FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 29, 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 September 29, 2001
----- ------------------------------------
Common Stock, $.01 par value 19,925,315
INDEX
Part I. - Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended September 29, 2001 and September 30, 2000 3
Consolidated Condensed Balance Sheets -
September 29, 2001 and December 30, 2000 4
Consolidated Condensed Statements of Cash Flows -
For Nine Months Ended September 29, 2001 and September 30, 2000 5
Notes to Consolidated Condensed Financial Statements 6-13
Independent Auditors' Review Report 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Part II. - Other Information
Item 6. Exhibits and Reports on Form 8-K 25
2
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales $ 656.4 $ 592.7 $ 1,822.5 $ 1,621.8
Cost of sales 488.3 398.9 1,301.7 1,108.9
--------- --------- --------- ---------
Gross profit 168.1 193.8 520.8 512.9
Store operating, selling,
general and administrative
expenses 146.4 131.5 421.5 369.0
Depreciation and amortization 11.9 9.2 36.5 29.6
Restructuring and asset
impairment charge (reversal) 61.2 (0.9) 61.2 (0.9)
--------- --------- --------- ---------
Operating (loss) profit (51.4) 54.0 1.6 115.2
Interest expense, net 3.7 3.0 12.3 6.1
--------- --------- --------- ---------
(Loss) income before income
taxes and minority interests (55.1) 51.0 (10.7) 109.1
Income tax (benefit) provision
for income taxes (20.7) 15.7 (7.4) 33.9
--------- --------- --------- ---------
(Loss) income before minority
interests (34.4) 35.3 (3.3) 75.2
Minority interests in net
income 10.1 10.7 29.3 32.4
========= ========= ========= =========
Net (loss) income $ (44.5) $ 24.6 $ (32.6) $ 42.8
========= ========= ========= =========
Weighted average shares
outstanding:
Basic: 20.2 19.8 20.2 19.9
========= ========= ========= =========
Diluted: 20.2 20.3 20.2 20.3
========= ========= ========= =========
(Loss) earnings per share:
Basic: $ (2.20) $ 1.24 $ (1.61) $ 2.15
========= ========= ========= =========
Diluted: $ (2.20) $ 1.21 $ (1.61) $ 2.11
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
3
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except for share data)
September 29, December 30,
2001 2000
(Unaudited) (Audited)
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 15.1 $ 14.3
Accounts receivable, net 62.2 54.2
Inventories 461.5 360.6
Prepaid expenses and other
current assets 53.5 28.1
------ ------
Total current assets 592.3 457.2
Property and equipment, net 243.2 261.7
Goodwill, deferred charges
and other non-current assets 91.0 54.8
------ ------
Total assets $926.5 $773.7
====== ======
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $130.7 $ 86.9
Accrued expenses 131.6 136.7
Income taxes payable 6.2 9.1
Notes payable -- 74.0
------ ------
Total current liabilities 268.5 306.7
Long-term debt 227.8 --
Other long-term liabilities 72.5 61.0
Minority interests in
subsidiaries 60.0 81.6
------ ------
Total liabilities $628.8 $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: 10,711,569 and
10,782,106 shares at cost (310.5) (312.6)
Unearned compensation (6.9) (5.4)
Retained earnings 267.5 300.1
------ ------
Total shareholders' equity $297.7 324.4
------ ------
Total liabilities and
shareholders' equity $926.5 $773.7
====== ======
See accompanying notes to consolidated condensed financial statements.
4
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Nine Months Ended
-----------------------------
September 29, September 30,
2001 2000
------------- -------------
Net cash used in operating activities $ (2.4) $(12.5)
------ ------
Cash flows (used in) provided
by investing activities:
Acquisition of J. Baker (59.0) --
Acquisition of Just For Feet,
net of cash acquired -- (64.2)
Additions to property and
equipment (41.8) (32.8)
Proceeds from sale of
furniture and fixtures 0.2 --
------ ------
Net cash used in investing
activities (100.6) (97.0)
------ ------
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 2.1 3.1
Payment on stock incentive plans (0.5) --
Net proceeds from notes payable 153.8 156.9
Payments on capital leases (0.7) (3.7)
Payments on mortgage note (0.5) --
Proceeds of common stock
from minority interest 0.8 --
Other 0.6 (1.2)
------ ------
Net cash provided by
financing activities 103.8 90.8
------ ------
Net increase (decrease) in
cash and cash equivalents 0.8 (18.7)
Cash and cash equivalents,
beginning of period 14.3 31.8
------ ------
Cash and cash equivalents,
end of period $ 15.1 $ 13.1
====== ======
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 September 29, 2001, the results of operations for
the three-month and nine-month periods ended September 29, 2001 and September
30, 2000, respectively, and cash flows for the nine months ended September 29,
2001 and September 30, 2000, 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 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 $23.5 million was recorded as goodwill and is being
amortized over 15 years. Adjustments to the purchase price allocation during the
third quarter resulted principally from the appraisals of license agreements
performed subsequent to the purchase. Additional adjustments to the purchase
price allocation may result from the completion of an appraisal of the acquired
assets, which is currently in progress.
6
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ 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 September 29, 2001 Nine Months Ended September 29, 2001
----------------------------------------------------- -----------------------------------------------------
($ in millions) Meldisco(1),(3) Athletic(2),(3) Corporate Total(3) Meldisco(1),(3) Athletic(2),(3) Corporate Total(3)
--------------- --------------- --------- -------- --------------- --------------- --------- --------
Net sales $357.4 $299.0 $ -- $656.4 $1,044.0 $778.5 $ -- $1,822.5
Operating profit
(loss) 23.8 (74.2) (1.0) (51.4) 87.7 (81.0) (5.1) 1.6
Operating profit
(loss) before
non-recurring
items 29.5 21.6 (1.0) 50.1 93.4 14.8 (5.1) 103.1
Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
----------------------------------------------------- -----------------------------------------------------
($ in millions) Meldisco Athletic(2) Corporate Total Meldisco Athletic(2) Corporate Total
--------------- --------------- --------- -------- --------------- --------------- --------- --------
Net sales $311.2 $281.5 $ -- $592.7 $942.6 $679.2 $ -- $1,621.8
Operating profit
(loss) 32.2 24.0 (2.2) 54.0 96.1 25.7 (6.6) 115.2
Operating profit
(loss) before
restructuring
reversal 32.2 23.1 (2.2) 53.1 96.1 24.8 (6.6) 114.3
(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.
(3) The operating profit (loss) before non-recurring items, excludes certain
costs related to the Company's restructuring plan. These excluded,
non-recurring items amounted to $101.5 million, $61.2 million related to
restructuring and asset impairments and $40.3 million related to inventory
write-downs, which were recorded as a component of cost of sales. The
athletic segment recorded $95.8 million of these non-recurring items and
the Meldisco segment recorded $5.7 million.
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 (loss) for the three- and nine- month periods ended
September 29, 2001 and September 30, 2000 contain no other components of
comprehensive income other than net income (loss). Comprehensive income (loss)
for the three-month periods ended September 29, 2001 and September 30, 2000 was
$(44.5) million and $24.6 million, respectively. Comprehensive income (loss) for
the nine-month periods ended September 29, 2001 and September 30, 2000 was
$(32.6) million and $42.8 million, respectively.
7
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ 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 Nine Months Ended
---------------------------------- ----------------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Numerator for Basic and
Diluted EPS - Net
(loss) income $ (44.5) $ 24.6 $ (32.6) $ 42.8
=========== =========== =========== ===========
Denominator:
Shares outstanding at beginning
of period 19,902,643 19,506,813 19,854,778 20,123,983
Weighted average deferred
compensation shares
earned not issued 321,892 298,691 310,332 270,534
Weighted average shares
issued/(repurchased) 12,892 15,553 38,045 (475,472)
----------- ----------- ----------- -----------
Denominator for Basic
EPS-Weighted average
common shares outstanding 20,237,427 19,821,057 20,203,155 19,919,045
----------- ----------- ----------- -----------
Dilutive effect of stock options -- 479,014 -- 430,711
----------- ----------- ----------- -----------
Denominator for Diluted
EPS- Adjusted weighted
average common shares
outstanding 20,237,427 20,300,071 20,203,155 20,349,756
----------- ----------- ----------- -----------
Basic EPS $ (2.20) $ 1.24 $ (1.61) $ 2.15
=========== =========== =========== ===========
Diluted EPS $ (2.20) $ 1.21 $ (1.61) $ 2.11
=========== =========== =========== ===========
8
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 three-month and nine-month periods ended September 29, 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
September 29, 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 September 29, 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 nine-month period
ended September 29, 2001 totaled 22,672 shares and 70,537 shares, respectively.
From March 2000, when the Company first started issuing shares out of treasury,
through September 29, 2001 the Company had issued 506,631 shares from treasury
stock.
7. Restructuring and Asset Impairment Charge
During the third quarter of 2001, the Company approved a restructuring plan (the
"Plan"). In connection with this Plan, the Company recorded pre-tax
non-recurring restructuring and asset impairment charges totaling $101.5 million
($67 million after tax) for the write-down of inventory, the impairment of
assets and certain costs associated with the early termination of leases.
The Plan covers costs related to asset impairments and lease terminations
associated with the closing of 60 under-performing stores in the athletic
segment, asset impairments for additional athletic segment stores to be closed
when their leases expire over the next several years, inventory write-downs due
to a more aggressive approach to reducing aging athletic inventory, inventory
markdowns related to the stores to be closed, certain costs to exit
non-strategic landlord relationships acquired in the J. Baker acquisition and a
further reduction in the carrying value of the former Just For Feet headquarters
building in Birmingham, Alabama, which was acquired as part of the Just For Feet
asset purchase in March of 2000.
The most significant component of the Plan included the write-down of certain
inventory, which totaled $40.3 million and has been recorded as a component of
cost of sales. Approximately $36.6 million of the write-down related to the
athletic segment. The athletic inventory write-down included the write-down of
specific Just For Feet inventory, which was purchased on an "as -available"
basis during the initial period subsequent to the acquisition of the chain in
2000, a markdown of inventory at the closing stores and a markdown of various
inventory due to a more aggressive approach to reducing aged inventory. The
remaining $3.7 million of the write-downs relates to the Meldisco segment which
recorded markdowns for inventory at certain Ames stores which are closing and
for inventory at certain landlords which the Company will exit.
The Company recorded a fixed asset and goodwill impairment charge, pursuant to
the requirements of SFAS No. 121 of $32.1 million. In the athletic segment the
charge amounted to $31.0 million and related to the accelerated store closings,
the stores closing when their respective leases expire and for certain
under-performing stores. The Meldisco
9
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
segment recorded an asset impairment charge of $1.1 million related to the
termination of certain landlord relationships. These fixed asset and goodwill
impairment charges represent the amount necessary to write-down the carrying
values of the fixed assets and goodwill for the respective stores based upon the
Company's best estimate of those stores future discounted cash flows. The asset
impairment charge was primarily recorded as a reduction of fixed assets
principally representing fixtures and leasehold improvements.
In connection with the store closings, the Company established a reserve of
$28.2 million within the athletic segment, and $0.9 million within the Meldisco
segment for exit costs, which are anticipated to be paid in cash (store exit
costs). These store exit costs are principally for future lease payments,
anticipated sublease activity and lease buyouts based upon historical
experience. Costs are being charged against the reserve as incurred and the
reserve will be reviewed periodically to determine its adequacy.
The following table displays a rollforward of the activity and significant
components of the restructuring and asset impairment charge and the related
reserves remaining as of September 29, 2001.
Remaining at
Recorded 2001 Activity September 29, 2001
-------- ------------- ------------------
Non-cash components:
Inventory write-downs $ 40.3 $ 40.3 $ --
Asset impairments 32.1 32.1 --
------ ------ ------
Sub total 72.4 72.4 --
Cash components:
Store exit costs 29.1 0.7 28.4
------ ------ ------
Total $101.5 $ 73.1 $ 28.4
====== ====== ======
The 2001 activity primarily consists of permanent markdowns of inventory and the
permanent impairment of fixed assets and goodwill.
8. Supplemental Cash Flow Information
Nine Months Ended
------------------------------
September 29, September 30,
2001 2000
------------- -------------
Cash paid for income taxes $26.2 $40.0
Cash paid for interest $13.1 $ 7.0
10
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
9. Note Payable
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 September 29, 2001, there was $227.8 million outstanding under the
credit facility with a quarterly weighted average interest rate of 5.3%.
10. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. During the third quarter, Ames, a retail chain in
which the company operates licensed footwear departments, 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 $8.9 million. The Company has commenced adversary
proceedings against Ames challenging the characterization of it as an unsecured
creditor. In the opinion of management, the Company has substantial legal
defenses and assertions with respect to this proceeding. The Company continues
to operate its licensed footwear departments within Ames during this
reorganization period.
11. 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
11
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
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 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 $39.5 million and unamortized identifiable intangible assets in
the amount of $16.5 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 $1.5 million for the year ended December 30, 2000 and the
nine months ended September 29, 2001, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations. The statement requires the recognition of a liability if a
reasonable estimate of fair value can be made for an asset retirement obligation
in the period in which it is incurred. Upon initial recognition of a liability
for an asset retirement obligation, an entity shall capitalize an asset
retirement cost by increasing the carrying amount of the related long-lived
asset by the same amount as the liability. An entity shall subsequently allocate
that asset retirement cost to expense using a systematic and rational method
over its useful life. Future changes in the liability resulting from the passage
of time should be recognized as an increase in the carrying amount of the
liability and as an expense
12
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
classified as an operating item in the statement of income. The statement is
effective for fiscal years beginning after June 15, 2002. The Company does not
expect to recognize a material asset retirement obligation as a result of this
statement.
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, Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
while retaining many of the fundamental provisions covered by that statement.
Statement 144 differs fundamentally from Statement 121 in that goodwill and
other intangible assets that are not amortized are excluded from the scope of
Statement 144. Additionally Statement 144 addresses and clarifies implementation
and estimation issues arising from Statement 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 144 retains the basic provisions of 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 Company does not expect Statement 144 to materially impact the
Company.
13
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 September 29, 2001 and the related consolidated
condensed statements of operations for the three-month and nine-month periods
ended September 29, 2001 and September 30, 2000, respectively and condensed cash
flows for the nine-month periods ended September 29, 2001 and September 30,
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
October 17, 2001
14
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
-----------------------------
September 29, September 30,
($ in millions) 2001 2000
------------- -------------
Company:
Net sales $656.4 $592.7
Net sales % change from prior year 10.7% 26.0%
Same store sales % change(1) 2.3% 5.1%
Meldisco:
Net sales $357.4 $311.2
Net sales % change from prior year 14.8% 6.5%
Same store sales % change(1) (1.7%) 4.7%
% of consolidated net sales 54.4% 52.5%
Athletic:
Net sales $299.0 $281.5
Net sales % change from prior year 6.2% 58.1%
Same store sales % change 6.7% 5.8%
% of consolidated net sales 45.6% 47.5%
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 September 29, 2001, were
$656.4 million, an increase of 10.7% from net sales of $592.7 million for the
same period of 2000. Same store sales for the three-month period increased 2.3%
compared to the year-ago period. Total sales for Meldisco increased 14.8% to
$357.4 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 1.7% from a strong back-to-school
performance last year. In the athletic segment total sales increased 6.2% to
$299.0 million and same store sales increased 6.7%, driven by a strong
back-to-school selling period. High demand for basketball and cross-training
shoes at Footaction and improved inventory assortment and marketing campaigns at
Just For Feet fueled the increase.
15
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Nine Months Ended
-----------------------------
September 29, September 30,
($ in millions) 2001 2000
------------- -------------
Company:
Net sales $1,822.5 $1,621.8
Net sales % change from prior year 12.4% 16.8%
Same store sales % change(1), (2) (0.7%) 2.7%
Meldisco:
Net sales $1,044.0 $ 942.6
Net sales % change from prior year 10.8% 5.3%
Same store sales % change(1) (3.9%) 4.0%
% of consolidated net sales 57.3% 58.1%
Athletic:
Net sales $ 778.5 $ 679.2
Net sales % change from prior year 14.6% 37.7%
Same store sales % change(2) 3.8% 0.2%
% of consolidated net sales 42.7% 41.9%
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 nine months ended September 29, 2001, were
$1,822.5 million, an increase of 12.4 % from net sales of $1,621.8 million for
the same period of 2000. Same store sales for the nine-month period decreased
0.7% compared to the year-ago period. Total sales for Meldisco increased 10.8%
to $1,044.0 million and same store sales at Meldisco (which do not include the
newly acquired J. Baker business) decreased 3.9%. At Meldisco, weak comparisons
in the first half of the year due to depleted winter boot inventories and
unseasonably cold weather were partially offset by a modest back-to-school
performance in the third quarter. Total sales for the athletic segment increased
14.6% to $778.5 million due to the addition of Just For Feet. Same store sales
increased 3.8% for the athletic segment mainly due to the improved performance
of the Just For Feet stores; 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.
16
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Restructuring and Asset Impairment Charge
The Company recorded pre-tax non-recurring charges totaling $101.5 million
($66.9 million after taxes) during the third quarter of 2001. The majority of
the charge consists of non-cash inventory write-downs and asset impairments and
store exit costs associated with the closing of under-performing stores, which
are anticipated to be paid in cash. The net effect of the charge is expected to
be cash flow positive after tax. In connection with this charge, the Company
recorded inventory write-downs of $40.3 million, which were included as a
component of cost of sales and recorded asset impairment and store exit costs,
which amounted to $61.2 million, which were included in operating costs and
expenses.
The Company expects that these strategic actions will increase the
competitiveness of the athletic business and further strengthen the Company's
platform for future growth. The Company further expects that the elimination of
these under-performing stores will increase profitability, improve operating
cash flows and allow management to concentrate on the most profitable areas of
the business.
Cost of Sales and Expenses
Three Months Ended
---------------------------------------
($ in millions, % are percent
of net sales) September 29, 2001 September 30, 2000
------------------ ------------------
Sales $656.4 100.0% $592.7 100.0%
Cost of sales 448.0 68.3% 398.9 67.3%
Cost of sales - restructuring 40.3 6.1% -- --
----- ---- ----- ----
Total cost of sales 488.3 74.4% 398.9 67.3%
Gross margin 168.1 25.6% 193.8 32.7%
Store operating, selling,
general and administrative
expenses 146.4 22.3% 131.5 22.2%
Depreciation and amortization 11.9 1.8% 9.2 1.6%
17
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Nine Months Ended
---------------------------------------
($ in millions, % are percent
of net sales) September 29, 2001 September 30, 2000
------------------ ------------------
Sales $1,822.5 100.0% $1,621.8 100.0%
Cost of sales 1,261.4 69.2% 1,108.9 68.4%
Cost of sales - restructuring 40.3 2.2% -- --
------- ---- ------- ----
Total cost of sales 1,301.7 71.4% 1,108.9 68.4%
Gross margin 520.8 28.6% 512.9 31.6%
Store operating, selling,
general and administrative
expenses 421.5 23.1% 369.0 22.8%
Depreciation and amortization 36.5 2.0% 29.6 1.8%
Cost of Sales
Cost of sales for the third quarter of 2001, as a percent of net sales,
increased from the corresponding prior-year period mainly due to non-recurring
restructuring charges representing inventory write-downs in the athletic segment
associated with the closing of under-performing stores and a more aggressive
approach to reducing aged inventory. Lower gross margins in the athletic segment
due to a highly promotional mall-based environment and expected lower gross
margin rates at Meldisco's newly acquired businesses also contributed to the
cost of sales increase.
Cost of sales for the nine months ended September 29, 2001, as a percent of net
sales, increased from the comparable 2000 period primarily due to the
restructuring charge in the third quarter and increased markdowns taken to
compete in a promotional athletic retail environment.
Store Operating, Selling, General and Administrative Expenses
Third quarter 2001 store operating, selling, general and administrative ("SG&A")
expenses, as a percent of net sales, increased 10 basis points from the same
year-ago period. While the athletic segment achieved better expense leverage,
Meldisco was unable to flex selling expenses down to match sales shortfalls.
Third quarter 2001 SG&A expenses were $14.9 million greater than in the third
quarter of 2000 largely due to the added cost of operating the acquired J. Baker
business.
Store operating, selling, general and administrative expenses for the nine
months ended September 29, 2001, as a percent of net sales, increased 30 basis
points from the corresponding prior-year period primarily due to decreased fixed
cost leverage at Meldisco and one-time J. Baker transition-related expenses.
18
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Operating Profit (Loss)
Three Months Ended
---------------------------------------
($ in millions) September 29, 2001 September 30, 2000
------------------ ------------------
Meldisco (1), (2) $ 29.5 8.3% $ 32.2 10.4%
Athletic (1), (2) 21.6 7.2% 23.1 8.2%
Corporate overhead (1.0) -- (2.2) --
Restructuring and asset
impairment (charge) reversal (101.5) -- 0.9 --
------ ---- ------
Total (1) $(51.4) (7.8%) $ 54.0 9.1%
====== ==== ======
Note: (1) Percentages represent percent of net sales of the respective
entities.
(2) Operating profit is presented before restructuring (charge)
reversal.
Nine Months Ended
---------------------------------------
($ in millions) September 29, 2001 September 30, 2000
------------------ ------------------
Meldisco (1), (2) $ 93.4 8.9% $ 96.1 10.2%
Athletic (1), (2) 14.8 1.9% 24.8 3.7%
Corporate overhead (5.1) -- (6.6) --
Restructuring and asset
impairment (charge) reversal (101.5) -- 0.9 --
------ ------ ------
Total (1) $ 1.6 0.1% $115.2 7.1%
====== ====== ======
Note: (1) Percentages represent percent of net sales of the respective
entities.
(2) Operating profit is presented before restructuring (charge)
reversal.
During the third quarter ended September 29, 2001 operating profit as a percent
of net sales decreased significantly versus the same period of 2000 due to the
third quarter 2001 restructuring charge relating primarily to asset impairments,
inventory write-downs and store exit costs associated with the closing of
under-performing stores in the athletic segment. Excluding this charge,
operating profit would have been $50.1 million for the quarter. Also
contributing to the decrease were lower margins at the athletic segment, at
Meldisco's Rite Aid business which incurred start-up costs from the addition of
approximately 2,700 new footwear departments in August and at the acquired J.
Baker businesses which operate at a lower margin than the Kmart business.
For the nine months ended September 29, 2001 operating profit as a percent of
net sales declined significantly versus the same year-ago period due to the
effect of the third quarter 2001 restructuring charge. Excluding this
19
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
charge, operating profit for the nine months ended September 29, 2001 would have
been $103.1 million. Also contributing to the decline were acquisition-related
expenses at Meldisco, the effect of the March 2001 product recall of an
exclusive Nike running shoe at Footaction and increased markdowns at both Just
For Feet and Footaction.
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
20
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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 $39.5 million and unamortized identifiable intangible assets in
the amount of $16.5 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 $1.5 million for the year ended December 30, 2000 and the
nine months ended September 29, 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.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations. The statement requires the recognition of a liability if a
reasonable estimate of fair value can be made for an asset retirement obligation
in the period in which it is incurred. Upon initial recognition of a liability
for an asset retirement obligation, an entity shall capitalize an asset
retirement cost by increasing the carrying amount of the related long-lived
asset by the same amount as the liability. An entity shall subsequently allocate
that asset retirement cost to expense using a systematic and rational method
over its useful life. Future changes in the liability resulting from the passage
of time should be recognized as an increase in the carrying amount of the
liability and as an expense classified as an operating item in the statement of
income. The statement is effective for fiscal years beginning after June 15,
2002. The Company does not expect to recognize a material asset retirement
obligation as a result of this statement.
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, Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
while retaining many of the fundamental provisions covered by that statement.
Statement 144 differs fundamentally from Statement 121 in that goodwill and
other intangible assets that are not amortized are excluded from the scope of
Statement 144. Additionally Statement 144 addresses and clarifies implementation
and estimation issues arising from Statement 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.
21
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Statement 144 retains the basic provisions of 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 Company does not expect Statement 144 to materially impact the
Company.
Liquidity and Financial Condition
The Company's inventories at the end of the third quarter increased by
approximately 4.3% versus the same quarter of 2000. The increase is attributable
to the addition of the J. Baker businesses partially offset by lower inventory
levels in the core Kmart business and both athletic chains.
The Company's accounts receivable balance as of September 29, 2001 has increased
by $16.1 million or 35% versus the same quarter end of 2000. This increase is
directly attributable to the addition of the J. Baker businesses, which were
acquired in February 2001 and $8.9 million of receivables related to Ames. The
license to operate footwear departments within Ames stores was part of the J.
Baker acquisition. Ames filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code and named the Company as a general
creditor with respect to a pre-petition receivable, which amounted to $8.9
million. The Company has commenced adversary proceedings against Ames
challenging the characterization of it as an unsecured creditor. In the opinion
of management, the Company has substantial legal defenses and assertions with
respect to this proceeding. The Company continues to operate licensed footwear
departments within Ames during this reorganization period.
In addition to inventory and accounts receivable, the Company experienced
increases in various other assets in connection with the J. Baker purchase. The
majority of these 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
non-current assets.
As of September 29, 2001, the Company had $227.8 million in borrowings,
classified as long-term debt. Net interest expense for the nine months ended
September 29, 2001 was $12.3 million compared to $6.1 million for the same
period of 2000. This increase was the result of the increased borrowings
associated with the Company's acquisitions, capital expenditures, inventory
purchases to re-stock the J. Baker and Just for Feet businesses and the purchase
of the Company's building in Mahwah, New Jersey.
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 September 29, 2001 the Company was in
compliance with all covenants.
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
22
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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.
Capital expenditures for the nine months ended September 29, 2001 were $41.8
million. Total capital expenditures for the entire 2001 fiscal year are
estimated to be between $80 to $85 million and involve projects that are
expected to 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.
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, risks associated with foreign global
sourcing, 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.
23
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.
24
Part II. - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
a) EXHIBIT INDEX
Exhibit
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: November 13, 2001
25