Banana Republic 2011 Annual Report Download - page 26

$1.2 billion which provides not only for our working capital needs, but also a reserve for unexpected business
downturns. However, if our cash flows from operations decline significantly, we may be unable to service or
refinance our current debt while maintaining our other business initiatives. In addition, the interest rate on our
term loan is subject to adjustment from time to time with the London Interbank Offered Rate plus a margin based
on our long-term senior unsecured credit ratings from Moody’s Investors Service and Standard & Poor’s Rating
Service. Any future reduction in these ratings would increase our interest costs related to our term loan and could
result in reduced access to the credit and capital markets and higher interest costs on future financings.
We remain committed to maintaining a strong financial profile with ample liquidity. Proceeds from the debt
issuance were used for general corporate purposes including share repurchases.
For further information on our debt and credit facilities, see Item 8, Financial Statements and Supplementary Data,
Notes 4 and 5 of Notes to Consolidated Financial Statements of this Form 10-K.
Trade matters may disrupt our supply chain.
Trade restrictions, including increased tariffs or quotas, embargoes, safeguards, and customs restrictions against
apparel items, as well as U.S. or foreign labor strikes, work stoppages, or boycotts, could increase the cost or reduce
the supply of apparel available to us and adversely affect our business, financial condition, and results of operations.
We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be
manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign
governments, including the likelihood, type, or effect of any such restrictions. In addition, we face the possibility of
anti-dumping or countervailing duties lawsuits from U.S. domestic producers. We are unable to determine the impact
of the changes to the quota system or the impact that potential tariff lawsuits could have on our global sourcing
operations. Our sourcing operations may be adversely affected by trade limits or political and financial instability,
resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar
against foreign currencies, restrictions on the transfer of funds, and/or other trade disruptions.
Updates or changes to our IT systems may disrupt operations.
We continue to evaluate and implement upgrades and changes to our IT systems, some of which are significant.
Upgrades involve replacing existing systems with successor systems, making changes to existing systems, or cost-
effectively acquiring new systems with new functionality. We are aware of inherent risks associated with replacing
these systems, including accurately capturing data and system disruptions, and believe we are taking appropriate
action to mitigate the risks through testing, training, and staging implementation, as well as ensuring appropriate
commercial contracts are in place with third-party vendors supplying or supporting our IT initiatives. However, there
can be no assurances that we will successfully launch these systems as planned or that they will occur without
disruptions to our operations. IT system disruptions, if not anticipated and appropriately mitigated, or failure to
successfully implement new or upgraded systems, could have a material adverse effect on our results of operations.
Our IT services agreement with IBM could cause disruptions in our operations and have an adverse effect
on our financial results.
We have entered into the seventh year of a ten-year non-exclusive services agreement with International Business
Machines Corporation (“IBM”) under which IBM operates certain significant aspects of our IT infrastructure. Under
the original agreement, this included supporting our mainframe, server, network and data center, and store
operations, as well as help desk, end user support, and some disaster recovery. Since the original agreement in
January 2006, we have amended the agreement to take back certain services originally performed by IBM. These
returned services include services related to management of our server and data center environment, along with
disaster recovery, circuit expense billing, database administration services, and help desk services for stores
worldwide. All other services remain with IBM per the original agreement. Our ability to realize the expected
benefits of this arrangement is subject to various risks, some of which are not within our complete control. These
risks include, but are not limited to, disruption in services and the failure to protect the security and integrity of the
Company’s data under the terms of the agreement. We are unable to provide assurances that some or all of these
risks will not occur. Failure to effectively mitigate these risks, if they occur, could have a material adverse effect on
our operations and financial results.
12 Gap Inc. Form 10-K