-----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, MrMY4b5IRAsw24z5T7pzb1jj0/ff+J/zNuqHypPgzUg1XncJJmM0oyA3t5wTCZGQ wIbipjVLFM6I3SOAym+zuQ== 0001012870-97-000791.txt : 19970423 0001012870-97-000791.hdr.sgml : 19970423 ACCESSION NUMBER: 0001012870-97-000791 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970421 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: 1934 Act SEC FILE NUMBER: 001-07562 FILM NUMBER: 97584430 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 ANNUAL REPORT FILED ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 1, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-1697231 ------------------------ ------------------- (State of Incorporation) (I.R.S. Employer Identification No.) ONE HARRISON SAN FRANCISCO, CALIFORNIA 94105 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 952-4400 _______________________ 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 STOCK 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 voting stock held by non-affiliates of the Registrant as of March 24, 1997 was approximately $5,890,706,222, 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 24, 1997 was 273,698,780. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 1997 (hereinafter referred to as the "1997 Proxy Statement") are incorporated into Parts I and III. Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended February 1, 1997 (hereinafter referred to as the "1996 Annual Report to Stockholders") are incorporated into Parts II and IV. The Exhibit Index is located on Page 11 hereof. PART I ------ ITEM 1 - BUSINESS GENERAL - ------- The Gap, Inc. (hereinafter referred to as the "Company") is an international specialty retailer which operates stores selling casual apparel, shoes and other accessories for men, women and children under a number of brand names, including: Gap, GapKids, babyGap, Banana Republic, and Old Navy Clothing Co. 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. On March 24, 1997, the Company operated 1,883 stores, including 947 Gap, 491 GapKids, 17 baby Gap, 229 Banana Republic, and 199 Old Navy Clothing Co. stores (71 of the Gap and GapKids stores are located in the United Kingdom, 101 in Canada, 18 in France, 11 in Japan and 8 in Germany; 8 of the Banana Republic stores are located in Canada). Virtually all of the Company's merchandise is private label. The Gap stores offer casual clothing for men and women. GapKids was introduced in 1986 to provide well-designed, comfortable clothing for boys and girls ages 2-12. The babyGap line, offering mostly natural fiber clothing for infants and toddlers, was added in 1990 and is sold in all GapKids stores as well as in its own freestanding stores. Banana Republic offers classic, casual fashions for men and women and a home accessories line in selected stores. Old Navy Clothing Co. was introduced in 1993 and offers casual basic and fashion clothing and various accessories and gift items at lower price points for men, women and children. RECENT DEVELOPMENTS - ------------------- During fiscal 1996, the Company focused on developing and growing its brands, especially in its two newer divisions: Old Navy Clothing Co. and International. The Company also invested in the development of brand extensions: new product categories (such as personal care in all its divisions, bedding and layette for babyGap, a home accessories line for Banana Republic, jewelry and underwear for Gap and Banana Republic) and new formats (testing separate men's and women's stores for Gap and Banana Republic, separate babyGap stores, airport store locations, and an alliance with Duty Free Stores in Hong Kong and Guam). The Company has limited operating history in some of these concepts 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 1996. 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 investments in infrastructure (a new distribution center located in Holland) and personnel growth (expanding the European Support Office to support the anticipated European expansion). The Company's ability to grow successfully in the continental European markets will depend in part on determining the best way to compete in the especially challenging retail environment of Germany and France. Even though in fiscal 1996 the Gap division had its best comparable store performance in five years, its comparable store performance in the first two months of fiscal 1997 was negative, driven primarily by weakness in the men's apparel business. This business had experienced difficulties in fiscal 1996, and this trend is expected to continue, especially in the first half of 1997, when prior-year comparisons are the most difficult. Given its large store base and modest growth in new stores, the most critical factor in profit growth for the Gap division is growth in the number of stores. Improvement in the men's apparel business is especially important in growing comparable store sales. If the Gap division is unable to improve its comparable store growth, the Company's results of operations could be adversely affected. MERCHANDISE INVENTORY, REPLENISHMENT AND DISTRIBUTION - ----------------------------------------------------- The retail apparel business fluctuates according to changes in customer preferences dictated in part by fashion 1 and season. These fluctuations especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and sometimes before fashion trends are evidenced by customer purchases. The Company is also vulnerable to changing fashion trends. In addition, the cyclical nature of the retail business requires the Company to carry a significant amount of inventory, especially prior to peak selling seasons when the Company and other retailers generally build up their inventory levels. The Company must enter into contracts for the purchase and manufacture of apparel well in advance of the applicable selling season. As a result, the Company is vulnerable to demand and pricing shifts and to 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, 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 their extent and the 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 over 1,200 suppliers located domestically and overseas. No supplier accounted for more than 5% of the Company's fiscal 1996 purchases. Of the Company's merchandise sold worldwide during fiscal 1996, approximately 30% was produced domestically while the remaining 70% was made outside the United States. Approximately 10% of the Company's total merchandise was from Hong Kong, with the remainder coming from 47 other countries. Any event causing a sudden disruption of imports from Hong Kong, including the imposition of additional import restrictions, could have a materially adverse effect on the Company's operations. Substantially all of the Company's foreign purchases are negotiated and paid for in U.S. dollars. The Company cannot predict whether any of the foreign 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. In addition, the Company's import 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. SEASONAL BUSINESS - ----------------- 2 The Company's business follows a seasonal pattern, peaking over a total of about 12 weeks during the late summer (late August through September) and holiday (Thanksgiving through Christmas) periods. During fiscal year 1996, these periods accounted for approximately 33% 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 could adversely affect the Company's net sales and profitability. ADVERTISING - ----------- In 1996, the Company increased its investment in advertising and marketing as a percentage of sales. 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 babyGap concept and TV and radio ads for Old Navy, established a site on the world-wide web, and ran promotional campaigns for the opening of its Old Navy and International stores. The Company plans to continue its stronger investments in advertising and marketing in 1997. There can be no assurances that these increased investments will result in increased sales or profitability. EMPLOYEES - --------- On February 1, 1997, the Company had a work force of approximately 66,000 employees. The Company also hires temporary employees during the peak late summer 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 Clothing Co., 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. 3 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 and Chief Operating Officer of the Company. Each of Messrs. Donald G. Fisher, Robert J. Fisher and 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 1997 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, 39 Senior Vice President - General Counsel Senior Vice President - General Counsel since April 1994. Vice President - General Counsel 1993-94; Associate General Counsel and Managing Attorney, 1992- 93; and Associate General Counsel, 1991-92. Joined the Company in 1991. WARREN R. HASHAGEN, 46 Senior Vice President - Finance and Chief Financial Officer 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, 37 Executive Vice President and Chief Administrative Officer Executive Vice President and Chief Administrative Officer since October 1996. Executive Vice President, Finance and Strategy and Chief Financial Officer of Staples, Inc., 1992-96. ITEM 2 - PROPERTIES During fiscal year 1996, the Company opened 203 stores and closed 30. The newly-opened stores include 62 Gap stores (including 5 stores in the United Kingdom, 5 stores in Canada, 2 stores in France, 3 stores in Japan and 2 stores in Germany), 47 GapKids stores (including 7 stores in the United Kingdom, 5 stores in Canada, 3 stores in France, 2 stores in Japan and 2 stores in Germany), 13 babyGap stores, 18 Banana Republic stores (including 3 stores in Canada), and 63 Old Navy Clothing Co. stores. In addition, during fiscal year 1996, the Company expanded 42 stores. The expanded stores include 19 Gap stores (including 2 in the United Kingdom), 13 GapKids stores (including 2 in the United Kingdom), and 10 Banana Republic stores. The 1,854 stores operating on February 1, 1997 aggregated approximately 12.6 million square feet. The Company leases virtually all of its store premises for terms generally ranging from 12 to 15 years. 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. During fiscal year 1997, the Company plans to increase store space by approximately 18%, before taking into account store closings. This increase is expected to include the opening of at least 275 new stores worldwide and the expansion of approximately 65 to 75 of the Company's existing stores. 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 has entered into a lease for 19 acres of land and a 320,000 square foot structure for consolidation/deconsolidation purposes in Hebron, Kentucky. The Company owns its Canadian Distribution Center (CDC) located in Brampton, Ontario. It consists of approximately 150,000 square feet. A 215,000 square foot expansion to the CDC is estimated to be completed by June 1997. The Company also owns its Western Distribution Center (WDC), a 344,000 square-foot facility located in 4 Ventura, California. The Company also owns 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, covers 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, Shiba, Japan, to serve its Japanese stores. Both these facilities are operated by third parties. The Company also owns and operates a data center located on seven acres of land in Rocklin, California; it covers approximately 40,000 square feet and serves as a corporate computer processing center. In February 1996, the Company exercised an option to purchase a 12-acre parcel of land for $9,000,000 in San Bruno, California to expand its headquarters facilities. Construction began in April 1996 for an estimated cost at completion of $55-60 million. The Company will own the facility, which is expected to be in operation in late 1997. 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 23 of the 1996 Annual Report to Stockholders filed 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 1996 Annual Report to Stockholders filed 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 and 23 of the 1996 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. Safe-Harbor Statement under the Private Securities Litigation Reform Act of --------------------------------------------------------------------------- 1995 - ---- The Management's Discussion and Analysis incorporated by reference herein as well as other portions of this report and of the 1996 Annual Report to Stockholders contain a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. In these reports 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 already 5 have been discussed under Item 1 of this report; other risks include, without limitation, ongoing competitive pressures in the apparel industry, a continuation or exacerbation of the current over-capacity problem affecting the industry, and/or changes in the level of consumer spending or preferences in apparel, 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. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ($000) February 1, 1997 February 3, 1996 ---------------- ---------------- Accrued Payroll $47,281 $39,331 The remaining information required by this item is incorporated herein by reference to pages 24-34 of the 1996 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III -------- ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the Section entitled "Nominees for Election as Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1997 Proxy Statement. See also Item 1 above. ITEM 11 - EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Sections entitled "Compensation of Directors," "Executive Compensation" and "Employment Contracts and Termination of Employment Arrangements" in the 1997 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 1997 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Sections entitled "Other Reportable Transactions" in the 1997 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 6 or are incorporated herein as indicated. (1) Financial Statements -------------------- (i) Independent Auditors' Report. Incorporated by reference to Page 24 of the 1996 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. (ii) The consolidated balance sheets as of February 1, 1997 and February 3, 1996 and the related consolidated statements of earnings, cash flows, and stockholders' equity and notes thereto for each of the three fiscal years in the period ended February 1, 1997 are incorporated by reference to pages 25-34 of the 1996 Annual Report to Stockholders filed 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. Individual financial statements of the Company have been omitted since the Company is primarily an operating Company and the indebtedness of the wholly owned subsidiaries to any person other than the Company does not exceed five percent of the total assets. (3) Exhibits -------- Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index which begins on sequentially numbered page 11 of this Report. (4) Reports on Form 8-K ------------------- No reports on Form 8-K were filed or required to be filed for the last quarter of the fiscal year. 7 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 15, 1997 By /s/ Millard S. Drexler ---------------------- Millard S. Drexler, Chief Executive Officer (Principal Executive Officer) Date: April 15, 1997 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 15, 1997 By /s/ Adrian D. P. Bellamy ------------------------ Adrian D. P. Bellamy, Director Date: April 15, 1997 By /s/ John G. Bowes ----------------- John G. Bowes, Director Date: April 15, 1997 By /s/ Millard S. Drexler ---------------------- Millard S. Drexler, Director Date: April 15, 1997 By /s/ Donald G. Fisher -------------------- Donald G. Fisher, Director Date: April 15, 1997 By /s/ Doris F. Fisher ------------------- Doris F. Fisher, Director SIGNATURES (CONT'D) ------------------- 8 Date: April 15, 1997 By /s/ Robert J. Fisher -------------------- Robert J. Fisher, Director Date: April 15, 1997 By /s/ Lucie J. Fjeldstad ---------------------- Lucie J. Fjeldstad, Director Date: April 15, 1997 By /s/ William A. Hasler --------------------- William A. Hasler, Director Date: April 15, 1997 By /s/ John M. Lillie ------------------ John M. Lillie, Director Date: April 15, 1997 By /s/ Charles R. Schwab --------------------- Charles R. Schwab, Director Date: April 15, 1997 By /s/ Brooks Walker, Jr. ---------------------- Brooks Walker, Jr., Director 9 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. 10.1 Credit Agreement, dated as of August 1, 1995, among Registrant and Citicorp USA Inc.; Bank of America National Trust & Savings Association; National Westminster Bank PLC; Nationsbank of Texas; The Royal Bank of Canada; Bank of Montreal; Societe Generale; The Fuji Bank, Limited; U.S. National Bank of Oregon; Morgan Guaranty Trust Company of New York; The Sumitomo Bank Limited; and Citibank, N.A., filed as Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the period ended October 28, 1995, Commission File No. 1-7562. 10.2 Lease Agreement (Eastern Distribution Center), dated as of July 6, 1979, between Registrant and Corporate Property Associates, filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended February 3, 1980, Commission File No. 1-7562. 10.3 Amendment to Lease Agreement (Eastern Distribution Center), dated as of October 10, 1986, filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.4 Second Amendment to Lease Agreement (Eastern Distribution Center), dated as of February 16, 1988, filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.5 Lease Agreement (Kentucky Distribution Center), dated as of February 16, 1988, between Registrant and Corporate Property Associates 7, filed as Exhibit 10.12 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.6 Lease Agreement (One Harrison, San Francisco), dated as of September 1, 1987, between Registrant's wholly-owned subsidiary, Banana Republic, Inc. ("Banana Republic"), and JMC Associates Limited Partnership, filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.7 First Amendment to Lease Agreement (One Harrison, San Francisco), dated as of December 21, 1987, filed as Exhibit 10.14 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.8 Second Amendment to Lease Agreement (One Harrison, San Francisco), dated as of October 16, 1991, filed as Exhibit 10.15 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.9 Sublease Agreement (One Harrison, San Francisco), dated as of December 21, 1987, between Registrant's wholly- owned subsidiary, Banana Republic, Inc. and Hillman Properties West, Inc., filed as Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.10 First Amendment to Sublease Agreement (One Harrison, San Francisco), dated as of December 17, 1990, filed as Exhibit 10.17 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.11 Second Amendment to Sublease Agreement (One Harrison, San Francisco), dated as of September 30, 1991, filed as Exhibit 10.18 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.12 Third Amendment to Sublease Agreement (One Harrison, San Francisco), dated as of October 16, 1991, filed as Exhibit 10.19 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.13 Lease Agreement (Two Harrison, San Francisco), dated as of May 31, 1991, between Registrant and Harrison Plaza, Ltd., a California limited partnership, filed as Exhibit 10.20 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.14 Purchase Agreement (Atlantic Distribution Center), dated as of April 9, 1990, between Registrant and Greater arford Industrial Park Partnership, filed as Exhibit 0.13 to Registrant's Annual Report on Form 10-K for the ear ended February 3, 1990, Commission File No. 1-7562. 10.15 Purchase and Installation Agreement (Materials Handling Equipment for Atlantic Distribution Center), dated as of December 18, 1990, between Registrant and Computer Aided Systems, Inc. filed as Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.16 Construction Agreement (Atlantic Distribution Center), dated as of July 31, 1990, between Registrant and Robert A. Kinsley, Inc., filed as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.17 Purchase Agreement (Rocklin Data Center), dated as of November 20, 1990, between Registrant and Stanford Ranch, Inc., filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.18 Construction Agreement (Rocklin Data Center), dated as of January 11, 1991, between Registrant and The Austin Company, filed as Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.19 Purchase Agreement (Canadair Corporate Jet), dated as of July 11, 1991, between Registrant and Canadair Challenger, Inc., a Delaware corporation, filed as Exhibit 10.26 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, 10.20 Construction Agreement, dated as of January 1, 1992, between Registrant and Fisher Development, Inc., filed as Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.21 Letter Agreement, dated as of December 17, 1992, amending the Restated Construction Agreement between Registrant and Fisher Development, Inc., filed as Exhibit 10.27 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.22 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54690. 10.23 Form of Nonqualified Stock Option Agreement under Registrant's 1981 Stock Option Plan, filed as Exhibit 4.2 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54690. 10.24 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. 10.25 Form of Restricted Stock Agreement under Registrant's Management Incentive Restricted Stock Plan II, filed as Exhibit 4.2 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54686. 10.26 GapShare, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 333-00417. 10.27 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. 10.28 Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-56021. 10.29 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. 10.30 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. 10.31 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. 10.32 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. 10.33 Executive Long-Term Cash Award 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. 10.34 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. 10.35 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. 10.36 Agreement, dated as of October 22, 1985, between Registrant and Millard S. Drexler, together with an amendment thereto dated as of November 21, 1985, filed as Exhibits 19.1 and 19.2, respectively, to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 2, 1985, Commission File No. 1-7562. 10.37 Amendment to the Agreement between Registrant, Millard Drexler and Donald Fisher, dated October 23, 1992, filed as Exhibit 10.38 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.38 Amended and Restated Restricted Stock Agreement, dated January 30, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.39 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.39 First Amendment to the Amended and Restated Restricted Stock Agreement, dated October 23, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.40 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.40 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. 10.41 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. 10.42 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. 10.43 Employment Arrangement, dated July 16, 1997, between Registrant and John B. Wilson. 11 Computation of Earnings per Share. 13 Registrant's annual report to security holders for the fiscal year ended February 1, 1997. 21 Subsidiaries of Registrant. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. EX-10.43 2 EMPLOYEE AGREEMENT DATED 07/16/97 EXHIBIT 10.43 July 16, 1996 John B. Wilson 135 Benvue Street Wellesley, Massachusetts 02181 Dear John: We are very pleased to offer you employment at The Gap, Inc. This offer is contingent upon a start date on or before November 1, 1996. Below please find a summary of the offer. 1. POSITION: Chief Administrative Officer, The Gap, Inc. Contingent upon the -------- Board of Directors' approval, this position will be subject to the rules and regulations of Section 16 of the 1934 Securities Exchange Act (as amended). 2. REPORTING RELATIONSHIP: You will report to me. ---------------------- 3. AREAS OF RESPONSIBILITY: The following departments will report to you: ----------------------- Finance, Internal Audit, Corporate Administration, MIS, Distribution, Real Estate and Store Construction, General Counsel. 4. START DATE: To be determined, but in no event later than your tentative ---------- start date of November 1, 1996. 5. SALARY: Your base salary will be $550,000 per year, payable every two ------ weeks. If you start on or before October 31, 1996 you will be eligible for a pro-rated base salary review in April of 1997. If you start on November 1, or after, your base salary will be reviewed in April of 1998 and will be pro-rated to include the partial year worked in fiscal year 1996. 6. BONUS: We are offering three different cash bonuses to you: ----- A. Signing Bonus. On your first scheduled pay date you will receive a cash ------------- bonus of $850,000 (less applicable taxes). B. MICAP Bonus. Under our Management Incentive Cash Award Program (MICAP), ----------- you will be eligible to receive a bonus each year with a target award of 50% of your base salary. Depending upon the performance of The Gap, Inc. against its annual goals, John B. Wilson July 16, 1996 Page 2 your payment could range from 0 to 150% of your target. At this point, an individual performance factor will be applied of 85% to 125%. Provided that your start date is on or before November 1, 1996, your first bonus will be guaranteed at target and payable in April 1997 provided that you are actively employed by The Gap, Inc. at that time. The amount of this bonus will be prorated for the number of months you worked in fiscal year 1996. C. Long Term Cash Bonus: You will be eligible to participate in our -------------------- Executive Long Term Cash Award Performance Plan (ELCAPP), subject to pre-approval of the Board of Directors. ELCAPP provides for a target cash incentive of 100% of your base salary every three years. "Base Salary" for each three year cycle is the average of your fiscal year end salary in each year of the three year cycle. Assuming you are still actively employed by The Gap, Inc. at that time, you will be eligible for the first payout under the Plan in April 1999. Any bonus provided at that time will be prorated to your Anniversary Date (as defined herein). The cycles for this program are overlapping. For example, the 2nd cycle you would be eligible for, begins on February 1, 1997 to January 31, 2000 with a payout in the year 2000. Your payout will be based on achievement of Company goals during that period. 7. STOCK: Below are three different types of stock grants that we are ----- offering to you. Keep in mind that as a Section 16 officer of the Company, you will be subject to the rules and regulations of Section 16 of the 1934 Securities Exchange Act (as amended), as well as Company designated trading windows. All of the stock grants described below are contingent upon the approval of the Compensation and Stock Option Committee of the Board of Directors and are subject to the terms and conditions of the Company's 1996 Stock Option and Award Plan. A. Stock Options: On the date when the award is approved or on your first ------------- day of employment, whichever is later (hereafter "Anniversary Date"), you will receive an option to purchase 300,000 shares of stock of The Gap, Inc. The exercise price for the option shall be determined by the market value of the stock on the Anniversary Date. These shares will become 100% vested and exercisable on the Anniversary Date in the year shown in the schedule below, provided you are then employed John B. Wilson July 16, 1996 Page 3 by us. The options must be exercised within ten years from the date of the grant, or you will lose your right to do so. 100,000 options in 1998 100,000 options in 1999 100,000 options in 2000 These partially accelerated grants have been offered as inducement to join our Company and, as such, they exceed the number of shares your peers will receive during the same years. Beginning in the next review cycle, (i.e. April 1997) your grants will be consistent with our overall compensation scheme and, in light of this offer, you will not receive any more options vesting in the year 2000. B. Restricted Stock: On your Anniversary Date (defined in paragraph 7A ---------------- above), you will receive 20,300 restricted shares of common stock of The Gap, Inc. Assuming you are then employed by us, the share restrictions will be lifted on your Anniversary Date in 1997. C. Discounted Stock Option: On your Anniversary Date (defined in paragraph ----------------------- 7A above), you will receive an option to purchase 70,000 shares of stock of The Gap, Inc. The exercise price for the options will be 50% of the fair market value of the stock on the Anniversary Date. The option shall become 100% vested and exercisable as shown in the schedule below provided you are then employed by us: 42,000 options on February 1, 1998 28,000 options on your Anniversary Date in 1999 These options must be exercised within ten years from the date of the grant, or you will lose your right to do so. 8. RELOCATION LOAN AND EXPENSES: You will be eligible to receive a low ---------------------------- interest relocation loan for every dollar of equity you put towards the purchase of a new home, up to a maximum of $550,000. The loan will be interest only, at 3%, for five years, with all principal and interest due in five years. More details about this benefit will be forthcoming. We will also pay your relocation expenses in accordance with the Company's relocation policy. Your relocation packet will be forwarded directly by our Relocation Department. John B. Wilson July 16, 1996 Page 4 9. CAR ALLOWANCE: During your employment, you will be provided with a car ------------- allowance of $1100 per month. All operating expenses (i.e. gasoline, insurance coverage, registration, maintenance, etc.) will be your responsibility. The monthly allowance is taxable and will be added to your W-2 Form. 10. PROPRIETARY INFORMATION OR TRADE SECRETS OF OTHERS: You represent and -------------------------------------------------- warrant to us that: 1) you do not have any other agreements or relationships with, or commitments to, any other person or entity that conflicts with accepting this offer or performing your obligations as outlined herein; and 2) you have returned all property and confidential information belonging to all prior employers; and 3) you will not disclose to us, or use, or persuade any other Company employee to use, any proprietary information or trade secrets of another person or entity. You further agree to defend, indemnify and hold us harmless in the event that any person or entity brings a lawsuit alleging your breach of the above representations and warranties. 11. TERMINATION/SEVERANCE PROTECTION: In the event that you are involuntarily -------------------------------- terminated for any reason other than "cause" within the first 24 months of employment, we will offer the following protection: A. One year of severance pay at your then-effective base rate, payments to cease as soon as new employment is effective. B. If your termination occurs before the Anniversary Date in 1997, we will accelerate the vesting and lapse of restrictions for your 1997 restricted shares to the date of your termination. C. If your termination occurs before February 1, 1998, we will accelerate the vesting of your 1998 discounted stock options to the date of your termination. The term "cause" is hereby defined to include dishonesty, fraud or deliberate injury to the Company, any activity that creates a conflict of interest between you and the Company, any unlawful or criminal activity of a serious nature, or any willful breach or neglect of your duties. 12. GAP'S PARTIAL RECAPTURE OF ANY ACCELERATED STOCK: You acknowledge that a ------------------------------------------------- large part of this offer was designed to John B. Wilson July 16, 1996 Page 5 compensate you for an unvested stock option granted to you by your current employer (Staples) which would have vested in 1997. You agree that if you receive any acceleration of this stock grant ("Accelerated Stock") from your current employer, or its surviving corporation, either due to your termination or your willingness to temporarily extend your employment through an agreed upon date, then your pre-tax gain on this Accelerated Stock will be used to reduce this offer as follows. Your gain on such Accelerated Stock will be calculated as of the market value on the accelerated vesting date ("Vesting Date") and fifty-percent of such gain (up to a maximum of $1.15 million) will be used to reduce the value of this offer by first reducing the number of shares of restricted shares offered to you in paragraph 7B above (calculated at their market value on the Vesting Date) then reducing the number of discounted 1998 shares in paragraph 7C, then the number of discounted 1999 shares, until the $1,150,000 maximum is recaptured by us. 13. BENEFITS: -------- A. Benefits Basics - Company-paid Income Protection, Life, and Vision coverage will be effective the day you report to work. You will have 31 days from your first day of employment to elect optional coverage, such as Medical and Dental, Core Plus Income Protection, Supplemental Life, AD&D, etc. If optional coverage is elected it will take effect on your first day of employment. B. GapShare - You will become eligible to participate in our 401(k) Plan, called GapShare, after one year of service. Enrollment in the Plan occurs just prior to the Plan Entry Dates, January 1, April 1, July 1 and October 1 of each year after you meet the eligibility requirement. Please contact our Benefits Department if you would like to roll-over any amounts from former plans into GapShare. C. Employee Stock Purchase Plan - The company also offers an Employee Stock Purchase Plan which gives employees the opportunity to purchase shares of The Gap, Inc. stock at a discount through payroll deductions. More information about the plan will be provided to you before the annual enrollment date of June 1st. D. LifeStyle Benefits - We also offer a variety of other benefit services and programs about which you may be interested. John B. Wilson July 16, 1996 Page 6 Services include BabyLine, LifeWorks, babyGap Gift, and the Dependent Care Account Plan. Detailed information on all of the Benefits Programs will be provided to you on your first day of employment. This package will also contain important information on enrollment deadlines. You understand that this agreement does not constitute an employment contract and that your employment is at-will. This means that you do not have a contract of employment for any particular duration or limiting the grounds for your termination in any way. You are free to resign at any time. Similarly, The Gap, Inc. is free to terminate your employment at any time for any reason. You understand that while personnel policies, programs and procedures may exist and be changed from time to time, the only time your at-will status could be changed is if you were to enter into an express written contract with The Gap, Inc., explicitly promising you job security, containing the words "This is an express contract of employment", and signed by an officer of The Gap, Inc. The above language contains our entire agreement about your at-will status and there are no oral or side agreements of any kind. Again, John, we are delighted to offer you employment at The Gap, Inc. We know you will contribute greatly to our organization and will find the position to be a most challenging one. After accepting this offer by signing below, please return one original to me. The other is for your records. Very truly yours, Accepted by, THE GAP, INC. - ------------------ ------------------ Millard S. Drexler John B. Wilson President and Chief Executive Officer On , 1996 --------------------- EX-11 3 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 THE GAP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Fifty-two Fifty-three Fifty-two Weeks Ended Weeks Ended Weeks Ended February 1, 1997 February 3, 1996 January 28, 1995 -------------------------------------------------------- Net earnings ($000) $ 452,859 $ 354,039 $ 320,240 ============ ============ ============ Weighted average shares of common stock outstanding during the period 283,330,290 288,062,430 291,141,076 Add incremental shares from assumed exercise of stock options (primary) 3,731,352 1,292,990 1,148,118 ------------ ------------ ------------ 287,061,642 289,355,420 292,289,194 ============ ============ ============ Primary earnings per share $ 1.58 $ 1.22 $ 1.10 ============ ============ ============ Weighted average shares of common stock outstanding during the period 283,330,290 288,062,430 291,141,076 Add incremental shares from assumed exercise of stock options (fully-diluted) 3,732,467 2,311,716 1,178,832 ------------ ------------ ------------ 287,062,757 290,374,146 292,319,908 ============ ============ ============ Fully-diluted earnings per share $ 1.58 $ 1.22 $ 1.10 ============ ============ ============
NOTE: (1) The information provided above is presented in accordance with Regulation S-K, Item 601(b)(11), while net earnings per share on the Consolidated Statements of Earnings is presented in accordance with APB Opinion 15. The information in this exhibit is not required under APB Opinion 15, as the difference between primary and fully-diluted earnings per share and earnings per share calculated on a weighted average share bases is less than 3%. (2) All share and per share data have been restated to reflect the 2-for-1 split of common stock in the form of a stock dividend effective April 10, 1996. EX-13 4 ANNUAL REPORT FISCAL YEAR ENDED 02/03/97 EXHIBIT 13 THE GAP, INC. Ten-Year Selected Financial Data
- ---------------------------------------------------------------------------------------------------------------------------------- Compound Annual Growth Rate Fiscal Year ------------------------------------ ----------------------------------------- 1996 1995 1994 3-year 5-year 10-year 52 weeks 53 weeks 52 weeks - ---------------------------------------------------------------------------------------------------------------------------------- Operating Results ($000) Net Sales 17.0% 16.0% 20.1% $5,284,381 $4,395,253 $3,722,940 Cost of goods sold and occupancy expenses, excluding depreciation and amortization - - - 3,093,709 2,645,736 2,202,133 Percentage of net sales - - - 58.5% 60.2% 59.2% Depreciation and amortization (a) - - - 191,457 175,719 148,863 Operating expenses - - - 1,270,138 1,004,396 853,524 Net interest (income) expense - - - (19,450) (15,797) (10,902) Earnings before income taxes (b) 20.8% 15.1% 18.5% 748,527 585,199 529,322 Percentage of net sales - - - 14.2% 13.3% 14.2% Income Taxes - - - 295,668 231,160 209,082 Net earnings 20.6% 14.5% 20.9% 452,859 354,039 320,240 Percentage of net sales - - - 8.6% 8.1% 8.6% Cash dividends 16.5% 15.3% 23.0% 83,854 66,993 64,775 Capital expenditures (c) - - - 375,838 309,599 236,616 -------------------------------------------------------------------------------- Per Share Data (d) Net earnings (e) 21.6% 14.6% 20.9% $1.60 $1.23 $1.10 Cash dividends - - - .30 .24 .23 Stockholders' equity (book value) (f) - - - 6.03 5.70 4.75 -------------------------------------------------------------------------------- Financial Position ($000) Property and equipment (net) 15.3% 15.7% 25.5% $1,135,720 $957,752 $828,777 Merchandise inventory 20.5% 13.0% 14.8% 578,765 482,575 370,638 Total assets 14.2% 18.0% 21.9% 2,626,927 2,343,068 2,004,244 Working capital 3.9% 18.7% 17.4% 554,359 728,301 555,827 Current ratio - - - 1.72:1 2.32:1 2.11:1 Total debt, less current installments - - - - - - Ratio of total debt to stockholders' equity - - - N/A N/A N/A Stockholders' equity 13.7% 19.5% 22.8% 1,654,470 1,640,473 1,375,232 Return on average assets - - - 18.2% 16.3% 17.0% Return on average stockholders' equity - - - 27.5% 23.5% 25.6% -------------------------------------------------------------------------------- Statistics Number of stores opened 23.4% 7.9% 9.0% 203 225 172 Number of stores expanded - - - 42 55 82 Number of stores closed - - - 30 53 34 Number of stores open at year-end (g) 10.6% 8.8% 9.9% 1,854 1,680 1,508 Net increase in number of stores - - - 10.4% 11.4% 10.1% Comparable store sales growth (52-week basis) - - - 5.0% 0.0% 1.0% Sales per square foot (52-week basis) (h) - - - $441 $425 $444 Square footage of gross store space at year-end 18.8% 17.5% 14.1% 12,645,000 11,100,200 9,165,900 Percentage increase in square feet - - - 13.9% 21.1% 21.5% Number of employees at year-end 14.5% 15.6% 18.6% 66,000 60,000 55,000 Weighted average number of shares outstanding (d) - - - 283,330,290 288,062,430 291,141,076 Number of shares outstanding at year end, net of treasury stock (d) - - - 274,517,931 287,747,984 289,529,498 -------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Fiscal Year ----------------------------------------------------------- 1993 1992 1991 1990 52 weeks 52 weeks 52 weeks 52 weeks - ------------------------------------------------------------------------------------------------------------------- Operating Results ($000) Net Sales $3,295,679 $2,960,409 $2,518,893 $1,933,780 Cost of goods sold and occupancy expenses, excluding depreciation and amortization 1,996,929 1,856,102 1,496,156 1,187,644 Percentage of net sales 60.6% 62.7% 59.4% 61.4% Depreciation and amortization (a) 124,860 99,451 72,765 53,599 Operating expenses 748,193 661,252 575,686 454,180 Net interest (income) expense 809 3,763 3,523 1,435 Earnings before income taxes (b) 424,888 339,841 370,763 236,922 Percentage of net sales 12.9% 11.5% 14.7% 12.3% Income Taxes 166,464 129,140 140,890 92,400 Net earnings 258,424 210,701 229,873 144,522 Percentage of net sales 7.8% 7.1% 9.1% 7.5% Cash dividends 53,041 44,106 41,126 29,625 Capital expenditures (c) 215,856 213,659 244,323 199,617 ----------------------------------------------------------- Per Share Data (d) Net earnings (e) $ .89 $ .73 $ .81 $ .51 Cash dividends .19 .16 .15 .11 Stockholders' equity (book value) (f) 3.88 3.08 2.38 1.65 ----------------------------------------------------------- Financial Position ($000) Property and equipment (net) $740,422 $650,368 $547,740 $383,548 Merchandise inventory 331,155 365,692 313,899 247,462 Total assets 1,763,117 1,379,248 1,147,414 776,900 Working capital 494,194 355,649 235,537 101,518 Current ratio 2.07:1 2.06:1 1.71:1 1.39:1 Total debt, less current installments 75,000 75,000 80,000 17,500 Ratio of total debt to stockholders' equity .07:1 .08:1 .12:1 .04:1 Stockholders' equity 1,126,475 887,839 677,788 465,733 Return on average assets 16.4% 16.7% 23.9% 21.3% Return on average stockholders' equity 25.7% 26.9% 40.2% 36.0% ----------------------------------------------------------- Statistics Number of stores opened 108 117 139 152 Number of stores expanded 130 94 79 56 Number of stores closed 45 26 15 20 Number of stores open at year-end (g) 1,370 1,307 1,216 1,092 Net increase in number of stores 4.8% 7.5% 11.4% 13.8% Comparable store sales growth (52-week basis) 1.0% 5.0% 13.0% 14.0% Sales per square foot (52-week basis) (h) $463 $489 $481 $438 Square footage of gross store space at year-end 7,546,300 6,509,200 5,638,400 4,762,300 Percentage increase in square feet 15.9% 15.4% 18.4% 17.4% Number of employees at year-end 44,000 39,000 32,000 26,000 Weighted average number of shares outstanding (d) 289,682,274 287,345,848 284,279,154 283,001,776 Number of shares outstanding at year end, net of treasury stock (d) 290,497,456 288,370,476 285,046,668 282,528,060 ---------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------ Fiscal Year --------------------------------------------------- 1989 1988 1987 53 weeks 52 weeks 52 weeks - ------------------------------------------------------------------------------------------------------ Operating Results ($000) Net Sales $1,586,596 $1,252,097 $1,062,021 Cost of goods sold and occupancy expenses, excluding depreciation and amortization 1,006,647 814,028 654,361 Percentage of net sales 63.4% 65.0% 61.6% Depreciation and amortization (a) 39,589 31,408 24,869 Operating expenses 364,101 277,429 254,209 Net interest (income) expense 2,760 3,416 3,860 Earnings before income taxes (b) 162,714 125,816 124,722 Percentage of net sales 10.3% 10.0% 11.7% Income Taxes 65,086 51,585 55,127 Net earnings 97,628 74,231 69,595 Percentage of net sales 6.2% 5.9% 6.6% Cash dividends 22,857 18,244 17,328 Capital expenditures (c) 94,266 68,153 67,307 --------------------------------------------------- Per Share Data (d) Net earnings (e) $ .35 $ .26 $ .24 Cash dividends .09 .07 .06 Stockholders' equity (book value) (f) 1.20 .98 .95 --------------------------------------------------- Financial Position ($000) Property and equipment (net) $238,103 $191,257 $156,639 Merchandise inventory 243,482 193,268 194,886 Total assets 579,483 481,148 434,231 Working capital 129,139 106,210 129,988 Current ratio 1.69:1 1.70:1 2.01:1 Total debt, less current installments 20,000 22,000 18,500 Ratio of total debt to stockholders' equity .06:1 .08:1 .05:1 Stockholders' equity 337,972 276,399 272,912 Return on average assets 18.4% 16.2% 17.4% Return on average stockholders' equity 31.8% 27.0% 28.7% --------------------------------------------------- Statistics Number of stores opened 98 106 110 Number of stores expanded 7 N/A N/A Number of stores closed 38 21 19 Number of stores open at year-end (g) 960 900 815 Net increase in number of stores 6.7% 10.4% 12.6% Comparable store sales growth (52-week basis) 15.0% 8.0% 9.0% Sales per square foot (52-week basis) (h) $389 $328 $292 Square footage of gross store space at year-end 4,056,600 3,879,300 3,644,500 Percentage increase in square feet 4.6% 6.4% 8.0% Number of employees at year-end 23,000 20,000 16,000 Weighted average number of shares outstanding (d) 282,160,400 289,178,240 285,836,104 Number of shares outstanding at year end, net of treasury stock (d) 281,102,808 281,050,912 286,959,704 --------------------------------------------------- - 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(a) Excludes amortization of restricted stock. (b) 1989 includes a non-recurring pretax charge of $10,785 ($.02 per share after tax) taken in the fourth quarter for costs associated with closing the Hemisphere stores. 1988 includes a non-recurring pretax charge of $6,800 ($.01 per share after tax) taken in the first quarter for costs associated with the restructuring of Banana Republic's operations. (c) Includes property and equipment, as well as lease rights. (d) Reflects the two-for-one splits of common stock in the form of a stock dividend to stockholders of record on March 18, 1996, June 17, 1991, September 17, 1990 and June 30, 1986. (e) Based on weighted-average number of shares outstanding at year-end. (f) Based on actual number of shares outstanding at year-end. (g) Includes the conversion of a GapKids department to its own separate store. Converted stores are not classified as new stores. (h) Based on weighted average monthly gross square footage. THE GAP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Sales - --------------------------------------------------------------------------------
Fiscal Year Ended - ------------------------------------------------------------------------------- Feb. 1, 1997 Feb. 3, 1996 Jan. 28, 1995 (Fiscal 1996) (Fiscal 1995) (Fiscal 1994) 52 Weeks 53 Weeks 52 Weeks - -------------------------------------------------------------------------------- Net sales ($000) $5,284,381 $4,395,253 $3,722,940 Total net sales growth percentage 20 18 13 Comparable store sales growth percentage 5 0 1 (52-week basis) Net sales per average gross 441 425 444 square foot (52-week basis) Square footage of gross 12,645 11,100 9,166 store space (000) Number of: New stores 203 225 172 Expanded stores 42 55 82 Closed stores 30 53 34 - --------------------------------------------------------------------------------
The total net sales growth reflected above for 1996, 1995, and 1994 was attributable to the opening of new stores (net of stores closed), the expansion of existing stores, and in 1996, to an increase in comparable store sales. During 1995, an additional week of operations compared to fiscal 1994 contributed one percent to sales growth. Net sales per average square foot were $441 in 1996, $425 in 1995, and $444 in 1994. The increase in net sales per average square foot in 1996 compared to 1995 was primarily attributable to increases in comparable stores sales aided by the smaller size of new stores. The decline in net sales per average square foot in 1995 compared to 1994 was primarily attributable to continued store growth in the Old Navy division, with lower priced merchandise and significantly larger stores, and to increases in the average size of new stores in other divisions in connection with the Company's store expansion program. During 1995, the Company increased the average size of its new stores and expanded existing stores as a long-term investment. COST OF GOODS SOLD AND OCCUPANCY EXPENSES Cost of goods sold and occupancy expenses as a percentage of net sales were 62.2 percent in 1996, 64.2 percent in 1995, and 63.2 percent in 1994. The resulting 2.0 percentage point increase in gross margin net of occupancy expenses in 1996 from 1995 was attributable to a 1.2 percentage point increase in merchandise margin as a percentage of net sales combined with a .8 percentage point decrease in occupancy expenses as a percentage of net sales. The increase in merchandise margin in 1996 from 1995 was driven by increases in initial merchandise margin and in the percentage of merchandise sold at regular price. The 1.0 percentage point decrease in gross margin net of occupancy expenses in 1995 from 1994 was attributable to a 1.2 percentage point decrease in merchandise margin as a percentage of net sales offset by a .2 percentage point decrease in occupancy expenses as a percentage of net sales. The decrease in merchandise margin in 1995 from 1994 was driven by a decline in initial merchandise margin in the first three quarters partially offset by better regular-priced selling in the second half. 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. The decrease in occupancy expenses as a percentage of net sales between 1996 and 1995 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. The decrease in occupancy expenses as a percentage of net sales between 1995 and 1994 was attributable to leverage obtained from the 53rd week of sales. Without this extra week, occupancy expenses as a percentage of net sales would have been essentially flat. OPERATING EXPENSES Operating expenses as a percentage of net sales were 24.0 percent for 1996 and 22.9 percent for 1995 and 1994. During 1996, the 1.1 percentage point increase was primarily attributable to a planned .3 percentage point increase in advertising/marketing costs to support the Company's brands and a .5 percentage point increase in incentive bonus expense. The Company awarded bonuses for 1996 due to strong earnings performance measured against annual targets. During 1995, a .3 percentage point increase in advertising costs as a percentage of net sales was offset by a .4 percentage point decrease in bonus expense as a percentage of net sales. Advertising costs increased to support the Company's brands and included marketing expense related to the opening of stores in Germany, Japan, and the Old Navy store in Manhattan. Due to the Company's performance relative to financial targets, less bonus expense was recognized in 1995 as compared to 1994. NET INTEREST INCOME Net interest income was $19.5, $15.8, and $10.9 million for 1996, 1995, and 1994, respectively. The change in 1996 from 1995 was primarily attributable to an increase in gross average investments. The change in 1995 from 1994 was attributable to an increase in income from higher average interest rates. INCOME TAXES The effective tax rate was 39.5 percent in 1996 , 1995 and 1994. LIQUIDITY AND CAPITAL RESOURCES The following sets forth certain measures of the Company's liquidity:
- ----------------------------------------------------------------- Fiscal Year - ----------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------- Cash provided by operating activities ($000) $834,953 $489,087 $504,450 Working capital ($000) 554,359 728,301 555,827 Current ratio 1.72:1 2.32:1 2.11:1 - -----------------------------------------------------------------
For the fiscal year ended February 1, 1997, the increase in cash provided by operating activities was attributable to an increase in net earnings exclusive of depreciation and the timing of certain year-end payables and accrued expenses. For the fiscal year ended February 3, 1996, the decrease in cash provided by operating activities was attributable to an increased investment in inventory partially offset by a decrease in income tax payments. Merchandise inventories at February 3, 1996 increased primarily as a result of new products, new store growth, and early receipt of Spring merchandise to accommodate a one- week shift in the Spring selling season. 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 late Summer and Holiday periods. During 1996 and 1995, these periods accounted for approximately 33 and 34 percent, respectively, of the Company's annual sales. The Company has a credit agreement which provides for a $250 million revolving credit facility through June 30, 2001. In addition, the credit agreement provides for the issuance of letters of credit on a committed basis up to $450 million at any one time. The Company has arrangements providing for the issuance of letters of credit on an uncommitted basis of up to an additional $200 million at any one time. The Company had outstanding letters of credit of approximately $429 million at February 1, 1997. Capital expenditures, net of construction allowances and dispositions, totaled approximately $359 million in 1996. These expenditures resulted in a net increase in store space of approximately 1.5 million square feet or 14 percent due to the addition of 203 new stores, the expansion of 42 stores, and the remodeling of certain stores. Capital expenditures for 1995 and 1994 were $291 million and $220 million, respectively, resulting in a net increase in store space of approximately 1.9 million square feet or 21 percent in 1995, and approximately 1.6 million square feet or 21 percent in 1994. Expenditures in 1996, 1995, and 1994 also included costs for equipment. The increase in capital expenditures in 1996 from 1995 was primarily attributable to the construction of two distribution centers and an administrative facility. The increase in capital expenditures in 1995 from 1994 was due to an increase in the number of stores opened and expanded. Expenditures in 1996, 1995 and 1994 also included costs for equipment. For 1997, the Company expects capital expenditures to total approximately $400 to $450 million, net of construction allowances, representing the addition of at least 275 new stores, the expansion of approximately 65 to 75 stores, and the remodeling of certain stores. Planned expenditures also include amounts for administrative facilities, distribution centers, and equipment. The Company expects to fund such capital expenditures with cash flow from operations. Square footage growth is expected to be approximately 18 percent before store closings. New stores are generally expected to be leased. During 1996, the Company completed construction of a distribution center in Gallatin, Tennessee for approximately $55 million. The facility became fully operational in September 1996. Additionally, in May 1996, the Company purchased land and a building in the Netherlands for approximately $10 million to relocate its European distribution center. The distribution center, which began operating in June 1996, provides a central shipping location to the European continent. In February 1996, the Company exercised an option to purchase land for $9 million in San Bruno, California to expand its headquarters facilities. Construction commenced in April 1996 for an estimated cost at completion of $55 to $60 million. The facility is expected to be in operation in late fiscal 1997. On February 27, 1996, the Company's Board of Directors authorized a two-for-one split of its common stock effective by a distribution on April 10, 1996, in the form of a stock dividend for stockholders of record at the close of business on March 18, 1996. Per share amounts in the accompanying consolidated financial statements give effect to the stock split. In October 1996, the Board of Directors approved a program under which the Company may repurchase up to 30 million shares of its outstanding common stock in the open market over a three-year period. During 1996, 4.7 million shares were repurchased for $140 million. The program announced in October 1996 follows an earlier 18 million share repurchase program, which was completed in November 1996. Under this program, 10.9 million shares were acquired in fiscal 1996 for approximately $329 million. The cost for the entire 18 million share repurchase program was approximately $450 million. PER SHARE DATA
Market Prices Cash Dividends - --------------------------------------------------------------------------- Fiscal 1996 1995 1996 1995 - ------------------------------------------------------ ----------------- High Low High Low - --------------------------------------------------------------------------- 1st Quarter $30 1/2 $23 1/5 $17 3/4 $15 3/8 $.075 $ .06 2nd Quarter 36 1/8 27 1/4 18 3/4 14 7/8 .075 .06 3rd Quarter 36 1/2 26 20 1/4 15 7/8 .075 .06 4th Quarter 33 1/2 27 7/8 25 1/2 19 1/4 .075 .06 - --------------------------------------------------------------------------- Year $.30 $ .24 - ---------------------------------------------------------------------------
The information above has been adjusted to reflect the two-for-one split of common stock in the form of a stock dividend to stockholders of record on March 18, 1996. The principal markets on which the Company's stock is traded are the New York and Pacific Stock Exchanges. The number of holders of record of the Company's stock as of March 24, 1997 was 6,785. THE 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 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 Audit and Finance Committee, with and without Management's presence. INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of The Gap, Inc. We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of February 1, 1997 and February 3, 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three fiscal years in the period ended February 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as of February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP San Francisco, California February 27, 1997 THE GAP, INC. Consolidated Statements of Earnings
- ------------------------------------------------------------------------------------------------------------- Fifty-two Fifty-three Fifty-two Weeks Ended Weeks Ended Weeks Ended ($000 except per share amounts) February 1, 1997 February 3, 1996 January 28, 1995 - ------------------------------------------------------------------------------------------------------------- Net sales $ 5,284,381 100.0% $ 4,395,253 100.0% $ 3,722,940 100.0% ---------------------------------------------------------------------- Costs and expenses Cost of goods sold and occupancy expenses 3,285,166 62.2% 2,821,455 64.2% 2,350,996 63.2% Operating expenses 1,270,138 24.0% 1,004,396 22.9% 853,524 22.9% Net interest income (19,450) (0.4%) (15,797) (0.4%) (10,902) (0.3%) ---------------------------------------------------------------------- Earnings before income taxes 748,527 14.2% 585,199 13.3% 529,322 14.2% Income taxes 295,668 5.6% 231,160 5.2% 209,082 5.6% ---------------------------------------------------------------------- Net earnings $ 452,859 8.6% $ 354,039 8.1% $ 320,240 8.6% ---------------------------------------------------------------------- Weighted average number of shares (a) 283,330,290 288,062,430 291,141,076 ---------------------------------------------------------------------- Earnings per share (a) $ 1.60 $ 1.23 $ 1.10 - -------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. (a) Reflects the two-for-one split of common stock in the form of a stock dividend to stockholders of record on March 18, 1996. THE GAP, INC. Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------- ($000) February 1, 1997 February 3, 1996 ------------------------------------------------------------------------------------------ Assets Current Assets Cash and equivalents $ 485,644 $ 579,566 Short-term investments 135,632 89,506 Merchandise inventory 578,765 482,575 Prepaid expenses and other current assets 129,214 128,398 ------------------------------ Total Current Assets 1,329,255 1,280,045 ------------------------------ Property and Equipment Leasehold improvements 836,577 736,879 Furniture and equipment 960,516 763,673 Construction-in-progress 101,520 62,030 ------------------------------ 1,898,613 1,562,582 Accumulated depreciation and amortization (762,893) (604,830) ------------------------------ 1,135,720 957,752 ------------------------------ Long-term investments 36,138 30,370 Lease rights and other assets 125,814 74,901 ------------------------------ Total Assets $2,626,927 $2,343,068 ------------------------------ Liabilities and Stockholders' Equity Current Liabilities Notes payable $ 40,050 $ 21,815 Accounts payable 351,754 262,505 Accrued expenses 282,494 194,426 Income taxes payable 91,806 66,094 Deferred lease credits and other current liabilities 8,792 6,904 ------------------------------ Total Current Liabilities 774,896 551,744 ------------------------------ Long-Term Liabilities Deferred lease credits and other liabilities 197,561 150,851 Stockholders' Equity Common stock $.05 par value (a) Authorized 500,000,000 shares; issued 317,864,090 and 315,971,306 shares; outstanding 274,517,331 and 287,747,984 shares 15,895 15,799 Additional paid-in capital (a) 442,049 335,193 Retained earnings 1,938,352 1,569,347 Foreign currency translation adjustment (5,187) (9,071) Restricted stock plan deferred compensation (47,838) (48,735) Treasury stock, at cost (688,801) (222,060) ------------------------------ 1,654,470 1,640,473 ------------------------------ Total Liabilities and Stockholders' Equity $2,626,927 $2,343,068 - -------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. (a) Reflects the two-for-one split of common stock in the form of a stock dividend to stockholders of record on March 18, 1996. THE GAP, INC. Consolidated Statements of Cash Flows
($000) - ----------------------------------------------------------------------------------------------------------------------- Fifty-two Fifty-three Fifty-two Weeks Ended Weeks Ended Weeks Ended February 1, 1997 February 3, 1996 January 28, 1995 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings $ 452,859 $ 354,039 $ 320,240 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization (a) 214,905 197,440 168,220 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 47,348 11,444 19,384 Deferred income taxes (28,897) (2,477) (24,431) Change in operating assets and liabilities Merchandise inventory (93,800) (113,021) (39,860) Prepaid expenses and other (16,355) (15,278) (10,989) Accounts payable 88,532 1,183 46,031 Accrued expenses 87,974 9,427 21,953 Income taxes payable 25,706 24,806 (29,241) Deferred lease credits and other long-term liabilities 56,681 21,524 33,143 -------------------------------------------------- Net cash provided by operating activities 834,953 489,087 504,450 -------------------------------------------------- Cash Flows from Investing Activities Net maturity (purchase) of short-term investments (11,774) 116,134 (36,474) Purchase of long-term investments (40,120) (30,370) (85,669) Purchase of property and equipment (371,833) (302,260) (232,776) Acquisition of lease rights and other assets (12,206) (6,623) (4,938) -------------------------------------------------- Net cash used for investing activities (435,933) (223,119) (359,857) -------------------------------------------------- Cash Flows from Financing Activities Net increase (decrease) in notes payable 18,445 20,787 (4,583) Payment on long-term debt - - (75,000) Issuance of common stock 37,053 17,096 12,849 Net purchase of treasury stock (466,741) (71,314) (58,292) Cash dividends paid (83,854) (66,993) (64,775) -------------------------------------------------- Net cash used for financing activities (495,097) (100,424) (189,801) -------------------------------------------------- Effect of exchange rate changes on cash 2,155 (465) (637) -------------------------------------------------- Net increase (decrease) in cash and equivalents (93,922) 165,079 (45,845) Cash and equivalents at beginning of year 579,566 414,487 460,332 -------------------------------------------------- Cash and equivalents at end of year $ 485,644 $ 579,566 $ 414,487 -------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. (a) Includes amortization of restricted stock THE GAP, INC. Consolidated Statements of Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------- Common Stock/(a)/ Additional --------------------- Paid-in Retained ($000 except per share amounts) Shares Amount Capital/(a)/ Earnings - --------------------------------------------------------------------------------------------------------------------- Balance at January 29, 1994 311,466,512 $15,573 $232,869 $1,026,836 -------------------------------------------------- Issuance of common stock pursuant to stock option plans 1,249,612 63 10,842 Net issuance of common stock pursuant to management incentive restricted stock plans 1,229,430 61 27,470 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 19,384 Foreign currency translation adjustment Amortization of restricted stock Purchase of treasury stock Net earnings 320,240 Cash dividends ($.23 per share) (64,775) -------------------------------------------------- Balance at January 28, 1995 313,945,554 $15,697 $290,565 $1,282,301 -------------------------------------------------- Issuance of common stock pursuant to stock option plans 994,372 50 9,616 Net issuance of common stock pursuant to management incentive restricted stock plans 1,031,380 52 19,556 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 11,444 Foreign currency translation adjustment Amortization of restricted stock Purchase of treasury stock Reissuance of treasury stock 4,012 Net earnings 354,039 Cash dividends ($.24 per share) (66,993) -------------------------------------------------- Balance at February 3, 1996 315,971,306 $15,799 $335,193 $1,569,347 -------------------------------------------------- Issuance of common stock pursuant to stock option plans 1,591,174 81 19,732 Net issuance of common stock pursuant to management incentive restricted stock plans 301,610 15 32,807 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 47,348 Foreign currency translation adjustment Amortization of restricted stock Purchase of treasury stock Reissuance of treasury stock 6,969 Net earnings 452,859 Cash dividends ($.30 per share) (83,854) -------------------------------------------------- Balance at February 1, 1997 317,864,090 $15,895 $442,049 $1,938,352 -------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Foreign Restricted Currency Stock Plan Treasury Stock/(a)/ Translation Deferred --------------------- ($000 except per share amounts) Adjustment Compensation Shares Amount Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 29, 1994 ($8,314) ($48,035) (20,969,056) ($ 92,454) $1,126,475 --------------------------------------------------------------- Issuance of common stock pursuant to stock option plans 10,905 Net issuance of common stock pursuant to management incentive restricted stock plans (25,587) 1,944 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 19,384 Foreign currency translation adjustment (6) (6) Amortization of restricted stock 19,357 19,357 Purchase of treasury stock (3,447,000) (58,292) (58,292) Net earnings 320,240 Cash dividends ($.23 per share) (64,775) --------------------------------------------------------------- Balance at January 28, 1995 ($8,320) ($54,265) (24,416,056) (150,746) $1,375,232 --------------------------------------------------------------- Issuance of common stock pursuant to stock option plans 9,666 Net issuance of common stock pursuant to management incentive restricted stock plans (16,191) 3,417 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 11,444 Foreign currency translation adjustment (751) (751) Amortization of restricted stock 21,721 21,721 Purchase of treasury stock (4,192,800) (72,717) (72,717) Reissuance of treasury stock 385,534 1,403 5,415 Net earnings 354,039 Cash dividends ($.24 per share) (66,993) --------------------------------------------------------------- Balance at February 3, 1996 ($9,071) ($48,735) (28,223,322) ($222,060) $1,640,473 --------------------------------------------------------------- Issuance of common stock pursuant to stock option plans (9,648) 10,165 Net issuance of common stock pursuant to management incentive restricted stock plans (12,903) 19,919 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 47,348 Foreign currency translation adjustment 3,884 3,884 Amortization of restricted stock 23,448 23,448 Purchase of treasury stock (15,523,100) (468,246) (468,246) Reissuance of treasury stock 399,663 1,505 8,474 Net earnings 452,859 Cash dividends ($.30 per share) (83,854) --------------------------------------------------------------- Balance at February 1, 1997 ($5,187) ($47,838) ($43,346,759) ($688,801) $1,654,470 --------------------------------------------------------------- - 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See notes to consolidated financial statements. (a) Reflects the two-for-one split of common stock in the form of a stock dividend to stockholders of record on March 18, 1996. THE GAP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two Weeks ended February 1, 1997, the Fifty-three Weeks ended February 3, 1996 and the Fifty-two Weeks ended January 28, 1995. NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company is an international specialty retailer which operates stores selling casual apparel, shoes, and other accessories for men, women, and children under a variety of brand names including: Gap, GapKids, babyGap, Banana Republic, and Old Navy Clothing Co. Its principal markets consist of the United States, Canada, Europe, and Asia with the United States being the most significant. On February 27, 1996, the Company's Board of Directors authorized a two-for-one split of its common stock effective April 10, 1996, in the form of a stock dividend for stockholders of record at the close of business on March 18, 1996. Per share amounts in the accompanying consolidated financial statements give effect to 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 or a remaining maturity of less than one year. Long-term investments include investments with an original and remaining maturity of greater than one year and less than five years. The Company's short- and long- term investments consist primarily of debt securities which have been classified as held to maturity and are carried at amortized cost, which approximates fair market value. 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 or lease terms, whichever is less. Lease rights are recorded at cost and are amortized over 12 years or the lives of the respective leases, whichever is less. Costs associated with the opening or remodeling of stores, such as pre-opening rent and payroll, are charged to expense 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. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, as of January 29, 1995. The adoption of SFAS No. 121 had no material effect on the Company's consolidated financial statements. Costs associated with the production of advertising, such as writing copy, printing, and other costs, are charged to expense when incurred. Costs associated with communicating advertising that has been produced, such as magazine and billboard space, are charged to expense when the advertising first takes place. Advertising costs were $96 million, $64 million, and $44 million in fiscal 1996, 1995, and 1994, 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 stockholders' equity. Restricted stock awards represent deferred compensation and are shown as a reduction of stockholders' equity. The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, as of February 4, 1996. The Company elected to continue 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 SFAS No. 123. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. SFAS No. 128 requires dual presentation of basic earnings per share (EPS) and diluted EPS on the face of all statements of earnings issued after December 15, 1997, for all entities with complex capital structures. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding 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 awards, warrants, and other convertible securities. The Company does not anticipate the effect on earnings per share to be material. Earnings per share are based upon the weighted-average number of shares of common stock outstanding during the period. Certain reclassifications have been made to the 1994 and 1995 financial statements to conform with the 1996 financial statements. NOTE B: DEBT AND OTHER CREDIT ARRANGEMENTS The Company has a credit agreement with a syndicated bank group which provides for a $250 million revolving credit facility until June 30, 2001. The revolving credit facility contains both auction and fixed spread borrowing options and may serve as support for the Company's commercial paper program. In addition, the credit agreement provides, on a committed basis, for the issuance of letters of credit through July 1, 1997 of up to $450 million at any one time. At February 1, 1997, the Company had outstanding letters of credit, including committed and uncommitted lines of credit, totaling $428,600,000. Borrowings under the Company's loan and credit agreements are subject to the Company maintaining certain levels of tangible net worth and financial ratios. Under the most restrictive covenant of these agreements, $1,074,062,000 of retained earnings were available for the payment of cash dividends at February 1, 1997. Gross interest payments were $2,800,000, $2,274,000, and $7,032,000 in fiscal 1996, 1995, and 1994, respectively. NOTE C: INCOME TAXES Income taxes consisted of the following:
- ----------------------------------------------------------------------------------- Fifty-two Fifty-three Fifty-Two Weeks Ended Weeks Ended Weeks Ended ($000) Feb.1, 1997 Feb.3, 1997 Jan. 28,1995 - ----------------------------------------------------------------------------------- Currently Payable Federal income taxes $269,648 $180,597 $182,811 Less tax credits (3,585) (4,397) (12,692) ---------------------------------------------- 266,063 176,200 170,119 State income taxes 36,167 40,111 45,807 Foreign income taxes 22,335 17,348 17,587 ---------------------------------------------- 324,565 233,659 233,513 ---------------------------------------------- Deferred Federal (23,980) (7,169) (19,911) State (4,917) 4,670 (4,520) ---------------------------------------------- (28,897) (2,499) (24,431) ---------------------------------------------- Total provision 295,668 $231,160 $209,082 - -----------------------------------------------------------------------------------
The foreign component of pretax earnings before eliminations and corporate allocations in fiscal 1996, 1995, and 1994 was $82,220,000, $71,545,000, and $66,701,000, respectively. Deferred federal and applicable state income taxes, net of applicable foreign tax credits, have not been provided for the undistributed earnings of foreign subsidiaries (approximately $123,489,000 at February 1, 1997) because the Company intends to permanently reinvest such undistributed earnings abroad. The difference between the effective income tax rate and the United States federal income tax rate is summarized as follows:
- ----------------------------------------------------------------------- Fifty-two Fifty-three Fifty-two Weeks Ended Weeks Ended Weeks Ended Feb. 1, 1997 Feb. 3, 1997 Jan. 28, 1997 - ----------------------------------------------------------------------- Federal tax rate 35.0% 35.0% 35.0% State income taxes, 4.4 5.0 5.1 less federal benefit Other .1 (.5) (.6) - ----------------------------------------------------------------------- Effective tax rate 39.5% 39.5% 39.5% - -----------------------------------------------------------------------
Deferred tax assets (liabilities) consisted of the following at February 1, 1997 and February 3, 1996:
- ---------------------------------------------------------------- ($000) Feb. 1, 1997 Feb. 3, 1996 - ---------------------------------------------------------------- Compensation and benefits accruals $ 31,640 $ 28,872 Scheduled rent 40,834 34,077 Inventory capitalization 16,459 13,243 Nondeductible accruals 18,705 17,011 Other 24,224 10,022 ------------------------------- Gross deferred tax assets 131,862 103,225 ------------------------------- Depreciation (13,611) (14,318) Other (5,404) (4,957) ------------------------------- Gross deferred tax liabilities (19,015) (19,275) ------------------------------- Net deferred tax assets $112,847 $ 83,950 - ----------------------------------------------------------------
Income tax payments were $249,968,000, $197,802,000, and $232,869,000 in fiscal 1996, 1995, and 1994, respectively. NOTE D: LEASES The Company leases virtually all of its store premises, office facilities, and some of its distribution centers. Leases relating to store premises, distribution centers, and office facilities expire at various dates through 2035. The aggregate minimum annual lease payments under leases in effect on February 1, 1997 are as follows:
- ---------------------------------------------- Fiscal Year ($000) - ---------------------------------------------- 1997 $ 335,774 1998 330,712 1999 324,824 2000 318,642 2001 311,492 Thereafter 1,740,731 - ---------------------------------------------- Total minimum lease commitment $3,362,175 - ----------------------------------------------
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 February 1, 1997 and February 3, 1996, this liability amounted to $110,633,000 and $93,081,000, 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 February 1, 1997 contain renewal options for periods ranging up to 30 years. Most 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-three Fifty-two Weeks Ended Weeks Ended Weeks Ended ($000) Feb. 1, 1997 Feb. 3, 1996 Jan. 28, 1995 - ----------------------------------------------------------------------------- Minimum rentals $337,487 $300,171 $255,202 Contingent rentals 30,644 22,464 20,955 -------------------------------------------------------- $368,131 $322,635 $276,157 - -----------------------------------------------------------------------------
NOTE E: FOREIGN EXCHANGE CONTRACTS The Company enters into foreign exchange 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 February 1, 1997, the Company had contracts maturing at various dates through 1997 to purchase the equivalent of $60,598,000 in foreign currencies (35,900,000 Canadian dollars through July 3, 1997, 17,100,000 British pounds through May 29, 1997, and 759,000,000 Japanese yen through July 3,1997) at the contracted rates. The deferred gains and losses on the Company's foreign exchange contracts at February 1, 1997 are immaterial. NOTE F: EMPLOYEE BENEFIT AND INCENTIVE PROGRAMS 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 on behalf of the employee progressively over a seven-year period. Company contributions to the retirement plan in 1996, 1995, and 1994 were $11,427,000, $9,839,000, and $8,281,000, 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. EMPLOYEE BENEFITS PLAN The Company has an Employee Benefits Plan to provide certain health and welfare benefits. Payments made to the plan relating to benefits payable in future periods are included in prepaid expenses. INCENTIVE COMPENSATION PLANS The Company has a Management Incentive Cash Award Plan (MICAP) for key management employees. The MICAP empowers the Compensation and Stock Option Committee to award compensation, in the form of cash bonuses, to employees based on the achievement of Company and individual performance goals. Awards can also be made in the form of nonqualified stock options or restricted shares of the Company's stock under the 1996 Stock Option and Award Plan. Restrictions on shares generally lapse in one to five years. Compensation expense is recorded during the vesting period. The nonqualified stock options generally have a maximum term of ten years and vest over a period of three to four years. An Executive Management Incentive Cash Award Plan (Executive MICAP) was established on March 22, 1994 for key executive officers. The Executive MICAP empowers the Compensation and Stock Option Committee to award compensation in the form of cash bonuses to executives based on the achievements of Companywide or divisional earnings goals for that fiscal year. An Executive Long-Term Cash Award Performance Plan (ELCAPP) was established in January 1996. The ELCAPP empowers the Compensation and Stock Option Committee to award compensation in the form of cash bonuses to key officers based on the achievement of multiyear financial goals, as determined by the Committee for each participant in the plan. Payouts are determined based upon the achievement of performance goals over a three-year period. The 1996 Stock Option and Award Plan (the Plan), was established on March 26, 1996. The Board authorized 20,000,000 shares for issuance under the Plan. The Plan superseded a Management Incentive Restricted Stock Plan (MIRSP) and an earlier stock option plan established in 1981. The Plan empowers the Compensation and Stock Option Committee to award compensation primarily in the form of nonqualified stock options or restricted stock to key employees. 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 Board of Directors. Total compensation cost for the Plan and MIRSP was $22,248,000, $23,743,000 and $20,317,000 in 1996, 1995, and 1994, respectively. EMPLOYEE STOCK PURCHASE PLAN An Employee Stock Purchase Plan was established on December 1, 1994. Under the Plan 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 399,663 shares issued under the plan during fiscal 1996 and all shares were acquired from reissued treasury stock. At February 1, 1997, there were 3,214,803 shares reserved for future subscriptions. NOTE G: STOCKHOLDERS' 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 stockholders. No preferred shares have been issued. In October 1994, the Board of Directors approved a program under which the Company repurchased 18,000,000 shares of its outstanding stock in the open market over a two-year period. In fiscal 1996, 10,860,000 shares were acquired for $328,695,000. All 18,000,000 shares were purchased for $449,672,000. In October 1996, the Board of Directors approved a second share-buyback program under which the Company may repurchase up to 30,000,000 shares of its outstanding stock in the open market over a three-year period. Under this program, 4,663,000 shares were repurchased for $140,031,000 in fiscal 1996. STOCK OPTIONS Under the Company's Stock Option Plans, nonqualified options to purchase common stock are granted to officers 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 Board of Directors. Stock option activity for all employee benefit plans was as follows:
- ----------------------------------------------------------------------- Shares Weighted-Average Exercise Price ------------------------------------------------- Balance at January 29, 1994 7,151,086 $12.12 - ----------------------------------------------------------------------- Granted 2,310,800 22.45 Exercised (1,249,612) 8.73 Cancelled (465,730) 19.97 - ----------------------------------------------------------------------- Balance at January 28, 1995 7,746,544 $15.27 - ----------------------------------------------------------------------- Granted 9,484,400 17.91 Exercised (994,372) 9.72 Cancelled (596,148) 18.41 - ----------------------------------------------------------------------- Balance at February 3, 1996 15,640,424 $17.11 - ----------------------------------------------------------------------- Granted 6,242,740 30.90 Exercised (1,591,174) 12.45 Cancelled (799,072) 22.28 - ----------------------------------------------------------------------- Balance at February 1, 1997 (19,492,918) $21.69 - -----------------------------------------------------------------------
Outstanding options at February 1, 1997 have expiration dates ranging from March 20, 1997 to January 29, 2007 and represent grants to 1,793 key employees. At February 1, 1997, the Company reserved 34,239,852 shares of its common stock for the exercise of stock options. There were 14,749,234 and 190,602 shares available for granting of options at February 1, 1997 and February 3, 1996, respectively. Options for 2,915,481 and 2,946,164 shares were exercisable as of February 1, 1997 and February 3, 1996, respectively, and had a weighted-average exercise price of $13.52 and $12.38 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 three 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.
- --------------------------------------------------- 1996 1995 ---------------------- Net Earnings As reported $452,859 $354,039 ($000) Pro forma $437,232 $348,977 - --------------------------------------------------- Earnings As reported $ 1.60 $ 1.23 per share Pro forma $ 1.54 $ 1.21 - ---------------------------------------------------
The weighted-average fair value of the stock options granted during fiscal 1996 and 1995 was $11.21 and $6.27, 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 1996 and 1995: dividend yield of 1.0 percent for all years; expected price volatility of 30 percent; risk-free interest rates ranging from 5.5 percent to 6.5 percent; and expected lives between 3.5 and 6 years. The following table summarizes information about stock options outstanding at February 1, 1997: - -------------------------------------------------------------------------------- Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------- Weighted-Average Range of Number Remaining Number Exercise Outstanding Contractual Life Weighted-Average Exercisable Weighted-Average Prices at 2/1/97 (in years) Exercise Price at 2/1/97 Exercise Price - ------------------------------------------------------------------------------------------------------------- $4.76 to $15.69 2,825,688 4.31 $12.38 2,173,888 $11.42 15.72 to 16.94 4,001,690 6.09 16.10 97,023 16.29 17.09 to 22.59 7,186,470 6.10 20.23 593,970 19.81 22.69 to 35.44 5,479,070 9.25 32.51 50,600 24.36 - ------------------------------------------------------------------------------------------------------------- $4.76 to $35.44 19,492,918 6.72 $21.69 2,915,481 $13.52 - -------------------------------------------------------------------------------------------------------------
NOTE H: 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 177, 204, and 159 new stores' leasehold improvements and fixtures during fiscal 1996, 1995, and 1994, respectively. In the same respective years, FDI supervised construction of 38, 54, and 79 expansions, as well as remodels of existing stores. FDI construction also included administrative offices. Total cost of this construction was $111,871,000, $164,820,000, and $142,791,000, including profit and overhead costs of $10,751,000, $11,753,000, and $10,738,000. At February 1, 1997 and February 3, 1996, amounts due to FDI were $6,456,000 and $12,491,000, respectively. The terms and conditions of the agreement with FDI are reviewed annually by the Audit and Finance Committee of the Board of Directors. During the first quarter of fiscal 1995, the Company repurchased 250,000 shares of its common stock for $8,438,000 from a senior executive of the Company. NOTE I: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FISCAL 1996 QUARTER ENDED - ------------------------------------------------------------------------------------------------------------------------------------ Thirteen Weeks Thirteen Weeks Thirteen Weeks Thirteen Weeks Fifty-two Ended May 4, Ended Aug. 3, Ended Nov. 2, Ended Feb. 1, Weeks Ended ($000 except per share amounts) 1996 1996 1996 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 Net earnings per share .28 .23 .48 .62 1.60 - ------------------------------------------------------------------------------------------------------------------------------------ FISCAL 1995 QUARTER ENDED - ------------------------------------------------------------------------------------------------------------------------------------ ($000 except per share Thirteen Weeks Thirteen Weeks Thirteen Weeks Fourteen Weeks Fifty-three amounts) Ended April 29, Ended July 29, Ended Oct. 28, Ended Feb. 3, Weeks Ended 1995 1995 1995 1996 Feb. 3, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 848,688 $ 868,514 $1,155,929 $1,522,122 $4,395,253 Gross profit 280,557 259,193 458,050 575,998 1,573,798 Net earnings 50,113 32,414 116,875 154,637 354,039 Net earnings per share .17 .11 .41 .54 1.23 - ------------------------------------------------------------------------------------------------------------------------------------
THE GAP, INC. Financial Highlights
- ------------------------------------------------------------------------------------------------------------- Fiscal 1996 Fiscal 1995 Fiscal 1994 ($000 except per share amounts) 52 weeks 53 weeks 52 weeks - ------------------------------------------------------------------------------------------------------------- Operating Results Net sales $ 5,284,381 $ 4,395,253 $ 3,722,940 Earnings before income taxes 748,527 585,199 529,322 Net earnings 452,859 354,039 320,240 ---------------------------------------------------- Per Share Data (a) Net earnings $ 1.60 $1.23 $1.10 Cash dividends 0.30 0.24 0.23 ---------------------------------------------------- Financial Position Total assets 2,626,927 2,343,068 2,004,244 Long-term debt, less current installments - - - Working capital 554,359 728,301 555,827 Current ratio 1.72:1 2.32:1 2.11:1 Stockholders' equity 1,654,470 1,640,473 1,375,232 ---------------------------------------------------- Statistics Weighted average number of shares outstanding (a) 283,330,290 288,062,430 291,141,076 Number of shares outstanding at year-end, net of treasury stock (a) 274,517,331 287,747,984 289,529,498 Net earnings as a percentage of net sales 8.6% 8.1% 8.6% Return on average assets 18.2% 16.3% 17.0% Return on average stockholders' equity 27.5% 23.5% 25.6% Number of stores open at year-end 1,854 1,680 1,508 Comparable store sales growth (52-week basis) 5.0% 0.0% 1.0% ---------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(a) Reflects the two-for-one split of common stock in the form of a stock dividend to stockholders of record on March 18, 1996. EX-21 5 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 Banana Republic (H.K.) Limited, a Hong Kong corporation Banana Republic Limited, an England and Wales corporation Banana Republic (ITM), Inc., a California corporation Banana Republic Stores Pty. Ltd., an Australia corporation Banana Republic, Inc., a California corporation GPS (Bermuda) Limited, a Bermuda corporation GPS (Delaware), Inc., a Delaware corporation GPS (EDT), Inc., a Delaware corporation GPS (Great Britain) Limited, an England and Wales corporation GPS (Japan) Limited, a Delaware corporation GPS (Maryland), Inc., a Maryland corporation GPS (Puerto Rico) Limited, a California corporation GPS (U.K.) Limited, a California corporation GPS (U.S.A.) Limited, a California corporation GPS Limited, a California corporation GPS Management Services, Inc., a California corporation Gap (Apparel) Inc., a California corporation Gap (Canada) Inc., a Canada corporation Gap (Deutschland) GmbH, a Germany corporation Gap (ESO) Limited, an England and Wales corporation Gap (France) SA, a France corporation Gap (Ireland) Limited, an Ireland corporation Gap (ITM) Inc., a California corporation Gap (Japan) K.K., a Japan corporation Gap (Merchandise) Inc., a California corporation Gap (Netherlands) B.V., a Netherlands corporation Gap (Puerto Rico), Inc., a Puerto Rico corporation Gap (RHC) B.V., a Netherlands corporation Gap (TK) B.V., a Netherlands corporation Gap International Sourcing, Inc., a California corporation Gap International Sourcing (JV) LLC., a California limited liability corporation Gap International Sourcing Limited, a Hong Kong corporation Gap International Sourcing Pte. Ltd., a Singapore corporation Gap International Sourcing (USA) Inc., a California corporation Gap International, Inc., a California corporation Goldhawk B.V., a Netherlands corporation Old Navy Inc. Real Estate Ventures (Glastonbury), Inc., a Delaware corporation Real Estate Ventures (Glen Eagle), Inc., a Delaware corporation Real Estate Ventures (Wheaton), Inc., an Illinois corporation The Fisher Gap Stores, Inc., a California corporation The Gap Limited, an England and Wales corporation The Pottery Barn West, Inc., a California corporation EX-23 6 CONSENT OF DELOITTE & TOUCHE LLP. EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post Effective Amendment No. 1 to 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, and Registration Statement No. 333-12337 of The Gap, Inc. on Form S-8 of our report dated February 27, 1997, incorporated by reference in the Annual Report on Form 10-K of The Gap, Inc. for the fiscal year ended February 1, 1997. /s/ Deloitte & Touche LLP San Francisco, California April 18, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR FEB-01-1997 FEB-04-1996 FEB-01-1997 485,644 135,632 0 0 578,765 1,329,255 1,898,613 762,893 2,626,927 774,896 0 0 0 15,895 1,638,575 2,626,927 5,284,381 5,284,381 3,285,166 1,270,138 (19,450) 0 0 748,527 295,668 452,859 0 0 0 452,859 1.58 1.58
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