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 June 30, 2001
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)
1 Crosfield Avenue West Nyack, New York 10994
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(845) 727-6500
--------------
(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 June 30, 2001
----- -------------------------------
Common Stock, $.01 par value 19,902,643
INDEX
Part I. - Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
Three and Six Months Ended June 30, 2001 and July 1, 2000 3
Consolidated Condensed Balance Sheets -
June 30, 2001 and December 30, 2000 4
Consolidated Condensed Statements of Cash Flows -
For Six Months Ended June 30, 2001 and July 1, 2000 5
Notes to Consolidated Condensed Financial Statements 6-12
Independent Auditors' Review Report 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Part II. - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
2
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
Three Months Ended Six Months Ended
----------------------------------- -----------------------------------
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
---------------- -------------- -------------- ---------------
Net sales $649.0 $589.4 $1,166.1 $1,029.1
Cost of sales 443.4 397.4 813.4 710.1
---------------- -------------- -------------- ---------------
Gross profit 205.6 192.0 352.7 319.0
Store operating, selling, general and
administrative expenses 140.7 130.4 275.1 237.4
Depreciation and amortization 12.6 10.9 24.5 20.4
---------------- -------------- -------------- ---------------
Operating profit 52.3 50.7 53.1 61.2
Interest expense, net 5.3 2.6 8.6 3.1
---------------- -------------- -------------- ---------------
Income before income taxes and minority
interests 47.0 48.1 44.5 58.1
Provision for income taxes 14.1 15.0 13.3 18.2
---------------- -------------- -------------- ---------------
Income before minority interests 32.9 33.1 31.2 39.9
Minority interests in net income 16.8 17.7 19.2 21.7
================ ============== ============== ===============
Net income $ 16.1 $ 15.4 $ 12.0 $ 18.2
================ ============== ============== ===============
Weighted average shares outstanding:
Basic: 20.2 19.8 20.2 20.0
================ ============== ============== ===============
Diluted: 20.7 20.4 20.8 20.4
================ ============== ============== ===============
Earnings per share:
Basic: $ 0.80 $ 0.78 $ 0.59 $ 0.91
================ ============== ============== ===============
Diluted: $ 0.78 $ 0.76 $ 0.58 $ 0.89
================ ============== ============== ===============
See accompanying notes to consolidated condensed financial statements.
3
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except for share data)
June 30, December 30,
2001 2000
(Unaudited) (Audited)
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 16.5 $ 14.3
Accounts receivable, net 59.4 54.2
Inventories 498.6 360.6
Prepaid expenses and other current assets 34.6 28.1
-------- --------
Total current assets 609.1 457.2
Property and equipment, net 263.8 261.7
Goodwill, deferred charges and other non-
current assets 82.4 54.8
-------- --------
Total assets $ 955.3 $ 773.7
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 161.3 $ 86.9
Accrued expenses 101.6 136.7
Income taxes payable 0.2 9.1
Notes payable -- 74.0
-------- --------
Total current liabilities 263.1 306.7
Long-term debt 234.7 --
Other long-term liabilities 66.7 61.0
Minority interests in subsidiaries 49.8 81.6
-------- --------
Total liabilities $ 614.3 $ 449.3
-------- --------
Shareholders' Equity:
Common stock $.0l par value: 100,000,000
shares authorized, 30,636,884 shares issued 0.3 0.3
Additional paid-in capital 347.4 342.1
Accumulated other comprehensive income (0.1) (0.1)
Treasury stock: 10,734,241 and 10,782,106
shares at cost (311.2) (312.6)
Unearned compensation (7.5) (5.4)
Retained earnings 312.1 300.1
-------- --------
Total shareholders' equity 341.0 324.4
-------- --------
Total liabilities and shareholders' equity $ 955.3 $ 773.7
======== ========
See accompanying notes to consolidated condensed financial statements.
4
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Six Months Ended
--------------------
June 30, July 1,
2001 2000
--------- ---------
Net cash used in operating activities $ (26.7) $ (12.3)
-------- --------
Cash flows used in investing activities:
Acquisition of J. Baker (59.0) --
Acquisition of Just For Feet, net of cash
acquired -- (64.2)
Additions to property and equipment (20.7) (12.1)
-------- --------
Net cash used in investing activities (79.7) (76.3)
-------- --------
Cash flows provided by (used in) financing
activities:
Dividends paid to minority interests (51.8) (44.4)
Treasury stock acquired -- (19.9)
Treasury stock issued 1.4 2.6
Payment on stock incentive plans (0.5) --
Net proceeds from notes payable 160.7 140.8
Payments on capital leases (0.4) (3.6)
Payments on mortgage note (0.3) --
Other (0.5) (1.0)
-------- --------
Net cash provided by financing activities 108.6 74.5
-------- --------
Net increase (decrease) in cash and cash equivalents 2.2 (14.1)
Cash and cash equivalents, beginning of period 14.3 31.8
-------- --------
Cash and cash equivalents, end of period $ 16.5 $ 17.7
======== ========
See accompanying notes to consolidated condensed financial statements.
5
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 June 30, 2001, the results of operations for the
three-month and six-month periods ended June 30, 2001 and July 1, 2000,
respectively, and cash flows for the six months ended June 30, 2001 and July 1,
2000, 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
consolidated financial statements of the Company included in the Company's 2000
Annual Report on Form 10-K.
2. Acquisition of J. Baker
Effective as of February 4, 2001, the Company completed the acquisition of the
footwear assets of J. Baker, Inc. and its subsidiaries. The business operated
1,163 licensed footwear departments under 13 agreements with retail chains
including Ames, Roses, Stein Mart and Spiegel. Assets purchased by the Company
included inventory, store fixtures, intellectual property and license
agreements. The cash consideration paid for the assets was approximately $59.0
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 J. Baker from the acquisition date. The
results of operations generated from the assets acquired are reported as part of
the Company's Meldisco segment. Based on purchase price allocations, the excess
of the purchase price over the fair market value of the net assets acquired
amounting to approximately $16.6 million was recorded as goodwill and is being
amortized over 15 years. Adjustments to the purchase price during the second
quarter resulted principally from the appraisals of license agreements performed
subsequent to the purchase. Additional adjustments to the purchase price
allocation may result from the completion of an appraisal of the acquired
assets, which is currently in progress.
6
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except 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 J. Baker licensed footwear departments and the Meldisco licensed
footwear departments represent operating segments that have been aggregated into
the reporting segment called "Meldisco" for financial reporting purposes. The
assets of the two athletic footwear and apparel chains, Footaction and Just For
Feet have been aggregated into the reporting segment called "athletic" for
reporting purposes.
Three Months Ended June 30, 2001
-----------------------------------------------------
($ in millions) Meldisco(1) Athletic(2) Corporate Total
-----------------------------------------------------
Net sales $410.0 $239.0 $ -- $649.0
Operating profit (loss) 56.5 (1.5) (2.7) 52.3
Six Months Ended June 30, 2001
-----------------------------------------------------
($ in millions) Meldisco(1) Athletic(2) Corporate Total
-----------------------------------------------------
Net sales $686.6 $479.5 $ -- $1,166.1
Operating profit (loss) 64.0 (6.8) (4.1) 53.1
Three Months Ended July 1, 2000
-----------------------------------------------------
($ in millions) Meldisco Athletic(2) Corporate Total
-----------------------------------------------------
Net sales $357.2 $232.2 $ -- $589.4
Operating profit (loss) 51.1 1.8 (2.2) 50.7
Six Months Ended July 1, 2000
-----------------------------------------------------
($ in millions) Meldisco Athletic(2) Corporate Total
-----------------------------------------------------
Net sales $631.4 $397.7 $ -- $1,029.1
Operating profit (loss) 63.9 1.7 (4.4) 61.2
(1) The newly acquired J. Baker licensed footwear departments have been
combined with and reported as the Meldisco segment.
(2) Footaction and Just For Feet have been combined and reported as a group
called the athletic segment.
7
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except 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.
Comprehensive income for the three- and six- month periods ended June 30, 2001
and July 1, 2000 contain no other components of comprehensive income other than
net income. Comprehensive income for the three-month periods ended June 30, 2001
and July 1, 2000 was $16.1 million and $15.4 million, respectively.
Comprehensive income for the six-month periods ended June 30, 2001 and July 1,
2000 was $12.0 million and $18.2 million, respectively.
8
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
5. Earnings per Share
The table below shows calculated earnings per share in accordance with SFAS No.
128.
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
----------- ----------- ----------- ------------
Numerator for Basic and Diluted EPS -
Net Income $16.1 $15.4 $12.0 $18.2
=========== =========== =========== ============
Denominator:
Shares outstanding at beginning of
period 19,887,868 19,624,534 19,854,778 20,123,983
Weighted average deferred compensation
shares earned not issued 322,928 299,604 304,552 256,456
Weighted average shares issued/(repurchased) 10,356 (103,837) 26,690 (412,400)
----------- ----------- ----------- ------------
Denominator for Basic EPS - Weighted average
common shares outstanding 20,221,152 19,820,301 20,186,020 19,968,039
----------- ----------- ----------- ------------
Dilutive effect of stock options 487,000 542,813 578,770 401,525
----------- ----------- ----------- ------------
Denominator for Diluted EPS - Adjusted
weighted average common shares outstanding 20,708,152 20,363,114 20,764,790 20,369,564
----------- ----------- ----------- ------------
Basic EPS $0.80 $0.78 $0.59 $0.91
=========== =========== =========== ============
Diluted EPS $0.78 $0.76 $0.58 $0.89
=========== =========== =========== ============
9
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
6. Purchase of Treasury Stock
During the second quarter ended June 30, 2001, the Company did not repurchase
any of its stock. From May 1997, when the first share repurchase program was
approved by the Company's Board of Directors, through June 30, 2001, 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 June 30, 2001
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 out of treasury for the
Company's stock incentive plans during the three-month and six-month period
ended June 30, 2001 totaled 14,775 shares and 47,865 shares, respectively. From
March 2000, when the Company first started issuing shares out of treasury,
through June 30, 2001 the Company had issued 483,959 shares from treasury stock.
7. Supplemental Cash Flow Information
Six Months Ended
----------------------------
June 30, July 1,
2001 2000
-------------- ------------
Cash paid for income taxes $22.6 $23.8
Cash paid for interest $7.8 $3.6
Net cash used in operating activities for the second quarter ended June 30, 2001
was $26.7 million versus $12.3 million for the same period of 2000. The Company
used more cash to fund its operating activities during the second quarter of
2001 than during the second quarter of 2000 primarily to support its larger
inventory levels resulting from its acquisitions of both Just For Feet and J.
Baker.
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. As of June 30, 2001, there was $234.7 million
outstanding under the Credit Facility with a quarterly weighted average interest
rate of 6.1%.
10
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
9. Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001 and
to adopt Statement 142 effective the first day of fiscal 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 requires that, upon adoption of Statement 142, the Company
evaluate existing intangible assets and goodwill that were acquired in a
purchase business combination effective prior to June 30, 2001, and to make any
necessary reclassifications in order to conform with the new criteria in
Statement 141. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit
11
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of it assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $35.5 million and unamortized identifiable intangible assets in
the amount of $25.2 million, both of which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $0.7 million and $0.8 million for the year ended December 30, 2000 and the
six months ended June 30, 2001, respectively. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
12
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 June 30, 2001 and the related consolidated condensed
statements of operations for the three-month and six-month periods ended June
30, 2001 and July 1, 2000, respectively and condensed cash flows for the
six-month periods ended June 30, 2001 and July 1, 2000, 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 December 30, 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 12,
2001, 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 December 30, 2000 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/S/ KPMG LLP
New York, New York
July 19, 2001
13
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
Condensed Financial Statements of the Company and notes thereto appearing
elsewhere in this report.
General
Three Months Ended
----------------------------------
June 30, July 1,
($ in millions) 2001 2000
------------- ------------
Company:
Net sales $649.0 $589.4
Net sales % change from prior year 10.1% 23.1%
Same store sales % change(1) (1.3%) 5.9%
Meldisco:
Net sales $410.0 $357.2
Net sales % change from prior year 14.8% 8.5%
Same store sales % change(1) (2.0%) 7.1%
% of consolidated net sales 63.2 60.6%
Athletic:
Net sales $239.0 $232.2
Net sales % change from prior year 2.9% 55.0%
Same store sales % change (0.1%) 3.1%
% of consolidated net sales 36.8 39.4%
Note: (1) Same store sales do not include J. Baker sales since the acquired
stores have not been operated by the Company for twelve months.
Consolidated net sales for the three months ended June 30, 2001, were $649.0
million, an increase of 10.1% from net sales of $589.4 million for the same
period of 2000. Same store sales for the three-month period decreased 1.3%
compared to the year-ago period. Total sales for Meldisco increased 14.8% to
$410.0 million, due to the addition of sales from the J. Baker businesses.
Meldisco's same store sales percentage (which does not include sales of the
newly acquired J. Baker stores) decreased 2.0%. The decrease is attributable to
difficult comparisons with sales in an unseasonably warm second quarter in 2000.
In the athletic segment total sales increased 2.9% to $239.0 million and same
store sales declined 0.1%. Weak sales of apparel and running shoes at Footaction
contributed to the decline.
14
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Six Months Ended
----------------------------------
June 30, July 1,
($ in millions) 2001 2000
------------- ------------
Company:
Net sales $1,166.1 $1,029.1
Net sales % change from prior year 13.3% 12.1%
Same store sales % change(1),(2) (2.5%) 1.4%
Meldisco:
Net sales $686.6 $631.4
Net sales % change from prior year 8.7% 4.7%
Same store sales % change(1) (5.0%) 3.7%
% of consolidated net sales 58.9% 61.4%
Athletic:
Net sales $479.5 $397.7
Net sales % change from prior year 20.6% 26.1%
Same store sales % change(2) 1.6% (3.0%)
% of consolidated net sales 41.1% 38.6%
Note:(1) Same store sales do not include J. Baker sales since the acquired
stores have not been operated by the Company for twelve months.
(2) Same store sales include Just For Feet sales beginning in April 2001
when the acquired stores had been operated by the company for twelve
months.
Consolidated net sales for the six months ended June 30, 2001, were $1,166.1
million, an increase of 13.3% from net sales of $1029.1 million for the same
period of 2000. Same store sales for the six-month period decreased 2.5%
compared to the year-ago period. Total sales for Meldisco increased 8.7% to
$686.6 million and same store sales at Meldisco (which do not include the newly
acquired J. Baker business) decreased 5.0%. Depleted winter boot inventories in
the first quarter and cold weather during the spring-selling season negatively
impacted Meldisco's same store sales. Total sales for the athletic segment
increased 20.6% to $479.5 million, due to the addition of Just For Feet. Same
store sales increased 1.6% for the athletic segment; this comparison percentage
includes Just For Feet sales beginning with sales of April 2001 after which the
acquired stores had been operated by the company for twelve months.
15
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 Six Months Ended
--------------------- ----------------------
(As a percent of net sales) June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- -------- --------
Cost of sales 68.3% 67.4% 69.8% 69.0%
Store operating, selling,
general and administrative
expenses 21.7% 22.1% 23.6% 23.1%
Depreciation and
amortization 1.9% 1.9% 2.1% 2.0%
Cost of Sales
Cost of sales for the second quarter of 2001, as a percent of net sales,
increased 90 basis points from the corresponding prior-year period primarily due
to substantially lower gross margins in the athletic segment. In the Meldisco
segment, margins were slightly below last year; improved margins in the core
Kmart business were offset by lower margins at the newly acquired business, as
inventory on hand at the time of the acquisition was cleared to make room for
new assortments.
Cost of sales for the six months ended June 30, 2001, as a percent of net sales,
increased 80 basis points from the same comparable 2000 period mainly due to
increased markdowns in the athletic segment in a highly promotional environment.
Store Operating, Selling, General and Administrative Expenses
Second quarter 2001 store operating, selling, general and administrative
("SG&A") expenses, as a percent of net sales, decreased 40 basis points from
the same year-ago period as expenses were better leveraged at both Meldisco and
the athletic segment. Second quarter SG&A expenses were $10.3 million greater
than in the second quarter of 2000 due to the added operating cost of the
acquired J. Baker business, one-time J. Baker transition-related expenses, and
operating costs associated with the eleven Just For Feet stores opened within
the past year.
Store operating, selling, general and administrative expenses for the six months
ended June 30, 2001, as a percent of net sales, increased 50 basis points from
the corresponding prior-year period due to additional sales promotion expenses
at Just For Feet during the first quarter and higher expenses at Meldisco
resulting from the acquisition of the J. Baker business.
16
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Operating Profit
Three Months Ended
-------------------------------------------------
($ in millions) June 30, 2001 July 1, 2000
---------------------- ---------------------
Meldisco(1) $56.5 13.8% $51.1 14.3%
Athletic(1) (1.5) (0.6%) 1.8 0.8%
Corporate overhead (2.7) -- (2.2) --
----- -----
Total(1) $52.3 8.1% $50.7 8.6%
===== =====
Note: (1) percentages represent percent of net sales of the respective entities.
Six Months Ended
-------------------------------------------------
($ in millions) June 30, 2001 July 1, 2000
---------------------- ---------------------
Meldisco(1) $64.0 9.3% $63.9 10.1%
Athletic(1) (6.8) (1.4%) 1.7 0.4%
Corporate overhead (4.1) -- (4.4) --
----- -----
Total(1) $53.1 4.6% $61.2 5.9%
===== =====
Note: (1) percentages represent percent of net sales of the respective entities.
During the second quarter ended June 30, 2001 operating profit as a percent of
net sales decreased 50 basis points versus the same period of 2000. Meldisco's
operating profit as a percent of net sales decreased by 50 basis points due to
the transition expenses related to the J. Baker acquisition. Operating profit at
the athletic segment for the second quarter ended June 30, 2001 decreased 140
basis points compared to the prior-year period due to additional markdowns taken
in a heavily promotional athletic market.
For the six months ended June 30, 2001 operating profit as a percent of net
sales declined 130 basis points versus the same year-ago period. Meldisco's
operating profit as a percent of net sales decreased 80 basis points due to
adverse weather conditions and acquisition-related transition expenses. For the
first two quarters of 2001 versus the same period in 2000 operating profit at
the athletic segment declined 180 basis points. The product recall of the
exclusive Nike running shoe, the Trunner, announced in March 2001, negatively
impacted sales. The effect of the recall, plus increased markdowns at Footaction
and high markdowns at Just For Feet to clear excess fourth quarter 2000 apparel
inventories, resulted in lowered operating profits in the athletic segment.
17
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001 and
to adopt Statement 142 effective the first day of fiscal 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 requires that, upon adoption of Statement 142, the Company
evaluate existing intangible assets and goodwill that were acquired in a
purchase business combination effective prior to June 30, 2001, and to make any
necessary reclassifications in order to conform with the new criteria in
Statement 141. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 requires the Company to perform an assessment of whether there is an
indication that goodwill is
18
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
impaired as of the date of adoption. To accomplish this the Company must
identify its reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. The
Company will then have up to six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of it assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with Statement 141, to its carrying amount, both of which would be measured as
of the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of operations.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $35.5 million and unamortized identifiable intangible assets in
the amount of $25.2 million, both of which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $0.7 million and $0.8 million for the year ended December 30, 2000 and the
six months ended June 30, 2001, respectively. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
Liquidity and Financial Condition
The Company's inventories at the end of the second quarter increased by
approximately 24% versus the same quarter of 2000. The increase is attributable
to depressed post-acquisition inventory levels at Just For Feet last year and
the acquisition of the J. Baker inventories in the first quarter of 2001.
In addition to inventories, the majority of the J. Baker acquired assets
represent store fixtures, which have been classified within property and
equipment and intellectual property, license agreements and goodwill classified
within goodwill, deferred charges and other noncurrent assets.
As of June 30, 2001, the Company had $234.7 million in borrowings, classified as
long-term debt. Net interest expense for the six months ended June 30, 2001 was
$8.6 million compared to $3.1 million for the same period of 2000. This increase
was the result of the borrowings associated with the Company's acquisitions,
capital expenditures, inventory purchases to re-
19
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
stock the J. Baker and Just for Feet businesses and the purchase of the
Company's former headquarters building in Mahwah, New Jersey. As of August 2001
the Company's headquarters moved to leased office space in West Nyack, New York
and Meldisco's corporate offices remained in the aforementioned building in
Mahwah.
The Company has a $325 million 3-year revolving credit facility with a syndicate
of banks led by Fleet National Bank, which was effective May 25, 2000
(collectively, with all amendments the "Credit Facility"). The Credit Facility
contains various operating covenants, which, among other things, impose certain
limitations on the Company's ability to incur liens, incur indebtedness, merge,
consolidate, 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 all covenants.
The Company's businesses are seasonal in nature and, therefore, impacted by
weather conditions. 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 new growth and investment
opportunities.
The Company expects that it will retain all available funds for the operation
and expansion of its business, 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 $51.8 million representing
Kmart's normal dividend for its minority interest in net income for fiscal year
2000.
Capital expenditures for the six months ended June 30, 2001 were $20.7 million.
Total capital expenditures for the entire 2001 fiscal year are estimated to be
between $80 to $85 million and are expected to involve projects that will
improve asset productivity into the future including upgrading the point of sale
and back office systems in the athletic segment, improving the allocation and
replenishment applications in both the athletic and Meldisco segments, and
expanding the Mira Loma, California cross-docking distribution center.
20
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: uncertainties related
to the integration of new businesses, the ability of the Company to execute its
plans including its marketing plans, the continued independence and financial
health of the Company's significant licensors, 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.
21
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
(Unaudited)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
Interest Rates
The Company's investment and debt portfolios are primarily seasonal in nature.
The Company, from time to time, undertakes borrowings to finance working
capital, acquisitions and other corporate requirements. The Company's peak
borrowing periods coincide with peak inventory purchases.
Foreign Exchange
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.
22
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 1, 2001. The
stockholders elected all of management's nominees for the Board of Directors to
serve until the Annual Meeting of Stockholders in 2004 and ratified the
appointment of KPMG LLP as the Corporation's independent auditors for fiscal
2001.
The voting results are as follows:
Election of Directors
Broker
For Withheld Non-Votes
-----------------------------------------------
Robert A. Davies, III 14,630,192 3,595,200 --
Terry R. Lautenbach 14,629,728 3,595,664 --
Ratification of Auditors
Broker
For Against Abstain Non-Votes
-------------------------------------------------------
18,189,250 20,371 15,771 --
23
Item 6. - Exhibits and Reports on Form 8-K
a) EXHIBIT INDEX
Exhibit
10-14 (a) First Amendment to Credit Agreement
10-14 (b) Second Amendment to Credit Agreement
15 Accountants' Acknowledgment
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/ STEPHEN R. WILSON
-----------------------------
Stephen R. Wilson
Executive Vice President and
Chief Financial Officer
Date: August 13, 2001
24