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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 July 31, 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 August 28, 2004, 30,748,807 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

             
Page
Number
 PART I FINANCIAL INFORMATION
  Financial Statements        
     Condensed Consolidated Balance Sheets     2  
     Condensed Consolidated Statements of Operations     3  
     Condensed Consolidated Statements of Cash Flows     4  
     Notes to Condensed Consolidated Financial Statements     5  
     Report of Independent Registered Public Accounting Firm     9  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     10  
  Quantitative and Qualitative Disclosures about Market Risk     15  
  Controls and Procedures     15  
 PART II OTHER INFORMATION
  Legal Proceedings     16  
  Submission of Matters to a Vote of Security Holders     16  
  Exhibits     16  
 Signatures     17  
 Exhibit Index        
 EXHIBIT 15
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

1

Table of Contents

PART I — FINANCIAL INFORMATION

 
Item 1. Financial Statements

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
                             
July 31, January 31, August 2,
2004 2004 2003
(In thousands, except share data)
(Unaudited)
ASSETS
Current Assets
                        
 
Cash and cash equivalents
  $ 76,495     $ 89,553     $ 48,440  
 
Accounts receivable
    14,575       11,456       7,943  
 
Merchandise inventories
    78,542       73,017       67,618  
 
Prepaid expenses and deferred taxes
    4,161       5,564       10,624  
     
     
     
 
   
Total current assets
    173,773       179,590       134,625  
     
     
     
 
Property and Equipment
                        
 
Land and buildings
    10,376       10,375       10,371  
 
Leasehold improvements
    129,032       108,743       96,613  
 
Furniture, fixtures and equipment
    150,537       139,974       133,486  
     
     
     
 
      289,945       259,092       240,470  
 
Less accumulated depreciation and amortization
    (157,075 )     (146,349 )     (135,850 )
     
     
     
 
      132,870       112,743       104,620  
Lease Rights, Deferred Taxes and Other Assets
     11,039       6,378       7,303  
     
     
     
 
 
Total Assets
   $ 317,682     $ 298,711     $ 246,548  
     
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
                        
 
Accounts payable
  $ 33,036     $ 33,356     $ 30,756  
 
Income tax payable
    413       7,839       121  
 
Accrued liabilities
    40,240       27,124       17,745  
     
     
     
 
   
Total current liabilities
    73,689       68,319       48,622  
     
     
     
 
Long-Term Liabilities
                        
 
Deferred rent and other liabilities
    27,905       26,644       20,151  
     
     
     
 
 
Total Liabilities
     101,594       94,963       68,773  
     
     
     
 
Stockholders’ Equity
                        
 
Common stock, including excess paid-in capital ($.001 par value: 100,000,000 shares authorized, 30,747,672, 30,203,149 and 29,614,340 shares outstanding at July 31, 2004, January 31, 2004 and August 2, 2003, respectively)
    64,000       58,460       52,725  
 
Retained earnings
    152,318       145,805       126,301  
 
Accumulated other comprehensive loss
    (230 )     (517 )     (1,251 )
     
     
     
 
   
Total stockholders’ equity
    216,088       203,748       177,775  
     
     
     
 
 
Total Liabilities and Stockholders’ Equity
   $ 317,682     $ 298,711     $ 246,548  
     
     
     
 

See notes to condensed consolidated financial statements.

2

Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                     
13 Weeks Ended 26 Weeks Ended
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
(In thousands, except per share data)
(Unaudited)
Net sales:
                               
 
Retail
  $ 119,794     $ 110,356     $ 271,175     $ 246,438  
 
Play & Music and Other
    2,585       2,734       5,252       6,107  
     
     
     
     
 
   
Total net sales
    122,379       113,090       276,427       252,545  
Cost of goods sold, including buying and occupancy expenses
    (78,271 )     (71,855 )     (166,540 )     (152,489 )
     
     
     
     
 
   
Gross profit
    44,108       41,235       109,887       100,056  
Selling, general and administrative expenses
    (49,232 )     (43,506 )     (101,932 )     (90,432 )
     
     
     
     
 
 
Operating income (loss)
    (5,124 )     (2,271 )     7,955       9,624  
Other income, net
    138       468       368       379  
     
     
     
     
 
 
Income (loss) before income taxes and cumulative effect of change in accounting principle
    (4,986 )     (1,803 )     8,323       10,003  
Income tax benefit (expense)
    1,820       744       (3,038 )     (3,801 )
     
     
     
     
 
 
Income (loss) before cumulative effect of change in accounting principle
    (3,166 )     (1,059 )     5,285       6,202  
Cumulative effect of change in accounting principle, net of income tax
    —       —       1,228       —  
     
     
     
     
 
 
Net income (loss)
  $ (3,166 )   $ (1,059 )   $ 6,513     $ 6,202  
     
     
     
     
 
Basic per share amounts:
                               
Income (loss) before cumulative effect of change in accounting principle
  $ (0.10 )   $ (0.04 )   $ 0.17     $ 0.21  
Cumulative effect of change in accounting principle, net of income tax
    —       —       0.04       —  
     
     
     
     
 
Net income (loss)
  $ (0.10 )   $ (0.04 )   $ 0.21     $ 0.21  
     
     
     
     
 
Diluted per share amounts:
                               
Income (loss) before cumulative effect of change in accounting principle
  $ (0.10 )   $ (0.04 )   $ 0.17     $ 0.20  
Cumulative effect of change in accounting principle, net of income tax
    —       —       0.04       —  
     
     
     
     
 
Net income (loss)
  $ (0.10 )   $ (0.04 )   $ 0.21     $ 0.20  
     
     
     
     
 
Weighted average shares outstanding:
                               
 
Basic
    30,693       29,552       30,584       29,433  
 
Diluted
    30,693       29,552       31,374       30,723  

See notes to condensed consolidated financial statements.

3

Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                     
26 Weeks Ended
July 31, August 2,
2004 2003
(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
                
Net income
  $ 6,513     $ 6,202  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
 
Cumulative effect of change in accounting principle, net of income tax
    (1,228 )     —  
 
Depreciation and amortization
    14,051       13,325  
 
Deferred income tax provision (benefit)
    (3,474 )     100  
 
(Gain) Loss on disposal of property and equipment
    (201 )     55  
 
Asset write-off
    133       —  
 
Tax benefit from exercise of stock options
    2,643       385  
 
Change in assets and liabilities:
               
   
Accounts receivable
    (3,116 )     (380 )
   
Merchandise inventories
    (3,099 )     (4,705 )
   
Prepaid expenses and other assets
    188       (195 )
   
Accounts payable
    (317 )     3,531  
   
Income tax payable
    (8,132 )     (12,624 )
   
Accrued liabilities
    7,078       (7,029 )
   
Deferred and other liabilities
    1,312       (772 )
     
     
 
 
Net cash provided by (used in) operating activities
    12,351       (2,107 )
     
     
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Capital expenditures
    (28,541 )     (11,920 )
Proceeds from sale of assets and other
    416       386  
     
     
 
 
Net cash used in investing activities
    (28,125 )     (11,534 )
     
     
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from issuance of stock
    2,897       2,258  
     
     
 
 
Net cash provided by financing activities
    2,897       2,258  
     
     
 
Effect of exchange rate fluctuations on cash
    (181 )     (805 )
Net Decrease in Cash and Cash Equivalents
    (13,058 )     (12,188 )
CASH AND CASH EQUIVALENTS:
                
Beginning of Period
    89,553       60,628  
     
     
 
End of Period
  $ 76,495     $ 48,440  
     
     
 
NON-CASH INVESTING ACTIVITIES:
                
Capital expenditures incurred, but not yet paid
  $ 6,066     $ —  

See notes to condensed consolidated financial statements.

4

Table of Contents

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 twenty-six weeks ended July 31, 2004 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 29, 2005 (“fiscal 2004”).

 
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, which was recorded in the first quarter of fiscal 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 other 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 (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, net income (loss) and net income (loss) per share would have been as follows:

                                   
13 Weeks Ended 26 Weeks Ended
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
(In thousands, except per share data)
Net income (loss), as reported
  $ (3,166 )   $ (1,059 )   $ 6,513     $ 6,202  
Deduct: Total stock-based employee compensation expense determined under fair value based method, for awards granted or settled, net of related tax effects
    (1,309 )   &