-----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, EZVxMR46zWYr6C8zZZCTyP+WHPSzsGKmHB8M2TpP1UbkP3zfqLAx+vkPaDYkGLjc iKnI1BciFOJ6dwUB57wYWA== 0001012870-98-000890.txt : 19980406 0001012870-98-000890.hdr.sgml : 19980406 ACCESSION NUMBER: 0001012870-98-000890 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980403 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAP INC CENTRAL INDEX KEY: 0000039911 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [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: 98587518 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 FOR FISCAL YEAR ENDED 01/31/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-1697231 ----------------- --------------- (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 9, 1998 was approximately $11,454,266,735 based upon the last price reported for such date in the NYSE-Composite transactions. The number of shares of the registrant's Common Stock outstanding as of March 27, 1998 was 393,914,220. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1998 (hereinafter referred to as the "1998 Proxy Statement") are incorporated into Parts I and III. Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended January 31, 1998 (hereinafter referred to as the "1997 Annual Report to Shareholders") are incorporated into Parts II and IV. The Exhibit Index is located on Page 12 hereof. This Annual Report on Form 10-K and the information incorporated herein by reference contain certain forward-looking statements which reflect the Company's current view with respect to future events and financial performance. Whenever used, the words "expect," "plan," "anticipate," "believe" and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results of operations to differ materially from historical results or current expectations. Some of these risks are discussed in Item 1 of this report below, and include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging international retail environments, changes in the level of consumer spending or preferences in apparel, and/or trade restrictions and political or financial instability in countries where the Company's goods are manufactured, and other factors that may be described in the Company's filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenue and profitability remain difficult to predict. The Company does not undertake to publicly update or revise its forward- looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. PART I ------ ITEM 1 - BUSINESS GENERAL - ------- The Gap, Inc. (together with its subsidiaries, the "Company") is an international specialty retailer which operates stores selling casual apparel, personal care and other accessories for men, women and children under a variety of brands including Gap, GapKids, babyGap, Banana Republic and Old Navy. As of February 28, 1998, the Company operated 2,143 stores in the United States, Canada, the United Kingdom, France, Germany and Japan. The Company designs virtually all of it products for sale under its brands in Company-operated stores. These brands and their corresponding store formats collectively are positioned to address a broad consumer base. The Company operates the following store formats: GAP, GAPKIDS AND BABYGAP. Founded in 1969, Gap stores offer extensive selections of classically-styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics, such as denim, khakis and T-shirts, to accessories and personal care products for men and women aged teen to adult. At February 28, 1998, the Company operated 1,023 Gap stores, including 136 in international locations. Seventy-one of the domestic stores are Gap Outlet stores. The Company entered the children's apparel market with the introduction of GapKids in 1986 and babyGap in 1989. These stores offer casual basics, outerwear, shoes and other accessories in the tradition of Gap style and quality for children aged newborn through teen. At February 28, 1998, the Company operated a total of 573 GapKids and babyGap stores, including 105 in international locations. BANANA REPUBLIC. Acquired in 1983 with two stores, Banana Republic now offers sophisticated, fashionable collections of dress-casual and tailored clothing and accessories for men and women at higher price points. At February 28, 1998, the Company operated 259 Banana Republic stores, including 9 in Canada. OLD NAVY. The Company launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes and accessories for adults, children and infants in an innovative, exciting shopping environment. At February 28, 1998, the Company operated 288 Old Navy stores. The Company was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988. 2 RECENT DEVELOPMENTS - ------------------- During fiscal 1997, the Company continued to focus on developing and growing its brands. The Company believes that its brands are among its most important assets and is taking action to maintain and strengthen brand loyalty. To that end, during fiscal 1997, the Company increased its investment in advertising and marketing as a percentage of sales by 0.8 percentage points over the prior year. The Company is also exploring store label credit cards, additional flagship stores and further television advertising to complement its in-store customer service focus. The Company also invested in the development of brand extensions through new product offerings, such as home accessories and personal care items. The Company continues to invest in store expansion and development of new distribution channels to address changing market requirements. The Company has added new store formats, including Gap and GapKids combined stores, large flagship stores, men's/women's-only stores, baby-only stores, airport locations and a wholesaling arrangement under which Gap products are sold in duty-free stores in Hong Kong, Guam, Singapore, Australia and New Zealand. The Company is exploring new channels of distribution including development of electronic retailing which it launched in November 1997 and a catalog for the Banana Republic division which it plans to launch later in 1998. The Company has no or only limited operating history in the new channels of distribution and is faced with competition from established retailers in these new lines. There is no guarantee that these investments will result in increased profitability. The Company continued to expand internationally in fiscal 1997. The International division is faced with competition in its European and Japanese markets from established regional and national chains. Operations in these markets involve special risks and complexities. If such expansion is not successful, the Company's results of operations could be adversely affected. Specifically, the division's operations in Germany and France are not profitable at the present early stage of expansion, due in part to a soft retailing environment, low brand awareness, and Company investments in infrastructure, including expansion of the European Support Office. The Company's ability to grow successfully in the continental European markets will depend in part on determining a sustainable profit formula to build brand loyalty and gain market share in the especially challenging retail environment of Germany and France. The Company has begun a process to integrate the Gap and GapKids field organizations over the next 18 months to achieve a singular brand focus. Thinking and acting as a single brand will allow the Company to better serve its customers, to work more closely with the community, and to take full advantage of real estate opportunities. Integration also will allow the Company to staff more consistently and train more completely. The integration process entails a number of risks, including decreased product knowledge of sales associates due to increased product assortments and diversion of sales associates' attention adversely impacting customers' experience and quality of service, diversion of management's attention from other business matters, and possible employee dissatisfaction with changes in job scope or supervisor assignments. In particular, sales productivity may decline as sales associates learn new product information and selling techniques. To mitigate these risks, the Company will implement a phased approach that accommodates employee training, provides time for supervisors to become confident and competent in the new environment, and pilots certain aspects of the integration before rollout. The Company is addressing the need to ensure that its operations will not be adversely impacted by software or other system failures related to year 2000. A program office was established in 1997 to coordinate the identification, evaluation, and implementation of any necessary changes to computer systems, applications, and business processes. The costs associated with this effort are expected to be incurred through 1999 and are not expected to have a material impact on results of operations, cash flows, or financial condition in any given year. However, no assurances can be given that the Company will be able to completely identify or address all year 2000 compliance issues, or that third parties with whom the Company does business will not experience system failures as a result of the year 2000 issue, nor can the Company fully predict the consequences of noncompliance. MERCHANDISE INVENTORY, REPLENISHMENT AND DISTRIBUTION - ----------------------------------------------------- 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 3 business requires the Company to carry a significant amount of inventory, especially prior to peak selling seasons when the Company and other retailers generally build up their inventory levels. The Company must enter into contracts for the purchase and manufacture of apparel well in advance of the applicable selling season. As a result, the Company is vulnerable to demand and pricing shifts and to errors in selection and timing of merchandise purchases. The Company reviews its inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Markdowns may be used if inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference or lack of consumer acceptance of fashion items, or if it is determined that the inventory in stock will not sell at its currently marked price. Such markdowns may have an adverse impact on earnings, depending on the extent of the markdowns and amount of inventory affected. Because the Company does not carry much replenishment inventory in its stores, such inventory is maintained in the Company's distribution centers in California, Kentucky, Maryland, Tennessee and Canada and in distribution centers operated by third parties in The Netherlands and Japan, and then shipped to the stores. STORE OPERATIONS AND EXPANSION - ------------------------------ The Company's stores offer a shopper-friendly environment with an assortment of casual clothing and accessories which emphasizes style, quality and good value. The range of apparel displayed in each store varies significantly depending on the selling season and the size and location of the store. The Company's stores generally are open seven days per week (where permitted by law), three to six nights per week and most holidays. All sales are made for cash, personal checks or on credit cards issued by others. The Company's continued success depends, in part, upon its ability to increase sales at existing store locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the Company's growth will result in enhanced profitability or that it will continue at the same rate in future years. SUPPLIERS - --------- The Company purchases merchandise from approximately 1,200 suppliers located domestically and overseas. No supplier accounted for more than 5% of the Company's fiscal 1997 purchases. Of the Company's merchandise sold worldwide during fiscal 1997, approximately 27% of all units (representing approximately 18% of total cost) were produced domestically while the remaining 73% of all units (82% of cost) were made outside the United States. Approximately 6% of the Company's total merchandise units (representing 8% of cost) was from Hong Kong, with the remainder coming from 42 other countries. Any event causing a sudden disruption of imports from Hong Kong or other foreign countries, including the imposition of additional import restrictions, could have a material adverse effect on the Company's operations. Substantially all of the Company's foreign purchases of merchandise are negotiated and paid for in U.S. dollars. The Company cannot predict whether any of the countries in which its products currently are manufactured or may be manufactured in the future will be subject to trade restrictions imposed by the U.S. government, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, or both, against apparel items could increase the cost or reduce the supply of apparel available to the Company and adversely affect the Company's business, financial condition and results of operations. The Company pursues a diversified global import strategy which includes relationships with vendors in over 40 countries. These sourcing operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions. The current financial instability in Asia is an example of the instability which could affect some suppliers adversely. Although to date the instability in Asia has not had a material adverse effect on the Company's ability to import apparel and therefore the Company's results of operations and financial condition, no assurances can be given that they will not have such an effect in the future. 4 SEASONAL BUSINESS - ----------------- The Company's business follows a seasonal pattern, peaking over a total of about 10 to 12 weeks during the Back-to-School (mid-August through early September) and Holiday (early November through December) periods. During fiscal year 1997, these periods accounted for approximately 35% of the Company's annual sales. COMPETITION - ----------- The Company's business is highly competitive. The Company's stores compete with national and local department, specialty and discount store chains and independent retail stores which handle similar lines of merchandise. Some competitors have larger sales and assets than the Company. Depth of selection in sizes, colors and styles of merchandise, merchandise procurement and pricing, ability to anticipate fashion trends and customer preferences, inventory control, reputation, quality of merchandise, store design and location, advertising and customer service are all important factors in competing successfully in the retail industry. Given the large number of companies in the retail industry, the Company cannot estimate the number of its competitors or its relative competitive position. The performance of the Company in recent years has increased imitation by other retailers. Such imitation has made and will continue to make the retail environment in which the Company operates more competitive. In addition, the success of the Company's operations depends upon a number of factors relating to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation. A decline in consumer spending on apparel could have a material adverse effect on the Company's net sales and profitability. ADVERTISING - ----------- In fiscal 1997, the Company increased its investment in advertising and marketing as a percentage of sales by 0.8 percentage points over the prior year. Besides expanding the number of print ads placed in major metropolitan newspapers and their Sunday magazines, major news weeklies and lifestyle and fashion magazines, the Company's ads appeared in various outdoor venues, such as mass transit posters, exterior bus panels, bus shelters and gigantic billboards spanning entire buildings. In addition, the Company ran TV ads for its Gap, GapKids, and babyGap concepts and TV and radio ads for Old Navy. The Company plans to continue increasing its investments in advertising and marketing as a percentage of sales in 1998. There can be no assurances that these increased investments will result in increased sales or profitability. EMPLOYEES - --------- On January 31, 1998, the Company had a work force of approximately 81,000 employees. The Company also hires temporary employees during the peak Back-to- School and Holiday seasons. The Company considers its employee relations to be good. TRADEMARKS AND SERVICE MARKS - ---------------------------- The trademarks and service marks for Gap, GapKids, babyGap, Banana Republic and Old Navy, and certain other trademarks either have been registered, or have trademark applications pending, with the United States Patent and Trademark Office and with the registries of many foreign countries. 5 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 with respect to each of them is set forth in the table located in the section entitled "Nominees for Election as Directors" of the 1998 Proxy Statement and is incorporated by reference herein. The following are also executive officers of the Company: NAME, AGE, POSITION AND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS: ANNE B. GUST, 40, Senior Vice President and General Counsel since April 1994; Vice President - General Counsel, 1993-94. Joined the Company in 1991. WARREN R. HASHAGEN, 47, Senior Vice President - Finance and Chief Financial Officer since November 1995; Senior Vice President - Finance, 1992-95. Joined the Company in 1982. JOHN B. WILSON, 38, Chief Operating Officer since March 1998; Executive Vice President since October 1996; and Chief Administrative Officer from October 1996 to March 1998. Executive Vice President, Finance and Strategy and Chief Financial Officer of Staples, Inc., 1992-96. ITEM 2 - PROPERTIES During fiscal year 1997, the Company opened 298 stores and closed 22. The newly-opened stores include 98 Gap stores (including 18 international locations), 76 GapKids and babyGap stores (including 21 international locations), 34 Banana Republic stores (including one store in Canada), and 90 Old Navy stores. In addition, during fiscal 1997, the Company expanded 98 stores. The expanded stores include 48 Gap stores, 19 GapKids stores, 27 Banana Republic stores, and 4 Old Navy stores. The 2,130 stores operating as of January 31, 1998 aggregated approximately 15 million square feet. The Company leases virtually all of its store premises. Terms generally range from five to 15 years with one or two five-year renewal options. Most leases provide for additional rent based on a percentage of store sales above a certain level in addition to or in lieu of minimum rentals, as well as for the payment of certain other expenses. Some leases contain cancellation clauses in favor of the Company if specified sales levels are not achieved. In the United States, the Company's stores are located in all of the 50 largest metropolitan statistical areas. The Company currently leases most of its headquarters and regional office buildings, as well as its Eastern Distribution Center (EDC) and Kentucky Distribution Center (KDC). The EDC/KDC in Erlanger, Kentucky together consist of approximately 1,220,000 square feet. Their lease term runs through February 28, 2003, with options to extend the lease for an additional 30 years. In order to capitalize on synergies with the nearby EDC/KDC, the Company leases a 325,000 square foot structure for consolidation/deconsolidation purposes and has recently entered into a lease for a 520,000 square foot facility for distribution purposes, both in Hebron, Kentucky. The Company owns its Canadian Distribution Center (CDC) located in Brampton, Ontario. It consists of approximately 363,000 square feet. The Company owns its Western Distribution Center (WDC), a 344,000 square-foot facility located in Ventura, California, as well as an adjacent five acre parcel for possible future expansion. The Atlantic Distribution Center (ADC), a facility owned by the Company in Edgewood, Maryland, covers approximately 745,000 square feet. The Company also owns 156 adjacent acres, portions of which could be used for potential expansion of the ADC. The Southern Distribution Center (SDC), a facility owned by the Company in Gallatin, Tennessee, consists of approximately 769,000 square feet. The Company also owns its Holland Distribution Center (HDC), a 127,000 square foot facility located in Roosendaal, The Netherlands, to serve its European stores, and its Japan Distribution Center (JDC), a 30,000 square foot facility located in Funabashi City, Chiba, Japan, to serve its Japanese stores. Both these facilities are operated by third parties. 6 During the third quarter of 1997, the Company commenced construction on a 565,000 square foot distribution center in Fresno, California. The facility is expected to be in operation in early 1999. In late 1997, the Company completed construction of a 189,000 square foot building in San Bruno, California which serves as part of the Company's headquarters facilities. The Company continues to explore alternatives for additional corporate offices in San Francisco and San Bruno, California. The Company acquired land in 1997 in San Francisco and in the fourth quarter entered into a purchase contract to acquire land in San Bruno. Item 3 - LEGAL PROCEEDINGS The Company is a party to routine litigation incident to its business. Some of the lawsuits to which the Company is a party are covered by insurance and are being defended by the Company's insurance carriers. The Company has established reserves which management believes are adequate to cover any litigation losses which may occur. Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ------- ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to page 25 of the 1997 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 6 - SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to pages 20 and 21 of the 1997 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to pages 22-25 of the 1997 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to page 38 of the Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to pages 26-37 of the 1997 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 7 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 1998 Proxy Statement. See also Item 1 above in the section entitled "Executive Officers of the Registrant." In addition, the following persons currently are directors of the Company, but will not stand for re-election at the Annual Meeting of Shareholders to be held on April 28, 1998:
SERVED AS DIRECTOR NAME, AGE, PRINCIPAL OCCUPATION DURING PAST FIVE YEARS AND OTHER INFORMATION SINCE - ---------------------------------------------------------------------------- ---------- LUCIE J. FJELDSTAD, 54............................................................................... 1995 President, Fjeldstad International, consulting company, 1997-present, 1993-95. President, Video and Networking, Tektronix, Inc., electronics company, 1995-97. Vice President and General Manager, Multimedia, IBM, 1992-93. Director of Entergy Corp. DE, utility holding company; and Director of Data Dimensions Inc., a year 2000 software company. WILLIAM A. HASLER, 56................................................................................ 1991 Dean, Haas Graduate School of Business, University of California, Berkeley since 1991. Director of Tenera, Inc., information services company; Director of Aphton, Inc., biotechnology pharmaceutical company; Director of Walker Interactive Systems, Inc., software company; and Director of TCSI, communications technology company. Governor of the Pacific Stock Exchange.
ITEM 11 - EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the sections entitled "Compensation of Directors," "Summary of Executive Compensation," "Stock Options," "Employment Contracts and Termination of Employment Arrangements," and "Compensation Committee Interlocks and Insider Participation" in the 1998 Proxy Statement. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the section entitled "Beneficial Ownership of Shares" in the 1998 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section entitled "Other Reportable Transactions" in the 1998 Proxy Statement. PART IV ------- 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. 8 (1) Financial Statements -------------------- (i) Independent Auditors' Report. Incorporated by reference to page 26 of the 1997 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. (ii) The consolidated balance sheets as of January 31, 1998 and February 1, 1997 and the related consolidated statements of earnings, cash flows, and shareholders' equity and notes thereto for each of the three fiscal years in the period ended January 31, 1998 are incorporated by reference to pages 27-37 of the 1997 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. (2) Financial Statement Schedules ----------------------------- Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto. (3) Exhibits -------- Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index which begins on sequentially numbered page 12 of this Annual Report on Form 10-K. (b) No reports on Form 8-K were filed or required to be filed for the last quarter of the fiscal year. 9 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: April 3, 1998 By /s/ MILLARD S. DREXLER ----------------------- Millard S. Drexler, Chief Executive Officer (Principal Executive Officer) Date: April 3, 1998 By /s/ WARREN R. HASHAGEN ---------------------- Warren R. Hashagen, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 3, 1998 By /s/ ADRIAN D.P. BELLAMY ------------------------------ Adrian D. P. Bellamy, Director Date: April 3, 1998 By /s/ JOHN G. BOWES ------------------------------ John G. Bowes, Director Date: April 3, 1998 By /s/ MILLARD S. DREXLER ------------------------------ Millard S. Drexler, Director Date: April 3, 1998 By /s/ DONALD G. FISHER ------------------------------ Donald G. Fisher, Director Date: April 3, 1998 By /s/ DORIS F. FISHER ------------------------------ Doris F. Fisher, Director 10 SIGNATURES (con't.) ------------------- Date: April 3, 1998 By /s/ ROBERT J. FISHER ------------------------------- Robert J. Fisher, Director Date: April 3, 1998 By /s/ LUCIE J. FJELDSTAD ------------------------------- Lucie J. Fjeldstad, Director Date: April 3, 1998 By /s/ WILLIAM A. HASLER ------------------------------- William A. Hasler, Director Date: April 3, 1998 By /s/ JOHN M. LILLIE ------------------------------- John M. Lillie, Director Date: April 3, 1998 By /s/ CHARLES R. SCHWAB ------------------------------- Charles R. Schwab, Director Date: April 3, 1998 By /s/ BROOKS WALKER, JR. ------------------------------- Brooks Walker, Jr., Director Date: April 3, 1998 By /s/ SERGIO ZYMAN ------------------------------- Sergio Zyman, Director 11 Exhibit Index 3.1 Registrant's Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 3.2 Registrant's By-Laws, filed as Exhibit C to Registrant's definitive proxy statement for its annual meeting of stockholders held on May 24, 1988, Commission File No. 1-7562. 3.3 Amended Article IV of Registrant's By-Laws, filed as Exhibit 4.4 to Registrant's Registration Statement on Form S-8, Commission File No. 333- 00417. 4 Indenture, dated September 1, 1997, between the Registrant and Harris Trust Company of California filed as Exhibit 4 to Registrant's Form 10-Q for the quarter ended November 1, 1997, Commission File No. 1-7562. 10.1 Credit Agreement dated as of July 1, 1997 between the Registrant; Citicorp USA Inc.; Bank Of America National; Trust & Savings Association; The Hongkong and Shanghai Banking Corporation Limited; Nationsbank Of Texas, N.A.; The Royal Bank Of Canada; Bank Of Montreal; Societe Generale; The Fuji Bank, Limited; Morgan Guaranty Trust Company Of New York; The Sumitomo Bank Limited; Deutsche Bank AG New York Branch and/or Cayman Islands Branch; Union Bank Of Switzerland, New York Branch; U.S. National Bank Of Oregon; and Citibank, N.A. filed as Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1- 7562. 10.2 Credit Agreement dated as of July 1, 1997 between the Registrant; Citicorp USA Inc.; Bank Of America National; Trust & Savings Association; The Hongkong and Shanghai Banking Corporation Limited; Nationsbank Of Texas, N.A.; The Royal Bank Of Canada; Bank Of Montreal; Societe Generale; The Fuji Bank, Limited; Morgan Guaranty Trust Company Of New York; The Sumitomo Bank Limited; Deutsche Bank AG New York Branch and/or Cayman Islands Branch; Union Bank of Switzerland, New York Branch; U.S. National Bank of Oregon; and Citibank, N.A. filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1- 7562. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.3 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54690. 12 10.4 Management Incentive Restricted Stock Plan II, filed as exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54686. 10.5 GapShare, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 333-00417. 10.6 Amendment No. 5 to GapShare filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended November 1, 1997, Commission File No. 1-7562. 10.7 Description of Management Incentive Cash Award Plan filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562. 10.8 Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-56021. 10.9 Amendment No. 1 to the Employee Stock Purchase Plan. 10.10 Amended and Restated Executive Management Incentive Cash Award Plan, filed as Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 23, 1995, Commission File No. 1-7562. 10.11 Deferred Compensation Plan filed as Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562. 10.12 Executive Capital Accumulation Plan filed as Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year ended January 28, 1995, Commission File No. 1-7562. 10.13 1996 Stock Option and Award Plan, filed as Exhibit A to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 21, 1996, Commission File No. 1-7562. 10.14 Amendment Number 1 to the Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562. 10.15 Amendment Number 2 to the Registrant's 1996 Stock Option and Award Plan. 10.16 Form of Nonqualified Stock Option Agreement for employees under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562. 10.17 Form of Nonqualified Stock Option Agreement for directors under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.6 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562. 10.18 Form of Restricted Stock Agreement under Registrant's 1996 Stock Option and Award Plan filed as Exhibit 10.7 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562. 10.19 Executive Long-Term Cash Award Performance Plan, filed as Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 21, 1996, Commission File No. 1-7562. 10.20 Relocation Loan Plan, filed as Exhibit A to Registrant's definitive proxy statement for its annual meeting of stockholders held on October 25, 1977, Commission File No. 1-7562. 10.21 Certificate of Corporate Resolution amending the Relocation Loan Plan, adopted by the Board of Directors on November 27, 1990, filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.22 Restricted Stock Award Agreement, dated April 13, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.41 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.23 First Amendment to Restricted Stock Award Agreement, dated October 23, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.42 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.24 Non-Employee Director Retirement Plan, dated October 27, 1992, filed as Exhibit 10.43 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.25 Statement Regarding Non-Employee Director Retirement Plan 10.26 The Gap, Inc. Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 333-36265. 10.27 Form of Discounted Stock Option Agreement under the Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.5 to Registrant's Registration Statement on Form S-8, Commission File No. 333-36265. 10.28 Employment Arrangement, dated July 16, 1997, between Registrant and John B. Wilson, filed as Exhibit 10.45 to Registrant's Annual Report on Form 10-K for the year ended February 1, 1997, Commission File No. 1-7562. 13 Portions of Registrant's annual report to security holders for the fiscal year ended January 31, 1998. 21 Subsidiaries of Registrant. 23 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule for the year ended January 31, 1998. 27.2 Financial Data Schedule by quarter for the year ended February 1, 1997. 27.3 Financial Data Schedule by quarter for the first three quarters of fiscal 1997. EX-10.9 2 AMENDMENT NO. 1 TO THE EMPLOYEE STOCK PURCHASE PLA EXHIBIT 10.9 AMENDMENT NO. 1 TO THE GAP, INC. EMPLOYEE STOCK PURCHASE PLAN The Gap, Inc., having adopted The Gap, Inc. Employee Stock Purchase Plan (the "Plan") effective as of December 1, 1994, hereby amends the Plan, effective as of May 1, 1997, as follows: 1. Section 2.8 is hereby amended in its entirety to read as follows: "Eligible Employee" means every Employee of an Employer, except any ----------------- Employee who, immediately after the grant of an option under the Plan, would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary of the Company (including stock attributed to such Employee pursuant to Section 424(d) of the Code). IN WITNESS WHEREOF, The Gap, Inc., by its duly authorized officer, has executed this Amendment No. 1 as of the date indicated below. THE GAP, INC. Date: May 1, 1997 By /s/ Richard S. McKinley ------------------------------------ Chairman, Global Benefits Committee EX-10.15 3 AMENDMENT NO. 2 TO THE 1996 STOCK OPTION PLAN EXHIBIT 10.15 AMENDMENT NO. 2 TO THE GAP, INC. 1996 STOCK OPTION AND AWARD PLAN The Gap, Inc., having adopted The Gap, Inc. 1996 Stock Option and Award Plan (the "Plan") effective as of March 26, 1996, and amended effective as of May 20, 1997, hereby further amends the Plan, effective as of January 27, 1998, as follows: 1. Clause (a) in the second sentence of Section 3.2 is hereby amended in its entirety to read as follows: (a) determine which Employees, Consultants, and Nonemployee Directors shall be granted Awards (other than with respect to the Options granted to Nonemployee Directors pursuant to Section 9), 2. The second sentence of Section 3.4 is hereby amended in its entirety to read as follows: In the Board's administration of Section 9 and the Options and any Shares granted to Nonemployee Directors pursuant to Section 9, the Board shall have all of the authority and discretion otherwise granted to the Committee with respect to the administration of the Plan. 3. The first sentence of Section 5.1 is hereby amended in its entirety to read as follows: Subject to the terms and provisions of the Plan, Options may be granted to Employees, Consultants, and Nonemployee Directors at any time and from time to time as determined by the Committee in its sole discretion. 4. The following sentence is hereby added to the end of Section 5.1: Options granted to Nonemployee Directors pursuant to this Section 5 shall be Nonqualified Stock Options to purchase treasury Shares. 5. Section 9.2.8 is hereby amended in its entirety to read as follows: Other Terms. All provisions of the Plan not inconsistent with this ----------- Section 9 shall apply to Options granted to Nonemployee Directors under this Section 9; provided, however, that Section 5.2 (relating to the Committee's discretion to set the terms and conditions of Options) shall be inapplicable with respect to Options granted to Nonemployee Directors under this Section 9. 6. Section 10.2 is hereby amended in its entirety to read as follows: Participation. No Employee, Consultant, or Nonemployee Director ------------- (except as otherwise provided in Section 9 with respect to Nonemployee Directors) shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. IN WITNESS WHEREOF, The Gap, Inc., by its duly authorized officer, has executed this Amendment No. 2 as of the date indicated below. THE GAP, INC. Date: January 27, 1998 By: /s/ Anne B. Gust ---------------------------- Title: Senior Vice President and General Counsel EX-10.25 4 STATEMENT REGARDING NON-EMPLOYEE DIRECTORS EXHIBIT 10.25 STATEMENT REGARDING NON-EMPLOYEE DIRECTOR RETIREMENT PLAN --------------------------------------------------------- The Corporate Governance Committee agreed to terminate the Non-Employee Director Retirement Plan effective January 28, 1997. Directors holding office on that date will continue to be eligible for the benefits of the Plan; however, the amount of the annual payment to be made under the Plan will be frozen at the then current annual retainer amount. EX-13 5 PORTIONS OF REGISTRANT'S ANNUAL REPORT EXHIBIT 13 [Portions of Registrant's annual report to security holders for the fiscal year ended January 31, 1998]
Gap Inc. Ten-Year Selected Financial Data Compound Annual Growth Rate --------------------------- -------------------------- 1997 1996 3-year 5-year 10-year 52 weeks 52 weeks --------------------------- -------------------------- Operating Results ($000) Net sales 21% 17% 20% $ 6,507,825 $ 5,284,381 Cost of goods sold and occupancy expenses, excluding depreciation and amortization - - - 3,775,957 3,093,709 Percentage of net sales - - - 58.0% 58.5% Depreciation and amortization(a) - - - $ 245,584 $ 191,457 Operating expenses - - - 1,635,017 1,270,138 Net interest (income) expense - - - (2,975) (19,450) Earnings before income taxes 17 20 21 854,242 748,527 Percentage of net sales - - - 13.1% 14.2% Income taxes - - - $ 320,341 $ 295,668 Net earnings 19 20 23 533,901 452,859 Percentage of net sales - - - 8.2% 8.6% Cash dividends - - - $ 79,503 $ 83,854 Capital expenditures - - - 483,114 375,838 ----------------------------------------------------- Per Share Data Net earnings-basic(b) 21% 21% 23% $ 1.35 $ 1.09 Net earnings-diluted(c) 21 22 23 1.30 1.06 Cash dividends - - - .20 .20 Shareholders' equity (book value)(d) - - - 4.03 4.02 ----------------------------------------------------- Financial Position ($000) Property and equipment, net 18% 16% 24% $ 1,365,246 $ 1,135,720 Merchandise inventory 26 15 14 733,174 578,765 Total assets 19 19 23 3,337,502 2,626,927 Working capital 15 19 21 839,399 554,359 Current ratio - - - 1.85:1 1.72:1 Total long-term debt, less current installments - - - $ 496,044 - Ratio of long-term debt to shareholders' equity - - - .31:1 N/A Shareholders' equity 5 12 19 $ 1,583,986 $ 1,654,470 Return on average assets - - - 17.9% 18.2% Return on average shareholders' equity - - - 33.0% 27.5% ----------------------------------------------------- Statistics Number of stores opened 20% 21% 10% 298 203 Number of stores expanded - - - 98 42 Number of stores closed - - - 22 30 Number of stores open at year-end(e) 12 10 10 2,130 1,854 Net increase in number of stores - - - 15% 10% Comparable store sales growth (52-week basis) - - - 6% 5% Sales per square foot (52-week basis)(f) - - - $ 463 $ 441 Square footage of gross store space at year-end 19 19 15 15,312,700 12,645,000 Percentage increase in square feet - - - 21% 14% Number of employees at year-end 14 16 18 81,000 66,000 Weighted-average number of shares-basic(b) - - - 396,179,975 417,146,631 Weighted-average number of shares-diluted(c) - - - 410,200,758 427,267,220 Number of shares outstanding at year-end, net of treasury stock - - - 393,133,028 411,775,997 -----------------------------------------------------
(a) Excludes amortization of restricted stock, discounted stock options and discount on long-term debt. (b) Based on weighted-average number of shares excluding restricted stock. (c) Based on weighted-average number of shares adjusted for dilutive effect of stock options and restricted stock. (d) Based on actual number of shares outstanding at year-end. (e) Includes the conversion of GapKids departments to their own separate stores. Converted stores are not classified as new stores. (f) Based on weighted-average gross square footage. 1997 Annual Report page 20 Gap Inc.
Fiscal Year - -------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 53 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 53 weeks 52 weeks - -------------------------------------------------------------------------------------------------------------------------------- $ 4,395,253 $ 3,722,940 $ 3,295,679 $ 2,960,409 $ 2,518,893 $ 1,933,780 $ 1,586,596 $ 1,252,097 2,645,736 2,202,133 1,996,929 1,856,102 1,496,156 1,187,644 1,006,647 814,028 60.2% 59.2% 60.6% 62.7% 59.4% 61.4% 63.4% 65.0% $ 175,719 $ 148,863 $ 124,860 $ 99,451 $ 72,765 $ 53,599 $ 39,589 $ 31,408 1,004,396 853,524 748,193 661,252 575,686 454,180 364,101 277,429 (15,797) (10,902) 809 3,763 3,523 1,435 2,760 3,416 585,199 529,322 424,888 339,841 370,763 236,922 162,714 125,816 13.3% 14.2% 12.9% 11.5% 14.7% 12.3% 10.3% 10.0% $ 231,160 $ 209,082 $ 166,464 $ 129,140 $ 140,890 $ 92,400 $ 65,086 $ 51,585 354,039 320,240 258,424 210,701 229,873 144,522 97,628 74,231 8.1% 8.6% 7.8% 7.1% 9.1% 7.5% 6.2% 5.9% $ 66,993 $ 64,775 $ 53,041 $ 44,106 $ 41,126 $ 29,625 $ 22,857 $ 18,244 309,599 236,616 215,856 213,659 244,323 199,617 94,266 68,153 - -------------------------------------------------------------------------------------------------------------------------------- $ .85 $ .76 $ .62 $ .51 $ .56 $ .36 $ .24 $ .18 .83 .74 .60 .49 .54 .34 .23 .17 .16 .15 .13 .11 .10 .07 .06 .05 3.80 3.17 2.59 2.05 1.59 1.10 .80 .65 - -------------------------------------------------------------------------------------------------------------------------------- $ 957,752 $ 828,777 $ 740,422 $ 650,368 $ 547,740 $ 383,548 $ 238,103 $ 191,257 482,575 370,638 331,155 365,692 313,899 247,462 243,482 193,268 2,343,068 2,004,244 1,763,117 1,379,248 1,147,414 776,900 579,483 481,148 728,301 555,827 494,194 355,649 235,537 101,518 129,139 106,210 2.32:1 2.11:1 2.07:1 2.06:1 1.71:1 1.39:1 1.69:1 1.70:1 - - $ 75,000 $ 75,000 $ 80,000 $ 17,500 $ 20,000 $ 22,000 N/A N/A .07:1 .08:1 .12:1 .04:1 .06:1 .08:1 $ 1,640,473 $ 1,375,232 $ 1,126,475 $ 887,839 $ 677,788 $ 465,733 $ 337,972 $ 276,399 16.3% 17.0% 16.4% 16.7% 23.9% 21.3% 18.4% 16.2% 23.5% 25.6% 25.7% 26.9% 40.2% 36.0% 31.8% 27.0% - ------------------------------------------------------------------------------------------------------------------------------ 225 172 108 117 139 152 98 106 55 82 130 94 79 56 7 N/A 53 34 45 26 15 20 38 21 1,680 1,508 1,370 1,307 1,216 1,092 960 900 11% 10% 5% 7% 11% 14% 7% 10% 0% 1% 1% 5% 13% 14% 15% 8% $ 425 $ 444 $ 463 $ 489 $ 481 $ 438 $ 389 $ 328 11,100,200 9,165,900 7,546,300 6,509,200 5,638,400 4,762,300 4,056,600 3,879,300 21% 21% 16% 15% 18% 17% 5% 6% 60,000 55,000 44,000 39,000 32,000 26,000 23,000 20,000 417,718,397 421,644,426 417,905,336 412,629,996 407,007,521 401,965,082 399,847,754 410,942,274 427,752,515 431,619,827 428,937,902 427,068,347 423,687,625 419,978,006 420,619,541 434,112,567 431,621,976 434,294,247 435,746,184 432,555,714 427,570,002 423,792,090 421,654,212 421,576,368 - --------------------------------------------------------------------------------------------------------------------------------
1997 Annual Report page 21 Gap Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition The information below and elsewhere in this Annual Report contains certain forward-looking statements which reflect the current view of Gap Inc. (the "Company") with respect to future events and financial performance. Wherever used, the words "expect," "plan," "anticipate," "believe" and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results of operations to differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging international retail environments, changes in the level of consumer spending or preferences in apparel, and/or trade restrictions and political or financial instability in countries where the Company's goods are manufactured and other factors that may be described in the Company's filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability remain difficult to predict. The Company does not undertake to publicly update or revise its forward- looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Results of Operations Net Sales - -------------------------------------------------------------------------- Fifty-two Fifty-two Fifty-three Weeks Ended Weeks Ended Weeks Ended Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 - -------------------------------------------------------------------------- Net sales ($000) $6,507,825 $5,284,381 $4,395,253 Total net sales growth percentage 23 20 18 Comparable store sales growth percentage (52-week basis) 6 5 0 Net sales per average gross square foot (52-week basis) $ 463 $ 441 $ 425 Square footage of gross store space at year-end (000) 15,313 12,645 11,100 Number of: New stores 298 203 225 Expanded stores 98 42 55 Closed stores 22 30 53 - -------------------------------------------------------------------------
The total net sales growth for all years presented was attributable primarily to the increase in retail selling space, both through the opening of new stores (net of stores closed) and the expansion of existing stores. An increase in comparable store sales also contributed to net sales growth in 1997 and 1996. The increase in net sales per average square foot in 1997 and 1996 was primarily attributable to increases in comparable store sales. Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales were 61.8 percent in 1997, 62.2 percent in 1996 and 64.2 percent in 1995. The .4 percentage point decrease in 1997 from 1996 was primarily attributable to a .6 percentage point decrease in occupancy expenses, partially offset by a decrease in merchandise margin. The decrease in occupancy expenses as a percentage of net sales was primarily attributable to leverage achieved through comparable store sales growth. The 2.0 percentage point decrease in 1996 from 1995 was due to a 1.2 percentage point increase in merchandise margin combined with an .8 percentage point decrease in occupancy expenses as a percentage of net sales. The increase in merchandise margin was driven by increases in initial merchandise markup and in the percentage of merchandise sold at regular price. The decrease in occupancy expenses was primarily attributable to the effect of the growth of the Old Navy division, which carries lower occupancy expenses as a percentage of net sales when compared to other divisions, and leverage achieved through comparable store sales growth. 1997 Annual Report page 22 Gap Inc. The Company reviews its inventory levels in order to identify slow- moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Such markdowns may have an adverse impact on earnings, depending upon the extent of the markdown and the amount of inventory affected. Operating Expenses Operating expenses as a percentage of net sales were 25.1 percent for 1997, 24.0 percent for 1996 and 22.9 percent for 1995. In 1997, the 1.1 percentage point increase was primarily attributable to an .8 percentage point increase in advertising/marketing costs as part of the Company's brand development efforts. An increase in the write-off of leasehold improvements and fixtures associated with the remodeling, relocation and closing of certain stores planned for the next fiscal year accounted for .4 percentage point of the increase. In 1996, the 1.1 percentage point increase was primarily attributable to a .3 percentage point increase in advertising/marketing costs to support the Company's brands and a .5 percentage point increase in incentive bonus expense. Net Interest Income Net interest income was $3.0, $19.5 and $15.8 million for 1997, 1996 and 1995, respectively. The decrease in 1997 was due to the interest expense related to the long-term debt securities issued during the third quarter, as well as to a decrease in gross average investments. The change in 1996 from 1995 was primarily attributable to an increase in gross average investments. Income Taxes The effective tax rate was 37.5 percent in 1997 and 39.5 percent in 1996 and 1995. The decrease in the effective tax rate in 1997 was a result of the impact of tax planning initiatives to support changing business needs. Liquidity and Capital Resources The following sets forth certain measures of the Company's liquidity:
- --------------------------------------------------------------- Fiscal Year ------------------------------- 1997 1996 1995 - --------------------------------------------------------------- Cash provided by operating activities ($000) $844,651 $834,953 $489,087 Working capital ($000) 839,399 554,359 728,301 Current ratio 1.85:1 1.72:1 2.32:1 - ---------------------------------------------------------------
For the fiscal year ended January 31, 1998, the increase in cash provided by operating activities was due to an increase in net earnings offset by investments in merchandise inventory and the timing of payments for income taxes and certain payables. For the fiscal year ended February 1, 1997, the increase in cash provided by operating activities was attributable to an increase in net earnings and the timing of certain year-end payables and accrued expenses. The Company funds inventory expenditures during normal and peak periods through a combination of cash flows provided by operations and normal trade credit arrangements. The Company's business follows a seasonal pattern, peaking over a total of about ten to twelve weeks during the Back-to-School and Holiday periods. During 1997 and 1996, these periods accounted for approximately 35 and 33 percent, respectively, of the Company's annual sales. The Company has committed credit facilities totaling $950 million, consisting of an $800 million, 364-day revolving credit facility, and a $150 million, 5-year revolving credit facility through June 30, 2002. These credit facilities provide for the issuance of up to $450 million in letters of credit. The Company has additional uncommitted credit facilities of $300 million for the issuance of letters of credit. At January 31, 1998, the Company had outstanding letters of credit of approximately $498 million. 1997 Annual Report page 23 Gap Inc. To provide financial flexibility, the Company issued $500 million of 6.9 percent, 10-year debt securities in fiscal 1997. The proceeds from this issuance are intended to be used for general corporate purposes, including store expansion, brand investment, development of additional distribution channels and repurchases of the Company's common stock pursuant to its ongoing repurchase program. Capital expenditures, net of construction allowances and dispositions, totaled approximately $450 million in 1997. These expenditures resulted in a net increase in store space of approximately 2.7 million square feet or 21 percent due to the addition of 298 new stores, the expansion of 98 stores and the remodeling of certain stores. Capital expenditures for 1996 and 1995 were $359 million and $291 million, respectively, resulting in a net increase in store space of approximately 1.5 million square feet in 1996 and approximately 1.9 million square feet in 1995. The increase in capital expenditures in 1997 from 1996 was primarily attributable to the number of stores opened, expanded and remodeled, as well as the expansion of headquarters facilities. The increase in capital expenditures in 1996 from 1995 was primarily attributable to the construction of two distribution centers and a headquarters facility. Expenditures in 1997, 1996 and 1995 also included costs for equipment. For 1998, the Company expects capital expenditures to total approximately $700 million, net of construction allowances. This represents the addition of 300 to 350 new stores, the expansion of approximately 80 to 90 stores and the remodeling of certain stores, as well as amounts for headquarters facilities, distribution centers and equipment. The Company expects to fund such capital expenditures with cash flow from operations and other sources of financing. Square footage growth is expected to be 18 to 20 percent before store closings. New stores are generally expected to be leased. In 1997, the Company completed construction of a headquarters facility in San Bruno, California for approximately $60 million. The facility became fully operational in October 1997. To further support its growth, the Company continues to explore alternatives for additional headquarters facilities in San Francisco and San Bruno, California. The Company acquired land in 1997 in San Francisco and in the fourth quarter entered into a purchase contract to acquire additional land in San Bruno. Also during 1997, the Company commenced construction on a distribution center in Fresno, California for an estimated cost at completion of $60 million. The majority of the expenditures for this facility will be incurred in 1998. The facility is expected to begin operations in early 1999. On November 24, 1997, the Company's Board of Directors authorized a three-for-two split of its common stock effective December 22, 1997, in the form of a stock dividend for shareholders of record at the close of business on December 8, 1997. Share and per share amounts herein and in the accompanying consolidated financial statements have been restated to reflect the stock split. In October 1996, the Board of Directors approved a program under which the Company may repurchase up to 45 million shares of its outstanding common stock in the open market over a three-year period. As of January 31, 1998, 28 million shares had been repurchased for $744 million. The program announced in October 1996 follows an earlier 27 million share repurchase program which was completed in November 1996 at a cost of approximately $450 million. 1997 Annual Report page 24 Gap Inc. During fiscal 1997, the Company entered into various put option contracts in connection with the share repurchase program to hedge against stock price fluctuations. The Company also continued to enter into foreign exchange forward contracts to reduce exposure to foreign currency exchange risk involved in its commitments to purchase merchandise for foreign operations. Additional information on these contracts and agreements is presented in the Notes to Consolidated Financial Statements (Note E). Quantitative and qualitative disclosures about market risk for financial instruments are presented on page 38. The Company pursues a diversified global import operations strategy which includes relationships with vendors in over 40 countries. These sourcing operations may be adversely affected by political instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions. The current financial instability in Asia is an example of this instability, which could affect some suppliers adversely. Although to date the instability in Asia has not had a material adverse effect on the Company's ability to import apparel, and therefore on the Company's results of operations and financial condition, no assurances can be given that it will not have such an effect in the future. The Company is addressing the need to ensure that its operations will not be adversely impacted by software or other system failures related to year 2000. A program office was established in 1997 to coordinate the identification, evaluation and implementation of any necessary changes to computer systems, applications and business processes. The costs associated with this effort are expected to be incurred through 1999 and are not expected to have a material impact on the results of operations, cash flows or financial condition in any given year. However, no assurances can be given that the Company will be able to completely identify or address all year 2000 compliance issues, or that third parties with whom the Company does business will not experience system failures as a result of the year 2000 issues, nor can the Company fully predict the consequences of noncompliance.
Per Share Data - ---------------------------------------------------------------------------- Market Prices Cash Dividends ---------------------------------------- -------------- Fiscal 1997 1996 1997 1996 - ---------------------------------------------------------------------------- High Low High Low - ---------------------------------------------------------------------------- 1st Quarter $ 24 1/8 $ 19 1/16 $20 5/16 $15 7/16 $.05 $.05 2nd Quarter 29 13/16 20 9/16 24 1/16 18 1/8 .05 .05 3rd Quarter 35 3/4 28 24 5/16 17 5/16 .05 .05 4th Quarter 41 1/4 32 15/16 22 5/16 18 9/16 .05 .05 - ---------------------------------------------------------------------------- Year $.20 $.20 - ----------------------------------------------------------------------------
The principal markets on which the Company's stock is traded are the New York Stock Exchange and the Pacific Exchange. The number of holders of record of the Company's stock as of March 9, 1998 was 7,108. 1997 Annual Report page 25 Gap Inc. Management's Report on Financial Information Management is responsible for the integrity and consistency of all financial information presented in the Annual Report. The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include certain amounts based on Management's best estimates and judgments. In fulfilling its responsibility for the reliability of financial information, Management has established and maintains accounting systems and procedures appropriately supported by internal accounting controls. Such controls include the selection and training of qualified personnel, an organizational structure providing for division of responsibility, communication of requirement for compliance with approved accounting control and business practices and a program of internal audit. The extent of the Company's system of internal accounting control recognizes that the cost should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgments by Management. Although no system can ensure that all errors or irregularities have been eliminated, Management believes that the internal accounting controls in use provide reasonable assurance, at reasonable cost, that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with Management's authorization and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The financial statements of the Company have been audited by Deloitte & Touche LLP, independent auditors. Their report, which appears below, is based upon their audits conducted in accordance with generally accepted auditing standards. The Audit and Finance Committee (the "Committee") of the Board of Directors is comprised solely of directors who are not officers or employees of the Company. The Committee is responsible for recommending to the Board of Directors the selection of independent auditors. It meets periodically with Management, the independent auditors and the internal auditors to assure that they are carrying out their responsibilities. The Committee also reviews and monitors the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. Deloitte & Touche LLP and the internal auditors have full and free access to the Committee, with and without Management's presence. Independent Auditors' Report To the Shareholders and Board of Directors of The Gap, Inc.: We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three fiscal years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP San Francisco, California February 27, 1998 1997 Annual Report page 26 Gap Inc.
Consolidated Statements of Earnings Fifty-two Fifty-two Fifty-three Weeks Ended Percentage Weeks Ended Percentage Weeks Ended Percentage ($000 except share and per share amounts) January 31, 1998 to Sales February 1, 1997 to Sales February 3, 1996 to Sales - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 6,507,825 100.0% $ 5,284,381 100.0% $ 4,395,253 100.0% Costs and expenses Cost of goods sold and occupancy expenses 4,021,541 61.8 3,285,166 62.2 2,821,455 64.2 Operating expenses 1,635,017 25.1 1,270,138 24.0 1,004,396 22.9 Net interest income (2,975) 0.0 (19,450) (0.4) (15,797) (0.4) -------------------------------------------------------------------------------------------- Earnings before income taxes 854,242 13.1 748,527 14.2 585,199 13.3 Income taxes 320,341 4.9 295,668 5.6 231,160 5.2 -------------------------------------------------------------------------------------------- Net earnings $ 533,901 8.2% $ 452,859 8.6% $ 354,039 8.1% -------------------------------------------------------------------------------------------- Weighted-average number of shares-basic 396,179,975 417,146,631 417,718,397 Weighted-average number of shares-diluted 410,200,758 427,267,220 427,752,515 -------------------------------------------------------------------------------------------- Earnings per share-basic $ 1.35 $ 1.09 $ .85 Earnings per share-diluted 1.30 1.06 .83 --------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 1997 Annual Report page 27 Gap Inc. Consolidated Balance Sheets
($000) January 31, 1998 February 1, 1997 - ------------------------------------------------------------------------------------------------------------------- Assets Current Assets Cash and equivalents $ 913,169 $ 485,644 Short-term investments - 135,632 Merchandise inventory 733,174 578,765 Prepaid expenses and other current assets 184,604 129,214 ----------- ---------- Total current assets 1,830,947 1,329,255 ----------- ---------- Property and Equipment Leasehold improvements 846,791 736,608 Furniture and equipment 1,236,450 960,516 Land and buildings 154,136 99,969 Construction-in-progress 66,582 101,520 ----------- ---------- 2,303,959 1,898,613 Accumulated depreciation and amortization (938,713) (762,893) ----------- ---------- Property and equipment, net 1,365,246 1,135,720 ----------- ---------- Long-term investments - 36,138 Lease rights and other assets 141,309 125,814 ----------- ---------- Total assets $ 3,337,502 $2,626,927 ----------- ---------- Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 84,794 $ 40,050 Accounts payable 416,976 351,754 Accrued expenses 389,412 282,494 Income taxes payable 83,597 91,806 Deferred lease credits and other current liabilities 16,769 8,792 ----------- ---------- Total current liabilities 991,548 774,896 ----------- ---------- Long-Term Liabilities Long-term debt 496,044 - Deferred lease credits and other liabilities 265,924 197,561 ----------- ---------- Total long-term liabilities 761,968 197,561 ----------- ---------- Shareholders' Equity Common stock $.05 par value Authorized 500,000,000 shares; issued 439,922,841 and 476,796,135 shares; outstanding 393,133,028 and 411,775,997 shares 21,996 23,840 Additional paid-in capital 317,674 434,104 Retained earnings 2,392,750 1,938,352 Foreign currency translation adjustments (15,230) (5,187) Deferred compensation (38,167) (47,838) Treasury stock, at cost (1,095,037) (688,801) ----------- ---------- Total shareholders' equity 1,583,986 1,654,470 ----------- ---------- Total liabilities and shareholders' equity $ 3,337,502 $2,626,927 ----------- ----------
See Notes to Consolidated Financial Statements. 1997 Annual Report page 28 Gap Inc.
Consolidated Statements of Cash Flows Fifty-two Fifty-two Fifty-three Weeks Ended Weeks Ended Weeks Ended ($000) January 31, 1998 February 1, 1997 February 3, 1996 - ------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings $ 533,901 $ 452,859 $ 354,039 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization(a) 269,706 214,905 197,440 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 23,682 47,348 11,444 Deferred income taxes (13,706) (28,897) (2,477) Change in operating assets and liabilities: Merchandise inventory (156,091) (93,800) (113,021) Prepaid expenses and other (44,736) (16,355) (15,278) Accounts payable 63,532 88,532 1,183 Accrued expenses 107,365 87,974 9,427 Income taxes payable (8,214) 25,706 24,806 Deferred lease credits and other long-term liabilities 69,212 56,681 21,524 ------------------------------------------------- Net cash provided by operating activities 844,651 834,953 489,087 ------------------------------------------------- Cash Flows from Investing Activities Net maturity (purchase) of short-term investments 174,709 (11,774) 116,134 Net purchase of long-term investments (2,939) (40,120) (30,370) Net purchase of property and equipment (465,843) (371,833) (302,260) Acquisition of lease rights and other assets (19,779) (12,206) (6,623) ------------------------------------------------- Net cash used for investing activities (313,852) (435,933) (223,119) ------------------------------------------------- Cash Flows from Financing Activities Net increase in notes payable 44,462 18,445 20,787 Net issuance of long-term debt 495,890 - - Issuance of common stock 30,653 37,053 17,096 Net purchase of treasury stock (593,142) (466,741) (71,314) Cash dividends paid (79,503) (83,854) (66,993) ------------------------------------------------- Net cash used for financing activities (101,640) (495,097) (100,424) ------------------------------------------------- Effect of exchange rate changes on cash (1,634) 2,155 (465) ------------------------------------------------- Net increase (decrease) in cash and equivalents 427,525 (93,922) 165,079 Cash and equivalents at beginning of year 485,644 579,566 414,487 ------------------------------------------------- Cash and equivalents at end of year $ 913,169 $ 485,644 $ 579,566 -------------------------------------------------
See Notes to Consolidated Financial Statements. (a) Includes amortization of restricted stock, discounted stock options and discount on long-term debt. 1997 Annual Report page 29 Gap Inc. Consolidated Statements of Shareholders' Equity
($000 except share and per share amounts) Common Stock Additional ------------------------ Paid-in Shares Amount Capital - ------------------------------------------------------------------ Balance at January 28, 1995 470,918,331 $ 23,546 $ 282,716 ------------------------------------- Issuance of common stock pursuant to stock option plans 1,491,558 75 9,591 Net issuance of common stock pursuant to management incentive restricted stock plans 1,547,070 77 19,531 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 11,444 Foreign currency translation adjustments Amortization of restricted stock Purchase of treasury stock Reissuance of treasury stock 4,012 Net earnings Cash dividends ($.16 per share) ------------------------------------- Balance at February 3, 1996 473,956,959 $ 23,698 $ 327,294 ------------------------------------- Issuance of common stock pursuant to stock option plans 2,386,761 119 19,694 Net issuance of common stock pursuant to management incentive restricted stock plans 452,415 23 32,799 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 47,348 Foreign currency translation adjustments Amortization of restricted stock Purchase of treasury stock Reissuance of treasury stock 6,969 Net earnings Cash dividends ($.20 per share) ------------------------------------- Balance at February 1, 1997 476,796,135 $ 23,840 $ 434,104 ------------------------------------- Issuance of common stock pursuant to stock option plans(a) 2,848,567 142 47,963 Net cancelations of common stock pursuant to management incentive restricted stock plans (946,861) (47) (10,452) Tax benefit from exercise of stock options by employees and from vesting of restricted stock 23,682 Foreign currency translation adjustments Amortization of restricted stock and discounted stock options Purchase of treasury stock Reissuance of treasury stock 7,344 Retirement of treasury stock (38,775,000) (1,939) (184,967) Net earnings Cash dividends ($.20 per share) ------------------------------------- Balance at January 31, 1998 439,922,841 $ 21,996 $ 317,674 -------------------------------------
1997 Annual Report Page 30
Gap Inc. Foreign Currency Treasury Stock Retained Translation Deferred ------------------------- Earnings Adjustments Compensation Shares Amount Total -------------------------------------------------------------------------------- Balance at January 28, 1995 $1,282,301 $ (8,320) $(54,265) (36,624,084) $ (150,746) $1,375,232 -------------------------------------------------------------------------------- Issuance of common stock pursuant to stock option plans 9,666 Net issuance of common stock pursuant to management incentive restricted stock plans (16,191) 3,417 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 11,444 Foreign currency translation adjustments (751) (751) Amortization of restricted stock 21,721 21,721 Purchase of treasury stock (6,289,200) (72,717) (72,717) Reissuance of treasury stock 578,301 1,403 5,415 Net earnings 354,039 354,039 Cash dividends ($.16 per share) (66,993) (66,993) -------------------------------------------------------------------------------- Balance at February 3, 1996 $1,569,347 $ (9,071) $(48,735) (42,334,983) $ (222,060) $1,640,473 -------------------------------------------------------------------------------- Issuance of common stock pursuant to stock option plans (9,648) 10,165 Net issuance of common stock pursuant to management incentive restricted stock plans (12,903) 19,919 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 47,348 Foreign currency translation adjustments 3,884 3,884 Amortization of restricted stock 23,448 23,448 Purchase of treasury stock (23,284,650) (468,246) (468,246) Reissuance of treasury stock 599,495 1,505 8,474 Net earnings 452,859 452,859 Cash dividends ($.20 per share) (83,854) (83,854) -------------------------------------------------------------------------------- Balance at February 1, 1997 $1,938,352 $ (5,187) $(47,838) (65,020,138) $ (688,801) $1,654,470 -------------------------------------------------------------------------------- Issuance of common stock pursuant to stock option plans(a) (18,166) 29,939 Net cancelations of common stock pursuant to management incentive restricted stock plans 3,869 (6,630) Tax benefit from exercise of stock options by employees and from vesting of restricted stock 23,682 Foreign currency translation adjustments (10,043) (10,043) Amortization of restricted stock and discounted stock options 23,968 23,968 Purchase of treasury stock (21,190,300) (598,149) (598,149) Reissuance of treasury stock 645,625 5,007 12,351 Retirement of treasury stock 38,775,000 186,906 0 Net earnings 533,901 533,901 Cash dividends ($.20 per share) (79,503) (79,503) -------------------------------------------------------------------------------- Balance at January 31, 1998 $2,392,750 $ (15,230) $(38,167) (46,789,813) $(1,095,037) $1,583,986 --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. (a) Includes payout of cash for fractional shares resulting from the three-for-two split of common stock effective December 22, 1997. 1997 Annual Report page 31 Gap Inc. Notes to Consolidated Financial Statements For the Fifty-two Weeks ended January 31, 1998 (fiscal 1997), the Fifty-two Weeks ended February 1, 1997 (fiscal 1996) and the Fifty-three Weeks ended February 3, 1996 (fiscal 1995).>> Note A: Summary of Significant Accounting Policies Gap Inc. (the "Company") is an international specialty retailer which operates stores selling casual apparel, personal care and other accessories for men, women and children under a variety of brand names including: Gap, GapKids, babyGap, Banana Republic and Old Navy. Its principal markets consist of the United States, Canada, Europe and Asia with the United States being the most significant. On November 24, 1997, the Company's Board of Directors authorized a three-for-two split of its common stock effective December 22, 1997, in the form of a stock dividend for shareholders of record at the close of business on December 8, 1997. Share and per share amounts in the accompanying consolidated financial statements for all periods have been restated to reflect the stock split. The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less. Short-term investments include investments with an original maturity of greater than three months and a remaining maturity of less than one year. Long- term investments include investments with an original and remaining maturity of greater than one year. Effective July 1997, the Company's short-and long-term investments, which consist primarily of debt securities, are classified as available for sale and are carried at fair market value. Any unrealized gains or losses computed in marking these securities to market are reported within shareholders' equity. Prior to July 1997, such securities were classified as held to maturity and were carried at amortized cost. Merchandise inventory is stated at the lower of FIFO (first-in, first- out) cost or market. Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Lease rights are recorded at cost and are amortized over 12 years or the lives of the respective leases including option periods, whichever is less. Costs associated with the opening or remodeling of stores, such as pre- opening rent and payroll, are expensed as incurred. The net book value of fixtures and leasehold improvements for stores scheduled to be closed or expanded within the next fiscal year is charged against current earnings. Costs associated with the production of advertising, such as writing copy, printing and other costs, are expensed as incurred. Costs associated with communicating advertising that has been produced, such as magazine and billboard space, are expensed when the advertising first takes place. Advertising costs were $175 million, $96 million and $64 million in fiscal 1997, 1996 and 1995, respectively. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Translation adjustments result from the process of translating foreign subsidiaries' financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. Resulting translation adjustments are included in shareholders' equity. The Company accounts for stock-based awards using the intrinsic value- based method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and has provided pro forma disclosures of net earnings and earnings per share in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Restricted stock and discounted stock options represent deferred compensation and are shown as a reduction of shareholders' equity. In the fourth quarter of 1997, the Company adopted SFAS No. 128, Earnings per Share, which requires dual presentation of basic earnings per share (EPS) and diluted EPS. All prior periods have been restated to conform with the new statement. Basic EPS is computed as net earnings divided by the weighted- average number of common shares outstanding, excluding restricted stock, for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options, restricted stock and other convertible securities. 1997 Annual Report page 32 Gap Inc. The Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources; and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these standards will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. SFAS No. 130 and SFAS No. 131 are effective for the Company's fiscal years ending after January 31, 1998. Certain reclassifications have been made to the 1995 and 1996 financial statements to conform with the 1997 financial statements. Note B: Debt and Other Credit Arrangements The Company has committed credit facilities totaling $950 million, consisting of an $800 million, 364-day revolving credit facility, and a $150 million, 5-year revolving credit facility through June 30, 2002. These credit facilities provide for the issuance of up to $450 million in letters of credit. The Company has additional uncommitted credit facilities of $300 million for the issuance of letters of credit. At January 31, 1998, the Company had outstanding letters of credit of $498,256,000. Borrowings under the Company's credit agreements are subject to the Company not exceeding a certain debt ratio. The Company was in compliance with this debt covenant at January 31, 1998. During fiscal 1997, the Company issued long-term debt which consists of $500 million of 6.9 percent unsecured notes, due September 15, 2007. Interest on the notes is payable semi-annually. The fair value at January 31, 1998 of the notes was approximately $526 million, based on the current rates at which the Company could borrow funds with similar terms and remaining maturities. The balance of the debt is net of unamortized discount. Gross interest payments were $8,399,000, $2,800,000 and $2,274,000 in fiscal 1997, 1996 and 1995, respectively.
Note C: Income Taxes Income taxes consisted of the following: - --------------------------------------------------------------------------------------- Fifty-two Fifty-two Fifty-three Weeks Ended Weeks Ended Weeks Ended ($000) Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 - --------------------------------------------------------------------------------------- Currently Payable Federal $279,068 $266,063 $176,200 State 33,384 36,167 40,111 Foreign 21,595 22,335 17,348 - --------------------------------------------------------------------------------------- Total currently payable 334,047 324,565 233,659 - --------------------------------------------------------------------------------------- Deferred Federal (14,832) (23,980) (7,169) State and foreign 1,126 (4,917) 4,670 - --------------------------------------------------------------------------------------- Total deferred (13,706) (28,897) (2,499) - --------------------------------------------------------------------------------------- Total provision $320,341 $295,668 $231,160 - ---------------------------------------------------------------------------------------
The foreign component of pretax earnings before eliminations and corporate allocations in fiscal 1997, 1996 and 1995 was $84,487,000, $82,220,000 and $71,545,000, respectively. No provision was made for U.S. income taxes on the undistributed earnings of the foreign subsidiaries as it is the Company's intention to utilize those earnings in the foreign operations for an indefinite period of time or repatriate such earnings only when tax effective to do so. Undistributed earnings of foreign subsidiaries were $218,113,000 at January 31, 1998. The difference between the effective income tax rate and the United States federal income tax rate is summarized as follows:
- --------------------------------------------------------------------- Fifty-two Fifty-two Fifty-three Weeks Ended Weeks Ended Weeks Ended Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 - --------------------------------------------------------------------- Federal tax rate 35.0% 35.0% 35.0% State income taxes, less federal benefit 3.2 4.4 5.0 Other (.7) .1 (.5) - --------------------------------------------------------------------- Effective tax rate 37.5% 39.5% 39.5% - ---------------------------------------------------------------------
Deferred tax assets (liabilities), reported in other assets in the Consolidated Balance Sheets, consisted of the following at January 31, 1998 and February 1, 1997:
- ----------------------------------------------------------------------------- ($000) Jan. 31, 1998 Feb. 1, 1997 - ----------------------------------------------------------------------------- Compensation and benefits accruals $ 31,367 $ 31,640 Scheduled rent 44,451 40,834 Inventory capitalization 28,776 16,459 Nondeductible accruals 20,003 18,705 Other 17,854 24,224 - ----------------------------------------------------------------------------- Gross deferred tax assets 142,451 131,862 - ----------------------------------------------------------------------------- Depreciation (9,553) (13,611) Other (6,345) (5,404) - ----------------------------------------------------------------------------- Gross deferred tax liabilities (15,898) (19,015) - ----------------------------------------------------------------------------- Net deferred tax assets $126,553 $112,847 - -----------------------------------------------------------------------------
1997 Annual Report page 33 Gap Inc. Income tax payments were $320,744,000, $249,968,000 and $197,802,000 in fiscal 1997, 1996 and 1995, respectively. Note D: Leases The Company leases most of its store premises and headquarters facilities and some of its distribution centers. These leases expire at various dates through 2013. The aggregate minimum non-cancelable annual lease payments under leases in effect on January 31, 1998 are as follows:
- -------------------------------------------- Fiscal Year ($000) - -------------------------------------------- 1998 $ 409,607 1999 403,285 2000 387,668 2001 364,270 2002 332,364 Thereafter 1,172,849 - -------------------------------------------- Total minimum lease commitment $3,070,043 - --------------------------------------------
Many leases entered into by the Company include options, which are generally exercised, that may extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. Some leases also include early termination options which can be exercised under specific conditions. If conditions did not warrant invoking early termination of any leases, and all renewal options were exercised for current lease agreements, the total lease commitment for the Company would be approximately $4.1 billion. For leases that contain predetermined fixed escalations of the minimum rentals, the Company recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred lease credits. At January 31, 1998 and February 1, 1997, this liability amounted to $129,981,000 and $110,633,000, respectively. Cash or rent abatements received upon entering into certain store leases are recognized on a straight-line basis as a reduction to rent expense over the lease term. The unamortized portion is included in deferred lease credits. Some of the leases relating to stores in operation at January 31, 1998 contain renewal options for periods ranging up to 25 years. Many leases also provide for payment of operating expenses, real estate taxes and for additional rent based on a percentage of sales. No lease directly imposes any restrictions relating to leasing in other locations (other than radius clauses). Rental expense for all operating leases was as follows:
- -------------------------------------------------------------------------- Fifty-two Fifty-two Fifty-three Weeks Ended Weeks Ended Weeks Ended ($000) Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 - -------------------------------------------------------------------------- Minimum rentals $391,472 $337,487 $300,171 Contingent rentals 38,657 30,644 22,464 - -------------------------------------------------------------------------- Total $430,129 $368,131 $322,635 - --------------------------------------------------------------------------
Note E: Financial Instruments Foreign Exchange Forward Contracts The Company enters into foreign exchange forward contracts to reduce exposure to foreign currency exchange risk. These contracts are primarily designated and effective as hedges of commitments to purchase merchandise for foreign operations. The market value gains and losses on these contracts are deferred and recognized as part of the underlying cost to purchase the merchandise. At January 31, 1998, the Company had contracts maturing at various dates through 1998 to sell the equivalent of $123,230,000 in foreign currencies (20,200,000 British pounds, 46,200,000 Canadian dollars, 62,625,260,078 Italian lire, 1,543,000,000 Japanese yen and 1,234,884,074 Spanish pesetas) at the contracted rates. The deferred gains and losses on the Company's foreign exchange forward contracts at January 31, 1998 are immaterial. Put Options At January 31, 1998, the Company had various put option contracts to repurchase up to 3,050,000 shares of its common stock. The contracts have exercise prices ranging from $32.95 to $38.37, with expiration dates extending to the third quarter of fiscal 1998. Interest Rate Swaps During fiscal 1997, the Company entered into interest rate swap agreements in order to reduce interest rate risk on a substantial portion of its long-term debt. The swap agreements, which were issued at an aggregate notional amount of $400 million, were settled in September 1997 at an interest rate of 6.7 percent. The gains on the interest rate swaps were deferred and are being amortized to reduce interest expense over the life of the debt. 1997 Annual Report page 34 Gap Inc. Note F: Employee Benefit And Incentive Stock Compensation Plans Retirement Plans The Company has a qualified defined contribution retirement plan, called GapShare, which is available to employees who meet certain age and service requirements. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. Under the plan, the Company matches all or a portion of the employee's contributions under a predetermined formula. The Company's contributions vest over a seven-year period. Company contributions to the retirement plan in 1997, 1996 and 1995 were $12,907,000, $11,427,000 and $9,839,000, respectively. A nonqualified Executive Deferred Compensation Plan was established on January 1, 1994 and a nonqualified Executive Capital Accumulation Plan was established on April 1, 1994. Both plans allow eligible employees to defer compensation up to a maximum amount defined in each plan. The Company does not match employees' contributions. A Deferred Compensation Plan was established on August 26, 1997 for nonemployee members of the Board of Directors. Under this plan, Board members may elect to defer receipt on a pre-tax basis of eligible compensation received for serving as nonemployee directors of the Company. In exchange for compensation deferred, Board members are granted discounted stock options to purchase shares of the Company's common stock. All options are fully exercisable upon the date granted and expire seven years after grant or one year after retirement from the Board, if earlier. The Company may issue up to 300,000 shares under the plan. Incentive Stock Compensation Plans The 1996 Stock Option and Award Plan (the "Plan") was established on March 26, 1996. The Board authorized 41,485,041 shares for issuance under the Plan, which includes shares available under the Management Incentive Restricted Stock Plan ("MIRSP") and an earlier stock option plan established in 1981, both of which were superseded by the Plan. The Plan empowers the Compensation and Stock Option Committee of the Board of Directors to award compensation primarily in the form of nonqualified stock options or restricted stock to key employees. Stock options generally expire ten years from the grant date or one year after the date of retirement, if earlier. Stock options generally vest over a three-year period, with shares becoming exercisable in full on the third anniversary of the grant date. Nonqualified stock options are generally issued at fair market value but may be issued at prices less than the fair market value at the date of grant or at other prices as determined by the Compensation and Stock Option Committee. Total compensation cost for those stock options issued at less than fair market value under the Plan and for the restricted shares issued under MIRSP was $17,170,000, $22,248,000 and $23,743,000 in 1997, 1996 and 1995, respectively. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan under which all eligible employees may purchase common stock of the Company at 85 percent of the lower of the closing price of the Company's common stock on the grant date or the purchase date on the New York Stock Exchange Composite Transactions Index. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 percent to 15 percent. There were 645,625 shares issued under the plan during fiscal 1997, 599,495 during 1996 and 578,301 during 1995. All shares were acquired from reissued treasury stock. At January 31, 1998, there were 4,176,579 shares reserved for future subscriptions. Note G: Shareholders' Equity And Stock Options Common and Preferred Stock The Company is authorized to issue 60,000,000 shares of Class B common stock which is convertible into shares of common stock on a share-for-share basis; transfer of the shares is restricted. In addition, the holders of the Class B common stock have six votes per share on most matters and are entitled to a lower cash dividend. No Class B shares have been issued. The Board of Directors is authorized to issue 30,000,000 shares of one or more series of preferred stock and to establish at the time of issuance the issue price, dividend rate, redemption price, liquidation value, conversion features and such other terms and conditions of each series (including voting rights) as the Board of Directors deems appropriate, without further action on the part of the shareholders. No preferred shares have been issued. In October 1996, the Board of Directors approved a share-buyback program under which the Company may repurchase up to 45,000,000 shares of its outstanding stock in the open market over a three-year period. As of January 31, 1998, 28,184,650 shares were repurchased for $743,805,000 under this program. 1997 Annual Report page 35 Gap Inc. Stock Options Under the Company's Stock Option Plans, nonqualified options to purchase common stock are granted to officers, directors and key employees at exercise prices equal to the fair market value of the stock at the date of grant or at other prices as determined by the Compensation and Stock Option Committee of the Board of Directors. Stock option activity for all employee benefit plans was as follows:
- ---------------------------------------------------------------- Weighted-Average Shares Exercise Price - ---------------------------------------------------------------- Balance at January 28, 1995 11,619,816 $10.18 - ---------------------------------------------------------------- Granted 14,226,600 11.94 Exercised (1,491,558) 6.48 Canceled (894,222) 12.27 - ---------------------------------------------------------------- Balance at February 3, 1996 23,460,636 $11.41 - ---------------------------------------------------------------- Granted 9,364,110 20.60 Exercised (2,386,761) 8.30 Canceled (1,198,608) 14.85 - ---------------------------------------------------------------- Balance at February 1, 1997 29,239,377 $14.46 - ---------------------------------------------------------------- Granted 11,392,531 21.62 Exercised (2,849,034) 10.65 Canceled (2,559,295) 16.01 - ---------------------------------------------------------------- Balance at January 31, 1998 35,223,579 $16.97 - ----------------------------------------------------------------
Outstanding options at January 31, 1998 have expiration dates ranging from March 20, 1998 to January 29, 2008 and represent grants to 2,347 key employees. At January 31, 1998, the Company reserved 60,083,011 shares of its common stock, including 14,996 treasury shares, for the exercise of stock options. There were 24,859,432 and 32,745,096 shares available for granting of options at January 31, 1998 and February 1, 1997, respectively. Options for 4,299,847 and 4,373,222 shares were exercisable as of January 31, 1998 and February 1, 1997, respectively, and had a weighted-average exercise price of $11.66 and $9.01 for those respective periods. The Company accounts for its Stock Option and Award Plans in accordance with APB Opinion No. 25, under which no compensation cost has been recognized for stock option awards granted at fair market value. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to fiscal year 1995. Additional awards in future years are anticipated.
- ------------------------------------------------------------------------- Fifty-two Fifty-two Fifty-three Weeks Ended Weeks Ended Weeks Ended Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 - ------------------------------------------------------------------------- Net earnings ($000) As reported $533,901 $452,859 $354,039 Pro forma 507,966 437,232 348,977 - ------------------------------------------------------------------------- Earnings per share As reported-basic $ 1.35 $ 1.09 $ .85 Pro forma-basic 1.28 1.05 .84 As reported-diluted 1.30 1.06 .83 Pro forma-diluted 1.24 1.02 .82 - -------------------------------------------------------------------------
The weighted-average fair value of the stock options granted during fiscal 1997, 1996 and 1995 was $8.76, $7.47 and $4.18, respectively. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1997: dividend yield of .7 percent; expected price volatility of 31 percent; risk-free interest rates ranging from 5.9 percent to 7.0 percent and expected lives between 3.9 and 5.8 years. The fair value of stock options granted prior to 1997 was based on the following weighted-average assumptions: dividend yield of 1.0 percent; expected price volatility of 30 percent; risk-free interest rates ranging from 5.5 percent to 6.5 percent; and expected lives between 3.6 and 5.8 years. The following table summarizes information about stock options outstanding at January 31, 1998:
- ----------------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------------------------ ------------------------------------ Number Outstanding Weighted-Average Remaining Weighted-Average Number Exercisable Weighted-Average Range of Exercise Prices at Jan. 31, 1998 Contractual Life (in years) Exercise Price at Jan. 31, 1998 Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- $ 3.86 to $11.29 8,215,077 5.10 $10.12 1,995,467 $ 8.39 11.40 to 13.03 7,454,625 5.75 12.96 210,600 11.79 13.42 to 20.88 10,688,682 8.08 19.13 2,077,095 14.68 20.89 to 39.00 8,865,195 8.66 24.10 16,685 25.79 - ----------------------------------------------------------------------------------------------------------------------------------- $ 3.86 to $39.00 35,223,579 7.04 $16.97 4,299,847 $11.66 - -----------------------------------------------------------------------------------------------------------------------------------
1997 Annual Report page 36 Gap Inc. Note H: Earnings Per Share Under SFAS No. 128, the Company provides dual presentation of EPS on a basic and diluted basis. The Company's granting of certain stock options and restricted stock resulted in potential dilution of basic EPS. The following summarizes the effects of the assumed issuance of dilutive securities on weighted-average shares for basic EPS.
- -------------------------------------------------------------------------- Fifty-two Fifty-two Fifty-three Weeks Ended Weeks Ended Weeks Ended Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 - -------------------------------------------------------------------------- Weighted-average number of shares-basic 396,179,975 417,146,631 417,718,397 Incremental shares from assumed issuance of: Stock options 10,037,700 5,597,219 1,939,485 Restricted stock 3,983,083 4,523,370 8,094,633 - -------------------------------------------------------------------------- Weighted-average number of shares-diluted 410,200,758 427,267,220 427,752,515 - --------------------------------------------------------------------------
The number of incremental shares from the assumed issuance of stock options and restricted stock is calculated applying the treasury stock method. Excluded from the above computation of weighted-average shares for diluted EPS were options to purchase 440,063 shares of common stock during fiscal 1997, 5,084,978 during 1996 and 3,087,269 during 1995. Issuance of these securities would have resulted in an antidilutive effect on EPS. Note I: Related Party Transactions The Company has an agreement with Fisher Development, Inc. (FDI), wholly owned by the brother of the Company's chairman, setting forth the terms under which FDI may act as general contractor in connection with the Company's construction activities. FDI acted as general contractor for 266, 177 and 204 new stores' leasehold improvements and fixtures during fiscal 1997, 1996 and 1995, respectively. In the same respective years, FDI supervised construction of 97, 38 and 54 expansions, as well as remodels of existing stores and headquarters facilities. Total cost of construction was $233,777,000, $111,871,000 and $164,820,000, including profit and overhead costs of $16,845,000, $10,751,000 and $11,753,000 for fiscal 1997, 1996 and 1995, respectively. At January 31, 1998 and February 1, 1997, amounts due to FDI were $10,318,000 and $6,456,000, respectively. The terms and conditions of the agreement with FDI are reviewed annually by the Audit and Finance Committee of the Board of Directors.
Note J: Quarterly Financial Information (Unaudited) Fiscal 1997 Quarter Ended - ------------------------------------------------------------------------------------------------------------------------------- Thirteen Thirteen Thirteen Thirteen Fifty-two Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended ($000 except per share amounts) May 3, 1997 Aug. 2, 1997 Nov. 1, 1997 Jan. 31, 1998 Jan. 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------- Net sales $1,231,186 $1,345,221 $1,765,939 $2,165,479 $6,507,825 Gross profit 442,060 462,135 721,266 860,823 2,486,284 Net earnings 84,304 69,458 164,523 215,616 533,901 Earnings per share-basic .21 .17 .42 .55 1.35 Earnings per share-diluted .20 .17 .40 .53 1.30 - ------------------------------------------------------------------------------------------------------------------------------- Fiscal 1996 Quarter Ended - ------------------------------------------------------------------------------------------------------------------------------- Thirteen Thirteen Thirteen Thirteen Fifty-two Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended ($000 except per share amounts) May 4, 1996 Aug. 3, 1996 Nov. 2, 1996 Feb. 1, 1997 Feb. 1, 1997 - ------------------------------------------------------------------------------------------------------------------------------- Net sales $1,113,154 $1,120,335 $1,382,996 $1,667,896 $5,284,381 Gross profit 413,840 400,170 545,221 639,984 1,999,215 Net earnings 81,573 65,790 134,310 171,186 452,859 Earnings per share-basic .19 .16 .32 .42 1.09 Earnings per share-diluted .19 .15 .32 .41 1.06 - -------------------------------------------------------------------------------------------------------------------------------
1997 Annual Report page 37 Gap Inc. Quantitative and Qualitative Disclosures About Market Risk The table on the right provides information about the Company's market sensitive financial instruments as of January 31,1998 and constitutes a forward-looking statement. The Company operates in foreign countries which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company's policy is to hedge substantially all merchandise purchases for foreign operations through foreign exchange forward contracts. These contracts are entered into with large reputable financial institutions, thereby minimizing the risk of credit loss. Further discussion of these contracts appears in the Notes to Consolidated Financial Statements (Note E). The Company issued unsecured notes payable with a fixed interest rate of 6.9 percent. By entering into the fixed-rate notes, the Company avoided interest rate risk from variable rate fluctuations. A portion of the Company's fixed-rate short-term borrowings used to finance foreign operations are denominated in foreign currencies. By borrowing and repaying the loans in local currencies, the Company avoided the risk associated with exchange rate fluctuations.
- ------------------------------------------------------------------------------------------------------ Notional Amount of Average Forward Contracts Fair Value at ($000) Contract Rate(a) in U.S. Dollars Jan. 31, 1998(b) - ------------------------------------------------------------------------------------------------------ Foreign exchange forward contracts(c) British pounds .60 $ 33,394 $ 33,269 Canadian dollars 1.40 32,984 31,757 Italian lire 1,743.25 35,924 35,383 Japanese yen 120.52 12,803 12,266 Spanish pesetas 151.98 8,125 8,112 - ------------------------------------------------------------------------------------------------------ Total foreign exchange forward contracts $123,230 $120,787 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ Fixed Carrying Amount in Fair Value at ($000) Interest Rate U.S. Dollars Jan. 31, 1998(d) - ------------------------------------------------------------------------------------------------------ Notes payable(e) 6.9% $496,044 $526,128 - ------------------------------------------------------------------------------------------------------
(a) Currency per U.S. dollar. (b) Calculated using spot rates at January 31, 1998. (c) All contracts mature within one year. (d) Based on the rates at which the Company could borrow funds with similar terms and remaining maturities at January 31, 1998. (e) Principal amount $500 million due September 15, 2007. 1997 Annual Report page 38 EX-21 6 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 List of Subsidiaries Banana Republic (Apparel) Inc. California Banana Republic (California) LLC Delaware Banana Republic (East) L.P. California Banana Republic (Florida) LLC California Banana Republic (H.K.) Limited Hong Kong Banana Republic (Holdings) Inc. California Banana Republic (ITM) Inc. California Banana Republic (Merchandise) Inc. California Banana Republic (New York) LLC Delaware Banana Republic Limited England and Wales Banana Republic Stores Pty. Ltd. New South Wales, Australia Banana Republic, Inc. California Banana Republic, Inc. Delaware GPS (Bermuda) Limited Bermuda GPS (Delaware), Inc. Delaware GPS (Great Britain) Limited England and Wales GPS (International Investments) B.V. Amsterdam, The Netherlands GPS (Japan), Limited Delaware GPS (Maryland), Inc. Maryland GPS (Puerto Rico) Limited California GPS (UK) Limited California GPS (USA) Limited California GPS Catalog, Inc. California GPS Employee Services, Inc. California GPS Limited California GPS Management Services, Inc. California GPS Realty Company Inc. Delaware Gap (Apparel), Inc. California Gap (Canada) Inc. Canada Gap (Deutschland) GmbH Dusseldorf, Germany Gap (ESO) Limited England and Wales Gap (Florida) LLC California Gap (France) SAS Paris, France Gap (Georgia) LP California Gap (ITM) Inc. California Gap (Indiana) LP California Gap (Ireland) Limited Dublin, Ireland Gap (Japan) K.K. Tokyo, Japan Gap (Kentucky) LP California Gap (Merchandise), Inc. California Gap (Netherlands) B.V. Amsterdam, The Netherlands Gap (Puerto Rico), Inc. Puerto Rico Gap (RHC) B.V. Amsterdam, The Netherlands Gap (Tennessee) LP California Gap (Texas) LP California Gap (Wisconsin) LP California Gap Holdings, Inc. California Gap International Sourcing (California) Inc. California Gap International Sourcing (Holdings) Limited Hong Kong Gap International Sourcing (JV) LLC California Gap International Sourcing (Mexico) S.A. de C.V. Mexico Gap International Sourcing (U.S.A.) Inc. California Gap International Sourcing Limited Hong Kong Gap International Sourcing Pte. Ltd. Singapore Gap International Sourcing, Inc. California Gap International, Inc. California Gap Online, Inc. California Goldhawk B.V. Amsterdam, The Netherlands Old Navy (Apparel) Inc. California Old Navy (California) LLC Delaware Old Navy (East) L.P. California Old Navy (Florida) LLC California Old Navy (Holdings) Inc. California Old Navy (ITM) Inc. California Old Navy (Merchandise) Inc. California Old Navy Inc. Delaware Real Estate Ventures (Glastonbury), Inc. Delaware Real Estate Ventures (Glen Eagle), Inc. Delaware Real Estate Ventures (Wheaton) Inc. Illinois The Fisher Gap Stores Inc. California The Gap (H.K.) Limited Hong Kong The Gap Limited England and Wales EX-23 7 CONSENT OF DELOITTE & 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, and Registration Statement No. 333-36265 of The Gap, Inc. all on Form S-8 of our report dated February 27, 1998, incorporated by reference in the Annual Report on Form 10-K of The Gap, Inc. for the fiscal year ended January 31, 1998. /s/ Deloitte & Touche LLP San Francisco, California April 2, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 1/31/98
5 YEAR JAN-31-1998 FEB-02-1997 JAN-31-1998 913,169 0 0 0 733,174 1,830,947 2,303,959 938,713 3,337,502 991,548 0 0 0 21,996 1,561,990 3,337,502 6,507,825 6,507,825 4,021,541 1,635,017 (2,975) 0 0 854,242 320,341 533,901 0 0 0 533,901 1.35 1.30 EPS-PRIMARY amount presented is the EPS-basic amount calculated as defined by SFAS No. 128. EPS-DILUTED amount presented is the EPS-diluted amount calculated as defined by SFAS No. 128.
EX-27.2 9 FINANCIAL DATA SCHEDULE QUARTER YEAR ENDED 2/1/97
5 3-MOS 3-MOS 3-MOS YEAR FEB-01-1997 FEB-01-1997 FEB-01-1997 FEB-01-1997 FEB-04-1996 MAY-05-1996 AUG-04-1996 FEB-04-1996 MAY-04-1996 AUG-03-1996 NOV-02-1996 FEB-01-1997 552,729 514,213 477,272 485,644 79,819 74,061 109,340 135,632 0 0 0 0 0 0 0 0 489,719 573,080 711,934 578,765 1,269,058 1,303,903 1,438,579 1,329,255 1,626,967 1,705,498 1,787,490 1,898,613 645,956 686,769 719,883 762,893 2,373,314 2,459,300 2,628,156 2,626,927 486,853 641,496 819,218 774,896 0 0 0 0 0 0 0 0 0 0 0 0 23,767 23,798 23,814 23,840 1,705,830 1,627,611 1,608,412 1,630,630 2,373,314 2,459,300 2,628,156 2,626,927 1,113,154 1,120,335 1,382,996 5,284,381 1,113,154 1,120,335 1,382,996 5,284,381 699,314 720,165 837,775 3,285,166 282,627 295,381 328,434 1,270,138 (3,618) (3,956) (5,213) (19,450) 0 0 0 0 0 0 0 0 134,831 108,745 222,000 748,527 53,258 42,955 87,690 295,668 81,573 65,790 134,310 452,859 0 0 0 0 0 0 0 0 0 0 0 0 81,573 65,790 134,310 452,859 0.19 0.16 0.32 1.09 0.19 0.15 0.32 1.06 EPS-PRIMARY amounts presented are the EPS-basic amounts calculated as defined by SFAS No. 128. EPS-DILUTED amounts presented are the EPS-diluted amounts calculated as defined by SFAS No. 128.
EX-27.3 10 FINANCIAL DATA SCHEDULE (1ST 3 QUARTERS OF 1997)
5 3-MOS 3-MOS 3-MOS JAN-31-1998 JAN-31-1998 JAN-31-1998 FEB-02-1997 MAY-04-1997 AUG-03-1997 MAY-03-1997 AUG-02-1997 NOV-01-1997 244,643 220,148 627,760 112,268 37,454 0 0 0 0 0 0 0 628,693 791,925 980,531 1,136,736 1,201,089 1,762,961 1,980,305 2,083,432 2,216,708 806,302 849,048 897,246 2,502,415 2,576,749 3,225,076 663,800 782,515 1,007,122 0 0 0 0 0 0 0 0 0 23,892 23,892 23,907 1,594,750 1,536,069 1,448,955 2,502,415 2,576,749 3,225,076 1,231,186 1,345,221 1,765,939 1,231,186 1,345,221 1,765,939 789,126 883,086 1,044,673 311,911 352,462 453,977 (4,738) (1,459) 4,052 0 0 0 0 0 0 134,887 111,132 263,237 50,583 41,674 98,714 84,304 69,458 164,523 0 0 0 0 0 0 0 0 0 84,304 69,458 164,523 0.21 0.17 0.42 0.20 0.17 0.40 EPS-PRIMARY amounts presented are the EPS-basic amounts calculated as defined by SFAS No. 128. EPS-DILUTED amounts presented are the EPS-diluted amounts calculated as defined by SFAS No. 128.
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