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 April 3, 1999
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Commission File Number 1-11681
FOOTSTAR, INC.
--------------
(Exact Name of Registrant as specified in its charter)
Delaware 22-3439443
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(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
933 MacArthur Boulevard, Mahwah, New Jersey 07430
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(Address of principal executive offices) (Zip Code)
(201) 934-2000
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(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 April 3, 1999
----- -------------------------------
Common Stock, $.01 par value 22,102,048
<PAGE>
INDEX
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Part I. - Financial Information Page No.
--------
Consolidated Condensed Statements of Operations -
Three Months Ended April 3, 1999 and April 4, 1998 3
Consolidated Condensed Balance Sheets -
April 3, 1999 and January 2, 1999 4
Consolidated Condensed Statements of Cash Flows -
For Three Months Ended April 3, 1999 and April 4, 1998 5
Notes to Consolidated Condensed Financial Statements 6-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
Review by Independent Auditors 18
Exhibit 1 - Independent Auditors' Review Report 19
Part II. - Other Information
Item 6 - Exhibits and Reports on Form 8-K 20
2
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
($ in millions, except per share data)
Three Months Ended
-----------------------------------
April 3, 1999 April 4, 1998
---------------- --------------
Net sales $ 439.1 $ 400.9
Cost of sales 314.9 286.3
-------- --------
Gross profit 124.2 114.6
Store operating, selling,
general and administrative
expenses 99.6 98.1
Depreciation and amortization 9.4 8.3
Restructuring and asset
impairment reversal (2.9) --
-------- --------
Operating profit 18.1 8.2
Interest (expense) income, net (0.3) 0.8
-------- --------
Income before income taxes
and minority interests 17.8 9.0
Provision for income taxes 5.7 3.0
-------- --------
Income before minority interests 12.1 6.0
Minority interests in net income 3.6 0.7
-------- --------
Net income $ 8.5 $ 5.3
======== ========
Weighted average shares outstanding:
Basic: 22.5 26.7
======== ========
Diluted: 22.6 26.9
======== ========
Earnings per share
Basic: $ 0.38 $ 0.20
======== ========
Diluted: $ 0.38 $ 0.20
======== ========
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)
April 3, January 2,
1999 1999
(Unaudited) (Audited)
----------- ----------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 12.7 $ 49.1
Accounts receivable, net 60.5 52.0
Inventories 313.0 280.2
Prepaid expenses and other
current assets 50.6 49.4
-------- --------
Total current assets 436.8 430.7
Property and equipment, net 211.4 217.3
Goodwill, net 26.5 26.6
Deferred charges and other
non-current assets 11.0 10.8
-------- --------
Total assets $ 685.7 $ 685.4
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 111.7 $ 112.3
Accrued expenses 135.1 143.8
Income taxes payable 12.1 12.7
Notes payable 30.0 --
-------- --------
Total current liabilities 288.9 268.8
Other long-term liabilities 46.8 45.5
Minority interests in subsidiaries 71.4 67.8
-------- --------
Total liabilities 407.1 382.1
-------- --------
Shareholders' equity:
Common stock $.0l par value:
100,000,000
shares authorized, 30,602,048 and
30,591,575 shares issued 0.3 0.3
Additional paid-in capital 338.9 335.5
Accumulated other comprehensive income (0.1) (0.2)
Treasury stock: 8,500,000 and
7,068,825 shares at cost (235.8) (200.8)
Unearned compensation (7.0) (5.4)
Retained earnings 182.3 173.9
-------- --------
Total shareholders' equity 278.6 303.3
-------- --------
Total liabilities and shareholders'
equity $ 685.7 $ 685.4
======== ========
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Three Months Ended
-----------------------------------
April 3, 1999 April 4, 1998
------------- -------------
Net cash used in operating activities $ (28.3) $ (24.8)
--------- --------
Cash flows used in investing activities:
Additions to property and equipment (3.5) (18.4)
--------- --------
Cash flows from (used in) financing
activities:
Treasury stock acquired (35.0) (83.7)
Proceeds from notes payable 1,529.7 --
Payments of notes payable (1,499.7) --
Other 0.4 1.3
--------- --------
Net cash used in financing activities (4.6) (82.4)
--------- --------
Net decrease in cash and cash equivalents (36.4) (125.6)
Cash and cash equivalents at beginning
of period 49.1 152.2
--------- --------
Cash and cash equivalents at end of period $ 12.7 $ 26.6
========= ========
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 April 3, 1999 and the results of operations for the three-month
period ended April 3, 1999 and April 4, 1998 and cash flows for the three months
ended April 3, 1999 and April 4, 1998. 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 1998 Annual Report on Form 10-K.
2. Accounting Pronouncements
The Company has implemented Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131") for fiscal year end 1999. SFAS No. 131 also requires that public business
enterprises report selected information also operating segments in interim
financial reports issued to shareholders.
Three Months Ended April 3, 1999
-----------------------------------------------------------
($ in millions) Meldisco Footaction Corporate Total
-----------------------------------------------------------
Net Sales $273.5 $165.6 -- $439.1
Operating Profit 8.6 10.5 (1.0) 18.1
6
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
3. Comprehensive Income
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 months ended April 3, 1999 and April 4, 1998
are as follows:
Three Months Ended
----------------------------------------
April 3, 1999 April 4, 1998
------------------- -----------------
Comprehensive Income:
Net income $8.5 $5.3
Other comprehensive income -
Foreign currency adjustment 0.1 0.2
=================== =================
Comprehensive income $8.6 $5.5
=================== =================
7
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
4. Earnings per Share
The table below shows calculated earnings per share in accordance with
SFAS No. 128.
Three Months Three Months
Ended April 3, Ended April 4,
1999 1998
-------------- --------------
Basic EPS Computation
Numerator:
Net Income $ 8.5 $ 5.3
=========== ===========
Denominator:
Shares outstanding at beginning of year 23,522,750 27,872,207
Deferred compensation shares earned
not issued 172,669 --
Weighted average shares repurchased (1,226,331) (1,146,405)
----------- -----------
Weighted average common shares
outstanding 22,469,088 26,725,802
=========== ===========
Basic EPS
$ 0.38 $ 0.20
=========== ===========
Diluted EPS computation
Numerator:
Net Income $ 8.5 $ 5.3
=========== ===========
Denominator:
Shares outstanding at beginning of year 23,522,750 27,872,207
Deferred compensation shares earned
not issued 172,669 --
Weighted average shares repurchased (1,226,331) (1,146,405)
----------- -----------
Weighted average common shares
outstanding 22,469,088 26,725,802
Dilutive effect of stock options 128,525 190,565
----------- -----------
Total shares 22,597,613 26,916,367
=========== ===========
Diluted EPS $ 0.38 $ 0.20
=========== ===========
8
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
5. Purchase of Treasury Stock
During the first quarter, ended April 3, 1999, the Company purchased 1,431,175
shares of its stock in the open market at an average price of $24.42 for an
aggregate purchase amount of $35.0 million, to complete the Company's third
share repurchase program, announced in the fourth quarter of 1998. Since the
inception of the share repurchase programs in May 1997 through April 3, 1999,
the Company has purchased a total of 8,500,000 shares at an average price of
$27.74 for an aggregate purchase amount of $235.8 million. Treasury shares may
be issued in connection with employee stock benefit plans or for other corporate
purposes.
6. Restructure Reversal
In the first quarter of 1999 the Company reversed $2.9 million ($1.8 million
after taxes) of the reserve created to consolidate its logistics networks and
centralize certain accounting functions. The original reserve totaled $15.7
million ($9.9 million after taxes) with $1.1 million remaining in the reserve as
of April 3, 1999.
7. Subsequent Event
On May 4, 1999 the Company announced that their Board of Directors authorized a
fourth share repurchase program for up to 2,210,000 shares. Due to restrictive
loan covenants, the Company is only able to execute approximately half of this
program at current market prices, without first amending or refinancing its
existing credit facility. However, both options are currently being evaluated.
8. Supplemental Cash Flow Information
Three Months Ended
-------------------------------------
April 3, 1999 April 4, 1998
---------------- ------------------
Cash paid for income taxes $6.2 $8.9
Cash paid for interest $0.3 $0.1
9
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and notes thereto appearing
elsewhere in this report.
General
Footstar, Inc. (the "Company") became an independent company after the Board of
Directors of Melville Corporation ("Melville") approved the spin-off of its
footwear operations. The spin-off was completed with the distribution (the
"Distribution") on October 12, 1996 to the Melville shareholders of record on
October 2, 1996 of all the shares of the Company.
Three Months Ended
---------------------------
April 3, April 4,
($ in millions) 1999 1998
------------- ------------
Company:
Net Sales $439.1 $400.9
Net sales % change from prior year 9.5% 6.4%
Same store sales % change 6.7% (0.7%)
Meldisco:
Net Sales $273.5 $236.3
Net sales % change from prior year 15.7% (1.2%)
Same store sales % change 14.3% (4.6%)
% of consolidated net sales 62.3% 59.0%
Footaction:
Net Sales $165.6 $164.6
Net sales % change from prior year 0.6% 19.6%
Same store sales % change (4.7%) 6.9%
% of consolidated net sales 37.7% 41.0%
Consolidated net sales for the first quarter ended April 3, 1999, were $439.1
million, an increase of 9.5% from net sales of $400.9 million for the same
period of 1998. Same store sales for the three month period increased 6.7%
compared to the first quarter in 1998. Both divisions benefited from a shift in
the calendar with Easter week falling in the first quarter selling period as
opposed to last year when it fell in the second quarter. Meldisco posted a 15.7%
increase in sales over last year, achieving increases across all categories,
particularly sales of Women's product. Footaction's sales increased 0.6%
10
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
over last year driven mainly by sales of promotional items. Sales of product
made exclusively for Footaction, as well as sales of new launch product in both
the basketball and cross-training categories were encouraging.
Cost of Sales and Expenses
Three Months Ended
-----------------------------------
(As a percent of net sales) April 3, 1999 April 4, 1998
--------------- ---------------
Cost of sales 71.7% 71.4%
Store operating, selling, general and
administrative expenses 22.7% 24.5%
Depreciation and amortization 2.1% 2.1%
Cost of Sales
Cost of sales for the first quarter of 1999, as a percent of net sales,
increased 30 basis points from the corresponding prior-year period. Meldisco
experienced slight decreases in cost of sales this quarter. Footaction's cost of
sales, as a percent of sales, increased slightly, primarily due to the under
absorption of occupancy expenses, as a result of negative comparable store sales
and performance at new stores.
Store Operating, Selling, General and Administrative Expenses
Store operating, selling, general and administrative expenses ("SG&A"), as a
percent of sales, for the first quarter ended April 3, 1999 decreased 180 basis
points as compared to the same prior year period. The SG&A rate was down
significantly in both divisions reflecting effective expense control of
discretionary spending at the store level. This resulted in improved leverage of
fixed expenses on higher sales volume.
11
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Operating Profit
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
($ in millions) April 3, 1999 April 4, 1998
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Meldisco $ 8.6 3.1% $ 1.8 0.8%
Footaction (2) 9.0 5.4% 8.9 5.4%
Corporate overhead(2) (2.4) -- (2.5) --
Restructuring and asset 2.9 -- -- --
impairment reversal ======= =======
Total $ 18.1 4.1% $ 8.2 2.0%
======= =======
</TABLE>
note: (1) percentages represent percent of net sales of the respective entities.
(2) 1999 operating profit is presented before the restructuring
reversal.
Operating profit, before the reversal of restructuring charges, for the first
quarter period ended April 3, 1999, increased 85.4% over the same period of
1998. Footaction's operating profit before the reversal of restructuring
charges, was flat to last year, as lower gross margins due to higher occupancy
costs were offset by a lower rate of selling, general and administrative
expenses. Meldisco's operating profit as a percent of net sales for the quarter
increased 230 basis points over a year ago. This increase was predominantly
driven by strong sales and tight expense control.
Liquidity and Financial Condition
The Company's financial position continues to be very strong. Accounts
receivable increased over the comparable period a year ago due to the shift in
the Easter holiday from the second quarter last year to the first quarter this
year. Inventories were slightly lower than a year ago, with Meldisco's
quarter-end inventories down by 9.6% and Footaction's up by 11.3% to support its
square footage growth. Inventories at Footaction were slightly down on a square
foot basis at April 3, 1999.
As of April 3, 1999, the Company had $30.0 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.
12
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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. In April 1999, after the end of the fiscal quarter, the Company
distributed $38.0 million representing Kmart's normal dividend for their
minority interest on net income for fiscal year 1998.
Capital expenditures for the three months ended April 3, 1999 were $3.5 million
and were in line with the full year capital expenditure plan of approximately
$30 million. These expenditures related primarily to the opening, remodeling,
relocation or expansion of Footaction stores, investments in strategic
management information systems and equipment for our distribution systems.
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
13
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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"). Virtually
all of the compliance was performed or is expected to be performed by Company
associates. The general phases common to all sections are inventory;
prioritization and assessment; remediation and replacement; testing; and
contingency planning.
As of April 3, 1999, the inventory, prioritization and assessment phase of each
section of the Project had been substantially completed for all material items.
The remediation and replacement phase of each section of the Project has also
been substantially completed for all material items. Material items are those
believed by the Company to have a significant 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 in 1999. 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 completed
and is currently undergoing integration testing. Such integration testing is
scheduled to be completed by approximately the end of the second quarter of
1999. Contingency planning for this section, as necessary, is ongoing.
The Infrastructure and Facilities section consists of major computer equipment
and software other than Applications Software and facilities operated by the
Company. The majority of such computer equipment and software other than
Applications Software has been recently remediated by utilizing hardware and
software represented as Year 2000
14
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
compliant by the respective vendors. Initial testing has to date confirmed this.
The remainder of the major Infrastructure has been inventoried, prioritized and
assessed and remediation efforts are ongoing and currently scheduled for
completion by approximately the end of the second quarter of 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 approximately the end of the
second quarter of 1999. This section also includes major 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 approximately
the end of the second quarter of 1999. Contingency planning for this section has
begun and will continue as required.
The Third Parties section includes the process of identifying and prioritizing
major 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 such material suppliers,
trading partners and vendors that they expect to be Year 2000 compliant prior to
the creation of material issues. However, Nike, a significant vendor for our
Footaction division, has publicly stated that a substantial number of their
significant suppliers and customers have not responded to Nike's surveys or have
not provided assurance of their Year 2000 readiness or have not responded with
sufficient detail for Nike to determine their Year 2000 readiness. The Company
will monitor this situation and will work with Nike, if necessary, to develop
contingency plans. The Company has conducted certain follow-up inquiries of such
major suppliers, trading partners and vendors. The Company has begun to develop
initial contingency plans and will continue as necessary. If necessary, the
Company intends to implement contingency plans during the second, third and
fourth quarters of 1999. The Company as part of its contingency planning has
begun looking at the possibility of taking delivery of certain merchandise in
December, 1999 rather than January, 2000 as originally planned. With respect to
the Company's Meldisco division, the Company believes that such division's
suppliers have adequate capacity in a majority of situations to address such
early delivery. With respect to the Company's Footaction division, the Company
believes that there may be capacity issues with certain of such division's
suppliers which may limit such division's ability to take delivery of certain
merchandise early, which issues could impact the viability of such a plan with
respect to such suppliers.
Costs
The total cost associated with the 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 $1.2 million
excluding payroll costs of the Company's internal personnel. The total amount
expended on the Project through April 3, 1999 was $0.9 million of which $0.2
million was spent in 1999. All of these costs were expensed. The future cost of
completing the Year 2000 Project is estimated to be approximately $0.3 million
excluding any costs for contingency plans and any costs if third parties
experience Year 2000 problems. Funds for the Project are provided from existing
operating budgets.
15
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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, inability to interact with
providers of banking and other services and disruption of the supply of product
and distribution channel (including, but not limited to ports, transportation
vendors and U.S. Customs). A majority of the Company's products are sourced from
Asia. From the Company's investigation and other third party sources, including
key vendor disclosures, the Company believes that the factories which produce
the Company's products have limited Year 2000 exposure because of the limited
amount of automation, however, the Company does have concerns regarding
infrastructure in Asia such as electric power and telecommunications. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. In addition, the Company's Kmart
and Nike relationships are significant to the Company and the failure of Kmart
or Nike to be Year 2000 compliant or to have Year 2000 issues could have a
material adverse effect on the Company. The Company's Meldisco division is
dependent on Kmart's system and in-store environment and disruptions in either
or both could have a material adverse affect 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 what the consequences of Year 2000 failures will be
and therefore whether they will have a material impact on the Company's results
of operations, liquidity or financial condition.
The Year 2000 Project is intended 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."
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," "anticipates" or similar statements or the negative
thereof or other variations. Such forward-looking statements include, without
limitation, statements relating to cost savings, capital expenditures, future
cash needs, improvements in infrastructure, Year 2000 matters 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, internal and external, Year 2000 risks
and uncertainties, 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 including information under
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations," 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 achievement 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
<PAGE>
REVIEW BY INDEPENDENT AUDITORS
The April 3, 1999 and April 4, 1998 consolidated condensed financial statements
included in this filing on Form 10-Q have been reviewed by KPMG LLP, independent
auditors in accordance with established professional standards and procedures
for such a limited review.
The report of KPMG LLP, commenting on their review, is included herein as Part I
- - Exhibit 1.
18
<PAGE>
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 April 3, 1999 and the related consolidated condensed
statements of operations for the three month periods ended April 3, 1999 and
April 4, 1998, respectively and cash flows for the three-month periods ended
April 3, 1999 and April 4, 1998, 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 2, 1999 and the related consolidated statements of
operations, shareholders' equity and comprehensive income, and cash flows for
the year then ended (not presented herein); and in our report dated February 8,
1999, 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 2, 1999, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from which
it has been derived.
/S/KPMG LLP
Short Hills, New Jersey
April 20, 1999
19
<PAGE>
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 January 7, 1999
announcing the Company's year end results and the 1998 restructuring
plan.
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: May 12, 1999
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 April 20, 1999 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 LLP
Short Hills, New Jersey
May 12, 1999
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