SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material under Rule 14a-12
THE GAP, INC.
----------------------------------
(Name of Registrant as Specified in Its Certificate)
------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee Required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
PROXY
NOTICE OF ANNUAL MEETING OF GAP INC. SHAREHOLDERS AND PROXY STATEMENT
May 10, 2002
Albuquerque, New Mexico
GAP INC. GAP BANANA REPUBLIC OLD NAVY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 10, 2002
To Our Shareholders:
The Annual Meeting of Shareholders of The Gap, Inc. will be held at the Hyatt
Regency Hotel located at 330 Tijeras NW, Albuquerque, New Mexico on Friday, May
10, 2002 at 10:00 a.m., for the following purposes:
1. To elect a Board of Directors;
2. To ratify the selection of Deloitte & Touche LLP as our independent auditors
for the fiscal year ending on February 1, 2003;
3. To consider and vote upon a proposal to increase the number of shares of our
common stock available for issuance under our Employee Stock Purchase Plan
(from 13,500,000 to 24,500,000); and
4. To transact such other business as may properly come before the meeting.
These items of business are more fully described in the Proxy Statement
following this Notice.
You must be a shareholder of record at the close of business on March 15, 2002
to vote at the Annual Meeting. A complete list of shareholders entitled to vote
at this meeting will be available for inspection at our offices at Two Folsom
Street, San Francisco, California for a period of ten days before the Annual
Meeting. Whether or not you plan to attend the Annual Meeting, please vote your
shares by either (a) completing and returning the enclosed proxy card, (b)
touch-tone telephone from the United States and Canada, using the toll-free
telephone number on your proxy card, or (c) the internet.
If you plan to attend the meeting and you are a shareholder of record (your
shares are in your name), you must bring the enclosed admission ticket and
identification with you to the meeting. If you plan to attend the meeting and
your shares are held in "street name" (your shares are in the name of your
broker or bank), check the box on the right side of the card so that your
broker can send you a legal proxy. You must bring the legal proxy and
identification to the meeting. You will not be allowed to attend this meeting
without proof of share ownership and identification.
By Order of the Board of Directors,
/s/ Lauri M. Shanahan
Lauri M. Shanahan
Secretary
April 4, 2002
THE GAP, INC.
TWO FOLSOM STREET, SAN FRANCISCO, CALIFORNIA 94105
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of The Gap, Inc. for use at our Annual
Meeting of Shareholders to be held on May 10, 2002 at 10:00 a.m. at the Hyatt
Regency Hotel located at 330 Tijeras NW, Albuquerque, New Mexico, and at any
adjournment thereof. This statement and the enclosed form of proxy were first
sent to shareholders on or about April 4, 2002. References in this Proxy
Statement to the "Company," "we," "us," and "our" refer to The Gap, Inc.
THE PROXY
The persons named as proxyholders were selected by our Board of Directors and
are officers of the Company.
The proxyholders will vote all proxies, or record an abstention or withholding,
in accordance with the directions on the proxy. If no contrary direction is
given, the shares will be voted:
FOR the election of directors nominated by the Board of Directors;
FOR the ratification of the selection of Deloitte & Touche LLP as our
independent auditors for the fiscal year ending February 1, 2003; and
FOR approval of the proposal to increase the number of shares of the Company's
common stock available for issuance under our Employee Stock Purchase Plan.
We will pay all expenses in connection with the solicitation of the enclosed
proxy, including the charges of brokerage houses and other custodians, nominees
or fiduciaries for forwarding documents to security owners. In addition to
solicitation by mail, certain of our officers, directors and employees (who
will receive no extra compensation for their services) or a proxy solicitation
firm retained by us may solicit proxies by telephone, fax or in person.
You may revoke your proxy at any time before its exercise. You may also revoke
your proxy by voting in person at the Annual Meeting.
VOTING SECURITIES AND VOTING RIGHTS
Our only outstanding voting securities are our shares of common stock, of which
866,759,250 shares were outstanding at the close of business on March 15, 2002.
Only shareholders of record at the close of business on that date are entitled
to vote at the meeting. Each shareholder is entitled to one vote per share on
each matter submitted to the meeting.
The election inspector(s) appointed for the Annual Meeting will determine
whether or not a quorum is present and will tabulate votes cast by proxy or in
person at the Annual Meeting. The holders of a majority of the outstanding
shares of our common stock, present in person or by proxy, will constitute a
quorum for the transaction of business at the Annual Meeting. Election of
directors by shareholders will be determined by a plurality of the votes of the
shares present in person or by proxy at the Annual Meeting and entitled to vote
on the election of directors. The other matters submitted for shareholder
approval at the Annual Meeting will be decided by the affirmative vote of a
majority of the shares present in person or by proxy at the Annual Meeting and
entitled to vote.
1
Abstentions are included in the determination of shares present for quorum
purposes. Because abstentions represent shares entitled to vote, the effect of
an abstention will be the same as a vote against a proposal. However,
abstentions will have no effect on the election of directors.
If you hold shares in "street name" through a broker or other nominee, your
broker or nominee may not be permitted to exercise voting discretion with
respect to certain matters to be acted upon. If you do not give your broker or
nominee specific instructions, your shares may not be voted on those matters
and will not be considered as present and entitled to vote with respect to
those matters. Shares represented by such "broker non-votes" will, however, be
counted in determining whether there is a quorum.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AS DIRECTORS
Directors will be elected at the Annual Meeting to serve until the next Annual
Meeting and until their successors are elected. The Board of Directors proposes
to nominate the persons whose names are set forth below, all of whom are
current directors. In the absence of instructions to the contrary, shares
represented by the proxy will be voted for the election of all these nominees
to the Board of Directors. The Board of Directors has no reason to believe that
any of these nominees will be unable to serve. However, if any nominee should
for any reason be unavailable to serve, the proxies will be voted for the
election of such other person to the office of director as the Board of
Directors may recommend in place of such nominee. Set forth below is certain
information concerning the nominees which is based on data furnished by them.
Name, Age, Principal Occupation During Past Five Years and Other Information Served as Director Since
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Adrian D. P. Bellamy, 60 1995
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Chairman of Gucci Group NV, luxury accessories and apparel manufacturer and retailer, and The Body Shop
International plc. Director of Reckitt Benckiser plc, and Williams-Sonoma, Inc.
Chairman of the Compensation and Stock Option Committee
Chairman of the Corporate Governance Committee
Member of the Human Resources Development Committee
Millard S. Drexler, 57 1983
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Chief Executive Officer of the Company since 1995 and President of the Company since 1987. Director of
Apple Computer Inc.
Member of the Human Resources Development Committee
Donald G. Fisher, 73 1969
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Chairman of the Company since 1969. Chief Executive Officer of the Company, 1969-95. Director of The
Charles Schwab Corporation.
(Donald G. Fisher and Doris F. Fisher are husband and wife)
Doris F. Fisher, 70 1969
------------------------------------------------------------------------------------------------------- -
Merchandising consultant to the Company.
(Donald G. Fisher and Doris F. Fisher are husband and wife)
Robert J. Fisher, 47 1990
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Executive Vice President of the Company, 1992-99; President of Gap Division 1997-99; Chief Operating
Officer of the Company, 1992-93 and 1995-97. Director of Sun Microsystems, Inc.
(Robert J. Fisher is the son of Donald G. and Doris F. Fisher)
Chairman of the Human Resources Development Committee
2
Glenda A. Hatchett, 50 1999
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Judge on the syndicated television program "Judge Hatchett" since 2000. Chief Judge, Fulton County
Juvenile Court, Atlanta, Georgia, 1991-99. Director of HCA-The Healthcare Company.
Member of the Compensation and Stock Option Committee
Member of the Corporate Governance Committee
Steven P. Jobs, 47 1999
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Chief Executive Officer, Apple Computer, Inc., a computer hardware and software company, since 2000;
Interim Chief Executive Officer, 1997-2000. Chairman and Chief Executive Officer, Pixar, an animation
company, since 1986. Chairman and Chief Executive Officer, NeXT Software, Inc., a software company,
1985-97. Director of Apple Computer, Inc.
Member of the Corporate Governance Committee
John M. Lillie, 65 1992
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Vice Chairman of the Company since January 2001. President, Sequoia Associates LLC, private
investment firm, since 1998. Chairman, The Epic Team, bicycle and accessory products, 1996-98.
Member of the Human Resources Development Committee
Arun Sarin, 46 2001
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Chief Executive Officer of Accel-KKR Telecom, a venture focused on telecommunications industry
investments, since 2001; Chief Executive Officer of InfoSpace, Inc., a global internet infrastructure
company, 2000-2001; Chief Executive Officer of the Asia/Pacific region of Vodafone (AirTouch), 1999-
2000; President and Chief Operating Officer of AirTouch Communications, 1997-1999; President and
Chief Executive Officer of AirTouch International, 1995-1997. Director of Accel-KKR, Vodafone plc, The
Charles Schwab Corporation and Cisco Systems.
Member of the Audit and Finance Committee
Member of the Compensation and Stock Option Committee
Member of the Corporate Governance Committee
Member of the Human Resources Development Committee
Charles R. Schwab, 64 1986
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Chairman and Co-Chief Executive Officer of The Charles Schwab Corporation, financial services firm,
since 1998. Chairman and Chief Executive Officer of The Charles Schwab Corporation, 1986-98. Director
of Siebel Systems, Inc.
Chairman of the Audit and Finance Committee
Member of the Corporate Governance Committee
Mayo A. Shattuck III, 47 2002
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President and Chief Executive Officer of Constellation Energy Group since November 2001; Chairman
and Chief Executive Officer of Deutsche Bank Alex Brown 1999-2001; Vice Chairman of Bankers Trust
Corporation, 1997-1999; President and Chief Operating Officer of Alex Brown Inc., 1991-1997. Director of
Constellation Energy Group.
Member of the Audit and Finance Committee
Member of the Corporate Governance Committee
Information concerning our executive officers who are not also directors is set
forth in our Annual Report on Form 10-K for the fiscal year ended February 2,
2002.
3
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors has four standing committees: the Audit and Finance
Committee, the Compensation and Stock Option Committee and the Corporate
Governance Committee, each of which is composed of directors who are not our
employees ("non-employee directors"), and the Human Resources Development
Committee, which is composed of non-employee directors and employee directors.
The Audit and Finance Committee assists the Board of Directors in fulfilling
its oversight responsibilities relating to the quality and integrity of our
accounting, auditing, and reporting practices. The functions of the committee
include (i) recommending the engagement of our independent auditors and
reviewing with them the plan, scope and results of their audit for each year,
(ii) reviewing with our Consulting and Assurance Services department the plan,
scope and results of their operations, (iii) considering and reviewing other
matters relating to our financial and accounting affairs, and (iv) overseeing
our Corporate Compliance Program. The present members of the Audit and Finance
Committee are Messrs. Sarin, Schwab (Chairman) and Shattuck.
The functions of the Compensation and Stock Option Committee are to review and
approve salaries and other forms of compensation for all corporate and
divisional officers, to approve the guaranteeing or granting of loans to
certain corporate and divisional officers under our Relocation Loan Plan, to
grant stock and options to purchase stock to selected employees under our stock
plans, to make awards under our annual and long-term incentive plans to key
employees, and to make recommendations to the Board concerning the compensation
of non-employee directors. The present members of the Compensation and Stock
Option Committee are Messrs. Bellamy (Chairman) and Sarin and Ms. Hatchett.
The functions of the Corporate Governance Committee are to make recommendations
to the Board on all matters concerning corporate governance and directorship
practices, including the qualifications and retention of directors, the size
and function of the Board of Directors, the functions and duties of the
committees of the Board, the effectiveness and procedures of the Board,
retirement policies of non-employee directors, and succession planning for
directors. The present members of the Corporate Governance Committee are
Messrs. Bellamy (Chairman), Jobs, Sarin, Schwab and Shattuck, and Ms. Hatchett.
The functions of the Human Resources Development Committee are to advise senior
management on policy and strategy regarding the development of senior
executives, to review the succession planning of the top-level positions, to
review the individual development strategies of that group and their individual
development plans, to assess the overall talent of all our vice presidents and
above, to counsel with the CEO for the placement of key employees, and to
review leadership and management processes as appropriate, including leadership
development programs. The present members of the Human Resources Development
Committee are Messrs. Bellamy, Drexler, Robert Fisher (Chairman), Lillie and
Sarin.
During the last fiscal year, the Board of Directors held five meetings, the
Compensation and Stock Option Committee held six meetings, the Audit and
Finance Committee held three meetings, the Corporate Governance Committee held
one meeting, and the Human Resources Development Committee held seven meetings.
Each director attended at least 75% of the meetings of the Board and committees
on which he or she served, with the exception of Mr. Jobs and Mr. Schwab who
each attended 67% of the meetings of the Board and committees on which each
served.
COMPENSATION OF DIRECTORS
We do not pay director fees to directors who are employees of the Company or
any affiliated company.
We pay each of our non-employee directors an annual retainer of $36,000 per
year, payable quarterly, which is diminished by $2,500 for each Board and/or
committee meeting missed (maximum of $2,500 per meeting series). Mr. Jobs has
elected not to receive the retainer. Our non-employee directors who serve as
committee chairs receive an additional annual retainer of $16,000 per year,
payable quarterly, for each committee chaired. In addition, we reimburse travel
expenses to attend Board and committee meetings. All directors and their
immediate families are eligible to receive discounts on our merchandise.
4
Under our Non-Employee Director Deferred Compensation Plan, each non-employee
director may elect to forego receipt of his or her annual retainer on a
quarterly basis in exchange for an option to purchase shares of our common
stock. In October 2001, the Board of Directors approved an amendment to the
plan to increase the limit on the number of shares per quarter from 937 to a
maximum of 2,500 shares under certain circumstances so that the options are not
discounted by more than 75%. Any such options will have an exercise price which
is discounted to reflect an amount up to the foregone retainer, will be
exercisable immediately, and will have a maximum term of seven years. Any
portion of the foregone retainer which would otherwise result in the number of
options exceeding the 2,500 share limit will be paid in cash. Shares issued
under the plan will come from treasury shares. Each non-employee director,
except for Mr. Jobs, participated in the plan in fiscal 2001.
Under our 1996 Stock Option and Award Plan, non-employee directors are eligible
to receive stock options according to a pre-determined formula, as follows: (i)
each new non-employee director automatically receives an option to purchase
15,000 shares at the then-current fair market value; and (ii) each continuing
non-employee director automatically receives yearly an option to purchase 3,750
shares at the then-current fair market value. All initial options to new
non-employee directors are granted on the date of appointment to the Board. All
continuing non-employee director options are granted on the first business day
after each Annual Meeting of Shareholders. The options normally become
exercisable three years after the date of grant. In addition, the Compensation
and Stock Option Committee is authorized to grant discretionary options to
non-employee directors using treasury shares.
In October 2001, the Board of Directors made a special stock option grant to
non-employee directors in the amount of 10,000 shares for each director, plus
an additional 2,000 shares for each committee participation. The options were
granted at fair market value and become exercisable three years after the date
of grant. Each director who received the special stock option grant waived the
annual grant that otherwise would have been automatically granted in May 2002
following the Annual Meeting. Mr. Jobs elected not to receive any annual or
special stock option grant.
The Non-Employee Director Retirement Plan is an unfunded deferred compensation
plan which sets mandatory retirement from service on the Board at age 72 and
provides for annual benefits if a non- employee director has served on the
Board for five consecutive years and is still a director at age 72. The annual
benefit payable to an eligible retired director is equal to 75% of the annual
retainer fee in effect at the time of the director's retirement. The duration
of these annual payments equals the number of years that the director served on
the Board. If the director dies before the maximum payment period expires,
payments will continue for the life of his or her surviving spouse, or until
the end of the maximum payment period, whichever is sooner. In fiscal 1996, the
Board of Directors elected to discontinue this plan for future directors.
Directors in office at January 27, 1997 are still eligible for plan benefits,
assuming they meet the requirements of the plan; however, the benefit payable
will be capped at the current level (i.e., 75% of $36,000).
In fiscal 2001, Doris Fisher received $24,000 for merchandising services
rendered in the course of her employment with the Company. As an employee, Mrs.
Fisher participates in all benefits which we make available to our employees
generally, except for stock-based compensation and bonus programs.
In May 2001, the Board of Directors amended the agreements relating to certain
outstanding options held by Mr. Brooks Walker, Jr., a former member of the
Board of Directors, to provide for a three-year extension of exercisability
following his retirement from the Board of Directors in May 2001.
5
PROPOSAL NO. 2
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Deloitte & Touche LLP as our independent
auditors for the fiscal year ending February 1, 2003. Deloitte & Touche LLP has
acted as our auditors since 1972. If shareholders fail to approve the selection
of such auditors, the Board of Directors will reconsider the selection.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE SELECTION OF
DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting and available to make statements to, and respond to appropriate
questions of, shareholders.
PRINCIPAL ACCOUNTING FIRM FEES
The following table sets forth the aggregate fees billed to us for the fiscal
year ended February 2, 2002 by our principal accounting firm, Deloitte & Touche
LLP, the member firms of Deloitte Touche Tohmatsu, and their respective
affiliates (collectively "Deloitte & Touche"), which includes Deloitte
Consulting:
Fees Amount
------------------------------------------------------------ ----------
Audit Fees $ 996,000
Financial Information Systems Design and Implementation Fees 0
All Other Fees (1,2) 1,674,000
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Total Fees for the fiscal year ended February 2, 2002 $2,670,000
1. The Audit and Finance Committee of the Board of Directors has considered
whether the provision of these services is compatible with maintaining the
principal accountant's independence.
2. Includes audit related fees of $745,000 related to statutory audits, audits
of subsidiaries, audits of benefit plans and debt offerings.
The Audit and Finance Committee has revised our policy to monitor and limit as
appropriate non-audit related services performed by our Independent Auditors.
The new policy requires pre-approval by our Chief Financial Officer and Chief
Internal Auditor of any contract for services, other than audit and audit
related services, up to $100,000 and by the Audit and Finance Committee for any
such contract in excess of $100,000.
REPORT OF THE AUDIT AND FINANCE COMMITTEE
Notwithstanding anything to the contrary in any of the Company's previous or
future filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate this Proxy Statement
or future filings with the Securities and Exchange Commission, in whole or in
part, the following report shall not be deemed to be incorporated by reference
into any such filing.
The Audit and Finance Committee assists the Board of Directors in fulfilling
its oversight responsibilities relating to the quality and integrity of the
accounting, auditing, and reporting practices of the Company. The Committee
operates under a written charter adopted by the Board of Directors. The
Committee is composed exclusively of directors who are independent under New
York Stock Exchange listing standards.
The Committee has reviewed and discussed the audited financial statements of
the Company for the fiscal year ended February 2, 2002 with the Company's
management. The Committee has discussed with Deloitte & Touche LLP, the
Company's independent auditors, the matters required to be discussed by
Statement on Auditing Standards No. 61 (Communication with Audit Committees).
The Committee also has received the written disclosures and the letter from
Deloitte & Touche LLP required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) and the Committee also has
discussed the independence of Deloitte & Touche LLP with that firm.
Based on the Committee's review and discussions noted above, the Committee
recommended to the Board of Directors that the Company's audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 2002 for filing with the Securities and Exchange
Commission.
Charles R. Schwab (Chairman)
Arun Sarin
Mayo A. Shattuck III
6
PROPOSAL NO. 3
INCREASE IN THE NUMBER OF SHARES AVAILABLE UNDER THE EMPLOYEE STOCK PURCHASE
PLAN
Our Employee Stock Purchase Plan (the "ESPP") provides our eligible employees
and those of our participating subsidiaries with the opportunity to purchase
shares of our common stock through convenient payroll deductions.
The Board of Directors has determined that in order to give us the ability to
continue to attract and retain the talented employees, the number of shares
issuable under the ESPP should be increased. Therefore, on January 29, 2002,
the Board of Directors amended the ESPP to reserve an additional 11,000,000
shares of common stock for issuance under the ESPP from 13,500,000 to
24,500,000, subject to approval of our shareholders at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK AVAILABLE FOR ISSUANCE UNDER THE
COMPANY'S EMPLOYEE STOCK PURCHASE PLAN.
Purpose
The purpose of the ESPP is to provide our eligible employees with the
opportunity to purchase shares of our common stock through payroll deductions.
The ESPP is intended to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended.
Eligibility to Participate
Most of our employees and those of our participating subsidiaries are eligible
to elect to participate in the ESPP. However, employees who have the right to
acquire five percent or more of our voting stock or the voting stock of any of
our subsidiaries are not eligible. Also, seasonal employees (that is, employees
whose customary employment is for not more than five months in any calendar
year) are not eligible. As of December 2001, approximately 16,277 employees are
participating in the ESPP.
Administration, Amendment and Termination
The Global Benefits Committee administers the ESPP.
The members of the Global Benefits Committee are appointed by and serve at the
pleasure of our Chief Executive Officer.
Subject to the terms of the ESPP, the Global Benefits Committee has all
discretion and authority necessary or appropriate to supervise and control the
operation and administration of the ESPP, including the power to interpret and
determine any question arising in connection with the ESPP. The Global Benefits
Committee may delegate one or more of its duties in the administration of the
ESPP to any one of its members or to any other person.
The Board of Directors, in its sole discretion, may amend or terminate the ESPP
at any time and for any reason. Assuming approval of this proposal, we plan to
register the additional 11,000,000 shares on Form S-8 under the Securities Act
of 1933.
Number of Shares of Common Stock Available under the ESPP
A maximum of 24,500,000 shares of common stock are available for issuance
pursuant to the ESPP. Shares sold under the ESPP may be newly issued shares or
treasury shares. In the event of any stock split or other change in our capital
structure, appropriate adjustments will be made in the number, kind and
purchase price of the shares available for purchase under the ESPP.
7
Enrollment and Contributions
Eligible employees voluntarily elect whether or not to enroll in the ESPP.
Employees join for a purchase period of six months. Employees who have enrolled
in the ESPP in previous periods, will continue to participate in future rolling
six-month periods. However, an employee may cancel their participation at any
time (subject to ESPP rules).
Employees contribute to the ESPP through payroll deductions. Participating
employees generally may contribute up to 15% of their eligible compensation
through after-tax payroll deductions. From time to time, the Global Benefits
Committee may establish a lower maximum permitted contribution percentage or
change the length of the purchase periods (but in no event may any purchase
period exceed 27 months). After the purchase period begins, an employee may not
change their current contribution percentage until the next enrollment period.
Purchase of Shares
On the last business day of each six-month purchase period, each participating
employee's payroll deductions are used to purchase shares of common stock for
the employee. The price of the shares purchased will be 85% of the lower of (i)
the stock's market value on the first day of the six-month purchase period, or
(ii) the stock market's value on the last day of the purchase period. Market
value under the ESPP means the closing price of the common stock on the New
York Stock Exchange Composite Transactions Index for the day in question.
However, during any single year, no employee may purchase under the ESPP more
than the lesser of 25,000 shares of common stock or $25,000 based on market
value on the applicable purchase date(s).
Termination of Participation
Participation in the ESPP terminates when a participating employee's employment
with the Company ceases for any reason, the employee withdraws from the ESPP or
the ESPP is terminated or amended such that the employee no longer is eligible
to participate.
Tax Aspects
Based on management's understanding of current federal income tax laws, the tax
consequences of the purchase of shares of common stock under the ESPP are as
follows:
An employee will have no taxable income when the shares of common stock are
purchased for him or her under the ESPP. The employee generally will be taxed
when he or she sells or otherwise disposes of the stock (such sales or
dispositions are collectively referred to below as sales).
No income tax will be withheld at the time of the purchase of shares under the
ESPP. However, proposed IRS regulations would require employers to withhold
FICA taxes. The proposed regulations, if finalized, would apply to stock
purchases under the ESPP on or after January 1, 2003.
The employee's income tax treatment depends on whether shares are sold within
24 months after the first day of the six-month purchase period in which the
shares were purchased (the "24-month holding period"). For a sale after the
24-month holding period, an employee will have ordinary income equal to the
lesser of: (i) the amount equal to 15% of the fair market value of the stock on
the enrollment date; or (ii) the amount by which the fair market value of the
stock at the time of sale exceeds the purchase price. Any additional gain from
a sale after the 24-month holding period will be taxed as long-term capital
gain. Any loss will be taxed as long-term capital loss.
If shares are sold before the end of the 24-month holding period, a gain up to
the amount of the discount received from the stock's market price when the
shares were purchased will be taxed at ordinary income. Any
8
additional gain or any loss will be taxed as long-term or short-term capital
gain or loss, depending on whether the employee has held the shares for more
than one year at the time of sale. The holding period for determining whether
the gain or loss is short-term or long-term begins on the day after the stock
is purchased through the ESPP.
We will be entitled to deduct for federal income tax purposes an amount equal
to the amount of ordinary income that an employee recognizes when he or she
sells stock purchased under the ESPP within the 24-month holding period. We
will not be entitled to such a deduction with respect to any shares that are
sold of after the 24-month holding period.
Pro Forma Benefits for ESPP
Given that we are in the middle of a purchase period, it is not possible to
conclusively state the amount of benefits which will be paid under the ESPP
this year. Instead, the following table sets forth the amounts that were
received by each of the following groups at the end of the last two six-month
purchase periods ending May 31, 2001 and November 30, 2001.
Plan Benefits
----------------------------------------------------------------------------------------------------------------
Employee Stock Purchase Plan
----------------------------------------------------------------------------------------------------------------
Name and Principal Position Dollar Value ($)(1) Number of Units (1)
------------------------------------------------------------------------ ------------------- -------------------
Millard S. Drexler $0 0
President and Chief Executive Officer of the Company
----------------------------------------------------------------------------------------------------------------
Anne B. Gust 7,114 940
Executive Vice President and Chief Administrative Officer of the Company
----------------------------------------------------------------------------------------------------------------
John M. Lillie 1,600 808
Vice Chairman of the Company
----------------------------------------------------------------------------------------------------------------
Jenny J. Ming 10,063 1,010
President, Old Navy Division
----------------------------------------------------------------------------------------------------------------
Kenneth S. Pilot 10,063 1,010
President, Gap International Division
----------------------------------------------------------------------------------------------------------------
Executive Group 41,350 5,606
----------------------------------------------------------------------------------------------------------------
Non-executive Director Group 0 0
----------------------------------------------------------------------------------------------------------------
Non-executive Officer Employee Group 12,242,399 2,343,673
----------------------------------------------------------------------------------------------------------------
1. These pro-forma calculations are based on actual enrollment figures of
17,716 and 14,992 employees as of May 31, 2001 and November 30, 2001,
respectively. The dollar value is based on the discount applied to the lower
of the closing market price on either the first day of the purchase period
or the last day of the purchase period. The closing market prices for
December 1, 2000 and November 30, 2001 ($24.75 and $13.23, respectively)
were used to calculate purchase prices of $21.04 and $11.25, which
represented discounts of $9.96 and $1.98 per share off the closing market
price of our stock on their respective dates of purchase, May 31, 2001
($31.00) and November 30, 2001 ($13.23). The actual total amount of payroll
deductions accumulated for both purchase periods was $35,780,790, yielding a
total amount of shares to be purchased of 2,349,279. The dollar value for
this group of employees is calculated by multiplying the per-share discount
amounts by the number of shares to be purchased each period.
9
BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth certain information as of March 15, 2002, to
indicate beneficial ownership of our common stock by (i) each person known by
us to be the beneficial owner of more than 5% of the outstanding shares of our
common stock, (ii) each director and nominee and each executive officer named
in the Summary Compensation Table, and (iii) all our directors and executive
officers as a group. Unless otherwise indicated, beneficial ownership is direct
and the person indicated has sole voting and investment power.
Name of Beneficial Owner Shares Beneficially Owned (1) Additional Notes Percent of Class
---------------------------------------------------------------------------------------------------------------
Directors and Executive Officers
---------------------------------------------------------------------------------------------------------------
Adrian D. P. Bellamy 125,069 -- *
----------------------------------------------- ----------------------------- ---------------- ----------------
Millard S. Drexler 26,267,612 (2) 3%
----------------------------------------------- ----------------------------- ---------------- ----------------
Donald G. Fisher and Doris F. Fisher 172,192,677 (3) 20%
----------------------------------------------- ----------------------------- ---------------- ----------------
Robert J. Fisher 53,678,100 (4) 6%
----------------------------------------------- ----------------------------- ---------------- ----------------
Anne B. Gust 656,868 -- *
----------------------------------------------- ----------------------------- ---------------- ----------------
Glenda A. Hatchett 40,219 -- *
----------------------------------------------- ----------------------------- ---------------- ----------------
Steven P. Jobs 0 -- --
----------------------------------------------- ----------------------------- ---------------- ----------------
John M. Lillie 374,104 (5) *
----------------------------------------------- ----------------------------- ---------------- ----------------
Jenny J. Ming 717,542 -- *
----------------------------------------------- ----------------------------- ---------------- ----------------
Kenneth S. Pilot 475,121 -- *
----------------------------------------------- ----------------------------- ---------------- ----------------
Arun Sarin 3,811 -- *
----------------------------------------------- ----------------------------- ---------------- ----------------
Charles R. Schwab 152,477 (6) *
----------------------------------------------- ----------------------------- ---------------- ----------------
Mayo A. Shattuck III 937 -- *
----------------------------------------------- ----------------------------- ---------------- ----------------
All directors and executive officers as a group
(16 persons) 255,453,346 (7) 29%
----------------------------------------------- ----------------------------- ---------------- ----------------
Certain Other Beneficial Holders
---------------------------------------------------------------------------------------------------------------
John J. Fisher 56,101,104 (8) 6%
----------------------------------------------- ----------------------------- ---------------- ----------------
* Indicates ownership of less than 1% of the outstanding shares of our common
stock.
1. Shares issuable upon exercise of stock options that are exercisable within
60 days after March 15, 2002 are treated as beneficially owned as follows:
Mr. Bellamy, 92,669; Mr. Drexler, 16,439,437; Mr. Robert J. Fisher, 4,358;
Ms. Gust, 635,000; Ms. Hatchett, 39,837; Mr. Lillie, 347,046; Ms. Ming,
625,468; Mr. Pilot, 413,153; Mr. Sarin, 2,811; Mr. Schwab, 64,762; Mr.
Shattuck, 937; and all directors and executive officers as a group,
19,323,728.
2. Includes 281,250 shares held by the Peggy and Millard Drexler Family
Foundation of which Mr. Drexler disclaims beneficial ownership. Also
includes 3,485,089 shares held in Grantor Retained Annuity Trusts (GRATs).
3. Donald G. Fisher and Doris F. Fisher, who are husband and wife, are the
founders of the Company, directors, and, respectively, the Chairman of and a
merchandising consultant to the Company. Their address is Two Folsom Street,
San Francisco, California 94105. In the table shown above, the
172,192,677 shares beneficially owned by Donald G. Fisher and Doris F.
Fisher are beneficially owned by both of them. Of the shares shown,
145,435,645 shares are held as community property of which 86,000,000 are
held in a partnership. The remainder of the shares are held by the Fishers
as trustees for various foundations and trusts. Amounts shown exclude shares
held directly or indirectly by the Fishers' three adult sons, beneficial
ownership of which is disclaimed.
10
4. Includes 2,623,725 shares held jointly by Robert Fisher and his spouse and
26,391,889 shares held by Robert Fisher as trustee under certain trusts.
Robert Fisher's address is One Maritime Plaza, Suite 1400, San Francisco,
California 94111.
5. Includes 21,750 shares held under the Lillie Family Living Trust, over which
Mr. Lillie and his wife share voting and investment power. Includes 4,500
shares held by Mr. Lillie's adult children. Mr. Lillie only has investment
power over these shares and disclaims beneficial ownership.
6. Includes 8,438 shares owned by Mr. Schwab's spouse.
7. Reflects the information in the footnotes set forth above.
8. Includes 26,391,888 shares owned by John Fisher as trustee under certain
trusts. John Fisher's address is One Maritime Plaza, Suite 1400, San
Francisco, California 94111.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
As required by the Securities and Exchange Act of 1934, as amended, the Company
notes that Mr. Pilot reported one transaction late on a Form 4. The transaction
involved the exercise of options to purchase 2,500 shares of common stock in
September 2001. The transaction did not result in any liability under Section
16(b) of such Act.
EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth for the periods presented compensation paid to,
earned by or awarded to our Chief Executive Officer and our four other most
highly compensated executive officers in the fiscal year ended February 2,
2002. The footnotes to the table provide additional information concerning our
compensation and benefit programs.
Summary Compensation Table
----------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation Awards
---------------------------------------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Fiscal Salary Bonus Compensation Awards Options Compensation
Name and Principal Position Year ($) ($) ($) (1) ($) (#) ($) (2)
---------------------------------------------------------------------------------------------------------
Millard S. Drexler 2001 $2,189,708 $0 $11,992 $0 850,000 $601,634
President and Chief Executive 2000 2,279,138 3,262,500 10,525 0 1,500,000 171,322
Officer of the Company (3) 1999 2,154,084 5,672,500 13,618 0 120,000 20,494
---------------------------------------------------------------------------------------------------------
Anne B. Gust 2001 599,572 0 0 0 300,000 72,852
Executive Vice President 2000 580,386 450,000 0 0 100,000 21,515
and Chief Administrative 1999 466,925 752,000 0 0 75,000 6,361
Officer of the Company
---------------------------------------------------------------------------------------------------------
John M. Lillie 2001 1,137,091 0 0 0 300,000 101,761
Vice Chairman of the 2000 41,358 0 0 0 750,000 0
Company (3,4)
---------------------------------------------------------------------------------------------------------
Jenny J. Ming 2001 848,120 0 0 0 780,000 27,090
President, Old Navy Division 2000 825,165 630,000 0 0 80,000 12,044
---------------------------------------------------------------------------------------------------------
Kenneth S. Pilot 2001 648,670 0 0 0 480,000 15,306
President, Gap 2000 622,037 457,500 0 0 250,000 7,895
International Division
---------------------------------------------------------------------------------------------------------
1. While the named executive officers enjoy certain perquisites, for fiscal
years 1999, 2000 and 2001, these did not exceed the lesser of $50,000 or 10%
of each executive officer's salary and bonus. The amounts listed for Mr.
Drexler represent tax gross-up payments.
11
2. These amounts include earnings over 120% of applicable federal long-term
rate in accordance with Securities and Exchange Commission rules on deferred
compensation credited, but not paid or payable, during the fiscal year under
our Executive Capital Accumulation Plan, Executive Deferred Compensation
Plan and/or Supplemental Executive Retirement Plan as follows: Mr. Drexler,
$592,945 for 2001, $164,486 for 2000 and $14,035 for 1999 ; Ms. Gust,
$65,352 for 2001, $16,068 for 2000 and $1,125 for 1999 ; Mr. Lillie, $215
for 2001 and $0 for 2000; Ms. Ming, $20,813 for 2001 and $5,459 for 2000;
and Mr. Pilot, $11,556 for 2001 and $3,453 for 2000. All remaining amounts
shown represent the Company's matching contributions to our GapShare 401(k)
Plan. Also includes $100,000 for 2000 that was paid to Mr. Lillie pursuant
to a consulting agreement which terminated in January 2001.
3. In September 2001, both Mr. Drexler and Mr. Lillie voluntarily elected to
reduce their base salary for fiscal year 2001 by 10%.
4. Mr. Lillie became an executive officer in January 2001.
STOCK OPTIONS
The following tables set forth certain information regarding stock options
granted to, exercised by and held by the executive officers named in the
Summary Compensation Table.
Option Grants In Last Fiscal Year
----------------------------------------------------------------------------------------------------
Individual Grants
Number of
Securities Percent of Total Market
Underlying Options Granted Exercise or Price on Grant Date
Options Granted to Employees in Base Price Grant Date Expiration Present Value
Name (#) (1,2,3) Fiscal Year ($/Sh) ($/Sh) (4) Date (5) ($) (6)
---------------------------------------------------------------------------------------------------
Millard S. Drexler 300,000 0.99% $17.12 $13.43 10/29/11 $1,562,910
250,000 0.82% 24.14 24.14 4/03/11 3,032,075
200,000 0.66% 16.41 13.43 10/29/11 1,074,400
100,000 0.33% 15.70 13.43 10/29/11 554,210
---------------------------------------------------------------------------------------------------
Anne B. Gust 225,000 0.74% 14.27 14.27 10/19/11 1,125,006
75,000 0.25% 23.86 23.86 4/02/11 627,019
---------------------------------------------------------------------------------------------------
John M. Lillie 300,000 0.99% 14.27 14.27 10/19/11 1,251,390
---------------------------------------------------------------------------------------------------
Jenny J. Ming 360,000 1.18% 14.27 14.27 10/19/11 1,800,009
300,000 0.99% 33.90 33.90 5/22/11 4,616,835
120,000 0.40% 23.86 23.86 4/02/11 1,003,230
---------------------------------------------------------------------------------------------------
Kenneth S. Pilot 360,000 1.18% 14.27 14.27 10/19/11 1,800,009
120,000 0.40% 23.86 23.86 4/02/11 1,003,230
---------------------------------------------------------------------------------------------------
1. Except for the options granted to Mr. Drexler, Mr. Lillie and the 300,000
options granted to Ms. Ming, the options will become exercisable in four
equal annual installments commencing one year from the date of grant. The
250,000 and 300,000 options granted to Mr. Drexler and Ms. Ming,
respectively, will vest in two equal annual installments commencing four
years from date of grant. The remaining 600,000 options granted to Mr.
Drexler will vest in installments of 100,000 options one year from date of
grant, 200,000 options two years from date of grant and 300,000 options
three years from date of grant. The 300,000 options granted to Mr. Lillie
will vest in two equal annual installments commencing one year from the date
of grant.
2. Under the terms of our 1996 Stock Option and Award Plan, the Compensation
and Stock Option Committee retains discretion, subject to plan limits, to
modify the terms of outstanding stock options.
3. Options granted to Messrs. Lillie and Pilot and Msess. Gust and Ming with an
exercise price of $14.27 were part of an accelerated granting of annual
stock option awards to eligible employees, including executive officers,
from the first quarter of 2002 to October 2001. In addition, the options
granted to Mr. Drexler with exercise prices above the market price ($17.12,
$16.41 and $15.70) were part of the same accelerated annual grant process.
12
4. Average of high and low stock prices for our common stock as reported in
NYSE-Composite Transactions for the date of grant.
5. Options granted in fiscal 2001 were granted for a term of ten years and
except for the options granted to Mr. Lillie are subject to termination
three months following termination of employment in certain events and
vesting is accelerated upon death or retirement if the option is held for at
least one year. The terms of Mr. Lillie's option grant provides for
termination of the option following termination of employment for any reason
(including retirement) other than death or involuntary termination. However,
Mr. Lillie will have up to ten years to exercise any unexercised portion
which is then exercisable at the time of termination. In the event of
involuntary termination, he will have up to ten years to exercise any
unexercised portion (whether or not exercisable) of the option.
6. This column represents the value of the options on the grant date using the
Black-Scholes option pricing model for the common stock, utilizing the
following assumptions: stock price volatility of between 43% to 47%;
dividend yield of 0.63%; 2 to 8-year expected option terms; 2% to 5%
risk-free interest rate; and no adjustment for non-transferability or
forfeiture. The actual value, if any, that an executive officer may realize
will depend on the excess of the market price over the exercise price on the
date the option is exercised so there is no assurance that the value
realized by an executive will be at or near the value estimated by the
Black-Scholes model, which is based on assumptions as to the variables of
stock price volatility, future dividend yield and interest rate. For an
estimate of the impact of all stock option grants on our financial results
using the Black-Scholes valuation method, see Note G in the Notes to
Consolidated Financial Statements in our Annual Report to Shareholders for
the fiscal year ended February 2, 2002.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
-----------------------------------------------------------------------------------------------------
Number of Value of
Securities Underlying Unexercised
Shares Unexercised Options In-the-Money Options
Acquired on Value at FY-End (#) at FY-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
-----------------------------------------------------------------------------------------------------
Millard S. Drexler 0 $0 14,523,187 7,870,000 $117,556,745 $0
----------------------------------------------------------------------------------------------------
Anne B. Gust 10,125 197,494 508,863 818,437 2,236,960 604,819
----------------------------------------------------------------------------------------------------
John M. Lillie 0 0 341,421 809,375 68,790 0
----------------------------------------------------------------------------------------------------
Jenny J. Ming 37,260 742,054 561,518 1,820,625 2,951,067 1,358,600
----------------------------------------------------------------------------------------------------
Kenneth S. Pilot 32,500 690,195 254,403 1,176,250 769,519 604,819
----------------------------------------------------------------------------------------------------
1. Represents the difference between the closing price of our common stock on
February 1, 2002 ($14.08) and the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2001, Messrs. Bellamy and Sarin and Ms. Hatchett, all of whom
were non-employee directors, served on the Compensation and Stock Option
Committee of the Board of Directors.
During fiscal 2001, Mr. Drexler served as a member of the Board of Directors of
Apple Computer Inc., which does not have a compensation committee. Mr. Jobs,
Chief Executive Officer of Apple Computer Inc., serves on our Board of
Directors.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation and Stock Option Committee of the Board of Directors is
responsible for reviewing and approving the Company's compensation policies and
the compensation paid to executive officers.
Compensation Philosophy
The general philosophy of the Company's compensation program, which has been
reviewed and approved by the Committee, is to provide a competitive advantage
to the Company and rewards to the executives based
13
both on the Company's performance and on the individual's contribution to the
Company. Corporate and divisional performance are evaluated by reviewing the
extent to which financial, strategic and target goals are met, including such
factors as profitability and sales growth. These performance criteria are
reviewed each year to ensure that they are consistent with the Company's
mission and strategies. Officers are also given annual goals and their
individual performance is evaluated by reviewing progress against these
objectives.
The Company's executive compensation policies are intended to motivate and
reward highly qualified executives for long-term strategic management and the
enhancement of shareholder value, to support a performance-oriented environment
that rewards achievement of specific internal Company and individual goals, and
to attract and retain executives whose abilities are critical to the long-term
success and competitiveness of the Company. The program is heavily oriented
toward incentive compensation tied to the annual and long-term financial
performance of the Company and to the long-term return realized by the
Company's shareholders.
There are three main components of the Company's executive compensation program:
.. Base Salary
.. Annual Incentives
.. Long-Term Incentives
Base Salary
Executive officers' salaries generally have been targeted above the average
rates paid by competitors to enable the Company to attract and retain highly
skilled executives. The Committee believes that the Company remains a target
for other companies seeking talent and that, therefore, these rates are
necessary to retain the Company's executive officers and other key employees.
The Committee reviews the performance of and approves salaries for the Chief
Executive Officer and the executive officers on an annual basis, generally in
the first fiscal quarter.
The Committee believes that the market for retailing executives, and thus the
relevant competitive data, includes a broader group of companies than that
shown in the stock price performance graph presented in this Proxy Statement
under the heading "Performance Graph." Accordingly, in setting salaries for
executive officers, the Committee periodically examines market data and salary
surveys for specialty retail, consumer/branded goods, and general industry
groups prepared by national consulting companies. Salaries are also adjusted
based on actual individual job performance and/or changes in duties and
responsibilities.
Mr. Drexler's base salary for fiscal year 2001 was initially set at $2.3
million, remaining unchanged from the prior fiscal year. (In September 2001,
the Committee reviewed and accepted Mr. Drexler's voluntary reduction in base
salary to $2.07 million, representing a decrease of 10% from the prior year).
In setting the Chief Executive Officer's 2001 salary, the Committee considered
the Company's 2000 results, future objectives and challenges, and Mr. Drexler's
individual performance and contributions. The Company's 2000 performance was
judged by the Committee to have fallen short of expectations and not in line
with industry/competitor results. The Committee reviewed in detail Mr.
Drexler's performance relative to his 2000 goals and his individual
contributions to the Company. The Committee concluded that he had not fully
achieved his 2000 goals. Specifically, the Company did not achieve its three
strategic priorities for 2000: growing earnings and improving the return on
investments, developing employees, and strengthening the Brand. The Committee
also considered Mr. Drexler's continued decisive management of operational and
strategic issues, his drive to reinforce a culture of innovation and his
ability and dedication to enhance the long-term value of the Company for the
shareholders. Despite the Company's 2001 performance, the Committee continues
to believe that Mr. Drexler has the ability to provide the leadership and
vision that he has provided throughout his 18-year tenure as a Company
executive, during which, on a compounded annual growth basis, the Company's net
earnings decreased by 5.5%, net sales increased by 20.5% and market value
increased by 27.3%. In making its salary decisions with respect to Mr. Drexler,
the Committee exercised its discretion and judgment based on the above factors,
and no specific formula was applied to determine the weight of each factor.
14
Annual Incentive Bonus
Annual incentive bonuses for executive officers are intended to reflect the
Committee's belief that a significant portion of the annual compensation of
each executive officer should be contingent upon the performance of the Company.
To carry out this philosophy, the Company has implemented a performance-based
Executive Management Incentive Cash Award Plan ("Executive MICAP"), in which
bonuses are payable only for the achievement of Company, not individual,
performance targets. As a pay-for-performance plan, the Executive MICAP is
intended to motivate and reward executive officers by directly linking the
amount of any cash bonus to specific corporate and/or divisional financial
goals. Specific measurements are chosen each year among earnings, sales growth
and volume, return on assets, and/or return on equity; and threshold, target
and maximum payout levels are established to reflect the Company's objectives.
These goals and the potential bonuses are reviewed and approved by the
Committee in the first quarter of each fiscal year. The goals and the potential
bonuses will continue to be reviewed and approved by the Committee at the
beginning of each performance period. Under the 2001 guidelines adopted by the
Committee, executive officers were eligible to receive a bonus between 15% and
150% of their salary, depending on actual earnings performance compared to
target earnings goals set for each division. Actual bonus amounts are
calculated within this range pursuant to a set formula which takes into account
the extent to which earnings goals were achieved and the grade level of the
officer. No bonus is paid if threshold goals are not met.
The Company's 2001 performance fell short of its predetermined financial goals
for the year. The Chief Executive Officer was eligible to earn between 25% and
150% of his base salary as a bonus under the 2001 guidelines adopted by the
Committee at the start of the fiscal year. Because the Company did not meet
threshold expectations, neither Mr. Drexler nor the other executive officers
received any Executive MICAP bonus.
The Committee believes that the Executive MICAP program provides an excellent
link between annual results and the incentives paid to executives.
Long-Term Incentives
Long-term incentives represent over half the total income opportunity for
executive officers. These incentives create a direct linkage between executive
rewards and increased shareholder value by tying a significant portion of total
compensation opportunity to stock options.
The Committee believes that executive officers and other key employees should
have significant ownership of the Company's stock. Notably, all executive
officers as a group beneficially own approximately 23% of the outstanding
shares of common stock. In particular, Mr. Donald Fisher, the Company's founder
and Chairman, beneficially owns jointly with his wife Doris Fisher
approximately 20% of the outstanding shares.
Long-Term Performance Plan
The Company also has had an Executive Long-Term Cash Award Performance Plan
("ELCAPP"), in which officers could earn bonuses for results over a three-year
performance cycle for achievement of Company and/or business unit performance
targets. The targets and the potential amounts of officer bonuses were reviewed
and approved by the Committee at the beginning of each cycle. No bonus is paid
if threshold goals are not met unless the Company's return on assets is in the
top 10% of a predesignated group of competitors, in which case, 50% of the base
target award is paid (target awards range between 30% and 100% of their
three-year average salary).
ELCAPP was established in 1996, with the first cycle comprising fiscal years
1996-1998. The Company's performance for the 1999-2001 cycle fell short of
predetermined financial goals for the three-year cycle, even though fiscal year
1999 exceeded expectations.
The Committee has decided to discontinue ELCAPP.
15
Stock Option and Award Plan
The Committee has the power to grant both stock options and restricted stock
under the Company's 1996 Stock Option and Award Plan. It has been the
Committee's practice to grant stock options to executive officers on an annual
basis, usually in the first quarter of each fiscal year. Generally, options
vest 25% per year for four years from date of grant and executives must be
employed by the Company at the time of vesting in order to exercise the
options. The Committee has discretion to grant discounted stock options and has
done so when it determined it was necessary to attract and/or retain key
executives. The Committee believes that stock option grants provide an
incentive that focuses the executives' attention on managing the Company from
the perspective of an owner with an equity stake in the business. The Company's
stock options are tied to the future performance of the Company's stock and
will provide value to the recipient only when the price of the Company's stock
increases above the option grant price.
In order to determine the appropriate number of options to be granted to its
executive officers in 2001, the Company considered competitive practices for a
wide array of companies in a large number of industries. The calculations
underlying these guidelines are based on the grant value of the option (i.e.,
number of shares times the exercise price) in relation to the employee's salary
and performance level. The Company's actual 2001 option grants to executive
officers were in line with those ranges. The size of each grant was based on a
range of potential shares for each eligible employee's level.
In April of 2001, Mr. Drexler was granted options to purchase 250,000 shares at
market value at the date of grant. However, unlike most options which vest 25%
each year over four years from date of grant, these options will not become
exercisable until four and five years from date of grant.
The Committee also determined that it was in the best interests of the Company
to accelerate the granting of annual stock option awards to eligible employees,
including executive officers, from the first quarter of 2002 to October 2001.
Mr. Drexler was granted options to purchase 600,000 shares. The shares become
exercisable in annual installments over a three-year period from date of grant.
However, unlike most options which are granted at market value, Mr. Drexler
received only "premium price" options. The number and price of the shares are
as follows: 100,000 at a price which was 17% above the market value at the date
of grant, 200,000 at a price which was 22% above the market value at the date
of grant and 300,000 at a price which was 28% above the market value at the
date of grant. The "premium price" options are intended to reward Mr. Drexler
only after shareholders have been delivered growth in the stock price which is
consistent with the Committee's philosophies of increasing shareholder value
and including at-risk compensation as a significant part of an executive's
overall compensation.
Impact of Section 162(m) of the Internal Revenue Code
The Committee has considered the potential impact of Section 162(m) of the
Internal Revenue Code on its compensation plans and has determined that it is
the Company's preference to qualify its executives' compensation for
deductibility under applicable tax laws, to the extent the Committee determines
it is consistent with the Company's best interests. The Company's compensation
plans have been designed to permit the Committee to grant awards (other than
restricted stock and discounted stock options) which qualify for deductibility
under Section 162(m).
To help prevent the loss of deductibility of base salaries, those named
executive officers whose base salaries exceed the $1,000,000 limit have from
time-to-time voluntarily deferred all or a portion of their compensation above
the limit under the Company's deferred compensation plans.
Adrian D. P. Bellamy (Chairman)
Glenda A. Hatchett
Arun Sarin
16
PERFORMANCE GRAPH
The graph below compares the percentage changes in our cumulative total
shareholder return* on our common stock for the five-year period ended February
2, 2002, with the cumulative total return of the S&P 500 Index and the Dow
Jones U.S. Retail, Apparel Index. The Dow Jones U.S. Retail, Apparel Index
replaced the Dow Jones All Specialty Index, which had been used in years
previous to fiscal 2000. However, another indicator, the Dow Jones U.S. Retail
Index, and not the Dow Jones U.S. Retail, Apparel Index was used in the
performance graph for the fiscal year 2000 proxy statement. In order to
transition back to the correct index, and for fiscal year 2001 only, the
performance graph below compares the percentage changes in our cumulative total
shareholder return* on our common stock with the cumulative total return of
both the Dow Jones U.S. Retail Index and Dow Jones U.S. Retail, Apparel Index.
Total Return to Shareholders
(Assumes $100 investment on 02/01/97)
[PERFORMANCE CHART APPEARS HERE]
Total Return Analysis
-----------------------------------------------------------------------------------------------
02/01/1997 01/31/1998 01/30/1999 01/29/2000 02/03/2001 02/02/2002
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
The Gap, Inc. $100 $205 $507 $530 $293 $186
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
DJ U.S. Retail Index $100 $140 $227 $227 $239 $255
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
DJ U.S. Retail, Apparel Index $100 $162 $279 $255 $296 $260
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
S&P 500 $100 $127 $164 $182 $182 $163
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
* Total return assumes quarterly reinvestment of dividends.
Source: Carl Thompson and Associates / (800) 959-9677. Data from BRIDGE
Information Systems and Dow Jones Total Return Indices.
OTHER REPORTABLE TRANSACTIONS
We have an agreement with Fisher Development, Inc. ("FDI"), a company which is
wholly owned by the brother of Donald G. Fisher (our Chairman) and the
brother's immediate family. The agreement sets forth the terms under which FDI
may act as one of our general contractors in connection with our construction
activities. During the 2001 fiscal year, FDI supervised the construction of new
store leasehold improvements for
17
282 store concepts and expansions, remodels and relocations of 171 store
concepts. The total amount paid under the agreement was approximately $416
million, including profit and overhead costs of approximately $42 million. This
relationship is reviewed annually by the Audit and Finance Committee of the
Board of Directors.
In October 2001, the Audit and Finance Committee of the Board of Directors
reviewed and approved the terms of agreements to lease to Donald G. Fisher and
Doris F. Fisher, directors, and, respectively, the Chairman of and a
merchandising consultant to the Company, a total of approximately 26,000 square
feet of space in our One Harrison and Two Folsom Corporate San Francisco
locations to display portions of their art collection. The agreements provide
for base rent ranging from $30 to $42.35 per square foot over a 15-year term.
The agreements were reviewed and approved by the Audit and Finance Committee.
In 2000, we made a $2,000,000 loan to Ms. Heidi Kunz, Executive Vice President
and Chief Financial Officer, at no interest, secured by a deed of trust on her
home and by the stock options granted to her under our 1996 Stock Option and
Award Plan. The loan will be due and payable on February 1, 2005, or earlier
upon termination of employment.
In 2001, we made a $1,475,000 loan to Mr. Ken Pilot, President, Gap
International Division, at 3% interest, secured by a deed of trust on his home
and by the stock options and unreleased restricted stock awarded to him under
our 1996 Stock Option and Award Plan. The loan will be due and payable on
December 31, 2010, or earlier upon termination of employment.
OTHER BUSINESS
If any matter not mentioned in this Proxy Statement is properly brought before
the meeting, including without limitation matters about which the proponent
failed to notify us on or before February 20, 2002, shareholder proposals
omitted from this Proxy Statement and the form of proxy pursuant to the proxy
rules of the Securities and Exchange Commission and matters incident to the
conduct of the meeting, the proxyholders will vote upon such matters in
accordance with their best judgment pursuant to the discretionary authority
granted by the proxy. As of the date of the printing of this Proxy Statement,
our management is not aware, nor has it been notified, of any other matters
that may be presented for consideration at the meeting.
PROPOSALS OF SHAREHOLDERS
Proposals of shareholders intended to be presented at our Annual Meeting in
2003 must be received by us on or before December 5, 2002 to be considered for
inclusion in our Proxy Statement and form of proxy relating to that meeting.
Proposals must be addressed to our Corporate Secretary at The Gap, Inc., Two
Folsom Street, San Francisco, California 94105.
In accordance with Rule 14a-4(c)(1) of the Securities Exchange Act of 1934, as
amended, management proxyholders intend to use their discretionary voting
authority with respect to any shareholder proposal raised at our Annual Meeting
in 2003 as to which the proponent fails to notify us on or before February 18,
2003 (one year after 45 days prior to the date on which this Proxy Statement
was first mailed to shareholders). Notifications must be addressed to our
Corporate Secretary at The Gap, Inc., Two Folsom Street, San Francisco, CA
94105.
By Order of the Board of Directors,
/s/ Lauri M. Shanahan
Lauri M. Shanahan
Secretary
18
[LOGO OF THE GAP]
GAP INC. Two Folsom Street, San Francisco, CA 94105 gapinc.com
ANNUAL MEETING OF SHAREHOLDERS
Friday, May 10, 2002 Albuquerque, New Mexico
10:00 a.m. Local Time
Admission Ticket
This is your admission ticket to the 2002 Annual Meeting of Shareholders of
The Gap, Inc.
Presentation of this ticket on the day of the meeting will grant admission
to the shareholder(s) named on the reverse side of this card.
Attendance will be limited to shareholders only.
Gap Inc.
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PROXY GAP Inc.
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Annual Meeting of Shareholders - May 10, 2002
Proxy Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Millard Drexler, Heidi Kunz and Lauri M.
Shenahan, or any of them, each with full power of substitution, as proxies
to vote, in accordance with the instructions set forth in this Proxy, all
shares of common stock of The Gap, Inc. which the undersigned is entitled
to vote at the Annual Meeting of Shareholders to be held on May 10, 2002 at
10:00 a.m. local time in Albuquerque, New Mexico, and any postponements and
adjournments thereof. The proxies are authorized in their discretion to
vote upon such other business as may properly come before the meeting.
IMPORTANT - This proxy must be signed and dated on the reverse side.
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE ON THE REVERSE SIDE. IF NO CHOICES ARE INDICATED, THE
SHARES COVERED BY THIS PROXY WILL BE VOTED FOR ALL NOMINEES LISTED ON THE
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REVERSE SIDE, FOR PROPOSALS 2 AND 3, AND, WITH RESPECT TO ANY OTHER MATTERS
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AS MAY PROPERLY COME BEFORE THE MEETING, IN ACCORDANCE WITH THE DISCRETION
OF THE PROXIES.
See reverse for voting instructions.
____________________
Company #
Control #
____________________
There are three ways to vote your Proxy
Your telephone or Internet vote authorizes the Named Proxies to vote your
shares in the same manner as if you marked, signed and returned your proxy
card.
VOTE BY PHONE - TOLL FREE - 1-800-240-6326 - QUICK *** EASY *** IMMEDIATE
. Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 11:00 a.m. (CT) on May 9, 2002.
. You will be prompted to enter your 3-digit Company Number and your
7-digit Control Number which are located above.
. Follow the simple instructions the voice provides you.
VOTE BY INTERNET - http://www.eproxy.com/gps/ - QUICK *** EASY *** IMMEDIATE
. Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m. (CT) on May 9, 2002.
. You will be prompted to enter your 3-digit Company Number and your
7-digit Control Number which are located above to obtain your records and
create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid
envelope we've provided or return it to The Gap, Inc., c/o Shareowner
Services(TM), P.O. Box 64873, St. Paul, MN 55164-0873.
If you vote by Phone or Internet, please do not mail your Proxy Card
Please detach here
The Board of Directors Recommends a Vote "FOR" Items 1, 2 and 3.
1. Election of 01 Adrian D. P. Bellemy 05 Robert J. Fisher 09 Anin Sarin [_] Vote FOR [_] Vote WITHHELD
directors 02 Millard S. Drexler 06 Glenda A. Hatchett 10 Charles R. Schwab all nominees from all
03 Donald G. Fisher 07 Steven P. Jobs 11 Mayo A Shattuck III (except as marked) nominees
04 Doris F. Fisher 08 John M. Lillie
(Instructions: To withhold authority to vote for any indicated nominee, ___________________________________________________
write the number(s) of the nominee(s) in the box provided to the right.)
___________________________________________________
2. Ratify the appointment of Deloitte & Touche LLP as independent auditors. [_] For [_] Against [_] Abstain
3. To approve the proposal to increase the number of shares of the Company's
Common Stock available for issuance under the Company's Employee Stock
Purchase Plan. [_] For [_] Against [_] Abstain
4. Such other business as may properly come before the meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
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Address Change? Mark Box [_] Indicate changes below: Date: ___________________________________, 2002
___________________________________________________
___________________________________________________
Signature(s) in Box
Note: Please sign exactly as your name(s) appears
hereon. Joint owners should each sign. When signing
as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a
corporation, please sign in full corporate name by
President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.