The Gap 2007 Annual Report Download - page 36

with individual members of the Fisher family. During fiscal 2007, approximately 13 million shares were
repurchased for $249 million from the Fisher family. All of the share repurchases were paid for as of February 2,
2008. See Note 15 of Notes to Consolidated Financial Statements for further discussion on the purchase
agreements with the Fisher family.
Dividends
A dividend of $0.08 per share was declared and paid in each quarter of fiscal 2007 and 2006, for an annual
dividend of $0.32 per share. In 2005, a dividend of $0.045 per share was declared and paid in each quarter of
fiscal 2005, for an annual dividend of $0.18.
NOTE 9. SHARE-BASED COMPENSATION
Share-based compensation cost recognized in fiscal 2007 and 2006 included: a) compensation cost for all share-
based awards granted prior to, but not yet vested as of January 28, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS 123, and b) compensation cost for all share-based
awards granted subsequent to January 28, 2006, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123(R). The impact of forfeitures that are estimated to occur prior to vesting is considered
in the amount recognized.
Total share-based compensation expense recognized in the Consolidated Statements of Earnings is as follows:
($ in millions)
52 Weeks Ended
February 2, 2008
53 Weeks Ended
February 3, 2007
52 Weeks Ended
January 28, 2006
Stockoptions.......................................... $14 $29 $ 4
Stockunits ............................................ 34 13 18
Employee stock purchase plan ........................... 4 6 —
Share-based compensation recognized as operating
expenses ........................................... 52 48 22
Less: Income tax benefit ................................. (20) (21) (13)
Share-based compensation, net of taxes . . . . . . . . . . . . . . . . . . . $ 32 $ 27 $ 9
There was no share-based compensation capitalized in fiscal 2007, 2006, and 2005.
Other than the stock option modifications noted below, there were no other material modifications made to our
outstanding stock options and other stock awards in fiscal 2007, 2006, and 2005.
General Description of Stock Option and Other Stock Award Plans
The 1996 Stock Option and Award Plan (the “1996 Plan”) was established on March 26, 1996, and amended and
restated on January 28, 2003. The 1996 Plan was further amended and restated on January 24, 2006 and
renamed the 2006 Long-Term Incentive Plan (the “2006 Plan”). Under the 2006 Plan, nonqualified stock options
and other stock awards are granted to officers, directors, eligible employees and consultants at exercise prices or
with initial values equal to the fair market value of the stock at the date of grant or as determined by the
Compensation and Management Development Committee of the Board of Directors (the “Committee”).
The 2002 Stock Option Plan (the “2002 Plan”) was established on January 1, 1999. On May 9, 2006, the 2002
Plan was discontinued and only those awards then outstanding continue to be subject to the terms of the 2002
Plan under which they were granted. The 2002 Plan empowered the Committee to award nonqualified stock
options to non-officer employees.
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As of February 2, 2008, we had reserved 134,389,044 shares of our common stock for our stock option and other
stock award plans. Stock options generally expire 10 years from the grant date, three months after employee
termination, or one year after the date of an employees’ retirement or death, if earlier. In addition, stock options
generally vest over a four-year period, with shares becoming exercisable in equal annual installments of 25
percent. Other stock awards generally vest over a four year period in equal annual installments of 25 percent.
Shares for options exercised by directors and employees in Japan are issued from treasury stock.
Stock Option and Stock Unit Modifications
In February 2007, the Committee approved the modification of certain stock options and other stock awards held
by designated employees such that at the time of an involuntary termination without cause, any outstanding,
unvested time-based options or other stock awards scheduled to vest within a defined time frame will be
accelerated. No material amounts were recognized in fiscal 2007 as a result of the modification. Additional
compensation expense may be recognized in future periods if the vesting of options or other stock awards is
accelerated pursuant to the modification.
On January 26, 2006, we accelerated the vesting of all stock options with an exercise price equal to or greater
than $21 per share except options held by non-employee directors and performance-based options to purchase
1 million shares granted to our former Chief Executive Officer. Options to purchase approximately 15 million
shares of common stock that were scheduled to vest from fiscal 2006 to 2009 were impacted by this action.
Although these options became immediately exercisable, the exercise price did not change. The primary purpose
of the accelerated vesting was to reduce total share-based compensation expense after the adoption of SFAS
123(R). There was no impact to our Consolidated Statement of Earnings in fiscal 2005.
In December 2005, we finalized our Tender Offer (the “Offer”) to provide eligible employees, including certain
executives, a voluntary opportunity to exchange outstanding, eligible options for new options and, if applicable,
cash payments. The Offer was instituted to allow employees holding eligible options the opportunity to avoid
unfavorable tax consequences. Each eligible option had been granted with a per share exercise price that was
below the fair market value on that option’s original date of grant. Due to Section 409A of the Internal Revenue
Code and regulations under Section 409A, neither of which were in effect or anticipated at the time these options
were granted, these options likely would have resulted in income recognition by the optionee prior to exercise, an
additional twenty percent (20%) income tax, and potential interest charges if they had remained outstanding. In
total, eligible options to purchase 1,968,525 shares of common stock were exchanged for new options with
exercise prices greater than or equal to the original exercise price and with similar vesting periods. Compensation
expense of $4 million was recognized in fiscal 2005 representing the incremental intrinsic value of the new awards
and, for certain new options, the cash consideration. Total cash paid related to the Offer awards for fiscal 2007,
2006, and 2005 was $0.7 million, $6 million, and $4 million, respectively.
Compensation Cost for Stock Options
We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. This model
requires the input of subjective assumptions that have a significant impact on the fair value estimate. The
assumptions for the current period grants were developed based on SFAS 123(R) and the U.S. Securities and
Exchange Commission guidance contained in SAB 107, “Share-Based Payment.” The determination of the fair
value of stock options on the date of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of subjective variables:
• Expected term – The expected term of stock options represents the estimated time until exercise and is
based on historical exercise patterns, which we believe are representative of future behavior.
• Expected volatility – The expected volatility of our common stock is based on a combination of historical
volatility of our stock for a period approximating the expected term and the implied volatility based on traded
options of our stock. Prior to fiscal 2006, only historical volatility was considered.
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