-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DZsExl3ckV1fDNg44CyTCg7GJhc5jpPJCHjP8zpNWwjPtbQta7MM2w8YM7vE52w0 s6qjLBb9pP+XhnwpYj/j9g== 0001021408-02-004717.txt : 20020415 0001021408-02-004717.hdr.sgml : 20020415 ACCESSION NUMBER: 0001021408-02-004717 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020202 FILED AS OF DATE: 20020402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAP INC CENTRAL INDEX KEY: 0000039911 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 941697231 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07562 FILM NUMBER: 02599954 BUSINESS ADDRESS: STREET 1: ONE HARRISON CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4159524400 MAIL ADDRESS: STREET 1: ONE HARRISON STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: GAP STORES INC DATE OF NAME CHANGE: 19850617 10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 2, 2002 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.) Two Folsom Street San Francisco, California 94105 (Address of principal executive offices) (Zip code) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common equity held by non-affiliates of the registrant as of March 15, 2002 was approximately $9,016,000,000 based upon the last price reported for such date in the NYSE-Composite transactions. The number of shares of the registrant's Common Stock outstanding as of March 15, 2002 was 866,759,250. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2002 (hereinafter referred to as the "2002 Proxy Statement") are incorporated into Parts I and III. Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended February 2, 2002 (hereinafter referred to as the "2001 Annual Report to Shareholders") are incorporated into Parts II and IV. The Exhibit Index is located on Page 13 hereof. 1 This Annual Report on Form 10-K and the information incorporated herein by reference contain certain forward-looking statements which reflect our current view 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 are discussed in Item 1 of this report below, and 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 filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenue 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. PART I ------ Item 1 - Business General - ------- We are a global specialty retailer operating stores selling casual apparel, personal care and other accessories for men, women and children under the Gap, Banana Republic and Old Navy brands. We operate stores in the United States, Canada, the United Kingdom, France, Germany and Japan. All references to "we," "our," "us," and "the Company" in this Annual Report mean The Gap, Inc. and its subsidiaries. We design virtually all of our products, which in turn are manufactured by independent sources, and sell them under our brands in the following store formats: Gap. Founded in 1969, Gap stores offer extensive selections of classically-styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics such as denim, khakis and T-shirts to fashion apparel, accessories and personal care products for men and women aged teen through adult. We entered the children's apparel market with the introduction of GapKids in 1986 and babyGap in 1989. These stores offer casual apparel and accessories in the tradition of Gap style and quality for children aged newborn through teen. We launched GapBody in 1998 offering men's and women's underwear, sleepwear and personal care products. As of February 2, 2002, we operated 2,932 Gap brand store concepts at 1,858 locations in the United States, Canada, the United Kingdom, France, Germany, and Japan. Store concepts are any Gap Adult, GapKids, babyGap or GapBody that meets a certain square footage threshold even when residing within a single physical location. Banana Republic. Acquired in 1983 with two stores, Banana Republic now offers sophisticated, fashionable collections of dress-casual and tailored apparel and accessories for men and women at higher price points than Gap. Banana Republic products range from apparel, including intimate apparel, to personal care products and home products. As of February 2, 2002, we operated 441 Banana Republic stores in the United States and Canada. Old Navy. We launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes and accessories for adults, children and infants as well as other items, including personal care products, in an innovative, exciting shopping environment. As of February 2, 2002, we operated 798 Old Navy stores in the United States and Canada. 2 As of February 2, 2002, we operated a total of 4,171 store concepts at 3,097 locations. For more information on the number of store concepts by brand and country, see our Management's Discussion and Analysis of Financial Condition and Results of Operations included as Part II, Item 7 of this form by reference to pages 16 through 23 of the 2002 Annual Report to Shareholders. We established Gap Online, a web-based store located at gap.com, in 1997. Products comparable to those carried in Gap, GapKids and babyGap stores can be purchased on-line. In addition, a line of maternity apparel is available at Gap Online. Banana Republic introduced a catalog format in 1998 and Banana Republic Online, a web-based store located at www.bananarepublic.com, in 1999. Both of these Banana Republic formats offer apparel and accessories comparable to those carried in the store collections. In 1999, we established Old Navy Online, a promotional website located at www.oldnavy.com, and began operating Old Navy Online as a web-based store in 2000. Old Navy Online also carries a line of maternity apparel. Our online and catalog businesses are offered as an extension of our store experience and are intended to strengthen our relationship with our customers. The Company was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988. Store Operations - ---------------- Our stores offer a shopper-friendly environment with an assortment of casual apparel and accessories which emphasize style, quality and good value. The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store. Our stores generally are open seven days per week (where permitted by law) and most holidays. All sales are tendered for cash, personal checks, debit cards or credit cards issued by others, including Gap, Banana Republic and Old Navy private label credit cards which are issued by a third party. International - ------------- We are faced with competition in European, Japanese and Canadian markets from established regional and national chains. If international expansion is not successful, our results of operations could be adversely affected. Our ability to grow successfully in the continental European market will depend in part on determining a sustainable profit formula to build brand loyalty and gain market share in the especially challenging retail environments of France and Germany. Certain financial information about international operations is set forth under the heading "Segments" in Note A to Notes to Consolidated Financial Statements, incorporated by reference in Item 8 - Financial Statements and Supplementary Data. Merchandise Vendors - ------------------- We purchase merchandise from more than 1,000 vendors located domestically and overseas. No vendor accounted for more than 5% of the dollar amount of our fiscal 2001 purchases. Of our merchandise sold during fiscal 2001, approximately 9% of all units (representing approximately 6% of total cost) was produced domestically while the remaining 91% of all units (representing approximately 94% of total cost) was made outside the United States. Approximately 13% of our total merchandise units (representing approximately 16% of total cost) was from China, including Hong Kong, with the remainder coming from more than 50 other countries. Any event causing a sudden disruption of imports from China or other foreign countries, including the imposition of additional import restrictions, could have a material adverse effect on our operations. Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, and customs restrictions, against apparel items could increase the cost or reduce the supply 3 of apparel available to us and adversely affect our business, financial condition and results of operations. We pursue a diversified global sourcing strategy that includes relationships with vendors in over 50 countries. These sourcing operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions. Seasonal Business - ----------------- Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the Back-to-School (mid-August through early September) and Holiday (November through December) periods. During fiscal 2001, these periods accounted for approximately 32 % of our net sales. Brand Building - -------------- Our ability to continually change and evolve our brands is a key source of competitive advantage. We believe our three distinct brands are among our most important assets. All aspects of brand development from product design and distribution, to marketing, merchandising and shopping environments are controlled by us. We continue to invest in the development of our brands through advertising spending. We have also made investments to enhance the customer experience through the expansion and remodeling of existing stores, the closure of under-performing stores, and a focus on customer service. Advertising - ----------- We place print ads in major metropolitan newspapers and their Sunday magazines, major news weeklies and lifestyle and fashion magazines. Our ads also appear in various outdoor venues, such as mass transit posters, exterior bus panels, bus shelters and billboards. We have also run TV ads for Gap and Old Navy and radio ads for Old Navy. We plan to continue our investments in advertising and marketing in 2002. There can be no assurances that these investments will result in increased sales or profitability. Employees - --------- On February 2, 2002, we had a work force of approximately 165,000 employees. We hire temporary employees during the peak Back-to-School and Holiday seasons. Trademarks and Service Marks - ---------------------------- The Gap, GapKids, babyGap, GapBody, Banana Republic and Old Navy trademarks and service marks, and certain other trademarks, either have been registered, or are the subject of pending trademark applications, with the United States Patent and Trademark Office and with the registries of many foreign countries. Certain Business Risk Factors - ----------------------------- We must successfully gauge fashion trends and changing consumer preferences to succeed. Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. The global specialty retail business fluctuates according to changes in consumer preferences dictated in part by fashion and season. To the extent we misjudge the market for our merchandise, our sales will be adversely affected and the markdowns required to move the resulting excess inventory will adversely affect our operating results. A disproportionate part of our recent product offerings may have been too fashion-forward for our broad and diverse customer base. While we believe our current strategies and initiatives appropriately address these issues, continued merchandise misjudgments could have a material adverse effect on our image with our customers and on our operating results. Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising and marketing staff. Competition for these personnel 4 is intense, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. Fluctuations in the global specialty retail business especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and frequently before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the global specialty retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we build up our inventory levels. We must enter into contracts for the purchase and manufacture of merchandise well in advance of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. In the recent past, we did not predict our customers' preferences and acceptance levels of our fashion items with the same accuracy we had previously experienced. In addition, lead times for many of our purchases are long, which may make it more difficult for us to respond rapidly to new or changing fashion trends or consumer acceptance for our products. Our business is highly competitive and depends on consumer spending patterns. The global specialty retail industry is highly competitive. We compete with national and local department stores, specialty and discount store chains, independent retail stores and internet businesses that market similar lines of merchandise. We face a variety of competitive challenges including: . anticipating and quickly responding to changing consumer demands; . maintaining favorable brand recognition and effectively marketing our products to consumers in several diverse market segments; . developing innovative, high-quality products in sizes, colors and styles that appeal to consumers of varying age groups and tastes; . competitively pricing our products and achieving customer perception of value; and . providing strong and effective marketing support. We have lost market share to some of our competitors in the recent past and if we do not strengthen our competitive position, we may not recover that share and could also lose additional market share in the future. Our business is sensitive to a number of factors that influence the levels of consumer spending, including economic conditions such as the current recessionary environment, the levels of disposable consumer income, consumer debt, interest rates and consumer confidence. The recent and current recessionary environment has had a negative impact on our sales and has contributed to a significantly higher level of promotional sales activities, which have adversely affected our profitability. Further declines in consumer spending on apparel and accessories could have an adverse effect on our operating results. We experience fluctuations in our comparable store sales and margins. Our continued success depends, in part, upon our ability to improve sales and margins at our stores. Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that they will continue to fluctuate in the future. Over the past two years, our comparable store sales have decreased each quarter versus the prior comparable period, ranging from decreases of 2% in each of the first two quarters of fiscal 2000 to 16% and 17% in the final two quarters of fiscal 2001. A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions. These factors may cause our comparable store sales results to differ materially from prior periods and from expectations. The declines we have experienced in comparable store sales have significantly contributed to a decline in our margins, which have decreased from 42% in fiscal 1999 to 37% in fiscal 2000 to 30% in fiscal 2001 (including a margin of 25% in the fourth quarter). Any failure to meet the expectations of 5 investors, security analysts or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline. Our ability to improve our comparable store sales results and margins depends in large part on improving our forecasting of demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base and using more effective pricing strategies. Recent changes in our credit ratings may have a negative impact on our financing costs and structure in future periods. On January 14, 2002, Moody's Investors Service 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 Rating Service 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 aggregate principal amount of our outstanding notes are subject to increase. 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. We are planning certain system changes that may disrupt our supply chain. Our success depends on our ability to continue sourcing merchandise efficiently. We continue to evaluate making modifications to our information technology systems supporting the product pipeline, including merchandise planning, forecasting, and purchase order, inventory and price management. Modifications may involve replacing legacy systems with successor systems. We are aware of inherent risks associated with replacing these core systems, including supply chain disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation. The launch of these successor systems will take place in a phased approach over an approximate five-year period. There can be no assurances that we will successfully launch these new systems or that they will occur without supply chain disruptions. Any resulting supply chain disruptions could have a material adverse effect on our operations. Executive Officers of the Registrant - ------------------------------------ Donald G. Fisher is our Chairman. Millard S. Drexler is our President and Chief Executive Officer. John Lillie is our Vice Chairman. Donald G. Fisher, Millard S. Drexler and John Lillie are directors and the required information for each of them is set forth in the table located in the section entitled "Nominees for Election as Directors" of the 2002 Proxy Statement and is incorporated by reference herein. The following are also executive officers: Name, Age, Position and Principal Occupation During Past Five Years: Charles K. Crovitz, 48, Executive Vice President, Chief Supply Chain Officer since April 2000; Executive Vice President, Supply Chain and Technology from September 1998 to April 2000; Senior Vice President of Strategy, Logistics and Information Systems from March 1998 to September 1998; Senior Vice President of Strategic Planning and Business Development from 1993 to March 1998. Joined in 1993. Anne B. Gust, 44, Executive Vice President, Chief Administrative Officer since April 2000; Executive Vice President, Human Resources, Legal, Global Compliance and Corporate Administration from May 1999 to April 2000; Executive Vice President, Human Resources, Legal and Corporate Administration from September 1998 to May 1999; Senior Vice President and General Counsel from April 1994 to September 1998; Vice President and General Counsel from 1993 to 1994. Joined in 1991. 6 Heidi Kunz, 47, Executive Vice President and Chief Financial Officer since August 1999. Executive Vice President and Chief Financial Officer of ITT Industries from 1995 to 1999. Joined in 1999. Jenny Ming, 46, President, Old Navy Brand since 1998; Executive Vice President, Merchandising, Old Navy Brand from 1996 to 1998; Senior Vice President, Merchandising, Old Navy Brand from 1993 to 1996. Joined in 1986. Item 2 - Properties We operate stores in the United States, Canada, the United Kingdom, France, Germany and Japan. The stores operated as of February 2, 2002 aggregated approximately 36.3 million square feet. We lease most of our store premises. Terms generally range from five to 15 years with one or two five-year renewal options. Most leases provide for additional rent based on a percentage of store sales above a certain level in addition to or in lieu of minimum rentals, as well as for the payment of certain other expenses. Some leases contain cancellation clauses in our favor if specified sales levels are not achieved. We currently lease our domestic and international regional offices and part of our headquarters office space, including approximately 495,000 square feet in buildings in San Francisco, California, approximately 265,000 square feet in buildings in San Bruno, California (near the San Francisco Airport), and approximately 350,000 square feet in buildings in New York City. We also have leased an additional office building of approximately 285,000 square feet in San Francisco which is currently under construction and scheduled to be delivered in mid 2002. In San Francisco and San Bruno, we currently have excess office capacity, and are attempting to sublease approximately 565,000 square feet of space on the office sublease market. We also lease approximately 115,000 square feet in Albuquerque, New Mexico that houses our corporate shared services center, as well as approximately 40,000 square feet of office space in Rocklin, California (near Sacramento). We also lease certain other distribution facilities. Our Eastern Distribution Center/Kentucky Distribution Center complex (EDC/KDC) in Erlanger, Kentucky (near Cincinnati) consists of approximately 725,000 square feet and will be closed in late 2002. Nearby Northern Kentucky facilities include three additional facilities for distribution purposes totaling approximately 1,365,000 square feet. The warehouse/call center consists of approximately 270,000 square feet in Grove City, Ohio (near Columbus) and approximately 425,000 square feet in Groveport, Ohio, both of which service our catalog and online businesses. Our Japan Distribution Center (JDC), approximately 130,000 square feet, in Funabashi City, Chiba, Japan is provided and operated as a component of a distribution agreement with a third-party logistics provider. Our approximately 134,000 square foot warehouse in Basildon, England, will be closed in early 2002. We own an approximately 160,000 square foot office building and an approximately 540,000 square foot office building in San Francisco. We own office buildings in San Bruno of approximately 190,000 and 270,000 square feet and nearby land which potentially could accommodate an additional building of up to 290,000 square feet, and also own a computer facility of approximately 40,000 square feet in Rocklin, California. We own distribution facilities in the following locations: Location Total Square Footage (Approximate) - -------------------------------------------------------------------------------- Fresno, California 1,810,000 square feet - -------------------------------------------------------------------------------- Ventura, California 230,000 square feet (Closing early 2002 and being marketed for sale) - -------------------------------------------------------------------------------- Edgewood, Maryland 600,000 square feet - -------------------------------------------------------------------------------- Fishkill, New York 2,250,000 square feet - -------------------------------------------------------------------------------- Groveport, Ohio 830,000 square feet (Not yet commissioned) - -------------------------------------------------------------------------------- Gallatin, Tennessee 2,260,000 square feet - -------------------------------------------------------------------------------- Rugby, England 665,000 square feet - -------------------------------------------------------------------------------- Roosendaal, The Netherlands 130,000 square feet (Closing mid 2002 and being marketed for sale). - -------------------------------------------------------------------------------- Brampton, Ontario, Canada 1,075,000 square feet 7 The sites in Fresno, California; Edgewood, Maryland; Fishkill, New York; and Brampton, Ontario have additional land available for expansion or for additional facilities. In fiscal 2001 we recorded certain charges relating to certain facilities. See Note J to Notes to Consolidated Financial Statements, incorporated by reference in Item 8 - Financial Statements and Supplementary Data. Item 3 - Legal Proceedings In 1999, we were 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 us in Saipan. The plaintiffs seek injunctive relief, restitution, disgorgement of profits and other damages. Trial has not been set in the state case. On October 31, 2001, we filed a motion for summary judgment, or in the alternative, for summary adjudication. The hearing date for the motion originally set for March 1, 2002, has been continued by the Court to a date yet to be determined. 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 we (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 us. 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 Appeals 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. On October 29, 2001, the District Court of the Mariana Islands issued an order granting in part and denying in part the motion to dismiss. On December 17, 2001, plaintiffs filed a Second Amended Complaint. On January 14, 2002, defendants filed a motion to dismiss the Second Amended Complaint. On March 21, 2002 the Court heard the defendants' motion to dismiss the Second Amended Complaint. On February 14, 2002, the Court heard plaintiffs' motion for class certification and motion for preliminary settlement approval. No decisions have been rendered on these motions. We also are a party to routine litigation incident to our business. Some of the lawsuits to which we are a party are covered by insurance and are being defended by our insurance carriers. Item 4 - Submission of Matters to a Vote of Security Holders Not applicable. PART II ------- Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters The information required by this item is incorporated herein by reference to page 45 of the 2001 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. Item 6 - Selected Financial Data 8 The information required by this item is incorporated herein by reference to pages 14 through 15 of the 2001 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated herein by reference to pages 16 through 23 of the 2001 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. Item 7A - Quantitative and Qualitative Disclosures about Market Risk The information required by this item is incorporated herein by reference to pages 24 through 25 of the 2001 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. Item 8 - Financial Statements and Supplementary Data The information required by this item is incorporated herein by reference to pages 27 through 44 of the 2001 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. Item 9 - Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. PART III -------- Item 10 - Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the section entitled "Nominees for Election as Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2002 Proxy Statement. See also Item 1 above in the section entitled "Executive Officers of the Registrant." Item 11 - Executive Compensation The information required by this item is incorporated herein by reference to the sections entitled "Compensation of Directors," "Summary of Executive Compensation," "Stock Options," and "Compensation Committee Interlocks and Insider Participation" in the 2002 Proxy Statement. Item 12 - Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated herein by reference to the section entitled "Beneficial Ownership of Shares" in the 2002 Proxy Statement. Item 13 - Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the section entitled "Other Reportable Transactions" in the 2002 Proxy Statement. PART IV ------- Item 14 - Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (a) The following consolidated financial statements, schedules and exhibits are filed as part of this report or are incorporated herein as indicated. 9 (1) Financial Statements -------------------- (i) Independent Auditors' Report. Incorporated by reference to page 26 of the 2001 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. (ii) The consolidated balance sheets as of February 2, 2002 and February 3, 2001 and the related consolidated statements of operations, shareholders' equity, cash flows, and notes thereto for each of the three fiscal years in the period ended February 2, 2002 are incorporated by reference to pages 27 through 44 of the 2001 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K. (2) Financial Statement Schedules ----------------------------- Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto. (3) Exhibits -------- Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index which begins on sequentially numbered page 13 of this Annual Report on Form 10-K. (b) We filed two reports on Form 8-K for the quarter ended February 2, 2002. The first report on Form 8-K was filed on November 8, 2001 announcing our intent to sell certain senior unsecured notes. The second report on Form 8-K was filed on November 19, 2001 announcing our agreement to sell certain senior unsecured notes pursuant to a private placement under Rule 144A and Regulation S. 10 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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: April 2, 2002 By /s/ MILLARD S. DREXLER ----------------------- Millard S. Drexler, Chief Executive Officer (Principal Executive Officer) Date: April 2, 2002 By /s/ HEIDI KUNZ -------------- Heidi Kunz, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 2, 2002 By /s/ ADRIAN D.P. BELLAMY ----------------------- Adrian D. P. Bellamy, Director Date: April 2, 2002 By /s/ MILLARD S. DREXLER ---------------------- Millard S. Drexler, Director Date: April 2, 2002 By /s/ DONALD G. FISHER -------------------- Donald G. Fisher, Director Date: April 2, 2002 By /s/ DORIS F. FISHER ------------------- Doris F. Fisher, Director Date: April 2, 2002 By /s/ ROBERT J. FISHER -------------------- Robert J. Fisher, Director 11 SIGNATURES (con't.) ------------------- Date: April 2, 2002 By /s/ GLENDA A. HATCHETT ---------------------- Glenda A. Hatchett, Director Date: April 2, 2002 By /s/ Steven P. Jobs ------------------ Steven P. Jobs, Director Date: April 2, 2002 By /s/ JOHN M. LILLIE ------------------ John M. Lillie, Director Date: April 2, 2002 By /s/ ARUN SARIN -------------- Arun Sarin, Director Date: April 2, 2002 By /s/ CHARLES R. SCHWAB --------------------- Charles R. Schwab, Director Date: April 2, 2002 By /s/ MAYO A. SHATTUCK III ------------------------ Mayo A. Shattuck III, Director 12 Exhibit Index 3.1 Registrant's Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562 3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for year ended January 29, 2000, Commission File No. 1-7562 3.3 Registrant's By-Laws, filed as Exhibit C to Registrant's definitive proxy statement for its annual meeting of stockholders held on May 24, 1988, Commission File No. 1-7562 3.4 Amended Article IV of Registrant's By-Laws, filed as Exhibit 4.4 to Registrant's Registration Statement on Form S-8, Commission File No. 333-00417 4.1 Indenture, dated September 1, 1997, between the Registrant and Harris Trust Company of California filed as Exhibit 4 to Registrant's Form 10-Q for the quarter ended November 1, 1997, Commission File No. 1-7562 4.2 Indenture, dated November 21, 2001, between the Registrant and The Bank of New York 10.1 Amended and Restated Credit Agreement, dated as of June 27, 2000 among the Registrant, Citicorp USA, Inc., Bank of America, N.A., The Hong Kong and Shanghai Bank Corporation Limited, Morgan Guaranty Trust Company of New York, The Sumitomo Bank Limited, Deutsche Bank AG New York Branch and/or Cayman Islands Branch, Societe Generale, The Fuji Bank, Limited, ABN AMRO Bank N.V., The Bank of New York, Bank One, NA f/k/a The National Bank of Chicago, U.S. Bank National Association, Fleet National Bank, and Wells Fargo Bank, National Association filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended July 29, 2000, Commission File No. 1-7562 10.2 Third Amended and Restated Credit Agreement, dated as of June 26, 2001 among the Registrant, 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 13 Citibank, N.A. filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended August 4, 2001, Commission File No. 1-7562 10.3 Credit Agreement, dated as of March 7, 2002, among The Gap, Inc., the LC Subsidiaries, the Subsidiary Borrowers, the Lenders and the Issuing Banks (as such terms are defined in the Credit Agreement), Salomon Smith Barney Inc., ("SSB") and Banc of America Securities, LLC ("BAS") as Joint Book Managers, BAS, HSBC Bank USA and JP Morgan Securities, Inc. ("JPM") as Co-Syndication Agents, ABN AMRO Bank N.V. as Documentation Agent, SSB, BAS, and JPM as Joint Lead Arrangers, and Citicorp USA, Inc. as Agent for the Lenders and the Issuing Banks thereunder, filed as Exhibit 99.1 to Registrant's Form 8-K, dated March 21, 2002, Commission File No. 1-7562 EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.4 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54690 10.5 Management Incentive Restricted Stock Plan II, filed as exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54686 10.6 Description of Management Incentive Cash Award Plan, filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562 10.7 Executive Management Incentive Cash Award Plan (January 25, 2000 Amendment and Restatement), filed as Exhibit A to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 5, 2000, Commission File No. 1-7562 10.8 Executive Management Incentive Cash Award Plan (January 28, 2002 Amendment and Restatement) 10.9 The Gap, Inc. Executive Deferred Compensation Plan, filed as Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No.1-7562 10.10 1996 Stock Option and Award Plan, filed as Exhibit A to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 21, 1996, Commission File No. 1-7562 10.11 Amendment Number 1 to the Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562 10.12 Amendment Number 2 to the Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.15 to Registrant's Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562 10.13 Amendment Number 3 to the Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562 10.14 Amendment Number 4 to the Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended July 29, 2000, Commission File No. 1-7562 10.15 Amendment Number 5 to the Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.13 to the Registrant's Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562 10.16 Amendment Number 6 to the Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562 10.17 Form of Nonqualified Stock Option Agreement for employees under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562 10.18 Form of Nonqualified Stock Option Agreement for directors under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.6 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562 10.19 Form of Restricted Stock Agreement under Registrant's 1996 Stock Option and Award Plan filed, as Exhibit 10.7 to Registrant's Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562 10.20 Form of Restricted Stock Agreement effective February 2, 2002 under Registrant's 1996 Stock Option and Award Plan 10.21 Form of Nonqualified Stock Option Agreement for consultants under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562 10.22 Form of Nonqualified Stock Option Agreement for employees in France under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562 10.23 Form of Nonqualified Stock Option Agreement for international employees under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.6 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562 10.24 Form of Nonqualified Stock Option Agreement for employees in Japan under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.7 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562 10.25 Form of Nonqualified Stock Option Agreement for directors effective April 3, 2001 under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562 10.26 Form of Stock Option Agreement for employees under the UK Sub-plan to the U.S. Stock Option and Award Plan, filed as Exhibit 10.8 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562 10.27 Executive Long-Term Cash Award Performance Plan (January 26, 1999 Restatement), filed as Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 4, 1999, Commission File No. 1-7562 10.28 Executive Long-Term Cash Award Performance Plan (January 26, 1999 Restatement, as amended March 28, 2000), filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended January 29, 2000, Commission File No. 1-7562 10.29 Relocation Loan Plan, filed as Exhibit A to Registrant's definitive proxy statement for its annual meeting of stockholders held on October 25, 1977, Commission File No. 1-7562 10.30 Certificate of Corporate Resolution amending the Relocation Loan Plan, adopted by the Board of Directors on November 27, 1990, filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562 10.31 Non-Employee Director Retirement Plan, dated October 27, 1992, filed as Exhibit 10.43 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562 10.32 Statement Regarding Non-Employee Director Retirement Plan, filed as Exhibit 10.25 to Registrant's Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562 10.33 Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 333-36265 10.34 Amendment Number 1 to the Registrant's Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562 10.35 Amendment Number 2 to the Registrant's Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended July 29, 2000, Commission File No. 1-7562 10.36 Amendment Number 3 to the Registrant's Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562 10.37 Nonemployee Director Deferred Compensation Plan, as amended and restated on October 30, 2001, filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562 10.38 Form of Discounted Stock Option Agreement under the Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.5 to Registrant's Registration Statement on Form S-8, Commission File No. 333-36265 10.39 Form of Nonqualified Stock Option Agreement for directors effective April 3, 2001 under Registrant's Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562 10.40 Income continuation protection arrangement, dated December 21, 1998, between Registrant and John B. Wilson, filed as Exhibit 10.33 to Registrant's Form 10-K for the year ended January 30, 1999, Commission File No. 1-7562 10.41 Employment arrangement, dated July 6, 1999, between Registrant and Heidi Kunz, filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-Q for the quarter ended July 31, 1999, Commission File No. 1-7562 10.42 Consulting Agreement, dated December 7, 2000, between Registrant and John M. Lillie, filed as Exhibit 10.35 to Registrant's Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562 10.43 Termination of Consulting Agreement, dated January 24, 2001, between Registrant and John M. Lillie, filed as Exhibit 10.37 to Registrant's Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562 10.44 Non-qualified Stock Option Agreement, dated January 23, 2001, between Registrant and John M. Lillie, filed as Exhibit 10.36 to Registrant's Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562 10.45 Form of Amended and Restated Nonqualified Stock Option Agreement, dated October 19, 2001, amending option agreement dated January 23, 2001, between Registrant and John M. Lillie, filed as Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562 10.46 Form of Nonqualified Stock Option Agreement under Registrant's 1996 Stock Option and Award Plan, filed as Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562 10.47 Amendment to the Nonqualified Stock Option Agreements, dated April 3, 2001, between Registrant and Brooks Walker, Jr., filed as Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562 13 Portions of Registrant's annual report to security holders for the fiscal year ended February 2, 2002 21 Subsidiaries of Registrant 23 Consent of Deloitte & Touche LLP EX-4.2 3 dex42.txt INDENTURE, DATED NOVEMBER 21, 2001 Exhibit 4.2 ================================================================================ THE GAP, INC. as Issuer --------- TO THE BANK OF NEW YORK as Trustee ---------- ---------------------- Indenture Dated as of November 21, 2001 ---------------------- Up to $700,000,000 8.15% NOTES DUE DECEMBER 15, 2005 8.80% NOTES DUE DECEMBER 15, 2008 ================================================================================ ================================================================================ The Gap, Inc. Certain Sections of this Indenture relating to Sections 310 through 318 of the Trust Indenture Act of 1939:
Trust Indenture Indenture Act Section Section ----------- ------- Section 310(a)(1) ............................................ 6.09 (a)(2) ............................................ 6.09 (a)(3) ............................................ Not Applicable (a)(4) ............................................ Not Applicable (b) ............................................ 6.08 6.10 Section 311(a) ............................................ 6.13 (b) ............................................ 6.13 Section 312(a) ............................................ 7.01 (b) ............................................ 7.02 (c) ............................................ 7.02 Section 313(a) ............................................ 7.03 (b) ............................................ 7.03 (c) ............................................ 7.03 (d) ............................................ 7.03 Section 314(a) ............................................ 7.04 10.08 (b) ............................................ Not Applicable (c)(1) ............................................ 1.02 (c)(2) ............................................ 1.02 (c)(3) ............................................ Not Applicable (d) ............................................ Not Applicable (e) ............................................ 1.02 Section 315(a) ............................................ 6.01 (b) ............................................ 6.02 (c) ............................................ 6.01 (d) ............................................ 6.01 (e) ............................................ 5.14 Section 316(a)(1)(A) ............................................ 5.02 5.12 (a)(1)(B) ............................................ 5.13 (a)(2) ............................................ Not Applicable (b) ............................................ 5.08 (c) ............................................ 1.04 Section 317(a)(1) ............................................ 5.03 (a)(2) ............................................ 5.04 (b) ............................................ 10.03 Section 318(a) ............................................ 1.07
Note: This reconciliation and tie shall not, for any purpose, be deemed to be part of this Indenture. ================================================================================ TABLE OF CONTENTS
Page ARTICLE ONE Definitions and Other Provisions of General Application SECTION 1.01. Definitions...................................................................1 SECTION 1.02. Compliance Certificates and Opinions.........................................10 SECTION 1.03. Form of Documents Delivered to Trustee.......................................11 SECTION 1.04. Acts of Holders; Record Dates................................................11 SECTION 1.05. Notices, Etc., to Trustee and Company........................................14 SECTION 1.06. Notice to Holders; Waiver....................................................14 SECTION 1.07. Application of Trust Indenture Act...........................................15 SECTION 1.08. Effect of Headings and Table of Contents.....................................15 SECTION 1.09. Successors and Assigns.......................................................15 SECTION 1.10. Separability Clause..........................................................15 SECTION 1.11. Benefits of Indenture........................................................16 SECTION 1.12. No Personal Liability of Directors, Officers, Employees and Stockholders.....16 SECTION 1.13. Governing Law................................................................16 SECTION 1.14. Legal Holidays...............................................................16 ARTICLE TWO Security Forms SECTION 2.01. Forms Generally..............................................................17 SECTION 2.02. Form of Face of the Securities...............................................17 SECTION 2.03. Form of Reverse of the Securities............................................22 SECTION 2.04. Additional Provisions Required in Global Security............................27 SECTION 2.05. Form of Trustee's Certificate of Authentication..............................27 ARTICLE THREE The Securities SECTION 3.01. Title and Terms..............................................................28 SECTION 3.02. Denominations................................................................30 SECTION 3.03. Execution, Authentication, Delivery and Dating...............................30 SECTION 3.04. Temporary Securities.........................................................31 SECTION 3.05. Registration, Registration of Transfer and Exchange..........................31
Note : This table shall not, for any purpose, be deemed to be part of this Indenture -i- ================================================================================
Page SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities.............................36 SECTION 3.07. Payment of Interest; Interest Rights Preserved...............................37 SECTION 3.08. Persons Deemed Owners........................................................38 SECTION 3.09. Cancellation.................................................................38 SECTION 3.10. Computation of Interest......................................................39 SECTION 3.11. CUSIP Numbers................................................................39 ARTICLE FOUR Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture......................................39 SECTION 4.02. Application of Trust Money...................................................40 ARTICLE FIVE Remedies SECTION 5.01. Events of Default............................................................41 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment...........................42 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee..............44 SECTION 5.04. Trustee May File Proofs of Claim.............................................44 SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities..................45 SECTION 5.06. Application of Money Collected...............................................45 SECTION 5.07. Limitation on Suits..........................................................46 SECTION 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest....46 SECTION 5.09. Restoration of Rights and Remedies...........................................47 SECTION 5.10. Rights and Remedies Cumulative...............................................47 SECTION 5.11. Delay or Omission Not Waiver.................................................47 SECTION 5.12. Control by Holders...........................................................47 SECTION 5.13. Waiver of Past Defaults......................................................47 SECTION 5.14. Undertaking for Costs........................................................48 SECTION 5.15. Waiver of Stay or Extension Laws.............................................49 ARTICLE SIX The Trustee SECTION 6.01. Certain Duties and Responsibilities..........................................49 SECTION 6.02. Notice of Defaults...........................................................49
Note : This table shall not, for any purpose, be deemed to be part of this Indenture -ii- ================================================================================
Page SECTION 6.03. Certain Rights of Trustee....................................................50 SECTION 6.04. Not Responsible for Recitals or Issuance of Securities.......................51 SECTION 6.05. May Hold Securities..........................................................52 SECTION 6.06. Money Held in Trust..........................................................52 SECTION 6.07. Compensation and Reimbursement...............................................52 SECTION 6.08. Disqualification; Conflicting Interests......................................53 SECTION 6.09. Corporate Trustee Required; Eligibility......................................53 SECTION 6.10. Resignation and Removal; Appointment of Successor............................54 SECTION 6.11. Acceptance of Appointment by Successor.......................................55 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business..................55 SECTION 6.13. Preferential Collection of Claims Against the Company........................56 SECTION 6.14. Appointment of Authenticating Agent..........................................56 ARTICLE SEVEN Holders' Lists and Reports by Trustee and the Company SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders....................58 SECTION 7.02. Preservation of Information; Communications to Holders.......................58 SECTION 7.03. Reports by Trustee...........................................................58 SECTION 7.04. Reports by Company...........................................................59 SECTION 7.05. Officers' Certificate with Respect to Change in Interest Rates...............59 ARTICLE EIGHT Merger, Consolidation, Etc. SECTION 8.01. Mergers, Consolidations and Certain Sales of Assets..........................60 SECTION 8.02. Successor Substituted........................................................60 SECTION 8.03. Officers' Certificate and Opinion of Counsel.................................61 ARTICLE NINE Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Holders...........................61 SECTION 9.02. Supplemental Indentures With Consent of Holders..............................62 SECTION 9.03. Execution of Supplemental Indentures.........................................63 SECTION 9.04. Effect of Supplemental Indentures............................................64 SECTION 9.05. Conformity with Trust Indenture Act..........................................64 SECTION 9.06. Reference in Securities to Supplemental Indentures...........................64
Note : This table shall not, for any purpose, be deemed to be part of this Indenture -iii- ================================================================================ ARTICLE TEN Covenants
Page SECTION 10.01. Payment of Principal, Premium and Interest...................................64 SECTION 10.02. Maintenance of Office or Agency..............................................65 SECTION 10.03. Money for Security Payments to be Held in Trust..............................65 SECTION 10.04. Existence....................................................................67 SECTION 10.05. Maintenance of Properties....................................................67 SECTION 10.06. Payment of Taxes and Other Claims............................................67 SECTION 10.07. Provision of Financial Information...........................................68 SECTION 10.08. Provision of Additional Information..........................................68 SECTION 10.09. Statement by Officers as to Compliance.......................................68 SECTION 10.10. Waiver of Certain Covenants..................................................69 SECTION 10.11. Statement by Officers as to Default..........................................69 ARTICLE Eleven Defeasance and Covenant Defeasance SECTION 11.01. Company's Option to Effect Defeasance or Covenant Defeasance.................69 SECTION 11.02. Defeasance and Discharge.....................................................70 SECTION 11.03. Covenant Defeasance..........................................................70 SECTION 11.04. Conditions to Defeasance or Covenant Defeasance..............................71 SECTION 11.05. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.....................................................72 SECTION 11.06. Reinstatement................................................................73 SECTION 11.07. Repayment to Company.........................................................73 ARTICLE Twelve Redemption of Securities SECTION 12.01. Right of Redemption..........................................................74 SECTION 12.02. Applicability of Article.....................................................74 SECTION 12.03. Election to Redeem; Notice to Trustee........................................74 SECTION 12.04. Selection by Trustee of Securities to Be Redeemed............................74 SECTION 12.05. Notice of Redemption.........................................................75 SECTION 12.06. Deposit of Redemption Price..................................................76 SECTION 12.07. Securities Payable on Redemption Date........................................76
Note : This table shall not, for any purpose, be deemed to be part of this Indenture -iv- ================================================================================ Page ANNEX A - Form of Regulation S Certificate ANNEX B - Form of Restricted Securities Certificate ANNEX C - Form of Unrestricted Securities Certificate Note : This table shall not, for any purpose, be deemed to be part of this Indenture -v- ================================================================================ INDENTURE, dated as of November 21, 2001, between The Gap, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), having its principal office at One Harrison, San Francisco, California 94105, and The Bank of New York, a New York banking corporation, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of up to $200,000,000 aggregate principal amount of its 8.15% Notes due December 15, 2005 (the "2005 Notes") and up to $500,000,000 aggregate principal amount of its 8.80% Notes due December 15, 2008 (the "2008 Notes" and, together with the 2005 Notes, and including the Exchange Securities, as hereinafter defined, the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. The Securities may consist of Original Securities and/or Exchange Securities, each as defined herein. The Original Securities and the Exchange Securities shall rank pari passu in right of payment with all existing and future unsecured and unsubordinated obligations of the Company. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE Definitions and Other Provisions of General Application SECTION 1.01 Definitions. ----------- For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; ================================================================================ (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP (whether or not such is indicated herein); and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "2005 Notes" has the meaning set forth in the recitals. "2008 Notes" has the meaning set forth in the recitals. "Act", when used with respect to any Holder, has the meaning specified in Section 1.04. "Additional Interest" has the meaning set forth in the form of the Securities contained in Section 2.02. Unless the context otherwise requires, references herein to "interest" on the Securities shall include Additional Interest. "Additional Interest Notice" has the meaning set forth in Section 3.01. "Adjusted Treasury Rate" has the meaning set forth in Section 2.03. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" means any member of, or participant in, the Depositary. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, Euroclear and Clearstream, in each case to the extent applicable to such transaction and as in effect from time to time. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 6.14 to act on behalf of the Trustee to authenticate Securities. -2- ================================================================================ "Board of Directors" means either the board of directors of the Company or any duly authorized committee thereof. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The Borough of Manhattan, The City of New York, New York are authorized or obligated by law or executive order to close. "Clearstream" means Clearstream Banking S.A. (or any successor securities clearing agency). "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Chief Executive Officer, its President, its Chief Financial Officer or a Vice President, and by its Treasurer, an Assistant Treasurer, its Controller, an Assistant Controller, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the principal office of the Trustee in the Borough of Manhattan, The City of New York, New York, at which at any particular time its corporate trust business shall be administered, which at the date hereof is located at 20 Broad Street, Lower Level, Attn: Corporate Trust Reorg. Department, New York, New York 10005. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Default Amount" has the meaning specified in Section 5.02. -3- ================================================================================ "Defaulted Interest" has the meaning specified in Section 3.07. "Depositary" means, with respect to the Securities issuable or issued in whole or in part in the form of one or more Global Securities, DTC, and with respect to payments of the principal of, premium, if any, and interest on such Global Securities, its nominee, for so long as it shall be a clearing agency registered under the Exchange Act, or such successor (which shall be a clearing agency registered under the Exchange Act) as the Company shall designate from time to time in an Officers' Certificate delivered to the Trustee. "DTC" means The Depository Trust Company. "DWAC System" means DTC's Deposit/Withdrawal at Custodian system. "Euroclear" means the Euroclear Clearance System (or any successor securities clearing agency). "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor act) and the rules and regulations thereunder. "Exchange and Registration Rights Agreement" means the Exchange and Registration Rights Agreement among the Company and the Purchasers, dated November 21, 2001, as the same may be amended, supplemented or otherwise modified from time to time in accordance with its terms. "Exchange Offer" has the meaning set forth in the form of the Securities contained in Section 2.02. "Exchange Registration Statement" has the meaning set forth in the form of the Securities contained in Section 2.02. "Exchange Security" means any Security issued in exchange for an Original Security or Original Securities pursuant to the Exchange Offer or otherwise registered under the Securities Act and any Security with respect to which the next preceding Predecessor Security of such Security was an Exchange Security. "Expiration Date" has the meaning specified in Section 1.04. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. -4- ================================================================================ "Global Security" means a Security in the form prescribed in Section 2.02 evidencing all or part of a series of Securities, issued to the Depositary or its nominee, and registered in the name of such Depositary or its nominee. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument, and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "Issue Date" means the date on which the Securities are first authenticated and delivered under this Indenture. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity, by declaration of acceleration, call for redemption or otherwise. "Moody's" means Moody's Investors Service, Inc. and its successors. "Notice of Default" has the meaning specified in Section 5.01. "Officers' Certificate" means a certificate signed by (i) the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President, and (ii) the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee and containing the statements provided for in Section 1.02. One of the officers signing an Officers' Certificate given pursuant to Section 10.09 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of legal counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee, and containing the statements provided for in Section 1.02. "Original Securities" means all Securities other than Exchange Securities. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities authenticated and delivered under this Indenture, except: ------ -5- ================================================================================ (i) Securities cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities, provided that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities, except to the extent provided in Sections 11.02 and 11.03, with respect to which the Company has effected defeasance or covenant defeasance as provided in Article Eleven; and (iv) Securities which have been paid pursuant to Section 3.06 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the -------- ------- requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of, premium, if any, or interest on any Securities on behalf of the Company. The Trustee is hereby authorized by the Company to act as a "Paying Agent" for the purposes of this Indenture, until such time as the Company notifies the Trustee in writing that such authorization is revoked. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. -6- ================================================================================ "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by, such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Purchase Agreement" means the Purchase Agreement, dated November 16, 2001, between the Company and the Purchasers, as such agreement may be amended from time to time. "Purchasers" means Goldman, Sachs & Co., J.P. Morgan Securities Inc., Salomon Smith Barney Inc., ABN AMRO Incorporated, Banc of America Securities LLC, HSBC Securities (USA) Inc., Fleet Securities, Inc., Mizuho International plc, Scotia Capital (USA) Inc. and US Bancorp Piper Jaffray Inc. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Registered Securities" means the Exchange Securities and all other Securities sold or otherwise disposed of pursuant to an effective registration statement under the Securities Act, together with their respective Successor Securities. "Registration Default" has the meaning set forth in the form of Security contained in Section 2.02. "Regular Record Date" for the interest payable on any Interest Payment Date means the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act (or any successor provision), as it may be amended from time to time. "Regulation S Certificate" means a certificate substantially in the form set forth in Annex A. "Regulation S Global Security" has the meaning specified in Section 2.01. "Regulation S Legend" means a legend substantially in the form of the legend required in the form of the Securities set forth in Section 2.02 to be placed upon each Regulation S Security. -7- ================================================================================ "Regulation S Securities" means the Securities purchased by the Purchasers from the Company pursuant to the Purchase Agreement in reliance on Regulation S under the Securities Act. Such term includes the Regulation S Global Security. "Resale Registration Statement" has the meaning set forth in the form of the Securities contained in Section 2.02. "Responsible Officer" shall mean any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Restricted Global Security" has the meaning specified in Section 2.01. "Restricted Period" means the period of 41 consecutive days beginning on and including the later of (i) the day on which Securities are first offered to persons other than distributors (as defined in Regulation S) in reliance on Regulation S and (ii) the original issuance date of the Securities. "Restricted Securities" means all Securities required pursuant to Section 3.05(c) to bear any Restricted Securities Legend. Such term includes the Restricted Global Securities. "Restricted Securities Certificate" means a certificate substantially in the form set forth in Annex B. "Restricted Securities Legend" means, collectively, the legends substantially in the forms of the legends required in the form of the Securities set forth in Section 2.02 to be placed upon each Restricted Security. "Rule 144A" means Rule 144A under the Securities Act (or any successor provision), as it may be amended from time to time. "Rule 144A Securities" means the Securities purchased by the Purchasers from the Company pursuant to the Purchase Agreement, other than the Regulation S Securities. "SEC Reports" has the meaning specified in Section 7.04. "Securities" has the meaning specified in the recitals and such reference includes the Exchange Securities and the Original Securities. -8- ================================================================================ "Securities Act" means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time. "Securities Act Legend" means a Restricted Securities Legend or a Regulation S Legend. "Security Register" and "Security Registrar" have the respective meanings specified in Section 3.05. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07. "S&P" means Standard & Poor's Ratings Services, a division of McGraw-Hill, Inc., and its successors. "Stated Maturity", when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable, and shall not include any contingent obligations to repay or redeem any such interest or principal prior to the date originally scheduled for the payment thereof. "Statistical Release" has the meaning set forth in Section 2.03. "Step-Down Date" has the meaning set forth in the form of the Securities contained in Section 2.02. "Step-Up" has the meaning set forth in the form of the Securities contained in Section 2.02. "Subsidiary" means any corporation of which at least a majority of the outstanding stock having by the terms thereof ordinary voting power for the election of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company, or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. "Successor Security" of any particular Security means every Security issued after, and evidencing all or a portion of the same debt as that evidenced by, such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the -9- ================================================================================ applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, -------- ------- that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Unrestricted Securities Certificate" means a certificate substantially in the form set forth in Annex C. "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depositary receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depositary receipt. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words (including "Senior" and "Executive") added before or after the title "vice president". SECTION 1.02. Compliance Certificates and Opinions. ------------------------------------ Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act and under this Indenture. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include -10- ================================================================================ (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.03. Form of Documents Delivered to Trustee. -------------------------------------- In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate of an officer of the Company may be based, insofar as it relates to legal matters, upon an opinion of counsel submitted therewith, unless such officer knows, or in the exercise of reasonable care should know, that the opinion with respect to the matters upon which his certificate is based is erroneous. Any opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate of an officer or officers of the Company submitted therewith stating the information on which counsel is relying, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate with respect to such matters is erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.04. Acts of Holders; Record Dates. ----------------------------- Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied -11- ================================================================================ in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing pursuant to this Section 1.04 may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. The ownership of Securities shall be proved by the Security Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of either series entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities of such series, provided that the -------- Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such matter referred to in the foregoing sentence, the record date for any such matter shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 7.01) prior to such first solicitation. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of such series on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that -------- no such action shall be effective hereunder unless taken on or prior to the -12- ================================================================================ applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of a series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 1.06. The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of either series entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 5.02, (iii) any request to institute proceedings referred to in Section 5.07(2) or (iv) any direction referred to in Section 5.12. If any record date is set pursuant to this paragraph with respect to one or more series of Securities, the Holders of Outstanding Securities of such series on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be -------- effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of either series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph with respect to either series of Securities, the Trustee, at the Company's expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities of such series in the manner set forth in Section 1.06. With respect to any record date set with respect to either series of Securities pursuant to this Section, the party hereto which sets such record dates may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day; provided that no such -------- change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities of such series in the manner set forth in Section 1.06, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto which set such record date shall be deemed to have initially designated the 180th day -13- ================================================================================ after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. SECTION 1.05. Notices, Etc., to Trustee and Company. ------------------------------------- Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if delivered in writing to the Trustee at its Corporate Trust Office; or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to the Company at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 1.06. Notice to Holders; Waiver. ------------------------- Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if (i) in the case of a Global Security, in writing by facsimile and/or by overnight mail to the Depositary, and (ii) in the case of securities other than Global Securities, in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such -14- ================================================================================ notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.07. Application of Trust Indenture Act. ---------------------------------- The Trust Indenture Act shall apply as a matter of contract to this Indenture for purposes of interpretation, construction and defining the rights and obligations hereunder. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 1.08. Effect of Headings and Table of Contents. ---------------------------------------- The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.09. Successors and Assigns. ---------------------- All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 1.10. Separability Clause. ------------------- In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -15- ================================================================================ SECTION 1.11. Benefits of Indenture. --------------------- Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.12. No Personal Liability of Directors, Officers, Employees and ----------------------------------------------------------- Stockholders. ------------ No past, present or future director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Securities, this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder shall be deemed to have waived and released each such past, present and future director, officer, employee, incorporator and stockholder of the Company of any such liability by accepting a Security as part of the consideration for the issuance of the Securities. SECTION 1.13. Governing Law. ------------- This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law thereof. SECTION 1.14. Legal Holidays. -------------- In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest and premium, if any need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date or at the Stated Maturity; provided that -------- no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be. -16- ================================================================================ ARTICLE TWO Security Forms SECTION 2.01. Forms Generally. --------------- The Securities of each series and the Trustee's certificates of authentication thereof shall be in substantially the forms set forth in this Article, with such appropriate legends, insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. Upon their original issuance, each series of the Rule 144A Securities shall be issued in the form of one or more Global Securities registered in the name of the Depositary or its nominee and deposited with the Trustee, as custodian for the Depositary, for credit by the Depositary to the respective accounts of beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Such Global Securities, together with their Successor Securities which are Global Securities other than the Regulation S Global Security, are collectively herein called the "Restricted Global Security." Upon their original issuance, each series of the Regulation S Securities shall be issued in the form of one or more Global Securities registered in the name of the Depositary, or its nominee and deposited with the Trustee, as custodian for the Depositary, for credit to the respective accounts of the beneficial owners of the Securities represented thereby (or such other accounts as they may direct); provided that upon such deposit all such -------- Securities shall be credited to or through accounts maintained at the Depositary by or on behalf of Euroclear or Clearstream. Such Global Securities, together with their Successor Securities which are Global Securities other than the Restricted Global Security, are collectively herein called the "Regulation S Global Security." The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. In certain cases described elsewhere herein, the legends set forth in Section 2.02 may be omitted from Securities issued hereunder. SECTION 2.02. Form of Face of the Securities. ------------------------------ [If the Security is a Global Security, insert the legends required by Section 2.04 of the Indenture] -17- ================================================================================ [If Restricted Securities, then insert - THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) TO A PERSON THAT THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT ACQUIRING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (3) TO AN INSTITUTIONAL INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), (4) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. THIS NOTE, AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON RESALES AND OTHER TRANSFERS OF THIS NOTE TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS NOTE SHALL BE DEEMED BY THE ACCEPTANCE OF THIS NOTE TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT.] [If a Regulation S Security, then insert -- THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD OR DELIVERED IN THE UNITED STATES TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON, UNLESS THIS NOTE IS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE.] THE GAP, INC. [Insert for 2005 Notes -- 8.15%] [Insert for 2008 Notes -- 8.80%] NOTES DUE DECEMBER 15, [Insert for 2005 Notes -- 2005] [Insert for 2008 Notes -- 2008] [IF RESTRICTED GLOBAL SECURITY - CUSIP NO. ] [IF ANY REGULATION S SECURITY - CUSIP NO. ] [IF REGULATION S GLOBAL SECURITY - ISIN NO. ] -18- ================================================================================ No. $ ------ ------------ The Gap, Inc., a corporation organized under the laws of the State of Delaware (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the principal sum of ------------- Dollars [if this Security is a Global Security, then insert: - ------------- (which principal amount may from time to time be increased or decreased to such other principal amounts (which, taken together with the principal amounts of all other Outstanding Securities, shall not exceed [Insert for 2005 Notes -- $200,000,000] [Insert for 2008 Notes -- $500,000,000] in the aggregate at any time) by adjustments made on the records of the Trustee hereinafter referred to in accordance with the Indenture)] on December 15, [Insert for 2005 Notes - --2005] [Insert for 2008 Notes -- 2008], and to pay interest thereon from November 21, 2001 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on June 15 and December 15 in each year, commencing June 15, 2002 at the rate of [Insert for 2005 Notes -- 8.15%] [Insert for 2008 Notes -- 8.80%] per annum, which rate shall be subject to adjustment from time to time as set forth on the reverse of this Security, until the principal hereof is paid or made available for payment. [If Original Securities, then insert: provided, however, that if (i) the Company -------- ------- has not filed a registration statement (the "Exchange Registration Statement") under the Securities Act, registering a security substantially identical to this Security (except that such Security will not contain terms with respect to the Additional Interest payments described below or transfer restrictions) pursuant to an exchange offer (the "Exchange Offer") (or, in lieu thereof, a registration statement registering this Security for resale (a "Resale Registration Statement")) by February 19, 2002, (ii) the Exchange Registration Statement relating to the Exchange Offer has not become or been declared effective by May 20, 2002 or, if applicable, the Resale Registration Statement, has not become or been declared effective within 120 days of the date of the filing of such registration statement, (iii) the Exchange Offer has not been completed within 45 days after the date on which the Exchange Registration Statement has become or been declared effective (if the Exchange Offer is then required to be made pursuant to the Exchange and Registration Rights Agreement), (iv) either the Exchange Registration Statement or, if applicable, the Resale Registration Statement is filed and declared effective (except as specifically permitted therein) but shall thereafter cease to be effective without being succeeded immediately by an additional registration statement filed and declared effective or (v) the Holders of this series of Securities are prevented or restricted by the Company from affecting sales pursuant to any Resale Registration Statement except as expressly permitted under the Exchange and Registration Rights Agreement, in each case (i) through (v) upon the terms and conditions set forth in the Exchange and Registration Rights Agreement (each such event referred to in clauses (i) through (iv), a "Registration Default"), then interest will accrue (in addition to any stated interest on the Securities) (the "Step-Up") at a rate of 0.25% per annum, determined daily, on the principal amount of the Securities, for the 90-day period immediately following the occurrence of the Registration Default, which rate shall be increased by 0.25% per annum at the beginning of each subsequent 90-day period (provided that the rate at which such -------- additional interest -19- ================================================================================ accrues shall not exceed 1.00% per annum in the aggregate) and interest shall be payable at such increased rate until such time (the "Step-Down Date") as no Registration Default is in effect (after which such interest rate will be restored to its initial rate). Interest accruing as a result of the Step-Up (which shall be computed on the basis of a 365 or 366-day year, as the case may be) is referred to herein as "Additional Interest." Additional Interest on such Securities shall cease to accrue (A) in the case of clause (i) above, upon the filing of the Exchange Registration Statement or Resale Registration Statement, (B) in the case of clause (ii) above, upon the effectiveness of the Exchange Registration Statement or Resale Registration Statement, (C) in the case of clause (iii) above, upon the completion of the Exchange Offer, (D) in the case of clause (iv) above, upon the effectiveness of a new Exchange Registration Statement or Resale Registration Statement succeeding a withdrawn Exchange Registration Statement or Resale Registration Statement or upon the cessation of the stop order suspending the effectiveness of such Exchange Registration Statement or Resale Registration Statement, as applicable, (E) in the case of clause (v) above, when the holders of such Securities are no longer prevented or restricted by the Company from effecting sales pursuant to any Resale Registration Statement and (F) other than with respect to a Holder that is an affiliate of the Company or a Holder that is not otherwise eligible to utilize the provisions of Rule 144(k) under the Securities Act, upon the expiration of two years (or such shorter period as may be prescribed by paragraph (k) of Rule 144) commencing on the Issue Date, in each case (A)-(E), subject to the new accrual of Additional Interest upon the occurrence of a new Registration Default. Accrued Additional Interest, if any, shall be paid semi-annually on June 15 and December 15 in each year; and the amount of accrued Additional Interest shall be determined on the basis of the number of days actually elapsed. Any accrued and unpaid interest (including Additional Interest) on this Security upon the issuance of an Exchange Security (as defined in the Indenture) in exchange for this Security shall cease to be payable to the Holder hereof but such accrued and unpaid interest (including Additional Interest) shall be payable on the next Interest Payment Date for such Exchange Security to the Holder thereof on the related Regular Record Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. -20- ================================================================================ In the case of a default in payment of principal and premium, if any, or upon acceleration or redemption, interest shall be payable pursuant to the preceding paragraph on such overdue principal and premium, if any, such interest shall be payable on demand and, if not so paid on demand, such interest shall itself bear interest at the same rate of interest that is payable pursuant to the preceding paragraph on the overdue principal (to the extent that the payment of such interest shall be legally enforceable), and shall accrue from the date of such demand for payment to the date payment of such interest has been made or duly provided for, and such interest on unpaid interest shall also be payable on demand. If this Security is issued in the form of a Global Security, payments of the principal of and premium, if any, and interest on this Security shall be made in immediately available funds to the Depositary. If this Security is issued in certificated form, payment of the principal of and premium, if any, and interest on this Security will be made at the corporate trust office of the Trustee and at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, New York, and at any other office or agency maintained by the Company for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the -------- ------- option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: The Gap, Inc. By --------------------------------- Name: Title: Attest: -21- ================================================================================ - ------------------------------ Name: Title: SECTION 2.03. Form of Reverse of the Securities. --------------------------------- This Security is one of a duly authorized issue of a series of Securities of the Company designated as its [Insert for 2005 Notes -- 8.15%] [Insert for 2008 Notes -- 8.80%] Notes due December 15, [Insert for 2005 Notes - -- 2005] [Insert for 2008 Notes -- 2008] issued under an Indenture, dated as of November 21, 2001 (herein called the "Indenture"), between the Company and The Bank of New York, as trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture). The Securities of this series are limited in aggregate principal amount to [Insert for 2005 Notes -- $200,000,000] [Insert for 2008 Notes -- $500,000,000]. Reference is hereby made to the Indenture and all indentures supplemental thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of this series of Securities and of the terms upon which this series of Securities are, and are to be, authenticated and delivered. The Securities of this series do not have the benefit of any sinking fund obligations. At any time on or after the Issue Date, the interest rate payable on this Security shall be subject to adjustment from time to time as set forth below if Moody's downgrades the rating ascribed to the Securities to Baa3 or below or S&P downgrades the rating ascribed to this series of Securities to BBB or below. (a) If the rating ascribed to the Securities of this series by Moody's is changed to a rating set forth below, the interest rate applicable to this series of Securities shall increase from the rate set forth on the face of this Security (as it may be increased as provided herein in the event of a Registration Default) by the percentage per annum set opposite such rating: Rating Percentage - ------ ---------- Baa2 or above 0% Baa3 .25% Ba1 .50% Ba2 .75% Ba3 1.00% B1 1.25% B2 1.50% B3 1.75% -22- ================================================================================ Rating Percentage - ------ ---------- Caa1 2.00% Caa2 2.25% Caa3 2.50% Ca 2.75% C 3.00% (b) If the rating ascribed to the Securities of this series by S&P is changed to a rating set forth below, the interest rate applicable to this series of Securities shall increase from the rate set forth on the face of this Security (as it may be increased as provided herein in the event of a Registration Default) by the percentage per annum set opposite such rating: Rating Percentage - ------ ---------- BBB+ or above 0% BBB .25% BBB- .50% BB+ .75% BB 1.00% BB- 1.25% B+ 1.50% B 1.75% B- 2.00% CCC+ 2.25% CCC 2.50% CCC- 2.75% CC 3.00% C 3.25% D 3.50% Each adjustment required by any change in rating as provided herein, whether occasioned by the action of Moody's or S&P, shall be made independent of, and shall be in addition to, any and all other adjustments, including (i) in the case of an adjustment occasioned by the action of Moody's, any adjustment occasioned by the action of S&P, (ii) in the case of an adjustment occasioned by the action of S&P, any adjustment occasioned by the action of Moody's and (iii) in the case of an adjustment occasioned by the action of Moody's and/or S&P, any adjustment resulting from a Registration Default as provided herein. If, subsequent to an adjustment in the interest rate on this Security as a result of a change in the ratings ascribed to this series of Securities by Moody's or S&P, either Moody's or S&P subsequently changes its ratings ascribed to this series of Securities to any of the thresholds set forth above, the interest rate on this Security shall be readjusted in accordance with the tables set forth above. In no event shall the interest rate payable -23- ================================================================================ with respect to this Security be reduced to below [Insert for 2005 Notes -- 8.15%] [Insert for 2008 Notes -- 8.80%] [if Original Securities, then insert: plus any increase in the interest rate applicable as a consequence of a Registration Default, as provided herein]. Any interest rate increase or decrease on this Security as a consequence of a change in the ratings ascribed to this series of Securities by Moody's and/or S&P as described herein, shall take effect from the Interest Payment Date following such ratings change. The Securities of this series are subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time, as a whole or in part, at the election of the Company, at a redemption price equal to the greater of (i) 100% of the principal amount of the Securities of this series to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including the portion of any such payments of interest accrued as of the Redemption Date) discounted to the Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (determined on the third Business Day preceding such Redemption Date), together in the case of any such redemption with accrued and unpaid interest (except if the Redemption Date is an Interest Payment Date) and Additional Interest, if any, to the Redemption Date, but interest installments that are due on or prior to such Redemption Date shall be payable to the holders of such Securities of record at the close of business on the relevant Regular Record Dates. "Adjusted Treasury Rate" means (i) the arithmetic mean of the yields under the heading "Week Ending" published in the Statistical Release most recently published prior to the date of determination under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the remaining life to maturity, as of the Redemption Date, of the principal being redeemed plus (ii) 0.45%. If no maturity set forth under such heading exactly corresponds to the maturity of such principal, yields for the two published maturities most closely corresponding to the maturity of such principal shall be calculated pursuant to the immediately preceding sentence, and the Adjusted Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of the relevant periods to the nearest month. "Statistical Release" means the statistical release designated "H.15 (519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively-traded United States government securities adjusted to constant maturities, or, if such statistical release is not published at the time of any determination under the terms hereof, then such other reasonably comparable index which shall be designated by the Company. In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. [If a Global Security insert -- In the event of a deposit or withdrawal of an interest in this Security (including upon an exchange or transfer of this Security in part only) effected in accordance with the Applicable Procedures, the Security Registrar, upon -24- ================================================================================ receipt of notice of such event from the Depositary's custodian for this Security, shall make an adjustment on its records to reflect an increase or decrease of the Outstanding principal amount of this Security resulting from such deposit or withdrawal, as the case may be.] If an Event of Default with respect to the Securities of this series shall occur and be continuing, the entire principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (i) the entire indebtedness of this Security, or (ii) certain restrictive covenants with respect to this Security, in each case upon compliance with certain conditions set forth therein. Unless the context otherwise requires, the Original Securities of this series of Securities (as defined in the Indenture) and the Exchange Securities of this series of Securities (as defined in the Indenture) shall constitute one class for all purposes under the Indenture, including without limitation, amendments and waivers. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of this series under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Securities of this series at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of this series at the time Outstanding, on behalf of the Holders of all the Securities of this series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of at least 25% in aggregate principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee indemnity reasonably satisfactory to the Trustee, and the Trustee shall not have received from the Holders of a majority in aggregate principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The -25- ================================================================================ foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof and premium, if any, or interest hereon on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and like tenor and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like tenor and aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary. Interest [If an Original Security, then insert: (other than Additional Interest)] on this Security shall be computed on the basis of a 360-day year of twelve 30-day months. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -26- ================================================================================ SECTION 2.04. Additional Provisions Required in Global Security. ------------------------------------------------- Any Global Security issued hereunder shall, in addition to the provisions contained in Sections 2.02 and 2.03, bear a legend in substantially the following form: [If a Global Security, insert -- THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.] [If a Global Security to be held by DTC, insert -- UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] SECTION 2.05. Form of Trustee's Certificate of Authentication. ----------------------------------------------- This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: The Bank of New York, as Trustee By ------------------------------- Authorized Signatory -27- ================================================================================ ARTICLE THREE The Securities SECTION 3.01. Title and Terms. --------------- The Securities shall be issued in two series, namely 8.15% Notes due December 15, 2005 and 8.80% Notes due December 15, 2008. The aggregate principal amount of Securities which may be authenticated by the Trustee and delivered under this Indenture is limited to $700,000,000 (comprised of up to $200,000,000 in aggregate principal amount of 2005 Notes and up to $500,000,000 aggregate principal of 2008 Notes), except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 3.04, 3.05, 3.06 or 9.06. The Trustee shall authenticate Original Securities on the Issue Date in an aggregate principal amount not to exceed $200,000,000 in the case of the 2005 Notes and $500,000,000 in the case of the 2008 Notes. The Company may issue Exchange Securities of a series from time to time pursuant to an Exchange Offer or otherwise, in each case pursuant to a Board Resolution, subject to Section 3.03, included in an Officers' Certificate delivered to the Trustee, in authorized denominations in exchange for a like principal amount of Original Securities of such series. Upon any such exchange the Original Securities of such series shall be canceled in accordance with Section 3.09 and shall no longer be deemed Outstanding for any purpose. In no event shall the aggregate principal amount of Original Securities and Exchange Securities Outstanding exceed $200,000,000 in the case of the 2005 Notes and $500,000,000 in the case of the 2008 Notes. The Securities shall be known and designated as the "8.15% Notes due December 15, 2005," in the case of the 2005 Notes, and the "8.80% Notes due December 15, 2008," in the case of the 2008 Notes, of the Company. The Stated Maturity of the 2005 Notes shall be December 15, 2005 and the Stated Maturity of the 2008 Notes shall be December 15, 2008. The 2005 Notes shall initially bear interest at the rate of 8.15% per annum and the 2008 Notes shall initially bear interest at the rate of 8.80% per annum, which rate of interest, in each case, may be adjusted from time to time as provided in Section 2.03, from November 21, 2001 or from the most recent Interest Payment Date thereafter to which interest has been paid or duly provided for, as the case may be, payable semi-annually on June 15 and December 15, commencing June 15, 2002, until the principal thereof is paid or made available for payment; provided, -------- however, with respect to Original Securities of either series of Securities, if - ------- there has been a Registration Default with respect to such series of Securities, a Step-Up will occur and such Original Securities will from then bear Additional Interest until the Step-Down Date. Accrued Additional Interest, if any, shall be paid in cash in arrears semi-annually on June 15 and December 15 in each year, and the amount of accrued Additional Interest -28- ================================================================================ shall be determined on the basis of the number of days actually elapsed. In connection with the cash payment of any Additional Interest, the Company shall notify the Trustee (the "Additional Interest Notice") on or before the later to occur of (i) the Regular Record Date preceding such payment of any Additional Interest, and (ii) the date on which any such Additional Interest begins to accrue, of the amount of Additional Interest to be paid by the Company on the next Interest Payment Date. In the event of the occurrence of a Step-Down Date during the period between the date on which the Additional Interest Notice is given and the next Interest Payment Date, the Company shall so notify the Trustee and shall provide the Trustee with the revised amount of Additional Interest to be paid by the Company on such Interest Payment Date. In the case of a default in payment of principal or upon acceleration, interest shall be payable pursuant to the preceding paragraph on such overdue principal, such interest shall be payable on demand and, if not so paid on demand, such interest shall itself bear interest at the same rate of interest that is payable pursuant to the preceding paragraph on the overdue principal (to the extent that the payment of such interest shall be legally enforceable), and shall accrue from the date of such demand for payment to the date payment of such interest has been made or duly provided for, and such interest on unpaid interest shall also be payable on demand. If the Securities of a series are issued in the form of one or more Global Securities, payments of the principal of, premium, if any, and interest on the Securities of such series shall be made in immediately available funds to the Depositary. If the Securities of a series are issued in certificated form, the principal of and premium, if any, and interest on the Securities of such series shall be payable at the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York, New York, maintained for such purpose and at any other office or agency maintained by the Company for such purpose; provided, however, that at the option of the Company payment of -------- ------- interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The Securities shall not have the benefit of any sinking fund obligations. The Securities of each series shall be subject to defeasance and covenant defeasance at the option of the Company as provided in Article Eleven. The Securities of each series shall also be subject to redemption at the option of the Company as provided in Article Twelve. Unless the context otherwise requires, the Original Securities and the Exchange Securities of each series of Securities shall constitute one class for all purposes under this Indenture, including without limitation, amendments, waivers and redemptions. -29- ================================================================================ SECTION 3.02. Denominations. ------------- The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 3.03. Execution, Authentication, Delivery and Dating. ---------------------------------------------- The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, its Chief Administrative Officer, its Chief Financial Officer or one of its Vice Presidents, and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of either series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee, in accordance with such Company Order, shall authenticate and deliver such Securities as provided by this Indenture. At any time and from time to time after the execution and delivery of this Indenture and after the effectiveness of a registration statement under the Securities Act with respect thereto, the Company may deliver Exchange Securities of a series of Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Exchange Securities and a like principal amount of Original Securities of such series of Securities for cancellation in accordance with Section 3.09 of this Indenture, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. In authenticating any such Exchange Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating, (a) that such Exchange Securities have been duly and validly issued in accordance with the terms of this Indenture, and are entitled to all the rights and benefits set forth herein; and (b) that the issuance of the Exchange Securities in exchange for the Original Securities has been effected in compliance with the Securities Act. -30- ================================================================================ Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 3.04. Temporary Securities. -------------------- Pending the preparation of definitive Securities of either series, the Company may execute, and upon a Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities of either series are issued, the Company will cause definitive Securities of such series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at any office or agency of the Company designated pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of either series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like tenor and principal amount of definitive Securities of the same series of authorized denominations. Until so exchanged, the temporary Securities of either series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series. SECTION 3.05. Registration, Registration of Transfer and Exchange. --------------------------------------------------- (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as they may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers and exchanges of Securities as herein provided. -31- ================================================================================ Such Security Register shall distinguish between 2005 Notes and 2008 Notes, and between Original Securities and Exchange Securities. Subject to the other provisions of this Indenture regarding restrictions on transfer, upon surrender for registration of transfer of any Security of either series at an office or agency of the Company designated pursuant to Section 10.02 for such purpose in accordance with the terms hereof, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series of any authorized denominations and of a like tenor and aggregate principal amount and bearing such restrictive legends as may be required by this Indenture. At the option of the Holder and subject to the other provisions of this Section 3.05, Securities of either series may be exchanged for other Securities of the same series of any authorized denominations and of a like tenor and aggregate principal amount and bearing the applicable legends set forth in Section 2.02, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the legal, valid and binding obligations of the Company, evidencing the same debt, and (subject to the provisions in the Original Securities regarding the payment of Additional Interest) entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to the Holder for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 3.05 or 9.06. In the event of a redemption, in whole or in part, of the Securities of either series, neither the Company nor the Security Registrar will be required (a) to register the transfer of or exchange Securities of such series for a period of 15 days immediately preceding the date notice is given identifying the serial numbers of the Securities called for such redemption under Section 12.04 or (b) to register the transfer of or exchange any Security of such series, or portion thereof, called for redemption. -32- ================================================================================ (b) Certain Transfers and Exchanges. Notwithstanding any other ------------------------------- provision of this Indenture or the Securities, transfers and exchanges of Securities and beneficial interests in a Global Security of the kinds specified in this Section 3.05(b) shall be made only in accordance with this Section 3.05(b). (i) Restricted Global Security to Regulation S Global Security. If the ---------------------------------------------------------- owner of a beneficial interest in the Restricted Global Security of either series wishes at any time to transfer such interest to a Person who wishes to acquire the same in the form of a beneficial interest in the Regulation S Global Security of such series, such transfer may be effected only in accordance with the provisions of this clause (b)(i) and clause (b)(iv) below and subject to the Applicable Procedures. Upon receipt by the Trustee, as Security Registrar, of (A) an order given by the Depositary or its authorized representative directing that a beneficial interest in such Restricted Global Security in a specified principal amount be debited from a specified Agent Member's account and that a beneficial interest in the corresponding Regulation S Global Security in an equal principal amount be credited to another specified Agent Member's account and (B) a Regulation S Certificate, satisfactory to the Trustee and duly executed by the owner of such beneficial interest in the Restricted Global Security or his attorney duly authorized in writing, then the Trustee, as Security Registrar shall reduce the principal amount of such Restricted Global Security and increase the principal amount of the corresponding Regulation S Global Security by such specified principal amount. (ii) Regulation S Global Security to Restricted Global Security. If ---------------------------------------------------------- the owner of a beneficial interest in the Regulation S Global Security of either series wishes at any time to transfer such interest to a Person who wishes to acquire the same in the form of a beneficial interest in the corresponding Restricted Global Security, such transfer may be effected only in accordance with this clause (b)(ii) and subject to the Applicable Procedures. Upon receipt by the Trustee, as Security Registrar, of (A) an order given by the Depositary or its authorized representative directing that a beneficial interest in such Regulation S Global Security in a specified principal amount be debited from a specified Agent Member's account and that a beneficial interest in the corresponding Restricted Global Security in an equal principal amount be credited to another specified Agent Member's account and (B) if such transfer is to occur during the Restricted Period, a Restricted Securities Certificate, satisfactory to the Trustee and duly executed by the owner of such beneficial interest in such Regulation S Global Security or his attorney duly authorized in writing, then the Trustee, as Security Registrar, shall reduce the principal amount of such Regulation S Global Security and increase the principal amount of the corresponding Restricted Global Security by such specified principal amount. (iii) Non-Global Security to Non-Global Security. A Security of either ------------------------------------------ series that is not a Global Security may be transferred, in whole or in part, -33- ================================================================================ to a Person who takes delivery in the form of another Security of such series that is not a Global Security as provided in Section 3.05(a); provided that, if the Security to be transferred in whole or in part is a -------- Restricted Security, or is a Regulation S Security and the transfer is to occur during the Restricted Period, then the Trustee shall have received (A) a Restricted Securities Certificate, satisfactory to the Trustee and duly executed by the transferor Holder or his attorney duly authorized in writing, in which case the transferee Holder shall take delivery in the form of a Restricted Security, or (B) a Regulation S Certificate, satisfactory to the Trustee and duly executed by the transferor Holder or his attorney duly authorized in writing, in which case the transferee Holder shall take delivery in the form of a Regulation S Security (subject in every case to Section 3.05(c)), respectively. (iv) Regulation S Global Security to be Held Through Euroclear or ------------------------------------------------------------ Clearstream during Restricted Period. The Company shall use its best ------------------------------------ efforts to cause the Depositary to ensure that, until the expiration of the Restricted Period, beneficial interests in any Regulation S Global Security may be held only in or through accounts maintained at the Depositary by Euroclear or Clearstream (or by Agent Members acting for the account thereof), and no person shall be entitled to effect any transfer or exchange that would result in any such interest being held otherwise than in or through such an account; provided that this clause (b)(iv) shall not -------- prohibit any transfer or exchange of such an interest in accordance with clause (b)(ii) above. (v) Exchanges of Book-Entry Securities for Certificated Securities. A -------------------------------------------------------------- beneficial interest in a Global Security of either series may not be exchanged for a Security of such series in certificated form unless (i) DTC (x) notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security or (y) has ceased to be a clearing agency registered under the Exchange Act and in either case the Company thereupon fails to appoint a successor Depositary, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Securities of such series in certificated form or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to the Securities of such series. In all cases, certificated Securities delivered in exchange for any Global Security or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the Depositary (in accordance with its customary procedures). Any certificated Security issued in exchange for an interest in a Global Security will bear the legend restricting transfers that is borne by such Global Security. Any such exchange will be effected through the DWAC System and an appropriate adjustment will be made in the records of the Security Registrar to reflect a decrease in the principal amount of the relevant Global Security. -34- ================================================================================ (c) Securities Act Legends. Rule 144A Securities and their Successor ---------------------- Securities shall bear a Restricted Securities Legend, and the Regulation S Securities and their Successor Securities shall bear a Regulation S Legend, subject to the following: (i) subject to the following clauses of this Section 3.05(c), a Security or any portion thereof which is exchanged, upon transfer or otherwise, for a Global Security or any portion thereof shall bear the Securities Act Legend borne by such Global Security while represented thereby; (ii) subject to the following clauses of this Section 3.05(c), a new Security which is not a Global Security and is issued in exchange for another Security (including a Global Security) or any portion thereof, upon transfer or otherwise, shall bear the Securities Act Legend borne by such other Security; provided that, if such new Security is required pursuant to -------- Section 3.05(b) to be issued in the form of a Restricted Security, it shall bear a Restricted Securities Legend and, if such new Security is so required to be issued in the form of a Regulation S Security, it shall bear a Regulation S Legend; (iii) Registered Securities shall not bear a Securities Act Legend; (iv) at any time after the Securities of either series may be freely transferred without registration under the Securities Act or without being subject to transfer restrictions pursuant to the Securities Act, a new Security which does not bear a Securities Act Legend may be issued in exchange for or in lieu of a Security of such series (other than a Global Security) or any portion thereof which bears such a legend if the Trustee has received an Unrestricted Securities Certificate, satisfactory to the Trustee and duly executed by the Holder of such legended Security or his attorney duly authorized in writing, and after such date and receipt of such certificate, the Trustee shall authenticate and deliver such a new Security of such series in exchange for or in lieu of such other Security as provided in this Article Three; (v) a new Security of a series which does not bear a Securities Act Legend may be issued in exchange for or in lieu of a Security of such series (other than a Global Security) or any portion thereof which bears such a legend if, in the Company's judgment, placing such a legend upon such new Security is not necessary to ensure compliance with the registration requirements of the Securities Act, and the Trustee, at the written direction of the Company, shall authenticate and deliver such new Security as provided in this Article Three; and (vi) notwithstanding the foregoing provisions of this Section 3.05(c), a Successor Security of a Security that does not bear a particular form of Securities Act Legend shall not bear such form of legend unless the Company has reasonable cause to believe that such Successor Security is a "restricted security" within the meaning of Rule 144, in which case the Trustee, at the direction of the Company, shall authenticate and deliver a new Security bearing a Restricted -35- ================================================================================ Securities Legend in exchange for such Successor Security as provided in this Article Three. (d) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Agent Members or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities. ------------------------------------------------ If any mutilated Security of either series is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security of either series and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in exchange for or in lieu of any such destroyed, lost or stolen Security, a new Security of the same series of like tenor, form, terms and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security of either series has become or is about to become due and payable, the Company in the discretion of the Company may, instead of issuing a new Security of the same series, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of either series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this -36- ================================================================================ Indenture equally and proportionately with any and all other Securities of the same series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.07. Payment of Interest; Interest Rights Preserved. ---------------------------------------------- Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest (including Additional Interest) on any Security of either series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall (a) bear interest at the rate per annum determined pursuant to the form of Security for such series included herein (to the extent that the payment of such interest shall be legally enforceable), and (b) forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a "Special Record Date" for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as provided in this clause. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities of such series at his address as it appears in the Security Register, not less than 10 days prior to such Special -37- ================================================================================ Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest on the Securities of either series in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of such series may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 3.08. Persons Deemed Owners. --------------------- Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.09. Cancellation. ------------ All Securities surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of in accordance with its standard procedures or as directed by a Company Order; provided, however, that the Trustee shall not -------- ------- be required to destroy such Securities. -38- ================================================================================ SECTION 3.10. Computation of Interest. ----------------------- Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months, except that Additional Interest shall be computed on the basis of a 365 or 366-day year, as the case may be. SECTION 3.11. CUSIP Numbers. ------------- The Company in issuing the Securities may use "CUSIP" and "ISIN" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any -------- such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such CUSIP numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE FOUR Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture. --------------------------------------- This Indenture shall cease to be of further effect as to all outstanding Securities of either series and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to such series, when (1) either (A) the Company shall have paid or caused to be paid the principal of and premium, if any, and interest on the Securities of such series as and when the same will have become due and payable; or (B) all outstanding Securities of such series (except lost, stolen or destroyed Securities which have been replaced or paid) have been delivered to the Trustee for cancellation; and the Company, in the case of (A) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on the Securities of such series not theretofore delivered to the Trustee for cancellation, for principal, premium, if any, and interest to the date of such deposit (in the -39- ================================================================================ case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder with respect to such series by the Company; (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture with respect to such series have been complied with; and (4) the Trustee shall have received such other documents and assurances as the Trustee shall have reasonably requested. Notwithstanding the satisfaction and discharge of this Indenture, the following shall survive: (i) the obligations of the Company to the Trustee under Section 6.07, (ii) the substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of Holders of Securities to receive payment of principal of and premium, if any, and interest on the Securities, (iv) rights, obligations and immunities of the Trustee under this Indenture (including, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03), and (v) rights of holders of the Securities as beneficiaries of this Indenture with respect to any property deposited with the Trustee payable to all or any of them. SECTION 4.02. Application of Trust Money. -------------------------- Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal, premium, if any, and interest for whose payment such money has been deposited with the Trustee. -40- ================================================================================ ARTICLE FIVE Remedies SECTION 5.01. Events of Default. ----------------- "Event of Default", wherever used herein with respect to Securities of either series, means any one of the following events with respect to such series of Securities (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of or premium, if any, on any Security of that series when due; or (3) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture or in the Securities of that series (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (4) if an event of default as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for money borrowed of the Company or any Subsidiary, whether such indebtedness now exists or shall hereafter be created, if (A) such default either (1) results from the failure to pay the principal of any such indebtedness at its stated maturity or (2) relates to an obligation other than the obligation to pay the principal of such indebtedness at its stated maturity and results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, (B) the principal amount of such indebtedness, together with the principal amount of any other such indebtedness in default for failure to pay principal at stated maturity or the maturity of which has been so accelerated, aggregates $25,000,000 or more at any one time outstanding and (C) such indebtedness is not discharged, or such acceleration is not rescinded or annulled within a period of 10 Business Days after there has been given, by registered or certified mail, to the Company by the -41- ================================================================================ Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of Outstanding Securities of that series a written notice specifying such event of default and requiring the Company to cause such acceleration to be rescinded or annulled or to cause such indebtedness to be discharged and stating that such notice is a "Notice of Default" hereunder; or (5) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (6) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. -------------------------------------------------- If an Event of Default with respect to the Securities of either series (other than an Event of Default specified in Section 5.01(5) or (6)) with respect to the Company occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities of that series may declare the Default Amount of all the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such Default Amount and any accrued interest, -42- ================================================================================ together with all other amounts due with respect to that series under this Indenture, shall become immediately due and payable. If an Event of Default specified in Section 5.01(5) or (6) with respect to the Company occurs, the Default Amount of and any accrued interest on the Securities then Outstanding, together with all other amounts due under this Indenture, shall ipso facto become immediately due and payable without any declaration or other Act on the part of the Trustee or any Holder. The "Default Amount" in respect of any particular Security as of any particular date of acceleration shall equal the principal amount and premium, if any, of the Security plus accrued and unpaid interest to such date. At any time after such a declaration of acceleration has been made with respect to the Securities of either series and before a judgment or decree for payment of the money due based on such acceleration has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities of that series, (B) the principal of and premium, if any, on any Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate prescribed by the Securities of that series, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the applicable rate prescribed by the Securities of that series, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to the Securities of that series, other than the non-payment of the principal of and any premium and interest on such Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. -43- ================================================================================ SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. --------------------------------------------------------------- The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of or premium, if any, on any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and premium, if any, and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium, if any, and on any overdue interest, at the rate provided by such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses incurred by the Trustee under this Indenture, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default with respect to the Securities of either series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.04. Trustee May File Proofs of Claim. -------------------------------- In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys, securities or other property payable or deliverable upon the exchange of the Securities or upon any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07. -44- ================================================================================ No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, -------- however, that the Trustee may, on behalf of the Holders, vote for the election - ------- of a trustee in bankruptcy or similar official and be a member of a creditors committee or other similar committee. SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities. ----------------------------------------------------------- All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 5.06. Application of Money Collected. ------------------------------ Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.07; and SECOND: To the payment of the amounts then due and unpaid for principal of, premium, if any, and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal, premium, if any, and interest, respectively. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to the Holders pursuant to this Section 5.06. -45- ================================================================================ SECTION 5.07. Limitation on Suits. ------------------- No Holder of any Security of either series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; (2) the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered and provided to the Trustee indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request, offer and provision of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 5.08. Unconditional Right of Holders to Receive Principal, Premium and ---------------------------------------------------------------- Interest. -------- Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and (subject to Section 3.07) interest on such Security on the Stated Maturity expressed in such Security (or, in the case of redemption, on the Redemption Date), and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. -46- ================================================================================ SECTION 5.09. Restoration of Rights and Remedies. ---------------------------------- If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 5.10. Rights and Remedies Cumulative. ------------------------------ Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11. Delay or Omission Not Waiver. ---------------------------- No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 5.12. Control by Holders. ------------------ The Holders of a majority in aggregate principal amount of the Outstanding Securities of either series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Securities of such series; provided that -------- (1) such direction shall not be in conflict with any rule of law or with this Indenture, -47- ================================================================================ (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) subject to the provisions of Section 6.01, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, determine that the proceeding so directed would involve the Trustee in personal liability. SECTION 5.13. Waiver of Past Defaults. ----------------------- The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities of either series may on behalf of the Holders of all the Securities of such series by written notice to the Trustee waive any past default hereunder with respect to such series and its consequences, except a default (1) in the payment of the principal of, premium, if any, or interest on any Security of such series, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 5.14. Undertaking for Costs. --------------------- In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs, including reasonable attorney's fees and expenses, against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that -------- neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Trustee or any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities of either series or in any suit instituted by any Holder for the enforcement of principal of, premium, if any, or interest on any Security on or after the applicable Stated Maturity of such Security (or, in the case of redemption, on or after the Redemption Date). -48- ================================================================================ SECTION 5.15. Waiver of Stay or Extension Laws. -------------------------------- The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX The Trustee SECTION 6.01. Certain Duties and Responsibilities. ----------------------------------- The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. If an Event of Default shall have occurred and be continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 6.02. Notice of Defaults. ------------------ If a default occurs hereunder with respect to Securities of either series, the Trustee shall give the Holders of Securities of such series notice of such Default hereunder as and to the extent provided by the Trust Indenture Act, unless such Default has been cured or waived; provided, however, that in -------- ------- the case of any Default of the character specified in Section 5.01(3) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof and provided, further, that -------- ------- the Trustee may withhold from such Holders notice of any continuing Default (other than a Default of the character specified in Sections 5.01(1) and -49- ================================================================================ 5.01(2)), if the Trustee shall determine that withholding such notice is in the interests of such Holders. SECTION 6.03. Certain Rights of Trustee. ------------------------- Subject to the provisions of Section 6.01: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document whether in its original form or facsimile form believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or a Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate or an Opinion of Counsel; (d) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction reasonably satisfactory to the Trustee; (f) prior to the occurrence of an Event of Default and after all such Events of Default shall have been cured, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to -50- ================================================================================ make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith which the Trustee reasonably believed to have been authorized or within its rights or powers; (i) except as otherwise required pursuant to the Trust Indenture Act, the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any such Default or Event of Default, as the case may be, is received by the Trustee at the Corporate Trust Office of the Trustee, and that such notice references the Securities and this Indenture; and (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder. (k) the Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorized to sign an Officers' Certificate, including any person specified as so authorized in any certificate previously delivered and not superseded. SECTION 6.04. Not Responsible for Recitals or Issuance of Securities. ------------------------------------------------------ The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. -51- ================================================================================ SECTION 6.05. May Hold Securities. ------------------- The Trustee, any Paying Agent, any Security Registrar (if other than the Trustee) or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.08 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. Subject to the provisions of Section 6.08, the Trustee may become and act as trustee under other indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding in the same manner as if it were not Trustee. SECTION 6.06. Money Held in Trust. ------------------- Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. SECTION 6.07. Compensation and Reimbursement. ------------------------------ The Company agrees (1) to pay to the Trustee from time to time such compensation as shall be agreed in writing between the Company and the Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify each of the Trustee, or any predecessor Trustee, for, and to hold it harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of the trust or trusts -52- ================================================================================ hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder and the costs and expenses of enforcing this right of indemnification. The Trustee shall have a lien prior to the Securities as to all property and funds held by it hereunder for any amount owing it or any predecessor Trustee pursuant to this Section 6.07, except with respect to funds held in trust for the benefit of the Holders of particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture and the resignation or removal of the Trustee. SECTION 6.08. Disqualification; Conflicting Interests. --------------------------------------- If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest within 90 days after ascertaining that it has such conflicting interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 6.09. Corporate Trustee Required; Eligibility. --------------------------------------- There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000 and its Corporate Trust Office in the Borough of Manhattan, The City of New York, New York. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of a Federal, State, Territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. -53- ================================================================================ SECTION 6.10. Resignation and Removal; Appointment of Successor. ------------------------------------------------- (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11, at which time the retiring Trustee shall be fully discharged from its obligations hereunder. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the Trustee being removed may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities. (e) If at any time: (1) the Trustee shall fail to comply with Section 6.08 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by or pursuant to a Board Resolution may remove the Trustee and appoint a successor Trustee with respect to the Securities, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (f) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by -54- ================================================================================ Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (g) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 1.06. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. Acceptance of Appointment by Successor. -------------------------------------- Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee under Section 6.07, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business. ----------------------------------------------------------- Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder; provided that -------- such corporation shall be otherwise -55- ================================================================================ qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 6.13. Preferential Collection of Claims Against the Company. ----------------------------------------------------- If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 6.14. Appointment of Authenticating Agent. ----------------------------------- The Trustee may appoint an Authenticating Agent or Agents with respect to the Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 3.06, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, -56- ================================================================================ or any corporation succeeding to all or substantially all the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment in the manner provided in Section 1.06 to all Holders of Securities. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section. If an appointment is made pursuant to this Section, the Securities of either series may have endorsed thereon, in lieu of the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. The Bank of New York, As Trustee By -------------------------------------- As Authenticating Agent By -------------------------------------- Authorized Signatory -57- ================================================================================ ARTICLE SEVEN Holders' Lists and Reports by Trustee and the Company SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders. --------------------------------------------------------- The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its - --------- capacity as Security Registrar. SECTION 7.02. Preservation of Information; Communications to Holders. ------------------------------------------------------ (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company, the Trustee or any agent of any of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 7.03. Reports by Trustee. ------------------ (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by -58- ================================================================================ Section 313 (a) of the Trust Indenture Act, the Trustee shall, within sixty days after each May 15 following the date of this Indenture deliver to Holders a brief report, dated as of such May 15, which complies with the provisions of such Section 313(a). (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which either series of Securities are listed, with the Commission and with the Company. The Company shall promptly notify the Trustee of the listing of either series of Securities on any stock exchange and of any delisting thereof. SECTION 7.04. Reports by Company. ------------------ The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act and in the manner set forth in Section 10.07; provided that any such information, documents or reports -------- required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act ( "SEC Reports") shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. In the event the Company shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company will nonetheless continue to file such reports with the Commission (unless the Commission will not accept such a filing) and the Trustee and to furnish copies of such SEC Reports to the Holders of Securities at the time the Company is required to file such reports with the Trustee and will make such information available to investors who request it in writing. Delivery of such reports, information and documents to the Trustee shall be for informational purposes only and the Trustee's receipt of such reports, information and documents shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 7.05. Officers' Certificate with Respect to Change in Interest Rates. -------------------------------------------------------------- Within seven Business Days after any Step-Up or Step-Down Date, or after any adjustment of the interest rate payable as a result of a ratings change by Moody's or S&P as provided in Section 2.03, with respect to Securities of either series, the Company shall deliver an Officers' Certificate to the Trustee stating the new interest rate with respect to the Securities of such series and the date on which it became effective. -59- ================================================================================ ARTICLE EIGHT Merger, Consolidation, Etc. SECTION 8.01. Mergers, Consolidations and Certain Sales of Assets. --------------------------------------------------- The Company shall not consolidate with or merge with or into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) either the Company shall be the continuing corporation, or the successor Person or purchaser shall be a corporation, partnership or trust organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of, premium, if any, and interest on all the Securities, the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and all of the Company's obligations under the Exchange and Registration Rights Agreement; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; and (3) if a supplemental indenture is to be executed in connection with such consolidation, merger, transfer or lease, the Company shall have delivered to the Trustee (A) an Officers' Certificate and (B) an Opinion of Counsel attesting to compliance with these provisions. SECTION 8.02. Successor Substituted. --------------------- Upon any consolidation of the Company with, or merger of the Company with or into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. -60- ================================================================================ SECTION 8.03. Officers' Certificate and Opinion of Counsel. -------------------------------------------- The Trustee, subject to the provisions of Sections 6.01 and 6.03, shall receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, conveyance, transfer or lease, and any such assumption, complies with the provisions of this Article before the Trustee shall execute any supplemental indenture required pursuant to this Article. ARTICLE NINE Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Holders. -------------------------------------------------- Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders of the Securities of either series (and if such covenants are to be for the benefit of only one series, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default with respect to both or either series of Securities; or (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in uncertificated form in addition to or in place of certificated Securities; or (5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or both series of Securities, provided that any such addition, change or elimination (i) shall neither (A) apply to any Security created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (B) modify the rights of the Holder of any such Security with -61- ================================================================================ respect to such provision or (ii) shall become effective only when there is no such Security Outstanding; or (6) to secure the Securities; or (7) to establish the form or terms of the Securities of either series as permitted by Sections 2.01 and 3.01; or (8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities; or (9) if allowed, without penalty under applicable laws and regulations, to permit payment in the United States (including any of the States thereof and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction of principal, premium, if any, or interest on securities in bearer form; or (10) to cure any ambiguity, to correct or supplement any provision herein which is mistaken or may be inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this clause (10), other than with respect to a mistaken provision, shall not adversely affect the interests of the Holders of Securities of either series in any material respect; or (11) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to comply with any requirement of the Commission in order to effect qualification of this Indenture under the Trust Indenture Act in connection with the issuance of Exchange Securities or thereafter to maintain the qualification of this Indenture under the Trust Indenture Act. SECTION 9.02. Supplemental Indentures With Consent of Holders. ----------------------------------------------- With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities of each series adversely affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture with respect to such series of Securities or of modifying in any manner the rights of the Holders of such series of Securities under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security of such series affected thereby, -62- ================================================================================ (1) change the Stated Maturity of the principal of or interest on, any Security of that series, or reduce the principal amount thereof or the premium, if any, or the rate of interest thereon or modify the provisions with respect to the adjustment of the interest rate payable on the Securities of that series in a manner adverse to Holders of such series, or change the place of payment where, or the coin or currency in which, payment of the principal of, premium, if any, or interest on any Security of that series is payable, or impair the right to institute suit for the enforcement of any payment in respect of any Security of that series on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (2) reduce the amount payable upon a redemption of any Securities of such series or modify the Company's right to redeem the Securities of that series in a manner adverse to such Holders, or (3) reduce the percentage in principal amount of the Outstanding Securities of that series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (4) modify any of the provisions of this Section, Section 5.13, Section 10.08 or Section 10.10, except to increase any percentage set forth in such Sections or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security of such series affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 10.10, or the deletion of this proviso, in accordance with the requirements of Section 9.01(8). It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.03. Execution of Supplemental Indentures. ------------------------------------ In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental -63- ================================================================================ indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. Effect of Supplemental Indentures. --------------------------------- Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05. Conformity with Trust Indenture Act. ----------------------------------- Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 9.06. Reference in Securities to Supplemental Indentures. -------------------------------------------------- Securities of either series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of either series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. ARTICLE TEN Covenants SECTION 10.01. Payment of Principal, Premium and Interest. ------------------------------------------ The Company will duly and punctually pay the principal of and premium, if any, and interest on each series of Securities in accordance with the terms of such series of Securities and this Indenture. -64- ================================================================================ SECTION 10.02. Maintenance of Office or Agency. ------------------------------- The Company will maintain in the Borough of Manhattan, The City of New York, New York, an office or agency where Securities of either series may be presented or surrendered for payment or redemption, where Securities of either series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of either series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York, New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, -------- however, that no such designation or rescission shall in any manner relieve the - ------- Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 10.03. Money for Security Payments to be Held in Trust. ----------------------------------------------- If the Company shall at any time act as its own Paying Agent with respect to either series of Securities, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee in writing of its action or failure so to act. As provided in Section 5.04, upon any bankruptcy or reorganization proceeding relative to the Company, the Trustee shall serve as the Paying Agent for the Securities. Whenever the Company shall have one or more Paying Agents for either series of Securities, it will, prior to each due date of the principal of, premium, if any, or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium, if any, or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee in writing of its action or failure so to act. As provided in Section 5.04, upon any -65- ================================================================================ bankruptcy or reorganization proceeding relative to the Company the Trustee shall serve as the Paying Agent for the Securities. The Company will cause each Paying Agent for either series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Securities of that series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment of principal, premium, if any, or interest; (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (4) acknowledge, accept and agree to comply in all respects with the provisions of this Indenture relating to the duties, rights and obligations of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture with respect to either series of Securities or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company on the Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being -------- ------- required to make any such repayment, shall, at the expense of the Company, cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of -66- ================================================================================ Manhattan, The City of New York, New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 10.04. Existence. --------- Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 10.05. Maintenance of Properties. ------------------------- The Company will cause all material properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary or appropriate in connection with its business; provided, however, that nothing in this Section shall prevent the Company from - -------- ------- discontinuing the operation or maintenance of, or selling, abandoning or otherwise disposing of, any of such properties if such discontinuance or disposal is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 10.06. Payment of Taxes and Other Claims. --------------------------------- The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, -------- however, that the Company shall not be required to pay or discharge or cause to - ------- be paid or discharged (i) any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings or (ii) any such tax, assessment, charge or claim which the failure to pay or discharge, individually or in the aggregate with all such other failures, would not have a material adverse effect on the Company and its Subsidiaries taken as a whole. -67- ================================================================================ SECTION 10.07. Provision of Financial Information. ---------------------------------- The Company agrees to furnish the Trustee and file with the Commission, in each case within the time periods specified in the Commission's rules and regulations: (i) all quarterly and annual financial information that would be required to be included in filings with the Commission on Forms 10-Q and 10-K, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Company and its consolidated Subsidiaries (showing in reasonable detail, either on the face of the financial statements or in the footnotes thereto and in "Management's Discussion of Analysis of Financial Condition and Results of Operations," the financial condition and results of operations of the Company and its Subsidiaries) and, with respect to the annual information only, a report thereon by the Company's certified independent accountants; and (ii) all current reports that would be required to be filed with the Commission on Form 8-K. In the event the Company shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company shall nevertheless continue to file such reports with the Commission (unless the Commission will not accept such a filing) and the Trustee for so long as any Securities are outstanding. The Company will furnish copies of the SEC Reports to the Holders of Securities who request it in writing. SECTION 10.08. Provision of Additional Information. ----------------------------------- For so long as any Securities of either series are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act or, if earlier, until two years after the Issue Date, at any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, for the benefit of holders from time to time of Securities of such series, to furnish at its expense, upon request, to holders of Securities such series and prospective purchasers of such securities, information satisfying the requirements of subsection (d)(4)(i) of Rule 144A under the Securities Act. SECTION 10.09. Statement by Officers as to Compliance. -------------------------------------- The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, one of the signers of which shall be the principal executive officer, principal financial officer or principal accounting officer of the Company, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and -68- ================================================================================ observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 10.10. Waiver of Certain Covenants. --------------------------- The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 10.03 to 10.07, inclusive, with respect to the Securities of either series if before or after the time for such compliance the Holders of at least a majority in aggregate principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. SECTION 10.11. Statement by Officers as to Default. ----------------------------------- The Company shall deliver to the Trustee, as soon as possible and in any event within five days after the Company becomes aware of the occurrence of any Event of Default or an event which, with notice or the lapse of time or both, would constitute an Event of Default, an Officers' Certificate setting forth the details of such Event of Default or default and the action which the Company proposes to take with respect thereto. ARTICLE ELEVEN Defeasance and Covenant Defeasance SECTION 11.01. Company's Option to Effect Defeasance or Covenant Defeasance. ------------------------------------------------------------ The Company may, at its option by Board Resolution at any time (subject to 5 Business Day's prior written notification to the Trustee or such lesser period as may be acceptable to the Trustee), elect to have either Section 11.02 or Section 11.03 applied to the Outstanding Securities of either series upon compliance with the conditions set forth below in this Article Eleven. -69- ================================================================================ SECTION 11.02. Defeasance and Discharge. ------------------------ Upon the Company's exercise of its option provided in Section 11.01 to have this Section applied to either series of Securities, the Company shall be deemed to have been discharged from its obligations with respect to the Outstanding Securities of that series on and after the date the conditions precedent set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities of that series which shall thereafter be deemed to be "Outstanding" only for the purposes of the Sections of this Indenture referred to in clauses (1) and (2) of this Section, and to have satisfied all its other obligations under the Securities of that series and this Indenture insofar as the Securities of that series is concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of Outstanding Securities of that series to receive, solely from the trust fund described in Section 11.04 as more fully set forth in such Section, payments of the principal of and premium, if any, and interest on such Securities when such payments are due; (2) the Company's obligations with respect to the Securities of that series under Sections 3.05, 3.06, 10.02 and 10.03 and such obligations as shall be ancillary thereto; (3) the rights, powers, trusts, duties, immunities and other provisions in respect of the Trustee hereunder; and (4) this Article Eleven. Subject to compliance with this Article Eleven, the Company may exercise its option under this Section 11.02 notwithstanding the prior exercise of its option under Section 11.03 with respect to the Securities. Following a defeasance with respect to the Securities of either series, payment of the Securities of that series may not be accelerated because of an Event of Default with respect to such series. SECTION 11.03. Covenant Defeasance. ------------------- Upon the Company's exercise of its option with respect to either series of Securities provided in Section 11.01 applicable to this Section, the Company shall be released from its obligations under Section 8.01 and any Event of Default applicable to the Securities of such series shall not be deemed to be an Event of Default with respect to the Outstanding Securities of such series on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Securities of such series -70- ================================================================================ shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with Section 8.01, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Securities of that series, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or such other covenant whether directly or indirectly by reason of any reference elsewhere herein to any such Section or such other covenant or by reason of any reference in any such Section or such other covenant to any other provision herein or in any other document, but the remainder of this Indenture and the Securities of such series shall be unaffected thereby. SECTION 11.04. Conditions to Defeasance or Covenant Defeasance. ----------------------------------------------- The following shall be the conditions precedent to application of either Section 11.02 or Section 11.03 to the Outstanding Securities of either series: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 who shall agree to comply with the provisions of this Article Eleven applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series, (A) money in an amount (in such currency, currencies or currency units in which the Securities of such series are then specified as payable at Maturity), or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof in an amount, sufficient, without reinvestment, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (i) the principal of and premium, if any, and interest on the Outstanding Securities of that series on the Maturity of such principal, premium, if any, or interest; (2) No Event of Default with respect to the Securities of that series or event which with notice or lapse of time or both would become an Event of Default with respect to the Securities of that series shall have occurred and be continuing (A) on the date of such deposit or (B) insofar as subsections 5.01(5) and (6) are concerned, at any time during the period ending on the 91st day after the date of such deposit or, if longer, ending on the day following the expiration of the longest preference period applicable to the Company in respect of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); -71- ================================================================================ (3) Such defeasance or covenant defeasance shall not (A) cause the Trustee for the Securities of that series to have a conflicting interest as defined in Section 6.08 or for purposes of the Trust Indenture Act with respect to any securities of the Company or (B) result in the trust arising from such deposit to constitute, unless it is qualified as, a regulated investment company under the Investment Company Act of 1940, as amended; (4) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound; (5) In the case of an election under Section 11.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities of that series will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (6) In the case of an election under Section 11.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities of that series will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (7) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 11.02 or the covenant defeasance under Section 11.03 (as the case may be) have been complied with. SECTION 11.05. Deposited Money and U.S. Government Obligations to Be Held in ------------------------------------------------------------- Trust; Other Miscellaneous Provisions. ------------------------------------- Subject to the provisions of the last paragraph of Section 10.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee or other qualifying trustee (collectively, for purposes of this Section 11.05, the "Trustee") pursuant to Section 11.04 in respect of the Outstanding Securities of either series shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities of such series and this Indenture, to the payment, either directly or -72- ================================================================================ through any Paying Agent (but not including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of the Securities of such series, of all sums due and to become due thereon in respect of principal and premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the money or U.S. Government Obligations deposited pursuant to Section 11.04 or the principal and interest received in respect thereof. Anything herein to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 11.04 which in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. SECTION 1.01. Reinstatement. ------------- If the Trustee or the Paying Agent is unable to apply any money in accordance with Section 11.02 or 11.03 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities of such series shall be revived and reinstated as though no deposit had occurred pursuant to this Article Eleven until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 11.02 and 11.03; provided, however, that if the Company makes any payment of -------- ------- principal of and premium, if any, or interest on any Security of such series following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or the Paying Agent. SECTION 1.02. Repayment to Company. -------------------- Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company on a Company Request for such payment, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or -73- ================================================================================ such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the -------- ------- Trustee or such Paying Agent, before being required to make any such repayment, shall, at the expense of the Company, cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. ARTICLE TWELVE Redemption of Securities SECTION 12.01. Right of Redemption. ------------------- The Securities may be redeemed in accordance with the provisions of the form of the Securities set forth in Sections 2.02 and 2.03. SECTION 12.02. Applicability of Article. ------------------------ Redemption of Securities of either series at the election of the Company pursuant to any provision of the Securities of such series or this Indenture, shall be made in accordance with such provision and this Article Twelve. SECTION 12.03. Election to Redeem; Notice to Trustee. ------------------------------------- The election of the Company to redeem any Securities pursuant to Section 12.01 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of any of the Securities of either series, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date. SECTION 12.04. Selection by Trustee of Securities to Be Redeemed. ------------------------------------------------- If less than all the Securities of either series are to be redeemed, the particular Securities of such series to be redeemed shall be selected by the Trustee within five Business Days after it receives the notice described in Section 12.03, from the -74- ================================================================================ Outstanding Securities of such series not previously called for redemption, by lot or by such other method as the Trustee may deem fair and appropriate. The Trustee shall promptly notify the Company and the Security Registrar in writing of the Securities of either series selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities of either series redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 12.05. Notice of Redemption. -------------------- Notice of redemption shall be given in the manner provided in Section 1.06 to the Holders of Securities to be redeemed not less than 30 nor more than 60 days prior to the Redemption Date, and such notice shall be irrevocable. All notices of redemption shall state: (a) the Redemption Date, (b) the Redemption Price, and accrued interest (including Additional Interest, if any), if any, to the Redemption Date, (c) if less than all Outstanding Securities of either series are to be redeemed, the aggregate principal amount of Securities of such series to be redeemed and the aggregate principal amount of Securities of such series which will be outstanding after such partial redemption, (d) that on the Redemption Date the Redemption Price, and accrued interest (including Additional Interest, if any), if any, to the Redemption Date, will become due and payable upon each such Security to be redeemed, and that interest thereon shall cease to accrue on and after said date, and (e) the place or places where such Securities are to be surrendered for payment of the Redemption Price and accrued interest (including Additional Interest, if any), if any, to the Redemption Date. In case of a partial redemption, the notice shall specify the serial and CUSIP numbers (if any) and the portions thereof called for redemption and that transfers and exchanges may occur on or prior to the Redemption Date. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's written request, by the Trustee in the name of and at the expense of the Company. Notice of redemption of Securities to be -75- ================================================================================ redeemed at the election of the Company received by the Trustee shall be given by the Trustee to each Paying Agent in the name of and at the expense of the Company. SECTION 12.06. Deposit of Redemption Price. --------------------------- On or prior to the Redemption Date, the Company shall deposit with the Trustee (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money (which shall be in immediately available funds on such Redemption Date) sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest (including Additional Interest, if any) to the Redemption Date on all the Securities which are to be redeemed on that date. SECTION 12.07. Securities Payable on Redemption Date. ------------------------------------- Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price, including accrued interest) such Securities shall cease to bear interest. Upon surrender of any Security for redemption in accordance with said notice such Security shall be paid by the Company at the Redemption Price together with accrued and unpaid interest (including Additional Interest, if any) to the Redemption Date; provided, however, that installments of interest on Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Record Date according to their terms and the provisions of Section 3.07. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal amount of, premium, if any, and, to the extent permitted by applicable law, accrued interest on such Security shall, until paid, bear interest from the Redemption Date at the rate of interest then accruing on the principal of such Security. Any Security that is to be redeemed only in part shall be surrendered at the Corporate Trust Office or an office or agency of the Company designated for that purpose pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ---------- -76- ================================================================================ This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -77- ================================================================================ IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. THE GAP, INC. By /s/ SABRINA SIMMONS ------------------- Name: Sabrina Simmons Title: Vice President and Treasurer THE BANK OF NEW YORK, not in its individual capacity but solely as Trustee By /s/ MICHAEL PITFICK ------------------- Name: Michael Pitfick Title: Assistant Treasurer -78- ================================================================================ ANNEX A- Form of Regulation S Certificate REGULATION S CERTIFICATE (For transfers pursuant to Section .3.05(b)(i), (iii) and (v) of the Indenture) The Bank of New York, as Trustee 20 Broad Street, Lower Level Attention: Corporate Trust Reorg. Department New York, New York 10005 Re: [8.15% Notes due December 15, 2005] [8.80% Notes due December 15, ----------------------------------------------------------------- 2008] of The Gap, Inc. (the "Securities") ----------------------------------------- Reference is made to the Indenture, dated as of November 21, 2001 (the "Indenture"), between The Gap, Inc. (the "Company") and The Bank of New York, as Trustee. Terms used herein and defined in the Indenture or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as amended (the "Securities Act") are used herein as so defined. This certificate relates to U.S. $ principal amount of ------------ Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s). --------------------------- CERTIFICATE No(s). --------------------- The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner." If the Specified Securities are represented by a Global Security, they are held through the Depositary or an Agent Member in the name of the Undersigned, as or on behalf of the Owner. If the Specified Securities are not represented by a Global Security, they are registered in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be transferred to a person (the "Transferee") who will take delivery in the form of a Regulation S Security. In connection with such transfer, the Owner hereby certifies that, unless such transfer is A-1 ================================================================================ being effected pursuant to an effective registration statement under the Securities Act, it is being effected in accordance with Rule 904 or Rule 144 under the Securities Act and with all applicable securities laws of the states of the United States and other jurisdictions. Accordingly, the Owner hereby further certifies as follows: (1) Rule 904 Transfers. If the transfer is being effected in accordance with Rule 904: (A) the Owner is not a distributor of the Securities, an affiliate of the Company or any such distributor or a person acting on behalf of any of the foregoing; (B) the offer of the Specified Securities was not made to a person in the United States; (C) either: (i) at the time the buy order was originated, the Transferee was outside the United States or the Owner and any person acting on its behalf reasonably believed that the Transferee was outside the United States, or (ii) the transaction is being executed in, on or through the facilities of the Eurobond market, as regulated by the Association of International Bond Dealers, or another designated offshore securities market and neither the Owner nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States; (D) no directed selling efforts have been made in the United States by or on behalf of the Owner or any affiliate thereof; (E) if the Owner is a dealer in securities or has received a selling concession, fee or other remuneration in respect of the Specified Securities, and the transfer is to occur during the Restricted Period, then the requirements of Rule 904(c)(1) have been satisfied; and (F) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. (2) Rule 144 Transfers. If the transfer is being effected pursuant to ------------------ Rule 144: (A) the transfer is occurring after a holding period of at least one year (computed in accordance with paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the A-2 ================================================================================ Company or from an affiliate of the Company, whichever is later, and is being effected in accordance with the applicable amount, manner of sale and notice requirements of Rule 144; or (B) the transfer is occurring after a holding period of at least two years has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Company. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and the Purchasers. Dated: (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By: -------------------------------------------------- Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) A-3 ================================================================================ ANNEX B - Form of Restricted Securities Certificate RESTRICTED SECURITIES CERTIFICATE (For transfers pursuant to Section .3.05(b)(ii), (iii), (iv) and (v) of the Indenture) The Bank of New York, as Trustee 20 Broad Street, Lower Level Attention: Corporate Trust Reorg. Department New York, New York 10005 Re: [8.15% Notes due December 15, 2005] [8.80% Notes due December 15, ----------------------------------------------------------------- 2008] of The Gap, Inc. (the "Securities") ----------------------------------------- Reference is made to the Indenture, dated as of November 21, 2001 (the "Indenture"), between The Gap, Inc. (the "Company") and The Bank of New York, as Trustee. Terms used herein and defined in the Indenture or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as amended (the "Securities Act") are used herein as so defined. This certificate relates to U.S. $ principal amount of ------------- Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s). --------------------------- CERTIFICATE No(s). --------------------- The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner." If the Specified Securities are represented by a Global Security, they are held through the Depositary or an Agent Member in the name of the Undersigned, as or on behalf of the Owner. If the Specified Securities are not represented by a Global Security, they are registered in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be transferred to a person (the "Transferee") who will take delivery in the form of a Restricted Security. In connection with such transfer, the Owner hereby certifies that, unless such transfer is being effected pursuant to an effective registration statement under the Securities Act, it is being effected in accordance with Rule 144A or Rule 144 under the Securities Act and B-1 ================================================================================ all applicable securities laws of the states of the United States and other jurisdictions. Accordingly, the Owner hereby further certifies as follows: (1) Rule 144A Transfers. If the transfer is being effected in accordance with Rule 144A: (A) the Specified Securities are being transferred to a person that the Owner and any person acting on its behalf reasonably believe is a "qualified institutional buyer" within the meaning of Rule 144A, acquiring for its own account or for the account of a qualified institutional buyer; and (B) the Owner and any person acting on its behalf have taken reasonable steps to ensure that the Transferee is aware that the Owner may be relying on Rule 144A in connection with the transfer. (2) Rule 144 Transfers. If the transfer is being effected pursuant to Rule 144: (A) the transfer is occurring after a holding period of at least one year (computed in accordance with paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and is being effected in accordance with the applicable amount, manner of sale and notice requirements of Rule 144; or (B) the transfer is occurring after a holding period of at least two years has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Company. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and the Purchasers. Dated: (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By: ----------------------------------------- Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) B-2 ================================================================================ ANNEX C - Form of Unrestricted Securities Certificate UNRESTRICTED SECURITIES CERTIFICATE (For removal of Securities Act Legends pursuant to Section .3.05(c)) The Bank of New York, as Trustee 20 Broad Street, Lower Level Attention: Corporate Trust Reorg. Department New York, New York 10005 Re: [8.15% Notes due December 15, 2005] [8.80% Notes due December 15, ----------------------------------------------------------------- 2008] of The Gap, Inc. (the "Securities") ----------------------------------------- Reference is made to the Indenture, dated as of November 21, 2001 (the "Indenture"), between The Gap, Inc. (the "Company") and The Bank of New York, as Trustee. Terms used herein and defined in the Indenture or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as amended (the "Securities Act") are used herein as so defined. This certificate relates to U.S. $ principal amount of ------------- Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s). --------------------------- CERTIFICATE No(s). --------------------- The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner." If the Specified Securities are represented by a Global Security, they are held through the Depositary or an Agent Member in the name of the Undersigned, as or on behalf of the Owner. If the Specified Securities are not represented by a Global Security, they are registered in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be exchanged for Securities bearing no Securities Act Legend pursuant to Section 3.05(c) of the Indenture. In connection with such exchange, the Owner hereby certifies that the exchange is occurring after a holding period of at least two years (computed in accordance with C-1 ================================================================================ paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Company. The Owner also acknowledges that any future transfers of the Specified Securities must comply with all applicable securities laws of the states of the United States and other jurisdictions. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and the Purchasers. Dated: (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By: ----------------------------------------- Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) C-2 ================================================================================ EX-10.8 4 dex108.txt EXECUTIVE MANAGEMENT INCENTIVE CASH AWARD PLAN Exhibit 10.8 THE GAP, INC. EXECUTIVE MANAGEMENT INCENTIVE CASH AWARD PLAN (January 28, 2002 Amendment and Restatement) 1. Purpose of the Plan ------------------- The purpose of the Executive Management Incentive Cash Award Plan (the "Plan") is to provide financial incentives for certain of the Company's officers to meet and exceed the Company's annual financial goals. The Plan is intended to qualify as "performance-based compensation" under Code section 162(m). 2. Definitions ----------- 2.1 "Affiliated Company" means any company controlling, controlled by, or under common control with the Company. 2.2 "Award" means a cash award pursuant to the provisions of the Plan. 2.3 "Base Salary" means, as to a Fiscal Period, a Participant's average actual annual salary rate during the Fiscal Period, based on the numbers of days at each actual salary rate, but assuming that the actual salary rate in effect immediately after focal review in the Spring of the current Fiscal Year had been in effect on the first day of the Fiscal Period. Such salary shall be before (1) deductions for taxes and benefits, and (2) deferrals of compensation pursuant to Company-sponsored plans. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. 2.5 "Committee" means the Compensation and Stock Option Committee of the Company's Board of Directors, or any other Committee appointed by the Board pursuant to Section 3 of the Plan. 2.6 "Company" means The Gap, Inc., a Delaware corporation. 2.7 "Comparable Store Sales Growth" means the Company's or a division's same store net sales growth for the Fiscal Period in excess of the prior year. 2.8 "Determination Date" means, as to a Fiscal Period, the latest date possible which will not jeopardize the Plan's qualification as "performance-based compensation" under Code section 162(m). 2.9 "Earnings" shall mean either: (i) operating income of the Company or one of its divisions for a given Fiscal Period less certain allocated expenses (e.g., headquarters, distribution 1 centers, etc.); or (ii) income before interest and taxes of the Company or one of its divisions; provided that prior to the Determination Date the Committee shall determine (1) whether Earnings will be measured under clause (i) or (ii), and (2) whether any significant adjustments should be made to the calculation. Non-recurring or unusual expenses shall be excluded from the calculation of Earnings. 2.10 "Economic Value Added" means the Company's or a division's Net Operating Profit After Tax (NOPAT) for a given Fiscal Period less Capital Charges. NOPAT means net operating income after taxes. NOPAT for a division includes direct revenues and expenses, but also may include an allocation for shared costs for applicable Information Technology, Distribution, and other services from which the division benefits. Capital Charges means the Company's or a division's Capital Balances multiplied by the Weighted Average Cost of Capital. Divisional Capital Balances include division specific assets and liabilities, the present value of operating leases, and also may include an allocation for shared assets and shared liabilities. Total Company Capital Balances includes most assets, the present value of operating leases less most non-interest bearing liabilities. The Committee (prior to the Determination Date) determines the measures of NOPAT, and Capital Balances. 2.11 "Fiscal Period" means any Fiscal Year of the Company or any portion thereof as determined by the Committee. 2.12 "Fiscal Year" means any fiscal year of the Company. 2.13 "Officer" means an officer (whether or not a member of the Company's Board of Directors) employed by the Company or any Affiliated Company. 2.14 "Participant" means as to any Fiscal Period, an Officer who has been selected by the Committee for participation in the Plan for such Fiscal Period. 2.15 "Performance Goals" means the goal(s) (or combined goal(s)) determined by the Committee (in its sole discretion) to be applicable to a Participant for a Fiscal Period. As determined by the Committee, the Performance Goals applicable to each Participant shall provide for a targeted level or levels of achievement using one or more of the following measures: (a) Comparable Store Sales Growth, (b) Earnings, (c) Return on Equity, (d) Return on Net Assets, (e) Sales Volume, (f) Total Sales, and (g) Economic Value Added. As determined in the discretion of the Committee, the Performance Goals for any Fiscal Period may differ from Participant to Participant, relate to performance on a Company-wide or divisional basis, and/or provide for a comparison of actual performance by the Company or a division to actual performance by a group of competitors determined in the discretion of the Committee. For each Fiscal Period, the Performance Goals applicable to each Participant shall be set forth in writing on or prior to the Determination Date. 2.16 "Return on Equity" means the Company's or a division's Earnings for the Fiscal Period expressed as a percentage of the Company's or a division's average shareholders' equity over the Fiscal Period. 2 2.17 "Return on Net Assets" means the Company's or a division's Earnings for the Fiscal Period expressed as a percentage of the Company's or a division's average assets over the Fiscal Period. 2.18 "Sales Volume" means the total sales volume per store of the Company or one of its divisions for the Fiscal Period. 2.19 "Termination of Employment" means the time when the employee- employer relationship between the Participant and the Company and its Affiliated Companies is terminated for any reason, including, but not limited to, a termination by resignation, discharge, death, permanent disability, retirement, or the disaffiliation of an Affiliated Company, but excluding any such termination where there is a simultaneous reemployment by either the Company or one of its Affiliated Companies. 2.20 "Total Sales" means the Company's or a division's net sales for the Fiscal Period. 2.21 "Weighted Average Cost of Capital" (or "WACC") means the weighted average of the Company's cost of debt and cost of capital. The weighting is determined by comparing the balance of the Company's debt (acquired debt plus capitalized leases) to the balance of the Company's equity based upon market value (rather than book value). 3. Administration of the Plan -------------------------- 3.1 The Plan shall be administered by the Committee, which shall consist of no fewer than two members of the Company's Board of Directors, who shall be appointed and serve at the pleasure of the Company's Board of Directors. No member of the Company's Board of Directors who is not an "outside director" under Code section 162(m) shall serve on the Committee. 3.2 Subject to the provisions of the Plan, the Committee shall have exclusive authority to select the Participants, and to determine the target Award levels, the applicable Fiscal Period, the times when Awards will be granted, and the Performance Goals which must be achieved prior to payment of any Awards. For each Fiscal Period, all actions by the Committee shall be taken by the Determination Date. 3.3 The Committee shall have all discretion and authority necessary or appropriate to administer the Plan, including, but not limited to, the power to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable in the administration of the Plan, and such determination shall be final and binding upon all persons having an interest in the Plan. 3.4 A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at a meeting at which a quorum is present or any action taken without a 3 meeting by a writing executed by a majority of the Committee shall constitute the act of the Committee. 3.5 All expenses and liabilities incurred by the Committee in the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, or other persons. The Committee and the Company and its officers and directors shall be entitled to rely upon the advice, opinion, or valuations of any such persons. No member of the Committee shall be personally liable for any action, determination, or interpretation taken or made with respect to the Plan, unless such action, determination, or interpretation constitutes criminal misconduct or willful negligence or demonstrates bad faith, and all members of the Committee shall be fully protected by the Company in respect of any such action, determination or interpretation. 4. Eligibility and Participation ----------------------------- The Plan is designed for Officers whose responsibilities significantly influence Company results. Participants shall be selected by the Committee prior to or on the Determination Date. Participation in the Plan is on a Fiscal Period basis and in the sole discretion of the Committee. Thus, an Officer who is selected for participation in a given Fiscal Period is in no way guaranteed to be selected for participation in any subsequent Fiscal Period or Fiscal Periods. 5. Determination of Awards ----------------------- 5.1 Prior to or on the Determination Date, the Committee, in its sole discretion, shall assign each Participant a target Award expressed as a percentage of Base Salary. The maximum percentage of Base Salary that may be assigned to any Participant is such percentage, which when added to the aggregate percentage used for such Participant for all other Fiscal Periods within a given Fiscal Year under Section this Section 5.1, that does not exceed 100%. 5.2 On or prior to the Determination Date, the Committee, in its sole discretion, shall establish a payout table or formula for purposes of determining the Award (if any) payable to each Participant. Each payout formula or table shall (a) be in writing, (b) be based on a comparison of actual performance to the Performance Goals, (c) provide for the payment of a Participant's target Award if the Performance Goals for the Fiscal Period are achieved, and (d) provide for an actual Award greater than or less than the Participant's target Award, depending upon the extent to which actual performance exceeds or falls below the Performance Goals. 5.3 After the end of each Fiscal Period, the Committee shall certify in writing the extent to which the Performance Goals applicable to each Participant for the Fiscal Period were achieved or exceeded. The actual Award for each Participant shall be determined by applying the formula established pursuant to Section 5.2 of the Plan to the level of actual performance that has been certified by the Committee. However, each Participant's actual Award (if any) shall be subject to the maximum provided in Section 6. 4 5.4 No Awards shall be paid to a Participant for a Fiscal Period unless at least the minimum actual performance for the Fiscal Period specified by the Committee pursuant to Section 5.2 of the Plan is achieved. 5.5 The Committee, in its sole discretion, may eliminate any Participant's Award, or reduce it below that which otherwise would be payable in accordance with the Plan. 6. Maximum Award Payable --------------------- The maximum aggregate Award(s) payable to any Participant under the Plan with respect to all Fiscal Periods of a given Fiscal Year shall be $5,000,000. 7. Payment of Award ---------------- 7.1 Except as provided in Section 7.2 of the Plan or as otherwise determined by the Committee, payment of Awards (if any) for a Fiscal Period will be made in cash or its equivalent on or about the date ten weeks following the end of the Fiscal Period. 7.2 Unless otherwise specifically determined by the Committee, a Participant actually will be entitled to payment of an Award only if the Participant is an Officer on the date of payment (except to the limited extent provided in the following sentence). If, after the completion of a Fiscal Period, a Participant incurs a Termination of Employment due to death or permanent disability, the Participant still shall be entitled to the payment of any Award for such Fiscal Period otherwise payable to the Participant (subject to Section 5.5). In the event an Award is payable to a Participant subsequent to the Participant's death, such payment shall be made to the Participant's estate. 7.3 The Company shall withhold all applicable income and other taxes from any Award payment to any Participant, including any federal, FICA, state and local taxes. 7.4 Each Award shall be payable solely from the general assets of the Company. Each Participant's right to payment of an Award (if any) shall be solely as an unsecured general creditor of the Company. 8. Employment Rights ----------------- Nothing in the Plan shall confer upon any Participant the right to continue in the employ of the Company or its Affiliated Companies or shall interfere with or restrict in any way the rights of the Participant's employer to discharge or change the terms of employment of any Participant at any time for any reason whatsoever, with or without cause. 9. Effect on Other Plans --------------------- The adoption of the Plan shall not affect any other equity or other compensation or incentive plan in effect for the Company or any Affiliated Company, and the Plan shall not 5 preclude the Company's Board of Directors from establishing any other forms of incentive compensation for Officers. 10. Amendment, Suspension or Termination of the Plan ------------------------------------------------ The Board, in its sole discretion, may alter, amend, or terminate the Plan or any part thereof at any time and for any reason; provided, however, that if and to the extent required to ensure the Plan's qualification under Code section 162(m) as "performance-based compensation", any such amendment shall be subject to stockholder approval. 11. Effective Date -------------- The Plan originally was effective as of March 21, 1995. The Plan was amended and restated effective as of January 25, 2000, and approved by a majority of the shares of the common stock of the Company that were present in person or by proxy and entitled to vote at the 2000 Annual Meeting of Shareholders. This amended and restated Plan is effective as of January 28, 2002. 6 EX-10.20 5 dex1020.txt FORM OF RESTRICTED STOCK AGREEMENT Exhibit 10.20 Grant No. ----- THE GAP, INC. RESTRICTED STOCK AWARD AGREEMENT The Gap, Inc. (the "Company") hereby grants to_______________ (the "Employee"), an award of Restricted Stock under The Gap, Inc. 1996 Stock Option and Award Plan (the "Plan"). This award is subject to all of the terms and conditions contained in this Agreement, including the terms and conditions contained in the attached Appendix A. The date of this Agreement is __________. Subject to the provisions of Appendix A and of the Plan, the principal features of this award are as follows: Number of Shares: ---------------- _____ Date of Grant: ------------- _____ Date(s) Restrictions on Shares Scheduled to Lapse: ------------------------- _____ As provided in the Plan and in this Agreement, this award may terminate before the restrictions on all or part of the shares lapse. For example, if Employee's employment ends before the date the restrictions lapse, this award will terminate and the shares awarded shall revert to the Company. See paragraph 4 of Appendix A for further information concerning how changes in employment affect termination of this award. IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement, in duplicate, to be effective as of the date first above written. THE GAP, INC. Dated:_____ __________________________________________ Millard S. Drexler President and Chief Executive Officer My signature below indicates that I understand that this award is subject to all of the terms and conditions of this Agreement (including the attached Appendix A) and of the Plan. EMPLOYEE Dated: ____________ ___________________________________ Address: __________________________ __________________________ Social Security #: ________________ 1 of 3 APPENDIX A TERMS AND CONDITIONS OF RESTRICTED STOCK AWARD 1. Grant of Award. The Company hereby grants to Employee for past -------------- services and as a separate incentive in connection with his or her employment and not in lieu of any salary or other compensation for his or her services, an award of the number of restricted shares of common stock of the Company, $0.05 par value, set forth on page 1 of this Agreement, which shares of Restricted Stock shall be granted on the date hereof, subject to all the terms and conditions in this Agreement and the Plan. 2. Shares held in Escrow. Unless and until the restrictions on the --------------------- shares of Restricted Stock shall have lapsed in the manner set forth in paragraph 3 below, such shares shall be issued in the name of Employee and held by the Secretary of the Company as escrow agent (the "Escrow Agent"), and shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. The Company may instruct the transfer agent for its common stock to place a legend on the certificates representing the Restricted Stock or otherwise note its records as to the restrictions on transfer set forth in this Agreement and the Plan. The certificate or certificates representing such shares shall be delivered by the Escrow Agent to Employee only after the restrictions on such shares have lapsed and all other terms and conditions in this Agreement have been satisfied. 3. Lapse of Restrictions. Subject to the provisions of paragraph 3(b), --------------------- the restrictions on the shares of Restricted Stock awarded by this Agreement shall lapse with respect to a number of shares on a date (the "Lapse Date") determined under paragraph 3(a). (a) The Lapse Date shall be as set forth on page 1 of this Agreement. (b) If compliance with a trading restriction imposed by the Company's policy prohibiting trading on undisclosed material information, as set forth in the Company's Securities Law Compliance Manual (the "Insider Trading Policy") would prohibit Employee from selling any shares of the Company's common stock on a Lapse Date set forth in paragraph 3(a), then the Lapse Date with respect to that number of shares which would otherwise become vested pursuant to paragraph 3(a) shall be the earlier of (i) the first subsequent day on which both (A) the Company's common stock is traded on a national securities exchange within the meaning of Section 6 of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") (such as the New York Stock Exchange) or a national market system within the meaning of Section 11A of the Exchange Act and (B) on which Employee may sell shares of the Company's common stock without violating the Insider Trading Policy, or (ii) in the event of the Employee's involuntary termination, the first subsequent day following termination which satisfies both conditions (A) and (B) above, but no later than the date three (3) months following the date of termination.. 4. Termination of Service or Change in Status. The shares of ------------------------------------------ Restricted Stock as to which restrictions have not lapsed at the time of Employee's Termination of Service shall thereupon be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company. Notwithstanding paragraph 3 or any other provision of this Agreement, prior to the date the restrictions on the shares of Restricted Stock awarded by this Agreement are deemed to have lapsed, the Committee, in its sole discretion, may determine that such restrictions shall never lapse as to all or part of the shares specified in paragraph 1 (and as adjusted pursuant to paragraph 10, if appropriate), in which case the award shall terminate as to such shares and such shares shall thereupon be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company. The Committee shall exercise such power only if the Committee, in its sole discretion, determines that (a) Employee's employment with the Company or an Affiliate has been reduced to less than a full-time basis, and/or (b) Employee has transferred to a position which, under the Committee's then existing policy, normally would not qualify Employee to be granted an award of Restricted Stock or to be granted an award of the number of shares of Restricted Stock granted under this Agreement. Employee hereby appoints the Escrow Agent with full power of substitution, as Employee's true and lawful attorney-in-fact with irrevocable power and authority in the name and on behalf of Employee to take any action and execute all documents and instruments, including, without limitation, stock powers which may be necessary to transfer the certificate or certificates evidencing such unvested shares to the Company upon such Termination of Service or determination by the Committee. 5. Continuous Employment Required. Restrictions on shares of ------------------------------ Restricted Stock shall not lapse in accordance with any of the provisions of this Agreement unless Employee shall have been continuously employed by the Company or by one of its Affiliates from the date of the award until the date such restrictions are deemed to have lapsed. 6. Withholding Taxes. Notwithstanding anything in this Agreement to ----------------- the contrary, no certificate representing Restricted Stock may be released from the escrow established pursuant to paragraph 2 of this Agreement unless and until Employee shall have delivered to the Company or its designated Affiliate, the full amount of any federal, state or local income and other taxes which the Company or such Affiliate may be required by law to withhold with respect to such shares. 7. Beneficiary Designation. Any distribution or delivery to be made to ----------------------- Employee under this Agreement shall, if the Employee is then deceased, be made to the Employee's designated beneficiary, or if no such beneficiary survives the Employee, the person or persons entitled to such distribution or delivery under the Employee's will or, if the Employee shall fail to make testamentary disposition of such property, the executor of his or her estate. In order to be effective, a beneficiary designation must be made by the Employee in a form and manner acceptable to the Committee. Any transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer. 8. Conditions to Issuance of Shares. The shares of stock deliverable -------------------------------- to Employee may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. The Company shall not be required to issue any certificate or certificates for shares of stock hereunder prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other 2 of 3 qualification of such shares under any State or Federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any State or Federal governmental agency, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the date of grant of the Restricted Stock as the Committee may establish from time to time for reasons of administrative convenience. 9. Rights as Stockholder. Except as otherwise provided in this --------------------- Agreement, after the date of this Agreement, Employee shall have all rights of a stockholder of the Company with respect to voting such shares and receipt of dividends and distributions on such shares. 10. Changes in Stock. In the event that as a result of a stock ---------------- dividend, stock split, reclassification, recapitalization, combination of shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other reorganization, the Company's common stock shall be increased, reduced or otherwise changed, and by virtue of any such change Employee shall in his or her capacity as owner of unvested shares of Restricted Stock which have been awarded to him or her (the "Prior Shares") be entitled to new or additional or different shares of stock or securities (other than rights or warrants to purchase securities), such new or additional or different shares or securities shall thereupon be considered to be unvested Restricted Stock and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. If an Employee receives rights or warrants with respect to any Prior Shares, such rights or warrants may be held or exercised by the Employee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants shall be considered to be unvested Restricted Stock and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. 11. Plan Governs. This Agreement is subject to all the terms and ------------ provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Terms used in this Agreement that are not defined in this Agreement shall have the meaning set forth in the Plan. 12. Committee Authority. The Committee shall have the power to ------------------- interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon Employee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 13. No Right to Continued Employment. The Employee understands and -------------------------------- agrees that this Agreement does not impact in any way the right of the Company, or the Affiliate employing the Employee, as the case may be, to terminate or change the terms of the employment of the Employee at any time for any reason whatsoever, with or without good cause. The Employee understands and agrees that his or her employment is "at-will" and that either the Company or the Employee may terminate Employee's employment at any time and for any reason. Employee also understands and agrees that his or her "at-will" status can only be changed by an express written contract signed by an authorized officer of the Company and the Employee. 14. Non-Transferability of Award. Except as otherwise herein provided, ---------------------------- the Restricted Stock herein granted and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of such award, or of any right or privilege conferred hereby, contrary to the provisions hereof, or upon any attempted sale under any execution, attachment or similar process upon the rights and privileges conferred hereby, such award and the rights and privileges conferred hereby shall immediately become null and void. 15. Binding Agreement. Subject to the limitation on the ----------------- transferability of the Restricted Stock contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of Employee and the Company. 16. Addresses for Notices. Any notice to be given to the Company under --------------------- the terms of this Agreement shall be addressed to the Company, in care of its Law Department, at The Gap, Inc., One Harrison, San Francisco, California 94105, or at such other address as the Company may hereafter designate in writing. Any notice to be given to the Employee shall be addressed to the Employee at the address set forth beneath the Employee's signature hereto, or at such other address as the Employee may hereafter designate in writing. Any such notice shall be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, registered or certified and deposited, postage and registry fee prepaid, in a United States post office. 17. Captions. Captions provided herein are for convenience only and -------- are not to serve as a basis for interpretation or construction of this Agreement. 18. Agreement Severable. In the event that any provision in this ------------------- Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. * * * 3 of 3 EX-13 6 dex13.txt PORTIONS OF THE REGISTRANT'S ANNUAL REPORT 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 - ---------------------------------------------------------------------------------------------------------------------------------- Per Share Data - ---------------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------------- Financial Position ($ in thousands) - ---------------------------------------------------------------------------------------------------------------------------------- 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% - ---------------------------------------------------------------------------------------------------------------------------------- Statistics - ---------------------------------------------------------------------------------------------------------------------------------- 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 $.0222 per share declared in January 2002 but paid in the first quarter of fiscal 2002. (c) Long-term debt includes current installments. (d) Since the beginning of fiscal 2000, Gap brand stores have been reported based on concepts. Any Gap Adult, GapKids, babyGap or GapBody that meets a certain square footage threshold has been counted as a store, even when residing within a single physical location. The number of stores by location at the end of fiscal 2001 and 2000 was 3,097 and 2,848, respectively. (e) Based on weighted-average gross square footage. GAP INC. ANNUAL REPORT 2001 14 10-YEAR SELECTED FINANCIAL DATA (continued)
- ------------------------------------------------------------------------------------------------------------------------------------ Operating Results ($ in thousands) 1998 (52) 1997 (52) 1996 (52) 1995 (53) - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ Per Share Data - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ Financial Position ($ in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ 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% - ------------------------------------------------------------------------------------------------------------------------------------ Statistics - ------------------------------------------------------------------------------------------------------------------------------------ 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 - -------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------------------------------------- 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 EX-21 7 dex21.txt SUBSIDIARIES OF REGISTRANT Exhibit 21 Banana Republic (Apparel) Inc. California Banana Republic (California) LLC Delaware Banana Republic (East) L.P. California Banana Republic (Florida) LLC California Banana Republic (Holdings) Inc. California Banana Republic (ITM) Inc. California Banana Republic (New York) LLC Delaware Banana Republic Direct, Inc. California Banana Republic, Inc. Delaware GPS (Bermuda) Insurance Services Limited Bermuda GPS (Great Britain) Limited England and Wales GPS (Maryland), Inc. Maryland GPS Brand Services, Inc. California GPS Consumer Direct, Inc. California GPS Corporate Facilities, Inc. California GPS Employee Services, Inc. California GPS Management Services, Inc. California GPS Park Restaurant, Inc. California GPS Real Estate, Inc. California GPS Realty Company Inc. Delaware GPS Sourcing (South Africa) (Proprietary) Limited Durban, South Africa GPSDC (CADC) LLC California GPSDC (Fresno) LLC California GPSDC (New York) Inc. Delaware GPSDC (WDC) LLC California Gap (Apparel), Inc. California Gap (Canada) Inc. Canada Gap (Deutschland) GmbH Dusseldorf, Germany Gap (ESO) Limited England and Wales Gap (Florida) LLC California Gap (France) S.A.S. Paris, France Gap (Georgia) L.P. California Gap (ITM) Inc. California Gap (Indiana) L.P. California Gap (Ireland) Limited Dublin, Ireland Gap (Japan) K.K. Tokyo, Japan Gap (Kentucky) L.P. California Gap (Netherlands) B.V. Amsterdam, The Netherlands Gap (Puerto Rico), Inc. Puerto Rico Gap (RHC) B.V. Amsterdam, The Netherlands Gap (Tennessee) L.P. California Gap (Texas) L.P. California Gap (UK Distribution) Limited England and Wales Gap (UK Holdings) Limited England and Wales Gap (UK Lettings) Limited England and Wales Gap (UK) Limited England and Wales Gap (Wisconsin) L.P. California Gap Direct, Inc. California Gap Holdings, Inc. California Gap International B.V. Amsterdam, The Netherlands Gap International Sourcing (Americas) LLC California Gap International Sourcing (California) Inc. California Gap International Sourcing (Holdings) Limited Hong Kong Gap International Sourcing (Honduras) S.A. de C.V. Honduras Gap International Sourcing (JV) LLC California Gap International Sourcing (Mexico) S.A. de C.V. Mexico Gap International Sourcing (Thailand) Limited Thailand Gap International Sourcing (U.S.A.) Inc. California Gap International Sourcing FZE Free Zone, United Arab Emirates Gap International Sourcing Limited Hong Kong Gap International Sourcing Pte. Ltd. Singapore Gap International Sourcing, Inc. California Gap International Sourcing, Srl. Florence, Italy Gebe S.A.R.L. Paris, France Goldhawk B.V. Amsterdam, The Netherlands La Mer S.A. Paris, France Maravan S.A.R.L. Paris, France Melanie Rennes Saint Germain SARL Paris, France Old Navy (Apparel) Inc. California Old Navy (California) LLC Delaware Old Navy (Canada) Inc. Canada Old Navy (East) L.P. California Old Navy (Florida) LLC California Old Navy (Holdings) Inc. California Old Navy (ITM) Inc. California Old Navy (Puerto Rico) Inc. Puerto Rico Old Navy Direct, Inc. California Old Navy Inc. Delaware The Fisher Gap Stores Inc. California The Gap Limited England and Wales WCB Twenty-Eight Limited Partnership Delaware EX-23 8 dex23.txt CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23 Deloitte & Touche LLP 50 Fremont Street Telephone: (415) 783-4000 San Francisco, California 94105-2230 Facsimile: (415) 783-4329 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of The Gap, Inc. on Form S-8: No. 2-72586, No. 2-60029, No. 33-39089, No. 33-40505, No. 33-54686, No. 33-54688, No. 33-54690, No. 33-56021, No. 333-00417, No. 333-12337, No. 333-36265, No. 333-68285, No. 333-72921, No. 333-76523, No. 333-47508 and No. 333-59292, and Registration No. 333-75416 on Form S-4 of our report dated March 12, 2002, appearing in the Annual Report on Form 10-K of The Gap, Inc. for the fiscal year ended February 2, 2002. /s/ Deloitte & Touche LLP San Francisco, California April 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----