Banana Republic 2005 Annual Report Download - page 51

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In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” to clarify
the proper accounting for rental costs incurred on building or ground operating leases during a construction period. The FSP requires that rental costs
incurred during a construction period be expensed, not capitalized. The statement is effective for the first reporting period beginning after December
15, 2005. We do not believe adoption of FSP 13-1 will have a material effect on our financial position, cash flows or results of operations.
NOTE B: DEBT, SENIOR CONVERTIBLE NOTES AND OTHER CREDIT ARRANGEMENTS
On May 6, 2005, we entered into four separate $125 million 3-year letter of credit agreements and four separate $100 million 364-day letter of
credit agreements for a total aggregate availability of $900 million, which collectively replaced our prior letter of credit agreements. Unlike the previ-
ous letter of credit agreements, the current letter of credit agreements are unsecured. Consequently, the $900 million of restricted cash that collat-
eralized the prior letter of credit agreements was fully released in May 2005.
On August 30, 2004, we terminated all commitments under our $750 million three-year secured revolving credit facility scheduled to expire in June
2006 (the “Old Facility”) and replaced the Old Facility with a new $750 million five-year unsecured revolving credit facility scheduled to expire in
August 2009 (the “New Facility”). The New Facility is available for general corporate purposes, including commercial paper backstop, working capital,
trade letters of credit and standby letters of credit. The facility usage fees and fees related to the New Facility fluctuate based on our long-term senior
unsecured credit ratings and our leverage ratio.
The New Facility and letter of credit agreements contain financial and other covenants, including, but not limited to, limitations on liens and subsidiary
debt as well as the maintenance of two financial ratios – a fixed charge coverage ratio and a leverage ratio. A violation of these covenants could result
in a default under the New Facility and new letter of credit agreements, which would permit the participating banks to terminate our ability to access
the New Facility for letters of credit and advances, terminate our ability to request letters of credit under the letter of credit agreements, require the
immediate repayment of any outstanding advances under the New Facility, and require the immediate posting of cash collateral in support of any
outstanding letters of credit under the letter of credit agreements. In addition, such a default could, under certain circumstance, permit the holders
of our outstanding unsecured debt to accelerate payment of such obligations.
Letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a given amount of money upon presentation
of specific documents demonstrating that merchandise has shipped. Vendor payables are recorded in the Consolidated Balance Sheets at the time
of merchandise title transfer, although the letters of credit are generally issued prior to this. As of January 28, 2006, we had $306 million in trade
letters of credit issued under our letter of credit agreements totaling $900 million and there were no borrowings under our $750 million revolving
credit facility.
A summary of our long-term debt and senior convertible notes is as follows:
January 28, 2006 January 29, 2005
Carrying Amount Carrying Amount
($ in millions) in U.S. Dollars Fair Value (a) in U.S. Dollars Fair Value (a)
$500 million notes payable, 6.90%,
interest due semi-annually,
due September 2007 $ 325 $ 329 $ 325 $ 348
$500 million notes payable, 8.80%
(9.55%), interest due semi-annually,
due December 2008 (b) 138 153 138 167
$50 million notes payable, 6.25%,
interest due semi-annually,
due March 2009 50 51 50 53
Total long-term debt 513 533 513 568
$1.38 billion senior convertible
notes payable, 5.75%,
interest due semi-annually, due March 2009 - - 1,373 1,833
Total long-term debt and senior
convertible notes $ 513 $ 533 $ 1,886 $ 2,401
(a) Based on the face amount multiplied by the market price of the note as of January 27, 2006.
(b) The interest rate payable on these notes is subject to increase (decrease) by 0.25 percent for each rating downgrade (upgrade) by the rating agencies.
The rate in parentheses reflects the rate at January 28, 2006. In no event will the interest rate be reduced below the original interest rate on the note.