Banana Republic 2005 Annual Report Download - page 30

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28 gap inc. 2005 annual report
common stock per $1,000 principal amount. As of March 31, 2005, $1.4 billion of principal was converted into 85,143,950 shares of Gap Inc. common
stock and approximately $0.5 million was paid in cash redemption.
In line with our fiscal 2004 objective of reducing long-term debt, we repaid $871 million in debt in fiscal 2004. This included early extinguishment of $596
million of our domestic debt and the maturity of €227 million 5-year euro bond ($275 million). We repurchased and extinguished early an aggregate of
$180 million in principal amount of our notes due 2005, $91 million in principal amount of our notes due 2007 and $325 million in principal amount of our
notes due 2008. We performed a net present value analysis on our outstanding debt and determined that it would be beneficial to repurchase the debt
early even though we incurred $105 million in loss on early retirement of debt due to premiums paid and write-off of debt issuance costs.
Our note payable, due December 2005 (“2005 Notes”), and our note payable, due December 2008 (“2008 Notes”), have interest rates that are
subject to adjustment if our credit rating is upgraded or downgraded by the rating agencies. As a result of upgrades to our long-term credit ratings in
fiscal 2004, the interest rate on the 2008 Notes decreased from 10.55 percent as of year-end fiscal 2003 to 10.05 percent as of year-end fiscal 2004.
The 2005 Notes were fully repaid in fiscal 2004.
Our access to the capital markets and interest expense on future financings are dependent on our senior unsecured debt rating. On February 10,
2005, Standard & Poor’s upgraded our senior unsecured debt rating to investment grade, BBB- from BB+. On April 5, 2005, Moody’s upgraded our
senior unsecured debt rating to Baa3 from Ba1. As a result of these upgrades by the rating agencies, the interest rate payable by us on the 2008
Notes decreased by 50 basis points to 9.55 percent per annum as of June 15, 2005 and remains at this rate as of January 28, 2006.
Contractual Cash Obligations and Commercial Commitments
We are party to many contractual obligations involving commitments to make payments to third parties. The following table provides summary informa-
tion concerning our future contractual obligations as of January 28, 2006. These obligations impact our short and long-term liquidity and capital resource
needs. Certain of these contractual obligations are reflected in the Consolidated Balance Sheets, while others are disclosed as future obligations.
Purchase obligations include our newly entered non-exclusive services agreement with International Business Machines Corporation (“IBM”) as
described in Note J to the accompanying Consolidated Financial Statements. Under the services agreement, IBM will operate certain aspects of our
information technology infrastructure that are currently operated by us. The services agreement has an initial term of ten years, and we have the right
to renew it for up to three additional years. We have various options to terminate the agreement, and we will pay IBM under a combination of fixed
and variable charges, with the variable charges fluctuating based on our actual consumption of services. Based on the currently projected service
needs, we expect to pay approximately $1.1 billion to IBM ratably over the initial 10-year term.
The services agreement has performance levels that IBM must meet or exceed. If these service levels are not met, we would in certain circum-
stances receive a credit against the charges otherwise due, have the right to other interim remedies, or as to material breaches have the right to
terminate the services agreement. In addition, the agreement provides us certain pricing protections, and we have the right to terminate the
($ in millions) Less than 1 Year 1–3 Years 3–5 Years After 5 Years Total
Amounts reflected in Consolidated Balance Sheets:
Long-term debt (a) $ - $ 463 $ 50 $ - $ 513
Accrued interest on long-term debt (b) 11 - - - 11
Other cash obligations not reflected
in Consolidated Balance Sheets:
Operating leases (c) 974 1,659 1,215 1,660 5,508
Purchase obligations and commitments (d) 2,645 292 268 495 3,700
Interest (e) 29 46 1 - 76
Total contractual cash obligations $ 3,659 $ 2,460 $ 1,534 $ 2,155 $ 9,808
(a) Represents principal maturities, net of unamortized discount, excluding interest. See Note B to the Consolidated Financial Statements.
(b) See Note B to the Consolidated Financial Statements for discussion of our long-term debt.
(c) Payments for maintenance, insurance, taxes, and percentage rent to which we are obligated are excluded.
See Note D to the Consolidated Financial Statements for discussion of our operating leases.
(d) Represents estimated open purchase orders, commitments to purchase fabric and trim to be used during the next several seasons,
and commitments to purchase inventory and other goods and services in the normal course of business to meet operational requirements.
(e) Represents interest expected to be paid on our long-term debt and does not assume early debt repurchases, which would reduce the interest payments projected above.