-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pp0nNJTd+Jf5ySy11GhUSCJ9d5A0j51ut8LM93NGLpunZc1rjUmRWDUhHiuFfOPj lZtyvsTtz4KmkbL9ibtlKw== 0000891092-02-000968.txt : 20020813 0000891092-02-000968.hdr.sgml : 20020813 20020813172402 ACCESSION NUMBER: 0000891092-02-000968 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020629 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOTSTAR INC CENTRAL INDEX KEY: 0001011308 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 223439443 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11681 FILM NUMBER: 02730784 BUSINESS ADDRESS: STREET 1: 933 MACARTHUR BLVD CITY: MAHWAH STATE: NJ ZIP: 07430 BUSINESS PHONE: 2019342000 MAIL ADDRESS: STREET 1: 933 MACARTHUR BOULEVARD CITY: MAHWAH STATE: NJ ZIP: 07430 FORMER COMPANY: FORMER CONFORMED NAME: FOOTWEAR GROUP INC DATE OF NAME CHANGE: 19960327 10-Q 1 e13720_10q.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 29, 2002 ------------- Commission File Number 1-11681 ------- FOOTSTAR, INC. -------------- (Exact Name of Registrant as specified in its charter) Delaware 22-3439443 - -------- ---------- (State or other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 1 Crosfield Avenue West Nyack, New York 10994 --------------------------------------------- (Address of principal executive offices) (Zip Code) (845) 727-6500 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Number of shares outstanding of the issuer's Common Stock: Class Outstanding as of June 29, 2002 ----- ------------------------------- Common Stock, $.01 par value 20,160,426 INDEX ----- Part I. - Financial Information Page No. -------- Item 1. Financial Statements Condensed Consolidated Statements of Operations - Three and Six Months Ended June 29, 2002 and June 30, 2001 3 Condensed Consolidated Balance Sheets - June 29, 2002, December 29, 2001 and June 30, 2001 4 Condensed Consolidated Statements of Cash Flows - For Six Months Ended June 29, 2002 and June 30, 2001 5 Notes to Condensed Consolidated Financial Statements 6-17 Independent Auditors' Review Report 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19-26 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27-28 Part II. - Other Information Item 4. Submission of Matters to a Vote of Security Holders 29 Item 6. Exhibits and Reports on Form 8-K 30 2 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (tabular amounts in millions, except per share data)
Three Months Ended Six Months Ended ------------------------ -------------------------- June 29, June 30, June 29, June 30, 2002 2001 2002 2001 -------- -------- -------- -------- Net sales $ 593.1 $ 649.0 $1,146.9 $1,166.1 Cost of sales 408.9 443.4 808.7 813.4 ------- ------- -------- -------- Gross profit 184.2 205.6 338.2 352.7 Store operating, selling, general and administrative expenses 132.2 140.7 275.2 275.1 Bad debt expense (Note 2) 9.2 -- 9.2 -- Depreciation and amortization 11.1 12.6 21.2 24.5 Restructuring, asset impairment and other charges (reversals), net 8.5 -- 15.0 -- ------- ------- -------- -------- Operating profit 23.2 52.3 17.6 53.1 Interest expense, net 2.9 5.3 5.0 8.6 ------- ------- -------- -------- Income before income taxes, minority interest and cumulative effect of a change in accounting principle 20.3 47.0 12.6 44.5 Income tax provision 4.6 14.1 2.3 13.3 ------- ------- -------- -------- Income before minority interests and cumulative effect of a change in accounting principle 15.7 32.9 10.3 31.2 Minority interests in net income 16.3 16.8 17.1 19.2 ------- ------- -------- -------- (Loss) income before cumulative effect of a change in accounting principle (0.6) 16.1 (6.8) 12.0 Cumulative effect of a change in accounting principle, net of income taxes of $6.8 million -- -- 18.2 -- ------- ------- -------- -------- Net (loss) income $ (0.6) $ 16.1 $ (25.0) $ 12.0 ======= ======= ======== ======== Weighted average shares outstanding: Basic: 20.4 20.2 20.4 20.2 ======= ======= ======== ======== Diluted: 20.4 20.7 20.4 20.8 ======= ======= ======== ======== (Loss) earnings per share: Basic: (Loss) income before cumulative effect of a change in accounting principle $ (0.03) $ 0.80 $ (0.33) $ 0.59 Cumulative effect of a change in accounting principle, net of taxes -- -- (0.89) -- ------- ------- -------- -------- Net (loss) income $ (0.03) $ 0.80 $ (1.22) $ 0.59 ======= ======= ======== ======== Diluted: (Loss) income before cumulative effect of a change in accounting principle $ (0.03) $ 0.78 $ (0.33) $ 0.58 Cumulative effect of a change in accounting principle, net of taxes -- -- (0.89) -- ------- ------- -------- -------- Net (loss) income $ (0.03) $ 0.78 $ (1.22) $ 0.58 ======= ======= ======== ======== (Loss) earnings per share excluding amortization of goodwill and intangible asset with indefinite useful life: Basic: $ (0.03) $ 0.82 $ (1.22) $ 0.64 ======= ======= ======== ========= Diluted: $ (0.03) $ 0.80 $ (1.22) $ 0.63 ======= ======= ======== =========
See accompanying notes to the condensed consolidated financial statements. 3 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (tabular amounts in millions, except for share data)
June 29, December 29, June 30, 2002 2001 2001 -------- ------------ -------- ASSETS Current Assets: Cash and cash equivalents $ 9.4 $ 12.4 $ 16.5 Accounts receivable, net 51.0 69.6 59.4 Inventories 426.2 368.5 498.6 Prepaid expenses and other current assets 62.4 61.2 34.6 -------- -------- -------- Total current assets 549.0 511.7 609.1 Property and equipment, net 273.5 258.6 263.8 Goodwill, net 17.4 42.4 36.8 Intangible assets, net 22.6 23.6 24.4 Deferred charges and other non-current assets 30.4 29.7 21.2 -------- -------- -------- Total assets $ 892.9 $ 866.0 $ 955.3 ======== ======== ======== LIABILITIES and SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 140.5 $ 108.8 $ 161.3 Accrued expenses 133.6 144.0 101.6 Income taxes payable 10.5 12.2 0.2 Notes payable 213.8 -- -- -------- -------- -------- Total current liabilities 498.4 265.0 263.1 Long-term debt -- 146.9 234.7 Other long-term liabilities 63.4 70.7 66.7 Minority interests in subsidiaries 47.8 75.7 49.8 -------- -------- -------- Total liabilities $ 609.6 $ 558.3 $ 614.3 -------- -------- -------- Shareholders' Equity: Common stock $.0l par value: 100,000,000 shares authorized, 30,871,995, 30,770,372 and 30,636,884 shares issued 0.3 0.3 0.3 Additional paid-in capital 347.4 347.3 347.4 Accumulated other comprehensive loss (1.0) (0.1) (0.1) Treasury stock: 10,711,569, 10,711,569 and 10,734,241 shares at cost (310.6) (310.6) (311.2) Unearned compensation (4.5) (5.8) (7.5) Retained earnings 251.7 276.6 312.1 -------- -------- -------- Total shareholders' equity $ 283.3 $ 307.7 $ 341.0 -------- -------- -------- Total liabilities and shareholders' equity $ 892.9 $ 866.0 $ 955.3 ======== ======== ========
See accompanying notes to the condensed consolidated financial statements. 4 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (tabular amounts in millions)
Six Months Ended ---------------------------------- June 29, 2002 June 30, 2001 ------------- ------------- Cash flows from operating activities: Net (loss) income (25.0) 12.0 Adjustments to reconcile: Restructuring and asset impairment (reversals) charges, net 35.7 -- Bad debt expense (Note 2) 9.2 -- Minority interests in net income 17.2 20.0 Depreciation and amortization 21.2 24.4 Impairment of goodwill 25.0 -- Loss on disposal of fixed assets 0.3 1.3 Stock incentive plans (2.3) 5.8 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable, net 9.4 (5.2) Increase in inventories (78.4) (108.3) Increase in prepaids, deferred charges and other assets (4.4) (5.7) Increase in accounts payable and accrued expenses 7.5 34.0 Decrease in federal income taxes payable and other liabilities (1.3) (5.0) ------- -------- Net cash provided by (used in) operating activities $ 14.1 $ (26.7) ------- -------- Cash flows (used in) provided by investing activities: Acquisition of footwear assets of J. Baker -- (59.0) Additions to property and equipment (43.0) (20.7) Proceeds from sale of building 3.1 -- ------- -------- Net cash used in investing activities (39.9) (79.7) ------- -------- Cash flows (used in) provided by financing activities: Dividends paid to minority interests (45.0) (51.8) Treasury stock issued -- 1.4 Payment on stock incentive plans (0.6) (0.5) Net proceeds from notes payable 66.9 160.7 Payments on capital leases (0.5) (0.4) Payments on mortgage note (0.4) (0.3) Other 2.4 (0.5) ------- -------- Net cash provided by financing activities 22.8 108.6 ------- -------- Net (decrease) increase in cash and cash equivalents (3.0) 2.2 Cash and cash equivalents, beginning of period 12.4 14.3 ------- -------- Cash and cash equivalents, end of period $ 9.4 $ 16.5 ======= ========
See accompanying notes to the condensed consolidated financial statements. 5 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions) 1. Basis of Presentation In the opinion of Footstar, Inc. (the "Company"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of June 29, 2002 and the results of operations and cash flows for the three-month and six-month periods ended June 29, 2002 and June 30, 2001, respectively. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Because of the seasonality of the specialty retailing business, operating results of the Company on a quarterly basis may not be indicative of operating results for the full year or any other period. The condensed consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements of the Company included in the Company's 2001 Annual Report on Form 10-K. 2. Subsequent Events - Ames Bankruptcy Proceeding During the third quarter of fiscal year 2001, Ames, whose footwear department license was acquired by Footstar in the J. Baker acquisition, filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Footstar subsidiaries currently operate licensed footwear departments within each of Ames' 332 stores. The Footstar subsidiaries own all footwear inventories and certain fixtures within these departments, and are responsible for staffing the departments. As a result of Ames' performance and events subsequent to June 29, 2002, it is now expected that Ames will cease operations and close all of its stores over the next few months. Footstar management is currently in the process of developing plans to liquidate the inventory in the related footwear departments and exit those operations. The Company recorded a charge in the second quarter ended June 29, 2002, of $9.2 million as an allowance for bad debt in connection with its pre-petition receivables from Ames. In addition to these charges, the Company now also expects to incur certain closing and severance related costs, along with costs related to inventory write-downs and asset impairments. These additional charges will be determined based upon the Company's final liquidation and exit plan which will be formulated once Ames liquidation plans are known. As of August 12, 2002 the Company's Ames operations had post-petition receivables of approximately $3.0 million, inventory with a cost of approximately $17.3 million and fixed assets with a net book value of $1.7 million. The Company has not recorded a reserve in the second quarter for the potential additional losses to be incurred as a result of Ames' liquidation and store closings. The Company will continue to review and evaluate the impact of the liquidation and is expecting to record a charge for this liquidation as information becomes available during the third and fourth quarters of 2002. The Company currently expects it will continue to operate licensed footwear departments within Ames during the liquidation period. The Company expects to apply to the bankruptcy court seeking an order confirming its right to take certain actions with respect to its operation of the footwear departments in order to protect its proceed from the sale of its inventory in the Ames stores and to confirm its right to receive those proceeds in a timely manner. 3. Significant Relationship with Kmart Footstar has a significant business relationship with Kmart. Footstar operates the licensed footwear departments in Kmart stores through its Meldisco subsidiaries, in which Kmart owns a 49 percent equity interest. Under the agreement with Kmart, these Meldisco subsidiaries retain title to the inventory in each licensed footwear department up until the time the product is sold to the consumer and are responsible for staffing the footwear departments. Kmart collects the proceeds of each sale and, on a weekly basis, Kmart remits the proceeds of the sales to Meldisco less applicable deductions and fees. Meldisco has operated licensed footwear departments in Kmart stores since 1961. The licensed footwear departments in Kmart have historically provided a significant portion of Footstar's total annual sales and profits. For the fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000, Kmart footwear sales represented 49%, 58% and 64% of Footstar's net sales, respectively. Operating profit relating to Kmart footwear departments, excluding restructuring and other charges, reduced by Kmart's 49% equity interest in such departments, was 81%, 78% and 73% of Footstar's total operating profits in each of the fiscal years in the three year period ended December 29, 2001, respectively. On January 22, 2002, Kmart filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In March 2002 Kmart secured $2 billion in senior secured debtor-in-possession ("DIP") financing to be used to supplement its existing cash flows to fund its reorganization and continuing operations. Kmart stated that its decision to seek judicial reorganization was based on a combination of factors, including a rapid decline in its liquidity resulting from Kmart's sales and earnings performance in its fourth quarter ending January 2002, the weakening of the surety bond market and an erosion of supplier confidence. 6 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions) During March 2002, Kmart received bankruptcy court approval to close 283 under-performing stores. The 283 licensed footwear departments in those stores generated $116.5 million of sales for Footstar for fiscal year 2001 compared with $125.1 million for fiscal year 2000, or 4.7% and 5.6% of Footstar's total sales in the respective years. Total operating profits for 2001 from these 283 licensed departments were $9.3 million compared with $11.5 million in 2000. Footstar's operating profit from these 283 licensed departments reduced by Kmart's 49% equity interest in such departments (51% of total operating profit) was approximately $4.7 million in 2001, and $5.9 million in 2000, or 5.8% and 6.0% of Footstar's operating profits in the respective years after excluding the Kmart equity interest. Prior to Kmart's store closing announcement, the Company took steps to mitigate the potential effect of these store closings by reducing inventory purchases and reducing headcount in Meldisco and at Footstar's corporate offices. As of June 29, 2002, all 283 Kmart stores were closed. Note 7 below describes the charges recorded during the first quarter of 2002 relating to Kmart's store closing plan. 7 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except per share data) 4. Segment Information Statement of Financial Accounting Standards ("Statement") No. 131, Disclosures about Segments of an Enterprise and Related Information, requires that public business enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under Statement No. 131, the assets of the two athletic footwear and apparel chains, Footaction and Just For Feet, have been aggregated into the reporting segment called "Athletic" for reporting purposes. All other footwear sales represent operating segments that have been aggregated into the reporting segment called "Meldisco" for financial reporting purposes.
Three Months Ended June 29, 2002 --------------------------------------------------------------------------------- Meldisco(1),(3) Athletic(3) Corporate(3) Total(3) --------------------------------------------------------------------------------- Net sales $367.6 $225.5 $ -- $593.1 Operating profit (loss) before restructuring 52.1 (1.1) (2.5) 48.5 and other charges Bad debt expense 9.2 -- -- 9.2 Restructuring, asset impairment and other 16.1 -- -- 16.1 charges (reversals) Operating profit (loss) 26.8 (1.1) (2.5) 23.2 Six Months Ended June 29, 2002 --------------------------------------------------------------------------------- Meldisco(1),(2),(4) Athletic(1),(2),(4) Corporate(1),(2),(4) Total(1),(2),(4) --------------------------------------------------------------------------------- Net sales $683.2 $463.7 $ -- $1,146.9 Operating profit (loss) before restructuring 64.4 2.0 (3.9) 62.5 and other charges Bad debt expense 9.2 -- -- 9.2 Restructuring, asset impairment and other 30.9 4.5 0.3 35.7 charges (reversals) Operating profit (loss) 24.3 (2.5) (4.2) 17.6
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001 ------------------------------------------ ------------------------------------------- Meldisco Athletic Corporate Total Meldisco Athletic Corporate Total ------------------------------------------ ------------------------------------------- Net sales $410.0 $239.0 $ -- $649.0 $686.6 $479.5 $ -- $1,166.1 Operating profit (loss) 56.5 (1.5) (2.7) 52.3 64.0 (6.8) (4.1) 53.1
(1) Operating profit (loss) before bad debt expense restructuring, asset impairment and other charges excludes the $9.2 million allowance for bad debt expense and excludes certain costs related to the Company's decision to end two unprofitable footwear relationships operated by its Meldisco segment. During the second quarter 2002, restructuring and other charges amounted to $16.1 million, of which $7.6 million related to inventory write-downs, which were recorded as a component of cost of sales, and $8.5 million related to asset impairment charges, lease exit costs and severance costs. (2) Operating profit (loss) before restructuring, asset impairment and other charges, excludes certain costs related to the Company's restructuring plan and Kmart's store closing action. During first quarter 2002, restructuring, asset impairment and other charges amounted to $19.6 million, of which $13.1 million related to inventory write-downs, which were recorded as a component of cost of sales, and $6.5 million related to severance and building exit costs. Meldisco, Athletic and Corporate recorded $14.8 million, $4.4 million and $0.4 million of these charges, respectively. (3) Amortization expense included in the three months ended June 30, 2001, but no longer required in 2002 as a result of the Company's adoption of Statement 142 totaled $0.6 million, of which Meldisco, Athletic and Corporate recorded $0.3 million, $0.2 million and $0.1 million, respectively. (4) Amortization expense included in the six months ended June 30, 2001 but no longer required in 2002 as a result of the Company's adoption of Statement 142, totaled $1.0 million, of which Meldisco, Athletic and Corporate recorded $0.5 million, $0.3 million and $0.2 million, respectively. 8 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except per share data) 5. Comprehensive Income (Loss) Statement No. 130, Reporting Comprehensive Income, requires that items defined as other comprehensive income, such as foreign currency translation adjustments and unrealized gain (loss) in the fair value of derivatives, be separately classified in the financial statements and that the accumulated balance of other comprehensive income be reported separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The components of comprehensive income for the three and six months ended June 29, 2002 and June 30, 2001 are as follows:
Three Months Ended Six Months Ended -------------------------------------- ------------------------------------- June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 ----------------- ----------------- ----------------- ---------------- Comprehensive (Loss) Income: Net (loss) income $ (0.6) $ 16.1 $ (25.0) $ 12.0 Other comprehensive loss -- Unrealized loss on interest rate swap agreement (1.0) -- (1.0) -- ------ ------ ------- ------ Comprehensive (loss) income $ (1.6) $ 16.1 $ (26.0) $ 12.0 ====== ====== ======= ======
9 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except share and per share data) 6. Earnings per Share The table below shows the reconciliation of the earnings available to common stockholders and the shares used in calculating basic and diluted earnings per common share.
Three Months Ended Six Months Ended ---------------------------- ------------------------------- June 29, June 30, June 29, June 30, 2002 2001 2002 2001 ----------- ----------- ----------- ------------ Numerator for Basic and Diluted EPS - Net income (loss) $ (0.6) $ 16.1 $ (25.0) $ 12.0 =========== =========== =========== ============ Denominator: Shares outstanding at beginning of period 20,112,831 19,887,868 20,058,803 19,854,778 Weighted average deferred compensation shares earned not issued 278,239 322,928 291,565 304,552 Weighted average shares issued/(repurchased) 40,939 10,356 56,420 26,690 ----------- ----------- ----------- ------------ Denominator for Basic EPS - Weighted average common shares outstanding 20,432,009 20,221,152 20,406,788 20,186,020 ----------- ----------- ----------- ------------ Dilutive effect of stock options(1) -- 487,000 -- 578,770 ----------- ----------- ----------- ------------ Denominator for Diluted EPS - Adjusted weighted average common shares outstanding 20,432,009 20,708,152 20,406,788 20,764,790 ----------- ----------- ----------- ------------ Basic EPS $ (0.03) $ 0.80 $ (1.22) $ 0.59 =========== =========== =========== ============ Diluted EPS $ (0.03) $ 0.78 $ (1.22) $ 0.58 =========== =========== =========== ============
(1) The computation of diluted EPS does not assume conversion, exercise, or issuance of shares that would have an anti-dilutive effect on earnings per share. During the three and six months ended June 29, 2002, the Company had a net loss; as a result, any assumed conversions would result in reducing the loss per share and therefore are not included in the calculation. 10 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except share and per share data) 7. Restructuring, Asset Impairment and Other Charges (Reversals) During the second quarter of 2002, the Company adopted a restructuring plan in connection with its decision to end two unprofitable licensed footwear relationships operated by its Meldisco segment (the "Second Quarter Plan"). The Company exited the Variety Wholesale Distributors ("Variety") operation during the second quarter 2002, and will cease operating the footwear departments in Stein Mart stores ("Stein Mart") no later than February 2003, when that contract expires. The Company recorded pre-tax restructuring and other charges ("Second Quarter Charges") totaling $16.1 million ($10.3 million after taxes) for the write-down of inventory, asset impairment costs, lease exit costs and severance costs. The Second Quarter Charges include the write-down of certain inventory, which totaled $7.6 million and has been recorded as a component of cost of sales. The Second Quarter Charges also contain approximately $1.3 million relating primarily to costs to exit its Variety operation, which the Company will settle through the transfer of inventory to Variety. Additionally, the Second Quarter Charges contain an asset impairment charge of $4.7 million recorded pursuant to the requirements of Statement No. 144. These charges relate to certain fixed assets, leasehold improvements and intangible assets associated with the exit from Variety, and Stein Mart. In connection with the Second Quarter Plan, the Company established reserves within the Meldisco segment for severance costs totaling $1.5 million. The Company also established a reserve of $1.0 million for exit costs, which are anticipated to be paid in cash (store exit costs). Costs are being charged against the reserves as incurred and the reserves will be reviewed periodically to determine their adequacy. During the first quarter of 2002, the Company approved a restructuring plan in connection with its Athletic reorganization and incurred other charges relating to Kmart's store closing plan (the "First Quarter Charges"). In connection with these First Quarter Charges, the Company recorded pre-tax restructuring and other charges totaling $20.4 million ($8.5 million after tax and minority interest) for the write-down of inventory, building exit costs and severance costs. In addition, the Company reversed approximately $0.8 million ($0.6 million after taxes) of the charge recorded in 2001 relating to exit costs associated with a landlord relationship assumed in the J. Baker acquisition as the Company did not exit the relationship. The charges recorded in the first quarter cover costs related to inventory write-downs and severance costs in connection with Kmart's announcement of its plan to close 283 stores, as well as costs to shut down the Company's Irving, Texas Footaction offices, including building exit costs and severance costs in connection with the Company's plan to combine the marketing, planning, finance and human resources functions of its two athletic chains, Footaction and Just For Feet. The most significant component of the First Quarter Charges included the write-down of certain inventory in the Meldisco segment related to the Kmart store closings, which totaled $13.1 million and has been recorded as a component of cost of sales. 11 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except share and per share data) Additionally, in connection with the first quarter consolidation of the Company's athletic divisions, the Company established reserves within the athletic segment for costs to exit its Footaction headquarters building of $2.3 million and severance costs of $2.1 million. In connection with Kmart's 283 store closings, Meldisco established reserves for various exit costs and severance costs totaling $0.6 million and $1.9 million, respectively. Costs are being charged against the reserves as incurred and the reserves will be reviewed periodically to determine their adequacy. The following table displays a rollforward of the activity for the six-month period ended June 29, 2002, the significant components of the first and second quarter restructuring, and other charges and the related reserves remaining as of June 29, 2002. The balance at December 29, 2001 primarily relates to severance and lease termination costs associated with the Company's 2001 and 1998 restructuring, asset impairment and other charges.
Balance Three months ended Three months ended December 29, March 30, 2002 June 29, 2002 Remaining at 2001 Charge/(Reversal), net Charge Usage June 29, 2002 ---- ---------------------- ------ ----- -------------- Non-cash components: - -------------------- Inventory write-downs $ -- $ 13.1 $ 7.6 20.7 $ -- Lease exit costs -- -- 1.3 1.3 -- Asset Impairment -- -- 4.7 4.7 -- Cash components: - ---------------- Severance costs 1.5 4.4 1.5 3.1 4.3 Store, building and lease exit costs 29.1 2.1 1.0 5.4 26.8 ------ ------ ------ ------ ------ Total $ 30.6 $ 19.6 $ 16.1 $ 35.2 $ 31.1 ====== ====== ====== ====== ======
The 2002 usage primarily consists of permanent markdowns of inventory, asset impairment charges, various lease costs, severance payments and the payments relating to exiting the stores, building and leases. 8. Supplemental Cash Flow Information Six Months Ended ------------------------------------- June 29, June 30, 2002 2001 ---------------- ---------------- Cash paid for income taxes $ 7.5 $22.6 Cash paid for interest $ 4.4 $ 7.8 12 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except per share data) 9. Long-term Debt Effective May 25, 2000, the Company entered into a three-year, $325 million revolving credit facility with a syndicate of banks. This facility replaced a $300 million revolving credit facility, which was due to expire September 18, 2000. As of June 29, 2002, there was $213.8 million outstanding under the credit facility and the weighted average interest rate on the outstanding balance was 3.9%. As of December 29, 2001 and June 30, 2001, there was $146.9 million and $234.7 million, respectively, outstanding under the credit facility with an average interest rate of 3.6% and 6.1%, respectively. The Company's credit facility expires in May 2003; therefore, the borrowings under the credit facility are classified within current liabilities on the balance sheet at June 29, 2002. 10. 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. The Company continues the expansion of its distribution center located in Mira Loma, California. The Company spent $2.9 million and $10.4 million on this project during the three- and six-months periods ended June 29, 2002, respectively, and expects to spend approximately $7 million to complete this project. See Note 2, "Subsequent Events," for information with respect to certain contingencies in connection with the Company's relationship with Ames. 13 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except per share data) 11. Goodwill and Other Intangible Assets In July 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment annually in accordance with the provisions of Statement No. 142. Statement No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. Intangible assets with definite useful lives are reviewed for impairment in accordance with Statement No. 144. See the "Impact of Recently Issued Accounting Standards" Note 13 for more information. The Company adopted the provisions of Statement No. 142 effective the first day of fiscal 2002. The Company ceased the amortization of all unamortized goodwill and ceased the amortization of $9.9 million of an unamortized intangible asset, which has an indefinite useful life. Amortization expense related to goodwill was $0.6 million and $1.1 million for the three- and six-month period ended June 30, 2001, respectively. Amortization expense related to the intangible asset with an indefinite useful life was $0.1 million and $0.3 million for the three- and six-month periods ended June 30, 2001, respectively. Statement No. 142 requires the annual testing for the impairment of goodwill at a reporting unit level. The Standard also required a goodwill impairment test as of the adoption date. The Company identified its reporting units under Statement No. 142 as the operating segments within the Meldisco and Athletic reportable segments. The Company maintained goodwill at the Footaction operating segment in Athletic in the amount of $17.4 million and at the Meldisco segment relating to the assets acquired from J. Baker in the amount of $25.0 million. The fair value of these reporting units was estimated using the expected present value of associated future cash flows and market values of related businesses, where appropriate. The Company completed its impairment test during the second quarter of 2002 and determined that the $25.0 million of goodwill of the Meldisco segment relating to the assets acquired from J. Baker was impaired under the fair value test. This impairment was the result of sequential periods of decreased operating profit. Accordingly, the Company has recognized a charge for the cumulative change of adopting the accounting standard as shown in the condensed consolidated statements of operations. The Company has established the first day of its fourth fiscal quarter as the Company's annual impairment test date and will test its athletic segment goodwill on that date each year unless circumstances arise prior to that date indicating that impairment may exist. In connection with the adoption of Statement No. 142, the Company reassessed the useful lives of its amortizable intangible assets to be as noted in the table below, which did not change from previous years. 14 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except per share data) Additionally, the unamortizable tradename is determined to have an indefinite useful life due to its expected ability to generate cash flows indefinitely. During the first quarter of 2002, the Company reevaluated the fair value of the unamortizable tradename and determined that there was no impairment of the intangible asset. The following table shows information regarding intangible assets that are deemed to have a finite life and are, therefore, currently amortized in accordance with Statement No. 142 and intangibles with indefinite life, which are no longer being amortized.
As of June 29, 2002 As of December 29, 2001 As of June 30, 2001 - ----------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Amortizable Carrying Accumulated Carrying Accumulated Carrying Accumulated lives Amount Amortization Amount Amortization Amount Amortization Amortizable assets - ------------------ Tradenames 5-20 $13.9 $2.9 $13.9 $2.2 $13.1 $1.2 Customer Database 5 3.1 1.4 3.1 1.1 3.1 0.8 Unamortizable asset - ------------------- Tradenames 10.5 0.6 10.5 0.6 10.5 0.3 - ----------------------------------------------------------------------------------------------------------------------- Total $27.5 $4.9 $27.5 $3.9 $26.7 $2.3 - -----------------------------------------------------------------------------------------------------------------------
The following schedule shows the reconciliation between net income and the net income excluding amortization of goodwill and amortization of tradename with an indefinite life at June 30, 2001, as well as the related impact on basic and diluted earnings per share.
For the three months For the six months ended June 30, 2001 ended June 30, 2001 -------------------- ------------------- Net income reported $16.1 $12.0 Add back: Goodwill amortization 0.5 0.8 Add back: Tradename amortization 0.1 0.2 ----- ------ Adjusted net income $16.7 $13.0 ===== ====== Basic earnings per share: Net income $ 0.80 $0.59 Goodwill amortization $ 0.02 $0.04 Tradename amortization -- $0.01 Adjusted net income $ 0.82 $0.64 Diluted earnings per share: Net income $ 0.78 $0.58 Goodwill amortization $ 0.02 $0.04 Tradename amortization -- $0.01 Adjusted net income $ 0.80 $0.63
15 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except per share data) The following table lists amortization expense relating to amortizable intangible assets for the quarter ended June 29, 2002 and projected amortization expense for the next five years. Quarter ended June 29, 2002 $0.5 Fiscal year 2002 2.1 Fiscal year 2003 2.1 Fiscal year 2004 2.1 Fiscal year 2005 1.4 Fiscal year 2006 1.2 12. Interest Rate Swap Agreements The Company incurs variable rate debt through its Credit Facility. This debt exposes the Company to variability in interest expense due to changes in interest rates. In order to limit the variability of a portion of its interest expense, effective January 8, 2002, the Company entered into four interest rate swap agreements with a total notional amount of $60 million, which fixes the rate at 3.6% on the notional amount of $60 million. For the quarter ended June 29, 2002, interest rate cash flow hedges resulted in immaterial ineffectiveness. As of June 29, 2002, the fair value of each interest rate swap (the net interest receivable/payable) is reflected in the consolidated balance sheet as a current payable in accrued expenses and other comprehensive loss totaling $1.0 million. Since the interest rate swaps qualified as a cash flow hedge and were determined to be highly effective, the changes in the fair value were recorded in other comprehensive income. The Company does not expect to charge any net derivative losses included in other comprehensive income as of June 29, 2002 to earnings during the next twelve months. The Company does not enter into derivative instruments for any purpose other than to manage its interest rate exposure. The Company does not hold derivative financial investments for trading or speculative purposes. 13. Impact of Recently Issued Accounting Standards Effective fiscal 2002, the Company adopted the provision of Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets to Be Disposed Of. This statement addresses accounting and reporting for the impairment or disposal of long-lived assets. The statement superseded FASB Statement No. 121, while retaining many of the fundamental provisions covered by that statement. Statement No. 144 differs fundamentally from Statement No. 121 in that goodwill and other intangible assets that are not amortized are excluded from the scope of Statement No. 144. Additionally Statement No. 144 addresses and clarifies implementation and estimation issues arising from Statement No. 121. 16 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (tabular amounts in millions, except per share data) Statement No. 144 also superseded the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. Statement No. 144 retains the basic provisions of APB Opinion No. 30 for the presentation of discontinued operations in the income statement but broadens that presentation to apply to a component of an entity rather than a segment of a business. The application of Statement No. 144 in 2002 did not have a material impact on the Company's consolidated financial statements as the impairment assessment under Statement No. 144 is predominantly unchanged from Statement No. 121 and as the stores closed during the six months ended June 29, 2002 did not meet all of the requirements to be reported as discontinued operations under Statement No. 144. During April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt and FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, so that certain lease modifications that have economic effects that are similar to sale-leaseback transactions are accounted for the same way as sale-leaseback transactions. Additionally, Statement No. 13 is amended so that the original lessee under an operating lease agreement that becomes secondarily liable shall recognize the fair value of the guarantee obligation. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The amendment to Statement No. 13 is effective for transactions occurring after May 15, 2002 and the remainder of Statement 145 is effective for fiscal years beginning after May 15, 2002. The application of Statement No. 145 did not have a material impact on the Company's consolidated financial statements. On July 30, 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement 146 is different from EITF Issue No. 94-3 in that Statement No. 146 requires that a liability be recognized for a cost associated with an exit or disposal activity only when the liability is incurred, that is when it meets the definition of a liability in the FASB's conceptual framework. Statement 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. In contrast, under EITF Issue 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. Statement No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The application of this statement did not have an impact on the Company's exit activity initially applied prior to the adoption of Statement 146, however the adoption of Statement 146 can be expected to impact the timing of liability recognition associated with any future exit activities. 17 Independent Auditors' Review Report The Board of Directors and Shareholders Footstar, Inc. We have reviewed the condensed consolidated balance sheets of Footstar, Inc. and subsidiary companies as of June 29, 2002 and June 30, 2001 and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 29, 2002 and June 30, 2001, respectively and condensed cash flows for the six-month periods ended June 29, 2002 and June 30, 2001, respectively. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Footstar, Inc. and subsidiary companies as of December 29, 2001 and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2002, except as to the third paragraph of the "Business Risk" note which was as of March 15, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 29, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/ KPMG LLP New York, New York August 12, 2002 18 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and notes thereto appearing elsewhere in this report. General - ------- Three Months Ended ------------------------------------ June 29, June 30, ($ in millions) 2002 2001 ----------------- ----------------- Company: Net sales $593.1 $649.0 Net sales % change from prior year (8.6%) 10.1% Same store sales % change (5.6%) (1.3%) Meldisco: Net sales $367.6 $410.0 Net sales % change from prior year (10.3%) 14.8% Same store sales % change (7.1%) (2.0%) % of consolidated net sales 62.0% 63.2% Athletic: Net sales $225.5 $239.0 Net sales % change from prior year (5.6%) 2.9% Same store sales % change (3.3%) (0.1%) % of consolidated net sales 38.0% 36.8% Consolidated net sales for the three months ended June 29, 2002 were $593.1 million, a decrease of 8.6% from net sales of $649.0 million for the same period of 2001. Same store sales for the three-month period decreased 5.6% compared to the year-ago period. Total sales for Meldisco decreased 10.3% from $410.0 million in the second quarter of 2001 to $367.6 million in the second quarter of 2002. Meldisco's same store sales declined by 7.1% compared to the year-ago period. The decrease was primarily due to fewer stores in operation and the shift in Easter from April in 2001 to March in 2002, cooler than normal weather in May and lower sales in the footwear departments outside of Kmart which faced comparisons with heavy liquidations during the initial phase-in of the J. Baker acquisition in 2001. In the Athletic segment, total sales decreased 5.6% to $225.5 million and athletic same store sales decreased 3.3% compared to the year-ago period due to the Easter shift from the second quarter in 2001 to the first quarter in 2002, fewer stores in operation and a heavy promotional environment. Strong sales of basketball footwear were offset by lower sales in other categories. 19 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Six Months Ended ------------------------------------ June 29, June 30, ($ in millions) 2002 2001 ----------------- ----------------- Company: Net sales $1,146.9 $1,166.1 Net sales % change from prior year (1.6%) 13.3% Same store sales % change 0.3% (2.5%) Meldisco: Net sales $ 683.2 $ 686.6 Net sales % change from prior year (0.5%) 8.7% Same store sales % change 0.5% (5.0%) % of consolidated net sales 59.6% 58.9% Athletic: Net sales $ 463.7 $ 479.5 Net sales % change from prior year (3.3%) 20.6% Same store sales % change (0.1%) 1.6% % of consolidated net sales 40.4% 41.1% Consolidated net sales for the six months ended June 29, 2002 totaled $1,146.9 million, a 1.6% decrease from net sales of $1,166.1 million for the same period of 2001. Same store sales for the six-month period increased 0.3% compared to the year-ago period. Total sales for Meldisco decreased 0.5% to $683.2 million due to improved performance in the first quarter of 2002 and in June 2002, offset by poor sales performance in May, primarily attributed to cooler than expected weather. Meldisco's same store sales increased 0.5% compared to the year-ago period. In the Athletic segment, total sales decreased 3.3% to $463.7 million primarily due to fewer athletic stores in operation this year compared with 2001, and a same store sales decrease of 0.1%. Restructuring, Asset Impairment and Other Charges (Reversals), Net During the second quarter of 2002, the Company adopted a restructuring plan in connection with its decision to end two unprofitable licensed footwear relationships operated by its Meldisco segment (collectively the "Second Quarter Plan"). The Company exited the Variety Wholesale Distributors ("Variety") operation during the second quarter 2002, and will cease operating the footwear departments in Stein Mart stores ("Stein Mart") no later than February 2003, when that contract expires. The Company recorded pre-tax restructuring and other charges ("Second Quarter Charges") totaling $16.1 million ($10.3 million after taxes) for the write-down of inventory, asset impairment costs, lease exit costs and severance costs. In connection with these Second Quarter Charges, 20 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) the Company recorded inventory write-downs of $7.6 million, which were included as a component of cost of sales, and asset impairment costs, lease exit costs and severance costs amounting to $8.5 million, which were included in operating costs and expenses. (See Note 7 for a further discussion of these charges.) During the first quarter of 2002, the Company adopted a restructuring plan in connection with its athletic reorganization, and incurred other charges relating to Kmart's store closing plan. Charges recorded included pre-tax restructuring and other charges totaling $20.4 million ($8.5 million after tax and minority interest) for the write-down of inventory, building exit costs and severance costs. In addition, the Company reversed approximately $0.8 million ($0.6 million after taxes) of the charge recorded in 2001 relating to exit costs associated with a landlord relationship assumed in the J. Baker acquisition. In connection with the charges, $13.1 million of inventory write-downs were included as a component of cost of sales, and $6.5 million in severance costs and net building exit costs were included in operating costs and expenses. (See Note 7 for a further discussion of these charges.) Cost of Sales and Expenses
Three Months Ended Six Months Ended ---------------------------------------- -------------------------------------------- ($ in millions, % are percent of net sales) June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2002 ---------------------------------------- -------------------------------------------- Sales $593.1 100.0% $649.0 100.0% $1,146.9 100.0% $1,166.1 100.0% Cost of sales 401.3 67.7% 443.4 68.3% 788.0 68.7% 813.4 69.8% Cost of sales-other charges 7.6 1.3% -- -- 20.7 1.8% -- -- ---------------------------------------- -------------------------------------------- Total cost of sales 408.9 69.0% 443.4 68.3% 808.7 70.5% 813.4 69.8% Gross Margin 184.2 31.0% 205.6 31.7% 338.2 29.5% 352.7 30.2% Store operating, selling, general, and administrative expenses 132.2 22.3% 140.7 21.7% 275.2 24.0% 275.1 23.6% Bad debt expense 9.2 1.6% -- -- 9.2 0.8% -- -- Restructuring, asset impairment and other charges 8.5 1.4% -- -- 15.0 1.3% -- -- Depreciation and amortization 11.1 1.9% 12.6 1.9% 21.2 1.9% 24.5 2.1%
Cost of Sales Cost of sales for the second quarter of 2002 versus the same year-ago period increased 70 basis points to 69% of net sales due to other charges consisting of $7.6 million in inventory write-downs in the Meldisco Segment; excluding those other charges, cost of sales declined 70 basis points. Gross profit decreased 70 basis points to $184.2 million due to lower margins in the Athletic segment and inventory write-downs at Meldisco. Excluding the $7.6 million 21 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) inventory write-down, Footstar's second quarter 2002 gross margin as a percent of net sales increased 60 basis points; the gross margin at Meldisco improved with a reduction in clearance sales, the gross margin at Just For Feet improved as a result of a reduction in promotional sales, while higher markdowns in a promotional retail environment lowered the gross margin at Footaction. For the six months ended June 29, 2002, cost of sales as a percent of net sales increased by 70 basis points versus the same year-ago period; cost of sales in the first half of 2002 included $20.7 million in other charges representing inventory write-downs in connection with Kmart's announcement of its plan to close 283 stores and with the termination of two unprofitable licensed footwear relationships operated by Meldisco. Excluding the $20.7 million in other charges, Footstar's gross margin as a percent of net sales increased 110 basis points for the first six months of 2002. Store Operating, Selling, General and Administrative Expenses Store operating, selling, general and administrative ("SG&A") expenses, as a percent of net sales, increased 60 basis points from 21.7% in the second quarter of 2001 to 22.3% in the second quarter of 2002 as a result of the decreased leverage of selling and occupancy expenses from lower than expected sales. For the six months ended June 29, 2002, SG&A expenses as a percent of net sales, increased 40 basis points as a result of the decreased leverage of selling and occupancy expenses from lower than expected sales. Bad Debt Expense The Company recorded an allowance for bad debt of $9.2 million during the second quarter of 2002 in connection with its pre-petition Ames receivable. (See Note 2, Subsequent Events). The Company currently expects it will continue to operate licensed footwear departments within Ames during the liquidation period and is currently taking actions to limit future financial exposure. The Company expects to apply to the bankruptcy court seeking an order confirming its right to take certain actions with respect to its operation of the footwear departments in order to protect its proceed from the sale of its inventory in the Ames stores and to confirm its right to receive those proceeds in a timely manner. Operating Profit (Loss) Operating profit for each segment is presented below before restructuring, asset impairment and other charges and bad debt expense, which are recorded on a separate line.
Three Months Ended Six Months Ended --------------------------------------------------- ----------------------------------------------------- June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 --------------------------------------------------- ----------------------------------------------------- ($ in millions) Amount % of Net Sales Amount % of Net Sales Amount % of Net Sales Amount % of Net Sales --------------------------------------------------- ----------------------------------------------------- Meldisco $52.1 14.2% $56.5 13.8% $64.4 9.4% $64.0 9.3% Athletic (1.1) (0.5%) (1.5) (0.6%) 2.0 0.4% (1.4%) (6.8) Corporate overhead (2.5) -- (2.7) -- (3.9) -- (4.1) -- Bad debt expense 9.2 -- -- -- 9.2 -- -- -- Restructuring, asset impairment and other charges/(reversals) 16.1 -- -- -- 35.7 -- -- -- --------------------------------------------------- ----------------------------------------------------- Total 23.2 3.9% $52.3 8.1% $17.6 1.5% $53.1 4.6%
Note: Percentages represent percent of net sales of the respective entities. 22 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) During the second quarter ended June 29, 2002, operating profit after restructuring, asset impairment and other charges and bad debt expense as a percent of net sales decreased versus the same period of 2001 due to the second quarter 2002 restructuring, asset impairment and other charges within Meldisco relating primarily to exiting various underperforming landlord relationships, which were acquired in the J. Baker acquisition and bad debt expense relating to Ames. Excluding these charges and bad debt expense, operating profit would have been $48.5 million for the second quarter 2002. At Meldisco, operating profit as a percentage of sales increased 40 basis points due to improved gross margins, partially offset by higher SG&A expenses due to the underabsorption of expenses resulting from lower sales. In the Athletic segment, operating profit as a percentage of sales increased 10 basis points. For the six months ended June 29, 2002, operating profit excluding restructuring charges, asset impairment and other charges and bad debt expense would have been $62.5 million, or 5.4% of net sales, an 80 basis point increase versus the same year-ago period. This increase was driven by positive comp store sales and reduced markdowns at Meldisco, and the elimination of under-performing stores in the Athletic segment. New Business Relationship On July 11, 2002 the Company announced that it reached an agreement with Wal-Mart Stores, Inc. to supply Thom McAn brand value family footwear to 300 Wal-Mart stores for a six-month test period beginning in October of this year. Liquidity and Financial Condition The Company's inventories at the end of the second quarter decreased by $72.4 million or 14.5% versus the same quarter of 2001. The decrease is attributable to lower inventory levels in Meldisco and at both athletic chains. The Company's accounts receivable balance as of June 29, 2002, decreased by $8.4 million or 14.1% versus the prior year. Other current assets were higher than last year due to deferred taxes related to the restructuring charges. Accounts payable balances were lower than last year due to the lower overall level of inventories. Net cash provided by operating activities totaled $14.1 million during the first six months of 2002, compared with net cash used in operating activities of $26.7 million during the first six months of 2001. The Company's principal sources of liquidity used in funding its short-term operations are its operating cash flows and bank borrowings. The Company has a $325 million 3-year revolving credit facility with a syndicate of banks, which was effective May 25, 2000 (collectively, with all amendments, the "Credit Facility"). The 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, make capital expenditures or declare and make dividend payments. Under the Credit Facility, the Company is also required to comply with financial covenants relating to debt and interest coverage. As of June 29, 2002 the Company was in compliance with all covenants. 23 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The Credit Facility expires on May 24, 2003. The Company is currently in discussions with its banks about replacing the current facility with a new 3-year secured facility. The new facility is expected to be fully secured and availability will be subject to a borrowing base formula based on eligible inventory and accounts receivable. The amount of eligible inventory will be determined based on the liquidation value of inventory and will be subject to the lender's ability to secure a first priority lien on that inventory. The Company currently expects to have a new facility in place by the end of 2002. However, this is subject to further review and final determination. As of June 29, 2002, the Company had $213.8 million in borrowings, classified as notes payable in the balance sheet. Since the Company's Credit Facility expires on May 24, 2003, the borrowings are classified within current liabilities on the balance sheet as of June 29, 2002. At June 30, 2001, the Company had $234.7 million in borrowings classified as long-term debt. Net interest expense for the six months ended June 29, 2002, was $4.9 million compared to $8.6 million for the same period of 2001. This decline in interest expense was due to lower interest rates during 2002. During the third quarter of fiscal year 2001, Ames whose footwear department license was acquired by Footstar in the J. Baker acquisition, filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Footstar subsidiaries currently operate licensed footwear departments within each of Ames' 332 stores. The Footstar subsidiaries own all footwear inventories and certain fixtures within these departments and are responsible for staffing the departments. As a result of Ames' performance and events subsequent to June 29, 2002, it is now expected that Ames will cease operations and close all of its stores over the next few months. Footstar management is currently in the process of developing plans to liquidate the inventory in the Ames footwear departments and exit those operations. The Company recorded a charge in the second quarter ended June 29, 2002, of $9.2 million as bad debt expense and setup an allowance in connection with its pre-petition receivables from Ames. These 332 licensed departments generated $43.9 million or 4% of Footstar's total sales of $1.1 billion for the six months ended June 29, 2002. These licensed departments had an operating loss of approximately $0.5 million before bad debt expense for the six month period ended June 29, 2002, as compared to Footstar's consolidated operating profit of $62.5 million before restructuring, bad debt expense and other charges for the same period. In addition to these charges, the Company now also expects to incur certain closing and severance related costs, along with costs related to inventory write-downs and asset impairments. These additional charges will be determined based upon the Company's final liquidation and exit plan which will be formulated once Ames liquidation plans are known. As of August 12, 2002 the Company's Ames operations had post-petition receivables of approximately $3.0 million, inventory with a cost of approximately $17.3 million and fixed assets with a net book value of $1.7 million. The Company has not recorded a reserve in the second quarter for the potential additional loss to be incurred as a result of Ames' liquidation and store closings. The Company will continue to review and evaluate the impact of the liquidation and is expecting to record a charge for this liquidation during the third and fourth quarter's of 2002. The Company currently expects it will continue to operate licensed footwear departments within Ames during the liquidation period, and is currently taking actions to limit future financial exposure. The Company expects to apply to the bankruptcy court seeking an order confirming its right to take certain actions with respect to its operation of the footwear departments in order to protect its proceed from the sale of its inventory in the Ames stores and to confirm its right to receive those proceeds in a timely manner. On March 8, 2002, Kmart announced that it would close 283 underperforming stores. These 283 licensed departments generated $116.5 million of Footstar's total sales of $2.5 billion for fiscal year 2001. Total operating profit from these licensed departments was $9.3 million. While the store closings are expected to negatively affect earnings, the Company believes the effect on 2002 cash flows to be minimal. The cash generated from the inventory liquidations, lower ongoing working capital requirements and reduced accounts receivable will offset most of the reduced cash flows from lower earnings. Until Kmart provides information about its future plans, it is premature to predict the impact of those plans, including the impact of any potential future Kmart store closings, on the Company or its Credit Facility. However, if Kmart were to elect to close additional stores, those store closings may have a negative effect on the Company's cash flows from operations. Store closings will also reduce the Company's total working capital requirements, and thus have a positive effect on the Company's liquidity, as Footstar's Meldisco division owns the related inventory and has a receivable balance for sales receipts from each Kmart licensed footwear department. The Company continues to monitor the Kmart bankruptcy proceedings. 24 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The Company's businesses are seasonal in nature and, therefore, are impacted by weather conditions. Peak selling periods coincide with Christmas, the Easter holiday and the back-to-school selling seasons. Working capital requirements vary with seasonal business volume and inventory buildups, which occur prior to the peak selling periods. The Company expects that its current cash, together with cash generated from operations and its credit facilities, will be sufficient to fund its expected operating expenses, working capital needs, capital expenditures and projected internal growth for the foreseeable future. The Company believes its current borrowing capacity will allow it to take advantage of new growth and investment opportunities. The Company expects that it will retain all available funds for the operation and expansion of its business and does not anticipate paying any cash dividends to shareholders in the foreseeable future. Capital expenditures for the six months ended June 29, 2002 were $43.0 million. Total capital expenditures for the entire 2002 fiscal year are estimated to be between $75 and $80 million. Capital projects include the expansion of the Company's distribution center in Mira Loma, California, 20 to 30 new stores in the Athletic segment, new landlord growth in the Meldisco segment and several projects to support the Company's information systems infrastructure. Under the Company's arrangement with Kmart, Meldisco distributes annually to Kmart a portion of profits representing Kmart's 49% minority interest in Meldisco subsidiaries and an excess rent payment which is contingent upon profits above certain levels. In April 2002, the Company distributed approximately $45.0 million and approximately $25.5 million, respectively, representing Kmart's dividend for its minority interest in the net earnings of each of the Kmart licensed footwear department and excess rent for the fiscal year 2001. Effective fiscal 2002, the Company adopted the provision of Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets to Be Disposed Of. This statement addresses accounting and reporting for the impairment or disposal of long-lived assets. The statement superseded FASB Statement No. 121, while retaining many of the provisions covered by that statement. Statement No. 144 differs fundamentally from Statement No. 121 in that goodwill and other intangible assets that are not amortized are excluded from the scope of Statement No. 144. Additionally Statement No. 144 addresses and clarifies implementation and estimation issues arising from Statement No. 121. Statement No. 144 also superseded the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. Statement No. 144 retains the basic provisions of APB Opinion No. 30 for the presentation of discontinued operations in the income statement but broadens that presentation to apply to a component of an entity rather than a segment of a business. The application of Statement No. 144 in 2002 did not have a material impact on the Company's consolidated financial statements as the impairment assessment under Statement No. 144 is predominantly unchanged from Statement No. 121 and as the stores closed during the six months ended June 29, 2002 did not meet all of the requirements to be reported as discontinued operations under Statement No. 144. 25 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Forward-Looking Statements This Report on Form 10-Q 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 report as well as the documents incorporated herein by reference and can be identified by the use of forward-looking terminology such as "believe," "expect," "outlook," "look forward," "estimate," "plans," "projects," "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, potential write-offs and other charges, future cash needs, improvements in infrastructure, and operating efficiencies and other future results of operation or financial position. Such forward-looking statements involve significant material 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, including the possible substantial impact on the Company's business of the bankruptcy proceedings commenced by Kmart Corporation (at which the Company currently has approximately 1,831 licensed footwear departments) and potential adverse developments in such proceedings including: failing to successfully reorganize the chain, any significant store closings effected by Kmart as part of such proceedings, rights of the debtor to seek rejection of agreements in such bankruptcy proceedings, and the impact of any other plans or activities effected by Kmart in such proceedings. Certain other risks and uncertainties include but are not limited to: uncertainties related to Ames liquidation and cessation of business, uncertainties related to the integration of new businesses, the continued independence and financial health of the Company's other significant licensors and customers, consumer demand for the Company's products; unseasonable weather; risks associated with foreign global sourcing, global liquidity, the occurrence of catastrophic events or acts of terrorism, consumer acceptance of the Company's merchandise mix, availability of favorable retail locations, product availability; the effect of competitive products and pricing; and existing retail economic conditions, including the impact on consumer spending and consumer confidence from a slowing economy and the impact of a highly promotional retail environment and going out of business sales. In such case, actual results may differ materially from such forward-looking statements. Certain other information that may cause actual results to differ from such forward-looking statements are contained in this and other Company filings with the Securities and Exchange Commission. In light of the uncertainty inherent in such forward-looking statements you should not consider the inclusion to be a representation that such forward-looking matters are achievable. The Company undertakes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. 26 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK DERIVATIVES As of June 29, 2002, the Company was not materially exposed to changes in the underlying values of its assets or liabilities nor was it materially exposed to changes in the value of expected foreign currency cash flows. Therefore, the Company has not engaged in the purchase or sale of any derivative instruments, except as described below. INTEREST RATES The Company's debt portfolio is subject to variable rates and primarily seasonal in nature. The Company, from time to time, undertakes borrowings to finance working capital, acquisitions and other corporate borrowing requirements. The Company's peak borrowing periods coincide with peak inventory purchases. As of June 29, 2002, the Company had $213.8 million outstanding under its Credit Facility. The Company incurs variable rate debt through its Credit Facility. This debt exposes the Company to variability in interest expense due to changes in interest rates. In order to limit the variability of a portion of its interest expense, effective January 8, 2002, the Company entered into four interest rate swap agreements with a total notional amount of $60 million, which fix the rate on the notional amount. The interest rate swaps change the variable-rate cash flow exposure on the notes to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the effect of fixed-rate notes. On the date the derivative was entered into, the Company designated the derivative as a cash flow hedge of a forecasted transaction related to a recognized liability. The Company formally documents the relationship between the hedged instrument and the hedged items, as well as its risk management objective and strategy for undertaking the hedge transaction. The Company also formally assessed, at the hedge's inception, and will assess on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. For the quarter ended June 29, 2002, interest rate cash flow hedges resulted in immaterial ineffectiveness. The fair value of each interest rate swap (the net interest receivable/payable) is reflected in the consolidated balance sheet as a current payable in accrued expenses and other comprehensive loss totaling $1.0 million at June 29, 2002. Since the interest rate swaps qualified as a cash flow hedge and were determined to be highly effective, the changes in the fair value are recorded in other comprehensive income. The Company does not expect to charge any net derivative gains included in other comprehensive income as of June 29, 2002 to earnings during the next twelve months. The Company does not enter into derivative instruments for any purpose other than to manage its interest rate exposure. That is, the Company does not hold derivative financial investments for trading or speculation purposes. The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Credit risk of derivative instruments is considered minimal as the Company maintains risk management control 27 FOOTSTAR, INC. AND SUBSIDIARY COMPANIES systems to monitor the financial condition of the counterparties to the contract and interest rate cash flow risk attributable to both the Company's outstanding or forecasted debt obligations, as well as the Company's offsetting hedge positions. FOREIGN EXCHANGE The Company's offshore product sourcing and purchasing activities are denominated in US dollars and therefore the Company does not have material exposure to cash flows denominated in foreign currencies nor have net foreign exchange gains or losses been material to operating results in the past 3 reporting periods. 28 Part II. - OTHER INFORMATION Item 4. - Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on May 14, 2002. The stockholders elected all of management's nominees for the Board of Directors to serve until the Annual Meeting of Stockholders in 2005 and ratified the appointment of KPMG LLP as the Corporation's independent auditors for fiscal 2002. The voting results are as follows: Election of Directors - --------------------- Broker For Withheld Non-Votes ------------------------------------------------------ George S. Day 14,940,925 3,320,181 -- Bettye Martin Musham 15,119,609 3,141,497 -- Kenneth S. Olshan 14,940,806 3,320,300 -- Ratification of Auditors - ------------------------
Broker For Against Abstain Non-Votes ------------------------------------------------------------------------- 17,885,209 362,952 12,946 --
29 Part II. - OTHER INFORMATION Item 6. - Exhibits and Reports on Form 8-K a) EXHIBIT INDEX Exhibit - ------- 10.9(a) Amended and Restated Supplemental Retirement Plan for Senior Management of Footstar, Inc. 15 Accountants' Acknowledgment b) Reports - Reports on Form 8-K - None Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOOTSTAR, INC. By: /s/ STEPHEN R. WILSON ---------------------------- Stephen R. Wilson Executive Vice President and Chief Financial Officer Date: August 13, 2002 30 EX-10.9(A) 3 e13720ex10_9a.txt SUPPLEMENTAL RETIREMENT PLAN Exhibit 10.9(a) SUPPLEMENTAL RETIREMENT PLAN FOR FOOTSTAR, INC. Effective October 14, 1996 Amended and Restated Effective June 19, 2002 TABLE OF CONTENTS Article 1. INTRODUCTION......................................................1 Article 2. DEFINITIONS.......................................................2 2.01 ACTUARIAL EQUIVALENT.................................................2 2.02 BENEFICIARY..........................................................2 2.03 BENEFIT COMMENCEMENT DATE............................................2 2.04 BOARD................................................................2 2.05 CAUSE................................................................2 2.06 CHANGE IN CONTROL....................................................3 2.07 COMMITTEE............................................................4 2.08 COMPENSATION.........................................................4 2.09 CORPORATION..........................................................4 2.10 EARLY RETIREMENT DATE................................................4 2.11 FOOTSTAR.............................................................5 2.12 NORMAL RETIREMENT DATE...............................................5 2.13 PARTICIPANT..........................................................5 2.14 PLAN.................................................................5 2.15 RETIREE..............................................................5 2.16 RETIREMENT ADMINISTRATION COMMITTEE..................................5 2.17 SERVICE; YEAR OF SERVICE.............................................5 2.18 SUPPLEMENTAL RETIREMENT BENEFIT......................................5 2.19 VESTED RETIREMENT BENEFIT............................................6 Article 3. PARTICIPATION.....................................................7 3.01 ELIGIBLE EXECUTIVES..................................................7 3.02 PARTICIPATION........................................................7 3.03 RECLASSIFICATION.....................................................7 Article 4. SUPPLEMENTAL RETIREMENT BENEFIT...................................8 4.01 ELIGIBILITY FOR SUPPLEMENTAL RETIREMENT BENEFIT......................8 4.02 NORMAL RETIREMENT BENEFIT............................................8 4.03 EARLY RETIREMENT BENEFIT.............................................8 4.04 BENEFIT COMMENCEMENT DATE............................................8 4.05 FORM OF BENEFIT PAYMENT..............................................8 Article 5. DEATH BENEFIT....................................................10 5.01 DEATH AFTER EARLY RETIREMENT DATE...................................10 5.02 DEATH PRIOR TO EARLY RETIREMENT DATE................................10 5.03 DEATH AFTER BENEFIT COMMENCEMENT DATE...............................11 5.04 DESIGNATION OF BENEFICIARY..........................................11 Article 6. PARTICIPANT OBLIGATIONS..........................................12 6.01 CONFIDENTIALITY; COOPERATION WITH REGARD TO LITIGATION..............12 6.02 NON-COMPETITION.....................................................12 6.03 NON-SOLICITATION OF EMPLOYEES.......................................13 6.04 DEFINITIONS.........................................................13 Article 7. CHANGE IN CONTROL................................................14 7.01 APPLICABILITY.......................................................14 7.02 RETIREES AND BENEFICIARIES AT TIME OF CHANGE IN CONTROL.............14 7.03 TERMINATION OF EMPLOYMENT WITHIN 24 MONTHS FOLLOWING A CHANGE IN CONTROL.................................................15 7.04 TERMINATION OF EMPLOYMENT MORE THAN 24 MONTHS FOLLOWING A CHANGE IN CONTROL.....................................16 i Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 Article 8. FORFEITURE OF BENEFITS...........................................17 Article 9. ADMINISTRATION...................................................18 9.01 POWERS AND DUTIES OF THE COMMITTEE..................................18 9.02 RETIREMENT ADMINISTRATION COMMITTEE.................................18 9.03 DELEGATION OF DUTIES................................................18 9.04 EXPENSES............................................................18 9.05 INDEMNIFICATION OF RETIREMENT ADMINISTRATION COMMITTEE..............19 9.06 LIABILITY...........................................................19 9.07 APPEALS PROCEDURE...................................................19 Article 10. AMENDMENT OR TERMINATION........................................20 Article 11. GENERAL PROVISIONS..............................................21 11.01 RIGHT TO WITHHOLD TAXES............................................21 11.02 NO RIGHT TO CONTINUED EMPLOYMENT...................................21 11.03 BENEFITS NON-ASSIGNABLE............................................21 11.04 UNFUNDED PLAN......................................................21 11.05 MENTAL OR PHYSICAL INCOMPETENCY....................................21 11.06 GOVERNING LAWS.....................................................21 11.07 SEVERABILITY.......................................................21 ii Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 1. INTRODUCTION The Supplemental Retirement Plan for Senior Management of Footstar, Inc. is designed to provide a benefit which, when added to the retirement income provided under other Company plans, will ensure the payment of a competitive level of retirement income to key senior executives of Footstar, Inc., thereby providing an additional incentive for assuring orderly management succession. The Plan is intended to be an unfunded plan maintained "primarily for the purpose of providing deferred compensation for a select group of management or other highly compensated individuals" within the meaning of the Employee Retirement Income Security Act. Eligibility for participation in the Plan shall be limited to executives designated by the Compensation Committee of the Board of Directors of Footstar, Inc. This Plan became effective as of October 14, 1996. This plan document sets forth the provisions of the Plan as amended and restated effective June 19, 2002. 1 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 2. DEFINITIONS Wherever used herein, the following terms shall have the meanings set forth below: 2.01 ACTUARIAL EQUIVALENT "Actuarial Equivalent" means a benefit which is equivalent in value to another benefit when computed on the basis of the following actuarial assumptions: (a) Mortality: The 1983 Group Annuity Mortality Table (b) Interest: The Pension Benefit Guaranty Corporation rate used in the calculation of immediate annuities applicable to the month that benefits will commence MINUS 0.5%. 2.02 BENEFICIARY "Beneficiary" means the person designated by the Participant in accordance with Section 5.04 to receive benefits in the event of the Participant's death. 2.03 BENEFIT COMMENCEMENT DATE "Benefit Commencement Date" means the first day on which benefits are scheduled to commence for a Participant pursuant to Section 4.04. 2.04 BOARD "Board" means the Board of Directors of Footstar, Inc. 2.05 CAUSE "Cause" means, in connection with an involuntary termination by the Corporation of a Participant's employment, (a) the Participant's willful and material breach of Article 6 of this Plan; (b) the Participant is convicted of a felony involving moral turpitude; or (c) the Participant engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his duties under this Plan, resulting, in either case, in material harm to the financial condition or reputation of Footstar. For purposes of this Plan, an act or failure to act on Participant's part shall be considered "willful" if it was done or omitted to be done by him or her not in good faith, and shall not include any act or failure to act resulting from any incapacity of a Participant. A termination for Cause shall not take effect unless the following provisions are complied with. The Participant shall be given written notice by Footstar of its intention to terminate him or her or her for Cause, such notice (i) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for Cause is based and (ii) to be given within 90 days of Footstar's learning of such act or acts or failure or failures to act. The Participant shall have 10 days after the date that such written notice has been given to him or her in which to cure such conduct, to the extent such cure is possible. If he or she fails to cure such conduct, the Participant shall then be entitled to a hearing before the Committee at which the Participant is entitled to appear. Such hearing shall be held within 15 days of such notice to the Participant, provided he or she requests such hearing within 10 days of the written notice from Footstar of the intention to terminate him or her or her for Cause. If, within five days following such hearing, the Participant is furnished written notice by the Board confirming that, 2 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 in its judgment, grounds for Cause on the basis of the original notice exist, he or she shall thereupon be terminated for Cause. 2.06 CHANGE IN CONTROL "Change in Control" means any of the following occurrences: (a) An acquisition by any Person of beneficial Ownership of the shares of common stock of Footstar then outstanding (the "Footstar Common Stock Outstanding") or the voting securities of Footstar then outstanding entitled to vote generally in the election of directors (the "Footstar Voting Securities Outstanding"), if such acquisition of Beneficial Ownership results in the Person's Beneficially Owning 25% or more of Footstar Common Stock Outstanding or 25% or more of the combined voting power of Footstar Voting Securities Outstanding; or (b) The approval by the stockholders of Footstar of a reorganization, merger, consolidation, complete liquidation or dissolution of Footstar, the sale or disposition of all or substantially all of the assets of Footstar or similar corporate transaction (in each case referred to in this Section 2.06 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 a Participant or entities controlled by a Participant shall not constitute a Corporate Transaction; or (c) 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 2.06, that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by Footstar'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 Incumber Board. (d) Notwithstanding the provisions set forth in paragraphs (a) and (b) above, the following shall not constitute a Change in Control for purposes of this Section 2.06: (i) Any acquisition by or consummation of a Corporate Transaction with any entity that was a subsidiary of Footstar immediately prior to the transaction or an employee benefit plan (or related trust) sponsored or maintained by Footstar or an entity that was a subsidiary of Footstar 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 Footstar immediately prior to such transactions; or (ii) Any acquisition or consummation of a Corporate Transaction following which more than 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 3 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 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 Footstar Common Stock Outstanding and Footstar 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 Footstar Common Stock Outstanding and Footstar Voting Securities Outstanding, as the case may be. (e) For purposes of this Section 2.06, (i) The terms "Beneficial Ownership", "Beneficial Owning", "Beneficially Owned" and "Beneficial Owners" shall have the meanings ascribed to such terms in Rule 13d-3 under the Exchange Act (including any successor to such rule). (ii) The term "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (iii) The term "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, including "group" as defined in Section 13(d) thereof. 2.07 COMMITTEE "Committee" means the Compensation Committee of the Board. 2.08 COMPENSATION "Compensation" means the sum of: (a) The average of the Participant's annual rate of base pay for the highest three (3) years out of the last ten (10) years ending with the year in which the Participant's Compensation Measurement Date occurs; plus (b) The Participant's full target annual incentive compensation award in effect for the year in which the Participant's Compensation Measurement Date occurs. "Compensation Measurement Date" means (i) the date on which the Participant terminates employment with the Corporation for any reason; or (ii) in the event of a Change in Control, the date of the Change in Control if such date would result in a higher amount of Compensation for the Participant. 2.09 CORPORATION "Corporation" means Footstar, Inc. and any subsidiary or other entity at any time at which 50% or more of the voting power or beneficial interest of such subsidiary or other entity, is owned directly or indirectly, by Footstar. 2.10 EARLY RETIREMENT DATE "Early Retirement Date" means the date on which the Participant completes 10 Years of Service and attains age 55. A Participant whose employment terminates for any reason within 60 days of the date on 4 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 which he or she would have satisfied both of the conditions set forth in the preceding sentence shall be deemed to have reached his or her Early Retirement Date. 2.11 FOOTSTAR "Footstar" means Footstar, Inc. and any successor to all or a substantial portion of its assets or business which assumes the obligations of Footstar. 2.12 NORMAL RETIREMENT DATE "Normal Retirement Date" means the date on which the Participant completes 10 Years of Service and attains age 60. A Participant whose employment terminates for any reason within 60 days of the date on which he or she would have satisfied both of the conditions set forth in the preceding sentence shall be deemed to have reached his or her Normal Retirement Date. 2.13 PARTICIPANT "Participant" means any employee who is participating in the Plan pursuant to Article 3. 2.14 PLAN "Plan" means the Supplemental Retirement Plan for Senior Management of Footstar, Inc. as set forth herein, and any amendments thereto. 2.15 RETIREE "Retiree" means a Participant who has terminated employment and is eligible to receive, or is receiving, a Supplemental Retirement Benefit pursuant to Article 4. 2.16 RETIREMENT ADMINISTRATION COMMITTEE "Retirement Administration Committee means the Committee of the Starfund 401(k) Profit Sharing Plan of Footstar, Inc. and Affiliated Companies. 2.17 SERVICE; YEAR OF SERVICE "Service" means a Participant's period of active employment with the Corporation while a Participant but excluding, unless otherwise provided by the Committee, any period during which the Participant was (a) engaged as a consultant or (b) receiving salary continuance or severance payments. "Service" also shall include any additional periods that may be credited to a Participant by the Committee in its sole discretion. "Year of Service" means a period of 12 consecutive months of Service. 2.18 SUPPLEMENTAL RETIREMENT BENEFIT "Supplemental Retirement Benefit" means the retirement benefit payable to a Retiree as determined pursuant to Article 4. 5 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 2.19 VESTED RETIREMENT BENEFIT "Vested Retirement Benefit" means the aggregate annualized value of any benefits in respect of a Participant under any pension, retirement, or deferred profit sharing plan maintained by the Corporation (other than this Plan) that either have been paid prior to the Participant's Benefit Commencement Date or are vested as of the Participant's Benefit Commencement Date. For this purpose, (a) Any elective pre-tax or after-tax contributions made by or on behalf of the Participant, and any earnings attributable to such contributions, shall not be taken into account; and (b) The aggregated annualized value of such benefits shall be computed in the form of a single life annuity for the Participant's life in accordance with the Actuarial Equivalent assumptions set forth in Section 2.01. 6 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 3. PARTICIPATION 3.01 ELIGIBLE EXECUTIVES Participation in this Plan shall be limited to such employees of the Corporation as selected by the Committee who, in the opinion of the Committee, occupy a position of senior management with the Corporation. 3.02 PARTICIPATION An executive shall become a Participant in the Plan only if the executive is individually selected by, and specifically named by, the Committee for inclusion in the Plan. In addition, the Committee shall have the complete discretionary authority to impose such conditions upon initial participation by an executive or continuing participation by an executive who is already a Participant, as the Committee, in its sole discretion, determines appropriate, including the execution by the Participant of such documents and agreements, which may include restrictive covenants and other conditions, that the Committee requires. 3.03 RECLASSIFICATION If a Participant is reclassified to a responsibility which, in the opinion of the Committee, is not a senior management position at any time prior to becoming eligible for benefits in accordance with Article 4, the Participant's continuing eligibility will be subject to the approval of the Committee. Notwithstanding any provision of the Plan to the contrary, if the Committee determines that participation in the Plan by any one or more Participants will cause the Plan to become subject to Parts 2, 3 or 4 of Title I of the Employee Retirement Income Security Act, the entire interest of such Participant or Participants under the Plan at the discretion of the Committee shall be paid immediately to such Participant or Participants by the applicable Employer, or shall otherwise be segregated from the Plan, and such Participant or Participants shall cease to have any interest under the Plan. 7 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 Article 4. Supplemental Retirement Benefit 4.01 ELIGIBILITY FOR SUPPLEMENTAL RETIREMENT BENEFIT (a) A Participant shall be eligible to receive the Supplemental Retirement Benefit under this Plan if he or she terminates employment for any reason other than death or termination by the Corporation for Cause after attaining his or her Early Retirement Date or Normal Retirement Date. (b) Except as otherwise provided pursuant to Article 7, a Participant shall not be eligible to receive the Supplemental Retirement Benefit under this Plan if he or she does not meet the conditions set forth in this Section 4.01. 4.02 NORMAL RETIREMENT BENEFIT The amount of the Supplemental Retirement Benefit payable to a Participant who terminates employment at or after reaching his or her Normal Retirement Date shall be an annual benefit payable for the life of the Participant equal to the lesser of (a) or (b): (a) the excess, if any, of (i) 2% of the Participant's Compensation multiplied by his or her Years of Service; REDUCED BY (ii) the Actuarial Equivalent value of the Participant's Vested Retirement Benefits determined as of his or her employment termination date. (b) 50% of the Participant's Compensation. 4.03 EARLY RETIREMENT BENEFIT The amount of the Supplemental Retirement Benefit payable to a Participant who terminates employment after reaching his or her Early Retirement Date but prior to his or her Normal Retirement Date shall be an annual benefit payable for the life of the Participant equal to the Normal Retirement Benefit determined under Section 4.02 reduced by 4% for each whole and partial year (treating a partial year as a whole year) prior to the date the Participant would have reached his or her Normal Retirement Date. 4.04 BENEFIT COMMENCEMENT DATE Payment of a Participant's Supplemental Retirement Benefit shall commence as of the first day of the month next following the Participant's employment termination date. 4.05 FORM OF BENEFIT PAYMENT (a) Single Life Annuity. A Participant's Supplemental Retirement Benefit shall be payable in the form of a single life annuity for the life of the Participant unless he or she elects an optional form of payment pursuant to paragraph (b). 8 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 (b) Optional Forms of Payment. A Participant may elect to have his or her Supplemental Retirement Benefit paid in one of the optional forms of payment described below by making an irrevocable election at least 12 months prior to the Participant's Benefit Commencement Date in accordance with the procedures established by Retirement Administration Committee. The optional forms of payment are: (i) Joint and 50% or 100% Survivor Annuity. An annuity payable for the life of the Participant with a survivor annuity continuing for the life of his or her Beneficiary. The amount of the annuity continued to the Beneficiary shall be 50% or 100% of the amount payable to the Participant. The amount of such benefit shall be equal to the Actuarial Equivalent value of the single life annuity payable under paragraph (a). (ii) Lump Sum. A single lump sum payment equal to the Actuarial Equivalent present value of the single life annuity payable under paragraph (a). 9 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 5. DEATH BENEFIT 5.01 DEATH AFTER EARLY RETIREMENT DATE (a) In the event that a Participant dies (i) while still an employee after attaining his or her Early Retirement Date or Normal Retirement Date, or (ii) after becoming eligible to receive a Supplemental Retirement Benefit but prior to the Benefit Commencement Date, his or her Beneficiary shall be entitled to receive the benefit described in (b). (b) The amount of the benefit payable to the Beneficiary shall be an annual benefit for the life of the Beneficiary in an amount equal to one-half of the Normal Retirement Benefit or Early Retirement Benefit that would have been payable to the Participant (determined pursuant to Section 4.02 or 4.03, as applicable) if the Participant had retired immediately prior to the date of his or her death, provided, that if the age difference between the Participant and the Beneficiary is greater than 5 years, the benefit payable shall be actuarially adjusted to reflect the differences in the life expectancy of the Participant and the Beneficiary. Such benefit shall be payable commencing as of the first day of the month next following the Participant's death. (c) If Participant's Beneficiary is his or her estate, then the benefit payable such Beneficiary shall be an immediate single lump sum payment in an amount equal to the Actuarial Equivalent value of the one-half of the Normal Retirement Benefit or Early Retirement Benefit that would have been payable (determined pursuant to Section 4.02 or 4.03, as applicable) in the form of a single life annuity to the Participant if the Participant had retired immediately prior to his or her death. 5.02 DEATH PRIOR TO EARLY RETIREMENT DATE (a) In the event that a Participant dies (i) while still an employee prior to attaining his or her Early Retirement Date, and (ii) the Participant is survived by his or her spouse or, the Participant is not survived by his or her spouse but is survived by a Dependent Child or Dependent Children, such spouse or Dependent Child or Children shall be entitled to receive the benefit described in paragraph (b). (b) The amount of the benefit payable to the surviving spouse shall be an annual benefit payable for the life of the spouse amount equal to one-half of the Normal Retirement Benefit that would have been payable to the Participant (determined pursuant to Section 4.02) if the Participant had retired immediately prior to the date of his or her death, reduced by 4% for each whole and partial year (treating a partial year as a whole year) prior to the date the Participant would have reached his or her Normal Retirement Date, and provided, that if the age difference between the Participant and the Beneficiary is greater than 5 years, the benefit payable shall be actuarially adjusted to reflect the differences in the life expectancy of the Participant and the Beneficiary. Such benefit shall be payable commencing as of the first day of the month next following the Participant's death. 10 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 (c) In the event that the Participant is not survived by his or her spouse, but is survived by a Dependent Child or Children, then an annual benefit equal to the annual benefit that would have been payable to a surviving spouse pursuant to paragraph (b) above, shall be paid to each such Dependent Child, in equal shares, until the date such Dependent Child attains age 21 or, if earlier, the date such Dependent Child dies. (d) For purposes of this Section 5.02, "Dependent Child" or "Dependent Children" means each natural and/or adopted child of a Participant who is under the age of 21. 5.03 DEATH AFTER BENEFIT COMMENCEMENT DATE In the event that a Participant dies after his or her Benefit Commencement Date, then benefits shall be payable only in accordance with form of benefit payment in effect on the Participant's date of death. 5.04 DESIGNATION OF BENEFICIARY (a) Each Participant may designate, in the form and manner prescribed by the Committee, one or more persons as the Beneficiary under this Plan. A Participant also may designate one or more persons as a contingent beneficiary in the event that the Participant's primary Beneficiary does not survive the Participant. (b) Any Beneficiary designation made by a Participant may be changed or revoked by the Participant at any time or from time to time prior to his or her Benefit Commencement Date, or death, if earlier. (c) If no Beneficiary is designated or survives the Participant, then the Participant's Beneficiary shall be his or her spouse, if living; otherwise, the Participant's estate. 11 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 6. PARTICIPANT OBLIGATIONS 6.01 CONFIDENTIALITY; COOPERATION WITH REGARD TO LITIGATION (a) During a Participant's employment with Footstar and thereafter, the Participant shall not, without the prior written consent of Footstar, disclose to anyone except in good faith in the ordinary course of business to a person who will be advised by the member to keep such information confidential or make use of any Confidential Information, except when required to do so by legal process, by any governmental agency having supervisory authority over the business of Footstar or by any administrative or legislative body (including a committee thereof) that requires him or her to divulge, disclose or make accessible such information. In the event that the Participant is so ordered, he or she shall give prompt written notice to Footstar in order to allow Footstar the opportunity to object to or otherwise resist such order. (b) "Confidential Information" shall mean all information that is not known or available to the public concerning the business of Footstar or any Subsidiary relating to any of their products, product development, trade secrets, customer suppliers, finances, and business plans and strategies. For this purpose, information known or available generally within the trade or industry of Footstar or any Subsidiary shall be deemed to be known or available to the public. Confidential Information shall include information that is, or becomes, known to the public as a result of a breach by the Executive of the provisions of Section 6.01(a) above. (c) The Participant agrees to cooperate with Footstar, (including following the Participant's termination of employment for any reason), by making himself or herself available to testify on behalf of Footstar or any Subsidiary or affiliate of Footstar, in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to assist Footstar, or any Subsidiary or affiliate of Footstar, in any such action, suit, or proceeding, by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to Footstar, or any Subsidiary or affiliate of Footstar, as requested. Footstar agrees to reimburse the Participant, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or assistance. 6.02 NON-COMPETITION (a) During the Restriction Period (as defined below), the Participant shall not engage in Competition with Footstar, or any Subsidiary. "Competition" shall mean engaging in any activity, except as provided below, for a Competitor of Footstar or any Subsidiary, whether as an employee, consultant, principal, agent, officer, director, partner, shareholder (except as a less than one percent shareholder of a publicly trade company) or otherwise. A "Competitor" shall mean those companies designated by Footstar and communicated to the Participant (in an Employment Agreement, Change in Control Agreement or otherwise) and any successor or successors thereto) or (ii) the portion of any other corporation or other entity or start-up corporation or entity that is engaged in the Discount Retail Footwear Business within fifty (50) miles of any Discount Retail Footwear Business outlet in the United States of Footstar or any Subsidiary, provided that a corporation or entity described in clause (ii) above shall not be deemed to be a Competitor if the Participant shall not either directly or indirectly oversee or manage the activities of such corporation or entity's division or unit engaged in the Discount Retail Footwear Business. If the Participant commences employment or becomes a consultant, principal, agent, officer, director, partner, or 12 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 shareholder of any entity that is not a Competitor at the time the Participant initially becomes employed or becomes a consultant, principal, agent, officer, director, partner, or shareholder of any entity, future activities of such entity shall not result in a violation of this provision unless (x) such activities were contemplated at the time the Participant initially became employed or becomes a consultant, principal, agent, officer, director, partner or shareholder of the entity (and the contemplation of such activities was known to the Participant) or (y) the Participant commences directly or indirectly overseeing or managing the activities of Footstar or Subsidiary so long as he or she does not regularly participate in discussions with regard to the competing business. For purposes of the foregoing, "Discount Retail Footwear Business" shall mean a group of four or more stores which primarily sell discount footwear. 6.03 NON-SOLICITATION OF EMPLOYEES During the portion of the Restriction Period following the termination of the Participant's employment, the Participant shall not induce employees of Footstar or any Subsidiary to terminate their employment. During the portion of the Restriction Period following the termination of the Participant's employment, the Participant shall not directly or indirectly hire any employee of Footstar or any Subsidiary or any person who was employed by Footstar or any Subsidiary within 180 days of such hiring. 6.04 DEFINITIONS For purposes of this Article 6 - (a) "Restriction Period" shall mean the period beginning with the Participant's initial date of employment by Footstar and ending the date of a Change in Control except that if the Participant has an Employment Agreement with Footstar it shall have the meaning contained in such employment agreement. (b) "Subsidiary" shall mean any corporation controlled directly or indirectly by Footstar and any affiliate of Footstar. 13 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 7. CHANGE IN CONTROL 7.01 APPLICABILITY This Article 7 shall apply in the event of a "Change in Control". 7.02 RETIREES AND BENEFICIARIES AT TIME OF CHANGE IN CONTROL The following rules shall apply to the payment of benefits to individuals who are Retirees or Beneficiaries of deceased Participants at the time a Change in Control occurs: (a) Retirees. - -------------------------------------------------------------------------------- Status of benefits at time of Change in Control Effect of Change in Control - -------------------------------------------------------------------------------- Single Life Annuity Retiree to receive immediate lump If receiving payment of benefits in sum payment equal to Actuarial the form of a single life annuity Equivalent of future benefits in lieu of annuity payments. - -OR- If Retiree has not elected the joint and survivor annuity option pursuant to Section 4.05(b)(i) and payments have not yet begun - -------------------------------------------------------------------------------- Joint and Survivor Annuity Retiree and Beneficiary to If receiving payment of benefits receive immediate lump sum in the form of a joint and payments equal to Actuarial survivor annuity Equivalent of respective portions of future benefits in - -OR- lieu of annuity payments. If Retiree has elected the joint and survivor annuity option pursuant to Section 4.05(b)(i) and payments have not yet begun - -------------------------------------------------------------------------------- (b) Beneficiaries of Deceased Participants. - -------------------------------------------------------------------------------- Status of benefits at time of Change in Control Effect of Change in Control - -------------------------------------------------------------------------------- Payment of benefits has Beneficiary to receive immediate lump sum begun payment equal to Actuarial Equivalent of future benefits in lieu of annuity payments. - -------------------------------------------------------------------------------- Payment of benefits has Beneficiary to receive immediate not yet begun lump sum payment equal to Actuarial Equivalent of the death benefit determined pursuant to Article 5 in lieu of annuity payments. - -------------------------------------------------------------------------------- 14 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 7.03 TERMINATION OF EMPLOYMENT WITHIN 24 MONTHS FOLLOWING A CHANGE IN CONTROL (a) Participants. A Participant shall be entitled to benefits under this Section 7.03 if during the 24-month period following a Change in Control (i) the Participant's employment is terminated by the Corporation for any reason other than Cause, or (ii) the Participant terminates employment for "Good Reason" (as defined below). - -------------------------------------------------------------------------------- Status of at time of employment termination Effect of Change in Control - -------------------------------------------------------------------------------- Termination occurs at or after Participant to receive immediate lump reaching Normal Retirement Date sum payment equal to Actuarial Equivalent of Participant's Normal Retirement Benefit. - -------------------------------------------------------------------------------- Termination occurs prior to Participant to receive immediate lump Normal Retirement Date but after sum payment equal to Actuarial 10 Years of Service Equivalent of Participant's Normal Retirement Benefit payable in the form of a single life annuity commencing as of the date on which the Participant would have reached his or her Normal Retirement Date if he or she had continued in employment. - -------------------------------------------------------------------------------- Termination occurs prior to Participant to receive immediate lump completing 10 Years of Service sum payment equal to Actuarial Equivalent of the benefit determined pursuant to the following formula payable in the form of a single life annuity commencing as of the date on which the Participant would have reached his or her Normal Retirement Date if he or she had continued in employment. Participant's Normal Retirement Benefit TIMES Years of Service as of date of employment termination 10 - -------------------------------------------------------------------------------- (b) Beneficiaries. In the event that a Participant dies while employed during the 24-month period following a Change in Control, then his or her Beneficiary shall be entitled to receive immediate lump sum payment equal to Actuarial Equivalent of the death benefit determined pursuant to Article 5 in lieu of annuity payments. (c) Good Reason. For purposes of this Section 7.03, "Good Reason" means any of the following which occur after the occurrence of a Change in Control without the express written consent of the affected Participant: (i) An assignment of any duties to the Participant which are inconsistent with his or her status as a senior executive of Footstar. 15 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 (ii) Any decrease in annual base pay or any reduction in annual target incentive compensation opportunity. (iii) Any other failure by Footstar to perform any material obligation under, or breach by Footstar of any material provision of an employment agreement with the Participant that is not cured within 30 days. (iv) Any failure to secure the agreement of any successor corporation or other entity to the Corporation to fully assume Footstar's obligations under an employment agreement with the Participant. (v) A relocation of the Participant's principal place of employment outside a 35-mile radius of his or her principal place of employment as in effect immediately prior to such Change in Control. 7.04 TERMINATION OF EMPLOYMENT MORE THAN 24 MONTHS FOLLOWING A CHANGE IN CONTROL (a) Participants. The following rules shall apply to a Participant whose employment is terminated by the Corporation for any reason other than Cause after the end of the 24-month period following a Change in Control: - -------------------------------------------------------------------------------- Status of at time of employment termination Effect of Change in Control - -------------------------------------------------------------------------------- Termination occurs after Benefits payable in accordance with Participant reaches his or her Article 4. Early Retirement Date or Normal Retirement Date - -------------------------------------------------------------------------------- Termination occurs prior to Participant shall receive the benefit Participant reaching his or her determined pursuant to the following Early Retirement Date formula commencing as of the date on which the Participant would have reached his or her Normal Retirement Date if he or she had continued in employment. Participant's Normal Retirement Benefit TIMES Years of Service as of date of the Change in Control 10 The benefit will be payable in one of the payment forms described in Section 4.05. - -------------------------------------------------------------------------------- (b) Beneficiaries. In the event that a Participant dies after end of the 24-month period following a Change in Control, then his or her Beneficiary shall be entitled to receive death benefits in accordance with Article 5. 16 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 Article 8. Forfeiture of Benefits Notwithstanding any other provision of the Plan, future payment of benefits hereunder to a Participant or Beneficiary will, at the discretion of the Committee, be discontinued and forfeited, and the Corporation will have no further obligation hereunder to such Participant or Beneficiary, if any of the following circumstances occur: (a) The Participant is discharged from employment with the Corporation for Cause; (b) The Participant at any time violates any of the provisions of Article 6; or (c) The Participant is convicted of a crime involving dishonesty or fraud on the part of such Participant in his relationship with the Corporation. The Committee shall have sole discretion with respect to the application of the provisions of this paragraph and such exercise of discretion shall be conclusive and binding upon the Participant, his or her Beneficiary and all other persons. 17 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 9. ADMINISTRATION 9.01 POWERS AND DUTIES OF THE COMMITTEE The Committee shall have the sole discretion and authority: (a) To determine the eligibility of employees to participate in the Plan; (b) To credit a Participant with additional Service; and (c) To waive any or all of the requirements set forth in this Plan with respect to any Participant. The Committee's exercise of its discretion under this Plan with respect to any Participant will not create a precedent for any other Participant. 9.02 RETIREMENT ADMINISTRATION COMMITTEE The Plan shall be administered by the Retirement Administration Committee. Except as otherwise provided in Section 9.01, the Retirement Administration Committee shall have full authority and power to administer and construe the Plan, subject to applicable requirements of law. Without limiting the generality of the foregoing, the Retirement Administration Committee shall have the following powers and duties: (a) To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan; (b) To interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan; (c) To decide all questions concerning the Plan; and (d) To appoint such agents, counsel, accountants, consultants and other persons as may be required to assist in administering the Plan. All decisions made by the Retirement Administration Committee pursuant to the provisions of the Plan shall be made in its sole discretion and shall be final, conclusive, and binding upon all parties. 9.03 DELEGATION OF DUTIES The Retirement Administration Committee may delegate such of its duties and may engage such experts and other persons as it deems appropriate in connection with administering the Plan. The Retirement Administration Committee shall be entitled to rely conclusively upon, and shall be fully protected in any action taken by the Retirement Administration Committee in good faith in reliance upon any opinions or reports furnished them by any such experts or other persons. 9.04 EXPENSES All expenses incurred prior to the termination of the Plan that shall arise in connection with the administration of the Plan, including, without limitation, administrative expenses and compensation and other expenses and charges of any actuary, counsel, accountant, specialist or other person who shall be 18 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 employed by the Retirement Administration Committee in connection with the administration of the plan, shall be paid by the Corporation. 9.05 INDEMNIFICATION OF RETIREMENT ADMINISTRATION COMMITTEE The Corporation agrees to indemnify and to defend to the fullest extent permitted by law any person serving as a member of the Retirement Administration Committee, and each employee of the Corporation or any of its affiliates appointed by the Retirement Administration Committee to carry out duties under this Plan, against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the Corporation) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith. 9.06 LIABILITY To the extent permitted by law, neither the Retirement Administration Committee nor any other person shall incur any liability for any acts or for any failure to act except for liability arising out of such person's own willful misconduct or willful breach of the Plan. 9.07 APPEALS PROCEDURE (a) The Retirement Administration Committee shall approve or wholly or partially deny all claims for benefits under the Plan within a reasonable period of time after all required documentation has been furnished to the Retirement Administration Committee. (b) If a claim is wholly or partially denied, the Retirement Administration Committee shall provide the claimant with written notice setting forth the specific reasons for the denial, making reference to the pertinent provisions of the Plan or the Plan documents on which the denial is based; describe any additional material or information that should be received before the claim may be acted upon favorably, and explain why such material or information, if any, is needed; and inform the person making the claim of his right pursuant to this Section to request review of the decision by the Retirement Administration Committee. (c) A claimant shall have the right to request a review of the decision denying the claim. Such request must be made by filing a written application for review with the Retirement Administration Committee no later than sixty (60) days after receipt by the claimant of written notice of the denial of his claim. The claimant may review pertinent Plan documents and shall submit such written comments and other information which he wishes the Retirement Administration Committee to consider in connection with his claim. (d) The Retirement Administration Committee may hold any hearing or conduct any independent investigation which it deems necessary to render its decision on review. Such decision shall be made as soon as practicable after the Retirement Administration Committee receives the request for review. Written notice of the decision on review shall be promptly furnished to the claimant and shall include specific reasons for the decision. (e) For all purposes under the Plan, decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested persons. 19 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 10. AMENDMENT OR TERMINATION The Committee reserves the right to modify or amend, in whole or in part, or to terminate, this Plan at any time; provided, however, that no such modification, amendment or termination shall adversely affect the right of any Participant (or Beneficiary) to receive the benefits of such Participant (or Beneficiary) should have received under the Plan upon termination of employment with the Corporation for any reason, including retirement, death or disability had the Plan not been so modified, amended or terminated, taking into account the Participant's Service and age at the time of such Participant's actual termination of employment with the Corporation for any reason including retirement, death or disability. 20 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 ARTICLE 11. GENERAL PROVISIONS 11.01 RIGHT TO WITHHOLD TAXES The Corporation shall have the right to withhold such amounts from any payment under this Plan as it determines necessary to fulfill any federal, state, or local wage or compensation withholding requirements. 11.02 NO RIGHT TO CONTINUED EMPLOYMENT Neither the Plan, nor any action taken under the Plan, shall confer upon any Participant any right to continuance of employment by the Corporation nor shall it interfere in any way with the right of the Corporation to terminate any Participant's employment at any time. 11.03 BENEFITS NON-ASSIGNABLE Benefits under the Plan may not be anticipated, assigned or alienated, and will not be subject to claims of his creditors by any process whatsoever, except as specifically provided in this Plan or by the Retirement Administration Committee in its sole discretion. 11.04 UNFUNDED PLAN Nothing in this Plan shall be construed as giving any Participant or his or her legal representative, or designated beneficiary, any claim against any specific assets of the Corporation or as imposing any trustee relationship upon the Corporation in respect of the Participant. The Corporation shall not be required to segregate any assets in order to provide for the satisfaction of the obligations hereunder. If and to the extent that the Participant or his or her legal representative or designated beneficiary acquires a right to receive any payment pursuant to this Plan, such right shall be no greater than the right of an unsecured general creditor of the Corporation. 11.05 MENTAL OR PHYSICAL INCOMPETENCY If the Retirement Administration Committee determines that any person entitled to payments under the Plan is incompetent by reason of physical or mental disability, as established by a court of competent jurisdiction, the Retirement Administration Committee may cause all payments thereafter becoming due to such person to be made to any other person for his benefit, without responsibility to follow the application of amounts so paid. Payments made pursuant to this Section shall completely discharge the Retirement Administration Committee and the Corporation. 11.06 GOVERNING LAWS The provisions of the Plan shall be construed, administered and enforced according to applicable Federal law and the laws of the State of New York. 11.07 SEVERABILITY The provisions of the Plan are severable. If any provision of the Plan is deemed legally or factually invalid or unenforceable to any extent or in any application, then the remainder of the provision and the Plan, except to such extent or in such application, shall not be affected, and each and every provision of the Plan shall be valid and enforceable to the fullest extent and in the broadest application permitted by law. 21 Supplemental Retirement Plan for Senior Management of Footstar, Inc. Amended and Restated June 19, 2002 EX-15 4 e13720ex_15.txt LETTER RE: UNAUDITED INTERIM FINANCIAL INFO Exhibit 15 Accountants' Acknowledgment --------------------------- Footstar, Inc. West Nyack, New York Board of Directors: Re: Registration Statements Numbers 333-20731, 333-30011 and 333-41390 on Form S-8 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 18, 2002 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. /s/ KPMG LLP New York, New York August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----