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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 May 3, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES [X] NO [ ]
Number of shares of Common Stock outstanding at June 6, 2003: 142,005,247
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...................................... 3
Condensed Consolidated Statements
of Cash Flows................................................ 4
Notes to Condensed Consolidated
Financial Statements......................................... 5-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 14-21
Item 4. Controls and Procedures........................................... 21
Part II. Other Information
Item 1. Legal Proceedings................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 21
Signature......................................................... 22
Certifications.................................................... 23-24
Index to Exhibits................................................. 25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except shares)
May 3, May 4, February 1,
2003 2002 2003
---------- ---------- ----------
(Unaudited) (Unaudited)
ASSETS
Current assets
Cash and cash equivalents...................................... $ 306 $ 278 $ 357
Merchandise inventories........................................ 941 839 835
Assets of discontinued operations.............................. 2 3 2
Other current assets........................................... 90 86 90
---------- ---------- ----------
1,339 1,206 1,284
Property and equipment, net....................................... 626 626 636
Deferred taxes.................................................... 233 253 240
Goodwill and intangible assets.................................... 222 194 216
Assets of business transferred under
contractual arrangement (note receivable)................... - 12 -
Other assets...................................................... 111 74 110
---------- ---------- ----------
$ 2,531 $ 2,365 $ 2,486
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable............................................... $ 344 $ 353 $ 251
Accrued liabilities............................................ 254 183 296
Current portion of repositioning and restructuring reserves.... 3 6 3
Current portion of reserve for discontinued operations......... 15 11 18
Liabilities of discontinued operations......................... 3 5 3
Current portion of long-term debt and obligations
under capital leases......................................... - 32 1
---------- ---------- ----------
619 590 572
Long-term debt and obligations
under capital leases........................................... 358 365 356
Liabilities of business transferred under
contractual arrangement........................................ - 12 -
Other liabilities................................................. 401 372 448
Shareholders' equity
Common stock and paid-in capital: 141,986,116;
140,428,144 and 141,180,455 shares, respectively............. 381 367 378
Retained earnings.............................................. 980 817 946
Accumulated other comprehensive loss........................... (206) (158) (213)
Less: Treasury stock at cost: 185,220; 70,220 and
105,220 shares, respectively................................. (2) - (1)
---------- ---------- ----------
Total shareholders' equity........................................ 1,153 1,026 1,110
---------- ---------- ----------
$ 2,531 $ 2,365 $ 2,486
========== ========== ==========
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
--------------------
May 3, May 4,
2003 2002
------- -------
Sales............................................................. $ 1,128 $ 1,090
Costs and Expenses
Cost of sales................................................... 783 770
Selling, general and administrative expenses.................... 241 220
Depreciation and amortization................................... 37 36
Interest expense, net........................................... 5 7
------- -------
1,066 1,033
------- -------
Income from continuing operations before
income taxes................................................. 62 57
Income tax expense................................................ 23 19
------- -------
Income from continuing operations................................. 39 38
Loss on disposal of discontinued operations....................... - (18)
Cumulative effect of accounting change, net of income
tax benefit of $- (1) -
------- -------
Net income........................................................ $ 38 $ 20
======= =======
Basic earnings per share:
Income from continuing operations............................ $ 0.28 $ 0.27
Loss from discontinued operations............................ - (0.13)
Cumulative effect of accounting change....................... (0.01) -
------- -------
Net income................................................... $ 0.27 $ 0.14
======= =======
Weighted-average common shares outstanding........................ 141.1 140.1
Diluted earnings per share:
Income from continuing operations............................ $ 0.27 $ 0.26
Loss from discontinued operations............................ - (0.12)
Cumulative effect of accounting change (0.01) -
------- -------
Net income................................................... $ 0.26 $ 0.14
======= =======
Weighted-average common shares assuming dilution.................. 151.3 150.9
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
Thirteen weeks ended
--------------------
May 3, May 4,
2003 2002
------- -------
Net income............................................................... $ 38 $ 20
Other comprehensive income
Foreign currency translation adjustments arising during the period..... 5 10
Change in fair value of derivatives, net of tax of $-.................. 2 -
------- -------
Comprehensive income..................................................... $ 45 $ 30
======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Thirteen weeks ended
--------------------
May 3, May 4,
2003 2002
----- -----
From Operating Activities:
Net income.................................................................... $ 38 $ 20
Adjustments to reconcile net income to net cash provided by (used in)
operating activities of continuing operations:
Loss on disposal of discontinued operations, net of tax..................... - 18
Cumulative effect of accounting change, net of tax.......................... 1 -
Depreciation and amortization............................................... 37 36
Deferred income taxes....................................................... 10 13
Change in assets and liabilities:
Merchandise inventories................................................... (101) (42)
Accounts payable and other accruals....................................... 58 46
Other, net................................................................ (54) 2
----- -----
Net cash provided by (used in) operating activities of continuing operations.. (11) 93
----- -----
From Investing Activities:
Lease acquisition costs....................................................... (6) (3)
Capital expenditures.......................................................... (25) (25)
----- -----
Net cash used in investing activities of continuing operations................ (31) (28)
----- -----
From Financing Activities:
Reduction in long-term debt and capital lease obligations..................... - (1)
Issuance of common stock...................................................... 1 3
Dividends paid................................................................ (4) -
----- -----
Net cash provided by (used in) financing activities of continuing operations.. (3) 2
----- -----
Net Cash used in Discontinued Operations......................................... (2) (4)
Effect of exchange rate fluctuations
on Cash and Cash Equivalents.................................................. (4) -
----- -----
Net change in Cash and Cash Equivalents.......................................... (51) 63
Cash and Cash Equivalents at beginning of year................................... 357 215
----- -----
Cash and Cash Equivalents at end of interim period............................... $ 306 $ 278
===== =====
Cash paid during the period:
Interest...................................................................... $ - $ -
Income taxes.................................................................. $ 17 $ 5
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
1, 2003, as filed with the Securities and Exchange Commission (the "SEC") on May
19, 2003. 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 thirteen weeks ended
May 3, 2003 are not necessarily indicative of the results expected for the year.
Goodwill and Intangible Assets
The Registrant adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective February 3, 2002, which requires that goodwill and intangible
assets with indefinite lives no longer be amortized but reviewed for impairment
if impairment indicators arise and, at a minimum, annually. Accordingly, the
Registrant stopped amortizing goodwill in the first quarter of 2002. During the
first quarter of 2003, the Registrant completed its annual review of goodwill,
which did not result in an impairment charge.
Goodwill (in millions) May 3, 2003 May 4, 2002 February 1, 2003
- ----------------------------------------------- ----------- ----------- ----------------
Athletic Stores $ 56 $ 55 $ 56
Direct-to-Customers 80 80 80
----------- ----------- ----------------
$ 136 $ 135 $ 136
=========== =========== ================
Intangible Assets (in millions) May 3, 2003 May 4, 2002 February 1, 2003
- ----------------------------------------------- ----------- ----------- ----------------
Intangible assets not subject to amortization $ 2 $ - $ 2
Intangible assets subject to amortization, net
of accumulated amortization of $39 million,
$35 million and $36 million, respectively 84 59 78
----------- ----------- ----------------
$ 86 $ 59 $ 80
=========== =========== ================
Total $ 222 $ 194 $ 216
=========== =========== ================
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 May 3, 2003 was
approximately 10 years. Amortization expense for lease acquisition costs was
approximately $2 million for the first quarters of each of 2003 and 2002. Annual
estimated amortization expense for lease acquisition costs is expected to be
approximately $10 million for 2003 and each of the succeeding four years.
Intangible assets not subject to amortization relate to the
Registrant's U.S. defined benefit retirement plan.
-5-
Derivative Financial Instruments
Ineffectiveness related to cash flow hedges and the change in fair
value of derivative financial instruments designated as hedges reduced net
income by $1 million during the quarter ended May 3, 2003, while the amount
related to the quarter ended May 4, 2002 was not material.
During the quarters ended May 3, 2003 and May 4, 2002, the change in
the fair value of derivative instruments not designated as hedges was not
material.
The fair value of derivative contracts outstanding at May 3, 2003
comprised current assets of $3 million, non-current assets of $2 million and
current liabilities of $12 million.
Asset Retirement Obligations
The Registrant adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143") as of February 2, 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 amortized over the
useful life of 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 may at any
time include structural alterations to store locations and equipment removal
costs from distribution centers required by certain leases. On February 2, 2003,
the Registrant recorded a liability of $2 million for the expected present value
of future retirement obligations, increased property and equipment by $1 million
and recognized a $1 million after tax charge for the cumulative effect of the
accounting change. The Registrant did not incur any additional asset retirement
obligations during the first quarter of 2003, and accordingly, the amortization
and accretion expenses recorded during the period were not material. Pro forma
effects for the quarter ended May 4, 2002, assuming adoption of SFAS No. 143 as
of February 3, 2002, were not material to the liability, the net earnings or the
per share amounts, and therefore, have not been presented.
Stock-Based Compensation
The Registrant accounts for stock-based compensation by applying APB
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), as permitted
by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). In
accordance with APB No. 25, compensation expense is not recorded for options
granted if the option price is not less than the quoted market price at the date
of grant. Compensation expense is also not recorded for employee purchases of
stock under the 1994 Stock Purchase Plan. The plan, which is compensatory as
defined in SFAS No. 123, is non-compensatory as defined in APB No. 25. SFAS No.
123 requires disclosure of the impact on earnings per share if the fair value
method of accounting for stock-based compensation is applied for companies
electing to continue to account for stock-based plans under APB No. 25.
-6-
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure an amendment of FASB Statement No. 123," which was issued in December
2002, provides alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
compensation and requires more prominent disclosure of the pro forma impact on
earnings per share. As the Registrant has continued to account for stock-based
compensation under APB No. 25, such disclosures are now required quarterly for
interim periods beginning in 2003. Accounting for the Registrant's stock-based
compensation, in accordance with the fair value method provisions of SFAS No.
123 would have resulted in the following:
May 3, May 4,
2003 2002
-------- --------
(in millions, except per share amounts)
Net income, as reported: $ 38 $ 20
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of income tax benefit 1 1
-------- --------
Pro forma net income $ 37 $ 19
======== ========
Basic earnings per share:
As reported $ 0.27 $ 0.14
Pro forma $ 0.27 $ 0.13
Diluted earnings per share:
As reported $ 0.26 $ 0.14
Pro forma $ 0.26 $ 0.13
The fair values of the issuance of the stock-based compensation pursuant to the
Company's various stock option and purchase plans were estimated at the grant
date using the Black-Scholes option pricing model.
Stock Option Plans Stock Purchase Plan
May 3, 2003 May 4, 2002 May 3, 2003 May 4, 2002
----------- ----------- ----------- -----------
Weighted-average risk free
rate of interest 2.23% 4.25% 1.20% 2.59%
Expected volatility 37% 42% 31% 35%
Weighted-average expected award life 3.5 years 3.5 years .7 years .7 years
Dividend yield 1.2% 1.2% - -
Weighted-average fair value $ 2.75 $ 5.21 $ 2.83 $ 4.36
The Black-Scholes option valuation model was developed for estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options, and because the Registrant's options do not have the
characteristics of traded options, the option valuation models do not
necessarily provide a reliable measure of the fair value of its options.
Discontinued Operations
On January 23, 2001, the Registrant announced that it was exiting its
694 store Northern Group segment. The Registrant recorded a charge to earnings
of $252 million before-tax, or $294 million after-tax, in 2000 for the loss on
disposal of the segment. Major components of the charge included expected cash
outlays for lease buyouts and real estate disposition costs of $68 million,
severance and personnel related costs of $23 million and operating losses and
other exit costs from the measurement date through the expected date of disposal
of $24 million. Non-cash charges included the realization of a $118 million
currency translation loss, resulting from the movement in the Canadian dollar
during the period the Registrant held its investment in the
-7-
segment and asset write-offs of $19 million. The Registrant also recorded a tax
benefit for the liquidation of the Northern U.S. stores of $42 million, which
was offset by a valuation allowance of $84 million to reduce the deferred tax
assets related to the Canadian operations to an amount that is more likely than
not to be realized.
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. During the second quarter of 2001,
the Registrant completed the liquidation of the 324 stores in the United States
and recorded a charge to earnings of $12 million before-tax, or $19 million
after-tax. The charge comprised the write-down of the net assets of the Canadian
business to their net realizable value pursuant to the then pending transaction,
which was partially offset by reduced severance costs as a result of the
transaction and favorable results from the liquidation of the U.S. stores and
real estate disposition activity. 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 agreed to obtain a revolving line of credit with a
lending institution, satisfactory to the Registrant, in an amount not less than
CAD$25 million (approximately US$17 million). Another wholly-owned subsidiary of
the Registrant was the assignor of the store leases involved in the transaction
and therefore retains potential liability for such leases. The Registrant also
entered into a credit agreement with the purchaser to provide a revolving credit
facility to be used to fund its working capital needs, up to a maximum of CAD$5
million (approximately US$3 million). The net amount of the assets and
liabilities of the former operations was written down to the estimated fair
value of the Note, approximately US$18 million. The transaction was accounted
for pursuant to SEC Staff Accounting Bulletin Topic 5:E "Accounting for
Divestiture of a Subsidiary or Other Business Operation," ("SAB Topic 5:E") 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 were presented under the
balance sheet captions as "Assets of business transferred under contractual
arrangement (note receivable)" and "Liabilities of business transferred under
contractual arrangement."
In the fourth quarter of 2001, the Registrant further reduced its
estimate for real estate costs by $5 million based on then current negotiations,
which was completely offset by increased severance, personnel and other
disposition costs.
The Registrant recorded a charge of $18 million in the first quarter of
2002 reflecting the poor performance of the Northern Group stores in Canada
since the date of the transaction. There was no tax benefit recorded related to
the $18 million charge, which 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. This charge was recorded pursuant to SAB Topic 5:E,
which requires accounting for the Note in a manner somewhat analogous to equity
accounting for an investment in common stock.
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.
On December 31, 2002, the Registrant-provided revolving credit facility
expired, without having been used. Furthermore, the operating results of
Northern Canada had significantly improved during the year such that the
Registrant had reached an agreement in principle to receive CAD$5 million
(approximately US$3 million) cash consideration in partial prepayment of the
Note and accrued interest due and agreed to reduce the face value of the Note to
CAD$17.5 million (approximately US$12 million). Based upon the improved results
of the Northern Canada business, the Registrant believes there is no substantial
uncertainty as to the amount of the future costs and expenses that could be
payable by the Registrant. As indicated above, as the assignor of the Northern
Canada leases, a wholly-owned subsidiary of the Registrant remains secondarily
liable under those leases. As of May 3, 2003, the Registrant estimates that its
gross contingent lease liability is between CAD$83
-8-
to $89 million (approximately US$58 to $62 million). Based upon its assessment
of the risk of having to satisfy that liability and the resultant possible
outcomes of lease settlement, the Registrant currently estimates the expected
value of the lease liability to be approximately US$2 million. The Registrant
believes that it is unlikely that it would be required to make such contingent
payments, and further, such contingent obligations would not be expected to have
a material effect on the Registrant's consolidated financial position, liquidity
or results of operations. As a result of the aforementioned developments, during
the fourth quarter of 2002 circumstances changed sufficiently such that it
became appropriate to recognize the transaction as an accounting divestiture.
During the fourth quarter of 2002, as a result of the accounting
divestiture, the Note was recorded in the financial statements at its estimated
fair value of CAD$16 million (approximately US$10 million). The Registrant, with
the assistance of an independent third party, determined the estimated fair
value by discounting expected cash flows at an interest rate of 18 percent. This
rate was selected considering such factors as the credit rating of the
purchaser, rates for similar instruments and the lack of marketability of the
Note. As the net assets of the former operations were previously written down to
zero, the fair value of the Note was recorded as a gain on disposal within
discontinued operations. There was no tax expense recorded related to this gain.
The Registrant ceased presenting the assets and liabilities of Northern Canada
as "Assets of business transferred under contractual arrangement (note
receivable)" and "Liabilities of business transferred under contractual
arrangement," and has recorded the Note initially at its estimated fair value.
At May 3, 2003 and February 1, 2003, US$4 million is classified as a current
receivable with the remainder classified as long term within other assets in the
accompanying Condensed Consolidated Balance Sheet.
Future adjustments, if any, to the carrying value of the Note will be
recorded pursuant to SEC Staff Accounting Bulletin Topic 5:Z:5, "Accounting and
Disclosure Regarding Discontinued Operations," which requires changes in the
carrying value of assets received as consideration from the disposal of a
discontinued operation to be classified within continuing operations. Interest
and accretion income will also be recorded within continuing operations. The
Registrant will recognize an impairment loss when, and if, circumstances
indicate that the carrying value of the Note may not be recoverable. Such
circumstances would include a deterioration in the business, as evidenced by
significant operating losses incurred by the purchaser or nonpayment of an
amount due under the terms of the Note.
As the stock transfer on September 28, 2001 was accounted for in
accordance with SAB Topic 5:E, a disposal was not achieved pursuant to APB No.
30. If the Registrant had applied the provisions of Emerging Issues Task Force
90-16, "Accounting for Discontinued Operations Subsequently Retained" ("EITF
90-16"), prior reporting periods would not be restated, accordingly reported net
income would not have changed. However, the results of operations of the
Northern business segment in all prior periods would have been reclassified from
discontinued operations to continuing operations. The incurred loss on disposal
at September 28, 2001 would continue to be classified as discontinued
operations, however, the remaining accrued loss on disposal at this date, of
U.S. $24 million, primarily relating to the lease liability of the Northern U.S.
business, would have been reversed as part of discontinued operations. Since the
liquidation of this business was complete, this liability would have been
recorded in continuing operations in the same period pursuant to EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." With
respect to Northern Canada, the business was legally sold as of September 28,
2001 and thus operations would no longer be recorded, but instead the business
would be accounted for pursuant to SAB Topic 5:E. In the first quarter of 2002,
the $18 million charge recorded within discontinued operations would have been
classified as continuing operations. Similarly, the $1 million benefit recorded
in the third quarter of 2002 would also have been classified as continuing
operations. Having achieved divestiture accounting in the fourth quarter of 2002
and applying the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Registrant would have then reclassified all
prior periods' results of the Northern Group to discontinued operations.
Reported net income in each of the periods would not have changed and therefore
the Registrant did not amend any of its prior filings.
-9-
The remaining reserve balance of $6 million at May 3, 2003 is expected
to be utilized within twelve months.
NORTHERN GROUP (in millions)
Balance Net Charge/ Balance
2/1/2003 Usage (Income) 5/3/2003
-------------------------------------
Real estate & lease liabilities $ 6 $ (1) $ - $ 5
Other costs 1 - - 1
-------------------------------------
Total $ 7 $ (1) $ - $ 6
=====================================
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. The
successor-assignee of the leases of a former business included in the Domestic
General Merchandise segment filed a petition in bankruptcy during 2002, and
rejected in the bankruptcy proceeding 15 leases it originally acquired from a
subsidiary of the Registrant. There are currently several actions pending
against this subsidiary by former landlords for the lease obligations. In the
fourth quarter of 2002, the Registrant recorded a charge of $1 million after-tax
related to certain actions. The Registrant estimates the gross contingent lease
liability related to the remaining actions as approximately $9 million. The
Registrant believes that it may have valid defenses, however as these actions
are in the preliminary stage of proceedings, their outcome cannot be predicted
with any degree of certainty.
The remaining reserve balances for these three discontinued segments
totaled $18 million as of May 3, 2003, $9 million of which is expected to be
utilized within twelve months and the remaining $9 million thereafter.
Disposition activity related to the reserves is presented below:
(in millions)
INTERNATIONAL GENERAL MERCHANDISE
Balance Net Charge/ Balance
2/1/2003 Usage (Income) 5/3/2003
-------------------------------------
Woolco $ 1 $ (1) $ - $ -
The Bargain! Shop 6 - - 6
-------------------------------------
$ 7 $ (1) $ - $ 6
=====================================
SPECIALTY FOOTWEAR
Balance Net Charge/ Balance
2/1/2003 Usage (Income) 5/3/2003
-------------------------------------
Real estate & lease liabilities $ 2 $ - $ - $ 2
Other costs 1 - - 1
-------------------------------------
Total $ 3 $ - $ - $ 3
=====================================
DOMESTIC GENERAL MERCHANDISE
Balance Net Charge/ Balance
2/1/2003 Usage (Income) 5/3/2003
-------------------------------------
Real estate & lease liabilities $ 7 $ - $ - $ 7
Legal and other costs 3 (1) - 2
-------------------------------------
Total $ 10 $ (1) $ - $ 9
=====================================
-10-
The following is a summary of the assets and liabilities of
discontinued operations:
DOMESTIC
NORTHERN SPECIALTY GENERAL
(in millions) GROUP FOOTWEAR MERCHANDISE TOTAL
------------- ---------- ----------- -------------
5/3/2003
Assets $ - $ - $ 2 $ 2
Liabilities 1 - 2 3
------------- ---------- ----------- -------------
Net liabilities of discontinued operations $ (1) $ - $ - $ (1)
============= ========== =========== =============
5/4/2002
Assets $ - $ 1 $ 2 $ 3
Liabilities 2 1 2 5
------------- ---------- ----------- -------------
Net liabilities of discontinued operations $ (2) $ - $ - $ (2)
============= ========== =========== =============
2/1/2003
Assets $ - $ - $ 2 $ 2
Liabilities 1 - 2 3
------------- ---------- ----------- -------------
Net liabilities of discontinued operations $ (1) $ - $ - $ (1)
============= ========== =========== =============
The Northern Group assets and liabilities of discontinued operations
primarily comprised the Northern Group stores in the U.S. 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. The remaining reserve balance at May 3, 2003 totaled
$1 million, which is expected to be utilized within twelve months.
The Registrant sold The San Francisco Music Box Company ("SFMB") in
2001; however, the Registrant remains as an assignor or guarantor of leases of
SFMB related to a distribution center and five store locations. In May 2003,
SFMB filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the
U.S. Bankruptcy Court for the District of Delaware. If all of the specified
leases are rejected in bankruptcy, the Registrant estimates its gross contingent
lease liability for these leases to be approximately $5 million. The Registrant
expects to be able to determine more accurately its lease liability exposure as
the SFMB bankruptcy proceeding progresses.
1993 Repositioning and 1991 Restructuring
The Registrant recorded charges of $558 million in 1993 and $390
million in 1991 to reflect the anticipated costs to sell or close
under-performing specialty and general merchandise stores in the United States
and Canada. Under the 1993 repositioning program, approximately 970 stores were
identified for closing. Approximately 900 stores were closed under the 1991
restructuring program. The remaining reserve balance of $2 million at May 3,
2003 comprises future lease obligations and is expected to be substantially
utilized within twelve months.
-11-
Disposition activity related to the reserves within the restructuring
programs is presented below.
1999 Restructurings
(in millions)
Balance Net Charge/ Balance
2/1/2003 Usage (Income) 5/3/2003
-------------------------------------
Real estate $ 1 $ - $ - $ 1
=====================================
1993 Repositioning and 1991 Restructuring
(in millions)
Balance Net Charge/ Balance
2/1/2003 Usage (Income) 5/3/2003
-------------------------------------
Real estate $ 1 $ - $ - $ 1
Other disposition costs 1 - - 1
--------------------------------------
Total $ 2 $ - $ - $ 2
======================================
Total Restructuring Reserves
(in millions)
Balance Net Charge/ Balance
2/1/2003 Usage (Income) 5/3/2003
-------------------------------------
Real estate $ 2 $ - $ - $ 2
Other disposition costs 1 - - 1
-------------------------------------
Total $ 3 $ - $ - $ 3
=====================================
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
------------------------
(in millions) May 3, May 4,
2003 2002
---------- ----------
Numerator:
Income from continuing operations........................................... $ 39 $ 38
Effect of Dilution:
Convertible debt............................................................ 1 1
---------- ----------
Income from continuing operations assuming dilution......................... $ 40 $ 39
========== ==========
Denominator:
Weighted-average common shares outstanding.................................. 141.1 140.1
Effect of Dilution:
Stock options and awards.................................................... 0.7 1.3
Convertible debt............................................................ 9.5 9.5
---------- ----------
Weighted-average common shares assuming dilution............................ 151.3 150.9
========== ==========
Options to purchase 6.8 million and 1.8 million shares of common stock
were not included in the computation for the thirteen weeks ended May 3, 2003
and May 4, 2002, respectively, 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.
-12-
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss was comprised of the following:
May 3, 2003 May 4, 2002 February 1, 2003
----------- ----------- ----------------
Foreign currency translation adjustments $ (10) $ (43) $ (15)
Minimum pension liability adjustment (198) (115) (198)
Changes in the fair value of derivatives
designated as hedges 2 - -
----------- ----------- ----------------
$ (206) $ (158) $ (213)
=========== =========== ================
Segment Information
Sales and operating results for the Registrant's reportable segments
for the thirteen weeks ended May 3, 2003 and May 4, 2002, respectively, are
presented below. Operating profit before corporate expense, net reflects income
from continuing operations before income taxes, corporate expense, non-operating
income and net interest expense.
Sales:
(in millions)
Thirteen weeks ended
----------------------------
May 3, 2003 May 4, 2002
----------- -----------
Athletic Stores................................................. $ 1,041 $ 1,006
Direct-to-Customers............................................. 87 84
----------- -----------
Total sales $ 1,128 $ 1,090
=========== ===========
Operating Results:
(in millions)
Thirteen weeks ended
----------------------------
May 3, 2003 May 4, 2002
----------- -----------
Stores.......................................................... $ 75 $ 69
Direct-to-Customers............................................. 9 8
----------- -----------
Operating profit before corporate expense, net.................. 84 77
Corporate expense, net.......................................... 17 13
----------- -----------
Operating profit................................................ 67 64
Interest expense, net........................................... 5 7
----------- -----------
Income from continuing operations
before income taxes.......................................... $ 62 $ 57
=========== ===========
Recently Issued Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In general, SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Registrant does not expect the adoption of
SFAS No. 149 to have a significant impact on its financial position and results
of operations.
-13-
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Among other
things, the statement does not affect the classification or measurement of
convertible bonds, puttable stock, or other outstanding shares that are
conditionally redeemable. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
statement is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim period
of adoption. The Registrant is currently evaluating the impact that the adoption
of the statement may have on its financial position and results of operations.
Subsequent Event
On May 6, 2003, the amendments to the Northern Note were executed and a
cash payment of CAD$5.2 million (approximately US$3.5 million) was received
representing principal and interest through the date of the amendment. After
taking into account this payment, the remaining principal due under the Note was
reduced to CAD$17.5 million (approximately US$12 million). Under the terms of
the renegotiated Note, a principal payment of CAD$1 million is due January 15,
2004. An accelerated principal payment of CAD$1 million may be due if certain
events occur. The remaining amount of the Note is required to be repaid upon the
occurrence of "payment events," as defined in the purchase agreement, but no
later than September 28, 2008. Interest is payable semiannually and began to
accrue on May 1, 2003 at a rate of 7.0 percent per annum.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All references to comparable-store sales for a given period relate to
sales of stores that are open at the period-end and that have been open for more
than one year. Accordingly, stores opened and closed during the period are not
included. All comparable-store sales increases and decreases exclude the impact
of foreign currency fluctuations.
RESULTS OF OPERATIONS
Sales of $1,128 million for the first quarter of 2003 increased 3.5
percent from sales of $1,090 million for the first quarter of 2002. Excluding
the impact of foreign currency fluctuations, sales increased 0.1 percent as
compared with the corresponding prior-year period. Comparable-store sales
declined by 2.5 percent.
Gross margin, as a percentage of sales, of 30.6 percent in the first
quarter of 2003 improved by 120 basis points as compared with 29.4 percent in
the corresponding prior-year period. This improvement was primarily driven by a
decrease in markdowns, as a percentage of sales, that were required in the
prior-year period to sell certain slow-moving merchandise, in addition to a
reduction in the cost of merchandise, as a percentage of sales, which reflected
better merchandise purchasing. Inventory levels at May 3, 2003 are in line with
the Registrant's plan.
Selling, general and administrative expenses ("SG&A") of $241 million
increased by $21 million or 9.5 percent in the first quarter of 2003 as compared
with the corresponding prior-year period, which primarily related to new store
openings and remodelings across several formats and the impact of foreign
currency fluctuations primarily related to the euro.
Depreciation and amortization increased by $1 million in the first
quarter of 2003 to $37 million compared with $36 million for the first quarter
of 2002.
-14-
Operating profit before corporate expense, net increased by $7 million,
or 9.1 percent, to $84 million in 2003. This increase is primarily due to lower
markdowns as compared with the prior-year period that were required to sell
certain slow-moving merchandise and better merchandise purchasing. The Internet
business continued to grow rapidly which also contributed to the increase. Total
operating profit before corporate expense, net, as a percentage of sales, was
7.4 percent in 2003 and 7.1 percent in 2002.
Net interest expense of $5 million decreased by $2 million for the
thirteen weeks ended May 3, 2003 as compared with the corresponding prior-year
period. Interest expense decreased to $7 million for the thirteen weeks ended
May 3, 2003 from $8 million for the thirteen weeks ended May 4, 2002. The
decrease was primarily related to savings obtained from $100 million of interest
rate swaps that the Registrant entered into, during the fourth quarter of 2002
and during the first quarter of 2003, to convert the fixed interest rate on the
8.5 percent debentures to a floating rate instrument. The decrease was also
attributed to the repayment in October 2002 of the remaining $32 million of the
$40 million 7.0 percent medium-term notes. Interest income increased to $2
million for the thirteen weeks ended May 3, 2003 from $1 million for the
thirteen weeks ended May 4, 2002. The increase in the first quarter of 2003 was
primarily related to the recognition of interest and accretion income related to
the Northern Note.
The Registrant's effective tax rate for the thirteen weeks ended May 3,
2003 was approximately 36 percent as compared with approximately 34 percent for
the corresponding prior-year period. The effective tax rate during the first
quarter of 2003 was lower than expected due to the impact of state tax law
changes and a higher proportion of earnings being attributed to lower tax
jurisdictions. During the first quarter of 2002, the Registrant recorded a $3
million tax benefit related to a multi-state tax planning strategy, which
reduced the effective tax rate for the thirteen weeks ended May 4, 2002 to
approximately 34 percent. This tax planning strategy resulted in a reduction in
the valuation allowance. The Registrant expects its effective tax rate to
approximate 37 percent for the remainder of 2003.
Income from continuing operations of $39 million, or $0.27 per diluted
share, for the thirteen weeks ended May 3, 2003, improved by $0.01 per diluted
share from $38 million for the thirteen weeks ended May 4, 2002. For the quarter
ended May 3, 2003, the Registrant reported net income of $38 million, or $0.26
per diluted share, compared with net income of $20 million, or $0.14 per diluted
share for the corresponding prior-year period. The first quarter of 2003
included an after-tax charge of $1 million, or $0.01 per diluted share, related
to the adoption of SFAS No. 143, which was reflected as a cumulative effect of
an accounting change. The first quarter of 2002 included a loss in discontinued
operations related to its Northern Group segment of $18 million, or $0.12 per
diluted share.
STORE COUNT
At May 3, 2003, the Registrant operated 3,600 stores, as compared with 3,625
at February 1, 2003. During the quarter ended May 3, 2003, the Registrant opened
17 stores, closed 42 stores and remodeled/relocated 60 stores.
SALES
The following table summarizes sales by segment:
Thirteen weeks ended
-------------------------
May 3, 2003 May 4, 2002
----------- -----------
(in millions)
Athletic Stores.............................. $ 1,041 $ 1,006
Direct-to-Customers.......................... 87 84
----------- -----------
Total sales $ 1,128 $ 1,090
=========== ===========
-15-
The total increase in sales was primarily driven by Foot Locker
Europe's strong sales performance. Sales in the primarily mall-based U.S. Foot
Locker formats declined primarily due to the general downturn in the retail
industry coupled with unseasonably colder weather. This resulted in an overall
decline of 2.5 percent in comparable-store sales.
Athletic Stores sales increased by 3.5 percent primarily due to the
strength of the euro's performance against the U.S. dollar in the first quarter
of 2003. Excluding the effect of foreign currency fluctuations, sales increased
0.3 percent. Comparable-store sales decreased 2.9 percent. Most of the
international formats, Foot Locker Europe in particular, continued to achieve
strong sales in the first quarter of 2003 and produced mid-single digit
comparable-store sales increases. During the first quarter of 2003, the
basketball category and the continuing current trend of classic shoes led
footwear sales across most of the Athletic Store formats. Apparel sales,
including both licensed and private label categories were particularly strong
during the thirteen weeks ended May 3, 2003. Sales for the prior-year period
ended May 4, 2002 were primarily led by footwear, basketball in particular.
Management expects the current trend of classic footwear and licensed
apparel to continue to be strong performers throughout the balance of 2003 and
into 2004. The Registrant accelerated the receipt of inventory during the first
quarter of 2003 to accommodate this expected continuing trend as well as to
support the growth of Foot Locker Europe.
Direct-to-Customers sales increased by 3.6 percent for the thirteen
weeks ended May 3, 2003 as compared with the corresponding prior-year period.
Internet sales increased by 27.3 percent for the thirteen weeks ended May 3,
2003 to $42 million as compared with the corresponding period in the prior year.
This increase in Internet sales was partially offset by a decline in catalog
sales, reflecting the continuing trend of the Registrant's customers to browse
and select products through its catalogs and then make their purchases via the
Internet. During the first quarter of 2003, the Registrant entered into an
arrangement with the NBA and Amazon.com whereby Foot Locker will provide the
fulfillment of products for NBA apparel sold over the Internet at NBAstore.com
and the NBA store on Amazon.com.
OPERATING RESULTS
Operating profit before corporate expense, net reflects income from
continuing operations before income taxes, corporate expense, non-operating
income and net interest expense.
Thirteen weeks ended
-------------------------
May 3, 2003 May 4, 2002
----------- -----------
Athletic Stores................................. $ 75 $ 69
Direct-to-Customers............................. 9 8
----------- -----------
Operating profit before corporate expense, net.. 84 77
Corporate expense, net.......................... 17 13
----------- -----------
Operating profit................................ 67 64
Interest expense, net........................... 5 7
----------- -----------
Income from continuing operations
before income taxes.......................... $ 62 $ 57
=========== ===========
Athletic Stores operating profit before corporate expense, net
increased by 8.7 percent for the first quarter of 2003 as compared with the
corresponding prior-year period. The increase in the first quarter of 2003 is
primarily a result of the increased gross margin rate due to fewer markdowns
taken in the first quarter of 2003 as compared with the prior-year period in
addition to better merchandise purchasing. The first quarter of 2002 reflected
an increase in markdowns taken to sell slow-moving marquee product, which were
offset, in part, by operating expense reductions. Operating profit before
corporate expense, net, as a percentage of sales, increased to 7.2 percent in
the first quarter of 2003 from 6.9 percent in the corresponding prior-year
period.
-16-
Direct-to-Customers operating profit before corporate expense, net
increased slightly for the thirteen weeks ended May 3, 2003, as compared with
the corresponding period ended May 4, 2002. Operating profit before corporate
expense, net, as a percentage of sales, increased to 10.3 percent in the first
quarter of 2003 from 9.5 percent in the corresponding prior-year period.
STRATEGIC DISPOSITIONS AND REPOSITIONINGS
Discontinued operations
On January 23, 2001, the Registrant announced that it was exiting its
694 store Northern Group segment. The Registrant recorded a charge to earnings
of $252 million before-tax, or $294 million after-tax, in 2000 for the loss on
disposal of the segment. Major components of the charge included expected cash
outlays for lease buyouts and real estate disposition costs of $68 million,
severance and personnel related costs of $23 million and operating losses and
other exit costs from the measurement date through the expected date of disposal
of $24 million. Non-cash charges included the realization of a $118 million
currency translation loss, resulting from the movement in the Canadian dollar
during the period the Registrant held its investment in the segment and asset
write-offs of $19 million. The Registrant also recorded a tax benefit for the
liquidation of the Northern U.S. stores of $42 million, which was offset by a
valuation allowance of $84 million to reduce the deferred tax assets related to
the Canadian operations to an amount that is more likely than not to be
realized.
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. During the second quarter of 2001,
the Registrant completed the liquidation of the 324 stores in the United States
and recorded a charge to earnings of $12 million before-tax, or $19 million
after-tax. The charge comprised the write-down of the net assets of the Canadian
business to their net realizable value pursuant to the then pending transaction,
which was partially offset by reduced severance costs as a result of the
transaction and favorable results from the liquidation of the U.S. stores and
real estate disposition activity. 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 net amount of the assets and liabilities
of the former operations was written down to the estimated fair value of the
note, approximately US$18 million. The transaction was accounted for pursuant to
SEC Staff Accounting Bulletin Topic 5:E "Accounting for Divestiture of a
Subsidiary or Other Business Operation," 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 were presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement" at May
4, 2002.
In the fourth quarter of 2001, the Registrant further reduced its
estimate for real estate costs by $5 million based on then current negotiations,
which was completely offset by increased severance, personnel and other
disposition costs.
The Registrant recorded a charge of $18 million in the first quarter of
2002 reflecting the poor performance of the Northern Group stores in Canada
since the date of the transaction. There was no tax benefit recorded related to
the $18 million charge, which 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. This charge was recorded pursuant to SAB Topic 5:E,
which requires accounting for the Note in a manner somewhat analogous to equity
accounting for an investment in common stock.
-17-
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.
On December 31, 2002, the Registrant-provided revolving credit facility
expired, without having been used. Furthermore, the operating results of
Northern Canada had significantly improved during the year such that the
Registrant had reached an agreement in principle to receive CAD$5 million
(approximately US$3 million) cash consideration in partial prepayment of the
Note and accrued interest due and agreed to reduce the face value of the Note to
CAD$17.5 million (approximately US$12 million). Based upon the improved results
of the Northern Canada business, the Registrant believes there is no substantial
uncertainty as to the amount of the future costs and expenses that could be
payable by the Registrant. As indicated above, as the assignor of the Northern
Canada leases, a wholly-owned subsidiary of the Registrant remains secondarily
liable under those leases. As of May 3, 2003, the Registrant estimates that its
gross contingent lease liability is between CAD$82 to $89 million (approximately
US$58 to $62 million). Based upon its assessment of the risk of having to
satisfy that liability and the resultant possible outcomes of lease settlement,
the Registrant currently estimates the expected value of the lease liability to
be approximately US$2 million. The Registrant believes that it is unlikely that
it would be required to make such contingent payments, and further, such
contingent obligations would not be expected to have a material effect on the
Registrant's consolidated financial position, liquidity or results of
operations. As a result of the aforementioned developments, during the fourth
quarter of 2002 circumstances changed sufficiently such that it became
appropriate to recognize the transaction as an accounting divestiture.
During the fourth quarter of 2002, as a result of the accounting
divestiture, the Note was recorded in the financial statements at its estimated
fair value of CAD$16 million (approximately US$10 million). The Registrant, with
the assistance of an independent third party, determined the estimated fair
value by discounting expected cash flows at an interest rate of 18 percent. This
rate was selected considering such factors as the credit rating of the
purchaser, rates for similar instruments and the lack of marketability of the
Note. As the net assets of the former operations were previously written down to
zero, the fair value of the Note was recorded as a gain on disposal within
discontinued operations. There was no tax expense recorded related to this gain.
The Registrant ceased presenting the assets and liabilities of Northern Canada
as "Assets of business transferred under contractual arrangement (note
receivable)" and "Liabilities of business transferred under contractual
arrangement," and has recorded the Note initially at its estimated fair value.
At May 3, 2003 and February 1, 2003, US$4 million is classified as a current
receivable with the remainder classified as long term within other assets in the
accompanying Condensed Consolidated Balance Sheet. On May 6, 2003, the
amendments to the Note were executed and a cash payment of CAD$5.2 million
(approximately US$3.5 million) was received representing principal and interest
through the date of the amendment. After taking into account this payment, the
remaining principal due under the Note was reduced to CAD$17.5 million
(approximately US$12 million). Under the terms of the renegotiated Note, a
principal payment of CAD$1 million is due January 15, 2004. An accelerated
principal payment of CAD$1 million may be due if certain events occur. The
remaining amount of the Note is required to be repaid upon the occurrence of
"payment events," as defined in the purchase agreement, but no later than
September 28, 2008. Interest is payable semiannually and began to accrue on May
1, 2003 at a rate of 7.0 percent per annum.
Future adjustments, if any, to the carrying value of the Note will be
recorded pursuant to SEC Staff Accounting Bulletin Topic 5:Z:5, "Accounting and
Disclosure Regarding Discontinued Operations," which requires changes in the
carrying value of assets received as consideration from the disposal of a
discontinued operation to be classified within continuing operations. Interest
and accretion income will also be recorded within continuing operations. The
Registrant will recognize an impairment loss when, and if, circumstances
indicate that the carrying value of the Note may not be recoverable. Such
circumstances would include a deterioration in the business, as evidenced by
significant operating losses incurred by the purchaser or nonpayment of an
amount due under the terms of the Note.
-18-
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. The remaining reserve balance at May 3, 2003 totaled
$1 million, which is expected to be utilized within twelve months.
The Registrant sold The San Francisco Music Box Company ("SFMB") in
2001; however, the Registrant remains as an assignor or guarantor of leases of
SFMB related to a distribution center and five store locations. In May 2003,
SFMB filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the
U.S. Bankruptcy Court for the District of Delaware. If all of the specified
leases are rejected in bankruptcy, the Registrant estimates its gross contingent
lease liability for these leases to be approximately $5 million. The Registrant
expects to be able to determine more accurately its lease liability exposure as
the SFMB bankruptcy proceeding progresses.
1993 Repositioning and 1991 Restructuring
The Registrant recorded charges of $558 million in 1993 and $390
million in 1991 to reflect the anticipated costs to sell or close
under-performing specialty and general merchandise stores in the United States
and Canada. Under the 1993 repositioning program, approximately 970 stores were
identified for closing. Approximately 900 stores were closed under the 1991
restructuring program. The remaining reserve balance of $2 million at May 3,
2003 comprises future lease obligations and is expected to be substantially
utilized within twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Registrant's primary sources of cash have been from
operations. The Registrant has a $190 million revolving credit facility
available through June 2004. Other than $22 million to meet letter of credit
requirements, this revolving credit facility was not used during the first
quarter of 2003. 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.
Net cash used in operating activities of continuing operations was $11
million for the thirteen weeks ended May 3, 2003. Operating activities provided
cash of $93 million for the thirteen weeks ended May 4, 2002. These amounts
reflect the income from continuing operations adjusted for non-cash items and
working capital changes. The decrease in cash from operations was due to working
capital changes. The Registrant made a $50 million contribution to its U.S.
qualified retirement plan in February 2003, in advance of ERISA funding
requirements. The first quarter of 2003 resulted in net cash outflows for both
merchandise inventories and accounts payable and accrued liabilities whereas the
first quarter of 2002 increase in merchandise inventories was more than offset
by the increase in accounts payable and accrued liabilities.
Net cash used in investing activities of continuing operations of $31
million and $28 million for the first quarters of 2003 and 2002, respectively,
reflected capital expenditures and lease acquisition costs. Total projected
capital expenditures of $143 million for 2003 comprise $87 million for new store
openings and modernizations of existing stores, $38 million for the development
of information systems and other support facilities and lease acquisition costs
of $18 million, primarily 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.
-19-
Financing activities for the Registrant's continuing operations used
cash of $3 million for the thirteen weeks ended May 3, 2003 compared with cash
provided by financing activities of $2 million for the thirteen weeks ended May
4, 2002. The Registrant declared and paid a $0.03 per share dividend during the
first quarter of 2003 totaling $4 million. Management believes operating cash
flows and current credit facilities will be adequate to finance its working
capital requirements, to make scheduled pension contributions for the
Registrant's retirement plans, to fund quarterly dividend payments and support
the development of its short-term and long-term strategies.
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 ADOPTED ACCOUNTING PRONOUNCEMENTS
The Registrant adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations" as of February 2, 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 amortized over the useful life of 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 may at any time include
structural alterations to store locations and equipment removal obligations from
distribution centers required by certain leases. On February 2, 2003, the
Registrant recorded a liability of $2 million for the expected present value of
future retirement obligations, increased property and equipment by $1 million
and recognized a $1 million after tax charge for the cumulative effect of the
accounting change. The Registrant did not incur any additional asset retirement
costs during the first quarter of 2003, and accordingly, the amortization and
accretion expenses recorded during the period were immaterial.
RECENTLY ISSUED PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In general, SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Registrant does not expect the adoption of
SFAS No. 149 to have a significant impact on its financial position and results
of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Among other
things, the statement does not affect the classification or measurement of
convertible bonds, puttable stock, or other outstanding shares that are
conditionally redeemable. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
statement is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim period
of adoption. The Registrant is currently evaluating the impact that the adoption
of the statement may have on its financial position and results of operations.
-20-
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, including 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 Company's
merchandise mix and retail locations, the Registrant's reliance on a few key
vendors for a majority of its merchandise purchases (including a significant
portion from one key vendor), unseasonable weather, risks associated with
foreign global sourcing, including political instability, changes in import
regulations and the presence of severe acute respiratory syndrome, economic
conditions worldwide, any changes in business, political and economic conditions
due to the threat of future terrorist activities in the United States or in
other parts of the world and related U.S. military action overseas, and the
ability of the Company 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 Company undertakes no
obligation to update forward-looking statements, whether as a result of new
information, future events, or otherwise.
Item 4. 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 the factors that could significantly affect internal controls,
subsequent to the date the Principal Executive Officer and the Principal
Financial Officer completed their evaluation.
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
The Registrant filed no reports on Form 8-K during the quarter ended
May 3, 2003.
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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: June 16, 2003 /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.
June 16, 2003
/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;
June 16, 2003
/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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