Gymboree (GYMB) 10-Q/A 2004 Q3 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q/A

(Mark One)
x	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.)
500 Howard Street, San Francisco, California	94105
(Address of principal executive offices)	(Zip code)

(415) 278-7000
(Registrant’s telephone number, including area code)

700 Airport Boulevard, Suite 200, Burlingame, California 94010-1912
(Former address, if changed since last report)

     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  x No  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  x No  o

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

This amendment on Form 10-Q/A amends the Registrant’s Quarterly Report on Form 10-Q for the period ended May 1, 2004, as filed by the Registrant on June 9, 2004 (“Original Filing”), and is being filed to reflect the restatement of the Registrant’s condensed consolidated financial statements (the “restatement”).  This restatement reflects (i) adjustments to conform the Registrant’s lease accounting to the Generally Accepted Accounting Principles expressed by the Office of the Chief Accountant of the Securities and Exchange Commission in a letter dated February 7, 2005, as described in Note 10 to the condensed consolidated financial statements, (ii) reclassification of certain auction rate securities from cash and cash equivalents to marketable securities, as described in Note 10 to the condensed consolidated financial statements, and (iii) presentation of the United Kingdom and Ireland operations as discontinued operations subseq uent to the period ended May 1, 2004, as described in Note 9 to the condensed consolidated financial statements.  Amendments to the Registrant’s Quarterly Reports on Form 10-Q for the periods ended July 31, 2004 and October 30, 2004, are being filed concurrently.

The following Items in Part I of the Original Filing have been amended as a result of the restatement:  Item 1 – Financial Statements; Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Item 4 – Controls and Procedures.  In addition, pursuant to the rules of the SEC, Item 6 of Part II has been amended to contain the letter re: unaudited interim financial information from our independent registered public accounting firm and currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  The letter from the independent registered public accounting firm and certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 15, 31.1, 31.2, 32.1 and 32.2, respectively.

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety.  Except as otherwise expressly stated, the information in this Form 10-Q/A is as of June 9, 2004, the date on which the Original Filing was made and this Form 10-Q/A does not purport to provide an update or discussion of any developments subsequent to the Original Filing.

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TABLE OF CONTENTS

			Page Number
Part I	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (as restated)	4
		Condensed Consolidated Statements of Income (as restated)	5
		Condensed Consolidated Statements of Cash Flows (as restated)	6
		Notes to Condensed Consolidated Financial Statements	7
		Report of Independent Registered Public Accounting Firm	14
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
	Item 4.	Controls and Procedures	21
Part II	Other Information
	Item 1.	Legal Proceedings	22
	Item 6.	Exhibits and Reports on Form 8-K	22
Signatures			23
Exhibit Index			24

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Part I  -  FINANCIAL  INFORMATION
Item 1.    FINANCIAL STATEMENTS

THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

	May 1, 2004			January 31, 2004			May 3, 2003
	(Restated) (Note 10)			(Restated) (Note 10)			(Restated) (Note 10)
Assets
Current Assets
Cash and cash equivalents	$	30,906		$	21,553		$	24,208
Marketable securities		79,300			68,000			35,925
Accounts receivable		9,267			12,468			7,388
Merchandise inventories		64,840			70,674			48,793
Prepaid expenses		8,652			2,865			10,253
Deferred taxes		589			1,144			16
Current assets of discontinued operations		9,092			8,690			8,497
Total current assets		202,646			185,394			135,080
Property and Equipment
Land and buildings		10,376			10,375			10,371
Leasehold improvements		113,270			105,185			90,272
Furniture, fixtures and equipment		139,511			133,364			124,565
		263,157			248,924			225,208
Less accumulated depreciation and amortization		(144,534	)		(140,026	)		(124,670	)
		118,623			108,898			100,538
Lease Rights, Deferred Taxes and Other Assets		9,328			8,108			7,977
Total Assets	$	330,597		$	302,400		$	243,595
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	35,998		$	33,318		$	9,733
Income tax payable		11,033			7,839			11,759
Accrued liabilities		32,732			24,563			19,840
Current liabilities of discontinued operations		3,950			3,604			2,551
Total current liabilities		83,713			69,324			43,883
Long-Term Liabilities
Deferred rent and other liabilities		33,710			32,862			25,314
Total Liabilities		117,423			102,186			69,197
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 issued and outstanding at May 1, 2004, January 31, 2004 and May 3, 2003, respectively)		62,207			58,460			51,220
Retained earnings		151,503			142,271			123,923
Accumulated other comprehensive loss		(536	)		(517	)		(745	)
Total stockholders’ equity		213,174			200,214			174,398
Total Liabilities and Stockholders’ Equity	$	330,597		$	302,400		$	243,595

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

	13 Weeks Ended
	May 1, 2004			May 3, 2003
	(Restated) (Note 10)			(Restated) (Note 10)
Net sales:
Retail	$	144,448		$	128,653
Play & Music and Other		2,667			3,373
Total net sales		147,115			132,026
Cost of goods sold, including buying and occupancy expenses		(84,758	)		(75,150	)
Gross profit		62,357			56,876
Selling, general and administrative expenses		(50,603	)		(44,928	)
Operating income		11,754			11,948
Other income (loss), net		238			(117	)
Income from continuing operations before income taxes		11,992			11,831
Income tax expense		(4,377	)		(4,555	)
Income from continuing operations, net of income tax		7,615			7,276
Income from discontinued operations, net of income tax		390			36
Income before cumulative effect of change in accounting principle		8,005			7,312
Cumulative effect of change in accounting principle, net of income tax		1,227			—
Net income	$	9,232		$	7,312
Basic per share amounts:
Income from continuing operations, net of income tax	$	0.25		$	0.25
Income from discontinued operations, net of income tax		0.01			—
Cumulative effect of change in accounting principle, net of income tax		0.04			—
Net income	$	0.30		$	0.25
Diluted per share amounts:
Income from continuing operations, net of income tax	$	0.24		$	0.24
Income from discontinued operations, net of income tax		0.01			—
Cumulative effect of change in accounting principle, net of income tax		0.04			—
Net income	$	0.29		$	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
(In thousands)
(Unaudited)

	13 Weeks Ended
	May 1, 2004			May 3, 2003
	(Restated) (Note 10)			(Restated) (Note 10)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	9,232		$	7,312
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of income tax		(390	)		(36	)
Cumulative effect of change in accounting principle, net of income tax		(1,227	)		—
Depreciation and amortization		6,570			6,421
Deferred income tax benefit		(323	)		(91	)
Loss on disposal of property and equipment		38			38
Tax benefit from exercise of stock options		1,935			385
Change in assets and liabilities:
Accounts receivable		1,898			(57	)
Merchandise inventories		7,585			10,665
Prepaid expenses and other assets		(6,134	)		(449	)
Accounts payable		2,725			(17,273	)
Income tax payable		2,444			(986	)
Accrued liabilities		4,712			(3,146	)
Deferred and other liabilities		2,093			(143	)
Net cash provided by continuing operations		31,158			2,640
Net cash provided by discontinued operations		721			1,290
Net cash provided by operating activities		31,879			3,930
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities		196,155			102,000
Purchases of marketable securities		(207,455	)		(97,925	)
Capital expenditures		(13,053	)		(5,217	)
Proceeds from sale of assets and other		107			268
Net cash used in investing activities		(24,246	)		(874	)
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		(92	)		(225	)
Net Increase in Cash and Cash Equivalents		9,353			3,580
CASH AND CASH EQUIVALENTS:
Beginning of Period		21,553			20,628
End of Period	$	30,906		$	24,208
NON-CASH INVESTING ACTIVITIES:
Capital expenditures incurred, but not yet paid	$	3,525		$	—

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 29, 2005.
	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 (“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:

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	13 Weeks Ended
	May 1, 2004			May 3, 2003
	(In thousands, except per share data)
Net income, as reported	$	9,232		$	7,312
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	$	8,091		$	6,551
Basic income per share
As reported	$	0.30		$	0.25
Pro forma		0.27			0.22
Diluted income per share
As reported	$	0.29		$	0.24
Pro forma		0.26			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, 2004			May 3, 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, 2004		May 3, 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

     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.

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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, 2004			May 3, 2003
	(In thousands)
Net income	$	9,232		$	7,312
Other comprehensive income (loss)		(19	)		23
Total comprehensive income	$	9,213		$	7,335

6.	Segments
	The Company operates two reportable segments, retail stores and Play & Music.  Corporate overhead and income taxes are included in the retail stores segment.  The following table provides the summary financial data of each reportable segment (in thousands).

	13 Weeks Ended May 1, 2004
	Retail Stores		Play & Music		Total
Net sales	$	144,448	$	2,667	$	147,115
Depreciation and amortization		6,446		124		6,570
Operating income		11,434		320		11,754
Total assets		315,936		5,569		321,505
Capital expenditures		13,009		44		13,053

	13 Weeks Ended May 3, 2003
	Retail Stores		Play & Music		Total
Net sales	$	128,653	$	3,373	$	132,026
Depreciation and amortization		6,250		171		6,421
Operating income		11,395		553		11,948
Total assets		227,464		7,634		235,098
Capital expenditures		5,175		42		5,217

	Net sales from our Canadian operations amounted to $5.7 million and $4.7 million in the first quarter of 2004 and 2003, respectively.  Long-lived assets held by our Canadian operations approximated $3.0 million as of May 1, 2004 and May 3, 2003.
7.	Co-Branded Credit Card
	In late 2003, the Company entered into co-branded credit card agreements (the “Agreements”) with a third-party bank (the “Bank”) and Visa U.S.A. Inc. for the issuance of a Visa credit card bearing the Gymboree brand and administration of an associated incentive program for cardholders.  The program, which was launched in April 2004, offers incentives to cardholders, including a 5% discount on in-store purchases using the Gymboree Visa card and annual rewards in the form of a Gymboree gift certificate or gift card equal to 1% of total non-Gymboree purchases.  The Bank is the sole owner of the

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accounts issued under the program and will absorb all losses associated with non-payment by the cardholder and any fraudulent usage of the accounts by third parties.  The Company is responsible for redeeming the incentives, including the issuance of any gift certificates or gift cards. The Bank will pay fees to the Company based on the number of credit card accounts opened and card usage and will make certain guaranteed minimum annual payments.  Visa U.S.A. Inc. will also pay fees to the Company based on card usage.  Cardholder incentives will be funded from the fees paid by the Bank to the Company.  As of May 1, 2004 and as of January 31, 2004, the Company has received $6.0 million in advance payments under these Agreements, which are included in other long-term liabilities in the respective consolidated balance sheet.  The Company will recognize revenues related to these agreements as follows:

• New account fees will be recognized as other revenues on a straight-line basis over the estimated life of the customer relationship, currently estimated to be 3 years.

• Credit card usage fees will be recognized as other revenues as actual usage occurs.

• Minimum guaranteed annual payments which exceed amounts earned based on the number of accounts opened and card usage, will be recognized as other revenues on a straight-line basis over the estimated life of the customer relationship, currently estimated to be 3 years.

• Annual rewards earned will be shown as gift certificate liabilities and recognized as retail revenues when the gift certificates are redeemed.

8.	March 2004 Corporate Office Lease
	In March 2004, the Company signed a lease agreement for a new corporate office building in San Francisco, California.  The lease, which expires on April 14, 2018, requires base rent payments of approximately $4.7 million annually, subject to market value adjustments after 11 years.  The lease requires the Company to provide a $2.4 million standby letter of credit, which may be reduced on each anniversary of the lease commencement.  As part of the agreement, the Company’s new landlord will assume the Company’s lease obligations for its Burlingame, California headquarters through the 2006 expiration of such lease.  When the Company ceases to use the Burlingame headquarters, which is expected in the fourth quarter of 2004, it will record a non-cash charge that cannot yet be estimated.  At the same time, the same amount will be recorded as a deferred lease incentive from the new landlord, which will be amortized over the life of the new lease as a reduction of rent expense in accordance with generally accepted accounting principles.
9.	Discontinued Operations
	On August 16, 2004, the Board of Directors authorized the Company to proceed with the closure of its United Kingdom and Ireland operations (22 stores and one distribution center), as a result of their continued poor financial performance.  As of October 30, 2004, substantially all such operations had ceased.  The results of the United Kingdom and Ireland operations have been presented as discontinued operations in the accompanying financial statements for all periods presented.  Net sales and net loss from discontinued operations were as follows:

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	13 Weeks Ended
	May 1, 2004			May 3, 2003
Net retail sales	$	6,933		$	7,429
Income from discontinued operations	$	614			58
Income tax expense		(224	)		(22	)
Income from discontinued operations, net of income taxes	$	390		$	36

10.	Restatement of Previously Issued Condensed Consolidated Financial Statements
	On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under accounting principles generally accepted in the United States of America (“GAAP”). The Company’s management subsequently initiated a review of its lease-related accounting practices and determined that, like many other retailers, the period over which it recognized rent expense and amortized tenant allowances was not in accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” (“FTB No. 85-3”) and Technical Bulletin No. 88-1 “Issues Relating to Accounting for Leases” (“FTB No. 88-1”).  As a result, the Company’s condensed consolidated financial statements as of and for the thirteen week periods ended May 1, 2004 and May 3, 2003, have been restated from the amounts previously reported.
	Under the requirements of FTB No. 85-3, rent expense should be recognized on a straight-line basis over the term of the lease, including any rent holiday period.  In prior periods, the Company determined that the term of the lease begins on the rent commencement date of the lease, which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which rent is expensed.  The Company now considers possession to occur on the date it enters the space and begins construction build-out.
	With respect to lease incentives such as tenant allowances received from the landlord to cover construction costs incurred, FTB No. 88-1 states that lease incentives should be treated by the Company as a reduction of rental expense and amortized on a straight-line basis over the term of the lease in accordance with FTB No. 85-3.  The Company’s policy related to lease incentives had been to record such incentives as deferred liabilities and amortize them as a reduction to rent expense over the term of the lease which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which lease incentives are amortized.

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     For all periods presented herein, the Company determined that investments in auction rate securities should have been classified as marketable securities and not as cash and cash equivalents.  As a result, securities that have stated maturities beyond three months, but are priced and traded as short-term investments due to the liquidity provided through the interest rate reset mechanism approximately every 30 days, are now shown as marketable securities.  The purchase and sale of marketable securities previously presented as cash and cash equivalents have been reclassified to investing activities in the Condensed Consolidated Statements of Cash Flows.

     The following tables present a summary of the effects of this restatement and reclassification on the Company’s Condensed Consolidated Balance Sheets as of May 1, 2004 and May 3, 2003, Condensed Consolidated Statements of Income for the thirteen-weeks ended May 1, 2004 and May 3, 2003, and Condensed Consolidated Statements of Cash Flows for the thirteen-weeks ended May 1, 2004 and May 3, 2003 (in thousands, except per share data):

	As of May 1, 2004
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cash and cash equivalents	$	110,206		$	—		$	(79,300	)	$	30,906
Marketable securities		—			—			79,300			79,300
Accounts receivable		8,716			(610	)		1,161			9,267
Current assets of discontinued operations		—			8,942			150			9,092
Lease Rights, Deferred Taxes and Other Assets		7,712			(887	)		2,503			9,328
Total assets		326,784			(1	)		3,814			330,597
Current liabilities of discontinued operations		—			3,285			665			3,950
Deferred rent and other liabilities		26,808			(251	)		7,153			33,710
Retained earnings		155,484			—			(3,981	)		151,503
Accumulated other comprehensive income		(512	)		—			(24	)		(536	)
Total stockholders’ equity		217,179			—			(4,005	)		213,174

	As of May 3, 2003
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cash and cash equivalents	$	60,133		$	—		$	(35,925	)	$	24,208
Marketable securities		—			—			35,925			35,925
Accounts receivable		7,610			(322	)		100			7,388
Current assets of discontinued operations		—			8,475			22			8,497
Lease Rights, Deferred Taxes and Other Assets		6,767			(979	)		2,189			7,977
Total assets		241,284			—			2,311			243,595
Current liabilities of discontinued operations		—			1,722			829			2,551
Deferred rent and other liabilities		20,734			(340	)		4,920			25,314
Retained earnings		127,361			—			(3,438	)		123,923
Accumulated other comprehensive income		(745	)		—			—			(745	)
Total stockholders’ equity		177,836			—			(3,438	)		174,398

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	13 Weeks Ended May 1, 2004
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cost of goods sold, including buying and occupancy expenses	$	88,268		$	(4,231	)	$	721		$	84,758
Income tax benefit (expense)		(4,858	)		218			263			(4,377	)
Income from discontinued operations, net of tax		—			379			11			390
Net income		9,679			—			(447	)		9,232
Net income per share:
Basic	$	0.32		$	—		$	(0.02	)	$	0.30
Diluted	$	0.31		$	—		$	(0.02	)	$	0.29

	13 Weeks Ended May 3, 2003
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cost of goods sold, including buying and occupancy expenses	$	80,634		$	(5,429	)	$	(55	)	$	75,150
Income tax benefit (expense)		(4,545	)		11			(21	)		(4,555	)
Income from discontinued operations, net of tax		—			19			17			36
Net income		7,261			—			51			7,312
Net income per share:
Basic	$	0.25		$	—		$	—		$	0.25
Diluted	$	0.24		$	—		$	—		$	0.24

	13 Weeks Ended May 1, 2004
	As Previously Reported			Reclassifications*		Restatement Adjustments			As Restated
Net cash used in investing activities	$	(16,500	)		3,554		(11,300	)	$	(24,246	)

	13 Weeks Ended May 3, 2003
	As Previously Reported			Reclassifications*		Restatement Adjustments		As Restated
Net cash used in investing activities	$	(5,015	)		66		4,075	$	(874	)

*    In the third quarter of fiscal 2004, the Company reclassified the assets, liabilities and results of operations of its United Kingdom and Ireland operations to discontinued operations for all periods presented.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of The Gymboree Corporation:

We have reviewed the accompanying condensed consolidated balance sheets of The Gymboree Corporation and subsidiaries (the “Company”) as of May 1, 2004 and May 3, 2003, and the related condensed consolidated statements of income and cash flows for the thirteen-week periods then ended.  These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the condensed consolidated financial statements, effective February 1, 2004, the Company changed its accounting method for inventory valuation from the retail method to the lower of cost or market method, determined on a weighted average basis.

As discussed in Note 10 to the condensed consolidated financial statements, the condensed consolidated financial statements have been restated.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Gymboree Corporation as of January 31, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated April 22, 2005, we expressed an unqualified opinion on those consolidated financial statements (and included an explanatory paragraph relating to the restatement).  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/Deloitte & Touche LLP

San Francisco, California
June 9, 2004 (April 22, 2005 as to the discontinued operations discussed in Note 9 and the effects of the restatement discussed in Note 10)

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements

          The following discussion and analysis should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report.  The discussion in this report contains forward-looking statements that involve risks and uncertainties, including statements regarding planned capital expenditures, planned store openings, expansions and renovations, systems infrastructure development, future cash generated from operations and future cash needs. Inaccurate assumptions and known and unknown risks and uncertainties can affect the accuracy of forward-looking statements, and our actual results could differ materially from results that may be anticipated by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, customer reactions to new merchandise, concepts and marketing activity, gross margin achievement, our ability to manage inventory levels appropriately, general economic conditions, success in meeting delivery targets, competitive market conditions, trade restrictions, instability in countries where our merchandise is manufactured and the other factors described in this document.  When used in this document, the words “believes,” “expects,” “estimates,” “anticipates” and similar expressions are intended to identify certain of these forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on information available as of the date of this report. We do not intend to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report, in our Annual Reports on Form 10-K and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

Restatement of Financial Statements

     On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under accounting principles generally accepted in the United States of America (“GAAP”). The Company’s management subsequently initiated a review of its lease-related accounting practices and determined that, like many other retailers, the period over which it recognized rent expense and amortized tenant allowances was not in accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” (“FTB No. 85-3”) and Technical Bulletin No. 88-1 “Issues Relating to Accounting for Leases” (“FTB No. 88-1”).  As a r esult, the Company’s condensed consolidated financial statements as of and for the thirteen week periods ended May 1, 2004 and May 3, 2003, have been restated from the amounts previously reported.

     Under the requirements of FTB No. 85-3, rent expense should be recognized on a straight-line basis over the term of the lease, including any rent holiday period.  In prior periods, the Company determined that the term of the lease begins on the rent commencement date of the lease, which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which rent is expensed.  The Company now considers possession to occur on the date it enters the space and begins construction build-out.  

     With respect to lease incentives such as tenant allowances received from the landlord to cover construction costs incurred, FTB No. 88-1 states that lease incentives should be treated by the Company as a reduction of rental expense and amortized on a straight-line basis over the term of the lease in accordance with FTB No. 85-3.  The Company’s policy related to lease incentives had been to record such incentives as deferred liabilities and amortize them as a reduction to rent expense over the term of the lease which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which lease incentives are amortized. 

     For all periods presented herein, the Company determined that investments in auction rate securities should have been classified as marketable securities and not as cash and cash equivalents.  As a result, securities that have stated maturities beyond three months, but are priced and traded as short-term investments due to the liquidity provided through the interest rate reset mechanism approximately every 30 days, are now shown as marketable securities.  The purchase and sale of marketable securities previously presented as cash and cash equivalents have been reclassified to investing activities in the Condensed Consolidated Statements of Cash Flows.

     See Note 10 in the notes to the condensed consolidated financial statements of this Report for a summary of the effects of these changes on the Company’s Condensed Consolidated Balance Sheets as of May 1, 2004 and May 3, 2003, Condensed Consolidated Statements of Income for the thirteen-weeks ended May 1, 2004 and May 3, 2003, and Condensed Consolidated Statements of Cash Flows for the thirteen-weeks ended May 1, 2004 and May 3, 2003.

General

     The Gymboree Corporation is an international specialty retailer operating stores selling high quality apparel and accessories, as well as play programs for women and children under the GYMBOREE®, JANIE AND JACK®, JANEVILLE™ and GYMBOREE PLAY & MUSIC® brands. As of May 1, 2004, the Company conducted its business through four primary divisions: Gymboree, Janie and Jack, Janeville and Gymboree Play & Music. As of May 1, 2004, we had 633 stores, including 583 stores in the United States (including 40 Janie and Jack shops and 3 Janeville stores), 28 stores in Canada and 22 stores in Europe. The Company also operates two on-line stores at www.gymboree.com and www.janieandjack.com.

     Our plan for fiscal 2004 is to continue to grow our store base for both Gymboree and Janie and Jack, opening approximately 20 and 25 stores respectively.  We will also continue to invest in Gymboree retail stores, upgrading our fixture and merchandise display systems to better and more consistently display our products.  In the first quarter of 2004, we launched our newest retail concept, Janeville, with 3 stores and the goal of opening a total of 14 new stores by the end of the year.  We also launched our co-branded Gymboree Visa card with a compelling rewards program for our customers.

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     Subsequent to the issuance of the Company’s condensed consolidated financial statements for the quarter ended May 1, 2004, the Board of Directors authorized the Company, on August 16, 2004, to proceed with the closure of its United Kingdom and Ireland operations (22 stores and one distribution center), as a result of their continued poor financial performance.  As of October 30, 2004, substantially all such operations had ceased.  The results of the United Kingdom and Ireland operations have been presented as discontinued operations in the accompanying financial statements for all periods presented.

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Results of Operations

Thirteen weeks ended May 1, 2004 compared to thirteen weeks ended May 3, 2003

Net Sales

     Net retail sales in the first quarter of 2004 increased to $144.4 million from $128.7 million in the same period last year, an increase of $15.7 million or 12.2%.  Comparable store sales increased 7% or $10.2 million over the same 13-week period last year.  This increase was primarily due to an increase in the number of transactions resulting from higher traffic levels and a higher conversion rate.  Product performance was strong in the first quarter of 2004 due to positive customer reaction to our baby girl and kid girl product lines, as well as the rebalance of fashion and basics in our baby boy and kid boy departments.  Non-comparable store sales increased $6.3 million due to net store and square footage growth of 44 stores and 97,000 square feet, respectively.  This increase was offset by a decrease of $0.8 million in sales to off-price retailers, which vary based on the availability of merchandise.  The number of stores open at the end of the quarter was 633 compared to 589 as of the end of the same period last year. 

     Play & Music net sales in the first quarter of 2004 decreased to $2.7 million from $3.4 million in the same period last year, a decrease of $0.7 million or 20.6%.  The decrease was primarily due to a decrease in new franchise sales and royalties from existing franchisees, as well as the closure of 9 corporate owned sites as part of our ongoing restructuring of the Play & Music business. 

Gross Profit

     Gross profit for the first quarter of 2004 increased to $62.4 million from $56.9 million in the same period last year.  As a percentage of net sales, gross profit decreased 0.7 percentage points to 42.4% from 43.1% in the same period last year.  Our gross margins were positively impacted by markdown optimization, whereby markdowns are targeted to maximize SKU level sales and margins, as well as occupancy leverage related to our comparable store sales increase.  This effect was offset by increased buying costs related to our new concepts, Janie and Jack and Janeville.   Gross profit in 2004 was calculated using the cost method compared to the retail method in 2003.  The impact of this change cannot be determined.

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Selling, General and Administrative Expenses

     Selling, general and administrative (“SG&A”) expenses, which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, increased to $50.6 million in the first quarter of 2004 from $44.9 million in the same period last year.  As a percentage of net sales, SG&A expenses increased 0.4 percentage points to 34.4% in the first quarter of 2004 from 34.0% in the same period last year.  The increase in SG&A was primarily due to higher corporate expenses related to marketing, incentive compensation and benefits.  Marketing expenses increased as a result of more extensive in-store marketing campaigns, an increase in web marketing and the launch of Janeville.  Incentive compensation and benefits increased primarily due to increased headcount and medical insurance premiums.

Other Income (Expense), Net

     Other income increased to $238,000 in the first quarter of 2004 from a loss of $117,000 in the same period last year primarily due to foreign exchange gains.  These gains resulted from foreign currency fluctuations on inter-company transactions between our United States operations and foreign subsidiaries.  The amount of foreign exchange gains or losses is dependent on both monthly currency fluctuations and balances held in those associated currencies.

Income Taxes

     Our effective tax rate for the first quarter of 2004 and 2003 was 36.5% and 38.5%, respectively.  Our estimated annual 2004 effective tax rate was reduced to 36.5%, as we expect to benefit from higher tax-free interest income and other permanent deductions. 

Discontinued Operations

     Income reported for the discontinued United Kingdom and Ireland operations includes operating results in the first quarter of fiscal 2004 and 2003, which were close to break-even.

Seasonality

     Our business is impacted by the general seasonal trends characteristic of the apparel and retail industries.  Sales from retail operations have historically been highest during the fourth fiscal quarter, somewhat lower during the first and third fiscal quarters and lowest during the second fiscal quarter.  Consequently, the results for any fiscal quarter are not necessarily indicative of results for the full year. 

Financial Condition

Liquidity and Capital Resources

     Net cash provided by operating activities for the thirteen weeks ended May 1, 2004 was $31.9 million compared to $3.9 million provided by operating activities in the same period last year.  This increase was primarily due to changes in working capital items.    

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     Net cash used in investing activities for the thirteen weeks ended May 1, 2004 was $24.2 million and consisted of $13.0 million in capital expenditures for the opening of 16 new stores, relocation and/or expansion of 6 existing stores, expenditures related to store openings and relocations currently in progress, and information technology improvements, as well as a net increase of $11.3 million in marketable securities.  The Company estimates that capital expenditures, net of allowances, will be approximately $45 million during 2004, and will primarily be used to relocate 15 Gymboree stores, re-brand 200 Gymboree stores, open 20 new Gymboree stores, 25 new Janie and Jack shops and 14 new Janeville stores ($28 million for all stores), build-out our new corporate headquarters ($8 million) and continue the systems infrastructure replacement ($9 million). 

     Cash provided by financing activities for the thirteen weeks ended May 1, 2004 totaled $1.8 million compared to $749,000 in the same period last year.  This increase was due to an increase in proceeds from stock option exercises.

     Cash and cash equivalents were $30.9 million at May 1, 2004, an increase of $9.4 million from January 31, 2004.  Working capital as of May 1, 2004 was $118.9 million compared to $116.1 million as of January 31, 2004.

     The Company has an unsecured revolving credit facility for borrowings of up to $60 million. This credit facility has a three-year term and may, at the option of the Company, be increased to $70 million at any time during the first two years of the term.  This credit facility may be used for working capital and capital expenditure needs, as well as the issuance of documentary and standby letters of credit.  As of May 1, 2004, $34.5 million of documentary and standby letters of credit were outstanding.

     In late 2003, the Company entered into co-branded credit card agreements (the “Agreements”) with a third-party bank (the “Bank”) and Visa U.S.A. Inc. for the issuance of a Visa credit card bearing the Gymboree brand and administration of an associated incentive program for cardholders.  The program, which was launched in April 2004, offers incentives to cardholders, including a 5% discount on in-store purchases using the Gymboree Visa card and annual rewards in the form of a Gymboree gift certificate or gift card equal to 1% of total non-Gymboree purchases.  The Bank is the sole owner of the accounts issued under the program and will absorb all losses associated with non-payment by the cardholder and any fraudulent usage of the accounts by third parties.  The Company is responsible for redeeming the incentives, including the issuance of any gift certificates or gift cards. The Bank will pay fees to the Company based on the number of credit card accounts opened and card usage and will make certain guaranteed minimum annual payments.  Visa U.S.A. Inc. will also pay fees to the Company based on card usage.  Cardholder incentives will be funded from the fees paid by the Bank to the Company.  As of May 1, 2004 and as of January 31, 2004, the Company has received $6.0 million in advance payments under these Agreements, which are included in other long-term liabilities in the respective consolidated balance sheet.  The Company will recognize revenues related to these agreements as follows:

• New account fees will be recognized as other revenues on a straight-line basis over the estimated life of the customer relationship, currently estimated to be 3 years.

• Credit card usage fees will be recognized as other revenues as actual usage occurs.

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• Minimum guaranteed annual payments which exceed amounts earned based on the number of accounts opened and card usage, will be recognized as other revenues on a straight-line basis over the estimated life of the customer relationship, currently estimated to be 3 years.

• Annual rewards earned will be shown as gift certificate liabilities and recognized as retail revenues when the gift certificates are redeemed.

     In March 2004, the Company signed a lease agreement for a new corporate office building in San Francisco, California.  The lease, which expires on April 14, 2018, requires base rent payments of approximately $4.7 million annually, subject to market value adjustments after 11 years.  The lease requires the Company to provide a $2.4 million standby letter of credit, which may be reduced on each anniversary of the lease commencement.  As part of the agreement, the Company’s new landlord will assume the Company’s lease obligations for its Burlingame, California headquarters through the 2006 expiration of such lease.  When the Company ceases to use the Burlingame headquarters, which is expected in the fourth quarter of 2004, it will record a non-cash charge that cannot yet be estimated.  At the same time, the same amount will be recorded as a deferred lease incentive from the new landlord, which will be amortized over the life of the new lease as a reduction of rent expense.

     There have been no material changes to the Company’s contractual obligations since its Annual Report on Form 10-K for the year ended January 31, 2004, except for the lease obligations related to the Company’s new corporate offices described above.

     The Company no longer believes it has any potential liability in connection with the Company’s guarantees of lease agreements for Zutopia stores sold to Wet Seal in 2000.  Wet Seal has announced that it has closed all Zutopia stores and that it will negotiate early lease buyouts of the Zutopia leases.  The Company remains liable on lease agreements for 4 Play & Music sites sold to franchisees.  However, the Company does not believe that payment by the Company of its maximum potential amount of future payments under the Play & Music lease agreements would have a material current or future effect on its liquidity or capital resources.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company enters into forward foreign exchange contracts to hedge certain inter-company loans and inventory purchases.  The term of the forward exchange contracts is generally less than one year.  The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar net cash inflow resulting from the repayment of certain inter-company loans from our foreign subsidiaries and dollar margins resulting from inventory purchases will be adversely affected by changes in exchange rates.

     The tables below summarize by major currency the notional amounts and fair values of our forward foreign exchange contracts in U.S. dollars as of May 1, 2004 and May 3, 2003.

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	May 1, 2004
	Notional Amount		Fair Value Gain/(Loss)			Weighted Average Rate
	(in thousands, except weighted average rate data)
British pounds sterling	$	7,222	$	84		$	1.76
Canadian dollars		9,682		320			0.73
Euro		1,779		(5	)		1.20
Total	$	18,683	$	399

	May 3, 2003
	Notional Amount		Fair Value Loss			Weighted Average Rate
	(in thousands, except weighted average rate data)
British pounds sterling	$	15,297	$	(407	)	$	1.60
Canadian dollars		7,739		(629	)		0.70
Euro		6,015		(404	)		1.15
Total	$	29,051	$	(1,440	)

Item 4.    CONTROLS AND PROCEDURES

     We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Due to the facts and circumstances surrounding the correction in the Company’s lease accounting practices described in Note 10 of our Condensed Consolidated Financial Statements, the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.

     We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial reporting occurred during the quarter ended May 1, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II – OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

     The Company is subject to various legal proceedings and claims arising in the ordinary course of business.  Our management does not expect that the results in any of these legal proceedings, either individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flow.

Item 6.	EXHIBITS AND REPORTS ON FORM 8-K
	(a) Exhibits
10.57	Sublease Agreement for 500 Howard, San Francisco, CA.
15	Letter re:  Unaudited Interim Financial Information
18	Letter re:  Change in Accounting Principle
31.1	Certification of Lisa M. Harper Pursuant to §302 of the Sarbanes-
	Oxley Act of 2002.
31.2	Certification of Blair W. Lambert Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Lisa M. Harper Pursuant to 18 U.S.C.§1350, as Adopted
	Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Blair W. Lambert Pursuant to 18 U.S.C.§1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
	(b) Reports on Form 8-K
	On February 5, 2004, we furnished a current report on Form 8-K pursuant to Items 7 and 12 in connection with a press release announcing fourth quarter and fiscal year 2003 sales.
	On March 2, 2004, we furnished a current report on Form 8-K pursuant to Items 7 and 12 in connection with a press release announcing fourth quarter and fiscal year 2003 earnings, as well as February sales.
	On April 8, 2004, we filed a current report on Form 8-K pursuant to Items 5 and 7 in connection with a press release announcing March sales and a change in accounting principle.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE GYMBOREE CORPORATION
		(Registrant)
April 22, 2005	By:	/s/ BLAIR W. LAMBERT
Date
		Blair W. Lambert
		Chief Operating Officer and Chief Financial Officer

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Exhibit Index

Exhibit Number	Description
10.57	Sublease Agreement for 500 Howard, San Francisco, CA.
15	Letter re:  Unaudited Interim Financial Information
18	Letter re:  Change in Accounting Principle
31.1	Certification of Lisa M. Harper Pursuant to §302 of the Sarbanes- Oxley Act of 2002.
31.2	Certification of Blair W. Lambert Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Lisa M. Harper Pursuant to 18 U.S.C.§1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Blair W. Lambert Pursuant to 18 U.S.C.§1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

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