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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 2, 2003
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.) |
Two Folsom Street
San Francisco, California 94105
(Address of principal executive offices)
Registrant’s telephone number, including area code: (650) 952-4400
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 whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
Common Stock, $0.05 par value, 893,443,208 shares as of August 27, 2003
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THE GAP, INC.
PAGE NUMBER | ||||
PART I | FINANCIAL INFORMATION | |||
Item 1 | Financial Statements | |||
Condensed Consolidated Balance Sheets August 2, 2003, February 1, 2003 and August 3, 2002 | 3 | |||
Condensed Consolidated Statements of Operations Thirteen and Twenty-six weeks ended August 2, 2003 and August 3, 2002 | 4 | |||
Condensed Consolidated Statements of Cash Flows Twenty-six weeks ended August 2, 2003 and August 3, 2002 | 5 | |||
Notes to Condensed Consolidated Financial Statements | 6 | |||
Independent Accountants’ Report | 11 | |||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | ||
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 18 | ||
Item 4 | Controls and Procedures | 18 | ||
PART II | OTHER INFORMATION | |||
Item 1 | Legal Proceedings | 19 | ||
Item 4 | Submission of Matters to a Vote of Security Holders | 19 | ||
Item 6 | Exhibits and Reports on Form 8-K | 20 |
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share and par value) | August 2, 2003 | February 1, 2003 | August 3, 2002 | |||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and equivalents | $ | 1,908,413 | $ | 3,388,514 | $ | 2,386,829 | ||||||
Restricted cash (a) | 1,236,000 | — | — | |||||||||
Total Cash and Equivalents and Restricted Cash | 3,144,413 | 3,388,514 | 2,386,829 | |||||||||
Merchandise inventory | 2,273,645 | 2,047,879 | 2,087,485 | |||||||||
Other current assets | 315,277 | 303,332 | 342,658 | |||||||||
Total Current Assets | 5,733,335 | 5,739,725 | 4,816,972 | |||||||||
Property and equipment, net | 3,510,478 | 3,776,843 | 4,007,674 | |||||||||
Other assets | 427,625 | 385,436 | 406,727 | |||||||||
Total Assets | $ | 9,671,438 | $ | 9,902,004 | $ | 9,231,373 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Current maturities of long-term debt | $ | — | $ | 499,979 | $ | 500,000 | ||||||
Accounts payable | 1,174,406 | 1,159,301 | 1,115,845 | |||||||||
Accrued expenses and other current liabilities | 822,931 | 874,129 | 848,640 | |||||||||
Income taxes payable | 76,580 | 193,165 | 137,471 | |||||||||
Total Current Liabilities | 2,073,917 | 2,726,574 | 2,601,956 | |||||||||
Long-Term Liabilities: | ||||||||||||
Long-term debt | 1,528,577 | 1,515,794 | 1,493,132 | |||||||||
Senior convertible notes | 1,380,000 | 1,380,000 | 1,380,000 | |||||||||
Lease incentives and other liabilities | 581,900 | 621,424 | 592,660 | |||||||||
Total Long-Term Liabilities | 3,490,477 | 3,517,218 | 3,465,792 | |||||||||
Shareholders’ Equity: | ||||||||||||
Common stock $.05 par value | ||||||||||||
Authorized 2,300,000,000 shares; Issued 972,649,720, 968,010,453 and 952,032,089 shares; Outstanding 892,796,992, 887,322,707 and 870,401,079 shares | 48,632 | 48,401 | 47,602 | |||||||||
Additional paid-in capital | 691,913 | 638,306 | 495,086 | |||||||||
Retained earnings | 5,661,663 | 5,289,480 | 4,964,519 | |||||||||
Accumulated other comprehensive losses | (8,751 | ) | (16,766 | ) | (36,391 | ) | ||||||
Deferred compensation | (11,380 | ) | (13,574 | ) | (5,322 | ) | ||||||
Treasury stock, at cost | (2,275,033 | ) | (2,287,635 | ) | (2,301,869 | ) | ||||||
Total Shareholders’ Equity | 4,107,044 | 3,658,212 | 3,163,625 | |||||||||
Total Liabilities and Shareholders’ Equity | $ | 9,671,438 | $ | 9,902,004 | $ | 9,231,373 | ||||||
See accompanying notes to condensed consolidated financial statements.
(a) | See Note 2 and Note 5. |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
(In thousands except share and per share amounts) | August 2, 2003 | August 3, 2002 | August 2, 2003 | August 3, 2002 | ||||||||||||
Net sales | $ | 3,685,299 | $ | 3,268,309 | $ | 7,038,070 | $ | 6,159,149 | ||||||||
Costs and expenses | ||||||||||||||||
Cost of goods sold and occupancy expenses | 2,359,588 | 2,177,774 | 4,435,107 | 4,189,536 | ||||||||||||
Operating expenses | 929,985 | 922,080 | 1,818,502 | 1,688,497 | ||||||||||||
Interest expense | 61,849 | 66,964 | 128,290 | 115,081 | ||||||||||||
Interest income | (9,249 | ) | (9,843 | ) | (18,876 | ) | (17,216 | ) | ||||||||
Earnings before income taxes | 343,126 | 111,334 | 675,047 | 183,251 | ||||||||||||
Income taxes | 133,819 | 54,554 | 263,268 | 89,793 | ||||||||||||
Net earnings | $ | 209,307 | $ | 56,780 | $ | 411,779 | $ | 93,458 | ||||||||
Weighted average number of shares—basic | 891,701,717 | 869,518,765 | 890,257,859 | 868,102,226 | ||||||||||||
Weighted average number of shares—diluted | 987,514,041 | 876,609,916 | 983,614,652 | 875,306,720 | ||||||||||||
Earnings per share—basic | $ | 0.23 | $ | 0.07 | $ | 0.46 | $ | 0.11 | ||||||||
Earnings per share—diluted | $ | 0.22 | $ | 0.06 | $ | 0.44 | $ | 0.11 | ||||||||
Cash dividends paid per share | $ | 0.02 | (c) | $ | 0.02 | (d) | $ | 0.04 | (a)(c) | $ | 0.04 | (b)(d) |
See accompanying notes to condensed consolidated financial statements.
(a) | Includes a dividend of $0.02 per share declared in fourth quarter of fiscal 2002 but paid in first quarter of fiscal 2003. |
(b) | Includes a dividend of $0.02 per share declared in fourth quarter of fiscal 2001 but paid in first quarter of fiscal 2002. |
(c) | Includes a dividend of $0.02 per share declared in first quarter of fiscal 2003 but paid in second quarter of fiscal 2003. |
(d) | Includes a dividend of $0.02 per share declared and paid in second quarter of fiscal 2002. |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended | ||||||||
(In thousands) | August 2, 2003 | August 3, 2002 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net earnings | $ | 411,779 | $ | 93,458 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||
Depreciation and amortization | 343,829 | 350,849 | ||||||
Loss on disposal and other non-cash items affecting net earnings | 12,677 | 11,471 | ||||||
Tax benefit from exercise of stock options and vesting of restricted stock | 11,168 | 7,858 | ||||||
Deferred income taxes | (28,750 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Merchandise inventory | (219,088 | ) | (306,930 | ) | ||||
Other assets | (39,719 | ) | 6,963 | |||||
Accounts payable | 13,756 | (86,890 | ) | |||||
Accrued expenses and other current liabilities | (46,552 | ) | 50,597 | |||||
Income taxes payable | (115,809 | ) | 52,951 | |||||
Lease incentives and other liabilities | 2,577 | 29,626 | ||||||
Net cash provided by operating activities | 345,868 | 209,953 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchase of property and equipment | (110,295 | ) | (184,452 | ) | ||||
Proceeds from sale of property & equipment | 1,406 | — | ||||||
Net change in other assets | 2,393 | 1,638 | ||||||
Net cash used for investing activities | (106,496 | ) | (182,814 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Decrease in notes payable | — | (41,942 | ) | |||||
Net issuance of senior convertible notes | — | 1,345,500 | ||||||
Payments of long-term debt | (500,000 | ) | — | |||||
Restricted cash (a) | (1,236,000 | ) | — | |||||
Issuance of common stock | 53,721 | 43,330 | ||||||
Cash dividends paid | (39,595 | ) | (38,533 | ) | ||||
Net cash (used for) provided by financing activities | (1,721,874 | ) | 1,308,355 | |||||
Effect of exchange rate fluctuations on cash | 2,401 | 15,586 | ||||||
Net (decrease) increase in cash and equivalents | (1,480,101 | ) | 1,351,080 | |||||
Cash and equivalents at beginning of period | $ | 3,388,514 | $ | 1,035,749 | ||||
Cash and equivalents at end of period | $ | 1,908,413 | $ | 2,386,829 | ||||
See accompanying notes to condensed consolidated financial statements.
(a) | See Note 2 and Note 5. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | BASIS OF PRESENTATION |
The condensed consolidated balance sheets as of August 2, 2003 and August 3, 2002 and the interim condensed consolidated statements of operations for the thirteen and twenty-six weeks ended August 2, 2003 and August 3, 2002 and cash flows for the twenty-six week periods ended August 2, 2003 and August 3, 2002 have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”), without audit. In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly our financial position, results of operations and cash flows at August 2, 2003 and August 3, 2002 and for all periods presented.
Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted from these interim financial statements. We suggest that you read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended February 1, 2003.
Certain amounts from the prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on net earnings as previously reported.
The results of operations for the thirteen and twenty-six weeks ended August 2, 2003 are not necessarily indicative of the operating results that may be expected for the year ending January 31, 2004.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
For a description of our significant accounting policies, see Note A to the Consolidate Financial Statements included in Form 10-K for the year ended February 1, 2003. Additional information regarding our significant accounting policies is set forth below.
Restricted Cash
Restricted cash represents the restriction of cash that backs our letter of credit agreements. Restricted cash classified in Current Assets on the Condensed Consolidated Balance Sheet totaled $1.24 billion as of August 2, 2003.
Stock-based Awards
Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure an Amendment of FASB Statement No. 123”, amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
We account for stock-based awards to employees and directors using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”. Under the intrinsic value method, when the exercise price of an employee stock option is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Condensed Consolidated Statements of Operations. For restricted stock and discounted stock option awards, which are granted at a price less than fair market value, we recognize deferred compensation. Deferred compensation is shown as a reduction of shareholders’
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equity and is amortized to operating expenses over the vesting period of the stock award. We amortize deferred compensation for each vesting layer of a stock award using the straight-line method.
We have adopted the disclosure provisions required under SFAS 148, to disclose pro forma information regarding the effect on net earnings and earnings per share as if we had applied the fair-value recognition provisions of SFAS 123. The following table illustrates the pro forma information required:
(In thousands) | Thirteen Weeks Ended August 2, 2003 | Thirteen Weeks Ended August 3, 2002 | Twenty-six Weeks Ended August 2, 2003 | Twenty-six Weeks Ended August 3, 2002 | ||||||||||
Net earnings | ||||||||||||||
As reported | $ | 209,307 | $ | 56,780 | $ | 411,779 | $ | 93,458 | ||||||
Add: Stock-based employee compensation expense (or cancellations) included in reported net earnings, net of tax | (581 | ) | 342 | (86 | ) | 910 | ||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax | 11,704 | 18,744 | 22,028 | 35,468 | ||||||||||
Pro forma net earnings | $ | 197,022 | $ | 38,378 | $ | 389,655 | $ | 58,900 | ||||||
Earnings per share: | ||||||||||||||
As reported-basic | $ | 0.23 | $ | 0.07 | $ | 0.46 | $ | 0.11 | ||||||
Pro forma-basic | 0.22 | 0.04 | 0.44 | 0.07 | ||||||||||
As reported-diluted | 0.22 | 0.06 | 0.44 | 0.11 | ||||||||||
Pro forma-diluted | 0.21 | 0.04 | 0.42 | 0.07 |
3. | NEW ACCOUNTING PRONOUNCEMENTS |
During January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. For any arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have any impact on our operating results or financial position as we do not have any variable interest entities.
During June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 2002. SFAS 143 addresses the financial accounting and reporting for obligations and retirement costs related to the retirement of tangible long-lived assets. The adoption of SFAS 143 did not have a significant impact on our operating results or financial position because we do not have significant asset retirement obligations.
During April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The adoption of SFAS 149 did not have any impact on our operating results or financial position as we do not have any derivative instruments that are affected by FAS 149.
During May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and
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equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact on our operating results or financial position as we do not have any financial instruments with characteristics of both liabilities and equity that are not already classified as liabilities.
4. | COMPREHENSIVE EARNINGS |
Comprehensive earnings include net earnings and other comprehensive earnings. Other comprehensive earnings include foreign currency translation adjustments and fluctuations in the fair market value of certain derivative financial instruments. Comprehensive earnings for the thirteen and twenty-six weeks ended August 2, 2003 and August 3, 2002 were as follows:
(In thousands) | Thirteen Weeks Ended August 2, 2003 | Thirteen Weeks Ended August 3, 2002 | Twenty-six Weeks Ended August 2, 2003 | Twenty-six Weeks Ended August 3, 2002 | |||||||||||
Net earnings | $ | 209,307 | $ | 56,780 | $ | 411,779 | $ | 93,458 | |||||||
Adjustments for foreign currency translation | 1,440 | 23,867 | 3,481 | 40,214 | |||||||||||
Adjustments for fluctuations in fair market value of financial instruments, net of tax | 1,708 | (8,085 | ) | (2,815 | ) | (14,976 | ) | ||||||||
Comprehensive earnings | $ | 212,455 | $ | 72,562 | $ | 412,445 | $ | 118,696 | |||||||
5. | DEBT AND OTHER CREDIT ARRANGEMENTS |
In June 2003, we replaced our existing $1.4 billion secured two-year credit facility scheduled to expire in March 2004 with a new three-year secured $750 million revolving credit facility (the “new Facility”). In addition, we executed agreements securing $1.2 billion in letter of credit issuing capacity. The letter of credit agreements also have three-year terms and are secured by approximately $1.24 billion in cash. This $1.24 billion is recorded as restricted cash on our Condensed Consolidated Balance Sheet. The new Facility is used for general corporate purposes. The fees related to the new Facility fluctuate based on our unsecured credit ratings and our leverage ratio.
The new Facility contains financial and other covenants, including, but not limited to, limitations on capital expenditures, liens and cash dividends and maintenance of certain financial ratios, including a fixed charge coverage ratio and a leverage ratio. The letter of credit agreements contain a fixed charge coverage ratio, which is more lenient than the ratio in the new Facility. Violation of these covenants could result in a default under the new Facility and letter of credit agreements, which default would permit the participating banks to restrict our ability to further access the new Facility for letters of credit and advances, terminate our ability to request letters of credit pursuant to the letter of credit agreements and require the immediate repayment of any outstanding advances under the new Facility. In addition, such a default could, under certain circumstances, permit the holders of our outstanding unsecured debt to accelerate payment of such obligations.
Letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a given amount of money upon presentation of specific documents demonstrating that merchandise has shipped. Vendor payables are recorded in the balance sheet at the time of merchandise title transfer, although the letters of credit are generally issued prior to this.
As of August 2, 2003, we had $779 million in trade letters of credit issued under our letter of credit agreements. There were no drawings under the $750 million revolving credit facility.
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6. | EARNINGS PER SHARE |
Basic earnings per share are computed using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes the additional dilutive effect of our potentially dilutive securities, which include certain stock options and unvested shares of restricted stock, calculated using the treasury stock method, and convertible notes which are potentially dilutive at certain earnings levels, and are computed using the if-converted method. The following summarizes the incremental shares from the potentially dilutive securities:
Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||
August 2, 2003 | August 3, 2002 | August 2, 2003 | August 3, 2002 | |||||||||
Weighted-average number of shares—basic | 891,701,717 | 869,518,765 | 890,257,859 | 868,102,226 | ||||||||
Incremental shares resulting from: | ||||||||||||
Stock options (a) | 10,204,384 | 7,091,151 | 7,748,853 | 7,204,494 | ||||||||
Senior convertible notes (b) | 85,607,940 | — | 85,607,940 | — | ||||||||
Weighted-average number of shares—diluted | 987,514,041 | 876,609,916 | 983,614,652 | 875,306,720 | ||||||||
Earnings per share—basic | $ | 0.23 | $ | 0.07 | $ | 0.46 | $ | 0.11 | ||||
Earnings per share—diluted | $ | 0.22 | $ | 0.06 | $ | 0.44 | $ | 0.11 |
(a) | Excluded from the above computations of weighted-average shares for diluted earnings per share were options to purchase 30,952,453 and 33,763,782 shares of common stock and 659 and 2,205 shares of unvested restricted stock during the thirteen and twenty-six weeks ended August 2, 2003, respectively. Excluded from the above computations of weighted-average shares for diluted earnings per share were options to purchase 76,128,495 and 76,889,619 shares of common stock and 97,734 and 103,577 shares of unvested restricted stock during the thirteen and twenty-six weeks ended August 3, 2002, respectively. |
(b) | The calculation above also excludes senior convertible notes that are convertible to 85,607,940 shares of common stock during the thirteen and twenty-six weeks ended August 3, 2002 because their inclusion would have an anti-dilutive effect on earnings per share. |
7. | EXCESS FACILITIES AND SUBLEASE LOSS CHARGES |
During 2001, as a result of the rationalization of our global distribution center network, we announced plans to close distribution facilities located in Erlanger, Kentucky (“Erlanger”), Basildon, England (“Basildon”), and Roosendaal, Holland (“Roosendaal”). We lease the Erlanger and Basildon facilities and we own the Roosendaal facility. The Basildon facility was closed during the first quarter of fiscal 2002, the Roosendaal facility was closed during the second quarter of fiscal 2002 and the Erlanger facility was closed during the third quarter of fiscal 2002.
Facilities-related charges associated with the Erlanger facility and the Basildon facility closures include costs associated with lease terminations, facilities restoration and equipment removal. Our lease associated with the Erlanger facility expired in February 2003, and the lease associated with the Basildon facility will expire in October 2003. Remaining cash expenditures of $0.7 million associated with facility closures as of August 2, 2003 are expected to be paid by the fourth quarter of fiscal 2003.
The Roosendaal facility, including land and building, is currently on the market for sale. During the second quarter of fiscal 2003, we recorded an asset impairment charge of $3.8 million to reduce the net book value of the facility to the estimated net selling price due to a weak real estate market. The total carrying value of the remaining land and building as of August 2, 2003 was $3.0 million.
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During 2001, we consolidated and downsized headquarters facilities in our San Francisco and San Bruno campuses as part of our cost containment efforts. We identified 361,383 square feet of excess facility space and recorded charges of $47.3 million during fiscal 2001, which charge primarily related to the difference between our contract rent obligations and the rate at which we expected to be able to sublease the properties. In the third and fourth quarters of 2002, based on a review of real estate market conditions, we revised our sublease income and sublease commencement projections and assumptions. Additionally, in 2002, we considered our corporate facilities space needs and identified additional excess facility space of 193,228 square feet. As a result of these actions, we recorded an additional sublease loss charge of $77.4 million in fiscal 2002. The additional sublease loss charge was recorded in operating expenses on our condensed consolidated statement of operations. Remaining cash expenditures associated with the sublease loss reserve are expected to be paid over the remaining various lease terms through 2017. Based on the current assumptions set forth above as of August 2, 2003, we expect the sublease of our excess facilities to result in a total reduction of approximately $111.9 million in future rent expense and $278.7 million in cash savings over the various remaining lease terms through 2017.
(In thousands) | Facilities Charges | Sublease Loss Reserve | Total Reserve | |||||||||
Balance at February 1, 2003 | $ | 4,157 | $ | 114,686 | $ | 118,843 | ||||||
Provisions | — | 1,168 | 1,168 | |||||||||
Cash payments | (2,741 | ) | (11,279 | ) | (14,020 | ) | ||||||
Adjustments | (732 | ) | (792 | ) | (1,524 | ) | ||||||
Balance at August 2, 2003 | $ | 684 | $ | 103,783 | $ | 104,467 | ||||||
8. | INCOME TAXES |
The effective tax rate was 39.0 percent and 49.0 percent for the second quarter and first half of fiscal 2003 and 2002, respectively. The decrease in tax rate was primarily driven by an improvement in the mix of earnings from domestic and international operations and improved earnings performance.
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Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105-2230
Tel: (415) 783-4000
Fax: (415) 783-4329
www.deloitte.com
Deloitte
& Touche
INDEPENDENT ACCOUNTANTS’ REPORT
To the Board of Directors and Shareholders of
The Gap, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of The Gap, Inc. and subsidiaries as of August 2, 2003 and August 3, 2002, and the related condensed consolidated statements of operations for each of the thirteen and twenty-six week periods ended August 2, 2003 and August 3, 2002, and the condensed consolidated statements of cash flows for the twenty-six week periods ended August 2, 2003 and August 3, 2002. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of The Gap, Inc. and subsidiaries as of February 1, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 7, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 1, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
San Francisco, California
September 2, 2003
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THE GAP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this quarterly report on Form 10-Q contains certain forward-looking statements that reflect the current view of The Gap, Inc. (the “Company”, “we” and “our”) with respect to future events and financial performance. Wherever used, the words “expect,” “plan,” “anticipate,” “believe,” “may” and similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties, and our future results of operations could differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging domestic and international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where our goods are manufactured, impact of legal proceedings, and/or other factors that may be described in our Annual Report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict.
We suggest that this document be read in conjunction with the Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2003.
We assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
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RESULTS OF OPERATIONS
Net Sales
Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
August 2, 2003 | August 3, 2002 | August 2, 2003 | August 3, 2002 | |||||||||||||
Net sales (In thousands) | $ | 3,685,299 | $ | 3,268,309 | $ | 7,038,070 | $ | 6,159,149 | ||||||||
Total net sales increase (decrease) percentage | 13 | % | 1 | % | 14 | % | (4 | )% | ||||||||
Comparable store sales increase (decrease) percentage | 10 | % | (7 | )% | 11 | % | (12 | )% | ||||||||
Net sales per average square foot | $ | 97 | $ | 86 | $ | 184 | $ | 163 | ||||||||
Square footage of gross store space—at end of period (In thousands) | 37,132 | 37,377 | ||||||||||||||
Number of Store Concepts: | ||||||||||||||||
Beginning of Period | 4,241 | 4,228 | 4,252 | 4,171 | ||||||||||||
New store concepts | 14 | 60 | 26 | 131 | ||||||||||||
Expanded / remodeled store concepts(1) | 2 | — | 6 | 16 | ||||||||||||
Closed store concepts | (25 | ) | (27 | ) | (48 | ) | (41 | ) | ||||||||
End of Period | 4,230 | 4,261 | 4,230 | 4,261 | ||||||||||||
Number of Store Locations: | ||||||||||||||||
Beginning of Period | 3,105 | 3,125 | 3,117 | 3,097 | ||||||||||||
New store locations | 10 | 38 | 17 | 79 | ||||||||||||
Closed store locations | (20 | ) | (24 | ) | (39 | ) | (37 | ) | ||||||||
End of Period | 3,095 | 3,139 | 3,095 | 3,139 | ||||||||||||
(1) | Expanded stores do not change store count |
Store count and square footage at second quarter end for fiscal 2003 and 2002 were as follows:
August 2, 2003 | August 3, 2002 | |||||||||||
Number of Store Concepts | Number of Store Locations | Sq. Ft. (millions) | Number of Store Concepts | Number of Store Locations | Sq. Ft. (millions) | |||||||
Gap U.S. | 2,284 | 1,438 | 13.0 | 2,323 | 1,484 | 13.3 | ||||||
Gap International | ||||||||||||
United Kingdom | 240 | 148 | 1.4 | 235 | 147 | 1.4 | ||||||
Canada | 189 | 107 | 1.0 | 192 | 110 | 1.0 | ||||||
France | 56 | 37 | 0.3 | 54 | 35 | 0.3 | ||||||
Japan | 159 | 73 | 0.8 | 155 | 71 | 0.8 | ||||||
Germany | 20 | 10 | 0.1 | 20 | 10 | 0.1 | ||||||
Banana Republic(1) | 440 | 440 | 3.7 | 440 | 440 | 3.7 | ||||||
Old Navy(2) | 842 | 842 | 16.8 | 842 | 842 | 16.8 | ||||||
Total | 4,230 | 3,095 | 37.1 | 4,261 | 3,139 | 37.4 | ||||||
Gap Brand stores are reported based on concepts and locations. Any Gap Adult, GapKids, babyGap or GapBody concept that meets a certain square footage threshold has been counted as a store concept, even when residing within a single physical location that may have other concepts. In the table above, we present the number of store concepts and the number of locations.
(1) | Includes 16 stores in Canada in 2003 and 2002. |
(2) | Includes 28 and 25 stores in Canada for 2003 and 2002 respectively. |
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Net sales for the second quarter of fiscal 2003 increased $417 million compared with the same period last year. Comparable store sales increased $308 million and non-comparable store sales increased $109 million. The comparable and non-comparable store sales increase was primarily due to higher markdown margins compared with the second quarter of 2002.
Net sales for year-to-date fiscal 2003 increased $879 million compared with the same period last year. Comparable store sales increased $650 million and non-comparable store sales increased $229 million. The comparable and non-comparable store sales increase was primarily due to an increase in regular price selling and higher markdown margins compared with the same period last year.
Comparable store sales by division for the second quarter were as follows:
Gap U.S. reported a positive 9% versus a negative 13% last year
Gap International reported a positive 13% versus a negative 12% last year
Banana Republic reported a positive 5% versus a negative 5% last year
Old Navy reported a positive 11% versus a negative 1% last year
Total sales by division for the second quarter were as follows:
Gap U.S. reported $1.2 billion versus $1.1 billion last year
Gap International reported $468 million versus $374 million last year
Banana Republic reported $497 million versus $465 million last year
Old Navy reported $1.5 billion versus $1.3 billion last year
Comparable store sales by division for year-to-date were as follows:
Gap U.S. reported a positive 11% versus a negative 17% last year
Gap International reported a positive 13% versus a negative 15% last year
Banana Republic reported a positive 3% versus a negative 6% last year
Old Navy reported a positive 13% versus a negative 9% last year
Total sales by division for year-to-date were as follows:
Gap U.S. reported $2.4 billion versus $2.1 billion last year
Gap International reported $879 million versus $692 million last year
Banana Republic reported $907 million versus $862 million last year
Old Navy reported $2.9 billion versus $2.5 billion last year
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales decreased 2.6 percentage points from 66.6 percent to 64.0 percent in the second quarter of fiscal 2003 and decreased 5.0 percentage points from 68.0 percent to 63.0 percent in the first half of fiscal 2003 compared with the same periods in fiscal 2002. The decrease in the second quarter of fiscal 2003 was primarily driven by lower occupancy expenses of 1.7 percentage points and slightly higher merchandise margins of 0.9 percentage points.The decrease for the first half of fiscal 2003 was primarily driven by higher merchandise margins of 3.2 percentage points and lower occupancy expenses of 1.7 percentage points.
The decrease in occupancy expenses as a percentage of net sales for the second quarter and first half of fiscal 2003 compared with the same periods in fiscal 2002 was due to improved sales leverage.
The improvement in merchandise margins of 3.2 percentage points in the first half of fiscal 2003, compared with the same period in fiscal 2002 was driven by improved product acceptance and focused assortments that drove increased regular price selling and higher markdown margins. In addition, we experienced improved shortage results based on annual counts in the first half of fiscal 2003 compared with the same period in fiscal 2002.
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Operating Expenses
Operating expenses as a percentage of net sales decreased 3.0 percentage points from 28.2 percent to 25.2 percent for the second quarter of fiscal 2003 and decreased 1.6 percentage points from 27.4 percent to 25.8 percent for the first half of 2003, compared with the same periods in fiscal 2002. Operating expenses increased $8 million in the second quarter of fiscal 2003 to $930 million compared with $922 million in the second quarter of fiscal 2002. Operating expenses increased $130 million in the first half of fiscal 2003 to $1.8 billion compared with $1.7 billion in the first half of fiscal 2002. The increase in total operating expense dollars for the second quarter and first half of fiscal 2003 was primarily due to higher store payroll to support increased sales and higher bonus expense and consulting fees compared with the same periods in fiscal 2002, partially offset by insurance recovery proceeds primarily related to the losses at the World Trade Center stores received in the second quarter of fiscal 2003, and lower marketing expenses. The decrease in operating expenses as a percentage of net sales for the second quarter and first half of fiscal 2003 was driven by improved store payroll efficiency along with lower marketing expenses and insurance recovery proceeds.
The aggregate amount of insurance recovery proceeds received in the first half of fiscal 2003 was $21.6 million, all of which were received during the second quarter. This compares with $6.5 million of insurance recovery proceeds received during the first half of fiscal 2002, all which were received during the first quarter.
Interest Expense
The decrease of $5 million in interest expense in the second quarter, compared with the same period in fiscal 2002, was primarily due to the maturity of our $500 million two-year bond in May 2003, partially offset by higher interest rates in the second quarter of 2003, payable on $700 million of our outstanding notes as a result of downgrades in our long-term credit ratings, effective June 15, 2002.
The increase of $13 million in interest expense in the first half of fiscal 2003, compared with the same period in fiscal 2002, was primarily due to a full two quarters of interest expense in fiscal 2003 on our senior convertible notes issued in March 2002 plus higher interest rates in the first half of fiscal 2003, payable on $700 million of our outstanding notes as a result of downgrades in our long-term credit ratings, effective June 15, 2002.
For fiscal 2003, we expect interest expense to be approximately $240 million to $245 million compared with $249 million in fiscal 2002.
Interest Income
The decrease of $0.6 million in interest income in the second quarter, compared with the same period in fiscal 2002, was primarily due to a decrease in interest rates, partially offset by increases in average cash available for investment as a result of improved cash flow from operations.
The increase of $2 million in interest income for the first half of fiscal 2003, compared with the same period in fiscal 2002, was primarily due to increases in average cash available for investment as a result of improved cash flow from operations and the issuance of our senior convertible notes in March 2002, partially offset by a decrease in interest rates.
Income Taxes
The effective tax rate was 39.0 percent and 49.0 percent for the second quarter and first half of fiscal 2003 and 2002, respectively. The decrease in tax rate compared with prior year was driven primarily by an improvement in the mix of earnings from domestic and international operations and improved earnings performance. While we expect the effective tax rate for fiscal 2003 to be 39 percent, the actual rate could fluctuate higher or lower depending on several variables, including the mix of earnings from domestic and international operations, the overall level of earnings, and the potential resolution of outstanding tax controversies. We anticipate that any fluctuation would result in an effective tax rate in the range of 38 percent to 40 percent.
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LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of our liquidity:
Twenty-six Weeks Ended | Fifty-two Weeks Ended | ||||||||
(In thousands) | August 2, 2003 | August 3, 2002 | February 1, 2003 | ||||||
Cash provided by operating activities | $ | 345,868 | $ | 209,953 | $ | 1,238,356 | |||
Working capital | $ | 3,659,418 | $ | 2,215,016 | $ | 3,013,151 | |||
Current ratio | 2.76:1 | 1.85:1 | 2.11:1 | ||||||
At August 2, 2003 our working capital and current ratio calculation included $1.24 billion of restricted cash.
For the twenty-six weeks ended August 2, 2003, the increase in cash flows provided by operating activities, compared with the same period in the prior year, was primarily attributable to improvement in our net earnings, exclusive of depreciation and amortization, and a decrease in the relative growth of merchandise inventory, offset by changes in other operating assets and liabilities, which were primarily driven by timing of certain payments.
For the twenty-six weeks ended August 2, 2003, the decrease in cash flows provided by financing activities, compared with the same period in the prior year, was primarily due to the restriction of cash that backs our letter of credit agreements.
We fund inventory expenditures during normal and peak periods through a combination of cash flows from operations as well as long-term financing arrangements. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods. Consequently, we believe the most meaningful analysis of operating cash flows is one that compares the current interim period changes to the prior interim period changes.
Credit Facility and Trade Obligations
In June 2003, we replaced our existing $1.4 billion secured two-year credit facility scheduled to expire in March 2004 with a new three-year secured $750 million revolving credit facility (the “new Facility”). In addition, we executed agreements securing $1.2 billion in letter of credit issuing capacity. The letter of credit agreements also have three-year terms and are secured by approximately $1.24 billion in cash. This $1.24 billion is recorded as restricted cash on our Condensed Consolidated Balance Sheet. The new Facility is used for general corporate purposes. The fees related to the new Facility fluctuate based on our unsecured credit ratings and our leverage ratio.
The new Facility contains financial and other covenants, including, but not limited to, limitations on capital expenditures, liens and cash dividends and maintenance of certain financial ratios, including a fixed charge coverage ratio and a leverage ratio. The letter of credit agreements contain a fixed charge coverage ratio, which is more lenient than the ratio in the new Facility. Violation of these covenants could result in a default under the new Facility and letter of credit agreements, which default would permit the participating banks to restrict our ability to further access the new Facility for letters of credit and advances, terminate our ability to request letters of credit pursuant to the letter of credit agreements and require the immediate repayment of any outstanding advances under the new Facility. In addition, such a default could, under certain circumstances, permit the holders of our outstanding unsecured debt to accelerate payment of such obligations.
Letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a given amount of money upon presentation of specific documents demonstrating that merchandise has
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shipped. Vendor payables are recorded in the balance sheet at the time of merchandise title transfer, although the letters of credit are generally issued prior to this.
As of August 2, 2003, we had $779 million in trade letters of credit issued under our letter of credit agreements. There were no drawings under the $750 million revolving credit facility.
Summary Disclosures about Contractual Obligations and Commercial Commitments
We also have standby letters of credit, surety bonds and bank guarantees outstanding at August 2, 2003, amounting to $30 million, $22 million and $7 million, respectively.
On August 12, 2003, Moody’s Investor Services changed our long-term ratings outlook from negative to stable and raised our speculative grade liquidity (SGL) rating from SGL-2 to SGL-1. The SGL rating is intended to give bondholders a short-term (12-18 month) view on a company’s ability to meet operating and financing obligations. The rating is on a scale of 1 to 4 with 1 being the highest.
Rent expense for all operating leases was $493 million and $482 million, for the twenty-six weeks ended August 2, 2003 and August 3, 2002, respectively.
For the twenty-six weeks ended August 2, 2003, capital expenditures totaled approximately $110 million. The majority of these expenditures were for information technology and store remodels. We still expect capital spending to be $300 million to $325 million for the year.
For fiscal 2003, we continue to expect a decline in net square footage of approximately 2 percent. We anticipate concept closures and store location closures to be higher compared with fiscal 2002.
Our store plans for fiscal 2003 are as follows:
Number of Store Concepts* | Number of Store Locations* | |||
Gap U.S. | (85 – 90) | (65 – 70) | ||
Gap International | 5 – 10 | 0 – 5 | ||
Banana Republic | (5 – 10) | (5 – 10) | ||
Old Navy | (5 – 10) | (5 – 10) | ||
Total | (90 – 100) | (75 – 85) | ||
* | Represents approximate net openings (closings). |
Gap Brand stores are reported based on concepts and locations. Any Gap Adult, GapKids, babyGap or GapBody concept that meets a certain square footage threshold has been counted as a store concept, even when residing within a single physical location that may have other concepts. In the table above, we present the number of store concepts and the number of locations.
NEW ACCOUNTING PRONOUNCEMENTS
During January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. For any arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have any impact on our operating results or financial position as we do not have any variable interest entities.
During June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 2002. SFAS 143 addresses the financial accounting and reporting for obligations and retirement costs
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related to the retirement of tangible long-lived assets. The adoption of SFAS 143 did not have a significant impact on our operating results or financial position because we do not have significant asset retirement obligations.
During April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The adoption of SFAS 149 did not have any impact on our operating results or financial position as we do not have any derivative instruments that are affected by FAS 149.
During May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact on our operating results or financial position as we do not have any financial instruments with characteristics of both liabilities and equity that are not already classified as liabilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge substantially all merchandise purchases for foreign operations using foreign exchange forward contracts. At August 2, 2003, we had forward contracts maturing at various dates through July 2004 to buy and sell the equivalent of approximately $689 million in foreign currencies at contracted rates. We also use forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain loans denominated in currencies other than the functional currency of the entity holding or issuing the loan.
The outstanding mark-to-market net liability for all derivatives reflected in the Condensed Consolidated Balance Sheet as of August 2, 2003, was $16.0 million.
We have limited exposure to interest rate fluctuations on our borrowings. The interest on our long-term debt is set at a fixed coupon, with the exception of the interest rates payable by us on $700 million of our outstanding notes, which are subject to change based on our long-term credit ratings. The interest rates earned on our cash and equivalents and restricted cash is expected to fluctuate in line with short-term interest rates.
Our market risk profile as of August 2, 2003 has not significantly changed since February 1, 2003. Our market risk profile on February 1, 2003 is disclosed in our 2002 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of August 2, 2003. Based on such evaluation, they have concluded that as of such date, our disclosure controls and procedures are effective.
Changes in Internal Controls
During our last fiscal quarter, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
As a multinational company, we are subject to various proceedings, lawsuits, disputes and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us include general commercial, intellectual property, customer, and labor and employment related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour laws. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance.
We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse settlements or resolutions may occur and negatively impact earnings in the quarter of settlement or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our results from operations, liquidity or financial position taken as a whole.
Item 4. Submissions of Matters to a Vote of Security Holders
a) On May 14, 2003, the Annual Meeting of Stockholders of the Company was held in Groveport, Ohio. There were 889,164,488 shares of common stock outstanding on the record date and entitled to vote at the Annual Meeting.
b) The following directors were elected:
Vote For | Vote Withheld | |||
Adrian D. P. Bellamy | 817,880,912 | 26,427,938 | ||
Donald G. Fisher | 834,254,312 | 10,054,538 | ||
Doris F. Fisher | 834,030,604 | 10,278,246 | ||
Robert J. Fisher | 834,032,235 | 10,276,615 | ||
Glenda A. Hatchett | 817,704,153 | 26,604,697 | ||
Penelope L. Hughes | 833,645,198 | 10,663,652 | ||
Bob L. Martin | 814,279,059 | 30,029,791 | ||
Paul S. Pressler | 834,406,669 | 9,902,181 | ||
Charles R. Schwab | 830,451,707 | 13,857,143 | ||
Mayo A. Shattuck III | 833,695,784 | 10,613,066 |
There were no abstentions and no broker non-votes.
c) The selection of Deloitte & Touche, LLP as independent auditors for the fiscal year ending January 31, 2004, was ratified with 826,082,304 votes in favor and 13,997,500 votes against.
There were 4,229,046 abstentions and no broker non-votes.
d) The proposal to amend and restate the Company’s 1996 Stock Option and Award Plan was ratified with 487,157,440 votes in favor and 352,368,227 votes against.
There were 4,783,183 abstentions and no broker non-votes.
e) The shareholder proposal to expense the Company’s stock options was rejected with 276,822,997 votes in favor and 483,636,307 votes against.
There were 9,639,174 abstentions and 74,210,372 broker non-votes.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10.1) | Credit Agreement, dated as of June 25, 2003, among The Gap, Inc., the LC Subsidiaries, the Subsidiary Borrowers, the Lenders and the Issuing Banks (as such terms are defined in the Credit Agreement), Citigroup Global Markets Inc. (“CGMI”) and Banc of America Securities LLC (“BAS”) as joint book managers (the “Joint Managers”), BAS, HSBC Bank USA (“HSBC”) and J.P. Morgan Inc. (“JP Morgan”) as co-syndication agents, CGMI, BAS, and JP Morgan as joint lead arrangers, and Citigroup USA, Inc., as agent for the Lenders and the Issuing Banks thereunder, filed as Exhibit 10.1 to the Registrant’s Form 8-K, dated June 25, 2003, Commission File No. 1-7562 |
(10.2) | Agreement of termination of employment, dated as of July 21, 2003, by and between Charles K. Crovitz and The Gap, Inc., filed as Exhibit 10.1 to the Registrant’s Form 8-K, dated July 22, 2003, Commission File No. 1-7562 |
(15) | Letter re: Unaudited Interim Financial Information |
(31.1) | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). |
(31.2) | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). |
(32.1) | Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(32.2) | Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
b) Reports on Form 8-K
We filed or furnished the following reports on Form 8-K during the three months ended August 2, 2003:
1. | Form 8-K, dated May 8, 2003, regarding the announcement of our sales for the month and quarter ended May 3, 2003, filed with the SEC on May 8, 2003; |
2. | Form 8-K, dated May 22, 2003, regarding the announcement of our earnings for the first quarter ended May 2, 2003, filed with the SEC on May 22, 2003; |
3. | Form 8-K, dated May 29, 2003, regarding the announcement that the Board of Directors elected Howard P. Behar to serve as a director of the Company, filed with the SEC on May 30, 2003; |
4. | Form 8-K, dated June 5, 2003, regarding the announcement of our May 2003 sales, filed with the SEC on June 5, 2003; |
5. | Form 8-K, dated June 25, 2003, regarding the announcement of the completion of a secured $750,000,000 three-year revolving credit facility and the execution of letter of credit agreements with an aggregate commitment of $1,200,000,000, filed with the SEC on June 25, 2003; |
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6. | Form 8-K, dated July 10, 2003, regarding the announcement of our June 2003 sales, filed with the SEC on July 10, 2003; and |
7. | Form 8-K, dated July 22, 2003, regarding the announcement of the resignation of Charles K. Crovitz as Executive Vice President and Chief Supply Chain Officer of the Company, filed with the SEC on July 22, 2003. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE GAP, INC. | ||||
Date: September 3, 2003 | By | /s/ PAUL S. PRESSLER | ||
Paul S. Pressler | ||||
President and Chief Executive Officer | ||||
Date: September 3, 2003 | By | /s/ BYRON H. POLLITT, JR. | ||
Byron H. Pollitt, Jr. | ||||
Executive Vice President and Chief Financial Officer |
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EXHIBIT INDEX
(10.1) | Credit Agreement, dated as of June 25, 2003, among The Gap, Inc., the LC Subsidiaries, the Subsidiary Borrowers, the Lenders and the Issuing Banks (as such terms are defined in the Credit Agreement), Citigroup Global Markets Inc. (“CGMI”) and Banc of America Securities LLC (“BAS”) as joint book managers (the “Joint Managers”), BAS, HSBC Bank USA (“HSBC”) and J.P. Morgan Inc. (“JP Morgan”) as co-syndication agents, CGMI, BAS, and JP Morgan as joint lead arrangers, and Citigroup USA, Inc., as agent for the Lenders and the Issuing Banks thereunder, filed as Exhibit 10.1 to the Registrant’s Form 8-K, dated June 25, 2003, Commission File No. 1-7562 |
(10.2) | Agreement of termination of employment, dated as of July 21, 2003, by and between Charles K. Crovitz and The Gap, Inc., filed as Exhibit 10.1 to the Registrant’s Form 8-K, dated July 22, 2003, Commission File No. 1-7562 |
(15) | Letter re: Unaudited Interim Financial Information |
(31.1) | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). |
(31.2) | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). |
(32.1) | Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(32.2) | Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |