Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(1)
Description of
the
Plan
The following description of the Foot Locker
Puerto Rico 1165(e)
Plan (the
"
Plan
"
) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan
’
s provisions.
(a
)
General
In September 2004, the Foot Locker Puerto Rico 1165(e) Plan (the
"
Plan
"
) was established with an effective date of January
1,
2004. The Plan is a defined contribution plan covering generally all employees of Foot Locker, Inc. (the
"
Company
"
or the
"
Plan Sponsor
"
) whose primary place of employment is in Puerto Rico. Eligible employees are those who have attained age twenty-one and completed one year of service consisting of at least 1,000 hours. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended
(
"
ERISA
"
).
(b
)
Contributions
The Plan provides for automatic revocable enrollment in the Plan at a contribution rate of 3% of pre-tax annual compensation
,
as defined, for participants who meet the eligibility requirements. The initial automatic enrollment percentage automatically increases each year in 1% increments up to a maximum of 5%.
The maximum allowable salary reduction contribution by a participant is 40% of pre-tax annual compensation, as defined in the Plan document.
Participants may elect to change their contribution rate and salary reduction agreement as often as
daily. For
both
2016
and
2015
, pre-tax contributions could be made up to the Puerto Rico Department of Treasury limit of $
1
5
,000.
Participants
may also roll over certain amounts representing distributions from other qualified retirement plans in Puerto Rico prior to becoming eligible to participate in the Plan; however, additional contributions cannot be made until the completion of one year of service consisting of at least 1,000 hours. For any participant who (i) has completed 1,000 hours of service during the Plan year and is actively employed by the Company on the last day of the Plan year or (ii)
during the Plan year, has died, has become disabled or retired on or after normal retirement age, the Company
makes a matching contribution in
an amount equal to 25
%
of
the
employees’ pre-tax contributions
on
up to the first 4
%
of the employees’ compensation (subject to certain limitations).
Matching contributions, at the Company’s option, are made either in shares of the Company's common stock ("Foot Locker Shares") or in cash to be invested in Foot Locker Shares
. P
articipants that are invested in the Foot Locker Stock Fund can diversify their matching contributions into any of the other investment options available under the Plan at any time.
Matching contributions for
2016 and 2015
were made entirely in cash.
Additional contributions may be made at the discretion of the Company and are subject to certain limitations. No additional contributions were made in
2016
or
2015
.
(c
)
Participant Accounts
Each participant's account is credited with (a) the participant's contributions and allocations of the Company’s matching contribution and (b) Plan net earnings, and reduced by (c) Plan net losses (including maintenance fees paid by the participant) and (d) loan initiation fees, when applicable. Allocations are based on participants’ salary deferrals or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account balance.
Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(1)
Description
of the Plan
–
(continued)
(d)
Vesting
Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company’s matching contributions and earnings thereon is over a five-year period; a participant vests 20% per year beginning after the first year of vesting service and is fully vested
for each annual matching contribution
after five years of vesting service, as defined in the Plan document.
(e)
Investment Options
Participants may change their investment options daily.
Participants may elect to allocate up to 25% of their contributions to
the Company’s
stock. In addition, each participant could direct his or her contributions to the following funds in 1% increments:
Northern Trust Focus Funds (age based) – Each Northern Trust Focus Fund invests in an array of underlying Northern Trust Funds, allowing the Participant to invest in a mix of stocks, bonds, and capital preservation investments.
Some of the underlying funds held by the Northern Trust Focus Funds invest in international securities, which involve risks such as currency fluctuations and economic and political instability.
Northern Trust Focus Income Fund - The fund seeks to provide current income for investors in retirement.
The fund will employ a strategic asset allocation strategy which begins with an aggressive allocation and over time moves toward a more conservative allocation.
The fund will invest primarily, but will not be limited to, in various equity, fixed income, real estate
,
and short
-
term cash collective funds.
Baron Small Cap Fund – The fund seeks capital appreciation through long-term investments primarily in securities of small-sized growth companies.
The fund intends that at least 80% of the fund’s total assets are invested in the securities of small-sized growth companies. A small-sized growth company is defined as one having a market capitalization of under $2.5 billion at the time of purchase.
Mainstay Large Cap Growth Fund – The fund’s objective is to seek long-term growth of capital.
The fund normally invests at least 80% of its assets in companies with market capitalization in excess of $4.0 billion at time of purchase.
Northern
Trust
Collective
All Country World Ex-US IMI Fund – The fund seeks to approximate the risk and return characteristics of the Morgan Stanley All Country World
Ex-
US Investable Market Index.
This index is commonly used to represent the non-US equity developed and emerging markets.
Northern Trust S&P 500 Index Fund – The
fund
seeks to approximate the risk and return characteristics of the S&P 500 Index. This
index
is commonly used to represent the large-cap segment of the U.S. equity market.
Goldman Sachs Small Cap Value Fund –
The
fund seeks long-term capital appreciation by investing, under normal circumstances, at least 80% of its assets in a diversified portfolio of equity investments in small-cap issuers with public stock market capitalizations within the range of the market capitalization of companies constituting the Russell 2000 Value Index.
The fund invests in small and/or midsize companies.
Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(1)
Description of the Plan – (continued)
(e)
Investment Options
– (continued)
Dodge & Cox Stock Fund – The fund seeks long-term growth of principal and income. A secondary objective is to achieve a reasonable current income. The fund invests primarily in a diversified portfolio of equity securities.
The fund will invest at least 80% of its total assets in equity securities including common stocks, depository receipts evidencing ownership of common stocks, preferred stocks, securities convertible into common stocks
,
and securities that carry the right to buy common stocks.
Metropolitan West Total Return Bond Fund – The fund seeks to outperform the Barclays Capital Aggregate Index while maintaining overall risk similar to the index. Investments are made primarily in a diversified portfolio of investment grade, fixed-income securities of various types of bonds and other securities, and can include corporate bonds, notes, collateralized bond obligations, collateralized debt obligations, mortgage and other asset backed securities, bank loans, money-market securities, swaps, futures, options, credit-default swaps, private placements, municipal securities and restricted securities.
Wells Fargo Stable Return Fund – The
fund
seeks safety of principal and consistency of returns with minimal volatility. The fund is for conservative investors seeking more income than money market funds
and
an expectation of less price fluctuation of stock or bond funds. The fund intends to
be
fully invested in book value investment instruments and employs a broad diversification among contract issuers and underlying securities. The fund’s returns will fluctuate with interest rates and market conditions.
Foot Locker Stock Fund - Foot Locker Shares may be obtained directly from the Company out of its authorized but unissued shares of common stock or out of its treasury shares, or on the open market.
(
f
)
Notes Receivable from Participants
Participants may borrow from their accounts once each year a minimum of $1,000, up to a maximum equal to the lesser of $50,000 or 50% of their total vested account balance.
At any time, only one loan may be outstanding per participant.
Loan transactions are treated as transfers between the investment funds and the participant loans fund. Loan terms range up to 5 years, or up to 15 years for the purchase of a primary residence. The loans bear a rate of interest equal to the prime rate on the date of the loan distribution. Principal and interest is generally paid ratably through regular payroll deductions.
Notes
receivable from participants
totaling $
3
77
,
06
5
and
$
3
84,253
were outstanding at December 31,
2016
and
2015
,
respectively, bearing interest rates ranging from 3.25% to 7.75%
at December 31,
2016
and
2015
.
(
g
)
Payment of Benefits
Participants are eligible for a distribution on termination of service, death, disability or retirement. A participant will receive a lump-sum amount equal to the fair market value of the participant's vested interest in his or her account. A participant may elect to have any investment in the Foot Locker Stock Fund distributed either in
Foot Locker
Shares
or cash.
Participants are eligible for a distribution due to financial hardship under certain conditions in accordance with the Plan document.
The amount of a hardship withdrawal may not exceed the cost associated with the financial hardship in addition to any mandatory federal income tax withholding, state and local income taxes, or penalties incurred.
Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(1)
Description of the Plan
–
(continued)
(
h
)
Administrative Fees
Included in administrative fees are amounts paid by participants for processing loans
, administrative fees paid using forfeitures,
and investment management fees. To the extent expenses of administering the Plan are not paid by the Plan, the expenses are paid by the Company and
,
therefore
,
are not included in the accompanying financial statements.
For registered investment companies, investment advisers are reimbursed for costs incur
red
and
receive
a management fee for providing investment advisory
services
.
These reimbursed costs and management fees are reflected in the net appreciation of investments on the statement
s
of changes in net asse
t
s available for benefits.
(
i
)
Forfeitures
Forfeitures of non-vested employer matching contributions totaled
$
2,
672
and
$
2,197
, as of December
31,
2016
and
2015
, respectively, which may be used to pay future administrative expenses of the Plan and then to reduce future matching contributions. Administrative expenses paid from forfeited non-vested accounts amounted to
$
2,
959
and $
2,058
in
2016
and
2015
, respectively.
(2)
Summary of Significant Accounting Policies
(
a
)
Basis of Accounting
The financial statements of the Plan are prepared using the accrual method of accounting.
(
b
)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein and disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions.
(
c
)
Investment Valuation and Income Recognition
The Plan's investments are stated at fair value
.
Investments in commingled funds are valued at the net asset value of units held by the Plan at year-end. Foot Locker Shares
held within the Foot Locker Stock Fund
and mutual funds
are valued at the quoted market price. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date.
Interest and dividend income earned from commingled funds are re-invested by the respective funds and are included in net appreciation of investments in the statements of changes in net assets available for benefits. Dividend income earned from the mutual funds and common stock is recorded as dividends in the statements of changes in ne
t assets available for benefits
.
See Note 7 for a discussion of fair value measurements.
The Plan has a
n indirect investment in a
fully benefit-responsive common collective trust
through the
Wells Fargo Stable Return Fund. This investment is reported at
fair
value
, which approximates contract value
.
The Wells Fargo Stable Return Fund invests in investment contracts and security-backed contracts. An investment contract is a contract issued by a financial institution to provide a stated rate of return to the buyer of the contract for a specified period of time. A security-backed contract has similar characteristics as a traditional investment contract and is comprised of two parts: the first part is a fixed-income security or portfolio of fixed-income securities; the second part is a contract value guarantee (wrapper) provided by a third party. Wrappers provide contract value payments for certain participant-initiated withdrawals and transfers, a floor crediting rate, and return of fully accrued contract value at maturity. There are no unfunded commitments or reserves as of December 31,
2016
and
2015
.
Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(2)
Summary of Significant Accounting Policies – (continued)
(
d
)
Notes Receivable from Participants
Notes
receivable from participants are carried at their outstanding
principal
balances. Delinquent participant loans are reclassified as distributions based upon the terms of the
P
lan document.
(
e
)
Payment of Benefits
Benefits are recorded when paid.
(
f
)
Recent Accounting Pronouncements
In July 2015, the
Financial Accounting Standards Board ("FASB")
issued
Accounting Standards Update ("ASU")
No.
2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962) and
Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient.
ASU 2015-12 simplifies the required disclosures related to employee benefit plans. Part I eliminates the requirement to measure and disclose the fair value of fully benefit-responsive contracts, including common collective trust assets. Contract value is the only required measure for fully benefit-responsive investment contracts. Part II eliminates the requirement to disclose individual investments which comprise 5% or more of total net assets available for benefits, as well as the net appreciation or depreciation of fair values by type. Part II also requires plans to continue to disaggregate investments that are measured using fair value by general type, however plans are no longer required to also disaggregate investments by nature, characteristics and risks. Furthermore, the disclosure of information about fair value measurements shall be provided by general type of plan asset.
Part III provides a practical expedient to permit plans to measure investments and investment-related accounts as of a month-end date that is closest to the plan's fiscal year-end, when the fiscal period does not coincide with a month-end
.
ASU 2015-12 is effective for fiscal years beginning after December 15, 2015, with early adoption permitted.
The Plan adopt
ed
certain provisions of
Part II of
ASU 2015-1
2
retrospectively as of December 31, 2016
, and
Part
s I and
III do not apply to the Plan and will not be adopted.
Other recent
accounting pronouncements issued by the
FASB
did not, or are not believed by management to, have a material effect on the Plan’s financial statements.
(3)
Plan Termination
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and/or to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become fully vested in their accounts.
(4)
Tax Status
On
July 13, 2015
, the Company received a favorable determination letter, confirming that the Plan, as amended effective
January 1, 2011
, is in compliance with the provisions of the Internal Revenue Code
(
"
IRC
"
)
for a New Puerto Rico.
The Company believes that the Plan currently is designed and is being operated in compliance with the applicable requirements of the
IRC
, as amended, and the trust established thereunder will be entitled to exemption from local income taxes.
Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(4)
Tax Status
– (continued)
Accounting principles generally accepted in the United States of America require
Plan
management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain
tax
position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31,
2016
and
2015
,
there are no uncertain
tax
positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements.
(5)
Risks and Uncertainties
The Plan offers a number of investment options including participant investments in Foot Locker Shares. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement
s
of net assets available for benefits.
The Plan’s exposure to a concentration of credit risk is limited by the diversification of investments across all participant-directed fund elections. Additionally, the investments within each participant-directed fund election are further diversified into varied financial instruments, with the exception of the Foot Locker Stock Fund, which invests in the securities of
the Plan Sponsor.
At December 31,
2016
and
2015
,
approximately 3
2
% and
35
%
, respectively,
of the Plan's net assets were invested in the common stock of the Plan Sponsor. The underlying value of the common stock is entirely dependent upon the performance of Foot Locker, Inc. and the market's evaluation of such performance.
The Plan’s investments include commingled funds that may directly or indirectly invest in securities with contractual cash flows, such as asset backed securities, collateralized mortgage obligations and commercial mortgage backed securities, including securities backed by sub
-
prime mortgage loans. The value, liquidity
,
and related income of these securities
, including the Foot Locker Stock Fund
,
is sensitive to changes in economic conditions, including real estate value, delinquencies
or
defaults, or both, and may be adversely affected by shifts in the market’s perception of the issuers and changes in interest rates.
(6)
Investments
The following investments represent five
percent
or more of the Plan’s net assets
:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
Northern Trust Focus 2035
Fund – 3,
938
and
3,61
8
units
, respectively
|
|
$
|
651,551
|
|
$
|
558,548
|
Northern Trust Focus 2040
Fund –
2
,
192
and
1,9
89
units
, respectively
|
|
|
365,190
|
|
|
308,385
|
Northern Trust Focus 2045
Fund –
3
,
222
and 2
,
903
units
, respectively
|
|
|
536,878
|
|
|
450,219
|
Northern Trust Focus 2050
Fund – 2,
786
and
2,4
96
units
, respectively
|
|
|
464,371
|
|
|
387,218
|
Foot Locker Stock
Fund – 2
0
,7
47
and
2
2,720
shares
, respectively
|
|
|
1,470,735
|
|
|
1,478,851
|
Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(7)
Fair Value Measurements
The Plan categorizes its financial assets into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. 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.
The Plan’s financial assets recorded at fair value are categorized as follows:
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 methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There were no changes in methodologies used at December 31,
2016
and
2015
. There were no transfers between levels during
2016
and
2015
. See footnote 2(c) for description of valuation methodologies for assets measured at fair value.
The following tables provide a summary, by level, of the Plan’s financial assets that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31,
2016
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Commingled funds
|
$
|
—
|
$
|
2,677,048
|
$
|
—
|
$
|
2,677,048
|
Mutual funds
|
|
62,135
|
|
—
|
|
—
|
|
62,135
|
Common stock:
|
|
|
|
|
|
|
|
|
Foot Locker Stock Fund
|
|
1,470,735
|
|
—
|
|
—
|
|
1,470,735
|
|
$
|
1,532,870
|
$
|
2,677,048
|
$
|
—
|
$
|
4,209,918
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31,
2015
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Commingled funds
|
$
|
—
|
$
|
2,291,272
|
$
|
—
|
$
|
2,291,272
|
Mutual funds
|
|
57,704
|
|
—
|
|
—
|
|
57,704
|
Common stock:
|
|
|
|
|
|
|
|
|
Foot Locker Stock Fund
|
|
1,478,851
|
|
—
|
|
—
|
|
1,478,851
|
|
$
|
1,536,555
|
$
|
2,291,272
|
$
|
—
|
$
|
3,827,827
|
Foot Locker Puerto Rico 1165(e) Plan
Notes to Financial Statements
December 31,
2016
and
2015
(8)
Related Party Transactions
The Plan allows for transactions with certain parties who may perform services or have fiduciary responsibilities to the Plan, including the Company. Certain Plan investments are shares of various commingled funds which were managed by
Mercer HR Services, LLC
, the Plan’s record keeper
. In addition, Northern Trust
Investments, N.A.
serves as the custodian for certain
commingled
funds. The Plan invests in common stock of the Company and issues loans to participants.
(9)
Reconciliation of Financial Statements to Form 5500
The following is a reconciliation of net
increase
in net assets
per the financial statements for the years ended December 31,
2016
and
2015
to
net income per
the Form 5500:
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Net increase in net assets per the financial statements
|
|
$
|
373,582
|
|
$
|
172,857
|
Prior year adjustment from contract value to fair value for
indirect
fully benefit
‑responsive investment contracts
|
|
|
—
|
|
|
(402)
|
Net income per the Form 5500
|
|
$
|
373,582
|
|
$
|
172,455
|