EXHIBIT 13
2002 Annual Report
FOOT LOCKER, INC.
Growing Our Global Presence
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ABOUT THE COMPANY
Foot Locker, Inc. (NYSE: FL) 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-Customers business offering athletic footwear, apparel and
equipment through its Internet and catalog channels.
FINANCIAL HIGHLIGHTS
(Millions, except per share amounts) 2002 2001 2000
- -----------------------------------------------------------------
Sales $4,509 $4,379 $4,356
Total operating profit $ 269 $ 198 $ 181
Income from continuing operations $ 162 $ 111 $ 107
Diluted EPS from continuing operations $ 1.10 $ 0.77 $ 0.77
Debt, net of cash $ -- $ 184 $ 204
TABLE OF CONTENTS
2 Shareholders' Letter
6 Business Overview
7 Our Global Presence
8 Our Brand Presence
12 Our European Presence
14 Our Marketing Presence
16 Our Direct-to-Customers Presence
17 Financial Contents
52 Board of Directors, Corporate Officers,
Corporate Information
GROWING OUR GLOBAL PRESENCE
Athletic Stores Sales Per
Average Gross Square Foot
(dollars)
00 $301
01 $306
02 $316
ROE
00 10.0%
01 11.1%
02 15.4%
Income from
Continuing Operations
(millions)
00 $107
01 $111
02 $162
Debt, Net of Cash
(millions)
00 $204
01 $184
02 $ --
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SHAREHOLDERS' LETTER
Several strategic initiatives were designed to increase shareholder value.
Over the past three years, we have forged ahead with our efforts to build
shareholder value by completing our repositioning to a pure-play athletic retail
business while embedding - throughout our organization - a renewed focus on the
strategic discipline and operational fundamentals upon which our athletic
footwear and apparel business was first built. Towards these ends, we have
implemented several strategic initiatives, including developing private-label
merchandise offerings, creating a multi-dimensional real estate program,
launching an integrated Internet channel, refining our infrastructure to be more
cost-efficient and completing the divestitures of all non-athletic businesses.
The successful implementation of these initiatives has contributed to our
significantly improved profitability, strong cash flow and solid balance sheet.
Today, Foot Locker, Inc. is well positioned as the leader in the specialty
athletic retail industry, both home and abroad, with retail stores successfully
operating in the United States, Europe, Canada and Australia. The ability to
operate profitably in international markets provides our Company with geographic
diversification and exciting growth opportunities. Another area of strength is
our Direct-to-Customers business, comprising our industry-leading catalog and
Internet channels. Our success is visible in the results we reported in fiscal
year 2002.
Looking to the future, we are confident that we will profitably build on our
industry-leading position. Significant store growth opportunities have been
identified in the United States and the 13 other countries where we have a
proven presence, with a particular emphasis in western Europe. We also plan to
continue the growth of our highly profitable Direct-to-Customers business. In
short, we are moving forward with a focused growth strategy that we expect to
carefully implement over the next several years. This growth strategy builds on
all that we have accomplished over the past three years, and will continue to be
balanced with our ongoing commitment to maintain a strong liquidity position and
strengthened balance sheet.
2002 Year in Review
2002 proved to be a very challenging year for the retail industry in most
markets in which we operate. Consumer spending remained subdued throughout the
year and customer traffic, particularly in United States shopping malls,
decreased from prior year levels. We are pleased that, in spite of these
economic and retail challenges, we continued to generate earnings growth and
strengthen our financial base, thereby providing us with a platform to explore
other opportunities to build shareholder value. From increased earnings through
top-line sales growth and ongoing expense management, to major progress in
reducing debt, net of cash, we continued to meet or exceed our objectives. We
also further differentiated our businesses from the competition by maintaining a
standard of excellence unparalleled in the athletic retail industry. Highlights
include:
- - Athletic Stores sales increased 4.0 percent in 2002, reaching $316 per
average gross square foot versus $306 last year, reflecting our growing and
more productive store base, and strengthening foreign exchange rates versus
the U.S. dollar.
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- - Sales in our Direct-to-Customers Internet and catalog business grew by 7.1
percent and, more important, operating profit before corporate expense, net
grew by 67 percent.
- - Income from continuing operations grew 43 percent, to $1.10 per share
compared with $0.77 per share last year.
- - Debt, net of cash was reduced by $184 million to zero at year end 2002,
accomplishing a key objective that the Company established in early 1999.
We are pleased that we increased our earnings per share from continuing
operations in each quarter versus the comparable quarter of the prior year. We
also continued to strengthen our balance sheet, which remains a high priority
for our Company. During 2002, in recognition of our much improved financial
results and balance sheet, Standard & Poor's and Moody's Investor Services
upgraded our credit ratings to BB+ and Ba2, respectively.
Given the Company's strengthened financial position, our Board of Directors
approved a shareholder dividend program in 2002, annualized at $0.12 per share.
This program was initiated with a $0.03 per share quarterly payment on January
31, 2003. During 2002, our Board of Directors also authorized a three-year, $50
million share repurchase program to enable the Company to purchase its common
stock, from time to time, based on market conditions and other factors.
Our strong cash flow allowed us to continue to increase our store base. During
2002, we opened 157 new stores, concentrating our growth in markets where we had
opportunities to strengthen our presence. Europe continues to be our most
significant growth opportunity, where we opened 57 stores in 2002, ending the
year with 377 total stores. Our new Foot Locker and Champs Sports stores at
Times Square in New York City were two of our most exciting projects.
Last year, we also continued to invest in our infrastructure and initiate
projects that we expect will benefit our Company in the future. One such project
was the expansion of our Footlocker.com/Eastbay distribution center, doubling
its capacity to meet the expected needs of this business for the next several
years. Another important project was the development of a plan to roll out a new
point-of-sale system, beginning in 2003, to our U.S. stores. We are already
enjoying the benefits of a similar state-of-the-art system in our European
operation.
The Year Ahead
As we enter 2003, Foot Locker, Inc.'s financial and operational position is
strong and we fully intend to benefit from our many competitive strengths. These
strengths, including our industry leading market share position, global
diversification, private-label sourcing capabilities, multiple channels of
distribution, and management depth at both the divisional and corporate levels,
provide a strong foundation on which our Company can continue to grow.
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Gross Square Footage
-------------------- 2003
February 2, Remodeled/ February 1, Average Total Targeted
Store Summary 2002 Opened Closed Relocated 2003 Size (in thousands) Openings
- ---------------------------------------------------------------------------------------------------------------------------
Foot Locker 1,472 63 58 81 1,477 4,100 6,043 25
Lady Foot Locker 632 1 27 30 606 2,200 1,362 --
Kids Foot Locker 391 1 15 8 377 2,400 912 --
Foot Locker International 521 66 4 39 583 2,800 1,639 60
Champs Sports 574 26 18 47 582 5,600 3,262 15
- ---------------------------------------------------------------------------------------------------------------------------
Total 3,590 157 122 205 3,625 3,600 13,218 100
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Two years ago, we identified three key strategies designed to propel our
earnings to higher levels over the next several years. These strategies are to
improve the productivity of our existing business, open 1,000 new stores and
increase the profitability of our Direct-to-Customers business. Our ongoing
success is largely attributable to the successful implementation of these
initiatives.
We expect to improve the productivity of our existing business through the
continued execution of our diligent expense control process and real estate
strategies. During 2003, the Company plans to accelerate its remodel and
relocation program, with approximately 500 projects planned, with a significant
percentage of the total targeted to our Foot Locker and Lady Foot Locker stores
in the United States. Our objective is to increase our sales from $316 to $350
per average gross square foot and our operating profit margin from 6.0 to 8.5
percent of sales over the next several years - two key performance measurements
that we use to monitor the improvement in our businesses' productivity.
At the end of 2002, nearly 30 percent of our 1,000 store opening program had
been completed. We plan to continue to open new stores, concentrating in markets
where we have a proven track record, being careful not to cannibalize sales from
our existing stores. In 2003, we also plan to move into three new markets -
Portugal, Greece and New Zealand.
We are encouraged by the strength and increased profit opportunities of our
Footlocker.com/Eastbay business that sells athletic products direct to customers
through catalogs and the Internet. This business is poised for several years of
continued growth, particularly as the Internet continues to become a more widely
used medium for retail commerce. We plan to explore new business ventures with
well-known, industry-leading third parties, such as the strategic alliance that
we entered into with Amazon.com during 2002 that allows Footlocker.com to be a
featured brand in its new Apparel & Accessories online store.
As we continue to expand our Company, we will maintain a sharp focus on managing
our expenses, cash flow and financial position. We also plan to provide an
ongoing cash return to our shareholders, carefully balanced with our objective
of further strengthening our credit ratings.
Community Involvement
We feel proud and privileged to be a part of the communities in which we
operate, and continually explore opportunities to further our involvement in
aiding humanitarian activities. For example, in 2002, our associates
participated with and contributed to many charities including the American
Cancer Society, Fred Jordan Mission in Los Angeles and the United Way of New
York City.
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Foot Locker, Inc. remains well-positioned in the specialty athletic retail
industry to continue to generate meaningful earnings growth.
In addition, in late 2001, Foot Locker, Inc. established the Foot Locker
Foundation, Inc. for the purpose of raising and donating funds to charitable
causes. During December 2002, the Foundation hosted its second annual "On Our
Feet" fund-raising benefit with more than 1,000 members of the sporting
community rallying together and raising funds for the benefit of worthy causes
such as the United Way of New York City.
Acknowledgements
We recognize that our hard working and loyal worldwide associates are our
greatest assets and a key competitive strength. It is through their efforts and
dedication that our Company was able to strengthen its leadership position
within the athletic industry during the past three years and remain well
positioned for future profitable growth.
The strength of Foot Locker, Inc. is significantly enhanced by its long-standing
business relationships with its many industry-leading vendors. In particular, we
benefit from the strength of our key merchandise suppliers who consistantly
provide our businesses with athletic offerings that meet the fashion-tastes of
our customers. We believe these merchandise suppliers, as a group, are the best
that service the retail industry.
Our Company is also fortunate to benefit from the strength of an experienced and
diverse Board of Directors. Its guidance continues to contribute to the ongoing
success of our Company.
In summary, we are very encouraged by our progress during the past three years
and are optimistic about the future of our Company. We believe that we are well
positioned in the athletic retail industry to continue to grow our Company
profitably and provide a meaningful return to our shareholders. Thank you for
your continuing support of Foot Locker, Inc.
/s/ J. Carter Bacot
J. Carter Bacot
Chairman of the Board
/s/ Matthew D. Serra
Matthew D. Serra
President and Chief Executive Officer
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J. Carter Bacot
Chairman of the Board
[PHOTO OF Matthew D. Serra]
Matthew D. Serra
President and Chief Executive Officer
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BUSINESS OVERVIEW
Primary Customer Merchandise Mix # of Stores Average Store Size
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[PHOTO OF FOOT LOCKER] 12 to 20 Year Old Men's, Women's 1,477 4,100 Gross
and Children's Square Feet
Athletic Footwear
Men's Athletic
Apparel and
Accessories
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[PHOTO OF LADY FOOT LOCKER] 14 to 29 Year Old Women's Athletic 606 2,200 Gross
Female Footwear, Apparel Square Feet
and Accessories
- -------------------------------------------------------------------------------------------------------------------------
[PHOTO OF KIDS FOOT LOCKER] 5 to 11 Year Old Children's Athletic 377 2,400 Gross
Footwear, Apparel Square Feet
and Accessories
- -------------------------------------------------------------------------------------------------------------------------
[PHOTO OF FOOT LOCKER INTERNATIONAL] 12 to 20 Year Old Men's, Women's 583 2,800 Gross
and Children's Square Feet
Athletic Footwear
Men's Athletic
Apparel and
Accessories
- -------------------------------------------------------------------------------------------------------------------------
[PHOTO OF CHAMPS] 10 to 25 Year Old Men's, Women's 582 5,600 Gross
and Children's Square Feet
Athletic Footwear
Men's Athletic
Apparel and
Accessories
Athletic equipment
- -------------------------------------------------------------------------------------------------------------------------
[PHOTO OF FOOTLOCKER.COM] 12 to 35 Year Old Men's, Women's
and Children's
Athletic Footwear,
Apparel and
Equipment
- -------------------------------------------------------------------------------------------------------------------------
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OUR GLOBAL PRESENCE
GUAM STORES 5
AUSTRALIAN STORES 75
CANADIAN STORES 168
U.S. STORES 2,897
PUERTO RICO STORES 74
VIRGIN ISLANDS STORES 8
HAWAII STORES 21
EUROPEAN STORES 377
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 620 Foot Locker and Champs
Sports stores outside the United States, with 377 in Europe, 168 in Canada and
75 in Australia. Last year, approximately 19 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.
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OUR BRAND PRESENCE
Foot Locker, Inc. currently operates approximately 3,600 stores under the names
Foot Locker, Lady Foot Locker, Kids Foot Locker and Champs Sports. In addition,
the Company operates a highly successful Direct-to-Customers business, selling
to its customers through catalog and Internet channels. Its Direct-to-Customers
business operates under the same names as its store operations, as well as under
its well-known Eastbay brand.
Diversification has long played a significant role and has been a competitive
strength of the Company. Foot Locker, Inc. is diversified in many respects,
including operating under several names, through multiple channels of
distribution, and globally in 14 countries in North America, Europe and
Australia. The Company enjoys further diversification in the United States due
to its significant presence in enclosed shopping malls, strip centers and street
locations, both in suburban and urban markets. This diversification is expected
to continue to provide the Company with a competitive edge by being able to
reach a much wider customer base and being less dependent on any one economy or
sector.
The Company's primary brand is Foot Locker, which was first introduced to the
United States retail market in 1974. Since its inception, Foot Locker has grown
to a total of 2,060 stores worldwide, with 1,477 in the United States, 377 in
Europe, 131 in Canada and 75 in Australia. Today, Foot Locker has wide name
recognition in every market where the Company operates, and its stores have
become destination locations for its customers. Foot Locker's core customer is
the 12-to-20 year old who is highly fashion conscious.
Several years after the initiation of the Foot Locker store concept, the Company
launched its Lady Foot Locker and Kids Foot Locker businesses. Each business was
founded and developed to appeal to a more narrowly focused core customer and one
with different demographics from those who typically shop at a Foot Locker
store.
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Lady Foot Locker was launched in 1982 and today operates 606 stores in the
United States, primarily located in major shopping malls. Its stores average
2,200 gross square feet with a focused selection of branded athletic footwear
and select branded and private-label athletic apparel. Its core customer is a
14-to-29 year old woman, who is fashion-minded, active and brand conscious.
The introduction of Kids Foot Locker followed in 1987, and was quickly expanded
to a chain that today total 377 stores. The typical Kids Foot Locker store
averages 2,400 gross square feet and caters to the parents of 5-to-11 year-old
children. Its product offerings are similar to those of Foot Locker, with a high
concentration in branded athletic footwear.
After Foot Locker, Champs Sports is the second largest specialty athletic
footwear and apparel retail chain in the United States in terms of number of
stores, sales volume and most importantly, level of profit. Champs Sports, which
operates 582 stores, differentiates its business from Foot Locker's by offering
a wider assortment of athletic apparel, equipment and accessories in a larger
store, averaging 5,600 gross square feet. Its mainly suburban stores target a
more diverse customer base, typically 10-to-25 years of age.
Eastbay is another well-recognized name that has wide consumer appeal. Eastbay
was founded in 1980, with a mission of selling direct to team-sport
participants and technical athletes through its catalogs. Foot Locker, Inc.
acquired this business in 1997 to integrate an additional channel of
distribution for athletic footwear, apparel and equipment to complement its
industry-leading athletic specialty retail store business. Since that time, the
Company expanded Eastbay's existing customer base to include the fashion
consumer. In addition, the Company successfully developed its Internet channel,
benefiting from Eastbay's well-established infrastructure.
Foot Locker, Inc.'s brands are some of the most recognized names in retailing.
The Company's merchandising strategy, however, is to sell athletic products
manufactured and branded by its well-known suppliers. Private label apparel,
which the Company designs and sources directly from manufacturers, is offered to
supplement these branded products. Licensed apparel is another important and
growing category, including products manufactured by the Company's Team Edition
division. Product offerings vary from season-to-season targeted to those styles
that are anticipated to be in the strongest demand by the Company's targeted
customers.
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OUR EUROPEAN PRESENCE
The European athletic footwear and apparel market is an important source of
sales and profits for Foot Locker, Inc. Sales per gross square foot and
operating profit margins are approximately double those of the Company's Foot
Locker stores in the United States. While the combined population and total GDP
of this market rivals that of the United States, the per capita consumption of
athletic footwear is less than one-half, presenting opportunities for
significant future growth for Foot Locker.
Foot Locker was introduced to Europe in 1980, when its first store was opened in
the United Kingdom. Expansion of this business was initiated in 1988 through the
acquisition of a 14-store specialty athletic footwear chain operating in the
Netherlands and Belgium. Since that time, Europe has been a significant source
of growth for the Company.
Today, Europe is the largest international market in which the Company operates
stores. Foot Locker is one of the largest athletic retailers and the one with
the largest presence, operating stores in many countries across this region.
The business is managed from the Netherlands, incorporating a shared service
approach, including its headquarters office and 250,000 square foot
state-of-the-art distribution center.
Foot Locker's European expansion continued during 2002. The Company opened 57
additional stores and ended the year with 377 in 11 countries. Foot Locker's
comparable-store sales were strong throughout the year as the Company continued
to provide its customers with an appropriate mix of fashion and technical
athletic footwear and apparel.
The Company's infrastructure, including its management structure and
distribution center, is well positioned to support the Company's growth plans in
Europe. Current plans call for adding at least 300 additional stores in Europe
over the next several years. Expansion will also be explored in neighboring
countries where the Company does not currently have a presence.
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OUR MARKETING PRESENCE
Foot Locker, Inc. supports its businesses with a comprehensive marketing program
designed to increase consumer awareness and enhance the Company's already strong
reputation as the leading destination to purchase athletic footwear, apparel and
equipment. These programs include Foot Locker, Inc. brand-specific events as
well as those that are co-sponsored by the Company's most-important suppliers.
In addition, strong strategic partnerships and alliances have been forged with
several professional sports leagues.
For over a decade, Foot Locker has been the official retailer for the National
Football League's Super Bowl, offering fans an exciting shopping experience at
its Team Shop typically located near the stadium. Since the inception of the
Women's National Basketball League, Lady Foot Locker has participated as a
primary sponsor of this organization, benefiting from its wide fan appeal.
Champs Sports has teamed up with the National Hockey League to provide hockey
enthusiasts with an exciting shopping experience.
Foot Locker, Inc. takes particular pride in participating in many programs
within the communities in which it operates. The New York Marathon is an
exciting event that Foot Locker has participated in as a major sponsor over the
past several years. Additionally, for almost 25 years, the Company has
participated in many communities across the United States through the "Foot
Locker Cross Country Championships."
Several media are employed to communicate the Company's message to the consumer.
The print medium is utilized extensively for this purpose, including
advertisements in teen-targeted magazines. The Company's own catalogs, including
Eastbay and Final Score, are another important source to effectively market our
brands. Television is also utilized for advertising, with spots selectively
purchased on teen-targeted and sports programming.
In addition to all of these programs and partnerships, Foot Locker, Inc. seeks
to foster a strong relationship with its customers through its worldwide
associates, who provide industry-leading service. Sales personnel receive
extensive training to understand the attributes of the products offered to
ensure that they better meet the needs of the individual consumer. While
merchandise offerings are specifically targeted to meet the demands of the local
consumer, store operations and layout are uniformly designed to emphasize the
brand image that the Company seeks to project.
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OUR DIRECT-TO-CUSTOMERS PRESENCE
During the past several years, Foot Locker, Inc. significantly increased the
profits of its Direct-to-Customers business, comprising its well-established
Eastbay catalog operation and rapidly growing Footlocker.com Internet channel.
These two retail channels share a distribution system and complement the
Company's store operations by selling to a large and diverse base of customers.
In 2002, sales in this segment reached almost $350 million and, more important,
operating profit before corporate expense, net grew 67 percent to $40 million.
Eastbay remains the foundation of this business and is the leading catalog
retailer in the United States that sells athletic footwear, apparel and
equipment. More recently, the Company leveraged Eastbay's well-developed
infrastructure to develop and grow its Internet operation rapidly. Six
e-commerce websites are currently maintained to sell athletic products directly
to consumers - footlocker.com, ladyfootlocker.com, kidsfootlocker.com,
champssports.com, eastbay.com and final-score.com.
New and existing business alliances, with well-known third parties, remain a
significant growth opportunity for this business. For example, Footlocker.com
manages the catalog and e-commerce business for the National Football League,
including the maintenance of the nflshop.com website.
Last year, we entered into a strategic alliance with Amazon.com, whereby Foot
Locker is featured in its new Apparel & Accessories online store. Additional
third-party opportunities, including third-party fulfillment for key suppliers,
will be pursued to leverage Eastbay's infrastructure and operating expertise
further.
The Company also continues to increase its existing Direct-to-Customers business
through internally developed initiatives. During 2002, "Final-Score" was
launched via catalogs and a new website to expand market penetration and
capitalize on the trend towards more value-based products. The investment in
product customization was another strategy initiated to expand this business and
further differentiate its products from the competition.
Footlocker.com/Eastbay remains well positioned to continue its profitable growth
through new internal and external opportunities. The Company believes that it
will benefit as a result of the expected increased usage of the Internet as a
shopping medium. In anticipation of and to support this planned growth, during
2002 the Company increased the size of its fulfillment center, thereby doubling
its distribution capacity.
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Footlocker.com,
Inc., which sells, through its affiliates, including Eastbay, Inc., to customers
through catalogs and Internet websites.
All references to comparable-store sales for a given period relate to
sales of stores that are open at the period-end and that have been open for more
than one year. Accordingly, stores opened and closed during the period are not
included. All comparable-store sales increases and decreases exclude the impact
of foreign currency fluctuations.
The following table summarizes sales by segment, after reclassification
for businesses disposed. The disposed category is included in continuing
operations and represents all business formats sold or closed other than
discontinued business segments. The disposition of all businesses previously
held for disposal was completed in 2001. The 2002 and 2001 reporting years
included 52 weeks compared with the 2000 reporting year, which included 53
weeks.
(in millions) 2002 2001 2000
- ------------------ ------ ------ ------
Athletic Stores $4,160 $3,999 $3,953
Direct-to-Customers 349 326 279
------ ------ ------
4,509 4,325 4,232
Disposed(1) -- 54 124
------ ------ ------
$4,509 $4,379 $4,356
====== ====== ======
Operating profit before corporate expense, net reflects income from
continuing operations before income taxes, corporate expense, non-operating
income and net interest expense. The following table reconciles operating profit
before corporate expense, net by segment to income from continuing operations
before income taxes.
(in millions) 2002 2001 2000
- ---------------------------------------- ---- ----- -----
Athletic Stores $279 $ 283 $ 269
Direct-to-Customers 40 24 1
---- ----- -----
Operating profit before corporate
expense, net from ongoing operations 319 307 270
Disposed(1) -- (12) (2)
Restructuring income (charges)(2) 2 (33) (7)
Gain (loss) on sale of businesses(3) -- 1 (1)
---- ----- -----
Total operating profit before
corporate expense, net 321 263 260
Corporate expense(4) 52 65 79
---- ----- -----
Total operating profit 269 198 181
Non-operating income 3 1 17
Interest expense, net 26 24 22
---- ----- -----
Income from continuing operations
before income taxes(5) $246 $ 175 $ 176
==== ===== =====
(1) Includes The San Francisco Music Box Company, Foot Locker Outlets,
Going to the Game!, Randy River Canada, Burger King and Popeye's
franchises and Foot Locker Asia.
(2) Restructuring income of $2 million in 2002 and restructuring charges of
$33 million and $7 million in 2001 and 2000, respectively, reflect the
disposition of non-core businesses and an accelerated store closing
program.
(3) 2001 reflects a $1 million adjustment to the $164 million gain on sale
of Afterthoughts in 1999. 2000 reflects a $1 million adjustment to the
gain of $19 million recognized on the sale of Garden Centers in 1998.
(4) 2001 includes a $1 million restructuring charge related to the 1999
closure of a distribution center. 2000 includes a $6 million reduction
in previous restructuring charges.
(5) 2000 includes $16 million from the 53rd week.
Corporate expense included depreciation and amortization of $26 million
in 2002, $28 million in 2001 and $29 million in 2000. Corporate expense in 2002
declined compared with 2001 primarily reflecting decreased payroll expenses
related to reductions in headcount. Corporate expense in 2002 was also reduced
by a net foreign exchange gain of $4 million related to intercompany foreign
currency denominated firm commitments. Corporate expense decreased in 2001
compared with 2000 primarily as a result of decreased compensation costs for
incentive bonuses.
SALES
Sales of $4,509 million in 2002 increased 3.0 percent from sales of $4,379
million in 2001. Excluding sales from businesses disposed and the effect of
foreign currency fluctuations, 2002 sales increased by 3.1 percent as compared
with 2001 primarily as a result of the new store opening program.
Comparable-store sales increased by 0.1 percent.
Sales of $4,379 million in 2001 increased 0.5 percent from sales of
$4,356 million in 2000. Excluding sales from businesses disposed, 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.
RESULTS OF OPERATIONS
GROSS MARGIN
Gross margin, as a percentage of sales, of 29.8 percent declined by 10 basis
points in 2002 as compared with 29.9 percent in 2001, primarily resulting from
the increase in the cost of merchandise, as a percentage of sales, due to
increased markdown activity. Vendor allowances increased by $13 million as
compared with the prior year period. The impact of these vendor allowances was
an improvement in gross margin in 2002, as a percentage of sales, of 30 basis
points as compared with 2001.
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased by $5 million in
2002 to $928 million. The increase included $13 million related to new store
openings, $11 million related to the impact of foreign currency fluctuations
primarily related to the euro and $10 million related to increased pension
costs. The increase in pension costs resulted from the decline in plan asset
values and the expected long-term rate of return used to determine the expense.
These increases were partially offset by $29 million in the reduction in SG&A
expenses related to the dispositions of The San Francisco Music Box Company and
the Burger King and Popeye's franchises during the third quarter of 2001 and a
$3 million increase in income related to the postretirement plan. The increase
in postretirement income of $3 million resulted from the amortization of the
associated gains. SG&A, as a percentage of sales, decreased to 20.6 percent in
2002 from 21.1 percent in 2001. During 2002, the Company recorded asset
impairment charges of $6 million and $1 million related to the Kids Foot Locker
and Lady Foot Locker formats, respectively, compared with
18
$2 million in 2001 for the Lady Foot Locker format. SG&A in 2002 was reduced by
a net foreign exchange gain of $4 million related to intercompany foreign
currency denominated firm commitments.
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 and $5 million in 2000, 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. SG&A also included an asset impairment charge of $2 million in
2001 for the Lady Foot Locker format. There were no material asset impairment
charges in 2000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of $149 million decreased by 3.2 percent in 2002
from $154 million in 2001. The impact of no longer amortizing goodwill, as
required by SFAS No. 142, which was adopted by the Company effective February 3,
2002, was $7 million and was partially offset by increased depreciation of $2
million associated with the new store opening program, primarily in Europe.
Depreciation and amortization of $154 million increased by 2.0 percent
in 2001 from $151 million in 2000.
OTHER INCOME
The Company received cash proceeds of $6 million in 2002 related to the
condemnation of a part-owned and part-leased property and recorded a net gain of
$2 million. The Company also recorded a gain from the sale of real estate of $1
million in 2002.
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.
OPERATING RESULTS
Total operating profit before corporate expense, net increased by $58 million,
or 22.1 percent, to $321 million in 2002. This increase was primarily due to
operating losses and costs related to exiting disposed businesses in 2001 of $44
million, as compared with restructuring income of $2 million in 2002, and a $12
million increase in operating profit for ongoing operations. Operating profit
before corporate expense, net from ongoing operations, as a percentage of sales,
was 7.1 percent in 2002 and in 2001.
Total operating profit before corporate expense, net increased by $3
million, or 1.2 percent, to $263 million in 2001 from $260 million in 2000. The
increase reflected an increase of $37 million in operating profit before
corporate expense, net for ongoing operations, which was partially offset by
incremental restructuring charges and operating losses of $34 million related to
disposed businesses. Operating profit before corporate expense, net 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.
INTEREST EXPENSE, NET
(in millions) 2002 2001 2000
- ------------------------------- ---- ---- -----
Interest expense $ 33 $ 35 $ 41
Interest income (7) (11) (19)
---- ---- -----
Interest expense, net $ 26 $ 24 $ 22
Weighted-average interest rate
(excluding facility fees):
Short-term debt --% 6.0% 9.2%
Long-term debt 7.2% 7.4% 8.0%
Total debt 7.2% 7.4% 8.2%
Short-term debt outstanding
during the year:
High $ -- $ 11 $ 206
Weighted-average $ -- $ -- $ 68
Interest expense of $33 million declined by 5.7 percent in 2002 from $35 million
in 2001. Interest expense related to short-term debt decreased by $1 million
primarily as a result of the amortization of deferred financing costs related to
the revolving credit facility over the amended agreement term. Interest expense
related to long-term debt also declined by $1 million. There was an increase of
$3 million in interest expense in 2002 resulting from the issuance of the $150
million 5.50 percent convertible notes in June 2001. This increase was more than
offset by the reduction in interest expense that resulted from the repayment of
the remaining $32 million of the $40 million 7.00 percent medium-term notes in
October 2002 and the interest expense in 2001 associated with the $50 million
6.98 percent medium-term notes that were repaid in October 2001.
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,
which was 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 income related to cash and cash equivalents and other
short-term investments amounted to $5 million in 2002 and $4 million in 2001.
Interest income in both 2002 and 2001 included $2 million of interest income
related to tax refunds and settlements. Also included was intercompany interest
of $5 million in 2001 related to the Northern Group segment. The offsetting
interest expense for the Northern Group was charged to the reserve for
discontinued operations.
Interest income related to cash and cash equivalents and other
short-term investments amounted to $4 million in both 2001 and 2000. Interest
income in 2001 and 2000 included $2 million and $5 million, respectively, of
interest income related to tax refunds and settlements. Also included in
interest income was intercompany interest of $5 million and $10 million in 2001
and 2000 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.
19
INCOME TAXES
The effective rate for 2002 was 34.2 percent, as compared with 36.6 percent in
the prior year. During the first quarter of 2002, the Company recorded a $3
million tax benefit related to a reduction in the valuation allowance for
deferred tax assets related to a multi-state tax planning strategy and
subsequently, during the year, recorded an additional $2 million tax benefit
related to this strategy. During the second quarter of 2002, the Company
recorded a $2 million tax benefit related to a reduction in the valuation
allowance for deferred tax assets related to foreign tax credits. During the
fourth quarter the Company recorded a $1 million tax benefit related to the
settlement of tax examinations and $1 million related to international tax
planning strategies. The combined effect of these items, in addition to higher
earnings in lower tax jurisdictions and the utilization of tax loss carry
forwards reduced the effective tax rate to 34.2 percent in 2002. The Company
expects the effective tax rate to be approximately 37 percent for 2003.
In 2001, the effective tax rate was 36.6 percent. 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.
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 of 2001, 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 then pending transaction,
which was partially offset by reduced severance costs as a result of the
transaction and favorable results from the liquidation of the U.S. stores and
real estate disposition activity. On September 28, 2001, the 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 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). Another wholly-owned subsidiary of the Company
was the assignor of the store leases involved in the transaction and therefore
retains potential liability for such leases. 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, up to a maximum of CAD$5 million
(approximately US$3 million). The net amount of the assets and liabilities of
the former operations was written down to the estimated fair value of the Note,
approximately US$18 million. The transaction was accounted for pursuant to SEC
Staff Accounting Bulletin Topic 5:E "Accounting for Divestiture of a Subsidiary
or Other Business Operation," ("SAB Topic 5:E") as a "transfer of assets and
liabilities under contractual arrangement" as no cash proceeds were received and
the consideration comprised the Note, the repayment of which is dependent on the
future successful operations of the business. The assets and liabilities related
to the former operations were presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement."
In the fourth quarter of 2001, the 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.
The Company recorded a charge of $18 million in the first quarter of
2002 reflecting the poor performance of the Northern Group stores in Canada
since the date of the transaction. There was no tax benefit recorded related to
the $18 million charge, which comprised a valuation allowance in the amount of
the operating losses incurred by the purchaser and a further reduction in the
carrying value of the net amount of the assets and liabilities of the former
operations to zero, due to greater uncertainty with respect to the
collectibility of the Note. This charge was recorded pursuant to SAB Topic 5:E,
which requires accounting for the Note in a manner somewhat analogous to equity
accounting for an investment in common stock.
In the third quarter of 2002, the Company recorded a charge of
approximately $1 million before-tax for lease exit costs in excess of previous
estimates. In addition, the Company recorded a tax benefit of $2 million, which
also reflected the impact of the tax planning strategies implemented related to
the discontinuance of the Northern Group.
On December 31, 2002, the Company-provided revolving credit facility
expired, without having been used. Furthermore, the operating results of
Northern Canada had significantly improved during the year such that the Company
had reached an agreement in principle to receive CAD$5 million (approximately
US$3 million) cash consideration in partial prepayment of the Note and accrued
interest due and agreed to reduce the face value of the Note to CAD$17.5 million
(approximately US$12 million). Based upon the improved results of the Northern
Canada business, the Company believes there is no substantial uncertainty as to
the amount of the future costs and expenses that could be payable by the
Company. As indicated above, as the assignor of the Northern Canada leases, a
wholly-owned subsidiary of the Company remains secondarily liable under those
leases. As of February 1, 2003, the Company estimates that its gross contingent
lease liability is between CAD$88 to $95 million (approximately US$57 to $62
million). Based upon its assessment of the risk of having to satisfy that
liability
20
and the resultant possible outcomes of lease settlement, the Company currently
estimates the expected value of the lease liability to be approximately US$2
million. The Company believes that it is unlikely that it would be required to
make such contingent payments, and further, such contingent obligations would
not be expected to have a material effect on the Company's consolidated
financial position, liquidity or results of operations. As a result of the
aforementioned developments, during the fourth quarter of 2002 circumstances
changed sufficiently such that it became appropriate to recognize the
transaction as an accounting divestiture.
During the fourth quarter of 2002, as a result of the accounting
divestiture, the Note was recorded in the financial statements at its estimated
fair value of CAD$16 million (approximately US$10 million). The Company, with
the assistance of an independent third party, determined the estimated fair
value by discounting expected cash flows at an interest rate of 18 percent. This
rate was selected considering such factors as the credit rating of the
purchaser, rates for similar instruments and the lack of marketability of the
Note. As the net assets of the former operations were previously written down to
zero, the fair value of the Note was recorded as a gain on disposal within
discontinued operations. There was no tax expense recorded related to this gain.
The Company will no longer present the assets and liabilities of Northern Canada
as "Assets of business transferred under contractual arrangement (note
receivable)" and "Liabilities of business transferred under contractual
arrangement," but rather will record the Note initially at its estimated fair
value. At February 1, 2003, US$4 million is classified as a current receivable
with the remainder classified as long term within other assets in the
accompanying Consolidated Balance Sheet.
Future adjustments, if any, to the carrying value of the Note will be
recorded pursuant to SEC Staff Accounting Bulletin Topic 5:Z:5, "Accounting and
Disclosure Regarding Discontinued Operations," which requires changes in the
carrying value of assets received as consideration from the disposal of a
discontinued operation to be classified within continuing operations. Interest
income will also be recorded within continuing operations. The Company will
recognize an impairment loss when, and if, circumstances indicate that the
carrying value of the Note may not be recoverable. Such circumstances would
include a deterioration in the business, as evidenced by significant operating
losses incurred by the purchaser or nonpayment of an amount due under the terms
of the Note.
On May 6, 2003, the amendments to the Note were executed and a cash
payment of CAD$5.2 million (approximately US$3.5 million) was received
representing principal and interest through the date of the amendment. After
taking into account this payment, the remaining principal due under the Note is
CAD$17.5 million (approximately US$12 million). Under the terms of the
renegotiated Note, a principal payment of CAD$1 million is due January 15, 2004.
An accelerated principal payment of CAD$1 million may be due if certain events
occur. The remaining amount of the Note is required to be repaid upon the
occurrence of "payment events," as defined in the purchase agreement, but no
later than September 28, 2008. Interest is payable semiannually and will accrue
beginning on May 1, 2003 at a rate of 7.0 percent per annum.
Net disposition activity of $13 million in 2002 included the $18
million reduction in the carrying value of the net assets and liabilities,
recognition of the note receivable of $10 million, real estate disposition
activity of $1 million and severance and other costs of $4 million. 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.
The remaining reserve balance of $7 million at February 1, 2003 is expected to
be utilized within twelve months.
The net loss from discontinued operations for 2000 includes sales of
$335 million, and an interest expense allocation of $10 million based on
intercompany debt balances, restructuring charges of $3 million and long-lived
asset impairment charges of $4 million.
In 1998, the Company exited both its International General Merchandise
and Specialty Footwear segments. In the second quarter of 2002, the Company
recorded a $1 million charge for a lease liability related to a Woolco store in
the former International General Merchandise segment, which was more than offset
by a net reduction of $2 million before-tax, or $1 million after-tax, for each
of the second and third quarters of 2002 in the Specialty Footwear reserve
primarily reflecting real estate costs more favorable than original estimates.
In 1997, the Company announced that it was exiting its Domestic General
Merchandise segment. In the second quarter of 2002, the Company recorded a
charge of $4 million before-tax, or $2 million after-tax, for legal actions
related to this segment, which have since been settled. In addition, the
successor-assignee of the leases of a former business included in the Domestic
General Merchandise segment has filed a petition in bankruptcy, and rejected in
the bankruptcy proceeding 15 leases it originally acquired from a subsidiary of
the Company. There are currently several actions pending against this subsidiary
by former landlords for the lease obligations. In the fourth quarter of 2002,
the Company recorded a charge of $1 million after-tax related to certain
actions. The Company estimates the gross contingent lease liability related to
the remaining actions as approximately $9 million. The Company believes that it
may have valid defenses, however as these actions are in the preliminary stage
of proceedings, their outcome cannot be predicted with any degree of certainty.
The remaining reserve balances for these three discontinued segments
totaled $20 million as of February 1, 2003, $11 million of which is expected to
be utilized within twelve months and the remaining $9 million thereafter.
REPOSITIONING AND RESTRUCTURING RESERVES
1999 RESTRUCTURING
Total restructuring charges of $96 million before-tax were recorded in 1999 for
the Company's restructuring program to sell or liquidate eight non-core
businesses. The restructuring plan also included an accelerated store-closing
program in North America and Asia, corporate headcount reduction and a
distribution center shutdown.
Throughout 2000, the disposition of Randy River Canada, Foot Locker
Outlets, Colorado, Going to the Game!, 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. The
Company completed the sales of The San Francisco Music Box Company and the
assets related to its Burger King and Popeye's franchises in 2001, for cash
proceeds of approximately $14 million and $5 million, respectively.
Restructuring charges of $33 million
21
in 2001 and reductions to the reserves of $2 million in 2002 were primarily due
to The San Francisco Music Box Company sale. The remaining reserve balance of $1
million at February 1, 2003 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 recorded a $1 million restructuring charge in connection with the
termination of its Maumelle distribution center lease, which was completed in
2002.
Included in the consolidated results of operations are sales of $54
million and $139 million and operating losses of $12 million and $4 million in
2001 and 2000, respectively, for the above non-core businesses and
under-performing stores, excluding Team Edition.
1993 REPOSITIONING AND 1991 RESTRUCTURING
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
repositioning program, approximately 970 stores were identified for closing.
Approximately 900 stores were closed under the 1991 restructuring program. The
remaining reserve balance of $2 million at February 1, 2003, is expected to be
substantially utilized within twelve months.
STORE COUNT
At February 1, 2003, the Company operated 3,625 stores, as compared with 3,590
at February 2, 2002. During 2002, the Company opened 157 stores, closed 122
stores and remodeled/relocated 205 stores.
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
format 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, Inc., which sells, through its affiliates, directly to
customers through catalogs and the Internet. Eastbay, Inc., one of its
affiliates, is one of the largest direct marketers of athletic footwear, apparel
and equipment in the United States, and provides the Company's seven
full-service e-commerce sites access to an integrated fulfillment and
distribution system. Included in the Company's disposed category are Foot Locker
Outlets, Going to the Game! and Foot Locker Asia.
ATHLETIC STORES
(in millions) 2002 2001 2000
- ---------------------------------- ------ ------ -------
SALES
Stores $4,160 $3,999 $ 3,953
Disposed -- -- 1
------ ------ -------
Total sales $4,160 $3,999 $ 3,954
====== ====== =======
OPERATING PROFIT BEFORE CORPORATE
EXPENSE, NET
Stores $ 279 $ 283 $ 269
Disposed -- -- (2)
Restructuring income 1 -- 4
------ ------ -------
Total operating profit before corporate
expense, net $ 280 $ 283 $ 271
====== ====== =======
Sales as a percentage of
consolidated total 92% 92% 91%
Number of stores at year end 3,625 3,590 3,582
Selling square footage (in millions) 8.04 7.94 7.91
Gross square footage (in millions) 13.22 13.14 13.08
Athletic Stores sales of $4,160 million increased 4.0 percent in 2002, as
compared with $3,999 million in 2001. The increase was in part due to the
strength of the euro's performance against the U.S. dollar in 2002, particularly
in the third and fourth quarters. Excluding the effect of foreign currency
fluctuations, sales from athletic store formats increased 2.8 percent in 2002,
which was driven by the Company's new store opening program, particularly in
Foot Locker Europe, Champs Sports and Foot Locker Australia. Foot Locker Europe
and Foot Locker Australia generated impressive comparable-store sales increases
and Champs Sports also contributed a comparable-store sales increase. Athletic
Stores comparable-store sales decreased by 0.4 percent in 2002.
The Foot Locker business in the United States showed disappointing
sales during 2002. In the United States, both the basketball category as well as
the current trend in classic shoes led footwear sales across most formats,
although certain higher-priced marquee footwear did not sell as well as
anticipated in the first quarter of 2002. During the second quarter of 2002, the
Company successfully moved its marquee footwear back in line with historical
levels and re-focused its marquee footwear selection on products having a retail
price of $90 to $120 per pair and made changes to the product assortment, which
accommodated customer demands in the third quarter of 2002. Lower mall traffic
resulted in disappointing sales during the fourth quarter of 2002. Sales,
however, continued to benefit from the apparel strategy led by merchandise in
private label and licensed offerings.
Sales from the Lady Foot Locker and Kids Foot Locker formats were
particularly disappointing in 2002. The Kids Foot Locker format, which had
previously been managed in conjunction with Lady Foot Locker, is currently being
managed by the Foot Locker U.S management team. Pursuant to SFAS No. 144, the
Company performed an analysis of the recoverability of store long-lived assets
for the Lady Foot Locker format during the third quarter of 2002 and for the
Kids Foot Locker format during the fourth quarter of 2002 and recorded asset
impairment charges of $1 million and $6 million,
22
respectively. Management has implemented various merchandising strategies in an
effort to improve future performance and expects the businesses to return to
historical levels of profitability.
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 store formats increased 3.4 percent in 2001, compared with 2000,
reflecting a comparable store sales increase of 4.0 percent. The most
significant growth was in Foot Locker Europe, which generated comparable-store
increases in the double-digits. Champs Sports also contributed impressive
comparable-store sales increases and Foot Locker U.S., 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.
Operating profit before corporate expense, net from ongoing athletic
store formats decreased 1.4 percent to $279 million in 2002 from $283 million in
2001. Operating profit before corporate expense, net, as a percentage of sales,
decreased to 6.7 percent in 2002 from 7.1 percent in 2001 primarily due to the
increased operating expenses associated with the new store opening program. The
impact of no longer amortizing goodwill as a result of the Company's adoption of
SFAS No. 142 was a reduction of amortization expense of $2 million in 2002.
Operating performance improved internationally but was more than offset by the
decline in performance in the United States from the Foot Locker, Lady Foot
Locker and Kids Foot Locker formats. Operating profit before corporate expense,
net included asset impairment charges of $1 million and $2 million in 2002 and
2001, respectively, for the Lady Foot Locker format. An asset impairment charge
of $6 million was also recorded in 2002 related to the Kids Foot Locker format.
Operating profit before corporate expense, net 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 before
corporate expense, net from ongoing athletic store formats increased 11.4
percent in 2001 from $254 million in 2000. The increase in 2001 was driven by
all formats, with the exception of Lady Foot Locker, for which an asset
impairment charge of $2 million was recorded in 2001. There were no material
asset impairment charges in 2000.
DIRECT-TO-CUSTOMERS
(in millions) 2002 2001 2000
- ------------------------------- ---- ---- ----
SALES $349 $326 $279
==== ==== ====
OPERATING PROFIT BEFORE CORPORATE
EXPENSE, NET $ 40 $ 24 $ 1
==== ==== ====
Sales as a percentage of
consolidated total 8% 7% 6%
Direct-to-Customers sales increased by 7.1 percent to $349 million in 2002 from
$326 million in 2001. The Internet business continued to drive the sales growth
in 2002. Internet sales increased by $44 million, or 44.0 percent, to $144
million in 2002 compared with $100 million in 2001. Catalog sales decreased 9.3
percent to $205 million in 2002 from $226 million in 2001. Management believes
that the decrease in catalog sales is substantially offset by the increase in
Internet sales as the trend has continued for customers to browse and select
products through its catalogs and then to make their purchases via the Internet.
During 2002, the Company implemented many new initiatives designed to increase
market share within the Internet arena. A new catalog website was launched that
will offer value-based products. The Company began to offer product
customization to further differentiate its products from those of competitors,
expanded on the existing relationship with the National Football League and,
prior to the end of 2002, entered into a strategic alliance to offer footwear
and apparel on the Amazon.com website. Foot Locker is a featured brand in the
Amazon.com specialty store for apparel and accessories.
Direct-to-Customers sales increased 16.8 percent in 2001 to $326
million compared with $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 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 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.
The Direct-to-Customers business generated operating profit before
corporate expense, net of $40 million in 2002 compared with $24 million in 2001,
and continued to increase profitability levels greater than the Athletic Stores
segment. Operating profit before corporate expense, net, as a percentage of
sales, increased to 11.5 percent in 2002 from 7.4 percent in 2001. The increase
was primarily due to the increase in gross margin, reduced marketing costs and
$5 million related to the impact of no longer amortizing goodwill as a result of
the Company's adoption of SFAS No. 142 in 2002. Management anticipates that the
sales growth in its integrated Internet and catalog business will continue in
future years at high levels of profitability.
The Direct-to-Customers business generated operating profit before
corporate expense, net of $24 million in 2001 compared with $1 million in 2000.
The increase in operating profit was primarily due to the increase in sales
performance. Excluding the impact of the 53rd week in 2000, the
Direct-to-Customers business broke even in 2000.
BUSINESS CONCENTRATION
In 2002, the Company purchased approximately 71 percent of its merchandise from
five vendors and expects to continue to obtain a significant percentage of its
athletic product from these vendors in future periods. Of that amount,
approximately 44 percent was purchased from one vendor - Nike, Inc. ("Nike") -
and 11 percent from another. While the Company generally considers its
relationships with its vendors to be satisfactory, given the significant
concentration of its purchases from a few key vendors, its access to merchandise
that it considers appropriate for its stores, catalogs, and on-line retail sites
may be subject to the policies and practices of key vendors.
During 2002, Nike advised the Company that Nike would limit purchases
of certain marquee and launch athletic footwear by the Company's U.S. divisions
for delivery after February 1, 2003. Also, the Company has reduced its orders
for certain other products offered for sale by Nike. The Company expects to make
incremental purchases of marquee and launch product from its other key vendors,
which the Company currently expects will allow it to meet customer demand for
marquee and launch products. The Company expects that Nike will continue to be a
significant supplier in 2003 and will reflect approximately 32 percent to 38
percent of its 2003 merchandise purchases.
23
ALL OTHER BUSINESSES
The disposition of all business formats captured in the "All Other" category was
completed during 2001. 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) 2002 2001 2000
- -------------------------------- ---- ---- -----
SALES $-- $ 54 $ 123
==== ==== =====
OPERATING PROFIT (LOSS) BEFORE
CORPORATE EXPENSE, NET
Disposed $-- $(12) $ --
Restructuring income (charges) 1 (33) (11)
Gain (loss) on sale of businesses -- 1 (1)
---- ---- -----
Total operating profit (loss)
before corporate expense, net $ 1 $(44) $ (12)
==== ==== =====
Sales as a percentage of
consolidated total --% 1% 3%
Number of stores at year end -- -- 170
Selling square footage (in millions) -- -- 0.18
Gross square footage (in millions) -- -- 0.24
In connection with the 1999 restructuring program, restructuring income
of $1 million was recorded in 2002 as a reduction in the previous charges
related to the disposition of the non-core businesses. Restructuring 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 2001, a $1 million adjustment was recorded to the gain on the 1999
sale of Afterthoughts. In 2000, the Company recorded a $1 million adjustment to
the $19 million gain recognized on the 1998 sale of the Garden Centers nursery
business.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW AND LIQUIDITY
Generally, the Company's primary source of cash has been from operations. The
Company has a $190 million revolving credit facility available through June
2004. In 2001, the Company raised $150 million in cash 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.
Management believes operating cash flows and current credit facilities
will be adequate to finance its working capital requirements, to make scheduled
pension contributions for the Company's retirement plans, to fund quarterly
dividend payments, which are part of the approved dividend payment program, and
support the development of its short-term and long-term operating strategies.
Planned capital expenditures for 2003 are $148 million, of which $114 million
relates to new store openings and modernizations of existing stores and $34
million reflects the development of information systems and other support
facilities. In addition, planned lease acquisition costs are $17 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, the Company's reliance on a few key vendors for a significant
portion of its merchandise purchases (and on one key vendor for approximately 44
percent of its merchandise purchases), risks associated with foreign global
sourcing 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 $347
million in 2002 compared with $204 million in 2001. These amounts reflect income
from continuing operations, adjusted for non-cash items and working capital
changes. The increase in cash flow from operations of $143 million in 2002 is
primarily due to improved operating performance and is also related to working
capital changes primarily related to merchandise inventories, offset by the
related payables and income taxes payable. During the third quarter of 2002, the
Company recorded a current receivable of approximately $45 million related to a
Federal income tax refund and subsequently received the cash during the fourth
quarter. Payments charged to the repositioning and restructuring reserves were
$3 million in 2002 compared with $62 million in 2001.
Operating activities of continuing operations provided cash of $204
million in 2001 compared with $265 million in 2000. The decline in cash flow
from operations in 2001 reflected increased cash outflows for merchandise
inventories and income taxes payable and repositioning and restructuring
reserves. Payments charged to repositioning reserves were $62 million in 2001
compared with $38 million in 2000.
Net cash used in investing activities of continuing operations was $162
million in 2002 compared with $116 million in 2001. Capital expenditures of $150
million in 2002 and $116 million in 2001 primarily related to store remodelings
and new stores. Lease acquisition costs, primarily related to the process of
securing and extending prime lease locations for real estate in Europe, were $18
million and $20 million in 2002 and 2001, respectively. Proceeds from sales of
real estate and other assets and investments were $6 million in 2002 compared
with $20 million in 2001. Proceeds from the condemnation of the Company's
part-owned and part-leased property contributed $6 million of cash received in
2002. 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.
Net cash used in investing activities of continuing operations was $116
million in 2001 compared with $86 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. Capital expenditures of $116
million in 2001 primarily related to store remodelings and new stores compared
with $94 million in 2000.
Cash used in financing activities of the Company's continuing
operations was $36 million in 2002 as compared with $89 million of cash provided
by financing activities of continuing operations in 2001. The change in 2002
compared with 2001 was primarily due to the issuance of $150 million of
convertible notes on June 8, 2001, which was partially offset by the repayment
of the $50 million 6.98 percent medium-term notes that matured in October 2001
and the purchase and retirement of $8 million of the $40 million 7.00 percent
medium-term notes payable in October 2002. During 2002, the repayment of debt
continued as the Company repaid the balance of the $40 million 7.00 percent
medium-term notes that were due in October 2002 and $9 million
24
of the $200 million of debentures due in 2022. There were no outstanding
borrowings under the Company's revolving credit agreement as of February 1, 2003
and February 2, 2002. During 2002, the Board of Directors of the Company
initiated a dividend program and declared and paid a $0.03 per share dividend
during the fourth quarter of 2002 of $4 million.
Cash provided by financing activities of the Company's continuing
operations was $89 million in 2001 compared with cash used in financing
activities of $167 million in 2000. The change in 2001 compared with 2000 was
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. 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.
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 2002
and 2001, discontinued operations utilized cash of $10 million and $75 million,
respectively, 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.
CAPITAL STRUCTURE
The Company reduced debt and capital lease obligations, net of cash and cash
equivalents to zero at February 1, 2003 from $184 million at February 2, 2002.
In 2002, the Company repaid the remaining $32 million of the $40 million 7.00
percent medium-term notes that were payable in October 2002 and repurchased and
retired $9 million of the $200 million 8.50 percent notes due in 2022,
contributing to the reduction of debt and capital lease obligations, net of cash
and cash equivalents. During the fourth quarter of 2002, the Board of Directors
initiated the Company's dividend program and declared and paid a dividend of
$0.03 per share. The Company will also be making scheduled contributions to the
retirement plans. The Company made a $50 million contribution to its U.S.
qualified retirement plan in February 2003, in advance of ERISA requirements.
During 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 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 1,
2003. There were no borrowings outstanding under the revolving credit agreement
at February 1, 2003. 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+. On May 28, 2002, Moody's Investors Service's increased the
Company's credit rating to Ba2.
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) 2002 2001
- ------------------------------------ ------ ------
Debt and capital lease obligations,
net of cash and cash equivalents $ -- $ 184
Present value of operating leases 1,571 1,372
------ ------
Total net debt 1,571 1,556
Shareholders' equity 1,110 992
------ ------
Total capitalization $2,681 $2,548
====== ======
Net debt capitalization percent 58.6% 61.1%
Net debt capitalization percent without
operating leases -- % 15.6%
Excluding the present value of operating leases, the Company reduced
debt and capital lease obligations, net of cash and cash equivalents to zero at
February 1, 2003, due to the Company's ability to reduce debt and capital lease
obligations by $42 million while increasing cash and cash equivalents by $142
million. These improvements were offset by an increase of $199 million in the
present value of operating leases for additional leases entered into during 2002
for the Company's new store program, resulting in an increase in total net debt
of $15 million. Including the present value of operating leases, the Company's
net debt capitalization percent improved by 2.5 percent in 2002. Total
capitalization improved by $133 million in 2002, which was primarily a result of
a $118 million increase in shareholders' equity and a $15 million increase in
total net debt. The increase in shareholders' equity relates primarily to net
income of $153 million in 2002 and an increase of $38 million in the foreign
exchange currency translation adjustment primarily related to the increase in
the euro, which were partially offset by a charge of $83 million to record an
additional minimum liability for the Company's pension plans. The additional
minimum liability was required as a result of the plan's negative return on
assets in 2002, coupled with a decrease in the discount rate used to value the
benefit obligations.
The following represents the scheduled maturities of the Company's
long-term contractual obligations and other commercial commitments as of
February 1, 2003:
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 $ 342 $ -- $ -- $ -- $ 342
Capital lease obligations 15 1 -- 14 --
Operating leases 2,241 357 629 519 736
------ ---- ---- ---- ------
Total contractual cash
obligations $2,598 $358 $629 $533 $1,078
====== ==== ==== ==== ======
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 $169 $ -- $169 $ -- $ --
Stand-by letters of credit 21 -- 21 -- --
--------- ------ ------ ----- -------
Total commercial
commitments $190 $ -- $190 $ -- $ --
========= ====== ====== ===== =======
25
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 and assets, the
Company may be obligated for certain lease commitments transferred to third
parties and pursuant to certain normal representations, warranties, or
indemnifications entered into with the purchasers of such businesses or assets.
Although the maximum potential amounts for such obligations cannot be readily
determined, management believes that the resolution of such contingencies will
not have a material effect on the Company's consolidated financial position,
liquidity, or results of operations. 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.
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 accounting principles generally
accepted 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 for the Company's Athletic Stores 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
that may be required to correctly reflect merchandise inventories at the lower
of cost or market. Management believes this method and its related assumptions,
which have been consistently applied, to be reasonable.
VENDOR ALLOWANCES
In the normal course of business, the Company receives allowances from its
vendors for markdowns taken. Vendor allowances are recognized as a reduction in
cost of sales in the period in which the markdowns are taken. The Company has
volume-related agreements with certain vendors, under which it receives rebates
based on fixed percentages of cost purchases. These rebates are recorded in cost
of sales when the product is sold and they contributed 10 basis points to the
2002 gross margin rate.
The Company receives support from some of its vendors in the form of
reimbursements for cooperative advertising and catalog costs for the launch and
promotion of certain products. The reimbursements are agreed upon with vendors
for specific advertising campaigns and catalogs. Such cooperative income is
recorded in SG&A in the same period as the associated expense is incurred.
Cooperative income amounted to approximately 17 percent of total advertising
costs and approximately 7 percent of catalog costs in 2002.
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 and the fair value of non-cash consideration received. 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, significant judgment is required and
these estimates and assumptions may change as additional information becomes
available or as facts or circumstances change.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, which the Company adopted in 2002, the Company
recognizes an impairment loss when circumstances indicate that the carrying
value of long-lived tangible and intangible assets with finite lives may not be
recoverable. Management's policy in determining whether an impairment indicator
exists, a triggering event, comprises measurable operating performance criteria
as well as qualitative measures. If an analysis is necessitated by the
occurrence of a triggering event, the Company uses assumptions, which are
predominately identified from the Company's three-year strategic plans, in
determining the impairment amount. The calculation of fair value of long-lived
assets is based on estimated expected discounted future cash flows by store,
which is generally measured by discounting the expected future cash flows at the
Company's weighted-average cost of capital. 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. Long-lived tangible assets and intangible assets with finite lives
primarily include property and equipment and intangible lease acquisition costs.
In accordance with SFAS No. 142, which the Company adopted in 2002,
goodwill is no longer amortized but is subject to impairment review. The Company
completed its transitional impairment review as of February 3, 2002 and no
impairment charges were recorded. The impairment review requires a two-step
approach. The initial step requires that the carrying value of each reporting
unit be compared with its estimated fair value. The second step to evaluate
goodwill of a reporting unit for impairment is only required if the carrying
value of that reporting unit exceeds its estimated fair value. The fair value of
each of the Company's reporting units exceeded its carrying value as of February
3, 2002. The Company used a market-based approach to determine the fair value of
a reporting unit, which requires judgment and uses one or more methods to
compare the reporting unit with similar businesses, business ownership interests
or securities that have been sold.
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
26
actuaries, taking into consideration existing and future economic conditions and
the Company's intentions with regard to the plans. Management believes its
estimates for 2002, the most significant of which are stated below, to be
reasonable. The expected long-term rate of return on invested plan assets is a
component of pension expense and the rate is based on the plans'
weighted-average asset allocation of 64 percent equity securities and 36 percent
fixed income investments, as well as historical and future expected performance
of those assets. The Company's common stock represented approximately one
percent of the total pension plans' assets at February 1, 2003. A decrease of 50
basis points in the weighted-average expected long-term rate of return would
have increased 2002 pension expense by $3 million. The actual return on plan
assets in a given year may differ from the expected long-term rate of return and
the resulting gain or loss is deferred and amortized over time. An assumed
discount rate is used to measure the present value of future cash flow
obligations of the plans and the interest cost component of pension expense and
postretirement income. The discount rate is selected with reference to the
long-term corporate bond yield. A decrease of 50 basis points in the weighted-
average discount rate would have increased the accumulated benefit obligation at
February 1, 2003 of the pension and postretirement plans by $33 million and $1
million, respectively. Such a decrease would not have significantly changed 2002
pension expense or postretirement income. There is limited risk to the Company
for increases in healthcare costs related to the postretirement plan as new
retirees have assumed the full expected costs and existing retirees have assumed
all increases in such costs since the beginning of fiscal year 2001. The
additional minimum liability included in shareholders' equity at February 1,
2003 for the pension plans represented the amount by which the accumulated
benefit obligation exceeded the fair market value of plan assets.
2002 PRINCIPAL ASSUMPTIONS: PENSION BENEFITS POSTRETIREMENT BENEFITS
- --------------------------- ---------------- -----------------------
Weighted-average discount rate 6.50% 6.50%
Weighted-average rate of
compensation increase 3.65% N/A
Weighted-average expected long-term
rate of return on assets 8.87% N/A
The Company expects to record postretirement income of $12 million and
pension expense of $16 million in 2003. Pension expense would be $20 million in
2003 if the Company had not made the $50 million contribution to its U.S.
qualified retirement plan in February 2003, in advance of ERISA requirements.
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 income for future years by taxing jurisdiction and
to use its judgment to determine whether or not to record a valuation allowance
for part or all of a deferred tax asset.
A one percent change in the Company's overall statutory tax rate for
2002 would have resulted in a $5 million change in the carrying value of the net
deferred tax asset and a corresponding charge or credit to income tax expense
depending on whether such tax rate change was a decrease or increase.
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.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In 2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed at a minimum annually
(or more frequently if impairment indicators arise) for impairment. The Company
completed the transitional review, which did not result in an impairment charge.
Separable intangible assets that are deemed to have definite lives continue to
be amortized over their estimated useful lives (but with no maximum life). With
respect to goodwill acquired prior to July 1, 2001, the Company ceased
amortizing those assets during the first quarter of 2002. Goodwill amortization
was $7.5 million in 2001 and $7.7 million in 2000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), 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 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. The Company adopted SFAS No. 144 in 2002, and as required,
prior year balance sheet amounts have been conformed for the required
presentation of discontinued operations and other long-lived assets held for
disposal. In addition, impairment reviews were performed in 2002 pursuant to
SFAS No. 144 and impairment charges of $7 million were recorded.
27
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS No. 145"). SFAS No. 145 amends other existing authoritative
pronouncements to make various technical corrections, including that gains and
losses from extinguishment of debt no longer be classified as extraordinary. The
statement also eliminates an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. In addition, it requires that the original lessee under an
operating lease agreement that becomes secondarily liable shall recognize the
fair value of the guarantee obligation for all transactions occurring after May
15, 2002. The Company adopted SFAS No. 145 as of May 15, 2002, and it did not
have a material impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), which is
effective for exit and disposal activities that are initiated after December 31,
2002. The statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The statement requires that the fair value
of an initial liability for a cost associated with an exit or disposal activity
be recognized when the liability is incurred as opposed to when the entity
commits to an exit plan, thereby eliminating the definition and requirements for
recognition of exit costs, as is the guidance under EITF 94-3. The Company
adopted SFAS No. 146 in 2002, and it did not have a material impact on its
financial position or results of operations.
In November 2002, EITF Issue No. 02-16, "Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor" was
issued to clarify the accounting for consideration received from a vendor. Cash
received applies to cash received for reimbursements of costs incurred to sell
the vendor's products, cooperative advertising and cash received as rebates or
refunds based upon cumulative levels of purchases. The pronouncement applies to
new arrangements, including modifications of existing arrangements entered into
after December 31, 2002. The Company adopted the provisions of the
pronouncement, as of January 1, 2003 and it did not have a material impact on
its financial position or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which is effective for fiscal years beginning
after June 15, 2002. 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 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 does not expect the adoption to have a
significant impact on its financial position or results of operations.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No.
123," was issued and provides alternative methods of transition for an entity
that changes to the fair value based method of accounting for stock-based
compensation, requires more prominent disclosure of the pro forma impact on
earnings per share and requires such disclosures quarterly for interim periods
beginning in 2003. The Company intends to adopt the interim disclosure
requirements as of the beginning of fiscal year 2003 and to continue to account
for stock-based compensation under APB No. 25.
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, dividend payments, stock repurchases, 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, the Company's reliance on a few key
vendors for a significant portion of its merchandise purchases (and on one key
vendor for approximately 44 percent of its merchandise purchases), unseasonable
weather, risks associated with foreign global sourcing, including political
instability, changes in import regulations and the presence of Severe Acute
Respiratory Syndrome, the effect on the Company, its suppliers and customers, of
any significant future increases in the cost of oil or petroleum products,
economic conditions worldwide, any changes in business, political and economic
conditions due to the threat of future terrorist activities in the United States
or in other parts of the world and related U.S. military action overseas, and
the ability of the Company to execute its business plans effectively with regard
to each of its business units, including its plans for marquee and launch
footwear component of its business. Any changes in such assumptions or factors
could produce significantly different results. The Company undertakes no
obligation to 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 these 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,
Executive Vice President and
Chief Financial Officer
May 12, 2003
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. and subsidiaries as of February 1, 2003 and February 2, 2002, 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 1, 2003. These consolidated financial statements are the
responsibility of Foot Locker, Inc.'s 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 1, 2003 and February 2, 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 1, 2003 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 in 2002 changed its method of accounting for goodwill and other
intangible assets, in 2001 changed its method of accounting for derivative
financial instruments and hedging activities and in 2000 changed its method of
accounting for sales under its layaway program.
KPMG LLP
New York, NY
March 12, 2003
29
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts) 2002 2001 2000
- --------------------------------------- ---- ---- ----
SALES $ 4,509 $ 4,379 $ 4,356
Costs and Expenses
Cost of sales 3,165 3,071 3,047
Selling, general and administrative expenses 928 923 975
Depreciation and amortization 149 154 151
Restructuring charges (income) (2) 34 1
Interest expense, net 26 24 22
------- ------- -------
4,266 4,206 4,196
Other income (3) (2) (16)
------- ------- -------
4,263 4,204 4,180
------- ------- -------
Income from continuing operations before income taxes 246 175 176
Income tax expense 84 64 69
------- ------- -------
Income from continuing operations 162 111 107
------- ------- -------
Loss from discontinued operations, net of income tax benefit of $(15) -- -- (50)
Loss on disposal of discontinued operations, net of income tax (benefit)
expense of $(2), $ -- and $42, respectively (9) (19) (296)
Cumulative effect of accounting change, net of income tax benefit of $ -- -- -- (1)
------- ------- -------
NET INCOME (LOSS) $ 153 $ 92 $ (240)
======= ======= =======
Basic earnings per share:
Income from continuing operations $ 1.15 $ 0.79 $ 0.78
Loss from discontinued operations (0.06) (0.13) (2.51)
Cumulative effect of accounting change -- -- (0.01)
------- ------- -------
Net income (loss) $ 1.09 $ 0.66 $ (1.74)
======= ======= =======
Diluted earnings per share:
Income from continuing operations 1.10 $ 0.77 $ 0.77
Loss from discontinued operations (0.05) (0.13) (2.49)
Cumulative effect of accounting change -- -- (0.01)
------- ------- -------
Net income (loss) $ 1.05 $ 0.64 $ (1.73)
======= ======= =======
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
NET INCOME (LOSS) $ 153 $ 92 $(240)
Other comprehensive income (loss), net of tax
Foreign currency translation
adjustment:
Translation adjustment arising during the period 38 (12) (19)
Less: reclassification adjustment for net loss included in (loss)
income on disposal of discontinued operations -- -- 118
----- ----- -----
Net foreign currency translation adjustment 38 (12) 99
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 $(56), $(71) and $2, respectively (83) (115) 2
----- ----- -----
COMPREHENSIVE INCOME (LOSS) $ 108 $ (35) $(139)
===== ===== =====
See Accompanying Notes to Consolidated Financial Statements.
30
CONSOLIDATED BALANCE SHEETS
(in millions) 2002 2001
- ------------- ---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 357 $ 215
Merchandise inventories 835 793
Assets of discontinued operations 2 5
Other current assets 90 102
------ ------
1,284 1,115
PROPERTY AND EQUIPMENT, NET 636 637
DEFERRED TAXES 240 238
GOODWILL 136 135
INTANGIBLE ASSETS, NET 80 56
ASSETS OF BUSINESS TRANSFERRED UNDER CONTRACTUAL ARRANGEMENT (NOTE RECEIVABLE) -- 30
OTHER ASSETS 110 89
------ ------
$2,486 $2,300
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 251 $ 272
Accrued liabilities 296 211
Liabilities of discontinued operations 3 7
Current portion of repositioning and restructuring reserves 3 6
Current portion of reserve for discontinued operations 18 16
Current portion of long-term debt and obligations under capital leases 1 34
------ ------
572 546
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 356 365
LIABILITIES OF BUSINESS TRANSFERRED UNDER CONTRACTUAL ARRANGEMENT -- 12
OTHER LIABILITIES 448 385
SHAREHOLDERS' EQUITY 1,110 992
------ ------
$2,486 $2,300
====== ======
See Accompanying Notes to Consolidated Financial Statements.
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
2002 2001 2000
---- ---- ----
(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 139,981 $ 363 138,691 $ 351 137,542 $ 337
Restricted stock issued under stock option
and award plans 60 -- 210 (2) -- (1)
Forfeitures of restricted stock -- 1 -- 1 -- 3
Amortization of stock issued under restricted
stock option plans -- 2 -- 2 -- 2
Issued under director and employee stock plans,
net of related tax benefit 1,139 12 1,080 11 1,149 10
------- ------ ------- ------ ------- ------
Issued at end of year 141,180 378 139,981 363 138,691 351
------- ------ ------- ------ ------- ------
Common stock in treasury at beginning of year (70) -- (200) (2) (100) (1)
Reissued under employee stock plans -- -- 192 1 113 1
Restricted stock issued under stock option and
award plans 30 -- 210 2 100 1
Forfeitures of restricted stock (60) (1) (270) (1) (312) (3)
------- ------ ------- ------ ------- ------
Exchange of options (5) -- (2) -- (1) --
------- ------ ------- ------ ------- ------
Common stock in treasury at end of year (105) (1) (70) -- (200) (2)
------- ------ ------- ------ ------- ------
141,075 377 139,911 363 138,491 349
------- ------ ------- ------ ------- ------
RETAINED EARNINGS
Balance at beginning of year 797 705 945
Net income (loss) 153 92 (240)
Cash dividends declared on common stock (4) -- --
------ ------ ------
Balance at end of year 946 797 705
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign Currency Translation Adjustment
Balance at beginning of year (53) (41) (140)
Aggregate translation adjustment 38 (12) 99
------ ------ ------
Balance at end of year (15) (53) (41)
------ ------ ------
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 (115) -- (2)
Change during year, net of deferred
tax expense (benefit) (83) (115) 2
------ ------ ------
Balance at end of year (198) (115) --
------ ------ ------
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS (213) (168) (41)
------ ------ ------
TOTAL SHAREHOLDERS' EQUITY $1,110 $ 992 $1,013
====== ====== ======
See Accompanying Notes to Consolidated Financial Statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
FROM OPERATING ACTIVITIES
Net income (loss) $ 153 $ 92 $(240)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities of continuing operations:
Loss on disposal of discontinued operations, net of tax 9 19 296
Loss from discontinued operations, net of tax -- -- 50
Restructuring charges (income) (2) 34 1
Cumulative effect of accounting change, net of tax -- -- 1
Depreciation and amortization 149 154 151
Impairment of long-lived assets 7 2 --
Restricted stock compensation expense 2 2 2
Tax benefit on stock compensation 2 2 2
Gains on sales of real estate (3) (1) (10)
Gains on sales of assets and investments -- (1) (5)
Deferred income taxes 38 38 21
Change in assets and liabilities, net of acquisitions and dispositions:
Merchandise inventories (22) (69) (36)
Accounts payable and other accruals (22) 9 36
Repositioning and restructuring reserves (3) (62) (38)
Income taxes payable 42 (45) 7
Other, net (3) 30 27
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 347 204 265
----- ----- -----
FROM INVESTING ACTIVITIES
Proceeds from sales of assets and investments -- 19 7
Proceeds from sales of real estate 6 1 18
Lease acquisition costs (18) (20) (17)
Capital expenditures (150) (116) (94)
----- ----- -----
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (162) (116) (86)
----- ----- -----
FROM FINANCING ACTIVITIES
Decrease in short-term debt -- -- (71)
Issuance of convertible long-term debt -- 150 --
Debt issuance costs -- (8) --
Reduction in long-term debt (41) (58) (100)
Reduction in capital lease obligations (1) (4) (5)
Dividends paid on common stock (4) -- --
Issuance of common stock 10 9 9
----- ----- -----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS (36) 89 (167)
----- ----- -----
NET CASH USED IN DISCONTINUED OPERATIONS (10) (75) (67)
----- ----- -----
EFFECT OF EXCHANGE RATE FLUCTUATIONS ON CASH AND CASH EQUIVALENTS 3 4 2
----- ----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS 142 106 (53)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 215 109 162
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 357 $ 215 $ 109
----- ----- -----
CASH PAID DURING THE YEAR:
Interest $ 27 $ 36 $ 36
Income taxes $ 39 $ 35 $ 31
----- ----- -----
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.
REPORTING YEAR
The reporting period for the Company is the Saturday closest to the last day in
January. Fiscal years 2002 and 2001 represented the 52 weeks ended February 1,
2003 and February 2, 2002, 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.
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.
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 the fair market value of sublease rental income, is provided for
once the store ceases to be used, in accordance with SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," which the Company
adopted in 2002.
ADVERTISING COSTS
Advertising and sales promotion costs are expensed at the time the advertising
or promotion takes place, net of reimbursements for cooperative advertising.
Cooperative advertising income earned for the launch and promotion of certain
products is agreed upon with vendors and is recorded in the same period as the
associated expense is incurred. Advertising costs as a component of selling,
general and administrative expenses of $73.8 million in 2002, $79.7 million in
2001 and $80.9 million in 2000 were net of reimbursements for cooperative
advertising of $15.4 million in 2002, $8.8 million in 2001 and $6.9 million in
2000.
CATALOG COSTS
Catalog costs, which primarily comprise paper, printing, and postage, are
capitalized and amortized over the expected customer response period to each
catalog, generally 60 days. Cooperative income earned for the promotion of
certain products is agreed upon with vendors and is recorded in the same period
as the associated catalog expenses are amortized. Catalog costs as a component
of selling, general and administrative expenses of $39.0 million in 2002, $37.7
million in 2001 and $37.4 million in 2000 were net of cooperative reimbursements
of $2.9 million in 2002, $2.3 million in 2001 and $1.3 million in 2000. Prepaid
catalog costs totaled $3.5 million at February 1, 2003 and February 2, 2002.
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) 2002 2001 2000
- ------------- ---- ---- ----
NUMERATOR:
Income from continuing operations $ 162 $ 111 $ 107
Effect of Dilution:
Convertible debt 5 3 --
------ ------ ------
Income from continuing operations
assuming dilution $ 167 $ 114 $ 107
====== ====== ======
DENOMINATOR:
Weighted-average common
shares outstanding 140.7 139.4 137.9
Effect of Dilution:
Stock options and awards 0.6 1.3 1.2
Convertible debt 9.5 6.2 --
------ ------ ------
Weighted-average common shares
outstanding assuming dilution 150.8 146.9 139.1
====== ====== ======
Options to purchase 6.8 million, 3.1 million and 4.5 million shares of
common stock for the years ended February 1, 2003, February 2, 2002 and February
3, 2001, 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 of their inclusion would be
antidilutive.
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
34
Compensation" ("SFAS No. 123"). In accordance with APB No. 25, compensation
expense is not recorded for options granted if the option price is not less than
the quoted market price at the date of grant. Compensation expense is also not
recorded for employee purchases of stock under the 1994 Stock Purchase Plan. The
plan, which is compensatory as defined in SFAS No. 123, is non-compensatory as
defined in APB No. 25. SFAS No. 123 requires disclosure of the impact on
earnings per share if the fair value method of accounting for stock-based
compensation is applied for companies electing to continue to account for
stock-based plans under APB No. 25.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure an amendment of FASB Statement No. 123," which was issued in December
2002, provides alternative methods of transition for an entity that changes to
the fair value based method of accounting for stock-based compensation and
requires more prominent disclosure of the pro forma impact on earnings per
share. Such disclosures are now required quarterly for interim periods beginning
in 2003. Accounting for the Company's stock-based compensation during the
three-year period ended February 1, 2003, in accordance with the fair value
method provisions of SFAS No. 123 would have resulted in the following:
(in millions, except per share amounts) 2002 2001 2000
- --------------------------------------- ---- ---- ----
Net income (loss):
As reported $ 153 $ 92 $ (240)
Compensation expense included in
reported net income (loss), net of
income tax benefit 1 1 1
Total compensation expense under
fair value method for all awards,
net of income tax benefit (6) (7) (4)
Pro forma $ 148 $ 86 $ (243)
Basic earnings per share:
As reported $1.09 $0.66 $(1.74)
Pro forma $1.05 $0.62 $(1.76)
Diluted earnings per share:
As reported $1.05 $0.64 $(1.73)
Pro forma $1.02 $0.61 $(1.75)
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 for the Company's Athletic Stores 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. The cost of merchandise is
recorded net of amounts received from vendors for damaged product returns,
markdown allowances and volume rebates.
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 $62.7 million at February 1, 2003 and $68.8 million at
February 2, 2002.
Effective as of the beginning of 2003, the Company will adopt SFAS No.
143, "Accounting for Asset Retirement Obligations." The statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate can be made. The
carrying amount of the related long-lived asset shall be increased by the same
amount as the liability and that amount will be depreciated or amortized
consistent with the underlying long-lived asset. The difference between the fair
value and the value of the ultimate liability will be accreted over time using
the credit-adjusted risk-free interest rate in effect when the liability is
initially recognized. Asset retirement obligations of the Company may include
structural alterations to store locations and equipment removal costs from
distribution centers required by certain leases. The Company does not expect the
adoption of SFAS No. 143 to have a significant impact on its financial position
or results of operations.
RECOVERABILITY OF LONG-LIVED ASSETS
Effective as of the beginning of 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), which superseded SFAS No. 121. In accordance with SFAS No. 144, an
impairment loss is recognized whenever events or changes in circumstances
indicate that the carrying amounts of long-lived tangible and intangible assets
with finite lives 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
35
amount of the asset with its estimated fair value. The estimation of fair value
is generally measured by discounting expected future cash flows at the Company's
weighted-average cost of capital. The Company estimates fair value based on the
best information available using estimates, judgments and projections as
considered necessary.
GOODWILL AND INTANGIBLE ASSETS
In 2002, the Company adopted SFAS No. 142, "Goodwill and Intangible Assets,"
which requires that goodwill and intangible assets with indefinite lives no
longer be amortized but reviewed for impairment if impairment indicators arise
and, at a minimum, annually. Accordingly, the Company stopped amortizing
goodwill in the first quarter of 2002 and completed its transitional review,
which did not result in an impairment charge. The fair value of each reporting
unit, which was determined using a market approach, exceeded the carrying value
of each respective reporting unit. The Company will perform its annual
impairment review as of the beginning of each fiscal year. Previously, goodwill
was amortized on a straight-line basis over 20 years for acquisitions after 1995
and over 40 years prior to 1995. Recoverability was evaluated based upon
estimated future profitability and cash flows.
The following would have resulted had the provisions of the new
standards been applied for 2001 and 2000:
(in millions, except per share amounts) 2001 2000
- --------------------------------------- ---- ----
Income from continuing operations:
As reported $ 111 $ 107
Pro forma $ 118 $ 115
Basic earnings per share:
As reported $0.79 $0.78
Pro forma $0.84 $0.84
Diluted earnings per share:
As reported $0.77 $0.77
Pro forma $0.82 $0.83
Separable intangible assets that are deemed to have finite lives will
continue to be amortized over their estimated useful lives (but with no maximum
life). Intangible assets with finite lives primarily reflect lease acquisition
costs and are amortized over the lease term.
DERIVATIVE FINANCIAL INSTRUMENTS
All derivative financial instruments are recorded in the Consolidated Balance
Sheets at their fair values. Changes in fair values of derivatives are 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 is reported as a component of other
comprehensive income (loss) and 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 are 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 and other current receivables approximate fair value
due to the short-term maturities of these assets. 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.
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.
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
for the aggregate of claims reported and claims incurred but not yet reported.
Self-insured liabilities totaled $16.1 million and $20.3 million at February 1,
2003 and February 2, 2002, respectively. Imputed interest expense related to
these liabilities was $2 million in both 2002 and 2001 and $1 million in 2000.
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.
36
RECLASSIFICATIONS
Certain balances in prior fiscal years have been reclassified to conform to the
presentation adopted in the current year. In addition, the adoption of SFAS No.
144 in 2002, which also supersedes the accounting and reporting requirements of
APB 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," required balance sheet reclassifications for the presentation
of discontinued operations and other long-lived assets held for disposal.
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 of 2001, 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 then pending transaction,
which was partially offset by reduced severance costs as a result of the
transaction and favorable results from the liquidation of the U.S. stores and
real estate disposition activity. On September 28, 2001, the 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 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). Another wholly-owned subsidiary of the Company
was the assignor of the store leases involved in the transaction and therefore
retains potential liability for such leases. 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, up to a maximum of CAD$5 million
(approximately US$3 million). The net amount of the assets and liabilities of
the former operations was written down to the estimated fair value of the Note,
approximately US$18 million. The transaction was accounted for pursuant to SEC
Staff Accounting Bulletin Topic 5:E "Accounting for Divestiture of a Subsidiary
or Other Business Operation," ("SAB Topic 5:E") as a "transfer of assets and
liabilities under contractual arrangement" as no cash proceeds were received and
the consideration comprised the Note, the repayment of which is dependent on the
future successful operations of the business. The assets and liabilities related
to the former operations were presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement."
In the fourth quarter of 2001, the 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.
The Company recorded a charge of $18 million in the first quarter of
2002 reflecting the poor performance of the Northern Group stores in Canada
since the date of the transaction. There was no tax benefit recorded related to
the $18 million charge, which comprised a valuation allowance in the amount of
the operating losses incurred by the purchaser and a further reduction in the
carrying value of the net amount of the assets and liabilities of the former
operations to zero, due to greater uncertainty with respect to the
collectibility of the Note. This charge was recorded pursuant to SAB Topic 5:E,
which requires accounting for the Note in a manner somewhat analogous to equity
accounting for an investment in common stock.
In the third quarter of 2002, the Company recorded a charge of
approximately $1 million before-tax for lease exit costs in excess of previous
estimates. In addition, the Company recorded a tax benefit of $2 million, which
also reflected the impact of the tax planning strategies implemented related to
the discontinuance of the Northern Group.
On December 31, 2002, the Company-provided revolving credit facility
expired, without having been used. Furthermore, the operating results of
Northern Canada had significantly improved during the year such that the Company
had reached an agreement in principle to receive CAD$5 million (approximately
US$3 million) cash consideration in partial prepayment of the Note and accrued
interest due and agreed to reduce the face value of the Note to CAD$17.5 million
(approximately US$12 million). Based upon the improved results of the Northern
Canada business, the Company believes there is no substantial uncertainty as to
the amount of the future costs and expenses that could be payable by the
Company. As indicated above, as the assignor of the Northern Canada leases, a
wholly-owned subsidiary of the Company remains secondarily liable under those
leases. As of February 1, 2003, the Company estimates that its gross contingent
lease liability is between CAD$88 to $95 million (approximately US$57 to $62
million).
37
Based upon its assessment of the risk of having to satisfy that liability and
the resultant possible outcomes of lease settlement, the Company currently
estimates the expected value of the lease liability to be approximately US$2
million. The Company believes that it is unlikely that it would be required to
make such contingent payments, and further, such contingent obligations would
not be expected to have a material effect on the Company's consolidated
financial position, liquidity or results of operations. As a result of the
aforementioned developments, during the fourth quarter of 2002 circumstances
changed sufficiently such that it became appropriate to recognize the
transaction as an accounting divestiture.
During the fourth quarter of 2002, as a result of the accounting
divestiture, the Note was recorded in the financial statements at its estimated
fair value of CAD$16 million (approximately US$10 million). The Company, with
the assistance of an independent third party, determined the estimated fair
value by discounting expected cash flows at an interest rate of 18 percent. This
rate was selected considering such factors as the credit rating of the
purchaser, rates for similar instruments and the lack of marketability of the
Note. As the net assets of the former operations were previously written down to
zero, the fair value of the Note was recorded as a gain on disposal within
discontinued operations. There was no tax expense recorded related to this gain.
The Company will no longer present the assets and liabilities of Northern Canada
as "Assets of business transferred under contractual arrangement (note
receivable)" and "Liabilities of business transferred under contractual
arrangement," but rather will record the Note initially at its estimated fair
value. At February 1, 2003, US$4 million is classified as a current receivable
with the remainder classified as long term within other assets in the
accompanying Consolidated Balance Sheet.
Future adjustments, if any, to the carrying value of the Note will be
recorded pursuant to SEC Staff Accounting Bulletin Topic 5:Z:5, "Accounting and
Disclosure Regarding Discontinued Operations," which requires changes in the
carrying value of assets received as consideration from the disposal of a
discontinued operation to be classified within continuing operations. Interest
income will also be recorded within continuing operations. The Company will
recognize an impairment loss when, and if, circumstances indicate that the
carrying value of the Note may not be recoverable. Such circumstances would
include a deterioration in the business, as evidenced by significant operating
losses incurred by the purchaser or nonpayment of an amount due under the terms
of the Note.
As the stock transfer on September 28, 2001 was accounted for in
accordance with SAB Topic 5:E, a disposal was not achieved pursuant to APB
No. 30. If the Company had applied the provisions of Emerging Issues Task Force
90-16, "Accounting for Discontinued Operations Subsequently Retained" ("EITF
90-16"), prior reporting periods would not be restated, accordingly reported net
income would not have changed. However, the results of operations of the
Northern business segment in all prior periods would have been reclassified from
discontinued operations to continuing operations. The incurred loss on disposal
at September 28, 2001 would continue to be classified as discontinued
operations, however, the remaining accrued loss on disposal at this date, of
U.S. $24 million, primarily relating to the lease liability of the Northern U.S.
business, would have been reversed as part of discontinued operations. Since the
liquidation of this business was complete, this liability would have been
recorded in continuing operations in the same period pursuant to EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." With
respect to Northern Canada, the business was legally sold as of September 28,
2001 and thus operations would no longer be recorded, but instead the business
would be accounted for pursuant to SAB Topic 5:E. In the first quarter of 2002,
the $18 million charge recorded within discontinued operations would have been
classified as continuing operations. Similarly, the $1 million benefit recorded
in the third quarter of 2002 would also have been classified as continuing
operations. Having achieved divestiture accounting in the fourth quarter of 2002
and applying the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company would have then reclassified all
prior periods' results of the Northern Group to discontinued operations.
Reported net income in each of the periods would not have changed and therefore
the Company did not amend any of its prior filings.
Net disposition activity of $13 million in 2002 included the $18
million reduction in the carrying value of the net assets and liabilities,
recognition of the note receivable of $10 million, real estate disposition
activity of $1 million and severance and other costs of $4 million. 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.
The remaining reserve balance of $7 million at February 1, 2003 is expected to
be utilized within twelve months.
The net loss from discontinued operations for 2000 includes sales of
$335 million, and an interest expense allocation of $10 million based on
intercompany debt balances, restructuring charges of $3 million and long-lived
asset impairment charges of $4 million.
In 1998, the Company exited both its International General Merchandise
and Specialty Footwear segments. In the second quarter of 2002, the Company
recorded a $1 million charge for a lease liability related to a Woolco store in
the former International General Merchandise segment, which was more than offset
by a net reduction of $2 million before-tax, or $1 million after-tax, for each
38
of the second and third quarters of 2002 in the Specialty Footwear reserve
primarily reflecting real estate costs more favorable than original estimates.
In 1997, the Company announced that it was exiting its Domestic General
Merchandise segment. In the second quarter of 2002, the Company recorded a
charge of $4 million before-tax, or $2 million after-tax, for legal actions
related to this segment, which have since been settled. In addition, the
successor-assignee of the leases of a former business included in the Domestic
General Merchandise segment has filed a petition in bankruptcy, and rejected in
the bankruptcy proceeding 15 leases it originally acquired from a subsidiary of
the Company. There are currently several actions pending against this subsidiary
by former landlords for the lease obligations. In the fourth quarter of 2002,
the Company recorded a charge of $1 million after-tax related to certain
actions. The Company estimates the gross contingent lease liability related to
the remaining actions as approximately $9 million. The Company believes that it
may have valid defenses, however as these actions are in the preliminary stage
of proceedings, their outcome cannot be predicted with any degree of certainty.
The remaining reserve balances for these three discontinued segments
totaled $20 million as of February 1, 2003, $11 million of which is expected to
be utilized within twelve months and the remaining $9 million thereafter.
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 2002
- -------------- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Realized loss - currency movement $ 118 $(118) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Asset write-offs & impairments 19 (19) -- 23 (23) -- 18 (18) --
Recognition of note receivable -- -- -- -- -- -- (10) 10 --
Real estate & lease liabilities 68 -- 68 (16) (46) 6 1 (1) 6
Severance & personnel 23 -- 23 (13) (8) 2 -- (2) --
Operating losses & other costs 24 -- 24 18 (39) 3 -- (2) 1
----- ----- ----- ----- ----- ----- ----- ----- -----
Total $ 252 $(137) $ 115 $ 12 $(116) $ 11 $ 9 $ (13) $ 7
===== ===== ===== ===== ===== ===== ===== ===== =====
INTERNATIONAL GENERAL
MERCHANDISE 1999 2000 2001 2002
- ----------- ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Woolco $-- $-- $-- $-- $ 4 $(4) $-- $ 1 $ -- $ 1
The Bargain! Shop 10 3 (6) 7 -- (1) 6 -- -- 6
--- --- --- --- --- --- --- --- ---- ---
Total $10 $ 3 $(6) $ 7 $ 4 $(5) $ 6 $ 1 $ -- $ 7
=== === === === === === === === ==== ===
1999 2000 2001 2002
SPECIALTY FOOTWEAR ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Lease liabilities $ 15 $ 1 $ (7) $ 9 $ -- $ (2) $ 7 $ (4) $ (1) $ 2
Operating losses & other costs 13 (6) (4) 3 -- (1) 2 -- (1) 1
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total $ 28 $ (5) $(11) $ 12 $ -- $ (3) $ 9 $ (4) $ (2) $ 3
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
DOMESTIC GENERAL 1999 2000 2001 2002
MERCHANDISE ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Lease liabilities $16 $ 4 $(4) $16 $-- $(6) $10 $-- $(3) $ 7
Legal and other costs 7 -- (5) 2 3 (3) 2 5 (4) 3
--- --- --- --- --- --- --- --- --- ---
Total $23 $ 4 $(9) $18 $ 3 $(9) $12 $ 5 $(7) $10
=== === === === === === === === === ===
39
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
classified as discontinued operations for all periods presented in the
Consolidated Statements of Operations and Consolidated Balance Sheets.
Presented below is a summary of the assets and liabilities of
discontinued operations at February 1, 2003 and February 2, 2002. The Northern
Group assets and liabilities of discontinued operations primarily comprised the
Northern Group stores in the U.S. Liabilities included accounts payable,
restructuring reserves and other accrued liabilities. The net assets of the
Specialty Footwear and Domestic General Merchandise segments consist primarily
of fixed assets and accrued liabilities.
Domestic
Northern Specialty General
(in millions) Group Footwear Merchandise Total
- ------------- ----- -------- ----------- -----
2002
Assets $-- $-- $ 2 $ 2
Liabilities 1 -- 2 3
--- --- --- ---
$(1) $-- $-- $(1)
=== === === ===
2001
Assets $ 1 $ 2 $ 2 $ 5
Liabilities 3 1 3 7
--- --- --- ---
$(2) $ 1 $(1) $(2)
=== === === ===
3. REPOSITIONING AND RESTRUCTURING RESERVES
1999 RESTRUCTURING
Total restructuring charges of $96 million before-tax were recorded in 1999 for
the Company's restructuring program to sell or liquidate eight non-core
businesses. The restructuring plan also included an accelerated store-closing
program in North America and Asia, corporate headcount reduction and a
distribution center shutdown.
Throughout 2000, the disposition of Randy River Canada, Foot Locker
Outlets, Colorado, Going to the Game!, 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. The
Company completed the sales of The San Francisco Music Box Company and the
assets related to its Burger King and Popeye's franchises in 2001, for cash
proceeds of approximately $14 million and $5 million, respectively.
Restructuring charges of $33 million in 2001 and reductions to the reserves of
$2 million in 2002 were primarily due to The San Francisco Music Box Company
sale. The remaining reserve balance of $1 million at February 1, 2003 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 recorded a $1 million restructuring charge in connection with the
termination of its Maumelle distribution center lease, which was completed in
2002.
Included in the consolidated results of operations are sales of $54
million and $139 million and operating losses of $12 million and $4 million in
2001 and 2000, respectively, for the above non-core businesses and
under-performing stores, excluding Team Edition.
1993 REPOSITIONING AND 1991 RESTRUCTURING
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
repositioning program, approximately 970 stores were identified for closing.
Approximately 900 stores were closed under the 1991 restructuring program. The
remaining reserve balance of $2 million at February 1, 2003, is expected to be
substantially utilized within twelve months.
40
The components of the restructuring charges and disposition activity related to
the reserves is presented below:
NON-CORE BUSINESSES 1999 2000 2001 2002
- ------------------- ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(In Millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Real estate $ 16 $ 1 $(13) $ 4 $ -- $ (3) $ 1 $ -- $ -- $ 1
Asset impairment -- 5 (5) -- 30 (30) -- -- -- --
Severance & personnel 2 3 (3) 2 -- (2) -- -- -- --
Other disposition costs 6 (1) (2) 3 3 (3) 3 (2) (1) --
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total $ 24 $ 8 $(23) $ 9 $ 33 $(38) $ 4 $ (2) $ (1) $ 1
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
ACCELERATED STORE-CLOSING
PROGRAM 1999 2000 2001 2002
- ------- ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Real estate $ 3 $ -- $(3) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Severance & personnel 1 -- (1) -- -- -- -- -- -- --
Other disposition costs 1 -- (1) -- -- -- -- -- -- --
--- ---- --- ---- ---- ---- ---- ---- ---- ----
Total $ 5 $ -- $(5) $ -- $ -- $ -- $ -- $ -- $ -- $ --
=== ==== === ==== ==== ==== ==== ==== ==== ====
CORPORATE OVERHEAD AND
LOGISTICS 1999 2000 2001 2002
- --------- ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Real estate $ 3 $(1) $(2) $-- $ 1 $-- $ 1 $ -- $(1) $ --
Severance & personnel 11 (1) (8) 2 -- (2) -- -- -- --
Other disposition costs 1 (5) 4 -- -- -- -- -- -- --
--- --- --- --- --- --- --- ---- --- ----
Total $15 $(7) $(6) $ 2 $ 1 $(2) $ 1 $ -- $(1) $ --
=== === === === === === === ==== === ====
TOTAL 1999 RESTRUCTURING 1999 2000 2001 2002
- ------------------------ ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ NET
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Real estate $ 22 $ -- $(18) $ 4 $ 1 $ (3) $ 2 $ -- $ (1) $ 1
Asset impairment -- 5 (5) -- 30 (30) -- -- -- --
Severance & personnel 14 2 (12) 4 -- (4) -- -- -- --
Other disposition costs 8 (6) 1 3 3 (3) 3 (2) (1) --
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total $ 44 $ 1 $(34) $ 11 $ 34 $(40) $ 5 $ (2) $ (2) $ 1
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
1993 REPOSITIONING AND
1991 RESTRUCTURING 1999 2000 2001 2002
- ------------------ ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Real estate $ 6 $ -- $(3) $ 3 $ -- $(2) $ 1 $ -- $-- $ 1
Other disposition costs 3 -- -- 3 -- (1) 2 -- (1) 1
--- ---- --- --- ---- --- --- ---- --- ---
Total $ 9 $ -- $(3) $ 6 $ -- $(3) $ 3 $ -- $(1) $ 2
=== ==== === === ==== === === ==== === ===
TOTAL RESTRUCTURING RESERVES 1999 2000 2001 2002
- ---------------------------- ---- ---- ---- ----
Charge/ Net Charge/ Net Charge/ Net
(in millions) Balance (Income) Usage Balance (Income) Usage Balance (Income) Usage Balance
- ------------- ------- -------- ----- ------- -------- ----- ------- -------- ----- -------
Real estate $ 28 $ -- $(21) $ 7 $ 1 $ (5) $ 3 $ -- $ (1) $ 2
Asset impairment -- 5 (5) -- 30 (30) -- -- -- --
Severance & personnel 14 2 (12) 4 -- (4) -- -- -- --
Other disposition costs 11 (6) 1 6 3 (4) 5 (2) (2) 1
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total $ 53 $ 1 $(37) $ 17 $ 34 $(43) $ 8 $ (2) $ (3) $ 3
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
41
4. OTHER INCOME
In 2002, other income of $2 million related to the condemnation of a part-owned
and part-leased property for which the Company received proceeds of $6 million.
Other income also included real estate gains from the sale of corporate
properties of $1 million in both 2002 and 2001 and $11 million in 2000.
In 2001, the Company recorded an additional $1 million gain related to
the 1999 sale of the assets of its Afterthoughts retail chain. 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.
5. IMPAIRMENT OF LONG-LIVED ASSETS
The Company recorded non-cash pre-tax charges in selling, general and
administrative expenses of approximately $7 million and $2 million in 2002 and
2001, respectively, which represented impairment of long-lived assets such as
store fixtures and leasehold improvements related to Athletic Stores.
In addition, the Company recorded non-cash pre-tax asset impairment
charges of $30 million and $5 million, related to assets held for sale in 2001
and 2000, respectively. These charges primarily related to the disposition of
The San Francisco Music Box Company, which was sold in 2001, and were included
in the net restructuring charges of $34 million and $1 million recorded in 2001
and 2000, respectively.
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 1, 2003, 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. The disposition of all formats presented as "All Other"
was completed during 2001.
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 profit before corporate expense, net
reflects income from continuing operations before income taxes, corporate
expense, non-operating income and net interest expense.
SALES
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
Athletic Stores $4,160 $3,999 $3,954
Direct-to-Customers 349 326 279
------ ------ ------
4,509 4,325 4,233
All Other -- 54 123
------ ------ ------
Total sales $4,509 $4,379 $4,356
====== ====== ======
OPERATING RESULTS
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
Athletic Stores(1) $280 $283 $271
Direct-to-Customers 40 24 1
---- ---- ----
320 307 272
All Other(2) 1 (44) (12)
---- ---- ----
Operating profit before corporate
expense, net 321 263 260
Corporate expense(3) 52 65 79
---- ---- ----
Operating profit 269 198 181
Non-operating income 3 1 17
Interest expense, net 26 24 22
---- ---- ----
Income from continuing operations
before income taxes $246 $175 $176
==== ==== ====
(1) 2002 and 2000 include reductions in restructuring charges of $1 million
and $4 million, respectively.
(2) 2002 includes a $1 million reduction in restructuring charges. 2001
includes restructuring charges of $33 million, offset by a $1 million
adjustment to the $164 million Afterthoughts gain in 1999. 2000
includes restructuring charges of $11 million.
(3) 2001 includes restructuring charges of $1 million. 2000 includes a $6
million reduction in restructuring charges.
DEPRECIATION AND
AMORTIZATION CAPITAL EXPENDITURES TOTAL ASSETS
------------ -------------------- ------------
(in millions) 2002 2001 2000 2002 2001 2000 2002 2001 2000
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
Athletic Stores $119 $115 $113 $124 $106 $66 $1,564 $1,474 $1,367
Direct-to-Customers(4) 4 11 9 8 4 7 177 179 175
---- ---- ---- ---- ---- --- ------ ------ ------
123 126 122 132 110 73 1,741 1,653 1,542
All Other 1 36
Corporate 26 28 29 18 6 20 743 612 631
Assets of business transferred under
contractual arrangement -- 30
Discontinued operations, net 2 5 69
---- ---- ---- ---- ---- --- ------ ------ ------
Total Company $149 $154 $151 $150 $116 $94 $2,486 $2,300 $2,278
==== ==== ==== ==== ==== === ====== ====== ======
(4) Decrease in 2002 depreciation and amortization primarily reflects the
impact of no longer amortizing goodwill.
42
Sales and long-lived asset information by geographic area as of and for the
fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001 is
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) 2002 2001 2000
- ------------- ---- ---- ----
United States $3,639 $3,686 $3,756
International 870 693 600
------ ------ ------
Total sales $4,509 $4,379 $4,356
====== ====== ======
LONG-LIVED ASSETS
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
United States $518 $549 $610
International 118 88 74
---- ---- ----
Total long-lived assets $636 $637 $684
==== ==== ====
7. MERCHANDISE INVENTORIES
(in millions) 2002 2001
- ------------- ---- ----
LIFO inventories $622 $622
FIFO inventories 213 171
---- ----
Total merchandise inventories $835 $793
==== ====
The value of the Company's LIFO inventories, as calculated on a LIFO basis,
approximates their value as calculated on a FIFO basis.
8. OTHER CURRENT ASSETS
(in millions) 2002 2001
Net receivables $33 $ 31
Operating supplies and prepaid expenses 37 31
Deferred taxes 15 40
Current portion of Northern Group note receivable 4 --
Fair value of derivative contracts 1 --
--- ----
$90 $102
=== ====
9. PROPERTY AND EQUIPMENT, NET
(in millions) 2002 2001
- ------------- ---- ----
LAND $ 3 $ 3
BUILDINGS:
Owned 32 34
Leased 1 2
FURNITURE, FIXTURES AND EQUIPMENT:
Owned 994 944
Leased 18 19
------ ------
1,048 1,002
Less: accumulated depreciation (675) (597)
------ ------
373 405
ALTERATIONS TO LEASED AND OWNED BUILDINGS,
NET OF ACCUMULATED AMORTIZATION 263 232
------ ------
$ 636 $ 637
====== ======
10. GOODWILL
Goodwill increased by $1 million in 2002 due to the impact of foreign currency
translation fluctuations. The carrying value of goodwill by operating segment
was as follows:
(in millions) 2001 2002
- ------------- ---- ----
Athletic Stores $ 56 $ 55
Direct-to-Customers 80 80
---- ----
$136 $135
==== ====
11. INTANGIBLE ASSETS, NET
(in millions) 2002 2001
- ------------- ---- ----
Intangible assets not subject to amortization $ 2 $ --
Intangible assets subject to amortization 78 56
--- ---
$80 $56
=== ===
Intangible assets not subject to amortization relate to the Company's U.S.
defined benefit retirement plan. The additional minimum liability required at
February 1, 2003, which represented the amount by which the accumulated benefit
obligation exceeded the fair market value of plan assets, was offset by an
intangible asset to the extent of previously unrecognized prior service costs of
$2 million.
Intangible assets subject to amortization comprise lease acquisition
costs, which are required to secure prime lease locations and other lease
rights, primarily in Europe. The weighted-average amortization period as of
February 1, 2003 was 10 years. Amortization expense for lease acquisition costs
was $8 million in 2002, $7 million in 2001 and $6 million in 2000. Annual
estimated amortization expense is expected to be $10 million for 2003 and 2004
and approximately $9 million for 2005, 2006 and 2007. Finite life intangible
assets subject to amortization, were as follows:
Lease Acquisition Costs (in millions) 2002 2001
- ------------------------------------- ---- ----
Gross Carrying Amount $114 $ 89
Accumulated Amortization (36) (33)
---- ----
Net $ 78 $ 56
==== ====
12. OTHER ASSETS
(in millions) 2002 2001
- ------------- ---- ----
Deferred tax costs $ 39 $ 9
Investments and notes receivable 23 23
Income taxes receivable 8 28
Northern Group note receivable, net of current portion 6 --
Fair value of derivative contracts 1 --
Other 33 29
---- ---
$110 $89
==== ===
43
13. ACCRUED LIABILITIES
(in millions) 2001 2002
- ------------- ---- ----
Pension and postretirement benefits $ 59 $ 9
Incentive bonuses 29 32
Other payroll and related costs 40 37
Taxes other than income taxes 34 22
Property and equipment 25 23
Income taxes payable 23 6
Gift cards and certificates 21 21
Fair value of derivative contracts 8 --
Other operating costs 57 61
---- ----
$296 $211
==== ====
14. SHORT-TERM DEBT
At February 1, 2003, the Company had unused domestic lines of credit of $169
million, pursuant to a $190 million unsecured revolving credit agreement, which
also provided for $21 million outstanding standby letters of credit. The Company
has additional informal agreements with certain banks in the United States and
internationally.
In 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
quarterly facility fees paid on the unused portion were reduced to 0.5 percent
in 2002 based on the Company's 2002 fixed charge coverage ratio. There were no
short-term borrowings during 2002. The facility will expire in June 2004.
Interest expense, including facility fees, related to short-term debt
was $3 million in 2002, $4 million in 2001 and $12 million in 2000.
15. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
In 2002, the Company repaid the remaining $32 million of the $40 million 7.00
percent medium-term notes that matured in October in addition to purchasing and
retiring $9 million of the $200 million 8.50 percent debentures payable in 2022.
The Company entered into an interest rate swap agreement in December 2002 to
convert $50 million of the 8.50 percent debentures to variable rate debt. The
fair value of the swap, included in other assets, was approximately $1 million
at February 1, 2003 and the carrying value of the 8.50 percent debentures was
increased by the corresponding amount. The interest rate swap did not have a
significant impact on interest expense in 2002.
In 2001, the Company issued $150 million of subordinated convertible
notes due 2008, which 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.
Following is a summary of long-term debt and obligations under capital
leases:
(in millions) 2002 2001
- ------------- ---- ----
8.50% debentures payable 2022 $192 $200
5.50% convertible notes payable 2008 150 150
7.00% medium-term notes payable 2002 -- 32
---- ----
Total long-term debt 342 382
Obligations under capital leases 15 17
---- ----
357 399
Less: Current portion 1 34
---- ----
$356 $365
==== ====
Maturities of long-term debt and minimum rent payments under capital
leases in future periods are:
Long-Term Capital
(in millions) Debt Leases Total
- ------------- ---- ------ -----
2003 $ -- $ 1 $ 1
2007 -- 14 14
Thereafter 342 -- 342
---- --- ----
342 15 1
Less: Current portion -- 1 1
---- --- ----
$342 $14 $356
==== === ====
Interest expense related to long-term debt and capital lease
obligations, including the amortization of the associated debt issuance costs,
was $28 million in 2002, $29 million in 2001 and $27 million in 2000.
16. LEASES
The Company is obligated under 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) 2002 2001 2000
- ------------- ---- ---- ----
Rent $495 $475 $464
Contingent rent based on sales 11 11 12
Sublease income (1) (1) (1)
---- ---- ----
Total rent expense $505 $485 $475
==== ==== ====
Future minimum lease payments under non-cancelable operating leases
are:
(in millions)
2003 $ 357
2004 328
2005 301
2006 276
2007 243
Thereafter 736
------
Total operating lease commitments $2,241
======
Present value of operating lease commitments $1,571
======
44
17. OTHER LIABILITIES
(in millions) 2002 2001
Pension benefits $237 $144
Postretirement benefits 132 148
Deferred taxes 16 9
Reserve for discontinued operations 9 22
Repositioning and restructuring reserves -- 2
Other 54 60
---- ----
$448 $385
==== ====
18. 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
2002 or 2001. Derivative financial instruments qualifying for hedge accounting
must maintain a specified level of effectiveness between the hedging instrument
and the item being hedged, both at inception and throughout the hedged period.
The 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. For 2002, gains
reclassified to cost of sales related to such contracts were approximately $1
million. 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 and primarily related to such contracts. The
Company enters into other forward contracts to hedge intercompany foreign
currency royalty cash flows. The effective portion of gains and losses
associated with these forward contracts is reclassified from accumulated other
comprehensive loss to selling, general and administrative expenses in the same
quarter as the underlying intercompany royalty transaction occurs. For 2002,
losses reclassified to selling, general and administrative expenses related to
such contracts were approximately $1 million and for 2001, such amounts were not
material.
For 2002, the fair value of forward contracts designated as cash flow
hedges of inventory increased by approximately $1 million and was substantially
offset by the change in fair value of forward contracts designated as cash flow
hedges of intercompany royalties. The change in fair value of derivative
financial instruments designated as cash flow hedges in 2001 was not material.
The ineffective portion of gains and losses related to cash flow hedges recorded
to earnings in 2002 and 2001 was not material. 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.
The changes in fair value of forward contracts and option contracts
that do not qualify as hedges are recorded in earnings. In 2002, the Company
entered into certain forward foreign exchange contracts to hedge intercompany
foreign-currency denominated firm commitments and recorded losses of
approximately $9 million in selling, general and administrative expenses to
reflect their fair value. These losses were more than offset by foreign exchange
gains of approximately $13 million related to the underlying commitments, which
will be settled in 2003 and 2004. In 2001, the Company 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.
The fair value of derivative contracts outstanding at February 1, 2003
comprised current liabilities of $8 million, current assets of $1 million and
other assets of $1 million. The fair value of derivative contracts outstanding
at February 2, 2002 was not significant.
INTEREST RATE RISK MANAGEMENT
The Company has employed interest rate swaps to minimize its exposure to
interest rate fluctuations. In 2002, the Company entered into an interest rate
swap agreement with a notional amount of $50 million to receive interest at a
fixed rate of 8.50 percent and pay interest at a variable rate of LIBOR plus 3.1
percent. The swap, which matures in 2022, has been designated as a fair value
hedge of the changes in fair value of $50 million of the Company's 8.50 percent
debentures payable in 2022 attributable to changes in interest rates. The fair
value of the swap of approximately $1 million at February 1, 2003 was included
in other assets and the carrying value of the 8.50 percent debentures was
increased by the corresponding amount. There were no interest rate swap
agreements in effect at February 2, 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of long-term debt was $342 million
and $341 million, respectively, at February 1, 2003, and $382 million and $380
million, respectively, at February 2, 2002. The carrying value and estimated
fair value of long-term investments and notes receivable was $33 million and $32
million, respectively, at February 1, 2003, and $23 million and $20 million,
respectively, at February 2, 2002. The carrying value of cash and cash
equivalents and other current receivables approximates their fair value.
45
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 operates in
14 countries and purchases merchandise from hundreds of vendors worldwide.
In 2002, the Company purchased approximately 44.0 percent of its
athletic merchandise from one major vendor and approximately 11.0 percent from
another major vendor. The Company generally considers vendor relations to be
satisfactory.
Included in the Company's Consolidated Balance Sheet as of February 1,
2003, are the net assets of the Company's European operations totaling $242
million, which are located in 11 countries, 8 of which adopted the euro as their
common currency on January 1, 2002.
19. INCOME TAXES
Following are the domestic and international components of pre-tax income from
continuing operations:
(in millions) 2002 2001 2000
Domestic $160 $113 $136
International 86 62 40
---- ---- ----
Total pre-tax income $246 $175 $176
==== ==== ====
The income tax provision consists of the following:
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
CURRENT:
Federal $16 $ 7 $22
State and local 5 (5) 9
International 25 24 17
--- --- ---
Total current tax provision 46 26 48
--- --- ---
DEFERRED:
Federal 31 32 18
State and local -- 7 (2)
International 7 (1) 5
--- --- ---
Total deferred tax provision 38 38 21
--- --- ---
Total income tax provision $84 $64 $69
=== === ===
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 $146 million at February 1, 2003.
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:
2002 2001 2000
---- ---- ----
Federal statutory income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal tax benefit 2.0 3.5 3.0
International income taxed at
varying rates 1.0 (1.0) 12.0
Foreign tax credit utilization (1.2) (0.8) (15.0)
Increase (decrease) in valuation
allowance (2.0) -- 3.0
Change in Canadian tax rates -- 1.1 --
State and local tax settlements (0.3) (4.1) --
Goodwill amortization -- 1.5 2.0
Tax exempt obligations (0.1) -- --
Work opportunity tax credit (0.3) (0.5) (2.0)
Other, net 0.1 1.9 1.0
---- ---- ----
Effective income tax rate 34.2% 36.6% 39.0%
==== ==== ====
Items that gave rise to significant portions of the deferred tax
accounts are as follows:
(in millions) 2002 2001
- ------------- ---- ----
DEFERRED TAX ASSETS:
Tax loss/credit carryforwards $ 91 $ 152
Employee benefits 162 134
Reserve for discontinued operations 10 10
Repositioning and restructuring reserves 3 5
Property and equipment 76 91
Allowance for returns and doubtful accounts 6 6
Straight-line rent 11 9
Other 25 21
------ ------
Total deferred tax assets 384 428
Valuation allowance (117) (138)
------ ------
Total deferred tax assets, net 267 290
------ ------
DEFERRED TAX LIABILITIES:
Inventories 25 18
Other 3 3
------ ------
Total deferred tax liabilities 28 21
------ ------
Net deferred tax asset $ 239 $ 269
====== ======
BALANCE SHEET CAPTION REPORTED IN:
Deferred taxes $ 240 $ 238
Other current assets 15 40
Other liabilities (16) (9)
------ ------
$ 239 $ 269
====== ======
46
As of February 1, 2003, the Company had a valuation allowance of $117
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 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 1, 2003, was principally due to current
utilization and future benefit relating to state net operating losses and
foreign tax credits, for which a valuation allowance is no longer necessary, and
the expiration of certain state net operating losses for which there was a full
valuation allowance, offset by an increase in the Canadian valuation allowance
relating to a current year increase in deferred tax assets for which the Company
does not expect to receive future benefit.
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 1, 2003. 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 1, 2003, the Company's tax loss/credit carryforwards
included international operating loss carryforwards with a potential tax benefit
of $24 million. Those expiring between 2003 and 2009 are $23 million and those
that do not expire are $1 million. The Company also had state net operating loss
carryforwards with a potential tax benefit of $35 million, which principally
related to the 16 states where the Company does not file a combined return.
These loss carryforwards expire between 2003 and 2020 as well as work
opportunity tax credits totaling $2 million, which expire between 2013 and 2018.
The Company had U.S. Federal alternative minimum tax credits and Canadian
capital loss carryforwards of approximately $21 million and $9 million,
respectively, which do not expire.
20. 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
---------------- --------
(in millions) 2002 2001 2002 2001
- ------------- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $ 655 $ 647 $ 37 $ 57
Service cost 8 8 -- --
Interest cost 44 45 2 3
Plan participants' contributions -- -- 5 4
Actuarial (gain) loss 43 27 (3) (1)
Foreign currency translation
adjustments 3 (5) -- --
Benefits paid (68) (67) (11) (11)
Plan amendment -- -- -- (15)
Curtailment -- (1) -- --
Settlement -- 1 -- --
----- ----- ----- -----
Benefit obligation at
end of year $ 685 $ 655 $ 30 $ 37
----- ----- ----- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year $ 500 $ 612
Actual return on plan assets (57) (48)
Employer contribution 2 7
Foreign currency translation
adjustments 3 (4)
Benefits paid (68) (67)
----- ----- ----- -----
Fair value of plan assets at
end of year $ 380 $ 500
----- ----- ----- -----
FUNDED STATUS
Funded status $(305) $(155) $ (30) $ (37)
Unrecognized prior service cost 5 5 (12) (13)
Unrecognized net (gain) loss 337 190 (96) (105)
----- ----- ----- -----
Prepaid asset
(accrued liability) $ 37 $ 40 $(138) $(155)
===== ===== ===== =====
BALANCE SHEET CAPTION REPORTED IN:
Intangible assets $ 2 $ -- $ -- $ --
Accrued liabilities (53) (2) (6) (7)
Other liabilities (237) (144) (132) (148)
Accumulated other
comprehensive income,
pre-tax 325 186 -- --
----- ----- ----- -----
$ 37 $ 40 $(138) $(155)
===== ===== ===== =====
As of February 1, 2003 and February 2, 2002, the accumulated benefit
obligation for all pension plans, totaling $664 million and $642 million,
respectively, exceeded plan assets.
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.
47
PRINCIPAL ASSUMPTIONS
Pension Benefits Postretirement Benefits
---------------- -----------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Weighted-average discount rate 6.50% 6.94% 7.44% 6.50% 7.00% 7.50%
Weighted-average rate of compensation increase 3.65% 3.54% 4.95% -- -- 5.00%
Weighted-average expected long-term rate of return on assets 8.87% 8.87% 9.93%
The components of net benefit expense (income) are: Pension Benefits Postretirement Benefits
---------------- -----------------------
(in millions) 2002 2001 2000 2002 2001 2000
- ------------- ---- ---- ---- ---- ---- ----
Service cost $ 8 $ 8 $ 8 $ -- $ -- $ --
Interest cost 44 45 49 2 3 4
Expected return on plan assets (50) (58) (61) -- -- --
Amortization of prior service cost 1 1 1 (1) (2) --
Amortization of net (gain) loss 3 -- (1) (12) (9) (9)
---- ----- ---- ---- ---- ----
Net benefit expense (income) $ 6 $ (4) $ (4) $(11) $ (8) $ (5)
==== ===== ==== ==== ==== ====
Beginning in 2001, new retirees were charged the expected full 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. In 2002, based on historical experience, the
drop out rate assumption was increased for the medical plan, thereby shortening
the expected amortization period, which decreased the accumulated postretirement
benefit obligation at February 1, 2003 by approximately $6 million, and
increased postretirement benefit income by approximately $3 million in 2002.
For measurement purposes, a 13.0 percent increase in the cost of
covered health care benefits was assumed for 2002, as compared with 15.0 percent
for 2001. The rate was assumed to decline gradually to 5.0 percent in 2008 and
remain at that level thereafter. For 2002 and 2001, a change in the health care
cost trend rates assumed would not impact the accumulated benefit obligation or
net benefit income since retirees will incur 100 percent of such expected future
increases.
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 $1.4 million, $1.3
million and $1.2 million in 2002, 2001 and 2000, respectively.
21. 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.
The 2002 Foot Locker Directors' Stock Plan replaced both the Directors'
Stock Plan, which was adopted in 1996 and the Directors' Stock Plan, which was
adopted in 2000. There are 500,000 shares authorized under the 2002 plan. No
further grants or awards may be made under either of the prior plans. Options
granted prior to 2003 have a three-year vesting schedule. Options granted
beginning in 2003 become exercisable one year from the date of grant.
48
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, 745 participating employees purchased
254,115 shares in 2002. To date, a total of 1,507,968 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 fair values of the issuance of the stock-based compensation
pursuant to the Company's various stock option and purchase plans were estimated
at the grant date using a Black-Scholes option pricing model.
Stock Option Plans Stock Purchase Plan
------------------ -------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Weighted-average risk free rate of interest 4.17% 4.17% 6.43% 2.59% 3.73% 5.36%
Expected volatility 42% 48% 55% 35% 40% 46%
Weighted-average expected award life 3.5 YEARS 4.0 years 3.9 years .7 YEARS .7 years .7 years
Dividend yield 1.2% -- -- -- -- --
Weighted-average fair value $5.11 $5.31 $4.99 $4.23 $4.42 $2.86
The Black-Scholes option valuation model was developed for estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options, and because the 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:
2002 2001 2000
---- ---- ----
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 7,557 $14.63 7,696 $14.49 9,923 $15.12
Granted 1,640 $15.72 2,324 $12.81 2,167 $10.50
Exercised 783 $ 6.67 995 $ 7.28 811 $ 5.17
Expired or canceled 738 $19.80 1,468 $15.98 3,583 $15.93
----- ------ ----- ------ ----- ------
Options outstanding at end of year 7,676 $15.18 7,557 $14.63 7,696 $14.49
===== ====== ===== ====== ===== ======
Options exercisable at end of year 4,481 $15.94 4,371 $16.83 4,047 $18.78
----- ------ ----- ------ ----- ------
Options available for future grant at end of year 6,739 7,389 8,652
===== ====== ===== ====== ===== ======
The following table summarizes information about stock options outstanding and
exercisable at February 1, 2003:
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 $11.91 2,354 7.0 $ 9.83 1,616 $ 9.14
$12.31 to $15.75 1,955 6.8 13.80 980 14.39
$15.85 to $22.19 2,437 7.0 17.56 955 19.93
$22.41 to $30.38 930 4.1 25.45 930 25.45
----- --- ------ ----- ------
$4.53 to $30.38 7,676 6.6 $15.18 4,481 $15.94
===== === ====== ===== ======
49
22. RESTRICTED STOCK
Restricted shares of the Company's common stock may be awarded to certain
officers and key employees of the Company under the 1998 Plan and the 1995 Plan.
These awards fully vest after the passage of a restriction period, generally
three to five years. There were 90,000, 420,000, and 100,000 restricted shares
of common stock granted in 2002, 2001 and 2000, respectively. The market values
of the shares at the date of grant amounted to $1.3 million in 2002, $5.4
million in 2001 and $0.6 million in 2000. The market values are recorded within
shareholders' equity and are amortized as compensation expense over the related
vesting periods. During 2002, 2001 and 2000, respectively, 60,000, 270,000 and
311,667 restricted shares were forfeited. The Company recorded compensation
expense related to restricted shares of $1.9 million in 2002, $1.6 million in
2001 and $2.2 million in 2000.
23. 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 amended by the Board, or the rights are earlier redeemed
or exchanged by the Company.
24. 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
material effect on the Company's consolidated financial position, liquidity, or
results of operations.
25. COMMITMENTS
In connection with the sale of various businesses and assets, the Company may be
obligated for certain lease commitments transferred to third parties and
pursuant to certain normal representations, warranties, or indemnifications
entered into with the purchasers of such businesses or assets. Although the
maximum potential amounts for such obligations cannot be readily determined,
management believes that the resolution of such contingencies will not have a
material effect on the Company's consolidated financial position, liquidity, or
results of operations. 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.
26. 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 ticker symbol
for the Company's common stock will be changed to "FL" from "Z", effective March
31, 2003.
At February 1, 2003, the Company had 30,049 shareholders of record
owning 141,075,235 common shares.
Market prices for the Company's common stock were as follows:
2002 2001
---- ----
HIGH LOW High Low
---- --- ---- ---
COMMON STOCK
QUARTER
1st Q $17.95 $14.35 $14.20 $10.20
2nd Q 16.00 9.02 17.65 12.64
3rd Q 11.19 8.20 19.10 11.90
4th Q 13.73 9.75 17.01 13.30
50
27. QUARTERLY RESULTS (UNAUDITED)
(in millions, except per share amounts) 1st Q 2nd Q 3rd Q 4th Q Year
- --------------------------------------- ----- ----- ----- ----- ----
SALES
2002 $1,090 1,085 1,120 1,214 4,509
2001 $1,072 1,048 1,104 1,155 4,379
GROSS MARGIN(A)
2002 $ 320 312 343 369(c) 1,344
2001 $ 326 306 327 349(d) 1,308
OPERATING PROFIT(B)
2002 $ 64 55 72(e) 78(f) 269
2001 $ 57 9 59 73(g) 198
INCOME FROM CONTINUING OPERATIONS
2002 $ 38(h) 33 43(h) 48 162(h)
2001 $ 32 4 33(i) 42 111(i)
NET INCOME (LOSS)
2002 $ 20(h) 31 45(h) 57 153(h)
2001 $ 37 (14) 33(i) 36 92(i)
BASIC EARNINGS PER SHARE:
2002
Income from continuing operations $ 0.27(h) 0.23 0.30(h) 0.35 1.15(h)
Income (loss) from discontinued operations $(0.13) (0.01) 0.02 0.06 (0.06)
Net income $ 0.14(h) 0.22 0.32(h) 0.41 1.09(h)
2001
Income from continuing operations $ 0.23 0.03 0.24(i) 0.29 0.79(i)
Income (loss) from discontinued operations $ 0.04 (0.13) -- (0.04) (0.13)
Net income (loss) $ 0.27 (0.10) 0.24(i) 0.25 0.66(i)
DILUTED EARNINGS PER SHARE:
2002
Income from continuing operations $ 0.26(h) 0.22 0.29(h) 0.33 1.10(h)
Income (loss) from discontinued operations $(0.12) (0.01) 0.02 0.06 (0.05)
Net income $ 0.14(h) 0.21 0.31(h) 0.39 1.05(h)
2001
Income from continuing operations $ 0.23 0.03 0.23(i) 0.28 0.77(i)
Income (loss) from discontinued operations $ 0.04 (0.13) -- (0.04) (0.13)
Net income (loss) $ 0.27 (0.10) 0.23(i) 0.24 0.64(i)
(a) Gross margin represents sales less cost of sales.
(b) Operating profit represents income from continuing operations before
income taxes, interest expense, net and non-operating income.
(c) Includes an increase in vendor allowances of $10 million as compared
with the prior year fourth quarter.
(d) Includes income from vendor settlements related to prior years of $7
million.
(e) Includes asset impairment charge of $1 million.
(f) Includes asset impairment charge of $6 million.
(g) Includes a $2 million asset impairment charge.
(h) As more fully described in note 2, in applying EITF 90-16 to the
first quarter of 2002, the $18 million Northern charge recorded within
discontinued operations would have been classified as continuing
operations. Similarly, the $1 million benefit recorded in the third
quarter of 2002 would have been classified as continuing operations.
Income from continuing operations for the first and third quarters
would have been $20 million and $44 million, respectively. Diluted
earnings per share would have been $0.14 and $0.30 for the first and
third quarters, respectively. Reported net income for the first and
third quarters would have remained unchanged. After achieving
divestiture accounting for Northern in the fourth quarter of 2002,
these amounts would have been reclassified to reflect the results as
shown above and as originally reported by the Company. As such, the
Company has not amended these prior filings.
(i) As more fully described in note 2, applying EITF 90-16 in the third
quarter of fiscal 2001, income from continuing operations would have
been $13 million or $0.10 per basic and diluted earnings per share.
This change would have represented the remaining accrued loss on
disposal at the date of the Northern Canada stock transfer, which would
have been reported within continuing operations. As such, income from
continuing operations of fiscal year 2001 would have been $91 million
or $0.65 and $0.64 per basic and diluted earnings per share,
respectively. After achieving divestiture accounting for Northern in
the fourth quarter of 2002, these amounts would have been reclassified
to reflect the results as shown above and as originally reported by the
Company. As such, the Company has not amended these prior filings.
28. SUBSEQUENT EVENT (UNAUDITED)
On May 6, 2003, the amendments to the Northern Note were executed and a cash
payment of CAD$5.2 million (approximately US$3.5 million) was received
representing principal and interest through the date of the amendment. After
taking into account this payment, the remaining principal due under the Note is
CAD$17.5 million (approximately US$12 million). Under the terms of the
renegotiated Note, a principal payment of CAD$1 million is due January 15, 2004.
An accelerated principal payment of CAD$1 million may be due if certain events
occur. The remaining amount of the Note is required to be repaid upon the
occurrence of "payment events," as defined in the purchase agreement, but no
later than September 28, 2008. Interest is payable semiannually and will accrue
beginning on May 1, 2003 at a rate of 7.0 percent per annum.
51
FIVE YEAR-SUMMARY OF SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and other information
contained elsewhere in this report. All selected financial data have been
restated for discontinued operations.
($ in millions, except per share amounts) 2002 2001 2000 1999 1998
- ----------------------------------------- ---- ---- ---- ---- ----
SUMMARY OF CONTINUING OPERATIONS
Sales $ 4,509 4,379 4,356 4,263 4,161
Gross margin 1,344 1,308 1,309 1,164(1) 1,131
Selling, general and administrative expenses 928 923 975 985 1,062
Restructuring charges (income) (2) 34 1 85 --
Depreciation and amortization 149 154 151 169 139
Interest expense, net 26 24 22 51 44
Other income (3) (2) (16) (223) (100)
Income from continuing operations 162 111(4) 107(4) 59(4) 14(4)
Cumulative effect of accounting change(2) -- -- (1) 8 --
Basic earnings per share from continuing operations 1.15 0.79(4) 0.78(4) 0.43(4) 0.10(4)
Basic earnings per share from cumulative effect of
accounting change -- -- (0.01) 0.06 --
Diluted earnings per share from continuing operations 1.10 0.77(4) 0.77(4) 0.43(4) 0.10(4)
Diluted earnings per share from cumulative effect of
accounting change -- -- (0.01) 0.06 --
Common stock dividends declared 0.03 -- -- -- --
Weighted-average common shares outstanding (in millions) 140.7 139.4 137.9 137.2 135.4
Weighted-average common shares outstanding
assuming dilution (in millions) 150.8 146.9 139.1 138.2 135.9
======= ===== ===== ===== =====
FINANCIAL CONDITION
Cash and cash equivalents $ 357 215 109 162 193
Merchandise inventories 835 793 730 697 786
Property and equipment, net 636 637 684 754 906
Total assets 2,486 2,300 2,278 2,525 2,912
Short-term debt -- -- -- 71 250
Long-term debt and obligations
under capital leases 357 399 313 418 517
Total shareholders' equity 1,110 992 1,013 1,139 1,038
======= ===== ===== ===== =====
FINANCIAL RATIOS
Return on equity (ROE) 15.4% 11.1 10.0 5.4 1.2
Income from continuing operations
as a percentage of sales 3.6% 2.5(4) 2.5(4) 1.4(4) 0.3(4)
Net debt capitalization percent(3) 58.6% 61.1 60.9 61.2 67.6
Net debt capitalization percent
(without present value of operating leases)(3) -- 15.6 16.8 22.3 35.6
Current ratio 2.2 2.0 1.5 1.5 1.4
======= ===== ===== ===== =====
Capital Expenditures $ 150 116 94 152 512
Number of stores at year end 3,625 3,590 3,752 3,953 5,062
Total selling square footage at year end (in millions) 8.04 7.94 8.09 8.40 9.41
Total gross square footage at year end (in millions) 13.22 13.14 13.32 13.35 15.00
======= ===== ===== ===== =====
(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.
(3) Represents total debt, net of cash and cash equivalents.
(4) As more fully described in note 2, applying the provisions of EITF
90-16, income from continuing operations for 2001, 2000, 1999 and 1998
would have been reclassified to include the results of the Northern
Group. Accordingly, income from continuing operations would have been
$91 million, $57 million, $17 million and $3 million, respectively. As
such, basic earnings per share would have been $0.65, $0.42, $0.13, and
$0.02 for fiscal 2001, 2000, 1999 and 1998, respectively. Diluted
earnings per share would have been $0.64, $0.41, $0.13 and $0.02 for
fiscal 2001, 2000, 1999 and 1998, respectively. However, upon achieving
divestiture accounting in the fourth quarter of 2002, the results would
have been reclassified to reflect the results as shown above and as
originally reported by the Company.
52
BOARD OF DIRECTORS
J. CARTER BACOT (1, 4, 6)
Non-Executive Chairman of the Board
MATTHEW D. SERRA (1, 5)
President and Chief Executive Officer
PURDY CRAWFORD (1, 2, 3)
Chairman of the Board
AT&T Canada
NICHOLAS DIPAOLO (2)
Vice Chairman and Chief Operating Officer
Bernard Chaus, Inc.
PHILIP H. GEIER JR. (3, 6)
Retired Chairman of the Board
and Chief Executive Officer
Interpublic Group of Companies, Inc.
JAROBIN GILBERT JR.(1, 2 ,4)
President and Chief Executive Officer
DBSS Group, Inc.
JAMES E. PRESTON (1, 3, 4, 6)
Retired Chairman of the Board
and Chief Executive Officer
Avon Products, Inc.
DAVID Y. SCHWARTZ (2, 6)
Independent Business Advisor and Consultant
CHRISTOPHER A. SINCLAIR (1, 3, 6)
Managing Director
Manticore Partners LLC
CHERYL N. TURPIN (3, 4)
Retired President and Chief Executive Officer
The Limited Stores
DONA D. YOUNG (2, 4)
Chairman of the Board, President
and Chief Executive Officer
The Phoenix Companies, Inc.
(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
CORPORATE OFFICERS
MATTHEW D. SERRA
President and Chief Executive Officer
EXECUTIVE VICE PRESIDENT
BRUCE L. HARTMAN
Chief Financial Officer
SENIOR VICE PRESIDENTS
GARY M. BAHLER
General Counsel and Secretary
JEFFREY L. BERK
Real Estate
MARC D. KATZ
Chief Information Officer
LAUREN B. PETERS
Strategic Planning
LAURIE J. PETRUCCI
Human Resources
VICE PRESIDENTS
JOSEPH N. BONGIORNO
Logistics
GARY H. BROWN
Real Property
PETER D. BROWN
Investor Relations and Treasurer
PETER M. CUPPS
Corporate Shared Services
ROBERT W. MCHUGH
Chief Accounting Officer
PATRICIA A. PECK
Human Resources
DENNIS E. SHEEHAN
Deputy General Counsel
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
112 West 34th Street
New York, New York 10120
(212) 720-3700
TRANSFER AGENT AND REGISTRAR
The Bank of New York
Shareholder Relations Department
P.O. Box 11258
Church Street Station
New York, New York 10286
(866) 857-2216
(610) 312-5303 Outside the U.S. and Canada
(800) 936-4237 Hearing Impaired
www.stockbny.com
email: shareowner-svcs@bankofny.com
INDEPENDENT AUDITORS
KPMG LLP
345 Park Avenue
New York, New York 10154
(212) 758-9700
FORM 10-K
A copy of the Foot Locker, Inc. 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available, without charge, by request to
the Investor Relations Department at the Corporate Headquarters.
INVESTOR INFORMATION
Investor inquiries should be directed to the Investor Relations Department at
(212) 720-4600.
WORLD WIDE WEB SITE
Our website at www.footlocker-inc.com offers information about our Company, as
well as online versions of our Annual Report, SEC reports, quarterly results and
press releases.
Foot Locker, Inc., Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs
Sports, footlocker.com, Eastbay, Colorado, Going to the Game!, Weekend Edition,
and Team Edition service marks and trademarks are owned by Foot Locker, Inc. or
its affiliates.
FOOT LOCKER, INC.
112 West 34th Street
New York, NY 10120