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. |
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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 |
| (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 August 28, 2004, 30,748,807 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 July 31, 2004, as filed by the Registrant on September 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 subsequent to the period ended July 31, 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 May 1, 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 September 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.
TABLE OF CONTENTS
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Part I |
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| Item 1. |
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| 4 | |
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| 5 | |
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| Condensed Consolidated Statements of Cash Flows (as restated) | 6 |
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| 7 | |
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| 14 | |
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
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| Item 3. | 22 | |
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| Item 4. | 23 | |
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Part II |
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| Item 1. | 24 | |
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| Item 4. | 24 | |
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| Item 6. | 24 | |
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| 25 | ||
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| 26 |
3
FINANCIAL STATEMENTS |
THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
|
| July 31, |
| January 31, |
| August 2, |
| |||
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| ||||||
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| (Restated) |
| (Restated) |
| (Restated) |
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Assets |
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Current Assets |
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Cash and cash equivalents |
| $ | 18,495 |
| $ | 21,553 |
| $ | 20,440 |
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Marketable securities |
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| 58,000 |
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| 68,000 |
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| 28,000 |
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Accounts receivable |
|
| 15,870 |
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| 12,468 |
|
| 8,814 |
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Merchandise inventories |
|
| 74,931 |
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| 70,674 |
|
| 65,462 |
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Prepaid expenses |
|
| 2,180 |
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| 2,865 |
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| 7,739 |
|
Deferred taxes |
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| 665 |
|
| 1,144 |
|
| 1,591 |
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Current assets of discontinued operations |
|
| 9,051 |
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| 8,690 |
|
| 8,685 |
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Total current assets |
|
| 179,192 |
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| 185,394 |
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| 140,731 |
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Property and Equipment |
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Land and buildings |
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| 10,376 |
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| 10,375 |
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| 10,371 |
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Leasehold improvements |
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| 125,546 |
|
| 105,185 |
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| 93,092 |
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Furniture, fixtures and equipment |
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| 144,442 |
|
| 133,364 |
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| 127,472 |
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| ||||||
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| 280,364 |
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| 248,924 |
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| 230,935 |
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Less accumulated depreciation and amortization |
|
| (150,466 | ) |
| (140,026 | ) |
| (130,283 | ) |
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| 129,898 |
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| 108,898 |
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| 100,652 |
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Deferred taxes |
|
| 11,514 |
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| 6,855 |
|
| 7,411 |
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Lease Rights and Other Assets |
|
| 1,709 |
|
| 1,253 |
|
| 1,093 |
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Total Assets |
| $ | 322,313 |
| $ | 302,400 |
| $ | 249,887 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities |
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Accounts payable |
|
| 32,845 |
| $ | 33,318 |
| $ | 29,556 |
|
Income tax payable |
|
| 414 |
|
| 7,839 |
|
| 121 |
|
Accrued liabilities |
|
| 36,881 |
|
| 24,563 |
|
| 16,829 |
|
Current liabilities of discontinued operations |
|
| 4,513 |
|
| 3,604 |
|
| 3,229 |
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Total current liabilities |
|
| 74,653 |
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| 69,324 |
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| 49,735 |
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Long-Term Liabilities |
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Deferred rent and other liabilities |
|
| 36,380 |
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| 32,862 |
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| 25,862 |
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Total Liabilities |
|
| 111,033 |
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| 102,186 |
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| 75,597 |
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Stockholders’ Equity |
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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 issued and outstanding at July 31, 2004, January 31, 2004 and August 2, 2003, respectively) |
|
| 64,000 |
|
| 58,460 |
|
| 52,725 |
|
Retained earnings |
|
| 147,554 |
|
| 142,271 |
|
| 122,816 |
|
Accumulated other comprehensive loss |
|
| (274 | ) |
| (517 | ) |
| (1,251 | ) |
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Total stockholders’ equity |
|
| 211,280 |
|
| 200,214 |
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| 174,290 |
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Total Liabilities and Stockholders’ Equity |
| $ | 322,313 |
| $ | 302,400 |
| $ | 249,887 |
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See notes to condensed consolidated financial statements.
4
THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
| 13 Weeks Ended |
| 26 Weeks Ended |
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|
| July 31, |
| August 2, |
| July 31, |
| August 2, |
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| (Restated) |
| (Restated) |
| (Restated) |
| (Restated) |
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Net sales: |
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Retail |
| $ | 113,399 |
| $ | 104,118 |
| $ | 257,847 |
| $ | 232,771 |
|
Play & Music and Other |
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| 2,585 |
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| 2,734 |
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| 5,252 |
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| 6,107 |
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Total net sales |
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| 115,984 |
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| 106,852 |
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| 263,099 |
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| 238,878 |
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Cost of goods sold, including buying and occupancy expenses |
|
| (74,756 | ) |
| (67,377 | ) |
| (159,513 | ) |
| (142,527 | ) |
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Gross profit |
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| 41,228 |
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| 39,475 |
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| 103,586 |
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| 96,351 |
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Selling, general and administrative expenses |
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| (47,075 | ) |
| (41,523 | ) |
| (97,678 | ) |
| (86,451 | ) |
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Operating income (loss) |
|
| (5,847 | ) |
| (2,048 | ) |
| 5,908 |
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| 9,900 |
|
Other income, net |
|
| 145 |
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| 452 |
|
| 382 |
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| 335 |
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Income (loss) from continuing operations before income taxes |
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| (5,702 | ) |
| (1,596 | ) |
| 6,290 |
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| 10,235 |
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Income tax benefit (expense) |
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| 2,081 |
|
| 665 |
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| (2,296 | ) |
| (3,889 | ) |
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Income (loss) from continuing operations, net of income tax |
|
| (3,621 | ) |
| (931 | ) |
| 3,994 |
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| 6,346 |
|
Income (loss) from discontinued operations, net of income tax |
|
| (328 | ) |
| (175 | ) |
| 62 |
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| (140 | ) |
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Income (loss) before cumulative effect of change in accounting principle |
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| (3,949 | ) |
| (1,106 | ) |
| 4,056 |
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| 6,206 |
|
Cumulative effect of change in accounting principle, net of income tax |
|
| — |
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| — |
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| 1,228 |
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| — |
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Net income (loss) |
| $ | (3,949 | ) | $ | (1,106 | ) | $ | 5,284 |
| $ | 6,206 |
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Basic per share amounts: |
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Income (loss) from continuing operations, net of income tax |
| $ | (0.12 | ) | $ | (0.03 | ) | $ | 0.13 |
| $ | 0.22 |
|
Income (loss) from discontinued operations, net of income tax |
|
| (0.01 | ) |
| (0.01 | ) |
| — |
|
| — | |
Cumulative effect of change in accounting principle, net of income tax |
|
| — |
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| — |
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| 0.04 |
|
| — |
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| ||||||||
Net income (loss) |
| $ | (0.13 | ) | $ | (0.04 | ) | $ | 0.17 |
| $ | 0.21 |
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Diluted per share amounts: |
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Income (loss) from continuing operations, net of income tax |
| $ | (0.12 | ) | $ | (0.03 | ) | $ | 0.13 |
| $ | 0.21 |
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Income (loss) from discontinued operations, net of income tax |
|
| (0.01 | ) |
| (0.01 | ) |
| — |
|
| — | |
Cumulative effect of change in accounting principle, net of income tax |
|
| — |
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| — |
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| 0.04 |
|
| — |
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Net income (loss) |
| $ | (0.13 | ) | $ | (0.04 | ) | $ | 0.17 |
| $ | 0.20 |
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Weighted average shares outstanding: |
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Basic |
|
| 30,693 |
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| 29,552 |
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| 30,584 |
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| 29,433 |
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Diluted |
|
| 30,693 |
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| 29,552 |
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| 31,374 |
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| 30,723 |
|
See notes to condensed consolidated financial statements.
5
THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| 26 Weeks Ended |
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|
| July 31, |
| August 2, |
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| (Restated) |
| (Restated) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
| $ | 5,284 |
| $ | 6,206 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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|
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Loss (income) from discontinued operations, net of income tax |
|
| (62 | ) |
| 140 |
|
Cumulative effect of change in accounting principle, net of income tax |
|
| (1,228 | ) |
| — |
|
Depreciation and amortization |
|
| 13,296 |
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| 12,766 |
|
Deferred income tax expense (benefit) |
|
| (4,182 | ) |
| 104 |
|
Loss on disposal of property and equipment |
|
| 85 |
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| 55 |
|
Tax benefit from exercise of stock options |
|
| 2,643 |
|
| 385 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
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Accounts receivable |
|
| (4,697 | ) |
| (1,446 | ) |
Merchandise inventories |
|
| (2,247 | ) |
| (5,980 | ) |
Prepaid expenses and other assets |
|
| 233 |
|
| (234 | ) |
Accounts payable |
|
| (471 | ) |
| 2,520 |
|
Income tax payable |
|
| (8,164 | ) |
| (12,580 | ) |
Accrued liabilities |
|
| 6,258 |
|
| (6,164 | ) |
Deferred and other liabilities |
|
| 4,790 |
|
| 411 |
|
|
|
|
| ||||
Net cash provided by (used in) continuing operations |
|
| 11,538 |
|
| (3,817 | ) |
Net cash provided by discontinued operations |
|
| 1,052 |
|
| 1,589 |
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|
|
|
| ||||
Net cash provided by (used in) operating activities |
|
| 12,590 |
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| (2,228 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
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Proceeds from sales and maturities of marketable securities |
|
| 426,305 |
|
| 211,850 |
|
Purchases of marketable securities |
|
| (416,305 | ) |
| (199,850 | ) |
Capital expenditures |
|
| (28,485 | ) |
| (11,796 | ) |
Proceeds from sale of assets and other |
|
| 108 |
|
| 386 |
|
|
|
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| ||||
Net cash provided by (used in) investing activities |
|
| (18,377 | ) |
| 590 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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|
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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 |
|
| (168 | ) |
| (808 | ) |
|
|
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| ||||
Net Decrease in Cash and Cash Equivalents |
|
| (3,058 | ) |
| (188 | ) |
CASH AND CASH EQUIVALENTS: |
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|
|
|
|
|
|
Beginning of Period |
|
| 21,553 |
|
| 20,628 |
|
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End of Period |
| $ | 18,495 |
| $ | 20,440 |
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NON-CASH INVESTING ACTIVITIES: |
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|
|
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|
|
Capital expenditures incurred, but not yet paid |
| $ | 6,066 |
| $ | — |
|
See notes to condensed consolidated financial statements.
6
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. |
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| 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. |
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| 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”). |
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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. |
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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: |
7
|
| 13 Weeks Ended |
| 26 Weeks Ended |
| ||||||||
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| ||||||||||
|
| July 31, |
| August 2, |
| July 31, |
| August 2, |
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| (In thousands, except per share data) |
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Net income (loss), as reported |
| $ | (3,949 | ) | $ | (1,106 | ) | $ | 5,284 |
| $ | 6,206 |
|
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 | ) |
| (865 | ) |
| (2,450 | ) |
| (1,625 | ) |
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| ||||||||
Pro forma net income (loss) |
| $ | (5,258 | ) | $ | (1,971 | ) | $ | 2,834 |
| $ | 4,581 |
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Basic income (loss) per share |
|
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As reported |
| $ | (0.13 | ) | $ | (0.04 | ) | $ | 0.17 |
| $ | 0.21 |
|
Pro forma |
|
| (0.17 | ) |
| (0.07 | ) |
| 0.09 |
|
| 0.16 |
|
Diluted income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
| $ | (0.13 | ) | $ | (0.04 | ) | $ | 0.17 |
| $ | 0.20 |
|
Pro forma |
|
| (0.17 | ) |
| (0.07 | ) |
| 0.09 |
|
| 0.15 |
|
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 |
| ||||
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| |||||
|
| July 31, |
| August 2, |
| ||
|
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| ||||
Expected dividend rate |
|
| 0 | % |
| 0 | % |
Expected volatility |
|
| 48.5 | % |
| 45.4 | % |
Risk-free interest rate |
|
| 2.6 | % |
| 2.6 | % |
Expected lives (years) |
|
| 4.0 |
|
| 4.0 |
|
4. | Net Income (Loss) Per Share |
| Basic net income (loss) per share is calculated by dividing net income (loss) 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 |
| 26 Weeks Ended |
| ||||||||
|
|
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| ||||||||||
|
| July 31, |
| August 2, |
| July 31, |
| August 2, |
| ||||
|
|
|
|
|
| ||||||||
|
| (In thousands) |
| ||||||||||
Weighted average number of shares - basic |
|
| 30,693 |
|
| 29,552 |
|
| 30,584 |
|
| 29,433 |
|
Add: effect of dilutive securities |
|
| — |
|
| — |
|
| 790 |
|
| 1,290 |
|
|
|
|
|
|
| ||||||||
Weighted average number of shares - diluted |
|
| 30,693 |
|
| 29,552 |
|
| 31,374 |
|
| 30,723 |
|
|
|
|
|
|
|
| Anti-dilutive options to purchase 3,621,542 and 2,617,924 shares of common stock for the 13 weeks ended July 31, 2004 and August 2, 2003, respectively, and 1,636,569 and 1,576,559 shares of common stock for the 26 weeks ended July 31, 2004 and August 2, 2003, respectively, were excluded from the above computations of weighted average shares. |
8
5. | Comprehensive Income (Loss) |
| Comprehensive income (loss), which includes net income (loss), foreign currency translation adjustments and fluctuations in the fair market value of certain derivative financial instruments, is as follows: |
|
| 13 Weeks Ended |
| 26 Weeks Ended |
| ||||||||
|
|
|
| ||||||||||
|
| July 31, |
| August 2, |
| July 31, |
| August 2, |
| ||||
|
|
|
|
|
| ||||||||
|
| (In thousands) |
| ||||||||||
Net income (loss) |
| $ | (3,949 | ) | $ | (1,106 | ) | $ | 5,284 |
| $ | 6,206 |
|
Other comprehensive income (loss) |
|
| 262 |
|
| (507 | ) |
| 243 |
|
| (484 | ) |
|
|
|
|
|
| ||||||||
Total comprehensive income (loss) |
| $ | (3,687 | ) | $ | (1,613 | ) | $ | 5,527 |
| $ | 5,722 |
|
|
|
|
|
|
|
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 July 31, 2004 |
| 26 Weeks Ended July 31, 2004 |
| ||||||||||||||
|
|
|
| ||||||||||||||||
|
| Retail |
| Play & Music |
| Total |
| Retail |
| Play & Music |
| Total |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||
Net sales |
| $ | 113,399 |
| $ | 2,585 |
| $ | 115,984 |
| $ | 257,847 |
| $ | 5,252 |
| $ | 263,099 |
|
Depreciation and amortization |
|
| 6,609 |
|
| 117 |
|
| 6,726 |
|
| 13,054 |
|
| 242 |
|
| 13,296 |
|
Operating income (loss) |
|
| (6,332 | ) |
| 485 |
|
| (5,847 | ) |
| 5,102 |
|
| 806 |
|
| 5,908 |
|
Total assets |
|
| 307,723 |
|
| 5,539 |
|
| 313,262 |
|
| 307,723 |
|
| 5,539 |
|
| 313,262 |
|
Capital expenditures |
|
| 11,864 |
|
| 34 |
|
| 11,898 |
|
| 28,407 |
|
| 78 |
|
| 28,485 |
|
|
| 13 Weeks Ended August 2, 2003 |
| 26 Weeks Ended August 2, 2003 |
| ||||||||||||||
|
|
|
| ||||||||||||||||
|
| Retail |
| Play & Music |
| Total |
| Retail |
| Play & Music |
| Total |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||
Net sales |
| $ | 104,118 |
| $ | 2,734 |
| $ | 106,852 |
| $ | 232,771 |
| $ | 6,107 |
| $ | 238,878 |
|
Depreciation and amortization |
|
| 6,274 |
|
| 71 |
|
| 6,345 |
|
| 12,524 |
|
| 242 |
|
| 12,766 |
|
Operating income (loss) |
|
| (2,239 | ) |
| 191 |
|
| (2,048 | ) |
| 9,156 |
|
| 744 |
|
| 9,900 |
|
Total assets |
|
| 234,276 |
|
| 6,926 |
|
| 241,202 |
|
| 234,276 |
|
| 6,926 |
|
| 241,202 |
|
Capital expenditures |
|
| 6,541 |
|
| 38 |
|
| 6,579 |
|
| 11,716 |
|
| 80 |
|
| 11,796 |
|
| Net retail sales from our Canadian operations amounted to $4.7 million and $4.4 million for the 13 weeks ended July 31, 2004 and August 2, 2003, respectively, and $10.3 million and $9.1 million for the 26 weeks ended July 31, 2004 and August 2, 2003, respectively. Long-lived assets held by our Canadian operations amounted to $3.1 million and $2.3 million as of July 31, 2004 and August 2, 2003, respectively. |
|
|
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 accounts issued under the program and will absorb all losses associated with non-payment |
9
| 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 pays fees to the Company based on the number of credit card accounts opened and card usage and makes certain guaranteed minimum annual payments. Visa U.S.A. Inc. also pays fees to the Company based on card usage. Cardholder incentives are funded from the fees paid by the Bank to the Company. The Company recognizes 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 credit card 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 credit card 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. |
| As of July 31, 2004 and as of January 31, 2004, the Company has received $6.0 million in advance payments under these Agreements. During the quarter ended July 31, 2004, the Company recognized approximately $76,000 in new account and credit card usage fees, which are included in Play & Music and Other net sales in the respective condensed consolidated statement of operations. As of July 31, 2004, $5.3 million and $0.7 million in advance payments under these Agreements are included in accrued liabilities and other long-term liabilities, respectively, in the respective condensed consolidated balance sheet. |
|
|
8. | New 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 the Company may choose to reduce 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 fiscal 2004, it will record a non-cash charge that cannot yet be determined. 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. | Subsequent Event |
| 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. The Company anticipates recording charges related to the closure of approximately $9.5 million, net of income taxes, exclusive of operating costs incurred during the wind |
10
| down process. These charges, largely related to costs of lease disposition, asset write-offs and severances, are expected to be realized in the third and fourth quarters of fiscal 2004. 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: |
|
| 13 Weeks Ended |
| 26 Weeks Ended |
| ||||||||
|
|
|
| ||||||||||
|
| July 31, |
| August 2, |
| July 31, |
| August 2, |
| ||||
|
|
|
|
|
| ||||||||
|
| (In thousands) |
| ||||||||||
Net retail sales |
| $ | 6,395 |
| $ | 6,239 |
| $ | 13,328 |
| $ | 13,667 |
|
|
|
|
|
|
| ||||||||
Loss from discontinued operations |
| $ | (517 | ) | $ | (283 | ) | $ | 97 |
| $ | (225 | ) |
Income tax benefit |
|
| 189 |
|
| 108 |
|
| (36 | ) |
| 85 |
|
|
|
|
|
|
| ||||||||
Loss from discontinued operations, net of income taxes |
| $ | (328 | ) | $ | (175 | ) | $ | 62 |
| $ | (140 | ) |
|
|
|
|
|
|
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 and twenty-six week periods ended July 31, 2004 and August 2, 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. |
11
| 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 July 31, 2004 and August 2, 2003, Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003, and Condensed Consolidated Statements of Cash Flows for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003 (in thousands, except per share data): |
|
| As of July 31, 2004 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
| $ | 76,495 |
| $ | — |
| $ | (58,000 | ) | $ | 18,495 |
|
Marketable securities |
|
| — |
|
| — |
|
| 58,000 |
|
| 58,000 |
|
Accounts receivable |
|
| 14,575 |
|
| (224 | ) |
| 1,519 |
|
| 15,870 |
|
Current assets of discontinued operations |
|
| — |
|
| 8,892 |
|
| 159 |
|
| 9,051 |
|
Lease Rights, Deferred Taxes and Other Assets |
|
| 11,039 |
|
| (769 | ) |
| 2,953 |
|
| 13,223 |
|
Total assets |
|
| 317,682 |
|
| — |
|
| 4,631 |
|
| 322,313 |
|
Current liabilities of discontinued operations |
|
| — |
|
| 3,812 |
|
| 701 |
|
| 4,513 |
|
Deferred rent and other liabilities |
|
| 27,905 |
|
| (263 | ) |
| 8,738 |
|
| 36,380 |
|
Retained earnings |
|
| 152,318 |
|
| — |
|
| (4,764 | ) |
| 147,554 |
|
Accumulated other comprehensive income |
|
| (230 | ) |
| — |
|
| (44 | ) |
| (274 | ) |
Total stockholders’ equity |
|
| 216,088 |
|
| — |
|
| (4,808 | ) |
| 211,280 |
|
|
| As of August 2, 2003 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
| |||||||||
Cash and cash equivalents |
| $ | 48,440 |
| $ | — |
| $ | (28,000 | ) | $ | 20,440 |
|
Marketable securities |
|
| — |
|
| — |
|
| 28,000 |
|
| 28,000 |
|
Accounts receivable |
|
| 7,943 |
|
| (223 | ) |
| 1,094 |
|
| 8,814 |
|
Current assets of discontinued operations |
|
| — |
|
| 8,658 |
|
| 27 |
|
| 8,685 |
|
Lease Rights, Deferred Taxes and Other Assets |
|
| 7,303 |
|
| (1,017 | ) |
| 2,218 |
|
| 8,504 |
|
Total assets |
|
| 246,548 |
|
| — |
|
| 3,339 |
|
| 249,887 |
|
Current liabilities of discontinued operations |
|
| — |
|
| 2,448 |
|
| 781 |
|
| 3,229 |
|
Deferred rent and other liabilities |
|
| 20,151 |
|
| (332 | ) |
| 6,043 |
|
| 25,862 |
|
Retained earnings |
|
| 126,301 |
|
| — |
|
| (3,485 | ) |
| 122,816 |
|
Accumulated other comprehensive income |
|
| (1,251 | ) |
| — |
|
| — |
|
| (1,251 | ) |
Total stockholders’ equity |
|
| 177,775 |
|
| — |
|
| (3,485 | ) |
| 174,290 |
|
12
|
| 13 Weeks Ended July 31, 2004 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
| |||||||||
Cost of goods sold, including buying and occupancy expenses |
| $ | 78,271 |
| $ | (4,720 | ) | $ | 1,205 |
| $ | 74,756 |
|
Income tax benefit |
|
| 1,820 |
|
| (179 | ) |
| 440 |
|
| 2,081 |
|
Loss from discontinued operations, net of tax |
|
| — |
|
| (310 | ) |
| (18 | ) |
| (328 | ) |
Net loss |
|
| (3,166 | ) |
| — |
|
| (783 | ) |
| (3,949 | ) |
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.10 | ) | $ | — |
| $ | (0.03 | ) | $ | (0.13 | ) |
Diluted |
| $ | (0.10 | ) | $ | — |
| $ | (0.03 | ) | $ | (0.13 | ) |
|
| 13 Weeks Ended August 2, 2003 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
| |||||||||
Cost of goods sold, including buying and occupancy expenses |
| $ | 71,855 |
| $ | (4,607 | ) | $ | 129 |
| $ | 67,377 |
|
Income tax benefit |
|
| 744 |
|
| (128 | ) |
| 49 |
|
| 665 |
|
Loss from discontinued operations, net of tax |
|
| — |
|
| (208 | ) |
| 33 |
|
| (175 | ) |
Net loss |
|
| (1,059 | ) |
| — |
|
| (47 | ) |
| (1,106 | ) |
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.04 | ) | $ | — |
| $ | — |
| $ | (0.04 | ) |
Diluted |
| $ | (0.04 | ) | $ | — |
| $ | — |
| $ | (0.04 | ) |
|
| 26 Weeks Ended July 31, 2004 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
| |||||||||
Cost of goods sold, including buying and occupancy expenses |
| $ | 166,540 |
| $ | (8,952 | ) | $ | 1,925 |
| $ | 159,513 |
|
Income tax expense |
|
| (3,038 | ) |
| 1,445 |
|
| (703 | ) |
| (2,296 | ) |
Income from discontinued operations, net of tax |
|
| — |
|
| 69 |
|
| (7 | ) |
| 62 |
|
Net income |
|
| 6,513 |
|
| — |
|
| (1,229 | ) |
| 5,284 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.21 |
| $ | — |
| $ | (0.04 | ) | $ | 0.17 |
|
Diluted |
| $ | 0.21 |
| $ | — |
| $ | (0.04 | ) | $ | 0.17 |
|
|
| 26 Weeks Ended August 2, 2003 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
| |||||||||
Cost of goods sold, including buying and occupancy expenses |
| $ | 152,489 |
| $ | (10,036 | ) | $ | 74 |
| $ | 142,527 |
|
Income tax expense |
|
| (3,801 | ) |
| (116 | ) |
| 28 |
|
| (3,889 | ) |
Loss from discontinued operations, net of tax |
|
| — |
|
| (190 | ) |
| 50 |
|
| (140 | ) |
Net income |
|
| 6,202 |
|
| — |
|
| 4 |
|
| 6,206 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.21 |
| $ | — |
| $ | — |
| $ | 0.21 |
|
Diluted |
| $ | 0.20 |
| $ | — |
| $ | — |
| $ | 0.20 |
|
|
| 26 Weeks Ended July 31, 2004 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
| |||||||||
Net cash used in investing activities |
| $ | (28,125 | ) | $ | (252 | ) | $ | 10,000 |
| $ | (18,377 | ) |
|
| 26 Weeks Ended August 2, 2003 |
| ||||||||||
|
|
| |||||||||||
|
| As Previously |
| Reclassifications* |
| Restatement |
| As Restated |
| ||||
|
|
|
|
| |||||||||
Net cash used in investing activities |
| $ | (11,534 | ) | $ | 124 |
| $ | 12,000 |
| $ | 590 |
|
* 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. |
13
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 July 31, 2004 and August 2, 2003, and the related condensed consolidated statements of operations for the thirteen week and twenty-six week periods then ended, and cash flows for the twenty-six 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
September 9, 2004 (April 22, 2005 as to the discontinued operations discussed in Note 9 and the effects of the restatement discussed in Note 10)
14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-looking statements
You should read the following discussion and analysis in conjunction with our consolidated 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, future cash needs and the wind down of our United Kingdom and Ireland operations. 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, unexpected complications with the wind down of our United Kingdom and Ireland operations, 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 Report 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 result, the Company’s condensed consolidated financial statements as of and for the thirteen and twenty-six week periods ended July 31, 2004 and August 2, 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.
15
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 July 31, 2004 and August 2, 2003, Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003, and Condensed Consolidated Statements of Cash Flows for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003.
General
The Gymboree Corporation is an international specialty retailer operating stores selling high quality apparel and accessories for women and children under the GYMBOREE®, JANIE AND JACK®, JANEVILLE™ brands, as well as play programs for children under the GYMBOREE PLAY & MUSIC™ brand. As of July 31, 2004, the Company conducted its business through four primary divisions: Gymboree, Janie and Jack, Janeville and Gymboree Play & Music. As of July 31, 2004, we had 646 stores, including 596 stores in the United States (including all 46 Janie and Jack shops and all 7 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 the remainder of fiscal 2004 is to continue to grow our domestic store base for Gymboree, Janie and Jack and Janeville, bringing the total number of store openings for the fiscal year to approximately 24, 24 and 14 new stores, respectively. We will also continue to invest in Gymboree retail stores in the United States, upgrading our fixture and merchandise display systems to better and more consistently display our products.
16
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.
Results of Operations
Thirteen weeks ended July 31, 2004 compared to thirteen weeks ended August 2, 2003
Net Sales
Net retail sales in the thirteen weeks ended July 31, 2004 increased to $113.4 million from $104.1 million in the same period last year, an increase of $9.3 million or 8.9%. Comparable store sales increased 2% or $2.9 million over the same period last year. This increase was primarily due to an increase in the average transaction value. Strong product performance in our newborn, baby boy, baby girl, and kid girl departments was slightly offset by weakness in our accessories and kid boy departments. Non-comparable store sales increased $7.2 million due to net store and square footage growth of 52 stores and 114,000 square feet, respectively. The increase was also due to a $319,000 increase in shipping income related to our web business. These increases were offset by a decrease of $1.3 million in sales to off-price retailers as a result of our seasonal clearance strategy whereby markdown merchandise is primarily sold at our retail stores. The number of stores open at the end of the quarter was 646 compared to 594 as of the end of the same period last year.
Play & Music net sales in the second quarter of fiscal 2004 decreased to $2.6 million from $2.7 million in the same period last year, a decrease of $0.1 million or 3.7%. The decrease was primarily due to the sale and closure of 7 corporate owned sites as part of our ongoing restructuring of the Play & Music business.
Gross Profit
Gross profit for the second quarter of fiscal 2004 increased to $41.2 million from $39.5 million in the same period last year. As a percentage of net sales, gross profit decreased 1.4 percentage points to 35.5% in the second quarter of fiscal 2004 from 36.9% in the same period last year. The decrease in our gross profit margin was primarily due to increased buying costs related to our new concepts, Janie and Jack and Janeville, as well as higher occupancy costs as a percent of net sales. Gross profit in fiscal 2004 was calculated using the cost method compared to the retail method in fiscal 2003. The impact of this change cannot be determined.
17
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 $47.1 million in the second quarter of fiscal 2004 from $41.5 million in the same period last year. As a percentage of net sales, SG&A expenses increased 1.7 percentage points to 40.6% in the second quarter of fiscal 2004 from 38.9% in the same period last year. The increase in SG&A was primarily due to higher corporate expenses related to compensation, benefits and marketing. Compensation increased primarily due to the increased headcount needed to support our new concepts, Janie and Jack and Janeville. Benefits increased due to increased headcount, higher medical insurance premiums and expanded employee benefits. Marketing expenses increased primarily as a result of more extensive in-store marketing campaigns for Gymboree.
Other Income, Net
Other income decreased to $145,000 in the second quarter of fiscal 2004 from $452,000 in the same period last year primarily due to foreign exchange losses. These losses 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. These losses were offset by an increase of $163,000 in interest income due to higher cash and cash equivalent balances on a quarter-over-quarter basis.
Income Taxes
Our effective tax rate for the second quarters of fiscal 2004 and 2003 was 36.5% and 38.0%, respectively. Our estimated fiscal 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 second quarter of fiscal 2004 and 2003, which were close to break even.
Twenty-six weeks ended July 31, 2004 compared to twenty-six weeks ended August 2, 2003
Net Sales
Net retail sales for the twenty-six weeks ended July 31, 2004 increased to $257.8 million from $232.8 million in the same period last year, an increase of $25.0 million or 10.7%. Comparable store sales increased 5% or $13.1 million over the same 26-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, as well as an increase in average transaction value. Product performance was strong in our newborn, baby boy, baby girl and kid girl departments, offset by weak performance in our kid boy department. Non-comparable store sales increased $13.4 million due to net store and square footage growth of 52 stores and 114,000 square feet, respectively. The increase was also due to a $370,000 increase in shipping income related to our web business. These increases were offset by a decrease of $2.1 million in sales to off-price retailers as a result of our seasonal clearance strategy whereby markdown merchandise is primarily sold at our retail stores. The number of stores open at the end of the quarter was 646 compared to 594 as of the end of the same period last year.
18
Play & Music net sales for the twenty-six weeks ended July 31, 2004 decreased to $5.2 million from $6.1 million in the same period last year, a decrease of $0.9 million or 15%. The decrease was primarily due to a decrease in new franchise sales, lower royalties from existing franchisees, and the sale and closure of a total of 13 corporate owned sites as part of our ongoing restructuring of the Play & Music business.
Gross Profit
Gross profit for the twenty-six weeks ended July 31, 2004 increased to $103.6 million from $96.4 million in the same period last year, an increase of $7.2 million. As a percentage of net sales, gross profit decreased 0.9 percentage points to 39.4% in the twenty-six weeks ended July 31, 2004 from 40.3% in the same period last year. The decrease in our gross profit margin was primarily due to increased buying costs related to our new concepts, Janie and Jack and Janeville, as well as higher occupancy costs as a percent of net sales. This effect was offset by markdown optimization, whereby markdowns are targeted to maximize SKU level sales and margins. Gross profit in fiscal 2004 was calculated using the cost method compared to the retail method in fiscal 2003. The impact of this change cannot be determined.
Selling, General and Administrative Expenses
SG&A expenses increased to $97.7 million in the twenty-six weeks ended July 31, 2004 from $86.5 million in the same period last year. As a percentage of net sales, SG&A expenses increased 0.9 percentage points to 37.1% in the twenty-six weeks ended July 31, 2004 from 36.2% in the same period last year. The increase in SG&A was primarily due to higher corporate expenses related to compensation, marketing and benefits. Compensation increased primarily due to the increased headcount needed to support our new concepts, Janie and Jack and Janeville. Marketing expenses increased as a result of more extensive in-store marketing campaigns for Gymboree. Benefits increased due to increased headcount, higher medical insurance premiums and expanded employee benefits.
Other Income, Net
Other income increased to $382,000 in the twenty-six weeks ended July 31, 2004 from $335,000 in the same period last year primarily due to an increase in interest income, offset in part by foreign exchange losses. These losses 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 twenty-six weeks ended July 31, 2004 and August 2, 2003 was 36.5% and 38.0%, respectively. Our estimated fiscal 2004 effective tax rate was reduced to 36.5%, as we expect to benefit from higher tax-free interest income and other permanent deductions.
19
Discontinued Operations
Income reported for the discontinued United Kingdom and Ireland operations includes operating results for the twenty-six weeks ended July 31, 2004 and August 2, 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 twenty-six weeks ended July 31, 2004 was $12.6 million compared to $2.2 million used in operating activities in the same period last year. This increase was primarily due to changes in working capital items.
Net cash used in investing activities for the twenty-six weeks ended July 31, 2004 was $18.4 million (excluding $6.1 million in capital expenditures incurred, but not yet paid) and consisted of capital expenditures for the opening of 30 new stores, relocation and/or expansion of 8 existing stores, expenditures related to store openings and relocations currently in progress, and information technology improvements, as well as a net increase of $10.0 million in marketable securities. The Company estimates that capital expenditures, net of allowances, will be approximately $45 to $50 million during fiscal 2004, and will primarily be used to relocate 16 Gymboree stores, re-brand 200 existing Gymboree stores, open 24 new Gymboree stores, 24 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 our systems infrastructure replacement ($9 million).
Cash provided by financing activities for the twenty-six weeks ended July 31, 2004 totaled $2.9 million compared to $2.3 million in the same period last year. This increase was due to an increase in proceeds from stock option exercises.
Because of the seasonal nature of our business, our cash needs vary throughout the year. In the second quarter, our cash and cash equivalents and working capital typically decrease. This effect was more pronounced this year due to increased merchandise requirements related to our new concepts, Janie and Jack and Janeville, as well as the increase in capital expenditures discussed above. Cash and cash equivalents were $18.5 million at July 31, 2004, a decrease of $3.1 million from January 31, 2004. Marketable securities were $58.0 million at July 31, 2004, a decrease of $10.0 million from January 31, 2004. Working capital as of July 31, 2004 was $104.5 million compared to $116.1 million as of January 31, 2004.
The Company has an unsecured revolving credit facility for borrowings of up to $70 million (increased from $60 million in August 2004). This credit facility has a three-year term expiring in August 2006, and may be used for working capital and capital expenditure needs, as well as the issuance of documentary and standby letters of credit. As of July 31, 2004, $50.3 million of documentary and standby letters of credit were outstanding. The increase in documentary and standby letters of credit outstanding is primarily due to the increased merchandise requirements discussed above.
20
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 pays fees to the Company based on the number of credit card accounts opened and card usage and makes certain guaranteed minimum annual payments. Visa U.S.A. Inc. also pays fees to the Company based on card usage. Cardholder incentives are funded from the fees paid by the Bank to the Company. The Company recognizes 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 credit card 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 credit card 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. |
As of July 31, 2004 and as of January 31, 2004, the Company has received $6.0 million in advance payments under these Agreements. During the quarter ended July 31, 2004, the Company recognized approximately $76,000 in new account and credit card usage fees, which are included in Play & Music and Other net sales in the respective condensed consolidated statement of operations. As of July 31, 2004, $5.3 million and $0.7 million in advance payments under these Agreements are included in accrued liabilities and other long-term liabilities, respectively, in the respective condensed consolidated balance sheet.
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 the Company may choose to reduce 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 fiscal 2004, it will record a non-cash charge that cannot yet be determined. 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.
21
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. The Company expects the wind down of its United Kingdom and Ireland operations to be substantially complete by the end of the third quarter of fiscal 2004. The Company anticipates recording charges related to the closure of approximately $9.5 million, net of income taxes, exclusive of operating costs incurred during the wind down process. These charges, largely related to costs of lease disposition, asset write-offs and severances, are expected to be realized in the third and fourth quarters of fiscal 2004.
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 does not believe 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 3 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.
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 July 31, 2004 and August 2, 2003.
22
|
| July 31, 2004 |
| |||||||
|
|
| ||||||||
|
| Notional |
| Fair Value |
| Weighted |
| |||
|
|
|
|
| ||||||
|
| (in thousands, except weighted average rate data) |
| |||||||
British pounds sterling |
| $ | 5,264 |
| $ | (47 | ) | $ | 1.81 |
|
Canadian dollars |
|
| 8,049 |
|
| 77 |
|
| 0.75 |
|
Euro |
|
| 1,636 |
|
| 49 |
|
| 1.20 |
|
|
|
|
|
|
|
| ||||
Total |
| $ | 14,949 |
| $ | 79 |
|
|
|
|
|
|
|
|
|
|
|
|
| August 2, 2003 |
| |||||||
|
|
| ||||||||
|
| Notional |
| Fair Value |
| Weighted |
| |||
|
|
|
|
| ||||||
|
| (in thousands, except weighted average rate data ) |
| |||||||
British pounds sterling |
| $ | 9,695 |
| $ | (138 | ) | $ | 1.59 |
|
Canadian dollars |
|
| 8,912 |
|
| (516 | ) |
| 0.71 |
|
Euro |
|
| 67 |
|
| — |
|
| 1.13 |
|
|
|
|
|
|
|
| ||||
Total |
| $ | 18,674 |
| $ | (654 | ) |
|
|
|
|
|
|
|
|
|
|
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 July 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
23
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.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Gymboree Corporation Annual Meeting of Stockholders (“the annual meeting”) was held on June 16, 2004, at which time the stockholders voted on the following proposals:
|
| Votes for |
| Votes Against |
| Abstentions and |
| |||
|
|
|
|
| ||||||
Election of Class II Directors: |
|
|
|
|
|
|
|
|
|
|
Lisa M. Harper |
|
| 29,253,861 |
|
| 333,763 |
|
| — |
|
Barbara L. Rambo |
|
| 29,159,626 |
|
| 427,998 |
|
| — |
|
Advisory Vote on the Appointment of Deloitte & Touche LLP as Independent Auditors |
|
| 28,876,471 |
|
| 703,807 |
|
| 7,345 |
|
Adoption of 2004 Equity Incentive Plan |
|
| 21,352,103 |
|
| 5,373,974 |
|
| 8,062 |
|
At the annual meeting, Lisa M. Harper and Barbara L. Rambo were elected as Class II directors, whose terms will expire at the annual meeting in 2007. Continuing Class III directors, whose terms will expire at the annual meeting in 2005, are Stuart G. Moldaw, John C. Pound and William U. Westerfield. Continuing Class I directors, whose terms will expire at the annual meeting in 2006, are Blair W. Lambert and Gary M. Heil.
The advisory vote on the appointment of Deloitte & Touche LLP as the independent auditors of the Company for the fiscal year ending January 29, 2005 was approved at the meeting.
The Gymboree Corporation 2004 Equity Incentive Plan was approved at the meeting.
| EXHIBITS | |
|
|
|
15 |
| Letter re: Unaudited Interim Financial Information |
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. |
24
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 |
|
|
Date | By: | /s/ BLAIR W. LAMBERT |
| ||
|
| Blair W. Lambert |
25
Exhibit |
| Description |
15 |
| Letter re: Unaudited Interim Financial Information |
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. |
26