10-Q 1 fl71302.htm FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

F O R M 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2004

Commission file no. 1-10299

FOOT LOCKER, INC.
(Exact name of registrant as specified in its charter)

New York

 

13-3513936


 


(State or other jurisdiction of incorporation or organization)

 

(I.R.S.  Employer Identification No.)

 

 

 

112 W. 34th Street, New York, New York

 

10120


 


(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number: (212) 720-3700

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x

No   o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   x

No   o

Number of shares of Common Stock outstanding at August 27, 2004: 155,665,049



FOOT LOCKER, INC.

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 


Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

1  

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

2  

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

3  

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4  

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5-14  

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14-19  

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

19  

 

 

 

 

 

Item 4.

Controls and Procedures

20  

 

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1.

Legal Proceedings

20  

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

20  

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

21  

 

 

 

 

 

 

Signature

22  

 

 

 

 

 

 

Index to Exhibits

23  


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except shares)

 

 

July 31,
2004

 

August 2,
2003

 

January 31,
2004

 

 

 


 


 


 

 

 

(Unaudited)

 

(Unaudited)

 

*

 

ASSETS

Current assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

399

 

$

332

 

$

448

 

Merchandise inventories

 

 

1,166

 

 

948

 

 

920

 

Assets of discontinued operations

 

 

2

 

 

2

 

 

2

 

Other current assets

 

 

156

 

 

98

 

 

149

 

 

 



 



 



 

 

 

 

1,723

 

 

1,380

 

 

1,519

 

Property and equipment, net

 

 

694

 

 

621

 

 

644

 

Deferred taxes

 

 

208

 

 

256

 

 

194

 

Goodwill and intangible assets

 

 

392

 

 

223

 

 

232

 

Other assets

 

 

89

 

 

109

 

 

100

 

 

 



 



 



 

 

 

$

3,106

 

$

2,589

 

$

2,689

 

 

 



 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

475

 

$

339

 

$

234

 

Accrued liabilities

 

 

293

 

 

259

 

 

300

 

Current portion of repositioning and restructuring reserves

 

 

1

 

 

4

 

 

1

 

Current portion of reserve for discontinued operations

 

 

8

 

 

17

 

 

8

 

Liabilities of discontinued operations

 

 

2

 

 

2

 

 

2

 

Current portion of long-term debt and obligations under capital leases

 

 

18

 

 

—  

 

 

—  

 

 

 



 



 



 

 

 

 

797

 

 

621

 

 

545

 

Long-term debt and obligations under capital leases

 

 

339

 

 

348

 

 

335

 

Other liabilities

 

 

318

 

 

428

 

 

434

 

 

 



 



 



 

 

 

 

1,454

 

 

1,397

 

 

1,314

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

Common stock and paid-in capital: 155,704,339, 142,262,025 and 144,008,667 shares, respectively

 

 

587

 

 

385

 

 

411

 

Retained earnings

 

 

1,244

 

 

1,012

 

 

1,132

 

Accumulated other comprehensive loss

 

 

(178

)

 

(204

)

 

(167

)

Less: Treasury stock at cost: 48,922, 66,124 and  56,587 shares, respectively

 

 

(1

)

 

(1

)

 

(1

)

 

 



 



 



 

Total shareholders’ equity

 

 

1,652

 

 

1,192

 

 

1,375

 

 

 



 



 



 

 

 

$

3,106

 

$

2,589

 

$

2,689

 

 

 



 



 



 

See Accompanying Notes to Condensed Consolidated Financial Statements.

* The balance sheet at January 31, 2004 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004.

-1-


FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

 

 

July 31,
2004

 

Aug. 2,
 2003

 

July 31,
2004

 

Aug. 2,
 2003

 

 

 



 



 



 



 

Sales

 

$

1,268

 

$

1,123

 

$

2,454

 

$

2,251

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

900

 

 

792

 

 

1,726

 

 

1,575

 

Selling, general and administrative expenses

 

 

268

 

 

233

 

 

516

 

 

474

 

Depreciation and amortization

 

 

37

 

 

38

 

 

71

 

 

75

 

Restructuring charge

 

 

2

 

 

1

 

 

2

 

 

1

 

Interest expense, net

 

 

4

 

 

4

 

 

8

 

 

9

 

Other income, net

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 



 



 



 



 

 

 

 

1,211

 

 

1,068

 

 

2,323

 

 

2,134

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

 

57

 

 

55

 

 

131

 

 

117

 

Income tax expense

 

 

12

 

 

18

 

 

39

 

 

41

 

 

 



 



 



 



 

Income from continuing operations

 

 

45

 

 

37

 

 

92

 

 

76

 

 

 



 



 



 



 

Income (loss) on disposal of discontinued operations, net of income tax benefit of $37 in 2004 and  $1 in 2003, respectively

 

 

37

 

 

(1

)

 

38

 

 

(1

)

Cumulative effect of accounting change, net of income tax of $-

 

 

—  

 

 

—  

 

 

—  

 

 

(1

)

 

 



 



 



 



 

Net income

 

$

82

 

$

36

 

$

130

 

$

74

 

 

 



 



 



 



 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.30

 

$

0.26

 

$

0.63

 

$

0.54

 

Income (loss) from discontinued operations

 

 

0.25

 

 

(0.01

)

 

0.26

 

 

(0.01

)

Cumulative effect of accounting change

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 



 



 



 



 

Net income

 

$

0.55

 

$

0.25

 

$

0.89

 

$

0.53

 

 

 



 



 



 



 

Weighted-average common shares outstanding

 

 

150.8

 

 

141.3

 

 

147.1

 

 

141.2

 

                           

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.29

 

$

0.25

 

$

0.60

 

$

0.52

 

Income (loss) from discontinued operations

 

 

0.24

 

 

(0.01

)

 

0.24

 

 

(0.01

)

Cumulative effect of accounting change

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 



 



 



 



 

Net income

 

$

0.53

 

$

0.24

 

$

0.84

 

$

0.51

 

 

 



 



 



 



 

Weighted-average common shares assuming dilution

 

 

157.1

 

 

152.1

 

 

156.6

 

 

151.7

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

-2-


FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

 

 

July 31,
2004

 

Aug. 2,
2003

 

July 31,
2004

 

Aug. 2,
2003

 

 

 


 


 


 


 

Net income

 

$

82

 

$

36

 

$

130

 

$

74

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments arising during the period

 

 

5

 

 

3

 

 

(11

)

 

8

 

Change in fair value of derivatives / reclassification adjustments, net of tax of $-, respectively

 

 

—  

 

 

(1

)

 

—  

 

 

1

 

 

 



 



 



 



 

Comprehensive income

 

$

87

 

$

38

 

$

119

 

$

83

 

 

 



 



 



 



 

See Accompanying Notes to Condensed Consolidated Financial Statements.

-3-


FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)

 

 

Twenty-six weeks ended

 

 

 


 

 

 

July 31,
2004

 

Aug. 2,
2003

 

 

 


 


 

From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

130

 

$

74

 

Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:

 

 

 

 

 

 

 

(Income) loss from disposal of discontinued operations, net of tax

 

 

(38

)

 

1

 

Cumulative effect of accounting change, net of tax

 

 

—  

 

 

1

 

Restructuring charge

 

 

2

 

 

1

 

Depreciation and amortization

 

 

71

 

 

75

 

Deferred income taxes

 

 

(6

)

 

(14

)

Change in assets and liabilities:

 

 

 

 

 

 

 

Merchandise inventories

 

 

(213

)

 

(107

)

Accounts payable and other accruals

 

 

235

 

 

55

 

Pension contribution

 

 

(50

)

 

(50

)

Other, net

 

 

(38

)

 

18

 

 

 



 



 

Net cash provided by operating activities of continuing operations

 

 

93

 

 

54

 

 

 



 



 

From Investing Activities:

 

 

 

 

 

 

 

Lease acquisition costs

 

 

(15

)

 

(9

)

Acquisition of Footaction stores

 

 

(224

)

 

—  

 

Capital expenditures

 

 

(83

)

 

(59

)

 

 



 



 

Net cash used in investing activities of continuing operations

 

 

(322

)

 

(68

)

 

 



 



 

From Financing Activities:

 

 

 

 

 

 

 

Increase in long-term debt

 

 

175

 

 

—  

 

Debt issuance costs

 

 

(2

)

 

—  

 

Issuance of common stock

 

 

27

 

 

5

 

Dividends paid

 

 

(18

)

 

(8

)

 

 



 



 

Net cash provided by (used in) financing activities of continuing operations

 

 

182

 

 

(3

)

 

 



 



 

Net Cash used in Discontinued Operations

 

 

(1

)

 

(3

)

Effect of exchange rate fluctuations on Cash and Cash Equivalents

 

 

(1

)

 

(5

)

 

 



 



 

Net change in Cash and Cash Equivalents

 

 

(49

)

 

(25

)

Cash and Cash Equivalents at beginning of year

 

 

448

 

 

357

 

 

 



 



 

Cash and Cash Equivalents at end of interim period

 

$

399

 

$

332

 

 

 



 



 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

Interest

 

$

13

 

$

13

 

Income taxes

 

$

68

 

$

39

 

 

 

   

 

   

 

Non-cash Financing Activities:

 

 

 

 

 

 

 

Common stock issued upon conversion of convertible debt

 

$

150

 

$

—  

 

Debt issuance costs reclassified to equity upon conversion of convertible debt

 

$

(3

)

$

—  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

-4-


FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation 

                    The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company’s Form 10-K for the year ended January 31, 2004, as filed with the Securities and Exchange Commission (the “SEC”) on April 5, 2004. Certain items included in these statements are based on management’s estimates. In the opinion of management, all material adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods have been included. The results for the twenty-six weeks ended July 31, 2004 are not necessarily indicative of the results expected for the year.

2.     Acquisition

                    The Company closed its purchase of 349 Footaction stores from Footstar, Inc. on May 7, 2004. Footstar, Inc. had filed for Chapter 11 bankruptcy protection on March 2, 2004; consequently, the disposition of its Footaction stores was conducted under a Bankruptcy Code Section 363 sale process.  The U.S. Bankruptcy Court approved the sale on April 21, 2004 and the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired on May 4, 2004.  The agreement to acquire the Footaction stores is in line with the Company’s strategic priorities, including the acquisition of compatible athletic footwear and apparel retail companies. The Company’s consolidated results of operations include those of Footaction beginning with the date that the acquisition was consummated.

                    The Company integrated the Footaction business into the Athletic Stores segment and will operate the majority of the stores under the Footaction name. The purchase price of $224 million was increased for direct costs related to the acquisition totaling $5 million.  The direct costs include investment banking, legal and accounting fees and other costs. The Company has allocated the purchase price of approximately $229 million based, in part, upon internal estimates of cash flows, recoverability and independent appraisals, and may be revised as more definitive facts and evidence become available. Pro forma effects of the acquisition have not been presented, as their effects were not significant to the consolidated results of operations. The allocation of the purchase price is detailed below:            

(in millions)

 

 

 

 

Inventory

 

$

38

 

Property and equipment

 

 

45

 

Intangible assets

 

 

29

 

Goodwill

 

 

126

 

 

 



 

Total assets

 

$

238

 

 

 



 

Accounts payable and accrued liabilities (1)

 

 

5

 

Other liabilities (2)

 

 

4

 

 

 



 

Total liabilities

 

$

9

 

 

 



 

Total purchase price

 

$

229

 

Due to Footstar, Inc. (3)

 

 

(4

)

Other amounts due and payable (4)

 

 

(1

)

 

 



 

Cash paid as of July 31, 2004

 

$

224

 

 

 



 


(1)

“Accounts payable and accrued liabilities” include approximately $3 million for anticipated payments to landlords to cancel two of the acquired leases. Also included is approximately $1 million of liabilities related to gift cards assumed. The remaining $1 million relates to transfer taxes and real estate charges assumed from Footstar, Inc. as part of the acquisition.

(2)

“Other liabilities” includes $4 million of liabilities assumed for leased locations with rents above their fair value.

(3)

“Due to Footstar, Inc. includes amounts payable to Footstar, Inc. for final purchase price adjustments.

(4)

“Other amounts due and payable” includes professional fees related to the transaction.


          In accordance with the purchase agreement, $13.7 million of the purchase price was deposited into an escrow account pending resolution of certain lease related issues. As of July 31, 2004, the Company and the respective landlords were in negotiation to resolve those issues.

-5-


3.     Term Loan and Amended Revolving Credit Facility

                    The Company elected to finance a portion of the Footaction stores’ purchase price, and on May 19, 2004 obtained a 5-year, $175 million amortizing term loan with the bank group participating in its existing revolving credit facility.  The initial interest rate on the LIBOR-based, floating-rate loan was 2.625 percent. The loan requires minimum principal payments each May, equal to a percentage of the original principal amount of 10 percent in years 2005 and 2006, 15 percent in years 2007 and 2008 and 50 percent in year 2009. The Company also amended and extended its revolving credit agreement to 2009 to coincide with the final maturity of the term loan. Closing and upfront fees totaling approximately $2 million were paid for the term loan and the amendment to the revolver.  These fees, as well as the remaining unamortized fees on the existing revolver, are being amortized over the five-year period. The amended and restated revolving credit facility includes various financial covenants, with which the Company was in compliance as of July 31, 2004.

4.     Convertible Subordinated Notes

                    The Company notified The Bank of New York, as Trustee under the indenture, that it intended to redeem its entire $150 million outstanding 5.5 percent convertible subordinated notes, effective June 4, 2004.   By June 3, 2004, The Bank of New York had received notice from 100 percent of the holders of the notes of their election to convert their securities into shares of the Company’s common stock.  As of June 3, 2004, all of the convertible subordinated notes were cancelled and approximately 9.5 million new shares of the Company’s common stock were issued. The Company reclassified the remaining $3 million of unamortized deferred costs related to the original issuance of the convertible debt to equity as a result of the conversion.

5.     Goodwill and Intangible Assets

                   The Company accounts for goodwill and other intangibles in accordance with SFAS No. 142, “Goodwill and Other 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. During the first quarters of 2004 and 2003, the Company completed its annual reviews of goodwill, which did not result in an impairment charge. The goodwill assigned to the Footaction acquisition is expected to be tested for impairment at the Company’s next scheduled evaluation, which is the first day of the 2005 fiscal year.

Goodwill (in millions)

 

July 31, 2004

 

August 2, 2003

 

January 31, 2004

 


 



 



 



 

Athletic Stores

 

$

181

 

$

56

 

$

56

 

Direct-to-Customers

 

 

80

 

 

80

 

 

80

 

 

 



 



 



 

 

 

$

261

 

$

136

 

$

136

 

 

 



 



 



 


Intangible Assets (in millions)

 

July 31, 2004

 

August 2, 2003

 

January 31, 2004

 


 


 


 


 

Intangible assets not subject to amortization

 

$

2

 

$

2

 

$

2

 

Intangible assets subject to amortization, net of accumulated amortization of $56 million, $42 million and $51 million, respectively

 

 

129

 

 

85

 

 

94

 

 

 



 



 



 

 

 

$

131

 

$

87

 

$

96

 

 

 



 



 



 

Total

 

$

392

 

$

223

 

$

232

 

 

 



 



 



 

Intangible assets not subject to amortization relate to the Company’s U.S. defined benefit retirement plan.

-6-


                    The changes in the carrying amount of goodwill and intangibles subject to amortization for the twenty-six weeks ended July 31, 2004 are as follows:

 

 

Jan. 31, 2004

 

Acquisitions (a)

 

Additions

 

Amortization
/ Other (b)

 

July 31, 2004

 

Weighted
Average
Useful Life
in Years

 

 

 


 


 


 


 


 


 

Goodwill

 

$

136

 

$

126

 

$

—  

 

$

(1

)

$

261

 

 

 

 

 

 



 



 



 



 



 

 

 

 

Finite life intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease acquisition costs

 

$

94

 

$

—  

 

$

15

 

$

(9

)

$

100

 

 

12.1    

 

Trademark

 

 

—  

 

 

21

 

 

—  

 

 

 

 

 

21

 

 

20.0    

 

Loyalty program

 

 

—  

 

 

1

 

 

—  

 

 

—  

 

 

1

 

 

2.0    

 

Favorable leases

 

 

—  

 

 

7

 

 

—  

 

 

—  

 

 

7

 

 

4.7    

 

 

 



 



 



 



 



 



 

Total

 

$

94

 

$

29

 

$

15

 

$

(9

)

$

129

 

 

12.7    

 

 

 



 



 



 



 



 



 

(a)  Attributable to acquisition of 349 Footaction stores.
(b)  Includes effect of foreign currency translation.

                    Lease acquisition costs represent amounts that are required to secure prime lease locations and other lease rights, primarily in Europe. Included in finite life intangibles, as a result of the Footaction purchase, are the trademark for the Footaction name, amounts paid for leased locations with rents below their fair value and amounts paid to obtain names of members associated with the loyalty program.

                    Amortization expense for the intangibles subject to amortization was approximately $4 million and $3 million for the second quarters of 2004 and 2003, respectively, and $7 million and $5 million for the first half of 2004 and 2003, respectively. Annual estimated amortization expense for lease acquisition costs is expected to be approximately $13 million for 2004, 2005 and 2006, approximately $12 million for 2007 and approximately $11 million for 2008.

6.     Asset Retirement Obligations

                    The Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) as of February 2, 2003. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate can be made. The carrying amount of the related long-lived asset shall be increased by the same amount as the liability and that amount will be amortized over the useful life of the underlying long-lived asset. The difference between the fair value and the value of the ultimate liability will be accreted over time using the credit-adjusted risk-free interest rate in effect when the liability is initially recognized. Asset retirement obligations of the Company may at any time include structural alterations to store locations and equipment removal costs from distribution centers required by certain leases. The Company recorded a liability of $2 million for the expected present value of future retirement obligations on February 2, 2003, increased property and equipment by $1 million and recognized a $1 million after tax charge for the cumulative effect of the accounting change. Accretion, amortization expense and effects of foreign exchange translation recorded during the first half of 2004 and 2003 were not material. The liability at July 31, 2004 and August 2, 2003 was $4 million and $2 million, respectively.

7.     Derivative Financial Instruments

                    The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third party and intercompany 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 would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings immediately.

-7-


                    Beginning in the second quarter of 2004, the Company began to implement new strategies to mitigate the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings. Such strategies may at times include holding a variety of derivative instruments, which includes entering into forwards and option contracts, whereby the changes in the fair value of these financial instruments are charged to the statements of operations immediately.

                    Derivative financial instrument qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the items being hedged, both at inception and throughout the hedged period, which management evaluates periodically.

                    The primary currencies to which the Company is exposed are the euro, the British Pound and the Canadian Dollar. When using a forward contract as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The change in a forward contract’s time value is reported in earnings. For forward foreign exchange contracts designated as cash flow hedges of inventory, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized as a component of cost of sales when the related inventory is sold. The Company enters into other forward contracts to hedge intercompany royalty cash flows that are denominated in foreign currencies. The effective portion of gains and losses associated with these forward contracts is reclassified from accumulated other comprehensive income or loss to selling, general and administrative expenses in the same quarter as the underlying intercompany royalty transaction occurs. 

                    The Company has hedged forecasted transactions for no more than the next twelve months and expects all derivative-related amounts reported in accumulated other comprehensive income or 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.

                    Changes in fair values and reclassifications for settled contracts during the thirteen and twenty-six week periods of 2004 were not material. Accumulated comprehensive income decreased by approximately $1 million after-tax due to changes in the fair values of derivative financial instruments designated as hedges and reclassified to the statements of operations for settled contracts during the second quarter of 2003 and increased by $1 million after-tax for the 2003 year to date period.

                    The impact of cash flow hedges that were classified as ineffective during the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003 was not material. The changes in fair value of derivative instruments not designated as hedges were substantially offset by the changes in value of the underlying transactions, which were recorded in selling, general and administrative expenses, in both periods.

                    The fair value of derivative contracts outstanding at July 31, 2004 comprised current assets of $1 million, current liabilities of $3 million and non-current liabilities of $5 million.

8.     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.

                    A taxing authority may challenge positions that the Company has adopted in its income tax filings. Accordingly, the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax financial reporting. The Company regularly assesses its tax position for such transactions and records reserves for those differences.

                    As mentioned in the Company’s Form 10-K for the year ending January 31, 2004, the Internal Revenue Service (“IRS”) indicated that it was going to conduct a survey of the Company’s income tax returns for the years from 1999-2001 and had begun an examination for the 2002 year and a voluntary pre-filing review for 2003. During the second quarter of 2004, the IRS completed its survey of the 1999-2001 years and its examination of the 2002 year. The IRS and the Company have come to an agreement on the pre-filing review of the Company’s income tax return for 2003. As a result of these actions by the IRS, during the second quarter of 2004, the Company reduced its income tax provision for Continuing Operations by $7.1 million and Discontinued Operations by $37 million. The reduction in Continuing Operations was principally related to U.S. taxation of the Company’s foreign operations. The reduction in Discontinued Operations related to previously discontinued foreign businesses.

-8-


                    During the second quarter of 2004, the Commonwealth of Puerto Rico concluded an examination of the Company’s branch income tax returns, including an income tax audit, for the years 1994 through 1999 and a branch profit tax audit for the years 1994 through 2002. As a result, the Company reduced its income tax provision for Continuing Operations by $2.1 million.

9.     Discontinued Operations

                    On January 23, 2001, the Company announced that it was exiting its 694-store Northern Group segment. During the second quarter of 2001, the Company completed the liquidation of the 324 stores in the United States. 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”). 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 net amount of the assets and liabilities of the former operations was written down to the estimated fair value of the Note.  The transaction was accounted for pursuant to SEC Staff Accounting Bulletin Topic 5:E “Accounting for Divestiture of a Subsidiary or Other Business Operation,” as a “transfer of assets and liabilities under contractual arrangement” as no cash proceeds were received and the consideration comprised the Note, the repayment of which was dependent on the future successful operations of the business.  

                    An agreement in principle had been reached during December 2002 to receive CAD$5 million (approximately US$3 million) cash consideration in partial prepayment of the Note and accrued interest, and further, the Company agreed to reduce the face value of the Note to CAD$17.5 million (approximately US$12 million). During the fourth quarter of 2002, circumstances had changed sufficiently such that it became appropriate to recognize the transaction as an accounting divestiture. Accordingly, the Note was recorded in the financial statements at its estimated fair value of CAD$16 million (approximately US$10 million).  

                    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.  At July 31, 2004 and August 2, 2003, US$3 million and US$1 million, respectively, are classified as a current receivable, with the remainder classified as long term within other assets in the accompanying Condensed Consolidated Balance Sheet. All principal and interest payments have been received timely and in accordance with the terms of the Note.

                    As indicated above, as the assignor of the Northern Canada leases, the Company remained secondarily liable under those leases.  As of July 31, 2004, the Company estimates that its gross contingent lease liability is between CAD$38 to $42 million (approximately US$29 to $32 million).  The Company currently estimates the expected value of the lease liability to be approximately US$1 million. The Company believes that it is unlikely that it would be required to make such contingent payments.  The remaining reserve balance of $2 million at July 31, 2004 is expected to be utilized within twelve months.

                    The major components of the pre-tax losses (gains) on disposal and disposition activity related to the reserves are presented below:

Northern Group (in millions)

 

 

Balance
1/31/2004

 

Net
Usage

 

Charge/
(Income)

 

Balance
7/31/2004

 

 

 


 


 


 


 

Other costs

 

$

2

 

$

—  

 

$

—  

 

$

2

 

 

 



 



 



 



 

                    In 1998, the Company exited both its International General Merchandise and Specialty Footwear segments. During the first quarter of 2004, the Company recorded income of $1 million, after-tax, related to a refund of Canadian customs duties related to certain of the businesses that comprised the Specialty Footwear segment.

                    In 1997, the Company exited its Domestic General Merchandise segment. In 2002, 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. Two of the actions brought against this subsidiary by former landlords on lease obligations remain unresolved as of July 31, 2004 and the associated gross contingent lease liability, related to these two leases, is approximately $3 million. The Company recorded charges totaling $3 million, after-tax, related to certain of these actions, as well as others that have been settled, during the second and fourth quarters of 2003. The Company believes that it may have valid defenses; however, the outcome of the remaining actions cannot be predicted with any degree of certainty.

                    During the second quarter of 2004, the Company recorded $37 million of income tax benefit in discontinued operations as a result of achieving resolution of U.S. income tax examinations.

-9-


                    The remaining reserve balances for these three discontinued segments totaled $16 million as of July 31, 2004, $6 million of which is expected to be utilized within twelve months and the remaining $10 million thereafter.

                    Disposition activities related to the reserves are presented below:

(in millions)

 

 

 

 

 

 

 

 

 

International General Merchandise

 

 

 

 

 

 

 

 

 

 

 

Balance
1/31/2004

 

Net
Usage

 

Charge/
(Income)

 

Balance
7/31/2004

 

 

 


 


 


 


 

The Bargain! Shop – Real estate & lease liabilities

 

$

5

 

$

—  

 

$

—  

 

$

5

 

 

 



 



 



 



 


Specialty Footwear

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance
1/31/2004

 

Net
Usage

 

Charge/
(Income)

 

Balance
7/31/2004

 

 

 


 


 


 


 

Real estate & lease liabilities

 

$

2

 

$

1

 

$

(1

)

$

2

 

 

 



 



 



 



 


Domestic General Merchandise

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance
1/31/2004

 

Net
Usage

 

Charge/
(Income)

 

Balance
7/31/2004

 

 

 


 


 


 


 

Real estate & lease liabilities

 

$

6

 

$

—  

 

$

—  

 

$

6

 

Legal and other costs

 

 

4

 

 

(1

)

 

—  

 

 

3

 

 

 



 



 



 



 

Total

 

$

10

 

$

(1

)

$

—  

 

$

9

 

 

 



 



 



 



 

10.     Repositioning and Restructuring Programs

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. The dispositions of Randy River Canada, Foot Locker Outlets, Colorado, Going to the Game!, Weekend Edition and the store-closing program were essentially completed in 2000. 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 32 of the stores.  In 2001, the Company completed the sales of The San Francisco Music Box Company (“SFMB”) and the assets related to its Burger King and Popeye’s franchises. The termination of the Maumelle distribution center lease was completed in 2002.

                    In connection with the sale of SFMB, the Company remained as an assignor or guarantor of leases of SFMB related to a distribution center and five store locations. In May 2003, SFMB filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.  During July and August 2003, SFMB rejected five of the leases and assumed one of the store leases in the bankruptcy proceedings.  During the second quarter of 2003 and 2004, the Company recorded a charge of $1 million and $2 million, respectively, primarily related to the distribution center lease. The lease for the distribution center expires January 31, 2010, while the remaining store leases expired on January 31, 2004. As of July 31, 2004, the Company estimates its gross contingent lease liability for the distribution center lease to be approximately $4 million, however, the Company believes that this liability may be settled for an amount lower than the gross obligation due to potential subleases that may be obtained during the lease term.  Accordingly, at July 31, 2004 the reserve balance is $2 million.

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.

-10-


                    Disposition activity related to the reserves within the restructuring programs is presented below.

1999 Restructurings
(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance
1/31/2004

 

Net
Usage

 

Charge/
(Income)

 

Balance
7/31/2004

 

 

 


 


 


 


 

Real estate

 

$

1

 

$

(1

)

$

2

 

$

2

 

 

 



 



 



 



 


1993 Repositioning and 1991 Restructuring
(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance
1/31/2004

 

Net
Usage

 

Charge/
(Income)

 

Balance
7/31/2004

 

 

 


 


 


 


 

Real estate

 

$

1

 

$

—  

 

$

—  

 

$

1

 

Other disposition costs

 

 

1

 

 

—  

 

 

—  

 

 

1

 

 

 



 



 



 



 

Total

 

$

2

 

$

—  

 

$

—  

 

$

2

 

 

 



 



 



 



 


Total Restructuring Reserves
(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance
1/31/2004

 

Net
Usage

 

Charge/
(Income)

 

Balance
7/31/2004

 

 

 


 


 


 


 

Real estate

 

$

2

 

$

(1

)

$

2

 

$

3

 

Other disposition costs

 

 

1

 

 

—  

 

 

—  

 

 

1

 

 

 



 



 



 



 

Total

 

$

3

 

$

(1

)

$

2

 

$

4

 

 

 



 



 



 



 

                    The remaining reserve balances totaled $4 million at July 31, 2004, of which, $1 million is expected to be utilized within the next twelve months and the remaining $3 million thereafter.

11.     Earnings Per Share

                    Basic earnings per share is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options and the conversion of convertible long-term debt. The following table reconciles the numerator and denominator used to compute basic and diluted earnings per share for continuing operations.

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions)

 

July 31,
2004

 

Aug. 2,
2003

 

July 31,
2004

 

Aug. 2,
2003

 


 


 


 


 


 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

45

 

$

37

 

$

92

 

$

76

 

Effect of Dilution:

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible debt (1)

 

 

1

 

 

1

 

 

2

 

 

2

 

 

 



 



 



 



 

Income from continuing operations assuming dilution

 

$

46

 

$

38

 

$

94

 

$

78

 

 

 



 



 



 



 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

150.8

 

 

141.3

 

 

147.1

 

 

141.2

 

Effect of Dilution:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and awards

 

 

3.0

 

 

1.3

 

 

3.1

 

 

1.0

 

Convertible debt (1)

 

 

3.3

 

 

9.5

 

 

6.4

 

 

9.5

 

 

 



 



 



 



 

Weighted-average common shares assuming dilution

 

 

157.1

 

 

152.1

 

 

156.6

 

 

151.7

 

 

 



 



 



 



 

(1) By June 3, 2004, 100 percent of the convertible notes were converted to equity.

                    Options to purchase 1.7 million and 4.0 million shares of common stock were not included in the computation for the thirteen weeks ended July 31, 2004 and August 2, 2003, respectively.  Options to purchase 1.3 million and 5.7 million shares of common stock were not included in the computation for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively.  These amounts were not included because the exercise price of the options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

-11-


12.     Accumulated Other Comprehensive Loss.

Accumulated other comprehensive loss was comprised of the following:

(in millions)

 

July 31, 2004

 

August 2, 2003

 

January 31, 2004

 


 


 


 


 

Foreign currency translation adjustments

 

$

5

 

$

(7

)

$

16

 

Minimum pension liability adjustment

 

 

(182

)

 

(198

)

 

(182

)

Fair value of derivatives designated as hedges

 

 

(1

)

 

1

 

 

(1

)

 

 



 



 



 

 

 

$

 (178

)

$

(204

)

$

(167

)

 

 



 



 



 

13.     Segment Information

                    Sales and division results for the Company’s reportable segments for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively, are presented below. Division profit reflects income from continuing operations before income taxes, corporate expense, non-operating income and net interest expense.

                    The operations of the Footaction stores have been included in the Athletic Segment as a result of the Company’s review of its operating segments in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information.” The Company assigned the stores to the segment based on its method of internal reporting, which disaggregates its business by product category. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004.

Sales:

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions)

 

July 31, 2004

 

Aug. 2, 2003

 

July 31, 2004

 

Aug. 2, 2003

 


 


 


 


 


 

Athletic Stores

 

$

1,194

 

$

1,050

 

$

2,294

 

$

2,091

 

Direct-to-Customers

 

 

74

 

 

73

 

 

160

 

 

160

 

 

 



 



 



 



 

Total Sales

 

$

1,268

 

$

1,123

 

$

2,454

 

$

2,251

 

 

 



 



 



 



 

Operating results:

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions)

 

July 31, 2004

 

Aug. 2, 2003

 

July 31, 2004

 

Aug. 2, 2003

 


 


 


 


 


 

Athletic Stores

 

$

80

 

$

68

 

$

162

 

$

143

 

Direct-to-Customers

 

 

6

 

 

8

 

 

17

 

 

17

 

 

 



 



 



 



 

 

 

 

86

 

 

76

 

 

179

 

 

160

 

All Other (1)

 

 

(2

)

 

(1

)

 

(2

)

 

(1

)

 

 



 



 



 



 

Total division profit

 

 

84

 

 

75

 

 

177

 

 

159

 

Corporate expense

 

 

23

 

 

16

 

 

38

 

 

33

 

 

 



 



 



 



 

Operating profit

 

 

61

 

 

59

 

 

139

 

 

126

 

Non-operating income

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Interest expense, net

 

 

4

 

 

4

 

 

8

 

 

9

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

$

57

 

$

55

 

$

131

 

$

117

 

 

 



 



 



 



 


(1)

The disposition of all other formats presented as “All Other” was completed in 2001. All periods presented represent restructuring charges associated with the SFMB closure.

-12-


14.     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. 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 are the components of net periodic pension benefit cost for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003:

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions)

 

July 31, 2004

 

Aug. 2, 2003

 

July 31, 2004

 

Aug. 2, 2003

 


 


 


 


 


 

Service cost

 

$

3

 

$

2

 

$

5

 

$

4

 

Interest cost

 

 

9

 

 

11

 

 

19

 

 

22

 

Expected return on assets

 

 

(10

)

 

(12

)

 

(21

)

 

(24

)

Net Amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized prior service cost

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Unrecognized net loss

 

 

2

 

 

2

 

 

5

 

 

5

 

 

 



 



 



 



 

Net periodic pension benefit cost

 

$

4

 

$

3

 

$

8

 

$

7

 

 

 



 



 



 



 

                    The following are the components of the net postretirement benefit income for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003:

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions)

 

July 31, 2004

 

Aug. 2, 2003

 

July 31, 2004

 

Aug. 2, 2003

 


 


 


 


 


 

Service cost

 

$

—  

 

$

—  

 

$

—  

 

$

—  

 

Interest cost

 

 

1

 

 

1

 

 

1

 

 

1

 

Net amortization of unrecognized prior service benefit

 

 

(1

)

 

(1

)

 

(1

)

 

(1

)

Amortization of net gain

 

 

(4

)

 

(5

)

 

(7

)

 

(8

)

 

 



 



 



 



 

Net postretirement benefit income

 

$

(4

)

$

(5

)

$

(7

)

$

(8

)

 

 



 



 



 



 

                    The Company previously disclosed in its financial statements for the year ended January 31, 2004, that it expected to contribute $50 million to its pension plans during 2004, to the extent that the contributions were tax deductible. As of July 31, 2004, $50 million of contributions have been made. The Company expects to make additional payments of $1 million for its non-qualified plans throughout the remainder of the year. The Company may accelerate a portion of its planned February 2005 contribution, or approximately $56 million, in September 2004 to its U.S. qualified pension plan.

                    In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”).  The Act establishes a prescription drug benefit under Medicare, known as “Medicare Part D,” and a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.  In May 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2 requires companies to account for the effect of the subsidy on benefits attributable to past service as an actuarial experience gain and as a reduction of the service cost component of net postretirement health care costs for amounts attributable to current service, if the benefit provided is at least actuarially equivalent to Medicare Part D. Management has concluded that the health care benefits that it provides to retirees is not actuarially equivalent to Medicare Part D and therefore, the Company will not be eligible to receive the Federal subsidy. 

-13-


15.     Stock-Based Compensation

                    The Company accounts for stock-based compensation by applying APB No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“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 2003 and 1994 Stock Purchase Plans. The plans, which are compensatory as defined in SFAS No. 123, are 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.

                    Accounting for the Company’s stock-based compensation in accordance with the fair value method provisions of SFAS No. 123 would have resulted in the following:

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions, except per share amounts)

 

July 31,
2004

 

August 2,
2003

 

July 31,
2004

 

August 2,
2003

 


 


 


 


 


 

Net income, as reported:

 

$

82

 

$

36

 

$

130

 

$

74

 

Add: Stock-based employee compensation expense included in reported net income, net of income tax benefit

 

 

1

 

 

—  

 

 

2

 

 

1

 

Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of income tax benefit

 

 

3

 

 

1

 

 

6

 

 

2

 

 

 



 



 



 



 

Pro forma net income

 

$

80

 

$

35

 

$

126

 

$

73

 

 

 



 



 



 



 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

0.55

 

$

0.25

 

$

0.89

 

$

0.53

 

Pro forma

 

$

0.53

 

$

0.25

 

$

0.86

 

$

0.51

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

0.53

 

$

0.24

 

$

0.84

 

$

0.51

 

Pro forma

 

$

0.52

 

$

0.24

 

$

0.82

 

$

0.50

 

16.     Subsequent Event

                    On August 20, 2004, the Company received a contingent payment, which was based upon a certain transaction, from the purchasers of the Northern Group of CAD$1 million. Based upon this payment the contingency was settled, the CAD$17.5 million Note executed on May 6, 2003 was cancelled and a new note was issued for the remaining principal balance of CAD$15.5 million. Prior to the receipt of this payment, an additional payment of CAD$1 million had been received on January 15, 2004, which aided in decreasing the remaining balance on the Note. The terms of the new note are substantially the same as the May 6, 2003 Note including the expiration date and interest payment terms.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

                    Foot Locker, Inc., through its subsidiaries, 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, Champs Sports and Footaction (beginning May 2004).  The Direct-to-Customers segment reflects Footlocker.com, Inc., which sells, through its affiliates, including Eastbay, Inc., to customers through catalogs and Internet websites.

-14-


SALES AND GROSS MARGIN

                    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. All references to comparable store sales for the thirteen and twenty-six weeks ended July 31, 2004 exclude the acquisition of Footaction.

                    Sales of $1,268 million for the second quarter of 2004 increased 12.9 percent from sales of $1,123 million for the second quarter of 2003. For the twenty-six weeks ended July 31, 2004, sales of $2,454 million increased 9.0 percent from sales of $2,251 million for the twenty-six weeks ended August 2, 2003. The sales increases were primarily driven by the addition of the Footaction stores which were acquired near the beginning of the second quarter of 2004. Footaction sales amounted to $104 million for the thirteen and twenty-six weeks ended July 31, 2004. Excluding the impact of foreign currency fluctuations, sales for the thirteen and twenty-six week periods ended July 31, 2004 increased 11.2 percent and 6.6 percent, respectively, as compared with the corresponding prior-year periods. Comparable-store sales decreased by 0.5 percent and 0.1 percent for the thirteen and twenty-six weeks ended July 31, 2004, respectively.

                    Gross margin, as a percentage of sales, of 29.0 percent and 29.7 percent for the thirteen and twenty-six weeks ended July 31, 2004, respectively, declined as compared with 29.5 and 30.0 percent, respectively, in the corresponding prior-year periods. Excluding the impact of Footaction, gross margin, as a percentage of sales would have been 30.5 percent and 30.4 percent for the thirteen and twenty-six week periods ending July 31, 2004, respectively. Footaction recorded markdowns to properly position the inventories for the back-to-school selling season. Additionally, markdowns, as a percentage of sales, were increased as a result of the promotional environment in certain European countries, in particular, France, Germany and the U.K. 

STORE COUNT

                    At July 31, 2004, the Company operated 3,958 stores, as compared with 3,610 at January 31, 2004. During the first half of 2004, the Company opened 61 stores, acquired 349 stores, closed 62 stores, and remodeled/relocated 167 stores.

SEGMENT INFORMATION

Sales

The following table summarizes sales by segment:

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions)

 

July 31, 2004

 

Aug. 2, 2003

 

July 31, 2004

 

Aug. 2, 2003

 


 


 


 


 


 

Athletic Stores

 

$

1,194

 

$

1,050

 

$

2,294

 

$

2,091

 

Direct-to-Customers

 

 

74

 

 

73

 

 

160

 

 

160

 

 

 



 



 



 



 

Total Sales

 

$

1,268

 

$

1,123

 

$

2,454

 

$

2,251

 

 

 



 



 



 



 

                    Athletic Stores sales increased by 13.7 percent and 9.7 percent for the thirteen and twenty-six weeks ended July 31, 2004, respectively, primarily due to the additional sales from the newly acquired Footaction stores, additional stores in Europe, and the strength of the euro’s performance against the U.S. dollar in the first half of 2004 as compared with the same period of 2003.  Excluding the impact of the Footaction stores, sales increased 3.8 percent and 4.7 percent for the thirteen and twenty-six weeks ended July 31, 2004, respectively, as compared with the corresponding prior-year periods.  Excluding the effect of foreign currency fluctuations, Athletic Stores’ sales increased 11.8 percent and 7.1 percent for the thirteen and twenty-six weeks ended July 31, 2004, respectively. As compared with the corresponding periods of the prior year. Comparable-store sales decreased 0.7 percent and 0.2 percent for the second quarter and first half of 2004, respectively. The sale of classic footwear continued to be the key driver during the first and second quarters of 2004 while the Company continued to benefit from exclusive offerings from its primary suppliers. Private-label apparel products also generated strong sales gains during the first half of 2004.  Classic footwear sales during the first quarter of 2004 resulted in a lower average selling price per unit.  However, average selling prices began to increase in the second quarter of 2004 as the Company has regained greater access to higher price point marquee footwear and the fashion trend is beginning to return to more technical based footwear. 

-15-


                    Direct-to-Customers sales remained relatively unchanged for the thirteen weeks and twenty-six weeks ended July 31, 2004, as compared with the corresponding prior-year period. Internet sales increased by 15.0 and 14.7 percent to $44 million and $92 million, for the thirteen and twenty-six weeks ended July 31, 2004, respectively, as compared with the corresponding prior year periods. These increases in Internet sales were offset by a decline in catalog sales, reflecting the continuing trend of the Company’s customers to browse and select products through its catalogs and then make their purchases via the Internet.

Operating Results

                    Division profit reflects income from continuing operations before income taxes, corporate expense, non-operating income and net interest expense.

Operating results:

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 


 


 

(in millions)

 

July 31, 2004

 

Aug. 2, 2003

 

July 31, 2004

 

Aug. 2, 2003

 


 


 


 


 


 

Athletic Stores

 

$

80

 

$

68

 

$

162

 

$

143

 

Direct-to-Customers

 

 

6

 

 

8

 

 

17

 

 

17

 

 

 



 



 



 



 

 

 

 

86

 

 

76

 

 

179

 

 

160

 

Restructuring charge (1)

 

 

(2

)

 

(1

)

 

(2

)

 

(1

)

 

 



 



 



 



 

Division profit

 

 

84

 

 

75

 

 

177

 

 

159

 

Corporate expense

 

 

23

 

 

16

 

 

38

 

 

33

 

 

 



 



 



 



 

Operating profit

 

 

61

 

 

59

 

 

139

 

 

126

 

Non-operating income

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Interest expense, net

 

 

4

 

 

4

 

 

8

 

 

9

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

$

57

 

$

55

 

$

131

 

$

117

 

 

 



 



 



 



 


 

(1)

All periods presented represent restructuring charges associated with the SFMB closure which was completed in 2001.

                    Athletic Stores division profit increased by 17.6 percent and 13.3 percent for the second quarter and first half of 2004, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, increased to 6.7 percent and 7.1 percent in the second quarter and first half of 2004, respectively, from 6.5 percent and 6.8 percent in the corresponding prior-year periods.  These increases in the second quarter and first half of 2004 were primarily a result of lower selling, general and administrative expenses, as a percentage of sales, offset in part by the Footaction format loss of $5 million.

                    Direct-to-Customers division profit decreased 25.0 percent for the thirteen weeks ended July 31, 2004, as compared with the corresponding period ended August 2, 2003. The decrease in division profit is a result of an increase in certain catalog costs related to expanded catalog circulation during the second quarter of 2004. Division profit, as a percentage of sales, decreased to 8.1 percent in the second quarter from 11.0 percent in the corresponding prior-year period. Direct-to-Customers division profit and division profit, as a percentage of sales, remained relatively the same for the twenty-six weeks ended July 31, 2004 as compared with the twenty-six weeks ended August 2, 2003. 

                    Corporate expense consists of unallocated general and administrative expenses related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses and other items.  The increases in corporate expense in the second quarter and first half of 2004 were primarily related to $5 million of Footaction integration costs and increased personnel costs. Integration costs represent incremental costs directly related to the Footaction acquisition and were primarily related to expenses incurred to re-merchandise the Footaction stores during the first three months of operations.

-16-


RESULTS OF OPERATIONS

                    Selling, general and administrative expenses (“SG&A”) of $268 million increased by $35 million or 15.0 percent in the second quarter of 2004 as compared with the corresponding prior-year period.  SG&A of $516 million increased by $42 million or 8.9 percent in the first half of 2004 as compared with the corresponding prior-year period.  Excluding the effect of foreign currency fluctuations, SG&A increased $33 million for both the thirteen and twenty-six weeks ended July 31, 2004 as compared with the corresponding prior year periods, of which $26 million related to Footaction.  SG&A, as a percentage of sales, increased to 21.1 percent for the thirteen weeks ended July 31, 2004 as compared with 20.7 percent in the corresponding prior-year period.  SG&A, as a percentage of sales, remained relatively flat for the twenty-six weeks ended July 31, 2004 as compared with the corresponding prior-year period. Excluding Footaction, SG&A, as a percentage of sales, was 20.8 percent and 20.9 percent for the thirteen and twenty-six weeks ended July 31, 2004, respectively.

                    Depreciation and amortization decreased by $1 million in the second quarter of 2004 to $37 million as compared with $38 million for the second quarter of 2003.  Depreciation and amortization decreased by $4 million in the first half of 2004 to $71 million as compared with $75 million for the first half of 2003.  These declines were a result of older assets becoming fully depreciated offset by an increase in depreciation associated with Footaction assets of $2 million in both 2004 periods.

                    Net interest expense of $4 million remained essentially flat for the second quarters of 2004 and 2003, and decreased to $8 million from $9 million, or 11.1 percent for the first half of 2004, as compared with the corresponding prior-year period. Interest expense remained flat at $6 million for the second quarters of 2004 and 2003, and decreased to $12 million for the twenty-six weeks ended July 31, 2004 from $13 million as compared with the corresponding prior year period. The decreases in both the quarter and year-to-date periods were primarily attributable to the lower debt balance as $150 million of its 5.5 percent convertible subordinated notes were converted to equity in June 2004 and repurchased $19 million of the 8.50 percent debentures payable in 2022 during the second half of 2003. These decreases were offset by an increase resulting from the interest from the new term loan that commenced in May 2004.  Interest income was $2 million for the thirteen weeks ended July 31, 2004 and August 2, 2003.  Interest income was $4 million for the twenty-six weeks ended July 31, 2004 and August 2, 2003. 

                    The Company’s effective tax rate for the thirteen and twenty-six weeks ended July 31, 2004 were approximately 20.8 percent and 29.8 percent as compared with approximately 32.7 percent and 34.7 percent for the corresponding prior-year periods.  The lower effective tax rate during 2004 included tax benefits of $9.2 million recorded in the second quarter of 2004 from favorable determinations by taxing authorities.  During the second quarter of 2003, the Company recorded $2 million of tax benefits related to multi-state tax planning strategies.  These tax planning strategies resulted in a reduction in the valuation allowance. The Company expects its effective tax rate to approximate 37 percent for each of the remaining quarters of 2004.

                    During the second quarter of 2004, the Company recorded $37 million income tax benefit resulting from the resolution of U.S income tax examinations related to discontinued businesses.  During the first quarter of 2004, the Company recorded income from discontinued operations of $1 million, after tax, related to a refund of customs duties related to certain of the businesses that comprised the Specialty Footwear segment. The first quarter and year-to-date periods of 2003 included an after-tax charge of $1 million, or $0.01 per diluted share, related to the adoption of SFAS No. 143, which was reflected as a cumulative effect of an accounting change.    

LIQUIDITY AND CAPITAL RESOURCES

                    Generally, the Company’s primary sources of cash have been from operations. The Company has a $200 million revolving credit facility, which was amended on May 19, 2004.  As a result of the amendment, the credit facility maturity date was extended to May 2009 from July 2006. Other than $24 million to meet letter of credit requirements, this revolving credit facility was not used during the first half of 2004.  The Company generally finances real estate with operating leases. The principal use of cash has been to finance inventory requirements, capital expenditures related to store openings, store remodelings and management information systems, and to fund other general working capital requirements.

                    The Company closed its purchase of 349 Footaction stores from Footstar, Inc. on May 7, 2004 for a purchase price of approximately $229 million (including direct costs related to the acquisition of $5 million). The Company elected to finance a portion of the Footaction stores’ purchase price through a 5-year, $175 million amortizing term loan with the bank group participating in its existing revolving credit facility.  The loan was obtained on May 19, 2004 simultaneously with the amendment to extend the revolving credit agreement’s expiration date.

-17-


                    On April 20, 2004, the Company notified The Bank of New York, as Trustee under the indenture, that it intended to redeem all of its $150 million outstanding 5.5 percent convertible subordinated notes, effective June 4, 2004.  By June 3, 2004, The Bank of New York had received notice from 100 percent of the holders of the notes of their election to convert their securities into shares of the Company’s common stock.  As of June 3, 2004, all of the convertible subordinated notes were cancelled and approximately 9.5 million new shares of the Company’s common stock were issued.

                    Management believes operating cash flows and current credit facilities will be adequate to finance its working capital requirements, to fund the operations of the Footaction stores, to make planned pension contributions for the Company’s retirement plans, to fund quarterly dividend payments and support the development of its short-term and long-term strategies.

                    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, risks associated with foreign global sourcing or economic conditions worldwide and the integration of the Footaction stores could affect the ability of the Company to continue to fund its needs from business operations.

                    Net cash provided by operating activities of continuing operations was $93 million and $54 million for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. These amounts reflect the income from continuing operations adjusted for non-cash items and working capital changes. Inventories increased $213 million, excluding the impact of foreign currency fluctuations, which was primarily related to the addition of the Footaction stores. The Company’s inventory position as of the end of the second quarter of 2004 is well positioned to meet the back-to-school demand. The Company contributed $44 million and $6 million to its U.S. and Canadian qualified pension plans, respectively, in February 2004.  The U.S. contribution was made in advance of ERISA requirements.

                    Net cash used in investing activities of continuing operations were $322 million and $68 million for the first half of 2004 and 2003, respectively. During the first half of 2004, the Company paid $224 million for the purchase of 349 Footaction stores.  Total projected capital expenditures (inclusive of anticipated capital expenditures for the Footaction stores) of $180 million for 2004 comprise $108 million for new store openings and modernizations of existing stores, $40 million for the development of information systems and other support facilities, $21 million of lease acquisition costs, primarily related to the securing of leases for the Company’s European operations and $11 million of costs related to the Foot Locker Europe distribution center expansion. The Company has the ability to revise and reschedule its anticipated capital expenditure program in the event that any changes to the Company’s financial position require it.

                    Financing activities for the Company’s continuing operations provided net cash of $182 million for the twenty-six weeks ended July 31, 2004 as compared with net cash used of $3 million for the twenty-six weeks ended August 2, 2003. The $175 million amortizing term loan was obtained on May 19, 2004 simultaneously with the amendment to extend the revolving credit agreement’s expiration date.  The Company declared and paid a $0.06 per share dividend during the first and second quarters of 2004 totaling $18 million as compared with a $0.03 per share dividend during the first and second quarters of 2003, which totaled $8 million. The Company received proceeds from the issuance of common stock in connection with employee stock programs of $27 million and $5 million for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively.

-18-


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

                    Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the federal securities laws.  All statements, other than statements of historical facts, which address activities, events or developments that the 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 majority of its merchandise purchases (including a significant portion from one key vendor), unseasonable weather, risks associated with foreign global sourcing, including political instability, changes in import regulations, disruptions to transportation services and distribution, the presence of severe acute respiratory syndrome, economic conditions worldwide, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, and the ability of the Company to execute its business plans effectively with regard to each of its business units, including its plans for the marquee and launch footwear component of its business and its plans for the integration of the Footaction stores.  Any changes in such assumptions or factors could produce significantly different results.  The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 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 would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings immediately.

                    Beginning in the second quarter of 2004, the Company began to implement new strategies to mitigate the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings. Such strategies may at times include holding a variety of derivative instruments, which includes entering into forwards and option contracts, whereby the changes in the fair value of these financial instruments are charged to the statements of operations immediately.

                    Derivative financial instrument qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the items being hedged, both at inception and throughout the hedged period, which management evaluates periodically.

                    The primary currencies to which the Company is exposed are the euro, the British Pound and the Canadian Dollar. When using a forward contract as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The change in a forward contract’s time value is reported in earnings. For forward foreign exchange contracts designated as cash flow hedges of inventory, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized as a component of cost of sales when the related inventory is sold. The Company enters into other forward contracts to hedge intercompany royalty cash flows that are determinated in foreign currencies. 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. 

                    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.

-19-


Item 4. Controls and Procedures

                    The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be included in this quarterly report has been made known to them in a timely fashion. 

                    The Company’s Chief Executive Officer and Chief Financial Officer also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to affect the Company’s internal control over financial reporting.  Based on the evaluation, there have been no such changes during the quarter covered by this report.

                    There have been no material changes in the Company’s internal controls, or in the factors that could materially affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

                    The Company is involved in claims, proceedings and litigation, arising from the operation of its business and incident to the sale and disposition of businesses that have occurred in past 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.

Item 4.  Submission of Matters to a Vote of Security Holders

 

(a)

The Company’s annual meeting of shareholders was held on May 26, 2004.  There were represented at the meeting, in person or by proxy, 134,774,698 shares of Common Stock, par value $0.01 per share, which represented 92.8 percent of the shares outstanding on April 2, 2004, the record date for the meeting.

 

 

 

 

(b)

Each of James E. Preston, Matthew D. Serra, Christopher A. Sinclair and Dona D. Young was elected as a director in Class I for a three-year term ending at the annual meeting of shareholders of the Company in 2007.  All of these individuals previously served as directors of the Company.  J. Carter Bacot, Purdy Crawford, Nicholas DiPaolo, Philip H. Geier Jr., Jarobin Gilbert Jr., David Y. Schwartz and Cheryl Nido Turpin, having previously been elected directors of the Company for terms continuing beyond the 2004 annual meeting of shareholders, continue in office as directors of the Company.

 

 

 

 

(c)

The matters voted upon and the results of the voting were as follows:

(1)     Election of Directors:

Name

 

 

Votes For

 

 

Votes Withheld

 

 

Abstentions and
Broker Non-Votes

 


 



 



 



 

James E. Preston

 

 

129,957,539

 

 

4,817,159

 

 

0

 

Matthew D. Serra

 

 

129,107,339

 

 

5,667,359

 

 

0

 

Christopher A. Sinclair

 

 

131,055,699

 

 

3,718,999

 

 

0

 

Dona D. Young

 

 

127,862,010

 

 

6,912,688

 

 

0

 

(2)     Proposal to ratify the appointment of independent accountants:

Votes For    

 

 

Votes Against

 

 

Abstentions

 

 

Broker Non-Votes

 


 



 



 



 

129,351,037

 

 

5,315,345

 

 

108,316

 

 

0

 

-20-


Item 6. Exhibits and Reports on Form 8-K

 

(a)

Exhibits

 

 

The exhibits that are in this report immediately follow the index.

 

 

 

 

(b)

Reports on Form 8-K

 

 

Form 8-K, dated May 6, 2004, under Items 7 and 12, reporting the Company’s sales results for the first quarter of 2004.

 

 

 

 

 

Form 8-K, dated May 7, 2004, under Items 5 and 7, announcing the closing of the Company’s purchase of approximately 350 Footaction stores from Footstar, Inc.

 

 

 

 

 

Form 8-K, dated May 19, 2004, under Item 5 announcing that the Company entered into a five-year $175 million amortizing loan with its existing bank group and amended and extended to 2009 its revolving credit agreement; and under Items 7 and 12, reporting the Company’s operating results for the first quarter of 2004.

 

 

 

 

 

Form 8-K, dated June 4, 2004, under Items 5 and 7, announcing the conversion of 100 percent of the Company’s $150 million 5.5 percent convertible subordinated notes into approximately 9.5 million new shares of Foot Locker, Inc. Common Stock.

-21-


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FOOT LOCKER, INC.

 

(Company)

 

 

 

 

Date: September 8, 2004

 

 

/s/ BRUCE L. HARTMAN

 


 

BRUCE L. HARTMAN

 

Executive Vice President and Chief Financial Officer

-22-


FOOT LOCKER, INC.
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K

Exhibit No. in Item 601
of Regulation S-K

 

Description


 


10.1

 

Fifth Amended and Restated Credit Agreement dated as of April 9, 1997, amended and restated as of May 19, 2004.

 

 

 

10.2

 

Form of Nonstatutory Stock Option Award Agreement for Executive Officers.

 

 

 

10.3

 

Form of Incentive Stock Option Award Agreement for Executive Officers.

 

 

 

10.4

 

Form of Nonstatutory Stock Option Award Agreement for Non-employee Directors.

 

 

 

10.5

 

Asset Purchase Agreement between Footstar, Inc., Certain of its Subsidiaries, FL Specialty Operations LLC, FL Retail Operations LLC, Foot Locker Stores, Inc., Foot Locker Retail, Inc. and Foot Locker, Inc. (solely for purposes of Sections 6.6, 6.8, 6.9, and 13.10), dated as of April 13, 2004, which closed on May 7, 2004 (“Footstar Purchase Agreement”).

 

 

 

10.6

 

First Amendment Agreement dated as of April 28, 2004 to the Footstar Purchase Agreement.

 

 

 

10.7

 

Second Amendment Agreement dated as of May 7, 2004 to the Footstar Purchase Agreement.

 

 

 

12

 

Computation of Ratio of Earnings to Fixed Charges.

 

 

 

15

 

Accountants’ Acknowledgement.

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

99

 

Report of Independent Registered Public Accounting Firm.

-23-