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 March 30, 2002
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Commission File Number 1-11681
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FOOTSTAR, INC.
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(Exact Name of Registrant as specified in its charter)
Delaware 22-3439443
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(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1 Crosfield Avenue West Nyack, New York 10994
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(Address of principal executive offices) (Zip Code)
(845) 727-6500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding as of March 30, 2002
----- --------------------------------
Common Stock, $.01 par value 20,112,831
INDEX
Part I. - Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
Three Months Ended March 30, 2002 and March 31, 2001 3
Consolidated Condensed Balance Sheets -
March 30, 2002, December 29, 2001 and March 31, 2001 4
Consolidated Condensed Statements of Cash Flows -
For Three Months Ended March 30, 2002 and March 31, 2001 5
Notes to Consolidated Condensed Financial Statements 6-14
Independent Auditors' Review Report 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22-23
Part II. - Other Information
Item 6. Exhibits and Reports on Form 8-K 24
2
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(tabular amounts in millions, except per share data)
Three Months Ended
-------------------------
March 30, March 31,
2002 2001
---------- ---------
Net sales $553.8 $517.2
Cost of sales 399.8 370.1
------ ------
Gross profit 154.0 147.1
Store operating, selling, general and
administrative expenses 143.0 134.4
Depreciation and amortization 10.1 11.9
Restructuring and other charges (reversals), net 6.5 --
------ ------
Operating (loss) profit (5.6) 0.8
Interest expense, net 2.0 3.3
------ ------
Loss before income taxes and minority interests (7.6) (2.5)
Income tax benefit (2.4) (0.8)
------ ------
Loss before minority interests (5.2) (1.7)
Minority interests in net income 0.9 2.4
------ ------
Net loss $ (6.1) $ (4.1)
====== ======
Weighted average shares outstanding:
Basic: 20.4 20.1
====== ======
Diluted: 20.4 20.1
====== ======
Loss per share:
Basic: $(0.30) $(0.20)
====== ======
Diluted: $(0.30) $(0.20)
====== ======
Loss per share excluding
amortization of goodwill and intangible
asset with indefinite useful life:
Basic $(0.30) $(0.19)
====== ======
Diluted $(0.30) $(0.19)
====== ======
See accompanying notes to consolidated condensed financial statements.
3
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(tabular amounts in millions, except for share data)
March 30, December 29, March 31,
2002 2001 2001
--------- ------------ ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 14.9 $ 12.4 $ 17.8
Accounts receivable, net 67.8 69.6 55.6
Inventories 439.2 368.5 513.6
Prepaid expenses and other current assets 60.0 61.2 39.6
------- ------- -------
Total current assets 581.9 511.7 626.6
Property and equipment, net 269.7 258.6 262.1
Goodwill, net 42.4 42.4 35.8
Intangible assets, net 23.1 23.6 20.4
Deferred charges and other non-current assets 29.7 29.7 33.2
------- ------- -------
Total assets $ 946.8 $ 866.0 $ 978.1
======= ======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 135.5 $ 108.8 $ 158.0
Accrued expenses 160.0 144.0 130.9
Income taxes payable 11.0 12.2 3.8
Notes Payable -- -- 91.7
------- ------- -------
Total current liabilities 306.5 265.0 384.4
Long-term debt 193.3 146.9 120.0
Other long-term liabilities 68.3 70.7 66.6
Minority interests in subsidiaries 76.5 75.7 84.0
------- ------- -------
Total liabilities $ 644.6 $ 558.3 $ 655.0
------- ------- -------
Shareholders' Equity:
Common stock $.0l par value: 100,000,000
shares authorized, 30,824,400, 30,770,372 and 30,636,884
shares issued 0.3 0.3 0.3
Additional paid-in capital 348.2 347.3 346.2
Accumulated other comprehensive income -- (0.1) (0.1)
Treasury stock: 10,711,569, 10,711,569 and 10,749,016 shares
at cost (310.6) (310.6) (311.7)
Unearned compensation (6.2) (5.8) (7.6)
Retained earnings 270.5 276.6 296.0
------- ------- -------
Total shareholders' equity $ 302.2 $ 307.7 $ 323.1
------- ------- -------
Total liabilities and shareholders' equity $ 946.8 $ 866.0 $ 978.1
======= ======= =======
See accompanying notes to consolidated condensed financial statements.
4
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(tabular amounts in millions)
Three Months Ended
------------------------
March 30, March 31,
2002 2001
---------- ---------
Net cash used in operating activities $(22.9) $(66.3)
------ ------
Cash flows (used in) provided by investing activities:
Acquisition of footwear assets of J. Baker -- (59.0)
Additions to property and equipment (24.5) (8.7)
Proceeds from sale of building 3.2 --
------ ------
Net cash used in investing activities (21.3) (67.7)
------ ------
Cash flows (used in) provided by financing activities:
Treasury stock issued -- 1.0
Payment on stock incentive plans (0.6) (0.5)
Net proceeds from notes payable 46.4 137.7
Payments on capital leases (0.1) (0.1)
Payments on mortgage note (0.2) (0.2)
Other 1.2 (0.4)
------ ------
Net cash provided by financing activities 46.7 137.5
------ ------
Net increase in cash and cash equivalents 2.5 3.5
Cash and cash equivalents, beginning of period 12.4 14.3
------ ------
Cash and cash equivalents, end of period $ 14.9 $ 17.8
====== ======
See accompanying notes to consolidated condensed financial statements.
5
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions)
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 March 30, 2002 and the results of operations and
cash flows for the three-month periods ended March 30, 2002 and March 31, 2001,
respectively. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America,
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 2001 Annual Report on Form 10-K.
2. Significant Relationship with Kmart
Footstar has a significant business relationship with Kmart. Footstar operates
the licensed footwear departments in Kmart stores through its Meldisco
subsidiaries, in which Kmart owns a 49 percent equity interest. Under the
agreement with Kmart, these Meldisco subsidiaries retain title to the inventory
in each licensed footwear department up until the time the product is sold and
are responsible for staffing the footwear departments. Kmart collects the
proceeds of each sale and, on a weekly basis, Kmart remits the proceeds of the
sales to Meldisco less applicable deductions and fees. Meldisco has operated
licensed footwear departments in Kmart stores since 1961. The licensed footwear
departments in Kmart have historically provided a significant portion of
Footstar's total annual sales and profits. For the fiscal years ended December
29, 2001, December 30, 2000 and January 1, 2000, Kmart footwear sales
represented 49%, 58% and 64% of Footstar's net sales, respectively. Operating
profit relating to Kmart footwear departments, excluding restructuring and other
charges, reduced by Kmart's 49% equity interest in such departments was 81%, 78%
and 73% of Footstar's operating profits in each of the fiscal years in the three
year period ended December 29, 2001, respectively.
On January 22, 2002, Kmart filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Kmart also announced that it had secured
$2 billion in senior secured debtor-in-possession ("DIP") financing to be used
to supplement its existing cash flows to fund its proposed reorganization and
continuing operations. Kmart stated that its decision to seek judicial
reorganization was based on a combination of factors, including a rapid decline
in its liquidity resulting from Kmart's sales and earnings performance in its
fourth quarter ending January 2002, the weakening of the surety bond market and
an erosion of supplier confidence.
6
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions)
During March 2002, Kmart received bankruptcy court approval to close 283
under-performing stores. These 283 licensed footwear departments generated
$116.5 million of sales for Footstar for fiscal year 2001 compared with $125.1
million for fiscal year 2000, or 4.7% and 5.6% of Footstar's total sales in the
respective years. Total operating profits for 2001 from these 283 licensed
departments were $9.3 million compared with $11.5 million in 2000. Footstar's
operating profit from these 283 licensed departments reduced by Kmart's 49%
equity interest in such departments (51% of total operating profit) was
approximately $4.7 million in 2001, and $5.9 million in 2000, or 5.8% and 6.0%
of Footstar's operating profits in the respective years after excluding such
Kmart equity interest. Prior to Kmart's announcement, the Company took steps to
mitigate the potential effect of these store closings by reducing inventory
purchases, eliminating non-essential projects and reducing headcount in Meldisco
and at Footstar's corporate offices. The Company expects the 283 stores to be
closed by the end of the second quarter of 2002.
Note 7 below describes the charges recorded during the first quarter of 2002
relating to Kmart's store closing plan.
3. Acquisition of J. Baker
On February 4, 2001, the Company completed the acquisition of the footwear
assets of J. Baker, Inc. and its subsidiaries. At the date of acquisition, 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 $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 $26.7 million, was recorded as goodwill. Effective
the first day of fiscal 2002, the Company adopted Statement of Financial
Accounting Standards ("Statement") No. 142, Goodwill and Other Intangible
Assets, and ceased amortizing goodwill. See the "Goodwill and Other Intangible
Assets" section of these notes for additional information.
7
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions, except per share data)
4. Segment Information
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires that public business enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Under Statement No. 131, licensed footwear departments operated by
the Company represent operating segments that have been aggregated into the
reporting segment called "Meldisco" for financial reporting purposes. The assets
of the two athletic footwear and apparel chains, Footaction and Just For Feet,
have been aggregated into the reporting segment called "Athletic" for reporting
purposes.
Three Months Ended March 30, 2002
----------------------------------------------------------------------
($ in millions) Meldisco(1),(3) Athletic(2),(3),(4) Corporate(3),(4) Total(4)
--------------- --------------- ------------------- ---------------- --------
Net sales $315.6 $238.2 $ -- $553.8
Operating profit (loss)
before restructuring and
other charges 12.3 3.0 (1.3) 14.0
Restructuring and other
charges (reversals) 14.8 4.4 0.4 19.6
Operating loss (2.5) (1.4) (1.7) (5.6)
Three Months Ended March 31, 2001
-----------------------------------------------------------------------
($ in millions) Meldisco(1) Athletic(2),(4) Corporate(4) Total(4)
--------------- --------------- ------------------- ---------------- ---------
Net sales $276.6 $240.6 $ -- $517.2
Operating profit (loss) 7.5 (5.3) (1.4) 0.8
(1) The licensed footwear departments have been combined and reported as the
Meldisco segment.
(2) Footaction and Just For Feet have been combined and reported as the
athletic segment.
(3) The operating profit (loss) before restructuring and other charges,
excludes certain costs related to the Company's restructuring plan and
Kmart's store closing plan. Restructuring and other charges amounted to
$19.6 million, $13.1 million related to inventory write-downs, which were
recorded as a component of cost of sales, and $6.5 million related to
severance and building exit costs. Meldisco, athletic and Corporate
recorded $14.8 million, $4.4 million and $0.4 million of these charges,
respectively.
(4) Amortization expense included in 2001 but no longer required in 2002 as a
result of the Company's adoption of Statement 142 totaled $0.2 million,
$0.1 million and $0.3 million for athletic, corporate and the consolidated
Company, respectively.
5. Comprehensive Loss
Statement No. 130, Reporting Comprehensive Income, requires that items defined
as other comprehensive income, such as foreign currency translation adjustments
and unrealized gain (loss) in the fair value of derivatives, 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 loss for the three-month period ended March 30, 2002 was $6.1
million which contains $0.034 million of unrealized gain on interest rate swap
transactions and net loss of $6.1 million. Comprehensive loss for the
three-month period ended March 31, 2001 was $4.1 million and contains no other
components other than the net loss.
8
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions, except share and per share data)
6. Earnings per Share
The table below shows the reconciliation of the earnings available to common
stockholders and the shares used in calculating basic and dilutive earnings per
common share.
Three Months Ended
---------------------------
March 30, March 31,
2002 2001
----------- -----------
Numerator for Basic and Diluted EPS - Net loss $(6.1) $(4.1)
=========== ===========
Denominator:
Shares outstanding at beginning of period 20,058,803 19,854,778
Weighted average deferred compensation
shares earned not issued 304,891 284,572
Weighted average shares issued 17,873 9,933
----------- -----------
Denominator for Basic EPS-Weighted average
common shares outstanding 20,381,567 20,149,283
----------- -----------
Dilutive effect of stock options(1) -- --
----------- -----------
Denominator for Diluted EPS-Adjusted
weighted average common shares outstanding 20,381,567 20,149,283
----------- -----------
Basic loss per share $(0.30) $(0.20)
=========== ===========
Diluted loss per share $(0.30) $(0.20)
=========== ===========
(1) The computation of diluted EPS should not assume conversion, exercise, or
issuance of shares that would have an anti-dilutive effect on earnings per
share. For fiscal 2001, the Company had a loss from operations and, as a result,
any assumed conversions would result in reducing the loss per share and
therefore are not included in the calculation.
9
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions, except per share data)
7. Restructuring and Other Charges (Reversals)
During the first quarter of 2002, the Company approved a restructuring plan in
connection with its athletic reorganization and incurred other charges relating
to Kmart's store closing plan (the "charges"). In connection with these charges,
the Company recorded pre-tax restructuring and other charges totaling $20.4
million ($8.5 million after tax and minority interest) for the write-down of
inventory, building exit costs and severance costs. In addition, the Company
reversed approximately $0.8 million ($0.6 million after taxes) of the charge
recorded in 2001 relating to exit costs associated with a landlord relationship
assumed in the J. Baker acquisition.
These charges cover costs related to inventory write-downs and severance costs
in connection with Kmart's announcement of its plan to close 283 stores, as well
as costs to shut down the Company's Irving, Texas Footaction offices, including
building exit costs and severance costs in connection with the Company's plan to
combine the marketing, planning, finance and human resources functions of its
two athletic chains, Footaction and Just For Feet.
The most significant component of these charges included the write-down of
certain inventory in the Meldisco segment, which totaled $13.1 million and has
been recorded as a component of cost of sales.
In connection with the consolidation of the Company's athletic divisions, the
Company established reserves within the athletic segment for costs to exit its
Footaction headquarters building of $2.3 million and severance costs of $2.1
million. In connection with Kmart's 283 store closings, Meldisco established
reserves for various exit costs and severance costs totaling $0.6 million and
$1.9 million, respectively. Costs are being charged against the reserves as
incurred and the reserves will be reviewed periodically to determine their
adequacy.
The following table displays a rollforward of the activity for the three month
period ended March 30, 2002 and significant components of the restructuring and
other charges and the related reserves remaining as of March 30, 2002. The
balance at December 30, 2001 primarily relates to severance and lease
termination costs associated with the Company's 2001 and 1998 restructuring,
asset impairment and other charges.
Balance
December 29, Additional Remaining at
2001 Charge/(Reversal) Usage March 30, 2002
---- ----------------- ----- --------------
Non-cash components:
Inventory write-downs $ -- $13.1 $13.1 $ --
Cash components:
Severance costs 1.5 4.4 0.8 5.1
Store, building and
lease exit costs 29.1 2.1 3.2 28.0
----- ----- ----- -----
Total $30.6 $19.6 $17.1 $33.1
===== ===== ===== =====
The 2002 usage primarily consists of permanent markdowns of inventory, various
lease costs and severance payments.
10
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions, except per share data)
8. Supplemental Cash Flow Information
Three Months Ended
------------------------------
March 30, March 31,
2002 2001
--------- ---------
Cash (received) paid for
income taxes $(2.5) $11.1
Cash paid for interest $ 2.0 $4.5
9. Long-term Debt
Effective May 25, 2000, the Company entered into a three-year, $325 million
revolving credit facility with a syndicate of banks. This facility replaced a
$300 million revolving credit facility, which was due to expire September 18,
2000. As of March 30, 2002, there was $193.3 million outstanding under the
credit facility and the weighted average interest rate on the outstanding
balance was 3.9%. As of March 31, 2001, there was $211.7 million outstanding
under the Credit Facility with an average interest rate of 6.7%.
10. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
During the third quarter of fiscal year 2001, Ames, whose footwear department
license was acquired in the J. Baker acquisition, filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code and named the
Company as a general unsecured creditor with respect to a pre-petition
receivable, which amounted to $9.2 million. As a debtor in a reorganization
proceeding, Ames has the right to seek to reject or assume contracts with
bankruptcy court approval. The Company believes, based upon all available
information, that Ames will in all likelihood assume its agreement with the
Company, which, under the bankruptcy code, will require Ames to pay the
pre-petition amounts due. As such, the Company believes that these amounts are
recoverable and no allowance has been established. The Company continues to
operate licensed footwear departments within Ames during this reorganization
period.
The Company is committed to the continued expansion of its distribution center
located in Mira Loma, California. The Company spent $7.5 million on this project
during the first quarter of 2002 and expects to spend an additional $13 million
on this project during the remainder of 2002.
11
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions, except amortizable lives)
11. Goodwill and other Intangible Assets
In July 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible
Assets. Statement No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment annually in accordance with the provisions of Statement No. 142.
Statement No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values. Intangible assets with definite useful lives are
reviewed for impairment in accordance with Statement No. 144. See the "Impact of
Recently Issued Accounting Standard" note for more information.
The Company adopted the provisions of Statement No. 142 effective the first day
of fiscal 2002. The Company ceased the amortization of all unamortized goodwill
and ceased the amortization of $9.9 million of an unamortized intangible asset,
which has an indefinite useful life. At March 30, 2002, goodwill relating to the
Meldisco and the athletic segments totaled $26.7 million and $15.7 million,
respectively. Amortization expense related to goodwill was $0.3 million for the
quarter ended March 31, 2001. Amortization expense related to the intangible
asset with an indefinite useful life was $0.1 million for the quarter ended
March 31, 2001.
In connection with the adoption of Statement No. 142, the Company reassessed the
useful lives of its amortizable intangible assets to be as noted in the table
below, which did not change from previous years. Additionally, the unamortizable
tradename is determined to have an indefinite useful life due to its expected
ability to generate cash flows indefinitely. As of March 30, 2002 the Company
reevaluated the fair value of the unamortizable tradename and determined that
there was no impairment of the intangible asset.
The following table shows information regarding intangible assets that are
deemed to have a finite life and are therefore currently amortized in accordance
with Statement No. 142 and intangibles with indefinite life which are no longer
being amortized.
As of March 30, 2002 As of December 29, 2001 As of March 31, 2001
-------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross
Amortizable Carrying Accumulated Carrying Accumulated Carrying Accumulated
lives Amount Amortization Amount Amortization Amount Amortization
Amortizable assets
Tradenames 10-20 $12.7 $2.0 $12.7 $1.7 $ 7.5 $0.7
Feet.com 5 1.2 0.5 1.2 0.5 1.2 0.3
Customer Database 5 3.1 1.3 3.1 1.1 3.1 0.7
Unamortizable asset
Tradenames 10.5 0.6 10.5 0.6 10.5 0.2
-------------------------------------------------------------------------------------------------------------------------
Total $27.5 $4.4 $27.5 $3.9 $22.3 $1.9
-------------------------------------------------------------------------------------------------------------------------
12
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions, except per share data)
The following schedule shows the reconciliation between net loss and the net
loss excluding amortization of goodwill and amortization of tradename with an
indefinite life at March 31, 2001 as well as the related impact on basic and
dilutive loss per share.
For the three months
ended March 30, 2001
--------------------
Net loss reported $(4.1)
Add back: Goodwill amortization 0.3
Add back: Tradename amortization 0.1
Adjusted net loss $(3.7)
======
Basic loss per share:
Net loss $(0.20)
Goodwill amortization $ 0.01
Tradename amortization --
Adjusted net loss $(0.19)
Diluted loss per share:
Net loss $(0.20)
Goodwill amortization $ 0.01
Tradename amortization --
Adjusted net loss $(0.19)
The following table lists amortization expense relating to these intangible
assets for the quarter ended March 30, 2002 and projected amortization expense
for the next five years.
Quarter ended March 30, 2002 $0.5
Fiscal year 2002 2.1
Fiscal year 2003 2.1
Fiscal year 2004 2.1
Fiscal year 2005 1.4
Fiscal year 2006 1.2
The Company has six months from the date of adoption to complete the initial
test of impairment for goodwill and will perform that test by June 29, 2002.
Because of the extensive effort needed to comply with adopting Statement No.
142, it is not practicable to reasonably estimate whether any goodwill-related
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
13
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions, except per share data)
12. Interest Rate Swap Agreements
The Company incurs variable rate debt through its Credit Facility. This debt
exposes the Company to variability in interest expense due to changes in
interest rates. In order to limit the variability of a portion of its interest
expense, effective January 8, 2002, the Company entered into four interest rate
swap agreements with a total notional amount of $60 million, which fix the rate
at 3.6% on the notional amount of $60 million. For the quarter ended March 30,
2002, interest rate cash flow hedges resulted in immaterial ineffectiveness. The
fair value of each interest rate swap (the net interest receivable/payable) is
reflected in the consolidated balance sheet as a current receivable and other
comprehensive income totaling $0.034 million at March 30, 2002. Since the
interest rate swaps qualified as a cash flow hedge and were determined to be
highly effective, the changes in the fair value were recorded in other
comprehensive income. The Company does not expect to charge any net derivative
gains included in other comprehensive income as of March 30, 2002 to earnings
during the next twelve months. The Company does not enter into derivative
instruments for any purpose other than to manage its interest rate exposure. The
Company does not hold derivative financial investments for trading or
speculation purposes.
13. Impact of Recently Issued Accounting Standard
On October 3, 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets to Be Disposed Of. This statement
addresses accounting and reporting for the impairment or disposal of long-lived
assets. The statement supersedes FASB Statement No. 121, while retaining many of
the fundamental provisions covered by that statement. Statement No. 144 differs
fundamentally from Statement No. 121 in that goodwill and other intangible
assets that are not amortized are excluded from the scope of Statement No. 144.
Additionally Statement No. 144 addresses and clarifies implementation and
estimation issues arising from Statement No. 121.
Statement No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
Statement No. 144 retains the basic provisions of APB Opinion No. 30 for the
presentation of discontinued operations in the income statement but broadens
that presentation to apply to a component of an entity rather than a segment of
a business. The statement is effective for fiscal years beginning after December
15, 2001. The application of Statement No. 144 in January 2002 did not have a
material impact on the Company's consolidated financial statements.
14
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 March 30, 2002 and March 31, 2001 and the related
consolidated condensed statements of operations for the three-month periods
ended March 30, 2002 and March 31, 2001, respectively and condensed cash flows
for the three-month periods ended March 30, 2002 and March 31, 2001,
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 29, 2001 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 5,
2002, except as to the third paragraph of the "Business Risk" note which was as
of March 15, 2002, 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 29, 2001 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
April 24, 2002
15
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
---------------------------
March 30, March 31,
($ in millions) 2002 2001
--------- ---------
Company:
Net sales $553.8 $517.2
Net sales % change from prior year 7.1% 17.6%
Same store sales % change 7.5% (4.2%)
Meldisco:
Net sales $315.6 $276.6
Net sales % change from prior year 14.1% 0.9%
Same store sales % change 11.1% (8.8%)
% of consolidated net sales 57.0% 53.5%
Athletic:
Net sales $238.2 $240.6
Net sales % change from prior year (1.0%) 45.3%
Same store sales % change 3.2% 4.3%
% of consolidated net sales 43.0% 46.5%
Consolidated net sales for the three months ended March 30, 2002, were $553.8
million, an increase of 7.1% from net sales of $517.2 million for the same
period of 2001. Same store sales for the three-month period increased 7.5%
compared to the year-ago period. Total sales for Meldisco increased 14.1% to
$315.6 million, due to the Easter shift from April last year to March this year
and strong sales inside Kmart during the entire quarter. Meldisco's same store
sales increased 11.1%. Colder weather early in the quarter helped drive sales of
winter-related product while warmer weather later in the quarter aided in
driving strong sales of spring-related product. In the athletic segment, total
sales decreased 1.0% to $238.2 million due to fewer athletic stores in operation
this year compared with 2001. Athletic same store sales increased 3.2%, with
increases in most categories.
16
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Restructuring and Other Charges (Reversals), Net
The Company recorded pre-tax charges totaling $20.4 million partially offset by
a restructuring reversal totaling $0.8 million ($19.6 million, net of reversal
and $7.9 million after taxes and minority interests) during the first quarter of
2002. The charge consists of non-cash inventory write-downs, severance and
building exit costs associated with the announced Kmart store closings,
severance and exit costs associated with the closing of the Company's Dallas
facility due to the consolidation of certain departments within the athletic
division and reversals of certain lease costs from the 2001 restructuring
charge. In connection with this charge, the Company recorded inventory
write-downs of $13.1 million, which were included as a component of cost of
sales and severance costs and net building exit costs, which amounted to $6.5
million, which were included in operating costs and expenses.
Cost of Sales and Expenses
Three Months Ended
($ in millions, % are ---------------------------------------
percent of net sales) March 30, 2002 March 31, 2001
---------------- -----------------
Sales $553.8 100.0% $517.2 100.0%
Cost of sales 386.7 69.8% 370.1 71.6%
Cost of sales - other charges 13.1 2.4% --
------ ------ ------ ------
Total cost of sales 399.8 72.2% 370.1 71.6%
Gross margin 154.0 27.8% 147.1 28.4%
Store operating, selling, general and
administrative expenses 143.0 25.8% 134.4 26.0%
Restructuring and other charges 6.5 1.2% -- --
Depreciation and amortization 10.1 1.8% 11.9 2.3%
Cost of Sales
Cost of sales for the first quarter of 2002, as a percent of net sales,
increased from the corresponding prior-year period due to other charges
representing inventory write-downs in connection with Kmart's announcement of
its plan to close 283 stores. Gross profit increased to $154.0 million due to
higher margins at both Meldisco (before inventory write downs) and in the
athletic segment. Gross margins at Meldisco were higher due to the sales of
regular priced product and lower clearance sales. Gross margins for the athletic
division were higher than last year at both Footaction and Just For Feet as a
result of a better inventory position, as well as a less aggressive promotional
environment than a year ago.
17
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
First quarter 2002, store operating, selling, general and administrative
("SG&A") expenses, as a percent of net sales, decreased 20 basis points from the
same year-ago period as a result of better operating leverage from the J. Baker
and Just For Feet acquisitions. First quarter 2002 SG&A expenses increased from
$134.4 million to $143.0 million or $8.6 million due to higher variable SG&A
expenses driven by the higher sales volume during the first quarter of 2002.
Operating Profit (Loss)
Operating profit for each segment is presented below before restructuring and
other charges, which are recorded on a separate line.
Three Months Ended
--------------------------------------------------------
March 30, 2002 March 31, 2001
-------------------------- ------------------------
($ in millions) Amount % of Net Sales Amount % of Net Sales
------ -------------- ------ --------------
Meldisco $12.3 3.9% $7.5 2.7%
Athletic 3.1 1.3% (5.3) (2.2%)
Corporate overhead (1.4) -- (1.4) --
Restructuring and other
charges/(reversals) 19.6 -- -- --
----- ----
Total ($5.6) (1.0%) $0.8 0.2%
===== ====
During the first quarter ended March 30, 2002, operating profit after
restructuring and other charges as a percent of net sales decreased versus the
same period of 2001 due to the first quarter 2002 restructuring and other
charges relating primarily to inventory write-downs and employee severance and
exit costs associated with the closing of 283 Kmart stores and employee
severance and building exit costs relating to the consolidation of certain
departments within the Company's athletic segment. The $19.6 million net charge
includes the Company's reversal of approximately $0.8 million of charges
recorded in 2001 relating to exit costs associated with a landlord relationship
assumed in the J. Baker acquisition. Excluding these charges, operating profit
would have been $14.0 million for the first quarter 2002. The increase in
operating profit excluding restructuring charges during the quarter was due to
the increased comparable store sales as well as stronger margins in both
divisions. Meldisco operating profit increased due to the strong performance at
the Kmart footwear departments, partially offset by an operating loss in the
footwear departments outside of Kmart, which were unable to absorb fixed payroll
costs as a result of lower than anticipated sales volume. Athletic operating
profit increased due to the closing of under-performing stores, positive comp
store sales and a less promotional athletic footwear market.
18
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Liquidity and Financial Condition
The Company's inventories at the end of the first quarter decreased by
approximately 14.5% versus the same quarter of 2001. The decrease is
attributable to lower inventory levels in Meldisco and at both athletic chains.
The Company's accounts receivable balance as of March 30, 2002, increased by
$12.2 million or 21.9% versus the prior year. This increase is attributable to a
$9.2 million receivable related to Ames (see note 11 "Commitments and
Contingencies" for more information). Other current assets were higher than last
year due to deferred taxes related to the restructuring charges. Accounts
payable balances were lower than last year due to the lower overall level of
inventories.
Net cash used by operating activities totaled $22.9 million in 2002, compared
with $66.3 million for 2001. The Company's principal sources of liquidity used
in funding its short-term operations are its operating cash flows and bank
borrowings. The Company has a $325 million 3-year revolving credit facility with
a syndicate of banks, 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. As of March 30, 2002 the Company was in
compliance with all covenants.
As of March 30, 2002 the Company had $193.3 million in borrowings, classified as
long-term debt. At March 31, 2001, the Company had $211.7 million in borrowings
classified in both notes payable and long-term debt. Net interest expense for
the three months ended March 30, 2002 was $2.0 million compared to $3.3 million
for the same period of 2001. This decline in interest expense was due to lower
interest rates during the first quarter of 2002.
On March 8th Kmart announced that it would close 283 underperforming stores.
These 283 licensed departments generated $116.5 million of Footstar's total
sales of $2.5 billion for fiscal year 2001. Total operating profits for 2001
from these licensed departments were $9.3 million. While the store closings are
expected to negatively affect earnings, the Company believes the effect on 2002
cash flows to be minimal. The cash generated from the inventory liquidations,
lower ongoing working capital requirements and reduced accounts receivable will
offset most of the reduced cash flows from lower earnings. Until Kmart provides
information about its future plans, it is premature to predict the impact of
those plans, including the impact of any potential future Kmart store closings,
on the Company or its Credit Facility. However, if Kmart were to elect to close
additional stores, those store closings may have a negative effect on the
Company's cash flows from operations. Store closings will also reduce the
Company's total working capital requirements, and thus have a positive effect on
the Company's liquidity, as Footstar's Meldisco division owns the related
inventory and has a receivable balance for sales receipts from each Kmart
licensed footwear department.
19
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The Company's businesses are seasonal in nature and, therefore, are 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.
Capital expenditures for the three months ended March 30, 2002 were $24.5
million. Total capital expenditures for the entire 2002 fiscal year are
estimated to be between $70 to $80 million to continue the expansion of the
Company's distribution center in Mira Loma, California, for 20 to 30 new stores
in the athletic segment, new landlord growth in the Meldisco segment and for
several projects to support the Company's information systems infrastructure.
Under the Company's arrangement with Kmart, Meldisco distributes annually to
Kmart a portion of profits representing Kmart's 49% minority interest in
Meldisco subsidiaries and an excess rent payment which is contingent upon
profits above certain levels. In April 2001, the Company distributed $51.2
million, representing Kmart's dividend, for its minority interest in the net
earnings of each of the Kmart licensed departments for the fiscal year 2000 and
$32.2 million representing Kmart's excess rent payment for fiscal year 2000. In
April 2002, the Company distributed approximately $44.8 million and
approximately $25.5 million respectively, representing Kmart's dividend for its
minority interest in the net earnings of each of the Kmart licensed footwear
department and excess rent for the fiscal year 2001.
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 herein by reference and can be identified by the use
of forward-looking terminology such as "believe," "expect," "outlook," "look
forward," "estimate," "plans," "projects," "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
and other future results of operation or financial position. The retail footwear
and apparel business is highly competitive, and such forward-looking statements
involve significant material known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements to be
20
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements, including the possible
substantial impact on the Company's business of the bankruptcy proceedings
commenced by Kmart Corporation (at which the Company currently has approximately
2,114 licensed footwear departments) and potential adverse developments in such
proceedings including: failing to successfully reorganize the chain, any
significant store closings effected by Kmart as part of such proceedings, rights
of the debtor to seek rejection of agreements in such bankruptcy proceedings,
and the impact of any other plans or activities effected by Kmart in such
proceedings. Certain other risks and uncertainties include but are not limited
to: uncertainties related to the integration of new businesses, the continued
independence and financial health of the Company's other significant licensors
and customers, consumer demand for footwear; unseasonable weather; risks
associated with foreign global sourcing, the occurrence of catastrophic events
or acts of terrorism, consumer acceptance of the Company's merchandise mix,
retail locations, product availability; the effect of competitive products and
pricing; and existing retail economic conditions, including the impact on
consumer spending and consumer confidence from a slowing economy and the impact
of a highly promotional retail environment. In such case, actual results may
differ materially from such forward-looking statements. Certain other
information that may cause actual results to differ from such forward-looking
statements are contained in this and other Company filings with the Securities
and Exchange Commission. In light of the uncertainty inherent in such
forward-looking statements you should not consider the inclusion to be a
representation that such forward-looking matters are achievable. The Company
undertakes no obligation to update forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
21
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
DERIVATIVES
As of March 30, 2002, the Company was not materially exposed to changes in the
underlying values of its assets or liabilities nor was 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,
except as described below.
INTEREST RATES
The Company's debt portfolio is subject to variable rates and is primarily
seasonal in nature. The Company, from time to time, undertakes borrowings to
finance working capital, acquisitions and other corporate borrowing
requirements. The Company's peak borrowing periods coincide with peak inventory
purchases. As of March 30, 2002, the Company had $193.3 million outstanding
under its Credit Facility. The Company incurs variable rate debt through its
Credit Facility. This debt exposes the Company to variability in interest
expense due to changes in interest rates. In order to limit the variability of a
portion of its interest expense, effective January 8, 2002, the Company entered
into four interest rate swap agreements with a total notional amount of $60
million, which fix the rate on the notional amount.
The interest rate swaps change the variable-rate cash flow exposure on the notes
to fixed-rate cash flows by entering into receive-variable, pay-fixed interest
rate swaps. Under the interest rate swaps, the Company receives variable
interest rate payments and makes fixed interest rate payments, thereby creating
the effect of fixed-rate notes. On the date the derivative was entered into, the
Company designated the derivative as a cash flow hedge of a forecasted
transaction related to a recognized liability. The Company formally documents
the relationship between the hedged instrument and the hedged items, as well as
its risk management objective and strategy for undertaking the hedge
transaction. The Company also formally assessed, at the hedge's inception, and
will assess on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items. For the quarter ended March 30, 2002, interest
rate cash flow hedges resulted in immaterial ineffectiveness. The fair value of
each interest rate swap (the net interest receivable/payable) is reflected in
the consolidated balance sheet as a current receivable and other comprehensive
income totaling $0.034 million at March 30, 2002. Since the interest rate swaps
qualified as a cash flow hedge and were determined to be highly effective, the
changes in the fair value are recorded in other comprehensive income. The
Company does not expect to charge any net derivative gains included in other
comprehensive income as of March 30, 2002 to earnings during the next twelve
months. The Company does not enter into derivative instruments for any purpose
other than to manage its interest rate exposure. That is, the Company does not
hold derivative financial investments for trading or speculation purposes.
The Company assesses interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities. Credit risk of
derivative instruments is considered minimal as the Company maintains risk
management control
22
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
systems to monitor the financial condition of the counterparties to the contract
and interest rate cash flow risk attributable to both the Company's outstanding
or forecasted debt obligations, as well as the Company's offsetting hedge
positions.
FOREIGN EXCHANGE
The Company's offshore product sourcing and purchasing activities are
denominated in US dollars and therefore the Company does not have material
exposure to cash flows denominated in foreign currencies nor have net foreign
exchange gains or losses been material to operating results in the past 3
reporting periods.
23
Part II. - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
a) EXHIBIT INDEX
-------------
Exhibit
10.5 (a) Employment Agreement for J. M. Robinson
15 Accountants' Acknowledgment
b) Reports -
Reports on Form 8-K - On January 23, 2002, the Company filed a report
on Form 8-K dated January 22, 2002 reporting the press release issued
regarding the bankruptcy of Kmart Corporation
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: May 14, 2002
24