-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PAD4Sf2LRSnqXY9MKho3hoWljAHj2A36j2foGJFlqwd11CfXuKPpjhFeYtJpIkBR C1gKdF6TrUf64dATHshQdQ== 0000891618-97-002044.txt : 19970506 0000891618-97-002044.hdr.sgml : 19970506 ACCESSION NUMBER: 0000891618-97-002044 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970202 FILED AS OF DATE: 19970505 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GYMBOREE CORP CENTRAL INDEX KEY: 0000786110 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 942615258 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21250 FILM NUMBER: 97595554 BUSINESS ADDRESS: STREET 1: 700 AIRPORT BLVD STE 200 CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 4155790600 MAIL ADDRESS: STREET 2: 700 AIRPORT BLVD #200 CITY: BURLINGAME STATE: CA ZIP: 94010 10-K405 1 FORM 10-K FOR THE YEAR ENDED FEBRUARY 2, 1997 1 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 FEBRUARY 2, 1997 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: (415)-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 this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 1997, was approximately $672,400,201, based upon the last price reported for such date on the Nasdaq National Market. As of March 31, 1997, 25,024,198 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended February 2, 1997 (hereinafter referred to as the "1996 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 16, 1997 (hereinafter referred to as the "1996 Proxy Statement") are incorporated into Part III. The exhibit index is located on page 22 2 THE GYMBOREE CORPORATION TABLE OF CONTENTS
PART I PAGE NUMBER ITEM 1. BUSINESS.................................................................. 3 ITEM 2. PROPERTIES................................................................ 14 ITEM 3. LEGAL PROCEEDINGS......................................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 15 ITEM 6. SELECTED FINANCIAL DATA................................................... 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................ 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES................................................ 16 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............ 17 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K................... 18
2 3 PART 1 ITEM 1. BUSINESS The Gymboree Corporation and its wholly-owned subsidiaries ("Gymboree" or the "Company") is a leading specialty retailer of high quality apparel and accessories for children ages newborn to seven years old. The Company operates a nationwide chain of stores, primarily in regional shopping malls, and as of March 1, 1997, the Company operated 366 stores. Under the GYMBOREE(R) brand name, the Company designs and manufactures children's active-wear for sale exclusively by Gymboree. The Company's apparel is characterized by bright colors, bold fun prints with complex embroidery, comfort, functionality and durability. The Company also offers directed parent-child developmental play programs for children ages newborn to five years old at approximately 375 franchised centers and 13 Company-operated locations. This annual report on Form 10-K contains certain 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 in the "Business" section, and in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the 1996 Annual Report to Stockholders incorporated by reference in this annual report on Form 10-K. BUSINESS STRATEGY The Company's business strategy consists of the following principal elements: o HIGH QUALITY APPAREL. Gymboree strives to offer its customers high quality apparel with an excellent price/value relationship. The Company designs its merchandise to be comfortable, functional, safe and durable by placing particular emphasis on high quality fabrics and detailed garment construction. o BRAND NAME RECOGNITION. Gymboree has developed a clearly recognizable brand image through its distinctive design, merchandising and retailing. Customers associate Gymboree with high quality, brightly colored children's clothing sold in an attractive and friendly environment. o INTEGRATED OPERATIONS: DESIGN, PRODUCTION AND RETAILING. The Company believes that the vertical integration of its operations enables it to identify and respond to market trends, maintain rigorous product quality standards and closely monitor the distribution of its products. o EXCLUSIVE DISTRIBUTION CHANNEL. Gymboree products are sold exclusively through its retail stores and, to a very limited extent, through its play programs. During fiscal 1996, the Company began a catalog operation which was terminated in 1996. This exclusive distribution enables the Company to maintain and enhance the Gymboree brand image, more effectively control the presentation and pricing of its merchandise, obtain valuable feedback from its customer base, provide a high level of customer service and closely monitor the retail sell-through of its products. 3 4 o MERCHANDISE FOCUS. Gymboree apparel is designed, manufactured and merchandised by line. Merchandise is displayed on the walls of 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 items and accessories. The Company offers a broad range of styles, themes and colors, as opposed to relying primarily on certain key items. To maintain the freshness of its merchandise, the Company introduces between 30 and 40 new lines of boy's, girl's and infant's apparel each year. o 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 sales associates. The Company believes that this customer service in combination with its merchandise encourages multiple item purchases per customer. STORE EXPANSION STRATEGY Gymboree seeks to significantly increase its current store base by opening new stores in major metropolitan malls, certain secondary regional malls and in select downtown street locations and airport terminals that satisfy its demographic and financial return criteria. In fiscal 1996, the Company opened 75 new stores and expanded 19 existing stores. Over the past year, the average size of new and relocated stores has increased to approximately 1,700 square feet. The Company plans to open 80 to 85 new stores in fiscal 1997, 12 of which were opened as of March 1, 1997. As indicated in the table below, the Company has achieved increasing geographic diversification within the United States in recent years. The Company started its international expansion by opening five retail stores in Canada during fiscal 1996. During fiscal 1997, the Company is planning to open approximately 15 stores in Canada, the United Kingdom and the Republic of Ireland. The Company's 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, the Company's financial resources and the ability to control the operational aspects of this growth. Gymboree expanded from two stores in California in 1986 to 361 stores in 48 states and 5 stores in 3 Canadian provinces as of March 1, 1997. The following table sets forth, by geographic region, the net number of stores opened and closed during each of the periods indicated:
Fiscal Year -------------------------------------------------------------------------------- Prior to 1992 1992 1993 1994 1995 1996 1997(1) Total ----------- -------- ------- ------- -------- ------- -------- ---------- East 35 8 9 14 14 17 3 100 Midwest 7 10 9 12 19 25 3 85 South 6 9 10 23 26 12 4 90 West 32 5 12 8 11 16 2 86 Canada 0 0 0 0 0 5 0 5 ----------- -------- ------- ------- -------- ------- -------- ---------- Total 80 32 40 57 70 75 12 366 =========== ======== ======= ======= ======== ======= ======== ==========
(1) Includes stores opened through March 1, 1997. 4 5 SITE SELECTION. In selecting new store sites, the Company 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. The Company's 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 young children in the trade area are important considerations. Although the Company's current stores are located primarily in regional malls, the Company has opened stores in alternative locations. In addition, the Company plans to relocate some higher volume stores within the same malls where it anticipates receiving a competitive advantage. There can be no assurance that the Company will continue to be successful in either obtaining favorable sites for its new stores or negotiating favorable lease terms for such sites. NEW STORE ECONOMICS. The Company's average cost for leasehold improvements, furniture and fixtures for stores opened in fiscal 1996 was approximately $207,000 per store, before landlord construction allowances. In addition, working capital requirements on these same stores, consisting almost entirely of inventory purchases, averaged approximately $61,000 per store. Average preopening costs per store, which are expensed as incurred, were $13,000 during fiscal 1996. Gymboree stores have typically achieved profitability at the store operating level within their first full quarter of operation, although there can be no assurance that new stores will continue to achieve the same levels of profitability. PRODUCTS AND MERCHANDISING Gymboree's merchandise has evolved significantly over time. Prior to 1988, the Company offered unisex apparel for children ages six months to five years and a selection of non-apparel products, including toys. Since 1989, the Company has broadened its apparel merchandise assortment by developing separate boy's and girl's lines for children ages eighteen months to seven years, the GymBaby line for children ages newborn to eighteen months, and the Layette line for infants from newborn to three months. 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, bedding and, to a limited extent, shoes. The Company's merchandising strategy focuses upon the quality and design of its apparel products and planned introduction of new product lines. The Company 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 the Company's stores features six major merchandising presentations consisting of two boys' and two girls' lines, a Layette line, and a seasonal line of swimwear. In 1996 the Company merged the GymBaby line into Boy and Girl lines. Each merchandise line generally consists of approximately 60 to 150 clothing items, encompassing matching tops and bottoms, with similar color pallets, 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, the Company regularly updates its assortments by rotating each line on an eleven to thirteen week selling cycle. Although Gymboree generally is unable to reorder items after a line has been purchased, the Company carefully monitors its rotation schedule and has the ability to move up the set-up of new lines based on selling demand. The Company does not typically use special sales promotions, however, merchandise in each line generally flows through a structured markdown process. 5 6 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 sales associates in the process of wardrobing, which, the Company believes, 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. DESIGN, SOURCING AND CONTRACT MANUFACTURING Gymboree apparel is characterized by colorful and distinctive designs, quality fabrications and construction and an excellent price/value relationship. The Company sources soft, comfortable and durable fabrics. The Company's 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. The Company manages the production of Gymboree apparel from the initial product concept, through color and pattern design, fabric development and testing, sample approval and testing and garment manufacturing. The Company believes that the vertical integration of its operations and the coordinated efforts of its merchandising and design, production, and financial planning teams enable Gymboree to create its 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 the Company'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 finished product requires approximately ten months. Fabric and production commitments are made approximately six months before receipt of the finished garments at the Company's distribution center. 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 its specifications by approximately 60 independent manufacturers, located primarily in the Far East (Hong Kong, China, Indonesia, Philippines, Thailand, Sri Lanka, and Saipan) and to a lesser extent in Honduras, Israel and the United States. The Company sources its fabric raw material from approximately 15 vendors. In fiscal 1996, the Company's product assortment was approximately 70% knit and 30% woven. In fiscal 1996, one vendor accounted for approximately 80% of the Company's cotton knit fabric purchases. Although the Company believes that other sources could be identified to satisfy its requirements for its cotton knit fabrics, the loss of this vendor, or a delay in obtaining fabric from this vendor, could have a material adverse effect on the Company's business and operating results. The Company does business with all of its vendors in United States currency and has not historically experienced any material difficulties as a result of any foreign political, economic or social instabilities, although there can be no assurance that it will not experience such difficulties 6 7 in the future. The Company has no long-term contracts with suppliers and typically transacts 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. 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 sales associates' time away from customers, operational procedures are reviewed and streamlined by the store operations group prior to implementation at the store level. This group is also responsible for field and store staffing, daily sales motivation and central office to store communications. The Company's merchandising group 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 41 operating districts, divided into seven geographic regions. Each district manager is responsible for approximately eight stores. Stores are typically staffed with a manager, two assistant managers and several sales associates which varies with store volume. During the holiday selling season, staff levels are substantially increased to accommodate peak traffic levels. A number of Gymboree programs offers incentives to both sales associates and management. Sales associates receive compensation primarily in the form of hourly wages. Incentive structures are designed to maximize sales associates' average sales transactions. Scheduling procedures allocate payroll hours to sales associates based upon sales performance rather than simple availability. Other programs provide bonuses or cash awards to high achieving store personnel during contest periods, or to all employees of a store based on store sales achievements. District and regional managers receive compensation in the form of salaries, performance-based bonuses and stock options. CUSTOMER SERVICE Customer service is a defining feature of the Gymboree corporate culture. The Company believes that knowledgeable and enthusiastic store personnel 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. The Company's store and district team leaders and regional team director spend the majority of their work week on Gymboree selling floors, providing leadership by coaching the sales staff and assisting customers through a time approach. 7 8 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 sales associates. The Company 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, the Company believes that Gymboree has established a reputation for excellent customer service. 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 colored arches supported by giant children's building blocks. The dramatic archways and Gymboree's logo attract the customer's attention, even from a distance. The Company believes that the playful image created by its 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 To generate sales, Gymboree relies primarily on the location and design of its stores and word-of-mouth advertising and, to a lesser extent, cross-promotional activities with franchisees. The Company offers coupons for limited retail merchandise discounts on a semi-annual basis to participants in its Play Programs. Through their promotional activities on behalf of Gymboree play centers, franchisees promote the GYMBOREE(R) brand name through advertisements and periodic mailings. The Company's retail stores generally make play center information available to retail customers. NEW BUSINESS OPPORTUNITIES The Company launched its first catalog at the beginning of fiscal 1996, and then closed operation of the catalog in January, 1997 in order to more fully devote time and effort to its retail stores. The estimated costs for the termination of this business, were recorded during the fourth quarter of fiscal 1996. The Company commenced international retail operations by opening five retail stores in Canada during fiscal 1996. The Company plans to open during fiscal 1997 up to 15 stores in Canada, the United Kingdom and the Republic of Ireland. 8 9 MERCHANDISE DISTRIBUTION The Company's merchandise production calendar provides significant lead time from the manufacturing completion date to the targeted in-store date. This typically enables consolidation of larger merchandise shipments on cost-efficient ocean carriers. The Company's transportation department coordinates shipments from contract manufacturers or vendors, and regularly monitors the timeliness of such shipments. Late merchandise is shipped on conference ocean carrier with the manufacturer paying the difference between the conference and non-conference ocean freight rates. The merchandise is shipped to the Port of Oakland, California where customs clearance takes place. Samples of all items are reviewed by U. S. Customs prior to actual merchandise shipments. This process reduces the customs clearance time and speeds the delivery of the merchandise to the Company. The Company's merchandise is received, inspected, processed, warehoused and distributed through its two distribution centers comprising 140,000 square feet leased distribution facilities in Hayward, California. Merchandise received at the distribution center is promptly reviewed and readied for shipment to the stores. The Company's store inventory levels are analyzed through the Company's central management information systems. Normally, merchandise is sent to the stores once per week, however, during certain seasonal periods, stores may receive more than one shipment per week. Various methods of domestic transportation are used, including truck, pool distribution and air freight. During 1997, the Company plans to construct a new 280,000 square feet distribution center on 15 acres which will be located in Dixon, California. The target opening for this new facility is January 1998. MANAGEMENT INFORMATION SYSTEMS Gymboree's information systems provide integration of store, merchandising, distribution and financial systems. These systems operate on a Unix platform with a central minicomputer running a third party software package. Sales are updated daily in the merchandise reporting systems by polling sales information from each store's point-of-sale ("POS") terminals. The Company's POS system consists of registers providing price look-up, scanning of bar-coded tickets and credit authorization. Through automated two-way electronic communication with each store, sales information, payroll hours and store initiated transfers are uploaded to the host system, and price changes are downloaded to the POS devices. The communication with the stores also enables the Company to receive physical inventory details and send electronic mail. Information obtained from daily polling results in automatic merchandise replenishment in response to the specific unit inventory requirements of each store. The Company evaluates information obtained through daily reporting to implement merchandising decisions regarding markdowns and allocation of merchandise. In the first quarter of 1997, Gymboree implemented a client/server GUI based system for merchandise allocation and replenishment (MARS). MARS replaces the legacy computer-aided distribution system which required time-consuming manual corrections. MARS has eliminated much of this manual effort and has increased time for allocation analysis and better tailors merchandise replenishments to business needs. Other features of MARS are drill down/up capabilities, a decrease in the communication time to the Distribution Center, improved reporting capabilities, and a reduced processing load on the host system. The Company is in the process of installing a new PC based, in-store POS system throughout all stores within the chain in 1997. This new system configuration will allow for faster customer checkout, integrated tender authorizations, and automatic collection of detailed sales data for analysis. The Company believes that its management information systems are an important factor in allowing the Company to efficiently support its growth and maintain a competitive industry position. The Company is committed to utilizing technology to enhance its competitive position 9 10 and has installed a computer-aided design system to automate certain merchandise design and production functions, and a client/server based production system. In the event that the Company's existing management information systems are inadequate to support the Company's operations or its change over to the new MARS and POS system is disruptive to operations, the Company's business and operating results could be materially adversely affected. PLAY PROGRAMS As of February 2, 1997, the Company's Play Programs included 13 Company-operated play centers in California and approximately 377 franchisee-operated play centers, of which approximately 80% of the play centers 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. The Company believes that its 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 colorful, developmentally appropriate play equipment. The Gymboree Play Program generally 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 a finale featuring a colorful parachute, songs, bubbles and GYMBO(R) the clown. Parents are generally present at play classes and participate in the activities with their children. Gymboree classes are offered to children ages newborn to six years old. CradleGym (birth through 3 months) focuses on parent support and discussion topics, as well as parent-child interaction through music, gentle movement and at-home play ideas. In BabyGym classes (3-12 months) babies and parents enjoy exploring the play equipment, socializing and music as well as an opportunity to exchange parenting information. The Gymboree I, II and III programs (1-2 1/2 years) focus on developing balance, refining motor skills and building toddler confidence and self-esteem through activities and play. In GymGrad classes (2 1/2-4 years), children are introduced to pre-sport skills and non-competitive games which are designed to promote physical development and social skills such as cooperation. GymKids (4-5 years) is a parent-optional program which emphasizes drama, creative movement and pre-sport skills. The Company's standard franchise agreement provides for an initial term of ten 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 one additional ten year term, and Gymboree receives no fee upon the renewal of the franchise from domestic franchisees. The Company 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 10 11 domestic franchisee to another. Currently, Gymboree supplies the franchisees with program aids, equipment and consumer products and conducts initial and ongoing training programs. Gymboree will be offering franchises for sale in new market areas in fiscal 1997. During fiscal 1996, the Company made no such offerings. TRADEMARKS AND SERVICE MARKS The Company 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 the Company'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. The Company's rights in the "GYMBOREE" mark and other marks are a significant part of the Company's business. Accordingly, the Company intends to maintain its mark and the related registrations. The Company is not aware of any material claims of infringement or other challenges to the Company's right to use its mark in the United States. COMPETITION The children's apparel segment of the specialty retail business is highly competitive. The Company competes 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 the Company, and there can be no assurance that the Company will be able to compete successfully with them in the future. The principal competitive factors in the Company's market include quality and variety of merchandise, price, brand-name recognition, customer service, convenience and the attractiveness of the stores. Gymboree's play program competes with various regional and local play programs on the basis of the reputation and quality of programs, convenience and price. EMPLOYEES As of February 2, 1997, the Company had over 6,500 employees. In addition, a significant number of seasonal employees are hired during each holiday selling season. None of the Company's employees is represented by a labor union, and the Company believes that its relationship with its employees is good. 11 12 James P. Curley.............. 41 Senior Vice President, Chief Financial Officer/Chief Administrative Officer and Director Cynthia S. Dennis............ 39 Senior Vice President and General Merchandise Manager of New Business Development Mindy C. Meads............... 45 Senior Vice President and General Merchandise Manager Officers Walter J. Blum............... 45 Vice President, Distribution JoAnn H. Davis............... 53 Vice President, Real Estate Diana Dobbs-Melton........... 33 Vice President, Planning & Distribution John Estill.................. 36 Vice President of the United Kingdom John Mazurk.................. 43 President of Play Programs Trudi A. Muller.............. 38 Vice President, Design Joseph T. Prusko............. 42 Vice President and Treasurer George A. Rodriguez.......... 38 Vice President, Production and Sourcing Michelle Van Hoose........... 40 Vice President, Human Resources
Mr. Stuart G. Moldaw resumed the position of Chairman of the Board of Directors of the Company in January 1994. Mr. Moldaw has been a director of the Company since May 1982 and served as Chairman from January 1990 until January 1993. Until February 1990, Mr. Moldaw was a general partner, and is currently a special venture partner of U.S. Venture Partners, a venture capital investment firm. Mr. Moldaw is a director and Chairman Emeritus of Ross Stores, Inc. Mr. Gary White has been President, Chief Executive Officer and director of the Company since February 1997. Mr. White joined the Company as Senior Vice President and Chief Operating Officer in January 1996. Prior to joining the Company, Mr. White was Executive Vice President of Mervyn's, a division of Dayton Hudson Corporation until January 1996. Mr. White was employed by Dayton Hudson Corporation since 1976 having served in various positions as an officer with Dayton Hudson from January 1988 to January 1996. Mr. James P. Curley has been Chief Administrative Officer and director of the Company since February 1996 and has been Senior Vice President and Chief Financial Officer since July 1992. From May 1989 to July 1992, Mr. Curley was Senior Vice President, Chief Financial Officer and Treasurer of Gantos, Inc., an apparel retailer. Mr. Curley is a director of West Marine, Inc., a boating supplies retailer. Ms. Cynthia S. Dennis has been Senior Vice President and General Merchandise Manager of New Business Development since December 1995. Ms. Dennis previously served as the Company's Senior Vice President and General Merchandise Manager from December 1994 to December 1995; Vice President, Production and Merchandising from January 1994 to December 1995; Vice President, Production from November 1991 to January 1994; and was the Company's merchandiser from February 1990 to November 1991. Ms. Mindy C. Meads joined the Company as Senior Vice President and General Merchandise Manager in March 1996. Previously, Ms. Meads was with Lands' End, Inc. as Senior Vice President of Merchandising & Design since 1994 and Vice President, General Merchandise Manager from 1991 until 1994. 12 13 Mr. Walter J. Blum joined Gymboree as Director of Distribution in January 1992, and was promoted to Vice President of Distribution in April 1994. Prior to joining the Company, Mr. Blum was Director of Operations for Electronic Arts, an entertainment software developer and distributor, from July 1990 to October 1991. From November 1988 to July 1990, Mr. Blum was Director of Distribution Services for Imaginarium, a specialty retail toy company. Ms. JoAnn H. Davis has been Vice President of Real Estate, Construction and Store Planning since March, 1997. Ms. Davis joined Gymboree as Vice President of Real Estate in July 1995 and served in that capacity until March, 1997. Prior to joining the Company, Ms. Davis provided consulting services to the Company from July 1994 until July 1995. Ms. Davis served as President of Davis McKinney Associates, a real estate consulting company, from July 1992 to July 1995. From May 1988 to July 1992, Ms. Davis was Vice President of Real Estate for Trans World Entertainment, a specialty retail music company. Ms. Diana Dobbs-Melton joined Gymboree in February 1996 as Vice President of Planning and Distribution. From February 1995 until joining the Company, Ms. Dobbs-Melton was the Senior Director of Planning and Distribution for GapKids, a division of the Gap, Inc. From March 1994 to February 1995, Ms. Dobbs-Melton was the Senior Director of Planning and Distribution for the International Gap and GapKids Divisions. From March 1991 to March 1994, Ms. Dobbs-Melton was Director of Planning and Distribution for the same division. On March 14, 1997, Ms. Dobbs-Melton passed away from complications of child birth. Mr. John Estill joined Gymboree in June, 1996 as Vice President of the United Kingdom. From March 1992 through July 1995, Mr. Estill was Retail Director for Episode, a stylized women's wear retailer. From January 1988 until December, 1991 he was Retail Sales Director for Next Retail, Ltd., a specialty department store. Both Episode and Next Retail are located in the United Kingdom. Mr. John Mazurk joined Gymboree in August 1996, as President, Play Programs. From January 1994 until joining the Company, Mr. Mazurk was Vice President for Broadway Stores, Inc. From January 1977 to January 1994, Mr. Mazurk was Vice President General Manager for Burdines, a division of Federated Department Stores, Inc. Ms. Trudi A. Muller joined the Company in January 1996 as Vice President of Design. From September 1995 until joining the Company, Ms. Muller was Director of Product Development for Kids Mart/Little Folks Shop. From January 1995 to September 1995, Ms. Muller was Manager of Children's Product for the Broadway Stores. From July 1993 to January 1995, Ms. Muller was Director of Product Development for Story Book Heirlooms. From January 1991 to July 1993, Ms. Muller was the owner and designer of Trudiwear, specialty children's wear apparel. Mr. Joseph T. Prusko has been Vice President and Treasurer of the Company since March, 1997. Mr. Prusko joined Gymboree in November 1994 as Vice President and Controller and served in that capacity until March, 1997. Prior to joining the Company, Mr. Prusko had been Vice President of Finance at Waldenbooks, a subsidiary of Kmart, since December 1989. From August 1983 until December 1989, Mr. Prusko was Controller for Pearle Vision Centers, retail optical stores. 13 14 Mr. George A. Rodriguez joined Gymboree as Director of Sourcing in October 1992 and assumed the position of Director of Sourcing and Production in January 1994. Since May 1995, Mr. Rodriguez has been Vice President, Sourcing and Production of the Company. Prior to joining the Company, Mr. Rodriguez was Sourcing and Production Manager for Generra Sportswear, a young men's and junior sportswear company, from November 1989 until April 1992. Ms. Michelle Van Hoose has been Vice President, Human Relations, since October 1996. Ms. Van Hoose joined Gymboree in June 1995, as Director of Human Resources. From March 1993 to June 1995, Ms. Van Hoose was Director of Human Resources for H2O Plus, a retail cosmetic organization. Prior to that, Ms. Van Hoose held numerous positions with The GAP from September 1992 to March 1993 and with Eddie Bauer from February 1987 to September 1992. ITEM 2. PROPERTIES The Company's 45,000 square foot corporate headquarters is located in an office facility in Burlingame, California, which the Company occupies under a lease expiring in 1999. During 1996, the Company leased a nearby building of 25,000 square feet, which expires in 1999. The Company's distribution centers are located in 140,000 square foot facilities in Hayward, California, which the Company occupies under a lease expiring in 1998. During 1997, the Company plans to construct a new 280,000 square foot distribution center on 15 acres which will be located in Dixon, California. The Company is close to purchasing the land and will commence construction in May 1997. At February 2, 1997, the Company's 354 stores included an aggregate of approximately 519,000 square feet of space. The Company's stores are all leased, typically for a ten-year term. In most cases, the Company 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 the Company to pay insurance, utilities, real estate taxes and repair and maintenance expenses. See Note 3 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market 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.
FISCAL 1996 FISCAL 1995 HIGH LOW HIGH LOW First Quarter $29 $17 3/4 $28 1/4 $21 1/2 Second Quarter 35 3/4 20 1/8 32 3/8 20 7/8 Third Quarter 33 5/8 23 3/8 37 1/4 18 3/4 Fourth Quarter 34 3/4 21 1/4 25 1/8 14 3/8
As of March 31, 1997, the approximate number of holders of record of the Company's Common Stock was 786. The Company 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 the Company's Board of Directors and will depend upon, among other things, future earnings, capital requirements, the financial condition of the Company and general business conditions. On February 28, 1997, the Company announced that its Board of Directors had authorized a repurchase program in which shares of its Common Stock with an aggregate value of $30 million may be purchased by the Company in the open market. See Note 9 of Notes to Consolidated Financial Statements. 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 market 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. 15 16 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. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to page 1 of the 1996 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 2 through 7 of the 1996 Annual Report to Stockholders filed as Exhibit 13.1 to this Annual Report on Form 10-K, and to Note 9, Subsequent Events, which covers a complete discussion of a Stock Repurchase Program and a Stockholder Rights Plan, which is incorporated by reference on page 21 of the 1996 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 8 through 24 of the 1996 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. 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 1996 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 1996 Proxy Statement. 16 17 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 1996 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 1996 Proxy Statement. 17 18 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 8 through 24 of the 1996 Annual Report to Stockholders filed as Exhibit 13.1 to this Annual Report on Form 10-K. Consolidated Balance Sheets as of February 2, 1997 and February 4, 1996 Consolidated Statements of Income for each of the three fiscal years ended February 2, 1997 Consolidated Statements of Cash Flows for the three fiscal years ended February 2, 1997 Consolidated Statements of Stockholders' Equity for the three fiscal years ended February 2, 1997 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. 18 19 (A)(3) EXHIBITS
Exhibit Number Description ------ ----------- 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 10.13 Deferred Compensation Agreement 11.1 Statement re Computation of Net Income Per Share. 13.1 1996 Annual Report to Stockholders 23.1 Independent Auditors' Consent 27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K A report on Form 8-K was filed on February 28, 1997, announcing the election of Jerome A. Chazen, a new director and the resignation of Ms. Nancy Pedot, from her positions as President, Chief Executive Officer and Director, as of February 14, 1997. Gary White, formerly Chief Operating Officer and Senior Vice President of the Company, has been appointed to the positions of President, Chief Executive Officer and Director. - ---------- (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. 19 20 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 May 5, 1997 By: /s/ Gary White - -------------------- -------------------------------- (Date) Gary White President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Stuart G. Moldaw Chairman of the Board of Directors May 5, 1997 - ------------------------------------ Stuart G. Moldaw /s/ Gary White President and Chief Executive Officer May 5, 1997 - ------------------------------------ and Director Gary White /s/ Arthur S. Berliner Director May 5, 1997 - ------------------------------------ Arthur S. Berliner /s/ Jerome A. Chazen Director May 5, 1997 - ------------------------------------ Jerome A. Chazen /s/ James P. Curley Senior Vice President and May 5, 1997 - ------------------------------------ Chief Financial Officer/Chief James P. Curley Administrative Officer and Director (Principal financial and accounting officer of the registrant) /s/ Walter F. Loeb Director May 5, 1997 - ------------------------------------ Walter F. Loeb /s/ Barbara L. Rambo Director May 5, 1997 - ------------------------------------ Barbara L. Rambo /s/ Peter L. Thigpen Director May 5, 1997 - ------------------------------------ Peter L. Thigpen /s/ William U. Westerfield Director May 5, 1997 - ------------------------------------ William U. Westerfield
20 21 THE GYMBOREE CORPORATION EXHIBIT INDEX EXHIBIT NUMBER - ------ 10.12 Lease Agreement for 770 Airport Blvd., Burlingame, CA dated October 11, 1996 10.13 Deferred Compensation Agreement 11.1 Statement re: Computation of Net Income per Share 13.1 1996 Annual Report to Stockholders 23.1 Independent Auditors' Consent 27.1 Financial Data Schedule
EX-10.12 2 LEASE AGREEMENT FOR 770 AIRPORT BLVD. 1 EXHIBIT 10.12 LEASE SUMMARY (770 Airport Boulevard) BUILDING: 770 Airport Boulevard (currently the Purdy Building) PREMISES: Approximately 25,578 square feet TENANT: The Gymboree Corporation TERM: Three (3) years with one five year option Initial Term: December 1, 1996 - November 30, 1999 (700 Airport Lease expires September 30, 1998) Early Entry: October 1, 1996 - November 30, 1996 (no rent) OPTION AND REQUIRED EXTENSIONS: A. Tenant has an option to extend the lease for 1 full five year period beginning December 1, 1999 and expiring November 30, 2004; or B. If Gymboree exercises its option to renew at 700 Airport Boulevard, Gymboree must and will be required to renew at 770 Airport Boulevard for a period which will be less than five years -- beginning December 1, 1999 and expiring September 30, 2003 (which will make both lease terms coterminous and expire September 30, 2003). C. If Gymboree extends its lease at 700 Airport Boulevard (rather than exercise its option) for a period beyond 770 lease expiration date (November 30, 1999), Gymboree must and will be required to extend the 770 lease for same period so both lease terms are coterminous. Any required extension on the 770 lease will be for no longer than November 30, 2004. Rent Credit (with option thru November 30, 2004 (60 MO): $125,000.00 If the full five year option is exercised, Landlord will reimburse Gymboree $125,000.00 for its original tenant improvements. Reimbursement will be in the form of a rent credit to be taken beginning on first day of option period until fully recaptured. Rent Credit (with required lease extension thru September 30, 2003 (46 MO): $95,000.00 If there is a less than five full year lease renewal, Landlord will reimburse Gymboree $95,000.00 for its original tenant improvements. Reimbursement will be in the form of a rent credit to be taken beginning on first day of option period until fully recaptured. Rent Credit (with required lease extension through date TBD): NONE X-Reference 700 Airport Boulevard Lease: 700 Airport Boulevard Lease expires September 30, 1998. Gymboree has 1 five year option to renew which would extend lease through September 30, 2003. Tenant must exercise option by giving notice not later than 180 days = March 1, 1998. Rental rate to be FMV as agreed upon by the parties. - ------------------------------------------------------------------------------ Internal Calendar Dates: 1st calendar date October 1, 1997 (budget and notify Jim Curley) 2nd calendar date January 1, 1998 3rd calendar date February 1, 1998 NOTICE TO BOTH LLs BY March 1, 1998 - ------------------------------------------------------------------------------ 2 RENT: INITIAL TERM: December 1, 1996 - November 30, 1997 Calculated at a rate of $0.65 PSF per month $198,000/YR $16,500/MO ("First Year's Rent") December 1, 1997 - November 30, 1998 First Years Rent as increased by CPI with a minimum increase of 3% and a maximum increase of 5% ("Second Year's Rent") December 1, 1998 - November 30, 1999 Second Year's Rent as increased by CPI with a minimum increase of 3% and a maximum increase of 5% OPTION TERM: December 1, 1999 - November 30, 2004 Calculated at a rate of $0.95 PSF per month $291,589.00/YR $24,299/MO Thereafter, Rent shall be increased each year by application of CPI with a minimum increase of 3% and a maximum increase of 5%. *Rent same rate for less than 5 year option and/or an automatic renewal TRIPLE NET EXPENSES/ADDITIONAL RENT: Gymboree will pay LL property taxes and property insurance monthly (estimates to be reconciled by LL year end). Property taxes and insurance estimated to be $0.068 PSF per month or $1,739/MO. Gymboree will arrange for and pay for all sewer, water, telephone, utilities, garbage, all HVAC costs, window washing, and all outside landscaping maintenance costs, and any other costs related to services in the premises and keeping the exterior areas including the parking lot maintained and in good order. ASSIGNMENT - Gymboree can assign/sublet to subsidiary or affiliate without LL's prior consent. If assignment to an unrelated third party, Gymboree must obtain LL prior consent, which consent cannot be unreasonably withheld. If Gymboree gets "excess" rent from assignee/sublessee, excess split 25%LL/75% Gymboree. BUILDING SIGN: Gymboree can remove Purdy Building sign or signs and replace with Gymboree sign--subject to LL approval not to be unreasonably withheld RENT PAYMENT ADDRESS: Burlingame Shore Investments 2151 Irving Street, Room 201 San Francisco, CA 94122 ATTN: Martin Lin, General Partner SECURITY DEPOSIT: $16,500.00 3 OFFICE LEASE dated this 11th day of October 1996 by and between BURLINGAME SHORE INVESTMENTS, a California General Partnership, as landlord ("Landlord") and THE GYMBOREE CORPORATION a Delaware corporation, as tenant ("Tenant") for the Premises located at 770 Airport Boulevard Burlingame, California 1 4 LEASE SUMMARY This page is for the convenience of the parties and summarizes the principal terms of the lease. It is not part of the lease and does not alter or define any of the terms of the lease. BUILDING: The building in which the Premises are located is 770 Airport Boulevard, in the City of Burlingame, State of California. PREMISES: Tenant is the single tenant in the Building and the Premises consists of approximately 25,578 square feet as outlined in Exhibit A. TENANT: The Tenant is The Gymboree Corporation, a Delaware corporation. TERM: Three (3) years beginning December 1, 1996 and expiring November 30, 1999 with an option to extend for an additional five (5) years beginning December 1, 1999 and expiring November 30, 2004. EARLY OCCUPANCY: Tenant's early occupancy of the Premises is rent free beginning October 1, 1996 and continuing through and until November 30, 1996. RENT: December 1, 1996 - November 30, 1997, Tenant's Annual Rent shall be $198,000.00 ("First Year's Rent") with monthly installments due and payable in the amount $16,500.00 per month; December 1, 1997 - November 30, 1998, Tenant's Annual Rent shall be Tenant's First Year Rent, as increased by CPI (as defined in the Lease) with a minimum increase of three percent (3%) and a maximum increase of five (5%) ("Second Year's Rent"); and December 1, 1998 - November 30, 1999, Tenant's Annual Rent shall be Tenant's Second Year's Rent, as increased by CPI with a minimum increase of three percent (3%) and a maximum increase of five (5%). TRIPLE NET CHARGES; Tenant shall pay Landlord's costs associated with Building Property Taxes and Insurance and Landscaping. Tenant's Triple Net Expenses are estimated to be $0.068 PSF per month or $1,739.00 per month. LANDLORD'S RENT PAYMENT ADDRESS: Burlingame Shore investments 2151 Irving Street, Room 201 San Francisco, CA 94122 ATTN: Martin Lin, General Partner SECURITY DEPOSIT: $16,500.00 2 INITIAL [SIG] 5 OFFICE LEASE THIS LEASE ("Lease") is made and entered into by and between BURLINGAME SHORE INVESTMENTS, a Cal. General Partnership ("Landlord") and THE GYMBOREE CORPORATION, a Delaware corporation ("Tenant") and dated as of this 11th day of October, 1996. 1. PREMISES/TERM/USE PREMISES. Subject to the terms and conditions of this Lease, Landlord hereby leases premises to Tenant, and Tenant hereby rents and accepts premises from Landlord pursuant to the terms of this Lease. The "Premises" are approximately 25,578 square feet of space in the building located at 770 Airport Boulevard, Burlingame, California (the "Building"), as shown on the Site Plan attached hereto and marked Exhibit "A". TERM. The term of this Lease (the "Term") shall be three (3) years, commencing on December 1, 1996 ("Commencement Date") and expiring November 30, 1999 ("Expiration Date"). SEE ADDENDUM OPTION. Tenant shall have an option (the "Option") to extend the Term under the provisions of Exhibit "B". USE. Tenant shall use the Premises for general business offices uses. 2. RENT RENT. Tenant shall pay Landlord, without offset or deduction, monthly rent ("Rent") commencing on the Commencement Date. Payment of monthly installments shall be made at the office of Landlord, in advance for the following month, on the first day of each and every month until the end of the Term, in the amounts as follows: 1) For the period beginning December 1, 1996 and continuing through and until December 30, 1997, Tenant's Annual Rent shall be $198,000.00 ("First Year's Rent") with monthly installments due and payable in the amount $16,500.00 per month. 2) For the period beginning December 1, 1997 and continuing through November 30, 1998, Tenant's Annual Rent shall be Tenant's First's Year Rent, as increased by CPI (as defined in the Lease) with a minimum increase of three percent (3%) and a maximum increase of five (5%) ("Second Year's Rent"). 3) For the period beginning December 1, 1998 and continuing through November 30, 1999, Tenant's Annual Rent shall be Tenant's Second Year's Rent, as increased by CPI with a minimum increase of three percent (3%) and a maximum increase of five (5%). For purposes of this Lease, "CPI" shall mean The Consumer's Price Index for Urban Consumers. All Items (Base year 1982-1984 = 100) published by the U.S. Department of Labor, Bureau of Labor Statistics, All City Average (U.S. City Average being San Francisco-Oakland-San Jose, CA). If the Consumer's Price Index shall be discontinued or no longer published, Landlord shall designate a comparable non-partisan substitute price index or formula and such substitute index or formula shall have the same effect as if it had been originally designated herein. 3. TRIPLE NET CHARGES Tenant shall pay Landlord's Real Estate Taxes (as defined below and estimated to be $14,942.00 per year), Landlord's Insurance Premiums (as defined below and estimated to be $5,927.00 per year), such costs hereinafter collectively referred to as Tenant's Triple Net Expenses. Tenant's Triple Net Expenses are initially estimated to be $0.068 PSF per month. [EXPENSES SUBJECT TO REVIEW BY GYMBOREE PRIOR TO EXECUTION OF THIS LEASE] 3 INITIAL [SIG] 6 REAL ESTATE TAXES: Tenant shall pay the real estate taxes associated with the Premises and the Building. Real Estate Taxes shall mean any taxes levied with respect to the land and the Building. Real Estate Taxes shall not include Landlord's federal or state income, franchise, inheritance or estate taxes or any unpaid taxes or penalties assessed prior to Tenant's Commencement Date. Tenant shall not be responsible for any real property taxes covering any period of time prior to or after the Lease Term. Tenant shall not be required to pay increases to the real property taxes if such increases occurred due to a reassessment of the Building from a sale or other transfer occurring after the Commencement Date. INSURANCE PREMIUMS. Landlord shall at all times during the Term, maintain a policy or policies of insurance covering loss of or damage to the Building and the Premises in the full amount of its replacement value. Such policy shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (All Risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary or appropriate. Specific policy terms are described on attached Exhibit D. Tenant shall pay the premiums for the insurance policy which are applicable to the policy period in effect as of the Commencement Date. Landlord's insurance coverage shall not include insurance against earthquake damage. BUILDING LANDSCAPING COSTS: SEE ADDENDUM Tenant shall not be responsible for any Landscaping Costs covering any period of time prior to or after the Lease Term. 4. PERSONAL PROPERTY TAXES. Tenant shall be liable for and shall pay before delinquency all taxes, and penalties and interest thereon, if any, levied against Tenant's furniture, trade fixtures and equipment, and any other personal property of Tenant situated or installed in and upon the Premises. For the purpose of determining the amount of such taxes, figures supplied by the county assessor's office or other taxing authority as to the amount thereof shall be conclusive. 5. UTILITIES Tenant shall arrange for and pay to the appropriate supplier, the cost of all gas, heat, light, power, sewer service, telephone, water, refuse disposal and all costs of heating, ventilation, and air conditioning (including repair and maintenance of any HVAC systems and equipment), and other utilities and services required to be supplied to the Premises. 6. CONDITION OF THE PREMISES SEE ADDENDUM DUE DILIGENCE. Notwithstanding the full execution of this Lease, Tenant shall have a period of twenty (20) days from the date of full execution to conduct due diligence with regard to the Building and the Premises. Should any defect be discovered that would materially alter the obligations of the parties under this Lease such that it cannot be cured or resolved satisfactorily by the parties hereto within the twenty (20) day period, and/or which will result in additional unanticipated or unforeseen costs to Tenant, then Tenant shall have the right to terminate this Lease by written notice to Landlord within said twenty (20) day period. SEE ADDENDUM. 4 INITIAL [SIG] 7 7. QUIET ENJOYMENT Tenant, upon keeping, observing and performing all of the covenants and agreements of this Lease, Tenant shall lawfully and quietly hold, occupy and enjoy the Premises during the term of this Lease, subject, however, to the covenants, agreements, terms, provisions and conditions of this Lease and to underlying mortgages to which this Lease is subject and subordinate. 8. MAINTENANCE AND REPAIR SEE ADDENDUM LANDLORD'S OBLIGATIONS. Landlord shall make all repairs, restorations and replacements as and when needed to those portions of the Building which are not required to be made by Tenant, limited to the structural portions of the exterior walls, roof and foundation of the Building (excluding windows, doors, and glass), of the Building and all building systems that bring services to the Building (i.e. gas and sewer lines, underlying pipes and electrical lines). LANDLORD'S REQUIRED REPAIRS. If Landlord should be in default in the performance of any of its obligations under this Lease, which default continues for a period of more than thirty (30) days and continues beyond the time reasonably necessary to cure, Tenant may at is option upon written notice, incur any expense necessary to perform the obligations of Landlord specified in such notice and bill Landlord for the costs thereof. Landlord shall reimburse Tenant for the costs so billed within fifteen (15) days after receipt of the billing. Nothing herein shall be deemed a waiver by Tenant of any remedy available to Tenant at law, in equity or in this Lease. 9. TENANT'S ALTERATIONS NO LIENS. Tenant will keep the Premises free and clear of all mechanic's liens, and other liens on account of work done for Tenant or persons claiming under it. Tenant shall indemnify and hold Landlord harmless against any liability, loss, damage, costs or expenses, including attorney's fees, on account of any claims of any nature whatsoever relating to Tenant Alterations, including claims of liens of laborers or material persons or others for work performed for, or materials or supplies furnished to Tenant or persons claiming under Tenant. TENANT FIXTURES AND OTHER PROPERTY. All built-in furniture, cabinetwork, movable business and trade fixtures and equipment installed by Tenant may be removed by Tenant at the termination of this Lease if Tenant so elects, and shall be so removed if required by Landlord, or if not so removed shall, at the option of Landlord, become the property of Landlord. All such removals and restoration shall be accomplished in a good and workmanlike manner so as not to damage the Premises or the Building. 10. ASSIGNMENT AND SUBLETTING PROHIBITION OF ASSIGNMENT AND OTHER TRANSFERS. Tenant shall not, except as otherwise provided herein without the prior written consent of Landlord, which consent shall not be unreasonably withheld, assign or sublet all or any part of the Premises. The consent of Landlord to any assignment, other transfer or sublease of this Lease shall not relieve Tenant of the obligation to obtain such consent to any further assignment or other transfer. PROPOSED ASSIGNMENT AND SUBLEASES. If Tenant desires to assign or sublease this Lease or any part hereof, then at least thirty (30) days, but not more than one hundred eighty (180) days, prior to the date when Tenant desires the assignment or sublease to be effective (the "Transfer Date"), Tenant shall give Landlord a Notice (the "Assignment Notice") which shall set forth the name, address and business of the proposed assignee or sublessee, the Transfer Date, information (including references) on the credit and financial condition of the proposed assignee or sublessee and such other material as Landlord shall reasonably require. Landlord shall within ten (10) days following the Assignment Notice with all required information notify Tenant in writing that Landlord elects (a) either to disapprove the proposed 5 INITIAL [SIG] 8 assignee or sublessee; or (b) to terminate this Lease as to the space so affected as of the date so specified by Tenant, in which event Tenant will be relieved of all further obligation hereunder as to such space (unless Tenant upon Landlord's notification to terminate this Lease, revokes its Assignment Notice, in which case Landlord shall not be permitted to terminate the Lease hereunder); or (c) to permit Tenant to assign or sublet such space to the proposed assignee of sublessee. If Landlord should fail to notify Tenant in writing of such election within said thirty (30) day period, Landlord shall be deemed to have elected to approve the proposed assignee or sublessee. If the Rent agreed to by Tenant and its subtenant or assignee is greater than the Rent payable under this Lease, 25% of excess Rent, after Tenant shall have recovered therefrom its costs for tenant improvements paid by Tenant for the benefit of the assignee or sublessee and the amount of any leasing commissions incurred by Tenant in connection with the assignment or sublease shall be paid to Landlord at the same time and in the same manner as the Rent. TENANT TO REMAIN LIABLE. Notwithstanding any assignment or subletting, Tenant shall at all times remain fully responsible and liable for the payment of all Rent under this Lease and for compliance with all of Tenant's other obligations under this Lease, unless otherwise agreed upon by the parties. ASSIGNMENT TO AFFILIATES AND SUCCESSORS. Tenant shall not require Landlord's approval or prior consent for a proposed assignee or sublessee which is a subsidiary or other affiliate of Tenant, or is a corporation into which Tenant is merged, with which Tenant is consolidated or which acquired all or substantially all of the assets of Tenant. LANDLORD'S ASSIGNMENT. Landlord may sell, transfer, mortgage, encumber or assign the Building or this Lease. Within twenty (20) days after request by Landlord, upon such sale, transfer, mortgage, encumbrances or assignment, by Landlord, Tenant shall execute, acknowledge and deliver a certificate ("Estoppel Certificate") certifying the capacity of the person executing such certificate and that such person is dully authorized to execute it on behalf of Tenant; the commencement date of this Lease and the date upon which the Term expires; that this Lease is unmodified and in full force and effect (or if modified, in full force and effect as modified); that Landlord is not in default thereunder, that there are no defenses or offsets thereto known to Tenant (if such be the case); and the date to which Rent has been paid. II. USE OF THE PREMISES LEGAL USE AND VIOLATIONS OF INSURANCE COVERAGE. Tenant shall use the Premises in a careful, safe and proper manner and shall not occupy or use, or permit any portion of the Premises to be occupied or used, for any business or purpose which is unlawful or deemed to be disreputable in any manner, or extra hazardous on account of fire. 12. INDEMNITY/LIABILITY INDEMNITY BY TENANT. Tenant shall indemnify, defend, protect, and hold harmless Landlord from and against any and all claims, losses, proceedings, damages, causes of action, liability, costs and expenses (including attorney's fees) arising from or in connection with, or caused by any act, omission or negligence of Tenant or any sublessee of Tenant, or their respective contractors, licensees, invitees, agents, or employees, on or about the Premises or the Building, or any breach or default in the performance of any obligations on Tenant's part to be performed under the terms of this Lease. Nothing contained herein however shall be construed as excusing Landlord, its agents and employees from liability for its negligence or intentional misconduct. LANDLORD NOT LIABLE. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the good, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers, contractors, workers, or any other person in or about the Premises, nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air-conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Premises. Landlord shall not be liable or responsible for any injury, loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition, on order of governmental body of authority, or other matter beyond the control of Landlord. Nothing contained herein however shall be construed as excusing Landlord, its agents and employees from liability for its negligence or intentional misconduct. INITIAL [SIG] 6 9 MUTUAL RELEASE AND WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive, and release the other from any claim or liability for damage to such party's property occurring during the Term which is covered by insurance. Each party shall cause the property hazard insurance carried by it, with respect to the Building, the Premises or such party's other property located therein, to be endorsed, if necessary, to prevent any invalidation of such insurance by reason of the waivers and releases contained in this Section, provided such endorsement can be obtained at no cost. If additional costs are involved, the party carrying such insurance shall give the other party the opportunity to apply for such endorsement. TRANSFER OF OWNERSHIP. Upon the sale or transfer of the Building, the obligations and duties of the Landlord selling or transferring the Building under the Lease shall terminate, except as to liabilities that shall have accrued prior to the transfer or which are the result of the conduct of that Landlord. 13. ACCESS FOR REPAIRS Landlord and Landlord's agents shall have the right to enter the Premises at all reasonable hours to perform maintenance, repairs, and improvements as Landlord may deem necessary or desirable for the safety, improvement or preservation of the Premises or the Building, without such acts constituting an eviction of Tenant in whole or in part or entitling Tenant to any abatement of rent by reason of loss or interruption of business of Tenant, or otherwise. Excepting emergencies, any entry by Landlord under this Section shall be made only after such notice as is reasonable under the circumstances of the entry and made in a manner that shall not unreasonably interfere with Tenant's business. 14. FIRE OR OTHER CASUALTY MAJOR CASUALTY. If the Building shall be damaged by fire or other casualty so as to render thirty three percent (33%) or more of the Premises untenantable, and if the damage is such that an architect selected by Landlord shall certify in writing to Landlord that the Building cannot be repaired and fully restored within one hundred eighty (180) days from the date of the occurrence of the fire or other casualty, or if insurance proceeds are not made available to Landlord for repair of such damages, then, in either event, this Lease may be terminated by Landlord or Tenant as of the date of the occurrence of the fire or other casualty by giving written notice to the other party of such termination within thirty (30) days after receipt of the architect's certification. Upon such notice of termination, Tenant shall surrender to Landlord the Premises and all interest therein under this Lease, Landlord and Tenant shall be free and discharged from all obligations arising under this Lease after the date of such termination. If, however, the damage is such that Landlord's architect shall certify that the Building can be repaired within the one hundred and eighty (180) days the date of the occurrence happening of the fire or other casualty, and insurance proceeds are made available to Landlord for repair of such damage, then Landlord shall, with reasonable promptness, repair the damage except that Landlord shall not be required to repair, replace or restore any items which Tenant is obligated to repair or replace. Unless and until the Building is repaired and the Premises is restored to a condition such that Tenant can begin its restoration work, Rent and all other expenses, including Triple Net Expenses, shall be abated in proportion to the part of the Premises which is unusable by Tenant in the reasonable conduct of its business or profession. Notwithstanding anything in the Lease to the contrary, Tenant shall at its option have the right to terminate this Lease notwithstanding the amount of time it may take Landlord to rebuild or the availability of insurance proceeds in the event (i) there is Major Damage (meaning more than fifty percent (50%) or more the Building is damaged) or if (ii) there is damage to the Building in excess of thirty three percent (33%) and such damage occurs during the last two years of the term. Tenant shall exercise its right to terminate upon thirty (30) days notice to Landlord and the Lease shall be terminated effective as of the date of the occurrence of the casualty. 15. CONDEMNATION CONDEMNATION. Upon any taking under the power of eminent domain, or sale under threat of the exercise of said power ("Condemnation") of the whole or a substantial part of the Building, the Premises or the parking area that shall substantially interfere with Tenant's use and occupancy of the balance thereof, this Lease shall, at the election of either Tenant or Landlord exercised by either party giving written notice to the other of such termination, terminate as of the date the condemning authority takes title or possession, whichever first occurs. Nothing herein however shall prevent Tenant from prosecuting claims in connection with condemnation proceeding for the value of its interest. 7 10 Restoration After Partial Taking. If there is Condemnation which does not result in a termination of this Lease, Landlord shall, to the extent of any funds received from the condemning authority for repair or restoration, restore the Building substantially to the condition prior to such partial Condemnation and, thereafter, Rent shall be abated in the proportion which the square footage of the part of the Premises so made unusable bears to the amount of square footage immediately prior to the Condemnation. No temporary taking of a part of the Premises or of the Building shall give Tenant any right to terminate this Lease or to any abatement of Rent. 16. HOLDOVER If Tenant or any person claiming through or under Tenant is in possession of any part of the Premises after the expiration of the Term, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and not a renewal of this Lease or an extension for any further term, and such month-to-month tenancy shall be subject to each and every term, covenant and agreement contained herein. SEE ADDENDUM. 17. INSURANCE Tenant's Insurance - Liability. Tenant shall keep in force with respect to the Premises and Tenant's business and other activities a policy of commercial general liability insurance providing coverage of not less than $2,000,000.00 naming Landlord as an additional insured. Tenant's Insurance - Property. Tenant shall carry and maintain a policy of insurance covering all of Tenant's property: additions or improvements to the Premises in an amount of not less than ninety percent (90%) of the full replacement value. Such policy shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (All Risk), sprinkler leakage and any other perils which Tenant deems reasonably necessary or appropriate. The provisions of this Section will be subject to the provisions of Section 11. Evidence of Insurance. Tenant shall deliver to Landlord policies or duly executed certificates of insurance. Renewals shall be delivered to Landlord at least (10) days prior to the expiration of the respective policy terms. Landlord Not To Insure. Landlord shall have no obligation to carry insurance of any kind on Tenant's goods, furniture or furnishings or other property, and Landlord shall not be obligated to repair any damage thereto or to replace the same except with respect to any damage thereto caused by Landlord's willful misconduct or negligence. 18. DEFAULT The occurrence of any one or more of the events set forth below shall constitute a material default and breach of this Lease by Tenant. Non-Payment of Rent. The failure by Tenant to make any payment of Rent or any other charges as and when due where such failure shall continue for a period of ten (10) days after notice from Landlord that said payment is delinquent. Breach. The failure by Tenant to observe or perform any covenants, conditions or provisions of the Lease to be observed or performed by Tenant, other than the failure to pay Rent and other charges where such failure shall continue for a period of thirty (30) days after written notice from Landlord to Tenant (unless the event of a default is a "curable" default and if Tenant has commenced to cure and is diligently prosecuting to cure following notice from Landlord, Tenant shall not be deemed in default hereunder). 8 11 Insolvency. (a) The making by Tenant of any general arrangement or assignment for the benefit of creditors; (b) Tenant becomes a "debtor" as defined in the Federal Laws of Bankruptcy (unless, in the case of a petition filed against Tenant, the petition is dismissed within sixty (60) days); (c) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within fifteen (15) days; or (d) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within fifteen (15) days without notice. Abandonment. The abandonment of the Premises by Tenant. Remedies. Upon default by Tenant, Landlord shall have the right (i) to terminate the Lease and Tenant's right to possession or (ii) to continue this Lease in full force and effect even though Tenant may have defaulted in its obligations under this Lease. In the event that Landlord elects the remedy provided for in subsection (i) above, then Landlord may recover from Tenant the following: (i) the amount of the unpaid Rent and other charges payable by Tenant under this Lease at the time of termination; (ii) an amount equal to the Rent and other charges reserved and payable under this Lease for the balance of the Lease Term discounted at the discount rate of the Federal Reserve Bank of San Francisco plus one percent (1%) at the time of Tenant's obligation to pay which shall be the date of termination by Landlord; and, (iii) such reasonable amounts as necessary to compensate Landlord for Tenant's failure to perform its obligations under the Lease which in the ordinary course of business are likely to arise therefrom (i.e., cleaning, reletting, altering, repairing, or otherwise preparing the Premises for reletting). Nothing herein shall be deemed to limit Tenant's rights to allege and prove that any such future rental loss could have reasonably been avoided by Landlord. In the event that Landlord elects the remedy provided for in subsection (ii) above, then Landlord may recover from Tenant all damages Landlord may sustain by reason of Tenant's default, and may enforce all other rights and remedies under this Lease provided, however, that Tenant shall have the right, unless Landlord elects to terminate this Lease and Tenant's right to possession of the Premises, to assign this Lease or sublet the entire Premises as provided in this Lease. If Landlord elects to terminate this Lease and Tenant's possession of the Premises, Landlord at any time thereafter may relet the Premises, or any part or parts thereof for a term or terms which may, at Landlord's option, be less than, exceed or equal the period of the remainder of the Lease Term hereof. Landlord shall receive the rents from such reletting and shall apply the same first, to the payment of any indebtedness other than Rent due hereunder from Tenant; second, to the payment of such expenses as Landlord may have incurred in connection with re-entering; and the balance, if any, to the fulfillment of the terms, covenants and conditions of this Lease to be performed by Tenant hereunder, and Tenant hereby waives all claims to the surplus, if any. Landlord shall in no event be liable in any way whatsoever for the failure to relet the Premises or in the event of such reletting for failure to collect the rents reserved thereunder and any such efforts to mitigate damages caused by Tenant's default shall not waive Landlord's rights to recover damages. Landlord is hereby authorized and empowered to make such repairs, alterations, or other preparations for the reletting of the Premises as Landlord shall deem fit, advisable or necessary, without in any way releasing Tenant from any liability under this Lease. If Landlord elects to terminate this Lease and Tenant's possession of the Premises, Landlord and Tenant covenant and agree that Landlord shall have the right to immediately re-enter the Premises by summary proceedings, if necessary, and to dispossess Tenant and all other occupants thereof and to remove and dispose of all property therein or to store such property in a public warehouse or elsewhere at the cost and for the account of Tenant. The parties hereby expressly waive trial by jury in any action, proceeding or counterclaim brought by either party against the other (notwithstanding any statute, rule of law or public policy to the contrary) on any matter not related to negligently caused personal injury or property damage connected with this Lease and further covenant and agree that they shall confirm such waivers in writing at the time of commencement of any such action, proceeding or counterclaim. In the event of any breach or threatened breach by Landlord or Tenant of any of the terms and provisions of this Lease, Landlord and Tenant shall have the right to injunctive and/or declaratory relief as if no other remedies were provided for such breach. INITIAL /s/ H.L. /s/ J.P. 9 12 The rights and remedies herein reserved by or granted to Landlord and Tenant are distinct, separate and cumulative, and the exercise of any one of them shall not be deemed to preclude, waive or prejudice their right to exercise any or all others. Landlord and Tenant hereby expressly waive any right to assert a defense based on merger and agree that neither the commencement of any action or proceeding, nor the settlement thereof nor the entry of judgment therein shall bar Landlord or Tenant from bringing any subsequent actions or proceedings from time to time. Landlord shall in no event be charged with a default in the performance of any obligations under this Lease unless and until Landlord shall have failed to perform such obligations for a period of thirty (30) days (or within such additional time as is reasonably required) to cure any such default after written notice to Landlord by Tenant properly specifying Landlord's failure to perform any such obligations. In the event of any litigation or formal legal proceeding between the parties to this Lease, Landlord and Tenant specifically covenant and agree that the prevailing party in such litigation, including appellate proceedings, shall be entitled to recover, in addition to other damages, full and complete compensation for all court costs, expenses and reasonable attorneys' fees that it may incur in connection with such litigation or proceeding. 19. UNDERLYING MORTGAGES SUBORDINATION. This Lease and the term and estate hereby granted are and shall be subject and subordinate to the lien of each mortgage which may now or at any time hereafter affect Landlord's interest in the Building (an "Underlying Mortgage"). Each holder of each Underlying Mortgage shall have the right, exercisable at such holders' sole option at any time, to cause any of the Underlying Mortgages which such holder owns to be and become subordinate and inferior to the lien and change of this Lease by delivering Notice of such exercise to Tenant. Tenant shall from time to time execute and deliver such instruments as Landlord or the holder of any Underlying Mortgage, may reasonably request to confirm the status of this Lease. ATTORNMENT TO MORTGAGEE. Tenant confirms that if by reason of a default under any Underlying Mortgage the holder of such Underlying Mortgage or its successor or assignee in interest becomes the Landlord hereunder, Tenant shall attorn to, and shall recognize, such holder as Tenant's landlord under this Lease, provided such Underlying Mortgagee has agreed in writing to be bound by the terms and conditions of this Lease. Tenant shall execute and deliver, at any time and from time to time, upon request of Landlord or of the holder of any Underlying Mortgage, and instrument which may be reasonably necessary or appropriate to evidence such non disturbance and attornment. LANDLORD'S DEFAULT. In the event of any act or omission by Landlord which pursuant to this Lease or by law would give Tenant the right to terminate this Lease, Tenant shall not exercise such right unless or until (a) it has given written Notice on such act or omission to the holder of each underlying Mortgage who has previously given Tenant written Notice of the existence of such Underlying Mortgage and (b) a reasonable period of time for remedying such act or omission shall have elapsed following the giving of such Notice. NON-DISTURBANCE. Notwithstanding anything contained in this Section, as a condition to the attornment and subordination obligations set forth in this Section, this Lease and the leasehold estate hereby created shall not be extinguished or terminated or the possession or the right of Tenant (including the rights with respect to enjoyment and removal of Tenant's property) be disturbed so long as this Lease shall be in force and no material default by Tenant exists and the Underlying Mortgagee shall enter into a non-disturbance and attornment agreement at the request of Tenant in form and substance reasonably acceptable to Tenant, Landlord and such Underlying Mortgagee. 10 13 20. PARKING PARKING. Tenant shall have the right to exclusively use for the benefit of its employees the entire parking area, as shown on the Exhibit A. Parking spaces are located on the uncovered surface parking area and there shall be no monthly charge. LANDLORD NOT TO BE LIABLE. Tenant, its agents, employees, customers, business invitees, and all persons using the drives and parking areas do so at their own risk and Landlord shall not be responsible for, or in any way have any obligation or liability for, any damage, loss, theft, or injury to any vehicle or other equipment, any contents thereof or any other personal property or for the death or injury to any person while located in or entering or exiting any portion of the drives and parking areas. Nothing contained herein shall be construed as excusing Landlord from liability for its negligence or intentional misconduct. 21. HAZARDOUS MATERIALS SEE ADDENDUM. TENANT'S REPRESENTATIONS AND INDEMNITY AS TO HAZARDOUS MATERIALS. Tenant represents and warrants that it will not cause or permit the presence, discharge, storage or disposal of any Hazardous Materials on the Premises at any time during the Term. *Except with regard to asbestos which is known to be present and except with regard to asbestos or any other hazardous materials not placed in the Premises or the Building by Tenant, Tenant agrees to indemnify and hold Landlord harmless for costs of any monitoring, testing, removal, cleanup or compliance with the laws of any federal, state or local government having jurisdiction over Hazardous Materials which Tenant has caused or permitted to be present, discharged, stored or disposed at the Premises during the Term. HAZARDOUS MATERIALS DEFINED. "Hazardous Materials", for purposes of this Section 16, means any substances defined as "hazardous substances", "hazardous materials", "hazardous waste", "toxic substances", or related terms by the California Health and Safety Code, or applicable Federal law from time to time. 22. BUILDING NAME/SIGN *Landlord shall not unreasonably withhold its approval as to a building sign that Tenant may wish to place on the Building. *Tenant shall be permitted to remove references to the "Purdy" building and install a Gymboree sign (or signs) sufficient to identify Gymboree as the tenant in the Building. 23. NOTICES Any notice, demand or request provided for or permitted to be given pursuant to this Lease must be in writing and shall be properly given and effective when personally served, when sent by air courier or when deposited in an official depository under the regular care and custody of the United States Mail, addressed as specified below, sent by registered or certified mail, return receipt requested, with postage prepaid. The time period in which a response of any such mailed Notice must be given, however, shall commence to run from the date of receipt on the return receipt of the Notice by the addressee. Rejection or other refusal to accept or the inability to deliver because of change in address of which no Notice was given shall be deemed to be receipt of the Notice. Notices shall be addressed as follows: To Landlord: Burlingame Shore Investments 2151 Irving Street, Room 201 San Francisco, CA 94122 ATTN: Martin Lin, General Partner To Tenant at the Premises or to: THE GYMBOREE CORPORATION 700 Airport Boulevard, Suite 200 Burlingame, CA. 94010 11 14 Notice of change of address shall be given in the same manner as prescribed herein for other Notices. 24. BROKER'S OR AGENT'S COMMISSION Cushman & Wakefield represents the Tenant and CB Commercial represents the Landlord. All commissions shall be payable by Landlord. Landlord agrees to indemnify Tenant and hold Tenant harmless from and against all liabilities and costs and fees arising from any claims by any brokers in connection with this Lease, including without limitation attorneys' fees in connection therewith. 25. GENERAL Place of Performance - Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State of California. Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the Term, then, and in that event, the parties intend that the remainder of this Lease shall not be affected thereby, and it is the parties also intend that in lieu of each clause or provision of this Lease that is illegal, invalid, or unenforceable, there is added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. Successors. Subject to the provisions of this Lease governing assignments and transfers by Landlord and Tenant, respectively, the terms, provisions, covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives. Integration. This Lease and the Exhibits hereto constitute the entire understanding between Landlord and Tenant. All previous conversations, memorandums, and writings pertaining to leasing of the Premises not incorporated or referenced in this Lease are not binding or effective. Any modification hereto must be made by a separate written instrument. No officer, employee or representative of Landlord or of Tenant has the authority to make any representation or promise not already contained herein or made pursuant to the within provisions, and Landlord and Tenant expressly agree that by executing this Agreement, and any other document required herein or caused to be executed hereby that it is not doing so in reliance upon any representation or promise which is not set forth herein. No Waiver. No delay or failure of Landlord in exercising any right, privilege or remedy hereunder or any single or partial exercise of any right, power or privilege shall preclude other or further exercise thereof or the exercise of any other right, power or privilege. Any waiver, permission or consent of any kind by Landlord must be in writing and shall be effective only to the extent provided herein. Attorneys' Fees. If suit is instituted to enforce or construe the terms of this Lease, the prevailing party shall be entitled to recover reasonable costs and attorneys' fees in connection therewith in addition to any other remedy to which it may be entitled. Captions. Captions used in this Lease are for ease of reference only and do not define or limit provisions. Authority. If Tenant is a corporation, partnership, trust, association or other entity, Tenant and each person executing this Lease on behalf of Tenant hereby covenant and warrant that (a) Tenant is duly incorporated or otherwise established or formed and validly existing under the laws of its state of incorporation, establishment or formation, (b) Tenant is duly qualified to do business in California, (c) Tenant has full corporate, partnership, trust, association or other appropriate power and authority to enter into this Lease and to perform all Tenant's obligations hereunder, and (d) each person (and all of the persons if more than one signs) signing this Lease on behalf of Tenant is duly and validly authorized to do so. If Landlord is a corporation, partnership, trust, association or other entity, Landlord and each person executing this Lease on behalf of Landlord hereby covenant and warrant that (a) Landlord is duly incorporated or otherwise established or formed and validly existing under the laws of its state of incorporation, establishment or formation, (b) Landlord is duly qualified to do business in California, (c) Landlord has full corporate, partnership, trust, association or other appropriate power and authority to enter into this Lease and to perform all Landlord's obligations hereunder, and (d) each person (and all of the persons if more than one signs) signing this Lease on behalf of Landlord is duly and validly authorized to do so. 12 15 Submission of Lease. The submission of this Lease to Landlord or Tenant for examination or execution does not constitute a reservation of or option on the Premises or an agreement to lease the Premises or any other space. This Lease shall become effective only upon the execution and delivery of this Lease by Landlord and Tenant. Exhibits. The following Exhibits are part of this Lease and by reference incorporated herein. A -- Site Plan Exhibit D: Existing Insurance Summary B -- Option To Extend Term C -- Tenant Improvements SEE ADDENDUM FOR ADDITIONAL TERMS In witness whereof the parties have executed this Lease as of the date first set forth hereinabove. Landlord: BURLINGAME SHORE INVESTMENTS, a California General Partnership By: Martin Lin ------------------------------ Its: Managing Partner ----------------------------- Tenant: THE GYMBOREE CORPORATION, a Delaware corporation By: Joseph T. Prusko ------------------------------ Its: Vice President ----------------------------- INITIAL /s/ M.L. /s/ J.P. 13 16 EXHIBIT A Site Plan (to be attached by Landlord) To be supplied by Landlord INITIAL /s/ M.L. /s/ J.P. 14 17 EXHIBIT B OPTIONS AND EXTENSIONS OF TERM 1. Five Year Option (through November 30, 2004) Tenant shall have the right to renew this Lease for one (1) additional period of five (5) years. The Option shall be exercised, if at all, by written Notice to Landlord of its exercise of this Option not later than (a) Tenant's exercise of its option for the premises located at 700 Airport Boulevard, or (b) December 1, 1998, whichever shall first occur. Upon exercise of this Option, the Lease shall be extended on the same terms and conditions, except as set forth in paragraph 3 below. 2. Co-Terminating Lease Extension A. In the event that Tenant exercises its option to renew its existing lease for premises located at 700 Airport Boulevard, this Lease shall be automatically extended for a period of three years and ten months and shall terminate on September 30, 2003 so as to be co-terminous with the lease at 700 Airport Boulevard. Tenant shall provide written Notice to Landlord of its exercise of its 700 Airport Boulevard option not later than (a) Tenant's exercise of its option for the premises located at 700 Airport Boulevard, or (b) December 1, 1998, whichever shall first occur. All terms and conditions of this Lease shall remain in effect, except for those terms set forth in paragraph 3 below. B. In the event that Tenant enters into a new lease at 700 Airport Boulevard, or extends its existing lease beyond November 30, 1999 other than by way of exercising the option referred to above, this Lease shall be automatically extended for a period which shall be co-terminous with the lease at 700 Airport Boulevard (as so extended or renewed), but shall not in any event extend beyond November 30, 2004. Tenant shall provide written Notice to Landlord of the consummation of a new lease or lease extension at 700 Airport Boulevard, and the termination date thereof, not later than December 1, 1998. All terms and conditions of this Lease shall remain in effect, except for those terms set forth in paragraph 3 below. 3. Rental and Reimbursement A. Rent: In the event that this lease is extended by virtue of the provisions of Paragraph 1 or Paragraph 2 above, the rent for the extended term shall be calculated at $0.95 PSF per month (or $24,299.00 per month) for the first twelve (12) months of the EXHIBIT B - PAGE 15.1 INITIAL /s/ M.L. /s/ J.P. 18 extended or option term. Thereafter, Rent shall be increased each year by an application of CPI (as defined in the Lease) with a minimum increase of three percent (3%) and a maximum increase of five percent (5%). B. Tenant Improvement Reimbursement: 1) In the event Tenant exercises its five year option to extend under Paragraph 1 above, Landlord shall pay to Tenant the sum of $125,000.00 to compensate Tenant for the cost of the Tenant Improvements initially installed and completed by Tenant ("Tenant Allowance Recapture"). 2) In the event that the term of this Lease is extended pursuant to the provisions of Paragraph 2A. above for a period of three years and ten months, the Tenant Allowance Recapture shall be in the amount of $95,000. In the event the term of this Lease is extended pursuant to the provisions of 2B, the Tenant Allowance Recapture shall be 0. 3) The Tenant Allowance Recapture shall be taken as a credit against monthly Rent then due and payable beginning on the first day of the option or extension period (December 1, 1999) until the total amount is recaptured by Tenant. EXHIBIT 15 - PAGE 15.2 INITIAL /s/ M.L. /s/ J.P. 19 EXHIBIT C TENANT IMPROVEMENTS GENERAL PROVISIONS Tenant generally intends to remodel and make certain upgrades to the interior of the Premises (the "Tenant Improvements"). Tenant shall supply Landlord with the proposed scope of the Tenant Improvements. Tenant represents that it will spend a minimum of $250,000.00 constructing the Tenant Improvements with at least $50,000.00 being allocated to the repair, restoration or replacement of the existing HVAC system or the installation of additional equipment. Tenant shall cause its contractor to perform the work and supply the materials in compliance with the approved plans and to have the work performed diligently and in a first-class workmanlike manner in compliance with applicable laws and codes and with applicable standards of the local Building Code. Prior to construction Tenant's General Contractor shall provide Landlord with a certificate of insurance naming Landlord as an additional insured with general liability and property damage insurance with respect to construction of the improvements of not less than One Million Dollars ($1,000,000.00) combined single limit for bodily injury, death and property damage liability and Workers Compensation in compliance with California law. SEE ADDENDUM, Amendment to Exhibit C INITIAL /s/ M.L. /s/ J.P. 16 20 EXHIBIT D EXISTING INSURANCE SUMMARY COMMON [ ] TRUCK INSURANCE [X] MID-CENTURY INSURANCE [ ] FARMERS INSURANCE POLICY EXCHANGE COMPANY EXCHANGE DECLARATIONS
--------------------------------------------------------------- MEMBERS of FARMERS INSURANCE GROUP OF COMPANIES HOME OFFICE: 4680 WILSHIRE BLVD., LOS ANGELES, CALIFORNIA 90010 1. Named BURLINGTON SHORE INVESTMENT Insured ------------------ Mailing 67 WATERSIDE CIRCLE Prematic Acc't No. Address 96-24-35A 60152-24-28 REDWOOD CITY CA 94065 ------------------ ------------- Agent Policy Number Type of The named insured is an individual [X] Partnership [ ] Corp. Business LESSORS RISK unless otherwise stated: [ ] Joint Venture [ ] Organization (Other than Partnership or Joint Venture) 2. Policy period from 04/23/96 (not prior to time applied for) to 04/23/97 12:01 a.m. Standard Time.
If this policy replaces other coverages that end at noon standard time on the same day this policy begins, this policy will not take effect until the other coverage ends. This policy will continue for successive policy periods as follows: If we elect to continue this insurance, we will renew this policy if you pay the required renewal premium for each successive policy period subject to our premiums, rules and forms then in effect. THIS POLICY CONSISTS OF THE FOLLOWING COVERAGE PARTS FOR WHICH A PREMIUM IS INDICATED. THIS PREMIUM MAY BE SUBJECT TO ADJUSTMENT. Premium After Applicable Discount and Modification Commercial Property Coverage Part $3,419.00 - -------------------------------------------------------------------------------- Commercial General Liability Coverage Part $2,167.00 - -------------------------------------------------------------------------------- Commercial Auto Coverage Part $ - -------------------------------------------------------------------------------- Commercial Crime Coverage Part $ - -------------------------------------------------------------------------------- Commercial Inland Marine Coverage Part $ - -------------------------------------------------------------------------------- Commercial Boiler and Machinery Coverage Part $ - -------------------------------------------------------------------------------- Professional Liability Coverage Part $ - -------------------------------------------------------------------------------- Other $ - ------------------------------------------------------------------------------- TOTAL $ SEE INVOICE ------------------------------- Forms applicable to all Coverage parts IL00171185 565166-ED1 IL00030689 COUNTERSIGNED MAY 30 1996 BY [SIG.] ------------------------------ ------------------------------ (Date) (Authorized Representative) [FARMERS INSURANCE GROUP LOGO] 21 DECLARATIONS [ ] TRUCK INSURANCE [X] MID-CENTURY INSURANCE [ ] FARMERS INSURANCE COMMERCIAL EXCHANGE COMPANY EXCHANGE GENERAL LIABILITY
--------------------------------------------------------------- MEMBERS OF FARMERS INSURANCE GROUP OF COMPANIES HOME OFFICE: 4680 WILSHIRE BLVD., LOS ANGELES, CALIFORNIA 90010 [ ] POLICY [X] COVERAGE PART 1. Named BURLINGTON SHORE INVESTMENT Insured ------------------ Mailing 67 WATERSIDE CIRCLE Prematic Acc't No. Address 96-24-35A 60152-24-28 REDWOOD CITY CA 94065 ------------------ ------------- Agent Policy Number Type of The named insured is an individual [X] Partnership [ ] Corp. Business LESSORS RISK unless otherwise stated: [ ] Joint Venture [ ] Organization (Other than Partnership or Joint Venture) 2. Policy period from 04/23/96 (not prior to time applied for) to 04/23/97 12:01 a.m. Standard Time
This policy replaces other coverages that end at noon standard time on the same day this policy begins, this policy will not take effect until the other coverage ends. This policy will continue for successive policy periods as follows: If we elect to continue this insurance, we will renew this policy if you pay the required renewal premium for each successive policy period subject to our premiums, rules and forms then in effect. - ------------------------------------------------------------------------------- LIMITS OF INSURANCE General Aggregate Limit (Other Than Products-Completed Operations) $2,000,000 Products Completed Operations Aggregate Limit $ Personal & Advertising Injury Limit $1,000,000 Each Occurrence Limit $1,000,000 Fire Damage Limit $ 50,000 ANY ONE FIRE Medical Expense Limit $ 5,000 ANY ONE PERSON _______________________________________________________________ $
- -------------------------------------------------------------------------------- RETROACTIVE DATE (Applies only when Claims - Made form CG 00 02 is attached.) Coverage A of the insurance does not apply to "bodily injury" or "property damage" which occurs before the Retroactive Date, if any. Retroactive Date: (enter Date or "none" if no Retroactive Date applies) - -------------------------------------------------------------------------------- LOCATION OF ALL PREMISES YOU OWN, RENT OR OCCUPY: (Same as mailing address unless otherwise shown) 700 AIRPORT BLVD BURLINGAME CA 94010 - -------------------------------------------------------------------------------- (A) Area (C) Total Cost (M) Admissions (P) Payroll (S) Gross Sales (U) Units (T) Other - ------------------------------------------------------------------------------------------------------------------------------ CLASS PREMIUM 'X' IF ADVANCE PREM (May (C) N CLASSIFICATION CODE BASIS EXPOSURE COVERED RATE be subject to adjustment) - ------------------------------------------------------------------------------------------------------------------------------ [ ] BUILDINGS OR PREMISES - 61211 A 24,500 [X] Premises/Operations 88.435 2,167.00 BANK OR OFFICE - [ ] INCLUDES PROD AND/OR [ ] Products/Completed COMP QPS Operations [ ] Other - ------------------------------------------------------------------------------------------------------------------------------ [ ] Premises/Operations [ ] Products/Completed Operations [ ] Other - ------------------------------------------------------------------------------------------------------------------------------ INCLUDES EXPERIENCE MODIFICATION AND/OR PACKAGE CREDIT IF APPLICABLE. MINIMUM PREMIUM APPLIES - ------------------------------------------------------------------------------------------------------------------------------
ENDORSEMENTS ATTACHED TO THIS POLICY: CG21441185 IL00211185 CG24021185 E0207-ED1 CG21460187 CG21470989 E6036-ED1 CG00011188 IL02700294 Countersigned MAY 30, 1996 By [SIG] ------------------------------ ----------------------------- (Date) (Authorized Signature) [FARMERS INSURANCE GROUP LOGO] 22 COMMON [ ] TRUCK INSURANCE [X] MID-CENTURY INSURANCE [ ] FARMERS INSURANCE PROPERTY EXCHANGE COMPANY EXCHANGE DECLARATIONS --------------------------------------------------------------- [ ] POLICY MEMBERS of FARMERS INSURANCE GROUP OF COMPANIES [X] COVERAGE PART HOME OFFICE: 4680 WILSHIRE BLVD., LOS ANGELES, CALIFORNIA 90010
1. Named BURLINGTON SHORE INVESTMENT Insured ------------------ Mailing 67 WATERSIDE CIRCLE Prematic Acc't No. Address 96-24-35A 60152-24-28 REDWOOD CITY CA 94065 ------------------ ------------- Agent Policy Number Type of The named insured is [X] Partnership [ ] Corp. Business LESSORS RISK an individual less [ ] Joint Venture [ ] Organization (Other than Partnership otherwise stated: or Joint Venture) 2. Policy period from 04/23/96 (not prior to time applied for) to 04/23/97 12:01 a.m. Standard Time
If this policy replaces other coverages that end at noon standard time on the same day this policy begins, this policy will not take effect until the other coverage ends. This policy will continue for successive policy periods as follows: If we elect to continue this insurance, we will renew this policy if you pay the required renewal premium for each successive policy period subject to our premiums, rules and forms then in effect. - ------------------------------------------------------------------------------------------------------- DESCRIPTION OF PREMISES - ------------------------------------------------------------------------------------------------------- LOC.# BLDG.# ADDRESS CONSTRUCTION 001 001 770 AIRPORT BLVD FRAME BURLINGAME CA 94010 - ------------------------------------------------------------------------------------------------------- COVERAGE PROVIDED LIMIT OF COVERED CAUSE OF LOSS(X) COIN- LOC# BLDG# COVERAGE INSURANCE BASIC BROAD SPECIAL SURANCE 001 001 BUILDING $1,249,500 X 90% 001 001 BUSINESS INCOME W/O EXTRA EXP $96,000 X 100% *IF EXTRA EXPENSE COVERAGE, LIMITS ON LOSS PAYMENT - ------------------------------------------------------------------------------------------------------- OPTIONAL COVERAGES. Applicable only when entries are made in the schedule below. - ------------------------------------------------------------------------------------------------------- REPLACEMENT COST(X) PERSONAL INCLUDING LOC# BLDG# AGREED VALUE(X) BUILDING PROPERTY "STOCK" 001 001 X INFLATION GUARD (Percentage) *MONTHLY LIMIT OF *MAXIMUM PERIOD *EXTENDED PERIOD BUILDING PERSONAL PROPERTY INDEMNITY (FRACTION) OF INDEMNITY(X) OF INDEMNITY (DAYS) 4% *Applies to Business Income only - ------------------------------------------------------------------------------------------------------- MORTGAGE HOLDERS - - CHINA TRUST BANK OF CALIFORNIA - - - - - - 22939 HAWTHORNE BLVD - - - - - - TORRANCE CA 90505 - Ln# 122100590 Ln# - ------------------------------------------------------------------------------------------------------- DEDUCTIBLE: $ 500 Exceptions: - ------------------------------------------------------------------------------------------------------- EARTHQUAKE DEDUCTIBLE: - ------------------------------------------------------------------------------------------------------- FORMS APPLICABLE CP00900788 CP02991185 IL02700294 E6036-ED1 CP00101091 CP10301091 CP00321091 COUNTERSIGNED MAY 30, 1996 BY /s/ [SIG] ----------------------------------------- -------------------------------------------- (Date) (Authorized Representative)
23 The endorsement shown below applies only if (so) indicated in the Declarations on the reverse side. Further, it applies only to buildings insured under the Buildings Coverage Form, if any, in your policy. It replaces the Mortgage Holders Conditions. Form 438BFU NS (Rev. May 1, 1942)X LENDER'S LOSS PAYABLE ENDORSEMENT 1. Loss or damage, if any, under this policy, shall be paid to the Payee named in the Declarations of this Policy, its successors and assigns, hereinafter referred to as "the Lender", in whatever form or capacity its interest may appear and whether said interest be vested in said Lender in its individual or in its disclosed or undisclosed fiduciary or representative capacity, or otherwise, or vested in a nominee or trustee of said Lender. 2. The insurance under this policy, or any rider or endorsement attached thereto, as to the interest only of the Lender, its successors and assigns, shall not be invalidated or suspended: (a) by any error, or omission, or change respecting ownership, description, possession or location of the subject of the insurance or the interest therein, or the title thereto; (b) by the commencement of foreclosure proceedings or the giving of notice of any property covered by this policy by virtue of any mortgage or trust deed; (c) by any breach of warranty, act, omission, neglect, or non-compliance with any of the provisions of this policy, including any and all riders now or hereafter attached thereto, by the named insured, the borrower, mortgagor, trustor, vendee, owner, tenant, warehouseman, custodian, occupant, or by the agents of either or any of them or by the happening of any event permitted by them or either of them, or their agents, or which they failed to prevent, whether occurring before or after the attachment of this endorsement, or whether before or after a loss, which under the provisions of this policy of insurance or of any rider or endorsement attached thereto would invalidate or suspend the insurance as to the named insured, excluding herefrom, however, any acts or omissions of the Lender while exercising active control and management of the property. 3. In the event of failure of the insured to pay any premium or additional premium which shall be or become due under the terms of this policy or on account of any change in occupancy or increase in hazard not permitted by this policy, this Company agrees to give written notice to the Lender of such nonpayment of premium after sixty (60) days from and within one hundred and twenty (120) days after due date of such premium and it is a condition of the continuance of the rights of the Lender hereunder that the Lender when so notified in writing by this Company of the failure of the insured to pay such premium shall pay or caused to be paid the premium due within ten (10) days following receipt of the Company's demand in writing therefor. If the Lender shall decline to pay said premium or additional premium, the rights of the Lender under this Lender's Loss Payable Endorsement shall not be terminated before ten (10) days after receipt of said written notice by the Lender. 4. Whenever this Company shall pay to the Lender any sum for loss or damage under this policy and shall claim that as to the Insured no liability therefore exists, this Company, at its option may pay to the Lender the whole principal sum and interest and other indebtedness due or to become due from the insured, whether secured or unsecured (with refund of all interest not accrued), and this Company, to the extent of such payment, shall thereupon receive a full assignment and transfer, without recourse, of the debt and all rights and securities held as collateral thereto. 5. If there be any other insurance upon the within described property, this Company shall be liable under this policy as to the Lender for the proportion of such loss or damage that the sum hereby insured bears to the entire insurance of similar character on said property under policies held by, payable to and expressly consented to by the Lender. Any Contribution Clause included in any Fallen Building Clause Waiver or any Extended Coverage Endorsement attached to this contract of insurance is hereby nullified, and also any Contribution Clause in any other endorsement or rider attached to this contract of insurance hereby nullified except Contribution Clauses for the compliance with which the insured has received reduction in the rate charged or has received extension of the coverage to include hazards other than fire and compliance with such Contribution Clause is made part of the consideration for insuring such other hazards. The Lender upon the payment to it of the full amount of its claim, will subrogate this Company (pro rata with all other insurers contributing to said payment) to all of the Lender's right of Contribution under said other insurance. 6. This Company reserves the right to cancel this policy at any time, as provided by its terms, but in such case this policy shall continue in force for the benefit of the Lender for ten (10) days after written notice of such cancellation is received by the Lender and shall then cease. 7. This policy shall remain in full force and effect as to the interest of the Lender for a period of ten (10) days after its expiration unless an acceptable policy in renewal thereof with loss thereunder payable to the Lender in accordance with the terms of this Lender's Loss Payable Endorsement, shall have been issued by some insurance company and accepted by the Lender. 8. Should legal title to and beneficial ownership of any of the property covered under this policy become vested in the Lender or its agents, insurance under this policy shall continue for the term thereof for the benefit of the Lender but, in such event, any privileges granted by this Lender's Loss Payable Endorsement which are not also granted the insured under the terms and conditions of this policy and/or under other riders or endorsement attached thereto shall not apply to the insurance hereunder as respects such property. 9. All notices herein provided to be given by the Company to the Lender in connection with this policy and this Lender's Loss Payable Endorsement shall be mailed to or delivered to the Lender at its office or branch described in the Declarations of this policy. Approved: Board of Fire Underwriters of the Pacific, California Banker's Association, - Committee on Insurance - 24 POLICY NUMBER 60152-24-28 COMMERCIAL GENERAL LIABILITY THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. LIMITATION OF COVERAGE TO DESIGNATED PREMISES OR PROJECT This endorsement modifies insurance provided under the following: COMMERCIAL GENERAL LIABILITY COVERAGE PART. SCHEDULE PREMISES: 770 AIRPORT BLVD BURLINGAME CA 94010 PROJECT: (If no entry appears above, information required to complete this endorsement will be shown in the Declarations as applicable to this endorsement.) This insurance applies only to "bodily injury," "property damage," "personal injury," "advertising injury" and medical expenses arising out of: 1. The ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises; or 2. The project shown in the Schedule. CG 21 44 11 85 Copyright, Insurance Services Office, Inc., 1984 25 ADDENDUM TO OFFICE LEASE BY AND BETWEEN BURLINGAME SHORE INVESTMENTS, A CALIFORNIA GENERAL PARTNERSHIP, AS LANDLORD AND THE GYMBOREE CORPORATION, A DELAWARE CORPORATION, AS TENANT THIS LEASE ADDENDUM is entered into this 11th day of October, 1996, and modifies and amends the Office Lease between BURLINGAME SHORE INVESTMENTS, a California General Partnership, as Landlord and THE GYMBOREE CORPORATION, a Delaware Corporation, as Tenant. In the event of any inconsistency between the Lease and this Addendum, this Addendum shall prevail. 1. PREMISES/TERM/USE Early Occupancy Date. Tenant shall be permitted to take early occupancy of the Premises on October 1, 1996, except for that portion of the Premises (approximately 500 square feet) currently occupied by an existing tenant on a month to month lease. Upon the expiration of Tenant's Due Diligence (as defined in Paragraph 6 below), or such time within the Due Diligence period that Tenant notifies Landlord in writing of Tenant's unconditional acceptance of the premises and waiver of its right to terminate this Lease under said Paragraph 6, Landlord shall deliver to the existing month to month tenant a written thirty (30) day notice to terminate said tenancy; and thereafter, Tenant shall be permitted to take occupancy of that portion of the Premises immediately upon vacation by the existing tenant. Tenant's early occupancy shall be on all the terms and conditions of this Lease, except that Tenant shall not be required to pay rent or any Triple Net Expenses (as defined below) until December 1, 1996. Tenant shall not be required to pay rent on the 500 square foot portion of the Premises unless and until Tenant has legal possession thereof. 3. TRIPLE NET CHARGES. Building Landscaping Costs: Tenant shall contract for and pay for all Landscaping Costs which shall specifically include the following: Landscape maintenance, repair, and gardening services; all to Landlord's reasonable satisfaction to a standard consistent with the appearance of landscaping in existence at the Commencement Date (currently estimated at a cost of $4,500.00 per year). Payment of Triple Net Charges: Upon the lease term Commencement Date, and commencing at the same time as any rental commences under this Lease, Tenant shall pay said estimated Triple Net Expenses on a monthly basis concurrently with the payment of rent. Tenant shall continue to make Lease2: with CoTerminating Option 1 26 said monthly payments until notified by Landlord of a change thereof. By March 1 of each year Landlord shall be required to give Tenant a statement showing the actual Triple Net Expenses incurred for the prior calendar year, prorated from the lease term Commencement Date. In the event the total of the monthly payments which Tenant has made for the prior calendar year is less than the actual Triple Net Expenses, then Tenant shall pay the difference in a lump sum within ten days after receipt of such statement from Landlord. Thereafter, the monthly payment of Triple Net Expenses shall be calculated and adjusted based on the prior year's experience. Any overpayment by Tenant shall be credited towards the Triple Net Expenses next coming due. 6. CONDITION OF THE PREMISES. Condition of Premises on Delivery. The Premises are rented "as is," except for Landlord's obligation with respect to exterior asbestos, as set forth below. Tenant hereby agrees to accept possession of the premises in its existing condition, and, at Tenant's expense, to make all repairs, improvements, and installations that Tenant may deem necessary for the proper conduct of Tenant's business. Tenant shall notify Landlord in advance of any such work, and shall provide at Landlord's request copies of any plans or specifications therefor. Exterior Asbestos: In the event that Landlord replaces the roof on the Building during the Term or Option period, Landlord shall at that time remove or repair, as required by law, the asbestos located in the exterior areas of the Building (specifically, the parapet sheeting and gray penetration tar). Inspection Reports and Results of Due Diligence. [Add] Tenant shall promptly deliver to Landlord a copy of any inspection reports or results of any due diligence inspections, examinations or studies which relate to or reflect upon the condition of the Premises or the Building which are received by Tenant at any time prior to or during the Term of the Lease. 8. MAINTENANCE AND REPAIRS. Tenant's Obligations. Tenant will, at Tenant's own cost and expense, repair or replace any damage done to the Premises or any part thereof, caused by Tenant or Tenant's agents, employees, invitees or visitors, subject to the provisions of Paragraph 12. Subject to Landlord's Obligations below, any cosmetic or aesthetic modifications, maintenance or repair of the exterior portions of the Premises or the Building (limited to painting, landscaping, and maintenance) shall be Tenant's sole responsibility. Tenant shall be solely responsible for parking lot striping and maintenance and may at Tenant's expense (but shall not be required to) resurface the parking lot in conjunction with such maintenance; provided, however, that in no event shall Landlord be obligated to repave or resurface said parking lot during the Lease Term or Option periods, whether by virtue of Tenant's restriping of the parking lot or otherwise. Tenant shall take reasonable care of the Building and the Premises, including the parking lot and surrounding exterior areas of the Premises, and the fixtures and improvements therein and shall not commit waste thereon or therein. Tenant's Required Repairs. If Tenant should be in default in the performance of any of its Lease2: with CoTerminating Option 2 27 obligations under the terms of this Section 8, which default continues for a period of more than thirty (30) days and continues beyond the time reasonably necessary to cure, Landlord may at its option upon written notice, incur any expense necessary to perform the obligations of Tenant specified in such notice and bill Tenant for the costs thereof. Tenant shall reimburse Landlord for the costs so billed within fifteen (15) days after receipt of the billing. Nothing herein shall be deemed a waiver by Landlord of any remedy available to Landlord at law, in equity or in this Lease. 16. HOLDOVER. [Add] In the event of such a holdover, the monthly Rent payable by Tenant shall be increased to one hundred fifty (150%) percent of the Rent payable by Tenant at the expiration of the Term. Said monthly Rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 21. HAZARDOUS MATERIALS. Landlord's Representations and Indemnity as to Hazardous Materials. Tenant acknowledges that it has been advised that asbestos has been located in the Building and in the Premises. Landlord shall have no responsibility for removal or abatement of such asbestos located in the interior portions of the Premises. Landlord represents and warrants that, to the best of Landlord's knowledge and other than the asbestos described herein, no Hazardous Materials are present on or affect the Premises or the Building, and (other than as pertains to the asbestos described herein) Landlord agrees to indemnify and hold Tenant harmless for costs of any monitoring, testing, removal, cleanup or compliance with the laws of any federal, state or local government having jurisdiction over Hazardous Materials present on or affecting the Premises or the Building. Upon execution of this Lease, Landlord shall deliver to Tenant a copy of any reports or estimates in Landlord's possession concerning said asbestos, consisting of (1) asbestos survey dated May, 1995, and (2) Phase I Environmental Assessment Report dated October 3, 1995. 6. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord a Security Deposit equal to one month's Rent upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant fails to pay any rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within Lease2: with CoTerminating Option 3 28 ten (10) days after written demand therefor, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for herein. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. AMENDMENT TO EXHIBIT C: TENANT IMPROVEMENTS Upon completion of Tenant Improvements, Tenant shall provide Landlord with copies of invoices pertaining to the cost of the Tenant Improvements. Landlord: BURLINGAME SHORE INVESTMENTS a California General Partnership By /s/ MARTIN LIN ------------------------------ Martin Lin Its Managing General Partner Tenant: THE GYMBOREE CORPORATION, a Delaware corporation By /s/ JOSEPH T. PRUSKO ----------------------------- Its Vice President ----------------------------- Lease2: with CoTerminating Option 4
EX-10.13 3 DEFERRED COMPENSATION AGREEMENT 1 EXHIBIT 10.13 The Merrill Lynch Special Non-Qualified Deferred Compensation Plan ARTICLE 1 -- INTRODUCTION 1.1 PURPOSE OF PLAN The Employer has adopted the Plan set forth herein to provide a means by which certain employees may elect to defer receipt of designated percentages or amounts of their Compensation and to provide a means for certain other deferrals of Compensation. 1.2 STATUS OF PLAN The Plan is intended to be "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of Sections 201(2) and 301(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and shall be interpreted and administered to the extent possible in a manner consistent with that intent. ARTICLE 2 -- DEFINITIONS Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context: 2.1 ACCOUNT means, for each Participant, the account established for his or her benefit under Section 5.1. 2.2 ADOPTION AGREEMENT means the Merrill Lynch Special Non-Qualified Deferred Compensation Plan for Select Employees Adoption Agreement signed by the Employer to establish the Plan and containing all the options selected by the Employer, as the same may be amended from time to time. 2.3 CHANGE OF CONTROL means (a) the purchase or other acquisition in one or more transactions other than from the Employer, by any individual, entity or group of persons, within the meaning of section 13(d)(3) or 14(d) of the Securities Exchange Act of 1934 or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 of Securities Exchange Act of 1934) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of the Employer's then outstanding voting securities entitled to vote generally, or (b) the approval by the stockholders of the Employer of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Employer immediately prior to such reorganization, merger or consolidation do not immediately thereafter own more than 50 percent of the combined voting power of the reorganized, merged or consolidated Employer's then outstanding securities that are entitled to vote generally in the election of directors or (c) the sale of substantially all of the Employer's assets. 2.4 CODE means the Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection of the Code includes reference to any comparable or succeeding provisions of any legislation which amends, supplements or replaces such section or subsection. 2.5 COMPENSATION has the meaning elected by the Employer in the Adoption Agreement. 2.6 EFFECTIVE DATE means the date chosen in the Adoption Agreement as of which the Plan first becomes effective. 2.7 ELECTION FORM means the participation election form as approved and prescribed by the Plan Administrator. 2.8 ELECTIVE DEFERRAL means the portion of Compensation which is deferred by a Participant under Section 4.1. 2.9 ELIGIBLE EMPLOYEE means, on the Effective Date or on any Entry Date thereafter, each employee of the Employer who satisfies the criteria established in the Adoption Agreement. 2.10 EMPLOYER means the corporation referred to in the Adoption Agreement, any successor to all or a major portion of the Employer's assets or business which assumes the obligations of the Employer, and each other entity that is affiliated with the Employer which adopts the Plan with the consent of the Employer, provided that the Employer that signs the Adoption Agreement shall have the sole power to amend this Plan and shall be the Plan Administrator if no other person or entity is so serving at any time. 2.11 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to any section or subsection of ERISA includes reference to any comparable or succeeding provisions of any legislation which amends, supplements or replaces such section or subsection. 2.12 INCENTIVE CONTRIBUTION means a discretionary additional contribution made by the Employer as described in Section 4.3. 2.13 INSOLVENT means either (i) the Employer is unable to pay its debts as they become due, or (ii) the Employer is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 2.14 MATCHING DEFERRAL means a deferral for the benefit of a Participant as described in Section 4.2. 2.15 PARTICIPANT means any individual who participates in the Plan in accordance with Article 3. 2.16 PLAN means the Employer's plan in the form of the Merrill Lynch Special Non-Qualified Deferred Compensation Plan for Select Employees and the Adoption Agreement and all amendments thereto. 2.17 PLAN ADMINISTRATOR means the person, persons or entity designated by the Employer in the Adoption Agreement to administer the Plan and to serve as the agent for "Company" with respect to the Trust as contemplated by the agreement establishing the Trust. If no such person or entity is so serving at any time, the Employer shall be the Plan Administrator. 2.18 PLAN YEAR means the 12-month period chosen in the Adoption Agreement. 2.19 TOTAL AND PERMANENT DISABILITY means the inability of a Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, and the permanence and degree of which shall be supported by medical evidence satisfactory to the Plan Administrator. 2.20 TRUST means the trust established by the Employer that identifies the Plan as a plan with respect to which assets are to be held by the Trustee. 2.21 TRUSTEE means the trustee or trustees under the Trust. 2.22 YEAR OF SERVICE means the computation period and service requirement elected in the Adoption Agreement. ARTICLE 3 -- PARTICIPATION 3.1 COMMENCEMENT OF PARTICIPATION Any individual who elects to defer part of his or her Compensation in accordance with Section 4.1 shall become a Participant in the Plan as of the date such deferrals commence in accordance with Section 4.1. 2 Any individual who is not already a Participant and whose Account is credited with an Incentive Contribution shall become a Participant as of the date such amount is credited. 3.2 CONTINUED PARTICIPATION A Participant in the Plan shall continue to be a Participant so long as any amount remains credited to his or her Account. ARTICLE 4 - ELECTIVE AND MATCHING DEFERRALS 4.1 ELECTIVE DEFERRALS An individual who is an Eligible Employee on the Effective Date may, by completing an Election Form and filing it with the Plan Administrator within 30 days following the Effective Date, elect to defer a percentage or dollar amount of one or more payments of Compensation, on such terms as the Plan Administrator may permit, which are payable to the Participant after the date on which the individual files the Election Form. Any individual who becomes an Eligible Employee after the Effective Date may, by completing an Election Form and filing it with the Plan Administrator within 30 days following the date on which the Plan Administrator gives such individual written notice that the individual is an Eligible Employee, elect to defer a percentage or dollar amount of one or more payments of Compensation, on such terms as the Plan Administrator may permit, which are payable to the Participant after the date on which the individual files the Election Form. Any Eligible Employee who has not otherwise initially elected to defer Compensation in accordance with this paragraph 4.1 may elect to defer a percentage or dollar amount of one or more payments of Compensation, on such terms as the Plan Administrator may permit, commencing with Compensation paid in the next succeeding Plan Year, by completing an Election Form prior to the first day of such succeeding Plan Year. In addition, a Participant may defer all or part of the amount of any elective deferral or matching contribution made on his or her behalf to the Employer's 401(k) plan for the prior Plan Year but treated as an excess deferral, an excess contribution or otherwise limited by the application of the limitations of sections 401(k), 401(m), 415 or 402(q) of the Code, so long as the Participant so indicates on an Election Form. A Participant's Compensation shall be reduced in accordance with the Participant's election hereunder and amounts deferred hereunder shall be paid by the Employer to the Trust as soon as administratively feasible and credited to the Participant's Account as of the date the amounts are received by the Trustee. An election to defer a percentage or dollar amount of Compensation for any Plan Year shall apply to subsequent Plan Years unless changed or revoked. A Participant may change or revoke his or her deferral election as of the first day of any Plan Year by giving written notice to the Plan Administrator before such first day or any such earlier date as the Plan Administrator may prescribe. 4.2 MATCHING DEFERRALS After each payroll period, monthly, quarterly or annually, at the Employer's discretion, the Employer shall contribute to the Trust Matching Deferrals equal to the rate of Matching Contribution selected by the Employer and multiplied by the amount of the Elective Deferrals credited to the Participants' Accounts for such period under Section 4.1. Each Matching Deferral will be credited as of the later of the date it is received by the Trustee or the date the Trustee receives from the Plan Administrator such instructions as the Trustee may reasonably require to allocate the amount received among the asset accounts maintained by the Trustee to the Participants' Accounts pro rata in accordance with the amount of Elective Deferrals of each Participant which are taken into account to calculating the Matching Deferral. 4.3 INCENTIVE CONTRIBUTIONS In addition to other contributions provided for under the Plan, the Employer may, in its sole discretion, select one or more Eligible Employees to receive an Incentive Contribution to his or her Account on such terms as the Employer shall specify at the time it makes the contribution. For example, the Employer may contribute an amount to a Participant's Account and condition the payment of that amount and accrued earnings thereon upon the Participant remaining employed by the Employer for an additional specified period of time. The terms specified by the Employer shall supersede any other provision of this Plan as regards Incentive Contributions and earnings with respect thereto, provided that if the Employer does not specify a method of distribution, the Incentive Contribution shall be distributed in a manner consistent with the election last made by the particular Participant prior to the year in which the Incentive Contribution is made. The Employer, in its discretion, may permit the Participant to designate a distribution schedule for a particular Incentive Contribution provided that such designation is made prior to the time that the Employer finally determines that the Participant will receive the Incentive Contribution. ARTICLE 5 - ACCOUNTS 5.1 ACCOUNTS The Plan Administrator shall establish an Account for each Participant reflecting Elective Deferrals, Matching Deferrals and Incentive Contributions made for the Participant's benefit together with any adjustments for income, gain or loss and any payments from the Account. The Plan Administrator may cause the Trustee to maintain and invest separate asset accounts corresponding to each Participant's Account. The Plan Administrator shall establish sub-accounts for each Participant that has more than one election in effect under Section 7.1 and such other sub-accounts as are necessary for the proper administration of the Plan. As of the last business day of each calendar quarter, the Plan Administrator shall provide the Participant with a statement of his or her Account reflecting the income, gains and losses (realized and unrealized), amounts of deferrals, and distributions of such Account since the prior statement. 5.2 INVESTMENTS The assets of the Trust shall be invested in such investments as the Trustee shall determine. The Trustee may (but is not required to) consider the Employer's or a Participant's investment preferences when investing the assets attributable to a Participant's Account. ARTICLE 6 - VESTING 6.1 GENERAL A Participant shall be immediately vested in, i.e., shall have a nonforfeitable right to, all Elective Deferrals, and all income and gain attributable thereto, credited to his or her Account. A Participant shall become vested in the portion of his or her Account attributable to Matching Deferrals and income and gain attributable thereto in accordance with the schedule selected by the Employer in the Adoption Agreement, subject to earlier vesting in accordance with Sections 6.3, 6.4 and 6.5. 6.2 VESTING SERVICE For purposes of applying the vesting schedule in the Adoption Agreement, a Participant shall be considered to have completed a Year of Service for each complete year of full-time service with the Employer or an Affiliate, measured from the Participant's first date of such employment unless the Employer also maintains a 401(k) plan that is qualified under section 401(a) of the Internal Revenue Code in which the Participant participates, in which case the rules governing vesting service under that plan shall also be controlling under this Plan. 6.3 CHANGE OF CONTROL A Participant shall become fully vested in his or her Account immediately prior to a Change of Control of the Employer. 6.4 DEATH OR DISABILITY A Participant shall become fully vested in his or her Account immediately prior to termination of the Participant's employment by reason of the Participant's death or Total and Permanent Disability. Whether a Participant's termination of employment is by reason of the Participant's Total and Permanent Disability shall be determined by the Plan Administrator in its sole discretion. 6.5 INSOLVENCY A Participant shall become fully vested in his or her Account immediately prior to the Employer becoming insolvent, in which case the Participant will have the same rights 3 as a general creditor of the Employer with respect to his or her Account balance. ARTICLE 7 - PAYMENTS 7.1 ELECTION AS TO TIME AND FORM OF PAYMENT. SEE RIDER ATTACHED. A participant shall elect (on the Election Form used to elect to defer Compensation under Section 4.1) the date at which the Effective Deferrals and vested Matching Deferrals (including any earnings attributable thereto) will commence to be paid to the Participant. The Participant shall also elect thereon for payments to be paid in either: a. a single lump-sum payment; or b. annual installments over a period elected by the Participant up to 10 years, the amount of each installment to equal the balance of his or her Account immediately prior to the installment divided by the number of installments remaining to be paid. Each such election will be effective for the Plan Year for which it is made and succeeding Plan Years, unless changed by the Participant. Any change will be effective only for Effective Deferrals and Matching Deferrals made for the first Plan Year beginning after the date on which the Election Form containing the change is filed with the Plan Administrator. Except as provided in Sections 7.2, 7.3, 7.4 or 7.5, payment of a Participant's Account shall be made in accordance with the Participant's election under this Section 7.1 7.2 CHANGE OF CONTROL As soon as possible following a Change of Control of the Employer, each Participant shall be paid his or her entire Account balance (including any amount vested pursuant to Section 6.3) in a single lump sum. 7.3 TERMINATION OF EMPLOYMENT Upon termination of a Participant's employment for any reason other than death and prior to the attainment of the Retirement Age specified in the Adoption Agreement, the vested portion of the Participant's Account (including any portion vested pursuant to Section 6.4 as a consequence of the Participant's Total and Permanent Disability) shall be paid to the Participant in a single lump sum as soon as practicable following the date of such termination; provided, however, that the Plan Administrator, in its sole discretion, may pay out a Participant's Account balance in annual installments if the Participant's employment terminates by reason of the Participant's Total and Permanent Disability. 7.4 DEATH If a Participant dies prior to the complete distribution of his or her Account, the balance of the Account shall be paid as soon as practicable to the Participant's designated beneficiary or beneficiaries, in the form elected by the Participant under either of the following options: a. a single lump-sum payment; or b. annual installments over a period elected by the Participant up to 10 years, the amount of each installment to equal the balance of the Account immediately prior to the installment divided by the number of installments remaining to be paid. Any designation of beneficiary and form of payment to such beneficiary shall be made by the Participant on an Election Form filed with the Plan Administrator and may be changed by the Participant at any time by filing another Election Form containing the revised instructions. If no beneficiary is designated or no designated beneficiary survives the Participant, payment shall be made to the Participant's surviving spouse or, if none, to his or her issue per stirpes in a single payment. If no spouse or issue survives the Participant, payment shall be made in a single lump sum to the Participant's estate. 7.5 UNFORESEEN EMERGENCY If a Participant suffers an unforeseen emergency, as defined herein, the Plan Administrator, in its sole discretion, may pay to the Participant only that portion, if any, of the vested portion of his or her Account which the Plan Administrator determines is necessary to satisfy the emergency need, including any amounts necessary to pay any federal, state or local income taxes reasonably anticipated to result from the distribution. A Participant requesting an emergency payment shall apply for all the payment in writing in a form approved by the Plan Administrator and shall provide such additional information as the Plan Administrator may require. For purposes of this paragraph, "unforeseen emergency" means an immediate and heavy financial need resulting from any of the following: a. expenses which are not covered by insurance and which the Participant or his or her spouse or dependent has incurred as a result of, or is required to incur in order to receive, medical care. b. the need to prevent eviction of a Participant from his or her principal residence or foreclosure on the mortgage of the Participant's principal residence; or c. any other circumstance that is determined by the Plan Administrator in its sole discretion to constitute an unforeseen emergency which is not covered by insurance and which cannot reasonably be relieved by the liquidation of the Participant's assets. See Rider Attached 7.6 FORFEITURE OF NON-VESTED AMOUNTS To the extent that any amounts credited to a Participant's Account are not vested at the time such amounts are otherwise payable under Section 7.1 or 7.3, such amounts shall be forfeited and shall be used to satisfy the Employer's obligation to make contributions to the Trust under the Plan. 7.7 TAXES All federal, state or local taxes that the Plan Administrator determines are required to be withheld from any payments made pursuant to this Article 7 shall be withheld. ARTICLE 8 - PLAN ADMINISTRATOR 8.1 PLAN ADMINISTRATION AND INTERPRETATION The Plan Administrator shall oversee the administration of the Plan. The Plan Administrator shall have complete control and authority to determine the rights and benefits and all claims, demands and actions arising out of the provisions of the Plan of any Participant, beneficiary, deceased Participant, or other person having or claiming to have any interest under the Plan. The Plan Administrator shall have complete discretion to interpret the Plan and to decide all matters under the Plan. Such interpretation and decision shall be final, conclusive and binding on all Participants and any person claiming under or through any Participant, in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously. Any individual(s) serving as Plan Administrator who is a Participant will not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Plan Administrator shall be entitled to rely on information furnished by a Participant, a beneficiary, the Employer or the Trustee. The Plan Administrator shall have the responsibility for complying with any reporting and disclosure requirements of ERISA. 8.2 POWERS, DUTIES, PROCEDURES, ETC. The Plan Administrator shall have such powers and duties, may adopt such rules and tables, may act in accordance with such procedures, may appoint such officers or agents, may delegate such powers and duties, may receive such reimbursements and compensation, and shall follow such claims and appeal procedures with respect to the Plan as it may establish. 8.3 INFORMATION To enable the Plan Administrator to perform its functions, the Employer shall supply full and timely information to the Plan Administrator on all matters relating to the compensation of Participants, their employment, retirement, death, termination of employment, and such other pertinent facts as the Plan Administrator may require. 8.4 INDEMNIFICATION OF PLAN ADMINISTRATOR The Employer agrees to indemnify and to defend to the fullest extent permitted by law any officer(s) or employer(s) who serve 4 as Plan Administrator (including any such individual who formerly served as Plan Administrator) against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the Employer) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith. ARTICLE 9--AMENDMENT AND TERMINATION 9.1 AMENDMENTS The Employer shall have the right to amend the Plan from time to time, subject to Section 9.3, by an instrument in writing which has been executed on the Employer's behalf by its duly authorized officer. 9.2 TERMINATION OF PLAN This Plan is strictly a voluntary undertaking on the part of the Employer and shall not be deemed to constitute a contract between the Employer and any Eligible Employee (or any other employee) or a consideration for, or an inducement or condition of employment for, the performance of the services by any Eligible Employee (or other employee). The Employer reserves the right to terminate the Plan at any time, subject to Section 9.3, by an instrument in writing which has been executed on the Employer's behalf by its duly authorized officer. Upon termination, the Employer may (a) elect to continue to maintain the Trust to pay benefits hereunder as they become due as if the Plan had not terminated or (b) direct the Trustee to pay promptly to Participants (or their beneficiaries) the vested balance of their Accounts. For purposes of the preceding sentence, in the event the Employer chooses to implement clause (b), the Account balances of all Participants who are in the employ of the Employer at the time the Trustee is directed to pay such balances shall become fully vested and nonforfeitable. After Participants and their beneficiaries are paid all Plan benefits to which they are entitled, all remaining assets of the Trust attributable to Participants who terminated employment with the Employer prior to termination of the Plan and who were not fully vested in their Accounts under Article 6 at that time shall be returned to the Employer. 9.3 EXISTING RIGHTS No amendment or termination of the Plan shall adversely affect the rights of any Participant with respect to amounts that have been credited to his or her Account prior to the date of such amendment or termination. ARTICLE 10--MISCELLANEOUS 10.1 NO FUNDING The Plan constitutes a mere promise by the Employer to make payments in accordance with the terms of the Plan and Participants and beneficiaries shall have the status of general unsecured creditors of the Employer. Nothing in the Plan will be construed to give any employee or any other person rights to any specific assets of the Employer or of any other person. In all events, it is the intent of the Employer that the Plan be treated as unfunded for tax purposes and for purposes of Title I of ERISA. 10.2 NON-ASSIGNABILITY None of the benefits, payments, proceeds or claims of any Participant or beneficiary shall be subject to any claim of any creditor of any Participant or beneficiary and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of such Participant or beneficiary, nor shall any Participant or beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds which he or she may expect to receive, contingently or otherwise, under the Plan. 10.3 LIMITATION OF PARTICIPANTS' RIGHTS Nothing contained in the Plan shall confer upon any person a right to be employed or to continue in the employ of the Employer, or interfere in any way with the right of the Employer to terminate the employment of a Participant in the Plan at any time, with or without cause. 10.4 PARTICIPANTS BOUND Any action with respect to the Plan taken by the Plan Administrator or the Employer or the Trustee or any action authorized by or taken at the direction of the Plan Administrator, the Employer or the Trustee shall be conclusive upon all Participants and beneficiaries entitled to benefits under the Plan. 10.5 RECEIPT AND RELEASE Any payment to any Participant or beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Employer, the Plan Administrator and the Trustee under the Plan, and the Plan Administrator may require such Participant or beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. If any Participant or beneficiary is determined by the Plan Administrator to be incompetent by reason of physical or mental disability (including minority) to give a valid receipt and release, the Plan Administrator may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Plan Administrator, the Employer or the Trustee to follow the application of such funds. 10.6 GOVERNING LAW The Plan shall be construed, administered, and governed in all respects under and by the laws of the state in which the Employer maintains its primary place of business. If any provision shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 10.7 HEADINGS AND SUBHEADINGS Headings and subheadings in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof. 5 RIDER TO THE MERRILL LYNCH SPECIAL NON-QUALIFIED DEFERRED COMPENSATION PLAN FIRST: Notwithstanding anything in this Article 7 to the contrary, distribution of a Participant's Account shall be in accordance with the Participant's Election Form in effect at the time of the distribution. If there is no Election Form in effect at the time of the distribution, the provisions of this Article 7 shall apply. SECOND: The following Section 7.5a shall be added to Article 7: "7.5a Voluntary Withdrawal At the request of a Participant, the Plan Administrator may authorize a withdrawal of the Participant's vested Account (including any earnings attributable thereto) provided that as the consequence of making such a withdrawal, (1) Participant shall forfeit an amount equal to ten percent (10%) of the requested withdrawal; and (2) the Participant shall be suspended from making further contributions to the Plan for a period of not less than twelve (12) months following any such withdrawal. The Plan Administrator may establish reasonable procedures and limitations concerning Participants' withdrawal rights pursuant to this Section 7.5a as the Plan Administrator may, in its sole discretion, deem necessary or appropriate or in furtherance of the purposes of the Plan. Distributions pursuant to Participant withdrawal elections under this Section 7.5a shall be made as soon as practicable following the Plan Administrator's receipt of a Participant's written withdrawal election, which election shall be in such form as the Plan Administrator shall prescribe." 6 The Merrill Lynch Special Non-Qualified Deferred Compensation Plan Adoption Agreement Please complete the information requested in the Adoption Agreement to establish the specific provisions of your plan. You do not have to provide a copy to your Financial Consultant. (Only the Merrill Lynch account opening agreements and an original executed copy of the associated Trust Agreement need to be returned to Merrill Lynch at the address printed on those forms.) This document and the Merrill Lynch Special Non-Qualified Deferred Compensation Plan for Select Employees govern the rights of plan participants and should, therefore, be disclosed to participants and retained as part of your permanent records. 1. EMPLOYER INFORMATION A. Name of the Plan: The Gymboree Corporation Deferred Compensation Plan B. Name and Address of employer sponsoring the Plan. Please provide employer's business name. The Gymboree Corporation ------------------------ Business Name 700 Airport Blvd., Suite 200 ---------------------------- Address Burlingame ---------- City California 94010-1912 ---------------------- State Zip Code C. Provide employer's primary contact for the Plan and telephone and FAX numbers. Also include the employer's Tax Identification Number. Janelle Dausch --------------- Primary Contact Benefits Manager ---------------- Title 415-696-7403 ------------ Telephone 415-696-7400 ------------ Fax 94-2615258 ---------------------------------- Employer Tax Identification Number D. Give the first day of the 12-month period for which the employer pays taxes: __________ 2. PLAN INFORMATION A. What is the effective date of the Plan? December 1, 1995 ---------------- B. Plan Year Ends. Your "Plan Year" is the 12-consecutive-month period for which you credit elective and matching deferrals and keep Plan records. Enter the last day of your Plan Year. For example, if you use the calendar year as your plan year, enter "December 31." If you use a different 12-month period - for instance if your business is on a fiscal year - enter the last day of your fiscal year, e.g., "July 31." December 31 ----------- 3. ELIGIBLE EMPLOYEES The following persons or classes of persons shall be Participants (enter the names or positions of individuals eligible to participate or the criteria used to identify Participants, e.g., "Those key employees of the Company selected by the Compensation Committee of the Board of Directors"). Directors (including Regional Directors), Vice Presidents, ------------------------------------------------------------------------ Senior Vice Presidents, the President, Members of the Board of Directors ------------------------------------------------------------------------ 4. COMPENSATION Compensation is used to determine the amount of Elective Deferrals a Participant can elect. Compensation under the Plan is defined as (select one): [ ] the Participant's wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer or an Affiliate to the extent that the amounts are includable in gross income, including but not limited to commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements, and expense allowances, but not including those items excludable from the definition of compensation under Treas. Reg. section 1.415-2(d)(3). [ ] the regular or base salary payable to the individual by the Employer or an Affiliate, excluding commissions and bonuses. [XX] the cash compensation payable to the individual by the Employer or an Affiliate, including any commissions and bonuses. [ ] the cash bonuses payable to the individual by the Employer or an Affiliate. For purposes of the Plan, Compensation will be determined before giving effect to Elective Deferrals and other salary reduction amounts which are not included in the Participant's gross income under Code section 125.401(k), 402(h) or 403(b). 5. CONTRIBUTIONS A. Elective Deferrals. Participants may elect to reduce their Compensation and to have Elective Deferrals credited to their Accounts by making an election under the Plan (which may be changed each year for later Plan Years as described in the plan), but no Participant may defer more than 100% (1%-100%) of his or her Compensation for a Plan Year. B. Matching Deferrals. If the Employer elects to match Elective Deferrals, specify the matching rate and indicate the amount of the Participant's Elective Deferrals that will be matched. You may also elect to decide each year whether Matching Deferrals will be made and, if so, what that year's matching rate will be. For example, the Employer may decide to credit a Matching Deferral of, for example, 50 cents for each dollar of a Participant's Elective Deferrals, but limit the match to the first 5% of Compensation deferred by the Participant. If you want to set a maximum dollar amount on the amount of Elective Deferrals that will be matched, insert the dollar amount and interval over which that amount is to be measured. For example, you could say that you will not match Elective Deferrals in excess of $1,000 per month. Matching Deferrals can be made after each payroll period, monthly, quarterly, or annually, at the Employer's discretion. Matching Deferrals will be subject to the vesting schedule selected in Item 6A (select one): [XX] No Matching Deferrals will be credited. [ ] The Employer will credit Matching Deferrals for each Participant equal to ____% of the first ____% of the Participant's Compensation which is elected as an Elective Deferral, but no Matching Deferral will be made on Elective Deferrals in excess of $______ per (specify time period if applicable). ______________________________________________________________________________ [ ] The Employer will decide from year to year whether Matching Deferrals will be made and will notify Participants annually of the manner in which Matching Deferrals will be calculated for the subsequent year. 7 C. Discretionary Incentive Contributions. The Employer may make Discretionary Incentive Contributions in any amounts the Employer selects. These contributions will be subject to the vesting schedule selected in Item 6C. The Employer will make Discretionary Incentive Contributions under the Plan. [ ] yes [X] no 6. VESTING OF MATCHING DEFERRALS AND DISCRETIONARY INCENTIVE CONTRIBUTIONS A. Vesting Schedule for Matching Deferrals. Indicate how the portion of a Participant's Account attributable to Matching Deferrals is to vest. Matching Deferrals vest in accordance with the following schedule (select one): [ ] 100% immediate. [ ] 100% after _______ years of service. [ ] 20% after _______ years of service and an additional 20% for each year thereafter. [ ] Other vesting schedule (specify): - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- B. Vesting Service. Indicate whether you will give credit for vesting service for time spent with a predecessor employer, and if so, specify the maximum number of years and the type of predecessor service for which credit will be given. For vesting purposes (select one): [ ] Service with a predecessor employer will not be considered. [ ] Service (up to a maximum of ______ years) with the following employer(s) will be considered: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- C. Vesting Schedule of Discretionary Incentive Contributions. Indicate how the portion of a Participant's Account attributable to Discretionary Incentive Contributions is to vest. Unless otherwise specified by the Employer at the time a Discretionary Incentive Contribution is made, Discretionary Incentive Contributions vest in accordance with the following schedule (select one): [ ] 100% immediate. [ ] 100% after _____ years of service. [ ] 20% after _____ years of service and an additional 20% for each year thereafter. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 7. ACCOUNTS The Trustee can either invest each Participant's Account balance as a separate account (in which case the Trustee, could, but would not be required to, take into consideration the investment preferences of the Participants) or invest the Account balances of all Participants as a single fund (in which case the Trustee could, but would not be required to, take into consideration the investment preference of the Employer) (select one): [X] Account balances are to be invested separately. [ ] Account balances are to be invested as a single fund. 8. RETIREMENT AGE The Retirement Age under the Plan is age 60. A Participant terminating employment before Retirement Age for reasons other than death or Total and Permanent Disability will not be entitled to receive any installment payments elected on the Election Form. See Rider Attached 9. WITHDRAWALS WHILE WORKING Withdrawals for Unforeseen Emergency. If you check the first box, Participants may make withdrawals while working in the event they encounter an unforeseen emergency. They generally can withdraw the vested portion of their Accounts. NOTE: Withdrawals are strictly limited as described in Plan Section 7.5. It is the Plan Administrator's responsibility to ensure that the limits are being followed. Excess withdrawals may result in loss of the tax deferral on all amounts credited under the Plan for the benefit of all Participants. Withdrawals of the vested portion of a Participant's Account for unforeseen emergencies (select one): [X] Are permitted to the full extent allowable under the plan. [ ] Are not permitted. See Rider Attached 10. ADMINISTRATION Plan Administrator. The Plan Administrator is legally responsible for the operation of the Plan, including: o Keeping track of which employees are eligible to participate in the Plan and the date each employee becomes eligible to participate. o Maintaining Participants' Accounts, including all sub-accounts required for different contribution types and payment elections, and keeping track of all elections made by Participants under the Plan and any other relevant information. o Transmitting important communications to the Participants, and obtaining relevant information from Participants such as changes in investment selections. o Filing important reports required to be submitted to governmental agencies. The Plan Administrator will be the person or persons identified below: Nancy J. Pedot - ----------------------------- Name President and CEO - ----------------------------- Title James P. Curley - ----------------------------- Name Senior Vice President and CFO - ----------------------------- Name - ----------------------------- Name - ----------------------------- Title 11. SIGNATURES After reviewing the Adoption Agreement, enter the current date and the name of the Employer. The signature of the Employer or the person signing for the Employer must be witnessed. Note that the person signing for the Employer must be authorized to do so, such as by a resolution of the Employer's board of directors or governing by-laws. While the Merrill Lynch Special Non-Qualified Deferred Compensation Plan for Select Employees, including this Adoption Agreement, has been designed in a manner to permit Participants to defer federal income tax on amounts credited to their accounts until the amounts are actually paid, neither Merrill Lynch, Pierce, Fenner & Smith Incorporated, the sponsor of this document, nor any of its affiliates ("Merrill Lynch") provide any assurances of that result in the Employer's particular situation or assume any responsibility in this regard. Please consult your tax advisor regarding the tax consequences of this Plan to you and your employees and the advisability of submitting this document to the Internal Revenue Service to obtain a ruling concerning those consequences. In addition, please consult your independent legal counsel with respect to securities law issues. By signing this Adoption Agreement the Employer acknowledges that no representations or warranties as to the tax consequences to the Employer and Participants of the operation of this Plan have been made by Merrill Lynch. THE GYMBOREE CORPORATION - -------------------------------- Name of Employer (Print or Type) James P. Curley, Senior VP, CFO - -------------------------------- Print Name and Title Date: WITNESS: Janelle Dausch - -------------------------------- Signature 8 RIDER TO THE MERRILL LYNCH SPECIAL NON-QUALIFIED DEFERRED COMPENSATION PLAN ADOPTION AGREEMENT FIRST: Notwithstanding anything to the contrary in this Section 8 of The Merrill Lynch Special Non-Qualified Deferred Compensation Agreement, a Participant terminating employment before Retirement Age for reasons other than death or Total and Permanent Disability shall be entitled to receive installment payments elected on the Election Form. SECOND: Notwithstanding anything to the contrary in this Section 9 of The Merrill Lynch Special Non-Qualified Deferred Compensation Plan Adoption Agreement, Participants shall also be permitted to make Voluntary Withdrawals in accordance with Section 7.5a of the Plan. EX-11.1 4 STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 THE GYMBOREE CORPORATION COMPUTATION OF NET INCOME PER SHARE
FISCAL YEAR ENDED --------------------------------------------- FEBRUARY 2, FEBRUARY 4, JANUARY 29, 1997 1996 1995 ----------- ----------- ----------- NET INCOME (000'S) $ 31,788 $ 26,381 $ 22,195 =========== =========== =========== Weighted average number of shares outstanding during the period: Common Stock 25,111,027 24,861,874 24,279,137 Add incremental shares from assumed exercise of stock options and warrants 553,019 495,370 983,061 ----------- ----------- ----------- 25,664,046 25,357,244 25,262,198 =========== =========== =========== PRIMARY NET INCOME PER SHARE $ 1.24 $ 1.04 $ 0.88 =========== =========== =========== Weighted average number of shares outstanding during the period: Common Stock 25,111,027 24,861,874 24,279,137 Add incremental shares from assumed exercise of stock options and warrants 558,526 494,704 985,518 ----------- ----------- ----------- Weighted average common and common equivalent shares outstanding during the period 25,669,553 25,356,578 25,264,655 =========== =========== =========== FULLY DILUTED NET INCOME PER SHARE $ 1.24 $ 1.04 $ 0.88 =========== =========== ===========
EX-13.1 5 1996 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 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.
(In thousands, except operating data and per share amounts) 1996 1995 1994 1993 1992 --------- ----------- ----------- --------- --------- INCOME STATEMENT DATA: (1) Net sales $ 303,111 $ 259,381 $ 188,424 $ 129,582 $ 86,367 Cost of goods sold, including buying and occupancy expenses (164,052) (149,428) (100,651) (69,462) (47,630) --------- ----------- ----------- --------- --------- Gross profit 139,059 109,953 87,773 60,120 38,737 Selling, general and administrative expenses (91,540) (69,845) (53,095) (38,312) (28,107) Play program income, net 74 316 554 1,237 740 --------- ----------- ----------- --------- --------- Operating income 47,593 40,424 35,232 23,045 11,370 Interest income 3,678 2,823 1,760 867 227 --------- ----------- ----------- --------- --------- Income before income taxes 51,271 43,247 36,992 23,912 11,597 Income taxes (19,483) (16,866) (14,797) (9,806) (4,650) --------- ----------- ----------- --------- --------- Net income $ 31,788 $ 26,381 $ 22,195 $ 14,106 $ 6,947 ========= =========== =========== ========= ========= Net income per share(2) $ 1.24 $ 1.04 $ 0.88 $ 0.57 $ 0.31 Weighted average shares outstanding 25,670 25,357 25,265 24,858 22,112 Cash dividends per share --- --- --- --- --- OPERATING DATA: Number of stores at end of period 354 279 209 152 112 Net sales per average gross square foot $ 670 $ 827 $ 882 $ 851 $ 805 Net sales per average store 948,000 1,063,000 1,050,000 982,000 899,000 Comparable store net sales increase/(decrease) (3) (6%) 3% 12% 11% 21% BALANCE SHEET DATA : Working capital $ 105,190 $ 89,417 $ 73,937 $ 49,907 $ 13,757 Total assets 216,909 160,009 126,083 87,607 38,592 Long-term debt --- --- --- --- --- Redeemable preferred stock --- --- --- --- 8,429 Stockholders' equity $ 161,933 $ 123,934 $ 92,629 $ 63,305 $ 15,497
(1) 1996 included 52 weeks, 1995 included 53 weeks, and 1994 through 1992 included 52 weeks. (2) Primary and fully diluted net income per share for all five years are the same. (3) A store becomes comparable after it is opened for 14 full months. Comparable store net sales in fiscal years 1996 through 1992 were calculated on a 52 week basis. This annual report contains certain 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. -1- 2 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. Through the end of 1996, the Company has grown to 354 stores, which includes 349 stores in 48 states in the United States and 5 stores in Canada. The Company's net sales for the 52 weeks ended February 2, 1997 increased to $303.1 million from $259.4 million in the 53 weeks ended February 4, 1996 and $188.4 million in the 52 weeks ended January 29, 1995. Net income increased to $31.8 million in 1996 from $26.4 million in 1995 and $22.2 million in 1994. These increases in net sales and net income were due principally to the Company's store expansion. Comparable store net sales, all based on a 52 week period, decreased 6% for 1996 and increased 3% and 12% for 1995 and 1994, respectively. The Company expects that future increases in net sales and net income will be increasingly dependent on the opening and profitability of new stores. The Company's year typically ends on the Sunday closest to January 31 of each year. 1996, which included 52 weeks, ended on February 2, 1997 while 1995, which included 53 weeks, ended on February 4, 1996 and 1994, which had 52 weeks, ended on January 29, 1995. 2 3 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, (i) selected income statement data expressed as a percentage of net sales, (ii) the percentage change from the same period of the prior year in such selected income statement data and (iii) the number of stores open at the end of each such period:
Percentage Change As a Percentage of Net Sales in Amounts for the Year Ended From Year ---------------------------- ------------------------------------ (52 weeks) (53 weeks) (52 weeks) 1996 to 1995 to 1997 1996 1995 1995 1994 ---------- ---------- ---------- ------- ------- Net sales 100.0% 100.0% 100.0% 17% 38% Cost of goods sold, including buying and occupancy expenses (54.1) (57.6) (53.4) 10 48 ----- ----- ----- --- -- Gross profit 45.9 42.4 46.6 26 25 Selling, general and administrative expenses (30.2) (26.9) (28.2) 31 32 Play program income, net 0.0 0.1 0.3 (77) (43) ----- ----- ----- --- -- Operating income 15.7 15.6 18.7 18 15 Interest income 1.2 1.1 0.9 30 60 ----- ----- ----- --- -- Income before income taxes 16.9 16.7 19.6 19 17 Income taxes (6.4) (6.5) (7.8) 16 14 ----- ----- ----- --- -- Net income 10.5% 10.2% 11.8% 20% 19% ===== ===== ===== === == Number of stores at end of period 354 279 209 27% 33%
3 4 RESULTS OF OPERATIONS (CONTINUED) 1996 COMPARED TO 1995 NET SALES Net sales increased 17% to $303.1 million for 1996, compared to $259.4 million for 1995. Sales for the 75 stores opened in 1996 contributed $35.3 million of the increase in net sales. Stores opened prior to 1996 but not qualifying as comparable stores, including the 19 stores expanded in 1996, contributed $20.9 million of the increase in net sales. These were offset, in part, by a decrease in comparable store net sales for 1996 of $12.5 million. Comparable store net sales for 1996 decreased 6% over the same period in 1995. The decrease in comparable store net sales was primarily due to the Company operating with significantly lower average store inventory levels and lower levels of markdowns compared to 1995. GROSS PROFIT Gross profit increased 26% to $139.1 million in 1996 from $110.0 million in 1995. As a percentage of net sales, gross profit increased to 45.9% in 1996 from 42.4% in 1995. The increase in gross profit was attributable to the trend of lower per store inventory levels which contributed to a reduction in average markdowns per store in 1996 compared to 1995. The Company is planning higher average per store inventory levels in 1997 as compared to 1996. While the increase in average per store inventory levels is expected to have a favorable impact on comparable store sales, this may result in downward pressure on gross profit as a percent of 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 30.2% in 1996 compared to 26.9% in 1995. The increase in S,G&A, as a percentage of net sales, was largely due to a decline in comparable store sales, the funding of a new catalog business and international store expansion. The Company expects total S,G&A, as a percentage of net sales, to decline slightly in 1997 due to a planned increase in comparable store sales and the discontinuation of the Company's catalog business at the end of 1996. However, this will be partially offset by expenses associated with the international store expansion. INTEREST INCOME Interest income increased to $3.7 million in 1996, from $2.8 million in 1995, due to higher average cash and investment balances as compared to the prior year. 4 5 RESULTS OF OPERATIONS (CONTINUED) INCOME TAXES The Company's effective tax rate for 1996 was 38% compared to 39% in 1995 due to a lower aggregate state tax rate than the prior year. See Note 6 of Notes to Consolidated Financial Statements. 1995 COMPARED TO 1994 NET SALES Net sales increased 38% to $259.4 million in 1995 compared to $188.4 million in 1994. Sales for the 71 stores opened in 1995 contributed $35.6 million of the increase in net sales. Stores opened prior to 1995 but not qualifying as comparable stores, including the 14 stores expanded in 1995, contributed $26.7 million of the increase in net sales. Increases in comparable store net sales for 1995 contributed $8.7 million of the increase in net sales. Comparable store net sales for 1995 increased 3% over 1994. The increase in comparable store net sales was primarily due to an increase in unit sales attributable to increased promotional pricing and the introduction of the new Layette line in the fall of 1994. GROSS PROFIT Gross profit increased 25% to $110.0 million in 1995 from $87.8 million in 1994. As a percentage of net sales, gross profit decreased to 42.4% in 1995 from 46.6% in 1994. The decrease was primarily due to an increased level of markdowns compared to 1994. The largest portion of this increase in markdowns occurred in the second half of 1995, when the Company strategically reduced inventory levels per store through promotional pricing. 5 6 RESULTS OF OPERATIONS (CONTINUED) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses, which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, decreased as a percentage of net sales to 26.9% in 1995 from 28.2% in 1994. The decrease was primarily due to decreases, as a percentage of net sales, in corporate office and store payroll expenses. In addition, overall expense leverage was achieved due to the growth in net sales. INTEREST INCOME Interest income increased to $2.8 million in 1995 from $1.8 million in 1994 due to higher average cash and investment balances as compared to the prior year. INCOME TAXES The Company's effective tax rate for 1995 was 39%, compared to 40% in 1994, due to a lower aggregate state tax rate than in the prior year. See Note 6 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES During 1994, 1995 and 1996, the Company satisfied its cash requirements through cash flow from operations. Primary uses of cash have been to finance the construction of new stores, purchase merchandise inventories and purchase investments. The combined balances of cash, cash equivalents and investments were $90.4 million and $73.6 million at the end of 1996 and 1995, respectively. Working capital as of February 2, 1997 was $105.2 million compared to $89.4 million at February 4, 1996. The increase in working capital was primarily due to higher cash, cash equivalents and investments balances. The Company's investments are largely made in short to medium term investment grade securities. During 1996, the Company generated $49.1 million of cash from operations and $4.8 million from the exercise of stock options. Uses of cash consisted primarily of $37.1 million for capital expenditures, related largely to the opening of 75 new stores, the expansion of 19 existing stores and the investment in management information systems. During 1995, the Company generated $32.7 million of cash from operations and $2.4 million from the exercise of stock options. In 1995, the Company used cash of $25.5 million primarily to open 71 new stores and expand 14 existing stores. 6 7 The Company has no long-term debt and did not require any cash borrowings in either 1996 or 1995. The Company's only outside financing requirement was for documentary letters of credit used to fund its foreign sourcing of merchandise inventories. As of February 2, 1997, the Company had two bank lines of credit that allow up to $100 million of long-term, unsecured letters of credit, of which $86.6 million was available pursuant to such lines. The Company estimates that capital expenditures during 1997 will be between $50 million and $60 million, which will primarily be used to open approximately 75 to 85 new stores and expand approximately 25 existing stores, and to purchase land and construct a new 280,000 square foot distribution facility. In February 1997, the Board of Directors authorized the Company to repurchase up to $30 million of its outstanding common stock. See Note 9 of Notes to consolidated Financial Statements. The Company anticipates that cash generated from operations, together with its existing cash resources and funds available from its current letters of credit facilities, will be sufficient to satisfy its cash needs through at least 1997. SEASONALITY AND QUARTERLY FLUCTUATIONS The Company has historically experienced and expects to continue to experience seasonal fluctuations in its sales and net income. A disproportionate amount of the Company's sales and net income is realized during the months of November and December. The Company has also experienced periods of increased sales activity in early spring and early fall. Furthermore, sales and net income are weakest during the second quarter. 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. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of results that may be achieved for a full year. See Note 10 of Notes to Consolidated Financial Statements. FACTORS THAT MAY AFFECT FUTURE PERFORMANCE The discussion in this annual report contains certain forward-looking statements that 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 and the ability of the Company to successfully identify and respond to emerging children's fashion trends, achieve its expansion plans and effectively monitor and control costs. While the Company expects that its increased inventory levels will have a favorable effect on comparable store sales, there can be no assurance that the Company will experience increases in comparable store sales. During 1996, the Company opened five stores in Canada. In 1997, the Company is planning to further its international expansion in Canada, the United Kingdom and the Republic of Ireland. The success of this expansion will depend upon a number of factors, including the ability to provide an adequate supply of inventory and the ability to hire and train qualified employees, of which there can be no assurance. 7 8 THE GYMBOREE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) ASSETS
February 2, February 4, 1997 1996 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $ 8,027 $ 8,755 Investments 82,360 64,893 Accounts receivable 4,336 2,868 Merchandise inventories 48,979 37,652 Prepaid expenses and other 1,893 1,886 --------- --------- Total current assets 145,595 116,054 --------- --------- PROPERTY AND EQUIPMENT: Leasehold improvements 44,231 31,126 Furniture, fixtures, and equipment 45,820 24,367 --------- --------- 90,051 55,493 Less accumulated depreciation and amortization (19,465) (12,085) --------- --------- 70,586 43,408 OTHER ASSETS 728 547 --------- --------- TOTAL ASSETS $ 216,909 $ 160,009 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 21,949 $ 9,657 Accrued liabilities 11,825 10,736 Income taxes payable 6,631 6,244 --------- --------- Total current liabilities 40,405 26,637 --------- --------- DEFERRED RENT AND OTHER LIABILITIES 14,571 9,438 STOCKHOLDERS' EQUITY: Common stock, including excess paid-in capital ($.001 par value: 100,000,000 shares authorized; 25,324,060 and 24,992,276 shares outstanding at February 2, 1997 and February 4, 1996, respectively) 62,694 56,687 Restricted stock deferred compensation (753) (1,139) Unrealized investment gain 220 402 Retained earnings 99,772 67,984 --------- --------- Total stockholders' equity 161,933 123,934 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 216,909 $ 160,009 ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -8- 9 THE GYMBOREE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Year Ended ------------------------------------------- February 2, February 4, January 29, 1997 1996 1995 (52 weeks) (53 weeks) (52 weeks) ----------- ----------- ----------- Net sales $ 303,111 $ 259,381 $ 188,424 Cost of goods sold, including buying and occupancy expenses (164,052) (149,428) (100,651) --------- --------- --------- Gross profit 139,059 109,953 87,773 Selling, general and administrative expenses (91,540) (69,845) (53,095) Play program income, net 74 316 554 --------- --------- --------- Operating income 47,593 40,424 35,232 Interest income 3,678 2,823 1,760 --------- --------- --------- Income before income taxes 51,271 43,247 36,992 Income taxes (19,483) (16,866) (14,797) --------- --------- --------- ========= Net income $ 31,788 $ 26,381 $ 22,195 ========= ========= ========= Net income per share: Primary and fully diluted $ 1.24 $ 1.04 $ 0.88 Weighted average shares outstanding 25,670 25,357 25,262
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -9- 10 THE GYMBOREE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended ---------------------------------------- February 2, February 4, January 29, 1997 1996 1995 (52 weeks) (53 weeks) (52 weeks) ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 31,788 $ 26,381 $ 22,195 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,899 5,367 3,334 Non-cash compensation expenses 386 394 404 Loss on disposal of property and equipment 980 712 174 Provision for deferred income taxes 1,200 647 63 Tax benefit from exercise of stock options 1,167 1,217 4,879 Change in assets and liabilities: Accounts receivable (1,468) (727) (436) Merchandise inventories (11,327) (3,555) (13,699) Prepaid expenses and other assets (1,338) (374) 44 Accounts payable 12,292 (1,983) 3,064 Accrued liabilities 1,089 (176) 2,897 Income taxes payable 387 1,695 679 Deferred rent and other 5,085 3,085 2,511 -------- -------- -------- Net cash provided by operating activities 49,140 32,683 26,109 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (37,059) (25,500) (11,645) Purchases of investments (17,649) (11,905) (16,626) -------- -------- -------- Net cash used in investing activities (54,708) (37,405) (28,271) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 4,840 2,449 2,402 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (728) (2,273) 240 CASH AND CASH EQUIVALENTS: Beginning of year 8,755 11,028 10,788 -------- -------- -------- End of year $ 8,027 $ 8,755 $ 11,028 ======== ======== ======== OTHER CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 16,822 $ 13,605 $ 9,188 ======== ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of restricted stock $ --- $ --- $ 1,937 ======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -10- 11 THE GYMBOREE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK AND EXCESS PAID-IN CAPITAL RESTRICTED ------------------------ STOCK UNREALIZED DEFERRED INVESTMENTS RETAINED SHARES AMOUNT COMPENSATION GAIN (LOSS) EARNINGS TOTAL ====================================================================================================================== Balance at January 30, 1994 23,919,944 $ 43,803 $ -- $ 94 $19,408 $ 63,305 Issuance of common stock under stock plans 565,258 2,402 2,402 Tax benefit from exercise of stock options 4,879 4,879 Unrealized loss on investments (556) (556) Issuance of restricted stock 100,000 1,937 (1,937) -- Amortization of restricted stock 404 404 Net income 22,195 22,195 ====================================================================================================================== Balance at January 29, 1995 24,585,202 $ 53,021 $(1,533) $(462) $41,603 $ 92,629 Issuance of common stock under stock plans 407,074 2,449 2,449 Tax benefit from exercise of stock options 1,217 1,217 Unrealized gain on investments 864 864 Amortization of restricted stock 394 394 Net income 26,381 26,381 ====================================================================================================================== Balance at February 4, 1996 24,992,276 $ 56,687 $(1,139) $ 402 $67,984 $123,934 Issuance of common stock under stock plans 331,784 4,840 4,840 Tax benefit from exercise of stock options 1,167 1,167 Unrealized loss on investments (182) (182) Amortization of restricted stock 386 386 Net income 31,788 31,788 ====================================================================================================================== Balance at February 2, 1997 25,324,060 $ 62,694 $ (753) $ 220 $99,772 $161,933 ======================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -11- 12 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 intercompany balances and transactions have been eliminated. NATURE OF THE BUSINESS. The Company is a leading specialty retailer of high quality apparel and accessories for children ages newborn to seven years. As of February 2, 1997, February 4, 1996 and January 29, 1995, the Company had 354, 279 and 209 retail stores, respectively. The Company also offers directed parent-child developmental play programs at approximately 377 franchised locations and 13 Company-operated locations. FISCAL YEAR. The Company's fiscal year typically ends on the Sunday closest to January 31 of each year. 1996, which included 52 weeks, ended on February 2, 1997, while 1995, which included 53 weeks ended on February 4, 1996, and 1994, which included 52 weeks, ended on January 29, 1995. 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. The Company's investments, consisting primarily of municipal bonds, are classified as available-for-sale and are recorded at fair market value. Fair market value is based upon quoted market prices on the last day of the year. Unrealized changes in value are recorded as a component of stockholders' equity. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash equivalents, accounts receivable and accounts payable 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 three to ten years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. 12 13 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) COMPUTER SOFTWARE. Internally developed and purchased computer software is recorded at cost and is amortized using the straight-line method based on an estimated useful life of five years. 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. 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. NET INCOME PER SHARE. Primary and fully diluted net income per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The dilutive effect of such common stock equivalents is computed using the treasury stock method. The computation of primary and fully diluted net income per share is the same for 1996, 1995, and 1994. STORE PREOPENING COSTS. Store preopening costs are expensed as incurred. PLAY PROGRAM 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. USE OF ESTIMATES. The preparation of the 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. STOCK-BASED COMPENSATION. In 1996, the Company adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", which provide for the disclosure of pro forma net earnings and earnings per share as if the fair value method were used to account for stock-based employee compensation plans (see Note 7). Pursuant to SFAS No.123, the Company has elected to continue to use the intrinsic value method to account for such plans in the accompanying consolidated financial statements 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 1996 presentation. 13 14 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NEW ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share" ("EPS"), which requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The pro forma effect assuming adoption of SFAS No. 128 at the beginning of each period is presented below:
1996 1995 1994 ----- ----- ----- Pro forma EPS: Basic $1.26 $1.06 $0.91 Diluted $1.24 $1.04 $0.88
2. INVESTMENTS As of February 2, 1997 and February 4, 1996, all of the Company's investment securities were classified as available-for-sale. The Company's investments consist of the following (in thousands):
February 2, 1997 February 4, 1996 --------------------------------- ---------------------------------- Gross Gross Unrealized Fair Unrealized Fair Amortized Holding Market Amortized Holding Market Cost Gain Value Cost Gain (Loss) Value --------- ---------- -------- --------- ----------- ------- Municipal bonds $47,597 $169 $47,766 $23,054 $ 98 $23,152 Treasury bills/notes 20,847 2 20,849 21,421 179 21,600 Commercial paper 8,755 19 8,774 19,211 139 19,350 Asset backed securities 2,618 5 2,623 0 0 0 Collateralized mortgage obligations 2,323 25 2,348 805 (14) 791 ------- ---- ------- ------- ----- ------- Totals $82,140 $220 $82,360 $64,491 $ 402 $64,893 ======= ==== ======= ======= ===== =======
14 15 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table shows the amortized cost and approximate fair market value of investment securities by contractual maturity at February 2, 1997 (in thousands):
Fair Amortized Market Cost Value --------- ------- Within one year $26,255 $26,366 After one but within five years 52,086 52,194 Over five years 3,799 3,800 ------- ------- Totals $82,140 $82,360 ======= =======
3. LEASES The Company leases its store locations, corporate headquarters, a distribution center and certain fixtures and equipment under operating leases. The leases expire at various dates through the year 2009. 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. Future minimum lease payments under operating leases at February 2, 1997 are as follows:
Operating (In thousands) Leases - ---------------------------------------------------------- Year: 1997 $ 19,760 1998 19,231 1999 18,575 2000 18,523 2001 18,033 Later years 59,644 -------- Total minimum lease commitments $153,766 ========
Rent expense for all operating leases was $29.1 million, $23.1 million and $16.4 million, in 1996, 1995 and 1994 respectively, which includes percentage rent expense and other lease required expenses of $10.9 million, $9.7 million and $7.2 million for 1996, 1995 and 1994, respectively. 15 16 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. LINES OF CREDIT The Company's only outside financing requirement was for documentary letters of credit used to fund its foreign sourcing of merchandise inventories. As of February 2, 1997, the Company had two bank lines of credit that allow up to $100 million of long-term, unsecured letters of credit, of which $86.6 million was available. 5. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
February 2, February 4, 1997 1996 ----------- ----------- Employee compensation $ 5,290 $ 4,042 Sales taxes 1,582 1,078 Percentage rent 561 1,808 Store credits and gift certificates 2,150 1,486 Other 2,242 2,322 ------- ------- Total $11,825 $10,736 ======= =======
Other accrued liabilities relate primarily to store operating expenses. 16 17 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. INCOME TAXES The provision for income taxes consists of the following (in thousands):
1996 1995 1994 ------- ------- -------- Current: Federal $15,100 $14,669 $ 12,825 State 3,183 1,550 1,909 ------- ------- -------- Total current 18,283 16,219 14,734 ------- ------- -------- Deferred: Federal 960 467 122 State 240 180 (59) ------- ------- -------- Total deferred 1,200 647 63 ------- ------- -------- Total provision $19,483 $16,866 $ 14,797 ======= ======= ========
A reconciliation of the statutory federal income tax rate with the Company's effective income tax rate is as follows:
1996 1995 1994 ---- ---- ---- Statutory federal rate 35% 35% 35% State income taxes, net of federal income tax benefit 3 4 5 -- -- -- Effective tax rate 38% 39% 40% == == ==
17 18 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows (in thousands):
February 2, February 4, 1997 1996 ----------- ----------- Deferred tax assets: Uniform capitalization costs $ 735 $ 875 Accrued reserves 650 325 State taxes 388 302 Deferred rent 2,264 1,615 Other 210 245 ------- ------- 4,247 3,362 ------- ------- Deferred tax liabilities: Prepaid expenses (389) (372) Deferred construction allowances (911) (519) Software development (1,092) (444) Assets written-off (1,682) (655) ------- ------- (4,074) (1,990) ------- ------- Net deferred tax assets: $ 173 $ 1,372 ======= =======
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 employees 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 employees, 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 4,025,000 shares of common stock for issuance under the 1993 Plan. 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 1,587,668 and 1,045,176 shares available for the grant of options under the 1993 Plan at February 2, 1997 and February 4, 1996, respectively. 18 19 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following summarizes all stock option transactions for the three years ended February 2, 1997 (shares in thousands):
Weighted Shares Average Price Outstanding Per Share - -------------------------------------------------------------------- Balance, January 30, 1994 2,088 $ 7.52 Options granted 712 22.50 Options exercised (512) 3.69 Options canceled (412) 12.19 - -------------------------------------------------------------------- Balance, January 29, 1995 1,847 12.26 Options granted 529 24.87 Options exercised (382) 5.28 Options canceled (226) 17.44 - -------------------------------------------------------------------- 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 ===== =========
The following table summarizes information about stock options outstanding at February 2, 1997 (shares in thousands):
Options Outstanding Options Exercisable (Vested) ----------------------------------------------- ---------------------------- Weighted Average Weighted Weighted Range of Remaining Average Number Average Exercisable Number Life Exercise of Options Exercise Prices of Options (in years) Price at 2/2/97 Price - --------------------------------- ---------- --------- ---------- ---------- $ 0.17 to 10.00 566 5.8 $ 9.21 530 $ 9.16 14.94 to 20.81 358 7.5 19.74 212 20.16 21.75 to 23.50 530 8.6 23.19 152 23.02 23.88 to 26.50 155 8.5 25.21 27 25.04 26.75 to 28.50 204 8.3 26.80 82 26.75 28.63 to 36.63 113 8.4 30.61 33 30.61 ------ ------ ----- ------ $ 0.17 to 36.63 1,926 $19.51 1,036 $15.93 ------ ------ ----- ------
19 20 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) At February 2, 1997, options to purchase 1,036,000 shares were exercisable at a weighted average price of $15.93. At February 4, 1996, options to purchase 730,955 shares were exercisable at a weighted average price of $14.03. At January 29, 1995, options to purchase 589,710 shares were exercisable at a weighted average price of $8.27. 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 37,840 and 25,524 shares issued under the Purchase Plan in fiscal 1996 and fiscal 1995, 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 was $1,937,500. The shares, which were issued pursuant to the 1993 Plan, are subject to a repurchase option that lapses over a period of 60 months. The difference between the purchase price and the aggregate fair market value of the shares will be amortized as compensation expense over the five year vesting period. Accordingly, the Company recognized compensation expense of $386,000 in 1996, $394,000 in 1995, and $404,000 in 1994. ADDITIONAL STOCK PLAN INFORMATION The Company has adopted only the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation"; therefore such adoption will have no effect on the Company's consolidated net earnings or cash flows. 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, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 20 21 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Year Ended ------------------------------- February 2, February 4, 1997 1996 ----------- ----------- Net income (in thousands) As reported $31,788 $26,381 Pro forma 29,317 25,430 Primary & fully diluted net income per share As reported $1.24 $1.04 Pro forma 1.14 1.00
The weighted average fair value of options granted during 1996 and 1995 were $8.67 and $8.75, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Year Ended -------------------------- February 2, February 4, 1997 1996 ----------- ----------- Expected Dividend Rate 0.0% 0.0% Expected volatility 55.0% 55.0% Risk-free interest rate 6.0% 6.0% Expected lives (yrs.) 3.0 2.9
8. 401(k) PLAN The Company maintains a voluntary defined contribution 401(k) profit sharing plan (the "Plan") covering all employees 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 an employee, up to a maximum Company contribution of $500 per employee per year. The Company's matching contributions to the Plan were $133,000, $102,000 and $40,000 in 1996, 1995 and 1994, respectively. 9. SUBSEQUENT EVENTS STOCK REPURCHASE In February 1997, the Board of Directors authorized the Company to repurchase up to $30 million of its outstanding common stock in the open market. As of March 3, 1997, no shares have been repurchased. 21 22 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 market 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. 22 23 THE GYMBOREE CORPORATION -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. 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.
1996 Quarter Ended ------------------------------------------------ (In thousands, except per share amounts May 5, Aug. 4, Nov. 3, Feb. 2, and store data) 1996 1996 1996 1997 -------- -------- -------- -------- Net sales $69,103 $57,898 $84,685 $91,425 Gross profit 33,656 25,148 40,255 40,000 Operating income 12,969 5,949 13,690 14,985 Net income 8,593 4,285 8,995 9,915 Net income per share $ 0.34 $ 0.17 $ 0.35 $ 0.39 Stores at end of period 305 326 348 354
1995 Quarter Ended --------------------------------------------------- Apr. 30, July 30, Oct. 29, Feb. 4, 1995 1995 1995 1996(1) -------- --------- --------- -------- Net sales $55,077 $49,391 $66,225 $88,688 Gross profit 25,503 21,359 28,520 34,571 Operating income 9,617 6,320 11,067 13,420 Net income 6,288 4,283 7,032 8,778 Net income per share $ 0.25 $ 0.17 $ 0.28 $ 0.35 Stores at end of period 234 251 271 279
- ---------- (1) The fourth quarter of 1995 included 14 weeks as 1995 included 53 weeks. 23 24 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 February 2, 1997 and February 4, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended February 2, 1997. 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 February 2, 1997 and February 4, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 1997 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 18, 1997 (March 3, 1997 as to Note 9) THE GYMBOREE CORPORATION
EX-23.1 6 INDEPENDENT AUDITOR'S CONSENT 1 EXHIBIT 23.1 [DELOITTE & TOUCHE LLP LETTERHEAD] [LOGO] 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 on Forms S-8 of our report dated February 18, 1997 (March 3, 1997 as to Note 9), incorporated by reference in the Annual Report on Form 10-K of The Gymboree Corporation for the fiscal year ended February 2, 1997. /s/ DELOITTE & TOUCHE LLP April 28, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME AND THE CONSOLIDATED BALANCE SHEETS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K 1,000 YEAR YEAR FEB-02-1997 FEB-04-1996 FEB-05-1996 JAN-30-1995 FEB-02-1997 FEB-04-1996 8,027 8,755 82,360 64,893 4,336 2,868 0 0 48,979 37,652 145,595 116,054 90,051 55,493 (19,465) (12,085) 216,909 160,009 40,405 26,637 0 0 0 0 0 0 62,694 56,687 99,239 67,247 216,909 160,009 303,111 259,381 303,111 259,381 (164,052) (149,428) (164,052) (149,428) (91,540) (69,845) 0 0 0 0 51,271 43,247 (19,483) (16,866) 31,788 26,381 0 0 0 0 0 0 31,788 26,381 1.24 1.04 1.24 1.04
-----END PRIVACY-ENHANCED MESSAGE-----