SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 29, 2000 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 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
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(State of Incorporation) (I.R.S. Employer
Identification No.)
One Harrison Street
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San Francisco, California 94105
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (415) 427-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.05 par value New York Stock Exchange, Inc.
(Title of class) Pacific Exchange, Inc.
(Name of each exchange where registered)
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the common equity held by non-affiliates of the registrant as of March 10, 2000 was approximately $24,479,000,000 based upon the last price reported for such date in the NYSE-Composite transactions.
The number of shares of the registrant's Common Stock outstanding as of March 10, 2000 was 851,577,689.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2000 (hereinafter referred to as the "2000 Proxy Statement") are incorporated into Parts I and III.
Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended January 29, 2000 (hereinafter referred to as the "1999 Annual Report to Shareholders") are incorporated into Parts II and IV.
The Exhibit Index is located on Page 12 hereof.
This Annual Report on Form 10-K and the information incorporated herein by reference contain certain forward-looking statements which reflect the Company's current view with respect to future events and financial performance. Whenever used, the words "expect," "plan," "anticipate," "believe" and similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties and the Company's future results of operations could differ materially from historical results or current expectations. Some of these risks are discussed in Item 1 of this report below, and include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where the Company's goods are manufactured, disruption to operations from Year 2000 issues and/or other factors that may be described in the Company's filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict.
The Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Item 1 - Business
The Gap, Inc. (together with its subsidiaries, the "Company") is a global specialty retailer which operates stores selling casual apparel, personal care and other accessories for men, women and children under the Gap, Banana Republic and Old Navy brands. As of February 26, 2000, the Company operated 3,058 stores in the United States, Canada, the United Kingdom, France, Germany and Japan.
The Company designs virtually all of its products, which in turn are manufactured by independent sources, and sells them under its brands in the following store formats:
Gap. Founded in 1969, Gap stores offer extensive selections of classically-styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics, such as denim, khakis and T-shirts, to accessories and personal care products for men and women aged teen through adult. The Company entered the children's apparel market with the introduction of GapKids in 1986 and babyGap in 1989. These stores offer casual basics, outerwear, shoes and other accessories in the tradition of Gap style and quality for children aged newborn through teen. As of February 26, 2000, the Company operated a total of 1,781 Gap brand stores in the United States, including 115 Outlet stores. Gap brand stores outside the United States total 400.
Banana Republic. Acquired in 1983 with two stores, Banana Republic now offers sophisticated, fashionable collections of dress-casual and tailored clothing and accessories for men and women at higher price points. Banana Republic products range from clothing, including intimate apparel, to personal care products and home products. As of February 26, 2000, the Company operated 347 Banana Republic stores, including 10 in Canada and 18 outlet stores.
Old Navy. The Company launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes and accessories for adults, children and infants, as well as other items including personal care products, in an innovative, exciting shopping environment. As of February 26, 2000, the Company operated 530 Old Navy stores.
The Company established Gap Online in 1997, a web-based store located at www.gap.com. GapKids and babyGap web-based stores, located at www.gapkids.com and www.babygap.com, were established in 1998. Products
from Gap, GapKids and babyGap stores can be purchased online. Banana Republic introduced a catalog format in 1998 and Banana Republic Online, a web-based store located at www.bananarepublic.com, in 1999. Both of the new Banana Republic formats offer clothing and accessories comparable to those carried in the store collections. Also, in 1999 the Company established Old Navy Online, a promotional website located at www.oldnavy.com. The Company plans to begin operating Old Navy Online as a web-based store during 2000. The online and catalog business is offered as an extension of our store experience and is intended to strengthen our relationship with our customers.
The Company was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988.
The retail apparel business fluctuates according to changes in customer preferences dictated in part by fashion and season. In addition, certain economic conditions affect the level of consumer spending on merchandise offered by the Company, including, among others, business conditions, interest rates, taxation and consumer confidence in future economic conditions. Customer preferences and economic conditions may differ or change from time to time in each market in which the Company operates.
Fluctuations in the retail apparel business especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and sometimes before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the retail business requires the Company to carry a significant amount of inventory, especially prior to peak selling seasons when the Company and other retailers generally build up their inventory levels. The Company must enter into contracts for the purchase and manufacture of apparel well in advance of the applicable selling season. As a result, the Company is vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases.
The Company reviews its inventory levels in order to identify slow- moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Markdowns may be used if inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference or lack of consumer acceptance of fashion items, or if it is determined that the inventory in stock will not sell at its currently marked price. Such markdowns may have an adverse impact on earnings, depending on the extent of the markdowns and amount of inventory affected.
Because the Company does not carry much replenishment inventory in its stores, much of the inventory is maintained in the Company's distribution centers in California, Kentucky, Maryland, Ohio, Tennessee, Canada, England and The Netherlands, and in distribution centers operated by third parties in California, Kentucky, Japan and England, and then shipped to the stores.
The Company's stores offer a shopper-friendly environment with an assortment of casual clothing and accessories which emphasize style, quality and good value. The range of apparel displayed in each store varies significantly depending on the selling season and the size and location of the store.
The Company's stores generally are open seven days per week (where permitted by law), three to six nights per week and most holidays. All sales are tendered for cash, personal checks or credit cards issued by others, including a Banana Republic private label credit card.
The Company's continued success depends, in part, upon its ability to increase sales at existing store locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the Company's growth will result in enhanced profitability or that it will continue at the same rate in future years.
The Company continued to expand internationally in fiscal 1999. It is faced with competition in European and Japanese markets from established regional and national chains. If international expansion is not successful, the Company's results of operations could be adversely affected. The Company's ability to grow successfully in the continental European market will depend in part on determining a sustainable profit formula to build brand loyalty and gain market share in the especially challenging retail environments of France and Germany.
Certain financial information about international operations is set forth in Note A to Notes to Consolidated Financial Statements, incorporated by reference in Item 8 - Financial Statements and Supplementary Data.
The Company purchases merchandise from approximately 1,200 suppliers located domestically and overseas. No supplier accounted for more than 5% of the Company's fiscal 1999 purchases. Of the Company's merchandise sold during fiscal 1999, approximately 22% of all units (representing approximately 16% of total cost) were produced domestically while the remaining 78% of all units (84% of cost) were made outside the United States. Approximately 12% of the Company's total merchandise units (representing 16% of cost) was from China, including Hong Kong, with the remainder coming from 55 other countries. Any event causing a sudden disruption of imports from China or other foreign countries, including the imposition of additional import restrictions, could have a material adverse effect on the Company's operations. Substantially all of the Company's foreign purchases of merchandise are negotiated and paid for in U.S. dollars.
The Company cannot predict whether any of the countries in which its products currently are manufactured or may be manufactured in the future will be subject to trade restrictions imposed by the U.S. government, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, or both, against apparel items could increase the cost or reduce the supply of apparel available to the Company and adversely affect the Company's business, financial condition and results of operations. The Company pursues a diversified global sourcing strategy that includes relationships with vendors in over 50 countries. These sourcing operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions.
The Company's business follows a seasonal pattern, peaking over a total of about 10-13 weeks during the Back-to-School (mid-August through early September) and Holiday (November through December) periods. During fiscal year 1999, these periods accounted for approximately 36% of the Company's annual sales.
The Company's business is highly competitive. The Company competes with national and local department stores, specialty and discount store chains, independent retail stores and internet and catalog businesses which handle similar lines of merchandise. Some competitors have more resources than the Company. The Company's online business has limited operating history and is faced with competition from other online apparel retailers. In addition, certain other online retailers, some of whom have greater resources than the Company, may enter the online apparel market, further increasing competition. There is no guarantee that consumers will embrace shopping for apparel online or that the Company's online business will be profitable. Given the large number of companies in the retail industry, the Company cannot estimate the number of its competitors.
Depth of selection in sizes, colors and styles of merchandise, merchandise procurement and pricing, ability to anticipate fashion trends and customer preferences, inventory control, reputation, quality of merchandise, store design and location, advertising and customer service are all important factors in competing successfully in the retail industry.
The performance of the Company in recent years has increased the amount of imitation by other retailers. Such imitation has made and will continue to make the retail environment in which the Company operates more competitive. In addition, the success of the Company's operations depends upon a number of factors relating to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation. A decline in consumer spending on apparel could have a material adverse effect on the Company's net sales and profitability.
The ability of the Company to continually change and evolve its brands is a key source of competitive advantage and the Company believes its three distinct brands are among its most important assets. All aspects of brand development -from product design and distribution, to marketing, merchandising and shopping environments - are controlled by the Company. The Company continues to invest in the development of its brands through advertising spending, the establishment of an online presence and the opening of flagship stores. The Company has also made investments to enhance the customer experience through the opening of new stores, the expansion and remodeling of existing stores, and a focus on customer service.
The Company places print ads in major metropolitan newspapers and their Sunday magazines, major news weeklies and lifestyle and fashion magazines. The Company's ads also appeared in various outdoor venues, such as mass transit posters, exterior bus panels, bus shelters and gigantic billboards spanning entire buildings. The Company continues to run TV ads for all of its brands and radio ads for Old Navy. The Company plans to continue its investments in advertising and marketing in 2000. There can be no assurances that these investments will result in increased sales or profitability.
On January 29, 2000, the Company had a work force of approximately 140,000 employees. The Company also hires temporary employees during the peak Back-to-School and Holiday seasons. The Company considers its employee relations to be good.
The Gap, GapKids, babyGap, Banana Republic and Old Navy trademarks and service marks, and certain other trademarks, either have been registered, or are the subject of pending trademark applications, with the United States Patent and Trademark Office and with the registries of many foreign countries.
The Year 2000 issue is primarily the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year.
The Company has noticed no material impact to its operations as a result of transition to the Year 2000. Problems relating to the Year 2000 issue could still arise. However, the Company does not believe that the Year 2000 issue will have a material adverse effect on its financial condition or results of operations. The Company operates a large number of geographically dispersed stores and has a large supplier base and believes that these factors will mitigate any adverse impact.
The Company's beliefs and expectations, however, are based on certain assumptions and expectations that ultimately may prove to be inaccurate, including the Year 2000 viability of sourcing countries, and compliance of third-party vendors and suppliers. The Company has identified that a significant disruption in the product supply chain represents the most reasonably likely worst case Year 2000 scenario. A substantial, extended disruption in the
product supply chain could have a material adverse effect on the Company's financial condition and results of operations.
To date, the Company has incurred $40 million to address the Year 2000 issue. The Company does not expect to incur significant additional costs in connection with this issue.
The Chairman of the Company is Donald G. Fisher. Millard S. Drexler is the President and Chief Executive Officer of the Company. Both Donald G. Fisher and Millard S. Drexler are directors of the Company and the required information for each of them is set forth in the table located in the section entitled "Nominees for Election as Directors" of the 2000 Proxy Statement and is incorporated by reference herein. The following are also executive officers of the Company:
Name, Age, Position and Principal Occupation During Past Five Years:
Charles K. Crovitz, 46, Executive Vice President, Supply Chain and Technology since September 1998; Senior Vice President of Strategy, Logistics and Information Systems from March 1998 to September 1998; Senior Vice President of Strategic Planning and Business Development from 1993 to March 1998. Joined the Company in 1993.
Anne B. Gust, 42, Executive Vice President, Human Resources, Legal, Global Compliance and Corporate Administration since May 1999; Executive Vice President, Human Resources, Legal and Corporate Administration from September 1998 to May 1999; Senior Vice President and General Counsel from April 1994 to September 1998; Vice President and General Counsel from 1993 to 1994. Joined the Company in 1991.
Heidi Kunz, 45, Executive Vice President and Chief Financial Officer since August 1999. Executive Vice President and Chief Financial Officer of ITT Industries from 1995 to 1999. Vice President and Treasurer of General Motors from 1994 to 1995.
John B. Wilson, 40, Executive Vice President and Chief Operating Officer since March 1998; Executive Vice President and Chief Administrative Officer from October 1996 to March 1998. Executive Vice President, Finance and Strategy and Chief Financial Officer of Staples, Inc. from 1992 to 1996.
Item 2 - Properties
During fiscal year 1999, the Company opened 570 stores and closed 18. The newly-opened stores include 281 domestic Gap stores, 18 domestic Gap Outlet stores, 98 international Gap stores, 41 Banana Republic stores and 15 Banana Republic Factory stores in the United States and 117 Old Navy stores in the United States. In addition, during fiscal 1999, the Company expanded 68 domestic Gap stores, 4 Gap Outlet stores, 28 international Gap stores, 21 Banana Republic stores and 8 Old Navy stores. The 3,018 stores operating as of January 29, 2000 aggregated approximately 24 million square feet. The Company leases virtually all of its store premises. Terms generally range from five to 15 years with one or two five-year renewal options. Most leases provide for additional rent based on a percentage of store sales above a certain level in addition to or in lieu of minimum rentals, as well as for the payment of certain other expenses. Some leases contain cancellation clauses in favor of the Company if specified sales levels are not achieved. In the United States, the Company's stores are located in the 50 largest metropolitan areas.
The Company currently leases its regional offices and much of its headquarters office space, including approximately 495,000 square feet in buildings in San Francisco, California, 270,000 square feet in buildings in San Bruno, California (near the San Francisco Airport), and 300,000 square feet in buildings in New York City. The Company also leases its Eastern Distribution Center/Kentucky Distribution Center complex (EDC/KDC) and certain other distribution facilities. The EDC/KDC facilities in Erlanger, Kentucky (near Cincinnati) consist of
approximately 725,000 square feet. Nearby Northern Kentucky facilities include an approximately 325,000 square foot warehouse for consolidation/deconsolidation purposes, an approximately 520,000 square foot warehouse for distribution purposes, and an approximately 175,000 square foot warehouse for supply purposes. The Company leases a temporary distribution facility of approximately 350,000 square feet in Baltimore, Maryland. The Company also leases a warehouse/call center of approximately 270,000 square feet in Grove City, Ohio (near Columbus), which services Gap Online and Banana Republic catalog and Online; this facility is expected to be expanded to service other aspects of the Company's direct-to-consumer business. The Company leases its Japan Distribution Center (JDC), approximately 127,000 square feet, in Funabashi City, Chiba, Japan. The JDC is operated by a third party. The Company also leases an approximately 134,000 square foot warehouse in Essex, England and an approximately 17,000 square foot facility also in Essex, England for supply and distribution purposes.
The Company purchased an approximately 160,000 square feet building in San Francisco in 1999, owns an office facility in San Bruno of approximately 190,000 square feet and nearby land at that site which potentially could accommodate up to an additional 290,000 square feet, and also owns an office/computer facility of approximately 40,000 square feet in Rocklin, California (near Sacramento). The Company currently is in the process of developing an office building of approximately 540,000 square feet near its existing facilities in San Francisco, and an office building of approximately 260,000 square feet near its existing leased and owned facilities in San Bruno.
The Company owns distribution facilities in the following locations:
Location Square Footage (Approximate)
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Ventura, California 230,000 square feet
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Edgewood, Maryland 600,000 square feet
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Gallatin, Tennessee 1,030,000 square feet
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Gallatin, Tennessee 550,000 square feet
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Gallatin, Tennessee 710,000 square feet (Under Construction)
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Fresno, California 540,000 square feet
490,000 square feet (Expansion Under Construction)
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Fishkill, New York 1,400,000 square feet (Under Construction)
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Brampton, Ontario 370,000 square feet
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Brampton, Ontario 740,000 square feet (Under Construction)
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Roosendaal, The Netherlands 130,000 square feet
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The sites in Ventura, California and Edgewood, Maryland have additional land available for expansion or for additional facilities.
Item 3 - Legal Proceedings
The Company has been named as a defendant in two lawsuits relating to sourcing of products from Saipan (Commonwealth of the Northern Mariana Islands). A complaint was filed on January 13, 1999 in California Superior Court in San Francisco by the Union of Needletrades Industrial and Textile Employees, AFL- CIO; Global Exchange; Sweatshop Watch; and Asian Law Caucus against the Company and 17 other parties. The plaintiffs allege violations of California's unlawful, fraudulent and unfair business practices and untrue and misleading advertising statutes in connection with labeling of product and labor practices regarding workers of factories that make product for the Company in Saipan. The plaintiffs seek injunctive relief, restitution, disgorgement of profits and other damages. Trial has not been set in the state case. A second complaint was filed on January 13, 1999 in Federal District Court, Central District of California, by various unidentified worker plaintiffs against the Company and 25 other parties. Those unidentified worker plaintiffs seek class-action status and allege, among other things, that the Company (and other defendants) violated the Racketeer Influenced and Corrupt Organizations Act also in connection with the labor practices and treatment of workers of factories in Saipan that make product for the Company. The plaintiffs seek injunctive relief as well as actual and punitive damages. On September 29, 1999 the action was transferred to the
United States District Court, State of Hawaii. On April 22, 1999 the Company, along with several other defendants, filed a motion in Federal District Court, Central District of California, to dismiss the case. That motion currently is set for hearing on May 22, 2000. Trial in the Federal case has been set for February 27, 2001.
The Company also is a party to routine litigation incident to its business. Some of the lawsuits to which the Company is a party are covered by insurance and are being defended by the Company's insurance carriers.
The Company has established reserves which management believes are adequate to cover any litigation losses which may occur.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters
The information required by this item is incorporated herein by reference to page 26 of the 1999 Annual Report to Shareholders (Results book) included as Exhibit 13 to this Annual Report on Form 10-K.
Item 6 - Selected Financial Data
The information required by this item is incorporated herein by reference to pages 4 and 5 of the 1999 Annual Report to Shareholders (Results book) included as Exhibit 13 to this Annual Report on Form 10-K.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is incorporated herein by reference to pages 6-10 of the 1999 Annual Report to Shareholders (Results book) included as Exhibit 13 to this Annual Report on Form 10-K.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is incorporated herein by reference to page 11 of the 1999 Annual Report to Shareholders (Results book) included as Exhibit 13 to this Annual Report on Form 10-K.
Item 8 - Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference to pages 12-26 of the 1999 Annual Report to Shareholders (Results book) included as Exhibit 13 to this Annual Report on Form 10-K.
Item 9 - Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 10 - Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference to the section entitled "Nominees for Election as Directors" in the 2000 Proxy Statement. See also Item 1 above in the section entitled "Executive Officers of the Registrant."
Item 11 - Executive Compensation
The information required by this item is incorporated herein by reference to the sections entitled "Compensation of Directors," "Summary of Executive Compensation," "Stock Options," "Employment Contracts," and "Compensation Committee Interlocks and Insider Participation" in the 2000 Proxy Statement.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the section entitled "Beneficial Ownership of Shares" in the 2000 Proxy Statement.
Item 13 - Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the section entitled "Other Reportable Transactions" in the 2000 Proxy Statement.
Item 14 - Exhibits, Financial Statements, Schedules, and Reports On Form 8-K
(a) The following consolidated financial statements, schedules and exhibits are filed as part of this report or are incorporated herein as indicated.
(i) Independent Auditors' Report. Incorporated by reference to page 12 of the 1999 Annual Report to Shareholders (Results book) included as Exhibit 13 to this Annual Report on Form 10-K.
(ii) The consolidated balance sheets as of January 29, 2000 and January 30, 1999 and the related consolidated statements of earnings, shareholders' equity, cash flows, and notes thereto for each of the three fiscal years in the period ended January 29, 2000 are incorporated by reference to pages 13-26 of the 1999 Annual Report to Shareholders (Results book) included as Exhibit 13 to this Annual Report on Form 10-K.
Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto.
Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index which begins on sequentially numbered page 12 of this Annual Report on Form 10-K.
(b) No reports on Form 8-K were filed or required to be filed for the last quarter of the fiscal year.
Pursuant to the requirements of Section 13 or 15(d) 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 GAP, INC.
Date: March 28, 2000 By /s/ MILLARD S. DREXLER
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Millard S. Drexler,
Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 2000 By /s/ HEIDI KUNZ
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Heidi Kunz,
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 28, 2000 By /s/ ADRIAN D.P. BELLAMY
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Adrian D. P. Bellamy, Director
Date: March 28, 2000 By /s/ EVAN S. DOBELLE
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Evan S. Dobelle, Director
Date: March 28, 2000 By /s/ MILLARD S. DREXLER
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Millard S. Drexler, Director
Date: March 28, 2000 By /s/ DONALD G. FISHER
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Donald G. Fisher, Director
Date: March 28, 2000 By /s/ DORIS F. FISHER
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Doris F. Fisher, Director
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Date: March 28, 2000 By /s/ ROBERT J. FISHER
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Robert J. Fisher, Director
Date: March 28, 2000 By /s/ GLENDA A. HATCHETT
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Glenda A. Hatchett, Director
Date: March 28, 2000 By /s/ STEVEN P. JOBS
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Steven P. Jobs, Director
Date: March 28, 2000 By /s/ JOHN M. LILLIE
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John M. Lillie, Director
Date: March 28, 2000 By /s/ CHARLES R. SCHWAB
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Charles R. Schwab, Director
Date: March 28, 2000 By /s/ BROOKS WALKER, JR.
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Brooks Walker, Jr., Director
Date: March 28, 2000 By /s/ SERGIO S. ZYMAN
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Sergio S. Zyman, Director
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Exhibit Index
3.1 Registrant's Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562.
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation.
3.3 Registrant's By-Laws, filed as Exhibit C to Registrant's definitive proxy statement for its annual meeting of stockholders held on May 24, 1988, Commission File No. 1-7562
3.4 Amended Article IV of Registrant's By-Laws, filed as Exhibit 4.4 to Registrant's Registration Statement on Form S-8, Commission File No. 333-00417
4 Indenture, dated September 1, 1997, between the Registrant and Harris Trust Company of California filed as Exhibit 4 to Registrant's Form 10-Q for the quarter ended November 1, 1997, Commission File No. 1-7562
10.1 Amended and Restated Credit Agreement dated as of June 29, 1999 between the Registrant; Citicorp USA Inc.; Salomon Smith Barney Inc.; Bank of America National Trust & Savings Association; HSBC Bank USA; Morgan Guaranty Trust Company of New York; Bank of Montreal; ABN Amro Bank N.V.; Deutsche Bank AG New York Branch and/or Cayman Islands Branch; Societe Generale; The Sumitomo Bank Limited; The First National Bank of Chicago; Fleet Bank; Wells Fargo Bank, National Association; The Bank of New York; The Fuji Bank, Limited; Royal Bank of Canada U.S. Bank National Association and Citibank, N.A. filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended July 31, 1999, Commission File No. 1-7562
10.2 Credit Agreement dated as of July 1, 1997 between the Registrant; Citicorp USA Inc.; Bank of America National; Trust & Savings Association; The Hongkong and Shanghai Banking Corporation Limited; Nationsbank of Texas, N.A.; The Royal Bank of Canada; Bank of Montreal; Societe Generale; The Fuji Bank, Limited; Morgan Guaranty Trust Company of New York; The Sumitomo Bank Limited; Deutsche Bank AG New York Branch and/or Cayman Islands Branch; Union Bank of Switzerland, New York Branch; U.S. National Bank of Oregon; and Citibank, N.A. filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.3 First Letter Agreement dated June 30, 1998 to the Credit Agreement dated July 1, 1997 filed as Exhibit 10.4 to Registrant's Form 10-K for the year ended January 30, 1999, Commission File No. 1-7562
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.5 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration
Statement on Form S-8, Commission File No. 33-54690
10.6 Management Incentive Restricted Stock Plan II, filed as exhibit 4.1 to
Registrant's Registration Statement on Form S-8, Commission File No.
33-54686
10.7 Description of Management Incentive Cash Award Plan filed as Exhibit 10.34
to Registrant's Annual Report on Form 10-K for the year ended January 29,
1994, Commission File No. 1-7562
10.8 Executive Management Incentive Cash Award Plan (March 21, 1995 Amendment
and Restatement), filed as Exhibit B to the Registrant's definitive proxy
statement for its annual meeting of stockholders held on May 23, 1995,
Commission File No. 1-7562
10.9 Executive Management Incentive Cash Award Plan (January 25, 2000 Amendment
and Restatement), filed as Exhibit A to the Registrant's definitive proxy
statement for its annual meeting of stockholders held on May 5, 2000,
Commission File No. 1-7562
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10.10 The Gap, Inc. Executive Deferred Compensation Plan, filed as Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No.1-7562
10.11 1996 Stock Option and Award Plan, filed as Exhibit A to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 21, 1996, Commission File No. 1-7562
10.12 Amendment Number 1 to the Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.13 Amendment Number 2 to the Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.15 to Registrant's Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562
10.14 Amendment Number 3 to the Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.15 Form of Nonqualified Stock Option Agreement for employees under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.16 Form of Nonqualified Stock Option Agreement for directors under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.6 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.17 Form of Restricted Stock Agreement under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.7 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.18 Form of Nonqualified Stock Option Agreement for consultants under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.19 Form of Nonqualified Stock Option Agreement for employees in France under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.20 Form of Nonqualified Stock Option Agreement for international employees under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.6 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.21 Form of Nonqualified Stock Option Agreement for employees in Japan under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.7 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.22 Form of stock option agreement for employees under the UK Sub-plan to the U.S. Stock Option and Award Plan filed as Exhibit 10.8 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.23 Executive Long-Term Cash Award Performance Plan, filed as Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 21, 1996, Commission File No. 1-7562
10.24 Executive Long-Term Cash Award Performance Plan (January 26, 1999 Restatement), filed as Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 4, 1999, Commission File No. 1-7562
10.25 Executive Long-Term Cash Award Performance Plan (January 26, 1999 Restatement, as amended March 28, 2000)
10.26 Relocation Loan Plan, filed as Exhibit A to Registrant's definitive proxy statement for its annual meeting of stockholders held on October 25, 1977, Commission File No. 1-7562
10.27 Certificate of Corporate Resolution amending the Relocation Loan Plan, adopted by the Board of Directors on November 27, 1990, filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562
10.28 Non-Employee Director Retirement Plan, dated October 27, 1992, filed as Exhibit 10.43 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562
10.29 Statement Regarding Non-Employee Director Retirement Plan filed as Exhibit 10.25 to Registrant's Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562
10.30 The Gap, Inc. Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 333-36265
10.31 Amendment Number 1 to the Registrant's Nonemployee Director Deferred Compensation Plan filed as Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.32 Form of Discounted Stock Option Agreement under the Nonemployee Director
Deferred Compensation Plan, filed as Exhibit 4.5 to Registrant's
Registration Statement on Form S-8, Commission File No. 333-36265
10.4 Income continuation protection arrangement, dated December 21, 1998,
between Registrant and John B. Wilson, filed as Exhibit 10.33 to
Registrant's Form 10-K for the year ended January 30, 1999, Commission
File No. 1-7562
|
10.33 Employment arrangement, dated July 6, 1999, between Registrant and Heidi Kunz, filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-Q for the quarter ended July 31, 1999, Commission File No. 1-7562
13 Portions of Registrant's annual report to security holders for the fiscal year ended January 29, 2000
21 Subsidiaries of Registrant
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule for the year ended January 29, 2000
Exhibit 3.2
CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION
OF
THE GAP, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is The Gap, Inc.
2. The certificate of incorporation of the corporation is hereby amended by striking out Section 1 of Article FIFTH thereof and by substituting in lieu of said Section 1 the following new Section 1:
The total number of shares of all classes of stock which this corporation shall have authority to issue is 2,390,000,000 shares. The classes and the aggregate number of shares of stock of each class which this corporation shall have authority to issue are as follows:
(i) 2,300,000,000 shares of Common Stock, $0.05 par value per share (hereinafter the "Common Stock");
(ii) 60,000,000 shares of Class B Common Stock, $0.05 par value per share (hereinafter the "Class B Stock"); and
(iii) 30,000,000 shares of Preferred Stock, $0.05 par value per share, with such rights, privileges, restrictions and preferences as the Board of Directors may authorize from time to time (hereinafter the "Preferred Stock")."
3. The amendment of the certificate of incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
Signed on May 4, 1999.
/s/ Anne B. Gust Anne B. Gust Executive Vice President and Secretary |
Exhibit 10.25
THE GAP, INC.
EXECUTIVE LONG-TERM CASH AWARD PERFORMANCE PLAN
The purpose of the Executive Long-Term Cash Award Performance Plan is to provide financial incentives for certain of the Company's officers to meet and exceed the Company's multi-year financial goals. The Plan is intended to qualify as "performance-based compensation" under Code Section 162(m).
2.1 "Affiliated Company" means any company controlling, controlled by or under common control with the Company.
2.2 "Award" means a cash award pursuant to the provisions of the Plan.
2.3 "Capital Control" means adherence to the capital budget approved by the Company's Board of Directors as part of the annual budgeting process. Such budget shall be inclusive of the costs of new, enlarged, and relocated stores, remodels, lease rights, divisional capital, and other associated costs.
2.4 "Code" means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any further legislation or regulation amending, supplementing or superseding such section or regulation.
2.5 "Committee" means the Compensation and Stock Option Committee of the Company's Board of Directors, or any other Committee appointed by the Board pursuant to Section 3 of the Plan.
2.6 "Company" means The Gap, Inc., a Delaware corporation.
2.7 "Comparable Store Sales" means the Company's or a division's same store net sales growth for the Fiscal Year in excess of the prior year.
2.8 "Determination Date" means as to a Performance Cycle, the latest date possible that will not jeopardize the Plan's qualification as "performance-based compensation" under Code section 162(m).
2.9 "Earnings" means either (a) operating income of the Company or one of its divisions for a given Performance Cycle less certain allocated expenses (e.g., headquarters, distribution centers, etc.), or (b) income before interest and taxes of the Company or one of its divisions; determined in accordance with Generally Accepted Accounting Principles, provided that prior to the Determination Date the Committee shall determine (1) whether Earnings will be measured under clause (a) or (b), and (2) whether
any significant adjustments should be made to the calculation (e.g., exclusions for non-recurring items or unusual costs, etc.).
2.10 "Economic Value Added" means the Company's or a division's Net Operating Profit After Tax (NOPAT) for a specific performance period less charges for use of capital assets (Capital Charges). NOPAT for a division includes not only the division-specific revenues and directly controllable expenses, but also may include shared costs for applicable Information Technology, Distribution, and other Headquarters-related expenses, as determined by the Committee (prior to the Determination Date). Prior to applying taxes, operating profits are adjusted for interest expense on the present value of operating leases. Capital Charges means the Company's or a Division's Average Capital Balances multiplied by the Weighted Average Cost of Capital. Divisional Average Capital Balances is defined as an average of both directly controllable assets (Inventory, Property Plant and Equipment, Net Lease Rights, and the present value of operating leases), but also can include shared assets for applicable Information Technology, Distribution, other Headquarters-related capital balances, and a working capital allocation, as determined by the Committee (prior to the Determination Date). Total Company Average Capital Balances includes all assets except cash in excess of that attributable to day- to-day operations, and tax-related net assets, plus the present value of operating leases less all non-interest bearing liabilities.
2.11 "Fiscal Year" means the 1999 fiscal year of the Company and each succeeding fiscal year of the Company.
2.12 "Officer" means an officer (whether or not a member of the Company's Board of Directors) employed by the Company or any Affiliated Company.
2.13 "Participant" means as to any Performance Cycle, an Officer who has been selected by the Committee for participation in the Plan for such Performance Cycle.
2.14 "Performance Cycle" means any fiscal period of not less than two consecutive Fiscal Years nor more than five consecutive Fiscal Years, as determined by the Committee in its sole discretion.
2.15 "Performance Goals" means the goal(s) (or combined goals(s)) determined by the Committee (in its sole discretion) to be applicable to a Participant for a Performance Cycle. As determined by the Committee, the Performance Goals applicable to each Participant shall provide for a targeted level or levels of achievement using one or more of the following measures: (a) Capital Control, (b) Comparable Store Sales; (c) Earnings; (d) Economic Value Added, (d) Return on Equity; (e) Return on Invested Capital; (f) Return on Net Assets; (g) Sales Volume; (h) Spread, and (i) Total Sales. As determined in the discretion of the Committee, the Performance Goals for any Performance Cycle may: (a) differ among Participants, (b) relate to performance on a Company-wide or divisional basis, and/or (c) provide for a comparison of actual performance by the Company or a division to actual performance by a group of competitors determined in the discretion of the Committee. For each Performance Cycle, the Performance Goals applicable to each Participant shall be set forth in writing on or prior to the Determination Date.
2.16 "Plan" means the Executive Long-Term Cash Award Performance Plan, as set forth in this document and as hereafter amended from time to time.
2.17 "Return on Equity" means the Company's or a division's Earnings for the Performance Cycle, expressed as a percentage of the Company's or a division's average shareholders' equity over the Performance Cycle.
2.18 "Return on Invested Capital" (or "ROIC") means the Company's or a division's Net Operating Profit After Tax (NOPAT) divided by their respective Average Capital Balances over the same period of time. For a division, NOPAT includes not only the division-specific revenues and directly controllable expenses, but also may include shared costs for applicable Information Technology, Distribution, and other Headquarters-related expenses. Prior to applying taxes, operating profits are adjusted for interest expense on the present value of operating leases. Divisional Average Capital Balances is defined as an average of both directly controlled assets (Inventory, Property Plant and Equipment, Net Lease Rights and the present value of operating leases) as well as any applicable shared assets for related Information Technology, Distribution, other Headquarters-related capital balances, and a working capital allocation. For the Company, NOPAT means after tax earnings, adjusted for interest on the present value of operating leases but excluding interest expense or income on debt and cash. Total Company Average Capital Balances includes all assets except cash in excess of that attributable to day-to-day operations, and tax-related net assets, plus the present value of operating leases less non- interest bearing liabilities.
2.19 "Return on Net Assets" means the Company's or division's Earnings for the Performance Cycle, expressed as a percentage of the Company's or a division's average assets for Performance Cycle.
2.20 "Sales Volume" means the total sales volume per store of the Company or one of its divisions for the Performance Cycle.
2.21 "Spread" means the difference between the Company's or a division's ROIC for a Performance Cycle and the Weighted Average Cost of Capital. In practice, it can be used as an alternative method of calculating Economic Value Added, by simply multiplying the calculated spread by the Average Capital figures.
2.22 "Termination of Employment" means the time when the employee-employer relationship between the Participant and the Company and its Affiliated Companies is terminated for any reason, including, but not limited to, a termination by resignation, discharge, death, permanent disability, retirement, or the disaffiliation of an Affiliated Company, but excluding any such termination where there is a simultaneous reemployment by either the Company or one of its Affiliated Companies.
2.23 "Total Sales" means the Company's or a division's net sales for the Performance Cycle.
2.24 "Weighted Average Cost of Capital" (or "WACC") means the weighted average of the Company's cost of debt and cost of capital. The weighting is determined by comparing the balance of the Company's debt (acquired debt plus capitalized leases)
to the balance of the Company's equity based upon market value (rather than book value).
3.1 The Plan shall be administered by the Committee, which shall consist of no fewer than two members of the Company's Board of Directors, who shall be appointed and serve at the pleasure of the Company's Board of Directors. No member of the Company's Board of Directors who is not an "outside director" under Code section 162(m) shall serve on the Committee.
3.2 Subject to the provisions of the Plan, the Committee shall have exclusive authority to select the Participants, and to determine the target Award levels, the times when Awards will be granted, and the Performance Goals which must be achieved prior to payment of any Awards. For each Performance Cycle, all actions by the Committee shall be taken by the Determination Date.
3.3 The Committee shall have all discretion and authority necessary or appropriate to administer the Plan, including, but not limited to, the power to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable in the administration of the Plan, and all such determinations shall be final and binding upon all persons having and interest in the Plan.
3.4 A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at a meeting at which the quorum is present or any action taken without a meeting by a writing executed by a majority of the Committee shall constitute the act of the Committee.
3.5 All expenses and liabilities incurred by the Committee in the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, or other persons. The Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinion, or valuations of any such persons. No member of the Committee shall be personally liable for any action, determination, or interpretation taken or made with respect to the Plan, unless such action, determination, or interpretation constitutes criminal misconduct, willful negligence or demonstrates bad faith and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation.
The Plan is designed for Officers whose responsibilities significantly influence Company results. Participants shall be selected by the Committee prior to or on the Determination Date. Participation in the Plan is on a Performance Cycle basis and in the sole discretion of the Committee. Thus, an Officer who is selected for participation in a given Performance Cycle is in no way guaranteed to be selected for participation in any subsequent Performance Cycle or Performance Cycles.
5.1 Prior to or on the Determination Date, the Committee, in its sole discretion shall assign each Participant a target Award expressed as a percentage of the Participant's average annual base salary during the Performance Cycle.
5.3 After the end of the each Performance Cycle, the Committee shall
certify in writing the extent to which the Performance Goals applicable to each
Participant for the Performance Cycle were achieved or exceeded. The actual
Award for each Participant shall be determined by applying the formula
established pursuant to Section 5.2 of the Plan to the level of actual
performance that has been certified by the Committee. However, each
Participant's actual Award (if any) shall be subject to the maximum provided in
Section 6.
5.4 No Awards shall be paid to a Participant for a Performance Cycle unless the minimum actual performance for the Performance Cycle specified by the Committee pursuant to Section 5.2 of the Plan is achieved.
5.5 The Committee, in its sole discretion, may eliminate any Participant's Award, or reduce it below that which otherwise would be payable in accordance with the Plan.
For any Performance Cycle, the maximum Award payable to any Participant under the Plan shall be $8,000,000.
7.1 Except as provided in Section 7.2 of the Plan or as otherwise determined by the Committee, payment of Awards (if any) for a Performance Cycle will be made in cash or its equivalent on or about the first April 1 following the end of the Performance Cycle. If the Committee (in its discretion) so determines, payment of all or part of an Award to one or more Participants may be deferred for a period not to exceed five years after the date when payment otherwise would have been made. Any such deferral shall be subject to such rules and procedures as the Committee (in its discretion) shall determine. For example (but not by way of limitation), the Committee may determine that a deferred Award shall be forfeited unless the Participant remains an Officer through the scheduled payment date.
7.2 Unless otherwise specifically determined by the Committee, a Participant actually will be entitled to payment of an Award only if the Participant is an Officer on the date of payment (and except to the limited extent provided in the following sentence). If, after the completion of a Performance Cycle, a Participant incurs a Termination of Employment due to death or permanent disability, the Participant still shall be entitled to the payment of any Award for such Performance Cycle otherwise payable to the Participant. In the event an Award is payable to a Participant subsequent to the Participant's death, such payment shall be made to the Participant's estate.
7.3 The Company shall withhold all applicable income and other taxes from any Award payment to any Participant, including any federal, FICA, state and local taxes.
7.4 Each Award shall be payable solely from the general assets of the Company. Each Participant's right to payment of an Award (if any) shall be solely as an unsecured general creditor of the Company.
Nothing in the Plan shall confer upon any Participant the right to continue in the employ of the Company or its Affiliated Companies or shall interfere with or restrict in any way the rights of the Participant's employer to discharge or change the terms of employment of any Participant at any time for any reason whatsoever, with or without cause.
The adoption of the Plan shall not affect any other equity or other compensation or incentive plan in effect for the Company or any Affiliated Company, and the Plan shall not preclude the Company's Board of Directors from establishing any other forms of incentive compensation for Officers.
The Board, in its sole discretion, may alter, amend, or terminate the Plan or any part thereof at any time and for any reason; provided, however, that to the extent required to ensure the Plan's qualification under Code section 162(m) as "performance-based compensation", any such amendment shall be subject to stockholder approval.
The Plan originally was effective as of January 23, 1996. This amended and restated Plan is effective as of January 26, 1999, subject to the approval of the Plan by a majority of the shares of the common stock of the Company that are present in person or by proxy and entitled to vote at the 1999 Annual Meeting of
Stockholders.
10-YEAR SELECTED FINANCIAL DATA
Compound Annual Growth Rate Fiscal Year (in weeks)
------------------------------------------------------------------------------------------------- -------------------------------
3-year 5-year 10-year 1999 (52) 1998 (52)
------------------------------------------------------------------------------------------------- -------------------------------
Operating Results ($000)
-----------------------------------------------------------------------------------------------------------------------------------
Net sales 30% 26% 22% $ 11,635,398 $ 9,054,462
-----------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization -- -- -- 6,360,704 5,013,473
-----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales -- -- -- 54.7% 55.4%
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization (a) -- -- -- $ 414,558 $ 304,745
-----------------------------------------------------------------------------------------------------------------------------------
Operating expenses -- -- -- 3,043,432 2,403,365
-----------------------------------------------------------------------------------------------------------------------------------
Net interest expense (income) -- -- -- 31,755 13,617
-----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 34 28 27 1,784,949 1,319,262
-----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales -- -- -- 15.3% 14.6%
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes -- -- -- $ 657,884 $ 494,723
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings 36 29 28 1,127,065 824,539
-----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales -- -- -- 9.7% 9.1%
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid -- -- -- $ 75,795 $ 76,888
-----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures -- -- -- 1,268,811 842,655
-----------------------------------------------------------------------------------------------------------------------------------
Per Share Data
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings-basic 40% 31% 29% $ 1.32 $ 0.95
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings-diluted 39 31 29 1.26 0.91
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid (b) -- -- -- 0.09 0.09
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (book value) -- -- -- 2.63 1.83
-----------------------------------------------------------------------------------------------------------------------------------
Financial Position ($000)
-----------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 34% 27% 28% $ 2,715,315 $ 1,876,370
-----------------------------------------------------------------------------------------------------------------------------------
Merchandise inventory 36 32 20 1,462,045 1,056,444
-----------------------------------------------------------------------------------------------------------------------------------
Total assets 25 21 25 5,188,756 3,963,919
-----------------------------------------------------------------------------------------------------------------------------------
Working capital -- -- -- 444,911 318,721
-----------------------------------------------------------------------------------------------------------------------------------
Current ratio -- -- -- 1.25:1 1.21:1
-----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt, less current installments -- -- -- $ 784,925 $ 496,455
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of long-term debt to shareholders' equity -- -- -- 0.35:1 0.32:1
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity -- -- -- $ 2,233,045 $ 1,573,679
-----------------------------------------------------------------------------------------------------------------------------------
Return on average assets -- -- -- 24.6% 22.6%
-----------------------------------------------------------------------------------------------------------------------------------
Return on average shareholders' equity -- -- -- 59.2% 52.2%
-----------------------------------------------------------------------------------------------------------------------------------
Statistics
-----------------------------------------------------------------------------------------------------------------------------------
Number of stores opened (c) 41% 27% 19% 570 356
-----------------------------------------------------------------------------------------------------------------------------------
Number of stores expanded -- -- -- 129 135
-----------------------------------------------------------------------------------------------------------------------------------
Number of stores closed -- -- -- 18 20
-----------------------------------------------------------------------------------------------------------------------------------
Number of stores open at year-end (c) 18 15 12 3,018 2,466
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in number of stores -- -- -- 22% 16%
-----------------------------------------------------------------------------------------------------------------------------------
Comparable store sales growth (52-week basis) -- -- -- 7% 17%
-----------------------------------------------------------------------------------------------------------------------------------
Sales per square foot (52-week basis) (d) -- -- -- $ 548 $ 532
-----------------------------------------------------------------------------------------------------------------------------------
Square footage of gross store space at year-end 24 21 19 23,978,100 18,757,400
-----------------------------------------------------------------------------------------------------------------------------------
Percentage increase in square feet -- -- -- 28% 22%
-----------------------------------------------------------------------------------------------------------------------------------
Number of employees at year-end 28 21 20 140,000 111,000
-----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares-basic -- -- -- 853,804,924 864,062,060
-----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares-diluted -- -- -- 895,029,176 904,374,383
-----------------------------------------------------------------------------------------------------------------------------------
Number of shares outstanding at year-end,
net of treasury stock -- -- -- 850,498,941 857,960,032
-----------------------------------------------------------------------------------------------------------------------------------
|
(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Excludes a dividend of $.0222 per share declared in January 2000 but paid
in the first quarter of fiscal 2000.
(c) Reflects new store-count methodology for 1999 and 1998 stores, see page 7.
(d) Based on weighted-average gross square footage.
10-YEAR SELECTED FINANCIAL DATA (continued)
Fiscal Year (in weeks)
----------------------------------------------------------------------------------------------------------------------------------
1997 (52) 1996 (52) 1995 (53) 1994 (52)
----------------------------------------------------------------------------------------------------------------------------------
Operating Results ($000)
----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 6,507,825 $ 5,284,381 $ 4,395,253 $ 3,722,940
----------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 3,775,957 3,093,709 2,645,736 2,202,133
----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales 58.0% 58.5% 60.2% 59.2%
----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization (a) $ 245,584 $ 191,457 $ 175,719 $ 148,863
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses 1,635,017 1,270,138 1,004,396 853,524
----------------------------------------------------------------------------------------------------------------------------------
Net interest expense (income) (2,975) (19,450) (15,797) (10,902)
----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 854,242 748,527 585,199 529,322
----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales 13.1% 14.2% 13.3% 14.2%
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 320,341 $ 295,668 $ 231,160 $ 209,082
----------------------------------------------------------------------------------------------------------------------------------
Net earnings 533,901 452,859 354,039 320,240
----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales 8.2% 8.6% 8.1% 8.6%
----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid $ 79,503 $ 83,854 $ 66,993 $ 64,775
----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 483,114 375,838 309,599 236,616
----------------------------------------------------------------------------------------------------------------------------------
Per Share Data
----------------------------------------------------------------------------------------------------------------------------------
Net earnings-basic $ 0.60 $ 0.48 $ 0.38 $ 0.34
----------------------------------------------------------------------------------------------------------------------------------
Net earnings-diluted 0.58 0.47 0.37 0.33
----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid (b) 0.09 0.09 0.07 0.07
----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (book value) 1.79 1.79 1.69 1.41
----------------------------------------------------------------------------------------------------------------------------------
Financial Position ($000)
----------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 1,365,246 $ 1,135,720 $ 957,752 $ 828,777
----------------------------------------------------------------------------------------------------------------------------------
Merchandise inventory 733,174 578,765 482,575 370,638
----------------------------------------------------------------------------------------------------------------------------------
Total assets 3,337,502 2,626,927 2,343,068 2,004,244
----------------------------------------------------------------------------------------------------------------------------------
Working capital 839,399 554,359 728,301 555,827
----------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.85:1 1.72:1 2.32:1 2.11:1
----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt, less current installments $ 496,044 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Ratio of long-term debt to shareholders' equity 0.31:1 N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 1,583,986 $ 1,654,470 $ 1,640,473 $ 1,375,232
----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 17.9% 18.2% 16.3% 17.0%
----------------------------------------------------------------------------------------------------------------------------------
Return on average shareholders' equity 33.0% 27.5% 23.5% 25.6%
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Statistics
----------------------------------------------------------------------------------------------------------------------------------
Number of stores opened (c) 298 203 225 172
----------------------------------------------------------------------------------------------------------------------------------
Number of stores expanded 98 42 55 82
----------------------------------------------------------------------------------------------------------------------------------
Number of stores closed 22 30 53 34
----------------------------------------------------------------------------------------------------------------------------------
Number of stores open at year-end (c) 2,130 1,854 1,680 1,508
----------------------------------------------------------------------------------------------------------------------------------
Net increase in number of stores 15% 10% 11% 10%
----------------------------------------------------------------------------------------------------------------------------------
Comparable store sales growth (52-week basis) 6% 5% 0% 1%
----------------------------------------------------------------------------------------------------------------------------------
Sales per square foot (52-week basis) (d) $ 463 $ 441 $ 425 $ 444
----------------------------------------------------------------------------------------------------------------------------------
Square footage of gross store space at year-end 15,312,700 12,645,000 11,100,200 9,165,900
----------------------------------------------------------------------------------------------------------------------------------
Percentage increase in square feet 21% 14% 21% 21%
----------------------------------------------------------------------------------------------------------------------------------
Number of employees at year-end 81,000 66,000 60,000 55,000
----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares-basic 891,404,945 938,579,921 939,866,394 948,699,959
----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares-diluted 922,951,706 961,351,245 962,443,160 971,144,612
----------------------------------------------------------------------------------------------------------------------------------
Number of shares outstanding at year-end,
net of treasury stock 884,549,313 926,495,994 971,149,446 977,162,057
----------------------------------------------------------------------------------------------------------------------------------
|
10-YEAR SELECTED FINANCIAL DATA (continued)
Fiscal Year (in weeks)
----------------------------------------------------------------------------------------------------------------------------------
1993 (52) 1992 (52) 1991 (52) 1990 (52)
----------------------------------------------------------------------------------------------------------------------------------
Operating Results ($000)
----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,295,679 $ 2,960,409 $ 2,518,893 $ 1,933,780
----------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 1,996,929 1,856,102 1,496,156 1,187,644
----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales 60.6% 62.7% 59.4% 61.4%
----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization (a) $ 124,860 $ 99,451 $ 72,765 $ 53,599
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses 748,193 661,252 575,686 454,180
----------------------------------------------------------------------------------------------------------------------------------
Net interest expense (income) 809 3,763 3,523 1,435
----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 424,888 339,841 370,763 236,922
----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales 12.9% 11.5% 14.7% 12.3%
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 166,464 $ 129,140 $ 140,890 $ 92,400
----------------------------------------------------------------------------------------------------------------------------------
Net earnings 258,424 210,701 229,873 144,522
----------------------------------------------------------------------------------------------------------------------------------
Percentage of net sales 7.8% 7.1% 9.1% 7.5%
----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid $ 53,041 $ 44,106 $ 41,126 $ 29,625
----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 215,856 213,659 244,323 199,617
----------------------------------------------------------------------------------------------------------------------------------
Per Share Data
----------------------------------------------------------------------------------------------------------------------------------
Net earnings-basic $ 0.27 $ 0.23 $ 0.25 $ 0.16
----------------------------------------------------------------------------------------------------------------------------------
Net earnings-diluted 0.27 0.22 0.24 0.15
----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid (b) 0.05 0.05 0.04 0.03
----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (book value) 1.15 0.91 0.71 0.49
----------------------------------------------------------------------------------------------------------------------------------
Financial Position ($000)
----------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 740,422 $ 650,368 $ 547,740 $ 383,548
----------------------------------------------------------------------------------------------------------------------------------
Merchandise inventory 331,155 365,692 313,899 247,462
----------------------------------------------------------------------------------------------------------------------------------
Total assets 1,763,117 1,379,248 1,147,414 776,900
----------------------------------------------------------------------------------------------------------------------------------
Working capital 494,194 355,649 235,537 101,518
----------------------------------------------------------------------------------------------------------------------------------
Current ratio 2.07:1 2.06:1 1.71:1 1.39:1
----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt, less current installments $ 75,000 $ 75,000 $ 80,000 $ 17,500
----------------------------------------------------------------------------------------------------------------------------------
Ratio of long-term debt to shareholders' equity 0.07:1 0.08:1 0.12:1 0.04:1
----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 1,126,475 $ 887,839 $ 677,788 $ 465,733
----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 16.4% 16.7% 23.9% 21.3%
----------------------------------------------------------------------------------------------------------------------------------
Return on average shareholders' equity 25.7% 26.9% 40.2% 36.0%
----------------------------------------------------------------------------------------------------------------------------------
Statistics
----------------------------------------------------------------------------------------------------------------------------------
Number of stores opened (c) 108 117 139 152
----------------------------------------------------------------------------------------------------------------------------------
Number of stores expanded 130 94 79 56
----------------------------------------------------------------------------------------------------------------------------------
Number of stores closed 45 26 15 20
----------------------------------------------------------------------------------------------------------------------------------
Number of stores open at year-end (c) 1,370 1,307 1,216 1,092
----------------------------------------------------------------------------------------------------------------------------------
Net increase in number of stores 5% 7% 11% 14%
----------------------------------------------------------------------------------------------------------------------------------
Comparable store sales growth (52-week basis) 1% 5% 13% 14%
----------------------------------------------------------------------------------------------------------------------------------
Sales per square foot (52-week basis) (d) $ 463 $ 489 $ 481 $ 438
----------------------------------------------------------------------------------------------------------------------------------
Square footage of gross store space at year-end 7,546,300 6,509,200 5,638,400 4,762,300
----------------------------------------------------------------------------------------------------------------------------------
Percentage increase in square feet 16% 15% 18% 17%
----------------------------------------------------------------------------------------------------------------------------------
Number of employees at year-end 44,000 39,000 32,000 26,000
----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares-basic 940,287,006 928,417,491 915,766,923 904,421,435
----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares-diluted 965,110,280 960,903,782 953,297,157 944,950,514
----------------------------------------------------------------------------------------------------------------------------------
Number of shares outstanding at year-end,
net of treasury stock 980,428,914 973,250,357 962,032,505 953,532,203
----------------------------------------------------------------------------------------------------------------------------------
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information below and elsewhere in this Annual Report contains certain forward-looking statements which reflect the current view of Gap Inc. (the "Company") with respect to future events and financial performance. Wherever used, the words "expect," "plan," "anticipate," "believe" and similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties and the Company's future results of operations could differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where the Company's goods are manufactured, disruption to operations from Year 2000 issues and/or other factors that may be described in the Company's Annual Report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict.
The Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Results of Operations
Net Sales
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
---------------------------------------------------------------------------------------------------------------------------
Net sales ($000) $11,635,398 $ 9,054,462 $ 6,507,825
---------------------------------------------------------------------------------------------------------------------------
Total net sales growth percentage 29 39 23
---------------------------------------------------------------------------------------------------------------------------
Comparable store sales growth percentage 7 17 6
---------------------------------------------------------------------------------------------------------------------------
Net sales per average gross square foot $ 548 $ 532 $ 463
---------------------------------------------------------------------------------------------------------------------------
Square footage of gross store space at year-end (000) 23,978 18,757 15,313
---------------------------------------------------------------------------------------------------------------------------
Number of new stores 570 356 298
---------------------------------------------------------------------------------------------------------------------------
Number of expanded stores 129 135 98
---------------------------------------------------------------------------------------------------------------------------
Number of closed stores 18 20 22
---------------------------------------------------------------------------------------------------------------------------
|
The total net sales growth for all years presented was primarily attributable to the increase in retail selling space, both through the opening of new stores (net of stores closed) and the expansion of existing stores. An increase in comparable store sales also contributed to net sales growth for all years presented.
The increase in net sales per average square foot for 1999 and 1998 was primarily attributable to increases in comparable store sales.
Comparable store sales growth by division for 1999 and 1998 was as follows: Gap domestic reported positive low single-digit growth in 1999 versus positive low double-digit growth in 1998; Gap international reported positive mid-teens growth in 1999 versus positive low-thirties growth in 1998; Banana Republic reported positive low double-digit growth in 1999 versus positive high-teens growth in 1998; Old Navy reported positive mid-teens growth in 1999 versus positive mid-twenties growth in 1998.
Store count and square footage growth were as follows:
Jan. 29, 2000 Jan. 30, 1999
---------------------------------------------------------------------------------------------------------------------------
Number of Stores Sq. Ft. (Millions) Number of Stores Sq. Ft. (Millions)
---------------------------------------------------------------------------------------------------------------------------
Gap Domestic 1,767 10.3 1,476 9.0
---------------------------------------------------------------------------------------------------------------------------
Gap International 393 2.1 300 1.5
---------------------------------------------------------------------------------------------------------------------------
Banana Republic (a) 345 2.6 292 2.0
---------------------------------------------------------------------------------------------------------------------------
Old Navy 513 9.0 398 6.3
---------------------------------------------------------------------------------------------------------------------------
Total 3,018 24.0 2,466 18.8
===========================================================================================================================
Increase 22% 28% 16% 22%
---------------------------------------------------------------------------------------------------------------------------
|
(a) Includes 10 stores in Canada in fiscal 1999 and 1998.
New Store-count Methodology
Store count numbers for 1999 and 1998 have been restated to reflect the Company's new store-count methodology as it relates to Gap brand. Historically, the Company has defined existing and new Gap brand stores by the number of doors of entry, regardless of how many concepts were included in the store. Under the new methodology, individual concepts (adult, kids, baby and body) that meet minimum square footage requirements will be counted as a store, even when residing in a single, physical location. This methodology change resulted in an increase of 86 stores at January 29, 2000. The store count numbers for years prior to1998 have not been restated as they are not significantly different under the new methodology.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales decreased 0.5 and 3.1 percentage points in 1999 from 1998 and in 1998 from 1997, respectively.
The decrease in 1999 from 1998 was primarily attributable to a decrease in occupancy expenses as a percentage of net sales due to changes in the mix of stores as Old Navy becomes a larger part of the business, partially offset by a decrease in the merchandise margin due to a decline in the level of merchandise sold at regular price.
The decrease in 1998 from 1997 was primarily attributable to a decrease in occupancy expenses as a percentage of net sales due to leverage achieved through comparable store sales growth combined with an increase in merchandise margin due to higher margins achieved on marked-down goods, as well as to an increase in the percentage of merchandise sold at regular price.
As a general business practice, the Company reviews its inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Such markdowns may have an adverse impact on earnings, depending upon the extent of the markdown and the amount of inventory affected.
Operating Expenses
Operating expenses as a percentage of net sales decreased 0.3 percentage points in 1999 from 1998 and increased 1.4 percentage points in 1998 from 1997.
In 1999, the decrease resulted from lower administrative costs as a percentage of net sales.
In 1998, the increase was driven by significantly higher advertising/marketing costs as part of the Company's continued brand development efforts, partially offset by a decrease as a percentage of net sales in the write-off of leasehold improvements and fixtures associated with the remodeling, relocation and closing of certain stores, as well as to leverage from comparable store sales growth.
Net Interest Expense/Income
The increase in net interest expense between 1999 and 1998 is primarily due to the additional interest expense from the issuance of long-term debt during 1999 to support the Company's international expansion plans.
The change in 1998 to net interest expense from net interest income in 1997 was primarily due to the interest expense incurred for the full fiscal year related to the $500 million of debt securities issued during the third quarter of 1997. The Company's greater short-term borrowings in the last half of 1998 compared to 1997 also contributed to the increase in interest expense.
Income Taxes
The effective tax rate was 36.9 percent in 1999 and 37.5 percent in 1998 and 1997. The decrease in the effective tax rate in 1999 resulted from the Company's implementation of global tax planning initiatives based on long-term business needs.
Liquidity and Capital Resources
The following sets forth certain measures of the Company's liquidity:
Fiscal Year 1999 Fiscal Year 1998 Fiscal Year 1997
------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities ($000) $1,477,928 $1,394,161 $ 844,651
------------------------------------------------------------------------------------------------------------------------------
Working capital ($000) 444,911 318,721 839,399
------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.25:1 1.21:1 1.85:1
------------------------------------------------------------------------------------------------------------------------------
|
For the fiscal year ended January 29, 2000, the increase in cash flows provided by operating activities was primarily due to an increase in net earnings exclusive of depreciation and amortization and a tax benefit from the vesting of a large restricted stock grant, partially offset by the timing of payments for certain payables and an increase in merchandise inventory. The increase in working capital and the current ratio was primarily due to investments in merchandise inventory, partially offset by an increase in payables.
For the fiscal year ended January 30, 1999, the increase in cash provided by operating activities was primarily due to an increase in net earnings and the timing of payments for certain payables, partially offset by investments in merchandise inventory. The decline in working capital and the current ratio was attributable to an increase in payables driven by business growth combined with a decrease in cash resulting from greater capital expenditures and share repurchases.
The Company funds inventory expenditures during normal and peak periods through a combination of cash flows from operations and short-term financing arrangements. The Company's business follows a seasonal pattern, peaking over a total of about 13 weeks during the Back-to-School and Holiday periods. During 1999 and 1998, these periods accounted for 36 and 37 percent, respectively, of the Company's annual sales.
The Company has committed credit facilities totaling $1 billion, consisting of an $850 million, 364-day revolving credit facility, and a $150 million, 5-year revolving credit facility through June 28, 2003. These credit facilities provide for the issuance of up to $500 million in letters of credit and provide backup for the Company's $500 million commercial paper program. The Company has additional uncommitted credit facilities of $520 million for the issuance of letters of credit. At January 29, 2000, the Company had outstanding letters of credit totaling approximately $851 million. The Company had no commercial paper outstanding at January 29, 2000.
To provide financial flexibility, the Company filed a shelf registration statement in January 1999 with the Securities and Exchange Commission for $500 million of debt securities. The net proceeds from any issuance are expected to be used for general corporate purposes, including expansion of stores, distribution centers and headquarters facilities, brand investment, development of additional distribution channels and repurchases of the Company's common stock pursuant to its ongoing repurchase program. The Company has not issued any securities under this shelf registration and no assurances can be given that the Company will issue these debt securities in the future.
In September 1997, the Company issued $500 million of debt securities, due September 15, 2007. The proceeds were used for general corporate purposes similar to those described above.
In March 1999, the Company's Japanese subsidiary, Gap (Japan) KK, issued $50 million of debt securities, due March 1, 2009. The net proceeds were used for general corporate purposes similar to those described above. The cash flows relating to the bonds were swapped for the equivalent amounts in Japanese yen to minimize currency exposure.
Also, in September 1999, the Company's Netherlands subsidiary, Gap International B.V., issued debt securities in the amount of 250 million Euro, approximately $262 million at issuance, due September 30, 2004. The net proceeds will be used to support the Company's international expansion plans.
All of the Company's long-term debt was issued at fixed interest rates to avoid the risk of fluctuations in interest rates. Quantitative and qualitative disclosures about market risk for the Company's long-term debt are presented on page 11.
Capital expenditures, net of construction allowances and dispositions, totaled approximately $1.189 billion in 1999. These expenditures resulted in a net increase in store space of approximately 5.2 million square feet, or 28 percent, due to the addition of 570 new stores, the expansion of 129 stores and the remodeling of certain stores. Capital expenditures for 1998 and 1997 were $797 million and $450 million, respectively, resulting in a net increase in store space of 3.4 million square feet in 1998 and 2.7 million square feet in 1997.
The increases in capital expenditures in 1999 and 1998 over the prior years were primarily attributable to the number of stores opened, expanded and remodeled, as well as the expansion of headquarters facilities. The addition and expansion of distribution centers also contributed to the 1999 and 1998 capital expenditure increases.
For 2000, the Company expects capital expenditures to exceed $1.6 billion, net of construction allowances. This represents the addition of 600 to 660 new stores, the expansion of approximately 200 stores and the remodeling of certain stores, as well as amounts for headquarters facilities, distribution centers and equipment. The Company expects to fund such capital expenditures with cash flow from operations and other sources of financing. Square footage growth is expected to be in the mid-20 percent range. By division, the 600 to 660 new stores are expected to be: Gap domestic 320 to 340 stores, Banana Republic 40 to 60 stores, Old Navy 120 to 130 stores and Gap international 120 to 130 stores. New stores are generally expected to be leased.
During 1998, the Company purchased land on which to construct additional headquarters facilities in San Francisco and San Bruno, California. The estimated total project costs are approximately $240 million and $100 million, respectively. Construction commenced on the San Francisco facility during the third quarter of 1998 and is estimated to continue through early 2001. Construction commenced during the first quarter of 1999 on the San Bruno facility and is estimated to continue through late 2000.
During 1999, the Company opened a distribution center that was constructed over fiscal 1997 and 1998 for a total cost of approximately $60 million. During 1999, the Company commenced construction of a $55 million expansion of this distribution center, which is expected to be complete in mid-2000.
Additionally during 1999, the Company commenced construction on three distribution facilities for an estimated total cost of approximately $300 million. Approximately half of these expenditures were incurred during fiscal 1999, with the remainder to be incurred during fiscal 2000. These expenditures are included in the projected capital expenditures as described above. The first facility opened in mid-1999. The remaining two facilities are expected to open in early 2000 and late 2000, respectively.
In 1999, the Company agreed to purchase a distribution site and building in Ontario, Canada to support the initial international expansion plans for the Old Navy business. The Company will take possession of the facility in early 2000 and will spend the next year remodeling the facility prior to its anticipated opening date in mid-2001. The estimated total project cost is approximately $89 million.
On May 20, 1999, the Company's Board of Directors authorized a three-for-two split of the Company's common stock that was distributed on June 21, 1999, in the form of a stock dividend for shareholders of record at the close of business on June 4, 1999. All share and per share amounts in the accompanying consolidated financial statements for all periods have been restated to reflect the stock split.
During 1999, the Company completed a 101 million share repurchase program approved in October 1996 by acquiring approximately 2.1 million shares for approximately $94 million. In addition, during fiscal 1999, under the 67.5 million share repurchase program approved in October 1998, the Company acquired approximately 16.4 million shares for approximately $651 million, including 0.8 million shares acquired under put option contracts for approximately $32 million.
During 1999, the Company entered into various put option contracts in connection with the share repurchase program to hedge against stock price fluctuations. As of January 29, 2000, the Company had an outstanding put option contract to repurchase approximately 0.4 million shares of the Company's stock. The contract has an exercise price of $32.00 per share, with an expiration date in March 2000.
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company's risk management policy is to hedge substantially all merchandise purchases for foreign operations through the use of foreign exchange forward contracts to minimize this risk. Additional information on these contracts and agreements is presented in the Notes to Consolidated Financial Statements (Note E.). Quantitative and qualitative disclosures about market risk for financial instruments are presented on page 11.
Year 2000 Issue
The Year 2000 issue is primarily the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year.
The Company has noticed no material impact to its operations as a result of the transition to the Year 2000. Problems relating to the Year 2000 issue could still arise. However, the Company does not believe that the Year 2000 issue will have a material adverse effect on its financial condition or results of operations. The Company operates a large number of geographically dispersed stores and has a large supplier base and believes that these factors will mitigate any adverse impact.
The Company's beliefs and expectations, however, are based on certain assumptions and expectations that ultimately may prove to be inaccurate, including the Year 2000 viability of sourcing countries, and compliance of third-party vendors and suppliers. The Company has identified that a significant disruption in the product supply chain represents the most reasonably likely worst case Year 2000 scenario. A substantial, extended disruption in the product supply chain could have a material adverse effect on the Company's financial condition and results of operations.
To date, the Company has incurred costs of $40 million to address the Year 2000 issue. The Company does not expect to incur significant additional costs in connection with this issue.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's market sensitive financial instruments as of January 29, 2000 and January 30, 1999.
The Company purchases foreign exchange forward contracts to hedge substantially all merchandise purchases made by foreign operations. These contracts are entered into with large reputable financial institutions, thereby minimizing the risk of credit loss. Further discussion of these contracts appears in the Notes to Consolidated Financial Statements (Note E).
During fiscal 1997, the Company issued $500 million of unsecured notes, due September 15, 2007, with a fixed interest rate of 6.9 percent.
During fiscal 1999, the Company's Japanese subsidiary, Gap (Japan) KK, issued $50 million of debt securities due March 1, 2009, with a fixed interest rate of 6.25 percent payable in U.S. dollars. The Company swapped the cash flows payable under these debt securities to Japanese yen with a fixed interest rate of 2.43 percent. These debt securities are recorded in the balance sheet at their fair market value as of January 29, 2000.
During 1999, the Company's Netherlands subsidiary, Gap International B.V., issued debt securities in the amount of 250 million Euro, approximately $262 million, with a fixed interest rate of 5.0 percent, due September 30, 2004.
By entering into the fixed-rate borrowings, the Company avoids interest rate risk from variable rate fluctuations. A portion of the Company's fixed-rate borrowings used to finance foreign operations is denominated in foreign currencies. By borrowing and repaying the loans in local currencies, the Company avoids the risk associated with exchange rate fluctuations.
Jan. 29, 2000 Jan. 30, 1999
---------------------------------------------------------------------------- -----------------------------------------------------
Notional Amount of Notional Amount of
Average Forward Contracts Average Forward Contracts
($000) Contract Rate (a) in U.S. Dollars Fair Value (b) Contract Rate (a) in U.S. Dollars Fair Value (b)
---------------------------------------------------------------------------- -----------------------------------------------------
Foreign exchange
forward contracts (c)
-----------------------------------------------------------------------------------------------------------------------------------
Sell contracts:
British pounds 0.62 $133,432 $134,469 0.61 $137,222 $136,581
-----------------------------------------------------------------------------------------------------------------------------------
Canadian dollars 1.47 91,151 92,678 1.51 112,967 112,228
-----------------------------------------------------------------------------------------------------------------------------------
Japanese yen 109.12 67,648 70,393 126.24 25,776 28,197
-----------------------------------------------------------------------------------------------------------------------------------
Buy contracts:
Italian lire 1,842.40 47,178 44,269 1,700.06 24,459 25,052
-----------------------------------------------------------------------------------------------------------------------------------
Spanish pesetas 159.02 12,476 11,730 142.75 9,351 9,189
-----------------------------------------------------------------------------------------------------------------------------------
Total foreign exchange
forward contracts $351,885 $353,539 $309,775 $311,247
===================================================================================================================================
Jan. 29, 2000 Jan. 30, 1999
---------------------------------------------------------------------------- -----------------------------------------------------
Carrying Amount in Carrying Amount
($000) U.S. Dollars Fair Value (d) in U.S. Dollars Fair Value (d)
---------------------------------------------------------------------------- -----------------------------------------------------
Notes payable, due 2007 $496,866 $478,393 $496,455 $551,818
-----------------------------------------------------------------------------------------------------------------------------------
Notes payable, due 2009 44,136 44,136 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Notes payable, due 2004 243,923 231,880 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $784,925 $754,409 $496,455 $551,818
===================================================================================================================================
|
(a) Currency per U.S. dollar.
(b) Calculated using forward spot rates at the dates presented.
(c) All contracts mature within one year.
(d) Based on the rates at which the Company could borrow funds with similar
terms and remaining maturities at the dates presented.
MANAGEMENT'S REPORT ON FINANCIAL INFORMATION
Management is responsible for the integrity and consistency of all financial information presented in the Annual Report. The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include certain amounts based on Management's best estimates and judgments.
In fulfilling its responsibility for the reliability of financial information, Management has established and maintains accounting systems and procedures appropriately supported by internal accounting controls. Such controls include the selection and training of qualified personnel, an organizational structure providing for division of responsibility, communication of requirement for compliance with approved accounting control and business practices and a program of internal audit. The extent of the Company's system of internal accounting control recognizes that the cost should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgments by Management. Although no system can ensure that all errors or irregularities have been eliminated, Management believes that the internal accounting controls in use provide reasonable assurance, at reasonable cost, that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with Management's authorization and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The financial statements of the Company have been audited by Deloitte & Touche LLP, independent auditors, whose report appears below.
The Audit and Finance Committee (the "Committee") of the Board of Directors is comprised solely of directors who are not officers or employees of the Company. The Committee is responsible for recommending to the Board of Directors the selection of independent auditors. It meets periodically with Management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities. The Committee also reviews and monitors the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. Deloitte & Touche LLP and the internal auditors have full and free access to the Committee, with and without Management's presence.
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE GAP, INC.:
We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of January 29, 2000 and January 30, 1999, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three fiscal years in the period ended January 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as of January 29, 2000 and January 30, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 2000 in conformity with generally accepted accounting principles.
/s/ Deloitte and Touche LLP San Francisco, California February 23, 2000 |
CONSOLIDATED STATEMENTS OF EARNINGS
52 Weeks Ended Percentage 52 Weeks Ended Percentage 52 Weeks Ended Percentage
($000 except per share amounts) Jan. 29, 2000 to Sales Jan. 30, 1999 to Sales Jan. 31, 1998 to Sales
-----------------------------------------------------------------------------------------------------------------------------------
Net sales $11,635,398 100.0% $ 9,054,462 100.0% $ 6,507,825 100.0%
-----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
-----------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold and occupancy expenses 6,775,262 58.2 5,318,218 58.7 4,021,541 61.8
-----------------------------------------------------------------------------------------------------------------------------------
Operating expenses 3,043,432 26.2 2,403,365 26.5 1,635,017 25.1
-----------------------------------------------------------------------------------------------------------------------------------
Net interest expense (income) 31,755 0.3 13,617 0.2 (2,975) 0.0
-----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,784,949 15.3 1,319,262 14.6 854,242 13.1
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes 657,884 5.6 494,723 5.5 320,341 4.9
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,127,065 9.7% $ 824,539 9.1% $ 533,901 8.2%
===================================================================================================================================
Weighted-average number of shares-basic 853,804,924 864,062,060 891,404,945
-----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares-diluted 895,029,176 904,374,383 922,951,706
-----------------------------------------------------------------------------------------------------------------------------------
Earnings per share-basic $ 1.32 $ 0.95 $ 0.60
-----------------------------------------------------------------------------------------------------------------------------------
Earnings per share-diluted 1.26 0.91 0.58
-----------------------------------------------------------------------------------------------------------------------------------
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
($000 except par value) Jan. 29, 2000 Jan. 30, 1999
--------------------------------------------------------------------------------------------
Assets
--------------------------------------------------------------------------------------------
Current Assets
--------------------------------------------------------------------------------------------
Cash and equivalents $ 450,352 $ 565,253
--------------------------------------------------------------------------------------------
Merchandise inventory 1,462,045 1,056,444
--------------------------------------------------------------------------------------------
Other current assets 285,393 250,127
--------------------------------------------------------------------------------------------
Total current assets 2,197,790 1,871,824
--------------------------------------------------------------------------------------------
Property and Equipment
--------------------------------------------------------------------------------------------
Leasehold improvements 1,426,537 1,040,959
--------------------------------------------------------------------------------------------
Furniture and equipment 2,083,604 1,601,572
--------------------------------------------------------------------------------------------
Land and buildings 278,422 160,776
--------------------------------------------------------------------------------------------
Construction-in-progress 414,725 245,020
--------------------------------------------------------------------------------------------
4,203,288 3,048,327
--------------------------------------------------------------------------------------------
Accumulated depreciation and amortization (1,487,973) (1,171,957)
--------------------------------------------------------------------------------------------
Property and equipment, net 2,715,315 1,876,370
--------------------------------------------------------------------------------------------
Lease rights and other assets 275,651 215,725
--------------------------------------------------------------------------------------------
Total assets $ 5,188,756 $ 3,963,919
============================================================================================
Liabilities and Shareholders' Equity
--------------------------------------------------------------------------------------------
Current Liabilities
--------------------------------------------------------------------------------------------
Notes payable $ 168,961 $ 90,690
--------------------------------------------------------------------------------------------
Accounts payable 805,945 684,130
--------------------------------------------------------------------------------------------
Accrued expenses and other current liabilities 751,710 655,770
--------------------------------------------------------------------------------------------
Income taxes payable 26,263 122,513
--------------------------------------------------------------------------------------------
Total current liabilities 1,752,879 1,553,103
--------------------------------------------------------------------------------------------
Long-Term Liabilities
--------------------------------------------------------------------------------------------
Long-term debt 784,925 496,455
--------------------------------------------------------------------------------------------
Deferred lease credits and other liabilities 417,907 340,682
--------------------------------------------------------------------------------------------
Total long-term liabilities 1,202,832 837,137
--------------------------------------------------------------------------------------------
Shareholders' Equity
--------------------------------------------------------------------------------------------
Common stock $.05 par value
--------------------------------------------------------------------------------------------
Authorized 2,300,000,000 shares; issued 1,007,356,790
and 997,496,214 shares; outstanding 850,498,941
and 857,960,032 shares 50,368 49,875
--------------------------------------------------------------------------------------------
Additional paid-in capital 669,490 349,037
--------------------------------------------------------------------------------------------
Retained earnings 4,172,796 3,121,360
--------------------------------------------------------------------------------------------
Accumulated other comprehensive loss (6,759) (12,518)
--------------------------------------------------------------------------------------------
Deferred compensation (23,150) (31,675)
--------------------------------------------------------------------------------------------
Treasury stock, at cost (2,629,700) (1,902,400)
--------------------------------------------------------------------------------------------
Total shareholders' equity 2,233,045 1,573,679
--------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,188,756 $ 3,963,919
============================================================================================
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($000) Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
-----------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,127,065 $ 824,539 $ 533,901
-----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to
net cash provided by operating activities:
-----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 436,184 326,447 269,706
-----------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options
and vesting of restricted stock 211,891 79,808 23,682
-----------------------------------------------------------------------------------------------------------------------
Deferred income taxes 2,444 (34,766) (13,706)
-----------------------------------------------------------------------------------------------------------------------
Change in operating assets and liabilities:
-----------------------------------------------------------------------------------------------------------------------
Merchandise inventory (404,211) (322,287) (156,091)
-----------------------------------------------------------------------------------------------------------------------
Prepaid expenses and other (55,519) (77,292) (44,736)
-----------------------------------------------------------------------------------------------------------------------
Accounts payable 118,121 265,296 63,532
-----------------------------------------------------------------------------------------------------------------------
Accrued expenses 89,071 231,178 107,365
-----------------------------------------------------------------------------------------------------------------------
Income taxes payable (94,893) 38,805 (8,214)
-----------------------------------------------------------------------------------------------------------------------
Deferred lease credits and other long-term liabilities 47,775 62,433 69,212
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,477,928 1,394,161 844,651
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
-----------------------------------------------------------------------------------------------------------------------
Net purchase of property and equipment (1,238,722) (797,592) (465,843)
-----------------------------------------------------------------------------------------------------------------------
Acquisition of lease rights and other assets (39,839) (28,815) (19,779)
-----------------------------------------------------------------------------------------------------------------------
Net maturity of short-term investments -- -- 174,709
-----------------------------------------------------------------------------------------------------------------------
Net purchase of long-term investments -- -- (2,939)
-----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,278,561) (826,407) (313,852)
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
-----------------------------------------------------------------------------------------------------------------------
Net increase in notes payable 84,778 1,357 44,462
-----------------------------------------------------------------------------------------------------------------------
Net issuance of long-term debt 311,839 -- 495,890
-----------------------------------------------------------------------------------------------------------------------
Issuance of common stock 76,211 36,655 23,309
-----------------------------------------------------------------------------------------------------------------------
Net purchase of treasury stock (707,125) (879,383) (585,798)
-----------------------------------------------------------------------------------------------------------------------
Cash dividends paid (75,795) (76,888) (79,503)
-----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (310,092) (918,259) (101,640)
-----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash (4,176) 2,589 (1,634)
-----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (114,901) (347,916) 427,525
-----------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of year 565,253 913,169 485,644
-----------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 450,352 $ 565,253 $ 913,169
=======================================================================================================================
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
----------------------------------------
Additional
($000 except share and per share amounts) Shares Amount Paid-in Capital
-----------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 1,072,791,305 $ 53,640 $ 404,304
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 6,409,277 320 47,785
-----------------------------------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans (2,130,438) (107) (10,392)
-----------------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 23,682
-----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments
-----------------------------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options
-----------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
-----------------------------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 7,344
-----------------------------------------------------------------------------------------------------------------------------------
Retirement of treasury stock (87,243,750) (4,362) (267,330)
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 989,826,394 $ 49,491 $ 205,393
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 7,575,195 380 46,709
-----------------------------------------------------------------------------------------------------------------------------------
Net issuance of common stock pursuant to management
incentive restricted stock plans 94,625 4 4,361
-----------------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 79,808
-----------------------------------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819)
-----------------------------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options
-----------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
-----------------------------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 12,766
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.11 per share)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 997,496,214 $ 49,875 $ 349,037
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 9,933,713 497 81,456
-----------------------------------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans (73,137) (4) 2,583
-----------------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 211,891
-----------------------------------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454)
-----------------------------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options 72
-----------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock 4,276
-----------------------------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 20,175
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at January 29, 2000 1,007,356,790 $ 50,368 $ 669,490
==================================================================================================================================
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
Accumulated Other
Retained Comprehensive Deferred
($000 except share and per share amounts) Earnings Loss Compensation
--------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 $ 1,938,352 $ (5,187) $ (47,838)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans (18,166)
--------------------------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans 3,869
--------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
--------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments (10,043)
--------------------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options 23,968
--------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
--------------------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock
--------------------------------------------------------------------------------------------------------------------------
Retirement of treasury stock
--------------------------------------------------------------------------------------------------------------------------
Net earnings 533,901
--------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share) (79,503)
--------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 $ 2,392,750 $ (15,230) $ (38,167)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans (10,351)
--------------------------------------------------------------------------------------------------------------------------
Net issuance of common stock pursuant to management
incentive restricted stock plans (3,873)
--------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
--------------------------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819) 2,712
--------------------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options 20,716
--------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
--------------------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock
--------------------------------------------------------------------------------------------------------------------------
Net earnings 824,539
--------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.11 per share) (95,929)
--------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 $ 3,121,360 $ (12,518) $ (31,675)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans (9,186)
--------------------------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans (3,411)
--------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
--------------------------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454) 5,759
--------------------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options 21,122
--------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
--------------------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock
--------------------------------------------------------------------------------------------------------------------------
Net earnings 1,127,065
--------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share) (75,629)
--------------------------------------------------------------------------------------------------------------------------
Balance at January 29, 2000 $ 4,172,796 $ (6,759) $ (23,150)
==========================================================================================================================
|
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
Treasury Stock
---------------------------------------
($000 except share and per share amounts) Shares Amount
-------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 (146,295,311) $ (688,801)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans
-------------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans
-------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
-------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments
-------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options
-------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (47,678,177) (598,149)
-------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 1,452,657 5,007
-------------------------------------------------------------------------------------------------------------
Retirement of treasury stock 87,243,750 271,692
-------------------------------------------------------------------------------------------------------------
Net earnings
-------------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share)
-------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 (105,277,081) $ (1,010,251)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans
-------------------------------------------------------------------------------------------------------------
Net issuance of common stock pursuant to management
incentive restricted stock plans
-------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
-------------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819)
-------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options
-------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (35,714,475) (910,387)
-------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 1,455,374 18,238
-------------------------------------------------------------------------------------------------------------
Net earnings
-------------------------------------------------------------------------------------------------------------
Cash dividends ($.11 per share)
-------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 (139,536,182) $ (1,902,400)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans
-------------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans
-------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
-------------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454)
-------------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options
-------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (18,500,000) (745,056)
-------------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 1,178,333 17,756
-------------------------------------------------------------------------------------------------------------
Net earnings
-------------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share)
-------------------------------------------------------------------------------------------------------------
Balance at January 29, 2000 (156,857,849) $ (2,629,700)
=============================================================================================================
|
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
Comprehensive
($000 except share and per share amounts) Total Earnings
-----------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 $ 1,654,470
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 29,939
-----------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans (6,630)
-----------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 23,682
-----------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments (10,043) $ (10,043)
-----------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options 23,968
-----------------------------------------------------------------------------------------------------------
Purchase of treasury stock (598,149)
-----------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 12,351
-----------------------------------------------------------------------------------------------------------
Retirement of treasury stock --
-----------------------------------------------------------------------------------------------------------
Net earnings 533,901 533,901
-----------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share) (79,503)
-----------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 $ 1,583,986 $ 523,858
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 36,738
-----------------------------------------------------------------------------------------------------------
Net issuance of common stock pursuant to management
incentive restricted stock plans 492
-----------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 79,808
-----------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819) 2,712 2,712
-----------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options 20,716
-----------------------------------------------------------------------------------------------------------
Purchase of treasury stock (910,387)
-----------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 31,004
-----------------------------------------------------------------------------------------------------------
Net earnings 824,539 824,539
-----------------------------------------------------------------------------------------------------------
Cash dividends ($.11 per share) (95,929)
-----------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 $ 1,573,679 $ 827,251
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 72,767
-----------------------------------------------------------------------------------------------------------
Net cancellations of common stock pursuant to management
incentive restricted stock plans (832)
-----------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 211,891
-----------------------------------------------------------------------------------------------------------
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454) 5,759 5,759
-----------------------------------------------------------------------------------------------------------
Amortization of restricted stock and discounted stock options 21,194
-----------------------------------------------------------------------------------------------------------
Purchase of treasury stock (740,780)
-----------------------------------------------------------------------------------------------------------
Reissuance of treasury stock 37,931
-----------------------------------------------------------------------------------------------------------
Net earnings 1,127,065 1,127,065
-----------------------------------------------------------------------------------------------------------
Cash dividends ($.09 per share) (75,629)
-----------------------------------------------------------------------------------------------------------
Balance at January 29, 2000 $ 2,233,045 $ 1,132,824
===========================================================================================================
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 52 WEEKS ENDED JANUARY 29, 2000 (FISCAL 1999), JANUARY 30, 1999
(FISCAL 1998), AND JANUARY 31, 1998 (FISCAL 1997).
Note A: Summary of Significant Accounting Policies
Organization
Gap Inc. (the "Company") is a global specialty retailer that operates stores selling casual apparel, personal care and other accessories for men, women and children under a variety of brand names including Gap, Banana Republic and Old Navy. Its principal markets consist of the United States, Canada, Europe and Japan with the United States being the most significant. The Company sells its products through traditional retail stores, a catalog and online.
Stock Split
On May 20, 1999, the Company's Board of Directors authorized a three-for-two split of the Company's common stock that was distributed on June 21, 1999, in the form of a stock dividend for shareholders of record at the close of business on June 4, 1999. All share and per share amounts in the accompanying consolidated financial statements for all periods have been restated to reflect the stock split.
Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated.
Translation adjustments result from translating foreign subsidiaries` financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. Resulting translation adjustments are included in shareholders' equity.
Fiscal Year
The Company's fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal years 1999, 1998 and 1997 each consisted of 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Equivalents
Cash and equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less.
Merchandise Inventory
Merchandise inventory is stated at the lower of FIFO (first-in, first-out) cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Interest costs related to assets under construction are capitalized during the construction period.
Lease Rights
Lease rights are recorded at cost and are amortized over the estimated useful lives of the respective leases, not to exceed 20 years.
Impairment of Long-lived Assets
The Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the long-lived asset are less than the carrying value, a loss equal to the difference between the carrying value and the fair market value of the asset is recorded.
Advertising
Costs associated with the production of advertising, such as writing copy, printing and other costs, are expensed as incurred. Costs associated with communicating advertising that has been produced, such as television and magazine, are expensed when the advertising event takes place. Direct response costs of catalogs are capitalized and amortized over the expected lives of the related catalogs, not to exceed six months. Advertising costs were $529 million, $419 million and $175 million in fiscal 1999, 1998 and 1997, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.
Stock-based Awards
The Company accounts for stock-based awards using the intrinsic value-based method of accounting, under which no compensation cost is recognized for stock option awards granted at fair market value. Restricted stock and discounted stock option awards, which are granted at less than fair market value, result in the recognition of deferred compensation. Deferred compensation is shown as a reduction of shareholders' equity and is amortized to operating expenses over the vesting period of the stock award.
Segments
The Company has one reportable segment given the similarities of economic characteristics between the operations represented by the Company's three brands. Revenues of international retail operations represent 11.3 percent, 10.1 percent and 9.7 percent of the Company's revenues for fiscal 1999, 1998 and 1997, respectively. Long-term assets of international operations, including retail and sourcing, represent 13.8 percent and 14.3 percent of the Company's long-term assets for fiscal 1999 and 1998, respectively.
Derivatives
The Company records the fair value of derivatives designated as fair-value and cash-flow hedges on the balance sheet. The Company also records the fair value of the hedged firm commitments on the balance sheet.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial statements to conform with the 1999 presentation.
Note B: Debt and Other Credit Arrangements
The Company has committed credit facilities totaling $1 billion, consisting of an $850 million, 364-day revolving credit facility, and a $150 million, 5-year revolving credit facility through June 28, 2003. These credit facilities provide for the issuance of up to $500 million in letters of credit and provide backup for the Company's $500 million commercial paper program. The Company has additional uncommitted credit facilities of $520 million for the issuance of letters of credit. At January 29, 2000, the Company had outstanding letters of credit totaling approximately $851 million. The Company had no commercial paper outstanding as of January 29, 2000.
Borrowings under the Company's credit agreements are subject to the Company not exceeding a certain debt ratio. The Company was in compliance with this debt covenant at January 29, 2000.
During fiscal 1997, the Company issued $500 million of unsecured notes, due September 15, 2007, with a fixed annual interest rate of 6.9 percent. Interest on the notes is payable semi-annually. The fair value of the notes at January 29, 2000 was approximately $478 million, based on the current rates at which the Company could borrow funds with similar terms and remaining maturities. The notes are recorded in the balance sheet at their issuance amount net of unamortized discount.
During fiscal 1999, the Company's Japanese subsidiary, Gap (Japan) KK, issued $50 million of 10-year debt securities, due March 1, 2009, with a fixed annual interest rate of 6.25 percent payable in U.S. dollars. Interest on the notes is payable semi-annually. The Company swapped the cash flows payable under these debt securities to Japanese yen with a fixed annual interest rate of 2.43 percent to minimize foreign currency exposure. The fair value of the notes at January 29, 2000 was approximately $44 million, based on the current rates at which the Company could borrow funds with similar terms and remaining maturities. The notes are recorded in the balance sheet at their fair value.
Also, during fiscal 1999, the Company's Netherlands subsidiary, Gap International B.V., issued debt securities in the amount of 250 million Euro, approximately $262 million at issuance, with a fixed annual interest rate of 5.0 percent, due September 30, 2004. Interest on the notes is payable annually. The fair value of the notes at January 29, 2000 was approximately $232 million, based on the current rates at which the Company could borrow funds with similar terms and remaining maturities. The notes are recorded in the balance sheet at their issuance amount net of an unamortized discount and are translated into U.S. dollars at the period-end exchange rate.
Gross interest payments were $53,790,000, $47,415,000 and $8,399,000 in fiscal 1999, 1998 and 1997, respectively.
Note C: Income Taxes
Income taxes consisted of the following:
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($000) Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
----------------------------------------------------------------------------
Current
----------------------------------------------------------------------------
Federal $ 549,107 $ 438,110 $ 279,068
----------------------------------------------------------------------------
State 62,357 55,716 33,384
----------------------------------------------------------------------------
Foreign 43,976 35,663 21,595
----------------------------------------------------------------------------
Total current 655,440 529,489 334,047
----------------------------------------------------------------------------
Deferred
----------------------------------------------------------------------------
Federal (3,815) (29,163) (14,832)
----------------------------------------------------------------------------
State and foreign 6,259 (5,603) 1,126
----------------------------------------------------------------------------
Total deferred 2,444 (34,766) (13,706)
----------------------------------------------------------------------------
Total provision $ 657,884 $ 494,723 $ 320,341
============================================================================
|
The foreign component of pretax earnings before eliminations and corporate allocations in fiscal 1999, 1998 and 1997 was $225,873,000, $190,864,000 and $84,487,000, respectively. No provision was made for U.S. income taxes on the undistributed earnings of the foreign subsidiaries as it is the Company's intention to utilize those earnings in the foreign operations for an indefinite period of time or repatriate such earnings only when tax effective to do so. Accumulated undistributed earnings of foreign subsidiaries were $524,982,000 at January 29, 2000.
The difference between the effective income tax rate and the U.S. federal income tax rate is summarized as follows:
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
--------------------------------------------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 35.0%
--------------------------------------------------------------------------------------------------------
State income taxes, less federal benefit 2.5 2.5 3.2
--------------------------------------------------------------------------------------------------------
Other (0.6) 0.0 (0.7)
--------------------------------------------------------------------------------------------------------
Effective tax rate 36.9% 37.5% 37.5%
========================================================================================================
|
Deferred tax assets (liabilities) consisted of the following:
($000) Jan. 29, 2000 Jan. 30, 1999 -------------------------------------------------------------------------------------------------------- Compensation and benefits accruals $ 26,377 $ 43,509 -------------------------------------------------------------------------------------------------------- Scheduled rent 50,164 54,687 -------------------------------------------------------------------------------------------------------- Inventory capitalization 39,485 40,976 -------------------------------------------------------------------------------------------------------- Nondeductible accruals 24,126 10,257 -------------------------------------------------------------------------------------------------------- Other 44,501 22,031 -------------------------------------------------------------------------------------------------------- Gross deferred tax assets 184,653 171,460 -------------------------------------------------------------------------------------------------------- Depreciation (23,054) (4,058) -------------------------------------------------------------------------------------------------------- Other (2,724) (6,083) -------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities (25,778) (10,141) -------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 158,875 $ 161,319 ======================================================================================================= |
Net deferred tax assets at January 29, 2000 and January 30, 1999 are included in Other Current Assets ($81,920,000 and $101,048,000, respectively), and Lease Rights and Other Assets ($76,955,000 and $60,271,000, respectively) in the Consolidated Balance Sheets. Income tax payments were $537,187,000, $410,919,000 and $320,744,000 in fiscal 1999, 1998 and 1997, respectively.
Note D: Leases
The Company leases most of its store premises and headquarters facilities and some of its distribution centers. These leases expire at various dates through 2019.
The aggregate minimum non-cancelable annual lease payments under leases in effect on January 29, 2000 are as follows:
Fiscal Year ($000) ----------------------------------------------------------------------------- 2000 $ 633,985 ----------------------------------------------------------------------------- 2001 611,753 ----------------------------------------------------------------------------- 2002 582,483 ----------------------------------------------------------------------------- 2003 527,717 ----------------------------------------------------------------------------- 2004 460,770 ----------------------------------------------------------------------------- Thereafter 1,818,509 ----------------------------------------------------------------------------- Total minimum lease commitment $4,635,217 ============================================================================= |
Many leases entered into by the Company include options that may extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. Some leases also include early termination options which can be exercised under specific conditions.
For leases that contain predetermined fixed escalations of the minimum rentals, the Company recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred lease credits. At January 29, 2000 and January 30, 1999, this liability amounted to $170,275,000 and $154,897,000, respectively.
Cash or rent abatements received upon entering into certain store leases are recognized on a straight-line basis as a reduction to rent expense over the lease term. The unamortized portion is included in deferred lease credits. At January 29, 2000 and January 30, 1999, the long-term deferred credit was $168,903,000 and $112,416,000, respectively.
Some of the leases relating to stores in operation at January 29, 2000 contain renewal options for periods ranging up to 30 years. Many leases also provide for payment of operating expenses, real estate taxes and for additional rent based on a percentage of sales. No lease directly imposes any restrictions relating to leasing in other locations, other than radius clauses.
Rental expense for all operating leases was as follows:
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($000) Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
---------------------------------------------------------------------------
Minimum rentals $546,215 $460,715 $391,472
---------------------------------------------------------------------------
Contingent rentals 114,484 75,601 38,657
---------------------------------------------------------------------------
Total $660,699 $536,316 $430,129
===========================================================================
|
Note E: Financial Instruments
Foreign Exchange Forward Contracts
The Company operates in foreign countries which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company's risk management policy is to hedge substantially all U.S. dollar-denominated merchandise purchases for foreign operations through the use of foreign exchange forward contracts to minimize this risk. At January 29, 2000, the Company had contracts maturing at various dates through November 2000 to buy and sell the equivalent of $351,885,000 in foreign currencies (Buy contracts: 86,921,000,000 Italian lire and 1,984,000,000 Spanish pesetas; Sell contracts: 83,000,000 British pounds, 133,700,000 Canadian dollars and 7,382,000,000 Japanese yen) at the contracted rates.
Changes in the fair value of forward contracts designated as fair-value hedges, along with the offsetting changes in fair value of the related firm commitments to purchase foreign merchandise, are recorded in cost of sales in the current period. Changes in the fair value of forward contracts designated as cash-flow hedges are recorded as a component of comprehensive earnings, and are recognized in earnings in the period in which the hedged merchandise inventory is sold. The related balance included in comprehensive earnings at January 29, 2000 will be recognized in earnings over the next 12 months. The critical terms of the forward contracts and the respective firm commitments and forecasted foreign purchase transactions are essentially the same. As a result, there were no amounts reflected in fiscal 1999 earnings resulting from hedge ineffectiveness.
Note F: Employee Benefit and Incentive Stock Compensation Plans
Retirement Plans
The Company has a qualified defined contribution retirement plan, called GapShare, which is available to employees who meet certain age and service requirements. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. Under the plan, the Company matches all or a portion of employees' contributions under a predetermined formula. The Company's contributions vest immediately. Company contributions to the retirement plan in 1999, 1998 and 1997 were $16,035,000, $14,284,000 and $12,907,000, respectively.
A nonqualified Executive Deferred Compensation Plan was established on January 1, 1999 which allows eligible employees to defer compensation up to a maximum amount. This plan superseded an earlier nonqualified Executive Deferred Compensation Plan, established on January 1, 1994, and a nonqualified Executive Capital Accumulation Plan, established on April 1, 1994. The Company does not match employees' contributions under the current plan.
A Deferred Compensation Plan was established on August 26, 1997 for nonemployee members of the Board of Directors. Under this plan, Board members may elect to defer receipt on a pre-tax basis of eligible compensation received for serving as non-employee directors of the Company. In exchange for compensation deferred, Board members are granted discounted stock options to purchase shares of the Company's common stock. All options are fully exercisable upon the date granted and expire seven years after grant or one year after retirement from the Board, if earlier. The Company may issue up to 675,000 shares under the plan.
Incentive Stock Compensation Plans
The 1996 Stock Option and Award Plan (the "1996 Plan") was established on March 26, 1996. The Board authorized 93,341,342 shares for issuance under the 1996 Plan, which includes shares available under the Management Incentive Restricted Stock Plan ("MIRSP") and an earlier stock option plan established in 1981, both of which were superseded by the 1996 Plan. The 1996 Plan empowers the Compensation and Stock Option Committee of the Board of Directors (the "Committee") to award compensation primarily in the form of nonqualified stock options or restricted stock to key employees. The 1999 Stock Option Plan (the "1999 Plan") was established on March 29, 1999. The Board authorized 22,500,000 shares for issuance under the 1999 Plan. The 1999 Plan empowers the Committee to award nonqualified stock options to non-officers. Stock options generally expire 10 years from the grant date or one year after the date of retirement, if earlier. Stock options generally vest over a three-year period, with shares becoming exercisable in full on the third anniversary of the grant date. Nonqualified stock options are generally issued at fair market value but may be issued at prices less than the fair market value at the date of grant or at other prices as determined by the Committee. Total compensation cost for those stock options issued at less than fair market value and for the restricted shares issued was $19,175,000, $20,845,000 and $17,170,000 in 1999, 1998 and 1997, respectively.
In 1998, the Company established a stock option plan for non-officers, called Stock Up On Success, under which eligible employees may receive nonqualified stock options. The Board of Directors authorized 6,000,000 shares for issuance under Stock Up On Success. Stock options under the plan must be issued at not less than fair market value. During 1999, options to purchase approximately 1,484,000 shares were granted to approximately 19,000 employees under the plan. These stock options have a vesting period of one-and-a-half years and expire 10 years after the grant date.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which all eligible employees may purchase common stock of the Company at 85 percent of the lower of the closing price of the Company's common stock on the grant date or the purchase date on the New York Stock Exchange Composite Transactions Index. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 percent to 15 percent. There were 1,178,333 shares issued under the plan during fiscal 1999, 1,440,615 shares during 1998 and 1,452,657 shares during 1997. All shares were acquired from reissued treasury stock. At January 29, 2000, there were 6,778,354 shares reserved for future subscriptions.
Note G: Shareholders' Equity and Stock Options
Common and Preferred Stock
The Company is authorized to issue 60,000,000 shares of Class B common stock, which is convertible into shares of common stock on a share-for-share basis; transfer of the shares is restricted. In addition, the holders of the Class B common stock have six votes per share on most matters and are entitled to a lower cash dividend. No Class B shares have been issued.
The Board of Directors is authorized to issue 30,000,000 shares of one or more series of preferred stock and to establish at the time of issuance the issue price, dividend rate, redemption price, liquidation value, conversion features and such other terms and conditions of each series (including voting rights) as the Board of Directors deems appropriate, without further action on the part of the shareholders. No preferred shares have been issued.
During 1999, the Company completed a 101 million share repurchase program approved in 1996 by acquiring approximately 2.1 million shares for approximately $94 million. In addition, during fiscal 1999, under the 67.5 million share repurchase program approved in 1998, the Company acquired approximately 16.4 million shares for approximately $651 million, including 0.8 million shares acquired under put option contracts for approximately $32 million.
At the end of fiscal 1999, the Company was obligated under a put option contract to repurchase 375,000 shares of the Company's stock. The contract has an exercise price of $32.00 per share, with an expiration date of March 22, 2000.
Stock Options
Under the Company's stock option plans, nonqualified options to purchase common stock are granted to officers, directors and employees at exercise prices equal to the fair market value of the stock at the date of grant or at other prices as determined by the Compensation and Stock Option Committee of the Board of Directors.
Stock option activity for all employee benefit plans was as follows:
Weighted-Average
Shares Exercise Price
----------------------------------------------------------------------
Balance at February 1, 1997 65,788,599 $ 6.43
----------------------------------------------------------------------
Granted 25,633,196 9.61
----------------------------------------------------------------------
Exercised (6,410,327) 4.73
----------------------------------------------------------------------
Canceled (5,758,415) 7.11
----------------------------------------------------------------------
Balance at January 31, 1998 79,253,053 $ 7.54
----------------------------------------------------------------------
Granted 28,445,033 21.45
----------------------------------------------------------------------
Exercised (7,603,242) 4.95
----------------------------------------------------------------------
Canceled (2,836,809) 11.94
----------------------------------------------------------------------
Balance at January 30, 1999 97,258,035 $ 11.69
----------------------------------------------------------------------
Granted 11,780,067 42.15
----------------------------------------------------------------------
Exercised (9,942,133) 7.50
----------------------------------------------------------------------
Canceled (6,582,343) 17.30
----------------------------------------------------------------------
Balance at January 29, 2000 92,513,626 $ 15.61
======================================================================
|
Outstanding options at January 29, 2000 have expiration dates ranging from March 2000 to January 2010.
At January 29, 2000, the Company reserved 145,993,924 shares of its common stock, including 160,912 treasury shares, for the exercise of stock options. There were 53,480,298 and 36,214,437 shares available for granting of options at January 29, 2000 and January 30, 1999, respectively. Options for 15,682,738, 10,913,039 and 9,674,657 shares were exercisable as of January 29, 2000, January 30, 1999 and January 31, 1998, respectively, and had a weighted-average exercise price of $7.76, $5.51 and $5.18 for those respective periods.
The Company accounts for its stock option and award plans using the intrinsic value-based method of accounting, under which no compensation cost has been recognized for stock option awards granted at fair market value. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below.
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
------------------------------------------------------------------------------
Net earnings ($000)
------------------------------------------------------------------------------
As reported $1,127,065 $ 824,539 $ 533,901
------------------------------------------------------------------------------
Pro forma 1,047,304 772,062 507,966
------------------------------------------------------------------------------
Earnings per share
------------------------------------------------------------------------------
As reported-basic $ 1.32 $ 0.95 $ 0.60
------------------------------------------------------------------------------
Pro forma-basic 1.23 0.89 0.57
------------------------------------------------------------------------------
As reported-diluted 1.26 0.91 0.58
------------------------------------------------------------------------------
Pro forma-diluted 1.17 0.85 0.55
==============================================================================
|
The weighted-average fair value of the stock options granted during fiscal 1999, 1998 and 1997 was $16.77, $7.50 and $3.89, respectively. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1999: dividend yield of 0.2 percent; expected price volatility of 35 percent; risk-free interest rates ranging from 5.4 percent to 6.7 percent and expected lives between 3.9 and 6.2 years. The fair value of stock options granted in 1998 was based on the following weighted-average assumptions: dividend yield of 0.4 percent; expected price volatility of 32 percent; risk-free interest rates ranging from 5.3 percent to 5.7 percent and expected lives between 3.9 and 6.1 years. The fair value of stock options granted in 1997 was based on the following weighted-average assumptions: dividend yield of 0.7 percent; expected price volatility of 31 percent; risk-free interest rates ranging from 5.9 percent to 7.0 percent and expected lives between 3.9 and 5.8 years.
The following table summarizes information about stock options outstanding at January 29, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Contractual Weighted-Average Exercisable at Weighted-Average
Range of Exercise Prices Jan. 29, 2000 Life (in years) Exercise Price Jan. 29, 2000 Exercise Price
----------------------------------------------------------------------------------------------------------------------------------
$ 4.17 to $ 5.79 24,865,302 3.87 $ 5.39 5,435,433 $ 4.73
----------------------------------------------------------------------------------------------------------------------------------
5.96 to 9.80 27,755,468 6.45 9.09 9,741,033 8.98
----------------------------------------------------------------------------------------------------------------------------------
9.87 to 24.25 25,061,458 8.15 19.59 467,201 15.00
----------------------------------------------------------------------------------------------------------------------------------
24.36 to 50.29 14,831,398 8.84 38.24 39,071 36.43
----------------------------------------------------------------------------------------------------------------------------------
$ 4.17 to $50.29 92,513,626 6.60 $15.61 15,682,738 $ 7.76
----------------------------------------------------------------------------------------------------------------------------------
|
Note H: Earnings Per Share
Basic earnings per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share includes the additional dilutive effect of the Company's potentially dilutive securities, which includes certain stock options, unvested shares of restricted stock, and certain put options. The following summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method, as included in the calculation of diluted weighted-average shares.
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
-----------------------------------------------------------------------------------------------------------
Weighted-average number of shares-basic 853,804,924 864,062,060 891,404,945
-----------------------------------------------------------------------------------------------------------
Incremental shares resulting from:
-----------------------------------------------------------------------------------------------------------
Stock options 39,781,579 35,340,667 22,584,825
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Restricted stock 1,442,673 4,971,656 8,961,936
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Weighted-average number of shares-diluted 895,029,176 904,374,383 922,951,706
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|
Excluded from the above computations of weighted-average shares for diluted earnings per share were options to purchase 7,089,268 shares of common stock for fiscal 1999, 27,263 shares for fiscal 1998 and 990,143 shares for fiscal 1997. Issuance or repurchase of these securities would have resulted in an antidilutive effect on earnings per share.
Note I: Related Party Transactions
The Company has an agreement with Fisher Development, Inc. (FDI), a company wholly owned by the brother of the Company's chairman, setting forth the terms under which FDI may act as general contractor in connection with the Company's construction activities. FDI acted as general contractor for 547, 340 and 266 new stores' leasehold improvements and fixtures during fiscal 1999, 1998 and 1997, respectively. In the same respective years, FDI supervised construction of 123, 135 and 97 expansions, as well as remodels of existing stores and headquarters facilities. Total cost of construction was $485,295,000, $342,030,000 and $233,777,000, including profit and overhead costs of $46,886,000, $28,877,000 and $16,845,000, for fiscal 1999, 1998 and 1997, respectively. At January 29, 2000 and January 30, 1999, amounts due to FDI were $26,265,000 and $15,302,000, respectively. The terms and conditions of the agreement with FDI are reviewed annually by the Audit and Finance Committee of the Board of Directors.
QUARTERLY FINANCIAL INFORMATION
Fiscal 1999
13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 52 Weeks Ended
($000 except per share amounts) May 1, 1999 Jul. 31, 1999 Oct. 30, 1999 Jan. 29, 2000 Jan. 29, 2000
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Net sales $ 2,277,734 $ 2,453,339 $ 3,045,386 $ 3,858,939 $11,635,398
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Gross profit 943,579 1,009,794 1,304,288 1,602,475 4,860,136
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Net earnings 202,370 195,829 315,017 413,849 1,127,065
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Earnings per share-basic 0.24 0.23 0.37 0.49 1.32
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Earnings per share-diluted 0.22 0.22 0.35 0.47 1.26
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Fiscal 1998
13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 52 Weeks Ended
($000 except per share amounts) May 2, 1998 Aug. 1, 1998 Oct. 31, 1998 Jan. 30, 1999 Jan. 30, 1999
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Net sales $ 1,719,712 $ 1,904,970 $ 2,399,948 $ 3,029,832 $ 9,054,462
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Gross profit 688,708 769,805 1,023,943 1,253,788 3,736,244
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Net earnings 136,066 136,874 237,749 313,850 824,539
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Earnings per share-basic 0.16 0.16 0.28 0.37 0.95
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Earnings per share-diluted 0.15 0.15 0.27 0.35 0.91
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Per Share Data
Market Prices Cash Dividends Paid
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Fiscal 1999 1998 1999 1998
--------------------------------------------------------------------------------------- -----------------------------------
High Low High Low
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1st Quarter $51 9/16 $39 13/16 $22 7/8 $ 17 9/16 $0.0222 $0.0222
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2nd Quarter 52 11/16 39 3/8 29 15/16 22 7/16 0.0222 0.0222
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3rd Quarter 47 15/16 30 13/16 30 3/16 20 3/16 0.0222 0.0222
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4th Quarter 49 5/16 32 13/32 43 5/16 26 1/16 0.0222 0.0222
------------------------------------------------------------------------------------------------------------------------------
Year $0.0888 $0.0888
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|
The principal markets on which the Company's stock is traded are the New York Stock Exchange and the Pacific Exchange. The number of holders of record of the Company's stock as of March 10, 2000 was 9,409.
Exhibit 21 Banana Republic (Apparel) Inc. California Banana Republic (California) LLC Delaware Banana Republic (Canada) Inc. Canada Banana Republic (East) L.P. California Banana Republic (Florida) LLC California Banana Republic (H.K.) Limited Hong Kong Banana Republic (Holdings) Inc. California Banana Republic (ITM) Inc. California Banana Republic (New York) LLC Delaware Banana Republic (Puerto Rico) Inc. Puerto Rico Banana Republic Direct, Inc. California Banana Republic Limited England and Wales Banana Republic Stores Pty. Ltd. New South Wales, Australia Banana Republic, Inc. Delaware GPS (Bermuda) Insurance Services Limited Bermuda GPS (Delaware), Inc. Delaware GPS (Great Britain) Limited England and Wales GPS (Japan), Limited Delaware GPS (Maryland), Inc. Maryland GPS (Puerto Rico) Limited California GPS (UK) Limited California GPS (USA) Limited California GPS Brand Services, Inc. California GPS Consumer Direct, Inc. California GPS Corporate Facilities, Inc. California GPS Employee Services, Inc. California GPS Management Services, Inc. California GPS Park Restaurant, Inc. California GPS Real Estate, Inc. California GPS Realty Company Inc. Delaware GPSDC (CADC) LLC California GPSDC (Fresno) LLC California GPSDC (NEW YORK) INC. Delaware GPSDC (WDC) LLC California Gap (Apparel), Inc. California Gap (Canada) Inc. Canada Gap (Deutschland) GmbH Dusseldorf, Germany Gap (Distribution) B.V. Amsterdam, The Netherlands Gap (ESO) Limited England and Wales Gap (Florida) LLC California Gap (France) S.A.S. Paris, France Gap (Georgia) LP California |
Gap (Hong Kong) Limited Hong Kong Gap (ITM) Inc. California Gap (Indiana) LP California Gap (Ireland) Limited Dublin, Ireland Gap (Japan) K.K. Tokyo, Japan Gap (Kentucky) LP California Gap (Netherlands) B.V. Amsterdam, The Netherlands Gap (Puerto Rico), Inc. Puerto Rico Gap (RHC) B.V. Amsterdam, The Netherlands Gap (Tennessee) LP California Gap (Texas) LP California Gap (UK Distribution) Limited England and Wales Gap (UK Holdings) Limited England and Wales Gap (UK Lettings) Limited England and Wales Gap (UK) Limited England and Wales Gap (Wisconsin) LP California Gap Direct, Inc. California Gap Holdings, Inc. California Gap International B.V. Amsterdam, The Netherlands Gap International Sourcing (Americas) LLC California Gap International Sourcing (California) Inc. California Gap International Sourcing (Holdings) Limited Hong Kong Gap International Sourcing (JV) LLC California Gap International Sourcing (Mexico) S.A. de C.V. Mexico Gap International Sourcing (U.S.A.) Inc. California Gap International Sourcing FZE Free Zone, United Arab Emirates Gap International Sourcing Limited Hong Kong Gap International Sourcing Pte. Ltd. Singapore Gap International Sourcing, Inc. California Gap International Sourcing, Srl. Florence, Italy Gap International, Inc. California Gebe S.A.R.L. Paris, France Goldhawk B.V. Amsterdam, The Netherlands La Mer S.A. Paris, France Maravan S.A.R.L. Paris, France Melanie Rennes Saint Germain SARL Paris, France Old Navy (Apparel) Inc. California Old Navy (California) LLC Delaware Old Navy (Canada) Inc. Province of Ontario Old Navy (East) L.P. California Old Navy (Florida) LLC California Old Navy (Holdings) Inc. California Old Navy (ITM) Inc. California Old Navy (Puerto Rico) Inc. Puerto Rico Old Navy Direct, Inc. California Old Navy Inc. Delaware Real Estate Ventures (Glastonbury), Inc. Delaware Real Estate Ventures (Glen Eagle), Inc. Delaware |
Real Estate Ventures (Wheaton) Inc. Illinois The Fisher Gap Stores Inc. California The Gap Limited England and Wales WCB Twenty-Eight Limited Partnership Delaware |
Exhibit 23
Deloitte & Touche LLP
50 Fremont Street Telephone: (415) 783-4000
San Francisco, California 94105-2230 Facsimile: (415) 783-4329
To the Board of Directors and Shareholders of The Gap, Inc.:
We consent to the incorporation by reference in the following Registration Statements on Form S-8: No. 2-72586, No. 2-60029, No. 33-39089, No. 33-40505, No. 33-54686, No. 33-54688, No. 33-54690, No. 33-56021, No. 333-00417, No. 333-12337, No. 333-36265, No. 333-68285, No. 333-72921, No. 333-76523, and Registration Statement No. 333-70991 on Form S-3 of our report dated February 23, 2000, appearing in this Annual Report on Form 10-K of The Gap, Inc. for the fiscal year ended January 29, 2000.
/s/ Deloitte & Touche LLP San Francisco, California March 31, 2000 Deloitte Touche Tohmatsu |
| ARTICLE 5 |
| THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | JAN 29 2000 |
| PERIOD END | JAN 29 2000 |
| CASH | 450,352 |
| SECURITIES | 0 |
| RECEIVABLES | 0 |
| ALLOWANCES | 0 |
| INVENTORY | 1,462,045 |
| CURRENT ASSETS | 2,197,790 |
| PP&E | 4,203,288 |
| DEPRECIATION | 1,487,973 |
| TOTAL ASSETS | 5,188,756 |
| CURRENT LIABILITIES | 1,752,879 |
| BONDS | 784,925 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 50,368 |
| OTHER SE | 2,182,677 |
| TOTAL LIABILITY AND EQUITY | 5,188,756 |
| SALES | 11,635,398 |
| TOTAL REVENUES | 11,635,398 |
| CGS | 6,775,262 |
| TOTAL COSTS | 6,775,262 |
| OTHER EXPENSES | 3,043,432 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 31,755 |
| INCOME PRETAX | 1,784,949 |
| INCOME TAX | 657,884 |
| INCOME CONTINUING | 1,127,065 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 1,127,065 |
| EPS BASIC | 1.32 |
| EPS DILUTED | 1.26 |