SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2000
Commission File Number 1-11681
FOOTSTAR, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3439443
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(State of incorporation) (IRS Employer Identification No.)
933 MacArthur Boulevard, Mahwah, New Jersey 07430
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(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 934-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock (par value $.01 per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.
[ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of January 1, 2000 was approximately $607 million.*
Number of shares outstanding of Common Stock, par value $.01 per share, at
January 1, 2000: 20,123,983.
Documents Incorporated by Reference
1. Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended January 1, 2000: Part I, Item 1; Part II, Items 5, 6,
7 and 8; and Part IV, Item 14.
2. Portions of the Registrant's definitive Proxy Statement expected to be
filed pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year (January 1, 2000): Part III, Items 10, 11, 12 and 13.
Forward-Looking Statements
This Report on Form 10-K and the documents incorporated by reference
contain statements which constitute forward-looking statements within the
meaning of The Private Securities Litigation Reform Act of 1995. These
statements appear in a number of places in this Report as well as the documents
incorporated by reference and can be identified by the use of forward-looking
terminology such as "believe," "expect," "estimate," "plans," "may," "will,"
"should," "anticipates," or similar statements, or the negative thereof or other
variations. Such forward-looking statements include, without limitation,
statements relating to revenue projections, cost savings, capital expenditures,
future cash needs, improvements in infrastructure and operating efficiencies.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such risks
and uncertainties include, but are not limited to; uncertainties related to
consumer demand for footwear, warmer than expected weather, consumer acceptance
of the Company's merchandise mix, retail locations, product availability and the
effect of competitive products and pricing. Consequently, all of the
forward-looking statements, internal and external, are qualified by these
cautionary statements, and there can be no assurance that the actual results,
performance or achievements will be realized. The information contained in this
Report and the documents incorporated by reference as well as information
contained under the caption "Risk Factors" in other Company filings with the
Securities and Exchange Commission, identifies important factors that could
cause such results, performance or achievements not to be realized. The Company
undertakes no obligation to update forward-looking statements to reflect events
or circumstances after the date such statements were made.
* For purposes of this calculation, only voting stock beneficially owned
by directors and executive officers has been excluded. In making such a
calculation, the Registrant does not determine the affiliate or
non-affiliate status of any shares for any other purpose.
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PART I
ITEM 1. BUSINESS
General
Footstar, Inc. (the "Company" or the "Registrant") is a holding company,
which directly or indirectly, through its wholly-owned subsidiaries, owns the
capital stock of the subsidiaries that operate its Meldisco, Footaction and
recently acquired Just For Feet businesses and its discontinued Thom McAn
segment. The Company was organized in Delaware on March 21, 1996 and became a
publicly traded company as part of the overall restructuring of Melville
Corporation ("Melville"). As part of that restructuring plan, Melville divested
its ownership interest in the Company by means of a tax-free distribution to its
stockholders on October 12, 1996 of all of the outstanding shares of common
stock of the Company.
The Company is principally a specialty retailer conducting business in the
discount footwear segment through its Meldisco business and the branded athletic
footwear and apparel segment through its Footaction and Just For Feet
businesses. The financial information concerning industry segments required by
Item 101(b) of Regulation S-K is set forth on page 34 of the Company's Annual
Report to Shareholders for the year ended January 1, 2000 and is incorporated
herein by reference.
In general, the retailing business is seasonal in nature, with peak sales
periods during the Easter, "Back-to-School" and Christmas selling periods.
Competition is generally based upon such factors as price, style, quality,
design of product and location and design of stores.
THE DISCOUNT FOOTWEAR BUSINESS: MELDISCO
Meldisco has operated licensed footwear departments in discount chains
since 1961 and is the leading operator of licensed footwear departments today.
As of January 1, 2000, Meldisco operated licensed footwear departments in 2,177
Kmart department stores and 317 former PayLess Drug Stores and Thrifty Drug
Stores now operated under the name "Rite Aid." In its Kmart licensed footwear
departments, Meldisco sells a wide variety of family footwear, including men's,
women's and children's dress, casual and athletic footwear, work shoes and
slippers. The majority of the shoes offered by Meldisco in its licensed footwear
departments are private label brands, although Meldisco also sells some national
brand merchandise at discounted prices.
For the fiscal year ended January 1, 2000, Meldisco's net sales from
Kmart's operations accounted for approximately 64% of the Company's consolidated
net sales and 98% of Meldisco's net sales. For the fiscal year ended January 1,
2000, Meldisco accounted for approximately 66% of the Company's net sales and
approximately 84% of the Company's operating profit after non-recurring charges.
Pursuant to an agreement between the Company and Kmart Corporation
("Kmart") entered into effective July 1, 1995, and amended as of March 1996
(collectively, the "Kmart Agreement"), and an agreement between the Company and
Thrifty Payless, Inc. ("TPI"), a wholly owned subsidiary of Rite Aid
Corporation, entered into in principle effective January 1, 1999, the Company
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has the exclusive right to operate the footwear departments in Kmart and in the
former Payless/Thrifty drug stores now operated under the name Rite Aid ("Rite
Aid stores"). All license agreements relating to the Kmart licensed departments
expire July 1, 2012 and all agreements relating to certain TPI stores have an
initial term that expires December 31, 2001 with the option to extend the term
until either party terminates upon six months prior written notice. The Kmart
Agreement is subject to certain performance standards. Payments by the Company
under all such license agreements are based on a percentage of sales, with
additional payments under the Kmart Agreement to be made based on profits. The
Company has a 51 percent equity interest and Kmart has a 49 percent equity
interest in all the subsidiaries which operate licensed departments in Kmart
stores, with the exception of 40 such subsidiaries in which the Company has a
100 percent equity interest (the "Meldisco Subsidiaries"). The Company has a 100
percent equity interest in all the subsidiaries which operate licensed
departments in certain TPI stores.
The business relationship between Meldisco and Kmart is very significant
to the Company, and the loss of Meldisco's Kmart operations would have a
material adverse effect on the Company. The Kmart Agreement or any license
agreement for a particular Kmart store may only be terminated: (i) by Kmart
with respect to any Kmart store with a footwear department which is to cease to
operate and be open for business to the public; (ii) by Kmart or Meldisco with
respect to any affected Kmart store, in the event that any footwear department
premises become unfit for use and occupancy by reason of material damage or
destruction, or as a result of condemnation; (iii) by Kmart or Meldisco if the
other party shall fail to make any material payments when due or to deliver any
material accounting reports as required by the Kmart Agreement, or in the event
of a material breach of any covenant, representation or warranty of the other
party, subject to the right of the party so charged to cure the breach or
failure within a specified period; (iv) by either party if Kmart or Meldisco
shall fail to pay its debts when due or becomes subject to certain insolvency,
bankruptcy or similar events; (v) at the option of the non-selling or
non-transferring party, in the event of a sale or transfer of a majority of the
outstanding shares of the other party to a single person or entity or an
affiliated group under common control; or (vi) in the event that the Meldisco
Subsidiaries fail to achieve the performance standards outlined in the Kmart
Agreement.
Meldisco--Merchandising
Meldisco's merchandising strategy focuses on solidifying and building upon
its current industry position while attracting Kmart shoppers who do not
currently purchase their footwear at Kmart. The essence of this two-pronged
strategy is to satisfy Meldisco's core customer with high in-stock availability
rates of its footwear products while generating interest among Kmart's
non-footwear shoppers by providing a wider selection of well-known national
brands.
Meldisco seeks to attract more affluent Kmart non-footwear shoppers into
the footwear department from other areas of the store. To this end, Meldisco
increasingly offers selected high-quality footwear licensed by well-known
national brands at prices significantly lower than comparable merchandise sold
by full-price retailers. These branded products are also intended to change
customer perceptions of "sameness" among discount footwear retailers. Licensed
Brands available only at Meldisco's Kmart operations include Thom McAn(R),
Everlast(R), Route 66(R), Texas Steer(R), and Cobbie Cuddlers(R) (a brand name
licensed from Nine West). Meldisco is currently conducting consumer research
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to assess the fit of additional brands in terms of price, positioning and
discount category suitability.
Meldisco's traditional strength has been in seasonal, work, value-priced
athletic, women's casuals and children's shoes. Meldisco works to solidify its
strength in these segments by ensuring high levels of customer service and
satisfaction. Meldisco's "narrow and deep" merchandising strategy and its
planned systems innovations are designed to ensure that each store is well
stocked in product lines that are particularly popular with Meldisco's core
customers. Meldisco's demand-driven merchandise replenishment system has been
designed to permit inventory management at the store, style and size level.
Meldisco is taking steps to increase customer perception of assortment
availability without increasing store inventories. Meldisco believes that
customer satisfaction and perception of assortment availability should improve
as Meldisco develops and implements systems enabling it to offer the optimal
product mix at the individual store level.
Meldisco--Marketing
Meldisco believes that Kmart's typical footwear shopper generally
parallels the average Kmart softlines shopper who is a "busy, budget-conscious
mom" in the 25-49 age group, employed at least part-time, has at least one child
under the age of 18 and reports a total annual household income between $25,000
and $65,000. Meldisco's marketing initiatives are designed to support its
overall business strategy of increasing purchases among traditional Kmart
footwear shoppers while attracting more affluent current Kmart non-footwear
shoppers into the footwear department from softlines and other areas of the
store.
Meldisco's marketing strategy is designed to convey to prospective Kmart
customers that Meldisco carries the right combination of product selection,
quality, and price to make Meldisco-operated licensed footwear departments their
discount footwear destination of choice. This message is communicated through
weekly advertising in Kmart's newspaper insert. Meldisco currently pays Kmart a
sales promotional fee that Kmart applies toward its footwear advertisements in
the Kmart weekly newspaper insert, a publication with a circulation of
approximately 72 million. Meldisco advertises primarily through the Kmart
newspaper insert but continuously evaluates other alternatives for promotion of
its products. Meldisco's marketing strategy is supported by the Kmart "Big K"
concept remodeling program which includes the relocation of the footwear
department to an improved location near the center of the softlines area of the
store. Meldisco shoe departments within Big K locations have outperformed
non-converted stores throughout 1999. As of January 1, 2000, Kmart had converted
84% of their chain to the Big K format.
Meldisco--Competitive Environment
The discount footwear industry is a highly competitive environment that
has experienced significant consolidation. Competition within the discount
segment is heavily concentrated among four retailers including Meldisco, Payless
ShoeSource, Inc. ("Payless") (which is not affiliated with PayLess Thrifty Drug
Stores), and two discount department stores, Wal-Mart and Target. These
competitors have grown more rapidly and have substantially greater resources
than the Company. The Company believes that it has been able to maintain its
overall unit market share during this period of growth by its primary
competitors due to the relative strength of Meldisco's business. There
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can be no assurance however that in the future the operations of competitors
will not have a material adverse effect on the Company.
J. Baker,Inc.'s JBI footwear division is Meldisco's primary competitor
among operators of leased footwear departments. JBI footwear, through its
subsidiaries, operates leased self-selection footwear departments in discount
and promotional department store chains located throughout the U. S., including
footwear departments at Bradlees and Ames stores. JBI footwear ceased operating
footwear departments in ShopKo stores in the middle of 1999. JBI footwear
constitutes a competitor insofar as Meldisco is seeking to expand its licensed
footwear department operations. Neither JBI footwear nor any other operator,
however, is a competitor with respect to Kmart since the Meldisco agreement with
Kmart provides for Meldisco's continued operation of Kmart's footwear
departments through 2012, unless terminated earlier in the case of breach or
certain other limited circumstances.
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THE BRANDED ATHLETIC FOOTWEAR AND APPAREL BUSINESS: FOOTACTION
Footaction, which opened its first store in 1976, is a leading mall-based
specialty retailer of branded athletic footwear, apparel and related
accessories. Its primary customers are 12-24 year-olds for whom having the most
up-to-date athletic footwear and apparel is an important consideration. As of
January 1, 2000, Footaction operated 544 stores in 43 states and the Caribbean
region. During 1999, the Company opened 7 new Footaction stores and remodeled,
relocated or expanded 13 existing Footaction stores. The Company closed 35
stores during the year.
Footaction's stores are located predominantly in enclosed regional malls
anchored by major department stores to take advantage of customer traffic and
the shopping preferences of Footaction's target customers. The athletic footwear
industry, as well as Footaction, had a difficult year in 1999 with Footaction
posting a same store sales decrease of 3.4%. Total sales decreased 1.7% to $643
million and operating profit before non-recurring charges decreased 26% to $29
million. For the fiscal year ended January 1, 2000, Footaction accounted for
approximately 34% of the Company's net sales and approximately 20% of the
Company's operating profit after non-recurring charges.
The ability of Footaction to maintain a high level of sales is dependent
upon the fashionability of branded athletic footwear and apparel and the
division's ability to ensure supplies of desirable products from key vendors.
Its future growth is dependent on its ability to open new stores both in the
mall and in high traffic urban locations. Unfavorable developments with respect
to any of these factors could have a material adverse effect on the Company.
Footaction--Merchandising
Footaction seeks to be the first to offer the most current and innovative
"street-inspired," athletic footwear and apparel available to its target
customer group. Footaction constantly monitors product trends to help identify
styles which are, or may become, popular. Footaction carries the leading
athletic and sport fashion footwear brands, including Nike, Adidas, AND 1,
Reebok, Fila, Converse, New Balance, Asics, K Swiss and Saucony. Footaction
offers a selection of brand-name apparel and accessories including windwear and
warm-ups, T-shirts, athletic shorts, caps, socks and shoe care products.
Athletic apparel and accessory brands include Nike, Adidas, Reebok, AND 1 and
Fila, among others. Footaction also offers footwear, apparel and accessories in
the fast growing fashion brand segment featuring such brands as FUBU, DADA,
Avirex and Lugz. The following table sets forth the approximate percentages of
Footaction's net sales attributable to footwear, apparel and accessories:
Approximate Percentages of Footaction's Net Sales
1999 1998 1997
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Footwear 83% 79% 78%
Apparel 12% 16% 16%
Accessories 5% 5% 6%
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100% 100% 100%
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Footaction also seeks to differentiate itself from other branded athletic
footwear and apparel retailers by increasing consumer awareness and name
recognition of Footaction and establishing in the minds of its target customer
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group the perception that Footaction is the first to offer the latest styles.
Footaction seeks to be the leading retailer in "street-inspired athletic style
and performance." As part of this strategy, Footaction works with its vendors to
design and develop product line exclusives, either unique designs or color
variations, which represent over 50% of the footwear business.
Footaction tailors merchandise assortments and store space allocations to
customer preferences at each store location. This is accomplished by recognizing
subtle differences in fashion preferences and demographic factors in the region
or market in which each store is located. This store-by-store merchandising
results in differences in brands, classifications, sizes, colors, and timing of
the assortment and space allocated to present such merchandise. Footaction
maintains information systems designed to manage aged inventory to keep its
product lines current.
Footaction--Marketing
Footaction's core customers, teens and young adults ages 12-24, constitute
55% of total branded athletic footwear sales. Within the target age group, male
and female teens (age 12-17) account for 34% of Footaction shoppers and 43% of
sales.
Footaction's marketing strategy is to build traffic, sales, and brand
awareness with its primary customers by increasing awareness of Footaction among
individuals in the target customer group and by increasing the perception among
these individuals that Footaction is the first to have the latest styles.
Footaction's media advertisements typically feature both Footaction and a
branded product, and may include celebrity endorsements. A portion of the cost
of such advertising is offset by co-operative advertising allowances. During key
selling periods, Footaction focuses its mass media advertising on core customers
in the 12-24 year-old age group.
In-store visual merchandising programs are also an important part of
Footaction's marketing effort. Footaction believes these initiatives create
excitement at the store level and support the marketplace message that
Footaction carries the latest products with the integration of apparel to
enhance the shopping experience. Footaction enhances the presentation of new
product with a "New Arrivals" tower for the latest lines, and uses "exclusive
tags" to highlight products only available at Footaction.
Another key component of Footaction's marketing strategy is its direct
marketing effort aimed at increasing customer loyalty. Footaction has created a
preferred customer program called the Star Club(TM), formerly the Star Card,
which is designed to build a marketing database that enables the chain to
communicate directly with customers and gain more information about their buying
habits. Star Club(TM) members receive individualized birthday greetings,
selected vendor mailings and the Footaction Star(R) magazine. As of the end of
1999, there were approximately five million Star Club(TM) members. The
Footaction Star(R) magazine is a magazine/catalog combination that is mailed to
Star Club(TM) members during the year. It is an entertaining and informative
marketing tool featuring the latest in athletic footwear and apparel along with
product availability dates. It also includes interviews with popular athletes
who appear in current Footaction advertising campaigns, vendor profiles and
other teen-relevant sports features.
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Footaction also offers the latest in athletic footwear and apparel for
sale at its Web site, www.footaction.com and at the Footaction Baller Mall,
which is part of HoopsTV.com, a new Internet site devoted to basketball and
entertainment. Footaction is the exclusive provider of basketball related
footwear, apparel and equipment at HoopsTV.com, an internet venture in which
Footstar holds an equity investment.
Footaction--Competitive Environment
Historically, the athletic footwear industry has been served by a variety
of distribution channels, including mall-based specialty athletic footwear
retailers, department stores, discount retailers, traditional shoe stores,
sporting goods stores, and "category killers" (i.e. retailers providing a
dominant assortment of selected lines of merchandise at competitive prices).
Footaction competes in the brand-name segment of the athletic footwear market,
and faces competition primarily from other mall-based athletic footwear and
sporting goods stores.
Within the mall-based specialty athletic footwear retail environment,
Footaction's primary competitors are Venator Athletic, The Finish Line and The
Athlete's Foot. Venator Athletic is the largest athletic footwear retailer,
offering multiple formats, including Foot Locker, Lady Foot Locker, Kids Foot
Locker, and Champs, designed to compete in this market segment. Footaction
believes that it differentiates itself from its competitors by offering
exclusive leading sport fashion brands and products demanded by
fashion-conscious, status-oriented consumers in an exciting shopping
environment. With the slower demand for athletic footwear, principally "hero"
shoes associated with star athletes, there has been an increase in promotional
activity among this group of retailers as compared to prior years.
JUST FOR FEET
On March 7, 2000, the Company acquired 79 Just For Feet superstores and
the Internet Web Site www.feet.com that had been operated under the protection
of the bankruptcy court. The stores, which are primarily located in the southern
half of the U.S., offer a broad product selection of branded athletic footwear
and apparel at competitive prices. Just For Feet's core customer is represented
by technical athletes and most importantly, suburban families. The Company will
be relaunching this chain and believes that there are significant opportunities
to improve its operating results by leveraging Footstar's centralized
distribution system, shared operating model, purchasing power, merchandising
and marketing capabilities.
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Fashion Trends
The success of the Company depends in part on its ability to anticipate
and respond to changing fashion and merchandise trends and consumer demands in a
timely manner. Accordingly, any failure by the business segments to identify and
respond to emerging trends could adversely affect consumer acceptance of the
merchandise which in turn could adversely affect the Company's business.
Key Vendors
Product sourcing in the branded athletic footwear and apparel business is
driven by relationships with athletic footwear and apparel vendors. In 1999,
approximately 76% of Footaction's net sales were generated by merchandise
purchased from Nike, Adidas, Reebok and K Swiss with the most significant
percentage attributable to Nike. The loss of the Company's relationship with
certain key vendors could have a material adverse impact on the Company.
Foreign Purchasing
The Company's sourcing and purchasing of product is conducted by the
merchandising department of each of its segments. A significant percentage of
the Company's products are sourced or manufactured offshore, with China
accounting for approximately 94% of all sources. There are risks inherent in
foreign sourcing and manufacturing and although the Company has not historically
experienced any material adverse effects from these risks, there can be no
assurances that they will not have a material adverse effect in the future.
Trademarks and Service Marks
The Company or its subsidiaries own all rights to Footaction(R) and Thom
McAn(R) for use as a trademark or service mark in connection with footwear and
related products and services. The Company or its subsidiaries have registered
or have common law rights to over 100 trademarks and/or service marks under
which the Company markets private label merchandise or its services. The Company
either has registered or is in the process of registering its trademarks and
service marks in foreign countries in which it operates or may operate in the
future. As necessary, the Company vigorously protects its trademarks and service
marks both domestically and internationally.
Employees
As of January 1, 2000, the Company had approximately 14,633 employees
including approximately 7,657 at Meldisco and 6,670 at Footaction. Meldisco had
approximately 4,530 full-time and 3,127 part-time employees and Footaction had
approximately 1,604 full-time and 5,066 part-time employees.
Acquisition Integration
In acquiring the Just For Feet business referred to above, the Company
made certain assumptions with respect to its ability to (i) successfully
relaunch a business that has been operated under the constraints and protection
of the bankruptcy laws (ii) integrate this business into its existing models and
(iii) operate the purchased stores and business profitably. Such assumptions
have known and unknown risks and uncertainties and actual results may differ
from those assumed or implied. The failure of the Company to successfully
execute these plans could have a material adverse effect on the Company's
business or operations.
Discontinuation of Thom McAn Segment
Thom McAn, which had been part of Melville since 1922, was primarily a
mall-based, specialty store retailer, marketing moderately-priced men's and
women's private label footwear and accessories. As a result of extreme
competitive pressures in the moderately-priced footwear retail market, Melville
decided to discontinue the Thom McAn chain in 1996 by converting 76 Thom McAn
stores to Footaction stores, and closing the remaining locations. As of January
25, 1997, all Thom McAn stores were closed.
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ITEM 2. PROPERTIES
Footaction has a nationwide presence. As of January 1, 2000, it operated
544 stores in 43 states and the Caribbean. Footaction's prototype store design
is a 4,000 square foot large store format. At January 1, 2000, 397 of the
Company's 544 Footaction stores were of the large store format and 147 were of
the traditional store format. Footaction stores are all leased with a typical
lease term of 10 years. These leases call for minimum annual rent subject to
periodic adjustments, plus other charges, including a proportionate share of
taxes, insurance and common area maintenance, and percentage rent based on the
store's sales volume.
At January 1, 2000, Meldisco operated licensed footwear departments in
2,494 stores. Collectively, these licensed departments are located in all 50
states, Guam, and, the Caribbean. All but 317 of the licensed departments
operated at January 1, 2000 were located in Kmart discount department stores.
The remaining 317 licensed departments were located in Rite Aid stores.
Kmart and Rite Aid stores provide Meldisco with store space to sell
footwear in exchange for certain payments. Meldisco-operated footwear
departments in traditional Kmart stores average 2,400 square feet, 3,100 square
feet in Big K stores and 3,500 square feet in Super Kmart Centers. Meldisco's
footwear departments in Rite Aid stores generally occupy approximately 100
linear feet of selling space. Just For Feet superstores generally average 17,000
square feet.
Just For Feet's corporate headquarters will be relocated from Birmingham,
Alabama to 30,000 square feet of leased office space in Mahwah, New Jersey.
Company headquarters and Meldisco's corporate offices are located in 160,000
square feet of leased office space in Mahwah, New Jersey. The Company's
corporate tax department is located in 3,500 square feet of leased office space
located in Worcester, Massachusetts. Footaction's corporate offices are located
in 59,000 square feet of leased office space in Irving, Texas. The Shared
Service Center, which was opened in 1998, is located in 57,000 square feet of
leased office space in Irving, Texas. Both Meldisco and Footaction currently
operate and Just For Feet will operate out of the Company's two distribution
facilities located in Mira Loma, California and Gaffney, South Carolina, with a
total of 966,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to the conduct of its business, none of which, the Company believes, will have a
material adverse effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended January 1, 2000.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following information sets forth the name, age and business experience
during the past five years of the executive officers of the Registrant.
J.M. Robinson, age 54, is and has been the Chairman, Chief Executive
Officer and President of the Company since October 12, 1996. Mr. Robinson was
President and Chief Executive Officer of the Meldisco division of Melville since
June 1988.
Carlos E. Alberini, age 44, is and has been the Senior Vice President and
Chief Financial Officer of the Company since October 12, 1996. From February,
1996 to July 10, 1996, Mr. Alberini was the Acting Chief Financial Officer of
Melville, having joined Melville in May 1995 as Vice President of Finance. Prior
to that time, Mr. Alberini served as the Chief Financial Officer and Senior Vice
President (1990-1995) of The Bon Ton Stores Inc., a chain of 64 department
stores.
Maureen Richards, age 43, is and has been the Vice President, General
Counsel and Corporate Secretary of the Company since October 12, 1996. From
October 1995, Ms. Richards had been Vice President, Corporate Counsel and
Assistant Secretary of Melville and its Corporate and Trademark Counsel and
Assistant Secretary from October 1991 to October 1995.
Robert D. Ravener, Jr., age 41, is and has been the Vice President and
Chief Personnel Officer of the Company since March 1998. From February 1997 to
March 1998, Mr. Ravener was Director of Safety and Risk, and from February 1994
to February 1997, a Director of Human Resources for Pepsi-Cola Company.
PART II
ITEM 5. MARKET PRICES OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended January 1, 2000 on pages 13, 17 and 33
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended January 1, 2000 on page 36 and
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended January 1, 2000 on pages 13
through 17 and is incorporated herein by reference.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivatives
The Company is not materially exposed to changes in the underlying values
of its assets or liabilities nor is it materially exposed to changes in the
value of expected foreign currency cashflows. Therefore, the Company has not
engaged in the purchase or sale of any derivative instruments.
Interest Rates
The Company's investment and debt portfolios are short-term, seasonal in
nature. The Company's investment portfolio consists of highly rated short-term
marketable securities with peak amounts coinciding with the year-end peak
selling season. The Company, from time to time, undertakes short-term borrowings
to finance working capital. The Company's peak borrowing periods coincide with
peak inventory purchases. The Company had no borrowings outstanding as of the
fiscal year end.
Foreign Exchange
International operations constituted approximately 0.2% of 1999 net sales.
The Company exited its Meldisco's European business in 1999. Translating the
income statements of these operations for the effects of foreign currency
changes does not have a material impact on the Company's financial positions.
The Company does not have material exposure to cash flows denominated in foreign
currency nor have net foreign exchange gains or losses been material to
operating results in the past three reporting periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended January 1, 2000 on pages 18
through 36 and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers is furnished under the
heading "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I of this report since
such information will not be furnished in the Company's definitive proxy
statement other than for Mr. Robinson.
Any other information required by this Part III (Items 10, 11, 12 and 13)
will be included in the Company's definitive proxy statement to be filed with
the Securities and Exchange Commission within 120 days of the end of the
Registrant's fiscal year and is incorporated herein by reference. The
Compensation Committee report on executive compensation and the performance
graph included in such proxy statement shall not be deemed incorporated herein
by reference.
13
<PAGE>
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(l) Financial Statements
The following financial statements and reports are incorporated by
reference to pages 18 through 36 of the Company's Annual Report to Shareholders
for the fiscal year ended January 1, 2000.
Independent Auditors' Report 18
Consolidated Statements of Operations for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998 19
Consolidated Balance Sheets as of January 1, 2000 and January 2, 1999 20
Consolidated Statements of Shareholders'
Equity and Comprehensive Income for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998 21
Consolidated Statements of Cash Flows for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998 22
Notes to Consolidated Financial Statements 23
(a)(2) Schedules
The following schedules are included in Part IV of this Report: Page
Independent Auditors' Report on Schedule F-1
Schedule II - Valuation and Qualifying Accounts for the
fiscal years ended January 1, 2000, January 2, 1999 and
January 3, 1998 F-2
Schedules not included above have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
related notes.
14
<PAGE>
(a)(3) Exhibits
The exhibits to this Report are listed in the Exhibit Index included elsewhere
herein.
(b) There were no reports on Form 8-K filed during the fourth quarter of the
fiscal year ended January 1, 2000.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FOOTSTAR, INC.
By /s/ J. M. Robinson
---------------------------------------
J. M. Robinson, Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ CARLOS E. ALBERINI Senior Vice President and March 29, 2000
- ------------------------------- Chief Financial Officer
Carlos E. Alberini
/s/ ROBERT A. DAVIES, III Director March 30, 2000
- -------------------------------
Robert A. Davies, III
/s/ GEORGE S. DAY Director March 29, 2000
- -------------------------------
George S. Day
/s/ STANLEY P. GOLDSTEIN Director March 29, 2000
- -------------------------------
Stanley P. Goldstein
/s/ TERRY R. LAUTENBACH Director March 30, 2000
- -------------------------------
Terry R. Lautenbach
/s/ BETTYE MARTIN MUSHAM Director March 29, 2000
- -------------------------------
Bettye Martin Musham
/s/ KENNETH S. OLSHAN Director March 31, 2000
- -------------------------------
Kenneth S. Olshan
16
<PAGE>
Independent Auditor's Report on Schedule
To the Board of Directors and Shareholders of Footstar, Inc.:
Under the date of February 8, 2000, we reported on the consolidated
balance sheets of Footstar, Inc. and Subsidiary Companies as of January 1, 2000
and January 2, 1999, and the related consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for each of the
years in the three-year period ended January 1, 2000, as contained in the 1999
Annual Report to Shareholders. These consolidated financial statements and our
report thereon are incorporated by reference in the Annual Report on Form 10-K
for the year ended January 1, 2000. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule listed in Part IV, Item 14(a)(2) of this
Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/KPMG LLP
Short Hills, NJ
February 8, 2000
F-1
17
<PAGE>
Schedule II
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
Years ended January 1, 2000, January 2, 1999, and January 3, 1998
($ in Millions)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions (1) End of Year
----------- ------- -------- -------------- -----------
<S> <C> <C> <C> <C>
Accounts Receivable:
Allowance for Doubtful Accounts:
Year Ended January 1, 2000 $1.2 $2.0 $(0.8) $2.4
==== ==== ===== ====
Year Ended January 2, 1999 $1.5 $1.7 $(2.0) $1.2
==== ==== ===== ====
Year Ended January 3, 1998 $0.4 $1.1 $0.0 $1.5
==== ==== ===== ====
</TABLE>
(1) Write-offs, net of recoveries
F-2
18
<PAGE>
Exhibit Index
Exhibit
Number DESCRIPTION
------ -----------
2.1 Form of Distribution Agreement among Melville
Corporation ("Melville"), Footaction Center, Inc., and
Footstar, Inc. (incorporated by reference to Exhibit 2.1
to Footstar, Inc.'s Form 10/A Information Statement
dated September 26, 1996).
3.1 Amended and Restated Articles of Incorporation of
Footstar, Inc. (incorporated by reference to Exhibit 3.1
to Footstar, Inc.'s Form 10/A Information Statement
dated September 26, 1996).
3.2 Amended and Restated Bylaws of Footstar, Inc.
as of March 16, 2000.
4.1 Rights Agreement, dated as of March 8, 1999 between
Footstar, Inc. and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent, which includes, as Exhibit A
the Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock of
Footstar, Inc., as Exhibit B the Form of Right
Certificate, and as Exhibit C the Summary of Rights to
Purchase Preferred Shares (incorporated by reference to
Exhibit 1 to Footstar, Inc.'s Form 8-A dated March 9,
1999).
10.1 Master Agreement, dated as of June 9, 1995, between
the Kmart Corporation and Footstar, Inc., as amended
(incorporated by reference to Exhibit 10.1 to Footstar,
Inc.'s Form 10/A Information Statement dated September
26, 1996. Certain portions of this Exhibit have been
accorded confidential treatment).
10.2 Tax Disaffiliation Agreement between Melville and
Footstar, Inc. (incorporated by reference to Exhibit
10.2 to Footstar, Inc.'s Form 10/A Information Statement
dated September 26, 1996).
10.3 1996 Incentive Compensation Plan of Footstar, Inc.
(incorporated by reference to Exhibit 10.3 to Footstar,
Inc.'s Form 10/A Information Statement dated September
26, 1996).*
10.4 1996 Non-Employee Director Stock Plan of Footstar, Inc.
(incorporated by reference to Exhibit 10.4 to Footstar,
Inc.'s Form 10/A Information Statement dated September
26, 1996).*
10.5 Employment Agreements with Executive Officers
(incorporated by reference to Exhibit 10.5 to Footstar,
Inc.'s 1996 Annual Report on Form 10-K).*
10.6 Credit Agreement, dated as of September 18, 1997, among
the Banks listed therein, the Bank of New York, as
Issuing Bank, Morgan Guaranty Trust Company of New York,
as Administrative Agent and
19
<PAGE>
Swingline Lender, and Footstar, Inc. (incorporated by
reference to Exhibit 10.6 to Footstar, Inc.'s Form 10-Q
dated November 10,1997
10.7(a) Amendment dated as of April 30, 1998 to Credit Agreement
dated as of September 18, 1997, among the Banks listed
therein, The Bank of New York, as Issuing Bank, Morgan
Guaranty Trust Company of New York, as Administrative
Agent and Swingline Lender, and Footstar, Inc.
(incorporated by reference to Exhibit 10.7(a) to
Footstar, Inc.'s 1998 Annual Report on Form 10-K).
10.7(b) Amendment dated as of October 23, 1998 to Credit
Agreement dated as of September 18, 1997, among the
Banks listed therein, The Bank of New York, as Issuing
Bank, Morgan Guaranty Trust Company of New York, as
Administrative Agent and Swingline Lender, and Footstar,
Inc. (incorporated by reference to Exhibit 10.7(b) to
Footstar, Inc.'s 1998 Annual Report on Form 10-K).
10.7(c) Amendment dated as of August 3, 1999 to Credit Agreement
dated as of September 18, 1997, among the Banks listed
therein, The Bank of New York, as Issuing Bank, Morgan
Guaranty Trust Company of New York, as Administrative
Agent and Swingline Lender, and Footstar, Inc.
10.8 Footstar Deferred Compensation Plan (incorporated by
reference to Exhibit 10.8 to Footstar, Inc.'s 1996
Annual Report on Form 10-K).*
10.9 Supplemental Retirement Plan for select senior
management (incorporated by reference to Exhibit 10.9 to
Footstar, Inc.'s 1996 Annual Report on Form 10-K).*
10.10 Asset Purchase Agreement by and among Footstar, Inc. and
Just For Feet, Inc., Just For Feet of Nevada, Inc.,
Sneaker Stadium Inc., Just For Feet of Texas, Inc., Just
For Feet Specialty Stores, Inc., SNKR Holding Corp. and
Athletic Attic Marketing, Inc. dated as of February 16,
2000 (incorporated by reference to Exhibit 10.10 to
Footstar, Inc.'s Report on Form 8-K dated March 7,
2000).
10.11 2000 Equity Incentive Plan
13.1 Portions of Annual Report to Shareholders for the fiscal
year ended January 1, 2000.
21.1 A list of subsidiaries of Footstar, Inc.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule for the fiscal year ended
January 1, 2000.
* Management contract or compensatory plan.
20
EXHIBIT 3.2
BYLAWS
OF
Footstar, Inc.
* * * * *
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be in
the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the
Corporation may require.
Section 3. Books. The books of the Corporation may be kept within
or without of the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place of Meetings. All meetings of
stockholders shall be held at such place, either within or without the State
of Delaware, on such date and at such time as may be determined from time to
time by the Board of Directors (or the Chairman of the Board in the absence of
a designation by the Board of Directors).
Section 2. Annual Meetings. Annual meetings of stockholders,
commencing with the year 1997, shall be held to elect directors and transact
such other business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of stockholders may
be called by the Board of Directors or the Chairman of the Board of Directors,
the President or the Secretary of the Corporation and may not be called by any
other person. Notwithstanding the foregoing, whenever holders of one or more
classes or series of Preferred Stock shall have the right, voting separately
as a class or series, to elect directors, such holders may call, pursuant to
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to Article Four of the certificate of incorporation, special meetings
of holders of such Preferred Stock.
Section 4. Notice of Meetings and Adjourned Meetings; Waivers of
Notice. (a) Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting shall be given which
shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
Unless otherwise provided by the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended ("Delaware Law"), such
notice shall be given not less than 10 nor more than 60 days before the date
of the meeting to each stockholder of record entitled to vote at such meeting.
Unless these bylaws otherwise require, when a meeting is adjourned to another
time or place (whether or not a quorum is present), notice need not be given
of the adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than 30 days, or after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
(b) A written waiver of any such notice signed by the person
entitled thereto, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 5. Quorum. Unless otherwise provided by Delaware Law, the
presence, in person or by proxy, of the holders of at least one-third of the
outstanding capital stock of the Corporation entitled to vote at a meeting of
stockholders shall constitute a quorum for the transaction of business.
Section 6. Voting. (a) Except as otherwise provided in the certificate
of incorporation or by Delaware Law, each stockholder shall be entitled to one
vote for each outstanding share of capital stock of the Corporation held by such
stockholder. Except as otherwise provided in the certificate of incorporation or
these bylaws with respect to the right of holders of one or more classes or
series of Preferred Stock to elect additional directors under specified
circumstances, and except as otherwise provided by Delaware law, directors shall
be elected by a plurality of the votes cast by the shares of capital stock of
the Corporation present, in person or by proxy, at a meeting of stockholders and
entitled to vote on the election of directors. Except as otherwise provided by
Delaware Law, all matters other than the election of directors properly
submitted at any meeting of the stockholders shall be decided by the affirmative
majority of the votes cast by shares of capital stock of the Corporation
present, in person or by proxy, and entitled to vote on the matter. Abstentions
shall not be included in calculating the number of votes cast on, in favor of,
or in opposition to any matter.
(b) Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to a corporate action in writing without a meeting
may authorize another person or persons to act for him or her by proxy, but no
such proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period.
Section 7. No Action by Consent. Any action required or permitted to
be taken at any annual or special meeting of stockholders may be taken only upon
the vote of stockholders at an annual or special meeting duly noticed and called
in accordance with Delaware Law and may not be taken by written consent of
stockholders without a meeting.
Section 8. Organization. At each meeting of stockholders, the Chairman
of the Board, if one shall have been elected, (or in his or her absence or if
one shall not have been elected, the President) shall act as chair of the
meeting. The Secretary (or in his or her absence or inability to act, the person
whom the chair of the meeting shall appoint secretary of the meeting) shall act
as secretary of the meeting and keep the minutes thereof.
Section 9. Order of Business. The order of business and rules of
conduct at all meetings of stockholders shall be as determined by the chair of
the meeting.
Section 10. Nomination of Directors. Only persons who are nominated in
accordance with the procedures set forth in these bylaws shall be eligible to
serve as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of stockholders (a) by or
at the direction of the Board of Directors or (b) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 10, who shall be entitled to vote for the election
of directors at the meeting and who complies with the notice procedures set
forth in this Section 10. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting or such public disclosure was given or made.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such stockholder and (ii) the class and number of shares
of the Corporation which are beneficially owned by such stockholder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. No person shall be eligible to
serve as a director of the Corporation unless nominated in accordance with the
procedures set forth in this bylaw. The chair of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the bylaws, and if he or she should
so determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions of
this Section 10, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, and the rules and
regulations thereunder with respect to the matters set forth in this Section.
Section 11. Notice of Business. At any meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting (a) by or at the direction of the Board of Directors or (b) in the case
of an annual meeting of stockholders, by any stockholder of the Corporation who
is a stockholder of record at the time of giving of the notice provided for in
this Section 11, who shall be entitled to vote at such meeting and who complies
with the notice procedures set forth in this Section 11. For business to be
properly brought before an annual meeting of stockholders by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be received no later than the close of business on
the 10th day following the day on which such notice of the date of the meeting
was mailed or such public disclosure was given or made. A stockholder's notice
to the secretary shall set forth as to each matter the stockholder proposes to
bring before the meeting (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (b) the name and address, as they appear on the Corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the stockholder and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the bylaws to the contrary, no business shall be conducted at a stockholder
meeting except in accordance with the procedures set forth in this Section 11,
and no business shall be brought by a stockholder before a special meeting. The
chair of the meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of the bylaws, and if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing,
provisions of this Section 11, a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, and the rules
and regulations thereunder with respect to the matters set forth in this Section
11.
ARTICLE III
DIRECTORS
Section 1. General Powers. Except as otherwise provided in Delaware
Law or the certificate of incorporation, the business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors.
Section 2. Number, Classes, Term of Office, etc. The Board of
Directors shall consist of not less than three nor more than ten directors, with
the exact number of directors to be determined from time to time solely by
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors. The directors shall be divided into three classes, designated Class
I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. Except as otherwise provided in the certificate of
incorporation, each director shall serve for a term ending on the date of the
third annual meeting of stockholders next following the annual meeting at which
such director was elected. Notwithstanding the foregoing, each director shall
hold office until such director's successor shall have been duly elected and
qualified or until such director's earlier death, resignation or removal.
Directors need not be stockholders. The provisions of this Section 2 shall be
subject, in each case, to the rights of holders of one or more series of
Preferred Stock of the Corporation with respect to the election of directors set
forth in Section 15 of this Article III.
Section 3. Quorum and Manner of Acting. Unless the certificate of
incorporation or these bylaws require a greater number, a majority of the
total number of directors shall constitute a quorum for the transaction of
business, and the affirmative vote of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of
Directors. When a meeting is adjourned to another time or place (whether or
not a quorum is present), notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the Board of Directors may
transact any business which might have been transacted at the original
meeting. If a quorum shall not be present at any meeting of the Board of
Directors the directors present thereat may adjourn the meeting, from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 4. Time and Place of Meetings. The Board of Directors
shall hold its meetings at such place, either within or without the State of
Delaware, and at such time as may be determined from time to time by the Board
of Directors (or the Chairman in the absence of a determination by the Board
of Directors).
Section 5. Annual Meeting. The Board of Directors shall meet for
the purpose of electing officers and transacting other business, as soon as
practicable after each annual meeting of stockholders, on the same day and at
the same place where such annual meeting shall be held. Notice of such
meeting need not be given. In the event such annual meeting is not so held,
the annual meeting of the Board of Directors may be held at such place either
within or without the State of Delaware, on such date and at such time as shall
be specified in a notice thereof given as hereinafter provided in Section 7 of
this Article III or in a waiver of notice thereof signed by any director who
chooses to waive the requirement of notice.
Section 6. Regular Meetings. After the place and time of regular
meetings of the Board of Directors shall have been determined and notice
thereof shall have been once given to each member of the Board of Directors,
regular meetings may be held without further notice being given.
Section 7. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President and
shall be called by the Chairman of the Board, President or Secretary on the
written request of three directors. Notice of special meetings of the Board of
Directors shall be given to each director at least three days before the date
of the meeting in such manner as is determined by the Board of Directors.
Section 8. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. Any such committee, to the extent provided in the resolution
of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; but no such committee shall
have the power or authority in reference to amending the certificate of
incorporation, adopting an agreement of merger or consolidation, recommending
to the stockholders the sale, lease or exchange of all or substantially all of
the Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending
the bylaws of the Corporation; and unless the resolution of the Board of
Directors or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
Section 9. Action by Consent. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 10. Telephonic Meetings. Unless otherwise restricted by
the certificate of incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or such committee, as the
case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
Section 11. Resignation. Any director may resign at any time by
giving written notice to the Board of Directors or to the Secretary of the
Corporation. The resignation of any director shall take effect upon receipt
of notice thereof or at such later time as shall be specified in such notice;
and unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 12. Vacancies. Unless otherwise provided in the certificate of
incorporation, vacancies on the Board of Directors resulting from death,
resignation, removal or otherwise and newly created directorships resulting from
any increase in the number of directors may be filled solely by a majority of
the directors then in office (although less than a quorum) or by the sole
remaining director. Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of directors elected by such class
or classes or series thereof then in office, or by a sole remaining director so
elected. Each director so elected shall hold office for a term that shall
coincide with the term of the Class to which such director shall have been
elected. If there are no directors in office, then an election of directors may
be held in accordance with Delaware Law. Unless otherwise provided in the
certificate of incorporation, when one or more directors shall resign from the
Board, effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have the power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in the filling of other vacancies.
Section 13. Removal. No director may be removed from office by the
stockholders except for cause with the affirmative vote of the holders of not
less than a majority of the total voting power of all outstanding securities of
the corporation then entitled to vote generally in the election of directors,
voting together as a single class.
Section 14. Compensation. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall
have authority to fix the compensation of directors, including fees and
reimbursement of expenses.
Section 15. Preferred Directors. Notwithstanding anything else
contained herein, whenever the holders of one or more classes or series of
Preferred Stock shall have the right, voting separately as a class or series, to
elect directors, the election, term of office, filling of vacancies, removal and
other features of such directorships shall be governed by the terms of the
resolutions adopted by the Board of Directors pursuant to the certificate of
incorporation applicable thereto, and such directors so elected shall not be
subject to the provisions of Sections 2, 12 and 13 of this Article III unless
otherwise provided therein.
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The principal officers of the
Corporation shall be a Chairman of the Board, a Chief Executive Officer, a
President, one or more Vice Presidents, a Treasurer and a Secretary who shall
have the duty, among other things, to record the proceedings of the meetings
of stockholders and directors in a book kept for that purpose. The
Corporation may also have such other principal officers, including one or more
Controllers, as the Board may in its discretion appoint. One person may hold
the offices and perform the duties of any two or more of said offices, except
that no one person shall hold the offices and perform the duties of President
and Secretary.
Section 2. Election and Term of Office. The principal officers of
the Corporation shall be elected annually by the Board of Directors at the
annual meeting thereof. Each such officer shall hold office until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal. Any vacancy in any office shall be filled in such
manner as the Board of Directors shall determine.
Section 3. Subordinate Officers. In addition to the principal
officers enumerated in Section 1 of this Article IV, the Corporation may have
one or more Assistant Treasurers, Assistant Secretaries and Assistant
Controllers and such other subordinate officers, agents and employees as the
Board of Directors may deem necessary, each of whom shall hold office for such
period as the Board of Directors may from time to time determine. The Board
of Directors may delegate to any principal officer the power to appoint and to
remove any such subordinate officers, agents or employees.
Section 4. Removal. Except as otherwise permitted with respect to
subordinate officers, any officer may be removed, with or without cause, at
any time, by resolution adopted by the Board of Directors.
Section 5. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors (or to a principal officer if
the Board of Directors has delegated to such principal officer the power to
appoint and to remove such officer). The resignation of any officer shall
take effect upon receipt of notice thereof or at such later time as shall be
specified in such notice; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 6. Powers and Duties. The officers of the Corporation
shall have such powers and perform such duties incident to each of their
respective offices and such other duties as may from time to time be conferred
upon or assigned to them by the Board of Directors.
ARTICLE V
GENERAL PROVISIONS
Section 1. Fixing the Record Date. (a) In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors,
and which record date shall not be more than 60 nor less than 10 days before
the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on
the day preceding the day on which notice is given, or, if notice is waived,
at the close of business on the day preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect
of any change, conversion or exchange of stock, or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
Section 2. Dividends. Subject to limitations contained in Delaware
Law and the certificate of incorporation, the Board of Directors may declare
and pay dividends upon the shares of capital stock of the Corporation, which
dividends may be paid in cash, in property or in shares of the capital stock
of the Corporation.
Section 3. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 4. Voting of Stock Owned by the Corporation. Unless
otherwise ordered by the Board of Directors, the Chairman of the Board may
authorize any person, on behalf of the Corporation, to attend, vote at and
grant proxies to be used at any meeting of stockholders of any corporation
(except this Corporation) in which the Corporation may hold stock.
Section 5. Authorized Signatures for Instruments of Payment. All
checks, notes, drafts or other instruments for the payment of money shall be
signed on behalf of the Corporation by such person or persons and in such manner
as the Board of Directors may prescribe by resolution from time to time.
Section 6. Transfer of Shares. Shares of the stock of the Corporation
may be transferred on the register of stockholders of the Corporation by the
holder thereof in person or by his duly authorized attorney upon surrender of a
certificate therefor properly endorsed.
Section 7. Issue, Transfer and Registration of Share Certificates;
Replacement Certificates. The Board of Directors shall have power and authority
to make all such rules and regulations as it may deem expedient concerning the
issue and transfer of certificates for shares of the stock of the Corporation as
well as for the issuance of new certificates in lieu of those which may be lost
or destroyed, and may require of any stockholder requesting replacement of lost
or destroyed certificates, a bond in such amount and in such form as the Board
may deem expedient to indemnify the Corporation, and/or the transfer agents,
and/or the registrars of its stock against any claims arising in connection
therewith.
Section 8. Transfer Agents and Registrars. The Board of Directors may
appoint one or more transfer agents and one or more registrars of transfer and
may require all stock certificates to be countersigned by such transfer agent
and registered by such registrar of transfers on the stock register. One person
or organization may serve as both transfer agent and registrar.
Section 9. Amendments. These bylaws or any of them, may be
altered, amended or repealed, or new bylaws may be made, by the Board of
Directors or by the affirmative vote of the holders of not less than 80% of
the total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class.
ARTICLE VI
DIVISIONS
Section 1. Organization. The Board of Directors may cause the business
and operations of the Corporation to be divided into divisions based upon
character or type of operations, operating units, or upon such other basis of
division as the Board of Directors may from time to time determine to be
advisable, and may cause the business and operations of any such division to be
further divided into subdivisions or departments if deemed advisable by the
Board of Directors and upon such basis of subdivision as the Board of Directors
may determine.
Section 2. Officers of Divisions. Unless the Board of Directors of the
Corporation provides otherwise, the Chairman of the Board or the Chief Executive
Officer may provide for the appointment of officers for each division into which
any of the activities of this Corporation may be divided, with such duties as
such officer or the Board of Directors of the Corporation may from time to time
determine. Officers of a division may be designated by such titles as President,
Executive Vice President, Senior Vice President, Vice President, Secretary,
Assistant Secretary, Treasurer, Assistant Treasurer, or Controller, as the Board
of Directors of the Corporation may from time to time determine. The authority
of the officers of each division shall be subject to the control of, and shall
be limited to acts and transactions in conformity with the policies of, the
Board of Directors of the Corporation, and may be further limited to acts and
transactions pertaining to the business of this corporation which such division
is authorized to transact and perform. Individuals shall be appointed as
divisional officers, and may be removed as such, by the Chairman of the Board of
Directors. One person may hold more than one of the divisional or departmental
offices. Any general officer of the Corporation shall be eligible for
appointment to one or more offices in one or more divisions or departments, but
a divisional or departmental officer, as such, shall not be an officer of the
Corporation.
EXHIBIT 10.7 (c)
EXECUTION COPY
AMENDMENT Number 3 dated as of August 3, 1999, to
the Credit Agreement dated as of September 18, 1997, as
amended (the "Credit Agreement"), among FOOTSTAR, INC.
(the "Company"), the BANKS party thereto, THE BANK OF
NEW YORK, as Issuing Bank, and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Administrative Agent and
Swingline Lender. Capitalized terms used herein and not
defined herein shall have the meanings assigned thereto
in the Credit Agreement.
A. The Company, the Banks and the Agent have heretofore entered into the
Credit Agreement and the Amendments thereto dated as of April 30, 1998 and
October 23, 1998.
B. The Company, wishes, and the undersigned Banks and the Agent are
willing, upon the terms and subject to the conditions set forth herein, to amend
Section 5.15 of the Credit Agreement as set forth herein.
Accordingly, in consideration of the mutual agreements herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the Company, the Banks and the Agent hereby agree as follows:
SECTION 1. Amendment of the Credit Agreement. Section 5.15 of the Credit
Agreement is hereby amended as of the Amendment Effective Date (as defined
below) by replacing the amount "$205,000,000" in clause (d) thereof with the
amount "$305,000,000."
SECTION 2. Representations and Warranties. The Company hereby represents
and warrants on and as of the Amendment Effective Date that (i) the
representations and warranties of the Company contained in the Credit Agreement
and the other Loan Documents are true in all material respects and (ii) no
Default has occurred and is continuing.
SECTION 3. Effectiveness. This Amendment shall become effective on the
date (the "Amendment Effective Date") of receipt by the Agent (or its counsel)
of counterparts hereof signed by the Company and the Required Banks or, in the
case of any such party as to which an executed counterpart shall not have been
received, receipt by the Agent in form satisfactory to it of telegraphic, telex
or other written confirmation from such party of execution of a counterpart
hereof by such party.
SECTION 4. New York Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 5. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
<PAGE>
2
SECTION 6. Headings. The headings of this Amendment are for convenience of
reference only and are not part of this Amendment and are not to be taken into
consideration in interpreting this Amendment.
SECTION 7. Effect of Amendment. Unless and until this Amendment becomes
effective, the Credit Agreement shall continue in effect on the terms thereof in
effect on the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
FOOTSTAR, INC.,
By:
/s/ MARC A. COMITO
--------------------------
Name: Marc A. Comito
Title: Assistant Treasurer
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
individually and as
Administrative Agent and
Swingline Lender,
By:
/s/ SOVONNA L. DAY
--------------------------
Name: Sovonna L. Day
Title: Vice President
THE BANK OF NEW YORK,
individually and as Issuing Bank,
By:
/s/ HOWARD F. BASCOM, JR.
--------------------------
Name: Howard F. Bascom, Jr.
Title: Vice President
THE ASAHI BANK, LTD.,
By:
/s/ DOUGLAS PRICE
--------------------------
Name: Douglas Price
Title: Senior Vice President
<PAGE>
3
BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION,
By:
/s/ TIMOTHY H. SPANOS
--------------------------
Name: Timothy H. Spanos
Title: Senior Vice President
BANKBOSTON, N.A.,
By:
/s/ NANCY E. FULLER
--------------------------
Name: Nancy E. Fuller
Title: Director
CIBC, INC.
By:
/s/ GERALD GIRARDI
--------------------------
Name: Gerald Girardi
Title: Executive Director
CREDIT LYONNAIS NEW YORK BRANCH,
By:
/s/ DEBORAH E. BRADLEY
--------------------------
Name: Deborah E. Bradley
Title: First Vice President
CREDIT SUISSE FIRST BOSTON,
By:
/s/ CHRIS T. HORGAN
--------------------------
Name: Chris T. Horgan
Title: Vice President
By:
/s/ KRISTIN LEPRI
--------------------------
Name: Kristin Lepri
Title: Associate
<PAGE>
4
FLEET NATIONAL BANK,
By:
/s/ THOMAS J. BULLARD
--------------------------
Name: Thomas J. Bullard
Title: Vice President
FIRST UNION NATIONAL BANK,
By:
/s/ IRENE ROSEN MARKS
--------------------------
Name: Irene Rosen Marks
Title: Vice President
NATIONAL AUSTRALIA BANK LIMITED,
By:
/s/ BILL SCHMID
--------------------------
Name: Bill Schmid
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION,
By:
/s/ MICHAEL RICHARDS
--------------------------
Name: Michael Richards
Title: Vice President
THE SAKURA BANK, LTD.,
By:
/s/ YOSHIKAZU NAGURA
--------------------------
Name: Yoshikazu Nagura
Title: Vice President
<PAGE>
5
STANDARD CHARTERED BANK,
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.,
By:
--------------------------
Name:
Title:
7958s
EXHIBIT 10.11
FOOTSTAR, INC.
- --------------------------------------------------------------------------------
2000 Equity Incentive Plan
- --------------------------------------------------------------------------------
1. Purpose. The purpose of this 2000 Equity Incentive Plan (the "Plan") is
to assist Footstar, Inc., a Delaware corporation (the "Company"), and its
subsidiaries in attracting, retaining, and rewarding high-quality employees,
enabling such persons to acquire or increase a proprietary interest in the
Company in order to strengthen the mutuality of interests between such persons
and the Company's stockholders, and providing such persons with annual and long
term performance incentives to expend their maximum efforts in the creation of
shareholder value. The Plan is intended to be classified and administered as a
"broadly-based" plan within the meaning of Section 312 of the New York Stock
Exchange Listing Rules as in effect on the Effective Date.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof:
(a) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of
another award, Dividend Equivalent, Other Stock-Based Award, Performance
Award or Annual Incentive Award, together with any other right or interest
granted to an Eligible Person under the Plan.
(b) "Beneficiary" means the person, persons, trust or trusts
whom or which have been designated by a Participant in his or her most
recent written beneficiary designation filed with the Committee to receive
the benefits specified under the Plan upon such Participant's death or to
whom or which Awards or other rights are transferred if and to the extent
permitted under Section 10(b) hereof. If, upon a Participant's death,
there is no designated Beneficiary or surviving designated Beneficiary,
then the term Beneficiary means person, persons, trust or trusts entitled
by will or the laws of descent and distribution to receive such benefits.
(c) "Beneficial Owner," "Beneficially Owning" and "Beneficial
Ownership" shall have the meanings ascribed to such terms in Rule 13d-3
under the Exchange Act and any successor to such Rule.
(d) "Board" means the Company's Board of Directors.
<PAGE>
(e) "Change in Control" means Change in Control as defined with
related terms in Section 9 of the Plan.
(f) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(g) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions
and regulations thereto.
(h) "Committee" means the Compensation Committee of the Board or
such other Committee designated by the Board to administer the Plan.
(i) "Corporate Transaction" means a Corporate Transaction as defined
in Section 9(b) of the Plan.
(j) "Deferred Stock" means a right, granted to an Eligible Person
under Section 6(e) hereof, to receive Stock, cash or a combination thereof
at the end of a specified deferral period.
(k) "Dividend Equivalent" means a right, granted to an Eligible
Person under Section 6(g), to receive cash, Stock, other Awards or other
property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments.
(l) "Effective Date" means the date set forth in Section 10(k)
(m) "Eligible Person" means each full-time salaried employee of the
Company, except that such term shall not include any individual who is an
executive officer who would be designated at such time as a named
executive officer in the proxy statement to be filed with the Securities
and Exchange Commission in connection with the annual meeting for the
applicable year.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(o) "Fair Market Value" means the fair market value of Stock, Awards
or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the
Committee, the Fair Market Value of Stock as of any given date shall be
the closing sale price per share reported on a consolidated basis for
stock listed on the principal stock exchange or market on which Stock is
traded on the date as of which such value is being determined or, if there
is no sale on that date, then on the last previous day on which a sale was
reported.
(p) "Incumbent Board" means the Incumbent Board as defined in
Section 9(b) of the Plan.
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<PAGE>
(q) "Limited SAR" means a right granted to an Eligible Person under
Section 6(c) hereof.
(r) "Option" means a right, granted to an Eligible Person under
Section 6(b) hereof, to purchase Stock or other Awards at a specified
price during specified time periods.
(s) "Other Stock-Based Awards" means Awards granted to an Eligible
Person under Section 6(h) hereof.
(t) "Participant" means an Eligible Person who has been granted an
Award under the Plan, which Award remains outstanding.
(u) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
and shall include a "group" as defined in Section 13(d) thereof.
(v) "Restricted Stock" means Stock granted to an Eligible Person
under Section 6(d) hereof, that is subject to certain restrictions and to
a risk of forfeiture.
(w) "Rule 16b-3" and "Rule 16a-1(c)(3)" mean Rule 16b-3 and Rule
16a-1(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act.
(x) "Stock" means the Company's Common Stock and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(y) "Stock Appreciation Rights" or "SAR" means a right granted to an
Eligible Person under Section 6(c) hereof.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority, in each case
subject to and consistent with the provisions of the Plan, to select Eligible
Persons to become Participants, grant Awards, determine the type, number and
other terms and conditions of, and all other matters relating to, Awards,
prescribe Award agreements (which need not be identical for each Participant)
and rules and regulations for the administration of the Plan, construe and
interpret the Plan and Award agreements and correct defects, supply omissions or
reconcile inconsistencies therein, and to make all other decisions and
determinations as the Committee may deem necessary or advisable for the
administration of the Plan.
(b) Manner of Exercise of Committee Authority. The Committee shall
exercise sole and exclusive discretion on any matter relating to a Participant,
including, without limitation, actions deemed necessary to
3
<PAGE>
ensure in order that transactions by such Participant shall be exempt under Rule
16b-3 under the Exchange Act. Any action of the Committee shall be final,
conclusive and binding on all persons, including the Company, its subsidiaries,
Participants, Beneficiaries, transferees under Section 10(b) hereof or other
persons claiming rights from or through a Participant, and stockholders of the
Company. The express grant of any specific power to the Committee, and the
taking of any action by the Committee, shall not be construed as limiting any
power or authority of the Committee. The Committee may delegate to officers or
managers of the Company or any subsidiary, or committees thereof, the authority,
subject to such terms as the Committee shall determine, (i) to perform
administrative functions, and (ii) to perform such other functions of the
Committee as the Committee may determine, to the extent performance of such
functions will not result in the loss of an exemption under Rule 16b-3 otherwise
available, for transactions by such persons, in each case to the extent
permitted under applicable law. The Committee may appoint agents to assist it in
administering the Plan.
(c) Limitation of Liability. The Committee and each member thereof shall
be entitled to, in good faith, rely or act upon any report or other information
furnished to him or her by any executive officer, other officer or employee of
the Company or a subsidiary, the Company's independent auditors, consultants or
any other agents assisting in the administration of the Plan. Members of the
Committee and any officer or employee of the Company or a subsidiary acting at
the direction or on behalf of the Committee shall not be personally liable for
any action or determination taken or made in good faith with respect to the
Plan, and shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action or determination.
(d) NYSE Compliance. The Plan will be administered in accordance with the
"broad based" plan requirements of Section 312 of the New York Stock Exchange
Listing Rules as in effect on the Effective Date.
4. Stock Subject to Plan.
(a) Overall Number of Shares Available for Delivery. Subject to adjustment
as provided in Section 10(c) hereof, the total number of shares of Stock
reserved and available for delivery in connection with Awards under the Plan
shall be two (2) million. Any shares of Stock delivered under the Plan may
consist, in whole or in part, of authorized and unissued shares or treasury
shares.
(b) Application of Limitation to Grants of Awards. No Award may be granted
if the number of shares of Stock to be delivered in connection with such Award
or, in the case of an Award relating to shares of Stock but settleable only in
cash (such as cash-only SARs), the number of shares to which such Award relates,
exceeds the number of shares of Stock remaining available under the Plan minus
the number of shares of Stock issuable in settlement of or relating to
then-outstanding Awards. The Committee may adopt reasonable counting procedures
to ensure appropriate counting, avoid double counting (as, for example, in the
case of tandem or substitute awards) and make adjustments if the number of
shares of Stock actually delivered differs from the number of shares previously
counted in connection with an Award.
4
<PAGE>
(c) Availability of Shares Not Delivered Under Awards. Shares of Stock
subject to an Award under the Plan that is canceled, expired, forfeited, settled
in cash or otherwise terminated without a delivery of such shares to the
Participant, including (i) the number of shares withheld in payment of any
exercise or purchase price of an Award or taxes relating to Awards, and (ii) the
number of shares surrendered in payment of any exercise or purchase price of an
Award or taxes relating to any Award, will again be available for Awards under
the Plan, except that if any such shares could not again be available for Awards
to a particular Eligible Person under any applicable law or regulation, such
shares shall be available exclusively for Awards to Eligible Persons who are not
subject to such limitation.
5. Eligibility. Awards may be granted under the Plan only to Eligible
Persons.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth
in this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 10(e)),
such additional terms and conditions, not inconsistent with the provisions of
the Plan, as the Committee shall determine, including terms requiring forfeiture
of Awards in the event of termination of employment by the Participant and terms
permitting a Participant to make elections relating to his or her Award. The
Committee shall retain full power and discretion to accelerate, waive or modify,
at any time, any term or condition of an Award that is not mandatory under the
Plan.
(b) Options. The Committee is authorized to grant Options to Eligible
Persons on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee, provided
that such exercise price shall be not less than the Fair Market Value of a
share of Stock on the date of grant of such Option except as provided
under Section 7(a) hereof.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which or the circumstances under which an Option may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the methods by
which such exercise price may be paid or deemed to be paid, the form of
such payment, including, without limitation, cash, Stock, other Awards or
awards granted under other plans of the Company or any subsidiary, or
other property (including notes or other contractual obligations of
Participants to make payment on a deferred basis), and the methods by or
forms in which Stock will be delivered or deemed to be delivered to
Participants.
(c) Stock Appreciation Rights.. The Committee is authorized to grant SARs
to Eligible Persons on the following terms and conditions:
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<PAGE>
(i) Right to Payment. An SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of (A)
the Fair Market Value of one share of Stock on the date of exercise (or,
in the case of a Limited SAR, the Fair Market Value determined by
reference to the Change in Control Price, as defined under Section 9(c)
hereof), over (B) the grant price of the SAR as determined by the
Committee.
(ii) Other Terms. The Committee shall determine at the date of grant
or thereafter, the time or times at which and the circumstances under
which an SAR may be exercised in whole or in part (including based on
achievement of performance goals and/or future service requirements), the
method of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed
to be delivered to Participants, whether or not an SAR shall be in tandem
or in combination with any other Award, and any other terms and conditions
of any SAR. Limited SARs that may only be exercised in connection with a
Change in Control or other event as specified by the Committee may be
granted on such terms, not inconsistent with this Section 6(c), as the
Committee may determine. SARs and Limited SARs may be either freestanding
or in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock to Eligible Persons on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee may impose, which restrictions may
lapse separately or in combination at such times, under such circumstances
(including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee may
determine at the date of grant or thereafter. Except to the extent
restricted under the terms of the Plan and any Award agreement relating to
the Restricted Stock, a Participant granted Restricted Stock shall have
all of the rights of a stockholder, including the right to vote the
Restricted Stock and the right to receive dividends thereon (subject to
any mandatory reinvestment or other requirement imposed by the Committee).
During the restricted period applicable to the Restricted Stock, subject
to Section 10(b) below, the Restricted Stock may not be sold, transferred,
pledged, hypothecated, margined or otherwise encumbered by the
Participant.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Company; provided that the Committee may
provide, by rule or regulation or in any Award agreement, or may determine
in any individual case, that restrictions or forfeiture conditions
relating to Restricted
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<PAGE>
Stock shall be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases
waive in whole or in part the forfeiture of Restricted Stock.
(iii) Certificates for Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Participant, the Committee may require that such certificates bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to such Restricted Stock, that the Company retain physical
possession of the certificates, and that the Participant deliver a stock
power to the Company, endorsed in blank, relating to the Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an Award
of Restricted Stock, the Committee may require that any cash dividends
paid on a share of Restricted Stock be automatically reinvested in
additional shares of Restricted Stock or applied to the purchase of
additional Awards under the Plan. Unless otherwise determined by the
Committee, Stock distributed in connection with a Stock split or Stock
dividend, and other property distributed as a dividend, shall be subject
to restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which such Stock or other property has
been distributed.
(e) Deferred Stock. The Committee is authorized to grant to Eligible
Persons Deferred Stock, which are rights to receive Stock, cash, or a
combination thereof at the end of a specified deferral period, subject to the
following terms and conditions:
(i) Award and Restrictions. Satisfaction of an Award of Deferred
Stock shall occur upon expiration of the deferral period specified for
such Deferred Stock by the Committee (or, if permitted by the Committee,
as elected by the Participant). In addition, Deferred Stock shall be
subject to such restrictions (which may include a risk of forfeiture) as
the Committee may impose, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified times (including
based on achievement of performance goals and/or future service
requirements), separately or in combination, in installments or otherwise,
as the Committee may determine. Deferred Stock may be satisfied by
delivery of Stock, cash equal to the Fair Market Value of the specified
number of shares of Stock covered by the Deferred Stock, or a combination
thereof, as determined by the Committee at the date of grant or
thereafter.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the
Award agreement evidencing the Deferred Stock), all Deferred Stock that is
at that time subject to
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deferral (other than a deferral at the election of the Participant) shall
be forfeited; provided that the Committee may provide, by rule or
regulation or in any Award agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to Deferred
Stock shall be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases
waive in whole or in part the forfeiture of Deferred Stock.
(iii) Dividend Equivalents. Unless otherwise determined by the
Committee at date of grant, Dividend Equivalents on the specified number
of shares of Stock covered by an Award of Deferred Stock shall be either
(A) paid with respect to such Deferred Stock at the dividend payment date
in cash or in shares of unrestricted Stock having a Fair Market Value
equal to the amount of such dividends, or (B) deferred with respect to
such Deferred Stock and the amount or value thereof automatically deemed
reinvested in additional Deferred Stock, other Awards or other investment
vehicles, as the Committee shall determine or permit the Participant to
elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash or deliver other property under the Plan or
under other plans or compensatory arrangements, provided that, in the case of
Participants subject to Section 16 of the Exchange Act, the amount of such
grants remains within the discretion of the Committee to the extent necessary to
ensure that acquisitions of Stock or other Awards are exempt from liability
under Section 16(b) of the Exchange Act. Stock or Awards granted hereunder shall
be subject to such other terms as shall be determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to an Eligible Person, entitling the Eligible Person to receive
cash, Stock, other Awards, or other property equal in value to dividends paid
with respect to a specified number of shares of Stock, or other periodic
payments. Dividend Equivalents may be awarded on a free-standing basis or in
connection with another Award. The Committee may provide that Dividend
Equivalents shall be paid or distributed when accrued or shall be deemed to have
been reinvested in additional Stock, Awards, or other investment vehicles, and
subject to such restrictions on transferability and risks of forfeiture, as the
Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Eligible Persons such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Stock, as deemed by the Committee to
be consistent with the purposes of the Plan, including, without limitation,
convertible or exchangeable debt securities, other rights convertible or
exchangeable into Stock, purchase rights for Stock, Awards with value and
payment contingent upon performance of the Company or any other factors
designated by the Committee, and Awards valued by reference to the book value of
Stock or the value of securities of or the performance of specified
subsidiaries. The Committee shall determine the
8
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terms and conditions of such Awards. Stock delivered pursuant to an Award
in the nature of a purchase right granted under this Section 6(h) shall be
purchased for such consideration, paid for at such times, by such methods,
and in such forms, including, without limitation, cash, Stock, other
Awards, or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may also
be granted pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution or exchange for, any other
Award or any award granted under another plan of the Company, any subsidiary, or
any business entity to be acquired by the Company or a subsidiary, or any other
right of an Eligible Person to receive payment from the Company or any
subsidiary. Such additional, tandem, and substitute or exchange Awards may be
granted at any time. If an Award is granted in substitution or exchange for
another Award or award, the Committee shall require the surrender of such other
Award or award in consideration for the grant of the new Award. In addition,
Awards may be granted in lieu of cash compensation, including in lieu of cash
amounts payable under other plans of the Company or any subsidiary, in which the
value of Stock subject to the Award is equivalent in value to the cash
compensation (for example, Deferred Stock or Restricted Stock), or in which the
exercise price, grant price or purchase price of the Award in the nature of a
right that may be exercised is equal to the Fair Market Value of the underlying
Stock minus the value of the cash compensation surrendered (for example, Options
granted with an exercise price "discounted" by the amount of the cash
compensation surrendered).
(b) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided that in no event shall the term of any
Option or SAR exceed a period of ten (10) years from the date of grant.
(c) Form and Timing of Payment Under Awards; Deferrals. Subject to the
terms of the Plan and any applicable Award agreement, payments to be made to or
by the Company or a subsidiary upon the exercise of an Option or other Award or
settlement of an Award may be made in such forms as the Committee shall
determine, including, without limitation, cash, Stock, other Awards or other
property, and may be made in a single payment or transfer, in installments, or
on a deferred basis. The settlement of any Award may be accelerated, and cash
paid in lieu of Stock in connection with such settlement, in the discretion of
the Committee or upon occurrence of one (1) or more specified events (in
addition to a Change in Control). Installment or deferred payments may be
required by the Committee (subject to Section 10(e) of the Plan) or permitted at
the election of the Participant on terms and conditions established by the
Committee. Payments may include, without limitation, provisions for the payment
or crediting of reasonable interest on installment or deferred payments or the
grant or crediting of Dividend Equivalents or other amounts in respect of
installment or deferred payments denominated in Stock.
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(d) Exemptions from Section 16(b) Liability. It is the intent of the
Company that this Plan comply in all respects with applicable provisions of Rule
16b-3 or Rule 16a-1(c)(3) to the extent necessary to ensure that neither the
grant of any Awards to nor other transaction by an Eligible Person who is
subject to Section 16 of the Exchange Act is subject to liability under Section
16(b) thereof (except for transactions acknowledged in writing to be non-exempt
by such Participant). Accordingly, if any provision of this Plan or any Award
agreement does not comply with the requirements of Rule 16b-3 or Rule
16a-1(c)(3) as then applicable to any such transaction, such provision will be
construed or deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such Participant shall
avoid liability under Section 16(b) of the Exchange Act.
(e) Cancellation and Rescission of Awards. Unless the Award agreement
specifies otherwise, the Committee may cancel any unexpired, unpaid, or deferred
Awards at any time if the Participant is not in compliance with all applicable
provisions of the Award agreement and the Plan including the following
conditions:
(i) A Participant shall not render services for any organization or
engage directly or indirectly in any business which, in the judgment of
the Chief Executive Officer of the Company or other senior officer
designated by the Committee, is or becomes competitive with the Company.
For Participants whose employment has terminated, the judgment of the
Chief Executive Officer or other senior officer designated by the
Committee shall be based on the Participant's position and
responsibilities while employed by the Company, the Participant's
post-employment responsibilities and position with the other organization
or business, the extent of past, current and potential competition or
conflict between the Company and the other organization or business, the
effect on the Company's stockholders, customers, suppliers and competitors
of the Participant assuming the post-employment position and such other
considerations as are deemed relevant given the applicable facts and
circumstances. A Participant who has retired shall be free, however, to
purchase as an investment or otherwise, stock or other securities of such
organization or business so long as they are listed upon a recognized
securities exchange or traded over-the-counter, and such investment does
not represent a substantial investment to the Participant or a greater
than five percent equity interest in the organization or business. For
purposes of this Section 7(e)(i), an organization shall be considered to
be competitive with the Company if it is engaged directly or indirectly in
the retail footwear business (including the e-commerce-based retail
footwear business).
(ii) A Participant shall not, without prior written authorization
from the Company, disclose to anyone outside the Company, or use in other
than the Company's business, any confidential information or material
relating to the business of the Company that is acquired by the
Participant either during or after employment with the Company.
10
<PAGE>
(iii) A Participant shall disclose promptly and assign to the
Company all right, title, and interest in any invention or idea,
patentable or not, made or conceived by the Participant during employment
by the Company, relating in any manner to the actual or anticipated
business, research or development work of the Company and shall do
anything reasonably necessary to enable the Company to secure a patent
where appropriate in the United States and in foreign countries.
(iv) Upon exercise, payment or delivery pursuant to an Award, the
Participant shall certify on a form acceptable to the Committee that he or
she is in compliance with the terms and conditions of the Plan. Failure to
comply with the provisions of this Section 7(e) prior to, or during the
six (6) months after, any exercise, payment or delivery pursuant to an
Award shall cause such exercise, payment or delivery to be rescinded. The
Company shall notify the Participant in writing of any such rescission
within two (2) years after such exercise, payment or delivery. Within ten
(10) days after receiving such a notice from the Company, the Participant
shall pay to the Company the amount of any gain realized or payment
received as a result of the rescinded exercise, payment or delivery
pursuant to an Award. Such payment shall be made either in cash or by
returning to the Company the number of shares of Stock that the
Participant received in connection with the rescinded exercise, payment or
delivery.
8. Performance Awards. The right of an Eligible Person to receive a grant
of or a Participant to exercise or receive a grant or settlement of any Award,
and the timing thereof, may be subject to such performance conditions as may be
specified by the Committee. The Committee may use such business criteria and
other measures of performance as it may deem appropriate in establishing any
performance conditions, and may exercise its discretion to reduce or increase
the amounts payable under any Award subject to performance conditions.
9. Change in Control.
(a) Effect of Change in Control. In the event of a Change in Control, as
defined in Section 9(b), the following provisions shall apply unless otherwise
provided in the Award agreement:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested as of the
time of the Change in Control and shall remain exercisable and vested for
the balance of the stated term of such Award without regard to any
termination of employment by the Participant, subject only to applicable
restrictions set forth in Section 10(a) hereof;
(ii) Any optionee who holds an Option shall be entitled to elect,
during the 60-day period immediately following a Change in Control, in
lieu of acquiring the shares of Stock covered by such
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<PAGE>
Option, to receive, and the Company shall be obligated to pay, in cash the
excess of the Change in Control Price over the exercise price of such
Option, multiplied by the number of shares of Stock covered by such
Option; provided, however, that no optionee who is subject to Section 16
of the Exchange Act with respect to the Company at the time of the Change
in Control shall be entitled to make such an election if the acquisition
of the right to make such election would represent a non-exempt purchase
under Section 16(b) of the Exchange Act by such optionee;
(iii) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Plan shall
lapse and such Awards shall be deemed fully vested as of the time of the
Change in Control, except to the extent of any waiver by the Participant
and subject to applicable restrictions set forth in Section 10(a) hereof;
and
(iv) With respect to any outstanding Award subject to achievement of
performance goals and conditions under the Plan, such performance goals
and other conditions will be deemed to be met if and to the extent so
provided by the Committee in the Award agreement relating to such Award.
(b) Definition of Change in Control. A Change in Control shall be deemed
to have occurred upon:
(i) An acquisition by any Person of Beneficial Ownership of the
shares of Common Stock of the Company then outstanding (the "Company
Common Stock Outstanding") or the voting securities of the Company then
outstanding entitled to vote generally in the election of directors (the
"Company Voting Securities Outstanding") if such acquisition of Beneficial
Ownership results in the Person's Beneficially Owning twenty-five percent
(25%) or more of the Company Common Stock Outstanding or twenty-five
percent (25%) or more of the combined voting power of the Company Voting
Securities Outstanding; or
(ii) The approval by the stockholders of the Company of a
reorganization, merger, consolidation, complete liquidation or dissolution
of the Company, sale or disposition of all or substantially all of the
assets of the Company, or similar corporate transaction (in each case
referred to in this Section 9(b) as a "Corporate Transaction") or, if
consummation of such Corporate Transaction is subject, at the time of such
approval by stockholders, to the consent of any government or governmental
agency, the obtaining of such consent (either explicitly or implicitly);
provided, however, that any merger, consolidation, sale, disposition or
other similar transaction to or with one (1) or more Participants or
entities controlled by one (1) or more Participants shall not constitute a
Corporate Transaction in respect of such Participant(s); or
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<PAGE>
(iii) A change in the composition of the Board such that the
individuals who, as of the Effective Date, constitute the Board (such
Board shall be hereinafter referred to as the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board; provided,
however, for purposes of this Section 9(b), that any individual who
becomes a member of the Board subsequent to the Effective Date whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though
such individual were a member of the Incumbent Board; and, provided,
further, that any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A under the Exchange
Act, including any successor to such Rule) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board shall in no event be considered as a member of the Incumbent
Board.
Notwithstanding the provisions set forth in subparagraphs (i) and (ii) of this
Section 9(b), the following shall not constitute a Change in Control for
purposes of the Plan: (1) any acquisition by or consummation of a Corporate
Transaction with any entity that was a subsidiary of the Company immediately
prior to the transaction or an employee benefit plan (or related trust)
sponsored or maintained by the Company or an entity that was a subsidiary of the
Company immediately prior to the transaction if, immediately after such
transaction (including consummation of all related transactions), the surviving
entity is controlled by no Person other than such employee benefit plan (or
related trust) and/or other Persons who controlled the Company immediately prior
to such transaction; or (2) any acquisition or consummation of a Corporate
Transaction following which more than fifty (50%) of, respectively, the shares
then outstanding of common stock of the corporation resulting from such
acquisition or Corporate Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were Beneficial
Owners, respectively, of the Company Common Stock Outstanding and Company Voting
Securities Outstanding immediately prior to such acquisition or Corporate
Transaction in substantially the same proportions as their ownership,
immediately prior to such acquisition or Corporate Transaction, of the Company
Common Stock Outstanding and Company Voting Securities Outstanding, as the case
may be.
(c) Definition of Change in Control Price. The Change in Control Price
means an amount in cash equal to the higher of (i) the amount of cash and fair
market value of property that is the highest price per share paid (including
extraordinary dividends) in any Corporate Transaction triggering the Change in
Control under Section 9(b)(ii) hereof or any liquidation of shares following a
sale of substantially all assets of the Company, or (ii) the highest Fair Market
Value per share at any time during the 60-day period preceding and 60-day period
following the Change in Control.
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10. General Provisions.
(a) Compliance With Legal and Other Requirements. The Company may, to the
extent deemed necessary or advisable by the Committee, postpone the issuance or
delivery of Stock or payment of other benefits under any Award until completion
of such registration or qualification of such Stock or other required action
under any federal or state law, rule or regulation, listing or other required
action with respect to any stock exchange or automated quotation system upon
which the Stock or other Company securities are listed or quoted, or compliance
with any other obligation of the Company, as the Committee may consider
appropriate, and may require any Participant to make such representations,
furnish such information and comply with or be subject to such other conditions
as it may consider appropriate in connection with the issuance or delivery of
Stock or payment of other benefits in compliance with applicable laws, rules,
and regulations, listing requirements, or other obligations. The foregoing
notwithstanding, in connection with a Change in Control, the Company shall take
or cause to be taken no action, and shall undertake or permit to arise no legal
or contractual obligation, that results or would result in any postponement of
the issuance or delivery of Stock or payment of benefits under any Award or the
imposition of any other conditions on such issuance, delivery or payment, to the
extent that such postponement or other condition would represent a greater
burden on a Participant than existed on the 90th day preceding the Change in
Control.
(b) Limits on Transferability; Beneficiaries. No Award or other right or
interest of a Participant under the Plan, including any Award or right which
constitutes a derivative security as generally defined in Rule 16a-1(c) under
the Exchange Act, shall be pledged, hypothecated or otherwise encumbered or
subject to any lien, obligation or liability of such Participant to any party
(other than the Company or a subsidiary), or assigned or transferred by such
Participant otherwise than by will or the laws of descent and distribution or to
a Beneficiary upon the death of a Participant, and such Awards or rights that
may be exercisable shall be exercised during the lifetime of the Participant
only by the Participant or his or her guardian or legal representative, except
that Awards and other rights may be transferred to one or more Beneficiaries or
other transferees during the lifetime of the Participant, and may be exercised
by such transferees in accordance with the terms of such Award, but only if and
to the extent such transfers are permitted by the Committee pursuant to the
express terms of an Award agreement (subject to any terms and conditions which
the Committee may impose thereon). A Beneficiary, transferee, or other person
claiming any rights under the Plan from or through any Participant shall be
subject to all terms and conditions of the Plan and any Award agreement
applicable to such Participant, except as otherwise determined by the Committee,
and to any additional terms and conditions deemed necessary or appropriate by
the Committee.
(c) Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Stock, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, liquidation, dissolution or other
similar corporate transaction or event affects the Stock such that an adjustment
is determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the rights of
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Participants under the Plan, then the Committee shall, in such manner as it may
deem equitable, adjust any or all of (i) the number and kind of shares of Stock
which may be delivered in connection with Awards granted thereafter, (ii) the
number and kind of shares of Stock subject to or deliverable in respect of
outstanding Awards, and (iii) the exercise price, grant price or purchase price
relating to any Award and/or make provision for payment of cash or other
property in respect of any outstanding Award. In addition, the Committee is
authorized to make adjustments in the terms and conditions of, and the criteria
included in, Awards (including performance goals) in recognition of unusual or
nonrecurring events (including, without limitation, events described in the
preceding sentence, as well as acquisitions and dispositions of businesses and
assets) affecting the Company, any subsidiary or any business unit, or the
financial statements of the Company or any subsidiary, or in response to changes
in applicable laws, regulations, accounting principles, tax rates and
regulations or business conditions or in view of the Committee's assessment of
the business strategy of the Company, any subsidiary or business unit thereof,
performance of comparable organizations, economic and business conditions,
personal performance of a Participant, and any other circumstances deemed
relevant.
(d) Taxes. The Company and any subsidiary thereof is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Stock, or any payroll or other payment to
a Participant, amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations,
either on a mandatory or elective basis in the discretion of the Committee.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of the Company's stockholders or any Eligible
Persons or Participants, except that any amendment or alteration to the Plan
shall be subject to the approval of the Company's stockholders not later than
the annual meeting next following such Board action if such stockholder approval
is required by any federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Stock may then be listed or
quoted, and the Board may otherwise, in its discretion, determine to submit
other such changes to the Plan to stockholders for approval; provided that,
without the consent of an affected Participant, no such Board action may
materially and adversely affect the rights of such Participant under any
previously granted and outstanding Award. The Committee may waive any conditions
or rights under, or amend, alter, suspend, discontinue or terminate any Award
theretofore granted and any Award agreement relating thereto, except as
otherwise provided in the Plan; provided that, without the consent of an
affected Participant, no such Committee action may materially and adversely
affect the rights of such Participant under such Award. Notwithstanding anything
in the Plan to the contrary, if any right under this Plan would cause a
transaction to be ineligible for pooling of interest accounting that would, but
for the right hereunder, be eligible for such accounting treatment, the
Committee may modify or adjust the right so that pooling of interest accounting
shall be
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available, including the substitution of Stock having a Fair Market Value equal
to the cash otherwise payable hereunder for the right which caused the
transaction to be ineligible for pooling of interest accounting.
(f) Limitation on Rights Conferred Under Plan. Neither the Plan nor any
action taken hereunder shall be construed as (i) giving any Eligible Person or
Participant the right to continue as an Eligible Person or Participant or in the
employ of the Company or a subsidiary, (ii) interfering in any way with the
right of the Company or a subsidiary to terminate any Eligible Person's or
Participant's employment at any time, (iii) giving an Eligible Person or
Participant any claim to be granted any Award under the Plan or to be treated
uniformly with other Participants and employees, or (iv) conferring on a
Participant any of the rights of a stockholder of the Company unless and until
the Participant is duly issued or transferred shares of Stock in accordance with
the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant or obligation to deliver
Stock pursuant to an Award, nothing contained in the Plan or any Award shall
give any such Participant any rights that are greater than those of a general
creditor of the Company; provided that the Committee may authorize the creation
of trusts and deposit therein cash, Stock, other Awards or other property, or
make other arrangements to meet the Company's obligations under the Plan. Such
trusts or other arrangements shall be consistent with the "unfunded" status of
the Plan unless the Committee otherwise determines with the consent of each
affected Participant. The trustee of such trusts may be authorized to dispose of
trust assets and reinvest the proceeds in alternative investments, subject to
such terms and conditions as the Committee may specify and in accordance with
applicable law.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board or a
committee thereof to adopt such other incentive arrangements as it may deem
desirable.
(i) Payments in the Event of Forfeitures; Fractional Shares. Unless
otherwise determined by the Committee, in the event of a forfeiture of an Award
with respect to which a Participant paid cash or other consideration, the
Participant shall be repaid the amount of such cash or other consideration. No
fractional shares of Stock shall be issued or delivered pursuant to the Plan or
any Award. The Committee shall determine whether cash, other Awards or other
property shall be issued or paid in lieu of such fractional shares or whether
such fractional shares or any rights thereto shall be forfeited or otherwise
eliminated.
(j) Governing Law. The validity, construction and effect of the Plan, any
rules and regulations under the Plan, and any Award agreement shall be
determined in accordance with the laws of the State of New Jersey, without
giving effect to principles of conflicts of laws, and applicable federal law.
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(k) Termination. The Plan shall terminate upon the earlier occurrence of
the following, unless further extended by the Board:
(i) the adoption of a resolution by the Board terminating the Plan;
or
(ii) February 9, 2010.
(l) Plan Effective Date. The Plan has been approved by the Board on, and
is to be effective on and as of, March 10, 2000.
17
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders contains statements which constitute
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this Annual Report as well as the documents incorporated by reference and can be
identified by the use of forward-looking terminology such as "believe,"
"expect," "estimate," "plans," "may," "will," "should," "anticipates," or
similar statements, or the negative thereof or other variations. Such
forward-looking statements include, without limitation, statements relating to
revenue projections, cost savings, capital expenditures, future cash needs,
improvements in infrastructure and operating efficiencies. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks and uncertainties
include, but are not limited to; uncertainties related to consumer demand for
footwear, warmer than expected weather, consumer acceptance of the Company's
merchandise mix, retail locations, product availability and the effect of
competitive products and pricing. Consequently, all of the forward-looking
statements, internal and external, are qualified by these cautionary statements,
and there can be no assurance that the actual results, performance or
achievements will be realized. The information contained in this Annual Report
including information included under this section captioned "Management's
Discussion and Analysis," as well as information contained under the caption
"Risk Factors" in other Company filings with the Securities and Exchange
Commission, identifies important factors that could cause such results,
performance or achievements not to be realized. The Company undertakes no
obligation to update forward-looking statements to reflect events or
circumstances after the date such statements were made.
THE COMPANY
Footstar, Inc. (the "Company") became an independent company in 1996 after the
Board of Directors of Melville Corporation ("Melville") approved the spin-off of
its footwear segments. These businesses were comprised of Meldisco, a leading
operator of leased footwear departments nationwide and abroad; Footaction, a
mall-based branded athletic footwear and apparel chain; and Thom McAn, which has
been reported as discontinued operations. The spin-off was completed with the
distribution (the "Distribution") on October 12, 1996, to Melville shareholders
of record on October 2, 1996, of all the shares of the Company. The Distribution
was made on the basis of .2879 shares of the Company's common stock for every
one share of Melville common stock. A total of 30,533,883 shares of the common
stock were issued.
GENERAL
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto that appear elsewhere in
this Annual Report.
Fiscal Year 1999
In 1999, the Company recorded a net reversal of charges of $4.7 million
consisting of reversals of restructuring charges totaling $12.8 million
partially offset by an asset impairment charge of $8.1 million. During the year,
the Company successfully negotiated with landlords for the early termination of
certain store leases attributable to the 1998 closed store restructuring charge
which allowed the Company to reverse $9.9 million of the original reserve. Also
in 1999, the Company completed the 1997 warehouse and service center
consolidation plan, reversing $2.9 million of restructuring costs previously
reserved.
During 1999, the Company recorded an $8.1 million asset impairment charge in
accordance with SFAS 121. This impairment charge relates entirely to
underperforming Footaction stores in a difficult athletic retail environment.
The charge includes the impairment of fixed assets and goodwill.
Footstar, Inc. and Subsidiary Companies 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company also recorded, in December of 1999, a reversal of $3.8 million
of a reserve balance recorded as a result of the discontinuance of the Thom McAn
chain in 1996.
The Company continued its share repurchase program in 1999 by buying back
3,441,475 shares at an average price per share of $30.38, for an aggregate
purchase amount of $104.6 million. Since becoming a public company in October
1996, through the end of fiscal 1999 the Company has repurchased a total of 10.5
million shares, representing approximately 34 percent of the total shares
outstanding at the time of the spin-off from Melville, now known as CVS
Corporation.
Fiscal Year 1998
The Company announced a non-recurring plan to close approximately 30
underperforming Footaction stores, reconfigure Footaction merchandise
assortments and refine store layouts to place greater emphasis on
better-performing, higher-potential categories and exit Meldisco's Central
European business. In conjunction with these actions, Footstar recorded pre-tax,
non-recurring charges of $34.4 million ($22.7 million after taxes) in the fourth
quarter of fiscal 1998. These non-recurring charges included lease buyouts,
inventory markdowns and asset impairment charges.
In 1998, the Company also successfully consolidated its logistics network
and centralized several accounting operations. Footaction's distribution
operations were relocated from its Dallas facility and combined with those of
Meldisco in the Company's state-of-the-art distribution center located in
Gaffney, South Carolina. Prior to the consolidation, this center only served
Meldisco's distribution needs.
The Company also established a shared accounting operations service center
("Shared Service Center") in the Dallas area, to support both its Meldisco and
Footaction businesses. This Shared Service Center currently supports the
accounts payable, store accounting, inventory management, asset protection and
payroll functions of both businesses.
During 1999, these initiatives have begun to generate considerable annual
cost savings and to reduce the current need for substantial capital expenditures
to expand Footaction's distribution network.
Fiscal Year 1997
In preparation for the distribution center and accounting operations
consolidations in 1998, the Company recorded a one-time, pre-tax charge of $15.7
million ($9.9 million after taxes) in the fourth quarter of 1997.
The Company also reversed $34.0 million ($21.4 million after taxes) of a
reserve balance created as a result of the discontinuance of the Thom McAn chain
in 1996. This reversal was recorded in the fourth quarter of 1997 as
discontinued operations.
RESULTS OF OPERATIONS
Net Sales
Fiscal Year Ended
-----------------------------------
($ in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Company:
Net sales $1,880.0 $1,829.1 $1,794.9
Net sales % change from prior year 2.8% 1.9% 7.3%
Same store sales % change 1.4% (0.4)% 0.3%
Meldisco:
Net sales $1,236.7 $1,174.8 $1,187.2
Net sales % change from prior year 5.3% (1.0)% 2.7%
Same store sales % change 4.0% (0.5)% 1.4%
% of combined net sales 65.8% 64.2% 66.1%
Footaction:
Net sales $ 643.3 $ 654.3 $ 607.7
Net sales % change from prior year (1.7)% 7.7% 17.8%
Same store sales % change (3.4)% (0.1)% (2.5)%
% of combined net sales 34.2% 35.8% 33.9%
- --------------------------------------------------------------------------------
14 Footstar, Inc. and Subsidiary Companies
<PAGE>
Fiscal Year 1999
Consolidated net sales for 1999 increased $50.9 million, or 2.8 percent over
1998. Meldisco reported a net sales increase of 5.3 percent over 1998 and a
comparable stores sales increase of 4.0 percent. Meldisco continued to
experience solid results from the Thom McAn(R) brand with the expansion of the
line this year to include kid's and women's product. Meldisco's sales benefited
as Kmart continued its growth with the acquisition of certain former Caldor
stores, which resulted in the opening of 16 new shoe departments. Kmart also
continued its store remodeling program, converting 578 stores to its Big Kmart
format, ending the year with 84 percent of its 2,177 stores operating in the new
redesigned format. Meldisco's Kmart operations accounted for 64.5 percent and 98
percent of the net sales of the Company and Meldisco, respectively.
Footaction's performance continued to reflect difficult conditions in the
athletic footwear and apparel sector. Total sales in 1999 decreased 1.7 percent
from 1998, with same store sales decreasing 3.4 percent. Footaction opened seven
new stores, expanded 13 stores and closed 35 stores. A highly promotional
environment, weak apparel sales and reduced demand for basketball product all
had a negative impact on sales.
Fiscal Year 1998
Consolidated net sales for 1998 increased 1.9 percent over 1997. Meldisco's
total sales for 1998 decreased 1.0 percent while comparable store sales declined
0.5 percent. Meldisco experienced positive results from the Thom McAn(R) brand
and growth at Kmart while seasonal footwear sales were relatively weak due to
adverse weather conditions. The Kmart growth was supported by an acquisition of
certain former Venture store leases that added a net of 37 high-volume shoe
departments in the fourth quarter. Kmart also continued to convert stores to the
Big K format in 1998. By year-end, the chain had converted 1,231 stores, or 57
percent of its 2,161 stores nationwide. Meldisco's Kmart operations accounted
for 62.3 percent and 96.9 percent of the net sales of the Company and Meldisco,
respectively.
Footaction continued to face a difficult athletic footwear environment.
Total sales in 1998 increased 7.7 percent over 1997 due to a 14 percent
expansion of square footage while comparable store sales declined 0.1 percent.
Footaction opened 42 new stores and expanded 66 stores in 1998.
Weak consumer demand for athletic footwear and apparel, the NBA lockout, a
highly promotional marketplace and non-seasonal weather all had a negative
impact on sales. In December 1998, the Company announced a reorganization plan
to strengthen Footaction and position the chain to better compete in the current
environment. As part of this plan, approximately 30 underperforming stores were
planned to be closed. Expansion plans for 1999 were also scaled back in response
to the over-stored environment.
COSTS AND EXPENSES
Fiscal Year Ended
-------------------------------------
(As a % of net sales) 1999 1998 1997
- --------------------------------------------------------------------------------
Cost of sales(1) 68.9% 69.9% 69.1%
Store operating, selling, general
and administrative expenses 21.1% 21.1% 20.7%
Depreciation and amortization 1.8% 1.8% 1.9%
- --------------------------------------------------------------------------------
1 After non-recurring charges
- --------------------------------------------------------------------------------
COST OF SALES
In fiscal year 1999, consolidated cost of sales decreased 100 basis points. This
cost decrease is primarily attributable to lower markdowns in both divisions. At
Footaction, lower markdowns and lower delivery costs were offset by increased
occupancy costs as a percentage of sales due to lower store productivity.
Meldisco's cost of sales decreased from last year as a result of lower
distribution costs, lower markdowns and improved purchasing.
Footstar, Inc. and Subsidiary Companies 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
In fiscal 1998, cost of sales rose 80 basis points from 1997. This cost
increase was primarily attributable to higher markdowns recorded by Footaction
as a result of the highly promotional business environment and to the under
absorption of occupancy expenses due to lower sales productivity. Excluding the
effect of non-recurring charges representing inventory writedowns of $5.2
million in Footaction and $2.5 million in Meldisco's Central European business,
cost of sales would have been 69.4 percent. Meldisco's cost of sales decreased
from 1997 as a result of better buying, lower distribution costs and improved
inventory management which contributed to lower markdowns.
STORE OPENING, SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
For 1999, store operating, general and administrative expenses were flat, as a
percentage of sales, to last year. Total expenses increased from $386.3 million
in 1998 to $396.9 million in 1999, primarily to support the increased sales
volume. Store expenses increased from last year as a result of increased selling
and occupancy costs at both Meldisco and Footaction.
Store operating, selling, general and administrative expenses for fiscal
1998 versus 1997 increased 40 basis points. This increase was due primarily to
the under absorption of fixed expenses resulting from lower sales productivity.
OPERATING PROFIT
Fiscal Year Ended
-------------------------------
($ in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Operating Profit
Meldisco(1) $133.4 $108.5 $105.0
Footaction(1) 29.0 39.4 53.0
General corporate expenses(1) (8.5) (8.9) (8.5)
Restructuring and asset
impairment (reversals) charges, net (4.7) 34.4 15.7
- --------------------------------------------------------------------------------
Operating profit $158.6 $104.6 $133.8
================================================================================
Operating profit as a % of net sales 8.4% 5.7% 7.5%
- --------------------------------------------------------------------------------
1 Calculated before non-recurring charges
- --------------------------------------------------------------------------------
Operating profit for 1999 increased from 1998 due to improved gross
margins and tight expense control. Meldisco improved operating profit in 1999
through increased gross margin as a result of lower markdowns.
Fiscal 1998 operating profit decreased from 1997 due primarily to the
$34.4 million non-recurring charges relating to the planned closing of
approximately 30 Footaction stores, reconfiguring merchandise assortments at
Footaction and exiting Meldisco's Central European business. Excluding this
charge, operating profit would have been $139.0 million. Also contributing to
the decrease was the decline in Footaction's operating profit resulting from
gross margin pressure due to the highly promotional environment and higher fixed
expenses, primarily rent, that Footaction could not absorb efficiently due to
the lower sales productivity of the existing space. In 1998, Meldisco improved
operating profit through improved gross margins and effective expense control in
spite of lower same store sales due to unseasonable weather.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $151.1 million, $126.5 million
and $145.4 million for 1999, 1998 and 1997, respectively, and continued to serve
as the Company's primary source of liquidity. During the three years ended
January 1, 2000, cash generated from operations exceeded cash requirements for
capital additions and dividends to Kmart. Additionally, the Company has a credit
agreement that provides for a $300 million unsecured revolving credit facility
(the "Credit Facility") to meet its operating and discretionary spending
requirements.
The Company's Credit Facility contains various operating covenants which,
among other things, impose certain limitations on the Company's ability to incur
liens, incur indebtedness, merge, consolidate or declare and make dividend
payments. Under the Credit Facility, the Company is required to comply with
financial covenants relating to ratios of debt and fixed charge coverage. The
Credit Facility may be prepaid or retired by the Company without penalty prior
to the maturity date of September 18, 2000. The Credit Facility can be utilized
for direct borrowings and the issuance of letters of credit.
Fiscal Year Ended
----------------------------------------
($ in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Cash flows provided by
operating activities(1) $151.1 $126.5 $145.4
Working capital 151.3 161.9 285.1
Current ratio 1.66x 1.60x 2.17x
Capital expenditures 23.1 58.6 59.1
- --------------------------------------------------------------------------------
1 Cash flows from operating activities are stated before cash outlays for
minority interest of $38.1 million, $36.3 million and $35.9 million for the
fiscal years 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
16 Footstar, Inc. and Subsidiary Companies
<PAGE>
As of January 1, 2000, there were no loans outstanding under the Credit
Facility.
During February 2000, the Company received and accepted a commitment from
Fleet National Bank for a 3-year, $350 million revolving credit facility. The
Company expects that the credit facility will become effective in the second
quarter of 2000 (see "Subsequent Events" in the "Notes to the Consolidated
Financial Statements").
At the end of the year, the Company had $31.8 million in cash and cash
equivalents and it was debt free, in spite of spending $104.6 million for its
share buyback programs during the 1999 fiscal year. At the end of 1999, working
capital declined from 1998 reflecting lower levels of inventory, accounts
receivable and other current assets, as well as lower levels of cash and cash
equivalents as a result of the share repurchases. The Company's 1999 year-end
current ratio increased over 1998 reflecting a decrease in current liabilities
primarily attributable to the decrease in accrued expenses.
The Company's businesses are seasonal in nature. Peak selling periods
coincide with Christmas, the Easter holiday and the back-to-school season.
Working capital requirements vary with seasonal business volume and inventory
buildups occur prior to peak selling periods. The Company expects that its
current cash, together with cash generated from operations and credit
facilities, will be sufficient to fund its operating expenses, working capital
needs, capital expenditures and projected growth for the foreseeable future. The
Company currently maintains significant borrowing capacity to take advantage of
growth and investment opportunities.
At the end of 1999, accounts receivable balances decreased over 1998
levels due to a decrease in construction allowances at Footaction as a result of
decreased store openings. The decrease in current liabilities in 1999 versus
1998 was due primarily to the utilization, and where appropriate, reversal of
restructuring reserves.
The Company spent $23.1 million in capital expenditures in 1999 primarily
relating to its continuing investment in information systems and the opening,
relocating, or remodeling of Footaction stores. The decline of capital
expenditures in 1999 was attributable to the decrease in the number of
Footaction store openings and expansions during 1999 versus 1998.
For fiscal year 2000, the Company expects capital expenditures to be
approximately $48 million to support the recently completed acquisition of
certain assets of Just For Feet, Inc., information systems infrastructure
projects, e-commerce initiatives and a store kiosk program at Footaction.
Footaction plans to open or convert approximately 30 new stores in 2000.
Year 2000 Update
As described in the Company's public filings with the Securities and Exchange
Commission during 1999, the Company had developed plans to address the possible
exposures related to the impact on its computer systems of the Year 2000. Since
entering the year 2000, the Company has not experienced any significant
disruptions to its business nor is it aware of any significant Year 2000-related
disruptions impacting its third-party suppliers, trading partners and vendors.
The Company will continue to monitor its critical systems over the next several
months but does not anticipate any significant impacts due to Year 2000
exposures from its internal systems as well as from the activities of its
third-party suppliers, trading partners and vendors.
Costs incurred to achieve Year 2000 readiness were charged to expense as
incurred. Such costs totaled approximately $0.6 million in 1999, excluding
payroll costs of the Company's internal personnel. The total amount expended on
the Project from inception was $1.3 million.
Footstar, Inc. and Subsidiary Companies 17
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The integrity and objectivity of the financial statements and related financial
information in this report are the responsibility of the management of the
Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, when necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reliable basis for the preparation of the financial
statements. The system of internal accounting controls is continually reviewed
by management and improved and modified as necessary in response to changing
business conditions and recommendations of the Company's internal auditors and
independent auditors.
The Audit Committee of the Board of Directors, consisting solely of
independent directors, meets periodically with management, internal auditors and
the independent auditors to review matters relating to the Company's financial
reporting, the adequacy of internal accounting controls and the scope and
results of audit work. The internal auditors and independent auditors have free
access to the Audit Committee.
KPMG LLP, certified public accountants, were engaged to audit the
consolidated financial statements of the Company. Their Independent Auditors'
Report, which is based on an audit made in accordance with generally accepted
auditing standards, expresses an opinion as to the fair presentation of these
financial statements.
/s/ J. M. Robinson
- ----------------------------------
J. M. ROBINSON
Chairman of the Board, Chief Executive Officer and President
/s/ Carlos E. Alberini
- ----------------------------------
CARLOS E. ALBERINI
Senior Vice President and Chief Financial Officer
February 8, 2000
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Footstar, Inc.: We have audited
the accompanying consolidated balance sheets of Footstar, Inc. and Subsidiary
Companies as of January 1, 2000 and January 2, 1999, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
January 1, 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Footstar,
Inc. and Subsidiary Companies as of January 1, 2000 and January 2, 1999, and the
results of its operations and its cash flows for each of the years in the
three-year period ended January 1, 2000 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
- -----------------------------
KPMG LLP
Short Hills, New Jersey
February 8, 2000
18 Footstar, Inc. and Subsidiary Companies
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Fiscal Years Ended
--------------------------------------------
(dollars in millions, except per share amounts) Jan. 1, 2000 Jan. 2, 1999 Jan. 3, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,880.0 $1,829.1 $1,794.9
Cost of sales 1,294.5 1,278.0 1,240.8
- ------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 585.5 551.1 554.1
Store operating, selling, general and administrative expenses 396.9 386.3 371.1
Depreciation and amortization 34.7 33.5 33.5
Restructuring and asset impairment (reversals) charges, net (4.7) 26.7 15.7
- ------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 158.6 104.6 133.8
Interest expense (income), net 2.3 0.6 (2.1)
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS 156.3 104.0 135.9
Provision for income taxes 48.3 32.4 41.3
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS 108.0 71.6 94.6
Minority interests in net income 44.6 38.1 36.0
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS 63.4 33.5 58.6
Income on disposal of discontinued operations,
net of income taxes of $1.4 and $12.6 2.4 -- 21.4
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 65.8 $ 33.5 $ 80.0
- ------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
Basic 21.6 25.2 29.3
==================================================================================================================
Diluted 21.9 25.4 29.4
==================================================================================================================
EARNINGS PER SHARE
Basic:
Income from continuing operations $ 2.94 $ 1.33 $ 2.00
Income from discontinued operations 0.11 -- 0.73
==================================================================================================================
Net income $ 3.05 $ 1.33 $ 2.73
- ------------------------------------------------------------------------------------------------------------------
Diluted:
Income from continuing operations $ 2.89 $ 1.32 $ 1.99
Income from discontinued operations 0.11 -- 0.73
==================================================================================================================
Net income $ 3.00 $ 1.32 $ 2.72
==================================================================================================================
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Footstar, Inc. and Subsidiary Companies 19
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts) Jan. 1, 2000 Jan. 2, 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 31.8 $ 49.1
Accounts receivable, net 42.8 52.0
Inventories 271.3 280.2
Prepaid expenses and other current
assets 34.9 49.4
- --------------------------------------------------------------------------------
Total current assets 380.8 430.7
Property and equipment, net 198.7 217.3
Goodwill, deferred charges and other
noncurrent assets 32.7 37.4
- --------------------------------------------------------------------------------
Total assets $ 612.2 $ 685.4
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 100.5 $ 112.3
Accrued expenses 117.8 143.8
Income taxes payable 11.2 12.7
- --------------------------------------------------------------------------------
Total current liabilities 229.5 268.8
Other long-term liabilities 40.5 45.5
Minority interests in subsidiaries 74.3 67.8
- --------------------------------------------------------------------------------
Total liabilities $ 344.3 $ 382.1
================================================================================
Shareholders' equity:
Common stock $.01 par value: 100,000,000
shares authorized, 30,634,283 and
30,591,575 shares issued $ 0.3 $ 0.3
Additional paid-in capital 338.6 335.5
Accumulated other comprehensive income (0.1) (0.2)
Treasury stock: 10,510,300 and 7,068,825
shares, at cost, respectively (305.4) (200.8)
Unearned compensation (5.2) (5.4)
Retained earnings 239.7 173.9
- --------------------------------------------------------------------------------
Total shareholders' equity 267.9 303.3
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 612.2 $ 685.4
================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
20 Footstar, Inc. and Subsidiary Companies
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Treasury Shares Additional Unearned Compre-
------------------ --------------- Paid-in Compen- Retained hensive
(in millions, except share amounts) Shares Amount Stock Amount Capital sation Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF
DECEMBER 28, 1996 30,533,883 $0.3 -- $ -- $330.0 $(6.1) $ 60.4 $(0.4) $ 384.2
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- -- -- 80.0 -- 80.0
Common stock
incentive plans 24,224 -- -- -- 3.6 1.0 -- -- 4.6
Purchase of treasury shares -- -- (2,685,900) (66.3) -- -- -- -- (66.3)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
JANUARY 3, 1998 30,558,107 $0.3 (2,685,900) $ (66.3) $333.6 $(5.1) $140.4 $(0.4) $ 402.5
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- -- -- 33.5 -- 33.5
Foreign currency
translation adjustment,
net of tax -- -- -- -- -- -- -- 0.2 0.2
--------
Total comprehensive
income 33.7
Common stock
incentive plans 33,468 -- -- -- 1.9 (0.3) -- -- 1.6
Purchase of treasury shares -- -- (4,382,925) (134.5) -- -- -- -- (134.5)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
JANUARY 2, 1999 30,591,575 $0.3 (7,068,825) $(200.8) $335.5 $(5.4) $173.9 $(0.2) $ 303.3
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- -- -- 65.8 -- 65.8
Foreign currency
translation adjustment,
net of tax -- -- -- -- -- -- -- 0.1 0.1
--------
Total comprehensive
income 65.9
Common stock
incentive plans 42,708 -- -- -- 3.1 0.2 -- -- 3.3
Purchase of treasury shares -- -- (3,441,475) (104.6) -- -- -- -- (104.6)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
JANUARY 1, 2000 30,634,283 $0.3 (10,510,300) $(305.4) $338.6 $(5.2) $239.7 $(0.1) $ 267.9
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Footstar, Inc. and Subsidiary Companies 21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(dollars in millions) Jan. 1, 2000 Jan. 2, 1999 Jan. 3, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 65.8 $ 33.5 $ 80.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of discontinued operations (3.8) -- (34.0)
Restructuring and asset impairment (reversals) charges, net (4.7) 34.4 15.7
Minority interests in net income 44.6 38.1 36.0
Depreciation and amortization 34.7 33.5 33.5
Loss on disposal of fixed assets 2.3 4.6 3.9
Deferred income taxes 14.5 (2.3) 18.9
Stock incentive plans 3.1 2.2 1.9
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 9.2 (8.1) 33.7
Decrease (increase) in inventories 8.8 (3.4) (2.6)
Decrease (increase) in prepaid expenses, deferred charges
and other assets 2.5 1.1 (3.5)
(Decrease) increase in accounts payable and accrued expenses (19.8) 13.9 (30.6)
(Decrease) in federal income taxes payable and other liabilities (6.1) (21.0) (7.5)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 151.1 126.5 145.4
- --------------------------------------------------------------------------------------------------------------------
Cash flows (used in) investing activities:
Additions to property and equipment (23.1) (58.6) (59.1)
Investment in HoopsTV.com (3.0) -- --
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (26.1) (58.6) (59.1)
- --------------------------------------------------------------------------------------------------------------------
Cash flows (used in) from financing activities:
Payments on stock incentive plans (0.3) (0.8) --
Dividends paid to minority interests (38.1) (36.3) (35.9)
Proceeds of common stock from minority interest 0.5 0.8 --
Treasury stock acquired (104.6) (134.5) (66.3)
Other 0.2 (0.2) 3.5
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (142.3) (171.0) (98.7)
- --------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (17.3) (103.1) (12.4)
Cash and cash equivalents, beginning of year 49.1 152.2 164.6
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 31.8 $ 49.1 $152.2
====================================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
22 Footstar, Inc. and Subsidiary Companies
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except share and per share amounts)
THE COMPANY
Footstar, Inc. (the "Company") became an independent company in 1996 after the
Board of Directors of Melville Corporation ("Melville") approved the spin-off of
its footwear operations. These businesses are comprised of Meldisco, a leading
operator of leased footwear departments nationwide; Footaction, a mall-based
branded athletic footwear and apparel chain; and Thom McAn, which has been
reported as discontinued operations. The spin-off was completed with the
distribution (the "Distribution") on October 12, 1996, to Melville shareholders
of record on October 2, 1996, of all the shares of the Company. The Distribution
was made on the basis of .2879 shares of the Company's common stock for every
one share of Melville Corporation common stock. A total of 30,533,883 shares of
the Company's common stock was issued and began trading on the New York Stock
Exchange on a when-issued basis on September 25, 1996.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of all
subsidiary companies. The minority interests represent the 49 percent
participation of Kmart Corporation ("Kmart") in the ownership of substantially
all retail subsidiaries of Meldisco formed or to be formed from July 1967 until
July 1, 2012 for the purpose of operating leased shoe departments in Kmart
stores. Interdivisional balances and transactions between the entities have been
eliminated. The accompanying financial statements include the consolidated
results of operations, assets and liabilities of the Company for the 52-week
year ended January 1, 2000, the 52-week year ended January 2, 1999 and the
53-week year ended January 3, 1998. For simplicity of presentation, these
financial statements are referred to as consolidated financial statements
herein.
Basis of Presentation
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of three
months or less and are stated at cost that approximates their fair market value.
The Company's cash management program utilizes zero balance accounts. Accord-
ingly, all book overdraft balances have been reclassified to current
liabilities.
Inventories
Inventories are finished goods, consisting of merchandise purchased from
domestic and foreign vendors and are carried at the lower of cost or market
value, determined by the retail inventory method on a first-in, first-out (FIFO)
basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are computed on a straight-line basis, generally over the
estimated useful lives of the assets or, when applicable, the life of the lease,
whichever is shorter. Capitalized software costs are amortized on a
straight-line basis over their estimated useful lives. Maintenance and repairs
are charged directly to expense as incurred. Major renewals or replacements are
capitalized after making the necessary adjustment on the asset and accumulated
depreciation accounts of the items renewed or replaced.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to discounted future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by comparing projected
individual store discounted cash flows over the lease term to the asset carrying
values.
Deferred Charges
Deferred charges are amortized on a straight-line basis, generally over the
remaining life of the charge.
Footstar, Inc. and Subsidiary Companies 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
The excess of acquisition costs over the fair value of net assets acquired is
amortized on a straight-line basis over 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
discounted future operating cash flows of the acquired operation. The assessment
of the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
Revenue Recognition
Revenues from retail sales are recognized at the time of sale.
Store Opening and Closing Costs
New store opening costs are charged to expense as incurred. In the event a store
is closed before its lease has expired, the estimated lease obligation or the
expected amount necessary to eliminate such obligation, less estimated sublease
rental income, is provided for in the year of closing.
Advertising Costs
The Company charges production costs of advertising to expense the first time
the advertising takes place. Advertising costs, as a component of store
operating, selling, general and administrative expenses, were $40.9 million in
1999, $40.6 million in 1998 and $39.6 million in 1997.
Income Taxes
In 1996, the Company and Melville entered into a Tax Disaffiliation Agreement.
Under the Agreement, the Company is generally responsible for any of its tax
obligations with respect to periods prior to the spin-off, determined as if on a
separate company basis. For periods subsequent to October 12, 1996, the Company
files its own federal and state tax returns.
The Company determines its deferred tax provision under the liability
method, whereby deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
Foreign Currency Translation
The Company translates foreign currency financial statements by translating
balance sheet accounts at the exchange rate as of the balance sheet date and
income statement accounts at the average rate for the year. Adjustments
resulting from the translation of financial statements are reflected as a
component of comprehensive income. Translation gains and losses were
insignificant in all periods.
Postretirement Benefits
The Company provides a defined benefit health care plan for substantially all
retirees who meet certain eligibility requirements, including providing 10 years
of service prior to January 1, 1993. The annual cost of postretirement benefits
is funded as it arises and the cost is recognized over an employee's term of
service to the Company.
Stock-Based Compensation Plans
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected not to adopt the fair value-based method of accounting for
its stock-based compensation plans, but continues to apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25").
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share," which the Company adopted in fiscal 1997. SFAS
No. 128 replaced the presentation of primary earnings per share (EPS) with basic
EPS. Basic EPS is computed by dividing net income available for common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by net income available to common shareholders
divided by the weighted average shares outstanding after giving effect to the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted.
The following reconciles shares outstanding at the beginning of the year
to average shares outstanding used to compute basic and diluted earnings per
share.
1999 1998 1997
- --------------------------------------------------------------------------------
Shares outstanding at beginning of year 23.5 27.9 30.5
Weighted average shares repurchased (2.1) (2.8) (1.2)
Contingently issuable shares 0.2 0.1 --
- --------------------------------------------------------------------------------
Average shares outstanding - basic 21.6 25.2 29.3
Dilutive effect of stock options 0.3 0.2 0.1
- --------------------------------------------------------------------------------
Average shares outstanding - diluted 21.9 25.4 29.4
================================================================================
24 Footstar, Inc. and Subsidiary Companies
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair value of certain financial instruments. Cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses are
reflected in the consolidated financial statements at carrying value, which
approximates fair value due to the short-term nature of these instruments.
Comprehensive Income
On January 4, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the consolidated statements of shareholders'
equity and comprehensive income. The statement requires only additional
disclosures in the notes to the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements of prior years to conform to the 1999 presentation.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
The net reversal of charges of $4.7 million ($2.9 million after taxes) for 1999
includes a $9.9 million ($6.6 million after taxes) reversal of lease obligations
in connection with the 1998 closed store restructuring charge, a $2.9 million
($1.7 million after taxes) reversal of transition costs related to the 1997
warehouse and service center consolidation plan, partially offset by $8.1
million ($5.4 million after taxes) for asset impairment charges as a result of
the 1999 asset impairment review of Footaction stores.
The fixed asset and goodwill impairment charge associated with
underperforming Footaction stores of $8.1 million represented the amount
necessary to write-down the carrying values of the fixed assets and goodwill for
the respective stores based on the Company's best estimate as of January 1, 2000
of those stores' future discounted cash flows.
The asset impairment test was applied to all stores with negative
contribution and cash flows. The amount of the impairment charge was calculated
as the difference between the carrying amount of the assets and each store's
estimated future discounted cash flows. The asset impairment charge was recorded
as a reduction of goodwill and fixed assets, principally representing fixtures
and leasehold improvements.
During 1998, the Company had approved a restructuring plan that included
the closing of approximately 30 underperforming Footaction stores, the
reconfiguring of Footaction merchandise assortments, the refinement of store
layouts and the exiting of Meldisco's Central European business. These charges
included lease buyouts, inventory markdowns and asset impairment charges
relating to planned store closings and asset impairment charges relating to
other stores.
In connection with these actions, the Company recorded a one-time, pre-tax
charge of $34.4 million in 1998.
The following table displays a rollforward of the activity and the
significant components of the restructuring, asset impairment and other charges,
and the reserves remaining as of January 1, 2000 and January 2, 1999:
Remaining Remaining
Deductions Jan. 2, Deductions Jan. 1,
Recorded 1998 1999 1999 2000
- --------------------------------------------------------------------------------
Lease obligations
and fixed asset
write-offs for
Footaction store
closings $20.0 $ -- $20.0 $(14.2) $5.8
Impaired assets,
principally
fixtures and
leasehold
improvements 6.4 (6.4) -- -- --
Store footwear and
apparel inventory
markdowns 5.2 -- 5.2 (5.2) --
Europe inventory
markdown 2.5 -- 2.5 (2.5) --
Lease obligations and
fixed asset write-offs
for Europe closings 0.3 -- 0.3 (0.3) --
- --------------------------------------------------------------------------------
$34.4 $(6.4) $28.0 $(22.2) $5.8
================================================================================
During 1998, the inventory reduction charge totaling $7.7 million was
recorded in cost of sales while the remaining $26.7 million was recorded in
operating expenses under restructuring and asset impairment charges. Of the
$28.0 million reserve remaining at January 2, 1999, $7.7 million was recorded as
a reserve reducing inventory and $20 million of Footaction lease obligations and
fixed asset write-offs were a component of
Footstar, Inc. and Subsidiary Companies 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accrued expenses. The $0.3 million of Europe lease obligations and fixed asset
write-offs were reserved for in long-term liabilities. The asset impairment
charge of $6.4 million was recorded as a reduction of property and equipment.
The fixed asset write-offs and asset impairments represent principally fixtures
and leasehold improvements.
In connection with the Footaction store closings, the Company established
a reserve for future lease payments anticipating sublease activity and lease
buyouts based on historical experience. Costs are being charged against the
reserve as incurred. On average, the remaining lease term for the stores to be
closed at the time the charge was taken was approximately five years. Given the
estimated payout term of these reserves, they will be assessed periodically to
determine their adequacy.
The fixed assets written off could not readily be used at other store
locations nor was there a ready market outside the Company to determine fair
value; the assets are expected to be discarded at the time of closing.
Accordingly, the asset write-off charge recorded represented the carrying value
of the assets at the time of approval for the restructuring plan. Depreciation
for those assets was discontinued. Operating results for the individual stores
were included in operations through the closing dates of the respective stores.
The deductions to the reserve balance during 1999 included a reversal of
lease obligations previously reserved for totaling $9.9 million, payments of
lease obligations and fixed asset write-offs for closed stores totaling $4.6
million and store inventory markdowns taken totaling $7.7 million.
During 1999, the Company completed the exit of Meldisco's Central European
business by winding down the business and selling the remaining inventory to an
outside party. Net sales for this business amounted to $4.7 million, $11.5
million and $11.8 million in 1999, 1998 and 1997, respectively. Consolidated net
losses after intercompany eliminations amounted to $0.3 million in 1999, $1.9
million in 1998 and $0.1 million in 1997. The 1998 net loss is before the
non-recurring charge of $2.8 million.
During November 1997, in support of its long-term strategy, the Company
announced plans to consolidate its logistics networks and centralize certain
accounting functions. In connection with these actions, the Company recorded a
one-time, pre-tax charge of $15.7 million comprised of fixed asset write-offs of
$9.0 million, lease obligations and transition costs of $4.3 million, and
severance and other employee benefits of $2.4 million in 1997. The Company
ceased operating its Dallas distribution center's warehouse in 1998 and
completely exited the distribution center during the first quarter of 1999 as
part of this plan.
The significant components of the restructuring and asset impairment
charges recorded in the fourth quarter of 1997, and the reserves remaining as of
January 1, 2000, January 2, 1999 and January 3, 1998, were as follows:
Remaining Remaining Remaining
Jan. 3, Deductions Jan. 2, Deductions Jan. 1,
1998 1998 1999 1999 2000
- --------------------------------------------------------------------------------
Lease obligations
and transition costs
related to warehouse
and service center $4.3 $(0.3) $4.0 $(4.0) $ --
Severance and other
employee benefit
vesting 2.4 (2.4) -- -- --
- --------------------------------------------------------------------------------
$6.7 $(2.7) $4.0 $(4.0) $ --
================================================================================
The deductions to the reserve balance during 1998 included payments of
lease obligations and transition costs totaling $0.3 million and payments of
severance and other employee benefits totaling $2.4 million. The deductions to
the reserve balance during 1999 included both a reversal of lease obligations
and transition costs previously reserved for totaling $2.9 million and payments
of lease obligations and transition costs totaling $1.1 million.
DISCONTINUED OPERATIONS
On June 3, 1996, Melville announced a plan to convert approximately 100 Thom
McAn stores to Footaction stores and to exit the Thom McAn business. This plan
was primarily completed by the end of fiscal 1997. In connection with this plan,
the Company recorded a pre-tax charge of $85.0 million in the first quarter of
1996. Accordingly, the results of operations for the Thom McAn segment have been
classified as discontinued operations for all periods presented in the
consolidated statements of operations.
26 Footstar, Inc. and Subsidiary Companies
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997 and 1999, the Company reversed $34.0 million ($21.4 million
after taxes) and $3.8 million ($2.4 million after taxes), respectively, of the
$85.0 million ($53.6 million after taxes) reserve created as a result of the
discontinuation of the Thom McAn chain in 1996. The reversal of the discontinued
operations reserve reflected revisions of lease obligations and contingencies
based on the favorable settlement of leases and litigation.
The remaining discontinued operations reserve of $3.0 million is a
component of accrued expenses and is principally for lease obligations and
environmental contingencies.
ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
1999 1998
- ----------------------------------------------------------------------------
Due from licensors, principally Kmart $28.5 $28.4
Other 16.7 24.8
- ----------------------------------------------------------------------------
45.2 53.2
Less: Allowance for doubtful accounts 2.4 1.2
- ----------------------------------------------------------------------------
Total $42.8 $52.0
============================================================================
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
1999 1998
- ----------------------------------------------------------------------------
Deferred income taxes $21.6 $35.9
Other 13.3 13.5
- ----------------------------------------------------------------------------
Total $34.9 $49.4
============================================================================
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Useful Lives (in years) 1999 1998
- ----------------------------------------------------------------------------
Land $ 9.9 $ 8.9
Buildings and improvements 10-40 3.6 12.1
Equipment and furniture 5-10 213.1 211.0
Leasehold improvements 10 83.3 75.3
- ----------------------------------------------------------------------------
309.9 307.3
Less: Accumulated depreciation
and amortization 111.2 90.0
- ----------------------------------------------------------------------------
Total $198.7 $217.3
============================================================================
ACCRUED EXPENSES
Accrued expenses consisted of the following:
1999 1998
- ----------------------------------------------------------------------------
Rent $ 36.2 $ 28.1
Taxes other than federal income taxes 13.0 14.4
Salaries and compensated absences 16.0 12.0
Reserve for loss on disposal of discontinued operations 3.0 6.0
Capital expenditures 1.1 4.7
Restructuring reserve 5.8 24.0
Other 42.7 54.6
- ----------------------------------------------------------------------------
Total $117.8 $143.8
============================================================================
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
1999 1998
- ----------------------------------------------------------------------------
Employee benefit costs $40.5 $40.4
Restructuring reserves -- 0.3
Other -- 4.8
- ----------------------------------------------------------------------------
Total $40.5 $45.5
============================================================================
LONG-TERM DEBT
The Company maintains a $300 million unsecured revolving Credit Facility to
support general corporate borrowing requirements. As of January 1, 2000 and
January 2, 1999, respectively, there were no loans outstanding under the Credit
Facility. Interest on all borrowings is determined based upon several
alternative rates available under the Credit Facility.
The Company's Credit Facility contains various operating covenants which,
among other things, impose certain limitations on the Company's ability to incur
liens, incur indebtedness, merge, consolidate or declare and make dividend
payments. Under the Credit Facility, the Company is required to comply with
financial covenants relating to ratios of debt and fixed charge coverage. The
Credit Facility may be prepaid or retired by the Company without penalty prior
to the maturity date of September 18, 2000. On August 3, 1999, the Company
announced an amendment to its Credit Facility that eased a certain restrictive
covenant that had limited its ability to repurchase stock. This amendment gave
the Company the flexibility to complete its fourth share repurchase program of
2,210,000 shares and participate in future share repurchase programs.
Footstar, Inc. and Subsidiary Companies 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES
The Company and its subsidiaries lease retail stores and warehouse and office
facilities over periods generally ranging from 5 to 10 years. The Company also
leases autos, computer hardware and various equipment for shorter periods.
Net rental expense for all operating leases for each of the years in the
three-year period ended January 1, 2000 was as follows:
1999 1998 1997
- ----------------------------------------------------------------------------
Minimum rentals $ 67.3 $ 61.9 $ 47.9
Contingent rentals 135.1 124.0 125.3
- ----------------------------------------------------------------------------
Total $202.4 $185.9 $173.2
============================================================================
Contingent rent expense represents rentals assessed under the Master
Agreement with Kmart which are principally based on sales. Accordingly, the
future minimum rental payments disclosed below exclude future rents to Kmart.
At January 1, 2000, the future minimum rental payments under operating
leases, excluding lease obligations for closed stores, were as follows:
Operating Leases
- -----------------------------------------------------------------------------
2000 $ 64.3
2001 62.1
2002 59.7
2003 57.5
2004 53.5
Thereafter 136.3
- -----------------------------------------------------------------------------
Total $433.4
=============================================================================
INCOME TAXES
The provision for income taxes was comprised of the following:
1999 1998 1997
- ----------------------------------------------------------------------------
Federal $38.2 $25.2 $32.2
State 10.1 7.2 9.1
- ----------------------------------------------------------------------------
Total $48.3 $32.4 $41.3
============================================================================
The provision for income taxes for continuing operations includes a net
deferred tax charge of $10.2 million for January 1, 2000 and net deferred tax
benefits of $9.4 million and $9.3 million for January 2, 1999 and January 3,
1998, respectively.
Reconciliations of the effective tax rates to the U.S. statutory income
tax rate are as follows:
1999 1998 1997
- ----------------------------------------------------------------------------
Effective tax rate 30.9% 31.1% 30.4%
State income taxes, net of
federal tax benefit (4.2) (4.5) (4.3)
51% owned subsidiaries excluded
from the parent's consolidated
federal income tax return 8.0 11.7 8.6
Other 0.3 (3.3) 0.3
- ----------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
============================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities for the fiscal years were as
follows:
1999 1998
- ----------------------------------------------------------------------------
Deferred tax assets:
Restructuring reserves $ 3.5 $12.0
Inventories 9.9 14.9
Postretirement benefits 12.7 13.4
Employee benefits 9.4 9.9
Other 5.0 3.6
- ----------------------------------------------------------------------------
Total deferred tax assets 40.5 53.8
- ----------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment 14.4 13.6
Other 3.2 2.8
- ----------------------------------------------------------------------------
Total deferred tax liabilities 17.6 16.4
- ----------------------------------------------------------------------------
Net deferred tax assets $22.9 $37.4
============================================================================
The Company has recorded $1.3 million and $1.5 million of the net deferred
tax asset as a noncurrent asset at January 1, 2000 and January 2, 1999,
respectively.
Based on the Company's historical taxable income and projected future
taxable income over the periods in which deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
net deferred tax assets.
STOCK INCENTIVE PLANS
As of October 12, 1996, the Company adopted the 1996 Incentive Compensation Plan
(the "Plan"). The Plan is designed to motivate and reward officers and key
employees for outstanding service, by providing awards that are linked to the
28 Footstar, Inc. and Subsidiary Companies
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's performance and the creation of shareholder value. Under the Plan, a
maximum of 3,100,000 shares, plus 10 percent of the number of any shares newly
issued by the Company (excluding issuances under the Plan or any other
compensation or benefit plan of the Company) may be issued in connection with
stock options, restricted stock, deferred stock and other stock-based awards.
Under the Plan, employee stock options may not be awarded with an exercise
price less than fair market value on the date of grant. Generally, options are
exercisable in installments of 20 percent beginning one year from date of grant
and expire ten years after the grant date, provided the optionee continues to be
employed by the Company.
The following table provides information relating to the status of, and
changes in, employee stock options granted:
1999 1998
------------------- ----------------------
Employee Average Employee Average
Stock Option Stock Option
Options Price Options Price
- --------------------------------------------------- ----------------------
Outstanding at
beginning of year 1,195,580 $26 971,370 $24
Granted 512,471 26 305,600 31
Cancelled (48,150) 28 (52,550) 25
Exercised (29,660) 24 (28,840) 22
- --------------------------------------------------- ----------------------
Outstanding at end of year 1,630,241 $26 1,195,580 $26
- --------------------------------------------------- ----------------------
Exercisable at end of year 486,966 344,451
================================================================================
Deferred restricted stock units were granted to certain officers and key
employees. The units vest five years from date of grant, provided the executive
continues to be employed by the Company.
The following table provides information relating to the status of, and
changes in, deferred restricted stock units:
1999 1998
---------------------- ------------------------
Deferred Average Deferred Average
Restricted Unit Restricted Unit
Stock Units Price Stock Units Price
- --------------------------------------------------- ------------------------
Outstanding at
beginning of year 171,348 $22 156,297 $21
Granted 33,776 30 15,051 27
- --------------------------------------------------- ------------------------
Outstanding at end of year 205,124 $23 171,348 $22
- --------------------------------------------------------------------------------
The Company recorded $1.0 million and $0.4 million as unearned
compensation in 1999 and 1998, respectively, and has amortized $0.9 million,
$0.7 million and $0.7 million in 1999, 1998 and 1997, respectively.
The Plan also permits the granting of deferred stock units, representing
rights to receive cash and/or common stock of the Company based upon certain
performance criteria generally over a three-year performance period.
Compensation expense related to grants under these provisions is based on the
current market price of the Company's common stock at the date of grant and the
extent to which performance criteria are being met.
The following table provides information relating to the status of, and
changes in, these deferred stock units:
1999 1998
------------------- ---------------------
Deferred Average Deferred Average
Stock Unit Stock Unit
Units Price Units Price
- --------------------------------------------------- ---------------------
Outstanding at
beginning of year 27,902 $29 -- $--
Granted 12,218 25 27,902 29
- --------------------------------------------------- ---------------------
Outstanding at end of year 40,120 $28 27,902 $29
- --------------------------------------------------------------------------------
The Company recorded $0.8 million, $2.1 million and $1.1 million as
unearned compensation in 1999, 1998 and 1997, respectively, and amortized $0.7
million, $1.1 million and $1.2 million in 1999, 1998 and 1997, respectively. The
Company paid $0.3 million and $0.8 million in cash relating to the plan in 1999
and 1998, respectively.
The Plan also offers incentive opportunities based upon performance
results against pre-established earnings targets and other selected measures for
each fiscal year. Plan awards may be paid exclusively in cash or partially in
deferred stock with a matching Footstar grant. The elective deferrals and
matched amounts are deferred for a five-year period. The amount deferred will be
paid in shares.
The following table provides information relating to the status of, and
changes in, deferred shares:
1999 1998
------------------- ---------------------
Average Average
Deferred Share Deferred Share
Shares Price Shares Price
- --------------------------------------------------- ----------------------
Outstanding at
beginning of year 153,014 $28 122,520 $26
Granted 65,996 25 40,507 29
Cancelled (4,777) 27 (3,337) 28
Shares issued (9,553) 27 (6,676) 28
- --------------------------------------------------- ----------------------
Outstanding at end of year 204,680 $27 153,014 $28
- --------------------------------------------------------------------------------
Footstar, Inc. and Subsidiary Companies 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded $0.6 million and $0.4 million as unearned
compensation in 1999 and 1998, respectively, and has amortized $0.2 million,
$0.4 million and $0.2 million in 1999, 1998 and 1997, respectively.
Shares available for grant under the Plan totaled 940,262 and 1,508,780 as
of January 1, 2000 and January 2, 1999, respectively.
Effective on the Distribution, the Company adopted the 1996 Non-Employee
Director Stock Plan (the "Director Plan"). A total of 200,000 shares of Company
common stock are reserved and available for issuance under the Director Plan.
Any person who becomes an eligible director receives an initial option to
purchase 2,000 shares of common stock. All options are awarded with an exercise
price equal to the fair market value of the common stock on the date of grant.
Generally, options are exercisable in installments of 20 percent beginning one
year from date of grant and expire ten years after grant date, provided the
non-employee director is still a member of the board.
The following table provides information relating to the status of, and
changes in, options granted:
1999 1998
------------------ ----------------
Average Average
Stock Option Stock Option
Options Price Options Price
- ----------------------------------------------- ----------------
Outstanding at
beginning of year 14,000 $24 12,000 $21
Granted -- -- 2,000 44
- ----------------------------------------------- ----------------
Outstanding at end of year 14,000 $24 14,000 $24
- ----------------------------------------------- ----------------
Options exercisable
at end of year 7,200 4,400
- -------------------------------------------------------------------
The Director Plan also provides for automatic grants of 2,000 stock units
("Stock Units") to each non-employee director on the date of each annual meeting
of the Company's shareholders. Each Stock Unit represents the right to receive
one share of Company common stock at the end of a specified period. Fifty
percent of such Stock Units vest six months and a day after the grant date,
provided the non-employee director has not ceased to serve as a director for any
reason other than death, disability or retirement. The remaining fifty percent
of such Stock Units will be paid upon the later of ceasing to be a director or
attaining age 65, provided that settlement of such Stock Units shall be
accelerated in the event of death, disability or a change in control.
The following table provides information relating to the status of, and
changes in, stock units:
1999 1998
--------------- -----------------
Average Average
Stock Unit Stock Unit
Units Price Units Price
- ---------------------------------------------- ----------------
Outstanding at
beginning of year 28,000 $30 18,000 $22
Granted 12,000 35 12,000 44
Shares issued (6,000) 34 (2,000) 44
- ---------------------------------------------- ----------------
Outstanding at end of year 34,000 $31 28,000 $30
- -------------------------------------------------------------------
Shares available for grant under the Director's Plan totaled 131,426 and
146,525 as of January 1, 2000 and January 2, 1999, respectively.
The Company applies APB No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock and
performance-based awards. Had compensation cost for the Company's other stock
option plans been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under SFAS
No. 123, the Company's net income and earnings per share would have been as
follows:
1999 1998
- -----------------------------------------------------------------
Net income:
Reported $65.8 $33.5
As adjusted for SFAS 123 61.3 30.2
- -----------------------------------------------------------------
Earnings per share:
Basic:
Reported $3.05 $1.33
As adjusted for SFAS 123 2.84 1.20
Diluted:
Reported 3.00 1.32
As adjusted for SFAS 123 2.80 1.19
- -----------------------------------------------------------------
30 Footstar, Inc. and Subsidiary Companies
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted during 1999, 1998 and 1997 was $12.55,
$13.87 and $12.96 respectively. The fair value of each option granted was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
1999 1998 1997
- -----------------------------------------------------------------
Expected volatility 40.0% 35.0% 35.0%
Expected life in years 6.0 6.0 6.1
Risk-free interest rate 5.4% 5.5% 5.6%
Assumed forfeiture rate 0.0% 0.0% 0.0%
- -----------------------------------------------------------------
During 1997, the Company adopted an Associate Stock Purchase Plan to
provide substantially all employees who have completed one year of service an
opportunity to purchase shares of its common stock through payroll deductions,
up to 10 percent of eligible compensation. Quarterly, participant account
balances are used to purchase shares of stock at 85 percent of the lower of the
fair market value of the shares at the beginning of the offering period or the
purchase date. A total of 1,600,000 shares are available for purchase under the
plan. There were 82,185, 56,199 and 19,486 shares purchased under this plan in
fiscal 1999, 1998 and 1997, respectively.
TREASURY STOCK
From May 1997 until the end of fiscal year 1999, the Company's Board of
Directors has authorized four stock repurchase programs of approximately
3,050,000, 3,000,000, 2,450,000 and 2,210,000 shares. As of January 1, 2000, an
aggregate of 10,510,300 shares for an aggregate purchase amount of $305.4
million, or 34 percent of the total common stock outstanding prior to the
repurchase programs, have been repurchased in the open market. The treasury
shares may be used for the exercise of employee stock options and for other
corporate purposes. The following table shows a rollforward of the common stock
repurchased during the two years ended January 1, 2000:
Common Average Aggregate
Stock Purchase Purchase
Repurchased Price Amount
- -----------------------------------------------------------------
Total shares repurchased
at January 3, 1998 2,685,900 $24.68 $ 66.3
- -----------------------------------------------------------------
1998 Activity:
Program 1 364,100 27.24 9.9
Program 2 3,000,000 34.32 103.0
Program 3 1,018,825 21.24 21.6
- -----------------------------------------------------------------
Total 1998 Activity 4,382,925 30.69 134.5
- -----------------------------------------------------------------
Total shares repurchased
at January 2, 1999 7,068,825 $28.41 $200.8
- -----------------------------------------------------------------
1999 Activity:
Program 3 1,431,175 24.42 35.0
Program 4 2,010,300 34.63 69.6
- -----------------------------------------------------------------
Total 1999 Activity 3,441,475 30.38 104.6
- -----------------------------------------------------------------
Total shares repurchased
at January 1, 2000 10,510,300 $29.05 $305.4
- -----------------------------------------------------------------
401(K) PROFIT SHARING PLAN
The Company has a qualified 401(k) Profit Sharing Plan available to full-time
employees who meet the plan's eligibility requirements. This plan, which is also
a defined contribution plan, contains a profit sharing component, with
tax-deferred contributions to each employee based on certain performance
criteria, and also permits employees to make contributions up to the maximum
limits allowed by the Internal Revenue Code Section 401(d). Under the 401(k)
profit sharing component, the Company matches a portion of the employee's
contribution under a pre-determined formula based on the level of contribution
and years of vesting service.
Contributions to the plan by the Company for both profit sharing and
matching of employee contributions were approximately $2.8 million, $2.6 million
and $3.3 million for the fiscal years 1999, 1998 and 1997, respectively.
POSTRETIREMENT BENEFITS
On January 4, 1998, the Company adopted SFAS No. 132, "Employer's Disclosure
about Pension and Other Postretirement Benefits." SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the method of accounting for such plans.
Footstar, Inc. and Subsidiary Companies 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.
The following table represents the Company's change in benefit obligations:
1999 1998
- --------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $17.8 $24.3
Service cost 0.3 0.2
Interest cost 1.2 1.4
Amendments (1.0) (4.1)
Actuarial loss/(gain) 0.1 (2.4)
Net benefits paid (net of participant contributions) (1.0) (1.6)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $17.4 $17.8
Unrecognized net actuarial gain 6.4 6.8
Unrecognized prior service cost 9.4 9.4
- --------------------------------------------------------------------------------
Accrued benefit cost $33.2 $34.0
===============================================================================
1999 1998
- --------------------------------------------------------------------------------
Weighted-average assumptions as of December 31
Discount rate 7.5% 6.75%
- --------------------------------------------------------------------------------
For measurement purposes, a 9.0 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.0 percent for 2007 and remain at that level
thereafter.
1999 1998
- --------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 0.3 $ 0.2
Interest cost 1.2 1.4
Amortization of prior service cost (1.0) (0.5)
Recognized net actuarial gain (0.3) (0.4)
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 0.2 $ 0.7
================================================================================
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
- ------------------------------------------------------------------------------
Effect on total of service and
interest cost components 0.2 (0.2)
Effect on postretirement benefit obligation 2.1 (1.8)
- ------------------------------------------------------------------------------
MELDISCO'S RELATIONSHIP WITH KMART
For the fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998,
Meldisco's Kmart operations represented 98.0 percent, 96.9 percent and 96.2
percent of Meldisco's net sales, respectively. These operations represented 64.5
percent, 62.3 percent and 63.6 percent, respectively, of the Company's
consolidated net sales during the same periods. The business relationship
between Meldisco and Kmart is very significant to the Company, and the loss of
Meldisco's Kmart operations would have a material adverse effect on the Company.
The Company's arrangement with Kmart is governed by a Master Agreement
effective as of July 1, 1995 and amended as of March 25, 1996. The Master
Agreement provides the Company with the non-transferable exclusive right and
license to operate a footwear department in each applicable Kmart store. The
initial term of the Master Agreement expires July 1, 2012 and is renewable
thereafter for 15-year terms, unless terminated earlier as provided in the
Master Agreement.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has an unfunded Supplemental Executive Retirement Plan ("SERP").
Expense related to the SERP was $1.1 million, $0.9 million and $0.6 million in
fiscal years 1999, 1998 and 1997, respectively.
COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
SHAREHOLDER RIGHTS PLAN
On March 9, 1999, the Company's Board of Directors approved the adoption of a
Shareholder Rights Plan. Under this plan, Preferred Stock Purchase "Rights" will
be distributed as a dividend to shareholders at the rate of one Right for each
share of common stock outstanding. Initially, the Rights are not exercisable.
Upon a "trigger event," each Right entitles its holder (other than the holder
who caused the trigger event) to purchase at an "Exercise Price" of $100 the
equivalent of that number of shares of common stock of the Company worth twice
the Exercise Price.
32 Footstar, Inc. and Subsidiary Companies
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Rights will be exercisable only if a person or group that is not
currently a 15 percent shareholder acquires beneficial ownership of 15 percent
or more of the Company's common stock. The Rights will not be triggered by a
"Qualifying Offer" that provides that all shareholders will receive the same
"fair" consideration and is for all outstanding shares not owned by the offerer,
among other things. In addition, stock repurchases by the Company do not
constitute a trigger event under any circumstances. Shareholders who owned more
than 15 percent of the stock at the time the plan was implemented or increase
their ownership percentage as a result of the Company's share repurchases are
"grandfathered" under this plan as long as they do not purchase additional
shares.
The Company will be entitled to redeem the Rights at a price of $0.01 per
Right at any time prior to the earlier of the trigger or expiration of the
Rights.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for income taxes and interest for the three years ended January 1,
2000, January 2, 1999 and January 3, 1998 were as follows:
1999 1998 1997
- -----------------------------------------------------------------
Income taxes $37.8 $43.6 $32.4
Interest $ 3.6 $ 3.2 $ 1.8
- -----------------------------------------------------------------
MARKET INFORMATION
The Company's common stock is listed on the New York Stock Exchange under the
trading symbol "FTS." Information concerning the 1999 and 1998 market prices of
the Company's common stock is set forth in the table below:
Stock Trading Price
-----------------------------------
1999 1998
-------------- ----------------
Quarter High Low High Low
- ---------------------------------------------- ----------------
First $32.63 $23.19 $38.00 $25.13
Second 41.00 29.81 48.63 37.50
Third 39.19 31.94 48.13 22.69
Fourth 36.13 26.63 29.75 19.31
- ------------------------------------------------------------------
As of January 1, 2000, the closing price of the Company's stock was
$30.50. As of year-end 1999, there were 3,691 shareholders of record.
SUBSEQUENT EVENTS - UNAUDITED
Just For Feet Acquisition
On March 7, 2000, the Company announced the completion of its acquisition of
certain assets of Just For Feet, Inc. The total cash consideration paid was
$66.8 million and is subject to further post closing adjustments. The Company
acquired the Just For Feet(R) name, 79 superstores, 23 specialty retail stores,
the Internet business and the corporate headquarters building in a transaction
to be accounted for as a purchase.
Credit Facility Commitment
During February 2000, the Company received and accepted a commitment from Fleet
National Bank for a 3-year, $350 million revolving credit facility. The Company
is currently negotiating the structure and terms of the facility but expects it
to contain alternative borrowing options for committed loans, including LIBOR
loans and competitive bid loans. The Company expects that the credit facility
will become effective in the second quarter of 2000.
Fifth Stock Repurchase Program
During January 2000, the Company completed its fourth stock repurchase program.
On February 13, 2000, the Board of Directors authorized the Company's fifth
stock repurchase program enabling the Company to purchase from time to time in
the open market up to 10% of the shares of common stock outstanding, or
approximately 2.0 million shares.
2000 Equity Incentive Plan
On March 16, 2000, the Board of Directors adopted the 2000 Equity Incentive Plan
(the "Incentive Plan"). The Incentive Plan is intended to attract, retain, and
reward high-quality employees, providing awards that are linked to the Company's
stock performance. The Incentive Plan is designed to qualify as a "broad based
plan" under Rule 312 of the listing rules of the New York Stock Exchange. Under
the Incentive Plan, a maximum of 2 million shares may be issued in connection
with stock options, restricted stock, deferred stock and other stock-based
awards.
Footstar, Inc. and Subsidiary Companies 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION
The Company is a retailer conducting business through retail stores in two
business segments: Meldisco in discount footwear and Footaction in branded
athletic footwear and apparel. Information about operations for each of these
segments is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MELDISCO:
Net sales $1,236.7 $1,174.8 $1,187.2
Operating profit (2),(3) 133.4 105.7 105.0
Identifiable assets at year-end 319.7 330.3 342.5
Depreciation and amortization 14.0 13.8 13.5
Additions to property and equipment 6.3 11.3 7.9
FOOTACTION:
Net sales 643.3 654.3 607.7
Operating profit (1),(2),(3) 32.3 7.8 41.2
Identifiable assets at year-end 238.5 298.1 275.0
Depreciation and amortization 20.5 19.6 19.5
Additions to property and equipment 8.6 42.0 44.3
CORPORATE:
General corporate expense (1),(2),(3) (7.1) (8.9) (12.4)
Identifiable assets at year-end 46.1 46.6 139.3
Depreciation and amortization 0.2 0.1 0.5
Additions to property and equipment 8.2 5.3 6.9
CONSOLIDATED:
Net sales 1,880.0 1,829.1 1,794.9
Operating profit (1),(2),(3) 158.6 104.6 133.8
Interest expense (income), net 2.3 0.6 (2.1)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interests $ 156.3 $ 104.0 $ 135.9
===============================================================================================================================
Identifiable assets at year-end 604.3 675.0 756.8
Assets of discontinued operations 7.9 10.4 14.2
- -------------------------------------------------------------------------------------------------------------------------------
Total assets at year-end $ 612.2 $ 685.4 $ 771.0
===============================================================================================================================
Depreciation and amortization 34.7 33.5 33.5
Total additions to property and equipment $ 23.1 $ 58.6 $ 59.1
===============================================================================================================================
</TABLE>
Operating profit is defined as total revenues less operating expenses.
Identifiable assets include those assets directly related to each segment's
operations.
(1) 1999 includes special charges recorded in connection with the Company's
restructuring and other one-time charges. Excluding these charges,
operating profit for the fiscal year-ended 1999 would have been $29.0
million for Footaction, ($8.5) million for Corporate and $153.9 million
for the consolidated Company.
(2) 1998 includes special charges recorded in connection with the Company's
restructuring and other one-time charges. Excluding these charges,
operating profit for the fiscal year-ended 1998 would have been $108.5
million for Meldisco, $39.4 million for Footaction, ($8.9) million for
Corporate and $139.0 million for the consolidated Company.
(3) 1997 includes special charges recorded in connection with the Company's
restructuring. Excluding these charges, operating profit for the fiscal
year-ended 1997 would have been $105.0 million for Meldisco, $53.0 million
for Footaction, ($8.5) million for Corporate and $149.5 million for the
consolidated Company.
- --------------------------------------------------------------------------------
34 Footstar, Inc. and Subsidiary Companies
<PAGE>
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
Summary data for the years ended January 1, 2000 and January 2, 1999 is as
follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter(1) Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES
1999 $439.1 $ 479.0 $470.2 $491.7 $1,880.0
1998 400.9 462.6 472.6 493.0 1,829.1
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT
1999 $124.2 $ 157.7 $147.9 $155.7 $ 585.5
1998 114.7 149.7 145.9 140.8 551.1
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
1999 $ 8.5 $ 18.5 $ 18.0 $ 18.4 $ 63.4
1998 5.3 17.4 18.4 (7.6) 33.5
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME
1999 $ 8.5 $ 18.5 $ 18.0 $ 20.8 $ 65.8
1998 5.3 17.4 18.4 (7.6) 33.5
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE (2)
1999 Basic
Continuing operations $ 0.38 $ 0.84 $ 0.85 $ 0.89 $ 2.94
Discontinued operations -- -- -- 0.12 0.11
Net income 0.38 0.84 0.85 1.01 3.05
1999 Diluted
Continuing operations $ 0.38 $ 0.83 $ 0.83 $ 0.88 $ 2.89
Discontinued operations -- -- -- 0.11 0.11
Net income 0.38 0.83 0.83 0.99 3.00
1998 Basic
Continuing operations $ 0.20 $ 0.71 $ 0.75 $(0.31) $ 1.33
Discontinued operations -- -- -- -- --
Net income 0.20 0.71 0.75 (0.31) 1.33
1998 Diluted
Continuing operations $ 0.20 $ 0.69 $ 0.74 $ (0.31) $ 1.32
Discontinued operations -- -- -- -- --
Net income 0.20 0.69 0.74 (0.31) 1.32
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1999, the Company reversed restructuring and asset impairment charges
of $4.7 million, net relating to both the reversal of lease obligations in
connection with the 1998 closed store restructuring charge and the
reversal of transition costs related to the 1997 warehouse and service
center consolidation plan, partially offset by asset impairment charges as
a result of the 1999 asset impairment review of Footaction stores. In the
fourth quarter of 1998, the Company had announced plans to close
approximately 30 underperforming Footaction stores, reconfigure Footaction
merchandise assortments, refine store layouts and exit Meldisco's Central
European business. In connection with these actions, the Company recorded
a pre-tax charge of $34.4 million.
(2) Computations for each quarter or other period are independent. Earnings
per share data would neither be restated retroactively nor adjusted
currently to obtain quarterly (or other period) amounts to equal the
amount computed for the year to date due to fluctuations in stock price
and the application of the treasury stock method for determining the
dilutive effect of stock options.
- --------------------------------------------------------------------------------
Footstar, Inc. and Subsidiary Companies 35
<PAGE>
FIVE-YEAR HISTORICAL FINANCIAL SUMMARY
<TABLE>
<CAPTION>
($ in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $1,880.0 $1,829.1 $1,794.9 $1,672.3 $1,615.2
Cost of sales 1,294.5 1,278.0 1,240.8 1,144.7 1,124.5
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 585.5 551.1 554.1 527.6 490.7
Store operating, selling, general and
administrative expenses 396.9 386.3 371.1 355.5 343.0
Depreciation and amortization 34.7 33.5 33.5 24.8 20.0
Restructuring and asset impairment charges (4.7) 26.7 15.7 -- 23.7
- ---------------------------------------------------------------------------------------------------------------------------------
Operating profit(1) 158.6 104.6 133.8 147.3 104.0
Interest expense (income), net 2.3 0.6 (2.1) (14.4) (21.1)
Provision for income taxes 48.3 32.4 41.3 54.6 37.3
Minority interests in net income 44.6 38.1 36.0 36.0 38.4
Earnings (loss) from discontinued operations, net(2) 2.4 -- 21.4 (52.8) (26.8)
Cumulative effect of changes in accounting principle, net(3) -- -- -- -- (3.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 65.8 $ 33.5 $ 80.0 $ 18.3 $ 18.7
=================================================================================================================================
BALANCE SHEET DATA
Current assets:
Cash and cash equivalents $ 31.8 $ 49.1 $ 152.2 $ 164.6 $ 26.3
Due from parent and other divisions -- -- -- -- 710.8
Inventories 271.3 280.2 284.5 281.9 298.1
Other 77.7 101.4 92.3 137.6 94.6
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 380.8 430.7 529.0 584.1 1,129.8
Property and equipment, net 198.7 217.3 201.9 197.0 195.1
Other assets 32.7 37.4 40.1 44.9 63.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets 612.2 685.4 771.0 826.0 1,388.2
- ---------------------------------------------------------------------------------------------------------------------------------
Current liabilities 229.5 268.8 243.9 324.7 219.0
Other liabilities 40.5 45.5 59.5 52.1 61.6
Minority interests in subsidiaries 74.3 67.8 65.1 65.0 93.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 344.3 382.1 368.5 441.8 374.4
- ---------------------------------------------------------------------------------------------------------------------------------
Divisional equity investment -- -- -- -- 1,013.8
Shareholders' equity 267.9 303.3 402.5 384.2 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 612.2 $ 685.4 $ 771.0 $ 826.0 $1,388.2
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts in 1999, 1998, 1997 and 1995 reflect certain non-recurring special
charges. Operating profit in 1999, 1998, 1997 and 1995, excluding the
effect of these charges would have been $153.9 million, $139.0 million,
$149.5 million and $139.3 million, respectively. See "Management's
Discussion and Analysis."
(2) The Company recorded a pre-tax charge of $85.0 million in the first
quarter of 1996 for the discontinuation of Thom McAn. The Company reversed
$3.8 million ($2.4 million after taxes) and $34.0 million ($21.4 million
after taxes) of this pre-tax charge in 1999 and 1997, respectively.
(3) The charge in 1995 was for the write-off, effective January 1, 1995, of
internally developed software costs that had previously been capitalized.
- --------------------------------------------------------------------------------
Exhibit 21.1
SUBSIDIARIES OF FOOTSTAR, INC.
The registrant is the direct parent corporation of Footstar Center, Inc.,
a California corporation which owns all of the outstanding shares of Footstar
Corporation, a Texas corporation which owns all of the outstanding shares of
Footaction Center, Inc., a New York Corporation, Meldisco H. C., Inc., a
Minnesota corporation, Feet Center, Inc., an Arizona corporation, Melville
Mexico H.C., Inc., a Minnesota corporation, Melville Atlmex H.C., Inc., a
Minnesota corporation and Melville Foreign, Inc., a Minnesota corporation.
Footaction Center, Inc. owns all of the outstanding shares of Rosedale
Open Country, Inc., a Minnesota corporation, which owns all of the outstanding
shares of Mall of America Fan Club, Inc. and Apache-Minnesota Thom McAn, Inc.
which owns all of the outstanding shares of Pheasant Thom McAn, Inc., a New
Hampshire corporation. Mall of America Fan Club, Inc. owns all of the
outstanding shares of approximately 420 corporations which operate specialty
retail stores under the Footaction trade name located in the United States and
Puerto Rico selling brand name athletic footwear and related apparel for men,
women and children. Pheasant Thom McAn, Inc. owns all of the outstanding shares
of approximately 110 corporations which operate specialty retail stores under
the Footaction trade name located in the United States, Puerto Rico and the U.S.
Virgin Islands selling brand name athletic footwear and related apparel for men,
women and children.
Meldisco H.C., Inc. owns all of the outstanding shares of Miles Shoes
Meldisco Lakewood, Colorado, Inc., a Colorado corporation which owns 51% of the
capital stock of approximately 2170 corporations and 100% of the common stock of
approximately 1060 corporations which were formed to operate leased footwear
departments in Kmart or Rite Aid Drug Stores all located in the United States,
Puerto Rico, the U.S. Virgin Islands or Guam. Miles Shoes Meldisco Lakewood
Colorado, Inc., also owns 100% of the common stock of Meldisco Europe, Inc., a
New York corporation which was involved in the registrant's former operations in
Hungary, Poland, the Czech Republic and Slovakia.
Feet Center, Inc. owns all of the outstanding shares of Nevada Feet, Inc.,
a Nevada corporation which owns all of the outstanding shares of Feet of
Colorado, Inc., a Colorado corporation which owns all of the outstanding shares
of approximately 65 corporations which operate large format retail footwear
stores under the Just For Feet trade name located in the United States.
Melville Foreign, Inc., a Minnesota corporation directly or indirectly
owns all of the outstanding shares of approximately 4 foreign subsidiaries
formerly involved in the registrant's former operations in Hungary, Poland, the
Czech Republic and Slovakia.
Several of the subsidiaries referred to in this Exhibit have not yet
opened their stores for business and several no longer operate any stores. All
of the subsidiaries referred to herein are included in the consolidated
financial statements of the registrant.
The names of other subsidiaries are omitted as, considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
EXHIBIT 23.1
Independent Auditors' Consent
To the Board of Directors and Shareholders of Footstar, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-20731 and No. 33-30011) on Form S-8 of Footstar, Inc. of our report dated
February 8, 2000, relating to the consolidated balance sheets of Footstar, Inc.
and Subsidiary Companies as of January 1, 2000 and January 1, 1999 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended January 1, 2000 and the related schedule, which report appears or
is incorporated by reference in the January 1, 2000 annual report on Form 10-K
of Footstar, Inc.
/s/ KPMG LLP
Short Hills, NJ
March 31, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 31,800
<SECURITIES> 0
<RECEIVABLES> 45,200
<ALLOWANCES> 2,400
<INVENTORY> 271,300
<CURRENT-ASSETS> 380,800
<PP&E> 309,900
<DEPRECIATION> 111,200
<TOTAL-ASSETS> 612,200
<CURRENT-LIABILITIES> 229,500
<BONDS> 0
0
0
<COMMON> 300
<OTHER-SE> 267,600
<TOTAL-LIABILITY-AND-EQUITY> 612,200
<SALES> 1,880,000
<TOTAL-REVENUES> 1,880,000
<CGS> 1,294,500
<TOTAL-COSTS> 1,294,500
<OTHER-EXPENSES> 426,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,300
<INCOME-PRETAX> 156,300
<INCOME-TAX> 48,300
<INCOME-CONTINUING> 108,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,800
<EPS-BASIC> 3.05
<EPS-DILUTED> 3.00
</TABLE>
