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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
Page 1 of 2 page Cover Page
1
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.
Page 2 of 2-page Cover Page
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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
4
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
5
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.
6
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
---- ---- ----
Footwear 83% 79% 78%
Apparel 12% 16% 16%
Accessories 5% 5% 6%
---- ---- ----
100% 100% 100%
==== ==== ====
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
7
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
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
(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
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
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
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)
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions (1) End of Year
----------- ------- -------- -------------- -----------
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
==== ==== ===== ====
(1) Write-offs, net of recoveries
F-2
18
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
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