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 July 31,
1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
______________ to ______________
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Harrison
San Francisco, California 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 427-2000
_______________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.05 par value New York Stock Exchange, Inc.
(Title of class) Pacific 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 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, 856,213,988 shares as of August 28,
1999
GAP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value) July 31, January 30, August 1,
1999 1999 1998
ASSETS
Current Assets:
Cash and equivalents $ 420,954 $ 565,253 $ 515,207
Short-term investments 14,989 - 29,532
Merchandise inventory 1,502,255 1,056,444 1,102,693
Other current assets 283,230 250,127 186,589
Total Current Assets 2,221,428 1,871,824 1,834,021
Property and equipment, net 2,229,729 1,876,370 1,576,440
Lease rights and other assets 227,426 215,725 172,688
Total Assets $4,678,583 $3,963,919 $3,583,149
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 413,495 $ 90,690 $ 93,006
Accounts payable 742,370 684,130 530,275
Accrued expenses and other current liabilities 646,433 655,770 597,744
Income taxes payable 40,652 122,513 43,955
Total Current Liabilities 1,842,950 1,553,103 1,264,980
Long-Term Liabilities:
Long-term debt 542,279 496,455 496,250
Deferred lease credits and other liabilities 365,874 340,682 292,620
Total Long-Term Liabilities 908,153 837,137 788,870
Shareholders' Equity:
Common stock $.05 par value
Authorized 2,300,000 shares
Issued 1,003,911; 997,496
and 993,827 shares
Outstanding 858,936; 857,960
and 873,608 shares 50,196 49,875 49,691
Additional paid-in capital 578,550 349,037 379,050
Retained earnings 3,500,643 3,121,360 2,626,800
Accumulated other comprehensive loss (20,887) (12,518) (16,980)
Deferred compensation (28,948) (31,675) (34,365)
Treasury stock, at cost (2,152,074) (1,902,400) (1,474,897)
Total Shareholders' Equity 1,927,480 1,573,679 1,529,299
Total Liabilities and Shareholders' Equity $4,678,583 $3,963,919 $3,583,149
See accompanying notes to condensed consolidated financial statements.
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except share and per share amounts)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
Net sales $ 2,453,339 $ 1,904,970 $ 4,731,073 $ 3,624,682
Costs and expenses
Cost of goods sold and occupancy expenses 1,443,545 1,135,165 2,777,700 2,166,169
Operating expenses 693,297 550,128 1,308,446 1,022,272
Net interest expense (income) 3,171 678 7,809 (463)
Earnings before income taxes 313,326 218,999 637,118 436,704
Income taxes 117,497 82,125 238,919 163,764
Net earnings $ 195,829 $ 136,874 $ 398,199 $ 272,940
Weighted average number of shares - basic 857,352,256 874,424,014 855,909,900 874,444,241
Weighted average number of shares - diluted 898,991,202 914,563,361 899,521,052 913,074,899
Earnings per share - basic $ 0.23 $ 0.16 $ 0.47 $ 0.31
Earnings per share - diluted $ 0.22 $ 0.15 $ 0.44 $ 0.30
Cash dividends per share $ 0.02 $ 0.02 $ 0.04 $ 0.04
See accompanying notes to condensed consolidated financial statements.
GAP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands) Twenty-six Weeks Ended
July 31, 1999 August 1, 1998
Cash Flows from Operating Activities:
Net earnings $ 398,199 $ 272,940
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 195,873 152,524
Tax benefit from exercise of stock options
and vesting of restricted stock 165,353 56,012
Changes in operating assets and liabilities:
Merchandise inventory (447,785) (371,397)
Other current assets (33,935) (5,858)
Accounts payable 58,989 115,212
Accrued expenses 6,826 196,461
Income taxes payable (81,521) (39,708)
Deferred lease credits and other current liabilities 32,543 18,248
Net cash provided by operating activities 294,542 394,434
Cash Flows from Investing Activities:
Net purchase of short-term investments (14,989) (29,532)
Net purchase of property and equipment (549,985) (349,025)
Acquisition of lease rights and other assets (19,521) (31,420)
Net cash used for investing activities (584,495) (409,977)
Cash Flows from Financing Activities:
Net increase in notes payable 328,516 10,761
Net issuance of long-term debt 49,710 -
Issuance of common stock 48,408 26,766
Net purchase of treasury stock (241,562) (379,860)
Cash dividends paid (37,963) (38,890)
Net cash provided by (used for) financing activities 147,109 (381,223)
Effect of exchange rate fluctuations on cash (1,455) (1,196)
Net decrease in cash and equivalents (144,299) (397,962)
Cash and equivalents at beginning of year 565,253 913,169
Cash and equivalents at end of quarter $ 420,954 $ 515,207
See accompanying notes to condensed consolidated financial statements.
GAP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheets as of July 31, 1999 and August 1,
1998 and the interim condensed consolidated statements of earnings for the
thirteen and twenty-six weeks ended July 31, 1999 and August 1, 1998 and
cash flows for the twenty-six week periods ended July 31, 1999 and August
1, 1998 have been prepared by the Company, without audit. In the opinion
of management, such statements include all adjustments (which include only
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows of the Company at
July 31, 1999 and August 1, 1998, and for all periods presented.
Certain information and disclosures normally included in the notes to the
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted from these interim financial
statements. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended January 30, 1999.
The condensed consolidated balance sheet as of January 30, 1999 was derived
from the Company's January 30, 1999 balance sheet included in the Company's
1998 Annual Report on Form 10-K.
The results of operations for the twenty-six weeks ended July 31, 1999 are
not necessarily indicative of the operating results that may be expected
for the year ending January 29, 2000.
2. THREE-FOR-TWO STOCK SPLIT
On May 20, 1999, the Company's Board of Directors authorized a three-for-
two stock split of its common stock which was distributed on June 21, 1999
in the form of a stock dividend for shareholders of record at the close of
business on June 4, 1999. All share and per share amounts in the
accompanying condensed consolidated financial statements for all periods
have been restated to reflect the stock split.
3. COMPREHENSIVE EARNINGS
Comprehensive earnings include net earnings and other comprehensive losses.
Other comprehensive losses include foreign currency translation
adjustments and fluctuations in the fair market value of certain financial
instruments. Comprehensive earnings for the thirteen and twenty-six weeks
ended July 31, 1999 and August 1, 1998 were as follows (in thousands):
Thirteen Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
Net earnings $195,829 $ 136,874 $398,199 $272,940
Other comprehensive losses (408) (4,258) (8,369) (1,750)
Comprehensive earnings $195,421 $ 132,616 $389,830 $271,190
4. EARNINGS PER SHARE
Under SFAS No. 128, the Company provides dual presentation of EPS on a
basic and diluted basis. The Company's granting of certain stock options
and restricted stock and issuance of certain put options resulted in
potential dilution of basic EPS. The following summarizes the effects of
the assumed issuance of dilutive securities on weighted-average shares for
basic EPS.
Thirteen Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
Weighted-average number of shares - basic 857,352,256 874,424,014 855,909,900 874,444,241
Incremental shares from assumed
issuance of:
Stock options 40,685,597 35,472,847 41,540,285 32,426,301
Restricted stock 941,906 4,666,500 2,052,413 6,204,357
Put options 11,443 - 18,454 -
Weighted-average number of shares - diluted 898,991,202 914,563,361 899,521,052 913,074,899
The number of incremental shares from the assumed issuance of stock options
and restricted stock is calculated applying the treasury stock method.
Excluded from the above computations of weighted-average shares for diluted
EPS were options to purchase 112,694 and 254,712 shares of common stock
during the thirteen and twenty-six weeks ended July 31, 1999, respectively,
and 1,692,891 and 3,009,051 shares during the thirteen and twenty-six weeks
ended August 1, 1998, respectively. Additionally, put options to repurchase
750,000 shares during the thirteen and twenty-six weeks ended July 31, 1999
were excluded from the above computations. Issuance or repurchase of these
securities would have resulted in an antidilutive effect on EPS.
5. LONG-TERM DEBT
During the first quarter of fiscal 1999, the Company's Japanese subsidiary
issued $50 million of 10-year debt securities at 6.25 percent fixed
interest rate. The Company swapped the cash flows payable under these debt
securities to Japanese yen with a fixed interest rate of 2.43 percent.
These debt securities are recorded in the balance sheet at their market
value as of July 31, 1999.
6. PUT OPTIONS
At the end of the second quarter of fiscal 1999, the Company was obligated
under various put option contracts that were issued during the second
quarter to repurchase up to 1,500,000 shares of the Company's stock. The
contracts have exercise prices ranging from $43.33 to $46.00 per share,
with expiration dates through January 2000.
Deloitte & Touche LLP
50 Fremont Street Telephone: (415) 783-4000
San Francisco, California 94105-2230 Facsimile: (415) 783-4329
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 July 31, 1999 and August 1, 1998
and the related condensed consolidated statements of earnings for the
thirteen-week and twenty-six week periods ended July 31, 1999 and August
1, 1998 and the condensed consolidated statement of cash flows for the
twenty-six week periods ended July 31, 1999 and August 1, 1998. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and of making inquiries of persons
responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The Gap, Inc. and
subsidiaries as of January 30, 1999, and the related consolidated
statements of earnings, shareholders' equity and cash flows for the year
then ended (not presented herein); and in our report dated February 25,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of January 30, 1999 is fairly
stated in all material respects, in relation to the consolidated balance
sheet from which it was derived.
/s/ Deloitte & Touche LLP
August 11, 1999
Deloitte Touche
Tohmatsu
GAP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information below contains certain forward-looking statements which
reflect the current view of Gap Inc. (the "Company") with respect to
future events and financial performance. Wherever used, the words
"expect," "plan," "anticipate," "believe," and similar expressions
identify forward-looking statements.
Any such forward-looking statements are subject to risks and
uncertainties and the Company's future results of operations could differ
materially from historical results or current expectations. Some of
these risks include, without limitation, ongoing competitive pressures in
the apparel industry, risks associated with challenging international
retail environments, changes in the level of consumer spending or
preferences in apparel, trade restrictions and political or financial
instability in countries where the Company's goods are manufactured,
disruption to operations from Year 2000 issues, and/or other factors that
may be described in the Company's Annual Report on Form 10-K and/or other
filings with the Securities and Exchange Commission. Future economic and
industry trends that could potentially impact revenues and profitability
are difficult to predict.
It is suggested that this document be read in conjunction with the
Management's Discussion and Analysis included in the Company's Annual
Report on Form 10-K for the year ended January 30, 1999.
The Company does not undertake to publicly update or revise its forward-
looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be
realized.
RESULTS OF OPERATIONS
Net Sales
Thirteen Weeks Ended Twenty-six Weeks Ended
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
Net sales ($000) $2,453,339 $1,904,970 $4,731,073 $3,624,682
Total net sales growth percentage 29 42 31 41
Comparable store sales growth percentage 8 19 10 18
Net sales per average square foot $123 $116 $242 $225
Square footage of gross store space -
at end of period (000) 20,391 16,799
Number of Stores:
Beginning of Year 2,428 2,130
New stores 188 147
Expanded stores(1) 36 73
Closed stores (5) (5)
End of Period 2,611 2,272
(1) Expanded stores do not change store count.
The increases in net sales for the second quarter and first half of 1999
over the same periods last year were primarily attributable to the
increase in retail selling space through the opening of new stores (net
of stores closed) and the expansion of existing stores. Additionally, the
increase in comparable store sales also contributed to net sales growth
for both periods.
The increases in net sales per average square foot for the second quarter
and first half of 1999 were primarily attributable to increases in
comparable store sales.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased 0.8 and 1.1 percentage points in the second quarter and first
half of 1999, respectively, from the same periods in 1998. The
improvements were driven by decreases in occupancy expenses as a
percentage of net sales. For the first half of 1999, the improvement in
occupancy expenses was slightly offset by a decrease in the merchandise
margin as a percentage of net sales.
For both the second quarter and first half of 1999, the decreases in
occupancy expenses as a percentage of net sales were primarily
attributable to new real estate initiatives to reduce occupancy expenses,
changes in the mix of stores toward larger, more cost effective stores
and leverage achieved from the increases in comparable store sales. The
decrease in the merchandise margin as a percentage of net sales for the
first half of 1999 was primarily attributable to a greater percentage of
merchandise sold at markdown when compared to the same period last year.
As a general business practice, the Company reviews its inventory levels
in order to identify slow-moving merchandise and broken assortments
(items no longer in stock in a sufficient range of sizes) and uses
markdowns to clear merchandise. Such markdowns may have an adverse
impact on earnings, depending upon the extent of the markdowns and amount
of inventory affected.
Operating Expenses
Operating expenses as a percentage of net sales decreased 0.6 percentage
points for the second quarter over the prior year primarily due to the
timing of advertising campaigns. Operating expenses as a percentage of
net sales decreased 0.5 percentage points for the first half of 1999 due
to lower overhead expenses as a percentage of net sales partially offset
by higher advertising and marketing costs as a percentage of net sales as
a part of the Company's brand development efforts.
Net Interest Expense (Income)
Net interest expense increased in the second quarter and first half of
1999 over the comparable prior year periods primarily due to lower
interest income resulting from a decrease in cash available for
investment.
Income Taxes
The effective tax rate was 37.5 percent for the thirteen and twenty-six
weeks ended July 31, 1999 and August 1, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Twenty-six Weeks Ended
July 31, 1999 August 1, 1998
Cash provided by operating activities ($000) $299,687 $394,434
Working capital ($000) $378,478 $569,041
Current ratio 1.21:1 1.45:1
For the twenty-six weeks ended July 31, 1999, the decrease in cash flows
provided by operating activities, compared to the same period in the
prior year, was primarily attributable to a decrease in accrued expenses
and an increase in merchandise inventory partially offset by an increase
in net earnings and an increase in the tax benefit from the vesting of a
large restricted stock grant.
The Company funds inventory expenditures during normal and peak periods
through a combination of cash flows provided by operations and short-term
financing arrangements. The Company's business follows a seasonal
pattern, peaking over a total of about ten to thirteen weeks during the
Back-to-School and Holiday periods.
The Company has committed credit facilities totaling $1 billion,
consisting of an $850 million, 364-day revolving credit facility, and a
$150 million, 5-year revolving credit facility through June 28, 2003.
These credit facilities provide for the issuance of up to $500 million in
letters of credit. The Company has additional uncommitted credit
facilities of $460 million for the issuance of letters of credit. At
July 31, 1999, the Company had outstanding letters of credit of
approximately $895 million. The credit facilities also provide backup
for the Company's $500 million commercial paper program. The Company had
$300 million of commercial paper outstanding at July 31, 1999.
To provide financial flexibility, the Company filed a shelf registration
statement in January 1999 with the Securities and Exchange Commission for
$500 million of debt securities. The net proceeds from any issuance are
expected to be used for general corporate purposes, including expansion
of stores, distribution centers and headquarters facilities, brand
investment, development of additional distribution channels and
repurchases of the Company's common stock pursuant to its ongoing
repurchase program. The Company has not issued any debt under this
registration statement and no assurances can be given that the Company
will issue any debt under this registration statement.
During the first quarter of fiscal 1999, the Company's Japanese
subsidiary issued $50 million of 10-year debt securities. The net
proceeds are intended to be used for general corporate purposes. The
cash flows relating to the bonds were swapped for the equivalent amounts
in Japanese yen to minimize currency exposure.
For the twenty-six weeks ended July 31, 1999, capital expenditures, net
of construction allowances and dispositions, totaled approximately $528
million. These expenditures were used to expand the Company's store base
and distribution facilities. During the first half of 1999, the Company
experienced a net increase in store space of approximately 1,634,000
square feet, or 9 percent, due to the addition of 188 new stores, the
expansion of 36 stores and the remodeling of certain stores.
For 1999, the Company expects capital expenditures to exceed $1 billion,
net of construction allowances. This represents the addition of 400 to
470 new stores, the expansion of approximately 100 to 110 stores, the
remodeling of certain stores, as well as amounts for headquarters
facilities, distribution centers and equipment. The Company expects to
fund such capital expenditures with cash flow from operations and other
sources of financing. Square footage growth is expected to be in excess
of 20 percent before store closings. New stores are generally expected
to be leased.
During 1998, the Company purchased land on which to construct additional
headquarter facilities in San Francisco and San Bruno, California. The
estimated total project costs are approximately $240 million and $100
million, respectively. Construction commenced on the San Francisco
facility during the third quarter of 1998 and is estimated to continue
through late 2001. Construction commenced during the first quarter of
1999 for the San Bruno facility and is estimated to continue through late
2000.
During second quarter of 1999, the Company opened a distribution center
that was constructed over fiscal 1997 and 1998 for a total cost of
approximately $60 million. During the second quarter of 1999, the
Company commenced construction of a $55 million expansion of this
distribution center which is expected to be complete in mid-2000.
Additionally during 1999, the Company commenced construction on three
additional distribution facilities for an estimated total cost of
approximately $300 million. Approximately half of these expenditures
will be incurred during fiscal 1999, with the remainder incurred during
fiscal 2000. These expenditures are included in the projected capital
expenditures as described above. The first facility opened in the second
quarter of 1999. The remaining two facilities are expected to open in
the first quarter of 2000 and third quarter of 2000, respectively.
On May 20, 1999, the Company's Board of Directors authorized a three-for-
two stock split of the Company's common stock that was distributed on
June 21, 1999 in the form of a stock dividend for shareholders of record
at the close of business on June 4, 1999. All share and per share
amounts below and in the accompanying condensed consolidated financial
statements for all periods have been restated to reflect the stock split.
During the first quarter of 1999, the Company completed a 101 million
share repurchase program approved in October 1996 by acquiring
approximately 2.1 million shares for approximately $94 million. In
addition, in the first half of 1999, under the 67.5 million share
repurchase program approved in October 1998, the Company acquired
approximately 3.9 million shares for approximately $164 million.
During the second quarter, the Company issued put option contracts to
repurchase up to 1,500,000 shares of the Company's stock. The contracts
have exercise prices ranging from $43.33 to $46.00 per share, with
expiration dates through January 2000.
The Company operates in foreign countries which exposes it to market
risk associated with foreign currency exchange rate fluctuations. The
Company's risk management policy is to hedge substantially all
merchandise purchases for foreign operations through the use of foreign
exchange forward contracts to minimize this risk.
YEAR 2000 ISSUE
The Year 2000 issue is primarily the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such
computer systems may be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to a
disruption in the operation of such systems. In 1996, the Company
established a project team to coordinate and address Year 2000 issues.
The team has focused its efforts on three areas: (1) information systems
software and hardware; (2) facilities and distribution equipment and (3)
third-party relationships.
The Program. The Company adopted a five-phase Year 2000 program
consisting of: Phase I-identification and ranking of the components of
the Company's systems, equipment and suppliers that may be vulnerable to
Year 2000 problems; Phase II-assessment of items identified in Phase I;
Phase III-remediation or replacement of non-compliant systems and
components and determination of solutions for non-compliant suppliers;
Phase IV-testing of systems and components following remediation and
Phase V-developing contingency plans to address the most reasonably
likely worst case Year 2000 scenarios. The Company has completed Phases
I and II, is substantially complete with Phase III, and expects to
complete Phase IV by December 1999 and Phase V by the end of the third
quarter of 1999.
Information Systems Software and Hardware. The Company has completed
Phase III, with the exception of the Company's human resources
administration system and systems that support the Company's on-line and
catalog support division. Phase IV testing is being conducted
concurrently with Phase III activities. Management believes that the
Company will complete all remediation, certification testing and
implementation of the systems identified above by November 1999, and
integration testing by December 1999. Phase V contingency planning has
begun and is expected to be completed by the end of the third quarter of
1999.
Facilities and Distribution Equipment. The Company has completed Phase
III and Phase IV; Phase V contingency planning is expected to be
completed by the end of the third quarter of 1999.
Third-Party Relationships. Some suppliers and vendors that provide
critical products and services have not confirmed their Year-2000
readiness to the Company. As a result, the Company is in the process of
developing contingency plans to mitigate this risk. The plans include
addressing problems encountered in the supply chain, substitution of
vendors where possible and work-arounds for loss of important services.
Phase V contingency planning is expected to be completed by the end of
the third quarter of 1999.
Risks / Contingency Plans. Based on the assessment efforts to date, the
Company does not believe that the Year 2000 issue will have a material
adverse effect on its financial condition or results of operations. The
Company operates a large number of geographically dispersed stores and
has a large supplier base and believes that these factors will mitigate
any adverse impact. The Company's beliefs and expectations, however, are
based on certain assumptions and expectations that ultimately may prove
to be inaccurate, including the Year 2000 viability of sourcing
countries, and compliance of individual third party vendors and
suppliers.
The Company has identified that a significant disruption in the product
supply chain represents the most reasonably likely worst case Year 2000
scenario. Potential sources of risk include (a) the inability of
principal suppliers or logistics providers to be Year 2000-ready, which
could result in delays in product deliveries from such suppliers or
logistics providers and (b) disruption of the distribution channel,
including ports, transportation vendors, and the Company's own
distribution centers as a result of a general failure of systems and
necessary infrastructure such as electricity supply. The Company plans
to flow inventory around an assumed period of disruption to the supply
chain, which will include accelerating delivery of selected critical
products in advance of January 2000. However, a substantial, extended
disruption in the product supply chain could have a material adverse
effect on the Company's financial condition and results of operations.
The Company does not expect the costs associated with its Year 2000
program to be material. Since the inception of the program, the Company
has incurred $26 million through July 31, 1999 to address the Year 2000
issue. The Company estimates that the total costs for the Year 2000
program will be approximately $50 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk of the Company's financial instruments as of July 31,
1999 has not significantly changed since January 30, 1999 with the
exception of the issuance of $50 million of long-term debt during the
first quarter. The Company's Japanese subsidiary issued $50 million of
10-year debt securities during the first quarter with a fixed interest
rate of 6.25 percent payable in US dollars. The Company swapped the cash
flows payable under these debt securities to Japanese yen with a fixed
interest rate of 2.43 percent. These debt securities are recorded in the
balance sheet at their market value as of July 31, 1999.
The market risk profile of the Company on January 30, 1999 is disclosed
in the Company's 1998 Annual Report on Form 10-K.
The net change in unrealized losses since January 30, 1999 for the
Company's foreign exchange contracts and long-term debt was an unrealized
gain of $13 million.
PART II
OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders (as
reported on a post June 21, 1999 split basis)
a) On May 4, 1999 the Annual Meeting of Shareholders of the
Company was held in San Francisco, California. There were 859,421,899
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 749,648,271 2,167,776
Evan S. Dobelle 734,478,447 8,337,600
Millard S. Drexler 749,648,308 2,167,738
Donald G. Fisher 749,646,411 2,169,636
Doris F. Fisher 745,496,238 6,319,809
Robert J. Fisher 749,645,997 2,170,050
Glenda A. Hatchett 743,474,472 8,341,575
John M. Lillie 749,651,620 2,164,426
Charles R. Schwab 749,647,708 2,168,338
Brooks Walker, Jr. 749,621,884 2,194,162
Sergio Zyman 749,649,204 2,166,843
There were no abstentions and no broker non-votes.
c) The amendment to the Amended and Restated Certificate of
Incorporation to increase the authorized number of shares of Common Stock
was approved with 707,333,002 votes in favor and 43,109,461 against.
There were 1,373,583 abstentions.
d) The Executive Long-Term Cash Award Performance Plan was
approved with 742,856,188 votes in favor and 6,735,421 against.
There were 2,224,437 abstentions.
e) The selection of Deloitte & Touche, LLP as independent
auditors for the fiscal year ending January 29, 2000 was ratified with
749,877,150 votes in favor and 291,181 against.
There were 1,647,715 abstentions.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10.1) Amended and Restated Credit Agreement, dated as
of June 29, 1999 among The Gap, Inc., Citibank, N.A. Bank of
America National Trust and Savings Association, HSBC Bank
USA and Morgan Guaranty Trust Company of New York, Salomon
Smith Barney Inc., and Citicorp USA Inc.
(10.2) Employment arrangement, dated July 6, 1999, between
Registrant and Heidi Kunz
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
b) The Company did not file any reports on Form 8-K during the
three months ended July 31, 1999.
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 10, 1999 By /s/ Heidi Kunz
Heidi Kunz
Chief Financial Officer
(Principal financial officer of the registrant)
Date: September 10, 1999 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief Executive Officer
EXHIBIT INDEX
(10.1) Amended and Restated Credit Agreement, dated as of June
29, 1999 among The Gap, Inc., Citibank, N.A., Bank of America
National Trust and Savings Association, HSBC Bank USA and Morgan
Guaranty Trust Company of New York, Salomon Smith Barney Inc., and
Citicorp USA Inc.
(10.2) Employment arrangement, dated July 6, 1999, between
Registrant and Heidi Kunz
(15) Letter re: Unaudited Interim Financial
Information
(27) Financial Data Schedule