American Eagle Outfitters 2008 Annual Report Download - page 55

Auction rate preferred securities (“ARPS”) are a type of ARS that have an underlying asset of perpetual
preferred stock. In the event of default or liquidation of the collateral by the ARS issuer or trustee, the Company is
entitled to receive non-convertible preferred shares in the ARS issuer. Lehman Brothers Holdings, Inc. (“Lehman”)
(which filed for Chapter 11 bankruptcy protection during September 2008) acted as the broker and auction agent for
all of the ARPS held by the Company. The Lehman bankruptcy resulted in the dissolution of the investment trusts
for most of the Company’s ARPS. As a result, during Fiscal 2008, the Company received a total of 760,000
preferred shares of four companies. For Fiscal 2008, the Company recorded an OTTI charge of $12.8 million based
on the closing market price of the preferred shares on January 30, 2009.
Furthermore, as a result of the Lehman bankruptcy, it is probable that the trusts for three additional ARPS will
dissolve in the first quarter of 2009. Since it is unlikely that these investments will recover in value in the near term,
for Fiscal 2008 the Company recorded an OTTI charge related to these ARPS of $10.1 million based on the closing
market price for the underlying preferred shares on January 30, 2009.
In addition to the OTTI recorded, as a result of the current market conditions, the Company recorded a net
temporary impairment charge of $35.3 million in connection with the valuation of the remainder of its ARS
portfolio at January 31, 2009.
For instruments deemed to be temporarily impaired, we believe that these ARS investments can be liquidated
through successful auctions or redemptions at par or par plus accrued interest. We maintain our ability and intent to
hold these investments until recovery of market value and believe that the current illiquidity and impairment of
these investments is temporary. In addition, we believe that the current lack of liquidity relating to ARS investments
will have no impact on our ability to fund our ongoing operations and growth initiatives.
We continue to monitor the market for ARS and consider the impact, if any, on the fair value of its investments.
If current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may
be required to record additional OTTI and/or temporary impairment.
Refer to Note 14 to the Consolidated Financial Statements for additional information regarding a subsequent
event relating to our investment securities.
4. Fair Value Measurements
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair value measure-
ments. Fair value is defined under SFAS No. 157 as the exit price associated with the sale of an asset or transfer of a
liability in an orderly transaction between market participants at the measurement date. The Company has adopted
the provisions of SFAS No. 157 as of February 3, 2008, for its financial instruments, including its investment
securities.
Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable
inputs and minimize the use of unobservable inputs. In addition, SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•Level 1 — Quoted prices in active markets for identical assets or liabilities. Our short-term investments with
active markets, which represent our preferred stock investments, as well as cash and cash equivalents are
reported at fair value utilizing Level 1 inputs. For these items, quoted current market prices are readily
available.
•Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities. The
Company has concluded that the ARPS with underlyings of publicly traded preferred stock that it has
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AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)