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 August 1,October 31, 1998
-------------------------------
Commission file no. 1-10299
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VENATOR GROUP, INC.
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(Exact name of registrant as specified in its charter)
New York 13-3513936
- -------------------------------- ----------------------------------
(State or other jurisdiction of I.R.S.(I.R.S. Employer Identification No.)
incorporation 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 xX NO
--- ------- ----
Number of shares of Common Stock outstanding at August 28,November 27, 1998: 135,524,566135,614,566
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2
VENATOR GROUP, INC.
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TABLE OF CONTENTS
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Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets...................1Sheets.......................1
Condensed Consolidated Statements
of Operations......................................2Operations............................................2
Condensed Consolidated Statements
of Comprehensive Loss..............................3Income (Loss)...........................3
Condensed Consolidated Statements
of Retained Earnings...............................4Earnings.....................................4
Condensed Consolidated Statements
of Cash Flows......................................5Flows............................................5
Notes to Condensed Consolidated
Financial Statements.............................6-8Statements...................................6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...8-14Operations.........9-15
Part II. Other Information
Item 1. Legal Proceedings......................................14
Item 4. Submission of Matters to Vote of Security Holders...14-15Proceedings......................................16
Item 6. Exhibits and Reports on Form 8-K.......................15
Signature..............................................168-K.......................16
Signature..............................................17
Index to Exhibits...................................17-18Exhibits...................................18-20
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
- ------------------------------------ --------------------
VENATOR GROUP, INC.
-------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(in millions)
August 1, July 26,October 31, October 25, January 31,
1998 1997 1998
-------- -------- -------------- ---- ----
(Unaudited) (Unaudited) (Audited)(1)
ASSETS
------
Current assets
Cash and cash equivalents..................equivalents ........... $ 77147 $ 6917 $ 11681
Merchandise inventories.....................1,406 1,216 1,159inventories ............. 1,112 886 754
Net assets of discontinued operations....... 10 209 7operations 220 597 619
Other current assets........................ 228 174 177assets ................ 136 149 131
----- ------ ------
1,721 1,668 1,459----- -----
1,615 1,649 1,585
Property and equipment, net....................1,214 903 1,053net ............ 916 511 625
Deferred charges and other assets.............. 716 737 670assets ...... 614 655 585
----- ------ ------
$3,651----- -----
$3,145 $ 3,3082,815 $ 3,1822,795
===== ===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Short-term debt............................debt ..................... $ 451371 $ 3821 $ ---
Accounts payable and accrued
liabilities.... 747 646 662liabilities ...................... 652 490 507
Current portion of reserve for
discontinued operations................... 27 232operations .......... 217 128 72
Current portion of long-term debt
and obligations under capital
leases.......... 23 14 22
----- ------ ------
$1,248 930 756leases ......................... 20 13 19
---- ---- ----
1,260 652 598
Long-term debt and obligations
under capital leases........................ 536 568 535leases ................ 508 510 508
Deferred taxes and other liabilities........... 586 654 602liabilities ... 345 432 400
Reserve for discontinued operations............ 18operations .... 30 67 18
Shareholders' Equity
Common stock and paid-in capital............capital .... 327 311315 317
Retained earnings...........................1,015 870earnings ................... 860 925 1,033
Accumulated other comprehensive loss........ (79) (92)loss . (185) (86) (79)
----- ------ ---------- -----
Total shareholders' equity.....................1,263 1,089equity ............ 1,002 1,154 1,271
Commitments....................................----- ------ ------
$3,651Commitments ............................
----- ----- -----
$ 3,3083,145 $ 3,1822,815 $ 2,795
===== ===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements.
(1) The Condensed Consolidated Balance Sheet as of January 31, 1998 has been
summarized from the Registrant's audited Consolidated Balance Sheet as of that
date.
1
4
VENATOR GROUP, INC.
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended Twenty-sixThirty-nine weeks ended
-------------------- ----------------------
August 1, July 26, August 1, July 26,-----------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
------- ------- ------- ----------- ---- ---- ----
SalesSales......................... $ 1,4651,122 $ 1,5001,107 $ 2,9313,223 $ 3,039
Cost3,198
Costs and expenses
Cost of sales ................. 1,052 1,037 2,098 2,111sales............... 840 741 2,324 2,167
Selling, general and
administrative expenses .... 380 370 771 758. 302 252 827 744
Depreciation and amortization . 47 43 91 8438 30 108 90
Interest expense, net ......... 9 11 21 22net....... 18 8 35 25
Other income .................. (3) (2) (22) (6)
------- ------- ------- -------
1,485 1,459 2,959 2,969
------- ------- ------- -------income................ - - (19) -
----- ----- ----- -----
1,198 1,031 3,275 3,026
----- ----- ----- -----
Income (loss) from continuing
operations before income
taxes (20) 41 (28) 70...................... (76) 76 (52) 172
Income tax expense (benefit) .... (7) 15 (10) 27
------- ------- ------- -------. (36) 26 (26) 65
Income (loss) from continuing ---- ---- ---- ----
operations . (13) 26 (18) 43
Loss................. (40) 50 (26) 107
Income (loss) from discontinued
operations, net of income tax
benefitsexpense (benefit) of $8$6, $5,
$(14) and $19 million,$(26), respectively ............... -- (12) -- (28)
Loss6 5 (26) (37)
Net loss on disposal of
discontinued operations, net
of income tax benefitexpense (benefit)
of $115 million .... --$52, $0, $52, and $(115),
respectively ............... (121) - (121) (195)
-- (195)
------- ------- -------- ------------ ----- ----- -----
Net loss ........................income (loss) ............ $ (13)(155) $ (181)55 $ (18)(173) $ (180)
======= ======= ======= =======(125)
====== ===== ====== ======
Basic earnings per share:
Income (loss) from continuing
operations ................................ $ (0.09)(0.29) $ 0.190.37 $ (0.13)(0.19) $ 0.32
Loss0.80
Income (loss) from
discontinued operations ................. -- (1.54) -- (1.66)
------- ------- ------- -------.. (0.85) 0.04 (1.08) (1.73)
------ ---- ------ ------
Net loss ...................income (loss) .......... $ (0.09)(1.14) $ (1.35)0.41 $ (0.13)(1.27) $ (1.34)
======= ======= ======= =======(0.93)
===== ===== ===== =====
Weighted-average common shares
outstanding .............................. 135.6 134.9 135.4 134.5 135.3 134.3
Diluted earnings per share:
Income (loss) from continuing
operations ............................. $ (0.09)(0.29) $ 0.190.37 $ (0.13)(0.19) $ 0.32
Loss0.79
Income (loss) from discontinued
operations ................ -- (1.52) -- (1.64)
------- ------- ------- -------............... (0.85) 0.03 (1.08) (1.71)
----- ----- ----- -----
Net loss ................... (0.09)income (loss) ....... $ (1.33)(1.14) $ (0.13)0.40 $ (1.32)
======= ======= ======= =======(1.27) $ (0.92)
Weighted-average common shares ===== ===== ===== =====
assuming dilution ............. 135.6 136.3 135.4 136.0 135.3 135.6135.8
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
5
VENATOR GROUP, INC.
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
-------------------------------------------------------INCOME (LOSS)
----------------------------------------------------------------
(Unaudited)
(in millions)
Thirteen weeks ended Twenty-sixThirty-nine weeks ended
-------------------- ----------------------
August 1, July 26, August 1, July 26,-----------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
-------- ------- -------- ------------ ---- ---- ----
Net loss ........................income (loss)........... $ (13) $(181)(155) $ (18)55 $ (180)(173) $ (125)
Other comprehensive loss,income
(loss), net of tax:
Foreign currency translation
adjustments:
Translation adjustments
arising during period
(pre-tax $(19)$(216), $(46)$10,
$(216), $0,
and $(124)$(114),
respectively) .. (12) (30) -- (77)........... (108) 6 (108) (71)
Less: reclassification
adjustment for gains included
in net income (loss)
(pre-tax $298).......... 149 - 149 -
----- ----- ----- -----------
41 6 41 (71)
Minimum pension liability
adjustments (pre-tax $4) 2 - 2 -
----- ----- ----- -----
Comprehensive loss ..............income (loss). $ (25) $(211)(112) $ (18)61 $ (257)(130) $ (196)
===== ===== ===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
6
VENATOR GROUP, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
------------------------------------------------------
(Unaudited)
(in millions)
Twenty-sixThirty-nine weeks ended
----------------------
August 1, July 26,-----------------------------
October 31, October 25,
1998 1997
------- ----------- ----
Retained earnings at beginning of year.....year ... $ 1,033 $ 1,050
Net loss ................................... (18) (180)
------ ------................................. (173) (125)
----- -----
Retained earnings at end of interim period.period $ 1,015860 $ 870
====== ======925
===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
7
VENATOR GROUP, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(in millions)
Twenty-sixThirty-nine weeks ended
----------------------
August 1, July 26,-----------------------
October 31, October 25,
1998 1997
-------- ----------- ----
From Operating Activities:
Net loss ................................................................................... $ (18)(173) $ (180)(125)
Adjustments to reconcile net loss to net cash used in..
provided by (used in) operating activities:
Non-cash charge for discontinued operations,
net of tax .................................... --................................. 121 195
Discontinued operations reserve activity ................ (45) (11). (127) (104)
Depreciation and amortization ................... 91 84............ 108 90
Net gain on sales of real estate ................ (1) (4)......... - (3)
Net gain on sales of assets and investments ..... (19) ---
Deferred income taxes ........................... (4) (23).................... (38) (37)
Change in assets and liabilities, net of acquisition:
Merchandise inventories ......................... (243) (153).................. (356) (238)
Accounts payable and other liabilities .......... 91 63... 146 29
Net assets of discontinued operations ........... (3) 27.... (56) 299
Other, net ...................................... (123) (111)
----- -----............................... (15) (54)
Net cash used inprovided by (used in) operating ---- ----
activities ............. (274) (113)
----- -----............................... (409) 52
---- ----
From Investing Activities:
Net proceeds from businesses disposed ........ 495 -
Proceeds from sales of assets and investments 22 -
Proceeds from sales of real estate .................. 7 19........... - 3
Capital expenditures ................................ (233) (56)......................... (395) (114)
Payments for businesses acquired, net of cash
acquired ................................... (29) (140)
Proceeds from sales of assets and investments ....... 22 --
----- -----(148)
Net cash used inprovided by (used in) investing ---- ----
activities ............. (233) (177)
----- -----................................. 93 (259)
---- ----
From Financing Activities:
Increase in short-term debt ......................... 451 38.................. 371 21
Reduction in long-term debt and capital lease
obligations ....................................... (3) (1)................................ (2) (2)
Issuance of common stock ................................................. 10 11
----- -----16
---- ----
Net cash provided by financing activities ......... 458 48
----- -----.. 379 35
---- ----
Effect of exchange rate fluctuations
on Cash and Cash Equivalents ........................ 10 (17)
----- -----................. 3 (8)
---- ----
Net change in Cash and Cash Equivalents ................ (39) (259)......... 66 (180)
Cash and Cash Equivalents at beginning of year ......... 116 328
----- -----.. 81 197
---- ----
Cash and Cash Equivalents at end of interim period .....$ 77147 $ 69
===== =====17
==== ====
Cash paid during the period:
Interest.............................................Interest ..................................... $ 2532 $ 2221
Income taxes.........................................taxes ................................. $ 1014 $ 4658
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
8
VENATOR GROUP, INC.
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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, as filed with the Securities and Exchange Commission (the "SEC") on
April 21, 1998. The Condensed Consolidated Statement of Comprehensive LossIncome
(Loss) was prepared in conformity with thegenerally accepted accounting principles
and was not required for the year ended January 31, 1998. 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 periodperiods have
been included. The results for the twenty-sixthirty-nine weeks ended August 1,October 31, 1998 are
not necessarily indicative of the results expected for the year. All financial
statements have been restated to reflect the discontinuance of the Specialty
Footwear and International General Merchandise segments.
Name Change
- -----------
The Registrant (formerly Woolworth Corporation) changed its name to Venator Group, Inc. (formerly Woolworth
Corporation) effective June 11, 1998.
Discontinued Operations
- -----------------------
On September 22, 1998, the Registrant announced that it is exiting its
International General Merchandise segment. On October 22, 1998, the Registrant
completed the sale of its 357 store German general merchandise business for $563
million, pursuant to a definitive agreement. 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, in the third quarter 1998. The disposition
of the International General Merchandise segment will be completed in 1999.
On September 16, 1998, the Registrant announced that it is exiting its
Specialty Footwear segment including 467 Kinney Shoe stores 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 launch 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 a charge to earnings of $243 million before-tax, or $160
million after-tax, for the loss on disposal of the Specialty Footwear
operations.
On July 17, 1997, the Registrant announced that it was exiting its 400
store domestic Woolworth general merchandise businessDomestic 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. The loss from discontinued operations
recorded through July 17, 1997 was $47 million before-tax or $28 million
after-tax. The remaining domestic Woolworth general merchandise stores as well
as the division's distribution center in Denver, Pennsylvania were closed in
November 1997. The Registrant is in the process of convertingplans to convert approximately 150
of the prime
locations to Foot Locker, Champs Sports, and other athletic or specialty
formats. The Registrant has successfully converted and opened 88147 stores in former domestic general
merchandise locations through August 1,October 31, 1998.
The results of operations for all periods presented for the domestic
Woolworth general merchandise businessInternational
General Merchandise segment, the Specialty Footwear segment, and the Domestic
General Merchandise segment have been classified as discontinued operations in
the Condensed Consolidated Statements of Operations.
Sales and net income or loss from discontinued operations for the 1997 second quarter
and year-to-date periods were $198 million and $427 million, respectively.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)
==== ==== ==== ====
The following is a summary of the net assets of discontinued operations:
August 1, July 26,(in millions) October 31, October 25, Jan. 31,
1998 1997 1998
------ ------- -------
Assets............................... $ 17 $ 358 $ 28
Liabilities.......................... 7 149 21
---- ---- ----
International General Merchandise
Assets .......................... $ 57 $ 854 $ 786
Liabilities ..................... 13 419 354
Net assets of discontinued ---- ---- ----
operations .................... $ 1044 $ 209435 $ 432
==== ==== ====
Specialty Footwear
Assets .......................... $ 190 $ 244 $ 213
Liabilities ..................... 26 33 33
Net assets of discontinued ---- ---- ----
operations .................... $ 164 $ 211 $ 180
==== ==== ====
Domestic General Merchandise
Assets .......................... $ 46 $ 100 $ 28
Liabilities ..................... 34 149 21
Net assets (liabilities) of ---- ---- ----
discontinued operations ....... $ 12 $ (49) $ 7
==== ==== ====
Total Net Assets of discontinued
operations ................... $ 220 $ 597 $ 619
==== ==== ====
The net assets of discontinued operations as of August 1, 1998 and
January 31, 1998 consisted primarily of fixed assets. As of July 26, 1997, the
net assets consistedeach segment consist primarily of inventory and fixed assets.
Liabilities for
all periods presented consistedThe liabilities of the International General Merchandise segment at October 25,
1997 and January 31, 1998 predominantly include amounts due to vendors and
pension liabilities. The decrease in net assets of International General
Merchandise discontinued operations at October 31, 1998 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
ofreflect amounts due to vendors.
67
9 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 August 1,October 31, 1998 was approximately $25$32 million and $45$77 million,
respectively.respectively, for the domestic general merchandise business. The remaining
reserve balance at August
1,October 31, 1998 was $45$13 million.
Earnings Per Share
- ------------------
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires the presentation of basic earnings per share and diluted
earnings per share.
Basic earnings per share is computed as net earnings 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. A reconciliation of
weighted-average common shares outstanding to weighted-average common shares
assuming dilution follows:
Thirteen weeks ended Twenty-sixThirty-nine weeks ended
-------------------- ----------------------
August 1, July 26, August 1, July 26,-----------------------
October 31, October 25, October 31, October 25,
(in millions) 1998 1997 1998 1997
-------- ------- -------- ----------- ---- ---- ----
Weighted-average common shares
outstanding....................outstanding ................ 135.6 134.9 135.4 134.5 135.3 134.3
Incremental common shares
issuable -- 1.5 --................... - 1.4 - 1.3
Weighted-average common shares ----- ----- ----- -----
assuming dilution..............dilution .......... 135.6 136.3 135.4 136.0 135.3 135.6135.8
===== ===== ===== =====
Incremental common shares were not included in the computation for the
quarter and year-to-date periods ended August 1,October 31, 1998 since their inclusion in
periods when the Registrant reported a net loss from continuing operations would be
antidilutive. For the thirteen and the twenty-sixthirty-nine weeks ended July 26,October 25, 1997,
options with an exercise price greater than the average market price are not
included in the computation of diluted earnings per share and would not have a
material impact on diluted earnings per share.
Comprehensive Income
- --------------------
The Registrant adopted SFASStatement 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.
Accumulated other comprehensive loss was comprised of foreign currency
translation adjustments of $142 million, $49 million, and $34 million, and
minimum pension liability adjustments of $43 million, $37 million, and $45
million, at August 1,October 31, 1998, October 25, 1997, and January 31, 1998.1998,
respectively.
Reclassifications
- -----------------
Certain balances in prior periods have been reclassified to conform with
the presentation adopted in the current period. 7
10As discussed above, all
financial statements have been restated to reflect the discontinuance of the
Specialty Footwear and International General Merchandise segments.
Legal Proceedings
- -----------------
During 1994, the staff of the SEC initiated an inquiry relating to the
matters that were reviewed by the Special Committee established by the Board of
Directors in 1994 as well as in connection with trading in the Registrant's
securities by certain directors and officers of the Registrant.
On June 29, 1998, the SEC announced that it had accepted the
Registrant's Offer of Settlement in resolution of an administrative proceeding
arising from the inquiry. In the Offer of Settlement, the Registrant admitted
that during its 1993 fiscal year it violated Sections 13(a) and 13(b) (2) (A)
and (B) of the Securities Exchange Act of 1934, 15 U.S.C. Sections 78m(a) and
78m(b) (2) (A) - (B), and SEC rules 13a-13 and 12b-20 promulgated thereunder,
and the SEC found that the Registrant had committed those violations and ordered
that the Registrant cease and desist from any violation of those provisions.
Apart from this direction to cease and desist,There are no monetary or other relief
against the Registrant was awarded.material legal proceedings.
8
11
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")SFAS
No. 131, "Disclosures about Segments 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, 1997.1997 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 SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal quarters of
fiscal years beginning after June 15, 1999 and therefore, effective for the
Registrant in 2000. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------------------------------------------------------------------------
Results--------------------------------------------------------------------------------
of Operations
---------------------- -------------
As discussed more fully in the footnotes to the Condensed Consolidated
Financial Statements, the Registrant announced that it was exiting its Specialty
Footwear and its International General Merchandise segments. Accordingly, the
results of operations for all periods presented for these businesses have been
classified as discontinued operations and all financial statements have been
restated.
Total sales for the 1998 secondthird quarter decreased 2.3increased 1.4 percent to $1,465$1,122
million as compared with $1,500$1,107 million for the secondthird quarter of 1997,
reflecting foreign currency fluctuations andsales from 384 additional stores, offset by a comparable-store sales
decreasedecline of 6.05.3 percent. Excluding the effect of foreign currency fluctuations
and sales from disposed operations, sales increased 2.8 percent for the 1998 second quarter were essentially
flat as compared with the corresponding prior-year period. Total Specialty
segment sales for the 1998 second quarter remained unchanged while
comparable-store sales decreased 6.1 percent, as compared with the corresponding
prior-year period. International General Merchandise segment sales for the 1998
second quarter decreased 8.8 percent and comparable-store sales decreased 5.8
percent, as compared with the corresponding prior-year period.
8
11quarter.
Sales for the 1998 twenty-sixthirty-nine weeks ended August 1,October 31, 1998 decreased 3.6increased 0.8
percent to $2,931$3,223 million as compared with $3,039$3,198 million for the same period a
year earlier. Excluding the effect of foreign currency fluctuations and sales
from disposed operations, sales decreased 1.1 percent as compared with 1997.
Comparable-store sales decreased 6.4increased 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 percentage of sales, decreased 790 basis points 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 ("SG&A") increased $10$50 million and $13$83
million for the thirteen and twenty-sixthirty-nine weeks ended August 1,October 31, 1998 as
compared with the corresponding prior-year periods. TheThese increases primarily
reflect the incremental costs of $7 million associated with the shutdown of the
Registrant's 83-store Canadian Kinney Shoe and 11-store U.S. Randy River
specialty footwear operations in the first quarter of 1998, and a $9 million
charge primarily relatedadditional stores
year-over-year attributable to the shutdown of the Registrant's Eagle Rock footwear
operations, consisting of four manufacturing facilities and an administrative
office in the second quarter of 1998.new store program. These increases were
partially offset by decreases in net pension and net postretirement benefit
expense, of $9 million.
The decreasewhich primarily reflects the amortization of the plans' unrecognized
gains 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.
SecondThird quarter operating results from continuing operations (before
corporate expense, interest expense and income taxes) includereflect a $3$30 million loss
for 1998 as compared with a profit of $74$91 million infor the secondthird quarter of 1997.1997,
reflecting a significant increase in inventory markdown activity and an increase
in selling, general and administrative expenses. For the twenty-sixthirty-nine weeks ended
August 1,October 31, 1998, operating profit declined to $25$43 million from $131$245 million in
the corresponding prior-year period.
Gross margin,
as a percentage of sales, decreased approximately 270 basis points to 28.2
percent for the 1998 second quarter and decreased approximately 210 basis points
to 28.4 percent for the 1998 year-to date period, as compared with the
corresponding periods a year earlier. These declines primarily reflect a
continuing decline in sales and an increase in markdowns as a result of the
aggressive promotional selling environment currently prevailing in the athletic
footwear and apparel industry.
Interest expense, net of interest income, decreased $2increased $10 million for the
1998 secondthird quarter and $1 million for the year-to-date periodperiods as compared with the corresponding
prior-year periods. InterestThe incremental interest expense is attributable to
increased short- term borrowing levels during 1998 and is partially offset by
interest income of approximately $7 million related to a franchise tax
settlement in the second quarter of 1998 more
than offset higher interest expense as a result of increased short-term
borrowing levels.quarter.
The Registrant reported a net loss from continuing operations for the thirteen
weeks ended August
1,October 31, 1998 of $13$40 million, or $0.09$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.
During the quarter the effective tax rate was adjusted to 47.4 percent and
50 percent for the quarter and year-to-date periods ended October 31, 1998,
respectively, as compared with 34.2 percent and 37.8 percent for the
corresponding prior-year periods. The increase reflects the impact of
non-deductible terms, such as goodwill amortization, at lower earnings levels.
The net loss for the quarter of $155 million or $1.14 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 with a net loss of $181$125 million, or $1.33$0.92 per diluted
share for the corresponding prior-year period, which included an after-tax loss of $207includes $232 million
(after-tax) or $1.52$1.71 per diluted share for discontinued operations.
For the twenty-six weeks ended August 1, 1998Consistent with an announcement made by the Registrant reported a net lossduring the quarter,
in light of $18 million, or $0.13 per share, as compared with a net
loss of $180 million or $1.32 per sharecurrent trends, particularly in athletic apparel, and based upon its
intention to continue to position its inventory properly for the corresponding prior-year period,
which included an after-tax lossbeginning of
$223 million or $1.64 per share for
discontinued operations.1999, the Registrant expects fourth quarter earnings to be below plan.
The Registrant ended the secondthird quarter with 7,2625,964 stores consisting of
6,749 specialty stores3,869 in the Athletic Group, 914 in the Northern Group and 513 international general merchandise stores.1,181 in Other
Specialty. This compares with 6,9295,580 stores adjusted for dispositions, at the end of the corresponding
prior-year period. During the twenty-sixthirty-nine weeks ended August 1,October 31, 1998, the
Registrant opened 347500 stores, closed or disposed of 322258 stores and remodeled or
relocated 194361 stores. Of the 347500 stores opened, 90 stores representedrepresent the first
quarter acquisition of Athletic Fitters stores.
910
12 13
SALES
- -----
The following table summarizes sales for continuing operations by segment and
geographic area:
Thirteen weeks ended Twenty-sixThirty-nine weeks ended
-------------------- ---------------------------------------------
(in millions) August 1, July 26, August 1, July 26,October 31, October 25, October 31, October 25,
By Segment: ................ 1998 1997 1998 1997
-------- ------- -------- ------------ ---- ---- ----
Specialty:
Athletic Group...............Group .......... $ 871945 $ 858912 $ 1,7732,730 $ 1,7632,685
Northern Group................ 85 86 159 160Group .......... 97 110 256 270
Other Specialty Footwear............ 107 119 214 232
Other Specialty............... 83 83 158 155
------ ------ ------ ------......... 80 79 233 229
----- ----- ----- -----
Specialty total.................. 1,146 1,146 2,304 2,310
------ ------ ------ ------total ............ 1,122 1,101 3,219 3,184
===== ===== ===== =====
Disposed operations ........ - 6 4 14
----- ----- ----- -----
$ 1,122 $ 1,107 $ 3,223 $ 3,198
===== ===== ===== =====
By Geographic Area:
Domestic ................ $ 936 $ 909 $ 2,711 $ 2,681
International General Merchandise 311 341 608 700
------ ------ ------ ------........... 186 192 508 503
Disposed operations.............. 8 13 19 29
------ ------ ------ ------operations ..... - 6 4 14
----- ----- ----- -----
$ 1,4651,122 $ 1,5001,107 $ 2,9313,223 $ 3,039
====== ====== ====== ======
By geographic area:
Domestic.....................$ 935 $ 937 $ 1,919 $ 1,923
International................. 522 550 993 1,087
Disposed operations........... 8 13 19 29
------ ------ ------ ------
$ 1,465 $ 1,500 $ 2,931 $ 3,039
====== ====== ====== ======3,198
===== ===== ===== =====
Specialty
- ---------
Athletic Group sales increased by 1.5 percent and by 0.63.6 percent for the 1998 secondthird quarter
and by 1.7 percent for the year-to-date periods,period, as compared with the
corresponding periods a year earlier. These increases wereThe increase was primarily dueattributable to
343sales from 360 additional stores and the positive impactalso, in part, to increased sales from
store remodelings. On a
comparable-store basisremodeled stores. Comparable-store sales declined by 7.75.1 percent and by 7.1
percent for both the 1998 second quarter and the year-to-date periods primarily due to over-suppliedreflecting decreased sales of
branded and licensed product, offset by improved sales from several athletic
footwear in the marketplace,categories, such as well as decreased sales in the licensed product
categories.running, trail and basketball.
Excluding the impact of foreign currency fluctuations, the Northern GroupGroup's
sales increaseddecreased by 0.98.7 percent and by 1.81.9 percent for the second quarterthirteen and
year-to-datethirty-nine week periods, respectively. The increase reflects new store openings,
particularly in the United States, offsetComparable-store sales declined by comparable-store sales decreases of
4.715.7
percent and 5.49.6 percent, for the second quarter and year-to-date periods,
respectively.
Specialty Footwear 1998 second quarter and year-to-date sales decreased
10.1 percent and 7.8 percent as compared with the corresponding prior-year
periods. Excludingrespectively, reflecting the impact of foreign currency fluctuationsa change in
the Australian
operations,merchandise mix and decreased sales declined by 4.9 percent and by 2.3 percent for the 1998 second
quarter and year-to-date periods, respectively. On a comparable-store basis,
sales decreased by 3.6 percent for the second quarter and by 2.4 percent for the
year-to-date period. These decreases were primarily due to the closure of 43
under-performingfrom stores in the U.S. Kinney Shoe format since the second quarter
1997, offset in part by comparable-store increasessouthern United States,
which experienced unusually mild weather in the Australian operations
of 1.8 percent for the second quarter and 3.2 percent for the year-to-date
period.fall.
Other Specialty 1998 secondthird quarter and year-to-date comparable-store sales
increased by 7.29.9 percent and by 6.37.4 percent, as compared with the corresponding
prior-year periods. The increaseafterthoughts format is primarily relates to the
Afterthoughts format,responsible for these
increases, reflecting, positive customer responses to increased
private-label product andin part, the success of the format's larger-store design.
1011
13
International General Merchandise
- ---------------------------------
International General Merchandise sales decreased by 8.8 percent and by
13.1 percent for the second quarter and year-to-date periods, respectively.
Excluding the impact of foreign currency fluctuations, sales decreased by 4.0
percent and by 8.5 percent for the second quarter and year-to-date periods,
respectively. Comparable-store sales decreased by 5.8 percent for the second
quarter and by 7.2 percent for the year-to-date period. These decreases reflect
the overall difficulties of the German retail industry in the current recession
and the negative impact of the increase in VAT rates in Germany as of April
1998. 14
OPERATING RESULTS
- -----------------
Operating results from continuing operations (before corporate expense, interest
expense, and income taxes) are as follows:
Thirteen weeks ended Twenty-sixThirty-nine weeks ended
-------------------- ---------------------------------------------
(in millions) August 1, July 26, August 1, July 26,
By Segment:October 31, October 25, October 31, October 25
1998 1997 1998 1997
-------- ------- -------- ------------ ---- ---- ----
Specialty.....................Specialty .................... $ 18(30) $ 8592 $ 4026 $ 148247
Disposed operations .......... - (1) 17 (2)
---- ---- ---- ----
$ (30) $ 91 $ 43 $ 245
==== ==== ==== ====
By Geographic Area:
Domestic ..................... $ (36) $ 75 $ 24 $ 225
International General
Merchandise.................. (13) (9) (14) (12)
Net gain on sales of
real estate.................. 1 -- 1 4................ 6 17 2 22
Disposed operations............ (9)operations .......... - (1) 17 (2)
(2) (9)
----- ----- ----- --------- ---- ---- ----
$ (3)(30) $ 7491 $ 2543 $ 131
===== ===== ===== =====
By geographic area:
Domestic......................$ 14 $ 74 $ 45 $ 142
International.................. (9) 2 (19) (6)
Net gain on sales of real estate 1 -- 1 4
Disposed operations............ (9) (2) (2) (9)
----- ----- ----- -----
$ (3) $ 74 $ 25 $ 131
===== ===== ===== =====245
==== ==== ==== ====
Specialty
- ---------
The Specialty segment's operating profit decreased by 78.8 percent and
by 73.0 percentsegment reported a loss of $30 million for the thirteen and twenty-six weeks ended August 1, 1998 third
quarter as compared with a profit of $92 million in the corresponding prior-year periods.1997 third quarter. The declines in
Athletic Group sales contributed to higherincreases were more than anticipated inventory levels andoffset by the increased
promotional markdowns taken as part of the aggressive inventory reduction
program undertaken by the Registrant in the third quarter, in order to keep the
product assortment current.current and enhance the Registrant's competitiveness for
1999. Operating results for Specialty Footwear and the Northern Group for the 1998 secondthird quarter and
year-to-date periods also decreased due to sales declines and
increased markdowns.disappointing sales. Other Specialty
operating results improved by 40.042.9 percent and by 33.336.4 percent for the 1998 second quarterthirteen
and year-to-date periods,thirty-nine weeks ended October 31, 1998, respectively, as compared with the
corresponding prior-yearprior year periods, predominantly related to the Afterthoughtsafterthoughts
format.
Included in disposed operations for the twenty-sixthirty-nine weeks ended August
1,October 31,
1998 is a $19 million gain from the sale of the Registrant's six-store nursery
chain. This gain is offset by a $21$2 million loss, including operating losses, for
the shutdown of the Canadian Kinney Shoe, U.S. Randy River and Eagle Rock specialty footwear
operations, including $8 million in operating losses.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.
11
14
International General Merchandise
- ---------------------------------
The International General Merchandise segment's operating loss
increased by $4 million and by $2 million for the 1998 second quarter and
year-to-date periods, respectively, as compared with the corresponding
prior-year periods. The increased operating loss is primarily attributable to
severance costs in Germany in connection with the ongoing improvement of its
personnel structure.
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 proportion of sales and net income is generated in the first
quarter, 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
15
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used in operating activities was $274$409 million for the twenty-sixthirty-nine
weeks ended August 1,October 31, 1998, as compared with $113net cash provided by operating
activities of $52 million in the corresponding prior-year period, whichperiod. This
principally reflects an additional $90
million used to purchase inventories. These additional inventory purchasesthe liquidation of the domestic general merchandise
business in the prior year and the operating losses incurred from continuing
operations in 1998. Inventories purchased in 1998 contributed to a $28 millionthe increase in
accounts payable, and other liabilities.
Increasedincluded inventory reflects lower than anticipated sales and seasonal increases
associated with the back to school season. Additionally, under the Registrant's
new store and remodeling program, inventory was received for approximately 375200 new and remodeled
stores which arewere scheduled for completion in August and
September.November.
Net cash used infrom investing activities totaled $233$93 million for the twenty-sixthirty-nine
weeks ended August 1,October 31, 1998, as compared with $177$259 million net 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, the majority of which were used to
reduce short-term borrowings. Cash used in investing activities forin the twenty-six weeks ended July 26, 1997prior
year was predominantly due to the first quarter
cash acquisition of Eastbay, Inc. for
$140 million, in a transaction accounted for as a purchase. Capital expenditures
increased by $177totaled $395 million of which $25
million relates tofor the Woolworth conversion stores,thirty-nine weeks ended October 31, 1998 as
compared with $114 million for the corresponding prior-year period; approximately $545 million of capitalperiod reflecting
planned expenditures are planned for the year as compared with $284 million in 1997.
Increased inventory levels contributedrelated to the increase in accounts
payable at August 1, 1998 by $114 million as compared with July 26, 1997 and by
$139 million as compared with January 31, 1998.
Short-term debt at August 1, 1998 increased by $451 million and by $413
million as compared with January 31, 1998 and July 26, 1997. The increases in
short-term debt were principally due to the significant capital expenditures
required for the Registrant's aggressive new store and
remodeling programprogram. 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 acquisitionrelocation and reduction in size of the Athletic Fitters storesRegistrant's divisional
and corporate office space in connection with the sale of its Corporate
Headquarters. Capital expenditures for $291998 are expected to total $515 million.
Short-term debt, net of cash, increased by $220 million in February 1998.
Loweras of October 31,
1998, from October 25, 1997, reflecting increased borrowings under the
Registrant's revolving credit agreement primarily due to lower than expected
sales and higherincreased capital expenditures. During 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 sale of its German general merchandise
business. Due to lower than anticipated inventory levels also
contributedplanned earnings in the quarter and the charges
related to the increases in short-term borrowing levels.
On June 22, 1998,closing of the Registrant's Specialty Footwear operations, the
Registrant entered intoobtained 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 shares of its
capital stock. The Registrant is in the process of amending its revolving credit
agreement and expects to have an agreementamended credit facility in place prior to
sellexpiration of the waiver.
The Registrant completed the sale of its Corporate Headquarters building in
New York, the Woolworth Building.Building, and leased back four floors, on December 4,
1998 for gross proceeds of $137.5 million. The transaction is expected tonet proceeds will be completed in October 1998.
As previously announced,used for
general corporate purposes.
On September 10, 1998, the Registrant and The Sports Authority, Inc.
have signed a definitivejointly 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 through a pooling of
interests.
There is a provision in the merger agreement that provides that for
the transaction to be put to a vote of the shareholders of The Sports Authority,
the Registrant's average stock price is at least $20.50 per share during one or
more specified measuring periods prior to December 31, 1998. The transaction is
subject to approval by The Sports Authority shareholders.
1213
15
IMPACT OF 16
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-
compliantnon-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. At present, approximately 60 percent ofThose applications considered most critical
to the IT systemsRegistrant's business operations have been remediated.remediated and testing is
scheduled to begin in December 1998. The Registrant anticipates the completion of
all remediation of the IT systems by the endpoint of 1998.sale
equipment is expected to be completed in early 1999, with pilot testing
anticipated in March and April. Extensive testing of theall remediated systems will
be performed throughout 1999 for implementation during that year.
Apart from the Y2K issue, the Registrant had developed and installed
throughout its business units beginning in 1997 a comprehensive information
computer system ("ECLIPSE"), encompassing merchandising, logistics, finance and
human resources. 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 is presently compiling anhas 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 buildings'building's
infrastructure. OnceManagement is currently in the inventory is complete,process of establishing the
priority and possible remediation of systems will be prioritized
and assessed for compliance.identified as non-compliant.
Preliminary 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- ITnon-IT systems will be performed throughout 1999.
Material Third Parties
- ----------------------
Key vendors and service providers have been identified, and management
intendswhose
non-compliance could have a material impact on the Registrant's ability to
meet with these third partiesoperate worldwide. Management has undertaken to discussdetermine the statusstate of their
compliance and to distribute a comprehensive compliance questionnaire.
Approximatelyreadiness
of its approximately 20 vendors are considered key vendors by issuing questionnaires and conducting
meetings and on-site visits. The level of compliance of the Registrant.Registrant's major
providers of banking services, transportation, telecommunications and utilities
is in the course of being ascertained and the related risks established.
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 affecteffect on
continuing operations. The total estimated direct cost, excluding ECLIPSE, to remediate
the Y2K issue is estimated to be approximately $5 million, of which $1.2 million
has been spent. 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 expectedexpect the total Y2K remediation costs to be
material to the Registrant's results of operations or financial condition. All costs, excluding
ECLIPSE, are being expensed as incurred.
Contingency Plan/Risks
- ----------------------
The Registrant is in the process of developing contingency plans for those
areas which 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 parties to be Y2K compliant wouldcould result in the interruption of
its business, which could have a material adverse affecteffect on the results of
operations or financial condition of the Registrant.
1314
16 17
IMPACT OF EUROPEAN MONETARY UNION
- ---------------------------------
The European Union is comprised of fifteen member states, eleven of which
will adopt 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 convert 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 does not expect the euro conversion to have a material
adverse effect on its results of operations or financial condition.
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
issue.and euro issues. Any changes in such assumptions or factors could produce
significantly different results.
15
18
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- -------------------------
This information is incorporated by reference to the Legal Proceedings
section of the Notes to Condensed Consolidated Financial Statements on page 8 of
Part I, Item 1.
Item 4. Submission of Matters to Vote of Security Holders
- ---------------------------------------------------------
(a) The Registrant's annual meeting of shareholders was held on June 11,
1998, in Watertown, Massachusetts. Proxies were solicited by management
of the Registrant pursuant to Regulation 14A under the Securities
Exchange Act of 1934; there wasThere are no solicitation in opposition to
management's nominees as listed in the Notice of 1998 Annual Meeting
and Proxy Statement, both dated April 28, 1998.
(b) Allan Z. Loren was elected as a director in Class III for a two-year
term ending at the annual meeting of shareholders of the Registrant in
2000. Each of Roger N. Farah, James E. Preston and Christopher A.
Sinclair was elected as a director in Class I for a three-year term
ending at the annual meeting in 2001. All of such individuals
previously served as directors of the Registrant. J. Carter Bacot,
Purdy Crawford, Philip H. Geier Jr., Jarobin Gilbert Jr., Dale W.
Hilpert, Margaret P. MacKimm and John J. Mackowski, having previously
been elected directors of the Registrant for terms continuing beyond
the 1998 annual meeting of shareholders, continue in office as
directors.
(c) The matters voted upon and the results of the voting were as follows:
(1) Election of Directors:
Abstentions and
Name Votes For Votes Withheld Broker Non-Votes
----------------------- ----------- ----------- ----------------
Roger N. Farah 114,158,903 5,841,327 --
Allan Z. Loren 114,229,354 5,770,876 --
James E. Preston 114,184,187 5,816,043 --
Christopher A. Sinclair 101,191,554 18,808,676 --
(2) Amendment of the Certificate of Incorporation to change the name
the Registrant's name:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ---------------
94,158,905 24,356,846 1,484,479 --
14
17
(3) Ratification of the appointment of KPMG Peat Marwick LLP as
independent accountants for the fiscal year beginning February 1,
1998:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
118,472,061 207,227 1,320,942 --
(4) Approval of the 1998 Stock Option and Award Plan:
Votes For Votes Against Abstentions Broker Non-Votes
-------- ------------- ----------- ----------------
100,453,155 17,881,428 1,665,647 --
(5) Shareholder Proposal on German Operations:
Votes For Votes Against Abstentions Broker Non-Votes
-------- ------------ ----------- ----------------
35,647,893 78,432,131 1,062,983 4,857,223
(6) Shareholder Proposal on Rights Plan:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------ ----------- ----------------
90,785,519 21,700,412 2,657,076 4,857,223
At the close of business on the record date of April 23, 1998, there
were issued and outstanding 135,251,929 shares of the Registrant's Common Stock,
par value $.01 per share ("Common Stock"). There were represented at the
meeting, in person or by proxy, 120,000,230 shares of Common Stock. Such shares
represented 88.72 percent of the total number of shares of such class of stock
issued and outstanding on the record date.material legal proceedings.
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 1718 through 18.20. 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 May 7, 1998 (date of
earliest event reported) reporting that it had signed a definitive
merger agreement with The Sports Authority, Inc., whereby the
Registrant will acquire The Sports Authority in a tax-free exchange of
shares. The transaction is subject to approval by the shareholders of
The Sports Authority, Inc. and to customary regulatory approvals.
Additionally, the Registrant filed a report on Form 8-K dated June 11,August 12, 1998 (date
of earliest event reported) reporting that the Board of Directors
andamended the shareholders approved the proposal to change the nameBy-laws of the Registrant from Woolworth Corporation to Venator Group,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.
The Registrant filed a report on Form 8-K dated September 10, 1998
(date of earliest event reported) reporting that the Registrant and
The Sports Authority, Inc. jointly announced that they had mutually
agreed to terminate the merger agreement, effective asimmediately,
pursuant to which the Registrant would have acquired The Sports
Authority, Inc. in a tax-free exchange of June 11, 1998.
15shares.
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.
16
18 19
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: September 4,December 14, 1998 /s/ Reid Johnson
------------------------------------------
REID JOHNSON
Senior Vice President
and Chief Financial Officer
1617
19 20
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
- ----------------------------------------- -----------
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)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).
4.3 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)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)No. 33-43334) previously filed with the
SEC).
1718
20 21
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
4.5 Form of 81/2%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 Computation of Ratio of Earnings to
Fixed Charges.*
13 *
15 Letter re: Unaudited Interim Financial Statements.
16 *
17 *
18 *
19 *
20 *
21 *
22 *
23 *
24 *
25 *
19
22
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
26 *
27.1 Financial Data Schedule, August 1,October 31, 1998 (which is
submitted electronically to the SEC for information
only and not filed).
27.2 Restated Financial Data Schedule - July 26,October 25, 1997
(which is submitted electronically to the SEC for
information only and not filed).
99 Independent Accountants' Review Report.
______________- -------------------
* Not applicable
1820
21 23
Exhibits filed with this Form 10-Q:
Exhibit No. Description
- ---------- ----------- 12 Computation-----------
10.1 Venator Group Executive Severance Pay Plan.
10.2 Form of RatioSenior Executive Severance Agreement.
10.3 Bridge Loan Agreement dated as of EarningsSeptember 25, 1998.
10.4 Waiver dated as of November 6, 1998 to Fixed Charges.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 - August 1,October 31, 1998.
27.2 Restated Financial Data Schedule - July 26,October 25, 1997.
99 Independent Accountants' Review Report.