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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 30, 1999 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 12, 1999 was approximately $24,332,000,000 based upon
the last price reported for such date in the NYSE-Composite transactions.
The number of shares of the registrant's Common Stock outstanding as of
March 15, 1999 was 572,932,578.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 4, 1999 (hereinafter referred to as the "1999
Proxy Statement") are incorporated into Parts I and III.
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended January 30, 1999 (hereinafter referred to as the "1998 Annual Report
to Shareholders") are incorporated into Parts II and IV.
The Exhibit Index is located on Page 13 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
and the Company's future results of operations could differ materially from
historical results or current expectations. Some of these risks are discussed
in Item 1 of this report below, and include, without limitation, ongoing
competitive pressures in the apparel industry, risks associated with challenging
international retail environments, changes in the level of consumer spending or
preferences in apparel, trade restrictions and political or financial
instability in countries where the Company's goods are manufactured, disruption
to operations from Year 2000 issues and/or other factors that may be described
in the Company's filings with the Securities and Exchange Commission. Future
economic and industry trends that could potentially impact revenue and
profitability are difficult to predict.
The Company 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 a global
specialty retailer which operates stores selling casual apparel, personal care
and other accessories for men, women and children under the Gap, Banana Republic
and Old Navy brands. As of February 27, 1999, the Company operated 2,448 stores
in the United States, Canada, the United Kingdom, France, Germany and Japan.
The Company designs virtually all of its products, which in turn are
manufactured by independent sources, and sells them under its brands in the
following store formats:
Gap, 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. The Company entered the children's apparel market
with the introduction of GapKids in 1986 and babyGap in 1989. These stores
offer casual basics, outerwear, shoes and other accessories in the
tradition of Gap style and quality for children aged newborn through teen.
As of February 27, 1999, the Company operated a total of 1,749 Gap brand
stores which include: 1,109 Gap stores and 640 GapKids stores. The Gap
brand stores include 165 Gap stores and 133 GapKids stores 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.
Banana Republic products range from clothing, including intimate apparel,
to personal care products and home products. As of February 27, 1999, the
Company operated 292 Banana Republic stores, including 10 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, as well as
other items including personal care products, in an innovative, exciting
shopping environment. As of February 27, 1999, the Company operated 407 Old
Navy stores .
The Company established "Gap Online" in 1997, a web-based store located at
www.gap.com. GapKids and babyGap web-based stores were established in 1998.
Products from Gap, GapKids and babyGap stores can be
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purchased online. In 1998, Banana Republic introduced a catalog format, which
offers clothing and accessories comparable to those carried in its store
collections, and is aimed at developing a closer relationship with its customer
base.
During fiscal 1998, the Company continued to focus on developing and
growing its brands and believes that its brands are among its most important
assets. The Company is taking action to maintain and strengthen brand loyalty,
including significantly increasing its investment in advertising and marketing.
The Company continues to add flagship stores and increase television advertising
to complement its in-store customer service focus. The Company also continues to
invest in store expansion as well as development of new distribution channels to
address changing market requirements. Its new channels of distribution include
Gap Online and a catalog for Banana Republic. The Company has limited operating
history in these 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 was incorporated in the State of California in July 1969 and
was reincorporated under the laws of the State of Delaware in May 1988.
Year 2000 Issue
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The Year 2000 issue is primarily the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such
computer systems will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to a disruption
in the operation of such systems. In 1996, the Company established a project
team to coordinate existing Year 2000 activities and address remaining Year 2000
issues. The team has focused its efforts on three areas: (1) information
systems software and hardware; (2) facilities and distribution equipment; and
(3) third-party relationships.
The Program. The Company has adopted a five-phase Year 2000 program
consisting of: Phase I--identification and ranking of the components of the
Company's systems, equipment and suppliers that may be vulnerable to Year 2000
problems; Phase II--assessment of items identified in Phase I; Phase III--
remediation or replacement of non-compliant systems and components and
determination of solutions for non-compliant suppliers; Phase IV--testing of
systems and components following remediation; and Phase V--developing
contingency plans to address the most reasonably likely worst case Year 2000
scenarios. The Company has completed Phases I and II and continues to make
progress according to plan on Phases III, IV and V.
Information Systems Software and Hardware. The Company has completed Phase
II and has made substantial progress on Phase III. Phase IV testing is being
conducted concurrently with Phase III activities. Management believes that the
Company is on track to complete remediation, testing and implementation of its
individual information systems by mid-1999. Phase V contingency planning has
begun and is expected to be complete by the end of the third quarter of 1999.
Facilities and Distribution Equipment. The Company has completed Phase II
and is actively working on Phase III. Phase IV testing and Phase V contingency
planning are scheduled to begin in the first quarter of 1999.
Third-Party Relationships. The Company has completed Phase II and is
actively working on Phase III. Phase IV certification and Phase V contingency
planning are expected to begin in the first quarter of 1999.
Risks / Contingency Plans. Based on the assessment efforts to date, the
Company does not believe that the Year 2000 issue will have a material adverse
effect on its financial condition or results of operations. The Company
operates a large number of geographically dispersed stores and has a large
supplier base and believes that these factors will mitigate any adverse impact.
The Company's beliefs and expectations, however, are based on certain
assumptions and expectations that ultimately may prove to be inaccurate.
The Company has identified that a significant disruption in the product
supply chain represents the most reasonably likely worst case Year 2000
scenario. Potential sources of risk include (a) the inability of principal
suppliers or logistics providers to be Year 2000 ready, which could result in
delays in product deliveries from such
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suppliers or logistics providers, and (b) disruption of the distribution
channel, including ports, transportation vendors, and the Company's own
distribution centers as a result of a general failure of systems and necessary
infrastructure such as electricity supply. The Company is preparing plans to
flow inventory around an assumed period of disruption to the supply chain, which
could include accelerating selected critical products to reduce the impact of
significant failure.
The Company does not expect the costs associated with its Year 2000 efforts
to be substantial. Approximately $30 million has been budgeted to address the
Year 2000 issue, of which $16.5 million has been expensed through January 30,
1999. The Company's aggregate estimate does not include time and costs that may
be incurred by the Company as a result of the failure of any third parties,
including suppliers, to become Year 2000-ready or costs to implement any
contingency plans.
Merchandise Inventory, Replenishment and Distribution
- - -----------------------------------------------------
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 business requires the Company to carry a significant amount of inventory,
especially prior to peak selling seasons when the Company and other retailers
generally build up their inventory levels. The Company must enter into
contracts for the purchase and manufacture of apparel well in advance of the
applicable selling season. As a result, the Company is vulnerable to demand and
pricing shifts and to suboptimal selection and timing of merchandise purchases.
The Company reviews its inventory levels in order to identify slow-moving
merchandise and broken assortments (items no longer in stock in a sufficient
range of sizes) and uses markdowns to clear merchandise. Markdowns may be used
if inventory exceeds customer demand for reasons of style, seasonal adaptation,
changes in customer preference or lack of consumer acceptance of fashion items,
or if it is determined that the inventory in stock will not sell at its
currently marked price. Such markdowns may have an adverse impact on earnings,
depending on the extent of the markdowns and amount of inventory affected.
Because the Company does not carry much replenishment inventory in its
stores, such inventory is maintained in the Company's distribution centers in
California, Kentucky, Maryland, Ohio, Tennessee, Canada and The Netherlands, and
in distribution centers operated by third parties in Japan and England, 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 emphasize style, quality and
good value. The range of apparel displayed in each store varies significantly
depending on the selling season and the size and location of the store.
The Company's stores generally are open seven days per week (where
permitted by law), three to six nights per week and most holidays. All sales are
tendered for cash, personal checks or credit cards issued by others, including a
Banana Republic private label credit card.
The Company's continued success depends, in part, upon its ability to
increase sales at existing store locations, to open new stores and to operate
stores on a profitable basis. There can be no assurance that the Company's
growth will result in enhanced profitability or that it will continue at the
same rate in future years.
In early 1998, the Company began a process to integrate the Gap and GapKids
field organizations to achieve a singular brand focus. This process of
integration allowed Gap and GapKids to think and act as a single brand which
allowed the Company to better serve its customers, work more closely with the
community, and take full advantage of real estate opportunities. To date,
integration has been successful and has allowed the Company to gain efficiencies
in staffing and training. As the Company continues the process of integration a
number of risks exist, including possible employee concerns with changes in job
scope or supervisor assignments and diversion of management's attention from
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other business matters. The Company continues to implement integration in a
phased approach that accommodates employee training and provides time for
supervisors to become confident and competent in the new environment.
International Expansion
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The Company continued to expand internationally in fiscal 1998. It is faced
with competition in European and Japanese markets from established regional and
national chains. If international expansion is not successful, the Company's
results of operations could be adversely affected. The Company's ability to grow
successfully in the continental European markets will depend in part on
determining a sustainable profit formula to build brand loyalty and gain market
share in the especially challenging retail environments of France and Germany.
Certain financial information about international operations is set forth
in Note A to Notes to Consolidated Financial Statements, incorporated by
reference in Item 8 Financial Statements and Supplementary Data.
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 1998 purchases. Of the Company's merchandise sold during fiscal
1998 approximately 20% of all units (representing approximately 12% of total
cost) were produced domestically while the remaining 80% of all units (88% of
cost) were made outside the United States. Approximately 6% of the Company's
total merchandise units (representing 11% of cost) was from Hong Kong, with the
remainder coming from 54 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 U.S. or foreign governments, including
the likelihood, type or effect of any such restrictions. Trade restrictions,
including increased tariffs or quotas, or both, against apparel items could
increase the cost or reduce the supply of apparel available to the Company and
adversely affect the Company's business, financial condition and results of
operations. The Company pursues a diversified global sourcing strategy which
includes relationships with vendors in over 50 countries. These sourcing
operations may be adversely affected by political and financial instability
resulting in the disruption of trade from exporting countries, significant
fluctuation in the value of the U.S. dollar against foreign currencies,
restrictions on the transfer of funds and/or other trade disruptions. The
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 an 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.
Seasonal Business
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The Company's business follows a seasonal pattern, peaking over a total of
about 10 to 13 weeks during the Back-to-School (mid-August through early
September) and Holiday (November through December) periods. During fiscal year
1998, these periods accounted for approximately 37% of the Company's annual
sales.
Competition
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The Company's business is highly competitive. The Company competes with
national and local department, specialty and discount store chains, independent
retail stores and internet and catalog businesses which handle similar lines of
merchandise. Some competitors have more resources than the Company.
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
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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.
The performance of the Company in recent years has increased the amount of
imitation by other retailers. Such imitation has made and will continue to make
the retail environment in which the Company operates more competitive. In
addition, the success of the Company's operations depends upon a number of
factors relating to consumer spending, including future economic conditions
affecting disposable consumer income such as employment, business conditions,
interest rates and taxation. A decline in consumer spending on apparel could
have a material adverse effect on the Company's net sales and profitability.
Advertising
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In fiscal 1998, the Company significantly increased its investment in
advertising and marketing. 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. The Company continues to run
TV ads for all of its brands and radio ads for Old Navy. The Company plans to
continue increasing its investments in advertising and marketing in 1999. There
can be no assurances that these increased investments will result in increased
sales or profitability.
Employees
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On January 30, 1999, the Company had a work force of approximately 111,000
employees. In addition 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 Gap, GapKids, babyGap, Banana Republic and Old Navy trademarks and
service marks, and certain other trademarks, either have been registered, or are
the subject of pending trademark applications, with the United States Patent and
Trademark Office and with the registries of many foreign countries.
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 for each of them is set forth in the table
located in the section entitled "Nominees for Election as Directors" of the 1999
Proxy Statement and is incorporated by reference herein. The following are also
executive officers of the Company:
Name, Age, Position and Principal Occupation During Past Five Years:
Charles K. Crovitz, 45, Executive Vice President, Supply Chain and
Technology since September 1998; Senior Vice President of Strategy,
Logistics and Information Systems from March 1998 to September 1998; Senior
Vice President of Strategic Planning and Business Development from 1993 to
March 1998. Joined the Company in 1993.
Anne B. Gust, 41, Executive Vice President, Human Resources, Legal and
Corporate Administration since September 1998; Senior Vice President and
General Counsel from April 1994 to September 1998; Vice President - General
Counsel, 1993-94. Joined the Company in 1991.
Warren R. Hashagen, 48, Senior Vice President, Finance and Chief Financial
Officer since November 1995; Senior Vice President, Finance, 1992-95.
Joined the Company in 1982.
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John B. Wilson, 39, Chief Operating Officer since March 1998; Executive
Vice President and Chief Administrative Officer from October 1996 to March
1998. Executive Vice President, Finance and Strategy and Chief Financial
Officer of Staples, Inc., 1992-96.
Item 2 - Properties
During fiscal year 1998, the Company opened 318 stores and closed 20. The
newly-opened stores include 102 Gap stores (including 27 international
locations), 65 GapKids and babyGap stores (including 23 international
locations), 33 Banana Republic stores (including 1 in Canada) and 118 Old Navy
stores. In addition, during fiscal 1998, the Company expanded 135 stores. The
expanded stores include 91 Gap stores, 17 GapKids stores, 23 Banana Republic
stores and 4 Old Navy stores. The 2,428 stores operating as of January 30, 1999
aggregated approximately 19 million square feet. The Company leases virtually
all of its store premises. Terms generally range from four to five years with
options to renew, or eight to ten years with options to renew and rights to
terminate 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 its regional offices and much of its
headquarters office space, including approximately 540,000 square feet in three
buildings in San Francisco, California, 265,000 square feet in three buildings
in San Bruno, California (near the San Francisco Airport), and 240,000 square
feet in a building in New York City. The Company also leases its Eastern
Distribution Center/Kentucky Distribution Center complex (EDC/KDC) and certain
other distribution facilities. The EDC/KDC facilities in Erlanger, Kentucky
(near Cincinnati) consist of approximately 725,000 square feet. Nearby Northern
Kentucky facilities include an approximately 325,000 square foot warehouse for
consolidation/deconsolidation purposes, an approximately 520,000 square foot
warehouse for distribution purposes, and an approximately 175,000 square foot
warehouse for supply purposes. The Company also leases a warehouse/call center
of approximately 90,000 square feet in Grove City, Ohio (near Columbus), which
presently services the Banana Republic catalog; this facility is expected to be
expanded to a total of approximately 270,000 square feet by mid-1999 to service
other aspects of the Company's direct-to-consumer business (such as Gap Online).
The Company leases its Japan Distribution Center (JDC), approximately 65,000
square feet, in Funabashi City, Chiba, Japan. The JDC is operated by a third
party. During the fourth quarter of 1998, the Company entered into a lease for
an approximately 156,000 square foot warehouse in Essex, England for supply and
distribution purposes.
The Company owns an office facility in San Bruno of approximately 190,000
square feet and nearby land at that site which potentially could accommodate up
to an additional 760,000 square feet, and also owns an office/computer facility
of approximately 40,000 square feet in Rocklin, California (near Sacramento).
The Company currently is in the process of developing an office building of
approximately 540,000 square feet near its existing leased facilities in San
Francisco, and an office building of approximately 260,000 square feet near its
existing leased and owned facilities in San Bruno.
The Company owns the following distribution facilities:
<TABLE>
<CAPTION>
Title Location Square Footage (Approximate)
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<S> <C> <C>
Western Distribution Center (WDC) Ventura, California 225,000 square feet
- - ----------------------------------------------------------------------------------------------------------------
Atlantic Distribution Center (ADC) Edgewood, Maryland 600,000 square feet
- - ----------------------------------------------------------------------------------------------------------------
Southern Distribution Center (SDC) Gallatin, Tennessee 1,030,000 square feet
- - ----------------------------------------------------------------------------------------------------------------
Pacific Distribution Center (PDC) Fresno, California 530,000 square feet
(Under Construction)
- - ----------------------------------------------------------------------------------------------------------------
Old Navy East Distribution Center (ODC) Fishkill, New York 1,400,000 square feet
(Planned Construction)
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Canadian Distribution Center (CDC) Brampton, Ontario 325,000 square feet
- - ----------------------------------------------------------------------------------------------------------------
Holland Distribution Center (HDC) Roosendaal, The Netherlands 130,000 square feet
</TABLE>
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The WDC, ADC and SDC sites have additional land available for expansion or for
additional facilities, and the Company presently is constructing a new
approximately 555,000 square foot consolidation/deconsolidation facility and a
new approximately 655,000 square foot distribution facility at the SDC Gallatin
campus.
Item 3 - Legal Proceedings
The Company has been named as a defendant in two lawsuits relating to
sourcing of products from Saipan (Commonwealth of the Northern Mariana Islands).
A complaint was filed on January 13, 1999 in California Superior Court in San
Francisco by the Union of Needletrades Industrial and Textile Employees, AFL-
CIO; Global Exchange; Sweatshop Watch; and Asian Law Caucus against the Company
and 17 other parties. The plaintiffs allege violations of California's unlawful,
fraudulent and unfair business practices and untrue and misleading advertising
statutes in connection with labeling of product and labor practices regarding
workers of factories that make product for the Company in Saipan. The plaintiffs
seek injunctive relief, restitution, disgorgement of profits and other damages.
On March 29, 1999, the Company, along with other defendants, filed a demurrer in
California Superior Court in San Francisco, seeking dismissal of the complaint.
A second complaint was filed on January 13, 1999 in Federal District
Court, Central District of California, by various unidentified worker plaintiffs
against the Company and 25 other parties. Those unidentified worker plaintiffs
seek class-action status and allege, among other things, that the Company (and
other defendants) violated the Racketeer Influenced and Corrupt Organizations
Act in connection with the labor practices and treatment of workers of
factories in Saipan that make product for the Company. The plaintiffs seek
injunctive relief as well as actual and punitive damages. On March 29, 1999, the
Company, along with several other defendants, filed a motion in Federal District
Court, Central District of California, to transfer the venue of the case to the
Commonwealth of the Northern Mariana Islands.
The Company also is a party to routine litigation incidental 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 27 of the 1998 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 22 and 23 of the 1998 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 24-27 of the 1998 Annual Report to Shareholders included as
Exhibit 13 to this Annual Report on Form 10-K.
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Item 7A - Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is incorporated herein by
reference to page 41 of the 1998 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 28-40 of the 1998 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.
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 1999 Proxy
Statement. See also Item 1 above in the section entitled "Executive Officers of
the Registrant."
Item 11 - Executive Compensation
The information required by this item is incorporated herein by
reference to the sections entitled "Compensation of Directors," "Summary of
Executive Compensation," "Stock Options," "Employment Contracts," and
"Compensation Committee Interlocks and Insider Participation" in the 1999 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 1999
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 1999
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.
(1) Financial Statements
--------------------
(i) Independent Auditors' Report. Incorporated by
reference to page 28 of the 1998 Annual Report to
Shareholders included as Exhibit 13 to this Annual
Report on Form 10-K.
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(ii) The consolidated balance sheets as of January 30,
1999 and January 31, 1998 and the related
consolidated statements of earnings, shareholders'
equity, cash flows, and notes thereto for each of
the three fiscal years in the period ended January
30, 1999 are incorporated by reference to pages 29-
40 of the 1998 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
--------
Incorporated herein by reference is a list of the Exhibits
contained in the Exhibit Index which begins on sequentially
numbered page 13 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
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE GAP, INC.
Date: March 30, 1999 By /s/ MILLARD S. DREXLER
----------------------
Millard S. Drexler,
Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 1999 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: March 30, 1999 By /s/ ADRIAN D.P. BELLAMY
------------------------------
Adrian D. P. Bellamy, Director
Date: March 30, 1999 By /s/ MILLARD S. DREXLER
----------------------------
Millard S. Drexler, Director
Date: March 30, 1999 By /s/ DONALD G. FISHER
--------------------------
Donald G. Fisher, Director
Date: March 30, 1999 By /s/ DORIS F. FISHER
-------------------------
Doris F. Fisher, Director
Date: March 30, 1999 By /s/ ROBERT J. FISHER
--------------------------
Robert J. Fisher, Director
11
<PAGE>
SIGNATURES (con't.)
-------------------
Date: March 30, 1999 By /s/ JOHN M. LILLIE
------------------------
John M. Lillie, Director
Date: March 30, 1999 By /s/ CHARLES R. SCHWAB
---------------------------
Charles R. Schwab, Director
Date: March 30, 1999 By /s/ BROOKS WALKER, JR.
----------------------------
Brooks Walker, Jr., Director
Date: March 30, 1999 By /s/ SERGIO S. ZYMAN
-------------------------
Sergio S. Zyman, Director
Date: March 30, 1999 By /s/ EVAN S. DOBELLE
-------------------------
Evan S. Dobelle, Director
Date: March 30, 1999 By /s/ GLENDA A. HATCHETT
----------------------
Glenda A. Hatchett
12
<PAGE>
Exhibit Index
<TABLE>
<S> <C>
3.1 Registrant's Amended and Restated Certificate of Incorporation, filed as
Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended
January 30, 1993, Commission File No. 1-7562.
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation filed as Exhibit 3 to
Registrant's Form 10-Q for the quarter ended May 2, 1998, Commission File No. 1-7562
3.3 Registrant's By-Laws, filed as Exhibit C to Registrant's definitive proxy statement for its annual
meeting of stockholders held on May 24, 1988, Commission File No. 1-7562
3.4 Amended Article IV of Registrant's By-Laws, filed as Exhibit 4.4 to Registrant's Registration
Statement on Form S-8, Commission File No. 333-00417
4 Indenture, dated September 1, 1997, between the Registrant and Harris Trust Company of California
filed as Exhibit 4 to Registrant's Form 10-Q for the quarter ended November 1, 1997, Commission File
No. 1-7562
10.1 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 First Letter Amendment dated June 30, 1998 to the Credit Agreement dated July 1, 1997.
10.3 Credit Agreement dated as of July 1, 1997 between the Registrant; Citicorp USA Inc.; Bank Of America
National; Trust & Savings Association; The Hongkong and Shanghai Banking Corporation Limited;
Nationsbank Of Texas, N.A.; The Royal Bank Of Canada; Bank Of Montreal; Societe Generale; The Fuji
Bank, Limited; Morgan Guaranty Trust Company Of New York; The Sumitomo Bank Limited; Deutsche Bank
AG New York Branch and/or Cayman Islands Branch; Union Bank of Switzerland, New York Branch; U.S.
National Bank of Oregon; and Citibank, N.A. filed as Exhibit 10.4 to Registrant's Form 10-Q for the
quarter ended August 2, 1997, Commission File No. 1-7562
10.4 First Letter Amendment dated June 30, 1998 to the Credit Agreement
dated July 1, 1997
</TABLE>
<PAGE>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
<TABLE>
<S> <C>
10.5 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8,
Commission File No. 33-54690
10.6 Management Incentive Restricted Stock Plan II, filed as exhibit 4.1 to Registrant's Registration
Statement on Form S-8, Commission File No. 33-54686
10.7 Description of Management Incentive Cash Award Plan filed as Exhibit 10.34 to Registrant's Annual
Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562
10.8 Executive Management Incentive Cash Award Plan (March 21, 1995 Amendment and Restatement), filed as
Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held
on May 23, 1995, Commission File No. 1-7562
10.9 The Gap, Inc. Executive Deferred Compensation Plan, filed as Exhibit 10.3 to Registrant's Form 10-Q
for the quarter ended October 31, 1998, Commission File No.1-7562
10.10 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
10.11 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
10.12 Amendment Number 2 to the Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.15 to
Registrant's Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562
10.13 Amendment Number 3 to the Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.14 Form of Nonqualified Stock Option Agreement for employees under Registrant's 1996 Stock Option and
Award Plan filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended August 2, 1997,
Commission File No. 1-7562
10.15 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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.16 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
10.17 Form of Nonqualified Stock Option Agreement for consultants under Registrant's 1996 Stock Option and
Award Plan filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended October 31, 1998,
Commission File No. 1-7562
10.18 Form of Nonqualified Stock Option Agreement for employees in France under Registrant's 1996 Stock
Option and Award Plan filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended October
31, 1998, Commission File No. 1-7562
10.19 Form of Nonqualified Stock Option Agreement for international employees under Registrant's 1996
Stock Option and Award Plan filed as Exhibit 10.6 to Registrant's Form 10-Q for the quarter ended
October 31, 1998, Commission File No. 1-7562
10.20 Form of Nonqualified Stock Option Agreement for employees in Japan under Registrant's 1996 Stock
Option and Award Plan filed as Exhibit 10.7 to Registrant's Form 10-Q for the quarter ended October
31, 1998, Commission File No. 1-7562
10.21 Form of stock option agreement for employees under the UK Sub-plan to the U.S. Stock Option and
Award Plan filed as Exhibit 10.8 to Registrant's Form 10-Q for the quarter ended October 31, 1998,
Commission File No. 1-7562
10.22 Executive Long-Term Cash Award Performance Plan (January 26, 1999 Restatement), filed as Exhibit B
to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 4,
1999, Commission File No. 1-7562
10.23 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
10.24 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
10.25 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
10.26 First Amendment to Restricted Stock Award Agreement, dated October 23, 1992, between Registrant and
Millard Drexler, filed as Exhibit 10.42 to Registrant's
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Annual Report on Form 10-K for the year ended January 30, 1993,
Commission File No. 1-7562
10.27 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
10.28 Statement Regarding Non-Employee Director Retirement Plan filed as Exhibit 10.25 to Registrant's
Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562
10.29 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
10.30 Amendment Number 1 to the Registrant's Nonemployee Director Deferred Compensation Plan filed as
Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No.
1-7562
10.31 Form of Discounted Stock Option Agreement under the Nonemployee Director Deferred Compensation Plan,
filed as Exhibit 4.5 to Registrant's Registration Statement on Form S-8, Commission File No.
333-36265
10.32 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
10.33 Income continuation protection arrangement, dated December 21, 1998, between Registrant and John B.
Wilson
13 Portions of Registrant's annual report to security holders for the fiscal year ended January 30, 1999
21 Subsidiaries of Registrant
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule for the year ended January 30, 1999
</TABLE>
<PAGE>
EXHIBIT 10.2
FIRST LETTER AMENDMENT
June 30, 1998
To the Financial Institutions
parties as A Lenders
to the Credit Agreement
referred to below
Gentlemen:
We refer to the U.S. $800,000,000 Credit Agreement dated as of July 1,
1997 (the "Credit Agreement") among the undersigned, certain of our subsidiaries
parties thereto as LC Subsidiaries, you, Citibank, N.A., as Issuing Bank and
Citicorp USA Inc., as Agent. Unless otherwise defined herein, the terms defined
in the Credit Agreement shall be used herein as therein defined.
It is hereby agreed by you and us that the Credit Agreement is,
effective as of the date first above written, hereby amended as follows:
(a) The definition of "A Commitment" in Section 1.01 is amended in
------------
full to read as follows:
"`A Commitment' means, as to each A Lender, the amount set forth
------------
opposite such A Lender's name on Schedule I to the First Letter
Amendment under the caption A Commitment or, if such A Lender has
------------
entered into one or more Assignment and Acceptances, the amount
set forth for such A Lender with respect thereto in the Register
maintained by the Agent pursuant to Section 10.07 hereof, in each
case as such amount may be reduced or increased pursuant to
Section 2.05."
(b) The definition of "Eurodollar Rate Margin" in Section 1.01 is
----------------------
amended by deleting the number "0.165%" therein and substituting for such
number the number "0.175%".
(c) The definition of "LC Commitment" in Section 1.01 is amended in
-------------
full to read as follows:
"`LC Commitment' means, as to any LC Lender, the amount set forth
-------------
opposite such LC Lender's name on Schedule I to the First Letter
Amendment under the caption LC Commitment or, if such LC Lender
-------------
has entered into one or more Assignment and Acceptances, the
amount set forth for such LC Lender with respect thereto in the
Register maintained by the Agent pursuant to Section 10.07
hereof, in each case
<PAGE>
2
as such amount may be reduced or increased from time to time
pursuant to Section 3.09."
(d) The definition of "LC Termination Date" in Section 1.01 is amended
-------------------
by deleting the date "June 30, 1998" therein and substituting for such date
the date "June 29, 1999"
(e) The definition of "Revolver Termination Date" in Section 1.01 is
-------------------------
amended by deleting the date "June 30, 1998" therein and substituting for
such date the date "June 29, 1999."
(f) A definition of First Letter Amendment is added in Section 1.01 in
----------------------
the appropriate alphabetical order to read as follows:
"`First Letter Amendment' means the First Letter Amendment dated
----------------------
June 30, 1998 to this Agreement."
(g) Section 2.04(a) is amended by deleting the number "0.06%" therein
and substituting for such number the number "0.05%".
By executing this Amendment, each of the undersigned and each of you
agree that ABN AMRO Bank N.V. is a Lender for all purposes of the Credit
Agreement and its A Commitment and LC Commitment are the respective amounts set
forth opposite its name on Schedule I hereto.
On and after the effective date of this letter amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement as amended by this letter amendment. The
Credit Agreement, as amended by this letter amendment, is and shall continue to
be in full force and effect and is hereby in all respects ratified and
confirmed.
If you agree to the terms and provisions hereof, please evidence such
agreement by executing and returning five signature pages of this letter
amendment to Shearman & Sterling, 555 California Street, San Francisco,
California 94104, Attention: Steven Sherman. This letter amendment shall become
effective as of the date first above written when and if on or before June 30,
1998 counterparts of this letter amendment shall have been executed by us and
all of the A Lenders. This letter amendment is subject to the provisions of
Section 10.01 covering amendments, etc. of the Credit Agreement.
<PAGE>
3
This letter amendment may be executed in any number of counterparts
and by any combination of the parties hereto in separate counterparts, each of
which counterparts shall be an original and all of which taken together shall
constitute one and the same letter amendment.
Very truly yours,
THE BORROWER
THE GAP, INC.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
THE LC SUBSIDIARIES
BANANA REPUBLIC, INC.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
GPS (U.S.A.) LIMITED
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
GAP (CANADA) INC.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
GAP INTERNATIONAL SOURCING LIMITED
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
<PAGE>
4
GAP INTERNATIONAL SOURCING
PTE. LTD.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
GAP (JAPAN) K.K.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
GAP INTERNATIONAL SOURCING (HOLDING) LIMITED
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
GAP (NETHERLANDS) B.V.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
OLD NAVY INC.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
GPS CATALOG, INC.
By /s/ Warren R. Hashagen
-----------------------------
Name:
Title:
<PAGE>
5
Agreed as of the date first above written:
CITICORP USA INC., as a Bank
and as Agent
By /s/ Carolyn A. Wendler
---------------------------
Name: Carolyn A. Wendler
Title: Managing Director
CITIBANK N.A., as Issuing Bank
By
---------------------------
Name: Marjorie Futornick
Title: Vice President
<PAGE>
6
BANK OF AMERICA NATIONAL
TRUST & SAVINGS ASSOCIATION, as
a Bank and as Senior Managing Agent
By /s/ Maria Vickroy-Peralta
----------------------------
Name: Maria Vickroy-Peralta
Title: Vice President
<PAGE>
7
THE HONGKONG AND SHANGHAI
BANK CORPORATION LIMITED, as
a Bank and as Senior Managing Agent
By /s/ Douglas F. Stolberg
----------------------------
Name: Douglas F. Stolberg
Title: Senior Vice President
<PAGE>
8
NATIONSBANK OF TEXAS, N.A., as
a Bank
By /s/ Michael Shea
---------------------
Name: Michael Shea
Title: S.V.P.
<PAGE>
9
THE ROYAL BANK OF CANADA, as
a Bank
By /s/ Molly Drennan
--------------------
Name: Molly Drennan
Title: Senior Manager Corporate Banking
<PAGE>
10
BANK OF MONTREAL, as
a Bank
By /s/ Richard W. Camm
----------------------
Name: Richard W. Camm
Title: Managing Director
<PAGE>
11
SOCIETE GENERALE, as
a Bank
By /s/ J. Blaine Shaum
-----------------------
Name: J. Blaine Shaum
Title: Managing Director
<PAGE>
12
THE FUJI BANK, LIMITED, as
a Bank
By /s/ Keiichi Ozawa
---------------------
Name: Keiichi Ozawa
Title: Joint General Manager
<PAGE>
13
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as a Bank
and as a Senior Managing Agent
By /s/ Robert Bottamedi
-----------------------
Name: Robert Bottamedi
Title: Vice President
<PAGE>
14
THE SUMITOMO BANK LIMITED, as
a Bank
By /s/ Kozo Masaki
------------------
Name: Kozo Masaki
Title: General Manager
<PAGE>
15
DEUTSCHE BANK AG NEW YORK
BRANCH AND/OR CAYMAN ISLANDS
BRANCH, as a Bank
By /s/ Hans-Josef Thiele
-------------------------
Name: Hans-Josef Thiele
Title: Director
By /s/ Joel Makowsky
--------------------
Name: Joel Makowsky
Title: Vice President
<PAGE>
16
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH, as a Bank
By /s/ Paula Mueller
--------------------
Name: Paula Mueller
Title: Vice President Structured Finance
By /s/ Philippe R. Sandmeier
----------------------------
Name: Philippe R. Sandmeier
Title: Director
<PAGE>
17
U.S. NATIONAL BANK OF OREGON, as
a Bank
By /s/ Brennan K. Church
------------------------
Name: Brennan K. Church
Title: Assistant Vice President
<PAGE>
18
ABN AMRO BANK N.V., as a Bank
By /s/ Jeffrey A. French
------------------------
Name: Jeffrey A. French
Title: Group Vice President & Director
By /s/ Ian S. Hisert
--------------------
Name: Ian S. Hisert
Title: Corporate Banking Officer
<PAGE>
19
SCHEDULE I
<TABLE>
<CAPTION>
Lender A Commitment LC Commitment
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Citicorp USA Inc. 38,684,210.53 49,736,842.11
- - ---------------------------------------------------------------------------------------------------
Bank of America National Trust & Savings 33,157,894.74 42,631,578.95
Association
- - ---------------------------------------------------------------------------------------------------
The Hongkong and Shanghai 33,157,894.74 42,631,578.95
Bank Corporation Limited
- - ---------------------------------------------------------------------------------------------------
NationsBank of Texas, N.A. 23,947,368.42 30,789,473.68
- - ---------------------------------------------------------------------------------------------------
The Royal Bank of Canada 18,421,052.63 23,684,210.53
- - ---------------------------------------------------------------------------------------------------
Bank of Montreal 18,421,052.63 23,684,210.53
- - ---------------------------------------------------------------------------------------------------
Societe Generale 23,947,368.42 30,789,473.68
- - ---------------------------------------------------------------------------------------------------
The Fuji Bank, Limited 18,421,052.63 23,684,210.53
- - ---------------------------------------------------------------------------------------------------
Morgan Guaranty Trust Company of New York 33,157,894.74 42,631,578.95
- - ---------------------------------------------------------------------------------------------------
The Sumitomo Bank Limited 23,947,368.42 30,789,473.68
- - ---------------------------------------------------------------------------------------------------
Deutsche Bank AG New York Branch and/or 23,947,368.42 30,789,473.68
Cayman Islands Branch
- - ---------------------------------------------------------------------------------------------------
Union Bank of Switzerland, New York Branch 18,421,052.63 23,684,210.53
- - ---------------------------------------------------------------------------------------------------
U.S. National Bank of Oregon 18,421,052.63 23,684,210.53
- - ---------------------------------------------------------------------------------------------------
ABN AMRO Bank N.V. 23,947,368.42 30,789,473.68
- - ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.4
FIRST LETTER AMENDMENT
June 30, 1998
To the Financial Institutions
parties as A Lenders
to the Credit Agreement
referred to below
Gentlemen:
We refer to the U.S. $150,000,000 Credit Agreement dated as of July 1,
1997 (the "Credit Agreement") among the undersigned, you, and Citicorp USA Inc.,
as Agent. Unless otherwise defined herein, the terms defined in the Credit
Agreement shall be used herein as therein defined.
It is hereby agreed by you and us that the Credit Agreement is,
effective as of the date first above written, hereby amended as follows:
(a) The definition of "A Commitment" in Section 1.01 is amended in
------------
full to read as follows:
"`A Commitment' means, as to each A Lender, the amount set forth
------------
opposite such A Lender's name on Schedule I to the First Letter
Amendment dated June 30, 1998 to this Agreement or, if such A
Lender has entered into one or more Assignment and Acceptances,
the amount set forth for such A Lender with respect thereto in
the Register maintained by the Agent pursuant to Section 9.07
hereof, in each case as such amount may be reduced pursuant to
Section 2.05."
(b) The definition of "Eurodollar Rate Margin" in Section 1.01 is
----------------------
amended by deleting the table therein and substituting for such table the
following table:
<TABLE>
<CAPTION>
Debt Rating or CP Rating
S&P/Moody's Eurodollar Rate Margin
for Eurodollar Rate
Advances
------------------------------------------------------------
<S> <C>
Level 1
-------
Debt Rating:
-----------
A+ or above or A1 or above .13%
------------------------------------------------------------
Level 2
-------
Debt Rating:
-----------
below A+ but at least A-
or below A1 but at
------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
------------------------------------------------------------
least A3
or
CP Rating:
---------
A1 or P1 .155%
------------------------------------------------------------
Level 3
-------
Debt Rating:
-----------
below A- but at least BBB-
or below A3 but
at least Baa3
or
CP Rating:
---------
below A1 or below P1 .21%
------------------------------------------------------------
Level 4
-------
Debt Rating:
-----------
none for S&P or Moody's or
below BBB- or below Baa3
and
CP Rating:
---------
None from S&P or Moody's .31%
------------------------------------------------------------
</TABLE>
(c) The definition of "Facility Fee Percentage" in Section 1.01 is
-----------------------
amended by deleting the table therein and substituting for such table the
following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Debt Rating or CP Rating
S&P/Moody's Facility Fee
-------------------------------------------------------------
<S> <C>
Level 1
-------
Debt Rating:
-----------
A+ or above or A1 or
above .06%
-------------------------------------------------------------
Level 2
-------
Debt Rating:
------------
below A+ but at least A-
or below A1 but at
least A3
or
-------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
-------------------------------------------------------------
<S> <C>
CP Rating:
---------
A1 or P1 .07%
-------------------------------------------------------------
Level 3
-------
Debt Rating:
-----------
below A- but at least BBB-
or below A3 but
at least Baa3
or
CP Rating:
---------
below A1 or below P1 .115%
-------------------------------------------------------------
Level 4
-------
Debt Rating:
-----------
none for S&P or Moody's or
below BBB- or below Baa3
and
CP Rating:
---------
None from S&P or Moody's .19%
-------------------------------------------------------------
</TABLE>
(d) The definition of "Revolver Termination Date" in Section 1.01 is
-------------------------
amended by deleting the date "June 28, 2002" therein and substituting for
such date the date "June 28, 2003."
By executing this Amendment, each of the undersigned and each of you
agree that ABN AMRO Bank N.V. is a Lender for all purposes of the Credit
Agreement and its A Commitment is the amount set forth opposite its name on
Schedule I hereto.
On and after the effective date of this letter amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement as amended by this letter amendment. The
Credit Agreement, as amended by this letter amendment, is and shall continue to
be in full force and effect and is hereby in all respects ratified and
confirmed.
If you agree to the terms and provisions hereof, please evidence such
agreement by executing and returning five signature pages of this letter
amendment to Shearman & Sterling, 555 California Street, San Francisco,
California 94104, Attention: Steven Sherman. This letter amendment shall become
effective as of the date first above written when and if on or before June 30,
1998 counterparts of this letter amendment shall have been executed by us and
all of the A Lenders. This letter amendment is subject to the provisions of
Section 10.01 covering amendments, etc. of the Credit Agreement.
<PAGE>
4
This letter amendment may be executed in any number of counterparts
and by any combination of the parties hereto in separate counterparts, each of
which counterparts shall be an original and all of which taken together shall
constitute one and the same letter amendment.
Very truly yours,
THE BORROWER
THE GAP, INC.
By /s/ Warren R. Hashagen
--------------------------
Name:
Title:
Agreed as of the date first above written:
CITICORP USA INC., as a Bank
and as Agent
By /s/ Carolyn A. Wendler
------------------------
Name: Carolyn A. Wendler
Title: Managing Director
<PAGE>
5
BANK OF AMERICA NATIONAL
TRUST & SAVINGS ASSOCIATION, as
a Bank and as Senior Managing Agent
By /s/ Maria Vickroy-Peralta
----------------------------
Name: Maria Vickroy-Peralta
Title: Vice President
<PAGE>
6
THE HONGKONG AND SHANGHAI
BANK CORPORATION LIMITED, as
a Bank and as Senior Managing Agent
By /s/ Douglas F. Stolberg
----------------------------
Name: Douglas F. Stolberg
Title: Senior Vice President
<PAGE>
7
NATIONSBANK OF TEXAS, N.A., as
a Bank
By /s/ Michael Shea
---------------------
Name: Michael Shea
Title: S.V.P.
<PAGE>
8
THE ROYAL BANK OF CANADA, as
a Bank
By /s/ Molly Drennan
--------------------
Name: Molly Drennan
Title: Senior Manager Corporate Banking
<PAGE>
9
BANK OF MONTREAL, as
a Bank
By /s/ Richard W. Camm
----------------------
Name: Richard W. Camm
Title: Managing Director
<PAGE>
10
SOCIETE GENERALE, as
a Bank
By /s/ J. Blaine Shaum
-----------------------
Name: J. Blaine Shaum
Title: Managing Director
<PAGE>
11
THE FUJI BANK, LIMITED, as
a Bank
By /s/ Keiichi Ozawa
---------------------
Name: Keiichi Ozawa
Title: Joint General Manager
<PAGE>
12
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as a Bank
and as a Senior Managing Agent
By /s/ Robert Bottamedi
-----------------------
Name: Robert Bottamedi
Title: Vice President
<PAGE>
13
THE SUMITOMO BANK LIMITED, as
a Bank
By /s/ Kozo Masaki
------------------
Name: Kozo Masaki
Title: General Manager
<PAGE>
14
DEUTSCHE BANK AG NEW YORK
BRANCH AND/OR CAYMAN ISLANDS
BRANCH, as a Bank
By /s/ Hans-Josef Thiele
-------------------------
Name: Hans-Josef Thiele
Title: Director
By /s/ Joel Makowsky
--------------------
Name: Joel Makowsky
Title: Vice President
<PAGE>
15
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH, as a Bank
By /s/ Paula Mueller
--------------------
Name: Paula Mueller
Title: Vice President Structured Finance
By /s/ Philippe R. Sandmeier
----------------------------
Name: Philippe R. Sandmeier
Title: Director
<PAGE>
16
U.S. NATIONAL BANK OF OREGON, as
a Bank
By /s/ Brennan K. Church
------------------------
Name: Brennan K. Church
Title: Assistant Vice President
<PAGE>
17
ABN AMRO BANK N.V., as a Bank
By /s/ Jeffrey A. French
------------------------
Name: Jeffrey A. French
Title: Group Vice President & Director
By /s/ Ian S. Hisert
--------------------
Name: Ian S. Hisert
Title: Corporate Banking Officer
<PAGE>
SCHEDULE I
<TABLE>
<S> <C>
- - -------------------------------------------------------------------------------
Lender A Commitment
- - -------------------------------------------------------------------------------
Citicorp USA Inc. 16,578,947.37
- - -------------------------------------------------------------------------------
Bank of America National Trust & Savings 14,210,526.32
Association
- - -------------------------------------------------------------------------------
The Hongkong and Shanghai 14,210,526.32
Bank Corporation Limited
- - -------------------------------------------------------------------------------
NationsBank of Texas, N.A. 10,263,157.89
- - -------------------------------------------------------------------------------
The Royal Bank of Canada 7,894,736.84
- - -------------------------------------------------------------------------------
Bank of Montreal 7,894,736.84
- - -------------------------------------------------------------------------------
Societe Generale 10,263,157.89
- - -------------------------------------------------------------------------------
The Fuji Bank, Limited 7,894,736.84
- - -------------------------------------------------------------------------------
Morgan Guaranty Trust Company of New York 14,210,526.32
- - -------------------------------------------------------------------------------
The Sumitomo Bank Limited 10,263,157.89
- - -------------------------------------------------------------------------------
Deutsche Bank AG New York Branch and/or Cayman 10,263,157.89
Islands Branch
- - -------------------------------------------------------------------------------
Union Bank of Switzerland, New York Branch 7,894,736.84
- - -------------------------------------------------------------------------------
U.S. National Bank of Oregon 7,894,736.84
- - -------------------------------------------------------------------------------
ABN AMRO Bank N.V. 10,263,157.89
- - -------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.33
Gap Inc. One Harrison Street
Gap San Francisco, CA 94105
Banana Republic 650 952-4400 tel
Old Navy
John B. Wilson December 21, 1998
[address omitted]
Re: Income Continuation Protection
Dear John,
You have recently expressed your desire for financial protection in the
event that The Gap, Inc. ("the Company") decides to significantly decrease your
current level of responsibilities ("Company's Decision"). This letter
summarizes our agreement regarding what the Company will provide for you in that
event.
I. In exchange for your delivery of the documents described in paragraph
II below, the Company will provide you with the following:
A. Continued employment for two years ("Continued Employment"). The
------------------------------------------------------------
Company will provide you with Continued Employment for two years; except, of
course, your Continued Employment will end if you accept a position with another
company. During the period of Continued Employment, you will remain an employee
of the Company and, as such, will not be permitted to be associated with, or
employed by, any other business without the written consent of the CEO or
Chairman of the Company. Your duty, as an employee, to maintain the Company's
trade secrets and confidential information and not to engage in any act
inconsistent with an employee's duty of loyalty shall continue during this
period of Continued Employment. At the end of Continued Employment, you and the
Company can negotiate a new agreement that is acceptable to both parties.
B. Salary and benefits continued during Continued Employment. Your last
----------------------------------------------------------
base salary in effect at the time of the Company's Decision will continue to be
paid every two weeks during the period of Continued Employment. You will not be
eligible to receive salary increases during Continued Employment.
During the period of Continued Employment, you will be eligible to
participate in whatever medical plans, long-term disability plans, and life
insurance plans the Company is currently offering. However, you will not be
eligible to receive a car allowance.
C. Additional benefits provided during the period of Continued Employment.
-----------------------------------------------------------------------
1. Management Incentive Cost Award Plan ("MICAP"). If you are still
--------------------------------------------
an employee at the time MICAP bonuses are actually paid out, then for each
fiscal year (or portion thereof) occurring after the Company's Decision, you
will receive a MICAP bonus equal to the average bonus given, during that fiscal
year, to executives of the same grade level you held at the
<PAGE>
Letter to John B. Wilson
December 21, 1998
Page 2
time of the Company's Decision. For partial fiscal years, you will receive a
pro-rated bonus. You will not be eligible to receive any other bonuses during
the period of Continued Employment.
2. Executive Long-Term Cash Award Performance Plan ("ELCAPP"). As
--------------------------------------------------------
indicated below in paragraph II, all rights to ELCAPP will cease at the time of
the Company's Decision. However, if you are still employed at the time ELCAPP
bonuses are actually paid out, then you will receive an ELCAPP payment (pro-
rated for the number of months during the ELCAPP cycle that you were an employee
prior to the Company's Decision) if: (i) you had participated in the ELCAPP
cycle for at least 12 months (i.e., one year of three) before the date of the
Company's Decision; and (ii) ELCAPP payments were made for that particular
ELCAPP cycle according to the terms of ELCAPP. You will not be eligible to
participate in any ELCAPP cycles which begin after the date of the Company's
Decision.
3. Stock Options. As long as you are still employed on the vesting
-------------
date, you will vest in 50% of the options (discounted or otherwise) that vest
during your period of Continued Employment. The other 50% will be amended as
noted in paragraphs I.D. and II.C. below. All stock grants with vesting dates
beyond 24 months (or after "Second Anniversary") of the Company's Decision will
be canceled. You will not be eligible to receive any other stock grants during
the period of Continued Employment.
D. Additional benefits if you are still an employee on the Second
--------------------------------------------------------------
Anniversary of the Company's Decision. If you are still an employee on the
- - -------------------------------------
Second Anniversary of the Company's Decision, then you will receive these
additional benefits on the Second Anniversary of the Company's Decision:
1. Stock Options. As indicated above in paragraph I.C.3., 50% of
-------------
your options (discounted or otherwise) that would have vested during the period
of Continued Employment will be amended at the time of the Company's Decision to
provide for a vesting date on the Second Anniversary of the Company's Decision.
All stock grants with vesting dates beyond the Second Anniversary of the
Company's Decision will be canceled. You will not be eligible to receive any
other stock grants during the period of Continued Employment.
II. In exchange for the above, you agree to provide the Company with the
following documents at the time of the Company's Decision:
A. Resignation of officer status. You will submit a written resignation
------------------------------
from your position as a Company officer.
B. Legal release. You will sign a legal release of all claims, in a form
--------------
acceptable to the Company, in its sole discretion, which will also include a
confidentiality provision and a non-disparagement clause.
C. Amended stock grants. You will sign a document canceling all stock
---------------------
options which have a vesting date more than 24 months from the date of the
Company's Decision. Fifty percent of each grant which will vest within 24
months of the Company's Decision will be amended so that the vesting date for
50% of the shares is changed to be the date of the Second Anniversary of the
Company's Decision.
<PAGE>
Letter to John B. Wilson
December 21, 1998
Page 3
D. Amended ELCAPP. You will sign a consent to cancel further
---------------
participation in the ELCAPP plan and amend your existing right to participate in
the plan to reflect the partial participation described in Paragraph I.C.2.
above.
III. Miscellaneous
In the event you become disabled during Continued Employment, your base
salary will be continued uninterrupted for the entire period of Continued
Employment, but will be offset by any amount you receive from the Company's
disability insurance carrier or a government disability program. In the event
of disability during the period of Continued Employment you will be allowed to
vest in stock provided to you under this agreement for the duration of any
Company-provided medical leaves of absence ("MLOA") for which you qualify. If
your disability exceeds the maximum allowable time for a MLOA, then any stock
which would have vested after the end of the MLOA but during this period of
Continued Employment will be canceled.
In the event you were to die during the period of Continued Employment,
then all stock options (discounted or otherwise) that would have been provided
to you during the period of Continued Employment will be immediately accelerated
and provided to your estate. Your estate will not have any right to future
salary or bonuses (MICAP or ELCAPP) under this agreement.
By signing this agreement you agree that no promises or representations
have been made to you which do not appear in this letter agreement, and that
this letter contains the entire agreement between us and that you are not
relying on any representations or promises that do not appear in this letter.
John, you have contributed greatly to our organization and I trust that we
will have many more years of shared success.
Very truly yours,
/s/ Millard Drexler
Millard S. Drexler
President and Chief Executive Officer
The Gap, Inc.
Agreed to this 29 day of December, 1998
/s/ John B. Wilson
- - -------------------------
John B. Wilson
<PAGE>
Gap Inc. Gap Banana Republic Old Navy
Ten-Year Selected Financial Data
<TABLE>
<CAPTION>
Compound Annual Growth Rate Fiscal Year
----------------------------------- -------------------------
1998 1997
3-year 5-year 10-year 52 weeks 52 weeks
----------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS ($000)
Net sales 27% 22% 22% $9,054,462 $6,507,825
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization - - - 5,013,473 3,775,957
Percentage of net sales - - - 55.4% 58.0%
Depreciation and amortization/(a)/ - - - $ 304,745 $ 245,584
Operating expenses - - - 2,403,365 1,635,017
Net interest expense (income) - - - 13,617 (2,975)
Earnings before income taxes 31 25 26 1,319,262 854,242
Percentage of net sales - - - 14.6% 13.1%
Income taxes - - - $ 494,723 $ 320,341
Net earnings 33 26 27 824,539 533,901
Percentage of net sales - - - 9.1% 8.2%
Cash dividends paid - - - $ 76,888 $ 79,503
Capital expenditures - - - 842,655 483,114
-------------------------------------------------------------------------------------
PER SHARE DATA
Net earnings--basic 36% 28% 28% $1.43 $.90
Net earnings--diluted 36 28 29 1.37 .87
Cash dividends paid/(b)/ - - - .13 .13
Shareholders' equity (book value) - - - 2.75 2.69
-------------------------------------------------------------------------------------
FINANCIAL POSITION ($000)
Property and equipment, net 25% 20% 26% $1,876,370 $1,365,246
Merchandise inventory 30 26 19 1,056,444 733,174
Total assets 19 18 23 3,963,919 3,337,502
Working capital - - - 318,721 839,399
Current ratio - - - 1.21:1 1.85:1
Total long-term debt, less current
installments - - - $ 496,455 $ 496,044
Ratio of long-term debt to shareholders'
equity - - - .32:1 .31:1
Shareholders' equity - - - $1,573,679 $1,583,986
Return on average assets - - - 22.6% 17.9%
Return on average shareholders' equity - - - 52.2% 33.0%
-------------------------------------------------------------------------------------
STATISTICS
Number of stores opened 12% 24% 12% 318 298
Number of stores expanded - - - 135 98
Number of stores closed - - - 20 22
Number of stores open at year-end/(c)/ 13 12 10 2,428 2,130
Net increase in number of stores - - - 14% 15%
Comparable store sales growth (52-week basis) - - - 17% 6%
Sales per square foot (52-week basis)/(d)/ - - - $532 $463
Square footage of gross store space at year-end 19 20 17 18,757,400 15,312,700
Percentage increase in square feet - - - 22% 21%
Number of employees at year-end 23 20 19 111,000 81,000
Weighted-average number of shares--basic - - - 576,041,373 594,269,963
Weighted-average number of shares--diluted - - - 602,916,255 615,301,137
Number of shares outstanding at year-end,
net of treasury stock - - - 571,973,354 589,699,542
-------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Excludes a dividend of $.0333 per share declared in January 1999 but paid
in the first quarter of fiscal 1999.
(c) Includes the conversion of GapKids departments to their own separate stores.
Converted stores are not classified as new stores.
(d) Based on weighted-average gross square footage.
page 22 1998 Annual Report
<PAGE>
Gap Inc. Gap Banana Republic Old Navy
Ten-Year Selected Financial Data (continued)
<TABLE>
<CAPTION>
Fiscal Year
- - ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
52 weeks 53 weeks 52 weeks 52 weeks
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS ($000)
Net sales $5,284,381 $4,395,253 $3,722,940 $3,295,679
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 3,093,709 2,645,736 2,202,133 1,996,929
Percentage of net sales 58.5% 60.2% 59.2% 60.6%
Depreciation and amortization/(a)/ $ 191,457 $ 175,719 $ 148,863 $ 124,860
Operating expenses 1,270,138 1,004,396 853,524 748,193
Net interest expense (income) (19,450) (15,797) (10,902) 809
Earnings before income taxes 748,527 585,199 529,322 424,888
Percentage of net sales 14.2% 13.3% 14.2% 12.9%
Income taxes $ 295,668 $ 231,160 $ 209,082 $ 166,464
Net earnings 452,859 354,039 320,240 258,424
Percentage of net sales 8.6% 8.1% 8.6% 7.8%
Cash dividends paid $ 83,854 $ 66,993 $ 64,775 $ 53,041
Capital expenditures 375,838 309,599 236,616 215,856
-------------------------------------------------------------------------------
PER SHARE DATA
Net earnings--basic $ .72 $ .57 $ .51 $ .41
Net earnings--diluted .71 .55 .49 .40
Cash dividends paid/(b)/ .13 .11 .10 .09
Shareholders' equity (book value) 2.68 2.53 2.11 1.72
-------------------------------------------------------------------------------
FINANCIAL POSITION ($000)
Property and equipment, net $1,135,720 $ 957,752 $ 828,777 $ 740,422
Merchandise inventory 578,765 482,575 370,638 331,155
Total assets 2,626,927 2,343,068 2,004,244 1,763,117
Working capital 554,359 728,301 555,827 494,194
Current ratio 1.72:1 2.32:1 2.11:1 2.07:1
Total long-term debt, less current installments -- -- -- 75,000
Ratio of long-term debt to shareholders' equity N/A N/A N/A .07:1
Shareholders' Equity $1,654,470 $1,640,473 $1,375,232 $1,126,475
Return on average assets 18.2% 16.3% 17.0% 16.4%
Return on average shareholders' equity 27.5% 23.5% 25.6% 25.7%
-------------------------------------------------------------------------------
STATISTICS
Number of stores opened 203 225 172 108
Number of stores expanded 42 55 82 130
Number of stores closed 30 53 34 45
Number of stores open at year-end/(c)/ 1,854 1,680 1,508 1,370
Net increase in number of stores 10% 11% 10% 5%
Comparable store sales growth (52-week basis) 5% 0% 1% 1%
Sales per square foot (52-week basis)/(d)/ $441 $425 $444 $463
Square footage of gross store space at year-end 12,645,000 11,100,200 9,165,900 7,546,300
Percentage increase in square feet 14% 21% 21% 16%
Number of employees at year-end 66,000 60,000 55,000 44,000
Weighted-average number of shares--basic 625,719,947 626,577,596 632,466,639 626,858,004
Weighted-average number of shares--diluted 640,900,830 641,628,773 647,429,741 643,406,853
Number of shares outstanding at year-end,
net of treasury stock 617,663,996 647,432,964 651,441,371 653,619,276
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------------------------------
1992 1991 1990 1989
52 weeks 52 weeks 52 weeks 53 weeks
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS ($000)
Net sales $2,960,409 $2,518,893 $1,933,780 $1,586,596
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 1,856,102 1,496,156 1,187,644 1,006,647
Percentage of net sales 62.7% 59.4% 61.4% 63.4%
Depreciation and amortization/(a)/ $ 99,451 $ 72,765 $ 53,599 $ 39,589
Operating expenses 661,252 575,686 454,180 364,101
Net interest expense (income) 3,763 3,523 1,435 2,760
Earnings before income taxes 339,841 370,763 236,922 162,714
Percentage of net sales 11.5% 14.7% 12.3% 10.3%
Income taxes $ 129,140 $ 140,890 $ 92,400 $ 65,086
Net earnings 210,701 229,873 144,522 97,628
Percentage of net sales 7.1% 9.1% 7.5% 6.2%
Cash dividends paid $ 44,106 $ 41,126 $ 29,625 $ 22,857
Capital expenditures 213,659 244,323 199,617 94,266
----------------------------------------------------------------------------------
PER SHARE DATA
Net earnings--basic $ .34 $ .38 $.24 $.16
Net earnings--diluted .33 .36 .23 .15
Cash dividends paid/(b)/ .07 .07 .05 .04
Shareholders' equity (book value) 1.37 1.06 .73 .53
----------------------------------------------------------------------------------
FINANCIAL POSITION ($000)
Property and equipment, net $ 650,368 $ 547,740 $383,548 $238,103
Merchandise inventory 365,692 313,899 247,462 243,482
Total assets 1,379,248 1,147,414 776,900 579,483
Working capital 355,649 235,537 101,518 129,139
Current ratio 2.06:1 1.71:1 1.39:1 1.69:1
Total long-term debt, less current installments $ 75,000 $ 80,000 $ 17,500 $ 20,000
Ratio of long-term debt to shareholders' equity .08:1 .12:1 .04:1 .06:1
Shareholders' equity $ 887,839 $ 677,788 $465,733 $337,972
Return on average assets 16.7% 23.9% 21.3% 18.4%
Return on average shareholders' equity 26.9% 40.2% 36.0% 31.8%
----------------------------------------------------------------------------------
STATISTICS
Number of stores opened 117 139 152 98
Number of stores expanded 94 79 56 7
Number of stores closed 26 15 20 38
Number of stores open at year-end/(c)/ 1,307 1,216 1,092 960
Net increase in number of stores 7% 11% 14% 7%
Comparable store sales growth (52-week basis) 5% 13% 14% 15%
Sales per square foot (52-week basis)/(d)/ $489 $481 $438 $389
Square footage of gross store space at year-end 6,509,200 5,638,400 4,762,300 4,056,600
Percentage increase in square feet 15% 18% 17% 5%
Number of employees at year-end 39,000 32,000 26,000 23,000
Weighted-average number of shares--basic 618,944,994 610,511,282 602,947,623 599,771,631
Weighted-average number of shares--diluted 640,602,521 635,531,438 629,967,009 630,929,312
Number of shares outstanding at year-end,
net of treasury stock 648,833,571 641,355,003 635,688,135 632,481,318
----------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Excludes a dividend of $.0333 per share declared in January 1999 but paid
in the first quarter of fiscal 1999.
(c) Includes the conversion of GapKids departments to their own separate stores.
Converted stores are not classified as new stores.
(d) Based on weighted-average gross square footage.
1998 Annual Report page 23
<PAGE>
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The information below and elsewhere in this Annual Report contains certain
forward-looking statements which reflect the current view of Gap Inc. (the
"Company") with respect to future events and financial performance. Wherever
used, the words "expect," "plan," "anticipate," "believe" and similar
expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties
and the Company's future results of operations could differ materially from
historical results or current expectations. Some of these risks include, without
limitation, ongoing competitive pressures in the apparel industry, risks
associated with challenging international retail environments, changes in the
level of consumer spending or preferences in apparel, trade restrictions and
political or financial instability in countries where the Company's goods are
manufactured, disruption to operations from Year 2000 issues and/or other
factors that may be described in the Company's Annual Report on Form 10-K
and/or other filings with the Securities and Exchange Commission. Future
economic and industry trends that could potentially impact revenues and
profitability are difficult to predict.
The Company 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.
Results of Operations
Net Sales
- - --------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
Jan. 30, 1999 Jan. 31, 1998 Feb. 1, 1997
- - --------------------------------------------------------------------------------
Net sales ($000) $9,054,462 $6,507,825 $5,284,381
Total net sales growth
percentage 39 23 20
Comparable store sales
growth percentage 17 6 5
Net sales per average
gross square foot $532 $463 $441
Square footage of gross
store space at year-end (000) 18,757 15,313 12,645
Number of:
New stores 318 298 203
Expanded stores 135 98 42
Closed stores 20 22 30
- - --------------------------------------------------------------------------------
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 for all years
presented.
The increase in net sales per average square foot for 1998 and 1997 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 decreased
3.1 and .4 percentage points in 1998 from 1997 and in 1997 from 1996,
respectively.
The decrease in 1998 from 1997 was attributable to a decrease in occupancy
expenses as a percentage of net sales combined with an increase in merchandise
margin. The decrease in occupancy expenses as a percentage of net sales was
primarily due to leverage achieved through comparable store sales growth. The
margin improvement was due to higher margins achieved on marked-down goods, as
well as to an increase in the percentage of merchandise sold at regular price.
The decrease in 1997 from 1996 was primarily attributable to a decrease in
occupancy expenses as a percentage of net sales, 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.
As a general business practice, the Company reviews its inventory levels in
order to identify slow-moving merchandise and broken assortments (items no
longer in stock in a sufficient range of sizes) and uses markdowns to clear
merchandise. Such markdowns may have an adverse impact on earnings, depending
upon the extent of the markdown and the amount of inventory affected.
Page 24 1998 Annual Report
<PAGE>
Gap Inc. Gap Banana Republic Old Navy
OPERATING EXPENSES
Operating expenses as a percentage of net sales increased 1.4 percentage points
in 1998 from 1997 and 1.1 percentage points in 1997 from 1996.
In 1998, the increase was driven by significantly higher advertising/
marketing costs as part of the Company's continued brand development efforts,
partially offset by a decrease as a percentage of net sales in the write-off of
leasehold improvements and fixtures associated with the remodeling, relocation
and closing of certain stores planned for the next fiscal year, as well as to
leverage from comparable store sales growth.
In 1997, the increase was primarily attributable to both increases in
advertising/marketing costs and the write-off of leasehold improvements and
fixtures.
NET INTEREST EXPENSE/INCOME
The change in 1998 to net interest expense from net interest income in 1997 was
primarily due to the interest expense incurred for the full fiscal year related
to the $500 million of debt securities issued during the third quarter of 1997.
The Company's greater short-term borrowings in the last half of 1998 compared
to 1997 also contributed to the increase in interest expense. The decrease in
net interest income in 1997 from 1996 was due to the interest expense related to
the long-term debt and to a decrease in gross average investments.
INCOME TAXES
The effective tax rate was 37.5 percent in 1998 and 1997 and 39.5 percent in
1996. 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:
- - --------------------------------------------------------------------------------
Fiscal Year
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Cash provided by
operating activities ($000) $1,394,161 $844,651 $834,953
Working capital ($000) 318,721 839,399 554,359
Current ratio 1.21:1 1.85:1 1.72:1
- - --------------------------------------------------------------------------------
For the fiscal year ended January 30, 1999, the increase in cash provided by
operating activities was due to an increase in net earnings and the timing of
payments for certain payables, partially offset by investments in merchandise
inventory. The decline in working capital and the current ratio was attributable
to an increase in payables driven by business growth combined with a decrease in
cash resulting from greater capital expenditures and share repurchases. For the
fiscal year ended January 31, 1998, the increase in cash provided by operating
activities was attributable to an increase in net earnings, offset by
investments in merchandise inventory and the timing of payments for income taxes
and certain payables.
The Company funds inventory expenditures during normal and peak periods
through a combination of cash flows from operations and short-term financing
arrangements. The Company's business follows a seasonal pattern, peaking over a
total of about 10 to 13 weeks during the Back-to-School and Holiday periods.
During 1998 and 1997, these periods accounted for 37 and 35 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 28, 2003. These credit facilities
provide for the issuance of up to $450 million in letters of credit. The Company
has additional uncommitted credit facilities of $400 million for the issuance of
letters of credit. At January 30, 1999, the Company had outstanding letters of
credit totaling approximately $677 million. The credit facilities also provide
backup for the Company's $500 million commercial paper program. During the last
half of fiscal 1998, the Company issued a total of $500 million of commercial
paper to cover short-term borrowing needs. The Company had no commercial paper
outstanding at January 30, 1999.
To provide financial flexibility, the Company filed a shelf registration
statement in January 1999 with the Securities and Exchange Commission for $500
million of debt securities. The net proceeds from any issuance are expected to
be used for general corporate purposes, including expansion of stores,
distribution centers and headquarters facilities, brand investment, development
of additional distribution channels and repurchases of the Company's common
stock pursuant to its ongoing repurchase program. No assurances can be given
that the Company will issue these debt securities.
In fiscal 1997, the Company issued $500 million of 6.9 percent ten-year debt
securities. The proceeds were used for general corporate purposes similar to
those described above.
In addition, during the first quarter of fiscal 1999, the Company's Japanese
subsidiary issued $50 million of ten-year
1998 Annual Report page 25
<PAGE>
debt securities. The net proceeds are intended to be used for general corporate
purposes. The cash flows relating to the bonds were swapped for the equivalent
amounts in Japanese yen to minimize currency exposure.
Capital expenditures, net of construction allowances and dispositions,
totaled approximately $797 million in 1998. These expenditures resulted in a net
increase in store space of approximately 3.4 million square feet or 22 percent
due to the addition of 318 new stores, the expansion of 135 stores and the
remodeling of certain stores. Capital expenditures for 1997 and 1996 were $450
million and $359 million, respectively, resulting in a net increase in store
space of 2.7 million square feet in 1997 and 1.5 million square feet in 1996.
The increases in capital expenditures in 1998 from 1997 and in 1997 from 1996
were primarily attributable to the number of stores opened, expanded and
remodeled, as well as the expansion of headquarters facilities. The addition and
expansion of distribution centers also contributed to the 1998 increase.
For 1999, the Company expects capital expenditures to exceed $1 billion, net
of construction allowances. This represents the addition of 400 to 470 new
stores, the expansion of approximately 100 to 110 stores and the remodeling of
certain stores, as well as amounts for headquarters facilities, distribution
centers and equipment. The Company expects to fund such capital expenditures
with cash flow from operations and other sources of financing. Square footage
growth is expected to be in excess of 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 Company acquired land in
1998 in San Bruno and San Francisco on which to construct additional
headquarters facilities. Construction commenced during the third quarter on the
San Francisco property.
Also during 1997, the Company commenced construction on a distribution center
for an estimated cost at completion of $60 million. The majority of the
expenditures for this facility were incurred in 1998. The facility is expected
to begin operations in early 1999.
On October 28, 1998, the Company's Board of Directors authorized a
three-for-two split of its common stock effective November 30, 1998, in the form
of a stock dividend for shareholders of record at the close of business on
November 11, 1998. All share and per share amounts in the accompanying
consolidated financial statements for all periods have been restated to reflect
the stock split.
In October 1998, the Board of Directors approved a program under which the
Company may purchase up to 45 million shares of its common stock. This program
follows an earlier 67.5 million share repurchase program, under which the
Company acquired 23.8 million shares for approximately $910 million during 1998.
To date under the earlier program 66.1 million shares have been repurchased for
approximately $1.7 billion.
During 1998, 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 41.
Year 2000 Issue
The Year 2000 issue is primarily the result of computer programs using a two-
digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to a disruption in the
operation of such systems. In 1996, the Company established a project team to
coordinate existing Year 2000 activities and address remaining Year 2000 issues.
The team has focused its efforts on three areas: (1) information systems
software and hardware; (2) facilities and distribution equipment and (3) third-
party relationships.
The Program. The Company has adopted a five-phase Year 2000 program
consisting of: Phase I-identification and ranking of the components of the
Company's systems, equipment and suppliers that may be vulnerable to Year 2000
problems; Phase II-assessment of items identified in Phase I; Phase
III-remediation or replacement of non-compliant systems and components and
determination of solutions for non-compliant suppliers; Phase IV-testing of
systems and components following remediation and Phase V-developing contingency
plans to address the most
page 26 1998 Annual Report
<PAGE>
Gap Inc. Gap Banana Republic Old Navy
reasonably likely worst case Year 2000 scenarios. The Company has completed
Phases I and II and continues to make progress according to plan on Phases III,
IV and V.
Information Systems Software and Hardware. The Company has completed Phase II
and has made substantial progress on Phase III. Phase IV testing is being
conducted concurrently with Phase III activities. Management believes that the
Company is on track to complete remediation, testing and implementation of its
individual information systems by mid-1999. Phase V contingency planning has
begun and is expected to be complete by the end of the third quarter of 1999.
Facilities and Distribution Equipment. The Company has completed Phase II and
is actively working on Phase III. Phase IV testing and Phase V contingency
planning are scheduled to begin in the first quarter of 1999.
Third-Party Relationships. The Company has completed Phase II and is actively
working on Phase III. Phase IV certification and Phase V contingency planning
are expected to begin in the first quarter of 1999.
Risks/Contingency Plans. Based on the assessment efforts to date, the
Company does not believe that the Year 2000 issue will have a material adverse
effect on its financial condition or results of operations. The Company operates
a large number of geographically dispersed stores and has a large supplier base
and believes that these factors will mitigate any adverse impact. The Company's
beliefs and expectations, however, are based on certain assumptions and
expectations that ultimately may prove to be inaccurate.
The Company has identified that a significant disruption in the product
supply chain represents the most reasonably likely worst case Year 2000
scenario. Potential sources of risk include (a) the inability of principal
suppliers or logistics providers to be Year 2000-ready, which could result in
delays in product deliveries from such suppliers or logistics providers and (b)
disruption of the distribution channel, including ports, transportation vendors
and the Company's own distribution centers as a result of a general failure of
systems and necessary infrastructure such as electricity supply. The Company is
preparing plans to flow inventory around an assumed period of disruption to the
supply chain, which could include accelerating selected critical products to
reduce the impact of significant failure.
The Company does not expect the costs associated with its Year 2000 efforts
to be substantial. Approximately $30 million has been budgeted to address the
Year 2000 issue, of which $16.5 million has been expensed through January 30,
1999. The Company's aggregate estimate does not include time and costs that may
be incurred by the Company as a result of the failure of any third parties,
including suppliers, to become Year 2000-ready or costs to implement any
contingency plans.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Market Prices Cash Dividends
--------------------------------------------- ------------------
Fiscal 1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
High Low High Low
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $34 5/16 $26 5/16 $16 1/16 $12 11/16 $.0333 $.0333
2nd Quarter 44 15/16 33 11/16 19 7/8 13 5/8 .0333 .0333
3rd Quarter 45 5/16 30 1/4 23 13/16 18 11/16 .0333 .0333
4th Quarter 65 39 1/8 27 1/2 21 15/16 .0333(a) .0333
- - -------------------------------------------------------------------------------------------------------------------
Year $.1332 $.1332
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes a dividend of $.0333 per share declared in January 1999 but paid in
the first quarter of fiscal 1999.
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 12, 1999 was 7,967.
<PAGE>
Management's Report on Financial Information
Management is responsible for the integrity and consistency of all financial
information presented in the Annual Report. The financial statements have been
prepared in accordance with generally accepted accounting principles and
necessarily include certain amounts based on Management's best estimates and
judgments.
In fulfilling its responsibility for the reliability of financial
information, Management has established and maintains accounting systems and
procedures appropriately supported by internal accounting controls. Such
controls include the selection and training of qualified personnel, an
organizational structure providing for division of responsibility, communication
of requirement for compliance with approved accounting control and business
practices and a program of internal audit. The extent of the Company's system
of internal accounting control recognizes that the cost should not exceed the
benefits derived and that the evaluation of those factors requires estimates and
judgments by Management. Although no system can ensure that all errors or
irregularities have been eliminated, Management believes that the internal
accounting controls in use provide reasonable assurance, at reasonable cost,
that assets are safeguarded against loss from unauthorized use or disposition,
that transactions are executed in accordance with Management's authorization
and that the financial records are reliable for preparing financial statements
and maintaining accountability for assets. The financial statements of the
Company have been audited by Deloitte & Touche LLP, independent auditors whose
report appears below.
The Audit and Finance Committee (the "Committee") of the Board of Directors
is comprised solely of directors who are not officers or employees of the
Company. The Committee is responsible for recommending to the Board of Directors
the selection of independent auditors. It meets periodically with Management,
the independent auditors and the internal auditors to 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 30, 1999 and January 31, 1998, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three fiscal years in the period ended January 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 30, 1999 and January 31, 1998, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
January 30, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
February 25, 1999
page 28 1998 Annual Report
<PAGE>
Gap Inc. Gap Banana Republic Old Navy
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Fifty-two Fifty-two Fifty-two
Weeks Ended Percentage Weeks Ended Percentage Weeks Ended Percentage
($000 except per share amounts) January 30, 1999 to Sales January 31, 1998 to Sales February 1, 1997 to Sales
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $9,054,462 100.0% $6,507,825 100.0% $5,284,381 100.0%
Costs and expenses
Cost of goods sold and occupancy
expenses 5,318,218 58.7 4,021,541 61.8 3,285,166 62.2
Operating expenses 2,403,365 26.5 1,635,017 25.1 1,270,138 24.0
Net interest expense (income) 13,617 0.2 (2,975) 0.0 (19,450) (0.4)
------------------------------------------------------------------------------------------
Earnings before income taxes 1,319,262 14.6 854,242 13.1 748,527 14.2
Income taxes 494,723 5.5 320,341 4.9 295,668 5.6
------------------------------------------------------------------------------------------
Net earnings $ 824,539 9.1% $ 533,901 8.2% $ 452,859 8.6%
------------------------------------------------------------------------------------------
Weighted-average number of shares-basic 576,041,373 594,269,963 625,719,947
Weighted-average number of shares-diluted 602,916,255 615,301,137 640,900,830
------------------------------------------------------------------------------------------
Earnings per share-basic $1.43 $.90 $.72
Earnings per share-diluted 1.37 .87 .71
------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
1998 Annual Report page 29
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
($000 except par value) January 30, 1999 January 31, 1998
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 565,253 $ 913,169
Merchandise inventory 1,056,444 733,174
Other current assets 250,127 184,604
---------------------------------
Total current assets 1,871,824 1,830,947
---------------------------------
Property and Equipment
Leasehold improvements 1,040,959 846,791
Furniture and equipment 1,601,572 1,236,450
Land and buildings 160,776 154,136
Construction-in-progress 245,020 66,582
---------------------------------
3,048,327 2,303,959
Accumulated depreciation and amortization (1,171,957) (938,713)
---------------------------------
Property and equipment, net 1,876,370 1,365,246
---------------------------------
Lease rights and other assets 215,725 141,309
---------------------------------
Total assets $ 3,963,919 $ 3,337,502
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 90,690 $ 84,794
Accounts payable 684,130 416,976
Accrued expenses and other current liabilities 655,770 406,181
Income taxes payable 122,513 83,597
---------------------------------
Total current liabilities 1,553,103 991,548
---------------------------------
Long-Term Liabilities
Long-term debt 496,455 496,044
Deferred lease credits and other liabilities 340,682 265,924
---------------------------------
Total long-term liabilities 837,137 761,968
---------------------------------
Shareholders' Equity
Common stock $.05 par value
Authorized 1,500,000,000 shares; issued 664,997,475
and 659,884,262 shares; outstanding 571,973,354
and 589,699,542 shares 33,250 32,994
Additional paid-in capital 365,662 221,890
Retained earnings 3,121,360 2,392,750
Accumulated other comprehensive earnings (12,518) (15,230)
Deferred compensation (31,675) (38,167)
Treasury stock, at cost (1,902,400) (1,010,251)
---------------------------------
Total shareholders' equity 1,573,679 1,583,986
---------------------------------
Total liabilities and shareholders' equity $ 3,963,919 $ 3,337,502
=================================
</TABLE>
See Notes to Consolidated Financial Statements.
page 30 1998 Annual Report
<PAGE>
Gap Inc. Gap Banana Republic Old Navy
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
($000) January 30, 1999 January 31, 1998 February 1, 1997
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 824,539 $ 533,901 $ 452,859
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization/(a)/ 326,447 269,706 214,905
Tax benefit from exercise of stock options
and vesting of restricted stock 79,808 23,682 47,348
Deferred income taxes (34,766) (13,706) (28,897)
Change in operating assets and liabilities:
Merchandise inventory (322,287) (156,091) (93,800)
Prepaid expenses and other (77,292) (44,736) (16,355)
Accounts payable 265,296 63,532 88,532
Accrued expenses 231,178 107,365 87,974
Income taxes payable 38,805 (8,214) 25,706
Deferred lease credits and other long-term liabilities 62,433 69,212 56,681
-------------------------------------------------------
Net cash provided by operating activities 1,394,161 844,651 834,953
=======================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Net maturity (purchase) of short-term investments - 174,709 (11,774)
Net purchase of long-term investments - (2,939) (40,120)
Net purchase of property and equipment (797,592) (465,843) (371,833)
Acquisition of lease rights and other assets (28,815) (19,779) (12,206)
-------------------------------------------------------
Net cash used for investing activities (826,407) (313,852) (435,933)
=======================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in notes payable 1,357 44,462 18,445
Net issuance of long-term debt - 495,890 -
Issuance of common stock 49,421 30,653 37,053
Net purchase of treasury stock (892,149) (593,142) (466,741)
Cash dividends paid (76,888) (79,503) (83,854)
-------------------------------------------------------
Net cash used for financing activities (918,259) (101,640) (495,097)
=======================================================
Effect of exchange rate fluctuations on cash 2,589 (1,634) 2,155
-------------------------------------------------------
Net (decrease) increase in cash and equivalents (347,916) 427,525 (93,922)
Cash and equivalents at beginning of year 913,169 485,644 579,566
-------------------------------------------------------
Cash and equivalents at end of year $ 565,253 $ 913,169 $ 485,644
-------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
(a) Includes amortization of restricted stock, discounted stock options and
discount on long-term debt.
1998 Annual Report page 31
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
-------------------------------
($000 except share and per share amounts) Shares Amount Additional Paid-in Capital
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at February 3, 1996 710,935,439 $35,547 $315,445
------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 3,580,141 179 19,634
Net issuance of common stock pursuant to management
incentive restricted stock plans 678,623 34 32,788
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 47,348
Foreign currency translation adjustments
Amortization of restricted stock
Purchase of treasury stock
Reissuance of treasury stock 6,969
Net earnings
Cash dividends ($.13 per share)
------------------------------------------------------------------
Balance at February 1, 1997 715,194,203 $35,760 $422,184
------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans(a) 4,272,851 213 47,892
Net cancellations of common stock pursuant to management
incentive restricted stock plans (1,420,292) (71) (10,428)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 23,682
Foreign currency translation adjustments
Amortization of restricted stock and discounted stock options
Purchase of treasury stock
Reissuance of treasury stock 7,344
Retirement of treasury stock (58,162,500) (2,908) (268,784)
Net earnings
Cash dividends ($.13 per share)
------------------------------------------------------------------
Balance at January 31, 1998 659,884,262 $32,994 $221,890
------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans(b) 5,050,130 253 46,836
Net issuance of common stock pursuant to management
incentive restricted stock plans 63,083 3 4,362
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 79,808
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments
($819)
Amortization of restricted stock and discounted stock options
Purchase of treasury stock
Reissuance of treasury stock 12,766
Net earnings
Cash dividends ($.17 per share (c))
------------------------------------------------------------------
Balance at January 30, 1999 664,997,475 $33,250 $365,662
------------------------------------------------------------------
</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.
(b) Includes payout of cash for fractional shares resulting from the three-for-
two split of common stock effective November 30, 1998.
(c) Includes a dividend of $.0333 per share declared in January 1999 but paid in
the first quarter of fiscal 1999.
page 32 1998 Annual Report
<PAGE>
Gap Inc. Gap Banana Republic Old Navy
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated Other
($000 except share and per share amounts) Retained Earnings Comprehensive Earnings Deferred Compensation
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at February 3, 1996 $1,569,347 $ (9,071) $(48,735)
- - ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans (9,648)
Net issuance of common stock pursuant to management
incentive restricted stock plans (12,903)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
Foreign currency translation adjustments 3,884
Amortization of restricted stock 23,448
Purchase of treasury stock
Reissuance of treasury stock
Net earnings 452,859
Cash dividends ($.13 per share) (83,854)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 $1,938,352 $ (5,187) $(47,838)
- - ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans(a) (18,166)
Net cancellations of common stock pursuant to management
incentive restricted stock plans 3,869
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
Foreign currency translation adjustments (10,043)
Amortization of restricted stock and discounted stock options 23,968
Purchase of treasury stock
Reissuance of treasury stock
Retirement of treasury stock
Net earnings 533,901
Cash dividends ($.13 per share) (79,503)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 $2,392,750 $ (15,230) $(38,167)
- - ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans(b) (10,351)
Net issuance of common stock pursuant to management
incentive restricted stock plans (3,873)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819) 2,712
Amortization of restricted stock and discounted stock options 20,716
Purchase of treasury stock
Reissuance of treasury stock
Net earnings 824,539
Cash dividends ($.17 per share (c)) (95,929)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 $3,121,360 $ (12,518) $(31,675)
- - ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Treasury Stock
----------------------------- Comprehensive
Shares Amount Total Earnings
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at February 3, 1996 (63,502,475) $ (222,060) $1,640,473
- - ----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 10,165
Net issuance of common stock pursuant to management
incentive restricted stock plans 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
Purchase of treasury stock (34,926,975) (468,246) (468,246)
Reissuance of treasury stock 899,243 1,505 8,474
Net earnings 452,859 452,859
Cash dividends ($.13 per share) (83,854)
- - ----------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 (97,530,207) $ (688,801) $1,654,470 $456,743
- - ----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans(a) 29,939
Net cancellations of common stock pursuant to management
incentive restricted stock plans (6,630)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 23,682
Foreign currency translation adjustments (10,043) (10,043)
Amortization of restricted stock and discounted stock options 23,968
Purchase of treasury stock (31,785,451) (598,149) (598,149)
Reissuance of treasury stock 968,438 5,007 12,351
Retirement of treasury stock 58,162,500 271,692 0
Net earnings 533,901 533,901
Cash dividends ($.13 per share) (79,503)
- - ----------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 (70,184,720) $(1,010,251) $1,583,986 $523,858
- - ----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock pursuant to stock option plans(b) 36,738
Net issuance of common stock pursuant to management
incentive restricted stock plans 492
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 79,808
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819) 2,712 2,712
Amortization of restricted stock and discounted stock options 20,716
Purchase of treasury stock (23,809,650) (910,387) (910,387)
Reissuance of treasury stock 970,249 18,238 31,004
Net earnings 824,539 824,539
Cash dividends ($.17 per share (c)) (95,929)
- - ----------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 (93,024,121) $(1,902,400) $1,573,679 $827,251
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
1998 Annual Report page 33
<PAGE>
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For the Fifty-two Weeks ended January 30, 1999 (fiscal 1998), the Fifty-two
Weeks ended January 31, 1998 (fiscal 1997) and the Fifty-two Weeks ended
February 1, 1997 (fiscal 1996).
Gap Inc. (the "Company") is a global 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, 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 October 28, 1998, the Company's Board of Directors authorized a three-for-
two split of its common stock effective November 30, 1998, in the form of a
stock dividend for shareholders of record at the close of business on
November 11, 1998. All 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.
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 the estimated useful
lives of the respective leases, not to exceed 20 years.
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 television and
magazine, are expensed when the advertising first takes place. Direct response
costs of catalogs are capitalized and amortized over the expected lives of the
related catalogs, not to exceed six months. Advertising costs were $419 million,
$175 million and $96 million in fiscal 1998, 1997 and 1996, 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 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 fiscal 1998, the Company adopted 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. The components of comprehensive earnings are shown in the Consolidated
Statements of Shareholders' Equity.
The Company also adopted 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.
The Company has one reportable segment given the similarities of economic
characteristics between the operations represented by the Company's three
brands. Revenues of international retail operations represent 10.1 percent, 9.7
percent and 9.1 percent of Gap Inc.'s revenues for fiscal
Page 34 1998 Annual Report
<PAGE>
1998, 1997 and 1996, respectively. Long-term assets of international operations,
including retail and sourcing, represent 14.3 percent and 13.4 percent of Gap
Inc.'s long-term assets for fiscal 1998 and 1997, respectively.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, on November 1, 1998. In accordance with the transition
provisions of SFAS No. 133, the Company recorded the fair value of derivatives
designated as fair-value and cash-flow hedges on the balance sheet. The Company
also recorded a corresponding offset within the balance sheet to reflect the
fair value of the hedged firm commitments. The net impact of the cumulative-
effect adjustment for fair-value hedges was not material. The Company also
recorded an immaterial cumulative-effect adjustment in comprehensive earnings to
recognize at fair value all derivatives designated as cash-flow hedges.
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 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 28, 2003. These credit facilities provide
for the issuance of up to $450 million in letters of credit. The Company has
additional uncommitted credit facilities of $400 million for the issuance of
letters of credit. At January 30, 1999, the Company had outstanding letters of
credit totaling $677,305,000.
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 30, 1999.
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 of the notes at January 30, 1999
was approximately $552 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 $47,415,000, $8,399,000 and $2,800,000 in fiscal
1998, 1997 and 1996, respectively.
NOTE C: INCOME TAXES
Income taxes consisted of the following:
- - --------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
($000) Jan. 30,1999 Jan. 31, 1998 Feb. 1, 1997
- - --------------------------------------------------------------------------------
Currently Payable
Federal $438,110 $279,068 $266,063
State 55,716 33,384 36,167
Foreign 35,663 21,595 22,335
- - --------------------------------------------------------------------------------
Total currently payable 529,489 334,047 324,565
- - --------------------------------------------------------------------------------
Deferred
Federal (29,163) (14,832) (23,980)
State and foreign (5,603) 1,126 (4,917)
- - --------------------------------------------------------------------------------
Total deferred (34,766) (13,706) (28,897)
- - --------------------------------------------------------------------------------
Total provision $494,723 $320,341 $295,668
- - --------------------------------------------------------------------------------
The foreign component of pretax earnings before eliminations and corporate
allocations in fiscal 1998, 1997 and 1996 was $190,864,000, $84,487,000 and
$82,220,000, 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 $371,886,000 at January 30,
1999.
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
- - --------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
Jan. 30,1999 Jan. 31, 1998 Feb. 1, 1997
- - --------------------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 35.0%
State income taxes,
less federal benefit 2.5 3.2 4.4
Other 0.0 (0.7) 0.1
- - --------------------------------------------------------------------------------
Effective tax rate 37.5% 37.5% 39.5%
- - --------------------------------------------------------------------------------
Deferred tax assets (liabilities) consisted of the following:
- - --------------------------------------------------------------------------------
($000) Jan. 30, 1999 Jan. 31, 1998
- - --------------------------------------------------------------------------------
Compensation and benefits accruals $43,509 $31,367
Scheduled rent 54,687 44,451
Inventory capitalization 40,976 28,776
Nondeductible accruals 10,257 20,003
Other 22,031 17,854
- - --------------------------------------------------------------------------------
Gross deferred tax assets 171,460 142,451
- - --------------------------------------------------------------------------------
Depreciation (4,058) (9,553)
Other (6,083) (6,345)
- - --------------------------------------------------------------------------------
Gross deferred tax liabilities (10,141) (15,898)
- - --------------------------------------------------------------------------------
Net deferred tax assets $161,319 $126,553
- - --------------------------------------------------------------------------------
1998 Annual Report page 35
<PAGE>
Net deferred tax assets at January 30, 1999 and January 31, 1998 are included in
Other Current Assets ($101,048,000 and $66,120,000, respectively), and Lease
Rights and Other Assets ($60,271,000 and $60,433,000, respectively) in the
Consolidated Balance Sheets. Income tax payments were $410,919,000, $320,744,000
and $249,968,000 in fiscal 1998, 1997 and 1996, 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
2017.
The aggregate minimum non-cancelable annual lease payments under leases in
effect on January 30, 1999 are as follows:
- - --------------------------------------------------------------------------------
Fiscal Year ($000)
- - --------------------------------------------------------------------------------
1999 $ 511,335
2000 496,589
2001 472,029
2002 440,932
2003 385,126
Thereafter 1,322,334
- - --------------------------------------------------------------------------------
Total minimum lease commitment $3,628,345
- - --------------------------------------------------------------------------------
Many leases entered into by the Company include options that may extend the
lease term beyond the initial commitment period, subject to terms agreed to at
lease inception. Some leases also include early termination options which can be
exercised under specific conditions. 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 $5.7 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 30, 1999
and January 31, 1998, this liability amounted to $154,897,000 and $129,981,000,
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 30, 1999
contain renewal options for periods ranging up to 30 years. Many leases also
provide for payment of operating expenses, real estate taxes and for additional
rent based on a percentage of sales. No lease directly imposes any restrictions
relating to leasing in other locations (other than radius clauses).
Rental expense for all operating leases was as follows:
- - --------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
($000) Jan. 30,1999 Jan. 31, 1998 Feb. 1, 1997
- - --------------------------------------------------------------------------------
Minimum rentals $460,715 $391,472 $337,487
Contingent rentals 75,601 38,657 30,644
- - --------------------------------------------------------------------------------
Total $536,316 $430,129 $368,131
- - --------------------------------------------------------------------------------
NOTE E: FINANCIAL INSTRUMENTS
Foreign Exchange Forward Contracts
The Company operates in foreign countries which exposes it to market risk
associated with foreign currency exchange rate fluctuations. The Company's risk
management policy is to hedge substantially all merchandise purchases for
foreign operations through the use of foreign exchange forward contracts to
minimize this risk. At January 30, 1999, the Company had contracts maturing at
various dates through 1999 to sell the equivalent of $309,775,000 in foreign
currencies (83,200,000 British pounds, 171,100,000 Canadian dollars,
41,582,379,856 Italian lire, 3,254,000,000 Japanese yen and 1,334,870,281
Spanish pesetas) at the contracted rates.
Changes in the fair value of forward contracts designated as fair-value
hedges, along with the offsetting changes in fair value of the related firm
commitments to purchase foreign merchandise, are recorded in cost of sales in
the current period. Changes in the fair value of forward contracts designated as
cash-flow hedges are recorded as a component of comprehensive earnings, and are
recognized in earnings when the hedged merchandise inventory is paid for. The
related balance included in comprehensive earnings at January 30, 1999 will be
recognized in earnings over the next 12 months. The critical terms of the
forward contracts and the respective firm commitments and forecasted foreign
purchase transactions are essentially the same. As a result, there were no
amounts reflected in fiscal 1998 earnings resulting from hedge ineffectiveness.
NOTE F: EMPLOYEE BENEFIT AND INCENTIVE STOCK COMPENSATION PLANS
Retirement Plans
The Company has a qualified defined contribution retirement plan, called
GapShare, which is available to employees who meet certain age and service
requirements. This plan permits employees to make contributions up to the
maximum limits allowable under the Internal Revenue Code. Under the plan,
page 36 1998 Annual Report
<PAGE>
the Company matches all or a portion of the employee's contributions under a
predetermined formula. The Company's contributions vest immediately. Company
contributions to the retirement plan in 1998, 1997 and 1996 were $14,284,000,
$12,907,000 and $11,427,000, respectively.
A nonqualified Executive Deferred Compensation Plan was established on
January 1, 1999 which allows eligible employees to defer compensation up to a
maximum amount. This plan superseded an earlier nonqualified Executive Deferred
Compensation Plan, established on January 1, 1994, and a nonqualified Executive
Capital Accumulation Plan, established on April 1, 1994. The Company does not
match employees' contributions under the current plan.
A Deferred Compensation Plan was established on August 26, 1997 for
nonemployee members of the Board of Directors. Under this plan, Board members
may elect to defer receipt on a pre-tax basis of eligible compensation received
for serving as 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 450,000
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 62,227,561 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 (the "Committee") 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 Committee. Total
compensation cost for those stock options issued at less than fair market value
and for the restricted shares issued was $20,845,000, $17,170,000 and
$22,248,000 in 1998, 1997 and 1996, respectively.
In 1998, the Company established a stock option plan for non-officers, called
Stock Up On Success, under which eligible employees may receive nonqualified
stock options. The Board of Directors authorized 4,000,000 shares for issuance
under Stock Up On Success. Stock options under the plan must be issued at not
less than fair market value. On February 25, 1999, options to purchase 983,400
shares were granted to approximately 19,000 employees under the plan. These
stock options have a vesting period of 11/2 years and expire ten years after the
grant date.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which all eligible
employees may purchase common stock of the Company at 85 percent of the lower of
the closing price of the Company's common stock on the grant date or the
purchase date on the New York Stock Exchange Composite Transactions Index.
Employees pay for their stock purchases through payroll deductions at a rate
equal to any whole percentage from 1 percent to 15 percent. There were 960,410
shares issued under the plan during fiscal 1998, 968,438 during 1997 and 899,243
during 1996. All shares were acquired from reissued treasury stock. At
January 30, 1999, there were 5,304,458 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 1998, the Board of Directors approved a program under which the
Company may purchase up to 45 million shares of its common stock. This program
follows an earlier 67.5 million share repurchase program, under which the
Company acquired 23.8 million shares for approximately
1998 Annual Report page 37
<PAGE>
$910 million during 1998. To date under the earlier program 66.1 million shares
have been repurchased for approximately $1.7 billion.
Stock Options
Under the Company's stock option plans, nonqualified options to purchase common
stock are granted to officers, directors and employees at exercise prices equal
to the fair market value of the stock at the date of grant or at other prices as
determined by the Compensation and Stock Option Committee of the Board of
Directors.
Stock option activity for all employee benefit plans was as follows:
- - --------------------------------------------------------------------------------
Weighted-Average
Shares Exercise Price
- - --------------------------------------------------------------------------------
Balance at February 3, 1996 35,190,954 $ 7.61
- - --------------------------------------------------------------------------------
Granted 14,046,165 13.73
Exercised (3,580,141) 5.53
Canceled (1,797,912) 9.90
- - --------------------------------------------------------------------------------
Balance at February 1, 1997 43,859,066 $ 9.64
- - --------------------------------------------------------------------------------
Granted 17,088,797 14.41
Exercised (4,273,551) 7.10
Canceled (3,838,943) 10.67
- - --------------------------------------------------------------------------------
Balance at January 31, 1998 52,835,369 $11.31
- - --------------------------------------------------------------------------------
Granted 18,963,355 32.18
Exercised (5,068,828) 7.43
Canceled (1,891,206) 17.91
- - --------------------------------------------------------------------------------
Balance at January 30, 1999 64,838,690 $17.53
- - --------------------------------------------------------------------------------
Outstanding options at January 30, 1999 have expiration dates ranging from
March 26, 1999 to January 26, 2009.
At January 30, 1999, the Company reserved 88,981,648 shares of its common
stock, including 69,260 treasury shares, for the exercise of stock options.
There were 24,142,958 and 37,289,148 shares available for granting of options at
January 30, 1999 and January 31, 1998, respectively. Options for 7,275,359,
6,449,771 and 6,559,833 shares were exercisable as of January 30, 1999, January
31, 1998 and February 1, 1997, respectively, and had a weighted-average exercise
price of $8.26, $7.77 and $6.01 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.
- - --------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
Jan. 30,1999 Jan. 31, 1998 Feb. 1, 1997
- - --------------------------------------------------------------------------------
Net earnings ($000)
As reported $824,539 $533,901 $452,859
Pro forma 772,062 507,966 437,232
- - --------------------------------------------------------------------------------
Earnings per share
As reported-basic $1.43 $.90 $.72
Pro forma-basic 1.34 .85 .70
As reported-diluted 1.37 .87 .71
Pro forma-diluted 1.28 .83 .68
- - --------------------------------------------------------------------------------
The weighted-average fair value of the stock options granted during fiscal
1998, 1997 and 1996 was $11.25, $5.84 and $4.98, 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 1998: dividend yield of .4 percent; expected price
volatility of 32 percent; risk-free interest rates ranging from 5.3 percent to
5.7 percent and expected lives between 3.9 and 6.1 years. The fair value of
stock options granted in 1997 was based on the following weighted-average
assumptions: dividend yield of .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.
page 38 1998 Annual Report
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes information about stock options outstanding at January 30, 1999:
- - -----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------------------------- ------------------------------------
Number Outstanding Weighted-Average Remaining Weighted-Average Number Exercisable Weighted-Average
Range of Exercise Prices at Jan. 30, 1999 Contractual Life (in years) Exercise Price at Jan. 30, 1999 Exercise Price
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.45 to $ 8.69 19,519,642 4.71 $ 7.91 4,648,267 $ 6.89
8.94 to 13.91 14,180,163 7.30 12.88 2,395,097 9.86
13.92 to 22.73 12,926,859 7.71 16.06 164,610 15.13
22.75 to 62.22 18,212,026 9.15 32.49 67,385 29.48
- - -----------------------------------------------------------------------------------------------------------------------------------
$ 5.45 to $62.22 64,838,690 7.12 $17.53 7,275,359 $ 8.26
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
- - --------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
Jan. 30,1999 Jan. 31, 1998 Feb. 1, 1997
- - --------------------------------------------------------------------------------
Weighted-average number
of shares-basic 576,041,373 594,269,963 625,719,947
Incremental shares from
assumed issuance of:
Stock options 23,560,445 15,056,550 8,395,829
Restricted stock 3,314,437 5,974,624 6,785,054
- - --------------------------------------------------------------------------------
Weighted-average number
of shares-diluted 602,916,255 615,301,137 640,900,830
- - --------------------------------------------------------------------------------
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 18,175 shares of common stock during fiscal 1998,
660,095 during 1997 and 7,627,467 during 1996. 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 302, 266 and 177 new stores'
leasehold improvements and fixtures during fiscal 1998, 1997 and 1996,
respectively. In the same respective years, FDI supervised construction of 135,
97 and 38 expansions, as well as remodels of existing stores and headquarters
facilities. Total cost of construction was $342,030,000, $233,777,000 and
$111,871,000, including profit and overhead costs of $28,877,000, $16,845,000
and $10,751,000, for fiscal 1998, 1997 and 1996, respectively. At January 30,
1999 and January 31, 1998, amounts due to FDI were $15,302,000 and $10,318,000,
respectively. The terms and conditions of the agreement with FDI are reviewed
annually by the Audit and Finance Committee of the Board of Directors.
1998 Annual Report page 39
<PAGE>
NOTE J: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 1998
- - ---------------------------------------------------------------------------------------------------------------------------------
Thirteen Thirteen Thirteen Thirteen Fifty-two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
($000 except per share amounts) May 2, 1998 Aug. 1, 1998 Oct. 31, 1998 Jan. 30, 1999 Jan. 30, 1999
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,719,712 $1,904,970 $2,399,948 $3,029,832 $9,054,462
Gross profit 688,708 769,805 1,023,943 1,253,788 3,736,244
Net earnings 136,066 136,874 237,749 313,850 824,539
Earnings per share-basic .23 .23 .42 .55 1.43
Earnings per share-diluted .22 .22 .40 .53 1.37
- - ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fiscal 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
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
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 .14 .12 .28 .37 .90
Earnings per share-diluted .14 .11 .27 .36 .87
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
page 40 1998 Annual Report
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
The table below provides information about the Company's market sensitive
financial instruments as of January 30, 1999 and January 31, 1998.
The Company purchases foreign exchange forward contracts to hedge
substantially all merchandise purchases made by foreign operations. These
contracts are entered into with large reputable financial institutions, thereby
minimizing the risk of credit loss. Further discussion of these contracts
appears in the Notes to the Consolidated Financial Statements (Note E).
During fiscal 1997, the Company issued $500 million of unsecured notes, due
September 15, 2007, with a fixed interest rate of 6.9 percent. 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 is 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>
- - -----------------------------------------------------------------------------------------------------------------------------------
January 30, 1999 January 31, 1998
--------------------------------------------------- ---------------------------------------------------
Notional Amount of Notional Amount of
Average Forward Contracts Average Forward Contracts
($000) Contract Rate(a) in U.S. Dollars Fair Value(b) Contract Rate(a) in U.S. Dollars Fair Value(b)
- - ----------------------------------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange
forward contracts(c)
British pounds .61 $137,222 $136,581 .60 $ 33,394 $ 33,269
Canadian dollars 1.51 112,967 112,228 1.40 32,984 31,757
Italian lire 1,700.06 24,459 25,052 1,743.25 35,924 35,383
Japanese yen 126.24 25,776 28,197 120.52 12,803 12,266
Spanish pesetas 142.75 9,351 9,189 151.98 8,125 8,112
- - -----------------------------------------------------------------------------------------------------------------------------------
Total foreign exchange forward contracts $309,775 $311,247 $123,230 $120,787
- - -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
January 30, 1999 January 31, 1998
--------------------------------------------------- ---------------------------------------------------
Carrying Amount in Carrying Amount in
($000) U.S. Dollars Fair Value(d) U.S. Dollars Fair Value(d)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes payable $496,455 $551,818 $496,044 $526,128
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Currency per U.S. dollar.
(b) Calculated using forward spot rates at the dates presented.
(c) All contracts mature within one year.
(d) Based on the rates at which the Company could borrow funds with similar
terms and remaining maturities at the dates presented.
1998 Annual Report page 41
<PAGE>
EXHIBIT 21
The Gap, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Corporation Inc. State
----------- ----------
<S> <C>
The Gap, Inc. Delaware
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 (Puerto Rico) Inc. Puerto Rico
Banana Republic Direct, Inc. California
Banana Republic Limited England and Wales
Banana Republic Stores Pty. Ltd. New South Wales, Australia
Banana Republic, Inc. California
Banana Republic, Inc. Delaware
GPS (Bermuda) Insurance Services Limited Bermuda
GPS (Bermuda) Limited Bermuda
GPS (Delaware), Inc. Delaware
GPS (Great Britain) Limited England and Wales
GPS (International Investments) B.V. Amsterdam, Netherlands
GPS (Japan), Limited Delaware
GPS (Maryland), Inc. Maryland
GPS (USA) Limited California
GPSDC (New York) Inc. California
GPS Brand Services, Inc. California
GPS Consumer Direct, Inc. California
GPS Employee Services, Inc. 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 (DTM) Inc. California
Gap (ESO) Limited England and Wales
Gap (Florida) LLC California
Gap (France) SAS Paris, France
Gap (Georgia) LP California
Gap (Hong Kong) Limited Hong Kong
Gap (ITM) Inc. California
Gap (Indiana) LP California
Gap (Ireland) Limited Dublin, Ireland
Gap (Japan) K.K. Tokyo, Japan
Gap (Kentucky) LP California
Gap (Merchandise), Inc. California
Gap (Netherlands) B.V. Amsterdam, Netherlands
Gap (Puerto Rico), Inc. Puerto Rico
Gap (RHC) B.V. Amsterdam, Netherlands
Gap (Tennessee) LP California
Gap (Texas) LP California
Gap (Wisconsin) LP California
Gap Direct, Inc. California
Gap Holdings, Inc. California
Gap International Sourcing (California) California
Inc.
Gap International Sourcing (Holdings) Hong Kong
Limited
Gap International Sourcing (JV) LLC California
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Gap International Sourcing (Mexico) S.A. Mexico
de CV
Gap International Sourcing (U.S.A.) Inc. California
Gap International Sourcing FZE Dubai
Gap International Sourcing Limited Hong Kong
Gap International Sourcing Pte. Ltd. Singapore
Gap International Sourcing, Inc. California
Gap International, Inc. California
Goldhawk B.V. Amsterdam, 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 (Puerto Rico) Inc. Puerto Rico
Old Navy Inc. Delaware
Old Navy Direct, Inc. California
Real Estate Ventures (Glastonbury), Inc. Delaware
Real Estate Ventures (Glen Eagle), Inc. Delaware
Real Estate Ventures (Wheaton) Inc. Illinois
The Fisher Gap Stores Inc. California
The Gap Limited England and Wales
</TABLE>
<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, Registration Statement No. 333-36265,
Registration Statement No. 333-68285 and Registration Statement No. 333-72921
all on Form S-8, of our report dated February 25, 1999, incorporated by
reference in the Annual Report on Form 10-K of The Gap, Inc. for the fiscal
year ended January 30, 1999.
/s/ Deloitte & Touche LLP
San Francisco, California
April 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS OF THE GAP, INC. AND SUBSIDIARIES AS OF 01/30/1999 AND
01/31/1998 AND THE RELATED CONSOLIDATED STATEMENTS OF EARNINGS, SHAREHOLDER
EQUITY AND CASHFLOWS FOR EACH OF THE 3 FISCAL YEARS IN THE PERIOD ENDED
01/30/1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 565,253,000
<SECURITIES> 0
<RECEIVABLES> 250,127,000
<ALLOWANCES> 0
<INVENTORY> 1,056,444,000
<CURRENT-ASSETS> 1,871,824,000
<PP&E> 3,048,327,000
<DEPRECIATION> 1,171,957,000
<TOTAL-ASSETS> 3,963,919,000
<CURRENT-LIABILITIES> 1,553,103,000
<BONDS> 496,455,000
0
0
<COMMON> 33,250,000
<OTHER-SE> 1,540,429,000
<TOTAL-LIABILITY-AND-EQUITY> 3,963,919,000
<SALES> 9,054,462,000
<TOTAL-REVENUES> 9,054,462,000
<CGS> 5,318,218,000
<TOTAL-COSTS> 2,403,365,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,617,000
<INCOME-PRETAX> 1,319,262,000
<INCOME-TAX> 494,723,000
<INCOME-CONTINUING> 824,539,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 824,539,000
<EPS-PRIMARY> 1.43<F1>
<EPS-DILUTED> 1.37<F1>
<FN>
<F1>Reflects the three-for-two split of common stock in the form of a stock
dividend effective November 30, 1998. Prior Financial Data Schedules have not
been restated to reflect the stock split.
</FN>
</TABLE>
