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 1, 2000
------------
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 1, 2000
----- ------------------------------
Common Stock, $.01 par value 19,506,813
<PAGE>
INDEX
Part I. - Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
Three and Six Months Ended July 1, 2000 and July 3, 1999 3
Consolidated Condensed Balance Sheets -
July 1, 2000 and January 1, 2000 4
Consolidated Condensed Statements of Cash Flows -
For Six Months Ended July 1, 2000 and July 3, 1999 5
Notes to Consolidated Condensed Financial Statements 6-11
Independent Auditors' Review Report 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19-20
Part II. - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
2
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ---------------------------------
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $589.4 $479.0 $1,029.1 $918.1
Cost of sales 397.4 321.3 710.1 636.2
------ ------ -------- ------
Gross profit 192.0 157.7 319.0 281.9
Store operating, selling, general and
administrative expenses 130.4 99.6 237.4 199.3
Depreciation and amortization 10.9 9.1 20.4 18.4
Restructuring and asset impairment reversal -- -- -- (2.9)
------ ------ -------- ------
Operating profit 50.7 49.0 61.2 67.1
Interest expense, net 2.6 0.9 3.1 1.2
------ ------ -------- ------
Income before income taxes and minority
interests 48.1 48.1 58.1 65.9
Provision for income taxes 15.0 15.0 18.2 20.7
------ ------ -------- ------
Income before minority interests 33.1 33.1 39.9 45.2
Minority interests in net income 17.7 14.6 21.7 18.2
------ ------ -------- ------
Net income $ 15.4 $ 18.5 $ 18.2 $ 27.0
====== ====== ======== ======
Weighted average shares outstanding:
Basic: 19.8 22.0 20.0 22.2
====== ====== ======== ======
Diluted: 20.4 22.4 20.4 22.5
====== ====== ======== ======
Earnings per share
Basic: $ 0.78 $ 0.84 $ 0.91 $ 1.22
====== ====== ======== ======
Diluted: $ 0.76 $ 0.83 $ 0.89 $ 1.20
====== ====== ======== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except for share data)
<TABLE>
<CAPTION>
July 1, 2000 January 1, 2000
(Unaudited) (Audited)
------------ ---------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 17.7 $ 31.8
Accounts receivable, net 47.7 42.8
Inventories 401.0 271.3
Prepaid expenses and other current assets 33.6 34.9
------- -------
Total current assets 500.0 380.8
Property and equipment, net 237.7 198.7
Goodwill, deferred charges and other non-
current assets 55.5 32.7
------- -------
Total assets $ 793.2 $ 612.2
======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 151.9 $ 100.5
Accrued expenses 104.9 117.8
Income taxes payable 12.1 11.2
Notes payable 140.8 --
------- -------
Total current liabilities 409.7 229.5
Other long-term liabilities 60.3 40.5
Minority interests in subsidiaries 51.6 74.3
------- -------
Total liabilities $ 521.6 $ 344.3
------- -------
Shareholders' equity:
Common stock $.0l par value: 100,000,000
shares authorized, 30,636,884 and 30,634,283
shares issued 0.3 0.3
Additional paid-in capital 343.7 338.6
Accumulated other comprehensive income (0.1) (0.1)
Treasury stock: 11,130,071 and 10,510,300
shares at cost (322.7) (305.4)
Unearned compensation (7.5) (5.2)
Retained earnings 257.9 239.7
------- -------
Total shareholders' equity 271.6 267.9
------- -------
Total liabilities and shareholders' equity $ 793.2 $ 612.2
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Net cash (used in) provided by operating activities $(12.3) $ 33.7
------ ------
Cash flows used in investing activities:
Acquisition of Just For Feet, net of cash
acquired (64.2) --
Additions to property and equipment (12.1) (8.5)
------ ------
Net cash used in investing activities (76.3) (8.5)
------ ------
Cash flows provided by (used in) financing activities:
Dividends paid to minority interests (44.4) (38.1)
Treasury stock acquired (19.9) (62.0)
Treasury stock issued 2.6 --
Net proceeds from notes payable 140.8 36.7
Payments on capital lease (3.6) --
Other (1.0) 0.3
------ ------
Net cash provided by (used in) financing activities 74.5 (63.1)
------ ------
Net decrease in cash and cash equivalents (14.1) (37.9)
Cash and cash equivalents, beginning of period 31.8 49.1
------ ------
Cash and cash equivalents, end of period $ 17.7 $ 11.2
====== ======
</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 Footstar, Inc. (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 1, 2000 and July 3, 1999 and the results of
operations for the three- and six-month periods ended July 1, 2000 and July 3,
1999, respectively, and cash flows for the six months ended July 1, 2000 and
July 3, 1999, 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 1999 Annual Report on Form 10-K.
2. Acquisition of Just For Feet
On March 7, 2000 the Company acquired certain assets of Just For Feet, Inc. and
its subsidiaries, which had filed for Chapter 11 bankruptcy protection on
November 4, 1999. Just For Feet is the leading operator of large-format
superstores which specialize in brand-name athletic outdoor footwear and
apparel. The assets purchased by the Company included 3 Just For Feet
superstores, 76 Just For Feet superstore leases, 23 specialty store leases, the
Just For Feet name, the Internet business and the corporate headquarters
building located in Birmingham, Alabama. The net cash consideration paid for the
assets was $64.2 million.
The acquisition has been accounted for under the purchase method of accounting
for business combinations. Accordingly, the consolidated financial statements
include the results of operations of Just For Feet from the acquisition date.
The results of operations generated from the assets acquired have been added to
those of Footaction and reported as Footstar's athletic segment. The purchase
price was allocated to the acquired assets and liabilities assumed, tangible and
intangible. The acquired assets and liabilities assumed were predominantly
inventories, fixed assets and lease obligations. Based on
6
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
preliminary purchase price allocations, the excess of the fair market value of
the net assets acquired over the purchase price amounting to approximately $38.7
million was deducted from the book values of the non-current, non-monetary
assets acquired. Adjustments to the purchase price during the second quarter
resulted principally from the appraisals of favorable leases performed
subsequent to the purchase. Additional adjustments to the purchase price
allocation may result from the completion of an appraisal of the acquired
assets, which is currently in progress.
Unaudited Just For Feet pro forma net sales and Footstar pro forma consolidated
net sales for the three-month and six-month periods ended July 1, 2000 and July
3, 1999, respectively assuming Just For Feet assets were acquired as of January
3, 1999 are as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Three Months Ended Six Months Ended
---------------------------------- -------------------------------------
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
-------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Just For Feet net sales $ 81.5 $114.1 $ 154.0 $ 238.0
Footstar consolidated net sales 589.4 593.1 1,084.3 1,156.1
</TABLE>
Pro forma net income and earnings per share data have not been disclosed since
the Company is unable to avoid the use of forward-looking information and
assumptions in order to meaningfully present the effect of the acquisition on
the Company's operations. The Just For Feet historical results for the six
months ended July 1, 2000 include the effects of transactions and estimates
which are related either directly or indirectly, to Just For Feet Inc.'s
liquidation proceedings under Chapter 7. As such, the Company cannot accurately
determine the operating results that would have resulted had the liquidation
process not been initiated and had the assets been acquired by the Company
effective January 1, 2000.
The pro forma sales results for the periods presented include actual Footstar
results beginning March 7, 2000. For the same reasons expressed above, the pro
forma sales are not necessarily indicative of the results of the Company had the
Just For Feet, Inc. assets been acquired at the beginning of the periods
presented, and they are not necessarily indicative of sales in future periods.
3. Segment Information
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS No. 131") requires that public
business
7
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except share and per share data)
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Under SFAS No. 131 the newly acquired
Just For Feet stores and Footaction stores represent two operating segments that
have been aggregated for financial reporting purposes.
<TABLE>
<CAPTION>
Three Months Ended July 1, 2000
------------------------------------------------------------
($ in millions) Meldisco Athletic(1) Corporate Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $357.2 $232.2 $ -- $589.4
Operating profit (loss) 51.1 1.8 (2.2) 50.7
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended July 1, 2000
------------------------------------------------------------
($ in millions) Meldisco Athletic(1) Corporate Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $631.4 $397.7 $ -- $1,029.1
Operating profit (loss) 63.9 1.7 (4.4) 61.2
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended July 3, 1999
------------------------------------------------------------
($ in millions) Meldisco Athletic(1) Corporate Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $329.2 $149.8 $ -- $479.0
Operating profit (loss) 44.8 6.1 (1.9) 49.0
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended July 3, 1999
------------------------------------------------------------
($ in millions) Meldisco Athletic(1) Corporate Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $602.7 $315.4 $ -- $918.1
Operating profit (loss) 53.4 16.6 (2.9) 67.1
</TABLE>
The operating profit (loss) for the six-months ended July 3, 1999, without the
1999 first quarter reversal of restructuring charges, was $15.1 million for
Athletic, ($4.3) million for Corporate and $64.2 million for Footstar
consolidated.
(1) Footaction and Just For Feet have been combined and reported as a group
called the Athletic Segment.
8
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except share and per share data)
4. Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("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 1,
2000 and July 3, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ -------------------------------------
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Comprehensive Income:
Net income $15.4 $18.5 $18.2 $27.0
Other comprehensive income --
Foreign currency adjustment -- (0.1) -- --
----- ----- ----- -----
Comprehensive income $15.4 $18.4 $18.2 $27.0
===== ===== ===== =====
</TABLE>
9
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
5. 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 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted EPS - Net Income $ 15.4 $ 18.5 $ 18.2 $ 27.0
=========== =========== =========== ===========
Denominator:
Shares outstanding at beginning of period 19,624,534 22,102,048 20,123,983 23,522,750
Weighted average deferred compensation shares
earned not issued 299,604 178,628 256,456 161,019
Weighted average shares repurchased (103,837) (238,957) (412,400) (1,442,996)
----------- ----------- ----------- -----------
Denominator for Basic EPS - Weighted average
common shares outstanding 19,820,301 22,041,719 19,968,039 22,240,773
----------- ----------- ----------- -----------
Dilutive effect of stock options 542,813 402,233 401,525 278,900
----------- ----------- ----------- -----------
Denominator for Diluted EPS - Adjusted weighted
average common shares outstanding 20,363,114 22,443,952 20,369,564 22,519,673
----------- ----------- ----------- -----------
Basic EPS $ 0.78 $ 0.84 $ 0.91 $ 1.22
=========== =========== =========== ===========
Diluted EPS $ 0.76 $ 0.83 $ 0.89 $ 1.20
=========== =========== =========== ===========
</TABLE>
10
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
6. Purchase of Treasury Stock
During the second quarter ended July 1, 2000, the Company repurchased 205,500
shares of its stock in the open market at an average price of $32.85 per share
for an aggregate purchase amount of $6.8 million. Total shares repurchased
year-to-date were 707,900 at an average price of $28.11 per share for an
aggregate purchase amount of $19.9 million. Since May 1997 when the first share
repurchase program was approved by the Company's Board of Directors, through
July 1, 2000, the Company had repurchased a total of 11,218,200 shares at an
average price of $28.99 per share, for an aggregate purchase amount of $325.3
million. As of July 1, 2000 the Company has approximately 1,491,800 shares
that may be repurchased under its fifth share repurchase program. Treasury
shares may be issued in connection with employee stock benefit plans and for
other corporate purposes.
7. Supplemental Cash Flow Information
Six Months Ended
------------------------------------
July 1, 2000 July 3, 1999
--------------- ---------------
Cash paid for income taxes $23.8 $25.6
Cash paid for interest $3.6 $1.9
The Company entered into a capital lease with General Electric Capital Corp.
("GECC") principally for furniture and fixtures in 42 Just For Feet stores on
which GECC had a secured interest at the time of the Just For Feet acquisition.
The net present value of payments will be $5.9 million of which $3.6 million was
paid in the second quarter.
8. Note Payable
Effective May 25, 2000, the Company entered into a new three-year, $325 million
revolving credit facility with a syndicate of banks led by Fleet National Bank.
This new facility replaced a $300 million revolving credit facility, which was
due to expire September 18, 2000.
11
<PAGE>
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 1, 2000 and the related consolidated condensed
statements of operations for the three and six month periods ended July 1, 2000
and July 3, 1999, respectively and cash flows for the six-month periods ended
July 1, 2000 and July 3, 1999, 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 1, 2000 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,
2000, 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 1, 2000, 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 26, 2000
12
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
ITEM 2. 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
Three Months Ended
-----------------------------
($ in millions) July 1, 2000 July 3, 1999
------------ ------------
Company:
Net sales $589.4 $479.0
Net sales % change from prior year 23.1% 3.5%
Same store sales % change 5.9% 1.6%
Meldisco:
Net sales $357.2 $329.2
Net sales % change from prior year 8.5% 4.0%
Same store sales % change 7.1% 2.4%
% of consolidated net sales 60.6% 68.7%
Athletic:
Net sales $232.2 $149.8
Net sales % change from prior year 55.0% 2.6%
Same store sales % change (1) 3.1% 0.0%
% of consolidated net sales 39.4% 31.3%
note:(1) Same store sales do not include Just For Feet sales since the Just For
Feet stores have not been operated by the Company for twelve months.
Consolidated net sales for the second quarter ended July 1, 2000, were $589.4
million, an increase of 23.1% from net sales of $479.0 million for the same
period of 1999. Same store sales for the three-month period increased 5.9%
compared to the second quarter of 1999. Meldisco posted an 8.5% increase in
sales over last year, partly as a result of the shift in Easter sales from the
first quarter of 1999 to the second quarter of 2000. Second quarter 2000 sales
in the athletic segment increased 55.0% over the same period of 1999, largely
due to additional sales generated by the acquired Just For Feet assets, plus a
3.1% increase in Footaction same store sales. This increase was driven by the
strong performance of Men's footwear, led by higher sales of basketball and
running product.
13
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Six Months Ended
--------------------------------
($ in millions) July 1, 2000 July 3, 1999
------------ ------------
Company:
Net sales $1,029.1 $ 918.1
Net sales % change from prior year 12.1% 6.3%
Same store sales % change 1.4% 4.0%
Meldisco:
Net sales $631.4 $602.7
Net sales % change from prior year 4.7% 9.0%
Same store sales % change 3.7% 7.4%
% of consolidated net sales 61.4% 65.6%
Athletic:
Net sales $397.7 $315.4
Net sales % change from prior year 26.1% 1.5%
Same store sales % change(1) (3.0%) (2.5%)
% of consolidated net sales 38.6% 34.4%
note: (1) Same store sales do not include Just For Feet sales since the Just For
Feet stores have not been operated by the Company for twelve months.
Consolidated net sales for the six months ended July 1, 2000, were $1,029.1
million, an increase of 12.1% from net sales of $918.1 million for the same
period of 1999. Same store sales for the six-month period increased 1.4%
compared to the year-ago period. Meldisco experienced increases in sales across
all departments and a positive sales mix during the period. Total sales for
Meldisco increased 4.7% to $631.4 million, and total sales for the athletic
segment increased 26.1% to $397.7 million. Same store sales (which do not
include the new Just For Feet business) declined 3.0% for the athletic segment,
and increased 3.7% at Meldisco.
14
<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 1, 2000 July 3, 1999
--------------- ---------------
Cost of sales 67.4% 67.1%
Store operating, selling, general and
administrative expenses 22.1% 20.8%
Depreciation and amortization 1.9% 1.9%
Six Months Ended
-----------------------------------
(As a percent of net sales) July 1, 2000 July 3, 1999
--------------- ---------------
Cost of sales 69.0% 69.3%
Store operating, selling, general and
administrative expenses 23.1% 21.7%
Depreciation and amortization 2.0% 2.0%
Cost of Sales
Cost of sales for the second quarter of 2000, as a percent of net sales,
increased 30 basis points from the corresponding prior-year period. This
increase is primarily attributable to higher cost of sales contributed by Just
For Feet in the athletic segment, due to higher occupancy expenses, higher
markdowns and reduced sales leverage.
Cost of sales for the six months ended July 1, 2000, as a percent of net sales,
decreased by 30 basis points from the comparable 1999 period. Meldisco achieved
an increase in gross margin primarily due to a decrease in markdowns.
Store Operating, Selling, General and Administrative Expenses
Store operating, selling, general and administrative ("SG&A") expenses, as a
percent of net sales, for the second quarter ended July 1, 2000 increased 130
basis points as compared to the same prior-year period. The increase was
primarily due to expenses incurred to restart and run the Just For Feet business
and $1.5 million in one time costs related to the integration of the Just For
Feet business. Meldisco's SG&A, as a percent of net sales, decreased during the
period as a result of the improved leverage of fixed costs due to increasing
same store sales. SG&A expenses, as a percent of sales, for the six months ended
July 1, 2000 were 140 basis points higher than the comparable 1999 period.
Meldisco's SG&A rate decreased during the first six months, while the athletic
15
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
segment's SG&A rate increased primarily due to the underabsorption of fixed
costs and one time costs associated with the Just For Feet acquisition and
integration.
Operating Profit
Three Months Ended
---------------------------------------------------
($ in millions) July 1, 2000 July 3, 1999
---------------------- ----------------------
Meldisco(1) $51.1 14.3% $44.8 13.6%
Athletic(1) 1.8 0.8% 6.1 4.1%
Corporate overhead (2.2) -- (1.9) --
----- -----
Total(1) $50.7 8.6% $49.0 10.2%
===== =====
note: (1) percentages represent percent of net sales of the respective entities.
Six Months Ended
---------------------------------------------------
($ in millions) July 1, 2000 July 3, 1999
---------------------- ----------------------
Meldisco(1) $63.9 10.1% $53.4 8.9%
Athletic(1),(2) 1.7 0.4% 15.1 4.8%
Corporate overhead(2) (4.4) -- (4.3) --
Restructuring and asset
impairment reversal -- -- 2.9 --
----- -----
Total(1) $61.2 5.9% $67.1 7.3%
===== =====
note: (1) percentages represent percent of net sales of the respective entities.
(2) 1999 operating profit is presented before the reversal of
restructuring charges.
Operating profit, as a percent of net sales, for the second quarter ended July
1, 2000, decreased 160 basis points over the same period of 1999. Meldisco's
operating profit as a percent of net sales increased by 70 basis points due to
improved gross margins. The athletic segment's operating profit decreased due to
increased markdowns, the underabsorption of fixed costs and start up costs
related to the Just For Feet business.
16
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Liquidity and Financial Condition
Footstar's quarter-end inventories increased by 28% versus the same quarter of
1999, primarily as a result of the addition of inventory to support the Just For
Feet chain. The increase in inventories generated a corresponding increase in
accounts payable at quarter-end.
In addition to inventories, the majority of the Just For Feet acquired assets
represent fixed assets which have been classified within property and equipment,
net, favorable leases classified within goodwill, deferred charges and other
noncurrent assets and unfavorable leases classified within other long-term
liabilities.
As of July 1, 2000, the Company had $140.8 million in borrowings, classified as
notes payable. Effective May 25, 2000, the Company entered into a new $325
million 3-year revolving credit facility (the "Credit Facility") with a
syndicate of banks led by Fleet National Bank. 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, make capital expenditures or declare and make dividend payments.
Under the Credit Facility, the Company is required to comply with financial
covenants relating to debt and interest coverage. At the end of the quarter, the
Company was in compliance with these covenants.
Effective June 1, 2000 the Company entered into a 10-year, $35 million Master
Lease Agreement with General Electric Credit Corp. to be utilized beginning
January 1, 2001. Under the terms of this facility the Company may lease
materials handling equipment and furniture, fixtures and equipment for related
stores.
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 credit
facilities, will be sufficient to fund its expected operating expenses, working
capital needs, capital expenditures, and projected growth for the foreseeable
future. The Company believes its current borrowing capacity will allow it to
take advantage of growth and investment opportunities.
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<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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 Meldisco
subsidiaries. At the beginning of the second fiscal quarter, the Company
distributed $44.4 million representing Kmart's normal dividend for their
minority interest on net income for fiscal year 1999.
Capital expenditures for the six months ended July 1, 2000 were $12.1 million.
Total capital expenditures for the entire 2000 fiscal year are estimated to be
$60-$65 million, which includes approximately $19 million to purchase the
corporate headquarters building located in Mahwah, New Jersey. Capital
expenditures during the second quarter related primarily to the Company's
continuing investment in information systems and the opening, relocating or
remodeling of Footaction and Just For Feet stores.
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<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 revenue projections, cost savings, capital
expenditures, future cash needs, improvements in infrastructure and operating
efficiencies. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
risks and uncertainties include, but are not limited to; the ability of the
Company to execute its integration plans for the Just For Feet business,
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, are qualified by
these cautionary statements, and there can be no assurance that the actual
results, performance or achievements 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 achievements not to be
realized. The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date such statements
were made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivatives
The Company is not materially exposed to changes in the underlying values of its
assets or liabilities nor is it materially exposed to changes in the value of
expected foreign currency cashflows. Therefore, the Company has not engaged in
the purchase or sale of any derivative instruments.
19
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Interest Rates
The Company's investment and debt portfolios are short-term, seasonal in nature.
The Company's investment portfolio consists of highly rated short-term
marketable securities with peak amounts coinciding with the year-end peak
selling season. The Company, from time to time, undertakes short-term borrowings
to finance working capital. The Company's peak borrowing periods coincide with
peak inventory purchases.
Foreign Exchange
The Company exited its Meldisco's European business in 1999. Translating the
income statements of these operations for the effects of foreign currency
changes does not have a material impact on the Company's financial positions.
The Company does not have material exposure to cash flows denominated in foreign
currency, nor have net foreign exchange gains or losses been material to
operating results in the past three reporting periods.
20
<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 2, 2000. The
stockholders elected all of management's nominees for the Board of Directors to
serve until the Annual Meeting of Stockholders in 2003 and ratified the
appointment of KPMG LLP as the Corporation's independent auditors for fiscal
2000.
The voting results are as follows:
Election of Directors
Broker
For Withheld Non-Votes
-------------------------------------------
Stanley P. Goldstein 18,103,129 16,394 --
J.M. Robinson 18,103,183 16,340 --
Neele E. Stearns, Jr 18,102,954 16,569 --
Ratification of Auditors
Broker
For Against Abstain Non-Votes
------------------------------------------------------------
18,099,737 4,269 15,517 --
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<PAGE>
Part II. - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
a) EXHIBIT INDEX
Exhibit
-------
10.12 Credit Facility
15 Accountants' Acknowledgment
27 Financial Data Schedule
b) Reports - A report on Form 8-K/A was filed on May 22, 2000 as an
amendment to the Form 8-K filed on March 22, 2000; the amendment
contained financial statements, proforma financial statements and
exhibits related to the acquisition of Just For Feet.
A report on Form 8-K was filed on May 22, 2000 announcing anticipated
second quarter earnings, and that the integration of Just For Feet is
ahead of 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: August 15, 2000
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