American Eagle Outfitters 2006 Annual Report Download - page 29

Recent Accounting Pronouncements
Recent accounting pronouncements are disclosedin Note 2 of the Consolidated Financial Statements.
Certain Relationships and Related Party Transactions
We have historically had various transactions with related parties. The nature of our relationship withthe related
parties and adescription of the respectivetransactions are statedbelow.
As of February 3, 2007, the Schottenstein-Deshe-Diamond families (the “families”) owned 13% of the outstanding
shares of our Common Stock. The familiesalso own aprivate company, Schottenstein Stores Corporation (“SSC”),
which includes apublicly-traded subsidiary, Retail Ventures, Inc. (“RVI”), formerly Value CityDepartment Stores,
Inc., and also owned 99% of LinmarRealty Company II(“Linmar Realty”) until June 4, 2004. During Fiscal 2004,
we implemented astrategic plan toeliminate related party transactions with thefamilies. As aresult, we didnot
have any material transactions remaining with thefamilies subsequent toJanuary 29, 2005. We believe that the
terms of the prior transactions were as favorable as thosethat could have been obtained from unrelated third parties.
We had thefollowing transactions with these related parties during Fiscal 2004.
•Weacquired Linmar Realty Company II, ageneral partnership that owned our corporate headquarters
and distribution center. Prior to the acquisition, we had an operating lease with Linmar Realty for these
properties.
•Wesold portions of our end-of-season, overstock and irregular merchandise to RVI.
•SSC and its affiliates charged us for an allocated cost of various professional services provided to us,
including certain legal, real estate, travel and insurance services.
•Wediscontinued our cost sharing arrangement withSSC for the acquisition of an interest in several
corporate aircraft. We incurredoperating costs and usage fees under this arrangement.
See Note12of the ConsolidatedFinancial Statements for further discussion of these relationships and transactions.
Additionally, see Part III, Item 13ofthisForm 10-K for further information regarding related party transactions.
Impact of Inflation/Deflation
We do not believe that inflation has had asignificant effect on our net sales or our profitability. Substantial
increases in cost, however, could have asignificant impact on our business and theindustry in the future.
Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on
our average unit retail price, resulting in lower sales and profitability.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.
We have market risk exposure related to interest rates and foreign currency exchange rates. Market risk is
measured as the potential negative impact on earnings, cashflows or fair values resulting from ahypothetical
change in interest rates or foreign currency exchange rates over the next year.
Interest Rate Risk
We are exposed to the impact of interest rate changesoncash equivalents and investments. The impact on cash
and investments held at the end of Fiscal 2006 from ahypothetical 10% decrease in interest rates would have
been adecrease in net income of approximately $5.1 million during Fiscal 2006.
Foreign Exchange Rate Risk
We are exposed to the impact of foreign exchange rate risk primarily through our Canadian operations where the
functional currency is the Canadian dollar. The recent weakening of the U.S. dollar compared to the Canadian
dollar has positively impacted our net sales and any operating income generated by our Canadian businesses. As
of February 3, 2007, a10%change in the Canadian foreign exchange rate would have resulted in an increase or
decrease in net income of approximately $4.3 million during Fiscal 2006.
PAGE 28 ANNUAL REPORT 2006
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Report of Independent Registered PublicAccounting Firm ........................................ 30
Consolidated Balance Sheets............................................................... 31
Consolidated Statements of Operations ....................................................... 32
Consolidated Statements of Comprehensive Income ............................................. 33
Consolidated Statements of Stockholders’ Equity ............................................... 34
Consolidated Statements of Cash Flows....................................................... 35
Notes to Consolidated Financial Statements .................................................... 36
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