SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 3, 2001
Commission file no. 1-10299
FOOT LOCKER, INC.
(Exact name of registrant as specified in its charter)
New York 13-3513936
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
112 W. 34th Street, New York, New York 10120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 720-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of Common Stock outstanding at December 1, 2001: 139,857,332
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................................5-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......13-18
Part II. Other Information
Item 1. Legal Proceedings........................................19
Item 4. Submission of Matters to a Vote of
Security Holders ......................................19
Item 6. Exhibits and Reports on Form 8-K.........................19
Signature................................................20
Index to Exhibits........................................21
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except shares)
November 3, October 28, February 3,
2001 2000 * 2001
(Unaudited) (Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 62 $ 18 $ 109
Merchandise inventories 943 861 730
Assets held for disposal 14 54 31
Net assets of discontinued operations -- 78 37
Other current assets 99 108 93
------- ------- -------
1,118 1,119 1,000
Property and equipment, net 639 694 684
Deferred taxes 224 313 234
Goodwill, net 137 145 143
Assets of business transferred under
contractual arrangement (note receivable) 30 -- --
Other assets 191 162 171
------- ------- -------
$ 2,339 $ 2,433 $ 2,232
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ -- $ 140 $ --
Accounts payable 348 282 264
Accrued liabilities 202 238 222
Current portion of repositioning and restructuring reserves 10 22 13
Current portion of reserve for discontinued operations 24 16 76
Current portion of long-term debt and obligations
under capital leases 34 54 54
------- ------- -------
618 752 629
Long-term debt and obligations
under capital leases 366 259 259
Liabilities of business transferred under
contractual arrangement 12 -- --
Other liabilities 268 264 331
Shareholders' equity
Common stock and paid-in capital: 139,884,055;
138,116,998 and 138,690,560 shares, respectively 360 344 351
Retained earnings 761 993 705
Accumulated other comprehensive loss (46) (178) (41)
Less: Treasury stock at cost: 67,455; 199,625 and
199,625 shares, respectively -- (1) (2)
------- ------- -------
Total shareholders' equity 1,075 1,158 1,013
------- ------- -------
$ 2,339 $ 2,433 $ 2,232
======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
* 2000 interim information has been restated to reflect the change in method of
accounting for layaway sales and the presentation of the Northern Group as a
discontinued segment.
-1-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended Thirty-nine weeks ended
--------------------- ------------------------
Nov. 3, Oct. 28, Nov. 3, Oct. 28,
2001 2000 * 2001 2000 *
--------- ------- --------- -----------
Sales....................................... $ 1,104 $ 1,085 $ 3,224 $ 3,100
Costs and Expenses
Cost of sales............................. 777 751 2,265 2,176
Selling, general and administrative
expenses................................. 229 241 687 702
Depreciation and amortization............. 38 37 114 113
Restructuring charge...................... 1 4 33 3
Interest expense, net..................... 8 5 18 16
Other income.............................. -- -- (1) (16)
----- ----- ----- -----
1,053 1,038 3,116 2,994
----- ----- ----- -----
Income from continuing operations before
income taxes............................. 51 47 108 106
Income tax expense.......................... 18 18 39 41
----- ----- ----- -----
Income from continuing operations........... 33 29 69 65
Loss from discontinued operations, net of
income tax benefit of $2 and $10......... -- (4) -- (16)
Loss on disposal of discontinued
operations, net of income tax expense
of $1................................... -- -- (13) --
Cumulative effect of accounting change,
net of income tax benefit of $-......... -- -- -- (1)
----- ----- ----- -----
Net income.................................. $ 33 $ 25 $ 56 $ 48
===== ===== ===== =====
Basic earnings per share:
Income from continuing operations........ $ 0.24 $ 0.21 $0.50 $ 0.47
Loss from discontinued operations........ -- (0.03) (0.09) (0.11)
Cumulative effect of accounting change... -- -- -- (0.01)
----- ----- ----- -----
Net income............................... $ 0.24 $ 0.18 $ 0.41 $ 0.35
====== ====== ====== =====
Weighted-average common shares outstanding.. 139.8 137.9 139.3 137.7
Diluted earnings per share:
Income from continuing operations........ $0.23 $ 0.21 $ 0.49 $ 0.46
Loss from discontinued operations........ -- (0.03) (0.09) (0.11)
Cumulative effect of accounting change... -- -- -- (0.01)
------ ------ ------ ------
Net income............................... $ 0.23 $ 0.18 $ 0.40 $ 0.34
====== ====== ====== ======
Weighted-average common shares assuming
dilution................................. 150.8 139.5 145.7 139.0
See Accompanying Notes to Condensed Consolidated Financial Statements.
* 2000 interim information has been restated to reflect the change in method of
accounting for layaway sales, shipping and handling revenues and costs and the
presentation of the Northern Group as a discontinued segment.
-2-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
Thirteen weeks ended Thirty-nine weeks ended
--------------------- ------------------------
Nov. 3, Oct. 28, Nov. 3, Oct. 28,
2001 2000 * 2001 2000 *
-------- -------- --------- ------------
Net income............................... $ 33 $ 25 $ 56 $ 48
Other comprehensive income (loss), net
of tax
Foreign currency translation
adjustments arising during the period.. 3 (23) (5) (36)
------- ------- ------- --------
Comprehensive income..................... $ 36 $ 2 $ 51 $ 12
======= ======= ======= ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
* 2000 interim information has been restated to reflect the change in method of
accounting for layaway sales and the presentation of the Northern Group as a
discontinued segment.
-3-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Thirty-nine weeks ended
------------------------
Nov. 3, Oct. 28,
2001 2000 *
---------- -----------
From Operating Activities:
Net income.................................................................... $ 56 $ 48
Adjustments to reconcile net income to net cash used in operating
activities of continuing operations:
Restructuring charge......................................................... 33 3
Loss on disposal of discontinued operations, net of tax...................... 13 --
Loss from discontinued operations, net of tax................................ -- 16
Cumulative effect of accounting change, net of tax........................... -- 1
Depreciation and amortization................................................ 114 113
Gains on sales of investments................................................ -- (6)
Gains on sales of real estate................................................ (1) (10)
Deferred taxes............................................................... (29) (12)
Change in assets and liabilities:
Merchandise inventories.................................................... (216) (177)
Accounts payable and other accruals........................................ 62 43
Repositioning and restructuring reserves................................... (43) (32)
Other, net................................................................. 3 4
----- -----
Net cash used in operating activities of continuing operations................ (8) (9)
----- -----
From Investing Activities:
Proceeds from sales of investments............................................ 5 7
Proceeds from sales of real estate............................................ 1 7
Capital expenditures.......................................................... (75) (68)
----- -----
Net cash used in investing activities of continuing operations................ (69) (54)
----- -----
From Financing Activities:
Increase in short-term debt................................................... -- 69
Issuance of convertible long-term debt........................................ 150 --
Debt issuance costs........................................................... (8) --
Reduction in long-term debt and capital lease obligations..................... (61) (104)
Issuance of common stock...................................................... 9 5
----- -----
Net cash provided by (used in) financing activities of continuing
operations.................................................................. 90 (30)
----- -----
Net Cash used in Discontinued Operations........................................ (62) (55)
Effect of exchange rate fluctuations on Cash and Cash Equivalents............... 2 4
----- -----
Net change in Cash and Cash Equivalents......................................... (47) (144)
Cash and Cash Equivalents at beginning of year.................................. 109 162
----- -----
Cash and Cash Equivalents at end of interim period.............................. $ 62 $ 18
===== =====
Cash paid during the period:
Interest...................................................................... $ 25 $ 22
Income taxes.................................................................. $ 30 $ 27
See Accompanying Notes to Condensed Consolidated Financial Statements.
* 2000 interim information has been restated to reflect the change in method of
accounting for layaway sales and the presentation of the Northern Group as a
discontinued segment.
-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
3, 2001, as filed with the Securities and Exchange Commission (the "SEC") on
April 23, 2001. 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 3, 2001 are not necessarily indicative of the
results expected for the year. As discussed below, prior year financial
statements have been restated to reflect the discontinuance of the Northern
Group, the change in method of accounting for layaway sales and the
reclassification of shipping and handling fees to revenue and the related costs
to cost of sales.
Name Change
The Registrant (formerly known as Venator Group, Inc.) changed its name to
Foot Locker, Inc. effective November 1, 2001.
Derivative Financial Instruments
Effective February 4, 2001, the Registrant adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and its related amendment, Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative
financial instruments be recorded in the Consolidated Balance Sheets at their
fair values. Changes in fair values of derivatives will be recorded each period
in earnings or other comprehensive income (loss), depending on whether a
derivative is designated and effective as part of a hedge transaction and, if it
is, the type of hedge transaction. The effective portion of the gain or loss on
the hedging derivative instrument will be reported as a component of other
comprehensive income (loss) and will be reclassified to earnings in the period
in which the hedged item affects earnings. To the extent derivatives do not
qualify as hedges, or are ineffective, their changes in fair value will be
recorded in earnings immediately, which may subject the Registrant to increased
earnings volatility. The adoption of SFAS No. 133 in 2001 did not have a
material impact on the Registrant's consolidated earnings.
The Registrant operates internationally and utilizes certain derivative
financial instruments to mitigate its foreign currency exposures, primarily
related to third-party and intercompany forecasted transactions. For a
derivative to qualify as a hedge at inception and throughout the hedged period,
the Registrant formally documents the nature and relationships between the
hedging instruments and hedged items, as well as its risk-management objectives,
strategies for undertaking the various hedge transactions and method of
assessing hedge effectiveness. Additionally, for hedges of forecasted
transactions, the significant characteristics and expected terms of a forecasted
transaction must be specifically identified, and it must be probable that each
forecasted transaction will occur. If it were deemed probable that the
forecasted transaction would not occur, the gain or loss would be recognized in
earnings immediately. No such gains or losses were recognized in earnings during
the quarter ended November 3, 2001. Derivative financial instruments qualifying
for hedge accounting must maintain a specified level of effectiveness between
the hedging instrument and the item being hedged, both at inception and
throughout the hedged period. The Registrant does not hold derivative financial
instruments for trading or speculative purposes.
The primary currencies to which the Registrant is exposed are the Euro,
the British Pound and the Canadian Dollar. When using a forward contract as a
hedging instrument, the Registrant excludes the time value from the assessment
of effectiveness. The change in a forward contract's time value is reported in
earnings. For forward foreign exchange contracts designated as cash flow hedges
of inventory, the effective portion of gains and losses is deferred as a
component of accumulated other comprehensive loss and is recognized as a
component of cost of sales when the related inventory is sold. The effective
portion of gains and losses associated with other forward contracts is deferred
as a component of accumulated other comprehensive loss until the underlying
hedged transaction is reported in earnings. The changes in fair value of forward
contracts and option contracts that do not qualify as hedges are recorded in
earnings.
-5-
During the quarter ended November 3, 2001, ineffectiveness related to cash
flow hedges 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.
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 quarter ended November 3, 2001, the changes in fair value of
derivative instruments not designated as hedges were not material.
Revenue Recognition
In the fourth quarter of 2000, the Registrant changed its method of
accounting for sales under its layaway program, in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
effective as of the beginning of the year. Under the new method, revenue from
layaway sales is recognized when the customer receives the product, rather than
when the initial deposit is paid. The cumulative effect of the change was a $1
million after-tax charge, or $0.01 per diluted share. The impact on each of the
quarters in 2000 was not material.
Revenue was restated in the fourth quarter of 2000, in accordance with
Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs," to include shipping and handling fees for all periods
presented. Shipping and handling fees of $8 million and $20 million,
respectively, were reclassified to sales from selling, general and
administrative expenses for the thirteen and thirty-nine weeks ended October 28,
2000 and the associated costs of $6 million and $15 million, respectively, were
reclassified from selling, general and administrative expenses to cost of sales.
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 the fourth quarter of
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. In the second quarter, the Registrant
recorded a charge to earnings of $12 million before-tax, or $19 million
after-tax, comprising the write-down of the net assets of the Canadian business
to their net realizable value pursuant to the 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.
During the second quarter of 2001, the Registrant completed the
liquidation of the 324 stores in the United States. 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 net amount of the assets and liabilities of the former operations
have been written down to the estimated fair value of the Note. The purchaser
will operate 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."
-6-
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, when
the initial payment is due. Interest will accrue at 7% annually beginning on
September 28, 2002 and is to be paid semi-annually. Additional payments to the
Registrant may be required in accordance with the agreement through September
28, 2026 should a payment event occur.
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). 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. The facility is available up to a maximum of
CAD$5 million (approximately US$3 million) and will expire on December 31, 2002.
The Registrant has subordinated its interest to permitted encumbrances as
defined in the credit agreement.
Net disposition activity of $107 million for the thirty-nine weeks ended
November 3, 2001 included operating losses of $28 million, a $5 million interest
expense allocation based on intercompany debt balances, real estate disposition
activity of $39 million, severance of $7 million and asset impairments and other
costs of $28 million. Of the remaining reserve balance of $20 million at
November 3, 2001, $14 million is expected to be utilized within twelve months
and the remaining $6 million thereafter. The net loss from discontinued
operations for the thirteen and thirty-nine weeks ended October 28, 2000,
includes sales of $82 million and $228 million, respectively, and interest
expense allocations of $3 million and $7 million, respectively, based on
intercompany debt balances.
In 1998, the Registrant exited both its International General Merchandise
and Specialty Footwear segments. 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. In 1997, the Registrant announced that it was exiting its
Domestic General Merchandise segment. The remaining reserve balances totaled $26
million as of November 3, 2001, $10 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
2/3/2001 Usage (Income) 11/3/2001
-------------------------------------------
Real estate & lease liabilities $ 68 $(39) $ (11) $ 18
Severance & personnel 23 (7) (14) 2
Asset impairments -- (23) 23 --
Operating losses & other costs 24 (38) 14 --
-------------------------------------------
Total $ 115 $ (107) $ 12 $ 20
===========================================
INTERNATIONAL GENERAL MERCHANDISE
(in millions)
Balance Net Charge Balance
2/3/2001 Usage (Income) 11/3/2001
-------------------------------------------
The Bargain! Shop $ 7 $ (1) $ -- $ 6
===========================================
SPECIALTY FOOTWEAR
(in millions)
Balance Net Charge Balance
2/3/2001 Usage (Income) 11/3/2001
-------------------------------------------
Real estate & lease liabilities $ 9 $ (1) $-- $ 8
Other costs 3 (1) -- 2
-------------------------------------------
Total $ 12 $ (2) $-- $ 10
===========================================
DOMESTIC GENERAL MERCHANDISE
(in millions)
Balance Net Charge Balance
2/3/2001 Usage (Income) 11/3/2001
-------------------------------------------
Real estate & lease liabilities $ 16 $ (7) $-- $ 9
Other costs 2 (1) -- 1
-------------------------------------------
Total $ 18 $ (8) $-- $ 10
===========================================
-7-
The following is a summary of the net assets of discontinued operations:
DOMESTIC
NORTHERN SPECIALTY GENERAL
(in millions) GROUP FOOTWEAR MERCHANDISE TOTAL
11/3/2001
Assets $ -- $ 2 $ 8 $ 10
Liabilities 7 1 2 10
-------- -------- -------- ---------
Net assets (liabilities) of
discontinued operations $ (7) $ 1 $ 6 $ --
======== ======== ======== =========
10/28/2000
Assets $ 121 $ 3 $ 11 $ 135
Liabilities 52 1 4 57
-------- -------- -------- ---------
Net assets of discontinued
operations $ 69 $ 2 $ 7 $ 78
======== ======== ======== =========
2/3/2001
Assets $ 64 $ 3 $ 8 $ 75
Liabilities 33 1 4 38
-------- -------- -------- ---------
Net assets of discontinued
operations $ 31 $ 2 $ 4 $ 37
======== ======== ======== =========
The Northern Group's assets at October 28, 2000 and February 3, 2001
comprise inventory, fixed assets and other current assets. The Northern Group's
liabilities comprise accounts payable, restructuring reserves and other accrued
liabilities. The net assets of the Specialty Footwear and Domestic General
Merchandise segments consist primarily of fixed assets, deferred tax 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. In the second quarter of 1999,
the Registrant announced its plan to sell or liquidate eight non-core
businesses: The San Francisco Music Box Company, Randy River Canada, Foot Locker
Outlets, Colorado, Team Edition, Going to the Game!, Weekend Edition and the
Burger King and Popeye's franchises. In the fourth quarter of 1999, the Company
announced a further restructuring plan, which included an accelerated store
closing program in the United States and Asia, corporate headcount reduction and
a distribution center shutdown.
In the first quarter of 2000, the Registrant recorded an additional
restructuring charge of $5 million related to its non-core businesses.
Throughout 2000, the disposition of Randy River Canada, Foot Locker Outlets,
Colorado, Going to the Game!, and Weekend Edition and the accelerated store
closing programs were essentially completed. In the third quarter of 2000,
management decided to continue to operate Team Edition as a manufacturing
business, primarily as a result of the resurgence of the screen print business.
In connection with the disposition of several of its non-core businesses,
the Registrant reduced sales support and corporate staff by over 30 percent,
reduced divisional staff and consolidated the management of Kids Foot Locker and
Lady Foot Locker into one organization. In addition, the Registrant closed its
Champs Sports distribution center in Maumelle, Arkansas and consolidated its
operations with the Foot Locker facility located in Junction City, Kansas. In
the first quarter of 2000, the Registrant recorded a reduction to the corporate
reserve of $5 million, which related to the agreement to sublease its Maumelle
distribution center and sell the associated fixed assets, which had been
impaired in 1999, for proceeds of approximately $3 million.
-8-
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 the pending sale of 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, 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. The remaining reserve balance at
November 3, 2001 totaled $9 million, $8 million of which is expected to be
utilized within twelve months. Disposition activity related to the reserves is
presented below:
NON-CORE BUSINESSES
(in millions)
Balance Net Charge Balance
2/3/2001 Usage (Income) 11/3/2001
-------------------------------------------
Real estate $ 4 $ (2) $ -- $ 2
Asset impairment -- (30) 30 --
Severance 2 (1) -- 1
Other disposition costs 3 -- 3 6
-------------------------------------------
Total $ 9 $ (33) $ 33 $ 9
===========================================
CORPORATE OVERHEAD AND LOGISTICS
(in millions)
Balance Net Charge Balance
2/3/2001 Usage (Income) 11/3/2001
-------------------------------------------
Severance $ 2 $ (2) $ -- $ --
===========================================
TOTAL RESTRUCTURING RESERVES
(in millions)
Balance Net Charge Balance
2/3/2001 Usage (Income) 11/3/2001
-------------------------------------------
Real estate $ 4 $ (2) $ -- $ 2
Asset impairment -- (30) 30 --
Severance 4 (3) -- 1
Other disposition costs 3 -- 3 6
-------------------------------------------
Total $ 11 $ (35) $ 33 $ 9
===========================================
Sales and operating losses, excluding restructuring charges, of the above
non-core businesses and under-performing stores included in the consolidated
results of operations for the thirteen and thirty-nine weeks ended November 3,
2001 and October 28, 2000, respectively, are presented below.
Thirteen weeks ended Thirty-nine weeks ended
------------------------- -----------------------------
November 3, October 28, November 3, October 28,
(in millions) 2001 2000 2001 2000
----------- ---------- ------------- ------------
Sales................................ $ 20 $ 28 $ 54 $ 83
=========== ========== ============ ============
Operating loss....................... $ 5 $ 2 $ 12 $ 13
=========== ========== ============ ============
Inventory, fixed assets and other long-lived assets of all businesses to
be exited have been valued at the lower of cost or net realizable value. These
assets, totaling $14 million, $54 million and $31 million, have been
reclassified as assets held for disposal in the Consolidated Balance Sheets as
of November 3, 2001, October 28, 2000 and February 3, 2001, respectively.
-9-
1993 Repositioning and 1991 Restructuring
In the three quarters of 2001, disposition activity reduced the reserve
balance by approximately $3 million. The remaining reserve balance of $3 million
comprises future lease obligations of $2 million and other facilities-related
costs of $1 million.
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 the exercise of 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. 3, Oct. 28, Nov. 3, Oct. 28,
2001 2000 2001 2000
--------- -------- ---------- -----------
Numerator:
Income from continuing operations.......... $ 33 $ 29 $ 69 $ 65
Effect of Dilution:
Convertible debt........................... 1 -- 2 --
----- ----- ----- -----
Income from continuing operations assuming
dilution................................... $ 34 $ 29 $ 71 $ 65
===== ===== ===== =====
Denominator:
Weighted-average common shares outstanding. 139.8 137.9 139.3 137.7
Effect of Dilution:
Stock options and awards................... 1.5 1.6 1.3 1.3
Convertible debt........................... 9.5 -- 5.1 --
----- ----- ----- -----
Weighted-average common shares assuming
dilution................................... 150.8 139.5 145.7 139.0
===== ===== ===== =====
Options to purchase 2.0 million and 3.1 million shares of common stock
were not included in the computation for the thirteen and thirty-nine weeks
ended November 3, 2001, 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.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss comprised foreign currency
translation adjustments of $46 million, $176 million, and $41 million at
November 3, 2001, October 28, 2000 and February 3, 2001, respectively.
Accumulated other comprehensive loss included a minimum pension liability
adjustment of $2 million at October 28, 2000.
Long-Term and Short-Term Debt
On June 8, 2001, the Registrant completed its offering of $125 million
of subordinated convertible notes due 2008 and an option to exercise an
additional $25 million was completed by July 9, 2001. The notes bear interest at
5.50% and are convertible into the Registrant's common stock at the option of
the holder, at a conversion price of $15.806 per share. The net proceeds of the
proposed offering are being used for working capital and general corporate
purposes and to reduce reliance on bank financing. The registration of the notes
on Form S-3 became effective on August 1, 2001. Simultaneous with this offering,
the Registrant amended and restated its $300 million revolving credit agreement
to a reduced $190 million three-year facility. During the third quarter, the
Registrant repaid the $50 million 6.98% medium-term notes that matured during
October in addition to purchasing and retiring $6 million of the $40 million
7.00% medium-term notes payable in October 2002.
-10-
Segment Information
Sales and operating results for the Registrant's reportable segments
for the thirteen and thirty-nine weeks ended November 3, 2001 and October 28,
2000, respectively, are presented below. Operating results reflect income from
continuing operations before income taxes, excluding corporate expense,
corporate gains and net interest expense.
Sales:
(in millions) Thirteen weeks ended Thirty-nine weeks ended
------------------------ ---------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
----------- ---------- ----------- -----------
Athletic Stores........................ $ 999 $ 987 $ 2,940 $ 2,849
Direct to Customers.................... 85 75 230 191
--------- -------- ---------- --------
1,084 1,062 3,170 3,040
All Other (1).......................... 20 23 54 60
--------- -------- ---------- --------
$ 1,104 $ 1,085 $ 3,224 $ 3,100
========= ======== ========== ========
Operating Results:
(in millions) Thirteen weeks ended Thirty-nine weeks ended
------------------------- -------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
----------- ---------- ----------- -----------
Athletic Stores (2)................... $ 69 $ 74 $ 206 $ 186
Direct to Customers................... 8 3 13 (5)
--------- -------- ----------- --------
77 77 219 181
All Other (1)......................... (6) (6) (45) (19)
--------- -------- ----------- --------
Operating profit.................. 71 71 174 162
Corporate expense (3)............. 12 19 48 40
Interest expense, net............. 8 5 18 16
--------- -------- ----------- --------
Income from continuing operations
before income taxes................ $ 51 $ 47 $ 108 $ 106
========= ======== =========== ========
(1) All formats presented as "All Other" were disposed at November 3,
2001. Restructuring charges included were $1 million and $33
million for the thirteen and thirty-nine weeks ended November 3,
2001, respectively and $4 million and $9 million for the thirteen
and thirty-nine weeks ended October 28, 2000.
(2) The thirty-nine weeks ended October 28, 2000 includes a $3
million reduction in the 1999 second quarter restructuring
charge, offset by a $2 million restructuring charge.
(3) Thirty-nine weeks ended October 28, 2000 includes a $5 million
reduction in the 1999 fourth quarter restructuring charge.
-11-
Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets" ("SFAS No. 142").
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations and requires all business combinations initiated or
completed after June 30, 2001 to be accounted for using the purchase method.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001.
Amortization expense related to goodwill was $8 million and $6 million for the
year ended February 3, 2001 and the thirty-nine weeks ended November 3, 2001,
respectively. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Registrant is required to adopt SFAS No. 142 effective as of
the beginning of fiscal 2002 and is currently evaluating the impact on its
results of operations and financial position.
Asset Retirements, Dispositions and Impairments of Long-Lived Assets
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, although earlier adoption is encouraged. The Registrant
intends to adopt it as of the beginning of fiscal year 2002. 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 of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The initial amount to be
recognized will be at its fair value. The liability will then be discounted and
accretion expense will be recognized using the credit-adjusted risk-free
interest rate in effect when the liability is initially recognized.
Lastly, in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to
Be Disposed Of," as well as the accounting and reporting requirements of APB
Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events." The Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and for interim periods
within those fiscal years. The Registrant intends to adopt the provisions as of
the beginning of fiscal year 2002. The pronouncement now provides for a single
accounting model for reporting long-lived assets to be disposed of by sale.
The Registrant is currently evaluating the impact of the adoption of SFAS
No. 143 and SFAS No. 144 on its results of operations and financial position.
-12-
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, Foot Locker Outlets, Going To The
Game!, Randy River Canada, Burger King and Popeye's franchises and Foot Locker
Asia. As discussed in the footnotes to the Condensed Consolidated Financial
Statements, the Registrant discontinued its Northern Group segment in the fourth
quarter of 2000. Accordingly, prior year financial statements have been restated
to present this business segment as a discontinued operation.
NAME CHANGE
The Registrant (formerly known as Venator Group, Inc.) changed its name to
Foot Locker, Inc. effective November 1, 2001.
RESULTS OF OPERATIONS
Sales of $1,104 million for the third quarter of 2001 increased 1.8
percent from sales of $1,085 million for the third quarter of 2000. For the
thirty-nine weeks ended November 3, 2001, sales of $3,224 million increased 4.0
percent from sales of $3,100 million for the thirty-nine weeks ended October 28,
2000. These increases were primarily attributable to the improved sales
performance of ongoing formats. Excluding the effect of foreign currency
fluctuations and sales from businesses disposed and held for disposal, sales
increased 2.0 percent and 5.1 percent for the third quarter and year-to-date
periods of 2001, respectively, as compared with the corresponding prior-year
periods, reflecting increases of 5.6 percent and 5.9 percent in comparable-store
sales.
Gross margin, as a percentage of sales, of 29.6 percent in the third
quarter of 2001 and 29.7 percent for the thirty-nine weeks ended November 3,
2001, declined by 120 basis points for the quarter and was relatively flat for
the thirty-nine week period as compared with 30.8 percent and 29.8 percent,
respectively, in the corresponding prior-year periods. The decline during the
quarter is mainly attributable to an increase in promotions and additional
markdowns taken to continue to generate sales after the events of September
11th.
Selling, general and administrative expenses ("SG&A") of $229 million
declined by 150 basis points to 20.7 percent of sales in the third quarter of
2001 as compared with 22.2 percent in the corresponding prior-year period. SG&A
of $687 million for the thirty-nine weeks ended November 3, 2001, declined
approximately 130 basis points to 21.3 percent of sales. These declines reflect
the operating efficiencies achieved by the ongoing store-base in the three
quarters of 2001 as compared with a year earlier, as a result of previous
cost-cutting initiatives and restructuring programs, which were stepped up as a
result of the events of September 11th. SG&A included income related to the
Registrant's pension and postretirement obligations of $5 million and $8
million, respectively, for the thirteen and thirty-nine weeks ended November 3,
2001, as compared with $3 million and $5 million for the corresponding
prior-year periods. The increased income primarily reflects a change related to
the postretirement obligation in the third quarter of 2001. New retirees will be
charged the full expected cost of the medical plan and existing retirees will
incur 100 percent of the expected future increase in medical plan costs. For the
thirty-nine weeks ended October 28, 2000, SG&A also included one-time Internet
costs of approximately $4 million related to website development.
Interest expense of $9 million declined by 10.0 percent for the thirteen
weeks ended November 3, 2001 and by 12.9 percent to $27 million for the
thirty-nine weeks ended November 3, 2001, as compared with the corresponding
prior-year periods. The decrease is primarily due to reduced short-term interest
expense as there were no outstanding borrowings under the revolving credit
agreement during substantially all of 2001. Interest income amounted to $1
million for the thirteen weeks ended November 3, 2001 and $5 million for the
thirteen weeks ended October 28, 2000, which included intercompany interest
income related to the Northern Group segment of $3 million. For the year-to-date
period, interest income totaled $9 million in 2001 and $15 million in 2000 and
included intercompany interest income related to the Northern Group segment of
$5 million and $7 million, respectively. The offsetting interest expense was
included in the loss from discontinued operations through the measurement date
for 2000 and subsequently, in 2001, was charged to the reserve for discontinued
operations. Interest income related to income tax settlements and refunds of $1
million and $2 million was also included in the three quarters of 2001 and 2000,
respectively.
-13-
During the second quarter of 2001, the Registrant recorded a $6 million
tax credit related to a state income tax settlement, partially offset by a $2
million charge from the impact of Canadian tax rate reductions on existing
deferred tax assets. In the third quarter of 2001, the Registrant recorded state
and local income tax settlements of $1 million. The combined effect of these
credits, in addition to higher earnings in lower tax jurisdictions and the
utilization of tax loss carryforwards offset, in part, by the impact of
non-deductible goodwill in the second quarter, reduced the effective tax rate
for the thirty-nine weeks ended November 3, 2001 to 35.7 percent as compared
with 39.0 percent for the 2000 year-to-date period. The effective tax rate for
the thirteen weeks ended November 3, 2001 was 34.4 percent as compared with 39.0
percent for the 2000 third quarter. The Registrant expects the effective tax
rate to be 38.0 percent for the fourth quarter of 2001.
Income from continuing operations of $33 million, or $0.23 per diluted
share, for the thirteen weeks ended November 3, 2001, improved by $0.02 per
diluted share from $29 million for the thirteen weeks ended October 28, 2000,
and increased to $69 million from $65 million, or $0.49 and $0.46 per diluted
share, for the thirty-nine weeks ended November 3, 2001 and October 28, 2000,
respectively. Income from continuing operations for the 2001 year-to-date period
included restructuring charges of $23 million after-tax or $0.16 per diluted
share. For the quarter ended November 3, 2001, the Registrant reported net
income of $33 million, or $0.23 per diluted share, compared with net income of
$25 million, or $0.18 per diluted share for the corresponding prior-year period,
which included a $4 million loss from discontinued operations, or $0.03 per
diluted share. Net income of $56 million, or $0.40 per diluted share, for the
thirty-nine weeks ended November 3, 2001 included a loss on disposal of
discontinued operations of $13 million, or $0.09 per diluted share. Net income
of $48 million, or $0.34 per diluted share, for the corresponding prior-year
period included a $16 million loss from discontinued operations or $0.11 per
diluted share, and a $1 million charge, or $0.01 per diluted share for the
cumulative effect of the change in accounting.
STORE COUNT
The following table summarizes store count, after reclassification for
businesses disposed and held for disposal. During the thirty-nine weeks ended
November 3, 2001, the Registrant remodeled or relocated 143 ongoing stores.
Feb. 3, Nov. 3, Oct. 28,
2001 Opened Closed 2001 2000
------- ------ ------ ------- --------
Athletic Stores.................. 3,582 62 76 3,568 3,615
Disposed and held for disposal... 170 12 20 162(1) 176
----- -- -- ----- -----
Total 3,752 74 96 3,730 3,791
===== == == ===== =====
(1) Reflects The San Francisco Music Box Company stores which were sold on
November 13, 2001.
SALES
The following table summarizes sales by segment, after reclassification
for businesses disposed and held for disposal. The disposed and held for
disposal category represents all businesses sold or closed or held for disposal
other than the discontinued segments, and are therefore included in continuing
operations.
(in millions) Thirteen weeks ended Thirty-nine weeks ended
--------------------- ------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
----------- ---------- ----------- -----------
Athletic Stores..................... $ 999 $ 987 $ 2,940 $ 2,848
Direct to Customers................. 85 75 230 191
--------- ---------- --------- ---------
1,084 1,062 3,170 3,039
Disposed and held for disposal........ 20 23 54 61
--------- ---------- --------- ---------
Total sales........................ $ 1,104 $ 1,085 $ 3,224 $ 3,100
========= ========== ========= =========
Athletic Stores sales increased by 1.2 percent and by 3.2 percent,
respectively, reflecting comparable-store sales increases of 4.9 percent and 5.1
percent, respectively. Footwear, basketball in particular, continued to drive
the sales growth across most formats, as the number of launches of marquee and
exclusive footwear products was increased throughout the thirty-nine weeks of
2001. Despite the sales increases achieved by most formats, Foot Locker Europe
in particular, sales were lower than planned for the third quarter of 2001.
Although August sales exceeded the plan, the tragic events of September 11th
-14-
resulted in a decline in consumer purchasing for the remainder of September and
the beginning part of October. In addition, the third quarter of 2001 was also
negatively impacted by a one-week calendar shift, which resulted in one week of
the back-to-school period that would normally fall in the third quarter, falling
in the second quarter. Apparel sales were also beginning to return to the level
existing prior to September 11th toward the latter part of October and reflected
a balanced mix of branded, licensed and private label products.
Direct to Customers sales increased by 13.3 percent and by 20.4 percent
for the thirteen and thirty-nine weeks ended November 3, 2001 as compared with
the corresponding prior-year periods. Catalog sales of $60 million were flat for
the third quarter of 2001 and increased by 5.1 percent to $165 million for the
year-to-date period. Internet sales increased by 66.7 percent and 91.2 percent
for the thirteen and thirty-nine weeks ended November 3, 2001 to $25 million and
$65 million, respectively, as compared with the corresponding periods in 2000.
The Registrant expects to meet its sales plan for the fourth quarter of
2001 by continuing to promote its products aggressively in what it expects will
be a highly competitive retail environment.
OPERATING RESULTS
Operating results reflect income from continuing operations before income
taxes, excluding corporate expense, corporate gains and net interest expense.
The following table summarizes operating profit by segment, after
reclassification for businesses disposed and held for disposal.
(in millions) Thirteen weeks ended Thirty-nine weeks ended
----------------------- -------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
----------- ---------- ----------- ------------
Athletic Stores....................... $ 69 $ 74 $ 206 $ 187
Direct to Customers................... 8 3 13 (5)
----- ----- ------ ------
77 77 219 182
Disposed and held for disposal....... (5) (2) (12) (12)
Restructuring charges................ (1) (4) (33) (8)
----- ----- ------ ------
Total operating profit................ $ 71 $ 71 $ 174 $ 162
===== ===== ====== ======
Athletic Stores operating profit decreased by 6.8 percent for the 2001
third quarter and increased by 10.2 percent for the 2001 year-to-date period.
The decrease in the third quarter of 2001 is primarily a result of the tragic
events of September 11th, which temporarily curtailed customer purchasing. Lower
than planned sales and increased markdowns resulted in reduced gross margin rate
performances, which were offset, in part, by operating expense reductions.
Operating profit, as a percentage of sales, decreased to 6.9 percent in the
third quarter of 2001 from 7.5 percent in the corresponding prior-year period
and increased to 7.0 percent from 6.6 percent for the year-to-date period. Sales
and gross margin rates for Lady Foot Locker have been disappointing in 2001.
Management has implemented various merchandising strategies in an effort to
improve future performance.
Direct to Customers operating results improved by $5 million and $18
million, respectively, for the thirteen and thirty-nine weeks ended November 3,
2001, as compared with the corresponding periods ended October 28, 2000. The
thirty-nine weeks ended October 28, 2000 included one-time Internet development
costs of approximately $4 million. The improved operating performance in 2001
was driven primarily by the Internet business.
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 pending sale of The San Francisco Music Box Company, which closed
on November 13, 2001. On October 10, 2001, the Registrant closed the sale of
assets related to the fifteen Burger King and Popeye's franchises and during the
third quarter of 2001, the Registrant recorded a restructuring charge of
approximately $1 million before-tax as a result of these sales. Related to the
disposition of these and other restructured businesses, the Registrant recorded
charges of $4 million and $8 million in the third quarter and year-to-date
period of 2000.
-15-
STRATEGIC DISPOSITIONS AND REPOSITIONING
On September 28, 2001, the Registrant completed the stock transfer of the
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 net amount of the assets and liabilities of
the former operations have been written down to the estimated fair value of the
Note. The purchaser will operate 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 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, when
the initial payment is due. Interest will accrue at 7% annually beginning on
September 28, 2002 and is to be paid semi-annually. Additional payments to the
Registrant may be required in accordance with the agreement through September
28, 2026 should a payment event occur.
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.) 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. The facility is available up to a maximum of
CAD$5 million (approximately US$3 million) and will expire on December 31, 2002.
The Registrant has subordinated its interest to permitted encumbrances as
defined in the credit agreement.
The sale of The San Francisco Music Box Company was completed on November
13, 2001, for cash proceeds of approximately $14 million. In addition, on
October 10, 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.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Registrant's primary sources of cash have been from
operations, borrowings under the revolving credit agreement and proceeds from
the sale of non-strategic assets. As noted below, 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.
Operating activities of continuing operations used cash of $8 million and
$9 million, respectively, for the thirty-nine weeks ended November 3, 2001 and
October 28, 2000. These amounts reflect the income from continuing operations
reported by the Registrant in those periods, adjusted for non-cash items and
working capital changes.
Net cash used in investing activities of continuing operations of $69
million and $54 million for the thirty-nine weeks of 2001 and 2000,
respectively, primarily reflected capital expenditures. Planned capital
expenditures of $110 million and lease acquisition costs of $20 million for 2001
comprise $100 million for new store openings and remodeling of existing stores,
and $30 million for management information systems, logistics and other support
facilities. Proceeds from the sale of investments comprise the sale of the
Burger King and Popeye's franchises for $5 million in the third quarter of 2001
and $7 million related to the demutualization of MetLife in the second quarter
of 2000.
Financing activities for the Registrant's continuing operations provided
cash of $90 million for the thirty-nine weeks ended November 3, 2001 compared to
cash used in financing activities of $30 million for the corresponding
prior-year period. On June 8, 2001, the Registrant completed its offering of
$125 million of subordinated convertible notes due 2008 and an option to
exercise an additional $25 million was completed by July 9, 2001. The notes bear
interest at 5.50% and are convertible into the Registrant's common stock at the
option of the holder, at a conversion price of $15.806 per share. The net
proceeds of the proposed offering are being used for working capital and general
corporate purposes and to reduce reliance on bank financing. The registration of
the notes on Form S-3 became effective on August 1, 2001. Simultaneous with this
offering, the Registrant amended and restated its $300 million revolving credit
agreement to a reduced $190 million three-year facility. During the third
quarter, the Registrant repaid the $50 million 6.98% medium-term notes that
matured during October in addition to purchasing and retiring $6 million of the
$40 million 7.00% medium-term notes payable in October 2002.
-16-
During the first half of 2000, the Registrant purchased $13 million of its $200
million 7.00% debentures and on June 1, 2000, the remaining balance of $87
million was repaid. There were no short-term borrowings outstanding during
substantially all of the thirty-nine weeks of 2001, whereas outstanding
borrowings under the Registrant's revolving credit agreement amounted to $140
million at October 28, 2000, an increase of $69 million for the thirty-nine
weeks of 2000. Management believes current domestic and international credit
facilities and cash provided by operations will be adequate to finance its
working capital requirements and support the development of its short-term and
long-term strategies.
Net cash used in discontinued operations includes the Northern Group loss
from discontinued operations in 2000, the change in assets and liabilities of
the discontinued segments and disposition activity charged to the reserves for
both periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets" ("SFAS No. 142").
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations and requires all business combinations initiated or
completed after June 30, 2001 to be accounted for using the purchase method.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001.
Amortization expense related to goodwill was $8 million and $4 million for the
year ended February 3, 2001 and the nine months ended November 3, 2001,
respectively. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Registrant is required to adopt SFAS No. 142 effective as of
the beginning of fiscal 2002.
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, although earlier adoption is encouraged. The Registrant
intends to adopt it as of the beginning of fiscal year 2002. 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 of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The initial amount to be
recognized will be at its fair value. The liability will then be discounted and
accretion expense will be recognized using the credit-adjusted risk-free
interest rate in effect when the liability is initially recognized.
Lastly, in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to
Be Disposed Of," as well as the accounting and reporting requirements of APB
Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events." The Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and for interim periods
within those fiscal years. The Registrant intends to adopt the provisions as of
the beginning of fiscal year 2002. The pronouncement now provides for a single
accounting model for reporting long-lived assets to be disposed of by sale.
The Registrant is currently evaluating the impact of SFAS No. 142, SFAS No.
143 and SFAS No. 144 on its results of operation and financial position.
-17-
IMPACT OF EUROPEAN MONETARY UNION
The European Union comprises 15 member states, 12 of which adopted a
common currency, the "euro." From January 1, 1999 until January 1, 2002, the
transition period, the national currencies will remain legal tender in the
participating countries as denominations of the euro. Monetary, capital, foreign
exchange and interbank markets have converted to the euro, and non-cash
transactions are possible in euros. On January 1, 2002, euro bank notes and
coins will be issued and the former national currencies will be withdrawn from
circulation no later than February 28, 2002.
The Registrant has substantially completed the necessary modifications to
its information systems, accounting systems, vendor payments and human resource
systems. Completion of the testing of the upgrades and modification of the point
of sale hardware and software systems are in progress and are expected to be
finalized throughout the remainder of 2001.
The adoption of a single European currency will lead to greater product
pricing transparency and a more competitive environment. The Registrant
currently displays the euro equivalent price of merchandise, as do many
retailers. The euro conversion is not expected to have a significant effect on
the Registrant's results of operations or financial condition.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the federal
securities laws. All statements, other than statements of historical facts,
which address activities, events or developments that the Registrant expects or
anticipates will or may occur in the future, including, but not limited to, such
things as future capital expenditures, expansion, strategic plans, growth of the
Registrant's business and operations and euro related actions and other such
matters are forward-looking statements. These forward-looking statements are
based on many assumptions and factors including, but not limited to, 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, economic conditions
worldwide, effects of currency fluctuations, the ability of the Registrant to
execute its business plans effectively with regard to each of its operating
units, the ability of the Registrant to implement, in a timely manner, the
programs and actions related to the euro issue and uncertainties arising out of
the events of September 11, 2001 and their aftermath, including, but not limited
to, effects on consumer spending, effects on customer willingness to frequent
shopping malls and other shopping areas, and effects on the Company's ability to
receive, on a timely basis and without disruption, merchandise manufactured
outside of the country in which the Company sells it. 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.
-18-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The only legal proceedings pending against the Registrant or its
consolidated subsidiaries consist of ordinary, routine litigation,
including administrative proceedings, incident to the businesses of the
Registrant, as well as litigation incident to the sale and disposition of
businesses that have occurred in the past several years. Management does
not believe that the outcome of such proceedings will have a material
effect on the Registrant's consolidated financial position, liquidity, or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Information on the results of a special meeting of shareholders of the
Registrant held on November 1, 2001 is incorporated herein by reference to
the Registrant's Report on Form 8-K filed with the Securities and Exchange
Commission on November 2, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An index of the exhibits that are required by this item, and which are
furnished in accordance with Item 601 of Regulation S-K, appears on page
21. The exhibits that are in this report immediately follow the index.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K dated November 1, 2001 (date of
earliest event reported) reporting its name change to Foot Locker, Inc.
-19-
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 18, 2001 /s/ Bruce Hartman
--------------------------
BRUCE HARTMAN
Senior Vice President
and Chief Financial Office
-20-
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 Independent Accountants' Review Report.
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