FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 3, 1998
Commission File Number 1-11681
FOOTSTAR, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 22-3439443
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
933 MacArthur Boulevard, Mahwah, New Jersey 07430
(Address of principal executive offices) (Zip Code)
(201) 934-2000
(Registrant's telephone number, including area code)
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 ___
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding as of October 3, 1998
----- ---------------------------------
Common Stock, $.01 par value 24,538,688
1
<PAGE>
INDEX
Part I. - Financial Information Page No.
--------
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended October 3, 1998 and
September 27, 1997 3
Consolidated Condensed Balance Sheets -
October 3, 1998 and January 3, 1998 4
Consolidated Condensed Statements of Cash Flows -
For Nine Months Ended October 3, 1998 and September 27, 1997 5
Notes to Consolidated Condensed Financial Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 17
Review by Independent Auditors 18
Exhibit 1 - Independent Auditors' Review Report 19
Part II. - Other Information
Item 6 - Exhibits and Reports on Form 8-K 20
2
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
($ in millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- ----------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Net sales $ 472.6 $ 464.0 $ 1,336.1 $ 1,266.9
Cost of sales 326.7 321.9 925.8 881.8
--------- --------- --------- -----------
Gross profit 145.9 142.1 410.3 385.1
Store operating, selling, general and
administrative expenses 97.9 96.5 290.7 277.1
Depreciation and amortization 9.2 8.1 25.8 23.5
--------- --------- --------- -----------
Operating profit 38.8 37.5 93.8 84.5
Interest (expense) income, net (0.4) (0.2) (0.2) 1.4
--------- --------- --------- -----------
Income before income taxes and minority
interests 38.4 37.3 93.6 85.9
Provision for income taxes 12.2 12.3 29.9 28.3
--------- --------- --------- -----------
Income before minority interests 26.2 25.0 63.7 57.6
Minority interests in net income 7.8 6.2 22.6 18.7
--------- --------- --------- -----------
Net income $ 18.4 $ 18.8 $ 41.1 $ 38.9
========= ========= ========= ===========
Weighted average shares outstanding:
Basic: 24.5 28.4 25.3 29.8
========= ========= ========= ===========
Diluted: 24.8 28.5 25.6 29.8
========= ========= ========= ===========
Earnings per share
Basic: $ 0.75 $ 0.66 $ 1.63 $ 1.31
========= ========= ========= ===========
Diluted: $ 0.74 $ 0.66 $ 1.60 $ 1.30
========= ========= ========= ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except for share data)
October 3, January 3,
1998 1998
(Unaudited) (Audited)
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 9.3 $ 152.2
Accounts receivable, net 44.8 43.9
Inventories 339.3 284.5
Prepaid expenses and other
current assets 53.3 48.4
-------- --------
Total current assets 446.7 529.0
Property and equipment, net 226.7 201.9
Goodwill, net 26.9 27.5
Deferred charges and other
non-current assets 10.0 12.6
-------- --------
Total assets $ 710.3 $ 771.0
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 89.5 $ 95.4
Accrued expenses 127.0 126.6
Income taxes payable 20.8 21.9
Notes payable 41.7 --
-------- --------
Total current liabilities 279.0 243.9
Other long-term liabilities 46.4 59.5
Minority interests in subsidiaries 51.4 65.1
-------- --------
Total liabilities 376.8 368.5
-------- --------
Shareholders' equity:
Common stock $.0l par value: 100,000,000
shares authorized, 30,588,688
and 30,558,107 shares
issued and outstanding 0.3 0.3
Additional paid-in capital 335.6 333.6
Accumulated other comprehensive (loss) (0.2) (0.4)
Treasury stock: 6,050,000 and 2,685,900
shares at cost (179.2) (66.3)
Unearned compensation (4.5) (5.1)
Retained earnings 181.5 140.4
-------- --------
Total shareholders' equity 333.5 402.5
-------- --------
Total liabilities and shareholders' equity $ 710.3 $ 771.0
======== ========
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Nine Months Ended
----------------------------
Oct. 3, 1998 Sept. 27, 1997
------------ --------------
Net cash provided by operating activities $ 15.6 $ 9.2
--------- --------
Cash flows used in investing activities:
Additions to property and equipment (51.0) (49.7)
--------- --------
Cash flows used in financing activities:
Dividends paid to minority interests (36.3) (35.9)
Treasury stock acquired (112.9) (52.8)
Proceeds from notes payable 1,717.4 --
Payments of notes payable (1,675.7) --
Other -- 1.5
--------- --------
Net cash used in financing activities (107.5) (87.2)
--------- --------
Net decrease in cash and cash equivalents (142.9) (127.7)
Cash and cash equivalents at beginning of period 152.2 164.6
--------- --------
Cash and cash equivalents at end of period $ 9.3 $ 36.9
========= ========
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
1. Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of October 3, 1998 and the results of operations for the three and
nine-month periods ended October 3, 1998 and September 27, 1997 and cash flows
for the nine months ended October 3, 1998 and September 27, 1997. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Because
of the seasonality of the specialty retailing business, operating results of the
Company on a quarterly basis may not be indicative of operating results for the
full year or any other period. The consolidated condensed financial statements
of the Company should be read in conjunction with the financial statements of
the Company included in the Company's 1997 Annual Report on Form 10-K. Certain
reclassifications have been made to the 1997 consolidated financial statements
to conform to the 1998 presentation.
2. Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No.130") effective January 4, 1998. SFAS
No. 130 requires that items defined as other comprehensive income, such as
foreign currency translation adjustments, be separately classified in the
financial statements and that the accumulated balance of other comprehensive
income be reported separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The components of
comprehensive income for the three and nine months ended October 3, 1998 and
September 27, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- --------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Comprehensive Income:
Net income $18.4 $18.8 $41.1 $38.9
Other comprehensive income (loss) -
Foreign currency adjustment -- 0.1 0.2 (0.1)
----- ----- ----- -----
Comprehensive income $18.4 $18.9 $41.3 $38.8
===== ===== ===== =====
</TABLE>
6
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
3. Earnings per Share
The table below shows calculated earnings per share in accordance with SFAS No.
128.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 3, 1998 October 3, 1998
------------------ -----------------
<S> <C> <C>
Basic EPS Computation
Numerator:
Net Income $ 18.4 $ 41.1
========== ==========
Denominator:
Shares outstanding at beginning of year 27,872,207 27,872,207
Weighted average shares repurchased 3,333,572 2,582,376
---------- ----------
Weighted average common shares
outstanding 24,538,635 25,289,831
========== ==========
Basic EPS $ 0.75 $ 1.63
========== ==========
Diluted EPS computation
Numerator:
Net Income $ 18.4 $ 41.1
========== ==========
Denominator:
Shares outstanding at beginning of year 27,872,207 27,872,207
Weighted average shares repurchased 3,333,572 2,582,376
---------- ----------
Weighted average common shares
outstanding 24,538,635 25,289,831
Dilutive effect of stock options 272,949 328,900
---------- ----------
Total shares 24,811,584 25,618,731
========== ==========
Diluted EPS $ 0.74 $ 1.60
========== ==========
</TABLE>
4. Purchase of Treasury Stock
During the third quarter, ended October 3, 1998, the Company did not purchase
any of its stock in the open market. Since the inception of the share repurchase
programs through October 3, 1998, the Company had purchased a total of 6,050,000
shares at an average price of $29.61 for an aggregate purchase amount of $179.2
million. Treasury shares may be issued in connection with employee stock
incentives or for other corporate purposes. On October 22, 1998 the Company
announced that the Board authorized a third share repurchase program for up to
2,450,000 shares.
7
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
5. Supplemental Cash Flow Information
Nine Months Ended
------------------------------------
Oct. 3, 1998 Sept. 27, 1997
----------------- ----------------
Cash paid for income taxes $31.8 $10.8
Cash paid for interest $ 2.4 $ 1.5
8
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and notes thereto appearing
elsewhere in this report.
General
Footstar, Inc. (the "Company") became an independent company after the Board of
Directors of Melville Corporation ("Melville") approved the spin-off of its
footwear operations. The spin-off was completed with the distribution (the
"Distribution") on October 12, 1996 to the Melville shareholders of record on
October 2, 1996 of all the shares of the Company.
Three Months Ended
-------------------------
Oct. 3, Sept. 27,
($ in millions) 1998 1997
-------- ---------
Company:
Net Sales $ 472.6 $ 464.0
Net sales % change from prior year 1.9% 7.2%
Same store sales % change 0.4% 0.6%
Meldisco:
Net Sales $ 288.3 $ 293.2
Net sales % change from prior year (1.7%) 2.7%
Same store sales % change (0.8%) 3.1%
% of consolidated net sales 61.0% 63.2%
Footaction:
Net Sales $ 184.3 $ 170.8
Net sales % change from prior year 7.9% 16.0%
Same store sales % change 2.7% (4.6%)
% of consolidated net sales 39.0% 36.8%
Consolidated net sales for the third quarter ended October 3, 1998, were $472.6
million, an increase of 1.9% from net sales of $464.0 million for the same
period of 1997. Same store sales for the three month period increased 0.4%
compared to the third quarter in 1997. This increase in sales resulted in part
from a successful back-to-school selling season. Footaction posted a 7.9% sales
increase over the prior year driven by the continued success of sales of Men's
running shoes, an 18.4% increase in average square footage, including an
increase in store count of 28 for a total of 563 stores. Meldisco ended the
quarter with a 1.7% decrease in sales and a 0.8% decline in same store sales due
in part to the negative impact of Hurricane Georges and a disappointing
performance in sales of children's shoes.
9
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Nine Months Ended
-------------------------
Oct. 3, Sept. 27,
($ in millions) 1998 1997
-------- ---------
Company:
Net Sales $1,336.1 $1,266.9
Net sales % change from prior year 5.5% 6.6%
Same store sales % change 1.3% 0.9%
Meldisco:
Net Sales $ 841.2 $ 834.1
Net sales % change from prior year 0.9% 1.6%
Same store sales % change (0.1%) 1.6%
% of consolidated net sales 63.0% 65.8%
Footaction:
Net Sales $ 494.9 $ 432.8
Net sales % change from prior year 14.3% 17.7%
Same store sales % change 4.0% (0.9%)
% of consolidated net sales 37.0% 34.2%
Net sales for the nine months ended October 3, 1998 were $1336.1 million, an
increase of 5.5% from net sales of $1266.9 million for the 1997 comparable
period, while same store sales for the nine months increased by 1.3%. Footaction
posted a 14.3% sales increase over the prior year and a 4.0% increase in
comparable store sales. Meldisco showed a 0.9% sales increase and a 0.1%
decrease in same store sales over last year's comparable nine month period.
10
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Cost of Sales and Expenses
Three Months Ended
-------------------------
Oct. 3, Sept. 27,
(As a percent of net sales) 1998 1997
---------- -----------
Cost of sales 69.1% 69.4%
Store operating, selling, general and
administrative expenses 20.7% 20.8%
Depreciation and amortization 1.9% 1.7%
Nine Months Ended
-------------------------
Oct. 3, Sept. 27,
(As a percent of net sales) 1998 1997
---------- -----------
Cost of sales 69.3% 69.6%
Store operating, selling, general and
administrative expenses 21.8% 21.9%
Depreciation and amortization 1.9% 1.9%
Cost of Sales
Cost of sales for the third quarter of 1998, as a percent of net sales,
decreased 30 basis points from the corresponding prior-year period. Meldisco, as
a percent of sales, experienced higher gross margin in the third quarter of 1998
than in the same 1997 period due to higher markup , better buying, lower inbound
freight costs, and lower markdowns, as sales of regular-priced items continued
to represent a higher portion of the total mix. Footaction's gross margin, as a
percent of sales, decreased due to a more promotional environment, and reverse
leverage of occupancy costs due to low sales productivity of the new and
remodeled space.
Cost of sales for the nine months ended October 3, 1998, as a percent of net
sales, also decreased 30 basis points from the comparable 1997 period. This
decrease was due to the improved Meldisco margin which was offset in part by
increased markdowns and higher occupancy costs at Footaction.
11
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Store Operating, Selling, General and Administrative Expenses
Store operating, selling, general and administrative expenses ("SG&A"), as a
percent of sales, for the third quarter and nine months ended October 3, 1998
were 10 basis points lower than total SG&A for the comparable periods in 1997.
Meldisco's SG&A decreased during both periods mainly due to a decrease in sales
promotion expense. Footaction's expenses also decreased in both periods due to
improved selling costs and tight management of other expenses. These reductions
were partially offset by higher corporate expenses.
Operating Profit
Three Months Ended
---------------------------------------------
($ in millions) October 3, 1998 September 27, 1997
------------------- ----------------------
Meldisco $23.3 8.1% $21.3 7.3%
Footaction 17.5 9.5% 18.2 10.7%
Corporate overhead (2.0) -- (2.0) --
----- -----
Total $38.8 8.2% $37.5 8.1%
===== =====
Nine Months Ended
---------------------------------------------
($ in millions) October 3, 1998 September 27, 1997
------------------- ----------------------
Meldisco $65.8 7.8% $56.2 6.7%
Footaction 34.4 7.0% 34.6 8.0%
Corporate overhead (6.4) -- (6.3) --
----- -----
Total $93.8 7.0% $84.5 6.7%
===== =====
* percentages represent percent of net sales of the respective entities.
Operating profit for the third quarter and nine month periods ended October 3,
1998 increased 3.5% and 11.0%, respectively, over the same periods of 1997. This
improvement was attributable to the Company's increased sales and improved gross
margin, coupled with its ability to leverage fixed costs.
12
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Liquidity and Financial Condition
Current assets at October 3, 1998 were lower than the comparable assets as of
January 3, 1998 due to a lower cash balance, offset in part by higher
inventories required to support the growth of the Footaction business, increased
prepaid expenses and other current assets. At October 3, 1998, the Company's
cash balance was $9.3 million, representing a significant reduction from the
year-end cash balance of $152.2 million. This reduction was due in part to the
Company's execution of its stock repurchase program which, for the nine month
period, represented $112.9 million of cash disbursements. During the third
quarter ended October 3, 1998, the Company did not purchase any of its own
stock. On October 22, 1998 the Company announced that the Board authorized a
third share repurchase program for up to 2,450,000 shares.
The increase in current liabilities at October 3, 1998 compared to January 3,
1998 was due to an increase in notes payable along with a slight increase in
accrued expenses, partially offset by a reduction in accounts payable. As of
October 3, 1998, the Company had $41.7 million in unsecured borrowings,
classified as notes payable. The Company has a $300 million unsecured revolving
credit facility (the "Credit Facility"). The Credit Facility contains various
operating covenants which, among other things, impose certain limitations on the
Company's ability to incur liens, incur indebtedness, merge, consolidate or
declare and make dividend payments. Under the Credit Facility, the Company is
required to comply with financial covenants relating to ratios of cash flow and
fixed charge coverage. The Company is in compliance with these covenants.
The Company's businesses are seasonal in nature. Peak selling periods coincide
with Christmas, the Easter holiday and the back-to-school selling seasons.
Working capital requirements vary with seasonal business volume and inventory
buildups occurring prior to the peak periods. The Company expects that its
current cash, together with cash generated from operations and borrowings, will
be adequate to fund its expected operating expenses, working capital needs,
capital expenditures, and projected growth and expansion plans for the
foreseeable future. The Company believes that its current borrowing capacity is
sufficient to take advantage of growth and investment opportunities.
The Company expects that it will retain all available funds for the operation
and expansion of its business, and to fund future share repurchases and does not
anticipate paying any cash dividends to shareholders in the foreseeable future.
Under its arrangement with Kmart, Meldisco will distribute annually to Kmart, a
portion of profits representing Kmart's minority interest in the Meldisco
Subsidiaries.
Capital expenditures for the nine months ended October 3, 1998 were $51.0
million and were in line with the full year capital expenditure plan of
approximately $65.0 million. These expenditures related primarily to the
opening, remodeling, relocation or expansion of Footaction stores, investments
in strategic management information systems and equipment for the Company's
distribution network.
13
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The Company has completed the conversion of certain functions to a Shared
Services' Center in the third quarter of 1998. The new center currently supports
the Company's two existing businesses providing shared back office support
functions, including Accounts Payable, Store Accounting, Inventory Management,
Asset Protection, Payroll Services and certain Systems' functions. The shared
environment creates increased efficiency with capacity for future growth. The
new facility is located in Dallas, Texas.
The Company has completed the consolidation of its distribution functions for
the two businesses, Meldisco and Footaction, in its existing state-of-the-art
distribution center located in Gaffney, South Carolina. Footaction's
distribution center, located in Dallas, Texas, has been closed.
Year 2000 Update
General
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. The Company has undertaken various initiatives intended to ensure
that its computer equipment and software will function properly with respect to
dates in the Year 2000 and thereafter. For this purpose, the term "computer
equipment and software" includes systems that are commonly thought of as
information technology ("IT") systems, including hardware, accounting, data
processing, and telephone/PBX systems, cash registers, hand-held terminals,
scanning equipment, and other miscellaneous systems, as well as systems that are
not commonly thought of as IT systems, such as alarm systems, fax machines,
elevators, sprinkler systems, material handling equipment and heating,
ventilating and air-conditioning systems. Both IT and non-IT systems may contain
embedded technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts.
Project
Overall, the Company's Year 2000 Project ("Project") is proceeding on schedule
toward its goal of remediating the Year 2000 issue as it applies to the Company
without a material business impact. The Project is divided into three major
sections --Infrastructure and Facilities; Applications Software; and Third-Party
Suppliers, Trading Partners and Vendors ("Third Parties"). The compliance was
performed or is expected to be performed by a combination of Company associates
and consultants. The general phases common to all sections are inventory,
prioritization and assessment; remediation and replacement; testing; and
contingency planning.
14
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
At October 3, 1998, the inventory, prioritization and assessment phase of each
section of the Project had been substantially completed. The remediation and
replacement phase of each section of the Project is ongoing. Material items are
those believed by the Company to have a risk involving the safety of
individuals, or that may cause damage to property or affect business operations
and/or revenues. The testing phase of the Project is being performed by the
Company. None of the Company's other IT projects have been delayed due to the
Project.
The Applications Software section includes both the conversion of applications
software that is not Year 2000 compliant and, where available from the supplier,
the replacement of such software. The Company utilizes commercially available
packaged software to support the majority of its application needs. A large
majority of such packages have been represented by the respective vendors as
Year 2000 compliant. Initial testing has to date confirmed this. Remaining
business software programs not addressed by such commercially available packaged
software have been inventoried, prioritized and assessed for Year 2000
compliance. Remediation of such software programs, where required, is ongoing
and scheduled for completion by the end of 1998. During the first and second
quarters of 1999 full integration testing is currently scheduled to be performed
to confirm full remediation of Application Software. Contingency planning, as
necessary, for this section is scheduled to begin in the first quarter of 1999.
The Infrastructure and Facilities section consists of computer equipment and
software other than Applications Software and facilities operated by the
Company. The majority of computer equipment and software other than Applications
Software has been recently remediated by utilizing hardware and software
represented as Year 2000 compliant by the respective vendors. Initial testing
has to date confirmed this. The remainder of the Infrastructure has been
inventoried, prioritized and assessed and remediation efforts are ongoing and
currently scheduled for completion by the end of the first quarter 1999. The
testing phase is ongoing as computer equipment and software other than
Applications Software is remediated, upgraded or replaced. All material
Infrastructure and Facility activities are expected to be completed by the end
of the second quarter of 1999. This section also includes non-IT systems that
are used in the operation of facilities operated by the Company. Integration
testing to confirm Year 2000 compliance is scheduled to be completed by the end
of the second quarter of 1999. Contingency planning for this section, if
necessary, is scheduled to begin in the second quarter 1999.
The Third Parties section includes the process of identifying and prioritizing
material suppliers, trading partners and vendors and communicating with them
about their plans and progress in addressing the Year 2000 problem.
Correspondence regarding the Year 2000 issue has been sent to all material
suppliers, trading partners and vendors. The Company has been told by a large
majority of material suppliers, trading partners and vendors that they expect to
be Year 2000 compliant prior to the creation of material issues. The Company
plans to conduct certain follow-up inquiries of such material suppliers, trading
partners and vendors during the fourth quarter of 1998. Depending on the results
of such follow-up, the Company is scheduled to develop contingency plans during
the first quarter of 1999. If necessary, the Company intends to implement
contingency plans during the second and third quarters of 1999.
15
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Costs
The total cost associated with required steps to become Year 2000 compliant is
not expected to be material to the Company's financial position. The estimated
total cost of the Year 2000 Project is approximately $1.0 million. Current year
expenditures are estimated to be $700,000 of which approximately $250,000 was
expensed through October 3, 1998. The cost of completing the Year 2000 Project
is estimated to be approximately $300,000. Funds for the Project are provided
from existing operating budgets.
Risks
Although the Company anticipates minimal business disruption will occur as a
result of the Year 2000 issue, the Year 2000 issue is unique and the failure to
correct a material Year 2000 issue could result in an interruption in, or a
failure of, certain normal business activities or operations, such as loss of
communication links with store locations, loss of electric power, inability to
process transactions and send purchase orders and disruption of the distribution
channel. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. In addition, the
Company's Kmart relationship is significant to the Company and the failure of
Kmart to be Year 2000 compliant could have a material adverse effect on the
Company. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of Third
Parties, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Year 2000 Project
is expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of its material Third Parties. The Company believes that, with the
implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosures under the
heading "Forward Looking Statements" on the next page.
16
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Forward-Looking Statements
This Report on Form 10-Q contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in this Report as well as
the documents incorporated by reference and can be identified by the use of
forward-looking terminology such as "believe," "expect," "estimate," "plans,"
"may," "will," "should" or "anticipates" or similar statements or the negative
thereof or other variations thereof. Such forward-looking statements include,
without limitation, statements made as to cost savings, capital expenditures,
future cash needs, improvements in infrastructure and operating efficiencies.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such risks
and uncertainties include, but are not limited to; uncertainties related to
consumer demand for footwear, warmer than expected weather, consumer acceptance
of the Company's merchandise mix, retail locations, product availability and the
effect of competitive products and pricing. Consequently, all of the
forward-looking statements made herein are qualified by these cautionary
statements, and there can be no assurance that the actual results, performance
or achievement will be realized. The information contained in this Report as
well as information contained under the caption "Risk Factors" in other Company
filings with the Securities and Exchange Commission, identifies important
factors that could cause such results, performance or achievements not to be
realized. The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date such statements
were made.
17
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REVIEW BY INDEPENDENT AUDITORS
The October 3, 1998 and September 27, 1997 consolidated condensed financial
statements included in this filing on Form 10-Q have been reviewed by KPMG Peat
Marwick LLP, independent auditors in accordance with established professional
standards and procedures for such a limited review.
The report of KPMG Peat Marwick LLP, commenting on their review, is included
herein as Part I - Exhibit 1.
18
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Part I - Exhibit 1
Independent Auditors' Review Report
The Board of Directors and Shareholders
Footstar, Inc.
We have reviewed the consolidated condensed balance sheet of Footstar, Inc. and
subsidiary companies as of October 3, 1998 and the related consolidated
condensed statements of operations for the three and nine-month periods ended
October 3, 1998 and September 27, 1997, respectively and cash flows for the
nine-month periods ended October 3, 1998 and September 27, 1997, respectively.
These consolidated condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with general accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Footstar, Inc. and subsidiary
companies as of January 3, 1998 and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 12, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of January 3, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/S/KPMG Peat Marwick LLP
New York, New York
October 20, 1998
19
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Part II. - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
a) EXHIBIT INDEX
Exhibit
-------
15 Accountants' Acknowledgment
27 Financial Data Schedule
b) Reports on Form 8-K - A report on Form 8-K was filed on October 23,
1998 announcing the Company's third quarter results and the Board's
authorization to repurchase up to 2,450,000 shares of the Company's
Common Stock, from time to time, in the open market.
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.
FOOTSTAR, INC.
By: /S/Carlos E. Alberini
-------------------------------
Carlos E. Alberini
Senior Vice President and
Chief Financial Officer
Date: November 16, 1998
20
Exhibit 15
Accountants' Acknowledgment
Footstar, Inc.
Mahwah, New Jersey
Board of Directors:
Re: Registration Statements Numbers 33-20731 and 33-30011 on Form S-8
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated October 22, 1998 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
/s/KPMG Peat Marwick LLP
New York, New York
November 16, 1998
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