The Gap 2007 Annual Report Download - page 41

services agreement provides us certain pricing protections, and we have the right to terminate the agreement
both for cause and for convenience (subject, in the case of termination for convenience, to our payment of a
termination fee). IBM also has certain termination rights in the event of our material breach of the agreement and
failure to cure.
We have assigned certain store and corporate facility leases to third parties as of February 2, 2008. Under these
arrangements, we are secondarily liable and have guaranteed the lease payments of the new lessees for the
remaining portion of our original lease obligation. We account for these guarantees in accordance with FIN 45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the
Indebtedness of Others.” The maximum potential amount of future lease payments we could be required to make
is approximately $48 million as of February 2, 2008. The fair value of the guarantees was not material as of
February 2, 2008.
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other
party for certain matters. These contracts primarily relate to our commercial contracts, operating leases,
trademarks, intellectual property, financial agreements and various other agreements. Under these contracts we
may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets,
environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in
duration and may not be explicitly defined.
Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall
amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments
for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not
have a material effect on our financial condition or results of operations.
As party to a reinsurance pool for workers’ compensation, general liability and automobile liability, we have
guarantees with a maximum exposure of $43 million as of February 2, 2008, of which $2 million has been cash
collateralized. We are currently in the process of winding down our participation in the reinsurance pool. Our
maximum exposure and cash collateralized balance are expected to decrease in the future as our participation in
the reinsurance pool diminishes.
As a multinational company, we are subject to various proceedings, lawsuits, disputes and claims (“Actions”)
arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and
are subject to uncertainties. Actions filed against us include commercial, intellectual property, customer,
employment and securities related claims, including class action lawsuits in which plaintiffs allege that we violated
federal and state wage and hour and other laws. The plaintiffs in some Actions seek unspecified damages or
injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. If
the outcome of an action is expected to result in a loss that is considered probable and reasonably estimable, we
will record a liability for the estimated loss.
We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse
developments, settlements or resolutions may occur and negatively impact earnings in the quarter of such
development, settlement or resolution. However, we do not believe that the outcome of any current Action would
have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
NOTE 15. RELATED PARTY TRANSACTIONS
We generally use a competitive bidding process for construction of new stores, expansions, relocations and major
remodels (major store projects). In addition, we utilize a construction industry standard stipulated sum,
non-exclusive agreement with our general contractors. Fisher Development, Inc. (“FDI”), a company that is wholly
owned by the brother of Donald G. Fisher, Founder and Chairman Emeritus, and the brother’s immediate family,
is one of our qualified general contractors. The stipulated sum agreement sets forth the terms under which our
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general contractors, including FDI, may act in connection with our construction activities. We paid to FDI $0.3
million, $2 million, and $21 million in fiscal 2007, 2006, and 2005, respectively. There was $0.1 million due to FDI
at February 2, 2008, and no amounts due at February 3, 2007 on our Consolidated Balance Sheets. The Audit
and Finance Committee of the Board reviews this relationship periodically.
In October 2001, the Audit and Finance Committee of the Board reviewed and approved the terms of agreements
to lease to Doris F. Fisher, Director, and Donald G. Fisher a total of approximately 26,000 square feet of space in
our One Harrison and Two Folsom San Francisco headquarter locations to display portions of their personal art
collection. The agreements provide for base rent ranging from $30.00 to $42.35 per square foot per year over a
15-year term. Our Consolidated Statements of Earnings include rental income from this leased space of $1
million, $0.9 million, and $0.9 million for fiscal 2007, 2006, and 2005, respectively. We believe that these rental
rates were at least competitive when the agreements were entered into. The agreements also provide us and our
employees significant benefits, including use of the space on a regular basis for corporate functions at no charge.
As discussed in Note 8, in connection with our share repurchase program, we entered into purchase agreements
with individual members of the Fisher family whose ownership represented approximately 17 percent of the
Company’s outstanding shares at the end of the second quarter of fiscal 2007. Multiple Fisher family members
and controlled entities owned approximately 34 percent of our outstanding shares at the end of the second
quarter of fiscal 2007. The shares were purchased each month at the same weighted-average market price that
we paid for share repurchases in the open market. During fiscal 2007, we repurchased approximately 13 million
shares of our common stock for a total cost of $249 million from the Fisher family.
In February 2008, in connection with the authorization of the $1 billion share repurchase program, we entered into
agreements with individual members of the Fisher family to repurchase shares. The Company expects that about
$158 million (approximately 16 percent) of the $1 billion share repurchase program will be purchased from these
Fisher family members.
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