10-YEAR SELECTED FINANCIAL DATA
Compound Annual
Growth Rate Fiscal Year (in weeks)
- -------------------------------------------------------------------------------------------------------------------
3-year 5-year 10-year 2000 (53) 1999 (52) 1998 (52) 1997 (52)
- -------------------------------------------------------------------------------------------------------------------
Operating Results ($000)
Net sales 28% 25% 22% $ 13,673,460 $ 11,635,398 $ 9,054,462 $ 6,507,825
Cost of goods sold and
occupancy expenses,
excluding depreciation and
amortization -- -- - 8,025,374 6,360,704 5,013,473 3,775,957
Percentage of net sales -- -- - 58.7% 54.7% 55.4% 58.0%
Depreciation and
amortization (a) -- -- - $ 574,068 $ 414,558 $ 304,745 $ 245,584
Operating expenses -- -- - 3,629,257 3,043,432 2,403,365 1,635,017
Net interest expense
(income) -- -- - 62,876 31,755 13,617 (2,975)
Earnings before income
taxes 17 19 19 1,381,885 1,784,949 1,319,262 854,242
Percentage of net sales -- -- - 10.1% 15.3% 14.6% 13.1%
Income taxes -- -- - $ 504,388 $ 657,884 $ 494,723 $ 320,341
Net earnings 18 20 20 877,497 1,127,065 824,539 533,901
Percentage of net sales -- -- - 6.4% 9.7% 9.1% 8.2%
Cash dividends paid -- -- - $ 75,488 $ 75,795 $ 76,888 $ 79,503
Net purchase of property
and equipment,
including lease rights -- -- - 1,881,127 1,268,811 842,655 483,114
Per Share Data
Net earnings-basic 20% 22% 20% $ 1.03 $ 1.32 $ 0.95 $ 0.60
Net earnings-diluted 20 22 21 1.00 1.26 0.91 0.58
Cash dividends paid (b) -- -- - 0.09 0.09 0.09 0.09
Shareholders' equity (book
value) -- -- - 3.43 2.63 1.83 1.79
Financial Position ($000)
Property and equipment, net 43% 33% 26% $ 4,007,685 $ 2,715,315 $ 1,876,370 $ 1,365,246
Merchandise inventory 37 32 23 1,904,153 1,462,045 1,056,444 733,174
Total assets 28 25 25 7,012,908 5,188,756 3,963,919 3,337,502
Working capital -- -- - (151,094) 444,911 318,721 839,399
Current ratio -- -- - 0.95:1 1.25:1 1.21:1 1.85:1
Total long-term debt, less
current installments -- -- - $ 780,246 $ 784,925 $ 496,455 $ 496,044
Ratio of long-term debt to
shareholders' equity (c) -- -- - 0.35:1 0.35:1 0.32:1 0.31:1
Shareholders' equity -- -- - $ 2,928,239 $ 2,233,045 $ 1,573,679 $ 1,583,986
Return on average assets -- -- - 14.4% 24.6% 22.6% 17.9%
Return on average
shareholders' equity -- -- - 34.0% 59.2% 52.2% 33.0%
Statistics
Number of stores opened 35% 27% 17% 731 570 356 298
Number of stores expanded -- -- - 268 129 135 98
Number of stores closed -- -- - 73 18 20 22
Number of stores open at
year-end 20 17 13 3,676 3,018 2,466 2,130
Net increase in number of
stores -- -- - 22% 22% 16% 15%
Comparable store sales
(decrease) increase
percentage (52-week basis) -- -- - (5%) 7% 17% 6%
Sales per square foot
(52-week basis)(d) -- -- - $ 482 $ 548 $ 532 $ 463
Square footage of gross
store space at year-end 27 23 21 31,373,400 23,978,100 18,757,400 15,312,700
Percentage increase in
square feet -- -- - 31% 28% 22% 21%
Number of employees at
year-end 27 23 20 166,000 140,000 111,000 81,000
Weighted-average number of
shares-basic -- -- - 849,810,658 853,804,924 864,062,060 891,404,945
Weighted-average number of
shares-diluted -- -- - 879,137,194 895,029,176 904,374,383 922,951,706
Number of shares
outstanding at year-end,
net of treasury stock -- -- - 853,996,984 850,498,941 857,960,032 884,549,313
(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Excludes a dividend of $.0222 per share declared in January 2001 but paid
in the first quarter of fiscal 2001.
(c) Long-term debt includes current installments.
(d) Based on weighted-average gross square footage.
14
Fiscal Year (in weeks)
- --------------------------------------------------------------------------------------------------------------------
1996 (52) 1995 (53) 1994 (52) 1993 (52) 1992 (52) 1991 (52)
- --------------------------------------------------------------------------------------------------------------------
Operating Results ($000)
Net sales $ 5,284,381 $ 4,395,253 $ 3,722,940 $ 3,295,679 $ 2,960,409 $ 2,518,893
Cost of goods sold and
occupancy expenses,
excluding depreciation and
amortization 3,093,709 2,645,736 2,202,133 1,996,929 1,856,102 1,496,156
Percentage of net sales 58.5% 60.2% 59.2% 60.6% 62.7% 59.4%
Depreciation and
amortization (a) $ 191,457 $ 175,719 $ 148,863 $ 124,860 $ 99,451 $ 72,765
Operating expenses 1,270,138 1,004,396 853,524 748,193 661,252 575,686
Net interest expense
(income) (19,450) (15,797) (10,902) 809 3,763 3,523
Earnings before income
taxes 748,527 585,199 529,322 424,888 339,841 370,763
Percentage of net sales 14.2% 13.3% 14.2% 12.9% 11.5% 14.7%
Income taxes $ 295,668 $ 231,160 $ 209,082 $ 166,464 $ 129,140 $ 140,890
Net earnings 452,859 354,039 320,240 258,424 210,701 229,873
Percentage of net sales 8.6% 8.1% 8.6% 7.8% 7.1% 9.1%
Cash dividends paid $ 83,854 $ 66,993 $ 64,775 $ 53,041 $ 44,106 $ 41,126
Net purchase of property
and equipment,
including lease rights 375,838 309,599 236,616 215,856 213,659 244,323
Per Share Data
Net earnings-basic $ 0.48 $ 0.38 $ 0.34 $ 0.27 $ 0.23 $ 0.25
Net earnings-diluted 0.47 0.37 0.33 0.27 0.22 0.24
Cash dividends paid (b) 0.09 0.07 0.07 0.05 0.05 0.04
Shareholders' equity (book
value) 1.79 1.69 1.41 1.15 0.91 0.71
Financial Position ($000)
Property and equipment, net $ 1,135,720 $ 957,752 $ 828,777 $ 740,422 $ 650,368 $ 547,740
Merchandise inventory 578,765 482,575 370,638 331,155 365,692 313,899
Total assets 2,626,927 2,343,068 2,004,244 1,763,117 1,379,248 1,147,414
Working capital 554,359 728,301 555,827 494,194 355,649 235,537
Current ratio 1.72:1 2.32:1 2.11:1 2.07:1 2.06:1 1.71:1
Total long-term debt, less
current installments -- -- -- $ 75,000 $ 75,000 $ 80,000
Ratio of long-term debt to
shareholders' equity (c) N/A N/A N/A 0.07:1 0.08:1 0.12:1
Shareholders' equity $ 1,654,470 $ 1,640,473 $ 1,375,232 $ 1,126,475 $ 887,839 $ 677,788
Return on average assets 18.2% 16.3% 17.0% 16.4% 16.7% 23.9%
Return on average
shareholders' equity 27.5% 23.5% 25.6% 25.7% 26.9% 40.2%
Statistics
Number of stores opened 203 225 172 108 117 139
Number of stores expanded 42 55 82 130 94 79
Number of stores closed 30 53 34 45 26 15
Number of stores open at
year-end 1,854 1,680 1,508 1,370 1,307 1,216
Net increase in number of
stores 10% 11% 10% 5% 7% 11%
Comparable store sales
(decrease) increase
percentage (52-week basis) 5% 0% 1% 1% 5% 13%
Sales per square foot
(52-week basis)(d) $ 441 $ 425 $ 444 $ 463 $ 489 $ 481
Square footage of gross
store space at year-end 12,645,000 11,100,200 9,165,900 7,546,300 6,509,200 5,638,400
Percentage increase in
square feet 14% 21% 21% 16% 15% 18%
Number of employees at
year-end 66,000 60,000 55,000 44,000 39,000 32,000
Weighted-average number of
shares-basic 938,579,921 939,866,394 948,699,959 940,287,006 928,417,491 915,766,923
Weighted-average number of
shares-diluted 961,351,245 962,443,160 971,144,612 965,110,280 960,903,782 953,297,157
Number of shares
outstanding at year-end,
net of treasury stock 926,495,994 971,149,446 977,162,057 980,428,914 973,250,357 962,032,505
GAP INC. ANNUAL REPORT 2000 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information below and elsewhere in this Annual Report contains certain
forward-looking statements which reflect the current view of Gap Inc. (the
"Company") with respect to future events and financial performance. Wherever
used, the words "expect," "plan," "anticipate," "believe" and similar
expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties 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 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.
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
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- ------------------------------------------------------------------------------------------------------------
Net sales ($000) $13,673,460 $11,635,398 $ 9,054,462
Total net sales growth percentage 18 29 39
Comparable store sales (decrease) increase percentage (a) (5) 7 17
Net sales per average gross square foot (a) $ 482 $ 548 $ 532
Square footage of gross store space at year-end (000) 31,373 23,978 18,757
Number of new stores 731 570 356
Number of expanded stores 268 129 135
Number of closed stores 73 18 20
(a) 52-week basis.
The total net sales growth for all years presented was primarily attributable to
the increase in retail selling space, both through the opening of new stores
(net of stores closed) and the expansion of existing stores. An increase in
comparable store sales also contributed to net sales growth for fiscal 1999 and
1998.
Comparable store sales by division for fiscal 2000 and 1999 was as follows: Gap
Domestic reported negative low-single digit in 2000 versus positive low-single
digit in 1999; Gap International reported negative low-single digit in 2000
versus positive mid-teens in 1999; Banana Republic reported negative low-single
digit in 2000 versus positive low-double digit in 1999; Old Navy reported
negative low-double digit in 2000 versus positive mid-teens in 1999.
The decrease in net sales per average square foot for fiscal 2000 were
primarily attributable to decreases in comparable store sales and the growing
impact of the Old Navy division. Old Navy division's lower-priced merchandise
and significantly larger stores resulted in lower net sales per average square
foot when compared to other divisions.
The increase in net sales per average square foot for fiscal 1999 was primarily
attributable to increases in comparable store sales.
16
Store count and square footage growth were as follows:
Feb. 3, 2001 Jan. 29, 2000
- ------------------------------------------------------------------------------------------------------------
Number of Stores Sq. Ft. (Millions) Number of Stores Sq. Ft. (Millions)
- ------------------------------------------------------------------------------------------------------------
Gap Domestic 2,079 12.1 1,767 10.3
Gap International 529 3.0 393 2.1
Banana Republic (a) 402 3.2 345 2.6
Old Navy 666 13.1 513 9.0
Total 3,676 31.4 3,018 24.0
Increase 22% 31% 22% 28%
(a) Includes 13 and 10 stores in Canada in fiscal 2000 and 1999, respectively.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales increased
4.7 percentage points in fiscal 2000 from 1999 and decreased 0.5 percentage
points in fiscal 1999 from 1998.
The increase in fiscal 2000 from 1999 was primarily attributable to a decrease
in merchandise margin as a percentage of net sales due to a greater percentage
of merchandise sold at markdown and lower margins from marked-down and regular
priced goods. Occupancy expenses as a percentage of net sales increased from
fiscal 1999 primarily due to the decrease in net sales per average square foot.
The decrease in fiscal 1999 from 1998 was primarily attributable to a decrease
in occupancy expenses as a percentage of net sales due to changes in the mix of
stores as Old Navy became a larger part of the business, partially offset by a
decrease in the merchandise margin due to a decline in the level of merchandise
sold at regular price.
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 a n adverse impact on earnings, depending
upon the extent of the markdown and the amount of inventory affected.
Operating Expenses
Operating expenses as a percentage of net sales increased 0.3 percentage points
in fiscal 2000 from 1999 and decreased 0.3 percentage points in fiscal 1999 from
1998.
In fiscal 2000, the increase was primarily attributable to the decrease in
comparable store sales and higher payroll as a percentage of net sales,
partially offset by lower advertising costs and lower bonus expense.
In fiscal 1999, the decrease resulted from lower administrative costs as a
percentage of net sales.
Interest Expense
The increase in interest expense between fiscal 2000 and 1999 was primarily due
to an increase in average borrowings, partially offset by additional interest
capitalized.
The decrease in interest expense between fiscal 1999 and 1998 was primarily due
to increased interest capitalized.
Interest Income
The decreases in interest income between fiscal 2000, 1999 and 1998 were due to
decreases in cash available for investment.
GAP INC. ANNUAL REPORT 2000 17
Income Taxes
The effective tax rate was 36.5, 36.9 and 37.5 percent in fiscal 2000, 1999 and
1998, respectively. The decrease in the effective 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:
Fiscal Year 2000 Fiscal Year 1999 Fiscal Year 1998
- ------------------------------------------------------------------------------------------------------------
Cash provided by operating activities ($000) $1,291,205 $1,477,928 $1,394,161
Working capital ($000) (151,094) 444,911 318,721
Current ratio 0.95:1 1.25:1 1.21:1
For the fiscal year ended February 3, 2001, the decrease in cash flows provided
by operating activities was primarily due to a decrease in net earnings
exclusive of depreciation and amortization, a decrease in tax benefit from the
exercise of stock options and vesting of restricted stock and an increase in
merchandise inventory. The decrease in working capital and the current ratio was
primarily due to an increase in current maturities of long-term debt and an
increase in payables, partially offset by an increase in merchandise inventory.
For the fiscal year ended January 29, 2000, the increase in cash flows provided
by operating activities was primarily due to an increase in net earnings
exclusive of depreciation and amortization and a tax benefit from the vesting of
a large restricted stock grant, partially offset by the timing of payments for
certain payables and an increase in merchandise inventory. The increase in
working capital and the current ratio was primarily due to investments in
merchandise inventory, partially offset by an increase in payables.
The Company funds inventory expenditures during normal and peak periods through
a combination of cash flows from operations as well as short-term and long-term
financing arrangements. The Company's business follows a seasonal pattern,
peaking over a total of about 13 weeks during the Back-to-School and Holiday
periods. During fiscal 2000 and 1999, these periods accounted for 35 and 36
percent, respectively, of the Company's annual sales.
The Company has committed credit facilities totaling $1.35 billion, consisting
of a $1.20 billion, 364-day revolving credit facility, and a $150 million, 5-
year revolving credit facility through June 27, 2005. These credit facilities
provide for the issuance of up to $600 million in letters of credit and provide
backup for the Company's $750 million commercial paper program. The Company has
additional uncommitted credit facilities of $845 million for the issuance of
letters of credit. At February 3, 2001, the Company had outstanding letters of
credit and commercial paper of $1.06 billion and $41 million, respectively. The
Company also had unused lines of credit of approximately $260 million at
February 3, 2001.
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 and
development of additional distribution channels. In May 2000, the Company issued
$250 million of debt securities under this shelf registration statement at a
rate per annum, reset quarterly, equal to three-month LIBOR plus 0.125%, due
November 15, 2001. The net proceeds were used for general corporate purposes,
similar to those described above.
In February 2001, the Company filed a shelf registration statement with the
Securities and Exchange Commission for $250 million of debt securities. The net
proceeds from any issuance are expected to be used for general corporate
purposes, similar to those described above. No assurances can be given that the
Company will issue the remaining $500 million of debt securities under these
registration statements in the future.
In March 1 1999, the Company's Japanese subsidiary, Gap (Japan) KK, issued $50
million of debt securities, due March 1, 2009, with a fixed annual interest rate
of 6.25 percent. The net proceeds were used for general corporate purposes
similar to those described above. The cash flows relating to the bonds were
swapped for the equivalent amounts in Japanese yen to minimize currency
exposure.
18
In September 1999, the Company's Netherlands subsidiary, Gap International
B.V., issued debt securities in the amount of 250 million Euro, approximately
$262 million, with a fixed annual interest rate of 5.0 percent, due September
30, 2004. The net proceeds were used to support the Company's international
expansion plans.
Quantitative and qualitative disclosures about market risk for the Company's
long-term debt are presented on page 20.
Capital expenditures, net of construction allowances, totaled approximately
$1.80 billion in fiscal 2000. The majority of these expenditures were used for
expansion of the store base, headquarters and distribution facilities. These
expenditures resulted in a net increase in store space of approximately 7.4
million square feet, or 31 percent, due to a net addition of 658 new stores, the
expansion of 268 stores and the remodeling of certain stores. Capital
expenditures for fiscal 1999 and 1998 were $1.19 billion and $797 million,
respectively, resulting in a net increase in store space of 5.2 million square
feet in fiscal 1999 and 3.4 million square feet in fiscal 1998.
For fiscal 2001, the Company expects capital expenditures to be in the range of
$1.3 to $1.4 billion, net of construction allowances. This represents the
addition of 550 to 630 new stores, the expansion of approximately 150 stores and
the remodeling of certain stores, as well as amounts for headquarters
facilities, distribution centers and equipment and information technology. The
Company expects to fund such capital expenditures with cash flows from
operations and other sources of financing.
Square footage growth is expected to be in the 17 to 20 percent range for fiscal
2001. Looking at the long-term growth domestically and abroad, the Company
anticipates a growth rate more in the range of 15 percent per year for fiscal
2002 and 2003.
The Company's store growth plan for fiscal 2001 is as follows:
Fiscal 2001
---------------------------
Store Growth Sq. Ft. Range
- ------------------------------------------------------------------------
Gap Domestic 280-300 11-14%
Gap International 100-120 20-25%
Banana Republic 40-60 13-17%
Old Navy 130-160 23-27%
Total 550-630 17-20%
During fiscal 1998, the Company purchased land on which to construct additional
headquarters facilities in San Francisco and San Bruno, California. The total
project costs were approximately $240 million and $100 million, respectively.
Construction commenced on the San Francisco facility during the third quarter of
1998 and is estimated to be completed by the third quarter of 2001. Construction
commenced on the San Bruno facility during the first quarter of 1999 and was
completed in November 2000.
The Company commenced construction on several distribution facilities in the
second quarter and third quarter of fiscal 2000. The estimated total cost for
these facilities is approximately $455 million. Approximately one-half of the
expenditures was incurred during fiscal 2000. The facilities are expected to be
opened by the fourth quarter of fiscal 2001.
The Company took possession of a distribution site and building in Ontario,
Canada during the first quarter of fiscal 2000 to support initial international
expansion plans for the Old Navy business. The Company remodeled the facility
and it was opened during the first quarter of 2001. The total project cost was
approximately $65 million.
During fiscal 2000, under the 67.5 million share repurchase program approved in
October 1998, the Company acquired approximately 11 million shares for
approximately $393 million, including 0.8 million shares acquired under put
option contracts for approximately $26 million. During the fourth quarter of
fiscal 2000, the Company discontinued repurchasing shares due to the lower cash
flows generated by the business. The Company does not anticipate repurchasing
stock in the near term and its policy has been and will remain that it uses
excess cash flows to repurchase. The Company will continue the program when its
cash flows support it.
GAP INC. ANNUAL REPORT 2000 19
During fiscal 2000, the Company entered into various put option contracts in
connection with the share repurchase program to hedge against stock price
fluctuations. As of February 3, 2001, the Company had an outstanding put option
contract to repurchase 400,000 shares of the Company's stock. The contract had
an exercise price of $25.53 per share, with an expiration date of February 15,
2001 and it expired unexercised.
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 as well as a portion of its Euro-denominated sales through
the use of foreign exchange forward contracts to minimize this risk. Additional
information on these contracts and agreements is presented in the Notes to
Consolidated Financial Statements (Note E). Quantitative and qualitative
disclosures about market risk for financial instruments are presented below.
New Accounting Pronouncements
Beginning with the fourth quarter of fiscal 2000, the Company adopted Emerging
Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and Handling Fees
and Costs. The Company records all amounts billed to a customer in a sale
transaction related to shipping and handling as Net Sales. Also, the Company
classifies shipping costs and the cost of supplies used to package product for
shipment to customers as Cost of Goods Sold and Occupancy Expenses. Prior to the
adoption of this consensus, shipping and handling revenues and costs were
classified as Operating Expenses. The Company did not reclassify prior period
amounts as the amounts were insignificant.
EITF Issue 00-14, Accounting for Certain Sales Incentives, provides guidance on
the recognition, measurement and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers. This
consensus must be adopted no later than the second quarter of fiscal 2001. The
Company does not expect this consensus to have a material impact on its
consolidated financial statements as the Company currently accounts for most
sales incentives in accordance with this guidance.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table on the right provides information about the Company's market sensitive
financial instruments as of February 3, 2001 and January 29, 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 as well as a portion of its Euro-denominated sales through
the use of foreign exchange forward contracts to minimize this risk. The Company
also uses forward contracts to hedge its 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. These contracts are entered into with large reputable financial
institutions, thereby minimizing the risk of credit loss. Further discussion of
these contracts appears in the Notes to Consolidated Financial Statements (Note
E).
During fiscal 1997, the Company issued $500 million of unsecured notes, due
September 15, 2007, with a fixed interest rate of 6.9 percent. The notes are
recorded in the balance sheet at their issuance amount net of unamortized
discount.
During fiscal 1999, the Company's Japanese subsidiary, Gap (Japan) KK, issued
$50 million of debt securities due March 1, 2009, with a fixed interest rate of
6.25 percent payable in U.S. 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 fair
market value as of February 3, 2001.
20
During fiscal 1999, the Company's Netherlands subsidiary, Gap International
B.V., issued debt securities in the amount of 250 million Euro, approximately
$262 million at issuance, with a fixed interest rate of 5.0 percent, due
September 30, 2004. The notes are recorded in the balance sheet at their
issuance amount net of an unamortized discount and are translated into U.S.
dollars at the period-end exchange rate.
During fiscal 2000, the Company issued $250 million of debt securities at a rate
per annum, reset quarterly, equal to three-month LIBOR plus 0.125%, due November
15, 2001. The notes are recorded in the balance sheet at their issuance amount.
By entering into the fixed-rate borrowings, the Company avoids interest rate
risk from variable rate fluctuations. A portion of the Company's fixed-rate
borrowings used to finance foreign operations is denominated in foreign
currencies. By borrowing and repaying the loans in local currencies, the Company
avoids the risk associated with exchange rate fluctuations.
Feb. 3, 2001 Jan. 29, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Average Notional Amount of Average Notional Amount of
Contract Forward Contracts Unrealized Contract Forward Contracts Unrealized
($000) Rate (a) in U.S. Dollars Gain/Loss (b) Rate (a) in U.S. Dollars Gain/Loss (b)
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign exchange forward contracts (c)
Sell contracts:
British pounds 0.66 $ 262,365 $ 7,232 0.62 $133,432 $ (1,037)
Canadian dollars 1.49 261,106 1,328 1.47 91,151 (1,527)
Euro 1.08 39,200 (550) -- -- --
Japanese yen 103.63 189,721 15,465 109.12 67,648 (2,745)
Buy contracts:
Euro 1.06 23,316 (131) 0.95 59,654 (3,655)
Total foreign exchange
forward contracts $ 775,708 $ 23,344 $351,885 $ (8,964)
Feb. 3, 2001 Jan. 29, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Amount Carrying Amount
($000) in U.S. Dollars Fair Value (d) in U.S. Dollars Fair Value (d)
- -----------------------------------------------------------------------------------------------------------------------------------
Notes payable, due 2001 $ 250,000 $ 249,930 $ -- $ --
Notes payable, due 2004 234,002 218,510 243,923 231,880
Notes payable, due 2007 497,277 501,590 496,866 478,393
Notes payable, due 2009 48,967 48,967 44,136 44,136
Total long-term debt,
including current maturities $1,030,246 $1,018,997 $784,925 $754,409
(a) Currency per U. S. dollar.
(b) The unrealized gain/(loss) represents the effect of the changes in the
forward rates compared to the average contract rates at February 3, 2001
and January 29, 2000. Approximately $22 million and $3 million of pre-tax
unrealized gain was included in Accumulated Other Comprehensive Losses at
February 3, 2001 and January 29, 2000, respectively. Approximately $1
million of pre-tax unrealized gain and $12 million of pre-tax unrealized
loss was recognized in the consolidated statements of earnings for fiscal
2000 and 1999, respectively, fully offset by a corresponding valuation
adjustment of the hedged items.
(c) All contracts mature within one year.
(d) Based on the rates at which the Company could borrow funds with similar
terms and remaining maturities at the dates presented.
GAP INC. ANNUAL REPORT 2000 21
MANAGEMENT'S REPORT ON FINANCIAL INFORMATION
Management is responsible for the integrity and consistency of all financial
information presented in the Annual Report. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and necessarily include certain amounts based on
Management's best estimates and judgments.
In fulfilling its responsibility for the reliability of financial information,
Management has established and maintains accounting systems and procedures
appropriately supported by internal accounting controls. Such controls include
the selection and training of qualified personnel, an organizational structure
providing for division of responsibility, communication of requirement for
compliance with approved accounting control and business practices and a program
of internal audit. The extent of the Company's system of internal accounting
control recognizes that the cost should not exceed the benefits derived and that
the evaluation of those factors requires estimates and judgments by Management.
Although no system can ensure that all errors or irregularities have been
eliminated, Management believes that the internal accounting controls in use
provide reasonable assurance, at reasonable cost, that assets are safeguarded
against loss from unauthorized use or disposition, that transactions are
executed in accordance with Management's authorization and that the financial
records are reliable for preparing financial statements and maintaining
accountability for assets. The financial statements of the Company have been
audited by Deloitte & Touche LLP, independent auditors, whose report appears
below.
The Audit and Finance Committee (the "Committee") of the Board of Directors is
comprised solely of directors who are not officers or employees of the Company.
The Committee is responsible for recommending to the Board of Directors the
selection of independent auditors. It meets periodically with Management, the
independent auditors and the internal auditors to ensure that they are carrying
out their responsibilities. The Committee also reviews and monitors the
financial, accounting and auditing procedures of the Company in addition to
reviewing the Company's financial reports. Deloitte & Touche LLP and the
internal auditors have full and free access to the Committee, with and without
Management's presence.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Gap, Inc.:
We have audited the accompanying consolidated balance sheets of The Gap, Inc.
and subsidiaries as of February 3, 2001 and January 29, 2000, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended February 3, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries as
of February 3, 2001 and January 29, 2000, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
February 3, 2001, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche
San Francisco, California
February 28, 2001
22
CONSOLIDATED STATEMENTS OF EARNINGS
($000 except share and 53 Weeks Ended Percentage 52 Weeks Ended Percentage 52 Weeks Ended Percentage
per share amounts) Feb. 3, 2001 to Sales Jan. 29, 2000 to Sales Jan. 30, 1999 to Sales
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 13,673,460 100.0% $ 11,635,398 100.0% $ 9,054,462 100.0%
Costs and expenses
Cost of goods sold and
occupancy expenses 8,599,442 62.9 6,775,262 58.2 5,318,218 58.7
Operating expenses 3,629,257 26.5 3,043,432 26.2 2,403,365 26.5
Interest expense 74,891 0.5 44,966 0.4 46,143 0.5
Interest income (12,015) 0.0 (13,211) (0.1) (32,526) (0.3)
Earnings before income taxes 1,381,885 10.1 1,784,949 15.3 1,319,262 14.6
Income taxes 504,388 3.7 657,884 5.6 494,723 5.5
Net earnings $ 877,497 6.4% $ 1,127,065 9.7% $ 824,539 9.1%
Weighted-average number
of shares-basic 849,810,658 853,804,924 864,062,060
Weighted-average number
of shares-diluted 879,137,194 895,029,176 904,374,383
Earnings per share-basic $ 1.03 $ 1.32 $0.95
Earnings per share-diluted 1.00 1.26 0.91
See Notes to Consolidated Financial Statements.
GAP INC. ANNUAL REPORT 2000 23
CONSOLIDATED BALANCE SHEETS
($000 except share and par value) Feb. 3, 2001 Jan. 29, 2000
- ---------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------
Current Assets
Cash and equivalents $ 408,794 $ 450,352
Merchandise inventory 1,904,153 1,462,045
Other current assets 335,103 285,393
Total current assets 2,648,050 2,197,790
Property and Equipment
Leasehold improvements 1,899,820 1,426,537
Furniture and equipment 2,826,863 2,083,604
Land and buildings 558,832 278,422
Construction-in-progress 615,722 414,725
5,901,237 4,203,288
Accumulated depreciation and amortization (1,893,552) (1,487,973)
Property and equipment, net 4,007,685 2,715,315
Lease rights and other assets 357,173 275,651
Total assets $ 7,012,908 $ 5,188,756
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 779,904 $ 168,961
Current maturities of long-term debt 250,000 --
Accounts payable 1,067,207 805,945
Accrued expenses and other current liabilities 684,209 751,710
Income taxes payable 17,824 26,263
Total current liabilities 2,799,144 1,752,879
Long-Term Liabilities
Long-term debt 780,246 784,925
Deferred lease credits and other liabilities 505,279 417,907
Total long-term liabilities 1,285,525 1,202,832
Shareholders' Equity
Common stock $.05 par value
Authorized 2,300,000,000 shares; issued 939,222,871 and
1,007,356,790 shares; outstanding 853,996,984
and 850,498,941 shares 46,961 50,368
Additional paid-in capital 294,967 669,490
Retained earnings 4,974,773 4,172,796
Accumulated other comprehensive losses (20,173) (6,759)
Deferred compensation (12,162) (23,150)
Treasury stock, at cost (2,356,127) (2,629,700)
Total shareholders' equity 2,928,239 2,233,045
Total liabilities and shareholders' equity $ 7,012,908 $ 5,188,756
See Notes to Consolidated Financial Statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($000) Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 877,497 $ 1,127,065 $ 824,539
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 590,365 436,184 326,447
Tax benefit from exercise of stock
options and vesting of restricted stock 130,882 211,891 79,808
Deferred income taxes (38,872) 2,444 (34,766)
Change in operating assets and liabilities:
Merchandise inventory (454,595) (404,211) (322,287)
Prepaid expenses and other (61,096) (55,519) (77,292)
Accounts payable 249,545 118,121 265,296
Accrued expenses (48,046) 89,071 231,178
Income taxes payable (8,495) (94,893) 38,805
Deferred lease credits and
other long-term liabilities 54,020 47,775 62,433
Net cash provided by operating activities 1,291,205 1,477,928 1,394,161
Cash Flows from Investing Activities
Net purchase of property and equipment (1,858,662) (1,238,722) (797,592)
Acquisition of lease rights and other assets (16,252) (39,839) (28,815)
Net cash used for investing activities (1,874,914) (1,278,561) (826,407)
Cash Flows from Financing Activities
Net increase in notes payable 621,420 84,778 1,357
Net issuance of long-term debt 250,000 311,839 -
Issuance of common stock 152,105 114,142 56,411
Net purchase of treasury stock (392,558) (745,056) (899,139)
Cash dividends paid (75,488) (75,795) (76,888)
Net cash provided by (used for) financing activities 555,479 (310,092) (918,259)
Effect of exchange rate fluctuations on cash (13,328) (4,176) 2,589
Net decrease in cash and equivalents (41,558) (114,901) (347,916)
Cash and equivalents at beginning of year 450,352 565,253 913,169
Cash and equivalents at end of year $ 408,794 $ 450,352 $ 565,253
See Notes to Consolidated Financial Statements.
GAP INC. ANNUAL REPORT 2000 25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
--------------- Paid-in Retained Comprehensive
($000 except per share and per share amounts) Shares Amount Capital Earnings Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 989,826,394 $49,491 $ 205,393 $2,392,750 $(15,230)
Issuance of common stock pursuant to stock option plans 7,575,195 380 46,709
Net issuance of common stock pursuant to management
incentive restricted stock plans 94,625 4 4,361
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 79,808
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819) 2,712
Amortization of restricted stock and discounted stock options
Purchase of treasury stock
Reissuance of treasury stock 12,766
Net earnings 824,539
Cash dividends ($.11 per share) (95,929)
Balance at January 30, 1999 997,496,214 $49,875 $ 349,037 $3,121,360 $(12,518)
Issuance of common stock pursuant to stock option plans 9,933,713 497 81,456
Net cancellations of common stock pursuant to management
incentive restricted stock plans (73,137) (4) 2,583
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 211,891
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454) 5,759
Amortization of restricted stock and discounted stock options 72
Purchase of treasury stock 4,276
Reissuance of treasury stock 20,175
Net earnings 1,127,065
Cash dividends ($.09 per share) (75,629)
Balance at January 29, 2000 1,007,356,790 $50,368 $ 669,490 $4,172,796 $ (6,759)
Issuance of common stock pursuant to stock option plans 13,078,981 654 115,167
Net cancellations of common stock pursuant to management
incentive restricted stock plans (185,563) (10) (364)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 130,882
Adjustments for foreign currency translation (24,286)
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of $8,131 10,872
Amortization of restricted stock and discounted stock options 45
Purchase of treasury stock 1,873
Reissuance of treasury stock 15,458
Retirement of treasury stock (81,027,337) (4,051) (637,584)
Net earnings 877,497
Cash dividends ($.09 per share) (75,520)
Balance at February 3, 2001 939,222,871 $46,961 $ 294,967 $4,974,773 $(20,173)
See Notes to Consolidated Financial Statements.
26
Treasury Stock Compre-
Deferred ------------------- hensive
($000 except per share and per share amounts) Compensation Shares Amount Total Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 $(38,167) (105,277,081) $(1,010,251) $1,583,986
Issuance of common stock pursuant to stock option plans (10,351) 36,738
Net issuance of common stock pursuant to management
incentive restricted stock plans (3,873) 492
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 79,808
Adjustments for foreign currency translation ($1,893) and
fluctuations in fair market value of financial instruments ($819) 2,712 $ 2,712
Amortization of restricted stock and discounted stock options 20,716 20,716
Purchase of treasury stock (35,714,475) (910,387) (910,387)
Reissuance of treasury stock 1,455,374 18,238 31,004
Net earnings 824,539 824,539
Cash dividends ($.11 per share) (95,929)
Balance at January 30, 1999 $(31,675) (139,536,182) $(1,902,400) $1,573,679 $ 827,251
Issuance of common stock pursuant to stock option plans (9,186) 72,767
Net cancellations of common stock pursuant to management
incentive restricted stock plans (3,411) (832)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 211,891
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454) 5,759 5,759
Amortization of restricted stock and discounted stock options 21,122 21,194
Purchase of treasury stock (18,500,000) (745,056) (740,780)
Reissuance of treasury stock 1,178,333 17,756 37,931
Net earnings 1,127,065 1,127,065
Cash dividends ($.09 per share) (75,629)
Balance at January 29, 2000 $(23,150) (156,857,849) $(2,629,700) $2,233,045 $1,132,824
Issuance of common stock pursuant to stock option plans (4,249) 111,572
Net cancellations of common stock pursuant to management
incentive restricted stock plans (919) (1,293)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 130,882
Adjustments for foreign currency translation (24,286) (24,286)
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of $8,131 10,872 10,872
Amortization of restricted stock and discounted stock options 16,156 16,201
Purchase of treasury stock (11,020,038) (392,558) (390,685)
Reissuance of treasury stock 1,624,663 24,496 39,954
Retirement of treasury stock 81,027,337 641,635 --
Net earnings 877,497 877,497
Cash dividends ($.09 per share) (75,520)
Balance at February 3, 2001 $(12,162) (85,225,887) $(2,356,127) $2,928,239 $ 864,083
See Notes to Consolidated Financial Statements.
Annual Report 2000 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 53 Weeks Ended February 3, 2001 (Fiscal 2000), 52 Weeks Ended
January 29, 2000 (Fiscal 1999) and January 30, 1999 (Fiscal 1998)
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Gap Inc. (the "Company") is a global specialty retailer selling casual apparel,
personal care and other accessories for men, women and children under a variety
of brand names including Gap, Banana Republic and Old Navy. Its principal
markets consist of the United States, Canada, Europe and Japan with the United
States being the most significant. The Company sells its products through
traditional retail stores, a catalog and online.
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany transactions have been eliminated.
Translation adjustments result from translating foreign subsidiaries' financial
statements into U.S. dollars. Balance sheet accounts are translated at exchange
rates in effect at the balance sheet date. Income statement accounts are
translated at average exchange rates during the year. Resulting translation
adjustments are included in Accumulated Other Comprehensive Losses in
shareholders' equity.
Fiscal Year
The Company's fiscal year is a 52- or 53-week period ending on the Saturday
closest to January 31. Fiscal years 2000, 1999 and 1998 consisted of 53, 52 and
52 weeks, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Equivalents
Cash and equivalents represent cash and short-term, highly liquid investments
with original maturities of three months or less.
Merchandise Inventory
Merchandise inventory is stated at the lower of FIFO (first-in, first-out) cost
or market.
28
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
Leasehold improvements for offices Life of the lease
Leasehold improvements for stores Life of the lease, not to exceed 12 years
Furniture and equipment Up to 10 years
Buildings 39 years
Interest costs related to assets under construction are capitalized during the
construction period. Interest of $41 million, $25 million and $11 million was
capitalized in fiscal 2000, 1999 and 1998, respectively.
Lease Rights
Temporary lease rights are recorded at cost and are amortized over the estimated
useful lives of the respective leases, not to exceed 20 years.
Impairment of Long-lived Assets
The Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the undiscounted future
cash flows from the long-lived asset are less than the carrying value, a loss
equal to the difference between the carrying value and the fair market value of
the asset is recorded.
Advertising
Costs associated with the production of advertising, such as writing copy,
printing and other costs, are expensed as incurred. Costs associated with
communicating advertising that has been produced, such as television and
magazine, are expensed when the advertising event takes place. Direct response
costs of catalogs are capitalized and amortized over the expected lives of the
related catalogs, not to exceed six months. Advertising costs were $487 million,
$504 million and $399 million in fiscal 2000, 1999 and 1998, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this
method, deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements.
Stock-based Awards
The Company accounts for stock-based awards using the intrinsic value-based
method of accounting, under which no compensation cost is recognized for stock
option awards granted at fair market value. Restricted stock and discounted
stock option awards, which are granted at less than fair market value, result in
the recognition of deferred compensation. Deferred compensation is shown as a
reduction of shareholders' equity and is amortized to Operating Expenses over
the vesting period of the stock award.
GAP INC. ANNUAL REPORT 2000 29
Segments
The Company's brands have been aggregated into one reportable segment given the
similarities of economic characteristics between the operations represented by
the Company's three brands. Revenues of international retail operations
represent 12.2 percent, 11.3 percent and 10.1 percent of the Company's revenues
for fiscal 2000, 1999 and 1998, respectively. Long-term assets of international
operations, including retail and sourcing, represent 14.5 percent and 13.8
percent of the Company's long-term assets for fiscal 2000 and 1999,
respectively.
Derivatives
The Company records the fair value of derivatives designated as fair-value and
cash-flow hedges on the balance sheet. The Company also records the fair value
of the hedged firm commitments on the balance sheet.
Accounting Pronouncements
Beginning with the fourth quarter of fiscal 2000, the Company adopted Emerging
Issues Task Force (EITF) Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs." The Company records all amounts billed to a customer in a sale
transaction related to shipping and handling as Net Sales. Also, the Company
classifies shipping costs and the cost of supplies used to package product for
shipment to customers as Cost of Goods Sold and Occupancy Expenses. Prior to the
adoption of this consensus, shipping and handling revenues and costs were
classified as Operating Expenses. The Company did not reclassify prior period
amounts as the amounts were insignificant.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company adopted SAB 101 in fiscal 1999. SAB
101 did not have a material impact on the Company's consolidated financial
statements.
Treasury Share Retirement
During fiscal 2000, the Company retired approximately 81 million treasury shares
with a cost basis of approximately $642 million. This retirement did not affect
results of operations.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform with the 2000 presentation.
30
NOTE B: DEBT AND OTHER CREDIT ARRANGEMENTS
The Company has committed credit facilities totaling $1.35 billion, consisting
of a $1.20 billion, 364-day revolving credit facility, and a $150 million, 5-
year revolving credit facility through June 27, 2005. These credit facilities
provide for the issuance of up to $600 million in letters of credit and provide
backup for the Company's $750 million commercial paper program. The Company has
additional uncommitted credit facilities of $845 million for the issuance of
letters of credit. At February 3, 2001, the Company had outstanding letters of
credit and commercial paper of $1.06 billion and $41 million, respectively. The
Company also had unused lines of credit of approximately $260 million at
February 3, 2001.
Borrowings under the Company's credit agreements are subject to the Company not
exceeding a certain debt ratio.
During fiscal 1999, the Company's Japanese subsidiary, Gap (Japan) KK, issued
$50 million of 10-year debt securities, due March 1, 2009, with a fixed annual
interest rate of 6.25 percent payable in U.S. dollars. Interest on the notes is
payable semi-annually. The Company swapped the cash flows payable under these
debt securities to Japanese yen with a fixed annual interest rate of 2.43
percent to minimize foreign currency exposure. The gain or loss on the swaps net
of the exchange gain or loss on the underlying debt was recognized in Operating
Expenses. The net losses were $503,000 and $483,000 in fiscal 2000 and 1999,
respectively. The fair value of the notes at February 3, 2001 was approximately
$49 million, based on the current rates at which the Company could borrow funds
with similar terms and remaining maturities. The notes are recorded in the
balance sheet at their fair value.
During fiscal 1999, the Company's Netherlands subsidiary, Gap International
B.V., issued debt securities in the amount of 250 million Euro, approximately
$262 million at issuance, with a fixed annual interest rate of 5.0 percent, due
September 30, 2004. Interest on the notes is payable annually. The fair value of
the notes at February 3, 2001 was approximately $219 million, based on the
current rates at which the Company could borrow funds with similar terms and
remaining maturities. The notes are recorded in the balance sheet at their
issuance amount net of an unamortized discount and are translated into U.S.
dollars at the period-end exchange rate.
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 and
development of additional distribution channels. In May 2000, the Company issued
$250 million of debt securities under this shelf registration statement at a
rate per annum, reset quarterly, equal to three-month LIBOR plus 0.125%, due
November 15, 2001. The interest rate at February 3, 2001 was 6.88 percent.
Interest on the notes is payable semi-annually. The fair value of the notes at
February 3, 2001 was approximately $250 million, based on the current rates at
which the Company could borrow funds with similar terms and remaining
maturities. The notes are recorded in the balance sheet at their issuance
amount.
In February 2001, the Company filed a shelf registration statement with the
Securities and Exchange Commission for $250 million of debt securities. The net
proceeds from any issuance are expected to be used for general corporate
purposes, similar to those described above. No assurances can be given that the
Company will issue the remaining $500 million of debt securities under these
registration statements in the future.
Gross interest payments were approximately $104 million, $54 million and $47
million in fiscal 2000, 1999 and 1998, respectively.
A summary of the Company's long-term debts is as follows:
Carrying Amount in U.S. Dollars
- --------------------------------------------------------------------------------------------
($000) Feb. 3, 2001 Jan. 29, 2000
- --------------------------------------------------------------------------------------------
Notes payable, variable, interest due semi-annually, due 2001 $ 250,000 $ --
Notes payable, 5.0%, interest due annually, due 2004 234,002 243,923
Notes payable, 6.9%, interest due semi-annually, due 2007 497,277 496,866
Notes payable, 6.25%, interest due semi-annually, due 2009 48,967 44,136
Total long-term debt, including current maturities $1,030,246 $784,925
GAP INC. ANNUAL REPORT 2000 31
NOTE C: INCOME TAXES
Income taxes consisted of the following:
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($000) Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- -----------------------------------------------------------------------
Current
Federal $442,264 $549,107 $438,110
State 47,814 62,357 55,716
Foreign 53,182 43,976 35,663
Total current 543,260 655,440 529,489
Deferred
Federal (30,005) (3,815) (29,163)
State and foreign (8,867) 6,259 (5,603)
Total deferred (38,872) 2,444 (34,766)
Total provision $504,388 $657,884 $494,723
The foreign component of pretax earnings before eliminations and corporate
allocations in fiscal 2000, 1999 and 1998 was approximately $334 million, $226
million and $191 million, respectively. No provision was made for U.S. income
taxes on the undistributed earnings of the foreign subsidiaries as it is the
Company's intention to utilize those earnings in the foreign operations for an
indefinite period of time or repatriate such earnings only when tax effective to
do so. Accumulated undistributed earnings of foreign subsidiaries were
approximately $447 million at February 3, 2001.
The difference between the effective income tax rate and the U.S. federal income
tax rate is summarized as follows:
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- ----------------------------------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 35.0%
State income taxes, less federal benefit 1.8 2.5 2.5
Other (0.3) (0.6) 0.0
Effective Tax Rate 36.5% 36.9% 37.5%
Deferred tax assets (liabilities) consisted of the following:
($000) Feb. 3, 2001 Jan. 29, 2000
- ------------------------------------------------------------------------
Compensation and benefits accruals $ 47,930 $ 26,377
Scheduled rent 61,741 50,164
Inventory caplitalization 52,880 39,485
Nondeductible accruals 20,678 24,126
Other 48,510 44,501
Gross deferred tax assets 231,739 184,653
Depreciation (25,281) (23,054)
Fair value of financial instruments included in
Accumulated Other Comprehensive Losses (8,131) -
Other (8,711) (2,724)
Gross deferred tax liabilities (42,123) (25,778)
Net deferred tax assets $189,616 $158,875
Net deferred tax assets at February 3, 2001 and January 29, 2000 are included in
Other Current Assets (approximately $76 million and $82 million, respectively),
and Lease Rights and Other Assets (approximately $113 million and $77 million,
respectively)in the Consolidated Balance Sheets. Income tax payments were
approximately $427 million, $537 million and $411 million in fiscal 2000, 1999
and 1998, respectively.
32
NOTE D: LEASES
The Company leases most of its store premises and headquarters facilities and
some of its distribution centers. These leases expire at various dates through
2025.
The aggregate minimum non-cancelable annual lease payments under leases in
effect on February 3, 2001 are as follows:
Fiscal Year ($000)
- --------------------------------------------------------------------------
2001 $ 774,560
2002 749,281
2003 696,541
2004 635,092
2005 529,749
Thereafter 2,072,630
Total minimum lease commitment $5,457,853
Some of the leases contain renewal options for periods ranging up to 30 years.
Many leases also provide for payment of operating expenses, real estate taxes
and additional rent based on a percentage of sales. No lease directly imposes
any restrictions relating to leasing in other locations, other than radius
clauses.
Many leases entered into by the Company include options that may extend the
lease term beyond the initial commitment period, subject to terms agreed to at
lease inception. Some leases also include early termination options which can be
exercised under specific conditions.
For leases that contain predetermined fixed escalations of the minimum rentals,
the Company recognizes the related rental expense on a straight-line basis and
records the difference between the recognized rental expense and amounts payable
under the leases as deferred lease credits. At February 3, 2001 and January 29,
2000, this liability amounted to approximately $180 million and $170 million,
respectively.
Cash or rent abatements received upon entering into certain store leases are
recognized on a straight-line basis as a reduction to rent expense over the
lease term. The unamortized portion is included in Deferred Lease Credits and
Other Liabilities. At February 3, 2001 and January 29, 2000, the long-term
deferred credit was approximately $250 million and $169 million, respectively.
Rental expense for all operating leases was as follows:
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($000) Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- --------------------------------------------------------------------------
Minimum rentals $705,760 $561,994 $471,628
Contingent rentals 135,406 114,484 75,601
Total $841,166 $676,478 $547,229
GAP INC. ANNUAL REPORT 2000 33
NOTE E: FINANCIAL INSTRUMENTS
Derivative Financial Instruments
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 as well as a portion of its Euro-denominated sales through
the use of foreign exchange forward contracts to minimize this risk. Forward
contracts used to hedge forecasted merchandise purchases and forecasted Euro-
denominated sales are designated as cash-flow hedges. Forward contracts used to
hedge merchandise purchases based on firm commitments are designated as fair-
value hedges. At February 3, 2001, the Company had contracts maturing at various
dates through March 2002 to buy and sell the equivalent of approximately $776
million in foreign currencies (Buy contracts: approximately 25 million Euro;
Sell contracts: approximately 174 million British pounds, 388 million Canadian
dollars, 42 million Euro and 19.7 billion Japanese yen) at the contracted rates.
Changes in the fair value of forward contracts designated as fair-value hedges,
along with the offsetting changes in fair value of the related firm commitments
to purchase foreign merchandise, are recorded in Costs of Goods Sold and
Occupancy Expenses in the current period. Changes in the fair value of forward
contracts designated as cash-flow hedges are recorded as a component of
comprehensive earnings, and are recognized in Costs of Goods Sold and Occupancy
Expenses in the period in which the hedged merchandise inventory is sold, or in
Net Sales when the forecasted sales take place. Approximately $14 million
included in Accumulated Other Comprehensive Losses at February 3, 2001 will be
recognized in Costs of Goods Sold and Occupancy Expenses or Net Sales over the
next 12 months. The critical terms of the forward contracts and the respective
firm commitments and forecasted foreign purchase and sales transactions are
essentially the same. As a result, there were no amounts reflected in fiscal
2000 earnings resulting from hedge ineffectiveness.
The Company also uses for ward contracts to hedge its 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. Gains and losses on the currency forward contracts
as well as on the underlying loans are recognized in Operating Expenses in the
same period and generally offset.
34
NOTE F: EMPLOYEE BENEFIT AND INCENTIVE STOCK COMPENSATION PLANS
Retirement Plans
The Company has a qualified defined contribution retirement plan, called
GapShare, which is available to employees who meet certain age and service
requirements. This plan permits employees to make contributions up to the
maximum limits allowable under the Internal Revenue Code. Under the plan, the
Company matches all or a portion of employees' contributions under a
predetermined formula. The Company's contributions vest immediately. Company
contributions to the retirement plan in fiscal 2000, 1999 and 1998 were
approximately $18 million, $16 million and $14 million, respectively.
A nonqualified Executive Deferred Compensation Plan was established on January
1, 1999 which allows eligible employees to defer compensation up to a maximum
amount. The Company does not match employees' contributions under the current
plan.
A Deferred Compensation Plan was established on August 26, 1997 for
nonemployee members of the Board of Directors. Under this plan, Board members
may elect to defer receipt on a pre-tax basis of eligible compensation
received for serving as nonemployee directors of the Company. In exchange for
compensation deferred, Board members are granted discounted stock options to
purchase shares of the Company's common stock. All options are fully
exercisable upon the date granted and expire seven years after grant or one
year after retirement from the Board, if earlier. The Company may issue up to
675,000 shares under the plan.
Incentive Stock Compensation Plans
The 1996 Stock Option and Award Plan (the "1996 Plan") was established on March
26, 1996. The Board authorized 93,341,342 shares for issuance under the 1996
Plan, which includes shares available under the Management Incentive Restricted
Stock Plan ("MIRSP") and an earlier stock option plan established in 1981, both
of which were superseded by the 1996 Plan. The 1996 Plan empowers the
Compensation and Stock Option Committee of the Board of Directors (the
"Committee") to award compensation primarily in the form of nonqualified stock
options or restricted stock to key employees. The 1999 Stock Option Plan (the
"1999 Plan") was established on March 29, 1999. The Board authorized 22,500,000
shares for issuance under the 1999 Plan. The 1999 Plan empowers the Committee to
award nonqualified stock options to non-officers. Stock options generally
expire 10 years from the grant date or one year after the date of retirement, if
earlier. Stock options generally vest over a three-year period, with shares
becoming exercisable in full on the third anniversary of the grant date or over
a four-year period, with shares becoming exercisable in equal annual
installments of 25%. Nonqualified stock options are generally issued at fair
market value but may be issued at prices less than the fair market value at the
date of grant or at other prices as determined by the Committee. Total
compensation cost for those stock options issued at less than fair market value
and for the restricted shares issued was approximately $10 million, $19 million
and $21 million in fiscal 2000, 1999 and 1998, respectively.
In 1998, the Company established a stock option plan for non-officers, called
Stock Up On Success, under which eligible employees may receive nonqualified
stock options. The Board of Directors authorized 6,000,000 shares for issuance
under Stock Up On Success. Stock options under the plan must be issued at
not less than fair market value. During fiscal 2000, options to purchase
approximately 1,159,000 shares were granted to approximately 23,000
employees under the plan. These stock options generally have a vesting period
of one-and-a-half years and expire 10 years after the grant date.
GAP INC. ANNUAL REPORT 2000 35
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which eligible United
States employees may purchase common stock of the Company at 85 percent of the
lower of the closing price of the Company's common stock on the first or last
day of the six-month purchase period on the New York Stock Exchange. Employees
pay for their stock purchases through payroll deductions at a rate equal to any
whole percentage from 1 percent to 15 percent. There were 1,624,663, 1,178,333
and 1,440,615 shares issued under the plan during fiscal 2000, 1999 and 1998,
respectively. All shares were acquired from reissued treasury stock. At February
3, 2001, there were 5,153,691 shares reserved for future subscriptions.
During fiscal 2000, the Company established an Employee Stock Purchase Plan for
employees in the United Kingdom. Under the plan, all eligible employees may
purchase common stock of the Company at the lower of the closing price of the
Company's common stock on the first or last day of the six-month purchase
period on the New York Stock Exchange. The Company will provide a share match
for every seven shares purchased. Employees pay for their stock purchases
through payroll deductions from (British Pounds)10 to (British Pounds)125 per
month, not to exceed the lesser of either (British Pounds)750 per each six-month
purchase period or 10 percent of gross annual base salary per tax year. At
February 3, 2001, (British Pound)1 was equivalent to $1.45. All shares will be
acquired from reissued treasury stock. The first purchase will take place during
the first quarter of fiscal 2001. At February 3, 2001, there were 1,000,000
shares reserved for future subscriptions.
NOTE G: SHAREHOLDERS'EQUITY AND STOCK OPTIONS
Common and Preferred Stock
The Company is authorized to issue 60,000,000 shares of Class B common stock,
which is convertible into shares of common stock on a share-for-share basis;
transfer of the shares is restricted. In addition, the holders of the Class B
common stock have six votes per share on most matters and are entitled to a
lower cash dividend. No Class B shares have been issued.
The Board of Directors is authorized to issue 30,000,000 shares of one or more
series of preferred stock and to establish at the time of issuance the issue
price, dividend rate, redemption price, liquidation value, conversion features
and such other terms and conditions of each series (including voting rights) as
the Board of Directors deems appropriate, without further action on the part of
the shareholders. No preferred shares have been issued.
During fiscal 2000, under the 67.5 million share repurchase program approved in
October 1998, the Company acquired approximately 11 million shares for
approximately $393 million, including 0.8 million shares acquired under put
option contracts for approximately $26 million. During the fourth quarter of
fiscal 2000, the Company discontinued repurchasing shares due to the lower cash
flows generated by the business. The Company does not anticipate repurchasing
stock in the near term and its policy has been and will remain that it uses
excess cash flows to repurchase. The Company will continue the program when its
cash flows support it.
As of February 3, 2001, the Company had an outstanding put option contract to
repurchase 400,000 shares of the Company's stock. The contract had an exercise
price of $25.53 per share, with an expiration date of February 15, 2001 and it
expired unexercised.
36
Stock Options
Under the Company's stock option plans, nonqualified options to purchase common
stock are granted to officers, directors and employees at exercise prices equal
to the fair market value of the stock at the date of grant or at other prices
as determined by the Compensation and Stock Option Committee of the Board of
Directors.
Stock option activity for all employee benefit plans was as follows:
Weighted-Average
Shares Exercise Price
- ---------------------------------------------------------------------------
Balance at January 31, 1998 79,253,053 $ 7.54
Granted 26,445,033 21.45
Exercised (7,603,242) 4.95
Canceled (2,836,809) 11.94
Balance at January 30, 1999 97,258,035 $11.69
Granted 11,780,067 42.15
Exercised (9,942,133) 7.50
Canceled (6,582,343) 17.30
Balance at January 29, 2000 92,513,626 $15.61
Granted 28,593,295 33.66
Exercised (13,090,888) 8.82
Canceled (10,939,938) 20.44
Balance at February 3, 2001 97,076,095 $21.29
Outstanding options at February 3, 2001 have expiration dates ranging from April
2001 to January 2011.
At February 3, 2001, the Company reserved 133,449,837 shares of its common
stock, including 972,502 treasury shares, for the exercise of stock options.
There were 35,810,440, 53,480,298 and 36,214,437 shares available for granting
of options at February 3, 2001, January 29, 2000 and January 30, 1999,
respectively. Options for 27,675,466, 15,682,738 and 10,913,039 shares were
exercisable as of February 3, 2001, January 29, 2000 and January 30, 1999,
respectively, and had a weighted-average exercise price of $9.59, $7.76 and
$5.51 for those respective periods.
The Company accounts for its stock option and award plans using the intrinsic
value-based method of accounting, under which no compensation cost has been
recognized for stock option awards granted at fair market value. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans, the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below.
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- -------------------------------------------------------------------------------
Net earnings ($000)
- -------------------------------------------------------------------------------
As reported $877,497 $1,127,065 $824,539
Pro forma 759,597 1,031,144 748,907
- -------------------------------------------------------------------------------
Earnings per share
- -------------------------------------------------------------------------------
As reported-basic $ 1.03 $ 1.32 $ 0.95
Pro forma-basic 0.89 1.21 0.87
As reported-diluted 1.00 1.26 0.91
Pro forma-diluted 0.86 1.15 0.83
GAP INC. ANNUAL REPORT 2000 37
The weighted-average fair value of the stock options granted during fiscal
2000, 1999 and 1998 was $11.42, $16.77 and $7.50, respectively. The fair value
of each option granted is estimated on the date of the grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions for
grants in 2000: dividend yield of 0.3 percent; expected price volatility of
between 39 percent and 43 percent; risk-free interest rates ranging from 4.1
percent to 5.2 percent and expected lives between 3.3 and 8.4 years. The fair
value of stock options granted in 1999 was based on the following weighted-
average assumptions: dividend yield of 0.2 percent; expected price volatility of
35 percent; risk-free interest rates ranging from 5.4 percent to 6.7 percent and
expected lives between 3.9 and 6.2 years. The fair value of stock options
granted in 1998 was based on the following weighted-average assumptions:
dividend yield of 0.4 percent; expected price volatility of 32 percent; risk-
free interest rates ranging from 5.3 percent to 5.7 percent and expected lives
between 3.9 and 6.1 years.
The following table summarizes information about stock options outstanding at
February 3, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Contractual Weighted-Average Exercisable at Weighted-Average
Range of Exercise Prices Feb. 3, 2001 Life (in years) Exercise Price Feb. 3, 2001 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
$ 4.17 to $ 9.28 29,064,644 4.10 $ 6.81 18,602,711 $ 7.16
9.30 to 20.21 24,453,330 6.56 16.29 7,975,217 11.40
20.39 to 38.91 25,346,670 8.86 25.45 293,283 26.34
38.94 to 59.23 18,211,451 8.74 45.33 804,255 41.59
$ 4.17 to $59.23 97,076,095 6.83 $21.29 27,675,466 $ 9.59
NOTE H: 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 includes certain stock options and unvested shares of
restricted stock. The following summarizes the incremental shares from these
potentially dilutive securities, calculated using the treasury stock method, as
included in the calculation of diluted weighted-average shares.
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- ----------------------------------------------------------------------------------------------
Weighted-average number of shares-basic 849,810,658 853,804,924 864,062,060
Incremental shares resulting from:
Stock options 28,811,344 39,781,579 35,340,667
Restricted stock 515,192 1,442,673 4,971,656
Weighted-average number of shares-diluted 879,137,194 895,029,176 904,374,383
Excluded from the above computations of weighted-average shares for diluted
earnings per share were options to purchase 20,154,144, 7,089,268 and 27,263
shares of common stock for fiscal 2000, 1999 and 1998, respectively.
Additionally, a put option to repurchase 400,000 shares for fiscal 2000 was
excluded from the above computations. Issuance or repurchase of these securities
would have resulted in an antidilutive effect on earnings per share.
NOTE I: RELATED PARTY TRANSACTIONS
The Company has an annual agreement with Fisher Development, Inc. (FDI), a
company wholly owned by the brother of the Company's chairman and his immediate
family, setting forth the terms under which FDI may act as one of the Company's
general contractors in connection with the Company's construction activities.
FDI acted as general contractor for 675,547 and 340 new stores' leasehold
improvements and fixtures during fiscal 2000, 1999 and 1998, respectively. In
the same respective years, FDI supervised construction of 262,123 and 135
expansions, remodels and relocations as well as headquarters facilities. Total
cost of construction was approximately $741 million, $485 million and $342
million, including profit and overhead costs of approximately $59 million, $47
million and $29 million, for fiscal 2000, 1999 and 1998, respectively. At
February 3, 2001 and January 29, 2000, amounts due to FDI were approximately $62
million and $26 million, respectively. The terms and conditions of the agreement
with FDI are reviewed annually by the Audit and Finance Committee of the Board
of Directors.
38
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Fiscal 2000
13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 14 Weeks Ended 53 Weeks Ended
($000 except per share amounts) Apr. 29, 2000 Jul. 29, 2000 Oct. 28, 2000 Feb. 3, 2001 Feb. 3, 2001
- ------------------------------------------------------------------------------------------------------------------------
Net sales $2,731,990 $2,947,714 $3,414,668 $ 4,579,088 $13,673,460
Gross profit 1,130,085 1,110,650 1,257,207 1,576,076 5,074,018
Net earnings 235,476 183,920 186,348 271,753 877,497
Earnings per share-basic 0.28 0.22 0.22 0.32 1.03
Earnings per share-diluted 0.27 0.21 0.21 0.31 1.00
Fiscal 1999
13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 52 Weeks Ended
($000 except per share amounts) May 1, 1999 Jul. 31, 1999 Oct. 30, 1999 Jan. 29, 2000 Jan. 29, 2000
- ------------------------------------------------------------------------------------------------------------------------
Net sales $2,277,734 $2,453,339 $3,045,386 $ 3,858,939 $11,635,398
Gross profit 943,579 1,009,794 1,304,288 1,602,475 4,860,136
Net earnings 202,370 195,829 315,017 413,849 1,127,065
Earnings per share-basic 0.24 0.23 0.37 0.49 1.32
Earnings per share-diluted 0.22 0.22 0.35 0.47 1.26
Per Share Data
Market Prices Cash Dividends Paid
------------------------------------------------- --------------------------
Fiscal 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------
High Low High Low
- ---------------------------------------------------------------------------------------------------------------
1st Quarter $53.75 $35.00 $51.56 $39.81 $0.0222 $0.0222
2nd Quarter 39.81 28.00 52.69 39.38 0.0222 0.0222
3rd Quarter 38.00 18.50 47.94 30.81 0.0222 0.0222
4th Quarter 34.00 21.50 49.31 32.41 0.0222 0.0222
Year $0.0888 $0.0888
The principal markets on which the Company's stock is traded are the New York
Stock Exchange and the Pacific Exchange. The number of holders of record of
the Company's stock as of March 13, 2001 was 10,086.
GAP INC. ANNUAL REPORT 2000 39