UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) DECEMBER 14, 2004
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FOOTSTAR, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
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(State or Other Jurisdiction of Incorporation)
1-11681 22-3439443
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(Commission File Number) (IRS Employer Identification No.)
933 MACARTHUR BOULEVARD
MAHWAH NEW JERSEY 07430
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(Address of Principal Executive Offices) (Zip Code)
(201) 934-2000
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
As previously disclosed, on March 2, 2004, Footstar, Inc. (the
"Registrant") and substantially all of its subsidiaries (collectively, the
"Debtors") filed voluntary petitions under chapter 11 of title 11, United States
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
Southern District of New York (the "Court") (Case No. 04-22350 (ASH)) (the
"Chapter 11 Case"). The Debtors remain in possession of their assets and
properties, and continue to operate their businesses and manage their properties
as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy
Code.
The Debtors filed a motion with the Court on November 29, 2004
for authorization to (i) establish a comprehensive compensation program for
certain employees, consisting of (a) a performance bonus for fiscal year 2005
(the "Performance Bonus"), (b) a retention bonus (the "Retention Bonus"), (c) a
revised severance plan (the "Revised Severance Plan"), (d) accelerated payments
of a portion of retention bonus payments established pursuant to the Debtors'
previously approved retention program (the "Accelerated Retention Bonus"), and
(e) the continuation of the Debtors' supplementary employee retirement program
(the "SERP," and together with the Performance Bonus, the Retention Bonus, the
Revised Severance Plan, and the Accelerated Retention Bonus, the "Meldisco
Compensation Program"); and (ii) enter into non-compete agreements with certain
key officers (the "Non-Compete Agreements").
On December 14, 2004, the Court, among other things:
o approved and ratified the Meldisco Compensation Program
pursuant to sections 363(b) and 105(a) of the Bankruptcy
Code;
o authorized taking all actions to implement and effectuate
the Meldisco Compensation Program, including, without
limitation, making the payments thereunder;
o authorized the Debtors to make payments to effectuate the
Performance Bonus;
o authorized the Debtors to make payments to effectuate the
Retention Bonus;
o authorized the Debtors to implement the Revised Severance
Plan;
o authorized the Debtors to make the Accelerated Retention
Bonus payments;
o authorized the Debtors to continue to honor their
obligations under their current SERP;
o ordered that the SERP was modified so that vesting
thereunder could occur upon the sale of substantially all of
the assets or stock of the Debtors (collectively defined
herein as "Sale");
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o ordered that the SERP shall not vest but shall continue if a
reorganization of Meldisco is effected as contemplated by
the Debtors' plan of reorganization;
o ordered that the Debtors shall not add any additional
participants to the SERP;
o authorized the Debtors to enter into the Non-Compete
Agreements with certain employees;
o ordered that certain employees must waive their rights under
their prepetition employment and other written contracts
(the "Employee Contracts") upon receipt of the benefits
contemplated by the Meldisco Compensation Program; and
o ordered that certain employees who are parties to Employee
Contracts shall retain their rights to assert claims against
the Debtors should the Debtors breach any portion of the
Meldisco Compensation Program or the Non-Compete Agreements.
Each of the following executive officers of the Registrant are
eligible to participate in certain components of the Meldisco Compensation
Program: Jeffrey Shepard, President and CEO of Meldisco and Executive Vice
President of Footstar, Inc.; Maureen Richards, Senior Vice President, General
Counsel and Corporate Secretary of Footstar, Inc.; and Richard Robbins, Senior
Vice President of Financial Reporting and Controls of Footstar, Inc.
(collectively the "Registrant's Executive Officers").
Performance Bonus
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With the Performance Bonus, Meldisco seeks to establish a bonus
program for fiscal year 2005 that adjusts performance metrics to align the
interests of Meldisco employees and equity holders. Accordingly, Meldisco will
pay the Performance Bonus upon achievement of certain free cash flow goals. The
Performance Bonuses range from (i) 100% of an employee's salary to (ii) 5% of an
employee's salary. Performance Bonuses will be pro-rated in the event of an
involuntary termination during fiscal year 2005.
The Debtors have identified approximately 170 employees who will
receive the Performance Bonus, which the Debtors will pay semi-annually. The
Debtors will increase the CEO's base salary from $567,000 to $650,000 per year
and increase his Performance Bonus target from 65% of base salary to 100% of
base salary, effective January 1, 2005. There is no change to the base salary or
bonus opportunities for Ms. Richards or Mr. Robbins.
Performance Bonuses will be pro-rated in the event of an
involuntary termination. If there is a Sale, the Debtors will pay the
Performance Bonuses to all eligible participants on a pro rated basis calculated
daily.
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The Retention Bonus
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With the Retention Bonus, the Debtors seek to establish a bonus
that provides retentive payments to key Meldisco employees to stem attrition.
Accordingly, the Retention Bonus guarantees a retention payment to key Meldisco
employees employed as of the date these bonus payments are scheduled. Retention
Bonuses will equal 75% of each employee's normal 2004 performance target award
level.
The Debtors have identified approximately 240 current employees,
which includes the Registrant's Executive Officers, that will receive Retention
Bonuses, which will be earned and paid quarterly.(1) Retention Bonuses will be
pro-rated in the event of an involuntary termination during fiscal year 2005. If
there is a Sale, the Debtors will pay the Retention Bonuses to all eligible
participants on a pro rated basis calculated daily.
Revised Severance Program.
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The Debtors seek to revise their current severance packages to
provide competitive severance benefits to stem attrition (the "Revised Severance
Program"). Under the Revised Severance Program, Meldisco will provide employees
with increased severance benefits, the amount of which is based on years of
service and/or minimum severance status based upon job level. For example, if an
employee is entitled to 6 weeks of severance based upon years of service and job
level, such employee will receive 6 weeks of severance, whether or not such
employee has found another employment opportunity after termination. If there is
a Sale, payments under the Revised Severance Program will only be available if
such employee is terminated and is not offered comparable employment by the
acquiring entity.(2) If such employee accepts non-comparable employment by the
acquiring entity, such employee will not receive severance payments. The Revised
Severance Program also provides a continuation of medical and dental benefits
during the severance period.
If there is a Sale, certain officers will be entitled to receive
an additional severance enhancement (the "Severance Enhancement") under the
Revised Severance Program if such individual is not offered comparable
employment by the acquiring entity.(3) If such senior executive accepts
non-comparable employment by the acquiring entity, such executive is not
entitled to the Severance Enhancement. Mr. Shepard will be entitled to receive
24 months of base salary and bonus if such enhancement is triggered. No
additional severance was awarded to Ms. Richards or Mr. Robbins under the
Meldisco Compensation Program.
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(1) For 13 officers, including the Registrant's Executive Officers, the
Retention Bonus will be paid semi-annually.
(2) For the purposes of severance for employees other than certain officers, an
offer of "comparable employment" means: (i) at least the same salary or
hourly rate in effect immediately prior to the Sale; (ii) substantially
comparable employee benefits in the aggregate to the employee benefits
applicable immediately prior to the Sale; and (iii) a principal place of
employment that is not more than 35 miles from the executive's principal
place of employment immediately prior to the Sale.
(3) For the purposes of severance for these officers, an offer of "comparable
employment" means unless such executive agrees otherwise: (i) substantially
the same duties as applicable to the executive immediately prior to the
Sale and no duties which are inconsistent with the executive's status as a
senior executive; (ii) at least the same salary rate in effect immediately
prior to the Sale; (iii) an equivalent target annual bonus opportunity;
(iv) substantially comparable employee benefits in the aggregate to the
employee benefits applicable immediately prior to the Sale, including,
without limitation, to the extent applicable, non-enhanced severance
benefits, life insurance, retirement benefits, and supplemental retirement
benefits; and (v) a principal place of employment that is not more than 35
miles from the executive's principal place of employment immediately prior
to the Sale.
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Accelerated Retention Bonus.
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The Debtors wish to accelerate the payment of a portion of the
Original Retention Bonuses to participants in the Court-approved Retention
Program. The Debtors, in consultation with the Creditors' Committee and the
Equity Committee, guaranteed payment of 50% of the Debtors' 2004 performance
bonuses to those Meldisco employees who were not participants in the
Court-approved Retention Program. These payments are scheduled for payment on
February 1, 2005. For participants in the initial Court-approved Retention
Program, their Original Retention Bonus was comprised of either (i) their 2004
performance bonus plus a percentage of such participant's salary or (ii) bonuses
established by the Debtors' CEO from the $ 1 million discretionary fund provided
in the Retention Program (the "Special Retention Bonus"). To avoid penalizing
Retention Program participants, the Debtors will pay (i) 50% of such
participants normal 2004 performance bonus component of the Original Retention
Bonus or (ii) 50% of the Special Retention Bonuses, as applicable, on July 1,
2005. The Debtors will pay the remainder of the Original Retention Bonuses or
Special Retention Bonuses in accordance with the Retention Program or any
agreement relating to the Special Retention Bonuses.
SERP
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Prior to March 2, 2004, the Debtors maintained a supplemental
executive retirement plan (the "SERP"). The Debtors initially sought approval of
the SERP as a component of the original Court-approved Retention Program, but
agreed to delay consideration of such approval. On December 14, 2004, the Court
authorized the continuation of the SERP for certain key officers as an
additional retention component under the Meldisco Compensation Program.
Pursuant to the SERP, the Debtors provide supplemental benefits
to certain senior employees whose income exceeds the Internal Revenue Service's
limitations for compensation eligible for contribution to the Debtors' 401(k)
retirement plan. The vesting of SERP benefits for a participating executive will
occur when such executive (i) reaches the age of 55 and (ii) has been employed
by the Debtors for ten or more years. If, however, there is a Change of Control
of the Debtors (as defined in the SERP) that results in a termination of a
participating executive, the SERP vests notwithstanding failure to satisfy the
qualification requirements.
The SERP will continue as part of the Meldisco Compensation
Program, except that, in the event of a Sale and the failure of the acquirer to
offer a participant comparable employment (4), future benefit calculations have
been agreed upon at reduced levels. No new participants will be added to this
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(4) An offer of "comparable employment" means unless such executive agrees
otherwise: (i) substantially the same duties as applicable to the executive
immediately prior to the Sale and no duties which are inconsistent with the
executive's status as a senior executive; (ii) at least the same salary
rate in effect immediately prior to the Sale; (iii) an equivalent target
annual bonus opportunity; (iv) substantially comparable employee benefits
in the aggregate to the employee benefits applicable immediately prior to
the Sale, including, without limitation, to the extent applicable,
non-enhanced severance benefits, life insurance, retirement benefits, and
supplemental retirement benefits; and (v) a principal place of employment
that is not more than 35 miles from the executive's principal place of
employment immediately prior to the Sale.
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program. If, however, a stand-alone reorganization of Meldisco is effected in
the manner contemplated by the Debtors' plan of reorganization, the SERP will
not vest, but benefits will continue to accrue according to the terms of the
SERP. In the event any rights to a SERP benefit are triggered by a Sale, Mr.
Shepard shall be entitled to receive a reduced benefit of $1,010,300 and Ms.
Richards shall be entitled to receive a reduced benefit of $462,700. Mr. Robbins
does not participate in the SERP.
Non-Compete Agreements
----------------------
With the uncertainty caused by the litigation with Kmart, the
Debtors are concerned that Kmart may try to hire certain key officers in an
effort to quickly replicate the Debtors' Meldisco business. To deter Kmart from
hiring these key employees, the Debtors propose entering into the Non-Compete
Agreements with these employees. The elements of the Meldisco Compensation
Program serve as consideration for the non-compete covenants contained in the
Non-Compete Agreements. The Non-Compete Agreements will restrict these
executives during (i) their employment with the Debtors and (ii) the earlier of
(a) 12 months after such executives are terminated or (b) 12 months after the
Kmart Agreements are terminated, from engaging in the procurement, sale, or
marketing of footwear, or the operation of a footwear business within Kmart
and/or Sears. The Non-Compete Agreements will also include a confidentiality
provision, a non-solicitation of employees provision, and a provision
prohibiting the executives from interfering with or disrupting the relationships
between the Debtors and any of their customers, vendors, suppliers, or
distributors. Mr. Shepard, Ms. Richards and Mr. Robbins will be required to sign
these agreements.
ITEM 4.01. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
At a meeting held on December 14, 2004, the Audit Committee of
the Board of Directors of the Registrant, approved the dismissal of the
Registrant's independent accountant KPMG LLP and the hiring of Amper, Politziner
& Mattia, P.C. ("APM").
In connection with the audits of the two fiscal years ended
December 28, 2002 and December 29, 2001, and the subsequent interim period
through December 14, 2004, there were no disagreements with KPMG LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
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The audit reports of KPMG LLP on the Registrant's consolidated
financial statements as of December 28, 2002 and December 29, 2001 and for the
three fiscal years then ended, included in the Registrant's Annual Report on
Form 10-K for Fiscal Year 2002 did not contain any adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle, except that KPMG LLP's report on the Registrant's
consolidated financial statements as of December 28, 2002 and December 29, 2001
and for the three fiscal years then ended contained (1) a separate paragraph
stating that "the accompanying consolidated financial statements and the
financial statement schedule have been prepared assuming that the Registrant
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, on March 2, 2004 the Registrant filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. This filing for
reorganization raises substantial doubt about the Registrant's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty," and (2) a
separate paragraph stating that the consolidated balance sheet as of December
29, 2001 and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for the years ended December 29,
2001 and December 30, 2000 included therein were restated.
In connection with the audits of the two fiscal years ended
December 28, 2002 and December 29, 2001, and the subsequent interim period
through December 14, 2004, there were no reportable events as defined in Item
304(a)(1)(v) of Regulation S-K, except that, KPMG LLP advised the Registrant of
the following matters which it considered to be "material weaknesses" or
"reportable conditions". Substantially all of the matters identified herein have
subsequently been remediated by the Company, with the several remaining in the
process of remediation:
o Control Environment (Tone at the Top, Adequacy of Resources and
Organizational Structure) - Need to improve the control environment of the
Registrant.
o Accounts Payable Reconciliation - These reconciliations were
incorrectly prepared and were not properly reviewed as part of the year end
closing process.
o Management Override of Controls - Vendor payables were written
off to reduce expenses.
o Three-way Auto Match Process of Purchase Order, Receiver and
Invoice - Controls over the three-way match of vendor purchase orders, receiving
reports and invoices were not consistently effective.
o Inventory In-Transit - The process and systems used to track
and record inventory in-transit were inadequate and flawed resulting in errors
in the timing of recording inventory receipts.
o Warehouse 15 Shrink - There was a lack of controls over and
accountability for inventory shipped between distribution centers and stores.
o Processing of Proof of Delivery Payments - Certain policies and
procedures should be implemented in order to enhance the overall control over
payments to vendors outside the normal accounts payable three-way auto match
process.
o Purge Process - There was no formal policy in place to assure
that all manual entries recorded to the general ledger for items such as proof
of delivery payments, electronic funds transfer payments and manual checks agree
with the related items deleted (purged) from the accounts payable sub ledger and
the unmatched vendor invoice file.
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o Manual Entries - Certain manual entries lacked appropriate
documentation and systems improvements are necessary to reduce the large number
of manual entries required in order to close the books.
o Vendor Debit Balances - There were a number of unapplied debit
balances which were not appropriately reviewed and resolved.
o Communications between Departments and Personnel - There is a
need for improved communication between the Registrant's various departments and
the Registrant's finance department.
o Document Retention - Retention policies and procedures were not
clearly defined and documented.
o Payroll Withholding Tax - Improved procedures are required to
eliminate the significant number of tax deficiency notices being received,
specifically in the payroll withholding area. Controls are required to quantify
and record changes to reserves required for estimated adjustments.
o Sales and Use Tax - The system to identify and assist
compliance with use tax obligations needs to be improved.
o Book to Budget Process - The method by which the Registrant
estimates several of its quarterly and annual accruals needs to be improved.
o Intercompany Reconciliations - Stronger controls over the
reconciliation of intercompany accounts needs to be implemented.
o Accrued Royalty to 3rd Parties - Stronger controls over the
calculation of the royalty accrual needs to be implemented.
o Inventory Reconciliations - Stronger controls over inventory
reconciliation procedures need to be implemented.
o Minority Interest/Excess Rent Calculation - Need to improve the
reconciliation process to ensure the accuracy of related balances recorded in
the general ledger.
o Accounting for Shrink - Stronger controls over the accounting
for shrink needs to be implemented.
o Reconciliation of Inventory Shrink to the General Ledger - Need
to document a process of reviewing shrink by store and reconciling the
cumulative year to date store shrink expense to the general ledger on a
quarterly and annual basis.
o Worn and Damaged Receivables - Need to improve the tracking and
monitoring of worn and damaged receivables by vendor.
o Family Plan Accrual - Need to improve the supporting
calculations used in determining this accrual.
o Contingent Rent Liability - Procedures should be put in place
to ensure that the contingent rent liability is computed accurately.
o Physical Inventory Process - Need to improve procedures
governing the physical inventory process.
o Co-Op Advertising - Need to improve procedures to enhance
overall controls in this area.
o Communication Between Internal and External Auditors - Need to
improve communications between internal and external auditors.
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o Actuarial Calculations - Need to utilize a qualified actuary to
assist in performing all relevant calculations.
o Formalization of Policies and Procedures - Need to document
formal written policies and procedures available for accounting and operating
personnel.
o Segregation of Duties of Generation of Purchase Orders and
Matching of Invoices - Need to implement a formal policy with proper segregation
of duties over the Construction and Store Planning Department.
o Inventory Aging Reserve - Need to improve the supporting
calculations used in determining this reserve.
o Sales Return Analysis - Need to improve the supporting
calculations used in determining sales returns.
o Bank Reconciliation - Need to reconcile all bank accounts on a
timely basis.
o 401k Profit Sharing Accrual and Employer Match Contribution -
Need to improve the supporting calculation used in determining the 401k profit
sharing and employer match accrual.
o Straight-Line Rent - Procedures should be put in place to
ensure that straight line rent is being computed accurately.
o Access to the Data Center - Need to restrict data center access
to authorized personnel only.
o Password Lockout Controls - Need to implement password lockout
controls for all critical applications.
o Forced Password Changes - Need to change passwords on a
periodic basis.
o Sharing of IDs and Passwords - Need to improve controls related
to the sharing of ids and passwords.
o Server Analysis - Need to develop minimum baseline build
requirements for all operating systems.
o Segregation of Duties/Data Integrity of an Affinity SQL Query -
Need to improve controls over the integrity of the affinity SQL query.
The Registrant has requested that KPMG LLP furnish it with a
letter addressed to the Securities and Exchange Commission stating whether it
agrees with the above statements. The letter is attached as Exhibit 16.1 to this
Form 8-K.
The Registrant has not consulted with APM on any matters relating
to the application of accounting principles or reportable events prior to its
engagement.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
16.1 Letter from KPMG LLP, dated December 20, 2004, to
Commission regarding statements included in this Form 8-K
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SIGNATURES
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 hereunto duly authorized.
Date: December 20, 2004
FOOTSTAR, INC.
By: /s/ MAUREEN RICHARDS
--------------------------------
Name: Maureen Richards
Title: Senior Vice President,
General Counsel and
Corporate Secretary
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EXHIBIT INDEX
Exhibit No. Description
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16.1 Letter from KPMG LLP, dated December 20, 2004, to
Commission regarding statements included in this Form 8-K
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