Banana Republic 2007 Annual Report Download - page 40

During fiscal 2007, the total gross unrecognized tax benefits decreased by approximately $12 million mostly
related to the settlement of audits, amended return filings and the expiration of statutes of limitation in fiscal 2007.
The impact of the decrease on our effective tax rate was not material. The following table summarizes the activity
related to our unrecognized tax benefits:
($ in millions)
Balance at February 4, 2007 ........................................................ $135
Increases related to current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Prior year tax positions
Increases .................................................................... 33
Decreases ................................................................... (20)
Cashsettlements ................................................................. (5)
Expiration of statute of limitations .................................................... (39)
Foreign currency translation ......................................................... 5
Balance at February 2, 2008 ........................................................ $123
Of the $123 million of total unrecognized tax benefits at February 2, 2008, approximately $51 million (net of the
federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would
favorably affect the effective income tax rate in future periods. During fiscal 2007, the total amount of interest
recognized in interest expense in the Consolidated Statements of Earnings was $2 million. As of February 2,
2008, the Company had total accrued interest related to the unrecognized tax benefits of $32 million.
The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. In the normal course of business we are subject to examination by
taxing authorities throughout the world, including such major jurisdictions as Canada, France, Hong Kong, Japan,
the United Kingdom and the United States. During fiscal 2007, the Company concluded its Appeals proceedings
with the Internal Revenue Service for fiscal 1997 through 2000. With few exceptions, we are no longer subject to
U.S. federal, state, local, or non-U.S. income tax examinations for fiscal years before 1998.
The Company does not anticipate recording any significant increases or decreases in total gross unrecognized
tax benefits within the next 12 months.
NOTE 12. EMPLOYEE BENEFIT PLANS
We have a qualified defined contribution retirement plan, called GapShare, which is available to employees who
meet certain age and service requirements. This plan permits employees to make contributions up to the
maximum limits allowable under the Internal Revenue Code. Under the plan, we match, in cash, all or a portion of
employees’ contributions under a predetermined formula. Our contributions vest immediately. Our contributions to
GapShare were $36 million, $35 million, and $33 million in fiscal 2007, 2006, and 2005, respectively.
A nonqualified Supplemental Deferred Compensation Plan (the “SDCP”) was established on January 1, 2006,
which allows eligible employees and non-employee members of the Board of Directors to defer compensation up
to a maximum amount. As of February 2, 2008 and February 3, 2007, the assets relating to the SDCP were $5
million and $3 million respectively, and were included in other long-term assets in the Consolidated Balance
Sheets. Plan investments are recorded at market value and are designated for the SDCP. As of February 2, 2008
and February 3, 2007, the liabilities relating to the SDCP were $6 million and $4 million, respectively, and were
included in lease incentives and other long-term liabilities in the Consolidated Balance Sheets. We match, in cash,
all or a portion of employees’ contributions under a predetermined formula. Plan investments are elected by the
participants, and investment returns are not guaranteed by the Company. Our contributions to the SDCP in fiscal
2007, 2006, and 2005 were not material. We do not match non-employee members of the Board of Directors
contributions under the SDCP.
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As of February 2, 2008 and February 3, 2007, the assets relating to a nonqualified Executive Deferred
Compensation Plan (the “EDCP”) were $19 million and $22 million, respectively, and were included in other long-
term assets in the Consolidated Balance Sheets. As of February 2, 2008 and February 3, 2007, the liabilities
relating to the EDCP were $19 million and $22 million, respectively, and were recorded in lease incentives and
other long-term liabilities in the Consolidated Balance Sheets. The EDCP was replaced by the SDCP and frozen
for additional contributions effective December 31, 2005. We did not match any employees’ contributions under
this plan.
NOTE 13. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period plus common stock equivalents.
Common stock equivalents consist of shares subject to share-based awards with exercise prices less than the
average market price of common stock for the period, to the extent their inclusion would be dilutive. The following
summarizes the incremental shares from the potentially dilutive securities:
($ in millions)
52 Weeks Ended
February 2, 2008
53 Weeks Ended
February 3, 2007
52 Weeks Ended
January 28, 2006
Earnings from continuing operations, net of income taxes—
basic ............................................... $867 $809 $1,131
Add: Interest on convertible notes ..................... — — 8
Earnings from continuing operations—diluted . . . . . . . . . . . . . . . $ 867 $ 809 $1,139
Weighted-average number of shares—basic . . . . . . . . . . . . . . . . 791 831 881
Incremental shares from:
Stock options and other stock awards .................. 3 5 8
Seniorconvertiblenotes ............................. — — 13
Weighted-average number of shares—diluted . . . . . . . . . . . . . . . 794 836 902
Earnings from continuing operations
Basic ............................................. $1.10 $0.97 $ 1.28
Diluted ........................................... $1.09 $0.97 $ 1.26
The above computations of weighted-average number of shares—diluted exclude stock options and other stock
awards to purchase 33 million, 42 million, and 44 million shares of common stock for fiscal 2007, 2006, and 2005,
respectively, as their inclusion would be antidilutive.
NOTE 14. 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 operates certain aspects of our information technology
infrastructure that had been previously 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 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 fixed charges of approximately $1.1 billion to IBM over the initial 10-year term. We paid $146 million
and $118 million to IBM for fixed charges during fiscal 2007 and 2006, respectively, and expect to pay
approximately $874 million 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
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