-----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, JAoDjjQXudA2XjHOD8AJhhQfNm05TvixHZQFwjdWsbMinEvxtInkhPsm743vX3g4 Ls/Zpp0HnzHSVMA/TLEmVg== 0000039911-98-000010.txt : 19981216 0000039911-98-000010.hdr.sgml : 19981216 ACCESSION NUMBER: 0000039911-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 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-Q SEC ACT: SEC FILE NUMBER: 001-07562 FILM NUMBER: 98769725 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended October 31, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) Delaware 94-1697231 (State of Incorporation) (I.R.S. Employer Identification No.) One Harrison San Francisco, California 94105 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 952-4400 _______________________ Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value New York Stock Exchange, Inc. (Title of class) Pacific Exchange, Inc. (Name of each exchange where registered) Securities registered pursuant to Section 12(g) of the Act: None _______________________ Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $0.05 par value, 380,597,122 shares as of November 27, 1998
GAP INC. PART 1 CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) ($000 and shares in thousands, except October 31, January 31, November 1, par value) 1998 1998 1997 ASSETS Current Assets: Cash and equivalents $ 271,518 $ 913,169 $ 627,760 Merchandise inventory 1,374,916 733,174 980,531 Prepaid expenses and other current assets 195,013 184,604 154,670 Total Current Assets 1,841,447 1,830,947 1,762,961 Property and equipment, net 1,748,840 1,365,246 1,319,462 Lease rights and other assets 164,474 141,309 142,653 Total Assets $ 3,754,761 $ 3,337,502 $ 3,225,076 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term notes payable $ 526,428 $ 84,794 $ 115,245 Accounts payable 536,408 416,976 433,313 Accrued expenses 570,363 389,412 349,999 Income taxes payable 42,008 83,597 93,395 Deferred lease credits and other 12,351 16,769 15,170 current liabilities Total Current Liabilities 1,687,558 991,548 1,007,122 Long-term Liabilities: Long-term debt 496,352 496,044 495,941 Deferred lease credits and other 314,855 265,924 249,151 liabilities Total Long-Term Liabilities 811,207 761,968 745,092 Shareholders' Equity: Common stock $.05 par value Authorized 1,500,000 shares Issued 663,488; 659,884; and 717,213 shares Outstanding 570,049; 589,700; and 592,744 shares 33,174 32,994 35,861 Additional paid-in capital 418,971 306,676 475,140 Retained earnings 2,845,441 2,392,750 2,196,647 Foreign currency translation adjustment (11,298) (15,230) (7,790) Deferred compensation (35,874) (38,167) (43,908) Treasury stock, at cost (1,994,418) (1,095,037) (1,183,088) Total Shareholders' Equity 1,255,996 1,583,986 1,472,862 Total Liabilities and Shareholders' $ 3,754,761 $ 3,337,502 $ 3,225,076 Equity See accompanying notes to condensed consolidated financial statements.
GAP INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Unaudited Thirteen Weeks Ended Thirty-nine Weeks Ended ($000 except per share amounts) October 31, November 1, October 31, November 1, 1998 1997 1998 1997 Net sales $ 2,399,948 $ 1,765,939 $ 6,024,630 $ 4,342,346 Costs and expenses Cost of goods sold and 1,376,005 1,044,673 3,542,174 2,716,885 occupancy expenses Operating expenses 636,745 453,977 1,659,017 1,118,350 Net interest (income)/expense 6,800 4,052 6,337 (2,145) Earnings before income taxes 380,398 263,237 817,102 509,256 Income taxes 142,649 98,714 306,413 190,971 Net earnings $ 237,749 $ 164,523 $ 510,689 $ 318,285 Weighted average number of 571,318,832 591,855,020 579,080,645 597,898,512 shares - basic Weighted average number of 597,431,414 613,436,672 605,073,243 617,202,378 shares - diluted Earnings per share - basic $ 0.42 $ 0.28 $ 0.88 $ 0.53 Earnings per share - diluted $ 0.40 $ 0.27 $ 0.84 $ 0.52 Cash dividends per share $ 0.03 $ 0.03 $ 0.10 $ 0.10 See accompanying notes to condensed consolidated financial statements.
GAP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited ($000) Thirty-nine Weeks Ended October 31, 1998 November 1, 1997 Cash Flows from Operating Activities: Net earnings $510,689 $318,285 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization (a) 236,413 194,571 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 67,018 16,047 Change in operating assets and liabilities: Merchandise inventory (641,672) (401,827) Prepaid expenses and other (13,636) (32,789) Accounts payable 120,690 81,647 Accrued expenses 179,922 67,138 Income taxes payable (41,742) 1,598 Deferred lease credits and other long-term liabilities 37,404 52,462 Net cash provided by operating activities 455,086 297,132 Cash Flows from Investing Activities: Net proceeds from maturity of short-term inve - 174,709 Net purchase of long-term investments - (2,939) Net purchase of property and equipment (591,056) (352,745) Acquisition of lease rights and other assets (20,474) (13,223) Net cash used for investing activities (611,530) (194,198) Cash Flows from Financing Activities: Net increase in notes payable 438,393 73,031 Issuance of long-term debt - 495,890 Issuance of common stock 32,462 23,838 Purchase of treasury stock net of reissuances (899,382) (494,287) Cash dividends paid (57,998) (59,990) Net cash used for financing activities (486,525) 38,482 Effect of exchange rate changes on cash 1,318 700 Net decrease in cash and equivalents (641,651) 142,116 Cash and equivalents at beginning of year 913,169 485,644 Cash and equivalents at end of quarter $271,518 $627,760 See accompanying notes to condensed consolidated financial statements. (a) Includes amortization of restricted stock, discounted stock options and discount on long-term debt. GAP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The condensed consolidated balance sheets as of October 31, 1998 and November 1, 1997 and the interim condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended October 31, 1998 and November 1, 1997 and cash flows for the thirty-nine week periods ended October 31, 1998 and November 1, 1997 have been prepared by the Company, without audit. In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows of the Company at October 31, 1998 and November 1, 1997, and for all periods presented. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted from these interim financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 1998. The condensed consolidated balance sheet as of January 31, 1998 was derived from the Company's January 31, 1998 balance sheet included in the 1997 Annual Report. The results of operations for the thirty-nine weeks ended October 31, 1998 are not necessarily indicative of the operating results that may be expected for the year ending January 30, 1999. 2. THREE-FOR-TWO STOCK SPLIT On October 28, 1998, the Company's Board of Directors authorized a three- for-two split of its common stock effective November 30, 1998, in the form of a stock dividend for shareholders of record at the close of business on November 11, 1998. All share and per share amounts in the accompanying consolidated financial statements for all periods have been restated to reflect the stock split. 3. COMPREHENSIVE EARNINGS During the first quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This Statement requires that all components of comprehensive earnings be reported in the financial statements. For the Company, other comprehensive earnings includes only foreign currency translation adjustments. Total comprehensive earnings for the thirteen and thirty- nine weeks ended October 31, 1998 and November 1, 1997 were as follows (in thousands): Thirteen Thirteen Thirty-nine Thirty-nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended October 31, November 1, October 31, November 1, 1998 1997 1998 1997 Net earnings $237,749 $164,523 $510,689 $318,285 Foreign currency translation adjustments 5,682 (1,300) 3,932 (2,603) Total comprehensive earnings $243,431 $163,223 $514,621 $315,682 4. FINANCIAL INSTRUMENTS The Company enters into foreign exchange contracts to reduce exposure to foreign currency exchange risk. These contracts are primarily designated and effective as hedges of commitments to purchase merchandise. The market value gains and losses on these contracts are deferred and recognized as part of the underlying cost to purchase the merchandise. At the end of the third quarter, the Company held various put option contracts to repurchase up to 1,650,000 shares of Gap stock. The contracts have an exercise price of $40.00, with expiration dates extending through January 1999. 5. EARNINGS PER SHARE Under SFAS No. 128, the Company provides dual presentation of EPS on a basic and diluted basis. The Company's granting of certain stock options and restricted stock resulted in potential dilution of basic EPS. The following summarizes the effects of the assumed issuance of dilutive securities on weighted-average shares for basic EPS. Thirteen Thirteen Thirty-nine Thirty-nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended October 31, November 1, October 31, November 1, 1998 1997 1998 1997 Weighted-average number of shares - basic 571,318,832 591,855,020 579,080,645 597,898,512 Incremental shares from assumed issuance of: Stock options 23,042,775 16,023,132 22,246,213 13,165,906 Restricted stock 3,069,807 5,558,520 3,746,385 6,137,960 Weighted-average number of shares - diluted 597,431,414 613,436,672 605,073,243 617,202,378 The number of incremental shares from the assumed issuance of stock options and restricted stock is calculated applying the treasury stock method. Excluded from the above computation of weighted-average shares for diluted EPS were options to purchase 1,992,332 and 2,234,084 shares of common stock during the thirteen and thirty-nine weeks ended October 31, 1998 respectively, and 41,378 and 297,846 shares during the thirteen and thirty-nine weeks ended November 1, 1997, respectively. Issuance of these securities would have resulted in an antidilutive effect on EPS. 6. NEW ACCOUNTING PRONOUNCEMENT In June 1998 the Financial Accounting Standards Board issued Statements of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that all derivative instruments be recorded on the balance sheet at fair value, and that changes in the fair value of the derivative instruments be recorded in net earnings or comprehensive earnings. SFAS 133 must be adopted for fiscal years beginning after June 15, 1999, with earlier adoption permitted. Management has determined that adoption of SFAS 133 will not have a material impact on the Company's consolidated financial statements. Deloitte & Touche LLP 50 Fremont Street Telephone: (415) 247-4000 San Francisco, California 94105-2230 Facsimile: (415) 247-4329 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of The Gap, Inc.: We have reviewed the accompanying condensed consolidated balance sheets of The Gap, Inc. and subsidiaries as of October 31, 1998 and November 1, 1997 and the related condensed consolidated statements of earnings for the thirteen and thirty-nine week periods ended October 31, 1998 and November 1, 1997 and condensed consolidated statements of cash flows for the thirty-nine week periods ended October 31, 1998 and November 1, 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Gap, Inc. and subsidiaries as of January 31, 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 27, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 31, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it was derived. /s/ Deloitte & Touche LLP November 10, 1998 Deloitte Touche Tohmatsu International GAP INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information below contains certain forward-looking statements which reflect the current view of Gap Inc. (the "Company") with respect to future events and financial performance. Wherever used, the words "expect," "plan," "anticipate," "believe," and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results of operations to differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where the Company's goods are manufactured and/or disruption to operations from Year 2000 issues, and other factors that may be described in the Company's Annual Report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability remain difficult to predict. It is suggested that this document be read in conjunction with the Management's Discussion and Analysis included in the Company's 1997 Annual Report on Form 10-K. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. RESULTS OF OPERATIONS Net Sales Thirteen Weeks Ended Thirty-nine Weeks Ended October 31, November 1, October 31, November 1, 1998 1997 1998 1997 Net sales ($000) 2,399,948 1,765,939 6,024,630 4,342,346 Total net sales growth percentage 36 28 39 20 Comparable store sales growth percentage 13 9 16 4 Net sales per average square foot ($) 138 123 366 319 Square footage of gross store space at period end (000) 17,858 14,679 Fifty-two Fifty-two Weeks Ended Weeks Ended October 31, November 1, 1998 1997 Number of New stores 285 281 Expanded stores 134 76 Closed stores 18 27 The increases in net sales for the third quarter and year-to-date 1998 over the same periods last year were attributable to the increase in retail selling space, both through the opening of new stores (net of stores closed) and the expansion of existing stores, as well as to the increase in comparable store sales. The increases in net sales per average square foot were primarily attributable to the increases in comparable store sales. Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.9 and 3.8 percentage points in the third quarter and year-to-date 1998, respectively, from the same periods in 1997. The decreases were driven by increased merchandise margins and decreased occupancy expenses as a percentage of sales. The increase in merchandise margin for the quarter was driven by higher initial merchandise markup and higher margins achieved on marked-down goods. For the year-to-date period, the increase in merchandise margin as a percentage of net sales was due to a greater percentage of merchandise sold at regular price and higher margins from marked-down goods. For both the third quarter and year-to-date 1998, the decreases in occupancy expenses as a percentage of net sales were primarily driven by leverage achieved through the growth in comparable store sales and total sales growth. As a general business practice, the Company reviews its inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Such markdowns may have an adverse impact on earnings depending upon the extent of the markdowns and amount of inventory affected. Operating Expenses Operating expenses as a percentage of net sales increased .8 and 1.8 percentage points for the third quarter and year-to-date 1998, respectively, from the comparable periods in 1997. The increases were driven by significantly higher advertising/marketing costs as part of the Company's continued brand development efforts. These were partially offset by decreased write-offs of leasehold improvements and fixtures of certain stores, and leverage from comparable store sales growth and total sales growth. A decrease in bonus as a percentage of sales also positively affected the operating expense rate in the quarter. Net Interest Income/Expense Net interest expense increased in the third quarter and year-to-date period from the same periods last year, primarily due to an increase in average borrowings. Income Taxes The effective tax rate was 37.5 percent for year-to-date 1998 and 1997. LIQUIDITY AND CAPITAL RESOURCES The following sets forth certain measures of the Company's liquidity: Thirty-nine Weeks Ended October 31, 1998 November 1, 1997 Cash provided by operating activities ($000) 455,086 297,132 Working capital ($000) 153,889 755,839 Current ratio 1.09:1 1.75:1 For the thirty-nine weeks ended October 31, 1998, the increase in cash flows provided by operating activities was primarily attributable to the increase in net earnings and timing of certain payables, partially offset by purchases of merchandise inventory. The decreases in working capital and current ratio are primarily due to a decrease in cash and increase in short-term borrowings. The Company issued approximately $500 million in short-term commercial paper during the third quarter to partially finance its increased capital expenditures and repurchases of its common stock. The Company funds inventory expenditures during normal and peak periods through a combination of cash flows provided by operations and normal trade credit arrangements. The Company's business follows a seasonal pattern, peaking over a total of about ten to twelve weeks during the Back-to-School and Holiday periods. The Company has committed credit facilities totaling $950 million, consisting of an $800 million, 364-day revolving credit facility, and a $150 million, 5- year revolving credit facility through June 30, 2002. These credit facilities provide for the issuance of up to $450 million in letters of credit. The Company has additional uncommitted credit facilities of $450 million for the issuance of letters of credit. At October 31, 1998, the Company had outstanding letters of credit of approximately $575 million. For the thirty-nine weeks ended October 31, 1998, capital expenditures, net of construction allowances and dispositions, totaled approximately $599 million. These expenditures resulted in a net increase in store space of approximately 2.5 million square feet due to the addition of 224 new stores, the expansion of 103 stores, and the remodeling of certain stores. For 1998, the Company expects capital expenditures to exceed $750 million, net of construction allowances. This represents the addition of 300 to 350 new stores, the expansion of approximately 100 stores, the remodeling of certain stores, as well as amounts for headquarters facilities, distribution centers, equipment, and a catalog facility. The Company expects to fund these capital expenditures with cash flows from operations and other sources of financing. New stores are generally expected to be leased. To further support its growth, the Company acquired land in 1998 in San Bruno and San Francisco on which to construct additional headquarter facilities. Construction commenced during the third quarter on the San Francisco property. During 1997 the Company commenced construction on a distribution center for an estimated cost at completion of $60 million. The majority of the expenditures for this facility will be incurred this fiscal year and is thus included in the projected capital expenditures above. The facility is expected to begin operations in early 1999. In October 1998, the Board of Directors approved a program under which the Company may purchase up to 45 million shares of its common stock. This program follows an earlier 67.5 million share repurchase program, under which the Company acquired 23.8 million shares for approximately $910 million during 1998. To date under the earlier program 66.1 million shares have been repurchased for approximately $1.7 billion. These amounts exclude approximately 1.65 million shares subject for repurchase under outstanding put option contracts. All share amounts reflect the three-for-two stock split effective November 30, 1998 described in the Notes to Condensed Consolidated Financial Statements (Note 2). During 1998, the Company entered into various put option contracts in connection with the share repurchase program to hedge against stock price fluctuations. The Company also continued to enter into foreign exchange forward contracts to reduce exposure to foreign currency exchange risk involved in its commitments to purchase merchandise for foreign operations. Additional information on these contracts and agreements is presented in the Notes to Condensed Consolidated Financial Statements (Note 4). YEAR 2000 ISSUE The Year 2000 issue is primarily the result of computer programs using a two- digit format, as opposed to four digits, to indicate the year. Such computer systems will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to a disruption in the operation of such systems. In 1996, the Company established a project team to coordinate existing Year 2000 activities and address remaining Year 2000 issues. The team has focused its efforts on three areas: (1) information systems software and hardware; (2) facilities and distribution equipment; and (3) third-party relationships. The Program. The Company has adopted a five-phase Year 2000 program consisting of: Phase I - identification and ranking of the components of the Company's systems, equipment and suppliers that may be vulnerable to Year 2000 problems; Phase II - assessment of items identified in Phase I; Phase III - remediation or replacement of non-compliant systems and components and determination of solutions for non-compliant suppliers; Phase IV - testing of systems and components following remediation; and Phase V - developing contingency plans to address the most reasonably likely worst case Year 2000 scenarios. The Company has completed Phases I and II and continues to make progress according to plan on Phases III, IV and V. Information Systems Software and Hardware. The Company has completed Phase II and has made substantial progress in Phase III. Phase IV testing is being conducted concurrently with Phase III activities. The Company is on track to complete remediation, testing and implementation of its individual information systems by mid-1999. Facilities and Distribution Equipment. The Company has completed Phase II and is actively working on Phase III. Third-Party Relationships. The Company has completed Phase II and is actively working on Phase III. Risks / Contingency Plans. Based on the assessment efforts to date, the Company does not believe that the Year 2000 issue will have a material adverse effect on its financial condition or results of operations. The Company operates a large number of geographically dispersed stores and has a large supplier base and believes that this will mitigate any adverse impact. The Company's beliefs and expectations, however, are based on certain assumptions and expectations that ultimately may prove to be inaccurate. The Company believes that by the end of 1998, it will be able to fully determine its most reasonably likely worst case scenarios. Potential sources of risk include (a) the inability of principal suppliers to be Year 2000 ready, which could result in delays in product deliveries from such suppliers, and (b) disruption of the distribution channel, including ports, transportation vendors, and the Company's own distribution centers as a result of a general failure of systems and necessary infrastructure such as electricity supply. Phase V contingency plan development is in process. The Company does not expect the costs associated with its Year 2000 efforts to be substantial. Approximately $30 million has been allocated to address the Year 2000 issue, of which $10 million has been incurred through October 31, 1998. The Company's aggregate cost estimate does not include time and costs that may be incurred by the Company as a result of the failure of any third parties, including suppliers, to become Year 2000 ready or costs to implement any contingency plans. Item 3. Quantitative and Qualitative Disclosures About Market Risk The market risk of the Company's financial instruments as of October 31, 1998 has not significantly changed since January 31, 1998. The market risk profile on January 31, 1998 is disclosed in the Company's 1997 Annual Report. The net change in unrealized losses since January 31, 1998 for the Company's foreign exchange forward contracts and long-term debt was $13 million. PART II OTHER INFORMATION Item 5. Other Information On October 28, 1998, the Company's Board of Directors authorized a three- for-two split of its common stock effective November 30, 1998. The following selected financial data has been restated to reflect the stock split.
1997 1996 1995 1994 1993 Fiscal Year 52 Weeks 52 Weeks 53 Weeks 52 Weeks 52 Weeks Earnings Per Share - basic $0.90 $0.72 $0.57 $0.51 $0.41 Earnings Per Share - diluted $0.87 $0.71 $0.55 $0.49 $0.40 Weighted-Average Shares - basic 594,269,963 625,719,947 626,577,596 632,466,639 626,858,004 Weighted-Average Shares - diluted 615,301,137 640,900,830 641,628,773 647,429,741 643,406,853 Number of shares outstanding 589,699,542 617,663,996 647,432,964 651,441,371 653,619,276 net of treasury shares Thirteen Thirteen Thirteen Weeks Ended Weeks Ended Weeks Ended Fiscal 1998 Quarter Ended May 2, 1998 August 1, 1998 October 31, 1998 Earnings Per Share - basic $0.23 $0.23 $0.42 Earnings Per Share - diluted $0.22 $0.22 $0.40 Weighted-Average Shares - basic 582,976,320 582,949,343 571,318,832 Weighted-Average Shares - diluted 607,500,656 609,708,908 597,431,414 Number of shares outstanding 589,081,187 582,405,242 570,048,782 net of treasury shares Thirteen Thirteen Thirteen Thirteen Weeks Ended Weeks Ended Weeks Ended Weeks Ended Fiscal 1997 Quarter Ended May 3, 1997 August 2, 1997 November 1, 1997 January 1, 1998 Earnings Per Share - basic $0.14 $0.12 $0.28 $0.37 Earnings Per Share - diluted $0.14 $0.11 $0.27 $0.36 Weighted-Average Shares - basic 604,205,309 597,621,705 591,855,020 583,357,655 Weighted-Average Shares - diluted 619,974,720 615,138,011 613,436,672 606,532,092 Number of shares outstanding 610,628,429 603,102,425 592,743,868 589,699,542 net of treasury shares
Item 6. Exhibits and Reports on Form 8-K a) Exhibits (10.1) Amendment Number 3 to the Registrant's 1996 Stock Option and Award Plan (10.2) Amendment Number 1 to the Registrant's Non-employee Director Deferred Compensation Plan (10.3) The Gap, Inc. Executive Deferred Compensation Plan (10.4) Form of Nonqualified Stock Option Agreement for consultants under Registrant's 1996 Stock Option and Award Plan (10.5) Form of Nonqualified Stock Option Agreement for employees in France under Registrant's 1996 Stock Option and Award Plan (10.6) Form of Nonqualified Stock Option Agreement for international employees under Registrant's 1996 Stock Option and Award Plan (10.7) Form of Nonqualified Stock Option Agreement for employees in Japan under Registrant's 1996 Stock Option and Award Plan (10.8) Form of stock option agreement for employees under the UK Sub-plan to the U.S. Stock Option and Award Plan (15) Letter re: Unaudited Interim Financial Information (27) Financial Data Schedule b) The Company did not file any reports on Form 8-K during the three months ended October 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE GAP, INC. Date: December 7, 1998 By /s/ Warren R. Hashagen Warren R. Hashagen Chief Financial Officer (Principal financial officer of the registrant) Date: December 7, 1998 By /s/ Millard S. Drexler Millard S. Drexler President and Chief Executive Officer EXHIBIT INDEX (10.1) Amendment Number 3 to the Registrant's 1996 Stock Option and Award Plan (10.2) Amendment Number 1 to the Registrant's Non-employee Director Deferred Compensation Plan (10.3) The Gap, Inc. Executive Deferred Compensation Plan (10.4) Form of Nonqualified Stock Option Agreement for consultants under Registrant's 1996 Stock Option and Award Plan. (10.5) Form of Nonqualified Stock Option Agreement for employees in France under Registrant's 1996 Stock Option and Award Plan. (10.6) Form of Nonqualified Stock Option Agreement for international employees under Registrant's 1996 Stock Option and Award Plan. (10.7) Form of Nonqualified Stock Option Agreement for employees in Japan under Registrant's 1996 Stock Option and Award Plan. (10.8) Form of stock option agreement for employees under the UK Sub-plan to the U.S. Stock Option and Award Plan (15) Letter re: Unaudited Interim Financial Information (27) Financial Data Schedule EX-10.1 2 AMENDMENT NO. 3 TO THE GAP, INC. 1996 STOCK OPTION AND AWARD PLAN The Gap, Inc., having adopted The Gap, Inc. 1996 Stock Option and Award Plan (the "Plan") effective as of March 26, 1996, and amended effective as of May 20, 1997, and amended effective as of January 27, 1998, hereby further amends the Plan, effective as of October 28, 1998, as follows: 1. The second sentence of Section 4.3 is hereby amended in its entirety to read as follows: In the case of Options granted to Non-employee Directors pursuant to Section 9, the foregoing adjustments shall be made by the Board, and beginning October 28, 1998 any such adjustments by stock dividend or split-up shall not apply to the future grants provided by Section 9. 2. The following sentence is hereby added to the end of Section 9.1.1: The number of Shares covered by each Option to be granted in the future to Non-employee Directors under this Section 9.1.1 shall be fixed as set forth herein (i.e., 15,000 and 3,750 on a split-adjusted basis), and beginning October 28, 1998 any adjustments by stock dividend or split-up shall not apply to these future grants. 3. The following sentence is hereby added to the end of Section 9.1.2: The number of Shares covered by each Option to be granted in the future to Non-employee Directors under this Section 9.1.2 shall be fixed as set forth herein (i.e., 3,750 on a split- adjusted basis), and beginning October 28, 1998 any adjustments by stock dividend or split-up shall not apply to these future grants. IN WITNESS WHEREOF, The Gap, Inc., by its duly authorized officer, has executed this Amendment No. 3 as of the date indicated below. THE GAP, INC. Date: October 28, 1998 By /s/ Anne B. Gust Name: Anne B. Gust Title: Executive Vice President EX-10.2 3 AMENDMENT NO. 1 TO THE GAP, INC. NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN The Gap, Inc., having adopted The Gap, Inc. Non-employee Director Deferred Compensation Plan (the "Plan") effective as of August 26, 1997, hereby amends the Plan, effective as of October 28, 1998, as follows: 1. The following sentence shall be added between the first and second sentences of Section 4.3: Beginning October 28, 1998 any such adjustments by stock dividend or split-up shall not apply to the future grants provided by Section 5. 2. The following sentence is hereby added to the end of Section 5.3.1: The number of Shares covered by each Option to be granted in the future to Non-employee Directors under this Section 5.3.1 shall be fixed as set forth herein (i.e., 937 on a split- adjusted basis), and beginning October 28, 1998 any adjustments by stock dividend or split-up shall not apply to these future grants. IN WITNESS WHEREOF, The Gap, Inc., by its duly authorized officer, has executed this Amendment No. 1 as of the date indicated below. THE GAP, INC. Date: October 28, 1998 By/s/ Anne B. Gust Name: Anne B. Gust Title: Executive Vice President EX-10.3 4 THE GAP, INC. EXECUTIVE DEFERRED COMPENSATION PLAN (January 1, 1999 Restatement) The Gap, Inc. (the "Company"), having established The Gap, Inc. Executive Deferred Compensation Plan, effective January 1, 1994, and The Gap, Inc. Executive Capital Accumulation Plan, effective April 1, 1994, for the benefit of a select group of management employees of the Company and its participating Affiliates, in order to provide such employees with certain deferred compensation benefits, hereby amends and restates the Plans into one Plan effective as of January 1, 1999. The Plan is an unfunded deferred compensation plan that is intended to qualify for the exemptions provided in sections 201, 301, and 401 of ERISA. SECTION 1 DEFINITIONS The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: 1.1 "Affiliate" shall mean a corporation, trade or business which is, together with the Company, a member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of section 414(b), (c), or (m) of the Code). 1.2 "Beneficiary" shall mean the person or persons entitled to receive the balance credited to a Participant's Account under the Plan upon the death of the Participant, as provided in Section 5.5. 1.3 "Board" shall mean the Board of Directors of the Company, as from time to time constituted. 1.4 "Bonus" shall mean an award of cash payable to an Employee in April of any fiscal year other than an ELCAPP Bonus. 1.5 "Code" shall mean 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 amending, supplementing or superseding such section. 1.6 "Committee" shall mean the Global Benefits Committee of the Company's Board. 1.7 "Company" shall mean The Gap, Inc. 1.8 "Company Contributions" shall mean the amounts credited to Participants' Accounts under the Plan by the Company, in accordance with Section 3.3. 1.9 "Deferral Contributions" shall mean the amounts credited to Participants' Accounts under the Plan pursuant to their deferral elections made in accordance with Section 2.2. A Participant's Deferral Contributions shall include his or her Bonus and ELCAPP Bonus Deferral Contributions and Salary Deferral Contributions, as described in Section 3.1. 1.10 "ELCAPP Bonus" shall mean an award of cash payable to an Employee pursuant to the Executive Long-Term Cash Award Performance Plan ("ELCAPP"). 1.11 "Eligible Employee" shall mean an Employee of an Employer who is employed at the level of "director" or higher and who has a Salary greater than 150% of the Social Security taxable wage base. Eligible Employee shall not include any Employee who is employed in a foreign country, unless he or she has been temporarily transferred to employment with an Employer in a foreign country and is a citizen or resident alien of the United States at the time of the transfer. An Employee's eligibility for any Plan Year shall be determined as of November 1 of the preceding Plan Year, based on the Employee's position and salary and on the taxable wage base in effect on that date; provided, however, that in the case of an Employee who first satisfies the conditions for being an Eligible Employee on or before June 1 of any Plan Year, eligibility shall be determined as of that June 1. If a Participant ceases to be an Eligible Employee, no further Deferral Contributions shall be made to the Plan on his or her behalf unless he or she is again determined to be an Eligible Employee, but the balance credited to his or her Account shall continue to be credited with earnings under the terms of the Plan, and shall be distributed to him or her at the time and in the manner set forth in Section 5. 1.12 "Employee" shall mean an individual who is employed by one of the Employers as a common-law employee. 1.13 "Employer" shall mean the Company and each participating Affiliates. At such times and under such conditions as the Board may direct, one or more other Affiliates may become participating Affiliates or a participating Affiliate may be withdrawn from the Plan. 1.14 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.15 "Participant" shall mean an Eligible Employee who has become a Participant in the Plan pursuant to Section 2.1 and has not ceased to be a Participant pursuant to Section 2.4. 1.16 "Participant's Account" or "Account" shall mean as to any Participant the separate account maintained on the books of the Company in order to reflect his or her interest under the Plan. 1.16.1 "Bonus Deferral Account" shall be the subaccount maintained to record the Bonus and ELCAPP Bonus Deferral Contributions made by the Participant, and the earnings relating thereto. To the extent necessary to reflect a Participant's distribution elections, a separate Bonus Deferral Account may be maintained with respect to amounts credited to the Participant's Bonus Deferral Account for any Plan Year. 1.16.2 "Salary Deferral Account" shall be the subaccount maintained to record the Salary Deferral Contributions made by the Participant, and the earnings relating thereto. To the extent necessary to reflect a Participant's distribution elections, a separate Salary Deferral Account may be maintained with respect to the amounts credited to the Participant's Salary Deferral Account for any Plan Year. 1.16.3 "Company Contribution Deferral Account" shall be the subaccount maintained to record any Company Contributions made by the Company, and the earnings related thereto. To the extent necessary to reflect a Participant's distribution elections, a separate Company Contribution Deferral Account may be maintained with respect to amounts credited to the Participant's Company Contribution Deferral Account for any Plan Year. 1.17 "Plan" shall mean The Gap, Inc. Executive Deferred Compensation Plan, as set forth in this instrument and as hereafter amended from time to time. 1.18 "Plan Year" shall mean the calendar year. 1.19 "Retirement" shall mean a Participant's termination of employment with all Employers and all Affiliates at or after age 50. 1.20 "Salary" shall mean a Participant's basic yearly salary, excluding bonuses and taxable and nontaxable fringe benefits; provided, however, that Salary shall include Salary Deferral Contributions and all amounts contributed by an Employer pursuant to a salary reduction agreement which are not includable in the Employee's gross income under sections 125, 402(a)(8), or 402(b) of the Code. 1.21 "Termination Date" shall mean a Participant's termination of employment with all Employers and Affiliates. SECTION 2 PARTICIPATION 2.1 Participation. Each Eligible Employee's decision to become a Participant shall be entirely voluntary. 2.2 Elections. An Eligible Employee may elect to become a Participant (or to reinstate active participation) in this Plan by electing to make Deferral Contributions under the Plan. 2.2.1 Salary Deferral Elections. An Eligible Employee may elect to make Salary Deferral Contributions for any Plan Year no later than December 31 of the preceding Plan Year. An election under this Section 2.2.1 to make Salary Deferral Contributions shall be effective for each succeeding Plan Year, until changed by the Eligible Employee in accordance with such procedures as the Committee (in its discretion) may specify from time to time. 2.2.2 Bonus and ELCAPP Bonus Deferral Elections. An Eligible Employee may elect to make a Bonus Deferral Contribution with respect to his or her Bonus (payable on April 1 of any Plan Year) no later than June 30 of the preceding Plan Year. In addition, an Eligible Employee may elect to make an ELCAPP Bonus Deferral Contribution with respect to his or her ELCAPP Bonus (payable as of April 1, immediately following the end of the Performance Cycle as defined in ELCAPP) no later than June 30 of the second year of the applicable Performance Cycle. For example: Performance Cycle begins: February 4, 1996 Performance Cycle ends: January 30, 1999 Bonus payable: April 1, 1999 Bonus deferral election made by: June 30, 1997 An election to make Bonus and ELCAPP Bonus Deferral Contributions shall be effective for each succeeding Plan Year, until changed by the Eligible Employee in accordance with such procedures as the Committee (in its discretion) may specify from time to time. 2.2.3 No Election Changes During Plan Year. A Participant shall not be permitted to change or revoke his or her election for a Plan Year after the beginning of such Plan Year, except that (a) to the limited extent provided in Section 2.3, a Participant may change or revoke his or her election, (b) if a Participant's job changes to a position which is ineligible for the Plan, his or her deferrals under the Plan shall cease, and (c) if permitted by the Committee, in its sole discretion, a Participant may revoke his or her election for the remainder of the Plan Year. 2.2.4 Specific Timing and Method of Election. Notwithstanding any contrary provision of this Section 2.2, the Committee, in its sole discretion, shall determine the manner and deadlines for Participants to make Compensation Deferral elections. The deadlines prescribed by the Committee may be earlier than the deadlines specified in Sections 2.2.1 and 2.2.2, but shall not be later than the deadlines prescribed in such Sections. 2.3 Suspension of Participation. In the event that all or part of the Participant's vested Account is paid to the Participant as an in-service withdrawal pursuant to Section 5.7, the Committee, in its sole discretion, may suspend the Participant's Deferral Contributions for a period of twelve months following such payment. However, an election to make Deferral Contributions under Section 2.2 shall be irrevocable as to amounts deferred as of the effective date of any suspension in accordance with this Section 2.3. 2.4 Termination of Participation. An Eligible Employee who has become a Participant shall remain a Participant until his or her entire vested Account balance is distributed. However, an Eligible Employee who has become a Participant may or may not be an active Participant making Deferral Contributions for a particular Plan Year, depending upon whether he or she has elected to make Deferral Contributions for such Plan Year. SECTION 3 DEFERRAL CONTRIBUTIONS 3.1 Amount of Contributions. At the times and in the manner prescribed in Section 2.2, each Eligible Employee may elect to defer up to (a) 75% of his or her Salary, and (b) 90% of his or her Bonus or ELCAPP Bonus for a Plan Year and to have the amounts of such deferrals credited to his or her Account under the Plan on the books of the Company. An Eligible Employee may elect to defer an amount equal to any specific percentage (in whole percentage increments) of the Participant's Compensation. Notwithstanding any contrary provision of the Plan, the Committee may reduce a Participant's Deferral Contributions to the extent necessary to satisfy applicable withholding tax requirements and employee welfare plan contributions. 3.2 Crediting of Deferral Contributions. The amounts deferred pursuant to Section 3.1 shall reduce the Participant's Compensation during the Plan Year and shall be credited to the Participant's Account as a date no later than fifteen business days after the date on which the amount (but for the deferral) otherwise would have been paid to the Participant. 3.3 Company Contributions. From time to time, the Committee may determine (in its sole discretion) that a Company Contribution shall be credited to a Participant's Company Contribution Deferral Account, on such terms and conditions as the Committee may specify in its sole discretion. The Company Contribution (if any) made on behalf of a Participant shall be credited to the Participant's Company Contribution Deferral Account as of the date specified by the Committee. The exact dollar amount of a Company Contribution credited to any Participant's Company Contribution Deferral Account shall be determined by the Committee under such formulae as it shall adopt from time to time. 3.4 Deemed Investment Returns and Deemed Interest on Accounts. Although no assets will be segregated or otherwise set aside with respect to a Participant's Account, the amount that is ultimately payable to the Participant with respect to his or her Account shall be determined as if such Account had been invested in accordance with the Participant's deemed investment elections (provided that such elections must comply with the procedures established by the Committee pursuant to this Section 3.4). The Committee, in its sole discretion, shall adopt (and may modify from time to time) such rules and procedures as it deems necessary or appropriate to implement and/or restrict the deemed investment of the Participants' Accounts. Such procedures generally shall provide that a Participant shall be entitled to make deemed investment elections as to the deemed investment of his or her Account, subject to any limitations determined by the Committee in its discretion. Such procedures may differ among Participants or classes of Participants, as determined by the Committee in its discretion. Notwithstanding the foregoing, if any Company Contribution is credited to a Participant's Company Contribution Deferral Account, such Contribution shall be deemed to be invested as determined by the Committee in its sole discretion. SECTION 4 ACCOUNTING 4.1 Participants' Accounts. At the direction of the Committee, there shall be established and maintained on the books of the Company for each Participant: (a) A Salary Deferral Account to which shall be credited all Salary Deferral Contributions made by the Participant; (b) A Bonus Deferral Account to which shall be credited all Bonus and ELCAPP Bonus Deferral Contributions made by the Participant; and (c) A Company Contribution Deferral Account to which shall be credited all Company Contributions made by the Company (if any). To the extent necessary to reflect a Participant's distribution elections, the Committee may direct the establishment of a separate Salary Deferral Account, Bonus Deferral Account and/or Company Contribution Deferral Account with respect to amounts credited to a Participant's Account for any Plan Year. Each Participant's Account shall also be credited at the end of each day that the New York Stock Exchange is open for business with deemed earnings and losses and/or deemed interest in accordance with Section 3.4. 4.2 Participants Remain Unsecured Creditors. No funds shall be set aside or earmarked for a Participant's Account, which shall be a purely bookkeeping device. Instead, all amounts credited to a Participant's Account under the Plan shall continue for all purposes to be a part of the general assets of the Employer. Each Participant's interest in the Plan shall make him or her only a general, unsecured creditor of the Employer. 4.3 Accounting Methods. The accounting methods or formulae to be used under the Plan for the purpose of maintaining the Participants' Accounts, including the calculation and crediting of deemed returns, gains and losses and any deemed interest shall be determined by the Committee, in its sole discretion. The accounting methods or formulae selected by the Committee may be revised from time to time. 4.4 Reports. Each Participant shall be furnished with periodic statements of his or her Account, reflecting the status of his or her interest in the Plan, at least annually. SECTION 5 DISTRIBUTIONS 5.1 Salary Deferral Account. Distribution of a Participant's Salary Deferral Account shall be made only after his or her Termination Date. Except as provided in Section 5.4, such distribution shall be made in a lump sum as soon as practicable following that Termination Date. For purposes of such distribution, the value of the Participant's Salary Deferral Account shall be determined as of the last business day preceding the date that such distribution is made. 5.2 Bonus Deferral Account. Except as provided in Section 5.4, a Participant's Bonus Deferral Account shall be distributed in a lump sum as soon as practicable following his or her Termination Date, unless the Participant has elected an earlier in-service distribution date or dates for all or a portion of such Account. 5.2.1 In-Service Distribution Election. A Participant's election of an in-service distribution date must be made at the time of his or her Bonus or ELCAPP Deferral Contribution election for a Plan Year, shall apply only to amounts deferred pursuant to that election and shall be irrevocable. A participant may elect an in-service distribution date with respect to a Bonus or ELCAPP Deferral Contribution to be in a year permitted by the Committee, in its sole discretion, for an in-service distribution, provided that an in-service distribution date may not be earlier than the Plan Year following the year in which the bonus would have been paid absent the deferral. 5.2.2 In-Service Distribution Payments. Payments made pursuant to an in-service distribution election shall be made on or before the last working day of April of the Plan Year in which such payment was elected to be made. For purposes of such payment the value of the Participant's Bonus Deferral Account shall be determined as of the last business day preceding the date that such distribution is made. 5.3 Company Contribution Deferral Account. Distribution of a Participant's vested Company Contribution Deferral Account shall be made at the same time and in the same manner as distribution of the Participant's Salary Deferral Account. 5.4 Retirement Installment Distributions. A Participant may elect to receive payments from his or her Salary Deferral Account and/or Bonus Deferral Account that are made after his or her Retirement in annual installments for 5, 10 or 15 years. 5.4.1 Installment Elections. A Participant's election of installment distributions must be made at the time of his or her Salary and/or Bonus Deferral Contribution election for a Plan Year and automatically shall apply to amounts deferred with respect to each succeeding Plan Year, until changed by the Participant in accordance with such procedures as the Committee (in its discretion) may specify from time to time. No such election shall be effective if the Participant's Termination Date occurs before he or she attains age 50. 5.4.2 Installment Payments. The first installment payment shall be made as soon as practicable following the Participant's Retirement date and succeeding payments shall be made on or before the last working day of April in each succeeding year. However, in no case shall a Participant receive more than one installment payment in any calendar year. The amount to be distributed in each installment payment shall be determined by dividing the value of the Account as of the Valuation Date preceding the date of each distribution by the number of installment payments remaining to be made. The "Valuation Date" for any installment distribution shall be the last business day immediately preceding the applicable distribution date. 5.5 Death Distributions. If a Participant dies before the entire balance of his or her Account has been distributed, the remaining balance of the Participant's Account shall be distributed to his or her Beneficiary in a lump sum as soon as practicable. 5.6 Beneficiary Designations. Each Participant may designate, in a signed writing delivered to the Committee on such form as it may prescribe, one or more Beneficiaries to receive any distribution which may become payable as the result of the Participant's death. Primary and secondary Beneficiaries are permitted. 5.6.1 Changes. A Participant may designate different Beneficiaries (or may revoke a prior Beneficiary designation) at any time by delivering a new designation (or revocation of a prior designation) in like manner. Any designation or revocation shall be effective only if it is received by the Committee. However, when so received, the designation or revocation shall be effective as of the date the notice is executed (whether or not the Participant still is living), but without prejudice to the Committee on account of any payment made before the change is recorded. The last effective designation received by the Committee shall supersede all prior designations. 5.6.2 Failed Designations. If a Participant dies without having effectively designated a Beneficiary, or if no Beneficiary (primary or secondary) survives the Participant, the Participant's Account shall be payable to his or her surviving spouse, or, if the Participant is not survived by his or her spouse, the Account shall be paid to his or her estate. 5.7 In-Service Withdrawals. The Committee, in its sole discretion and notwithstanding any contrary provision of the Plan, may determine that all or part of the Participant's vested Account shall be paid to him or her immediately as an in-service withdrawal; provided, however, that an amount equal to ten percent of the total amount of the in-service withdrawal shall be withheld by the Company. Participants shall be limited to one in-service withdrawal per Plan Year. 5.8 Payments to Incompetents. If any individual to whom a benefit is payable under the Plan is a minor, or if the Committee determines that any individual to whom a benefit is payable under the Plan is incompetent to receive such payment or to give a valid release therefor, payment shall be made to the guardian, committee or other representative of the estate of such individual which has been duly appointed by a court of competent jurisdiction. If no guardian, committee or other representative has been appointed, payment may be made to any person as custodian for such individual under the California Uniform Transfers to Minors Act or may be made to or applied to or for the benefit of the minor or incompetent, the incompetent's spouse, children or other dependents, the institution or persons maintaining the minor or incompetent, or any of them, in such proportions as the Committee from time to time shall determine; and the release of the person or institution receiving the payment shall be a valid and complete discharge of any liability of the Employers with respect to any benefit so paid. 5.9 Undistributable Accounts. Each Participant and (in the event of death) his or her Beneficiary shall keep the Committee advised of his or her current address. If the Committee is unable to locate the Participant or Beneficiary to whom a Participant's Account is payable under this Section 5, the Participant's Account shall be frozen as of the date on which distribution would have been completed in accordance with this Section 5, and no further deemed investment returns shall be credited thereto. If a Participant whose Account was frozen (or his or her Beneficiary) files a claim for distribution of the Account within seven years after the date that it was frozen, and if the Committee determines that such claim is valid, then the frozen balance shall be paid by the Company in a lump sum cash payment as soon as practicable thereafter. 5.10 Committee Discretion. Within the specific time periods described in this Section 5, the Committee shall have sole discretion to determine the specific timing of the payment of any Account balance under the Plan. SECTION 6 PARTICIPANT'S INTEREST IN ACCOUNT 6.1 Deferral Contributions. Subject to Sections 6.2 (relating to vesting in Company Contributions), 8.1 (relating to creditor status) and 9.2 (relating to amendment and/or termination of the Plan), a Participant's interest in the balance credited to his or her Account at all times shall be 100% vested and nonforfeitable. 6.2 Vesting in Company Contributions. A Participant's interest in his or her Company Contribution (if any) shall become 100% vested and nonforfeitable on the date that is one year after the date such Company Contribution was made, but only if the Participant remains an employee of the Company or an Affiliate for such entire one year period. Upon the Participant's Termination Date, the vested portion of his or her Company Contribution Deferral Account shall be distributable to him or her in the manner and at the time set forth in Section 5, and the unvested portion of such Account shall be permanently forfeited. SECTION 7 ADMINISTRATION OF THE PLAN 7.1 Plan Administrator. The Company is hereby designated as the administrator of the Plan (within the meaning of section 3(16)(A) of ERISA). On behalf of the Company, the Committee shall have the authority to control and manage the operation and administration of the Plan. Any member of the Committee may resign at any time by notice in writing mailed or delivered to the Board, who may remove any member of the Committee at anytime and may fill any vacancy that exists. 7.2 Actions by Committee. Each decision of a majority of the members of the Committee then in office shall constitute the final and binding act of the Committee. The Committee may act with or without a meeting being called or held and shall keep minutes of all meetings held and a record of all actions taken by written consent. 7.3 Powers of Committee. The Committee shall have all powers and discretion necessary or appropriate to supervise the administration of the Plan and to control its operation in accordance with its terms, including, but not by way of limitation, the following discretionary powers: (a) To interpret and determine the meaning and validity of the provisions of the Plan and to determine any question arising under, or in connection with, the administration, operation or validity of the Plan or any amendment thereto; (b) To determine any and all considerations affecting the eligibility of any Employee to become a Participant or remain a Participant in the Plan; (c) To cause one or more separate Accounts to be maintained for each Participant; (d) To cause Deferral Contributions and Company Contributions and deemed earnings or losses and/or deemed interest to be credited to Participants' Accounts; (e) To establish and revise an accounting method or formula for the Plan, as provided in Section 4.3; (f) To determine the manner and form in which any distribution is to be made under the Plan; (g) To determine the status and rights of Participants and their spouses, Beneficiaries or estates; (h) To employ such counsel, agents and advisers, and to obtain such legal, clerical and other services, as it may deem necessary or appropriate in carrying out the provisions of the Plan; (i) To establish, from time to time, rules for the performance of its powers and duties and for the administration of the Plan; (j) To arrange for annual distribution to each Participant of a statement of benefits accrued under the Plan; (k) To publish a claims and appeal procedure satisfying the minimum standards of section 503 of ERISA pursuant to which individuals or estates may claim Plan benefits and appeal denials of such claims; (l) To delegate to any one or more of its members or to any other person, severally or jointly, the authority to perform for and on behalf of the Committee one or more of the functions of the Committee under the Plan; and (m) to decide all issues and questions regarding Account balances, and the time, form, manner and amount of distributions to Participants. 7.4 Decisions of Committee. All actions, interpretations, and decisions of the Committee shall be conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law. 7.5 Administrative Expenses. All expenses incurred in the administration of the Plan by the Committee, or otherwise, including legal fees and expenses, shall be paid and borne by the Employers. 7.6 Eligibility to Participate. No member of the Committee who is also an employee of an Employer shall be excluded from participating in the Plan if otherwise eligible, but he or she shall not be entitled, as a member of the Committee, to act or pass upon any matters pertaining specifically to his or her own Account under the Plan. 7.7 Indemnification. Each of the Employers shall, and hereby does, indemnify and hold harmless the members of the Committee, from and against any and all losses, claims, damages or liabilities (including attorneys' fees and amounts paid, with the approval of an authorized officer of the Company, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual. SECTION 8 FUNDING 8.1 Unfunded Plan. All amounts credited to a Participant's Account under the Plan shall continue for all purposes to be a part of the general assets of the Company. The interest of the Participant in his or her Account, including his or her right to distribution thereof, shall be an unsecured claim against the general assets of the Company. Although the Company may choose to invest a portion of its general assets for purposes of enabling it to make payments under the Plan, nothing contained in the Plan shall give any Participant or beneficiary any interest in or claim against any specific assets of the Company. SECTION 9 MODIFICATION OR TERMINATION OF PLAN 9.1 Employers' Obligations Limited. The Plan is voluntary on the part of the Employers, and the Employers do not guarantee to continue the Plan. The Company at any time may, by amendment of the Plan, suspend Deferral Contributions or Company Contributions or may discontinue Deferral Contributions or Company Contributions, with or without cause. Complete discontinuance of all Deferral Contributions or Company Contributions shall be deemed a termination of the Plan. 9.2 Right to Amend or Terminate. The Board reserves the right to alter, amend or terminate the Plan, or any part thereof, in such manner as it may determine, for any reason whatsoever. Any alteration, amendment or termination shall take effect upon the date indicated in the document embodying such alteration, amendment or termination, provided that no such alteration or amendment shall divest any amount already credited to a Participant's Account under the Plan. The Company may (but shall have no obligation to) seek a private letter ruling from the Internal Revenue Service regarding the tax consequences of participation in the Plan. If such private letter ruling is sought, the Committee shall have the right to adopt such amendments to the Plan (whether retroactive or prospective) that the Internal Revenue Service may require as a condition to the issuance of such ruling. 9.3 Effect of Termination. If the Plan is terminated pursuant to this Section 9, the balances credited to the Accounts of the affected Participants shall be distributed to them at the time and in the manner set forth in Section 5; provided, however, that the Committee, in its sole discretion, may authorize accelerated distribution of Participants' Accounts as of any earlier date. SECTION 10 GENERAL PROVISIONS 10.1 Inalienability. In no event may either a Participant, a former Participant or his or her Beneficiary, spouse or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose of any right or interest under the Plan; and such rights and interests shall not at any time be subject to the claims of creditors nor be liable to attachment, execution or other legal process. Accordingly, for example, a Participant's interest in the Plan is not transferable pursuant to a domestic relations order. 10.2 Rights and Duties. Neither the Employers nor the Committee shall be subject to any liability or duty under the Plan except as expressly provided in the Plan, or for any action taken, omitted or suffered in good faith. 10.3 No Enlargement of Employment Rights. Neither the establishment or maintenance of the Plan, the making of any Deferral Contributions or Company Contributions nor any action of any Employer or the Committee, shall be held or construed to confer upon any individual any right to be continued as an Employee nor, upon dismissal, any right or interest in any specific assets of the Employers other than as provided in the Plan. Each Employer expressly reserves the right to discharge any Employee at any time. 10.4 Apportionment of Costs and Duties. All acts required of the Employers under the Plan may be performed by the Company for itself and its Affiliates, and the costs of the Plan may be equitably apportioned by the Committee among the Company and the other Employers. Whenever an Employer is permitted or required under the terms of the Plan to do or perform any act, matter or thing, it shall be done and performed by any officer or employee of the Employer who is thereunto duly authorized by the board of directors of the Employer. 10.5 Applicable Law. The provisions of the Plan shall be construed, administered and enforced in accordance with ERISA, and to the extent not preempted by ERISA, with the laws of the State of California. 10.6 Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability shall not affect any other provisions of the Plan, and in lieu of each provision which is held invalid or unenforceable, there shall be added as part of the Plan a provision that shall be as similar in terms to such invalid or unenforceable provision as may be possible and be valid, legal, and enforceable. 10.7 Captions. The captions contained in and the table of contents prefixed to the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge or describe the scope or intent of the Plan nor in any way shall affect the construction of any provision of the Plan. EXECUTION IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this Plan on the date indicated below. THE GAP, INC. Dated: _______________, 1998 By ________________________________ Title: EX-10.4 5 Grant No. _________ THE GAP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT (CONSULTANT) The Gap, Inc. (the "Company") hereby grants to ___________________ ("Consultant"), a stock option under The Gap, Inc. 1996 Stock Option and Award Plan (the "Plan"), to purchase shares of common stock of the Company, $0.05 par value ("Shares"). This option 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 option are as follows: Number of Shares Purchasable with this Option: ________ Price per Share: ________ Date Option was Granted: ________ Date Option is Scheduled to become Exercisable: ________ Latest Date Option Expires: ________ As provided in the Plan and in this Agreement, this option may terminate before the date written above, including before the option becomes exercisable or is exercised. For example, if Consultant's service relationship ends before the date this option becomes exercisable, this option will terminate at the same time as Consultant's service relationship terminates. See paragraphs 5, 6 and 7 of Appendix A for further information concerning how changes in service relationship affect termination of this option. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION. Consultant is an independent contractor and not an employee of the Company. See paragraph 21 of Appendix A for further information concerning consultant's independent contractor status. IN WITNESS WHEREOF, the Company and Consultan t 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 option is subject to all of the terms and conditions of this Agreement (including the attached Appendix A) and of the Plan. CONSULTANT Dated: _______________________ ______________________________________________________ Address: _____________________________________________ _____________________________________________ _____________________________________________ Social Insurance No.: ________________________ APPENDIX A TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION (CONSULTANT) 1. Grant of Option. The Company hereby grants to Consultant under the Plan, as a separate incentive in connection with his or her service relationship and not in lieu of any salary or other compensation for his or her services, a non-qualified stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of the number of Shares set forth on page 1 of this Agreement. The option granted hereby is not intended to be an Incentive Stock Option within the meaning of Section 422 of the Code. 2. Exercise Price. The purchase price per Share (the "Option Price") shall be equal to the price set forth on page 1 of this Agreement. The Option Price shall be payable in the legal tender of the United States. 3. Number of Shares. The number and class of Shares specified in paragraph 1 above, and/or the Option Price, are subject to appropriate adjustment in the event of changes in the capital stock of the Company by reason of stock dividends, split-ups or combinations of shares, reclassifications, mergers, consolidations, reorganizations or liquidations. Subject to any required action of the stockholders of the Company, if the Company shall be the surviving corporation in any merger or consolidation, the option granted hereunder (to the extent that it is still outstanding) shall pertain to and apply to the securities to which a holder of the same number of Shares that are then subject to the option would have been entitled. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Compensation and Stock Option Committee of the Company's Board of Directors (the "Committee"), whose determination in that respect shall be final, binding and conclusive. 4. Commencement of Exercisability. Except as otherwise provided in this Agreement, the right to exercise the option awarded by this Agreement shall accrue as set forth on page 1 of this Agreement, assuming that Consultant is still engaged by the Company or an Affiliate on such date(s). If Consultant is not in a service relationship with the Company on such date(s), the option shall terminate, as set out in paragraph 7. 5. Postponement of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall accrue on a date later than such date. The Committee shall exercise its power to postpone the commencement of exercisability only if the Committee, in its sole discretion, determines that Consultant has taken a personal leave of absence (as defined from time to time by the Committee) since the date of this Agreement. The duration of the period of postponement shall equal the duration of the personal leave of absence. If Consultant does not return from the personal leave of absence, the option shall terminate as set out in paragraph 7. 6. Elimination of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall never accrue as to all or part of the Shares specified in paragraph 1 (and as adjusted pursuant to paragraph 3, if appropriate), in which case the option shall terminate as to such Shares. The Committee shall exercise such power only if the Committee, in its sole discretion, determines that Consultant's service relationship with the Company or an Affiliate has been reduced to less than the number of hours which was the subject of the service relationship as of the date of this Agreement. 7. Termination of Option. In the event that Consultant's service relationship with the Company or an Affiliate terminates for any reason other than death, this option shall immediately thereupon terminate. In the event that Consultant shall die while engaged by the Company or an Affiliate, any unexercised portion of the option (whether or not exercisable) may be exercised by Consultant's beneficiary or transferee, as hereinafter provided, for a period of one (1) year after the date of Consultant's death or within ten (10) years from the date of this Agreement, whichever shall first occur. Notwithstanding the preceding two sentences, in the event that within one year of the date of this Agreement, Consultant dies, this option shall immediately thereupon terminate. 8. Persons Eligible to Exercise. The option shall be exercisable during Consultant's lifetime only by Consultant. The option shall be non-transferable by Consultant other than by a beneficiary designation made in a form and manner acceptable to the Committee, or by will or the applicable laws of descent and distribution. 9. Death of Consultant. To the extent exercisable after Consultant's death, the option shall be exercised only by Consultant's designated beneficiary or beneficiaries, or if no beneficiary survives Consultant, by the person or persons entitled to the option under Consultant's will, or if Consultant shall fail to make testamentary disposition of the option, his or her legal representative. Any transferee exercising the option must furnish the Company (a) written notice of his or her status as transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of the option and compliance with any laws or regulations pertaining to said transfer, and (c) written acceptance of the terms and conditions of the option as prescribed in this Agreement. 10. Exercise of Option. The option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving written notice of exercise to the Company, specifying the number of full Shares to be purchased and accompanied by full payment of the purchase price thereof (and the amount of any income tax the Company determines is required to be withheld by reason of such exercise), and (b) by giving satisfactory assurances in writing if requested by the Company, signed by the person exercising the option, that the Shares to be purchased upon such exercise are being purchased for investment and not with a view to the distribution thereof. 11. No Rights of Stockholder. Neither Consultant nor any person claiming under or through said Consultant shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable upon the exercise of the option, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to Consultant. 12. No Right to Continuation of Service Relationship. Consultant understands and agrees that this Agreement does not impact in any way the right of the Company, or the Affiliate engaging Consultant, as the case may be, to terminate or change the terms of the service relationship of Consultant at any time for any reason whatsoever, with or without good cause. Consultant's service relationship may be terminated by either the Company or Consultant. 13. 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 Consultant shall be addressed to Consultant at the address set forth beneath Consultant's signature hereto, or at such other address as Consultant 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. 14. Non-Transferability of Option. Except as otherwise herein provided, the option 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 said option, 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, said option and the rights and privileges conferred hereby shall immediately become null and void. 15. Maximum Term of Option. Notwithstanding any other provision of this Agreement, this option is not exercisable after the expiration of ten (10) years from the date of this Agreement. 16. Binding Agreement. Subject to the limitation on the transferability of the option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 17. Plan Governs. This Agreement is subject to all 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 and not defined in this Agreement shall have the meaning set forth in the Plan. 18. 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 Consultant, 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. 19. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 20. 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. 21. Independent Contractor. Consultant acknowledges that he or she will act at all times as an independent contractor and not as an employee of the Company or its Affiliates. Accordingly, Consultant understands that (unless expressly required by the laws of a foreign jurisdiction to which Consultant is subject) the Company will not pay, or withhold from Consultant, under this Agreement any F.I.C.A. (social security), state unemployment or disability insurance premiums, state or federal income taxes, or other taxes, and that Consultant is responsible for paying any applicable federal self- employment tax (in lieu of F.I.C.A.), state and federal income taxes (including estimated tax payments) and other applicable taxes. Consultant waives all rights to any benefits available to employees of the Company not otherwise set forth in a written agreement between Consultant and the Company or its Affiliates and signed by an authorized officer. Consultant further agrees that he or she will indemnify the Company and its Affiliates against any claim asserted against the Company and its Affiliates for Consultant's failure to comply with his or her obligations under this paragraph. EX-10.5 6 Grant No. __________ THE GAP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT1 The Gap, Inc. (the "Company") hereby grants to_________________________ (the "Employee"), a stock option under The Gap, Inc. 1996 Stock Option and Award Plan (the "Plan"), to purchase shares of common stock of the Company, $0.05 par value ("Shares"). This option 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, Appendix B and of the Plan, the principal features of this option are as follows: Number of Shares Purchasable with this Option: ________ Price per Share: ________ Date Option was Granted: ________ Date Option is Scheduled to become Exercisable: ________ Latest Date Option Expires: ________ As provided in the Plan and in this Agreement, this option may terminate before the date written above, including before the option becomes exercisable or is exercised. For example, if Employee's employment ends before the date this option becomes exercisable, this option will terminate at the same time as Employee's employment terminates. See paragraphs 5, 6 and 7 of Appendix A for further information concerning how changes in employment affect termination of this option. PLEASE BE SURE TO READ ALL OF APPENDIX A and APPENDIX B, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION. 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 option is subject to all of the terms and conditions of this Agreement (including the attached Appendix A and Appendix B) and of the Plan. EMPLOYEE Dated: _______________________ __________________________________ Address: _________________________ ___________________________________ ___________________________________ Social Security No.: __________________________ 1STOCK OPTIONS GRANTED BY THE GAP, INC. ARE GOVERNED SOLELY BY THE LAWS OF THE STATE OF CALIFORNIA AND THE UNITED STATES OF AMERICA. APPENDIX A TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION 1. Grant of Option. The Company hereby grants to Employee under the Plan, 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, a non-qualified stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of the number of Shares set forth on page 1 of this Agreement. The option granted hereby is not intended to be an Incentive Stock Option within the meaning of Section 422 of the Code. 2. Exercise Price. The purchase price per Share (the "Option Price") shall be equal to the price set forth on page 1 of this Agreement. The Option Price shall be payable in the legal tender of the United States. 3. Number of Shares. The number and class of Shares specified in paragraph 1 above, and/or the Option Price, are subject to appropriate adjustment in the event of changes in the capital stock of the Company by reason of stock dividends, split-ups or combinations of shares, reclassifications, mergers, consolidations, reorganizations or liquidations. Subject to any required action of the stockholders of the Company, if the Company shall be the surviving corporation in any merger or consolidation, the option granted hereunder (to the extent that it is still outstanding) shall pertain to and apply to the securities to which a holder of the same number of Shares that are then subject to the option would have been entitled. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Compensation and Stock Option Committee of the Company's Board of Directors (the "Committee"), whose determination in that respect shall be final, binding and conclusive. 4. Commencement of Exercisability. Except as otherwise provided in this Agreement, the right to exercise the option awarded by this Agreement shall accrue as set forth on page 1 of this Agreement, assuming that Employee is still employed with the Company or an Affiliate on such date(s). If Employee is not employed on such date(s), the option shall terminate, as set out in paragraph 7. 5. Postponement of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall accrue on a date later than such date. The Committee shall exercise its power to postpone the commencement of exercisability only if the Committee, in its sole discretion, determines that Employee has taken a personal leave of absence (as defined from time to time by the Committee) since the date of this Agreement. The duration of the period of postponement shall equal the duration of the personal leave of absence. If Employee does not return from the personal leave of absence, the option shall terminate as set out in paragraph 7. 6. Elimination of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall never accrue as to all or part of the Shares specified in paragraph 1 (and as adjusted pursuant to paragraph 3, if appropriate), in which case the option shall terminate as to such Shares. The Committee shall exercise such power only if the Committee, in its sole discretion, determines that Employee has transferred to a position which, under the Committee's then existing policy, normally would not qualify Employee to be granted options under the Plan or to be granted the number of options granted under this Agreement. 7. Termination of Option. In the event that Employee's employment with the Company or an Affiliate terminates for any reason other than Retirement (as defined in the Plan) or death, this option shall immediately thereupon terminate. In the event of Employee's Retirement, Employee may, within one (1) year after the date of such Retirement, or within ten (10) years from the date of this Agreement, whichever shall first occur, exercise any unexercised portion of the option (whether or not exercisable). In the event that Employee shall die while in the employ of the Company or an Affiliate, any unexercised portion of the option (whether or not exercisable) may be exercised by Employee's beneficiary or transferee, as hereinafter provided, for a period of one (1) year after the date of Employee's death or within ten (10) years from the date of this Agreement, whichever shall first occur. Notwithstanding the preceding two sentences, in the event that within one year of the date of this Agreement, Employee dies or terminates employment due to Retirement, this option shall immediately thereupon terminate. 8. Persons Eligible to Exercise. The option shall be exercisable during Employee's lifetime only by Employee. The option shall be non-transferable by Employee other than by a beneficiary designation made in a form and manner acceptable to the Committee, or by will or the applicable laws of descent and distribution. 9. Death of Employee. To the extent exercisable after Employee's death, the option shall be exercised only by Employee's designated beneficiary or beneficiaries, or if no beneficiary survives Employee, by the person or persons entitled to the option under Employee's will, or if Employee shall fail to make testamentary disposition of the option, his or her legal representative. Any transferee exercising the option must furnish the Company (a) written notice of his or her status as transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of the option and compliance with any laws or regulations pertaining to said transfer, and (c) written acceptance of the terms and conditions of the option as prescribed in this Agreement. 10. Exercise of Option. The option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving written notice of exercise to the Company, specifying the number of full Shares to be purchased and accompanied by full payment of the purchase price thereof (and the amount of any income tax the Company determines is required to be withheld by reason of such exercise), and (b) by giving satisfactory assurances in writing if requested by the Company, signed by the person exercising the option, that the Shares to be purchased upon such exercise are being purchased for investment and not with a view to the distribution thereof. 11. No Rights of Stockholder. Neither Employee nor any person claiming under or through said Employee shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable upon the exercise of the option, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to Employee. 12. No Right to Continued Employment. The granting of stock options to Employee does not in any way impact the right of the Company to terminate Employee's employment in accordance with applicable law. 13. 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 Employee shall be addressed to Employee at the address set forth beneath Employee's signature hereto, or at such other address as 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. 14. Non-Transferability of Option. Except as otherwise herein provided, the option 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 said option, 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, said option and the rights and privileges conferred hereby shall immediately become null and void. 15. Maximum Term of Option. Notwithstanding any other provision of this Agreement, this option is not exercisable after the expiration of ten (10) years from the date of this Agreement. 16. Binding Agreement. Subject to the limitation on the transferability of the option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 17. Plan Governs. This Agreement is subject to all 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 and not defined in this Agreement shall have the meaning set forth in the Plan. 18. 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. 19. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 20. 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. APPENDIX B ADDITIONAL TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION GRANT NUMBER [________] For Grant Number [number], an option granted to [employee name], under The Gap, Inc. 1996 Stock Option and Award Plan, the following terms apply in addition to those listed on Appendix A: 21. Sale of Shares. Employee shall not sell Shares issued under the Agreement before the expiration of a period of five years from the date of grant. Employee undertakes all stock price market risk once this option is exercised. The market value of the shares could decrease. 22. Escrow Account. During the period from the date this option becomes exercisable to the date five years from the date of grant, Employee may purchase exercisable shares in accordance with the Agreement only if Employee deposits the Shares acquired upon exercise in a brokerage account with the firm of Donaldson, Lufkin & Jenrette Securities Corporation in care of Mr. Jonathan L. White (or such other broker as determined by the Secretary of the Company in her sole discretion) (the "broker") and retains those Shares in that account for such entire period. 23. Terms of Escrow Account. In the event of any disrespect of any obligation of Employee under this Agreement or under the Plan, Employee shall pay to The Gap, Inc. and/or Gap (France) SAS damages including all fees, costs, charges and payments incurred by The Gap, Inc. and/or Gap (France) SAS as a result of Employee's breach. Such damages shall be withheld at the source by the broker and deducted from the transfer price of the relevant shares. Employee agrees that this Agreement shall serve as sufficient authorization and direction to the broker to honor requests from The Gap, Inc. to withhold funds and disperse such funds to The Gap, Inc. and/or Gap (France) SAS. If such a withholding is not feasible, Employee shall reimburse to The Gap, Inc. and/or Gap (France) SAS all fees, costs, charges and payments incurred by The Gap, Inc. and/or Gap (France) SAS as a result of Employee's breach. THE GAP, INC. Dated: [grant date] Anne B. Gust Executive Vice President and Secretary EMPLOYEE Dated: [employee name] social insurance number EX-10.6 7 Grant No. __________ THE GAP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT1 The Gap, Inc. (the "Company") hereby grants to_________________________ (the "Employee"), a stock option under The Gap, Inc. 1996 Stock Option and Award Plan (the "Plan"), to purchase shares of common stock of the Company, $0.05 par value ("Shares"). This option 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 option are as follows: Number of Shares Purchasable with this Option: ________ Price per Share: ________ Date Option was Granted: ________ Date Option is Scheduled to become Exercisable: ________ Latest Date Option Expires: ________ As provided in the Plan and in this Agreement, this option may terminate before the date written above, including before the option becomes exercisable or is exercised. For example, if Employee's employment ends before the date this option becomes exercisable, this option will terminate at the same time as Employee's employment terminates. See paragraphs 5, 6 and 7 of Appendix A for further information concerning how changes in employment affect termination of this option. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION. 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 option 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 No.: ______________ 1STOCK OPTIONS GRANTED BY THE GAP, INC. ARE GOVERNED SOLELY BY THE LAWS OF THE STATE OF CALIFORNIA AND THE UNITED STATES OF AMERICA. APPENDIX A TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION 1. Grant of Option. The Company hereby grants to Employee under the Plan, 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, a non-qualified stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of the number of Shares set forth on page 1 of this Agreement. The option granted hereby is not intended to be an Incentive Stock Option within the meaning of Section 422 of the Code. 2. Exercise Price. The purchase price per Share (the "Option Price") shall be equal to the price set forth on page 1 of this Agreement. The Option Price shall be payable in the legal tender of the United States. 3. Number of Shares. The number and class of Shares specified in paragraph 1 above, and/or the Option Price, are subject to appropriate adjustment in the event of changes in the capital stock of the Company by reason of stock dividends, split-ups or combinations of shares, reclassifications, mergers, consolidations, reorganizations or liquidations. Subject to any required action of the stockholders of the Company, if the Company shall be the surviving corporation in any merger or consolidation, the option granted hereunder (to the extent that it is still outstanding) shall pertain to and apply to the securities to which a holder of the same number of Shares that are then subject to the option would have been entitled. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Compensation and Stock Option Committee of the Company's Board of Directors (the "Committee"), whose determination in that respect shall be final, binding and conclusive. 4. Commencement of Exercisability. Except as otherwise provided in this Agreement, the right to exercise the option awarded by this Agreement shall accrue as set forth on page 1 of this Agreement, assuming that Employee is still employed with the Company or an Affiliate on such date(s). If Employee is not employed on such date(s), the option shall terminate, as set out in paragraph 7. 5. Postponement of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall accrue on a date later than such date. The Committee shall exercise its power to postpone the commencement of exercisability only if the Committee, in its sole discretion, determines that Employee has taken a personal leave of absence (as defined from time to time by the Committee) since the date of this Agreement. The duration of the period of postponement shall equal the duration of the personal leave of absence. If Employee does not return from the personal leave of absence, the option shall terminate as set out in paragraph 7. 6. Elimination of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall never accrue as to all or part of the Shares specified in paragraph 1 (and as adjusted pursuant to paragraph 3, if appropriate), in which case the option shall terminate as to such Shares. The Committee shall exercise such power only if the Committee, in its sole discretion, determines that Employee has transferred to a position which, under the Committee's then existing policy, normally would not qualify Employee to be granted options under the Plan or to be granted the number of options granted under this Agreement. 7. Termination of Option. In the event that Employee's employment with the Company or an Affiliate terminates for any reason other than Retirement (as defined in the Plan) or death, this option shall immediately thereupon terminate. In the event of Employee's Retirement, Employee may, within one (1) year after the date of such Retirement, or within ten (10) years from the date of this Agreement, whichever shall first occur, exercise any unexercised portion of the option (whether or not exercisable). In the event that Employee shall die while in the employ of the Company or an Affiliate, any unexercised portion of the option (whether or not exercisable) may be exercised by Employee's beneficiary or transferee, as hereinafter provided, for a period of one (1) year after the date of Employee's death or within ten (10) years from the date of this Agreement, whichever shall first occur. Notwithstanding the preceding two sentences, in the event that within one year of the date of this Agreement, Employee dies or terminates employment due to Retirement, this option shall immediately thereupon terminate. 8. Persons Eligible to Exercise. The option shall be exercisable during Employee's lifetime only by Employee. The option shall be non-transferable by Employee other than by a beneficiary designation made in a form and manner acceptable to the Committee, or by will or the applicable laws of descent and distribution. 9. Death of Employee. To the extent exercisable after Employee's death, the option shall be exercised only by Employee's designated beneficiary or beneficiaries, or if no beneficiary survives Employee, by the person or persons entitled to the option under Employee's will, or if Employee shall fail to make testamentary disposition of the option, his or her legal representative. Any transferee exercising the option must furnish the Company (a) written notice of his or her status as transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of the option and compliance with any laws or regulations pertaining to said transfer, and (c) written acceptance of the terms and conditions of the option as prescribed in this Agreement. 10. Exercise of Option. The option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving written notice of exercise to the Company, specifying the number of full Shares to be purchased and accompanied by full payment of the purchase price thereof (and the amount of any income tax the Company determines is required to be withheld by reason of such exercise), and (b) by giving satisfactory assurances in writing if requested by the Company, signed by the person exercising the option, that the Shares to be purchased upon such exercise are being purchased for investment and not with a view to the distribution thereof. 11. No Rights of Stockholder. Neither Employee nor any person claiming under or through said Employee shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable upon the exercise of the option, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to Employee. 12. No Right to Continued Employment. The granting of stock options to Employee does not in any way impact the right of the Company to terminate Employee's employment in accordance with applicable law. 13. 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 Employee shall be addressed to Employee at the address set forth beneath Employee's signature hereto, or at such other address as 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. 14. Non-Transferability of Option. Except as otherwise herein provided, the option 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 said option, 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, said option and the rights and privileges conferred hereby shall immediately become null and void. 15. Maximum Term of Option. Notwithstanding any other provision of this Agreement, this option is not exercisable after the expiration of ten (10) years from the date of this Agreement. 16. Binding Agreement. Subject to the limitation on the transferability of the option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 17. Plan Governs. This Agreement is subject to all 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 and not defined in this Agreement shall have the meaning set forth in the Plan. 18. 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. 19. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 20. 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. * * * EX-10.7 8 Grant No. _________ THE GAP, INC NON-QUALIFIED STOCK OPTION AGREEMENT1 The Gap, Inc. (the "Company") hereby grants to ____________________ (the "Employee"), a stock option under The Gap, Inc. 1996 Stock Option and Award Plan (the "Plan"), to purchase shares of common stock of the Company, $0.05 par value ("Shares"). This option 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 option are as follows: Number of Shares Purchasable with this Option: _________ Price per Share: _________ Date Option was Granted: _________ Date Option is Scheduled to become Exercisable: _________ Latest Date Option Expires: _________ Shares issued upon the exercise of this option will be Treasury Shares. As provided in the Plan and in this Agreement, this option may terminate before the date written above, including before the option becomes exercisable or is exercised. For example, if Employee's employment ends before the date this option becomes exercisable, this option will terminate at the same time as Employee's employment terminates. See paragraphs 5, 6 and 7 of Appendix A for further information concerning how changes in employment affect termination of this option. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION. 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 option is subject to all of the terms and conditions of this Agreement (including the attached Appendix A) and of the Plan. I understand that for purposes of Japanese law, this award is not considered salary, nor is it a promise for a reoccurring grant of stock options. EMPLOYEE Dated: _______________________ __________________________________ Address: __________________________________ __________________________________ __________________________________ Social Security No.: ______________ 1 STOCK OPTIONS GRANTED BY THE GAP, INC. ARE GOVERNED SOLELY BY THE LAWS OF THE STATE OF CALIFORNIA AND THE UNITED STATES OF AMERICA. APPENDIX A TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION 1. Grant of Option. The Company hereby grants to Employee under the Plan, 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, a non-qualified stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of the number of Shares set forth on page 1 of this Agreement. The option granted hereby is not intended to be an Incentive Stock Option within the meaning of Section 422 of the Code. 2. Exercise Price. The purchase price per Share (the "Option Price") shall be equal to the price set forth on page 1 of this Agreement. The Option Price shall be payable in the legal tender of the United States. 3. Number of Shares. The number and class of Shares specified in paragraph 1 above, and/or the Option Price, are subject to appropriate adjustment in the event of changes in the capital stock of the Company by reason of stock dividends, split-ups or combinations of shares, reclassifications, mergers, consolidations, reorganizations or liquidations. Subject to any required action of the stockholders of the Company, if the Company shall be the surviving corporation in any merger or consolidation, the option granted hereunder (to the extent that it is still outstanding) shall pertain to and apply to the securities to which a holder of the same number of Shares that are then subject to the option would have been entitled. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Compensation and Stock Option Committee of the Company's Board of Directors (the "Committee"), whose determination in that respect shall be final, binding and conclusive. 4. Commencement of Exercisability. Except as otherwise provided in this Agreement, the right to exercise the option awarded by this Agreement shall accrue as set forth on page 1 of this Agreement, assuming that Employee is still employed with the Company or an Affiliate on such date(s). If Employee is not employed on such date(s), the option shall terminate, as set out in paragraph 7. 5. Postponement of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall accrue on a date later than such date. The Committee shall exercise its power to postpone the commencement of exercisability only if the Committee, in its sole discretion, determines that Employee has taken a personal leave of absence (as defined from time to time by the Committee) since the date of this Agreement. The duration of the period of postponement shall equal the duration of the personal leave of absence. If Employee does not return from the personal leave of absence, the option shall terminate as set out in paragraph 7. 6. Elimination of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the date this option is scheduled to become exercisable, the Committee, in its sole discretion, may determine that the right to exercise the option awarded by this Agreement shall never accrue as to all or part of the Shares specified in paragraph 1 (and as adjusted pursuant to paragraph 3, if appropriate), in which case the option shall terminate as to such Shares. The Committee shall exercise such power only if the Committee, in its sole discretion, determines that Employee has transferred to a position which, under the Committee's then existing policy, normally would not qualify Employee to be granted options under the Plan or to be granted the number of options granted under this Agreement. 7. Termination of Option. In the event that Employee's employment with the Company or an Affiliate terminates for any reason other than Retirement (as defined in the Plan) or death, this option shall immediately thereupon terminate. In the event of Employee's Retirement, Employee may, within one (1) year after the date of such Retirement, or within ten (10) years from the date of this Agreement, whichever shall first occur, exercise any unexercised portion of the option (whether or not exercisable). In the event that Employee shall die while in the employ of the Company or an Affiliate, any unexercised portion of the option (whether or not exercisable) may be exercised by Employee's beneficiary or transferee, as hereinafter provided, for a period of one (1) year after the date of Employee's death or within ten (10) years from the date of this Agreement, whichever shall first occur. Notwithstanding the preceding two sentences, in the event that within one year of the date of this Agreement, Employee dies or terminates employment due to Retirement, this option shall immediately thereupon terminate. 8. Persons Eligible to Exercise. The option shall be exercisable during Employee's lifetime only by Employee. The option shall be non-transferable by Employee other than by a beneficiary designation made in a form and manner acceptable to the Committee, or by will or the applicable laws of descent and distribution. 9. Death of Employee. To the extent exercisable after Employee's death, the option shall be exercised only by Employee's designated beneficiary or beneficiaries, or if no beneficiary survives Employee, by the person or persons entitled to the option under Employee's will, or if Employee shall fail to make testamentary disposition of the option, his or her legal representative. Any transferee exercising the option must furnish the Company (a) written notice of his or her status as transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of the option and compliance with any laws or regulations pertaining to said transfer, and (c) written acceptance of the terms and conditions of the option as prescribed in this Agreement. 10. Exercise of Option. The option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving written notice of exercise to the Company, specifying the number of full Shares to be purchased and accompanied by full payment of the purchase price thereof (and the amount of any income tax the Company determines is required to be withheld by reason of such exercise), and (b) by giving satisfactory assurances in writing if requested by the Company, signed by the person exercising the option, that the Shares to be purchased upon such exercise are being purchased for investment and not with a view to the distribution thereof. 11. No Rights of Stockholder. Neither Employee nor any person claiming under or through said Employee shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable upon the exercise of the option, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to Employee. 12. No Right to Continued Employment. The granting of stock options to Employee does not in any way impact the right of the Company to terminate Employee's employment in accordance with applicable law. 13. 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 Employee shall be addressed to Employee at the address set forth beneath Employee's signature hereto, or at such other address as 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. 14. Non-Transferability of Option. Except as otherwise herein provided, the option 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 said option, 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, said option and the rights and privileges conferred hereby shall immediately become null and void. 15. Maximum Term of Option. Notwithstanding any other provision of this Agreement, this option is not exercisable after the expiration of ten (10) years from the date of this Agreement. 16. Binding Agreement. Subject to the limitation on the transferability of the option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 17. Plan Governs. This Agreement is subject to all 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 and not defined in this Agreement shall have the meaning set forth in the Plan. 18. 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. 19. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 20. 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. Exhibit 10.8 Grant No. ___________ THE GAP, INC. UK SUB-PLAN TO THE US STOCK OPTION AND AWARD PLAN The Gap, Inc. (the "Company") hereby grants to ______________________ (the "Employee"), a stock option under The Gap, Inc. UK Sup-plan to the 1996 Stock Option and Award Plan (the "Sub-plan"), to purchase shares of common stock of the Company, $0.05 par value ("Shares"). This option 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 Sub-plan, the principal features of this option are as follows: Number of Shares Purchasable with this Option: ________ Price per Share: ________ Date Option was Granted: ________ Date Option is Scheduled to become Exercisable: ________ Latest Date Option Expires: ________ As provided in the Sub-plan and in this Agreement, this option may terminate before the date written above, including before the option becomes exercisable or is exercised. For example, if Employee's employment ends before the date this option becomes exercisable, this option will terminate at the same time as Employee's employment terminates. See paragraphs 5, 6 and 7 of Appendix A for further information concerning how changes in employment affect termination of this option. As provided in the Sub-plan and in this Agreement, the exercise of this option must be: made at a time when the Scheme retains Inland Revenue approval, not earlier than 3 or later than 10 years after the Option was granted, and not earlier than 3 years following the latest previous exercise by the participant of an Option (obtained under this or any other Option Scheme approved by the Inland Revenue) which enjoyed relief from income tax. It is not transferable, and will lapse upon the occasion of an assignment, charge, disposal or other dealing with the rights conveyed by it in any other circumstances. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION. 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 option is subject to all of the terms and conditions of this Agreement (including the attached Appendix A) and of the Sub-plan. EMPLOYEE Dated: _______________________ Address: National Insurance No: APPENDIX A TERMS AND CONDITIONS OF GAP INC UK SUB-PLAN TO THE US STOCK OPTION AND AWARD PLAN 1. Grant of Option. The Company hereby grants to Employee under the Sub-plan, 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 approved stock option to purchase, on the terms and conditions set forth in this Agreement and the Sub-plan, all or any part of the number of Shares set forth on page 1 of this Agreement. The option granted hereby is not intended to be an Incentive Stock Option within the meaning of Section 422 of the Code. 2. Exercise Price. The purchase price per Share (the "Option Price") shall be equal to the price set forth on page 1 of this Agreement, which is the fair market value per Share as defined in the Sub-plan Rules as the average of the middle market quotation (as derived from the Wall Street Journal) on the date of this Agreement. 3. Number of Shares. The number and class of Shares specified in paragraph 1 above, and/or the Option Price, are subject to appropriate adjustment in the event of changes constituting a variation in capital within the meaning of paragraph 29 of Schedule 9 to the United Kingdom Income and Corporation Taxes Act 1988, and any such adjustment will be subject to Inland Revenue approval before it takes effect. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Compensation and Stock Option Committee of the Company's Board of Directors (the "Committee"), whose determination in that respect shall be final, binding and conclusive. 4. Commencement of Exercisability. Except as otherwise provided in this Agreement, the right to exercise the option awarded by this Agreement shall accrue as to 100% of the Shares subject to such option on the third anniversary date of the date of this Agreement, and expire on the tenth anniversary date of this agreement, assuming that Employee is still employed with the Company or an Affiliate on such date. If Employee is not employed on such date, the option shall terminate, as set out in paragraph 7. 5. Postponement of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the third anniversary of the date of this Agreement, the Committee, in its sole discretion, with the approval of the Inland Revenue, may determine that the right to exercise the option awarded by this Agreement shall accrue on a date later than the third anniversary of this Agreement. The Committee shall exercise its power to postpone the commencement of exercisability only if the Committee, in its sole discretion, determines that Employee has taken a personal leave of absence (as defined from time to time by the Committee) since the date of this Agreement. The duration of the period of postponement shall equal the duration of the personal leave of absence. If Employee does not return from the personal leave of absence, the option shall terminate as set out in paragraph 7. 6. Elimination of Exercisability. Notwithstanding paragraph 4 or any other provision of this Agreement, prior to the third anniversary of the date of this Agreement, the Committee, in its sole discretion, with the approval of the Inland Revenue, may determine that the right to exercise the option awarded by this Agreement shall never accrue as to all or part of the Shares specified in paragraph 1 (and as adjusted pursuant to paragraph 3, if appropriate). The Committee shall exercise such power only if the Committee, in its sole discretion, determines that Employee has transferred to a position which, under the Committee's then existing policy, normally would not qualify Employee to be granted options under the Sub-plan. 7. Termination of Option. In the event that Employee's employment with the Company or an Affiliate terminates for any reason other than Retirement (as defined in the Sub-plan) or death, this option shall immediately thereupon terminate. In the event of Employee's Retirement, Employee may, within one (1) year after the date of such Retirement, or within ten (10) years from the date of this Agreement, whichever shall first occur, exercise any unexercised portion of the option. In the event that Employee shall die while in the employ of the Company or an Affiliate, any unexercised portion of the option may be exercised by Employee's beneficiary or transferee, as hereinafter provided, for a period of one (1) year after the date of Employee's death or within ten (10) years from the date of this Agreement, whichever shall first occur. Notwithstanding the preceding two sentences, in the event that within one year of the date of this Agreement, Employee dies or terminates employment due to Retirement, this option shall immediately thereupon terminate. 8. Persons Eligible to Exercise. The option shall be exercisable during Employee's lifetime only by Employee. The option is personal to Employee and is not capable of being transferred, assigned or charged by Employee, except by will or the applicable laws of descent and distribution. 9. Death of Employee. To the extent exercisable after Employee's death, the option shall be exercised only by person or persons entitled to the option under Employee's will, or if Employee shall fail to make testamentary disposition of the option, his or her legal representative. Any transferee exercising the option must furnish the Company (a) written notice of his or her status as transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of the option and compliance with any laws or regulations pertaining to said transfer, and (c) written acceptance of the terms and conditions of the option as prescribed in this Agreement. 10. Exercise of Option. The option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving written notice of exercise to the Company, specifying the number of full Shares to be purchased and accompanied by full payment of the purchase prices thereof (and the amount of any income tax the Company determines is required to be withheld by reason of such exercise), and (b) by giving satisfactory assurances in writing if requested by the Company, signed by the person exercising the option, that the Shares to be purchased upon such exercise are being purchased for investment and not with a view to the distribution thereof. 11. No Rights of Stockholder. Neither Employee nor any person claiming under or through said Employee shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable upon the exercise of the option, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to Employee. The Company undertakes to issue such Share certificates within thirty days of employee exercising the option. 12. No Right to Continued Employment. The granting of stock options to Employee does not in any way impact the right of the Company to terminate Employee's employment in accordance with applicable law. 13. 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 Employee shall be addressed to Employee at the address set forth beneath Employee's signature hereto, or at such other address as 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. 14. Non-Transferability of Option. Except as otherwise herein provided, the option 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 said option, 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, said option and the rights and privileges conferred hereby shall immediately become null and void. 15. Maximum Term of Option. Notwithstanding any other provision of this Agreement, this option is not exercisable after the expiration of ten (10) years from the date of this Agreement. 16. Binding Agreement. Subject to the limitation on the transferability of the option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 17. Sub-plan Governs. This Agreement is subject to all terms and provisions of the Sub-plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Sub- plan, the provisions of the Sub-plan shall govern. Terms used and not defined in this Agreement shall have the meaning set forth in the Sub-plan. 18. Committee Authority. The Committee shall have the power to interpret the Sub-plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Sub-plan as are consistent therewith, and to interpret or revoke any such rules, subject to the approval of the Inland Revenue. 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 Sub-plan or this Agreement. 19. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 20. 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. EX-15 9 Deloitte & Touche LLP 50 Fremont Street Telephone: (415) 247-4000 San Francisco, California 94105-2230 Facsimile: (415) 247-4329 To the Board of Directors and Stockholders of The Gap, Inc.: We have made reviews, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim condensed consolidated financial statements of The Gap, Inc. and subsidiaries for the thirty-nine week periods ended October 31, 1998 and November 1, 1997, as indicated in our report dated November 10, 1998; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended October 31, 1998, is incorporated by reference in Post Effective Amendment No. 1 to Registration Statement No. 2-72586, Registration Statement No. 2-60029, Registration Statement No. 33-39089, Registration Statement No. 33-40505, Registration Statement No. 33-54686, Registration Statement No. 33-54688, Registration Statement No. 33-54690, Registration Statement No. 33-56021, Registration Statement No. 333-00417, Registration Statement No. 333-12337, Registration Statement No. 333-36265, and Registration Statement No. 333-68285. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP December 10, 1998 Deloitte Touche Tohmatsu International EX-27 10
5 3-MOS 3-MOS 3-MOS 9-MOS JAN-30-1999 JAN-30-1999 JAN-30-1999 JAN-30-1999 MAY-02-1998 AUG-01-1998 OCT-31-1998 OCT-30-1998 836,314 515,207 271,518 271,518 0 29,532 0 0 0 0 0 0 0 0 0 0 823,305 1,102,693 1,374,916 1,374,916 1,844,434 1,834,021 1,841,447 1,841,447 2,472,722 2,633,159 2,865,362 2,865,362 997,623 1,056,719 1,116,522 1,116,522 3,481,726 3,583,149 3,754,761 3,754,761 999,024 1,264,980 1,687,558 1,687,558 0 0 0 0 0 0 0 0 0 0 0 0 33,081 33,127 33,174 33,174 1,661,475 1,496,172 1,222,822 1,222,822 3,481,726 3,583,149 3,754,761 3,754,761 1,719,712 1,904,970 2,399,948 6,024,630 1,719,712 1,904,970 2,399,948 6,024,630 1,031,004 1,135,165 1,376,005 3,542,174 472,144 550,128 636,745 1,659,017 (1,141) 678 6,800 6,337 0 0 0 0 0 0 0 0 217,705 218,999 380,398 817,102 81,639 82,125 142,169 306,413 136,066 136,874 237,749 510,689 0 0 0 0 0 0 0 0 0 0 0 0 136,066 136,874 237,749 510,689 0.23 0.23 0.42 0.88 0.22 0.22 0.40 0.84
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