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 October 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from ______________
to ______________
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Harrison
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 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, 850,895,349 shares as of November 27, 1999
GAP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)
October 30, January 30, October 31,
1999 1999 1998
ASSETS
Current Assets:
Cash and equivalents $ 485,680 $ 565,253 $ 271,518
Merchandise inventory 1,825,038 1,056,444 1,374,916
Other current assets 306,567 250,127 195,013
Total Current Assets 2,617,285 1,871,824 1,841,447
Property and equipment, net 2,473,509 1,876,370 1,748,840
Lease rights and other assets 254,530 215,725 164,474
Total Assets $5,345,324 $3,963,919 $3,754,761
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 636,534 $ 90,690 $ 526,428
Accounts payable 725,635 684,130 536,408
Accrued expenses and other 720,056 655,770 582,714
current liabilities
Income taxes payable 141,353 122,513 42,008
Total Current Liabilities 2,223,578 1,553,103 1,687,558
Long-Term Liabilities:
Long-term debt 808,937 496,455 496,352
Deferred lease credits and 394,684 340,682 314,855
other liabilities
Total Long-Term Liabilities 1,203,621 837,137 811,207
Shareholders' Equity:
Common stock $.05 par value
Authorized 2,300,000 shares
Issued 1,004,527; 997,496
and 995,232 shares
Outstanding 850,868; 857,960
and 855,074 shares 50,226 49,875 49,762
Additional paid-in capital 594,740 349,037 402,383
Retained earnings 3,796,656 3,121,360 2,845,441
Accumulated other comprehensive loss (24,347) (12,518) (11,298)
Deferred compensation (28,243) (31,675) (35,874)
Treasury stock, at cost (2,470,907) (1,902,400) (1,994,418)
Total Shareholders' Equity 1,918,125 1,573,679 1,255,996
Total Liabilities and $5,345,324 $3,963,919 $3,754,761
Shareholders' Equity
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 Thirty-nine Weeks Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
Net sales $ 3,045,386 $ 2,399,948 $ 7,776,459 $ 6,024,630
Costs and expenses
Cost of goods sold and
occupancy expenses 1,741,098 1,376,005 4,518,798 3,542,174
Operating expenses 797,642 636,745 2,106,088 1,659,017
Net interest expense 10,557 6,800 18,366 6,337
Earnings before income taxes 496,089 380,398 1,133,207 817,102
Income taxes 181,072 142,649 419,991 306,413
Net earnings $ 315,017 $ 237,749 $ 713,216 $ 510,689
Weighted average number of shares - basic 853,705,825 856,978,247 855,187,459 868,620,967
Weighted average number of shares - diluted 891,325,345 896,147,120 897,271,042 907,609,865
Earnings per share - basic $ 0.37 $ 0.28 $ 0.83 $ 0.59
Earnings per share - diluted $ 0.35 $ 0.27 $ 0.79 $ 0.56
Cash dividends per share $ 0.02 $ 0.02 $ 0.07(a) $ 0.07
See accompanying notes to condensed consolidated financial statements.
(a) Includes a dividend of $.02 per share declared in January 1999 but paid
in the first quarter of fiscal 1999.
GAP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands) Thirty-nine Weeks Ended
October 30, October 31,
1999 1998
Cash Flows from Operating Activities:
Net earnings $ 713,216 $ 510,689
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 302,495 236,413
Tax benefit from exercise of stock options
and vesting of restricted stock 172,696 67,018
Changes in operating assets and liabilities:
Merchandise inventory (765,060) (641,672)
Other current assets (55,836) (13,636)
Accounts payable 34,633 120,690
Accrued expenses and other 57,286 179,922
Income taxes payable 19,445 (41,742)
Deferred lease credits and other liabilities 42,360 37,404
Net cash provided by operating activities 521,235 455,086
Cash Flows from Investing Activities:
Net purchase of property and equipment (865,751) (591,056)
Acquisition of lease rights and other assets (39,942) (20,474)
Net cash used for investing activities (905,693) (611,530)
Cash Flows from Financing Activities:
Net increase in notes payable 547,253 438,393
Net issuance of long-term debt 311,839
Issuance of common stock 52,800 32,462
Net purchase of treasury stock (560,394) (899,382)
Cash dividends paid (56,967) (57,998)
Net cash provided by (used for) financing activities 294,531 (486,525)
Effect of exchange rate fluctuations on cash 10,354 1,318
Net decrease in cash and equivalents (79,573) (641,651)
Cash and equivalents at beginning of year 565,253 913,169
Cash and equivalents at end of quarter $485,680 $271,518
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 October 30, 1999 and
October 31, 1998 and the interim condensed consolidated statements of
earnings for the thirteen and thirty-nine weeks ended October 30, 1999 and
October 31, 1998 and cash flows for the thirty-nine weeks ended October 30,
1999 and October 31, 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 October 30, 1999 and October 31, 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. These condensed consolidated financial statements should 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 thirty-nine weeks ended October 30, 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)
earnings. Other comprehensive (losses) earnings include foreign currency
translation adjustments and fluctuations in the fair market value of certain
financial instruments. Comprehensive earnings for the thirteen and thirty-
nine weeks ended October 30, 1999 and October 31, 1998 were as follows (in
thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
Net earnings $315,017 $237,749 $713,216 $510,689
Other comprehensive (losses) (3,460) 5,682 (11,829) 3,932
earnings
Comprehensive earnings $311,557 $243,431 $701,387 $514,621
4. EARNINGS PER SHARE
Basic earnings per share is 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 the Company's potentially
dilutive securities, which include certain stock options, unvested shares
of restricted stock, and certain put options. The following summarizes the
incremental shares from these potentially dilutive securities, calculated
using the treasury stock method.
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
Weighted-average number of shares - basic 853,705,825 856,978,247 855,187,459 868,620,967
Incremental shares resulting from:
Stock options 36,650,564 34,564,163 40,393,299 33,369,320
Restricted stock 809,735 4,604,710 1,646,136 5,619,578
Put options 159,221 - 44,148 -
Weighted-average number of shares - diluted 891,325,345 896,147,120 897,271,042 907,609,865
Excluded from the above computations of weighted-average shares for diluted
earnings per share were options to purchase 10,276,234 and 6,613,448 shares of
common stock during the thirteen and thirty-nine weeks ended October 30, 1999,
respectively, and 2,988,498 and 3,351,126 shares during the thirteen and thirty-
nine weeks ended October 31, 1998, respectively. Additionally, put options to
repurchase 375,000 shares during the thirteen and thirty-nine weeks ended
October 30, 1999 were excluded from the above computations. Issuance or
repurchase of these securities would have resulted in an antidilutive effect
on earnings per share.
5.LONG-TERM DEBT
During the first quarter of fiscal 1999, the Company's Japanese subsidiary, Gap
(Japan) KK, 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
October 30, 1999.
During the third quarter of fiscal 1999, the Company's Netherlands subsidiary,
Gap International B.V., issued five-year debt securities in the amount of 250
million Euro, approximately $262 million, at 5.00 percent fixed interest rate,
due September 30, 2004.
6.PUT OPTIONS
During the third quarter of fiscal 1999, the Company repurchased 750,000 shares
under put options contracts for approximately $32 million.
At the end of the third quarter of fiscal 1999, the Company was obligated under
various put option contracts to repurchase up to 1,125,000 shares of the
Company's stock. The contracts have exercise prices ranging from $32.00 to
$46.00 per share, with expiration dates through March 2000.
Deloitte & Touche LLP
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
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 October 30, 1999 and October 31, 1998 and the
related condensed consolidated statements of earnings for the thirteen-week and
thirty-nine week periods ended October 30, 1999 and October 31, 1998 and the
condensed consolidated statement of cash flows for the thirty-nine week periods
ended October 30, 1999 and October 31, 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
November 9, 1999
Deloitte Touche
Tohmatsu
International
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 assumes no obligation 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 Thirty-nine Weeks Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
Net sales ($000) $3,045,386 $2,399,948 $7,776,459 $6,024,630
Total net sales
growth percentage 27 36 29 39
Comparable store sales
growth percentage 5 13 8 16
Net sales per average
square foot $141 $138 $382 $366
Square footage of gross
store space - at end
of period (000) 22,721 17,858
Number of Stores:
Beginning of Year 2,428 2,130
New stores 392 224
Expanded stores(1) 76 103
Closed stores 11 10
End of Period 2,809 2,344
(1) Expanded stores do not change store count.
Store count and square footage growth is as follows:
October 30, 1999 October 31, 1998
Number of Sq. Ft Number of Sq. Ft.
Stores (millions) Stores (millions)
Gap(2) 1,233 8.7 1,083 7.6
GapKids(3) 752 3.1 616 2.6
Banana Republic(4) 329 2.4 281 1.9
Old Navy 495 8.5 364 5.8
Total 2,809 22.7 2,344 17.9
Year-to-Year Increase 20% 27% 13% 22%
(2) Includes 198 and 154 stores in Canada, Europe and Japan in 1999 and
1998, respectively.
(3) Includes 157 and 124 stores in Canada, Europe and Japan in 1999
and 1998, respectively.
(4) Includes 10 and 9 stores in Canada in 1999 and 1998, respectively.
The increases in net sales for the third quarter and year-to-date 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 third quarter and
year-to-date 1999 were primarily attributable to increases in comparable store
sales.
The Company's third quarter domestic comparable store sales by division were as
follows: Gap stores turned in a negative low-single digit versus a positive
high-single digit last year, GapKids was flat versus a positive low-single
digit last year, Banana Republic had a positive high-single digit versus
positive mid-teens last year, and Old Navy turned in positive low-teens versus
positive low-twenties last year.
The Company's year-to-date domestic comparable store sales by division were as
follows: Gap stores turned in a negative low-single digit versus positive mid-
teens last year, GapKids was flat versus a positive mid-single digit last
year, Banana Republic had positive low-teens versus positive mid-teens last
year, and Old Navy turned in positive high-teens versus positive low-twenties
last year.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased 0.1 and 0.7 percentage points in the third quarter and year-to-date
1999, respectively, from the same periods in 1998. The improvements were
primarily driven by decreases in occupancy expenses as a percentage of net
sales.
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 as Old Navy becomes a larger part of the business
and leverage achieved from the increases in comparable store sales.
Operating Expenses
Operating expenses as a percentage of net sales decreased 0.3 and 0.4
percentage points in the third quarter and year-to-date 1999, respectively,
from the same periods in 1998. The improvements were primarily 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.
Income Taxes
The effective tax rate was 36.5 percent and 37.1 percent for the third quarter
and year-to-date 1999, respectively, and 37.5 percent for the third quarter and
year-to-date 1998. The decrease in the tax rate resulted from the Company's
implementation of global tax planning initiatives based on long-term business
needs.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirty-nine Weeks Ended
October 30, 1999 October 31, 1998
Cash provided by operating activities ($000) $521,235 $455,086
Working capital ($000) 393,707 153,889
Current ratio 1.18:1 1.09:1
For the thirty-nine weeks ended October 30, 1999, the increase in cash flows
provided by operating activities, compared to the same period in the prior
year, was primarily attributable to the increase in net income and tax benefit
from the vesting of a large restricted stock grant partially offset by an
increase in merchandise inventory and a decrease in the relative growth in
accounts payable and accrued expenses compared to the same period in the prior
year.
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 and provide
backup to the Company's $500 million commercial paper program. The Company has
additional uncommitted credit facilities of $520 million for the issuance of
letters of credit. At October 30, 1999, the Company had outstanding letters of
credit of approximately $814 million. The Company had $430 million of
commercial paper outstanding at October 30, 1999. Separately, the Company had
$70 million of extendible commercial notes outstanding at October 30, 1999.
To provide financial flexibility, the Company filed a shelf registration
statement in January 1999 with the Securities and Exchange Commission for $500
million of debt securities. The net proceeds from any issuance are expected to
be used for general corporate purposes, including expansion of stores,
distribution centers and headquarters facilities, brand investment, development
of additional distribution channels and repurchases of the Company's common
stock pursuant to its ongoing repurchase program. 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, Gap
(Japan) KK, 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.
During the third quarter of fiscal 1999, the Company's Netherlands subsidiary,
Gap International B.V., issued five-year debt securities in the amount of 250
million Euro, approximately $262 million. The net proceeds will be used to
support the Company's international expansion plans.
For the thirty-nine weeks ended October 30, 1999, capital expenditures, net of
construction allowances and dispositions, totaled approximately $839 million.
These expenditures were used to expand the Company's store base and headquarter
and distribution facilities. For year-to-date 1999, the Company experienced a
net increase in store space of approximately 3,964,000 square feet, or 21
percent, due to the addition of 392 new stores, the expansion of 76 stores and
the remodeling of certain stores.
For 1999, the Company expects capital expenditures to be approximately $1.2
billion, net of construction allowances. This represents the addition of
approximately 500 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 the high-twenty percent
range before store closings. New stores are generally expected to be leased.
By division, the new stores are expected to be: Gap (including GapKids) more
than 250 stores, Banana Republic 50 to 60 stores, Old Navy 110 to 120 stores,
and International 80 to 100 stores.
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.
The Company plans to open approximately 550 to 600 new stores during fiscal
2000 and expects square footage growth in the mid-twenty percent range. By
division, the new stores are expected to be: Gap (including GapKids) 270 to
290 stores, Banana Republic 40 to 60 stores, Old Navy 110 to 120 stores, and
International 120 to 130 stores. New stores are generally expected to be
leased. The Company expects to fund such capital expenditures with cash flow
from operations and other sources of financing.
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 nine
months of 1999, under the 67.5 million share repurchase program approved in
October 1998, the Company acquired approximately 12.6 million shares for
approximately $483 million, including 750,000 shares acquired under put option
contracts for approximately $32 million.
At the end of the third quarter of fiscal 1999, the Company had outstanding put
option contracts to repurchase up to 1,125,000 shares of the Company's stock.
The contracts have exercise prices ranging from $32.00 to $46.00 per share,
with expiration dates through March 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 US dollar denominated
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 through III and Phase V, and expects to complete Phase
IV by December 1999.
Information Systems Software and Hardware. The Company has completed Phase III
for all critical computer systems. Phase IV testing was conducted concurrently
with Phase III activities and is still ongoing. Integration testing is expected
to be completed by December 1999. Phase V, critical computer system contingency
planning, has been completed. Remaining contingency planning activities will
address limited electronic vendor interfaces, which are not deemed to be
critical to the Company's internal operations, and are expected to be
completed by the end of December 1999.
Facilities and Distribution Equipment. The Company has completed Phase V
contingency planning. All critical activities for Facilities and Distribution
have been completed for Year 2000.
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 has completed the development of contingency
plans to mitigate this risk. These plans address potential problems that might
be experienced in the supply chain including substitution of vendors where
possible and work-arounds for the loss of important services.
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 $32
million through October 30, 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 October 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 and 250
million Euro debt securities during the third quarter.
The Company's Japanese subsidiary, Gap (Japan) KK, 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 October 31, 1999.
The Company's Netherlands subsidiary, Gap International B.V., issued five-year
debt securities in the amount of 250 million Euro, approximately $262 million,
with a fixed interest rate of 5.0 percent, due September 30, 2004
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 the fair value of the Company's foreign exchange contracts
and long-term debt since January 30, 1999 was a decrease of $57 million.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(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 October 30, 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: December 10, 1999 By /s/ Heidi Kunz
Heidi Kunz
Chief Financial Officer
(Principal financial officer of the
registrant)
Date: December 10, 1999 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief Executive Officer
EXHIBIT INDEX
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule