The Gap 2007 Annual Report Download - page 37

• Dividend yield – Dividend yield is based on our expected annual dividend payout for the current fiscal year.
• Risk-free interest rate – The risk-free interest rate is based on zero-coupon U.S. Treasury instruments with a
remaining term equal to the expected term of the awards.
We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting award forfeitures and
record share-based compensation expense only for those awards that are expected to vest.
The fair value of each option grant during fiscal 2007, 2006, and 2005 was estimated on the date of the grant
using the following assumptions:
52 Weeks Ended
February 2, 2008
53 Weeks Ended
February 3, 2007
52 Weeks Ended
January 28, 2006
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 4.8 4.1
Expected volatility ...................................... 28.9% 28.7% 35.5%
Dividend yield ......................................... 1.6% 1.6% 0.9%
Risk-free interest rate ................................... 4.9% 4.6% 4.1%
A summary of stock option activity under the 2006 Plan and 2002 Plan as of February 2, 2008 and changes
during fiscal 2007 are presented below:
Shares
Weighted-
Average Exercise
Price
Balance at February 3, 2007 ............................................. 52,194,231 $20.81
Granted .............................................................. 4,778,320 $17.92
Exercised ............................................................. (6,795,333) $14.64
Forfeited/Canceled/Expired .............................................. (9,950,920) $22.77
Balance at February 2, 2008 ............................................. 40,226,298 $21.03
The weighted-average fair value of stock options granted during fiscal 2007, 2006, and 2005 was $4.99, $5.07,
and $7.20 per share, respectively. The aggregate intrinsic value of options exercised during fiscal 2007, 2006,
and 2005 was $32 million, $87 million, and $56 million, respectively.
56฀฀฀Form฀10-K
Information about stock options outstanding, vested or expected to vest and exercisable at February 2, 2008 is
presented below:
Options Outstanding Options Exercisable
Range of
Exercise Prices
Number of Shares
at February 2, 2008
Weighted-Average
Remaining
Contractual Life
(in years)
Weighted Average
Exercise Price
Number of Shares
at February 2, 2008
Weighted-Average
Exercise Price
$2.85 – 12.87 4,052,675 4.87 $12.36 3,652,675 $12.51
12.95 – 15.42 4,497,906 3.82 $14.37 4,497,906 $14.37
15.95 – 17.84 6,254,427 8.09 $17.21 1,842,373 $17.33
17.88 – 20.21 5,432,630 6.42 $19.26 2,428,454 $19.74
20.27 – 21.21 3,074,247 6.79 $20.72 1,809,709 $20.67
21.22 – 21.55 6,200,071 5.93 $21.54 6,196,271 $21.54
21.60 – 23.31 5,210,628 4.92 $22.78 5,210,628 $22.78
23.34 – 44.44 4,064,413 2.13 $33.78 4,064,413 $33.78
45.16 – 45.97 1,434,301 2.12 $45.56 1,434,301 $45.56
47.50 – 47.50 5,000 1.94 $47.50 5,000 $47.50
40,226,298 5.40 $21.03 31,141,730 $21.92
Vested or expected to vest at
February 2, 2008 37,967,595 5.31 $21.17
The fair value of stock options that vested during fiscal 2007, 2006, and 2005 was $45 million, $47 million, and
$222 million, respectively. The aggregate intrinsic value of options outstanding, options vested or expected to vest
and options exercisable at February 2, 2008 was $66 million, $64 million, and $52 million, respectively. Options
exercisable at February 2, 2008 had a weighted-average remaining contractual life of 4.56 years.
Compensation Cost for Stock Units
Under the 2006 Plan, units are granted to employees and members of the Board of Directors whereby one share
of common stock is issued for each unit as the unit vests (“Stock Units”). Vesting is based on continued service by
the employee and is immediate in the case of members of the Board of Directors. In some cases, vesting is
subject to the attainment of a pre-determined financial target (“Performance Shares”).
In accordance with SFAS 123(R), we recognize the estimated share-based compensation cost of Stock Units, net
of estimated forfeitures. Prior to the adoption of SFAS 123(R), we recognized share-based compensation
expense related to Stock Units based on actual forfeitures. As such, we evaluated the need to record a
cumulative effect adjustment for estimated forfeitures upon the adoption of SFAS 123(R). Because the adjustment
was not material, it was recognized as a credit to operating expenses in the first quarter of fiscal 2006.
We evaluate the probability that the Performance Shares will vest at the end of each reporting period. We record
share-based compensation cost based on the grant-date fair value and the probability that the pre-determined
financial target will be achieved.
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