UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10 -Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended May 2, 2009
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. 34thStreet, 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer, “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
|
Accelerated filer o
|
Non-accelerated filer o
|
Smaller reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No x
Number of
shares of Common Stock outstanding at May 30, 2009:
155,691,198
FOOT LOCKER,
INC.
TABLE OF
CONTENTS
|
|
|
|
Page No.
|
|
Part
I.
|
Financial
Information
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
3
|
|
|
|
Condensed
Consolidated Statements of Operations
|
|
|
4
|
|
|
|
Condensed
Consolidated Statements of Comprehensive Income
|
|
|
5
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
6
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
|
7
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
14
|
|
|
Item
4.
|
Controls
and Procedures
|
|
|
18
|
|
Part
II.
|
Other
Information
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
19
|
|
|
Item
1A.
|
Risk
Factors
|
|
|
19
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
19
|
|
|
Item
6.
|
Exhibits
|
|
|
19
|
|
|
|
Signature
|
|
|
20
|
|
|
|
Index
to Exhibits
|
|
|
21
|
|
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in
millions, except shares)
|
|
May 2,
2009
|
|
|
May 3,
2008
|
|
|
January 31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
*
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
408
|
|
|
$
|
497
|
|
|
$
|
385
|
|
Short-term
investments
|
|
|
23
|
|
|
|
5
|
|
|
|
23
|
|
Merchandise
inventories
|
|
|
1,237
|
|
|
|
1,391
|
|
|
|
1,120
|
|
Other
current assets
|
|
|
212
|
|
|
|
260
|
|
|
|
236
|
|
|
|
|
1,880
|
|
|
|
2,153
|
|
|
|
1,764
|
|
Property
and equipment, net
|
|
|
429
|
|
|
|
526
|
|
|
|
432
|
|
Deferred
taxes
|
|
|
353
|
|
|
|
239
|
|
|
|
358
|
|
Goodwill
|
|
|
144
|
|
|
|
267
|
|
|
|
144
|
|
Other
intangibles and assets
|
|
|
163
|
|
|
|
150
|
|
|
|
179
|
|
|
|
$
|
2,969
|
|
|
$
|
3,335
|
|
|
$
|
2,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
292
|
|
|
$
|
335
|
|
|
$
|
187
|
|
Accrued
expenses and other current liabilities
|
|
|
201
|
|
|
|
263
|
|
|
|
231
|
|
|
|
|
493
|
|
|
|
598
|
|
|
|
418
|
|
Long-term
debt
|
|
|
142
|
|
|
|
219
|
|
|
|
142
|
|
Other
liabilities
|
|
|
383
|
|
|
|
255
|
|
|
|
393
|
|
|
|
|
1,018
|
|
|
|
1,072
|
|
|
|
953
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and paid-in capital: 160,400,218, 159,343,434 and 159,598,233
shares, respectively
|
|
|
697
|
|
|
|
681
|
|
|
|
691
|
|
Retained
earnings
|
|
|
1,589
|
|
|
|
1,734
|
|
|
|
1,581
|
|
Accumulated
other comprehensive loss
|
|
|
(232
|
)
|
|
|
(52
|
)
|
|
|
(246
|
)
|
Less:
Treasury stock at cost: 4,709,020, 4,564,432 and 4,680,533 shares,
respectively
|
|
|
(103
|
)
|
|
|
(100
|
)
|
|
|
(102
|
)
|
Total
shareholders’ equity
|
|
|
1,951
|
|
|
|
2,263
|
|
|
|
1,924
|
|
|
|
$
|
2,969
|
|
|
$
|
3,335
|
|
|
$
|
2,877
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements.
* The
balance sheet at January 31, 2009 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by U.S. generally accepted accounting principles 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, 2009.
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in
millions, except per share amounts)
|
|
Thirteen weeks ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
Sales
|
|
$ |
1,216 |
|
|
$ |
1,309 |
|
Costs
and Expenses
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
860 |
|
|
|
943 |
|
Selling,
general and administrative expenses
|
|
|
278 |
|
|
|
299 |
|
Depreciation
and amortization
|
|
|
28 |
|
|
|
32 |
|
Impairment
charge and store closing program costs
|
|
|
— |
|
|
|
19 |
|
Interest
expense, net
|
|
|
2 |
|
|
|
1 |
|
Other
income
|
|
|
(1
|
) |
|
|
— |
|
|
|
|
1,167 |
|
|
|
1,294 |
|
Income
before income taxes
|
|
|
49 |
|
|
|
15 |
|
Income
tax expense
|
|
|
18 |
|
|
|
12 |
|
Net
income
|
|
$ |
31 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
0.20 |
|
|
$ |
0.02 |
|
Weighted-average
common shares outstanding
|
|
|
155.3 |
|
|
|
153.8 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
0.20 |
|
|
$ |
0.02 |
|
Weighted-average
common shares assuming dilution
|
|
|
155.5 |
|
|
|
155.0 |
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in
millions)
|
|
Thirteen weeks ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
31 |
|
|
$ |
3 |
|
Other
comprehensive income (expense), net of tax
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments arising during the period
|
|
|
15 |
|
|
|
18 |
|
Pension
and postretirement plan adjustments
|
|
|
1
|
|
|
|
— |
|
Change
in fair value of derivatives
|
|
|
(1 |
) |
|
|
— |
|
Comprehensive
income
|
|
$ |
46 |
|
|
$ |
21 |
|
See
Accompanying Notes to Condensed Consolidated Financial Statements.
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
millions)
|
|
Thirteen weeks ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
From
Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
31
|
|
|
$
|
3
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Non-cash
impairment charge
|
|
|
—
|
|
|
|
15
|
|
Depreciation
and amortization
|
|
|
28
|
|
|
|
32
|
|
Share-based
compensation expense
|
|
|
2
|
|
|
|
3
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Merchandise
inventories
|
|
|
(110
|
)
|
|
|
(99
|
)
|
Accounts
payable and other accruals
|
|
|
73
|
|
|
|
101
|
|
Qualified
pension plan contributions
|
|
|
(11
|
)
|
|
|
(6
|
)
|
Income
tax payable
|
|
|
—
|
|
|
|
(8
|
)
|
Gain
on termination of interest rate swaps
|
|
|
19
|
|
|
|
—
|
|
Other,
net
|
|
|
35
|
|
|
|
32
|
|
Net
cash provided by operating activities
|
|
|
67
|
|
|
|
73
|
|
|
From
Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(26
|
)
|
|
|
(40
|
)
|
Net
cash used in investing activities
|
|
|
(26
|
)
|
|
|
(40
|
)
|
|
From
Financing Activities:
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Net
cash used in financing activities
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuations on Cash and Cash Equivalents
|
|
|
5
|
|
|
|
(1
|
)
|
Net
change in Cash and Cash Equivalents
|
|
|
23
|
|
|
|
9
|
|
Cash
and Cash Equivalents at beginning of year
|
|
|
385
|
|
|
|
488
|
|
Cash
and Cash Equivalents at end of interim period
|
|
$
|
408
|
|
|
$
|
497
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1
|
|
|
$
|
3
|
|
Income
taxes
|
|
$
|
7
|
|
|
$
|
18
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
FOOT LOCKER,
INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant
Accounting Policies
Basis of
Presentation
The
accompanying condensed consolidated financial statements contained in this
report are unaudited. In the opinion of management, the condensed consolidated
financial statements include all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the results for the interim periods
of the fiscal year ending January 30, 2010 and of the fiscal year ended January
31, 2009. Certain items included in these statements are based on management’s
estimates. Actual results may differ from those estimates. The results of
operations for any interim period are not necessarily indicative of the results
expected for the year. 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, 2009, as filed with the Securities and Exchange
Commission (the “SEC”) on March 30, 2009.
As
disclosed in the Company’s 2008 Annual Report on Form 10-K, the Condensed
Consolidated Balance Sheet for the quarter ended May 3, 2008 has been corrected
to reflect an immaterial revision related to income taxes. This correction did
not affect the Condensed Consolidated Statement of Operations for the period
ended May 3, 2008.
Recently Issued Accounting
Pronouncements
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or the Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” (“FSP No. 157-4”).
FSP No. FAS 157-4 amends Statement No. 157 to provide additional guidance on (i)
estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased in relation to normal market activity for
the asset or liability, and (ii) circumstances that may indicate that a
transaction is not orderly. FSP No. FAS 157-4 also requires additional
disclosures about fair value measurements in interim and annual reporting
periods. FSP No. FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009. The Company does not expect the adoption of FSP No.
FAS 157-4 to have a material effect on its consolidated financial
statements.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” FSP No. FAS 115-2 and FAS
124-2 amends the other-than-temporary impairment guidance for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This guidance does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The provisions of FSP No. FAS 115-2 and FAS 124-2 are effective for
interim and annual reporting periods ending after June 15, 2009. The Company
does not expect the adoption of FSP No. FAS 115-2 and FAS 124-2 to have a
material effect on its consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” which amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies, as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial
Reporting, to require
those disclosures in summarized financial information at interim reporting
periods. FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods
ending after June 15, 2009. The Company is currently assessing the effect that
the adoption of FSP No. FAS 107-1 and APB No. 28-1 will have on its financial
statement disclosures.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material effect on the Company’s present or future
consolidated financial statements.
2.
Goodwill and
Other
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 be reviewed for impairment if impairment
indicators arise and, at a minimum, annually. During the first quarters of 2009
and 2008, the Company completed its annual reviews of goodwill and the
indefinite lived trademark, which did not result in an impairment
charge.
|
|
May 2,
|
|
May 3,
|
|
January 31,
|
|
Goodwill
(in millions)
|
|
2009
|
|
2008
|
|
2009
|
|
Athletic
Stores
|
|
$
|
17 |
|
$
|
187 |
|
$
|
17 |
|
Direct-to-Customers
|
|
|
127 |
|
|
80 |
|
|
127 |
|
|
|
$
|
144 |
|
$
|
267 |
|
$
|
144 |
|
The change in goodwill from the amount reported at May 3, 2008 primarily
reflects the acquisition of CCS during the fourth quarter of 2008, which
increased goodwill by $47 million and the fourth quarter 2008 impairment charge
of $167 million related to the Athletic Stores.
|
|
May
2, 2009
|
|
|
May
3, 2008
|
|
|
January
31, 2009
|
|
|
|
Gross
|
|
|
Accum.
|
|
|
Net
|
|
|
Gross
|
|
|
Accum.
|
|
|
Net
|
|
|
Gross
|
|
|
Accum.
|
|
|
Net
|
|
(in
millions)
|
|
value
|
|
|
amort.
|
|
|
value
|
|
|
value
|
|
|
amort.
|
|
|
value
|
|
|
value
|
|
|
amort.
|
|
|
value
|
|
Finite
life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
acquisition costs
|
|
$ |
175 |
|
|
|
(128
|
) |
|
|
47 |
|
|
$ |
206 |
|
|
$ |
(135 |
) |
|
$ |
71 |
|
|
$ |
173 |
|
|
$ |
(124 |
) |
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
20 |
|
|
|
(5
|
) |
|
|
15 |
|
|
|
21 |
|
|
|
(4
|
) |
|
|
17 |
|
|
|
20 |
|
|
|
(5
|
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loyalty
program
|
|
|
1 |
|
|
|
(1
|
) |
|
|
— |
|
|
|
1 |
|
|
|
(1
|
) |
|
|
— |
|
|
|
1 |
|
|
|
(1
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
leases
|
|
|
9 |
|
|
|
(7
|
) |
|
|
2 |
|
|
|
10 |
|
|
|
(7
|
) |
|
|
3 |
|
|
|
9 |
|
|
|
(7
|
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCS
customer relationships
|
|
|
21 |
|
|
|
(2
|
) |
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
|
(1
|
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
finite life intangible assets
|
|
$ |
226 |
|
|
$ |
(143 |
) |
|
$ |
83 |
|
|
$ |
238 |
|
|
$ |
(147 |
) |
|
$ |
91 |
|
|
$ |
224 |
|
|
$ |
(138 |
) |
|
$ |
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
of Ireland trademark
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
3 |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
CCS
tradename
|
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
indefinite life intangible assets
|
|
$ |
27 |
|
|
|
— |
|
|
|
27 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
27 |
|
|
$ |
— |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets
|
|
$ |
253 |
|
|
$ |
(143 |
) |
|
$ |
110 |
|
|
$ |
241 |
|
|
$ |
(147 |
) |
|
$ |
94 |
|
|
$ |
251 |
|
|
$ |
(138 |
) |
|
$ |
113 |
|
The
weighted-average amortization period as of May 2, 2009 was approximately 11.8
years. Amortization expense was $5 million for both quarters ended May 2, 2009
and May 3, 2008. Additionally, the net intangible activity for the thirteen-week
period ended May 2, 2009, primarily reflects the effect of the strengthening of
the euro as compared with the U.S dollar of $2 million. Annual estimated
amortization expense for finite life intangible assets is expected to
approximate $14 million for the remainder of 2009, $17 million for 2010, $15
million for 2011, $10 million for 2012 and $9 million for 2013.
3.
Revolving Credit
Facility
On March
20, 2009, the Company entered into a new credit agreement with its banks,
providing for a $200 million revolving credit facility maturing on March 20,
2013 which replaces the existing credit agreement. The new credit
agreement also provides an incremental facility of up to $100 million under
certain circumstances. The new credit agreement provides for a
security interest in certain of the Company’s domestic assets, including certain
inventory assets. No material covenants or payment restrictions exist unless the
Company is borrowing under the agreement and, in that event, the restrictions
may vary depending upon the level of borrowings.
4.
Derivative Financial
Instruments
Effective
February 1, 2009, the Company adopted SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures
about an entity’s derivative and hedging activities. Entities will be required
to provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedge items are
accounted for under SFAS No.133 and its related interpretations; and (c) how
derivative instruments and related hedge items affect an entity’s financial
position, financial performance and cash flows. Additional information is
contained within note 10, Fair Value Measurements.
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. The Company
monitors counterparty credit risk and only uses highly rated financial
institutions as counterparties.
Derivatives designated as hedging
instruments under SFAS No. 133
Cash Flow
Hedges
The
primary currencies to which the Company is exposed are the euro, the British
Pound, and the Canadian Dollar. For option and forward foreign exchange
contracts designated as cash flow hedges of the purchase 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. When using a forward contract as a hedging
instrument, the Company excludes the time value from the assessment of
effectiveness. Generally, the Company does not hedge forecasted transactions for
more than the next twelve months, and the Company expects all derivative-related
amounts reported in accumulated other comprehensive loss to be reclassified to
earnings within twelve months.
The
amount reclassified to cost of sales related to such contracts and the
ineffective portion of gains and losses related to cash flow hedges recorded was
not significant for any of the periods presented. Net changes in the fair
value of foreign exchange derivative financial instruments designated as cash
flow hedges of the purchase of inventory was $1 million for the period ended May
2, 2009 and was not significant for the period ended May 3, 2008.
Net Investment
Hedges
The
Company has numerous investments in foreign subsidiaries, and the net assets of
those subsidiaries are exposed to foreign exchange-rate volatility. In 2005, the
Company hedged a portion of its net investment in its European subsidiaries by
entering into a 10-year cross currency swap, effectively creating a €100 million
long-term liability and a $122 million long-term asset. During the third quarter
of 2008, the Company terminated this hedge by amending its existing cross
currency swap and entering simultaneously into a new cross currency swap,
thereby fixing the amount owed to the counterparty in 2015 at $24 million. In
2006, the Company hedged a portion of its net investment in its Canadian
subsidiaries. The Company entered into a 10-year cross currency swap,
effectively creating a CAD $40 million liability and a $35 million long-term
asset. During the fourth quarter of 2008, the Company terminated this hedge and
received approximately $3 million.
The
Company had designated these hedging instruments as hedges of the net
investments in foreign subsidiaries, and used the spot rate method of accounting
to value changes of the hedging instrument attributable to currency rate
fluctuations. As such, adjustments in the fair market value of the hedging
instrument due to changes in the spot rate were recorded in other comprehensive
income and offset changes in the net investment. Amounts recorded to foreign
currency translation within accumulated other comprehensive loss will remain
there until the disposal of the net investment.
The
amount recorded within the foreign currency translation adjustment included in
accumulated other comprehensive loss on the Consolidated Balance Sheet decreased
shareholders’ equity by $15 million and $25 million, net of tax, at May 2, 2009
and May 3, 2008, respectively. The effect on the Consolidated Statements of
Operations, recorded as part of interest expense, related to the net investments
hedges was not significant for the thirteen weeks ended May 2, 2009 and was $1
million of expense for the thirteen weeks ended May 3, 2008.
Fair Value
Hedges
The
Company has employed various interest rate swaps to minimize its exposure to
interest rate fluctuations. These swaps have been designated as a fair value
hedge of the changes in fair value of $100 million of the Company’s 8.50 percent
debentures payable in 2022 attributable to changes in interest rates. The swaps
effectively convert the interest rate on the debentures from 8.50 percent to a
1-month variable rate of LIBOR plus 3.45 percent. During the first
quarter of 2009, the Company terminated its interest rate swaps for a gain of
$19 million. This gain will be amortized as part of interest expense
over the remaining term of the debt, using the effective-yield
method. The effect on the Condensed Consolidated Statements of
Operations, recorded as part of interest expense, related to the interest rate
swaps was income of $1 million for the thirteen weeks ended May 2, 2009 and was
not significant for the thirteen weeks ended May 3, 2008.
Derivatives not designated as hedging
instruments under SFAS No. 133
The
Company mitigates the effect of fluctuating foreign exchange rates on the
reporting of foreign currency denominated earnings by entering into a variety of
derivative instruments, including option currency contracts. Changes in the fair
value of these foreign currency option contracts are recorded in earnings
immediately within other income. Mark-to-market, realized gains and premiums
paid were not significant for the thirteen weeks ended May 2, 2009 and May 3,
2008, respectively.
The
Company also enters into forward foreign exchange contracts to hedge
foreign-currency denominated merchandise purchases and intercompany
transactions. Net changes in the fair value of foreign exchange derivative
financial instruments designated as non-hedges, recorded in selling, general and
administrative expenses were substantially offset by the changes in value
of the underlying transactions. The amounts recorded for the periods presented
were not significant.
During
2008, the Company entered into a series of monthly diesel fuel forward contracts
to mitigate a portion of the Company’s freight expense due to the variability
caused by fuel surcharges imposed by our third-party freight carriers. The
notional value of the contracts outstanding as of May 2, 2009 was $2 million and
these contracts extend through November 2009. Changes in the fair value of these
contracts are recorded in selling, general and administrative expenses
immediately. The amounts recorded for the periods presented were not
significant.
As discussed above, the Company
terminated its European net investment hedge during the third quarter of 2008.
During the remaining term of the agreement, the Company will remit to its
counterparty interest payments based on one-month U.S. LIBOR rates on the $24
million liability. The agreement includes a provision that may
require the Company to settle this transaction in August 2010 at the option of
the Company or the counterparty.
Fair
Value of Derivative Contracts
The
following represents the fair value of the Company’s derivative
contracts. Many of the Company’s agreements allow for a netting
arrangement. The following is presented on a gross basis, by type of
contract:
|
|
May 2, 2009
|
|
May 3, 2008
|
|
(in millions)
|
|
Balance Sheet
Caption
|
|
Fair Value
|
|
Balance Sheet
Caption
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Hedging
Instruments:
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
|
Current
assets
|
|
$ |
1 |
|
Current
Assets
|
|
$ |
2 |
|
Interest
rate swaps
|
|
Non
current assets
|
|
|
- |
|
Non
current assets
|
|
|
3 |
|
Net
investment hedges
|
|
Non
current liability
|
|
|
- |
|
Non
current liability
|
|
|
(39 |
) |
Total
|
|
|
|
$ |
1 |
|
|
|
$ |
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
|
Current
assets
|
|
$ |
1 |
|
Current
Assets
|
|
$ |
2 |
|
European
cross currency swap
|
|
Non
current liability
|
|
|
(24 |
) |
Non
current liability
|
|
|
- |
|
Fuel
contracts
|
|
Non
current liability
|
|
|
- |
|
Non
current liability
|
|
|
- |
|
Total
|
|
|
|
$ |
(23 |
) |
|
|
$ |
2 |
|
5. Accumulated Other
Comprehensive Loss
Accumulated
other comprehensive loss comprised the following:
(in millions)
|
|
May 2, 2009
|
|
|
May 3, 2008
|
|
|
January 31,
2009
|
|
Foreign
currency translation adjustments
|
|
$
|
25
|
|
|
$
|
111
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedge
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
pension cost and postretirement benefit
|
|
|
(253
|
)
|
|
|
(162
|
)
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available-for-sale securities
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
$
|
(232
|
)
|
|
$
|
(52
|
)
|
|
$
|
(246
|
)
|
6. Earnings Per
Share
On
February 1, 2009, the provisions of FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” (“FSP EITF 03-06-1”) became effective for the
Company. The provisions of this FSP clarified that share-based
payment awards that entitle their holders to receive nonforfeitable dividends
before vesting should be considered participating securities and, as such,
should be included in the calculation of basic earnings per
share. The Company’s restricted stock awards, which contain
nonforfeitable rights to dividends, are considered participating securities. FSP
EITF 03-6-1 is effective for the financial statements included in the Company’s
quarterly report for the thirteen weeks ended May 2, 2009, and application of
FSP EITF 03-6-1 did not have a significant effect on the Company’s earnings per
share calculations for any of the periods presented. Diluted earnings per share
reflects the weighted-average number of common shares outstanding during the
period used in the basic earnings per share computation plus dilutive common
stock equivalents, such as stock options and awards.
|
|
Thirteen weeks ended
|
(in millions)
|
|
May 2, 2009
|
|
May 3, 2008
|
Weighted-average
common shares outstanding
|
|
|
155.3
|
|
153.8
|
Effect of
Dilution:
|
|
|
|
|
|
Stock
options and awards
|
|
|
0.2
|
|
1.2
|
Weighted-average
common shares assuming dilution
|
|
|
155.5
|
|
155.0
|
Options
to purchase 6.4 million and 4.8 million shares of common stock were not included
in the computation for the thirteen weeks ended May 2, 2009 and May 3, 2008,
respectively. These options were not included because the exercise prices of the
options were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
7. Segment
Information
The
Company has determined that its reportable segments are those that are based on
its method of internal reporting. As of May 2, 2009, the Company has two
reportable segments, Athletic Stores and Direct-to-Customers. Sales and division
results for the Company’s reportable segments for the thirteen weeks ended May
2, 2009 and May 3, 2008 are presented below. Division profit reflects income
before income taxes, corporate expense, non-operating income and net interest
expense.
|
|
Thirteen weeks ended
|
|
(in millions)
|
|
May 2, 2009
|
|
|
May 3, 2008
|
|
Athletic
Stores
|
|
$ |
1,118 |
|
|
$ |
1,217 |
|
Direct-to-Customers
|
|
|
98 |
|
|
|
92 |
|
Total
sales
|
|
$ |
1,216 |
|
|
$ |
1,309 |
|
Operating
results
|
|
Thirteen weeks ended
|
|
(in millions)
|
|
May 2, 2009
|
|
|
May 3, 2008
|
|
Athletic
Stores (1)
|
|
$ |
61 |
|
|
$ |
40 |
|
Direct-to-Customers
|
|
|
8 |
|
|
|
10 |
|
Division
profit
|
|
|
69
|
|
|
|
50 |
|
Corporate
expense, net (2)
|
|
|
19 |
|
|
|
34 |
|
Operating
profit
|
|
|
50
|
|
|
|
16 |
|
Other
income (3)
|
|
|
(1 |
) |
|
|
— |
|
Interest
expense, net
|
|
|
2 |
|
|
|
1 |
|
Income
before income taxes
|
|
$ |
49 |
|
|
$ |
15 |
|
(1)
|
Included
in the results for the thirteen weeks ended May 3, 2008 are store closing
costs of $4 million which primarily represent lease termination
costs.
|
(2)
|
Included
in corporate expense for the thirteen weeks ended May 3, 2008 is a $15
million impairment charge on the Northern Group note
receivable.
|
(3)
|
Other
income for the thirteen weeks ended May 2, 2009 is primarily comprised of
changes in fair value, realized gains and premiums paid on foreign
currency option contracts and royalty
income.
|
8. Pension and 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 medical and life insurance plans are
contributory and are not funded.
The
following are the components of net periodic pension benefit cost and net
periodic postretirement benefit income:
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
(in millions)
|
|
May 2, 2009
|
|
|
May 3, 2008
|
|
|
May 2, 2009
|
|
|
May 3, 2008
|
|
Service
cost
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest
cost
|
|
|
9
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
Expected
return on plan assets
|
|
|
(10
|
)
|
|
|
(13
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization
of unrecognized prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
of net loss (gain)
|
|
|
3
|
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Net
benefit cost (income)
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
During
the first quarter of 2009, the Company made an $8 million contribution to its
U.S. pension plan and $3 million to its Canadian plan. Additional
contributions to the U.S. plan may be made later this year; the final amount and
timing of any such contributions will depend on the plan asset performance and
any statutory or regulatory changes that may occur.
9. Share-Based
Compensation
The
Company accounts for its share–based compensation in accordance with SFAS No.
123(R), “Share–Based Payment.” The Company uses a Black-Scholes option-pricing
model to estimate the fair value of share-based awards under SFAS No. 123(R).
The Black-Scholes option-pricing model incorporates various and highly
subjective assumptions, including expected term and expected
volatility.
Compensation
expense related to the Company’s stock option and stock purchase plans was $0.7
million and $1.1 million for the thirteen weeks ended May 2, 2009 and May 3,
2008, respectively. The following table shows the Company’s assumptions used to
compute the share-based compensation expense:
|
Stock Option Plans
|
|
|
Stock Purchase Plan
|
|
|
May 2,
2009
|
|
May 3,
2008
|
|
|
May 2,
2009
|
|
|
May 3,
2008
|
|
Weighted-average
risk free rate of interest
|
|
1.72
|
%
|
|
2.43
|
%
|
|
|
2.00
|
%
|
|
|
5.00
|
%
|
Expected
volatility
|
|
53
|
%
|
|
37
|
%
|
|
|
39
|
%
|
|
|
22
|
%
|
Weighted-average
expected award life
|
|
4.8
years
|
|
|
4.6
years
|
|
|
|
1.0
year
|
|
|
|
1.0
year
|
|
Dividend
yield
|
|
6.0
|
%
|
|
5.1
|
%
|
|
|
4.1
|
%
|
|
|
2.3
|
%
|
Weighted-average
fair value
|
$
|
2.85
|
|
$
|
2.47
|
|
|
$
|
3.11
|
|
|
$
|
4.18
|
|
The
information set forth in the following table covers options granted under the
Company’s stock option plans for the thirteen weeks ended May 2,
2009:
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
Average
|
|
(in thousands, except price per share)
|
|
Shares
|
|
|
Term
|
|
Exercise Price
|
|
Options
outstanding at the beginning of the year
|
|
|
6,080 |
|
|
|
|
|
$ |
18.64 |
|
Granted
|
|
|
868 |
|
|
|
|
|
|
9.93 |
|
Exercised
|
|
|
(28
|
) |
|
|
|
|
|
4.53 |
|
Expired
or cancelled
|
|
|
(49
|
) |
|
|
|
|
|
21.34 |
|
Options
outstanding at May 2, 2009
|
|
|
6,871 |
|
|
|
5.42 |
|
|
$ |
17.58 |
|
|
|
Options
exercisable at May 2, 2009
|
|
|
5,342 |
|
|
|
4.31 |
|
|
$ |
19.02 |
|
Options
available for future grant at May 2, 2009
|
|
|
3,461 |
|
|
|
|
|
|
|
|
|
The total
intrinsic value of options exercised during the thirteen weeks ended May 2, 2009
was not significant. There were no option exercises during the
thirteen weeks ended May 3, 2008. The aggregate intrinsic value for stock
options outstanding and for stock options exercisable as of May 2, 2009 was $3.9
million and $1.7 million, respectively. The aggregate intrinsic value for stock
options outstanding and exercisable as of May 3, 2008 was $4.4 million and $3.5
million, respectively. The intrinsic value for stock options outstanding and
exercisable is calculated as the difference between the fair market value as of
the end of the period and the exercise price of the shares.
The cash
received and the tax benefit realized from option exercises for the
thirteen weeks ended May 2, 2009 was not significant. For the thirteen weeks
ended May 3, 2008, there was no tax benefit realized by the Company as there
were no stock option exercises.
The
following table summarizes information about stock options outstanding and
exercisable at May 2, 2009:
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
Average
|
|
|
Number
|
|
Average
|
|
Range of Exercise Prices
|
|
|
Outstanding
|
|
|
Contractual Life
|
|
Exercise Price
|
|
|
Exercisable
|
|
Exercise Price
|
|
(in thousands, except price per share)
|
|
$
|
7.19 |
|
|
$ |
10.25 |
|
|
|
1,436 |
|
|
|
7.21 |
|
|
$ |
9.98 |
|
|
|
561 |
|
|
$ |
10.05 |
|
$
|
10.31 |
|
|
$ |
12.99 |
|
|
|
1,601 |
|
|
|
4.29 |
|
|
$ |
11.92 |
|
|
|
1,241 |
|
|
$ |
11.99 |
|
$
|
13.34 |
|
|
$ |
23.42 |
|
|
|
1,665 |
|
|
|
5.16 |
|
|
$ |
18.96 |
|
|
|
1,402 |
|
|
$ |
18.54 |
|
$
|
23.59 |
|
|
$ |
25.39 |
|
|
|
1,429 |
|
|
|
5.28 |
|
|
$ |
24.71 |
|
|
|
1,399 |
|
|
$ |
24.71 |
|
$
|
25.46 |
|
|
$ |
28.50 |
|
|
|
740 |
|
|
|
5.27 |
|
|
$ |
27.74 |
|
|
|
739 |
|
|
$ |
27.74 |
|
$
|
7.19 |
|
|
$ |
28.50 |
|
|
|
6,871 |
|
|
|
5.42 |
|
|
$ |
17.58 |
|
|
|
5,342 |
|
|
$ |
19.02 |
|
Changes
in the Company’s nonvested options for the thirteen weeks ended May 2, 2009 are
summarized as follows:
|
|
|
|
Weighted-
|
|
|
|
|
|
average grant
|
|
|
|
Number
of
|
|
grant date
fair value
|
|
(in thousands, except price per share)
|
|
shares
|
|
per share
|
|
Nonvested
at January 31, 2009
|
|
|
1,268 |
|
|
$ |
17.71 |
|
Granted
|
|
|
868 |
|
|
|
9.93 |
|
Vested
|
|
|
(558
|
) |
|
|
19.37 |
|
Expired
or Cancelled
|
|
|
(49
|
) |
|
|
21.34 |
|
Nonvested
at May 2, 2009
|
|
|
1,529 |
|
|
$ |
12.57 |
|
As of May
2, 2009, there was $2.8 million of total unrecognized compensation cost related
to nonvested stock options, which is expected to be recognized over a
weighted-average period of approximately 1.5 years.
Restricted
Shares and Units
Restricted
shares of the Company’s common stock may be awarded to certain officers and key
employees of the Company. For executives outside of the United States, the
Company issues restricted stock units. Each restricted stock unit represents the
right to receive one share of the Company’s common stock provided that the
vesting conditions are satisfied. As of May 2, 2009, 227,452 restricted stock
units were outstanding. Compensation expense is recognized using the fair market
value at the date of grant and is amortized over the vesting period, provided
the recipient continues to be employed by the Company. These awards fully vest
after the passage of time, generally three years. Restricted stock is considered
outstanding at the time of grant, as the holders of restricted stock are
entitled to receive dividends and have voting rights.
Restricted
shares and units activity for the thirteen weeks ended May 2, 2009 and May 3,
2008 is summarized as follows:
|
|
Number of Shares and Units
|
|
(in thousands)
|
|
May 2, 2009
|
|
|
May 3, 2008
|
|
Outstanding
at beginning of period
|
|
|
844 |
|
|
|
810 |
|
Granted
|
|
|
565 |
|
|
|
223 |
|
Vested
|
|
|
(39
|
) |
|
|
(59
|
) |
Cancelled
or forfeited
|
|
|
— |
|
|
|
— |
|
Outstanding
at end of period
|
|
|
1,370 |
|
|
|
974 |
|
Aggregate
value (in millions)
|
|
$ |
21.3 |
|
|
$ |
20.0 |
|
Weighted
average remaining contractual life
|
|
1.67
years
|
|
|
1.87
years
|
|
The
weighted average grant-date fair value per share was $9.67 and $11.66 for the
first quarter of 2009 and 2008, respectively. The total value of awards for
which restrictions lapsed during the first quarter of 2009 and 2008 was $0.9
million and $1.6 million, respectively. As of May 2, 2009 and May 3, 2008, there
was $9.1 million and $11.0 million, respectively, of total unrecognized
compensation cost related to nonvested restricted stock awards. The Company
recorded compensation expense related to restricted stock awards, net of
forfeitures, of $1.7 million and $2.1 million in the first quarter of 2009 and
2008, respectively.
10. Fair Value
Measurements
The Company adopted SFAS No. 157, “Fair
Value Measurements” (“SFAS No. 157”) on February 3, 2008 for financial assets
and liabilities. SFAS No. 157 provides a single definition of fair value and a
common framework for measuring fair value as well as new disclosure requirements
for fair value measurements used in financial statements. Under SFAS No. 157,
fair value is determined based upon the exit price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants exclusive of any transaction costs. SFAS No. 157 also
specifies a fair value hierarchy based upon the observability of inputs used in
valuation techniques. Observable inputs (highest level) reflect market data
obtained from independent sources, while unobservable inputs (lowest level)
reflect internally developed market assumptions. On February 1, 2009,
the Company adopted SFAS No. 157, for all non-financial assets and non-financial
liabilities recognized or disclosed in the financial statements on a
nonrecurring basis. As of May 2, 2009, the Company had no non-financial assets
or non-financial liabilities requiring measurement at fair value.
In
accordance with SFAS No. 157, fair value measurements are classified under the
following hierarchy:
|
Level 1 –
|
Quoted
prices for identical instruments in active
markets.
|
|
Level
2 –
|
Quoted
prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs or significant
value-drivers are observable in active
markets.
|
|
Level 3
–
|
Model-derived
valuations in which one or more significant inputs or significant
value-drivers are unobservable.
|
The
following table provides a summary of the recognized assets and liabilities that
are measured at fair value on a recurring basis at May 2, 2009:
(in
millions)
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
|
$ |
332 |
|
|
$ |
— |
|
|
$ |
— |
|
Short-term
investment
|
|
|
|
— |
|
|
|
— |
|
|
|
23 |
|
Auction
rate security
|
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
Forward
foreign exchange contracts
|
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
Total
Assets
|
|
|
$ |
332 |
|
|
$ |
5 |
|
|
$ |
23 |
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
foreign exchange contracts
|
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
European
cross currency swap
|
|
|
|
— |
|
|
|
24 |
|
|
|
— |
|
Total
Liabilities
|
|
|
$ |
— |
|
|
$ |
25 |
|
|
$ |
— |
|
At May 2,
2009, the Company had $408 million of cash and cash equivalents. Cash
equivalents, excluding amounts due from third-party credit card processors,
total $332 million and the carrying value approximates fair value due to its
short-term nature. At May 2, 2009, the Company’s auction rate security was
classified as available-for-sale and, accordingly, is reported at fair value.
The fair value of the security is determined by review of the underlying
security at each reporting period. The Company’s derivative financial
instruments are valued using market-based inputs to valuation models. These
valuation models require a variety of inputs, including contractual terms,
market prices, yield curves, and measures of volatility.
The
Company’s Level 3 assets include an investment in a money market fund classified
in short-term investments. The Company assessed the fair value of its investment
in the Reserve International Liquidity Fund, Ltd. (the “Fund”) and its
underlying securities. Based on this assessment, the Company recorded an
impairment charge of $3 million during the third quarter of 2008, incorporating
the valuation at zero for debt securities of Lehman Brothers. Changes in market
conditions and the method and timing of the liquidation process of the Fund
could result in further adjustments to the fair value and classification of this
investment.
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. The Direct-to-Customers segment reflects Footlocker.com, Inc., which
sells athletic footwear, apparel, and equipment, through its affiliates,
including Eastbay, Inc., and CCS, which sells skateboard and snowboard
equipment, apparel, footwear, and accessories. The Direct-to Customer
segment sells to customers through catalogs and Internet websites.
STORE
COUNT
At May 2,
2009, the Company operated 3,633 stores as compared with 3,641 and 3,758 stores
at January 31, 2009 and May 3, 2008, respectively. During the thirteen weeks
ended May 2, 2009, the Company opened 16 stores, remodeled or relocated 47
stores and closed 24 stores.
A total
of 19 franchised stores were operational at May 2, 2009. Revenue from the
franchised stores was not significant for the thirteen weeks ended May 2, 2009
or May 3, 2008. These stores are not included in the Company’s operating store
count above.
SALES AND OPERATING
RESULTS
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.
Sales from the Direct-to-Customer segment, excluding CCS sales, are included in
the calculation of comparable-store sales for all periods presented. Sales from
acquired businesses that include the purchase of inventory are included in the
computation of comparable-store sales after 15 months of operations.
Accordingly, CCS sales have been excluded in the computation of comparable-store
sales. Division profit reflects income before income taxes, corporate expense,
non-operating income and net interest expense.
The
following table summarizes results by segment:
Sales
|
|
Thirteen weeks ended
|
|
(in millions)
|
|
May 2, 2009
|
|
May 3, 2008
|
|
Athletic
Stores
|
|
$ |
1,118 |
|
|
$ |
1,217 |
|
Direct-to-Customers
|
|
|
98 |
|
|
|
92 |
|
Total
sales
|
|
$ |
1,216 |
|
|
$ |
1,309 |
|
Operating
results
|
|
Thirteen weeks ended
|
|
(in millions)
|
|
May 2, 2009
|
|
|
May 3, 2008
|
|
Athletic
Stores
|
|
$ |
61 |
|
|
$ |
40 |
|
Direct-to-Customers
|
|
|
8 |
|
|
|
10 |
|
Division
profit
|
|
|
69 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
Corporate
expense, net
|
|
|
19 |
|
|
|
34 |
|
Operating
profit
|
|
|
50 |
|
|
|
16 |
|
Other
income
|
|
|
(1
|
) |
|
|
— |
|
Interest
expense, net
|
|
|
2 |
|
|
|
1 |
|
Income
before income taxes
|
|
$ |
49 |
|
|
$ |
15 |
|
Sales of
$1,216 million for the first quarter of 2009 decreased by 7.1 percent from sales
of $1,309 million for the first quarter of 2008. Excluding the effect
of foreign currency fluctuations, total sales for the thirteen-week period
decreased 2.2 percent, as compared with the corresponding prior-year period.
Comparable-store sales decreased by 2.4 percent for the thirteen weeks ended May
2, 2009.
Gross
margin, as a percentage of sales, increased to 29.3 percent for the thirteen
weeks ended May 2, 2009 as compared with 28.0 percent in the corresponding
prior-year period. For the thirteen weeks ended May 2, 2009, the merchandise
rate improved by 130 basis points reflecting lower markdowns taken as the
Company was less promotional in the first quarter of 2009, while the occupancy
and buyers salary expense rate remained unchanged, as a percentage of sales. The
effect of vendor allowances was not significant for any of the periods
presented.
Segment
Analysis
Athletic
Stores
Athletic
Stores sales decreased by 8.1 percent to $1,118 million for the thirteen weeks
ended May 2, 2009, as compared with the corresponding prior-year period of
$1,217 million. Excluding the effect of foreign currency fluctuations, primarily
related to the euro, sales from athletic store formats decreased 2.9 percent for
the thirteen weeks ended May 2, 2009, as compared with the corresponding
prior-year period. Comparable-store sales decreased by 2.0 percent for the
thirteen weeks ended May 2, 2009. The decline in domestic operations sales for
the thirteen weeks ended May 2, 2009 was principally as a result of the
continued decline in mall traffic and consumer spending in general. This decline
was offset, in part, by sales increases in each of the Company’s international
operations, with the strongest increase in Australia. The increase in
international sales primarily reflected an improvement in apparel
sales.
Athletic
Stores division profit increased 52.5 percent for the thirteen weeks ended May
2, 2009, as compared with the corresponding prior-year period. Athletic Stores
division profit, as a percentage of sales, increased to 5.5 percent for the
thirteen weeks ended May 2, 2009, from 3.3 percent in the corresponding
prior-year period. The increase in division profit was mainly attributable
to increases in the domestic divisions’ gross margin, which benefited from less
promotional activity during the current period. Included in division
profit for the thirteen weeks ended May 3, 2008 are $4 million in costs
associated with the closure of underproductive stores, primarily lease
termination costs.
Direct-to-Customers
Direct-to-Customers
sales increased by 6.5 percent to $98 million for the thirteen weeks ended May
2, 2009, as compared with the corresponding prior-year period of $92 million
reflecting a comparable-sales decrease of 7.6 percent offset by sales from CCS,
which was acquired during the fourth quarter of 2008. Internet sales increased
by 10.7 percent to $83 million for the thirteen weeks ended May 2, 2009, as
compared with the corresponding prior-year period.
Direct-to-Customers
division profit for the thirteen weeks ended May 2, 2009 decreased by $2 million
to $8 million as compared with the corresponding prior-year period. Division
profit, as a percentage of sales, was 8.2 percent for the thirteen weeks ended
May 2, 2009 as compared with 10.9 percent for the corresponding prior-year
period. The decrease relates primarily to a decline in gross margin due to the
lack of close-out inventory purchases in the current period, which enhanced the
prior-year gross margin rate. The effect of the CCS acquisition on
division profit was not significant.
Corporate
Expense
Corporate
expense consists of unallocated general and administrative expenses, as well as
depreciation and amortization 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. Corporate
expense for the thirteen weeks ended May 2, 2009 decreased by $15 million to $19
million from the corresponding prior-year period. Included in the thirteen weeks
ended May 3, 2008 was the impairment charge of $15 million associated with
a note receivable due from the purchaser of the Company’s former Northern Group
operation in Canada.
Selling, General and
Administrative
Selling,
general and administrative expenses (“SG&A”) of $278 million decreased by
$21 million or 7.0 percent, in the first quarter of 2009 as compared with the
corresponding prior-year period. SG&A, as a percentage of sales, increased
to 22.9 percent for the thirteen weeks ended May 2, 2009, as compared with 22.8
percent in the corresponding prior-year period. Excluding the effect of foreign
currency fluctuations, SG&A decreased by $7 million for the thirteen weeks
ended May 2, 2009, as compared with the corresponding prior-year
period. This decrease principally reflects reduced store costs,
primarily wages, related to operating fewer stores and better expense
management. The inclusion of CCS, which was acquired during the
fourth quarter of 2008, did not significantly affect SG&A.
Depreciation and
Amortization
Depreciation
and amortization decreased by $4 million in the first quarter of 2009 to $28
million as compared with $32 million for the first quarter of 2008. Excluding
the effect of foreign currency fluctuations, primarily related to the euro,
depreciation and amortization decreased by $2 million. The decrease primarily
reflects reduced depreciation and amortization associated with the impairment
charges recorded during the fourth quarter of 2008 of approximately $4 million,
offset by the effect of prior-year capital spending and the amortization expense
associated with the CCS customer list intangible.
Interest
Expense
|
|
Thirteen weeks ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
Interest
expense
|
|
$ |
3 |
|
|
$ |
5 |
|
Interest
income
|
|
|
(1
|
) |
|
|
(4
|
) |
Interest
expense, net
|
|
$ |
2 |
|
|
$ |
1 |
|
Interest
expense decreased as a result of lower debt balances as the Company repaid its
term loan during the second quarter of 2008, coupled with the fact that during
the past 12 months the Company repurchased and retired a portion of its 2022
debentures. The decrease in interest income was primarily the result of lower
interest rates on cash, cash equivalents, and short-term
investments.
Income
Taxes
The
Company's effective tax rate for the thirteen weeks ended May 2, 2009 was 37.1
percent as compared with 77.2 percent for the corresponding prior-year period.
The decrease in the rate is primarily attributable to the establishment in the
prior year of a valuation allowance related to the tax benefit associated with
the impairment of the Northern Group note receivable. Excluding the
effect of the valuation allowance, the effective rate for the thirteen weeks
ended May 3, 2008 would have been 39.2 percent. The Company expects its
effective rate to range from 36 to 37 percent for the full year of 2009. The
actual rate will depend in significant part on the proportion of the Company's
worldwide income that is earned in the U.S.
Net
Income
Net
income of $31 million, or $0.20 per diluted share, for the thirteen weeks ended
May 2, 2009 increased by $0.18 per diluted share from $3 million, or $0.02 per
diluted share, for the thirteen weeks ended May 3, 2008. Included in the
thirteen weeks ended May 3, 2008 are charges totaling $19 million (pre-tax), or
$0.12 per share, representing an impairment charge of $15 million related to the
Northern Group note receivable and expenses of $4 million related to the store
closing program.
LIQUIDITY AND CAPITAL
RESOURCES
Generally,
the Company’s primary source of cash has been from operations. 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, information systems and technology, and other
support facilities, and to fund general working capital
requirements.
Management
believes its cash, cash equivalents, future operating cash flow from operations,
and the Company’s current revolving credit facility will be adequate to fund its
working capital requirements, capital expenditures, retirement plan
contributions, anticipated quarterly dividend payments, interest payments, and
other cash requirements to support the development of its short-term and
long-term operating strategies. The Company may also from time to time
repurchase its common stock or seek to retire or purchase outstanding debt
through open market purchases, privately negotiated transactions or otherwise.
Such repurchases, if any, will depend on prevailing market conditions, liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
On March
20, 2009, the Company entered into a new credit agreement with its banks,
providing for a $200 million revolving credit facility maturing on March 20,
2013 which replaces the existing credit agreement. The new credit
agreement also provides an incremental facility of up to $100 million under
certain circumstances. The new credit agreement provides for a
security interest in certain of the Company’s domestic assets, including certain
inventory assets. No material covenants or payment restrictions exist
unless the Company is borrowing under the agreement and, in that event, the
restrictions may vary depending upon the level of borrowings.
Any
materially adverse change in customer demand, fashion trends, competitive market
forces, or customer acceptance of the Company’s merchandise mix and retail
locations, uncertainties related to the effect of competitive products and
pricing, the Company’s reliance on a few key vendors for a significant portion
of its merchandise purchases and risks associated with foreign global sourcing
or economic conditions worldwide, as well as other factors listed under the
heading “Disclosure Regarding Forward-Looking Statements,” could affect the
ability of the Company to continue to fund its needs from business
operations.
Net cash
provided by operating activities was $67 million and $73 million for the
thirteen weeks ended May 2, 2009 and May 3, 2008, respectively. These amounts
reflect net income adjusted for non-cash items and working capital
changes. The non-cash charge for the thirteen weeks ended May 3, 2008
represents a $15 million impairment charge related to the Northern Group note
receivable. During the first quarter of 2009, the Company terminated its
interest rate swaps for a gain of $19 million. Additionally, during the first
quarter of 2009, the Company contributed $11 million to its U.S. and Canadian
qualified pension plans as compared with a $6 million contribution to the
Canadian qualified pension plan in the corresponding prior-year
period. Operating cash flows also includes a normal seasonal increase
in merchandise inventory in each period presented.
Net cash
used in investing activities was $26 million and $40 million for the thirteen
weeks ended May 2, 2009 and May 3, 2008, respectively, reflecting capital
expenditures. Capital expenditures forecasted for the full-year of 2009 are
approximately $106 million, of which $84 million relates to modernizations of
existing stores and new store openings, and $22 million reflects the development
of information systems and other support facilities. The Company has the ability
to revise and reschedule the anticipated capital expenditure program should the
Company’s financial position require it.
Net cash
used in financing was $23 million for both the thirteen weeks ended May 2, 2009
and May 3, 2008 reflecting common stock dividends declared and paid dividends
during the first quarters of 2009 and 2008, representing a rate of $0.15 per
share.
Recent
Accounting Pronouncements
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or the Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” (“FSP No. 157-4”).
FSP No. FAS 157-4 amends Statement No. 157 to provide additional guidance on (i)
estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased in relation to normal market activity for
the asset or liability, and (ii) circumstances that may indicate that a
transaction is not orderly. FSP No. FAS 157-4 also requires additional
disclosures about fair value measurements in interim and annual reporting
periods. FSP No. FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009. The Company does not expect the adoption of FSP No.
FAS 157-4 to have a material effect on its consolidated financial
statements.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” FSP No. FAS 115-2 and FAS
124-2 amends the other-than-temporary impairment guidance for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This guidance does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The provisions of FSP No. FAS 115-2 and FAS 124-2 are effective for
interim and annual reporting periods ending after June 15, 2009. The Company
does not expect the adoption of FSP No. FAS 115-2 and FAS 124-2 to have a
material effect on its consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” which amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies, as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial
Reporting, to require
those disclosures in summarized financial information at interim reporting
periods. FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods
ending after June 15, 2009. The Company is currently assessing the effect that
the adoption of FSP No. FAS 107-1 and APB No. 28-1 will have on its financial
statement disclosures.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material effect on the Company’s present or future
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
There
have been no significant changes to the Company’s critical accounting policies
and estimates from the information provided in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” included in the
Annual Report on Form 10-K for the fiscal year ended January 31,
2009.
DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
This
report 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 detailed in the Company’s filings with the Securities
and Exchange Commission, including the effects of currency fluctuations,
customer demand, fashion trends, competitive market forces, uncertainties
related to the effect of competitive products and pricing, customer acceptance
of the Company’s merchandise mix and retail locations, the Company’s reliance on
a few key vendors for a majority of its merchandise purchases (including a
significant portion from one key vendor), pandemics and similar major health
concerns, unseasonable weather, further deterioration of global financial
markets, economic conditions worldwide, further deterioration of business and
economic conditions, 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, the ability
of the Company to execute its business plans effectively with regard to each of
its business units, and risks associated with foreign global sourcing, including
political instability, changes in import regulations, and disruptions to
transportation services and distribution. Any changes in such assumptions or
factors could produce significantly different results. The Company undertakes no
obligation to update forward-looking statements, whether as a result of new
information, future events, or otherwise.
Item 4. Controls and
Procedures
The
Company’s management performed an evaluation under the supervision and with the
participation of the Company’s Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), and completed an evaluation as of May 2, 2009 of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on
that evaluation and the evaluation of the previously identified material
weakness in our internal control over financial reporting as disclosed in our
2008 Form 10-K, the Company’s CEO and CFO concluded that the Company’s
disclosure controls and procedures were not effective to ensure that information
relating to the Company that is required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC rules and form, and is
accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure.
In light
of this material weakness, in preparing the condensed consolidated financial
statements as of and for the thirteen weeks ended May 2, 2009, the Company
performed additional reconciliations and analyses and other post-closing
procedures designed to ensure that our condensed consolidated financial
statements for the thirteen weeks ended May 2, 2009 have been prepared in
accordance with generally accepted accounting principles. The Company’s CEO and
CFO have certified that, based on their knowledge, the consolidated financial
statements included in this report fairly present in all material respects our
financial condition, results of operations and cash flows for each of the
periods presented in this report.
The
Company has initiated a remediation plan, as described in our 2008 Annual Report
on Form 10-K. However, because the remedial actions relate to the
implementation of a software solution, training of personnel and many of the
controls in our system of internal controls rely extensively on manual review
and approval, the successful operation of these controls for at least several
quarters may be required prior to management being able to conclude that the
material weakness has been remediated.
During
the quarter ended May 2, 2009, there were no changes in the Company’s internal
control over financial reporting (as defined in Rules 13a-15(f) of the Exchange
Act) that materially affected or are reasonably likely to affect the Company’s
internal control over financial reporting.
PART II - OTHER
INFORMATION
Item 1. Legal
Proceedings
Legal
proceedings pending against the Company or its consolidated subsidiaries consist
of ordinary, routine litigation, including administrative proceedings,
incidental to the business of the Company, as well as litigation incidental to
the sale and disposition of businesses that have occurred in past years. These
legal proceedings include commercial, intellectual property, customer, and
labor-and-employment-related claims. Certain of the Company’s subsidiaries are
defendants in a number of lawsuits filed in state and federal courts containing
various class action allegations under state wage and hour laws, including
allegations concerning classification of employees as exempt or nonexempt,
unpaid overtime, meal and rest breaks, uniforms, and calculation of vacation
pay. Management does not believe that the outcome of such proceedings would have
a material adverse effect on the Company’s consolidated financial position,
liquidity, or results of operations, taken as a whole.
Item 1A. Risk
Factors
There
were no material changes to the risk factors disclosed in the 2008 Annual Report
on Form 10-K.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
There
were no purchases made by the Company of shares of its Common Stock during the
first quarter of 2009.
Item 6.
Exhibits
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(a)
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Exhibits
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The
exhibits that are in this report immediately follow the
index.
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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.
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FOOT
LOCKER, INC.
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Date:
June 10, 2009
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(Company)
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/s/
Robert W. McHugh
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ROBERT
W. MCHUGH
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Executive
Vice President and Chief Financial
Officer
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FOOT
LOCKER, INC.
INDEX
OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN
ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Exhibit No. in
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Item 601
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Description
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12
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Computation
of Ratio of Earnings to Fixed Charges.
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15
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Accountants’
Acknowledgment.
|
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31.1
|
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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.
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31.2
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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.
|
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32.1
|
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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.
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99
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Report
of Independent Registered Public Accounting
Firm.
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