SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended August 4, 2001 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to ______________ Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) Delaware 94-1697231 -------------------------- -------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) One Harrison San Francisco, California 94105 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 952-4400 ----------------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value New York Stock Exchange, Inc. (Title of class) Pacific Exchange, Inc. (Name of each exchange where registered) Securities registered pursuant to Section 12(g) of the Act: None ----------------------- Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $0.05 par value, 862,435,229 shares as of September 1, 2001 ------------------------------------------------------------------------- 1
GAP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> ($000 except share and par value) August 4, February 3, July 29, 2001 2001 2000 ---------------- ---------------- ---------------- <S> <C> <C> <C> ASSETS Current Assets: Cash and equivalents $ 722,952 $ 408,794 $ 327,860 Merchandise inventory 2,149,223 1,904,153 2,080,856 Other current assets 396,371 335,103 375,013 ---------------- ---------------- ---------------- Total Current Assets 3,268,546 2,648,050 2,783,729 Property and equipment, net 4,221,567 4,007,685 3,244,940 Lease rights and other assets 358,484 357,173 345,767 ---------------- ---------------- ---------------- Total Assets $ 7,848,597 $ 7,012,908 $ 6,374,436 ================ ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 691,670 $ 779,904 $ 859,448 Current maturities of long-term debt 250,000 250,000 - Accounts payable 1,081,819 1,067,207 922,866 Accrued expenses and other current liabilities 763,625 702,033 617,785 ---------------- ---------------- ---------------- Total Current Liabilities 2,787,114 2,799,144 2,400,099 Long-Term Liabilities: Long-term debt 1,268,036 780,246 1,022,871 Deferred lease credits and other liabilities 544,618 505,279 452,325 ---------------- ---------------- ---------------- Total Long-Term Liabilities 1,812,654 1,285,525 1,475,196 Shareholders' Equity: Common stock $.05 par value Authorized 2,300,000 shares; Issued 945,896,525; 939,222,871 and 933,098,193 shares; Outstanding 861,650,291; 853,996,984 and 849,573,626 shares 47,294 46,961 46,654 Additional paid-in capital 432,411 294,967 189,589 Retained earnings 5,160,981 4,974,773 4,573,338 Accumulated other comprehensive earnings (losses) (39,820) (20,173) 10,003 Deferred compensation (11,054) (12,162) (18,112) Treasury stock, at cost (2,340,983) (2,356,127) (2,302,331) ---------------- ---------------- ---------------- Total Shareholders' Equity 3,248,829 2,928,239 2,499,141 ---------------- ---------------- ---------------- Total Liabilities and Shareholders' Equity $ 7,848,597 $ 7,012,908 $ 6,374,436 ================ ================ ================ </TABLE> See accompanying notes to condensed consolidated financial statements. 2
GAP INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) - ------------------------------------------------------------------------------- ($000, except share and per share amounts) <TABLE> <CAPTION> -------------------------------- ----------------------------------- Thirteen Weeks Ended Twenty-six Weeks Ended ----------------------------- ----------------------------------- August 4, July 29, August 4, July 29, 2001 2000 2001 2000 ------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> Net sales $ 3,245,219 $ 2,947,714 $ 6,424,875 $ 5,679,704 Costs and expenses Cost of goods sold and occupancy expenses 2,204,137 1,837,064 4,258,619 3,438,969 Operating expenses 872,772 809,294 1,793,184 1,559,597 Interest expense 28,863 13,800 52,901 25,329 Interest income (1,893) (2,081) (3,028) (4,657) ------------- ------------- ------------- ------------- Earnings before income taxes 141,340 289,637 323,199 660,466 Income taxes 51,589 105,717 117,968 241,070 ------------- ------------- ------------- ------------- Net earnings $ 89,751 $ 183,920 $ 205,231 $ 419,396 ============= ============= ============= ============= - ---------------------------------------------------------------------------------------------------------------------- Weighted average number of shares - basic 859,671,047 849,641,253 857,002,238 849,983,457 Weighted average number of shares - diluted 883,662,826 880,119,755 879,933,693 884,183,119 Earnings per share - basic $ 0.10 $ 0.22 $ 0.24 $ 0.49 Earnings per share - diluted $ 0.10 $ 0.21 $ 0.23 $ 0.47 Cash dividends per share $ 0.02 $ 0.02 $ 0.04/(a)/ $ 0.04/(b)/ - ---------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to condensed consolidated financial statements. /(a)/ Includes a dividend of $0.02 per share declared in January 2001 but paid in first quarter of fiscal 2001. /(b)/ Includes a dividend of $0.02 per share declared in January 2000 but paid in first quarter of fiscal 2000. 3
GAP INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> ($000) Twenty-six Weeks Ended ------------------------------- August 4, 2001 July 29, 2000 -------------- ------------- <S> <C> <C> Cash Flows from Operating Activities: Net earnings $ 205,231 $ 419,396 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 382,164 270,436 Tax benefit from exercise of stock options and vesting of restricted stock 48,469 87,278 Changes in operating assets and liabilities: Merchandise inventory (252,042) (625,943) Other current assets (70,051) (104,486) Accounts payable 18,211 122,871 Accrued expenses 85,128 (114,034) Deferred lease credits and other liabilities 25,337 13,255 -------------- ------------- Net cash provided by operating activities 442,447 68,773 -------------- ------------- Cash Flows from Investing Activities: Net purchase of property and equipment (588,389) (793,827) Acquisition of lease rights and other assets (4,776) (52,791) -------------- ------------- Net cash used for investing activities (593,165) (846,618) -------------- ------------- Cash Flows from Financing Activities: Net increase (decrease) in notes payable (86,087) 700,053 Net issuance of long-term debt 495,886 250,000 Issuance of common stock 99,278 56,970 Net purchase of treasury stock - (304,713) Cash dividends paid (38,029) (37,735) -------------- ------------- Net cash provided by financing activities 471,048 664,575 -------------- ------------- Effect of exchange rate fluctuations on cash (6,172) (9,222) -------------- ------------- Net increase (decrease) in cash and equivalents 314,158 (122,492) Cash and equivalents at beginning of period 408,794 450,352 -------------- ------------- Cash and equivalents at end of period $ 722,952 $ 327,860 ============== ============= - ------------------------------------------------------------------------------------------------------ </TABLE> See accompanying notes to condensed consolidated financial statements. 4
GAP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION --------------------- The condensed consolidated balance sheets as of August 4, 2001 and July 29, 2000 and the interim condensed consolidated statements of earnings for the thirteen and twenty-six weeks ended August 4, 2001 and July 29, 2000 and cash flows for the twenty-six week periods ended August 4, 2001 and July 29, 2000 have been prepared by the Company, without audit. In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows of the Company at August 4, 2001 and July 29, 2000, and for all periods presented. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted from these interim financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 3, 2001. The condensed consolidated balance sheet as of February 3, 2001 was derived from the Company's February 3, 2001 balance sheet included in the Company's 2000 Annual Report on Form 10-K. The results of operations for the twenty-six weeks ended August 4, 2001 are not necessarily indicative of the operating results that may be expected for the year ending February 2, 2002. 2. COMPREHENSIVE EARNINGS ---------------------- Comprehensive earnings include net earnings and other comprehensive earnings (losses). Other comprehensive earnings (losses) include foreign currency translation adjustments and fluctuations in the fair market value of certain financial instruments. Comprehensive earnings for the thirteen and twenty-six weeks ended August 4, 2001 and July 29, 2000 were as follows (in thousands): <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended ---------------------------------- ----------------------------------- August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 ---------------------------------- ----------------------------------- <S> <C> <C> <C> <C> Net earnings $ 89,751 $ 183,920 $ 205,231 $ 419,396 Other comprehensive (losses) earnings (7,488) 3,990 (19,647) 16,762 ---------------------------------- ----------------------------------- Comprehensive earnings $ 82,263 $ 187,910 $ 185,584 $ 436,158 ================================== =================================== </TABLE> 5
3. EARNINGS PER SHARE ------------------ Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes the dilutive effect of the Company's potentially dilutive securities, which include certain stock options, unvested shares of restricted stock and certain put options. The following summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method. <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------------ ----------------------------- August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 -------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> Weighted-average number of shares - basic 859,671,047 849,641,253 857,002,238 849,983,457 Incremental shares resulting from: Stock options 23,937,596 29,906,782 22,801,584 33,580,804 Restricted stock 54,183 540,793 129,871 618,858 Put options - 30,927 - - -------------- ------------- -------------- ------------- Weighted-average number of shares - diluted 883,662,826 880,119,755 879,933,693 884,183,119 ============== ============= ============== ============= </TABLE> Excluded from the above computations of weighted-average shares for diluted earnings per share were options to purchase 21,401,588 and 23,003,521 shares of common stock during the thirteen and twenty-six weeks ended August 4, 2001, respectively, and 21,531,753 and 16,682,889 shares during the thirteen and twenty-six weeks ended July 29, 2000, respectively. Additionally, put options to repurchase 375,000 shares during the twenty-six weeks ended July 29, 2000 were excluded from the above computations. Issuance or repurchase of these securities would have resulted in an antidilutive effect on earnings per share. 4. LONG-TERM DEBT -------------- On April 27, 2001, the Company issued $500 million of debt securities at a fixed annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is payable semi-annually. The notes are recorded in the balance sheet at their issuance amount net of unamortized discount. In connection with the debt issuance, the Company entered into interest rate swap agreements in order to reduce interest rate risk. The swap agreements were settled in the first quarter and the net losses of approximately $2.2 million associated with these swaps will be amortized over the life of the debt securities. 5. WORKFORCE REDUCTIONS AND OTHER ACTIONS -------------------------------------- On June 21, 2001, the Company announced workforce reductions to streamline headquarters staffing and improve organizational efficiencies. The workforce reductions resulted in the elimination of approximately 1,600 positions consisting of an estimated 1,040 lay offs of headquarters and Banana Republic field employees and the elimination of approximately 560 open positions. In addition to these reductions, the Company plans to close distribution facilities in Ventura, California and London. Operations at those facilities will be consolidated at new facilities in Fresno, California and Rugby, England. The consolidation will be completed by the first quarter of fiscal 2002. Approximately 425 employees affected by these changes have the opportunity to apply for positions at the new locations. 6
The Company also plans to relocate its London headquarters to the new Rugby facility. This move will be completed by the first quarter of fiscal 2002. Approximately 125 employees affected by this move have the opportunity to transfer to Rugby or apply for other positions at Rugby. As a result of the workforce reductions and other actions, as described above, the Company recorded a charge of approximately $30 million during the second quarter of fiscal 2001 which was included in operating expenses. Of this charge, the Company recorded a liability for employee termination pay of approximately $27 million, substantially all of which will be paid during the third quarter of fiscal 2001. 7
Deloitte & Touche LLP 50 Fremont Street San Francisco, California 94105-2230 Tel: (415) 783 4000 Fax: (415) 783 4329 www.us.deloitte.com Deloitte & Touche INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Shareholders of The Gap, Inc.: We have reviewed the accompanying condensed consolidated balance sheets of The Gap, Inc. and subsidiaries as of August 4, 2001 and July 29, 2000, and the related condensed consolidated statements of earnings for the thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 and condensed consolidated statements of cash flows for the twenty-six week periods ended August 4, 2001 and July 29, 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of The Gap, Inc. and subsidiaries as of February 3, 2001, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated February 28, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 3, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP August 16, 2001 8
GAP INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - ------------------------------------------------------------------------------- The information below contains certain forward-looking statements which reflect the current view of Gap Inc. (the "Company") with respect to future events and financial performance. Wherever used, the words "expect," "plan," "anticipate," "believe," and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties and the Company's actual results of operations could differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where the Company's goods are manufactured, and/or other factors that may be described in the Company's Annual Report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict. It is suggested that this document be read in conjunction with the Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the year ended February 3, 2001. The Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. RESULTS OF OPERATIONS <TABLE> <CAPTION> Net Sales - ----------------------------------------------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-six Weeks Ended --------------------------------------------- --------------- August 4, July 29, August 4, July 29, 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales ($000) $3,245,219 $2,947,714 $6,424,875 $5,679,704 Total net sales growth percentage 10 20 13 20 Comparable store sales decrease percentage (9) (2) (8) (2) Net sales per average square foot $ 94 $ 111 $ 191 $ 221 Square footage of gross store space - at end of period (000) 34,381 26,932 Number of Stores: Beginning of Year 3,676 3,018 New stores 337 296 Expanded stores/(1)/ 98 72 Closed stores 40 30 End of Period 3,973 3,284 - ----------------------------------------------------------------------------------------------------------------- </TABLE> (1) Expanded stores do not change store count. 9
Store count and square footage at quarter end for fiscal 2001 and 2000 were as follows: <TABLE> <CAPTION> August 4, 2001 July 29, 2000 - ----------------------------------------------------------------------------------------- Number of Sq. Ft. Number of Sq. Ft. Stores (millions) Stores (millions) - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Gap Domestic 2,201 12.6 1,885 11.0 Gap International 594 3.3 454 2.4 Banana Republic 430 3.5 365 2.8 Old Navy 748 15.0 580 10.7 - ----------------------------------------------------------------------------------------- Total 3,973 34.4 3,284 26.9 ========================================================================================= Increase 21% 28% 23% 32% </TABLE> The increases in net sales for the second quarter and first half of fiscal 2001 over the same periods last year were attributable to the increase in retail selling space, both through the opening of new stores (net of stores closed) and the expansion of existing stores. The Company's second quarter comparable store sales by division were as follows: Gap Domestic had a negative high-single digit versus a positive mid-single digit last year, Gap International had a negative mid-single digit versus a positive low-single digit last year, Banana Republic had a negative mid-single digit versus a flat comp last year, Old Navy had negative mid-teens versus negative low-double digits last year. The Company's year-to-date comparable store sales by division were as follows: Gap Domestic had a negative mid-single digit versus a flat comp last year, Gap International had a negative high-single digit versus a positive low-single digit last year, Banana Republic had a negative mid-single digit versus a positive low-single digit last year, Old Navy had negative low-double digits versus a negative mid-single digit last year. The decreases in net sales per average square foot for the second quarter and first half of fiscal 2001 were primarily attributable to negative comparable store sales. Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales increased 5.6 and 5.8 percentage points in the second quarter and first half of fiscal 2001, respectively, from the same periods in fiscal 2000. The increases were driven by decreased merchandise margin and increased occupancy expenses as a percentage of net sales. For the second quarter and first half of fiscal 2001, the decreases in merchandise margin as a percentage of net sales were primarily attributable to lower margins from regular-priced goods and a greater percentage of merchandise sold at markdown when compared to the same periods last year. The increases in occupancy expenses as a percentage of net sales for the second quarter and first half of fiscal 2001 were primarily attributable to negative comparable store sales. Operating Expenses Operating expenses as a percentage of net sales, including charges in the amount of approximately $30 million primarily representing workforce reductions, decreased 0.6 and increased 0.4 percentage points for the second quarter and first half of fiscal 2001, respectively, from the same periods in fiscal 2000. Excluding the charges, operating expenses as a percentage of net sales, decreased 1.5 and 0.1 percentage points for the second quarter and first half of fiscal 2001, respectively, from the same periods in fiscal 2000. The decreases were primarily attributable to lower advertising costs, travel and entertainment as well as other personnel expenses as a percentage of net sales, partially offset by higher store payroll and headquarters depreciation expenses as a percentage of net sales. Advertising costs decreased 39 percent and 25 percent for the second quarter and first half of fiscal 2001, respectively, from the same periods in fiscal 2000. Travel and entertainment decreased 30 percent and 28 10
percent for the second quarter and first half of fiscal 2001, respectively, from the same periods in fiscal 2000. Other personnel expenses, including relocations and temporary help, declined 36 percent for the second quarter and first half of the fiscal 2001 from the same periods in fiscal 2000. Store payroll increased 18 percent for the second quarter and first half of fiscal 2001 from the same periods in fiscal 2000, driven by the Company's square footage growth. Interest Expense The increases in interest expense in the second quarter and first half of fiscal 2001 as compared to the same periods in fiscal 2000 were primarily due to increases in average borrowings. Interest Income The decreases in interest income in the second quarter and first half of fiscal 2001 as compared to the same periods in fiscal 2000 were primarily due to decreases in average investment rate and average cash available for investment. Income Taxes The effective tax rate was 36.5 percent for the second quarter and first half of fiscal 2001 and 2000. 11
LIQUIDITY AND CAPITAL RESOURCES The following sets forth certain measures of the Company's liquidity: <TABLE> <CAPTION> - --------------------------------------------------- --------------------------------------- Twenty-six Weeks Ended --------------------------------------- August 4, 2001 July 29, 2000 - --------------------------------------------------- --------------------------------------- <S> <C> <C> Cash provided by operating activities ($000) $ 442,447 $ 68,773 Working capital ($000) $ 481,432 $ 383,630 Current ratio 1.17:1 1.16:1 - --------------------------------------------------- --------------------------------------- </TABLE> For the twenty-six weeks ended August 4, 2001, the increase in cash flows provided by operating activities, compared to the same period in the prior year, was primarily attributable to a decrease in the growth of merchandise inventory and changes in other operating assets and liabilities which were primarily driven by timing of certain payments. This increase was partially offset by decreases in net earnings exclusive of depreciation and amortization and tax benefit from the exercise of stock options and vesting of restricted stock. The Company funds inventory expenditures during normal and peak periods through a combination of cash flows provided by operations as well as short-term and long-term financing arrangements. The Company's business follows a seasonal pattern, peaking over a total of about 13 weeks during the Back-to-School and Holiday periods. The Company has committed credit facilities totaling $1.45 billion, consisting of a $1.30 billion, 364-day revolving credit facility, and a $150 million, 5-year revolving credit facility through June 27, 2005. These credit facilities provide for the issuance of up to $600 million in letters of credit and provide backup of up to $850 million for the Company's commercial paper program. In addition, up to $200 million of the amount reserved for letters of credit can be reallocated to provide backup for the Company's commercial paper program increasing the total amount of commercial paper backup to $1.05 billion. The Company also has a credit facility effective September 17, 2001 to December 17, 2001 to provide backup of up to $400 million for the Company's commercial paper program over it's peak borrowing period. The Company has additional uncommitted credit facilities of $1.05 billion for the issuance of letters of credit. At August 4, 2001, the Company had outstanding letters of credit of approximately $1.2 billion. The Company had additional uncommitted unused lines of credit of approximately $304 million at August 4, 2001. On April 18, 2001, Moody's Investors Service ("Moody's") lowered their credit rating of the Company from A2 to A3 (for senior unsecured debt) citing the challenges that they expected the Company to face in improving comparable store sales in a highly promotional and unforgiving retail environment. On August 9, 2001 Standard and Poor's placed the Company on credit watch negative due to disappointing second quarter sales. On August 21, 2001, Moody's confirmed the ratings of the Company but changed the rating outlook from stable to negative as a result of the deterioration in the Company's operating profitability. On April 27, 2001, the Company issued $500 million of debt securities at a fixed annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is payable semi-annually. The notes are recorded in the balance sheet at their issuance amount net of unamortized discount. In connection with the debt issuance, the Company entered into interest rate swap agreements in order to reduce interest rate risk. The swap agreements were settled in the first quarter and the net losses of approximately $2.2 million associated with these swaps will be amortized over the life of the debt securities. For the twenty-six weeks ended August 4, 2001, capital expenditures, net of construction allowances, totaled approximately $547 million. The majority of these expenditures were used for expansion of the store base, headquarter buildings and distribution facilities. During the first half of fiscal 2001, the Company experienced a net increase in store space of approximately 3 million square feet, or 10 percent, due to a net addition of 297 stores, the expansion of 98 stores and the remodeling of certain stores. 12
For fiscal 2001, the Company expects capital expenditures to be in the range of $1.3 to $1.4 billion, net of construction allowances. This represents the addition of 550 to 630 new stores, the expansion of approximately 150 stores, the remodeling of certain stores, as well as amounts for headquarter buildings, distribution facilities and equipment and information technology. The Company expects to fund such capital expenditures with cash flows from operations and other sources of financing. Square footage growth is expected to be in the 17 to 20 percent range for fiscal 2001. Due to the lower level of new store openings during the first half of fiscal 2001, the Company expects capital expenditures, new store openings and square footage growth to fall at the lower end of these ranges. New stores are generally expected to be leased. During the second quarter of fiscal 2001, the Company revised its planned annual square footage growth for fiscal 2002 and 2003 to approximately 10 percent, compared to a previously stated rate of approximately 15 percent. During fiscal 1998, the Company purchased land in San Francisco to construct an additional headquarter facility. The estimated total project cost is approximately $240 million and approximately $55 million will be incurred during fiscal 2001. The Company commenced construction on this facility during the third quarter of fiscal 1998 and it was partially opened during the first quarter of fiscal 2001. Construction is estimated to be completed by the third quarter of fiscal 2001. The Company commenced construction on several distribution facilities in the second quarter and third quarter of fiscal 2000. The estimated total cost for these facilities is approximately $455 million. Approximately one-half of the expenditures will be incurred during fiscal 2001. The facilities are expected to be open by the fourth quarter of fiscal 2001. 13
18 Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The market risk of the Company's financial instruments as of August 4, 2001 has not significantly changed since February 3, 2001. The market risk profile of the Company on February 3, 2001 is disclosed on the Company's 2000 Annual Report on Form 10-K. PART II OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- In 1999, the Company was named as a defendant in two lawsuits relating to sourcing of products from Saipan (Commonwealth of the Northern Mariana Islands). A complaint was filed on January 13, 1999 in California Superior Court in San Francisco by the Union of Needletrades Industrial and Textile Employees, AFL-CIO; Global Exchange; Sweatshop Watch; and Asian Law Caucus against the Company and 17 other parties. The plaintiffs allege violations of California's unlawful, fraudulent and unfair business practices and untrue and misleading advertising statutes in connection with labeling of product and labor practices regarding workers of factories that make product for the Company in Saipan. The plaintiffs seek injunctive relief, restitution, disgorgement of profits and other damages. Trial has not been set in the state case. A second complaint was filed on January 13, 1999, in Federal District Court, Central District of California, by various unidentified worker plaintiffs against the Company and 27 other parties. Those unidentified worker plaintiffs seek class-action status and allege, among other things, that the Company (and other defendants) violated the Racketeer Influenced and Corrupt Organizations Act in connection with the labor practices and treatment of workers of factories in Saipan that make product for the Company. The plaintiffs seek injunctive relief as well as actual and punitive damages. On September 29, 1999, the action was transferred to the United States District Court, State of Hawaii. On April 28, 2000, plaintiffs filed a First Amended Complaint adding 22 new defendants. On June 23, 2000, the United States District Court, State of Hawaii, ordered the case transferred to the United States District Court, District of the Mariana Islands. On March 23, 2001, the Ninth Circuit Court of Appeal denied Plaintiffs' writ of mandamus requesting that the action either be transferred back to the District Court in Hawaii or to the Central District of California. Now that the case is in the District of the Mariana Islands, defendants have renewed their motion to dismiss the case, which was heard on August 10, 2001. No decision has been rendered. The Company is in the process of investigating the allegations set forth in the complaints and will pursue appropriate legal defenses. At this time the Company is unable to assess the likelihood of the outcome of these cases and cannot estimate the amount or range of potential loss, if any. 14
Item 4. Submissions of Matters to a Vote of Security Holders - ------------------------------------------------------------- a) On May 9, 2001 the Annual Meeting of Stockholders of the Company was held in Fishkill, New York. There were 854,429,402 shares of common stock outstanding on the record date and entitled to vote at the Annual Meeting. b) The following directors were elected: <TABLE> <CAPTION> Vote For Vote Withheld <S> <C> <C> Adrian D. P. Bellamy 764,039,406 3,942,180 Millard S. Drexler 764,014,986 3,966,600 Donald G. Fisher 763,201,272 4,780,314 Doris F. Fisher 763,917,022 4,064,564 Robert J. Fisher 763,937,177 4,044,409 Glenda A. Hatchett 763,980,028 4,001,558 Steven P. Jobs 762,103,630 5,877,956 John M. Lillie 763,288,972 4,692,614 Charles R. Schwab 764,008,064 3,973,522 Sergio S. Zyman 764,034,323 3,947,263 </TABLE> There were no abstentions and no broker non-votes. c) The selection of Deloitte & Touche, LLP as independent auditors for the fiscal year ending February 2, 2002 was ratified with 755,471,199 votes in favor and 10,262,624 against. There were 2,247,763 abstentions. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- a) Exhibits (10.1) Third Amended and Restated Credit Agreement, dated as of June 26, 2001 among The Gap, Inc., Banana Republic, Inc., Old Navy Inc., Banana Republic (Canada) Inc., Old Navy (Canada) Inc., Gap (Canada) Inc., Gap International Sourcing Limited, Gap International Sourcing Pte. Ltd., Gap (Japan) K.K., Gap International Sourcing (Holdings) Limited, Gap (Netherlands) B.V., Gap International B.V., GPS Consumer Direct, Inc., Citicorp USA, Inc., Salomon Smith Barney, Inc., Bank of America, N.A., HSBC Bank USA, ABN AMRO Bank N.V., The Chase Manhattan Bank, Banca Nazionale Del Lavoro S.p.A. New York Branch, Societe Generale, Sumitomo Mitsui Banking Corporation, Bank One, NA (Main Office Chicago), Fleet National Bank, Wells Fargo, National Association, The Bank of New York, The Fuji Bank, Limited, US Bank National Association, Bank of Nova Scotia, and Citibank, N.A. (15) Letter re: Unaudited Interim Financial Information b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three months ended August 4, 2001. 15
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE GAP, INC. Date: September 6, 2001 By /s/ Heidi Kunz ------------------------------------- Heidi Kunz Chief Financial Officer (Principal financial officer of the registrant) Date: September 6, 2001 By /s/ Millard S. Drexler ---------------------------------- Millard S. Drexler President and Chief Executive Officer 16
EXHIBIT INDEX (10.1) Third Amended and Restated Credit Agreement, dated as of June 26, 2001 among The Gap, Inc., Banana Republic, Inc., Old Navy Inc., Banana Republic (Canada) Inc., Old Navy (Canada) Inc., Gap (Canada) Inc., Gap International Sourcing Limited, Gap International Sourcing Pte. Ltd., Gap (Japan) K.K., Gap International Sourcing (Holdings) Limited, Gap (Netherlands) B.V., Gap International B.V., GPS Consumer Direct, Inc., Citicorp USA, Inc., Salomon Smith Barney, Inc., Bank of America, N.A., HSBC Bank USA, ABN AMRO Bank N.V., The Chase Manhattan Bank, Banca Nazionale Del Lavoro S.p.A. New York Branch, Societe Generale, Sumitomo Mitsui Banking Corporation, Bank One, NA (Main Office Chicago), Fleet National Bank, Wells Fargo, National Association, The Bank of New York, The Fuji Bank, Limited, US Bank National Association, Bank of Nova Scotia, and Citibank, N.A. (15) Letter re: Unaudited Interim Financial Information 17