Exhibit 13
10-YEAR SELECTED FINANCIAL DATA
Compound Annual Growth Rate Fiscal Year (in weeks)
- -------------------------------------------------------------------------------- ---------------------------------------------
3-year 5-year 10-year 2001 (52) 2000 (53) 1999 (52)
Operating Results ($ in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales 15% 21% 19% $ 13,847,873 $ 13,673,460 $ 11,635,398
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization -- -- -- 8,905,064 8,025,374 6,360,704
Percentage of net sales -- -- -- 64.3% 58.7% 54.7%
Depreciation and amortization (a) -- -- -- $ 799,325 $ 574,068 $ 414,558
Operating expenses -- -- -- 3,805,968 3,629,257 3,043,432
Net interest expense -- -- -- 95,875 62,876 31,755
Earnings before income taxes (43) (20) (4) 241,641 1,381,885 1,784,949
Percentage of net sales -- -- -- 1.7% 10.1% 15.3%
Income taxes -- -- -- $ 249,405 $ 504,388 $ 657,884
Net earnings (loss) -- -- -- (7,764) 877,497 1,127,065
Percentage of net sales -- -- -- (0.1%) 6.4% 9.7%
Cash dividends paid -- -- -- $ 76,373 $ 75,488 $ 75,795
Net purchase of property and
equipment, including lease rights -- -- -- 949,288 1,881,127 1,268,811
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Per Share Data
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Net earnings (loss) -- basic -- -- -- $ (0.01) $ 1.03 $ 1.32
Net earnings (loss) -- diluted -- -- -- (0.01) 1.00 1.26
Cash dividends paid (b) -- -- -- 0.09 0.09 0.09
Shareholders' equity (book value) -- -- -- 3.48 3.43 2.63
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Financial Position ($ in thousands)
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Property and equipment, net 30% 30% 22% $ 4,161,290 $ 4,007,685 $ 2,715,315
Merchandise inventory 17 24 18 1,677,116 1,904,153 1,462,045
Total assets 24 24 21 7,591,326 7,012,908 5,188,756
Working capital -- -- -- 988,317 (151,094) 444,911
Current ratio -- -- -- 1.48:1 0.95:1 1.25:1
Total long-term debt, less current installments -- -- -- $ 1,961,397 $ 780,246 $ 784,925
Ratio of long-term debt to shareholders' equity (c) -- -- -- 0.65:1 0.35:1 0.35:1
Shareholders' equity -- -- -- $ 3,009,581 $ 2,928,239 $ 2,233,045
Return on average assets -- -- -- (0.1%) 14.4% 24.6%
Return on average shareholders' equity -- -- -- (0.3%) 34.0% 59.2%
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Statistics
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Number of store concepts opened (d) 18% 24% 15% 587 731 570
Number of store concepts expanded (d) -- -- -- 311 268 129
Number of store concepts closed (d) -- -- -- 92 73 18
Number of store concepts open at year-end (d) 19 18 13 4,171 3,676 3,018
Net increase in number of store concepts (d) -- -- -- 13% 22% 22%
Comparable store sales increase (decrease)
percentage (52-week basis) -- -- -- (13%) (5%) 7%
Sales per square foot (52-week basis) (e) -- -- -- $ 394 $ 482 $ 548
Square footage of gross store space at year-end 25 24 20 36,333,400 31,373,400 23,978,100
Percentage increase in square feet -- -- -- 16% 31% 28%
Number of employees at year-end 14 20 18 165,000 166,000 140,000
Weighted-average number of shares -- basic -- -- -- 860,255,419 849,810,658 853,804,924
Weighted-average number of shares -- diluted -- -- -- 860,255,419 879,137,194 895,029,176
Number of shares outstanding at year-end,
net of treasury stock -- -- -- 865,726,890 853,996,984 850,498,941
(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Excludes a dividend of $.0222 per share declared in January 2002 but paid in
the first quarter of fiscal 2002.
(c) Long-term debt includes current installments.
(d) Since the beginning of fiscal 2000, Gap brand stores have been reported
based on concepts. Any Gap Adult, GapKids, babyGap or GapBody that meets a
certain square footage threshold has been counted as a store, even when
residing within a single physical location. The number of stores by location
at the end of fiscal 2001 and 2000 was 3,097 and 2,848, respectively.
(e) Based on weighted-average gross square footage.
GAP INC. ANNUAL REPORT 2001 14
10-YEAR SELECTED FINANCIAL DATA (continued)
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Operating Results ($ in thousands) 1998 (52) 1997 (52) 1996 (52) 1995 (53)
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Net sales $ 9,054,462 $ 6,507,825 $ 5,284,381 $ 4,395,253
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 5,013,473 3,775,957 3,093,709 2,645,736
Percentage of net sales 55.4% 58.0% 58.5% 60.2%
Depreciation and amortization (a) $ 304,745 $ 245,584 $ 191,457 $ 175,719
Operating expenses 2,403,365 1,635,017 1,270,138 1,004,396
Net interest expense 13,617 (2,975) (19,450) (15,797)
Earnings before income taxes 1,319,262 854,242 748,527 585,199
Percentage of net sales 14.6% 13.1% 14.2% 13.3%
Income taxes $ 494,723 $ 320,341 $ 295,668 $ 231,160
Net earnings (loss) 824,539 533,901 452,859 354,039
Percentage of net sales 9.1% 8.2% 8.6% 8.1%
Cash dividends paid $ 76,888 $ 79,503 $ 83,854 $ 66,993
Net purchase of property and
equipment, including lease rights 842,655 483,114 375,838 309,599
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Per Share Data
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Net earnings (loss) -- basic $ 0.95 $ 0.60 $ 0.48 $ 0.38
Net earnings (loss) -- diluted 0.91 0.58 0.47 0.37
Cash dividends paid (b) 0.09 0.09 0.09 0.07
Shareholders' equity (book value) 1.83 1.79 1.79 1.69
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Financial Position ($ in thousands)
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Property and equipment, net $ 1,876,370 $ 1,365,246 $ 1,135,720 $ 957,752
Merchandise inventory 1,056,444 733,174 578,765 482,575
Total assets 3,963,919 3,337,502 2,626,927 2,343,068
Working capital 318,721 839,399 554,359 728,301
Current ratio 1.21:1 1.85:1 1.72:1 2.32:1
Total long-term debt, less current installments $ 496,455 $ 496,044 -- --
Ratio of long-term debt to shareholders' equity (c) 0.32:1 0.31:1 N/A N/A
Shareholders' equity $ 1,573,679 $ 1,583,986 $ 1,654,470 $ 1,640,473
Return on average assets 22.6% 17.9% 18.2% 16.3%
Return on average shareholders' equity 52.2% 33.0% 27.5% 23.5%
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Statistics
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Number of store concepts opened (d) 356 298 203 225
Number of store concepts expanded (d) 135 98 42 55
Number of store concepts closed (d) 20 22 30 53
Number of store concepts open at year-end (d) 2,466 2,130 1,854 1,680
Net increase in number of store concepts (d) 16% 15% 10% 11%
Comparable store sales increase (decrease)
percentage (52-week basis) 17% 6% 5% 0%
Sales per square foot (52-week basis) (e) $ 532 $ 463 $ 441 $ 425
Square footage of gross store space at year-end 18,757,400 15,312,700 12,645,000 11,100,200
Percentage increase in square feet 22% 21% 14% 21%
Number of employees at year-end 111,000 81,000 66,000 60,000
Weighted-average number of shares -- basic 864,062,060 891,404,945 938,579,921 939,866,394
Weighted-average number of shares -- diluted 904,374,383 922,951,706 961,351,245 962,443,160
Number of shares outstanding at year-end,
net of treasury stock 857,960,032 884,549,313 926,495,994 971,149,446
Fiscal Year (in weeks)
- --------------------------------------------------------------------------------------------------------------
Operating Results ($ in thousands) 1994 (52) 1993 (52) 1992 (52)
- --------------------------------------------------------------------------------------------------------------
Net sales $ 3,722,940 $ 3,295,679 $ 2,960,409
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 2,202,133 1,996,929 1,856,102
Percentage of net sales 59.2% 60.6% 62.7%
Depreciation and amortization (a) $ 148,863 $ 124,860 $ 99,451
Operating expenses 853,524 748,193 661,252
Net interest expense (10,902) 809 3,763
Earnings before income taxes 529,322 424,888 339,841
Percentage of net sales 14.2% 12.9% 11.5%
Income taxes $ 209,082 $ 166,464 $ 129,140
Net earnings (loss) 320,240 258,424 210,701
Percentage of net sales 8.6% 7.8% 7.1%
Cash dividends paid $ 64,775 $ 53,041 $ 44,106
Net purchase of property and
equipment, including lease rights 236,616 215,856 213,659
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Per Share Data
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) -- basic $ 0.34 $ 0.27 $ 0.23
Net earnings (loss) -- diluted 0.33 0.27 0.22
Cash dividends paid (b) 0.07 0.05 0.05
Shareholders' equity (book value) 1.41 1.15 0.91
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Financial Position ($ in thousands)
- --------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 828,777 $ 740,422 $ 650,368
Merchandise inventory 370,638 331,155 365,692
Total assets 2,004,244 1,763,117 1,379,248
Working capital 555,827 494,194 355,649
Current ratio 2.11:1 2.07:1 2.06:1
Total long-term debt, less current installments -- $ 75,000 $ 75,000
Ratio of long-term debt to shareholders' equity (c) N/A 0.07:1 0.08:1
Shareholders' equity $ 1,375,232 $ 1,126,475 $ 887,839
Return on average assets 17.0% 16.4% 16.7%
Return on average shareholders' equity 25.6% 25.7% 26.9%
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Statistics
- --------------------------------------------------------------------------------------------------------------
Number of store concepts opened (d) 172 108 117
Number of store concepts expanded (d) 82 130 94
Number of store concepts closed (d) 34 45 26
Number of store concepts open at year-end (d) 1,508 1,370 1,307
Net increase in number of store concepts (d) 10% 5% 7%
Comparable store sales increase (decrease)
percentage (52-week basis) 1% 1% 5%
Sales per square foot (52-week basis) (e) $ 444 $ 463 $ 489
Square footage of gross store space at year-end 9,165,900 7,546,300 6,509,200
Percentage increase in square feet 21% 16% 15%
Number of employees at year-end 55,000 44,000 39,000
Weighted-average number of shares -- basic 948,699,959 940,287,006 928,417,491
Weighted-average number of shares -- diluted 971,144,612 965,110,280 960,903,782
Number of shares outstanding at year-end,
net of treasury stock 977,162,057 980,428,914 973,250,357
(a) Excludes amortization of restricted stock, discounted stock options and
discount on long-term debt.
(b) Excludes a dividend of $.0222 per share declared in January 2002 but paid in
the first quarter of fiscal 2002.
(c) Long-term debt includes current installments.
(d) Since the beginning of fiscal 2000, Gap brand stores have been reported
based on concepts. Any Gap Adult, GapKids, babyGap or GapBody that meets a
certain square footage threshold has been counted as a store, even when
residing within a single physical location. The number of stores by location
at the end of fiscal 2001 and 2000 was 3,097 and 2,848, respectively.
(e) Based on weighted-average gross square footage.
GAP INC. ANNUAL REPORT 2001 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
The information below and elsewhere in this Annual Report contains certain
forward-looking statements which reflect the current view of Gap Inc. (the
"Company," "we," "our") with respect to future events and financial performance.
Whenever used, the words "expect," "plan," "anticipate," "believe," "may" and
similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties and
our future results of operations could differ materially from historical results
or current expectations. Some of these risks include, without limitation,
ongoing competitive pressures in the apparel industry, risks associated with
challenging domestic and international retail environments, changes in the level
of consumer spending or preferences in apparel, trade restrictions and political
or financial instability in countries where our goods are manufactured and/or
other factors that may be described in our 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.
We assume no obligation to publicly update or revise our forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. We identified our most critical accounting policies to
be those related to inventory valuation, asset impairment and income taxes.
Inventory Valuation Method
Inventory is valued using the cost method which values inventory at the lower of
the actual cost or market, at the individual item level. Cost is determined
using the FIFO (first-in, first-out) method. Market is determined based on the
estimated net realizable value, which generally is the merchandise selling
price. We review our inventory levels in order to identify slow-moving
merchandise and broken assortments (items no longer in stock in a sufficient
range of sizes) and use markdowns to clear merchandise. Inventory value is
reduced immediately when the selling price is marked down below cost. We
estimate shortage for the period between the last physical count and the balance
sheet date. Our shortage estimate can be affected by changes in merchandise mix
and changes in actual shortage trends.
Asset Impairment
We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. If the undiscounted future cash flows from the long-lived assets
are less than the carrying value, we recognize a loss equal to the difference
between the carrying value and the discounted future cash flows of the asset.
Decisions to close a store or facility can also result in accelerated
depreciation over the revised useful life. For locations to be closed which are
under long-term leases, we record a charge for lease buyout expense or the
difference between our rent and the rate at which we expect to be able to
sublease the properties and related costs, as appropriate. Most store closures
occur upon the lease expiration. Our estimate of future cash flows is based on
our experience, knowledge and typically third-party advice or market data.
However, these estimates can be affected by factors such as future store
profitability, real estate demand and economic conditions that can be difficult
to predict.
Income Taxes
We record reserves for estimates of probable settlements of foreign and domestic
tax audits. At any one time, many tax years are subject to audit by various
taxing jurisdictions. The results of these audits and negotiations with taxing
authorities may affect the ultimate settlement of these issues. Our effective
tax rate in a given financial statement period may be materially impacted by
changes in the mix and level of earnings.
Management believes these critical accounting policies, among others, affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
GAP INC. ANNUAL REPORT 2001 16
Results of Operations
Net Sales
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- -------------------------------------------------------------------------------------------------------------------
Net sales ($ in thousands) $ 13,847,873 $13,673,460 $11,635,398
Total net sales growth percentage 1% 18% 29%
Comparable store sales increase (decrease) percentage (a) (13%) (5%) 7%
Net sales per average gross square foot(a) $ $ 394 $ 482 $ 548
Square footage of gross store space at
year-end (in thousands) 36,333 31,373 23,978
Number of new store concepts (b) 587 731 570
Number of expanded store concepts (b) 311 268 129
Number of closed store concepts (b) 92 73 18
- -------------------------------------------------------------------------------------------------------------------
(a) 52-week basis.
(b) Since the beginning of fiscal 2000, Gap brand stores have been reported
based on concepts. Any Gap Adult, GapKids, babyGap or GapBody that meets a
certain square footage threshold has been counted as a store, even when
residing within a single physical location. The number of stores by location
at the end of fiscal 2001 and 2000 was 3,097 and 2,848, respectively.
A store is included in comparable store sales ("Comp") when it has been open at
least one year and it has not been expanded by more than 15 percent or
permanently relocated within that year. Therefore, a store is included in Comp
on the first day it has comparable prior year sales. Stores in which square
footage has been expanded by 15 percent or more are excluded from Comp until the
first day they have comparable prior year sales.
A store is considered non-comparable ("Non-comp") when, in general, the store
had no comparable prior year sales. For example, a new store, or a store that
has been expanded by more than 15 percent or permanently relocated within the
last year. Non-store sales such as catalog and online operations are also
considered Non-comp.
Net sales increased $174 million in fiscal 2001 from 2000. Non-comparable store
sales increased $1.7 billion, offset by a $1.5 billion decrease in comparable
store sales.
Net sales increased $2.0 billion in fiscal 2000 from 1999. Non-comparable store
sales increased $2.5 billion, offset by a $497 million decline in comparable
store sales.
The non-comparable store sales increases in fiscal 2001 and 2000 were primarily
due 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 declines
in comparable store sales in fiscal 2001 and 2000 were driven by poor product
acceptance by customers, particularly in the men's division, which led to a
greater percentage of merchandise sold at markdown.
Comparable store sales by division for fiscal 2001 and 2000 were as follows:
. Gap Domestic reported negative 12% in 2001 versus negative 1% in 2000
. Gap International reported negative 11% in 2001 versus negative 1% in 2000
. Banana Republic reported negative 8% in 2001 versus negative 2% in 2000
. Old Navy reported negative 16% in 2001 versus negative 11% in 2000
Total sales by division for fiscal 2001, 2000 and 1999 were as follows:
. Gap Domestic reported $5.2 billion in 2001 versus $5.5 billion in 2000 versus
$4.9 billion in 1999
. Gap International reported $1.6 billion in 2001 versus $1.6 billion in 2000
versus $1.3 billion in 1999
. Banana Republic reported $1.9 billion in 2001 versus $1.8 billion in 2000
versus $1.5 billion in 1999
. Old Navy reported $5.1 billion in 2001 versus $4.7 billion in 2000 versus $3.9
billion in 1999
The decrease in net sales per average square foot for fiscal 2001 was primarily
attributable to decreases in comparable store sales.
GAP INC. ANNUAL REPORT 2001 17
The decrease in net sales per average square foot for fiscal 2000 was primarily
attributable to decreases in comparable store sales and the growing impact of
the Old Navy division. Old Navy division's lower-priced merchandise and
significantly larger stores resulted in lower net sales per average square foot
when compared to other divisions.
Store count and square footage growth were as follows:
Feb. 2, 2002 Feb. 3, 2001
---------------------------------------------- ----------------------------------------
Number of Number of
Store Concepts Sq. Ft. (in millions) Store Concepts Sq. Ft. (in millions)
- --------------------------------------------------------------------------- ----------------------------------------
Gap Domestic 2,298 13.2 2,079 12.1
Gap International (a) 634 3.5 529 3.0
Banana Republic (b) 441 3.6 402 3.2
Old Navy (c) 798 16.0 666 13.1
- ----------------------------------------------------------------------------------------------------------------------
Total 4,171 36.3 3,676 31.4
======================================================================================================================
Increase 13% 16% 22% 31%
- -----------------------------------------------------------------------------------------------------------------------
(a) Includes store concepts in the following countries:
United Kingdom: 225 and 184 store concepts in fiscal 2001 and 2000,
respectively.
Canada: 192 and 160 store concepts in fiscal 2001 and 2000, respectively.
France: 54 and 55 store concepts in fiscal 2001 and 2000, respectively.
Japan: 143 and 108 store concepts in fiscal 2001 and 2000, respectively.
Germany: 20 and 22 store concepts in fiscal 2001 and 2000, respectively.
(b) Includes 16 and 13 store concepts in Canada in fiscal 2001 and 2000,
respectively.
(c) Includes 17 store concepts in Canada in fiscal 2001; all stores were located
in the United States for fiscal 2000.
Since the beginning of fiscal 2000, Gap brand stores have been reported based on
concepts. Any Gap Adult, GapKids, babyGap or GapBody that meets a certain square
footage threshold has been counted as a store, even when residing within a
single physical location. The number of stores by location at the end of fiscal
2001 and 2000 was 3,097 and 2,848, respectively.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales increased
7.2 percentage points in fiscal 2001 from 2000 and increased 4.7 percentage
points in fiscal 2000 from 1999.
The increase in fiscal 2001 from 2000 was driven by a decrease in merchandise
margins and increased occupancy expenses of 4.9 and 2.3 percentage points,
respectively. Of the 4.9 percentage points decline in merchandise margins, 4.5
percentage points were attributable to lower margins on regular-priced and
marked-down goods and a greater percentage of merchandise sold at markdown. The
lower margins and the increase in proportion of goods sold at markdown were
driven by poor product acceptance, particularly in the men's division. After a
thorough review of our merchandise programs for the fourth quarter of fiscal
2001 and first quarter of fiscal 2002, we cancelled certain product orders in
the third quarter of fiscal 2001. This resulted in a $52 million charge which
accounted for an additional 0.4 of the 4.9 percentage points decline in
merchandise margins. We chose to cancel these programs in order to manage our
inventory levels consistent with current business and also as a result of making
changes to the product assortment for the fourth quarter of fiscal 2001 and
first quarter of fiscal 2002.
Of the 2.3 percentage points increase in occupancy expenses as a percentage of
net sales for fiscal 2001, 2.0 percentage points were due to negative comparable
store sales and 0.3 percentage points were primarily due to an increase in
depreciation expense.
The increase in fiscal 2000 from 1999 was primarily attributable to a decrease
in merchandise margins and increased occupancy expenses of 3.4 and 1.3
percentage points, respectively. The decline in merchandise margins was due to a
greater percentage of merchandise sold at markdown and lower margins on
regular-priced and marked-down goods. Occupancy expenses as a percentage of net
sales increased from fiscal 1999 primarily due to the decrease in net sales per
average square foot.
As a general business practice, we review our inventory levels in order to
identify slow-moving merchandise and broken assortments (items no longer in
stock in a sufficient range of sizes) and use markdowns to clear merchandise.
GAP INC. ANNUAL REPORT 2001 18
Operating Expenses
Operating expenses for the fiscal year include a number of unusual charges which
total $88 million and fall into three major categories: exit costs on excess
corporate facilities, reductions in workforce and distribution center closures
of $51 million, $25 million and $12 million, respectively. Total operating
expenses as a percentage of net sales including these charges increased 1.0
percentage point in fiscal 2001 from 2000. Excluding the charges, operating
expenses as a percentage of net sales increased 0.3 percentage points in fiscal
2001 from 2000.
In fiscal 2001, 2.7 percentage points and 0.7 percentage points of the increase
in operating expenses as a percentage of net sales were attributable to the
decrease in comparable store sales and the unusual charges noted above,
respectively. This increase was offset by lower spending on advertising, travel
and entertainment, and other operating expenses, which accounted for a 2.4
percentage points decrease in operating expenses as a percentage of net sales.
Operating expenses as a percentage of net sales increased 0.3 percentage points
in fiscal 2000 from 1999. Of this increase, 1.1 percentage points were
attributable to a decrease in comparable store sales, partially offset by lower
advertising costs and lower bonus expense, which accounted for a 0.8 percentage
points decrease.
Interest Expense
The increase in interest expense between fiscal 2001 and 2000 was primarily due
to an increase in long-term borrowings and a decrease in interest capitalized as
a result of fewer construction projects.
The increase in interest expense between fiscal 2000 and 1999 was primarily due
to an increase in average borrowings, partially offset by additional interest
capitalized as a result of more construction projects.
Interest Income
The increase in interest income between fiscal 2001 and 2000 was primarily due
to increases in average cash available for investment, partially offset by a
decrease in interest rates. The average cash balances increased due to the debt
issuances in April and November 2001 and positive cash flows in fiscal 2001. We
attained a higher cash position in advance of repayment of debt maturing in the
third and fourth quarters of fiscal 2001.
The decrease in interest income between fiscal 2000 and 1999 was due to a
decrease in cash available for investment.
Income Taxes
The effective tax rate was 103.2, 36.5 and 36.9 percent in fiscal 2001, 2000 and
1999, respectively.
The increase in the effective tax rate in fiscal 2001 resulted from a $131
million tax charge recorded during fiscal 2001 and an earnings performance that
was below expectations. The tax charge of $131 million primarily reflects our
current estimate of probable settlements of foreign and domestic tax audits. Any
cash amounts owed will be paid over the next several years and are not expected
to be material in any one year. In addition, the level and mix of earnings
caused our tax rate to increase well above earlier expectations. As a result,
the effective tax rate for fiscal 2001 (exclusive of the $131 million tax
charge) was 49 percent. We expect the effective tax rate for fiscal 2002 to be
sensitive to the level and mix of earnings.
GAP INC. ANNUAL REPORT 2001 19
Liquidity and Capital Resources
Cash Flows
The following sets forth certain measures of our liquidity:
Fiscal Year 2001 Fiscal Year 2000 Fiscal Year 1999
- ----------------------------------------------------------------------------------------------------
Cash provided by operating
activities ($ in thousands) $ 1,317,839 $ 1,291,205 $ 1,477,928
Working capital ($ in thousands) 988,317 (151,094) 444,911
Current ratio 1.48:1 0.95:1 1.25:1
====================================================================================================
For fiscal 2001, the increase in cash flows provided by operating activities was
primarily due to a decrease in merchandise inventory and an increase in accrued
expenses, partially offset by a decrease in net earnings (exclusive of
depreciation and amortization). The increase in working capital and the current
ratio was primarily due to a decrease in current maturities of long-term debt
and an increase in cash.
For fiscal 2000, the decrease in cash flows provided by operating activities was
primarily due to a decrease in net earnings (exclusive of depreciation and
amortization), a decrease in tax benefit from the exercise of stock options and
vesting of restricted stock, partially offset by an increase in accounts
payable. The decrease in working capital and the current ratio was primarily due
to an increase in current maturities of long-term debt and an increase in
payables, partially offset by an increase in merchandise inventory.
We fund inventory expenditures during normal and peak periods through a
combination of cash flows from operations as well as short-term and long-term
financing arrangements. Our business follows a seasonal pattern, peaking over a
total of about 13 weeks during the Back-to-School and Holiday periods. During
fiscal 2001 and 2000, these periods accounted for 32 and 35 percent,
respectively, of our annual net sales.
Credit Facility
Subsequent to year-end, we replaced our existing $1.45 billion bank facilities,
$1.3 billion of which was scheduled to expire in June 2002, with a new $1.4
billion secured revolving credit facility (the "new Facility"). The new Facility
will be used for general corporate purposes, including trade letters of credit
issuance and advances.
The new Facility is secured and contains financial and other covenants,
including limitations on capital expenditures, liens, cash dividends and
investments, and maintenance of certain financial ratios, including a
fixed-charge coverage ratio not less than 1.2:1 and 1.4:1 for fiscal 2002 and
fiscal 2003, respectively, and an asset-coverage ratio of not less than 1.75:1.
The fees related to the new Facility will fluctuate based on our senior
unsecured credit ratings.
Letters of credit represent a payment undertaking guaranteed by a bank on our
behalf to pay the vendor a given amount of money upon presentation of specific
documents demonstrating that merchandise has shipped. Vendor payables are
recorded in the balance sheet at the time of merchandise title transfer,
although the letters of credit are generally issued prior to this. Vendor
payables are paid directly to the vendor by us when the required documents are
presented.
At February 2, 2002, we had $42 million in commercial paper notes outstanding
and $901 million in trade letters of credit issued under the existing bank
facilities. Additional information about our existing bank facilities as of
February 2, 2002, is presented in the Notes to Consolidated Financial Statements
(Note B).
Summary Disclosures about Contractual Obligations and Commercial Commitments
The following table reflects a summary of our contractual cash obligations as of
February 2, 2002:
Contractual Obligations
($ in millions) 1-3 Years 4-5 Years After 5 Years Total
- ------------------------------------------------------------------------------------
Long-term debt 715 $ 200 $ 1,046 $ 1,961
Operating leases 2,306 1,089 1,844 5,239
- ------------------------------------------------------------------------------------
Total contractual cash obligations 3,021 $ 1,289 $ 2,890 $ 7,200
====================================================================================
GAP INC. ANNUAL REPORT 2001 20
We also have standby letters of credit, surety bonds and guarantees, primarily
for international lease deposits, outstanding at February 2, 2002, amounting to
$31 million.
In April 2001, we issued $500 million aggregate principal amount of debt
securities at a fixed annual interest rate of 5.625 percent, due May 1, 2003.
The net proceeds were used for general corporate purposes, including expansion
of stores, distribution centers and headquarters facilities. Interest on these
debt securities is payable semi-annually. In connection with the debt issuance,
we entered into forward rate agreements in order to reduce interest rate risk.
The agreements were settled in the first quarter of fiscal 2001 and the net
losses of approximately $2.2 million associated with these agreements are
amortized over the life of the debt securities.
In November 2001, we issued $200 million aggregate principal amount of debt
securities at an original annual interest rate of 8.15 percent, due December 15,
2005 (the "2005 notes"), and $500 million aggregate principal amount of debt
securities at an original annual interest rate of 8.8 percent, due December 15,
2008 (the "2008 notes"). The net proceeds were used for general corporate
purposes. Interest on the notes of each series is payable semi-annually. The
interest rate payable on the notes of each series is subject to adjustment from
time to time if either Moody's Investors Service ("Moody's") or Standard &
Poor's Rating Services ("Standard & Poor's") reduces the rating ascribed to the
notes below Baa2, in the case of Moody's, or below BBB+, in the case of Standard
& Poor's. The interest rate payable on the notes will be increased by 0.25
percent for each rating category downgrade by either rating agency. In addition,
if Moody's or Standard & Poor's subsequently increases the rating ascribed to
the notes, the ongoing interest rate then payable on the notes will be decreased
by 0.25 percent for each rating category upgrade by either rating agency up to
Baa2, in the case of Moody's, or BBB+, in the case of Standard & Poor's. In no
event will the interest rate be reduced below the original interest rate payable
on the notes. There is no limit to the number of times the interest rate payable
on the notes can be adjusted.
In response to the deterioration in our operating profitability, Moody's and
Standard and Poor's reduced their credit ratings of the Company. On January 14,
2002, Moody's reduced our long- and short-term senior unsecured credit ratings
from Baa2 to Baa3 and Prime-2 to Prime-3, respectively. On February 14, 2002,
Moody's reduced our long- and short-term senior unsecured credit ratings from
Baa3 to Ba2 and from Prime-3 to Not Prime, respectively, with a negative outlook
on our long-term ratings, and Standard & Poor's reduced our long- and short-term
credit ratings from BBB+ to BB+ and from A-2 to B, respectively, with a stable
outlook on our long-term ratings. On February 27, 2002, Moody's reduced our
long-term senior unsecured credit ratings from Ba2 to Ba3 and stated that its
outlook on our long-term ratings was stable. As a result of the recent
downgrades in our long-term credit ratings, the interest rates payable by us on
$700 million of our outstanding notes are subject to increase by 175 basis
points, effective June 15, 2002, to 9.90 percent per annum on the 2005 notes and
10.55 percent per annum on the 2008 notes. Any further downgrades of our
long-term credit ratings by these rating agencies would result in further
increases in the interest rates payable by us on $700 million of our outstanding
notes. As a result of the downgrades in our short-term credit ratings, we no
longer have meaningful access to the commercial paper market. In addition, we
expect both the recent and any future lowering of the ratings on our debt to
result in reduced access to the capital markets and higher interest costs on
future financings.
In March 2002, we issued $1.38 billion aggregate principal amount of 5.75
percent senior convertible notes due March 15, 2009, at par and received the net
proceeds in cash. Interest is payable semi-annually on March 15 and September 15
of each year, commencing on September 15, 2002. We have an option to call the
bonds on or after March 20, 2005. The notes are convertible, unless previously
redeemed or repurchased, at the option of the holder at any time prior to
maturity, into shares of our common stock at a conversion price of $16.12 per
share, subject to adjustment in certain events, for a total of approximately
85,607,940 shares. If converted, these additional shares would reduce our future
earnings per share. Prior to conversion, the convertible notes are potentially
dilutive at certain earnings levels. The effects of these dilutive securities
will be computed using the if-converted method. The net proceeds will be used
for general corporate purposes.
We operate in foreign countries, which exposes us to market risk associated with
foreign currency exchange rate fluctuations. Our risk management policy is to
hedge substantially all merchandise purchases for foreign operations through the
use of foreign exchange forward contracts to minimize this risk. Additional
information 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 24.
GAP INC. ANNUAL REPORT 2001 21
Capital expenditures, net of construction allowances, totaled approximately $1.0
billion in fiscal 2001. The majority of these expenditures was used for
expansion of the store base, headquarters and equipment, and information
technology. These expenditures resulted in a net increase in store space of
approximately 5.0 million square feet, or 16 percent, due to a net addition of
495 new store concepts, the expansion of 311 store concepts and the remodeling
of certain stores. Capital expenditures for fiscal 2000 and 1999 were $1.8
billion and $1.2 billion, respectively, resulting in a net increase in store
space of 7.4 million square feet in fiscal 2000 and 5.2 million square feet in
fiscal 1999.
For fiscal 2002, we expect capital expenditures to be about $400 million, net of
construction allowances. Store capital is estimated to be about $210 million of
total capital expenditures, with about $145 million for new stores and about $65
million for remodels. Of the remaining capital spending, about $130 million is
for information technology, with the balance split between distribution centers
and headquarters. We expect to fund such capital expenditures with cash flows
from operations and other sources of financing. New stores are generally
expected to be leased.
Net square footage growth is expected to be approximately 3 percent for fiscal
2002. Our store growth plan for fiscal 2002 is as follows:
Fiscal 2002
-------------------------------------------------------------------------
Number of Store Concepts Number of Store Locations Square Feet
- ----------------------------------------------------------------------------------------------
Gap Domestic 70-75 20-25 1-3%
Gap International 30-35 10-15 1-3%
Banana Republic 15-20 15-20 3-5%
Old Navy 55-60 55-60 4-6%
- ----------------------------------------------------------------------------------------------
Total 170-190 100-120 About 3%
==============================================================================================
Since the beginning of fiscal 2000, Gap brand stores have been reported based on
concepts. Any Gap Adult, GapKids, babyGap or GapBody that meets a certain square
footage threshold has been counted as a store, even when residing within a
single physical location. In the table above we present the number of store
concepts and the number of locations.
During fiscal 1998, we purchased land in San Francisco to construct an
additional headquarters facility. We 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 was completed during the third
quarter of fiscal 2001. The total project cost was approximately $235 million.
We commenced construction on several distribution facilities in the second and
third quarters of fiscal 2000. All facilities except one were opened by the end
of fiscal 2001. The estimated remaining cost for the distribution facility still
under construction is approximately $13.3 million, of which $5.4 million is
expected to be incurred in fiscal 2002 and $7.9 million is expected to be
incurred in fiscal 2003. This distribution facility is estimated to open during
the first quarter of fiscal 2003.
We purchased a distribution site and building in Ontario, Canada, during the
first quarter of fiscal 2000 to support initial international expansion plans
for the Old Navy business. We remodeled the facility, and it was opened during
the first quarter of fiscal 2001. The total project cost was approximately $65
million.
Related Party Transactions
We have an agreement with Fisher Development, Inc. ("FDI"), a company wholly
owned by the brother of our chairman and the brother's immediate family, setting
forth the terms under which FDI may act as one of our general contractors in
connection with our construction activities. FDI acted as general contractor for
282, 675 and 547 new store concepts' leasehold improvements and fixtures during
fiscal 2001, 2000 and 1999, respectively. The agreement with FDI is reviewed
annually by the Audit and Finance Committee of the Board of Directors.
GAP INC. ANNUAL REPORT 2001 22
New Accounting Pronouncements
During fiscal 2001, we adopted EITF Issue 00-14, Accounting for Certain Sales
Incentives. This Issue provides guidance on the recognition, measurement and
income statement classification for sales incentives offered voluntarily by a
vendor without charge to customers. The adoption of this issue did not have a
material impact on our financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001, and eliminates the pooling-of-interests method.
The adoption of SFAS 141 did not have any impact on our financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
all fiscal years beginning after December 15, 2001. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142 also
requires us to complete a transitional goodwill impairment test six months from
the date of adoption. We do not expect that the adoption of SFAS 142 will have a
significant impact on our financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which is
effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the
financial accounting and reporting for obligations and retirement costs related
to the retirement of tangible long-lived assets. We do not expect that the
adoption of SFAS 143 will have a significant impact on our financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to the disposal of a segment of a
business of Accounting Principles Board Opinion No. 30. We do not expect that
the adoption of SFAS 144 will have a significant impact on our financial
statements.
GAP INC. ANNUAL REPORT 2001 23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table on the right provides information about our market sensitive financial
instruments as of February 2, 2002, and February 3, 2001.
We operate in foreign countries, which exposes us to market risk associated with
foreign currency exchange rate fluctuations. Our risk management policy is to
hedge substantially all merchandise purchases for foreign operations through the
use of foreign exchange forward contracts to minimize this risk. We also use
forward contracts to hedge our market risk exposure associated with foreign
currency exchange rate fluctuations for certain loans denominated in currencies
other than the functional currency of the entity holding or issuing the loan.
These contracts are entered into with large reputable financial institutions,
thereby minimizing the risk of credit loss. Additional information is presented
in the Notes to Consolidated Financial Statements (Note E).
During fiscal 1997, we issued $500 million aggregate principal amount of debt
securities, due September 15, 2007, with a fixed interest rate of 6.9 percent.
Interest on these debt securities is payable semi-annually. These debt
securities are recorded in the balance sheet at their issuance amount net of
unamortized discount.
During fiscal 1999, our Japanese subsidiary, Gap (Japan) KK, issued $50 million
aggregate principal amount of debt securities due March 1, 2009, with a fixed
interest rate of 6.25 percent, payable in U.S. dollars. Interest on these debt
securities is payable semi-annually. We swapped the interest and principal
payable under these debt securities to Japanese yen with a fixed interest rate
of 2.43 percent. These debt securities are recorded in the balance sheet at
their fair market value as of February 2, 2002.
During fiscal 1999, our Netherlands subsidiary, Gap International B.V., issued
debt securities in the aggregate principal amount of 250 million Euro,
approximately $262 million at issuance, with a fixed interest rate of 5.0
percent, due September 30, 2004. Interest on these debt securities is payable
semi-annually. These debt securities are recorded in the balance sheet at their
issuance amount net of unamortized discount and are translated into U.S. dollars
at the period-end exchange rate.
In April 2001, we issued $500 million aggregate principal amount 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, we entered into forward rate agreements in
order to reduce interest rate risk. The agreements were settled in the first
quarter of fiscal 2001, and the net losses of approximately $2.2 million
associated with these agreements are amortized over the life of the debt
securities.
In November 2001, we issued $200 million aggregate principal amount of debt
securities at an original annual interest rate of 8.15 percent, due December 15,
2005, and $500 million aggregate principal amount of debt securities at an
original annual interest rate of 8.8 percent, due December 15, 2008. Interest on
the notes of each series is payable semi-annually. The interest rates payable
are subject to increase by 175 basis points effective June 15, 2002, as a result
of downgrades to our credit rating. These debt securities are recorded in the
balance sheet at their issuance amount net of unamortized discount.
In March 2002, we issued $1.38 billion aggregate principal amount of 5.75
percent senior convertible bonds due March 15, 2009, at par and received the net
proceeds thereof in cash. Interest is payable semi-annually on March 15 and
September 15 of each year, commencing on September 15, 2002.
GAP INC. ANNUAL REPORT 2001 24
By entering into the fixed-rate borrowings, we avoid interest rate risk from
variable rate fluctuations. A portion of our fixed-rate borrowings used to
finance foreign operations is denominated in foreign currencies. By borrowing
and repaying the loans in local currencies, we avoid the risk associated with
exchange rate fluctuations.
(Amounts in thousands except average contract rate) Notional Maturity Dates
- ---------------------------------------------------------------------------------------------------------------------------
Notional
Amount Unrealized
Average in Local 2006 and Gain (Loss) in
Contract Rate Currency 2002 2003 2004 2005 Beyond (a) U.S. Dollars (b)
- --------------------------------------------------- ----------------------------------------------------- -----------------
Foreign Exchange Forward Contracts
- ---------------------------------------------------------------------------------------------------------------------------
Sell Contracts -- Merchandise Hedges
- ---------------------------------------------------------------------------------------------------------------------------
British Pounds for U.S. Dollars 0.72 118,800 118,800 -- -- -- -- (1,007)
Canadian Dollars for U.S. Dollars 1.55 229,200 229,200 -- -- -- -- 3,927
Euros for U.S. Dollars 1.13 29,000 29,000 -- -- -- -- 812
Euros for British Pounds 1.65 41,800 41,800 -- -- -- -- (341)
Japanese Yen for U.S. Dollars 122.78 14,593,600 14,593,600 -- -- -- -- 8,196
- ---------------------------------------------------------------------------------------------------------------------------
Buy Contracts-- Merchandise Hedges
- ---------------------------------------------------------------------------------------------------------------------------
Euros for U.S. Dollars 1.14 29,854 29,854 -- -- -- -- (564)
- ---------------------------------------------------------------------------------------------------------------------------
Sell Contracts-- Loan Hedges
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Dollars for Euros 1.06 6,300 325 325 325 5,325 -- (1,023)
British Pounds for Japanese Yen 0.01 21,720 430 430 430 20,430 -- (6,141)
British Pounds for Euros 0.66 27,190 2,173 2,173 2,173 20,671 -- (1,899)
Canadian Dollars for U.S. Dollars 1.44 121,395 7,111 7,111 7,111 100,062 -- 7,307
Canadian Dollars for Japanese Yen 0.01 40,167 40,167 -- -- -- -- (62)
- ---------------------------------------------------------------------------------------------------------------------------
Buy Contracts-- Loan Hedges
- ---------------------------------------------------------------------------------------------------------------------------
Japanese Yen for Euros 0.01 540,824 -- -- -- 540,824 -- (889)
Japanese Yen for British Pounds 0.01 4,000,000 -- 4,000,000 -- -- -- (3,508)
Euros for British Pounds 0.66 116,500 5,500 5,500 105,500 -- -- (6,068)
- ---------------------------------------------------------------------------------------------------------------------------
Interest Rate and Principal Swap
- ---------------------------------------------------------------------------------------------------------------------------
Japanese Yen for U.S. Dollars 121.60 6,080,000 -- -- -- -- 6,080,000 3,375
===========================================================================================================================
Total foreign exchange forward contracts and interest rate and
principal swap 2,115
===========================================================================================================================
Feb. 2, 2002 Feb. 3, 2001
- --------------------------------------------------------------- -----------------------------------
Carrying Amount Carrying Amount
($ in thousands) in U.S. Dollars Fair Value (c) in U.S. Dollars Fair Value (c)
- ---------------------------------------------------------------------------------------------------
Notes payable, due 2001 $ -- $ -- $ 250,000 $ 249,930
Notes payable, due 2003 499,897 470,000 -- --
Notes payable, due 2004 215,589 174,596 234,002 218,510
Notes payable, due 2005 199,553 183,000 -- --
Notes payable, due 2007 497,688 420,000 497,277 501,590
Notes payable, due 2008 498,873 467,500 -- --
Notes payable, due 2009 49,797 39,000 48,967 48,967
- ---------------------------------------------------------------------------------------------------
Total long-term debt,
including current maturities $ 1,961,397 $ 1,754,096 $ 1,030,246 $ 1,018,997
===================================================================================================
(a) No amounts mature in 2006.
(b) The unrealized gain (loss) represents the effect of the changes in the
forward rates compared to the average contract rates at February 2, 2002.
Approximately $13 million of pre-tax unrealized gain was included in
Accumulated Other Comprehensive Losses at February 2, 2002. Approximately
$11 million of pre-tax unrealized loss was recognized in the consolidated
statements of earnings for fiscal 2001, generally offset by a corresponding
valuation adjustment of the hedged items.
(c) Based on the rates at which we could borrow funds with similar terms and
remaining maturities at the dates presented.
GAP INC. ANNUAL REPORT 2001 25
MANAGEMENT'S REPORT ON FINANCIAL INFORMATION
Management is responsible for the integrity and consistency of all financial
information presented in the Annual Report. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and necessarily include certain amounts based on
Management's best estimates and judgments.
In fulfilling its responsibility for the reliability of financial information,
Management has established and maintains accounting systems and procedures
appropriately supported by internal accounting controls. Such controls include
the selection and training of qualified personnel, an organizational structure
providing for division of responsibility, communication of requirement for
compliance with approved accounting control and business practices and a program
of internal audit. The extent of the Company's system of internal accounting
control recognizes that the cost should not exceed the benefits derived and that
the evaluation of those factors requires estimates and judgments by Management.
Although no system can ensure that all errors or irregularities have been
eliminated, Management believes that the internal accounting controls in use
provide reasonable assurance, at reasonable cost, that assets are safeguarded
against loss from unauthorized use or disposition, that transactions are
executed in accordance with Management's authorization and that the financial
records are reliable for preparing financial statements and maintaining
accountability for assets. The financial statements of the Company have been
audited by Deloitte & Touche LLP, independent auditors, whose report appears
below.
The Audit and Finance Committee (the "Committee") of the Board of Directors is
comprised solely of directors who are not officers or employees of the Company.
The Committee is responsible for recommending to the Board of Directors the
selection of independent auditors. It meets periodically with Management, the
independent auditors and the internal auditors to ensure that they are carrying
out their responsibilities. The Committee also reviews and monitors the
financial, accounting and auditing procedures of the Company in addition to
reviewing the Company's financial reports. Deloitte & Touche LLP and the
internal auditors have full and free access to the Committee, with and without
Management's presence.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Gap, Inc.:
We have audited the accompanying consolidated balance sheets of The Gap, Inc.
and subsidiaries as of February 2, 2002, and February 3, 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three fiscal years in the period ended February 2, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries as
of February 2, 2002, and February 3, 2001, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
February 2, 2002, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
March 12, 2002
GAP INC. ANNUAL REPORT 2001 26
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except share 52 Weeks Ended Percentage 53 Weeks Ended Percentage 52 Weeks Ended Percentage
and per share amounts) Feb. 2, 2002 to Sales Feb. 3, 2001 to Sales Jan. 29, 2000 to Sales
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $ 13,847,873 100.0% $ 13,673,460 100.0% $ 11,635,398 100.0%
Costs and expenses
Cost of goods sold and
occupancy expenses 9,704,389 70.1 8,599,442 62.9 6,775,262 58.2
Operating expenses 3,805,968 27.5 3,629,257 26.5 3,043,432 26.2
Interest expense 109,190 0.8 74,891 0.5 44,966 0.4
Interest income (13,315) (0.1) (12,015) 0.0 (13,211) (0.1)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 241,641 1.7 1,381,885 10.1 1,784,949 15.3
Income taxes 249,405 1.8 504,388 3.7 657,884 5.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7,764) (0.1%) $ 877,497 6.4% $ 1,127,065 9.7%
=================================================================================================================================
Weighted-average number
of shares -- basic 860,255,419 849,810,658 853,804,924
Weighted-average number
of shares -- diluted 860,255,419 879,137,194 895,029,176
Earnings (loss) per share--basic $ (0.01) $ 1.03 $ 1.32
Earnings (loss) per share--diluted (a) (0.01) 1.00 1.26
- ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(a) Diluted losses per share for the 52 weeks ended February 2, 2002, are
computed using the basic weighted average number of shares outstanding and
exclude 13,395,045 dilutive shares as their effects are antidilutive when
applied to losses.
GAP INC. ANNUAL REPORT 2001 27
CONSOLIDATED BALANCE SHEETS
($ in thousands except
share and par value) Feb. 2, 2002 Feb. 3, 2001
- ---------------------------------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------------------------------
Current Assets
- ---------------------------------------------------------------------------------------------------------------
Cash and equivalents $ 1,035,749 $ 408,794
Merchandise inventory 1,677,116 1,904,153
Other current assets 331,685 335,103
- ---------------------------------------------------------------------------------------------------------------
Total current assets 3,044,550 2,648,050
- ---------------------------------------------------------------------------------------------------------------
Property and Equipment
- ---------------------------------------------------------------------------------------------------------------
Leasehold improvements 2,127,966 1,899,820
Furniture and equipment 3,327,819 2,826,863
Land and buildings 917,055 558,832
Construction-in-progress 246,691 615,722
- ---------------------------------------------------------------------------------------------------------------
6,619,531 5,901,237
Accumulated depreciation and amortization (2,458,241) (1,893,552)
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, net 4,161,290 4,007,685
- ---------------------------------------------------------------------------------------------------------------
Lease rights and other assets 385,486 357,173
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 7,591,326 $ 7,012,908
===============================================================================================================
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
- ---------------------------------------------------------------------------------------------------------------
Notes payable $ 41,889 $ 779,904
Current maturities of long-term debt -- 250,000
Accounts payable 1,105,117 1,067,207
Accrued expenses and other current liabilities 909,227 702,033
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 2,056,233 2,799,144
- ---------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
- ---------------------------------------------------------------------------------------------------------------
Long-term debt 1,961,397 780,246
Deferred lease credits and other liabilities 564,115 505,279
- ---------------------------------------------------------------------------------------------------------------
Total long-term liabilities 2,525,512 1,285,525
- ---------------------------------------------------------------------------------------------------------------
Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Common stock $.05 par value
Authorized 2,300,000,000 shares; issued 948,597,949 and
939,222,871 shares; outstanding 865,726,890
and 853,996,984 shares 47,430 46,961
Additional paid-in capital 461,408 294,967
Retained earnings 4,890,375 4,974,773
Accumulated other comprehensive losses (61,824) (20,173)
Deferred compensation (7,245) (12,162)
Treasury stock, at cost (2,320,563) (2,356,127)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,009,581 2,928,239
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,591,326 $ 7,012,908
===============================================================================================================
See Notes to Consolidated Financial Statements.
GAP INC. ANNUAL REPORT 2001 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
($ in thousands) Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7,764) $ 877,497 $ 1,127,065
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 810,486 590,365 436,184
Tax benefit from exercise of stock
options and vesting of restricted stock 58,444 130,882 211,891
Deferred income taxes (28,512) (38,872) 2,444
Change in operating assets and liabilities:
Merchandise inventory 213,067 (454,595) (404,211)
Prepaid expenses and other (13,303) (61,096) (55,519)
Accounts payable 42,205 249,545 118,121
Accrued expenses 220,826 (56,541) (5,822)
Deferred lease credits and other long-term
liabilities 22,390 54,020 47,775
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,317,839 1,291,205 1,477,928
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
- -------------------------------------------------------------------------------------------------------------------
Net purchase of property and equipment (940,078) (1,858,662) (1,238,722)
Acquisition of lease rights and other assets (10,549) (16,252) (39,839)
- -------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (950,627) (1,874,914) (1,278,561)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in notes payable (734,927) 621,420 84,778
Proceeds from issuance of long-term debt 1,194,265 250,000 311,839
Payments of long-term debt (250,000) -- --
Issuance of common stock 139,105 152,105 114,142
Net purchase of treasury stock (785) (392,558) (745,056)
Cash dividends paid (76,373) (75,488) (75,795)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities 271,285 555,479 (310,092)
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash (11,542) (13,328) (4,176)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 626,955 (41,558) (114,901)
Cash and equivalents at beginning of year 408,794 450,352 565,253
- -------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 1,035,749 $ 408,794 $ 450,352
===================================================================================================================
See Notes to Consolidated Financial Statements.
GAP INC. ANNUAL REPORT 2001 29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
----------------------------------
($ in thousands except share Additional
and per share amounts) Shares Amount Paid-in Capital
- ----------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 997,496,214 $ 49,875 $ 349,037
============================================================================================================================
Issuance of common stock pursuant to stock option plans 9,933,713 497 81,456
Net cancellations of common stock pursuant to
management incentive restricted stock plans (73,137) (4) 2,583
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 211,891
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454)
Amortization of restricted stock and discounted stock options 72
Purchase of treasury stock 4,276
Reissuance of treasury stock 20,175
Net earnings
Cash dividends ($.09 per share)
============================================================================================================================
Balance at January 29, 2000 1,007,356,790 $ 50,368 $ 669,490
============================================================================================================================
Issuance of common stock pursuant to stock option plans 13,078,981 654 115,167
Net cancellations of common stock pursuant to management
incentive restricted stock plans (185,563) (10) (364)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 130,882
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of $8,131
Amortization of restricted stock and discounted stock options 45
Purchase of treasury stock 1,873
Reissuance of treasury stock 15,458
Retirement of treasury stock (81,027,337) (4,051) (637,584)
Net earnings
Cash dividends ($.09 per share)
============================================================================================================================
Balance at February 3, 2001 939,222,871 $ 46,961 $ 294,967
============================================================================================================================
Issuance of common stock pursuant to stock option plans 9,346,228 468 107,130
Net issuance of common stock pursuant to management
incentive restricted stock plans 28,850 1 683
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 58,444
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of ($5,793)
Amortization of restricted stock and discounted stock options
Purchase of treasury stock
Reissuance of treasury stock 184
Net earnings (loss)
Cash dividends ($.09 per share)
============================================================================================================================
Balance at February 2, 2002 948,597,949 $ 47,430 $ 461,408
============================================================================================================================
See Notes to Consolidated Financial Statements.
GAP INC. ANNUAL REPORT 2001 30
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
Accumulated Other
($ in thousands except share Comprehensive Deferred
and per share amounts) Retained Earnings Earnings (Loss) Compensation
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 $ 3,121,360 $ (12,518) $ (31,675)
=================================================================================================================================
Issuance of common stock pursuant to stock option plans (9,186)
Net cancellations of common stock pursuant to
management incentive restricted stock plans (3,411)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454) 5,759
Amortization of restricted stock and discounted stock options 21,122
Purchase of treasury stock
Reissuance of treasury stock
Net earnings 1,127,065
Cash dividends ($.09 per share) (75,629)
=================================================================================================================================
Balance at January 29, 2000 $ 4,172,796 $ (6,759) $ (23,150)
=================================================================================================================================
Issuance of common stock pursuant to stock option plans (4,249)
Net cancellations of common stock pursuant to management
incentive restricted stock plans (919)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
Adjustments for foreign currency translation (24,286)
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of $8,131 10,872
Amortization of restricted stock and discounted stock options 16,156
Purchase of treasury stock
Reissuance of treasury stock
Retirement of treasury stock
Net earnings 877,497
Cash dividends ($.09 per share) (75,520)
=================================================================================================================================
Balance at February 3, 2001 $ 4,974,773 $ (20,173) $ (12,162)
=================================================================================================================================
Issuance of common stock pursuant to stock option plans (5,006)
Net issuance of common stock pursuant to management
incentive restricted stock plans (704)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of ($5,793) (33,534)
Amortization of restricted stock and discounted stock options (8,117)
Purchase of treasury stock 10,627
Reissuance of treasury stock
Net earnings (loss) (7,764)
Cash dividends ($.09 per share) (76,634)
=================================================================================================================================
Balance at February 2, 2002 $ 4,890,375 $ (61,824) $ (7,245)
=================================================================================================================================
Treasury Stock
------------------------------
Comprehensive
Shares Amount Total Earnings (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 (139,536,182) $ (1,902,400) $ 1,573,679 $ 827,251
==================================================================================================================================
Issuance of common stock pursuant to stock option plans 72,767
Net cancellations of common stock pursuant to
management incentive restricted stock plans (832)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 211,891
Adjustments for foreign currency translation ($3,305) and
fluctuations in fair market value of financial instruments ($2,454) 5,759 5,759
Amortization of restricted stock and discounted stock options 21,194
Purchase of treasury stock (18,500,000) (745,056) (740,780)
Reissuance of treasury stock 1,178,333 17,756 37,931
Net earnings 1,127,065 1,127,065
Cash dividends ($.09 per share) (75,629)
==================================================================================================================================
Balance at January 29, 2000 (156,857,849) $ (2,629,700) $ 2,233,045 $ 1,132,824
==================================================================================================================================
Issuance of common stock pursuant to stock option plans 111,572
Net cancellations of common stock pursuant to management
incentive restricted stock plans (1,293)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 130,882
Adjustments for foreign currency translation (24,286) (24,286)
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of $8,131 10,872 10,872
Amortization of restricted stock and discounted stock options 16,201
Purchase of treasury stock (11,020,038) (392,558) (390,685)
Reissuance of treasury stock 1,624,663 24,496 39,954
Retirement of treasury stock 81,027,337 641,635 --
Net earnings 877,497 877,497
Cash dividends ($.09 per share) (75,520)
==================================================================================================================================
Balance at February 3, 2001 (85,225,887) $ (2,356,127) $ 2,928,239 $ 864,083
==================================================================================================================================
Issuance of common stock pursuant to stock option plans 102,592
Net issuance of common stock pursuant to management
incentive restricted stock plans (20)
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock 58,444
Adjustments for foreign currency translation (33,534) (33,534)
Adjustments for fluctuations in fair market value
of financial instruments, net of tax of ($5,793) (8,117) (8,117)
Amortization of restricted stock and discounted stock options 10,627
Purchase of treasury stock (34,500) (785) (785)
Reissuance of treasury stock 2,389,328 36,349 36,533
Net earnings (loss) (7,764) (7,764)
Cash dividends ($.09 per share) (76,634)
==================================================================================================================================
Balance at February 2, 2002 (82,871,059) $ (2,320,563) $ 3,009,581 $ (49,415)
==================================================================================================================================
See Notes to Consolidated Financial Statements
GAP INC. ANNUAL REPORT 2001 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 52 Weeks Ended February 2, 2002 (Fiscal 2001), 53 Weeks Ended February
3, 2001 (Fiscal 2000) and 52 Weeks Ended January 29, 2000 (Fiscal 1999).
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Gap Inc. (the "Company," "we," "our") is a global specialty retailer selling
casual apparel, personal care and other accessories for men, women and children
under a variety of brand names including Gap, Banana Republic and Old Navy. Our
principal markets consist of the United States, Canada, Europe and Japan with
the United States being the most significant. We sell our products through both
traditional retail stores and online stores.
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany transactions have been eliminated.
Translation adjustments result from translating foreign subsidiaries' financial
statements into U.S. dollars. Balance sheet accounts are translated at exchange
rates in effect at the balance sheet date. Income statement accounts are
translated at average exchange rates during the year. Resulting translation
adjustments are included in Accumulated Other Comprehensive Earnings (Loss) in
shareholders' equity.
Fiscal Year
Our fiscal year is a 52- or 53-week period ending on the Saturday closest to
January 31. Fiscal years 2001, 2000 and 1999 consisted of 52, 53 and 52 weeks,
respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Equivalents
Cash and equivalents represent cash and short-term, highly liquid investments
with original maturities of three months or less. Outstanding checks classified
in Accounts Payable on the balance sheet totalled $120 million and $168 million
as of the end of fiscal 2001 and 2000, respectively.
Merchandise Inventory
Inventory is valued using the cost method which values inventory at the lower of
the actual cost or market, at the individual item level. Cost is determined
using the FIFO (first-in, first-out) method. Market is determined based on the
estimated net realizable value, which generally is the merchandise selling
price. We review our inventory levels in order to identify slow-moving
merchandise and broken assortments (items no longer in stock in a sufficient
range of sizes) and use markdowns to clear merchandise. Inventory value is
reduced immediately when the selling price is marked down below cost. We
estimate shortage for the period between the last physical count and the balance
sheet date. Our shortage estimate can be affected by changes in merchandise mix
and changes in actual shortage trends.
GAP INC. ANNUAL REPORT 2001 32
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
Category Term
- ----------------------------------------------------------------------------------------------
Leasehold improvements for offices and stores Life of the lease, not to exceed 12 years
Furniture and equipment Up to 10 years
Buildings 39 years
- ----------------------------------------------------------------------------------------------
Interest costs related to assets under construction are capitalized during the
construction period. Interest of $25 million, $41 million and $25 million was
capitalized in fiscal 2001, 2000 and 1999, respectively.
Lease Rights
Temporary lease rights are recorded at cost and are amortized over the estimated
useful lives of the respective leases, not to exceed 20 years.
Impairment of Long-lived Assets
We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. If the undiscounted future cash flows from the long-lived assets
are less than the carrying value, we recognize a loss equal to the difference
between the carrying value and the discounted future cash flows of the asset.
Decisions to close a store or facility can also result in accelerated
depreciation over the revised useful life. For locations to be closed which are
under long-term leases, we record a charge for lease buyout expense or the
difference between our rent and the rate at which we expect to be able to
sublease the properties and related costs, as appropriate. Most store closures
occur upon the lease expiration. Our estimate of future cash flows is based on
our experience, knowledge and typically third-party advice or market data.
However, these estimates can be affected by factors such as future store
profitability, real estate demand and economic conditions that can be difficult
to predict.
Advertising
Costs associated with the production of advertising, such as writing copy,
printing and other costs, are expensed as incurred. Costs associated with
communicating advertising that has been produced, such as television and
magazine, are expensed when the advertising event takes place. Direct response
costs of catalogs are capitalized and amortized over the expected lives of the
related catalogs, not to exceed six months. Advertising costs were $423 million,
$487 million and $504 million in fiscal 2001, 2000 and 1999, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this
method, deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements.
Stock-based Awards
We account for stock-based awards using the intrinsic value-based method of
accounting, under which no compensation cost is recognized for stock option
awards granted at fair market value. Restricted stock and discounted stock
option awards, which are granted at less than fair market value, result in the
recognition of deferred compensation. Deferred compensation is shown as a
reduction of shareholders' equity and is amortized to Operating Expenses over
the vesting period of the stock award. We amortize deferred stock compensation
for each vesting layer of a stock award using the straight-line method.
GAP INC. ANNUAL REPORT 2001 33
Segments
Our brands have been aggregated into one reportable segment given the
similarities of economic characteristics between the operations represented by
our three brands. Revenues of international retail operations were $1.8 billion,
$1.7 billion and $1.3 billion, and represented 13.1 percent, 12.2 percent and
11.3 percent of our revenues for fiscal 2001, 2000 and 1999, respectively.
Long-term assets of international operations, including retail and sourcing,
were $618 million and $629 million, and represented 13.6 percent and 14.4
percent of our long-term assets as of the end of fiscal 2001 and 2000,
respectively.
Derivatives
We record the fair value of derivatives and hedged firm commitments on the
balance sheet. See Note E for further discussion.
Revenue Recognition
We recognize revenue for store sales at the point at which the customer pays at
the register. For online and catalog sales, revenue is recognized at the time
goods are shipped. Allowances for estimated returns are recorded for store sales
as well as online and catalog sales.
Reclassifications
Certain amounts from the prior periods have been reclassified to conform to the
current period presentation. These reclassifications had no effect on net income
as previously reported.
Accounting Pronouncements
During fiscal 2001, we adopted EITF Issue 00-14, Accounting for Certain Sales
Incentives. This Issue provides guidance on the recognition, measurement and
income statement classification for sales incentives offered voluntarily by a
vendor without charge to customers. The adoption of this issue did not have a
material impact on our financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001, and eliminates the pooling-of-interests method.
The adoption of SFAS 141 did not have any impact on our financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
all fiscal years beginning after December 15, 2001. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142 also
requires us to complete a transitional goodwill impairment test six months from
the date of adoption. We do not expect that the adoption of SFAS 142 will have a
significant impact on our financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which is
effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the
financial accounting and reporting for obligations and retirement costs related
to the retirement of tangible long-lived assets. We do not expect that the
adoption of SFAS 143 will have a significant impact on our financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to the disposal of a segment of a
business of Accounting Principles Board Opinion No. 30. We do not expect that
the adoption of SFAS 144 will have a significant impact on our financial
statements.
GAP INC. ANNUAL REPORT 2001 34
NOTE B: DEBT AND OTHER CREDIT ARRANGEMENTS
As of fiscal 2001 year-end our principal lines of credit were provided by two
credit facilities, under which we had committed lines of credit totaling $1.45
billion used for commercial paper backup and letter of credit issuance. We also
have uncommitted lines under which we issue trade letters of credit, as well as
international overdraft facilities. A summary of our credit facilities in place
as of February 2, 2002, is as follows:
For Commercial For Trade Letters
($ in millions) Paper Issuance of Credit Issuance Other Total
- ----------------------------------------------------------------------------------------------------------
Committed (expires)
- ----------------------------------------------------------------------------------------------------------
364 day revolver (June 2002) (a) $ 900 $ 400 $ -- $1,300
5 year revolver (June 2005) 150 -- -- 150
- ----------------------------------------------------------------------------------------------------------
Total committed lines 1,050 400 -- 1,450
==========================================================================================================
Uncommitted
- ----------------------------------------------------------------------------------------------------------
Trade letter of credit lines -- 1,155 -- 1,155
International overdraft facilities -- -- 249 249
- ----------------------------------------------------------------------------------------------------------
Total uncommitted lines $ -- $1,155 $249 $1,404
==========================================================================================================
(a) $200 million of the amount reserved for commercial paper backup may be
reallocated to provide backup for letters of credit.
Letters of credit represent a payment undertaking guaranteed by a bank on our
behalf to pay the vendor a given amount of money upon presentation of specific
documents demonstrating that merchandise has shipped. Vendor payables are
recorded on the balance sheet at the time of merchandise title transfer,
although the letters of credit are generally issued prior to this. Vendor
payables are paid directly to the vendor by us when the required documents are
presented.
At February 2, 2002, we had $42 million in commercial paper notes outstanding
and $329 million in trade letters of credit issued under the committed lines.
Additionally, we had $572 million in trade letters of credit issued under the
uncommitted lines.
Our credit agreements are subject to our not exceeding a debt to EBITDA ratio of
3:1. At February 2, 2002, we were in compliance with this financial covenant at
a debt to EBITDA ratio of 1.7:1. Subsequent to year-end, we replaced our
existing $1.45 billion bank facilities, $1.3 billion of which was scheduled to
expire in June 2002, with a new $1.4 billion secured revolving credit facility.
See Note K for further discussion.
In April 2001, we issued $500 million aggregate principal amount of debt
securities at a fixed annual interest rate of 5.625 percent, due May 1, 2003.
The net proceeds were used for general corporate purposes, including expansion
of stores, distribution centers and headquarters facilities. In connection with
the debt issuance, we entered into forward rate agreements in order to reduce
interest rate risk. The agreements were settled in the first quarter of fiscal
2001 and the net losses of approximately $2.2 million associated with these
agreements are amortized over the life of the debt securities. The fair value of
the debt securities at February 2, 2002, was approximately $470 million, based
on the current rates at which we could borrow funds with similar terms and
remaining maturities. The debt securities are recorded in the balance sheet at
their issuance amount net of unamortized discount.
GAP INC. ANNUAL REPORT 2001 35
In November 2001, we issued $200 million aggregate principal amount of debt
securities at an original annual interest rate of 8.15 percent, due December 15,
2005 (the "2005 notes"), and $500 million aggregate principal amount of debt
securities at an original annual interest rate of 8.8 percent, due December 15,
2008 (the "2008 notes"). Interest on the notes of each series is payable
semi-annually. The interest rate payable on the notes of each series is subject
to adjustment from time to time if either Moody's Investors Service ("Moody's")
or Standard & Poor's Rating Service ("Standard & Poor's") reduces the rating
ascribed to the notes below Baa2, in the case of Moody's, or below BBB+, in the
case of Standard & Poor's. The interest rate payable on the notes will be
increased by 0.25 percent for each rating category downgrade by either rating
agency. In addition, if Moody's or Standard & Poor's subsequently increases the
rating ascribed to the notes, the ongoing interest rate then payable on the
notes will be decreased by 0.25 percent for each rating category upgrade by
either rating agency up to Baa2, in the case of Moody's, or BBB+, in the case of
Standard & Poor's. In no event will the interest rate be reduced below the
original interest rate payable on the notes. There is no limit to the number of
times the interest rate payable on the notes can be adjusted. As a result of the
recent downgrades in our long-term credit ratings, the interest rates payable by
us on $700 million of our outstanding notes are subject to increase by 175 basis
points, effective June 15, 2002, to 9.90 percent per annum on the 2005 notes and
10.55 percent per annum on the 2008 notes. The fair value of the notes at
February 2, 2002, was approximately $651 million, based on the current rates at
which we could borrow funds with similar terms and remaining maturities. The
notes are recorded in the balance sheet at their issuance amount net of
unamortized discount.
Gross interest payments were approximately $117 million, $104 million and $54
million in fiscal 2001, 2000 and 1999, respectively.
A summary of our long-term debt is as follows:
Carrying Amount in U.S. Dollars
----------------------------------
($ in thousands) Feb. 2, 2002 Feb. 3, 2001
- ----------------------------------------------------------------------------------------------------------
Notes payable, variable, interest due semi-annually, due 2001 $ -- $ 250,000
Notes payable, 5.625%, interest due semi-annually, due 2003 499,897 --
Notes payable, 5.0%, interest due annually, due 2004 215,589 234,002
Notes payable, 8.15%, interest due semi-annually, due 2005 (a) 199,553 --
Notes payable, 6.9%, interest due semi-annually, due 2007 497,688 497,277
Notes payable, 8.80%, interest due semi-annually, due 2008 (a) 498,873 --
Notes payable, 6.25%, interest due semi-annually, due 2009 49,797 48,967
Total long-term debt, including current maturities $ 1,961,397 $ 1,030,246
==========================================================================================================
(a) The interest rates on these notes are subject to adjustments as described
above.
NOTE C: INCOME TAXES
Income taxes consisted of the following:
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
($ in thousands) Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- -------------------------------------------------------------------------------
Current
- -------------------------------------------------------------------------------
Federal $ 110,206 $442,264 $549,107
State 56,454 47,814 62,357
Foreign 108,922 53,182 43,976
- -------------------------------------------------------------------------------
Total current 275,582 543,260 655,440
- -------------------------------------------------------------------------------
Deferred
- -------------------------------------------------------------------------------
Federal (18,917) (30,005) (3,815)
State 1,650 (8,082) 7,044
Foreign (8,910) (785) (785)
- -------------------------------------------------------------------------------
Total deferred (26,177) (38,872) 2,444
- -------------------------------------------------------------------------------
Total provision $ 249,405 $504,388 $657,884
===============================================================================
GAP INC. ANNUAL REPORT 2001 36
The foreign component of pretax earnings before eliminations and corporate
allocations in fiscal 2001, 2000 and 1999 was approximately $282 million, $334
million and $226 million, respectively. No provision was made for U.S. income
taxes on the undistributed earnings of the foreign subsidiaries, as it is our
intention to utilize those earnings in the foreign operations for an indefinite
period of time or repatriate such earnings only when tax effective to do so.
Accumulated undistributed earnings of foreign subsidiaries were approximately
$709 million at February 2, 2002.
The difference between the effective income tax rate and the U.S. federal income
tax rate is summarized as follows:
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- -------------------------------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 35.0%
State income taxes, less federal benefit 3.5 1.8 2.5
Foreign 9.4 (1.0) (0.1)
Other 1.1 0.7 (0.5)
- -------------------------------------------------------------------------------------------
Tax rate before charge 49.0% 36.5% 36.9%
Tax charge (a) 54.2 -- --
- -------------------------------------------------------------------------------------------
Effective tax rate 103.2% 36.5% 36.9%
===========================================================================================
(a) The tax charge of $131 million primarily reflects our current estimate of
probable settlements of foreign and domestic tax audits. Any cash amounts
owed will be paid over the next several years and are not expected to be
material in any one year.
Deferred tax assets (liabilities) consisted of the following:
($ in thousands) Feb. 2, 2002 Feb. 3, 2001
- -------------------------------------------------------------------------------
Compensation and benefits accruals $ 57,892 $ 47,930
Scheduled rent 61,432 61,741
Inventory capitalization 49,384 52,880
Nondeductible accruals 23,121 20,678
Other 56,157 48,510
- -------------------------------------------------------------------------------
Gross deferred tax assets 247,986 231,739
- -------------------------------------------------------------------------------
Depreciation (14,816) (25,281)
Fair value of financial instruments included in
Accumulated Other Comprehensive Earnings (Loss) (5,793) (8,131)
Other (9,246) (8,711)
- -------------------------------------------------------------------------------
Gross deferred tax liabilities (29,855) (42,123)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 218,131 $ 189,616
===============================================================================
Net deferred tax assets at February 2, 2002, and February 3, 2001, are included
in Other Current Assets (approximately $78 million and $76 million,
respectively), and Lease Rights and Other Assets (approximately $140 million and
$113 million, respectively) in the Consolidated Balance Sheets.
NOTE D: LEASES
We lease most of our store premises and some of our headquarters facilities and
distribution centers. These leases expire at various dates through 2033.
The aggregate minimum non-cancelable annual lease payments under leases in
effect on February 2, 2002, are as follows:
Fiscal Year ($ in thousands)
- --------------------------------------------------------------------------------
2002 $ 816,130
2003 771,061
2004 718,421
2005 611,597
2006 476,995
Thereafter 1,844,360
- --------------------------------------------------------------------------------
Total minimum lease commitment $5,238,564
================================================================================
GAP INC. ANNUAL REPORT 2001 37
Many leases also provide for payment of operating expenses, real estate taxes
and additional rent based on a percentage of sales. No lease directly imposes
any restrictions relating to leasing in other locations, other than radius
clauses.
Many leases we enter into include options that may extend the lease term beyond
the initial commitment periods (periods ranging up to 35 years), subject to
terms agreed to at lease inception. Some leases also include early termination
options which can be exercised under specific conditions.
For leases that contain predetermined fixed escalations of the minimum rentals,
we recognize the related rental expense on a straight-line basis and record the
difference between the recognized rental expense and amounts payable under the
leases as deferred lease credits. At February 2, 2002, and February 3, 2001,
this liability amounted to approximately $178 million and $180 million,
respectively.
Cash or rent abatements received upon entering into certain store leases are
recognized on a straight-line basis as a reduction to rent expense over the
lease term. The unamortized portion is included in Deferred Lease Credits and
Other Liabilities. At February 2, 2002, and February 3, 2001, the long-term
deferred credit was approximately $303 million and $250 million, respectively.
Rental expense for all operating leases was as follows:
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
($ in thousands) Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- -----------------------------------------------------------------------------
Minimum rentals $ 788,123 $ 705,760 $ 561,994
Contingent rentals 135,184 135,406 114,484
- -----------------------------------------------------------------------------
Total $ 923,307 $ 841,166 $ 676,478
=============================================================================
NOTE E: FINANCIAL INSTRUMENTS
Derivative Financial Instruments
We operate in foreign countries, which exposes us to market risk associated with
foreign currency exchange rate fluctuations. Our risk management policy is to
hedge substantially all merchandise purchases for foreign operations through the
use of foreign exchange forward contracts to minimize this risk. Forward
contracts used to hedge forecasted merchandise purchases are designated as
cash-flow hedges. Forward contracts used to hedge merchandise purchases based on
firm commitments are designated as fair-value hedges. At February 2, 2002, we
had contracts maturing at various dates through January 2003 to buy and sell the
equivalent of approximately $520 million in foreign currencies (Buy contracts:
approximately 30 million Euro; Sell contracts: approximately 119 million British
pounds, 229 million Canadian dollars, 71 million Euro and 14.6 billion Japanese
yen) at the contracted rates.
Changes in the fair value of forward contracts designated as fair-value hedges,
along with the offsetting changes in fair value of the related firm commitments
to purchase foreign merchandise, are recorded in Cost of Goods Sold and
Occupancy Expenses in the current period. Changes in the fair value of forward
contracts designated as cash-flow hedges are recorded as a component of
comprehensive earnings, and are recognized in Cost of Goods Sold and Occupancy
Expenses in the period in which the hedged merchandise inventory is sold.
Approximately $5.5 million included in Accumulated Other Comprehensive Earnings
(Loss) at February 2, 2002, will be recognized in Costs of Goods Sold and
Occupancy Expenses over the next 12 months. The majority of the critical terms
of the forward contracts, and the respective firm commitments and forecasted
foreign purchase transactions, are essentially the same. As a result, there were
no amounts reflected in fiscal 2001 earnings resulting from hedge
ineffectiveness.
We also use forward contracts to hedge our market risk exposure associated with
foreign currency exchange rate fluctuations for certain loans denominated in
currencies other than the functional currency of the entity holding or issuing
the loan. Gains and losses on the currency forward contracts, as well as on the
underlying loans, are recognized in Operating Expenses in the same period and
generally offset.
GAP INC. ANNUAL REPORT 2001 38
NOTE F: EMPLOYEE BENEFIT AND INCENTIVE STOCK COMPENSATION PLANS
Retirement Plans
We have 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, we match in cash all or a
portion of employees' contributions under a predetermined formula. Our
contributions vest immediately. Our contributions to the retirement plan in
fiscal 2001, 2000 and 1999 were approximately $23 million, $18 million and $16
million, respectively.
A nonqualified Executive Deferred Compensation Plan established on January 1,
1999, allows eligible employees to defer compensation up to a maximum amount. We
do not match employees' contributions under the current plan.
A Deferred Compensation Plan was established on August 26, 1997, for nonemployee
members of the Board of Directors. Under this plan, Board members may elect to
defer receipt on a pre-tax basis of eligible compensation for serving as
nonemployee directors of the Company. In exchange for compensation deferred,
Board members are granted discounted stock options to purchase shares of our
common stock. All options are fully exercisable upon the date granted and expire
seven years after grant or three years after retirement from the Board, if
earlier. We may issue up to 675,000 shares under the plan. Outstanding options
at February 2, 2002, February 3, 2001, and January 29, 2000, were 101,282,
94,842 and 74,461, respectively.
Incentive Stock Compensation Plans
The 1996 Stock Option and Award Plan (the "1996 Plan") was established on March
26, 1996. The Board authorized 93,341,342 shares for issuance under the 1996
Plan, which includes shares available under the Management Incentive Restricted
Stock Plan ("MIRSP") and an earlier stock option plan established in 1981, both
of which were superseded by the 1996 Plan. The 1996 Plan empowers the
Compensation and Stock Option Committee of the Board of Directors (the
"Committee") to award compensation primarily in the form of nonqualified stock
options or restricted stock to key employees. The 1999 Stock Option Plan (the
"1999 Plan") was established on March 29, 1999. The Board authorized 22,500,000
shares for issuance under the 1999 Plan. On April 3, 2001, the Board authorized
an additional 30,000,000 shares, increasing the number of shares available for
issuance under the 1999 plan to 52,500,000 shares. The 1999 Plan empowers the
Committee to award nonqualified stock options to non-officers. Stock options
generally expire 10 years from the grant date or one year after the date of
retirement or death, if earlier. Stock options generally vest over a three-year
period, with shares becoming exercisable in full on the third anniversary of the
grant date or over a four-year period, with shares becoming exercisable in equal
annual installments of 25 percent. Nonqualified stock options are generally
issued at fair market value but may be issued at prices less than the fair
market value at the date of grant or at other prices as determined by the
Committee. Total compensation cost for those stock options issued at less than
fair market value and for the restricted shares issued was approximately $8
million, $10 million and $19 million in fiscal 2001, 2000 and 1999,
respectively.
In 1998, we established a stock option plan for non-officers, called Stock Up On
Success, under which eligible employees received nonqualified stock options.
During fiscal 2001, there were no options granted to employees under the plan.
The plan was discontinued as of January 10, 2002.
GAP INC. ANNUAL REPORT 2001 39
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (the "ESPP") under which eligible U.S.
employees may purchase our common stock at 85 percent of the lower of the
closing price of our common stock on the New York Stock Exchange on the first or
last day of the six-month purchase period. 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 2,350,049, 1,624,663 and 1,178,333
shares issued under the plan during fiscal 2001, 2000 and 1999, respectively.
All shares were acquired from reissued treasury stock. At February 2, 2002,
there were 2,810,094 shares reserved for future subscriptions. In January 2002,
the Board of Directors amended the ESPP to reserve an additional 11,000,000
shares of common stock for issuance under the ESPP, subject to approval of
shareholders at our 2002 Annual Meeting of Shareholders.
During fiscal 2000, we established an Employee Stock Purchase Plan for employees
in the United Kingdom. Under the plan, all eligible employees may purchase our
common stock at the lower of the closing price of our common stock on the first
or last day of the six-month purchase period on the New York Stock Exchange. We
will provide a share match for every seven shares purchased. Employees pay for
their stock purchases through payroll deductions from (pound)10 to (pound)125
per month, not to exceed the lesser of either (pound)750 per each six-month
purchase period or 10 percent of gross annual base salary per tax year. At
February 2, 2002, (pound)1 was equivalent to $1.42. There were 25,035 shares
issued under the plan during fiscal 2001. All shares were acquired from reissued
treasury stock. At February 2, 2002, there were 974,965 shares reserved for
future subscriptions.
NOTE G: SHAREHOLDERS' EQUITY AND STOCK OPTIONS
Common and Preferred Stock
We are 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.
Stock Options
Under our stock option plans, nonqualified options to purchase common stock are
granted to officers, directors and eligible 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 30, 1999 97,258,035 $ 11.69
- --------------------------------------------------------------------------------
Granted 11,780,067 42.15
Exercised (9,942,133) 7.50
Canceled (6,582,343) 17.30
- --------------------------------------------------------------------------------
Balance at January 29, 2000 92,513,626 $ 15.61
- --------------------------------------------------------------------------------
Granted 28,593,295 33.66
Exercised (13,090,888) 8.82
Canceled (10,939,938) 20.44
- --------------------------------------------------------------------------------
Balance at February 3, 2001 97,076,095 $ 21.29
- --------------------------------------------------------------------------------
Granted 30,450,716 15.85
Exercised (9,367,810) 11.27
Canceled (9,027,433) 29.12
- --------------------------------------------------------------------------------
Balance at February 2, 2002 109,131,568 $ 19.95
- --------------------------------------------------------------------------------
Outstanding options at February 2, 2002, have expiration dates ranging from
March 2002 to February 2012.
GAP INC. ANNUAL REPORT 2001 40
At February 2, 2002, we reserved 153,933,077 shares of our common stock,
including 1,172,783 treasury shares, for the exercise of stock options. There
were 44,245,584, 35,810,440 and 53,480,298 shares available for granting of
options at February 2, 2002, February 3, 2001, and January 29, 2000,
respectively. Options for 44,670,144, 27,675,466 and 15,682,738 shares were
exercisable as of February 2, 2002, February 3, 2001, and January 29, 2000,
respectively, and had a weighted-average exercise price of $14.21, $9.59 and
$7.76 for those respective periods.
The following table summarizes information about stock options outstanding at
February 2, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------------- ------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Contractual Weighted-Average Exercisable at Weighted-Average
Range of Exercise Prices Feb. 2, 2002 Life (in years) Exercise Price Feb. 2, 2002 Exercise Price
- --------------------------------------------------------------------------------------- ------------------------------------------
$ 3.46 to $ 9.80 28,880,028 3.15 $ 7.13 26,970,967 $ 7.16
9.87 to 15.16 28,174,182 9.37 14.22 1,613,873 14.01
15.32 to 25.99 29,630,752 7.35 22.22 12,143,755 21.31
26.19 to 59.23 22,446,606 7.84 40.65 3,941,549 40.66
- ----------------------------------------------------------------------------------------------------------------------------------
$ 3.46 to $ 59.23 109,131,568 6.86 $ 19.95 44,670,144 $ 14.21
==================================================================================================================================
We account for our stock option and award plans using the intrinsic value-based
method of accounting, under which no compensation cost has been recognized for
stock option awards granted at fair market value. Had compensation cost for our
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans, our net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below.
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- --------------------------------------------------------------------------------------------------------
Net earnings (loss)($ in thousands)
- --------------------------------------------------------------------------------------------------------
As reported $ (7,764) $ 877,497 $ 1,127,065
Pro forma (89,069) 759,597 1,031,144
- --------------------------------------------------------------------------------------------------------
Earnings (loss) per share
- --------------------------------------------------------------------------------------------------------
As reported--basic $ (0.01) $ 1.03 $ 1.32
Pro forma--basic (0.10) 0.89 1.21
As reported--diluted (0.01) 1.00 1.26
Pro forma--diluted (0.10) 0.86 1.15
- --------------------------------------------------------------------------------------------------------
The weighted-average fair value of the stock options granted during fiscal 2001,
2000 and 1999 was $5.74, $11.42 and $16.77, 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 2001: dividend yield of 0.63 percent; expected price volatility of between 43
percent and 47 percent; risk-free interest rates ranging from 1.3 percent to 5.3
percent and expected lives between 1.75 and 6.2 years. The fair value of stock
options granted in 2000 was based on the following weighted-average assumptions:
dividend yield of 0.3 percent; expected price volatility of between 39 percent
and 43 percent; risk-free interest rates ranging from 4.1 percent to 5.2 percent
and expected lives between 3.3 and 8.4 years. The fair value of stock options
granted in 1999 was based on the following weighted-average assumptions:
dividend yield of 0.2 percent; expected price volatility of 35 percent;
risk-free interest rates ranging from 5.4 percent to 6.7 percent and expected
lives between 3.9 and 6.2 years.
GAP INC. ANNUAL REPORT 2001 41
NOTE H: EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using the weighted-average number of
shares of common stock outstanding during the period. Diluted earnings per share
includes the additional dilutive effect of our potentially dilutive securities,
which includes certain stock options and unvested shares of restricted stock.
The following summarizes the incremental shares from these potentially dilutive
securities, calculated using the treasury stock method, as included in the
calculation of diluted weighted-average shares.
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- --------------------------------------------------------------------------------------------------------
Weighted-average number of shares -- basic 860,255,419 849,810,658 853,804,924
- --------------------------------------------------------------------------------------------------------
Incremental shares from:
Stock options -- 28,811,344 39,781,579
Restricted stock -- 515,192 1,442,673
- --------------------------------------------------------------------------------------------------------
Weighted-average number of shares -- diluted 860,255,419 879,137,194 895,029,176
========================================================================================================
Excluded from the above computations of weighted-average shares for diluted
earnings (loss) per share were options to purchase 56,800,632, 20,154,144 and
7,089,268 shares of common stock for fiscal 2001, 2000 and 1999, respectively.
Additionally, a put option to repurchase 400,000 shares for fiscal 2000 was
excluded from the above computations. Issuance or repurchase of these securities
would have resulted in an antidilutive effect on earnings (loss) per share. In
addition, diluted losses per share for fiscal 2001 is computed using the basic
weighted-average number of shares outstanding and excludes 13,395,045 dilutive
shares as their effect is antidilutive when applied to losses.
NOTE I: RELATED PARTY TRANSACTIONS
We have an agreement with Fisher Development, Inc. ("FDI"), a company wholly
owned by the brother of our chairman and the brother's immediate family, setting
forth the terms under which FDI may act as one of our general contractors in
connection with our construction activities. FDI acted as general contractor for
282, 675 and 547 new store concepts' leasehold improvements and fixtures during
fiscal 2001, 2000 and 1999, respectively. In the same respective years, FDI
supervised construction of 171, 262 and 123 store concept expansions, remodels
and relocations as well as headquarters facilities. The total amount paid under
the agreement was approximately $416 million, $741 million and $485 million,
including profit and overhead costs of approximately $42 million, $59 million
and $47 million, for fiscal 2001, 2000 and 1999, respectively. At February 2,
2002, and February 3, 2001, amounts due to FDI were approximately $15 million
and $62 million, respectively. The agreement with FDI is reviewed annually by
the Audit and Finance Committee of the Board of Directors.
GAP INC. ANNUAL REPORT 2001 42
NOTE J: REDUCTIONS IN WORKFORCE AND OTHER ACTIONS
In June 2001, we announced a reduction in workforce to streamline headquarters
staffing and improve organizational efficiencies.
We plan to close distribution facilities in Ventura, California; Basildon,
England; Erlanger, Kentucky and Roosendaal, Holland. The reduction in workforce
and distribution center closures resulted in the elimination of approximately
2,000 positions consisting of 1,370 layoffs of headquarters, distribution center
and Banana Republic field employees, and the elimination of 630 open positions.
The closure of the Ventura and Basildon facilities are expected to be completed
by the first quarter of fiscal 2002, and the Erlanger and Roosendaal facilities
are expected to be closed by the third quarter of fiscal 2002, respectively. As
of February 2, 2002, these four facilities remained in operation.
As a result of the reduction in workforce and distribution center closures, as
described above, we recorded a charge of approximately $38 million in exit costs
and $11 million in other costs related to these actions during fiscal 2001.
Components of accrued exit costs and changes in accrued amounts related to these
workforce reductions and other actions as of February 2, 2002, were as follows:
Severance and Asset
($ in thousands) Outplacement Facilities Write-Downs Total
- ------------------------------------------------------------------------------------------
Balance at February 3, 2001 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------
Provisions 29,945 7,040 757 37,742
Payments/deductions (24,510) -- (757) (25,267)
- ------------------------------------------------------------------------------------------
Balance at February 2, 2002 $ 5,435 $ 7,040 $ -- $ 12,475
==========================================================================================
Severance and outplacement costs related to approximately 1,370 employees.
Employee separation expenses are comprised of severance pay, outplacement
services, medical and other related benefits. As of February 2, 2002,
approximately 1,070 positions had been separated or were currently in the
separation process. Remaining cash expenditures associated with employee
separations are estimated to be approximately $5.4 million and are expected to
be paid by the third quarter of fiscal 2002.
Long-term asset write-downs include items identified as no longer needed to
support ongoing operations. During the fiscal year ended February 2, 2002, we
recorded an impairment charge of $0.8 million related to the Roosendaal,
Holland, facility to reduce the net book value of the facility to the estimated
net selling price.
Facilities-related charges associated with distribution center closures include
costs associated with lease terminations, facilities restoration and equipment
removal. During the fiscal year ended February 2, 2002, we recorded $7.0 million
in facilities-related charges. Remaining cash expenditures associated with
facilities as of February 2, 2002, are estimated to be approximately $7.0
million and are expected to be paid by November 2003.
In addition, we are consolidating and downsizing headquarters facilities in our
San Francisco and San Bruno campuses as part of our cost containment efforts. We
recorded a charge of approximately $51 million during fiscal 2001, $48 million
of which was a reserve for the difference between our rent and the rate at which
we expect to be able to sublease the properties through 2015. Components of
accrued exit costs related to these headquarters facilities as of February 2,
2002, were as follows:
Sublease Asset
($ in thousands) Reserve Write-Downs Total
- -------------------------------------------------------------------------------
Balance at February 3, 2001 $ -- $ -- $ --
- -------------------------------------------------------------------------------
Provisions 47,274 3,393 50,667
Payments/deductions (3,054) (3,393) (6,447)
- -------------------------------------------------------------------------------
Balance at February 2, 2002 $44,220 $ -- $44,220
===============================================================================
GAP INC. ANNUAL REPORT 2001 43
NOTE K: SUBSEQUENT EVENTS
Subsequent to year-end, we replaced our existing $1.45 billion bank facilities,
$1.3 billion of which was scheduled to expire in June 2002, with a new $1.4
billion secured revolving credit facility (the "new Facility"). The new Facility
is secured and contains financial and other covenants, including limitations on
capital expenditures, liens, cash dividends and investments, and maintenance of
certain financial ratios, including a fixed-charge coverage ratio not less than
1.2:1 and 1.4:1 for fiscal 2002 and fiscal 2003, respectively, and an
asset-coverage ratio of not less than 1.75:1. The new Facility will be used for
general corporate purposes, including trade letters of credit issuance and
advances.
On February 14, 2002, Moody's reduced our long- and short-term senior unsecured
credit ratings from Baa3 to Ba2 and from Prime-3 to Not Prime, respectively,
with a negative outlook on our long-term ratings, and Standard & Poor's reduced
our long- and short-term credit ratings from BBB+ to BB+ and from A-2 to B,
respectively, with a stable outlook on our long-term ratings. On February 27,
2002, Moody's reduced our long-term senior unsecured credit ratings from Ba2 to
Ba3 and stated that its outlook on our long-term ratings was stable. As a result
of downgrades in our long-term credit ratings, the interest rates payable by us
on $700 million of our outstanding notes are subject to increase by 175 basis
points, effective June 15, 2002. Any further downgrades of our long-term credit
ratings by these rating agencies would result in further increases in the
interest rates payable by us on $700 million of our outstanding notes. As a
result of the downgrades in our short-term credit ratings, we no longer have
meaningful access to the commercial paper market. In addition, we expect both
the recent and any future lowering of the ratings on our debt to result in
reduced access to the capital markets and higher interest costs on future
financings.
In March 2002, we issued $1.38 billion aggregate principal amount of 5.75
percent senior convertible notes due March 15, 2009, at par and received the net
proceeds in cash. Interest is payable semi-annually on March 15 and September 15
of each year, commencing on September 15, 2002. We have an option to call the
bonds on or after March 20, 2005. The notes are convertible, unless previously
redeemed or repurchased, at the option of the holder at any time prior to
maturity, into shares of our common stock at a conversion price of $16.12 per
share, subject to adjustment in certain events, for a total of approximately
85,607,940 shares. If converted, these additional shares would reduce our future
earnings per share. Prior to conversion, the convertible notes are potentially
dilutive at certain earnings levels. The effects of these dilutive securities
will be computed using the if-converted method. The net proceeds will be used
for general corporate purposes.
GAP INC. ANNUAL REPORT 2001 44
QUARTERLY INFORMATION
(Unaudited)
Financial Data
Fiscal 2001
-----------------------------------------------------------------------------------------
($ in thousands except 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 52 Weeks Ended
per share amounts) May 5, 2001 Aug. 4, 2001 Nov. 3, 2001 Feb. 2, 2002 Feb. 2, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,179,656 $ 3,245,219 $ 3,333,373 $ 4.089,625 $ 13,847,873
Gross profit 1,125,174 1,041,082 950,639 1,026,589 4,143,484
Net earnings (loss) 115,480 89,751 (178,837)(a) (34,158) (7,764)
Earnings (loss) per share -- basic 0.14 0.10 (0.21) (0.04) (0.01)
Earnings (loss) per share -- diluted 0.13 0.10 (0.21) (0.04) (0.01)
===========================================================================================================================
(a) Includes $131 million tax charge.
Fiscal 2000
-----------------------------------------------------------------------------------------
($ in thousands except 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended 14 Weeks Ended 53 Weeks Ended
per share amounts) Apr. 29, 2000 Jul. 29, 2000 Oct. 28, 2000 Feb. 3, 2001 Feb. 3, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 2,731,990 $ 2,947,714 $ 3,414,668 $ 4,579,088 $ 13,673,460
Gross profit 1,130,085 1,110,650 1,257,207 1,576,076 5,074,018
Net earnings 235,476 183,920 186,348 271,753 877,497
Earnings per share -- basic 0.28 0.22 0.22 0.32 1.03
Earnings per share -- diluted 0.27 0.21 0.21 0.31 1.00
===========================================================================================================================
Per Share Data
Market Prices Cash Dividends Paid (a)
----------------------------------------------- -------------------------------
Fiscal 2001 2000 2001 2000
- ------------------------------------------------------------------- -------------------------------
High Low High Low
- -----------------------------------------------------------------------------------------------------
1st Quarter $31.73 $22.02 $53.75 $35.00 $0.0222 $0.0222
2nd Quarter 34.98 25.38 39.81 28.00 0.0222 0.0222
3rd Quarter 28.40 11.12 38.00 18.50 0.0222 0.0222
4th Quarter 17.00 11.69 34.00 21.50 0.0222 0.0222
- -----------------------------------------------------------------------------------------------------
Year $0.0888 $0.0888
=====================================================================================================
The principal markets on which our stock is traded are the New York Stock
Exchange and the Pacific Exchange. The number of holders of record of our stock
as of March 15, 2002, was 10,505.
(a) Our new $1.4 billion secured revolving credit facility restricts cash
dividends to an amount not in excess of $.0888 per year per share, with such
per share amount to be adjusted ratably in respect of common stock
distributions to holders of our equity interests, recapitalizations, stock
splits or any similar event.
GAP INC. ANNUAL REPORT 2001 45