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 2, 1999
---------------
Commission File Number 1-11681
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FOOTSTAR, INC.
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(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 October 2, 1999
----- ---------------------------------
Common Stock, $.01 par value 20,838,548
<PAGE>
INDEX
Part I. - Financial Information Page No.
--------
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended October 2, 1999 and October 3, 1998 3
Consolidated Condensed Balance Sheets -
October 2, 1999 and January 2, 1999 4
Consolidated Condensed Statements of Cash Flows -
For Nine Months Ended October 2, 1999 and October 3, 1998 5
Notes to Consolidated Condensed Financial Statements 6-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
Review by Independent Auditors 19
Exhibit 1 - Independent Auditors' Review Report 20
Part II. - Other Information
Item 6 - Exhibits and Reports on Form 8-K 21
2
<PAGE>
<TABLE>
<CAPTION>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
($ in millions, except per share data)
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $470.3 $472.6 $1,388.3 $1,336.1
Cost of sales 322.4 326.7 958.5 925.8
------ ------ -------- --------
Gross profit 147.9 145.9 429.8 410.3
Store operating, selling, general and
administrative expenses 100.5 97.9 299.7 290.7
Depreciation and amortization 8.6 9.2 27.1 25.8
Restructuring and asset impairment reversal -- -- (2.9) --
------ ------ -------- --------
Operating profit 38.8 38.8 105.9 93.8
Interest expense, net 0.4 0.4 1.6 0.2
------ ------ -------- --------
Income before income taxes and minority
interests 38.4 38.4 104.3 93.6
Provision for income taxes 12.0 12.2 32.7 29.9
------ ------ -------- --------
Income before minority interests 26.4 26.2 71.6 63.7
Minority interests in net income 8.4 7.8 26.6 22.6
------ ------ -------- --------
Net income $18.0 $ 18.4 45.0 $ 41.1
====== ====== ======== ========
Weighted average shares outstanding:
Basic: 21.3 24.5 21.9 25.3
====== ====== ======== ========
Diluted: 21.7 24.8 22.3 25.6
====== ====== ======== ========
Earnings per share
Basic: $0.85 $ 0.75 $2.05 $ 1.63
====== ====== ======== ========
Diluted: $0.83 $ 0.74 $2.02 $ 1.60
====== ====== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except for share data)
October 2, January 2,
1999 1999
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 10.0 $ 49.1
Accounts receivable, net 40.6 52.0
Inventories 314.9 280.2
Prepaid expenses and other current assets 50.1 49.4
-------- --------
Total current assets 415.6 430.7
Property and equipment, net 205.4 217.3
Goodwill, net 26.1 26.6
Deferred charges and other non-current assets 8.4 10.8
======== ========
Total assets $ 655.5 $ 685.4
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 101.4 $ 112.3
Accrued expenses 130.6 143.8
Income taxes payable 14.2 12.7
Notes payable 41.9 --
-------- --------
Total current liabilities 288.1 268.8
Other long-term liabilities 41.3 45.5
Minority interests in subsidiaries 56.2 67.8
-------- --------
Total liabilities 385.6 382.1
-------- --------
Shareholders' equity:
Common stock $.0l par value: 100,000,000
shares authorized, 30,629,348 and 30,591,575
shares issued 0.3 0.3
Additional paid-in capital 340.0 335.5
Accumulated other comprehensive income (0.3) (0.2)
Treasury stock: 9,790,800 and 7,068,825
shares at cost (282.4) (200.8)
Unearned compensation (6.7) (5.4)
Retained earnings 219.0 173.9
-------- --------
Total shareholders' equity 269.9 303.3
======== ========
Total liabilities and shareholders' equity $ 655.5 $ 685.4
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Nine Months Ended
----------------------------
October 2, October 3,
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by operating activities $ 54.0 $ 15.6
------ ------
Cash flows used in investing activities:
Additions to property and equipment (15.5) (51.0)
------ ------
Cash flows provided by (used in) financing activities:
Dividends paid to minority interests (38.1) (36.3)
Treasury stock acquired (81.6) (112.9)
Net proceeds from notes payable 41.9 41.7
Other 0.2 --
------ ------
Net cash used in financing activities (77.6) (107.5)
------ ------
Net decrease in cash and cash equivalents (39.1) (142.9)
Cash and cash equivalents at beginning of period 49.1 152.2
------ ------
Cash and cash equivalents at end of period $ 10.0 $ 9.3
====== ======
</TABLE>
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 2, 1999 and the results of operations for the three and
nine-month periods ended October 2, 1999 and October 3, 1998, respectively, and
cash flows for the nine months ended October 2, 1999 and October 3, 1998,
respectively. 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 requires that
public business enterprises report selected information about operating segments
in interim financial reports issued to shareholders.
<TABLE>
<CAPTION>
Three Months Ended October 2, 1999
------------------------------------------------------------
Meldisco Footaction Corporate Total
------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $292.2 $178.1 -- $ 470.3
Operating Profit 24.6 16.0 (1.8) 38.8
Operating Profit before
restructuring reversal 24.6 16.0 (1.8) 38.8
Nine Months Ended October 2, 1999
------------------------------------------------------------
Meldisco Footaction Corporate Total
------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $894.9 $493.4 -- $1,388.3
Operating Profit 78.0 32.6 (4.7) 105.9
Operating Profit before
restructuring reversal 78.0 31.1 (6.1) 103.0
</TABLE>
6
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ 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 nine months ended October 2, 1999 and
October 3, 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------ -------------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Comprehensive Income:
Net income $18.0 $18.4 $45.0 $41.1
Other comprehensive (loss) income - Foreign
currency adjustment (0.1) -- (0.1) 0.2
===== ===== ===== =====
Comprehensive income $17.9 $18.4 $44.9 $41.3
===== ===== ===== =====
</TABLE>
7
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ 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 Nine Months Ended
------------------------------ ----------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted EPS - Net
Income $ 18.0 $ 18.4 $ 45.0 $ 41.1
=========== ============ =========== ===========
Denominator:
Shares outstanding at beginning of period 21,412,568 24,536,262 23,522,750 27,872,207
Weighted average deferred compensation shares earned
not issued 180,277 -- 167,438 --
Weighted average shares (repurchased)/issued (301,712) 2,373 (1,765,961) (2,582,376)
----------- ------------ ----------- -----------
Denominator for Basic EPS -Weighted average common
shares outstanding 21,291,133 24,538,635 21,924,227 25,289,831
----------- ------------ ----------- -----------
Dilutive effect of stock options 394,865 272,949 326,080 328,900
----------- ------------ ----------- -----------
Denominator for Diluted EPS- Adjusted weighted
average common shares outstanding
21,685,998 24,811,584 22,250,307 25,618,731
----------- ------------ ----------- -----------
Basic EPS $ 0.85 $ 0.75 $ 2.05 $ 1.63
=========== ============ =========== ===========
Diluted EPS $ 0.83 $ 0.74 $ 2.02 $ 1.60
=========== ============ =========== ===========
</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 third quarter ended October 2, 1999, the Company purchased 582,700
shares of its stock in the open market at an average price of $33.66 per share
for an aggregate purchase amount of $19.6 million. The total shares purchased
year-to-date were 2,721,975 at an average price of $29.97 for an aggregate
purchase amount of $81.6 million. Since May 1997, when the first share
repurchase program was approved by the Company's Board, through October 2, 1999,
the Company has purchased a total of 9,790,800 shares at an average price of
$28.84 per share for an aggregate purchase amount of $282.4 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 $0.6 million remaining in the reserve as
of October 2, 1999.
7. Supplemental Cash Flow Information
Nine Months Ended
---------------------------
October 2, October 3,
1999 1998
----------- ----------
Cash paid for income taxes $32.1 $31.8
Cash paid for interest $ 2.7 $ 2.4
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 on October
12, 1996 to the Melville shareholders of record on October 2, 1996 of all the
shares of the Company.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
October 2, October 3,
($ in millions) 1999 1998
------------- -------------
<S> <C> <C>
Company:
Net Sales $470.3 $472.6
Net sales % change from prior year (0.5%) 1.9%
Same store sales % change (1.5%) 0.4%
Meldisco:
Net Sales $292.2 $288.3
Net sales % change from prior year 1.4% (1.7%)
Same store sales % change 0.1% (0.8%)
% of consolidated net sales 62.1% 61.0%
Footaction:
Net Sales $178.1 $184.3
Net sales % change from prior year (3.4%) 7.9%
Same store sales % change (4.0%) 2.7%
% of consolidated net sales 37.9% 39.0%
</TABLE>
Consolidated net sales for the third quarter ended October 2, 1999, were $470.3
million, a decrease of 0.5% from net sales of $472.6 million for the same period
of 1998. Same store sales for the three-month period decreased 1.5% compared to
the third quarter of 1998. Meldisco posted a 1.4% increase in sales over last
year. With virtually flat same store sales, Venture store acquisitions played a
key role in Meldisco's sales increase. Also important to these sales results
were the continued strong performances of the Thom McAn brand across all
categories and the Women's categories of sandals, branded athletics and sport
shoes.
10
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Footaction's sales decreased 3.4% over last year. Positive results in running
were offset by continued lower sales of Jordan related product and apparel.
During the quarter, Footaction closed thirteen stores of those identified in
connection with the 1998 restructuring and impairment charge. Negotiations with
landlords to close the remaining stores continue at the time of this filing and
the Company expects additional closures in the fourth quarter.
Nine Months Ended
-------------------------------
October 2, October 3,
($ in millions) 1999 1998
--------------- ------------
Company:
Net Sales $1,388.3 $1,336.1
Net sales % change from prior year 3.9% 5.5%
Same store sales % change 2.0% 1.3%
Meldisco:
Net Sales $ 894.9 $ 841.2
Net sales % change from prior year 6.4% 0.9%
Same store sales % change 4.9% (0.1%)
% of consolidated net sales 64.5% 63.0%
Footaction:
Net Sales $ 493.4 $ 494.9
Net sales % change from prior year (0.3%) 14.3%
Same store sales % change (3.1%) 4.0%
% of consolidated net sales 35.5% 37.0%
Net sales for the nine months ended October 2, 1999, were $1,388.3 million, an
increase of 3.9% from net sales of $1,336.1 million for the 1998 comparable
period, while same store sales for the nine months increased by 2.0%. Meldisco
posted a 6.4% increase in sales over last year with increases across all
categories. Sales at Footaction decreased over last year by 0.3%. Increased
sales in footwear were not sufficient to offset the sales decrease in apparel
and accessories.
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
--------------------------------
October 2, October 3,
(As a percent of net sales) 1999 1998
------------- ------------
Cost of sales 68.6% 69.1%
Store operating, selling, general and
administrative expenses 21.4% 20.7%
Depreciation and amortization 1.8% 1.9%
Nine Months Ended
--------------------------------
October 2, October 3,
(As a percent of net sales) 1999 1998
------------- ------------
Cost of sales 69.0% 69.3%
Store operating, selling, general and
administrative expenses 21.6% 21.8%
Depreciation and amortization 2.0% 1.9%
Cost of Sales
Cost of sales for the third quarter of 1999, as a percent of net sales,
decreased 50 basis points from the corresponding prior-year period. Meldisco
experienced an increase in gross margin in the third quarter of 1999 versus the
same 1998 period due to decreases in occupancy and distribution costs.
Footaction's gross margin for the third quarter of 1999, as a percent of sales,
increased slightly compared to the same period last year due to an increase in
initial markon partially offset by the reversed leverage due to increased
occupancy costs and declining same store sales.
Cost of sales for the nine months ended October 2, 1999, as a percent of net
sales, decreased by 30 basis points from the comparable 1998 period. Improved
margins at Meldisco resulting from lower markdowns were partially offset by
increased markdowns and 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 third quarter ended October 2, 1999 were 70 basis
points higher than the comparable period of 1998. Meldisco's SG&A rate increased
by 50 basis points during the quarter due to higher selling expenses.
Footaction's SG&A rate increased 80 basis points during the quarter due to
continued funding of our inventory pipeline optimization project and the
expansion of the Star Club program to all stores.
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 nine months ended October 2, 1999
were 20 basis points lower than in the comparable 1998 period. Meldisco's SG&A
rate decreased by 20 basis points due to improved leverage of fixed expenses as
a result of increased store sales. Footaction's SG&A rate decreased by 20 basis
points due to lower selling and supervisory expenses.
Operating Profit
Three Months Ended
-----------------------------------------
($ in millions) October 2, October 3,
1999 1998
------------------ ------------------
Meldisco (1) $ 24.6 8.4% $ 23.3 8.1%
Footaction (1) 16.0 9.0% 17.5 9.5%
Corporate overhead (1.8) -- (2.0) --
Restructuring and asset
impairment reversal -- -- -- --
======= =======
Total (1) $ 38.8 8.3% $ 38.8 8.2%
======= =======
Note: (1) percentages represent percent of net sales of the respective entities.
Nine Months Ended
-----------------------------------------
($ in millions) October 2, October 3,
1999 1998
------------------ ------------------
Meldisco (1) $ 78.0 8.7% $ 65.8 7.8%
Footaction (1) , (2) 31.1 6.3% 34.4 7.0%
Corporate overhead (2) (6.1) -- (6.4) --
Restructuring and asset
impairment reversal 2.9 -- -- --
======= =======
Total (1) $ 105.9 7.6% $ 93.8 7.0%
======= =======
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 third quarter ended October 2, 1999 was flat versus the
same period of 1998. Footaction's operating profit decreased 8.6% from last year
due to lower sales combined with planned expenses incurred to support the
inventory pipeline optimization project and to expand the Star Club program.
Meldisco's operating margin, for the quarter increased 30 basis points over a
year ago. This increase was driven by lower distribution and occupancy costs.
Footstar's operating
13
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
profit for the nine-month period ended October 2, 1999, before the reversal of
restructuring charges, improved 9.8% from the same period in 1998. This
improvement was attributable to a 90 basis point operating margin gain at
Meldisco which was driven by the division's sales increase. These gains were
offset by a 70 basis point decrease at Footaction before the restructuring
reversal.
Liquidity and Financial Condition
Inventories were lower than a year ago, with Meldisco's quarter-end inventories
5.5% lower and Footaction's 11.1% lower. Inventories at Footaction also declined
on a per square foot basis at October 2, 1999.
As of October 2, 1999, the Company had $41.9 million in unsecured borrowings,
classified as notes payable under uncommitted facilities. Interest expense on
notes payable for the nine months ended October 2, 1999 was $1.6 million
compared to $0.2 million for the same period in 1998. This increase was the
result of the Company's execution of its share repurchase programs. The Company
also has a $300 million unsecured committed revolving credit facility (the
"Credit Facility"). The Credit Facility contains various operating covenants,
which, among other conditions, 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 debt coverage and fixed
charge coverage. The Company is in compliance with these covenants. There were
no amounts outstanding under the Credit Facility at the end of the third
quarter.
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 investment and expansion 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.
Pursuant to its arrangement with Kmart, Meldisco will distribute annually to
Kmart, a portion of profits representing Kmart's minority interest in the
Meldisco subsidiaries.
14
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Capital expenditures for the nine months ended October 2, 1999 were $15.5
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 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 phases common to all sections are inventory;
prioritization and assessment; remediation and replacement; testing; and
contingency planning.
As of October 2, 1999, the inventory, prioritization and assessment, remediation
and replacement and testing phases of each section of the Project had 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. None of the Company's other IT projects have been delayed due
to the Project.
15
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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. Testing to date has 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. The Company has
substantially completed integration testing jointly with certain material third
parties. Additional integration testing and re-testing will be completed during
the fourth 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 compliant by the respective vendors. Testing
to date has confirmed this. The remainder of the major Infrastructure has been
inventoried, prioritized and assessed, remediated and/or replaced and tested.
All material Infrastructure and Facility activities are substantially complete.
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 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
has been monitoring 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
16
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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 fourth quarter 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 October 2, 1999 was $1.3 million of which $0.6
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 $0.2
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.
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
17
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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.
The Year 2000 Update, even if incorporated by reference into other documents or
disclosures, is a Year 2000 Readiness Disclosure as defined under the Year 2000
Information and Readiness Disclosure Act of 1998.
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 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
18
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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 October 2, 1999 and October 3, 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 October 2, 1999 and the related consolidated
condensed statements of operations for the three and nine month periods ended
October 2, 1999 and October 3, 1998, respectively and cash flows for the
nine-month periods ended October 2, 1999 and October 3, 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
October 18, 1999
21
<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 - 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: November 15, 1999
22
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 statements, we acknowledge our
awareness of the use therein of our report dated October 18, 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
November 15, 1999
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