Banana Republic 2005 Annual Report Download - page 52

G A P I N C . F I N A N C I A L S 2 0 0 5
50 gap inc. 2005 annual report
On March 11, 2005, we called for the full redemption of our outstanding $1.4 billion aggregate in principal of our 5.75 percent senior convertible
notes (the “Notes”) due March 15, 2009. The redemption was complete by March 31, 2005. Note holders had the option to receive cash at a
redemption price equal to 102.46 percent of the principal amount of the Notes, plus accrued interest excluding the redemption date, for a total of
approximately $1,027 per $1,000 principal amount of Notes. Alternatively, note holders could elect to convert their Notes into approximately 62.03
shares of Gap, Inc. 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 earlier even though we incurred $105 million in loss on early retirement of debt due to premiums paid and the
write-off of debt issuance costs.
Our 8.80 percent note payable, due December 2008 (“2008 Notes”), has an interest rate that is subject to adjustment if our credit rating is
upgraded or downgraded by the credit 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. As a result of subsequent
upgrades to our long-term credit ratings in fiscal 2005, the interest payable by us on the 2008 Notes decreased a total of 50 basis points to 9.55
percent per annum as of June 15, 2005 and remains at this rate as of January 28, 2006.
NOTE C: INCOME TAXES
The provision for income taxes consisted of the following:
The foreign component of pretax earnings before elimination of intercompany transactions in fiscal 2005, 2004 and 2003 was approximately $273
million, $534 million and $431 million, respectively. Except where required by U.S. tax law, no provision was made for U.S. income taxes on the
undistributed earnings of the foreign subsidiaries as we intend to utilize those earnings in the foreign operations for an indefinite period of time or
repatriate such earnings only when tax-effective to do so. That portion of accumulated undistributed earnings of foreign subsidiaries at fiscal year-end
2005 and 2004 was approximately $700 million and $604 million, respectively. If the undistributed earnings were repatriated, the unrecorded de-
ferred tax liability in fiscal 2005 and 2004 would be approximately $80 million and $24 million, respectively.
In October 2004, Congress enacted, and the President signed into law, the American Jobs Creation Act of 2004. Among its numerous changes in
the tax law, this Act included a tax relief provision allowing corporate taxpayers a reduced tax rate on dividends received from controlled foreign
corporations if certain conditions are satisfied. We have reviewed the provisions of the new law and concluded we will not benefit from these
changes; therefore, there is no effect on income tax expense (or benefit) for the periods presented as a result of the American Jobs Creation Act’s
repatriation provisions.
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($ in millions) January 28, 2006 January 29, 2005 January 31, 2004
Current
Federal $ 657 $ 589 $ 473
State 63 73 79
Foreign 45 114 117
Total current 765 776 669
Deferred
Federal (44) (38) (5)
State 4 (19) (18)
Foreign (45) 3 7
Total deferred (85) (54) (16)
Total provision $ 680 $ 722 $ 653