Banana Republic 2005 Annual Report Download - page 59

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gap inc. 2005 annual report 57
NOTE I: EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earn-
ings per share includes the additional dilutive effect of our potentially dilutive securities, which includes certain stock options and unvested shares of
restricted stock, calculated using the treasury stock method, and convertible notes which are potentially dilutive at certain earnings levels calculated
using the if-converted method. The following summarizes the incremental shares from the potentially dilutive securities:
Excluded from the above computations of weighted-average shares for diluted earnings per share were options to purchase 44,499,102, 32,943,414,
and 30,788,277 shares of common stock for fiscal 2005, 2004 and 2003, respectively, because the exercise price was greater than the average
market price of the Company’s common stock during the period and, therefore, the effect is antidilutive.
NOTE J: COMMITMENTS AND CONTINGENCIES
In January 2006, we entered into a non-exclusive services agreement with International Business Machines Corporation (“IBM”). 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 ser-
vices. 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 services agreement provides us certain pricing protections, and we have the right to terminate
the agreement both for cause and for convenience (subject, in the case of termination for convenience, to our payment of a termination fee). IBM
also has certain termination rights in the event of our material breach of the agreement and failure to cure.
We have applied the measurement and disclosure provisions of FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Require-
ments for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” to our agreements that contain guarantee and certain indemnifica-
tion clauses. FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation
it assumes under the guarantee. The initial recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after
December 31, 2002. As of January 28, 2006, we did not have any material guarantees that were issued or modified subsequent to December 31, 2002.
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These
contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements and various other
agreements. Under these contracts we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership
of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be
explicitly defined.
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
January 28, 2006 January 29, 2005 January 31, 2004
Earnings–basic ($ in millions) $ 1,113 $ 1,150 $ 1,031
Add: Interest on convertible notes, net of tax 8 49 48
Earnings–diluted ($ in millions) $ 1,121 $ 1,199 $ 1,079
Weighted-average number of shares-basic 881,057,753 893,356,815 892,554,538
Incremental shares from:
Stock options 8,037,041 12,244,267 10,015,477
Restricted stock 202,871 - -
Convertible note 13,008,026 85,520,491 85,607,813
Weighted-average number of shares-diluted 902,305,691 991,121,573 988,177,828
Earnings per share–basic $ 1.26 $ 1.29 $ 1.15
Earnings per share–diluted 1.24 1.21 1.09