SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended August 4, 2001 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
-------------------------- --------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Harrison
San Francisco, California 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 952-4400
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.05 par value New York Stock Exchange, Inc.
(Title of class) Pacific Exchange, Inc.
(Name of each exchange where registered)
Securities registered pursuant to Section 12(g) of the Act: None
-----------------------
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Common Stock, $0.05 par value, 862,435,229 shares as of September 1, 2001
-------------------------------------------------------------------------
1
GAP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000 except share and par value) August 4, February 3, July 29,
2001 2001 2000
---------------- ---------------- ----------------
ASSETS
Current Assets:
Cash and equivalents $ 722,952 $ 408,794 $ 327,860
Merchandise inventory 2,149,223 1,904,153 2,080,856
Other current assets 396,371 335,103 375,013
---------------- ---------------- ----------------
Total Current Assets 3,268,546 2,648,050 2,783,729
Property and equipment, net 4,221,567 4,007,685 3,244,940
Lease rights and other assets 358,484 357,173 345,767
---------------- ---------------- ----------------
Total Assets $ 7,848,597 $ 7,012,908 $ 6,374,436
================ ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 691,670 $ 779,904 $ 859,448
Current maturities of long-term debt 250,000 250,000 -
Accounts payable 1,081,819 1,067,207 922,866
Accrued expenses and other current liabilities 763,625 702,033 617,785
---------------- ---------------- ----------------
Total Current Liabilities 2,787,114 2,799,144 2,400,099
Long-Term Liabilities:
Long-term debt 1,268,036 780,246 1,022,871
Deferred lease credits and other liabilities 544,618 505,279 452,325
---------------- ---------------- ----------------
Total Long-Term Liabilities 1,812,654 1,285,525 1,475,196
Shareholders' Equity:
Common stock $.05 par value
Authorized 2,300,000 shares;
Issued 945,896,525; 939,222,871
and 933,098,193 shares;
Outstanding 861,650,291; 853,996,984
and 849,573,626 shares 47,294 46,961 46,654
Additional paid-in capital 432,411 294,967 189,589
Retained earnings 5,160,981 4,974,773 4,573,338
Accumulated other comprehensive earnings (losses) (39,820) (20,173) 10,003
Deferred compensation (11,054) (12,162) (18,112)
Treasury stock, at cost (2,340,983) (2,356,127) (2,302,331)
---------------- ---------------- ----------------
Total Shareholders' Equity 3,248,829 2,928,239 2,499,141
---------------- ---------------- ----------------
Total Liabilities and Shareholders' Equity $ 7,848,597 $ 7,012,908 $ 6,374,436
================ ================ ================
See accompanying notes to condensed consolidated financial statements.
2
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
- -------------------------------------------------------------------------------
($000, except share and per share amounts)
-------------------------------- -----------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------------- -----------------------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
------------- ------------- ------------- --------------
Net sales $ 3,245,219 $ 2,947,714 $ 6,424,875 $ 5,679,704
Costs and expenses
Cost of goods sold and occupancy expenses 2,204,137 1,837,064 4,258,619 3,438,969
Operating expenses 872,772 809,294 1,793,184 1,559,597
Interest expense 28,863 13,800 52,901 25,329
Interest income (1,893) (2,081) (3,028) (4,657)
------------- ------------- ------------- -------------
Earnings before income taxes 141,340 289,637 323,199 660,466
Income taxes 51,589 105,717 117,968 241,070
------------- ------------- ------------- -------------
Net earnings $ 89,751 $ 183,920 $ 205,231 $ 419,396
============= ============= ============= =============
- ----------------------------------------------------------------------------------------------------------------------
Weighted average number of shares - basic 859,671,047 849,641,253 857,002,238 849,983,457
Weighted average number of shares - diluted 883,662,826 880,119,755 879,933,693 884,183,119
Earnings per share - basic $ 0.10 $ 0.22 $ 0.24 $ 0.49
Earnings per share - diluted $ 0.10 $ 0.21 $ 0.23 $ 0.47
Cash dividends per share $ 0.02 $ 0.02 $ 0.04/(a)/ $ 0.04/(b)/
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
/(a)/ Includes a dividend of $0.02 per share declared in January 2001 but paid
in first quarter of fiscal 2001.
/(b)/ Includes a dividend of $0.02 per share declared in January 2000 but paid
in first quarter of fiscal 2000.
3
GAP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------
($000) Twenty-six Weeks Ended
-------------------------------
August 4, 2001 July 29, 2000
-------------- -------------
Cash Flows from Operating Activities:
Net earnings $ 205,231 $ 419,396
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 382,164 270,436
Tax benefit from exercise of stock options
and vesting of restricted stock 48,469 87,278
Changes in operating assets and liabilities:
Merchandise inventory (252,042) (625,943)
Other current assets (70,051) (104,486)
Accounts payable 18,211 122,871
Accrued expenses 85,128 (114,034)
Deferred lease credits and other liabilities 25,337 13,255
-------------- -------------
Net cash provided by operating activities 442,447 68,773
-------------- -------------
Cash Flows from Investing Activities:
Net purchase of property and equipment (588,389) (793,827)
Acquisition of lease rights and other assets (4,776) (52,791)
-------------- -------------
Net cash used for investing activities (593,165) (846,618)
-------------- -------------
Cash Flows from Financing Activities:
Net increase (decrease) in notes payable (86,087) 700,053
Net issuance of long-term debt 495,886 250,000
Issuance of common stock 99,278 56,970
Net purchase of treasury stock - (304,713)
Cash dividends paid (38,029) (37,735)
-------------- -------------
Net cash provided by financing activities 471,048 664,575
-------------- -------------
Effect of exchange rate fluctuations on cash (6,172) (9,222)
-------------- -------------
Net increase (decrease) in cash and equivalents 314,158 (122,492)
Cash and equivalents at beginning of period 408,794 450,352
-------------- -------------
Cash and equivalents at end of period $ 722,952 $ 327,860
============== =============
- ------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
GAP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The condensed consolidated balance sheets as of August 4, 2001 and July 29, 2000
and the interim condensed consolidated statements of earnings for the thirteen
and twenty-six weeks ended August 4, 2001 and July 29, 2000 and cash flows for
the twenty-six week periods ended August 4, 2001 and July 29, 2000 have been
prepared by the Company, without audit. In the opinion of management, such
statements include all adjustments (which include only normal recurring
adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows of the Company at August 4, 2001 and July
29, 2000, and for all periods presented.
Certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted from these interim
financial statements. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended February 3, 2001.
The condensed consolidated balance sheet as of February 3, 2001 was derived from
the Company's February 3, 2001 balance sheet included in the Company's 2000
Annual Report on Form 10-K.
The results of operations for the twenty-six weeks ended August 4, 2001 are not
necessarily indicative of the operating results that may be expected for the
year ending February 2, 2002.
2. COMPREHENSIVE EARNINGS
----------------------
Comprehensive earnings include net earnings and other comprehensive earnings
(losses). Other comprehensive earnings (losses) include foreign currency
translation adjustments and fluctuations in the fair market value of certain
financial instruments. Comprehensive earnings for the thirteen and twenty-six
weeks ended August 4, 2001 and July 29, 2000 were as follows (in thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------------- -----------------------------------
August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
---------------------------------- -----------------------------------
Net earnings $ 89,751 $ 183,920 $ 205,231 $ 419,396
Other comprehensive (losses) earnings (7,488) 3,990 (19,647) 16,762
---------------------------------- -----------------------------------
Comprehensive earnings $ 82,263 $ 187,910 $ 185,584 $ 436,158
================================== ===================================
5
3. 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 dilutive effect of the Company's potentially dilutive securities,
which include certain stock options, unvested shares of restricted stock and
certain put options. The following summarizes the incremental shares from these
potentially dilutive securities, calculated using the treasury stock method.
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------ -----------------------------
August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
-------------- ------------- -------------- -------------
Weighted-average number of shares - basic 859,671,047 849,641,253 857,002,238 849,983,457
Incremental shares resulting from:
Stock options 23,937,596 29,906,782 22,801,584 33,580,804
Restricted stock 54,183 540,793 129,871 618,858
Put options - 30,927 - -
-------------- ------------- -------------- -------------
Weighted-average number of shares - diluted 883,662,826 880,119,755 879,933,693 884,183,119
============== ============= ============== =============
Excluded from the above computations of weighted-average shares for diluted
earnings per share were options to purchase 21,401,588 and 23,003,521 shares of
common stock during the thirteen and twenty-six weeks ended August 4, 2001,
respectively, and 21,531,753 and 16,682,889 shares during the thirteen and
twenty-six weeks ended July 29, 2000, respectively. Additionally, put options to
repurchase 375,000 shares during the twenty-six weeks ended July 29, 2000 were
excluded from the above computations. Issuance or repurchase of these securities
would have resulted in an antidilutive effect on earnings per share.
4. LONG-TERM DEBT
--------------
On April 27, 2001, the Company issued $500 million of debt securities at a fixed
annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is
payable semi-annually. The notes are recorded in the balance sheet at their
issuance amount net of unamortized discount.
In connection with the debt issuance, the Company entered into interest rate
swap agreements in order to reduce interest rate risk. The swap agreements were
settled in the first quarter and the net losses of approximately $2.2 million
associated with these swaps will be amortized over the life of the debt
securities.
5. WORKFORCE REDUCTIONS AND OTHER ACTIONS
--------------------------------------
On June 21, 2001, the Company announced workforce reductions to streamline
headquarters staffing and improve organizational efficiencies.
The workforce reductions resulted in the elimination of approximately 1,600
positions consisting of an estimated 1,040 lay offs of headquarters and Banana
Republic field employees and the elimination of approximately 560 open
positions.
In addition to these reductions, the Company plans to close distribution
facilities in Ventura, California and London. Operations at those facilities
will be consolidated at new facilities in Fresno, California and Rugby, England.
The consolidation will be completed by the first quarter of fiscal 2002.
Approximately 425 employees affected by these changes have the opportunity to
apply for positions at the new locations.
6
The Company also plans to relocate its London headquarters to the new Rugby
facility. This move will be completed by the first quarter of fiscal 2002.
Approximately 125 employees affected by this move have the opportunity to
transfer to Rugby or apply for other positions at Rugby.
As a result of the workforce reductions and other actions, as described above,
the Company recorded a charge of approximately $30 million during the second
quarter of fiscal 2001 which was included in operating expenses. Of this charge,
the Company recorded a liability for employee termination pay of approximately
$27 million, substantially all of which will be paid during the third quarter of
fiscal 2001.
7
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105-2230
Tel: (415) 783 4000
Fax: (415) 783 4329
www.us.deloitte.com
Deloitte
& Touche
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
The Gap, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of The
Gap, Inc. and subsidiaries as of August 4, 2001 and July 29, 2000, and the
related condensed consolidated statements of earnings for the thirteen and
twenty-six week periods ended August 4, 2001 and July 29, 2000 and condensed
consolidated statements of cash flows for the twenty-six week periods ended
August 4, 2001 and July 29, 2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of The
Gap, Inc. and subsidiaries as of February 3, 2001, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the fiscal year
then ended (not presented herein); and in our report dated February 28, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of February 3, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
August 16, 2001
8
GAP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- -------------------------------------------------------------------------------
The information below contains certain forward-looking statements which reflect
the current view of Gap Inc. (the "Company") with respect to future events and
financial performance. Wherever used, the words "expect," "plan," "anticipate,"
"believe," and similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties and
the Company's actual 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.
It is suggested that this document be read in conjunction with the Management's
Discussion and Analysis included in the Company's Annual Report on Form 10-K for
the year ended February 3, 2001.
The Company assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
RESULTS OF OPERATIONS
Net Sales
- -----------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------------------- ---------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Net sales ($000) $3,245,219 $2,947,714 $6,424,875 $5,679,704
Total net sales growth percentage 10 20 13 20
Comparable store sales decrease percentage (9) (2) (8) (2)
Net sales per average square foot $ 94 $ 111 $ 191 $ 221
Square footage of gross store space -
at end of period (000) 34,381 26,932
Number of Stores:
Beginning of Year 3,676 3,018
New stores 337 296
Expanded stores/(1)/ 98 72
Closed stores 40 30
End of Period 3,973 3,284
- -----------------------------------------------------------------------------------------------------------------
(1) Expanded stores do not change store count.
9
Store count and square footage at quarter end for fiscal 2001 and 2000 were as
follows:
August 4, 2001 July 29, 2000
- -----------------------------------------------------------------------------------------
Number of Sq. Ft. Number of Sq. Ft.
Stores (millions) Stores (millions)
- -----------------------------------------------------------------------------------------
Gap Domestic 2,201 12.6 1,885 11.0
Gap International 594 3.3 454 2.4
Banana Republic 430 3.5 365 2.8
Old Navy 748 15.0 580 10.7
- -----------------------------------------------------------------------------------------
Total 3,973 34.4 3,284 26.9
=========================================================================================
Increase 21% 28% 23% 32%
The increases in net sales for the second quarter and first half of fiscal 2001
over the same periods last year were 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.
The Company's second quarter comparable store sales by division were as follows:
Gap Domestic had a negative high-single digit versus a positive mid-single digit
last year, Gap International had a negative mid-single digit versus a positive
low-single digit last year, Banana Republic had a negative mid-single digit
versus a flat comp last year, Old Navy had negative mid-teens versus negative
low-double digits last year.
The Company's year-to-date comparable store sales by division were as follows:
Gap Domestic had a negative mid-single digit versus a flat comp last year, Gap
International had a negative high-single digit versus a positive low-single
digit last year, Banana Republic had a negative mid-single digit versus a
positive low-single digit last year, Old Navy had negative low-double digits
versus a negative mid-single digit last year.
The decreases in net sales per average square foot for the second quarter and
first half of fiscal 2001 were primarily attributable to negative comparable
store sales.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales increased
5.6 and 5.8 percentage points in the second quarter and first half of fiscal
2001, respectively, from the same periods in fiscal 2000. The increases were
driven by decreased merchandise margin and increased occupancy expenses as a
percentage of net sales.
For the second quarter and first half of fiscal 2001, the decreases in
merchandise margin as a percentage of net sales were primarily attributable to
lower margins from regular-priced goods and a greater percentage of merchandise
sold at markdown when compared to the same periods last year. The increases in
occupancy expenses as a percentage of net sales for the second quarter and first
half of fiscal 2001 were primarily attributable to negative comparable store
sales.
Operating Expenses
Operating expenses as a percentage of net sales, including charges in the amount
of approximately $30 million primarily representing workforce reductions,
decreased 0.6 and increased 0.4 percentage points for the second quarter and
first half of fiscal 2001, respectively, from the same periods in fiscal 2000.
Excluding the charges, operating expenses as a percentage of net sales,
decreased 1.5 and 0.1 percentage points for the second quarter and first half of
fiscal 2001, respectively, from the same periods in fiscal 2000.
The decreases were primarily attributable to lower advertising costs, travel and
entertainment as well as other personnel expenses as a percentage of net sales,
partially offset by higher store payroll and headquarters depreciation expenses
as a percentage of net sales. Advertising costs decreased 39 percent and 25
percent for the second quarter and first half of fiscal 2001, respectively, from
the same periods in fiscal 2000. Travel and entertainment decreased 30 percent
and 28
10
percent for the second quarter and first half of fiscal 2001, respectively, from
the same periods in fiscal 2000. Other personnel expenses, including relocations
and temporary help, declined 36 percent for the second quarter and first half of
the fiscal 2001 from the same periods in fiscal 2000. Store payroll increased 18
percent for the second quarter and first half of fiscal 2001 from the same
periods in fiscal 2000, driven by the Company's square footage growth.
Interest Expense
The increases in interest expense in the second quarter and first half of fiscal
2001 as compared to the same periods in fiscal 2000 were primarily due to
increases in average borrowings.
Interest Income
The decreases in interest income in the second quarter and first half of fiscal
2001 as compared to the same periods in fiscal 2000 were primarily due to
decreases in average investment rate and average cash available for investment.
Income Taxes
The effective tax rate was 36.5 percent for the second quarter and first half of
fiscal 2001 and 2000.
11
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
- --------------------------------------------------- ---------------------------------------
Twenty-six Weeks Ended
---------------------------------------
August 4, 2001 July 29, 2000
- --------------------------------------------------- ---------------------------------------
Cash provided by operating activities ($000) $ 442,447 $ 68,773
Working capital ($000) $ 481,432 $ 383,630
Current ratio 1.17:1 1.16:1
- --------------------------------------------------- ---------------------------------------
For the twenty-six weeks ended August 4, 2001, the increase in cash flows
provided by operating activities, compared to the same period in the prior year,
was primarily attributable to a decrease in the growth of merchandise inventory
and changes in other operating assets and liabilities which were primarily
driven by timing of certain payments. This increase was partially offset by
decreases in net earnings exclusive of depreciation and amortization and tax
benefit from the exercise of stock options and vesting of restricted stock.
The Company funds inventory expenditures during normal and peak periods through
a combination of cash flows provided by 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.
The Company has committed credit facilities totaling $1.45 billion, consisting
of a $1.30 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 of up to $850 million for the Company's commercial paper program. In
addition, up to $200 million of the amount reserved for letters of credit can be
reallocated to provide backup for the Company's commercial paper program
increasing the total amount of commercial paper backup to $1.05 billion. The
Company also has a credit facility effective September 17, 2001 to December 17,
2001 to provide backup of up to $400 million for the Company's commercial paper
program over it's peak borrowing period. The Company has additional uncommitted
credit facilities of $1.05 billion for the issuance of letters of credit. At
August 4, 2001, the Company had outstanding letters of credit of approximately
$1.2 billion. The Company had additional uncommitted unused lines of credit of
approximately $304 million at August 4, 2001.
On April 18, 2001, Moody's Investors Service ("Moody's") lowered their credit
rating of the Company from A2 to A3 (for senior unsecured debt) citing the
challenges that they expected the Company to face in improving comparable store
sales in a highly promotional and unforgiving retail environment. On August 9,
2001 Standard and Poor's placed the Company on credit watch negative due to
disappointing second quarter sales. On August 21, 2001, Moody's confirmed the
ratings of the Company but changed the rating outlook from stable to negative as
a result of the deterioration in the Company's operating profitability.
On April 27, 2001, the Company issued $500 million of debt securities at a fixed
annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is
payable semi-annually. The notes are recorded in the balance sheet at their
issuance amount net of unamortized discount.
In connection with the debt issuance, the Company entered into interest rate
swap agreements in order to reduce interest rate risk. The swap agreements were
settled in the first quarter and the net losses of approximately $2.2 million
associated with these swaps will be amortized over the life of the debt
securities.
For the twenty-six weeks ended August 4, 2001, capital expenditures, net of
construction allowances, totaled approximately $547 million. The majority of
these expenditures were used for expansion of the store base, headquarter
buildings and distribution facilities. During the first half of fiscal 2001, the
Company experienced a net increase in store space of approximately 3 million
square feet, or 10 percent, due to a net addition of 297 stores, the expansion
of 98 stores and the remodeling of certain stores.
12
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,
the remodeling of certain stores, as well as amounts for headquarter buildings,
distribution facilities 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. Due to the lower level of new store openings
during the first half of fiscal 2001, the Company expects capital expenditures,
new store openings and square footage growth to fall at the lower end of these
ranges. New stores are generally expected to be leased.
During the second quarter of fiscal 2001, the Company revised its planned annual
square footage growth for fiscal 2002 and 2003 to approximately 10 percent,
compared to a previously stated rate of approximately 15 percent.
During fiscal 1998, the Company purchased land in San Francisco to construct an
additional headquarter facility. The estimated total project cost is
approximately $240 million and approximately $55 million will be incurred during
fiscal 2001. The Company commenced construction on this facility during the
third quarter of fiscal 1998 and it was partially opened during the first
quarter of fiscal 2001. Construction is estimated to be completed by the third
quarter of fiscal 2001.
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 will be incurred during fiscal 2001. The facilities are expected to
be open by the fourth quarter of fiscal 2001.
13
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The market risk of the Company's financial instruments as of August 4, 2001 has
not significantly changed since February 3, 2001.
The market risk profile of the Company on February 3, 2001 is disclosed on the
Company's 2000 Annual Report on Form 10-K.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In 1999, the Company was named as a defendant in two lawsuits relating to
sourcing of products from Saipan (Commonwealth of the Northern Mariana
Islands). A complaint was filed on January 13, 1999 in California Superior
Court in San Francisco by the Union of Needletrades Industrial and Textile
Employees, AFL-CIO; Global Exchange; Sweatshop Watch; and Asian Law Caucus
against the Company and 17 other parties. The plaintiffs allege violations
of California's unlawful, fraudulent and unfair business practices and
untrue and misleading advertising statutes in connection with labeling of
product and labor practices regarding workers of factories that make product
for the Company in Saipan. The plaintiffs seek injunctive relief,
restitution, disgorgement of profits and other damages. Trial has not been
set in the state case.
A second complaint was filed on January 13, 1999, in Federal District Court,
Central District of California, by various unidentified worker plaintiffs
against the Company and 27 other parties. Those unidentified worker
plaintiffs seek class-action status and allege, among other things, that the
Company (and other defendants) violated the Racketeer Influenced and Corrupt
Organizations Act in connection with the labor practices and treatment of
workers of factories in Saipan that make product for the Company. The
plaintiffs seek injunctive relief as well as actual and punitive damages. On
September 29, 1999, the action was transferred to the United States District
Court, State of Hawaii. On April 28, 2000, plaintiffs filed a First Amended
Complaint adding 22 new defendants. On June 23, 2000, the United States
District Court, State of Hawaii, ordered the case transferred to the United
States District Court, District of the Mariana Islands. On March 23, 2001,
the Ninth Circuit Court of Appeal denied Plaintiffs' writ of mandamus
requesting that the action either be transferred back to the District Court
in Hawaii or to the Central District of California. Now that the case is in
the District of the Mariana Islands, defendants have renewed their motion to
dismiss the case, which was heard on August 10, 2001. No decision has been
rendered.
The Company is in the process of investigating the allegations set forth in
the complaints and will pursue appropriate legal defenses. At this time the
Company is unable to assess the likelihood of the outcome of these cases and
cannot estimate the amount or range of potential loss, if any.
14
Item 4. Submissions of Matters to a Vote of Security Holders
- -------------------------------------------------------------
a) On May 9, 2001 the Annual Meeting of Stockholders of the Company was
held in Fishkill, New York. There were 854,429,402 shares of common stock
outstanding on the record date and entitled to vote at the Annual Meeting.
b) The following directors were elected:
Vote For Vote Withheld
Adrian D. P. Bellamy 764,039,406 3,942,180
Millard S. Drexler 764,014,986 3,966,600
Donald G. Fisher 763,201,272 4,780,314
Doris F. Fisher 763,917,022 4,064,564
Robert J. Fisher 763,937,177 4,044,409
Glenda A. Hatchett 763,980,028 4,001,558
Steven P. Jobs 762,103,630 5,877,956
John M. Lillie 763,288,972 4,692,614
Charles R. Schwab 764,008,064 3,973,522
Sergio S. Zyman 764,034,323 3,947,263
There were no abstentions and no broker non-votes.
c) The selection of Deloitte & Touche, LLP as independent auditors for the
fiscal year ending February 2, 2002 was ratified with 755,471,199 votes in favor
and 10,262,624 against.
There were 2,247,763 abstentions.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
(10.1) Third Amended and Restated Credit Agreement, dated as of June
26, 2001 among The Gap, Inc., Banana Republic, Inc., Old Navy
Inc., Banana Republic (Canada) Inc., Old Navy (Canada) Inc.,
Gap (Canada) Inc., Gap International Sourcing Limited, Gap
International Sourcing Pte. Ltd., Gap (Japan) K.K., Gap
International Sourcing (Holdings) Limited, Gap (Netherlands)
B.V., Gap International B.V., GPS Consumer Direct, Inc.,
Citicorp USA, Inc., Salomon Smith Barney, Inc., Bank of
America, N.A., HSBC Bank USA, ABN AMRO Bank N.V., The Chase
Manhattan Bank, Banca Nazionale Del Lavoro S.p.A. New York
Branch, Societe Generale, Sumitomo Mitsui Banking Corporation,
Bank One, NA (Main Office Chicago), Fleet National Bank, Wells
Fargo, National Association, The Bank of New York, The Fuji
Bank, Limited, US Bank National Association, Bank of Nova
Scotia, and Citibank, N.A.
(15) Letter re: Unaudited Interim Financial Information
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended August 4, 2001.
15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GAP, INC.
Date: September 6, 2001 By /s/ Heidi Kunz
-------------------------------------
Heidi Kunz
Chief Financial Officer
(Principal financial officer
of the registrant)
Date: September 6, 2001 By /s/ Millard S. Drexler
----------------------------------
Millard S. Drexler
President and Chief Executive
Officer
16
EXHIBIT INDEX
(10.1) Third Amended and Restated Credit Agreement, dated as of June
26, 2001 among The Gap, Inc., Banana Republic, Inc., Old Navy
Inc., Banana Republic (Canada) Inc., Old Navy (Canada) Inc.,
Gap (Canada) Inc., Gap International Sourcing Limited, Gap
International Sourcing Pte. Ltd., Gap (Japan) K.K., Gap
International Sourcing (Holdings) Limited, Gap (Netherlands)
B.V., Gap International B.V., GPS Consumer Direct, Inc.,
Citicorp USA, Inc., Salomon Smith Barney, Inc., Bank of
America, N.A., HSBC Bank USA, ABN AMRO Bank N.V., The Chase
Manhattan Bank, Banca Nazionale Del Lavoro S.p.A. New York
Branch, Societe Generale, Sumitomo Mitsui Banking Corporation,
Bank One, NA (Main Office Chicago), Fleet National Bank, Wells
Fargo, National Association, The Bank of New York, The Fuji
Bank, Limited, US Bank National Association, Bank of Nova
Scotia, and Citibank, N.A.
(15) Letter re: Unaudited Interim Financial Information
17