1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
-----------------May 1, 1999
Commission file no. 1-10299
-------
VENATOR GROUP, INC.
-------------------
(Exact name of registrant as specified in its charter)
New York 13-3513936
- -------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
233 Broadway, New York, New York 10279-0003
- ---------------------------------------
New York 13-3513936
- --------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
233 Broadway, New York, New York 10279-0003
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212)-553-2000
-------------- 553-2000
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 of Common Stock outstanding at November 27, 1998: 135,614,566
-----------May 28, 1999: 137,198,806
2
VENATOR GROUP, INC.
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TABLE OF CONTENTS
-----------------
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.......................1
Condensed Consolidated Statements
of Operations............................................2
Condensed Consolidated Statements
of Comprehensive Income (Loss)...........................3
Condensed Consolidated Statements
of Retained Earnings.....................................4
Condensed Consolidated Statements
of Cash Flows............................................5
Notes to Condensed Consolidated
Financial Statements...................................6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........9-15
Part II. Other Information
Item 1. Legal Proceedings......................................16
Item 6. Exhibits and Reports on Form 8-K.......................16
Signature..............................................17
Index to Exhibits...................................18-20
i
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................................... 1
Condensed Consolidated Statements
of Operations...................................................... 2
Condensed Consolidated Statements
of Comprehensive Income (Loss)..................................... 3
Condensed Consolidated Statements
of Cash Flows...................................................... 4
Notes to Condensed Consolidated
Financial Statements............................................... 5-7
Item 2. Management"s Discussion and Analysis of
Financial Condition and Results of Operations...................... 8-14
Part II. Other Information
Item 1. Legal Proceedings....................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................ 15
Signature............................................................... 16
Index to Exhibits....................................................... 17-19
3
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
- ------- --------------------
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(in millions)
October 31, October 25,May 1, May 2, January 31,30,
1999 1998 1997 19981999
---- ---- ----
(Unaudited) (Unaudited) (Audited)
ASSETS
------
ASSETS
Current assets
Cash and cash equivalents ...................................................... $ 14713 $ 1713 $ 81193
Merchandise inventories ............. 1,112 886 754............................................. 889 880 837
Net assets of discontinued operations 220 597 619............................... 101 628 97
Other current assets ................ 136 149 131
----- ----- -----
1,615 1,649 1,585................................................ 210 195 148
------- ------- -------
1,213 1,716 1,275
Property and equipment, net ............ 916 511 625............................................ 984 688 974
Deferred charges and othertaxes ......................................................... 357 338 358
Intangible assets, ...... 614 655 585
----- ----- -----
$3,145net ................................................. 180 191 183
Other assets ........................................................... 82 91 86
------- ------- -------
$ 2,8152,816 $ 2,795
===== ===== =====3,024 $ 2,876
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Short-term debt .......................................................................... $ 371274 $ 21253 $ --250
Accounts payable and accrued.................................................... 276 284 245
Accrued liabilities ...................... 652 490 507................................................. 227 227 296
Current portion of reserve for discontinued operations .......... 217 128 72.............. 126 52 167
Current portion of long-term debt and obligations
under capital leases ......................... 20 13.............................................. 7 19 ---- ---- ----
1,260 652 5986
------- ------- -------
910 835 964
Long-term debt and obligations
under capital leases ................ 508 510 508
Deferred taxes and other liabilities ... 345 432 400................................................ 513 509 511
Reserve for discontinued operations ........................................ 30 67 18 30
Other liabilities ...................................................... 328 379 333
Shareholders' Equityequity
Common stock and paid-in capital .... 327 315 317.................................... 332 322 328
Retained earnings ................... 860 925 1,033................................................... 886 1,028 897
Accumulated other comprehensive loss . (185) (86) (79)
----- ---- -----................................ (183) (67) (187)
------- ------- -------
Total shareholders' equity ............ 1,002 1,154 1,271
Commitments ............................
----- ----- -----............................................. 1,035 1,283 1,038
------- ------- -------
$ 3,1452,816 $ 2,8153,024 $ 2,795
===== ===== =====2,876
======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
1-1-
4
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended
Thirty-nine weeks ended
--------------------
-----------------------
October 31, October 25, October 31, October 25,May 1, May 2,
1999 1998
1997 1998 1997
---- ---- ---- ----------- -------
Sales.........................Sales ........................................................................ $ 1,1221,079 $ 1,107 $ 3,223 $ 3,1981,058
Costs and expenses
Cost of sales............... 840 741 2,324 2,167sales .............................................................. 791 748
Selling, general and administrative expenses . 302 252 827 744............................... 257 271
Depreciation and amortization 38 30 108 90.............................................. 45 34
Interest expense, net....... 18 8 35 25net ...................................................... 11 10
Other income................ - -income ............................................................... (6) (19)
-
----- ----- ----- -----
1,198 1,031 3,275 3,026
----- ----- ----- ------------ -------
1,098 1,044
------- -------
Income (loss) from continuing operations
before income taxes ...................... (76) 76 (52) 172..................................................... (19) 14
Income tax expense (benefit) . (36) 26 (26) 65................................................. (8) 6
------- -------
Income (loss) from continuing ---- ---- ---- ----
operations ................. (40) 50 (26) 107
Income (loss)..................................... (11) 8
Loss from discontinued operations, net of income
tax expense (benefit)benefit of $6, $5,
$(14) and $(26), respectively 6 5 (26) (37)$9 million in 1998 ....................................... -- (13)
------- -------
Net loss on disposal of
discontinued operations, net
of income tax expense (benefit)
of $52, $0, $52, and $(115),
respectively ............... (121) - (121) (195)
----- ----- ----- -----
Net income (loss) ................................................................................. $ (155)(11) $ 55 $ (173) $ (125)
====== ===== ====== ======(5)
======= =======
Basic earnings per share:
Income (loss) from continuing operations ............................................... $ (0.29)(0.08) $ 0.37 $ (0.19) $ 0.80
Income (loss)0.06
Loss from discontinued operations .. (0.85) 0.04 (1.08) (1.73)
------ ---- ------ ------....................................... -- (0.10)
------- -------
Net income (loss) ..........loss ................................................................ $ (1.14)(0.08) $ 0.41 $ (1.27) $ (0.93)
===== ===== ===== =====(0.04)
======= =======
Weighted-average common shares outstanding .............. 135.6 134.9 135.4 134.5................................... 136.7 135.1
Diluted earnings per share:
Income (loss) from continuing operations ............................................ $ (0.29)(0.08) $ 0.37 $ (0.19) $ 0.79
Income (loss)0.06
Loss from discontinued operations ............... (0.85) 0.03 (1.08) (1.71)
----- ----- ----- -----...................................... -- (0.10)
------- -------
Net income (loss) .......loss ............................................................... $ (1.14)(0.08) $ 0.40 $ (1.27) $ (0.92)(0.04)
======= =======
Weighted-average common shares ===== ===== ===== =====
assuming dilution .......... 135.6 136.3 135.4 135.8............................. 136.7 136.4
See Accompanying Notes to Condensed Consolidated Financial Statements.
2-2-
5
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
----------------------------------------------------------------
(Unaudited)
(in millions)
Thirteen weeks ended
Thirty-nine weeks ended
--------------------
-----------------------
October 31, October 25, October 31, October 25,May 1, May 2,
1999 1998 1997 1998 1997
---- ----
---- ----
Net income (loss)...........loss ................................................................................... $(11) $ (155) $ 55 $ (173) $ (125)(5)
Other comprehensive income, (loss), net of tax:tax
Foreign currency translation adjustments:
Translation adjustments arising during the period,
(pre-tax $(216), $10,
$(216),net of deferred tax expense of $3 and $(114),
respectively)........... (108) 6 (108) (71)
Less: reclassification
adjustment for gains included
in net$7, respectively ............................... 4 12
---- ----
Comprehensive income (loss) (pre-tax $298).......... 149 - 149 -
----- ----- ----- -----
41 6 41 (71)
Minimum pension liability
adjustments (pre-tax $4) 2 - 2 -
----- ----- ----- -----
Comprehensive income (loss)................................................................. $ (112)(7) $ 61 $ (130) $ (196)
===== ===== ===== =====7
==== ====
See Accompanying Notes to Condensed Consolidated Financial Statements.
3-3-
6
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
------------------------------------------------------
(Unaudited)
(in millions)
Thirty-nine weeks ended
-----------------------------
October 31, October 25,
1998 1997
---- ----
Retained earnings at beginning of year ... $ 1,033 $ 1,050
Net loss ................................. (173) (125)
----- -----
Retained earnings at end of interim period $ 860 $ 925
===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
7
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(in millions)
Thirty-nineThirteen weeks ended
-----------------------
October 31, October 25,--------------------
May 1, May 2,
1999 1998
1997
---- --------- -----
From Operating Activities:
Net loss ........................................................................................................................... $ (173)(11) $ (125)(5)
Adjustments to reconcile net loss to net cash ..
provided by (used in) operating
activities:
Non-cash charge foractivities of continuing operations:
Loss from discontinued operations, net of tax ................................. 121 195
Discontinued operations reserve activity . (127) (104)............................................. -- 13
Depreciation and amortization ............ 108 90
Net gain on sales of real estate ......... - (3)
Net gain............................................................. 45 34
Gains on sales of assets and investments .................................................. (6) (19) -
Deferred income taxes .................... (38) (37)..................................................................... (14) (9)
Change in assets and liabilities, net of acquisition:
Merchandise inventories .................. (356) (238)................................................................. (51) (117)
Accounts payable and other liabilities ... 146 29
Net assets of discontinued operations .... (56) 299accruals ..................................................... (25) (12)
Other, net ............................... (15) (54).............................................................................. (65) (77)
----- -----
Net cash provided by (used in)used in operating ---- ----
activities ............................... (409) 52
---- ----of continuing operations .............................. (127) (192)
----- -----
From Investing Activities:
Net proceeds from businesses disposed ........ 495 -
Proceeds from sales of assets and investments ............................................... 7 22 -
Proceeds from sales of real estate ........... - 3
Capital expenditures ......................... (395) (114)........................................................................ (54) (80)
Payments for businessesbusiness acquired, net of cash acquired ........................................................................... -- (29)
(148)----- -----
Net cash provided by (used in)used in investing ---- ----
activities ................................. 93 (259)
---- ----of continuing operations .............................. (47) (87)
----- -----
From Financing Activities:
Increase in short-term debt .................. 371 21................................................................. 24 253
Reduction in long-term debt and capital lease obligations ................................................................... (2) (2)--
Issuance of common stock ..................... 10 16
---- ----.................................................................... 4 5
----- -----
Net cash provided by financing activities .. 379 35
---- ----of continuing operations .......................... 26 258
----- -----
Net Cash used in Discontinued Operations ....................................................... (29) (50)
Effect of exchange rate fluctuations
on Cash and Cash Equivalents ................................................................................. (3) 3
(8)
---- --------- -----
Net change in Cash and Cash Equivalents ......... 66........................................................ (180) (68)
Cash and Cash Equivalents at beginning of year ................................................... 193 81
197
---- --------- -----
Cash and Cash Equivalents at end of interim period ............................................. $ 14713 $ 17
==== ====13
===== =====
Cash paid during the period:
Interest ......................................................................................................................... $ 325 $ 212
Income taxes ................................................................................................................. $ 145 $ 583
See Accompanying Notes to Condensed Consolidated Financial Statements.
5-4-
87
VENATOR GROUP, INC.
-------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Registrant's Form 10-K for the year ended January
31, 1998,30, 1999, as filed with the Securities and Exchange Commission (the "SEC") on
April 21, 1998. The Condensed Consolidated Statement of Comprehensive Income
(Loss) was prepared in conformity with generally accepted accounting principles
and was not required for the year ended January 31, 1998.30, 1999. Certain items included in these statements are based on
management's estimates. In the opinion of management, all material adjustments,
which are of a normal recurring nature, necessary for a fair presentation of the
results for the interim periods have been included. The results for the thirty-ninethirteen
weeks ended October 31, 1998May 1, 1999 are not necessarily indicative of the results expected
for the year.
All financial
statements have been restatedShort-Term Debt
On March 19, 1999, the Registrant amended its revolving credit
agreement. In accordance with the amended agreement, the facility was reduced to
reflect$400 million, with a further reduction to $300 million by February 15, 2000. If
certain assets are sold or debt or equity is issued, the discontinuancerevolving credit
agreement may be reduced earlier than February 2000 to $350 million. Under the
terms of the Specialty
Footwearamended agreement, the Registrant is required to satisfy certain
financial and International General Merchandise segments.
Name Change
- -----------operating covenants, which include: maximum ratio of total debt to
earnings before interest, taxes, depreciation and amortization; minimum fixed
charge coverage ratio; minimum tangible net worth and limits on capital
expenditures. In addition, the Registrant is required to fund the repayment of
the $200 million 7.0 percent debentures, which are due in June 2000, by February
15, 2000. This facility is unsecured relating to the Registrant's inventory;
however, it does include collateralization of certain properties as defined in
the agreement. The Registrant changed its nameamended agreement also restricts consolidations or mergers
with third parties, investments and acquisitions, payment of dividends and stock
repurchases, and requires borrowings under the agreement to Venator Group, Inc. (formerly Woolworth
Corporation) effective Junebe reduced to not
more than $50 million for a period of at least 15 consecutive days during the
fourth quarter of each year.
On May 11, 1998.1999, the facility was reduced by $7 million to $393
million, as a result of the sale of certain assets.
Discontinued Operations
- -----------------------
On September 22,In the third quarter of 1998, the Registrant announced that it iswas
exiting its International General Merchandise segment. On October 22, 1998, the Registrantsegment and completed the sale of
its 357 store German general merchandise business for $563 million, pursuant to a definitive agreement.million. The
Registrant recorded a net gain
on the disposal of the International General Merchandise segment of $174 million before-tax, or $39 million
after-tax, inafter-tax. The reserve balance of $40 million at May 1, 1999 represents the
third quarter 1998. The dispositioncosts associated with the disposal of the remaining business of the
International General Merchandise segment, which will be completed in 1999.
On September 16, 1998, theThe Registrant also announced that it iswas exiting its Specialty
Footwear segment including 467 Kinney Shoe storesin 1998 and 103 Footquarters
stores. The Registrant expects to convert approximately 60 of these locations to
its Lady Foot Locker, Kids Foot Locker, and Colorado formats. Additionally, the
Registrant will launchrecorded a new athletic outlet chain utilizing approximately 35
Footquarters locations and 40 existing Foot Locker and Champs Sports outlet
stores. The remaining stores are expected to close or be disposed of in 1999.
The Registrant recorded anet charge to earnings of $243$234 million
before-tax, or $160$155 million after-tax for the loss on disposal of the Specialty Footwear
operations.
On July 17,segment.
Disposition activity of approximately $30 million charged to the reserve for the
period from January 30, 1999 to May 1, 1999 represented the payments for
leasehold and real estate disposition expenses, severance and benefit costs and
other related expenses. The remaining reserve balance of $91 million at May 1,
1999 primarily includes real estate disposition costs.
-5-
8
In 1997, the Registrant announced that it was exiting its 400 store
Domestic General Merchandise segment and recorded a charge to earnings of $310
million before-tax, or $195 million after-tax, for the loss on disposal of
discontinued operations. Net disposition activity for the thirteen weeks ended
May 1, 1999 was approximately $10 million, which included payments for leasehold
and real estate disposition expenses, offset by gains from planned disposals of
real estate. The Registrant plansremaining reserve balance of $25 million at May 1, 1999
consists principally of real estate disposition costs.
Prior year financial statements have been restated to convert approximately 150
locations to Foot Locker, Champs Sports, and other athletic or specialty
formats. The Registrant has opened 147 stores in former domestic general
merchandise locations through October 31, 1998.
Thepresent the
operating results of operations for all periods presented for the International
General Merchandise segment, the Specialty Footwear segment, and the Domestic
General Merchandise segment have been classifiedthese business segments as discontinued operations in
the Condensed Consolidated Statements of Operations.
Sales and net income or loss from discontinued operations for the quarter
and year-to-date periods through the date of discontinuance of each segment are
presented below.
6
9
Sales Thirteen weeks ended Thirty-nine weeks ended
- ----- -------------------- -----------------------
(in millions) October 31, October 25, October 31, October 25,
1998 1997 1998 1997
---- ---- ---- ----
International General Merchandise $ 234 $ 340 $ 842 $ 1,040
Specialty Footwear .............. 79 136 301 384
Domestic General Merchandise .... - - - 427
---- ---- ----- -----
Total ........................... $ 313 $ 476 $ 1,143 $ 1,851
==== ==== ===== =====
Net income (loss) Thirteen weeks ended Thirty-nine weeks ended
- ----------------- -------------------- -----------------------
(in millions) October 31, October 25, October 31, October 25,
1998 1997 1998 1997
---- ---- ---- ----
International General Merchandise $ (1) $ 4 $ (9) $ (2)
Specialty Footwear .............. 7 1 (17) (7)
Domestic General Merchandise .... - - - (28)
---- ---- ---- ----
Total ........................... $ 6 $ 5 $ (26) $ (37)
==== ==== ==== ====operations.
The following is a summary of the net assets of discontinued operations:
(in millions) October 31, October 25,May 1, May 2, Jan. 31,30,
1999 1998 1997 19981999
---- ---- ----
International General Merchandise
Assets ........................................................................................ $ 5746 $815 $ 854 $ 78647
Liabilities ..................... 13 419......................................................... 9 354 11
---- ---- ----
Net assets of discontinued operations ............................... $ 37 $461 $ 36
---- ---- ----
operations .................... $ 44 $ 435 $ 432
==== ==== ====
Specialty Footwear
Assets ........................................................................................ $ 19058 $194 $ 244 $ 21363
Liabilities ..................... 26 33 33......................................................... 8 38 17
---- ---- ----
Net assets of discontinued operations ............................... $ 50 $156 $ 46
---- ---- ----
operations .................... $ 164 $ 211 $ 180
==== ==== ====
Domestic General Merchandise
Assets ........................................................................................ $ 4621 $ 10021 $ 2823
Liabilities ..................... 34 149 21
Net assets (liabilities) of......................................................... 7 10 8
---- ---- ----
discontinued operations ....... $ 12 $ (49) $ 7
==== ==== ====
Total Net Assetsassets of discontinued operations .................................................. $ 22014 $ 59711 $ 61915
---- ---- ----
Total net assets of discontinued operations ......................... $101 $628 $ 97
==== ==== ====
The assets of each segmentthe discontinued operations consist primarily of
inventory and fixed assets. The liabilities of the International General
Merchandise segment at October 25,
1997 and January 31,May 2, 1998 predominantly includeincluded amounts due to vendors
and pension liabilities. The decrease in net assets of International General
Merchandise discontinued operations at October 31, 1998January 30, 1999 and May 1, 1999 reflects
the sale of the German general merchandise operations on October 22, 1998. The
liabilities of the Specialty Footwear and Domestic General Merchandise segments
primarily reflect amounts due to vendors.
7
10
The discontinued operations reserve for International General Merchandise
of $41 million was reduced by a $2 million foreign currency translation
adjustment. Disposition activity of $48 million for the period from September
16, 1998 to October 31, 1998 reduced the reserve of $243 million recorded for
Specialty Footwear discontinued operations to $195 million. Disposition activity
related to the discontinued operations reserve for the quarter and year-to-date
periods ended October 31, 1998 was approximately $32 million and $77 million,
respectively, for the domestic general merchandise business. The remaining
reserve balance at October 31, 1998 was $13 million.
Earnings Per Share
- ------------------
Basic earnings per share is computed as net earnings (loss) divided by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options,
restricted stock awards and other convertible securities.
-6-
9
A reconciliation of weighted-average common shares outstanding to
weighted-average common shares assuming dilution follows:
Thirteen weeks ended
Thirty-nine weeks ended
--------------------
-----------------------
October 31, October 25, October 31, October 25,May 1, May 2,
(in millions) 1999 1998
1997 1998 1997
---- ---- ---- ---------- ------
Weighted-average common shares outstanding ................ 135.6 134.9 135.4 134.5...................................... 136.7 135.1
Incremental common shares issuable ................... - 1.4 -.............................................. 1.3
------ ------
Weighted-average common shares ----- ----- ----- -----
assuming dilution .......... 135.6 136.3 135.4 135.8
===== ===== ===== =====................................ 136.7 136.4
====== ======
Incremental common shares were not included in the computation for the
quarter and year-to-date periods ended October 31, 1998May 1, 1999 since their inclusion in periods when the Registrant
reported a loss from continuing operations would be antidilutive. For the thirteen and the thirty-nine weeks ended October 25, 1997,Antidilutive
options with an exercise price greater than the average market price arewere not included in the computation of diluted earnings per share and
would not have a material impact on diluted earnings per share.
Accumulated Other Comprehensive Income
- --------------------
The Registrant adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
or loss and its components in the financial statements. Comprehensive income is
a more inclusive financial reporting methodology that includes the disclosure of
certain financial information that has not been recognized in the calculation of
net income or loss, such as foreign currency translations and changes in minimum
pension liability which are recorded directly to shareholders' equity.Loss
Accumulated other comprehensive loss was comprised of foreign currency
translation adjustments of $142$140 million, $49$22 million, and $34$144 million, and
minimum pension liability adjustments of $43 million, $37$45 million, and $45$43
million, at October 31,May 1, 1999, May 2, 1998, October 25, 1997, and January 31, 1998,30, 1999, respectively.
Reclassifications
- -----------------
Certain balances in prior periods have been reclassified to conform
with the presentation adopted in the current period. As discussed above, all
financial statements have been restated to reflect the discontinuance of the
Specialty Footwear and International General Merchandise segments.segments in the third
quarter of 1998.
Legal Proceedings
- -----------------
There are noThe only legal proceedings pending against the Registrant or its
consolidated subsidiaries consist of ordinary, routine litigation, including
administrative proceedings, incident to the businesses of the Registrant, as
well as litigation incident to the sale and disposition of businesses that have
occurred in the past several years. Management does not believe that the outcome
of such proceedings will have a material legal proceedings.
8
11effect on the Registrant's consolidated
financial position or results of operations.
Recent Accounting Pronouncements
- --------------------------------
In June 1997,1998, the Financial Accounting Standards Board ("FASB") issued
SFAS
No. 131, "Disclosures about SegmentsStatement of an Enterprise and Related Information,"
which is effective for financial statements issued for fiscal years beginning
after December 15, 1997 and therefore, effective for the Registrant in 1998. The
Registrant will adopt the provisions of this standard in the fourth quarter of
1998. SFAS No. 131 supersedes previously established standards for reporting
operating segments in the financial statements and requires disclosures
regarding selected information about operating segments in interim and annual
financial reports.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective for fiscal
years beginning after December 15, 1997 and therefore, effective for the
Registrant in 1998. This statement revises employers' disclosures about pensions
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans.
In June 1998, the FASB issued SFASFinancial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities,"Activities" ("SFAS No. 133"), which is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. On May 19, 1999,
and therefore,the FASB issued an exposure draft to propose the delay of the effective date for
SFAS No. 133 by one year. As a result, the Registrant in 2000.may not be required to
adopt the statement until 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Registrant is in the process of evaluating SFAS No. 133 to determine its impact
on the consolidated financial statements.
Short-Term Debt
- ---------------
On September 25, 1998, the Registrant borrowed $180 million under a
separate loan agreement ,in addition to amounts borrowed under its April 9, 1997
$500 million revolving credit agreement ("revolving credit agreement"). This
facility was subsequently repaid with proceeds received from the sale of its
German general merchandise business. Due to lower than planned earnings in the
quarter and the charges related to the closing of the Registrant's Specialty
Footwear operations, the Registrant obtained a waiver with regard to certain
financial covenants contained in the revolving credit agreement for the period
from October 31, 1998 through March 19, 1999. During the waiver period, the
Registrant is prohibited from paying cash dividends or repurchasing, redeeming,
retiring, or acquiring any shares of its capital stock. The Registrant is in the
process of amending its revolving credit agreement and expects to have an
amended credit facility in place prior to expiration of the waiver.
Subsequent Event
- ----------------
On June 22, 1998, the Registrant entered into an agreement to sell its
Corporate Headquarters building in New York, the Woolworth Building, and lease
back four floors. These transactions were completed on December 4, 1998 for
gross proceeds of $137.5 million. The Registrant will record a gain on the sale
totaling approximately $55 million after-tax, a substantial portion of which
will be recongnized in the fourth quarter with the remainder recognized over the
lease terms.-7-
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results - --------------------------------------------------------------------------------
of Operations
- -------------
As discussed more fully in the footnotes to the Condensed Consolidated
Financial Statements, the Registrant announced that it was exitingdiscontinued its Specialty Footwear and its
International General Merchandise segments.segments in the third quarter of 1998.
Accordingly, the
results of operations for all periods presented for these businesses have been
classified as discontinued operations and allprior year financial statements have been restated.
Totalrestated to present these
business segments as discontinued operations.
RESULTS OF OPERATIONS
Sales of $1,079 million in the first quarter of 1999 increased 2.0
percent from sales of $1,058 million in the first quarter of 1998, reflecting
the impact of 143 net additional stores. Comparable-store sales were flat for
the 1998 third quarter increased 1.4 percent to $1,122
million as compared with $1,107 million for the third quarter of 1997,
reflecting sales from 384 additional stores, offset by a comparable-store sales
decline of 5.3 percent.quarter. Excluding the effect of foreign currency fluctuations and sales
from disposed operations, sales increased 2.82.7 percent for the quarter.
Sales forfirst quarter of
1999.
Gross margin declined by 260 basis points to 26.7 percent in the thirty-nine weeks ended October 31, 1998 increased 0.8
percent to $3,223 millionfirst
quarter of 1999 as compared with $3,198to 29.3 percent in the corresponding prior-year
period. This decline principally reflects increased occupancy costs in the
Global Athletic Group as a result of 159 net additional stores in the first
quarter of 1999 as compared to 1998, and also aggressive markdown activity in
the Northern Group in order to position inventories properly.
Selling, general and administrative expenses ("SG&A") of $257 million
for the same period a
year earlier. Excluding the effectthirteen weeks ended May 1, 1999 declined by 180 basis points to 23.8
percent of foreign currency fluctuations and sales,
from disposed operations, sales increased 2.0 percent as compared with the corresponding prior-year period. Year-to-date comparable-store sales decreased
6.4 percent.
9
12
Gross margin, as a percentageThe
decline reflects the Registrant's successful cost cutting initiatives at both
the corporate and divisional levels. Corporate expense, included in SG&A, was
reduced to $17 million in the first quarter of 1999, an $8 million decrease from
the first quarter of 1998. The Registrant expects to reduce its 1999 corporate
and divisional operating expenses by $100 million, compared to 1998, and to
further cut corporate costs to one percent of sales decreased 790 basis pointsby 2001.
Depreciation and amortization increased by $11 million to 25.1
percent for the quarter and decreased from 32.2 percent to 27.9 percent for the
year-to-date period in 1998, as compared with the corresponding periods a year
earlier. These declines primarily reflect increased markdowns as a result of the
Registrant's decision to embark on an aggressive inventory reduction program in
the third quarter 1998 to ensure that inventories remain current in order to
enhance its competitiveness for 1999.
Selling, general and administrative expenses increased $50 million and $83$45 million
for the thirteen and thirty-nine weeks ended October 31,May 1, 1999. The increase reflects depreciation and
amortization of assets included in the 1998 as
compared with the corresponding prior-year periods. These increases primarily
reflect the incremental costs associated with the additional stores
year-over-year attributable to thecapital expenditure program, which
concentrated on new store program. These increases were
partially offset by decreases in net pensionopenings and net postretirement benefit
expense, which primarily reflects the amortizationremodeling of the plans' unrecognized
gainsexisting facilities, and
losses over the average remaining life expectancy of inactive
participants, who now comprise the majority of the plans' participants.
Previously, the unrecognized gains and losses were amortized over the average
remaining service period of active participants.
Third quarter operating results from continuing operations (before
corporate expense, interest expense and income taxes) reflect a $30 million loss
for 1998 as compared with a profit of $91 million for the third quarter of 1997,
reflecting a significant increase in inventory markdown activity and an increase
in selling, general and administrative expenses. For the thirty-nine weeks ended
October 31, 1998, operating profit declined to $43 million from $245 million in
the corresponding prior-year period.also included management information systems.
Interest expense, net of interest income, increased $10$1 million for the
1998 thirdfirst quarter and year-to-date periodsof 1999 as compared with the corresponding prior-year periods. Theperiod,
reflecting the incremental interest expense is attributable to increased short- termhigher interest
rates and short-term borrowing levels during 1998 and is partially1999, offset by $3 million of
interest income related to income tax refunds.
Corporate income, included in other income, totaled $6 million for the
first quarter of 1999, which reflects the recognition of $5 million of the
deferred gain recorded on the 1998 sale of the corporate headquarters and gains
of approximately $7$1 million related to a franchise tax
settlementthe disposal of other real estate assets.
This compares to other income of $19 million recorded in the second quarter.
The Registrant reported a loss from continuing operationsfirst quarter of
1998 for the thirteen
weeks ended October 31, 1998sale of $40 million, or $0.29 per diluted share, as
compared with income of $50 million, or $0.37 per diluted share for the prior-year period ended October 25, 1997. Year-to-date continuing operations
include a $26 million loss for 1998 as compared with $107 million in income for
the prior-year period.Registrant's Garden Centers nursery business.
During the first quarter of 1999, the effective tax rate was adjustedincreased
to 47.439.0 percent and
50 percent for the quarter and year-to-date periods ended October 31, 1998,
respectively, as compared with 34.2 percent and 37.837.0 percent for the corresponding prior-year
periods.period. The increase reflects the impact of non-deductible terms,items, such as
goodwill amortization, at lower earnings levels.levels, as well as higher proportional
foreign earnings, which are taxed at higher rates.
The Registrant reported a net loss for the quarterthirteen weeks ended May 1,
1999 of $155$11 million or $1.14$0.08 per diluted share, includes $115 million (after-tax) or $0.85 per diluted share for discontinued
operations. This compares with net income of $55 million, or $0.40 per diluted
share for the corresponding prior-year period. The net loss for the thirty-nine
weeks ended October 31, 1998 of $173 million or $1.27 per diluted share,
includes $147 million (after-tax), or $1.08 per diluted share for discontinued
operations. This compares withcompared to a net loss of $125$5
million, or $0.92$0.04 per diluted share for the corresponding prior-year period,
which includes $232a $13 million, (after-tax) or $1.71$0.10 per diluted share forloss from discontinued
operations.
Consistent with an announcement made by the Registrant during the quarter,
in light of current trends, particularly in athletic apparel, and based upon its
intention to continue to position its inventory properly for the beginning of
1999, the Registrant expects fourth quarter earnings to be below plan.
The Registrant ended the third quarter with 5,964 stores consisting of
3,869 in the Athletic Group, 914 in the Northern Group and 1,181 in Other
Specialty. This compares with 5,580 stores at the end of the corresponding
prior-year period. During the thirty-nine weeks ended October 31, 1998, the
Registrant opened 500 stores, closed or disposed of 258 stores and remodeled or
relocated 361 stores. Of the 500 stores opened, 90 stores represent the first
quarter acquisition of Athletic Fitters stores.
10-8-
13
SALES
- -----11
STORE COUNT
The following table summarizes sales for continuing operations by segment and
geographic area:store count:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
(in millions) October 31, October 25, October 31, October 25,
By Segment: ................At Jan. 30, At May 1, At May 2,
1999 Opened Closed 1999 1998
1997 1998 1997
---- ---------- ------ ---- ----
Specialty:
Global Athletic Group .......... $ 945 $ 912 $ 2,730 $ 2,685................. 3,925 43 69 3,899 3,740
Northern Group .......... 97 110 256 270........................ 940 8 9 939 850
All Other Specialty ......... 80 79 233 229............................. 1,137 5 31 1,111 1,216
----- ----- ----- ----- Specialty total ............ 1,122 1,101 3,219 3,184
===== ===== ===== =====
Disposed operations ........ - 6 4 14-----
Total .............................. 6,002 56 109 5,949 5,806
----- ----- ----- ----- -----
Of the 56 stores opened, 15 stores represent the conversion of Kinney
and Footquarters stores from the Registrant's discontinued Specialty Footwear
segment. During the thirteen weeks ended May 1, 1999, the Registrant remodeled
or relocated 61 stores. Additionally, a new athletic outlet chain was launched
utilizing 28 Footquarters locations and 51 existing Foot Locker and Champs
Sports outlet stores, which are included in the Global Athletic Group.
SALES
The following table summarizes sales by segment and geographic area,
after reclassification for disposed operations. Disposed operations represents
those businesses sold or closed other than the discontinued segments and are
therefore included in continuing operations.
Thirteen weeks ended
--------------------
(in millions) May 1, May 2,
1999 1998
---- ----
By Segment:
Global Athletic Group ................. $ 1,122931 $ 1,107 $ 3,223 $ 3,198
===== ===== ===== =====907
Northern Group ........................ 69 74
All Other ............................. 79 73
Disposed operations ................... -- 4
------ ------
Total sales .............................. $1,079 $1,058
====== ======
By Geographic Area:
Domestic ................United States ......................... $ 936929 $ 909 $ 2,711 $ 2,681913
Canada ................................ 70 78
Other International ........... 186 192 508 503................... 80 63
Disposed operations ..... - 6................... -- 4
14
----- ----- ----- -----
$ 1,122 $ 1,107 $ 3,223 $ 3,198
===== ===== ===== =====------ ------
Total sales .............................. $1,079 $1,058
====== ======
Global Athletic Group sales increased by 3.62.6 percent for the 1998 thirdfirst
quarter and by 1.7 percent for the year-to-date period,of 1999 as compared with the corresponding periods a year earlier.prior-year period. The
increase was primarily attributable to sales from 360159 net additional stores,
and also,offset by below plan sales performance in part, to increased sales from
remodeled stores.the Champs Sports format.
Comparable-store sales declineddecreased by 5.1 percent and by 7.10.3 percent for the quarter, and year-to-date periods reflecting decreasedan
improvement over fourth quarter 1998 trends. Sales for the quarter were impacted
by continued weak sales of branded and licensed product,apparel, offset by improvedincreased
sales in remodeled stores and from severalhigh-end performance athletic footwear,
categories, such as running, trail and basketball.primarily running.
Excluding the impact of foreign currency fluctuations, the Northern Group'sGroup
sales decreased by 8.7 percent and by 1.94.9 percent for the thirteen and
thirty-nine week periods, respectively. Comparable-storefirst quarter of 1999. The sales declinedfrom 89
net additional stores in 1999, compared to 1998 was more than offset by 15.7
percent anda
comparable-store sales decline of 9.6 percent respectively, reflectingfor the impactquarter.
The increase in sales of a change in
merchandise mix and decreased sales from storesthe All Other category was driven by the
continued double-digit growth in the southern United States,
which experienced unusually mild weather in the fall.
Other Specialty 1998 third quarter and year-to-date comparable-store sales
increased by 9.9 percent and by 7.4 percent, as compared with the corresponding
prior-year periods. The afterthoughts format is primarily responsible for these
increases, reflecting, in part, the success of the format's larger-store design.
11Afterthoughts jewelry format.
-9-
1412
OPERATING RESULTS
- -----------------
Operating results reflect income (loss) from continuing operations
(beforebefore income taxes, excluding corporate expense, corporate income and interest
expense, net. The following table summarizes operating profit by segment and
income taxes) are as follows:geographic area, after reclassification for disposed operations.
Thirteen weeks ended
Thirty-nine weeks ended
-------------------- -----------------------
(in millions) October 31, October 25, October 31, October 25May 1, May 2,
1999 1998 1997 1998 1997
---- ----
---- ----
Specialty ....................By Segment:
Global Athletic Group ................... $ (30)19 $ 92 $ 26 $ 24746
Northern Group .......................... (16) (9)
All Other ............................... 1 (6)
Disposed operations .......... -..................... (1) 17 (2)18
---- ----
---- ----Total operating profit ..................... $ (30)3 $ 91 $ 43 $ 245
==== ====49
==== ====
By Geographic Area:
DomesticUnited States ........................... $ 9 $ 38
Canada .................................. (7) (6)
Other International ..................... 2 (1)
Disposed operations ..................... (1) 18
---- ----
Total operating profit ..................... $ (36)3 $ 75 $ 24 $ 225
International ................ 6 17 2 22
Disposed operations .......... - (1) 17 (2)
---- ---- ---- ----
$ (30) $ 91 $ 43 $ 245
==== ====49
==== ====
The Specialty segmentGlobal Athletic Group reported a lossan operating profit of $30$19 million
for the 1998 third
quarterthirteen weeks ended May 1, 1999 as compared with a profit$46 million for the
prior-year period ended May 2, 1998. This decline principally reflects increased
occupancy and other costs associated with the 159 net additional stores as well
as the additional depreciation and amortization of $92remodeled stores in 1999 as
compared to 1998. The decline also reflects increased markdowns in most formats,
offset, in part, by reduced promotional markdown activity in Europe in the first
quarter of 1999 compared to 1998.
The Northern Group reported an operating loss of $16 million for the
first quarter of 1999, compared to an operating loss of $9 million in the 1997 third quarter. The
Athletic Group sales increases were more than offset by the increased
promotional markdowns takenfirst
quarter of 1998, as parta result of the aggressive inventory reduction
program undertaken by the Registrantdecline in the third quarter,sales and continued markdown
activity in order to keep the
product assortment current and enhance the Registrant's competitiveness for
1999.clear excess inventory.
Operating results for formats included in the Northern Group for the 1998 third quarter and
year-to-date periods decreased due to disappointing sales.All Other Specialty
operating resultscategory
improved by 42.9 percent and by 36.4 percent$7 million for the thirteen and thirty-nine weeks ended October 31, 1998, respectively,May 1, 1999 as compared with
the corresponding prior year periods,period, predominantly related to the afterthoughtsAfterthoughts
format.
Included in disposedDisposed operations for the thirty-nine weeks ended October 31,first quarter of 1998 isinclude a $19 million
gain fromon the sale of the Registrant's six-storeGarden Centers nursery chain. This gain isbusiness offset by a $2 million loss, including operating losses, forthe costs
associated with the shutdown of the U.S. Randy River operations.
This is part of the
Registrant's continuing program to reduce its investment in non-strategic
businesses. The prior-year amount represents the operating results of these
operations.
SEASONALITY
- -----------
The Registrant's businesses are seasonal in nature. Historically, the
greatest proportion of sales and net income is generated in the fourth quarter
and the lowest proportionproportions of sales and net income isare generated in the first
quarter,and second quarters, reflecting seasonal buying patterns. As a result of these
seasonal sales patterns, inventory generally increases in the third quarter in
anticipation of the strong fourth quarter sales.
12-10-
1513
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
NetThe Registrant's primary sources of working capital have been cash
used inflows from operations, borrowings under the revolving credit agreement,
financing real estate with operating leases and proceeds from the sale of
non-strategic assets. The principal use of cash has been to finance inventory
requirements, which are generally at their peak during the third and fourth
quarters, capital expenditures related to store openings and remodelings, and
management information systems, and to fund other general working capital
requirements.
Operating activities was $409of continuing operations reduced cash by $127
million for the thirty-ninethirteen weeks ended October 31, 1998,May 1, 1999, as compared with net cash provided by operating
activities of $52$192 million
in the corresponding prior-year period. This
principallyThese amounts reflect the net loss
reported by the Registrant in those periods, adjusted for non-cash items and
working capital changes. The decline in cash used for merchandise inventories in
1999 reflects the liquidationadditional inventory purchases in 1998 related to the opening
of the domestic general merchandise
businessnew larger-size athletic formats, coupled with a concerted effort in 1999 to
maximize inventories per square foot. Merchandise inventories were $889 million
at May 1, 1999, essentially unchanged from $880 million at May 2, 1998, however,
as a percentage of square footage, inventories declined by 16 percent. Included
in the prior year andcash flow from operations for both periods is the operating losses incurred fromcash outlay for
occupancy costs on May 1 due to the timing of each quarter end.
Net cash used in investing activities of continuing operations in 1998. Inventories purchased inwas $47
million and $87 million for the first quarter of 1999 and 1998, contributedrespectively.
Capital expenditures were $54 million for the thirteen weeks ended May 1, 1999,
primarily related to store remodelings as compared with $80 million for the
increase in
accounts payable, and included inventorycorresponding prior-year period. Planned capital expenditures of $175 million
for approximately 2001999 include expenditures for 350 new and remodeled stores, which were scheduled for completion in November.
Netmanagement
information systems, logistics and other support facilities. In the first
quarter of 1998, cash from investing activities totaled $93 millionused for the thirty-nine
weeks ended October 31, 1998, as compared with $259acquisition of Athletic Fitters of $29
million, netwas offset by $22 million cash used during
the corresponding prior-year period. On October 22, 1998, the Registrant sold
its German general merchandise business for $563 million. Net proceeds received from the sale amounted to $495 million,of the
majority of which were used to
reduce short-term borrowings. Cash used in investingGarden Centers nursery business.
Financing activities infor the prior
year was predominantly due to the first quarter acquisition of Eastbay, Inc. for
$140Registrant's continuing operations
contributed $26 million in a transaction accounted for as a purchase. Capital expenditures
totaled $395 millioncash for the thirty-ninethirteen weeks ended October 31, 1998 as
compared with $114May 1, 1999, and
$258 million in cash for the corresponding prior-year period reflecting
planned expenditures related to the Registrant's aggressive new store and
remodeling program. Additionally, the increase is attributable to unplanned
expenditures relating to the repositioning of 50 additional domestic general
merchandise locations, as well as costs associated with a European distribution
center and the relocation and reduction in size of the Registrant's divisional
and corporate office space in connection with the sale of its Corporate
Headquarters. Capital expenditures for 1998 are expected to total $515 million.
Short-term debt, net of cash, increased by $220 million as of October 31,
1998, from October 25, 1997, reflecting increasedperiod. Outstanding
borrowings under the Registrant's revolving credit agreement primarily duewere $274 million
and $253 million at May 1, 1999 and May 2, 1998, respectively and have been
classified as short-term debt. The Registrant expects to lower than expected
salesincur incremental
interest expense in 1999 compared to 1998, reflecting anticipated higher
interest rates and increasedfees during 1999. Management believes current domestic and
international credit facilities and cash provided by operations will be adequate
to finance its working capital expenditures. Duringrequirements and support the quarter, the Registrant
borrowed $180 million under a separate loan agreement, in addition to amounts
borrowed under the revolving credit agreement. This facility was subsequently
repaid with proceeds received from the saledevelopment of its
German general merchandise
business. Dueshort-term and long-term strategies. The Registrant expects to lower than planned earnings infund the
quarter and the charges
related to the closing of the Registrant's Specialty Footwear operations, the
Registrant obtained a waiver with regard to the fixed charge coverage ratio and
the minimum consolidated tangible net worth covenants contained in the revolving
credit agreement for the period from October 31, 1998 through March 19, 1999.
During the waiver period, the Registrant is prohibited from paying cash
dividends or repurchasing, redeeming, retiring, or acquiring any sharesrepayment of its capital stock. The Registrant is in the process of amending its revolving credit
agreement and expects to have an amended credit facility in place prior to
expiration of the waiver.
The Registrant completed the sale of its Corporate Headquarters building in
New York, the Woolworth Building, and leased back four floors, on December 4,
1998 for gross proceeds of $137.5 million. The net proceeds will be used for
general corporate purposes.
On September 10, 1998, the Registrant and The Sports Authority, Inc.
jointly announced that they had mutually agreed to terminate, effective
immediately, the merger agreement pursuant to which The Sports Authority would
have become a wholly-owned subsidiary of the Registrant$200 million 7.0 percent debentures through a pooling of
interests.
13future financing
and/or asset sales.
-11-
1614
YEAR 2000 READINESS DISCLOSURE
------------------------------
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits, rather than four, to define the applicable year.
Mistaking "00" for the year 1900 could result in miscalculations and errors and
cause significant business interruptions for the Registrant, as well as for the
government and most other companies. The Registrant has instituted a plan to
assess its state of readiness for Y2K, to remediate those systems that are
non-compliant and to assure that material third parties will be Y2K compliant.
State of Readiness
- ------------------
The Registrant has assessed all mainframe, operating and application
systems (including point of sale) for Y2K readiness, giving the highest priority
to those information technology applications (IT) systems that are considered
critical to its business operations. Those applications considered most critical
to the Registrant'sRegistrant"s business operations have been remediatedremediated. In-house
certification testing of all application systems is currently in progress. Code
changes have been made to the merchandising and logistics legacy systems,
remediation is complete, and testing is scheduledin progress. The necessary enhancements
to begin in December 1998. The remediation of the point of sale equipment are substantially complete. Approximately 2,300
stores have been upgraded with the Y2K remediated release of store systems
software and it is expected that this release will be in all stores by the end
of June. In July, the Registrant will perform a test of its Y2K compliant (and
recently upgraded) operating software on an isolated processor. Thereafter,
through the fall, the Registrant will complete its testing of application
software using this upgraded operating system infrastructure. The plan calls for
certification to be completed in early 1999, with pilot testing
anticipated in March and April. Extensive testingcomplete by the end of all remediated systems will
be performed throughout 1999 for implementation during that year.the third quarter.
Apart from the Y2K issue, the Registrant hadhas developed and installed
throughout its business unitsbusinesses beginning in 1997 a comprehensivean information computer system
("ECLIPSE"), encompassing merchandising, logistics,which will be installed in most divisions for the finance and human
resources.resources functions during 1999. The ECLIPSE project was undertaken for business
reasons unrelated to Y2K. However, the installation of ECLIPSE eliminates the
need to reprogram or replace certain existing software for Y2K compliance.
The Registrant has compiled a comprehensive inventory of its non-IT
systems, which include those systems containing embedded chip technology
commonly found in buildings and equipment connected with a building'sbuilding"s
infrastructure. Management is currently inhas established the process of establishing the
priority and possible remediation of systems identified as
non-compliant.
Preliminary investigationsnon-compliant and ongoing testing and implementation of any changes required for
the non-IT systems will be performed throughout 1999. Investigations of the
embedded chip systems indicate that Y2K will not affect systems such as heating,
ventilation and security in most store locations.
Ongoing testing and implementation of any remediation required for
the non-IT systems will be performed throughout 1999.
Material Third Parties
- ----------------------
Key vendors and service providers have been identified, whose
non-compliance could haveThe Registrant purchased approximately 44 percent of its 1998
merchandise from one major vendor. As a material impact onresult, the Registrant's ability to
operate worldwide.could be materially affected by the non-compliance of this key supplier.
Management has undertakendetermined through several meetings and interviews that the
vendor's Y2K readiness program is substantially complete. Electronic Data
Interchange software was successfully tested with this vendor and management
intends to determine the state of readiness
ofdevelop joint contingency plans for distribution and order entry.
Management has issued questionnaires to its approximately 20 key vendors by issuing questionnairesto
determine their state of readiness. The Registrant's efforts to obtain written
certifications have not been successful, for the most part, and conducting
meetings and on-site visits.management will
continue its efforts to assess the vendors' Y2K readiness through other means.
The level of compliance of the Registrant's major providers of banking services,
transportation, telecommunications and utilities is in the course of being ascertained and the
related risks established.evaluated.
-12-
15
Y2K Costs
- ---------
The Registrant is utilizing both internal and external resources to
address the Y2K issue. Internal resources reflect the reallocation of IT
personnel to the Y2K project from other IT projects. In the opinion of
management, the deferral of such other projects will not have a significant
adverse effectaffect on continuing operations. The total direct cost, excluding
ECLIPSE, to remediate the Y2K issue is estimated to be approximately $5 million,
of which $1.2$3 million has been spent.was spent in 1998 and a further $0.2 million in the first
quarter of 1999. All costs, excluding ECLIPSE, are being expensed as incurred
and are funded through operating cash flows. The Registrant's Y2K costs are
based on management's best estimates and may be updated, as additional
information becomes available. Management does not expect the total Y2K
remediation costs to be materialsignificant to the Registrant'sits results of operations or financial
condition.
Contingency Plan/Risks
- ----------------------
The Registrant is in the process of developing contingency plans for
those areas whichthat might be affected by Y2K. Although the full consequences are
unknown, the failure of either the Registrant's critical systems or those of its
material third partiesparty suppliers to be Y2K compliant couldwould result in the
interruption of itsthe Registrant's business, which could have a materialsignificant
adverse effect on theits results of operations or financial conditioncondition. If the
distribution channels were to be disrupted, alternative methods of delivering
merchandise to both the Registrant.
14
17Registrant's stores and its customers will be in place.
However, if any business interruptions occur in January 2000, and they are
promptly corrected, management expects it would not significantly impact the
Registrant's results of operations or financial position. Typically, at that
time of year, after the holiday season, there is lower customer demand and
borrowing requirements are not at their peak. In addition, successful inventory
and working capital management, along with contingency plans for store
operations, will help mitigate the risks associated with the Y2K issue. However,
some business disruptions may occur even with defensive contingency plans.
IMPACT OF EUROPEAN MONETARY UNION
- ---------------------------------
The European Union is comprised of fifteen member states, eleven of
which will adoptadopted a common currency, the "euro," effective January 1, 1999. From
that date until January 1, 2002, the transition period, the national currencies
will remain legal tender in the participating countries as denominations of the
euro. Monetary, capital, foreign exchange and interbank markets will converthave converted
to the euro and non-cash transactions will be possible in euros. On January 1,
2002, euro bank notes and coins will be issued and the former national
currencies will be withdrawn from circulation no later than July 1, 2002.
The Registrant has reviewed the impact of the euro conversion on its
information systems, accounting systems, vendor payments and human resources.
Modifications required to be made to the point of sale hardware and software
will be facilitated by the Y2K remediation.
The adoption of a single European currency will lead to greater product
pricing transparency and a more competitive environment. The Registrant will
display the euro equivalent price of merchandise as a customer service during
the transition period, as will many retailers until the official euro conversion
in 2002. The Registrant doeseuro conversion is not expect the euro conversionexpected to have a material
adversesignificant effect on itsthe
Registrant's results of operations or financial condition.
-13-
16
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- -----------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of the
federal securities laws. All statements, other than statements of historical
facts, which address activities, events or developments that the Registrant
expects or anticipates will or may occur in the future, including such things as
future capital expenditures, expansion, strategic plans, growth of the
Registrant's business and operations, Y2K and euro related actions and other
such matters are forward-looking statements. These forward-looking statements
are based on many assumptions and factors including effects of currency
fluctuations, consumer preferences and economic conditions worldwide and the
ability of the Registrant to implement, in a timely manner, the programs and
actions related to the Y2K and euro issues. Any changes in such assumptions or
factors could produce significantly different results.
15-14-
1817
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- -------------------------
There are noThe only legal proceedings pending against the Registrant or its
consolidated subsidiaries consist of ordinary, routine litigation,
including administrative proceedings, incident to the businesses of the
Registrant, as well as litigation incident to the sale and disposition
of businesses that have occurred in the past several years. Management
does not believe that the outcome of such proceedings will have a
material legal proceedings.effect on the Registrant's consolidated financial position or
results of operations.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
--------
An index of the exhibits that are required by this item, and which are
furnished in accordance with Item 601 of Regulation S-K, appears on
pages 18 through 20. The exhibits which are in this report immediately
follow the index.
(b) Reports on Form 8-K
--------------------
The Registrant filed a report on Form 8-K dated August 12, 1998February 17, 1999 (date
of earliest event reported) reporting that the Board of Directors
amended the By-laws of the Registrant to provide that the fiscal year
of the Registrant shall end on the Saturday closest to the last day in
January of each year, rather than on the last Saturday in January.Bruce L. Hartman had been
named Senior Vice President and Chief Financial Officer, and would
replace Reid Johnson, who had resigned, effective February 26, 1999.
The Registrant filed a report on Form 8-K dated SeptemberMarch 10, 19981999 (date of
earliest event reported) reporting thatsales and earnings for the Registrantfourth
quarter and The Sports Authority, Inc. jointly announced that they had mutually
agreed to terminate the merger agreement, effective immediately,
pursuant to which the Registrant would have acquired The Sports
Authority, Inc. in a tax-free exchange of shares.
The Registrant filed a report on Form 8-K dated September 16, 1998
(date of earliest event reported) reporting that: (i) the Registrant
announced that it is exiting its Specialty Footwear operations,
including 467 Kinney Shoe stores and 103 Footquarters stores, on
September 16, 1998, and (ii) on September 22, 1998, the Registrant
announced that it is exiting its International General Merchandise
business, including its 357 store German general merchandise
operations, which are being sold pursuant to a definitive agreement in
a management led buy-out backed by Electra Fleming, based in London.
16year ended January 30, 1999.
-15-
1918
SIGNATURE
---------
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.
VENATOR GROUP, INC.
---------------------------------------
(Registrant)
Date: December 14, 1998June 4, 1999
/s/ Reid Johnson
--------------------------
REID JOHNSONBruce Hartman
-------------------
BRUCE HARTMAN
Senior Vice President
and Chief Financial Officer
17-16-
2019
VENATOR GROUP, INC.
-------------------
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
-----------------------------------------------------------
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
Exhibit No. in Item 601
of Regulation S-K Description
- ----------------------- ------------
1 *
2 *
3(i)(a) Certificate of Incorporation of the
Registrant, as filed by the Department of
State of the State of New York on April 7,
1989 (incorporated herein by reference to
Exhibit 3(i)(a) to the Quarterly Report on
Form 10-Q for the quarterly period ended
July 26, 1997, filed by the Registrant with
the SEC on September 4, 1997 (the "July 26,
1997 Form 10-Q")).
3(i)(b) Certificates of Amendment of the Certificate
of Incorporation of the Registrant, as filed
by the Department of State of the State of
New York on (a) July 20, 1989 (b) July 24,
1990 (c) July 9, 1997 (incorporated herein
by reference to Exhibit 3(i)(b) to the July
26, 1997 Form 10-Q) and (d) June 11, 1998
(incorporated herein by reference to Exhibit
4.2(a) of the Registration Statement on Form
S-8 (Registration No. 333-62425) previously
filed with the SEC).
3(ii) By-laws of the Registrant, as amended
(incorporated herein by reference to Exhibit
4.2 of the Registration Statement on Form
S-8 (Registration No. 333-62425) previously
filed with the SEC).
4.1 The rights of holders of the Registrant's
equity securities are defined in the
Registrant's Certificate of Incorporation,
as amended (incorporated herein by reference
to Exhibits 3(i)(a) and 3(i)(b) to the July
26, 1997 Form 10-Q and Exhibit 4.2(a) to the
Registration Statement on Form S-8
(Registration No. 333-62425) previously
filed with the SEC).
4.2 Rights Agreement dated as of March 11, 1998,
between Venator Group, Inc. and First
Chicago Trust Company of New York, as Rights
Agent (incorporated herein by reference to
Exhibit 4 to the Form 8-K dated March 11,
1998).
4.2(a) Amendment No.1 to Rights Agreement.
-17-
20
1989 (b) July 24, 1990 (c) July 9, 1997
(incorporated herein by reference to Exhibit 3(i)(b) to
the July 26, 1997 Form 10-Q) and (d) June 11, 1998
(incorporated herein by reference to Exhibit 4.2(a) of
the Registration Statement on Form S-8 (Registration
No. 333-62425) previously filed with the SEC).
3(ii) By-laws of the Registrant, as amended (incorporated
herein by reference to Exhibit 4.2 of the Registration
Statement on Form S-8 (Registration No. 333-62425)
previously filed with the SEC).
4.1 The rights of holders of the Registrant's equity
securities are defined in the Registrant's Certificate
of Incorporation, as amended (incorporated herein by
reference to Exhibits 3(i)(a) and 3(i)(b) to the July
26, 1997 Form 10-Q and Exhibit 4.2(a) to the
Registration Statement on Form S-8 (Registration No.
333-62425) previously filed with the SEC).
4.2 Rights Agreement dated as of March 11, 1998, between
Venator Group, Inc. and First Chicago Trust Company of
New York, as Rights Agent (incorporated herein by
reference to Exhibit 4 to the Form 8-K dated March 11,
1998).
Exhibit No. in Item 601
of Regulation S-K Description
- ----------------------- ------------
4.3 Indenture dated as of October 10, 1991
(incorporated herein by reference to
Exhibit 4.1 to the Registration Statement
on Form S-3 (Registration No. 33-43334)
previously filed with the SEC).
4.4 Forms of Medium-Term Notes (Fixed Rate and
Floating Rate) (incorporated herein by
reference to Exhibits 4.4 and 4.5 to the
Registration Statement on Form S-3
(Registration No. 33-43334) previously
filed with the SEC).
18
21
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
4.5 Form of 8 1/2 % Debentures due 2022
(incorporated herein by reference to
Exhibit 4 to the Registrant's Form 8-K
dated January 16, 1992).
4.6 Purchase Agreement dated June 1, 1995 and
Form of 7% Notes due 2000 (incorporated
herein by reference to Exhibits 1 and 4,
respectively, to the Registrant's Form 8-K
dated June 7, 1995).
4.7 Distribution Agreement dated July 13, 1995
and Forms of Fixed Rate and Floating Rate
Notes (incorporated herein by reference to
Exhibits 1, 4.1 and 4.2, respectively, to
the Registrant's Form 8-K dated July 13,
1995).
5 *
8 *
9 *
10.1 Venator Group Executive Severance Pay Plan.
10.2 Form of Senior Executive Severance Agreement.
10.3 Bridge Loan Agreement dated as of September 25, 1998.
10.4 Waiver dated as of November 6, 1998 to the Credit
Agreement dated April 9, 1997.
10.5 Agreement with S. Ronald Gaston dated November 10,
1998.
10.6 Agreement with Reid Johnson, dated September 17, 1998
10.7 Purchase and Sale Agreement, as amended.
11 *
12 *
8 *
9 *
10.1 Form of Executive Severance Benefit
Agreement.
10.2 Form of Senior Executive Severance
Agreement, amended as of April 29, 1999.
10.3 Amendment to Supplemental Agreement with
M. Jeffrey Branman dated May 5, 1999.
11 *
12 Computation of Ratio of Earnings to Fixed
Charges.
13 *
15 Letter re: Unaudited Interim Financial
Statements.
16 *
17 *
18 *
19 *
20 *
-18-
21
*
22 *
23 *
24 *
25 *
19
22
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
26 *
27.1 Financial Data Schedule, October 31, 1998
Exhibit No. in Item 601
of Regulation S-K Description
- ----------------------- ------------
16 *
17 *
18 *
19 *
20 *
21 *
22 *
23 *
24 *
25 *
26 *
27.1 Financial Data Schedule - May 1, 1999
(which is submitted electronically to the
SEC for information only and not filed).
27.2 Restated Financial Data Schedule - May 2,
1998 (which is submitted electronically
to the SEC for information only and not
filed).
99 Independent Accountants'Review Report.
- October 25, 1997
(which is submitted electronically to the SEC for
information only and not filed).
99 Independent Accountants' Review Report.
- -----------------------------
* Not applicable
20-19-
2322
Exhibits filed with this Form 10-Q:
Exhibit No. Description
- ----------- -----------
10.1 Venator Group Executive Severance Pay Plan.
10.2 Form of Senior Executive Severance Agreement.
10.3 Bridge Loan Agreement dated as of September 25, 1998.
10.4 Waiver dated as of November 6, 1998 to the Credit
Agreement dated April 9, 1997.
10.5 Agreement with S. Ronald Gaston dated November 10,
1998.
10.6 Agreement with Reid Johnson dated, September 17, 1998.
10.7 Purchase and Sale Agreement, as amended.
15 Letter re: Unaudited Interim Financial Statements.
27.1 Financial Data Schedule - October 31, 1998.
27.2 Restated Financial Data Schedule - October 25, 1997.
99 Independent Accountants' Review Report.
Exhibit No. Description
- ----------- -----------
4.2(a) Amendment No.1 to Rights Agreement
10.1 Form of Executive Severance Benefit Agreement
10.2 Form of Senior Executive Severance Agreement,
amended as of April 29, 1999
10.3 Amendment to Supplemental Agreement with M. Jeffrey Branman
dated May 5, 1999
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter re: Unaudited Interim Financial Statements
27.1 Financial Data Schedule - May 1, 1999
27.2 Restated Financial Data Schedule - May 2, 1998
99 Independent Accountants' Review Report