-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DMU5B4vRLVzNtVTX3U1u27Hn73aGqAkWJOeVR2gUT40BWbCvZA8hxtD1Fdr3PEmN K5sz+flLnm3bGuerw7Pgjg== 0000929624-99-000704.txt : 19990505 0000929624-99-000704.hdr.sgml : 19990505 ACCESSION NUMBER: 0000929624-99-000704 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990402 DATE AS OF CHANGE: 19990504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAP INC CENTRAL INDEX KEY: 0000039911 STANDARD INDUSTRIAL CLASSIFICATION: 5651 IRS NUMBER: 941697231 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07562 FILM NUMBER: 99598618 BUSINESS ADDRESS: STREET 1: ONE HARRISON CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4159524400 MAIL ADDRESS: STREET 1: ONE HARRISON STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: GAP STORES INC DATE OF NAME CHANGE: 19850617 10-K 1 FORM 10-K 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 ------------------- ------------------ (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 ______ ----- 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. 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 ------ Item 1 - Business General - - ------- 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 2 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 - - --------------- 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 3 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 - - ------------------------------ 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 4 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 - - ----------------------- 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 - - --------- 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 - - ----------------- 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 - - ----------- 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 5 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 - - ----------- 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 - - --------- 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 - - ---------------------------- 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 - - ------------------------------------ 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. 6 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:
Title Location Square Footage (Approximate) - - ---------------------------------------------------------------------------------------------------------------- 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) - - ---------------------------------------------------------------------------------------------------------------- Canadian Distribution Center (CDC) Brampton, Ontario 325,000 square feet - - ---------------------------------------------------------------------------------------------------------------- Holland Distribution Center (HDC) Roosendaal, The Netherlands 130,000 square feet
7 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 ------- 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. 8 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 -------- 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 ------- 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. 9 (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. 10 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 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 Exhibit Index 3.1 Registrant's Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation 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
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.5 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54690 10.6 Management Incentive Restricted Stock Plan II, filed as exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54686 10.7 Description of Management Incentive Cash Award Plan filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562 10.8 Executive Management Incentive Cash Award Plan (March 21, 1995 Amendment and Restatement), filed as Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 23, 1995, Commission File No. 1-7562 10.9 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
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
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
EX-10.2 2 FIRST LETTER AMENDMENT DATED 07/01/1997 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 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. 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: 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: 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 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 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 8 NATIONSBANK OF TEXAS, N.A., as a Bank By /s/ Michael Shea --------------------- Name: Michael Shea Title: S.V.P. 9 THE ROYAL BANK OF CANADA, as a Bank By /s/ Molly Drennan -------------------- Name: Molly Drennan Title: Senior Manager Corporate Banking 10 BANK OF MONTREAL, as a Bank By /s/ Richard W. Camm ---------------------- Name: Richard W. Camm Title: Managing Director 11 SOCIETE GENERALE, as a Bank By /s/ J. Blaine Shaum ----------------------- Name: J. Blaine Shaum Title: Managing Director 12 THE FUJI BANK, LIMITED, as a Bank By /s/ Keiichi Ozawa --------------------- Name: Keiichi Ozawa Title: Joint General Manager 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 14 THE SUMITOMO BANK LIMITED, as a Bank By /s/ Kozo Masaki ------------------ Name: Kozo Masaki Title: General Manager 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 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 17 U.S. NATIONAL BANK OF OREGON, as a Bank By /s/ Brennan K. Church ------------------------ Name: Brennan K. Church Title: Assistant Vice President 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 19 SCHEDULE I
Lender A Commitment LC Commitment - - --------------------------------------------------------------------------------------------------- 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 - - ---------------------------------------------------------------------------------------------------
EX-10.4 3 FIRST LETTER AGREEMENT DATED 06/30/1998 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:
Debt Rating or CP Rating S&P/Moody's Eurodollar Rate Margin for Eurodollar Rate Advances ------------------------------------------------------------ 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 ------------------------------------------------------------
------------------------------------------------------------ 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% ------------------------------------------------------------
(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:
------------------------------------------------------------- Debt Rating or CP Rating S&P/Moody's Facility Fee ------------------------------------------------------------- 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 -------------------------------------------------------------
------------------------------------------------------------- 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% -------------------------------------------------------------
(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. 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 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 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 7 NATIONSBANK OF TEXAS, N.A., as a Bank By /s/ Michael Shea --------------------- Name: Michael Shea Title: S.V.P. 8 THE ROYAL BANK OF CANADA, as a Bank By /s/ Molly Drennan -------------------- Name: Molly Drennan Title: Senior Manager Corporate Banking 9 BANK OF MONTREAL, as a Bank By /s/ Richard W. Camm ---------------------- Name: Richard W. Camm Title: Managing Director 10 SOCIETE GENERALE, as a Bank By /s/ J. Blaine Shaum ----------------------- Name: J. Blaine Shaum Title: Managing Director 11 THE FUJI BANK, LIMITED, as a Bank By /s/ Keiichi Ozawa --------------------- Name: Keiichi Ozawa Title: Joint General Manager 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 13 THE SUMITOMO BANK LIMITED, as a Bank By /s/ Kozo Masaki ------------------ Name: Kozo Masaki Title: General Manager 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 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 16 U.S. NATIONAL BANK OF OREGON, as a Bank By /s/ Brennan K. Church ------------------------ Name: Brennan K. Church Title: Assistant Vice President 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 SCHEDULE I - - ------------------------------------------------------------------------------- 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 - - -------------------------------------------------------------------------------
EX-10.33 4 INCOME CONTINUATION PROTECTION ARRANGEMENT 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 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. 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 EX-13 5 PORTIONS OF THE REGISTRANT'S ANNUAL REPORT Gap Inc. Gap Banana Republic Old Navy Ten-Year Selected Financial Data
Compound Annual Growth Rate Fiscal Year ----------------------------------- ------------------------- 1998 1997 3-year 5-year 10-year 52 weeks 52 weeks ----------------------------------- ------------------------- 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 -------------------------------------------------------------------------------------
(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 Gap Inc. Gap Banana Republic Old Navy Ten-Year Selected Financial Data (continued)
Fiscal Year - - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 52 weeks 53 weeks 52 weeks 52 weeks ------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------
Fiscal Year ---------------------------------------------------------------------------------- 1992 1991 1990 1989 52 weeks 52 weeks 52 weeks 53 weeks ---------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------
(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 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 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 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 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.
- - ------------------------------------------------------------------------------------------------------------------- Market Prices Cash Dividends --------------------------------------------- ------------------ Fiscal 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------------- High Low High Low - - ------------------------------------------------------------------------------------------------------------------- 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 - - -------------------------------------------------------------------------------------------------------------------
(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. 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 Gap Inc. Gap Banana Republic Old Navy Consolidated Statements of Earnings
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 - - ------------------------------------------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 1998 Annual Report page 29 Consolidated Balance Sheets
($000 except par value) January 30, 1999 January 31, 1998 - - ------------------------------------------------------------------------------------------------------------------- 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 =================================
See Notes to Consolidated Financial Statements. page 30 1998 Annual Report Gap Inc. Gap Banana Republic Old Navy Consolidated Statements of Cash Flows
Fifty-two Fifty-two Fifty-two Weeks Ended Weeks Ended Weeks Ended ($000) January 30, 1999 January 31, 1998 February 1, 1997 - - ------------------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------
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 Consolidated Statements of Shareholders' Equity
Common Stock ------------------------------- ($000 except share and per share amounts) Shares Amount Additional Paid-in Capital - - ------------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------
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 Gap Inc. Gap Banana Republic Old Navy Consolidated Statements of Shareholders' Equity
Accumulated Other ($000 except share and per share amounts) Retained Earnings Comprehensive Earnings Deferred Compensation - - ------------------------------------------------------------------------------------------------------------------------------------ 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) - - ------------------------------------------------------------------------------------------------------------------------------------ Treasury Stock ----------------------------- Comprehensive Shares Amount Total Earnings - - ---------------------------------------------------------------------------------------------------------------------------- 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 - - ----------------------------------------------------------------------------------------------------------------------------
1998 Annual Report page 33 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 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 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 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 $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
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 - - ----------------------------------------------------------------------------------------------------------------------------------- $ 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 - - -----------------------------------------------------------------------------------------------------------------------------------
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 NOTE J: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
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 - - --------------------------------------------------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------------------------------------------------- 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 - - ---------------------------------------------------------------------------------------------------------------------------------
page 40 1998 Annual Report 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.
- - ----------------------------------------------------------------------------------------------------------------------------------- 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) - - ----------------------------------------------------------------------------- --------------------------------------------------- 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 - - ----------------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------------- 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) - - ----------------------------------------------------------------------------------------------------------------------------------- Notes payable $496,455 $551,818 $496,044 $526,128 - - -----------------------------------------------------------------------------------------------------------------------------------
(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 EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 The Gap, Inc. and Subsidiaries
Corporation Inc. State ----------- ---------- 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
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
EX-23 7 CONSENT OF DELIOTTE & TOUCHE LLP 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 EX-27 8 FINANCIAL DATA SCHEDULE -- YEAR ENDED 01/30/1999
5 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. YEAR JAN-30-1999 FEB-01-1998 JAN-30-1999 565,253,000 0 250,127,000 0 1,056,444,000 1,871,824,000 3,048,327,000 1,171,957,000 3,963,919,000 1,553,103,000 496,455,000 0 0 33,250,000 1,540,429,000 3,963,919,000 9,054,462,000 9,054,462,000 5,318,218,000 2,403,365,000 0 0 13,617,000 1,319,262,000 494,723,000 824,539,000 0 0 0 824,539,000 1.43 1.37 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.
-----END PRIVACY-ENHANCED MESSAGE-----