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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 31, 1998 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
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)
Securities registered pursuant to Section 12(g) of the Act: NONE
_______________________
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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. [ ]
The aggregate market value of the common equity held by non-affiliates of the
registrant as of March 9, 1998 was approximately $11,454,266,735 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
27, 1998 was 393,914,220.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 1998 (hereinafter referred to as the "1998
Proxy Statement") are incorporated into Parts I and III.
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 31, 1998 (hereinafter referred to as the "1997 Annual Report to
Shareholders") are incorporated into Parts II and IV.
The Exhibit Index is located on Page 12 hereof.
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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
that could cause the Company's actual results of operations to 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, and/or trade restrictions and political or
financial instability in countries where the Company's goods are manufactured,
and 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 remain difficult to predict.
The Company does not undertake 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.
PART I
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ITEM 1 - BUSINESS
GENERAL
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The Gap, Inc. (together with its subsidiaries, the "Company") is an
international specialty retailer which operates stores selling casual apparel,
personal care and other accessories for men, women and children under a variety
of brands including Gap, GapKids, babyGap, Banana Republic and Old Navy. As of
February 28, 1998, the Company operated 2,143 stores in the United States,
Canada, the United Kingdom, France, Germany and Japan.
The Company designs virtually all of it products for sale under its brands in
Company-operated stores. These brands and their corresponding store formats
collectively are positioned to address a broad consumer base. The Company
operates the following store formats:
GAP, GAPKIDS AND BABYGAP. 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 to adult. At February 28, 1998, the Company operated 1,023 Gap
stores, including 136 in international locations. Seventy-one of the
domestic stores are Gap Outlet stores. 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. At February 28, 1998, the Company operated a total of
573 GapKids and babyGap stores, including 105 in international locations.
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. At
February 28, 1998, the Company operated 259 Banana Republic stores,
including 9 in Canada.
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 in an
innovative, exciting shopping environment. At February 28, 1998, the
Company operated 288 Old Navy stores.
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.
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RECENT DEVELOPMENTS
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During fiscal 1997, the Company continued to focus on developing and growing
its brands. The Company believes that its brands are among its most important
assets and is taking action to maintain and strengthen brand loyalty. To that
end, during fiscal 1997, the Company increased its investment in advertising and
marketing as a percentage of sales by 0.8 percentage points over the prior year.
The Company is also exploring store label credit cards, additional flagship
stores and further television advertising to complement its in-store customer
service focus. The Company also invested in the development of brand extensions
through new product offerings, such as home accessories and personal care items.
The Company continues to invest in store expansion and development of new
distribution channels to address changing market requirements. The Company has
added new store formats, including Gap and GapKids combined stores, large
flagship stores, men's/women's-only stores, baby-only stores, airport locations
and a wholesaling arrangement under which Gap products are sold in duty-free
stores in Hong Kong, Guam, Singapore, Australia and New Zealand. The Company is
exploring new channels of distribution including development of electronic
retailing which it launched in November 1997 and a catalog for the Banana
Republic division which it plans to launch later in 1998. The Company has no or
only limited operating history in the new channels of distribution and is faced
with competition from established retailers in these new lines. There is no
guarantee that these investments will result in increased profitability.
The Company continued to expand internationally in fiscal 1997. The
International division is faced with competition in its European and Japanese
markets from established regional and national chains. Operations in these
markets involve special risks and complexities. If such expansion is not
successful, the Company's results of operations could be adversely affected.
Specifically, the division's operations in Germany and France are not profitable
at the present early stage of expansion, due in part to a soft retailing
environment, low brand awareness, and Company investments in infrastructure,
including expansion of the European Support Office. The Company's ability to
grow successfully in the continental European markets will depend in part on
determining a sustainable profit formula to build brand loyalty and gain market
share in the especially challenging retail environment of Germany and France.
The Company has begun a process to integrate the Gap and GapKids field
organizations over the next 18 months to achieve a singular brand focus.
Thinking and acting as a single brand will allow the Company to better serve its
customers, to work more closely with the community, and to take full advantage
of real estate opportunities. Integration also will allow the Company to staff
more consistently and train more completely. The integration process entails a
number of risks, including decreased product knowledge of sales associates due
to increased product assortments and diversion of sales associates' attention
adversely impacting customers' experience and quality of service, diversion of
management's attention from other business matters, and possible employee
dissatisfaction with changes in job scope or supervisor assignments. In
particular, sales productivity may decline as sales associates learn new product
information and selling techniques. To mitigate these risks, the Company will
implement a phased approach that accommodates employee training, provides time
for supervisors to become confident and competent in the new environment, and
pilots certain aspects of the integration before rollout.
The Company is addressing the need to ensure that its operations will not be
adversely impacted by software or other system failures related to year 2000. A
program office was established in 1997 to coordinate the identification,
evaluation, and implementation of any necessary changes to computer systems,
applications, and business processes. The costs associated with this effort are
expected to be incurred through 1999 and are not expected to have a material
impact on results of operations, cash flows, or financial condition in any given
year. However, no assurances can be given that the Company will be able to
completely identify or address all year 2000 compliance issues, or that third
parties with whom the Company does business will not experience system failures
as a result of the year 2000 issue, nor can the Company fully predict the
consequences of noncompliance.
MERCHANDISE INVENTORY, REPLENISHMENT AND DISTRIBUTION
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The retail apparel business fluctuates according to changes in customer
preferences dictated in part by fashion and season. These fluctuations
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. The Company is also
vulnerable to changing fashion trends. In addition, the cyclical nature of the
retail
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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 errors in 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,
such inventory is maintained in the Company's distribution centers in
California, Kentucky, Maryland, Tennessee and Canada and in distribution centers
operated by third parties in The Netherlands and Japan, and then shipped to the
stores.
STORE OPERATIONS AND EXPANSION
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The Company's stores offer a shopper-friendly environment with an assortment
of casual clothing and accessories which emphasizes 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 made for
cash, personal checks or on credit cards issued by others.
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.
SUPPLIERS
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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 1997 purchases. Of the Company's merchandise sold worldwide
during fiscal 1997, approximately 27% of all units (representing approximately
18% of total cost) were produced domestically while the remaining 73% of all
units (82% of cost) were made outside the United States. Approximately 6% of
the Company's total merchandise units (representing 8% of cost) was from Hong
Kong, with the remainder coming from 42 other countries. Any event causing a
sudden disruption of imports from Hong Kong 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 import strategy which includes
relationships with vendors in over 40 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 current financial
instability in Asia is an example of the instability which could affect some
suppliers adversely. Although to date the instability in Asia has not had a
material adverse effect on the Company's ability to import apparel and therefore
the Company's results of operations and financial condition, no assurances can
be given that they will not have such an effect in the future.
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SEASONAL BUSINESS
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The Company's business follows a seasonal pattern, peaking over a total of
about 10 to 12 weeks during the Back-to-School (mid-August through early
September) and Holiday (early November through December) periods. During fiscal
year 1997, these periods accounted for approximately 35% of the Company's annual
sales.
COMPETITION
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The Company's business is highly competitive. The Company's stores compete
with national and local department, specialty and discount store chains and
independent retail stores which handle similar lines of merchandise. Some
competitors have larger sales and assets than the Company.
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. Given the large number of
companies in the retail industry, the Company cannot estimate the number of its
competitors or its relative competitive position.
The performance of the Company in recent years has increased 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.
ADVERTISING
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In fiscal 1997, the Company increased its investment in advertising and
marketing as a percentage of sales by 0.8 percentage points over the prior year.
Besides expanding the number of print ads placed in major metropolitan
newspapers and their Sunday magazines, major news weeklies and lifestyle and
fashion magazines, the Company's ads appeared in various outdoor venues, such as
mass transit posters, exterior bus panels, bus shelters and gigantic billboards
spanning entire buildings. In addition, the Company ran TV ads for its Gap,
GapKids, and babyGap concepts and TV and radio ads for Old Navy. The Company
plans to continue increasing its investments in advertising and marketing as a
percentage of sales in 1998. There can be no assurances that these increased
investments will result in increased sales or profitability.
EMPLOYEES
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On January 31, 1998, the Company had a work force of approximately 81,000
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.
TRADEMARKS AND SERVICE MARKS
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The trademarks and service marks for Gap, GapKids, babyGap, Banana Republic
and Old Navy, and certain other trademarks either have been registered, or have
trademark applications pending, with the United States Patent and Trademark
Office and with the registries of many foreign countries.
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EXECUTIVE OFFICERS OF THE REGISTRANT
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The Chairman of the Company is Donald G. Fisher. Millard S. Drexler is the
President and Chief Executive Officer of the Company. Robert J. Fisher is
Executive Vice President of the Company and President of Gap Division. Each of
Donald G. Fisher, Robert J. Fisher and Millard S. Drexler is a director of the
Company and the required information with respect to each of them is set forth
in the table located in the section entitled "Nominees for Election as
Directors" of the 1998 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:
ANNE B. GUST, 40, Senior Vice President and General Counsel since April
1994; Vice President - General Counsel, 1993-94. Joined the Company in
1991.
WARREN R. HASHAGEN, 47, Senior Vice President - Finance and Chief Financial
Officer since November 1995; Senior Vice President - Finance, 1992-95.
Joined the Company in 1982.
JOHN B. WILSON, 38, Chief Operating Officer since March 1998; Executive
Vice President since October 1996; and Chief Administrative Officer from
October 1996 to March 1998. Executive Vice President, Finance and Strategy
and Chief Financial Officer of Staples, Inc., 1992-96.
ITEM 2 - PROPERTIES
During fiscal year 1997, the Company opened 298 stores and closed 22. The
newly-opened stores include 98 Gap stores (including 18 international
locations), 76 GapKids and babyGap stores (including 21 international
locations), 34 Banana Republic stores (including one store in Canada), and 90
Old Navy stores. In addition, during fiscal 1997, the Company expanded 98
stores. The expanded stores include 48 Gap stores, 19 GapKids stores, 27 Banana
Republic stores, and 4 Old Navy stores. The 2,130 stores operating as of
January 31, 1998 aggregated approximately 15 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 all of the 50 largest metropolitan statistical
areas.
The Company currently leases most of its headquarters and regional office
buildings, as well as its Eastern Distribution Center (EDC) and Kentucky
Distribution Center (KDC). The EDC/KDC in Erlanger, Kentucky together consist
of approximately 1,220,000 square feet. Their lease term runs through February
28, 2003, with options to extend the lease for an additional 30 years. In order
to capitalize on synergies with the nearby EDC/KDC, the Company leases a 325,000
square foot structure for consolidation/deconsolidation purposes and has
recently entered into a lease for a 520,000 square foot facility for
distribution purposes, both in Hebron, Kentucky.
The Company owns its Canadian Distribution Center (CDC) located in Brampton,
Ontario. It consists of approximately 363,000 square feet. The Company owns
its Western Distribution Center (WDC), a 344,000 square-foot facility located in
Ventura, California, as well as an adjacent five acre parcel for possible future
expansion. The Atlantic Distribution Center (ADC), a facility owned by the
Company in Edgewood, Maryland, covers approximately 745,000 square feet. The
Company also owns 156 adjacent acres, portions of which could be used for
potential expansion of the ADC. The Southern Distribution Center (SDC), a
facility owned by the Company in Gallatin, Tennessee, consists of approximately
769,000 square feet. The Company also owns its Holland Distribution Center
(HDC), a 127,000 square foot facility located in Roosendaal, The Netherlands, to
serve its European stores, and its Japan Distribution Center (JDC), a 30,000
square foot facility located in Funabashi City, Chiba, Japan, to serve its
Japanese stores. Both these facilities are operated by third parties.
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During the third quarter of 1997, the Company commenced construction on a
565,000 square foot distribution center in Fresno, California. The facility is
expected to be in operation in early 1999.
In late 1997, the Company completed construction of a 189,000 square foot
building in San Bruno, California which serves as part of the Company's
headquarters facilities. The Company continues to explore alternatives for
additional corporate offices in San Francisco and San Bruno, California. The
Company acquired land in 1997 in San Francisco and in the fourth quarter entered
into a purchase contract to acquire land in San Bruno.
Item 3 - LEGAL PROCEEDINGS
The Company 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.
PART II
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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 25 of the 1997 Annual Report to Shareholders 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 20 and 21 of the 1997 Annual Report to Shareholders 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 22-25 of the 1997 Annual Report to Shareholders 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 38 of the Annual Report to Shareholders 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 26-37 of the 1997 Annual Report to Shareholders 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.
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PART III
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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" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the 1998 Proxy Statement. See
also Item 1 above in the section entitled "Executive Officers of the
Registrant."
In addition, the following persons currently are directors of the Company,
but will not stand for re-election at the Annual Meeting of Shareholders to be
held on April 28, 1998:
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR
NAME, AGE, PRINCIPAL OCCUPATION DURING PAST FIVE YEARS AND OTHER INFORMATION SINCE
- ---------------------------------------------------------------------------- ----------
<S> <C>
LUCIE J. FJELDSTAD, 54............................................................................... 1995
President, Fjeldstad International, consulting company, 1997-present, 1993-95. President, Video
and Networking, Tektronix, Inc., electronics company, 1995-97. Vice President and General
Manager, Multimedia, IBM, 1992-93. Director of Entergy Corp. DE, utility holding company; and
Director of Data Dimensions Inc., a year 2000 software company.
WILLIAM A. HASLER, 56................................................................................ 1991
Dean, Haas Graduate School of Business, University of California, Berkeley since 1991. Director
of Tenera, Inc., information services company; Director of Aphton, Inc., biotechnology
pharmaceutical company; Director of Walker Interactive Systems, Inc., software company; and
Director of TCSI, communications technology company. Governor of the Pacific Stock Exchange.
</TABLE>
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 Termination of
Employment Arrangements," and "Compensation Committee Interlocks and Insider
Participation" in the 1998 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 1998 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 1998 Proxy
Statement.
PART IV
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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.
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(1) Financial Statements
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(i) Independent Auditors' Report. Incorporated by reference to
page 26 of the 1997 Annual Report to Shareholders included
as Exhibit 13 to this Annual Report on Form 10-K.
(ii) The consolidated balance sheets as of January 31, 1998 and
February 1, 1997 and the related consolidated statements of
earnings, cash flows, and shareholders' equity and notes
thereto for each of the three fiscal years in the period
ended January 31, 1998 are incorporated by reference to
pages 27-37 of the 1997 Annual Report to Shareholders
included as Exhibit 13 to this Annual Report on Form 10-K.
(2) Financial Statement Schedules
-----------------------------
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.
(3) Exhibits
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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.
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SIGNATURES
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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: April 3, 1998 By /s/ MILLARD S. DREXLER
-----------------------
Millard S. Drexler,
Chief Executive Officer
(Principal Executive Officer)
Date: April 3, 1998 By /s/ WARREN R. HASHAGEN
----------------------
Warren R. Hashagen,
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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: April 3, 1998 By /s/ ADRIAN D.P. BELLAMY
------------------------------
Adrian D. P. Bellamy, Director
Date: April 3, 1998 By /s/ JOHN G. BOWES
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John G. Bowes, Director
Date: April 3, 1998 By /s/ MILLARD S. DREXLER
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Millard S. Drexler, Director
Date: April 3, 1998 By /s/ DONALD G. FISHER
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Donald G. Fisher, Director
Date: April 3, 1998 By /s/ DORIS F. FISHER
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Doris F. Fisher, Director
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SIGNATURES (con't.)
-------------------
Date: April 3, 1998 By /s/ ROBERT J. FISHER
-------------------------------
Robert J. Fisher, Director
Date: April 3, 1998 By /s/ LUCIE J. FJELDSTAD
-------------------------------
Lucie J. Fjeldstad, Director
Date: April 3, 1998 By /s/ WILLIAM A. HASLER
-------------------------------
William A. Hasler, Director
Date: April 3, 1998 By /s/ JOHN M. LILLIE
-------------------------------
John M. Lillie, Director
Date: April 3, 1998 By /s/ CHARLES R. SCHWAB
-------------------------------
Charles R. Schwab, Director
Date: April 3, 1998 By /s/ BROOKS WALKER, JR.
-------------------------------
Brooks Walker, Jr., Director
Date: April 3, 1998 By /s/ SERGIO ZYMAN
-------------------------------
Sergio 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 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.
3.3 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 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 10.3 to Registrant's
Form 10-Q for the quarter ended August 2, 1997, 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.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.3 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration
Statement on Form S-8, Commission File No. 33-54690.
12
<PAGE>
10.4 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.
10.5 GapShare, filed as Exhibit 4.1 to Registrant's Registration Statement on
Form S-8, Commission File No. 333-00417.
10.6 Amendment No. 5 to GapShare filed as Exhibit 10.1 to Registrant's Form
10-Q for the quarter ended November 1, 1997, Commission File No. 1-7562.
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 Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrant's
Registration Statement on Form S-8, Commission File No. 33-56021.
10.9 Amendment No. 1 to the Employee Stock Purchase Plan.
10.10 Amended and Restated Executive Management Incentive Cash Award Plan,
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.
10.11 Deferred Compensation Plan filed as Exhibit 10.36 to Registrant's Annual
Report on Form 10-K for the year ended January 29, 1994, Commission File
No. 1-7562.
10.12 Executive Capital Accumulation Plan filed as Exhibit 10.36 to
Registrant's Annual Report on Form 10-K for the year ended January 28,
1995, Commission File No. 1-7562.
10.13 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.
10.14 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.
10.15 Amendment Number 2 to the Registrant's 1996 Stock Option and Award Plan.
10.16 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.
<PAGE>
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 Restricted Stock Award Agreement, dated April 13, 1992, between
Registrant and Millard Drexler, filed as Exhibit 10.41 to Registrant's
Annual Report on Form 10-K for the year ended January 30, 1993,
Commission File No. 1-7562.
10.23 First Amendment to Restricted Stock Award Agreement, dated October 23,
1992, between Registrant and Millard Drexler, filed as Exhibit 10.42 to
Registrant's Annual Report on Form 10-K for the year ended January 30,
1993, Commission File No. 1-7562.
10.24 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.
10.25 Statement Regarding Non-Employee Director Retirement Plan
10.26 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.
10.27 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.
<PAGE>
10.28 Employment Arrangement, dated July 16, 1997, between Registrant and John
B. Wilson, filed as Exhibit 10.45 to Registrant's Annual Report on Form
10-K for the year ended February 1, 1997, Commission File No. 1-7562.
13 Portions of Registrant's annual report to security holders for the fiscal
year ended January 31, 1998.
21 Subsidiaries of Registrant.
23 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule for the year ended January 31, 1998.
27.2 Financial Data Schedule by quarter for the year ended February 1, 1997.
27.3 Financial Data Schedule by quarter for the first three quarters of fiscal
1997.
<PAGE>
EXHIBIT 10.9
AMENDMENT NO. 1 TO
THE GAP, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Gap, Inc., having adopted The Gap, Inc. Employee Stock Purchase Plan (the
"Plan") effective as of December 1, 1994, hereby amends the Plan, effective as
of May 1, 1997, as follows:
1. Section 2.8 is hereby amended in its entirety to read as follows:
"Eligible Employee" means every Employee of an Employer, except any
-----------------
Employee who, immediately after the grant of an option under the Plan,
would own stock and/or hold outstanding options to purchase stock
possessing five percent (5%) or more of the total combined voting power
or value of all classes of stock of the Company or of any Subsidiary of
the Company (including stock attributed to such Employee pursuant to
Section 424(d) of the Code).
IN WITNESS WHEREOF, The Gap, Inc., by its duly authorized officer, has
executed this Amendment No. 1 as of the date indicated below.
THE GAP, INC.
Date: May 1, 1997 By /s/ Richard S. McKinley
------------------------------------
Chairman, Global Benefits Committee
<PAGE>
EXHIBIT 10.15
AMENDMENT NO. 2 TO
THE GAP, INC.
1996 STOCK OPTION AND AWARD PLAN
The Gap, Inc., having adopted The Gap, Inc. 1996 Stock Option and Award Plan
(the "Plan") effective as of March 26, 1996, and amended effective as of May 20,
1997, hereby further amends the Plan, effective as of January 27, 1998, as
follows:
1. Clause (a) in the second sentence of Section 3.2 is hereby amended in its
entirety to read as follows:
(a) determine which Employees, Consultants, and Nonemployee
Directors shall be granted Awards (other than with respect to the
Options granted to Nonemployee Directors pursuant to Section 9),
2. The second sentence of Section 3.4 is hereby amended in its entirety to
read as follows:
In the Board's administration of Section 9 and the Options and any
Shares granted to Nonemployee Directors pursuant to Section 9, the
Board shall have all of the authority and discretion otherwise
granted to the Committee with respect to the administration of the
Plan.
3. The first sentence of Section 5.1 is hereby amended in its entirety to
read as follows:
Subject to the terms and provisions of the Plan, Options may be
granted to Employees, Consultants, and Nonemployee Directors at any
time and from time to time as determined by the Committee in its
sole discretion.
4. The following sentence is hereby added to the end of Section 5.1:
Options granted to Nonemployee Directors pursuant to this Section 5
shall be Nonqualified Stock Options to purchase treasury Shares.
5. Section 9.2.8 is hereby amended in its entirety to read as follows:
Other Terms. All provisions of the Plan not inconsistent with this
-----------
Section 9 shall apply to Options granted to Nonemployee Directors
under this Section 9; provided, however, that Section 5.2 (relating
to the Committee's discretion to set the terms and conditions of
Options) shall be inapplicable with respect to Options granted to
Nonemployee Directors under this Section 9.
6. Section 10.2 is hereby amended in its entirety to read as follows:
Participation. No Employee, Consultant, or Nonemployee Director
-------------
(except as otherwise provided in Section 9 with respect to
Nonemployee Directors) shall
<PAGE>
have the right to be selected to receive an Award under this Plan,
or, having been so selected, to be selected to receive a future
Award.
IN WITNESS WHEREOF, The Gap, Inc., by its duly authorized officer, has
executed this Amendment No. 2 as of the date indicated below.
THE GAP, INC.
Date: January 27, 1998 By: /s/ Anne B. Gust
----------------------------
Title: Senior Vice President and
General Counsel
<PAGE>
EXHIBIT 10.25
STATEMENT REGARDING NON-EMPLOYEE DIRECTOR RETIREMENT PLAN
---------------------------------------------------------
The Corporate Governance Committee agreed to terminate the Non-Employee
Director Retirement Plan effective January 28, 1997. Directors holding office on
that date will continue to be eligible for the benefits of the Plan; however,
the amount of the annual payment to be made under the Plan will be frozen at the
then current annual retainer amount.
<PAGE>
EXHIBIT 13
[Portions of Registrant's annual report to security holders for the fiscal year
ended January 31, 1998]
<PAGE>
<TABLE>
<CAPTION>
Gap Inc.
Ten-Year Selected Financial Data
Compound Annual Growth Rate
--------------------------- --------------------------
1997 1996
3-year 5-year 10-year 52 weeks 52 weeks
--------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Operating Results ($000)
Net sales 21% 17% 20% $ 6,507,825 $ 5,284,381
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization - - - 3,775,957 3,093,709
Percentage of net sales - - - 58.0% 58.5%
Depreciation and amortization(a) - - - $ 245,584 $ 191,457
Operating expenses - - - 1,635,017 1,270,138
Net interest (income) expense - - - (2,975) (19,450)
Earnings before income taxes 17 20 21 854,242 748,527
Percentage of net sales - - - 13.1% 14.2%
Income taxes - - - $ 320,341 $ 295,668
Net earnings 19 20 23 533,901 452,859
Percentage of net sales - - - 8.2% 8.6%
Cash dividends - - - $ 79,503 $ 83,854
Capital expenditures - - - 483,114 375,838
-----------------------------------------------------
Per Share Data
Net earnings-basic(b) 21% 21% 23% $ 1.35 $ 1.09
Net earnings-diluted(c) 21 22 23 1.30 1.06
Cash dividends - - - .20 .20
Shareholders' equity (book value)(d) - - - 4.03 4.02
-----------------------------------------------------
Financial Position ($000)
Property and equipment, net 18% 16% 24% $ 1,365,246 $ 1,135,720
Merchandise inventory 26 15 14 733,174 578,765
Total assets 19 19 23 3,337,502 2,626,927
Working capital 15 19 21 839,399 554,359
Current ratio - - - 1.85:1 1.72:1
Total long-term debt, less current installments - - - $ 496,044 -
Ratio of long-term debt to shareholders' equity - - - .31:1 N/A
Shareholders' equity 5 12 19 $ 1,583,986 $ 1,654,470
Return on average assets - - - 17.9% 18.2%
Return on average shareholders' equity - - - 33.0% 27.5%
-----------------------------------------------------
Statistics
Number of stores opened 20% 21% 10% 298 203
Number of stores expanded - - - 98 42
Number of stores closed - - - 22 30
Number of stores open at year-end(e) 12 10 10 2,130 1,854
Net increase in number of stores - - - 15% 10%
Comparable store sales growth (52-week basis) - - - 6% 5%
Sales per square foot (52-week basis)(f) - - - $ 463 $ 441
Square footage of gross store space at year-end 19 19 15 15,312,700 12,645,000
Percentage increase in square feet - - - 21% 14%
Number of employees at year-end 14 16 18 81,000 66,000
Weighted-average number of shares-basic(b) - - - 396,179,975 417,146,631
Weighted-average number of shares-diluted(c) - - - 410,200,758 427,267,220
Number of shares outstanding at year-end,
net of treasury stock - - - 393,133,028 411,775,997
-----------------------------------------------------
</TABLE>
(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Based on weighted-average number of shares excluding restricted stock.
(c) Based on weighted-average number of shares adjusted for dilutive effect of
stock options and restricted stock.
(d) Based on actual number of shares outstanding at year-end.
(e) Includes the conversion of GapKids departments to their own separate
stores. Converted stores are not classified as new stores.
(f) Based on weighted-average gross square footage.
1997 Annual Report page 20
<PAGE>
Gap Inc.
<TABLE>
<CAPTION>
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
53 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 53 weeks 52 weeks
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 4,395,253 $ 3,722,940 $ 3,295,679 $ 2,960,409 $ 2,518,893 $ 1,933,780 $ 1,586,596 $ 1,252,097
2,645,736 2,202,133 1,996,929 1,856,102 1,496,156 1,187,644 1,006,647 814,028
60.2% 59.2% 60.6% 62.7% 59.4% 61.4% 63.4% 65.0%
$ 175,719 $ 148,863 $ 124,860 $ 99,451 $ 72,765 $ 53,599 $ 39,589 $ 31,408
1,004,396 853,524 748,193 661,252 575,686 454,180 364,101 277,429
(15,797) (10,902) 809 3,763 3,523 1,435 2,760 3,416
585,199 529,322 424,888 339,841 370,763 236,922 162,714 125,816
13.3% 14.2% 12.9% 11.5% 14.7% 12.3% 10.3% 10.0%
$ 231,160 $ 209,082 $ 166,464 $ 129,140 $ 140,890 $ 92,400 $ 65,086 $ 51,585
354,039 320,240 258,424 210,701 229,873 144,522 97,628 74,231
8.1% 8.6% 7.8% 7.1% 9.1% 7.5% 6.2% 5.9%
$ 66,993 $ 64,775 $ 53,041 $ 44,106 $ 41,126 $ 29,625 $ 22,857 $ 18,244
309,599 236,616 215,856 213,659 244,323 199,617 94,266 68,153
- --------------------------------------------------------------------------------------------------------------------------------
$ .85 $ .76 $ .62 $ .51 $ .56 $ .36 $ .24 $ .18
.83 .74 .60 .49 .54 .34 .23 .17
.16 .15 .13 .11 .10 .07 .06 .05
3.80 3.17 2.59 2.05 1.59 1.10 .80 .65
- --------------------------------------------------------------------------------------------------------------------------------
$ 957,752 $ 828,777 $ 740,422 $ 650,368 $ 547,740 $ 383,548 $ 238,103 $ 191,257
482,575 370,638 331,155 365,692 313,899 247,462 243,482 193,268
2,343,068 2,004,244 1,763,117 1,379,248 1,147,414 776,900 579,483 481,148
728,301 555,827 494,194 355,649 235,537 101,518 129,139 106,210
2.32:1 2.11:1 2.07:1 2.06:1 1.71:1 1.39:1 1.69:1 1.70:1
- - $ 75,000 $ 75,000 $ 80,000 $ 17,500 $ 20,000 $ 22,000
N/A N/A .07:1 .08:1 .12:1 .04:1 .06:1 .08:1
$ 1,640,473 $ 1,375,232 $ 1,126,475 $ 887,839 $ 677,788 $ 465,733 $ 337,972 $ 276,399
16.3% 17.0% 16.4% 16.7% 23.9% 21.3% 18.4% 16.2%
23.5% 25.6% 25.7% 26.9% 40.2% 36.0% 31.8% 27.0%
- ------------------------------------------------------------------------------------------------------------------------------
225 172 108 117 139 152 98 106
55 82 130 94 79 56 7 N/A
53 34 45 26 15 20 38 21
1,680 1,508 1,370 1,307 1,216 1,092 960 900
11% 10% 5% 7% 11% 14% 7% 10%
0% 1% 1% 5% 13% 14% 15% 8%
$ 425 $ 444 $ 463 $ 489 $ 481 $ 438 $ 389 $ 328
11,100,200 9,165,900 7,546,300 6,509,200 5,638,400 4,762,300 4,056,600 3,879,300
21% 21% 16% 15% 18% 17% 5% 6%
60,000 55,000 44,000 39,000 32,000 26,000 23,000 20,000
417,718,397 421,644,426 417,905,336 412,629,996 407,007,521 401,965,082 399,847,754 410,942,274
427,752,515 431,619,827 428,937,902 427,068,347 423,687,625 419,978,006 420,619,541 434,112,567
431,621,976 434,294,247 435,746,184 432,555,714 427,570,002 423,792,090 421,654,212 421,576,368
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Annual Report page 21
<PAGE>
Gap Inc.
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 that could cause the Company's actual results of operations to
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, and/or
trade restrictions and political or financial instability in countries where the
Company's goods are manufactured and 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 revenues and profitability
remain difficult to predict.
The Company does not undertake 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.
<TABLE>
<CAPTION>
Results of Operations
Net Sales
- --------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ($000) $6,507,825 $5,284,381 $4,395,253
Total net sales growth
percentage 23 20 18
Comparable store sales
growth percentage
(52-week basis) 6 5 0
Net sales per average
gross square foot
(52-week basis) $ 463 $ 441 $ 425
Square footage of gross
store space at year-end (000) 15,313 12,645 11,100
Number of:
New stores 298 203 225
Expanded stores 98 42 55
Closed stores 22 30 53
- -------------------------------------------------------------------------
</TABLE>
The total net sales growth for all years presented was attributable
primarily 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 in 1997
and 1996.
The increase in net sales per average square foot in 1997 and 1996 was
primarily attributable to increases in comparable store sales.
Cost of Goods Sold
and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales were 61.8
percent in 1997, 62.2 percent in 1996 and 64.2 percent in 1995.
The .4 percentage point decrease in 1997 from 1996 was primarily
attributable to a .6 percentage point decrease in occupancy expenses, partially
offset by a decrease in merchandise margin. The decrease in occupancy expenses
as a percentage of net sales was primarily attributable to leverage achieved
through comparable store sales growth.
The 2.0 percentage point decrease in 1996 from 1995 was due to a 1.2
percentage point increase in merchandise margin combined with an .8 percentage
point decrease in occupancy expenses as a percentage of net sales. The increase
in merchandise margin was driven by increases in initial merchandise markup and
in the percentage of merchandise sold at regular price. The decrease in
occupancy expenses was primarily attributable to the effect of the growth of the
Old Navy division, which carries lower occupancy expenses as a percentage of net
sales when compared to other divisions, and leverage achieved through comparable
store sales growth.
1997 Annual Report page 22
<PAGE>
Gap Inc.
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 were 25.1 percent for 1997, 24.0
percent for 1996 and 22.9 percent for 1995.
In 1997, the 1.1 percentage point increase was primarily attributable to
an .8 percentage point increase in advertising/marketing costs as part of the
Company's brand development efforts. An increase in the write-off of leasehold
improvements and fixtures associated with the remodeling, relocation and closing
of certain stores planned for the next fiscal year accounted for .4 percentage
point of the increase.
In 1996, the 1.1 percentage point increase was primarily attributable to
a .3 percentage point increase in advertising/marketing costs to support the
Company's brands and a .5 percentage point increase in incentive bonus expense.
Net Interest Income
Net interest income was $3.0, $19.5 and $15.8 million for 1997, 1996 and 1995,
respectively. The decrease in 1997 was due to the interest expense related to
the long-term debt securities issued during the third quarter, as well as to a
decrease in gross average investments. The change in 1996 from 1995 was
primarily attributable to an increase in gross average investments.
Income Taxes
The effective tax rate was 37.5 percent in 1997 and 39.5 percent in 1996 and
1995. The decrease in the effective tax rate in 1997 was a result of the impact
of tax planning initiatives to support changing business needs.
Liquidity and Capital Resources
The following sets forth certain measures of the Company's liquidity:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Fiscal Year
-------------------------------
1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by
operating activities ($000) $844,651 $834,953 $489,087
Working capital ($000) 839,399 554,359 728,301
Current ratio 1.85:1 1.72:1 2.32:1
- ---------------------------------------------------------------
</TABLE>
For the fiscal year ended January 31, 1998, the increase in cash
provided by operating activities was due to an increase in net earnings offset
by investments in merchandise inventory and the timing of payments for income
taxes and certain payables. For the fiscal year ended February 1, 1997, the
increase in cash provided by operating activities was attributable to an
increase in net earnings and the timing of certain year-end payables and accrued
expenses.
The Company funds inventory expenditures during normal and peak periods
through a combination of cash flows provided by operations and normal trade
credit arrangements. The Company's business follows a seasonal pattern, peaking
over a total of about ten to twelve weeks during the Back-to-School and Holiday
periods. During 1997 and 1996, these periods accounted for approximately 35 and
33 percent, respectively, of the Company's annual sales.
The Company has committed credit facilities totaling $950 million,
consisting of an $800 million, 364-day revolving credit facility, and a $150
million, 5-year revolving credit facility through June 30, 2002. These credit
facilities provide for the issuance of up to $450 million in letters of credit.
The Company has additional uncommitted credit facilities of $300 million for the
issuance of letters of credit. At January 31, 1998, the Company had outstanding
letters of credit of approximately $498 million.
1997 Annual Report page 23
<PAGE>
Gap Inc.
To provide financial flexibility, the Company issued $500 million of 6.9
percent, 10-year debt securities in fiscal 1997. The proceeds from this issuance
are intended to be used for general corporate purposes, including store
expansion, brand investment, development of additional distribution channels and
repurchases of the Company's common stock pursuant to its ongoing repurchase
program.
Capital expenditures, net of construction allowances and dispositions,
totaled approximately $450 million in 1997. These expenditures resulted in a net
increase in store space of approximately 2.7 million square feet or 21 percent
due to the addition of 298 new stores, the expansion of 98 stores and the
remodeling of certain stores. Capital expenditures for 1996 and 1995 were $359
million and $291 million, respectively, resulting in a net increase in store
space of approximately 1.5 million square feet in 1996 and approximately 1.9
million square feet in 1995.
The increase in capital expenditures in 1997 from 1996 was primarily
attributable to the number of stores opened, expanded and remodeled, as well as
the expansion of headquarters facilities. The increase in capital expenditures
in 1996 from 1995 was primarily attributable to the construction of two
distribution centers and a headquarters facility. Expenditures in 1997, 1996 and
1995 also included costs for equipment.
For 1998, the Company expects capital expenditures to total
approximately $700 million, net of construction allowances. This represents the
addition of 300 to 350 new stores, the expansion of approximately 80 to 90
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 18 to 20 percent before store
closings. New stores are generally expected to be leased.
In 1997, the Company completed construction of a headquarters facility
in San Bruno, California for approximately $60 million. The facility became
fully operational in October 1997. To further support its growth, the Company
continues to explore alternatives for additional headquarters facilities in San
Francisco and San Bruno, California. The Company acquired land in 1997 in San
Francisco and in the fourth quarter entered into a purchase contract to acquire
additional land in San Bruno.
Also during 1997, the Company commenced construction on a distribution
center in Fresno, California for an estimated cost at completion of $60 million.
The majority of the expenditures for this facility will be incurred in 1998. The
facility is expected to begin operations in early 1999.
On November 24, 1997, the Company's Board of Directors authorized a
three-for-two split of its common stock effective December 22, 1997, in the form
of a stock dividend for shareholders of record at the close of business on
December 8, 1997. Share and per share amounts herein and in the accompanying
consolidated financial statements have been restated to reflect the stock split.
In October 1996, the Board of Directors approved a program under which
the Company may repurchase up to 45 million shares of its outstanding common
stock in the open market over a three-year period. As of January 31, 1998, 28
million shares had been repurchased for $744 million. The program announced in
October 1996 follows an earlier 27 million share repurchase program which was
completed in November 1996 at a cost of approximately $450 million.
1997 Annual Report page 24
<PAGE>
Gap Inc.
During fiscal 1997, the Company entered into various put option
contracts in connection with the share repurchase program to hedge against stock
price fluctuations. The Company also continued to enter into foreign exchange
forward contracts to reduce exposure to foreign currency exchange risk involved
in its commitments to purchase merchandise for foreign operations. 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
38.
The Company pursues a diversified global import operations strategy
which includes relationships with vendors in over 40 countries. These sourcing
operations may be adversely affected by political 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 current financial
instability in Asia is an example of this instability, which could affect some
suppliers adversely. Although to date the instability in Asia has not had a
material adverse effect on the Company's ability to import apparel, and
therefore on the Company's results of operations and financial condition, no
assurances can be given that it will not have such an effect in the future.
The Company is addressing the need to ensure that its operations will
not be adversely impacted by software or other system failures related to year
2000. A program office was established in 1997 to coordinate the identification,
evaluation and implementation of any necessary changes to computer systems,
applications and business processes. The costs associated with this effort are
expected to be incurred through 1999 and are not expected to have a material
impact on the results of operations, cash flows or financial condition in any
given year. However, no assurances can be given that the Company will be able to
completely identify or address all year 2000 compliance issues, or that third
parties with whom the Company does business will not experience system failures
as a result of the year 2000 issues, nor can the Company fully predict the
consequences of noncompliance.
<TABLE>
<CAPTION>
Per Share Data
- ----------------------------------------------------------------------------
Market Prices Cash Dividends
---------------------------------------- --------------
Fiscal 1997 1996 1997 1996
- ----------------------------------------------------------------------------
High Low High Low
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 24 1/8 $ 19 1/16 $20 5/16 $15 7/16 $.05 $.05
2nd Quarter 29 13/16 20 9/16 24 1/16 18 1/8 .05 .05
3rd Quarter 35 3/4 28 24 5/16 17 5/16 .05 .05
4th Quarter 41 1/4 32 15/16 22 5/16 18 9/16 .05 .05
- ----------------------------------------------------------------------------
Year $.20 $.20
- ----------------------------------------------------------------------------
</TABLE>
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 9, 1998 was 7,108.
1997 Annual Report page 25
<PAGE>
Gap Inc.
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. Their report,
which appears below, is based upon their audits conducted in accordance with
generally accepted auditing standards.
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 assure 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 31, 1998 and February 1, 1997, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three fiscal years in the period ended January 31, 1998. 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 audits to obtain
reasonable assurance about whether the consolidated 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 31, 1998 and February 1, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
San Francisco, California
February 27, 1998
1997 Annual Report page 26
<PAGE>
Gap Inc.
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Fifty-two Fifty-two Fifty-three
Weeks Ended Percentage Weeks Ended Percentage Weeks Ended Percentage
($000 except share and per share amounts)
January 31, 1998 to Sales February 1, 1997 to Sales February 3, 1996 to Sales
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 6,507,825 100.0% $ 5,284,381 100.0% $ 4,395,253 100.0%
Costs and expenses
Cost of goods sold and
occupancy expenses 4,021,541 61.8 3,285,166 62.2 2,821,455 64.2
Operating expenses 1,635,017 25.1 1,270,138 24.0 1,004,396 22.9
Net interest income (2,975) 0.0 (19,450) (0.4) (15,797) (0.4)
--------------------------------------------------------------------------------------------
Earnings before income taxes 854,242 13.1 748,527 14.2 585,199 13.3
Income taxes 320,341 4.9 295,668 5.6 231,160 5.2
--------------------------------------------------------------------------------------------
Net earnings $ 533,901 8.2% $ 452,859 8.6% $ 354,039 8.1%
--------------------------------------------------------------------------------------------
Weighted-average number of
shares-basic 396,179,975 417,146,631 417,718,397
Weighted-average number of
shares-diluted 410,200,758 427,267,220 427,752,515
--------------------------------------------------------------------------------------------
Earnings per share-basic $ 1.35 $ 1.09 $ .85
Earnings per share-diluted 1.30 1.06 .83
--------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
1997 Annual Report page 27
<PAGE>
Gap Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
($000) January 31, 1998 February 1, 1997
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and equivalents $ 913,169 $ 485,644
Short-term investments - 135,632
Merchandise inventory 733,174 578,765
Prepaid expenses and other current assets 184,604 129,214
----------- ----------
Total current assets 1,830,947 1,329,255
----------- ----------
Property and Equipment
Leasehold improvements 846,791 736,608
Furniture and equipment 1,236,450 960,516
Land and buildings 154,136 99,969
Construction-in-progress 66,582 101,520
----------- ----------
2,303,959 1,898,613
Accumulated depreciation and amortization (938,713) (762,893)
----------- ----------
Property and equipment, net 1,365,246 1,135,720
----------- ----------
Long-term investments - 36,138
Lease rights and other assets 141,309 125,814
----------- ----------
Total assets $ 3,337,502 $2,626,927
----------- ----------
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 84,794 $ 40,050
Accounts payable 416,976 351,754
Accrued expenses 389,412 282,494
Income taxes payable 83,597 91,806
Deferred lease credits and other current liabilities 16,769 8,792
----------- ----------
Total current liabilities 991,548 774,896
----------- ----------
Long-Term Liabilities
Long-term debt 496,044 -
Deferred lease credits and other liabilities 265,924 197,561
----------- ----------
Total long-term liabilities 761,968 197,561
----------- ----------
Shareholders' Equity
Common stock $.05 par value
Authorized 500,000,000 shares; issued 439,922,841
and 476,796,135 shares; outstanding 393,133,028
and 411,775,997 shares 21,996 23,840
Additional paid-in capital 317,674 434,104
Retained earnings 2,392,750 1,938,352
Foreign currency translation adjustments (15,230) (5,187)
Deferred compensation (38,167) (47,838)
Treasury stock, at cost (1,095,037) (688,801)
----------- ----------
Total shareholders' equity 1,583,986 1,654,470
----------- ----------
Total liabilities and shareholders' equity $ 3,337,502 $2,626,927
----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
1997 Annual Report page 28
<PAGE>
Gap Inc.
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
($000) January 31, 1998 February 1, 1997 February 3, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 533,901 $ 452,859 $ 354,039
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization(a) 269,706 214,905 197,440
Tax benefit from exercise of stock options
by employees and from vesting of restricted stock 23,682 47,348 11,444
Deferred income taxes (13,706) (28,897) (2,477)
Change in operating assets and liabilities:
Merchandise inventory (156,091) (93,800) (113,021)
Prepaid expenses and other (44,736) (16,355) (15,278)
Accounts payable 63,532 88,532 1,183
Accrued expenses 107,365 87,974 9,427
Income taxes payable (8,214) 25,706 24,806
Deferred lease credits and other long-term liabilities 69,212 56,681 21,524
-------------------------------------------------
Net cash provided by operating activities 844,651 834,953 489,087
-------------------------------------------------
Cash Flows from Investing Activities
Net maturity (purchase) of short-term investments 174,709 (11,774) 116,134
Net purchase of long-term investments (2,939) (40,120) (30,370)
Net purchase of property and equipment (465,843) (371,833) (302,260)
Acquisition of lease rights and other assets (19,779) (12,206) (6,623)
-------------------------------------------------
Net cash used for investing activities (313,852) (435,933) (223,119)
-------------------------------------------------
Cash Flows from Financing Activities
Net increase in notes payable 44,462 18,445 20,787
Net issuance of long-term debt 495,890 - -
Issuance of common stock 30,653 37,053 17,096
Net purchase of treasury stock (593,142) (466,741) (71,314)
Cash dividends paid (79,503) (83,854) (66,993)
-------------------------------------------------
Net cash used for financing activities (101,640) (495,097) (100,424)
-------------------------------------------------
Effect of exchange rate changes on cash (1,634) 2,155 (465)
-------------------------------------------------
Net increase (decrease) in cash and equivalents 427,525 (93,922) 165,079
Cash and equivalents at beginning of year 485,644 579,566 414,487
-------------------------------------------------
Cash and equivalents at end of year $ 913,169 $ 485,644 $ 579,566
-------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
(a) Includes amortization of restricted stock, discounted stock options and
discount on long-term debt.
1997 Annual Report page 29
<PAGE>
Gap Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
($000 except share and per share amounts)
Common Stock Additional
------------------------ Paid-in
Shares Amount Capital
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 28, 1995 470,918,331 $ 23,546 $ 282,716
-------------------------------------
Issuance of common
stock pursuant to
stock option plans 1,491,558 75 9,591
Net issuance of common
stock pursuant to
management incentive
restricted stock
plans 1,547,070 77 19,531
Tax benefit from
exercise of stock
options by employees
and from vesting of
restricted stock 11,444
Foreign currency
translation adjustments
Amortization of restricted
stock
Purchase of treasury stock
Reissuance of treasury
stock 4,012
Net earnings
Cash dividends ($.16 per
share)
-------------------------------------
Balance at February 3, 1996 473,956,959 $ 23,698 $ 327,294
-------------------------------------
Issuance of common stock
pursuant to stock
option plans 2,386,761 119 19,694
Net issuance of common
stock pursuant to
management incentive
restricted stock plans 452,415 23 32,799
Tax benefit from exercise
of stock options by
employees and from
vesting of restricted
stock 47,348
Foreign currency
translation adjustments
Amortization of restricted
stock
Purchase of treasury stock
Reissuance of treasury
stock 6,969
Net earnings
Cash dividends ($.20 per
share)
-------------------------------------
Balance at February 1, 1997 476,796,135 $ 23,840 $ 434,104
-------------------------------------
Issuance of common stock
pursuant to stock
option plans(a) 2,848,567 142 47,963
Net cancelations of
common stock pursuant
to management incentive
restricted stock plans (946,861) (47) (10,452)
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 (38,775,000) (1,939) (184,967)
Net earnings
Cash dividends ($.20 per
share)
-------------------------------------
Balance at January 31, 1998 439,922,841 $ 21,996 $ 317,674
-------------------------------------
</TABLE>
1997 Annual Report Page 30
<PAGE>
<TABLE>
<CAPTION>
Gap Inc.
Foreign Currency Treasury Stock
Retained Translation Deferred -------------------------
Earnings Adjustments Compensation Shares Amount Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1995 $1,282,301 $ (8,320) $(54,265) (36,624,084) $ (150,746) $1,375,232
--------------------------------------------------------------------------------
Issuance of common
stock pursuant to
stock option plans 9,666
Net issuance of common
stock pursuant to
management incentive
restricted stock
plans (16,191) 3,417
Tax benefit from
exercise of stock
options by employees
and from vesting of
restricted stock 11,444
Foreign currency
translation adjustments (751) (751)
Amortization of restricted
stock 21,721 21,721
Purchase of treasury stock (6,289,200) (72,717) (72,717)
Reissuance of treasury
stock 578,301 1,403 5,415
Net earnings 354,039 354,039
Cash dividends ($.16 per
share) (66,993) (66,993)
--------------------------------------------------------------------------------
Balance at February 3, 1996 $1,569,347 $ (9,071) $(48,735) (42,334,983) $ (222,060) $1,640,473
--------------------------------------------------------------------------------
Issuance of common stock
pursuant to stock
option plans (9,648) 10,165
Net issuance of common
stock pursuant to
management incentive
restricted stock plans (12,903) 19,919
Tax benefit from exercise
of stock options by
employees and from
vesting of restricted
stock 47,348
Foreign currency
translation adjustments 3,884 3,884
Amortization of restricted
stock 23,448 23,448
Purchase of treasury stock (23,284,650) (468,246) (468,246)
Reissuance of treasury
stock 599,495 1,505 8,474
Net earnings 452,859 452,859
Cash dividends ($.20 per
share) (83,854) (83,854)
--------------------------------------------------------------------------------
Balance at February 1, 1997 $1,938,352 $ (5,187) $(47,838) (65,020,138) $ (688,801) $1,654,470
--------------------------------------------------------------------------------
Issuance of common stock
pursuant to stock
option plans(a) (18,166) 29,939
Net cancelations of
common stock pursuant
to management incentive
restricted stock plans 3,869 (6,630)
Tax benefit from exercise
of stock options by
employees and from
vesting of restricted
stock 23,682
Foreign currency
translation adjustments (10,043) (10,043)
Amortization of restricted
stock and discounted
stock options 23,968 23,968
Purchase of treasury stock (21,190,300) (598,149) (598,149)
Reissuance of treasury
stock 645,625 5,007 12,351
Retirement of treasury
stock 38,775,000 186,906 0
Net earnings 533,901 533,901
Cash dividends ($.20 per
share) (79,503) (79,503)
--------------------------------------------------------------------------------
Balance at January 31, 1998 $2,392,750 $ (15,230) $(38,167) (46,789,813) $(1,095,037) $1,583,986
--------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
(a) Includes payout of cash for fractional shares resulting from the
three-for-two split of common stock effective December 22, 1997.
1997 Annual Report page 31
<PAGE>
Gap Inc.
Notes to Consolidated Financial Statements
For the Fifty-two Weeks ended January 31, 1998 (fiscal 1997), the Fifty-two
Weeks ended February 1, 1997 (fiscal 1996) and the Fifty-three Weeks ended
February 3, 1996 (fiscal 1995).>>
Note A: Summary of Significant
Accounting Policies
Gap Inc. (the "Company") is an international specialty retailer which operates
stores selling casual apparel, personal care and other accessories for men,
women and children under a variety of brand names including: Gap, GapKids,
babyGap, Banana Republic and Old Navy. Its principal markets consist of the
United States, Canada, Europe and Asia with the United States being the most
significant.
On November 24, 1997, the Company's Board of Directors authorized a
three-for-two split of its common stock effective December 22, 1997, in the form
of a stock dividend for shareholders of record at the close of business on
December 8, 1997. Share and per share amounts in the accompanying consolidated
financial statements for all periods have been restated to reflect the stock
split.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
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 represent cash and short-term, highly liquid
investments with original maturities of three months or less.
Short-term investments include investments with an original maturity of
greater than three months and a remaining maturity of less than one year. Long-
term investments include investments with an original and remaining maturity of
greater than one year. Effective July 1997, the Company's short-and long-term
investments, which consist primarily of debt securities, are classified as
available for sale and are carried at fair market value. Any unrealized gains or
losses computed in marking these securities to market are reported within
shareholders' equity. Prior to July 1997, such securities were classified as
held to maturity and were carried at amortized cost.
Merchandise inventory is stated at the lower of FIFO (first-in, first-
out) cost or market.
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.
Lease rights are recorded at cost and are amortized over 12 years or the
lives of the respective leases including option periods, whichever is less.
Costs associated with the opening or remodeling of stores, such as pre-
opening rent and payroll, are expensed as incurred. The net book value of
fixtures and leasehold improvements for stores scheduled to be closed or
expanded within the next fiscal year is charged against current earnings.
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 magazine and billboard
space, are expensed when the advertising first takes place. Advertising costs
were $175 million, $96 million and $64 million in fiscal 1997, 1996 and 1995,
respectively.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements.
Translation adjustments result from the process of 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.
The Company accounts for stock-based awards using the intrinsic value-
based method under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and has provided pro forma disclosures of net
earnings and earnings per share in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Restricted stock and discounted stock options represent deferred
compensation and are shown as a reduction of shareholders' equity.
In the fourth quarter of 1997, the Company adopted SFAS No. 128,
Earnings per Share, which requires dual presentation of basic earnings per share
(EPS) and diluted EPS. All prior periods have been restated to conform with the
new statement. Basic EPS is computed as net earnings divided by the weighted-
average number of common shares outstanding, excluding restricted stock, for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options,
restricted stock and other convertible securities.
1997 Annual Report page 32
<PAGE>
Gap Inc.
The Financial Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income, which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these standards will not impact the Company's consolidated financial
position, results of operations or cash flows, and any effect will be limited to
the form and content of its disclosures. SFAS No. 130 and SFAS No. 131 are
effective for the Company's fiscal years ending after January 31, 1998.
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statements.
Note B: Debt and Other Credit Arrangements
The Company has committed credit facilities totaling $950 million, consisting of
an $800 million, 364-day revolving credit facility, and a $150 million, 5-year
revolving credit facility through June 30, 2002. These credit facilities provide
for the issuance of up to $450 million in letters of credit. The Company has
additional uncommitted credit facilities of $300 million for the issuance of
letters of credit. At January 31, 1998, the Company had outstanding letters of
credit of $498,256,000.
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 31, 1998.
During fiscal 1997, the Company issued long-term debt which consists of
$500 million of 6.9 percent unsecured notes, due September 15, 2007. Interest on
the notes is payable semi-annually. The fair value at January 31, 1998 of the
notes was approximately $526 million, based on the current rates at which the
Company could borrow funds with similar terms and remaining maturities. The
balance of the debt is net of unamortized discount.
Gross interest payments were $8,399,000, $2,800,000 and $2,274,000 in
fiscal 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Note C: Income Taxes
Income taxes consisted of the following:
- ---------------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
($000) Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently Payable
Federal $279,068 $266,063 $176,200
State 33,384 36,167 40,111
Foreign 21,595 22,335 17,348
- ---------------------------------------------------------------------------------------
Total currently payable 334,047 324,565 233,659
- ---------------------------------------------------------------------------------------
Deferred
Federal (14,832) (23,980) (7,169)
State and foreign 1,126 (4,917) 4,670
- ---------------------------------------------------------------------------------------
Total deferred (13,706) (28,897) (2,499)
- ---------------------------------------------------------------------------------------
Total provision $320,341 $295,668 $231,160
- ---------------------------------------------------------------------------------------
</TABLE>
The foreign component of pretax earnings before eliminations and
corporate allocations in fiscal 1997, 1996 and 1995 was $84,487,000, $82,220,000
and $71,545,000, 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.
Undistributed earnings of foreign subsidiaries were $218,113,000 at January 31,
1998.
The difference between the effective income tax rate and the United
States federal income tax rate is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax rate 35.0% 35.0% 35.0%
State income taxes,
less federal benefit 3.2 4.4 5.0
Other (.7) .1 (.5)
- ---------------------------------------------------------------------
Effective tax rate 37.5% 39.5% 39.5%
- ---------------------------------------------------------------------
</TABLE>
Deferred tax assets (liabilities), reported in other assets in the
Consolidated Balance Sheets, consisted of the following at January 31, 1998 and
February 1, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------
($000) Jan. 31, 1998 Feb. 1, 1997
- -----------------------------------------------------------------------------
Compensation and benefits accruals $ 31,367 $ 31,640
Scheduled rent 44,451 40,834
Inventory capitalization 28,776 16,459
Nondeductible accruals 20,003 18,705
Other 17,854 24,224
- -----------------------------------------------------------------------------
Gross deferred tax assets 142,451 131,862
- -----------------------------------------------------------------------------
Depreciation (9,553) (13,611)
Other (6,345) (5,404)
- -----------------------------------------------------------------------------
Gross deferred tax liabilities (15,898) (19,015)
- -----------------------------------------------------------------------------
Net deferred tax assets $126,553 $112,847
- -----------------------------------------------------------------------------
</TABLE>
1997 Annual Report page 33
<PAGE>
Gap Inc.
Income tax payments were $320,744,000, $249,968,000 and $197,802,000 in
fiscal 1997, 1996 and 1995, 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
2013.
The aggregate minimum non-cancelable annual lease payments under leases
in effect on January 31, 1998 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------
Fiscal Year ($000)
- --------------------------------------------
<S> <C>
1998 $ 409,607
1999 403,285
2000 387,668
2001 364,270
2002 332,364
Thereafter 1,172,849
- --------------------------------------------
Total minimum lease commitment $3,070,043
- --------------------------------------------
</TABLE>
Many leases entered into by the Company include options, which are
generally exercised, 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. If conditions did not warrant invoking early termination of any
leases, and all renewal options were exercised for current lease agreements, the
total lease commitment for the Company would be approximately $4.1 billion.
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 31, 1998
and February 1, 1997, this liability amounted to $129,981,000 and $110,633,000,
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.
Some of the leases relating to stores in operation at January 31, 1998
contain renewal options for periods ranging up to 25 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
($000) Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $391,472 $337,487 $300,171
Contingent rentals 38,657 30,644 22,464
- --------------------------------------------------------------------------
Total $430,129 $368,131 $322,635
- --------------------------------------------------------------------------
</TABLE>
Note E: Financial Instruments
Foreign Exchange Forward Contracts
The Company enters into foreign exchange forward contracts to reduce exposure to
foreign currency exchange risk. These contracts are primarily designated and
effective as hedges of commitments to purchase merchandise for foreign
operations. The market value gains and losses on these contracts are deferred
and recognized as part of the underlying cost to purchase the merchandise. At
January 31, 1998, the Company had contracts maturing at various dates through
1998 to sell the equivalent of $123,230,000 in foreign currencies (20,200,000
British pounds, 46,200,000 Canadian dollars, 62,625,260,078 Italian lire,
1,543,000,000 Japanese yen and 1,234,884,074 Spanish pesetas) at the contracted
rates. The deferred gains and losses on the Company's foreign exchange forward
contracts at January 31, 1998 are immaterial.
Put Options
At January 31, 1998, the Company had various put option contracts to repurchase
up to 3,050,000 shares of its common stock. The contracts have exercise prices
ranging from $32.95 to $38.37, with expiration dates extending to the third
quarter of fiscal 1998.
Interest Rate Swaps
During fiscal 1997, the Company entered into interest rate swap agreements in
order to reduce interest rate risk on a substantial portion of its long-term
debt. The swap agreements, which were issued at an aggregate notional amount of
$400 million, were settled in September 1997 at an interest rate of 6.7 percent.
The gains on the interest rate swaps were deferred and are being amortized to
reduce interest expense over the life of the debt.
1997 Annual Report page 34
<PAGE>
Gap Inc.
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 the employee's contributions under a
predetermined formula. The Company's contributions vest over a seven-year
period. Company contributions to the retirement plan in 1997, 1996 and 1995 were
$12,907,000, $11,427,000 and $9,839,000, respectively.
A nonqualified Executive Deferred Compensation Plan was established on
January 1, 1994 and a nonqualified Executive Capital Accumulation Plan was
established on April 1, 1994. Both plans allow eligible employees to defer
compensation up to a maximum amount defined in each plan. The Company does not
match employees' contributions.
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 nonemployee 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 300,000
shares under the plan.
Incentive Stock Compensation Plans
The 1996 Stock Option and Award Plan (the "Plan") was established on March 26,
1996. The Board authorized 41,485,041 shares for issuance under the 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 Plan. The Plan empowers the Compensation and Stock Option
Committee of the Board of Directors to award compensation primarily in the form
of nonqualified stock options or restricted stock to key employees. Stock
options generally expire ten 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 Compensation and Stock Option Committee.
Total compensation cost for those stock options issued at less than fair market
value under the Plan and for the restricted shares issued under MIRSP was
$17,170,000, $22,248,000 and $23,743,000 in 1997, 1996 and 1995, respectively.
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 645,625
shares issued under the plan during fiscal 1997, 599,495 during 1996 and 578,301
during 1995. All shares were acquired from reissued treasury stock. At January
31, 1998, there were 4,176,579 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.
In October 1996, the Board of Directors approved a share-buyback program
under which the Company may repurchase up to 45,000,000 shares of its
outstanding stock in the open market over a three-year period. As of January 31,
1998, 28,184,650 shares were repurchased for $743,805,000 under this program.
1997 Annual Report page 35
<PAGE>
Gap Inc.
Stock Options
Under the Company's Stock Option Plans, nonqualified options to purchase common
stock are granted to officers, directors and key 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Weighted-Average
Shares Exercise Price
- ----------------------------------------------------------------
<S> <C> <C>
Balance at January 28, 1995 11,619,816 $10.18
- ----------------------------------------------------------------
Granted 14,226,600 11.94
Exercised (1,491,558) 6.48
Canceled (894,222) 12.27
- ----------------------------------------------------------------
Balance at February 3, 1996 23,460,636 $11.41
- ----------------------------------------------------------------
Granted 9,364,110 20.60
Exercised (2,386,761) 8.30
Canceled (1,198,608) 14.85
- ----------------------------------------------------------------
Balance at February 1, 1997 29,239,377 $14.46
- ----------------------------------------------------------------
Granted 11,392,531 21.62
Exercised (2,849,034) 10.65
Canceled (2,559,295) 16.01
- ----------------------------------------------------------------
Balance at January 31, 1998 35,223,579 $16.97
- ----------------------------------------------------------------
</TABLE>
Outstanding options at January 31, 1998 have expiration dates ranging
from March 20, 1998 to January 29, 2008 and represent grants to 2,347 key
employees.
At January 31, 1998, the Company reserved 60,083,011 shares of its
common stock, including 14,996 treasury shares, for the exercise of stock
options. There were 24,859,432 and 32,745,096 shares available for granting of
options at January 31, 1998 and February 1, 1997, respectively. Options for
4,299,847 and 4,373,222 shares were exercisable as of January 31, 1998 and
February 1, 1997, respectively, and had a weighted-average exercise price of
$11.66 and $9.01 for those respective periods.
The Company accounts for its Stock Option and Award Plans in accordance
with APB Opinion No. 25, 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 in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below. The effects of applying SFAS No. 123 in this pro
forma disclosure are not indicative of future amounts. SFAS No. 123 does not
apply to awards prior to fiscal year 1995. Additional awards in future years are
anticipated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings ($000)
As reported $533,901 $452,859 $354,039
Pro forma 507,966 437,232 348,977
- -------------------------------------------------------------------------
Earnings per share
As reported-basic $ 1.35 $ 1.09 $ .85
Pro forma-basic 1.28 1.05 .84
As reported-diluted 1.30 1.06 .83
Pro forma-diluted 1.24 1.02 .82
- -------------------------------------------------------------------------
</TABLE>
The weighted-average fair value of the stock options granted during
fiscal 1997, 1996 and 1995 was $8.76, $7.47 and $4.18, 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 1997: dividend yield of .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 fair value of
stock options granted prior to 1997 was based on the following weighted-average
assumptions: dividend yield of 1.0 percent; expected price volatility of 30
percent; risk-free interest rates ranging from 5.5 percent to 6.5 percent; and
expected lives between 3.6 and 5.8 years.
The following table summarizes information about stock options outstanding at
January 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------ ------------------------------------
Number Outstanding Weighted-Average Remaining Weighted-Average Number Exercisable Weighted-Average
Range of Exercise Prices at Jan. 31, 1998 Contractual Life (in years) Exercise Price at Jan. 31, 1998 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.86 to $11.29 8,215,077 5.10 $10.12 1,995,467 $ 8.39
11.40 to 13.03 7,454,625 5.75 12.96 210,600 11.79
13.42 to 20.88 10,688,682 8.08 19.13 2,077,095 14.68
20.89 to 39.00 8,865,195 8.66 24.10 16,685 25.79
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3.86 to $39.00 35,223,579 7.04 $16.97 4,299,847 $11.66
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Annual Report page 36
<PAGE>
Gap Inc.
Note H: Earnings Per Share
Under SFAS No. 128, the Company provides dual presentation of EPS on a basic and
diluted basis. The Company's granting of certain stock options and restricted
stock resulted in potential dilution of basic EPS. The following summarizes the
effects of the assumed issuance of dilutive securities on weighted-average
shares for basic EPS.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average number
of shares-basic 396,179,975 417,146,631 417,718,397
Incremental shares from
assumed issuance of:
Stock options 10,037,700 5,597,219 1,939,485
Restricted stock 3,983,083 4,523,370 8,094,633
- --------------------------------------------------------------------------
Weighted-average number
of shares-diluted 410,200,758 427,267,220 427,752,515
- --------------------------------------------------------------------------
</TABLE>
The number of incremental shares from the assumed issuance of stock
options and restricted stock is calculated applying the treasury stock method.
Excluded from the above computation of weighted-average shares for
diluted EPS were options to purchase 440,063 shares of common stock during
fiscal 1997, 5,084,978 during 1996 and 3,087,269 during 1995. Issuance of these
securities would have resulted in an antidilutive effect on EPS.
Note I: Related Party Transactions
The Company has an agreement with Fisher Development, Inc. (FDI), 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 266, 177 and 204 new stores'
leasehold improvements and fixtures during fiscal 1997, 1996 and 1995,
respectively. In the same respective years, FDI supervised construction of 97,
38 and 54 expansions, as well as remodels of existing stores and headquarters
facilities. Total cost of construction was $233,777,000, $111,871,000 and
$164,820,000, including profit and overhead costs of $16,845,000, $10,751,000
and $11,753,000 for fiscal 1997, 1996 and 1995, respectively. At January 31,
1998 and February 1, 1997, amounts due to FDI were $10,318,000 and $6,456,000,
respectively. The terms and conditions of the agreement with FDI are reviewed
annually by the Audit and Finance Committee of the Board of Directors.
<TABLE>
<CAPTION>
Note J: Quarterly Financial Information (Unaudited)
<S> <C> <C> <C> <C> <C>
Fiscal 1997 Quarter Ended
- -------------------------------------------------------------------------------------------------------------------------------
Thirteen Thirteen Thirteen Thirteen Fifty-two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
($000 except per share amounts) May 3, 1997 Aug. 2, 1997 Nov. 1, 1997 Jan. 31, 1998 Jan. 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $1,231,186 $1,345,221 $1,765,939 $2,165,479 $6,507,825
Gross profit 442,060 462,135 721,266 860,823 2,486,284
Net earnings 84,304 69,458 164,523 215,616 533,901
Earnings per share-basic .21 .17 .42 .55 1.35
Earnings per share-diluted .20 .17 .40 .53 1.30
- -------------------------------------------------------------------------------------------------------------------------------
Fiscal 1996 Quarter Ended
- -------------------------------------------------------------------------------------------------------------------------------
Thirteen Thirteen Thirteen Thirteen Fifty-two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
($000 except per share amounts) May 4, 1996 Aug. 3, 1996 Nov. 2, 1996 Feb. 1, 1997 Feb. 1, 1997
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $1,113,154 $1,120,335 $1,382,996 $1,667,896 $5,284,381
Gross profit 413,840 400,170 545,221 639,984 1,999,215
Net earnings 81,573 65,790 134,310 171,186 452,859
Earnings per share-basic .19 .16 .32 .42 1.09
Earnings per share-diluted .19 .15 .32 .41 1.06
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Annual Report page 37
<PAGE>
Gap Inc.
Quantitative and Qualitative Disclosures About Market Risk
The table on the right provides information about the Company's market sensitive
financial instruments as of January 31,1998 and constitutes a forward-looking
statement. The Company operates in foreign countries which exposes it to market
risk associated with foreign currency exchange rate fluctuations. The Company's
policy is to hedge substantially all merchandise purchases for foreign
operations through foreign exchange forward contracts. 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).
The Company issued unsecured notes payable with a fixed interest rate of
6.9 percent. By entering into the fixed-rate notes, the Company avoided interest
rate risk from variable rate fluctuations.
A portion of the Company's fixed-rate short-term borrowings used to
finance foreign operations are denominated in foreign currencies. By borrowing
and repaying the loans in local currencies, the Company avoided the risk
associated with exchange rate fluctuations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Notional Amount of
Average Forward Contracts Fair Value at
($000) Contract Rate(a) in U.S. Dollars Jan. 31, 1998(b)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange
forward contracts(c)
British pounds .60 $ 33,394 $ 33,269
Canadian dollars 1.40 32,984 31,757
Italian lire 1,743.25 35,924 35,383
Japanese yen 120.52 12,803 12,266
Spanish pesetas 151.98 8,125 8,112
- ------------------------------------------------------------------------------------------------------
Total foreign exchange forward contracts $123,230 $120,787
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Fixed Carrying Amount in Fair Value at
($000) Interest Rate U.S. Dollars Jan. 31, 1998(d)
- ------------------------------------------------------------------------------------------------------
Notes payable(e) 6.9% $496,044 $526,128
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Currency per U.S. dollar.
(b) Calculated using spot rates at January 31, 1998.
(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 January 31, 1998.
(e) Principal amount $500 million due September 15, 2007.
1997 Annual Report page 38
<PAGE>
EXHIBIT 21
List of Subsidiaries
Banana Republic (Apparel) Inc. California
Banana Republic (California) LLC Delaware
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 (Merchandise) Inc. California
Banana Republic (New York) LLC Delaware
Banana Republic Limited England and Wales
Banana Republic Stores Pty. Ltd. New South Wales,
Australia
Banana Republic, Inc. California
Banana Republic, Inc. Delaware
GPS (Bermuda) Limited Bermuda
GPS (Delaware), Inc. Delaware
GPS (Great Britain) Limited England and Wales
GPS (International Investments) B.V. Amsterdam, The
Netherlands
GPS (Japan), Limited Delaware
GPS (Maryland), Inc. Maryland
GPS (Puerto Rico) Limited California
GPS (UK) Limited California
GPS (USA) Limited California
GPS Catalog, Inc. California
GPS Employee Services, Inc. California
GPS Limited California
GPS Management Services, Inc. California
GPS Realty Company Inc. Delaware
Gap (Apparel), Inc. California
Gap (Canada) Inc. Canada
Gap (Deutschland) GmbH Dusseldorf, Germany
Gap (ESO) Limited England and Wales
Gap (Florida) LLC California
Gap (France) SAS Paris, France
Gap (Georgia) LP California
Gap (ITM) Inc. California
Gap (Indiana) LP California
Gap (Ireland) Limited Dublin, Ireland
Gap (Japan) K.K. Tokyo, Japan
Gap (Kentucky) LP California
Gap (Merchandise), Inc. California
Gap (Netherlands) B.V. Amsterdam, The
Netherlands
<PAGE>
Gap (Puerto Rico), Inc. Puerto Rico
Gap (RHC) B.V. Amsterdam, The
Netherlands
Gap (Tennessee) LP California
Gap (Texas) LP California
Gap (Wisconsin) LP California
Gap Holdings, Inc. 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 Limited Hong Kong
Gap International Sourcing Pte. Ltd. Singapore
Gap International Sourcing, Inc. California
Gap International, Inc. California
Gap Online, Inc. California
Goldhawk B.V. Amsterdam, The
Netherlands
Old Navy (Apparel) Inc. California
Old Navy (California) LLC Delaware
Old Navy (East) L.P. California
Old Navy (Florida) LLC California
Old Navy (Holdings) Inc. California
Old Navy (ITM) Inc. California
Old Navy (Merchandise) 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 (H.K.) Limited Hong Kong
The Gap Limited England and Wales
<PAGE>
EXHIBIT 23
DELOITTE &
TOUCHE LLP
50 Fremont Street Telephone:(415)247-4000
San Francisco, California 94105-2230 Facsimile:(415)247-4329
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 2-
72586, Registration Statement No. 2-60029, Registration Statement No. 33-39089,
Registration Statement No. 33-40505, Registration Statement No. 33-54686,
Registration Statement No. 33-54688, Registration Statement No. 33-54690,
Registration Statement No. 33-56021, Registration Statement No. 333-00417,
Registration Statement No. 333-12337, and Registration Statement No. 333-36265
of The Gap, Inc. all on Form S-8 of our report dated February 27, 1998,
incorporated by reference in the Annual Report on Form 10-K of The Gap, Inc. for
the fiscal year ended January 31, 1998.
/s/ Deloitte & Touche LLP
San Francisco, California
April 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 913,169
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 733,174
<CURRENT-ASSETS> 1,830,947
<PP&E> 2,303,959
<DEPRECIATION> 938,713
<TOTAL-ASSETS> 3,337,502
<CURRENT-LIABILITIES> 991,548
<BONDS> 0
0
0
<COMMON> 21,996
<OTHER-SE> 1,561,990
<TOTAL-LIABILITY-AND-EQUITY> 3,337,502
<SALES> 6,507,825
<TOTAL-REVENUES> 6,507,825
<CGS> 4,021,541
<TOTAL-COSTS> 1,635,017
<OTHER-EXPENSES> (2,975)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 854,242
<INCOME-TAX> 320,341
<INCOME-CONTINUING> 533,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 533,901
<EPS-PRIMARY> 1.35<F1>
<EPS-DILUTED> 1.30<F2>
<FN>
<F1> EPS-PRIMARY amount presented is the EPS-basic amount calculated as defined
by SFAS No. 128.
<F2> EPS-DILUTED amount presented is the EPS-diluted amount calculated as
defined by SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS YEAR
<FISCAL-YEAR-END> FEB-01-1997 FEB-01-1997 FEB-01-1997 FEB-01-1997
<PERIOD-START> FEB-04-1996 MAY-05-1996 AUG-04-1996 FEB-04-1996
<PERIOD-END> MAY-04-1996 AUG-03-1996 NOV-02-1996 FEB-01-1997
<CASH> 552,729 514,213 477,272 485,644
<SECURITIES> 79,819 74,061 109,340 135,632
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 489,719 573,080 711,934 578,765
<CURRENT-ASSETS> 1,269,058 1,303,903 1,438,579 1,329,255
<PP&E> 1,626,967 1,705,498 1,787,490 1,898,613
<DEPRECIATION> 645,956 686,769 719,883 762,893
<TOTAL-ASSETS> 2,373,314 2,459,300 2,628,156 2,626,927
<CURRENT-LIABILITIES> 486,853 641,496 819,218 774,896
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 23,767 23,798 23,814 23,840
<OTHER-SE> 1,705,830 1,627,611 1,608,412 1,630,630
<TOTAL-LIABILITY-AND-EQUITY> 2,373,314 2,459,300 2,628,156 2,626,927
<SALES> 1,113,154 1,120,335 1,382,996 5,284,381
<TOTAL-REVENUES> 1,113,154 1,120,335 1,382,996 5,284,381
<CGS> 699,314 720,165 837,775 3,285,166
<TOTAL-COSTS> 282,627 295,381 328,434 1,270,138
<OTHER-EXPENSES> (3,618) (3,956) (5,213) (19,450)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 134,831 108,745 222,000 748,527
<INCOME-TAX> 53,258 42,955 87,690 295,668
<INCOME-CONTINUING> 81,573 65,790 134,310 452,859
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 81,573 65,790 134,310 452,859
<EPS-PRIMARY> 0.19 0.16 0.32 1.09<F1>
<EPS-DILUTED> 0.19 0.15 0.32 1.06<F2>
<FN>
<F1> EPS-PRIMARY amounts presented are the EPS-basic amounts calculated as
defined by SFAS No. 128.
<F2> EPS-DILUTED amounts presented are the EPS-diluted amounts calculated as
defined by SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-START> FEB-02-1997 MAY-04-1997 AUG-03-1997
<PERIOD-END> MAY-03-1997 AUG-02-1997 NOV-01-1997
<CASH> 244,643 220,148 627,760
<SECURITIES> 112,268 37,454 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 628,693 791,925 980,531
<CURRENT-ASSETS> 1,136,736 1,201,089 1,762,961
<PP&E> 1,980,305 2,083,432 2,216,708
<DEPRECIATION> 806,302 849,048 897,246
<TOTAL-ASSETS> 2,502,415 2,576,749 3,225,076
<CURRENT-LIABILITIES> 663,800 782,515 1,007,122
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 23,892 23,892 23,907
<OTHER-SE> 1,594,750 1,536,069 1,448,955
<TOTAL-LIABILITY-AND-EQUITY> 2,502,415 2,576,749 3,225,076
<SALES> 1,231,186 1,345,221 1,765,939
<TOTAL-REVENUES> 1,231,186 1,345,221 1,765,939
<CGS> 789,126 883,086 1,044,673
<TOTAL-COSTS> 311,911 352,462 453,977
<OTHER-EXPENSES> (4,738) (1,459) 4,052
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 134,887 111,132 263,237
<INCOME-TAX> 50,583 41,674 98,714
<INCOME-CONTINUING> 84,304 69,458 164,523
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 84,304 69,458 164,523
<EPS-PRIMARY> 0.21 0.17 0.42<F1>
<EPS-DILUTED> 0.20 0.17 0.40<F2>
<FN>
<F1> EPS-PRIMARY amounts presented are the EPS-basic amounts calculated as
defined by SFAS No. 128.
<F2> EPS-DILUTED amounts presented are the EPS-diluted amounts calculated as
defined by SFAS No. 128.
</FN>
</TABLE>
