Banana Republic 2007 Annual Report Download - page 23

2008. These obligations impact our short-term 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.
($ in millions)
Less than 1
Year 1-3 Years 3-5 Years After 5 Years Total
Amounts reflected in Consolidated Balance Sheets:
Debt(a).......................................... $ 138 $ 50 $ — $ — $ 188
Accrued interest on debt (b) ......................... 5 — — — 5
Liabilities for uncertain tax positions (c) ................ 3 — — — 3
Other cash obligations not reflected in Consolidated
Balance Sheets:
Operating leases (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,098 1,859 1,091 1,430 5,478
Purchase obligations and commitments (e) ............. 2,427 400 214 209 3,250
Interest(f) ........................................ 16 1 — — 17
Total contractual cash obligations .................... $3,687 $2,310 $1,305 $1,639 $8,941
(a) Represents principal maturities, net of unamortized discount, excluding interest. See Note 4 of Notes to the
Consolidated Financial Statements.
(b) See Note 4 of Notes to the Consolidated Financial Statements for discussion of our debt.
(c) The table above excludes $120 million of long-term liabilities under the Financial Accounting Standards
Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation
of FASB Statement No. 109,” as we are not able to reasonably estimate when cash payments of the long-
term liabilities for uncertain tax positions will occur. The amount is included in lease incentives and other
long-term liabilities in the accompanying Consolidated Balance Sheet as of February 2, 2008.
(d) Maintenance, insurance, taxes, and contingent rent obligations are excluded. See Note 10 of Notes to the
Consolidated Financial Statements for discussion of our operating leases.
(e) Represents estimated open purchase orders to purchase inventory as well as commitments for products and
services used in the normal course of business.
(f) Represents interest expected to be paid on our debt and does not assume early debt repurchases, which
would reduce the interest payments projected above.
We have other commercial commitments, not reflected in the table above, that were incurred in the normal course
of business to support our operations, including standby letters of credit of $55 million (of which $49 million was
issued under the revolving credit facility lines), surety bonds of $52 million and bank guarantees of $4 million
outstanding at February 2, 2008.
Amounts Reflected in Consolidated Balance Sheets
We have other long-term liabilities reflected in the Consolidated Balance Sheets, including deferred income taxes.
The payment obligations associated with these liabilities are not reflected in the table above due to the absence of
scheduled maturities. Therefore, the timing of these payments cannot be determined, except for amounts
estimated to be paid in fiscal 2008 that are included in current liabilities.
Other Cash Obligations Not Reflected in Consolidated Balance Sheets
The majority of our contractual obligations are made up of operating leases for our stores. Commitments for
operating leases represent future minimum lease payments under non-cancelable leases. In accordance with
accounting principles generally accepted in the United States of America, our operating leases are not recorded in
the Consolidated Balance Sheets; however, the minimum lease payments related to these leases are disclosed in
Note 10 of Notes to the Consolidated Financial Statements.
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Purchase obligations include our non-exclusive services agreement with International Business Machines
Corporation (“IBM”) entered in fiscal 2005 as described in Note 14 of Notes to the Consolidated Financial
Statements. Under the services agreement, IBM operates certain aspects of our information technology
infrastructure that had previously been 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 current projection of service needs, we
expect to pay approximately $874 million to IBM over the remaining eight years of the contract.
The services agreement has performance levels that IBM must meet or exceed. If these service levels are not
met, we would in certain circumstances 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 services 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 assigned certain store and corporate facility leases to third parties as of February 2, 2008. Under these
arrangements, we are secondarily liable and have guaranteed the lease payments of the new lessees for the
remaining portion of our original lease obligation. We account for these guarantees in accordance with the
Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others.” The
maximum potential amount of future lease payments we could be required to make is approximately $48 million
as of February 2, 2008. The fair value of the guarantees was not material as of February 2, 2008.
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.
Generally, the maximum obligation under such indemnifications is not explicitly stated and, as a result, the overall
amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments
for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not
have a material effect on our financial condition or results of operations.
As party to a reinsurance pool for workers’ compensation, general liability and automobile liability, we have
guarantees with a maximum exposure of $43 million, of which $2 million has already been cash collateralized. We
are currently in the process of winding down our participation in the reinsurance pool. Our maximum exposure
and cash collateralized balance are expected to decrease in the future as our participation in the reinsurance pool
diminishes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America requires management to adopt accounting policies and make significant judgments and
estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are
alternative policies or estimation techniques that could be used. We maintain a thorough process to review the
application of our accounting policies and to evaluate the appropriateness of the many estimates that are required
to prepare the financial statements of a large, global corporation. However, even under optimal circumstances,
estimates routinely require adjustment based on changing circumstances and the receipt of new or better
information. For additional information, see Note 1 of the Notes to the Consolidated Financial Statements.
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