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 July 3, 1999
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 July 3, 1999
----- ------------------------------
Common Stock, $.01 par value 21,412,568
<PAGE>
INDEX
Part I. - Financial Information Page No.
--------
Consolidated Condensed Statements of Operations -
Three and Six Months Ended July 3, 1999 and July 4, 1998 3
Consolidated Condensed Balance Sheets -
July 3, 1999 and January 2, 1999 4
Consolidated Condensed Statements of Cash Flows -
For Six Months Ended July 3, 1999 and July 4, 1998 5
Notes to Consolidated Condensed Financial Statements 6-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-19
Review by Independent Auditors 20
Exhibit 1 - Independent Auditors' Review Report 21
Part II. - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 22
Item 6 - Exhibits and Reports on Form 8-K 23
2
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
($ in millions, except per share data)
Three Months Ended Six Months Ended
------------------ ----------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 479.0 $ 462.6 $ 918.1 $ 863.5
Cost of sales 321.3 312.9 636.2 599.1
----- ----- ----- -----
Gross Profit 157.7 149.7 281.9 264.4
Store operating, selling, general and
administrative expenses 99.6 94.6 199.3 192.8
Depreciation and amortization 9.1 8.3 18.4 16.6
Restructuring and asset impairment
reversal -- -- (2.9) --
----- ----- ----- -----
Operating profit 49.0 46.8 67.1 55.0
Interest expense (income), net 0.9 0.6 1.2 (0.2)
----- ----- ----- -----
Income before income taxes and minority
interests 48.1 46.2 65.9 55.2
Provision for income taxes 15.0 14.6 20.7 17.6
----- ----- ----- -----
Income before minority interests 33.1 31.6 45.2 37.6
Minority interests in net income 14.6 14.2 18.2 14.9
----- ----- ----- -----
Net income $18.5 $17.4 $27.0 $22.7
===== ===== ===== =====
Weighted average shares outstanding:
Basic: 22.0 24.6 22.2 25.7
===== ===== ===== =====
Diluted: 22.4 25.1 22.5 26.0
===== ===== ===== =====
Earnings per share
Basic: $0.84 $0.71 $1.22 $0.89
===== ===== ===== =====
Diluted: $0.83 $0.69 $1.20 $0.87
===== ===== ===== =====
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except for share data)
July 3, January 2,
1999 1999
(Unaudited) (Audited)
----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 11.2 $ 49.1
Accounts receivable, net 46.0 52.0
Inventories 312.5 280.2
Prepaid expenses and other current assets 49.9 49.4
------- -------
Total current assets 419.6 430.7
Property and equipment, net 207.3 217.3
Goodwill, net 26.3 26.6
Deferred charges and other non-current assets 9.5 10.8
------- -------
Total assets $ 662.7 $ 685.4
======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 124.8 $ 112.3
Accrued expenses 129.6 143.8
Income taxes payable 7.0 12.7
Notes payable 36.7 --
------- -------
Total current liabilities 298.1 268.8
Other long-term liabilities 45.7 45.5
Minority interests in subsidiaries 47.8 67.8
------- -------
Total liabilities 391.6 382.1
------- -------
Shareholders' equity:
Common stock $.0l par value: 100,000,000
shares authorized, 30,620,668 and 30,591,575
shares issued 0.3 0.3
Additional paid-in capital 339.6 335.5
Accumulated other comprehensive income (0.2) (0.2)
Treasury stock: 9,208,100 and 7,068,825
shares at cost (262.8) (200.8)
Unearned compensation (6.7) (5.4)
Retained earnings 200.9 173.9
------- -------
Total shareholders' equity 271.1 303.3
------- -------
Total liabilities and shareholders' equity $ 662.7 $ 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)
Six Months Ended
---------------------------
July 3, 1999 July 4, 1998
------------ ------------
Net cash provided by (used in) operating
activities $ 33.7 $ (4.8)
------- --------
Cash flows used in investing activities:
Additions to property and equipment (8.5) (35.3)
------- --------
Cash flows from (used in) financing activities:
Dividends paid to minority interests (38.1) (36.3)
Treasury stock acquired (62.0) (112.9)
Net proceeds from notes payable 36.7 49.0
Other 0.3 --
------- --------
Net cash used in financing activities (63.1) (100.2)
------- --------
Net decrease in cash and cash equivalents (37.9) (140.3)
Cash and cash equivalents at beginning of period 49.1 152.2
------- --------
Cash and cash equivalents at end of period $ 11.2 $ 11.9
======= ========
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 July 3, 1999 and the results of operations for the three and
six-month periods ended July 3, 1999 and July 4, 1998 and cash flows for the six
months ended July 3, 1999 and July 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 the fiscal year ending January 1, 2000. SFAS No. 131 also requires
that public business enterprises report selected information about operating
segments in interim financial reports issued to shareholders.
Three Months Ended July 3, 1999
--------------------------------------------
Meldisco Footaction Corporate Total
--------------------------------------------
Net Sales $329.2 $149.8 -- $479.0
Operating Profit 44.8 6.1 (1.9) 49.0
Operating Profit before
restructuring reversal 44.8 6.1 (1.9) 49.0
Six Months Ended July 3, 1999
--------------------------------------------
Meldisco Footaction Corporate Total
--------------------------------------------
Net Sales $602.7 $315.4 -- $918.1
Operating Profit 53.4 16.6 (2.9) 67.1
Operating Profit before
restructuring reversal 53.4 15.1 (4.3) 64.2
6
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ 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 and six months ended July 3, 1999 and July 4,
1998 are as follows:
Three Months Ended Six Months Ended
--------------------- ---------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------- ------- ------- -------
Comprehensive Income:
Net income $18.5 $17.4 $27.0 $ 22.7
Other comprehensive (loss)
income - Foreign currency
adjustment (0.1) -- -- 0.2
===== ===== ===== ======
Comprehensive income $18.4 $17.4 $27.0 $ 22.9
===== ===== ===== ======
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -------------------------------
July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted EPS - Net Income $18.5 $17.4 $27.0 $22.7
========== ========== ========== ==========
Denominator:
Shares outstanding at beginning of period 22,102,048 25,248,307 23,522,750 27,872,207
Weighted average deferred compensation shares
earned not issued 178,628 -- 161,019 --
Weighted average shares repurchased (238,957) (643,252) (1,442,996) (2,206,778)
---------- ---------- ---------- ----------
Denominator for Basic EPS -Weighted average
common shares outstanding 22,041,719 24,605,055 22,240,773 25,665,429
---------- ---------- ---------- ----------
Dilutive effect of stock options 402,233 474,561 278,900 344,156
---------- ---------- ---------- ----------
Denominator for Diluted EPS- Adjusted weighted
average common shares outstanding 22,443,952 25,079,616 22,519,673 26,009,585
---------- ---------- ---------- ----------
Basic EPS $0.84 $0.71 $1.22 $0.89
========== ========== ========== ==========
Diluted EPS $0.83 $0.69 $1.20 $0.87
========== ========== ========== ==========
</TABLE>
8
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
5. Purchase of Treasury Stock
During the second quarter ended July 3, 1999, the Company purchased 708,100
shares of its stock in the open market at an average price of $38.14 per share
for an aggregate purchase amount of $27.0 million. The total shares purchased
year-to-date were 2,139,275 at an average price of $28.96 for an aggregate
purchase amount of $62.0 million. Since May 1997, when the first share
repurchase program was approved by the Company's Board, through July 3, 1999,
the Company has purchased a total of 9,208,100 shares at an average price of
$28.54 per share for an aggregate purchase amount of $262.8 million. Treasury
shares may be issued in connection with employee stock benefit plans or for
other corporate purposes.
6. Subsequent Event
On August 3, 1999, the Company announced an amendment to its $300 million
unsecured revolving credit facility which eases a certain restrictive covenant
that had limited its ability to repurchase stock. This amendment will give the
Company the flexibility to complete the current share repurchase program of
2,210,000 shares. As of the close of the second quarter, the Company had
repurchased 708,100 shares of its stock under this program for an aggregate
amount of $27.0 million.
7. Supplemental Cash Flow Information
Six Months Ended
---------------------------------
July 3, 1999 July 4, 1998
------------ ------------
Cash paid for income taxes $25.6 $19.7
Cash paid for interest $ 1.9 $ 1.6
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
-----------------------------
($ in millions) July 3, 1999 July 4, 1998
------------ ------------
Company:
Net Sales $479.0 $462.6
Net sales % change from prior year 3.5% 8.6%
Same store sales % change 1.6% 3.9%
Meldisco:
Net Sales $329.2 $316.6
Net sales % change from prior year 4.0% 4.9%
Same store sales % change 2.4% 4.4%
% of consolidated net sales 68.7% 68.4%
Footaction:
Net Sales $149.8 $146.0
Net sales % change from prior year 2.6% 17.4%
Same store sales % change 0.0% 2.7%
% of consolidated net sales 31.3% 31.6%
Consolidated net sales for the second quarter ended July 3, 1999, were $479.0
million, an increase of 3.5% from net sales of $462.6 million for the same
period of 1998. Same store sales for the three month period increased 1.6%
compared to the second quarter in 1998. Meldisco posted a 4.0% increase in sales
over last year driven by strong sales of branded footwear, including Thom McAn
and Cobbie Cuddlers. Footaction's sales increased 2.6% over last year. Gains in
Running and Basketball product were offset by lower sales of Jordan product and
apparel resulting in flat same store sales for the period.
10
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Six Months Ended
------------------------------
($ in millions) July 3, 1999 July 4, 1998
------------ ------------
Company:
Net Sales $918.1 $863.5
Net sales % change from prior year 6.3% 7.5%
Same store sales % change 4.0% 1.7%
Meldisco:
Net Sales $602.7 $552.9
Net sales % change from prior year 9.0% 2.2%
Same store sales % change 7.4% 0.3%
% of consolidated net sales 65.6% 64.0%
Footaction:
Net Sales $315.4 $310.6
Net sales % change from prior year 1.5% 18.5%
Same store sales % change (2.5%) 4.9%
% of consolidated net sales 34.4% 36.0%
Net sales for the six months ended July 3, 1999, were $918.1 million, an
increase of 6.3% from net sales of $863.5 million for the 1998 comparable
period, while same store sales for the six months increased by 4.0%. Meldisco
posted a 9.0% increase in sales over last year with increases across all
categories. Sales at Footaction increased over last year by 1.5%, driven by the
sale of running and basketball product.
11
<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
-------------------------------
(As a percent of net sales) July 3, 1999 July 4, 1998
------------ ------------
Cost of sales 67.1% 67.6%
Store operating, selling, general and
administrative expenses 20.8% 20.4%
Depreciation and amortization 1.9% 1.8%
Six Months Ended
-------------------------------
(As a percent of net sales) July 3, 1999 July 4, 1998
------------ ------------
Cost of sales 69.3% 69.4%
Store operating, selling, general and
administrative expenses 21.7% 22.3%
Depreciation and amortization 2.0% 1.9%
Cost of Sales
Cost of sales for the second quarter of 1999, as a percent of net sales,
decreased 50 basis points from the corresponding prior-year period. Meldisco
experienced higher gross margins, as a percent of sales, in the second quarter
of 1999 than in the same 1998 period due to higher initial markon and lower
markdowns. Footaction's gross margin, as a percent of sales, decreased due to
higher markdowns and increased occupancy expenses.
Cost of sales for the six months ended July 3, 1999, as a percent of net sales,
decreased by 10 basis points from the comparable 1998 period. This decrease was
due to the improved Meldisco margin partially offset by increased markdowns and
higher occupancy costs at Footaction.
Store Operating, Selling, General and Administrative Expenses
Store operating, selling, general and administrative expenses ("SG&A"), as a
percent of sales, for the second quarter ended July 3, 1999 were 40 basis points
higher than the comparable period of 1998. Meldisco's SG&A rate increased by 70
basis points during the quarter due to higher occupancy costs as a result of the
increased sales and higher sales promotion expenses. This increase was offset by
Footaction's 30 basis point decrease in the quarter due to lower selling
expenses.
12
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
SG&A expenses, as a percent of sales, for the six months ended July 3, 1999 were
60 basis points lower than the comparable 1998 period. Meldisco's SG&A rate
decreased by 50 basis points due to decreased selling expenses. Footaction's
SG&A rate decreased by 80 basis points due partly to lower sales promotion
expense.
Operating Profit
Three Months Ended
----------------------------------------------
($ in millions) July 3, 1999 July 4, 1998
------------------ ------------------
Meldisco (1) $44.8 13.6% $40.7 12.8%
Footaction (1) 6.1 4.1% 8.0 5.5%
Corporate overhead (1.9) -- (1.9) --
Restructuring and asset
impairment reversal -- -- -- --
----- -----
Total (1) $49.0 10.2% $46.8 10.1%
===== =====
note: (1) percentages represent percent of net sales of the respective entities
Six Months Ended
----------------------------------------------
($ in millions) July 3, 1999 July 4, 1998
------------------ ------------------
Meldisco (1) $53.4 8.9% $42.5 7.7%
Footaction (1) , (2) 15.1 4.8% 16.9 5.4%
Corporate overhead (2) (4.3) -- (4.4) --
Restructuring and asset
impairment reversal 2.9 -- -- --
----- -----
Total (1) $67.1 7.3% $55.0 6.4%
===== =====
note: (1) percentages represent percent of net sales of the respective entities.
(2) 1999 operating profit is presented before the restructuring reversal.
Operating profit for the second quarter ended July 3, 1999 increased 4.7% over
the same period of 1998. Footaction's operating profit decreased 23.8% from last
year; lower gross margins due to higher markdowns and increased occupancy costs
were only partially offset by a lower rate of selling, general and
administrative expenses. Meldisco's operating profit as a percent of net sales
13
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
for the quarter increased 80 basis points over a year ago. This increase was
predominantly driven by strong sales, a higher gross margin and tight expense
control. Operating profit for the six month period ended July 3, 1999, before
the reversal of restructuring charges, improved 90 basis points, which is an
increase of 16.7% from the same period in 1998. This improvement was
attributable to a 120 basis point improvement at Meldisco offset by a 60 basis
point decrease before the restructuring reversal at Footaction.
Liquidity and Financial Condition
The Company's financial position continues to be very strong. Inventories were
lower than a year ago, with Meldisco's quarter-end inventories down by 5.7% and
Footaction's down by 5.3%. Inventories at Footaction were also down on a square
foot basis at July 3, 1999.
As of July 3, 1999, the Company had $36.7 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. In April 1999, after the end of the first fiscal quarter, the
Company distributed $38.1 million representing Kmart's normal dividend for their
minority interest on net income for fiscal year 1998.
Capital expenditures for the six months ended July 3, 1999 were $8.5 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
14
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
systems. The Company estimates that for the full year 1999, capital expenditures
will not exceed $30 million.
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"). Virtually
all of the compliance was performed or is expected to be performed by Company
associates. The general
15
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
phases common to all sections are inventory; prioritization and assessment;
remediation and replacement; testing; and contingency planning.
As of July 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 had 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 the Company has substantially completed its integration testing. During the
third quarter of 1999, the Company will conduct further integration testing
jointly with certain material third parties. 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 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 are substantially completed and
are expected to be fully completed by approximately the end of the third 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 substantially completed and are
expected to be fully completed by approximately the end of the third quarter of
1999. This section also includes major non-IT systems that are used in the
operation of facilities operated by the Company. 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
16
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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. In
addition, Reebok, a vendor for Footaction had publicly stated that it was in the
process of replacing its legacy systems with a global information system
infrastructure developed by SAP partially to address Reebok's Year 2000 issues
and had also stated that there were substantial risks that problems could arise
in the implementation or that such system would not be fully effective by the
end of 1999. Subsequently, Reebok stated that it is postponing the
implementation of its new global information system infrastructure until the
year 2000 and instead will be addressing its Year 2000 issues by remediating its
existing legacy systems. If Reebok fails to be Year 2000 compliant the Company
does not believe it will have a material impact on the Company based on the
Company's current level of business with Reebok. However, the Company will
continue to monitor this situation and will work with Reebok, if necessary, to
develop contingency plans.
The Company has conducted certain follow-up inquiries of its 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 third and fourth quarters of
1999. The Company as part of its contingency planning is planning to take
delivery of certain merchandise in December, 1999 rather than January, 2000 as
originally planned. There is no guarantee that the Company will receive early
delivery of all such merchandise. 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 $1.5 million
excluding payroll costs of the Company's internal personnel. The total amount
expended on the Project through July 3, 1999 was $1.1 million of which $0.4
million was spent in 1999. All of these costs were expensed. The future costs
for completing the Year 2000 Project are estimated to be approximately $0.4
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.
17
<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
degree of automation, however, the Company does have concerns regarding
infrastructure in Asia such as electric power and telecommunications. Such
potential 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 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 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."
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
18
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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; unseasonable 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.
19
<PAGE>
REVIEW BY INDEPENDENT AUDITORS
The July 3, 1999 and July 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.
20
<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 July 3, 1999 and the related consolidated condensed
statements of operations for the three and six month periods ended July 3, 1999
and July 4, 1998, respectively and cash flows for the six-month periods ended
July 3, 1999 and July 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 generally 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
July 20, 1999
21
<PAGE>
Part II. - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 3, 1999. The
stockholders elected all of management's nominees for the Board of Directors to
serve until the Annual Meeting of Stockholders in 2002 and ratified the
appointment of KPMG LLP as the Corporation's auditors for fiscal 1999.
The voting results are as follows:
Election of Directors
Broker
For Withheld Non-Votes
---------------------------------------
Dr. George S. Day 16,230,072 3,520,302 --
Bettye Martin Musham 16,229,086 3,521,288 --
Kenneth S. Olshan 16,230,127 3,520,247 --
Ratification of Auditors
Broker
For Against Abstain Non-Votes
----------------------------------------------------
19,728,707 10,300 11,367 --
22
<PAGE>
Part II. - OTHER INFORMATION (continued)
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 - None
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: August 4, 1999
23
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 July 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
August 4, 1999
24
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