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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2002
Commission file no. 1-10299
FOOT LOCKER, INC.
-----------------
(Exact name of registrant as specified in its charter)
New York 13-3513936
- ---------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
112 W. 34th Street, New York, New York 10120
- -------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 720-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Number of shares of Common Stock outstanding at September 6, 2002: 140,936,050
FOOT LOCKER, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.......................1
Condensed Consolidated Statements of Operations.............2
Condensed Consolidated Statements of Comprehensive
Income (Loss).............................................3
Condensed Consolidated Statements of Cash Flows.............4
Notes to Condensed Consolidated Financial Statements.....5-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................11-17
Part II. Other Information
Item 1. Legal Proceedings..........................................17
Item 4. Submission of Matters to a Vote of Security Holders.....17-18
Item 6. Exhibits and Reports on Form 8-K...........................18
Signature..................................................19
Certifications..........................................20-21
Index to Exhibits..........................................22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except shares)
August 3, August 4, February 2,
2002 2001 2002
----------- ----------- -----------
(Unaudited) (Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents ................................... $ 307 $ 189 $ 215
Merchandise inventories ..................................... 887 835 793
Assets of discontinued operations ........................... 3 4 5
Assets held for sale ........................................ -- 61 --
Other current assets ........................................ 110 99 102
----------- ----------- -----------
1,307 1,188 1,115
Property and equipment, net .................................... 626 643 637
Deferred taxes ................................................. 247 222 251
Goodwill and intangible assets ................................. 202 188 191
Assets of business transferred under
contractual arrangement (note receivable) ................ 12 -- 30
Other assets ................................................... 69 145 73
----------- ----------- -----------
$ 2,463 $ 2,386 $ 2,297
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................ $ 389 $ 327 $ 272
Accrued liabilities ......................................... 203 187 211
Current portion of repositioning and restructuring reserves . 3 26 6
Current portion of reserve for discontinued operations ...... 21 44 16
Liabilities of discontinued operations ...................... 4 10 7
Liabilities of businesses held for sale ..................... -- 20 --
Current portion of long-term debt and obligations
under capital leases ...................................... 31 54 34
----------- ----------- -----------
651 668 546
Long-term debt and obligations
under capital leases ........................................ 363 405 365
Liabilities of business transferred under
contractual arrangement ..................................... 12 -- 12
Other liabilities .............................................. 360 276 382
Shareholders' equity
Common stock and paid-in capital: 141,036,379
139,730,062 and 139,980,630 shares, respectively .......... 373 358 363
Retained earnings ........................................... 848 728 797
Accumulated other comprehensive loss ........................ (144) (49) (168)
Less: Treasury stock at cost: 70,220, 22,455 and
70,220 shares, respectively ............................... -- -- --
----------- ----------- -----------
Total shareholders' equity ..................................... 1,077 1,037 992
----------- ----------- -----------
$ 2,463 $ 2,386 $ 2,297
=========== =========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-1-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended Twenty-six weeks ended
--------------------- ----------------------
Aug. 3, Aug. 4, Aug. 3, Aug. 4,
2002 2001 2002 2001
-------- -------- -------- --------
Sales ..................................................... $ 1,085 $ 1,048 $ 2,175 $ 2,120
Costs and Expenses
Cost of sales ........................................... 773 742 1,543 1,488
Selling, general and administrative expenses ............ 220 227 440 458
Depreciation and amortization ........................... 38 38 74 76
Restructuring charge (income) ........................... (1) 32 (1) 32
Interest expense, net ................................... 7 6 14 10
Other income ............................................ (3) (1) (3) (1)
-------- -------- -------- --------
1,034 1,044 2,067 2,063
-------- -------- -------- --------
Income from continuing operations before
income taxes ......................................... 51 4 108 57
Income tax expense ........................................ 18 -- 37 21
-------- -------- -------- --------
Income from continuing operations ......................... 33 4 71 36
Loss on disposal of discontinued operations, net of income
tax (benefit) expense of $(1), $6, $(1) and $1 ....... (2) (18) (20) (13)
-------- -------- -------- --------
Net income (loss) ......................................... $ 31 $ (14) $ 51 $ 23
======== ======== ======== ========
Basic earnings per share:
Income from continuing operations .................... $ 0.23 $ 0.03 $ 0.50 $ 0.26
Loss from discontinued operations .................... (0.01) (0.13) (0.14) (0.09)
-------- -------- -------- --------
Net income (loss) .................................... $ 0.22 $ (0.10) $ 0.36 $ 0.17
======== ======== ======== ========
Weighted-average common shares outstanding ................ 140.7 139.5 140.4 139.0
Diluted earnings per share:
Income from continuing operations .................... $ 0.22 $ 0.03 $ 0.48 $ 0.26
Loss from discontinued operations .................... (0.01) (0.13) (0.13) (0.09)
-------- -------- -------- --------
Net income (loss) .................................... $ 0.21 $ (0.10) $ 0.35 $ 0.17
======== ======== ======== ========
Weighted-average common shares assuming dilution .......... 151.0 140.8 150.9 143.2
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in millions)
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
Aug. 3, Aug. 4, Aug. 3, Aug. 4,
2002 2001 2002 2001
--------- ------- -------- -----------
Net income (loss) ....................................... $ 31 $(14) $ 51 $ 23
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments arising during
the period ............................................ 15 (1) 25 (8)
Change in fair value of derivatives accounted for as
hedges, net of deferred tax benefit of $- ............. (1) (1) (1) --
--------- ------- -------- -----------
Comprehensive income (loss) ............................. $ 45 $(16) $ 75 $ 15
========= ======= ======== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Twenty-six weeks ended
---------------------
Aug. 3, Aug. 4,
2002 2001
-------- --------
From Operating Activities:
Net income ....................................................... $ 51 $ 23
Adjustments to reconcile net income to net cash provided by
operating activities of continuing operations:
Restructuring charge (income) .................................. (1) 32
Loss on disposal of discontinued operations, net of tax ........ 20 13
Depreciation and amortization .................................. 74 76
Real estate gains .............................................. (3) (1)
Deferred income taxes .......................................... 3 (30)
Change in assets and liabilities:
Merchandise inventories ...................................... (84) (108)
Accounts payable and other accruals .......................... 92 34
Repositioning and restructuring reserves ..................... (2) (20)
Other, net ................................................... 3 2
-------- --------
Net cash provided by operating activities of continuing operations 153 21
-------- --------
From Investing Activities:
Proceeds from disposal of real estate ............................ 6 1
Lease acquisition costs .......................................... (8) (7)
Capital expenditures ............................................. (63) (39)
-------- --------
Net cash used in investing activities of continuing operations ... (65) (45)
-------- --------
From Financing Activities:
Issuance of convertible long-term debt ........................... -- 150
Debt issuance costs .............................................. -- (8)
Reduction in long-term debt and capital lease obligations ........ (4) (4)
Issuance of common stock ......................................... 9 8
-------- --------
Net cash provided by financing activities of continuing operations 5 146
-------- --------
Net Cash used in Discontinued Operations ............................ (6) (45)
Effect of exchange rate fluctuations
on Cash and Cash Equivalents ..................................... 5 3
-------- --------
Net change in Cash and Cash Equivalents ............................. 92 80
Cash and Cash Equivalents at beginning of year ...................... 215 109
-------- --------
Cash and Cash Equivalents at end of interim period .................. $ 307 $ 189
======== ========
Cash paid during the period:
Interest ......................................................... $ 14 $ 17
Income taxes ..................................................... $ 20 $ 21
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Registrant's Form 10-K for the year ended February
2, 2002, as filed with the Securities and Exchange Commission (the "SEC") on
April 29, 2002. Certain items included in these statements are based on
management's estimates. In the opinion of management, all material adjustments,
which are of a normal recurring nature, necessary for a fair presentation of the
results for the interim periods have been included. The results for the
twenty-six weeks ended August 3, 2002 are not necessarily indicative of the
results expected for the year.
Goodwill and Intangible Assets
The Registrant adopted Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" effective February 3, 2002. Accordingly, the Registrant
stopped amortizing goodwill in the first quarter of 2002. All intangible assets
of the Registrant have finite lives and will continue to be amortized over their
useful lives. The Registrant is required to test for potential impairment of
goodwill and intangible assets at least on an annual basis. The Registrant
completed its transitional review, which did not result in an impairment charge.
The following would have resulted had the provisions of the new
standards been applied as of January 31, 1999:
Thirteen
weeks Twenty-six
ended weeks ended Year ended Year ended Year ended
August 4, August 4, February 2, February 3, January 29,
2001 2001 2002 2001 2000
--------- ----------- ----------- ----------- -----------
Income from continuing operations
(in millions)
As reported ................ $ 4 $ 36 $ 111 $ 107 $ 59
Pro forma .................. $ 5 $ 38 $ 115 $ 112 $ 64
Basic earnings per share
As reported ................ $ 0.03 $ 0.26 $ 0.79 $ 0.78 $ 0.43
Pro forma .................. $ 0.04 $ 0.28 $ 0.82 $ 0.81 $ 0.47
Diluted earnings per share
As reported ................ $ 0.03 $ 0.26 $ 0.79 $ 0.77 $ 0.43
Pro forma .................. $ 0.04 $ 0.28 $ 0.82 $ 0.80 $ 0.46
There were no material changes in the carrying value of goodwill during
the thirteen and twenty-six weeks ended August 3, 2002. The carrying value of
goodwill by operating segment as of August 3, 2002 was as follows:
(in millions)
Athletic Stores............... $ 55
Direct to Customers........... 80
------
Total Goodwill................ $ 135
======
Finite life intangible assets comprise lease acquisition costs, which
are required to secure prime lease locations and other lease rights, primarily
in Europe. The weighted-average amortization period as of August 3, 2002 was
approximately 12 years. Amortization expense for lease acquisition costs was
approximately $2 million and $4 million for the thirteen and twenty-six weeks
ended August 3, 2002, respectively. For the thirteen and twenty-six weeks ended
August 4, 2001, amortization expense was approximately $1 million and $3
million, respectively. Annual estimated amortization expense is expected to be
$8 million for 2002 and 2003 and approximately $7 million for each of the
succeeding three years.
-5-
Finite life intangible assets subject to amortization, were as
follows:
Gross
Carrying Accumulated
Lease Acquisition Costs (in millions) Amount Amortization Net
------------------------------------- ------ ------------ ---
August 3, 2002 $104 $(37) $ 67
August 4, 2001 $ 84 $(35) $ 49
February 2, 2002 $ 90 $(34) $ 56
Impairment or Disposal of Long-Lived Assets
Effective as of February 3, 2002, the Registrant adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
retains the basic provisions of APB No. 30 for the presentation of discontinued
operations in the income statement but broadens that presentation to apply to a
component of an entity rather than a segment of a business. The pronouncement
now provides for a single accounting model for reporting long-lived assets to be
disposed of by sale. Certain balances in prior periods have been reclassified in
the Condensed Consolidated Balance Sheets to conform to the presentation
required by the pronouncement. The adoption of SFAS No. 144 did not have a
material impact on the Registrant's financial position or results of operations.
Derivative Financial Instruments
In the first quarter of 2001, the Registrant recorded other
comprehensive income of approximately $1 million, reflecting the impact of
adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." During the quarters ended August 3, 2002 and August 4, 2001, the
ineffective portion of gains and losses related to cash flow hedges recorded to
earnings was not material. The Registrant is hedging forecasted transactions for
no more than the next twelve months and expects all derivative-related amounts
reported in accumulated other comprehensive loss to be reclassified to earnings
within twelve months.
Accumulated comprehensive loss was increased by approximately $1
million after-tax due to the changes in fair value of derivative financial
instruments designated as hedges during the second quarter of 2002 and 2001.
During the quarter ended August 3, 2002, the change in fair value of
derivative instruments not designated as hedges was not material. During the
quarter ended August 4, 2001, the Registrant recorded a gain of approximately $1
million for the change in fair value of derivative instruments not designated as
hedges, which was offset by a foreign exchange loss related to the underlying
transactions.
Discontinued Operations
On September 28, 2001, the Registrant completed the stock transfer of
the 370 Northern Group stores in Canada, through one of its wholly-owned
subsidiaries for approximately CAD$59 million (approximately US$38 million),
which was paid in the form of a note (the "Note"). The purchaser operates the
Northern Group stores, from which the repayment of the Note will be made. The
transaction has been accounted for as a "transfer of assets and liabilities
under contractual arrangement" as no cash proceeds were received and the
consideration comprised the Note, the repayment of which is dependent on the
future successful operations of the business. The assets and liabilities related
to the former operations have been presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement." The net
amount of the assets and liabilities of the former operations was written down
to the estimated fair value of the Note in the second quarter of 2001. Due to
the poor performance of the Northern Group stores in Canada since the
transaction, the Registrant recorded a charge of $18 million in the first
quarter of 2002. The charge comprised a valuation allowance in the amount of the
operating losses incurred by the purchaser and a further reduction in the
carrying value of the net amount of the assets and liabilities of the former
operations to zero, due to greater uncertainty with respect to the
collectibility of the Note.
-6-
In the first quarter of 2001, the Registrant recorded a tax benefit of
$5 million as a result of the implementation of tax planning strategies related
to the discontinuance of the Northern Group. The second quarter 2001 charge of
$12 million before-tax, or $19 million after-tax, to write-down the assets and
liabilities to the estimated fair value of the Note was partially offset by
reduced severance and favorable results from the liquidation of the Northern U.S
stores and real estate activity.
Net disposition activity of $23 million for the first half of 2002
included the $18 million reduction in the carrying value of the net assets and
liabilities, real estate disposition activity of $2 million and severance and
other costs of $3 million. Of the remaining reserve balance of $6 million at
August 3, 2002, $5 million is expected to be utilized within twelve months and
the remaining $1 million thereafter.
In 1998, the Registrant exited both its International General
Merchandise and Specialty Footwear segments. In 1997, the Registrant announced
that it was exiting its Domestic General Merchandise segment. In the second
quarter of 2002, the Registrant recorded a charge of $4 million before-tax, or
$2 million after-tax, for pending legal actions related to the Domestic General
Merchandise segment and a $1 million charge for a lease liability related to
Woolco in the former International General Merchandise segment. These charges
were partially offset by a net reduction of $2 million before-tax, or $1 million
after-tax, in the Specialty Footwear reserve primarily reflecting real estate
costs more favorable than original estimates. In the second quarter of 2001, the
Registrant recorded a tax benefit of $1 million related to the settlement of tax
liabilities in Germany associated with exiting the International General
Merchandise segment. The remaining reserve balances totaled $27 million as of
August 3, 2002, $16 million of which is expected to be utilized within twelve
months. Disposition activity related to the reserves is presented below:
NORTHERN GROUP (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 8/3/2002
-------- ----- -------- --------
Real estate & lease liabilities $ 6 $ (2) $-- $ 4
Severance & personnel 2 (2) -- --
Asset impairments -- (18) 18 --
Other costs 3 (1) -- 2
-------- ----- -------- --------
Total $ 11 $(23) $ 18 $ 6
======== ===== ======== ========
INTERNATIONAL GENERAL MERCHANDISE (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 8/3/2002
-------- ----- -------- --------
The Bargain! Shop $ 6 $-- $-- $ 6
Woolco -- -- 1 1
-------- ----- -------- --------
Total $ 6 $-- $ 1 $ 7
======== ===== ======== ========
SPECIALTY FOOTWEAR (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 8/3/2002
-------- ----- -------- --------
Real estate & lease liabilities $ 7 $-- $(3) $ 4
Other costs 2 (2) 1 1
-------- ----- -------- --------
Total $ 9 $(2) $(2) $ 5
======== ===== ======== ========
DOMESTIC GENERAL MERCHANDISE (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 8/3/2002
-------- ----- -------- --------
Real estate & lease liabilities $10 $(1) $-- $ 9
Legal and other costs 2 -- 4 6
--- --- --- ---
Total $12 $(1) $ 4 $15
=== === === ===
-7-
The following is a summary of the assets and liabilities of
discontinued operations:
DOMESTIC
NORTHERN SPECIALTY GENERAL
(in millions) GROUP FOOTWEAR MERCHANDISE TOTAL
-------- --------- ----------- -----
8/3/2002
Assets $-- $ 1 $ 2 $ 3
Liabilities 2 -- 2 4
-------- --------- ----------- -----
Net assets (liabilities) of discontinued
operations $ (2) $ 1 $-- $ (1)
======== ========= =========== =====
8/4/2001
Assets $-- $ 2 $ 2 $ 4
Liabilities 7 1 2 10
-------- --------- ----------- -----
Net assets (liabilities) of discontinued
operations $ (7) $ 1 $-- $ (6)
======== ========= =========== =====
2/2/2002
Assets $ 1 $ 2 $ 2 $ 5
Liabilities 3 1 3 7
-------- --------- ----------- -----
Net assets (liabilities) of discontinued
operations $ (2) $ 1 $ (1) $ (2)
======== ========= =========== =====
The Northern Group assets and liabilities of discontinued operations
primarily comprised the Northern Group stores in the U.S. Liabilities included
accounts payable, restructuring reserves and other accrued liabilities. The
assets and liabilities of the Northern Group stores in Canada to be sold were
reclassified as "Assets held for sale" ($34 million) and "Liabilities of
businesses held for sale" ($16 million) as of August 4, 2001. As previously
mentioned, subsequent to the Northern Group Canada transaction, those assets and
liabilities have been presented under the balance sheet captions as "Assets of
business transferred under contractual arrangement (note receivable)" and
"Liabilities of business transferred under contractual arrangement." The net
assets of the Specialty Footwear and Domestic General Merchandise segments
consist primarily of fixed assets and accrued liabilities.
Restructuring Programs
1999 Restructuring
Total restructuring charges of $96 million before-tax were recorded in
1999 for the Registrant's restructuring program to sell or liquidate non-core
businesses. The restructuring plan also included an accelerated store-closing
program in the United States and Asia, corporate headcount reduction and a
distribution center shutdown. The disposition of all non-core businesses was
completed by November 2001.
In the second quarter of 2001, the Registrant recorded a restructuring
charge of approximately $32 million before-tax, or $22 million after-tax, as a
result of the terms of then current negotiations to sell The San Francisco Music
Box Company. In the second quarter of 2002, the Registrant recorded a reduction
of $1 million, which reflected favorable results compared with original
estimates for exit costs related to the sale.
The net assets of The San Francisco Music Box Company and the assets
related to the Burger King and Popeye's franchises as of August 4, 2001 have
been valued at the lower of cost or net realizable value. These assets, totaling
$27 million, and liabilities, totaling $4 million, have been reclassified as
"Assets held for sale" and "Liabilities of businesses held for sale,"
respectively, in the Condensed Consolidated Balance Sheet as of August 4, 2001.
-8-
Disposition activity related to the reserves is presented below. The
remaining reserve balance at August 3, 2002 totaled $3 million, $2 million of
which is expected to be utilized within twelve months.
NON-CORE BUSINESSES
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 8/3/2002
-------- ----- -------- --------
Real estate $ 1 $ -- $ -- $ 1
Other disposition costs 3 -- (1) 2
------ ------ ------ ------
Total $ 4 $ -- $ (1) $ 3
====== ====== ====== ======
CORPORATE OVERHEAD AND LOGISTICS
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 8/3/2002
-------- ----- -------- --------
Real estate $ 1 $ (1) $ -- $ --
====== ====== ====== ======
TOTAL RESTRUCTURING RESERVES
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 8/3/2002
-------- ----- -------- --------
Real estate $ 2 $ (1) $ -- $ 1
Other disposition costs 3 -- (1) 2
------ ------ ------ ------
Total $ 5 $ (1) $ (1) $ 3
====== ====== ====== ======
1993 Repositioning and 1991 Restructuring
In the first half of 2002, disposition activity reduced the reserve
balance by approximately $1 million. The remaining reserve balance of $2 million
comprised future lease obligations.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options and the
conversion of convertible long-term debt. The following table reconciles the
numerator and denominator used to compute basic and diluted earnings per share
for continuing operations.
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
(in millions) Aug. 3, Aug. 4, Aug. 3, Aug. 4,
2002 2001 2002 2001
------ ------ ------ ------
Numerator:
Income from continuing operations $ 33 $ 4 $ 71 $ 36
Effect of Dilution:
Convertible debt 1 -- 2 1
------ ------ ------ ------
Income from continuing operations assuming dilution $ 34 $ 4 $ 73 $ 37
====== ====== ====== ======
Denominator:
Weighted-average common shares outstanding 140.7 139.5 140.4 139.0
Effect of Dilution:
Stock options and awards 0.8 1.3 1.0 1.2
Convertible debt 9.5 -- 9.5 3.0
------ ------ ------ ------
Weighted-average common shares assuming dilution 151.0 140.8 150.9 143.2
====== ====== ====== ======
-9-
Options to purchase 4.1 million and 3.1 million shares of common stock
were not included in the computation for the thirteen weeks ended August 3, 2002
and August 4, 2001, respectively. Options to purchase 3.5 million and 3.3
million shares of common stock were not included in the computation for the
twenty-six weeks ended August 3, 2002 and August 4, 2001, respectively. These
amounts were not included because the exercise price of the options was greater
than the average market price of the common shares and, therefore, the effect
would be antidilutive.
For the thirteen weeks ended August 4, 2001, 5.9 million incremental
common shares issuable upon conversion of the Registrants 5.50% notes were not
included in the computation of diluted earnings per share because of their
antidilutive effect.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss comprised foreign currency
translation adjustments of $28 million, $49 million, and $53 million at August
3, 2002, August 4, 2001 and February 2, 2002, respectively. As of August 3,
2002, accumulated other comprehensive loss included a $1 million loss reflecting
the fair value of derivatives. Accumulated other comprehensive loss included a
minimum pension liability adjustment of $115 million at August 3, 2002 and
February 2, 2002.
Segment Information
Sales and operating results for the Registrant's reportable segments
for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001,
respectively, are presented below. Operating results reflect income from
continuing operations before income taxes, net corporate expense and net
interest expense.
Sales:
(in millions) Thirteen weeks ended Twenty-six weeks ended
------------------- ----------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
------ ------ ------ ------
Athletic Stores ...................... $1,016 $ 964 $2,022 $1,941
Direct to Customers .................. 69 67 153 145
------ ------ ------ ------
1,085 1,031 2,175 2,086
All Other (1) ....................... -- 17 -- 34
------ ------ ------ ------
$1,085 $1,048 $2,175 $2,120
====== ====== ====== ======
Operating Results:
(in millions) Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
----- ----- ----- -----
Athletic Stores ...................... $ 62 $ 64 $ 131 $ 137
Direct to Customers .................. 6 1 14 5
----- ----- ----- -----
68 65 145 142
All Other (1) (2) .................... 1 (36) 1 (39)
----- ----- ----- -----
Operating profit ................ 69 29 146 103
Corporate expense ............... 11 19 24 36
Interest expense, net ........... 7 6 14 10
----- ----- ----- -----
Income from continuing operations
before income taxes ............... $ 51 $ 4 $ 108 $ 57
===== ===== ===== =====
(1) Reflects The San Francisco Music Box Company and the Burger King and
Popeye's franchises.
(2) Both periods presented for 2001 include a restructuring charge of $32
million, which was reduced by $1 million as presented in both periods
of 2002.
-10-
Other Income
In the second quarter of 2002, the Registrant received proceeds of $6
million primarily related to the condemnation of a part-owned and part-leased
property and recorded a net gain of $3 million in other income.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which will be effective for fiscal years beginning
after June 15, 2002, and the Registrant will adopt it as of the beginning of
fiscal year 2003. The statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate can be made. The carrying amount of the
related long-lived asset shall be increased by the same amount as the liability
and that amount will be depreciated or amortized consistent with the underlying
long-lived asset. The difference between the fair value and the value of the
ultimate liability will be accreted over time using the credit-adjusted
risk-free interest rate in effect when the liability is initially recognized.
The Registrant is currently evaluating the impact of the adoption of SFAS No.
143 on its financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends other existing authoritative pronouncements to
make various technical corrections, including that gains and losses from
extinguishment of debt no longer be classified as extraordinary. The statement
also eliminates an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. In addition, it requires that the original lessee under an
operating lease agreement that becomes secondarily liable shall recognize the
fair value of the guarantee obligation for all transactions occurring after May
15, 2002. The Registrant adopted SFAS No. 145 as of May 15, 2002, which did not
have a material impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which will be effective for exit
and disposal activities that are initiated after December 31, 2002. The
statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The statement requires that the fair value of an initial
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred as opposed to when the entity commits to the exit
plan, thereby eliminating the definition and requirements for recognition of
exit costs, as is the guidance under EITF 94-3.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
References included herein to businesses disposed and held for disposal
relate to The San Francisco Music Box Company and the Burger King and Popeye's
franchises.
RESULTS OF OPERATIONS
Sales of $1,085 million for the second quarter of 2002 increased 3.5
percent from sales of $1,048 million for the second quarter of 2001. For the
twenty-six weeks ended August 3, 2002, sales of $2,175 million increased 2.6
percent from sales of $2,120 million for the twenty-six weeks ended August 4,
2001. Excluding the impact of foreign currency fluctuations and sales from
businesses disposed and held for disposal in the prior year, sales increased 3.6
percent and 3.7 percent for the second quarter and year-to-date periods of 2002,
respectively, as compared with the corresponding prior-year periods. These
increases included comparable-store sales increases of 0.9 percent and 1.2
percent, respectively, but were primarily attributable to the Registrant's
successful new store opening program. Sales for the twenty-six weeks ended
August 3, 2002 were negatively impacted by certain higher-priced marquee
footwear that did not sell as well as anticipated in the first quarter of 2002.
During the second quarter of 2002, the Registrant successfully moved its marquee
footwear back in line with historical levels.
-11-
Gross margin, as a percentage of sales, of 28.8 percent and 29.1 percent
for the thirteen and twenty-six weeks ended August 3, 2002, respectively,
declined slightly as compared with 29.2 percent and 29.8 percent, respectively,
in the corresponding prior-year periods. These declines primarily reflected
additional markdowns that were required to sell certain slow-moving
higher-priced marquee footwear in the first quarter of 2002 and the continuing
promotional environment. Buyer's salaries and occupancy costs, as a percentage
of sales, for the thirteen and twenty-six weeks ended August 3, 2002, improved
slightly from the corresponding prior-year periods.
Selling, general and administrative expenses ("SG&A") of $220 million and
$440 million for the thirteen and twenty-six weeks ended August 3, 2002,
respectively, improved by 140 basis points as a percentage of sales to 20.3
percent and 20.2 percent, respectively, as compared with 21.7 percent and 21.6
percent in the corresponding prior-year periods. This improvement reflected the
Registrant's continued cost-reduction efforts during 2002, particularly in
payroll and logistics. The completion of the sales of The San Francisco Music
Box Company and the Burger King and Popeye's franchises in 2001 also contributed
to the reduction in SG&A, as a percentage of sales.
Depreciation and amortization of $38 million remained flat for the second
quarter of 2002 and declined by $2 million to $74 million for the first half of
2002. The impact of no longer amortizing goodwill as required by SFAS No. 142,
which was adopted by the Registrant effective February 3, 2002, was $2 million
for the second quarter and $4 million for the first half of 2002, and was offset
by increased depreciation associated with the new store opening program.
Interest expense of $9 million and $17 million for the thirteen and
twenty-six weeks ended August 3, 2002, declined by 10.0 percent and 5.6 percent,
respectively, as compared with the corresponding prior-year periods. The
increase in interest expense in 2002 associated with the issuance of $150
million 5.50% convertible notes in June 2001 was more than offset by the impact
of the retirement of the $50 million 7.00% medium-term notes in October 2001 and
reduced amortization of deferred financing costs related to the revolving credit
facility. Interest income totaled $2 million and $3 million for the thirteen and
twenty-six weeks ended August 3, 2002, respectively, as compared with $4 million
and $8 million in the corresponding prior-year periods. The thirteen and
twenty-six weeks ended August 4, 2001 included intercompany interest income
related to the Northern Group segment of $2 million and $5 million. The
offsetting interest expense was charged to the reserve for discontinued
operations in 2001.
During the first quarter of 2002, the Registrant recorded a $3 million tax
benefit related to a multi-state tax planning strategy. During the second
quarter of 2002, the Registrant recorded a $2 million tax benefit related to a
reduction in the valuation allowance for deferred tax assets related to foreign
tax credits. The combined effect of these items reducing the valuation allowance
reduced the effective tax rate for the twenty-six weeks ended August 3, 2002 to
approximately 34.0 percent. This compared with 36.8 percent for the
corresponding prior-year period. The Registrant expects the effective tax rate
to approximate 37.5 percent for the remainder of 2002.
Income from continuing operations of $33 million, or $0.22 per diluted
share, for the thirteen weeks ended August 3, 2002, improved by $0.19 per
diluted share from $4 million, or $0.03 per diluted share, for the thirteen
weeks ended August 4, 2001. Income from continuing operations of $71 million, or
$0.48 per diluted share, for the twenty-six weeks ended August 4, 2002 improved
by $0.22 per diluted share from $36 million. Restructuring income of $1 million
was included in income from continuing operations for both periods in 2002.
Income from continuing operations included restructuring charges of $32 million
for the thirteen and twenty-six weeks ended August 4, 2001. These charges
amounted to $0.23 per diluted share and $0.22 per diluted share, respectively,
for the thirteen and twenty-six weeks ended August 4, 2001. For the quarter
ended August 3, 2002, the Registrant reported net income of $31 million, or
$0.21 per diluted share, which included a $2 million loss on the disposal of
discontinued operations, or $0.01 per diluted share, compared with a net loss of
$14 million, or $0.10 per diluted share, for the corresponding prior-year
period, which included a loss of $18 million, or $0.13 per diluted share, for
discontinued operations. For the year-to-date periods, the Registrant reported
net income of $51 million, or $0.35 per diluted share, for 2002, as compared
with net income of $23 million, or $0.17 per diluted share, in 2001, which
included losses related to discontinued operations of $20 million, or $0.13 per
diluted share, and $13 million, or $0.09 per diluted share, respectively.
-12-
STORE COUNT
The following table summarizes store count. During the twenty-six weeks
ended August 3, 2002, the Registrant remodeled or relocated 117 stores.
Feb. 2, Aug. 3, Aug. 4,
2002 Opened Closed 2002 2001
---- ------ ------ ---- ----
Athletic Stores ................... 3,590 66 56 3,600 3,555
Disposed and held for disposal .... -- -- -- -- 178
----- ----- ----- ----- -----
Total .......................... 3,590 66 56 3,600 3,733
===== ===== ===== ===== =====
SALES
The following table summarizes sales by segment.
Thirteen weeks ended Twenty-six weeks ended
--------------------- -----------------------
Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001
------------ ------------ ------------ ------------
(in millions)
Athletic Stores ....................................... $1,016 $ 964 $2,022 $1,941
Direct to Customers ................................... 69 67 153 145
------ ------ ------ ------
1,085 1,031 2,175 2,086
Disposed and held for disposal ........................ -- 17 -- 34
------ ------ ------ ------
Total sales ........................................ $1,085 $1,048 $2,175 $2,120
====== ====== ====== ======
Athletic Stores sales increased by 5.4 percent and 4.2 percent,
respectively, for the thirteen and twenty-six weeks ended August 3, 2002,
respectively, as compared with the corresponding prior-year periods. Due to the
strong performance of the euro against the U.S. dollar in the second quarter of
2002, the sales increases, excluding the impact of foreign currency
fluctuations, were 3.7 percent and 3.5 percent for the 2002 second quarter and
year-to-date periods, respectively. These increases primarily resulted from the
Registrant's successful new store opening program and included comparable-store
sales increases of 0.8 percent and 0.9 percent for the thirteen and twenty-six
weeks ended August 3, 2002, respectively.
Footwear continued to drive the sales growth across most formats, which
was dominated by both the basketball category and also the current trend in
classic shoes. Sales also continued to benefit from the apparel strategy led by
merchandise in private label and licensed offerings. In the U.S., sales for the
twenty-six weeks ended August 3, 2002 were negatively impacted by certain
higher-priced marquee footwear that did not sell as well as anticipated in the
first quarter of 2002. During the second quarter of 2002, the Registrant
successfully moved its marquee footwear back in line with historical levels and
re-focused its marquee footwear selection on products having a retail price of
$90 to $120 per pair in order to better meet customer demand.
Recently, Nike, Inc. ("Nike") advised the Registrant that Nike will limit
purchases of certain marquee and launch athletic footwear by the Registrant's
U.S. divisions for delivery after February 1, 2003. Also, the Registrant has
reduced its orders for certain other products offered for sale by Nike. The
Registrant currently anticipates that the strength of other key brand marquee
and launch offerings will allow its sales of marquee athletic footwear in the
U.S. for the full year 2003 to be at essentially the same level as they have
been historically, with a potential change in the mix of product among its
vendors, of which Nike is the largest.
Based upon its current understanding, the Registrant estimates that its
planned 2003 purchases of Nike marquee and launch footwear and other products
could be reduced by approximately $150 million to $250 million. The Registrant
expects to meet customer demand for marquee products with incremental purchases
from its other key vendors. The Registrant believes that its relationship with
Nike remains satisfactory and expects, in the ordinary course of business, to
continue to have on-going discussions with Nike concerning the Registrant's
planned purchases of Nike products.
-13-
The international formats, Foot Locker Europe in particular, continued to
achieve strong sales growth in the first half of 2002. The Lady Foot Locker
format produced disappointing sales during the first half of 2002. The
Registrant initiated changes to Lady Foot Locker's management team and is in the
process of developing various merchandising initiatives in an effort to improve
its performance. In the third quarter, once developed, the Registrant intends to
analyze the impact of these initiatives on the projected performance of the
division, which would include an analysis of the recoverability of store
long-lived assets pursuant to SFAS No. 144. In addition, the Registrant also
announced in August that Kids Foot Locker, which had previously been managed in
conjunction with Lady Foot Locker, would now be managed by the Foot Locker U.S.
management team.
Direct to Customers sales increased by 3.0 percent and by 5.5 percent for
the thirteen and twenty-six weeks ended August 3, 2002, respectively, as
compared with the corresponding prior-year periods. Internet sales of $24
million and $57 million for the thirteen and twenty-six weeks ended August 3,
2002, respectively, increased by 26.3 percent and by 42.5 percent, respectively,
as compared with the corresponding prior-year periods. This increase in Internet
sales was substantially offset by a decline in catalog sales, reflecting the
growing trend of the Registrant's customers to browse and select products
through its catalogs and then make their purchases via the Internet.
OPERATING RESULTS
Operating results reflect income from continuing operations before income
taxes, net corporate expense and net interest expense. The following table
summarizes operating profit by segment.
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001
------------ ------------ ------------ ------------
(in millions)
Athletic Stores .......................... $ 62 $ 64 $ 131 $ 137
Direct to Customers ...................... 6 1 14 5
----- ----- ----- -----
68 65 145 142
Disposed and held for disposal............ -- (4) -- (7)
Restructuring income (charge)............. 1 (32) 1 (32)
----- ----- ----- -----
Total operating profit ................... $ 69 $ 29 $ 146 $ 103
===== ===== ===== =====
Athletic Stores operating profit decreased by 3.1 percent and by 4.4
percent for the thirteen and twenty-six weeks ended August 3, 2002,
respectively, as compared with the corresponding prior-year periods. The
decrease in both periods of 2002 is primarily a result of the reduced gross
margin rate performances, which were offset, in part, by operating expense
reductions. Operating profit, as a percentage of sales, declined by
approximately 50 basis points to 6.1 percent and 6.5 percent, respectively, for
the thirteen and twenty-six weeks ended August 3, 2002 as compared with the
corresponding prior-year periods.
Direct to Customers operating results increased by $5 million for the
thirteen weeks ended August 3, 2002 and more than doubled for the twenty-six
weeks ended August 3, 2002 as compared with the corresponding periods ended
August 4, 2001. Operating profit, as a percentage of sales, increased to 8.7
percent and 9.2 percent, respectively, for the 2002 second quarter and
year-to-date periods, from 1.5 percent and 3.4 percent, respectively, in the
corresponding prior-year periods. The improved operating performance in 2002 was
driven primarily by increased sales in the Internet business.
-14-
STRATEGIC DISPOSITIONS AND REPOSITIONING
On September 28, 2001, the Registrant completed the stock transfer of the
370 Northern Group stores in Canada, through one of its wholly-owned
subsidiaries for approximately CAD$59 million (approximately US$38 million),
which was paid in the form of a note (the "Note"). The purchaser operates the
Northern Group stores, from which the repayment of the Note will be made. The
transaction has been accounted for as a "transfer of assets and liabilities
under contractual arrangement" as no cash proceeds were received and the
consideration comprised the Note, the repayment of which is dependent on the
future successful operations of the business. The assets and liabilities related
to the former operations have been presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement." The net
amount of the assets and liabilities of the former operations was written down
to the estimated fair value of the Note in the second quarter of 2001. Due to
the poor performance of the Northern Group stores in Canada since the
transaction, the Registrant recorded a charge of $18 million in the first
quarter of 2002. The charge comprised a valuation allowance in the amount of the
operating losses incurred by the purchaser and a further reduction in the
carrying value of the net amount of the assets and liabilities of the former
operations to zero, due to greater uncertainty with respect to the
collectibility of the Note.
In 1998, the Registrant exited both its International General Merchandise
and Specialty Footwear segments. In 1997, the Registrant announced that it was
exiting its Domestic General Merchandise segment. In the second quarter of 2002,
the Registrant recorded a charge of $4 million before-tax, or $2 million
after-tax, for pending legal actions related to the Domestic General Merchandise
segment and a $1 million charge for a lease liability related to Woolco in the
former International General Merchandise segment. These charges were partially
offset by a reduction of $2 million before-tax, or $1 million after-tax, in the
Specialty Footwear reserve primarily reflecting favorable real estate
disposition activity.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Registrant's primary source of cash is from operations. The
Registrant has a $190 million revolving credit facility, available through June
2004. During the second quarter of 2001, the Registrant raised $150 million in
cash through the issuance of subordinated convertible notes. The Registrant
generally finances real estate with operating leases. The principal use of cash
has been to finance inventory requirements, capital expenditures related to
store openings, store remodelings and management information systems, and to
fund other general working capital requirements.
Operating activities of continuing operations provided cash of $153
million for the twenty-six weeks ended August 3, 2002 compared with $21 million
for the twenty-six weeks ended August 4, 2001. These amounts reflect the income
from continuing operations adjusted for non-cash items and working capital
changes. The increase in cash from operations in 2002 was primarily due to
working capital changes. The increase in merchandise inventories for the first
half of 2002 was more than offset by the increase in accounts payable and
accrued liabilities, whereas the twenty-six weeks ended August 4, 2001 resulted
in net cash outflows for merchandise inventories, accounts payable and accrued
liabilities. Included in cash flow from operations for the twenty-six weeks
ended August 3, 2002 and August 4, 2001, were cash payments of $2 million and
$20 million, respectively, primarily related to the 1999 restructuring program.
Net cash used in investing activities of continuing operations of $65
million and $45 million for the first half of 2002 and 2001, respectively,
primarily reflected capital expenditures and lease acquisition costs. Total
planned capital expenditures of $165 million for 2002 comprise $116 million for
new store openings and modernizations of existing stores, $25 million for the
development of information systems and other support facilities and lease
acquisition costs of $24 million related to the Registrant's European
operations. The Registrant has the ability to revise and reschedule the
anticipated capital expenditure program should the Registrant's financial
position require it. Proceeds from disposal of real estate of $6 million for the
twenty-six weeks ended August 3, 2002 primarily related to the condemnation of a
part-owned and part-leased property in the second quarter of 2002 as compared
with sales of $1 million in the corresponding prior-year period.
-15-
Financing activities for the Registrant's continuing operations provided
cash of $5 million for the twenty-six weeks ended August 3, 2002 compared with
$146 million for the corresponding prior-year period, which included the
issuance of $150 million of subordinated convertible notes in the first half of
2001. The net proceeds of the offering were used for working capital and general
corporate purposes and to reduce reliance on bank financing. During the second
quarter of 2002, the Registrant amended its $190 million revolving credit
agreement to allow restricted payments, including share repurchases and
dividends, of up to 25% of the Registrant's consolidated income from continuing
operations for the most recent fiscal year. There were no short-term borrowings
outstanding during the entire first half of 2002 or during substantially all of
the first half of 2001. Management believes operating cash flows and current
credit facilities will be adequate to finance its working capital requirements,
fund the repayment of the medium-term notes due in October 2002, and support the
development of its short-term and long-term strategies. On March 29, 2002,
Standard & Poor's increased the Registrant's credit rating to BB+ and on May 28,
2002, Moody's Investors Service upgraded its rating to Ba2.
Net cash used in discontinued operations includes the change in assets and
liabilities of the discontinued segments and disposition activity charged to the
reserves for both periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which will be effective for fiscal years beginning
after June 15, 2002, and the Registrant will adopt it as of the beginning of
fiscal year 2003. The statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate can be made. The carrying amount of the
related long-lived asset shall be increased by the same amount as the liability
and that amount will be depreciated or amortized consistent with the underlying
long-lived asset. The difference between the fair value and the value of the
ultimate liability will be accreted over time using the credit-adjusted
risk-free interest rate in effect when the liability is initially recognized.
The Registrant is currently evaluating the impact of the adoption of SFAS No.
143 on its financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends other existing authoritative pronouncements to
make various technical corrections, including that gains and losses from
extinguishment of debt no longer be classified as extraordinary. The statement
also eliminates an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. In addition, it requires that the original lessee under an
operating lease agreement that becomes secondarily liable shall recognize the
fair value of the guarantee obligation for all transactions occurring after May
15, 2002. The Registrant adopted SFAS No. 145 as of May 15, 2002, which did not
have a material impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which will be effective for exit
and disposal activities that are initiated after December 31, 2002. The
statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The statement requires that the fair value of an initial
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred as opposed to when the entity commits to the exit
plan, thereby eliminating the definition and requirements for recognition of
exit costs, as is the guidance under EITF 94-3.
-16-
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the federal
securities laws. All statements, other than statements of historical facts,
which address activities, events or developments that the Registrant expects or
anticipates will or may occur in the future, including, but not limited to, such
things as future capital expenditures, expansion, strategic plans, growth of the
Registrant's business and operations, including future cash flows, revenues and
earnings, and other such matters are forward-looking statements. These
forward-looking statements are based on many assumptions and factors including,
but not limited to, the effects of currency fluctuations, customer demand,
fashion trends, competitive market forces, uncertainties related to the effect
of competitive products and pricing, customer acceptance of the Registrant's
merchandise mix and retail locations, the Registrant's reliance on a few key
vendors for a significant portion of its merchandise purchases (and on one key
vendor for approximately 50 percent of its merchandise purchases), unseasonable
weather, risks associated with foreign global sourcing, including political
instability and changes in import regulations, economic conditions worldwide,
the potential strike by the longshoreman's union against the Pacific Maritime
Association and the ability of the Registrant to execute its business plans
effectively with regard to each of its business units, including its plans for
the marquee and launch footwear component of its business. Any changes in such
assumptions or factors could produce significantly different results. The
Registrant undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The only legal proceedings pending against the Registrant or its
consolidated subsidiaries consist of ordinary, routine litigation,
including administrative proceedings, incident to the businesses of
the Registrant, as well as litigation incident to the sale and
disposition of businesses that have occurred in the past several
years. Management does not believe that the outcome of such
proceedings will have a material effect on the Registrant's
consolidated financial position, liquidity, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's annual meeting of shareholders was held on June 19,
2002, in New York, New York. Proxies were solicited by management of
the Registrant pursuant to Regulation 14A under the Securities
Exchange Act of 1934; there was no solicitation in opposition to
management's nominees as listed in the Notice of 2002 Annual Meeting
and Proxy Statement, both dated May 7, 2002.
(b) Each of J. Carter Bacot, Purdy Crawford, Nicholas DiPaolo and Philip
H. Geier Jr. was elected as a director in Class II for a three-year
term ending at the annual meeting of shareholders of the Registrant
in 2005. All of such individuals previously served as directors of
the Registrant. Jarobin Gilbert Jr., James E. Preston, David Y.
Schwartz, Matthew D. Serra, Christopher A. Sinclair, Cheryl N.
Turpin and Dona D. Young, having previously been elected directors
of the Registrant for terms continuing beyond the 2002 Annual
Meeting of Shareholders, continue in office as directors.
-17-
(c) The matters voted upon and the results of the voting were as
follows:
(1) Election of Directors:
Abstentions and
Name Votes For Votes Withheld Broker Non-Votes
---- --------- -------------- ----------------
J. Carter Bacot 118,574,311 1,065,675 0
Purdy Crawford 115,566,204 4,073,782 0
Nicholas DiPaolo 119,063,160 576,826 0
Philip H. Geier Jr. 119,060,587 579,399 0
(2) Proposal to ratify the appointment of independent accountants:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
117,187,451 2,363,070 89,465 0
(3) Proposal to approve the Foot Locker 2002 Directors Stock Plan:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
108,716,862 10,085,424 837,700 0
At the close of business on the record date of May 1, 2002, there were
outstanding 140,357,815 shares of the Registrant's Common Stock, par value
$0.01 per share ("Common Stock"). There were represented at the meeting,
in person or by proxy, 119,639,986 shares of Common Stock. Such shares
represented 85.24 percent of the total number of shares of such class of
stock outstanding on the record date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits that are in this report immediately follow the index.
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter
ended August 3, 2002.
-18-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOOT LOCKER, INC.
(Registrant)
Date: September 12, 2002
/s/ Bruce L. Hartman
------------------------------------
BRUCE L. HARTMAN
Executive Vice President
and Chief Financial Officer
-19-
CERTIFICATIONS
I, Matthew D. Serra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foot Locker, Inc.
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report.
September 12, 2002
/s/ Matthew D. Serra
------------------------------------
Principal Executive Officer
-20-
I, Bruce L. Hartman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foot Locker, Inc.
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
September 12, 2002
/s/ Bruce L. Hartman
------------------------------------
Principal Financial Officer
-21-
FOOT LOCKER, INC.
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
10.1 Foot Locker 2002 Directors Stock Plan.
10.2 Amendment No. 2 to Employment Agreement
with Matthew D. Serra dated June 10,
2002.
10.3 Amendment No. 6 dated July 1, 2002 to
the Credit Agreement dated as of April
9, 1997 and amended and restated as of
June 8, 2001.
12 Computation of Ratio of Earnings to
Fixed Charges.
15 Letter re: Unaudited Interim Financial
Statements.
99.1 Independent Accountants' Review Report.
99.2 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-22-