<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 28, 2000 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______________ to ______________
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
-------------------------- ---------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Harrison
San Francisco, California 94105
(Address of principal executive offices)
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
-----
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Common Stock, $0.05 par value, 849,695,146 shares as of November 25, 2000
-------------------------------------------------------------------------
1
<PAGE>
GAP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except par value) October 28, January 29, October 30,
2000 2000 1999
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 352,201 $ 450,352 $ 485,680
Merchandise inventory 2,567,502 1,462,045 1,825,038
Other current assets 475,605 285,393 306,567
------------ ------------ ------------
Total Current Assets 3,395,308 2,197,790 2,617,285
Property and equipment, net 3,621,474 2,715,315 2,473,509
Lease rights and other assets 344,677 275,651 254,530
------------ ------------ ------------
Total Assets $ 7,361,459 $ 5,188,756 $ 5,345,324
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 1,482,356 $ 168,961 $ 636,534
Accounts payable 1,032,095 805,945 725,635
Accrued expenses and other current liabilities 724,804 777,973 861,409
------------ ------------ ------------
Total Current Liabilities 3,239,255 1,752,879 2,223,578
Long-Term Liabilities:
Long-term debt 1,003,542 784,925 808,937
Deferred lease credits and other liabilities 498,496 417,907 394,684
------------ ------------ ------------
Total Long-Term Liabilities 1,502,038 1,202,832 1,203,621
Shareholders' Equity:
Common stock $.05 par value
Authorized 2,300,000 shares
Issued 935,383; 1,007,357
and 1,004,527 shares,
Outstanding 849,839, 850,499
and 850,868 shares 46,768 50,368 50,226
Additional paid-in capital 220,924 669,490 594,740
Retained earnings 4,721,976 4,172,796 3,796,656
Accumulated other comprehensive earnings (losses) 379 (6,759) (24,347)
Deferred compensation (15,154) (23,150) (28,243)
Treasury stock, at cost (2,354,727) (2,629,700) (2,470,907)
------------ ------------ ------------
Total Shareholders' Equity 2,620,166 2,233,045 1,918,125
------------ ------------ ------------
Total Liabilities and Shareholders' Equity $ 7,361,459 $ 5,188,756 $ 5,345,324
============ ============ ============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
--------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
-------------------------- ---------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- ---------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,414,668 $ 3,045,386 $ 9,094,372 $ 7,776,459
Costs and expenses
Cost of goods sold and occupancy expenses 2,157,461 1,741,098 5,596,430 4,518,798
Operating expenses 943,262 797,642 2,502,859 2,106,088
Net interest expense 20,483 10,557 41,155 18,366
------------ ------------ ----------- -------------
Earnings before income taxes 293,462 496,089 953,928 1,133,207
Income taxes 107,114 181,072 348,184 419,991
------------ ------------ ----------- -------------
Net earnings $ 186,348 $ 315,017 $ 605,744 $ 713,216
============ ============ =========== =============
-----------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares - basic 848,754,207 853,705,825 849,574,768 855,187,459
Weighted average number of shares - diluted 871,570,698 891,325,345 880,583,218 897,271,042
Earnings per share - basic $0.22 $0.37 $0.71 $0.83
Earnings per share - diluted $0.21 $0.35 $ 0.69 $0.79
Cash dividends per share $0.02 $0.02 $0.07/(a)/ $0.07/(b)/
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
(a) Includes a dividend of $0.02 per share declared in January 2000 but paid in
first quarter of fiscal 2000.
(b) Includes a dividend of $0.02 per share declared in January 1999 but paid in
first quarter of fiscal 1999.
3
<PAGE>
GAP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) Thirty-nine Weeks Ended
------------------------------------
October 28, 2000 October 30, 1999
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 605,744 $ 713,216
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 423,336 302,495
Tax benefit from exercise of stock options
and vesting of restricted stock 101,140 172,696
Changes in operating assets and liabilities:
Merchandise inventory (1,116,677) (765,060)
Other current assets (207,371) (55,836)
Accounts payable 206,857 34,633
Accrued expenses (17,081) 76,731
Deferred lease credits and other liabilities 53,150 42,360
----------- -----------
Net cash provided by operating activities 49,098 521,235
----------- -----------
Cash Flows from Investing Activities:
Net purchase of property and equipment (1,325,612) (865,751)
Acquisition of lease rights and other assets (40,995) (39,942)
----------- -----------
Net cash used for investing activities (1,366,607) (905,693)
----------- -----------
Cash Flows from Financing Activities:
Net increase in notes payable 1,324,543 547,253
Issuance of long-term debt 250,000 311,839
Issuance of common stock 73,960 52,800
Net purchase of treasury stock (357,176) (560,394)
Cash dividends paid (56,619) (56,967)
----------- -----------
Net cash provided by financing activities 1,234,708 294,531
----------- -----------
Effect of exchange rate fluctuations on cash (15,350) 10,354
----------- -----------
Net decrease in cash and equivalents (98,151) (79,573)
Cash and equivalents at beginning of year 450,352 565,253
----------- -----------
Cash and equivalents at end of quarter $ 352,201 $ 485,680
=========== ===========
</TABLE>
________________________________________________________________________________
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
GAP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The condensed consolidated balance sheets as of October 28, 2000 and October 30,
1999 and the interim condensed consolidated statements of earnings for the
thirteen and thirty-nine weeks ended October 28, 2000 and October 30, 1999 and
cash flows for the thirty-nine week periods ended October 28, 2000 and October
30, 1999 have been prepared by the Company, without audit. In the opinion of
management, such statements include all adjustments (which include only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows of the Company at October 28,
2000 and October 30, 1999, and for all periods presented.
Certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted from these interim
financial statements. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended January 29, 2000.
The condensed consolidated balance sheet as of January 29, 2000 was derived from
the Company's January 29, 2000 balance sheet included in the Company's 1999
Annual Report on Form 10-K.
The results of operations for the thirty-nine weeks ended October 28, 2000 are
not necessarily indicative of the operating results that may be expected for the
year ending February 3, 2001.
Certain reclassifications have been made to the 1999 financial statements to
conform with the 2000 presentation.
2. COMPREHENSIVE EARNINGS
----------------------
Comprehensive earnings include net earnings and other comprehensive earnings
(losses). Other comprehensive earnings (losses) include foreign currency
translation adjustments and fluctuations in the fair market value of certain
financial instruments. Comprehensive earnings for the thirteen and thirty-nine
weeks ended October 28, 2000 and October 30, 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- ---------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net earnings $186,348 $315,017 $605,744 $713,216
Other comprehensive (losses) earnings (9,624) (3,460) 7,138 (11,829)
------------------------- --------------------------
Comprehensive earnings $176,724 $311,557 $612,882 $701,387
========================= ==========================
</TABLE>
5
<PAGE>
3. EARNINGS PER SHARE
------------------
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share
includes the dilutive effect of the Company's potentially dilutive securities,
which include certain stock options, unvested shares of restricted stock, and
certain put options. The following summarizes the incremental shares from these
potentially dilutive securities, calculated using the treasury stock method.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ ------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
------------------------ ------------------------
<S> <C> <C> <C> <C>
Weighted-average number of shares - basic 848,754,207 853,705,825 849,574,768 855,187,459
Incremental shares resulting from:
Stock options 22,399,787 36,650,564 30,443,522 40,393,299
Restricted stock 402,175 809,735 564,928 1,646,136
Put options 14,529 159,221 - 44,148
------------------------ ------------------------
Weighted-average number of shares - diluted 871,570,698 891,325,345 880,583,218 897,271,042
======================== ========================
</TABLE>
Excluded from the above computations of weighted-average shares for diluted
earnings per share were options to purchase 27,666,897 and 18,593,628 shares of
common stock during the thirteen and thirty-nine weeks ended October 28, 2000,
respectively, and 10,276,234 and 6,613,448 shares during the thirteen and
thirty-nine weeks ended October 30, 1999, respectively. Additionally, put
options to repurchase 800,000 shares during the thirty-nine weeks ended October
28, 2000 were excluded from the above computations. Issuance or repurchase of
these securities would have resulted in an antidilutive effect on earnings per
share.
4. PUT OPTIONS
-----------
During the third quarter of 2000, the Company repurchased 375,000 shares under a
put option contract for approximately $12 million.
At the end of the third quarter of 2000, the Company was obligated under a put
option contract to repurchase 400,000 shares of the Company's stock. The
contract has an exercise price $25.53 per share, with an expiration date of
February 2001.
5. TREASURY SHARES RETIREMENT
--------------------------
During the first quarter of 2000, the Company retired approximately 81 million
treasury shares with a cost basis of approximately $642 million. This retirement
did not affect results of operations.
6. LONG-TERM DEBT
--------------
During the second quarter of 2000, the Company issued $250 million of debt
securities at a rate per annum, reset quarterly, equal to three-month LIBOR plus
0.125%, due November 15, 2001.
6
<PAGE>
7. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and
Handling Fees and Costs, requires that all amounts billed to a customer in a
sale transaction related to shipping and handling, if any, should be classified
as revenue. Also, the classification of shipping and handling costs is an
accounting policy decision that should be disclosed. Currently, the Company
classifies shipping and handling revenues and costs as operating expenses. This
consensus must be adopted no later than the fourth quarter of 2000. The Company
does not expect this consensus to have a material impact on its consolidated
financial statements.
7
<PAGE>
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105-2230
Tel: (415) 783 4000
Fax: (415) 783 4329
www.us.deloitte.com
Deloitte
& Touche
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
The Gap, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of The
Gap, Inc. and subsidiaries as of October 28, 2000 and October 30, 1999 and the
related condensed consolidated statements of earnings for the thirteen and
thirty-nine week periods ended October 28, 2000 and October 30, 1999 and
condensed consolidated statements of cash flows for the thirty-nine week periods
ended October 28, 2000 and October 30, 1999. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of The
Gap, Inc. and subsidiaries as of January 29, 2000, and the related consolidated
statements of earnings, shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated February 23, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of January 29, 2000 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
was derived.
/s/ Deloitte & Touche LLP
San Francisco, California
November 8, 2000
8
<PAGE>
GAP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------------
The information below 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 actual 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, 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.
It is suggested that this document be read in conjunction with the Management's
Discussion and Analysis included in the Company's Annual Report on Form 10-K for
the year ended January 29, 2000.
The Company assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Net Sales
------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ($000) $3,414,668 $3,045,386 $9,094,372 $7,776,459
Total net sales growth percentage 12 27 17 29
Comparable store sales (decrease) increase percentage (8) 5 (4) 8
Net sales per average square foot $118 $141 $339 $382
Square footage of gross store space -
at end of period (000) 29,978 22,721
Number of Stores:
Beginning of Year 3,018 2,466
New stores 564 424
Expanded stores/(1)/ 143 76
Closed stores 40 11
End of Period 3,542 2,879
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Expanded stores do not change store count.
9
<PAGE>
Store count and square footage at quarter end for 2000 and 1999 were as follows:
October 28, 2000 October 30, 1999
-------------------------------------------------------------------------------
Number of Sq. Ft. Number of Sq. Ft.
Stores (millions) Stores (millions)
-------------------------------------------------------------------------------
Gap Domestic 2,002 11.5 1,688 9.9
Gap International 503 2.8 367 1.9
Banana Republic 389 3.1 329 2.4
Old Navy 648 12.6 495 8.5
-------------------------------------------------------------------------------
Total 3,542 30.0 2,879 22.7
===============================================================================
Increase 23% 32% 21% 27%
The increases in net sales for the third quarter and year-to-date 2000 over the
same periods last year were attributable to the increase in retail selling
space, both through the opening of new stores (net of stores closed) and the
expansion of existing stores.
The Company's third quarter comparable store sales by division were as follows:
Gap Domestic had a negative low-single digit versus a negative low-single digit
last year, Gap International had a negative low-single digit versus a positive
high-single digit last year, Banana Republic had a negative low-single digit
versus a positive high-single digit last year, Old Navy had negative high-teens
versus positive low-double digits last year.
The Company's year-to-date comparable store sales by division were as follows:
Gap Domestic had a negative low-single digit versus a flat comp last year, Gap
International had a positive low-single digit versus positive mid-teens last
year, Banana Republic had a flat comp versus positive low-teens last year, Old
Navy had a negative low-double digit versus positive high-teens last year.
The decreases in net sales per average square foot for the third quarter and
year-to-date 2000 were primarily attributable to the decreases in comparable
store sales and the growing impact of the Old Navy division. Old Navy division's
lower-priced merchandise and significantly larger stores result in lower net
sales per average square foot when compared to other divisions.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales increased
6.0 and 3.4 percentage points in the third quarter and year-to-date 2000,
respectively, from the same periods in 1999.
For both the third quarter and year-to-date 2000, the decreases in merchandise
margin as a percentage of net sales were primarily attributable to a greater
percentage of merchandise sold at markdown and lower margins from marked-down
goods when compared to the same periods last year. The increases in occupancy
expenses as a percentage of net sales for the third quarter and year-to-date
2000 were primarily attributable to the decreases in net sales per average
square foot.
Operating Expenses
Operating expenses as a percentage of net sales increased 1.4 and 0.4 percentage
points in the third quarter and year-to-date 2000, respectively, from the same
periods in 1999. The increases were primarily attributable to the decreases in
comparable store sales, higher store payroll as a percentage of net sales offset
by lower advertising costs as a percentage of net sales.
10
<PAGE>
Net Interest Expense
The increases in net interest expense in the third quarter and year-to-date 2000
as compared to the same periods in 1999 were primarily due to increased interest
costs from an increase in average borrowings partially offset by additional
interest capitalized during the third quarter and year-to-date 2000.
Income Taxes
The effective tax rate was 36.5 percent for the third quarter and year-to-date
2000, and 36.5 and 37.1 percent for the third quarter and year-to-date 1999,
respectively. The decrease in the tax rate resulted from the Company's
implementation of global tax planning initiatives based on long-term business
needs.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Thirty-nine Weeks Ended
---------------------------------------------
October 28, 2000 October 30, 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities ($000) $49,098 $521,235
Working capital ($000) $156,053 $393,707
Current ratio 1.05:1 1.18:1
-------------------------------------------------------------------------------------------------
</TABLE>
For the thirty-nine weeks ended October 28, 2000, the decrease in cash flows
provided by operating activities, compared to the same period in the prior year,
was primarily attributable to an increase in merchandise inventory, a decrease
in tax benefit from the exercise of stock options and vesting of restricted
stock and changes in other operating assets and liabilities which were primarily
driven by timing of certain payments.
The Company funds inventory expenditures during normal and peak periods through
a combination of cash flows provided by operations and short-term financing
arrangements. The Company's business follows a seasonal pattern, peaking over a
total of about 13 weeks during the Back-to-School and Holiday periods.
The Company has committed credit facilities totaling $1.35 billion, consisting
of an $1.20 billion, 364-day revolving credit facility, and a $150 million,
5-year revolving credit facility through June 27, 2005. These credit facilities
provide for the issuance of up to $600 million in letters of credit and provide
backup for the Company's $750 million commercial paper program. The Company has
additional uncommitted credit facilities of $845 million for the issuance of
letters of credit. At October 28, 2000, the Company had outstanding letters of
credit totaling approximately $1.03 billion. The Company had $750 million of
commercial paper and $35 million in Extendable Commercial Notes outstanding at
October 28, 2000.
During the second quarter of 2000, the Company issued $250 million of debt
securities at a rate per annum, reset quarterly, equal to three-month LIBOR plus
0.125%, due November 15, 2001.
For the thirty-nine weeks ended October 28, 2000, capital expenditures, net of
construction allowances and dispositions, totaled approximately $1.28 billion.
The majority of these expenditures were used for expansion of the store base,
headquarter and distribution facilities. For year-to-date 2000, the Company
experienced a net increase in store space of approximately 6 million square
feet, or 25 percent, due to a net addition of 524 stores, the expansion of 143
stores and the remodeling of certain stores.
For 2000, the Company expects capital expenditures to be approximately $1.8
billion, net of construction allowances. This represents the addition of 640 to
700 new stores, the expansion of approximately 200 stores, the remodeling of
certain stores, as well as amounts for headquarters facilities, distribution
centers and equipment and information technology. 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 approximately 30 percent. New
stores are generally expected to be leased.
12
<PAGE>
The Company's store growth plans for fiscal 2000 and fiscal 2001 are as follows:
Fiscal 2000 Fiscal 2001
-------------------------------------------------------------------------------
Store Sq. Ft. Store Sq. Ft.
Growth Range Growth Range
-------------------------------------------------------------------------------
Gap Domestic 320-340 16-18% 270-290 11-14%
Gap International 130-140 38-41% 100-120 20-25%
Banana Republic 40-60 22-26% 40-60 13-17%
Old Navy 150-160 40-45% 140-160 23-27%
-------------------------------------------------------------------------------
Total 640-700 Approx. 30% 550-630 17-20%
===============================================================================
During 1998, the Company purchased land on which to construct additional
headquarter facilities in San Francisco and San Bruno, California. The estimated
total project costs are approximately $240 million and $100 million,
respectively. Construction commenced on the San Francisco facility during the
third quarter of 1998 and is estimated to continue through early 2001.
Construction commenced during the first quarter of 1999 on the San Bruno
facility and has recently been completed.
The Company commenced construction on several distribution facilities in the
second quarter and the third quarter of 2000. The estimated total cost for these
facilities is approximately $455 million. The majority of the expenditures will
be incurred during 2000. The facilities are expected to be open in the third
quarter of 2001.
The Company took possession of a distribution site and building in Ontario,
Canada during the first quarter of 2000 to support the initial international
expansion plans for the Old Navy business. The Company will spend the next year
remodeling the facility prior to its anticipated opening date in mid-2001. The
estimated total project cost is approximately $89 million.
In the first nine months of 2000, under the 67.5 million share repurchase
program approved in October 1998, the Company acquired approximately 10.4
million shares for approximately $377 million, including 0.8 million shares
acquired under put option contracts for approximately $26 million.
At the end of the third quarter of 2000, the Company was obligated under a put
option contract to repurchase 400,000 shares of the Company's stock. The
contract has an exercise price $25.53 per share, with an expiration date of
February 2001.
Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and
Handling Fees and Costs, requires that all amounts billed to a customer in a
sale transaction related to shipping and handling, if any, should be classified
as revenue. Also, the classification of shipping and handling costs is an
accounting policy decision that should be disclosed. Currently, the Company
classifies shipping and handling revenues and costs as operating expenses. This
consensus must be adopted no later than the fourth quarter of 2000. The Company
does not expect this consensus to have a material impact on its consolidated
financial statements.
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.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
The market risk of the Company's financial instruments as of October 28, 2000
has not significantly changed since January 29, 2000.
The market risk profile of the Company on January 29, 2000 is disclosed in the
Company's 1999 Annual Report on Form 10-K.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
The Company has been named as a defendant in two lawsuits relating to
sourcing of products from Saipan (Commonwealth of the Northern Mariana
Islands). A complaint was filed on January 13, 1999 in California
Superior Court in San Francisco by the Union of Needletrades Industrial
and Textile Employees, AFL-CIO; Global Exchange; Sweatshop Watch; and
Asian Law Caucus against the Company and 17 other parties. The
plaintiffs allege violations of California's unlawful, fraudulent and
unfair business practices and untrue and misleading advertising statutes
in connection with labeling of product and labor practices regarding
workers of factories that make product for the Company in Saipan. The
plaintiffs seek injunctive relief, restitution, disgorgement of profits
and other damages. Trial has not been set in the state case.
A second complaint was filed on January 13, 1999 in Federal District
Court, Central District of California, by various unidentified worker
plaintiffs against the Company and 25 other parties. Those unidentified
worker plaintiffs seek class-action status and allege, among other
things, that the Company (and other defendants) violated the Racketeer
Influenced and Corrupt Organizations Act in connection with the labor
practices and treatment of workers of factories in Saipan that make
product for the Company. The plaintiffs seek injunctive relief as well
as actual and punitive damages. On September 29, 1999 the action was
transferred to the United States District Court, State of Hawaii. On
April 28, 2000, plaintiffs filed a First Amended Complaint adding 22 new
defendants. On June 23, 2000, the United States District Court, State of
Hawaii, ordered the case transferred to the United States District
Court, District of the Mariana Islands. Transfer of the case has been
stayed pending writ review of the transfer order in the United States
Ninth Circuit. Upon resolution, defendants intend to renew a motion in
United States District Court, Central District of California, to dismiss
the case.
The Company is in the process of investigating the allegations set forth
in the complaints and will pursue appropriate legal defenses. At this
time the Company is unable to assess the likelihood of the outcome of
these cases and cannot estimate the amount or range of potential loss,
if any.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a) Exhibits
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended October 28, 2000.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GAP, INC.
Date: November 30, 2000 By /s/ Heidi Kunz
-----------------------------
Heidi Kunz
Chief Financial Officer
(Principal financial officer
of the registrant)
Date: November 30, 2000 By /s/ Millard S. Drexler
-----------------------------
Millard S. Drexler
President and Chief Executive
Officer
15
<PAGE>
EXHIBIT INDEX
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
16
