American Eagle Outfitters 2004 Annual Report Download - page 34

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20
Part II
will be repatriated in accordance with the terms of the Act. At this time, the Company has not yet identified qualified
earnings that would be beneficial to repatriate. The Company will continue to monitor its foreign earnings during
Fiscal 2005 to determine whether it is beneficial to repatriate earnings under the Act.
SFAS No. 123 (revised 2004), Share-Based Payment
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-
Based Payment, (“SFAS No. 123(R)”). SFAS No. 123(R) is a revision of SFAS No. 123, Accounting for Stock-
Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends
FASB Statement No. 95, Statement of Cash Flows. SFAS No. 123(R) requires that companies recognize all share-
based payments to employees, including grants of employee stock options, in the financial statements. The
recognized cost will be based on the fair value of the equity or liability instruments issued. Pro forma disclosure of
this cost will no longer be an alternative under SFAS No. 123(R).
SFAS No. 123(R) is effective for public companies at the beginning of the first interim or annual period beginning
after June 15, 2005. Transition methods available to public companies include either the modified prospective or
modified retrospective adoption. The modified prospective transition method requires that compensation cost be
recognized beginning on the effective date, or date of adoption if earlier, for all share-based payments granted after
the date of adoption and for all unvested awards existing on the date of adoption. The modified retrospective
transition method, which includes the requirements of the modified prospective transition method, additionally
requires the restatement of prior period financial information based on amounts previously recognized under SFAS
No. 123 for purposes of pro forma disclosures. The Company will adopt SFAS No. 123(R) in its third quarter of
Fiscal 2005, beginning July 31, 2005, as required. The Company is currently in the process of determining the
transition method that it will use to adopt the new standard.
The Company currently accounts for its stock-based compensation plans under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, using the intrinsic value method. As a result of using this method,
the Company generally recognizes no compensation cost for employee stock options. The adoption of SFAS No.
123(R) and the use of the fair value method will have a significant impact on our results of operations. The impact of
SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the
amounts in our pro forma disclosure as shown in Note 2 of the Consolidated Financial Statements. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing
cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net
operating cash flows and increase net financing cash flows in the periods after adoption. We cannot estimate what
those amounts will be in the future because they are dependent on, among other things, when employees exercise
stock options. The amount of operating cash flows recognized for such excess tax deductions was $28.8 million, $0.7
million and $1.2 million in Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively.
Certain Relationships and Related Party Transactions
The Company and its wholly-owned subsidiaries historically had various transactions with related parties. The nature
of the Company's relationship with the related parties and a description of the respective transactions is stated below.
As of January 29, 2005, the Schottenstein-Deshe-Diamond families (the "families") owned 17% of the outstanding
shares of Common Stock of the Company. The families also own a private company, Schottenstein Stores
Corporation ("SSC"), which includes a publicly-traded subsidiary, Retail Ventures, Inc. ("RVI"), formerly Value
City Department Stores, Inc., and also owned 99% of Linmar Realty Company II (“Linmar Realty”) until June 4,
2004. During Fiscal 2004, the Company implemented a strategic plan to eliminate related party transactions with the
families. As a result, we did not have any material transactions remaining with the families as of January 29, 2005.
We believe that the terms of the prior transactions were as favorable to the Company as those that could have been