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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
(Mark One)
   
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
 
    For the quarterly period ended May 1, 2004
 
or
 
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
 
    For the transition period from           to

Commission file number 000-21250

The Gymboree Corporation

(Exact name of registrant as specified in its charter)
     
Delaware   94-2615258
(State or other jurisdiction of
incorporation or organization)		   (IRS Employer
Identification No.)
 
700 Airport Boulevard, Suite 200,
Burlingame, California
(Address of principal executive offices)		   94010-1912
(Zip code)

(650) 579-0600

Registrant’s telephone number, including area code

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

          As of May 29, 2004, 30,587,466 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

               
 Part I Financial Information        
     Financial Statements     2  
     Condensed Consolidated Balance Sheets     2  
     Condensed Consolidated Statements of Income     3  
     Condensed Consolidated Statements of Cash Flows     4  
     Notes to Condensed Consolidated Financial Statements     5  
     Report of Independent Registered Accounting Firm     9  
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     10  
     Quantitative and Qualitative Disclosures about Market Risk     13  
     Controls and Procedures     14  
 Part II Other Information        
     Legal Proceedings     14  
     Exhibits and Reports on Form 8-K     14  
 Signatures     15  
 Exhibit Index        
 EXHIBIT 10.57
 EXHIBIT 15
 EXHIBIT 18
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

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PART I — FINANCIAL INFORMATION

 
Item 1. Financial Statements

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
                             
May 1, January 31, May 3,
2004 2004 2003
(Unaudited)
(In thousands, except share data)
ASSETS
Current Assets
                        
 
Cash and cash equivalents
  $ 110,206     $ 89,553     $ 60,133  
 
Accounts receivable
    8,716       11,456       7,610  
 
Merchandise inventories
    67,927       73,017       50,504  
 
Prepaid expenses and deferred taxes
    10,399       5,564       11,537  
     
     
     
 
   
Total current assets
    197,248       179,590       129,784  
     
     
     
 
Property and Equipment
                        
 
Land and buildings
    10,376       10,375       10,371  
 
Leasehold improvements
    116,683       108,743       93,796  
 
Furniture, fixtures and equipment
    145,472       139,974       130,523  
     
     
     
 
      272,531       259,092       234,690  
 
Less accumulated depreciation and amortization
    (150,707 )     (146,349 )     (129,957 )
     
     
     
 
      121,824       112,743       104,733  
Lease Rights, Deferred Taxes and Other Assets
     7,712       6,378       6,767  
     
     
     
 
 
Total Assets
   $ 326,784     $ 298,711     $ 241,284  
     
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
                        
 
Accounts payable
  $ 36,193     $ 33,356     $ 10,252  
 
Income tax payable
    11,033       7,839       11,759  
 
Accrued liabilities
    35,571       27,124       20,703  
     
     
     
 
   
Total current liabilities
    82,797       68,319       42,714  
     
     
     
 
Long-Term Liabilities
                        
 
Deferred rent and other liabilities
    26,808       26,644       20,734  
     
     
     
 
 
Total Liabilities
     109,605       94,963       63,448  
     
     
     
 
Stockholders’ Equity
                        
 
Common stock, including excess paid-in capital ($.001 par value: 100,000,000 shares authorized, 30,585,870, 30,203,149 and 29,399,728 shares outstanding at May 1, 2004, January 31, 2004 and May 3, 2003, respectively)
    62,207       58,460       51,220  
 
Retained earnings
    155,484       145,805       127,361  
 
Accumulated other comprehensive loss
    (512 )     (517 )     (745 )
     
     
     
 
   
Total stockholders’ equity
    217,179       203,748       177,836  
     
     
     
 
 
Total Liabilities and Stockholders’ Equity
   $ 326,784     $ 298,711     $ 241,284  
     
     
     
 

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                     
13 Weeks Ended
May 1, May 3,
2004 2003
(Unaudited)
(In thousands, except per
share data)
Net sales:
               
 
Retail
  $ 151,381     $ 136,082  
 
Play & Music
    2,667       3,373  
     
     
 
   
Total net sales
    154,048       139,455  
Cost of goods sold, including buying and occupancy expenses
    (88,268 )     (80,634 )
     
     
 
   
Gross profit
    65,780       58,821  
Selling, general and administrative expenses
    (52,700 )     (46,926 )
     
     
 
 
Operating income
    13,080       11,895  
Other income (expense), net
    230       (89 )
     
     
 
 
Income before income taxes and cumulative effect of change in accounting principle
    13,310       11,806  
Income tax expense
    (4,858 )     (4,545 )
     
     
 
 
Income before cumulative effect of change in accounting principle
    8,452       7,261  
Cumulative effect of change in accounting principle, net of income tax
    1,227       —  
     
     
 
 
Net income
  $ 9,679     $ 7,261  
     
     
 
Basic per share amounts:
               
Income before cumulative effect of change in accounting principle
  $ 0.28     $ 0.25  
Cumulative effect of change in accounting principle, net of income tax
    0.04       —  
     
     
 
Net income
  $ 0.32     $ 0.25  
     
     
 
Diluted per share amounts:
               
Income before cumulative effect of change in accounting principle
  $ 0.27     $ 0.24  
Cumulative effect of change in accounting principle, net of income tax
    0.04       —  
     
     
 
Net income
  $ 0.31     $ 0.24  
     
     
 
Weighted average shares outstanding:
               
 
Basic
    30,476       29,314  
 
Diluted
    31,348       30,609  

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                       
13 Weeks Ended
May 1, May 3,
2004 2003
(Unaudited)
(In thousands)
Cash Flows from Operating Activities:
                
Net income
  $ 9,679     $ 7,261  
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Cumulative effect of change in accounting principle, net of income tax
    (1,227 )     —  
 
Depreciation and amortization
    7,001       6,697  
 
Deferred income tax provision
    (68 )     (123 )
 
(Gain) Loss on disposal of property and equipment
    (228 )     35  
 
Asset write-off
    133       —  
 
Tax benefit from exercise of stock options
    1,935       385  
 
Change in assets and liabilities:
               
   
Accounts receivable
    3,027       (82 )
   
Merchandise inventories
    7,256       12,344  
   
Prepaid expenses and other assets
    (6,178 )     (342 )
   
Accounts payable
    2,887       (16,944 )
   
Income tax payable
    2,484       (986 )
   
Accrued liabilities
    8,551       (4,056 )
   
Deferred liabilities and other liabilities
    187       (196 )
     
     
 
     
Net cash provided by operating activities
    35,439       3,993  
     
     
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Capital expenditures
    (16,607 )     (5,283 )
Proceeds from sale of assets
    107       268  
     
     
 
 
Net cash used in investing activities
    (16,500 )     (5,015 )
     
     
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from issuance of stock
    1,812       749  
     
     
 
 
Net cash provided by financing activities
    1,812       749  
     
     
 
Effect of exchange rate fluctuations on cash
    (98 )     (222 )
Net Increase (Decrease) in Cash and Cash Equivalents
    20,653       (495 )
CASH AND CASH EQUIVALENTS:
                
Beginning of Period
    89,553       60,628  
     
     
 
End of Period
  $ 110,206     $ 60,133  
     
     
 

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
 
1. Basis of Presentation

      The unaudited interim condensed consolidated financial statements, which include The Gymboree Corporation and its subsidiaries, all of which are wholly owned (“the Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

      The accompanying interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results of operations, the financial position and cash flows for the periods presented. All such adjustments are of a normal and recurring nature.

      The results of operations for the thirteen weeks ended May 1, 2004 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 29, 2005.

 
2. Change in Accounting Principle

      Effective February 1, 2004, the Company elected to change its accounting method for inventory valuation from the retail method to the lower of cost or market method, determined on a weighted average basis (the “cost method”). The Company believes the cost method is a preferable method for matching the cost of merchandise with the revenues generated. The cumulative effect of this accounting change in the quarter ended May 1, 2004 was income of $1.2 million, or $0.04 per diluted share, net of income taxes. It is not possible to determine the effect of this change on any previously reported fiscal periods or on fiscal 2004.

 
3. Stock Based Compensation

      The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Had the Company recorded compensation expense for its stock option plans and purchase plan based on the fair value method consistent with the method of Statement of Financial Accounting Standards

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THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

(“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, net income and net income per share would have been as follows:

                   
13 Weeks Ended
May 1, May 3,
2004 2003
(In thousands, except
per share data)
Net income, as reported
  $ 9,679     $ 7,261  
Deduct: Total stock-based employee compensation expense determined under fair value based method, for awards granted or settled, net of related tax effects
    (1,141 )     (761 )
     
     
 
 
Pro forma net income
  $ 8,538     $ 6,500  
     
     
 
Basic income per share
               
 
As reported
  $ 0.32     $ 0.25  
 
Pro forma
    0.28       0.22  
Diluted income per share
               
 
As reported
  $ 0.31     $ 0.24  
 
Pro forma
    0.27       0.21  

      The fair value of option grants and shares issued under stock option plans and the purchase plan are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

                 
Periods Ended
May 1, May 3,
2004 2003
Expected dividend rate
    0 %     0 %
Expected volatility
    50.0 %     59.0 %
Risk-free interest rate
    2.5 %     2.8 %
Expected lives (yrs.)
    4.0       4.0  
 
4. Net Income Per Share

      Basic net income per share is calculated by dividing net income for the period by the weighted average common shares outstanding for that period. Diluted net income per share includes the effects of dilutive instruments, such as stock options, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The following summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method.

                 
13 Weeks Ended
May 1, May 3,
2004 2003
(In thousands)
Weighted average number of shares — basic
    30,476       29,314  
Add: effect of dilutive securities
    872       1,295  
     
     
 
Weighted average number of shares — diluted
    31,348       30,609  
     
     
 

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THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      Anti-dilutive options to purchase 1,558,897 and 1,662,996 shares of common stock were excluded from the above computations of weighted average shares for the 13 weeks ended May 1, 2004 and May 3, 2003, respectively.

 
5. Comprehensive Income

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

                   
13 Weeks Ended
May 1, May 3,
2004 200