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 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 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
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 May 28, 1999: 137,198,806
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VENATOR GROUP, INC.
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 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
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENATOR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
May 1, May 2, January 30,
1999 1998 1999
---- ---- ----
(Unaudited) (Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents ........................................... $ 13 $ 13 $ 193
Merchandise inventories ............................................. 889 880 837
Net assets of discontinued operations ............................... 101 628 97
Other current assets ................................................ 210 195 148
------- ------- -------
1,213 1,716 1,275
Property and equipment, net ............................................ 984 688 974
Deferred taxes ......................................................... 357 338 358
Intangible assets, net ................................................. 180 191 183
Other assets ........................................................... 82 91 86
------- ------- -------
$ 2,816 $ 3,024 $ 2,876
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt ..................................................... $ 274 $ 253 $ 250
Accounts payable .................................................... 276 284 245
Accrued liabilities ................................................. 227 227 296
Current portion of reserve for discontinued operations .............. 126 52 167
Current portion of long-term debt and obligations
under capital leases .............................................. 7 19 6
------- ------- -------
910 835 964
Long-term debt and obligations
under capital leases ................................................ 513 509 511
Reserve for discontinued operations .................................... 30 18 30
Other liabilities ...................................................... 328 379 333
Shareholders' equity
Common stock and paid-in capital .................................... 332 322 328
Retained earnings ................................................... 886 1,028 897
Accumulated other comprehensive loss ................................ (183) (67) (187)
------- ------- -------
Total shareholders' equity ............................................. 1,035 1,283 1,038
------- ------- -------
$ 2,816 $ 3,024 $ 2,876
======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended
--------------------
May 1, May 2,
1999 1998
------- -------
Sales ........................................................................ $ 1,079 $ 1,058
Costs and expenses
Cost of sales .............................................................. 791 748
Selling, general and administrative expenses ............................... 257 271
Depreciation and amortization .............................................. 45 34
Interest expense, net ...................................................... 11 10
Other income ............................................................... (6) (19)
------- -------
1,098 1,044
------- -------
Income (loss) from continuing operations
before income taxes ..................................................... (19) 14
Income tax expense (benefit) ................................................. (8) 6
------- -------
Income (loss) from continuing operations ..................................... (11) 8
Loss from discontinued operations, net of income
tax benefit of $9 million in 1998 ....................................... -- (13)
------- -------
Net loss ..................................................................... $ (11) $ (5)
======= =======
Basic earnings per share:
Income (loss) from continuing operations ................................ $ (0.08) $ 0.06
Loss from discontinued operations ....................................... -- (0.10)
------- -------
Net loss ................................................................ $ (0.08) $ (0.04)
======= =======
Weighted-average common shares outstanding ................................... 136.7 135.1
Diluted earnings per share:
Income (loss) from continuing operations ............................... $ (0.08) $ 0.06
Loss from discontinued operations ...................................... -- (0.10)
------- -------
Net loss ............................................................... $ (0.08) $ (0.04)
======= =======
Weighted-average common shares assuming dilution ............................. 136.7 136.4
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in millions)
Thirteen weeks ended
--------------------
May 1, May 2,
1999 1998
---- ----
Net loss ................................................................................... $(11) $ (5)
Other comprehensive income, net of tax
Foreign currency translation adjustments arising during the period,
net of deferred tax expense of $3 and $7, respectively ............................... 4 12
---- ----
Comprehensive income (loss) ................................................................ $ (7) $ 7
==== ====
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Thirteen weeks ended
--------------------
May 1, May 2,
1999 1998
----- -----
From Operating Activities:
Net loss .................................................................................... $ (11) $ (5)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities of continuing operations:
Loss from discontinued operations, net of tax ............................................. -- 13
Depreciation and amortization ............................................................. 45 34
Gains on sales of assets and investments .................................................. (6) (19)
Deferred income taxes ..................................................................... (14) (9)
Change in assets and liabilities, net of acquisition:
Merchandise inventories ................................................................. (51) (117)
Accounts payable and other accruals ..................................................... (25) (12)
Other, net .............................................................................. (65) (77)
----- -----
Net cash used in operating activities of continuing operations .............................. (127) (192)
----- -----
From Investing Activities:
Proceeds from sales of assets and investments ............................................... 7 22
Capital expenditures ........................................................................ (54) (80)
Payments for business acquired, net of cash acquired ........................................ -- (29)
----- -----
Net cash used in investing activities of continuing operations .............................. (47) (87)
----- -----
From Financing Activities:
Increase in short-term debt ................................................................. 24 253
Reduction in long-term debt and capital lease obligations ................................... (2) --
Issuance of common stock .................................................................... 4 5
----- -----
Net cash provided by financing activities 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
----- -----
Net change in Cash and Cash Equivalents ........................................................ (180) (68)
Cash and Cash Equivalents at beginning of year ................................................. 193 81
----- -----
Cash and Cash Equivalents at end of interim period ............................................. $ 13 $ 13
===== =====
Cash paid during the period:
Interest .................................................................................... $ 5 $ 2
Income taxes ................................................................................ $ 5 $ 3
See Accompanying Notes to Condensed Consolidated Financial Statements.
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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
30, 1999, as filed with the Securities and Exchange Commission (the "SEC") on
April 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 thirteen
weeks ended May 1, 1999 are not necessarily indicative of the results expected
for the year.
Short-Term Debt
On March 19, 1999, the Registrant amended its revolving credit
agreement. In accordance with the amended agreement, the facility was reduced to
$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 revolving credit
agreement may be reduced earlier than February 2000 to $350 million. Under the
terms of the amended agreement, the Registrant is required to satisfy certain
financial and 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 amended 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 be 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, 1999, the facility was reduced by $7 million to $393
million, as a result of the sale of certain assets.
Discontinued Operations
In the third quarter of 1998, the Registrant announced that it was
exiting its International General Merchandise segment and completed the sale of
its 357 store German general merchandise business for $563 million. The
Registrant recorded a net gain of $174 million before-tax, or $39 million
after-tax. The reserve balance of $40 million at May 1, 1999 represents the
costs associated with the disposal of the remaining business of the
International General Merchandise segment, which will be completed in 1999.
The Registrant also announced that it was exiting its Specialty
Footwear segment in 1998 and recorded a net charge to earnings of $234 million
before-tax, or $155 million after-tax for the loss on disposal of the 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.
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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 remaining reserve balance of $25 million at May 1, 1999
consists principally of real estate disposition costs.
Prior year financial statements have been restated to present the
operating results of these business segments as discontinued operations.
The following is a summary of the net assets of discontinued operations:
(in millions) May 1, May 2, Jan. 30,
1999 1998 1999
---- ---- ----
International General Merchandise
Assets .............................................................. $ 46 $815 $ 47
Liabilities ......................................................... 9 354 11
---- ---- ----
Net assets of discontinued operations ............................... $ 37 $461 $ 36
---- ---- ----
Specialty Footwear
Assets .............................................................. $ 58 $194 $ 63
Liabilities ......................................................... 8 38 17
---- ---- ----
Net assets of discontinued operations ............................... $ 50 $156 $ 46
---- ---- ----
Domestic General Merchandise
Assets .............................................................. $ 21 $ 21 $ 23
Liabilities ......................................................... 7 10 8
---- ---- ----
Net assets of discontinued operations ............................... $ 14 $ 11 $ 15
---- ---- ----
Total net assets of discontinued operations ......................... $101 $628 $ 97
==== ==== ====
The assets of the discontinued operations consist primarily of
inventory and fixed assets. The liabilities of the International General
Merchandise segment at May 2, 1998 predominantly included amounts due to vendors
and pension liabilities. The decrease in net assets of International General
Merchandise discontinued operations at January 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.
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.
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A reconciliation of weighted-average common shares outstanding to
weighted-average common shares assuming dilution follows:
Thirteen weeks ended
--------------------
May 1, May 2,
(in millions) 1999 1998
------ ------
Weighted-average common shares outstanding ...................................... 136.7 135.1
Incremental common shares issuable .............................................. 1.3
------ ------
Weighted-average common shares assuming dilution ................................ 136.7 136.4
====== ======
Incremental common shares were not included in the computation for the
quarter ended May 1, 1999 since their inclusion in periods when the Registrant
reported a loss from continuing operations would be antidilutive. Antidilutive
options were 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 Loss
Accumulated other comprehensive loss was comprised of foreign currency
translation adjustments of $140 million, $22 million, and $144 million, and
minimum pension liability adjustments of $43 million, $45 million, and $43
million, at May 1, 1999, May 2, 1998, and January 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 in the third
quarter of 1998.
Legal Proceedings
The 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 effect on the Registrant's consolidated
financial position or results of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. On May 19, 1999,
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 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.
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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 discontinued its Specialty Footwear and its
International General Merchandise segments in the third quarter of 1998.
Accordingly, prior year financial statements have been restated 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 quarter. Excluding the effect of foreign currency fluctuations and sales
from disposed operations, sales increased 2.7 percent for the first quarter of
1999.
Gross margin declined by 260 basis points to 26.7 percent in the first
quarter of 1999 as compared to 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 thirteen weeks ended May 1, 1999 declined by 180 basis points to 23.8
percent of sales, as compared with the corresponding prior-year period. The
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 by 2001.
Depreciation and amortization increased by $11 million to $45 million
for the thirteen weeks ended May 1, 1999. The increase reflects depreciation and
amortization of assets included in the 1998 capital expenditure program, which
concentrated on new store openings and remodeling of existing facilities, and
also included management information systems.
Interest expense, net of interest income, increased $1 million for the
first quarter of 1999 as compared with the corresponding prior-year period,
reflecting the incremental interest expense attributable to higher interest
rates and short-term borrowing levels during 1999, 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 $1 million related to the disposal of other real estate assets.
This compares to other income of $19 million recorded in the first quarter of
1998 for the sale of the Registrant's Garden Centers nursery business.
During the first quarter of 1999, the effective tax rate was increased
to 39.0 percent as compared with 37.0 percent for the corresponding prior-year
period. The increase reflects the impact of non-deductible items, such as
goodwill amortization, at lower earnings levels, as well as higher proportional
foreign earnings, which are taxed at higher rates.
The Registrant reported a net loss for the thirteen weeks ended May 1,
1999 of $11 million or $0.08 per diluted share, compared to a net loss of $5
million, or $0.04 per diluted share for the corresponding prior-year period,
which includes a $13 million, or $0.10 per share loss from discontinued
operations.
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STORE COUNT
The following table summarizes store count:
At Jan. 30, At May 1, At May 2,
1999 Opened Closed 1999 1998
---- ------ ------ ---- ----
Global Athletic Group ................. 3,925 43 69 3,899 3,740
Northern Group ........................ 940 8 9 939 850
All Other ............................. 1,137 5 31 1,111 1,216
----- ----- ----- ----- -----
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 ................. $ 931 $ 907
Northern Group ........................ 69 74
All Other ............................. 79 73
Disposed operations ................... -- 4
------ ------
Total sales .............................. $1,079 $1,058
====== ======
By Geographic Area:
United States ......................... $ 929 $ 913
Canada ................................ 70 78
Other International ................... 80 63
Disposed operations ................... -- 4
------ ------
Total sales .............................. $1,079 $1,058
====== ======
Global Athletic Group sales increased by 2.6 percent for the first
quarter of 1999 as compared with the corresponding prior-year period. The
increase was primarily attributable to sales from 159 net additional stores,
offset by below plan sales performance in the Champs Sports format.
Comparable-store sales decreased by 0.3 percent for the quarter, reflecting an
improvement over fourth quarter 1998 trends. Sales for the quarter were impacted
by continued weak sales of branded and licensed apparel, offset by increased
sales in remodeled stores and from high-end performance athletic footwear,
primarily running.
Excluding the impact of foreign currency fluctuations, Northern Group
sales decreased by 4.9 percent for the first quarter of 1999. The sales from 89
net additional stores in 1999, compared to 1998 was more than offset by a
comparable-store sales decline of 9.6 percent for the quarter.
The increase in sales of the All Other category was driven by the
continued double-digit growth in the Afterthoughts jewelry format.
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OPERATING RESULTS
Operating results reflect income (loss) from continuing operations
before income taxes, excluding corporate expense, corporate income and interest
expense, net. The following table summarizes operating profit by segment and
geographic area, after reclassification for disposed operations.
Thirteen weeks ended
--------------------
(in millions) May 1, May 2,
1999 1998
---- ----
By Segment:
Global Athletic Group ................... $ 19 $ 46
Northern Group .......................... (16) (9)
All Other ............................... 1 (6)
Disposed operations ..................... (1) 18
---- ----
Total operating profit ..................... $ 3 $ 49
==== ====
By Geographic Area:
United States ........................... $ 9 $ 38
Canada .................................. (7) (6)
Other International ..................... 2 (1)
Disposed operations ..................... (1) 18
---- ----
Total operating profit ..................... $ 3 $ 49
==== ====
The Global Athletic Group reported an operating profit of $19 million
for the thirteen weeks ended May 1, 1999 as compared with $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 remodeled 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 first
quarter of 1998, as a result of the decline in sales and continued markdown
activity in order to clear excess inventory.
Operating results for formats included in the All Other category
improved by $7 million for the thirteen weeks ended May 1, 1999 as compared with
the corresponding prior year period, predominantly related to the Afterthoughts
format.
Disposed operations for the first quarter of 1998 include a $19 million
gain on the sale of the Garden Centers nursery business offset by the costs
associated with the shutdown of the U.S. Randy River 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 proportions of sales and net income are generated in the first
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.
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LIQUIDITY AND CAPITAL RESOURCES
The Registrant's primary sources of working capital have been cash
flows 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 of continuing operations reduced cash by $127
million for the thirteen weeks ended May 1, 1999, as compared with $192 million
in the corresponding prior-year period. These 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 additional inventory purchases in 1998 related to the opening
of new 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 cash flow from operations for both periods is the cash outlay for
occupancy costs on May 1 due to the timing of each quarter end.
Net cash used in investing activities of continuing operations was $47
million and $87 million for the first quarter of 1999 and 1998, respectively.
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
corresponding prior-year period. Planned capital expenditures of $175 million
for 1999 include expenditures for 350 new and remodeled stores, management
information systems, logistics and other support facilities. In the first
quarter of 1998, cash used for the acquisition of Athletic Fitters of $29
million, was offset by $22 million cash proceeds received from the sale of the
Garden Centers nursery business.
Financing activities for the Registrant's continuing operations
contributed $26 million in cash for the thirteen weeks ended May 1, 1999, and
$258 million in cash for the corresponding prior-year period. Outstanding
borrowings under the Registrant's revolving credit agreement were $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 incur incremental
interest expense in 1999 compared to 1998, reflecting anticipated higher
interest rates and fees during 1999. Management believes current domestic and
international credit facilities and cash provided by operations will be adequate
to finance its working capital requirements and support the development of its
short-term and long-term strategies. The Registrant expects to fund the
repayment of its $200 million 7.0 percent debentures through future financing
and/or asset sales.
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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"s business operations have been remediated. 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 in progress. The necessary enhancements
to 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 complete by the end of the third quarter.
Apart from the Y2K issue, the Registrant has developed and installed
throughout its businesses beginning in 1997 an information computer system
("ECLIPSE"), which will be installed in most divisions for the finance and human
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"s
infrastructure. Management has established the priority of systems identified as
non-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.
Material Third Parties
The Registrant purchased approximately 44 percent of its 1998
merchandise from one major vendor. As a result, the Registrant's ability to
operate could be materially affected by the non-compliance of this key supplier.
Management has determined 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 develop joint contingency plans for distribution and order entry.
Management has issued questionnaires to its approximately 20 key vendors to
determine their state of readiness. The Registrant's efforts to obtain written
certifications have not been successful, for the most part, and 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 being ascertained and the
related risks evaluated.
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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 affect on continuing operations. The total direct cost, excluding
ECLIPSE, to remediate the Y2K issue is estimated to be approximately $5 million,
of which $3 million 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 significant to its results of operations or financial
condition.
Contingency Plan/Risks
The Registrant is in the process of developing contingency plans for
those areas that 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 party suppliers to be Y2K compliant would result in the
interruption of the Registrant's business, which could have a significant
adverse effect on its results of operations or financial condition. If the
distribution channels were to be disrupted, alternative methods of delivering
merchandise to both the Registrant'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 adopted 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 have 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 euro conversion is not expected to have a significant effect on the
Registrant's results of operations or financial condition.
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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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The 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 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 February 17, 1999 (date
of earliest event reported) reporting that 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 March 10, 1999 (date of
earliest event reported) reporting sales and earnings for the fourth
quarter and year ended January 30, 1999.
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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: June 4, 1999
/s/ Bruce Hartman
-------------------
BRUCE HARTMAN
Senior Vice President
and Chief Financial Officer
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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) 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.
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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).
4.5 Form of 8 % 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 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.
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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.
- ----------
* Not applicable
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Exhibits filed with this Form 10-Q:
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