Foot Locker 2003 Annual Report Download - page 45

During the fourth quarter of 2002, as a result of the accounting divestiture, the Note was recorded in the financial
statements at its estimated fair value of CAD$16 million (approximately US$10 million). The Company, with the assistance
of an independent third party, determined the estimated fair value by discounting expected cash flows at an interest rate
of 18 percent. This rate was selected considering such factors as the credit rating of the purchaser, rates for similar
instruments and the lack of marketability of the Note. As the net assets of the former operations were previously written
down to zero, the fair value of the Note was recorded as a gain on disposal within discontinued operations. The Company
will no longer present the assets and liabilities of Northern Canada as “Assets of business transferred under contractual
arrangement (note receivable)” and “Liabilities of business transferred under contractual arrangement,” but rather will
record the Note, initially at its estimated fair value.
On May 6, 2003, the amendments to the Note were executed and a cash payment of CAD$5.2 million (approximately
US$3.5 million) was received representing principal and interest through the date of the amendment. After taking into
account this payment, the remaining principal due under the Note was reduced to CAD$17.5 million (approximately
US$12 million). Under the terms of the renegotiated Note, a principal payment of CAD$1 million was due and received
on January 15, 2004, further reducing the principal balance on the note. Under the terms of the amended Note, an
accelerated principal payment of CAD$1 million may be due if certain events occur. The remaining amount of the Note
is required to be repaid upon the occurrence of “payment events,” as defined in the purchase agreement, but no later
than September 28, 2008. Interest is payable semiannually and began to accrue on May 1, 2003 at a rate of 7.0 percent
per annum. At January 31, 2004 and February 1, 2003, US$2 million and US$4 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.
Future adjustments, if any, to the carrying value of the Note will be recorded pursuant to SEC Staff Accounting Bulletin
Topic 5:Z:5, “Accounting and Disclosure Regarding Discontinued Operations,” which requires changes in the carrying value
of assets received as consideration from the disposal of a discontinued operation to be classified within continuing
operations. Interest income will also be recorded within continuing operations. The Company will recognize an impairment
loss when, and if, circumstances indicate that the carrying value of the Note may not be recoverable. Such circumstances
would include a deterioration in the business, as evidenced by significant operating losses incurred by the purchaser or
nonpayment of an amount due under the terms of the Note.
As the stock transfer on September 28, 2001 was accounted for in accordance with SAB Topic 5:E, a disposal was
not achieved pursuant to APB No. 30. If the Company had applied the provisions of Emerging Issues Task Force 90-16,
“Accounting for Discontinued Operations Subsequently Retained” (“EITF 90-16”), prior-reporting periods would not be
restated, accordingly reported net income would not have changed. However, the results of operations of the Northern
business segment in all prior periods would have been reclassified from discontinued operations to continuing operations.
The incurred loss on disposal at September 28, 2001 would continue to be classified as discontinued operations, however,
the remaining accrued loss on disposal at this date, of U.S. $24 million, primarily relating to the lease liability of the
Northern U.S. business, would have been reversed as part of discontinued operations. Since the liquidation of this business
was complete, this lease liability would have been recorded in continuing operations in the same period pursuant to EITF
94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).” With respect to Northern Canada, the business was legally sold as of
September 28, 2001 and thus operations would no longer be recorded, but instead the business would be accounted for
pursuant to SAB Topic 5:E. In the first quarter of 2002, the $18 million charge recorded within discontinued operations
would be classified as continuing operations. Similarly, the $1 million benefit recorded in the third quarter of 2002 would
also have been classified as continuing operations. Having achieved divestiture accounting in the fourth quarter of 2002
and applying the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the
Company would have then reclassified all prior periods’ of the Northern Group to discontinued operations. Reported net
income in each of the periods would not have changed and therefore the Company did not amend any of its prior filings.
During the third quarter of 2003, a charge in the amount of $1 million before-tax was recorded to cover additional
liabilities related to the exiting of the former leased corporate office in excess of the previous estimate. In the fourth
quarter of 2003, the Company made a CAD$10 million payment (approximately US$7 million) to the landlord, which
released the Company from all future liability related to the lease.
Net disposition activity of $6 million in 2003 primarily related to the $7 million payment for the buyout of the former
leased corporate office. Net disposition activity of $13 million in 2002 included the $18 million reduction in the carrying
value of the net assets and liabilities, recognition of the note receivable of $10 million, real estate disposition activity
of $1 million and severance and other costs of $4 million. The remaining reserve balance of $2 million at January 31, 2004
is expected to be utilized within twelve months.
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