The Gap 2006 Annual Report Download - page 26

Changes in our credit ratings may have a negative or positive impact on our financing costs and
structure in future periods.
In November 2001, we issued $500 million aggregate principal amount of debt securities at an original
annual interest rate of 8.80%, due December 15, 2008 (the “Notes”), of which only $138 million remained
outstanding as of February 3, 2007. The interest rate payable on the Notes is subject to adjustment from time to
time if either Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Rating Service (“Standard &
Poor’s”) reduces the rating ascribed to the Notes below Baa2, in the case of Moody’s, or below BBB+, in the
case of Standard & Poor’s. The interest rate on the Notes increases by 0.25% for each rating category downgrade
by either rating agency. In addition, if Moody’s or Standard & Poor’s subsequently increases the rating ascribed
to the Notes, the ongoing interest rate then payable on the Notes decreases by 0.25% for each rating category
upgrade by either rating agency up to Baa2, in the case of Moody’s, or BBB+, in the case of Standard & Poor’s.
In no event will the interest rate be reduced below the original interest rate payable on the Notes. As a result of
changes to our long-term credit ratings, the interest rate payable by us on the Notes has varied from 8.80% to
10.55% per annum. The interest rate on the Notes as of January 29, 2006 was 9.55%. On November 17, 2006,
Standard & Poor’s downgraded our long term credit rating to BB+ which increased the interest rate payable on
the Notes to 9.80% effective as of December 15, 2006. On February 5, 2007, Moody’s downgraded our long term
credit rating to Ba1 which will increase the interest rate payable on the Notes to 10.05% effective as of June 15,
2007. Given our current credit ratings, we do not have meaningful access to the commercial paper market. Any
future reduction in our long-term senior unsecured credit rating could result in reduced access to the capital
markets and higher interest costs on future financings.
For further information on our credit rating including outlook see the section entitled “Debt and Credit
Facility” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations
included as Part II, Item 7.
Trade matters and IT systems changes may disrupt our supply chain.
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. 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. Although
the quota system established by the Agreement on Textiles and Clothing was completely phased out for World
Trade Organization countries effective January 1, 2005, there can be no assurances that restrictions will not be
reestablished for certain categories in specific countries. We are unable to determine the impact of the changes to
the quota system on our global sourcing operations, including China and Vietnam. 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.
Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We
continue to evaluate and are currently implementing modifications and upgrades to our information technology
systems supporting the product pipeline, including merchandise planning and inventory management.
Modifications involve replacing legacy systems with successor systems or making changes to legacy systems.
We are aware of inherent risks associated with replacing and changing these core systems, including accurately
capturing data and possibly encountering supply chain 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 such replacement technologies. We have
completed implementation of the Perpetual and Financial inventory system and have launched an initiative to
replace our merchandise planning system, which will be rolled out in a phased approach over a two- to three-year
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