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 September 30, 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 September 30, 2000
----- ------------------------------------
Common Stock, $.01 par value 19,524,500
<PAGE>
INDEX
Part I. - Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2000 and October 2, 1999 3
Consolidated Balance Sheets -
September 30, 2000 and January 1, 2000 4
Consolidated Condensed Statements of Cash Flows -
For Nine Months Ended September 30, 2000 and October 2, 1999 5
Notes to Consolidated Financial Statements 6-12
Independent Auditors' Review Report 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20-21
Part II. - Other Information
Item 6. Exhibits and Reports on Form 8-K 22
2
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales $592.7 $470.3 $1,621.8 $1,388.3
Cost of sales 398.9 322.4 1,108.9 958.5
------ ------ -------- --------
Gross profit 193.8 147.9 512.9 429.8
Store operating, selling, general and
administrative expenses 131.5 100.5 369.0 299.7
Depreciation and amortization 9.2 8.6 29.6 27.1
Restructuring and asset impairment reversal (0.9) -- (0.9) (2.9)
------ ------ -------- --------
Operating profit 54.0 38.8 115.2 105.9
Interest expense, net 3.0 0.4 6.1 1.6
------ ------ -------- --------
Income before income taxes and minority
interests 51.0 38.4 109.1 104.3
Provision for income taxes 15.7 12.0 33.9 32.7
------ ------ -------- --------
Income before minority interests 35.3 26.4 75.2 71.6
Minority interests in net income 10.7 8.4 32.4 26.6
====== ====== ======== ========
Net income $ 24.6 $ 18.0 $ 42.8 $ 45.0
====== ====== ======== ========
Weighted average shares outstanding:
Basic: 19.8 21.3 19.9 21.9
====== ====== ======== ========
Diluted: 20.3 21.7 20.3 22.3
====== ====== ======== ========
Earnings per share
Basic: $ 1.24 $ 0.85 $ 2.15 $ 2.05
====== ====== ======== ========
Diluted: $ 1.21 $ 0.83 $ 2.11 $ 2.02
====== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
($ in millions, except for share data)
<TABLE>
<CAPTION>
September 30, January 1,
2000 2000
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13.1 $ 31.8
Accounts receivable, net 46.1 42.8
Inventories 442.4 271.3
Prepaid expenses and other current assets 29.8 34.9
-------- --------
Total current assets 531.4 380.8
Property and equipment, net 255.4 198.7
Goodwill, deferred charges and other non-
current assets 51.6 32.7
-------- --------
Total assets $ 838.4 $ 612.2
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 129.9 $ 100.5
Accrued expenses 116.6 117.8
Income taxes payable 11.5 11.2
Notes payable 156.9 --
-------- --------
Total current liabilities 414.9 229.5
Other long-term liabilities 64.7 40.5
Minority interests in subsidiaries 62.3 74.3
-------- --------
Total liabilities $ 541.9 $ 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 342.5 338.6
Accumulated other comprehensive income (0.1) (0.1)
Treasury stock: 11,112,384 and 10,510,300
shares at cost (322.2) (305.4)
Unearned compensation (6.6) (5.2)
Retained earnings 282.6 239.7
-------- --------
Total shareholders' equity 296.5 267.9
======== ========
Total liabilities and shareholders' equity $ 838.4 $ 612.2
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, October 2,
2000 1999
------------- ----------
<S> <C> <C>
Net cash (used in) provided by operating activities $(12.5) $ 54.0
------ ------
Cash flows used in investing activities:
Acquisition of Just For Feet, net of cash
acquired (64.2) --
Additions to property and equipment (32.8) (15.5)
------ ------
Net cash used in investing activities (97.0) (15.5)
------ ------
Cash flows provided by (used in) financing activities:
Dividends paid to minority interests (44.4) (38.1)
Treasury stock acquired (19.9) (81.6)
Treasury stock issued 3.1 --
Net proceeds from notes payable 156.9 41.9
Payments on capital lease (3.7) --
Other (1.2) 0.2
------ ------
Net cash provided by (used in) financing activities 90.8 (77.6)
------ ------
Net decrease in cash and cash equivalents (18.7) (39.1)
Cash and cash equivalents, beginning of period 31.8 49.1
------ ------
Cash and cash equivalents, end of period $ 13.1 $ 10.0
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED 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 financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of September 30, 2000 and October 2, 1999 and the results of
operations for the three- and nine-month periods ended September 30, 2000 and
October 2, 1999, respectively, and cash flows for the nine months ended
September 30, 2000 and October 2, 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 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 $64.2 million.
The acquisition has been accounted for under the purchase method of accounting
for business combinations. Accordingly, the consolidated financial statements
include the results of operations of Just For Feet from the acquisition date.
The results of operations generated from the assets acquired have been added to
those of Footaction and reported as Footstar's athletic segment. The purchase
price was allocated to the acquired assets and liabilities assumed, tangible and
intangible. The acquired assets and liabilities assumed were predominantly
inventories, fixed assets and lease obligations. Based on
6
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
purchase price allocations, the excess of the fair market value of the net
assets acquired over the purchase price amounting to approximately $32.4 million
was deducted from the book values of the non-current, non-monetary assets
acquired. Adjustments to the purchase price during the third 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 nine-month periods ended September 30, 2000
and October 2, 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 Nine Months Ended
---------------------------- ------------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Just For Feet net sales $94.2 $139.9 $248.2 $ 377.9
Footstar consolidated net sales 592.7 610.2 1,677.0 1,766.2
</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 nine
months ended September 30, 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.
7
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except share and per share data)
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 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 September 30, 2000
------------------------------------------------------
Meldisco Athletic(1) Corporate Total
-------- ----------- --------- -----
<S> <C> <C> <C> <C>
Net sales $311.2 $281.5 $ -- $592.7
Operating profit (loss) 32.2 24.0 (2.2) 54.0
Operating profit (loss) before
restructuring reversal 32.2 23.1 (2.2) 53.1
Nine Months Ended September 30, 2000
------------------------------------------------------
Meldisco Athletic(1) Corporate Total
-------- ----------- --------- -----
Net sales $942.6 $679.2 $ -- $1,621.8
Operating profit (loss) 96.1 25.7 (6.6) 115.2
Operating profit (loss) before
restructuring reversal 96.1 24.8 (6.6) 114.3
Three Months Ended October 2, 1999
------------------------------------------------------
Meldisco Athletic(1) Corporate Total
-------- ----------- --------- -----
Net sales $292.2 $178.1 $ -- $470.3
Operating profit (loss) 24.6 16.0 (1.8) 38.8
Operating profit (loss) before
restructuring reversal 24.6 16.0 (1.8) 38.8
</TABLE>
8
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended October 2, 1999
-----------------------------------------------------
Meldisco Athletic(1) Corporate Total
-------- ----------- --------- -----
<S> <C> <C> <C> <C>
Net sales $894.9 $493.4 $ -- $1,388.3
Operating profit (loss) 78.0 32.6 (4.7) 105.9
Operating profit (loss) before
restructuring reversal 78.0 31.1 (6.1) 103.0
</TABLE>
(1) Footaction and Just For Feet have been combined and reported as a group
called the Athletic Segment.
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 nine months ended September
30, 2000 and October 2, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- --------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Comprehensive Income:
Net income $ 24.6 $ 18.0 $ 42.8 $ 45.0
Other comprehensive income -
Foreign currency adjustment -- (0.1) -- (0.1)
------- ------- ------- -------
Comprehensive income $ 24.6 $ 17.9 $ 42.8 $ 44.9
======= ======= ======= =======
</TABLE>
9
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED 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 Nine Months Ended
--------------------------- ------------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted EPS - Net Income $ 24.6 $ 18.0 $ 42.8 $ 45.0
=========== =========== =========== ===========
Denominator:
Shares outstanding at beginning of period 19,506,813 21,412,568 20,123,983 23,522,750
Weighted average deferred compensation shares
earned not issued 298,691 180,277 270,534 167,438
Weighted average shares issued / (repurchased) 15,553 (301,712) (475,472) (1,765,961)
----------- ----------- ----------- -----------
Denominator for Basic EPS -Weighted average
common shares outstanding 19,821,057 21,291,133 19,919,045 21,924,227
----------- ----------- ----------- -----------
Dilutive effect of stock options 479,014 394,865 430,711 326,080
----------- ----------- ----------- -----------
Denominator for Diluted EPS- Adjusted weighted
average common shares outstanding 20,300,071 21,685,998 20,349,756 22,250,307
----------- ----------- ----------- -----------
Basic EPS $ 1.24 $ 0.85 $ 2.15 $ 2.05
=========== =========== =========== ===========
Diluted EPS $ 1.21 $ 0.83 $ 2.11 $ 2.02
=========== =========== =========== ===========
</TABLE>
10
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
6. Purchase of Treasury Stock
During the third quarter ended September 30, 2000, the Company did not
repurchase any of its stock in the open market. 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. From May 1997, when the first share
repurchase program was approved by the Company's Board of Directors, through
September 30, 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 September 30, 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. Shares issued from treasury during the nine months
ended September 30, 2000, totaled 105,816 shares.
7. Restructure Reversal
In the third quarter of 2000 the Company reversed $0.9 million ($0.5 million
after taxes) of the 1998 restructuring charge relating to lease obligations of
Footaction closed stores. The original restructuring reserve totaled $34.4
million ($21.4 million after taxes) with $3.2 million remaining in the reserve
as of September 30, 2000.
8. Supplemental Cash Flow Information
Nine Months Ended
---------------------------------
September 30, October 2,
2000 1999
------------- ----------
Cash paid for income taxes $40.0 $32.1
Cash paid for interest $7.0 $2.7
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 $3.7 million was
paid during the nine months ended September 30, 2000.
On September 1, 2000, the Company purchased its headquarters' building for
approximately $19.3 million. The Company paid approximately $9.8 million to the
seller, which is included in "additions to property and equipment" in the
Statement of Cash Flows. The Company incurred the remainder of the purchase
price, approximately $9.5 million by assuming the seller's mortgage through a
non-cash transaction.
11
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share)
9. 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.
12
<PAGE>
Independent Auditors' Review Report
The Board of Directors and Shareholders
Footstar, Inc.
We have reviewed the consolidated balance sheet of Footstar, Inc. and subsidiary
companies as of September 30, 2000 and the related consolidated statements of
operations for the three- and nine-month periods ended September 30, 2000 and
October 2, 1999, respectively and cash flows for the nine-month periods ended
September 30, 2000 and October 2, 1999, respectively. These consolidated
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 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 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
October 20, 2000
13
<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 Consolidated
Financial Statements of the Company and notes thereto appearing elsewhere in
this report.
General
Three Months Ended
--------------------------------
September 30, October 2,
($ in millions) 2000 1999
------------- ----------
Company:
Net sales $592.7 $470.3
Net sales % change from prior year 26.0% (0.5%)
Same store sales % change (1) 5.1% (1.5%)
Meldisco:
Net sales $311.2 $292.2
Net sales % change from prior year 6.5% 1.4%
Same store sales % change 4.7% 0.1%
% of consolidated net sales 52.5% 62.1%
Athletic:
Net sales $281.5 $178.1
Net sales % change from prior year 58.1% (3.4%)
Same store sales % change (1) 5.8% (4.0%)
% of consolidated net sales 47.5% 37.9%
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 third quarter ended September 30, 2000, were
$592.7 million, an increase of 26.0% from net sales of $470.3 million for the
same period of 1999. Same store sales for the three-month period increased 5.1%
compared to the third quarter of 1999. Meldisco posted a 6.5% increase in sales
over the prior-year period, driven by strong sales in the men's and seasonal
departments, and same store increases of 4.7% for the quarter. Third quarter
2000 sales in the athletic segment increased 58.1% over the same period of 1999,
largely due to additional sales generated by the acquired
14
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Just For Feet assets, plus a 5.8% increase in Footaction comparable store sales.
The 5.8% increase was driven by the strong performance of men's footwear, led by
sales in the basketball and outdoor categories.
Nine Months Ended
--------------------------------
September 30, October 2,
($ in millions) 2000 1999
------------- ----------
Company:
Net sales $1,621.8 $1,388.3
Net sales % change from prior year 16.8% 3.9%
Same store sales % change 2.7% 2.0%
Meldisco:
Net sales $942.6 $ 894.9
Net sales % change from prior year 5.3% 6.4%
Same store sales % change 4.0% 4.9%
% of consolidated net sales 58.1% 64.5%
Athletic:
Net sales $679.2 $ 493.4
Net sales % change from prior year 37.7% (0.3%)
Same store sales % change (1) 0.2% (3.1%)
% of consolidated net sales 41.9% 35.5%
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 nine months ended September 30, 2000, were
$1,621.8 million, an increase of 16.8% from net sales of $1,388.3 million for
the same period of 1999. Same store sales for the nine-month period increased
2.7% compared to the year-ago period. Total sales for Meldisco increased 5.3% to
$942.6 million, bolstered by strong spring and back-to-school sales. Total sales
for the athletic segment increased 37.7% to $679.2 million. Same store sales
(which do not include the new Just For Feet business) increased 0.2% for the
athletic segment, and 4.0% at Meldisco. The strong performance of men's footwear
in the basketball and running categories, partially offset by weaker sales of
apparel and kid's footwear, drove the same store sales increase in the athletic
segment. The same store sales increase at Meldisco was driven by positive sales
in all categories.
15
<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
--------------------------------
September 30, October 2,
(As a percent of net sales) 2000 1999
------------- ----------
Cost of sales 67.3% 68.6%
Store operating, selling, general and
administrative expenses 22.2% 21.4%
Depreciation and amortization 1.6% 1.8%
Nine Months Ended
--------------------------------
September 30, October 2,
(As a percent of net sales) 2000 1999
------------- ----------
Cost of sales 68.4% 69.0%
Store operating, selling, general and
administrative expenses 22.8% 21.6%
Depreciation and amortization 1.8% 2.0%
Cost of Sales
Cost of sales for the third quarter of 2000, as a percent of net sales,
decreased 130 basis points from the corresponding prior-year period. This
decrease is primarily attributable to Meldisco's improved sales mix with
increases in sales of regular-priced goods, better leverage of distribution
expenses and the athletic segment's improved absorption of fixed expenses.
Cost of sales for the nine months ended September 30, 2000, as a percent of net
sales, decreased by 60 basis points from the comparable 1999 period, largely due
to Meldisco's improved gross margin rate.
16
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Store Operating, Selling, General and Administrative Expenses
Store operating, selling, general and administrative ("SG&A") expenses, as a
percent of net sales, for the third quarter ended September 30, 2000, increased
80 basis points from the same prior-year period. The increase was primarily due
both to the anticipated expenses associated with integrating and running the
Just For Feet business, which has not yet reached full sales productivity, and
the integration of 10 additional Just for Feet superstores opened in July.
Meldisco's SG&A, as a percent of net sales, decreased during the period due to
the improved leverage of fixed costs as a result of the increased same store
sales. SG&A expenses, as a percent of sales, for the nine months ended September
30, 2000, were 120 basis points higher than in the comparable 1999 period.
This increase was primarily attributable to the underabsorption of fixed costs
in the athletic segment, and the impact of the Just For Feet acquisition and
integration.
Operating Profit
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
($ in millions) September 30, 2000 October 2, 1999
--------------------- -----------------------
<S> <C> <C> <C> <C>
Meldisco (1) $32.2 10.4% $24.6 8.4%
Athletic (1), (2) 23.1 8.2% 16.0 9.0%
Corporate overhead (2.2) -- (1.8) --
Restructuring and asset
Impairment reversal 0.9 -- -- --
===== =====
Total (1) $54.0 9.1% $38.8 8.3%
===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------------
($ in millions) September 30, 2000 October 2, 1999
--------------------- -----------------------
<S> <C> <C> <C> <C>
Meldisco (1) $ 96.1 10.2% $ 78.0 8.7%
Athletic (1), (2) 24.8 3.7% 31.1 6.3%
Corporate overhead (2) (6.6) -- (6.1) --
Restructuring and asset
Impairment reversal 0.9 -- 2.9 --
====== ======
Total (1) $115.2 7.1% $105.9 7.6%
====== ======
</TABLE>
note: (1) percentages represent percent of net sales of the respective entities.
(2) 1999 and 2000 operating profit is presented before the reversal of
restructuring charges.
17
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Operating profit, as a percent of net sales, for the third quarter ended
September 30, 2000, increased 80 basis points over the same period of 1999.
Meldisco's operating profit as a percent of net sales increased by 200 basis
points due to improved gross margins and tight expense control. Operating profit
at the athletic segment for the third quarter ended September 30, 2000 increased
compared to the prior-year period as a result of both increased comparable store
sales at Footaction and improved expense leverage as a result of the additional
sales volume contributed by Just For Feet. The athletic segment's operating
profit for the nine-month period ended September 30, 2000 decreased versus the
prior-year period, mainly due to the impact of the acquired and the 10 newly
opened Just For Feet stores, which have not yet reached full sales productivity.
Liquidity and Financial Condition
Footstar's quarter-end inventories increased by approximately 40% versus the
same quarter of 1999, primarily as a result of the addition of inventory to
support the Just For Feet chain and the planned increase of inventory at
Footaction stores in anticipation of higher holiday sales. Accounts payable
balances increased versus a year ago as a result of the higher inventories.
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 September 30, 2000, the Company had $156.9 million in borrowings,
classified as notes payable. Net interest expense for the nine months ended
September 30, 2000 was $6.1 million compared to $1.6 million for the same period
of 1999. This increase was primarily a result of the acquisition of the Just For
Feet assets, capital expenditures, the increased inventory levels and previous
share repurchases.
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.
18
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
On September 1, 2000 the Company purchased its headquarters' building located in
Mahwah, New Jersey, for approximately $19.3 million. The Company is financing
the purchase through both short- and long-term borrowings including the
assumption of a 10-year term mortgage, of which $9.5 million was outstanding as
of September 30, 2000. Under the terms of the mortgage agreement, the Company is
required to make quarterly payments of approximately $350,000, representing both
principal and interest through May 1, 2010 when the mortgage will be completely
paid down. The long-term portion of the mortgage is classified within other
long-term liabilities on the balance sheet.
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. The Company may lease material handling equipment and
furniture, fixtures and equipment for the Company's 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, which occur 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.
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.
Capital expenditures for the nine months ended September 30, 2000 were $42.3
million. Total capital expenditures for the entire 2000 fiscal year are
estimated to be approximately $60 million. Capital expenditures during the third
quarter related primarily to the purchase of the corporate headquarters building
located in Mahwah, New Jersey, the continuing investment in information systems
and the opening, relocating or remodeling of Footaction and Just For Feet
stores.
19
<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 plans, uncertainties related to consumer demand for
footwear, unseasonable weather, consumer acceptance of the Company's merchandise
mix and/or its 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 cash flows. Therefore, the Company has not engaged in
the purchase or sale of any derivative instruments.
20
<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 primarily 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.
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 -
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 14, 2000
22
