10-Q 1 ni43002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 001-15059 Nordstrom, Inc. ______________________________________________________ (Exact name of Registrant as specified in its charter) Washington 91-0515058 _______________________________ ___________________ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1617 Sixth Avenue, Seattle, Washington 98101 ____________________________________________________ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (206) 628-2111 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 _____ _____ Common stock outstanding as of May 31, 2002: 135,070,829 shares of common stock. 1 of 16 NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX -----
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Three months ended April 30, 2002 and 2001 3 Condensed Consolidated Balance Sheets April 30, 2002 and 2001 and January 31, 2002 4 Condensed Consolidated Statements of Cash Flows Three months ended April 30, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15
2 of 16 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands except per share amounts) (unaudited)
Three Months Ended April 30, ---------------------- 2002 2001 ---------- ---------- Net sales $1,245,761 $1,218,040 Cost of sales and related buying and occupancy (824,297) (798,430) ---------- ---------- Gross profit 421,464 419,610 Selling, general and administrative expenses (384,875) (396,706) ---------- ---------- Operating income 36,589 22,904 Interest expense, net (20,049) (19,504) Minority interest purchase (42,047) - Service charge income and other, net 33,304 37,155 ---------- ---------- Earnings before income taxes and cumulative effect of accounting change 7,797 40,555 Income tax expense (19,010) (15,800) ---------- ---------- (Loss) earnings before cumulative effect of accounting change (11,213) 24,755 Cumulative effect of accounting change (net of tax) (13,359) - ---------- ---------- Net (loss) earnings $ (24,572) $ 24,755 ========== ========== Basic (loss) earnings per share $ (.18) $ .18 ========== ========== Diluted (loss) earnings per share $ (.18) $ .18 ========== ========== Cash dividends paid per share of common stock outstanding $ .09 $ .09 ========== ========== These statements should be read in conjunction with the Notes to Condensed Consolidated Financial Statements contained herein.
3 of 16 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited)
April 30, January 31, April 30, 2002 2002 2001 ---------- ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 211,443 $ 331,327 $ 18,092 Accounts receivable, net 667,483 698,475 689,233 Merchandise inventories 994,136 888,172 1,052,274 Prepaid expenses 33,385 34,375 28,601 Other current assets 108,707 102,249 90,723 ---------- ---------- ---------- Total current assets 2,015,154 2,054,598 1,878,923 Land, buildings and equipment, net 1,791,676 1,761,082 1,617,244 Intangible assets, net 116,431 138,331 142,678 Other assets 101,169 94,768 70,091 ---------- ---------- ---------- TOTAL ASSETS $4,024,430 $4,048,779 $3,708,936 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 679 $ 148 $ 141,293 Accounts payable 557,854 490,988 538,012 Accrued salaries, wages and related benefits 186,041 236,373 191,764 Income taxes and other accruals 179,835 142,002 127,483 Current portion of long-term debt 3,996 78,227 89,336 ---------- ---------- ---------- Total current liabilities 928,405 947,738 1,087,888 Long-term debt 1,346,939 1,351,044 1,032,890 Deferred lease credits 369,401 342,046 289,611 Other liabilities 97,623 93,463 53,462 Shareholders' Equity: Common stock, no par: 250,000,000 shares authorized; 134,997,563, 134,468,608 and 134,013,395 shares issued and outstanding 349,593 341,316 334,176 Unearned stock compensation (2,513) (2,680) (3,543) Retained earnings 938,520 975,203 911,491 Accumulated other comprehensive earnings (loss) (3,538) 649 2,961 ---------- ---------- ---------- Total shareholders' equity 1,282,062 1,314,488 1,245,085 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,024,430 $4,048,779 $3,708,936 ========== ========== ========== These statements should be read in conjunction with the Notes to Condensed Consolidated Financial Statements contained herein.
4 of 16 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)
Three Months Ended April 30, ---------------------- 2002 2001 -------- -------- OPERATING ACTIVITIES: Net (loss) earnings $(24,572) $24,755 Adjustments to reconcile net (loss) earnings to net cash provided by (used for) operating activities: Depreciation and amortization 55,290 50,937 Amortization of intangible assets - 1,169 Amortization of deferred lease credits and other, net (4,333) (348) Stock-based compensation expense 1,131 1,628 Deferred income taxes, net (11,969) (852) Impairment of intangibles 21,900 - Change in: Accounts receivable, net 31,790 32,011 Merchandise inventories (139,658) (110,712) Prepaid expenses 1,786 1,940 Other assets (39) (409) Accounts payable 109,569 58,044 Accrued salaries, wages and related benefits (51,246) (44,143) Income taxes and other accruals 37,632 (26,090) Other liabilities 3,310 374 -------- -------- Net cash provided by (used for) operating activities 30,591 (11,696) -------- -------- INVESTING ACTIVITIES: Capital expenditures (96,827) (54,243) Additions to deferred lease credits 32,692 17,951 Other, net (1,413) (4,964) -------- -------- Net cash used for investing activities (65,548) (41,256) -------- -------- FINANCING ACTIVITIES: Increase in notes payable 531 58,233 Proceeds from long-term borrowings 431 391 Principal payments on long-term debt (81,874) (3,047) Proceeds from issuance of common stock 8,096 3,562 Cash dividends paid (12,111) (12,042) Purchase and retirement of common stock - (1,312) -------- -------- Net cash provided by financing activities (84,927) 45,785 -------- -------- Net decrease in cash and cash equivalents (119,884) (7,167) Cash and cash equivalents at beginning of period 331,327 25,259 -------- -------- Cash and cash equivalents at end of period $211,443 $18,092 ======== ======== These statements should be read in conjunction with the Notes to Condensed Consolidated Financial Statements contained herein.
5 of 16 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation --------------------- The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in the 2001 Nordstrom, Inc. Annual Report. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation. Due to the seasonal nature of the retail industry, quarterly results are not necessarily indicative of the results for the fiscal year. Recent Accounting Pronouncements -------------------------------- In February 2002, we adopted the following three pronouncements: SFAS No. 141 "Business Combinations" - SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of goodwill separate from other intangible assets. Adoption of SFAS No. 141 did not have a material impact on our financial statements. SFAS No. 142 "Goodwill and Other Intangible Assets" - Under SFAS No. 142, goodwill and intangible assets having indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives. Adoption of SFAS No. 142 resulted in an impairment charge and a reduction in amortization expense for the first quarter of 2002, which is detailed in Note 2 of the Notes to Condensed Consolidated Financial Statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" - SFAS No. 144 retains the fundamental provisions of SFAS No. 121, but establishes new criteria for asset classification and broadens the scope of qualifying discontinued operations. The adoption of this statement did not have a material impact on our financial statements. Note 2 - Cumulative Effect of Accounting Change Effective February 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets having indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives. In connection with the adoption of SFAS No. 142, we reviewed the classification and useful lives of our intangible assets. Our intangible assets were determined to be either goodwill or indefinite lived tradename. 6 of 16 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 2 - Cumulative Effect of Accounting Change (Cont.) As required by SFAS No. 142, we defined our reporting unit as the Faconnable Business Unit, one level below our reportable Retail Stores segment. We then tested our intangible assets for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value was determined using a discounted cash flow methodology. These impairment tests are required to be performed at adoption of SFAS No. 142 and at least annually thereafter. On an ongoing basis we expect to perform our impairment test during our first quarter or when other circumstances indicate we need to do so. Based on our initial impairment test, we recognized an adjustment to goodwill of $21,900 in the first quarter of 2002, while the tradename was determined not to be impaired. The goodwill adjustment resulted from a reduction in management's estimate of future growth for this reporting unit. The impairment charge recognized this quarter is reflected as a cumulative effect of accounting change. The changes in the carrying amount of our intangible assets for the quarter ended April 30, 2002, are as follows:
Goodwill Tradename ---------- ---------- Balance as of February 1, 2002 $ 38,198 $ 100,133 Impairment losses (21,900) - ---------- ---------- Balance as of April 30, 2002 $ 16,298 $ 100,133 ========== ==========
The following table shows the actual results of operations for the quarters ended April 30, 2002 and 2001 as well as pro-forma results adjusted for the exclusion of intangible amortization and the cumulative effect of the accounting change.
Three Months Ended April 30, -------------------- 2002 2001 --------- --------- Reported net (loss) income $ (24,572) $ 24,755 Intangible amortization, net of tax - 713 Cumulative effect of the accounting change, net of tax 13,359 - --------- --------- Adjusted net (loss) income $ (11,213) $ 25,468 ========= ========= Basic and diluted earnings per share Reported net (loss) income $ (.18) $ .18 Intangible amortization, net of tax - .01 Cumulative effect of the accounting change, net of tax .10 - --------- -------- Adjusted net (loss) income $ (.08) $ .19 ========= ========
7 of 16 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 3 - Earnings Per Share
Three Months Ended April 30, ------------------------ 2002 2001 ----------- ----------- Net (loss) earnings $(24,572) $24,755 Basic shares 134,702,331 133,855,973 Basic (loss) earnings per share $(0.18) $0.18 Dilutive effect of stock options and restricted stock - 65,625 Diluted shares 134,702,331 133,921,598 Diluted (loss) earnings per share $(0.18) $0.18 Antidilutive stock options 12,711,744 9,600,203
Note 4 - Accounts Receivable The components of accounts receivable are as follows:
April 30, ------------------------ 2002 2001 ----------- ----------- Unrestricted trade receivables $ 76,367 $685,503 Restricted trade receivables 592,908 - Other 20,994 20,962 Allowance for doubtful accounts (22,786) (17,232) ----------- ---------- Accounts receivable, net $667,483 $689,233 =========== ==========
Restricted accounts back the $300 million of Class A notes and the $200 million variable funding note issued by us in November 2001. Note 5 - Supplementary Cash Flow Information We own a 49% interest in a limited partnership which constructed a new corporate office building in which we are the primary occupant. During the first quarter of 2002, the limited partnership refinanced its construction loan obligation with an $85,000 mortgage secured by the property, of which $82,011 was included on our balance sheet at April 30, 2002. The obligation has a fixed interest rate of 7.68% and a term of 18 years. The $5,000 difference between the $90,000 outstanding under the original credit facility and the new mortgage was funded by Nordstrom, Inc. Our financial statements include capitalized costs related to this building of $90,078, and $70,165, which includes noncash amounts of $75,835 and $55,174 as of April 30, 2002 and 2001. The corresponding finance obligation of $87,011 and $66,351 as of April 30, 2002 and 2001 is included in other long-term debt. We capitalize certain property, plant and equipment during the construction period of commercial buildings which are subsequently derecognized and leased back. During the three months ended April 30, 2001, the noncash activity related to the reclassification of new stores that qualified as sale and leaseback were $17,614. 8 of 16 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 6 - Segment Reporting The following tables set forth information for the our reportable segments and a reconciliation to the consolidated totals:
Three months ended Retail Credit Catalog/ Corporate April 30, 2002 Stores Operations Internet and Other Eliminations Total Revenues from external customers $1,182,709 - $63,052 - - $1,245,761 Service charge income - $31,455 - - - 31,455 Intersegment revenues 3,818 9,906 - - $ (13,724) - Interest expense, net 184 6,439 185 $13,241 - 20,049 Earnings before cumulative effect of accounting change 56,934 1,578 (308) (69,417) - (11,213) Net earnings (loss) 43,575 1,578 (308) (69,417) - (24,572) Three months ended Retail Credit Catalog/ Corporate April 30, 2001 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $1,148,337 - $69,703 - - $1,218,040 Service charge income - $36,624 - - - 36,624 Intersegment revenues 3,496 5,556 - - $(9,052) - Interest expense, net 355 6,623 (48) $ 12,574 - 19,504 Net earnings (loss) 53,663 5,276 (4,247) (29,937) - 24,755
Note 7 - Nordstrom.com Put Agreement On May 13, 2002, we entered into an agreement to purchase the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70,000. The excess of the purchase price over the fair market value of the preferred stock and professional fees incurred resulted in a one-time charge of $42,047, which was recognized during the quarter. A valuation allowance has been provided for the full amount of the tax benefit of the transaction, as management believes it is not likely that these benefits will be realized. The excess of the fair market value over the book value of the series C preferred stock of Nordstrom.com, Inc. will result in additional goodwill. Subsequent to this transaction, we will own 97% of Nordstrom.com, Inc. Additional charges may be incurred in 2002 related to the integration of the Nordstrom.com business into Nordstrom, Inc. Note 8 - Subsequent Events On May 1, 2002, we replaced the $200 million variable funding note backed by VISA credit card receivables ("Visa VFN") with 5-year term notes also backed by the VISA credit card receivables. Class A and B notes with a combined face value of $200 million were issued to third party investors. We used the proceeds to retire the $200 million outstanding on the Visa VFN. Nordstrom fsb retained a Transferor's Interest, subordinated Class C note, and an Interest Only Strip. In accordance with SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilties," this debt and the related assets are not reflected in our consolidated balance sheets. 9 of 16 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 9 - Litigation Cosmetics --------- Nordstrom was originally named as a defendant along with other department store and specialty retailers in nine separate but virtually identical class action lawsuits filed in various Superior Courts of the State of California in May, June and July 1998 that have now been consolidated in Marin County state court. In May 2000, plaintiffs filed an amended complaint naming a number of manufacturers of cosmetics and fragrances and two other retailers as additional defendants. Plaintiffs' amended complaint alleges that the retail price of the "prestige" cosmetics sold in department and specialty stores was collusively controlled by the retailer and manufacturer defendants in violation of the Cartwright Act and the California Unfair Competition Act. Plaintiffs seek treble damages and restitution in an unspecified amount, attorneys' fees and prejudgment interest, on behalf of a class of all California residents who purchased cosmetics and fragrances for personal use from any of the defendants during the period four years prior to the filing of the amended complaint. Defendants, including us, have answered the amended complaint denying the allegations. The retail defendants have produced documents and responded to plaintiffs' other discovery requests, including providing witnesses for depositions. Plaintiffs have not yet moved for class certification. Pursuant to an order of the court, plaintiffs and defendants participated in mediation sessions in May and September 2001. Washington Public Trust Advocates --------------------------------- In early 2002, we were named as one of 30 defendants in Washington Public Trust Advocates, ex rel., et al. v. City of Spokane, et al., filed in the Spokane County Superior Court, State of Washington. Plaintiff is a not-for- profit corporation bringing claims on behalf of the City of Spokane and the Spokane Parking Public Development Authority. The claims relate to the River Park Square Mall and Garage Project in Spokane, Washington (the "Project"), which includes a Nordstrom store. The portion of the complaint applicable to us seeks to recover from us the amount of a loan made by the Department of Housing and Urban Development to the developer of the Project. Damages are sought in the amount of $22.75 million, or a lesser amount to the extent that the HUD loan proceeds were used for the construction of the store and not as tenant improvements. Other portions of the complaint seek to invalidate bonds issued to finance the public parking garage serving the Project, terminate the lease of the parking garage by the City of Spokane, and rescind other agreements between the City of Spokane and the developer of the Project, as well as damages from the developer of the Project in unspecified amounts. The Complaint also alleges breach of fiduciary duties by various defendants, including Nordstrom, to the people of the City of Spokane regarding lack of disclosures concerning the developer and the Project. Unspecified damages are sought for this cause of action. We filed a motion to dismiss the lawsuit on which the court has yet to rule. Other ----- We are also subject to other ordinary routine litigation incidental to its business and with respect to which no material liability is expected. 10 of 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dollars in Thousands The following discussion should be read in conjunction with the Management's Discussion and Analysis section of the 2001 Annual Report. RESULTS OF OPERATIONS: ---------------------- Overview -------- Earnings for the quarter ended April 30, 2002 decreased to a net loss of $24,572 from net income of $24,755 for the same period in 2001. The decrease was attributable to two one-time charges related to the purchase of series C preferred stock of Nordstrom.com, Inc. and the adoption of a new accounting pronouncement. Excluding these one-time charges, earnings for the quarter increased to $30,834 from $24,755 for the first quarter of last year. Diluted earnings per share before one-time charges were $0.22 for the quarter compared to $0.18 in the first quarter of last year. The increases in earnings and diluted earnings per share were primarily due to lower selling, general and administrative expenses. Sales ----- For the quarter, changes in total company sales and comparable-store sales were as follows:
Calendar 4-5-4 % Change % Change -------- -------- Total Company sales 2.3% 2.1% Comparable-store sales (1.5) (2.1)
During the first quarter of 2002, sales increased 2.3% compared to the corresponding quarter in 2001, primarily due to the opening of six full-line stores and eight new Nordstrom Rack stores since May 1, 2001. Comparable store sales (sales in stores open at least one full fiscal year at the beginning of the fiscal year) decreased 1.5%. The decrease in comparable store sales reflects the overall slowdown in the economy that began during the second half of the last fiscal year. Although comparable store sales were negative overall, they were positive for many of our merchandise divisions including Women's Designer, Women's Contemporary, Women's Active Wear, Kid's Wear and Cosmetics Gross Profit ------------ Gross profit as a percentage of net sales decreased in the first quarter of 2002, as compared to the same period in 2001. The decrease was primarily due to increased occupancy costs from store openings. Selling, General and Administrative ----------------------------------- For the first quarter of 2002, selling, general and administrative expenses as a percentage of net sales decreased when compared to the first quarter of 2001. The decrease was due to savings from the workforce reduction carried out in the third quarter of last year. Additionally, we were successful at controlling expenses including catalog expense and direct selling. These expense savings were partially offset by higher IT expenses related to the implementation of our perpetual inventory system. 11 of 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Interest Expense ---------------- Interest expense, net increased compared to the corresponding quarter in 2001. The increase for the quarter was due to higher average long-term borrowings, partially offset by a decrease in average short-term borrowings and long-term interest rates. Service Charge Income and Other ------------------------------- Service charge income and other, net decreased compared to the corresponding quarter in 2001. The decrease for the quarter resulted from lower service charge income due to declining interest rates, as well as lower receivable balances. Nordstrom.com Put Agreement --------------------------- On May 13, 2002, we entered into an agreement to purchase the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70,000. The excess of the purchase price over the fair market value of the preferred stock and professional fees incurred resulted in a one-time charge of $42,047, which was recognized during the quarter. A valuation allowance has been provided for the full amount of the tax benefits of the transaction, as management believes it is not probable that the full benefits will be realized. The excess of the fair market value over the book value of the series C preferred stock of Nordstrom.com, Inc. will result in additional goodwill. Subsequent to this transaction, we will own 97% of Nordstrom.com, Inc. Additional charges may be incurred in 2002 related to the integration of the Nordstrom.com business into Nordstrom, Inc. Cumulative Effect of Accounting Change -------------------------------------- During the quarter, we completed the review required by SFAS No. 142 "Goodwill and Other Intangible Assets." As a result of our review, we recorded a cumulative effect of accounting change of $13,359 net of tax or $0.10 per share on a diluted basis. Seasonality ------------ Our business, like that of other retailers, is subject to seasonal fluctuations. Our anniversary sale in July and the holidays in December result in sales that are higher in the second and fourth quarters of the fiscal year. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. LIQUIDITY AND CAPITAL RESOURCES: -------------------------------- Nordstrom finances its working capital needs and capital expenditures with cash provided by operations and borrowings. Cash Flow from Operations ------------------------- Net cash provided by operating activities for the quarter ended April 30, 2002 increased $42,287 compared to the same quarter last year. This increase was primarily due to higher earnings from continuing operations and an increase in accounts payable partially offset by an increase in merchandise inventories. Also contributing to the increase was the timing of income tax and interest payments made in the first quarter of 2001. 12 of 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Capital Expenditures -------------------- For the quarter ended April 30, 2002, net cash used in investing activities increased approximately $24,292 compared to the same period in 2001, primarily due to capital expenditures for new stores. During the first quarter of fiscal 2002, we opened three new full-line stores in Durham, North Carolina; Los Angeles, California and Orem, Utah. We also opened two new Nordstrom Rack stores in King of Prussia, Pennsylvania and Fresno, California. Throughout the remainder of the year ending January 31, 2003, we expect to open five full-line stores in Dulles, Virginia; St. Louis, Missouri; Coral Gables, Florida; Orlando, Florida and Las Vegas, Nevada; open three Nordstrom Rack stores; and close one Nordstrom Rack store. For the entire year, gross square footage is expected to increase approximately 8 percent. Total square footage of our stores was 17,479,000 as of April 30, 2002, compared to 16,305,000 as of April 30, 2002. Financing --------- For the three-month period ended April 30, 2002, cash used by financing activities was $84,927 primarily due to the scheduled retirement of $76,750 in medium-term notes and the reduced need for borrowings as a result of the $300,000 of Class A notes issued in November of 2001. For the three-month period ended April 30, 2001, cash provided by financing activities was $45,785 due to an increase in short-term notes payable. During the first quarter of 2002, we refinanced the construction loan obligation for an $85,000 mortgage secured by the property, of which $82,011 was outstanding at April 30, 2002. The obligation has a fixed interest rate of 7.68% and a term of 18 years. CRITICAL ACCOUNTING POLICIES: ----------------------------- The preparation of our financial statements require that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including those related to doubtful accounts, inventory valuation, intangible assets, income taxes, self-insurance liabilities, pensions, contingent liabilities and litigation. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Realization of Deferred Tax Assets ---------------------------------- As of April 30, 2002, we have $34,000 of capital loss carryforwards. The utilization of this deferred tax asset is contingent upon the ability to generate capital gains within the next four years. No valuation allowance has been provided because management believes it is probable that the full benefit of the carryforwards will be realized. In addition, we have a valuation allowance for the full amount of tax benefit related to the Nordstrom.com put agreement (see note 7), as management believes it is not likely that this tax benefit will be realized. RECENT ACCOUNTING PRONOUNCEMENTS: --------------------------------- In February 2002, we adopted the following three pronouncements: SFAS No. 141 "Business Combinations" - SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of goodwill separate from other intangible assets. Adoption of SFAS No. 141 did not have a material impact on our financial statements. 13 of 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) SFAS No. 142 "Goodwill and Other Intangible Assets" - Under SFAS No. 142, goodwill and intangible assets having indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives. Adoption of SFAS No. 142 resulted in an impairment charge and a reduction in amortization expense for the first quarter of 2002, which is detailed in Note 2 of the Notes to Condensed Consolidated Financial Statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" - SFAS No. 144 retains the fundamental provisions of SFAS No. 121, but establishes new criteria for asset classification and broadens the scope of qualifying discontinued operations. The adoption of this statement did not have a material impact on our financial statements. FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT: ------------------------------------------------- This document may include forward-looking statements regarding our performance, liquidity and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements are qualified by the risks and challenges posed by increased competition, shifting consumer demand, changing consumer credit markets, changing capital markets and general economic conditions, hiring and retaining effective team members, sourcing merchandise from domestic and international vendors, investing in new business strategies, achieving our growth objectives, and other risks and uncertainties, including the uncertain economic and political environment arising from the terrorist acts of September 11th and subsequent terrorist activities. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates. In seeking to minimize risk, we manage exposure through our regular operating and financing activities. We do not use financial instruments for trading or other speculative purposes and are not party to any leveraged financial instruments. We manage interest rate exposure through our mix of fixed and variable rate borrowings. Short-term borrowing and investing activities generally bear interest at variable rates, but because they have maturities of three months or less, we believe that the risk of material loss is low. In addition, we have outstanding at April 30, 2002, $300 million of 8.95% fixed-rate debt converted to variable rate through the use of an interest rate swap. The interest rate swap reduced interest payments on our highest fixed- rate debt by taking advantage of the current low interest rates. A shift in future interest rates could adversely affect the amount of interest paid through this swap agreement. The majority of our revenue, expense and capital expenditures are transacted in United States dollars. However, we periodically enter into foreign currency purchase orders for apparel and shoes denominated in Euros. We use forward contracts to hedge against fluctuations in foreign currency prices. The amounts of these contracts are immaterial. The use of derivatives is limited to only those financial instruments that have been authorized by our Chief Financial Officer and Treasurer. 14 of 16 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONT.) In addition, the functional currency of Faconnable, S.A. of Nice, France is the Euro. Assets and liabilities of Faconnable are translated into U.S. dollars at the exchange rate prevailing at the end of the period. Income and expenses are translated into U.S. dollars at the exchange rate prevailing on the respective dates of the transactions. The effects of changes in foreign currency exchange rates are included in other comprehensive earnings. Certain other information required under this item is included in Note 5 in the Notes to Condensed Consolidated Financial Statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings ------------------------- The information required under this item is included in the following section of Part I, Item 1 of this report: Note 9 in Notes to Condensed Consolidated Financial Statements Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits -------- (10.1) Stock Purchase Agreement dated May 13, 2002 between the Registrant and the investors listed on Schedule A thereto is hereby incorporated by reference from the Registrant's Form 8-K filed on May 17, 2002 (10.2) Promissory Note dated April 18, 2002 between 1700 Seventh L.P., and New York Life Insurance Company is filed herein as an exhibit. (10.3) Promissory Note dated April 18, 2002 between 1700 Seventh L.P., and Life Investors Insurance Company of America is filed herein as an exhibit. (10.4) Guaranty Agreement dated April 18, 2002 between Registrant, New York Life Insurance Company and Life Investors Insurance Company of America, is filed herein as an exhibit. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter for which this report is filed. 15 of 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORDSTROM, INC. (Registrant) /s/ Michael G. Koppel ---------------------------------------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Date: June 7, 2002 ------------- 16 of 16 NORDSTROM INC. AND SUBSIDIARIES Exhibit Index Exhibit Method of Filing ------- ---------------- 10.1 Stock Purchase Agreement dated May Incorporated by reference 13, 2002 between the Registrant from the Registrant's Form and the investors listed on 8-K filed on May 17, 2002 Schedule A thereto 10.2 Promissory Note dated April 18, Filed herewith electronically 2002 between 1700 Seventh, L.P. and New York Life Insurance Company 10.3 Promissory Note dated April 18, Filed herewith electronically 2002 between 1700 Seventh, L.P. and Life Investors Insurance Company of America 10.4 Guaranty Agreement dated April 18, Filed herewith electronically 2002 between Registrant, New York Life Insurance Company and Life Investors Insurance Company of America