FOOT LOCKER, INC.
2001 ANNUAL REPORT
MAXIMIZING OUR GLOBAL STRENGTH
[BACKGROUND GRAPHIC]
ABOUT THE COMPANY
Foot Locker, Inc. (NYSE:Z) is the world's leading retailer of athletic footwear
and apparel. Headquartered in New York City, it operates approximately 3,600
athletic retail stores in 14 countries in North America, Europe and Australia
under the brand names Foot Locker, Lady Foot Locker, Kids Foot Locker and Champs
Sports. Additionally, the Company's Footlocker.com/Eastbay business operates a
rapidly growing direct-to-customer business offering athletic footwear, apparel
and equipment through its Internet and catalog channels.
FINANCIAL HIGHLIGHTS, AS ADJUSTED
(Millions, except per share and per square foot amounts)
2001 2000 1999
- -----------------------------------------------------------------------------------------
Sales $4,325 $4,217 $3,726
Comparable store sales increase 4.9% 11.5% 2.1%
Sales per average gross square foot (in dollars) $ 306 $ 298(1) $ 270
Operating profit $ 307 $ 272 $ 119
Operating profit margin 7.1% 6.5% 3.2%
Net income $ 142 $ 111 $ 34
Diluted earnings per share $ 0.98 $ 0.80 $ 0.25
Debt, net of cash $ 184 $ 204 $ 327
(1) Excludes 53rd week
All references to sales, operating results, net income and earnings per share
included on pages 1 to 16 are presented on an adjusted basis to facilitate
comparison. Adjusted results are from continuing operations and exclude the
operations and disposition of The San Francisco Music Box Company, Hospitality
Group, Afterthoughts, Foot Locker Outlets, Going to the Game!, Randy River, Foot
Locker Asia, Weekend Edition, Colorado, and Garden Centers and the operations of
the accelerated store closings for all periods presented.
[BACKGROUND GRAPHIC]
TABLE OF CONTENTS
2 Shareholders' Letter
7 Business Overview
8 The World Leader in Athletic Footwear and Apparel
10 Maximizing Our Competitive Advantages
12 Our Retail Leadership
14 Strategies for Profitable Growth
16 Our Global Position
17 Financial Contents
IBC Board of Directors, Corporate Officers, Corporate Information
MAXIMIZING OUR
GLOBAL STRENGTH
We are uniquely positioned to further
expand our business and capitalize on
our market leadership internationally.
SALES PER AVERAGE
GROSS SQUARE FOOT
(in dollars)
[BAR CHART]
99 $270
00 $298
01 $306
OPERATING PROFIT MARGIN
(%)
[BAR CHART]
99 3.2%
00 6.5%
01 7.1%
NET INCOME
(in millions)
[BAR CHART]
99 $ 34
00 $111
01 $142
DILUTED EARNINGS PER SHARE
[BAR CHART]
99 $0.25
00 $0.80
01 $0.98
1
SHAREHOLDERS' LETTER
Increased shareholder value is expected to result from the implementation of
three significant earnings per share growth strategies.
2001 was a milestone year in many respects for our Company. We initiated
our program to open 1,000 new stores, strengthened our financial position
and significantly increased the profitability of our business -- in spite
of challenging times for the economy as a whole, and the retail sector in
particular.
Importantly, this year was also noteworthy in that we completed the
dispositions of our remaining non-athletic businesses, and changed our
corporate name to Foot Locker, Inc., to better reflect our current
identity as the world's leading retailer of athletic footwear and apparel.
We are proud of the extraordinary efforts demonstrated by our worldwide
associates throughout the emotional and economic challenges of this year,
precipitated by the tragic events of September 11th. As we enter 2002, we
are confident that our Company remains well positioned for continued
strong profitable growth.
2001 FINANCIAL HIGHLIGHTS
Foot Locker, Inc. achieved strong financial results in 2001 by maintaining
a sharp focus on the details that drive our business. Our 28 percent
increase in net income resulted from increased sales, higher gross margin
and an improved expense rate. We significantly increased our profitability
in the United States and international markets, and in both our store and
direct-to-customer segments.
ATHLETIC FOOTWEAR MARKET POSITION
[PIE CHART]
TOTAL MARKET MARKET POSITION
(DOLLARS) (PERCENTAGE)
United States $15 Billion 18%
Western Europe $ 7 Billion 6%
2
THE COMPANY'S DIRECT-TO-CUSTOMER OPERATION, FOOTLOCKER.COM/EASTBAY, IS THE
LEADING PROVIDER OF ATHLETIC FOOTWEAR, APPAREL AND EQUIPMENT THROUGH THE
INTERNET AND CATALOGS IN THE UNITED STATES.
Total athletic sales increased to $4.3 billion, reflecting a
comparable-store increase of 4.9 percent. Sales in our retail store
operations grew to $306 per gross square foot from $298 last year. Our
operating profit margin expanded to 7.1 percent from 6.5 percent and our
earnings per share increased to $0.98 from $0.80 in 2000.
Our financial position was also significantly strengthened in 2001. We
completed our refinancing plan, selling $150 million of convertible
subordinated notes, and amended and restated our $190 million revolving
credit facility. This refinancing provides our Company with additional
long-term capital and reduces our dependence on short-term bank financing.
BUSINESS HIGHLIGHTS
Each of our major businesses continued to deliver significant operating
profit improvements during 2001. The improvement in Foot Locker Worldwide,
which includes Foot Locker, Lady Foot Locker and Kids Foot Locker, was
driven largely by the growth of profits from our Foot Locker stores in
Europe. Our European Foot Locker operation is now our second largest
profit contributor after Foot Locker U.S. and is our highest profit
producer as measured by percentage of sales. For 2001, our international
stores accounted for 16 percent of our total worldwide sales.
Champs Sports had another year of very strong sales and profit
improvements in 2001. The profitability of this business has increased by
approximately $80 million over the past two years. While its profit
results have not yet reached levels achieved during the mid-1990s, we are
very encouraged by the strong momentum of this business. We believe that,
in the near term, Champs Sports is poised to return to its historical
profit levels.
Our direct-to-customer Internet and catalog business,
Footlocker.com/Eastbay, generated record sales and profits during 2001.
This was the first year that the Company enjoyed the full benefit of the
capital invested in this business in prior years. In fact, the operating
profit margin of this business is now greater than that of our store
operations. Footlocker.com/Eastbay is expected to be the Company's fastest
growing business for the next several years.
MAXIMIZING OUR EARNINGS GROWTH POTENTIAL
In 2001, Foot Locker, Inc. also took many steps to build on our
significant competitive advantages -- advantages that clearly distinguish
us from other athletic retailers. They include our market leadership
position, global diversification, product sourcing capabilities and
multiple channels of distribution. These competitive advantages provide
the foundation from which we expect to continue to increase shareholder
value.
3
Gross Square Footage
------------------------ 2002
February 3, Remodeled/ February 2, Average Total Targeted
STORE SUMMARY 2001 Opened Closed Relocated 2002 Size (in thousands) Openings
- -----------------------------------------------------------------------------------------------------------------------------
Foot Locker 1,453 59 40 73 1,472 4,100 6,039 47
Lady Foot Locker 662 2 32 33 632 2,200 1,416 2
Kids Foot Locker 398 1 8 9 391 2,400 944 1
Foot Locker International 483 49 11 49 521 2,800 1,482 65
Champs Sports 586 5 17 29 574 5,700 3,262 35
- -----------------------------------------------------------------------------------------------------------------------------
Total 3,582 116 108 193 3,590 3,700 13,143 150
- -----------------------------------------------------------------------------------------------------------------------------
Specifically, increased shareholder value is expected to result from three
significant earnings per share growth strategies that we expect to
implement over the next several years:
- IMPROVING THE PRODUCTIVITY OF OUR EXISTING STORE BASE. Our objective
is to grow our sales from $306 to $350 per gross square foot and our
operating profit margin from 7.1 to 10.0 percent of sales - levels
the Company has exceeded in prior years.
- OPENING 1,000 NEW STORES. This expansion program was initiated
during 2001, during which we successfully opened 116 new stores. We
are executing this program very carefully, and prudently focusing on
those markets where we already have a proven record of success. We
expect to increase the number of stores that we open each year in
line with increases in free cash flow from operations.
- CONTINUING TO DEVELOP OUR FOOTLOCKER.COM/EASTBAY DIRECT-TO-CUSTOMER
BUSINESS. This business includes our industry-leading athletic
e-commerce and catalog channels, and targets a demographic profile
different from that of our retail stores. The profitability of this
business, measured as a percentage of sales, is now greater than
that of our retail stores. We also expect to expand our Internet
presence to Europe, with the introduction of a new website to this
region during 2002.
REPOSITIONING COMPLETED
During 2001, we completed the disposition of all of our remaining
non-athletic businesses. These businesses included our Northern Group
operation, Hospitality Group, which consisted primarily of Burger King
franchises, and The San Francisco Music Box Company. The disposition of
these businesses allows our Company to focus completely on the execution
and growth of our industry-leading athletic operations.
4
THE COMPANY'S APPROXIMATELY 3,600 RETAIL STORES COMPRISE COMPLEMENTARY FORMATS
UNDER THE BRAND NAMES FOOT LOCKER, LADY FOOT LOCKER, KIDS FOOT LOCKER AND CHAMPS
SPORTS.
Foot Locker, Inc. achieved strong financial results in 2001 by maintaining
a sharp focus on the details that drive our business.
FOOT LOCKER, INC.
Recognizing the successful completion of our repositioning plans, on
November 1, 2001, we changed our corporate name to Foot Locker, Inc.
Our new name better reflects our current identity and represents one
of the most recognizable brand names in the world. To celebrate this
inauguration, the senior corporate management team of Foot Locker,
Inc. participated in the ringing of the bell ceremony at the New
York Stock Exchange on our first day of trading under our new name.
FOOT LOCKER FOUNDATION
We were deeply saddened by the horrific events of September 11,
2001. Although, fortunately, none of our associates was physically
injured from these violent acts, our Company felt that it was vital
to participate with the business community of New York to pull
together in assisting with the relief efforts.
During September, we contributed thousands of clothing garments to
the rescue workers at Ground Zero. Additionally, our Company and
individual associates pledged cash donations and contributed the
profits from the sales of several hundred thousand specially
designed T-shirts to the Twin Towers Fund.
We also established the Foot Locker Foundation for the purpose of
raising and donating additional funds to charitable causes such as
the Twin Towers Fund. During December, the Foundation coordinated a
charitable fundraising event, "On Our Feet," to unite the sports
world to support this worthy cause. We were delighted that
approximately 1,400 members of the sporting community rallied and
raised nearly $1 million for the victims' families of the World
Trade Center disaster.
ACKNOWLEDGEMENTS
We are very proud of our entire organization and its significant
accomplishments in 2001, especially given these unsettling times and
the current difficult retail climate. Our seasoned management team
continued to produce industry-leading results despite the
challenging environment. Our loyal and dedicated associates
continued to distinguish our Company from the competition and drove
our business to achieve higher levels of productivity.
5
We would also like to acknowledge the support and guidance of the members of our
Board of Directors. Their experience and wise counsel is valued and their
contributions are many, as we strive to maximize our global strength. Earlier
this year, Nicholas DiPaolo, Vice Chairman and Chief Operating Officer of
Bernard Chaus, Inc., joined our Board of Directors. His extensive business
experience in the apparel manufacturing industry will be an important asset to
our Company.
As we move forward, we are encouraged by our prospects to deliver significant
earnings growth through multiple opportunities. Our competitive strengths form a
strong foundation from which to continue to increase earnings per share. We are
very excited about our new, streamlined identity as Foot Locker, Inc. and remain
committed to building long-term shareholder value.
[PHOTO OF J. CARTER BACOT] [PHOTO OF MATTHEW D. SERRA]
/s/ J. Carter Bacot /s/ Matthew D. Serra
J. Carter Bacot Matthew D. Serra
Chairman of the Board President and Chief Executive Officer
6
BUSINESS OVERVIEW
PRIMARY CUSTOMER MERCHANDISE MIX # OF STORES AVERAGE STORE SIZE
- -------------------------------------------------------------------------------------------------------------------------
MEN'S, WOMEN'S
AND CHILDREN'S
[FOOT LOCKER LOGO] 12 TO 20 YEAR OLD ATHLETIC FOOTWEAR 1,472 4,100 GROSS
MEN'S ATHLETIC SQUARE FEET
APPAREL AND
ACCESSORIES
- -------------------------------------------------------------------------------------------------------------------------
[LADY FOOT LOCKER LOGO] 18 TO 29 YEAR OLD WOMEN'S ATHLETIC 632 2,200 GROSS
FEMALE FOOTWEAR, APPAREL SQUARE FEET
AND ACCESSORIES
- -------------------------------------------------------------------------------------------------------------------------
[KIDS FOOT LOCKER LOGO] 5 TO 11 YEAR OLD CHILDREN'S ATHLETIC 391 2,400 GROSS
FOOTWEAR, APPAREL SQUARE FEET
AND ACCESSORIES
- -------------------------------------------------------------------------------------------------------------------------
MEN'S, WOMEN'S
AND CHILDREN'S
[FOOT LOCKER INTERNATIONAL LOGO] 12 TO 20 YEAR OLD ATHLETIC FOOTWEAR 521 2,800 GROSS
MEN'S ATHLETIC SQUARE FEET
APPAREL AND
ACCESSORIES
- -------------------------------------------------------------------------------------------------------------------------
MEN'S, WOMEN'S
AND CHILDREN'S
[CHAMPS SPORTS LOGO] 12 TO 25 YEAR OLD ATHLETIC FOOTWEAR 574 5,700 GROSS
MEN'S ATHLETIC SQUARE FEET
APPAREL AND
ACCESSORIES
ATHLETIC EQUIPMENT
- -------------------------------------------------------------------------------------------------------------------------
MEN'S, WOMEN'S
AND CHILDREN'S
[FOOTLOCKER.COM/EASTBAY LOGO] 12 TO 35 YEAR OLD ATHLETIC FOOTWEAR,
APPAREL AND
EQUIPMENT
- -------------------------------------------------------------------------------------------------------------------------
[BACKGROUND GRAPHIC]
7
THE WORLD LEADER IN ATHLETIC
[BASKETBALL PLAYERS/ATHLETIC APPAREL GRAPHICS]
8
FOOTWEAR AND APPAREL
Foot Locker, Inc.'s broad reach has allowed it to achieve an approximate
18 percent share of the estimated $15 billion United States athletic
footwear market in 2001.
Foot Locker, Inc. is the world's leading multi-channel retailer of
athletic footwear and apparel. It enjoys strong brand-name
recognition and a significant market leadership position, with
approximately 3,600 retail stores under compatible formats: Foot
Locker, Lady Foot Locker, Kids Foot Locker and Champs Sports. The
retail stores are located in 14 countries in North America, Europe
and Australia, and are located in both mall and non-mall locations.
Footlocker.com/Eastbay, the Company's direct-to-customer business,
is the leading provider of athletic footwear, apparel and equipment
through the Internet and catalogs in the United States. The Eastbay
operation expands Foot Locker, Inc.'s reach by offering the world's
largest assortment of athletic products through its direct marketing
catalog channel to a customer base that has different demographic
profiles than the Company's store operations. The Company's
Footlocker.com Internet operation, which was rapidly developed by
capitalizing on Eastbay's established infrastructure, generated
sales of $100 million in 2001, with profitability characteristics
greater than that of our store operations.
The Company's broad reach has allowed it to achieve an approximate
18 percent share of the estimated $15 billion United States athletic
footwear market in 2001. More importantly, Foot Locker, Inc.'s 2001
sales are approximately double the estimated size of the Company's
three largest U.S. mall-based competitors combined. Its
second-largest presence is in Europe, where it operates more than
300 stores and commands approximately 6 percent of the estimated $7
billion athletic footwear market.
Foot Locker, Inc.'s share of these markets is expected to continue
to grow as it remodels and relocates existing stores, builds new
stores and further develops its direct-to-customer business. The
Company also expects to continue its growth in Canada and Australia,
where it operates approximately 230 stores combined.
[GRAPHIC]
9
MAXIMIZING OUR COMPETITIVE
[GRAPHIC]
10
ADVANTAGES
We are confident that our competitive strengths form a strong foundation
from which to continue to increase earnings per share.
Foot Locker, Inc.'s first competitive advantage comes from its
athletic market leadership position in the various regions where it
operates. This leadership position allows the Company to continue to
build on its strong relationships with the many business partners
that it has developed in the athletic retail industry. For example,
merchandise vendor partnerships allow the Company to provide its
customers with new, exciting product offerings at competitive
prices. Other key vendor partnerships are instrumental in developing
innovative operational solutions to improve the cost efficiencies in
our business.
The Company's second competitive advantage results from the
impressive global position that has been established by operating
profitably in 14 countries in North America, Europe and Australia.
Foot Locker is unique given its proven track record of operating a
successful retail operation across national borders. Developing this
profitable global presence provides the Company with geographic
diversification and significant growth opportunities for many years
to come. This past year, 116 new stores were opened, of which 68
were in North America, 38 in Europe and 10 in Australia.
The ability to source private-label product at highly favorable
terms is the Company's third competitive advantage. Foot Locker,
Inc. has owned and operated an Asian-based sourcing company for more
than 30 years. These private-label offerings, which are developed
internally, complement branded programs and generate significant
incremental sales volumes. New private-label products and expanded
offerings are expected to continue to differentiate the Company from
its competition.
The Company's fourth competitive advantage is its demonstrated
success in operating through multiple channels of distribution. Foot
Locker, Inc. is the industry leader in all three channels in which
it operates: retail stores, catalogs and e-commerce. The Company
believes this multiple channel strategy is most effective in
reaching a larger and more-diversified customer base than a
store-only strategy.
[GRAPHIC OF T-SHIRTS]
[GRAPHIC OF HIKING BOOTS]
11
OUR RETAIL LEADERSHIP
[PHOTO OF FOOT LOCKER STORE] [PHOTO OF LADY FOOT LOCKER STORE] [PHOTO OF FOOT LOCKER STORE]
Baltimore, Maryland Trumbull, Connecticut Concord, California
[PHOTO OF KIDS FOOT LOCKER STORE] [PHOTO OF FOOT LOCKER STORE] [PHOTO OF CHAMPS SPORTS STORE]
McAllen, Texas Melbourne, Australia Toronto, Canada
[PHOTO OF LADY FOOT LOCKER STORE] [PHOTO OF FOOT LOCKER STORE] [PHOTO OF FOOT LOCKER STORE]
San Jose, California Trumbull, Connecticut Covent Garden, United Kingdom
[PHOTO OF FOOT LOCKER STORE] [PHOTO OF CHAMPS SPORTS STORE] [PHOTO OF FOOT LOCKER STORE]
Tenerife, Canary Islands Coral Springs, Florida Stuttgart, Germany
12
FOOT LOCKER STORES ARE LOCATED IN 14 COUNTRIES IN NORTH AMERICA, EUROPE AND
AUSTRALIA.
[PHOTO OF FOOT LOCKER STORE] [PHOTO OF LADY FOOT LOCKER STORE] [PHOTO OF CHAMPS SPORTS STORE]
Montreal, Canada Costa Mesa, California New Hartford, New York
[PHOTO OF FOOT LOCKER STORE] [PHOTO OF KIDS FOOT LOCKER STORE] [PHOTO OF FOOT LOCKER STORE]
New York, New York Houston, Texas Madrid, Spain
[PHOTO OF KIDS FOOT LOCKER STORE] [PHOTO OF FOOT LOCKER STORE] [PHOTO OF FOOT LOCKER STORE]
Philadelphia, Pennsylvania Brisbane, Australia Montreal, Canada
[PHOTO OF FOOT LOCKER STORE] [PHOTO OF EASTBAY CATALOG] [PHOTO OF WEBSITE]
Las Palmas, Spain Eastbay Catalog Foot Locker Website
13
STRATEGIES FOR PROFITABLE
[BACKGROUND GRAPHIC]
[FOOT LOCKER LOGO] [LADY FOOT LOCKER LOGO] [KIDS FOOT LOCKER LOGO]
14
GROWTH
Foot Locker,Inc. is implementing a three-pronged strategy for profitable
growth.
Building on its competitive advantages, Foot Locker, Inc. is
implementing a three-pronged strategy for profitable growth. This
strategy, which will be implemented over the next several years,
includes improving the productivity of existing stores, opening new
stores in highly trafficked locations and further developing its
rapidly growing direct-to-customer business.
Providing customers with the right balance of fashion, technology
and value product is the cornerstone of the strategy to improve the
productivity of existing stores. Continuing to update the Company's
store fleet by completing approximately 200 remodel or relocation
projects annually over the next several years is another integral
part of this strategy. The Company's return on investment from these
projects significantly exceeds its cost of capital and has
contributed to the growth of its operating profit margin. New
marketing and promotional strategies are also expected to play a
large role in maintaining solid sales growth momentum and building
on the Company's industry-leading brand image.
The second strategy to propel earnings per share growth is the
Company's plan to open 1,000 new stores. The Company has identified
several exciting markets for Foot Locker store growth. These markets
include urban locations in the United States and the 11 countries in
Europe where the Company already operates, as well as Canada and
Australia. The growth of Champs Sports stores will be primarily
targeted to shopping malls in the United States and Canada.
Continuing the rapid expansion of the Company's direct-to-customer
business is the third exciting opportunity for earnings per share
growth. We have integrated this operation with our store business to
offer our customers a level of service superior to that of our
competition. The Company expects the sales and profitability of
Footlocker.com/Eastbay to grow at a more rapid pace than that of our
retail store businesses.
[BACKGROUND GRAPHIC]
[CHAMPS SPORTS LOGO] [FOOTLOCKER.COM LOGO] [EASTBAY LOGO]
15
OUR GLOBAL POSITION
158 CANADIAN STORES
2,929 US STORES
21 HAWAII STORES
323 EUROPEAN STORES
73 PUERTO RICO STORES
8 VIRGIN ISLANDS STORES
73 AUSTRALIAN STORES
5 GUAM STORES
Global diversification is a vital component of the Company's strategic
positioning. This diversification is unique in the athletic footwear and apparel
retail industry and provides many distinct advantages. Foot Locker, Inc. has
established a strong presence in several global markets within the United
States, Canada, Europe and Australia. Its infrastructures within these regions
are sufficient to support the Company's exciting new store growth plans for the
next several years.
The Company currently operates more than 550 Foot Locker and Champs Sports
stores outside the United States, with 323 in Europe, 158 in Canada and 73 in
Australia. Last year, approximately 16 percent of the Company's sales were
generated in international markets. In addition to providing significant growth
opportunities, global diversification can cushion the adverse effects from one
weak economy with the positive impact from a more vibrant economy in another
region.
[BACKGROUND GRAPHIC]
16
FINANCIAL CONTENTS
18 Management's Discussion and Analysis
of Financial Condition and Results of Operations
29 Management's Report
29 Independent Auditors' Report
30 Consolidated Statements of Operations
30 Consolidated Statements of Comprehensive Income (Loss)
31 Consolidated Balance Sheets
32 Consolidated Statements of Shareholders' Equity
33 Consolidated Statements of Cash Flows
34 Notes to Consolidated Financial Statements
52 Five Year-Summary of Selected Financial Data
IBC Board of Directors
IBC Corporate Officers
IBC Corporate Information
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company (formerly Venator Group, Inc.) changed its name to Foot Locker, Inc.
effective November 1, 2001. Foot Locker, Inc., through its subsidiaries (Foot
Locker, Inc. and its subsidiaries being hereafter referred to as the "Company")
operates in two reportable segments - Athletic Stores and Direct to Customers.
The Athletic Stores segment is one of the largest athletic footwear and apparel
retailers in the world, whose formats include Foot Locker, Lady Foot Locker,
Kids Foot Locker and Champs Sports. The Direct to Customers segment reflects the
Company's Footlocker.com, Inc. subsidiary, including Eastbay, which sells,
through its affiliates, to customers through catalogs and Internet websites.
The following table summarizes sales by segment, after reclassification
for businesses disposed and held for disposal. The disposed and held for
disposal category is included in continuing operations and represents all
business formats sold, closed or held for disposal other than discontinued
business segments. As of February 2, 2002, the disposition of all businesses
previously held for disposal was completed. The 2001 and 1999 reporting years
included 52 weeks compared with the 2000 reporting year, which included 53
weeks.
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Athletic Stores $3,999 $3,953 $3,593
Direct to Customers 326 279 217
- --------------------------------------------------------------------------------
4,325 4,232 3,810
Disposed and held for disposal(1) 54 124 453
- --------------------------------------------------------------------------------
$4,379 $4,356 $4,263
================================================================================
Operating results reflect income from continuing operations before
income taxes, excluding net corporate expense and net interest expense. The
following table reconciles operating profit from ongoing operations by segment
to income from continuing operations before income taxes.
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Athletic Stores $ 283 $ 269 $ 108
Direct to Customers 24 1 3
- --------------------------------------------------------------------------------
Operating profit from ongoing operations 307 270 111
Disposed and held for disposal(1) (12) (2) (22)
Restructuring charges(2) (33) (7) (75)
Gain (loss) on sale of businesses(3) 1 (1) 177
- --------------------------------------------------------------------------------
Total operating profit 263 260 191
Corporate expense, net(4) 64 62 43
Interest expense, net 24 22 51
- --------------------------------------------------------------------------------
Income from continuing operations
before income taxes(5) $ 175 $ 176 $ 97
================================================================================
(1) Includes Afterthoughts, The San Francisco Music Box Company, Foot
Locker Outlets, Colorado, Going to the Game!, Randy River Canada,
Weekend Edition, Garden Centers, Burger King and Popeye's franchises
and Foot Locker Asia.
(2) Restructuring charges of $33 million, $7 million and $75 million
included in operating expenses reflect the disposition of non-core
businesses and an accelerated store closing program for 2001, 2000 and
1999, respectively.
(3) 2001 reflects a $1 million adjustment to the gain on sale of
Afterthoughts. 2000 reflects a $1 million adjustment to the gain of $19
million recognized on the sale of Garden Centers in 1998. 1999 reflects
the sale of Afterthoughts ($164 million) and Colorado in Australia ($13
million).
(4) 2001 includes a $1 million restructuring charge related to the 1999
closure of a distribution center. 2000 includes a $6 million reduction
in the 1999 restructuring charge. 1999 includes a $21 million
restructuring charge related to headcount reduction and the closure of
a distribution center.
(5) 2000 includes $16 million from the 53rd week.
The following summarizes the components of Corporate expense, net:
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Corporate expense $ 64 $ 85 $ 68
Corporate income (1) (17) (46)
Restructuring charges (income) 1 (6) 21
- --------------------------------------------------------------------------------
Corporate expense, net $ 64 $ 62 $ 43
================================================================================
Corporate expense included depreciation and amortization of $28 million
in 2001, $29 million in 2000 and $33 million in 1999. The increase in other
corporate expense in 2000 compared with 2001 and 1999 primarily reflects
increased compensation costs for incentive bonuses. Corporate income is included
in other income.
SALES
- --------------------------------------------------------------------------------
Sales of $4,379 million in 2001 increased 0.5 percent from sales of $4,356
million in 2000. Excluding sales from businesses disposed and held for
disposal, the 53rd week in 2000, and the effect of foreign currency
fluctuations, 2001 sales increased by 4.4 percent as compared with 2000,
reflecting an increase of 4.9 percent in comparable-store sales for ongoing
formats.
Sales of $4,356 million in 2000 increased 2.2 percent from sales of
$4,263 million in 1999. Excluding sales from businesses disposed and held for
disposal, the 53rd week in 2000, and the effect of foreign currency
fluctuations, 2000 sales increased by 11.0 percent as compared with 1999,
reflecting an increase of 11.5 percent in comparable-store sales for ongoing
formats.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GROSS MARGIN
Gross margin, as a percentage of sales, of 29.9 percent declined by 20 basis
points in 2001 from 30.1 percent in 2000, reflecting increased occupancy and
buying costs. Excluding the impact of the 53rd week in 2000, gross margin, as a
percentage of sales, was unchanged in 2001.
Gross margin, as a percentage of sales, of 30.1 percent improved by 280
basis points in 2000 compared with 27.3 percent in 1999. Excluding the impact of
the 53rd week in 2000 and the inventory markdowns of $11 million in 1999
associated with the Company's restructuring plan to exit non-core businesses,
gross margin increased by 230 basis points to 29.9 percent in 2000. These
increases in 2000 reflect reduced occupancy, buying costs and markdowns as a
percentage of sales along with improved purchasing.
18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") declined by $52 million in
2001 to 21.1 percent, as a percentage of sales, compared with 22.4 percent in
2000. These declines reflect the operating efficiencies achieved by the ongoing
store base during 2001 as compared with a year earlier, as a result of
previous cost-cutting initiatives and restructuring programs. The completion
of the sales of The San Francisco Music Box Company and Burger King and Popeye's
franchises significantly contributed to the reduction in SG&A expenses. Salaries
and payroll expenses have declined year-over-year, primarily reflecting reduced
bonus expense during 2001. The impact of the 53rd week in 2000 was not material.
SG&A included income of $8 million in 2001, $5 million in 2000 and $4 million in
1999, which primarily reflected the amortization of gains associated with the
Company's postretirement benefits. The increase in 2001 reflected income of $3
million related to a change in the postretirement benefit plans. As a result of
this change, 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. In 2001 and 2000, SG&A also included $4
million of income related to the Company's pension plan, as the expected return
on the plan assets exceeded the cost to provide benefits. The Company did not
incur pension income or expense in 1999. The Company expects to incur pension
expense of approximately $8 million in 2002 principally due to the decline in
the expected long-term rate of return on plan assets. SG&A also included an
asset impairment charge of $2 million in 2001. There were no material asset
impairment charges in 2000.
SG&A declined by $10 million in 2000 to 22.4 percent, as a percentage
of sales, compared with 23.1 percent in 1999. The decline was principally due to
the Company's reduced and more efficient store base. The impact of the 53rd week
in 2000 was not material. In 1999, a total reduction of $11 million in the 1991
restructuring reserve and the 1993 repositioning reserve was recorded in SG&A.
The adjustment reflected revisions to estimates and other income related to
leased and owned properties. SG&A also included an asset impairment charge of
$13 million in 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of $154 million increased by 2.0 percent in 2001
from $151 million in 2000. Depreciation and amortization decreased by $18
million, or by 10.7 percent, in 2000 due to the reduction in depreciable assets
as a result of the disposal of businesses and stores in 1999 and a more focused
capital expenditure program.
OTHER INCOME
Other income in 2001 comprised real estate gains of $1 million and a $1 million
adjustment to the gain on the 1999 sale of Afterthoughts. Other income in 2000
primarily reflected corporate real estate gains of $11 million and a $6
million gain associated with the demutualization of the Metropolitan Life
Insurance Company, offset by a $1 million reduction in the gain on the 1998 sale
of the Garden Centers nursery business.
In 1999, the Company recorded a gain of $164 million from the sale of
the assets of its Afterthoughts retail chain. In connection with the public
offering of 100 percent of its holding in Colorado Group, Ltd., the Company
recorded a gain of $13 million to continuing operations in 1999 related to the
Australian athletic format. Corporate real estate gains of $29 million in 1999
are also included in other income in addition to a net gain of $17 million in
connection with terminating the lease of the Company's former corporate
headquarters in New York.
OPERATING RESULTS
Total operating profit increased by $3 million, or 1.2 percent, to $263 million
in 2001 from $260 million in 2000. The increase reflected a $37 million
operating profit increase for ongoing operations, offset by incremental
restructuring charges and operating losses of $34 million related to disposed
businesses. Operating profit from ongoing operations, excluding the impact of
the 53rd week in 2000, increased by 20.9 percent to $307 million in 2001 from
$254 million in 2000. The increase in operating profit in 2001 primarily
reflected lower operating expenses. Total operating profit increased by $69
million, or 36.1 percent, to $260 million in 2000 from $191 million in 1999.
Operating profit from ongoing operations, excluding the impact of the 53rd week
in 2000, more than doubled to $254 million in 2000 from $111 million in 1999.
The significant increase in operating profit in 2000 reflected improved sales
and gross margin rate performances in all athletic formats.
INTEREST EXPENSE, NET
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Interest expense $ 35 $ 41 $ 65
Interest income (11) (19) (14)
- --------------------------------------------------------------------------------
Interest expense, net $ 24 $ 22 $ 51
Weighted-average interest rate
(excluding facility fees):
Short-term debt 6.0% 9.2% 7.7%
Long-term debt 7.4% 8.0% 7.6%
Total debt 7.4% 8.2% 7.7%
Short-term debt outstanding during the year:
High $ 11 $ 206 $ 354
Weighted-average $ -- $ 68 $ 239
19
Interest expense declined by 14.6 percent in 2001, reflecting an $8 million
decrease in interest expense associated with short-term borrowings as the
Company was in a net investment position for substantially all of 2001, offset
by an increase in interest expense of $2 million related to long-term debt. The
issuance of the $150 million convertible notes in June 2001 increased interest
expense by $5 million, which was partially offset by the impact of repaying and
retiring $58 million of medium-term notes in the second half of 2001. Interest
expense declined by 36.9 percent in 2000 as compared with 1999, due to both
reduced short-term interest expense related to lower average short-term
borrowing levels, offset in part by higher short-term interest rates, and also
reduced long-term interest expense resulting from the repayment of the $200
million 7.0 percent debentures.
Interest income related to tax refunds and settlements amounted to $2
million in 2001 and $5 million in 2000 and 1999. Interest income also reflected
intercompany interest income of $5 million in 2001, $10 million in 2000 and $6
million in 1999, related to the Northern Group segment. The offsetting interest
expense for the Northern Group is included in the loss from discontinued
operations through the measurement date and subsequently, in 2001, was charged
to the reserve for discontinued operations.
INCOME TAXES
The effective tax rate was 36.6 percent in 2001 and 39.0 percent in 2000 and
1999. The Company recorded a tax benefit during 2001 of $7 million related to
state and local income tax settlements, partially offset by a $2 million charge
from the impact of Canadian tax rate reductions on existing deferred tax assets.
The combined effect of these items, 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 reduced the effective tax rate to 36.6
percent in 2001. The Company expects the effective tax rate to be approximately
38 percent for 2002.
DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
On January 23, 2001, the Company announced that it was exiting its 694 store
Northern Group segment. The Company 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 Company held its investment in the segment and asset write-offs of
$19 million. The Company 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 Company 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, the Company
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 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 Company 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."
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 7.0 percent
annually beginning on September 28, 2002 and is to be paid semi-annually.
Additional payments to the Company 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 Company, in an amount not less than CAD $25 million
(approximately US$17 million). The Company 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
Company has subordinated its interest to permitted encumbrances as defined in
the credit agreement.
20
In the fourth quarter of 2001, the Company 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. Net disposition activity of $116 million in 2001 included real estate
disposition activity of $46 million, severance of $8 million, asset impairment
of $23 million, operating losses of $28 million, a $5 million interest expense
allocation based on intercompany debt balances and other costs of $6 million. Of
the remaining reserve balance of $11 million at February 2, 2002, $5 million is
expected to be utilized within twelve months and the remaining $6 million
thereafter.
In 1998, the Company exited both its International General Merchandise
and Specialty Footwear segments. In the second quarter of 2001, the Company
recorded a tax benefit of $1 million related to the settlement of tax
liabilities in Germany. In the fourth quarter of 2001, the Company reached a
final settlement regarding the 1994 Woolco sale transaction in Canada and
recorded a charge of approximately $4 million pre-tax. There was no tax benefit
related to the fourth quarter charge and both transactions were associated with
the International General Merchandise segment. In 1997, the Company announced
that it was exiting its Domestic General Merchandise segment. In the fourth
quarter of 2001, the Company recorded a charge to the reserve of $3 million
before-tax, or $2 million after-tax, reflecting revisions to original
estimates for legal costs associated with exiting the segment. The remaining
reserve balances totaled $27 million as of February 2, 2002, $11 million of
which is expected to be utilized within twelve months and the remaining $16
million thereafter.
1999 RESTRUCTURING
- --------------------------------------------------------------------------------
Total restructuring charges of $96 million before-tax were recorded in 1999 for
the Company's restructuring program. In the second quarter of 1999, the Company
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 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, Canada and Asia, corporate headcount reduction and a distribution
center shutdown.
During 1999, the Company recorded restructuring charges of $63 million
pre-tax, or $38 million after-tax, associated with its plan to sell or liquidate
the eight 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 and the
Company recorded additional restructuring charges of $8 million. 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 the second quarter of 2001, the Company 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
Company completed the sale of assets related to its Burger King and Popeye's
franchises for cash proceeds of approximately $5 million. In connection with
these dispositions, the Company recorded a restructuring charge of approximately
$1 million before-tax in the third quarter of 2001. The remaining reserve
balance at February 2, 2002 totaled $4 million, $3 million of which is expected
to be utilized within twelve months.
The 1999 accelerated store-closing program comprised all remaining Foot
Locker stores in Asia and 150 stores in the United States and Canada. Total
restructuring charges of $13 million were recorded and the program was
essentially completed in 2000. During 2000, management decided to continue to
operate 32 stores included in the program as a result of favorable lease renewal
terms offered during negotiations with landlords. The impact on the reserve
was not significant and was, in any event, offset by lease buy-out costs for
other stores in excess of original estimates. Of the original 1,400 planned
terminations associated with the store-closing program, approximately 200
positions were retained as a result of the continued operation of the 32 stores.
In connection with the disposition of several of its non-core
businesses, the Company 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 Company
closed its Champs Sports distribution center in Maumelle, Arkansas and
consolidated its operations with the Foot Locker facility located in Junction
City, Kansas. Total restructuring charges of $20 million were recorded in 1999
and approximately 400 positions were eliminated. In 2000, the Company recorded
a reduction to the corporate reserve of $7 million, $5 million of 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. A further $2 million reduction reflected better than
anticipated real estate and severance payments. In the fourth quarter of 2001,
the Company entered into negotiations to exit the leased Maumelle distribution
center in 2002 and recorded a $1 million restructuring charge.
21
1999 DISPOSITIONS
- --------------------------------------------------------------------------------
During 1999, the Company completed the sale of its Afterthoughts retail chain
and the public offering of its holding in Colorado Group, Ltd. in Australia
for proceeds of approximately $250 million and $55 million, respectively.
STORE COUNT
- --------------------------------------------------------------------------------
The following table summarizes store count, after reclassification for
businesses disposed and held for disposal. During 2001, the Company remodeled or
relocated 193 stores.
2000 Opened Closed 2001
- --------------------------------------------------------------------------------
Athletic Stores 3,582 116 108 3,590
Disposed and held for disposal 170 12 182 --
- --------------------------------------------------------------------------------
Total 3,752 128 290 3,590
================================================================================
SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Company operates in two segments--Athletic Stores and Direct to Customers.
Athletic Stores formats include the Foot Locker businesses--Foot Locker, Lady
Foot Locker, and Kids Foot Locker--as well as Champs Sports. The Foot Locker
for- mat is located in North America, Europe and Australia. The Lady Foot Locker
and Kids Foot Locker formats operate in the United States, and Champs Sports
operates in the United States and Canada. The Direct to Customers division
operates Footlocker.com, which sells, through its affiliates, directly to
customers through catalogs and its Internet websites. Eastbay, one of its
affiliates, is the largest direct marketer of athletic footwear, apparel and
equipment in the United States, and provides the Company's six full-service
e-commerce sites access to an integrated fulfillment and distribution system.
Included in the Company's businesses disposed and held for disposal are the Foot
Locker Outlets, Colorado, Going to the Game! and Foot Locker Asia.
ATHLETIC STORES
- --------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
SALES
Stores $ 3,999 $ 3,953 $ 3,593
Disposed and held for disposal -- 1 112
- --------------------------------------------------------------------------------
Total sales $ 3,999 $ 3,954 $ 3,705
================================================================================
OPERATING PROFIT
Stores $ 283 $ 269 $ 108
Disposed and held for disposal -- (2) (36)
Restructuring (charges) income -- 4 (71)
Gain on sale of business -- -- 13
- --------------------------------------------------------------------------------
Total operating profit $ 283 $ 271 $ 14
================================================================================
Sales as a percentage of consolidated total 92% 91% 87%
Number of stores at year end 3,590 3,582 3,710
Selling square footage (in millions) 7.94 7.91 8.15
Gross square footage (in millions) 13.14 13.08 13.02
Sales of $3,999 million from ongoing athletic store formats increased 1.2
percent in 2001, compared with $3,953 million in 2000. Excluding the impact of
the 53rd week in 2000 and the effect of foreign currency fluctuations, sales
from ongoing athletic store formats increased 3.4 percent in 2001, reflecting a
comparable-store sales increase of 4.0 percent. The most significant growth
was in Foot Locker Europe, which generated comparable-store sales increases in
the double-digits. Champs Sports also contributed impressive comparable-store
sales increases and Foot Locker US, Australia and Canada contributed solid
increases. High-end basketball shoes continued to drive the strong footwear
sales performance as the number of launches of marquee and exclusive footwear
products contributed to incremental sales during the year. Apparel sales also
increased in 2001 and reflected a balanced mix of branded, licensed and private
label products. Lady Foot Locker's sales were disappointing in 2001. Management
has implemented various merchandising strategies in an effort to improve future
performance.
Sales of $3,953 million from ongoing store formats increased 10.0
percent in 2000, compared with $3,593 million in 1999. Excluding the impact of
the 53rd week in 2000, sales from ongoing store formats increased 8.3 percent in
2000, compared with 1999, reflecting a comparable-store sales increase of 10.5
percent, which was offset in part by the reduction in store base of 111 stores.
Operating profit from ongoing athletic store formats increased 5.2
percent to $283 million in 2001 from $269 million in 2000. Excluding the impact
of the 53rd week in 2000, operating profit from ongoing athletic store formats
increased 11.4 percent in 2001 from $254 million in 2000. Operating profit, as a
percentage of sales, increased to 7.1 percent in 2001 from 6.8 percent in 2000
primarily due to reduced operating expenses as a result of cost cutting
initiatives. The increase in operating profit in 2001 was driven by all formats,
with the exception of Lady Foot Locker. An asset impairment charge of $2 million
was included in operating profit in 2001. There were no material asset
impairment charges in 2000.
Operating profit from ongoing athletic store formats more than doubled
to $269 million in 2000, compared with $108 million in 1999. Operating profit
from ongoing retail store formats, excluding the 53rd week in 2000, was $254
million in 2000. The increase primarily reflected the improved sales and gross
margin rate performances in all formats in both footwear and apparel, in a
somewhat less promotional environment. An asset impairment charge of $8 million
was included in operating profit in 1999.
22
DIRECT TO CUSTOMERS
- --------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Sales $326 $279 $217
================================================================================
Operating profit $ 24 $ 1 $ 3
================================================================================
Sales as a percentage of consolidated total 7% 6% 5%
Direct to Customers sales increased by 16.8 percent to $326 million in 2001 from
$279 million in 2000. Excluding the impact of the 53rd week in 2000, Direct to
Customers sales increased by 18.5 percent in 2001. The Internet business
continued to drive the sales growth in 2001. Internet sales increased by $42
million, or 72.4 percent, to $100 million in 2001 compared with $58 million in
2000, which was driven by an increase in product offerings and the continued
growth of the overall Internet market in 2001. The impact of the 53rd week in
2000 did not have a material impact on Internet sales. Catalog sales, excluding
the impact of the 53rd week in 2000, increased 3.7 percent to $226 million in
2001 from $218 million in 2000, reflecting increased catalog distribution and an
expanded product assortment available to consumers.
Direct to Customers sales increased 28.6 percent in 2000 to $279
million compared with $217 million in 1999. Excluding the impact of the 53rd
week in 2000, Direct to Customers sales increased by 26.7 percent in 2000.
Internet sales increased by $44 million to $58 million in 2000 and catalog
sales, excluding the impact of the 53rd week in 2000, increased 7.4 percent to
$218 million in 2000 from $203 million in 1999.
The Direct to Customers business generated operating profits of $24
million in 2001, reaching profitability levels higher than Athletic Stores
formats. Operating profit of $1 million in 2000 and $3 million in 1999 included
initial Internet development and marketing costs of approximately $20 million
and $4 million, respectively. Excluding the impact of the 53rd week in 2000, the
Direct to Customers business broke even in 2000. Management anticipates the
significant sales growth in its integrated Internet and catalog business to
continue in future years at higher levels of profitability.
BUSINESS CONCENTRATION
- --------------------------------------------------------------------------------
In 2001, the Company purchased approximately 47 percent of its athletic
merchandise from one major vendor and approximately 70 percent from its top five
vendors. The Company considers vendor relations to be satisfactory.
ALL OTHER BUSINESSES
- --------------------------------------------------------------------------------
All business formats captured in the "All Other" category have been disposed as
of February 2, 2002. They include Afterthoughts, The San Francisco Music Box
Company, Burger King and Popeye's franchises, Randy River Canada, Weekend
Edition and Garden Centers.
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Sales $ 54 $ 123 $ 341
================================================================================
Operating profit (loss)
Disposed and held for disposal $ (12) $ -- $ 14
Restructuring charges (33) (11) (4)
Gain (loss) on sale of businesses 1 (1) 164
- --------------------------------------------------------------------------------
Total operating profit (loss) $ (44) $ (12) $ 174
================================================================================
Sales as a percentage of consolidated total 1% 3% 8%
Number of stores at year end -- 170 243
Selling square footage (in millions) -- 0.18 0.25
Gross square footage (in millions) -- 0.24 0.33
In connection with the 1999 restructuring program, total charges of $33
million and $11 million were recorded in 2001 and 2000, respectively, for the
disposition of The San Francisco Music Box Company and the Burger King and
Popeye's franchises. 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 Company completed the sale of assets
related to its Burger King and Popeye's franchises for cash proceeds of
approximately $5 million.
In 2000, the Company also recorded a $1 million adjustment to the $19
million gain recognized on the 1998 sale of the Garden Centers nursery business.
In 1999, the Company completed the sale of the assets of its Afterthoughts
retail chain and recorded a pre-tax gain of $164 million, which was increased by
$1 million in 2001. Total restructuring charges of $4 million were recorded in
1999 for the final disposition of Weekend Edition and Randy River Canada.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
CASH FLOW AND LIQUIDITY
Generally, the Company's primary sources of cash have been from operations,
borrowings under its revolving credit agreement and proceeds from the sale of
non-strategic assets. As noted below, the Company raised $150 million in cash in
2001 through the issuance of subordinated convertible notes. The Company
generally finances real estate with operating leases. The principal uses of cash
have 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.
23
Management believes operating cash flows and current credit facilities
will be adequate to finance its working capital requirements, fund the repayment
of the medium-term notes due in October 2002, and support the development of its
short-term and long-term strategies. Planned capital expenditures for 2002 are
approximately $141 million, of which $116 million relates to new store openings
and modernizations of existing stores and $25 million reflects the development
of information systems and other support facilities. In addition, planned lease
acquisition costs are $24 million and primarily relate to the Company's
operations in Europe. The Company has the ability to revise and reschedule the
anticipated capital expenditure program should the Company's financial position
require it.
Any materially adverse reaction to 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, or economic conditions worldwide could affect the ability of
the Company to continue to fund its needs from business operations.
Operating activities of continuing operations provided cash of $184
million in 2001 compared with $248 million in 2000. These amounts reflect the
income from continuing operations, adjusted for non-cash items and working
capital changes. The decline in cash flow from operations in 2001 reflected
increased cash outflows for merchandise inventories, income taxes payable and
repositioning and restructuring reserves. The increase in merchandise
inventories is in line with the Company's anticipated sales increases in 2002.
Payments charged to the repositioning and restructuring reserves were $62
million in 2001 compared with $38 million in 2000.
Operating activities of continuing operations provided cash of $248
million in 2000 compared with $37 million in 1999. The additional cash flow from
operations in 2000 was due to the significant improvement in operating
performance in all athletic businesses. The increases in merchandise inventories
and accounts payable were in line with the Company's increased sales volume.
Payments charged to the repositioning and restructuring reserves were $38
million in 2000 compared with $12 million in 1999.
Net cash used in investing activities of continuing operations was $96
million in 2001 compared with $69 million in 2000. The change was due to
proceeds from sales of real estate and other assets and investments of $20
million in 2001 compared with $25 million in 2000, in addition to the $22
million increase in capital expenditures in 2001. Proceeds from the sales of The
San Francisco Music Box Company and the Burger King and Popeye's franchises
contributed $14 million and $5 million in cash, respectively, in 2001. Capital
expenditures of $116 million in 2001 primarily related to store remodelings
and new stores compared with $94 million in 2000.
Net cash used in investing activities of continuing operations was
$69 million in 2000 compared with $155 million provided by investing activities
in 1999. The change was due to proceeds from sales of real estate and other
assets and investments of $307 million in 1999 compared with $25 million in
2000, offset by the $58 million reduction in capital expenditures in 2000.
Proceeds from the sale of five corporate properties contributed $18 million in
2000 and the Company also received $7 million associated with the
demutualization of the Metropolitan Life Insurance Company. Proceeds from
divesting activities of $307 million in 1999 comprised the sale of Afterthoughts
and the public offering of Colorado Group Ltd. for a total of $271 million and
the disposition of corporate real estate for $36 million.
Cash provided by financing activities of the Company's continuing
operations increased by $256 million in 2001 primarily due to the issuance of
$150 million of convertible notes and the $113 million reduction in debt
repayments for both short-term and long-term borrowings in 2001 compared with
2000. There were no outstanding borrowings under the Company's revolving credit
agreement as of February 2, 2002 and February 3, 2001. On June 8, 2001, the
Company 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. In 2001, the Company also repaid the $50 million 6.98 percent
medium-term notes that matured in October 2001 and purchased and retired $8
million of the $40 million 7.00 percent medium-term notes payable in October
2002.
Cash used in financing activities of the Company's continuing
operations declined by $114 million in 2000 due to the reduced levels of
short-term borrowings in 2000 compared with 1999. The Company purchased $100
million of its $200 million 7.00 percent debentures due on June 1, 2000, in 1999
and the remaining $100 million were purchased or repaid in 2000.
Net cash used in discontinued operations includes the loss from
discontinued operations, the change in assets and liabilities of the
discontinued segments and disposition activity related to the reserves. In 2001,
discontinued operations utilized cash of $75 million, which consisted of
payments for the Northern Group's operations and disposition activity related to
the other discontinued segments.
In 2000, discontinued operations utilized cash of $67 million, which
comprised the loss of $50 million from the Northern Group's operations and
disposition activity related to the other discontinued segments. In 1999, net
proceeds related to sales of the Australian specialty footwear format and The
Bargain! Shop stores of $51 million in addition to the results from real estate
activity, more than offset the payments charged to the discontinued reserves and
loss from operations during the year.
24
CAPITAL STRUCTURE
In 2001, the Company issued $150 million of subordinated convertible notes due
in 2008 and simultaneously amended its $300 million revolving credit agreement
to a reduced $190 million three-year facility. The subordinated convertible
notes bear interest at 5.50 percent and are convertible into the Company's
common stock at the option of the holder, at a conversion price of $15.806 per
share. The Company may redeem all or a portion of the notes at any time on or
after June 4, 2004. 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 Company's revolving credit facility includes various restrictive
covenants with which the Company was in compliance on February 2, 2002. There
were no borrowings outstanding under the revolving credit agreement at February
2, 2002. In 2001, the Company repaid its $50 million 6.98 percent medium-term
notes that matured in October 2001, in addition to purchasing and retiring $8
million of the $40 million 7.00 percent medium-term notes payable October 2002.
On March 29, 2002, Standard & Poor's increased the Company's credit rating to
BB+. Moody's Investors Service's rating remained unchanged at Ba3.
For purposes of calculating debt to total capitalization, the Company
includes the present value of operating lease commitments. These commitments
are the primary financing vehicle used to fund store expansion. The following
table sets forth the components of the Company's capitalization, both with and
without the present value of operating leases:
(in millions) 2001 2000
- --------------------------------------------------------------------------------
Debt and capital lease obligations, net of
cash and cash equivalents $ 184 $ 204
Present value of operating leases 1,372 1,374
- --------------------------------------------------------------------------------
Total net debt 1,556 1,578
Shareholders' equity 992 1,013
- --------------------------------------------------------------------------------
Total capitalization $2,548 $2,591
================================================================================
Net debt capitalization percent 61.1% 60.9%
Net debt capitalization percent without
operating leases 15.6% 16.8%
Excluding the present value of operating leases, the Company's net debt
capitalization ratio improved in 2001. Total capitalization declined by $43
million, which comprised a $22 million reduction in total net debt in 2001 and a
$21 million decrease in shareholders' equity. The decrease in total net debt of
$22 million reflected increased cash and cash equivalents of $106 million and
the repayment of medium-term notes and capital lease obligations of $65 million,
offset by the issuance of $150 million in subordinated convertible notes. The
decrease in shareholders' equity relates primarily to a charge to record an
additional minimum liability for the Company's pension plans of $115 million,
offset by net income of $92 million in 2001. The additional minimum liability
was required as a result of the plan's negative return on assets in 2001,
coupled with a decrease in the discount rate used to value the benefit
obligations. Management's objective is to further reduce both ratios of net debt
capitalization.
The following represents the scheduled maturities of the Company's
long-term contractual obligations and other commercial commitments as of
February 2, 2002:
Payments Due by Period
------------------------------------------------
Less
than 2 - 3 4 - 5 After 5
(in millions) Total 1 year years years years
- --------------------------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS
Long-term debt $ 382 $ 32 $ -- $ -- $ 350
Capital lease obligations 17 2 -- -- 15
Operating leases 1,913 330 556 444 583
- --------------------------------------------------------------------------------
Total contractual cash
obligations $2,312 $ 364 $ 556 $ 444 $ 948
================================================================================
Amount of Commitment Expiration by Period
--------------------------------------------------
Total Less
Amounts than 2 - 3 4 - 5 After 5
(in millions) Committed 1 year years years years
- --------------------------------------------------------------------------------
OTHER COMMERCIAL
COMMITMENTS
Line of credit $171 $-- $171 $-- $--
Stand-by letters of credit 19 -- 19 -- --
- --------------------------------------------------------------------------------
Total commercial
commitments $190 $-- $190 $-- $--
================================================================================
The Company does not have any off-balance sheet financing, other than
operating leases entered into in the normal course of business and disclosed
above, or unconsolidated special purpose entities. The Company's treasury and
risk management policies prohibit the use of leveraged derivatives or
derivatives for trading purposes.
In connection with the sale of various businesses, the Company may be
obligated for certain lease commitments transferred to third parties pursuant to
those sales. The Company is also operating certain stores for which lease
agreements are in the process of being negotiated with landlords. Although there
is no contractual commitment to make these payments, it is likely that a lease
will be executed. Management believes that the resolution of such contingencies
will not significantly affect the Company's consolidated financial position,
liquidity, or results of operations.
IMPACT OF THE EUROPEAN MONETARY UNION
- --------------------------------------------------------------------------------
The European Union comprises 15 member states, 12 of which adopted a common
currency, the "euro" on January 1, 2002. The former national currencies were
withdrawn from circulation by February 28, 2002. The euro conversion did not
have a significant effect on the Company's results of operations or financial
condition.
25
CRITICAL ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Management's responsibility for integrity and objectivity in the preparation and
presentation of the Company's financial statements requires diligent application
of appropriate accounting policies. Generally, the Company's accounting policies
and methods are those specifically required by generally accepted accounting
principles in the United States of America ("GAAP"). Note 1 to the Consolidated
Financial Statements includes a summary of the Company's most significant
accounting policies. In some cases, management is required to calculate amounts
based on estimates for matters that are inherently uncertain. The Company
believes the following to be the most critical of those accounting policies
that necessitate subjective judgments.
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market using the
retail inventory method. The retail inventory method ("RIM") is commonly used by
retail companies to value inventories at cost and calculate gross margins by
applying a cost-to-retail percentage to the retail value of inventories. The
RIM is a system of averages that requires management's estimates and assumptions
regarding markups, markdowns and shrink, among others, and as such, could result
in distortions of inventory amounts. Judgment is required to differentiate
between promotional and other markdowns. Management believes this method and its
related assumptions, which have been consistently applied, to be reasonable.
DISCONTINUED AND RESTRUCTURING RESERVES
The Company exited four business segments and other non-core businesses as part
of a major restructuring program in recent years. In order to identify and
calculate the associated costs to exit these businesses, management makes
assumptions regarding estimates of future liabilities for operating leases and
other contractual agreements, the net realizable value of assets held for sale
or disposal, the fair value of non-cash consideration received and in the case
of a discontinued business segment, future operating results. Management
believes its estimates, which are reviewed quarterly, to be reasonable, and
considers its knowledge of the retail industry, its previous experience in
exiting activities and valuations from independent third parties in the
calculation of such estimates. However, these estimates and assumptions may be
incorrect and may need to be revised as additional information becomes
available.
Effective as of the beginning of fiscal year 2002, the Company will
adopt SFAS No. 144, which broadens the presentation of discontinued operations
to apply to a component of an entity rather than a segment of a business.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with GAAP, the Company recognizes an impairment loss when
circumstances indicate that the carrying value of long-lived tangible and
intangible assets may not be recoverable. Management's policy includes criteria
based on operating performance to determine whether an impairment indicator
exists. The calculation of fair value of long-lived assets is based on
estimated expected undiscounted future cash flows by store. Management believes
its policy is reasonable and is consistently applied. Future expected cash flows
are based upon estimates that, if not achieved, may result in significantly
different results.
The Company will adopt SFAS No. 142 in 2002, which requires that
goodwill and intangible assets with indefinite lives no longer be amortized but
will be subject to impairment review. Long-lived tangible assets and intangible
assets with definite lives will be subject to impairment testing under SFAS No.
144.
PENSION AND POSTRETIREMENT LIABILITIES
The Company determines its obligations for pension and postretirement
liabilities based upon assumptions related to discount rates, expected long-term
rates of return on invested plan assets, salary increases, age, mortality and
health care cost trends, among others. Management reviews all assumptions
annually with its independent actuaries, taking into consideration existing
and future economic conditions and the Company's intentions with regard to the
plans. Changes in these assumptions at each year end can increase or decrease
pension or postretirement income or expense for the following year, and the
future obligation, which determines the minimum pension liability included in
shareholders' equity and future funding requirements. In accordance with GAAP,
gains and losses related to the pension and postretirement liabilities are
deferred and recognized over future periods. Management believes its estimates
for 2001, the most significant of which are stated below, to be reasonable.
Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------
Weighted-average discount rate 6.94% 7.00%
Weighted-average rate of
compensation increase 3.54% N/A
Weighted-average expected long-term
rate of return on assets 8.87% N/A
26
DEFERRED TAX ASSETS
In accordance with GAAP, deferred tax assets are recognized for tax credit and
net operating loss carryforwards, reduced by a valuation allowance, which is
established when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management is required to estimate
taxable net income for future years and to use its judgment to determine whether
or not to record a valuation allowance for part or all of a deferred tax asset.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE
- --------------------------------------------------------------------------------
Effective in 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and its related amendment, SFAS 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 Company to increased earnings
volatility. The adoption of SFAS No. 133 in 2001 did not have a material impact
on the Company's consolidated earnings and reduced accumulated other
comprehensive loss by approximately $1 million.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," in 1999, which
interprets generally accepted accounting principles related to revenue
recognition in financial statements. In the fourth quarter of 2000, the Company
changed its method of accounting for sales under its layaway program and
recorded an after-tax expense of $1 million as of the beginning of the fiscal
year, representing the cumulative effect of this change on prior years.
In 1999, the Company adopted a preferred method for calculating the
market-related value of its U.S. pension plan assets used in determining annual
pension expense. As compared with the previous accounting method, 1999 pension
expense was reduced by approximately $5 million (before-tax) or $0.02 per
diluted share. The Company recorded income of approximately $14 million
(before-tax) or $0.06 per diluted share representing the cumulative effect of
this change on prior years.
NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No.
141") and SFAS 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 deemed to have
definite 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 in 2001 and 2000 and $9 million in 1999. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, the Company is
required to adopt SFAS No. 142 effective as of the beginning of fiscal 2002. The
Company does not expect SFAS No. 141 and SFAS No. 142 to have a significant
impact on its results of operations or financial position.
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 Company
intends to adopt SFAS No. 143 as of the beginning of fiscal year 2003. The
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate 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.
The Company is currently evaluating the impact of SFAS No. 143 on its results of
operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 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" ("APB No. 30"). SFAS No. 144 is effective for the Company as
of the beginning of fiscal year 2002. SFAS No. 144 retains the basic provisions
of APB No. 30 for the presentation of discontinued operations in the
27
income statement but broadens that presentation to apply to a component of an
entity rather than a segment of a business. The pronouncement now provides for a
single accounting model for reporting long-lived assets to be disposed of by
sale. The Company does not expect SFAS No. 144 to have a significant impact on
its results of operations or financial position.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This report, including the Shareholders' Letter, the material following the
Shareholders' Letter, and 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 Company 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 Company's business and
operations, including future cash flows, revenues and earnings, and other such
matters are forward-looking statements. These forward-looking statements are
based on many assumptions and factors, including, but not limited to, the
effects of currency fluctuations, customer demand, fashion trends, competitive
market forces, uncertainties related to the effect of competitive products and
pricing, customer acceptance of the Company's merchandise mix and retail
locations, unseasonable weather, risks associated with foreign global sourcing,
including political instability and changes in import regulations, economic
conditions worldwide, and the ability of the Company to execute its business
plans effectively with regard to each of its business units. Any changes in such
assumptions or factors could produce significantly different results. The
Company undertakes no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise.
28
MANAGEMENT'S REPORT
The integrity and objectivity of the financial statements and other financial
information presented in this annual report are the responsibility of the
management of the Company. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and include, when necessary, amounts based on the best estimates and
judgments of management.
The Company maintains a system of internal controls designed to provide
reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization and the
accounting records provide a reliable basis for the preparation of the financial
statements. The system of internal accounting controls is continually reviewed
by management and improved and modified as necessary in response to changing
business conditions. The Company also maintains an internal audit function for
evaluating and formally reporting on the adequacy and effectiveness of internal
accounting controls, policies and procedures.
The Company's financial statements have been audited by KPMG LLP, the
Company's independent auditors, whose report expresses their opinion with
respect to the fairness of the presentation of the statements.
The Audit Committee of the Board of Directors, which is comprised solely
of directors who are not officers or employees of the Company, meets regularly
with the Company's management, internal auditors, legal counsel and KPMG LLP to
review the activities of each group and to satisfy itself that each is properly
discharging its responsibility. In addition, the Audit Committee meets on a
periodic basis with KPMG LLP, without management's presence, to discuss the
audit of the financial statements as well as other auditing and financial
reporting matters. The Company's internal auditors and independent auditors
have direct access to the Audit Committee.
/s/ Matthew D. Serra
MATTHEW D. SERRA,
President and
Chief Executive Officer
/s/ Bruce L. Hartman
BRUCE L. HARTMAN,
Senior Vice President and
Chief Financial Officer
April 17, 2002
INDEPENDENT AUDITORS' REPORT
[KPMG LOGO]
To the Board of Directors and Shareholders of Foot Locker, Inc.
We have audited the accompanying consolidated balance sheets of Foot
Locker, Inc. (formerly Venator Group, Inc.) and subsidiaries as of February 2,
2002 and February 3, 2001 and the related consolidated statements of operations,
comprehensive income (loss), shareholders' equity and cash flows for each of the
years in the three-year period ended February 2, 2002. These consolidated
financial statements are the responsibility of Foot Locker, Inc. management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Foot Locker,
Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 2, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for derivative financial instruments
and hedging activities in 2001.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for sales under its layaway program in
2000.
As discussed in note 18 to the consolidated financial statements, the
Company changed its method of calculating the market-related value of its U.S.
pension plan assets in 1999.
/s/ KPMG LLP
New York, NY
March 13, 2002
29
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
SALES $ 4,379 $ 4,356 $ 4,263
Costs and Expenses
Cost of sales 3,071 3,047 3,099
Selling, general and administrative expenses 923 975 985
Depreciation and amortization 154 151 169
Restructuring charges 34 1 85
Interest expense, net 24 22 51
- ------------------------------------------------------------------------------------------------------------------------
4,206 4,196 4,389
Other income (2) (16) (223)
- ------------------------------------------------------------------------------------------------------------------------
4,204 4,180 4,166
- ------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 175 176 97
Income tax expense 64 69 38
- ------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 111 107 59
- ------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations, net of income tax benefit
of $(15) and $(27), respectively -- (50) (42)
(Loss) income on disposal of discontinued operations, net of income
tax expense of $--, $42 and $14, respectively (19) (296) 23
Cumulative effect of accounting change, net of income
tax expense (benefit) of $--, $-- and $6, respectively -- (1) 8
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 92 $ (240) $ 48
========================================================================================================================
Basic earnings per share:
Income from continuing operations $ 0.79 $ 0.78 $ 0.43
Loss from discontinued operations (0.13) (2.51) (0.14)
Cumulative effect of accounting change -- (0.01) 0.06
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.66 $ (1.74) $ 0.35
========================================================================================================================
Diluted earnings per share:
Income from continuing operations $ 0.77 $ 0.77 $ 0.43
Loss from discontinued operations (0.13) (2.49) (0.14)
Cumulative effect of accounting change -- (0.01) 0.06
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.64 $ (1.73) $ 0.35
========================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 92 $(240) $48
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment:
Translation adjustment arising during the period (12) (19) 4
Less: reclassification adjustment for net loss included in (loss) income
on disposal of discontinued operations -- 118 --
- ------------------------------------------------------------------------------------------------------------------------
Net foreign currency translation adjustment (12) 99 4
Cash flow hedges:
Cumulative effect of accounting change, net of income tax expense of $1 1 -- --
Change in fair value of derivatives, net of income tax -- -- --
Reclassification adjustments, net of income tax benefit of $1 (1) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net change in cash flow hedges -- -- --
Minimum pension liability adjustment, net of deferred tax expense
(benefit) of $(71), $2 and $26, respectively (115) 2 41
- ------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (35) $(139) $93
========================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
30
CONSOLIDATED BALANCE SHEETS
(in millions) 2001 2000
- --------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 215 $ 109
Merchandise inventories 793 730
Assets held for disposal -- 31
Net assets of discontinued operations 4 37
Other current assets 102 107
- --------------------------------------------------------------------------------------------------------------
1,114 1,014
PROPERTY AND EQUIPMENT, NET 637 684
DEFERRED TAXES 251 231
GOODWILL, NET 135 143
ASSETS OF BUSINESS TRANSFERRED UNDER CONTRACTUAL ARRANGEMENT (NOTE RECEIVABLE) 30 --
OTHER ASSETS 123 168
- --------------------------------------------------------------------------------------------------------------
$2,290 $2,240
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 272 $ 264
Accrued liabilities 211 233
Current portion of repositioning and restructuring reserves 6 13
Current portion of reserve for discontinued operations 16 76
Current portion of long-term debt and obligations under capital leases 34 54
- --------------------------------------------------------------------------------------------------------------
539 640
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 365 259
LIABILITIES OF BUSINESS TRANSFERRED UNDER CONTRACTUAL ARRANGEMENT 12 --
OTHER LIABILITIES 382 328
SHAREHOLDERS' EQUITY 992 1,013
- --------------------------------------------------------------------------------------------------------------
$2,290 $2,240
==============================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
(shares in thousands, amounts in millions) Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK AND PAID-IN CAPITAL
Par value $.01 per share,
500 million shares authorized
Issued at beginning of year 138,691 $ 351 137,542 $ 337 135,654 $ 328
Restricted stock issued under stock option
and award plans 210 (2) -- (1) 1,255 --
Forfeitures of restricted stock -- 1 -- 3 -- 1
Amortization of stock issued under restricted
stock option plans -- 2 -- 2 -- 3
Issued under director and employee stock plans,
net of related tax benefit 1,080 11 1,149 10 633 5
- -----------------------------------------------------------------------------------------------------------------------------
Issued at end of year 139,981 363 138,691 351 137,542 337
- -----------------------------------------------------------------------------------------------------------------------------
Common stock in treasury at beginning of year (200) (2) (100) (1) (19) --
Reissued under employee stock plans 192 1 113 1 104 --
Restricted stock issued under stock option and
award plans 210 2 100 1 -- --
Forfeitures of restricted stock (270) (1) (312) (3) (185) (1)
Exchange of options (2) -- (1) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Common stock in treasury at end of year (70) -- (200) (2) (100) (1)
- -----------------------------------------------------------------------------------------------------------------------------
Common stock outstanding and paid-in capital
at end of year 139,911 363 138,491 349 137,442 336
- -----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 705 945 897
Net income (loss) 92 (240) 48
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 797 705 945
- -----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY BEFORE ADJUSTMENTS 1,160 1,054 1,281
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign Currency Translation Adjustment
Balance at beginning of year (41) (140) (144)
Aggregate translation adjustment (12) 99 4
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year (53) (41) (140)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flow Hedges
Balance at beginning of year -- -- --
Change during year, net of income tax -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year -- -- --
Minimum Pension Liability Adjustment
Balance at beginning of year -- (2) (43)
Change during year, net of deferred
tax expense (benefit) (115) 2 41
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year (115) -- (2)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS (168) (41) (142)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 992 $1,013 $1,139
=============================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
FROM OPERATING ACTIVITIES
Net income (loss) $ 92 $(240) $ 48
Adjustments to reconcile net income (loss) to net cash provided
by operating activities of continuing operations:
Loss (income) on disposal of discontinued operations, net of tax 19 296 (23)
Loss from discontinued operations, net of tax -- 50 42
Restructuring charges 34 1 85
Cumulative effect of accounting change, net of tax -- 1 (8)
Depreciation and amortization 154 151 169
Impairment of long-lived assets 2 -- 13
Restricted stock compensation expense 2 2 3
Tax benefit on stock compensation 2 2 --
Gains on sales of real estate (1) (10) (46)
Gains on sales of assets and investments (1) (5) (177)
Deferred income taxes 38 21 --
Change in assets and liabilities, net of acquisitions and dispositions:
Merchandise inventories (69) (36) 18
Accounts payable and other accruals 9 36 (45)
Repositioning and restructuring reserves (62) (38) (12)
Income taxes payable (45) 7 (25)
Other, net 10 10 (5)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of continuing operations 184 248 37
- -----------------------------------------------------------------------------------------------------------------------------
FROM INVESTING ACTIVITIES
Proceeds from sales of assets and investments 19 7 271
Proceeds from sales of real estate 1 18 36
Capital expenditures (116) (94) (152)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities of continuing operations (96) (69) 155
- -----------------------------------------------------------------------------------------------------------------------------
FROM FINANCING ACTIVITIES
Decrease in short-term debt -- (71) (179)
Issuance of convertible long-term debt 150 -- --
Debt issuance costs (8) -- --
Reduction in long-term debt (58) (100) (101)
Reduction in capital lease obligations (4) (5) (6)
Issuance of common stock 9 9 5
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities of continuing operations 89 (167) (281)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (75) (67) 64
- -----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE FLUCTUATIONS
ON CASH AND CASH EQUIVALENTS 4 2 (6)
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 106 (53) (31)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 109 162 193
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 215 $ 109 $ 162
=============================================================================================================================
CASH PAID DURING THE YEAR:
Interest $ 36 $ 36 $ 66
Income taxes $ 35 $ 31 $ 22
=============================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Foot Locker, Inc.
and its domestic and international subsidiaries (the "Company"), all of which
are wholly-owned. All significant intercompany amounts have been eliminated. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent liabilities at the date of the financial
statements, and the reported amounts of revenue and expense during the reporting
period. Actual results may differ from those estimates.
NAME CHANGE
The Company (formerly Venator Group, Inc.) changed its name to Foot Locker, Inc.
effective November 1, 2001.
REPORTING YEAR
The reporting period for the Company is the Saturday closest to the last day in
January. Fiscal years 2001 and 1999 represented the 52 weeks ended February 2,
2002 and January 29, 2000, respectively. Fiscal 2000 ended February 3, 2001 and
included 53 weeks. References to years in this annual report relate to fiscal
years rather than calendar years.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
MERCHANDISE INVENTORIES AND COST OF SALES
Merchandise inventories are valued at the lower of cost or market using the
retail inventory method. Cost for retail stores is determined on the last-in,
first-out (LIFO) basis for domestic inventories and on the first-in, first-out
(FIFO) basis for international inventories. Merchandise inventories of the
Direct to Customers business are valued at FIFO cost. Transportation,
distribution center and sourcing costs are capitalized in merchandise
inventories.
Cost of sales is comprised of the cost of merchandise, occupancy,
buyers' compensation and shipping and handling costs.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation and
amortization. Significant additions and improvements to property and equipment
are capitalized. Maintenance and repairs are charged to current operations as
incurred. Major renewals or replacements that substantially extend the useful
life of an asset are capitalized and depreciated. Owned property and equipment
is depreciated on a straight-line basis over the estimated useful lives of the
assets: 25 to 45 years for buildings and 3 to 10 years for furniture, fixtures
and equipment. Property and equipment under capital leases and improvements to
leased premises are generally amortized on a straight-line basis over the
shorter of the estimated useful life of the asset or the remaining lease term.
Capitalized software reflects certain costs related to software developed for
internal use that are capitalized and amortized, after substantial completion
of the project, on a straight-line basis over periods not exceeding 8 years.
Capitalized software, net of accumulated amortization, is included in property
and equipment and was $68.8 million at February 2, 2002 and $83.6 million at
February 3, 2001. Effective as of the beginning of 2003, the Company will accrue
and record asset retirement related costs equal to the discounted liability, in
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations."
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess purchase price over the fair value of assets
acquired and is amortized on a straight-line basis over periods not exceeding 40
years. Goodwill arising from acquisitions made since 1995 is amortized over
periods not exceeding 20 years. Recoverability of goodwill is evaluated based
upon estimated future profitability and cash flows. Accumulated amortization
amounted to $68.6 million and $61.1 million at February 2, 2002 and February 3,
2001, respectively. Intangible assets primarily reflect lease acquisition
costs and are included in other assets in the Consolidated Balance Sheets.
Effective July 1, 2001, all business combinations must be accounted for
under the purchase method of accounting, in accordance with SFAS No. 141,
"Business Combinations." Beginning in 2002, goodwill and intangible assets with
indefinite lives will no longer be amortized but reviewed for impairment if
impairment indicators arise and, at a minimum, annually, in accordance with
SFAS No. 142, "Goodwill and Intangible Assets." Separable intangible assets that
are deemed to have definite lives will continue to be amortized over their
useful lives (but with no maximum life). Amortization expense related to
goodwill was $7.5 million in 2001, $7.7 million in 2000 and $8.5 million in
1999.
34
DERIVATIVE FINANCIAL INSTRUMENTS
In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and its related amendment, SFAS 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 Company to increased earnings
volatility. The adoption of SFAS No. 133 in 2001 did not have a material impact
on the Company's consolidated earnings and reduced accumulated other
comprehensive loss by approximately $1 million.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. The carrying value of
cash and cash equivalents, other current receivables and short-term debt
approximate fair value due to the short-term maturities of these assets and
liabilities. Quoted market prices of the same or similar instruments are used
to determine fair value of long-term debt and forward foreign exchange
contracts. Discounted cash flows are used to determine the fair value of
long-term investments and notes receivable if quoted market prices on these
instruments are unavailable.
RECOVERABILITY OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), an
impairment loss is recognized whenever events or changes in circumstances
indicate that the carrying amounts of long-lived tangible and intangible assets
may not be recoverable. Assets are grouped and evaluated at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets. The Company has identified this lowest level to
be principally individual stores. The Company considers historical performance
and future estimated results in its evaluation of potential impairment and then
compares the carrying amount of the asset with the estimated future cash flows
expected to result from the use of the asset. If the carrying amount of the
asset exceeds estimated expected undiscounted future cash flows, the Company
measures the amount of the impairment by comparing the carrying amount of the
asset with its fair value. The estimation of fair value is generally measured by
discounting expected future cash flows at the rate the Company utilizes to
evaluate potential investments. The Company estimates fair value based on the
best information available using estimates, judgments and projections as
considered necessary.
Effective as of the beginning of 2002, the Company will adopt SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), which supersedes SFAS No. 121 as well as the accounting and reporting
requirements of Accounting Principles Board 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" ("APB
No. 30"). SFAS No. 144 retains the basic provisions of APB No. 30 for the
presentation of discontinued operations in the income statement but broadens
that presentation to apply to a component of an entity rather than a segment
of a business. The pronouncement now provides for a single accounting model for
reporting long-lived assets to be disposed of by sale.
STOCK-BASED COMPENSATION
The Company 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." 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 since the plan is non-compensatory as defined in APB No. 25.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's international operations is the
applicable local currency. The translation of the applicable foreign currency
into U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using the weighted-average rates of exchange prevailing during the year. The
unearned gains and losses resulting from such translation are included as a
separate component of accumulated other comprehensive loss within shareholders'
equity.
35
Income Taxes
The Company determines its deferred tax provision under the liability method,
whereby deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using presently enacted tax rates.
Deferred tax assets are recognized for tax credit and net operating loss
carryforwards, reduced by a valuation allowance, which is established when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
Provision for U.S. income taxes on undistributed earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered to
be permanently reinvested.
REVENUE RECOGNITION
Revenue from retail store sales is recognized when the product is delivered to
customers. Retail sales include merchandise, net of returns and exclude all
taxes. In the fourth quarter of 2000, the Company changed its method of
accounting for sales under its layaway program, in accordance with SEC 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, and would not have been material to 1999.
Revenue from Internet and catalog sales is recognized when the product is
shipped to customers. Sales include shipping and handling fees for all periods
presented.
STORE PRE-OPENING AND CLOSING COSTS
Store pre-opening costs are charged to expense as incurred. In the event a store
is closed before its lease has expired, the estimated post-closing lease exit
costs, less sublease rental income, if any, is provided for when a decision to
close the store is made.
ADVERTISING COSTS
Advertising and sales promotion costs are expensed at the time the advertising
or promotion takes place. Advertising costs as a component of selling, general
and administrative expenses were $77.8 million in 2001, $79.5 million in 2000
and $76.0 million in 1999. Advertising costs are recorded net of reimbursements
for cooperative advertising.
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.
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------
NUMERATOR:
Income from continuing operations $ 111 $ 107 $ 59
Effect of Dilution:
Convertible debt 3 -- --
- --------------------------------------------------------------------------------------------------
Income from continuing operations
assuming dilution $ 114 $ 107 $ 59
==================================================================================================
DENOMINATOR:
Weighted-average common
shares outstanding 139.4 137.9 137.2
Effect of Dilution:
Stock options and awards 1.3 1.2 1.0
Convertible debt 6.2 -- --
- --------------------------------------------------------------------------------------------------
Weighted-average common shares
outstanding assuming dilution 146.9 139.1 138.2
==================================================================================================
Options to purchase 3.1 million, 4.5 million and 7.3 million
shares of common stock for the years ended February 2, 2002, February 3, 2001
and January 29, 2000, respectively, were not included in the computations
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.
INSURANCE LIABILITIES
The Company is primarily self-insured for health care, workers' compensation and
general liability costs. Accordingly, provisions are made for the Company's
actuarially determined estimates of discounted future claim costs for such
risks. Imputed interest expense related to these liabilities was $2 million in
2001 and $1 million in both 2000 and 1999.
RECLASSIFICATIONS
Certain balances in prior fiscal years have been reclassified to conform to the
presentation adopted in the current year.
36
2. DISCONTINUED OPERATIONS
On January 23, 2001, the Company announced that it was exiting its 694 store
Northern Group segment. The Company 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 Company held its investment in the segment and asset write-offs of
$19 million. The Company 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 Company 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, the Company
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 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 Company 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."
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 7.0 percent annually
beginning on September 28, 2002 and is to be paid semi-annually. Additional
payments to the Company 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
Company, in an amount not less than CAD$25 million (approximately US$17
million). The Company 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 Company has
subordinated its interest to permitted encumbrances as defined in the credit
agreement.
In the fourth quarter of 2001, the Company further reduced its estimate
for real estate costs by $5 million based on current negotiations, which was
completely offset by increased severance, personnel and other disposition costs.
Net disposition activity of $116 million in 2001 included real estate
disposition activity of $46 million, severance of $8 million, asset
impairments of $23 million, operating losses of $28 million, a $5 million
interest expense allocation based on intercompany debt balances and other costs
of $6 million. Of the remaining reserve balance of $11 million at February 2,
2002, $5 million is expected to be utilized within twelve months and the
remaining $6 million thereafter.
The net loss from discontinued operations for 2000 and 1999 represents
sales of $335 million and $407 million, respectively, and includes interest
expense allocations of $10 million and $6 million, respectively, based on
intercompany debt balances. The net loss from discontinued operations includes
restructuring charges of $3 million and $59 million in 2000 and 1999,
respectively, and long-lived asset impairment charges of $4 million in 2000.
In 1998, the Company exited both its International General Merchandise and
Specialty Footwear segments. In the second quarter of 2001, the Company recorded
a tax benefit of $1 million related to the settlement of tax liabilities in
Germany. In the fourth quarter of 2001, the Company reached a final settlement
regarding the 1994 Woolco sale transaction in Canada and recorded a charge of
approximately $4 million pre-tax. There was no tax benefit related to the fourth
quarter charge and both transactions were associated with the International
General Merchandise segment. In 1997, the Company announced that it was exiting
its Domestic General Merchandise segment. In the fourth quarter of 2001, the
Company recorded a charge to the reserve of $3 million before-tax, or $2 million
after-tax, reflecting revisions to original estimates for legal costs
associated with exiting the segment. The remaining reserve balances totaled $27
million as of February 2, 2002, $11 million of which is expected to be utilized
within twelve months and the remaining $16 million thereafter.
37
The major components of the pre-tax losses (gains) on disposal and
disposition activity related to the reserves is presented below:
NORTHERN GROUP 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net CHARGE/ NET
(in millions) (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Realized loss on currency movement $118 $(118) $ -- $ -- $ -- $ --
Asset write-offs & impairments 19 (19) -- 23 (23) --
Real estate & lease liabilities 68 -- 68 (16) (46) 6
Severance & personnel 23 -- 23 (13) (8) 2
Operating losses & other costs 24 -- 24 18 (39) 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $252 $(137) $ 115 $ 12 $(116) $ 11
====================================================================================================================================
INTERNATIONAL GENERAL MERCHANDISE 1998 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net Charge/ Net CHARGE/ NET
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Woolco $-- $ -- $ -- $-- $-- $-- $-- $ 4 $(4) $--
The Bargain! Shop 41 (13) (18) 10 3 (6) 7 -- (1) 6
- ------------------------------------------------------------------------------------------------------------------------------------
Total $41 $(13) $(18) $10 $ 3 $(6) $ 7 $ 4 $(5) $ 6
====================================================================================================================================
SPECIALTY FOOTWEAR 1998 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net Charge/ Net CHARGE/ NET
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Lease liabilities $ 76 $(34) $(27) $15 $ 1 $ (7) $ 9 $-- $(2) $7
Operating losses & other
costs 26 (5) (8) 13 (6) (4) 3 -- (1) 2
Inventory liquidation 2 -- (2) -- -- -- -- -- -- --
Fixed asset write-offs 11 (2) (9) -- -- -- -- -- -- --
Severance & personnel 6 (4) (2) -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $121 $(45) $(48) $28 $(5) $(11) $12 $-- $(3) $9
====================================================================================================================================
DOMESTIC GENERAL MERCHANDISE 1998 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net Charge/ Net CHARGE/ NET
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Lease liabilities $21 $18 $(23) $16 $4 $(4) $16 $-- $(6) $10
Legal and other costs 14 3 (10) 7 - (5) 2 3 (3) 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total $35 $21 $(33) $23 $4 $(9) $18 $3 $(9) $12
====================================================================================================================================
38
The results of operations and assets and liabilities for the Northern
Group segment, the International General Merchandise segment, the Specialty
Footwear segment and the Domestic General Merchandise segment have been classi-
fied as discontinued operations for all periods presented in the Consolidated
Statements of Operations and Consolidated Balance Sheets.
Presented below is a summary of the net assets of discontinued
operations, excluding those transferred under contractual arrangement, at
February 2, 2002 and February 3, 2001. The Northern Group's assets at February
2, 2002 comprised inventory, fixed assets and other current assets. The Northern
Group's liabilities at February 2, 2002, comprised accounts payable,
restructuring reserves and other accrued liabilities. The assets of the
Specialty Footwear and Domestic General Merchandise segments consisted primarily
of fixed assets and deferred tax assets and liabilities reflect accrued
liabilities.
Domestic
Northern Specialty General
(in millions) Group Footwear Merchandise Total
- -----------------------------------------------------------------------------------------
2001
Assets $ 1 $2 $8 $11
Liabilities 3 1 3 7
- -----------------------------------------------------------------------------------------
Net assets (liabilities)
of discontinued operations $(2) $1 $5 $ 4
=========================================================================================
2000
Assets $64 $3 $8 $75
Liabilities 33 1 4 38
- -----------------------------------------------------------------------------------------
Net assets
of discontinued operations $31 $2 $4 $37
=========================================================================================
3. RESTRUCTURING RESERVES
1999 RESTRUCTURING
Total restructuring charges of $96 million before-tax were recorded in 1999 for
the Company's restructuring program. In the second quarter of 1999, the Company
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 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, Canada and Asia, corporate headcount reduction and a
distribution center shutdown.
During 1999, the Company recorded restructuring charges of $63 million
pre-tax, or $38 million after-tax, associated with its plan to sell or liquidate
the eight 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 and the
Company recorded additional restructuring charges of $8 million. 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 the second quarter of 2001, the Company 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
Company completed the sale of assets related to its Burger King and Popeye's
franchises for cash proceeds of approximately $5 million. In connection with
these dispositions, the Company recorded a restructuring charge of approximately
$1 million before-tax in the third quarter of 2001. The remaining reserve
balance at February 2, 2002 totaled $4 million, $3 million of which is expected
to be utilized within twelve months.
The 1999 accelerated store-closing program comprised all remaining Foot
Locker stores in Asia and 150 stores in the United States and Canada. Total
restructuring charges of $13 million were recorded and the program was
essentially completed in 2000. During 2000, management decided to continue to
operate 32 stores included in the program as a result of favorable lease renewal
terms offered during negotiations with landlords. The impact on the reserve
was not significant and was, in any event, offset by lease buy-out costs for
other stores in excess of original estimates. Of the original 1,400 planned
terminations associated with the store-closing program, approximately 200
positions were retained as a result of the continued operation of the 32 stores.
In connection with the disposition of several of its non-core businesses,
the Company 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 Company closed its
Champs Sports distribution center in Maumelle, Arkansas and consolidated its
operations with the Foot Locker facility located in Junction City, Kansas. Total
restructuring charges of $20 million were recorded in 1999 and approximately 400
positions were eliminated. In 2000, the Company recorded a reduction to the
corporate reserve of $7 million, $5 million of 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. A further $2 million reduction reflected better than anticipated real
estate and severance payments. In the fourth quarter of 2001, the Company
entered into negotiations to terminate the leased Maumelle distribution center
in 2002 and recorded a $1 million restructuring charge.
Included in the consolidated results of operations are sales of $54
million, $139 million and $353 million and operating losses of $12 million, $4
million and $40 million in 2001, 2000 and 1999, respectively, for the above
non-core businesses and under-performing stores, excluding Team Edition.
39
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 $31 million as of February 3, 2001, were reclassified as assets
held for disposal in the Consolidated Balance Sheet. As previously mentioned,
the assets of Team Edition were not reflected as assets held for disposal as of
February 3, 2001 as management had decided to retain its operations. As of
February 2, 2002, the disposition of all businesses previously held for disposal
was completed.
The components of the restructuring charges and disposition activity
related to the reserves is presented below:
NON-CORE BUSINESSES 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net Charge/ Net CHARGE/ NET
(in millions) (Income) Usage Balance (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate $ 20 $ (4) $ 16 $ 1 $(13) $ 4 $-- $ (3) $ 1
Inventory 11 (11) -- -- -- -- -- -- --
Asset impairment 21 (21) -- 5 (5) -- 30 (30) --
Severance & personnel 2 -- 2 3 (3) 2 -- (2) --
Other disposition costs 9 (3) 6 (1) (2) 3 3 (3) 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 63 $(39) $ 24 $ 8 $(23) $ 9 $33 $(38) $ 4
====================================================================================================================================
ACCELERATED STORE-CLOSING PROGRAM 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net Charge/ Net CHARGE/ NET
(in millions) (Income) Usage Balance (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate $ 3 $-- $ 3 $-- $(3) $-- $-- $-- $--
Inventory -- -- -- -- -- -- -- -- --
Asset impairment 8 (8) -- -- -- -- -- -- --
Severance & personnel 1 -- 1 -- (1) -- -- -- --
Other disposition costs 1 -- 1 -- (1) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $13 $(8) $ 5 $-- $(5) $-- $-- $-- $--
====================================================================================================================================
CORPORATE OVERHEAD AND LOGISTICS 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net Charge/ Net CHARGE/ NET
(in millions) (Income) Usage Balance (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate $ 3 $-- $ 3 $(1) $(2) $-- $ 1 $-- $ 1
Inventory -- -- -- -- -- -- -- -- --
Asset impairment 2 (2) -- -- -- -- -- -- --
Severance & personnel 14 (3) 11 (1) (8) 2 -- (2) --
Other disposition costs 1 -- 1 (5) 4 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $20 $(5) $15 $(7) $(6) $ 2 $ 1 $(2) $ 1
====================================================================================================================================
TOTAL RESTRUCTURING RESERVES 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Charge/ Net Charge/ Net CHARGE/ NET
(in millions) (Income) Usage Balance (Income) Usage Balance (INCOME) USAGE BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate $ 26 $ (4) $ 22 $-- $(18) $ 4 $ 1 $ (3) $ 2
Inventory 11 (11) -- -- -- -- -- -- --
Asset impairment 31 (31) -- 5 (5) -- 30 (30) --
Severance & personnel 17 (3) 14 2 (12) 4 -- (4) --
Other disposition costs 11 (3) 8 (6) 1 3 3 (3) 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 96 $(52) $ 44 $ 1 $(34) $ 11 $ 34 $(40) $ 5
====================================================================================================================================
40
1993 REPOSITIONING AND 1991 RESTRUCTURING RESERVES
The Company 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 repo-
sitioning program, approximately 970 stores were identified for closing.
Approximately 900 stores were closed under the 1991 restructuring program.
Payments charged to the reserve, net of sublease income, amounted to $3
million in 2001 and 1999 and $4 million in 2000. Imputed interest expense on the
net present value of lease obligations was $1 million in 2000 and $2 million in
1999. Operating results in 1999 included an adjustment of $11 million, which
primarily reflected sublease and other income relating to owned and leased
properties. The remaining reserve balance of $3 million at February 2, 2002 is
required to satisfy future lease obligations and cancellations of $1 million and
facilities-related costs of $2 million. Of the remaining reserve balance, $2
million is expected to be paid in 2002.
4. OTHER INCOME
Other income included real estate gains from the sale of corporate properties of
$1 million and $11 million, respectively, in 2001 and 2000. Other income in 2000
also reflected a $6 million gain associated with the demutualization of the
Metropolitan Life Insurance Company, offset by a $1 million adjustment to the
1998 gain on sale of the Garden Centers nursery business.
In 1999, the Company completed the sale of the assets of its
Afterthoughts retail chain for gross proceeds of $250 million and recorded a
gain of $164 million before-tax, or $100 million after-tax, from the sale, which
was increased by $1 million in 2001. The Company also completed the public
offering of 100 percent of its holding in Colorado Group, Ltd., in Australia in
1999 for gross proceeds of $75 million, which included the repayment of a $20
million intercompany loan and recorded a pre-tax gain of $13 million to
continuing operations. Included in the consolidated results of operations are
sales of $184 million and operating profit of $10 million in 1999 for
Afterthoughts and Colorado. In addition, the Company recorded real estate gains
of $29 million related to the sale of other corporate properties and a net gain
of $17 million in connection with terminating the lease of its former corporate
headquarters building in New York.
5. IMPAIRMENT OF LONG-LIVED ASSETS
The Company recorded non-cash pre-tax asset impairment charges of $30 million,
$5 million and $31 million, related to assets held for sale in 2001, 2000 and
1999, respectively. The charges recorded in 2001 and 2000 primarily related to
the disposition of The San Francisco Music Box Company, which was sold in 2001.
The $31 million charge in 1999 in connection with the Company's restructuring
program represented impairment of goodwill of $5 million and other long-lived
assets such as properties, store fixtures and leasehold improvements of $26
million. Of the total impairment loss recognized, $28 million related to
Athletic Stores. Corporate assets and formats included in the "All Other"
category were impaired by $2 million and $1 million, respectively. The
impairment losses were included in the net restructuring charges of $34 million,
$1 million and $85 million recorded in 2001, 2000 and 1999, respectively.
In addition, the Company recorded non-cash pre-tax charges in selling,
general and administrative expenses of approximately $2 million and $8 million
in 2001 and 1999, respectively, which represented impairment of long-lived
assets such as properties, store fixtures and leasehold improvements related
to Athletic Stores. Corporate expense also included a $5 million charge in 1999
related to the impairment of capitalized software.
6. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are based
on its method of internal reporting, which disaggregates its business by product
category. As of February 2, 2002, the Company has two reportable segments,
Athletic Stores, which sells athletic footwear and apparel through its various
retail stores and Direct to Customers, which includes the Company's catalogs and
Internet business. All formats presented as "All Other" were disposed of as of
February 2, 2002.
41
The accounting policies of both segments are the same as those described in the
"Summary of Significant Accounting Policies." The Company evaluates performance
based on several factors, of which the primary financial measure is operating
results. Operating results reflects income from continuing operations before
income taxes, net corporate expense and net interest expense.
SALES
(in millions) 2001 2000 1999
- ---------------------------------------------------------------------------------
Athletic Stores $3,999 $3,954 $3,705
Direct to Customers 326 279 217
- ---------------------------------------------------------------------------------
4,325 4,233 3,922
All Other 54 123 341
- ---------------------------------------------------------------------------------
Total sales $4,379 $4,356 $4,263
=================================================================================
OPERATING RESULTS
(in millions) 2001 2000 1999
Athletic Stores(1) $283 $271 $ 14
Direct to Customers 24 1 3
- ---------------------------------------------------------------------------------
307 272 17
All Other(2) (44) (12) 174
- ---------------------------------------------------------------------------------
Operating profit 263 260 191
Corporate expense, net(3) 64 62 43
Interest expense, net 24 22 51
- ---------------------------------------------------------------------------------
Income from continuing operations
before income taxes $175 $176 $ 97
=================================================================================
(1) 2000 includes a $4 million reduction in the 1999 restructuring charge. 1999
includes restructuring charges of $71 million ($11 million recorded in cost
of sales), offset by Colorado gain of $13 million.
(2) 2001 includes restructuring charges of $33 million, offset by a $1 million
adjustment to the Afterthoughts gain. 2000 includes restructuring charges
of $11 million. 1999 includes Afterthoughts gain of $164 million, offset by
restructuring charges of $4 million.
(3) 2001 and 1999 include restructuring charges of $1 million and $21 million,
respectively. 2000 includes a $6 million reduction in the 1999
restructuring charge.
Depreciation and
Amortization Capital Expenditures Total Assets
--------------------------------------------------------------------------------------
(in millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Athletic Stores $ 115 $ 113 $ 118 $ 106 $ 66 $ 103 $1,466 $1,359 $1,438
Direct to Customers 11 9 8 4 7 2 179 175 159
- -------------------------------------------------------------------------------------------------------------------------------
126 122 126 110 73 105 1,645 1,534 1,597
All Other 10 1 12 36 56
Corporate 28 29 33 6 20 35 611 633 739
Assets of business transferred under
contractual arrangement 30
Discontinued operations, net 4 37 55
- -------------------------------------------------------------------------------------------------------------------------------
Total Company $ 154 $ 151 $ 169 $ 116 $ 94 $ 152 $2,290 $2,240 $2,447
===============================================================================================================================
Sales and long-lived asset information by geographic area as of and for the
fiscal years ended February 2, 2002, February 3, 2001 and January 30, 1999 are
presented below. Sales are attributed to the country in which the sales
originate, which is where the legal subsidiary is domiciled. Long-lived assets
reflect property and equipment. No individual country included in the
International category is significant.
SALES
(in millions) 2001 2000 1999
- -------------------------------------------------------------
United States $3,686 $3,756 $3,663
International 693 600 600
- -------------------------------------------------------------
Total sales $4,379 $4,356 $4,263
=============================================================
</Table>
LONG-LIVED ASSETS
(in millions) 2001 2000 1999
- -------------------------------------------------------------
United States $ 549 $ 610 $ 682
International 88 74 72
- -------------------------------------------------------------
Total long-lived assets $ 637 $ 684 $ 754
=============================================================
</Table>
42
7. MERCHANDISE INVENTORIES
- ----------------------------------------------------------------------
(in millions) 2001 2000
- ----------------------------------------------------------------------
LIFO inventories $622 $584
FIFO inventories 171 146
- ----------------------------------------------------------------------
Total merchandise inventories $793 $730
======================================================================
LIFO inventories, calculated on a FIFO basis, would not differ significantly.
8. OTHER CURRENT ASSETS
- ----------------------------------------------------------------------
(in millions) 2000 2001
- ----------------------------------------------------------------------
Net receivables $ 31 $33
Operating supplies and prepaid expenses 31 28
Deferred taxes 40 46
- ----------------------------------------------------------------------
$102 $107
======================================================================
9. PROPERTY AND EQUIPMENT, NET
- -----------------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------------
Land $ 3 $ 3
Buildings:
Owned 34 33
Leased 2 2
Furniture, fixtures and equipment:
Owned 944 916
Leased 19 28
- -----------------------------------------------------------------------
1,002 982
Less: accumulated depreciation (597) (518)
- -----------------------------------------------------------------------
405 464
Alterations to leased and owned buildings,
net of accumulated amortization 232 220
- -----------------------------------------------------------------------
$ 637 $ 684
=======================================================================
</Table>
10. OTHER ASSETS
- -----------------------------------------------------------------------
(in millions) 2000 2001
- -----------------------------------------------------------------------
Lease acquisition costs $ 67 $ 63
Pension benefits -- 56
Investments and notes receivable 23 23
Income taxes receivable 15 11
Other 18 15
- -----------------------------------------------------------------------
$123 $168
=======================================================================
11. ACCRUED LIABILITIES
- ----------------------------------------------------------------------
(in millions) 2000 2001
- ----------------------------------------------------------------------
Incentive bonuses $ 32 $ 47
Other payroll and related costs 37 41
Taxes other than income taxes 22 17
Income taxes payable 6 24
Store closings and real estate related costs 16 17
Pension and postretirement benefits 9 9
Other operating costs 89 78
- ----------------------------------------------------------------------
$211 $233
======================================================================
12. SHORT-TERM DEBT
- --------------------------------------------------------------------------------
At February 2, 2002, the Company had unused domestic lines of credit of $171
million, pursuant to a $190 million unsecured revolving credit agreement, which
also provided for $19 million outstanding standby letters of credit. The Company
has additional informal agreements with certain banks in the United States and
internationally.
On June 8, 2001, the Company amended its revolving credit agreement with
several lending institutions, which included the reduction of the facility
available for general corporate purposes from $300 million to $190 million. The
agreement includes various restrictive covenants with which the Company is in
compliance. Interest is determined at the time of borrowing based on variable
rates and the Company's fixed charge coverage ratio, as defined in the
agreement. The rates range from LIBOR plus 2.125 percent to LIBOR plus 2.375
percent. Up-front fees paid and direct costs incurred to amend the agreement are
amortized over the life of the facility on a pro-rata basis. In addition, the
Company paid quarterly facility fees of 0.625 percent on the unused portion
based on the Company's 2001 fixed charge coverage ratio. There were no
short-term borrowings during substantially all of 2001. The facility will expire
in June 2004.
Interest expense, including facility fees, related to short-term debt was
$4 million in 2001, $12 million in 2000 and $23 million in 1999.
13. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
- --------------------------------------------------------------------------------
On June 8, 2001, the Company 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 Company's common stock at the option of the holder, at
a conversion price of $15.806 per share. The Company may redeem all or a portion
of the notes at any time on or after June 4, 2004. 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. In 2001, the Company repaid the
$50 million 6.98% medium-term notes that matured in October in addition to
purchasing and retiring $8 million of the $40 million 7.00% medium-term notes
payable in October 2002.
Following is a summary of long-term debt and obligations under capital
leases: (in millions)
(in millions) 2001 2000
- ----------------------------------------------------------
8.50% debentures payable 2022 $200 $200
5.50% convertible notes payable 2008 150 --
7.00% medium-term notes payable 2002 32 40
6.98% medium-term notes payable 2001 -- 50
- ----------------------------------------------------------
Total long-term debt 382 290
Obligations under capital leases 17 23
- ----------------------------------------------------------
399 313
Less: Current portion 34 54
- ----------------------------------------------------------
$365 $259
==========================================================
43
Maturities of long-term debt and minimum rent payments under capital leases
in future periods are:
Long-Term Capital
(in millions) Debt Leases Total
- -----------------------------------------------------------------------------
2002 $ 32 $ 2 $ 34
Beyond 2006 350 15 365
- -----------------------------------------------------------------------------
382 17 399
Less: Current portion 32 2 34
- -----------------------------------------------------------------------------
$350 $15 $365
=============================================================================
Interest expense related to long-term debt and capital lease obligations,
including the amortization of the associated debt issuance costs, was $29
million in 2001, $27 million in 2000 and $39 million in 1999.
14. LEASES
- --------------------------------------------------------------------------------
The Company is obligated under capital and operating leases for a major portion
of its store properties. Some of the store leases contain purchase or renewal
options with varying terms and conditions. Management expects that in the normal
course of business, expiring leases will generally be renewed or, upon making a
decision to relocate, replaced by leases on other premises. Operating lease
periods generally range from 5 to 10 years. Certain leases provide for
additional rent payments based on a percentage of store sales. The present
value of operating leases is discounted using various interest rates ranging
from 6 percent to 13 percent.
Rent expense consists of the following: (in millions)
2001 2000 1999
- --------------------------------------------------------------------
Rent $ 475 $ 464 $ 510
Contingent rent based on sales 11 12 9
Sublease income (1) (1) --
- --------------------------------------------------------------------
Total rent expense $ 485 $ 475 $ 519
====================================================================
Future minimum lease payments under non-cancelable operating leases are:
(in millions)
- --------------------------------------------------------------------------------
2002 $ 330
2003 295
2004 261
2005 234
2006 210
Thereafter 583
- --------------------------------------------------------------------------------
Total operating lease commitments $1,913
- --------------------------------------------------------------------------------
Present value of operating lease commitments $1,372
================================================================================
15. OTHER LIABILITIES
- --------------------------------------------------------------
(in millions) 2001 2000
- --------------------------------------------------------------
Postretirement benefits $148 $162
Pension benefits 144 24
Reserve for discontinued operations 22 76
Deferred taxes 6 8
Repositioning and restructuring reserves 2 4
Other 60 54
- --------------------------------------------------------------
$382 $328
==============================================================
16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
- --------------------------------------------------------------------------------
FOREIGN EXCHANGE RISK MANAGEMENT
The Company 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 Company
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 the methods of assessing hedge
effectiveness and hedge ineffectiveness. 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 year ended February 2, 2002. 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 Company does not hold derivative financial instruments
for trading or speculative purposes.
The primary currencies to which the Company is exposed are the euro, the
British Pound and the Canadian Dollar. When using a forward contract as a
hedging instrument, the Company 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.
The ineffectiveness related to cash flow hedges and the change in fair
value of derivative financial instruments designated as hedges in 2001 was not
material. Other comprehensive income of approximately $1 million, reflecting the
impact of adoption of SFAS No. 133 at February 4, 2001, was substantially
reclassified to earnings in 2001. The Company 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. In 2001, the Company also recorded a loss of
approximately $1 million for the change in fair value of derivative instruments
not designated as hedges, which was offset by a foreign exchange gain related to
the underlying transactions.
44
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of long-term debt was $382 million
and $380 million, respectively, at February 2, 2002, and $290 million and $233
million, respectively, at February 3, 2001. The carrying value and estimated
fair value of long-term investments and notes receivable was $23 million and $20
million, respectively, at February 2, 2002, and $23 million and $19 million,
respectively, at February 3, 2001. The carrying value of cash and cash
equivalents approximates their fair value.
BUSINESS RISK
The retailing business is highly competitive. Price, quality and selection of
merchandise, reputation, store location, advertising and customer service are
important competitive factors in the Company's business. The Company purchases
merchandise from hundreds of vendors worldwide. In 2001, the Company purchased
approximately 47.0 percent of its athletic merchandise from one major vendor.
The Company considers vendor relations to be satisfactory.
17. INCOME TAXES
- --------------------------------------------------------------------------------
Following are the domestic and international components of pre-tax income from
continuing operations:
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Domestic $113 $136 $72
International 62 40 25
- --------------------------------------------------------------------------------
Total pre-tax income $175 $176 $97
================================================================================
The income tax provision consists of the following:
(in millions) 2001 2000 1999
- ---------------------------------------------------------------
CURRENT:
Federal $ 7 $ 22 $ 28
State and local (5) 9 5
International 24 17 5
- ---------------------------------------------------------------
Total current tax provision 26 48 38
- ---------------------------------------------------------------
DEFERRED:
Federal 32 18 (7)
State and local 7 (2) (5)
International (1) 5 12
- ---------------------------------------------------------------
Total deferred tax provision 38 21 --
- ---------------------------------------------------------------
Total income tax provision $ 64 $ 69 $ 38
===============================================================
Provision has been made in the accompanying Consolidated Statements of
Operations for additional income taxes applicable to dividends received or
expected to be received from international subsidiaries. The amount of
unremitted earnings of international subsidiaries, for which no such tax is
provided and which is considered to be permanently reinvested in the
subsidiaries, totaled $95 million at February 2, 2002.
A reconciliation of the significant differences between the federal
statutory income tax rate and the effective income tax rate on pre-tax income
from continuing operations is as follows:
2001 2000 1999
- --------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal tax benefit 3.5 3.0 --
International income taxed at
varying rates (1.0) 12.0 3.3
Foreign tax credit utilization (0.8) (15.0) (1.2)
Increase in valuation allowance -- 3.0 1.2
Change in Canadian tax rates 1.1 -- --
State and local tax settlements (4.1) -- --
Goodwill amortization 1.5 2.0 3.1
Basis differential on disposition
of foreign assets -- -- (5.8)
Targeted jobs credit (0.5) (2.0) --
Other, net 1.9 1.0 3.4
- --------------------------------------------------------------------------
Effective income tax rate 36.6% 39.0% 39.0%
==========================================================================
Items that gave rise to significant portions of the deferred tax accounts
are as follows:
(in millions) 2001 2000
- -----------------------------------------------------------------------
DEFERRED TAX ASSETS:
Tax loss/credit carryforwards $ 160 $ 138
Employee benefits 131 81
Reserve for discontinued operations 10 46
Repositioning and restructuring reserves 5 13
Property and equipment 97 140
Allowance for returns and doubtful accounts 6 8
Straight-line rent 9 9
Other 36 59
- -----------------------------------------------------------------------
Total deferred tax assets 454 494
Valuation allowance (148) (201)
- -----------------------------------------------------------------------
Total deferred tax assets, net 306 293
- -----------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Inventories 18 20
Other 3 4
- -----------------------------------------------------------------------
Total deferred tax liabilities 21 24
- -----------------------------------------------------------------------
Net deferred tax asset $ 285 $ 269
=======================================================================
BALANCE SHEET CAPTION REPORTED IN:
Deferred taxes $ 251 $ 231
Other current assets 40 46
Other liabilities (6) (8)
- -----------------------------------------------------------------------
$ 285 $ 269
=======================================================================
45
As of February 2, 2002, the Company had a valuation allowance of $148
million to reduce its deferred tax assets to an amount that is more likely than
not to be realized. The valuation allowance primarily relates to the deferred
tax assets arising from state tax loss carryforwards, tax loss carryforwards of
certain foreign operations, foreign tax credit carryforwards and capital loss
carryforwards and unclaimed tax depreciation of the Canadian operations. The net
change in the total valuation allowance for the year ended February 2, 2002,
was principally due to the Canadian operations, including tax rate changes on
those assets that had a full valuation allowance and the expiration of Canadian
losses with a full valuation allowance. Adjustments from tax exams relating to
foreign tax credits and the expiration of certain foreign tax credits, both with
a full valuation allowance, also contributed to the net change in the total
valuation allowance.
Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the temporary differences are
anticipated to reverse, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the
valuation allowances at February 2, 2002. However, the amount of the deferred
tax asset considered realizable could be adjusted in the future if estimates of
taxable income are revised.
At February 2, 2002, the Company's tax loss/credit carryforwards included
international operating loss carryforwards with a potential tax benefit of $23
million. Those expiring between 2002 and 2009 are $21 million and those that do
not expire are $2 million. The Company also had a federal net operating loss
with a potential tax benefit of $29 million as well as state net operating loss
carryforwards with a potential tax benefit of $49 million, which principally
related to the 16 states where the Company does not file a combined return.
These loss carryforwards expire between 2002 and 2020. Foreign tax credits of
approximately $37 million expiring between 2002 and 2009 are also available to
the Company. The Company had U.S. Federal alternative minimum tax credits of
approximately $12 million, which do not expire.
18. RETIREMENT PLANS AND OTHER BENEFITS
- --------------------------------------------------------------------------------
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has defined benefit pension plans covering most of its North
American employees, which are funded in accordance with the provisions of the
laws where the plans are in effect. Plan assets consist primarily of stocks,
bonds and temporary investments. In addition to providing pension benefits,
the Company sponsors postretirement medical and life insurance plans, which are
available to most of its retired U.S. employees. These plans are contributory
and are not funded.
The following tables set forth the plans' changes in benefit obligations
and plan assets, funded status and amounts recognized in the Consolidated
Balance Sheets:
Postretirement
Pension Benefits Benefits
----------------------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $ 647 $ 662 $ 57 $ 67
Service cost 8 8 -- --
Interest cost 45 49 3 4
Plan participants' contributions -- -- 4 6
Actuarial (gain) loss 27 10 (1) (8)
Foreign currency translation
adjustments (5) (3) -- --
Benefits paid (67) (79) (11) (12)
Plan amendment -- -- (15) --
Curtailment (1) -- -- --
Settlement 1 -- -- --
- ---------------------------------------------------------------------------------------
Benefit obligation at
end of year $ 655 $ 647 $ 37 $ 57
- ---------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year $ 612 $ 662
Actual return on plan assets (48) 25
Employer contribution 7 7
Foreign currency translation
adjustments (4) (3)
Benefits paid (67) (79)
- ---------------------------------------------------------------------------------------
Fair value of plan assets at
end of year $ 500 $ 612
- ---------------------------------------------------------------------------------------
FUNDED STATUS
Funded status $(155) $ (35) $ (37) $ (57)
Unrecognized prior
service cost 5 6 (13) --
Unrecognized net (gain) loss 190 59 (105) (112)
- ---------------------------------------------------------------------------------------
Prepaid asset
(accrued liability) $ 40 $ 30 $(155) $(169)
=======================================================================================
BALANCE SHEET CAPTION REPORTED IN:
Other assets $ -- $ 56 $ -- $ --
Other liabilities (144) (24) (148) (162)
Accrued liabilities (2) (2) (7) (7)
Accumulated other
comprehensive
income, pre-tax 186 -- -- --
- ---------------------------------------------------------------------------------------
$ 40 $ 30 $(155) $(169)
=======================================================================================
As of February 2, 2002, the accumulated benefit obligation for all pension
plans, totaling $642 million, exceeded plan assets. As of February 3, 2001, the
projected benefit obligation and accumulated benefit obligation for pension
plans with accumulated benefit obligations in excess of plan assets were $24
million and $22 million, respectively.
In 2001, the Company recorded a curtailment and settlement loss for its
Canadian pension plan, in connection with the discontinuance of the Northern
Group. The net charge of approximately $1 million was charged to the reserve for
discontinued operations.
46
PRINCIPAL ASSUMPTIONS
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average discount rate 6.94% 7.44% 7.93% 7.00% 7.50% 8.00%
Weighted-average rate of compensation increase 3.54% 4.95% 4.89% -- 5.00% 5.00%
Weighted-average expected long-term rate of return on assets 8.87% 9.93% 9.87%
The components of net benefit income are: Pension Benefits Postretirement Benefits
-------------------------------------------------------------------
(in millions) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Service cost $ 8 $ 8 $ 7 $-- $-- $--
Interest cost 45 49 48 3 4 5
Expected return on plan assets (58) (61) (57) -- -- --
Amortization of net asset at transition -- -- (1) -- -- --
Amortization of prior service cost 1 1 1 (2) -- --
Amortization of net (gain) loss -- (1) 2 (9) (9) (9)
- --------------------------------------------------------------------------------------------------------------------------------
Net benefit income $ (4) $ (4) $-- $ (8) $ (5) $ (4)
================================================================================================================================
Beginning in 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. The substantive plan change increased
postretirement benefit income by approximately $3 million for 2001 and was
recorded as a prior service cost. For measurement purposes, a 15.0 percent
increase in the cost of covered health care benefits was assumed for 2001, which
increased the accumulated postretirement benefit obligation by approximately
$6 million at February 3, 2001, as compared with 8.0 percent for 2000. The rate
was assumed to decline gradually to 5.0 percent in 2008 and remain at that level
thereafter. In 2000, increases in age-related healthcare costs of approximately
4.0 percent up to age 65 and approximately flat thereafter, were assumed as
compared with a flat 3.0 percent in 1999. The impact of this change on the
accumulated postretirement benefit obligation at February 3, 2001 was a decrease
of approximately $6 million.
In the fourth quarter of 1999, the Company changed the method for
calculating the market-related value of plan assets for the U.S. qualified
retirement plan used in determining the return on plan assets component of net
pension expense and the accumulated unrecognized net loss subject to
amortization. Under the previous accounting method, equity assets were valued
based on a five-year moving average of investment gains and losses. Under the
new method, equities are valued based on either a five-year or a three-year
moving average of investment gains and losses, whichever value is closer to
market value in each plan year. Under both new and previous methods, non-equity
assets are valued at market value, and only the accumulated net loss, which
exceeds ten percent of the greater of the projected benefit obligation or the
market-related value of plan assets is subject to amortization. The Company
believes the new method is preferable because it results in calculated plan
asset values that more closely approximate fair value, while still mitigating
the impact of annual market-value fluctuations. This change resulted in a
non-cash benefit in 1999 of approximately $14 million before-tax, or $0.06 per
diluted share, representing the cumulative effect of the accounting change
related to years prior to 1999. The change was accounted for as if it had
occurred at the beginning of the first quarter of 1999. The impact of the change
resulted in lower pension expense in 1999 of $4.5 million before-tax, or $0.02
per diluted share as follows; $0.8 million in each of the first and second
quarters; $1.8 million in the third quarter and $1.1 million in the fourth
quarter.
401(k) PLAN
The Company has a qualified 401(k) savings plan available to full-time employees
who meet the plan's eligibility requirements. Effective January 1, 2002, this
savings plan allows eligible employees to contribute up to 25 percent of their
compensation on a pre-tax basis. Previously, the savings plan allowed eligible
employees to contribute up to 15 percent. The Company matches 25 percent of the
first 4 percent of the employees' contributions with Company stock. Such
matching Company contributions are vested incrementally over 5 years. The charge
to operations for the Company's matching contribution was $1.3 million, $1.2
million and $0.9 million in 2001, 2000 and 1999, respectively.
47
19. STOCK PLANS
- --------------------------------------------------------------------------------
Under the Company's 1998 Stock Option and Award Plan (the "1998 Plan"), options
to purchase shares of common stock may be granted to officers and key employees
at not less than the market price on the date of grant. Under the plan, the
Company may grant officers and other key employees, including those at the
subsidiary level, stock options, stock appreciation rights (SARs), restricted
stock or other stock-based awards. Unless a longer period is established at the
time of the option grant, up to one-half of each stock option grant may be
exercised on each of the first two anniversary dates of the date of grant.
Generally, for stock options granted beginning in 1996, one-third of each stock
option grant becomes exercisable on each of the first three anniversary dates of
the date of grant. The options terminate up to 10 years from the date of grant.
In 2000, the Company amended the 1998 Plan to provide for awards of up to
12,000,000 shares of the Company's common stock. The number of shares reserved
for issuance as restricted stock and other stock-based awards, as amended,
cannot exceed 3,000,000 shares.
In addition, options to purchase shares of common stock remain outstanding
under the Company's 1995 and 1986 stock option plans. The 1995 Stock Option and
Award Plan (the "1995 Plan") is substantially the same as the 1998 Plan. The
number of shares authorized for awards under the 1995 Plan is 6,000,000 shares.
The number of shares reserved for issuance as restricted stock under the 1995
Plan is limited to 1,500,000 shares. Options granted under the 1986 Stock Option
Plan (the "1986 Plan") generally become exercisable in two equal installments on
the first and the second anniversaries of the date of grant. No further options
may be granted under the 1986 Plan.
In 1996, the Company established the Directors' Stock Plan (the "Directors'
Plan"). Under the Directors' Plan, non-employee directors receive 50 percent of
their annual retainer in shares of common stock and may elect to receive up to
100 percent of their retainer in common stock. The maximum number of shares of
common stock that may be issued under the Directors' Plan is 250,000 shares. In
2000, the Company established the Directors' Stock Option Plan (the "Directors'
Option Plan"). Under the Directors' Option Plan, non-employee directors receive
an annual stock option grant on the first business day of the fiscal year to
purchase that number of shares of common stock having a value equal to $50,000
on the date of grant. Options are granted under the Directors' Option Plan at an
exercise price equal to 100 percent of the market price at the date of the
grant. Options are exercisable in three equal installments commencing on the
first anniversary of the date of grant. The number of shares authorized for
stock option grants under the Directors' Option Plan is 100,000 shares.
Under the Company's 1994 Employees Stock Purchase Plan, participating
employees may contribute up to 10 percent of their annual compensation to
acquire shares of common stock at 85 percent of the lower market price on one of
two specified dates in each plan year. Of the 8,000,000 shares of common stock
authorized for purchase under this plan, 649 participating employees purchased
216,594 shares in 2001. To date, a total of 1,253,853 shares have been purchased
under this plan.
When common stock is issued under these plans, the proceeds from options
exercised or shares purchased are credited to common stock to the extent of the
par value of the shares issued and the excess is credited to additional paid-in
capital. When treasury common stock is issued, the difference between the
average cost of treasury stock used and the proceeds from options exercised or
shares awarded or purchased is charged or credited, as appropriate, to either
additional paid-in capital or retained earnings. The tax benefits relating to
amounts deductible for federal income tax purposes, which are not included in
income for financial reporting purposes, have been credited to additional
paid-in capital.
The Financial Accounting Standards Board issued SFAS No. 123, which
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. Accounting for the
Company's grants for stock-based compensation during the three-year period ended
February 2, 2002, in accordance with the fair value method provisions of SFAS
No. 123 would have resulted in the following:
(in millions, except per share amounts) 2001 2000 1999
- --------------------------------------------------------------------------------
Net income (loss):
As reported $ 92 $ (240) $ 48
Pro forma $ 86 $ (243) $ 43
Basic earnings per share:
As reported $ 0.66 $ (1.74) $ 0.35
Pro forma $ 0.62 $ (1.76) $ 0.31
Diluted earnings per share:
As reported $ 0.64 $ (1.73) $ 0.35
Pro forma $ 0.61 $ (1.75) $ 0.31
48
The fair value of the Company's various stock option and purchase plans
were estimated at the grant date using a Black-Scholes option pricing model.
Stock Option Plans Stock Purchase Plan
-------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Weighted-average risk free rate of interest 4.17% 6.43% 5.31% 3.73% 5.36% 7.12%
Expected volatility 48% 55% 45% 40% 46% 38%
Weighted-average expected award life 2 years 2 years 2 years .7 years .7 years .7 years
Dividend yield -- -- -- -- -- --
Weighted-average fair value $5.31 $4.99 $2.14 $4.42 $2.86 $2.80
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 the Company'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.
The information set forth in the following table covers options granted
under the Company's stock option plans:
2001 2000 1999
-------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(in thousands, except prices per share) Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 7,696 $ 14.49 9,923 $ 15.12 8,057 $ 20.93
Granted 2,324 $ 12.81 2,167 $ 10.50 3,739 $ 5.17
Exercised 995 $ 7.28 811 $ 5.17 -- $ --
Expired or canceled 1,468 $ 15.98 3,583 $ 15.93 1,873 $ 20.23
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 7,557 $ 14.63 7,696 $ 14.49 9,923 $ 15.12
==================================================================================================================================
Options exercisable at end of year 4,371 $ 16.83 4,047 $ 18.78 4,837 $ 19.95
- ----------------------------------------------------------------------------------------------------------------------------------
Options available for future grant at end of year 7,389 8,652 2,220
==================================================================================================================================
The following table summarizes information about stock options outstanding
and exercisable at February 2, 2002:
Options Outstanding Options Exercisable
----------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
(in thousands, except prices per share) Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
- -----------------------------------------------------------------------------------------------------------
$4.53 to $8.03 1,136 7.3 $ 5.21 806 $ 5.34
$8.69 to $11.91 1,999 8.2 11.16 680 10.54
$12.99 to $21.88 2,599 7.1 14.42 1,062 16.31
$22.19 to $30.38 1,823 4.8 24.61 1,823 24.61
- -----------------------------------------------------------------------------------------------------------
$4.53 to $30.38 7,557 6.9 $14.63 4,371 $16.83
===========================================================================================================
49
20. RESTRICTED STOCK
- --------------------------------------------------------------------------------
Restricted shares of the Company's common stock may be awarded to certain
officers and key employees of the Company. These awards fully vest after the
passage of a restriction period, generally three to five years. Some awards are
subject to early vesting if certain performance targets are met. There were
420,000, 100,000 and 1,255,000 restricted shares of common stock granted in
2001, 2000 and 1999, respectively. The market values of the shares at the date
of grant amounted to $5.4 million in 2001, $0.6 million in 2000 and $8.4 million
in 1999. The market values are recorded within shareholders' equity and are
amortized as compensation expense over the related vesting periods. During 2001,
2000, and 1999, respectively, 270,000, 311,667, and 185,000 restricted shares
were forfeited. The Company recorded compensation expense related to restricted
shares of $1.6 million in 2001, $2.2 million in 2000 and $2.7 million in 1999.
21. SHAREHOLDER RIGHTS PLAN
- --------------------------------------------------------------------------------
Effective April 14, 1998, the Company issued one right for each outstanding
share of common stock. Each right entitles a shareholder to purchase one
two-hundredth of a share of Series B Participating Preferred Stock at an
exercise price of $100, subject to adjustment. Generally, the rights become
exercisable only if a person or group of affiliated or associated persons (i)
becomes an "Interested Shareholder" as defined in Section 912 of the New York
Business Corporation Law (an "Acquiring Person") or (ii) announces a tender or
exchange offer that results in that person or group becoming an Acquiring
Person, other than pursuant to an offer for all outstanding shares of the
common stock of the Company which the Board of Directors determines not to be
inadequate and to otherwise be in the best interests of, the Company and its
shareholders. The Company will be able to redeem the rights at $0.01 per right
at any time during the period prior to the 10th business day following the date
a person or group becomes an Acquiring Person. The plan also has a qualifying
offer provision.
Upon exercise of the right, each holder of a right will be entitled to
receive common stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value equal to two times the exercise price
of the right. The rights, which cannot vote and cannot be transferred separately
from the shares of common stock to which they are presently attached, expire on
April 14, 2008 unless extended prior thereto by the Board, or earlier redeemed
or exchanged by the Company.
22. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Legal proceedings pending against the Company or its consolidated subsidiaries
consist of ordinary, routine litigation, including administrative proceedings,
incident to the businesses of the Company, 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
significant effect on the Company's consolidated financial position, liquidity,
or results of operations.
23. COMMITMENTS
- --------------------------------------------------------------------------------
In connection with the sale of various businesses, the Company may be obligated
for certain lease commitments transferred to third parties pursuant to those
sales. The Company is also operating certain stores for which lease agreements
are in the process of being negotiated with landlords. Although there is no
contractual commitment to make these payments, it is likely that a lease will be
executed. Management believes that the resolution of such contingencies will not
significantly affect the Company's consolidated financial position, liquidity,
or results of operations.
24. SHAREHOLDER INFORMATION AND MARKET PRICES
(UNAUDITED)
- --------------------------------------------------------------------------------
Foot Locker, Inc. common stock is listed on the New York and Amsterdam stock
exchanges as well as on the Lausanne and Elektronische Borse Schweiz (EBS) stock
exchanges in Switzerland. In addition, the stock is traded on the Boston,
Cincinnati, Chicago, Philadelphia and Pacific stock exchanges. The New York
Stock Exchange ticker symbol for the Company's common stock is "Z."
At February 2, 2002, the Company had 31,085 shareholders of record owning
139,910,410 common shares.
Market prices for the Company's common stock were as follows:
2001 2000
---------------------------------------------
High Low High Low
- ---------------------------------------------------------
COMMON STOCK
QUARTER
1st Q $14.20 $10.20 $12.25 $ 5.00
2nd Q 17.65 12.64 14.75 9.88
3rd Q 19.10 11.90 16.50 11.31
4th Q 17.01 13.30 16.75 9.75
50
25. QUARTERLY RESULTS (UNAUDITED)
- --------------------------------------------------------------------------------
(in millions, except per share amounts) 1st Q 2nd Q 3rd Q 4th Q Year
- --------------------------------------------------------------------------------------------------------------------------------
SALES
2001 $ 1,072 1,048 1,104 1,155 4,379
2000 $ 1,044 971 1,085 1,256 4,356
GROSS MARGIN(a)
2001 $ 326 306 327 349 1,308
2000 $ 311 279 334 385 1,309
OPERATING PROFIT(b)
2001 $ 74 29 71 89(e) 263
2000 $ 52 39 71 98 260
INCOME FROM CONTINUING OPERATIONS
2001 $ 32 4 33 42 111
2000 $ 23 13 29 42 107
NET INCOME (LOSS)
2001 $ 37 (14) 33 36 92
2000 $ 13 10 25 (288) (240)
BASIC EARNINGS PER SHARE:
2001
Income from continuing operations $ 0.23 0.03 0.24 0.29 0.79
Income (loss) from discontinued operations $ 0.04 (0.13) -- (0.04) (0.13)
Net income (loss) $ 0.27 (0.10) 0.24 0.25 0.66
2000
Income from continuing operations $ 0.17 0.09 0.21 0.31 0.78
Loss from discontinued operations(d) $ (0.06) (0.02) (0.03) (2.39) (2.51)
Cumulative effect of accounting change(c) $ (0.01) -- -- -- (0.01)
Net income (loss)(d) $ 0.10 0.07 0.18 (2.08) (1.74)
DILUTED EARNINGS PER SHARE:
2001
Income from continuing operations $ 0.23 0.03 0.23 0.28 0.77
Income (loss) from discontinued operations $ 0.04 (0.13) -- (0.04) (0.13)
Net income (loss) $ 0.27 (0.10) 0.23 0.24 0.64
2000
Income from continuing operations(d) $ 0.17 0.09 0.21 0.31 0.77
Loss from discontinued operations(d) $ (0.06) (0.02) (0.03) (2.37) (2.49)
Cumulative effect of accounting change(c) $ (0.01) -- -- -- (0.01)
Net income (loss)(d) $ 0.10 0.07 0.18 (2.06) (1.73)
(a) Gross margin represents sales less cost of sales.
(b) Operating profit represents income from continuing operations before income
taxes, corporate expense, net and interest expense, net.
(c) Reflects change in method of accounting for layaway sales (see note 1).
(d) Net income (loss) per share is computed independently for each of the
periods presented. Accordingly, the sum of the quarterly net income (loss)
per share amounts does not equal the total for the year in 2000.
(e) Includes income from vendor settlements related to prior years of $7
million, partially offset by a $2 million asset impairment charge and
severance of $1 million.
51
FIVE YEAR-SUMMARY OF SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and other information
contained elsewhere in this report. All selected financial data has been
restated for discontinued operations, except for return on average investment
("ROI").
($ in millions, except per share amounts) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF CONTINUING OPERATIONS
Sales $ 4,379 4,356 4,263 4,161 4,177
Gross margin 1,308 1,309 1,164(1) 1,131 1,343
Selling, general and administrative expenses 923 975 985 1,062 916
Restructuring charges 34 1 85 -- --
Depreciation and amortization 154 151 169 139 112
Interest expense, net 24 22 51 44 35
Other income (2) (16) (223) (100) (9)
Income from continuing operations 111 107 59 14 185
Cumulative effect of accounting change(2) -- (1) 8 -- --
Basic earnings per share from continuing operations 0.79 0.78 0.43 0.10 1.37
Basic earnings per share from cumulative effect of
accounting change -- (0.01) 0.06 -- --
Diluted earnings per share from continuing operations 0.77 0.77 0.43 0.10 1.36
Diluted earnings per share from cumulative effect of
accounting change -- (0.01) 0.06 -- --
Weighted-average common shares outstanding (in millions) 139.4 137.9 137.2 135.4 134.6
Weighted-average common shares outstanding
assuming dilution (in millions) 146.9 139.1 138.2 135.9 135.8
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Cash and cash equivalents $ 215 109 162 193 81
Merchandise inventories 793 730 697 786 703
Property and equipment, net 637 684 754 906 557
Total assets 2,290 2,240 2,447 2,839 2,763
Short-term debt -- -- 71 250 --
Long-term debt and obligations under capital leases 399 313 418 517 527
Total shareholders' equity 992 1,013 1,139 1,038 1,271
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on equity (ROE) 11.1% 10.0 5.4 1.2 14.2
Return on average investment (ROI) 6.8% 6.4 3.7 2.7 8.3
Operating profit as a percentage of sales 6.0% 6.0 4.5 0.9 9.0
Income from continuing operations
as a percentage of sales 2.5% 2.5 1.4 0.3 4.4
Net debt capitalization percent(3) 61.1% 60.9 61.2 67.6 58.9
Net debt capitalization percent
(without present value of operating leases)(3) 15.6% 16.8 22.3 35.6 26.0
Current ratio 2.1 1.6 1.5 1.4 2.8
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 116 94 152 512 226
Number of stores at year end 3,590 3,752 3,953 5,062 4,881
Total selling square footage at year end (in millions) 7.94 8.09 8.40 9.41 7.58
Total gross square footage at year end (in millions) 13.14 13.32 13.35 15.00 12.91
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes a restructuring charge of $11 million related to inventory
markdowns.
(2) 2000 reflects change in method of accounting for layaway sales (see note
1). 1999 reflects change in method for calculating the market-related value
of pension plan assets (see note 18).
(3) Represents total debt, net of cash and cash equivalents.
52
Board of Directors Corporate Officers Corporate Information
J. CARTER BACOT (1),(4),(6) MATTHEW D. SERRA Corporate Headquarters
Non-Executive Chairman of the Board President and Chief Executive Officer
112 West 34th Street
New York, New York 10120
MATTHEW D. SERRA (1),(5) Executive Vice President (212) 720-3700
President and Chief Executive Officer
BRUCE L. HARTMAN
Chief Financial Officer
Transfer Agent and Registrar
PURDY CRAWFORD (1),(2),(3)
Chairman of the Board The Bank of New York
AT&T Canada Senior Vice Presidents Shareholder Relations Department
P.O. Box 11258
GARY M. BAHLER Church Street Station
NICHOLAS DIPAOLO(2) General Counsel and Secretary New York, New York 10286
Vice Chairman and Chief Operating Officer (866) 857-2216
Bernard Chaus, Inc. JEFFREY L. BERK (610) 312-5303 Outside the U.S. and Canada
Real Estate (800) 936-4237 Hearing Impaired
shareowner-svcs@bankofny.com
PHILIP H. GEIER JR.(3) LAUREN B. PETERS
Retired Chairman of the Board Strategic Planning Independent Auditors
and Chief Executive Officer KPMG LLP
Interpublic Group of Companies, Inc. LAURIE J. PETRUCCI 345 Park Avenue
Human Resources New York, New York 10154
(212) 758-9700
JAROBIN GILBERT JR.(1),(2),(4) TERRY L. TALLEY
President and Chief Executive Officer Chief Information Officer
DBSS Group, Inc. Form 10-K
A copy of the Foot Locker, Inc.
Vice Presidents 2001 Annual Report on Form 10-K
JAMES E. PRESTON (1),(3),(4),(6) JOSEPH N. BONGIORNO filed with the Securities and
Retired Chairman of the Board Logistics Exchange Commission is available,
and Chief Executive Officer without charge, by request to the
Avon Products, Inc. GARY H. BROWN Investor Relations Department at
Real Property the Corporate Headquarters.
DAVID Y. SCHWARTZ (2),(6)
Independent Business Advisor and Consultant PETER D. BROWN Investor Information
Investor Relations and Treasurer Investor inquiries should be
directed to the Investor Relations
CHRISTOPHER A. SINCLAIR (1),(3),(6) PETER M. CUPPS Department at (212) 720-4600.
Managing Director Corporate Shared Services
Manticore Group LLC World Wide Web Site
MARC D. KATZ Our website at
Controller www.footlocker-inc.com
CHERYL TURPIN (3),(4) offers information about our Company,
Retired President and Chief Executive Officer ROBERT W. MCHUGH as well as online versions of our Annual
The Limited Stores Chief Accounting Officer Report, SEC reports, quarterly results
and press releases.
DONA D. YOUNG (2),(4) PATRICIA A. PECK
President and Chief Operating Officer Human Resources
The Phoenix Companies, Inc. Foot Locker, Inc., Foot Locker, Lady Foot
DENNIS E. SHEEHAN Locker, Kids Foot Locker, Champs Sports,
Deputy General Counsel footlocker.com, Eastbay, Actra, Colorado,
Going to the Game!, Weekend Edition, and
Team Edition service marks and trademarks
are owned by Foot Locker, Inc. or its
affiliates.
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Compensation and
Management Resources Committee
4 Member of Nominating and
Corporate Governance Committee
5 Member of Retirement Plan Committee
6 Member of Finance and
Strategic Planning Committee
FOOT LOCKER, INC.
112 WEST 34TH STREET
NEW YORK, NY 10120