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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2002
----------------
Commission file no. 1-10299
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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 Identification No.)
or organization)
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 [ ]
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
------ ------
Number of shares of Common Stock outstanding at December 6, 2002: 141,011,715
-----------
FOOT LOCKER, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.................................... 1
Condensed Consolidated Income Statements................................. 2
Condensed Consolidated Statements of Comprehensive Income................ 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....................... 12-19
Item 4. Controls and Procedures.................................................. 19
Part II. Other Information
Item 1. Legal Proceedings........................................................ 20
Item 6. Exhibits and Reports on Form 8-K......................................... 20
Signature................................................................ 21
Certifications........................................................... 22-23
Index to Exhibits........................................................ 24
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except shares)
November 2, November 3, February 2,
2002 2001 2002
----------- ----------- ------------
(Unaudited) (Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents ................................... $ 255 $ 62 $ 215
Merchandise inventories ..................................... 973 943 793
Assets of discontinued operations ........................... 2 4 5
Assets held for sale ........................................ -- 21 --
Other current assets ........................................ 138 99 102
------- ------- -------
1,368 1,129 1,115
Property and equipment, net .................................... 628 639 637
Deferred taxes ................................................. 234 216 251
Goodwill and intangible assets ................................. 205 193 191
Assets of business transferred under
contractual arrangement (note receivable) ................ 12 30 30
Other assets ................................................... 55 133 73
------- ------- -------
$ 2,502 $ 2,340 $ 2,297
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................ $ 411 $ 348 $ 272
Accrued liabilities ......................................... 218 189 211
Current portion of repositioning and restructuring reserves . 2 10 6
Current portion of reserve for discontinued operations ...... 20 24 16
Liabilities of discontinued operations ...................... 3 10 7
Liabilities of businesses held for sale ..................... -- 7 --
Current portion of long-term debt and obligations
under capital leases ...................................... 1 34 34
------- ------- -------
655 622 546
Long-term debt and obligations
under capital leases ........................................ 356 366 365
Liabilities of business transferred under
contractual arrangement ..................................... 12 12 12
Other liabilities .............................................. 354 265 382
Shareholders' equity
Common stock and paid-in capital: 141,083,270,
139,884,055 and 139,980,630 shares, respectively .......... 374 360 363
Retained earnings ........................................... 893 761 797
Accumulated other comprehensive loss ........................ (141) (46) (168)
Less: Treasury stock at cost: 100,220, 67,455 and
70,220 shares, respectively ............................... (1) -- --
------- ------- -------
Total shareholders' equity ..................................... 1,125 1,075 992
------- ------- -------
$ 2,502 $ 2,340 $ 2,297
======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
-1-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended Thirty-nine weeks ended
--------------------- -----------------------
Nov. 2, Nov. 3, Nov. 2, Nov. 3,
2002 2001 2002 2001
------- ------- ------- -------
Sales .................................................... $ 1,120 $ 1,104 $ 3,295 $ 3,224
Costs and Expenses
Cost of sales .......................................... 777 777 2,320 2,265
Selling, general and administrative expenses ........... 235 229 675 687
Depreciation and amortization .......................... 37 38 111 114
Restructuring charge (income) .......................... (1) 1 (2) 33
Interest expense, net .................................. 5 8 19 18
Other income ........................................... -- -- (3) (1)
------- ------- ------- -------
1,053 1,053 3,120 3,116
------- ------- ------- -------
Income from continuing operations before
income taxes ........................................ 67 51 175 108
Income tax expense ....................................... 24 18 61 39
------- ------- ------- -------
Income from continuing operations ........................ 43 33 114 69
Income (loss) on disposal of discontinued operations, net
of income tax (benefit) expense of $(1), $(2) and $1 2 -- (18) (13)
------- ------- ------- -------
Net income ............................................... $ 45 $ 33 $ 96 $ 56
======= ======= ======= =======
Basic earnings per share:
Income from continuing operations ................... $ 0.30 $ 0.24 $ 0.80 $ 0.50
Income (loss) from discontinued operations ......... 0.02 -- (0.12) (0.09)
------- ------- ------- -------
Net income .......................................... $ 0.32 $ 0.24 $ 0.68 $ 0.41
======= ======= ======= =======
Weighted-average common shares outstanding ............... 140.9 139.8 140.6 139.3
Diluted earnings per share:
Income from continuing operations ................... $ 0.29 $ 0.23 $ 0.77 $ 0.49
Income (loss) from discontinued operations .......... 0.02 -- (0.11) (0.09)
------- ------- ------- -------
Net income .......................................... $ 0.31 $ 0.23 $ 0.66 $ 0.40
======= ======= ======= =======
Weighted-average common shares assuming dilution ......... 150.7 150.8 150.7 145.7
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
Nov. 2, Nov. 3, Nov. 2, Nov. 3,
2002 2001 2002 2001
------- ------- ------- -------
Net income .............................................. $45 $33 $ 96 $ 56
Other comprehensive income (loss)
Foreign currency translation adjustments arising during
the period ............................................ 2 3 27 (5)
Change in fair value of derivatives accounted for as
hedges, net of deferred tax benefit of $- ............. 1 -- -- --
------- ------- ------- -------
Comprehensive income .................................... $48 $36 $123 $ 51
======= ======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Thirty-nine weeks ended
---------------------------
Nov. 2, Nov. 3,
2002 2001
---------- ---------
From Operating Activities:
Net income .................................................................. $ 96 $ 56
Adjustments to reconcile net income to net cash provided by
operating activities of continuing operations:
Restructuring charge (income) ............................................. (2) 33
Loss on disposal of discontinued operations, net of tax ................... 18 13
Depreciation and amortization ............................................. 111 114
Real estate gains ......................................................... (3) (1)
Deferred income taxes ..................................................... 1 (29)
Change in assets and liabilities:
Merchandise inventories ................................................. (169) (216)
Accounts payable and other accruals ..................................... 125 62
Repositioning and restructuring reserves ................................ (2) (43)
Other, net .............................................................. 14 18
----- -----
Net cash provided by operating activities of continuing operations .......... 189 7
----- -----
From Investing Activities:
Proceeds from disposal of real estate ....................................... 6 1
Proceeds from sales of investments .......................................... -- 5
Lease acquisition costs ..................................................... (14) (15)
Capital expenditures ........................................................ (105) (75)
----- -----
Net cash used in investing activities of continuing operations .............. (113) (84)
----- -----
From Financing Activities:
Issuance of convertible long-term debt ...................................... -- 150
Debt issuance costs ......................................................... -- (8)
Reduction in long-term debt and capital lease obligations ................... (41) (61)
Issuance of common stock .................................................... 9 9
----- -----
Net cash (used in) provided by financing activities of continuing operations (32) 90
----- -----
Net Cash used in Discontinued Operations ....................................... (6) (62)
Effect of exchange rate fluctuations
on Cash and Cash Equivalents ................................................ 2 2
----- -----
Net change in Cash and Cash Equivalents ........................................ 40 (47)
Cash and Cash Equivalents at beginning of year ................................. 215 109
----- -----
Cash and Cash Equivalents at end of interim period ............................. $ 255 $ 62
===== =====
Cash paid during the period:
Interest .................................................................... $ 15 $ 25
Income taxes ................................................................ $ 29 $ 30
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
thirty-nine weeks ended November 2, 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 Thirty-nine
weeks ended weeks ended Year ended Year ended Year ended
November 3, November 3, February 2, February 3, January 29,
2001 2001 2002 2001 2000
----------- ----------- ----------- ----------- -------------
Income from continuing operations
(in millions)
As reported ............. $ 33 $ 69 $ 111 $ 107 $ 59
Pro forma ............... $ 34 $ 73 $ 115 $ 112 $ 64
Basic earnings per share
As reported ............. $ 0.24 $ 0.50 $ 0.79 $ 0.78 $ 0.43
Pro forma ............... $ 0.25 $ 0.53 $ 0.82 $ 0.81 $ 0.47
Diluted earnings per share
As reported ............. $ 0.23 $ 0.49 $ 0.77 $ 0.77 $ 0.43
Pro forma ............... $ 0.23 $ 0.51 $ 0.80 $ 0.80 $ 0.46
There were no material changes in the carrying value of goodwill during
the thirteen and thirty-nine weeks ended November 2, 2002. The carrying value of
goodwill by operating segment as of November 2, 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 November 2, 2002 was
approximately 12 years. Amortization expense for lease acquisition costs was
approximately $2 million and $6 million for the thirteen and thirty-nine weeks
ended November 2, 2002, respectively. For the thirteen and thirty-nine weeks
ended November 3, 2001, amortization expense was approximately $2 million and $5
million, respectively. Annual estimated amortization expense is expected to be
$8 million for 2002, 2005 and 2006 and approximately $9 million for 2003 and
2004.
-5-
Finite life intangible assets subject to amortization, were as
follows:
Gross
Carrying Accumulated
Lease Acquisition Costs (in millions) Amount Amortization Net
----------------------- ------ ------------ ---
November 2, 2002 $102 $(32) $70
November 3, 2001 $ 91 $(35) $56
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.
The Lady Foot Locker format showed disappointing sales for the first
half of 2002. During the third quarter of 2002, the Registrant performed an
analysis of the recoverability of store long-lived assets pursuant to SFAS No.
144 and recorded a non-cash pre-tax asset impairment charge in selling, general
and administrative expenses of approximately $1 million, which reflected the
impairment of long-lived assets such as store fixtures and leasehold
improvements related to the format, included in the Athletic Stores segment.
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 November 2, 2002 and November 3, 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 declined by approximately $1 million
after-tax during the third quarter of 2002 due to both the changes in fair value
of derivative financial instruments designated as hedges and the
reclassification of losses to earnings. During the quarter ended November 3,
2001, the decrease in accumulated comprehensive loss due to both the changes in
fair value of derivative financial instruments designated as hedges and the
reclassification to earnings was not material.
During the quarters ended November 2, 2002 and November 3, 2001, the
changes in fair value of derivative financial instruments not designated as
hedges were not material.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss comprised foreign currency
translation adjustments of $26 million, $46 million, and $53 million at November
2, 2002, November 3, 2001 and February 2, 2002, respectively. Accumulated other
comprehensive loss included a minimum pension liability adjustment of $115
million at November 2, 2002 and February 2, 2002.
-6-
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.
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.
In the third quarter of 2002, the Registrant recorded a charge of
approximately $1 million before-tax for lease exit costs in excess of previous
estimates. In addition, the Registrant recorded a tax benefit of $2 million,
which also reflected the impact of the tax planning strategies implemented
related to the discontinuance of the Northern Group. Net disposition activity of
$22 million for the thirty-nine weeks ended November 2, 2002 included the $18
million reduction in the carrying value of the net assets and liabilities, real
estate disposition activity of $1 million and severance and other costs of $3
million. The remaining reserve balance of $8 million at November 2, 2002 is
expected to be utilized within twelve months.
In 1998, the Registrant exited both its International General
Merchandise and Specialty Footwear segments. In 1997, the Registrant exited 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 legal actions related to the Domestic General Merchandise segment, which
have since been settled, 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, for each of the second and third quarters of 2002 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
successor-assignee of the leases of a former business included in the Domestic
General Merchandise segment has filed a petition in bankruptcy, and rejected in
the bankruptcy proceeding 17 leases it originally acquired from the Registrant.
There are currently six actions pending against the Registrant by former
landlords for the lease obligations. The Registrant believes that it may have
valid defenses, but as these actions are in the preliminary stage of
proceedings, their outcome cannot be predicted with any degree of certainty. The
remaining reserve balances totaled $23 million as of November 2, 2002, $11
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) 11/2/2002
-------- ----- -------- ---------
Real estate & lease liabilities $ 6 $ (1) $ 1 $6
Severance & personnel 2 (2) -- --
Asset impairments -- (18) 18 --
Other costs 3 (1) -- 2
--- ---- --- --
Total $11 $(22) $19 $8
=== ==== === ==
-7-
INTERNATIONAL GENERAL MERCHANDISE (in millions)
- ---------------------------------
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 11/2/2002
-------- ----- -------- ---------
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) 11/2/2002
-------- ------ -------- ---------
Real estate & lease liabilities $ 7 $ (1) $ (4) $ 2
Other costs 2 (2) -- --
---- ----- ---- ----
Total $ 9 $ (3) $ (4) $ 2
==== ===== ===== ====
DOMESTIC GENERAL MERCHANDISE (in millions)
- ----------------------------
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 11/2/2002
-------- ----- -------- ---------
Real estate & lease liabilities $ 10 $ (2) $ -- $ 8
Legal and other costs 2 -- 4 6
---- ---- ---- ----
Total $ 12 $ (2) $ 4 $ 14
==== ==== ==== ====
The following is a summary of the assets and liabilities of
discontinued operations:
DOMESTIC
NORTHERN SPECIALTY GENERAL
(in millions) GROUP FOOTWEAR MERCHANDISE TOTAL
-------- --------- ----------- -----
11/2/2002
---------
Assets $ -- $ -- $ 2 $ 2
Liabilities 1 -- 2 3
---- ---- ---- ----
Net assets (liabilities) of discontinued
operations $ (1) $ -- $ -- $ (1)
==== ==== ==== ====
11/3/2001
---------
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
Northern Group Canada 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. The sale was completed on November 13, 2001, for cash proceeds of
approximately $14 million. In addition, on October 10,
-8-
2001, the Registrant closed the sale of assets related to the fifteen Burger
King and Popeye's franchises for cash proceeds of approximately $5 million. In
connection with these dispositions, the Registrant recorded a restructuring
charge of approximately $1 million before-tax in the third quarter of 2001.
In the second quarter of 2002, the Registrant recorded a reduction of
$1 million, which primarily reflected favorable results compared with original
estimates for exit costs related to the sale of The San Francisco Music Box
Company. In the third quarter of 2002, the Registrant recorded a further
reduction of $1 million due to favorable real estate and other disposition
activity for its other non-core businesses.
The net assets of The San Francisco Music Box Company as of November 3,
2001 have been valued at the lower of cost or net realizable value. These
assets, totaling $21 million, and liabilities, totaling $7 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 November
3, 2001.
1993 Repositioning and 1991 Restructuring
For the thirty-nine weeks ended November 2, 2002, disposition activity
of approximately $1 million was offset by proceeds received to exit subleased
locations.
Disposition activity related to the reserves within the restructuring
programs is presented below. The remaining reserve balance at November 2, 2002
totaled $5 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) 11/2/2002
-------- ------ -------- ---------
Real estate $ 1 $ -- $-- $ 1
Other disposition costs 3 -- (2) 1
-------- ------ -------- ---------
Total $ 4 $ -- $(2) $ 2
======== ====== ======== =========
CORPORATE OVERHEAD AND LOGISTICS
- --------------------------------
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 11/2/2002
-------- ----- -------- ---------
Real estate $ 1 $ (1) $ -- $ --
======== ====== ======== =========
TOTAL 1999 RESTRUCTURING
------------------------
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 11/2/2002
-------- ----- -------- ---------
Real estate $2 $(1) $-- $1
Other disposition costs 3 -- (2) 1
-------- ------ -------- ---------
Total $5 $(1) $(2) $2
======== ====== ======== =========
1993 REPOSITIONING AND 1991 RESTRUCTURING
- -----------------------------------------
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 11/2/2002
-------- ------ -------- ---------
Real estate $1 $ 1 $-- $2
Other disposition costs 2 (1) -- 1
-------- ------ -------- ---------
Total $3 $-- $-- $3
======== ====== ======== =========
TOTAL RESTRUCTURING RESERVES
----------------------------
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 11/2/2002
-------- ------ -------- ---------
Real estate $3 $ - $ - $ 3
Other disposition costs 5 (1) (2) 2
-------- ------ -------- ---------
Total $8 $ (1) $(2) $ 5
======== ====== ======== =========
-9-
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 Thirty-nine weeks ended
---------------------- ----------------------
(in millions) Nov. 2, Nov. 3, Nov. 2, Nov. 3,
2002 2001 2002 2001
------ ------ ------ ------
Numerator:
Income from continuing operations ................. $ 43 $ 33 $ 114 $ 69
Effect of Dilution:
Convertible debt .................................. 1 1 3 2
------ ------ ------ ------
Income from continuing operations assuming dilution $ 44 $ 34 $ 117 $ 71
====== ====== ====== ======
Denominator:
Weighted-average common shares outstanding ........ 140.9 139.8 140.6 139.3
Effect of Dilution:
Stock options and awards .......................... 0.3 1.5 0.6 1.3
Convertible debt .................................. 9.5 9.5 9.5 5.1
------ ------ ------ ------
Weighted-average common shares assuming dilution .. 150.7 150.8 150.7 145.7
====== ====== ====== ======
Options to purchase 7.1 million and 2.0 million shares of common stock
were not included in the computation for the thirteen weeks ended November 2,
2002 and November 3, 2001, respectively. Options to purchase 3.9 million and 3.1
million shares of common stock were not included in the computation for the
thirty-nine weeks ended November 2, 2002 and November 3, 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.
Other Income
Other income for the thirty-nine weeks ended November 2, 2002,
reflected a net gain of $3 million primarily related to the condemnation of a
part-owned and part-leased property for which the Registrant received proceeds
of $6 million in the second quarter of 2002.
Segment Information
Sales and operating results for the Registrant's reportable segments
for the thirteen and thirty-nine weeks ended November 2, 2002 and November 3,
2001, respectively, are presented below. Operating profit before corporate
expense, net reflects income from continuing operations before income taxes, net
corporate expense and net interest expense.
Sales:
(in millions) Thirteen weeks ended Thirty-nine weeks ended
---------------------------- -----------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Athletic Stores......................................... $ 1,036 $ 999 $ 3,058 $ 2,940
Direct to Customers..................................... 84 85 237 230
----------- ----------- ----------- -----------
1,120 1,084 3,295 3,170
All Other (1)........................................... - 20 - 54
----------- ----------- ----------- -----------
$ 1,120 $ 1,104 $ 3,295 $ 3,224
=========== =========== =========== ===========
-10-
Operating Results:
(in millions) Thirteen weeks ended Thirty-nine weeks ended
------------------------- ---------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Athletic Stores (2) ................................ $77 $ 69 $208 $ 206
Direct to Customers ................................ 8 8 22 13
----------- ----------- ----------- -----------
85 77 230 219
All Other (1) (3) .................................. -- (6) 1 (45)
----------- ----------- ----------- -----------
Operating profit before corporate expense, net 85 71 231 174
Corporate expense ............................ 13 12 37 48
Interest expense, net ........................ 5 8 19 18
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes ............................. $67 $ 51 $175 $ 108
=========== =========== =========== ===========
(1) Reflects The San Francisco Music Box Company and the Burger King and
Popeye's franchises.
(2) Both periods presented for 2002 include restructuring income of $1
million.
(3) The thirty-nine weeks ended November 2, 2002 includes restructuring
income of $1 million. The thirteen and thirty-nine weeks ended November
3, 2001 include restructuring charges of $1 million and $33 million,
respectively.
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.
Asset retirement obligations of the Registrant could include structural
alterations to store locations and equipment removal costs from distribution
centers required by certain leases. The Registrant is currently evaluating SFAS
No. 143 and does not expect its adoption to have a significant impact on its
financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission 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.
-11-
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. All references to comparable-store sales relate to sales from stores
that have been open for more than one year.
RESULTS OF OPERATIONS
Sales of $1,120 million for the third quarter of 2002 increased 1.4
percent from sales of $1,104 million for the third quarter of 2001. For the
thirty-nine weeks ended November 2, 2002, sales of $3,295 million increased 2.2
percent from sales of $3,224 million for the thirty-nine weeks ended November 3,
2001. Excluding the impact of foreign currency fluctuations and sales from
businesses disposed and held for disposal in the prior year, sales increased 2.2
percent and 3.2 percent for the third quarter and year-to-date periods of 2002,
respectively, as compared with the corresponding prior-year periods. These sales
increases were primarily attributable to the Registrant's new store opening
program. Comparable-store sales decreased by 0.7 percent for the thirteen weeks
ended November 2, 2002. The thirty-nine weeks ended November 2, 2002 included a
comparable-store sales increase of 0.5 percent. Certain higher-priced marquee
footwear 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 made changes to the product
assortment, which accommodated customer demands in the third quarter of 2002.
Gross margin, as a percentage of sales, for the thirteen weeks ended
November 2, 2002 of 30.6 percent improved by 100 basis points as compared with
29.6 percent for the corresponding prior-year period. Gross margin, as a
percentage of sales, of 29.6 percent for the thirty-nine weeks ended November 2,
2002 remained essentially flat as compared with the corresponding prior-year
period. The improvement for the thirteen weeks primarily reflected better
merchandise purchasing. Buyers' salaries and occupancy costs, as a percentage of
sales, for the thirteen and thirty-nine weeks ended November 2, 2002, remained
relatively flat as compared with the corresponding prior-year periods.
Selling, general and administrative expenses ("SG&A") of $235 million
increased by 30 basis points, as a percentage of sales, to 21.0 percent in the
third quarter of 2002 as compared with 20.7 percent in the corresponding
prior-year period, which primarily related to new store openings and increased
marketing expenditures. SG&A of $675 million improved by 80 basis points, as a
percentage of sales, to 20.5 percent for the thirty-nine weeks ended November 2,
2002 as compared with 21.3 percent in the corresponding prior-year period. This
improvement reflected the Registrant's continued cost-reduction efforts during
2002, particularly in payroll and logistics, offset in part by new store
openings and increased marketing expenditures. SG&A included income of $4
million related to the Registrant's pension and postretirement plans for the
thirteen and thirty-nine weeks ended November 2, 2002. Income related to the
pension and postretirement plans totaled $5 million and $8 million for the
thirteen and thirty-nine weeks ended November 3, 2001, respectively. 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 $37 million declined by $1 million for
the third quarter of 2002 and declined by $3 million to $111 million for the
thirty-nine weeks ended November 2, 2002, as compared with the corresponding
prior-year periods. 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 third quarter and $6 million for the thirty-nine weeks
ended November 2, 2002, and was offset by increased depreciation associated with
the new store opening program.
-12-
Interest expense of $8 million and $25 million for the thirteen and
thirty-nine weeks ended November 2, 2002, declined by 11.1 percent and 7.4
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 $3 million and $6 million for the thirteen and
thirty-nine weeks ended November 2, 2002, respectively, as compared with $1
million and $9 million in the corresponding prior-year periods. The thirty-nine
weeks ended November 3, 2001 included intercompany interest income related to
the Northern Group segment of $5 million. The offsetting interest expense was
charged to the reserve for discontinued operations in 2001. The increase in
interest income of $2 million for the 2002 quarter-to-date and year-to-date
periods was primarily due to interest income related to income tax settlements
and refunds.
During the first quarter of 2002, the Registrant recorded a $3 million
tax benefit related to a multi-state tax planning strategy and subsequently,
during the third quarter ended November 2, 2002, recorded an additional $1
million tax benefit related to these strategies. 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 thirty-nine weeks ended November 2, 2002 to
approximately 35.0 percent as compared with approximately 36.0 percent for the
corresponding prior-year period. The Registrant expects the effective tax rate
to approximate 37.5 percent for the fourth quarter of 2002.
Income from continuing operations of $43 million, or $0.29 per diluted
share, for the thirteen weeks ended November 2, 2002, improved by $0.06 per
diluted share from $33 million, or $0.23 per diluted share, for the thirteen
weeks ended November 3, 2001. Income from continuing operations of $114 million,
or $0.77 per diluted share, for the thirty-nine weeks ended November 2, 2002,
improved by $0.28 per diluted share from $69 million, or $0.49 per diluted
share, for the thirty-nine weeks ended November 3, 2001. Restructuring income of
$1 million and $2 million, respectively, was included in income from continuing
operations for the thirteen and thirty-nine weeks ended November 2, 2002. Income
from continuing operations included restructuring charges of $1 million and $33
million for the thirteen and thirty-nine weeks ended November 3, 2001. For the
quarter ended November 2, 2002, the Registrant reported net income of $45
million, or $0.31 per diluted share, which included income of $2 million from
income on the disposal of discontinued operations, or $0.02 per diluted share,
compared with net income of $33 million, or $0.23 per diluted share, for the
corresponding prior-year period. For the year-to-date periods, the Registrant
reported net income of $96 million, or $0.66 per diluted share, for 2002, as
compared with net income of $56 million, or $0.40 per diluted share, in 2001,
which included losses related to discontinued operations of $18 million, or
$0.11 per diluted share, and $13 million, or $0.09 per diluted share,
respectively.
STORE COUNT
The following table summarizes store count. During the thirty-nine
weeks ended November 2, 2002, the Registrant remodeled or relocated 167 stores.
Feb. 2, Nov. 2, Nov. 3,
2002 Opened Closed 2002 2001
---- ------ ------ ----- ------
Athletic Stores .............. 3,590 109 85 3,614 3,568
Disposed and held for disposal -- -- -- -- 162
----- --- -- ----- -----
Total ..................... 3,590 109 85 3,614 3,730
===== === == ===== =====
-13-
SALES
The following table summarizes sales by segment.
Thirteen weeks ended Thirty-nine weeks ended
----------------------------- ------------------------------
Nov. 2, 2002 Nov. 3, 2001 Nov. 2, 2002 Nov. 3, 2001
------------ ------------ ------------ ------------
(in millions)
Athletic Stores ............. $1,036 $ 999 $3,058 $2,940
Direct to Customers ......... 84 85 237 230
------ ------ ------ ------
1,120 1,084 3,295 3,170
Disposed and held for disposal -- 20 -- 54
------ ------ ------ ------
Total sales ............... $1,120 $1,104 $3,295 $3,224
====== ====== ====== ======
Athletic Stores sales increased by 3.7 percent and 4.0 percent,
respectively, for the thirteen and thirty-nine weeks ended November 2, 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 third quarter of
2002, the sales increases, excluding the impact of foreign currency
fluctuations, were 2.5 percent and 3.2 percent for the 2002 third quarter and
year-to-date periods, respectively. These sales increases primarily resulted
from the Registrant's successful new store opening program. The thirteen weeks
ended November 2, 2002 included a comparable-store sales decrease of 0.8
percent. The Registrant currently expects the fourth quarter comparable-store
sales to increase by low single-digits. The thirty-nine weeks ended November 2,
2002 included a comparable-store sales increase of 0.4 percent.
Footwear sales across most formats in the U.S., were led by both the
basketball category and also the current trend in classic shoes. In the U.S.,
certain higher-priced marquee footwear 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 and made changes to the product assortment, which
accommodated customer demands in the third quarter of 2002. Sales also continued
to benefit from the apparel strategy led by merchandise in private label and
licensed offerings.
The international formats, Foot Locker Europe in particular, continued
to achieve strong sales growth in the first three quarters of 2002. Although the
Lady Foot Locker format showed disappointing sales for the first half of 2002,
it began to show improvements during the third quarter generating a low
single-digit comparable-store sales increase resulting from the initiatives
implemented by its new management. During the third quarter, the Registrant
performed an analysis of the recoverability of store long-lived assets for the
Lady Foot Locker format pursuant to SFAS No. 144 and recorded an asset
impairment charge of approximately $1 million. Management currently expects the
business to return to historical levels of profitability.
Nike, Inc. ("Nike") has previously advised the Registrant that Nike
would 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 had initially estimated that its planned 2003 purchases of
Nike marquee and launch footwear and other products could be reduced by
approximately $150 million to $250 million. Based upon recent discussions with
Nike, the Registrant currently estimates that its planned 2003 purchases of Nike
marquee and launch footwear and other products could be reduced by approximately
$300 million to $400 million. The Registrant expects to make incremental
purchases of marquee and launch product from its other key vendors, which the
Registrant currently expects will allow it to meet customer demand for marquee
and launch products. The Registrant expects that Nike will continue to be a
significant supplier in 2003.
In addition, since the third quarter of 2002, the Kids Foot Locker
format, which had previously been managed in conjunction with Lady Foot Locker,
is being managed by the Foot Locker U.S. management team. This change is
management is expected to benefit sales performance at Kids Foot Locker, which
has been below plan through the third quarter of 2002.
-14-
Direct to Customers sales decreased by 1.2 percent and increased by 3.0
percent for the thirteen and thirty-nine weeks ended November 2, 2002,
respectively, as compared with the corresponding prior-year periods. Internet
sales of $32 million and $90 million for the thirteen and thirty-nine weeks
ended November 2, 2002, respectively, increased by 28.0 percent and by 38.5
percent, respectively, as compared with the corresponding prior-year periods.
This increase in Internet sales was substantially offset by a decline in catalog
sales, which the Registrant believes reflects the growing trend of the
Registrant's customers to browse and select products through its catalogs and
then make their purchases via the Internet.
Recently, the Registrant entered into a strategic alliance to offer
footwear and apparel on the Amazon.com website. Foot Locker will be a featured
brand in the Amazon.com specialty store for apparel and accessories.
OPERATING RESULTS
Operating profit before corporate expense, net reflects income from
continuing operations before income taxes, net corporate expense and net
interest expense. The following table summarizes operating profit before
corporate expense, net by segment.
Thirteen weeks ended Thirty-nine weeks ended
--------------------------- ---------------------------
Nov. 2, 2002 Nov. 3, 2001 Nov. 2, 2002 Nov. 3, 2001
------------ ------------ ------------ ------------
(in millions)
Athletic Stores ....................... $76 $ 69 $207 $ 206
Direct to Customers ................... 8 8 22 13
------------ ------------ ------------ ------------
84 77 229 219
Disposed and held for disposal ....... -- (5) -- (12)
Restructuring income (charge) ........ 1 (1) 2 (33)
------------ ------------ ------------ ------------
Total operating profit before corporate
expense, net ......................... $85 $ 71 $231 $ 174
============ ============ ============ ============
Athletic Stores operating profit before corporate expense, net
increased by 10.1 percent for the thirteen weeks ended November 2, 2002, as
compared with the corresponding prior-year period, which reflected a higher
product margin rate. Athletic Stores operating profit before corporate expense,
net was essentially flat for the thirty-nine weeks ended November 2, 2002. Both
periods in 2002 benefited from reductions in divisional expenses resulting from
the Registrant's on-going cost-cutting programs. Included in operating profit
before corporate expense, net for the thirteen and thirty-nine weeks ended
November 2, 2002 was restructuring income of $1 million and $2 million,
respectively, for favorable real estate and other disposition activity for its
other non-core businesses. The Registrant recorded restructuring charges in
divisional profit of $1 million and $33 million for the thirteen and thirty-nine
weeks ended November 3, 2001, respectively, primarily related to the sale of The
San Francisco Music Box Company and the Burger King and Popeye's franchises
during 2001. During the third quarter ended November 2, 2002, the Registrant
recorded in operating profit before corporate expense, net a $1 million asset
impairment charge related to Lady Foot Locker. Operating profit before corporate
expense, net , as a percentage of sales, improved by 40 basis points to 7.3
percent and declined by 20 basis points to 6.8 percent, respectively, for the
thirteen and thirty-nine weeks ended November 2, 2002 as compared with the
corresponding prior-year periods.
Direct to Customers operating profit before corporate expense, net
remained flat for the thirteen weeks ended November 2, 2002 and increased by
69.2 percent for the thirty-nine weeks ended November 2, 2002 as compared with
the corresponding prior-year periods. Operating profit before corporate expense,
net , as a percentage of sales, increased to 9.3 percent from 5.7 percent for
the thirty-nine weeks ended November 2, 2002, primarily due to improved gross
margin rates, cost-reduction efforts and reduced marketing expenditures.
-15-
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 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.
In the third quarter of 2002, the Registrant recorded a charge of
approximately $1 million before-tax for lease exit costs in excess of previous
estimates. In addition, the Registrant recorded a tax benefit of $2 million,
which also reflected the impact of the tax planning strategies implemented
related to the discontinuance of the Northern Group. Net disposition activity of
$22 million for the thirty-nine weeks ended November 2, 2002 included the $18
million reduction in the carrying value of the net assets and liabilities, real
estate disposition activity of $1 million and severance and other costs of $3
million. The remaining reserve balance of $8 million at November 2, 2002 is
expected to be utilized within twelve months.
In 1998, the Registrant exited both its International General
Merchandise and Specialty Footwear segments. In 1997, the Registrant exited 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 legal actions related to the Domestic General Merchandise segment, which
have since been settled, 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, for each of the second and third quarters of 2002 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
successor-assignee of the leases of a former business included in the Domestic
General Merchandise segment has filed a petition in bankruptcy, and rejected in
the bankruptcy proceeding 17 leases it originally acquired from the Registrant.
There are currently six actions pending against the Registrant by former
landlords for the lease obligations. The Registrant believes that it may have
valid defenses, but as these actions are in the preliminary stage of
proceedings, their outcome cannot be predicted with any degree of certainty. The
remaining reserve balances totaled $23 million as of November 2, 2002, $11
million of which is expected to be utilized within twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow and Liquidity
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.
-16-
Operating activities of continuing operations provided cash of $189
million for the thirty-nine weeks ended November 2, 2002 compared with $7
million for the thirty-nine weeks ended November 3, 2001. These amounts reflect
income from continuing operations adjusted for non-cash items and working
capital changes. The increase in cash from operations in 2002 was due to both
increased income from continuing operations and working capital changes. The
increase in merchandise inventories resulted in net cash outflows for
merchandise inventories, accounts payable and accrued liabilities for the
thirty-nine weeks ended November 2, 2002 and November 3, 2001. Included in cash
flow from operations for the thirty-nine weeks ended November 2, 2002 and
November 3, 2001, were cash payments of $2 million and $43 million,
respectively, primarily related to the 1999 restructuring program.
Net cash used in investing activities of continuing operations of $113
million and $84 million for the thirty-nine weeks ended November 2, 2002 and
November 3, 2001, respectively, primarily reflected capital expenditures and
lease acquisition costs. Total planned capital expenditures of $165 million for
2002 comprise $122 million for new store openings and modernizations of existing
stores, $26 million for the development of information systems and other support
facilities and lease acquisition costs of $17 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 thirty-nine weeks ended November 2, 2002 primarily related to
the condemnation of a part-owned and part-leased property in the second quarter
of 2002. The thirty-nine weeks ended November 3, 2001 included proceeds from the
sale of the Burger King and Popeye's franchises of $5 million in the third
quarter of 2001 and real estate sales of $1 million.
Financing activities for the Registrant's continuing operations used
cash of $32 million for the thirty-nine weeks ended November 2, 2002 compared
with cash provided by operations of $90 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 thirty-nine weeks ended November 2, 2002, the Registrant
repaid the remaining $32 million of the $40 million 7.00% medium-term notes due
in October 2002 and retired approximately $9 million related to the $200 million
8.50% debentures. The thirty-nine weeks ended November 3, 2001 included the
repayment and retirement of the $50 million 6.98% medium-term notes due in
October 2001. During the second quarter of 2001, 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 thirty-nine weeks ended
November 2, 2002 or during substantially all of the corresponding period of
2001.
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.
The Registrant recorded a receivable of approximately $45 million
related to a Federal income tax refund in other current assets at November 2,
2002, which was subsequently received.
Capital Structure
The Registrant's debt and capital lease obligations, net of cash and
cash equivalents, decreased to $102 million at November 2, 2002, from $184
million at February 2, 2002. Shareholders' equity increased to $1,125 million at
November 2, 2002 from $992 million at February 2, 2002 reflecting the strength
of the ongoing businesses after the restructuring and repositioning of the
Registrant's non-core businesses and discontinued segments through 2001. As a
result of these improvements, the Registrant's net debt capitalization percent
without operating leases improved to 8.3 percent at November 2, 2002 from 15.6
percent at February 2, 2002.
Based upon the negative return on its pension plans' assets to date in
2002, as well as the projected reduction in the discount rate used to value the
benefit obligation, the Registrant estimates that an additional minimum
liability adjustment will be charged to shareholders' equity in the fourth
quarter of 2002. The Registrant expects this decline in shareholders' equity to
be offset in part by net income for the fourth quarter of 2002. In addition, the
Registrant expects to make a $50 million cash contribution to its U.S. pension
plan in the first quarter of 2003 in advance of ERISA funding requirements.
-17-
On November 20, 2002, the Board of Directors declared a quarterly
dividend on the Registrant's common stock of $0.03 per share. The dividend will
be paid on January 31, 2003 to shareholders of record on January 17, 2003.
The Board of Directors also authorized a $50 million share repurchase
program on November 20, 2002. The Registrant may make purchases of its common
stock under this program over the next three years, from time to time, depending
upon market conditions and other factors.
Management believes operating cash flows and current credit facilities
will be adequate to finance its working capital requirements, pension plan
contributions, the payment of quarterly dividends, its share repurchase program
and to support the development of its other 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.
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.
Asset retirement obligations of the Registrant could include structural
alterations to store locations and equipment removal costs from distribution
centers required by certain leases. The Registrant is currently evaluating SFAS
No. 143 and does not expect its adoption to have a significant impact on its
financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission 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.
-18-
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, dividend payments, stock re-purchases, 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 longshoremen'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.
Item 4. Disclosure Controls and Procedures
The Registrant's Principal Executive Officer and Principal Financial Officer
have evaluated the effectiveness of the Registrant's disclosure controls and
procedures, as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended, within the 90-day period prior to
the filing of this report. Based on that evaluation, the Principal Executive
Officer and the Principal Financial Officer concluded that the disclosure
controls and procedures are effective in ensuring that all material information
required to be included in this quarterly report has been made known to them in
a timely fashion.
There have been no significant changes in the Registrant's internal controls, or
in other factors that could significantly affect internal controls, subsequent
to the date the Principal Executive Officer and the Principal Financial Officer
completed their evaluation.
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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 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
A Form 8-K was filed on August 13, 2002 under Item 9, attaching copies
of the sworn statements submitted to the Securities and Exchange
Commission by Matthew D. Serra, the Principal Executive Officer, and
Bruce L. Hartman, the Principal Financial Officer, of the Registrant
pursuant to Securities and Exchange Commission Order No. 4-460.
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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: December 16, 2002
/s/ Bruce L. Hartman
---------------------------
BRUCE L. HARTMAN
Executive Vice President
and Chief Financial Officer
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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.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
Audit Committee of Registrant's Board of Directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
December 16, 2002
/s/ Matthew D. Serra
--------------------------
Principal Executive Officer
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CERTIFICATIONS
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;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
Audit Committee of Registrant's Board of Directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses;
December 16, 2002
/s/ Bruce L. Hartman
--------------------------
Principal Financial Officer
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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
- ------------------------- -----------
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.
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