The Gap 2006 Annual Report Download - page 63

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to
choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each subsequent reporting date.
SFAS No. 159 is effective for fiscal 2008. We are currently in the process of assessing the impact the adoption of
SFAS 159 will have on our financial position, cash flows or results of operations.
NOTE 2. DEBT AND CREDIT FACILITY
During fiscal 2006, the remaining balance of our 6.90 percent notes payable of $325 million, due September
2007, was classified into current maturities of long-term debt in our Consolidated Balance Sheets. In addition,
the remaining balance of our 8.80 percent notes payable of $138 million, due December 2008 (“2008 Notes”) is
subject to an increasing or decreasing rate of interest based on certain credit rating fluctuations. As a result of
prior and current fiscal year changes to our long-term credit ratings, the interest payable by us on the 2008 Notes
was 9.80 percent per annum as of February 3, 2007. Subsequent to year-end, our credit rating was further
downgraded which will increase the interest payable by us to 10.05 percent per annum effective on June 15,
2007.
On May 6, 2005, we entered into four separate $125 million 3-year letter of credit agreements and four
separate $100 million 364-day letter of credit agreements for a total aggregate availability of $900 million, which
collectively replaced our prior letter of credit agreements. Unlike the previous letter of credit agreements, the
current letter of credit agreements are unsecured. Consequently, the $900 million of restricted cash that
collateralized the prior letter of credit agreements was fully released in May 2005. As of May 5, 2006, the four
$100 million 364-day letter of credit agreements expired and the total letter of credit capacity was reduced to
$500 million. This reduction in the letter of credit capacity reflects our transition to open account payment terms
as well as the available capacity under our $750 million revolving credit facility to issue trade letters of credit.
On March 11, 2005, we called for the full redemption of our outstanding $1.4 billion, 5.75 percent senior
convertible notes (the “Notes”) due March 15, 2009. The redemption was complete by March 31, 2005. Note
holders had the option to receive cash at a redemption price equal to 102.46 percent of the principal amount of
the Notes, plus accrued interest, for a total of approximately $1,027 per $1,000 principal amount of Notes.
Alternatively, note holders could elect to convert their Notes into approximately 62.03 shares of The Gap, Inc.
common stock per $1,000 principal amount. As of March 31, 2005, $1.4 billion of principal was converted into
85 million shares of The Gap, Inc. common stock and approximately $0.5 million was paid in cash redemption.
On August 30, 2004, we terminated all commitments under our $750 million three-year secured revolving
credit facility scheduled to expire in June 2006 (the “Old Facility”) and replaced the Old Facility with a new
$750 million five-year unsecured revolving credit facility scheduled to expire in August 2009 (the “New
Facility”). The New Facility is available for general corporate purposes, including commercial paper backstop,
working capital, trade letters of credit and standby letters of credit. The facility usage fees and fees related to the
New Facility fluctuate based on our long-term senior unsecured credit ratings and our leverage ratio.
The New Facility and letter of credit agreements contain financial and other covenants, including, but not
limited to, limitations on liens and subsidiary debt as well as the maintenance of two financial ratios—a fixed
charge coverage ratio and a leverage ratio. A violation of these covenants could result in a default under the New
Facility and new letter of credit agreements, which would permit the participating banks to terminate our ability
to access the New Facility for letters of credit and advances, terminate our ability to request letters of credit under
the letter of credit agreements, require the immediate repayment of any outstanding advances under the New
Facility, and require the immediate posting of cash collateral in support of any outstanding letters of credit under
the letter of credit agreements. In addition, such a default could, under certain circumstance, permit the holders of
our outstanding unsecured debt to accelerate payment of such obligations.
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