EXHIBIT 13
[Portions of Registrant's annual report to security holders for the fiscal year
ended January 31, 1998]
Gap Inc.
Ten-Year Selected Financial Data
Compound Annual Growth Rate
--------------------------- --------------------------
1997 1996
3-year 5-year 10-year 52 weeks 52 weeks
--------------------------- --------------------------
Operating Results ($000)
Net sales 21% 17% 20% $ 6,507,825 $ 5,284,381
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization - - - 3,775,957 3,093,709
Percentage of net sales - - - 58.0% 58.5%
Depreciation and amortization(a) - - - $ 245,584 $ 191,457
Operating expenses - - - 1,635,017 1,270,138
Net interest (income) expense - - - (2,975) (19,450)
Earnings before income taxes 17 20 21 854,242 748,527
Percentage of net sales - - - 13.1% 14.2%
Income taxes - - - $ 320,341 $ 295,668
Net earnings 19 20 23 533,901 452,859
Percentage of net sales - - - 8.2% 8.6%
Cash dividends - - - $ 79,503 $ 83,854
Capital expenditures - - - 483,114 375,838
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Per Share Data
Net earnings-basic(b) 21% 21% 23% $ 1.35 $ 1.09
Net earnings-diluted(c) 21 22 23 1.30 1.06
Cash dividends - - - .20 .20
Shareholders' equity (book value)(d) - - - 4.03 4.02
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Financial Position ($000)
Property and equipment, net 18% 16% 24% $ 1,365,246 $ 1,135,720
Merchandise inventory 26 15 14 733,174 578,765
Total assets 19 19 23 3,337,502 2,626,927
Working capital 15 19 21 839,399 554,359
Current ratio - - - 1.85:1 1.72:1
Total long-term debt, less current installments - - - $ 496,044 -
Ratio of long-term debt to shareholders' equity - - - .31:1 N/A
Shareholders' equity 5 12 19 $ 1,583,986 $ 1,654,470
Return on average assets - - - 17.9% 18.2%
Return on average shareholders' equity - - - 33.0% 27.5%
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Statistics
Number of stores opened 20% 21% 10% 298 203
Number of stores expanded - - - 98 42
Number of stores closed - - - 22 30
Number of stores open at year-end(e) 12 10 10 2,130 1,854
Net increase in number of stores - - - 15% 10%
Comparable store sales growth (52-week basis) - - - 6% 5%
Sales per square foot (52-week basis)(f) - - - $ 463 $ 441
Square footage of gross store space at year-end 19 19 15 15,312,700 12,645,000
Percentage increase in square feet - - - 21% 14%
Number of employees at year-end 14 16 18 81,000 66,000
Weighted-average number of shares-basic(b) - - - 396,179,975 417,146,631
Weighted-average number of shares-diluted(c) - - - 410,200,758 427,267,220
Number of shares outstanding at year-end,
net of treasury stock - - - 393,133,028 411,775,997
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(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Based on weighted-average number of shares excluding restricted stock.
(c) Based on weighted-average number of shares adjusted for dilutive effect of
stock options and restricted stock.
(d) Based on actual number of shares outstanding at year-end.
(e) Includes the conversion of GapKids departments to their own separate
stores. Converted stores are not classified as new stores.
(f) Based on weighted-average gross square footage.
1997 Annual Report page 20
Gap Inc.
Fiscal Year
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1995 1994 1993 1992 1991 1990 1989 1988
53 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 53 weeks 52 weeks
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$ 4,395,253 $ 3,722,940 $ 3,295,679 $ 2,960,409 $ 2,518,893 $ 1,933,780 $ 1,586,596 $ 1,252,097
2,645,736 2,202,133 1,996,929 1,856,102 1,496,156 1,187,644 1,006,647 814,028
60.2% 59.2% 60.6% 62.7% 59.4% 61.4% 63.4% 65.0%
$ 175,719 $ 148,863 $ 124,860 $ 99,451 $ 72,765 $ 53,599 $ 39,589 $ 31,408
1,004,396 853,524 748,193 661,252 575,686 454,180 364,101 277,429
(15,797) (10,902) 809 3,763 3,523 1,435 2,760 3,416
585,199 529,322 424,888 339,841 370,763 236,922 162,714 125,816
13.3% 14.2% 12.9% 11.5% 14.7% 12.3% 10.3% 10.0%
$ 231,160 $ 209,082 $ 166,464 $ 129,140 $ 140,890 $ 92,400 $ 65,086 $ 51,585
354,039 320,240 258,424 210,701 229,873 144,522 97,628 74,231
8.1% 8.6% 7.8% 7.1% 9.1% 7.5% 6.2% 5.9%
$ 66,993 $ 64,775 $ 53,041 $ 44,106 $ 41,126 $ 29,625 $ 22,857 $ 18,244
309,599 236,616 215,856 213,659 244,323 199,617 94,266 68,153
- --------------------------------------------------------------------------------------------------------------------------------
$ .85 $ .76 $ .62 $ .51 $ .56 $ .36 $ .24 $ .18
.83 .74 .60 .49 .54 .34 .23 .17
.16 .15 .13 .11 .10 .07 .06 .05
3.80 3.17 2.59 2.05 1.59 1.10 .80 .65
- --------------------------------------------------------------------------------------------------------------------------------
$ 957,752 $ 828,777 $ 740,422 $ 650,368 $ 547,740 $ 383,548 $ 238,103 $ 191,257
482,575 370,638 331,155 365,692 313,899 247,462 243,482 193,268
2,343,068 2,004,244 1,763,117 1,379,248 1,147,414 776,900 579,483 481,148
728,301 555,827 494,194 355,649 235,537 101,518 129,139 106,210
2.32:1 2.11:1 2.07:1 2.06:1 1.71:1 1.39:1 1.69:1 1.70:1
- - $ 75,000 $ 75,000 $ 80,000 $ 17,500 $ 20,000 $ 22,000
N/A N/A .07:1 .08:1 .12:1 .04:1 .06:1 .08:1
$ 1,640,473 $ 1,375,232 $ 1,126,475 $ 887,839 $ 677,788 $ 465,733 $ 337,972 $ 276,399
16.3% 17.0% 16.4% 16.7% 23.9% 21.3% 18.4% 16.2%
23.5% 25.6% 25.7% 26.9% 40.2% 36.0% 31.8% 27.0%
- ------------------------------------------------------------------------------------------------------------------------------
225 172 108 117 139 152 98 106
55 82 130 94 79 56 7 N/A
53 34 45 26 15 20 38 21
1,680 1,508 1,370 1,307 1,216 1,092 960 900
11% 10% 5% 7% 11% 14% 7% 10%
0% 1% 1% 5% 13% 14% 15% 8%
$ 425 $ 444 $ 463 $ 489 $ 481 $ 438 $ 389 $ 328
11,100,200 9,165,900 7,546,300 6,509,200 5,638,400 4,762,300 4,056,600 3,879,300
21% 21% 16% 15% 18% 17% 5% 6%
60,000 55,000 44,000 39,000 32,000 26,000 23,000 20,000
417,718,397 421,644,426 417,905,336 412,629,996 407,007,521 401,965,082 399,847,754 410,942,274
427,752,515 431,619,827 428,937,902 427,068,347 423,687,625 419,978,006 420,619,541 434,112,567
431,621,976 434,294,247 435,746,184 432,555,714 427,570,002 423,792,090 421,654,212 421,576,368
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1997 Annual Report page 21
Gap Inc.
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 that could cause the Company's actual results of operations to
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, and/or
trade restrictions and political or financial instability in countries where the
Company's goods are manufactured and other factors that may be described in the
Company's filings with the Securities and Exchange Commission. Future economic
and industry trends that could potentially impact revenues and profitability
remain difficult to predict.
The Company does not undertake to publicly update or revise its forward-
looking statements even if experience or future changes make it clear that any
projected results expressed or implied therein will not be realized.
Results of Operations
Net Sales
- --------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- --------------------------------------------------------------------------
Net sales ($000) $6,507,825 $5,284,381 $4,395,253
Total net sales growth
percentage 23 20 18
Comparable store sales
growth percentage
(52-week basis) 6 5 0
Net sales per average
gross square foot
(52-week basis) $ 463 $ 441 $ 425
Square footage of gross
store space at year-end (000) 15,313 12,645 11,100
Number of:
New stores 298 203 225
Expanded stores 98 42 55
Closed stores 22 30 53
- -------------------------------------------------------------------------
The total net sales growth for all years presented was attributable
primarily 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 in 1997
and 1996.
The increase in net sales per average square foot in 1997 and 1996 was
primarily attributable to increases in comparable store sales.
Cost of Goods Sold
and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales were 61.8
percent in 1997, 62.2 percent in 1996 and 64.2 percent in 1995.
The .4 percentage point decrease in 1997 from 1996 was primarily
attributable to a .6 percentage point decrease in occupancy expenses, partially
offset by a decrease in merchandise margin. The decrease in occupancy expenses
as a percentage of net sales was primarily attributable to leverage achieved
through comparable store sales growth.
The 2.0 percentage point decrease in 1996 from 1995 was due to a 1.2
percentage point increase in merchandise margin combined with an .8 percentage
point decrease in occupancy expenses as a percentage of net sales. The increase
in merchandise margin was driven by increases in initial merchandise markup and
in the percentage of merchandise sold at regular price. The decrease in
occupancy expenses was primarily attributable to the effect of the growth of the
Old Navy division, which carries lower occupancy expenses as a percentage of net
sales when compared to other divisions, and leverage achieved through comparable
store sales growth.
1997 Annual Report page 22
Gap Inc.
The Company reviews its inventory levels in order to identify slow-
moving merchandise and broken assortments (items no longer in stock in a
sufficient range of sizes) and uses markdowns to clear merchandise. Such
markdowns may have an adverse impact on earnings, depending upon the extent of
the markdown and the amount of inventory affected.
Operating Expenses
Operating expenses as a percentage of net sales were 25.1 percent for 1997, 24.0
percent for 1996 and 22.9 percent for 1995.
In 1997, the 1.1 percentage point increase was primarily attributable to
an .8 percentage point increase in advertising/marketing costs as part of the
Company's brand development efforts. An increase in the write-off of leasehold
improvements and fixtures associated with the remodeling, relocation and closing
of certain stores planned for the next fiscal year accounted for .4 percentage
point of the increase.
In 1996, the 1.1 percentage point increase was primarily attributable to
a .3 percentage point increase in advertising/marketing costs to support the
Company's brands and a .5 percentage point increase in incentive bonus expense.
Net Interest Income
Net interest income was $3.0, $19.5 and $15.8 million for 1997, 1996 and 1995,
respectively. The decrease in 1997 was due to the interest expense related to
the long-term debt securities issued during the third quarter, as well as to a
decrease in gross average investments. The change in 1996 from 1995 was
primarily attributable to an increase in gross average investments.
Income Taxes
The effective tax rate was 37.5 percent in 1997 and 39.5 percent in 1996 and
1995. The decrease in the effective tax rate in 1997 was a result of the impact
of tax planning initiatives to support changing business needs.
Liquidity and Capital Resources
The following sets forth certain measures of the Company's liquidity:
- ---------------------------------------------------------------
Fiscal Year
-------------------------------
1997 1996 1995
- ---------------------------------------------------------------
Cash provided by
operating activities ($000) $844,651 $834,953 $489,087
Working capital ($000) 839,399 554,359 728,301
Current ratio 1.85:1 1.72:1 2.32:1
- ---------------------------------------------------------------
For the fiscal year ended January 31, 1998, the increase in cash
provided by operating activities was due to an increase in net earnings offset
by investments in merchandise inventory and the timing of payments for income
taxes and certain payables. For the fiscal year ended February 1, 1997, the
increase in cash provided by operating activities was attributable to an
increase in net earnings and the timing of certain year-end payables and accrued
expenses.
The Company funds inventory expenditures during normal and peak periods
through a combination of cash flows provided by operations and normal trade
credit arrangements. The Company's business follows a seasonal pattern, peaking
over a total of about ten to twelve weeks during the Back-to-School and Holiday
periods. During 1997 and 1996, these periods accounted for approximately 35 and
33 percent, respectively, of the Company's annual sales.
The Company has committed credit facilities totaling $950 million,
consisting of an $800 million, 364-day revolving credit facility, and a $150
million, 5-year revolving credit facility through June 30, 2002. These credit
facilities provide for the issuance of up to $450 million in letters of credit.
The Company has additional uncommitted credit facilities of $300 million for the
issuance of letters of credit. At January 31, 1998, the Company had outstanding
letters of credit of approximately $498 million.
1997 Annual Report page 23
Gap Inc.
To provide financial flexibility, the Company issued $500 million of 6.9
percent, 10-year debt securities in fiscal 1997. The proceeds from this issuance
are intended to be used for general corporate purposes, including store
expansion, brand investment, development of additional distribution channels and
repurchases of the Company's common stock pursuant to its ongoing repurchase
program.
Capital expenditures, net of construction allowances and dispositions,
totaled approximately $450 million in 1997. These expenditures resulted in a net
increase in store space of approximately 2.7 million square feet or 21 percent
due to the addition of 298 new stores, the expansion of 98 stores and the
remodeling of certain stores. Capital expenditures for 1996 and 1995 were $359
million and $291 million, respectively, resulting in a net increase in store
space of approximately 1.5 million square feet in 1996 and approximately 1.9
million square feet in 1995.
The increase in capital expenditures in 1997 from 1996 was primarily
attributable to the number of stores opened, expanded and remodeled, as well as
the expansion of headquarters facilities. The increase in capital expenditures
in 1996 from 1995 was primarily attributable to the construction of two
distribution centers and a headquarters facility. Expenditures in 1997, 1996 and
1995 also included costs for equipment.
For 1998, the Company expects capital expenditures to total
approximately $700 million, net of construction allowances. This represents the
addition of 300 to 350 new stores, the expansion of approximately 80 to 90
stores and 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 18 to 20 percent before store
closings. New stores are generally expected to be leased.
In 1997, the Company completed construction of a headquarters facility
in San Bruno, California for approximately $60 million. The facility became
fully operational in October 1997. To further support its growth, the Company
continues to explore alternatives for additional headquarters facilities in San
Francisco and San Bruno, California. The Company acquired land in 1997 in San
Francisco and in the fourth quarter entered into a purchase contract to acquire
additional land in San Bruno.
Also during 1997, the Company commenced construction on a distribution
center in Fresno, California for an estimated cost at completion of $60 million.
The majority of the expenditures for this facility will be incurred in 1998. The
facility is expected to begin operations in early 1999.
On November 24, 1997, the Company's Board of Directors authorized a
three-for-two split of its common stock effective December 22, 1997, in the form
of a stock dividend for shareholders of record at the close of business on
December 8, 1997. Share and per share amounts herein and in the accompanying
consolidated financial statements have been restated to reflect the stock split.
In October 1996, the Board of Directors approved a program under which
the Company may repurchase up to 45 million shares of its outstanding common
stock in the open market over a three-year period. As of January 31, 1998, 28
million shares had been repurchased for $744 million. The program announced in
October 1996 follows an earlier 27 million share repurchase program which was
completed in November 1996 at a cost of approximately $450 million.
1997 Annual Report page 24
Gap Inc.
During fiscal 1997, the Company entered into various put option
contracts in connection with the share repurchase program to hedge against stock
price fluctuations. The Company also continued to enter into foreign exchange
forward contracts to reduce exposure to foreign currency exchange risk involved
in its commitments to purchase merchandise for foreign operations. 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 on page
38.
The Company pursues a diversified global import operations strategy
which includes relationships with vendors in over 40 countries. These sourcing
operations may be adversely affected by political instability resulting in the
disruption of trade from exporting countries, significant fluctuation in the
value of the U.S. dollar against foreign currencies, restrictions on the
transfer of funds and/or other trade disruptions. The current financial
instability in Asia is an example of this instability, which could affect some
suppliers adversely. Although to date the instability in Asia has not had a
material adverse effect on the Company's ability to import apparel, and
therefore on the Company's results of operations and financial condition, no
assurances can be given that it will not have such an effect in the future.
The Company is addressing the need to ensure that its operations will
not be adversely impacted by software or other system failures related to year
2000. A program office was established in 1997 to coordinate the identification,
evaluation and implementation of any necessary changes to computer systems,
applications and business processes. The costs associated with this effort are
expected to be incurred through 1999 and are not expected to have a material
impact on the results of operations, cash flows or financial condition in any
given year. However, no assurances can be given that the Company will be able to
completely identify or address all year 2000 compliance issues, or that third
parties with whom the Company does business will not experience system failures
as a result of the year 2000 issues, nor can the Company fully predict the
consequences of noncompliance.
Per Share Data
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Market Prices Cash Dividends
---------------------------------------- --------------
Fiscal 1997 1996 1997 1996
- ----------------------------------------------------------------------------
High Low High Low
- ----------------------------------------------------------------------------
1st Quarter $ 24 1/8 $ 19 1/16 $20 5/16 $15 7/16 $.05 $.05
2nd Quarter 29 13/16 20 9/16 24 1/16 18 1/8 .05 .05
3rd Quarter 35 3/4 28 24 5/16 17 5/16 .05 .05
4th Quarter 41 1/4 32 15/16 22 5/16 18 9/16 .05 .05
- ----------------------------------------------------------------------------
Year $.20 $.20
- ----------------------------------------------------------------------------
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 9, 1998 was 7,108.
1997 Annual Report page 25
Gap Inc.
Management's Report on Financial Information
Management is responsible for the integrity and consistency of all financial
information presented in the Annual Report. The financial statements have been
prepared in accordance with generally accepted accounting principles and
necessarily include certain amounts based on Management's best estimates and
judgments.
In fulfilling its responsibility for the reliability of financial
information, Management has established and maintains accounting systems and
procedures appropriately supported by internal accounting controls. Such
controls include the selection and training of qualified personnel, an
organizational structure providing for division of responsibility, communication
of requirement for compliance with approved accounting control and business
practices and a program of internal audit. The extent of the Company's system of
internal accounting control recognizes that the cost should not exceed the
benefits derived and that the evaluation of those factors requires estimates and
judgments by Management. Although no system can ensure that all errors or
irregularities have been eliminated, Management believes that the internal
accounting controls in use provide reasonable assurance, at reasonable cost,
that assets are safeguarded against loss from unauthorized use or disposition,
that transactions are executed in accordance with Management's authorization and
that the financial records are reliable for preparing financial statements and
maintaining accountability for assets. The financial statements of the Company
have been audited by Deloitte & Touche LLP, independent auditors. Their report,
which appears below, is based upon their audits conducted in accordance with
generally accepted auditing standards.
The Audit and Finance Committee (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 assure that
they are carrying out their responsibilities. The Committee also reviews and
monitors the financial, accounting and auditing procedures of the Company in
addition to reviewing the Company's financial reports. Deloitte & Touche LLP and
the internal auditors have full and free access to the 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 January 31, 1998 and February 1, 1997, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three fiscal years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company and its
subsidiaries as of January 31, 1998 and February 1, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
San Francisco, California
February 27, 1998
1997 Annual Report page 26
Gap Inc.
Consolidated Statements of Earnings
Fifty-two Fifty-two Fifty-three
Weeks Ended Percentage Weeks Ended Percentage Weeks Ended Percentage
($000 except share and per share amounts)
January 31, 1998 to Sales February 1, 1997 to Sales February 3, 1996 to Sales
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 6,507,825 100.0% $ 5,284,381 100.0% $ 4,395,253 100.0%
Costs and expenses
Cost of goods sold and
occupancy expenses 4,021,541 61.8 3,285,166 62.2 2,821,455 64.2
Operating expenses 1,635,017 25.1 1,270,138 24.0 1,004,396 22.9
Net interest income (2,975) 0.0 (19,450) (0.4) (15,797) (0.4)
--------------------------------------------------------------------------------------------
Earnings before income taxes 854,242 13.1 748,527 14.2 585,199 13.3
Income taxes 320,341 4.9 295,668 5.6 231,160 5.2
--------------------------------------------------------------------------------------------
Net earnings $ 533,901 8.2% $ 452,859 8.6% $ 354,039 8.1%
--------------------------------------------------------------------------------------------
Weighted-average number of
shares-basic 396,179,975 417,146,631 417,718,397
Weighted-average number of
shares-diluted 410,200,758 427,267,220 427,752,515
--------------------------------------------------------------------------------------------
Earnings per share-basic $ 1.35 $ 1.09 $ .85
Earnings per share-diluted 1.30 1.06 .83
--------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
1997 Annual Report page 27
Gap Inc.
Consolidated Balance Sheets
($000) January 31, 1998 February 1, 1997
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and equivalents $ 913,169 $ 485,644
Short-term investments - 135,632
Merchandise inventory 733,174 578,765
Prepaid expenses and other current assets 184,604 129,214
----------- ----------
Total current assets 1,830,947 1,329,255
----------- ----------
Property and Equipment
Leasehold improvements 846,791 736,608
Furniture and equipment 1,236,450 960,516
Land and buildings 154,136 99,969
Construction-in-progress 66,582 101,520
----------- ----------
2,303,959 1,898,613
Accumulated depreciation and amortization (938,713) (762,893)
----------- ----------
Property and equipment, net 1,365,246 1,135,720
----------- ----------
Long-term investments - 36,138
Lease rights and other assets 141,309 125,814
----------- ----------
Total assets $ 3,337,502 $2,626,927
----------- ----------
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 84,794 $ 40,050
Accounts payable 416,976 351,754
Accrued expenses 389,412 282,494
Income taxes payable 83,597 91,806
Deferred lease credits and other current liabilities 16,769 8,792
----------- ----------
Total current liabilities 991,548 774,896
----------- ----------
Long-Term Liabilities
Long-term debt 496,044 -
Deferred lease credits and other liabilities 265,924 197,561
----------- ----------
Total long-term liabilities 761,968 197,561
----------- ----------
Shareholders' Equity
Common stock $.05 par value
Authorized 500,000,000 shares; issued 439,922,841
and 476,796,135 shares; outstanding 393,133,028
and 411,775,997 shares 21,996 23,840
Additional paid-in capital 317,674 434,104
Retained earnings 2,392,750 1,938,352
Foreign currency translation adjustments (15,230) (5,187)
Deferred compensation (38,167) (47,838)
Treasury stock, at cost (1,095,037) (688,801)
----------- ----------
Total shareholders' equity 1,583,986 1,654,470
----------- ----------
Total liabilities and shareholders' equity $ 3,337,502 $2,626,927
----------- ----------
See Notes to Consolidated Financial Statements.
1997 Annual Report page 28
Gap Inc.
Consolidated Statements of Cash Flows
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
($000) January 31, 1998 February 1, 1997 February 3, 1996
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net earnings $ 533,901 $ 452,859 $ 354,039
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization(a) 269,706 214,905 197,440
Tax benefit from exercise of stock options
by employees and from vesting of restricted stock 23,682 47,348 11,444
Deferred income taxes (13,706) (28,897) (2,477)
Change in operating assets and liabilities:
Merchandise inventory (156,091) (93,800) (113,021)
Prepaid expenses and other (44,736) (16,355) (15,278)
Accounts payable 63,532 88,532 1,183
Accrued expenses 107,365 87,974 9,427
Income taxes payable (8,214) 25,706 24,806
Deferred lease credits and other long-term liabilities 69,212 56,681 21,524
-------------------------------------------------
Net cash provided by operating activities 844,651 834,953 489,087
-------------------------------------------------
Cash Flows from Investing Activities
Net maturity (purchase) of short-term investments 174,709 (11,774) 116,134
Net purchase of long-term investments (2,939) (40,120) (30,370)
Net purchase of property and equipment (465,843) (371,833) (302,260)
Acquisition of lease rights and other assets (19,779) (12,206) (6,623)
-------------------------------------------------
Net cash used for investing activities (313,852) (435,933) (223,119)
-------------------------------------------------
Cash Flows from Financing Activities
Net increase in notes payable 44,462 18,445 20,787
Net issuance of long-term debt 495,890 - -
Issuance of common stock 30,653 37,053 17,096
Net purchase of treasury stock (593,142) (466,741) (71,314)
Cash dividends paid (79,503) (83,854) (66,993)
-------------------------------------------------
Net cash used for financing activities (101,640) (495,097) (100,424)
-------------------------------------------------
Effect of exchange rate changes on cash (1,634) 2,155 (465)
-------------------------------------------------
Net increase (decrease) in cash and equivalents 427,525 (93,922) 165,079
Cash and equivalents at beginning of year 485,644 579,566 414,487
-------------------------------------------------
Cash and equivalents at end of year $ 913,169 $ 485,644 $ 579,566
-------------------------------------------------
See Notes to Consolidated Financial Statements.
(a) Includes amortization of restricted stock, discounted stock options and
discount on long-term debt.
1997 Annual Report page 29
Gap Inc.
Consolidated Statements of Shareholders' Equity
($000 except share and per share amounts)
Common Stock Additional
------------------------ Paid-in
Shares Amount Capital
- ------------------------------------------------------------------
Balance at January 28, 1995 470,918,331 $ 23,546 $ 282,716
-------------------------------------
Issuance of common
stock pursuant to
stock option plans 1,491,558 75 9,591
Net issuance of common
stock pursuant to
management incentive
restricted stock
plans 1,547,070 77 19,531
Tax benefit from
exercise of stock
options by employees
and from vesting of
restricted stock 11,444
Foreign currency
translation adjustments
Amortization of restricted
stock
Purchase of treasury stock
Reissuance of treasury
stock 4,012
Net earnings
Cash dividends ($.16 per
share)
-------------------------------------
Balance at February 3, 1996 473,956,959 $ 23,698 $ 327,294
-------------------------------------
Issuance of common stock
pursuant to stock
option plans 2,386,761 119 19,694
Net issuance of common
stock pursuant to
management incentive
restricted stock plans 452,415 23 32,799
Tax benefit from exercise
of stock options by
employees and from
vesting of restricted
stock 47,348
Foreign currency
translation adjustments
Amortization of restricted
stock
Purchase of treasury stock
Reissuance of treasury
stock 6,969
Net earnings
Cash dividends ($.20 per
share)
-------------------------------------
Balance at February 1, 1997 476,796,135 $ 23,840 $ 434,104
-------------------------------------
Issuance of common stock
pursuant to stock
option plans(a) 2,848,567 142 47,963
Net cancelations of
common stock pursuant
to management incentive
restricted stock plans (946,861) (47) (10,452)
Tax benefit from exercise
of stock options by
employees and from
vesting of restricted
stock 23,682
Foreign currency
translation adjustments
Amortization of restricted
stock and discounted
stock options
Purchase of treasury stock
Reissuance of treasury
stock 7,344
Retirement of treasury
stock (38,775,000) (1,939) (184,967)
Net earnings
Cash dividends ($.20 per
share)
-------------------------------------
Balance at January 31, 1998 439,922,841 $ 21,996 $ 317,674
-------------------------------------
1997 Annual Report Page 30
Gap Inc.
Foreign Currency Treasury Stock
Retained Translation Deferred -------------------------
Earnings Adjustments Compensation Shares Amount Total
--------------------------------------------------------------------------------
Balance at January 28, 1995 $1,282,301 $ (8,320) $(54,265) (36,624,084) $ (150,746) $1,375,232
--------------------------------------------------------------------------------
Issuance of common
stock pursuant to
stock option plans 9,666
Net issuance of common
stock pursuant to
management incentive
restricted stock
plans (16,191) 3,417
Tax benefit from
exercise of stock
options by employees
and from vesting of
restricted stock 11,444
Foreign currency
translation adjustments (751) (751)
Amortization of restricted
stock 21,721 21,721
Purchase of treasury stock (6,289,200) (72,717) (72,717)
Reissuance of treasury
stock 578,301 1,403 5,415
Net earnings 354,039 354,039
Cash dividends ($.16 per
share) (66,993) (66,993)
--------------------------------------------------------------------------------
Balance at February 3, 1996 $1,569,347 $ (9,071) $(48,735) (42,334,983) $ (222,060) $1,640,473
--------------------------------------------------------------------------------
Issuance of common stock
pursuant to stock
option plans (9,648) 10,165
Net issuance of common
stock pursuant to
management incentive
restricted stock plans (12,903) 19,919
Tax benefit from exercise
of stock options by
employees and from
vesting of restricted
stock 47,348
Foreign currency
translation adjustments 3,884 3,884
Amortization of restricted
stock 23,448 23,448
Purchase of treasury stock (23,284,650) (468,246) (468,246)
Reissuance of treasury
stock 599,495 1,505 8,474
Net earnings 452,859 452,859
Cash dividends ($.20 per
share) (83,854) (83,854)
--------------------------------------------------------------------------------
Balance at February 1, 1997 $1,938,352 $ (5,187) $(47,838) (65,020,138) $ (688,801) $1,654,470
--------------------------------------------------------------------------------
Issuance of common stock
pursuant to stock
option plans(a) (18,166) 29,939
Net cancelations of
common stock pursuant
to management incentive
restricted stock plans 3,869 (6,630)
Tax benefit from exercise
of stock options by
employees and from
vesting of restricted
stock 23,682
Foreign currency
translation adjustments (10,043) (10,043)
Amortization of restricted
stock and discounted
stock options 23,968 23,968
Purchase of treasury stock (21,190,300) (598,149) (598,149)
Reissuance of treasury
stock 645,625 5,007 12,351
Retirement of treasury
stock 38,775,000 186,906 0
Net earnings 533,901 533,901
Cash dividends ($.20 per
share) (79,503) (79,503)
--------------------------------------------------------------------------------
Balance at January 31, 1998 $2,392,750 $ (15,230) $(38,167) (46,789,813) $(1,095,037) $1,583,986
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(a) Includes payout of cash for fractional shares resulting from the
three-for-two split of common stock effective December 22, 1997.
1997 Annual Report page 31
Gap Inc.
Notes to Consolidated Financial Statements
For the Fifty-two Weeks ended January 31, 1998 (fiscal 1997), the Fifty-two
Weeks ended February 1, 1997 (fiscal 1996) and the Fifty-three Weeks ended
February 3, 1996 (fiscal 1995).>>
Note A: Summary of Significant
Accounting Policies
Gap Inc. (the "Company") is an international specialty retailer which operates
stores selling casual apparel, personal care and other accessories for men,
women and children under a variety of brand names including: Gap, GapKids,
babyGap, Banana Republic and Old Navy. Its principal markets consist of the
United States, Canada, Europe and Asia with the United States being the most
significant.
On November 24, 1997, the Company's Board of Directors authorized a
three-for-two split of its common stock effective December 22, 1997, in the form
of a stock dividend for shareholders of record at the close of business on
December 8, 1997. Share and per share amounts in the accompanying consolidated
financial statements for all periods have been restated to reflect the stock
split.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and equivalents represent cash and short-term, highly liquid
investments with original maturities of three months or less.
Short-term investments include investments with an original maturity of
greater than three months and a remaining maturity of less than one year. Long-
term investments include investments with an original and remaining maturity of
greater than one year. Effective July 1997, the Company's short-and long-term
investments, which consist primarily of debt securities, are classified as
available for sale and are carried at fair market value. Any unrealized gains or
losses computed in marking these securities to market are reported within
shareholders' equity. Prior to July 1997, such securities were classified as
held to maturity and were carried at amortized cost.
Merchandise inventory is stated at the lower of FIFO (first-in, first-
out) cost or market.
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related assets.
Lease rights are recorded at cost and are amortized over 12 years or the
lives of the respective leases including option periods, whichever is less.
Costs associated with the opening or remodeling of stores, such as pre-
opening rent and payroll, are expensed as incurred. The net book value of
fixtures and leasehold improvements for stores scheduled to be closed or
expanded within the next fiscal year is charged against current earnings.
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 magazine and billboard
space, are expensed when the advertising first takes place. Advertising costs
were $175 million, $96 million and $64 million in fiscal 1997, 1996 and 1995,
respectively.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements.
Translation adjustments result from the process of translating foreign
subsidiaries' financial statements into U.S. dollars. Balance sheet accounts are
translated at exchange rates in effect at the balance sheet date. Income
statement accounts are translated at average exchange rates during the year.
Resulting translation adjustments are included in shareholders' equity.
The Company accounts for stock-based awards using the intrinsic value-
based method under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and has provided pro forma disclosures of net
earnings and earnings per share in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Restricted stock and discounted stock options represent deferred
compensation and are shown as a reduction of shareholders' equity.
In the fourth quarter of 1997, the Company adopted SFAS No. 128,
Earnings per Share, which requires dual presentation of basic earnings per share
(EPS) and diluted EPS. All prior periods have been restated to conform with the
new statement. Basic EPS is computed as net earnings divided by the weighted-
average number of common shares outstanding, excluding restricted stock, for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options,
restricted stock and other convertible securities.
1997 Annual Report page 32
Gap Inc.
The Financial Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income, which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these standards will not impact the Company's consolidated financial
position, results of operations or cash flows, and any effect will be limited to
the form and content of its disclosures. SFAS No. 130 and SFAS No. 131 are
effective for the Company's fiscal years ending after January 31, 1998.
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statements.
Note B: Debt and Other Credit Arrangements
The Company has committed credit facilities totaling $950 million, consisting of
an $800 million, 364-day revolving credit facility, and a $150 million, 5-year
revolving credit facility through June 30, 2002. These credit facilities provide
for the issuance of up to $450 million in letters of credit. The Company has
additional uncommitted credit facilities of $300 million for the issuance of
letters of credit. At January 31, 1998, the Company had outstanding letters of
credit of $498,256,000.
Borrowings under the Company's credit agreements are subject to the
Company not exceeding a certain debt ratio. The Company was in compliance with
this debt covenant at January 31, 1998.
During fiscal 1997, the Company issued long-term debt which consists of
$500 million of 6.9 percent unsecured notes, due September 15, 2007. Interest on
the notes is payable semi-annually. The fair value at January 31, 1998 of the
notes was approximately $526 million, based on the current rates at which the
Company could borrow funds with similar terms and remaining maturities. The
balance of the debt is net of unamortized discount.
Gross interest payments were $8,399,000, $2,800,000 and $2,274,000 in
fiscal 1997, 1996 and 1995, respectively.
Note C: Income Taxes
Income taxes consisted of the following:
- ---------------------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
($000) Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- ---------------------------------------------------------------------------------------
Currently Payable
Federal $279,068 $266,063 $176,200
State 33,384 36,167 40,111
Foreign 21,595 22,335 17,348
- ---------------------------------------------------------------------------------------
Total currently payable 334,047 324,565 233,659
- ---------------------------------------------------------------------------------------
Deferred
Federal (14,832) (23,980) (7,169)
State and foreign 1,126 (4,917) 4,670
- ---------------------------------------------------------------------------------------
Total deferred (13,706) (28,897) (2,499)
- ---------------------------------------------------------------------------------------
Total provision $320,341 $295,668 $231,160
- ---------------------------------------------------------------------------------------
The foreign component of pretax earnings before eliminations and
corporate allocations in fiscal 1997, 1996 and 1995 was $84,487,000, $82,220,000
and $71,545,000, 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.
Undistributed earnings of foreign subsidiaries were $218,113,000 at January 31,
1998.
The difference between the effective income tax rate and the United
States federal income tax rate is summarized as follows:
- ---------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- ---------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 35.0%
State income taxes,
less federal benefit 3.2 4.4 5.0
Other (.7) .1 (.5)
- ---------------------------------------------------------------------
Effective tax rate 37.5% 39.5% 39.5%
- ---------------------------------------------------------------------
Deferred tax assets (liabilities), reported in other assets in the
Consolidated Balance Sheets, consisted of the following at January 31, 1998 and
February 1, 1997:
- -----------------------------------------------------------------------------
($000) Jan. 31, 1998 Feb. 1, 1997
- -----------------------------------------------------------------------------
Compensation and benefits accruals $ 31,367 $ 31,640
Scheduled rent 44,451 40,834
Inventory capitalization 28,776 16,459
Nondeductible accruals 20,003 18,705
Other 17,854 24,224
- -----------------------------------------------------------------------------
Gross deferred tax assets 142,451 131,862
- -----------------------------------------------------------------------------
Depreciation (9,553) (13,611)
Other (6,345) (5,404)
- -----------------------------------------------------------------------------
Gross deferred tax liabilities (15,898) (19,015)
- -----------------------------------------------------------------------------
Net deferred tax assets $126,553 $112,847
- -----------------------------------------------------------------------------
1997 Annual Report page 33
Gap Inc.
Income tax payments were $320,744,000, $249,968,000 and $197,802,000 in
fiscal 1997, 1996 and 1995, respectively.
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
2013.
The aggregate minimum non-cancelable annual lease payments under leases
in effect on January 31, 1998 are as follows:
- --------------------------------------------
Fiscal Year ($000)
- --------------------------------------------
1998 $ 409,607
1999 403,285
2000 387,668
2001 364,270
2002 332,364
Thereafter 1,172,849
- --------------------------------------------
Total minimum lease commitment $3,070,043
- --------------------------------------------
Many leases entered into by the Company include options, which are
generally exercised, 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. If conditions did not warrant invoking early termination of any
leases, and all renewal options were exercised for current lease agreements, the
total lease commitment for the Company would be approximately $4.1 billion.
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 January 31, 1998
and February 1, 1997, this liability amounted to $129,981,000 and $110,633,000,
respectively.
Cash or rent abatements received upon entering into certain store leases
are recognized on a straight-line basis as a reduction to rent expense over the
lease term. The unamortized portion is included in deferred lease credits.
Some of the leases relating to stores in operation at January 31, 1998
contain renewal options for periods ranging up to 25 years. Many leases also
provide for payment of operating expenses, real estate taxes and for additional
rent based on a percentage of sales. No lease directly imposes any restrictions
relating to leasing in other locations (other than radius clauses).
Rental expense for all operating leases was as follows:
- --------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
($000) Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- --------------------------------------------------------------------------
Minimum rentals $391,472 $337,487 $300,171
Contingent rentals 38,657 30,644 22,464
- --------------------------------------------------------------------------
Total $430,129 $368,131 $322,635
- --------------------------------------------------------------------------
Note E: Financial Instruments
Foreign Exchange Forward Contracts
The Company enters into foreign exchange forward contracts to reduce exposure to
foreign currency exchange risk. These contracts are primarily designated and
effective as hedges of commitments to purchase merchandise for foreign
operations. The market value gains and losses on these contracts are deferred
and recognized as part of the underlying cost to purchase the merchandise. At
January 31, 1998, the Company had contracts maturing at various dates through
1998 to sell the equivalent of $123,230,000 in foreign currencies (20,200,000
British pounds, 46,200,000 Canadian dollars, 62,625,260,078 Italian lire,
1,543,000,000 Japanese yen and 1,234,884,074 Spanish pesetas) at the contracted
rates. The deferred gains and losses on the Company's foreign exchange forward
contracts at January 31, 1998 are immaterial.
Put Options
At January 31, 1998, the Company had various put option contracts to repurchase
up to 3,050,000 shares of its common stock. The contracts have exercise prices
ranging from $32.95 to $38.37, with expiration dates extending to the third
quarter of fiscal 1998.
Interest Rate Swaps
During fiscal 1997, the Company entered into interest rate swap agreements in
order to reduce interest rate risk on a substantial portion of its long-term
debt. The swap agreements, which were issued at an aggregate notional amount of
$400 million, were settled in September 1997 at an interest rate of 6.7 percent.
The gains on the interest rate swaps were deferred and are being amortized to
reduce interest expense over the life of the debt.
1997 Annual Report page 34
Gap Inc.
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 the employee's contributions under a
predetermined formula. The Company's contributions vest over a seven-year
period. Company contributions to the retirement plan in 1997, 1996 and 1995 were
$12,907,000, $11,427,000 and $9,839,000, respectively.
A nonqualified Executive Deferred Compensation Plan was established on
January 1, 1994 and a nonqualified Executive Capital Accumulation Plan was
established on April 1, 1994. Both plans allow eligible employees to defer
compensation up to a maximum amount defined in each plan. The Company does not
match employees' contributions.
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 300,000
shares under the plan.
Incentive Stock Compensation Plans
The 1996 Stock Option and Award Plan (the "Plan") was established on March 26,
1996. The Board authorized 41,485,041 shares for issuance under the 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 Plan. The Plan empowers the Compensation and Stock Option
Committee of the Board of Directors to award compensation primarily in the form
of nonqualified stock options or restricted stock to key employees. Stock
options generally expire ten 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. 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 Compensation and Stock Option Committee.
Total compensation cost for those stock options issued at less than fair market
value under the Plan and for the restricted shares issued under MIRSP was
$17,170,000, $22,248,000 and $23,743,000 in 1997, 1996 and 1995, respectively.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which all eligible
employees may purchase common stock of the Company at 85 percent of the lower of
the closing price of the Company's common stock on the grant date or the
purchase date on the New York Stock Exchange Composite Transactions Index.
Employees pay for their stock purchases through payroll deductions at a rate
equal to any whole percentage from 1 percent to 15 percent. There were 645,625
shares issued under the plan during fiscal 1997, 599,495 during 1996 and 578,301
during 1995. All shares were acquired from reissued treasury stock. At January
31, 1998, there were 4,176,579 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.
In October 1996, the Board of Directors approved a share-buyback program
under which the Company may repurchase up to 45,000,000 shares of its
outstanding stock in the open market over a three-year period. As of January 31,
1998, 28,184,650 shares were repurchased for $743,805,000 under this program.
1997 Annual Report page 35
Gap Inc.
Stock Options
Under the Company's Stock Option Plans, nonqualified options to purchase common
stock are granted to officers, directors and key employees at exercise prices
equal to the fair market value of the stock at the date of grant or at other
prices as determined by the 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 28, 1995 11,619,816 $10.18
- ----------------------------------------------------------------
Granted 14,226,600 11.94
Exercised (1,491,558) 6.48
Canceled (894,222) 12.27
- ----------------------------------------------------------------
Balance at February 3, 1996 23,460,636 $11.41
- ----------------------------------------------------------------
Granted 9,364,110 20.60
Exercised (2,386,761) 8.30
Canceled (1,198,608) 14.85
- ----------------------------------------------------------------
Balance at February 1, 1997 29,239,377 $14.46
- ----------------------------------------------------------------
Granted 11,392,531 21.62
Exercised (2,849,034) 10.65
Canceled (2,559,295) 16.01
- ----------------------------------------------------------------
Balance at January 31, 1998 35,223,579 $16.97
- ----------------------------------------------------------------
Outstanding options at January 31, 1998 have expiration dates ranging
from March 20, 1998 to January 29, 2008 and represent grants to 2,347 key
employees.
At January 31, 1998, the Company reserved 60,083,011 shares of its
common stock, including 14,996 treasury shares, for the exercise of stock
options. There were 24,859,432 and 32,745,096 shares available for granting of
options at January 31, 1998 and February 1, 1997, respectively. Options for
4,299,847 and 4,373,222 shares were exercisable as of January 31, 1998 and
February 1, 1997, respectively, and had a weighted-average exercise price of
$11.66 and $9.01 for those respective periods.
The Company accounts for its Stock Option and Award Plans in accordance
with APB Opinion No. 25, under which no compensation cost has been recognized
for stock option awards granted at fair market value. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below. The effects of applying SFAS No. 123 in this pro
forma disclosure are not indicative of future amounts. SFAS No. 123 does not
apply to awards prior to fiscal year 1995. Additional awards in future years are
anticipated.
- -------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- -------------------------------------------------------------------------
Net earnings ($000)
As reported $533,901 $452,859 $354,039
Pro forma 507,966 437,232 348,977
- -------------------------------------------------------------------------
Earnings per share
As reported-basic $ 1.35 $ 1.09 $ .85
Pro forma-basic 1.28 1.05 .84
As reported-diluted 1.30 1.06 .83
Pro forma-diluted 1.24 1.02 .82
- -------------------------------------------------------------------------
The weighted-average fair value of the stock options granted during
fiscal 1997, 1996 and 1995 was $8.76, $7.47 and $4.18, 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 1997: dividend yield of .7 percent; expected price
volatility of 31 percent; risk-free interest rates ranging from 5.9 percent to
7.0 percent and expected lives between 3.9 and 5.8 years. The fair value of
stock options granted prior to 1997 was based on the following weighted-average
assumptions: dividend yield of 1.0 percent; expected price volatility of 30
percent; risk-free interest rates ranging from 5.5 percent to 6.5 percent; and
expected lives between 3.6 and 5.8 years.
The following table summarizes information about stock options outstanding at
January 31, 1998:
- -----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------ ------------------------------------
Number Outstanding Weighted-Average Remaining Weighted-Average Number Exercisable Weighted-Average
Range of Exercise Prices at Jan. 31, 1998 Contractual Life (in years) Exercise Price at Jan. 31, 1998 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3.86 to $11.29 8,215,077 5.10 $10.12 1,995,467 $ 8.39
11.40 to 13.03 7,454,625 5.75 12.96 210,600 11.79
13.42 to 20.88 10,688,682 8.08 19.13 2,077,095 14.68
20.89 to 39.00 8,865,195 8.66 24.10 16,685 25.79
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3.86 to $39.00 35,223,579 7.04 $16.97 4,299,847 $11.66
- -----------------------------------------------------------------------------------------------------------------------------------
1997 Annual Report page 36
Gap Inc.
Note H: Earnings Per Share
Under SFAS No. 128, the Company provides dual presentation of EPS on a basic and
diluted basis. The Company's granting of certain stock options and restricted
stock resulted in potential dilution of basic EPS. The following summarizes the
effects of the assumed issuance of dilutive securities on weighted-average
shares for basic EPS.
- --------------------------------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- --------------------------------------------------------------------------
Weighted-average number
of shares-basic 396,179,975 417,146,631 417,718,397
Incremental shares from
assumed issuance of:
Stock options 10,037,700 5,597,219 1,939,485
Restricted stock 3,983,083 4,523,370 8,094,633
- --------------------------------------------------------------------------
Weighted-average number
of shares-diluted 410,200,758 427,267,220 427,752,515
- --------------------------------------------------------------------------
The number of incremental shares from the assumed issuance of stock
options and restricted stock is calculated applying the treasury stock method.
Excluded from the above computation of weighted-average shares for
diluted EPS were options to purchase 440,063 shares of common stock during
fiscal 1997, 5,084,978 during 1996 and 3,087,269 during 1995. Issuance of these
securities would have resulted in an antidilutive effect on EPS.
Note I: Related Party Transactions
The Company has an agreement with Fisher Development, Inc. (FDI), wholly owned
by the brother of the Company's chairman, setting forth the terms under which
FDI may act as general contractor in connection with the Company's construction
activities. FDI acted as general contractor for 266, 177 and 204 new stores'
leasehold improvements and fixtures during fiscal 1997, 1996 and 1995,
respectively. In the same respective years, FDI supervised construction of 97,
38 and 54 expansions, as well as remodels of existing stores and headquarters
facilities. Total cost of construction was $233,777,000, $111,871,000 and
$164,820,000, including profit and overhead costs of $16,845,000, $10,751,000
and $11,753,000 for fiscal 1997, 1996 and 1995, respectively. At January 31,
1998 and February 1, 1997, amounts due to FDI were $10,318,000 and $6,456,000,
respectively. The terms and conditions of the agreement with FDI are reviewed
annually by the Audit and Finance Committee of the Board of Directors.
Note J: Quarterly Financial Information (Unaudited)
Fiscal 1997 Quarter Ended
- -------------------------------------------------------------------------------------------------------------------------------
Thirteen Thirteen Thirteen Thirteen Fifty-two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
($000 except per share amounts) May 3, 1997 Aug. 2, 1997 Nov. 1, 1997 Jan. 31, 1998 Jan. 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $1,231,186 $1,345,221 $1,765,939 $2,165,479 $6,507,825
Gross profit 442,060 462,135 721,266 860,823 2,486,284
Net earnings 84,304 69,458 164,523 215,616 533,901
Earnings per share-basic .21 .17 .42 .55 1.35
Earnings per share-diluted .20 .17 .40 .53 1.30
- -------------------------------------------------------------------------------------------------------------------------------
Fiscal 1996 Quarter Ended
- -------------------------------------------------------------------------------------------------------------------------------
Thirteen Thirteen Thirteen Thirteen Fifty-two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
($000 except per share amounts) May 4, 1996 Aug. 3, 1996 Nov. 2, 1996 Feb. 1, 1997 Feb. 1, 1997
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $1,113,154 $1,120,335 $1,382,996 $1,667,896 $5,284,381
Gross profit 413,840 400,170 545,221 639,984 1,999,215
Net earnings 81,573 65,790 134,310 171,186 452,859
Earnings per share-basic .19 .16 .32 .42 1.09
Earnings per share-diluted .19 .15 .32 .41 1.06
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1997 Annual Report page 37
Gap Inc.
Quantitative and Qualitative Disclosures About Market Risk
The table on the right provides information about the Company's market sensitive
financial instruments as of January 31,1998 and constitutes a forward-looking
statement. The Company operates in foreign countries which exposes it to market
risk associated with foreign currency exchange rate fluctuations. The Company's
policy is to hedge substantially all merchandise purchases for foreign
operations through foreign exchange forward contracts. 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).
The Company issued unsecured notes payable with a fixed interest rate of
6.9 percent. By entering into the fixed-rate notes, the Company avoided interest
rate risk from variable rate fluctuations.
A portion of the Company's fixed-rate short-term borrowings used to
finance foreign operations are denominated in foreign currencies. By borrowing
and repaying the loans in local currencies, the Company avoided the risk
associated with exchange rate fluctuations.
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Notional Amount of
Average Forward Contracts Fair Value at
($000) Contract Rate(a) in U.S. Dollars Jan. 31, 1998(b)
- ------------------------------------------------------------------------------------------------------
Foreign exchange
forward contracts(c)
British pounds .60 $ 33,394 $ 33,269
Canadian dollars 1.40 32,984 31,757
Italian lire 1,743.25 35,924 35,383
Japanese yen 120.52 12,803 12,266
Spanish pesetas 151.98 8,125 8,112
- ------------------------------------------------------------------------------------------------------
Total foreign exchange forward contracts $123,230 $120,787
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Fixed Carrying Amount in Fair Value at
($000) Interest Rate U.S. Dollars Jan. 31, 1998(d)
- ------------------------------------------------------------------------------------------------------
Notes payable(e) 6.9% $496,044 $526,128
- ------------------------------------------------------------------------------------------------------
(a) Currency per U.S. dollar.
(b) Calculated using spot rates at January 31, 1998.
(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 January 31, 1998.
(e) Principal amount $500 million due September 15, 2007.
1997 Annual Report page 38