/s/ Walter F. Loeb Director April 26, 1999
- --------------------------------------------
Walter F. Loeb
/s/ Barbara L. Rambo Director April 26, 1999
- --------------------------------------------
Barbara L. Rambo
/s/ Deborah A. Sorondo Director April 26, 1999
- --------------------------------------------
Deborah A. Sorondo
/s/ William U. Westerfield Director April 26, 1999
- --------------------------------------------
William U. Westerfield
/s/ Carole J. Whitacre Director April 26, 1999
- --------------------------------------------
Carole J. Whitacre
</TABLE>
22
<PAGE> 23
THE GYMBOREE CORPORATION
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of Registrant.(1)
3.2 Bylaws of Registrant.(1)
4.1 Article III of Restated Certificate of Incorporation of Registrant (See
Exhibits 3.1).(1)
4.2 Form of certificate for Common Stock.(1)
10.1 1983 Incentive Stock Option Plan, with form of stock Option Agreement.(1)
10.2 1993 Stock Option Plan, with form of Stock Option Agreement.(4)
10.3 1993 Employee Stock Purchase Plan.(1)
10.4 Amended Line of Credit Agreement with Bank of America dated October 27,
1995.(3)
10.5 Line of Credit Agreement with CoreStates Bank dated August 2, 1994.(2)
10.6 Amended Lease Agreement for 700 Airport Blvd., Suite 200, Burlingame,
California.(2)
10.7 Amended Lease Agreement for distribution center.(3)
10.8 California Uniform Franchise Offering Circular, including form of
Franchise Agreement.(1)
10.11 Restricted Stock Purchase Agreement with Nancy J. Pedot.(2)
10.12 Lease Agreement for 770 Airport Blvd., Burlingame, CA. (5)
10.13 Deferred Compensation Agreement.(5)
10.14 Lease Agreement for Bays 140-141, Shannon Free Zone, Shannon, Ireland,
dated May 6, 1997.(6)
10.15 Lease Agreement for 111 Anza Blvd., Burlingame, CA dated January 8,
1998.(6)
10.16 Amendment No. 1 to the Amended and Restated Line of Credit Agreement with
Bank of America, dated July 17, 1997.(6)
10.17 Amendment No. 2 to the Amended and Restated Line of Credit Agreement with
Bank of America, dated August 11, 1997.(6)
10.18 Amendment No. 3 to the Amended and Restated Line of Credit Agreement and
Waiver with Bank of America, dated January 9, 1998.(6)
10.19 Amendment No. 4 to the Amended and Restated Line of Credit Agreement with
Bank of America, dated January 30, 1998.(6)
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.20 Amendment No. 5 to the Amended and Restated Line of Credit Agreement with
Bank of America, dated March 9, 1998.(6)
10.21 Amendment No. 6 to Amended and Restated Line of Credit Agreement with
Bank of America, dated March 9, 1998.(6)
10.22 Acquisition and Development Agreement for Dixon, California Distribution
Facility with Carl D. Panattoni and Wickland Properties, dated November,
1996.(6)
10.23 Standard Form of Contractor Agreement with DPR Construction, Inc. for
construction of Dixon, California Distribution Facility dated May 5,
1997.(6)
10.24 Amendment No. 7 to the Amended and Restated Line of Credit Agreement with
Bank of America, dated June 26, 1998.(7)
10.25 Amendment No. 8 to the Amended and Restated Line of Credit Agreement with
Bank of America, dated August 14, 1998.(7)
10.26 Management Change of Control Plan.(8)
10.27 Management Severance Plan.(8)
10.28 Term Loan and Security Agreement with Transamerica Equipment Financial
Services, Inc., dated December 28, 1998.
10.29 Commitment Letter for the Amended and Restated Line of Credit Agreement
with Bank of America, dated March 11, 1999.
10.30 Amended 1993 Stock Option Plan, with form of Stock Option Agreement,
dated March 8, 1999.(9)
11.1 Statement re Computation of Income Per Share.
13.1 1998 Annual Report to Stockholders.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (included in Part IV of this Form 10-K under the
caption "Signatures").
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed with the Commission on February 18,1993 (File No.
33-58322), as amended.
(2) Incorporated by reference to the Registrant's 1994 Annual Report on Form
10-K filed with the Commission on April 24, 1995.
(3) Incorporated by reference to the Registrant's 1995 Annual Report on Form
10-K filed with the Commission on May 2, 1996.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed with the Commission on February 18, 1993 (File No.
33-58322), as amended by numbers 33-60310, 33-90452, 33-94594 and
333-10811.
(5) Incorporated by reference to the Registrant's 1996 Annual Report on Form
10-K filed with the Commission on May 5, 1997.
(6) Incorporated by reference to the Registrant's 1997 Annual Report on Form
10-K filed with the Commission on April 20, 1998.
(7) Incorporated by reference to the Registrant's August 1, 1998 Quarterly
Report on Form 10-Q ("1998 Q2 10-Q") filed with the Commission on
September 11, 1998.
(8) Incorporated by reference to the Registrant's October 31, 1998 Quarterly
Report on Form 10-Q ("1998 Q3 10-Q") filed with the Commission on
December 21, 1998.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed with the Commission on March 11, 1999 (File No.
333-74269).
24
<PAGE> 1
EXHIBIT 10.28
TERM LOAN AND SECURITY AGREEMENT
AMONG
THE GYMBOREE CORPORATION
AND
GYMBOREE MANUFACTURING, INC.,
AS GUARANTORS
GYMBOREE LOGISTICS PARTNERSHIP,
AS BORROWER
AND
TRANSAMERICA BUSINESS CREDIT CORPORATION,
AS LENDER
CLOSING DATE: DECEMBER 28, 1998
AGGREGATE PRINCIPAL AMOUNT: $12,000,000
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS, TERMS AND REFERENCES........................................................1
1.1. CERTAIN DEFINITIONS............................................................1
1.2. USE OF DEFINED TERMS...........................................................7
1.3. ACCOUNTING TERMS...............................................................7
1.4. UCC TERMS......................................................................7
1.5. TERMINOLOGY....................................................................7
1.6. EXHIBITS.......................................................................7
2. THE FINANCING............................................................................7
2.1. TERM LOAN FACILITY.............................................................7
2.2. AMORTIZATION...................................................................8
2.3. INTEREST.......................................................................8
2.4. TERM NOTES.....................................................................8
2.5. LATE CHARGE; LIQUIDATED DAMAGES................................................8
2.6. VOLUNTARY PREPAYMENT...........................................................9
2.7. NATURE OF CHARGES IMPOSED.....................................................10
2.8. SAVINGS CLAUSE................................................................10
2.9. CLOSING FEE...................................................................11
2.10. GUARANTY.....................................................................11
3. SECURITY INTEREST -- COLLATERAL.........................................................16
3.1. REPRESENTATIONS AND WARRANTIES................................................16
3.2. PURCHASE MONEY LIENS; RELEASE PROVISION.......................................18
4. GENERAL REPRESENTATIONS AND WARRANTIES..................................................19
4.1. EXISTENCE.....................................................................19
4.2. AUTHORITY.....................................................................19
4.3. NO MATERIAL LITIGATION........................................................19
4.4. PAYMENT OF TAXES..............................................................20
4.5. NO VIOLATIONS, GENERALLY......................................................20
4.6. POLLUTION AND ENVIRONMENTAL CONTROL...........................................20
5. COVENANTS...............................................................................21
5.1. BOOKS AND RECORDS.............................................................21
5.2. PERIODIC FINANCIAL STATEMENTS.................................................21
5.3. ANNUAL FINANCIAL STATEMENTS...................................................21
5.4. COMPLIANCE CERTIFICATES.......................................................21
5.5. PAYMENT OF TAXES..............................................................21
5.6. MAINTENANCE OF INSURANCE......................................................22
5.7. PRESERVATION OF EXISTENCE.....................................................22
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
5.8. COMPLIANCE WITH LAWS..........................................................23
5.9. ENVIRONMENTAL LAW COMPLIANCE..................................................23
5.10. NOTICE OF LITIGATION; EVENTS OF DEFAULT, ETC.................................24
5.11. YEAR 2000 COMPLIANCE.........................................................24
5.12. INTERCOMPANY LEASE...........................................................25
6. EVENTS OF DEFAULT.......................................................................25
6.1. TERM NOTES...................................................................25
6.2. OTHER OBLIGATIONS............................................................25
6.3. MISREPRESENTATIONS...........................................................25
6.4. COVENANTS....................................................................25
6.5. OTHER DEBTS..................................................................25
6.6. VOLUNTARY BANKRUPTCY.........................................................26
6.7. INVOLUNTARY BANKRUPTCY.......................................................26
6.8. JUDGMENTS....................................................................26
6.9. CHANGE OF CONTROL............................................................26
6.10. LOSS OF COLLATERAL...........................................................26
6.11. GUARANTOR....................................................................27
6.12. MATERIAL AGREEMENTS..........................................................27
6.13. MATERIAL ADVERSE EFFECT......................................................27
6.14. FINANCIAL DEFAULTS...........................................................27
7. REMEDIES................................................................................28
7.1. ACCELERATION OF THE OBLIGATIONS...............................................28
7.2. REMEDIES OF A SECURED PARTY...................................................28
7.3. REPOSSESSION OF THE COLLATERAL................................................28
7.4. OTHER REMEDIES................................................................29
7.5. NOTICE TO GUARANTORS..........................................................29
8. MISCELLANEOUS...........................................................................29
8.1. WAIVER........................................................................29
8.2. GOVERNING LAW.................................................................29
8.3. SURVIVAL......................................................................29
8.4. NO ASSIGNMENT BY EITHER GUARANTOR OR BORROWER; LENDER MAY ASSIGN..............30
8.5. COUNTERPARTS..................................................................30
8.6. REIMBURSEMENT.................................................................30
8.7. SUCCESSORS AND ASSIGNS........................................................30
8.8. SEVERABILITY..................................................................31
8.9. NOTICES.......................................................................31
8.10. ENTIRE AGREEMENT - AMENDMENT.................................................31
8.11. TIME OF THE ESSENCE..........................................................32
8.12. INTERPRETATION...............................................................32
8.13. LENDER NOT A JOINT VENTURER..................................................32
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
8.14. JURISDICTION.................................................................32
8.15. PAYMENT ON NON-BUSINESS DAYS.................................................32
8.16. WAIVER OF RIGHTS.............................................................33
8.17. CURE OF DEFAULTS BY LENDER...................................................33
8.18. RECITALS.....................................................................33
8.19. ATTORNEY-IN-FACT.............................................................33
8.20. SOLE BENEFIT.................................................................33
8.21. REMEDIES.....................................................................33
8.22. INDEMNITY....................................................................34
8.23. ACCEPTANCE...................................................................34
9. CONDITIONS PRECEDENT....................................................................34
</TABLE>
-iii-
<PAGE> 5
EXHIBITS
A - PERMITTED ENCUMBRANCES
B - SUBSIDIARIES
C - LITIGATION
D - FINANCIAL TEST COMPUTATIONS
-iv-
<PAGE> 6
TERM LOAN AND SECURITY AGREEMENT
THIS TERM LOAN AND SECURITY AGREEMENT, made, entered into and effective
as of the Closing Date (defined below), by and among THE GYMBOREE CORPORATION, a
Delaware corporation ("Guarantor One"), GYMBOREE MANUFACTURING, INC., a
California corporation ("Guarantor Two"; Guarantor One and Guarantor Two each,
individually, a "Guarantor" and, collectively, the "Guarantors"), GYMBOREE
LOGISTICS PARTNERSHIP, a California general partnership ("Borrower"), and
TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender");
W I T N E S S E T H :
WHEREAS, Borrower has applied to Lender for financing, in the
form of two term loans, described more particularly below, to be secured by
liens on, and security interests in, certain real property, machinery and
equipment of Borrower and Guarantors, as likewise described more particularly
below;
WHEREAS, the making of such term loans by Lender to Borrower will
inure to the direct and material benefit of Guarantor One as the owner, directly
or indirectly, of all of the equity interests in Borrower, and to Guarantor Two
as an affiliate of Guarantor One and Borrower who conducts its business as a
common enterprise with Guarantor One and Borrower, and, to induce Lender to make
such term loans to Borrower, Guarantors are willing to guaranty Borrower's
payment and performance of its obligations to Lender; and
WHEREAS, Lender has considered Borrower's request for such
financing and is willing to extend such financing to Borrower for such purposes
in accordance with the terms of this Agreement upon the execution of this
Agreement by Borrower and Guarantors and, compliance by Borrower and Guarantors
with all of the terms and provisions of this Agreement and fulfillment by
Borrower and Guarantors of all conditions precedent to Lender's obligations
herein contained;
NOW, THEREFORE, in consideration of the foregoing premises, to
induce Lender to extend the financing provided for herein, and for other good
and valuable consideration, the sufficiency and receipt of all of which are
acknowledged by Guarantors and Borrower, Lender, Guarantors and Borrower agree
as follows:
1. DEFINITIONS, TERMS AND REFERENCES.
1.1. CERTAIN DEFINITIONS. In addition to such other terms as are
elsewhere defined herein, as used in this Agreement and in any Exhibits, the
following terms shall have the following meanings, unless the context requires
otherwise:
<PAGE> 7
"Agreement" shall mean this Term Loan and Security Agreement, as amended
or supplemented from time to time.
"Applicable Rate" shall mean the Fixed Rate or the Default Rate, as made
applicable to each Term Loan pursuant to Section 2.3 hereof.
"Authorized Officer" shall mean (i) for Borrower, any partner and (ii)
for each Guarantor, any officer, in each case authorized to execute the Loan
Documents on behalf of such entity.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended from time to time.
"Borrower" shall have the meaning ascribed thereto in the initial
recitals to this Agreement.
"Business Day" shall mean a day on which Lender is open for the conduct
of business at its offices in Atlanta, Georgia and Chicago, Illinois.
"Closing Date" shall mean the date of this Agreement, as specified on
the cover page of this Agreement.
"Collateral" shall mean, collectively, the Equipment Collateral, the
Real Estate Collateral and any and all other property of Borrower and each
Guarantor described in Article 3, or any part thereof, or elsewhere herein or in
any Loan Document, all as the context shall require, in which Lender has, or is
to have, or hereafter may obtain, a security interest, lien or encumbrance
pursuant thereto, as security for payment of the Obligations.
"Compliance Certificate" shall mean a certificate of each Guarantor and
Borrower executed by Authorized Officers of each Guarantor and Borrower, on each
Guarantor's and Borrower's behalf, stating that no Event of Default or Default
Condition has occurred or exists, or if an Event of Default or Default Condition
has occurred or exists, specifying the nature and period of existence thereof
and what action Guarantors and Borrower have taken or propose to take with
respect thereto.
"Contaminant" shall mean those substances which are regulated by or form
the basis of liability under federal, state or local environmental, health and
safety statutes or regulations including, without limitation, asbestos,
polychlorinated biphenyls ("PCBs"), radioactive substances, petroleum, petroleum
products, or any other material or substance which constitutes a material
health, safety or environmental hazard to any Person or Property.
"Default Condition" shall mean the occurrence of any event which, after
satisfaction of any requirement for the giving of notice or the lapse of time,
or both, would become an Event of Default.
"Default Rate" shall mean, as to each Term Loan, that simple interest
rate equal to four percent (4%) per annum in excess of the Fixed Rate applicable
to such Term Loan.
2
<PAGE> 8
"Distribution Center" shall mean the warehouse and distribution center
located at 2299 Kids Way, Dixon, California owned by Borrower and leased by it
to Guarantor Two pursuant to the Intercompany Lease.
"Environmental Claim" shall mean any notice of violation, claim, suit,
demand, abatement or other order or direction (conditional or otherwise) by any
Governmental Authority or any Person for personal injury (including sickness,
disease or death), tangible or intangible property damage, damage to the
environment, nuisance, pollution, contamination or other adverse effects on the
environment, or for fines, penalties or restrictions, resulting from or based
upon (i) the existence, or the continuation of the existence, of a Release
(including, without limitation, sudden or non-sudden, accidental or
non-accidental Releases) of, or exposure to, any Contaminant, odor or audible
noise or other release or emission in, into or onto the environment (including,
without limitation, the air, ground, surface water, groundwater or any surface)
in, by, from, or related to any Property, (ii) the environmental aspects of the
transportation, storage, treatment or disposal of materials, in connection with
the operation of any Property or (iii) the violation, or alleged violation, of
any statutes, ordinances, orders, rules, regulations, Permits, licenses,
registrations or approvals of or from any Governmental Authority relating to
environmental matters connected with any Property.
"Environmental Laws" shall mean all laws, whether domestic or foreign,
or federal, state , provincial or local, relating to the environmental, safety,
health and the regulation of Contaminants, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C.
Section 9601 et seq.), the Superfund Amendments and Reauthorization Act of 1986,
Public Law No. 99-499, 100 Stat. 163, the Hazardous Material Transportation Act
(49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act (42
U.S.C. Section 6901 et seq.), the Clean Water Act (33 U.S.C. Section 1251 et
seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances
Control Act, as amended (15 U.S.C. Section 2601 et seq.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), the
Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), as such laws
have been and hereafter may be amended or supplemented, and any analogous future
federal, or present or future domestic or foreign state, provincial or local
laws and all rules and regulations promulgated pursuant thereto.
"Equipment Collateral" shall mean all equipment, machinery, furniture,
furnishings and fixtures of Borrower and each Guarantor, at any time or from
time to time located at, or used or useful in the operation of, the Distribution
Center, together with any and all extensions, additions, improvements,
betterments, after-acquired property, renewals, replacements and substitutions
or proceeds from a voluntary or involuntary sale, liquidation or conversion of
any of the foregoing; and all attachments, additions and accessions thereto, and
any and all tools, repair parts and spare parts therefor; all whether now or
hereafter existing.
"Event of Default" shall mean any of the events or conditions described
in Article 6, provided that any requirement for the giving of notice or the
lapse of time, or both, has been satisfied.
3
<PAGE> 9
"Fixed Rate," as of the Closing Date shall mean that interest rate
determined by Lender to be equal to (i) the then prevailing yield to maturity of
a U.S. Treasury Note having a term comparable to the term of the Term Note in
question, as published in the "Treasury Notes, Bonds and Bills" section of The
Wall Street Journal on or as of that date closest (but prior) to the Closing
Date; plus (ii) three percent (3%) per annum.
"GAAP" shall mean generally accepted accounting principles which are (a)
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors as in effect from time to time,
(b) such that a certified public accountant would, insofar as the use of
accounting principles is pertinent, be in a position to deliver an unqualified
opinion as to financial statements in which such principles have been properly
applied and (c) applied on a basis consistent with prior periods.
"Governmental Authority" shall mean any nation or government, federal,
state, provincial, city, town, municipality, county, local or political
subdivision thereof or thereto and any department, commission, instrumentality
or agency exercising executive, legislative, judicial, regulatory or
administrative functions on behalf thereof.
"Guarantor" and "Guarantors" shall have the meanings ascribed thereto in
the initial recitals to this Agreement.
"Guarantor One" shall have the meaning ascribed thereto in the initial
recitals to this Agreement.
"Guarantor Two" shall have the meaning ascribed thereto in the initial
recitals to this Agreement.
"Headquarters" shall mean the principal place of business and chief
executive office of Guarantors and Borrower, and the office where all books and
records of Guarantors and Borrower are maintained, being 700 Airport Boulevard,
Suite 200, Burlingame, California 94010-1912, together with any successor
principal place of business and chief executive office as to which Guarantors
and Borrower have complied with the provisions of Section
3.1(h).
"Independent Accountants" shall mean any firm of independent certified
public accountants selected by Guarantor and reasonably acceptable to Lender.
"Intercompany Lease" that certain lease agreement, dated as of July 15,
1997, pursuant to which Borrower leases the Distribution Center and the
Equipment Collateral to Guarantor Two, as amended or modified from time to time.
"Lender" shall have the meaning ascribed thereto in the initial recitals
to this Agreement. The term "Lender" shall also include any Participant to whom
Lender shall assign, in whole or in part, its right, title and interest in and
to the Obligations hereunder on or subsequent to the Closing Date.
4
<PAGE> 10
"Loan Documents" shall mean this Agreement, each Term Note, the
Mortgage, each financing statement, and each and every other document,
instrument, certificate and agreement executed and/or delivered by Borrower or
either Guarantor in connection herewith, or any one, more, or all of the
foregoing, all as the context shall require.
"Material Adverse Change" shall mean (a) any change occurring in the
business, operations, properties or condition (financial or otherwise) of
Borrower or either Guarantor, which materially and adversely affects (i) the
ability of Borrower or such Guarantor to own or operate all, or any material
portion of, its assets or conduct its business as a going concern, (ii) the
collateral value to Lender of the whole of, or any material portion of, any
Collateral, or (iii) the ability of Borrower to pay the Obligations as and when
due and payable or otherwise perform its obligations hereunder or under the
other Loan Documents; or (iv) the ability of either Guarantor to perform its
obligations to Lender under its guaranty of the Obligations set forth in Section
2.10 hereof or to otherwise perform its obligations hereunder or under the other
Loan Documents; or (b) the failure or inability of Borrower or either Guarantor
to pay or perform its obligations to its creditors generally.
"Material Adverse Effect" shall mean an effect that has resulted in,
will result in, or is reasonably likely to result in, a Material Adverse Change.
"Material Agreements," in respect of Borrower and each Guarantor, shall
mean all loan and other debt instruments and agreements; all management,
employment and labor agreements; all real property leases; and any other
agreements, not specified hereinabove, the loss, diminution or impairment of
which would have, or would reasonably be expected to have, a Material Adverse
Effect; in each case, to the extent such instruments or agreements are binding
on Borrower or either Guarantor or any of their respective Property.
"Mortgage" shall mean each mortgage, deed of trust or similar instrument
pursuant to which Lender shall obtain a mortgage lien, security interest or
security title on or in the right, title and interest of Borrower in and to the
Distribution Center.
"Obligations" shall mean and include any and all indebtedness,
liabilities and obligations of Borrower or either Guarantor, and each of them,
jointly and severally, to Lender arising hereunder or as a result hereof,
whether evidenced by the Term Notes or otherwise, and any and all extensions or
renewals thereof in whole or in part; together with any and all other
indebtedness, liabilities and obligations of Borrower or either Guarantor, and
each of them, jointly and severally, to Lender, whether existing as of the date
hereof or hereafter arising, existing or incurred, whether under a loan, lease,
line of credit, letter of credit or other type of financing, whether direct,
indirect, absolute or contingent, as maker, endorser, guarantor, surety or
otherwise, and whether evidenced by, arising out of, or relating to, a
promissory note, bill of exchange, check, draft, bond, letter of credit,
guaranty agreement or otherwise issued in favor of, or acquired by, Lender.
"Participant" shall mean any Person to whom, now or hereafter, Lender
sells a participation interest in, or makes an assignment of, its right, title
or interest hereunder and in the Obligations (whether in whole or in part).
5
<PAGE> 11
"Permit" shall mean any permit, approval, authorization, license,
variance, or permission required from a Governmental Authority having
jurisdiction under an applicable Environmental Law.
"Person" shall mean any individual, partnership, corporation, trust,
unincorporated association, business trust, sole proprietorship, or joint
venture, a government or any department, agency, political subdivision or
instrumentality thereof, or any other entity or organization.
"Property" or "Properties" shall mean any real or personal property
owned, leased or operated by Borrower or either Guarantor.
"Real Estate Collateral" shall mean all right, title and interest of
Borrower as owner in fee simple of the Distribution Center, inclusive of all
buildings and other improvements thereon and all appurtenances thereto.
"Release" shall mean any actual or threatened release, spill, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching
or migration into the indoor or outdoor environment or into or out of any
Property, including the movement of Contaminants through or into the air, soil,
subsurface strata, surface water or groundwater.
"Remedial Action" shall mean all actions required to (1) clean up,
remove, treat or in any other way address Contaminants in the indoor or outdoor
environment; (2) prevent the Release or threat of Release or minimize the
further Release of Contaminants so they do not migrate or endanger or threaten
to endanger public health or welfare or the indoor or outdoor environment; or
(3) perform pre-remedial studies and investigations and post-remedial monitoring
and care in respect of actions contemplated in the preceding clauses (1) and
(2), in each instance in compliance with Environmental Laws.
"Subsidiary" shall mean, with respect to any Person, any corporation,
association or other business entity of which more than fifty percent (50%) of
the total voting power of shares of stock (or equivalent ownership or
controlling interest) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof.
"Term Loan" shall mean each term loan made by Lender to Borrower
pursuant to Section 2.1 below. "Term Loans" shall refer, collectively, to all
such loans from time to time outstanding.
"Term Loan Facility" shall mean the term loan facility in the maximum
amount of Twelve Million Dollars ($12,000,000) established by Lender in favor of
Borrower pursuant to Section 2.1.
6
<PAGE> 12
"Term Note" shall mean each Term Promissory Note issued by Borrower to
Lender to evidence its repayment obligations associated with a given Term Loan,
together with any extensions or renewals thereof, in whole or in part.
"UCC" shall mean the Uniform Commercial Code of Illinois, as in effect
on the Closing Date.
1.2. USE OF DEFINED TERMS. All terms defined in this Agreement and the
Exhibits shall have the same defined meanings when used in any other Loan
Documents, unless the context shall require otherwise.
1.3. ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall have the meanings generally attributed to such terms under GAAP.
1.4. UCC TERMS. The terms "equipment", "fixtures", "proceeds" and
"products", as and when used in the Loan Documents, together with any other or
similar terms not specifically defined herein but which are defined in the UCC
shall have the same meanings as given to such terms therein.
1.5. TERMINOLOGY. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural, and the plural shall include the
singular. Titles of Articles and Sections in this Agreement are for convenience
only, and neither limit nor amplify the provisions of this Agreement, and all
references in this Agreement to Articles, Sections, Subsections, paragraphs,
clauses, subclauses or Exhibits shall refer to the corresponding Article,
Section, Subsection, paragraph, clause, subclause of, or Exhibit attached to,
this Agreement, unless specific reference is made to the articles, sections or
other subdivisions divisions of, or Exhibit to, another document or instrument.
1.6. EXHIBITS. All Exhibits attached hereto are by reference made a part
hereof as fully as if the contents thereof were set forth expressly herein.
2. THE FINANCING.
2.1. TERM LOAN FACILITY. Lender hereby creates the Term Loan Facility in
favor of Borrower so that Borrower may obtain two (2) Term Loans, as follows:
(i) a Term Loan of up to Three Million One Hundred Twenty-Five Thousand Dollars
($3,125,000) in principal amount (herein, sometimes called "Term Loan A"), and
(ii) a Term Loan of up to Eight Million Eight Hundred Seventy-Five Thousand
Dollars ($8,875,000) in principal amount (herein, sometimes called "Term Loan
B"). The Term Loans shall be cross-collateralized and cross-defaulted to and
with the other until both Term Loans are fully paid and satisfied and this
Agreement is terminated. Each Term Loan so obtained shall reduce,
dollar-for-dollar, the amount which may be borrowed under the Term Loan
Facility. Each Term Loan shall be disbursed in its entirety on the Closing Date.
No amount of either Term Loan may be reborrowed once disbursed, notwithstanding
its repayment.
7
<PAGE> 13
2.2. AMORTIZATION. The principal amount of each Term Loan, together with
accrued interest thereon at the then Applicable Rate, shall be paid as follows:
(a) as to Term Loan A, in eighty-four (84) equal monthly installments of
principal and interest in the amount prescribed in the amortization schedule
attached to, and forming a part of, Term Note A, with payments commencing on
February 1, 1999 and continuing on the first day of each month thereafter
through January 1, 2006 provided that the final such payment shall, in any
event, be in such amount as necessary to pay Term Loan A in full; and (b) as to
Term Loan B, in one hundred nineteen (119) equal monthly installments of
principal and interest, in the amount prescribed in the amortization schedule
attached to and forming a part of Term Note B, with payments commencing on the
February 1, 1999 and continuing on the first day of each month thereafter
through December 1, 2008, followed by one (1) final, balloon payment, equal in
amount to the unpaid principal balance of Term Note B, together with all accrued
interest thereon, which shall be due and payable on January 1, 2009.
2.3. INTEREST. (a) Each Term Note shall bear interest at the Fixed Rate;
provided, however, that, notwithstanding the foregoing, however, from and after
the occurrence of any Event of Default, and continuing for so long thereafter as
such Event of Default shall be continuing, Lender shall have the right to
increase the interest rate payable on each Term Note to the Default Rate
applicable thereto upon giving Borrowers ten (10) calendar days' advance written
notice thereof, and Borrowers shall be responsible for the payment of the
additional interest resulting therefrom.
(b) Interest shall be computed on the basis of a year consisting
of twelve thirty day months. On January 1, 1999, Borrower shall make an interest
only payment on each Term Note as to interest accrued for the period from the
Closing Date through December 31, 1998. Thereafter, interest shall be paid as
part of the combined monthly payments of principal and interest described in
Section 2.2.
2.4. TERM NOTES. The indebtedness represented by each Term Loan shall be
evidenced by a Term Note corresponding in principal amount thereto. Each Term
Note shall be executed by Borrower and delivered to Lender on the closing date.
2.5. LATE CHARGE; LIQUIDATED DAMAGES. If payment of any principal of, or
interest on, any Term Note or any other sum payable hereunder or under any other
Loan Document is not received within ten (10) calendar days after its due date,
Lender shall have the right to impose a late charge relative to such payment in
an amount equal to up to five percent (5%) of the amount of such past due
payment, which charge, if imposed by Lender, shall be due and payable by
Borrower immediately upon receipt of notice thereof. In connection with the
foregoing, Borrower recognizes that any default in making, when due, any payment
of principal or interest due under any Term Note or any other sum payable
hereunder or under any other Loan Document, or the occurrence of any other Event
of Default, will require Lender to incur additional expense in servicing and
administering the Term Loans, in loss to Lender of the use of the money due and
in frustration to Lender in meeting its other financial and loan commitments and
that the damages caused thereby would be extremely difficult and impractical to
ascertain. Borrowers agree that (a) an amount equal to the late charge described
in the first sentence of this Section 2.5 plus the accrual of interest at the
default rate of interest set forth in Section 2.3(f) hereof is a reasonable
estimate of the damage to
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<PAGE> 14
Lender in the event of a late payment and (b) the accrual of interest at the
default rate of interest set forth in Section 2.3(f) hereof is a reasonable
estimate of the damages to Lender in the event of such other Event of Default,
regardless of whether there has been acceleration of the Term Loans. Nothing
herein shall be construed as an obligation on the part of Lender to accept, at
any time, less than the full amount then due hereunder, or as a waiver or
limitation of Lender's right to compel prompt performance.
2.6. VOLUNTARY PREPAYMENT. Provided that no Default Condition or Event
of Default has occurred which is then continuing, the Term Notes may be prepaid,
in whole or in part, by Borrowers at any time or from time to time after the
third (3rd) anniversary of the Closing Date; provided, however, that (i) any
such prepayment may be made only on a date on which a regularly scheduled
payment of principal is to be made; (ii) as between Term Loans, the order of
prepayment shall be, first, to Term Loan B, until it is paid in full; and then,
to Term Loan A, until it is paid in full; and (iii) any such prepayment must be
preceded by at least thirty (30) calendar days prior written notice thereof to
Lender; and, provided, further, that, any such prepayment must be accompanied by
the payment of all then accrued, but unpaid, interest on the principal amount to
be prepaid and a prepayment premium, representing liquidated damages to Lender
for the loss of its bargain and not a penalty, equal in amount to the product of
(A) the principal amount prepaid times (B) the applicable percentage described
in the table below:
<TABLE>
<CAPTION>
The
Applicable
If Prepayment Occurs Percentage
-------------------- Shall Be
-----------
Term Loan A Term Loan B
----------- -----------
<S> <C> <C>
After 3rd Anniversary of Closing Date but on 3% 3%
or before 4th Anniversary of Closing Date
After 4th Anniversary of Closing Date but on 2% 2%
or before 6th Anniversary of Closing Date
After 6th Anniversary of Closing Date on or 1% 1%
before 7th Anniversary of Closing Date
After 7th Anniversary of Closing Date but on N/A 1%
or before 9th Anniversary of Closing Date
After 9th Anniversary of Closing Date N/A 0%
</TABLE>
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<PAGE> 15
In the event that at any time hereafter, as a result of the occurrence and
continuation of any Event of Default, payment of the Term Notes is accelerated
by Lender in accordance with the provisions hereof or the provisions of any
other Loan Documents, Borrower shall become obligated to pay Lender, in addition
to any and all other sums payable hereunder, as liquidated damages for the loss
of its bargain and not as a penalty, an amount equal to the then applicable
amount of the prepayment premium described above which would have been due and
payable to Lender on the date on which such acceleration occurs as if, on such
date, the Term Notes then outstanding had been voluntarily prepaid in full,
which sum shall be added to the Obligations and be due and payable in full
automatically upon such acceleration occurring.
2.7. NATURE OF CHARGES IMPOSED. Lender and Borrower hereby agree that
(i) the only charges imposed by Lender upon Borrower for the use of money in
connection with the Term Loan Facility are and shall be accrued interest at the
rates per annum expressed in Section 2.3 hereinabove and in each Term Note and
(ii) all other charges imposed by Lender upon Borrowers in connection with the
Term Loan Facility, including, without limitation, the closing fee described in
Section 2.9, and any prepayment premium hereafter paid by Borrower pursuant to
Section 2.6, are and shall be deemed to be charges made to compensate Lender for
underwriting and administrative services and costs, and other services and costs
performed and incurred, and to be performed and incurred, by Lender in
connection with the creation and administration of the Term Loan Facility, and
shall under no circumstances be deemed to be charges for the use of money for
purposes of Illinois law.
2.8. SAVINGS CLAUSE. Notwithstanding the foregoing or any provision
contained in this Agreement, any Term Note or any other Loan Document to the
contrary, if at any time the amount of interest computed with respect to either
Term Note on the basis of the Applicable Rate would exceed the amount of such
interest computed upon the basis of the maximum rate of interest permitted by
applicable state or federal law in effect from time to time hereafter, after
taking into account, to the extent required by applicable law, any and all fees,
payments, charges and calculations provided for in this Agreement or in any
other agreement between Borrower and Lender (the "Maximum Legal Rate"), the
interest payable under this Agreement shall be computed upon the basis of the
Maximum Legal Rate, but any subsequent reduction in the Applicable Rate shall
not reduce such interest thereafter payable hereunder below the amount computed
on the basis of the Maximum Legal Rate until the aggregate amount of such
interest accrued and payable under this Agreement equals the total amount of
interest which would have accrued if such interest had been at all times
computed solely on the basis of the Applicable Rate. No agreements, conditions,
provisions or stipulations contained in this Agreement, any Term Note or any
other Loan Document or default of Borrower, or the exercise by the Lender of the
right to accelerate the payment of the maturity of principal and interest, or to
exercise any option whatsoever contained in this Agreement or any other Loan
Document, or arising of any contingency whatsoever, shall entitle Lender to
collect, in any event, interest exceeding the Maximum Legal Rate and in no event
shall Borrower be obligated to pay interest exceeding such Maximum Legal Rate
and all agreements, conditions or stipulations, if any, which may in any event
or contingency whatsoever operate to bind, obligate or compel Borrower to pay a
rate of interest exceeding the Maximum Legal Rate, shall be without binding
force or effect, at law or in equity, to the extent only of the excess of
interest over such
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<PAGE> 16
Maximum Legal Rate. In the event any interest is charged in excess of the
Maximum Legal Rate ("Excess Interest"), Borrower acknowledges and stipulates
that any such charge shall be the result of an accidental and bona fide error,
and such Excess Interest shall be, first, applied to reduce the principal then
unpaid hereunder; second, applied to reduce any other Obligations, until paid in
full; and third, returned to Borrower, it being the intention of the parties
hereto not to enter at any time into a usurious or otherwise illegal
relationship. Borrower recognizes that, with fluctuations in the Maximum Legal
Rate, such an unintentional result could inadvertently occur. By the execution
of this Agreement, Borrower covenants that (i) the credit or return of any
Excess Interest shall constitute the acceptance by the Borrower of such Excess
Interest, and (ii) the Borrower shall not seek or pursue any other remedy, legal
or equitable, against Lender, based in whole or in part upon the charging or
receiving of any interest in excess of the maximum authorized by applicable law.
For the purpose of determining whether or not any Excess Interest has been
contracted for, charged or received by Lender, all interest at any time
contracted for, charged or received by the Lender in connection with this
Agreement shall be amortized, prorated, allocated and spread in equal parts
during the entire term of this Agreement. The provisions of this Section shall
be deemed to be incorporated into each and every Term Note and other Loan
Document or communication relating to the Obligations which sets forth or
prescribes any account, right or claim or alleged account, right or claim of the
Lender with respect to Borrower (or any other obligor in respect of
Obligations), whether or not any provision of this Section is referred to
therein. All such documents and communications and all figures set forth therein
shall, for the sole purpose of computing the extent of the liabilities and
obligations of Borrower (or any other such obligor) asserted by the Lender
thereunder, be automatically recomputed by Borrower or any other obligor, and by
any court considering the same, to give effect to the adjustments or credits
required by this Section. If the applicable state or federal law is amended in
the future to allow a greater rate of interest to be charged under this
Agreement or any other Loan Documents than is presently allowed by applicable
state or federal law, then the limitation of interest under this Section shall
be increased to the maximum rate of interest allowed by applicable state or
federal law as amended, which increase shall be effective hereunder on the
effective date of such amendment, and all interest charges owing to the Lender
by reason thereof shall be payable upon demand.
2.9. CLOSING FEE. Borrower shall pay to Lender on the Closing Date a
closing fee of One Hundred Twenty Thousand Dollars ($120,000), which shall be
fully earned on the Closing Date, and not subject to rebate or refund once paid
by Borrower.
2.10. GUARANTY. (a) THE GUARANTEE. To induce Lender to make the Term
Loans to Borrower, Guarantors hereby, jointly and severally, guarantee to Lender
and its successors and assigns the prompt payment in full when due (whether at
stated maturity, by acceleration or otherwise) and performance of the
Obligations of Borrower to Lender (such Obligations herein called, collectively,
the "Guaranteed Obligations"), in each case strictly in accordance with the
terms hereof. Guarantors hereby further agree, jointly and severally, that if
Borrower shall fail to pay in full when due (whether at stated maturity, by
acceleration or otherwise) any of the Guaranteed Obligations, Guarantors will
promptly pay the same, upon demand, and that in the case of any extension of
time of payment or renewal of any of the Guaranteed Obligations, the same will
be
11
<PAGE> 17
promptly paid in full when due (whether at extended maturity, by acceleration or
otherwise) in accordance with the terms of such extension or renewal.
(b) OBLIGATIONS UNCONDITIONAL. The obligations of each Guarantor
hereunder are absolute, unconditional and irrevocable, joint and several,
irrespective of the value, genuineness, validity, regularity or enforceability
of the obligations of Borrower under this Agreement, the Term Notes or any other
Loan Document or any substitution, release or exchange of any other guarantee of
or security for any of the Guaranteed Obligations, and, to the fullest extent
permitted by applicable law, irrespective of any other circumstance whatsoever
that might otherwise constitute a legal or equitable discharge or defense of a
surety or guarantor, it being the intent of this Section that the obligations of
each Guarantor hereunder shall be absolute, and unconditional and irrevocable
under any and all circumstances. Without limiting the generality of the
foregoing, it is agreed that the occurrence of any one or more of the following
shall not alter or impair the liability of each Guarantor hereunder which shall
remain absolute and unconditional as described above:
(i) at any time or from time to time, without notice to
Guarantors, the time for any performance of or compliance with any of
the Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of this
Agreement or the Term Notes or any other agreement or instrument
referred to herein or therein shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall be
accelerated in accordance with the provisions of this Agreement or any
other Loan Document, or any of the Guaranteed Obligations shall be
modified, supplemented or amended in any respect, or any right under
this Agreement or the Term Notes or any other Loan Document shall be
waived or any other guarantee of any of the Guaranteed Obligations or
any security therefor shall be released or exchanged in whole or in part
or otherwise dealt with; or
(iv) any lien or security interest granted to, or in favor of,
Lender as security for any of the Guaranteed Obligations shall fail to
be created or perfected.
Each Guarantor hereby expressly waives diligence, presentment, demand of
payment, protest and all notices whatsoever, and any requirement that Lender
exhaust any right, power or remedy or proceed against Borrower under this
Agreement or the Term Notes or any other Loan Document, or against any other
Person under any other guaranty of, or security for, any of the Guaranteed
Obligations.
The obligations of each Guarantor hereunder shall not be affected, modified or
impaired by the occurrence of any of the following events, whether or not with
notice to, or the consent of, such Guarantor: (i) the surrender, compromise,
settlement, release or termination of any or all of the Guaranteed Obligations;
(ii) the failure to give notice to such Guarantor of the occurrence of any
breach, default of event or default under the Guaranteed Obligations; (iii) any
failure, omission,
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<PAGE> 18
delay or lack on the part of Lender to enforce, assert or exercise any right,
power or remedy conferred on Lender under the Guaranteed Obligations; (iv) the
voluntary or involuntary liquidation, dissolution, sale or other disposition of
all or substantially all of the assets, marshaling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditor or adjustment of debts,
or other similar proceedings affecting the Borrower or either Guarantor or any
of the assets of any of them; (v) the release or discharge by operation of law
of the Borrower from the payment, performance, satisfaction or discharge of any
or all of the Guaranteed Obligations; (vi) the release or discharge by operation
of law of either Guarantor from any or all of the obligations of either
Guarantor hereunder; or (vii) the invalidity or unenforceability of any or all
of the Guaranteed Obligations; or (viii) the release by Lender of the other
Guarantor from its obligations hereunder.
The obligations of each Guarantor hereunder are independent of the Guaranteed
Obligations. Each Guarantor agrees that Lender shall have the right to proceed
against such Guarantor directly and independently of the Borrower and the other
Guarantor. A separate action may be brought and prosecuted against each
Guarantor whether or not an action is brought against the Borrower or the other
Guarantor or the Borrower or the other Guarantor is joined in any such action.
Each Guarantor authorizes Lender and the Borrower, without notice to, demand of,
or consent from such Guarantor and without releasing or affecting such
Guarantor's liability hereunder, from time to time to amend, modify, renew,
extend, supplement or replace the Guaranteed Obligations or otherwise change the
terms of the Guaranteed Obligations, to take and hold collateral or security for
the Guaranteed Obligations, and to enforce, waive, surrender, impair, compromise
or release any such collateral or security or any or all of the Guaranteed
Obligations or any person or entity liable for any or all of the Guaranteed
Obligations. Each Guarantor shall be and remain bound hereunder notwithstanding
any such act or omission by the Borrower or Lender.
Each Guarantor waives all rights under section 2845 of the California Civil Code
and waives the right, if any, to require Lender to proceed against the Borrower,
to proceed against or exhaust any collateral or security held by Lender, or to
pursue any other remedy in Lender's power. Lender shall have the right to
exercise or enforce any right or remedy it may have against the Borrower or any
collateral or security held by Lender. Each Guarantor waives all rights under
section 2849 of the California Civil Code and waives the right, if any, to the
benefit of, or to direct the application of, any collateral or security held by
Lender. Each Guarantor waives any defense arising from any impairment of any
Collateral or security for any or all of the Guaranteed Obligations. Each
Guarantor waives (i) any defense arising out of any alteration of the original
Guaranteed Obligations, (ii) any defense arising out of the absence, impairment
or loss of any right of reimbursement or subrogation or other right or remedy of
such Guarantor against the Borrower or any collateral or security held by
Lender, and (iii) any defense arising by reason of any disability or other
defense of the Borrower or by reason of the cessation or reduction from any
cause whatsoever of the liability of the Borrower other than full payment,
performance, satisfaction and discharge of the Guaranteed Obligations. The
cessation or reduction of the liability of the Borrower for any reason
whatsoever (including, without limitation, section 580d of the California Code
of Civil Procedure) other than full payment, performance, satisfaction and
discharge of the Guaranteed
13
<PAGE> 19
Obligations shall not release or affect in any way the liability of either
Guarantor under this Guaranty.
EACH GUARANTOR HEREBY SPECIFICALLY AGREES THAT SUCH GUARANTOR SHALL NOT BE
RELEASED FROM LIABILITY HEREUNDER BY ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY
LENDER, BORROWER OR ANY OF THEIR RESPECTIVE AFFILIATES, EMPLOYEES, AGENTS OR
REPRESENTATIVES, INCLUDING WITHOUT LIMITATION, A NON-JUDICIAL SALE OF COLLATERAL
UNDER ANY SECURITY AGREEMENT, MORTGAGE OR DEED OF TRUST THAT WOULD AFFORD A
BORROWER OR A GUARANTOR A DEFENSE BASED UPON THE LAWS (INCLUDING THE
ANTI-DEFICIENCY LAWS) OF ANY STATE. EACH GUARANTOR EXPRESSLY WAIVES (i) ANY
DEFENSE TO THE RECOVERY OF A DEFICIENCY AGAINST BORROWER OR A GUARANTOR
HEREUNDER AFTER SUCH NON-JUDICIAL SALE, NOTWITHSTANDING THAT SUCH SALE MAY
RESULT IN A LOSS BY A GUARANTOR OF THE RIGHT TO RECOVER FROM THE BORROWER OF ANY
SUCH DEFICIENCY, (ii) ANY DEFENSE OR BENEFITS THAT MAY BE DERIVED FROM
CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580(A), 580(D) OR 726, OR SIMILAR
LAWS OF OTHER JURISDICTIONS, AND (iii) ALL SURETYSHIP DEFENSES THAT IT WOULD
OTHERWISE HAVE UNDER THE LAWS OF ANY JURISDICTION. WITHOUT LIMITING THE
FOREGOING, EACH GUARANTOR UNDERSTANDS THAT IN THE ABSENCE OF THE WAIVERS MADE
HEREIN, INCLUDING THOSE MADE IN THIS PARAGRAPH, SUCH GUARANTOR MIGHT HAVE A
DEFENSE AGAINST AN ACTION BY LENDER TO RECOVER A DEFICIENCY FROM SUCH GUARANTOR
HEREUNDER FOLLOWING A NON-JUDICIAL FORECLOSURE SALE OF REAL PROPERTY OR OTHER
COLLATERAL SECURING THE LOAN, AND EACH GUARANTOR IS SPECIFICALLY WAIVING THESE
DEFENSES AND ALL OTHER DEFENSES. EACH GUARANTOR EXPRESSLY AGREES THAT SUCH
GUARANTOR SHALL BE AND REMAIN LIABLE FOR ANY DEFICIENCY REMAINING AFTER
FORECLOSURE OF ANY MORTGAGE OR SECURITY INTEREST SECURING ANY OF THE
OBLIGATIONS, WHETHER OR NOT THE LIABILITY OF BORROWER WITH RESPECT TO ANY OF THE
OBLIGATIONS FOR SUCH DEFICIENCY IS DISCHARGED PURSUANT TO STATUTE OR JUDICIAL
DECISION.
(c) REINSTATEMENT. The obligations of each Guarantor hereunder
shall be automatically reinstated if and to the extent that for any reason any
payment by or on behalf of Borrower in respect of the Guaranteed Obligations is
rescinded or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise and Guarantors, jointly and severally, agree that
they will indemnify Lender on demand for all reasonable costs and expenses
(including, without limitation, fees of counsel) incurred by Lender in
connection with such rescission or restoration, including any such costs and
expenses incurred in defending against any claim alleging that such payment
constituted a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency or similar law.
(d) SUBROGATION. Each Guarantor hereby subordinates to the
indefeasible payment in full of the Obligations all rights of subrogation or
contribution against Borrower, whether arising by contract or operation of law
(including, without limitation, any such right arising under the Bankruptcy
Code) or otherwise by reason of any payment by it pursuant to the provisions
hereof and agrees that, unless and until the Obligations are indefeasibly paid
in full, it will not exercise any such right.
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<PAGE> 20
(e) REMEDIES. Each Guarantor agrees that, as between Guarantor
and Lender, the Guaranteed Obligations may be declared to be forthwith due and
payable as provided herein (and shall be deemed to have become automatically due
and payable in the circumstances provided herein) for purposes hereof,
notwithstanding any stay, injunction or other prohibition preventing such
declaration (or such obligations from becoming automatically due and payable) as
against Borrower and that, in the event of such declaration (whether or not due
and payable by the Borrower) shall forthwith become due and payable by
Guarantors for purposes hereof.
(f) INSTRUMENT FOR THE PAYMENT OF MONEY. Each Guarantor hereby
acknowledges that its guaranty herein constitutes an instrument for the payment
of money.
(g) CONTINUING GUARANTY. The guaranty set forth herein is a
continuing guaranty, and shall apply to all Guaranteed Obligations, whenever and
howsoever arising.
(h) ACKNOWLEDGMENTS. Each Guarantor assumes the responsibility
for being and keeping itself informed of the financial condition of the Borrower
and of all other circumstances bearing upon the risk of failure to pay, perform,
satisfy or discharge any of the Guaranteed Obligations that diligent inquiry
would reveal, and each Guarantor agrees that Lender has no duty to advise such
Guarantor of information known to Lender regarding such condition or any such
circumstance. Each Guarantor acknowledges that repeated and successive demands
may be made and payments or performances required hereunder in response to such
demands as and when, from time to time, the Borrower defaults in the payment
performance, satisfaction or discharge of the Guaranteed Obligations.
Notwithstanding any such payments and performances hereunder, each Guarantor's
obligations hereunder shall remain in full force and effect and shall apply to
any and all subsequent defaults by the Borrower. It is not necessary for Lender
to inquire into the capacity, authority or powers of the Borrower or the
partners, directors, officers, employees, agents or representatives acting or
purporting to act on behalf of the Borrower, and all of the Guaranteed
Obligations made or created in reliance upon the purported exercise of such
powers shall be guaranteed hereunder.
(i) REPRESENTATIONS. Each Guarantor represents and warrants to
Lender as of the date hereof as follows: such Guarantor has received reasonably
equivalent value in exchange for the execution, delivery and performance of this
guaranty. Each Guarantor is solvent and will not become insolvent as a result of
the execution, delivery or performance of this guaranty.
(j) RIGHTS OF CONTRIBUTION. Guarantors hereby agree, as between
themselves, that if any Guarantor shall become an "Excess Funding Guarantor" (as
defined below) by reason of the payment by such Guarantor of any Guaranteed
Obligations, the other Guarantor shall, on demand of such Excess Funding
Guarantor (but subject to the next sentence), pay to such Excess Funding
Guarantor an amount equal to such Guarantor's "Pro Rata Share" (as defined below
and determined, for this purpose, without reference to the properties, debts and
liabilities of such Excess Funding Guarantor) of the "Excess Payment" (as
defined below) in respect of such Guaranteed Obligations. The payment obligation
of a Guarantor to any Excess Funding Guarantor under this Section shall be
subordinate and subject in right of payment to the prior payment in full of the
obligations of such
15
<PAGE> 21
Guarantor under the other provisions of this Section 2.10 and such Excess
Funding Guarantor shall not exercise any right or remedy with respect to such
excess until payment and satisfaction in full of all such obligations. For
purposes hereof, (i) "Excess Funding Guarantor" means, in respect of any
Guaranteed Obligations, a Guarantor that has paid an amount in excess of its Pro
Rata Share of such Guaranteed Obligations, (ii) "Excess Payment" means, in
respect of any Guaranteed Obligations, the amount paid by an Excess Funding
Guarantor in excess of its Pro Rata Share of such Guaranteed Obligations, (iii)
"Pro Rata Share" means, for any Guarantor, the ratio (expressed as a percentage)
of (x) the amount by which the aggregate present fair saleable value of all
assets of such Guarantor (excluding any shares of stock of any other Guarantor)
exceeds the amount of all the debts and liabilities of such Guarantor (including
contingent, subordinated, unmatured and unliquidated liabilities, but excluding
the obligations of such Guarantor hereunder and any obligations of any other
Guarantor that have been guaranteed by such Guarantor) to (y) the amount by
which the aggregate fair saleable value of all assets of all of the Guarantors
exceeds the amount of all the debts and liabilities (including contingent,
subordinated, unmatured and unliquidated liabilities, but excluding the
obligations of such Guarantor hereunder) of the Guarantors, determined as of the
Closing Date.
(k) GENERAL LIMITATION ON GUARANTEED OBLIGATIONS. In any action
or proceeding involving any state corporate law, or any state or Federal
bankruptcy, insolvency, reorganization or other law affecting the rights of
creditors generally, if the obligations of a Guarantor hereunder, after giving
effect to the contribution rights provided in Section 2.10(j), would otherwise
be held or determined to be void, invalid or unenforceable, or subordinated to
the claims of any other creditors, on account of the amount of its liability
hereunder, then, notwithstanding any other provision hereof to the contrary, the
amount of such liability shall, without any further action by any Guarantor, any
Lender or any other Person, be automatically limited and reduced to the highest
amount that is valid and enforceable and not subordinated to the claims of other
creditors as determined in such action or proceeding.
30 SECURITY INTEREST -- COLLATERAL. As security for the payment of the
Term Notes and all other Obligations, Borrower and each Guarantor hereby grant
to Lender a first priority, continuing, general lien upon, security interest in,
and security title to the Equipment Collateral owned by Borrower or such
Guarantor, together with any and all products and proceeds of the foregoing,
including, without limitation, insurance proceeds. The foregoing shall be in
addition to, and be cumulative with, the Real Estate Collateral obtained by
Lender pursuant to the Mortgage.
3.1. REPRESENTATIONS AND WARRANTIES. With respect to the Collateral,
Borrower and each Guarantor hereby represents, warrants and covenants to Lender
as follows:
(a) GOOD TITLE; NO EXISTING ENCUMBRANCES. Borrower or a Guarantor
owns the Collateral free and clear of any prior security interest, lien or
encumbrance thereon other than liens in favor of Lender and those liens listed
on Exhibit A attached hereto and incorporated herein by reference (collectively,
"Permitted Encumbrances"), and no financing statements, registration statements,
certificates of title or other evidences of the grant of a security interest
respecting the
16
<PAGE> 22
Collateral exist on any public records as of the date hereof, other than any in
favor of Lender and those evidencing Permitted Encumbrances.
(b) RIGHT TO GRANT SECURITY INTEREST; NO FURTHER ENCUMBRANCES.
Borrower and each Guarantor has the right to grant the security interest in the
Collateral prescribed hereinabove in this Article 3; Borrower or a Guarantor
will pay all sales, use, franchise and other taxes and other charges against the
Collateral; neither Borrower nor either Guarantor will use the Collateral
illegally or allow the Collateral to be encumbered except for the security
interest in favor of Lender granted herein and except for any Permitted
Encumbrances (as described in Section 3.1(a)).
(c) CONDITION OF COLLATERAL; CASUALTY. All Equipment Collateral
is in good working order and repair as of the Closing Date. Borrower and each
Guarantor will maintain the Equipment Collateral in good working order and
repair subsequent to the Closing Date, ordinary wear and tear excepted, and
subject to Borrower's right to replace Equipment Collateral as provided in
Section 3.1(d) hereof. Borrower and each Guarantor further will take such
actions subsequent to the Closing Date as may be necessary to keep any
manufacturer's warranty in effect with respect to the Equipment Collateral.
Borrower and each Guarantor further will promptly report to Lender any material
loss, damage, theft or other casualty to any Equipment Collateral, and whether
Borrower or Guarantor has repaired (or caused to be repaired) or replaced, or
intends to repair (or cause to be repaired) or replace, such Equipment
Collateral.
(d) NO SALE OF COLLATERAL. Neither Borrower nor either Guarantor
will sell, assign, lease, license, exchange, mortgage, encumber, hypothecate,
grant a security interest in, or otherwise dispose of its right, title or
interest in any of the Collateral, without in each case first obtaining the
prior written consent of Lender thereto; provided, however, that (i) Borrower
may obtain purchase money financing of equipment purchases secured by liens on
such equipment to the extent permitted pursuant to Section 3.2, (ii) Borrower
may replace Collateral consisting of obsolete or worn out equipment and
machinery in the ordinary course of its business and consistent with past
practice so long as (x) the replacement Collateral has a value equal to or
greater than that of the Collateral being replaced, and (y) Lender has a
perfected first priority security interest in the replacement Collateral,
subject to no other security interests, liens or encumbrances and (iii) so long
as no Default Condition or Event of Default has occurred and is continuing,
Borrower may dispose of obsolete or worn out equipment and machinery in the
ordinary course of its business and consistent with past practice without
replacing same so long as the aggregate value of equipment so disposed of in any
calendar year does not exceed Twenty-Five Thousand Dollars ($25,000).
(e) WAIVERS. Borrower and Guarantors agree to obtain, on Lender's
behalf, such waivers or consents from third parties, including, without
limitation, any lessor, licensor, operator, servicer or vendor, as Lender may
reasonably request at any time, in order to assure Lender in regard to the
perfection and priority of its security interest in, and ability to realize on,
any Collateral.
(f) FURTHER ASSURANCES. Borrower and each Guarantor further shall
duly execute and/or deliver (or cause to be duly executed and/or delivered) to
Lender any instrument, invoice, registration certificate, certificate of title,
application, document, document of title, dock warrant,
17
<PAGE> 23
dock receipt, warehouse receipt, bill of lading, order, financing statement,
assignment, waiver, consent or other writing which may be necessary to Lender to
carry out the terms of this Agreement and any of the other Loan Documents and to
perfect its security interest in and facilitate its realization on the
Collateral. Borrower and each Guarantor shall perform or cause to be performed
such acts as Lender may reasonably request to establish and maintain for Lender
a valid and perfected first priority security interest in the Collateral, free
and clear of any liens, encumbrances or security interests other than in favor
of Lender and other than Permitted Encumbrances.
(g) RIGHT TO INSPECT. Lender or any Participant shall have the
right to call at the Headquarters or the Distribution Center at any reasonable
time, and, without hindrance or delay, inspect, audit and check the Collateral
and make extracts from each Guarantor's and Borrower's books, records, journals,
orders, receipts and any correspondence and other data relating to the
transactions contemplated herein and to the Collateral. As long as no Default
Condition or Event of Default has occurred and is continuing, Lender shall give
Borrower three (3) days advance notice of any such visit. No notice of any such
visit shall be required at any time when a Default Condition or Event of Default
has occurred and is continuing.
(h) CHANGE OF NAME. Borrower and each Guarantor hereby
acknowledges and agrees that if, at any time hereafter, Borrower or either
Guarantor elects to move its chief executive office and principal place of
business from the Headquarters, or elects to change its name, identity or its
organization structure, Borrower or such Guarantor will notify Lender in writing
at least thirty (30) days prior thereto (provided that the foregoing shall not
be deemed a consent to any action otherwise prohibited by the terms of this
Agreement or any of the other Loan Documents) and execute (or cause to be
executed) such financing statements, or amendments thereto, or other documents
as Lender then may require in response to such changed condition in accordance
with Sections 3.1(e) and 3.1(f).
(i) CHANGE OF LOCATION. Borrower and each Guarantor further agree
not to remove any Collateral from the Distribution Center to any other location.
3.2. PURCHASE MONEY LIENS; RELEASE PROVISION. Notwithstanding anything
contained herein to the contrary, Borrower may permit purchase money liens to be
placed on items of equipment acquired by it after the Closing Date if and to the
extent that (i) at the time of the incurrence of any indebtedness to be secured
by such lien, no Default Condition or Event of Default shall have occurred and
be continuing, (ii) the aggregate amount of such purchase money indebtedness
incurred during the term of this Agreement, together with the cost of all items
of equipment purchased by Borrower with cash as to which Borrower has requested
releases pursuant to the next sentence hereof, shall not exceed $500,000, and
(iii) each item of equipment shall secure only the indebtedness incurred to
purchase such item, shall be readily distinguishable (by using serial numbers
and other identification) from the other Equipment Collateral and shall not
serve as a replacement for any item of Equipment Collateral existing on the
Closing Date or acquired thereafter. Upon Borrower's written request, (i) Lender
shall release its security interest in any item of equipment financed with
purchase money financing as to which all of the conditions set forth in the
preceding sentence have been satisfied and (ii) Lender shall release its
security interest in any
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item of equipment purchased by Borrower after the Closing Date with cash if and
to the extent that (A) no Default Condition or Event of Default shall have
occurred and be continuing, (B) the aggregate amount of all purchase money
indebtedness as described in the preceding sentence and the cost of equipment
purchased by Borrower with cash and requested to be released hereby during the
term of this Agreement shall not exceed Five Hundred Thousand Dollars
($500,000), and (iii) each item of equipment requested to be released hereby
shall be readily distinguishable (by using serial numbers and other
identification) and shall not serve as a replacement for any item of Equipment
Collateral existing on the Closing Date or acquired thereafter.
40 GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce Lender to
enter into this Agreement, each Guarantor and Borrower hereby represents and
warrants to Lender as set forth in Sections 4.1 through 4.6, inclusive.
4.1. EXISTENCE. Borrower is a general partnership duly organized,
validly existing and in good standing under the laws of the State of California.
Guarantor One is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is qualified to do business
and in good standing under the laws of the State of California. Guarantor Two is
a corporation duly organized, validly existing and in good standing under the
laws of the State of California. The principal place of business and chief
executive office of each Guarantor and Borrower is located at the Headquarters.
Borrower and Guarantors keep their books and records concerning the Collateral
at the Headquarters. Borrower has no Subsidiaries. Guarantor One has only those
Subsidiaries listed on Exhibit B attached hereto and incorporated herein by
reference. Guarantor Two has no Subsidiaries.
4.2. AUTHORITY. Each Guarantor and Borrower has the power to make,
deliver and perform under this Agreement, the Term Notes and the other Loan
Documents to which it is party, and, in the case of Borrower, to borrow
hereunder, and has taken all necessary and appropriate legal action to authorize
the execution, delivery and performance of all such Loan Documents. This
Agreement constitutes, and the Term Notes and the remainder of the Loan
Documents to which each is party, when executed and delivered by a Guarantor or
Borrower for value received, will constitute, the valid obligations of such
Guarantor and Borrower, legally binding upon each of them and enforceable
against each of them in accordance with their respective terms, to the extent
that each is party thereto. The Persons whose names are inscribed below are
Authorized Officers of Guarantors and Borrower duly authorized and empowered to
execute, attest and deliver this Agreement, the Term Notes and the remainder of
the Loan Documents to which each is party, for and on behalf of Guarantors and
Borrower, and to bind Guarantors and Borrower accordingly thereby.
4.3. NO MATERIAL LITIGATION. Except as set forth on Exhibit C attached
hereto and incorporated herein by reference, there are no proceedings pending
or, so far as either Guarantor or Borrower knows, threatened, against either
Guarantor or Borrower, before any court, arbitration panel or administrative
agency, no material disputes with any contract party and no pending or
threatened labor action which, in each case, if decided adversely to either
Guarantor or Borrower, would have a Material Adverse Effect.
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4.4. PAYMENT OF TAXES. Each Guarantor and Borrower has filed or caused
to be filed any federal income tax returns required to be filed by it, and all
other tax returns required to be filed by it, and has paid all taxes shown to be
due and payable by it on said returns or on any assessments made against it.
Neither of Guarantors nor Borrower has participated in any "prohibited
transaction" (as defined in Section 4975 of the Internal Revenue Code of 1986)
that could subject either Guarantor or Borrower to any tax or penalty.
4.5. NO VIOLATIONS, GENERALLY. The execution, delivery and performance
by each Guarantor and Borrower of this Agreement, the Term Notes and the other
Loan Documents to which each is party do not and will not require any consent or
approval of any Person, except to the extent obtained by a Guarantor or Borrower
on or prior to the Closing Date; or violate either Guarantor's certificate of
incorporation or bylaws or Borrower's partnership agreement or any provision of
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to either
Guarantor or Borrower; or result in a breach of or constitute a default under
any agreement that is material to either Guarantor's or Borrower's business;
and, to the best of each Guarantor's and Borrower's knowledge following diligent
inquiry, neither of Guarantors nor Borrower is in default under any such law,
rule, regulation, order, writ, judgment, injunction, decree, determination or
award or material agreement.
4.6. POLLUTION AND ENVIRONMENTAL CONTROL.
(a) To the best knowledge of Guarantors and Borrower after due inquiry,
the business operations of each Guarantor and Borrower comply in all material
respects with all applicable Environmental Laws; each Guarantor and Borrower has
obtained all environmental, health and safety Permits necessary for the
operation of such Guarantor's and Borrower's businesses; and all such permits
are valid, and in good standing and Guarantors and Borrower are in compliance in
all material respects with all terms and conditions of such Permits.
(b) Further, to the best knowledge of Guarantors and Borrower after due
inquiry, (i) neither of Guarantors nor Borrower is subject to any outstanding
written order or agreement with any Governmental Authority or with any private
Person with respect to (A) any Environmental Laws, (B) any Remedial Actions, or
(C) any Environmental Claims arising from the Release of a Contaminant into the
environment with respect to the Distribution Center; (iii) none of the
operations of either Guarantor or Borrower at the Distribution Center is subject
to any judicial or administration proceeding alleging a violation of any
Environmental Law; (iv) none of the operations of either Guarantor or Borrower
is the subject of any federal or state investigation evaluating whether any
Remedial Action is needed to respond to a Release of any Contaminant into the
environment under any applicable law; (v) neither of Guarantors or Borrower nor
any predecessor of either Guarantor or Borrower has filed any notice under any
federal or state law indicating past or present treatment, storage, or disposal
of a hazardous waste or reporting a spill or Release of a Contaminant into the
environment under any applicable law; (vi) neither of Guarantors nor Borrower
has any contingent liability in connection with any Release of any Contaminant
into the environment; (vii) neither of Guarantors' nor Borrower's business
operations involve the generation, transportation, treatment or disposal of any
hazardous waste, as defined under 40 C.F.R.
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Parts 260-270 or any state equivalent (other than any done in compliance with
all Environmental Laws); (viii) neither of Guarantors nor Borrower has disposed
of any Contaminant by placing it in or on the ground, groundwater or surface
water, and, with regard to the Distribution Center, neither has any lessee,
prior owner, or other Person; and (ix) no Lien in favor of any Governmental
Authority for (A) any liability under Environmental Laws or regulations, or (B)
damages arising from or costs incurred by such governmental authority in
response to a Release of a Contaminant into the environment has been filed or
attached to any Property.
50 COVENANTS. Guarantors and Borrower agree that, so long as any
Obligations are outstanding and this Agreement has not been terminated in
writing by Lender, each Guarantor and Borrower will comply with the following
covenants:
5.1. BOOKS AND RECORDS. Guarantors and Borrower shall maintain, at all
times, true and complete books, records and accounts in which true and correct
entries are made of their transactions in accordance with GAAP.
5.2. PERIODIC FINANCIAL STATEMENTS. Guarantors and Borrower shall, as
soon as practicable, and in any event within sixty (60) days after the end of
each fiscal quarter, furnish (or cause to be furnished) to Lender and each
Participant unaudited financial statements of Guarantor One and its consolidated
Subsidiaries, including, in each instance, balance sheets, income statements and
cash flow statements, on a consolidated and consolidating basis, as of and for
the quarterly period then ended and for their fiscal year to date, prepared in
accordance with GAAP, certified as to truth and accuracy by Authorized Officers
of Guarantor One and Borrower, together with a copy of Guarantor One's 10-Q
quarterly report filed with the Securities and Exchange Commission incorporating
such financial statements.
5.3. ANNUAL FINANCIAL STATEMENTS. Guarantors and Borrower shall, as soon
as practicable, and in any event within ninety (90) days after the end of each
fiscal year, furnish (or cause to be furnished) to Lender and each Participant
annual financial statements of Guarantor One and its consolidated Subsidiaries,
including, in each instance, balance sheets, income statements and cash flow
statements for the fiscal year then ended, on a consolidated and consolidating
basis, which have been audited by Guarantor One's Independent Accountants,
together with a copy of Guarantor One's 10-K annual report filed with the
Securities and Exchange Commission incorporating such financial statements.
5.4. COMPLIANCE CERTIFICATES. Together with each of the financial
statements described in Sections 5.2 and 5.3 above, and more frequently, if
requested by Lender, Guarantors and Borrower shall deliver a Compliance
Certificate and a covenant compliance worksheet to Lender, including
calculations of the financial tests set forth in Section 6.14, each signed by
Authorized Officers of Guarantors and Borrower.
5.5. PAYMENT OF TAXES. Each Guarantor and Borrower shall pay and
discharge all taxes, assessments and governmental charges pertaining to
Collateral, and the Distribution Center and all other material taxes,
assessments and governmental charges upon each of them, their respective
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income and properties prior to the date on which penalties attach thereto,
unless and to the extent only that (i) such taxes, assessments and governmental
charges are being contested in good faith and by appropriate proceedings by
Borrower and (ii) the applicable Guarantor or Borrower maintains reasonable
reserves on its books therefor.
5.6. MAINTENANCE OF INSURANCE. Guarantors and Borrower shall insure the
Collateral against fire, theft and such other risks (including, but not limited
to boiler and machinery) as Lender shall require from time to time at the full
replacement cost thereof, and maintain at least six (6) months of business
interruption or loss of rental income insurance, with Lender shown by
endorsement and named on a certificate of insurance as loss payee, additional
insured and mortgagee thereof, with responsible insurance companies rated "A-"
or better by A.M. Best Company. As to other Properties and risks, including,
without limitation, liability coverage, Guarantors and Borrower shall maintain
such insurance, with such insurers (having the minimum qualifications described
above) on such Properties, in such amounts and against such risks as is
customarily maintained by similar businesses operating in the same vicinity;
provided that such insurance shall not be less, in terms of insurers, amounts,
coverages or limitations, than the insurance being maintained by Guarantors and
Borrower on the Closing Date; and, provided, further, that such insurance shall
include, in any event, at all times, comprehensive general liability (inclusive
of products liability coverage), in aggregate combined single limit coverage
acceptable to Lender; and, provided, further, that Lender shall be shown by
endorsement and named on a certificate of insurance as "additional insured"
thereon and with breach of warranty endorsement favoring Lender. All such
insurance in existence on the Closing Date shall not be cancellable or
modifiable by Guarantors or Borrower, thereafter, unless with the prior written
consent of Lender, or by Guarantors' or Borrower's insurer, unless with at least
thirty (30) days advance written notice to Lender thereof (except as may be
necessary to bring such insurance into compliance herewith from time to time).
Guarantors and Borrower shall file with Lender on the Closing Date and at least
annually thereafter or, at Lender's request at any time from and after the
occurrence of, and during the continuance of, any Event of Default, upon its
request, an insurer's certificate evidencing Guarantors' and Borrower's
compliance with the requirements of this Section 5.6. All casualty insurance
proceeds paid with respect to the Collateral shall, after deduction of
reasonable expenses of Lender actually incurred in collecting such proceeds (if
any), at Lender's option be (i) applied (upon compliance with such terms and
conditions as may be required by Lender) to repair or restoration, either partly
or entirely, of the Collateral or (ii) applied to the payment of the Obligations
in such order and manner as Lender may elect, whether or not due. In the event
that, notwithstanding the foregoing, Borrower or either Guarantor receives any
such insurance proceeds directly or that a check for such proceeds is made
payable to Borrower or a Guarantor and Lender jointly, Borrower or such
Guarantor shall take all actions necessary to convey such proceeds to Lender. In
the event that pursuant hereto such proceeds are to be used for repair or
restoration of the Collateral, at its option, Lender will either release such
proceeds directly to Borrower or use such proceeds to pay directly invoices for
repair or restoration work, in each case upon compliance with such terms and
conditions as it may require.
5.7. PRESERVATION OF EXISTENCE. Each Guarantor and Borrower shall
preserve and maintain its existence, rights, franchises and privileges, in each
local jurisdiction in which the Distribution Center exists and in each other
jurisdiction where the nature of the business conducted therein or the
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location of any Property therein requires that such rights, franchises and
privileges be preserved and maintained; and obtain and maintain for itself all
Permits, licenses, certificates of convenience and necessity, operating rights,
authorizations and consents as shall be necessary or advisable to permit it to
continue to operate its business in the manner contemplated to be conducted by
it on the Closing Date.
5.8. COMPLIANCE WITH LAWS. Each Guarantor and Borrower shall comply with
the requirements of all applicable laws, rules, regulations, permits, hearings,
approvals and clearances and orders of any Governmental Authority, including
particularly, but without limitation, in respect of Environmental Laws.
5.9. ENVIRONMENTAL LAW COMPLIANCE.
(a) On or before the Closing Date, Borrower will provide Lender
with the environmental assessment described in Section 9(g)(7) below together
with copies of any environmental assessments or similar reports made by or on
behalf of Borrower with respect to any of the Real Estate Collateral within the
preceding five (5) years (if any); and, subsequent to the Closing Date, Borrower
will provide Lender with copies of any such assessments or reports thereafter
made by or on behalf of Borrower with respect to any location where Collateral
is located, promptly as and when made or received by Borrower, but not later
than thirty (30) days thereafter.
(b) Each Guarantor and Borrower will notify Lender in writing of
any Environmental Claim as to which a Guarantor or Borrower is reasonably likely
to have liability in excess of Fifty Thousand Dollars ($50,000) or any
accusation or allegations which may give rise to such an Environmental Claim
hereafter made against it or received by it within fifteen (15) days after it
first obtains knowledge or notice thereof. Each such notice to Lender shall
include a copy of any claim, citation, order, notice or other communication (to
the extent in writing) received by a Guarantor or Borrower from the person
making such Environmental Claim, allegation or accusation, a description of the
nature of such Environmental Claim, allegation or accusation, the name of the
Person making such Environmental Claim, allegation or accusation; such
Guarantor's or Borrower's anticipated defense to such Environmental Claim,
allegation or accusation or the action such Guarantor or Borrower proposes to
take in respect of such Environmental Claim, allegation or accusation and the
anticipated costs to be incurred by such Guarantor or Borrower in connection
with such Environmental Claim, allegation or accusation (including, with
limitation, that amount of any anticipated damages, the costs of defending such
Environmental Claims and the costs of any cleanup or corrective action).
(c) In addition, each Guarantor and Borrower will promptly notify
Lender of any Release with regard to any Property if such Release would or would
reasonably be expected to have a Material Adverse Effect or of material change
in the nature or extent of any Contaminants used, transported or stored by
either Guarantor or Borrower or any Subsidiary, and allow no material change in
the use thereof or either Guarantor's or Borrower's or any Subsidiary's
operations that would increase in any material amount the risk of violation of
the Environmental Laws without the express prior written approval of Lender.
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(d) Guarantors and Borrower, jointly and severally, further agree
to indemnify and hold Lender, each Participant and the officers, directors,
agents, employees, affiliates and representatives of Lender and each Participant
(individually an "Indemnified Party" and collectively the "Indemnified Parties")
harmless from and against any and all damages, penalties, fines, claims, liens,
suits, liabilities, costs (including necessary and actual clean-up and response
costs), judgments, and expenses (including reasonable attorneys' fees and any
consultants' or other experts' fees and expenses) of every kind and nature
suffered by or asserted against any Indemnified Party (i) under or on account of
the Environmental Laws, including, without limitation, as a result of the past,
present or future institution of any suits, claims, actions, or proceedings by
any person against Borrower, either Guarantor or Lender in respect of any
alleged violation of the Environmental Laws by Borrower, either Guarantor or
Borrower's or either Guarantor's use, storage or disposition of Contaminants,
(ii) with respect to any past, present or future Release of Contaminants
affecting any Property, whether or not the same originates or emanates from any
Property or any contiguous real estate, (iii) with respect to any other past,
present, or future matters affecting any Property within the jurisdiction of any
Governmental Authority administering the Environmental Laws or (iv) with respect
to any past, present or future requirement under the Environmental Laws which
requires the elimination or removal of any Contaminants or other substances
regulated pursuant to any Environmental Laws, rules, or regulations of any
Governmental Authority having jurisdiction over Borrower or either Guarantor,
whether attributable to events occurring before or after the Closing Date. Any
payments required to be made hereunder shall be due and payable on demand.
(e) The agreements contained in this Section shall survive the
termination of this Agreement and shall continue in full force and effect for so
long as the prospect of any loss or liability covered by the indemnity contained
in such clause (d) above exists.
5.10. NOTICE OF LITIGATION; EVENTS OF DEFAULT, ETC. Promptly, after
receipt of notice or knowledge thereof, but not later than ten (10) days
thereafter, each Guarantor and Borrower will report to Lender: (i) any lawsuit
or administrative proceeding or arbitration proceeding in which Borrower or
either Guarantor is a defendant wherein the amount of damages claimed against
Borrower or either Guarantor exceeds One Hundred Thousand Dollars ($100,000) or
in which the validity of this Agreement or any Loan Document or any action taken
or to be taken pursuant hereto or thereto is questioned; (ii) any strike,
walkout, lockout or other related legal action, whether pending or threatened
pertaining to Borrower or either Guarantor which could have a Material Adverse
Effect; (iii) the existence and nature of any Default Condition or Event of
Default; and (iv) any Environmental Claim or an accusation or allegation which
may give rise to an Environmental Claim hereafter made against Borrower or
either Guarantor, or received by Borrower or either Guarantor or of which it
obtains knowledge, whether or not made against it, which either (A) relates to
the Distribution Center or (B) could reasonably be expected to result in
liability to Borrower or a Guarantor in excess of One Hundred Thousand Dollars
($100,000).
5.11. YEAR 2000 COMPLIANCE. Each Guarantor and Borrower shall take all
actions necessary or advisable to assure that its business operations will
handle date information involving any and all dates before, during and after
January 1, 2000, including, accepting and storing input,
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providing output and performing date calculations, without any change in
performance or realiability from that existing on the Closing Date for dates
shorter than January 1, 2000.
5.12. INTERCOMPANY LEASE. Guarantor Two and Borrower shall keep the
Intercompany Lease in effect at all times until the Obligations have been paid
in full and shall not, amend or modify in any material respect, or terminate, or
acquiesce in any amendment or modification in a material respect, or termination
of, the Intercompany Lease without Lender's prior written consent.
6. EVENTS OF DEFAULT. The occurrence of any events or conditions shall
constitute an Event of Default hereunder, provided that any requirement for the
giving of notice or the lapse of time, or both, has been satisfied.
6.1. TERM NOTES. Borrower or a Guarantor shall fail to make any payments
of principal of, or interest on, either Term Note, within ten (10) calendar days
after the same shall become due and payable.
6.2. OTHER OBLIGATIONS. Borrower or a Guarantor shall fail to pay any
Obligations (other than as evidenced by the Term Notes) to Lender, within ten
(10) calendar days after the same shall become due and payable (unless a longer
or shorter grace period is provided therefor in any document, instrument or
agreement evidencing, pertaining to or securing the repayment of such other
Obligations, in which event such other grace period shall apply).
6.3. MISREPRESENTATIONS. Borrower or a Guarantor shall make any
representation or warranty, respectively, in this Agreement or any of the Loan
Documents or in any certificate or statement furnished at any time hereunder or
in connection with this Agreement or any of the Loan Documents which proves to
have been untrue or misleading in any material respect when made or furnished.
6.4. COVENANTS. Borrower or a Guarantor shall default in the observance
or performance of any covenant or agreement contained in Section 5; or Borrower
or a Guarantor shall default in the observance or performance of any other
covenant or agreement contained in this Agreement or any of the Loan Documents,
except for any default of the types described in Sections 6.1, 6.2 or 6.3 above,
and such default shall continue for a period of thirty (30) calendar days from
the date of receipt by Borrower or a Guarantor of written notice from Lender
specifying such default (unless a longer or shorter cure period is provided
therefor in any such Loan Document, in which case such other grace period shall
apply), without such default being waived or cured.
6.5. OTHER DEBTS. Borrower or a Guarantor shall default under any
agreement for indebtedness in excess of Two Hundred Fifty Thousand Dollars
($250,000) under which it is a borrower or guarantor if such default (i)
consists of the failure to pay any debt when due or to perform any other
obligation thereunder, (ii) gives the holder of the debt the right to accelerate
the debt and (iii) the holder has accelerated the debt and commenced the
exercise of remedies.
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6.6. VOLUNTARY BANKRUPTCY. Borrower or a Guarantor shall file a
voluntary petition in bankruptcy or a voluntary petition or answer seeking
liquidation, reorganization, arrangement, readjustment of its debts, or for any
other relief under the Bankruptcy Code, or under any other act or law pertaining
to insolvency or debtor relief, whether state, federal, or foreign, now or
hereafter existing; or Borrower or a Guarantor shall enter into any agreement
indicating its consent to, approval of, or acquiescence in, any such petition or
proceeding; or Borrower or a Guarantor shall apply for or permit the appointment
by consent or acquiescence of a receiver, custodian or trustee for all or a
substantial part of its property; or Borrower or a Guarantor shall make an
assignment for the benefit of creditors; or Borrower or a Guarantor shall be
unable or shall fail to pay its debts generally as such debts become due; or
Borrower or a Guarantor shall admit, in writing, its inability or failure to pay
its debts generally as such debts become due.
6.7. INVOLUNTARY BANKRUPTCY. There shall have been filed against
Borrower or a Guarantor an involuntary petition in bankruptcy or seeking
liquidation, reorganization, arrangement, readjustment of its debts or for any
other relief under the Bankruptcy Code, or under any other act or law pertaining
to insolvency or debtor relief, whether state, federal or foreign, now or
hereafter existing; or Borrower or a Guarantor shall suffer or permit the
involuntary appointment of a receiver, custodian or trustee or for all or a
substantial part of its property; or Borrower or a Guarantor shall suffer or
permit the issuance of a warrant of attachment, execution or similar process
against all or any substantial part of its property; unless, in each such case,
such petition, appointment or process is fully bonded against, vacated or
dismissed within sixty (60) days from its effective date, but not later than ten
(10) days prior to any proposed disposition of any assets pursuant to any such
proceeding.
6.8. JUDGMENTS. If one or more final, nonappealable judgments or decrees
in excess of Two Hundred Fifty Thousand Dollars ($250,000) shall be entered
against Borrower or a Guarantor and such judgments or decrees shall not have
been vacated, discharged, stayed or bonded pending appeal within forty-five (45)
days from the date such judgment becomes nonappealable.
6.9. CHANGE OF CONTROL. If: (i) except as and to the extent consented to
by Lender in writing, Guarantor One shall cease to own, directly or indirectly,
all of the issued and outstanding equity interests of Borrower and Guarantor
Two; or (ii) except as and to the extent consented to by Lender in writing,
either Guarantor or Borrower shall merge with, or consolidate into, any other
corporation, partnership, company or other entity (except for a merger of
Borrower or Guarantor Two into Guarantor One if Guarantor One is the surviving
corporation); or (iii) either Guarantor or Borrower shall sell all, or
substantially all, of its assets.
6.10. LOSS OF COLLATERAL. If all or any material portion of the
Collateral: (i) suffers any loss, damage, theft or other casualty, in a single
occurrence or series of related occurrences not fully covered by insurance as
prescribed in Section 5.6 (provided that Borrower shall have the right to cure
one such loss in an amount not in excess of $250,000 by either prepaying the
Term Loans, together with any applicable prepayment premium pursuant to Section
2.6 hereof, in such amount as Lender determines to be necessary in connection
with such loss or providing to Lender substitute collateral satisfactory to
Lender in all respects in which Lender shall have a first priority security
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interest); or (ii) becomes subject to any lien, claim or encumbrance not being
contested, in good faith, and, in any event, removed within ninety (90) days of
its imposition; or (iii) is made the subject of any proceeding in which the
existence, scope, coverage, or priority of the security interest of Lender
therein is disputed by the Borrower or Guarantor.
6.11. GUARANTOR. If either Guarantor shall default in its observance or
performance of any term of its guaranty of the Obligations set forth in Section
2.10 hereof.
6.12. MATERIAL AGREEMENTS. If (a) Borrower or Guarantor Two shall
default in the payment or performance of the Intercompany Lease or (b) Borrower
or a Guarantor shall default in the payment or performance of any Material
Agreement (other than the Intercompany Lease) which default described in this
clause (b) entitles the other party or parties thereto to terminate or repudiate
such contract.
6.13. MATERIAL ADVERSE EFFECT. The occurrence of any Material Adverse
Effect.
6.14. FINANCIAL DEFAULTS.
(a) If Guarantor One's Net Worth (as defined below and measured
quarterly) shall be less than: (i) $155,000,000 at any time from the Closing
Date through January 31, 2000, (ii) $160,000,000, at any time from February 1,
2000 through January 31, 2001 or (iii) $175,000,000 at any time from and after
January 31, 2001.
(b) If Guarantor One's Fixed Charge Coverage Ratio (as defined
below) shall be less than: (i) 1.50:1, for each fiscal quarter during Guarantor
One's fiscal year ended January 31, 2000, (ii) 1.75:1.00 for each fiscal quarter
during Guarantor One's fiscal year ending January 31, 2001 or (iii) 1.85:1.00
for each fiscal quarter of Guarantor One thereafter.
The tests described in this Section 6.13 shall be measured quarterly, at
the end of each fiscal quarter of Guarantor One, on a consolidated basis, for
Guarantor One and its consolidated Subsidiaries. In addition thereto:
(a) "NET WORTH" shall mean total shareholder's equity, as
determined in accordance with GAAP; and
(b) "FIXED CHARGE COVERAGE RATIO" shall mean the ratio which:
(i) the net income of Guarantor One and its consolidated Subsidiaries,
determined without regard to any extraordinary gains or losses, plus the
following, to the extent included in the computation thereof, taxes, interest
expense, depreciation and amortization and rent/operating lease expenses,
determined on a rolling four (4) quarters' basis, bears to (ii) the sum of
interest expense of Guarantor One and its consolidated Subsidiaries, plus the
current maturities of long-term debt (including capital leases) of Guarantor One
and its consolidated Subsidiaries plus cash paid for rent/operating leases of
Guarantor One and its consolidated Subsidiaries, each for the same four fiscal
quarters.
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<PAGE> 33
An example computation of each such test is set forth on Exhibit
D attached hereto.
7. REMEDIES. Upon the occurrence or existence of any Event of Default,
or at any time thereafter, without prejudice to the rights of Lender to enforce
its claims against each Guarantor and Borrower for damages for failure by
Guarantors and Borrower to fulfill any of their obligations hereunder, subject
only to prior receipt by Lender of payment in full of all Obligations then
outstanding in a form acceptable to Lender, Lender shall have all of the rights
and remedies described in Sections 7.1 through 7.4, inclusive, and it may
exercise any one, more, or all of such remedies, in its sole discretion, without
thereby waiving any of the others.
7.1. ACCELERATION OF THE OBLIGATIONS. Lender, at its option, may declare
all of the Obligations (including but not limited to that portion thereof
evidenced by the Term Notes) to be immediately due and payable, whereupon the
same shall become immediately due and payable without presentment, demand,
protest, notice of nonpayment or any other notice required by law relative
thereto, all of which are hereby expressly waived by Borrower, anything
contained herein to the contrary notwithstanding and, in connection therewith,
if Lender so elects, by further written notice to Borrower, Lender may increase
the rate of interest charged on each Term Note then outstanding for so long
thereafter as Lender further shall elect to the Default Rate. Thereafter,
Lender, at its option, may, but shall not be obligated to, accept less than the
entire amount of Obligations due, if tendered, provided, however, that unless
then agreed to in writing by Lender, no such acceptance shall or shall be deemed
to constitute a waiver of any Event of Default or a reinstatement of any
commitments of Lender hereunder.
7.2. REMEDIES OF A SECURED PARTY. Lender shall thereupon have the rights
and remedies of a secured party under the UCC in effect on the date thereof
(regardless of whether the same has been enacted in the jurisdiction where the
rights or remedies are asserted), including, without limitation, the right to
take possession of any of the Collateral or the proceeds thereof, to sell or
otherwise dispose of the same, to apply the proceeds therefrom to any of the
Obligations in such order as Lender, in its sole discretion, may elect. Lender
shall give Borrower and Guarantors written notice of the time and place of any
public sale of the Collateral or the time after which any other intended
disposition thereof is to be made. The requirement of sending reasonable notice
shall be met if such notice is given to Borrower and Guarantors pursuant to
Section 8.9 at least ten (10) days before such disposition. Expenses of
retaking, holding, insuring, preserving, protecting, preparing for sale or
selling or the like with respect to the Collateral shall include, in any event,
reasonable attorneys' fees and other legally recoverable collection expenses,
all of which shall constitute Obligations.
7.3. REPOSSESSION OF THE COLLATERAL. Lender may take the Collateral or
any portion thereof into its possession, by such means (without breach of the
peace) and through agents or otherwise as it may elect (and, in connection
therewith, demand that Borrower and Guarantors assemble the Collateral at a
place or places and in such manner as Lender shall prescribe), and sell, lease
or otherwise dispose of the Collateral or any portion thereof in its then
condition or following any commercially reasonable preparation or processing,
which disposition may be by public or private proceedings, by one or more
contracts, as a unit or in parcels, at any time and place and on any
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<PAGE> 34
terms, so long as the same are commercially reasonable. To facilitate the
foregoing, Borrower and Guarantors agree to make available to Lender the
Distribution Center or any other premises then owned or leased by Borrower or a
Guarantor on which any Collateral then may be situated for such purposes,
without charge or undue delay, and on such terms as Lender then may reasonably
request (including, without limitation, if Lender so requests, the temporary or
permanent vacation by Borrower or a Guarantor of any leased premises).
7.4. OTHER REMEDIES. Unless and except to the extent expressly provided
for to the contrary herein, the rights of Lender specified herein shall be in
addition to, and not in limitation of, Lender's rights under the UCC, as amended
from time to time, or any other statute or rule of law or equity, or under any
other provision of any of the Loan Documents, or under the provisions of any
other document, instrument or other writing executed by Borrower, a Guarantor or
any third party in favor of Lender, all of which may be exercised successively
or concurrently.
7.5. NOTICE TO GUARANTORS. Lender shall send to each Guarantor in the
manner provided in Section 8.9 a copy of any written notice of the occurrence of
an Event of Default which it sends to Borrower.
8. MISCELLANEOUS.
8.1. WAIVER. Each and every right granted to Lender under this
Agreement, or any of the other Loan Documents, or any other document delivered
hereunder or in connection herewith or allowed it by law or in equity, shall be
cumulative and may be exercised from time to time. No failure on the part of
Lender to exercise, and no delay in exercising, any right shall operate as a
waiver thereof, nor shall any single or partial exercise by Lender of any right
preclude any other or future exercise thereof or the exercise of any other
right. No waiver by Lender of any Default Condition or Event of Default shall
constitute a waiver of any subsequent Default Condition or Event of Default.
8.2. GOVERNING LAW. THIS AGREEMENT AND, UNLESS OTHERWISE EXPRESSLY
PROVIDED THEREIN, THE TERM NOTES AND THE OTHER LOAN DOCUMENTS, AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
ILLINOIS.
8.3. SURVIVAL. All representations, warranties and covenants made herein
and in the other Loan Documents shall survive the execution and delivery of this
Agreement and such other Loan Documents. On the Closing Date, each Guarantor and
Borrower shall be deemed to have restated, renewed and reaffirmed as of each
such date all of such representations, warranties and covenants. The terms and
provisions of this Agreement shall continue in full force and effect,
notwithstanding the payment of the Term Notes, until all of the Obligations have
been paid in full and Lender has terminated this Agreement in writing.
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<PAGE> 35
8.4. NO ASSIGNMENT BY EITHER GUARANTOR OR BORROWER; LENDER MAY ASSIGN.
No assignment hereof shall be made by either Guarantor or Borrower without the
prior written consent of Lender. Lender may assign, or sell participations in,
its right, title and interest herein and in the Loan Documents at any time
hereafter without notice to or consent of either Guarantor or Borrower to any
Participant having at least Fifty Million Dollars ($50,000,000) in assets and
with the written consent of Guarantors and Borrower, to any Participant. Upon
any assignment by Lender, the assignee shall be entitled to all the rights,
powers, privileges and remedies of Lender to the extent assigned, and the
obligations of each Guarantor or Borrower shall not be subject, as against any
such assignee, to any defense, set-off or counterclaim available to Guarantor or
Borrower against Lender and any such defense, set-off or counterclaim may be
asserted only against Lender.
8.5. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which when fully executed shall be an original, and all of
said counterparts taken together shall be deemed to constitute one and the same
agreement.
8.6. REIMBURSEMENT. Guarantors and Borrower, jointly and severally,
agree to reimburse Lender for its out-of-pocket expenses, actually incurred,
including, without limitation, the reasonable fees and disbursements of its
legal counsel (including a reasonable allocation of the costs, compensation and
expenses of internal counsel), incurred in connection with the preparation of
the Loan Documents and any and all other documents, notes, and agreements
pursuant hereto, including the furnishing of any opinions which may be requested
of such counsel by the Lender on questions incident to this transaction, which
costs, exclusive of survey, title insurance and appraisal costs, are not
expected to exceed $20,000. Guarantors and Borrower will pay all expenses
incurred by Guarantors and Borrower in this transaction. If any taxes, fees or
other costs shall be payable on account of the execution, issuance, delivery or
recording of any of the Loan Documents, by reason of any existing or hereafter
enacted federal or state statute, Guarantors and Borrower, jointly and
severally, agree to pay all such taxes (other than taxes imposed on or measured
by Lender's net income), fees or other costs, including any applicable interest
and penalty, and to indemnify and hold Lender harmless from and against
liability in connection therewith. If any attorney (including, without
limitation, internal counsel) is engaged (a) to collect the Obligations, whether
or not legal proceedings are thereafter instituted by Lender, (b) to represent
Lender in any bankruptcy, reorganization, receivership or other proceedings
affecting creditors' rights and involving a claim under this Agreement or any of
the other Loan Documents, (c) to protect the lien of the Mortgage or any of the
other Loan Documents, (d) to represent Lender in any other proceedings
whatsoever in connection with this Agreement, the Mortgages or any other Loan
Documents, including, without limitation, post judgment proceedings to enforce
any judgment related to the Loan Documents, or (e) in connection with seeking of
an out-of-court workout or settlement of any of the foregoing, then Guarantors
and Borrower, jointly and severally, agree to pay to Lender all costs,
attorneys' fees and expenses in connection therewith (including a reasonable
allocation of the costs, compensation and expenses of internal counsel), in
addition to all other amounts due hereunder. This provision is separate and
several and shall survive the merger of this provision into any judgment.
8.7. SUCCESSORS AND ASSIGNS. This Agreement and every Loan Document
shall be binding upon and inure to the benefit of the successors and permitted
assigns of the parties hereto and
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<PAGE> 36
thereto. The foregoing shall expressly include, without limitation, in the case
of Lender, any Participant.
8.8. SEVERABILITY. If any provision of this Agreement or of the Loan
Documents or the application thereof to any party thereto or circumstances shall
be invalid or unenforceable to any extent, the remainder of such Loan Documents
and the application of such provisions to any other party thereto or
circumstance shall not be affected thereby and shall be enforced to the greatest
extent permitted by law.
8.9. NOTICES. All notices, requests and demands to or upon the
respective parties hereto shall be deemed to have been given or made when
personally delivered or deposited in the mail, registered or certified mail,
postage prepaid, or delivered by overnight courier, addressed as follows or to
such other address as may be designated hereafter in writing by the respective
parties hereto (which, in the case of Lender, may include the name and address
of each Participant):
Guarantor or Borrower:
The Gymboree Corporation
700 Airport Boulevard
Suite 200
Burlingame, California 94010
Attn: President
With a copy to:
Bartko, Zenkel, Tarrant & Miller
Attorneys at Law
900 Front Street
Suite 300
San Francisco, California 94111
Attn: Thomas E. Cooper, Esq.
Lender:
Transamerica Business Credit Corporation
Two Ravinia Drive, Suite 700
Atlanta, Georgia 30346
Attn: Region Credit Manager
except in cases where it is expressly provided herein or by applicable law that
such notice, demand to request is not effective until received by the party to
whom it is addressed.
8.10. ENTIRE AGREEMENT - AMENDMENT. This Agreement, together with the
Term Notes and the other Loan Documents, constitute the entire agreement between
the parties hereto with respect to the subject matter hereof and thereof and
supersedes any agreement or understanding, oral
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<PAGE> 37
or written, heretofore made in regard thereto. Neither this Agreement, the Term
Notes nor any other Loan Document may be changed, waived, discharged, modified
or terminated orally, but only by an instrument in writing signed by the party
against whom enforcement is sought.
8.11. TIME OF THE ESSENCE. Time is of the essence in this Agreement, the
Term Notes and the other Loan Documents.
8.12. INTERPRETATION. No provision of this Agreement or any Loan
Document shall be construed against or interpreted to the disadvantage of any
party hereto by any court or other governmental or judicial authority by reason
of such party having or being deemed to have structured or dictated such
provision.
8.13. LENDER NOT A JOINT VENTURER. Neither this Agreement nor any
agreements, instruments, documents or transactions contemplated hereby
(including the Loan Documents) shall in any respect be interpreted, deemed or
construed as making Lender a partner or joint venturer with either Guarantor or
Borrower or as creating any similar relationship or entity, and Guarantors and
Borrower each agree that they will not make any contrary assertion, contention,
claim or counterclaim in any action, suit or other legal proceeding involving
Lender and either Guarantor or Borrower.
8.14. JURISDICTION. GUARANTORS AND BORROWER AGREE THAT ANY LEGAL ACTION
OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE TERM NOTES OR ANY OTHER LOAN
DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR THE UNITED
STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, CHICAGO DIVISION, ALL
AS LENDER MAY ELECT. BY EXECUTION OF THIS AGREEMENT, EACH GUARANTOR AND BORROWER
HEREBY SUBMITS TO EACH SUCH JURISDICTION, HEREBY EXPRESSLY WAIVING WHATEVER
RIGHTS MAY CORRESPOND TO IT BY REASON OF ITS PRESENT OR FUTURE DOMICILE AND
CONSENTS TO SERVICE OF PROCESS BY WRITTEN NOTICE GIVEN IN THE MANNER SPECIFIED
FOR THE GIVING OF NOTICES IN SECTION 8.9 ABOVE; PROVIDED, HOWEVER, THAT NOTHING
HEREIN SHALL AFFECT THE RIGHT OF LENDER TO COMMENCE LEGAL PROCEEDINGS OR
OTHERWISE PROCEED AGAINST EITHER GUARANTOR OR BORROWER IN ANY OTHER JURISDICTION
OR TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED BY LAW. EACH OF LENDER,
EACH GUARANTOR AND BORROWER WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH
PROCEEDING. EACH GUARANTOR AND BORROWER FURTHER AGREES THAT LENDER SHALL NOT BE
LIABLE TO IT FOR CONSEQUENTIAL OR SPECIAL DAMAGES ARISING FROM BREACH OF
CONTRACT, TORT OR OTHER WRONG OR CLAIM RELATING TO THE ESTABLISHMENT,
ADMINISTRATION OR COLLECTION OF ANY OBLIGATIONS OR ANY LOAN DOCUMENT OR ANY
ACTION (OR INACTION) BY LENDER THEREUNDER.
8.15. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made
hereunder or under the Term Notes shall be stated to be due on a Saturday,
Sunday or a public holiday under the
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laws of the State of Georgia or the State of Illinois, such payment may be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest hereunder or under
the Term Notes.
8.16. WAIVER OF RIGHTS. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT,
EACH GUARANTOR AND BORROWER HEREBY WAIVES ANY AND ALL RIGHTS, IF ANY, WHICH
EITHER GUARANTOR AND BORROWER OTHERWISE HAS OR MAY HAVE UNDER AND BY VIRTUE OF
ANY LAW, WITH RESPECT TO THE RIGHT OF EITHER GUARANTOR OR BORROWER TO NOTICE AND
TO A JUDICIAL OR ADMINISTRATIVE HEARING PRIOR TO SEIZURE OF ANY COLLATERAL BY
LENDER.
8.17. CURE OF DEFAULTS BY LENDER. If, hereafter, either Guarantor or
Borrower defaults in the performance of any duty or obligation to Lender
hereunder, Lender may, at its option, but without obligation, cure such default
and any costs, fees and expenses incurred by Lender in connection therewith
including, without limitation, for the purchase of insurance, the payment of
taxes and the removal or settlement of liens and claims, shall constitute
Obligations, be payable on demand and bear interest until paid at the Default
Rate applicable to the Term Note with the then highest contract rate.
8.18. RECITALS. All recitals contained herein are hereby incorporated by
reference into this Agreement and made part thereof.
8.19. ATTORNEY-IN-FACT. Each Guarantor and Borrower hereby designates,
appoints and empowers Lender irrevocably to act as its attorney-in-fact, at such
Guarantor's and Borrower's cost and expense, to do in the name of such Guarantor
and Borrower any and all actions which Lender may deem necessary or advisable to
carry out the terms hereof, upon the failure, refusal or inability of such
Guarantor or Borrower to do so, and each Guarantor and Borrower hereby, jointly
and severally, agrees to indemnify and hold Lender harmless from any costs,
damages, expenses or liabilities arising against or incurred by Lender in
connection therewith.
8.20. SOLE BENEFIT. The rights and benefits set forth in this Agreement
and in all the other Loan Documents are for the sole and exclusive benefit of
Lender, its Participants (if any), each Guarantor and Borrower and may be relied
upon only by them.
8.21. REMEDIES. UNLESS EXPRESSLY PROVIDED TO THE CONTRARY, LENDER MAY
ENFORCE ITS RIGHTS UNDER THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS WITHOUT
RESORT TO PRIOR JUDICIAL PROCESS OR JUDICIAL HEARING, AND EACH GUARANTOR AND
BORROWER EXPRESSLY WAIVES, RENOUNCES AND KNOWINGLY RELINQUISHES ANY LEGAL RIGHT
WHICH MIGHT OTHERWISE REQUIRE LENDER TO ENFORCE ITS RIGHTS BY JUDICIAL PROCESS.
IN SO PROVIDING FOR A NON-JUDICIAL REMEDY, EACH GUARANTOR AND BORROWER
RECOGNIZES AND CONCEDES THAT SUCH A REMEDY IS CONSISTENT WITH THE USAGE OF THE
TRADE, IS RESPONSIVE TO COMMERCIAL NECESSITY AND IS THE RESULT OF BARGAINING AT
ARM'S LENGTH. NOTHING IN THIS AGREEMENT IS
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INTENDED TO PREVENT EITHER GUARANTOR, BORROWER OR LENDER FROM RESORTING TO
JUDICIAL PROCESS AT ANY PARTY'S OPTION.
8.22. INDEMNITY. Without limiting any provisions of Sections 5.10 or
8.6, Guarantors and Borrower, jointly and severally, agree to save, indemnify
and hold harmless Lender from and against any and all debts, liabilities,
obligations, damages, costs, expenses or other claims incurred by Lender as a
result of its entry into, and performance under, this Agreement or any other
Loan Documents, including, without limitation, with respect to the claims of any
broker or other intermediary, other than any of the foregoing resulting directly
from Lender's gross negligence or willful misconduct.
8.23. ACCEPTANCE. THIS AGREEMENT, TOGETHER WITH THE TERM NOTES AND ALL
OTHER LOAN DOCUMENTS, SHALL NOT BECOME EFFECTIVE UNLESS AND UNTIL (I) DULY
EXECUTED BY EACH GUARANTOR AND BORROWER, (II) DELIVERED TO LENDER FOR ACCEPTANCE
IN CHICAGO, ILLINOIS, (III) ACCEPTED BY LENDER IN CHICAGO, ILLINOIS AND (IV)
DULY EXECUTED BY LENDER, AS APPROPRIATE, IN CHICAGO, ILLINOIS. THE DISBURSEMENT
OF THE PROCEEDS OF THE TERM LOANS BY LENDER SHALL BE EVIDENCE THAT THE FOREGOING
CONDITIONS HAVE BEEN FULFILLED.
9. CONDITIONS PRECEDENT. Unless waived in writing by Lender at or prior
to the execution and delivery of this Agreement, the conditions set forth below
shall constitute express conditions precedent to any obligation of Lender
hereunder:
(a) NO INJUNCTION; ETC. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain,
or prohibit, or to obtain substantial damages in respect of, or which is related
to or arises out of this Agreement, or the consummation of the transactions
contemplated hereby, or which Lender determines would make it inadvisable to
consummate the transactions contemplated hereby.
(b) NO DEFAULT. Lender shall have determined that no Default
Condition or Event of Default shall have occurred and be continuing.
(c) COMPLIANCE WITH LAWS GENERALLY; ENVIRONMENTAL LAW COMPLIANCE.
Lender shall be satisfied in all respects that Borrower and Guarantors are in
material compliance with all applicable federal, state and local laws and
regulations, including particularly, but without limitation, all Environmental
Laws.
(d) MATERIAL AGREEMENTS. Lender shall have reviewed all of
Borrower's and Guarantors' Material Agreements, and all of the foregoing shall
be satisfactory to Lender.
(e) LITIGATION. Lender shall have reviewed all existing
litigation, injunctions and proceedings, if any, pending or threatened against
Borrower and Guarantors and the results of such review shall be satisfactory to
Lender.
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(f) NO MATERIAL ADVERSE CHANGE. Lender shall determine that no
Material Adverse Change has occurred. Without limitation of the foregoing,
Guarantor One's loss for its third quarter of its fiscal year ending January 31,
1999 shall not exceed $.03 per share.
(g) DOCUMENTATION. Lender shall have received the following
documents, each to be in form and substance satisfactory to Lender and its
counsel, and duly executed and delivered by the party or parties thereto:
(1) LOAN DOCUMENTS. This Agreement and all other Loan Documents to be
executed and delivered by Borrower and Guarantors hereunder and under the Loan
Documents on the Closing Date, to the extent not otherwise specified below;
(2) INSURANCE CERTIFICATES. Receipt by Lender of a certificate from
Borrower's insurer (or an authorized agent thereof) respecting all insurance
required hereunder, together with copies of all insurance policies evidencing
such insurance in each case in form and substance acceptable to Lender.
(3) AUTHORIZED OFFICER CERTIFICATES. Receipt by Lender of certificates
from Authorized Officers of Borrower and Guarantors, certifying as to their
respective partnership agreements or certificates or articles of incorporation
and bylaws, as applicable, and authority to consummate the transactions
contemplated hereby;
(4) TERM NOTES. Receipt by Lender of Term Notes in an aggregate
principal amount equal to the aggregate principal amount of the Term Loans;
(5) FINANCING STATEMENTS. Copies of all filing receipts or
acknowledgments issued by any Governmental Authority to evidence any filing or
recordation necessary to perfect the security interests of Lender in all
Collateral and evidence in a form acceptable to Lender that such security
interests constitute value and perfected first priority security interests in
Lender's favor;
(6) APPRAISAL. An appraisal, performed at Borrower's expense, of the
Real Estate Collateral, by a nationally recognized independent appraiser
selected by Borrower, but acceptable to Lender, using a methodology of appraisal
which is acceptable to Lender.
(7) ENVIRONMENTAL ASSESSMENT. As environmental regulatory review for the
Real Estate Collateral, prepared at Borrowers' expense, by independent
environmental experts selected by Lender, together with, if Lender shall so
request in its sole discretion, based on the results of such environmental
regulatory review, "Phase 1" environmental audits and such additional
environmental testing as Lender shall so require with respect to the Real Estate
Collateral, performed at Borrower's expense by independent environmental experts
selected by Lender (which conditions Lender acknowledges have been satisfied);
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(8) SURVEY. A current "as-built" boundary survey for the Real Estate
Collateral together with a surveyor's certificate prepared at Borrower's expense
from a registered land surveyor;
(9) MORTGAGE. A deed of trust, mortgage, deed to secure debt or other,
similar instrument pursuant to which Borrower shall convey to Lender or to a
trustee for the benefit of Lender the entirety of its right, title and interest
in and to the Real Estate Collateral.
(10) MORTGAGEE'S TITLE INSURANCE POLICIES. A mortgagee's title insurance
policy, issued, at Borrower's expense, by a title insurer selected by Borrower,
but acceptable to Lender insuring Lender's security interest in the Real Estate
Collateral in such amount, and containing only such conditions, limitations and
exception as shall be acceptable to Lender;
(11) EVIDENCE OF INSURANCE. Evidence that the Distribution Center is
covered by the insurance required under Section 5.6 and in the other Loan
Documents and as otherwise may be reasonably required by Lender in connection
with the disbursement of the Term Loans; and
(12) OTHER DOCUMENTS. Such other document, instruments, agreements and
certificates as Lender shall require.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and Borrower has caused its seal to be affixed hereto, all as of the
day and year first above written.
"LENDER"
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:
----------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
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"GUARANTOR ONE"
THE GYMBOREE CORPORATION (SEAL)
By: /s/ GARY WHITE
------------------------------------------
Name: Gary White
Title: President
Attest:
--------------------------------------
Name:
Title:
"GUARANTOR TWO"
GYMBOREE MANUFACTURING, INC. (SEAL)
By: /s/ GARY WHITE
------------------------------------------
Name: Gary White
Title: President
Attest:
--------------------------------------
Name:
Title:
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<PAGE> 43
"BORROWER"
GYMBOREE LOGISTICS (SEAL)
PARTNERSHIP
By: Gymboree Retail Stores, Inc., Partner
By: /s/ GARY WHITE
----------------------------------------
Gary White
Partner
By: The Gymboree Stores, Inc., Partner
By: /s/ GARY WHITE
------------------------------------------
Gary White
President
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EXHIBIT A
Permitted Encumbrances
1. In regard to the Real Estate Collateral, those matters identified as
"Permitted Encumbrances" in the Mortgage.
2. Financing Statement No. 9827360784 and 9827360789 filed September 25,
1998 with the Secretary of State of California covering one new 1998
Marathon Horizontal Bailer (S/N 108648), one used Komatsu Model FG25ST-3
Forklift (S/N FG25ST-8) and proceeds of such collateral.
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EXHIBIT B
Subsidiaries
Detail Not Required.
40
<PAGE> 46
EXHIBIT C
Litigation
Detail Not Required.
41
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EXHIBIT D
Financial Test Computations
Detail Not Required.
42
<PAGE> 1
EXHIBIT 10.29
THE GYMBOREE CORPORATION
SUMMARY OF TERMS AND CONDITIONS
MARCH 9, 1999
THIS SUMMARY OF TERMS AND CONDITIONS ("TERM SHEET") INDICATES OUR COMMITMENT TO
EXTEND CREDIT AS DESCRIBED IN GENERAL TERMS BELOW ("CREDIT FACILITY"). HOWEVER,
IT DOES NOT ATTEMPT TO DESCRIBE ALL OF THE TERMS AND CONDITIONS THAT WOULD
PERTAIN TO THE CREDIT FACILITY. INSTEAD, IT IS INTENDED TO OUTLINE BASIC
BUSINESS PARAMETERS TO FACILITATE OUR FURTHER DISCUSSIONS.
BORROWER: The Gymboree Corporation, and certain subsidiaries
("TGC")
GUARANTORS: As required in the existing Agreement.
LENDER: Bank of America National Trust and Savings Association
(in such capacity, the "Bank").
PURPOSE: To finance merchandise importation (through commercial
and usance L/Cs), working capital (through funded
advances) and rent guarantees (through SBLCs).
CREDIT FACILITY: $100 million revolving Credit Facility with a maturity
date of 3/31/2001, with the following quarterly usage
limits:
$ 68 million through 4/30/99
$100 million from 5/1/99 through 7/31/99
$ 80 million from 8/1/99 through 12/31/99
$ 68 million from 1/1/2000 through 4/30/2000
$100 million from 5/1/2000 through 7/31/2000
$ 80 million from 8/1/2000 through 3/31/2001
In addition, the following sub-limits will apply:
(A) Commercial L/C sub-limit (with tenors on Commercial
L/C's up to 180 days from issuance, drafts payable at
sight): difference between the usage limit above, the
$25 million Funded Advance/Usance L/C facility and
outstanding Standby Letters of Credit.
(B) $25 million Funded Advances and Usance Letters of
Credit sub-limit (with tenors on Usance Letters of
Credit up to 180 days from issuance, with drafts
payable at up to 180 days from sight).
(C) $10 million Standby Letter of Credit sub-limit
(with tenors up to one year from issuance).
REPAYMENT: Sub-limit (A) & (C): Upon negotiation of documents.
Sub-limit (B) Funded Advances: Interest monthly with
principal due at maturity.
Sub-limit (B) Usance L/C: At maturity.
<PAGE> 2
MATURITY/EXPIRATION: Availability under the Credit Facility through
3/31/2001, with no instruments to mature later than
9/30/2001.
INTEREST RATES: Interest rates on the Funded Advance sub-limit
(B) of the Credit Facility will be as follows:
(i) Bank of America's Reference Rate or
(ii) LIBOR plus the applicable margin determined
by the attached Variable Pricing Grid.
COMMITMENT FEE: An up front commitment fee of $50,000 per annum,
payable semi-annually in advance. Payable on acceptance
of this commitment or 3/12/99, whichever is earlier,
and semiannually thereafter.
UNUSED COMMITMENT
FEE: A fee of 0.10% per annum, calculated on the unused
portion of sub-limit (B) (outstanding Usance Letters of
Credit would not reduce the unused portion for purposes
of calculating this fee), and payable quarterly in
arrears.
OTHER FEES: Commercial L/Cs, Usance L/Cs and SBLCs at pricing
agreed to with Bank's trade finance group.
An early Termination fee of 1/16% will be charged on
any portion of the Credit Facility canceled by TGC
prior to maturity which is not refinanced by the Bank.
ALLOCATIONS: TGC must specify in advance any portion of sub-limit
(B) which it will use for usance L/C's. TGC, upon at
least five days written notice to the Bank, may request
reallocation from any unused allocation of sub-limit
(B).
FINANCIAL COVENANTS: TANGIBLE NET WORTH
------------------
TGC to maintain a minimum tangible worth, measured at
each of TGC's fiscal quarter ends as follows:
<TABLE>
<CAPTION>
(in millions)
----------------------------------------------------------
1/31/99 4/30/99 7/31/99 10/31/99 1/31/2000
<S> <C> <C> <C> <C> <C>
Projected 169 174 173 176 188
COVENANT 166 168 166 168 179
</TABLE>
Starting 1/31/2000, TGC to maintain an actual starting
Tangible Net Worth (of at least $183 Million) plus 80%
of TGC's consolidated positive quarterly Net Income
(which shall not be reduced by any quarterly losses).
Tangible Net Worth defined as the gross book value of
TGC's assets (excluding goodwill, patents, trademarks,
trade names, organization expense, treasury stock,
unamortized debt discount and expense, deferred
research and development costs, deferred marketing
expenses, and other like intangibles, and monies from
subsidiaries, affiliates, officers, directors, or
shareholders of TGC but including the aggregate book
value of TGC's lease rights up to a maximum aggregate
value of $2.5 million for all such lease rights), less
total
2
<PAGE> 3
liabilities (including but not limited to accrued and
deferred income taxes, and excluding liabilities
related to redeemable preferred stock) and any reserves
against assets, less any proceeds of equity capital
raised during the year.
SEASONAL CLEAN DOWN
TGC to maintain a ratio of cash plus short-term
investments, including credit card receivables up to $5
million, to total letters of credit (commercial, usance
and standby) outstanding plus borrowings under the
Funded Advance facility, of at least 0.85:1, for the
last two fiscal month-ends of fiscal years 1999 and
2000. In addition the following will apply in the event
the ratio is less than 1.00:1:
o TGC must pay a fee of $10,000 per reporting period
that the ratio is less than 0.90:1 but greater than
or equal to 0.85:1.
o TGC must pay a fee of $5,000 per reporting period
that the ratio is less than 1.00:1 but greater than
or equal to 0.90:1.
LIMITATIONS ON CAPITAL EXPENDITURES
TGC shall not incur capital expenditures in excess of
$40 million for the fiscal year 1999, without the prior
written consent of the Bank. Additionally, TGC shall
not commit to capital expenditures in excess of $20
million for each of the fiscal years 2000 and 2001,
without the prior written consent of the Bank.
TGC shall not enter into any joint venture, merger,
acquisition or purchase of a business or its assets
during any fiscal year, for consideration over $5
million, without the Bank's prior consent.
REPORTING COVENANTS: CPA audited FYE consolidated financial statements
(including 10-K) due within 120 days of FYE, with an
unqualified opinion. CPA management letter within 30
days of receipt. TGC prepared consolidating schedules
including Balance Sheet, Income Statement and Statement
of Cash Flows.
Quarterly TGC prepared consolidated and consolidating
financial statements (Balance Sheet, Income Statement
and Statement of Cash Flows), 10-Q and Compliance
Certificate, due within 45 days of period end.
Monthly TGC prepared consolidated financial statements
(Balance Sheet, Income Statement and Statement of Cash
Flows), due within 30 days of month-end except for the
final month of the fiscal year, which will be due
within 60 days of month-end.
Annual TGC prepared projections (Balance Sheet, Income
Statement and Statement of Cash Flows) for the upcoming
fiscal year within 60 days of FYE; revised projections,
including all material adjustments made to the
projections, as they occur.
REPRESENTATIONS AND
WARRANTIES: All representations and warranties remain materially
unchanged from the existing credit facility
3
<PAGE> 4
OTHER TERMS AND
CONDITIONS: A new Amended and Restated Loan Agreement will be
documented which will contain language reflecting a
Syndicated Credit with the Bank as Agent and permitting
assignments under the Agreement. All other terms and
conditions remain materially unchanged from the
existing credit facility.
4
<PAGE> 5
VARIABLE PRICING GRID
If at the end of any fiscal quarter, TGC's Tangible Net Worth (as defined) is
equal to or greater than I below, the applicable margin for the following
quarter will be 75 BASIS POINTS.
If at the end of any fiscal quarter, TGC's Tangible Net worth is less than I.,
but greater than or equal to II. below, the applicable margin for the following
quarter will be 87.5 BASIS POINTS.
If at the end of any fiscal quarter, TGC's Tangible Net worth is less than II.,
but greater than or equal to III. below, the applicable margin for the following
quarter will be 100 BASIS POINTS.
Tangible Net Worth as defined in the Summary of Terms and Conditions.
(in millions of dollars)
<TABLE>
<CAPTION>
QUARTER-ENDED: I. II. III.
<S> <C> <C> <C>
04/30/1999 174 171 168
07/31/1999 173 171 166
10/31/1999 176 172 168
01/31/2000 187 183 179
04/30/2000 191 187 Min TNW Cov.
07/31/2000 191 187 Min TNW Cov.
10/31/2000 193 189 Min TNW Cov.
01/31/2001 203 198 Min TNW Cov.
</TABLE>
ab
5
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF INCOME PER SHARE
<TABLE>
<CAPTION>
(In thousands, except per share data) FISCAL YEAR ENDED
---------------------------------------
January 30, January 31, February 2
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
NET INCOME $6,241 $35,170 $31,788
Weighted average number of shares of Common
Stock outstanding during the period:
Common Stock 24,164 24,302 25,111
Add incremental shares from assumed
exercise of stock options 63 698 559
Weighted average common and common
equivalent shares outstanding 24,227 25,000 25,670
====== ====== ======
BASIC INCOME PER SHARE $0.26 $1.45 $1.27
====== ====== ======
DILUTED INCOME PER SHARE $0.26 $1.41 $1.24
====== ====== ======
</TABLE>
<PAGE> 1
THE GYMBOREE CORPORATION
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Fiscal year 1998 1997 1996
(In thousands, except stores and per share amounts)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS:
Net sales $457,219 $373,440 $303,111
Operating income 9,454 53,884 47,593
Net income 6,241 35,170 31,788
Net income as a percentage of sales 1.4% 9.4% 10.5%
Diluted income per share $ 0.26 $ 1.41 $ 1.24
BALANCE SHEET DATA:
Working capital $ 76,314 $ 71,590 $105,190
Total assets 256,705 229,200 216,909
Long term debt 11,460 0 0
Total stockholders' equity $168,372 $157,710 $161,933
- ---------------------------------------------------------------------------------------------------------
STORES OPEN AT YEAR END: 564 435 354
- ---------------------------------------------------------------------------------------------------------
</TABLE>
TO OUR STOCKHOLDERS:
Looking back over 1998, despite disappointing results, I see several bright
spots. Like a child who falls, we stumbled in 1998 and performed below
expectations. However, as the child gets up and back in the game, all of us in
management and throughout the organization have learned tough lessons and are up
and running again.
Our progress in 1998 positioned us well for 1999. Gymboree's net sales
grew 22%, to $457.2 million in 1998 from $373.4 million in 1997. Our store count
increased to 564 from 435, including 18 new stores in Europe and 4 in Canada. We
opened our new distribution center in Dixon, California, enabling us to manage
product flow efficiently for all our United States stores. Our balance sheet
remained strong, and we plan to fund our growth with cash generated by our
operations for the foreseeable future. We continued work on our Zutopia launch
and our first 10 stores opened in March 1999. We hired or promoted strong
managerial leadership. Our products continued to enjoy strong consumer
acceptance during the year. Our play programs grew significantly, and we look
forward to continued expansion of this core business.
INVENTORY CHALLENGES
The primary problem experienced during 1998 can be summed up in one word:
inventory. Over-optimism and the desire to drive growth by higher inventory
purchases proved incorrect. Furthermore, we found certain styles, particularly
in boyswear, were not as popular as we had anticipated. These factors adversely
affected results because we had to cut prices to
1
<PAGE> 2
THE GYMBOREE CORPORATION
move merchandise out of the way of incoming products. The inevitable outcome was
that profits were down, even as gross sales were up.
Typically, we mark down prices when a line has become "broken," meaning
only a few sizes of each item are still available. This was not the case during
1998. Instead, even when products were well received and selling at full price,
we were forced to cut prices to clear shelves and racks. There is no worse
feeling for a merchant than to hang sale tags on merchandise while it is selling
through at full price, and we do not intend to see a repeat of this
disheartening experience.
The harsh lessons of 1998 led us to improve our inventory management
capabilities. In fact, at the end of 1998, our dollar inventory on hand was
almost exactly the same as it was at the end of 1997, despite having opened 30%
more stores during 1998. Looking forward, we will continue to manage inventories
to enable us to capture greater margins on our sales.
DISCIPLINED GROWTH
We added 129 new stores in 1998. We plan to open 40 to 50 new stores in 1999,
including our new retail concept Zutopia, which is a reduction from our
historic growth patterns. Our focus will be on turning new stores into solid
contributors as quickly as possible. We will continue to grow our store count
until we feel we have covered the areas where there is opportunity to operate
profitably.
The Gymboree Gift Center at www.gymboree.com is an obvious candidate to
further expand our channels of distribution and serve electronic commerce
customers efficiently and economically. We will also focus new business
development resources on investigating the most efficient ways to expand
internationally. We are confident that the Gymboree brand holds opportunities
not yet tapped.
PLAY PROGRAMS A SOLID CONTRIBUTOR
The founding business of Gymboree was play programs for young children. During
1998, we enjoyed the fruits of efforts undertaken in 1997, resulting in strong
income growth and expanded numbers of franchise and corporate-owned sites.
Income from the play programs increased by 289% in 1998. We have expanded the
curriculum and, in 1999, we plan to roll out a fully integrated music program.
CLOTHING FOR GENERATION Z
Responding to overwhelming input from parents whose children were outgrowing the
Gymboree size range, we are launching our Zutopia line of clothing and
accessories, which extends our expertise in design, quality and workmanship to
serve the needs of children from six years old to pre-teen. A hip blend of
designer, street and alternative
2
<PAGE> 3
THE GYMBOREE CORPORATION
gear, Zutopia products are appropriately styled for these older children. We
will include entertaining elements in our Zutopia store, including accessories
and toys, decor products, even Internet kiosks to create an environment where
youngsters want to spend time. We undertook extensive research with children in
our target age range to learn exactly what they want in fashion merchandise. We
will shape our merchandise selection and marketing campaigns around what we
learned. We believe Zutopia will enable us to serve our loyal Gymboree
customers as they grow into young adults.
LEADERSHIP TEAM
Leaders with significant industry experience and vision joined our team in
critical areas of the company. At the beginning of 1999, our new President,
Melanie Cox, assumed responsibility to steer crucial merchandising and product
development efforts. At her side is Lisa Harper, an inspirational head designer
who worked with us in the heyday of the early 1990s. We hired Larry Meyer, an
experienced Chief Financial Officer in the retail industry. And to ensure the
necessary processes are instituted in inventory ordering and allocation, we
hired Ed Wong, who has significant experience in vertically integrated,
specialty apparel organizations.
Gymboree's three senior team members are Stuart G. Moldaw, Chairman of the
Board, Melanie Cox, President, and Gary White, Vice-Chair of the Board and Chief
Executive Officer. Together, they have over 90 years experience in retailing to
children.
LOOKING FORWARD
With a hard year behind us, we are all looking forward to brighter times ahead.
We know our shareholders demand nothing less than success from us, and for this
reason we have established four business principles which underlie our goals for
1999. They are "Product Innovation", exploring new ways to create and deliver
the best products and services to our customers; "Cycle Time", increasing
efficiency, improving customer service and reducing costs; "Regular Price Sell
Through", minimizing markdowns by delivering products to our stores at the right
time in the right amounts; and "Increased Market Share", accelerating customer
traffic and the frequency and amount of purchase transactions.
We will continue to use our team approach to set and achieve our goals.
We grow by learning from one another and from experience. We look forward to
renewed success and improved performance, and we have confidence that we will
reward your faith in us in the years ahead.
/S/ GARY WHITE
- -------------------------------
GARY WHITE
Vice-Chair of the Board and Chief Executive Officer
April 5, 1999
3
<PAGE> 4
[PICTURE]
4
<PAGE> 5
THE GYMBOREE CORPORATION
LOOKING BACK, THINKING FORWARD
1998 was an important year for The Gymboree Corporation, a year during which we
continued to expand and strengthen our company.
Our goal has always been to be the premier children's clothing company. But
in fact we are much more than just a clothing company. We are dedicated to
children and to meeting their needs in our play programs and in our stores. We
strive to provide them and their parents and caregivers with superior products
and exceptional service each time they visit us.
During 1998, we increased the number of products we offered, broadened our
distribution channels, and evolved our play programs. Each initiative we
undertook was guided by our company's founding values--the celebration of
childhood, a commitment to teamwork, and a dedication to building stakeholder
value.
BABY YOUR BABY
GYMBOREE EXPANDS THE LAYETTE LINE
From its introduction, the overwhelming success of our layette line has proven
that tiny clothes have great potential. Parents and caregivers want to pamper
their new arrivals with products offering the highest quality, ultimate comfort
and latest styling. Our layette line fulfills all their desires and continues to
be a growing contributor to our bottom line.
To leverage the success of layette, we have expanded the line with special
occasion clothing, baby lotions, soaps and shampoos, and exclusive accessories.
5
<PAGE> 6
THE GYMBOREE CORPORATION
WWWONDERFUL!
GYMBOREE OPENS AN ONLINE STORE
Early in 1998, the Gymboree website became fully operational. One year later,
www.gymboree.com is showing strong growth. In the first twelve months, nearly a
half million shoppers visited the site and online sales continue to build.
The first items available online were baby gift sets. During the year, we
added the entire line of girls' apparel as well as gift certificates for
Gymboree merchandise and classes. We also posted an online job listing to help
us recruit new team members. This year, the complete layette line will be
available online.
Our goal for 1999 is to reach more customers through our website and better
serve their needs. To achieve it, we will be expanding the site, increasing our
presence on search engines and developing new strategic web partnerships.
SINGING A NEW TUNE:
GYMBOREE PLAY AND MUSIC
Program enhancements and a beefed up marketing plan helped Gymboree Play
Programs grow by leaps and bounds. 1998 was this area's best financial year ever
with enrollment and gross revenues both reaching all-time highs.
This year we are adding a music program to the curriculum. In fact, we are
changing the name from Gymboree Play Programs to Gymboree Play & Music.
Seventeen different musical styles--from rock 'n roll to classical to
reggae--will be explored throughout the year. Preview classes have received rave
reviews from parents and children. By fall, both the new music program and
traditional Gymboree classes will be offered at nearly all of our 400 worldwide
locations.
6
<PAGE> 7
[PICTURE]
7
<PAGE> 8
[PICTURE]
8
<PAGE> 9
THE GYMBOREE CORPORATION
ZUTOPIA
THE NEXT GENERATION
Gymboree has a cool new cousin--Zutopia. Designed to appeal to Generation Z
(age six to pre-teen), preppy isn't part of this picture.
Zutopia clothes, shoes and lifestyle accessories are edgy--an inspired
blend of designer, street and alternative styling. Developed after in-depth
research sessions and focus groups with boys, girls and parents, Zutopia
respects kids' attitudes about who they are and who they want to be. It reflects
their sense of style and their sense of self.
The new, stand-alone Zutopia retail stores, where the line will be sold
exclusively, are an inspired convergence of time, place, attitude. Kids are
invited to hang out in the Zu lounge, surf the Internet and play Nintendo at
in-store kiosks. To keep Zutopia's styling and strategic positioning fresh,
sophisticated and distinctive, completely separate design and merchandising
teams head up the brand.
Introducing Zutopia means we will be able to continue our relationship
with loyal customers long after they have outgrown Gymboree sizing--and styling.
And according to what the kids have told us so far, it's working.
In 1999, 15 to 20 Zutopia stores will open nationwide.
BEST FOOT FORWARD:
GYMBOREE'S SHOE BUSINESS
In 1998, we began selling shoes as a stand-alone item, not just accessories to
our clothing lines. We also added more styles--from dress-up shoes to sneakers
to beach sandals. The result? Shoe sales really stepped up.
Today our footwear offers great design and top quality in a range of
prices.
Working with experts in children's footwear, we have created both basic and
fun shoes that parents and children like. Even more importantly, they fit little
feet comfortably.
From a modest beginning, our shoe business has quickly grown into a
significant opportunity. And we expect the strong growth to continue. In 1999,
Gymboree customers will find more shoes, in more styles, at every Gymboree
location.
9
<PAGE> 10
THE GYMBOREE CORPORATION
TEAM GYMBOREE:
WORKING BETTER TOGETHER.
In the same way we look after the well-being and satisfaction of our customers,
we take good care of our team. We built our company on a set of shared values:
simplicity, creativity, innovation, stakeholder value, teamwork, talent,
quality, learning, brand, customer and the celebration of childhood.
All our business decisions are guided by these eleven values. Each year,
the individuals or teams who best exemplify our values are presented with the
coveted Gymbo Award.
[GYMBO AWARD RECIPIENT PICTURE]
BALANCING WORK AND LIFE
We provide team members who are new or expectant parents with reserved parking,
private space, even pagers to help moms and dads keep in touch during the third
trimester.
We organize weekly snack breaks for our team members as well as a popular
recess. We believe that celebrating the child in each of us helps keep us in
touch with our consumers.
[RESERVED PARKING, GYM MOM-TO-BE PICTURE]
CAREER-LONG LEARNING
At Gymboree we value continuous learning. In 1998, we opened the doors of the
Gymboree Learning Center.
We currently offer workshops in everything from Time Management to
Workplace Diversity, Computer Literacy to Team Leadership. Classes are open to
any team member interested in developing new skills and enhancing professional
growth and satisfaction.
[LEARNING CENTER PICTURE]
GYMCARES
We believe in supporting our communities. Through our GymCares program, we
sponsor a local elementary school, donate to child-oriented causes, participate
in the U.S. Marine Corps Toys for Tots program and maintain a long-standing
commitment to the March of Dimes.
[TOYS FOR TOTS PICTURE]
For two years, Chief Executive Officer Gary White has been the chair of the
San Francisco Bay Area March of Dimes "WalkAmerica" fund-raising event. Team
members have gathered community support by participating in the walk. In 1998,
Gymboree won the Jerry Rice Award after raising over $1 million for this vital
organization.
Every year, we seek ways to match our unique capabilities and the goodwill
of our team members to benefit children in need.
10
<PAGE> 11
THE GYMBOREE CORPORATION
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data have been derived from the consolidated
financial statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands, except operating data and
per share amounts) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:(1)
Net sales $ 457,219 $ 373,440 $ 303,111 $ 259,381 $ 188,424
Cost of goods sold, including
buying and occupancy expenses (292,686) (207,630) (164,052) (149,428) (100,651)
----------- ----------- ----------- ----------- -----------
Gross profit 164,533 165,810 139,059 109,953 87,773
Selling, general and administrative expenses (157,092) (112,443) (91,540) (69,845) (53,095)
Play programs income, net 2,013 517 74 316 554
----------- ----------- ----------- ----------- -----------
Operating income 9,454 53,884 47,593 40,424 35,232
Foreign exchange gains (losses) 187 (837) 0 0 0
Net interest income 265 2,778 3,678 2,823 1,760
----------- ----------- ----------- ----------- -----------
Income before income taxes 9,906 55,825 51,271 43,247 36,992
Income taxes (3,665) (20,655) (19,483) (16,866) (14,797)
----------- ----------- ----------- ----------- -----------
Net income $ 6,241 $ 35,170 $ 31,788 $ 26,381 $ 22,195
=========== =========== =========== =========== ===========
Basic income per share $ 0.26 $ 1.45 $ 1.27 $ 1.06 $ 0.91
=========== =========== =========== =========== ===========
Diluted income per share $ 0.26 $ 1.41 $ 1.24 $ 1.04 $ 0.88
=========== =========== =========== =========== ===========
Basic weighted average shares outstanding 24,164 24,302 25,111 24,862 24,279
Diluted weighted average shares outstanding 24,227 25,000 25,670 25,357 25,265
OPERATING DATA:
Number of stores at end of period 564 435 354 279 209
Net sales per average gross square foot $ 550 $ 621 $ 670 $ 827 $ 882
Net sales per average store $ 915,000 $ 947,000 $ 948,000 $ 1,063,000 $ 1,050,000
Comparable store net sales increase (decrease)(2) 1% 2% (6%) 3% 12%
BALANCE SHEET DATA:
Working capital $ 76,314 $ 71,590 $ 105,190 $ 89,417 $ 73,937
Total assets 256,705 229,200 216,909 160,009 126,083
Long term debt 11,460 0 0 0 0
Stockholders' equity 168,372 157,710 161,933 123,934 92,629
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1998, 1997, 1996, and 1994 included 52 weeks, while 1995 included 53 weeks.
(2) A store becomes comparable after it is opened for 14 full months.
Comparable store net sales in fiscal years 1998 through 1994 were
calculated on a 52 week basis.
This annual report contains forward-looking statements reflecting the Company's
current expectations and there can be no assurance that the Company's actual
future performance will meet such expectations. Factors that could cause future
performance to vary from current expectations include, but are not limited to,
the factors discussed later under the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section.
11
<PAGE> 12
THE GYMBOREE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Gymboree Corporation was founded in 1976 as a provider of interactive
parent-child play programs and began to franchise this business in 1979. In
1986, the Company opened its first retail store featuring children's apparel and
accessories. In fiscal 1999, the Company will open a new retail concept,
Zutopia, which targets children ages six to twelve. Through the end of fiscal
1998, the Company had grown to 564 stores, including 525 stores in 50 states in
the United States, 15 stores in Canada and 24 stores in Europe.
The Company's net sales for the 52 weeks ended January 30, 1999 increased
to $457.2 million from $373.4 million in the 52 weeks ended January 31, 1998 and
$303.1 million in the 52 weeks ended February 2, 1997. Net income decreased to
$6.2 million in 1998 from $35.2 million in 1997 and $31.8 million in 1996.
Comparable store net sales, all based on a 52 week period, increased 1% for
1998, increased 2% for 1997 and decreased 6% for 1996. The Company expects that
future increases in net sales and net income will be dependent on the ability to
generate sales increases within existing stores, the opening and profitability
of new domestic and international stores, and the success of Zutopia.
The Company's year-end is on the Saturday closest to January 31. Fiscal
years 1998 and 1997, which both included 52 weeks, ended on January 30, 1999 and
January 31, 1998, respectively. Prior to fiscal 1997, the Company's year ended
on the Sunday closest to January 31 of each year. Fiscal 1996, which included 52
weeks, ended February 2, 1997. This change did not have a significant effect on
the consolidated financial statements of the Company.
1998 COMPARED TO 1997
NET SALES
Net sales increased 22% to $457.2 million for 1998, compared to $373.4 million
for 1997. Sales for the 129 stores opened in 1998 contributed $49.4 million of
the increase in net sales. Stores opened or expanded prior to 1998 but not
qualifying as comparable stores, including the 25 stores expanded in 1998,
contributed $31.3 million of the increase in net sales. Increases in comparable
store net sales for 1998 contributed $3.1 million of the increase in net sales.
Comparable store net sales increased 1% over 1997. Comparable store sales were
adversely affected by the poor consumer acceptance of boys' apparel and an
overall decline in the average price per unit of merchandise sold.
GROSS PROFIT
Gross profit decreased 1% to $164.5 million in 1998 from $165.8 million in 1997.
As a percentage of net sales, gross profit decreased to 36.0% in 1998 from 44.4%
in 1997. The decrease in gross profit as a percentage of net sales was
attributable to a decline in the average price per unit of merchandise sold.
Such decline was primarily due to increased average markdowns per store taken to
sell excess inventory.
The Company is planning lower average per store inventory levels in fiscal
1999 as compared to fiscal 1998. While the decrease in average per store
inventory levels is expected to have a favorable impact on gross profit, this
may cause downward pressure on comparable store net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("S,G&A"), which
principally consist of non-occupancy store expenses, corporate overhead and
distribution expenses, increased as a percentage of net sales to 34.3% in 1998
compared to 30.1% in 1997. The increase in S,G & A, as a percentage of net
sales, was primarily attributable to the funding of the Company's international
expansion in Europe and Canada, marketing expenses associated with direct mail
and other promotional campaigns, start-up expenses for the development of the
new retail concept Zutopia, and loss of leverage on store selling expenses
caused by lower average store sales. Other increases in S, G&A included
distribution costs due to the opening of a new distribution center in Dixon,
California, closure of the existing facility located in Hayward, California, and
Year 2000 related professional services.
PLAY PROGRAMS INCOME
Play Programs income increased 289% to $2.0 million in 1998, from $0.5 million
in 1997, due primarily to new franchise sales, enrollment growth in both
franchised and corporate owned centers and increased play product sales.
FOREIGN EXCHANGE GAINS (LOSSES)
Net foreign exchange gains totaled $187 thousand in 1998 as compared to a loss
of $837 thousand in 1997. The Company entered into forward foreign exchange
contracts involving inter-company transactions during fiscal 1998 that resulted
in a minimal gain. In the prior year, the Company did not hedge these
transactions.
NET INTEREST INCOME
Interest income decreased to $0.8 million in 1998, from $2.8 million in 1997,
due to lower average cash and investment balances. In fiscal 1998 interest
expense totaled $0.5 million, as a result of borrowings, while the prior year's
interest expense was immaterial.
INCOME TAXES
The Company's effective tax rate for 1998 and 1997 was 37%. See Note 6 to Notes
to Consolidated Financial Statements.
1997 COMPARED TO 1996
NET SALES
Net sales increased 23% to $373.4 million for 1997, compared to $303.1 million
for 1996. Sales for the 82 stores opened in 1997 contributed $40.9 million of
the increase in net sales. Stores opened or expanded prior to 1997 but not
qualifying as comparable stores, including the 16 stores expanded in 1997,
contributed $24.2 million of the increase in net sales. Increases in comparable
store net sales for 1997 contributed $5.2 million of the increase in net sales.
Comparable store net sales increased 2% over 1996.
12
<PAGE> 13
THE GYMBOREE CORPORATION
The increase in comparable store net sales was primarily due to the Company
operating with higher store inventory levels throughout 1997 and somewhat higher
levels of markdowns compared to 1996.
GROSS PROFIT
Gross profit increased 19% to $165.8 million in 1997 from $139.1 million in
1996. As a percentage of net sales, gross profit decreased to 44.4% in 1997 from
45.9% in 1996. The decrease in gross profit as a percentage of net sales was
attributable to increases in average markdowns per store in 1997 compared to
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("S,G&A"), which principally
consist of non-occupancy store expenses, corporate overhead and distribution
expenses, remained relatively flat as a percentage of net sales at 30.1% in 1997
compared to 30.2% in 1996. S,G & A, as a percentage of net sales remained flat
during fiscal 1997 as compared to 1996 due primarily to increases in comparable
store sales and the discontinuation of the Company's catalog business at the end
of 1996 largely offset by S,G&A associated with its international store
expansions.
PLAY PROGRAMS INCOME
Play Programs income increased 599% to $517 thousand in 1997, from $74 thousand
in 1996, due primarily to new franchise sales, enrollment growth in both
franchised and corporate owned centers and increased play product sales.
FOREIGN EXCHANGE LOSSES
Foreign exchange losses increased $837 thousand in 1997 as compared to 1996.
Total losses from foreign exchange transactions during 1997 were 0.2% of sales.
This increase was primarily attributed to losses incurred from currency
fluctuations in inter-company transactions between the Company's U.S. operations
and its foreign subsidiaries.
NET INTEREST INCOME
Interest income decreased to $2.8 million in 1997, from $3.7 million in 1996,
due to lower average cash and investment balances resulting from two stock
repurchases during 1997.
INCOME TAXES
The Company's effective tax rate for 1997 was 37% compared to 38% in 1996 due to
implementation of tax planning strategies. See Note 6 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
During 1998 the Company satisfied its cash requirements through a combination of
cash flow from operations and from permanent financing as compared to 1997 and
1996 when cash requirements were met exclusively from cash flow from operations
and available cash balances. Primary uses of cash during 1998 have been to
finance the construction of new domestic and international stores.
Comparatively, in fiscal 1997 the Company used cash to purchase outstanding
common stock and to increase the average store inventory levels. The Company
also purchased land and constructed a 300,000 square foot distribution center in
Dixon, California in 1997, which was refinanced with debt in 1998.
The combined balances of cash, cash equivalents and investments were $27.8
million and $36.5 million at the end of 1998 and 1997, respectively. At January
30, 1999 the Company held no investments. At January 30, 1998, investments
included short to medium-term investment grade securities.
Working capital as of January 30, 1999 was $76.3 million compared to $71.6
million at January 31, 1998. The increase in working capital was primarily due
to a decrease in liabilities. During 1998, the Company generated $27.5 million
of cash from operations, $18.6 million from the sales of investments, $12.0
million of proceeds on borrowings, and $2.5 million from the exercise of stock
options. Uses of cash consisted primarily of $50.7 million for capital
expenditures, related largely to the opening of 129 new stores and the expansion
of 25 existing stores. During 1997, the Company generated $37.8 million of cash
from operations, $63.5 million from the sale of investments and $8.8 million
from the exercise of stock options. Uses of cash consisted primarily of $49.7
million for the repurchase of the Company's common stock and $49.0 million for
capital expenditures, related largely to the opening of 82 new stores, the new
Dixon distribution center, the expansion of 16 existing stores and the roll-out
of a new point-of-sale system.
As of January 30, 1999, the Company had a bank line of credit that allowed
up to $100 million in unsecured letters of credit, of which $11 million can be
used for standby letters of credit. As of January 30, 1999, approximately $67.0
million was available pursuant to such lines. The facility also provided a line
of up to $50 million for foreign exchange contracts. This facility is scheduled
to expire May 31, 1999. The Company uses these lines primarily to support
letters of credit which fund its foreign sourcing of merchandise inventories. As
of January 31, 1998, the Company had a bank line of credit that allowed up to
$100 million in unsecured letters of credit and up to $10 million in foreign
exchange contracts, of which $61.5 million was available pursuant to such lines.
On March 11, 1999, the Company and its current bank agreed to amend the
unsecured credit facility to extend the expiration date to March 31, 2001. The
revised terms provide for an overall credit line of $100 million that may be
used for issuance of commercial letters of credit, cash advances up to $25
million and standby letters of credit up to $10 million. Included within these
terms is a continuation of the foreign exchange facility. The interest rate will
be based on the bank's Reference Rate or LIBOR (London Interbank Offered Rate)
plus a pre-determined spread. The credit facility contains quarterly and annual
financial covenants, which require the Company to maintain minimum tangible net
worth and meet certain ratios. Additionally, the facility contains restrictions
on capital expenditures.
During fiscal 1998, the Company issued two promissory notes totaling $12
million both secured by the Company's
13
<PAGE> 14
THE GYMBOREE CORPORATION
distribution center in Dixon, California. The first note of approximately $3.1
million bears interest at 7.7%. The second note of approximately $8.9 million
bears interest at 7.9%.
The Company estimates that capital expenditures during 1999 will be between
$30.0 and $35.0 million, which will primarily be used to open approximately 40
to 50 new domestic and international stores and to expand approximately 25 to 30
existing stores.
The Company anticipates that cash generated from operations, together with
its existing cash resources and funds available from its current letters of
credit and line of credit facilities, will be sufficient to satisfy its cash
needs through at least fiscal 1999.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to experience
seasonal fluctuations in its retail sales and net income. Historically, a
disproportionate amount of the Company's retail sales and a significant portion
of its net income have been realized during the months of November and December.
In anticipation of increased sales activity during these months, the Company
hires a significant number of temporary employees to bolster its store staff. In
addition, the Company has experienced periods of increased sales activity in
early spring and early fall. If, for any reason, the Company's sales were below
seasonal norms during November and December, or during the early spring or early
fall, the Company's annual operating results could be materially and adversely
affected. Historically, retail sales and net income have been weakest during the
second fiscal quarter, and the Company expects this trend to continue. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of new store openings, the
costs and increased overhead associated with the opening and future operation of
new stores. In addition, the sales contributed by new stores, advertising and
marketing expenditures, merchandise mix and timing, and level of markdowns may
contribute to fluctuations in operating performance.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
The Company enters into forward foreign exchange contracts to hedge certain
inter-company loans denominated in foreign currencies (principally Irish punts,
British pounds sterling, and Canadian dollars). The term of the forward exchange
contracts is generally less than 90 days. The purpose of the Company's foreign
currency hedging activities is to protect the Company from the risk that the
eventual dollar net cash inflow resulting from the repayment of certain
inter-company loans from the Company's foreign subsidiaries will be adversely
affected by changes in exchange rates.
The table below summarizes by major currency the contractual amounts of the
Company's forward foreign exchange contracts in U.S. dollars. Foreign currency
amounts are translated at rates current at the reported date. The amounts
represent the U.S. dollar equivalent to buy or sell foreign currencies.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In thousands) Jan. 30, 1999
- --------------------------------------------------------------------------------
<S> <C>
Canadian dollars $11,185
Irish punts 6,308
British pounds sterling 13,985
-------
Total $31,478
- --------------------------------------------------------------------------------
</TABLE>
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The discussion in this annual report contains certain forward-looking
statements, including statements regarding future net sales and net income,
future inventory levels, future comparable store net sales, future S,G&A
expenses, future interest income, planned capital expenditures, planned store
expansions, international expansion and future cash needs. Such forward-looking
statements, in particular, and the Company's business and operating results, in
general, involve risks and uncertainties. Actual results may differ
significantly from the results discussed in the forward-looking statements.
Future operating results will depend upon many factors, including general
economic conditions, levels of competition, growth in the children's apparel
market, financing and working capital needs, the availability of suitable new
store locations, the ability to develop new merchandise and the ability to hire
and train qualified sales associates, and the ability to successfully identify
and respond to emerging children's fashion trends and effectively monitor and
control costs. There can be no assurance that the Company will be able to
effectively realize its plans for future growth. While the Company also expects
that its decreased inventory levels will have a favorable effect on gross
profit, there can be no assurance that the Company will have an adequate supply
of inventory or will experience increases in gross profit.
The Company's sales and profitability depend upon the continued demand by
its customers for its products and services. The Company believes that its
future success will depend in large part upon its ability to anticipate, gauge
and respond in a timely manner to changing consumer demands and fashion trends
and upon the appeal of the Company's products. There can be no assurance that
the demand for the Company's apparel or accessories will not decline or that the
Company will be able to anticipate, gauge and respond to changes in fashion
trends. If demand for the Company's apparel and accessories were to decline or
if the Company were to misjudge fashion trends, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
The Company's future profitability is critically dependent on its ability
to achieve and manage potential future growth effectively. There can be no
assurance that the Company will be successful in increasing net sales or gross
profit in the future or that the rate of period-to-period net sales or gross
profit growth, if any, will not decline. If the Company's operations were to
continue to grow, of which there can be no assurance, there
14
<PAGE> 15
THE GYMBOREE CORPORATION
could be increasing strain on other resources, and the Company may experience
serious operating difficulties, including difficulties in hiring, training,
managing an increasing number of employees, difficulties in obtaining sufficient
fabric and sourcing capacity to produce its products, problems in upgrading its
management information systems and delays in product distribution shipments.
There can be no assurance that the Company will be able to manage future growth
effectively. Any failure to manage growth effectively could have a material
adverse effect on the Company's results of operations and financial condition.
During 1998, the Company expanded its operations in Europe and Canada. As a
result, the Company's business is subject to the risks generally associated with
doing business abroad, such as foreign governmental regulations, foreign
consumer preferences, currency fluctuations, political unrest, disruptions or
delays in shipments and changes in economic conditions in countries in which the
Company operates its stores. These factors, among others, could influence the
Company's ability to sell its products in these international markets. If any
such factors were to render the conduct of business in a particular country
undesirable or impractical, there could be a material and adverse effect on the
Company's results of operations and financial condition.
The matters discussed in this report with respect to the opening of
Zutopia, a separate retail concept, are also forward-looking statements that
involve risk and uncertainties, including no prior operating history, no prior
history of market acceptance, potentially higher expenses without corresponding
revenue increases, impact to earnings, ability to obtain new store sites,
ability to obtain adequate sources of merchandise, competition from other
retailers and uncertainties generally associated with apparel retailing. In
addition, the Company has recently hired a highly experienced team to support
the production, merchandising and promotion of Zutopia. The Company's limited
experience with marketing apparel to this demographic segment could materially
and adversely affect its ability to introduce Zutopia successfully or to develop
this concept's product line.
The Company is developing a strategy to handle the planned conversion in
2002 of the Irish punt to the Euro.
YEAR 2000
Most companies could face a potentially serious information systems problem
because many software applications and operational programs written in the past
were designed to handle date formats with two-digit years and thus may not
properly recognize calendar dates beginning in the Year 2000. This problem could
result in computers either outputting incorrect data or shutting down altogether
when attempting to process a date such as "01/01/00".
The Company's Year 2000 initiative extends throughout the entire Company
and includes all operating functions. Managing this effort on a regular basis is
the Company's Year 2000 Project Office, which reports to a member of the
Executive Committee. It is through this office that various roles and
accountabilities regarding Year 2000 readiness have been established. Each of
the Company's business units have been directed to work on Year 2000 projects
and assemble teams to identify and implement plans to help mitigate potential
problems.
STATE OF READINESS
All of the Company's mission critical information technology and non-information
technology systems have been inventoried, ranked in terms of risk, and analyzed
as to their Year 2000 readiness. The Company has completed an Enterprise Master
Plan, Enterprise Test Plan, Configuration Management Plan, and Quality Assurance
Plan. A Test Data Center has been constructed and is being used to remediate and
test all mission critical systems. The Company's business processes are
organized into eighteen groups of applications. The plans call for completing
the remediation and testing phase for all groups by the end of the third quarter
1999. The Company currently expects material Year 2000 problems, if any, to be
corrected prior to December 1999.
COSTS
Based on best estimates, the total cost of the Year 2000 readiness initiative,
which covers fiscal years 1998 and 1999, is approximately $2.0 - $3.0 million of
which $1.2 million has been expensed for fiscal year 1998. There can be no
assurance that these estimates will not be exceeded. All costs will be paid from
the Company's operating funds.
RISKS OF YEAR 2000 ISSUES
The area of greatest risk to the Company's business operations is ensuring the
readiness of our critical trading partners. We have surveyed all of our critical
trading partners to ascertain their Year 2000 readiness. To date, a majority of
our trading partners have responded with a formal plan to be Year 2000
compliant. Failure of Year 2000 compliance by our trading partners could result
in a delay in the receipt of inventory, potential lost sales, and an inability
to operate stores. There can be no assurance that the Year 2000 problem will not
have a material adverse effect on the Company's business, operating results or
financial condition.
CONTINGENCY PLANS
Contingency plans have been developed for each mission critical application. The
contingency plan for trading partners that are not Year 2000 compliant by
January 1999 is to obtain alternate suppliers that are Year 2000 compliant. This
plan was communicated to our trading partners during the surveying process. As
of the beginning of fiscal 1999, the Company has begun implementation of its
contingency plan for trading partners that are not Year 2000 compliant. However,
there can be no assurance that such contingency plans will remediate all Year
2000 issues which the Company might ultimately encounter.
15
<PAGE> 16
THE GYMBOREE CORPORATION
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
January 30, January 31,
(In thousands, except share data) 1999 1998
=========================================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,810 $ 17,870
Investments 0 18,642
Accounts receivable 7,811 5,184
Merchandise inventories 74,396 75,293
Prepaid expenses and other 8,068 4,467
--------- ---------
Total current assets 118,085 121,456
--------- ---------
PROPERTY AND EQUIPMENT:
Land 995 810
Building 8,948 8,948
Leasehold improvements 79,832 58,729
Furniture, fixtures, and equipment 91,551 66,819
--------- ---------
181,326 135,306
Less accumulated depreciation and amortization (46,886) (30,934)
--------- ---------
134,440 104,372
LEASE RIGHTS AND OTHER ASSETS 4,180 3,372
--------- ---------
TOTAL ASSETS $ 256,705 $ 229,200
========= =========
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 540 $ 0
Accounts payable 21,842 26,046
Accrued liabilities 17,424 15,781
Income taxes payable 1,965 8,039
--------- ---------
Total current liabilities 41,771 49,866
--------- ---------
LONG TERM LIABILITIES:
Long term debt, net of current portion 11,460 0
Deferred rent and other liabilities 35,102 21,624
--------- ---------
TOTAL LIABILITIES 88,333 71,490
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, including excess paid-in capital ($.001 par value:
100,000,000 shares authorized; 24,240,763 and 24,015,096 shares
outstanding at January 30, 1999 and January 31, 1998, respectively) 26,855 23,109
Restricted stock deferred compensation 0 (337)
Retained earnings 141,517 134,938
--------- ---------
Total stockholders' equity 168,372 157,710
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 256,705 $ 229,200
========= =========
See notes to consolidated financial statements
=========================================================================================================================
</TABLE>
16
<PAGE> 17
THE GYMBOREE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
=================================================================================================================================
As a Percentage of Net Sales
Year Ended for the Year Ended
---------------------------------------- -------------------------------------
January 30, January 31, February 2, January 30, January 31, February 2,
(In thousands, except per share data) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 457,219 $ 373,440 $ 303,111 100.0% 100.0% 100.0%
Cost of goods sold, including buying and
occupancy expenses (292,686) (207,630) (164,052) (64.0) (55.6) (54.1)
--------- --------- --------- ----- ----- -----
Gross profit 164,533 165,810 139,059 36.0 44.4 45.9
Selling, general and administrative expenses (157,092) (112,443) (91,540) (34.3) (30.1) (30.2)
Play program income, net 2,013 517 74 0.4 0.1 0.0
--------- --------- --------- ----- ----- -----
Operating income 9,454 53,884 47,593 2.1 14.4 15.7
Foreign exchange gains (losses) 187 (837) 0 0 (0.2) 0.0
Net interest income 265 2,778 3,678 0.1 0.7 1.2
--------- --------- --------- ----- ----- -----
Income before income taxes 9,906 55,825 51,271 2.2 14.9 16.9
Income taxes (3,665) (20,655) (19,483) (0.8) (5.5) (6.4)
--------- --------- --------- ----- ----- -----
Net income $ 6,241 $ 35,170 $ 31,788 1.4% 9.4% 10.5%
========= ========= ========= ===== ===== =====
Income per share:
Basic $ 0.26 $ 1.45 $ 1.27
Diluted $ 0.26 $ 1.41 $ 1.24
Weighted average shares outstanding:
Basic 24,164 24,302 25,111
Diluted 24,227 25,000 25,670
See notes to consolidated financial statements
=================================================================================================================================
</TABLE>
17
<PAGE> 18
THE GYMBOREE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
=====================================================================================================================
Year Ended
-----------------------------------------------------
January 30, January 31, February 2,
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,241 $ 35,170 $ 31,788
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,776 13,549 8,899
Non-cash compensation expenses 0 416 386
Loss on disposal of property and equipment 1,794 1,510 980
Provision for deferred income taxes 214 2,136 1,200
Tax benefit from exercise of stock options 1,596 1,217 1,167
Change in assets and liabilities:
Accounts receivable (2,627) (848) (1,468)
Merchandise inventories 1,263 (26,346) (11,327)
Prepaid expenses and other assets (2,894) (1,176) (1,338)
Accounts payable (4,204) 4,097 12,292
Accrued liabilities 2,936 1,554 1,089
Income taxes payable (6,074) 1,408 387
Other liabilities 10,456 5,067 5,085
-------- -------- --------
Net cash provided by operating activities 27,477 37,754 49,140
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (50,662) (48,964) (37,059)
Proceeds from sales of assets 24 117 0
Sales of investments 18,614 63,526 (17,649)
Acquisition of lease rights 0 (1,788) 0
-------- -------- --------
Net cash provided by (used in) investing activities (32,024) 12,891 (54,708)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock 2,487 8,844 4,840
Repurchase of common stock 0 (49,646) 0
Proceeds from borrowings 12,000 0 0
-------- -------- --------
Net cash provided by (used in) financing activities 14,487 (40,802) 4,840
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,940 9,843 (728)
CASH AND CASH EQUIVALENTS:
Beginning of year 17,870 8,027 8,755
-------- -------- --------
End of year $ 27,810 $ 17,870 $ 8,027
======== ======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 3,561 $ 16,298 $ 16,822
Cash paid during the year for interest $ 537 $ 19 $ 9
See notes to consolidated financial statements
=====================================================================================================================
</TABLE>
18
<PAGE> 19
THE GYMBOREE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
===================================================================================================================
Common Stock and
Excess Paid-in Capital Restricted
--------------------------- Stock
Deferred Retained
(In thousands) Shares Amount Compensation Earnings Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
FEBRUARY 4, 1996 24,992,276 $ 56,687 $ (1,139) $ 68,386 $ 123,934
Issuance of common stock
under stock option plans 331,784 4,840 4,840
Tax benefit from exercise
of stock options 1,167 1,167
Amortization of restricted stock 386 386
Net income 31,788
Other comprehensive income (182)
-----------
Comprehensive income 31,606 31,606
BALANCE AT
FEBRUARY 2, 1997 25,324,060 62,694 (753) 99,992 161,933
---------- ----------- ----------- ----------- -----------
Issuance of common stock
under stock option plans 613,036 8,844 8,844
Stock repurchase (1,922,000) (49,646) (49,646)
Tax benefit from exercise
of stock options 1,217 1,217
Amortization of restricted stock 416 416
Net income 35,170
Other comprehensive income (224)
-----------
Comprehensive income 34,946 34,946
BALANCE AT
JANUARY 31, 1998 24,015,096 23,109 (337) 134,938 157,710
---------- ----------- ----------- ----------- -----------
Issuance of common stock
under stock option plans 225,667 2,487 2,487
Tax benefit from exercise
of stock options 1,596 1,596
Cancellation of restricted stock (337) 337 0
Net income 6,241
Other comprehensive income 338
-----------
Comprehensive income 6,579 6,579
BALANCE AT
JANUARY 30,1999 24,240,763 $ 26,855 $ 0 $ 141,517 $ 168,372
========== =========== =========== =========== ===========
See notes to consolidated financial statements
===================================================================================================================
</TABLE>
19
<PAGE> 20
THE GYMBOREE CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include The Gymboree Corporation and its
wholly owned subsidiaries (the "Company"). All significant inter-company
balances and transactions have been eliminated.
NATURE OF THE BUSINESS
The Company is a leading provider of apparel, accessories, and play programs for
children ages newborn to preteen. The Company operates as one reportable
segment. As of January 30, 1999, January 31, 1998, and February 2, 1997, the
Company had 564, 435 and 354 retail stores, respectively. The Company also
offers directed parent-child developmental play programs at approximately 380
franchised locations and 18 Company-operated locations.
FISCAL YEAR
The Company's year-end is on the Saturday closest to January 31. Fiscal years
1998 and 1997, which both included 52 weeks, ended on January 30, 1999 and
January 31, 1998, respectively. Prior to fiscal 1997, the Company's year ended
on the Sunday closest to January 31 of each year. Fiscal 1996, which included 52
weeks, ended February 2, 1997. This change did not have a significant effect on
the consolidated financial statements of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investment instruments with a maturity
of three months or less, at date of purchase.
INVESTMENTS
As of January 30, 1999, there were no investments. For the year ended January
31, 1998, the Company's investments, consisting primarily of municipal bonds,
were classified as available-for-sale and were recorded at fair market value.
Fair market value is based upon quoted market prices on the last day of the
year. Unrealized gains and losses are included in other comprehensive income. As
of January 31, 1998, the fair market value of investments of $18.6 million
approximated the amortized cost.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable, and debt approximates their estimated fair value.
MERCHANDISE INVENTORIES
Merchandise inventories are recorded under the retail method of accounting and
are stated at the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from approximately 3 to 10 years. Leasehold improvements are amortized over the
lesser of the lease term which range from 10 to 25 years, or the estimated
useful lives of the improvements. Internally developed and purchased computer
software is recorded at cost and is amortized using the straight-line method
based on an estimated useful life of 5 years.
INCOME TAXES
The Company computes income taxes using the asset and liability method. Deferred
income taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
LEASE RIGHTS
Lease rights are recorded at cost and are amortized over 10 years or the life of
the lease.
DEFERRED RENT
Many of the Company's operating leases contain predetermined fixed increases of
the minimum rental rate during the initial lease term. For these leases, the
Company recognizes the related rental expense on a straight-line basis and
records the difference between the amount charged to expense and the rent paid
as deferred rent.
CONSTRUCTION ALLOWANCE
As part of its lease agreements, the Company receives construction allowances
from landlords. These allowances offset the capital expenditures associated with
the expansion or construction of stores. The construction allowances have been
deferred and are amortized on a straight-line basis over the life of the lease
as a reduction of rent expense. Construction allowances of $10.5 million and
$4.6 million were granted in fiscal years 1998 and 1997, respectively.
20
<PAGE> 21
THE GYMBOREE CORPORATION
FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at
the exchange rates effective on the balance sheet date. Translation adjustments
resulting from this process are recorded as other comprehensive income.
Revenues, costs of sales, expenses and other income are translated at average
rates of exchange prevailing during the year.
In fiscal 1998 the Company entered into forward foreign exchange contracts
to reduce exposure to foreign currency exchange risk related to its
inter-company loans, which are denominated in foreign currencies. The net gains
and losses between the forward foreign exchange contracts and inter-company
loans are included in net income.
As of January 30, 1999, the Company had forward foreign contracts of $11.2
million, $6.3 million and $14.0 million to hedge Canadian dollars, Irish punts
and British pound sterling, respectively. The amounts represent the U.S. dollar
equivalent to buy or sell foreign currencies.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed as incurred.
PLAY PROGRAMS REVENUE RECOGNITION
Initial franchise fees for all sites sold in a territory are recognized as
revenue when the franchisee has paid the initial franchise fee, has received
government approval in the case of international franchises, and has completed
the training program. At that time, the Company has provided substantially all
of the initial services required by the franchise agreement.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees."
RECLASSIFICATIONS
Certain amounts for prior years have been reclassified to conform to the 1998
presentation.
INCOME PER SHARE
Basic income per share is computed as net income divided by the weighted average
number of common shares outstanding for the period. Diluted income per share
reflects the potential dilution that could occur from common shares issuable
through stock options and restricted stock and is computed by dividing net
income by the weighted average number of common shares out-
standing for the period plus the dilutive effect of outstanding stock options
and restricted stock.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," during fiscal 1998. SFAS No. 130 requires
the presentation, by major components and as a single total, the change in the
Company's net assets during a period from non-owner sources. As other
comprehensive income is immaterial for all periods, such amount is included in
retained earnings. Additionally, the Company is required to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity," during fiscal
1999. The adoption of this statement will not have a significant effect on the
consolidated financial statements of the Company.
2 LEASES
The Company leases its store locations, corporate headquarters, foreign
distribution centers and certain fixtures and equipment under operating leases.
The leases expire at various dates through the year 2023. Store leases typically
provide for payment by the Company of operating expenses, real estate taxes and
additional rent based on a percentage of sales if a specified sales target is
exceeded. Furthermore, a majority of the leases allow the Company to vacate
after a stipulated period.
Future minimum lease payments under operating leases at January 30, 1999
are as follows:
<TABLE>
<CAPTION>
===================================================================
(In thousands)
<S> <C>
Year:
1999 $ 35,612
2000 35,292
2001 35,127
2002 34,479
2003 33,728
Later years 142,139
--------
Total minimum lease commitments $316,377
===================================================================
</TABLE>
Rent expense for all operating leases was $46.7 million, $36.9 million and
$29.1 million, in 1998, 1997 and 1996 respectively, which includes percentage
rent expense and other lease required expenses of $15.4 million, $12.7 million
and $10.9 million for 1998, 1997 and 1996, respectively.
21
<PAGE> 22
THE GYMBOREE CORPORATION
3 LINES OF CREDIT
As of January 30, 1999, the Company had a bank line of credit that allowed up to
$100 million in unsecured letters of credit, of which $11 million can be used
for standby letters of credit. As of January 30, 1999, approximately $67.0
million was available pursuant to such lines. The facility also provided a line
of up to $50 million for foreign exchange contracts. The facility is scheduled
to expire May 31, 1999. The Company uses these lines primarily to support
letters of credit which fund its foreign sourcing of merchandise inventories. As
of January 31, 1998, the Company had a bank line of credit that allowed up to
$100 million in unsecured letters of credit and up to $10 million in foreign
exchange contracts, of which $61.5 million was available pursuant to such lines.
On March 11, 1999, the Company and its current bank agreed to amend the
unsecured credit facility to extend the expiration date to March 31, 2001. The
revised terms provide for an overall credit line of $100 million that may be
used for issuance of commercial letters of credit, cash advances up to $25
million and standby letters of credit up to $10 million. Included within these
terms is a continuation of the foreign exchange facility. The interest rate will
be based on the bank's Reference Rate or LIBOR (London Interbank Offered Rate)
plus a pre-determined spread.
The credit facility contains quarterly and annual financial covenants,
which require the Company to maintain minimum tangible net worth and meet
certain ratios. Additionally, the facility contains restrictions on capital
expenditures.
4 ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
=========================================================================
Jan. 30, Jan. 31,
(In thousands) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Employee compensation $ 5,623 $ 6,293
Store operating expenses and other 4,538 1,925
Store credits and gift certificates 3,103 3,223
Sales taxes 1,838 881
Percentage rent 1,211 1,057
Deferred taxes 1,111 2,402
------- -------
Total $17,424 $15,781
=========================================================================
</TABLE>
5 LONG TERM DEBT
During fiscal 1998, the Company issued two promissory notes totaling $12 million
both secured by the Company's distribution center in Dixon, California. The
first note of approximately $3.1 million bears interest at 7.7%. The second note
of approximately $8.9 million bears interest at 7.9%.
Aggregate principal payments required under the two notes are as follows:
<TABLE>
<CAPTION>
================================================================================
(In thousands)
- --------------------------------------------------------------------------------
<S> <C>
Year:
1999 $ 540
2000 583
2001 630
2002 681
2003 733
Later years 8,833
-------
Total $12,000
================================================================================
</TABLE>
6 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
================================================================================
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 3,073 $14,996 $15,100
State taxes 148 3,523 3,183
Foreign 230 0 0
------- ------- -------
Total current 3,451 18,519 18,283
------- ------- -------
Deferred:
Federal 62 1,796 960
State 152 340 240
------- ------- -------
Total deferred 214 2,136 1,200
------- ------- -------
Total provision $ 3,665 $20,655 $19,483
================================================================================
</TABLE>
22
<PAGE> 23
THE GYMBOREE CORPORATION
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
===============================================================================
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal rate 35% 35% 35%
State income taxes, net of
income tax benefit 4 4 4
Tax exempt interest 0 (1) (1)
Other (2) (1) 0
--- --- ---
Effective tax rate 37% 37% 38%
===============================================================================
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences and carry-forwards, which
give rise to deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
================================================================================
Jan. 30, Jan. 31,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Uniform capitalization costs $ 1,292 $ 1,399
Accrued reserves 1,267 672
State taxes 187 481
Deferred foreign assets 31 0
Deferred rent 3,132 1,654
Other 3,095 58
-------- --------
9,004 4,264
-------- --------
Deferred tax liability:
Deferred foreign liability (5) 0
Prepaid expenses (1,109) (510)
Fixed asset basis differences (10,067) (5,717)
-------- --------
(11,181) (6,227)
-------- --------
Net deferred tax liabilities $ (2,177) $ (1,963)
================================================================================
</TABLE>
7 STOCK PLANS
STOCK OPTION PLANS
The Company's 1983 Incentive Stock Option Plan (the "1983 Plan") and 1993 Stock
Option Plan (the "1993 Plan") provide for grants to team members of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code and
for grants of non-statutory stock options and stock purchase rights to team
members, consultants and non-employee directors of the Company. The Company has
reserved a total of 3,600,000 shares of common stock for issuance under the 1983
Plan and 6,025,000 shares of common stock for issuance under the 1993 Plan,
taking into consideration the additional 2,000,000 shares approved subsequent to
year-end. Options granted pursuant to the plans have been granted at exercise
prices equal to the fair market value of the Company's common stock on the date
of grant. The options have a term of either five or ten years and generally vest
over a four year period. No further options may be granted under the 1983 Plan.
There were 70,095 and 743,589 shares available for the grant of options under
the 1993 Plan at January 30, 1999 and January 31, 1998, respectively.
At a special meeting of shareholders on February 8, 1999, the Company's
1993 Stock Option Plan as Amended and Restated was approved. The changes to the
plan include:
(a) increased the aggregate number of shares of common stock authorized
for issuance under the Plan by 2,000,000 shares raising the number of
shares reserved under the plan since its inception to 6,025,000;
(b) imposed annual limits on the number of shares subject to stock option
grants, so as to qualify the compensation associated with such grants
as "performance-based" compensation within the meaning of Section
162(m) of the Internal Revenue Code;
(c) imposed an annual maximum limit of 200,000 shares that may be issued
pursuant to Stock Purchase Rights;
(d) imposed a minimum 3 year vesting schedule for all Stock Purchase
Rights;
(e) removed language from the 1993 Plan that contemplated option
re-pricings and exchanges.
23
<PAGE> 24
THE GYMBOREE CORPORATION
The following summarizes all stock option transactions for the three years
ended January 30, 1999:
<TABLE>
<CAPTION>
======================================================================================
Shares Weighted Average
(Shares in thousands) Outstanding Price Per Share
- --------------------------------------------------------------------------------------
<S> <C> <C>
Balance, February 4, 1996 1,768 $ 17.50
Options granted 704 24.37
Options exercised (294) 14.48
Options canceled (252) 23.92
- --------------------------------------------------------------------------------------
Balance, February 2, 1997 1,926 19.51
Options granted 1,299 24.55
Options exercised (577) 13.67
Options canceled (323) 24.42
- --------------------------------------------------------------------------------------
Balance, January 31,1998 2,325 22.11
Options granted 1,610 17.52
Options exercised (131) 13.25
Options canceled (938) 21.60
- --------------------------------------------------------------------------------------
Balance, January 30, 1999 2,866 $ 20.16
======================================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at January 30, 1999 (shares in thousands):
<TABLE>
<CAPTION>
========================================================================================================
Options Exercisable
Options Outstanding (Vested)
- ----------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Number Average
Exercisable Number Life Exercise Exercisable Exercise
Prices of Shares (in years) Price at 1/30/99 Price
- ----------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$0.17 to $ 8.25 571 9.7 $ 7.03 28 $ 3.51
8.38 to 20.81 521 7.6 16.03 240 19.59
21.25 to 24.00 537 7.5 23.62 312 23.48
24.13 to 25.38 493 8.6 25.20 160 25.11
25.44 to 27.06 638 8.6 26.90 201 26.81
27.13 to 36.63 106 7.2 29.74 63 30.26
----- ------- ----- ---------
$0.17 to $ 36.63 2,866 $ 20.16 1,004 $ 23.36
=========================================================================================================
</TABLE>
1993 EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved a total of 600,000 shares of common stock for issuance
under the 1993 Employee Stock Purchase Plan (the "Purchase Plan"). The price at
which stock is purchased under the Purchase Plan is equal to 85% of the fair
market value of the common stock on the first day of the applicable offering
period or the last day of the applicable purchase period, whichever is lower.
Unless terminated earlier, the Purchase Plan will terminate in 2013. There were
94,232 and 35,797 shares issued under the Purchase Plan in fiscal 1998 and 1997,
respectively.
RESTRICTED STOCK
In 1994, the Company granted 100,000 shares of its common stock to its former
President and Chief Executive Officer at an aggregate purchase price of $50.00.
The aggregate fair market value of the shares, as measured by the stock price on
the vesting commencement date, totaled $1,937,500. The shares, which were issued
pursuant to the 1993 Plan, were subject to a repurchase option that originally
lapsed over a period of 60 months. The difference between the purchase price and
the aggregate fair market value was being amortized over this 60-month period
and was recognized as compensation expense totaling $416,000 in 1997 and
$386,000 in 1996. Upon the resignation of this individual in fiscal 1997, the
purchase option was cancelled and no compensation expense was recognized in
fiscal 1998.
ADDITIONAL STOCK PLAN INFORMATION
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its three stock-based compensation plans, described above. Accordingly, no
compensation expense has been recognized for its stock option plans and its
employee stock purchase plan. Compensation expense has been charged against
income for its restricted stock plan. Had compensation expense for the Company's
stock option plans and the Purchase Plan been determined based on the fair value
at the grant dates for awards under these plans, consistent with the method of
SFAS No.123, "Accounting for Stock-Based Compensation," the Company's net income
and income per share would have been reduced to the pro forma amounts indicated
below:
24
<PAGE> 25
THE GYMBOREE CORPORATION
<TABLE>
<CAPTION>
===============================================================================================
Year Ended
------------------------------------------------
January 30, January 31, February 2,
(In thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $6,241 $35,170 $31,788
Pro forma 1,805 32,210 29,317
Basic income
per share As reported $ 0.26 $ 1.45 $ 1.27
Pro forma 0.07 1.33 1.17
Diluted income
per share As reported $ 0.26 $ 1.41 $ 1.24
Pro forma 0.07 1.29 1.14
===============================================================================================
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 were $8.53, $10.29, and $8.67, respectively. The fair value of each option
grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
=====================================================================================
Year Ended
---------------------------------------------
January 30, January 31, February 2,
1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend rate 0.0% 0.0% 0.0%
Expected volatility 70.9% 54.4% 55.0%
Risk-free interest rate 5.1% 6.0% 6.0%
Expected lives (yrs.) 3.0 3.0 3.0
=====================================================================================
</TABLE>
8 401(K) PLAN
The Company maintains a voluntary defined contribution 401(k) profit
sharing plan (the "Plan") covering all team members who have met certain service
and eligibility requirements. Employees may elect to contribute up to 20% of
their compensation to the Plan, not to exceed the dollar limit set by law. The
Company matches $0.50 to the Plan for each $1.00 contributed by a team member,
up to a maximum Company contribution of $500 per team member per year. The
Company's matching contributions to the Plan were $170,000, $176,000, and
$133,000 in 1998, 1997, and 1996, respectively.
9 STOCKHOLDER RIGHTS PLAN
In March 1997, the Company adopted a Stockholder Rights Plan (the "Plan").
The Plan entails a dividend of one right for each outstanding share of the
Company's common stock. The rights are represented by and traded with the
Company's common stock. There are no separate certificates or markets for the
rights.
The rights do not become exercisable or trade separately from the common
stock unless 17.5% or more of the common stock of the Company has been acquired,
or after a tender or exchange offer is made for 17.5% or greater ownership of
the Company's common stock. Should the rights become exercisable, each right
will entitle the holder thereof to buy 1/1,000th of a share of the Company's
Series A Preferred Stock at an exercise price of $125. Each 1/1,000th of a share
of the new Series A Preferred Stock will essentially be the economic equivalent
of one share of common stock.
Under certain circumstances, the rights "flip-in" and become rights to buy
the Company's common stock at a 50% discount. Under certain other circumstances,
the rights "flip-over" and become rights to buy an acquirer's common stock at a
50% discount.
The rights may be redeemed by the Company for $0.01 per right at any time
on or prior to the fifth day (or a later date as determined by the Board of
Directors) following the first public announcement by the Company of the
acquisition of beneficial ownership of 17.5% of the Company's common stock.
25
<PAGE> 26
THE GYMBOREE CORPORATION
10 STOCK REPURCHASE
In fiscal 1997, common stock repurchase programs were authorized by the Board of
Directors whereby the Company could buy back up to $60 million of its common
stock. During fiscal 1997, 1,922,000 shares were repurchased by the Company for
an aggregate amount of $49,646,000. During fiscal 1998, there were no shares
repurchased by the Company.
11 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly financial information presented below reflects all adjustments
which, in the opinion of the Company's management, are of a normal and recurring
nature necessary to present fairly the results of operations for the periods
presented.
<TABLE>
<CAPTION>
=====================================================================================================
1998 Quarter Ended
-----------------------------------------------------------
(In thousands, except per share May 2, Aug. 1, Oct. 31, Jan. 30,
amounts and store data) 1998 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 103,106 $ 99,789 $ 113,991 $ 140,333
Gross profit 41,479 33,334 41,094 48,626
Operating income 6,084 (1,345) (430) 5,145
Net income 4,148 (831) (273) 3,197
Basic income per share $ 0.17 $ (0.03) $ (0.01) $ 0.13
Diluted income per share $ 0.17 $ (0.03) $ (0.01) $ 0.13
Stores at end of period 464 495 548 564
</TABLE>
<TABLE>
<CAPTION>
1997 Quarter Ended
-----------------------------------------------------------
May 3, Aug. 2, Nov. 1, Jan. 31,
1997 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 85,240 $ 71,684 $ 101,120 $ 115,396
Gross profit 38,946 30,452 45,859 50,553
Operating income 12,640 6,544 16,893 17,807
Net income 8,599 4,578 10,865 11,128
Basic income per share $ 0.34 $ 0.19 $ 0.44 $ 0.46
Diluted income per share $ 0.34 $ 0.19 $ 0.44 $ 0.46
Stores at end of period 380 401 427 435
=====================================================================================================
</TABLE>
26
<PAGE> 27
THE GYMBOREE CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
The Gymboree Corporation:
We have audited the accompanying consolidated balance sheets of The Gymboree
Corporation and subsidiaries (the "Company") as of January 30, 1999 and January
31, 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three fiscal years in the period ended
January 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Gymboree Corporation and
subsidiaries as of January 30, 1999 and January 31, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 30, 1999 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- ----------------------------------------
San Francisco, California
February 24 , 1999
(March 11, 1999 as to the second paragraph of Note 3)
27
<PAGE> 28
THE GYMBOREE CORPORATION
BOARD OF DIRECTORS
Walter F. Loeb
Director
Stuart G. Moldaw
Chairman of the Board
Barbara L. Rambo
Director
Deborah A. Sorondo
Director
William U. Westerfield
Director
Carole J. Whitacre
Director
Gary White
Vice-Chair and
Chief Executive Officer
OFFICERS
Melanie B. Cox
President
Edward A. Loseman
Senior Vice President,
Sourcing and Logistics
Lawrence H. Meyer
Senior Vice President and
Chief Financial Officer
Kenneth F. Meyers
Senior Vice President,
Human Resources
Stuart G. Moldaw
Chairman of the Board
Gary White
Vice-Chair and
Chief Executive Officer
SECRETARY
Jeffrey D. Saper
Wilson, Sonsini,
Goodrich & Rosati
VICE PRESIDENTS
Theresa R. Backes
Vice President,
Store Operations
Della G. Berger
Vice President,
Compensation & Benefits
Robert B. Campbell
President,
Play Programs
JoAnn H. Davis
Vice President,
Real Estate, Construction
and Store Planning
John F. Estill
Vice President &
Managing Director
UK/Ireland Stores
Lisa A. Fitzgerald
Vice President and
Divisional Merchandise
Manager-Girls and Layette
Keith L. Harband
Vice President, Marketing
Lisa G. Harper
Vice President, Design
Carver L. Johnson
Vice President and
Chief Information Officer
Maura B. Kabureck
Vice President,
North American Stores
Patricia F. Kampmann
Vice President and
Divisional Merchandise
Manager-Boys, Accessories
and Play Products
Susan G. Neal
Vice President,
Business Development
F. Mario Petrocco
Vice President & Treasurer
Rick A. Planos
Vice President, Stores-Zutopia
George A. Rodriguez
Vice President, Production
Sheree A. Waterson
Vice President,
Merchandising-Zutopia
Laura A. Wilkin
Vice President, Logistics
Edward Wong
Vice President, Planning & Allocation
CORPORATE INFORMATION
HEADQUARTERS
The Gymboree Corporation
700 Airport Boulevard
Burlingame, CA 94010
Telephone: 650.579.0600
Facsimile: 650.579.1733
EUROPEAN OFFICE
Gymboree
First Floor Office Suite
Stonecroft House
Ervington Court
Meridian Business Park
Leicester LE3 2Wl England
Telephone: 44.116.282.7400
NORTH AMERICAN STORES
1.800.558.9885
PLAY PROGRAMS
1.800.520.PLAY
WEBSITE
www.gymboree.com
STOCKHOLDERS INFORMATION
ANNUAL MEETING
Stockholders are invited to attend our annual meeting at 9 a.m. on Wednesday,
May 26, 1999 at the
San Francisco Airport Marriott Hotel,
1800 Old Bayshore Highway,
Burlingame, California.
COMMON STOCK TRADING
Common stock for The Gymboree Corporation is traded under the symbol GYMB on the
Nasdaq National Market System.
<TABLE>
<CAPTION>
FISCAL 1998
HIGH LOW
<S> <C> <C>
1st Qtr 27.375 18.250
2nd Qtr 19.031 12.000
3rd Qtr 10.500 4.063
4th Qtr 8.500 4.875
</TABLE>
As of April 5, 1999, there were approximately 764 stockholders of record,
excluding stockholders whose stock is held in the nominee or street name by
brokers.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105
Telephone: 415.247.4000
GENERAL COUNSEL
Wilson, Sonsini,
Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Telephone: 650.493.9300
REGISTRAR AND TRANSFER AGENT
Inquiries from our stockholders regarding address changes and lost
certificates should be
directed to:
Bank Boston, NP
c/o Equiserve
P.O. Box 8040
Boston, MA 02266
Telephone: 1.800.733.5001
INVESTOR RELATIONS
Copies of The Gymboree Corporation's 1998 Annual Report, Form 10-K and
Form 10-Q are available by writing to:
The Gymboree Corporation
Investor Relations
700 Airport Boulevard
Burlingame, CA 94010
Fax Requests: 650.696.7502
Printed in U. S. A.
(C) 1999 The Gymboree Corp.
28
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Gymboree Manufacturing, Inc., a California corporation.
Gym-mark, Inc., a California corporation.
The Gymboree Stores, Inc., a California corporation.
Gymboree Retail Stores, Inc., a California corporation.
Gymboree Logistics Partnership, a California General partnership, wholly owned
by The Gymboree Stores, Inc. and Gymboree Retail Stores, Inc.
Gymboree Play Program, Inc., a California corporation.
Gymboree Operations, Inc., a California corporation.
Gymboree, Inc., a Canadian and Delaware corporation.
Gymboree Japan K.K., a Japanese corporation.
Gymboree Industries Holdings Ltd., a Republic of Ireland Limited Company.
Gymboree Hong Kong Ltd., a Hong Kong Limited Company, wholly owned by Gymboree
Industries Holdings Ltd.
Gymboree Industries Ltd., a Republic of Ireland Limited Company, wholly owned by
Gymboree Industries Holdings Ltd.
Gymboree Ireland Leasing Ltd., a Republic of Ireland Limited Company.
Gymboree of Ireland, Ltd., a Republic of Ireland Limited Company.
Gymboree U.K. Leasing Ltd., a United Kingdom Limited Company.
Gymboree U.K. Ltd., a United Kingdom Limited Company.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-60310, 33-90452, 33-94594 and 333-10811 of The Gymboree Corporation and
subsidiaries all on Forms S-8 of our report dated February 24, 1999 (March 11,
1999 as to the second paragraph of Note 3), incorporated by reference in this
Annual Report on Form 10-K of The Gymboree Corporation and subsidiaries for the
fiscal year ended January 30, 1999.
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 27,810
<SECURITIES> 0
<RECEIVABLES> 7,811
<ALLOWANCES> 0
<INVENTORY> 74,396
<CURRENT-ASSETS> 118,085
<PP&E> 181,326
<DEPRECIATION> (46,886)
<TOTAL-ASSETS> 256,705
<CURRENT-LIABILITIES> 41,771
<BONDS> 0
0
0
<COMMON> 26,855
<OTHER-SE> 141,517
<TOTAL-LIABILITY-AND-EQUITY> 256,705
<SALES> 457,219
<TOTAL-REVENUES> 457,219
<CGS> 292,686
<TOTAL-COSTS> 449,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,906
<INCOME-TAX> 3,665
<INCOME-CONTINUING> 6,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,241
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
