The Gap 2007 Annual Report Download - page 34

NOTE 3. DISCONTINUED OPERATION OF FORTH & TOWNE
In February 2007, we announced our decision to close our Forth & Towne store locations. The decision resulted
from a thorough analysis of the concept, which revealed that it was not demonstrating enough potential to deliver
an acceptable long-term return on investment. All of the 19 Forth & Towne stores were closed by the end of June
2007 and we reduced our workforce by approximately 550 employees in fiscal 2007. The results of Forth &
Towne, net of income tax benefit, have been presented as a discontinued operation in the accompanying
Consolidated Statements of Earnings for all periods presented as follows:
($ in millions)
52 Weeks Ended
February 2, 2008
53 Weeks Ended
February 3, 2007
52 Weeks Ended
January 28, 2006
Netsales ............................................. $16 $20 $ 4
Loss from discontinued operation, before income tax benefit . . . $(56) $(51) $(30)
Add:Incometaxbenefit ................................. 22 20 12
Loss from discontinued operation, net of income tax benefit .... $(34) $(31) $(18)
For fiscal 2007, the loss from the discontinued operation of Forth & Towne included the following charges on a
pre-tax basis: $29 million related to the impairment of long-lived assets, $6 million of lease settlement charges, $5
million of employee severance, $2 million of net sublease losses and $4 million of administrative and other costs.
We expect future charges related to the closure of Forth & Towne to be immaterial. Future cash payments for
Forth & Towne primarily relate to obligations associated with certain leases and these payments will be made
over the various remaining lease terms through 2017. Based on our current assumptions as of February 2, 2008,
we expect our lease payments, net of sublease income, to result in a total net cash outlay of approximately $2
million for future rent.
NOTE 4. DEBT
In September 2007, we paid $326 million related to the maturity of our 6.90 percent notes payable. The remaining
balance of our 8.80 percent notes payable of $138 million, due December 2008 (“2008 Notes”) is classified as
current maturities of long-term debt in our Consolidated Balance Sheet as of February 2, 2008. The interest rate
payable on the 2008 Notes is subject to increase (decrease) by 0.25 percent for each rating downgrade (upgrade)
by the rating agencies. In no event will the interest rate be reduced below the original interest rate on the notes.
As a result of changes to our long-term senior unsecured credit ratings in the current and prior periods, the
interest rate on the 2008 Notes was 10.05 percent per annum as of February 2, 2008. The fair value of the 2008
Notes was $144 million and $147 million as of February 2, 2008 and February 3, 2007, respectively.
Long-term debt as of February 2, 2008 consists of $50 million notes payable due March 2009 with a fixed interest
rate of 6.25 percent per annum. See Note 7 for information on the cross-currency interest rate swaps used in
connection with this debt. The fair value of the long-term debt was $51 million and $50 million as of February 2,
2008 and February 3, 2007, respectively.
In March 2005, we called for the full redemption of our outstanding $1.4 billion, 5.75 percent senior convertible
notes due March 15, 2009. 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.
NOTE 5. CREDIT FACILITIES
Trade letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a
given amount of money upon presentation of specific documents demonstrating that merchandise has shipped.
Vendor payables are recorded in the Consolidated Balance Sheets at the time of merchandise title transfer,
although the letters of credit are generally issued prior to this. As of February 2, 2008, our letter of credit
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agreements consist of two separate $125 million, three-year, unsecured letter of credit agreements for a total
aggregate availability of $250 million and a scheduled termination date of May 2010. As of February 2, 2008, we
had $91 million in trade letters of credit issued under our letter of credit agreements.
On May 18, 2007, we reduced our $750 million, five-year, unsecured revolving credit facility scheduled to expire
in August 2009 to $500 million and extended the facility through August 2012 (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. If we were to draw on the facility,
interest would be a base rate (typically the London Interbank Offered Rate) plus a margin based on our long-term
senior unsecured credit ratings and our leverage ratio on the unpaid principal amount. To maintain availability of
funds under the revolving credit facility, we pay a facility fee on the full facility amount, regardless of usage. As of
February 2, 2008, there were no borrowings under the New Facility.
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 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.
NOTE 6. SUBLEASE LOSS RESERVE
We have excess facility space as of February 2, 2008 and have recorded a sublease loss reserve for the net
present value of the difference between the contractual rent obligations and the amount for which we expect to be
able to sublease the properties. These estimates and assumptions are monitored on at least a quarterly basis for
changes in circumstances. We estimate the reserve based on the status of our efforts to lease vacant office
space and stores, including a review of real estate market conditions, our projections for sublease income and
sublease commencement assumptions. Sublease losses (reversals) are included in operating expenses in our
Consolidated Statements of Earnings.
In each of fiscal 2007 and 2006, we recorded a net sublease loss of $5 million. In fiscal 2005, we released a net
amount of $61 million of sublease loss reserve. During the second fiscal quarter of 2005 we completed our
assessment of available space and future office facility needs and decided that we would occupy one of our
vacant leased properties in San Francisco. As a result, the sublease loss reserve of $58 million associated with
this space was reversed. The remaining reduction in the provision was related to our decision to occupy certain
other office space.
Remaining cash expenditures associated with our sublease loss reserve are expected to be paid over the various
remaining lease terms through 2016. Based on our current assumptions as of February 2, 2008, we expect our
lease payments, net of sublease income, to result in a total net cash outlay of approximately $13 million for future
rent. Our gross sublease loss reserve of $34 million at February 2, 2008 was net of approximately $21 million of
estimated sublease income to be generated from sublease contracts.
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