Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

October 29, 2011 For the quarterly period ended October 29, 2011

OR

 

¨ 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)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated Filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of December 12, 2011, the registrant had 1,000 shares of common stock outstanding, par value $0.001 per share, all of which are owned by Giraffe Holding, Inc., the registrant’s parent holding company, and are not publicly traded.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Part I – FINANCIAL INFORMATION      3   
Item 1. FINANCIAL STATEMENTS      3   
CONDENSED CONSOLIDATED BALANCE SHEETS      3   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS      4   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      5   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS      6   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      27   

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

     28   
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      35   
Item 4. CONTROLS AND PROCEDURES      36   
Part II – OTHER INFORMATION      37   
Item 1. LEGAL PROCEEDINGS      37   
Item 1A. RISK FACTORS      37   
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      37   
Item 3. DEFAULTS UPON SENIOR SECURITIES      37   
Item 4. (REMOVED AND RESERVED)      37   
Item 5. OTHER INFORMATION      37   
Item 6. EXHIBITS      38   
SIGNATURES      39   
Exhibit Index      40   

 

2


Table of Contents

Part I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     Successor           Predecessor  
     October 29,
2011
    January 29,
2011
          October 30,
2010
 

Assets

           

Current Assets

           

Cash and cash equivalents

   $ 45,721      $ 32,124           $ 176,835   

Accounts receivable, net of allowance of $165, $- and $438

     21,948        13,669             18,777   

Merchandise inventories

     252,685        184,268             171,191   

Prepaid income taxes

     17,049        16,116             —     

Prepaid expenses

     5,861        4,856             4,913   

Deferred income taxes

     31,843        6,697             14,784   
  

 

 

   

 

 

        

 

 

 

Total current assets

     375,107        257,730             386,500   
  

 

 

   

 

 

        

 

 

 

Property and Equipment

           

Land and buildings

     22,427        22,397             25,758   

Leasehold improvements

     141,630        125,153             239,368   

Furniture, fixtures and equipment

     78,470        71,286             203,411   
  

 

 

   

 

 

        

 

 

 
     242,527        218,836             468,537   

Less accumulated depreciation and amortization

     (35,215     (6,345          (250,263
  

 

 

   

 

 

        

 

 

 
     207,312        212,491             218,274   

Deferred Income Taxes

     —          —               15,467   

Goodwill

     934,639        934,639             239   

Other Intangible Assets

     592,963        606,210             2,203   

Deferred Financing Costs

     49,549        61,983             —     

Other Assets

     7,605        15,072             3,142   
  

 

 

   

 

 

        

 

 

 

Total Assets

   $ 2,167,175      $ 2,088,125           $ 625,825   
  

 

 

   

 

 

        

 

 

 

Liabilities and Stockholders’ Equity

           

Current Liabilities

           

Accounts payable

   $ 68,674      $ 54,494           $ 55,775   

Accrued liabilities

     90,835        81,100             70,776   

Line of credit

     40,000        —               —     

Current portion of long-term debt

     8,200        8,200             —     

Income tax payable

     —          —               624   
  

 

 

   

 

 

        

 

 

 

Total current liabilities

     207,709        143,794             127,175   
  

 

 

   

 

 

        

 

 

 

Long-Term Liabilities

           

Long-term debt

     1,203,650        1,207,791             —     

Lease incentives and other deferred liabilities

     28,141        18,352             74,202   

Unrecognized tax benefits

     8,270        7,779             6,428   

Deferred income taxes

     238,929        224,598             —     
  

 

 

   

 

 

        

 

 

 

Total Liabilities

     1,686,699        1,602,314             207,805   
  

 

 

   

 

 

        

 

 

 

Commitments and Contingencies

     —          —               —     

Stockholders’ Equity

           

Successor Company - Common stock, including additional paid-in capital ($.001 par value: 1,000 shares authorized, issued, and outstanding at October 29, 2011 and January 29, 2011)

     527,811        508,617             —     

Predecessor Company - Common stock, including additional paid-in capital ($.001 par value: 100,000,000 shares authorized; 27,375,031 shares issued and outstanding at October 30, 2010)

     —          —               199,557   

Retained earnings (deficit)

     (43,465     (23,044          219,235   

Accumulated other comprehensive income (loss)

     (3,870     238             (772
  

 

 

   

 

 

        

 

 

 

Total stockholders’ equity

     480,476        485,811             418,020   
  

 

 

   

 

 

        

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,167,175      $ 2,088,125           $ 625,825   
  

 

 

   

 

 

        

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     Successor           Predecessor     Successor           Predecessor  
     13 Weeks Ended
October 29, 2011
          13 Weeks Ended
October 30, 2010
    39 Weeks Ended
October 29, 2011
          39 Weeks Ended
October 30, 2010
 

Net sales:

                  

Retail

   $ 296,445           $ 275,693      $ 815,735           $ 744,977   

Gymboree Play & Music and Other

     6,703             5,157        16,706             11,447   
  

 

 

        

 

 

   

 

 

        

 

 

 

Total net sales

     303,148             280,850        832,441             756,424   

Cost of goods sold, including buying and occupancy expenses

     (172,303          (142,046     (498,704          (390,549
  

 

 

        

 

 

   

 

 

        

 

 

 

Gross profit

     130,845             138,804        333,737             365,875   

Selling, general and administrative expenses

     (99,448          (82,102     (272,896          (241,515
  

 

 

        

 

 

   

 

 

        

 

 

 

Operating income

     31,397             56,702        60,841             124,360   

Interest income

     28             77        115             277   

Interest expense

     (22,051          (58     (67,981          (212

Loss on extinguishment of debt

     —               —          (19,563          —     

Other income (expense), net

     8             28        (44          114   
  

 

 

        

 

 

   

 

 

        

 

 

 

Income (loss) before income taxes

     9,382             56,749        (26,632          124,539   

Income tax (expense) benefit

     (12,430          (22,353     6,210             (48,703
  

 

 

        

 

 

   

 

 

        

 

 

 

Net (loss) income

   $ (3,048        $ 34,396      $ (20,422        $ 75,836   
  

 

 

        

 

 

   

 

 

        

 

 

 

See notes to condensed consolidated financial statements.

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Successor           Predecessor  
     39 Weeks Ended
October 29, 2011
          39 Weeks Ended
October 30, 2010
 

CASH FLOWS FROM OPERATING ACTIVITIES:

         

Net (loss) income

   $ (20,422        $ 75,836   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

         

Write-off of deferred financing costs and original issue discount

     15,860             —     

Depreciation and amortization

     42,703             29,712   

Amortization of deferred financing costs and accretion of original issue discount

     5,126             —     

Interest rate cap contracts - adjustment to market

     15             —     

Loss on disposal/impairment of assets

     3,501             832   

(Benefit) provision for deferred income taxes

     (6,269          1,102   

Excess tax benefits from exercise and vesting of share-based awards

     —               (4,237

Tax benefit from exercise of stock options and vesting of restricted stock awards and units

     —               4,278   

Share-based compensation expense

     4,330             12,551   

Change in assets and liabilities:

         

Accounts receivable

     (8,278          (8,860

Merchandise inventories

     (68,106          (50,104

Prepaid expenses and other assets

     (1,097          521   

Prepaid income taxes / income taxes payable

     (2,314          (4,372

Accounts payable

     14,178             9,242   

Accrued liabilities

     9,066             8,005   

Lease incentives and other deferred liabilities

     12,778             3,149   
  

 

 

        

 

 

 

Net cash provided by operating activities

     1,071             77,655   
  

 

 

        

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Capital expenditures

     (28,080          (38,808

Acquisition of business, net of cash acquired

     (1,352          —     

Other

     (296          (1,074
  

 

 

        

 

 

 

Net cash used in investing activities

     (29,728          (39,882
  

 

 

        

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Proceeds from Term Loan

     820,000             —     

Payments on Term Loan

     (826,150          —     

Proceeds from ABL facility

     60,656             —     

Payments on ABL facility

     (20,656          —     

Deferred financing costs

     (6,665          —     

Investment by Parent

     14,865             —     

Exercise of stock options

     —               1,362   

Repurchases of common stock

     —               (124,610

Excess tax benefits from exercise and vesting of share-based awards

     —               4,237   
  

 

 

        

 

 

 

Net cash provided by (used in) financing activities

     42,050             (119,011
  

 

 

        

 

 

 

Effect of exchange rate fluctuations on cash

     204             401   
  

 

 

        

 

 

 

Net increase (decrease) in cash and cash equivalents

     13,597             (80,837

CASH AND CASH EQUIVALENTS:

         

Beginning of period

     32,124             257,672   
  

 

 

        

 

 

 

End of period

   $ 45,721           $ 176,835   
  

 

 

        

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

         

Capital expenditures incurred, but not yet paid

   $ 5,877           $ 7,438   

OTHER CASH FLOW INFORMATION:

         

Cash paid for income taxes

   $ 1,735           $ 48,100   

Cash paid for interest

   $ 52,790           $ 77   

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

On October 11, 2010, The Gymboree Corporation, a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Giraffe Holding, Inc., a Delaware corporation (“Parent”), and Giraffe Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Parent (“Acquisition Sub”), whereby Acquisition Sub merged with and into the Company in accordance with the “short-form” merger provisions available under Delaware law (the “Merger”). The Company is continuing as the surviving corporation and 100%-owned indirect subsidiary of the Parent. Investment funds sponsored by Bain Capital Partners, LLC (“Bain”) own a controlling interest in the Parent. The Merger was consummated on November 23, 2010 (“Transaction Date”). The accompanying condensed consolidated balance sheets, statements of operations and cash flows and the notes to the condensed consolidated financial statements are presented for the Predecessor and Successor periods, which relate to the periods preceding and succeeding the Transaction Date, respectively.

The unaudited interim condensed consolidated financial statements, which include The Gymboree Corporation and its subsidiaries, all of which are 100% owned, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Registration Statement on Form S-4 filed on May 16, 2011.

The accompanying interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. All such adjustments are of a normal and recurring nature, except for a $10.7 million adjustment to cost of goods sold resulting from an increase in the net book value of inventory as a result of purchase accounting, recorded in the first quarter of fiscal 2011, the loss on extinguishment of debt further described in Note 6, also recorded in the first quarter of fiscal 2011, and a $7.2 million charge resulting from the termination of the Company’s master franchise relationship in China, recorded in the third quarter of fiscal 2011 and further described in Note 15.

The results of operations for the 13 and 39 weeks ended October 29, 2011 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 28, 2012 (“fiscal 2011”) or any future period.

 

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Table of Contents

Classification Error

The Company corrected the classification of approximately $4.4 million in leasehold improvement costs from land and buildings to leasehold improvements to properly present such amounts in the condensed consolidated balance sheet as of January 29, 2011. The Company’s net property and equipment balance as of January 29, 2011 did not change from the amount previously reported.

 

2. Recently Issued Accounting Standards

In January 2010, the FASB issued guidance which amends and clarifies existing guidance related to fair value measurements and disclosures. This guidance requires new disclosures for (1) transfers in and out of Level 1 and Level 2 and reasons for such transfers; and (2) the separate presentation of purchases, sales, issuances and settlement in the Level 3 reconciliation. It also clarifies guidance around disaggregation and disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements. The Company adopted this guidance as of January 31, 2010, except for the new disclosures in the Level 3 reconciliation, which were adopted during the first quarter of fiscal 2011. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective for the Company as of January 29, 2012. The Company does not anticipate a material impact on its consolidated financial statements upon adoption.

In June 2011, the FASB issued guidance to amend the presentation of comprehensive income. This new guidance requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance will be effective for the Company as of January 29, 2012. The Company is currently evaluating the impact of this guidance on its financial statement presentation of comprehensive income.

In September 2011, the FASB issued guidance to amend the testing of goodwill for impairment. This new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This new guidance will be effective for the Company as of January 29, 2012. The Company does not anticipate a material impact to its consolidated financial statements upon adoption.

 

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3. Investment by Parent

On or about January 31, 2011, Parent entered into subscription agreements with certain members of the Company’s management team. Under the subscription agreements, such members of the management team purchased an aggregate of 1,580,769 Class A Shares and 175,641 Class L Shares of Parent. The aggregate cash consideration paid for the shares was $7.9 million. This amount was indirectly contributed to the Company by Parent.

In February 2011, investment funds sponsored by Bain purchased an aggregate of 419,231 Class A Shares and 46,581 Class L Shares of Parent for $2.1 million. In addition, an unrelated party purchased an aggregate of 1,000,000 Class A Shares and 111,111 Class L Shares of Parent for $5.0 million. These amounts were indirectly contributed to the Company by Parent.

 

4. Intangible Assets and Liabilities

Intangible assets and liabilities consist of the following (in thousands):

 

     October 29, 2011 (Successor)  
     Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Amount
 

Intangible Assets Not Subject to Amortization:

  

Goodwill

   $ 934,639        $ 934,639   
  

 

 

     

 

 

 

Trade names

   $ 560,340        $ 560,340   
  

 

 

     

 

 

 

Intangible Assets Subject to Amortization:

      

Customer relationships

     36,400        (14,743     21,657   

Below market leases

     7,055        (1,290     5,765   

Co-branded credit card agreement

     4,000        (573     3,427   

Franchise agreements

     1,900        (126     1,774   
  

 

 

   

 

 

   

 

 

 
     49,355        (16,732     32,623   
  

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 609,695      $ (16,732   $ 592,963   
  

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

      

Above market leases (included in Lease Incentives and Other Deferred Liabilities)

   $ (16,631   $ 3,260      $ (13,371
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     January 29, 2011 (Successor)  
     Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Amount
 

Intangible Assets Not Subject to Amortization:

  

Goodwill

   $ 934,639        $ 934,639   
  

 

 

     

 

 

 

Trade names

   $ 560,127        $ 560,127   
  

 

 

     

 

 

 

Intangible Assets Subject to Amortization:

      

Customer relationships

     36,400        (2,874     33,526   

Below market leases

     7,049        (255     6,794   

Co-branded credit card agreement

     4,000        (112     3,888   

Franchise agreements

     1,900        (25     1,875   
  

 

 

   

 

 

   

 

 

 
     49,349        (3,266     46,083   
  

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 609,476      $ (3,266   $ 606,210   
  

 

 

   

 

 

   

 

 

 

Intangible Liabilities Subject to Amortization:

      

Above market leases (included in Lease Incentives and Other Deferred Liabilities)

   $ (16,623   $ 642      $ (15,981
  

 

 

   

 

 

   

 

 

 

The financial information presented reflects the Company’s preliminary allocation of goodwill to its reporting units, segments and the guarantor and non-guarantor subsidiaries. The allocation of goodwill may change upon completion of the final valuation of the Company’s reporting units in the fourth quarter of 2011.

As of October 30, 2010, the Company had intangible assets of approximately $2.2 million and goodwill of approximately $0.2 million, both of which were assigned a fair value of zero in purchase accounting.

During the 13 and 39 weeks ended October 29, 2011, the Company recorded net amortization income of approximately $0.5 million and $1.5 million, respectively, in cost of goods sold (“COGS”) and amortization expense of approximately $4.1 million and $12.4 million, respectively, in selling, general and administrative expenses (“SG&A”). The Company estimates that amortization expense (income) related to intangible assets and liabilities will be as follows for the remainder of fiscal 2011 and each of the next five fiscal years (in thousands):

 

Fiscal    Below Market
Leases
     Above Market
Leases
    Other
Intangibles
     Total  

2011 (remaining 13 weeks)

   $ 344       $ (851   $ 4,144       $ 3,637   

2012

     1,376         (3,253     16,577         14,700   

2013

     1,162         (2,651     2,626         1,137   

2014

     1,066         (2,071     751         (254

2015

     843         (1,612     751         (18

2016

     487         (1,463     751         (225

 

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5. Line of Credit

In connection with the Merger discussed in Note 1, the Company entered into a senior secured asset-based revolving credit facility (“ABL”) which provides senior secured financing of up to $225 million, subject to a borrowing base. Availability under the ABL is subject to the assets of the Company, any subsidiary co-borrowers and any subsidiary guarantors that are available to collateralize the borrowings thereunder, and is reduced by the level of outstanding letters of credit. As of October 29, 2011, availability under the ABL was approximately $119.9 million. The ABL provides the Company with the right to request up to $75 million of additional commitments under this facility, subject to the satisfaction of certain conditions, provided that the aggregate amount of additional commitments incurred under both the ABL and the senior secured term loan facility described in Note 6 may not exceed $200 million in the aggregate. Principal amounts outstanding under the ABL are due and payable in full in November 2015. In addition to paying interest on outstanding principal under the ABL, the Company is required to pay a commitment fee on unutilized commitments thereunder, which was 0.5% per annum as of October 29, 2011. The ABL contains financial and other covenants that, among other things, restrict the Company’s ability to incur additional indebtedness and pay dividends. As of October 29, 2011, the Company was in compliance with these covenants. As of October 29, 2011, there were $40 million of borrowings and $65.1 million of commercial and standby letters of credit outstanding under the ABL. The Company and its 100%-owned domestic subsidiaries have fully and unconditionally guaranteed the Company’s obligations under the ABL.

 

6. Long-Term Debt

 

Long-term debt consists of (in thousands):    Successor  
     October 29,
2011
    January 29,
2011
 

Senior secured term loan facility, net of discount of $2,000 and $4,010

   $ 811,850      $ 815,991   

9.125% senior notes

     400,000        400,000   
  

 

 

   

 

 

 

Subtotal

     1,211,850        1,215,991   

Less current portion

     (8,200     (8,200
  

 

 

   

 

 

 

Long-term debt - less current portion

   $ 1,203,650      $ 1,207,791   
  

 

 

   

 

 

 

In connection with the Merger discussed in Note 1, the Company entered into an agreement with several lenders to establish an $820 million senior secured term loan facility (“Term Loan”). The Term Loan allows the Company to request additional tranches of term loans in an aggregate amount not to exceed $200 million, subject to the satisfaction of certain conditions, provided that such amount will be subject to reduction by the amount of any additional commitments incurred under the ABL described in Note 5. The interest rate for borrowings under the Term Loan is, at the option of the Company, a base rate plus an additional marginal rate of 2.5% (reduced from 3.0% as a result of the refinancing discussed below) or the Adjusted LIBOR rate (with a 1.5% floor) plus an additional rate of 3.5%

 

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(reduced from 4.0% as a result of the refinancing discussed below). The Term Loan requires the Company to make quarterly payments each equal to 0.25% of the original $820 million principal amount of the Term Loan made on the closing date plus accrued and unpaid interest thereon, with the balance due in February 2018. The Term Loan also has mandatory and voluntary pre-payment provisions, including a requirement that the Company prepay the Term Loan with a certain percentage of its annual excess cash flow beginning with the excess cash flow for fiscal 2011. The Term Loan is presented net of the related original issue discount (“OID”). Accretion of OID is included in interest expense and was not material during the 13 and 39 weeks ended October 29, 2011. In February 2011, the Company refinanced the Term Loan through an amendment and restatement of its existing credit agreement to lower the interest rate, remove certain financial covenants and extend the maturity date from November 2017 to February 2018. In the first quarter of fiscal 2011, the Company recorded a loss on extinguishment of debt of approximately $19.6 million as a result of the refinancing, which included the write-off of approximately $15.9 million in deferred financing costs and OID related to the original Term Loan. The obligations under the Term Loan are secured, subject to certain exceptions, by substantially all of the Company’s assets and those of its 100%-owned domestic subsidiaries. The Company and its 100%-owned domestic subsidiaries also have fully and unconditionally guaranteed the Company’s obligations under the Term Loan.

In connection with the Merger discussed in Note 1, the Company issued $400 million aggregate principal amount of 9.125% senior notes (the “Notes”) due in December 2018. Interest on the Notes is payable semi-annually beginning June 1, 2011. If the Company or its subsidiaries sell certain assets, the Company generally must either invest the net cash proceeds from such sale in its business within a certain period of time, use the proceeds to prepay senior secured debt or make an offer to purchase a principal amount of the Notes equal to the excess net cash proceeds at a redemption price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest. Upon a change in control, the Company may also be required to make an offer to purchase all of the Notes at a redemption price equal to 101% of the principal amount of the Notes redeemed plus accrued and unpaid interest. The Notes also contain optional redemption provisions, but subject to certain exceptions, the Company will not be entitled to redeem the Notes at its option prior to December 1, 2014. The Notes are unsecured senior obligations of the Company. The Company and its 100%-owned domestic subsidiaries have fully and unconditionally guaranteed the Company’s obligations under the Notes (see Note 14).

Interest expense was $22.1 million and $68.0 million for the 13 and 39 weeks ended October 29, 2011, respectively, including $1.7 million and $5.1 million, respectively, of amortization of deferred financing costs and accretion of OID.

 

7. Fair Value Measurements

The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following three-tier hierarchy:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

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Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis as of October 29, 2011 and January 29, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

     October 29, 2011 (Successor)  
     Quoted Prices in
Active Markets for
Identical Assets  and
Liabilities

(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Fair Value  
     (in thousands)  

Assets

           

Forward foreign exchange contracts - inventory related

   $ —         $ 67       $ —         $ 67   

Interest rate caps

     —           4,234         —           4,234   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 4,301       $ —         $ 4,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Forward foreign exchange contracts - intercompany

   $ —         $ 148       $ —         $ 148   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     January 29, 2011 (Successor)  
     Quoted Prices in
Active Markets for
Identical Assets  and
Liabilities

(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Fair Value  
     (in thousands)  

Assets

           

Interest rate caps

   $ —         $ 11,863       $ —         $ 11,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Forward foreign exchange contracts

   $ —         $ 33       $ —         $ 33   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The fair value of the Company’s interest rate caps was determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) were based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, were incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of these contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its interest rate caps fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of October 29, 2011 and January 29, 2011, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate cap positions and determined that the credit valuation adjustment was not significant to the overall valuation. As a result, the Company classified its interest rate caps derivative valuations in Level 2 of the fair value hierarchy.

The fair value of the Company’s forward foreign exchange contracts was determined using the market approach and Level 2 inputs. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The Company had no other financial assets or liabilities measured at fair value as of October 29, 2011 and January 29, 2011. The Company had no significant financial assets or liabilities measured at fair value as of October 30, 2010.

The carrying value of cash and cash equivalents, receivables, payables and line of credit balances approximates their estimated fair values due to the short maturities of these instruments. The Company estimates the fair value of its long-term debt using interest rates currently available to the Company for issuance of notes payable and long-term debt (including current maturities). These interest rates are considered Level 2 inputs. The estimated fair value of long-term debt is as follows (in thousands):

 

     Successor  
     October 29, 2011      January 29, 2011  
     Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Term loan

   $ 811,850       $ 758,687       $ 815,991       $ 831,275   

Notes

     400,000         358,000         400,000         420,500   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,211,850       $ 1,116,687       $ 1,215,991       $ 1,251,775   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. During the 13 and 39 weeks ended October 29,

 

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2011, the Company recorded charges related to the impairment of assets at under-performing stores, which reduced the carrying amount of the applicable long-lived assets from $0.8 million and $2.8 million, respectively, to their fair value of zero. During the 39 weeks ended October 30, 2010, the Company recorded charges related to the impairment of assets at under-performing stores, which reduced the carrying amount of the applicable long-lived assets from $0.2 million to their fair value of zero. The Company recorded no impairment charges related to assets at under-performing stores during the 13 weeks ended October 30, 2010.

The fair market value of these non-financial assets was determined using the income approach and Level 3 inputs, which required management to make significant estimates about future cash flows. Management estimates the amount and timing of future cash flows based on its experience and knowledge of the retail market in which each store operates. These impairment charges are included in SG&A expenses in the accompanying condensed consolidated statements of operations.

 

8. Derivative Instruments

The Company enters into forward foreign exchange contracts with respect to certain purchases in United States dollars of inventory to be sold in the Company’s retail stores in Canada. The purpose of these contracts is to protect the Company’s margins on the eventual sale of the inventory from fluctuations in the exchange rate for Canadian and United States dollars. The term of these forward exchange contracts is generally less than one year. These contracts are treated as cash flow hedges. Amounts reported in accumulated other comprehensive income related to these forward foreign exchange contracts will be reclassified to cost of goods sold over a three-month period. The Company also enters into forward foreign exchange contracts with respect to short-term intercompany balances between U.S. and Canadian entities. The purpose of these contracts is to protect the Company from fluctuations in the exchange rate for Canadian and United States dollars upon the settlement of such balances. These contracts are not designated as hedges. Consequently, changes in the fair value of these contracts are included in other income.

The Company has four interest rate caps to hedge against rising interest rates associated with the Company’s Term Loan (see Note 6) above the strike rate of the cap through December 23, 2016, the maturity date of the caps. All four caps were designated on the date of execution as cash flow hedges. In December 2010, the Company paid approximately $12.1 million to enter into these caps. This premium, and any related amounts reported in accumulated other comprehensive income, will be amortized to interest expense through December 23, 2016, as interest payments are made on the underlying Term Loan. The Company estimates that approximately $0.2 million will be reclassified from accumulated other comprehensive income to interest expense within the next 12 months.

For a derivative instrument designated as a cash-flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. Gains or losses on the derivative representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.

 

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Table of Contents

The Company had the following outstanding derivatives designated as cash flow hedges (in thousands):

 

     Successor           Predecessor  
     October 29, 2011      January 29, 2011           October 30, 2010  
     Number of
Instruments
     Notional
(USD)
     Number of
Instruments
     Notional
(USD)
          Number of
Instruments
     Notional
(USD)
 

Interest rate derivatives

                     

Purchased Caps

     4       $ 700,000         4       $ 700,000             —         $ —     

Foreign exchange derivatives

                     

Forward foreign exchange contracts

     3         2,784         6         4,505             3         2,386   
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Total

     7       $ 702,784         10       $ 704,505             3       $ 2,386   
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

In addition to the cash flow hedges above, as of October 29, 2011, the Company had one forward foreign exchange contract with a notional amount of $4.1 million that was not designated as a hedge. The table below presents the fair value of all of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets (in thousands).

 

     Successor  
     October 29, 2011      January 29, 2011  
     Derivative Assets      Derivative Liabilities      Derivative Assets      Derivative Liabilities  

Interest rate derivatives

           

Balance Sheet Location

     Other Assets            Other Assets      

Purchased Caps

   $ 4,234          $ 11,863      

Foreign exchange derivatives

           

Balance Sheet Location

     Other Assets         Accrued liabilities            Accrued liabilities   

Forward foreign exchange contracts - inventory related

     67             $ 33   

Forward foreign exchange contracts - intercompany

      $ 148         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,301       $ 148       $ 11,863       $ 33   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no significant derivative financial instruments as of October 30, 2010.

 

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Table of Contents

The tables below present the effect of all of the Company’s derivative financial instruments on the condensed consolidated statements of operations (in thousands). No amounts were reclassified from accumulated other comprehensive income into earnings as a result of forecasted transactions that failed to occur or as a result of hedge ineffectiveness.

 

     13 weeks ended October 29, 2011 (Successor)  
     Amount of Gain /
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
    Location of Loss
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
   Amount of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
 

Interest rate derivatives

       

Purchased Caps

   $ (2,419   Interest expense    $ (13

Foreign exchange derivatives

       

Forward foreign exchange contracts

     186      Cost of goods sold      (64
  

 

 

      

 

 

 

Total

   $ (2,233      $ (77
  

 

 

      

 

 

 

 

     39 weeks ended October 29, 2011 (Successor)  
     Amount of Gain /
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
    Location of Loss
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
   Amount of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
 

Interest rate derivatives

       

Purchased Caps

   $ (7,613   Interest expense    $ (15

Foreign exchange derivatives

       

Forward foreign exchange contracts

     14      Cost of goods sold      (222
  

 

 

      

 

 

 

Total

   $ (7,599      $ (237
  

 

 

      

 

 

 

The amount of gain or loss recognized in other comprehensive income (“OCI”) and reclassified from accumulated OCI into income was not significant for the 13 and 39 weeks ended October 30, 2010.

 

9. Share-based Compensation

Share-based compensation expense is included as a component of selling, general and administrative expenses and consisted of the following (in thousands):

 

     Successor              Predecessor      Successor              Predecessor  
     13 Weeks Ended
October 29, 2011
             13 Weeks Ended
October 30, 2010
     39 Weeks Ended
October 29, 2011
             39 Weeks Ended
October 30, 2010
 

Stock options

   $ 1,458              $ —         $ 4,330              $ 3   

Restricted stock awards and units

     —                  4,013         —                  12,548   
  

 

 

           

 

 

    

 

 

           

 

 

 

Total

   $ 1,458              $ 4,013       $ 4,330              $ 12,551   
  

 

 

           

 

 

    

 

 

           

 

 

 

 

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10. 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, was as follows (in thousands):

 

    Successor           Predecessor     Successor           Predecessor  
    13 Weeks Ended
October 29, 2011
          13 Weeks Ended
October 30, 2010
    39 Weeks Ended
October 29, 2011
          39 Weeks Ended
October 30, 2010
 

Net (loss) income

  $ (3,048        $ 34,396      $ (20,422        $ 75,836   

Foreign currency translation

    (232          (1,337     320             (906

Changes in fair market value of cash flow hedges, net of tax

    825             (15     (4,428          (208
 

 

 

        

 

 

   

 

 

        

 

 

 

Total comprehensive (loss) income, net of tax

  $ (2,455        $ 33,044      $ (24,530        $ 74,722   
 

 

 

        

 

 

   

 

 

        

 

 

 

 

11. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of the following (in thousands):

 

     Successor           Predecessor  
     October 29, 2011     January 29, 2011           October 30, 2010  

Foreign currency translation

   $ 766      $ 446           $ (634

Unrealized net loss on cash flow hedges, net of tax

     (4,636     (208          (138
  

 

 

   

 

 

        

 

 

 

Total accumulated other comprehensive (loss) income

   $ (3,870   $ 238           $ (772
  

 

 

   

 

 

        

 

 

 

 

12. Segments

The Company has two reportable segments: retail stores and Gymboree Play & Music. These segments were identified based on differences in products and services. The retail stores segment includes four operating segments (brands) which sell high-quality apparel for children: Gymboree (including an online store), Gymboree Outlet, Janie and Jack (including an online store), and Crazy 8 (including an online store). These four operating segments have been aggregated into one reportable segment because, in the Company’s judgment, these operating segments have similar historical economic characteristics and/or are expected to have similar economic characteristics and similar long-term financial performance in the future. Gross margin is the principal measure the Company considers in determining whether the economic characteristics are similar. In addition, each operating segment has similar products, production processes and type or class of customer. The Company believes that disaggregating its operating segments would not provide material additional information. Corporate overhead (costs related to the Company’s distribution center and shared corporate services) is included in the retail stores segment. Other operating segments that do not meet the criteria of reportable segments are aggregated below. The Other segment primarily relates to the Company’s international retail franchise business.

 

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The following tables provide the summary financial data of each reportable segment (in thousands):

 

     13 Weeks Ended October 29, 2011 (Successor)           13 Weeks Ended October 30, 2010 (Predecessor)  
     Retail
Stores
     Gymboree
Play & Music
    Other      Total           Retail
Stores
     Gymboree
Play & Music
     Other      Total  

Net sales

   $ 296,445       $ 3,195      $ 3,508       $ 303,148           $ 275,693       $ 4,265       $ 892       $ 280,850   

Operating income (loss)

     36,769         (6,640     1,268         31,397             54,200         2,083         419         56,702   

Total assets

     2,157,755         6,850        2,570         2,167,175             620,074         5,271         480         625,825   

 

     39 Weeks Ended October 29, 2011 (Successor)           39 Weeks Ended October 30, 2010 (Predecessor)  
     Retail
Stores
     Gymboree
Play & Music
    Other      Total           Retail
Stores
     Gymboree
Play & Music
     Other      Total  

Net sales

   $ 815,735       $ 9,469      $ 7,237       $ 832,441           $ 744,977       $ 10,351       $ 1,096       $ 756,424   

Operating income (loss)

     61,913         (4,055     2,983         60,841             119,304         4,572         484         124,360   

Total assets

     2,157,755         6,850        2,570         2,167,175             620,074         5,271         480         625,825   

Interest expense, depreciation and amortization expense and capital expenditures have not been separately disclosed above as the amounts primarily relate to the retail segment. There are no intersegment revenues.

The Company attributes revenues to individual countries based on selling location. The following tables provide the summary financial data for the Company’s international locations (in thousands):

 

     13 Weeks Ended October 29, 2011 (Successor)           13 Weeks Ended October 30, 2010 (Predecessor)  
     Canada      Australia     Total International           Canada      Australia      Total International  

Net sales

   $ 12,102       $ 516      $ 12,618           $ 10,903       $ 390       $ 11,293   

Long-lived assets

     9,836         1,274        11,110             5,716         752         6,468   

 

     39 Weeks Ended October 29, 2011 (Successor)           39 Weeks Ended October 30, 2010 (Predecessor)  
     Canada      Australia      Total International           Canada      Australia      Total International  

Net sales

   $ 32,038       $ 1,527       $ 33,565           $ 28,664       $ 641       $ 29,305   

Long-lived assets

     9,836         1,274         11,110             5,716         752         6,468   

 

13. Common Stock Repurchases

In November 2009 and June 2010, the Board of Directors authorized the Company to utilize up to $40 million and $100 million, respectively, of its cash reserves to purchase shares of the Company’s outstanding common stock under two share repurchase programs. During the 13 weeks ended October 30, 2010, the Company did not purchase any shares, as the Company completed both share repurchase programs during the 13 weeks ended July 31, 2010. During the 26 weeks ended July 31, 2010, the Company purchased 2,613,375 shares at a cost of $113.6 million or approximately $43.49 per share.

 

14. Condensed Guarantor Data

In connection with the Merger discussed in Note 1, the Company issued $400 million aggregate principal amount of 9.125% Notes (see Note 6) under an indenture dated November 23, 2010. The Company and its 100%-owned domestic subsidiaries have fully and unconditionally guaranteed the Notes. The following condensed consolidating financial information presents the financial position, results of operations and cash flows of The Gymboree Corporation and the guarantor and non-guarantor subsidiaries. Intercompany transactions are eliminated.

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

(in thousands)

 

    October 29, 2011 (Successor)  
    The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  
ASSETS          

Current Assets:

         

Cash and cash equivalents

  $ 32,860      $ 5,180      $ 7,681      $ —        $ 45,721   

Accounts receivable, net of allowance

    1,946        19,620        382        —          21,948   

Merchandise inventories

    —          248,503        4,110        72        252,685   

Prepaid income taxes

    18,148        —          668        (1,767     17,049   

Prepaid expenses

    3,693        2,133        35        —          5,861   

Deferred income taxes

    19,694        12,052        97        —          31,843   

Intercompany receivable

    —          341,310        —          (341,310     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    76,341        628,798        12,973        (343,005     375,107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and Equipment, net

    19,738        179,106        8,468        —          207,312   

Deferred Income Taxes

    18,110        —          697        (18,807     —     

Goodwill

    —          934,639        —          —          934,639   

Other Intangible Assets

    3,450        589,305        208        —          592,963   

Deferred Financing Costs

    49,549        —          —          —          49,549   

Other Assets

    4,235        861        2,509        —          7,605   

Investment in Subsidiaries

    1,940,436        —          —          (1,940,436     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 2,111,859      $ 2,332,709      $ 24,855      $ (2,302,248   $ 2,167,175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY          

Current Liabilities:

         

Accounts payable

  $ 5,526      $ 62,896      $ 252      $ —        $ 68,674   

Accrued liabilities

    39,460        49,799        1,576        —          90,835   

Line of credit

    40,000        —          —          —          40,000   

Current portion of long-term debt

    8,200        —          —          —          8,200   

Income tax payable

    —          1,767        —          (1,767     —     

Intercompany payable

    329,852        —          10,974        (340,826     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    423,038        114,462        12,802        (342,593     207,709   

Long-Term Liabilities:

         

Long-term debt

    1,203,650        —          —          —          1,203,650   

Lease incentives and other liabilities

    4,695        27,308        4,408        —          36,411   

Deferred income taxes

    —          257,736        —          (18,807     238,929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    1,631,383        399,506        17,210        (361,400     1,686,699   

Commitments and Contingencies

    —          —          —          —          —     

Stockholders’ Equity

    480,476        1,933,203        7,645        (1,940,848     480,476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 2,111,859      $ 2,332,709      $ 24,855      $ (2,302,248   $ 2,167,175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

(in thousands)

 

    January 29, 2011 (Successor)  
    The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  
ASSETS          

Current Assets:

         

Cash and cash equivalents

  $ 19,157      $ 6,530      $ 6,437      $ —        $ 32,124   

Accounts receivable, net of allowance

    620        12,960        89        —          13,669   

Merchandise inventories

    —          181,544        2,955        (231     184,268   

Prepaid income taxes

    15,404        —          712        —          16,116   

Prepaid expenses

    3,149        1,658        49        —          4,856   

Deferred income taxes

    —          7,805        28        (1,136     6,697   

Intercompany receivable

    —          333,845        —          (333,845     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    38,330        544,342        10,270        (335,212     257,730   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and Equipment, net

    21,411        184,203        6,877        —          212,491   

Deferred Income Taxes

    37,573        —          828        (38,401     —     

Goodwill

    934,639        —          —          —          934,639   

Other Intangible Assets

    3,888        602,081        241        —          606,210   

Deferred Financing Costs

    61,983        —          —          —          61,983   

Other Assets

    11,867        802        2,403        —          15,072   

Investment in Subsidiaries

    962,297        —          —          (962,297     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 2,071,988      $ 1,331,428      $ 20,619      $ (1,335,910   $ 2,088,125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY          

Current Liabilities:

         

Accounts payable

  $ 4,235      $ 50,040      $ 219      $ —        $ 54,494   

Accrued liabilities

    36,197        43,538        1,365        —          81,100   

Current portion of long-term debt

    8,200        —          —          —          8,200   

Deferred income taxes

    1,136        —          —          (1,136     —     

Intercompany payable

    323,911        —          9,846        (333,757     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    373,679        93,578        11,430        (334,893     143,794   

Long-Term Liabilities:

         

Long-term debt

    1,207,791        —          —          —          1,207,791   

Lease incentives and other liabilities

    4,707        17,990        3,434        —          26,131   

Deferred income taxes

    —          262,999        —          (38,401     224,598   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    1,586,177        374,567        14,864        (373,294     1,602,314   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and Contingencies

    —          —          —          —          —     

Stockholders’ Equity

    485,811        956,861        5,755        (962,616     485,811   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 2,071,988      $ 1,331,428      $ 20,619      $ (1,335,910   $ 2,088,125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

(in thousands)

 

     October 30, 2010 (Predecessor)  
      The Gymboree
Corporation
     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS              

Current Assets:

             

Cash and cash equivalents

   $ 164,114       $ 6,287       $ 6,434       $ —        $ 176,835   

Accounts receivable, net of allowance

     548         18,057         172         —          18,777   

Merchandise inventories

     —           167,786         3,703         (298     171,191   

Prepaid income taxes

     —           —           647         (647     —     

Prepaid expenses

     3,040         1,847         26         —          4,913   

Deferred income taxes

     —           17,527         476         (3,219     14,784   

Intercompany receivable

     —           286,324         —           (286,324     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     167,702         497,828         11,458         (290,488     386,500   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property and Equipment, net

     22,374         188,979         6,921         —          218,274   

Deferred Income Taxes

     16,161         320         —           (1,014     15,467   

Other Assets

     4         2,649         2,931         —          5,584   

Investment in Subsidiaries

     550,287         —           —           (550,287     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 756,528       $ 689,776       $ 21,310       $ (841,789   $ 625,825   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current Liabilities:

             

Accounts payable

   $ 4,694       $ 51,038       $ 43       $ —        $ 55,775   

Accrued liabilities

     28,193         41,172         1,411         —          70,776   

Income tax payable

     1,271         —           —           (647     624   

Deferred income taxes

     3,219         —           —           (3,219     —     

Intercompany payable

     277,880         —           8,354         (286,234     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     315,257         92,210         9,808         (290,100     127,175   

Long-Term Liabilities:

             

Lease incentives and other liabilities

     23,252         54,399         3,993         (1,014     80,630   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities

     338,509         146,609         13,801         (291,114     207,805   

Commitments and Contingencies

     —           —           —           —          —     

Stockholders’ Equity

     418,019         543,167         7,509         (550,675     418,020   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 756,528       $ 689,776       $ 21,310       $ (841,789   $ 625,825   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

 

21


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE 13 WEEKS ENDED OCTOBER 29, 2011 (SUCCESSOR)

(in thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 364      $ 288,715      $ 13,230      $ (5,864   $ 296,445   

Gymboree Play & Music and Other

     —          6,703        —          —          6,703   

Intercompany revenue

     10,459        313        —          (10,772     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     10,823        295,731        13,230        (16,636     303,148   

Cost of goods sold, including buying and occupancy expenses

     (1,340     (169,232     (8,253     6,522        (172,303
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,483        126,499        4,977        (10,114     130,845   

Selling, general and administrative expenses

     (12,452     (93,535     (3,521     10,060        (99,448
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (2,969     32,964        1,456        (54     31,397   

Interest income

     11        —          17        —          28   

Interest expense

     (22,051     —          —          —          (22,051

Other income (expense), net

     15        —          (7     —          8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes and equity in earnings of affiliates

     (24,994     32,964        1,466        (54     9,382   

Income tax expense

     (488     (10,864     (1,078     —          (12,430

Equity in earnings of affiliates, net of tax

     22,434        —          —          (22,434     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (3,048   $ 22,100      $ 388      $ (22,488   $ (3,048
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF INCOME

FOR THE 13 WEEKS ENDED OCTOBER 30, 2010 (PREDECESSOR)

(in thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 1,861      $ 267,267      $ 11,774      $ (5,209   $ 275,693   

Gymboree Play & Music and Other

     —          5,157        —          —          5,157   

Intercompany revenue

     8,839        268        —          (9,107     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     10,700        272,692        11,774        (14,316     280,850   

Cost of goods sold, including buying and occupancy expenses

     (983     (139,929     (6,253     5,119        (142,046
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,717        132,763        5,521        (9,197     138,804   

Selling, general and administrative expenses

     (15,922     (72,468     (2,844     9,132        (82,102
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (6,205     60,295        2,677        (65     56,702   

Interest income

     64        —          13        —          77   

Interest expense

     (58     —          —          —          (58

Other income, net

     15        —          13        —          28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes and equity in earnings of affiliates

     (6,184     60,295        2,703        (65     56,749   

Income tax benefit (expense)

     3,435        (24,726     (1,062     —          (22,353

Equity in earnings of affiliates, net of tax

     37,145        —          —          (37,145     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 34,396      $ 35,569      $ 1,641      $ (37,210   $ 34,396   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE 39 WEEKS ENDED OCTOBER 29, 2011 (SUCCESSOR)

(in thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 977      $ 795,374      $ 35,536      $ (16,152   $ 815,735   

Gymboree Play & Music and Other

     —          16,706        —          —          16,706   

Intercompany revenue

     30,820        770        —          (31,590     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     31,797        812,850        35,536        (47,742     832,441   

Cost of goods sold, including buying and occupancy expenses

     (3,987     (489,360     (22,541     17,184        (498,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     27,810        323,490        12,995        (30,558     333,737   

Selling, general and administrative expenses

     (36,486     (256,915     (9,946     30,451        (272,896
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (8,676     66,575        3,049        (107     60,841   

Interest income

     22        26        67        —          115   

Interest expense

     (67,981     —          —          —          (67,981

Loss on extinguishment of debt

     (19,563     —          —          —          (19,563

Other expense, net

     (31     —          (13     —          (44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes and equity in earnings of affiliates

     (96,229     66,601        3,103        (107     (26,632

Income tax benefit (expense)

     32,816        (24,898     (1,708     —          6,210   

Equity in earnings of affiliates, net of tax

     42,991        —          —          (42,991     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (20,422   $ 41,703      $ 1,395      $ (43,098   $ (20,422
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF INCOME

FOR THE 39 WEEKS ENDED OCTOBER 30, 2010 (PREDECESSOR)

(in thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Retail

   $ 5,613      $ 722,635      $ 31,064      $ (14,335   $ 744,977   

Gymboree Play & Music and Other

     —          11,447        —          —          11,447   

Intercompany revenue

     35,028        671        —          (35,699     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     40,641        734,753        31,064        (50,034     756,424   

Cost of goods sold, including buying and occupancy expenses

     (2,948     (383,842     (17,875     14,116        (390,549
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     37,693        350,911        13,189        (35,918     365,875   

Selling, general and administrative expenses

     (50,490     (217,923     (8,874     35,772        (241,515
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (12,797     132,988        4,315        (146     124,360   

Interest income

     243        —          34        —          277   

Interest expense

     (212     —          —          —          (212

Other income (expense), net

     74        (1     41        —          114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes and equity in earnings of affiliates

     (12,692     132,987        4,390        (146     124,539   

Income tax benefit (expense)

     8,038        (54,358     (2,383     —          (48,703

Equity in earnings of affiliates, net of tax

     80,490            (80,490     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 75,836      $ 78,629      $ 2,007      $ (80,636   $ 75,836   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

23


Table of Contents

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE 39 WEEKS ENDED OCTOBER 29, 2011 (SUCCESSOR)

(in thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net cash (used in) provided by operating activities

   $ (65,535   $ 63,584      $ 3,104      $ (82   $ 1,071   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (2,961     (22,925     (2,194     —          (28,080

Acquisition of business, net of cash acquired

     (1,352     —          —          —          (1,352

Investment in subsidiaries

     (110     —          —          110        —     

Other

     (19     (246     (31     —          (296
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,442     (23,171     (2,225     110        (29,728
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     41,630        (41,763     51        82        —     

Proceeds from Term Loan

     820,000        —          —          —          820,000   

Payments on Term Loan

     (826,150     —          —          —          (826,150

Proceeds from ABL facility

     60,656        —          —          —          60,656   

Payments on ABL facility

     (20,656     —          —          —          (20,656

Deferred financing costs

     (6,665     —          —          —          (6,665

Investment by Parent

     14,865        —          110        (110     14,865   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     83,680        (41,763     161        (28     42,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash

     —          —          204        —          204   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     13,703        (1,350     1,244        —          13,597   

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

     19,157        6,530        6,437        —          32,124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 32,860      $ 5,180      $ 7,681      $ —        $ 45,721   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE 39 WEEKS ENDED OCTOBER 30, 2010 (PREDECESSOR)

(in thousands)

 

     The Gymboree
Corporation
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net cash provided by operating activities

   $ 14,274      $ 61,486      $ 1,895      $ —        $ 77,655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     (2,855     (34,158     (1,795     —          (38,808

Investment in subsidiaries

     (1,981     —          —          1,981        —     

Other

     —          (997     (77     —          (1,074
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,836     (35,155     (1,872     1,981        (39,882
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Intercompany transfers

     29,423        (25,228     (4,195     —          —     

Investment by Parent

     —          —          1,981        (1,981     —     

Exercise of stock options

     1,362        —          —          —          1,362   

Repurchases of common stock

     (124,610     —          —          —          (124,610

Excess tax benefits from exercise and vesting of share-based awards

     2,975        1,262        —          —          4,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (90,850     (23,966     (2,214     (1,981     (119,011
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash

     —          —          401        —          401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (81,412     2,365        (1,790     —          (80,837

CASH AND CASH EQUIVALENTS:

          

Beginning of Period

     245,526        3,922        8,224        —          257,672   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of Period

   $ 164,114      $ 6,287      $ 6,434      $ —        $ 176,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Gymboree Corporation and its guarantor subsidiaries participate in a cash pooling program. As part of this program, cash balances are generally swept on a daily basis between the guarantor subsidiary bank accounts and those of The Gymboree Corporation. In addition, The Gymboree Corporation pays expenses on behalf of its guarantor and non-guarantor subsidiaries on a regular basis. These types of transactions have been accounted for as intercompany transfers within financing activities.

The Gymboree Corporation’s transactions include interest, tax payments and intercompany sales transactions related to administrative costs incurred by The Gymboree Corporation, which are billed to guarantor and non-guarantor subsidiaries on a cost plus basis. All intercompany transactions are presumed to be settled in cash and therefore are included in operating activities. Non-operating cash flow changes have been classified as financing activities.

 

15. Gymboree Play & Music Franchisee Termination

In the third quarter of fiscal 2011, the Company terminated its agreement with a Gymboree Play & Music master franchisee in China. Costs associated with the termination of this master

 

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franchise relationship resulted in a $7.2 million charge to operating expenses in the third quarter of fiscal 2011. The Company assumed the role of master franchisor in China upon this termination.

 

16. Subsequent Events

In November 2011, the Company distributed $12.2 million in the form of a dividend to Parent, to potentially be used by Parent’s shareholders to fund an equity investment in a proposed venture that would be jointly controlled by the shareholders of the Company and Bain Capital Asia Fund, a fund advised by Bain. If ultimately consummated, the joint venture would operate branded retail stores in the China market through an exclusive franchise agreement with the Company.

 

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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 October 29, 2011 (Successor) and October 30, 2010 (Predecessor), and the related condensed consolidated statements of operations for the thirteen and thirty-nine week periods then ended, and of cash flows for the thirty-nine week periods ended October 29, 2011 and October 30, 2010. These interim 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 and 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 interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

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 and subsidiaries as of January 29, 2011 (Successor), and the related consolidated statements of operations, stockholders’ equity, and cash flows for the period from November 23, 2010 to January 29, 2011 (Successor) and for the period from January 30, 2010 to November 22, 2010 (Predecessor) and in our report dated April 28, 2011 (May 13, 2011 as to Note 19), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2011 (Successor), 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
December 12, 2011

 

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

Forward-looking statements

This quarterly report contains forward-looking statements. You can identify forward-looking statements because they contain words such as “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” or “anticipate” or similar expressions that concern our strategy, plans or intentions. All statements we make relating to: future sales, costs and expenses and gross profit percentages; the continuation of historical trends; our ability to operate our business under our capital and operating structure; and the sufficiency of our cash balances and cash generated from operating and financing activities for future liquidity and capital resource needs are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we had expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

Important factors that could cause actual results to differ materially from our expectations (“cautionary statements”) are disclosed under “Item 1A, Risk Factors,” in the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011, filed with the Securities and Exchange Commission on June 29, 2011. We encourage you to read these risk factors disclosures carefully. We caution investors not to place substantial reliance on the forward-looking statements contained in this quarterly report. These statements, like all statements in this quarterly report, speak only as of the date of this quarterly report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments, except as otherwise required by law.

General

The Gymboree Corporation (“we,” “us,” “our,” “Gymboree” and “Company”) is one of the largest children’s apparel specialty retailers in North America, offering collections of high-quality apparel and accessories. As of October 29, 2011, the Company operated a total of 1,137 retail stores, including 1,090 stores in the United States (593 Gymboree stores, 151 Gymboree Outlet stores, 127 Janie and Jack shops and 219 Crazy 8 stores), 41 Gymboree stores in Canada, 3 Gymboree stores in Australia, 1 Gymboree store in Puerto Rico and 2 Gymboree Outlet stores in Puerto Rico, as well as 3 online stores at www.gymboree.com, www.janieandjack.com and www.crazy8.com. The Company also offers directed parent-child developmental play programs at 697 franchised and Company-operated Gymboree Play & Music centers in the United States and 36 other countries. In addition, as of October 29, 2011, third-party overseas partners operated 15 Gymboree stores in the Middle East and 3 department store shop-in-shops in South Korea.

 

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During the third quarter of fiscal 2011, the Company opened 21 Crazy 8 stores, 3 Gymboree stores, 1 Gymboree Outlet store and 2 Janie and Jack shops. The Company also relocated, remodeled or expanded 4 Gymboree stores and closed 1 Gymboree store.

During the remainder of fiscal 2011, the Company plans to open approximately 20 new stores consisting mostly of Crazy 8 stores. In addition, third-party overseas partners plan to open approximately 3 stores in the Middle East and 3 stores in South Korea.

Effect of the Merger

On October 11, 2010, The Gymboree Corporation entered into an Agreement and Plan of Merger with Giraffe Holding, Inc. (“Parent”), and Giraffe Acquisition Corporation, a wholly owned subsidiary of Parent (“Acquisition Sub”), whereby Acquisition Sub merged with and into the Company in accordance with the “short-form” merger provisions available under Delaware law (the “Merger”). The application of purchase accounting as a result of the Merger required the adjustment of the Company’s assets and liabilities to their fair value, which resulted in an increase in amortization expense related to intangible assets acquired as a result of the Merger. Also, as a result of the Merger, the Company’s borrowings and interest expense significantly increased. The excess of purchase price over the estimated fair value of the Company’s net assets and identified intangible assets was allocated to goodwill. The Company’s indefinite-lived intangible assets and goodwill are subject to periodic tests for impairment. During the 39 weeks ended October 29, 2011, the Company recorded a non-recurring charge of $10.7 million to cost of goods sold resulting from an increase in the net book value of inventory as a result of purchase accounting. The section titled “Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)” included elsewhere in this quarterly report shows other purchase accounting adjustments that affected the 13 and 39 weeks ended October 29, 2011, as well as a reconciliation of such measures to net income (loss).

Results of Operations

13 weeks ended October 29, 2011, compared to 13 weeks ended October 30, 2010

Net Sales

Net retail sales for the third quarter of fiscal 2011 increased to $296.4 million from $275.7 million in the same period last year, an increase of $20.7 million, or 7.5%. Comparable store sales for the third quarter of fiscal 2011 increased 2% compared to the same period in the prior year. The increase in net retail sales was also due to net store and square footage growth of 88 stores and approximately 196,000 square feet, respectively. There were 1,137 stores open at October 29, 2011 compared to 1,049 at October 30, 2010.

Gymboree Play & Music and Other net sales for the third quarter of fiscal 2011 increased to $6.7 million from $5.2 million in the same period of last year. This increase was primarily related to the Company’s international retail partner businesses, which launched in August 2010. As of October 29, 2011, our third-party overseas partners operated 18 Gymboree stores (including 3 department store shop-in-shops), compared to 2 stores as of the end of the same period last year.

 

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Gross Profit

Gross profit for the third quarter of fiscal 2011 decreased to $130.8 million from $138.8 million in the same period last year. As a percentage of net sales, gross profit for the third quarter of fiscal 2011 decreased 6.2 percentage points to 43.2% from 49.4% in the same period last year. This decrease was primarily due to higher average unit costs, as well as $3.4 million in purchase accounting adjustments. The section titled “Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)” included elsewhere in this quarterly report shows the purchase accounting adjustments that affected gross profit.

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 $99.4 million in the third quarter of fiscal 2011, including $5.4 million in purchase accounting adjustments and $7.2 million in charges related to the termination of our Gymboree Play & Music master franchisee relationship in China, compared to $82.1 million in the same period last year. As a percentage of net sales, SG&A expenses increased to 32.8% for the third quarter of fiscal 2011 compared to 29.2% in the same period last year. This increase was primarily due to costs associated with the termination of our Gymboree Play & Music master franchisee relationship in China, as well as higher amortization expense related to the Merger and higher store compensation, and was partially offset by lower share-based and incentive compensation. The section titled “Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)” included elsewhere in this quarterly report shows the purchase accounting adjustments that affected SG&A.

Interest Expense

Interest expense increased to $22.1 million in the third quarter of fiscal 2011, primarily due to interest on the Company’s $820 million senior secured term loan (“Term Loan”) and $225 million senior secured asset-based revolving credit facility (“ABL” or “ABL Facility” and, together with the Term Loan, the “Senior Credit Facilities”) entered into, and 9.125% senior notes (the “Notes”) issued, in connection with the Merger, as well as amortization of the related deferred financing costs and accretion of the original issue discount on the Term Loan.

Income Taxes

The Company’s effective tax rate for the third quarter of fiscal 2011 and 2010 was 132.5% and 39.4%, respectively. The effective tax rate increased in the third quarter of fiscal 2011 due to lower forecasted annual earnings, which led to a cumulative reduction in the year to date tax benefit recorded in prior quarters.

 

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39 weeks ended October 29, 2011, compared to 39 weeks ended October 30, 2010

Net Sales

Net retail sales for the 39 weeks ended October 29, 2011 increased to $815.7 million from $745.0 million in the same period last year, an increase of $70.7 million, or 9.5%. Comparable store sales for the 39 weeks ended October 29, 2011 increased 3% compared to the same period in the prior year. The increase in net retail sales was also due to net store and square footage growth of 88 stores and approximately 196,000 square feet, respectively. There were 1,137 stores open at October 29, 2011 compared to 1,049 at October 30, 2010.

Gymboree Play & Music and Other net sales for the 39 weeks ended October 29, 2011 increased to $16.7 million from $11.4 million in the same period last year, an increase of $5.3 million, or 46.5%. This increase was primarily related to the Company’s international retail partner businesses, which launched in August 2010. As of October 29, 2011, our third-party overseas partners operated 18 Gymboree stores (including 3 department store shop-in-shops), compared to 2 stores as of the end of the same period last year.

Gross Profit

Gross profit for the 39 weeks ended October 29, 2011 decreased to $333.7 million from $365.9 million in the same period last year. As a percentage of net sales, gross profit for the 39 weeks ended October 29, 2011 decreased 8.3 percentage points to 40.1% from 48.4% in the same period last year. This decrease was due to higher average unit costs and a higher level of markdown selling, as well as $20.9 million in purchase accounting adjustments, including a $10.7 million increase in cost of goods sold resulting from an increase in the net book value of inventory. The section titled “Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)” included elsewhere in this quarterly report provides additional detail for the $20.9 million in adjustments noted above.

Selling, General and Administrative Expenses

SG&A expenses increased to $272.9 million for the 39 weeks ended October 29, 2011, including $16.9 million in purchase accounting adjustments and $7.2 million in charges related to the termination of our Gymboree Play & Music master franchisee relationship in China, compared to $241.5 million in the same period last year. As a percentage of net sales, SG&A expenses increased to 32.8% for the 39 weeks ended October 29, 2011 compared to 31.9% in the same period last year. This increase was primarily due to higher amortization expense related to the Merger, higher store compensation, costs associated with the termination of our Gymboree Play & Music master franchisee relationship in China, higher marketing costs, and an increase in impairment charges related to under-performing stores, and was partially offset by lower share-based and incentive compensation. The section titled “Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)” included elsewhere in this quarterly report shows the purchase accounting adjustments that affected SG&A.

Interest Expense

Interest expense increased to $68.0 million for the 39 weeks ended October 29, 2011 from $0.2 million in the same period last year, primarily due to interest on the Company’s Senior Credit

 

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Facilities entered into, and Notes issued, in connection with the Merger, as well as amortization of the related deferred financing costs and accretion of the original issue discount on the Term Loan.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was approximately $19.6 million for the 39 weeks ended October 29, 2011 and was due to the refinancing of the Term Loan. In February 2011, the Company refinanced the Term Loan through an amendment and restatement of its existing credit agreement to lower the interest rate, remove certain financial covenants and extend the maturity date from November 2017 to February 2018.

Income Taxes

The Company’s effective tax rate for the 39 weeks ended October 29, 2011 and October 30, 2010 was 23.3% and 39.1%, respectively. The effective tax rate decreased in fiscal 2011 due to the relationship of state and foreign taxes to forecasted annual earnings in 2011 compared to 2010.

Seasonality

The Company’s business is impacted by the general seasonal trends characteristic of the apparel and retail industries. Sales from retail operations in the past several years have been highest during the third and fourth fiscal quarters, somewhat lower during the first fiscal quarter, and lowest during the second fiscal quarter. Consequently, the results for any fiscal quarter are not necessarily indicative of results for the full year. These historical quarterly trends may not continue in the future.

Financial Condition

Liquidity and Capital Resources

Cash and cash equivalents were $45.7 million at October 29, 2011, an increase of $13.6 million from January 29, 2011. Working capital as of October 29, 2011 was $167.4 million compared to $113.9 million as of January 29, 2011.

Net cash provided by operating activities for the 39 weeks ended October 29, 2011 was $1.1 million compared to $77.7 million in the same period last year. This change was primarily due to interest payments on the Company’s Senior Credit Facilities entered into, and Notes issued, in connection with the Merger as well as increased average unit costs for inventory.

Net cash used in investing activities for the 39 weeks ended October 29, 2011 was $29.7 million compared to $39.9 million in the same period last year, and consisted primarily of capital expenditures related to the opening of new stores, relocation, remodeling or expansion of existing stores, information technology improvements, and investments in the Company’s distribution center. The decrease in capital expenditures was primarily due to a decrease in new store construction. The Company opened 79 new stores during the 39 weeks ended October 29, 2011 compared to 99 new stores during the same period last year.

 

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Net cash provided by financing activities for the 39 weeks ended October 29, 2011 was $42.1 million, compared to net cash used in financing activities of $119.0 million in the same period last year. Net cash provided by financing activities for the 39 weeks ended October 29, 2011 was primarily related to borrowings totaling $40 million under the ABL Facility. Net cash used in financing activities during the 39 weeks ended October 30, 2010 was primarily related to share repurchases.

The Company has an $820 million Term Loan and a $225 million ABL Facility. As of October 29, 2011, $813.9 million was outstanding under the Term Loan and $40 million was outstanding under the ABL Facility. There was approximately $119.9 million of undrawn availability under the ABL at October 29, 2011. Amounts available under the ABL are subject to customary borrowing base limitations and are reduced by letter of credit utilization. The Term Loan and ABL also allow an aggregate of $200 million in uncommitted incremental facilities, the availability of which is subject to our meeting certain conditions. No incremental facilities are currently in effect. The Term Loan and ABL contain covenants that, among other things, restrict the Company’s ability to incur additional indebtedness and pay dividends. The ABL also contains financial covenants. As of October 29, 2011, the Company was in compliance with these covenants.

We anticipate that cash and cash equivalents generated by operations, the remaining funds available under our Term Loan and ABL, and existing cash and cash equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the next twelve months.

There have been no material changes outside the ordinary course of business to the Company’s contractual obligations since January 29, 2011, as disclosed in the Company’s Registration Statement on Form S-4 filed on May 16, 2011.

Critical Accounting Policies and Estimates

There have been no material changes to the Company’s critical accounting policies and estimates affecting the application of those policies since the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011 filed on June 29, 2011.

Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)

In the table below, the Company presents Adjusted EBITDA (which is defined as net income (loss) before interest expense, interest income, income tax expense/benefit, and depreciation and amortization (EBITDA) adjusted for the other items described below), which is considered a non-GAAP financial measure. The Company presents Adjusted EBITDA in this quarterly report because it considers it an important supplemental measure of performance used by management and believes it is frequently used by securities analysts, investors and other interested parties in

 

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the evaluation of companies in the retail industry. Adjusted EBITDA is calculated in substantially the same manner as “EBITDA” under the indenture governing the Notes and “Consolidated EBITDA” under the agreement governing the Company’s Senior Credit Facilities. The Company believes that the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA is appropriate to provide additional information to investors about certain non-cash items and unusual or non-recurring items that the Company does not expect to continue in the future and to provide additional information with respect to the Company’s ability to meet its future debt service and to comply with various covenants in documents governing its indebtedness. However, Adjusted EBITDA is not a presentation made in accordance with GAAP, and the Company’s computation of Adjusted EBITDA may vary from others in the retail industry. Adjusted EBITDA should not be considered an alternative to operating income or net income (loss), as a measure of operating performance or cash flow, or as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP. For example, Adjusted EBITDA:

 

   

does not reflect the Company’s cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

   

does not reflect changes in, or cash requirements for, the Company’s working capital needs;

 

   

does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s debt;

 

   

excludes income tax payments that represent a reduction in cash available to the Company; and

 

   

does not reflect the impact of earnings or charges resulting from matters the Company considers not to be indicative of ongoing operations.

The following table is a reconciliation of net (loss) income to Adjusted EBITDA for the periods indicated:

 

     Successor           Predecessor     Successor           Predecessor  
     13 Weeks Ended
October 29, 2011
          13 Weeks Ended
October 30, 2010
    39 Weeks Ended
October 29, 2011
          39 Weeks Ended
October 30, 2010
 
     (in thousands)  

Net (loss) income

   $ (3,048        $ 34,396      $ (20,422        $ 75,836   

Interest expense

     22,051             58        67,981             212   

Interest income

     (28          (77     (115          (277

Income tax expense (benefit)

     12,430             22,353        (6,210          48,703   

Depreciation and amortization (a)

     14,086             10,169        42,703             29,712   

Non-cash share-based compensation expense

     1,458             4,013        4,330             12,551   

Loss on disposal/impairment on assets

     1,241             72        3,501             832   

Loss on extinguishment of debt

     —               —          19,563             —     

Gymboree Play & Music franchise transition

     7,200             —          7,200             —     

Acquisition-related adjustments (b)

     5,174             3,479        26,865             3,479   
  

 

 

        

 

 

   

 

 

        

 

 

 

Adjusted EBITDA

   $ 60,564           $ 74,463      $ 145,396           $ 171,048   
  

 

 

        

 

 

   

 

 

        

 

 

 

(a) Includes the following purchase accounting adjustments (in thousands):

                  

Amortization of intangible assets (impacts SG&A)

   $ 4,144           $ —        $ 12,433           $ —     

Amortization of below and above market leases (impacts COGS)

     (508          —          (1,528          —     
  

 

 

        

 

 

   

 

 

        

 

 

 
   $ 3,636           $ —        $ 10,905           $ —     
  

 

 

        

 

 

   

 

 

        

 

 

 

(b) Includes the following adjustments (in thousands):

                  

Adjustment to cost of goods sold from an increase in the net book value of inventory as a result of purchase accounting (impacts COGS)

   $ —             $ —        $ 10,731           $ —     

Additional rent expense recognized due to the elimination of deferred rent and construction allowances in purchase accounting (impacts COGS)

     2,437             —          7,274             —     

Legal, accounting and other costs incurred as a result of the Merger (impacts SG&A)

     1,276             3,479        4,436             3,479   

Decrease in net sales due to the elimination of deferred revenue related to the Company’s co-branded credit card program in purchase accounting (impacts net sales)

     1,461             —          4,424             —     
  

 

 

        

 

 

   

 

 

        

 

 

 
   $ 5,174           $ 3,479      $ 26,865           $ 3,479   
  

 

 

        

 

 

   

 

 

        

 

 

 

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

The Company enters into forward foreign exchange contracts with respect to certain purchases in United States dollars of inventory to be sold in the Company’s retail stores in Canada. The purpose of these contracts is to protect the Company’s margins on the eventual sale of the inventory from fluctuations in the exchange rate for Canadian and United States dollars. The term of the forward exchange contracts is generally less than one year. The Company also enters into forward foreign exchange contracts with respect to short-term intercompany balances between U.S. and Canadian entities. The purpose of these contracts is to protect the Company from fluctuations in the exchange rate for Canadian and United States dollars upon the settlement of such balances.

The table below summarizes the notional amounts and fair values of the Company’s forward foreign exchange contracts in U.S. dollars.

 

     Notional
Amount
     Fair Value
Loss
    Weighted-
Average Rate
 
     (in thousands, except weighted-average rate data)  

October 29, 2011

   $ 6,865       $ (81   $ 1.01   

January 29, 2011

   $ 4,505       $ (33   $ 1.00   

October 30, 2010

   $ 2,386       $ (71   $ 0.98   

 

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Interest Rate Risk

The Company is subject to interest rate risk in connection with its long-term debt. The Company’s principal interest rate risk relates to the outstanding Term Loan. The Company had $813.9 million outstanding under its Term Loan as of October 29, 2011, bearing interest at variable rates. A 0.125% increase in the floating rates applicable to the indebtedness outstanding under the Term Loan would have increased annual interest expense by approximately $1.0 million. The Term Loan and the ABL also allow an aggregate of $200 million in uncommitted incremental facilities, bearing interest at variable rates. No incremental facilities are currently in effect.

In December 2010, the Company purchased four interest rate caps to hedge against rising interest rates associated with the Company’s Term Loan above the 5% strike rate of the caps through December 23, 2016, the maturity date of the caps. The notional amount of these caps is $700 million. As of October 29, 2011 and January 29, 2011, accumulated other comprehensive income included approximately $7.8 million and $0.2 million, respectively, in unrealized losses related to the interest rate caps.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and the 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) of 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. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the Company’s Chief Executive Officer and the Chief Financial Officer concluded as of the end of the period covered by this report that the Company’s disclosure controls and procedures are also effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the third quarter of fiscal 2011, there was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that has materially affected, or is reasonably likely to materially affect, its 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 of 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 flows.

Item 1A. RISK FACTORS

There have been no material changes to the risk factors discussed in Part II, “Item 1A, Risk Factors,” in the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011, filed on June 29, 2011.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item  4. (REMOVED AND RESERVED)

Item 5. OTHER INFORMATION

Not applicable.

 

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Item 6. EXHIBITS

 

  31.1    Certification of Matthew K. McCauley Pursuant to §302 of the Sarbanes- Oxley Act of 2002.
  31.2    Certification of Jeffrey P. Harris Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Matthew K. McCauley Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Jeffrey P. Harris Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from The Gymboree Corporation’s Quarterly Report on Form 10-Q for the quarter ended October 29, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

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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)

December 12, 2011

     

By:    /s/ Jeffrey P. Harris

Date       Jeffrey P. Harris
      Chief Financial Officer

 

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Exhibit Index

 

Exhibit
Number

  

Description

  31.1    Certification of Matthew K. McCauley Pursuant to §302 of the Sarbanes- Oxley Act of 2002.
  31.2    Certification of Jeffrey P. Harris Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Matthew K. McCauley Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Jeffrey P. Harris Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from The Gymboree Corporation’s Quarterly Report on Form 10-Q for the quarter ended October 29, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

40

Certification of Matthew K. McCauley Pursuant to Section 302

Exhibit 31.1

CERTIFICATION

I, Matthew K. McCauley, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of The Gymboree Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and