American Eagle Outfitters 2001 Annual Report Download - page 46

AE Notes to Consolidated Financial Statements
45
Non-revolving Term Facility and Revolving Operating Facility
In November 2000, in connection with the Canadian acquisition, the Company entered into a $29.1 million non-revolving term facility (the “term facility”)
and a $4.9 million revolving operating facility (the “operating facility”). The term facility was used to partially fund the purchase price of the acquisition
and the operating facility will be used to support the working capital and capital expenditures of the acquired businesses. The term facility has an outstanding
balance, including foreign currency translation adjustments, of $23.4 million as of February 2, 2002. The facility requires annual payments of $4.0
million and matures in December 2007. The term facility bears interest at the one-month Bankers’ Acceptance Rate (2.1% at February 2, 2002)
plus 140 basis points. Interest paid under the term facility was $1.8 million for the year ended February 2, 2002. The operating facility is due in
November 2002, has five additional one-year extensions and bears interest at either the lender’s prime lending rate (4.0% at February 2, 2002) or the
Bankers’ Acceptance Rate (2.1% at February 2, 2002) plus 120 basis points. There were no borrowings under the operating facility for the years ended
February 2, 2002 and February 3, 2001.
Both the term facility and the operating facility contain restrictive covenants related to financial ratios. As of February 2, 2002, the Company was in
compliance with these covenants.
Note 8. Accounting for Derivative Instruments and Hedging Activities
On November 30, 2000, the Company entered into an interest rate swap agreement totaling $29.2 million in connection with the term facility. The swap
amount decreases on a monthly basis beginning January 1, 2001 until the termination of the agreement in December 2007. The Company utilizes the
interest rate swap to manage interest rate risk. The Company pays a fixed rate of 5.97% and receives a variable rate based on the one-month Bankers’
Acceptance Rate. This agreement effectively changes the interest rate on the borrowings under the term facility from a variable rate to a fixed rate of
5.97% plus 140 basis points.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS No. 133), on February 4, 2001,
the beginning of Fiscal 2001. SFAS No. 133 requires the transition adjustment from adoption to be reported in net income or other comprehensive income
(loss), as appropriate, as the cumulative effect of a change in accounting principle. In accordance with the transition provisions of SFAS No. 133, the
Company recorded a cumulative transition adjustment to decrease other comprehensive income (loss) by approximately $0.3 million, net of related
tax effects, to recognize the fair value of its derivative instruments as of the date of adoption.
The Company recognizes its derivative on the balance sheet at fair value at the end of each period. Changes in the fair value of the derivative that is
designated and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss). For the year
ended February 2, 2002, unrealized net losses on derivative instruments of approximately $0.7 million, net of related tax effects, were recorded in other
comprehensive income (loss).
The Company does not believe there is any significant exposure to credit risk due to the creditworthiness of the bank. In the event of non-performance
by the bank, the Company’s loss would be limited to any unfavorable interest rate differential.
Note 9. Other Comprehensive Income (Loss)
The accumulated balances of other comprehensive income (loss) included as part of the Consolidated Statements of Stockholders’ Equity follow:
Before Tax Other
Tax Benefit Comprehensive
Amount (Expense) Income (Loss), Net
in thousands
Balance at January 29, 2000 $(3,766) $1,480 $(2,286)
Unrealized gain on investments and reclassification adjustment 3,766 (1,480) 2,286
Foreign currency translation adjustment 770 (416) 354
Balance at February 3, 2001 770 (416) 354
Foreign currency translation adjustment (2,764) 1,174 (1,590)
Unrealized derivative losses on cash flow hedge (1,063) 404 (659)
Balance at February 2, 2002 $(3,057) $1,162 $(1,895)