Footstar Inc.’s second largest shareholder, Chapman Capital LLC , which holds a 7.1% stake in the parent company to Footaction , Just for Feet and Meldisco, filed papers last week with the Securities and Exchange Commission that called for the resignation of the company’s board, the replacement of FTS interim CEO Neele Stearns, and the firing of the company’s auditor, KMPG.

The managing member of Chapman Capital, Robert L. Chapman Jr. also said he wants to buy the company for $8 a share. Footstar shares have been trading on the OTC board since the NYSE suspended trading on the big board the previous week.

Shares jumped on the buyout overture, jumping 42.5% to close at $5.20 on Friday.

In very strong terms, the filing also asks FTS to consider “certain business strategies, joint ventures, recapitalizations, a full sale of the Company, sales of assets, mergers, negotiated or open-market stock repurchases or other extraordinary corporate transactions.”

The filing by Chapman also asserts:

  • That Finish Line is “reaping all the benefits of Nike’s reported dispute with …Footlocker”
  • That FTS must file its restated financial statements “no later than Jan. 30, 2004”
  • That several Members were described as “incompetent” and suggested their firing
  • That Chapman Capital “expressed an interest in leading a group, possibly including subsidiary management, to acquire the Issuer's outstanding shares for $8.00 per share, subject to further due diligence”

The filing also contained a letter sent to the Footstar board on January 8 in which Chapman shared his concerns for the company, including charges that:

  • “Insider ownership of Footstar, dwelling around 1/2 of 1%, may be one of the lowest across which we have stumbled in years, and may explain the oblivion in which the Board seems to find itself.”
  • Interim CEO Neele Stearns is “a detached, narrowly-focused, listless man displaying the twitch-like impulse of pointing at others when asked what went wrong.”

Chapman also went to praise non-corporate management, stated that “Footstar Athletic and Meldisco are world-class organizations managed by executives at the top of their respective fields.” Specifically, the investor pointed to FTS Athletic president & CEO, Shawn Neville, stating that he deserved “a medal of honor for maintaining Footaction USA's comparable store sales and vendor relationships” and “leaving Adidas North America to alternate executive candidates.”

He also went to say that “His pedigree as General Manager of Reebok North America, his final position at the end of an eight-year career with the athletic shoe leader, reportedly coincided with a 50% increase in operating profits.”

He also praised the athletic group’s GMM, Mark Lardie, Footwear GMM, Jack Bellini, Women’s DMM, Joe Passio, Apparel GMM Glenn Dopfel and marketing SVP Lee Applbaum. He said “all deserve gratitude from Footstar's shareholders for not jumping ship during these difficult past two years.”

“Consumer Direct President Harry Colcord, whose success with Foot Locker's Eastbay division, also remains a key player in Footstar's growth plans,” Chapman said I the letter.

He said that “all evidence points to Footstar's vendors, creditors and partners remaining comfortable with the Company despite its suspension from the NYSE”, inferring that they vendors only did so due to the efforts of the management team to keep the ship afloat.

At least one other group did jump ship as Sterling Capital Management LLC, once holder of 11.9% of FTS shares, reported in another SEC filing a day after Chapman expressed interest in acquiring the company that it had liquidated its stake in the company.

>>> Management could have either grins or egg on their faces, depending on the week ahead…