The Gap 2007 Annual Report Download - page 38

A summary of Stock Unit activity under the 2006 Plan as of February 2, 2008 and changes during fiscal 2007 are
presented below:
Shares
Weighted-Average
Grant-Date
Fair Value
Balance at February 3, 2007 ................................... 4,916,773 $19.23
Granted .................................................... 6,048,873 $17.63
Vested ..................................................... (921,096) $17.97
Forfeited .................................................... (1,875,457) $18.35
Balance at February 2, 2008 ................................... 8,169,093 $18.16
The weighted-average fair value of Stock Units granted during fiscal 2007, 2006, and 2005 was $17.63, $18.37,
and $21.37 per share, respectively. The fair value of Stock Units that vested during fiscal 2007 and 2006 was
$11 million and $10 million, respectively. No Stock Units vested in fiscal 2005.
The aggregate intrinsic value of unvested Stock Units at February 2, 2008 was $12 million with a weighted-
average remaining contractual life of 2.4 years.
At February 2, 2008, there was $46 million (before any related tax benefit) of unrecognized share-based
compensation, adjusted for estimated forfeitures, related to unvested Stock Units that is expected to be
recognized over a weighted-average period of 3.4 years. Total unrecognized share-based compensation may be
adjusted for future changes in estimated forfeitures.
Compensation Cost for Performance Units
Under the 2006 Plan, some Stock Units are granted to certain employees only after the achievement of
pre-determined performance metrics at the end of an annual performance period. These rights are referred to as
Performance Units herein. Once the Stock Unit is granted, vesting is then subject to continued service by the
employee.
In accordance with SFAS 123(R), at the end of each reporting period, we evaluate the probability that Stock Units
will be granted for outstanding Performance Units. We record share-based compensation cost based on the
probability that the performance metrics will be achieved, with an offsetting increase to current liabilities. We
revalue the liability at the end of each reporting period and record an adjustment to share-based compensation as
required, based on the probability that the performance metrics will be achieved. Upon achievement of the
performance metrics, a Stock Unit is granted. At that time, the associated liability is reclassified to stockholders’
equity.
Out of 6,048,873 Stock Unit grants in fiscal 2007, 119,102 Stock Units were granted for Performance Units
outstanding in fiscal 2006. During fiscal 2006 and 2005, no Stock Units were granted for previously outstanding
Performance Units.
At February 2, 2008, the liability related to outstanding Performance Units was $3 million, which is included in
accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheet.
Employee Stock Purchase Plan
Prior to December 1, 2006, under our Employee Stock Purchase Plan (“ESPP”), eligible U.S. employees could
purchase our common stock at 85 percent of the lower of the closing price on the New York Stock Exchange on
the first or last day of the six-month purchase period (“Option Feature”). After December 1, 2006, eligible U.S.
employees are able to purchase our common stock at 85 percent of the closing price on the New York Stock
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Exchange on the last day of the three-month purchase period. Accordingly, compensation cost is equal to the 15
percent discount and the Black-Scholes-Merton option-pricing model is no longer used to estimate the fair value
of the ESPP Option Feature after December 1, 2006. 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 1,485,699,
1,613,116, and 1,700,444 shares issued under the ESPP during fiscal 2007, 2006, and 2005, respectively. All
shares for ESPP purchases are issued from treasury stock. At February 2, 2008, there were 3,803,143 shares
reserved for future issuances.
The fair value of the ESPP Option Feature was estimated using the Black-Scholes-Merton option-pricing model
for fiscal 2006 and 2005 with the following assumptions:
53 Weeks Ended
February 3, 2007
52 Weeks Ended
January 28, 2006
Expectedterm(inyears) .............................................. 0.5 0.5
Expected volatility .................................................... 25.1% 21.8%
Dividend yield ....................................................... 1.4% 0.8%
Risk-free interest rate ................................................. 4.8% 4.1%
The average discounted price of ESPP purchases in fiscal 2007 was $16.34 per share. The weighted-average fair
value of ESPP shares for fiscal 2006 was $3.99, which included a weighted average fair value of $2.65 for
compensation cost associated with the purchase discount in accordance with SFAS 123(R). The weighted-
average fair value of ESPP shares for fiscal 2005 was $1.38, which was not recorded as additional compensation
cost during the period in accordance with APB 25.
NOTE 10. LEASES
We lease most of our store premises and some of our headquarter facilities and distribution centers. These
operating leases expire at various dates through 2033. Most store leases are for a five year base period and
include options that allow us to extend the lease term beyond the initial base period, subject to terms agreed to at
lease inception. Some leases also include early termination options, which can be exercised under specific
conditions.
We also lease certain equipment under operating leases that expire at various dates through 2013.
The aggregate minimum non-cancelable annual lease payments under leases in effect on February 2, 2008, are
as follows:
($ in millions)
Fiscal Year
2008 .......................................................................... $1,098
2009 .......................................................................... 1,006
2010 .......................................................................... 853
2011 .......................................................................... 642
2012 .......................................................................... 449
Thereafter ...................................................................... 1,430
Total minimum lease commitments ................................................. $5,478
The total minimum lease commitment amount above does not include minimum sublease rental income of $32
million receivable in the future under noncancelable sublease agreements.
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