As filed with the Securities and Exchange Commission on September 13, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
AMENDMENT NO. 5
TO
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
____________________
FOOTSTAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3439443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
933 MACARTHUR BOULEVARD
MAHWAH, NEW JERSEY
(Address of Principal 07430
executive offices) (Zip Code)
(201) 934-2000
(Registrant's telephone number, including area code)
____________________
Securities to be registered
pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Common Stock, par value $.01 per share The New York Stock Exchange, Inc.
Securities to be registered
pursuant to Section 12(g) of the Act:
None
Footstar, Inc.
Information Included In Information Statement
And Incorporated In Form 10 By Reference
Cross-Reference Sheet Between Information Statement
And Items Of Form 10
Item Location In Information Statement
- ---- --------------------------------
Item 1. Business...................... SUMMARY; RISK FACTORS; THE
DISTRIBUTION; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; THE
BUSINESS; DESCRIPTION OF
CREDIT FACILITY; COMBINED
FINANCIAL STATEMENTS
Item 2. Financial Information......... SUMMARY; RISK FACTORS;
CAPITALIZATION; UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS;
SELECTED HISTORICAL COMBINED
FINANCIAL DATA; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS; COMBINED FINANCIAL
STATEMENTS
Item 3. Properties.................... THE BUSINESS
Item 4. Security Ownership of Certain
Beneficial Owners and
Management.................... SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Item 5. Directors and Executive
Officers...................... MANAGEMENT
Item 6. Executive Compensation........ MANAGEMENT; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Item 7. Certain Relationships and
Related Transactions.......... SUMMARY; RELATIONSHIP BETWEEN
THE COMPANY AND MELVILLE; THE
DISTRIBUTION
Item 8. Legal Proceedings............. THE BUSINESS
Item 9. Market Price of and Dividends
on the Registrant's Common
Equity and Related Stockholder
Matters....................... SUMMARY; RISK FACTORS; THE
DISTRIBUTION; TRADING MARKET;
DIVIDENDS; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; DESCRIPTION OF CAPITAL
STOCK
Item 10. Recent Sales of Unregistered
Securities.................... NONE
Item 11. Description of Registrant's
Securities to be Registered... RISK FACTORS; DESCRIPTION OF
CAPITAL STOCK; CERTAIN STATUTORY,
CHARTER AND BYLAW PROVISIONS
Item 13. Financial Statements and
Supplementary Data............ SUMMARY; MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS; COMBINED
FINANCIAL STATEMENTS
Item 14. Changes in and Disagreements
with Accountants on
Accounting and Financial
Disclosure.................... NONE
Item 15. Financial Statements and Exhibits
(a) Financial Statements--See Index to Combined Financial Statements
(b) Exhibits:
Exhibit
Number DESCRIPTION
- ------- -----------
2.1 Form of Distribution Agreement among Melville Corporation
("Melville"), Footaction Center, Inc. and the Registrant.(*)
3.1 Amended and Restated Articles of Incorporation of the Registrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
10.1 Master Agreement, dated as of June 9, 1995, between Kmart Corporation
and the Registrant, as amended.** Application for confidential
treatment with respect to certain portions of this Exhibit has been
made to the Securities and Exchange Commission.
10.2 Form of Tax Disaffiliation Agreement between Melville and the
Registrant.*
10.3 1996 Incentive Compensation Plan of Registrant.*
10.4 1996 Non-Employee Director Stock Plan of Registrant.*
10.5 Form of Executive Employment Agreement.*
10.6 Credit Agreement, dated as of August 13, 1996, among the Banks listed
therein, the Bank of New York, as Issuing Bank, Morgan Guaranty Trust
Company of New York, as Administrative Agent and Swingline Lender,
and the Registrant.*
21.1 Subsidiaries of the Registrant.*
27.1 Financial Data Schedule for Six Months Ended June 30, 1996
and Year Ended December 31, 1995.*
- --------------------
* Filed herewith.
** Previously filed.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOOTSTAR, INC.
By: /s/ Carlos Alberini
-------------------------------
Name: Carlos Alberini
Title: Chief Financial Officer
Date: September 12, 1996
[Melville Corporation Letterhead]
, 1996
Dear Shareholder:
I am pleased to inform you that the Board of Directors of Melville Corporation
has approved a distribution to our shareholders of all the outstanding shares
of common stock of Footstar, Inc. ("FTS") to holders of record of Melville
common stock on October 2, 1996. In the distribution, you will receive 0.2879
shares of FTS common stock for every one share of Melville common stock you
hold on the record date.
Footstar will combine Melville's footwear businesses which consist of
Footaction, one of the leading athletic footwear and apparel specialty chains
in the country, and Meldisco, which operates leased footwear departments in
Kmart and Payless Drug stores.
The distribution of FTS common stock is part of Melville's comprehensive
strategic restructuring program, announced in October 1995. Your Board of
Directors has concluded that the distribution is in the best interests of
Melville, FTS and Melville's shareholders in light of, among other things the
positioning of Melville to take advantage of the strategic opportunities
presented by the ongoing drug store industry consolidation by creating two
separate public companies which the financial markets will evaluate more
effectively, the ability to offer management incentives in a manner that is
more directly linked to the performance of the respective companies, thereby
better aligning these incentives with the interests of shareholders, the
increased strategic clarity of the companies, and the overall cost savings
expected to be achieved and the expected resultant increase in overall
profitability of the separate companies.
Your current common shares will continue to represent your investment in
Melville which, following the distribution, will consist of CVS and,
initially, Linens 'n Things and Bob's Stores. Following completion of the
distribution, Melville's name will be changed to CVS Corporation and the New
York Stock Exchange ticker symbol will be CVS.
Shares of Footstar common stock are expected to trade on the New York Stock
Exchange, under the ticker symbol FTS.
The enclosed Information Statement explains the proposed distribution in
detail and provides important financial and other information regarding FTS.
We urge you to read it carefully. Holders of Melville common stock are not
required to take any action to participate in the distribution. A stockholder
vote is not required in connection with this matter and, accordingly, your
proxy is not being sought.
Very truly yours,
Preliminary and Subject to Completion, Dated September 13, 1996
INFORMATION STATEMENT
FOOTSTAR, INC.
COMMON STOCK
(par value $.01 per share)
This Information Statement relates to the distribution (the
"Distribution") by Melville Corporation ("Melville") of 100% of the shares of
common stock, par value $.01 per share (the "Company Common Stock"), of
Footstar, Inc., a Delaware corporation ("Footstar" or the "Company"),
outstanding on the Distribution Date (as defined below) to holders of
Melville's common stock, par value $1.00 per share ("Melville Common Stock").
Such shares of Company Common Stock will represent all of the Company Common
Stock owned by Melville on the Distribution Date and will be distributed by
Melville to its shareholders of record (other than Melville Restricted
Shareholders (as defined below)) as of the close of business on October 2,
1996 (the "Record Date") on the basis of 0.2879 shares of Company Common Stock
for every one share of Melville Common Stock held of record on the Record
Date. See "The Distribution." No consideration will be paid to Melville or the
Company by Melville shareholders for the shares of Company Common Stock
received in the Distribution. Following the Distribution, Melville will own no
shares of Company Common Stock or other securities of the Company.
The Distribution is currently expected to be effected on or
about October 12, 1996 (the date on which the Distribution is effected being
the "Distribution Date"). Certificates representing the shares of Company
Common Stock will be mailed to Melville shareholders on the Distribution Date
or as soon thereafter as practicable.
Prior to the time that the Distribution is effected, Melville
will contribute to the Company all of the outstanding shares of capital stock
of the first-tier subsidiaries that own and operate Melville's Meldisco and
Footaction businesses and its Thom McAn business which is being discontinued
(the "discontinued Thom McAn business"), in accordance with the terms of the
Distribution Agreement to be entered into prior to the Distribution Date
between Melville and the Company, the form of which is filed as an exhibit to
the Registration Statement on Form 10 (the "Form 10") filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), of which
this Information Statement is a part. See "The Distribution," "Relationship
Between The Company and Melville" and "The Business--Discontinuation of Thom
McAn Segment." At the time of the Distribution, the Company will own the
Meldisco, Footaction and discontinued Thom McAn businesses.
There has been no trading market for the Company Common Stock,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. The Company Common Stock has been approved for listing
on the New York Stock Exchange under the symbol "FTS" subject to official
notice of issuance. See "Trading Market."
In reviewing this Information Statement, stockholders should
carefully consider the matters described under the section entitled "Risk
Factors" on page 9.
____________________
SHAREHOLDER APPROVAL IS NOT REQUIRED IN CONNECTION WITH THE
DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is , 1996.
TABLE OF CONTENTS
PAGE
Introduction..............................................................1
Summary...................................................................2
Risk Factors..............................................................9
The Distribution.........................................................13
Relationship Between the Company and Melville............................17
Trading Market...........................................................21
Dividends................................................................21
Unaudited Pro Forma Combined Financial Statements........................23
Pro Forma Capitalization.................................................27
Selected Historical Combined Financial Data..............................29
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................30
Description of Credit Facility...........................................35
The Business.............................................................36
Management...............................................................49
Security Ownership of Certain Beneficial Owners and Management...........61
Description of Capital Stock.............................................62
Certain Statutory, Charter and Bylaw Provisions..........................63
Independent Auditors.....................................................65
Additional Information...................................................65
Index to Combined Financial Statements..................................F-i
INTRODUCTION
On July 10, 1996, the Board of Directors of Melville declared a
dividend payable to holders of record of Melville Common Stock (other than
Melville Restricted Shareholders) at the close of business on October 2, 1996
(the "Record Date") of 0.2879 shares of Company Common Stock for every one
share of Melville Common Stock owned of record on the Record Date. See "The
Distribution." It is expected that certificates representing shares of
Company Common Stock will be mailed to Melville shareholders on the
Distribution Date or as soon thereafter as practicable.
Prior to the Distribution Date, all of the outstanding capital
stock of the subsidiaries that own and operate the Meldisco, Footaction and
discontinued Thom McAn businesses (such Meldisco, Footaction and Thom McAn
businesses being referred to herein as "Meldisco", "Footaction" and "Thom
McAn", respectively) will have been transferred by Melville to, and will be
owned by, the Company (except for Kmart's minority interest in the Meldisco
Subsidiaries (as defined below)). As a result of the Distribution, 100% of the
outstanding shares of Company Common Stock will be distributed to Melville
shareholders. Melville will not own any securities of the Company immediately
after the Distribution.
Melville shareholders with inquiries relating to the
Distribution should contact Chase Mellon Shareholder Services, LLC (the
"Distribution Agent"), Overpeck Centre, 85 Challenger Road, Ridgefield Park,
NJ 07660; or Melville Corporation, Investor Relations, 1 CVS Drive,
Woonsocket, RI 02895. The Distribution Agent's telephone number is (800)
851-9677. Melville's telephone number is (401) 765-1500. After the
Distribution, stockholders of the Company with inquiries relating to the
Distribution should contact Footstar, Inc., Maureen Richards, Corporate
Secretary, 933 MacArthur Boulevard, Mahwah, New Jersey 07430. The Company's
telephone number is (201) 934-2000.
No action is required by Melville shareholders in order to
receive the Company Common Stock to which they are entitled in the
Distribution.
SUMMARY
The following is a brief summary of the matters covered by this
Information Statement and is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto)
included elsewhere herein. Unless the context indicates otherwise, the
"Company" means Footstar, Inc. and its subsidiaries after giving effect to the
Distribution.
The Company
Footstar is a leading retailer of discount footwear and branded
athletic footwear and apparel. As of June 29, 1996, the Company operated 2,553
leased discount footwear departments in 50 states, Puerto Rico, the U.S.
Virgin Islands, Guam, the Czech Republic, Slovakia and Mexico through Meldisco
and 436 branded athletic footwear and apparel specialty stores in 43 states
and Puerto Rico through Footaction.
The Company is a leading competitor in the U.S. retail footwear
industry, which had sales of approximately $32.5 billion in 1995. In the
discount footwear industry, principally through its relationship with Kmart,
the Company is the largest operator of leased footwear departments and is the
third largest retailer of discount footwear based on unit market share in
1995, according to Footwear Market Insights, a management consulting and
marketing research firm specializing in footwear ("FMI"). The Company's leased
footwear operations had aggregate sales in 1995 of $1.2 billion representing
approximately 3.7% and 7.5% of the industry's total dollar volume and
aggregate unit sales, respectively, according to FMI and published reports. In
1995, the three largest retailers of discount footwear (including the Company)
had aggregate sales of approximately $5.1 billion, representing approximately
72.4% of the discount footwear segment's total unit sales. During the fiscal
year ended December 31, 1995, Meldisco's Kmart operations accounted for 95.7%
of Meldisco's net sales and for 70.6% of the Company's combined net sales. For
additional information on Meldisco's sales and other operating results, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As an operator of leased discount footwear departments, the
Company believes that it has a significantly more variable cost structure than
its discount footwear competitors which generally own or lease real estate
facilities. Because of the Company's low fixed cost structure and its capital
investment in 1995 and 1996 in a state-of-the-art distribution network and
demand-driven merchandise replenishment system, the Company believes its
discount footwear segment will be able to support substantial growth with
minimal additional capital investment. The Company also believes that, through
its merchandising and direct sourcing expertise, its discount footwear
departments offer products of a quality/value mix that is superior to those of
its discount competitors. In addition, the Company believes that it has
certain competitive advantages in advertising, resulting from the promotion of
its discount footwear products through weekly newspaper inserts that have a
circulation of approximately 70 million.
Footaction is a leading mall-based specialty retailer of
branded athletic footwear, apparel and related accessories for the active
lifestyle consumer. Footaction ranked third (after Woolworth Athletic and
Athletes Foot) in total sales among athletic footwear specialty retailers in
1995 according to Sports Trend's Annual Top 100 Report. Aggregate sales of
Footaction have grown from $218 million in 1992 to $424 million in 1995,
representing a compounded annual growth rate of 24.8% compared to a .8%
compounded annual growth rate over the same period in footwear sales of the
athletic specialty store segment. Footaction achieved this sales growth
through an aggressive store expansion program and strong same store sales
growth. Same store sales for 1995, 1994 and 1993 increased by 13.1%, 2.4% and
2.7%, respectively. Aggregate sales for the first six months of 1996 were $220
million compared to $178 million for the first six months of 1995, an increase
of 23.5%. Same store sales growth for the first six months of 1996 and 1995
was 20.7% and 14.4%, respectively.
Footaction is recognized as being one of the first to offer the
latest and most popular styles of branded athletic footwear and apparel from
its key vendors such as Nike, Fila, Adidas and Reebok which are highly desired
by its target customers, 12 to 24 year olds. The Company believes that its new
"large store" prototype, 4,000 to 6,500 square feet in size, represents a
point of differentiation from competitors and positions Footaction to achieve
its growth plans. Footaction's marketing efforts are designed to build
traffic, sales and brand awareness among its target customers. Footaction's
advertisements typically feature both Footaction and branded products, and may
include celebrity endorsements. A portion of the cost of such advertising is
offset by co-operative advertising allowances.
Strategy
The Company's strategies are to achieve growth and increase
profitability through (i) expansion of its businesses and (ii) improved
operating performance within and across its businesses.
Expansion. Because of the Company's industry experience,
expertise and vendor relationships, it is well positioned to take advantage of
consolidation in the retail footwear industry. The Company's strategy is to
expand by capitalizing on growth opportunities in the branded athletic
footwear and apparel specialty store and discount footwear segments. In the
branded athletic footwear and apparel specialty store segment, the Company
intends to expand by opening new 4,000 to 6,500 square foot "large store"
prototype Footaction stores in new and existing markets, converting certain of
its traditional 2,000 square foot prototype stores to the new large store
prototype, engaging in strategic acquisitions as opportunities become
available, and converting approximately 80 to 100 Thom McAn stores which are
the most suitable locations for conversion in light of Footaction's real
estate, store profile and market requirements (as further described under "The
Business--Discontinuation of Thom McAn Segment" below). Footaction also
intends to continue marketing programs directed at its primary customer base
of 12 to 24 year olds in an effort to build traffic, sales and brand awareness
and the perception that Footaction is one of the first to offer the latest and
most popular styles of branded athletic footwear and apparel. In the discount
footwear segment, the Company intends to grow by implementing strategies
designed to expand its existing discount footwear customer base and by
entering into business arrangements with new lessors to operate additional
leased discount footwear departments. As an operator of leased departments,
these new arrangements would require little or no additional capital
investment on the part of the Company. The Company is also developing other
retail formats and concepts focused on leveraging its footwear industry
expertise and infrastructure investments. In addition, the Company is actively
pursuing international opportunities in the discount footwear segment
consistent with the Company's strategic objectives.
Improved Operating Performance. The Company has undertaken
various initiatives designed to increase sales and inventory turnover and to
reduce costs. The Company is implementing a new state-of-the-art distribution
network and a demand-driven merchandise replenishment system for its discount
segment to complement Footaction's existing state-of-the-art facilities.
For further information on the Company's demand-driven merchandise
replenishment system, see "The Business--Management Information Systems."
These efforts are designed to reduce the cost of merchandise replenishment,
significantly increase capacity utilization, provide greater flexibility
with respect to inventory management practices, improve in-stock position
and reduce the cost of and time involved in transporting inventory between
factory and store. These initiatives are expected to be fully implemented
by early 1997. The Company is also developing for its discount segment a
price management system designed to permit customized pricing at the
individual store level to reduce the effect of markdowns and thereby
improve profitability.
Discontinuation of Thom McAn Segment
Thom McAn, which has been part of Melville since 1922, is a
moderately-priced specialty retailer, largely mall-based, and markets
moderately-priced men's and women's private label footwear
and accessories to quality and value conscious customers. As a result of
extreme competitive pressures in the moderately-priced footwear retail
market and Thom McAn's inability as a segment to satisfy the Company's
sales, profit and return on investment objectives in recent years, the
Company has decided to exit the Thom McAn business by converting 80 to 100
Thom McAn stores (which are the most suitable locations for conversion in
light of Footaction's real estate, store profile and market requirements)
to Footaction stores and by selling or closing the remaining Thom McAn
stores (the "McAn Plan"). The Company currently expects to have exited the
Thom McAn business within 12 months of announcing the discontinuation.
Accordingly, the Company is treating its Thom McAn segment as discontinued
operations and, in connection with its McAn Plan, has recorded a pre-tax
charge of approximately $85 million in the first quarter of 1996. For
additional information on the material consequences expected to result from
the discontinuation of the Thom McAn segment, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources," and for additional information on the McAn Plan
generally, see "The Business--Discontinuation of Thom McAn Segment."
* * *
The Company is a holding company which, directly or indirectly
through its wholly-owned subsidiaries, owns all of the outstanding shares of
the capital stock of the subsidiaries that own and operate its Meldisco and
Footaction businesses and its discontinued Thom McAn segment (except for
Kmart's minority interest in the Meldisco Subsidiaries (as defined below)).
For a more detailed description of the Company's business, see "The Business."
The Company was organized in Delaware on March 21, 1996. The Company's
principal office is located at 933 MacArthur Boulevard, Mahwah, New Jersey
07430, and its telephone number is (201) 934-2000.
The Distribution
The following is a brief summary of certain terms of the Distribution.
Distributing Company............. Melville Corporation. After the
Distribution, Melville will own no shares of
Company Common Stock.
Primary Purposes of the
Distribution....................Melville has concluded that the
Distribution is in the best interests of
Melville, the Company and Melville's
shareholders. In reaching such conclusion
Melville considered, among other things, the
enchanced ability for Melville to take
advantage of strategic opportunities in the
chain drug industry, the ability of Melville
and the Company to offer management
incentives that are more directly linked to
the performance of the respective
businesses, overall aggregate profitability
of the independent companies after the
Distribution, the strategic clarity of the
Company and Melville after the Distribution,
that separating the two companies would
permit the financial markets to evaluate
both Melville and the Company more
effectively, enhancement of the Company's
financial strength in connection with the
Distribution, and that the Distribution will
enable Melville to achieve overall aggregate
cost savings. See "The
Distribution--Background to and Reasons for
the Distribution."
Securities To Be Distributed..... All of the outstanding shares of Company
Common Stock. Based on the number of shares
of Melville Common Stock outstanding as of
August 31, 1996, it is estimated that
approximately 30.5 million shares of Company
Common Stock will be distributed to Melville
shareholders in the Distribution. After the
Distribution, the Company estimates that the
Company Common Stock will be held by
approximately 5,900 stockholders of record,
although some of the shares may be
registered in nominee names representing an
additional number of stockholders.
Distribution Ratio............... 0.2879 shares of Company Common Stock for
every one share of Melville Common Stock
held by Melville shareholders of record on
the Record Date.
Record Date...................... October 2, 1996 (close of business)
Distribution Date................ October 12, 1996. Certificates representing
the shares of Company Common Stock will be
mailed to Melville shareholders on the
Distribution Date or as soon thereafter as
practicable.
Distribution Agent............... Chase Mellon Shareholder Services, LLC.
Trading Market and Symbol........ There has been no trading market for the
Company Common Stock, although it is
expected that a "when-issued" trading market
may develop on or about the Record Date. The
Company Common Stock has been approved for
listing on the New York Stock Exchange under
the symbol "FTS" subject to official notice
of issuance. See "Trading Market."
Tax Consequences................. Prior to the Distribution, Melville will
receive an opinion of counsel that the
Distribution should qualify as tax-free to
Melville and its shareholders for federal
income tax purposes. Such opinion of counsel
is not binding on the Internal Revenue
Service or the courts. See "The
Distribution--Certain Federal Income Tax
Consequences" for a more detailed
description of the federal income tax
consequences of the Distribution.
Risk Factors..................... Stockholders should carefully consider the
matters discussed under the section
entitled "Risk Factors" in this
Information Statement.
No Fractional Shares............. No fractional shares of Company Common Stock
will be distributed. All fractional share
interests will be aggregated and sold by the
Distribution Agent on behalf of stockholders
and the cash proceeds distributed to those
stockholders otherwise entitled to a
fractional interest. See "The
Distribution--Description of the
Distribution."
Relationship with Melville
After the Distribution; Footstar
Management and Management
Compensation Following the
Distribution..................... In connection with the Distribution,
Melville and the Company will enter into the
Distribution Agreement and the Tax
Disaffiliation Agreement described under
"Relationship Between the Company and
Melville." These agreements are not the
result of arm's length negotiations. Mr.
Stanley P. Goldstein, Chairman and Chief
Executive Officer of Melville, will serve on
the Board of Directors of the Company after
the Distribution. The Company currently
intends to elect to its Board of Directors,
as of or prior to the Distribution, M.
Cabell Woodward, Jr. and Terry R. Lautenbach
each of whom is a current director of
Melville. See "Relationship Between the
Company and Melville" and
"Management--Directors and Executive
officers." Additional or modified
agreements, arrangements and transactions
may be entered into between Melville and
the Company after the Distribution, which
will be negotiated at arm's length. In
connection with the Distribution,
Footstar is securing the services of
additional senior financial, treasury,
legal, human resources and other
management personnel. The compensation,
awards and other benefits payable to
certain Footstar management following the
Distribution are described in
"Management" under "--Executive
Compensation," "--Employment Agreements,"
"--Supplemental Executive Retirement
Plan," and "--1996 Incentive Compensation
Plan" generally (and in "--1996 Incentive
Compensation Plan --Initial Awards" with
respect to initial stock-based awards).
Summary Selected Historical Combined Financial Data
Prior to the Distribution Date, the Company and its Meldisco,
Footaction and discontinued Thom McAn segments have been operated as part of
Melville. The table below sets forth selected historical combined financial
data for the Company. The historical financial data presented below reflect
periods during which the Company did not operate as an independent company
and, accordingly, certain assumptions were made in preparing such financial
data. Therefore, such data may not reflect the results of operations or the
financial condition which would have resulted if the Company had operated as a
separate, independent company during such periods, and are not necessarily
indicative of the Company's future results of operation or financial
condition.
The following selected historical combined financial data of
the Company for the years ended December 31, 1995, 1994 and 1993, as of
December 31, 1995 and 1994 and as of and for the six months ended June 29,
1996 and July 1, 1995 are derived from and should be read in conjunction with
the Company's historical Combined Financial Statements and the Notes thereto
included elsewhere in this Information Statement and include all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation of the results for the unaudited periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Combined Financial Statements." Earnings per share data are presented
elsewhere in this Information Statement on a pro forma basis only. See
"Unaudited Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
Six Months Ended Fiscal Years Ended
--------------------- ------------------------------------------------------
June 29, July 1,
1996 1995 1995(1) 1994 1993 1992 1991
------- ------- -------- -------- -------- -------- --------
<S> <C) <C> <C> <C> <C> <C> <C>
Statement of Operations Data: ($ in millions)
Net sales................................... $ 755.9 $ 747.6 $1,615.2 $1,612.8 $1,474.8 $1,413.8 $1,279.2
Cost of sales............................... 524.2 527.4 1,124.5 1,117.8 1,011.7 971.5 894.9
------- ------- -------- -------- -------- -------- --------
Gross profit................................ 231.7 220.2 490.7 495.0 463.1 442.3 384.3
Store operating, selling, general and
administrative expenses................... 170.6 159.7 343.0 319.6 287.0 266.7 233.6
Depreciation and amortization............... 11.6 10.7 20.0 18.7 13.7 10.5 6.4
Restructuring and asset impairment
charges................................... -- -- 23.7 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Operating profit............................ 49.5 49.8 104.0 156.7 162.4 165.1 144.3
Interest income, net........................ 9.3 10.6 21.1 15.4 11.7 12.5 20.3
Provision for income taxes.................. 18.8 18.1 37.3 49.5 53.7 54.8 47.9
Minority interests in net income............ 11.7 16.1 38.4 51.9 47.3 53.8 50.4
Earnings (loss) from discontinued
operations, net........................... 0.8 (3.3) (26.8) 6.0 5.0 (45.2) 17.3
Loss on disposal of discontinued
operations, net(2)........................ (53.6) -- -- -- -- -- --
Cumulative effect of changes in
accounting principle, net(3).............. -- (3.9) (3.9) -- -- (22.1) --
------- ------- -------- -------- -------- -------- --------
Net (loss) income........................... $ (24.5) $ 19.0 $ 18.7 $ 76.7 $ 78.1 $ 1.7 $ 83.6
======= ======= ======== ======== ======== ======== ========
Balance Sheet Data: ($ in millions)
Current assets:
Due from parent and other divisions....... $ 626.6 $ 617.1 $ 710.8 $ 727.7 $ 706.1 $ 731.8 $ 696.4
Inventories............................... 311.9 356.5 282.6 347.3 307.1 299.4 342.5
Other..................................... 136.3 98.5 120.9 115.7 116.5 138.2 72.8
------- ------- -------- -------- -------- -------- --------
Total current assets........................ 1,074.8 1,072.1 1,114.3 1,190.7 1,129.7 1,169.4 1,111.7
Property and equipment, net................. 174.0 169.1 195.1 163.9 133.0 110.7 122.0
Total assets................................ 1,305.1 1,288.6 1,372.7 1,392.5 1,301.6 1,320.5 1,275.5
Current liabilities......................... 215.3 125.2 203.5 168.3 135.1 159.1 171.6
Minority interests in subsidiaries.......... 41.7 73.6 93.8 108.7 93.9 100.2 105.3
Melville equity investment.................. 989.4 1,030.8 1,013.8 1,033.1 978.2 936.8 976.4
<FN>
- --------------
(1) Amounts in 1995 also reflect certain non-recurring special charges.
Operating profit in 1995 excluding the effect of these charges would
have been $139 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) The Company recorded a pre-tax charge of $85.0 million in the first
quarter of 1996 for the discontinuation of Thom McAn.)
(3) The charge in 1995 was for the writeoff, effective January 1, 1995, of
internally developed software costs that had previously been)
capitalized. The charge in 1992 was for the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1,
1992.
</TABLE>
<TABLE>
<CAPTION>
Summary Selected Historical Combined Financial Data (continued)
Six Months Ended Fiscal Years Ended
--------------------------- ----------------------------------------
June 29, July 1,
1996 1995 1995 1994 1993
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Other Financial and Operating Data:
Current ratio (excluding due from
parent and other divisions)............. 2.1:1 3.6:1 2.0:1 2.7:1 3.1:1
Additions to property and equipment
($ in millions)......................... $ 25.2 $ 30.8 $ 92.9 $ 59.3 $ 45.9
Gross square footage: (in millions)
Meldisco................................ 8.6 8.6 8.6 9.0 8.6
Footaction.............................. 1.5 1.4 1.4 1.4 1.0
Net sales: ($ in millions)
Meldisco................................ $535.5 $569.2 $1,191.5 $1,280.5 $1,212.5
Footaction.............................. 220.4 178.4 423.7 332.3 262.3
Present value of operating leases:
($ in millions)
Meldisco................................ $ 28.3 $ 27.2 $ 28.6 $ 28.4 $ 37.4
Footaction.............................. 184.1 (1) 176.7 186.8 187.5 160.5
1996
Store openings and closings: (Projected)
(number of stores)
Meldisco
Beginning....................... 2,568 2,568 2,778 2,778 2,771 2,623
Openings........................ 25 13 13 29 159 257
Closings........................ 30 28 232 239 152 109
Ending.......................... 2,563 2,553 2,559 2,568 2,778 2,771
Footaction
Beginning....................... 439 439 439 439 391 298
Openings........................ 48 (2) 8 3 21 69 102
Closings........................ 12 11 5 21 21 9
Ending.......................... 475 436 437 439 439 391
<FN>
- --------------
(1) Does not include approximately $23.5 million of lease obligations related
to stores to be converted from the discontinued Thom McAn business.
(2) Includes 21 stores to be converted from the discontinued Thom McAn
business during 1996. The balance of the 80 to 100 Thom
McAn-to-Footaction store conversions is expected to be completed during
1997.
</TABLE>
RISK FACTORS
In addition to the other information contained in this
Information Statement, stockholders should carefully review the following
considerations.
This Information Statement contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Those statements appear in a number of places
in this Information Statement and can be identified by the use of
forward-looking terminology such as "believe," "expect," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon.
Such forward-looking statements include, without limitation, statements made
as to cost savings, the impact of the McAn Plan, improvements in
infrastructure, distribution and replenishment systems and operating
efficiencies, business strategy, and growth plans. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Consequently, all of
the forward-looking statements made herein are qualified by these cautionary
statements, and there can be no assurance that the actual results, performance
or achievements will be realized. The information contained in this
Information Statement, including without limitation the information set forth
below under "Risk Factors" and in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
identifies important factors that could cause such results, performance or
achievements not to be realized.
Significance of Relationship with Kmart
During the six months ended June 29, 1996 and the fiscal year
ended December 31, 1995, Meldisco's Kmart operations accounted for 96.0% and
95.7%, respectively, of Meldisco's net sales. Meldisco's Kmart operations
accounted for 68.0% and 70.6% of the Company's combined net sales during the
same periods, respectively. The business relationship between Meldisco and
Kmart is very significant to the Company, and the loss of Meldisco's Kmart
operations would have a material adverse effect on the Company. The Company's
arrangement with Kmart is governed by a Master Agreement. For a discussion of
Meldisco's Master Agreement with Kmart and the circumstances under which this
agreement may be terminated, see "The Business--Meldisco Relationship with
Kmart."
In an effort to gradually increase the significance of its
non-Kmart-related operations, the Company is actively seeking to identify,
develop and exploit new business opportunities. These efforts include, but are
not limited to, both domestic and international opportunities that leverage
the Company's expertise in leased footwear department operations. The Company
also seeks to expand through the growth of its Footaction segment. There can,
however, be no assurance as to when or whether the Company will be able to
secure such new business opportunities or attain such growth.
In 1995, Kmart closed 218 stores in which Meldisco was
operating leased footwear departments. The pro forma impact of the 218 store
closings (assuming they had all closed on January 1, 1995) would have been to
reduce 1995 net sales by approximately $16.0 million and to increase income
from continuing operations by approximately $0.6 million.
Kmart store closings generally have a negative effect on
Meldisco's overall profitability because, on an annualized basis, Meldisco
operates at a profit in substantially all Kmart stores. Although Kmart has
announced that it does not believe a significant number of additional closings
other than those described above will be necessary, there can be no assurance
that Kmart will not choose to close additional stores in the future.
There have been reports in the financial press as to financial
difficulties being experienced by Kmart. In the event of a further significant
deterioration in Kmart's financial condition, there could be a material
adverse effect on the Company.
Lack of Operating History as a Stand-Alone Company; Unavailability of
Melville's Support as a Parent; Differing Strategies of Operating Segments
While Meldisco and Footaction have established operating
histories, the Company has not operated as a combined, stand-alone public
company. The Company is subject to the risks and uncertainties associated with
any newly independent company. Prior to the Distribution Date, the Company's
segments had access to Melville's support as a parent company, including the
following support functions: corporate management, real estate, human
resources and other administration; treasury; tax; legal; internal auditing;
and external financial reporting. Following the consummation of the
Distribution, the Company will no longer have access to such Melville support.
In addition, initiatives of the Company designed to increase operating
efficiencies, such as implementation of a new state-of-the-art distribution
network (including the opening of two new distribution centers and the related
closing of five existing distribution centers), a demand-driven merchandise
replenishment system and the consolidation of certain administrative and other
functions, may not yield the expected benefits or efficiencies and may be
subject to delays, unexpected costs and cost overruns, all of which could have
a material adverse effect on the Company's financial condition or results of
operations. See "The Business--Purchasing and Distribution."
The Company is also subject to risks related to the different
nature and strategies of its business segments. Meldisco is a mature business
whose cash flow together with externally borrowed funds, the Company believes,
should be able to fund the growth of Footaction. Meldisco's cash flow and such
borrowed funds may also be needed with respect to the performance of Thom McAn
pending completion of the McAn Plan. See "The Business--Discontinuation of
Thom McAn Segment."
The Company has in place a credit facility, which becomes
effective as of the Distribution, that will permit borrowings in an amount
sufficient to satisfy its working capital needs and to fund trade letters of
credit. The Company believes that cash from operations, together with
borrowings under such credit facility, will be adequate to fund operating
expenses, working capital, capital expenditures and growth of the Company's
business in accordance with the Company's business plan. However, there can be
no assurance as to the future availability of such external financing or
internally generated funds. See "Unaudited Pro Forma Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Combined Financial Statements", and "Description of
Credit Facility."
Competitive Environment
Although sales in the retail footwear market have been
relatively flat during the past four years, sales in the discount and athletic
footwear segments have grown from $5.8 billion and $11.5 billion,
respectively, in 1991 to $6.5 billion and $13.3 billion, respectively, in
1995, representing compounded annual sales growth of approximately 2.9% and
3.7%, respectively. There can be no assurance that growth in the discount and
athletic footwear segments will continue or that the Company's sales will not
be adversely affected by continued weakness in the retail environment. For
information relating to the competitive pressures giving rise, in part, to the
McAn Plan, see "The Business--Discontinuation of Thom McAn Segment."
The retail footwear market is characterized by intense
competition. Moreover, a number of the Company's competitors have been growing
more rapidly or have substantially greater resources than the Company. In many
cases, the stores of the Company's Footaction segment are located in shopping
centers or malls in which one or more of their primary competitors competes.
As a result, there can be no assurance that the Company's Footaction stores
will be able to maintain or improve their sales performance, market share or
gross profit levels. See "The Business--Description of Operating Segments."
Fashion Trends
The success of the Company depends in part on its ability to
anticipate and respond to changing fashion and merchandise trends and consumer
demands in a timely manner. Accordingly, any failure by the business segments
to identify and respond to emerging trends could adversely affect consumer
acceptance of the merchandise in the Company's leased footwear departments or
stores, which in turn could adversely affect the Company's business. In
particular, a general consumer shift away from athletic footwear could have an
adverse effect on the financial condition or results of operations of
Footaction and, ultimately, the Company. If the Company miscalculates either
the market for its merchandise or its customers' purchasing habits, it may be
required to sell a significant amount of inventory at below average margins or
below cost. These outcomes could have an adverse effect on the Company's
financial condition or results of operations.
Risks of Foreign Manufacturing
Meldisco contracts for the manufacture of merchandise with
independent third parties in the United States and abroad. Additionally,
Footaction's vendors have a significant percentage of their merchandise
manufactured in foreign countries. Risks inherent in foreign manufacturing
include economic and political instability, transportation delays and
interruptions, restrictive actions by foreign governments, the laws and
policies of the United States affecting the importation of goods including
duties, quotas and taxes, trade and foreign tax laws, and fluctuations in
currency exchange rates. The Company has not historically experienced material
adverse effects from these risks, and the Company believes that its
competitors would most likely be similarly affected by any such instability,
delays, interruptions, restrictions, laws, policies or fluctuations.
Nevertheless, there can be no assurance that, in the future, these risks will
not result in increased costs and delays or disruption in product deliveries
that could cause loss of revenue and damage to customer relationships.
From time to time, the United States Congress has proposed
legislation which could result in import restrictions, and various foreign
countries in which the Company and its primary competitors source footwear
have considered voluntary export restrictions. The Company benefits from "most
favored nation" provisions in trade treaties between the United States and
certain countries in which the industry's main suppliers are located. From
time to time, the United States Congress has proposed legislation which could
result in such provisions being rescinded from particular trade treaties. This
could, in turn, result in higher product costs to the Company as well as to
its competitors.
In particular, there has been extensive congressional debate
with respect to the most favored nation provision of the trade treaty between
the U.S. and China. Meldisco currently imports a significant percentage
(approximately 77% in dollar amount) of its merchandise from China. In
addition, Footaction's vendors have a substantial amount of their product
manufactured in China. If the most favored nation provision of the trade
treaty between the U.S. and China were not renewed, the cost of importing
merchandise from China would increase. The Company believes that its segments
and their vendors would be able to find alternative sources of supply,
although merchandise shortages, delays in delivery or price increases may
result in the short-term. The Company believes that non-renewal of China's
most-favored nation status would similarly affect many of the Company's
competitors.
Reliance on Key Vendors
The Company is dependent to a significant degree upon its
ability to purchase merchandise at competitive prices. In particular, during
1995, approximately 85% of Footaction's net sales were generated by
merchandise purchased from Nike, Fila, Adidas and Reebok, with the most
significant percentage attributable to Nike. The loss of the Company's
relationship with certain key vendors could have a material adverse effect on
the Company. The Company believes that its relationships with its key vendors
are satisfactory and that the Company has adequate sources of merchandise;
however, there can be no assurance that the Company will be able to acquire
such merchandise at competitive prices or on competitive terms in the future.
Select new merchandise in high demand is allocated by vendors
based upon the vendors' internal criteria. Although Footaction has been able
to purchase sufficient quantities of allocated merchandise in the past, there
can be no assurance that Footaction will be able to obtain sufficient amounts
of such merchandise in the future. Footaction's vendors provide support to
Footaction through cooperative advertising allowances, employee training, and
promotional events. There can be no assurance that such assistance from
Footaction's vendors will continue in the future.
Quarterly and Seasonal Fluctuations
The Company's quarterly results of operations may fluctuate
materially depending on variables such as local, regional or national economic
or weather conditions. Footwear retailers are subject to general economic
conditions, and purchases of footwear may decline during recessionary periods.
In addition, the Company's businesses are also subject to some seasonal
fluctuation, with heavier concentrations of sales during Easter,
"back-to-school" and Christmas selling seasons. Any decrease in net sales for
such periods could have a material adverse effect on the Company's financial
condition or results of operations in particular quarterly or annual periods.
Dependence on Mall Traffic and Lease Space
Footaction stores are located primarily in enclosed regional
and neighborhood malls. Consequently, the ability of Footaction to maintain a
high level of sales is dependent in part on a high volume of mall traffic.
Mall traffic may be adversely affected by, among other things, economic
downturns, the closing of anchor department stores or changes in consumer
preferences. A decline in the popularity of mall shopping among individuals in
Footaction's target customer population -- 12 to 24 year olds -- could have a
material adverse effect on the financial condition and results of operations
of Footaction and, ultimately, the Company.
Since Footaction is principally a mall-based chain, its future
growth is dependent on its ability to open new stores in desirable mall
locations and its ability to make strategic acquisitions. There can be no
assurance as to when or whether such desirable locations or acquisition
opportunities will become available.
Reliance on Key Personnel
The Company's business is managed by key executive officers,
such as J. M. Robinson, Chairman of the Board and Chief Executive Officer, and
Carlos E. Alberini, Chief Financial Officer, the loss of whom could have a
material adverse effect on the Company. The Company believes that its
continued success will depend in large part on its ability to attract and
retain highly skilled and qualified personnel. The Company believes that the
Distribution will, among other things, permit the Company to offer management
incentives in a manner that is more directly linked to the Company's
performance, which the Company believes will facilitate the attraction,
retention and motivation of highly skilled and qualified personnel. In this
regard, the Company has taken steps to retain its key personnel, including the
execution of employment agreements with Messrs. Robinson and Alberini and
certain other senior personnel and the provision of competitive employee
benefit programs including the granting of stock options and other stock-based
awards. See "Management." Although the Company will seek to employ a qualified
person to fill his or her position with the Company in the event that any
officer or director of the Company ceases to be associated with the Company,
there can be no assurance that such individuals could be engaged by the
Company.
Dividend Policy
The Company anticipates that future earnings will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to pay cash dividends on the Company Common
Stock in the foreseeable future. The payment of cash dividends in the future
will be subject to the restriction on dividends contained in the Company's
credit facility (described below in "Description of Credit Facility") and, to
the extent dividends are permitted by the Company's lenders, will be at the
discretion of the Company's Board of Directors (the "Company Board"). The
declaration of dividends and the amount thereof will also depend on a number
of other factors, including the Company's financial condition, capital
requirements, funds from operations, future business prospects, applicable
contractual restrictions and such other factors as the Company Board may deem
relevant. For information on dividends payable by Meldisco to Kmart with
respect to Kmart's minority interest in the Meldisco Subsidiaries (as defined
under "The Business--Meldisco Relationship with Kmart"), see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
No Prior Market for Common Stock
Prior to the Distribution, there has been no public market for
the Company Common Stock, and there can be no assurance that an active trading
market will develop or be sustained in the future. The Company Common Stock
has been approved for listing on the New York Stock Exchange under the symbol
"FTS" subject to official notice of issuance. There can be no assurance as to
the price at which the Company Common Stock will trade or that such price will
not be significantly below the book value per share of the Company Common
Stock. See "Trading Market."
There can be no assurance that the Company Common Stock will
not experience substantial price volatility, particularly as a result of
quarter-to-quarter variations in the actual or anticipated financial results
of the Company or other companies in the retail industry or the markets served
by the Company. In addition, the stock market has experienced extreme price
and volume fluctuations that have affected the market price of many retail
stocks in particular and that have often been unrelated or disproportionate to
the operating performance of these companies. These and other factors may
adversely affect the market price of the Company Common Stock.
Certain Changes in Tax Law
The Clinton Administration and members of the United States
Congress have recently proposed various changes to the Internal Revenue Code,
including provisions affecting the dividends received deduction for corporate
taxpayers. Although the current proposals are not anticipated to have a
material adverse effect on the Company if enacted, it is uncertain at this
time whether any variation of the current proposals, or any future proposals,
will ultimately be enacted or whether, as enacted, they will have an adverse
effect on the Company.
Anti-Takeover Effects of Certain Statutory, Charter, Bylaw and Contractual
Provisions
Several provisions of the Company's Certificate of
Incorporation and Bylaws (as will be in effect as of the Distribution) and of
the Delaware General Corporation Law could discourage potential acquisition
proposals and could deter or delay unsolicited changes in control of the
Company. These include provisions creating a classified Board of Directors,
limiting the stockholders' powers to remove directors, prohibiting the taking
of action by written consent in lieu of a stockholders' meeting, and certain
restrictions on repurchases by the Company of its equity securities from
certain substantial stockholders. In addition, the Company Board has the
authority, without further action by the stockholders, to fix the rights and
preferences of and to issue preferred stock. The issuance of preferred stock
could adversely affect the voting power of the owners of Company Common Stock,
including the loss of voting control to others. The Company, however, has no
present plans to issue any preferred stock. Pursuant to the Tax Disaffiliation
Agreement, the Company will agree to refrain from engaging in certain
transactions for two years following the Distribution Date unless it shall
first provide Melville with a ruling from the Internal Revenue Service or an
unqualified opinion of counsel that the transaction will not cause the
Distribution to become taxable. Transactions subject to these restrictions
will include, among other things, the liquidation of the Company, the merger
or consolidation of the Company with another company, certain issuances or
redemptions of Company Common Stock, the sale, distribution or other
disposition of assets of the Company out of the ordinary course of business,
and the discontinuation of certain of the Company's businesses. The Company
will generally agree to indemnify Melville against any tax liability resulting
from the Company's breach of any covenant or representation contained in the
Tax Disaffiliation Agreement with respect to such transactions.
These provisions and others (such as a stockholder rights plan)
that could be adopted in the future could discourage unsolicited acquisition
proposals or delay or prevent changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these
provisions could limit the ability of stockholders to approve transactions
that they may deem to be in their best interests. See "Description of Capital
Stock" and "Certain Statutory, Charter and Bylaw Provisions."
THE DISTRIBUTION
Background to and Reasons for the Distribution
Melville has, up to the time of the Restructuring Program
described below, been a diversified retailer operating in four business
segments: prescription drugs and health and beauty care through its CVS
business; apparel through its Bob's Stores, its Marshalls business (up to the
time of the sale of Marshalls on November 17, 1995) and its Wilson's leather
goods chain (up to the time of the sale of Wilson's on May 25, 1996); footwear
through its Meldisco, Footaction and Thom McAn businesses; and toys through
its Kay-Bee business (up to the time of the sale of Kay-Bee on May 5, 1996)
and home furnishings through its Linens 'n Things and This End Up businesses
(up to the time of the sale of This End Up on May 31, 1996).
In Melville's letter to shareholders accompanying its 1994
Annual Report, Melville informed its shareholders that it was commencing a
strategic review of its organization and operations which it expected would be
substantially completed by December 31, 1995. In early 1994, Melville began to
explore various transaction structures, and this activity was accelerated in
late 1994 and throughout 1995. In the Spring of 1995, Melville retained Morgan
Stanley & Co. Incorporated ("Morgan Stanley") as financial adviser and certain
other advisers to assist in designing, formulating and implementing Melville's
restructuring strategy and plan (including Bain & Co., as a management
consultant, and Financo, Inc. as financial adviser in connection with the sale
of Kay-Bee and This End Up and, together with Morgan Stanley, the sale of
Marshalls). In this strategic review, Melville worked with its advisers and
legal counsel and accountants in an analysis and valuation of, among other
things, the financial, market, credit, tax, accounting and regulatory
implications of alternative transactions and structures, and Melville and its
advisers examined the mix of its businesses and the role and strategy of each
in generating sales and profits, as well as each business' market position and
growth potential.
These preparatory efforts of Melville's management and advisers
culminated in the formulation and announcement in October 1995 of Melville's
comprehensive strategic restructuring program (the "Restructuring Program")
designed to achieve various strategic, profitability and growth objectives as
well as cost savings, and thereby to increase value for Melville shareholders.
The Restructuring Program includes:
(i) The planned creation of independent retailing companies in
the chain drug and footwear industries. After giving effect to the
Restructuring Program, the remaining Melville (which will be renamed CVS
Corporation) will be a publicly traded holding company consisting of CVS and,
initially, Linens 'n Things and Bob's. On June 3, 1996, Melville announced a
formal plan to separate Linens 'n Things and Bob's from CVS, with Linens 'n
Things and Bob's to be classified as discontinued operations in Melville's
financial statements. Footstar will constitute the footwear company which will
become publicly traded through the Distribution.
(ii) The previously announced sale of Marshalls, which was
completed on November 17, 1995.
(iii) The previously announced sale of Kay-Bee Toys to
Consolidated Stores Corporation, which was completed on May 5, 1996.
(iv) The previously announced sale of Wilson's to an investor
group led by Wilson's management and other investors, which was completed on
May 25, 1996; and the sale of This End Up to an outside investor group which
was completed on May 31, 1996.
(v) The recording by Melville of an after-tax charge of
approximately $753.1 million in the fourth quarter of 1995 relating to the
Restructuring Program. An additional after-tax charge of approximately $148
million was recorded by Melville in the second quarter of 1996, resulting
primarily from the actions announced by Melville on June 3, 1996 regarding
Linens 'n Things and Bob's (discussed in paragraph (i) above) and the McAn
Plan (discussed in more detail in the section captioned "The
Business--Discontinuation of Thom McAn Segment").
(vi) A revision of Melville's dividend policy to align the
payout with the new Melville's growth and capital needs, as well as with the
prevailing practices in each industry segment. In January 1996, Melville
announced that its quarterly dividend would be reduced to $0.11 per share from
$0.38 per share.
As described above, the Distribution constitutes part of the
overall Restructuring Program. Melville has considered various alternatives
with respect to the restructuring of the entire Melville portfolio of
businesses (including its footwear operations) and has concluded that the
Distribution is in the best interests of Melville, the Company and Melville's
shareholders.
In concluding that the Distribution is in the best interests of
Melville, the Company and Melville's shareholders, Melville considered, among
other things, that (i) the Distribution will position Melville to take full
advantage of the strategic opportunities currently presented by the ongoing
drug store industry consolidation by creating two separate public companies
which the financial markets will evaluate more effectively; (ii) the
Distribution would permit Melville and the Company to offer management
incentives in a manner that is more directly linked to the performance of
their respective businesses, thereby better aligning these incentives with the
interests of shareholders; (iii) the Distribution will increase the strategic
clarity of the Company and Melville, as each will be focused on a specific
industry and will have the decision-making power to respond quickly and
decisively to evolving conditions in its industry; (iv) the Restructuring
Program should increase overall aggregate profitability of the newly
independent companies as a result of the cost savings achieved by removing
functions currently performed by Melville which duplicate similar functions
performed by the Meldisco and Footaction businesses; and (v) for various
corporate, strategic and contractual reasons, the Company could not, in
management's view, be disposed of through a third party sale.
Description of the Distribution
The general terms and conditions relating to the Distribution
are set forth in the Distribution Agreement between Melville and the Company.
See "Relationship between the Company and Melville--Terms of the Distribution
Agreement."
Melville will effect the Distribution on or about October 12,
1996 (the date on which the Distribution is effected being the "Distribution
Date") by providing for the delivery of the shares of Company Common Stock to
the Distribution Agent for distribution to the holders of record of Melville
Common Stock at the close of business on October 2, 1996 (the "Record Date"),
except that holders ("Melville Restricted Shareholders") of restricted
shares of Melville Common Stock issued under Melville stock-based compensation
plans to Melville employees who will remain Melville employees after the
Distribution will not receive Company Common Stock in respect of such
restricted stock in the Distribution and, in lieu thereof, an adjustment to
the applicable restricted stock award will be made pursuant to the terms of
such compensation plans whereby such employees will receive additional
Melville restricted stock equivalent to the Company Common Stock that would
otherwise have been received in the Distribution. The Distribution will be
made on the basis of 0.2879 shares of Company Common Stock for every one share
of Melville Common Stock outstanding on the Record Date. The actual total
number of shares of Company Common Stock to be distributed will depend on the
number of shares of Melville Common Stock outstanding on the Record Date.
Based upon the number of shares of Melville Common Stock outstanding on August
31, 1996, approximately 30.5 million shares of Company Common Stock will be
distributed to Melville shareholders, which will constitute all of the shares
of Company Common Stock owned by Melville. As a result of the Distribution,
100% of the outstanding shares of Company Common Stock will be distributed to
Melville shareholders. The shares of Company Common Stock will be fully paid
and nonassessable, and the holders thereof will not be entitled to preemptive
rights. See "Description of Capital Stock." Certificates representing the
shares of the Company Common Stock will be mailed to Melville shareholders on
the Distribution Date or as soon as practicable thereafter.
No certificates or scrip representing fractional shares of
Company Common Stock will be issued to Melville shareholders as part of the
Distribution. The Distribution Agent will aggregate fractional shares into
whole shares and sell them in the open market at then prevailing prices on
behalf of holders who otherwise would be entitled to receive fractional share
interests, and such persons will receive instead a cash payment in the amount
of their pro rata share of the total sale proceeds thereof. Proceeds from
sales of fractional shares will be paid by the Distribution Agent based upon
the average gross selling price per share of Company Common Stock of all such
sales. See "The Distribution--Federal Income Tax Consequences." Melville will
bear the cost of commissions incurred in connection with such sales. Such
sales are expected to be made as soon as practicable after the Distribution
Date. None of Melville, the Company or the Distribution Agent will guarantee
any minimum sale price for the fractional shares of Company Common Stock, and
no interest will be paid on the proceeds of such shares.
Certain Federal Income Tax Consequences
On January 9, 1996, Melville filed an application for a ruling
with the Internal Revenue Service (the "Service") to the effect that the
proposed Distribution would qualify as tax-free to Melville and its
shareholders. During the course of the Service's consideration of the
application, it has, from time to time, requested additional information from
Melville. The Service has recently made another such request which further
extends the review process for an indeterminate period. Melville believes
that it is in the best interests of Melville, the Company and Melville's
shareholders to effect the Distribution on or about October 12, 1996.
Accordingly, Melville has decided to withdraw its application and to proceed
with the Distribution on the basis of an opinion of Davis Polk & Wardwell to
the effect that the Distribution should qualify as tax-free to Melville and
its shareholders under Sections 355 and 368 of the Internal Revenue Code of
1986, as amended (the "Code").
Assuming that the Distribution qualifies as tax-free for
federal income tax purposes:
(i) Except as described below with respect to fractional
shares, a Melville shareholder will not recognize gain or loss as
a result of the Distribution. Cash received in lieu of a
fractional share will be treated as received in exchange for such
fractional share. Gain or loss will be recognized to the recipient
shareholder to the extent of the difference between the
shareholder's basis in the fractional share and the amount
received for the fractional share. Provided the fractional share
interest is held as a capital asset by the recipient shareholder,
such gain or loss will constitute capital gain or loss.
(ii) A Melville shareholder will apportion its tax basis for
its Melville Common Stock between such Melville Common Stock and
Company Common Stock received in the Distribution in proportion to
the relative fair market values of such Melville Common Stock and
Company Common Stock on the Distribution Date.
(iii) A Melville shareholder's holding period for the Company
Common Stock received in the Distribution will include the period
during which such shareholder held the Melville Common Stock with
respect to which the Distribution was made, provided that such
Melville Common Stock is held as a capital asset by such
shareholder as of the Distribution Date.
(iv) Except to the extent of any excess loss accounts or
deferred intercompany gains, no gain or loss will be recognized to
Melville as a result of the Distribution.
Opinions of counsel are not binding on the Service or the
courts. The Service may challenge positions taken based upon this opinion.
Davis Polk & Wardwell, however, is of the opinion that if the Service were to
assert that the Distribution did not qualify as tax-free, the Service should
not prevail in a judicial proceeding in which the issues and facts were
properly presented.
If the Distribution does not qualify as a tax-free
distribution, the fair market value of the shares of Company Common Stock
received by the Melville stockholders would be taxable as a dividend. In that
event, the tax basis of the shares of Company Common Stock held by the
Melville stockholders after the Distribution would not change and the tax
basis of the shares of Company Common Stock would be equal to their fair
market value on the Distribution Date. In addition, Melville would recognize
a capital gain equal to the difference between the fair market value of the
shares of Company Common Stock and Melville's basis in such shares.
Current Treasury regulations require each Melville shareholder
who receives Company Common Stock pursuant to the Distribution to attach to
its federal income tax return for the year in which the Distribution occurs a
descriptive statement concerning the Distribution. Melville (or the Company on
its behalf) will make available requisite information to each Melville
shareholder of record as of the Record Date.
ALL SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS
REGARDING THE PARTICULAR FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF
THE DISTRIBUTION TO THEM.
For a description of agreements pursuant to which Melville and
the Company have provided for certain tax sharing and other tax matters, see
"Relationship Between the Company and Melville--Terms of the Tax
Disaffiliation Agreement."
RELATIONSHIP BETWEEN THE COMPANY AND MELVILLE
This section of the Information Statement describes certain
agreements between the Company and Melville that will govern certain of the
on-going relationships between Melville and the Company after the Distribution
and will provide for an orderly transition to the status of two separate,
independent companies. To the extent that they relate to the Distribution
Agreement or the Tax Disaffiliation Agreement (collectively, the "Distribution
Documents"), the following descriptions describe the Distribution Documents as
they will be in effect as of the Distribution, do not purport to be complete
and are qualified in their entirety by reference to the Distribution
Documents, which are filed as exhibits to the Form 10 and are incorporated
herein by reference. All stockholders should read the Distribution Documents
in their entirety.
The Distribution Documents will be entered into in connection
with the Distribution and are, therefore, not the result of arm's length
negotiation between independent parties. Additional or modified agreements,
arrangements and transactions may be entered into between Melville and the
Company after the Distribution, which will be negotiated at arm's length.
Terms of the Distribution Agreement
Melville and the Company will enter into a Distribution
Agreement (the "Distribution Agreement") prior to the Distribution, among
other things, to provide for the principal corporate transactions and certain
procedures for effecting the Distribution, to define certain aspects of the
relationship between Melville and the Company after the Distribution and to
provide for the allocation of certain assets and liabilities between Melville
and the Company.
Contribution of Assets
Pursuant to the Distribution Agreement, on or prior to the
Distribution Date, Melville will contribute (the "Contributions") to the
Company all of the outstanding shares of capital stock of, or other ownership
interests in, the subsidiaries that own or operate Meldisco, Footaction and
the discontinued Thom McAn business (except for Kmart's minority interest in
the Meldisco Subsidiaries).
Cross Indemnification
The Company and Melville have agreed to indemnify one another
against certain liabilities. The Company has agreed to indemnify Melville and
its subsidiaries (other than the Company and its subsidiaries) (Melville and
such subsidiaries being the "Melville Group") and their respective directors,
officers and affiliates (collectively, the "Melville Indemnitees") from and
against any and all damage, loss, liability and expense incurred or suffered
by any of the Melville Indemnitees (i) arising out of or due to the failure of
the Company to pay, perform or otherwise discharge any obligations and
liabilities of the Company and its subsidiaries (including subsidiaries
contributed pursuant to the Contributions and including subsidiaries as of and
(except where the context clearly indicates otherwise) after the Distribution
(the "Company Group")) under the Distribution Agreement (including all
liabilities, whenever arising, of or relating to the Company Group or arising
from or in connection with the conduct of the Footstar business or the
ownership or use of assets in connection therewith) or (ii) arising out of or
in connection with the provision by the Melville Group of Services (as
defined below) to the Company Group pursuant to the Distribution Agreement. A
subsidiary of the Company will indemnify each of the Melville Indemnitees
against any and all damage, loss, liability and expense arising out of or due
to the failure of any Company subsidiary to pay, perform or otherwise
discharge its obligations under any Guaranteed Lease (as defined below). Such
indemnification obligations of this Company subsidiary with respect to the
Guaranteed Leases will be guaranteed by the Company.
Melville has agreed to indemnify the Company Group and the
respective directors, officers and affiliates of persons in the Company Group
(collectively, the "Company Indemnitees") from and against any and all damage,
loss, liability and expense arising out of or due to the failure of Melville
to pay, perform, or otherwise discharge any obligations and liabilities of the
Melville Group under the Distribution Agreement (including all liabilities,
whenever arising, of or relating to the Melville Group or arising from or in
connection with the conduct of the businesses of the Melville Group (other
than the Footstar business) or the ownership or use of assets in connection
therewith).
The Company and Melville have generally agreed to indemnify the
other and the other's affiliates and controlling persons from certain
liabilities under the securities laws in connection with the Form 10 and this
Information Statement or to contribute under certain circumstances to the
amount payable by the other in respect thereof.
None of the foregoing indemnities applies to indemnification
for tax liabilities, which are addressed in the Tax Disaffiliation Agreement
described below. The Company does not believe that any of the foregoing
indemnities will have a material adverse effect on the business, financial
condition or results of operations of the Company.
The Distribution Agreement also includes procedures for notice
and payment of indemnification claims and generally provides that the
indemnifying party may assume the defense of a claim or suit brought by a
third party. Any indemnification paid under the foregoing indemnities is to be
paid net of the amount of any insurance or other amounts that would be payable
by any third party to the indemnified party in the absence of such indemnity
and net of any tax benefit to the Indemnified Party attributable to the
relevant payment or liability, and shall be grossed up so that the indemnified
party receives 100% of the after-tax amount thereof.
Conditions to the Distribution
The Distribution Agreement provides that the Distribution is
subject to the following conditions being satisfied or waived prior to or as
of the Distribution Date: (i) the Company's Certificate of Incorporation and
Bylaws (each as defined under "Description of Capital Stock" below) shall be
in effect; (ii) Melville shall have effected the Contributions; (iii) Melville
shall have received an opinion of counsel satisfactory to Melville relating to
the tax-free nature of the Distribution; (iv) the Form 10 filed with the
Commission shall have become effective under the Exchange Act; (v) the Company
Common Stock shall have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance; (vi) Melville's Board of
Directors shall be satisfied that (A) both before and after giving effect to
the Distribution, Melville is not and would not be insolvent within the
meaning of Section 510 of the Business Corporation Law of the State of New York
("Section 510") and (B) the Distribution will be made solely out of surplus
within the meaning of Section 510; (vii) the Tax Disaffiliation Agreement
shall have been duly executed and delivered by the parties thereto; (viii) a
credit facility shall have been made available to the Company by its lenders
on terms and in an amount satisfactory to Melville and the Company, and (ix)
Melville's Board of Directors shall have approved the Distribution and shall
not have abandoned, deferred or modified the Distribution at any time prior to
the Distribution.
Lease Guarantees
The Distribution Agreement provides that, with respect to each
real estate lease of Footstar or any of its subsidiaries that is in effect
prior to the Distribution and that remains in effect following the
Distribution (i) without any renewal option having been exercised or (ii) by
reason of the exercise of any renewal option provided for in the terms of the
lease as of the Distribution (collectively, the "Guaranteed Leases"), any
lease guarantee of such Guaranteed Lease provided by Melville or Melville
Realty Corporation ("MRC") and in effect as of the Distribution (a "Lease
Guarantee") will remain in effect after the Distribution for the duration of
the term of such lease and any extension thereof pursuant to the exercise of
any such renewal option. Melville and MRC will be indemnified against any
liabilities arising from such Lease Guarantees as described under "--Cross
Indemnification" above.
Transfer of Assets
Subject to receipt of any necessary consents of third parties
or regulatory bodies, (i) Melville will use its best efforts to transfer to
the Company Group all assets not already owned by the Company Group and that
relate solely to the business of the Company Group (and not to that of
Melville) and the Company will assume all liabilities associated with such
assets and (ii) the Company will use its best efforts to transfer to Melville
and its subsidiaries (other than the Company and its subsidiaries) (the
"Melville Group") all assets not already owned by the Melville Group and that
relate solely to the business of the Melville Group (and not to that of the
Company Group) and Melville will assume all liabilities associated with such
assets .
Transitional Services
Melville has agreed to provide or cause to be provided to the
Company certain specified services for a transitional period after the
Distribution. The transitional services to be provided by Melville to the
Company will be tax services ("Tax Services") as specified in the Tax
Disaffiliation Agreement (as defined below), services relating to certain
Melville health and welfare plans ("Welfare Services"), check collection
services and insurance claims administration services (the "Services"). Such
Services are to be provided in a manner generally consistent with the nature
of Melville's intercompany services and practices prior to the Distribution.
The Services are generally to be offered through the first
anniversary of the Distribution Date, with the exception of Tax Services which
are to be offered until December 31, 1997 and Welfare Services which are to be
offered until December 31, 1996.
The Distribution Agreement generally provides that the Services
will be provided in exchange for payment of Melville's costs therefor, except
with respect to Tax Services for which the consideration will be the provision
by the Company of certain tax services to Melville. The Company believes that
the fees for such services will be consistent with the fees that would be paid
if the Services were provided by independent third parties and that such fees
are consistent in all material respects with the allocation of the costs of
such services set forth in the historical financial statements of the Company.
See the Company's historical Combined Financial Statements included elsewhere
herein. The Company estimates that the net charge for the Services that would
have been payable by the Company in 1995 if the Distribution Agreement had
been in effect during that period is approximately $1.2 million, which is
approximately the amount reflected in the Company's historical Combined
Financial Statements for the fiscal year ended December 31, 1995.
Other Terms of the Distribution Agreement
Employee Benefits
The Distribution Agreement provides that generally Melville
will cease to have any liability under its employee benefit plans with respect
to employees and former employees of the Company Group after the Distribution,
except that (i) options and other outstanding stock based awards in respect of
Melville stock will continue to operate in accordance with their terms, (ii)
the full account balances of current employees of the Company Group in
Melville's 401(k) profit sharing plan will be transferred to a similar
successor plan of the Company and (iii) employees of the Company Group will be
entitled to exercise applicable distribution rights under Melville's employee
stock ownership plan.
Intercompany Accounts
The Distribution Agreement provides that the amount of all
intercompany receivable, payable and loan balances between Melville and its
subsidiaries, on the one hand, and the Company and its subsidiaries, on the
other, outstanding as of the Distribution will be eliminated as provided in
Schedule 9.01 to the Distribution Agreement. For additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," Note 1 of the Company's
Unaudited Pro Forma Combined Balance Sheet and Note 1 under "Pro Forma
Capitalization."
Melville Rights in the Event of Certain Third Party Beneficial Ownership
of Footstar
The Distribution Agreement generally provides that no person or group may
acquire beneficial ownership of more than 35% of the Company Common Stock,
unless prior to such acquisition, the acquiror has provided to Melville a
guarantee of the Company's indemnity and other obligations under the
Distribution Agreement. In addition, if any person or group acquires such
beneficial ownership of the Company, Melville may forthwith terminate the
provision of Services.
Access to Information; Provision of Witnesses; Confidentiality
Pursuant to the Distribution Agreement, each of the Company and
Melville will, for a reasonable period of time, afford the other and certain
of their agents reasonable access to all records in its possession relating to
the business and affairs of the other party as reasonably required, including,
for auditing, accounting, litigation, disclosure and reporting purposes,
subject to limited exceptions. Each party will also use reasonable efforts to
make available to the other, its officers, directors, employees and agents as
witnesses, and will otherwise cooperate with the other party, in connection
with any proceeding arising out of the business of it or the other party prior
to the Distribution.
Except as otherwise provided in the Distribution Agreement, the
Company, Melville, and their respective officers, directors, employees and
agents will hold all information in its possession concerning the other party
in strict confidence.
Transaction Expenses
Melville will generally be responsible for all transaction
expenses incurred by the Melville Group or the Footstar Group in connection
with the Distribution, except that Footstar will be responsible for all fees
and expenses under or in connection with its bank credit facility (described
in "Description of Credit Facility").
Terms of the Tax Disaffiliation Agreement
Prior to the Distribution, Melville and the Company will enter
into a tax disaffiliation agreement (the "Tax Disaffiliation Agreement") that
will set forth each party's rights and obligations with respect to payments
and refunds, if any, with respect to taxes for periods before and after the
Distribution and related matters such as the filing of tax returns and the
conduct of audits or other proceedings involving claims made by taxing
authorities.
In general, Melville will be responsible for filing
consolidated federal and consolidated, combined or unitary state income tax
returns for periods through the Distribution Date, and paying the associated
taxes. The Company will reimburse Melville for the portion of such taxes, if
any, relating to the retail footwear businesses (except to the extent
attributable to Bob's or Marshalls), provided, however, that with respect to
any combined and unitary state income taxes based in part on allocation
percentages, the Company will reimburse Melville for the portion of such taxes
attributable to the retail footwear businesses' contribution to the relevant
allocation percentage. The Company will be reimbursed, however, for tax
attributes, such as net operating losses and foreign tax credits, when and to
the extent that they are used on a consolidated, combined or unitary basis.
The Company will be responsible for filing, and paying the taxes associated
with, all other tax returns relating to pre-Distribution tax periods relating
solely to the Company's businesses. Melville, however, will be responsible for
preparing all income tax returns to be filed by the Company for tax periods
that end on or before the Distribution Date.
In general, the Company will agree to indemnify Melville for
taxes relating to a pre-Distribution tax period to the extent such taxes are
attributable to the retail footwear businesses (except to the extent
attributable to Bob's or Marshalls) or, in the case of any combined and
unitary state income taxes based in part on allocation percentages, to the
extent such taxes are attributable to the retail footwear businesses'
contribution to the relevant allocation percentage and Melville will agree to
indemnify the Company for all other taxes relating to a pre-Distribution tax
period. The Tax Disaffiliation Agreement will also provide that Melville will
generally pay to the Company the net benefit realized by Melville relating to
the Company's businesses from the carryback to pre-Distribution tax periods of
certain tax attributes of the Company arising in post-Distribution tax
periods.
Pursuant to the Tax Disaffiliation Agreement the Company will
agree to refrain from engaging in certain transactions for two years following
the Distribution Date unless it shall first provide Melville with a ruling
from the Internal Revenue Service or an unqualified opinion of counsel that
the transaction will not cause the Distribution to become taxable.
Transactions subject to these restrictions will include, among other things,
the liquidation, merger, or consolidation with another company, the issuance
or redemption of Company Common Stock, the sale, distribution or other
disposition of assets out of the ordinary course of business, and the
discontinuation of certain businesses, except as such transaction relates to
the discontinuation of the Thom McAn business. The Company will generally
agree to indemnify Melville against any tax liability resulting from the
Company's breach of any covenant or representation contained in the Tax
Disaffiliation Agreement with respect to such transactions. In addition, the
Company and Melville have each agreed that neither party will take any action
inconsistent with the information furnished by such party in connection with
the rendering of the legal opinion regarding the tax-free nature of the
Distribution and, until the expiration of the statute of limitations period
applicable to the taxable year in which the Distribution occurs, neither party
will make or change any accounting method, amend any tax return or take any
tax position on any tax return, change the manner in which it conducts its
business, or take (or omit to take) any other action that results in any
increased tax liability relating to a pre-Distribution tax period. The
Company and Melville have agreed to indemnify the other for liabilities
arising as a result of the breach by the Company or Melville, as the case may
be, of the foregoing agreement. The Company and Melville have also agreed to
indemnify the other from liabilities under the securities laws or otherwise
resulting from information furnished by the Company or Melville, as the case
may be.
TRADING MARKET
There has been no trading market for the Company Common Stock,
and there can be no assurances as to the establishment or continuity of any
such market. However, it is expected that a "when-issued" trading market may
develop on or about the Record Date. The Company Common Stock has been
approved for listing on the New York Stock Exchange under the symbol "FTS"
subject to official notice of issuance.
Prices at which the Company Common Stock may trade prior to the
Distribution, on a "when-issued" basis, or after the Distribution cannot be
predicted. Nor can there be any assurance that such price will not be
significantly below the book value per share of the Company Common Stock.
Prices at which trading in shares of Company Common Stock occurs may fluctuate
significantly. See "Risk Factors--No Prior Market for Common Stock." The
prices at which the Company Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
quarter to quarter variations in the actual or anticipated financial results
of the Company or other companies in the retail industry or the markets served
by the Company. In addition, the stock market has experienced extreme price
and volume fluctuations that have affected the market price of many retail
stocks in particular and that have often been unrelated or disproportionate
to the operating performance of these companies. These and other factors may
adversely affect the market price of the Company Common Stock.
The Company Common Stock received by Melville shareholders
pursuant to the Distribution will be freely transferable, except for shares of
such Company Common Stock received by any person who may be deemed an
"affiliate" of the Company within the meaning of Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"). Persons who may be deemed to
be affiliates of the Company after the Distribution generally include
individuals or entities that directly, or indirectly through one or more
intermediaries, control, are controlled by, or are under common control with,
the Company. Persons who are affiliates of the Company will be permitted to
sell their Company Common Stock received pursuant to the Distribution only
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from registration under the Securities Act, such as
the exemption afforded by Rule 144 thereunder.
Options to purchase approximately 700,000 shares of Company
Common Stock, approximately 200,000 shares of deferred Company Common Stock
and stock units in respect of 12,000 shares of Company Common Stock will be
outstanding immediately following the Distribution, which options, deferred
stock and stock units will be granted pursuant to the Company's 1996 Incentive
Compensation Plan and the 1996 Non-Employee Director Stock Plan. See
"Management--1996 Incentive Compensation Plan--Initial Awards" and
"Management--1996 Non-Employee Director Stock Plan." Shares of Company Common
Stock issued upon exercise of such options or stock units and upon vesting of
such deferred stock will be registered on Form S-8 under the Securities Act
and will, therefore, be freely transferable under the securities laws, except
by affiliates as described above. Except for the shares of Company Common
Stock distributed in the Distribution and such stock options, deferred stock
and stock units, no securities of the Company will be outstanding as of or
immediately following the Distribution. The Company has not entered into any
agreement or otherwise committed to register any shares of Company Common
Stock under the Securities Act for sale by security holders. Except for the
shares registered on this Form 10 in connection with the Distribution and
common equity offered pursuant to employee benefit plans, no common equity of
the Company is being, or has been publicly proposed to be, publicly registered
or offered by the Company.
DIVIDENDS
The Company anticipates that future earnings will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to pay cash dividends on the Company Common
Stock in the foreseeable future. The payment of cash dividends in the future
will be subject to the restriction on dividends contained in the Company's
credit facility (described below in "Description of Credit Facility") and, to
the extent dividends are permitted by the Company's lenders, will be at the
discretion of the Company Board. The declaration of dividends and the amount
thereof will also depend on a number of other factors, including the Company's
financial condition, capital requirements, funds from operations, future
business prospects, applicable contractual restrictions and such other factors
as the Company Board may deem relevant. For information on dividends payable
by Meldisco to Kmart with respect to Kmart's minority interest in the Meldisco
Subsidiaries (as defined under "The Business--Meldisco Relationship with
Kmart"), see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Prior to the Distribution Date, the Company and its Meldisco,
Footaction and discontinued Thom McAn segments have been operated as part of
Melville. The following Unaudited Pro Forma Combined Statement of Income sets
forth the historical combined statement of income of the Company for the year
ended December 31, 1995 and for the six months ended June 29, 1996 and as
adjusted for the Distribution and the related transactions and events
described in the Notes to such Unaudited Pro Forma Combined Statements of
Income as if the Distribution and such transactions and events had been
consummated on January 1, 1995. The following Unaudited Pro Forma Combined
Balance Sheet sets forth the historical combined balance sheet of the Company
as of June 29, 1996, and as adjusted for the Distribution and the related
transactions and events described in the Notes to such Unaudited Pro Forma
Combined Balance Sheet as if the Distribution and such transactions and events
had been consummated on June 29, 1996.
In reviewing the Unaudited Pro Forma Combined Financial
Statements set forth below, in addition to the assumptions and other matters
noted in the above paragraph and in the Notes to the Unaudited Pro Forma
Combined Financial Statements, the following should be noted. Incremental
costs that will be incurred because the Company is an independent company have
been reflected in the pro forma adjustments. See the accompanying notes to
Unaudited Pro Forma Combined Financial Statements. In addition, during the
1995 fourth quarter, in anticipation of the Distribution, the Company
committed to close 18 stores and to outsource its data processing functions.
Furthermore, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Management believes that the assumptions used provide a
reasonable basis on which to present such Unaudited Pro Forma Combined
Financial Statements. The Unaudited Pro Forma Combined Financial Statements
should be read in conjunction with the historical Combined Financial
Statements and Notes thereto included elsewhere in this Information Statement
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations." The Unaudited Pro Forma Combined Financial Statements are
provided for informational purposes only and should not be construed to be
indicative of the Company's results of operations or financial condition had
the Distribution and the transactions and events described above been
consummated on the dates assumed, may not reflect the results of operations or
financial condition which would have resulted had the Company been operated as
a separate, independent company during such periods, and are not necessarily
indicative of the Company's future results of operations or financial
condition.
Footstar, Inc.
Unaudited Pro Forma Combined Statement of Income
Year Ended December 31, 1995
($ in millions, except per share amounts
and number of shares)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical(1) Distribution Distribution(5)
------------- ------------ ---------------
<S> <C> <C> <C>
Net sales................................ $1,615.2 $1,615.2
Cost of sales............................ 1,124.5 1,124.5
Gross profit............................. 490.7 490.7
Store operating, selling, general
and administrative expenses............ 343.0 $ 12.6(2) 355.6
Depreciation and amortization............ 20.0 20.0
Restructuring and asset
impairment charges..................... 23.7 23.7
-------- ------ --------
Operating profit......................... 104.0 (12.6) 91.4
Interest income, net..................... 21.1 (20.9)(3) 0.2
-------- ------ --------
Income from continuing operations before
income taxes and minority interests.... 125.1 (33.5) 91.6
Provision for income taxes............... 37.3 (13.1)(4) 24.2
-------- ------ --------
Income from continuing operations before
minority interests..................... 87.8 (20.4) 67.4
Minority interests in net income......... 38.4 38.4
-------- ------ --------
Income from continuing operations........ $ 49.4 $(20.4) $ 29.0
======== ====== ========
Earnings per share....................... $ 0.94
========
Weighted average number of
common shares outstanding(6)........... 30.7 million
============
<FN>
- --------------
(1) Historical amounts reflect all special charges. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(2) To record the elimination of Melville expense allocations and the
anticipated net increase in overhead. This increase consists of the
following:
Elimination of Melville expense allocations........ $ (5.4)
Stand-alone overhead costs......................... 18.0
-------
Net increase.................................... $ 12.6
=======
The Melville expense allocations consist of the following:
Cost of Employee Stock Ownership Plan.............. $ 3.6
Corporate administrative costs..................... 1.8
-------
$ 5.4
=======
The stand-alone overhead costs relate primarily to incremental salary
and related costs of corporate management, financing fees and other
costs associated with being a stand-alone public company.
(3) To eliminate net interest income relating to intercompany balances.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The net interest income on the intercompany
account balance was calculated on a daily basis utilizing the Treasury
Repurchase Agreement rate for overnight investments.
(4) To record the net change in the provision for income taxes to reflect the
pro forma adjustments. The effective tax rate utilized was 39%, which
approximates the Company's blended statutory rate.
(5) Adjusting for the restructuring and asset impairment charge (amounting to
$14.5 million after taxes), as well as asset writeoffs and certain
one-time charges related to the repositioning of the Company (aggregating
$9.0 million after taxes), pro forma income from continuing operations
would have been $52.5 million, and earnings per share would have been
$1.71. Adjusting further for the impact of 218 store closings by Kmart
in 1995, which incurred net losses totalling $0.6 million, pro forma
income from continuing operations would have been $53.1 million and
earnings per share would have been $1.73.
(6) The weighted average number of common shares outstanding reflects (i) the
Distribution ratio times (ii) the number of shares of Melville Common
Stock outstanding as of August 31, 1996 plus shares of deferred stock
and stock units to be granted as of the Distribution pursuant to the
Company's 1996 Incentive Compensation Plan and 1996 Non-Employee
Director Stock Plan.
</TABLE>
Footstar, Inc.
Unaudited Pro Forma Combined Statement of Income
Six Months Ended June 29, 1996
($ in millions, except per share amounts
and number of shares)
<TABLE>
<CAPTION> Adjustments Pro Forma
for for
Historical Distribution Distribution
------------- ------------ ---------------
<S> <C> <C> <C>
Net sales................................ $ 755.9 $ 755.9
Cost of sales............................ 524.2 524.2
-------- ------ --------
Gross profit............................. 231.7 231.7
Store operating, selling, general
and administrative expenses............. 170.6 $ 6.3(1) 176.9
Depreciation and amortization............ 11.6 11.6
-------- ------ --------
Operating profit......................... 49.5 (6.3) 43.2
Interest income, net..................... 9.3 (9.3)(2) 0.0
-------- ------ --------
Income from continuing operations before
income taxes and minority interests..... 58.8 (15.6) 43.2
Provision for income taxes............... 18.8 (6.1)(3) 12.7
-------- ------ --------
Income from continuing operations before
minority interests...................... 40.0 (9.5) 30.5
Minority interests in net income......... 11.7 11.7
-------- ------ --------
Income from continuing operations........ $ 28.3 $ (9.5) $ 18.8
======== ====== ========
Earnings per share....................... $ 0.61
========
Weighted average number of
common shares outstanding(4)............ 30.7 million
============
<FN>
- --------------
(1) To record the elimination of Melville expense allocations and the
anticipated net increase in overhead. This increase consists of the
following:
Elimination of Melville expense allocations $ (2.7)
Stand-alone overhead costs................. 9.0
-------
Net increase............................ $ 6.3
=======
The Melville expense allocations consist of the following:
Cost of Employee Stock Ownership Plan...... $ 1.9
Corporate administrative costs............. 0.8
-------
$ 2.7
=======
The stand-alone overhead costs relate primarily to incremental salary and
related costs of corporate management, financing fees and other costs
associated with being a stand-alone public company.
(2) To eliminate net interest income relating to intercompany balances. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." The net interest income on the intercompany
account balance was calculated on a daily basis utilizing the Treasury
Repurchase Agreement rate for overnight investments.
(3) To record the net change in the provision for income taxes to reflect the
pro forma adjustments. The effective tax rate utilized was
39%, which approximates the Company's blended statutory rate.
(4) The weighted average number of common shares outstanding reflects (i) the
Distribution ratio times (ii) the number of shares of Melville Common
Stock outstanding as of August 31, 1996 plus shares of deferred stock
and stock units to be granted as of the Distribution pursuant to the
Company's 1996 Incentive Compensation Plan and 1996 Non-Employee
Director Stock Plan.
</TABLE>
Footstar, Inc.
Unaudited Pro Forma Combined Balance Sheet
June 29, 1996
($ in millions)
<TABLE>
<CAPTION> Adjustments Pro Forma
for for
Historical Distribution Distribution
------------- ------------ ---------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................... $ 22.6 $ 22.6
Accounts receivable, net.................... 58.0 58.0
Due from parent and other divisions......... 626.6 $(896.8)(1a)
269.9 (1b)
0.3 (2) --
Inventories................................. 311.9 311.9
Prepaid expenses and other current assets... 55.7 (0.7)(2) 55.0
------- -------- --------
Total current assets.................. 1,074.8 (627.3) 447.5
Property and equipment, net.................... 174.0 174.0
Goodwill, net.................................. 29.2 29.2
Deferred charges and other noncurrent assets 27.1 0.4 (2) 27.5
-------- -------- --------
Total assets.......................... $1,305.1 $ (626.9) $ 678.2
======== ======== ========
Liabilities and Equity
Current liabilities:
Short-term borrowings...................... $ 16.1 (1b) $ 16.1
Accounts payable........................... $ 50.5 50.5
Accrued expenses........................... 164.8 164.8
-------- ------- --------
Total current liabilities............ 215.3 16.1 231.4
Long-term debt................................ 0.1 0.1
Other long-term liabilities................... 58.6 58.6
-------- ------- --------
Total long-term liabilities.......... 58.7 58.7
Minority interests in subsidiaries............ 41.7 41.7
Equity:
Melville equity investment................. 989.4 (896.8)(1a)
(92.6)(1c) --
Shareholders' equity:
Common stock............................. 0.3 (1c) 0.3
Contributed capital...................... 253.8 (1b)
51.6 (1c) 305.4
Retained earnings...................... 40.5 (1c) 40.5
Cumulative translation adjustment...... 0.2 (1c) 0.2
-------- ------- --------
Total equity....................... 989.4 (643.0) 346.4
-------- -------- --------
Total liabilities and equity....... $1,305.1 $(626.9) $ 678.2
======== ======== ========
- --------------
<FN>
(1) To reflect the recapitalization of the Company prior to the Distribution
(as if the Distribution occurred on June 29, 1996), including: (a) a
transfer of retained earnings to Melville, (b) the elimination of the
resulting intercompany indebtedness, and (c) a capital contribution by
Melville of its equity investment in the Company. The table above
reflects elimination of the intercompany balance through a Melville
capital contribution and the incurrence by the Company of external
short-term borrowings. The Company intends to eliminate intercompany
balances between the Company and its subsidiaries, on the one hand,
and Melville and its subsidiaries, on the other, outstanding as of the
Distribution as follows: Melville will make a capital contribution in
the amount reflected in the above table, and the remaining
intercompany balance will be repaid to Melville or the Company, as the
case may be. The actual amount of such repayment in connection with
the elimination of the intercompany balance will depend on the amount
of the intercompany balance (which balance will fluctuate based
primarily on the amount of working capital) as of the Distribution
Date. Accordingly, amounts in the table above are not necessarily
indicative of amounts in any future period or as of the Distribution.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
(2) To reflect the transfer to Melville of net assets related to certain
Melville-sponsored employee benefit plans.
</TABLE>
PRO FORMA CAPITALIZATION
Prior to the Distribution Date, the Company and its Meldisco,
Footaction and discontinued Thom McAn segments have been operated as part of
Melville. The following table sets forth the combined capitalization of the
Company as of June 29, 1996, and as adjusted to give effect to the
Distribution and the related transactions and events described in the notes
hereto and the Notes to the Unaudited Pro Forma Combined Balance Sheet
included in this Information Statement as if the Distribution and such
transactions and events had been consummated on June 29, 1996.
Management believes that the assumptions used provide a
reasonable basis on which to present such Pro Forma Capitalization. The Pro
Forma Capitalization table below should be read in conjunction with the
historical Combined Financial Statements and Notes thereto included elsewhere
in this Information Statement, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Unaudited Pro Forma
Combined Financial Statements." The Pro Forma Capitalization table below is
provided for informational purposes only and should not be construed to be
indicative of the Company's capitalization or financial condition had the
Distribution and such related transactions and events been consummated on the
date assumed, may not reflect the capitalization or financial condition which
would have resulted had the Company been operated as a separate, independent
company during such period, and are not necessarily indicative of the
Company's future capitalization or financial condition.
June 29, 1996
(Unaudited)
($ in millions)
---------------------------
Pro Forma
for
Historical Distribution(1)
---------- ---------------
Due from parent and other divisions........... $ 626.6 $ --
------- ---------
Total indebtedness:
Short-term borrowings......................... $ $ 16.1
Current portion of long-term debt ............ 0.1 0.1
Long-term debt................................ 0.1 0.1
------- -------
Total indebtedness......................... 0.2 16.3
------- -------
Minority interests in subsidiaries............. 41.7 41.7
Equity:
Melville equity investment.................... 989.4 --
Shareholders' equity:
Common stock, par value $.01 per
shares; 100 million shares
authorized; 30.7 million shares
issued and outstanding(2)................ 0.3
Contributed capital...................... 305.4
Retained earnings................... 40.5
Cumulative translation
adjustment... ..................... $ 0.2
Total equity.......................... 989.4 346.4
-------- --------
Total capitaliation................... $1,031.3 $ 404.4
======== ========
Debt to capitalization(3) ................... .02% 4.03%
- --------------
(1) To reflect the recapitalization of the Company prior to the
Distribution (as if the Distribution occurred on June 29, 1996),
including:(a) a transfer of retained earnings to Melville of $896.8
million, (b) the elimination of the resulting intercompany indebtedness
of $269.9 million, and (c) a capital contribution by Melville of $92.6
million representing Melville's equity investment in the Company. The
table above reflects elimination of the intercompany balance through a
Melville capital contribution and the incurrence by the Company of
external short-term borrowings. The Company intends to eliminate
intercompany balances between the Company and its subsidiaries, on the
one hand, and Melville and its subsidiaries, on the other, outstanding
as of the Distribution as follows: Melville will make a capital
contribution in the amount reflected in the above table, and the
remaining intercompany balance will be repaid to Melville or the
Company, as the case may be. The actual amount of such repayment in
connection with the elimination of the intercompany balance will depend
on the amount of the intercompany balance (which balance will fluctuate
based primarily on the amount of working capital) as of the
Distribution Date. Accordingly, amounts in the table above are not
necessarily indicative of amounts in any future period or as of the
Distribution. For additional information, see "Unaudited Pro Forma
Combined Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources."
(2) The number of shares of Company Common Stock outstanding
reflects (i) the Distribution ratio times (ii) the number of shares of
Melville Common Stock outstanding as of August 31, 1996 plus shares of
deferred stock and stock units to be granted as of the Distribution
pursuant to the Company's 1996 Incentive Compensation Plan and 1996
Non-Employee Director Stock Plan.
(3) Debt-to-capitalization has been computed by dividing total
indebtedness by total capitalization.The debt-to-capitalization ratio,
including the present value of future minimum rental payments under
operating leases, amounting to approximately $212 million, as
indebtedness and as capitalization, is 17% as of June 29, 1996 and 37%
as adjusted for the Distribution.
SELECTED HISTORICAL COMBINED FINANCIAL DATA
Prior to the Distribution Date, the Company and its Meldisco,
Footaction and discontinued Thom McAn segments have been operated as part of
Melville. The table below sets forth selected historical combined financial
data for the Company. The historical financial data presented below reflect
periods during which the Company did not operate as an independent company
and, accordingly, certain assumptions were made in preparing such financial
data. Therefore, such data may not reflect the results of operations or the
financial condition which would have resulted if the Company had operated as a
separate, independent company during such periods, and are not necessarily
indicative of the Company's future results of operation or financial condition.
The following selected historical combined financial data of
the Company for the years ended December 31, 1995, 1994 and 1993, as of
December 31, 1995 and 1994 and as of and for the six months ended June 29,
1996 and July 1, 1995 are derived from and should be read in conjunction with
the Company's historical Combined Financial Statements and the Notes thereto
included elsewhere in this Information Statement and include all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation of the results for the unaudited periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Combined Financial Statements." Earnings per share data are presented
elsewhere in this Information Statement on a pro forma basis only. See
"Unaudited Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
Six Months Ended Fiscal Years Ended
--------------------- ------------------------------------------------------
June 29, July 1,
1996 1995 1995(1) 1994 1993 1992 1991
------- ------- -------- -------- -------- -------- --------
<S> <C) <C> <C> <C> <C> <C> <C>
Statement of Operations Data: ($ in millions)
Net sales................................. $755.9 $747.6 $1,615.2 $1,612.8 $1,474.8 $1,413.8 $1,279.2
Cost of sales............................. 524.2 527.4 1,124.5 1,117.8 1,011.7 971.5 894.9
------- ------- -------- -------- -------- -------- --------
Gross profit.............................. 231.7 220.2 490.7 495.0 463.1 442.3 384.3
Store operating, selling, general and
administrative expenses................. 170.6 159.7 343.0 319.6 287.0 266.7 233.6
Depreciation and amortization............. 11.6 10.7 20.0 18.7 13.7 10.5 6.4
Restructuring and asset impairment
charges................................ -- -- 23.7 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Operating profit......................... 49.5 49.8 104.0 156.7 162.4 165.1 144.3
Interest income, net...................... 9.3 10.6 21.1 15.4 11.7 12.5 20.3
Provision for income taxes................ 18.8 18.1 37.3 49.5 53.7 54.8 47.9
Minority interests in net income.......... 11.7 16.1 38.4 51.9 47.3 53.8 50.4
Earnings (loss) from discontinued
operations, net......................... 0.8 (3.3) (26.8) 6.0 5.0 (45.2) 17.3
Loss on disposal of discontinued
operations, net(2)...................... (53.6) -- -- -- -- -- --
Cumulative effect of changes in
accounting principle, net(3)............ -- (3.9) (3.9) -- -- (22.1) --
------- ------- -------- -------- -------- -------- --------
Net (loss) income......................... $(24.5) $19.0 $18.7 $76.7 $78.1 $1.7 $83.6
======= ======= ======== ======== ======== ======== ========
Balance Sheet Data: ($ in millions)
Current assets:
Due from parent and other divisions..... $626.6 $617.1 $710.8 $727.7 $706.1 $731.8 $696.4
Inventories............................. 311.9 356.5 282.6 347.3 307.1 299.4 342.5
Other................................... 136.3 98.5 120.9 115.7 116.5 138.2 72.8
------- ------- -------- -------- -------- -------- --------
Total current assets...................... 1,074.8 1,072.1 1,114.3 1,190.7 1,129.7 1,169.4 1,111.7
Property and equipment, net............... 174.0 169.1 195.1 163.9 133.0 110.7 122.0
Total assets.............................. 1,305.1 1,288.6 1,372.7 1,392.5 1,301.6 1,320.5 1,275.5
Current liabilities....................... 215.3 125.2 203.5 168.3 135.1 159.1 171.6
Minority interests in subsidiaries........ 41.7 73.6 93.8 108.7 93.9 100.2 105.3
Melville equity investment................ 989.4 1,030.8 1,013.8 1,033.1 978.2 936.8 976.4
<FN>
- --------------
(1) Amounts in 1995 also reflect certain non-recurring special charges.
Operating profit in 1995 excluding the effect of these charges would
have been $139 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) The Company recorded a pre-tax charge of $85.0 million in the first
quarter of 1996 for the discontinuance of Thom McAn.)
(3) The charge in 1995 was for the writeoff, effective January 1, 1995, of
internally developed software costs that had previously been)
capitalized. The charge in 1992 was for the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1,
1992.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's historical Combined Financial Statements and Unaudited Pro Forma
Combined Financial Statements and the Notes thereto included elsewhere in this
Information Statement. Except as otherwise indicated, all dollar amounts
herein are stated in millions.
General
Prior to the Distribution Date, Meldisco, Footaction and Thom
McAn have been operated as part of Melville. The historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company, and accordingly, certain assumptions were
made in preparing such financial information. Such information, therefore, may
not necessarily reflect the results of operations or the financial condition
of the Company which would have resulted had the Company been an independent,
public company during the reporting periods, and are not necessarily
indicative of the Company's future operating results or financial condition.
On June 3, 1996, Melville announced the discontinuance of the Thom McAn
segment. Accordingly, the results of operations for the Thom McAn segment have
been classified as discontinued operations for all periods presented. In
connection with the discontinuation of Thom McAn, the Company recorded a
pre-tax charge of approximately $85.0 million in the first quarter of 1996.
The charge primarily relates to future operating losses during the wind-down
period, lease settlement costs, asset write-offs and severance. See "The
Business--Discontinuation of Thom McAn Segment."
Furthermore, the Company's operating profit from continuing
operations for the year ended December 31, 1995 as reflected in the Combined
Financial Statements included elsewhere in this Information Statement was
negatively impacted by the recording of special pre-tax charges of $35.0
million in the fourth quarter of 1995.
The restructuring component of this charge, amounting to $16.2
million, was for estimated tenancy and severance costs associated with the
closing of 18 stores, as well as asset write-offs and other costs to be
incurred from the strategic decision to outsource the data processing
function. In addition, the Company recorded an asset impairment charge of $7.5
million due to the early adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Other one-time charges in connection
with the Company's repositioning, including the recording of markdowns related
to the discontinuation of certain product lines and other miscellaneous
charges, were directly charged to operations and totalled $11.3 million.
In the absence of these non-recurring special charges,
operating profit from continuing operations would have been $139.0 million in
1995 compared with $104.0 million reflected in the historical Combined
Statement of Operations for such year.
In 1995, the Company also changed its policy to expense
internally developed software costs that were previously capitalized. Such
amount was recorded on the historical Combined Statement of Operations as the
cumulative effect of a change in accounting principle.
Results of Operations
Net Sales
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended Fiscal Years Ended
------------------------- --------------------- ----------------------------------
($ in millions) June 29, July 1, June 29, July 1, December 31,
1996 1995 1996 1995 1995 1994 1993
--------- -------- -------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Company:
Net sales................ $419.0 $421.8 $755.9 $747.6 $1,615.2 $1,612.8 $1,474.8
Net sales %
change from
prior year............. (0.7%) 8.0% 1.1% 3.9% 0.1% 9.4% 4.3%
Same store sales
% change............... (1.0%) 1.1% 1.5% (1.5%) (2.1%) 2.4% (1.8%)
Meldisco:
Net sales................ $308.7 $326.6 $535.5 $569.2 $1,191.5 $1,280.5 $1,212.5
Net sales %
change from
prior year............. (5.5%) 0.2% (5.9%) (3.6%) (7.0%) 5.6% 1.4%
Same store sales
% change............... (4.6%) (2.5%) (4.4%) (4.8%) (5.8%) 2.4% (2.5%)
% of combined net sales.... 73.7% 77.4% 70.8% 76.1% 73.8% 79.4% 82.2%
Footaction:
Net sales................ $110.3 $95.2 $220.4 $178.4 $423.7 $332.3 $262.3
Net sales %
change from
prior year............. 15.9% 47.4% 23.5% 37.8% 27.5% 26.7% 20.5%
Same store sales
% change............... 11.6% 19.5% 20.7% 14.4% 13.1% 2.4% 2.7%
% of combined net sales.... 26.3% 22.6% 29.2% 23.9% 26.2% 20.6% 17.8%
</TABLE>
Second Quarter and Six Months
Net sales for the second quarter ended June 29, 1996 decreased
0.7% while net sales for the first six months of 1996 increased 1.1% over the
prior year's comparable period. The second quarter of 1995 included sales from
the Easter and Palm Sunday selling periods, which occurred in the first
quarter of 1996. Driven by the continued success of its new merchandising
strategy, increased consumer demand for athletic footwear and increased sales
of branded apparel and accessories, Footaction's net sales increased 15.9% and
23.5% in 1996 over the comparable 1995 second quarter and six-month periods,
respectively. These increases were offset by decreased sales at Meldisco due
to unseasonably cool temperatures throughout the country, increased
competition among discount and department stores and the closing of stores in
1995 in which Meldisco operated leased footwear departments.
Fiscal Year
Combined net sales in 1995 increased 0.1% above the 1994 level.
Footaction's net sales grew by 27.5%, fueled by a 13.1% increase in same store
sales and the opening or acquisition of 21 new stores, as well as the
conversion of 11 additional stores to its new 4,000-6,500 square foot large
store prototype. Footaction's same store sales increase was driven by the
successful implementation of a new merchandise strategy more focused on
"narrow and deep" merchandise assortments and by the strength of branded
apparel. Footaction's sales performance was offset by a decline in Meldisco's
net sales resulting from decreased same store sales due to the difficult
retail environment, increased competition among department and discount
stores, and store closings. During 1995, 218 stores in which Meldisco operated
leased footwear departments were closed. During the fiscal year ended December
31, 1995, Meldisco's Kmart operations accounted for 70.6% and 95.7% of the net
sales of the Company and Meldisco, respectively.
The 9.4% increase in 1994 combined net sales over the 1993
level is attributable to new store openings at Footaction and increased same
store sales at Meldisco and Footaction. Footaction opened 69 new stores in
1994, of which 34 were of the large store prototype. Same store sales
increases at Meldisco and Footaction were primarily due to improvements in
inventory management including better in-stock positions, more focused
merchandise assortments and shorter lead-times for key product offerings.
Costs and Expenses
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended Fiscal Years Ended
------------------------- --------------------- ----------------------------------
(As a % of net sales) June 29, July 1, June 29, July 1,
1996 1995 1996 1995 1995 1994 1993
--------- -------- -------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost of sales............... 67.0% 69.2% 69.3% 70.5% 69.6% 69.3% 68.6%
Store operating, selling,
general and administrative
expenses*................. 20.7% 18.9% 22.6% 21.4% 21.2% 19.8% 19.5%
Depreciation and
amortization.............. 1.4% 1.2% 1.5% 1.4% 1.2% 1.2% 0.9%
<FN>
*Includes allocations from parent
</TABLE>
Cost of Sales
Second Quarter and Six Months
Cost of sales for the second quarter and the first six months
of 1996 as a percentage of sales on a combined basis decreased from the
corresponding prior year period primarily due to Footaction's higher
proportion of business to the total operations and improvements at Footaction
in leveraging fixed costs, shrinkage, promotional markdowns, and initial
markon. The Company's cost of sales in both such 1996 periods were also
favorably impacted by Meldisco's variable occupancy cost structure, offset in
part by higher distribution costs related to the startup of new distribution
facilities and increased markdowns to clear out slow selling merchandise at
Meldisco.
Fiscal Year
Cost of sales increased as a percentage of combined net sales
in 1995 as compared to 1994 due to the recording of additional markdowns at
Meldisco as a result of declining sales in a generally weak retail environment
as well as 218 Kmart store closings and at Footaction related to accelerated
liquidation of aged product and store closings associated with the strategic
restructuring in December 1995. Despite an increase in initial markon at both
the Meldisco and Footaction segments, cost of sales increased in 1994 from
1993 due to higher occupancy costs at Footaction resulting from the rollout
of 32 new superstores, 27 of which were opened in the second half of the year.
Additionally, Meldisco experienced an increase in its warehousing costs due to
incremental expenses incurred to implement a new merchandise replenishment
system.
Store Operating, Selling, General and Administrative Expenses
Second Quarter and Six Months
Store operating, selling, general and administrative expenses
as a percentage of net sales for the second quarter of 1996 increased from the
second quarter of 1995 due to lower sales volume at Meldisco and increased
advertising expenditures and incentive compensation at Footaction.
Store operating, selling, general and administrative expenses
as a percentage of net sales for the first six months of 1996 increased from
the first six months of 1995 due to lower sales volume at Meldisco partially
offset by improved leveraging of fixed costs at Footaction which resulted from
strong same store sales increases.
Fiscal Year
Store operating, selling, general and administrative expenses
increased as a percentage of net sales in 1995 primarily due to negative same
store sales at Meldisco which hindered its ability to leverage its fixed
costs, and due to $6.9 million of special charges recorded in connection with
the Company's restructuring and other contingencies. These special charges
were principally for the settlement of certain litigation, as well as for
asset write-offs related to the repositioning of the Company. See "--General"
above and "Unaudited Pro-Forma Combined Financial Statements." This increase
was partially offset by improved operating leverage at Footaction.
Store operating, selling, general and administrative expense as
a percentage of net sales increased in 1994 as compared to 1993 due to the
recognition of $5 million of one-time costs at Meldisco related to Kmart store
closings and other contingencies.
Operating Profit
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended Fiscal Years Ended
------------------------- --------------------- -------------------------------
($ in millions) June 29, July 1, June 29, July 1,
1996 1995 1996 1995 1995 1994 1993
--------- --------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating (loss) profit before
restructuring and asset
impairment charges*
Meldisco.................... $37.2 $41.1 $36.4 $47.3 $109.4 $147.1 $148.8
Footaction.................. 8.1 3.8 13.1 2.5 18.3 9.6 13.6
----- ----- ----- ----- ------ ------ ------
45.3 44.9 49.5 49.8 127.7 156.7 162.4
Restructuring and asset
impairment charges............ -- -- -- -- 23.7 -- --
----- ----- ----- ----- ------ ------ ------
Operating profit................ $45.3 $44.9 $49.5 $49.8 $104.0 $156.7 $162.4
===== ===== ===== ===== ====== ====== ======
Operating profit as a % of
net sales.................... 10.8% 10.6% 6.5% 6.7% 6.4% 9.7% 11.0%
<FN>
* Includes special charges recorded in connection with the Company's restructuring. Excluding these charges,
operating profit for the fiscal year ended 1995 would have been $116 million for Meldisco, $23 million for
Footaction, and $139 million for the Company combined (or 8.6% of the Company's combined net sales).
</TABLE>
Second Quarter and Six Months
Operating profit for the second quarter of 1996 was 0.9% higher
than the 1995 second quarter. Included in the second quarter of 1995 are the
Easter and Palm Sunday selling periods which fell in the first quarter of
1996. Footaction's growth in operating profit was due to increased sales and
the ability to leverage fixed costs. Meldisco's operating profit declined due
to lower overall and same store sales and the impact of Kmart closing over 200
stores in 1995.
Operating profit for the first six months of 1996 was
relatively flat compared to the first six months of 1995. Footaction's strong
growth in operating profits due to increased sales and leveraging of fixed
costs was offset by the disappointing results of Meldisco. Meldisco's decrease
in operating profit was due to lower same store sales and the impact of the
Kmart store closings.
Fiscal Year
Operating profit in 1995 was adversely affected by the
restructuring and asset impairment charges, asset write-offs related to the
repositioning of the Company in anticipation of the Distribution, and certain
one-time charges. For a discussion of these charges, see the discussion under
"--General" above. Adjusting operating profit to exclude the effect of these
charges, operating profit in 1995 would have been $139 million as compared to
$156.7 million in 1994. This decline resulted principally from the decrease in
operating performance of Meldisco due to a difficult retail environment and,
to a lesser extent, Kmart store closings. An improvement in Footaction's
operating performance driven primarily by a 13.1% same store sales increase
partially offset these results.
Operating profit in 1994 decreased from 1993 due to increased
markdowns in both of the operating segments and higher operating costs from
the rapid rollout of 32 new Footaction superstores, 27 of which were opened in
the second half of the year. Operating profit was also adversely affected by
approximately $5 million of one-time costs recognized by Meldisco related to
store closings and other contingencies.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Six Months Ended Fiscal Years Ended
----------------------------- ------------------------------------------
($ in millions) June 29, July 1,
1996 1995 1995 1994 1993
--------- --------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Cash flows provided by operating
activities*..................... $13.8 $2.2 $165.3 $136.2 $126.0
Capital expenditures.............. 25.2 30.8 92.9 59.3 45.9
<FN>
* Cash flows from operating activities are stated before cash outlays in respect of minority interest of $53.3 million,
$38.1 million and $54.6 million for the fiscal years ended 1995, 1994 and 1993, respectively. The cash flow
amounts include after-tax interest income amounts of approximately $10.6 million and $13.1 million for the six
months ended 1996 and 1995, respectively, and $27.0 million, $19.2 million and $14.3 million for the fiscal years
ended 1995, 1994 and 1993, respectively, related to intercompany accounts which will be eliminated as of the
Distribution.
</TABLE>
The historical financial statements reflect the Company's
status as a division of Melville, with an intercompany receivable balance that
generates interest income to the Company. As of the Distribution, a
significant amount of the Company's retained earnings will be transferred to
Melville, and the intercompany balance will be eliminated as described in the
Notes under "Pro Forma Capitalization." As a result of this recapitalization
and elimination of the intercompany balance, the Company will no longer
generate such interest income from Melville. In addition, as further discussed
below, the Meldisco Subsidiaries made a distribution to Kmart in respect of
Kmart's minority interest in all of the undistributed retained earnings of
such subsidiaries with respect to prior periods. For additional information,
see "Unaudited Pro Forma Combined Financial Statements" and "Pro Forma
Capitalization."
The Company's primary source of liquidity is cash provided by
operations. The earnings of the Company's businesses are seasonal in nature,
with approximately 39% of operating profit earned in the fourth quarter due to
the Christmas selling season. Other peak selling periods coincide with the
Easter holiday and the back-to-school selling seasons. Working capital
requirements vary with seasonal business volume and inventory buildups
occurring prior to the peak periods. The Company expects that the intercompany
balance (which will fluctuate primarily based on working capital) as of the
Distribution will be eliminated substantially through a capital contribution
by Melville. The Company believes that cash from operations, together with
borrowings under its credit facility (described in the section captioned
"Description of Credit Facility"), will be adequate to fund operating
expenses, working capital, capital expenditures, the cash needs associated
with implementation of the McAn Plan, and growth of the Company's business in
accordance with the Company's business plan. As discussed under
"Business--Strategy" the Company may, from time to time, pursue strategic
acquisitions or other new business opportunities, and may need to secure
additional financing in connection with any such acquisitions or other
business opportunities. The Company anticipates that the net after-tax cash
impact of implementing the McAn Plan will be approximately $15.0 million. Such
cash outlays relate principally to lease settlement and severance costs.
Current assets were higher at June 29, 1996 as compared to the
end of the second quarter of 1995 due primarily to increases in deferred tax
assets (primarily related to the discontinued operations charge) and increases
in the amount due from parent and other divisions. These increases were
partially offset by the success of a planned reduction in inventory levels.
Current assets decreased in 1995 as compared to year-end 1994 primarily due to
lower inventory levels and a reduced intercompany account balance with
Melville. The lower inventories resulted from a decreased store base,
effective inventory management, increased sales at Footaction and write-downs
of discontinued product lines. Prepaid expenses decreased due to the
utilization of deferred tax benefits recorded in 1994.
The increase in current liabilities during the first six months
of 1996 compared to the end of the second quarter of 1995 was due primarily to
the recording of the discontinued operation reserves in 1996.
The increase in current liabilities at December 31, 1995 versus
December 31, 1994 was due to an increase in accounts payable and accrued
expenses. The accounts payable increases resulted primarily from improved
working capital management. The increase in accrued expenses is due to the
recording of the special charges at December 31, 1995 of which approximately
$4 million will be paid in cash in 1996.
Capital expenditures in 1995 were $93 million and related
primarily to the construction of two state-of-the-art distribution facilities
to be used by Meldisco (one of which facilities was completed in 1995, with
the other opened in 1996). The balance of such 1995 capital expenditures
related to strategic management information systems at Meldisco and
Footaction, to the opening, remodeling, relocation or expansion of Footaction
stores, and miscellaneous expenditures at Thom McAn. The Company plans to
spend approximately $70 million on capital expenditures in 1996 relating
primarily to the opening, remodeling, relocation or expansion of Footaction
stores, with the balance relating to continuing investment in strategic
management information systems and the completion of the second
state-of-the-art distribution facility for Meldisco. During the first six
months of 1996, the Company has spent approximately $25 million on capital
expenditures.
Following the Distribution and except as described below with
respect to Kmart, the Company expects that it will retain all available funds
for operation and expansion of its business, and does not anticipate paying
any cash dividends to stockholders in the foreseeable future. See "Dividends"
and the discussion under "Description of Credit Facility" with respect to
restrictions on the payment of dividends contained in the Credit Facility.
Pursuant to the March 1996 amendment to the Master Agreement (as defined
below), Meldisco distributed to Kmart in April 1996 approximately $64 million,
representing Kmart's minority interest in all of the undistributed retained
earnings of the Meldisco Subsidiaries with respect to pre-1996 periods. Such
distribution was funded by an intercompany loan from Melville in connection
with the transfer of retained earnings to Melville and the elimination of the
resulting intercompany indebtedness. For additional information on the
capital contribution by Melville in connection with the elimination of the
intercompany balance, see Note 1 of the Company's Unaudited Pro Forma Combined
Balance Sheet, the Notes under "Pro Forma Capitalization" and the discussion
above in "--Liquidity and Capital Resources." Under its arrangement with
Kmart, Meldisco will distribute to Kmart, in future periods, a portion of
Meldisco Subsidiary profits representing Kmart's minority interest in the
Meldisco Subsidiaries. For additional information on Meldisco's relationship
with Kmart, see "The Business--Meldisco Relationship with Kmart."
DESCRIPTION OF CREDIT FACILITY
This section of the Information Statement describes the terms
and conditions of the Credit Facility that the Company will have in place as
of the Distribution. The following description does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all of
the provisions of the Credit Facility, which is filed as an exhibit to the
Form 10 and is incorporated herein by reference. Capitalized terms used in
this Section and not otherwise defined herein are used as defined in the
Credit Facility.
The Company has in place an unsecured credit facility (the
"Credit Facility"), which will be effective as of the Distribution Date, that
will permit revolving credit borrowings for working capital and general
corporate purposes up to an aggregate amount of $200 million and letters of
credit of up to an aggregate amount of $400 million, with an overall combined
limit for borrowings and letters of credit at any time outstanding of $425
million of which $50 million, at the option of the Company, can be in foreign
currency denominations. The term of the Credit Facility expires on the third
anniversary of the Distribution Date. The interest rate applicable to amounts
borrowed under the Credit Facility will be, at the election of the Company,
based on the following price options: an Adjusted CD Rate, a Base Rate and
LIBOR (each as defined in the Credit Facility), in each case (other than the
Base Rate) plus a spread that varies based on the Company's Fixed Charge
Coverage Ratio (defined as the ratio of EBITDAR for any period of four
consecutive fiscal quarters minus the consolidated capital expenditures of the
Company for such period to net interest expense and minimum rental expenses for
such period), and a competitive bid option, as outlined in the Credit
Facility. A fee will accrue on all letters of credit outstanding under the
Credit Facility at a percentage rate per annum that varies based on the
Company's Fixed Charge Coverage Ratio. In addition, a facility fee shall be
payable by the Company on all commitments under the Credit Facility, whether
used or unused, at a percentage rate per annum that varies based on the
Company's Fixed Charge Coverage Ratio.
The Credit Facility will contain customary covenants for
facilities of this nature, including covenants: limiting liens (except, among
other things, liens securing debt in an aggregate amount not exceeding 10% of
the Company's consolidated tangible net worth), investments, subsidiary debt
(except, among other things, debt in an aggregate principal amount not
exceeding 10% of the Company's consolidated tangible net worth),
consolidations, mergers, acquisitions and sales of assets, and transactions
with affiliates; and requiring that certain material subsidiaries of the
Company guarantee the obligations of the Company under the Credit Facility.
The Credit Facility will also require the Company to maintain the following
financial ratios: the ratio of total debt to total capitalization not to
exceed initially 0.65 to 1.0, adjusting over time to 0.6 to 1.0; the ratio of
total debt to EBITDAR for the most recently ended period of four fiscal
quarters not to exceed 2.5 to 1.0 at any time; and the Fixed Charge Coverage
Ratio not to be less than initially 2.0 to 1.0, adjusting over time to 2.25 to
1.0; in each case as defined in and as fully set forth in the Credit Facility.
In addition, the Credit Facility will prohibit any dividend or
other distribution on, or any repurchase or redemption of, any shares of the
capital stock of the Company, other than dividends or other distributions
payable solely in shares of the Company's capital stock.
The Credit Facility will also include customary events of
default, including payment and covenant defaults, material misrepresentations,
cross default to certain other debt of the Company and its subsidiaries,
bankruptcy, ERISA and judgment defaults and a change of control default.
THE BUSINESS
Introduction
Footstar is a leading retailer of discount footwear and branded
athletic footwear and apparel. As of June 29, 1996, the Company operated 2,553
leased discount footwear departments in 50 states, Puerto Rico, the U.S.
Virgin Islands, Guam, the Czech Republic, Slovakia and Mexico through Meldisco
and 436 branded athletic footwear and apparel specialty stores in 43 states
and Puerto Rico through Footaction.
The Company is a leading competitor in the U.S. retail footwear
industry, which had sales of approximately $32.5 billion in 1995. In the
discount footwear industry, principally through its relationship with Kmart,
the Company is the largest operator of leased footwear departments and is the
third largest retailer of discount footwear based on unit market share in
1995, according to FMI. The Company's leased footwear operations had aggregate
sales in 1995 of $1.2 billion representing approximately 3.7% and 7.5% of the
industry's total dollar volume and aggregate unit sales, respectively,
according to FMI and published reports. In 1995, the three largest retailers
of discount footwear (including the Company) had aggregate sales of
approximately $5.1 billion, representing approximately 72.4% of the discount
footwear segment's total unit sales. During the fiscal year ended December 31,
1995, Meldisco's Kmart operations accounted for 95.7% of Meldisco's net sales
and for 70.6% of the Company's combined net sales. For additional information
on Meldisco's sales and other operating results, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
As an operator of leased discount footwear departments, the
Company believes that it has a significantly more variable cost structure than
its discount footwear competitors which generally own or lease real estate
facilities. Because of the Company's low fixed cost structure and its capital
investment in 1995 and 1996 in a state-of-the-art distribution network and
demand-driven merchandise replenishment system, the Company believes its
discount footwear segment will be able to support substantial growth with
minimal additional capital investment. The Company also believes that, through
its merchandising and direct sourcing expertise, its discount footwear
departments offer products of a quality/value mix that is superior to those of
its discount competitors. In addition, the Company believes that it has
certain competitive advantages in advertising, resulting from the promotion of
its discount footwear products through weekly newspaper inserts that have a
circulation of approximately 70 million.
Footaction is a leading mall-based specialty retailer of
branded athletic footwear, apparel and related accessories for the active
lifestyle consumer. Footaction ranked third (after Woolworth Athletic and
Athletes Foot) in total sales among athletic footwear specialty retailers in
1995 according to Sports Trend's Annual Top 100 Report. Footaction's aggregate
sales have grown from $218 million in 1992 to $424 million in 1995,
representing a compounded annual growth rate of 24.8% compared to a .8%
compounded annual growth rate over the same period in footwear sales of the
athletic specialty store segment. Footaction achieved this sales growth
through an aggressive store expansion program and strong same store sales
growth. Same store sales for 1995, 1994 and 1993 increased by 13.1%, 2.4% and
2.7%, respectively. Aggregate sales for the first six months of 1996 were $220
million compared to $178 million for the first six months of 1995, an increase
of 23.5%. Same store sales growth for the first six months of 1996 and 1995
was 20.7% and 14.4%, respectively.
Footaction is recognized as being one of the first to offer the
latest and most popular styles of branded athletic footwear and apparel from
its key vendors such as Nike, Fila, Adidas and Reebok which are highly desired
by its target customers, 12 to 24 year olds. The Company believes that its new
"large store" prototype, 4,000 to 6,500 square feet in size, represents a
point of differentiation from competitors and positions Footaction to achieve
its growth plans. Footaction's marketing efforts are designed to build
traffic, sales and brand awareness among its target customers. Footaction's
advertisements typically feature both Footaction and branded products, and may
include celebrity endorsements. A portion of the cost of such advertising is
offset by co-operative advertising allowances.
Strategy
The Company's strategies are to achieve growth and increase
profitability through (i) expansion of its businesses and (ii) improved
operating performance within and across its businesses.
Expansion. Because of the Company's industry experience,
expertise and vendor relationships, it is well positioned to take advantage of
consolidation in the retail footwear industry. The Company's strategy is to
expand by capitalizing on growth opportunities in the branded athletic
footwear and apparel specialty store and discount footwear segments. In the
branded athletic footwear and apparel specialty store segment, the Company
intends to expand by opening new 4,000 to 6,500 square foot "large store"
prototype Footaction stores in new and existing markets, converting certain of
its traditional 2,000 square foot prototype stores to the new large store
prototype, engaging in strategic acquisitions as opportunities become
available and converting approximately 80 to 100 Thom McAn stores which are
the most suitable locations for conversion in light of Footaction's real
estate, store profile and market requirements (as further described under
"--Discontinuation of Thom McAn Segment" below). Footaction also intends to
continue marketing programs directed at its primary customer base of 12 to 24
year olds in an effort to build traffic, sales and brand awareness and the
perception that Footaction is one of the first to offer the latest and most
popular styles of branded athletic footwear and apparel. In the discount
footwear segment, the Company intends to grow by implementing strategies
designed to expand its existing discount footwear customer base and by
entering into business arrangements with new lessors to operate additional
leased discount footwear departments. As an operator of leased departments,
these new arrangements would require little or no additional capital
investment on the part of the Company. The Company is also developing other
retail formats and concepts focused on leveraging its footwear industry
expertise and infrastructure investments. In addition, the Company is actively
pursuing international opportunities in the discount footwear segment
consistent with the Company's strategic objectives.
Improved Operating Performance. The Company has undertaken
various initiatives designed to increase sales and inventory turnover and
to reduce costs. The Company is implementing a new state-of-the-art
distribution network and a demand-driven merchandise replenishment system
for its discount segment to complement Footaction's existing state-of-the-art
facilities. For further information on the Company's demand-driven
merchandise replenishment system, see "--Management Information Systems."
These efforts are designed to reduce the cost of merchandise replenishment,
significantly increase capacity utilization, provide greater flexibility
with respect to inventory management practices, improve in-stock position
and reduce the cost of and time involved in transporting inventory between
factory and store. These initiatives are expected to be fully implemented
by early 1997. The Company is also developing for its discount segment a
price management system designed to permit customized pricing at the
individual store level to reduce the effect of markdowns and thereby
improve profitability.
Store Locations
The following table sets forth the location by State and
country of each of the Company's Meldisco and Footaction stores as of June 29,
1996.
STATE TOTAL MELDISCO FOOTACTION
- ----- ------ -------- ----------
ALABAMA 55 46 9
ALASKA 14 14 --
ARIZONA 43 39 4
ARKANSAS 14 14 --
CALIFORNIA 379 339 40
COLORADO 64 52 12
CONNECTICUT 26 18 8
DELAWARE 7 6 1
FLORIDA 201 165 36
GEORGIA 85 75 10
HAWAII 4 4 --
IDAHO 24 24 --
ILLINOIS 107 94 13
INDIANA 67 63 4
IOWA 29 28 1
KANSAS 22 18 4
KENTUCKY 47 43 4
LOUISIANA 46 32 14
MAINE 9 7 2
MARYLAND 48 36 12
MASSACHUSETTS 43 27 16
MICHIGAN 137 126 11
MINNESOTA 49 45 4
MISSISSIPPI 24 20 4
MISSOURI 40 35 5
MONTANA 14 13 1
NEBRASKA 13 11 2
NEVADA 29 27 2
NEW HAMPSHIRE 14 12 2
NEW JERSEY 64 46 18
NEW MEXICO 24 19 5
NEW YORK 94 79 15
NORTH CAROLINA 93 78 15
NORTH DAKOTA 8 8 --
OHIO 135 121 14
OKLAHOMA 19 13 6
OREGON 85 82 3
PENNSYLVANIA 132 118 14
RHODE ISLAND 6 5 1
SOUTH CAROLINA 43 36 7
SOUTH DAKOTA 12 12 --
TENNESSEE 64 53 11
TEXAS 166 96 70
UTAH 39 37 2
VERMONT 3 3 --
VIRGINIA 63 54 9
WASHINGTON 147 137 10
WEST VIRGINIA 22 18 4
WISCONSIN 58 55 3
WYOMING 10 9 1
----- ----- ---
TOTAL U.S. STORES 2,941 2,512 429
----- ----- ---
PUERTO RICO 26 19 7
VIRGIN ISLANDS 2 2 --
CZECH REPUBLIC 6 6 --
SLOVAKIA 6 6 --
MEXICO 4 4 --
SINGAPORE (1) 3 3 --
GUAM 1 1 --
----- ----- ---
TOTAL STORES 2,989 2,553 436
===== ===== ===
- ---------------
(1) Closed effective August 1996.
Description of Operating Segments
The Company's discount footwear and branded athletic footwear
and apparel segments are conducted through Meldisco and Footaction,
respectively.
Discount Footwear Business
Meldisco, the leading operator of leased footwear departments,
has operated leased footwear departments in discount chains since 1961. As of
June 29, 1996, Meldisco operated leased footwear departments in 2,152 Kmart
department stores, 389 PayLess Drug Stores and Thrifty Drug Stores
(collectively, "PayLess Thrifty Drug Stores"), and 12 Tesco department stores
(located in the Czech Republic and Slovakia). In its Kmart leased footwear
departments, Meldisco sells a wide variety of family footwear, including
men's, women's and children's dress, casual and athletic footwear, workshoes
and slippers. The majority of the shoes offered by Meldisco in its leased
footwear departments are private label brands, although Meldisco also sells
some brand-name merchandise at discounted prices.
Meldisco began operating Kmart footwear departments in 1962.
Each Meldisco leased footwear department operation in a Kmart store is
conducted under a license agreement with Kmart pursuant to which a Meldisco
Subsidiary receives the exclusive right to operate a footwear department in a
Kmart store for the term of the agreement. Each Meldisco Subsidiary owns and
sells the inventory as principal for its own account (and not as agent for the
store) and itself employs the footwear department personnel. The arrangement
is transparent to Kmart customers, since the department is operated under the
store name. Kmart participates economically in the footwear department
operations through receipt of certain fees, as well as dividends from its
minority interest in the Meldisco Subsidiary. For a more detailed description
of the terms of Meldisco's arrangement with Kmart, see "The Business--Meldisco
Relationship with Kmart."
In its PayLess Thrifty Drug Store operations, Meldisco leases
approximately 100 feet of selling space to display beachwear, slippers and
other casual footwear in season. In exchange for the right to operate footwear
departments in PayLess Thrifty Drug Stores, Meldisco pays certain fees
calculated as a percentage of footwear sales.
Meldisco has achieved net sales in excess of $1 billion in each
year since 1986. For the fiscal year ended December 31, 1995, Meldisco's net
sales of approximately $1.2 billion accounted for approximately 74% of the
Company's net sales, and sales generated by Meldisco's Kmart operations
accounted for approximately 96% of Meldisco's net sales. For the first six
months of 1996, Meldisco's net sales of approximately $536 million accounted
for approximately 71% of the Company's net sales. Sales generated by
Meldisco's Kmart operations accounted for approximately 96% of Meldisco's net
sales for the same period.
Meldisco is presently pursuing strategies designed to improve
sales performance and profitability in the face of competitive pressures. In
its Kmart operations, Meldisco seeks to improve sales performance by
increasing unit sales to current customers while attracting new customers,
particularly Kmart non-footwear shoppers. See "--Merchandising--Discount
Footwear." Meldisco is implementing a state-of-the-art distribution network
and demand-driven merchandise replenishment system which, when completed,
the Company believes will reduce the cost of merchandise replenishment,
significantly increase capacity utilization, provide the Company with
maximum flexibility with respect to inventory management practices, improve
in-stock position and reduce the cost of and time involved in transporting
inventory between factory and store. See "The Business--Purchasing and
Distribution." The development and implementation of a new price management
system will support customized pricing at the individual store level and
thereby reduce the effect of markdowns on profitability. See "--
Merchandising--Discount Footwear."
The Company also plans to leverage its core competencies by
entering into new leased footwear department operations, either with Kmart or
with other parties, both in the U.S. and abroad. Within the U.S., Meldisco is
exploring numerous opportunities for leased footwear operations that would
offer a limited selection of Meldisco footwear (for example, in major grocery
or drugstore chains). Abroad, Meldisco believes that opportunities for
expansion exist in certain Eastern European markets characterized by
fragmentation and unsophisticated competition and in Mexico and Canada.
Competitive Environment--Discount Footwear
As the Company attempts to expand its leased footwear
operations, it faces competition from other discount footwear retailers and
from other operators of leased footwear departments.
Retail Sales of Discount Footwear. The discount footwear
industry is characterized by consolidation and extreme competitive pressures.
Competition within the discount segment is heavily concentrated among four
retailers. Payless ShoeSource, Inc. ("Payless") (which is not affiliated with
PayLess Thrifty Drug Stores), and two discount department stores, Wal-Mart,
Inc. and Dayton Hudson's Target, are Meldisco's primary retail footwear
competitors.
According to FMI, the market share of the discount footwear
category has grown from 37.4% in 1991 to 40.9% of the total footwear retail
market in 1995. Meldisco's unit market share, however, decreased from 8.4% in
1991 to 7.5% in 1995. This decrease in Meldisco's unit market share resulted
primarily from the fact that its domestic outlet base remained relatively
static (down 95 doors to 2,158 over the four year period ended December 31,
1995) during a period in which its primary competitors added outlets at a
compounded annual growth rate of 8.9%. Meldisco believes that its ability to
protect its overall unit market share during this period of rapid growth by
its primary competitors is attributable to the relative strength of Meldisco's
business. See "Risk Factors--Significance of Relationship with Kmart."
Competition for Leased Footwear Departments. J. Baker, Inc.'s
Morse Shoe division ("Morse") is Meldisco's primary competitor among operators
of leased footwear departments. Morse, through its subsidiaries, operates
leased self-selection footwear departments in discount and promotional
department store chains located throughout the U.S., including footwear
departments at Hills, Bradlees, and ShopKo stores. Morse constitutes a
competitor insofar as Meldisco is seeking to expand its leased footwear
department operations. However, neither Morse nor any other operator is a
competitor with respect to Kmart since the terms of Meldisco's Master
Agreement with Kmart provide for Meldisco's continued operation of Kmart's
footwear departments through 2012, unless terminated earlier in the case of
breach or certain other limited circumstances. For further information,
see "The Business--Meldisco Relationship with Kmart," and "Risk Factors--
Significance of Relationship with Kmart."
Merchandising--Discount Footwear
Meldisco's merchandising strategy focuses on solidifying and
building upon its current industry position while attracting Kmart shoppers
who do not currently purchase their footwear at Kmart. The essence of this
two-pronged strategy is to satisfy Meldisco's core customer with high in-stock
availability rates of traditional products while generating interest among
Kmart's non-footwear shoppers by introducing a wider selection of well known
national brands.
Meldisco's traditional strength has been in seasonal, work,
value-priced athletic, and children's shoes. Meldisco intends to solidify its
strength in these segments by ensuring high levels of customer service and
satisfaction. Meldisco's "narrow and deep" merchandising strategy and its
planned systems innovations are designed to ensure that each store is well
stocked in product lines that are particularly popular with Meldisco's core
customers. Meldisco's demand-driven merchandise replenishment system,
currently expected to be fully implemented by early 1997, will permit inventory
management at the store, SKU and size level.
Meldisco also seeks to attract more affluent Kmart non-footwear
shoppers to the footwear department from other areas of the store. To this
end, Meldisco will increasingly offer selected high quality footwear licensed
by well known national brands at prices significantly lower than comparable
merchandise sold by full price retailers. These branded products are also
intended to change customer perceptions of "sameness" among discount footwear
retailers. Licensed brands introduced during 1996 and available only at
Meldisco include "Black Ridge Mountain, A Division of the Timberland Co.";
"Yosemite by Hi Tec"; "Baywatch Gear"; and "Cobbie Cuddlers," a brand name
licensed from and styled by Nine West. Meldisco is currently conducting
consumer research to assess the fit of additional brands in terms of price,
positioning, and discount category suitability.
Discount footwear retailers, including Meldisco and its primary
competitors, currently pursue a policy of chain-wide uniform pricing. Meldisco
is developing a price management system that will allow flexible pricing
policies at the store level. The Company believes that this approach should
reduce the impact of markdowns on overall profitability by focusing on a given
shoe's performance in each store rather than chain averages. The Company
further believes that the pricing flexibility afforded by the price management
system will improve margins by identifying markets or products where strong
sales performance indicates an opportunity for higher prices.
Meldisco is also taking steps to increase customer perception
of assortment availability without increasing store inventories. Meldisco
believes that customer satisfaction and perception of assortment availability
should improve as Meldisco develops and implements systems enabling it to
offer the optimal product mix at the individual store level.
Marketing--Discount Footwear
Meldisco believes that Kmart's typical footwear shopper
generally parallels the average Kmart softlines shopper who is a "busy
budget-conscious mom" in the 25 to 49 age group, employed at least part-time,
has at least one child under 18 and reports a total annual household income
between $25,000 and $65,000. Kmart's apparel and footwear shoppers do,
however, tend to be less affluent than Kmart's overall clientele. Meldisco's
marketing strategy is designed to support its overall business strategy of
increasing purchases among traditional Kmart footwear shoppers while
attracting more affluent current Kmart non-footwear shoppers to the footwear
department from hardlines and other areas of the store.
Meldisco's marketing strategy is designed to convey to
prospective Kmart customers that Meldisco carries the right combination of
product selection, quality, and price to render Meldisco-operated Kmart leased
footwear departments their discount footwear destination of choice. This
marketing effort will support Meldisco's overall business strategy of
increasing current customer purchase occasions while drawing potential new
customers into the Kmart footwear department. These themes will also be
emphasized through advertisements in Kmart's weekly newspaper insert and other
advertising media.
Meldisco's point-of-sale marketing strategy complements its
merchandising strategy of an enhanced assortment of branded products. Meldisco
is continually reviewing all packaging and collateral materials to help
communicate product developments and the availability of branded products.
Point-of-sale signage will be used to communicate more effectively the
availability of leather products and to support national brand and private
label identification. Outpost displays in select areas featuring branded
products will be used to attract Kmart's non-footwear customers into the
footwear department.
Meldisco currently pays Kmart a sales promotional fee that
Kmart applies toward its footwear advertisements in the Kmart weekly newspaper
insert, a publication with a circulation of approximately 70 million. Although
Meldisco advertises primarily through the Kmart newspaper insert, it is
investigating other alternatives to promote its products such as merge mail,
consumer magazine advertising, television and radio advertising, and in-store
distribution programs.
Branded Athletic Footwear and Apparel Business
Footaction is a leading mall-based specialty retailer of
branded athletic footwear, apparel and related accessories for the active
life-style consumer. At June 29, 1996, Footaction operated 436 stores in 43
states and Puerto Rico. Footaction's stores are located predominantly in
enclosed regional and neighborhood malls anchored by major department stores
to take advantage of customer traffic and the shopping preferences of
Footaction's target customers.
Footaction has been growing rapidly in recent years, with 1995
sales increasing 28% to $424 million and operating profit before special
charges increasing 142% to $23 million. For the fiscal year ended December 31,
1995, Footaction accounted for approximately 26% of the Company's net sales
and approximately 17% of the Company's operating profit before special
charges. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Net sales increased 23.5% in the first six months of 1996 to
$220 million from $178 million in the first six months of 1995. For the first
six months of 1996, Footaction accounted for approximately 29% of the
Company's net sales and approximately 26% of the Company's operating profit.
Footaction is capitalizing on the importance of athletic
footwear and apparel for its 12 to 24 year old target customers. Having the
most up-to-date athletic footwear and apparel is an important consideration to
these target customers. Athletic footwear and apparel are highly fashionable
commodities and are acceptable for today's sports, casual, school and work
wear. In addition, the Company believes endorsements of athletic wear by
professional athletes, celebrities and other trend setters influence
purchasing patterns and preferences among Footaction's image and status
conscious target customers.
Footaction seeks to differentiate itself from other branded
athletic footwear and apparel retailers by increasing consumer awareness and
name recognition of Footaction and establishing in the minds of its target
customer group the perception that Footaction is one of the first to offer the
latest styles. As part of this strategy, Footaction works with leading vendors
such as Nike, Fila, Adidas and Reebok to design and develop product line
exclusives based on unique designs or variations in color of the latest styles
of popular brand-name footwear. See "--Merchandising--Branded Athletic Footwear
and Apparel."
Footaction is also in the process of refining its store
concept. Footaction's new prototype store design is the 4,000 to 6,500 square
foot "large store" format, which the Company believes can operate more
profitably than its 6,500 to 12,000 square foot "superstore" format while
satisfying the needs of its customers more effectively than its 2,500 square
foot "traditional store" format. At June 29, 1996, 39 of the Company's 436
Footaction stores were of the large store format, 351 stores were of the
traditional store format and 46 stores were of the superstore format. During
1996, the Company expects to open 27 new Footaction stores, convert 21 stores
from the discontinued Thom McAn business, and remodel, relocate or expand 27
existing Footaction stores. For 1997 and 1998, the Company presently expects
to open or convert 150 Footaction stores to the large store format in addition
to the Thom McAn stores that will be converted to the Footaction format under
the McAn Plan. See "The Business--Discontinuation of Thom McAn Segment." By
the end of 1998, the Company expects that over half of the Footaction stores
will be of the large store or superstore format.
Historically, Footaction's core business has been branded
athletic footwear retailing. Footwear sales accounted for 77% of Footaction's
sales in 1995. Sales of athletic apparel and related accessories represented
16% and 7%, respectively, of Footaction's 1995 sales. Footaction seeks to
increase sales of higher margin apparel and accessories which offer
opportunities for sales and profit growth. See"--Merchandising--Branded
Athletic Footwear and Apparel."
Footaction was founded by Charles Cristol who opened the first
Footaction store in Wichita Falls, Texas in 1976. In November 1991, Melville
acquired Footaction, whose 131 stores were located primarily in the Sunbelt
region, and converted Melville's existing chain of 124 Fan Club stores into
Footaction stores. Thereafter, Footaction expanded nationally through new
store openings and several small acquisitions.
Competitive Environment--Branded Athletic Footwear and Apparel
Athletic Footwear. According to NPD/Smart Consumer Panel
("NPD"), in 1995, total retail sales of athletic footwear in the United States
were $13.3 billion. Branded athletic footwear products accounted for
approximately $11.6 billion (or 87.2%) of athletic footwear sales. The
athletic footwear industry has experienced modest growth in recent years, with
sales increasing at a compounded annual growth rate of 3.7% between 1991 and
1995. Most of the growth in sales of athletic footwear during this period came
from unbranded products sold by discount retailers. Sales of unbranded athletic
footwear increased at a compounded annual growth rate of 10.1%, while sales of
branded products increased at a compounded annual growth rate of 2.9% between
1991 and 1995.
Historically, the industry has been served by a variety of
distribution channels, including mall-based specialty athletic footwear
retailers, department stores, discount retailers, traditional shoe stores,
sporting goods stores, and "category killers" (i.e., retailers providing a
dominant assortment of selected lines of merchandise at competitive prices).
Footaction competes in the brand-name segment of the athletic footwear market,
and faces competition primarily from other mall-based athletic footwear stores
and sporting goods stores. Department stores, out-of-mall discount retailers,
traditional shoe stores and category killers constitute secondary competitors.
According to NPD, in-mall sales accounted for approximately
$5.4 billion (or 47%) of branded athletic footwear sales in 1995. Footaction
believes that mall-based athletic footwear and apparel specialty retailers are
well positioned to compete effectively in the future against non mall-based
retailers. Total traffic in malls has been down in recent years, as has
average time spent by consumers shopping in malls. Nevertheless, the U.S.
Census Bureau projects that the population of 12 to 24 year olds will increase
in the coming decades (peaking at 30.8 million in 2010), and surveys by Teen
Research Unlimited ("TRU") indicate that malls remain popular with individuals
in this age group. These customers regularly shop Footaction and its
mall-based competitors in search of the latest styles.
Within the mall environment, Footaction's primary competitors
are Woolworth Athletic, Athletes Foot and The Finish Line. Woolworth Athletic
is the dominant athletic footwear retailer, offering multiple formats designed
to compete in this market segment including Foot Locker, Lady Foot Locker,
Kids Foot Locker, Champs, Athletic Express, and Going To The Game. The Finish
Line competes on the basis of price, while Footaction, Woolworth Athletic and
Athletes Foot are full-price retailers. Footaction believes that it can
differentiate itself from its competitors by offering the latest styles
demanded by fashion-conscious, status-oriented consumers in an exciting
shopping environment.
Athletic Apparel. Although industry statistics are difficult to
obtain for the athletic apparel market, the Company believes that total retail
sales of athletic apparel in the United States were $29.5 billion in 1994,
based on a study conducted for the Company by an independent management
consulting firm. Branded products accounted for approximately $8.9 billion (or
30%) of athletic apparel sales. The athletic apparel industry has experienced
modest growth in recent years, with sales increasing an average of 5.3% in
1993 and 1994.
Although athletic specialty stores are the primary source for
athletic footwear, department stores and discounters constitute a much larger
share of the athletic apparel market. Because athletic footwear specialty
retailers have traditionally had comparatively low participation in the large
athletic apparel market, Footaction believes that even a small increase in
Footaction's market share could produce significant sales growth.
Merchandising--Branded Athletic Footwear and Apparel
Footaction seeks to be one of the first to offer the most
current and innovative brand-name athletic footwear and apparel available to
its target customer group. Footaction carries the leading athletic footwear
brands, including Nike, Fila, Adidas, Reebok, New Balance, Asics and Converse,
as well as outdoor brands such as Timberland. Footaction also offers a
selection of brand-name apparel and accessories including warm-up suits,
T-shirts, athletic shorts, caps, socks and shoe care products. Apparel and
accessory brands include Nike, Fila, Adidas and Reebok. The following table
sets forth the approximate percentage of Footaction's net sales attributable
to footwear, apparel and accessories:
Approximate Percentage of Footaction's Net Sales
June 29, July 1, December 31,
1996 1995 1995 1994 1993
------- ------- ---- ---- -----
Footwear.... 80% 80% 77% 80% 81%
Apparel..... 14% 14% 16% 14% 15%
Accessories. 6% 6% 7% 6% 4%
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
Footaction constantly monitors product trends in order to
identify styles which are, or may become, popular. Footaction's buyers
regularly consult with vendor representatives, Footaction store and district
managers, and consumers to stay abreast of fashion trends in athletic footwear
and apparel. Footaction buyers visit key markets frequently to observe and
survey individuals in the target customer group.
A significant element of Footaction's merchandising effort is
to work with leading vendors such as Nike, Fila, Adidas and Reebok to design
and develop product line exclusives, based on unique designs or variations in
color of the latest styles of popular brand-name footwear. These exclusives,
which are available only at Footaction, have generally been very popular with
Footaction's target customers and help to differentiate Footaction from other
athletic footwear and apparel specialty retailers.
Footaction tailors merchandise assortment and store space
allocation to customer preferences at each store location. This is
accomplished by recognizing subtle differences in fashion preferences and
demographic factors in the region or market in which each store is located.
This store-by-store merchandising involves differences in brands, sizes,
colors, fabrication and timing or the assortment and space allocated to
present such merchandise. Footaction maintains information systems designed to
manage aged inventory, assuring that its product lines remain current.
Marketing--Branded Athletic Footwear and Apparel
Footaction's primary customers are teens and young adults, age
12 to 24. Footaction believes that these core customers constitute 47% of
total branded athletic footwear sales. According to TRU, 60% of teens claim to
visit a mall in a given week. An NPD survey found that these target customers
purchase 50% of their athletic footwear in malls. Footaction believes that,
within the target age group, male and female teens (age 12-17) are
over-represented among Footaction customers, accounting for 33% of Footaction
shoppers and 41% of sales.
Footaction's marketing strategy is to build traffic, sales, and
brand awareness with its primary customers by increasing awareness of
Footaction among individuals in the target customer group and by increasing
the perception among these individuals that Footaction is one of the first to
have the latest styles. Footaction intends to continue to drive this strategy
through a series of marketing initiatives.
Footaction's media advertisements typically feature both
Footaction and a branded product, and may include celebrity endorsements. A
portion of the cost of such advertising is offset by co-operative advertising
allowances. Footaction focuses its mass media advertising during key selling
periods on males in the 12 to 24 year old age group. Footaction is also
exploring cross-promotional opportunities with appropriate packaged goods
manufacturers, professional athletic teams and other companies.
In-store visual merchandising programs are also an important
part of Footaction's marketing effort. Footaction believes these initiatives
create excitement at the store level and support the marketplace message that
Footaction carries the latest products. Footaction is developing a "Coming
Soon" display to announce upcoming product launches, enhancing its
presentation of new product with a "New Arrivals" tower for the latest lines,
and special "exclusive tags" to highlight products only available at
Footaction.
Meldisco Relationship with Kmart
Meldisco's relationship with Kmart is governed by a Master
Agreement with Kmart effective as of July 1, 1995 and amended as of March 1996
(the "Master Agreement"). Pursuant to the March 1996 Amendment to the Master
Agreement, the Master Agreement has been assigned by Melville to the Company
in anticipation of the Distribution. The following description of the Master
Agreement does not purport to be a full description thereof and is qualified
in its entirety by reference to the Master Agreement itself, a copy of which
is filed as an exhibit to the Form 10 of which this Information Statement is a
part. Capitalized terms not defined herein are used in this Section as defined
in the Master Agreement.
Each license granted under the Master Agreement with respect to
a Meldisco footwear department is held by a separate Meldisco corporation
(each a "Meldisco Subsidiary"). The Company directly or indirectly, through
another corporation in which the Company has a direct or indirect majority
stock ownership interest (a "Company Group Member"), owns 51% of the capital
stock of substantially all of the Meldisco Subsidiaries, and Kmart directly or
indirectly, through another corporation in which Kmart has a direct or
indirect majority stock ownership interest, owns the remaining 49% of the
capital stock of these Meldisco Subsidiaries. Approximately 30 of the Meldisco
Subsidiaries are wholly-owned by the Company or a Company Group Member.
The Master Agreement grants to each Meldisco Subsidiary the
non-transferable exclusive right and license to operate a Footwear Department
in the applicable Kmart store and a non-transferable and non-exclusive license
to use certain of Kmart's trademarks and service marks in connection with the
operation of each Footwear Department (each Meldisco Subsidiary's licenses
being referred to herein as a "License Agreement"). Each Meldisco Subsidiary
is required to comply with Rules and Regulations established by Kmart with
respect to the operation of the Footwear Departments. Each Meldisco Subsidiary
is authorized to sell any footwear in the Footwear Department other than
certain products which are specifically excluded. The Meldisco Subsidiary
retains title to its merchandise until sale. Personnel working in each Footwear
Department are employees of each Meldisco Subsidiary, and each Meldisco
Subsidiary exercises control over such employees, including hiring,
terminating, promoting and determining wages and work procedures.
Kmart remits to Meldisco, as agent for each Meldisco
Subsidiary, the cash sales receipts for the Footwear Departments less
deductions for certain fees, which each Meldisco Subsidiary owes to Kmart with
respect to the licensed Footwear Department. Such fees include a license fee
equal to a fixed percentage of gross sales in the Footwear Department, a
portion of which is allocated by Kmart for advertising for the Footwear
Department and fees to defray certain costs and expenses related to fixtures,
data terminals, employee discounts and certain other items. The total of each
Meldisco Subsidiary's license fees during Kmart's fiscal year must equal or
exceed a specified annual minimum which is calculated based on the total floor
space comprising such Footwear Department on the last day of Kmart's fiscal
year. To the extent that the after-tax profit of a Meldisco Subsidiary exceeds
a certain threshold, such Meldisco Subsidiary also pays to Kmart a fee
calculated as a percentage of such excess within 90 days following the end of
such Meldisco Subsidiary's fiscal year. Each Meldisco Subsidiary that is
jointly owned by Kmart and the Company or a Company Group Member also pays
dividends once each fiscal year to Kmart in respect of Kmart's 49% minority
equity interest in such Meldisco Subsidiary. So long as the aggregate cash
balance of the Meldisco Subsidiaries at the end of a fiscal month is greater
than $1 million, Kmart has the right to borrow 49% of such cash at an interest
rate of 1% plus the 30-day LIBOR rate. The outstanding loan balance must be
repaid in full by Kmart (i) as soon as such aggregate cash balance at the end
of any month is negative and (ii) on an annual date specified in the Master
Agreement.
The initial Term of the Master Agreement is 17 years,
commencing as of July 1, 1995 and expiring July 1, 2012, unless earlier
terminated as set forth therein. All current and future License Agreements
between Kmart and the Meldisco Subsidiaries are coterminous with the Master
Agreement. At least 4 years prior to the end of the applicable Term or renewal
Term, either party may give the other party written notice of its intent to
renew the Master Agreement ("Renewal Notice") or to terminate the Master
Agreement ("Termination Notice") at the end of the applicable Term or renewal
Term. If renewed by means of Renewal Notice, the Master Agreement shall renew
for a 15 year renewal Term commencing on the day following the end of the
applicable Term or renewal Term. If either party gives Termination Notice to
the other, the Master Agreement shall terminate at the end of the applicable
Term or renewal Term. If neither party gives the other Renewal Notice or
Termination Notice, the applicable Term or renewal Term shall be extended for
a period ending on the date four years following either party's written notice
to the other of its intent to terminate.
During the Term and any renewal Term, the Master Agreement or
any License Agreement may only be terminated: (i) by Kmart with respect to any
Kmart store with a Footwear Department which is to cease to operate and be
open for business to the public; (ii) by Kmart or Meldisco with respect to any
affected Kmart store, in the event that any Footwear Department premises
become unfit for use and occupancy by reason of material damage or
destruction, or as a result of condemnation; (iii) by Kmart or Meldisco if the
other party shall fail to make any material payments when due or to deliver
any material accounting reports as required by the Master Agreement, or in the
event of a material breach of any covenant, representation or warranty of the
other party, subject to the right of the party so charged to cure the breach
or failure within a specified period; (iv) by either party if Kmart or
Meldisco shall fail to pay its debts when due or become subject to certain
insolvency, bankruptcy or similar events; (v) at the option of the non-selling
or non-transferring party, in the event of a sale or transfer of a majority of
the outstanding shares of the other party to a single person or entity or an
affiliated group under common control; or (vi) in the event that the Meldisco
Subsidiaries fail to achieve the Performance Standards outlined in the Master
Agreement.
If the Master Agreement is terminated with respect to any
stores under the circumstances described in the preceding paragraph, the
applicable Meldisco Subsidiaries must remove all fixtures, furnishings,
equipment and other property belonging to the Meldisco Subsidiary and
surrender possession of the premises of the Footwear Department (1) in the case
of clauses (i) or (ii) of the preceding paragraph, by the date specified in
the written notice of termination, (2) in the case of clauses (iii) or (vi) of
the preceding paragraph, within one year of receipt of notice, and (3) in the
case of clauses (iv) or (v) of the preceding paragraph or upon the expiration
of the Term or any renewal Term, within 30 days of receipt of notice. All
property remaining after the specified date will become the property of Kmart.
Upon such termination, Meldisco is required to pay all fees accruing through
the termination date. Meldisco has agreed to indemnify Kmart from certain
liabilities, including damages arising from any breach of the Master Agreement.
Neither party may assign its rights or delegate its duties
under the Master Agreement without the prior written consent of the other
party. Either party may, however, assign its rights under the Master Agreement
to a subsidiary or affiliate which is and shall remain wholly controlled by or
under common control with such party.
Purchasing and Distribution
The Company's sourcing and purchasing of product is conducted
by the merchandising department of each of its segments. A significant
percentage of the Company's products are sourced or manufactured offshore,
with China, Indonesia and Brazil being the most significant offshore sources.
See "Risk Factors--Risks of Foreign Manufacturing." The Company believes that
its purchasing volumes enable it to obtain product from suppliers on favorable
terms.
Footaction's product sourcing is driven by its relationships
with athletic footwear and apparel vendors. Footaction buyers routinely meet
with vendor representatives and visit key markets in an effort to build
appropriate merchandise assortments.
Previously, Meldisco products imported into the U.S. were
shipped to one of four distribution centers, located in Rancho Cucamonga,
California; Huntington, Indiana; Clinton, New Jersey; and Morrow, Georgia.
Each of these facilities either has been closed or is scheduled to be closed
by early 1997. New state-of-the-art facilities have been opened in Mira Loma,
California and Gaffney, South Carolina.Thom McAn's current distribution center
in Brockton, Massachusetts will be closed during 1996, and inventory will
thereafter be distributed through the Company's Gaffney, South Carolina
facility pending completion of the McAn Plan. The new facilities are designed
to reduce the cost of merchandise replenishment, significantly increase
capacity utilization and provide the Company with maximum flexibility with
respect to inventory management practices.
Substantially all of Footaction's inventory is received and
distributed through its state-of-the-art facility in Dallas, Texas. The
facility, which began operation in late 1993, utilizes high speed sortation
equipment, bar code scanning and radio frequency technologies to ship product
to Footaction stores. When necessary, the facility has the ability to ship
merchandise to all of its stores on the same day product is received.
Management Information Systems
The Company has emphasized the development and implementation
of strategic management information systems ("IS") focused on enhancing
productivity and improving inventory management and profit margins. The
Company utilizes relational database and client server technology to enhance
the speed of delivery of new systems and puts powerful decision support tools
in the hands of the users. In an effort to reduce capital requirements and
sharpen its focus on strategic efforts, the Company has entered into an
outsourcing arrangement with Lockheed Martin for the purchase, maintenance and
operation of all IS hardware.
The main thrust of application software development at Meldisco
is the creation of systems that support inventory pipeline improvements.
Components of this strategy include the implementation of the state-of-the-art
distribution network and demand-driven merchandise replenishment system. The
demand-driven merchandise replenishment system will utilize sophisticated
forecasting routines, including seasonal and promotional inflators/deflators,
to automatically generate distributions to meet preset service levels using
proprietary statistical algorithms. The system is automated, requires only
exception-based intervention and represents a significant enhancement to
existing merchandise replenishment capability. The state-of-the-art
distribution network and demand-driven merchandise replenishment systems are
scheduled to be fully implemented by early 1997.
The major thrust of IS at Footaction is to support the needs of
a rapidly growing business while maximizing synergies with Meldisco. The major
IS efforts are directed at merchandise allocation and replenishment, store
automation and labor management and decision support systems. EDI and Quick
Response programs are also planned. The Company will continue to engage in the
implementation of IS necessary to support its business objectives. It will
target its IS expenditures in areas with the largest strategic impact and will
strive to control IS expenditures by sharing software between divisions and
driving down processing costs.
Legal Proceedings
The Company is from time to time involved in routine litigation
incidental to the conduct of its business, none of which, the Company
believes, will have a material adverse effect on its financial position or
results of operations.
Properties
At June 29, 1996, Meldisco operated leased footwear departments
in 2,553 stores. Collectively, these leased departments are located in all 50
states, Guam, Puerto Rico, the U.S. Virgin Islands, the Czech Republic,
Slovakia and Mexico. All but 401 of the leased departments operated at June
29, 1996 were located in Kmart discount department stores. Of these 401
stores, 389 leased departments were located in PayLess Thrifty Drug Stores and
12 in Tesco department stores. Footaction has a nationwide presence, operating
436 stores in 43 states and Puerto Rico.
Meldisco-operated footwear departments in traditional Kmart
stores average 2,900 square feet and average 3,600 square feet in Super Kmart
Centers. Meldisco's footwear departments in PayLess Thrifty Drug Stores
generally occupy approximately 100 feet of selling space. Footaction's
prototype format is the 4,000 to 6,500 square foot large store format. At
June 29, 1996, 39 of the Company's 436 Footaction stores are of the large
store format, 351 are of the traditional store format and 46 are of the
superstore format. By the end of 1998, the Company expects that over half of
the Footaction stores will be of the large store or superstore format.
Kmart and PayLess Thrifty Drug Stores provide Meldisco with
store space to sell footwear in exchange for certain payments made by
Meldisco. See "The Business--Meldisco Relationship with Kmart." Footaction
stores are typically operated pursuant to long-term leases. These leases call
for minimum annual rent subject to periodic adjustments, plus other charges,
including a proportionate share of taxes, insurance and common area
maintenance, and, in some cases, percentage rent based on the store's sales
volume.
Meldisco's corporate offices are located in 130,000 square feet
of leased office space in Mahwah, New Jersey. Meldisco's offices also serve as
Company headquarters. Footaction's corporate offices are located in 50,000
square feet of leased office space in Irving, Texas. Meldisco has closed its
distribution facility in Rancho Cucamonga, California and expects to close its
distribution facilities in Huntington, Indiana, Clinton, New Jersey and
Morrow, Georgia by early 1997. The Company has recently opened
state-of-the-art distribution facilities in Mira Loma, California and Gaffney,
South Carolina. Footaction leases distribution facilities in Dallas, Texas
which will total 180,000 square feet as of the Distribution.
Employees
As of June 29, 1996, the Company had approximately 12,600
employees (excluding Thom McAn employees), including approximately 8,200 at
Meldisco and 4,400 at Footaction. Of Meldisco's approximately 8,200 employees,
approximately 3,600 were employed full-time, and 4,600 were part-time
employees. As of June 29, 1996, Footaction had approximately 1,600 full-time
and 2,800 part-time employees.
Except for the Thom McAn segment, none of the Company's
employees are covered by collective bargaining agreements. The Company
believes that its relationships with its employees are good.
Trademarks and Service Marks
The Company or its subsidiaries own all rights to "Footaction"
for use as a trademark or service mark in connection with footwear and related
products and services. The Company or its subsidiaries have registered or have
common law rights to over 200 trademarks and/or service marks under which the
Company markets private label merchandise or its services. The Company either
has registered or is in the process of registering its trademarks and service
marks in foreign countries in which it may operate in the future. As
necessary, the Company vigorously protects its trademarks and service marks
both domestically and internationally.
Discontinuation of Thom McAn Segment
Thom McAn, which has been part of Melville since 1922, is a
largely mall-based, moderately-priced specialty retailer, marketing
moderately-priced men's and women's private label footwear and accessories
to quality and value conscious customers. As of June 29, 1996, Thom McAn
operated 278 stores, located primarily in the Eastern U.S., Puerto Rico,
and the U.S. Virgin Islands. Seventy-eight percent of Thom McAn's stores
are located in enclosed regional and neighborhood malls, anchored by major
department stores. The remaining stores are located in urban areas
characterized by high customer traffic.
The moderately-priced footwear retail market has come under
pressure in recent years from rapidly expanding discounters at the lower
end and department stores and non-traditional channels such as mail order
businesses and apparel retailers at the higher end. Thom McAn also faces
competitive challenges within the moderately-priced category, primarily
from department stores. In light of this competition, the total market
share of the moderately-priced category has fallen from 20.9% of the retail
footwear market in 1991 to 19.7% in 1995. As a result of the difficult
competitive conditions in the moderately-priced footwear retail category,
the Company has, since 1992, closed in excess of 450 Thom McAn stores that
did not meet the Company's sales, profit and return on investment
objectives. Furthermore, Thom McAn's financial results have continued to
be disappointing following these store closings and other restructurings.
As a result of these extreme competitive pressures in the
moderately-priced footwear retail market and Thom McAn's inability to
satisfy the Company's sales, profit and return on investment objectives in
recent years, on June 3, 1996 Melville announced the decision to exit the
Thom McAn business by converting 80 to 100 Thom McAn stores (which are the
most suitable locations for conversion in light of Footaction's real
estate, store profile and market requirements) to Footaction stores, and by
pursuing the sale of or by closing the remaining Thom McAn stores. The
Company currently expects to have exited the Thom McAn business within 12
months of announcing the discontinuation. Accordingly, the Company is
treating its Thom McAn segment as discontinued operations and, in
connection with its McAn Plan, has recorded a pretax charge to income of
approximately $85 million in the first quarter of 1996. For additional
information on the material consequences expected to result from the
discontinuation of the Thom McAn segment, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
MANAGEMENT
Structure of Company's Board of Directors
The Company will amend its Certificate of Incorporation prior
to the Distribution to provide for a classified board of directors consisting
of seven directors (as indicated in the table below). The Company Board will
be divided into three classes of directors. The term of office of the first
class ("Class I") expires at the 1997 annual meeting, the term of office of
the second class ("Class II") expires at the 1998 annual meeting and the term
of office of the third class ("Class III") expires at the 1999 annual meeting.
At each annual meeting of stockholders held after the Distribution, a class of
directors will be elected for a three year term to replace the class whose
term has then expired. See "Certain Statutory, Charter and Bylaw
Provisions--Classified Board of Directors."
The Company Board further expects to establish an Audit
Committee and a Compensation Committee (the "Compensation Committee")
following the Distribution.
Directors and Executive Officers
The following tables set forth certain information concerning
the directors and executive officers of the Company who will be serving or in
office as of the Distribution Date.
Name Age Position
- ---- --- --------
J.M. Robinson 50 Chairman of the Board (Class I) and Chief
Executive Officer
Carlos E. Alberini 41 Chief Financial Officer
Charles Messina 53 Chief Human Resources Officer
Maureen Richards 40 General Counsel and Corporate Secretary
Stanley P. Goldstein 61 Director (Class I)
George S. Day 59 Director (Class III)
Terry R. Lautenbach 58 Director (Class II)
Bettye Martin Musham 63 Director (Class III)
Kenneth S. Olshan 64 Director (Class III)
M. Cabell Woodward, Jr. 67 Director (Class II)
J.M. Robinson will be the Chairman and Chief Executive Officer
of the Company as of the Distribution. Mr. Robinson has been President and
Chief Executive Officer of the Meldisco division of Melville Corporation since
June 1988. Prior to joining Meldisco, Mr. Robinson was President of Melville
Corporation's Smart Step division (1987-1988).
Carlos E. Alberini will be the Chief Financial Officer of the
Company as of the Distribution. From February, 1996 to July 10, 1996 Mr.
Alberini was the Acting Chief Financial Officer of Melville Corporation,
having joined Melville in May 1995 as Vice President of Finance. Prior to that
time, Mr. Alberini served as the Chief Financial Officer and Senior Vice
President (1990-1995) and Vice President and Controller (1987 to 1990) of The
Bon Ton Stores Inc., a chain of 64 department stores.
Charles Messina will be the Chief Human Resources Officer of
the Company as of the Distribution. Mr. Messina has been the Vice President of
Human Resources and International Sourcing and Specialty Retailing of the
Meldisco division of Melville Corporation since January 1992. Prior to joining
Meldisco, Mr. Messina was the Vice President, Operations and Personnel
(1985-1992) at Morse Shoe, Inc.
Maureen Richards will be the General Counsel and Corporate
Secretary of the Company as of the Distribution. Since October 1995, Ms.
Richards has been Vice President and Corporate Counsel of Melville
Corporation. She joined Melville in 1988 and served as its Corporate and
Trademark Counsel and Assistant Secretary from October 1991 to October 1995.
Stanley P. Goldstein is Chairman and Chief Executive Officer of
Melville Corporation and, as of the Distribution, will also serve as a
director of the Company. Mr. Goldstein has served in various capacities at
Melville Corporation or its CVS division since 1969 including, in addition to
his current titles, as President of Melville from January 1987 to January
1994; Executive Vice President of Melville Corporation from 1984 to December
1986; and, prior to that, President of the CVS division of Melville
Corporation. Mr. Goldstein also serves on the board of NYNEX.
Dr. George S. Day is a Professor of Marketing at The Wharton
School, University of Pennsylvania and, as of the Distribution, will also
serve as a director of the Company. Prior to joining the Wharton School in
July 1991, Dr. Day was executive director of the Marketing Science Institute,
an industry-supported research consortium. Dr. Day has been a consultant to
such corporations as AT&T, Eastman Kodak, General Electric, U.S. West, Trinova
Corporation, Unitel Corporation, E. I. duPont de Nemours and Company and IBM
Corporation.
Terry R. Lautenbach is a director of Melville Corporation and a
member of its Executive Committee. As of the Distribution, Mr. Lautenbach will
also serve as a director of the Company. A retired Senior Vice President of IBM
Corporation, Mr. Lautenbach is currently a director of Air Products Corp.,
Varian Associates, Inc. and Trustee of Loomis-Sayles Mutual Funds.
Bettye Martin Musham, is President and Chief Executive
Officer of GEAR HOLDINGS, INC., which she co-founded in 1977 and, as of the
Distribution, will also serve as a director of the Company. Ms. Martin
Musham is also a director of Brunswick Corporation, IO Electric, Peace
Links and the World Service Council of the YWCA of the USA. Before
launching GEAR, she was the United States Manager for Louis Vuitton and
spent the prior 17 years in the talent and advertising industries.
Kenneth S. Olshan was Chairman and Chief Executive Officer of
Wells Rich Greene BDDP until October 1995. As of the Distribution, Mr. Olshan
will serve as a director of the Company. Mr. Olshan currently serves on the
Creative Review Board of the Advertising Council and the boards of the Central
Park Conservancy, the National Multiple Sclerosis Foundation and Polytechnic
University.
M. Cabell Woodward, Jr. is a director of Melville Corporation
and is Chairman of its Executive Committee. As of the Distribution, Mr.
Woodward will also serve as a director of the Company. A retired Vice
Chairman, Chief Financial Officer and Director of ITT Corporation, Mr.
Woodward is currently a director of The Black & Decker Corporation and Trustee
of a management investment company sponsored by Paine Webber.
Compensation of Directors
Directors who are not currently receiving compensation as
officers or employees of the Company or any of its affiliates will be paid an
annual retainer fee of $10,000 and a $1,000 fee for each meeting of the
Company Board or any committee that they attend and a $2,500 retainer fee for
serving as a Committee chair. Non-employee directors will also participate in
the 1996 Non-Employee Director Stock Plan. See "--1996 Non-Employee Director
Stock Plan."
Executive Compensation
The following sets forth annual base salaries, effective on the
Distribution, payable to the Chief Executive Officer and each of the three
most highly compensated executive officers of the Company whose compensation
is expected to exceed $100,000 on an annualized basis during the fiscal year
ending December 31, 1996 (the "Named Executive Officers"):
Named Executive Officers Title Salary
- ------------------------ ----- ------
J.M. Robinson Chairman of the Board and Chief Executive $600,000
Officer
Carlos E. Alberini Chief Financial Officer 320,000
Charles Messina Chief Human Resources Officer 215,000
Maureen Richards General Counsel and Corporate Secretary 200,000
The Company intends to adopt a tailored compensation program
that offers incentive award opportunities to management through
performance-based plans authorized by the 1996 Incentive Compensation Plan
(described below). Awards under the 1996 Incentive Compensation Plan may be
made to Company executives, including those named above, each year reflecting
the annual earnings performance of the Company and its business units as well
as the annual achievement of strategic or qualitative goals in the same year.
Target annual awards will be set as a percentage of salary. Actual awards
thereunder, reflecting the annual assessment of performance, may be made in
cash or in Company Common Stock.
While long-term (or multiple year) awards under the 1996
Incentive Compensation Plan may also be made in Company Common Stock or in
cash, the Company intends to institute a long-term incentive program that pays
in a mixture of cash and Company Common Stock.
The Company will also maintain for substantially all of its
full-time employees a 401(k) profit sharing plan under which eligible
employees will be permitted to make salary reduction contributions. The
Company will also make matching contributions of up to 4% of compensation
under a specified schedule in respect of employee contributions. Under this
plan, various investment funds will be available for participants to direct
both employer and employee contributions and loans to participants will be
available in accordance with applicable Internal Revenue Code and ERISA rules.
Compensation Committee Interlocks and Insider Participation
The Company does not currently have a Compensation Committee.
Prior to the Distribution, compensation was determined by the Company Board.
Following the Distribution, the Company expects to establish a Compensation
Committee comprised of independent directors.
Employment Agreements
Prior to the Distribution, the Company expects to enter into
employment agreements (each referred to in this section individually as an
"Employment Agreement" and collectively as the "Employment Agreements"),
effective on the Distribution, with the Named Executive Officers relating to
their employment with the Company. The following briefly summarizes the
principal terms of such Employment Agreements and is qualified by reference to
the full text of the Employment Agreements.
The period of employment under the Employment Agreements
extends initially for three years (five years in the case of Mr. Robinson),
subject to automatic one-year extensions at the end of the initial term unless
either party gives notice of non-renewal at least 180 days prior to expiration
of the term. The Employment Agreements generally provide for payment of an
annual base salary that will be reviewed each year, but may not be decreased
from the amount in effect in the previous year. Initially, base salary will be
$600,000, $320,000, $215,000 and $200,000 for Messrs. Robinson, Alberini, and
Messina and Ms. Richards, respectively. The Employment Agreements also
generally provide for (i) continued payment of base salary, incentive
compensation, and other benefits for 36 months in the case of Mr. Robinson and
for 18 months in the case of the other Named Executive Officers (or 24 months
in the case of a change in control) in the event the executive's employment is
terminated other than a termination by the Company for "cause" or voluntarily
by the executive without "good reason"; (ii) non-competition for a period of
18 months (36 months for Mr. Robinson) subsequent to termination for any
reason other than by the executive for "good reason" or by the Company without
"cause" following a "change in control"; (iii) other restrictive covenants
including non-disclosure, non-solicitation of employees and availability for
litigation support; (iv) participation in certain benefit plans and programs
(including pension benefits, disability and life insurance, and medical
benefits); (v) annual and long-term incentive compensation opportunities; and
(vi) deferred compensation arrangements. Mr. Robinson's Employment Agreement
provides that his target annual incentive and long-term incentive
opportunities may not be less than 50% and 35%, respectively, of his base
salary.
A "change in control" is defined in generally the same manner
as under the 1996 Incentive Compensation Plan, as described below. "Good
reason" is defined generally as demotion, reduction in compensation,
unapproved relocation in the case of Mr. Robinson (or other Named Executive
Officers following a change in control), material breach of the Employment
Agreement by the Company, or, in the case of Mr. Robinson, failure to extend
the term of the Employment Agreement to his 60th birthday. "Cause" is defined
generally as a breach of the restrictive covenants referred to in clause (iii)
of the preceding paragraph, certain felony convictions, or willful acts or
gross negligence that are materially damaging to the Company.
If payments under the Employment Agreements following a change
in control are subject to the "golden parachute" excise tax, the Company will
make an additional "gross-up" payment sufficient to ensure that the net
after-tax amount retained by the executive (taking into account all taxes,
including those on the gross-up payment) is the same as would have been the
case had such excise tax not applied. The Employment Agreements obligate the
Company to indemnify the executives to the fullest extent permitted by law,
including the advancement of expenses, and provide that the Company generally
will reimburse an executive for expenses incurred in seeking enforcement of
the Employment Agreement, unless the executive's assertion of rights was in
bad faith or frivolous.
The Employment Agreement with Mr. Robinson relates to his
employment as Chairman and Chief Executive Officer and his agreement to serve
as a Director. The Employment Agreements with Messrs. Alberini and Messina and
with Ms. Richards relate to their employment as senior executives of the
Company.
Supplemental Executive Retirement Plan
Following the Distribution, the Company expects to adopt a
Supplemental Executive Retirement Plan for Select Senior Management of
Footstar, Inc. (the "Supplemental Retirement Plan"). The Supplemental
Retirement Plan is designed to provide competitive retirement benefits to
selected executives with at least ten years of credited service. The normal
retirement benefit commencing at age 60 is equal to 2% of the average of the
three highest salary amounts received by the executive in the preceding ten
years plus actual annual bonus (before any deferrals) for each year (full and
partial) of service with the Company from and after the Distribution. In the
case of retirement on or after age 55 but before age 60, a reduced benefit is
provided. Except in the event of a change in control (as defined in the
Supplemental Retirement Plan) or as provided in the Employment Agreements
referred to above, no benefits are payable to an eligible executive who
terminates employment prior to age 55 or prior to completing ten years of
credited service. Benefits are generally payable in annual installments for
the life of the executive, but other forms of payment of equivalent actuarial
value may be elected.
1996 Incentive Compensation Plan
Effective on the Distribution, the Company has adopted, and
Melville Corporation as sole stockholder of the Company has approved, the 1996
Incentive Compensation Plan (the "1996 ICP"). It is anticipated that the
Company's stockholders will be asked to ratify the adoption of the 1996 ICP at
the Company's first annual meeting of stockholders following the Distribution
in order to qualify certain compensation under the 1996 ICP as
"performance-based compensation" that is tax deductible by the Company without
limitation under Section 162(m) of the Code.
The Company Board believes that attracting and retaining key
employees of high quality is essential to the Company's growth and success. In
addition, the Company Board believes that the long term success of the Company
is enhanced by a competitive and comprehensive compensation program which may
include tailored types of incentives designed to motivate executives and
reward key employees for outstanding service, including awards that link
compensation to applicable measures of the Company's performance and the
creation of stockholder value. In this regard, stock options and other
stock-related awards will be an important element of compensation for key
employees. Such awards will enable the Company to attract and retain
executives and key employees and enable such persons to acquire a proprietary
interest in the Company and thereby align their interests with the interests
of the Company's stockholders. In addition, the Company Board has concluded
that the Compensation Committee of the Company Board (the "Compensation
Committee") should be given as much flexibility as possible to provide for
annual and long-term incentive awards contingent on performance.
The following is a brief description of the material features
of the 1996 ICP. Such description is qualified in its entirety by reference to
the full text of the 1996 ICP.
Types of Awards
The terms of the 1996 ICP provide for grants of stock options,
stock appreciation rights ("SARs"), restricted stock, deferred stock, other
stock-related awards, and performance or annual incentive awards that may be
settled in cash, stock, or other property ("Awards").
Shares Subject to the 1996 ICP; Annual Per-Person Limitations
Under the 1996 ICP, the total number of shares of Company
Common Stock reserved and available for delivery to participants in connection
with Awards is 3.1 million, plus 10% of the number of shares of Company Common
Stock issued by the Company during the term of the 1996 ICP (excluding
issuances under the 1996 ICP, or any other compensation or benefit plan of the
Company). Shares of Company Common Stock subject to an Award that is canceled,
expired, forfeited, settled in cash, or otherwise terminated without a
delivery of shares of Company Common Stock to the participant, including
shares of Company Common Stock withheld or surrendered in payment of any
exercise or purchase price of an Award or taxes relating to an Award, will
again be available for Awards under the 1996 ICP, except that, if any such
shares of Company Common Stock could not again be available for Awards to a
particular participant under any applicable law or regulation, such shares of
Company Common Stock shall be available exclusively for Awards to participants
who are not subject to such limitation. Shares of Company Common Stock issued
under the 1996 ICP may be either newly issued shares of Company Common Stock
or Company Common Stock held in treasury.
In addition, the 1996 ICP imposes individual limitations on the
amount of certain Awards in order to comply with Code Section 162(m). Under
these limitations, during any fiscal year the number of options, SARs, shares
of restricted stock, shares of deferred stock, shares of Company Common Stock
as a bonus or in lieu of other Company obligations, and other stock-based
Awards granted to any one participant shall not exceed 1,000,000 shares for
each type of such Award, subject to adjustment in certain circumstances. The
maximum amount that may be earned as a final annual incentive award or other
cash Award in any fiscal year by any one participant is $3 million, and the
maximum amount that may be earned as a final performance award or other cash
Award in respect of a performance period by any one participant is $5 million.
The Compensation Committee is authorized to adjust the number
and kind of shares of Company Common Stock subject to the aggregate share
limitations and annual limitations under the 1996 ICP and subject to
outstanding Awards (including adjustments to exercise prices and number of
shares of options and other affected terms of Awards) in the event that a
dividend or other distribution (whether in cash, shares of Company Common
Stock, or other property), recapitalization, forward or reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other similar corporate transaction or event affects the
Company Common Stock so that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of participants. The Compensation
Committee is also authorized to adjust performance conditions and other terms
of Awards in response to these kinds of events or in response to changes in
applicable laws, regulations, or accounting principles.
Eligibility
Executive officers and other officers and employees of the
Company or any subsidiary, including any such person who may also be a
director of the Company, are eligible to be granted Awards under the 1996 ICP.
Following the Distribution, it is anticipated that approximately 150 persons
would be considered eligible for Awards under the 1996 ICP.
Administration
The 1996 ICP will be administered by the Compensation
Committee, each member of which currently must be a "disinterested person" as
defined under Rule 16b-3 under the Exchange Act and an "outside director" for
purposes of Code Section 162(m). Subject to the terms and conditions of the
1996 ICP, the Compensation Committee is authorized to select participants,
determine the type and number of Awards to be granted and the number of shares
of Company Common Stock to which Awards will relate, specify times at which
Awards will be exercisable or settleable (including performance conditions
that may be required as a condition thereof), set other terms and conditions
of such Awards, prescribe forms of Award agreements, interpret and specify
rules and regulations relating to the 1996 ICP, and make all other
determinations which may be necessary or advisable for the administration of
the 1996 ICP. The 1996 ICP provides that Compensation Committee members shall
not be personally liable, and shall be fully indemnified, in connection with
any action, determination, or interpretation taken or made in good faith under
the 1996 ICP.
Stock Options and SARS
The Compensation Committee is authorized to grant stock
options, including both ISOs which can result in potentially favorable tax
treatment to the participant and non-qualified stock options (i.e, options not
qualifying as ISOs), and SARs entitling the participant to receive the excess
of the fair market value of the Company Common Stock on the date of exercise
(or defined "change in control price" following a change in control) over the
grant price of the SAR. The exercise price per share subject to an option and
the grant price of an SAR is determined by the Compensation Committee, but must
not be less than the fair market value of the Company Common Stock on the date
of grant (except to the extent of in-the-money awards or cash obligations
surrendered by the participant at the time of grant). The maximum term of
each option or SAR, the times at which each option or SAR will be
exercisable, and provisions requiring forfeiture of unexercised options or
SARs at or following termination of employment generally is fixed by the
Compensation Committee, except that no option or SAR may have a term
exceeding ten years. Options may be exercised by payment of the exercise
price in cash, shares of Company Common Stock, outstanding Awards, or other
property (possibly including notes or obligations to make payment on a
deferred basis) having a fair market value equal to the exercise price, as
the Compensation Committee may determine from time to time. Methods of
exercise and settlement and other terms of the SARs are determined by the
Compensation Committee. SARs granted under the 1996 ICP may include
"limited SARs" exercisable for a stated period of time following a "change
in control" of the Company, as discussed below.
Restricted and Deferred Stock
The Compensation Committee is authorized to grant restricted
stock and deferred stock. Restricted stock is a grant of shares of Company
Common Stock which may not be sold or disposed of, and which may be forfeited
in the event of certain terminations of employment and/or failure to meet
certain performance requirements, prior to the end of a restricted period
specified by the Compensation Committee. A participant granted restricted
stock generally has all of the rights of a stockholder of the Company,
including the right to vote the shares of Company Common Stock and to receive
dividends thereon, unless otherwise determined by the Compensation Committee.
An Award of deferred stock confers upon a participant the right to receive
shares of Company Common Stock at the end of a specified deferral period,
subject to possible forfeiture of the Award in the event of certain
terminations of employment and/or failure to meet certain performance
requirements prior to the end of a specified restricted period (which
restricted period need not extend for the entire duration of the deferral
period). Prior to settlement, an Award of deferred stock carries no voting or
dividend rights or other rights associated with Company Common Stock
ownership, although dividend equivalents may be granted, as discussed below.
Dividend Equivalents
The Compensation Committee is authorized to grant dividend
equivalents conferring on participants the right to receive, currently or on a
deferred basis, cash, shares of Company Common Stock, other Awards, or other
property equal in value to dividends paid on a specific number of shares of
Company Common Stock or other periodic payments. Dividend equivalents may be
granted on a free-standing basis or in connection with another Award, may be
paid currently or on a deferred basis, and, if deferred, may be deemed to have
been reinvested in additional shares of Company Common Stock, Awards, or other
investment vehicles specified by the Compensation Committee.
Bonus Stock and Awards in Lieu of Cash Obligations
The Compensation Committee is authorized to grant shares of
Company Common Stock as a bonus free of restrictions, or to grant shares of
Company Common Stock or other Awards in lieu of Company obligations to pay
cash under other plans or compensatory arrangements, subject to such terms as
the Compensation Committee may specify.
Other Stock-Based Awards
The 1996 ICP authorizes the Compensation Committee to grant
Awards that are denominated or payable in, valued by reference to, or
otherwise based on or related to the Company Common Stock. Such Awards might
include convertible or exchangeable debt securities, other rights convertible
or exchangeable into shares of Company Common Stock, purchase rights for
shares of Company Common Stock, Awards with value and payment contingent upon
performance of the Company or any other factors designated by the Compensation
Committee, and Awards valued by reference to the book value of the Company
Common Stock or the value of securities of or the performance of specified
subsidiaries. The Compensation Committee determines the terms and conditions
of such Awards, including consideration to be paid to exercise Awards in the
nature of purchase rights, the period during which Awards will be outstanding,
and forfeiture conditions and restrictions on awards.
Performance Awards, Including Annual Incentive Awards
The right of a participant to exercise or receive a grant or
settlement of an Award, and the timing thereof, may be subject to such
performance conditions as may be specified by the Compensation Committee. In
addition, the 1996 ICP authorizes specific annual incentive awards, which
represent a conditional right to receive cash, shares of Company Common Stock
or other Awards upon achievement of preestablished performance goals during a
specified one-year period. Performance awards and annual incentive awards
granted to persons the Compensation Committee expects to be, for the year in
which a deduction arises, among the Chief Executive Officer and four other
most highly compensated executive officers will, if so intended by the
Compensation Committee, be subject to provisions that should qualify such
Awards as "performance-based compensation" not subject to the limitation on
tax deductibility by the Company under Code Section 162(m).
The performance goals to be achieved as a condition of payment
or settlement of a performance award or annual incentive award will consist of
(i) one or more business criteria and (ii) a targeted level or levels of
performance with respect to each such business criteria. In the case of
performance awards intended to meet the requirements of Code Section 162(m)
with respect to such executive officers, the business criteria used must be
one of those specified in the 1996 ICP, although for other participants the
Compensation Committee may specify any other criteria. The business criteria
specified in the 1996 ICP are: (1) earnings per share; (2) revenues; (3) cash
flow; (4) cash flow return on investment; (5) return on net assets; return on
investment; return on capital; return on equity; (6) operating margin; (7) net
income; pretax earnings; pretax earnings before interest, depreciation and
amortization; pretax operating earnings after interest expense and before
incentives, service fees, and extraordinary or special items; operating
earnings; (8) total stockholder return; and (9) any of the above goals as
compared to the performance of a published or special index deemed applicable
by the Compensation Committee.
In granting annual incentive or performance awards, the
Compensation Committee may establish unfunded award "pools," the amounts of
which will be based upon the achievement of a performance goal or goals using
one or more of the business criteria described in the preceding paragraph.
During the first 90 days of a fiscal year or performance period, the
Compensation Committee will determine who will potentially receive annual
incentive or performance awards for that fiscal year or performance period,
either out of the pool or otherwise. After the end of each fiscal year or
performance period, the Compensation Committee will determine the amount, if
any, of the pool, the maximum amount of potential annual incentive or
performance awards payable to each participant in the pool, and the amount of
any potential annual incentive or performance award otherwise payable to a
participant. The Compensation Committee may, in its discretion, determine that
the amount payable as a final annual incentive or performance award will be
increased or reduced from the amount of any potential Award, but may not
exercise discretion to increase any such amount intended to qualify under Code
Section 162(m).
Subject to the requirements of the 1996 ICP, the Compensation
Committee will determine other performance award and annual incentive award
terms, including the required levels of performance with respect to the
business criteria, the corresponding amounts payable upon achievement of such
levels of performance, termination and forfeiture provisions, and the form of
settlement.
Other Terms of Awards
Awards may be settled in the form of cash, shares of Company
Common Stock, other Awards, or other property, in the discretion of the
Compensation Committee. The Compensation Committee may require or permit
participants to defer the settlement of all or part of an Award in accordance
with such terms and conditions as the Compensation Committee may establish,
including payment or crediting of interest or dividend equivalents on deferred
amounts, and the crediting of earnings, gains, and losses based on deemed
investment of deferred amounts in specified investment vehicles. The
Compensation Committee is authorized to place cash, shares of Company Common
Stock, or other property in trusts or make other arrangements to provide for
payment of the Company's obligations under the 1996 ICP. The Compensation
Committee may condition any payment relating to an Award on the withholding of
taxes and may provide that a portion of any shares of Company Common Stock or
other property to be distributed will be withheld (or previously acquired
shares of Company Common Stock or other property surrendered by the
participant) to satisfy withholding and other tax obligations. Awards granted
under the 1996 ICP generally may not be pledged or otherwise encumbered and
are not transferable except by will or by the laws of descent and
distribution, or to a designated beneficiary upon the participant's death,
except that the Compensation Committee may, in its discretion, permit
transfers for estate planning or other purposes.
Awards under the 1996 ICP are generally granted without a
requirement that the participant pay consideration in the form of cash or
property for the grant (as distinguished from the exercise), except to the
extent required by law. The Compensation Committee may, however, grant Awards
in exchange for other Awards under the 1996 ICP, awards under other Company
plans, or other rights to payment from the Company, and may grant Awards in
addition to and in tandem with such other Awards, awards, or rights as well.
Unless the Award agreement specifies otherwise, the
Compensation Committee may cancel or rescind Awards if the participant fails
to comply with certain noncompetition, confidentiality or intellectual
property covenants. For instance, Awards may be canceled or rescinded if the
participant engages in competitive activity while employed with the Company
or within a specified period following termination of employment.
Acceleration of Vesting
The Compensation Committee may, in its discretion, accelerate
the exercisability, the lapsing of restrictions, or the expiration of deferral
or vesting periods of any Award, and such accelerated exercisability, lapse,
expiration and vesting shall occur automatically in the case of a "change in
control" of the Company (including cash settlements of SARs and "limited SARs"
which may be exercisable only in the event of a change in control). In
addition, the Compensation Committee may provide that the performance goals
relating to any performance-based award will be deemed to have been met upon
the occurrence of any "change in control." Subject to certain exceptions, the
1996 ICP generally defines a "change in control" as (i) any person acquiring
beneficial ownership of 25% or more of the outstanding Company Common Stock or
the combined voting power of the Company's outstanding voting securities; (ii)
the reorganization, merger, consolidation, complete liquidation or dissolution
of the Company, sale or disposition of all or substantially all of the assets
of the Company, or similar corporate transaction; or (iii) members of the
Company Board serving at the effective date of the 1996 ICP, together with
members first elected thereafter (excluding certain directors elected as a
result of an actual or threatened election contest) with the approval of a
majority of the original members and new members previously so approved,
ceasing to constitute a majority of the Company Board. Upon the occurrence of
a change in control, limited SARs and other Awards may be cashed out based on
a defined "change in control price," which will be the higher of (i) the cash
and fair market value of property that is the highest price per share paid
(including extraordinary dividends) in any reorganization, merger,
consolidation, liquidation or dissolution, or liquidation of shares following
a sale of substantially all assets of the Company, or (ii) the highest fair
market value per share (generally based on market prices) at any time during
the 60 days before and 60 days after the change in control.
Amendment and Termination of the 1996 ICP
The Company Board may amend, alter, suspend, discontinue, or
terminate the 1996 ICP or the Compensation Committee's authority to grant
Awards without further stockholder approval, except stockholder approval must
be obtained for any amendment or alteration if required by law or regulation
or under the rules of any stock exchange or automated quotation system on
which the Company Common Stock is then listed or quoted. Thus, stockholder
approval will not necessarily be required for amendments which might increase
the cost of the 1996 ICP or broaden eligibility. Stockholder approval will not
be deemed to be required under laws or regulations, such as those relating to
ISOs, that condition favorable treatment of participants on such approval,
although the Company Board may, in its discretion, seek stockholder approval
in any circumstance in which it deems such approval advisable. Unless earlier
terminated by the Company Board, the 1996 ICP will terminate at such time as
no shares of Company Common Stock remain available for issuance under the 1996
ICP and the Company has no further rights or obligations with respect to
outstanding Awards under the 1996 ICP.
Initial Awards
At or shortly following the Distribution, it is anticipated
that the Compensation Committee will make deferred stock awards ("Founders
Stock Awards") to each Named Executive Officer under the 1996 ICP in an
amount approximately equal to his or her annual base salary. It is expected
that such Founders Stock Awards will generally become 100% vested after five
years of service with the Company following the grant date.
At or shortly following the Distribution, it is also
anticipated that the Compensation Committee will make the following grants of
non-qualified stock options to each Named Executive Officer under the 1996
ICP: Mr. Robinson -- 120,000 options, Mr. Alberini -- 60,000 options, Mr.
Messina -- 30,000 options and Ms. Richards -- 30,000 options. It is expected
that such options will have an exercise price equal to the average of the high
and low trading prices for Company Common Stock for the first 20 trading days.
It is expected that these options will generally become exercisable in five
equal installments based on continued service with the Company during the
five-year period following the grant date. No additional options are
anticipated to be granted to such Named Executive Officers until 1999.
Federal Income Tax Implications of the 1996 ICP
The following is a brief description of the federal income tax
consequences generally arising with respect to Awards under the 1996 ICP.
The grant of an option or SAR will create no tax consequences
for the participant or the Company. A participant will not recognize taxable
income upon exercising an ISO (except that the alternative minimum tax may
apply). Upon exercising an option other than an ISO, the participant must
generally recognize ordinary income equal to the difference between the
exercise price and fair market value of the freely transferable and
nonforfeitable shares of Company Common Stock acquired on the date of
exercise. Upon exercising an SAR, the participant must generally recognize
ordinary income equal to the cash or the fair market value of the freely
transferable and nonforfeitable shares of Company Common Stock received.
Upon a disposition of shares of Company Common Stock acquired
upon exercise of an ISO before the end of the applicable ISO holding periods,
the participant must generally recognize ordinary income equal to the lesser
of (i) the fair market value of the shares of Company Common Stock at the date
of exercise of the ISO minus the exercise price, or (ii) the amount realized
upon the disposition of the ISO shares minus the exercise price. Otherwise, a
participant's disposition of shares of Company Common Stock acquired upon the
exercise of an option (including an ISO for which the ISO holding periods are
met) or SAR generally will result in short-term or long-term capital gain or
loss measured by the difference between the sale price and the participant's
tax basis in such shares of Company Common Stock (the tax basis generally
being the exercise price plus any amount previously recognized as ordinary
income in connection with the exercise of the option or SAR).
The Company generally will be entitled to a tax deduction equal
to the amount recognized as ordinary income by the participant in connection
with an option or SAR. The Company generally is not entitled to a tax
deduction relating to amounts that represent a capital gain to a participant.
Accordingly, the Company will not be entitled to any tax deduction with
respect to an ISO if the participant holds the shares of Company Common Stock
for the ISO holding periods prior to disposition of the shares of Company
Common Stock.
With respect to Awards granted under the 1996 ICP that result
in the payment or issuance of cash or shares of Company Common Stock or other
property that is either not restricted as to transferability or not subject to
a substantial risk of forfeiture, the participant must generally recognize
ordinary income equal to the cash or the fair market value of shares of
Company Common Stock or other property received. Thus, deferral of the time of
payment or issuance will generally result in the deferral of the time the
participant will be liable for income taxes with respect to such payment or
issuance. The Company generally will be entitled to a deduction in an amount
equal to the ordinary income recognized by the participant.
With respect to Awards involving the issuance of shares of
Company Common Stock or other property that is restricted as to
transferability and subject to a substantial risk of forfeiture, the
participant must generally recognize ordinary income equal to the fair market
value of the shares of Company Common Stock or other property received at the
first time the shares of Company Common Stock or other property become
transferable or are not subject to a substantial risk of forfeiture, whichever
occurs earlier. A participant may elect to be taxed at the time of receipt of
shares of Company Common Stock or other property rather than upon lapse of
restrictions on transferability or the substantial risk of forfeiture, but if
the participant subsequently forfeits such shares of Company Common Stock or
property, the participant would not be entitled to any tax deduction,
including as a capital loss, for the value of the shares of Company Common
Stock or property on which he previously paid tax. The participant must file
such election with the Internal Revenue Service within 30 days of the receipt
of the shares of Company Common Stock or other property. The Company generally
will be entitled to a deduction in an amount equal to the ordinary income
recognized by the participant.
Awards that are granted, accelerated or enhanced upon the
occurrence of a change in control may give rise, in whole or in part, to
"excess parachute payments" within the meaning of Code Section 280G and, to
such extent, will be non-deductible by the Company and subject to a 20%
excise tax by the participant.
The foregoing summary of the federal income tax consequences in
respect of the 1996 ICP is for general information only. Interested parties
should consult their own advisors as to specific tax consequences, including
the application and effect of foreign, state and local tax laws.
1996 Non-Employee Director Stock Plan
Effective on the Distribution, the Company has adopted, and
Melville Corporation as sole stockholder of the Company has approved, the 1996
Non-Employee Director Stock Plan (the "1996 Director Plan"). The 1996 Director
Plan is intended to assist the Company in attracting and retaining highly
qualified persons to serve as non-employee directors and to more closely align
such directors' current and ongoing interests with those of the Company's
stockholders by providing a significant portion of their total compensation in
the form of Company Common Stock.
The following summary of the material terms of the 1996
Director Plan is qualified in its entirety by reference to the full text of
the 1996 Director Plan.
Eligibility
Under the 1996 Director Plan, only directors who are not
employees of the Company or of any subsidiary or parent corporation of the
Company are "non-employee directors" eligible to participate in the Plan.
Option Grant
An option to purchase 2,000 shares of Company Common Stock (an
"Option") will be automatically granted to each non-employee director upon the
later of the 30th trading day after the Distribution or the initial election
to the Company Board. Options granted under the 1996 Director Plan will be
non-qualified stock options and will be subject to, among other things, the
following terms and conditions:
(i) The exercise price per share of Company Common Stock
purchasable under an Option will be equal to 100% of the fair market value of
Company Common Stock on the date of grant of the Option, except that the
exercise price per share for Options granted on the 30th trading day after the
Distribution will be equal to the average of the high and low trading prices
for Company Common Stock for the first 30 trading days after the Distribution;
(ii) Each Option will expire at the earliest of (a) ten years
after the date of grant, (b) 12 months after the non-employee director ceases
to serve as a director of the Company for any reason other than death,
disability, or retirement at or after attaining age 65, or (c) immediately
upon removal of the non-employee director for cause;
(iii) Each Option will become exercisable as to 20% of the shares
of Company Common Stock relating to the Option on each of the first five
anniversaries of the date of grant, and will thereafter remain exercisable
until the Option expires; provided that an Option previously granted to a
participant (a) will be fully exercisable in the event of a Change in Control
(as defined in the 1996 Director Plan), (b) will be fully exercisable after
the non- employee director ceases to serve as a director of the Company due
to death, disability, or retirement at or after attaining age 65 and (c)
will be exercisable after the non-employee director ceases to serve as a
director of the Company for any reason other than death, disability, or
retirement at or after attaining age 65 only to the extent the Option was
exercisable at the date of such cessation of service; and
(iv) Each Option may be exercised, in whole or in part, at such
time as it is exercisable and prior to its expiration by, among other things,
giving written notice of exercise to the Company specifying the number of
shares to be purchased and accompanied by payment in full of the exercise
price in cash (including by check) or by surrender of shares of Company Common
Stock or a combination thereof.
Stock Unit Grants
The 1996 Director Plan also provides for automatic grants of
2,000 stock units ("Stock Units") to each non-employee director on the
Distribution and thereafter to each person who, at the close of business on
the date of each annual meeting of the Company's stockholders commencing in
1997, is a non-employee director. Each Stock Unit represents the right to
receive one share of Company Common Stock at the end of a specified period.
Fifty percent of such Stock Units will be paid six months and a day after
the grant date, provided the non-employee director has not ceased to serve
as a director for any reason other than death, disability, or retirement at
or after attaining age 65, except that payment of such Stock Units shall be
accelerated in the event of a Change in Control. The remaining fifty
percent of such Stock Units will be paid upon the later of ceasing to be a
director or attaining age 65, provided that payment of such Stock Units
shall be accelerated in the event of death, disability, or a Change in
Control.
Deferral
The 1996 Director Plan permits a non-employee director to elect
to defer receipt of all or a portion of the shares otherwise deliverable in
connection with Stock Units. The 1996 Director Plan also permits a
non-employee director to elect to defer receipt of fees otherwise payable in
cash, with such deferred amounts deemed invested in Stock Units. The director
may make such election for up to 100% of the fees otherwise payable to him or
her, including annual retainer fees, fees for attendance at meetings of the
Company Board or any committee and any other fees for service as director. If
a director elects to defer fees in the form of Stock Units, the Company will
credit a deferral account established for the director with a number of Stock
Units equal to the number of shares of Company Common Stock (including
fractional shares) having an aggregate fair market value at that date equal to
the amount of fees deferred by the director. The deferral period applicable to
Stock Units will be as elected by the director. However, all periods will end
upon a Change in Control of the Company.
Dividends
When, as, and if dividends are declared and paid on Company
Common Stock, dividend equivalents equal to the amount or value of any per
share dividend will be credited on each then outstanding Stock Unit. Such
dividend amounts will be deemed invested in non-forfeitable Stock Units, based
on the then-current fair market value of Company Common Stock.
Shares of Company Common Stock Available for Issuance
A total of 200,000 shares of Company Common Stock are reserved
and available for issuance under the 1996 Director Plan. Such shares may be
authorized but unissued shares, treasury shares or shares acquired in the
market for the account of a director. If any Option or Stock Unit is canceled
or forfeited, the shares subject thereto will again be available for issuance
under the 1996 Director Plan. The aggregate number of shares of Company Common
Stock issuable under the 1996 Director Plan and the number of shares subject
to each automatic grant of Options or Stock Units will be appropriately
adjusted by the Company Board in the event of a recapitalization,
reorganization, merger, consolidation, spin-off, combination, repurchase,
exchange of shares or other securities of the Company, stock split or reverse
split, stock dividend, certain other extraordinary dividends, liquidation,
dissolution, or other similar corporate transaction or event affecting Company
Common Stock, in order to prevent dilution or enlargement of directors' rights
under the 1996 Director Plan.
Administration
The 1996 Director Plan will be administered by the Company
Board, provided that any action by the Company Board shall be taken only if
approved by vote of a majority of the directors who are not then eligible to
participate in the 1996 Director Plan. The 1996 Director Plan may be amended,
altered, suspended, discontinued or terminated by the Company Board without
further stockholder approval, unless such approval is required by law or
regulation or under the rules of any stock exchange or automated quotation
system on which the Company Common Stock is then listed or quoted. Stockholder
approval will not be deemed to be required under laws or regulations that
condition favorable treatment of participating directors on such approval,
whether or not the amendment would increase the cost of the 1996 Director Plan
to the Company, although the Company Board may, in its discretion, seek
stockholder approval in any circumstance in which it deems such approval
advisable.
Effective and Termination Dates
The 1996 Director Plan will become effective upon the
Distribution. Unless earlier terminated by the Company Board, the 1996
Director Plan will terminate when no shares remain available under the 1996
Director Plan and the Company and directors have no further rights and
obligations under the 1996 Director Plan.
Federal Income Tax Implications of the 1996 Director Plan
The federal income tax consequences related to the grant and
exercise of Options to non-employee directors under the 1996 Director Plan are
substantially similar to the tax consequences described herein with respect to
the grant of non-qualified stock options under the 1996 Incentive
Compensation Plan. Directors will recognize ordinary income equal to the
fair market value of Company Common Stock received in connection with the
payment of Stock Units, and the Company will be entitled to a corresponding
tax deduction at such time.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of Company Common Stock are, and
will be prior to the Distribution, held beneficially and of record by
Melville. Set forth in the table below is information as of August 31, 1996
with respect to the number of shares of Melville Common Stock beneficially
owned by (i) each person or entity known by the Company to own more than five
percent of the outstanding Melville Common Stock, (ii) each director (and
nominee as director) of the Company, (iii) each of the Named Executive
Officers of the Company and (iv) all directors and executive officers of the
Company as a group. Also set forth below are the number of shares of Company
Common Stock that each such person or entity would own immediately after the
Distribution on a pro forma basis. To the Company's knowledge, unless
otherwise indicated, each person or entity has sole voting and investment
power with respect to the shares set forth opposite the person's or entity's
name.
<TABLE>
<CAPTION>
MELVILLE COMPANY PRO FORMA
------------------------------- -------------------------------
Number of Number of
Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding
Beneficial Owner Owned<F1> Shares Owned Shares
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Directors and Named
Executive Officers(1)
J. M. Robinson 111,794 * 8,141 *
Carlos E. Alberini 5,986 * 571 *
Charles Messina 14,200 * 0 0%
Maureen Richards 8,650 * 0 0%
Stanley P. Goldstein 638,618(3) * 51,246 *
George S. Day 0 0% 0 0%
Terry R. Lautenbach 7,800 * 581 *
Bettye Martin Musham 0 0% 0 0%
Kenneth S. Olshan 0 0% 0 0%
M. Cabell Woodward, Jr. 12,000 * 1,151 *
All Directors and Officers
as a Group (10 persons)
782,381 * 61,627 *
Other 5% Stockholders
FMR Corp.(4) 13,552,054 12.8% 3,901,636 12.8%
82 Devonshire Street
Boston, MA 02109
Brinson Partners, Inc.(5) 6,904,354 6.5% 1,987,763 6.5%
209 S. LaSalle Street
11th Floor
Chicago, IL 60604
<FN>
- --------------
(*) Less than 1%.
(1) The address of each director and Named Executive Officer is c/o Footstar,
Inc., 933 MacArthur Boulevard, Mahwah, NJ 07430.
(2) Of the shares of stock shown as beneficially owned, the following shares
are not currently owned but are subject to options which were outstanding
on August 31, 1996 and were exercisable within 60 days thereafter: Mr.
Robinson, 83,514 shares; Mr. Alberini, 4,000 shares; Ms. Richards, 8,650
shares; Mr. Messina, 14,200 shares; Mr. Goldstein, 452,000 shares; Mr.
Lautenbach, 6,000 shares; and Mr. Woodward, 8,000 shares. The foregoing
information does not reflect any adjustments to the options to be made as a
result of the Distribution.
(3) Of the shares shown opposite Mr. Goldstein's name, 9,434 shares are owned
of record by a non-profit charitable foundation of which he is President
and shares voting and investment power and 20,000 shares are owned by Mr.
Goldstein's wife. Mr. Goldstein disclaims ownership of all such 29,434
shares.
(4) FMR Corp. ("FMR") filed a statement with the Commission dated July 10,
1996 on Schedule 13G under the Exchange Act, as the parent holding company
in accordance with Rule 13d-1(b)(ii)(G) of the Exchange Act, disclosing
beneficial ownership of greater than 5% of the Melville Common Stock
(13,552,054 shares). According to the statement, FMR and/or subsidiaries
have neither shared voting power nor shared dispositive power over any of
these shares, and FMR has certified that all of these shares were acquired
in the ordinary course of business, and not for the purpose of changing or
influencing the control of Melville.
(5) Share ownership information relating to Brinson Partners set forth in the
table above is based on information contained in a 13(f) Filing Report
obtained from CDA/Spectrum as of August 31, 1996.
</TABLE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company
is based upon the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and its Amended and Restated Bylaws (the
"Bylaws") which are to be in effect as of the Distribution, and by applicable
provisions of law. The following description is qualified in its entirety by
reference to such Certificate of Incorporation and Bylaws, which are filed as
exhibits to the Form 10.
The Company's Certificate of Incorporation authorizes the
issuance of 100 million shares of Company Common Stock, par value $.01 per
share, and 30 million shares of preferred stock, par value $.01 per share (the
"Company Preferred Stock").
Company Common Stock
Subject to the rights of the holders of any Company Preferred
Stock which may be outstanding, each holder of Company Common Stock on the
applicable record date is entitled to receive such dividends as may be
declared by the Company Board out of funds legally available therefor, and, in
the event of liquidation, to share pro rata in any distribution of the
Company's assets after payment or providing for the payment of liabilities and
the liquidation preference of any outstanding Company Preferred Stock. Each
holder of Company Common Stock is entitled to one vote for each share held of
record on the applicable record date on all matters presented to a vote of
stockholders, including the election of directors. Holders of Company Common
Stock have no cumulative voting rights or preemptive rights to purchase or
subscribe for any stock or other securities and there are no conversion rights
or redemption or sinking fund provisions with respect to such stock. Based on
the number of shares of Melville Common Stock outstanding on August 31, 1996
and the distribution ratio of 0.2879 shares of Company Common Stock for every
one share of Melville Common Stock, it is anticipated that there will be
approximately 30.5 million shares of Company Common Stock outstanding upon
consummation of the Distribution.
The shares of the Company Common Stock distributed in the
Distribution will be duly authorized, validly issued, fully paid and
nonassessable. The Company's Certificate of Incorporation contains no
restrictions on the alienability of the Company Common Stock. For further
information on the securities laws restrictions, if any, on transferability of
the Company Common Stock, see "Trading Market." Except as disclosed in the
section entitled "Certain Statutory, Charter and Bylaw Provisions," no
provision of the Certificate of Incorporation and no provision of any
agreement or plan involving the Company is in effect that would discriminate
against any existing or prospective holder of such securities as a result of
such security holder owning a substantial amount of securities.
Preferred Stock
Under the Certificate of Incorporation, the Company Board will
have the authority to create one or more series of preferred stock, to issue
shares of preferred stock in such series up to the maximum number of shares of
preferred stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
voting rights, rights and terms of redemption, liquidating preferences, the
number of shares constituting any such series and the designation of such
series. The authorized shares of Company Preferred Stock, as well as
authorized but unissued shares of Company Common Stock, will be available for
issuance without further action by the Company's stockholders, unless
stockholder action is required by applicable law or by the rules of a stock
exchange on which any series of the Company's stock may then be listed.
Registrar and Transfer Agent
Chase Mellon Shareholder Services, LLC will serve as the
Registrar and Transfer Agent for the Company Common Stock.
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS
Certain provisions of the Certificate of Incorporation and
Bylaws of the Company summarized in the following paragraphs may be deemed to
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders. The following is a summary of certain of
these provisions. The Certificate of Incorporation and Bylaws are filed as
exhibits to the Form 10, and the following summary is qualified in its
entirety by reference to such documents.
Classified Board of Directors
The Certificate of Incorporation provides for the Company Board
to be divided into three classes of directors. The term of office of the first
class expires at the 1997 annual meeting, the term of office of the second
class expires at the 1998 annual meeting, and the term of office of the third
class expires at the 1999 annual meeting. At each annual meeting held
thereafter, a class of directors will be elected to replace the class whose
term has then expired. As a result, approximately one-third of the members of
the Company Board will be elected each year and, except as described above,
each of the directors serves a staggered three-year term. See
"Management--Directors." Moreover, as is permitted under the Delaware General
Corporation Law only in the case of a corporation having a classified board,
the Certificate of Incorporation provides that directors may be removed only
for cause.
These provisions could prevent a stockholder (or group of
stockholders) having majority voting power from obtaining control of the
Company Board until the second annual stockholders' meeting following the date
the acquiror obtains such voting power. Accordingly, these provisions could
have the effect of discouraging a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company.
Stockholder Action by Written Consent; Special Meetings
The Certificate of Incorporation provides that no action
required or permitted to be taken at an annual or special meeting of
stockholders may be taken without a meeting, and that no action may be taken
by the written consent of stockholders in lieu of a meeting. The Certificate
of Incorporation also provides that special meetings of the Company's
stockholders may only be called by the Company Board, the Chairman of the
Company Board, the President or the Secretary of the Company. These provisions
may make it more difficult for stockholders to take action opposed by the
Board.
Certain Restrictions on Repurchase of Equity Securities by the Company
The Certificate of Incorporation provides that, subject to
certain exceptions, any direct or indirect purchase by the Company of any
equity securities of the Company from any Five Percent Holder (as defined
below) that has been the beneficial owner of such security for less than two
years prior to the earlier of the date of such purchase or any agreement in
respect thereof at a price in excess of Fair Market Value (as defined below)
must be approved by the affirmative vote of the holders of not less than a
majority of the total outstanding securities entitled to vote generally in the
election of directors, excluding voting securities beneficially owned by such
Five Percent Holder. "Fair Market Value" means the closing sale price on the
trading day immediately preceding the earlier of the date of any such purchase
of such equity securities or the date of any agreement in respect thereof
(such earlier date being referred to as the "Valuation Date") of such equity
security on the principal U.S. securities exchange on which such equity
security is listed; or, if such security is not listed on any such exchange,
the highest closing bid quotation with respect to such security on the
Valuation Date on the National Association of Securities Dealers, Inc.
Automated Quotation System; or if no such quotations are available, the fair
market value of such security on the Valuation Date as determined by the
Company Board in good faith.
A "Five Percent Holder" is any person or entity that is the
beneficial owner of an aggregate of 5% or more of the outstanding shares of
Company Common Stock or of the total voting power of all outstanding
securities of the Company entitled to vote generally in the election of
directors.
Advance Notice Provisions
The Bylaws establish an advance written notice procedure for
stockholders seeking to nominate candidates for election as directors at any
annual meeting of stockholders, or to bring business before an annual meeting
of stockholders of the Company. The Bylaws provide that only persons who are
nominated by, or at the direction of, the Company Board, or by a stockholder
who has given timely written notice to the Secretary of the Company prior to
the meeting at which directors are to be elected, will be eligible for
election as directors of the Company. The Bylaws also provide that at any
meeting of stockholders only such business may be conducted as has been
brought before the meeting by, or at the direction of, the Company Board or,
in the case of an annual meeting of stockholders, by a stockholder who has
given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such meeting. Under the
Bylaws, for any such stockholder notice to be timely, such notice must be
received by the Company in writing not less than 60 days nor more than 90 days
prior to the meeting, or, in the event that less than 70 days' notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, to be timely, notice by the stockholder must be received not
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting or such public disclosure was made.
Under the Bylaws, a stockholder's notice must also contain certain information
specified in the Bylaws. These provisions may preclude or deter some
stockholders from bringing matters before a meeting of stockholders or from
making nominations for directors at an annual meeting.
Preferred Stock
Under the Certificate of Incorporation, the Company Board will
have the authority, without further stockholder approval, to create one or
more series of preferred stock, to issue shares of preferred stock in such
series up to the maximum number of shares of preferred stock authorized, and
to determine the preferences, rights, privileges and restrictions of any
series, including the dividend rights, voting rights, rights and terms of
redemption, liquidating preferences, the number of shares constituting any
such series and the designation of such series. Pursuant to this authority,
the Company Board could create and issue a series of preferred stock with
rights, privileges or restrictions, and adopt a stockholder rights plan, having
the effect of discriminating against an existing or prospective holder of such
securities as a result of such security holder beneficially owning or
commencing a tender offer for a substantial amount of Company Common Stock.
One of the effects of authorized but unissued and unreserved shares of capital
stock may be to render more difficult or discourage an attempt by a potential
acquiror to obtain control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of the
Company's management. The issuance of such shares of capital stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without any further action by the stockholders of the Company.
Amendment of Certain Charter and Bylaw Provisions
The Certificate of Incorporation provides that the Company
Board may adopt, amend or repeal any provision of the Bylaws. The Certificate
of Incorporation also provides that Bylaw provisions may be adopted, amended
or repealed by the affirmative vote of stockholders holding not less than 80%
of the total number of votes entitled to be cast in the election of directors.
Any amendment, modification or repeal of the provisions of the
Certificate of Incorporation relating to the election and removal of
directors, the right to call special meetings, the prohibition on action by
written consent, amendment of the Bylaws, the limitation of liability and
indemnification of officers and directors and the provisions restricting
certain repurchases of equity securities will require approval by the
affirmative vote of stockholders holding at least 80% of the total number of
votes entitled to vote generally in the election of directors.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"). In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder, unless (i) prior to such
date either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for purposes of
determining the number of shares outstanding, shares owned by (A) persons who
are both directors and officers and (B) employee stock plans in certain
circumstances), or (iii) on or after such date the business combination is
approved by the board and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interest
stockholder. A "business combination" includes a merger, consolidation, asset
sale, or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more
of the corporation's voting stock. The restrictions imposed by Section 203
will not apply to a corporation if, among other things, (i) the corporation's
original certificate of incorporation contains a provision expressly electing
not to be governed by Section 203 or (ii) 12 months have passed after the
corporation, by action of its stockholders holding a majority of the
outstanding stock, adopts an amendment to its certificate of incorporation or
bylaws expressly electing not to be governed by Section 203. The Company has
not elected out of Section 203 and, therefore, the restrictions imposed by
Section 203 will apply to the Company.
Liability and Indemnification of Directors and Officers
Certain provisions of the Delaware General Corporation Law and
the Company's Certificate of Incorporation and Bylaws relate to the limitation
of liability and indemnification of directors and officers of the Company.
These various provisions are described below.
The Certificate of Incorporation provides that the Company's
directors are not personally liable to the Company or its stockholders for
monetary damages for breach of their fiduciary duties as a director to the
fullest extent permitted by Delaware law. Under existing Delaware law,
directors would not be personally liable to the Company or its stockholders
for monetary damages for breach of their fiduciary duties as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) any transaction
from which the director derived improper personal benefit or (iv) the unlawful
payment of dividends or unlawful stock repurchases or redemptions. As a result
of this exculpation provision, stockholders may be unable to recover monetary
damages against directors for actions taken by them that constitute negligence
or that are otherwise in violation of their fiduciary duties as directors,
although it may be possible to obtain injunctive or other equitable relief
with respect to such actions. If equitable remedies are found not to be
available to stockholders in any particular situation, stockholders may not
have an effective remedy against a director in connection with such conduct.
The Certificate of Incorporation also provides that each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed civil or criminal action or proceeding by reason of the
fact that such person is or was a director or officer of the Company or is or
was serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified and held harmless by the Corporation to the fullest extent
permitted by Delaware Law. This right to indemnification shall also include
the right to be paid by the Company the expenses incurred in connection with
any such proceeding in advance of its final disposition to the fullest extent
authorized by Delaware Law. This right to indemnification shall be a contract
right. The Company may, by action of the Company Board, provide
indemnification to such of the employees and agents of the Company to such
extent and to such effect as the Company Board determines to be appropriate
and authorized by Delaware law.
The Company intends to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
or arising out of his or her status as such, whether or not the Company would
have the power or the obligation to indemnify him or her against such
liability under the provisions of the Company's Certificate of Incorporation.
INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed KPMG Peat
Marwick LLP as the Company's independent accountants to audit the Company's
financial statements for fiscal year 1996. KPMG Peat Marwick LLP has served as
Melville's auditors throughout the periods covered by the financial statements
included in this Information Statement.
ADDITIONAL INFORMATION
The Company has filed the Form 10 with the Commission under the
Exchange Act with respect to the shares of Company Common Stock being received
by Melville shareholders in the Distribution. This Information Statement does
not contain all of the information set forth in the Form 10 and the exhibits
and schedules thereto, to which reference is hereby made. For additional
information, reference is made to the Form 10 and the exhibits thereto, which
are on file at the offices of the Commission and may be inspected and copied
as set forth below.
The Form 10 and the exhibits thereto filed by the Company with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
DC 20549, as well as at the Regional Offices of the Commission at Northwest
Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, 13th floor, New York, New York 10048. Copies of such
information can be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates.
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report................................... F-1
Combined Balance Sheets as of June 29, 1996, July 1, 1995,
December 31, 1995 and December 31, 1994...................... F-2
Combined Statements of Operations for the Second Quarter
and Six Months Ended June 29, 1996 and July 1, 1995.......... F-3
Combined Statements of Operations for the Fiscal
Years 1995, 1994 and 1993.................................... F-4
Combined Statements of Divisional Equity for the Six Months
Ended June 29, 1996 and July 1, 1995.......................... F-5
Combined Statements of Divisional Equity for the Fiscal
Years 1995, 1994 and 1993..................................... F-6
Combined Statements of Cash Flows for the Six Months Ended
June 29, 1996 and July 1, 1995 and the Fiscal Years 1995,
1994 and 1993................................................. F-7
Notes to Combined Financial Statements.......................... F-8
Independent Auditors' Report
To the Board of Directors and Shareholders of
Melville Corporation:
We have audited the accompanying combined balance sheets of Footstar, Inc.
as of December 31, 1995 and 1994, and the related combined statements of
operations, divisional equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Footstar, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three-year period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in notes to combined financial statements, the Company has
adopted Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," effective October 1, 1995 and changed its policy for accounting for the
costs of internally developed software effective January 1, 1995.
KPMG Peat Marwick LLP
New York, New York
February 21, 1996, except as to note 3, which is as of June 3, 1996
FOOTSTAR, INC.
Combined Balance Sheets
June 29, 1996, July 1, 1995,
December 31, 1995 and December 31, 1994
($ in millions)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
------------------------- ------------------------
June 29, July 1, December 31,
1996 1995 1995 1994
---------- ---------- ---------- ----------
Assets
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $22.6 $17.4 $26.3 $13.9
Accounts receivable, net............................ 58.0 53.7 56.1 49.3
Due from parent and other divisions................. 626.6 617.1 710.8 727.7
Inventories......................................... 311.9 356.5 282.6 347.3
Prepaid expenses and other current assets........... 55.7 27.4 38.5 52.5
---------- ---------- ---------- ----------
Total current assets.................... 1,074.8 1,072.1 1,114.3 1,190.7
Property and equipment, net........................... 174.0 169.1 195.1 163.9
Goodwill, net of accumulated amortization of $3.8
at June 29, 1996, $3.2 at July 1, 1995, $3.4
at December 31, 1995 and $2.8 at
December 31, 1994................................... 29.2 32.3 29.6 32.7
Deferred charges and other noncurrent assets.......... 27.1 15.1 33.7 5.2
---------- ---------- ---------- ----------
$1,305.1 $1,288.6 $1,372.7 $1,392.5
Total assets............................ ========== ========== ========== ==========
Liabilities and Divisional Equity
Current liabilities:
Accounts payable.................................... $50.5 $45.7 $59.6 $39.4
Accrued expenses.................................... 164.8 79.5 143.9 121.9
Federal income taxes payable........................ -- -- -- 7.0
---------- ---------- ---------- ----------
215.3 125.2 203.5 168.3
Total current liabilities............... ---------- ---------- ---------- ----------
Long-term debt........................................ 0.1 0.2 0.2 0.2
Other long-term liabilities........................... 58.6 58.8 61.4 82.2
Minority interests in subsidiaries.................... 41.7 73.6 93.8 108.7
---------- ---------- ---------- ----------
Total long-term liabilities............. 100.4 132.6 155.4 191.1
---------- ---------- ---------- ----------
Divisional equity..................................... 989.4 1,030.8 1,013.8 1,033.1
---------- ---------- ---------- ----------
$1,305.1 $1,288.6 $1,372.7 $1,392.5
Total assets............................ ========== ========== ========== ==========
Total liabilities and divisional equity..........
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Operations
for the Second Quarter and Six Months Ended
June 29, 1996 and July 1, 1995
($ in millions)
<TABLE>
<CAPTION>
(Unaudited)
------------------------------------------------------------
Second Quarter Ended Six Months Ended
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales............................................. $419.0 $421.8 $755.9 $747.6
Cost of sales......................................... 280.9 291.8 524.2 527.4
------ ------ ------ ------
Gross profit..................................... 138.1 130.0 231.7 220.2
Store operating, selling, general and
administrative expenses............................ 86.9 79.9 170.6 159.7
Depreciation and amortization......................... 5.9 5.2 11.6 10.7
------ ------ ------ ------
Operating profit................................. 45.3 44.9 49.5 49.8
Interest income, net.................................. 4.0 5.1 9.3 10.6
------ ------ ------ ------
Income from continuing operations before
income taxes, minority interests and
cumulative effect of change in
accounting principle.......................... 49.3 50.0 58.8 60.4
Provision for income taxes............................ 15.6 15.3 18.8 18.1
------ ------ ------ ------
Income from continuing operations before
minority interests and cumulative effect
of change in accounting principle............. 33.7 34.7 40.0 42.3
Minority interests in net income...................... 11.5 14.1 11.7 16.1
------ ------ ------ ------
Income from continuing operations before
discontinued operations and cumulative
effect of change in accounting principle...... 22.2 20.6 28.3 26.2
Earnings (loss) from discontinued operations, net
of income taxes of $1.3, $0.7, $1.1 and
($1.7)............................................. 1.8 0.7 0.8 (3.3)
Loss on disposal of discontinued operations,
net of income taxes of $31.4....................... -- -- (53.6) --
------ ------ ------ ------
Income (loss) before cumulative effect of
change in accounting principle................ 24.0 21.3 (24.5) 22.9
Cumulative effect of change in accounting principle,
net................................................ -- -- -- (3.9)
------ ------ ------ ------
$24.0 $21.3 $(24.5) $19.0
Net income (loss)................................ ====== ====== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Operations
Years Ended December 31, 1995, 1994 and 1993
($ in millions)
<TABLE>
<CAPTION>
(Audited)
-------------------------------------
Years Ended
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales..................................................... $1,615.2 $1,612.8 $1,474.8
Cost of sales................................................. 1,124.5 1,117.8 1,011.7
-------- -------- --------
Gross profit............................................. 490.7 495.0 463.1
Store operating, selling, general and
administrative expenses.................................... 343.0 319.6 287.0
Depreciation and amortization................................. 20.0 18.7 13.7
Restructuring and asset impairment charges.................... 23.7 -- --
-------- -------- --------
Operating profit......................................... 104.0 156.7 162.4
Interest income, net.......................................... 21.1 15.4 11.7
-------- -------- --------
Income from continuing operations before
income taxes, minority interests and
cumulative effect of change in
accounting principle.................................. 125.1 172.1 174.1
Provision for income taxes.................................... 37.3 49.5 53.7
-------- -------- --------
Income from continuing operations before
minority interests and cumulative effect
of change in accounting principle..................... 87.8 122.6 120.4
Minority interests in net income.............................. 38.4 51.9 47.3
-------- -------- --------
Income from continuing operations before
discontinued operations and cumulative
effect of change in accounting principle.............. 49.4 70.7 73.1
(Loss) earnings from discontinued operations, net
of income taxes of ($14.1), $3.6 and $2.9 ................. (26.8) 6.0 5.0
-------- -------- --------
Income before cumulative effect of
change in accounting principle........................ 22.6 76.7 78.1
Cumulative effect of change in accounting principle,
net...................................................... (3.9) -- --
-------- -------- --------
$18.7 $76.7 $78.1
Net income............................................... ======== ======== ========
Pro forma net income assuming retroactive $73.6 $77.5
application of accounting change...................... ======== ========
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Divisional Equity
Six Months Ended June 29, 1996 and July 1, 1995
(Unaudited)
($ in millions)
<TABLE>
<CAPTION>
Cumulative
Common Retained Contributed translation
stock earnings capital adjustment Total
-------- --------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994....... $0.1 $981.3 $53.0 $(1.3) $1,033.1
Net income............................ -- 19.0 -- -- 19.0
Dividends paid to parent.............. -- (16.6) -- -- (16.6)
Recapitalization of subsidiaries by
parent............................. -- -- (4.5) -- (4.5)
Translation adjustment................ -- -- -- (0.2) (0.2)
-------- --------- ------------ ----------- --------
$0.1 $983.7 $48.5 $(1.5) $1,030.8
Balance as of July 1, 1995............ ======== ========= ============ =========== ========
Balance as of December 31, 1995....... $0.1 $961.8 $51.6 $0.3 $1,013.8
Net loss..............................
-- (24.5) -- -- (24.5)
Translation adjustment................ -- -- -- (0.1) (0.1)
Contribution of subsidiaries by
parent............................. -- -- 0.2 -- 0.2
-------- --------- ------------ ----------- --------
Balance as of June 29, 1996........... $0.1 $937.3 $51.8 $0.2 $989.4
======== ========= ============ =========== ========
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Divisional Equity
Years Ended December 31, 1995, 1994 and 1993
(Audited)
($ in millions)
<TABLE>
<CAPTION>
Cumulative
Common Retained Contributed translation
stock earnings capital adjustment Total
------ -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1992....... $0.1 $894.5 $42.2 $ -- $936.8
Net income............................ -- 78.1 -- -- 78.1
Dividends paid to parent.............. -- (36.7) -- -- (36.7)
Common stock redistributed by
parent in conjunction with
reorganization of subsidiary....... (0.1) -- -- -- (0.1)
------ -------- ----------- ----------- ---------
Balance as of December 31, 1993....... -- 935.9 42.2 -- 978.1
------ -------- ----------- ----------- ---------
Net income............................ -- 76.7 -- -- 76.7
Dividends paid to parent.............. -- (31.3) -- -- (31.3)
Translation adjustment................ -- -- -- (1.3) (1.3)
Recapitalization of subsidiaries
by parent.......................... 0.1 -- 10.8 -- 10.9
------ -------- ----------- ----------- ---------
Balance as of December 31, 1994....... 0.1 981.3 53.0 (1.3) 1,033.1
------ -------- ----------- ----------- ---------
Net income............................ -- 18.7 -- -- 18.7
Dividends paid to parent.............. -- (38.2) -- -- (38.2)
Recapitalization of subsidiaries by
parent -- -- (1.4) -- (1.4)
Translation adjustment................ -- -- -- 1.6 1.6
------ -------- ----------- ----------- ---------
$0.1 $961.8 $51.6 $0.3 $1,013.8
Balance as of December 31, 1995....... ====== ======== =========== =========== =========
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Cash Flows
Six Months Ended June 29, 1996 and July 1, 1995 and
Years Ended December 31, 1995, 1994 and 1993
($ in millions)
<TABLE>
<CAPTION> (Unaudited) (Audited)
---------------------- ------------------------------
Six Months Ended Years Ended
June 29, July 1,
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income...................................... $(24.5) $19.0 $18.7 $76.7 $78.1
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Loss on disposal of discontinued operations....... 85.0 -- -- -- --
Restructuring and asset impairment charges........ -- -- 51.8 -- --
Cumulative effect of change in accounting
principle....................................... -- 9.5 9.5 -- --
Minority interests in net income.................. 11.7 16.1 38.4 51.9 47.3
Depreciation and amortization..................... 14.8 14.3 26.7 25.9 20.9
Loss on disposal of fixed assets.................. 0.9 1.6 7.6 7.9 11.0
Deferred income taxes............................. (11.2) 0.2 (17.5) 12.2 11.9
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net. (1.9) (4.4) (3.5) (9.5) 13.0
(Increase) decrease in inventories.............. (29.3) (9.2) 64.7 (40.2) (6.7)
(Increase) decrease in prepaid expenses,
deferred charges and other assets............ (0.2) (6.0) (19.2) 1.1 4.2
Decrease in accounts payable
and accrued expenses......................... (29.5) (28.9) (2.6) (12.0) (41.4)
(Decrease) increase in federal income
taxes payable and other liabilities.......... (2.0) (10.0) (9.3) 22.2 (12.3)
-------- -------- -------- -------- --------
Net cash provided by
operating activities.................... 13.8 2.2 165.3 136.2 126.0
-------- -------- -------- -------- --------
Cash flows from investing activities:
Additions to property and equipment.................... (25.2) (30.8) (92.9) (59.3) (45.9)
Acquisitions, net of cash acquired..................... -- -- (1.5) (0.4) (3.4)
Proceeds from the sale or disposal of 3.4 -- -- -- --
-------- -------- -------- -------- --------
Net cash used in investing
activities.............................. (21.8) (30.8) (94.4) (59.7) (49.3)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Dividends paid to parent............................... -- (16.6) (38.2) (31.3) (36.7)
Dividends paid to minority interests................... (63.8) (51.2) (53.3) (38.1) (54.6)
(Decrease) increase in book overdrafts................. (15.2) (6.1) 16.4 6.4 (8.7)
Decrease (increase) in due from parent and
other divisions..................................... 84.2 110.6 16.6 (21.7) 25.6
Recapitalization of subsidiaries by parent............. -- (4.5) (1.4) 10.9 --
Other.................................................. (0.9) (0.1) 1.4 (1.5) 0.4
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities.................... 4.3 32.1 (58.5) (75.3) (74.0)
-------- -------- -------- -------- --------
Net (decrease) increase in cash
and cash equivalents.................... (3.7) 3.5 12.4 1.2 2.7
Cash and cash equivalents beginning of period............ 26.3 13.9 13.9 12.7 10.0
-------- -------- -------- -------- --------
$ 22.6 $17.4 $26.3 $13.9 $12.7
Cash and cash equivalents end of period.................. ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Notes to Combined Financial Statements
(1)Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements of Footstar, Inc. (the "Company") include
all of the subsidiaries of the Meldisco, Footaction and Thom McAn divisions
controlled directly or indirectly by Melville Corporation ("Melville" or the
"Parent"). All interdivisional balances and transactions between the entities
have been eliminated.
The minority interests represent the 49% participation of Kmart Corporation
("Kmart") in the ownership of substantially all retail subsidiaries of
Meldisco formed or to be formed from July 1967 until July 1, 2012 for the
purpose of operating leased shoe departments in Kmart stores.
The Parent allocates various costs to its subsidiaries, including the Company.
A summary of the amounts allocated to the Company for the fiscal years ended
is as follows:
(Audited)
Fiscal Years Ended
------------------------------
December 31,
1995 1994 1993
------ ------ ------
($ in millions)
Costs of Employee Stock
Ownership Plan................. $5.4 $3.8 $4.1
Administrative costs............. 3.1 3.7 3.3
------ ------ ------
$8.5 $7.5 $7.4
Total...................... ====== ====== ======
Allocations to the Company are based on the Company's share of costs paid
by the Parent on its behalf for consolidated programs. Such allocations
may not be reflective of the costs which would be incurred if the Company
operated on a stand-alone basis or which will be incurred in the future.
Management believes that the basis for allocations was reasonable. Had the
Company operated on a stand alone basis for the years ended December 31,
1993, 1994 and 1995, it would have incurred a net increase in expenses of
approximately $12.6 million in each such year.
Business
The Company is a leading retailer of discount footwear, branded athletic
footwear and apparel and moderately-priced footwear. Through its
arrangements with Kmart, Meldisco is the leading operator of leased shoe
departments and has operated since 1961. Meldisco also operates leased
aisle space in Payless Drug Stores. Meldisco operated 2,568 leased
discount footwear departments in the United States, Puerto Rico, the U.S.
Virgin Islands, the Czech Republic, Slovakia, Mexico, Singapore and Guam at
December 31, 1995.
Footaction is a mall-based specialty retailer of branded athletic footwear,
apparel and related accessories for the active lifestyle consumer. Footaction
operated 439 retail athletic footwear and apparel stores in the United States
and Puerto Rico at December 31, 1995.
Thom McAn is a mid-priced footwear specialty retailer which is largely
mall-based. Thom McAn operated 315 footwear stores located primarily in the
eastern United States, Puerto Rico and the U.S. Virgin Islands at December 31,
1995.
Accounting Changes
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). The reduction of depreciation and amortization expense due to the
adoption of SFAS No. 121 was immaterial for fiscal 1995 as well as the six
months ended June 29, 1996.
FOOTSTAR, INC.
Notes to Combined Financial Statements
(1), Continued
Effective January 1, 1995, the Company changed its policy from capitalizing
internally developed software costs to expensing them as incurred. The Company
believes that this change results in a better matching of revenues and
expenses. The impact on 1995, inclusive of discontinued operations, as a
result of this change, exclusive of the cumulative effect of $3.9 million, was
to reduce net income by $1.0 million.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," the cumulative effect of which was
not material to the combined financial statements and, therefore, is not
presented separately.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," the cumulative effect of which was also immaterial to the
combined financial statements and, therefore, is not presented separately.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of
three months or less and are stated at cost which approximates market. The
Company's cash management program utilizes zero balance accounts.
Accordingly, all book overdraft balances have been reclassified to current
liabilities.
Inventories
Inventories, principally finished goods, consist of merchandise purchased
from domestic and foreign vendors and are carried predominantly at the
lower of cost or market value, determined by the retail inventory method on
a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the present value of future minimum lease
payments.
Depreciation and amortization of property and equipment is computed on a
straight-line basis, generally over the estimated useful lives of the assets
or, when applicable, the life of the lease, whichever is shorter. Amortization
of leased property under capital leases is computed on a straight-line basis
over the life of the lease. Capitalized software costs are amortized on a
straight-line basis over their estimated useful lives beginning in the year
placed in service. Fully depreciated property and equipment are removed from
the cost and related accumulated depreciation accounts.
FOOTSTAR, INC.
Notes to Combined Financial Statements
(1), Continued
Maintenance and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the necessary adjustment
on the asset and accumulated depreciation accounts of the items renewed or
replaced.
Impairment of Long-Lived Assets
When changes in circumstance warrant measurement, impairment losses for store
fixed assets are calculated by comparing projected individual store cash flows
over the lease term to the asset carrying values.
Deferred Charges
Deferred charges, principally beneficial leasehold costs, are amortized on a
straight-line basis, generally over the remaining life of the leasehold
acquired.
Goodwill
The excess of acquisition costs over the fair value of net assets acquired is
amortized on a straight-line basis over periods not to exceed 40 years.
Impairment is assessed based on the profitability of the related business
relative to planned levels.
Store Opening and Closing Costs
New store opening costs are charged to expense as incurred. In the event a
store is closed before its lease has expired, the total lease obligation, less
sublease rental income, is provided for in the year of closing.
Advertising Costs
The Company charges production costs of advertising to expense the first time
the advertising takes place.
Income Taxes
The provision for federal income taxes recorded by the Company represents the
amount calculated on a separate return basis in accordance with a tax-sharing
agreement with the Parent. State income taxes represent actual amounts paid or
payable by the Company.
Foreign Currency Translation
The Company translates foreign currency financial statements by translating
balance sheet accounts at the exchange rate as of the balance sheet date and
income statement accounts at the average rate for the year. Translation gains
and losses are recorded in divisional equity, and realized gains and losses
are reflected in operations. The balance in the cumulative translation
adjustment account relates principally to the Company's operations in Mexico.
Transaction gains and losses were insignificant in all periods.
FOOTSTAR, INC.
Notes to Combined Financial Statements
(1),Continued
Postretirement Benefits
The annual cost of postretirement benefits is funded as it arises and the cost
is recognized over an employee's term of service to the Company.
(2)Restructuring and Asset Impairment Charges
On October 24, 1995, Melville announced a comprehensive restructuring plan
that includes the spin-off of the Company and the outsourcing of certain
information processing and telecommunication functions. In connection with the
initiation of the plan, 18 stores are scheduled to be closed and a pretax
charge of $23.7 million was recorded. Asset write offs included in the charge
totaled $19.9 million, while the balance will require cash outlays, primarily
in 1996. In connection with the various components of the plan, approximately
40 store employees will be eliminated.
The significant components of the restructuring and asset impairment charges,
and the reserves remaining as of December 31, 1995 and June 29, 1996, relating
to continuing operations, were as follows:
<TABLE>
<CAPTION>
Recorded Remaining
-------- -------------------------------
December 31, June 29,
1995 1996
------------ -----------
(Audited) (Audited) (Unaudited)
($ in millions)
<S> <C> <C> <C> <C>
Lease obligations and fixed asset
write-offs for store
closings........................ $ 3.8 $3.6 $1.8
Asset write-offs related to
outsourcing..................... 12.2 -- --
Severance and other employee
benefit vesting................. 0.2 0.2 --
-------- -------- --------
16.2 3.8 1.8
Asset impairment charge in
connection with the adoption
of SFAS No. 121................. 7.5 -- --
-------- -------- --------
$23.7 $3.8 $1.8
======== ======== ========
The SFAS No. 121 charge related entirely to assets to be held or used as
defined in SFAS No. 121. The net sales and operating losses in 1995 of the
stores to be closed were approximately $7.0 million and $0.8 million,
respectively.
(3) Discontinued Operations and Subsequent Event
On June 3, 1996, Melville announced a plan to convert approximately 100 Thom
McAn stores to Footaction stores and to exit the Thom McAn business. This plan
is expected to be completed by mid-1997. In connection with this plan, the
Company recorded a pre-tax charge of approximately $85.0 million in the first
quarter of 1996. Accordingly, the results of operations for the Thom McAn
segment have been classified as discontinued operations for all periods
presented in the combined statements of operations.
FOOTSTAR, INC.
Notes to Combined Financial Statements
(3), Continued
Discontinued operations accounted for 27.9% of total assets and 13.9% of
total liabilities as of December 31, 1995. The assets consist principally
of a due from parent, inventory and property and equipment. The following
table summarizes the operating results of the discontinued operations for
the first six months and fiscal years presented:
</TABLE>
<TABLE>
<CAPTION>
(Unaudited) (Audited)
Six Months Ended Fiscal Years Ended
-------------------- -------------------------------
June 29, July 1, December 31,
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C> <C>
Net sales...... $92.9 $97.7 $212.0 $227.1 $238.3
Operating loss. (2.5) (13.2) (57.3) (1.8) (1.1)
</TABLE>
The operating loss for the year ended December 31, 1995 reflected $24.8
million of restructuring charges related to the consolidation of operations
and closure of stores, as well as an asset impairment charge of $3.2 million
related to the adoption of SFAS No. 121.
The significant components of the restructuring and asset impairment charges,
and the reserves remaining as of December 31, 1995 and June 29, 1996 were as
follows:
<TABLE>
Recorded Remaining
--------- ---------------------------------
<CAPTION>
December 31, June 29,
1995 1996
-------------- --------------
(Audited) (Audited) (Unaudited)
($ in millions)
<S> <C> <C> <C>
Lease obligations and fixed asset write-offs for store closings,
home office and warehouse shutdowns................................ 17.6 $17.6 $12.9
Asset write-offs related to outsourcing............................. 0.3 -- --
Severance and other employee benefit vesting........................ 6.9 6.9 5.3
------ ------ ------
24.8 24.5 18.2
Asset impairment charge in connection with the adoption of SFAS
No. 121............................................................ 3.2 -- --
------ ------ ------
$28.0 $24.5 $18.2
====== ====== ======
</TABLE>
(4) Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 29, July 1, December 31,
1996 1995 1995 1994
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
Due from licensors........................... $27.9 $29.5 $31.8 $27.7
Other........................................ 30.6 24.8 25.3 22.2
------ ------ ------ ------
58.5 54.3 57.1 49.9
Less allowance for doubtful accounts......... 0.5 0.6 1.0 0.6
------ ------ ------ ------
$58.0 $53.7 $56.1 $49.3
Total.................................. ====== ====== ====== ======
</TABLE>
(5) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 29, July 1, December 31,
1996 1995 1995 1994
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
Deferred income taxes. $46.3 $20.8 $30.7 $44.9
Other........................................ 9.4 6.6 7.8 7.6
----- ----- ----- -----
$55.7 $27.4 $38.5 $52.5
Total.................................. ===== ===== ===== =====
</TABLE>
(6)Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 29, July 1, December 31,
1996 1995 1995 1994
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
Land........................................ $7.4 $6.1 $7.7 $1.1
Buildings and improvements.................. 48.4 26.2 55.6 20.8
Equipment and furniture..................... 181.9 173.1 174.3 171.0
Leasehold improvements...................... 75.4 77.7 78.3 75.7
Leased property under capital leases........ 4.4 4.4 4.4 4.4
------ ------ ------ ------
317.5 287.5 320.3 273.0
Less accumulated depreciation and amortization....... 143.5 118.4 125.2 109.1
------ ------ ------ ------
Property and equipment, net........... $174.0 $169.1 $195.1 $163.9
====== ====== ====== ======
</TABLE>
(7) Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 29, July 1, December 31,
1996 1995 1995 1994
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
Taxes other than federal income taxes......... $7.6 $7.1 $9.3 $13.0
Rent.......................................... 17.5 21.4 29.2 45.2
Salaries and compensated absences............. 9.0 5.4 10.4 11.7
Reserve for loss on disposal of
discontinued operations.................... 60.0 -- -- --
Restructuring reserves........................ 17.2 10.1 24.9 8.8
Professional fees............................. 1.5 4.5 14.1 5.0
Capital expenditures.......................... 5.4 1.2 15.3 1.9
Other......................................... 46.6 29.8 40.7 36.3
------ ------ ------ ------
Total...................................... $164.8 $79.5 $143.9 $121.9
====== ====== ====== ======
</TABLE>
(8)Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 29, July 1, December 31,
1996 1995 1995 1994
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
National Shawmut Bank 9.5% Notes, due 1998........ $0.1 $0.2 $0.2 $0.2
Other............................................. 0.1 0.1 0.1 0.1
------ ------ ------ ------
0.2 0.3 0.3 0.3
Less current installments......................... 0.1 0.1 0.1 0.1
------ ------ ------ ------
Total.......................................... $0.1 $0.2 $0.2 $0.2
====== ====== ====== ======
</TABLE>
The aggregate long-term debt maturing during each of the next three years
is as follows:
(Audited)
Year ($ in millions)
---- --------------
1996 $0.1
1997 0.1
1998 0.1
----
$0.3
----
(9)Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 29, July 1, December 31,
1996 1995 1995 1994
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
Employee benefit costs...................... $47.2 $44.7 $46.0 $43.5
Deferred income taxes....................... -- -- -- 20.3
Lease obligations for closed stores......... 5.6 6.1 7.7 10.2
Other....................................... 5.8 8.0 7.7 8.2
------ ------ ------ ------
$58.6 $58.8 $61.4 $82.2
====== ====== ====== ======
</TABLE>
(10)Divisional Equity
Divisional equity consisted of the following:
<TABLE>
<CAPTION>
June 29, 1996
(Unaudited)
Meldisco Footaction Thom McAn Total
-------- ---------- --------- -----
($ in millions)
<S> <C> <C> <C> <C>
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 650.9 8.1 278.3 937.3
Contributed capital.......... 3.6 48.2 -- 51.8
Cumulative translation
adjustment................ 0.2 -- -- 0.2
-------- ---------- --------- ------
$654.8 $56.3 $278.3 $989.4
======== ========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
July 1, 1995
(Unaudited)
Meldisco Footaction Thom McAn Total
-------- ---------- --------- --------
($ in millions)
<S> <C> <C> <C> <C>
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 635.3 4.6 343.8 983.7
Contributed capital.......... 0.3 48.2 -- 48.5
Cumulative translation
adjustment................ (1.5) -- -- (1.5)
-------- -------- -------- --------
$634.2 $52.8 $343.8 $1,030.8
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
(Audited)
Meldisco Footaction Thom McAn Total
-------- ---------- --------- --------
($ in millions)
<S> <C> <C> <C> <C>
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 629.4 1.4 331.0 961.8
Contributed capital.......... 3.4 48.2 -- 51.6
Cumulative translation
adjustment................ 0.3 -- -- 0.3
-------- --------- --------- --------
$633.2 $49.6 $331.0 $1,013.8
======== ========= ========= ========
</TABLE>
(10),Continued
<TABLE>
<CAPTION>
December 31, 1994
(Unaudited)
Meldisco Footaction Thom McAn Total
-------- ---------- --------- --------
($ in millions)
<S> <C> <C> <C> <C>
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 625.4 6.1 349.8 981.3
Contributed capital.......... 0.3 48.2 4.5 53.0
Cumulative translation
adjustment................ (1.3) -- -- (1.3)
-------- ---------- --------- --------
$624.5 $54.3 $354.3 $1,033.1
======== ========== ========= ========
</TABLE>
The figures presented above reflect the following capital transactions:
(A) A cash contribution of $10.8 million by Melville to Footaction in 1994,
which is reflected in contributed capital.
(B) The elimination by Melville in 1995 of a portion of the indebtedness of
the Company's Mexican subsidiaries and a return of capital in connection
with the dissolution of Thom McAn's manufacturing subsidiary. The net
effect of these transactions reduced contributed capital by $1.4 million.
(11)Leases
The Company leases retail stores, warehouses and office facilities under
capital leases that expire through 2002.
The Company also has noncancelable operating leases, primarily for retail
stores, which expire through 2011. The leases generally contain renewal
options for periods ranging from one to five years and require the Company to
pay costs such as real estate taxes and common area maintenance. Contingent
rentals are based on sales and profits. Net rental expense for all operating
leases for the years ended December 31, 1995, 1994 and 1993 was as follows:
(Audited)
1995 1994 1993
-------- ----------- --------
($ in millions)
Minimum rentals.......... $80.0 $70.6 $61.7
Contingent rentals....... 149.6 174.7 162.2
-------- ---------- --------
$229.6 $245.3 $223.9
Total.............. ======== ========== ========
(11),Continued
At December 31, 1995, the future minimum lease payments under capital leases,
future minimum rental payments under operating leases and future minimum
sublease rentals excluding lease obligations for closed stores were as follows:
<TABLE>
<CAPTION>
(Audited)
Year Capital leases Operating leases
-------------- ----------------
($ in millions)
<S> <C> <C>
1996..................................................... $0.4 $56.8
1997..................................................... 0.4 52.7
1998..................................................... 0.4 48.5
1999..................................................... 0.4 41.3
2000..................................................... 0.1 38.2
0.1 114.0
--------- -----------
Thereafter...............................................
$1.8 $351.5
Total........................................
0.4
--------- -----------
Less amount representing interest..................
$1.4
--------- -----------
Present value of minimum lease payments............
$0.5 $4.5
========= ===========
</TABLE>
(12)Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of the first quarter
and the fiscal years were as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 29, July 1, December 31,
1996 1995 1995 1994
-------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C>
Deferred tax assets:
Loss on disposal of discontinued
operations reserves................................ $31.4 $ -- $ -- $ --
Restructuring and purchase accounting reserves....... 3.6 8.5 21.2 9.6
Inventories.......................................... 6.8 8.0 6.8 8.0
Postretirement benefits.............................. 17.0 19.6 17.0 19.6
Other................................................ 9.3 2.7 9.4 2.7
-------- -------- -------- -------
Total deferred tax assets..................... 68.1 38.8 54.4 39.9
Deferred tax liabilities:
Property and equipment............................... 10.1 12.2 10.1 12.3
Other................................................ 2.1 3.0 2.1 3.0
-------- -------- -------- -------
12.2 15.3
Total deferred tax liabilities................ 12.2 15.2
-------- -------- -------- -------
$55.9 $23.6 $42.2 $24.6
Net deferred tax assets....................... ======== ======== ======== =======
</TABLE>
(12),Continued
Based on the Company's historical and current pre-tax earnings, management
believes it is more likely than not that the Company will realize the net
deferred tax assets.
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION
(Unaudited) (Audited)
Six Months Ended Years Ended
----------------------- _______________________________
June 29, July 1, December 31,
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C> <C>
Federal.. $15.8 $14.7 $29.6 $40.0 $44.2
State.... 3.0 3.4 7.7 9.5 9.5
-------- -------- -------- -------- --------
Total.. $18.8 $18.1 $37.3 $49.5 $53.7
-------- -------- -------- -------- --------
</TABLE>
Reconciliations of the effective tax rates to the U.S. statutory income tax
rate are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
Six Months Ended Years Ended
--------------------------- --------------------------------------------
June 29, July 1, December 31,
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Percent of pre-tax earnings)
<S> <C> <C> <C> <C> <C>
Effective tax rate........... 32.0% 30.0% 29.8% 28.7% 30.8%
State income taxes, net of
federal tax benefit........ (3.3) (3.7) (4.0) (3.6) (3.6)
51% owned subsidiaries
excluded from the Parent's
consolidated federal
income tax return.......... 6.3 8.2 11.4 10.1 8.8
Other........................ -- 0.5 (2.2) (0.2) (1.0)
-------- ------- ------- ------- -------
Statutory income tax rate.... 35.0% 35.0% 35.0% 35.0% 35.0%
======== ======= ======= ======= =======
</TABLE>
The provision for income taxes includes net deferred tax benefits of $15.0
million, $2.8 million and $3.6 million for 1995, 1994 and 1993, respectively.
(13) Supplemental Cash Flow Information
Cash payments for income taxes and interest for the six months ended June 29,
1996 and July 1, 1995 and the years ended December 31, 1995, 1994 and 1993
were as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
Six Months Ended Years Ended
----------------------- --------------------------------
June 29, July 1, December 31,
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C> <C>
Income taxes............................... $12.6 $34.2 $52.8 $40.6 $52.1
======== ======== ======== ======== ========
$0.4 $0.1 $0.3 $0.6 $0.2
Interest (net of amounts capitalized)...... ======== ======== ======== ======== ========
</TABLE>
(14) Related Party Transactions
Postretirement Benefits
The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.
The weighted average discount rates used to determine the accumulated
postretirement benefit obligation ("APBO") were 6.89% and 8.67% at December
31, 1995 and 1994, respectively. The following table reflects the Company's
accrued postretirement benefit costs as of December 31:
<TABLE>
<CAPTION>
(Audited)
1995 1994
------- -------
($ in millions)
<S> <C> <C>
Retirees.................................. $13.0 $11.2
Fully eligible active plan participants... 1.3 1.9
Not fully eligible active plan participants 12.5 7.9
------- -------
APBO...................................... 26.8 21.0
Unrecognized prior service cost........... 11.6 12.5
Unrecognized net gain..................... 7.5 7.3
------- -------
Accrued postretirement benefit cost....... $45.9 $40.8
======= =======
</TABLE>
Effective December 1992, the Company amended these plans to terminate
certain benefits, resulting in a prior service gain of $14.8 million to be
amortized over 13 years. The Company's net periodic cost, inclusive of
discontinued operations, for the years ended December 31, 1995, 1994 and
1993 was as follows:
<TABLE>
<CAPTION>
(Audited)
1995 1994 1993
------ ------ ------
($ in millions)
<S> <C> <C> <C>
Interest expense............................................ $1.8 $1.7 $1.9
Service cost (net of prior service gain amortization)....... (0.5) (0.3) (0.4)
Amortization of gains....................................... (0.3) -- --
------ ------ ------
$1.0 $1.4 $1.5
====== ====== ======
</TABLE>
For measurement purposes, a 10% increase in the cost of covered health care
benefits was assumed for 1995. The rate was assumed to decline gradually
to 5% in the year 2005 and remain at that level thereafter. A 1% increase
in the health-care cost trend rate would increase the APBO at December 31,
1995 by $3.3 million and the 1995 annual expense by $0.3 million.
401(k) Profit Sharing Plan
The Parent has a qualified 401(k) profit sharing plan available to full-
time employees who meet the plan's eligibility requirements. This plan,
which is a defined contribution plan, contains a profit sharing component
with tax-deferred contributions to each employee based on certain
performance criteria, and also permits employees to make contributions
(14),Continued
up to the maximum limits allowed by Internal Revenue Code Section 401(k).
Under the 401(k) component, the Parent matches a portion of the employee's
contribution under a predetermined formula based on the level of
contribution and years of vesting. The Parent charges to its divisions the
portion of the expense related to these contributions based on the
proportionate share of qualifying compensation at the Company to the total
of all such compensation for all plan participants.
Contributions to the plan by the Company for both profit sharing and
matching of employee contributions were approximately $2.3 million, $2.0
million and $2.0 million for the years ended December 31, 1995, 1994 and
1993, respectively.
Employee Stock Ownership Plan
The Company's employees participate in the Parent's Employee Stock
Ownership Plan ("ESOP"). The ESOP is a defined contribution plan for all
employees meeting certain eligibility requirements. During 1989, the ESOP
trust (the "Trust") borrowed $357.5 million at an interest rate of 8.6%
through a 20-year loan guaranteed by the Parent. The Trust used the
proceeds of the loan to purchase a new issue of convertible preference
stock from the Parent.
The Parent charges compensation expense to the Company based upon total
payments due to the ESOP. The charge allocated to the Company is based on
the Company's proportionate share of qualifying compensation expense and
does not reflect the manner in which the Parent funds these costs or the
related tax benefits realized by the Parent.
Administrative Costs
The Parent allocates other administrative expenses to the Company.
Allocations are based on the Company's ratable share of expense paid by the
Parent on behalf of the Company for the combined programs. The total costs
allocated to the Company for the years ended December 31, 1995, 1994 and
1993 were $3.1 million, $3.7 million and $3.3 million, respectively.
Melville Realty Company, Inc., a subsidiary of the Parent, guarantees the
leases of certain stores operated by the Company and charges a fee for that
service, which amounted to $0.7 million, $0.6 million and $0.4 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
Loans
The weighted average interest rate on loans to the Parent for the years
ended December 31, 1995, 1994 and 1993 were 5.7%, 4.2% and 3.0%,
respectively. The related interest income earned by the Company on such
loans was $20.9 million, $15.5 million and $11.7 million in 1995, 1994 and
1993, respectively.
(15) Commitments and Contingencies
At December 31, 1995, the Company had outstanding letters of credit of
approximately $189.1 million which were used to guarantee certain foreign
purchase contracts. The Company is not obligated under any formal or
informal compensating balance agreements.
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.
(16) Countervailing Duty
The U.S. Customs Service accused Brazilian companies of unfair trading
practices during 1980 and 1981, when the Brazilian government was allegedly
subsidizing its shoe manufacturers, and imposed an additional duty (the
"countervailing duty") on all shoes imported from Brazil by U.S. companies
during this time period. The Company accrued approximately $7.0 million
for the estimated liability related to this matter between 1981 and 1988.
In December 1994, the GATT Uruguay Round Agreements Act contained
provisions which effectively ended the Brazil countervailing duty.
Accordingly, the Company reversed the entire accrual which is reflected in
the 1994 combined statement of operations.
(17) Meldisco's Relationship with Kmart
For the six months ended June 29, 1996 and the fiscal year ended December
31, 1995, Meldisco's Kmart operations represented 96.0% and 95.7%,
respectively, of Meldisco's net sales. These operations represented 68.0%
and 70.6%, respectively, of the Company's combined net sales during the
same periods. The business relationship between Meldisco and Kmart is very
significant to the Company and the loss of Meldisco's Kmart operations
would have a material adverse effect on the Company.
The Company's arrangement with Kmart is governed by a Master Agreement
effective as of July 1, 1995 and amended as of March 25, 1996. The Master
Agreement grants to each Meldisco subsidiary the non-transferable exclusive
right and license to operate a footwear department in the applicable Kmart
store. The initial term of the Master Agreement expires July 1, 2012 and
is renewable thereafter for 15 year terms, unless earlier terminated as
provided in the Master Agreement.
(18) Segment Information
The company is a retailer conducting business through retail stores in two
business segments: Meldisco in discount footwear and Footaction in branded
athletic footwear and apparel. Information about operations for each of
these segments is summarized as follows:
<TABLE>
<CAPTION>
(Audited)
December 31,
1995 1994 1993
------ ------ ------
($ in millions)
<S> <C> <C> <C>
Meldisco
Net sales.................................................... $1,191.5 $1,280.5 $1,212.5
Operating profit(1).......................................... 99.5 147.1 148.8
Identifiable assets at December 31........................... 870.4 864.4 778.1
Depreciation and amortization................................ 4.6 5.9 4.8
Additions to property and equipment.......................... 75.2 14.1 6.4
Footaction
Net sales.................................................... 423.7 332.3 262.3
Operating profit(1).......................................... 4.5 9.6 13.6
Identifiable assets at December 31........................... 119.3 107.2 72.2
Depreciation and amortization................................ 15.4 12.8 8.9
Additions to property and equipment.......................... 13.2 32.4 32.1
Combined
Net sales.................................................... 1,615.2 1,612.8 1,474.8
Operating profit(1).......................................... 104.0 156.7 162.4
Interest income, net......................................... 21.1 15.4 11.7
-------- -------- --------
Earnings before income taxes and minority interests.......... $125.1 $172.1 $174.1
======== ======== ========
Identifiable assets at December 31............................. $989.7 $971.6 $850.3
Assets of discontinued operations.............................. 383.0 420.9 451.3
-------- -------- --------
Total assets at December 31.................................... $1,372.7 $1,392.5 $1,301.6
======== ======== ========
Depreciation and amortization.................................. $20.0 $18.7 $13.7
======== ======== ========
Additions to property and equipment............................ $88.4 $46.5 $38.5
Additions of discontinued operations to
property and equipment....................................... 4.5 12.8 7.4
-------- -------- --------
Total additions to property and equipment...................... $92.9 $59.3 $45.9
======== ======== ========
Operating profit is defined as total revenues less operating expenses.
Identifiable assets include those assets directly related to each segment's
operations.
- ----------------------
<FN>
(1) Includes special charges recorded in connection with the Company's
restructuring. Excluding these charges, operating profit for the fiscal year
ended 1995 would have been $116 million for Meldisco, $23 million for
Footaction, and $139 million for the Company combined.
</TABLE>
(19) Summary of Quarterly Results
Summary quarterly data for 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
(Unaudited)
------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ---------- ----------- ----------- -------
($ in millions)
<S> <C> <C> <C> <C> <C>
Net sales
1996................ $ 336.9 $ 419.0
1995................ 325.8 421.8 $412.4 $455.2 $1,615.2
1994................ 329.4 390.4 430.8 462.2 1,612.8
Gross profit
1996................ 93.6 138.1
1995................ 90.2 130.0 125.3 145.2 490.7
1994................ 89.7 123.8 133.0 148.5 495.0
Income from
continuing operations
before cumulative effect
of change in accounting
principle
1996 ............... 6.1 22.2
1995................ 5.6 20.6 17.9 5.3 49.4
1994................ 5.4 17.8 20.1 27.4 70.7
(Loss) income before
cumulative effect of
change in accounting
principle
1996................ (48.5) 24.0
1995................ 1.6 21.3 18.3 (18.6) 22.6
1994................ 1.6 18.9 20.0 36.2 76.7
Net (loss) income
1996................ (48.5) 24.0
1995................ (2.3) 21.3 18.3 (18.6) 18.7
1994................ 1.6 18.9 20.0 36.2 76.7
</TABLE>
EXHIBIT 2.1
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT dated as of [ ], 1996 (the
"Agreement") between Melville Corporation, a New York corporation
("Melville"), Footstar, Inc., a Delaware corporation ("Footstar"), and
Footaction Center, Inc., a California corporation.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Footstar is presently a wholly owned Subsidiary of
Melville;
WHEREAS, the Board of Directors of Melville has determined that it
is in the best interest of Melville, its shareholders and Footstar that all
shares of Footstar Common Stock owned by Melville be distributed pro rata to
Melville's shareholders;
WHEREAS, Melville and Footstar are concurrently herewith entering
into the Tax Disaffiliation Agreement;
WHEREAS, the parties hereto desire to set forth herein the
principal corporate transactions to be effected in connection with the
Distribution and certain other matters relating to the relationship and the
respective rights and obligations of the parties following the Distribution;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. The following terms, as used herein,
have the following meanings:
"Action" means any claim, suit, action, arbitration, inquiry,
investigation or other proceeding by or before any court, governmental or
other regulatory or administrative agency or commission or any other tribunal.
"Affiliate" means, with respect to any Person, any Person directly
or indirectly controlling, controlled by, or under common control with, such
other Person. For the purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Check Services" has the meaning set forth in Schedule 6.01(A).
"Claims Services" has the meaning set forth in Schedule 6.01(B).
"Commission" means the Securities and Exchange Commission.
"Contributed Subsidiaries" means (i) each of the corporations or
other entities that, as of the Distribution, own or operate Melville's
Meldisco, Footaction, and Thom McAn businesses, divisions or operating units,
(ii) Meldisco (Europe) Purchasing Ltd. ("MEP") and (iii) the respective
Subsidiaries (and holding companies (other than Footstar and Melville)) of the
Persons referred to in clauses (i) and (ii).
"Costs" means, with respect to Services provided hereunder, any
and all (i) costs incurred by Melville or its Affiliates in connection with or
with respect to performing the Services hereunder (including all costs and
charges referred to in the Exhibits hereto) that are consistent with the
nature of costs charged by Melville in connection with the provision by
Melville of comparable services to its Subsidiaries prior to the Distribution
(which costs in the case of Check Services will be those set forth in Schedule
6.01(A)) and (ii) incremental costs of performing or providing any Service
hereunder that are incurred as a result of or otherwise arise from any third
party consent required in connection with (x) the provision of such Service
hereunder or (y) the performance by Melville or its Affiliates of its
obligations with respect thereto.
"Distribution" means a distribution by Melville on the
Distribution Date of all Footstar Common Stock owned by it to the holders of
Melville Common Stock (other than Melville Restricted Shareholders) as of the
Record Date.
"Distribution Agent" means Mellon Shareholder Services, LLC.
"Distribution Date" means the day as of which the Distribution
shall be effected.
"Distribution Documents" means all of the agreements and other
documents entered into in connection with the Distribution as contemplated
hereby, including, without limitation, this Agreement and the Tax
Disaffiliation Agreement.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, codes, plans, permits, licenses and governmental
restrictions, whether now or hereafter in effect, relating to the environment,
the effect of the environment on human health or to emissions, discharges,
releases, manufacturing, storage, processing, distribution, use, treatment,
disposal, transportation or handling of pollutants, contaminants, petroleum or
petroleum products, chemicals or industrial, toxic, radioactive or hazardous
substances or wastes or the clean-up or other remediation thereof.
"FCI" means Footaction Center, Inc., a California corporation.
"Finally Determined" means, with respect to any Action or other
matter, that the outcome or resolution of such Action or matter has been
judicially determined by judgment or order not subject to further appeal or
discretionary review.
"Footstar Business" means (i) the businesses and operations
(including, without limitation, the footwear and footwear-related
manufacturing, purchasing, distribution and sales operations and activities)
(x) associated with the Meldisco (including Pimento), Footaction (including
Open Country and Fan Club) or Thom McAn (including BOQ, Pimento and Smart
Step) retail chains or (y) otherwise of the Footstar Group, in each case
whether conducted prior to, on or after the Distribution Date, and (ii) all
footwear and footwear-related manufacturing operations of the Melville Group
(and the respective predecessors of Persons in the Melville Group) conducted
prior to the Distribution Date; provided that "Footwear Business" shall
exclude any business or activity of Computer Development, Inc., Melville
Equipment Leasing Corporation, MC Retail, Inc., Melville Realty Company and
their direct and indirect Subsidiaries, and any business or activity related
to the Bob's Stores or Marshalls businesses.
"Footstar Common Stock" means the common stock, par value $.01 per
share, of Footstar.
"Footstar Group" means Footstar and its Subsidiaries (including
the Contributed Subsidiaries) as of (and, except where the context clearly
indicates otherwise, after) the Distribution Date (including all predecessors
to such Persons).
"Footstar Liabilities" means all (i) Liabilities of the Footstar
Group under this Agreement, (ii) except as otherwise specifically provided
herein or in the Tax Disaffiliation Agreement, other Liabilities, whether
arising before, on or after the Distribution Date, of or relating to the
Footstar Group or arising from or in connection with the conduct of the
Footstar Business or the ownership or use of assets in connection therewith,
including without limitation any Liabilities arising under or relating to
Environmental Laws, and (iii) Liabilities of the Footstar Group set forth in
Schedule 5.01 hereto. Notwithstanding the foregoing, "Footstar Liabilities"
shall exclude: (x) any Liabilities for Taxes (since such Liabilities shall be
governed by the Tax Disaffiliation Agreement) and (y) any Liabilities
specifically retained or assumed by Melville pursuant to this Agreement.
"Form 10" means the registration statement on Form 10 filed by
Footstar with the Commission on March 27, 1996 to effect the registration of
Footstar Common Stock pursuant to the 1934 Act in connection with the
Distribution, as such registration statement may be amended from time to time.
"Group" means, as the context requires, the Footstar Group or the
Melville Group.
"Guaranteed Lease" has the meaning assigned to such term in
Section 7.01.
"Indemnified Party" has the meaning set forth in Section 4.04.
"Indemnifying Party" has the meaning set forth in Section 4.04.
"Information Statement" means the information statement to be sent
to each holder of Melville Common Stock in connection with the Distribution.
"IRS" means the Internal Revenue Service.
"Lease Guarantee" has the meaning assigned to such term in Section
7.01.
"Liabilities" means any and all claims, debts, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including all costs and expenses relating thereto, and including, without
limitation, those debts, liabilities and obligations arising under this
Agreement, any law, rule, regulation, any action, order, injunction or consent
decree of any governmental agency or entity, or any award of any arbitrator of
any kind, and those arising under any agreement, commitment or undertaking.
"Losses" means, with respect to any Person, any and all damage,
loss, liability and expense incurred or suffered by such Person (including,
without limitation, reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any and all Actions or
threatened Actions).
"Melville Common Stock" means the common stock, par value $1 per
share, of Melville.
"Melville Group" means Melville and its Subsidiaries (other than
any Subsidiary or member of, or other entity in, the Footstar Group).
"Melville Liabilities" means all (i) Liabilities of the Melville
Group under this Agreement and (ii) except as otherwise specifically provided
herein or in the Tax Disaffiliation Agreement, other Liabilities, whether
arising before, on or after the Distribution Date, of or relating to the
Melville Group or arising from or in connection with the conduct of the
businesses of the Melville Group (other than the Footstar Business) or the
ownership or use of assets in connection therewith, including without
limitation any Liabilities arising under or relating to Environmental Laws.
Notwithstanding the foregoing, "Melville Liabilities" shall exclude (x) any
Liabilities for Taxes (since such Liabilities shall be governed by the Tax
Disaffiliation Agreement) and (y) any Liabilities specifically retained or
assumed by Footstar pursuant to this Agreement.
"Melville Restricted Shareholder" has the meaning that is assigned
to such term in the Form 10.
"1933 Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Person" means an individual, corporation, limited liability
company, partnership, association, trust or other entity or organization,
including a governmental or political subdivision or an agency or
instrumentality thereof.
"Record Date" means the date determined by Melville's Board of
Directors (or determined by a committee of such Board of Directors or by the
Chairman of the Board of Melville pursuant to authority delegated to such
committee or Chairman by Melville's Board of Directors) as the record date for
determining the holders of Melville Common Stock entitled to receive the
Distribution.
"Subsidiary" means, with respect to any Person, any other entity
of which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by such Person.
"Tax" means Tax as such term is defined in the Tax Disaffiliation
Agreement.
"Tax Disaffiliation Agreement" means the Tax Disaffiliation
Agreement dated as of the date hereof between Melville and Footstar.
"Third-Party Claim" has the meaning set forth in Section 4.05.
ARTICLE II
CONTRIBUTIONS TO FOOTSTAR
Section 2.01. Contribution of Contributed Subsidiaries.
Effective prior to or as of the Distribution Date, Melville shall contribute
or transfer to Footstar or to one or more wholly owned Subsidiaries of
Footstar all the outstanding shares of capital stock of, or other ownership
interests in, each of the Contributed Subsidiaries (except for the minority
interest of Kmart Corporation in Meldisco's store subsidiaries).
Section 2.02. Transfers of Certain Other Assets; Assumption of
Certain Tax Liabilities. (a) Effective prior to or as of the Distribution
Date or as soon as practicable after the Distribution Date, subject to receipt
of any necessary consents or approvals of third parties or of governmental or
regulatory agencies or authorities and subject to Section 9.05, (a) Melville
shall, or shall cause the relevant member of the Melville Group to, assign,
contribute, convey, transfer and deliver ("Transfer") to Footstar or to one or
more of Footstar's wholly owned Subsidiaries all of the right, title and
interest of Melville or such member of the Melville Group in and to all assets
held by any member of the Melville Group that relate solely to the Footstar
Business (and not to the businesses of the Melville Group) and Footstar shall
assume and take transfer of all liabilities associated with such assets, and
(b) Footstar shall, or shall cause the relevant member of the Footstar Group
to, Transfer to Melville or to one or more members of the Melville Group all
of the right, title and interest of Footstar or such member of the Footstar
Group in and to all assets held by any member of the Footstar Group that
relate solely to the businesses of the Melville Group (and not to the Footstar
Business) and Melville shall assume and take transfer of all liabilities
associated with such assets.
(b) Effective as of the time of Transfer of any asset by the
Melville Group to the Footstar Group pursuant to Section 2.02(a), the Footstar
Group shall assume all Tax liabilities attributable to such asset and the
businesses related thereto (to the extent attributable to the Footstar
Business) in respect of all periods prior to such time.
Section 2.03. Agreement Relating To Consents Necessary To
Transfer Assets. Notwithstanding anything in this Agreement to the contrary,
this Agreement shall not constitute an agreement to transfer or assign any
asset or any claim or right or any benefit arising thereunder or resulting
therefrom if an attempted assignment thereof, without the necessary consent of
a third party, would constitute a breach or other contravention thereof or in
any way adversely affect the rights of Footstar or Melville thereunder.
Footstar and Melville will, subject to Section 9.05, use their reasonable
efforts to obtain the consent of any third party or any governmental or
regulatory agency or authority, if any, required in connection with the
transfer or assignment pursuant to Section 2.02 of any such asset or any claim
or right or any benefit arising thereunder. If such required consent is not
obtained, or if an attempted assignment thereof would be ineffective or would
adversely affect the rights of the transferor thereunder so that the intended
transferee would not in fact receive all such rights, Footstar and Melville
will cooperate in a mutually agreeable arrangement under which the intended
transferee would obtain the benefits and assume the obligations thereunder in
accordance with this Agreement, including sub-contracting, sub-licensing or
sub-leasing to such transferee, or under which the transferor would enforce
for the benefit of the transferee, with the transferee assuming the
transferor's obligations, any and all rights of the transferor against a third
party thereto.
ARTICLE III
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution. (a)
Melville and Footstar shall prepare, and Footstar shall file with the
Commission, the Form 10, which shall include or incorporate by reference the
Information Statement which shall set forth appropriate disclosure concerning
Footstar and the Distribution. Melville and Footstar shall use reasonable
efforts to cause the Form 10 to become effective under the 1934 Act as soon as
practicable. After the Form 10 has become effective, Melville shall mail the
Information Statement to the holders of Melville Common Stock as of the Record
Date.
(b) Melville and Footstar shall cooperate in preparing, filing
with the Commission and causing to become effective any registration
statements or amendments thereto that are appropriate to reflect the
establishment of or amendments to any employee benefit and other plans
contemplated by this Agreement.
(c) Melville and Footstar shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement.
(d) Footstar shall prepare, file and pursue an application to
permit listing of the Footstar Common Stock on the New York Stock Exchange.
Section 3.02. Melville Board Action; Conditions Precedent to the
Distribution. Melville's Board of Directors shall, in its discretion,
establish (or delegate authority to establish) the Record Date and the
Distribution Date and any appropriate procedures in connection with the
Distribution. In no event shall the Distribution occur unless the following
conditions shall have been waived by Melville or shall have been satisfied:
(i) the Form 10 shall have become effective under the 1934 Act;
(ii) the Footstar Common Stock to be delivered in the
Distribution shall have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance;
(iii) the Board of Directors of Melville shall be satisfied that
(a) both before and after giving effect to the Distribution, Melville is
not and would not be insolvent within the meaning of Section 510 of the
Business Corporation Law of the State of New York (in that (i) the fair
value of Melville's assets would exceed its liabilities (ii) Melville
would be able to pay its liabilities as they mature and become absolute
and (iii) Melville would not have unreasonably small capital with which
to engage in its business), and (b) the Distribution will be made out of
surplus within the meaning of Section 510 of the Business Corporation
Law of the State of New York (in that Melville's net assets remaining
after the Distribution will exceed the aggregate par value of Melville's
outstanding capital stock);
(iv) Melville's Board of Directors shall have approved the
Distribution and shall not have abandoned, deferred or modified the
Distribution at any time prior to the Record Date;
(v) the contributions referred to in Section 2.01 of this
Agreement shall have been effected;
(vi) Footstar's Board of Directors, as named in the Information
Statement, shall have been elected by Melville, as sole stockholder of
Footstar, and Footstar's certificate of incorporation (the "Restated
Footstar Charter") and bylaws, in substantially the forms attached as
Exhibits A and B, respectively, hereto shall be in effect;
(vii) the Tax Disaffiliation Agreement shall have been duly
executed and delivered by the parties thereto;
(viii) Melville shall have received an opinion of counsel
satisfactory to Melville as to the tax-free nature of the Distribution;
and
(ix) a credit facility shall have been made available to Footstar
by its lenders on terms and in an amount satisfactory to Melville and
Footstar.
Section 3.03. The Distribution. Subject to the terms and
conditions set forth in this Agreement, (i) prior to the Distribution Date,
Melville shall deliver to the Distribution Agent for the benefit of holders of
record of Melville Common Stock on the Record Date, a stock certificate or
certificates, endorsed by Melville in blank, representing all of the then
outstanding shares of Footstar Common Stock owned by Melville, (ii) the
Distribution shall be effective as of the close of business, New York time, on
the Distribution Date and (iii) Melville shall instruct the Distribution Agent
to distribute, on or as soon as practicable after the Distribution Date, to
each holder of record of Melville Common Stock (other than any Melville
Restricted Shareholder) as of the Record Date 0.2879 shares of Footstar Common
Stock for each one share of Melville Common Stock so held. Footstar agrees to
provide all certificates for shares of Footstar Common Stock that Melville
shall require (after giving effect to Section 3.04) in order to effect the
Distribution.
Section 3.04. Subdivision of Footstar Common Stock to Accomplish
the Distribution. Effective upon the filing of the Restated Footstar Charter
with the Secretary of State of the State of Delaware, each share of Footstar
Common Stock then issued and outstanding shall, without any action on the part
of the holder thereof, be subdivided and converted into that number of fully
paid and non-assessable shares of Footstar Common Stock issued and outstanding
equal to the number of shares of Melville Common Stock outstanding on the
Record Date (excluding shares of restricted stock held by Melville employees
expected to remain Melville employees after the Distribution) times 0.2879
divided by the number of shares of Footstar Common Stock outstanding
immediately prior to such filing.
Section 3.05. Fractional Shares. No certificates representing
fractional shares of Footstar Common Stock will be distributed in the
Distribution. The Distribution Agent will be directed to determine the number
of whole shares and fractional shares of Footstar Common Stock allocable to
each holder of Melville Common Stock as of the Record Date. Upon the
determination by the Distribution Agent of such number of fractional shares,
as soon as practicable after the Distribution Date, the Distribution Agent,
acting on behalf of the holders thereof, shall sell such fractional shares for
cash on the open market and shall disburse the appropriate portion of the
resulting cash proceeds to each holder entitled thereto.
ARTICLE IV
INDEMNIFICATION
Section 4.01. Footstar Indemnification of the Melville Group.
(a) Subject to Section 4.03, on and after the Distribution Date, Footstar
shall indemnify, defend and hold harmless the Melville Group and the
respective directors, officers and Affiliates of each Person in the Melville
Group (the "Melville Indemnitees") from and against any and all Losses
incurred or suffered by any of the Melville Indemnitees (i) arising out of, or
due to the failure of any Person in the Footstar Group to pay, perform or
otherwise discharge, any of the Footstar Liabilities or (ii) arising out of or
in connection with the provision by the Melville Group of services to the
Footstar Group under Article VI.
(b) Subject to Section 4.03, Footstar shall indemnify, defend and
hold harmless each of the Melville Indemnitees and each Person, if any, who
controls any Melville Indemnitee within the meaning of either Section 15 of
the 1933 Act or Section 20 of the 1934 Act from and against any and all
Losses caused by any untrue statement or alleged untrue statement of a
material fact contained in the Form 10 or any amendment thereof or the
Information Statement (as amended or supplemented if Footstar shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such Losses are caused by any such
untrue statement or omission or alleged untrue statement or omission based
upon information furnished to Footstar in writing by Melville expressly for
use therein.
(c) Subject to Section 4.03, on and after the Distribution Date,
FCI shall indemnify, defend and hold harmless each of the Melville Indemnitees
from and against any and all Losses incurred or suffered by any of the
Melville Indemnitees due to the failure of any Person in the Footstar Group to
pay, perform or otherwise discharge its obligations under any of the
Guaranteed Leases or otherwise arising out of or with respect to any of the
Guaranteed Leases or Lease Guarantees.
Section 4.02. Melville Indemnification of Footstar Group. (a)
Subject to Section 4.03, on and after the Distribution Date, Melville shall
indemnify, defend and hold harmless the Footstar Group and the respective
directors, officers and Affiliates of each Person in the Footstar Group (the
"Footstar Indemnitees") from and against any and all Losses incurred or
suffered by any of the Footstar Indemnitees and arising out of, or due to the
failure of any Person in the Melville Group to pay, perform or otherwise
discharge, any of the Melville Liabilities.
(b) Subject to Section 4.03, Melville shall indemnify, defend and
hold harmless each of the Footstar Indemnitees and each Person, if any, who
controls any Footstar Indemnitee within the meaning of either Section 15 of
the 1933 Act or Section 20 of the 1934 Act from and against any and all
Losses caused by any untrue statement or alleged untrue statement of a
material fact contained in the Form 10 or any amendment thereof or the
Information Statement (as amended or supplemented if Footstar shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in each case to the extent, but only to the extent, that
such Losses are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information furnished to Footstar in
writing by Melville expressly for use therein.
Section 4.03. Insurance; Third Party Obligations; Tax Benefits.
Any indemnification pursuant to Sections 4.01 or 4.02 shall be paid net of the
amount of any insurance or other amounts that would be payable by any third
party to the Indemnified Party (as defined below) in the absence of this
Agreement (irrespective of time of receipt of such insurance or other amounts)
and net of any tax benefit to the Indemnified Party attributable to the
relevant payment or Liability. It is expressly agreed that no insurer or any
other third party shall be (i) entitled to a benefit it would not be entitled
to receive in the absence of the foregoing indemnification provisions, (ii)
relieved of the responsibility to pay any claims to which it is obligated or
(iii) entitled to any subrogation rights with respect to any obligation
hereunder.
Section 4.04. Notice and Payment of Claims. If any Melville
Indemnitee or Footstar Indemnitee (the "Indemnified Party") determines that it
is or may be entitled to indemnification by any party (the "Indemnifying
Party") under Article IV (other than in connection with any Action subject to
Section 4.05), the Indemnified Party shall deliver to the Indemnifying Party a
written notice specifying, to the extent reasonably practicable, the basis for
its claim for indemnification and the amount for which the Indemnified Party
reasonably believes it is entitled to be indemnified. Within 30 days after
receipt of such notice, the Indemnifying Party shall pay the Indemnified Party
such amount in cash or other immediately available funds unless the
Indemnifying Party objects to the claim for indemnification or the amount
thereof. If the Indemnifying Party does not give the Indemnified Party
written notice objecting to such indemnity claim and setting forth the grounds
therefor within such 30-day period, the Indemnifying Party shall be deemed to
have acknowledged its liability for such claim and the Indemnified Party may
exercise any and all of its rights under applicable law to collect such
amount. In the event of such a timely objection by the Indemnifying Party,
the amount, if any, that is Finally Determined to be required to be paid by
the Indemnifying Party in respect of such indemnity claim shall be paid by
the Indemnifying Party to the Indemnified Party in cash within 15 days
after such indemnity claim has been so Finally Determined.
Section 4.05. Notice and Defense of Third-Party Claims.
Promptly following the earlier of (i) receipt of notice of the commencement by
a third party of any Action against or otherwise involving any Indemnified
Party or (ii) receipt of information from a third party alleging the existence
of a claim against an Indemnified Party, in either case, with respect to which
indemnification may be sought pursuant to this Agreement (a "Third-Party
Claim"), the Indemnified Party shall give the Indemnifying Party written
notice thereof. The failure of the Indemnified Party to give notice as
provided in this Section 4.05 shall not relieve the Indemnifying Party of its
obligations under this Agreement, except to the extent that the Indemnifying
Party is prejudiced by such failure to give notice. Within 15 days after
receipt of such notice, the Indemnifying Party may (i) by giving written
notice thereof to the Indemnified Party, acknowledge liability for such
indemnification claim and at its option elect to assume the defense of such
Third-Party Claim at its sole cost and expense or (ii) object to the claim for
indemnification set forth in the notice delivered by the Indemnified Party
pursuant to the first sentence of this Section 4.05; provided that if the
Indemnifying Party does not within such 15-day period give the Indemnified
Party written notice objecting to such indemnification claim and setting forth
the grounds therefor, the Indemnifying Party shall be deemed to have
acknowledged its liability for such indemnification claim. If the
Indemnifying Party has elected to assume the defense of a Third-Party Claim,
(x) the defense shall be conducted by counsel retained by the Indemnifying
Party and reasonably satisfactory to the Indemnified Party, provided that the
Indemnified Party shall have the right to participate in such proceedings and
to be represented by counsel of its own choosing at the Indemnified Party's
sole cost and expense; and (y) the Indemnifying Party may settle or compromise
the Third Party Claim without the prior written consent of the Indemnified
Party so long as such settlement includes an unconditional release of the
Indemnified Party from all claims that are the subject of such Third Party
Claim, provided that the Indemnifying Party may not agree to any such
settlement pursuant to which any remedy or relief, other than monetary damages
for which the Indemnifying Party shall be responsible hereunder, shall be
applied to or against the Indemnified Party, without the prior written consent
of the Indemnified Party, which consent shall not be unreasonably withheld.
If the Indemnifying Party does not assume the defense of a Third-Party Claim
for which it has acknowledged liability for indemnification hereunder, the
Indemnified Party may require the Indemnifying Party to reimburse it on a
current basis for its reasonable expenses of investigation, reasonable
attorney's fees and reasonable out-of-pocket expenses incurred in defending
against such Third-Party Claim and the Indemnifying Party shall be bound by
the result obtained with respect thereto by the Indemnified Party; provided
that the Indemnifying Party shall not be liable for any settlement effected
without its consent, which consent shall not be unreasonably withheld. The
Indemnifying Party shall pay to the Indemnified Party in cash the amount, if
any, for which the Indemnified Party is entitled to be indemnified hereunder
within 15 days after such Third Party Claim has been Finally Determined, in
the case of an indemnity claim as to which the Indemnifying Party has
acknowledged liability or, in the case of any indemnity claim as to which the
Indemnifying Party has not acknowledged liability, within 15 days after such
Indemnifying Party's objection to liability hereunder has been Finally
Determined.
Section 4.06. Contribution. If for any reason the
indemnification provided for in Section 4.01 or 4.02 is unavailable to any
Indemnified Party, or insufficient to hold it harmless, then the Indemnifying
Party shall contribute to the amount paid or payable by such Indemnified Party
as a result of such Losses in such proportion as is appropriate to reflect all
relevant equitable considerations.
Section 4.07. Non-Exclusivity of Remedies. The remedies provided
for in this Article IV are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any Indemnified Party at law or
in equity.
ARTICLE V
EMPLOYEE MATTERS
Section 5.01. Employee Matters Generally. With respect to
employee matters and employee benefits arrangements, the parties hereto agree
as set forth in Schedule 5.01.
Section 5.02. Restriction on Solicitation or Employment of
Employees. During the period commencing on the Distribution Date and ending on
the second anniversary of the Distribution Date, neither Group shall solicit
to employ or employ any management (other than in-store management) level
employee of the other Group (the "Employer Group"), unless (i) such a
management individual of an Employer Group that is proposed to be solicited
for employment or employed by the other Group shall theretofore have been, or
shall theretofore have received notice that he or she will be, involuntarily
terminated by such Employer Group or (ii) at least six months shall have
elapsed following the cessation of such management individual's employment by
such Employer Group.
ARTICLE VI
CERTAIN TRANSITIONAL SERVICES
Section 6.01. Provision of Services. On the terms and conditions
set forth in this Agreement, in order to assist in effecting an orderly
transition following the Distribution, the Melville Group will provide to or
perform for the Footstar Group and the Footstar Group will purchase from the
Melville Group (and, in the case of tax services, the Footstar Group will
provide to the Melville Group), for the transitional period specified in
Section 6.02, (A) the Check Services as provided in Schedule 6.01(A) below,
(B) claims administration services with respect to general liability insurance
as provided in Schedule 6.01(B) below, and (C) tax services ("Tax Services")
as specified in the Tax Disaffiliation Agreement ((A), (B), and (C) being the
"Services").
Section 6.02. Duration of Provision and Purchase of Services.
The Services shall be offered by the Melville Group and purchased by Footstar
through the first anniversary of the Distribution Date (except for Tax
Services, which are to be offered reciprocally by the parties through December
31, 1997), subject to the right, if any, of a party to terminate its
respective obligation to provide or purchase Services hereunder as provided
in Schedule 6.01(A) or 6.01(B) or in the Tax Disaffiliation Agreement and
unless the provision of any such Service is theretofore terminated by
Melville pursuant to Section 9.02 hereof.
Section 6.03. Nature and Scope of Provision of Services. The
nature, scope and timing of provision of Services to be provided by the
Melville Group to the Footstar Group hereunder shall be substantially
consistent with the nature, scope and timing of Melville's comparable services
provided to its Subsidiaries prior to the Distribution.
Section 6.04. Charges and Payment for Services. Except with
respect to Tax Services, Footstar shall pay or reimburse Melville for all
Costs attributable to the provision or performance by Melville of Services
hereunder. Except as provided in Schedule 6.01(B) or in the Tax
Disaffiliation Agreement, (i) all Costs required to be paid or reimbursed to
Melville hereunder shall be invoiced monthly by Melville and (ii) invoiced
amounts shall be due and payable by Footstar in cash within ten (10) days from
date of receipt of such invoice therefor.
Section 6.05. Verification of Services and Costs. (a) Footstar
shall, during normal business hours and with reasonable prior notice to
Melville, have reasonable access to the properties, offices, books and records
of Melville for the purpose of observing that Services are being procured or
performed in accordance with the terms of this Agreement relevant to the
procurement or performance of such Services and to verify Cost amounts.
(b) Melville and Footstar shall, from time to time but not more
often than once each month, review the basis and amounts of Costs charged
hereunder. In the course of such review, the parties shall in good faith, (i)
establish principles for determining Costs to be charged hereunder on a
prospective basis and (ii) determine the amount of any adjustment, if any,
payable by a party to the other with respect to Costs charged and reimbursed
in respect of any preceding period.
Section 6.06. Exculpation; Force Majeure. (a) No Melville
Indemnitee shall be liable to any other Person for any Losses directly or
indirectly arising out of, relating to or in connection with the performance
or non-performance of Services hereunder, except to the extent such Losses are
attributable to the Melville Group's gross negligence or wilful misconduct.
(b) Without limiting the provisions of Section 6.06(a), the
Melville Group shall not be liable to the Footstar Group for any delay or
default in performance of Services where occasioned by any cause of any kind
or extent beyond the Melville Group's control including, by way of example,
but not limitation, any act of God, any act, regulation or law of any
government, war, civil commotion, destruction of production facilities or
materials by fire, earthquake or storm, labor disturbance, epidemic, equipment
breakdown or failure, failure to obtain any consent or approval of a third
party necessary to provide the Services, or failure of suppliers, public
utilities or common carriers ("Force Majeure"). In claiming relief hereunder
Melville shall promptly notify Footstar in writing of the Force Majeure
causing delay or default in performance, the probable extent to which it will
be unable to perform, and the actions it intends to take to remove such Force
Majeure, to the extent reasonably possible to do so. The Melville Group shall
take reasonable action within its control to alleviate the Force Majeure
causing delay or default in performance.
Section 6.07. No Transfer of Proprietary Rights. No assignment
or transfer by a Group of any right or license in or to any technology,
software, intellectual property, know-how or other proprietary right owned,
licensed or held for use by such Group shall occur or be deemed to occur by
virtue of or in connection with the provision or purchase of Services by
either Group hereunder.
ARTICLE VII
CERTAIN AGREEMENTS RELATING TO LEASES
Section 7.01. Continuity of Existing Lease Guarantees.
With respect to each real estate lease under which any Person in the Footstar
Group is a lessee or sublessee and that is in effect prior to the Distribution
and that remains in effect following the Distribution (i) without any renewal
option having been exercised or (ii) by reason of the exercise of any renewal
option provided for in the terms of such lease as in effect as of the
Distribution (collectively, the "Guaranteed Leases"), any lease guarantee of
such Guaranteed Lease provided by Melville or any of its Affiliates and in
effect as of the Distribution (a "Lease Guarantee") will remain in effect
after the Distribution for the duration of the term of such lease and any
extension thereof pursuant to the exercise of any such renewal option.
Melville and its Affiliates shall be indemnified against any Losses arising
from such Guaranteed Leases or Lease Guarantees, as provided in Section
4.01(c).
Section 7.02. No New Melville Lease Guarantees To be Furnished
After The Distribution. Except as expressly provided otherwise in Section
7.01, to the extent that any guarantee is required to be provided after the
Distribution with respect to any real estate or other lease entered into by a
Person in the Footstar Group, such guarantee shall not be furnished by any
Person in the Melville Group.
ARTICLE VIII
ACCESS TO INFORMATION
Section 8.01. Provision of Corporate Records.
Immediately prior to or as soon as practicable following the Distribution
Date, each Group shall provide to the other Group all documents, contracts,
books, records and data (including but not limited to minute books, stock
registers, stock certificates and documents of title) in its possession
relating to such other Group or such other Group's business and affairs;
provided that if any such documents, contracts, books, records or data relate
to both Groups or the business and operations of both Groups, each such Group
shall provide to the other Group true and complete copies of such documents,
contracts, books, records or data.
Section 8.02. Access to Information. From and after the
Distribution Date, each Group shall, for a reasonable period of time, afford
promptly to the other Group and its accountants, counsel and other designated
representatives reasonable access during normal business hours to all
documents, contracts, books, records, computer data and other data in such
Group's possession relating to such other Group or the business and affairs of
such other Group (other than data and information subject to an
attorney/client or other privilege), insofar as such access is reasonably
required by such other Group, including, without limitation, for audit,
accounting, litigation and disclosure and reporting purposes.
Section 8.03. Litigation Cooperation. Each Group shall use
reasonable efforts to make available to the other Group and its accountants,
counsel, and other designated representatives, upon written request, its
directors, officers, employees and representatives as witnesses, and shall
otherwise cooperate with the other Group, to the extent reasonably required in
connection with any legal, administrative or other proceedings arising out of
either Group's business and operations prior to the Distribution Date in which
the requesting party may from time to time be involved.
Section 8.04. Reimbursement. Each Group providing information or
witnesses to the other Group, or otherwise incurring any expense in connection
with cooperating, under Sections 8.01, 8.02 or 8.03 shall be entitled to
receive from the recipient thereof, upon the presentation of invoices
therefor, payment for all out-of-pocket costs and expenses as may be
reasonably incurred in providing such information, witnesses or cooperation.
Section 8.05. Retention of Records. Except as otherwise required
by law or agreed to in writing, each party shall, and shall cause the members
of its respective Group to, retain all information relating to the other
Group's business and operations in accordance with the past practice of such
party. Notwithstanding the foregoing, any party may destroy or otherwise
dispose of any such information at any time, provided that, prior to such
destruction or disposal, (i) such party shall provide not less than 90 days'
prior written notice to the other party, specifying the information proposed
to be destroyed or disposed of, and (ii) if the recipient of such notice shall
request in writing prior to the scheduled date for such destruction or
disposal that any of the information proposed to be destroyed or disposed
of be delivered to such requesting party, the party proposing the
destruction or disposal shall promptly arrange for the delivery of such of
the information as was requested at the expense of the requesting party.
Section 8.06. Confidentiality. Each party shall hold and shall
cause its directors, officers, employees, agents, consultants and advisors
("Representatives") to hold in strict confidence all information (other than
any such information relating solely to the business or affairs of such party)
concerning the other party unless (i) such party is compelled to disclose such
information by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law or (ii) such information can be shown to
have been (A) in the public domain through no fault of such party or (B)
lawfully acquired after the Distribution Date on a non-confidential basis from
other sources. Notwithstanding the foregoing, such party may disclose such
information to its Representatives so long as such Persons are informed by
such party of the confidential nature of such information and are directed by
such party to treat such information confidentially. If such party or any of
its Representatives becomes legally compelled to disclose any documents or
information subject to this Section, such party will promptly notify the other
party so that the other party may seek a protective order or other remedy or
waive such party's compliance with this Section. If no such protective order
or other remedy is obtained or waiver granted, such party will furnish only
that portion of the information which it is advised by counsel is legally
required and will exercise its reasonable efforts to obtain reliable assurance
that confidential treatment will be accorded such information. Such party
agrees to be responsible for any breach of this Section by it and its
Representatives.
Section 8.07. Inapplicability of Article VIII to Tax Matters.
Notwithstanding anything to the contrary in Article VIII, Article VIII shall
not apply with respect to information, records and other matters relating to
Taxes, all of which shall be governed by the Tax Disaffiliation Agreement.
ARTICLE IX
CERTAIN OTHER AGREEMENTS
Section 9.01. Intercompany Accounts. All intercompany
receivable, payable and loan balances in existence as of the Distribution Date
between the Melville Group and Footstar Group will be eliminated as provided
in Schedule 9.01 hereto.
Section 9.02. Certain Rights Upon a Third Party Obtaining Above a
Specified Ownership Level of Footstar Common Stock. No Person or group
(within the meaning of Section 13(d) under the 1934 Act) of Persons shall
become the beneficial owner (within the meaning of Rule 13d-3 under the 1934
Act) of more than 35% of the Footstar Common Stock unless (i) Melville shall
have received prior written notice that such Person or group proposes to
acquire beneficial ownership of more than 35% of the Footstar Common Stock and
(ii) prior to such acquisition such Person or group provides to Melville
(unless waived by Melville in writing) a guarantee, in form and substance
acceptable to Melville, of the obligations of Footstar and the Footstar Group
under this Distribution Agreement. In addition, upon any such Person or group
becoming the beneficial owner of more than 35% of the Footstar Common Stock,
Melville may, at its election, forthwith terminate its provision of any or all
of the Services under Article VI.
Section 9.03. Footstar Guarantee of Footaction Center, Inc. Lease
Indemnity. Footstar hereby unconditionally guarantees (the "Guaranty") to
Melville and the other Persons in the Melville Group (collectively, the
"Guaranteed Parties") that the payment obligations of FCI under Section
4.01(c) shall be promptly performed and complied with in full when due in
accordance with the terms thereof. Upon failure by FCI to make the payments
required to be made by it under Section 4.01(c), for whatever reason, Footstar
shall forthwith pay, within two business days of demand, the amount of the
payments not so made, by wire transfer to the account of Melville designated
to Footstar in writing for such purpose. Demand for payment hereunder shall
be made in writing signed by a duly authorized officer of any Guaranteed Party
and be given to Footstar at the address and in the manner set forth in Section
10.01. Footstar hereby agrees that its obligations under this Section 9.03
shall be unconditional, irrevocable and absolute and, without limiting the
foregoing, shall not be released, discharged or otherwise affected by, the
invalidity, irregularity or unenforceability of any provision of any
Distribution Document, the absence of any action to enforce the same, any
provision of applicable law or regulation purporting to prohibit the
performance by FCI of its obligations under Section 4.01(c), any extension,
renewal, settlement, compromise, waiver or release in respect of any
obligation of FCI under any provision of the Distribution Documents (except in
conformity therewith), any modification or amendment of or supplement to any
Distribution Document (except in conformity therewith), any change in the
corporate existence, structure or ownership of FCI, or any insolvency,
bankruptcy, reorganization or other similar proceeding affecting FCI or its
assets or any resulting release or discharge of any obligation under any
Distribution Document, any waiver or consent by any Guaranteed Party with
respect to any provisions of any Distribution Document, the recovery of any
judgment against FCI or any action to enforce the same, the existence of any
claim, set-off or other rights which Footstar may have at any time against any
Guaranteed Party, whether in connection herewith or with any unrelated
transaction (provided that nothing herein shall prevent the assertion of any
such claim, set-off or other rights by separate suit or counterclaim), or any
other circumstance which might otherwise constitute a legal or equitable
discharge or defense of Footstar. Footstar hereby waives diligence,
presentment, demand of payment (other than the demand referred to above), or
filing of claims with a court in the event of insolvency or bankruptcy of FCI,
any right to require a proceeding first against FCI, protest, notice and all
demands (other than the demand referred to above) whatsoever and covenants
that this Guaranty will not be discharged except by complete performance of
the obligations of FCI under Section 4.01(c) or of this Guaranty. If any
Guaranteed Party is required by any court or otherwise to return to Footstar
or FCI, or any receiver, trustee, assignee, liquidator, sequestrator or
similar official charged with maintaining possession or control over property
for one or more creditors acting in relation to Footstar or FCI, any amount
paid by Footstar or FCI to such Guaranteed Party, this Guaranty, to the extent
theretofore discharged, shall be reinstated in full force and effect.
Footstar hereby confirms its right of subrogation in relation to the
Guaranteed Parties in respect of any obligations guaranteed hereby, but
agrees to delay the enforceability of such right until all obligations of
FCI under Section 4.01(c) have been satisfied.
Section 9.04. Intellectual Property Rights and Licences. Except
for any license to the "Open Country" trademark granted by the Footstar Group
to Bob's, Inc., neither Group shall have any right or license in or to any
technology, software, intellectual property (including any trademark, service
mark, patent or copyright), know-how or other proprietary right owned,
licensed or held for use by the other Group.
Section 9.05. Further Assurances and Consents. In addition to
the actions specifically provided for elsewhere in this Agreement, each of the
parties hereto shall use its reasonable efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by
this Agreement, including but not limited to using its reasonable efforts to
obtain any consents and approvals and to make any filings and applications
necessary or desirable in order to consummate the transactions contemplated by
this Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to
any third party from whom such consents or approvals are requested or to take
any action or omit to take any action if the taking of or the omission to take
such action would be unreasonably burdensome to the party, its Group or its
Group's business.
ARTICLE X
MISCELLANEOUS
Section 10.01. Notices. All notices and other communications to
any party hereunder shall be in writing (including telex, telecopy or similar
writing) and shall be deemed given when received addressed as follows:
If to Melville, to:
Melville Corporation
1 CVS Drive
Woonsocket, Rhode Island 02895
Telecopy: (401) 765-XXXX
Attention: Chief Financial Officer and
General Counsel
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: (212) 450-4800
Attention: Dennis S. Hersch
If to Footstar or FCI, to:
Footstar, Inc.
933 MacArthur Boulevard
Mahwah, New Jersey 07430
Telecopy: (201) 934-6761
Attention: Chief Financial Officer and
General Counsel
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: (212) 450-4800
Attention: Dennis S. Hersch
Any party may, by written notice so delivered to the other parties, change the
address to which delivery of any notice shall thereafter be made.
Section 10.02. Amendments; No Waivers. (a) Any provision of
this Agreement may be amended or waived if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by Melville and
Footstar, or in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights
and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
Section 10.03. Expenses. Except as specifically provided
otherwise in this Agreement or the Tax Disaffiliation Agreement (including,
without limitation, in Articles IV and VI, Sections 8.04, 8.05, 9.01, 9.03 and
10.08(c) and Schedules 5.01, 6.01(A) and 6.01(B) of this Agreement), all costs
and expenses incurred in connection with the preparation, execution and
delivery of the Distribution Documents and the consummation of the
Distribution and the other transactions contemplated hereby (including the
fees and expenses of all counsel, accountants and financial and other advisors
of both Groups in connection therewith, and all expenses in connection with
preparation, filing and printing of the Form 10 and the Information Statement)
shall be paid by Melville; provided that Footstar shall be responsible for and
pay the fees, expenses and other amounts payable to the lenders under
Footstar's credit facilities and all other fees and expenses incurred in
connection therewith (including the fees and expenses of Footstar's counsel in
connection with the preparation and negotiation of all documentation relating
to such credit facilities).
Section 10.04. Successor and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that neither party may
assign, delegate or otherwise transfer any of its rights or obligations under
this Agreement without the consent of the other parties hereto.
Section 10.05. Governing Law. This Agreement shall be construed
in accordance with and governed by the law of the State of New York, without
regard to the conflicts of laws rules of such State.
Section 10.06. Counterparts; Effectiveness. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the
same instrument. This Agreement shall become effective when each party hereto
shall have received a counterpart hereof signed by the other parties hereto.
Section 10.07. Entire Agreement. This Agreement and the other
Distribution Documents constitute the entire understanding of the parties with
respect to the subject matter hereof and thereof and supersedes all prior
agreements, understandings and negotiations, both written and oral, between
the parties with respect to the subject matter hereof and thereof. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein or in the other Distribution Documents has been made or
relied upon by any party hereto. Neither this Agreement nor any provision
hereof is intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder. To the extent that the provisions of this
Agreement are inconsistent with the provisions of any other Distribution
Document, the provisions of such other Distribution Document shall prevail.
Section 10.08. Tax Disaffiliation Agreement; Set-Off; Payment of
After-Tax Amounts. (a) Except as otherwise provided herein and not
inconsistent with the Tax Disaffiliation Agreement, this Agreement shall not
govern any Tax, and any and all claims, losses, damages, demands, costs,
expenses or liabilities relating to Taxes shall be exclusively governed by the
Tax Disaffiliation Agreement.
(b) If, at the time Footstar is required to make any payment to
Melville under this Agreement, Melville owes Footstar any amount under this
Agreement or the Tax Disaffiliation Agreement, then such amounts shall be
offset and the excess shall be paid by the party liable for such excess.
Similarly, if at the time Melville is required to make any payment to Footstar
under this Agreement, Footstar owes Melville any amount under this Agreement
or the Tax Disaffiliation Agreement, then such amounts shall be offset and the
excess shall be paid by the party liable for such excess.
(c) If any amount paid by Melville, Footstar or their respective
Post-Distribution Affiliates pursuant to Section 4.01 or 4.02 of this
Agreement results in any increased Tax liability or reduction of any Tax Asset
of any member of the Footstar Group, Footstar or its Post-Distribution
Affiliates, or the Melville Group, Melville or its Post-Distribution
Affiliates, respectively, then Melville or Footstar, as the case may be, shall
indemnify the other party and hold it harmless from any interest or penalty
attributable to such increased Tax liability or the reduction of such Tax
asset and shall pay to the other party, in addition to amounts otherwise owed,
100 percent of the After-Tax Amount. All capitalized terms used in this
Section 10.08(c) and not otherwise defined in this Agreement are used as
defined in the Tax Disaffiliation Agreement. This Section 10.08(c) shall be
subject to the dispute resolution provisions contained in Section 16 of the
Tax Disaffiliation Agreement.
Section 10.09. Jurisdiction. Any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or
in connection with, this Agreement or the transactions contemplated hereby may
be brought in the United States District Court for the Southern District of
New York or any other New York State court sitting in New York County, and
each of the parties hereby consents to the jurisdiction of such courts (and
of the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit,
action or proceeding which is brought in any such court has been brought in an
inconvenient form. Process in any such suit, action or proceeding may be
served on any party anywhere in the world, whether within or without the
jurisdiction of any such court. Without limiting the foregoing, each party
agrees that service of process on such party as provided in Section 10.01
shall be deemed effective service of process on such party.
Section 10.10. Existing Arrangements. Except as otherwise
contemplated hereby, all prior agreements and arrangements, including those
relating to goods, rights or services provided or licensed, between the
Footstar Group and the Melville Group shall be terminated effective as of the
Distribution Date, if not theretofore terminated. No such agreements or
arrangements shall be in effect after the Distribution Date unless embodied in
the Distribution Documents.
Section 10.11. Termination Prior to the Distribution. The
Melville Board of Directors may at any time prior to the Distribution abandon
the Distribution and, by notice to Footstar, terminate this Agreement (whether
or not the Melville Board of Directors has theretofore approved this Agreement
and/or the Distribution).
Section 10.12. Captions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof.
IN WITNESS WHEREOF the parties hereto have caused this
Distribution Agreement to be duly executed by these respective authorized
officers as of the date first above written.
MELVILLE CORPORATION
By ____________________________
Name:
Title:
FOOTSTAR, INC.
By ____________________________
Name:
Title:
FOOTACTION CENTER, INC.
By ____________________________
Name:
Title:
Schedule 5.01
EMPLOYEE MATTERS
Section 1. General. Except as otherwise set forth in this Schedule
5.01, (a) Melville shall retain (i) any and all liabilities relating to or
arising out of any employee benefit or compensation arrangement (a "Plan") in
respect of any employee or former employee of Melville and any Affiliate of
Melville who is not a Transferred Employee (as hereinafter defined), and (ii)
any and all liabilities relating to or arising out of any Plan in respect of
all Transferred Employees that were incurred or are otherwise related to any
period prior to and including the Distribution Date and (b) Melville shall
have no liability relating to or arising out of any Plan in respect of
Transferred Employees to the extent that any such liability is incurred or
otherwise relates to any period after the Distribution Date.
Section 2. Employees. With respect to each individual who, as of
the Distribution Date, is employed (including persons absent from active
service by reason of Short Term Disability or Long Term Disability, as
hereinafter defined, or absence not relating to disability, whether paid or
unpaid) in the Footstar Business ("Transferred Employees"), Footstar shall
cause the employment of each Transferred Employee to be continued on the
Distribution Date, provided that nothing stated herein shall limit the right
of Footstar or any Subsidiary to terminate the employment of any Transferred
Employee following the Distribution Date or to reduce or otherwise modify the
position, responsibilities, compensation or benefits of any Transferred
Employee at any time, and provided further that an individual who is employed
as of the Distribution Date by Footstar or any of its Subsidiaries, but on
such date is absent from active service and is receiving Long Term Disability
Benefits (as hereinafter defined) shall not be considered a Transferred
Employee for purposes of the Melville Long Term Disability Plan. The employee
benefit plans and arrangements maintained by Footstar shall give full
service credit for purposes of eligibility and vesting (and in connection
with any such severance or vacation plan or policy, for purposes of
determining the level of benefit) for any service on or prior to the
Distribution Date of a Transferred Employee with Melville and its
Subsidiaries. For purposes of this Agreement, (i) "Short Term Disability"
shall mean a condition with respect to which an employee is receiving
benefits, as of the Distribution Date, under either the Melville Short Term
Disability Plan or the Melville Salary Continuation Plan, and (ii) "Long
Term Disability Benefits" shall mean benefits under the Melville Long Term
Disability Plan.
Section 3. Qualified Plans. (a) Melville shall retain all
liabilities and obligations in respect to benefits accrued by Transferred
Employees under Melville's ESOP. Melville shall cause each Transferred
Employee to become 100% vested in the employee's account in Melville's ESOP as
of the Distribution Date. As soon as practicable after the Distribution Date,
Melville shall take such action as may be necessary, if any, to permit each
Transferred Employee to exercise his rights under Melville's ESOP to effect an
immediate distribution of such Transferred Employee's full account balances
under Melville's ESOP or to effect a tax-free rollover of the taxable portion
of the account balances into an eligible retirement plan (within the meaning
of Section 401(a)(31) of the Internal Revenue Code ("Code"), a "Direct
Rollover") maintained by Footstar (the "Footstar Plan") or to an individual
retirement account. Melville and Footstar shall work together in order to
facilitate any such distribution or rollover and to effect a Direct Rollover
for those participants who elect to roll over their account balances directly
into the Footstar Plan; provided that nothing contained herein shall obligate
the Footstar Plan to accept a Direct Rollover in a form other than cash.
(b) On the Distribution Date, or as soon as practicable
thereafter, Footstar shall establish or designate the Footstar Plan in order
to accommodate the Direct Rollovers described above and shall take all action
necessary, if any, to qualify the Footstar Plan under the applicable
provisions of the Code and shall make any and all filings and submissions to
the appropriate governmental authorities required to be made by it in
connection with any Direct Rollover.
(c) As soon as practicable after the Distribution Date, Footstar
shall establish or designate an individual account plan (the "Successor
Individual Account Plan"), which may be the same plan as the Footstar Plan,
for the benefit of Transferred Employees, shall take all necessary action, if
any, to qualify such plan under the applicable provisions of the Code and
shall make any and all filings and submissions to the appropriate governmental
agencies required to be made by it in connection with the transfer of assets
described below. Melville shall cause each Transferred Employee to be 100%
vested in the employee's account balance under Melville's 401(k) Profit
Sharing Plan as of the Distribution Date. No later than the date of the
transfer described herein, Footstar shall make all applicable 401(k), profit
sharing, matching contributions and qualified non-elective contributions
payable under Melville's 401(k) Profit Sharing Plan with respect to
Transferred Employees for periods on or prior to the Distribution Date and
shall be entitled to retain any applicable reserves or accruals relating
thereto. As soon as practicable following the Distribution Date, Melville
shall cause the trustee of Melville's 401(k) Profit Sharing Plan to transfer
in the form of cash or, to the extent applicable, notes representing
outstanding loans made to Transferred Employees under Melville's 401(k) Profit
Sharing Plan (or such other form as may be agreed to by Melville and Footstar)
the full account balances of Transferred Employees (and beneficiaries thereof)
under Melville's 401(k) Profit Sharing Plan (which account balances will have
been credited with appropriate earnings attributable to the period from the
Distribution Date to the date of transfer described herein), reduced by any
necessary benefit or withdrawal payments to or in respect of Transferred
Employees occurring during the period from the Distribution Date to the date
of transfer described herein, to the appropriate trustee as designed by
Footstar under the trust agreement forming a part of the Successor Individual
Account Plan, it being understood that Melville is under no obligation to
effect a distribution, payment or loan under Melville's 401(k) Profit Sharing
Plan in respect of a Transferred Employee who either requests a loan or
terminates employment after the Distribution Date but prior to the date of
transfer described herein if the required distribution, payment or loan, as
the case may be, forms have not been received by Melville prior to the last
day of the month preceding the month in which the transfer described herein
occurs. Melville and Footstar agree to take such actions and enter into such
agreements, if any, that may be necessary to effect the transfer described
herein. In consideration for the transfer of assets described herein,
Footstar shall, effective as of the date of transfer described herein,
assume all of the obligations of Melville in respect of the account
balances accumulated by Transferred Employees under Melville's 401(k)
Profit Sharing Plan (exclusive of any portion of such account balances
which are paid or otherwise withdrawn prior to the date of transfer
described herein) with respect to the account balances transferred to the
Successor Individual Account Plan. Melville hereby indemnifies Footstar,
the Company and the Subsidiaries against and agrees to hold them harmless
from any liabilities or claims (including claims for benefits or for breach
of fiduciary duties, but excluding claims for benefits to the extent of the
assets transferred hereunder) relating to Melville's 401(k) Profit Sharing
Plan (or the qualified status of that Plan) which arose prior to the
transfer of assets described herein or which relate to the operation or
administration of that Plan prior to the transfer of assets. Footstar
hereby indemnifies Melville against and agrees to hold it harmless from any
liabilities or claims relating to the qualified status of the Successor
Individual Account Plan or the operation or administration of that Plan
following the transfer of assets described herein.
Section 4. Welfare Plans and Worker Compensation.
(a) Footstar and its Affiliates shall each establish or designate
welfare benefit plans, within the meaning of Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended, for the benefit of their
respective Transferred Employees (the "Replacement Welfare Plans") effective
January 1, 1997. Melville shall continue to provide services for Transferred
Employees (and eligible spouses and dependants) under its Plans which provide
medical, dental, life insurance and disability benefits for such period of
time from the Distribution Date to not later than December 31, 1996 (the
"Benefit Transition Period"). Footstar shall pay the cost of such services
during the Benefit Transition Period (including claims run out in respect of
claims incurred both before and after the Distribution Date) and shall
directly fund all medical and dental claims through a bank account set up
solely for such purposes. In addition, Footstar shall be entitled to retain
any applicable reserves or accruals relating to such benefits. Footstar and
its designated Affiliates shall retain or assume all of the obligations for
any retiree benefits under any welfare plan provided Transferred Employees
(and dependants) and retirees (and dependants) terminated while employed by
Footstar and any Affiliate or while employed in the Footstar Business prior to
the Distribution Date. Footstar and its Affiliates shall assume as of the
Distribution Date all the obligations of Melville and any of its Affiliates
for any obligation to provide coverage and benefits for Transferred Employees
and former employees of the Footstar Business and their qualified
beneficiaries under the Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985 and Section 4980B of the Code.
(b) Footstar shall be responsible for all workers compensation
claims, whether arising before or after the Distribution Date, with respect to
any employee or former employee of the Footstar Business, including, but not
limited to, any Transferred Employee. In addition, Footstar shall be entitled
to retain any applicable reserves or accruals relating thereto.
Section 5. Stock Options. Except as otherwise provided in any
agreement with a Transferred Employee, as of the Distribution Date, all
outstanding options issued to Transferred Employees to purchase Melville
Common Stock that have heretofore been granted under any employee stock option
plan of Melville and are exercisable on the Distribution Date shall be
exercisable for a period of 90 days from the Distribution Date.
Section 6. Bonus and Profit Incentive Plans. Except as otherwise
provided in any agreement with a Transferred Employee, Melville shall have no
liability for any bonus or profit incentive awards and Footstar shall be
responsible for all such awards relating to the period beginning on the
Distribution Date.
Section 7. Severance. The continued employment by Footstar and its
Affiliates of Transferred Employees after the Distribution Date shall not be
deemed a severance of employment of such Transferred Employees from Melville
for purposes of any policy, Plan, program or agreement of Melville or any of
its Subsidiaries that provides for the payment of severance, salary
continuation or similar benefits.
Section 8. Supplemental Retirement Benefits as Deferred
Compensation. Footstar and its Affiliates shall assume as of the Distribution
Date all of the obligations and liabilities of Melville and any of its
Affiliates for any Transferred Employee under the Supplemental Retirement
Plans I and II for Select Senior Management of Melville Corporation and the
Deferred Compensation Plan of Melville Corporation and Affiliated Companies,
and any reserve or accrual in respect of such Transferred Employees shall be
retained by or transferred to Footstar.
Section 9. No Third Party Beneficiaries. Neither Transferred
Employees nor any current, former or retired employee of Melville or its
affiliates shall be entitled to enforce the provisions of this Schedule 5.01
against the respective parties as third party beneficiaries thereof.
Schedule 6.01(A)
BAD DEBT COLLECTION AND PREVENTION
Services and Related Agreements
Footstar has requested that Melville provide transitional services
to Footstar pertaining to (i) check authorization, (ii) credit
transaction routing, (iii) check collection and reporting, and
(iv) bad debt collection and prevention ((i), (ii), (iii) and (iv)
collectively being the "Check Services").
On the terms and conditions set forth in this Exhibit and the
Agreement and for the Term set forth below, Melville will provide
to Footstar, and Footstar will purchase from Melville, the Check
Services with respect to the Footstar Business, including services
by Melville (i) using Melville's software system for bad debt
collection and check authorization (the "Bad Debt System") and
(ii) providing unlimited access to the negative check file with
respect to the Footstar Business only and the positive check
file with respect to all Melville businesses.
Access by Footstar to the negative check file can be continued by
Footstar only so long as Footstar continues to perform its
obligations under the ETC/SCAN Service Agreement (the "ETC
Agreement") (since Electronic Transaction Corporation ("ETC") is
the owner of the negative check file). ETC has agreed to allow
Footstar to continue to obtain services under the ETC Agreement
during the transition period, and ETC has informally advised that
such continued services will be at the same ETC rates as have
heretofore been applicable to the Footstar Business (since
Melville's original agreement with ETC covers Footstar).
Notwithstanding anything else contained in this Exhibit or the
Agreement, Melville will have no obligation to provide Footstar
with any access to the negative check file (or access at such
existing rates) if ETC does not permit Footstar such access (or
such access at such existing rates) or Footstar otherwise does not
continue to have any rights under the ETC Agreement.
Ownership of all information in the negative and positive check
file that is contributed by Footstar shall belong to Footstar and
shall be forwarded to Footstar upon its request.
Information relating to Footstar customers will be treated
confidentially so as to preserve confidentiality from, and
preclude any use by, Melville and its Affiliates, except that
Melville shall have unlimited access to Footstar's positive check
file. In addition, Footstar will have unlimited access to
Melville's positive check file, as these positive check files are
presently mutually inclusive.
Separate collection letters and telephone collection calls will be
made on Footstar bad checks.
Charges for services will be (1) $.02 per check authorization
request, (2) $.02 per credit card routing request and (3) $5.78
per returned item received.
Melville will use reasonable efforts to accommodate any required
or requested modification of Melville's Check Authorization,
Credit Routing and/or Collection Management Systems, provided that
Footstar will be responsible for all additional costs, as approved
by Footstar, associated with each such modification unless such
modification is required under the ETC Agreement and Melville
would have made such modification regardless of services related
to this Agreement.
All funds recovered or collected by Melville or its designated
Collection Agencies pursuant to the provision of services
hereunder will be deposited into a Bank of Boston recovery account
that will be opened and maintained at Footstar's expense.
Footstar may request that additional collection agencies be
approved by Melville, and Melville will give reasonable
consideration to such requests.
Footstar agrees to direct all customer inquiries, correspondence
and payments concerning returned checks to the Collections
Department, 200 Brickstone Square, P.O. Box 9031, Andover, MA
01810 or to telephone (508) 474-7200.
Term
The term for the provision and purchase of Check Services
hereunder shall be from the Distribution Date until the first
anniversary of the Distribution Date; provided that (i) Footstar
may terminate the Check Services by giving Melville 60 days'
written notice of such termination and (ii) Melville may terminate
the Check Services hereunder (x) if at any time such termination
is required (or continued provision of Check Services would result
in any penalty or other burdensome consequence or requirement
being imposed) by any federal or state regulatory agency or (y) as
provided in Section 9.02 of the Agreement.
Schedule 6.01(B)
INSURANCE CLAIMS ADMINISTRATION
Services and Related Agreements
On the terms and conditions set forth in this Exhibit and the
Agreement and for the Term set forth below, Melville will provide
to Footstar, and Footstar will purchase from Melville, claims
administration services ("Claims Services") relating to Footstar
general liability insurance claims made prior to the first
anniversary of the Distribution Date.
Melville shall maintain a special bank account (the "Claims
Account") for claims payment in connection with Claims Services.
Melville shall, on a weekly basis, render a statement to Footstar
of the amount of each claim to be paid pursuant to the provision
of Claims Services hereunder. Footstar shall, promptly upon
receipt of such statement, deposit (by wire transfer) the
aggregate amount of the claims covered by such statement into the
Claims Account. Melville shall make payment of claims by checks
drawn on the Claims Account, but shall only release such checks
once funds therefor have been so deposited by Footstar into the
Claims Account. In addition, Melville shall allow Footstar and/or
its agents reasonable access to its books and records relating to
Claims Services in order to perform claim reviews.
Within 15 days after the later of (i) the Distribution and (ii)
receipt by Footstar of an invoice therefor from Melville, Footstar
shall reimburse Melville for all claims handling charges and loss
disbursements made prior to the Distribution (whether billed or
unbilled by the Distribution Date). Additionally, at the close of
each month Melville will bill Footstar for all claims reported to
Melville the prior month. Upon termination of this Claims
Services agreement, all fees due and owed by Footstar through
termination will be paid within 15 days after the later of (x) the
termination date and (y) receipt by Footstar of an invoice
therefor from Melville.
Term
The term for the provision and purchase of Claims Services
hereunder shall be from the Distribution Date until the first
anniversary of the Distribution Date, unless theretofore
terminated by Melville as provided in Section 9.02 of the
Agreement or terminated by Footstar upon 30 days' notice to
Melville.
Upon termination, at Footstar's expense and with Melville's
co-operation, all open and outstanding claims will be copied and
moved to a third party processor of Footstar's choosing.
Additionally, Footstar will make arrangements at its expense for
moving and storing of all closed claims previously handled by the
Melville claims unit within a reasonable period of time not to
exceed 60 days.
CLAIMS RUNOUT
For a period of at least five years after the Distribution Date,
the Footstar Group will continue to have insurance coverage with
respect to claims made (i.e. claims runout) after the Distribution
Date in respect of claims or losses incurred or events occurring
prior to the Distribution Date (i) to the extent such claims or
losses are covered under Melville insurance policies under which
the Footstar Group or Footstar Business had coverage up to the
Distribution Date and (ii) on the terms in effect under such
policies at the time such pre-Distribution claims or losses were
incurred or events occurred. Notwithstanding anything else
contained herein, Melville will be liable for any deductible or
retention amounts under its directors and officers liability
insurance policies with respect to claims under such policies in
respect of individuals who were officers, directors and/or
employees of the Melville Group prior to the Distribution and
arising from acts, omissions or events occurring prior to the
Distribution.
Schedule 9.01
INTERCOMPANY ACCOUNTS
Effective January 1, 1996, Melville Corporation ("Melville") transferred the
ownership of its Meldisco and Thom McAn divisions to a newly formed
subsidiary, Mel Shoe Corporation ("Mel Shoe"). At the time of this transfer,
these divisions maintained an inter-divisional book investment balance of
$730,004,787.02 with Melville. Mel Shoe will be a subsidiary of Footstar,
Inc. ("Footstar") which is scheduled to be spun off by Melville in the
third quarter of 1996.
Since its inception, Mel Shoe has borrowed funds from Melville on an
inter-company basis to finance working capital and capital expenditure
requirements. In connection with the spin-off, Footstar and Melville have
agreed that Melville would retain $643,000,000 of the $730,004,787.02
inter-divisional book investment balance and contribute the remaining
$87,004,787.02 as a capital contribution to Footstar and/or its subsidiaries
(each a "Footstar Company"). This equity contribution will be used by the
Footstar Companies to repay a portion of the outstanding loan balance to
Melville. Had this capital contribution and repayment been made on August 7,
1996, the remaining aggregate balance owing to Melville as of such date would
have been $7,058,458.03. Other than this inter-divisional book investment
retention and capital contribution, all credits and debits between Melville
and its subsidiaries (other than the Footstar Companies) (the "Melville
Companies"), on the one hand, and the Footstar Companies, on the other hand,
since January 1, 1996 have been and shall be credited to, and debited from,
this inter-company balance, which will be the only inter-company balance
between the Footstar Companies and the Melville Companies. The net of such
inter-company balance will be repayable to Melville or the Footstar Companies,
as the case may be, on or prior to the spin-off date. That is, if the
Footstar Companies are in a borrowing position with Melville as of the
spin-off date, the Footstar Companies will repay their loan to Melville.
If the Footstar Companies are in an investment position with Melville as of
the spin-off date, Melville will repay this investment to the Footstar
Companies.
Based on management's forecasts, it is anticipated that sufficient cash will
be generated by the Footstar Companies prior to the scheduled September 28,
1996 spin-off date to repay any remaining loan balance due to Melville. In
the event the cash flow is not sufficient to repay any such amount, the
Footstar Companies will be required to borrow under the $425,000,000 revolving
credit facility to repay Melville.
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FOOTSTAR, INC.
Footstar, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is "Footstar, Inc." and the name
under which the Corporation was originally formed is "Footwear Group, Inc."
The original Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on March 21, 1996.
2. This Amended and Restated Certificate of Incorporation has
been duly adopted and proposed to the sole stockholder of the Corporation by
the Board of Directors of the Corporation, and has been approved and adopted
by the sole stockholder of the Corporation, in accordance with Sections 242
and 245 of the General Corporation Law of the State of Delaware.
3. Pursuant to Sections 242 and 245 of the General Corporation
Law of the State of Delaware, this Amended and Restated Certificate of
Incorporation restates and integrates and further amends the provisions of
the Certificate of Incorporation of the Corporation.
4. The text of the Certificate of Incorporation as heretofore
amended is hereby restated and further amended to read in its entirety as
hereinafter set forth:
FIRST: The name of the Corporation is Footstar, Inc.
SECOND: The address of its registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent at
such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware as the same exists or may hereafter
be amended ("Delaware Law").
FOURTH: The total number of shares of stock which the
Corporation shall have authority to issue is 130,000,000, consisting of
100,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), and 30,000,000 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock").
The Board of Directors is hereby empowered to authorize by
resolution or resolutions from time to time the issuance of one or more
classes or series of Preferred Stock and to fix the designations, powers,
preferences and relative, participating, optional or other rights, if any,
and the qualifications, limitations or restrictions thereof, if any, with
respect to each such class or series of Preferred Stock and the number of
shares constituting each such class or series, and to increase or decrease
the number of shares of any such class or series to the extent permitted by
Delaware Law.
FIFTH: (a) The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors consisting of not
less than three nor more than ten directors, the exact number of directors to
be determined from time to time solely by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors.
(b) The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as
nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors. Each director shall serve for
a term ending on the date of the third annual meeting of stockholders next
following the annual meeting at which such director was elected, provided
that directors initially designated as Class I directors shall serve for a
term ending on the date of the 1997 annual meeting, directors initially
designated as Class II directors shall serve for a term ending on the date
of the 1998 annual meeting, and directors initially designated as Class III
directors shall serve for a term ending on the date of the 1999 annual
meeting. Notwithstanding the foregoing, each director shall hold office
until such director's successor shall have been duly elected and qualified
or until such director's earlier death, resignation or removal. In the
event of any change in the number of directors, the Board of Directors
shall apportion any newly created directorships among, or reduce the number
of directorships in, such class or classes as shall equalize, as nearly as
possible, the number of directors in each class. In no event will a
decrease in the number of directors shorten the term of any incumbent
director.
(c) There shall be no cumulative voting in the election of
directors. Election of directors need not be by written ballot unless the
bylaws of the Corporation so provide.
(d) Vacancies on the Board of Directors resulting from death,
resignation, removal or otherwise and newly created directorships resulting
from any increase in the number of directors may be filled solely by a
majority of the directors then in office (although less than a quorum) or by
the sole remaining director, and each director so elected shall hold office
for a term that shall coincide with the term of the Class to which such
director shall have been elected.
(e) No director may be removed from office by the stockholders
except for cause with the affirmative vote of the holders of not less than a
majority of the total voting power of all outstanding securities of the
Corporation then entitled to vote generally in the election of directors,
voting together as a single class.
(f) Notwithstanding the foregoing, whenever the holders of one
or more classes or series of Preferred Stock shall have the right, voting
separately as a class or series, to elect directors, the election, term of
office, filling of vacancies, removal and other features of such
directorships shall be governed by the terms of the resolution or
resolutions adopted by the Board of Directors pursuant to ARTICLE FOURTH
applicable thereto, and such directors so elected shall not be subject to
the provisions of this ARTICLE SIXTH unless otherwise provided therein.
SIXTH: The Board of Directors shall have the power to adopt,
amend or repeal the bylaws of the Corporation.
The stockholders may adopt, amend or repeal the bylaws only with
the affirmative vote of the holders of not less than 80% of the total voting
power of all outstanding securities of the Corporation then entitled to vote
generally in the election of directors, voting together as a single class.
SEVENTH: Any action required or permitted to be taken at any
annual or special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with Delaware Law and may not be taken by written consent of
stockholders without a meeting.
EIGHTH: Special meetings of the stockholders may be called by
the Board of Directors, the Chairman of the Board of Directors, the
President or the Secretary of the Corporation and may not be called by any
other person. Notwithstanding the foregoing, whenever holders of one or
more classes or series of Preferred Stock shall have the right, voting
separately as a class or series, to elect directors, such holders may call,
pursuant to the terms of the resolution or resolutions adopted by the Board
of Directors pursuant to ARTICLE FOURTH, special meetings of holders of
such Preferred Stock.
NINTH: (1) A director of the Corporation shall, to the fullest
extent permitted by Delaware Law, not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(2)(a) Each person (and the heirs, executors or administrators
of such person) who was or is a party or is threatened to be made a party
to, or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture,
trust or other enterprise, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by Delaware Law. The right to
indemnification conferred in this ARTICLE NINTH shall also include the
right to be paid by the Corporation the expenses incurred in connection
with any such proceeding in advance of its final disposition to the fullest
extent authorized by Delaware Law. The right to indemnification conferred
in this ARTICLE NINTH shall be a contract right.
(b) The Corporation may, by action of its Board of Directors,
provide indemnification to such of the employees and agents of the
Corporation to such extent and to such effect as the Board of Directors
shall determine to be appropriate and authorized by Delaware Law.
(3) The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss incurred by such person in any such capacity or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under Delaware Law.
(4) The rights and authority conferred in this ARTICLE NINTH shall
not be exclusive of any other right which any person may otherwise have or
hereafter acquire.
(5) Neither the amendment nor repeal of this ARTICLE NINTH, nor
the adoption of any provision of this Certificate of Incorporation or the
bylaws of the Corporation, nor, to the fullest extent permitted by Delaware
Law, any modification of law, shall eliminate or reduce the effect of this
ARTICLE NINTH in respect of any acts or omissions occurring prior to such
amendment, repeal, adoption or modification.
TENTH: (1) Any direct or indirect purchase or other
acquisition by the Corporation of any Equity Security of any class or
series from any Five Percent Holder that has been the Beneficial Owner of
such security for less than two years prior to the earlier of the date of
such purchase or acquisition or any agreement in respect thereof at a price
in excess of the Fair Market Value thereof, shall, in addition to any
affirmative vote required by law or otherwise and except as expressly
provided in this ARTICLE TENTH, require approval by the affirmative vote of
the holders of not less than a majority of the total voting power of all
outstanding Voting Securities, excluding Voting Securities Beneficially
Owned by such Five Percent Holder. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law, in this Certificate of Incorporation
or in any agreement with any national securities exchange or otherwise.
Notwithstanding any other provision of this Article TENTH, the foregoing
majority voting requirement shall not be applicable with respect to (i) any
purchase or other acquisition of an Equity Security made as part of a
tender or exchange offer by the Corporation to purchase Equity Securities
of the same class made on the same terms to all holders of such securities,
(ii) a purchase program effected on the open market and not the result of a
privately-negotiated transaction, or (iii) any optional or required
redemption of an Equity Security pursuant to the terms of such security.
(2) For purposes of this ARTICLE TENTH:
(a) The terms "Affiliate" and "Associate" shall have the
meanings ascribed to them in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) The term "Beneficial Owner" shall mean any Person which
beneficially owns (within the meaning of Rule 13d-3 of the General Rules
and Regulations under the Exchange Act) any Voting Securities or who has
the right to acquire any such beneficial ownership (whether or not such
right is exercisable immediately, with the passage of time or subject to
any condition), including any right to acquire pursuant to any agreement,
contract, arrangement or understanding, or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise. A Person shall
be deemed the Beneficial Owner of all Voting Securities of which any
Affiliate or Associate of such Person is the Beneficial Owner.
(c) The term "Equity Security" means an equity security of the
Corporation within the meaning ascribed to such term in Section 3(a)(11) of
the Exchange Act.
(d) The term "Fair Market Value" means, in the case of any
Equity Security, the closing sale price on the trading day immediately
preceding the earlier of the date of any purchase or acquisition subject to
paragraph 1 of this ARTICLE TENTH and the date of any agreement in respect
thereof (such earlier date being referred to herein as the "Valuation
Date") of a share of such Equity Security on the principal United States
securities exchange registered under the Exchange Act on which such stock
is listed; or, if such security is not listed on any such exchange, the
highest closing bid quotation with respect to a share of such security on
the Valuation Date on the National Association of Securities Dealers, Inc.
Automated Quotation System or any similar system then in use; or if no such
quotations are available, the fair market value of such security on the
Valuation Date as determined by the Board of Directors in good faith.
(e) The term "Five Percent Holder" shall mean and include any
Person which, together with its Affiliates and Associates, is the
Beneficial Owner of an aggregate of 5% or more of the outstanding shares of
Common Stock or of the total voting power of all outstanding Voting
Securities, and any Affiliate or Associate of any such Person, provided
that for purposes of this ARTICLE TENTH, the term Five Percent Holder shall
not include any trustee or fiduciary when acting in such capacity with
respect to any employee benefit plan of the Corporation or a wholly owned
subsidiary of the Corporation.
(f) The term "Person" shall mean any individual, corporation,
limited liability company, partnership or other entity and shall include
any group comprised of any Person and any other Person with whom such
Person or any Affiliate or Associate of such Person has any agreement,
arrangement or understanding, directly or indirectly, for the purpose of
acquiring, holding, voting or disposing of Voting Securities, and each
Person which is a member of such group and any Affiliate or Associate of
any such member.
(g) The term "Voting Securities" shall mean all outstanding
shares of Common Stock and all other outstanding securities of the
Corporation, if any, which are then entitled to vote generally in the
election of directors.
(h) In any determination whether a Person is a Five Percent
Holder for purposes of this ARTICLE TENTH, the relevant class of securities
outstanding shall be deemed to comprise all such securities deemed owned by
such Person and its Affiliates and Associates through application of
paragraph 2(b) of this ARTICLE TENTH, but shall not include any other
securities of such class which may be issuable pursuant to any agreement,
contract, arrangement or understanding, or upon exercise of conversion
rights, exchange rights, warrants or options, or otherwise.
(3) The Board of Directors shall have the power to interpret
all the provisions of this ARTICLE TENTH and their application to a
particular transaction, including, without limitation, the power to
determine (a) whether a Person is a Five Percent Holder, (b) the number of
shares of Voting Securities or other Equity Securities of which any Person
and its Affiliates and Associates are the Beneficial Owners, (c) whether a
Person is an Affiliate or Associate of another, (d) subject to Paragraph
2(d) of this ARTICLE TENTH, the Fair Market Value of any Equity Security
and whether a price is above such Fair Market Value as of a given date, and
(e) such other matters with respect to which a determination is required
under this ARTICLE TENTH. Any such determination made by the Board of
Directors shall be conclusive and binding to the fullest extent permitted
by law.
ELEVENTH: The Corporation reserves the right to amend this
Certificate of Incorporation in any manner permitted by the Delaware Law
and all rights and powers conferred upon stockholders, directors and
officers herein are granted subject to this reservation. Notwithstanding
the foregoing, the provisions set forth in ARTICLE FIFTH through ARTICLE
ELEVENTH, inclusive, may not be repealed or amended in any respect, and no
other provision may be adopted, amended or repealed which would have the
effect of modifying or permitting the circumvention of the provisions set
forth in ARTICLE FIFTH through ARTICLE ELEVENTH, inclusive, unless such
action is approved by the affirmative vote of the holders of not less than
80% of the total voting power of all outstanding securities of the
Corporation then entitled to vote generally in the election of directors,
voting together as a single class.
IN WITNESS WHEREOF, Footstar, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its Chairman and Chief
Executive Officer and attested to by its Secretary this ___ day of
________________, 1996.
Footstar, Inc.
By:__________________________
Name: J.M. Robinson
Title: Chairman and Chief Executive
Officer
ATTEST:__________________
Name:
Title: Secretary
EXHIBIT 3.2
BYLAWS
OF
Footstar, Inc.
* * * * *
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be in
the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the
Corporation may require.
Section 3. Books. The books of the Corporation may be kept within
or without of the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place of Meetings. All meetings of
stockholders shall be held at such place, either within or without the State
of Delaware, on such date and at such time as may be determined from time to
time by the Board of Directors (or the Chairman of the Board in the absence of
a designation by the Board of Directors).
Section 2. Annual Meetings. Annual meetings of stockholders,
commencing with the year 1997, shall be held to elect directors and transact
such other business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of stockholders may
be called by the Board of Directors or the Chairman of the Board of Directors,
the President or the Secretary of the Corporation and may not be called by any
other person. Notwithstanding the foregoing, whenever holders of one or more
classes or series of Preferred Stock shall have the right, voting separately
as a class or series, to elect directors, such holders may call, pursuant to
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to Article Four of the certificate of incorporation, special meetings
of holders of such Preferred Stock.
Section 4. Notice of Meetings and Adjourned Meetings; Waivers of
Notice. (a) Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting shall be given which
shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
Unless otherwise provided by the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended ("Delaware Law"), such
notice shall be given not less than 10 nor more than 60 days before the date
of the meeting to each stockholder of record entitled to vote at such meeting.
Unless these bylaws otherwise require, when a meeting is adjourned to another
time or place (whether or not a quorum is present), notice need not be given
of the adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than 30 days, or after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
(b) A written waiver of any such notice signed by the person
entitled thereto, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 5. Quorum. Unless otherwise provided under the certificate
of incorporation or these bylaws and subject to Delaware Law, the presence, in
person or by proxy, of the holders of a majority of the outstanding capital
stock of the Corporation entitled to vote at a meeting of stockholders shall
constitute a quorum for the transaction of business.
Section 6. Voting. (a) Unless otherwise provided in the
certificate of incorporation and subject to Delaware Law, each stockholder
shall be entitled to one vote for each outstanding share of capital stock of
the Corporation held by such stockholder. Unless otherwise provided in
Delaware Law, the certificate of incorporation or these bylaws, the
affirmative vote of a majority of the shares of capital stock of the
Corporation present, in person or by proxy, at a meeting of stockholders and
entitled to vote on the subject matter shall be the act of the stockholders.
(b) Each stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to a corporate action in writing without a
meeting may authorize another person or persons to act for him or her by
proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period.
Section 7. No Action by Consent. Any action required or
permitted to be taken at any annual or special meeting of stockholders may be
taken only upon the vote of stockholders at an annual or special meeting duly
noticed and called in accordance with Delaware Law and may not be taken by
written consent of stockholders without a meeting.
Section 8. Organization. At each meeting of stockholders, the
Chairman of the Board, if one shall have been elected, (or in his or her
absence or if one shall not have been elected, the President) shall act as
chair of the meeting. The Secretary (or in his or her absence or inability
to act, the person whom the chair of the meeting shall appoint secretary of
the meeting) shall act as secretary of the meeting and keep the minutes
thereof.
Section 9. Order of Business. The order of business and rules of
conduct at all meetings of stockholders shall be as determined by the chair of
the meeting.
Section 10. Nomination of Directors. Only persons who are
nominated in accordance with the procedures set forth in these bylaws shall be
eligible to serve as directors. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a meeting of stockholders
(a) by or at the direction of the Board of Directors or (b) by any stockholder
of the Corporation who is a stockholder of record at the time of giving of
notice provided for in this Section 10, who shall be entitled to vote for the
election of directors at the meeting and who complies with the notice
procedures set forth in this Section 10. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant
to timely notice in writing to the secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th
day following the day on which such notice of the date of the meeting or such
public disclosure was given or made. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); and (b) as to the stockholder giving the notice (i) the
name and address, as they appear on the Corporation's books, of such
stockholder and (ii) the class and number of shares of the Corporation which
are beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which
pertains to the nominee. No person shall be eligible to serve as a director
of the Corporation unless nominated in accordance with the procedures set forth
in this bylaw. The chair of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the bylaws, and if he or she
should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded. Notwithstanding the foregoing
provisions of this Section 10, a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, and the rules
and regulations thereunder with respect to the matters set forth in this
Section.
Section 11. Notice of Business. At any meeting of the
stockholders, only such business shall be conducted as shall have been brought
before the meeting (a) by or at the direction of the Board of Directors or (b)
in the case of an annual meeting of stockholders, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of the notice
provided for in this Section 11, who shall be entitled to vote at such meeting
and who complies with the notice procedures set forth in this Section 11. For
business to be properly brought before an annual meeting of stockholders by a
stockholder, the stockholder must have given timely notice thereof in writing
to the secretary of the Corporation. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Corporation not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be received no later
than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was
given or made. A stockholder's notice to the secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business, (c) the class and number of shares of the Corporation which are
beneficially owned by the stockholder and (d) any material interest of the
stockholder in such business. Notwithstanding anything in the bylaws to the
contrary, no business shall be conducted at a stockholder meeting except in
accordance with the procedures set forth in this Section 11, and no business
shall be brought by a stockholder before a special meeting. The chair of the
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting and in accordance with
the provisions of the bylaws, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing, provisions of
this Section 11, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, and the rules and
regulations thereunder with respect to the matters set forth in this Section
11.
ARTICLE III
DIRECTORS
Section 1. General Powers. Except as otherwise provided in
Delaware Law or the certificate of incorporation, the business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors.
Section 2. Number, Classes, Term of Office, etc. The Board of
Directors shall consist of not less than three nor more than ten directors,
with the exact number of directors to be determined from time to time solely by
resolution adopted by the affirmative vote of a majority of the entire Board
of Directors. The directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the
entire Board of Directors. Except as otherwise provided in the certificate of
incorporation, each director shall serve for a term ending on the date of the
third annual meeting of stockholders next following the annual meeting at
which such director was elected. Notwithstanding the foregoing, each director
shall hold office until such director's successor shall have been duly elected
and qualified or until such director's earlier death, resignation or removal.
Directors need not be stockholders. The provisions of this Section 2 shall be
subject, in each case, to the rights of holders of one or more series of
Preferred Stock of the Corporation with respect to the election of directors
set forth in Section 15 of this Article III.
Section 3. Quorum and Manner of Acting. Unless the certificate of
incorporation or these bylaws require a greater number, a majority of the
total number of directors shall constitute a quorum for the transaction of
business, and the affirmative vote of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of
Directors. When a meeting is adjourned to another time or place (whether or
not a quorum is present), notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the Board of Directors may
transact any business which might have been transacted at the original
meeting. If a quorum shall not be present at any meeting of the Board of
Directors the directors present thereat may adjourn the meeting, from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 4. Time and Place of Meetings. The Board of Directors
shall hold its meetings at such place, either within or without the State of
Delaware, and at such time as may be determined from time to time by the Board
of Directors (or the Chairman in the absence of a determination by the Board
of Directors).
Section 5. Annual Meeting. The Board of Directors shall meet for
the purpose of electing officers and transacting other business, as soon as
practicable after each annual meeting of stockholders, on the same day and at
the same place where such annual meeting shall be held. Notice of such
meeting need not be given. In the event such annual meeting is not so held,
the annual meeting of the Board of Directors may be held at such place either
within or without the State of Delaware, on such date and at such time as shall
be specified in a notice thereof given as hereinafter provided in Section 7 of
this Article III or in a waiver of notice thereof signed by any director who
chooses to waive the requirement of notice.
Section 6. Regular Meetings. After the place and time of regular
meetings of the Board of Directors shall have been determined and notice
thereof shall have been once given to each member of the Board of Directors,
regular meetings may be held without further notice being given.
Section 7. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President and
shall be called by the Chairman of the Board, President or Secretary on the
written request of three directors. Notice of special meetings of the Board of
Directors shall be given to each director at least three days before the date
of the meeting in such manner as is determined by the Board of Directors.
Section 8. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. Any such committee, to the extent provided in the resolution
of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; but no such committee shall
have the power or authority in reference to amending the certificate of
incorporation, adopting an agreement of merger or consolidation, recommending
to the stockholders the sale, lease or exchange of all or substantially all of
the Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending
the bylaws of the Corporation; and unless the resolution of the Board of
Directors or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
Section 9. Action by Consent. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 10. Telephonic Meetings. Unless otherwise restricted by
the certificate of incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or such committee, as the
case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
Section 11. Resignation. Any director may resign at any time by
giving written notice to the Board of Directors or to the Secretary of the
Corporation. The resignation of any director shall take effect upon receipt
of notice thereof or at such later time as shall be specified in such notice;
and unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 12. Vacancies. Unless otherwise provided in the
certificate of incorporation, vacancies on the Board of Directors resulting
from death, resignation, removal or otherwise and newly created directorships
resulting from any increase in the number of directors may be filled solely by
a majority of the directors then in office (although less than a quorum) or by
the sole remaining director. Whenever the holders of any class or classes of
stock or series thereof are entitled to elect one or more directors by the
certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of directors
elected by such class or classes or series thereof then in office, or by a
sole remaining director so elected. Each director so elected shall hold
office for a term that shall coincide with the term of the Class to which such
director shall have been elected. If there are no directors in office, then
an election of directors may be held in accordance with Delaware Law. Unless
otherwise provided in the certificate of incorporation, when one or more
directors shall resign from the Board, effective at a future date, a majority
of the directors then in office, including those who have so resigned, shall
have the power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in the filling of other
vacancies.
Section 13. Removal. No director may be removed from office
by the stockholders except for cause with the affirmative vote of the holders
of not less than a majority of the total voting power of all outstanding
securities of the corporation then entitled to vote generally in the election
of directors, voting together as a single class.
Section 14. Compensation. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall
have authority to fix the compensation of directors, including fees and
reimbursement of expenses.
Section 15. Preferred Directors. Notwithstanding anything
else contained herein, whenever the holders of one or more classes or series
of Preferred Stock shall have the right, voting separately as a class or
series, to elect directors, the election, term of office, filling of vacancies,
removal and other features of such directorships shall be governed by the
terms of the resolutions adopted by the Board of Directors pursuant to the
certificate of incorporation applicable thereto, and such directors so elected
shall not be subject to the provisions of Sections 2, 12 and 13 of this
Article III unless otherwise provided therein.
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The principal officers of the
Corporation shall be a Chairman of the Board, a Chief Executive Officer, a
President, one or more Vice Presidents, a Treasurer and a Secretary who shall
have the duty, among other things, to record the proceedings of the meetings
of stockholders and directors in a book kept for that purpose. The
Corporation may also have such other principal officers, including one or more
Controllers, as the Board may in its discretion appoint. One person may hold
the offices and perform the duties of any two or more of said offices, except
that no one person shall hold the offices and perform the duties of President
and Secretary.
Section 2. Election and Term of Office. The principal officers of
the Corporation shall be elected annually by the Board of Directors at the
annual meeting thereof. Each such officer shall hold office until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal. Any vacancy in any office shall be filled in such
manner as the Board of Directors shall determine.
Section 3. Subordinate Officers. In addition to the principal
officers enumerated in Section 1 of this Article IV, the Corporation may have
one or more Assistant Treasurers, Assistant Secretaries and Assistant
Controllers and such other subordinate officers, agents and employees as the
Board of Directors may deem necessary, each of whom shall hold office for such
period as the Board of Directors may from time to time determine. The Board
of Directors may delegate to any principal officer the power to appoint and to
remove any such subordinate officers, agents or employees.
Section 4. Removal. Except as otherwise permitted with respect to
subordinate officers, any officer may be removed, with or without cause, at
any time, by resolution adopted by the Board of Directors.
Section 5. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors (or to a principal officer if
the Board of Directors has delegated to such principal officer the power to
appoint and to remove such officer). The resignation of any officer shall
take effect upon receipt of notice thereof or at such later time as shall be
specified in such notice; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 6. Powers and Duties. The officers of the Corporation
shall have such powers and perform such duties incident to each of their
respective offices and such other duties as may from time to time be conferred
upon or assigned to them by the Board of Directors.
ARTICLE V
GENERAL PROVISIONS
Section 1. Fixing the Record Date. (a) In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors,
and which record date shall not be more than 60 nor less than 10 days before
the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on
the day preceding the day on which notice is given, or, if notice is waived,
at the close of business on the day preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect
of any change, conversion or exchange of stock, or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
Section 2. Dividends. Subject to limitations contained in Delaware
Law and the certificate of incorporation, the Board of Directors may declare
and pay dividends upon the shares of capital stock of the Corporation, which
dividends may be paid in cash, in property or in shares of the capital stock
of the Corporation.
Section 3. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 4. Voting of Stock Owned by the Corporation. Unless
otherwise ordered by the Board of Directors, the Chairman of the Board may
authorize any person, on behalf of the Corporation, to attend, vote at and
grant proxies to be used at any meeting of stockholders of any corporation
(except this Corporation) in which the Corporation may hold stock.
Section 5. Authorized Signatures for Instruments of Payment.
All checks, notes, drafts or other instruments for the payment of money shall
be signed on behalf of the Corporation by such person or persons and in such
manner as the Board of Directors may prescribe by resolution from time to time.
Section 6. Transfer of Shares. Shares of the stock of the
Corporation may be transferred on the register of stockholders of the
Corporation by the holder thereof in person or by his duly authorized attorney
upon surrender of a certificate therefor properly endorsed.
Section 7. Issue, Transfer and Registration of Share
Certificates; Replacement Certificates. The Board of Directors shall have
power and authority to make all such rules and regulations as it may deem
expedient concerning the issue and transfer of certificates for shares of the
stock of the Corporation as well as for the issuance of new certificates in
lieu of those which may be lost or destroyed, and may require of any
stockholder requesting replacement of lost or destroyed certificates, a bond
in such amount and in such form as the Board may deem expedient to indemnify
the Corporation, and/or the transfer agents, and/or the registrars of its
stock against any claims arising in connection therewith.
Section 8. Transfer Agents and Registrars. The Board of
Directors may appoint one or more transfer agents and one or more registrars
of transfer and may require all stock certificates to be countersigned by such
transfer agent and registered by such registrar of transfers on the stock
register. One person or organization may serve as both transfer agent and
registrar.
Section 9. Amendments. These bylaws or any of them, may be
altered, amended or repealed, or new bylaws may be made, by the Board of
Directors or by the affirmative vote of the holders of not less than 80% of
the total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class.
ARTICLE VI
DIVISIONS
Section 1. Organization. The Board of Directors may cause the
business and operations of the Corporation to be divided into divisions based
upon character or type of operations, operating units, or upon such other
basis of division as the Board of Directors may from time to time determine to
be advisable, and may cause the business and operations of any such division
to be further divided into subdivisions or departments if deemed advisable by
the Board of Directors and upon such basis of subdivision as the Board of
Directors may determine.
Section 2. Officers of Divisions. Unless the Board of
Directors of the Corporation provides otherwise, the Chairman of the Board or
the Chief Executive Officer may provide for the appointment of officers for
each division into which any of the activities of this Corporation may be
divided, with such duties as such officer or the Board of Directors of the
Corporation may from time to time determine. Officers of a division may be
designated by such titles as President, Executive Vice President, Senior Vice
President, Vice President, Secretary, Assistant Secretary, Treasurer,
Assistant Treasurer, or Controller, as the Board of Directors of the
Corporation may from time to time determine. The authority of the officers of
each division shall be subject to the control of, and shall be limited to acts
and transactions in conformity with the policies of, the Board of Directors of
the Corporation, and may be further limited to acts and transactions
pertaining to the business of this corporation which such division is
authorized to transact and perform. Individuals shall be appointed as
divisional officers, and may be removed as such, by the Chairman of the Board
of Directors. One person may hold more than one of the divisional or
departmental offices. Any general officer of the Corporation shall be
eligible for appointment to one or more offices in one or more divisions or
departments, but a divisional or departmental officer, as such, shall not be
an officer of the Corporation.
EXHIBIT 10.2
TAX DISAFFILIATION AGREEMENT
between
MELVILLE CORPORATION,
on behalf of itself and its
Post-Distribution Affiliates
and
FOOTSTAR, INC.,
on behalf of itself and its
Post-Distribution Affiliates
Table of Contents
Page
1. Definitions.......................................................... 2
2. Federal and State Taxes--Administrative and Compliance............... 10
(a) Sole Tax Sharing Agreement..................................... 10
(b) Designation of Agent........................................... 10
(c) Pre-Distribution Period Returns................................ 12
3. Consolidated Federal, Consolidated State and Unitary State Taxes --
Allocation of Taxes.................................................. 12
(a) General........................................................ 12
(b) Estimated Payments............................................. 12
(c) Payment of Taxes at Year-End................................... 13
(d) Carrybacks and Certain Other Matters........................... 16
4. Other Taxes.......................................................... 19
5. Certain Representations and Covenants................................ 20
(a) (I) Footstar Representations................................ 20
(II) Melville Representations................................ 21
(III) Footstar and Melville Representations................... 21
(b) Footstar Covenants............................................. 21
(c) Melville Covenants............................................. 23
(d) Exceptions..................................................... 24
6. Indemnities.......................................................... 25
(a) Footstar Indemnity............................................. 25
(b) Melville Indemnity............................................. 26
(c) Discharge of Indemnity......................................... 28
(d) Tax Benefits................................................... 29
(e) Refunds........................................................ 30
(f) Clerical Errors................................................ 30
(g) Method of Calculation.......................................... 31
7. Communication and Cooperation........................................ 32
(a) Consult and Cooperate.......................................... 32
(b) Provide Information............................................ 33
(c) Tax Attribute Matters.......................................... 34
8. Audits and Contest................................................... 34
9. Payments............................................................. 35
10. Notices.............................................................. 37
11. Costs and Expenses................................................... 37
12. Effectiveness; Termination and Survival.............................. 38
13. Section Headings..................................................... 38
14. Entire Agreement; Amendments and Waivers............................. 38
(a) Entire Agreement............................................... 38
(b) Waiver......................................................... 38
15. Governing Law and Interpretation..................................... 39
16. Dispute Resolution................................................... 39
17. Counterparts......................................................... 39
18. Assignments; Third Party Beneficiaries............................... 39
Exhibit A................................................................ 43
Exhibit B................................................................ 45
TAX DISAFFILIATION AGREEMENT
This Agreement is entered into as of the [ ] day of [ ],
1996 between Melville Corporation ("Melville"), a New York corporation,
on behalf of itself and its Post-Distribution Affiliates, and Footstar, Inc.
("Footstar"), a Delaware corporation, on behalf of itself and its
Post-Distribution Affiliates.
W I T N E S S E T H:
WHEREAS, Melville and Footstar intend to enter into a Distribution
Agreement dated [ ], 1996 (the "Distribution Agreement"),
providing for the distribution by Melville to its shareholders of all of the
common stock of Footstar (the "Distribution");
WHEREAS, Melville and Footstar desire to set forth their agreement
on the rights and obligations of Melville, Footstar and their respective
Affiliates with respect to the handling and allocation of federal, state,
local and foreign Taxes incurred in Taxable periods beginning prior to the
Distribution Date and various other Tax matters;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties agree as follows:
1. Definitions
(a) As used in this Agreement:
"Affiliate" of any person shall mean any individual, corporation,
partnership or other entity directly or indirectly owning more than 50 percent
of, owned more than 50 percent by, or under more than 50 percent common
ownership with, such person.
"After-Tax Amount" shall mean an additional amount necessary to
reflect the hypothetical Tax consequences of the receipt or accrual of any
payment, using the maximum statutory rate (or rates, in the case of an item
that affects more than one Tax) applicable to the recipient of such payment
for the relevant year, reflecting for example, the effect of the deductions
available for interest paid or accrued and for Taxes such as state and local
income Taxes.
"Code" shall mean the Internal Revenue Code of 1986, as amended,
or any successor thereto.
"Consolidated Federal Tax" shall mean the consolidated Federal Tax
liability of the Melville Consolidated Group for any period as to which a
consolidated Federal Tax Return was or is filed by Melville, or any successor
thereto, for such group.
"Consolidated State Tax" shall mean with respect to each State,
any income or franchise Tax payable with respect to a group of at least two
corporations, other than a Unitary State Tax.
"Distribution" shall mean a distribution by Melville of all of the
common stock of Footstar to its shareholders.
"Distribution Date" shall mean the date on which the Distribution
shall be effected.
"Federal Tax" shall mean any Tax imposed under Subtitle A of the
Code and any related penalty imposed under Subtitle F of the Code.
"Final Determination" shall mean (i) with respect to Federal
Taxes, (A) a "determination" as defined in Section 1313(a) of the Code, or (B)
the date of acceptance by or on behalf of the Internal Revenue Service of Form
870-AD (or any successor form thereto), as a final resolution of Tax liability
for any Taxable period, except that a Form 870-AD (or successor form thereto)
that reserves the right of the taxpayer to file a claim for refund and/or the
right of the Internal Revenue Service to assert a further deficiency shall not
constitute a Final Determination with respect to the item or items so
reserved; (ii) with respect to Taxes other than Federal Taxes, any final
determination of liability in respect of a Tax provided for under applicable
law; (iii) any final disposition by reason of the expiration of the applicable
statute of limitations; and (iv) the payment of Tax by Melville, Footstar, or
any Affiliate of Melville or Footstar, whichever is responsible for payment of
such Tax under applicable law, with respect to any item disallowed or adjusted
by a Taxing Authority, provided that the provisions of Section 8 hereof have
been complied with, or, if such section is inapplicable, that the party
responsible under the terms of this Agreement for such Tax is notified by the
party paying such Tax that it has determined that no action should be taken to
recoup such disallowed item, and the other party agrees with such
determination.
"Footstar Group" shall mean Footstar and its Affiliates
immediately after the Distribution Date, including any predecessors thereto;
provided, however, that for purposes of this Agreement, each Related Footwear
Business for which separate accounting records were kept shall be treated for
purposes of this Agreement like a separate corporation that is a member of the
Footstar Group (including, without limitation, the BOQ, Fan Club, Open
Country, Pimento, Meldisco, Thom McAn and Smart Step activities previously
conducted by Melville); provided further, that if with respect to any
Pre-Distribution Period (or portion thereof) Melville or any of its current or
former Affiliates was involved solely in the conduct of a Related Footwear
Business (including, without limitation, Calzados Ped Regal, S.A. and Thom
McAn Manufacturing, Inc.), such member shall be treated as a member of the
Footstar Group for such Pre-Distribution Period (or portion thereof); and
provided further, that if with respect to any Pre-Distribution Period (or
portion thereof) any Affiliate of Footstar (other than MEP) was not involved
in the conduct of a Related Footwear Business (including, without limitation,
Meldisco HK Limited, during the period it was doing business as Top Gun
Company Limited, and Melville Foreign, Inc., to the extent it is the successor
to Melville Canada Specialty Retailing Inc., TEU Canada Holdings Inc., Erin
Mills TEU, Inc., Fairview TEU, Inc. or Markville Centre TEU, Inc.), such
member shall not be treated as a member of the Footstar Group for such
Pre-Distribution Period (or portion thereof). For the purpose of avoiding
ambiguity, the parties agree that (except as set forth in the last proviso
above) the Pre-Distribution Tax Liability of the Footstar Group includes the
portion of such liability attributable to the corporations (domestic or
foreign) comprising the Meldisco, Footaction (including Open Country and Fan
Club) and Thom McAn (including Smart Step) retail chains and MEP, and to any
business activity conducted by Melville or any of its Affiliates (domestic or
foreign) which is or was a Related Footwear Business.
"Melville Consolidated Group" shall mean, with respect to any
Taxable period, (i) with respect to Consolidated Federal Taxes, the affiliated
group of corporations of which Melville (or a successor) was or is the common
parent (within the meaning of Section 1504 of the Code), (ii) with respect to
Consolidated State Taxes and Unitary State Taxes, the consolidated, combined
or unitary group of which Melville (or a successor) or any of its Affiliates
was or is a member, and (iii) with respect to any Other Tax payable with
respect to a group which includes or included at least one member of the
Melville Group and at least one member of the Footstar Group, such group.
"Melville Group" shall mean, with respect to any Taxable period,
Melville, its Affiliates (including their predecessors and successors) at any
time prior to the Distribution (including, without limitation, the Non-Chain
Corporations) other than those Affiliates comprising the Footstar Group.
"MEP" shall mean Meldisco (Europe) Purchasing Ltd. and its
predecessors and successors, and current and former subsidiaries, including
but not limited to MIT Sales AG and MEP-Ventas.
"Non-Chain Corporations" shall mean Computer Development, Inc.,
Melville Equipment Leasing Corporation, MC Retail, Inc., Melville Realty
Company and their direct and indirect subsidiaries.
"Other Taxes" is defined in Section 4.
"Post-Distribution Affiliate" shall mean with regard to Melville,
any person that is or that will be an Affiliate of Melville or a successor to
Melville after the Distribution and, with regard to Footstar, any person that
is or that will be an Affiliate of Footstar or a successor to Footstar after
the Distribution.
"Post-Distribution Period" shall mean any taxable period (or
portion thereof) beginning after the close of business on the Distribution
Date.
"Pre-Distribution Period" shall mean any Taxable period ending on
or before the close of business on the Distribution Date; provided that if a
Taxable period ending after the Distribution Date contains any days which fall
prior to or on the Distribution Date, any portion of such Taxable period up to
or including the Distribution Date shall also be included in the
Pre-Distribution Period.
"Pre-Distribution Tax Liability" shall mean (i) the Consolidated
Federal Tax, and (ii) the Consolidated State Tax liability of any group that
includes at least one member of the Melville Group and at least one member of
the Footstar Group, (iii) the Unitary State Tax liability of any group which
includes at least one member of the Melville Group and at least one member of
the Footstar Group, and (iv) any Other Taxes, in each case for any
Pre-Distribution Period.
"Prime" shall mean the rate announced from time to time as "prime"
by Morgan Guaranty Trust Company as its prime rate.
"Referee" is defined in Section 16.
"Related Footwear Business" shall mean any business activity
(including but not limited to those activities related to the conduct of
manufacturing, purchasing, distribution and sales operations) associated with
the Meldisco (including Pimento), Footaction (including Open Country and Fan
Club) or Thom McAn (including BOQ, Pimento and Smart Step) retail chain which
was conducted by the Melville Group, including (but not limited to) the
activities associated with the Meldisco, Open Country, Fan Club, Smart Step
and Thom McAn chains which were conducted by Melville, and excluding any
activity conducted by the Non-Chain Corporations.
"Return" shall mean any Tax return, statement, report or form
(including estimated Tax returns and reports, extension requests and forms,
and information returns and reports) required to be filed with any Taxing
Authority.
"Tax" (and the correlative meaning, "Taxes," "Taxing" and
"Taxable") shall mean (A) any tax imposed under Subtitle A of the Code, any
net income, gross income, gross receipts, alternative or add-on minimum,
sales, use, value-added, goods and services, ad valorem, franchise, profits,
license, withholding, payroll, employment, excise, transfer, recording,
severance, stamp, occupation, premium, property, environmental, custom duty,
or other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and any penalty, addition to tax or
additional amount imposed by a Taxing Authority; (B) any liability of a member
of the Melville Group or the Footstar Group, as the case may be, for the
payment of any amounts of the type described in clause (A) for any Taxable
period resulting from the application of Treasury Regulation Section 1.1502-6
or any similar provision applicable under state, local or foreign law; and (C)
any liability of a member of the Melville Group or the Footstar Group for the
payment of any amounts described in clause (A) as a result of any express or
implied obligation to indemnify any other party.
"Tax Asset" shall mean any net operating loss, net capital loss,
investment Tax credit, foreign Tax credit, target jobs Tax credit, low income
housing credit, research and experimentation credit, charitable deduction or
any other credit or Tax attribute, including additions to basis of property,
which could reduce any Tax, including, without limitation, deductions,
credits, or alternative minimum net operating loss carryforwards related to
alternative minimum Taxes.
"Tax Packages" shall mean one or more packages of information,
including but not limited to the Corptax file and the divisional
reconciliation, that are (i) reasonably necessary for the purpose of preparing
Federal Tax, Consolidated State Tax, Unitary State Tax Returns or Other Tax
returns of the Melville Consolidated Group with respect to a Pre-Distribution
Period and (ii) completed in all material respects in accordance with the
standards that Melville has established for its subsidiaries with respect to
the relevant Pre-Distribution Period.
"Tax Proceeding" shall mean any Tax audit, dispute or proceeding
(whether administrative or judicial).
"Taxing Authority" shall mean any governmental authority (domestic
or foreign) responsible for the imposition of any Tax.
"Unitary State Tax" shall mean, with respect to each State, any
income or franchise Tax payable with respect to a group of at least two
corporations and based upon a group apportionment percentage.
(b) Any term used in this Agreement which is not defined in this
Agreement shall, to the extent the context requires, have the meaning assigned
to it in the Code or the applicable Treasury regulations thereunder and, in
the case of Consolidated State Taxes, Unitary State Taxes, and Other Taxes,
in comparable provisions of applicable law.
2. Federal and State Taxes--Administrative and Compliance
Matters.
(a) Sole Tax Sharing Agreement. The parties acknowledge that
there has not been a Final Determination of the Pre-Distribution Tax
Liability, and that certain members of the Footstar Group are includible in
the Melville Consolidated Group for the Pre-Distribution Period. This
Agreement shall constitute the sole Tax sharing agreement between Melville and
its Post-Distribution Affiliates, on one hand, and Footstar and its
Post-Distribution Affiliates, on the other hand, and, to the extent there is
any inconsistency between this Agreement and any existing Tax sharing
agreements or arrangements, written or unwritten, between Melville and its
Post-Distribution Affiliates, on one hand, and Footstar and its
Post-Distribution Affiliates, on the other hand, this Agreement shall govern.
(b) Designation of Agent. Footstar and each member of the
Footstar Group, with respect to Consolidated Federal Taxes, each hereby
irrevocably designate Melville or its successors as its agent, coordinator,
and administrator, and, with respect to Consolidated State Taxes, Unitary
State Taxes and any Other Taxes payable with respect to a group which includes
at least one member of the Melville Group and at least one member of the
Footstar Group, each hereby irrevocably authorize Melville to designate a
member of the Melville Group, or a successor of such member, as its agent,
coordinator, and administrator, for the purpose of taking any and all actions
(including the execution of waivers of applicable statutes of limitation)
necessary or incidental to the filing of any Return, any amended Return, or
any claim for refund (even where an item or Tax Asset giving rise to an
amended Return or refund claim arises in a Post-Distribution Period), credit
or offset of Tax or any other proceedings, and for the purpose of making
payments to, or collecting refunds from, any Taxing Authority, in each case
relating to any Pre-Distribution Period. Melville or the member of the
Melville Group, as the case may be, as agent, covenants to Footstar that it
shall be responsible to see that all such administrative matters relating
thereto shall be handled promptly and appropriately. Melville shall inform
and consult with Footstar prior to taking any action on behalf of, or which
will have any material impact on the Tax liability of the Footstar Group,
including, without limitation, strategies relating to waivers of any statute
of limitations period that have otherwise expired.
(c) Pre-Distribution Period Returns. Melville and its
Post-Distribution Affiliates will prepare, with the assistance of Footstar and
its Post-Distribution Affiliates, and file the Consolidated Federal Tax
Returns and the Consolidated State and Unitary State Tax Returns for all
Pre-Distribution Periods. With respect to the 1996 year, Footstar and its
Post-Distribution Affiliates shall prepare and deliver to Melville all Tax
Packages within 120 days after the Distribution Date.
3. Consolidated Federal, Consolidated State and Unitary State
Taxes -- Allocation of Taxes.
(a) General. For the 1995 and 1996 Taxable years of the Melville
Consolidated Group, Footstar shall pay, or cause to be paid, to Melville an
amount equal to (i) the Footstar Group's share of the Melville Consolidated
Group's Consolidated Federal Tax and Consolidated State Tax liability,
determined in accordance with Exhibit A to this Agreement, and (ii) the
Footstar Group's share of the Melville Consolidated Group's Unitary State Tax
liability, determined in accordance with Exhibit B to this Agreement.
(b) Estimated Payments. Promptly after Melville or any of its
Affiliates makes an estimated Tax payment with respect to the 1996 Taxable
year (other than a payment which relates solely to minimum Taxes due), whether
or not such payment is made prior to the Distribution Melville shall (i) in
good faith determine the amount of the Footstar Group's share of such
estimated Tax payment (X) in accordance with the principles of Exhibit A to
this Agreement, in the case of an estimated Tax payment in respect of the
Consolidated Federal Tax or any Consolidated State Tax liability of the
Melville Consolidated Group, and (Y) in accordance with the principles of
Exhibit B to this Agreement using 1995 apportionment factors, adjusted for
significant dispositions or transfers of assets, in the case of an estimated
Tax payment in respect of any Unitary State Tax liability of the Melville
Consolidated Group and (ii) deliver a written statement to Footstar reflecting
the determination described above. Footstar shall pay to Melville or Melville
shall pay to Footstar, as appropriate, the amount so determined in accordance
with Section 9 hereof.
(c) Payment of Taxes at Year-End.
(i) Promptly after Melville or any of its Affiliates files
an application to extend the due date of a Return for the 1995 or
1996 Taxable year, whether or not such application is filed prior
to the Distribution, Melville shall (a) in good faith determine
the estimated amount of the Footstar Group's share of the Melville
Consolidated Group's Consolidated Federal Tax or Consolidated
State Tax liability for such Return in accordance with the
principles of Exhibit A to this Agreement or, in the case of a
Unitary State Tax Return, in accordance with the principles of
Exhibit B to this Agreement using 1994 and 1995 apportionment
factors for 1995 and 1996, respectively, adjusted for significant
dispositions or transfers of assets, and (b) deliver a written
statement to Footstar reflecting the determination described
above. Footstar shall pay to Melville, or Melville shall pay to
Footstar, as appropriate, in accordance with Section 9 hereof, an
amount equal to the difference, if any, between (x) the amounts so
determined and (y) the aggregate amount of estimated installments
paid with respect to the Footstar Group's share of such Tax
liability for such year made pursuant to Section 3(b), adjusted to
take into account amounts previously paid or received by Footstar
or any Affiliate in connection with any previous extension
payments made either before or after the Distribution.
(ii) Promptly after Melville or a member of the Melville
Consolidated Group files a Consolidated Federal Tax Return,
Consolidated State Tax Return or Unitary State Tax Return, as the
case may be, for which payments are to be made under this
Agreement, whether or not such Return is filed prior to the
Distribution, Melville shall deliver to Footstar a written
statement setting forth the difference between (x) the Footstar
Group's share of the Melville Consolidated Group's Consolidated
Federal Tax, Consolidated State Tax or Unitary State Tax liability
for such Return, determined in accordance with the principles of
Exhibit A or B to this Agreement, as the case may be, and (y) the
aggregate amount of payments with respect to the Footstar Group's
share of such Tax liability for such year made pursuant to Section
3(b) or Section 3(c)(i). Footstar shall pay to Melville, or
Melville shall pay to Footstar, as appropriate, in accordance with
Section 9 hereof, an amount equal to such difference, if any.
(iii) If the determination of the Footstar Group's share of
the Melville Consolidated Group's Consolidated Federal Tax,
Consolidated State Tax or Unitary State Tax reflects a Tax Asset
that may under applicable law be used to reduce a Federal Tax,
Consolidated State Tax or Unitary State Tax liability, as the case
may be, of any member of the Melville Group for any Tax period,
Melville shall pay to Footstar the actual Tax saving produced by
such Tax Asset within 30 days of the receipt by Melville or any
Melville Affiliate of any refund, credit or other offset
attributable thereto from the relevant Taxing Authority. The
amount of any such tax saving for any tax period shall be the
amount of the reduction in Taxes payable to a Taxing Authority (or
the increase in any Tax refund) with respect to such period as
compared to the Taxes that would have been payable to a Taxing
Authority (or the Tax refund that would have been received) with
respect to such period in the absence of such Tax Asset; provided,
however, that in the event that the use in a Pre-Distribution
Period of a Tax Asset, attributable to any member of the Footstar
Group, gives rise to, or increases, any alternative minimum Tax
liability, Melville shall pay to Footstar, or Footstar shall pay
to Melville, as the case may be, an amount equal to the difference
between (i) the maximum hypothetical Tax savings that could result
from the use of such Tax Asset determined using the maximum
applicable regular tax rate in effect for such Taxable year (or,
in the case of a credit, 100 percent) and (ii) the Footstar
Group's share of the alternative minimum Tax liability or increase
in alternative minimum Tax liability, as the case may be,
determined in accordance with Exhibit A to this Agreement.
(d) Carrybacks and Certain Other Matters.
(i) Subject to the provisions of Exhibit A hereto,
Melville agrees to pay Footstar the actual benefit received by the
Melville Consolidated Group in any Tax period from the use in any
Pre-Distribution Period of any Tax Asset arising in a
Post-Distribution Period. Such benefit shall be considered equal
to the excess of the amount of Tax that would have been payable
(or of the Tax refund that would have been receivable) by the
Melville Consolidated Group in any Tax period in the absence of
such carryback over the amount of Tax actually payable (or of the
Tax refund actually receivable) by the Melville Consolidated Group
in such period; provided, however, that in the event that the use
in a Pre-Distribution Period of a Tax Asset, attributable to any
member of the Footstar Group, gives rise to, or increases, any
alternative minimum Tax liability, Melville shall pay to Footstar,
or Footstar shall pay to Melville, as the case may be, an amount
equal to the difference between (i) the maximum hypothetical Tax
savings that could result from the use of such Tax Asset
determined using the maximum applicable regular tax rate in effect
for such Taxable year and (ii) the Footstar Group's share of the
alternative minimum Tax liability or increase in alternative
minimum Tax liability, as the case may be, determined in
accordance with Exhibit A to this Agreement. Payment of the
amount of such benefit shall be made within 30 days of the receipt
by any member of the Melville Consolidated Group of any refund,
credit or other offset attributable thereto from the relevant
Taxing Authority.
(ii) If, subsequent to the payment by Melville to Footstar
of any amount referred to in Section 3(d)(i) above, there shall be
(A) a Final Determination which results in a disallowance or a
reduction of the Tax Asset so carried back or (B) a reduction in
the amount of the benefit realized by the Melville Consolidated
Group from such carryback as a result of a Final Determination or
the use by the Melville Consolidated Group of a Tax Asset of the
Melville Group, Footstar shall repay to Melville the amount which
would not have been payable to Footstar pursuant to Section 3(d)(i)
had the amount of the benefit been determined in light of such
event. In addition, Footstar shall hold Melville and each of its
Post-Distribution Affiliates harmless for any penalty or interest
payable by any member of the Melville Consolidated Group as a
result of any such event referred to in the preceding sentence.
Any amounts payable under this Section 3(d)(ii) shall be paid by
Footstar to Melville within 30 days of demand therefor. To the
extent Footstar's repayment obligation arises due to the use by the
Melville Consolidated Group of a Tax asset of a member of the
Melville Group, Footstar shall pay Melville interest on the amount
repaid to Melville from the date such amount was paid by Melville
to Footstar until such repayment at Prime.
(iii) The parties hereto acknowledge that, in connection
with the disposition or deconsolidation of certain members of the
Melville Group, Melville has entered into, and intends to enter
into, agreements similar to this Agreement (the "Melville Group
Agreements") relating to Tax matters involving such members.
Notwithstanding anything to the contrary in this Agreement, to the
extent that (i) Melville would be required under Section 3 of this
Agreement to make a payment to Footstar in respect of a Tax saving
or Tax benefit attributable to a Tax Asset of the Footstar Group
and (ii) Melville would be required under a Melville Group
Agreement or Agreements to make a similar payment to a member or
members of the Melville Group in respect of the same Tax saving or
Tax benefit, then the portion of such Tax saving or benefit
attributable to a Tax Asset of the Footstar Group shall be
calculated in accordance with Treasury Regulations Section
1502-21A and any successor thereto.
4. Other Taxes
(a) Liability for all Taxes other than Consolidated Federal
Taxes or Consolidated State or Unitary Taxes ("Other Taxes") attributable to
the Footstar Group or attributable to any lease termination payment made by a
member of the Footstar Group shall be the sole responsibility of Footstar and
its Post-Distribution Affiliates. Liability for all Other Taxes attributable
to the Melville Group (other than as provided in the preceding sentence) shall
be the sole responsibility of Melville and its Post-Distribution Affiliates.
The responsibility for preparing (with Melville's cooperation as provided in
Section 7 hereof) and filing all Returns, and for making all payments to any
Taxing Authority, relating solely to Other Taxes attributable to the Footstar
Group shall be the sole responsibility of Footstar and its Post-Distribution
Affiliates. The responsibility for preparing (with Footstar's cooperation as
provided in Section 7 hereof) and filing all other Returns, and for making all
payments to any Taxing Authority, relating to Other Taxes for any
Pre-Distribution Period shall be the sole responsibility of Melville and its
Post-Distribution Affiliates. Promptly after a payment of Other Taxes by
Melville, or any of its Post-Distribution Affiliates on one hand, or Footstar
or any of its Post-Distribution Affiliates, on the other hand, the paying
party shall notify the non-paying party of the amount of such Other Taxes, if
any, which is attributable to the non-paying party, in accordance with Section
4(c). The non-paying party shall pay to the paying party, in accordance with
Section 9 hereof, such amount.
(b) Footstar shall be entitled to all refunds and credits of
Other Taxes attributable to the Footstar Group, and Melville shall be entitled
to all refunds and credits of Other Taxes attributable to the Melville Group.
(c) The determination of whether Other Taxes are attributable to
the Melville Group, on one hand, or the Footstar Group, on the other hand,
shall be made in accordance with past practices.
(d) Notwithstanding anything to the contrary herein, all
transfer, documentary, sales, use, stamp, registration and other such Taxes
and fees (including any penalties and interest) incurred in connection with
Section 2.02 of the Distribution Agreement dated as of the date hereof among
Melville, Footstar and Footaction Center, Inc. shall be borne and paid equally
by Melville and Footstar. The party that is required by applicable law to
file any Return or make any payment with respect to any such Tax shall do so,
and the other party shall cooperate with respect thereto as necessary. The
non-paying party shall reimburse the paying party in accordance with this
Section 4(d) within 5 business days after it receives notice of the payment of
such Tax.
5. Certain Representations and Covenants.
(a) (I) Footstar Representations. Footstar and its
Post-Distribution Affiliates each represents that, as of the date hereof, and
covenants that on the Distribution Date there is no plan or intention (A) to
liquidate Footstar or to merge or consolidate Footstar with any other person
subsequent to the Distribution, (B) to sell or otherwise dispose of any asset
of Footstar or those of its Post-Distribution Affiliates subsequent to the
Distribution, except in the ordinary course of business and except with
respect to the Thom McAn chain, MEP or the distribution centers located in
Morrow, Georgia, Huntington, Indiana or Clinton, New Jersey, (C) to take any
action inconsistent with the information furnished to Davis Polk & Wardwell in
connection with its tax opinion with respect to the Distribution, (D) issue
stock of Footstar, other than pursuant to the Distribution, representing more
than 20 percent of the total combined voting power or more than 20 percent of
the total value of all classes of Footstar stock.
(II) Melville Representations. Melville and its
Post-Distribution Affiliates each represents that, as of the date hereof, and
covenants that on the Distribution Date there is no plan or intention to take
any action inconsistent with the information furnished to Davis Polk &
Wardwell in connection with its tax opinion with respect to the Distribution.
(III) Footstar and Melville Representations. Footstar and
Melville and their respective Post-Distribution Affiliates each represents
that, as of the date hereof, and covenants that on the Distribution Date
neither Footstar nor Melville and their respective Post-Distribution
Affiliates (as applicable) is aware of any present plan or intention by the
current shareholders of Melville to sell, exchange, transfer by gift, or
otherwise dispose of any of their stock in, or securities of, Melville or
Footstar subsequent to the Distribution.
(b) Footstar Covenants. Footstar covenants to Melville that (i)
during the two-year period following the Distribution Date it will not
liquidate, merge or consolidate with any other person, or sell, exchange,
distribute or otherwise dispose of its assets or those of its Post-Distribution
Affiliates, except in the ordinary course of business and except for the
disposition of assets of the Thom McAn chain or MEP, or the distribution
centers located in Morrow, Georgia, Huntington, Indiana or Clinton, New
Jersey, (ii) following the Distribution, Footstar will, for a minimum of two
years, continue the active conduct of the historic business conducted by
Footstar throughout the five year period prior to the Distribution, (iii)
other than pursuant to the Distribution during the two-year period following
the Distribution Date it will not issue stock of Footstar representing more
than 20 percent of the total combined voting power or more than 20 percent of
the total value of all classes of Footstar stock, (iv) Footstar will not, nor
will it permit any of its Post-Distribution Affiliates to, take any action
inconsistent with the information furnished to Davis Polk & Wardwell in
connection with its tax opinion with respect to the Distribution and (v)
during the period beginning on the Distribution Date and ending upon the
expiration of the statute of limitations period applicable to the Taxable year
in which the Distribution occurs (after giving effect to any extension,
mitigation or waiver thereof), Footstar will not, nor will it permit any of
its Post-Distribution Affiliates to make or change any accounting method,
amend any Tax Return or take any Tax position on any Tax Return, change the
manner in which it conducts its business, take any other action, omit to take
any action or enter into any transaction that results in any increased Tax
liability with respect to a Pre-Distribution Period, or reduction of any Tax
Asset which was created in a Pre-Distribution Period, of the Melville Group or
any member thereof without first obtaining the written consent of an authorized
representative of Melville; provided, however, that if a change in law
(including the enactment of any statute or the issuance of any proposed,
temporary or final regulations, or administrative pronouncement or judicial
decision) would have a material adverse effect on the aggregate Tax liability
of Footstar and its Post-Distribution Affiliates, then, notwithstanding
anything to the contrary in this clause (iii), Footstar shall be entitled to
take, or to permit its Post-Distribution Affiliates to take, such minimum
action as is necessary to eliminate or mitigate the effect of the change in
law. Footstar agrees to notify Melville of any action taken under the proviso
contained in the preceding sentence.
(c) Melville Covenants. Melville covenants to Footstar that (i)
it will not change its year-end for any Tax year beginning prior to January 1,
1997, (ii) it will not, nor will it permit any of its Post-Distribution
Affiliates to, take any action inconsistent with the information furnished to
Davis Polk & Wardwell in connection with its tax opinion with respect to the
Distribution and (iii) during the period beginning on the Distribution Date
and ending upon the expiration of the statute of limitations period applicable
to the Taxable year in which the Distribution occurs (after giving effect to
any extension, mitigation or waiver thereof), Melville will not, nor will it
permit any of its Post-Distribution Affiliates to make or change any
accounting method, amend any Tax Return or take any Tax position on any Tax
Return, change the manner in which it conducts its business, take any other
action, omit to take any action or enter into any transaction that results in
any increased Tax liability with respect to a Pre-Distribution Period or
reduction of any Tax Asset which was created in a Pre-Distribution Period of
the Footstar Group or any member thereof without first obtaining the written
consent of an authorized representative of Footstar; provided, however, that
if a change in law (including the enactment of any statute or the issuance of
any proposed, temporary or final regulations, or administrative pronouncement
or judicial decision) would have a material adverse effect on the aggregate
Tax liability of Melville and its Post-Distribution Affiliates, then,
notwithstanding anything to the contrary in this clause (c), Melville shall be
entitled to take, or to permit its Post-Distribution Affiliates to take, such
minimum action as is necessary to eliminate or mitigate the effect of the
change in law. Melville agrees to notify Footstar of any action taken under
the proviso contained in the preceding sentence.
(d) Footstar and Melville Covenant. The parties hereto agree to
act in good faith in complying with the terms of this Agreement.
(e) Exceptions. Notwithstanding the foregoing, Footstar and its
Post-Distribution Affiliates may take actions inconsistent with the covenants
contained in Section 5(b)(i) through (iv) above, and Melville and its
Post-Distribution Affiliates may take actions inconsistent with the covenants
contained in Section (c)(ii) above, if:
(i) Footstar or Melville, as the case may be, obtains a ruling
from the Internal Revenue Service to the effect that such actions will
not result in the Distribution being taxable to Melville or its
shareholders; or
(ii) Footstar or Melville, as the case may be, obtains an opinion
of counsel recognized as an expert in federal income tax matters and
acceptable to the other party to the same effect as in Section 5(e)(i).
6. Indemnities.
(a) Footstar Indemnity. Footstar and each corporation that is a
Post-Distribution Affiliate of Footstar will jointly and severally indemnify
Melville and its Post-Distribution Affiliates against and hold them harmless
from
(i) any Pre-Distribution Tax Liability assessed pursuant to a
Final Determination, to the extent attributable to an adjustment of any
item of income, gain, gross receipts, loss, credit, deduction or other
Tax attribute of any member of the Footstar Group;
(ii) any liability or damage resulting from a breach by Footstar or
any of its Post-Distribution Affiliates of any representation or
covenant made by Footstar herein; and
(iii) any liability or damage under the securities laws or otherwise
resulting from information furnished by Footstar in connection with the
Distribution.
For the purpose of avoiding ambiguity, the parties agree that (except as set
forth in the third proviso of the definition of "Footstar Group") Footstar and
its Post-Distribution Affiliates shall be responsible for any Tax for a
Pre-Distribution Period attributable to the corporations (domestic or foreign)
comprising the Meldisco (including Pimento), Footaction (including Open
Country and Fan Club) and Thom McAn (including BOQ, Pimento and Smart Step)
retail chains and MEP, and to any business activity conducted by Melville or
any of its Affiliates (domestic or foreign) which is or was a Related Footwear
Business.
(b) Melville Indemnity. Melville and each corporation that is a
Post-Distribution Affiliate of Melville will jointly and severally indemnify
Footstar and its Post-Distribution Affiliates against and hold them harmless
from
(i) any Pre-Distribution Tax Liability, or Tax liability
resulting from the Distribution, other than any such liabilities
described in Section 6(a);
(ii) any Tax liability allocable to a member of the Melville Group
which is a liability of the Footstar Group under clause (B) of the
definition of Tax with respect to any Pre-Distribution Period or any Tax
year of the Melville Consolidated Group which includes (but does not end
on) the Distribution Date;
(iii) any liability or damage resulting from a breach by Melville
or any of its Post-Distribution Affiliates of any representation or
covenant made by Melville herein; and
(iv) any liability or damage under the securities laws or otherwise
resulting from information furnished by Melville in connection with the
Distribution.
For the purpose of avoiding ambiguity, the parties agree that (except as set
forth in the first two provisos of the definition of "Footstar Group")
Melville and its Post-Distribution Affiliates shall be responsible for any Tax
for a Pre-Distribution Period attributable to (x) the corporations (domestic
or foreign) comprising the CVS, Bob's, Linens 'n Things, Wilsons, Kay-Bee,
Marshalls, This End Up, Prints Plus, Chess King, Foxmoor and Accessory Lady
retail chains, (y) the Non-Chain Corporations and (z) to any business activity
conducted by Melville or any of its Affiliates (domestic or foreign) which is
or was directly related to the businesses conducted by the corporations
specified in clauses (x) and (y). If a Post-Distribution Affiliate of
Melville ceases to be an Affiliate of Melville as a result of a sale of its
stock (other than one described in the immediately following sentence) to a
third party (whether or not treated as a sale of stock for Tax purposes), such
Post-Distribution Affiliate shall be released from its obligations under this
Agreement upon such sale and neither Melville nor any of its other
Post-Distribution Affiliates shall have any obligation to indemnify Footstar
or any of its Post-Distribution Affiliates under Section 6(b)(iii) for any
liability or damage attributable to actions taken after such sale by such
Post-Distribution Affiliate. If a Post-Distribution Affiliate of Melville
ceases to be an Affiliate of Melville as a result of one or more public
offerings or a distribution by Melville of its stock, at such time, if such
Post-Distribution Affiliate agrees to continue to be bound by the terms of
this Agreement, any indemnification obligation under Section 6(b)(iii)
attributable to actions taken by such Post-Distribution Affiliate after it
ceases to be an Affiliate of Melville shall be solely the liability of such
Post-Distribution Affiliate, and Footstar and its Post-Distribution Affiliates
shall have no rights against Melville or any of its other Post-Distribution
Affiliates for the payment of such obligation. It is understood by the parties
hereto that the two preceding sentences do not limit in any way the ability of
Melville or its Post-Distribution Affiliates to sell operating assets, rather
than stock, to a third party and, in the case of a sale of operating assets of
any chain other than CVS, Melville shall have no obligation to indemnify
Footstar or any of its Post-Distribution Affiliates under Section 6(b)(iii)
as a result of such an asset sale.
(c) Discharge of Indemnity. Footstar, Melville and their
respective Post-Distribution Affiliates shall discharge their obligations
under Section 6(a) and 6(b) hereof, respectively, by paying the relevant
amount within 30 days of demand therefor. After a Final Determination of an
obligation of Footstar or any of its Post-Distribution Affiliates under Section
6(a), Melville shall send a statement to Footstar showing the amount due
thereunder. After a Final Determination of an obligation of Melville or any
of its Post-Distribution Affiliates under Section 6(b), Footstar shall send a
statement to Melville showing the amount due thereunder. Calculation mechanics
relating to items described in Section 6(a)(i) are set forth in Section 3(c).
Notwithstanding the foregoing, if either Footstar, Melville or any of their
respective Post-Distribution Affiliates disputes in good faith the fact or the
amount of its obligation under Section 6(a) or Section 6(b), then no payment
of the amount in dispute shall be required until any such good faith dispute is
resolved in accordance with Section 16 hereof; provided, however, that any
amount not paid within 30 days of demand therefor shall bear interest as
provided in Section 9.
(d) Tax Benefits. If an indemnification obligation of
Melville, Footstar or any of their respective Post-Distribution Affiliates
under this Section 6 arises in respect of an adjustment that makes allowable
to Melville or its Affiliates, or Footstar or its Affiliates, respectively,
any deduction, amortization, exclusion from income or other allowance (a "Tax
Benefit") which would not, but for such adjustment, be allowable, then any
payment by Melville, Footstar or any of their respective Post-Distribution
Affiliates, as the case may be, pursuant to this Section 6 shall be an amount
equal to (X) the amount otherwise due but for this subsection (d), minus (Y)
the present value of the product of the Tax Benefit multiplied (i) by the
maximum federal or state, as the case may be, corporate tax rate in effect at
the time such Tax Benefit becomes allowable to Melville or its Affiliates, or
Footstar or its Affiliates (as the case may be) or (ii) in the case of a
credit, by 100 percent. The present value of such product shall be determined
by discounting such product from the time the Tax Benefit becomes allowable at
a rate equal to Prime.
(e) Refunds. Any refunds of Tax received by Melville or any of
its Post-Distribution Affiliates relating to a Pre-Distribution Period, to the
extent attributable to any item of income, loss, credit, deduction or other
tax attribute of any member of the Footstar Group shall be paid by Melville to
Footstar within 30 days of receipt. Any amount not paid when due shall bear
interest as provided in Section 9.
(f) Clerical Errors. If, as a result of a correction of a
clerical error made by booking any item at one member of the Melville
Consolidated Group instead of another, (i) the Pre-Distribution Tax Liability
allocable to the Footstar Group or the Melville Group, as the case may be, is
increased, (ii) the Pre-Distribution Tax Liability allocable to the other
group is decreased by an offsetting amount, and (iii) no Tax payment is
required to be made to a Taxing Authority in respect of the correction of the
clerical error, then the group referred to in clause (ii) of this Section 6(f)
shall be treated as having made a Tax payment in an amount equal to the
increased Pre-Distribution Tax Liability described in clause (i) of this
Section 6(f) and shall be entitled to indemnification therefor under this
Section 6 without regard to Section 6(d).
(g) Method of Calculation. (i) Except as otherwise provided, the
amount of any liability of Footstar and its Post-Distribution Affiliates or of
Melville and its Post-Distribution Affiliates under this Section 6 shall be
calculated pursuant to the method described in Exhibit A hereto; provided,
however, that the calculation of any party's share of Unitary State Tax shall
be calculated pursuant to the method described in Exhibit B hereto.
(ii) For purposes of this Section 6, in the case of Taxes that
are imposed on a periodic basis and are payable for a Tax period that includes
(but does not end on) the Distribution Date, the portion of such Tax related
to the portion of such Tax period ending on the Distribution Date shall (x) in
the case of any Taxes other than Taxes based upon or related to income, sales,
gross receipts, wages, capital expenditures or expenses, be deemed to be the
amount of such Tax for the entire Tax period multiplied by a fraction the
numerator of which is the number of days in the Tax period ending on the
Distribution Date and the denominator of which is the number of days in the
entire Tax period, and (y) in the case of any Tax based upon or related to
income, sales, gross receipts, wages, capital expenditures or expenses, be
deemed equal to the amount which would be payable if the relevant Tax period
ended on the Distribution Date and applying the weighted average 1996 Tax rate
for the relevant Tax applicable to the corporation subject to such Tax.
7. Communication and Cooperation.
(a) Consult and Cooperate. Footstar and Melville shall consult
and cooperate (and shall cause each of their Post-Distribution Affiliates to
cooperate) fully at such time and to the extent reasonably requested by the
other party in connection with all matters subject to this Agreement. Such
cooperation shall include, without limitation,
(i) the retention and provision on reasonable request of any and
all information including all books, records, documentation or other
information pertaining to Tax matters relating to the Melville Group and
the Footstar Group, any necessary explanations of information, and
access to personnel, until the expiration of the applicable statute of
limitation (giving effect to any extension, waiver, or mitigation
thereof);
(ii) the execution of any document that may be necessary or
helpful in connection of any required Return or in connection with any
audit, proceeding, suit or action;
(iii) reporting to the other party, on a quarterly basis, on the
status of any Tax audit relating to a Pre-Distribution Period; and
(iv) the use of the parties' best efforts to obtain any
documentation from a governmental authority or a third party that may be
necessary or helpful in connection with the foregoing.
(b) Provide Information. Melville and Footstar shall keep each
other fully informed with respect to any material development relating to the
matters subject to this Agreement. Melville shall provide to Footstar copies
of all Information Document Requests relating to a Pre-Distribution Period
issued by the Internal Revenue Service on Form 4564 or any successor thereto
and any analogous requests issued by any other Tax Authority (collectively,
"Requests"), and (to the extent practicable in light of the relevant Taxing
Authority's requirements) shall use reasonable efforts to provide copies of
the response to each Request more than two business days prior to filing such
response; provided, however, that Melville's failure to deliver a copy of a
response to a Request before such two-day period shall not relieve Footstar of
its obligations under this Agreement. Melville shall not be required to
provide Footstar with copies of the responses to any Requests unless
specifically related to the Footstar group; provided, however, Footstar shall
not be entitled to review or receive the portion of any response which does
not specifically relate to the Footstar Group.
(c) Tax Attribute Matters. Melville and Footstar shall advise
and consult with each other with respect to any proposed Tax adjustments
relating to the Melville Consolidated Group or, with respect to Other Taxes,
any group which includes at least one member of the Melville Group and at
least one member of the Footstar Group, which are the subject of an audit or
investigation, or are the subject of any proceeding or litigation, and which
may affect any Tax attribute of Melville, Footstar, the Melville Group, the
Footstar Group or any Post-Distribution Affiliate of Melville or Footstar
(including, but not limited to, basis in an asset or the amount of earnings and
profits).
8. Audits and Contest.
(a) Notwithstanding anything in this Agreement to the contrary,
Melville shall have full control over all matters relating to any Federal Tax
return filed by the Melville Consolidated Group, any Consolidated State or
Unitary State Tax Return, any Other Tax Return (other than one relating solely
to the Footstar Group), or any Tax Proceeding relating to any Tax matters of
at least one member of the Melville Group. Except as provided in Section
8(b), Melville shall have absolute discretion with respect to any decisions to
be made, or the nature of any action to be taken, with respect to any matter
described in the preceding sentence.
(b) No settlement of any Tax Proceeding relating to any matter
which would cause a payment obligation under Sections 6(a) or 6(b) shall be
accepted or entered into by or on behalf of the party entitled to receive a
payment under either Section 6(a) or Section 6(b), whichever is applicable,
unless the party ultimately responsible for such payment under either Section
6(a) or Section 6(b), whichever is applicable (the "Indemnitor"), consents
thereto in writing (which consent shall not be unreasonably withheld). If
such consent is unreasonably withheld, all expenses relating to the contest of
such matter shall be borne by the Indemnitor, and otherwise they shall be
borne equally by the Indemnitor and the indemnified party. If the Indemnitor
does not respond to the indemnified party's request for consent within 30
days, the Indemnitor will be deemed to have consented to the settlement.
(c) The indemnified party agrees to give prompt notice to the
Indemnitor of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought hereunder.
The failure of the indemnified party to give notice as provided in this
Section 8(c) shall not relieve the Indemnitor of its obligations under this
Agreement, except to the extent that the Indemnitor is materially prejudiced
by such failure to give notice.
(d) With respect to Returns relating to Other Taxes solely
attributable to the Footstar Group, Footstar and its Post-Distribution
Affiliates shall have full control over all matters relating to any Tax
Proceeding in connection therewith. Footstar and its Post-Distribution
Affiliates shall have absolute discretion with respect to any decisions to be
made, or the nature of any action to be taken, with respect to any matter
described in the preceding sentence.
9. Payments.
All payments to be made hereunder shall be made in immediately
available funds. Except as otherwise provided, all payments required to be
made pursuant to this Agreement will be due 30 days after the receipt of
notice of such payment or, where no notice is required, 30 days after the
fixing of liability or the resolution of a dispute. Payments shall be deemed
made when received. Any payment that is not made when due shall bear interest
at the rate per annum determined, from time to time, under the provision of
Section 6621(a)(2) of the Code for each day until paid; provided, however,
that, if an obligation or the amount thereof is being disputed in good faith,
any payment required after resolution of such dispute shall bear interest at
Prime until and including the thirtieth day after such resolution. If,
pursuant to a Final Determination, any amount paid by Melville, Footstar or
their respective Post-Distribution Affiliates pursuant to this Agreement
results in any increased Tax liability or reduction of any Tax Asset of any
member of the Footstar Group, Footstar or its Post-Distribution Affiliates, or
the Melville Group, Melville or its Post-Distribution Affiliates,
respectively, then Melville or Footstar, as the case may be, shall indemnify
the other party and hold it harmless from any interest or penalty attributable
to such increased Tax liability or the reduction of such Tax asset and shall
pay to the other party, in addition to amounts otherwise owed, 50 percent of
the After-Tax Amount; provided, however, that with respect to any amount paid
pursuant to Section 3(d)(ii) (other than as a result of the use by the
Melville Consolidated Group of a Tax Asset of the Melville Group), Section
6(a)(ii) or (iii) or Section 6(b)(iii) or (iv), Melville or Footstar, as the
case may be, shall pay to the other party 100 percent of the After-Tax Amount.
10. Notices.
Any notice, demand, claim, or other communication under this
Agreement shall be in writing and shall be deemed to have been given upon the
delivery or mailing thereof, as the case may be, if delivered personally or
sent by certified mail, return receipt requested, postage prepaid, to the
parties at the following addresses (or at such other address as a party may
specify by notice to the other):
If to Melville, to:
Charles Conaway
1 CVS Drive
Woonsocket, RI 02895
James E. Alward
Michael Golub
67 Millbrook Street
Worcester, MA 01606
If to Footstar, to:
Carlos Alberini
Maureen Richards
933 MacArthur Boulevard
Mahwah, NJ 07430
Joseph Couture
67 Millbrook Street
Worcester, MA 01606
11. Costs and Expenses.
Except as expressly set forth in this Agreement, each party shall
bear its own costs and expenses incurred pursuant to this Agreement. For
purposes of this Agreement, "out-of-pocket" expenses shall include reasonable
attorney fees, accountant fees and other related professional fees and
disbursements.
12. Effectiveness; Termination and Survival.
This Agreement shall become effective upon the consummation of the
Distribution. Notwithstanding anything in this Agreement to the contrary,
this Agreement shall remain in effect and its provisions shall survive for the
full period of all applicable statutes of limitation (giving effect to any
extension, waiver or mitigation thereof).
13. Section Headings.
The headings contained in this Agreement are inserted for
convenience only and shall not constitute a part hereof or in any way affect
the meaning or interpretation of this Agreement.
14. Entire Agreement; Amendments and Waivers.
(a) Entire Agreement. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter
contained herein. No alteration, amendment, modification, or waiver of any of
the terms of this Agreement shall be valid unless made by an instrument signed
by an authorized officer of Melville and Footstar, or in the case of a waiver,
by the party against whom the waiver is to be effective.
(b) Waiver. No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver hereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any right, power or privilege.
15. Governing Law and Interpretation. This Agreement has been
made in and shall be construed and enforced in accordance with the laws of the
Commonwealth of Massachusetts.
16. Dispute Resolution. If the parties hereto are unable to
resolve any disagreement or dispute relating to this Agreement within 20 days,
such disagreement or dispute shall be resolved by a nationally recognized law
firm or accounting firm expert in Tax matters that is mutually acceptable to
the parties hereto (a "Referee"). A Referee so chosen shall resolve any such
disagreement pursuant to such procedures as it may deem advisable. Any such
resolution shall be binding on the parties hereto without further recourse.
Except as otherwise provided herein, the costs of any Referee shall be
apportioned between Melville and Footstar as determined by such Referee in such
manner as the Referee deems reasonable, taking into account the circumstances
of the dispute, the conduct of the parties and the result of the dispute.
17. Counterparts.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
18. Assignments; Third Party Beneficiaries.
Except as provided below, this Agreement shall be binding upon and shall inure
only to the benefit of the parties hereto and their respective successors and
assigns. This Agreement is not intended to benefit any person other than the
parties hereto and such successors and assigns, and no such other person shall
be a third party beneficiary hereof. If, during the period beginning on the
Distribution Date and ending upon the expiration of all statute of limitations
periods applicable to Pre-Distribution Periods, any corporation becomes an
Affiliate of either Melville or Footstar, as the case may be, then upon the
request of either Footstar or Melville, as the case may be, the other party
shall provide evidence of such Affiliate's agreement to be bound by the terms
of this Agreement. During the period beginning on the Distribution Date and
ending upon the expiration of all statute of limitations periods applicable to
Pre-Distribution Periods, no entity shall be entitled to acquire a controlling
interest in Melville or Footstar unless such entity agrees to be bound by the
terms of this Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first written above.
Melville on its own behalf and on
behalf of its Post-Distribution
Affiliates.
By:__________________________
Title:_______________________
Bob's, Inc. on its own behalf and on
behalf of the Melville Post-Distribution
Affiliates in the Bob's chain.
By:__________________________
Title:_______________________
Linens 'n Things, Inc. on its own behalf and on
behalf of the Melville Post-Distribution
Affiliates in the Linens 'n Things chain.
By:__________________________
Title:_______________________
Footstar on its own behalf and on
behalf of its Post-Distribution
Affiliates.
By:__________________________
Title:_______________________
Footaction, Inc. on its own behalf and on behalf
of the Footstar Post-Distribution Affiliates in
the Footaction, Thom McAn and Meldisco chains.
By:__________________________
Title:_______________________
EXHIBIT A
1. The Footstar Group's share of any Pre-Distribution Consolidated Federal
or Consolidated State Tax liability shall be, with respect to such
Federal or Consolidated State Taxes, as applicable, calculated as if
Footstar were the parent of a group filing its own consolidated return
for all Pre-Distribution Periods; provided, however, that (i) income,
deductions, credits and losses shall be computed in a manner consistent
with past practices, (ii) the applicable Tax rate shall be the
appropriate maximum statutory rate in effect during the relevant year,
(iii) in no event shall the Footstar Group's share of any Consolidated
Federal or Consolidated State Tax liability exceed the amount that would
have constituted the Footstar Group's share of such liability if such
share had been calculated in accordance with the allocation principles
set forth in Treas. Reg. Section 1.1552-1(a)(2) and Treas. Reg. Section
1.1502-33(d)(2)(ii) as in effect prior to Treasury Decision 8597, except
to the extent consistent with past practice, (iv) notwithstanding
anything to the contrary in this Agreement, with respect to all
Pre-Distribution Tax Periods, Footstar and its Post-Distribution
Affiliates will be liable for all Taxes attributable to the Related
Footwear Business and MEP, calculated in accordance with past practice,
and (v) notwithstanding anything to the contrary in this Agreement, any
deduction attributable to the exercise of an option to acquire Melville
stock by a person who is an employee of a member of the Footstar Group
at the time of such exercise shall be treated as a deduction allocable
to the member of the Footstar Group employing such person.
2. For purposes of paragraph 1 above, "Tax liability" (1) shall exclude any
liability for the payment of alternative minimum tax; and (2) shall
refer to an actual out-of-pocket payment to any Taxing Authority, after
taking into account the utilization of net operating losses and any
other Tax Assets.
3. Any alternative minimum Tax liability (and any Tax Assets attributable
to such liability) and any environmental Tax imposed under Section 59A
of the Code shall be allocated among the members of the Melville
Consolidated Group in accordance with the formulas referenced in
Proposed Treasury Regulation Section 1.1502-5(b)(6).
4. For all Pre-Distribution Periods, Melville shall have the right, in its
sole discretion, to elect (in an original or an amended return) to
deduct currently any Taxes of foreign countries and of possessions of
the United States. In the event that Melville elects not to deduct
currently such Taxes but instead to elect to take a foreign tax credit
under the provisions of Part III of Subchapter N of the Code, any
consolidated unused foreign tax credit of the Melville Consolidated
Group shall be apportioned to the members of such group pursuant to
Treas. Reg. Section 1.1502-79(d).
5. Any interest imposed in connection with any Tax liability shall be
allocated in the same manner as the underlying Tax liability, as
provided above.
6. Any penalty imposed in connection with any Tax liability shall be the
responsibility of the party whose action or inaction resulted in the
imposition of such penalty; provided, however, that if such a
determination cannot be made, the penalty shall be allocated in the same
manner as the underlying Tax liability, as provided above.
EXHIBIT B
1. The Footstar Group's share of any Pre-Distribution Unitary State Tax
Liability shall be, with respect to each State, the aggregate amount of
Unitary State Tax Liability of all members of the Footstar Group that
are members of the relevant Melville Consolidated Group. A member's
liability for its share of Pre-Distribution Unitary State Tax shall be
determined in accordance with paragraph 3 of this Exhibit B; provided,
however, that (i) income, deductions, credits and losses shall be
computed in a manner consistent with past practices, (ii) credits and
any minimum taxes shall be allocated to the member responsible for the
generation of such credit or taxes, and [(iii) notwithstanding anything
to the contrary in this Agreement, any deduction attributable to the
exercise of an option to acquire Melville stock by a person who is an
employee of a member of the Footstar Group at the time of such exercise
shall be treated as a deduction allocable to the member of the Footstar
Group employing such person].
2. The Footstar Group's share of any Pre-Distribution Unitary State Tax
Assets shall be, with respect to each State, the aggregate amount of
Unitary State Tax Assets of all members of the Footstar Group. A
member's share of such Unitary State Tax Assets shall be determined in
accordance with paragraph 3 of this Exhibit B.
3. A member of the Footstar Group's share of any Pre-Distribution Unitary
State Tax Liability or Pre-Distribution Unitary State Tax Asset shall be
the product of (i) such Unitary State Tax Liability or Unitary State Tax
Asset, as the case may be, and (ii) the percentage of the numerator used
in determining the apportionment percentage of the Melville Consolidated
Group for such Unitary State which is attributable to such member of the
Footstar Group.
4. With respect to all Pre-Distribution Tax Periods, Footstar and its
Post-Distribution Affiliates will be liable for all Unitary State Taxes
attributable to the Retail Footwear Businesses or MEP, calculated in
accordance with past practice.
5. Any interest imposed in connection with any Tax liability shall be
allocated in the same manner as the underlying Tax liability, as
provided above.
6. Any penalty imposed in connection with any Tax liability shall be the
responsibility of the party whose action or inaction resulted in the
imposition of such penalty; provided, however, that if such a
determination cannot be made, the penalty shall be allocated in the same
manner as the underlying Tax liability, as provided above.
EXHIBIT 10.3
FOOTSTAR, INC.
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1996 Incentive Compensation Plan
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Page
----
1. Purpose.......................................................... 1
2. Definitions...................................................... 1
3. Administration................................................... 3
(a) Authority of the Committee.............................. 3
(b) Manner of Exercise of Committee Authority............... 3
(c) Limitation of Liability................................. 4
4. Stock Subject to Plan............................................ 4
(a) Overall Number of Shares Available for Delivery......... 4
(b) Application of Limitation to Grants of Awards........... 4
(c) Availability of Shares Not Delivered Under Awards....... 4
5. Eligibility; Per-Person Award Limitations....................... 4
6. Specific Terms of Awards........................................ 5
(a) General................................................. 5
(b) Options................................................. 5
(c) Stock Appreciation Rights............................... 5
(d) Restricted Stock........................................ 6
(e) Deferred Stock.......................................... 7
(f) Bonus Stock and Awards in Lieu of Obligations........... 7
(g) Dividend Equivalents.................................... 8
(h) Other Stock-Based Awards................................ 8
7. Certain Provisions Applicable to Awards....................... 8
(a) Stand-Alone, Additional, Tandem, and Substitute
Awards................................................. 8
(b) Term of Awards.......................................... 8
(c) Form and Timing of Payment Under Awards; Deferrals...... 9
(d) Exemptions from Section 16(b) Liability................. 9
(e) Cancellation and Rescission of Awards................... 9
8. Performance and Annual Incentive Awards...................... 10
(a) Performance Conditions................................. 10
(b) Performance Awards Granted to Designated Covered
Employees............................................. 10
(c) Annual Incentive Awards Granted to Designated Covered
Employees............................................. 13
(d) Written Determinations................................. 13
(e) Status of Section 8(b) and 8(c) Awards Under Code
Section 162(m)........................................ 13
9. Change in Control............................................ 13
(a) Effect of "Change in Control".......................... 13
(b) Definition of "Change in Control"...................... 14
(c) Definition of "Change in Control Price"................ 15
10. General Provisions........................................... 15
(a) Compliance With Legal and Other Requirements........... 15
(b) Limits on Transferability; Beneficiaries............... 15
(c) Adjustments............................................ 16
(d) Taxes.................................................. 16
(e) Changes to the Plan and Awards......................... 17
(f) Limitation on Rights Conferred Under Plan.............. 17
(g) Unfunded Status of Awards; Creation of Trusts.......... 17
(h) Nonexclusivity of the Plan............................. 17
(i) Payments in the Event of Forfeitures; Fractional
Shares................................................ 18
(j) Governing Law.......................................... 18
(k) Plan Effective Date and Stockholder Approval........... 18
FOOTSTAR, INC.
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1996 Incentive Compensation Plan
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1. Purpose. The purpose of this 1996 Incentive Compensation Plan (the
"Plan") is to assist Footstar, Inc., a Delaware corporation (the "Company"),
and its subsidiaries in attracting, retaining, and rewarding high-quality
executives and other employees, enabling such persons to acquire or increase a
proprietary interest in the Company in order to strengthen the mutuality of
interests between such persons and the Company's stockholders, and providing
such persons with annual and long term performance incentives to expend their
maximum efforts in the creation of shareholder value. The Plan is also
intended to qualify certain compensation awarded under the Plan for tax
deductibility under Section 162(m) of the Code (as hereafter defined) to the
extent deemed appropriate by the Compensation Committee (or any successor
committee) of the Board of Directors of the Company.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof:
(a) "Annual Incentive Award" means a conditional right granted to
a Participant under Section 8(c) hereof to receive a cash payment, Stock
or other Award, unless otherwise determined by the Committee, after the
end of a specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of
another award, Dividend Equivalent, Other Stock-Based Award, Performance
Award or Annual Incentive Award, together with any other right or
interest granted to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts
which have been designated by a Participant in his or her most recent
written beneficiary designation filed with the Committee to receive the
benefits specified under the Plan upon such Participant's death or to
which Awards or other rights are transferred if and to the extent
permitted under Section 10(b) hereof. If, upon a Participant's death,
there is no designated Beneficiary or surviving designated Beneficiary,
then the term Beneficiary means person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive such
benefits.
(d) "Beneficial Owner", "Beneficially Owning" and "Beneficial
Ownership" shall have the meanings ascribed to such terms in Rule 13d-3
under the Exchange Act and any successor to such Rule.
(e) "Board" means the Company's Board of Directors.
(f) "Change in Control" means Change in Control as defined with
related terms in Section 9 of the Plan.
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including regulations thereunder and successor
provisions and regulations thereto.
(i) "Committee" means the Compensation Committee of the Board or
such other Committee designated by the Board to administer the Plan;
provided, however, that the Committee shall consist solely of two or
more directors, each of whom shall be (i) a "disinterested person"
within the meaning of Rule 16b-3 under the Exchange Act, unless
administration of the Plan by "disinterested persons" is not then
required in order for exemptions under Rule 16b-3 to apply to
transactions under the Plan, and (ii) an "outside director" as defined
under Section 162(m) of the Code, unless administration of the Plan by
"outside directors" is not then required in order to qualify for tax
deductibility under Section 162(m) of the Code.
(j) "Corporate Transaction" means a transaction as defined in
Section 9(b) of the Plan.
(k) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(l) "Deferred Stock" means a right, granted to a Participant
under Section 6(e) hereof, to receive Stock, cash or a combination
thereof at the end of a specified deferral period.
(m) "Dividend Equivalent" means a right, granted to a Participant
under Section 6(g), to receive cash, Stock, other Awards or other
property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments.
(n) "Effective Date" means the date on which shares of Company
Common Stock are distributed to shareholders of Melville Corporation.
(o) "Eligible Person" means each executive officer of the Company
(as defined under the Exchange Act) and other officers and employees of
the Company or of any subsidiary, including such persons who may also be
directors of the Company. The foregoing notwithstanding, no member of
the Committee shall be an Eligible Person.
(p) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(q) "Executive Officer" means an executive officer of the Company
as defined under the Exchange Act.
(r) "Fair Market Value" means the fair market value of Stock,
Awards or other property as determined by the Committee or under
procedures established by the Committee. Unless otherwise determined by
the Committee, the Fair Market Value of Stock as of any given date shall
be the closing sale price per share reported on a consolidated basis for
stock listed on the principal stock exchange or market on which Stock is
traded on the date as of which such value is being determined or, if
there is no sale on that date, then on the last previous day on which a
sale was reported.
(s) "Incentive Stock Option" or "ISO" means any Option intended
to be and designated as an incentive stock option within the meaning of
Section 422 of the Code or any successor provision thereto.
(t) "Incumbent Board" means the Board as defined in Section 9(b)
of the Plan.
(u) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.
(v) "Option" means a right, granted to a Participant under
Section 6(b) hereof, to purchase Stock or other Awards at a specified
price during specified time periods.
(w) "Other Stock Based Awards" means Awards granted to a
Participant under Section 6(h) hereof.
(x) "Participant" means a person who has been granted an Award
under the Plan which remains outstanding, including a person who is no
longer an Eligible Person.
(y) "Performance Award" means a right, granted to a Participant
under Section 8 hereof, to receive Awards based upon performance
criteria specified by the Committee.
(z) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and
14(d) thereof, and shall include a "group" as defined in Section
13(d) thereof.
(aa) "Restricted Stock" means Stock granted to a Participant
under Section 6(d) hereof, that is subject to certain restrictions and
to a risk of forfeiture.
(bb) "Rule 16b-3" and "Rule 16a-1(c)(3)" mean Rule 16b-3 and Rule
16a-1(c)(3), as from time to time in effect and applicable to the Plan
and Participants, promulgated by the Securities and Exchange Commission
under Section 16 of the Exchange Act.
(cc) "Stock" means the Company's Common Stock and such other
securities as may be substituted (or resubstituted) for Stock pursuant
to Section 10(c) hereof.
(dd) "Stock Appreciation Rights" or "SAR" means a right granted
to a Participant under Section 6(c) hereof.
3. Administration.
(a) Authority of the Committee. The Plan shall be
administered by the Committee. The Committee shall have full and
final authority, in each case subject to and consistent with the
provisions of the Plan, to select Eligible Persons to become
Participants, grant Awards, determine the type, number and other
terms and conditions of, and all other matters relating to, Awards,
prescribe Award agreements (which need not be identical for each
Participant) and rules and regulations for the administration of the
Plan, construe and interpret the Plan and Award agreements and
correct defects, supply omissions or reconcile inconsistencies
therein, and to make all other decisions and determinations as the
Committee may deem necessary or advisable for the administration of
the Plan.
(b) Manner of Exercise of Committee Authority. The Committee
shall exercise sole and exclusive discretion on any matter relating
to a Participant then subject to Section 16 of the Exchange Act with
respect to the Company to the extent necessary in order that
transactions by such Participant shall be exempt under Rule 16b-3
under the Exchange Act. Any action of the Committee shall be final,
conclusive and binding on all persons, including the Company, its
subsidiaries, Participants, Beneficiaries, transferees under Section
10(b) hereof or other persons claiming rights from or through a
Participant, and stockholders. The express grant of any specific
power to the Committee, and the taking of any action by the
Committee, shall not be construed as limiting any power or authority
of the Committee. The Committee may delegate to officers or managers
of the Company or any subsidiary, or committees thereof, the
authority, subject to such terms as the Committee shall determine,
(i) to perform administrative functions, (ii) with respect to
Participants not subject to Section 16 of the Exchange Act, to
perform such other functions as the Committee may determine, and
(iii) with respect to Participants subject to Section 16, to perform
such other functions of the Committee as the Committee may determine
to the extent performance of such functions will not result in the
loss of an exemption under Rule 16b-3 otherwise available for
transactions by such persons, in each case to the extent permitted
under applicable law and subject to the requirements set forth in
Section 8(d). The Committee may appoint agents to assist it in
administering the Plan.
(c) Limitation of Liability. The Committee and each member
thereof shall be entitled to, in good faith, rely or act upon any
report or other information furnished to him or her by any executive
officer, other officer or employee of the Company or a subsidiary,
the Company's independent auditors, consultants or any other agents
assisting in the administration of the Plan. Members of the
Committee and any officer or employee of the Company or a subsidiary
acting at the direction or on behalf of the Committee shall not be
personally liable for any action or determination taken or made in
good faith with respect to the Plan, and shall, to the extent
permitted by law, be fully indemnified and protected by the Company
with respect to any such action or determination.
4. Stock Subject to Plan.
(a) Overall Number of Shares Available for Delivery. Subject
to adjustment as provided in Section 10(c) hereof, the total number
of shares of Stock reserved and available for delivery in connection
with Awards under the Plan shall be (i) 3.1 million, plus (ii) 10% of
the number of shares of Stock newly issued by the Company or
delivered out of treasury shares during the term of the Plan
(excluding any issuance or delivery in connection with Awards, or any
other compensation or benefit plan of the Company) provided, however,
that the total number of shares of Stock with respect to which ISO's
may be granted shall be 2 million. Any shares of Stock delivered
under the Plan may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
(b) Application of Limitation to Grants of Awards. No Award
may be granted if the number of shares of Stock to be delivered in
connection with such Award or, in the case of an Award relating to
shares of Stock but settleable only in cash (such as cash-only SARs),
the number of shares to which such Award relates, exceeds the number
of shares of Stock remaining available under the Plan minus the
number of shares of Stock issuable in settlement of or relating to
then-outstanding Awards. The Committee may adopt reasonable counting
procedures to ensure appropriate counting, avoid double counting (as,
for example, in the case of tandem or substitute awards) and make
adjustments if the number of shares of Stock actually delivered
differs from the number of shares previously counted in connection
with an Award.
(c) Availability of Shares Not Delivered Under Awards. Shares
of Stock subject to an Award under the Plan that is canceled,
expired, forfeited, settled in cash or otherwise terminated without a
delivery of shares to the Participant, including (i) the number of
shares withheld in payment of any exercise or purchase price of an
Award or taxes relating to Awards, and (ii) the number of shares
surrendered in payment of any exercise or purchase price of an Award
or taxes relating to any Award, will again be available for Awards
under the Plan, except that if any such shares could not again be
available for Awards to a particular Participant under any applicable
law or regulation, such shares shall be available exclusively for
Awards to Participants who are not subject to such limitation.
5. Eligibility; Per-Person Award Limitations. Awards may be granted
under the Plan only to Eligible Persons. In each fiscal year during any part
of which the Plan is in effect, an Eligible Person may not be granted Awards
relating to more than 1 million shares of Stock, subject to adjustment as
provided in Section 10(c), under each of Sections 6(b), 6(c), 6(d), 6(e),
6(f), 6(g), 6(h), 8(b) and 8(c). In addition, the maximum cash amount that
may be earned under the Plan as a final Annual Incentive Award or other cash
annual Award in respect of any fiscal year by any one Participant shall be
$3 million, and the maximum cash amount that may be earned under the Plan as
a final Performance Award or other cash Award in respect of a performance
period by any one Participant shall be $5 million.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and
conditions set forth in this Section 6. In addition, the Committee
may impose on any Award or the exercise thereof, at the date of grant
or thereafter (subject to Section 10(e)), such additional terms and
conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine, including terms requiring forfeiture of
Awards in the event of termination of employment by the Participant
and terms permitting a Participant to make elections relating to his
or her Award. The Committee shall retain full power and discretion
to accelerate, waive or modify, at any time, any term or condition of
an Award that is not mandatory under the Plan.
(b) Options. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee,
provided that such exercise price shall be not less than the Fair
Market Value of a share of Stock on the date of grant of such
Option except as provided under Section 7(a) hereof.
(ii) Time and Method of Exercise. The Committee shall
determine the time or times at which or the circumstances under
which an Option may be exercised in whole or in part (including
based on achievement of performance goals and/or future service
requirements), the methods by which such exercise price may be
paid or deemed to be paid, the form of such payment, including,
without limitation, cash, Stock, other Awards or awards granted
under other plans of the Company or any subsidiary, or other
property (including notes or other contractual obligations of
Participants to make payment on a deferred basis), and the methods
by or forms in which Stock will be delivered or deemed to be
delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan
shall comply in all respects with the provisions of Section 422 of
the Code. Anything in the Plan to the contrary notwithstanding,
no term of the Plan relating to ISOs (including any SAR in tandem
therewith) shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be exercised, so as
to disqualify either the Plan or any ISO under Section 422 of the
Code, unless the Participant has first requested the change that
will result in such disqualification.
(c) Stock Appreciation Rights. The Committee is authorized to
grant SARs to Participants on the following terms and conditions:
(i) Right to Payment. An SAR shall confer on the
Participant to whom it is granted a right to receive, upon
exercise thereof, the excess of (A) the Fair Market Value of one
share of Stock on the date of exercise (or, in the case of a
"Limited SAR" that is not related to an ISO the Fair Market Value
determined by reference to the Change in Control Price, as defined
under Section 9(c) hereof), over (B) the grant price of the SAR as
determined by the Committee.
(ii) Other Terms. The Committee shall determine at the
date of grant or thereafter, the time or times at which and the
circumstances under which an SAR may be exercised in whole or in
part (including based on achievement of performance goals and/or
future service requirements), the method of exercise, method of
settlement, form of consideration payable in settlement, method by
or forms in which Stock will be delivered or deemed to be
delivered to Participants, whether or not an SAR shall be in
tandem or in combination with any other Award, and any other terms
and conditions of any SAR. Limited SARs that may only be
exercised in connection with a Change in Control or other event as
specified by the Committee may be granted on such terms, not
inconsistent with this Section 6(c), as the Committee may
determine. SARs and Limited SARs may be either freestanding or in
tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant
Restricted Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee may
impose, which restrictions may lapse separately or in combination
at such times, under such circumstances (including based on
achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee
may determine at the date of grant or thereafter. Except to the
extent restricted under the terms of the Plan and any Award
agreement relating to the Restricted Stock, a Participant granted
Restricted Stock shall have all of the rights of a stockholder,
including the right to vote the Restricted Stock and the right to
receive dividends thereon (subject to any mandatory reinvestment
or other requirement imposed by the Committee). During the
restricted period applicable to the Restricted Stock, subject to
Section 10(b) below, the Restricted Stock may not be sold,
transferred, pledged, hypothecated, margined or otherwise
encumbered by the Participant.
(ii) Forfeiture. Except as otherwise determined by the
Committee, upon termination of employment during the applicable
restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by
the Company; provided that the Committee may provide, by rule
or regulation or in any Award agreement, or may determine in
any individual case, that restrictions or forfeiture conditions
relating to Restricted Stock shall be waived in whole or in
part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or
in part the forfeiture of Restricted Stock.
(iii) Certificates for Stock. Restricted Stock granted
under the Plan may be evidenced in such manner as the Committee
shall determine. If certificates representing Restricted Stock
are registered in the name of the Participant, the Committee
may require that such certificates bear an appropriate legend
referring to the terms, conditions and restrictions applicable
to such Restricted Stock, that the Company retain physical
possession of the certificates, and that the Participant
deliver a stock power to the Company, endorsed in blank,
relating to the Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of
an Award of Restricted Stock, the Committee may require that any
cash dividends paid on a share of Restricted Stock be
automatically reinvested in additional shares of Restricted Stock
or applied to the purchase of additional Awards under the Plan.
Unless otherwise determined by the Committee, Stock distributed in
connection with a Stock split or Stock dividend, and other
property distributed as a dividend, shall be subject to
restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which such Stock or other
property has been distributed.
(e) Deferred Stock. The Committee is authorized to grant
Deferred Stock to Participants, which are rights to receive Stock, cash,
or a combination thereof at the end of a specified deferral period,
subject to the following terms and conditions:
(i) Award and Restrictions. Satisfaction of an Award of
Deferred Stock shall occur upon expiration of the deferral period
specified for such Deferred Stock by the Committee (or, if
permitted by the Committee, as elected by the Participant). In
addition, Deferred Stock shall be subject to such restrictions
(which may include a risk of forfeiture) as the Committee may
impose, if any, which restrictions may lapse at the expiration of
the deferral period or at earlier specified times (including based
on achievement of performance goals and/or future service
requirements), separately or in combination, in installments or
otherwise, as the Committee may determine. Deferred Stock may be
satisfied by delivery of Stock, cash equal to the Fair Market
Value of the specified number of shares of Stock covered by the
Deferred Stock, or a combination thereof, as determined by the
Committee at the date of grant or thereafter.
(ii) Forfeiture. Except as otherwise determined by the
Committee, upon termination of employment during the applicable
deferral period or portion thereof to which forfeiture conditions
apply (as provided in the Award agreement evidencing the Deferred
Stock), all Deferred Stock that is at that time subject to
deferral (other than a deferral at the election of the
Participant) shall be forfeited; provided that the Committee may
provide, by rule or regulation or in any Award agreement, or may
determine in any individual case, that restrictions or forfeiture
conditions relating to Deferred Stock shall be waived in whole or
in part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or in
part the forfeiture of Deferred Stock.
(iii) Dividend Equivalents. Unless otherwise determined by
the Committee at date of grant, Dividend Equivalents on the
specified number of shares of Stock covered by an Award of
Deferred Stock shall be either (A) paid with respect to such
Deferred Stock at the dividend payment date in cash or in shares
of unrestricted Stock having a Fair Market Value equal to the
amount of such dividends, or (B) deferred with respect to such
Deferred Stock and the amount or value thereof automatically
deemed reinvested in additional Deferred Stock, other Awards or
other investment vehicles, as the Committee shall determine or
permit the Participant to elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee
is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of Company obligations to pay cash or deliver other
property under the Plan or under other plans or compensatory
arrangements, provided that, in the case of Participants subject to
Section 16 of the Exchange Act, the amount of such grants remains within
the discretion of the Committee to the extent necessary to ensure that
acquisitions of Stock or other Awards are exempt from liability under
Section 16(b) of the Exchange Act. Stock or Awards granted hereunder
shall be subject to such other terms as shall be determined by the
Committee.
(g) Dividend Equivalents. The Committee is authorized to
grant Dividend Equivalents to a Participant, entitling the
Participant to receive cash, Stock, other Awards, or other property
equal in value to dividends paid with respect to a specified number
of shares of Stock, or other periodic payments. Dividend Equivalents
may be awarded on a free-standing basis or in connection with another
Award. The Committee may provide that Dividend Equivalents shall be
paid or distributed when accrued or shall be deemed to have been
reinvested in additional Stock, Awards, or other investment vehicles,
and subject to such restrictions on transferability and risks of
forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized,
subject to limitations under applicable law, to grant to Participants
such other Awards that may be denominated or payable in, valued in
whole or in part by reference to, or otherwise based on, or related
to, Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, convertible or
exchangeable debt securities, other rights convertible or
exchangeable into Stock, purchase rights for Stock, Awards with value
and payment contingent upon performance of the Company or any other
factors designated by the Committee, and Awards valued by reference
to the book value of Stock or the value of securities of or the
performance of specified subsidiaries. The Committee shall determine
the terms and conditions of such Awards. Stock delivered pursuant to
an Award in the nature of a purchase right granted under this Section
6(h) shall be purchased for such consideration, paid for at such
times, by such methods, and in such forms, including, without
limitation, cash, Stock, other Awards, or other property, as the
Committee shall determine. Cash awards, as an element of or
supplement to any other Award under the Plan, may also be granted
pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards.
Awards granted under the Plan may, in the discretion of the
Committee, be granted either alone or in addition to, in tandem with,
or in substitution or exchange for, any other Award or any award
granted under another plan of the Company, any subsidiary, or any
business entity to be acquired by the Company or a subsidiary, or any
other right of a Participant to receive payment from the Company or
any subsidiary. Such additional, tandem, and substitute or exchange
Awards may be granted at any time. If an Award is granted in
substitution or exchange for another Award or award, the Committee
shall require the surrender of such other Award or award in
consideration for the grant of the new Award. In addition, Awards
may be granted in lieu of cash compensation, including in lieu of
cash amounts payable under other plans of the Company or any
subsidiary, in which the value of Stock subject to the Award is
equivalent in value to the cash compensation (for example, Deferred
Stock or Restricted Stock), or in which the exercise price, grant
price or purchase price of the Award in the nature of a right that
may be exercised is equal to the Fair Market Value of the underlying
Stock minus the value of the cash compensation surrendered (for
example, Options granted with an exercise price "discounted" by the
amount of the cash compensation surrendered).
(b) Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee; provided that in no event
shall the term of any Option or SAR exceed a period of ten years (or
such shorter term as may be required in respect of an ISO under Section
422 of the Code).
(c) Form and Timing of Payment Under Awards; Deferrals.
Subject to the terms of the Plan and any applicable Award agreement,
payments to be made to or by the Company or a subsidiary upon the
exercise of an Option or other Award or settlement of an Award may be
made in such forms as the Committee shall determine, including,
without limitation, cash, Stock, other Awards or other property, and
may be made in a single payment or transfer, in installments, or on a
deferred basis. The settlement of any Award may be accelerated, and
cash paid in lieu of Stock in connection with such settlement, in the
discretion of the Committee or upon occurrence of one or more
specified events (in addition to a Change in Control). Installment
or deferred payments may be required by the Committee (subject to
Section 10(e) of the Plan) or permitted at the election of the
Participant on terms and conditions established by the Committee.
Payments may include, without limitation, provisions for the payment
or crediting of reasonable interest on installment or deferred
payments or the grant or crediting of Dividend Equivalents or other
amounts in respect of installment or deferred payments denominated in
Stock.
(d) Exemptions from Section 16(b) Liability. It is the
intent of the Company that this Plan comply in all respects with
applicable provisions of Rule 16b-3 or Rule 16a-1(c)(3) to the extent
necessary to ensure that neither the grant of any Awards to nor other
transaction by a Participant who is subject to Section 16 of the
Exchange Act is subject to liability under Section 16(b) thereof
(except for transactions acknowledged in writing to be non-exempt by
such Participant). Accordingly, if any provision of this Plan or any
Award agreement does not comply with the requirements of Rule 16b-3
or Rule 16a-1(c)(3) as then applicable to any such transaction, such
provision will be construed or deemed amended to the extent necessary
to conform to the applicable requirements of Rule 16b-3 or Rule 16a-
1(c)(3) so that such Participant shall avoid liability under Section
16(b). In addition, the purchase price of any Award conferring a
right to purchase Stock shall be not less than any specified
percentage of the Fair Market Value of Stock at the date of grant of
the Award then required in order to comply with Rule 16b-3.
(e) Cancellation and Rescission of Awards. Unless the Award
agreement specifies otherwise, the Committee may cancel any
unexpired, unpaid, or deferred Awards at any time if the Participant
is not in compliance with all applicable provisions of the Award
agreement and the Plan including the following conditions:
(i) A Participant shall not render services for any
organization or engage directly or indirectly in any business
which, in the judgment of the Chief Executive Officer of the
Company or other senior officer designated by the Committee, is or
becomes competitive with the Company. For Participants whose
employment has terminated, the judgment of the Chief Executive
Officer or other senior officer designated by the Committee shall
be based on the Participant's position and responsibilities while
employed by the Company, the Participant's post-employment
responsibilities and position with the other organization or
business, the extent of past, current and potential competition or
conflict between the Company and the other organization or
business, the effect on the Company's stockholders, customers,
suppliers and competitors of the Participant assuming the
post-employment position and such other considerations as are
deemed relevant given the applicable facts and circumstances. A
Participant who has retired shall be free, however, to purchase as
an investment or otherwise, stock or other securities of such
organization or business so long as they are listed upon a
recognized securities exchange or traded over-the-counter, and
such investment does not represent a substantial investment to
the Participant or a greater than five percent equity interest
in the organization or business. For purposes of this Section
7(e)(i), an organization shall be considered to be competitive
with the Company if it is engaged directly or indirectly in the
retail footwear business, including, without limitation,
Payless Shoesource Inc., Target Stores, and Wal-Mart Stores,
Inc.
(ii) A Participant shall not, without prior written
authorization from the Company, disclose to anyone outside the
Company, or use in other than the Company's business, any
confidential information or material relating to the business of
the Company that is acquired by the Participant either during or
after employment with the Company.
(iii) A Participant shall disclose promptly and assign to
the Company all right, title, and interest in any invention or
idea, patentable or not, made or conceived by the Participant
during employment by the Company, relating in any manner to the
actual or anticipated business, research or development work of
the Company and shall do anything reasonably necessary to enable
the Company to secure a patent where appropriate in the United
States and in foreign countries.
(iv) Upon exercise, payment or delivery pursuant to an
Award, the Participant shall certify on a form acceptable to the
Committee that he or she is in compliance with the terms and
conditions of the Plan. Failure to comply with the provisions of
this Section 7(e) prior to, or during the six months after, any
exercise, payment or delivery pursuant to an Award shall cause
such exercise, payment or delivery to be rescinded. The Company
shall notify the Participant in writing of any such rescission
within two years after such exercise, payment or delivery. Within
ten days after receiving such a notice from the Company, the
Participant shall pay to the Company the amount of any gain
realized or payment received as a result of the rescinded
exercise, payment or delivery pursuant to an Award. Such payment
shall be made either in cash or by returning to the Company the
number of shares of Stock that the Participant received in
connection with the rescinded exercise, payment or delivery.
8. Performance and Annual Incentive Awards.
(a) Performance Conditions. The right of a Participant to
exercise or receive a grant or settlement of any Award, and the timing
thereof, may be subject to such performance conditions as may be
specified by the Committee. The Committee may use such business
criteria and other measures of performance as it may deem appropriate in
establishing any performance conditions, and may exercise its discretion
to reduce or increase the amounts payable under any Award subject to
performance conditions, except as limited under Sections 8(b) and 8(c)
hereof in the case of a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m).
(b) Performance Awards Granted to Designated Covered Employees.
If the Committee determines that a Performance Award to be granted to an
Eligible Person who is designated by the Committee as likely to be a
Covered Employee should qualify as "performance-based compensation" for
purposes of Code Section 162(m), the grant, exercise and/or settlement
of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this
Section 8(b).
(i) Performance Goals Generally. The performance goals
for such Performance Awards shall consist of one or more
business criteria and a targeted level or levels of performance
with respect to each of such criteria, as specified by the
Committee consistent with this Section 8(b). Performance goals
shall be objective and shall otherwise meet the requirements of
Code Section 162(m) and regulations thereunder (including
Income Tax Regulation 1.162-27 and successor proposed and final
regulations thereto), including the requirement that the level
or levels of performance targeted by the Committee result in
the achievement of performance goals being "substantially
uncertain." The Committee may determine that such Performance
Awards shall be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of
the performance goals must be achieved as a condition to grant,
exercise and/or settlement of such Performance Awards.
Performance goals may differ for Performance Awards granted to
any one Participant or to different Participants.
(ii) Business Criteria. One or more of the following
business criteria for the Company, on a consolidated basis,
and/or for specified subsidiaries or business units of the
Company (except with respect to the total stockholder return
and earnings per share criteria), shall be used exclusively by
the Committee in establishing performance goals for such
Performance Awards: (1) earnings per share; (2) revenues;
(3) cash flow; (4) cash flow return on investment; (5) return
on net assets; return on investment; return on capital; return
on equity; (6) operating margin; (7) net income; pretax
earnings; pretax earnings before interest, depreciation and
amortization; pretax operating earnings after interest expense
and before incentives, service fees, and extraordinary or
special items; operating earnings; (8) total stockholder
return; and (9) any of the above goals as compared to the
performance of a published or special index deemed applicable
by the Committee. One or more of the foregoing business
criteria shall also be exclusively used in establishing
performance goals for Annual Incentive Awards granted to a
Covered Employee under Section 8(c) hereof.
(iii) Performance Period; Timing For Establishing
Performance Goals. Achievement of performance goals in respect of
such Performance Awards shall be measured over a performance
period of up to ten years, as specified by the Committee.
Performance goals shall be established not later than 90 days
after the beginning of any performance period applicable to such
Performance Awards, or at such other date as may be required or
permitted for "performance-based compensation" under Code Section
162(m).
(iv) Performance Award Pool. The Committee may
establish a Performance Award pool, which shall be an unfunded
pool, for purposes of measuring Company performance in
connection with Performance Awards. The amount of such
Performance Award pool shall be based upon the achievement of a
performance goal or goals based on one or more of the business
criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance
with Section 8(b)(iii) hereof. The Committee may specify the
amount of the Performance Award pool as a percentage of any of
such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a
strictly mathematical relationship to such business criteria.
(v) Settlement of Performance Awards; Other Terms.
Settlement of such Performance Awards shall be in cash, Stock,
other Awards or other property, in the discretion of the
Committee. The Committee may, in its discretion, reduce the
amount of a settlement otherwise to be made in connection with
such Performance Awards, but may not exercise discretion to
increase any such amount payable to a Covered Employee in respect
of a Performance Award subject to this Section 8(b). The
Committee shall specify the circumstances in which such
Performance Awards shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end of a
performance period or settlement of such Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered
Employees. If the Committee determines that an Annual Incentive
Award to be granted to an Eligible Person who is designated by the
Committee as likely to be a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m),
the grant, exercise and/or settlement of such Annual Incentive Award
shall be contingent upon achievement of preestablished performance
goals and other terms set forth in this Section 8(c).
(i) Annual Incentive Award Pool. The Committee may
establish an Annual Incentive Award pool, which shall be an
unfunded pool, for purposes of measuring Company performance in
connection with Annual Incentive Awards. The amount of such
Annual Incentive Award pool shall be based upon the achievement of
a performance goal or goals based on one or more of the business
criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance
with Section 8(b)(iii) hereof. The Committee may specify the
amount of the Annual Incentive Award pool as a percentage of any
of such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a
strictly mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than
the end of the 90th day of each fiscal year, or at such other
date as may be required or permitted in the case of Awards
intended to be "performance-based compensation" under Code
Section 162(m), the Committee shall determine the Eligible
Persons who will potentially receive Annual Incentive Awards,
and the amounts potentially payable thereunder, for that fiscal
year, either out of an Annual Incentive Award pool established
by such date under Section 8(c)(i) hereof or as individual
Annual Incentive Awards. In the case of individual Annual
Incentive Awards intended to qualify under Code Section 162(m),
the amount potentially payable shall be based upon the
achievement of a performance goal or goals based on one or more
of the business criteria set forth in Section 8(b)(ii) hereof
in the given performance year, as specified by the Committee;
in other cases, such amount shall be based on such criteria as
shall be established by the Committee. In all cases, the
maximum Annual Incentive Award of any Participant shall be
subject to the limitation set forth in Section 5 hereof.
(iii) Payout of Annual Incentive Awards. After the end
of each fiscal year, the Committee shall determine the amount,
if any, of (A) the Annual Incentive Award pool, and the maximum
amount of potential Annual Incentive Award payable to each
Participant in the Annual Incentive Award pool, or (B) the
amount of potential Annual Incentive Award otherwise payable to
each Participant. The Committee may, in its discretion,
determine that the amount payable to any Participant as a final
Annual Incentive Award shall be increased or reduced from the
amount of his or her potential Annual Incentive Award,
including a determination to make no final Award whatsoever,
but may not exercise discretion to increase any such amount in
the case of an Annual Incentive Award intended to qualify under
Code Section 162(m). The Committee shall specify the
circumstances in which an Annual Incentive Award shall be paid
or forfeited in the event of termination of employment by the
Participant prior to the end of a fiscal year or settlement of
such Annual Incentive Award.
(d) Written Determinations. All determinations by the Committee
as to the establishment of performance goals, the amount of any
Performance Award pool or potential individual Performance Awards and as
to the achievement of performance goals relating to Performance Awards
under Section 8(b), and the amount of any Annual Incentive Award pool
or potential individual Annual Incentive Awards and the amount of final
Annual Incentive Awards under Section 8(c), shall be made in writing in
the case of any Award intended to qualify under Code Section 162(m).
The Committee may not delegate any responsibility relating to such
Performance Awards or Annual Incentive Awards.
(e) Status of Section 8(b) and Section 8(c) Awards Under Code
Section 162(m). It is the intent of the Company that Performance Awards
and Annual Incentive Awards under Sections 8(b) and 8(c) hereof granted
to persons who are designated by the Committee as likely to be Covered
Employees within the meaning of Code Section 162(m) and regulations
thereunder (including Income Tax Regulation 1.162-27 and successor
proposed and final regulations thereto) shall, if so designated by the
Committee, constitute "qualified performance-based compensation" within
the meaning of Code Section 162(m) and regulations thereunder.
Accordingly, the terms of Sections 8(b), (c), (d) and (e), including the
definitions of Covered Employee and other terms used therein, shall be
interpreted in a manner consistent with Code Section 162(m) and
regulations thereunder. The foregoing notwithstanding, because the
Committee cannot determine with certainty whether a given Participant
will be a Covered Employee with respect to a fiscal year that has not
yet been completed, the term Covered Employee as used herein shall mean
only a person designated by the Committee, at the time of grant of
Performance Awards or an Annual Incentive Award, as likely to be a
Covered Employee with respect to that fiscal year. If any provision of
the Plan or any agreement relating to such Performance Awards or Annual
Incentive Awards does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such
provision shall be construed or deemed amended to the extent necessary
to conform to such requirements.
9. Change in Control.
(a) Effect of "Change in Control." In the event of a "Change in
Control," as defined in Section 9(b), the following provisions shall
apply unless otherwise provided in the Award Agreement:
(i) Any Award carrying a right to exercise that was not
previously exercisable and vested shall become fully exercisable
and vested as of the time of the Change in Control and shall
remain exercisable and vested for the balance of the stated term
of such Award without regard to any termination of employment by
the Participant, subject only to applicable restrictions set forth
in Section 10(a) hereof;
(ii) Any optionee who holds an Option shall be entitled to
elect, during the 60-day period immediately following a Change
in Control, in lieu of acquiring the shares of Stock covered by
such Option, to receive, and the Company shall be obligated to
pay, in cash the excess of the Change in Control Price over the
exercise price of such Option, multiplied by the number of
shares of Stock covered by such Option; provided, however, that
no optionee who is subject to Section 16 with respect to the
Company at the time of the Change in Control shall be entitled
to make such an election if the acquisition of the right to
make such election would represent a non-exempt purchase under
Section 16(b) by such optionee;
(iii) The restrictions, deferral of settlement, and
forfeiture conditions applicable to any other Award granted under
the Plan shall lapse and such Awards shall be deemed fully vested
as of the time of the Change in Control, except to the extent of
any waiver by the Participant and subject to applicable
restrictions set forth in Section 10(a) hereof; and
(iv) With respect to any outstanding Award subject to
achievement of performance goals and conditions under the Plan,
such performance goals and other conditions will be deemed to be
met if and to the extent so provided by the Committee in the Award
agreement relating to such Award.
(b) Definition of "Change in Control." A "Change in Control"
shall be deemed to have occurred upon:
(i) An acquisition by any Person of Beneficial Ownership of
the shares of Common Stock of the Company then outstanding (the
"Company Common Stock Outstanding") or the voting securities of
the Company then outstanding entitled to vote generally in the
election of directors (the "Company Voting Securities
Outstanding") if such acquisition of Beneficial Ownership results
in the Person's Beneficially Owning 25% or more of the Company
Common Stock Outstanding or 25% or more of the combined voting
power of the Company Voting Securities Outstanding; or
(ii) The approval by the stockholders of the Company of a
reorganization, merger, consolidation, complete liquidation or
dissolution of the Company, sale or disposition of all or
substantially all of the assets of the Company, or similar
corporate transaction (in each case referred to in this Section
9(b) as a "Corporate Transaction") or, if consummation of such
Corporate Transaction is subject, at the time of such approval by
stockholders, to the consent of any government or governmental
agency, the obtaining of such consent (either explicitly or
implicitly); provided, however, that any merger, consolidation,
sale, disposition or other similar transaction to or with one or
more Participants or entities controlled by one or more
Participants shall not constitute a Corporate Transaction in
respect of such Participant(s); or
(iii) A change in the composition of the Board such that
the individuals who, as of the Effective Date, constitute the
Board (such Board shall be hereinafter referred to as the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes of this
Section 9(b), that any individual who becomes a member of the
Board subsequent to the Effective Date whose election, or
nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who
are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a member of the
Incumbent Board; and, provided, further, that any such individual
whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in
Rule 14a-11 of Regulation 14A under the Exchange Act, including
any successor to such Rule) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board shall in no event be considered as a member
of the Incumbent Board.
Notwithstanding the provisions set forth in subparagraphs (i) and
(ii) of this Section 9(b), the following shall not constitute a
Change in Control for purposes of the Plan: (1) any acquisition by
or consummation of a Corporate Transaction with any entity that was a
subsidiary of the Company immediately prior to the transaction or an
employee benefit plan (or related trust) sponsored or maintained by
the Company or an entity that was a subsidiary of the Company
immediately prior to the transaction if, immediately after such
transaction (including consummation of all related transactions), the
surviving entity is controlled by no Person other than such employee
benefit plan (or related trust) and/or other Persons who controlled
the Company immediately prior to such transaction; or (2) any
acquisition or consummation of a Corporate Transaction following
which more than 50% of, respectively, the shares then outstanding of
common stock of the corporation resulting from such acquisition or
Corporate Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the
individuals and entities who were Beneficial Owners, respectively, of
the Company Common Stock Outstanding and Company Voting Securities
Outstanding immediately prior to such acquisition or Corporate
Transaction in substantially the same proportions as their ownership,
immediately prior to such acquisition or Corporate Transaction, of
the Company Common Stock Outstanding and Company Voting Securities
Outstanding, as the case may be.
(c) Definition of "Change in Control Price." The "Change in
Control Price" means an amount in cash equal to the higher of (i) the
amount of cash and fair market value of property that is the highest
price per share paid (including extraordinary dividends) in any
Corporate Transaction triggering the Change in Control under Section
9(b)(ii) hereof or any liquidation of shares following a sale of
substantially all assets of the Company, or (ii) the highest Fair
Market Value per share at any time during the 60-day period preceding
and 60-day period following the Change in Control.
10. General Provisions.
(a) Compliance With Legal and Other Requirements. The Company
may, to the extent deemed necessary or advisable by the Committee,
postpone the issuance or delivery of Stock or payment of other benefits
under any Award until completion of such registration or qualification
of such Stock or other required action under any federal or state law,
rule or regulation, listing or other required action with respect to any
stock exchange or automated quotation system upon which the Stock or
other Company securities are listed or quoted, or compliance with any
other obligation of the Company, as the Committee may consider
appropriate, and may require any Participant to make such
representations, furnish such information and comply with or be subject
to such other conditions as it may consider appropriate in connection
with the issuance or delivery of Stock or payment of other benefits in
compliance with applicable laws, rules, and regulations, listing
requirements, or other obligations. The foregoing notwithstanding, in
connection with a Change in Control, the Company shall take or cause to
be taken no action, and shall undertake or permit to arise no legal or
contractual obligation, that results or would result in any postponement
of the issuance or delivery of Stock or payment of benefits under any
Award or the imposition of any other conditions on such issuance,
delivery or payment, to the extent that such postponement or other
condition would represent a greater burden on a Participant than existed
on the 90th day preceding the Change in Control.
(b) Limits on Transferability; Beneficiaries. No Award or other
right or interest of a Participant under the Plan, including any Award
or right which constitutes a derivative security as generally defined in
Rule 16a-1(c) under the Exchange Act, shall be pledged, hypothecated or
otherwise encumbered or subject to any lien, obligation or liability of
such Participant to any party (other than the Company or a subsidiary),
or assigned or transferred by such Participant otherwise than by will or
the laws of descent and distribution or to a Beneficiary upon the death
of a Participant, and such Awards or rights that may be exercisable
shall be exercised during the lifetime of the Participant only by the
Participant or his or her guardian or legal representative, except that
Awards and other rights (other than ISOs and SARs in tandem therewith)
may be transferred to one or more Beneficiaries or other transferees
during the lifetime of the Participant, and may be exercised by such
transferees in accordance with the terms of such Award, but only if and
to the extent such transfers are permitted by the Committee pursuant to
the express terms of an Award agreement (subject to any terms and
conditions which the Committee may impose thereon); provided, however,
that, for so long as the Company is relying on Rule 16b-3 as in effect
prior to May 1, 1991 for exemptions for Plan transactions, Awards may be
granted that are transferable (and thus are not exempted under such
version of Rule 16b-3) only on terms that do not preclude other grants
of Awards under the Plan that are exempt under such version of Rule
16b-3. A Beneficiary, transferee, or other person claiming any rights
under the Plan from or through any Participant shall be subject to all
terms and conditions of the Plan and any Award agreement applicable to
such Participant, except as otherwise determined by the Committee, and
to any additional terms and conditions deemed necessary or appropriate
by the Committee.
(c) Adjustments. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange,
liquidation, dissolution or other similar corporate transaction or
event affects the Stock such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or
enlargement of the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any
or all of (i) the number and kind of shares of Stock which may be
delivered in connection with Awards granted thereafter, (ii) the
number and kind of shares of Stock by which annual per-person Award
limitations are measured under Section 5 hereof, (iii) the number and
kind of shares of Stock subject to or deliverable in respect of
outstanding Awards and (iv) the exercise price, grant price or
purchase price relating to any Award and/or make provision for
payment of cash or other property in respect of any outstanding
Award. In addition, the Committee is authorized to make adjustments
in the terms and conditions of, and the criteria included in, Awards
(including Performance Awards and performance goals, and Annual
Incentive Awards and any Annual Incentive Award pool or performance
goals relating thereto) in recognition of unusual or nonrecurring
events (including, without limitation, events described in the
preceding sentence, as well as acquisitions and dispositions of
businesses and assets) affecting the Company, any subsidiary or any
business unit, or the financial statements of the Company or any
subsidiary, or in response to changes in applicable laws,
regulations, accounting principles, tax rates and regulations or
business conditions or in view of the Committee's assessment of the
business strategy of the Company, any subsidiary or business unit
thereof, performance of comparable organizations, economic and
business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment
shall be authorized or made if and to the extent that such authority
or the making of such adjustment would cause Options, SARs,
Performance Awards granted under Section 8(b) hereof or Annual
Incentive Awards granted under Section 8(c) hereof to Participants
designated by the Committee as Covered Employees and intended to
qualify as "performance-based compensation" under Code Section 162(m)
and regulations thereunder to otherwise fail to qualify as
"performance-based compensation" under Code Section 162(m) and
regulations thereunder.
(d) Taxes. The Company and any subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award under
the Plan, including from a distribution of Stock, or any payroll or
other payment to a Participant, amounts of withholding and other taxes
due or potentially payable in connection with any transaction involving
an Award, and to take such other action as the Committee may deem
advisable to enable the Company and Participants to satisfy obligations
for the payment of withholding taxes and other tax obligations relating
to any Award. This authority shall include authority to withhold or
receive Stock or other property and to make cash payments in respect
thereof in satisfaction of a Participant's tax obligations, either on a
mandatory or elective basis in the discretion of the Committee.
(e) Changes to the Plan and Awards. The Board may amend, alter,
suspend, discontinue or terminate the Plan or the Committee's authority
to grant Awards under the Plan without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall
be subject to the approval of the Company's stockholders not later than
the annual meeting next following such Board action if such stockholder
approval is required by any federal or state law or regulation or the
rules of any stock exchange or automated quotation system on which the
Stock may then be listed or quoted, and the Board may otherwise, in its
discretion, determine to submit other such changes to the Plan to
stockholders for approval; provided that, without the consent of an
affected Participant, no such Board action may materially and adversely
affect the rights of such Participant under any previously granted and
outstanding Award. The Committee may waive any conditions or rights
under, or amend, alter, suspend, discontinue or terminate any Award
theretofore granted and any Award agreement relating thereto, except as
otherwise provided in the Plan; provided that, without the consent of an
affected Participant, no such Committee action may materially and
adversely affect the rights of such Participant under such Award.
Notwithstanding anything in the Plan to the contrary, if any right under
this Plan would cause a transaction to be ineligible for pooling of
interest accounting that would, but for the right hereunder, be eligible
for such accounting treatment, the Committee may modify or adjust the
right so that pooling of interest accounting shall be available,
including the substitution of Stock having a Fair Market Value equal to
the cash otherwise payable hereunder for the right which caused the
transaction to be ineligible for pooling of interest accounting.
(f) Limitation on Rights Conferred Under Plan. Neither the Plan
nor any action taken hereunder shall be construed as (i) giving any
Eligible Person or Participant the right to continue as an Eligible
Person or Participant or in the employ of the Company or a subsidiary,
(ii) interfering in any way with the right of the Company or a
subsidiary to terminate any Eligible Person's or Participant's
employment at any time, (iii) giving an Eligible Person or Participant
any claim to be granted any Award under the Plan or to be treated
uniformly with other Participants and employees, or (iv) conferring on a
Participant any of the rights of a stockholder of the Company unless and
until the Participant is duly issued or transferred shares of Stock in
accordance with the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a
Participant or obligation to deliver Stock pursuant to an Award, nothing
contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
provided that the Committee may authorize the creation of trusts and
deposit therein cash, Stock, other Awards or other property, or make
other arrangements to meet the Company's obligations under the Plan.
Such trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines
with the consent of each affected Participant. The trustee of such
trusts may be authorized to dispose of trust assets and reinvest the
proceeds in alternative investments, subject to such terms and
conditions as the Committee may specify and in accordance with
applicable law.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan
by the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of
the Board or a committee thereof to adopt such other incentive
arrangements as it may deem desirable including incentive arrangements
and awards which do not qualify under Code Section 162(m).
(i) Payments in the Event of Forfeitures; Fractional Shares.
Unless otherwise determined by the Committee, in the event of a
forfeiture of an Award with respect to which a Participant paid cash or
other consideration, the Participant shall be repaid the amount of such
cash or other consideration. No fractional shares of Stock shall be
issued or delivered pursuant to the Plan or any Award. The Committee
shall determine whether cash, other Awards or other property shall be
issued or paid in lieu of such fractional shares or whether such
fractional shares or any rights thereto shall be forfeited or otherwise
eliminated.
(j) Governing Law. The validity, construction and effect of the
Plan, any rules and regulations under the Plan, and any Award agreement
shall be determined in accordance with the laws of the State of New
Jersey, without giving effect to principles of conflicts of laws, and
applicable federal law.
(k) Plan Effective Date and Stockholder Approval. The Plan has
been approved by Melville Corporation as sole shareholder of the Company
and shall become effective on the date on which shares of Company Common
Stock are distributed to shareholders of Melville Corporation.
EXHIBIT 10.4
FOOTSTAR, INC.
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1996 Non-Employee Director Stock Plan
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1. Purpose. The purpose of this 1996 Non-Employee Director Stock Plan
(the "Plan") is to assist Footstar, Inc., a Delaware corporation (the
"Company"), in attracting and retaining highly qualified persons to serve as
non-employee directors and to more closely align such directors' interests
with the interests of stockholders of the Company by providing a significant
portion of their compensation in the form of Company stock.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof:
(a) "Board" means the Company's Board of Directors.
(b) "Cause" means a director's conviction of a felony or a
director's willful act of fraud, serious dishonesty, or other act
materially harmful to the Company.
(c) "Change in Control" shall be defined in the manner set
forth in the Company's 1996 Incentive Compensation Plan, as of the
effective date of the Plan; provided, however, that no event that
would otherwise constitute a Change in Control shall be deemed to be
a Change in Control with respect to a Participant for purposes of the
Plan if the role of the Board or individual directors relating to
such event would result in non-compliance with Rule 16b-3 in respect
of such Participant, as specified in Section 12(d) of the Plan.
(d) "Disability" means a physical or mental incapacity of long
duration which, in the reasonable determination of the Board, renders
the Participant unable to perform the duties of a director of the
Company.
(e) "Distribution" means the distribution of shares of Company
Common Stock to stockholders of Melville Corporation.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(g) "Fair Market Value" of Stock means, as of any given date,
the closing sale price per share reported on a consolidated basis for
stock listed on the principal stock exchange or market on which Stock is
traded on the date as of which such value is being determined or, if
there is no sale on that date, then on the last previous day on which a
sale was reported.
(h) "Option" means the right, granted to a Participant under
Section 6, to purchase Stock at a specified exercise price for a
specified period of time under the Plan.
(i) "Participant" means a director who has been granted or
acquired Options or Stock Units which have not yet been exercised,
settled or forfeited under the Plan.
(j) "Retirement" means ceasing to serve as a director at or
after attaining age 65.
(k) "Stock" means the Company's Common Stock and such other
securities as may be substituted (or resubstituted) for Stock pursuant
to Section 10 hereof.
(l) "Stock Unit" means the credit to a Participant's account
under Sections 7, 8, or 9 hereof, which credit is denominated in shares
and represents the right to receive one share of Stock upon settlement
of the Stock Unit account for each such credited Stock Unit, subject to
such conditions as are imposed under the Plan.
3. Shares Available Under the Plan. Subject to adjustment as
provided in Section 10 hereof, the total number of shares of Stock reserved
and available for issuance under the Plan is 200,000. Such shares may be
authorized but unissued shares, treasury shares or shares acquired in the
market for the account of the Participant. If any Option or Stock Unit
expires or terminates for any reason without having been exercised or
settled, the unpurchased or undelivered shares subject to the Option or
Stock Unit will again be available for delivery under the Plan. Shares
surrendered in payment of the exercise price of any Option will again be
available for delivery under the Plan.
4. Administration of the Plan. The Plan will be administered by the
Board, provided that any action by the Board relating to the Plan will be
taken only if, in addition to any other required vote, such action is approved
by the affirmative vote of a majority of the directors who are not then
eligible to participate in the Plan.
5. Eligibility. Each director of the Company who, on any date on
which Options or Stock Units are to be granted under Sections 6 or 7 hereof
or on which fees are to be paid which could be deferred under Section 8
hereof, is not an executive officer or employee, either full-time or part-
time, of (i) the Company, (ii) any parent of the Company, or (iii) any
subsidiary of the Company, will be eligible, at such date, to be granted
Options under Section 6 hereof or Stock Units under Section 7 hereof or to
defer fees in the form of Stock Units under Section 8 hereof, as the case
may be. No person other than those specified in this Section 5 will be
eligible to participate in the Plan.
6. Stock Options. An Option to purchase 2,000 shares of Stock will
be granted to each director of the Company at the close of business on the
later of the 20th trading day or such director's initial election to the
Board, if such director is then eligible to receive an Option grant under
the Plan. Options granted under the Plan will be non-qualified stock
options and will be subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
purchasable under an Option will be equal to 100% of the Fair Market
Value of Stock on the date of grant of the Option, except that for
options granted on the 20th trading day the price will be the average
of the high and low trading prices for Stock for the first 20 trading
days.
(b) Option Term. Each Option will expire at the earliest of (i)
ten years after the date of grant, (ii) 12 months after the Participant
ceases to serve as a director of the Company for any reason other than
death, Disability, or Retirement or (iii) immediately upon the
Participant's removal for Cause.
(c) Exercisability. Each Option will become exercisable as to
20% of the Option shares on each of the first five anniversaries of
the date of grant and will thereafter remain exercisable until the
Option expires, provided that an Option previously granted to a
Participant (i) will be fully exercisable in the event of a Change in
Control, (ii) will be fully exercisable after the Participant ceases
to serve as a director of the Company due to death, Disability, or
Retirement, and (iii) will be exercisable after the Participant
ceases to serve as a director of the Company for any reason other
than death, Disability, or Retirement if and to the extent the Option
was exercisable at the date of such cessation of service.
(d) Method of Exercise. Each Option may be exercised, in
whole or in part, at such time as it is exercisable and prior to its
expiration by giving written notice of exercise to the Company
specifying the number of shares to be purchased and accompanied by
payment in full of the exercise price in cash (including by check) or
by surrender of shares of Stock having a Fair Market Value at the
time of exercise equal to the exercise price, or a combination of a
cash payment and surrender of such Stock.
7. Grants of Stock Units.
(a) Initial Grants. Each director of the Company who, at the
close of business on the date of Distribution, is then eligible under
Section 5 hereof shall be granted 2,000 Stock Units.
(b) Annual Grants. Each director of the Company who, at the
close of business on the date of each annual meeting of the Company's
stockholders commencing in 1997, is then eligible under Section 5
hereof shall be granted 2,000 Stock Units.
(c) Vesting of Stock Units. One-half of each grant of Stock
Units under Sections 7(a) and 7(b) hereof (including any Stock Units
resulting from an adjustment in accordance with Section 10 hereof)
shall be forfeited by a Participant who ceases to serve as a director
of the Company prior to six months and a day after the grant date for
any reason other than death, Disability, or Retirement, except that
Stock Units shall not be forfeited or forfeitable upon the occurrence
of a Change in Control and thereafter. Settlement of such Stock
Units shall occur as promptly as practicable after the date they
become nonforfeitable, except as provided in Section 7(e) hereof.
The remaining one-half of each such grant shall be nonforfeitable
when granted and, except as provided in Section 7(e) hereof, shall be
settled upon the later of the Participant's ceasing to be a director
of the Company or attaining age 65, provided that settlement of such
Stock Units shall be accelerated in the event of death, Disability or
a Change in Control.
(d) Dividend Equivalents. A Participant to whom any Stock
Unit is credited under this Section 7 (including this Section 7(d))
shall be entitled to receive dividend equivalents, in the form of
additional Stock Units, in accordance with Section 9 hereof. Such
additional Stock Units shall be nonforfeitable. Stock Units credited
as a result of dividend equivalents on other Stock Units granted
under this Section 7 shall be settled at the same time as such other
Stock Units are settled (or upon forfeiture of such other Stock
Units).
(e) Settlement and Elective Deferral. The Company will settle
Stock Units credited to the Participant's Stock Unit account
resulting from Stock Units granted under Sections 7(a) and 7(b) and
dividend equivalents thereon by delivering to the Participant (or his
or her beneficiary), as promptly as practicable after the end of the
applicable deferral period, the number of shares of Stock equal to
the number of such whole Stock Units then credited to such account as
to which the deferral period has expired, together with cash in lieu
of any fractional share at a time that less than one whole Stock Unit
remains credited to such account. The deferral period shall end at
the time the Stock Unit is to be settled as set forth in Sections
7(c) and 7(d), unless the Participant shall have filed an irrevocable
written election with the Secretary of the Company by such date as
may be specified by the Board electing to extend the period of
deferral of settlement of Stock Units granted under Sections 7(a) and
7(b) and dividend equivalents thereon, provided that, other
provisions of the Plan notwithstanding, all such deferral periods
will end upon the occurrence of a Change in Control. Electively
deferred Stock Units granted under Sections 7(a) and 7(b) and
dividend equivalents thereon shall be nonforfeitable.
8. Deferral of Cash Fees in the Form of Stock Units.
(a) Deferral of Fees Generally. Each director of the Company
may, in lieu of current receipt of fees in cash, defer receipt of
such fees in the form of Stock Units in accordance with this Section
8, provided that such director is then eligible under Section 5
hereof to defer fees at the date any such fee is otherwise payable.
Fees that may be deferred include annual retainer fees for service on
the Board, fees for attendance at meetings of the Board and
committees of the Board, and other fees for services payable under
then current policies of the Board.
(b) Deferral Elections. Each director who elects to defer
fees in the form of Stock Units for any calendar year must file an
irrevocable written election with the Secretary of the Company by
such date as may be specified by the Board. The election shall
specify the percentage of fees to be deferred and the period or
periods of deferral (subject to Section 8(e) hereof). If a deferral
of fees would take place within six months after the filing of the
election and at a time that the Company's employee benefit plans are
being operated under Rule 16b-3 under the Exchange Act as in effect
on and after May 1, 1991, the Board shall either delay the
effectiveness of such deferral election, or shall permit the deferral
of fees as a cash obligation to the Participant but shall delay the
date upon which Stock Units are credited to the Participant's Stock
Unit account, until a date, as specified by the Board, at least six
months (or such other period as then required under Rule 16b-3) after
the date of filing of the election (without interest on the cash
obligation). An election by a director shall be deemed to be
continuing and therefore applicable to Plan years after the year in
respect of which the election is filed, unless the director revokes
or changes such election by filing a new election form in accordance
with this Section 8(b).
(c) Crediting of Stock Units. At any date on which fees are
payable to a Participant who has elected to defer fees in the form of
Stock Units, the Company will credit such Participant's Stock Unit
account with a number of Stock Units equal to the number of shares of
Stock having an aggregate Fair Market Value at that date equal to the
fees that otherwise would have been payable at such date but for the
Participant's election to defer receipt of such fees in the form of
Stock Units. Such Stock Units shall be nonforfeitable.
(d) Dividend Equivalents. A Participant to whom any Stock Unit
is credited under this Section 8 (including this Section 8(d)) shall be
entitled to receive dividend equivalents, in the form of additional
Stock Units, in accordance with Section 9 hereof. Such additional Stock
Units shall be nonforfeitable. Stock Units credited as a result of
dividend equivalents n other Stock Units granted under this Section 8
shall be settled at the same time as such other Stock Units are settled.
(e) Settlement of Stock Units. The Company will settle Stock
Units credited to the Participant's Stock Unit account under this
Section 8 by delivering to the Participant (or his or her beneficiary),
as promptly as practicable after the end of the applicable deferral
period, the number of shares of Stock equal to the number of such whole
Stock Units then credited to such account as to which the deferral
period has expired, together with cash in lieu of any fractional share
at a time that less than one whole Stock Unit remains credited to such
account. Other provisions of the Plan notwithstanding, all deferral
periods will end upon the occurrence of a Change in Control.
9. Crediting of Dividend Equivalents. A Participant shall be entitled
to receive dividend equivalents, as of the payment date for any dividend or
distribution on Stock, in an amount equal to the cash or fair market value of
any property other than Stock paid as a dividend or distribution on a single
share of Stock at that date multiplied by the number of Stock Units (including
any fractional shares) credited to his or her Stock Unit account as of the
record date for such dividend or distribution. Such dividend equivalents
shall be credited as a number of Stock Units determined by dividing the
aggregate amount of such cash or property by the Fair Market Value of a share
of Stock at the payment date of the dividend or distribution. Dividends in
the form of additional shares of Stock shall not result in the crediting of
dividend equivalents, but will instead result in an adjustment in the number
of shares credited as Stock Units, in accordance with Section 10 hereof.
10. Adjustment Provisions. In the event any recapitalization,
reorganization, merger, consolidation, spinoff, combination, repurchase,
exchange of shares or other securities of the Company, stock split or
reverse split, stock dividend, other extraordinary dividend, liquidation,
dissolution or other similar corporate transaction or event affects the
Stock such that an adjustment is determined by the Board to be appropriate
in order to prevent dilution or enlargement of Participants' rights under
the Plan, then the Board will, in a manner that is proportionate to the
change to the Stock and is otherwise equitable, adjust (i) the number and
kind of shares of Stock reserved for issuance under the Plan, (ii) the
number and kind of shares of Stock to be subject to each automatic grant of
Options and Stock Units under Sections 6 and 7 hereof, and (iii) the number
and kind of shares of Stock to be issued and delivered in settlement of
outstanding Options and Stock Units, and/or the exercise price of
outstanding Options. The foregoing notwithstanding, no adjustment may be
made hereunder except as shall be necessary to maintain the proportionate
interest of a Participant under the Plan and to preserve, without
exceeding, the value of outstanding Options and Stock Units and potential
grants of Options and Stock Units. If at any date an insufficient number
of shares of Stock are available under the Plan for the automatic grant of
Options or Stock Units or the deferral of fees in the form of Stock Units
at that date, Stock Units will first be automatically granted
proportionately to Participants, to the extent shares are then available
and otherwise as provided under Section 7 hereof; and then, if any shares
remain available, Options will be automatically granted proportionately to
Participants, to the extent shares are then available and otherwise as
provided in Section 6 hereof; and then, if any shares remain available,
Stock Units will be credited proportionately among Participants deferring
fees in the form of Stock Units, to the extent shares are then available
and otherwise as provided under Section 8 hereof.
11. Changes to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or authority to grant Options under
Section 6 hereof, Stock Units under Section 7 hereof or defer fees under
Section 8 hereof without the consent of stockholders or Participants,
except that any such action will be subject to the approval of the
Company's stockholders at the next annual meeting of stockholders having a
record date after the date such action was taken if such stockholder
approval is required by any federal or state law or regulation or the rules
of any stock exchange or automated quotation system on which the Stock may
then be listed or quoted, or if the Board determines in its discretion to
seek or obtain stockholder approval; provided that, without the consent of
an affected Participant, no such action may impair the rights of such
Participant in respect of any previously granted or outstanding Options,
Stock Units or Stock Unit account; and provided further that any Plan
provision that specifies the directors who may receive grants of Options or
Stock Units, the amount and price of securities to be granted to such
directors, and the timing of grants to such directors, or is otherwise a
"plan provision" referred to in Rule 16b-3(c)(2)(ii)(B) under the Exchange
Act (or any successor provision), shall not be amended more than once every
six months, other than to comport with changes in the Internal Revenue Code
of 1986, as amended, or the rules thereunder, if such limitation on
frequency of amendments is then required under Rule 16b-3.
12. General Provisions.
(a) Unfunded Nature of Plan; Agreements. Stock Unit accounts
are maintained solely as bookkeeping entries by the Company
evidencing unfunded obligations of the Company. Accordingly,
Participants will not have rights to specific property of the Company
or otherwise have rights other than as unsecured creditors in respect
of such Stock Unit accounts. The Board may, however, authorize the
creation of trusts and deposit Stock therein, or make other
arrangements, to meet the Company's obligations under the Plan;
provided, however, that such actions and all other actions under this
Section 12(a) shall be consistent with Section 12(d) hereof. Such
trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Board otherwise determines with the
consent of each affected Participant. The Company's obligations
under the Plan will be evidenced by agreements or other documents
executed by the Company and the Participant incorporating the terms
and conditions set forth in the Plan, together with such other terms
and conditions not inconsistent with the Plan as the Board may from
time to time approve.
(b) Compliance with Laws and Obligations. The Company will not
be obligated to issue or deliver shares of Stock in connection with any
Option or in settlement of Stock Units in a transaction subject to the
registration requirements of the Securities Act of 1933, as amended, or
any other federal or state securities law, any requirement under any
listing agreement between the Company and any stock exchange or
automated quotation system, or any other law, regulation or contractual
obligation of the Company, until such laws, regulations and other
obligations of the Company have been complied with to the satisfaction
of the Company. Certificates representing shares of Stock issued under
the Plan will be subject to such stop-transfer orders and other
restrictions as may be applicable under such laws, regulations and other
obligations of the Company, including any requirement that a legend or
legends be placed thereon.
(c) Limitations on Transferability. No Options or Stock Units or
right under the Plan which constitutes a derivative security as
generally defined in Rule 16a-1(c) under the Exchange Act shall be
pledged, hypothecated, or otherwise encumbered or subject to any lien,
obligation, or liability of a Participant to any party (other than the
Company or a subsidiary), or assigned or transferred by such Participant
otherwise than by will or the laws of descent and distribution or to a
designated beneficiary upon the death of the Participant, except that
Options, Stock Units, and rights relating thereto may be transferred to
one or more beneficiaries or other transferees during the lifetime of
the Participant, but only if and to the extent such transfers are
permitted by the Board pursuant to the express terms of an award
agreement (subject to any terms and conditions which the Board may
impose thereon) then permitted under Rule 16b-3, otherwise consistent
with Section 12(d) hereof, and consistent with the registration of the
offer and sale of shares of Stock related thereto on Form S-8, Form S-3,
or such other registration form of the Securities and Exchange
Commission as may then be filed and effective with respect to the Plan.
A beneficiary, transferee, or other person claiming any rights under the
Plan from or through any Participant shall be subject to all terms and
conditions of the Plan and any award agreement applicable to such
Participant, except as otherwise determined by the Board, and to any
additional terms and conditions deemed necessary or appropriate by the
Board.
(d) Compliance with Rule 16b-3. It is the intent of the Company
that this Plan comply in all respects with applicable provisions of Rule
16b-3 under the Exchange Act. Accordingly, if any provision of this
Plan or any agreement hereunder does not comply with the requirements of
Rule 16b-3 as then applicable to a Participant, or would cause any
Participant to no longer be deemed a "disinterested person" within the
meaning of Rule 16b-3, such provision will be construed or deemed
amended to the extent necessary to conform to the applicable
requirements with respect to such Participant. In addition, the Board
shall have no authority to make any amendment, alteration, suspension,
discontinuation or termination of the Plan and the Board shall have no
authority to make any adjustment under Section 10 hereof, amend any
agreement hereunder or take other action if and to the extent such
authority would cause a transaction under the Plan by a Participant not
to be exempt, or would cause a Participant no longer to be deemed a
"disinterested person," under Rule 16b-3 under the Exchange Act.
(e) Designation of Beneficiary. Each Participant may designate,
on forms provided by the Company, one or more beneficiaries to receive
the amounts distributable pursuant to the Plan in the event of such
Participant's death. The Company may rely upon the beneficiary
designation last filed in accordance with the terms of the Plan.
(f) Crediting of Fractional Shares. The amount of Stock Units
credited to a Stock Unit Account shall include any fractional share,
calculated to at least three decimal places.
(g) No Right To Continue as a Director. Nothing contained in the
Plan or any agreement hereunder will confer upon any Participant any
right to continue to serve as a director of the Company.
(h) No Stockholder Rights Conferred. Nothing contained in the
Plan or any agreement hereunder, including the grant of Options or
crediting of Stock Units to a Participant's Stock Unit account, will
confer upon any Participant (or beneficiary or transferee) any rights of
a stockholder of the Company unless and until an Option is duly
exercised by, or shares of Stock are in fact issued and delivered in
settlement of Stock Units to, such Participant or his or her nominee (or
beneficiary or transferee or a nominee thereof).
(i) Governing Law. The validity, construction, and effect of the
Plan, any rules and regulations under the Plan, and any award agreement
shall be determined in accordance with the laws of the State of New
Jersey, without giving effect to principles of conflicts of laws, and
applicable federal law.
(j) Stockholder Approval, Effective Date, and Plan Termination.
The Plan has been approved by Melville Corporation as sole shareholder
of the Company and shall become effective upon the Distribution. Unless
earlier terminated by action of the Board, the Plan will remain in
effect until such time as no shares of Stock remain available for
issuance under the Plan and the Company and Participants have no further
rights or obligations under the Plan in respect of outstanding Options
or Stock Units under the Plan.
EXHIBIT 10.5
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FOOTSTAR, INC.
Employment Agreement for ___________
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Page
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1. Definitions...................................................... 1
2. Term of Employment............................................... 2
3. Position, Duties and Responsibilities............................ 2
4. Base Salary...................................................... 2
5. Annual Incentive Awards.......................................... 3
6. Long-Term Stock Incentive Programs............................... 3
7. Employee Benefit Programs........................................ 3
8. Disability....................................................... 4
9. Reimbursement of Business and Other Expenses; Perquisites........ 5
10. Termination of Employment....................................... 5
11. Confidentiality; Cooperation with Regard to Litigation.......... 14
12. Non-competition................................................. 15
13. Non-solicitation of Employees................................... 16
14. Remedies........................................................ 16
15. Resolution of Disputes.......................................... 16
16. Indemnification................................................. 17
17. Excise Tax Gross-Up............................................. 18
18. Effect of Agreement on Other Benefits........................... 19
19. Assignability; Binding Nature................................... 20
20. Representation.................................................. 20
21. Entire Agreement................................................ 20
22. Amendment or Waiver............................................. 20
23. Severability.................................................... 20
24. Survivorship.................................................... 21
25. Beneficiaries/References........................................ 21
26. Governing Law/Jurisdiction...................................... 21
27. Notices......................................................... 21
28. Headings........................................................ 22
29. Counterparts.................................................... 22
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of the day of June, 1996
by and between Footstar, Inc., a Delaware corporation (together with its
successors and assigns permitted under this Agreement, the "Company"), and
_______________ (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ the Executive pursuant to an
agreement embodying the terms of such employment (this "Agreement") and the
Executive desires to enter into this Agreement and to accept such employment,
subject to the terms and provisions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
receipt of which is mutually acknowledged, the Company and the Executive
(individually a "Party" and together the "Parties") agree as follows:
1. Definitions.
(a) "Approved Early Retirement" shall have the meaning set forth
in Section 10(f) below.
(b) "Base Salary" shall have the meaning set forth in Section 4
below.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Cause" shall have the meaning set forth in Section 10(b)
below.
(e) "Change in Control" shall have the meaning set forth in
Section 10(c) below.
(f) "Confidential Information" shall have the meaning set forth
in Section 11 below.
(g) "Constructive Termination Without Cause" shall have the
meaning set forth in Section 10(c) below.
(h) "Effective Date" shall have the meaning set forth in Section
2 below.
(i) "1996 ICP" shall have the meaning set forth in Section 5
below.
(j) "Normal Retirement" shall have the meaning set forth in
Section 10(f) below.
(k) "Original Term of Employment" shall have the meaning set
forth in Section 2 below.
(l) "Renewal Term" shall have the meaning set forth in Section 2
below.
(m) "Restriction Period" shall have the meaning set forth in
Section 12 below.
(n) "SERP" shall have the meaning set forth in Section 7 below.
(o) "Severance Period" shall have the meaning set forth in
Section 10(c)(ii) below, except as provided otherwise in Section 10(e) below.
(p) "Subsidiary" shall have the meaning set forth in Section 11
below.
(q) "Term of Employment" shall have the meaning set forth in
Section 2 below.
(r) "Termination Without Cause" shall have the meaning set forth
in Section 10(c) below.
2. Term of Employment.
(a) The term of the Executive's employment under this Agreement
shall commence immediately upon the date on which shares of Company common
stock are distributed to shareholders of Melville Corporation (the "Effective
Date") and end on the third anniversary of such date (the "Original Term of
Employment"). The Original Term of Employment shall be automatically renewed
for successive one-year terms (the "Renewal Terms") unless at least 180 days
prior to the expiration of the Original Term of Employment or any Renewal
Term, either Party notifies the other Party in writing that he or it is
electing to terminate this Agreement at the expiration of the then current
Term of Employment. "Term of Employment" shall mean the Original Term of
Employment and all Renewal Terms.
(b) Notwithstanding anything in this Agreement to the contrary,
at least one year prior to the expiration of the Original Term of Employment,
the Parties shall meet to discuss this Agreement and may agree in writing to
modify any of the terms of this Agreement.
3. Position, Duties and Responsibilities.
(a) Generally. Executive shall serve as a senior executive of
the Company. Executive shall have and perform such duties, responsibilities,
and authorities as shall be specified by the Company from time to time and as
are customary for a senior executive of a publicly held corporation of the
size, type, and nature of the Company as they may exist from time to time and
as are consistent with such position and status. Executive shall devote
substantially all of his business time and attention (except for periods of
vacation or absence due to illness), and his best efforts, abilities,
experience, and talent to his position and the businesses of the Company.
(b) Other Activities. Anything herein to the contrary
notwithstanding, nothing in this Agreement shall preclude the Executive from
(i) engaging in charitable activities and community affairs and (ii) managing
his personal investments and affairs, provided that such activities do not
materially interfere with the proper performance of his duties and
responsibilities under this Agreement. Unless approved in writing by the Board
or Chief Executive Officer of the Company, the Executive may not serve on the
board of directors of any corporation or the board of any association and/or
charitable organization.
4. Base Salary.
The Executive shall be paid an annualized salary, payable in
accordance with the regular payroll practices of the Company, of not less
than____________, subject to annual review for increase at the discretion of
the Compensation Committee of the Board ("Base Salary").
5. Annual Incentive Awards.
The Executive shall participate in the Companys 1996 Incentive
Compensation Plan (the "1996 ICP") with a target annual incentive award
opportunity of no less than ____% of Base Salary or in a successor plan to the
1996 ICP that provides the Executive with an equivalent opportunity. Payment
of annual incentive awards shall be made at the same time that other
senior-level executives receive their incentive awards.
6. Long-Term Stock Incentive Programs.
(a) General. The Executive shall be eligible to participate in
and to receive stock incentive awards under the 1996 ICP and any successor
plan.
(b) Career Equity Program. The Executive shall be eligible to
participate in the Companys Career Equity Program with a target long term
incentive award opportunity of no less than _____% of Base Salary or in a
successor plan or program that provides the Executive with an equivalent
opportunity.
7. Employee Benefit Programs.
(a) General Benefits. During the Term of Employment, the
Executive shall be entitled to participate in such employee pension and
welfare benefit plans and programs of the Company as are made available to the
Companys senior-level executives or to its employees generally, as such plans
or programs may be in effect from time to time, including, without limitation,
health, medical, dental, long-term disability, travel accident and life
insurance plans.
(b) SERP. At or as soon as practicable following (but effective
as of) the Effective Date, the Company shall adopt a supplemental retirement
plan ("SERP") providing for, among other things, a lifetime annuity benefit
for the Executive equal to 2% of his average high three of last 10 years
salary plus actual annual bonus (before any deferrals) for each year (full and
partial) of service with the Company.
(c) Deferral of Compensation. The Company shall implement
deferral arrangements, reasonably acceptable to Executive and the Company,
permitting Executive to elect to defer receipt, pursuant to written deferral
election terms and forms (the "Deferral Election Forms"), of all or a
specified portion of (i) his annual Base Salary and annual incentive
compensation under Sections 4 and 5, (ii) long term incentive compensation
under Section 6 and (iii) shares acquired upon exercise of options to purchase
Company common stock that are acquired in an exercise in which Executive pays
the exercise price by the surrender of previously acquired shares, to the
extent of the net additional shares otherwise issuable to Executive in such
exercise; provided, however, that such deferrals shall not reduce Executive's
total cash compensation in any calendar year below the sum of (i) the FICA
maximum taxable wage base plus (ii) the amount needed, on an after-tax basis,
to enable Executive to pay the 1.45% medicare tax imposed on his wages in
excess of such FICA maximum taxable wage base.
In accordance with such duly executed Deferral Election Forms or
the terms of any such mandatory deferral, the Company shall credit to one or
more bookkeeping accounts maintained for Executive on the respective payment
date or dates, amounts equal to the compensation subject to deferral, such
credits to be denominated in cash if the compensation would have been paid in
cash but for the deferral or in shares if the compensation would have been
paid in shares but for the deferral. An amount of cash equal in value to all
cash-denominated amounts credited to Executives account and a number of shares
of Company common stock equal to the number of shares credited to Executives
account pursuant to this Section 7(c) shall be transferred as soon as
practicable following such crediting by the Company to, and shall be held and
invested by, an independent trustee selected by the Company (a "Trustee")
pursuant to a "rabbi trust" established by the Company in connection with such
deferral arrangement and as to which the Trustee shall make investments based
on Executives investment objectives (including possible investment in publicly
traded stocks and bonds, mutual funds, and insurance vehicles). Thereafter,
Executives deferral accounts will be valued by reference to the value of the
assets of the "rabbi trust"; provided, however, that a portion of the assets of
the "rabbi trust" may be used to reimburse the Company for its reasonable cost
of funds resulting from payment of taxes by the Company relating to "rabbi
trust" assets during the period of deferral and prior to the settlement of
Executives deferral accounts. The Company shall pay all other costs of
administration of the deferral arrangement, without deduction or reimbursement
from the assets of the "rabbi trust."
Except as otherwise provided under Section 10, in the event of
Executives termination of employment with the Company or as otherwise
determined by the Committee in the event of hardship on the part of Executive,
upon such date(s) or event(s) set forth in the Deferral Election Forms
(including forms filed after deferral but before settlement in which Executive
may elect to further defer settlement) or under the terms of any mandatory
deferral, the Company shall promptly pay to Executive cash equal to the value
of the assets then credited to Executives deferral accounts, less applicable
withholding taxes, and such distribution shall be deemed to fully settle such
accounts; provided, however, that the Company may instead settle such accounts
by directing the Trustee to distribute the assets of the "rabbi trust." The
Company and Executive agree that compensation deferred pursuant to this
Section 7(c) shall be fully vested and nonforfeitable; however, Executive
acknowledges that his rights to the deferred compensation provided for in this
Section 7(c) shall be no greater than those of a general unsecured creditor of
the Company, and that such rights may not be pledged, collateralized,
encumbered, hypothecated, or liable for or subject to any lien, obligation, or
liability of Executive, or be assignable or transferable by Executive,
otherwise than by will or the laws of descent and distribution, provided that
Executive may designate one or more beneficiaries to receive any payment of
such amounts in the event of his death.
8. Disability.
(a) During the Term of Employment, as well as during the
Severance Period, the Executive shall be entitled to disability coverage as
described in this Section 8(a). In the event the Executive becomes disabled,
as that term is defined under the Companys Long-Term Disability Plan, the
Executive shall be entitled to receive pursuant to the Companys Long-Term
Disability Plan or otherwise, and in place of his Base Salary, an amount equal
to 60% of his Base Salary, at the annual rate in effect at the commencement
date of his Company long-term disability benefit ("Commencement Date") for a
period beginning on the Commencement Date and ending with the earlier to occur
of (A) the Executives attainment of age 65 or (B) the Executives commencement
of benefits under the SERP upon his election to receive such benefits. If (i)
the Executive ceases to be disabled during the Term of Employment (as
determined in accordance with the terms of the Long-Term Disability Plan),
(ii) his position or another senior executive position is then vacant and
(iii) the Company requests in writing that he resume such position, he may
elect to resume such position by written notice to the Company within 15 days
after the Company delivers its request. If he resumes such position, he shall
thereafter be entitled to his Base Salary at the annual rate in effect at the
Commencement Date and, for the year he resumes his position, a pro rata annual
incentive award. If he ceases to be disabled and does not resume his position
in accordance with the preceding sentence, he shall be treated as if he
voluntarily terminated his employment pursuant to Section 10(e) as of the date
the Executive ceases to be disabled. If the Executive is not offered his
position or another senior executive position after he ceases to be disabled
during the Term of Employment, he shall be treated as if his employment was
terminated without Cause pursuant to Section 10(c) as of the date the
Executive ceases to be disabled.
(b) The Executive shall be entitled to a pro rata annual
incentive award for the year in which the Commencement Date occurs based on
___% of Base Salary paid to him during such year prior to the Commencement
Date, payable in a lump sum promptly after the Commencement Date. The
Executive shall not be entitled to any annual incentive award with respect to
the period following the Commencement Date. If the Executive recommences his
position in accordance with Section 8(a), he shall be entitled to a pro rata
annual incentive award for the year he resumes his position and shall
thereafter be entitled to annual incentive awards in accordance with Section 5
hereof.
(c) During the period the Executive is receiving disability
benefits pursuant to Section 8(a) above, he shall continue to be treated as an
employee for purposes of all employee benefits and entitlements in which he
was participating on the Commencement Date, including without limitation, the
benefits and entitlements referred to in Sections 6 and 7 above, except that
the Executive shall not be entitled to receive any annual salary increases or
any new stock incentive awards following the Commencement Date.
9. Reimbursement of Business and Other Expenses; Perquisites.
The Executive is authorized to incur reasonable expenses in
carrying out his duties and responsibilities under this Agreement, and the
Company shall promptly reimburse him for all business expenses incurred in
connection therewith, subject to documentation in accordance with the Companys
policy.
10. Termination of Employment.
(a) Termination Due to Death. In the event the Executives
employment with the Company is terminated due to his death, his estate or his
beneficiaries, as the case may be, shall be entitled to and their sole
remedies under this Agreement shall be:
(i) Base Salary through the date of death, which shall be
paid in a single lump sum not later than 15 days following the Executives
death;
(ii) pro rata annual incentive award for the year in which
the Executives death occurs assuming that the Executive would have received an
award equal to ____% of Base Salary for such year, which shall be payable in
a lump sum promptly (but in no event later than 15 days) after his death;
(iii) lapse of all restrictions on any restricted stock
award (including any performance-based restricted stock) outstanding at the
time of his death;
(iv) Company common stock, issued without restrictions,
equal to any outstanding award of contingent shares as of the date of death,
including any matching grant under the Companys "STEP" program or award under
the Companys "Founders Stock" program;
(v) immediate vesting of all outstanding stock options and
the right to exercise such stock options for a period of one year following
death (or such longer period as may be provided in stock options granted to
other similarly situated executive officers of the Company) or for the
remainder of the exercise period, if less;
(vi) immediate vesting of all outstanding awards under the
"Career Equity" program and a pro rata payment of such awards based on target
performance, payable in a cash lump sum promptly (but in no event later than
15 days) after his death;
(vii) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which shall be paid in a
single lump sum not later than 15 days following the Executives death;
(viii) in the event that the Executives death occurs before
he has met the age and service requirements of the SERP, the Company will
provide his spouse with a 50% survivor annuity as if he had met such age and
service requirements at the time of his death, payable in accordance with the
terms of the SERP but subject to such other adjustments as may be provided in
the SERP;
(ix) settlement of all deferred compensation arrangements in
accordance with the Executives duly executed Deferral Election Forms or the
terms of any mandatory deferral; and
(x) other or additional benefits then due or earned in
accordance with applicable plans and programs of the Company.
(b) Termination by the Company for Cause.
(i) "Cause" shall mean:
(A) the Executives willful and material breach of
Sections 11, 12 or 13 of this Agreement;
(B) the Executive is convicted of a felony involving
moral turpitude; or
(C) the Executive engages in conduct that
constitutes willful gross neglect or willful gross misconduct in carrying out
his duties under this Agreement, resulting, in either case, in material harm
to the financial condition or reputation of the Company.
For purposes of this Agreement, an act or failure to act on Executives part
shall be considered "willful" if it was done or omitted to be done by him not
in good faith, and shall not include any act or failure to act resulting from
any incapacity of Executive.
(ii) A termination for Cause shall not take effect unless
the provisions of this paragraph (ii) are complied with. The Executive shall
be given written notice by the Company of its intention to terminate him for
Cause, such notice (A) 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 (B) to be given within 90 days of the
Companys learning of such act or acts or failure or failures to act. The
Executive shall have 10 days after the date that such written notice has been
given to him in which to cure such conduct, to the extent such cure is
possible. If he fails to cure such conduct, the Executive shall then be
entitled to a hearing before the Compensation Committee of the Board at which
the Executive is entitled to appear. Such hearing shall be held within 15
days of such notice to the Executive, provided he requests such hearing within
10 days of the written notice from the Company of the intention to terminate
him for Cause. If, within five days following such hearing, the Executive is
furnished written notice by the Board confirming that, in its judgment,
grounds for Cause on the basis of the original notice exist, he shall
thereupon be terminated for Cause. Such hearing shall not limit any other
review as set forth in this Agreement on a de novo basis.
(iii) In the event the Company terminates the Executives
employment for Cause, he shall be entitled to and his sole remedies under this
Agreement shall be:
(A) Base Salary through the date of the termination
of his employment for Cause, which shall be paid in a single lump sum not
later than 15 days following the Executives termination of employment;
(B) any incentive awards earned as of December 31 of
the prior year (but not yet paid), which shall be paid in a single lump sum
not later than 15 days following the Executives termination of employment;
(C) settlement of all deferred compensation
arrangements in accordance with the Executives duly executed Deferral Election
Form or the terms of any mandatory deferral; and
(D) other or additional benefits then due or earned
in accordance with applicable plans or programs of the Company including but
not limited to the SERP.
(c) Termination Without Cause or Constructive Termination Without
Cause Prior to Change in Control. In the event the Executives employment with
the Company is terminated without Cause (which termination shall be effective
as of the date specified by the Company in a written notice to the Executive),
other than due to death, or in the event there is a Constructive Termination
Without Cause (as defined below), in either case prior to a Change in Control
(as defined below) the Executive shall be entitled to and his sole remedies
under this Agreement shall be:
(i) Base Salary through the date of termination of the
Executives employment, which shall be paid in a single lump sum not later than
15 days following the Executives termination of employment;
(ii) Base Salary, at the annualized rate in effect on the
date of termination of the Executives employment (or in the event a reduction
in Base Salary is the basis for a Constructive Termination Without Cause, then
the Base Salary in effect immediately prior to such reduction), for a period
of 18 months following such termination (the "Severance Period"); provided
that the Company shall, within 30 days following such termination, contribute
to a "rabbi trust" an amount equal to any unpaid severance benefits due under
this Section 10(c)(ii) and Section 10(c)(iv) and direct the Trustee thereof to
make the remaining severance payments required hereunder when such payments
are due unless the Company, in its sole discretion, directs the Trustee to
return unpaid severance benefits to the Company because the Executive has
breached Sections 11, 12 or 13 hereunder; provided further that the salary
continuation payment under this Section 10(c)(ii) and Section 10(c)(iv) shall
be in lieu of any salary continuation arrangements under any other severance
program of the Company or any other agreement between the Executive and the
Company;
(iii) pro rata annual incentive award for the year in which
termination occurs assuming that the Executive would have received an award
equal to ____% of Base Salary for such year, payable in a lump sum promptly
(but in no event later than 15 days) following termination;
(iv) an amount equal to _____% of Base Salary multiplied by
1.5 payable in equal monthly installments over the Severance Period:
(v) the right to exercise all outstanding stock options
that are vested as of the date of termination during the Severance Period or
for the remainder of the exercise period, if less;
(vi) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which shall be paid in a
single lump sum not later than 15 days following the Executives termination of
employment;
(vii) settlement of all deferred compensation arrangements in
accordance with the Executives duly executed Deferral Election Forms or the
terms of any mandatory deferral;
(viii) continued participation in all medical, health and
life insurance plans at the same benefit level at which he was participating
on the date of the termination of his employment until the earlier of:
(A) the end of the Severance Period; or
(B) the date, or dates, he receives equivalent
coverage and benefits under the plans and programs of a subsequent employer
(such coverage and benefits to be determined on a coverage-by-coverage, or
benefit-by-benefit, basis); provided that (1) if the Executive is precluded
from continuing his participation in any employee benefit plan or program as
provided in this clause (viii) of this Section 10(c), he shall receive cash
payments equal on an after-tax basis to the cost to him of obtaining the
benefits provided under the plan or program in which he is unable to
participate for the period specified in this clause (viii) of this Section
10(c), (2) such cost shall be deemed to be the lowest reasonable cost that
would be incurred by the Executive in obtaining such benefit himself on an
individual basis, and (3) payment of such amounts shall be made quarterly in
advance; and
(ix) other or additional benefits then due or earned in
accordance with applicable plans and programs of the Company.
"Termination Without Cause" shall mean the Executives
employment is terminated by the Company for any reason other than Cause (as
defined in Section 10 (b)) or due to death.
"Constructive Termination Without Cause" shall mean a
termination of the Executives employment at his initiative as provided in this
Section 10(c) following the occurrence, without the Executives written
consent, of one or more of the following events (except as a result of a
prior termination):
(A) an assignment of any duties to Executive which
are inconsistent with his status as a senior executive of the Company;
(B) a decrease in annual Base Salary, target annual
incentive award opportunity below ____% of Base Salary or target long term
incentive award opportunity below _____% of Base Salary;
(C) any other failure by the Company to perform any
material obligation under, or breach by the Company of any material provision
of, this Agreement that is not cured within 30 days; or
(D) any failure to secure the agreement of any
successor corporation or other entity to the Company to fully assume the
Companys obligations under this Agreement.
In addition, following a Change in Control, "Constructive Termination Without
Cause" shall also mean a termination of the Executives employment at his
initiative as provided in this Section 10(c) following the occurrence, without
the Executives written consent, of a relocation of his principal place of
employment outside a 35-mile radius of his principal place of employment as in
effect immediately prior to such Change in Control.
A "Change in Control" shall be deemed to have occurred if:
(i) An acquisition by any Person of Beneficial Ownership
of the shares of common stock of the Company then outstanding (the "Company
Common Stock Outstanding") or the voting securities of the Company then
outstanding entitled to vote generally in the election of directors (the
"Company Voting Securities Outstanding"), if such acquisition of Beneficial
Ownership results in the Persons Beneficially Owning 25% or more of the
Company Common Stock Outstanding or 25% or more of the combined voting power
of the Company Voting Securities Outstanding; or
(ii) The approval by the stockholders of the Company of a
reorganization, merger, consolidation, complete liquidation or dissolution of
the Company, the sale or disposition of all or substantially all of the assets
of the Company or similar corporate transaction (in each case referred to in
this Section 10(c) 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 Executive or entities controlled by Executive shall not
constitute a Corporate Transaction; or
(iii) A change in the composition of the Board such that the
individuals who, as of the Effective Date, constitute the Board (such Board
shall be hereinafter referred to as the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however, for
purposes of this Section 10(c), that any individual who becomes a member of
the Board subsequent to the Effective Date whose election, or nomination for
election by the Companys stockholders, was approved by a vote of at least a
majority of those individuals who are members of the Board and who were also
members of the Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a member of the Incumbent
Board; and provided, further, that any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
under the Exchange Act, including any successor to such Rule) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board shall in no event be considered as a member of the
Incumbent Board.
Notwithstanding the provisions set forth in subparagraphs
(i) and (ii) of this Section 10(c), the following shall not constitute a
Change in Control for purposes of this Agreement: (1) any acquisition by or
consummation of a Corporate Transaction with any entity that was a subsidiary
of the Company immediately prior to the transaction or an employee benefit
plan (or related trust) sponsored or maintained by the Company or an entity
that was a subsidiary of the Company immediately prior to the transaction if,
immediately after such transaction (including consummation of all related
transactions), the surviving entity is controlled by no Person other than such
employee benefit plan (or related trust) and/or other Persons who controlled
the Company immediately prior to such transaction; or (2) any acquisition or
consummation of a Corporate Transaction following which more than 50% of,
respectively, the shares then outstanding of common stock of the corporation
resulting from such acquisition or Corporate Transaction and the combined
voting power of the voting securities then outstanding of such corporation
entitled to vote generally in the election of directors is then Beneficially
Owned, directly or indirectly, by all or substantially all of the individuals
and entities who were Beneficial Owners, respectively, of the Company Common
Stock Outstanding and Company Voting Securities Outstanding immediately prior
to such acquisition or Corporate Transaction in substantially the same
proportions as their ownership, immediately prior to such acquisition or
Corporate Transaction, of the Company Common Stock Outstanding and Company
Voting Securities Outstanding, as the case may be.
For purposes of this definition:
(A) The terms "Beneficial Ownership", "Beneficially
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).
(B) The term "Exchange Act" means the Securities
Exchange Act of 1934, as amended from time to time, or any successor act
thereto.
(C) 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.
(d) Voluntary Termination. In the event of a termination of
employment by the Executive on his own initiative after delivery of 10
business days advance written notice, other than a termination due to death, a
Constructive Termination Without Cause, or Approved Early Retirement or Normal
Retirement pursuant to Section 10(f) below, the Executive shall have the same
entitlements as provided in Section 10(b)(iii) above for a termination for
Cause, provided that at the Companys election, furnished in writing to the
Executive within 30 days following such notice of termination, the Company
shall in addition pay the Executive 50% of his Base Salary for a period of 18
months following such termination in exchange for the Executive not to engage
in competition with the Company or any Subsidiary as set forth in Section
12(a) below. Notwithstanding any implication to the contrary, the Executive
shall not have the right to terminate his employment with the Company during
the Term of Employment except in the event of a Constructive Termination
Without Cause, Approved Early Retirement or Normal Retirement, and any
voluntary termination of employment during the Term of Employment in violation
of this Agreement shall be considered a material breach.
(e) Termination Without Cause or Constructive Termination Without
Cause Following Change in Control. In the event the Executives employment
with the Company is terminated without Cause (which termination shall be
effective as of the date specified by the Company in a written notice to the
Executive), other than due to death, or in the event there is a Constructive
Termination Without Cause (as defined above), in either case within two years
following a Change in Control (as defined above), the Executive shall be
entitled to and his sole remedies under this Agreement shall be:
(i) Base Salary through the date of termination of the
Executives employment, which shall be paid in a single lump sum not later than
15 days following the Executives termination of employment;
(ii) an amount equal to two times the Executives Base
Salary, at the annualized rate in effect on the date of termination of the
Executives employment (or in the event a reduction in Base Salary is the basis
for a Constructive Termination Without Cause, then the Base Salary in effect
immediately prior to such reduction), payable in a cash lump sum promptly (but
in no event later than 15 days) following the Executives termination of
employment;
(iii) pro rata annual incentive award for the year in which
termination occurs assuming that the Executive would have received an award
equal to ____% of Base Salary for such year, payable in a cash lump sum
promptly (but in no event later than 15 days) following the Executives
termination of employment;
(iv) an amount equal to _____% of Base Salary multiplied by
two, payable in a cash lump sum promptly (but in no event later than 15 days)
following the Executives termination of employment;
(v) lapse of all restrictions on any restricted stock
award (including any performance-based restricted stock) outstanding at the
time of termination of employment;
(vi) Company common stock, issued without restrictions,
equal to any outstanding award of contingent shares as of the date of
termination, including any matching grant under the Companys "STEP" program or
award under the Companys "Founders Stock" program;
(vii) immediate vesting of all outstanding stock options and
the right to exercise such stock options during the Severance Period or for
the remainder of the exercise period, if less;
(viii) immediate vesting of all outstanding awards under the
"Career Equity" program and a pro rata payment of such awards based on target
performance, payable in a cash lump sum promptly (but in no event later than
15 days) following the Executives termination of employment;
(ix) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which shall be paid in a
single lump sum not later than 15 days following the Executives termination
of employment;
(x) settlement of all deferred compensation arrangements in
accordance with Executives duly executed Deferral Election Forms or the terms
of any mandatory deferral;
(xi) continued participation in all medical, health and
life insurance plans at the same benefit level at which he was participating
on the date of the termination of his employment until the earlier of:
(A) the end of the Severance Period; or
(B) the date, or dates, he receives equivalent
coverage and benefits under the plans and programs of a subsequent employer
(such coverage and benefits to be determined on a coverage-by-coverage, or
benefit-by-benefit, basis); provided that (1) if the Executive is precluded
from continuing his participation in any employee benefit plan or program as
provided in this clause (xi) of this Section 10(e), he shall receive cash
payments equal on an after-tax basis to the cost to him of obtaining the
benefits provided under the plan or program in which he is unable to
participate for the period specified in this clause (xi) of this Section
10(e), (2) such cost shall be deemed to be the lowest reasonable cost that
would be incurred by the Executive in obtaining such benefit himself on an
individual basis, and (3) payment of such amounts shall be made quarterly in
advance; and
(xii) other or additional benefits then due or earned in
accordance with applicable plans and programs of the Company.
For purposes of any termination pursuant to this Section 10(e), the term
"Severance Period" shall mean the period of 24 months following the
termination of the Executives employment.
(f) Approved Early Retirement or Normal Retirement. Upon the
Executives Approved Early Retirement or Normal Retirement (as defined below),
the Executive shall be entitled to and his sole remedies under this Agreement
shall be:
(i) Base Salary through the date of termination of the
Executives employment, which shall be paid in a single lump sum not later than
15 days following the Executives termination of employment;
(ii) pro rata annual incentive award for the year in which
termination occurs, based on performance valuation at the end of such year and
payable in a cash lump sum promptly (but in no event later than 15 days)
thereafter;
(iii) lapse of all restrictions on any restricted stock
award (including any performance-based restricted stock) outstanding at the
time of his termination of employment;
(iv) continued vesting (as if the Executive remained
employed by the Company) of any outstanding award of contingent shares as of
the date of termination of employment, including any matching grant under the
Companys "STEP" program or award under the Companys "Founders Stock" program;
(v) continued vesting of all outstanding stock options and
the right to exercise such stock options for a period of one year following
the Executives termination of employment (or such longer period as may be
provided in stock options granted to other similarly situated executive
officers of the Company) or for the remainder of the exercise period, if less;
(vi) continued vesting (as if Executive remained employed
by the Company) of all outstanding awards under the "Career Equity" program
and a payment of such awards based on valuation at the end of the performance
period, payable in a cash lump sum promptly (but in no event later than 15
days) thereafter;
(vii) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which shall be paid in a
single lump sum not later than 15 days following the Executives termination
of employment;
(viii) immediate vesting of benefits under the Companys SERP,
with payment of such benefits to be made in accordance with the terms and
conditions of the SERP as in effect at the date of the Executives termination
(or in accordance with the terms of any subsequent amendment to the SERP which
is more favorable to the Executive or his beneficiary);
(ix) settlement of all deferred compensation arrangements in
accordance with the Executives duly executed Deferral Election Forms or the
terms of any mandatory deferral;
(x) continued participation in all medical, health and
life insurance plans at the same benefit level at which he was participating
on the date of the termination of his employment until the earlier of:
(A) the Executives attainment of age 60; or
(B) the date, or dates, he receives substantially
equivalent coverage and benefits under the plans and programs of a subsequent
employer (such coverage and benefits to be determined on a
coverage-by-coverage, or benefit-by-benefit, basis); provided that (1) if the
Executive is precluded from continuing his participation in any employee
benefit plan or program as provided in this clause (x) of this Section 10(f),
he shall receive cash payments equal on an after-tax basis to the cost to him
of obtaining the benefits provided under the plan or program in which he is
unable to participate for the period specified in this clause (x) of this
Section 10(f), (2) such cost shall be deemed to be the lowest cost that would
be incurred by the Executive in obtaining such benefit himself on an
individual basis, and (3) payment of such amounts shall be made quarterly in
advance; and
(xi) other or additional benefits then due or earned in
accordance with applicable plans and programs of the Company.
"Approved Early Retirement" shall mean the Executives voluntary
termination of employment with the Company at or after attaining age 55 but
prior to attaining age 60, if such termination is approved in advance by the
Compensation Committee.
"Normal Retirement" shall mean the Executives voluntary termination of
employment with the Company at or after attaining age 60.
(g) No Mitigation; No Offset. In the event of any termination of
employment under this Section 10, the Executive shall be under no obligation
to seek other employment; amounts due the Executive under this Agreement shall
not be offset by any remuneration attributable to any subsequent employment
that he may obtain.
(h) Nature of Payments. Any amounts due under this Section 10
are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty.
(i) Exclusivity of Severance Payments. Upon termination of the
Executives employment during the Term of Employment, he shall not be entitled
to any severance payments or severance benefits from the Company or any
payments by the Company on account of any claim by him of wrongful
termination, including claims under any federal, state or local human and
civil rights or labor laws, other than the payments and benefits provided in
this Section 10.
(j) Release of Employment Claims. The Executive agrees, as a
condition to receipt of the termination payments and benefits provided for in
this Section 10, that he will execute a release agreement, in a form
reasonably satisfactory to the Company, releasing any and all claims arising
out of the Executives employment (other than enforcement of this Agreement,
the Executives rights under any of the Companys incentive compensation and
employee benefit plans and programs to which he is entitled under this
Agreement, and any claim for any tort for personal injury not arising out of or
related to his termination of employment).
11. Confidentiality; Cooperation with Regard to Litigation.
(a) During the Term of Employment and thereafter, the Executive
shall not, without the prior written consent of the Company, disclose to
anyone except in good faith in the ordinary course of business to a person who
will be advised by the Executive 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 the Company or by any administrative or legislative body
(including a committee thereof) that requires him to divulge, disclose or make
accessible such information. In the event that the Executive is so ordered,
he shall give prompt written notice to the Company in order to allow the
Company the opportunity to object to or otherwise resist such order.
(b) During the Term of Employment and thereafter, Executive
shall not disclose the existence or contents of this Agreement beyond what is
disclosed in the proxy statement or documents filed with the government unless
and to the extent such disclosure is required by law, by a governmental
agency, or in a document required by law to be filed with a governmental
agency or in connection with enforcement of his rights under this Agreement.
In the event that disclosure is so required, the Executive shall give prompt
written notice to the Company in order to allow the Company the opportunity to
object to or otherwise resist such requirement. This restriction shall not
apply to such disclosure by him to members of his immediate family, his tax,
legal or financial advisors, any lender, or tax authorities, or to potential
future employers to the extent necessary, each of whom shall be advised not to
disclose such information.
(c) "Confidential Information" shall mean all information that
is not known or available to the public concerning the business of the Company
or any Subsidiary relating to any of their products, product development,
trade secrets, customers, suppliers, finances, and business plans and
strategies. For this purpose, information known or available generally within
the trade or industry of the Company 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 11(a) above.
(d) "Subsidiary" shall mean any corporation controlled directly
or indirectly by the Company and any affiliate of the Company.
(e) The Executive agrees to cooperate with the Company, during
the Term of Employment and thereafter (including following the Executives
termination of employment for any reason), by making himself available to
testify on behalf of the Company or any Subsidiary or affiliate of the
Company, in any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, and to assist the Company, or any Subsidiary
or affiliate of the Company, 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 the Company, or
any Subsidiary or affiliate of the Company, as requested. The Company agrees
to reimburse the Executive, on an after-tax basis, for all expenses actually
incurred in connection with his provision of testimony or assistance.
12. Non-competition.
(a) During the Restriction Period (as defined in Section 12(b)
below), the Executive shall not engage in Competition with the Company or any
Subsidiary. "Competition" shall mean engaging in any activity, except as
provided below, for a Competitor of the Company 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
traded company) or otherwise. A "Competitor" shall mean (i)________,
________, ________, and ________ (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 the Company or any Subsidiary, provided that a corporation or
entity described in clause (ii) above shall not be deemed to be a Competitor
if the Executive shall not either directly or indirectly oversee or manage the
activities of such corporation or entitys division or unit engaged in the
Discount Retail Footwear Business. If the Executive commences employment or
becomes a consultant, principal, agent, officer, director, partner, or
shareholder of any entity that is not a Competitor at the time the Executive
initially becomes employed or becomes a consultant, principal, agent, officer,
director, partner, or shareholder of the 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 Executive 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 Executive) or (y) the Executive commences directly
or indirectly overseeing or managing the activities which are competitive with
the activities of the Company or Subsidiary. The Executive shall not be
deemed indirectly overseeing or managing the activities which are competitive
with the activities of the Company or Subsidiary so long as he 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 sells discount footwear.
(b) For the purposes of this Section 12 and Section 13 below,
"Restriction Period" shall mean the period beginning with the Effective Date
and ending with:
(i) in the case of a termination of the Executives
employment without Cause or a Constructive Termination Without Cause, in
either case prior to a Change in Control, the earlier of (1) the end of the
Severance Period (as such term is defined in Section 10(c)(ii)) and (2) the
occurrence of a Change in Control;
(ii) in the case of a termination of the Executives
employment for Cause, the first anniversary of such termination;
(iii) in the case of a voluntary termination of the
Executives employment pursuant to Section 10(d) above followed by the Companys
election to pay the Executive (and subject to the payment of) 50% of his Base
Salary, as provided in Section 10(d) above, the end of the 18-month period
following such termination;
(iv) in the case of a voluntary termination of the
Executives employment pursuant to Section 10(d) above which is not followed by
the Companys election to pay the Executive such 50% of Base Salary, the date
of such termination;
(v) in the case of Approved Early Retirement or Normal
Retirement pursuant to Section 10(f) above, the remainder of the Term of
Employment; or
(vi) in the case of a termination of the Executives
employment without Cause or a Constructive Termination Without Cause, in
either case following a Change in Control, immediately upon such termination
of employment.
13. Non-solicitation of Employees.
During the portion of the Restriction Period following the
termination of the Executives employment, the Executive shall not induce
employees of the Company or any Subsidiary to terminate their employment.
During the portion of the Restriction Period following the termination of the
Executives employment, the Executive shall not directly or indirectly hire any
employee of the Company or any Subsidiary or any person who was employed by
the Company or any Subsidiary within 180 days of such hiring.
14. Remedies.
In addition to whatever other rights and remedies the Company may
have at equity or in law, if the Executive breaches any of the provisions
contained in Sections 11, 12 or 13 above, the Company (a) shall have the right
to immediately terminate all payments and benefits due under this Agreement
and (b) shall have the right to seek injunctive relief. The Executive
acknowledges that such a breach would cause irreparable injury and that money
damages would not provide an adequate remedy for the Company.
15. Resolution of Disputes.
Any disputes arising under or in connection with this
Agreement, other than seeking injunctive relief under Section 14, shall be
resolved by binding arbitration, to be held at an office closest to the
Companys principal offices in accordance with the rules and procedures of
the American Arbitration Association, except that disputes arising under or
in connection with Sections 11, 12 and 13 above shall be submitted to the
federal or state courts in the State of New Jersey. Judgment upon the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. Pending the resolution of any arbitration or court
proceeding, the Company shall continue payment of all amounts and benefits
due the Executive under this Agreement. All reasonable costs and expenses
(including fees and disbursements of counsel) incurred by the Executive in
seeking to enforce rights pursuant to this Agreement shall be paid on
behalf of or reimbursed to the Executive promptly by the Company, whether
or not the Executive is successful in asserting such rights; provided,
however, that no reimbursement shall be made of such expenses relating to
any unsuccessful assertion of rights if and to the extent that the
Executives assertion of such rights was in bad faith or frivolous.
16. Indemnification.
(a) Company Indemnity. The Company agrees that if the Executive
is made a party, or is threatened to be made a party, to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director, officer or
employee of the Company or any Subsidiary or is or was serving at the request
of the Company or any Subsidiary as a director, officer, member, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
or not the basis of such Proceeding is the Executives alleged action in an
official capacity while serving as a director, officer, member, employee or
agent, the Executive shall be indemnified and held harmless by the Company to
the fullest extent legally permitted or authorized by the Companys certificate
of incorporation or bylaws or resolutions of the Companys Board of Directors
or, if greater, by the laws of the State of Delaware, against all cost,
expense, liability and loss (including, without limitation, attorneys fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by the Executive in
connection therewith, and such indemnification shall continue as to the
Executive even if he has ceased to be a director, member, officer, employee or
agent of the Company or other entity and shall inure to the benefit of the
Executives heirs, executors and administrators. The Company shall advance to
the Executive all reasonable costs and expenses incurred by him in connection
with a Proceeding within 20 days after receipt by the Company of a written
request for such advance. Such request shall include an undertaking by the
Executive to repay the amount of such advance if it shall ultimately be
determined that he is not entitled to be indemnified against such costs and
expenses.
(b) No Presumption Regarding Standard of Conduct. Neither the
failure of the Company (including its board of directors, independent legal
counsel or stockholders) to have made a determination prior to the
commencement of any proceeding concerning payment of amounts claimed by the
Executive under Section 16(a) above that indemnification of the Executive is
proper because he has met the applicable standard of conduct, nor a
determination by the Company (including its board of directors, independent
legal counsel or stockholders) that the Executive has not met such applicable
standard of conduct, shall create a presumption that the Executive has not met
the applicable standard of conduct.
(c) Liability Insurance. The Company agrees to continue and
maintain a directors and officers liability insurance policy covering the
Executive to the extent the Company provides such coverage for its other
executive officers.
17. Excise Tax Gross-Up.
If the Executive becomes entitled to one or more payments (with a
"payment" including, without limitation, the vesting of an option or other
non-cash benefit or property), whether pursuant to the terms of this Agreement
or any other plan, arrangement, or agreement with the Company or any
affiliated company (the "Total Payments"), which are or become subject to the
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code") (or any similar tax that may hereafter be imposed) (the "Excise
Tax"), the Company shall pay to the Executive at the time specified below an
additional amount (the "Gross-up Payment") (which shall include, without
limitation, reimbursement for any penalties and interest that may accrue in
respect of such Excise Tax) such that the net amount retained by the
Executive, after reduction for any Excise Tax (including any penalties or
interest thereon) on the Total Payments and any federal, state and local
income or employment tax and Excise Tax on the Gross-up Payment provided for
by this Section 17, but before reduction for any federal, state, or local
income or employment tax on the Total Payments, shall be equal to the sum of
(a) the Total Payments, and (b) an amount equal to the product of any
deductions disallowed for federal, state, or local income tax purposes because
of the inclusion of the Gross-up Payment in the Executives adjusted gross
income multiplied by the highest applicable marginal rate of federal, state,
or local income taxation, respectively, for the calendar year in which the
Gross-up Payment is to be made.
For purposes of determining whether any of the Total Payments will
be subject to the Excise Tax and the amount of such Excise Tax:
(i) The Total Payments shall be treated as "parachute
payments" within the meaning of Section 280G(b)(2) of the Code, and all
"excess parachute payments" within the meaning of Section 280G(b)(1) of the
Code shall be treated as subject to the Excise Tax, unless, and except to the
extent that, in the written opinion of independent compensation consultants,
counsel or auditors of nationally recognized standing ("Independent Advisors")
selected by the Company and reasonably acceptable to the Executive, the Total
Payments (in whole or in part) do not constitute parachute payments, or such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the base amount within the meaning of
Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax;
(ii) The amount of the Total Payments which shall be
treated as subject to the Excise Tax shall be equal to the lesser of (A) the
total amount of the Total Payments or (B) the total amount of excess parachute
payments within the meaning of Section 280G(b)(1) of the Code (after applying
clause (i) above); and
(iii) The value of any non-cash benefits or any deferred
payment or benefit shall be determined by the Independent Advisors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-up Payment, the
Executive shall be deemed (A) to pay federal income taxes at the highest
marginal rate of federal income taxation for the calendar year in which the
Gross-up Payment is to be made; (B) to pay any applicable state and local
income taxes at the highest marginal rate of taxation for the calendar year in
which the Gross-up Payment is to be made, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes if paid in such year (determined without regard to limitations on
deductions based upon the amount of the Executives adjusted gross income); and
(C) to have otherwise allowable deductions for federal, state, and local
income tax purposes at least equal to those disallowed because of the
inclusion of the Gross-up Payment in the Executives adjusted gross income. In
the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time the Gross-up Payment is made,
the Executive shall repay to the Company at the time that the amount of such
reduction in Excise Tax is finally determined (but, if previously paid to the
taxing authorities, not prior to the time the amount of such reduction is
refunded to the Executive or otherwise realized as a benefit by the Executive)
the portion of the Gross-up Payment that would not have been paid if such
Excise Tax had been applied in initially calculating the Gross-up Payment,
plus interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder at the time the Gross-up
Payment is made (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-up Payment), the Company
shall make an additional Gross-up Payment in respect of such excess (plus any
interest and penalties payable with respect to such excess) at the time that
the amount of such excess is finally determined.
The Gross-up Payment provided for above shall be paid on the 30th
day (or such earlier date as the Excise Tax becomes due and payable to the
taxing authorities) after it has been determined that the Total Payments (or
any portion thereof) are subject to the Excise Tax; provided, however, that if
the amount of such Gross-up Payment or portion thereof cannot be finally
determined on or before such day, the Company shall pay to the Executive on
such day an estimate, as determined by the Independent Advisors, of the
minimum amount of such payments and shall pay the remainder of such payments
(together with interest at the rate provided in Section 1274(b)(2)(B) of the
Code), as soon as the amount thereof can be determined. In the event that the
amount of the estimated payments exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth day after demand by the Company (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code). If more
than one Gross-up Payment is made, the amount of each Gross-up Payment shall
be computed so as not to duplicate any prior Gross-up Payment. The Company
shall have the right to control all proceedings with the Internal Revenue
Service that may arise in connection with the determination and assessment of
any Excise Tax and, at its sole option, the Company may pursue or forego any
and all administrative appeals, proceedings, hearings, and conferences with
any taxing authority in respect of such Excise Tax (including any interest or
penalties thereon); provided, however, that the Companys control over any such
proceedings shall be limited to issues with respect to which a Gross-up
Payment would be payable hereunder, and the Executive shall be entitled to
settle or contest any other issue raised by the Internal Revenue Service or
any other taxing authority. The Executive shall cooperate with the Company in
any proceedings relating to the determination and assessment of any Excise Tax
and shall not take any position or action that would materially increase the
amount of any Gross-Up Payment hereunder.
18. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence
of this Agreement shall not be interpreted to preclude, prohibit or restrict
the Executives participation in any other employee benefit or other plans or
programs in which he currently participates.
19. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs (in the case of the
Executive) and permitted assigns. No rights or obligations of the Company
under this Agreement may be assigned or transferred by the Company except that
such rights or obligations may be assigned or transferred in connection with
the sale or transfer of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained
in this Agreement, either contractually or as a matter of law. The Company
further agrees that, in the event of a sale or transfer of assets as described
in the preceding sentence, it shall take whatever action it legally can in
order to cause such assignee or transferee to expressly assume the
liabilities, obligations and duties of the Company hereunder. No rights or
obligations of the Executive under this Agreement may be assigned or
transferred by the Executive other than his rights to compensation and
benefits, which may be transferred only by will or operation of law, except as
provided in Section 24 below.
20. Representation.
The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization.
21. Entire Agreement.
This Agreement contains the entire understanding and agreement
between the Parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations and undertakings,
whether written or oral, between the Parties with respect thereto.
22. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by the Executive and an
authorized officer of the Company. No waiver by either Party of any breach by
the other Party of any condition or provision contained in this Agreement to
be performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or an authorized
officer of the Company, as the case may be.
23. Severability.
In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
24. Survivorship.
The respective rights and obligations of the Parties hereunder
shall survive any termination of the Executives employment to the extent
necessary to the intended preservation of such rights and obligations.
25. Beneficiaries/References.
The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executives death
by giving the Company written notice thereof. In the event of the Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to the Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
26. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and interpreted
in accordance with the laws of New Jersey without reference to principles of
conflict of laws, except insofar as the Delaware General Corporation Law,
federal laws and regulations may be applicable. Subject to Section 15, the
Company and the Executive hereby consent to the jurisdiction of any or all of
the following courts for purposes of resolving any dispute under this
Agreement: (i) the United States District Court for New Jersey, (ii) any of the
courts of the State of New Jersey, or (iii) any other court having
jurisdiction. The Company and the Executive further agree that any service of
process or notice requirements in any such proceeding shall be satisfied if
the rules of such court relating thereto have been substantially satisfied.
The Company and the Executive hereby waive, to the fullest extent permitted by
applicable law, any objection which it or he may now or hereafter have to such
jurisdiction and any defense of inconvenient forum.
27. Notices.
Any notice given to a Party shall be in writing and shall be
deemed to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address
as such Party may subsequently give such notice of:
If to the Company: Footstar, Inc.
933 MacArthur Boulevard
Mahwah, New Jersey 07430
Attention: Secretary
If to the Executive: __________________________________
__________________________________
__________________________________
28. Headings.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
29. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first written above.
FOOTSTAR, INC.
By:_________________________________
Name:
Title:
EXECUTIVE
____________________________________
_________________
EXHIBIT 10.6
CONFORMED COPY
=============================================================================
CREDIT AGREEMENT
dated as of
August 13, 1996
among
Footstar, Inc.
The Banks Listed Herein
The Bank of New York, as Issuing Bank,
and
Morgan Guaranty Trust Company of New York,
as Administrative Agent and Swingline Lender
=============================================================================
[Ref No. 1385-305]
CREDIT AGREEMENT
AGREEMENT dated as of August 13, 1996 among
FOOTSTAR, INC., the BANKS listed on the signature
pages hereof, THE BANK OF NEW YORK, as Issuing Bank,
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Administrative Agent and Swingline Lender.
The parties hereto agree as follows:
ARTICLE I
K
Definitions
SECTION 1.01. Definitions. The following terms, as used
herein, have the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market
Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03.
"Acquisition Consideration" means the aggregate amount of
consideration paid, distributed or otherwise delivered by the Company or any
Subsidiary to any Person (other than the Company or a Subsidiary) in
connection with any acquisition referred to in Section 5.11(c) including,
without limitation but without duplication, (i) the aggregate principal amount
of any Debt that is assumed or (without duplication) otherwise incurred as a
result of such acquisition, including Debt of any Person that becomes a
Subsidiary as a result of such acquisition, and (ii) the fair market value of
any other non-cash consideration so paid, distributed or otherwise delivered;
provided that Acquisition Consideration shall not include capital stock of the
Company other than preferred stock that is subject to redemption or repurchase
(other than at the option of the Company) prior to the date that is one year
after the Termination Date.
"Adjusted CD Rate" has the meaning set forth in Section
2.08(b).
"Administrative Questionnaire" means, with respect to each
Bank, an administrative questionnaire in the form prepared by the Agent and
submitted to the Agent (with a copy to the Company) duly completed by such
Bank.
"Affiliate" means any Person directly or indirectly
controlling, controlled by or under common control with the Company. As used
in this definition, the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities,
by contract or otherwise.
"Agent" means Morgan Guaranty Trust Company of New York in
its capacity as administrative agent for the Banks hereunder, and its
successors in such capacity.
"Alternative Currency" means any currency other than Dollars
which is freely transferable and convertible into Dollars.
"Applicable Lending Office" means, with respect to any Bank,
(i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in
the case of its Euro-Currency Loans, its Euro-Currency Lending Office and
(iii) in the case of its Money Market Loans, its Money Market Lending Office.
"Applicable Percentage" of any Bank means the percentage of
the aggregate Commitments represented by such Bank's Commitment.
"Assessment Rate" has the meaning set forth in Section
2.08(b).
"Assignee" has the meaning set forth in Section 9.06(c).
"Bank" means each bank listed on the signature pages hereof,
each Assignee which becomes a Bank pursuant to Section 9.06(c), and their
respective successors. References herein to a Bank or Banks may include the
Issuing Banks or the Swingline Lender or both as the context requires.
"Base Rate" means, for any day, a rate per annum equal to
the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1%
plus the Federal Funds Rate for such day.
"Base Rate Loan" means at any time a Committed Loan
outstanding hereunder which bears interest at such time at a rate based on the
Base Rate pursuant to a Notice of Committed Borrowing or Notice of Interest
Rate Election or pursuant to Article VIII.
"Benefit Arrangement" means at any time an employee benefit
plan within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
"Borrower" means the Company or any Eligible Subsidiary, as
the context may require, and their respective successors, and "Borrowers"
means all of the foregoing.
"Borrowing" has the meaning set forth in Section 1.03.
"Calculation Period" means a period of four consecutive
fiscal quarters of the Company for which financial statements have been
delivered to the Agent pursuant to Section 5.01(a) or (b).
"Capital Expenditures" means, for any period, the additions
to property, plant and equipment of the Company and its Consolidated
Subsidiaries for such period, as the same are (or would be) set forth, in
accordance with generally accepted accounting principles, in a consolidated
statement of cash flows of the Company for such period; provided that Capital
Expenditures shall (a) exclude any additions to property, plant and equipment
(i) to the extent paid for with proceeds of insurance received in respect of
any casualty, (ii) to the extent that the consideration therefor consisted of
assets other than cash, cash equivalents or obligations to pay cash or cash
equivalents, (iii) to the extent paid for with proceeds from the sale or other
disposition of property, plant and equipment used for the same or similar
purposes as such additions and (iv) to the extent paid for with the proceeds
from the sale or other disposition of the two distribution centers of the
Company located at Clinton, New Jersey and Huntington, Indiana, and (b)
include additions to property, plant and equipment financed by incurring Debt
(including without limitation capital leases).
"Cash Flow" means, with respect to the Company and its
Consolidated Subsidiaries for any period, to the extent positive, (a) the sum
(without duplication) of (i) Consolidated Net Income for such period
(excluding any non-cash extraordinary item of gain or loss) plus (ii)
depreciation and amortization deducted in determining Consolidated Net Income
for such period, minus (b) Capital Expenditures for such period.
"CD Base Rate" has the meaning set forth in Section 2.08(b).
"CD Loan" means at any time a Committed Loan outstanding
hereunder which bears interest at such time at a rate based on the Adjusted CD
Rate pursuant to a Notice of Committed Borrowing or Notice of Interest Rate
Election.
"CD Margin" has the meaning set forth in Section 2.08(b).
"CD Reference Banks" means The Bank of New York, The First
National Bank of Boston and Morgan Guaranty Trust Company of New York.
A "Change of Control" shall be deemed to have occurred if
after the Effective Date (i) any person or group (within the meaning of Rule
13d-5 of the Securities and Exchange Commission as in effect on the date
hereof) shall become the beneficial owner (within the meaning of Rule 13d-3 of
such Commission as in effect on the date hereof) of voting securities
(including any options, rights or warrants to purchase, and any securities
convertible into or exchangeable for, voting securities) of the Company
representing 25% or more of the voting power represented by all outstanding
securities of the Company; or (ii) a majority of the seats (other than vacant
seats) on the board of directors of the Company shall at any time be occupied
by persons who were neither (a) nominated by Melville or the management of the
Company, nor (b) appointed by directors so nominated.
"Commitment" means, with respect to each Bank, the amount
set forth opposite the name of such Bank on the signature pages hereof (or, in
the case of an Assignee, in its Assignment and Assumption Agreement), as such
amount may be reduced from time to time pursuant to Section 2.10 and adjusted
to reflect assignments pursuant to Section 9.06(c).
"Committed Borrowing" means a Borrowing consisting of
Committed Loans; provided that if the Loans constituting any such Borrowing or
Borrowings (or portions thereof) are combined or subdivided pursuant to a
Notice of Interest Rate Election, the term "Committed Borrowing" shall refer
to all of the Committed Loans to a single Borrower of the same Type and having
the same Interest Period that result from such combination or subdivision as
the case may be.
"Committed Exposure" means, with respect to any Bank at any
time, the sum of the aggregate principal amount of such Bank's Committed Loans
outstanding at such time and its Letter of Credit Exposure and Swingline
Exposure at such time.
"Committed Loan" means a loan made by a Bank pursuant to
Section 2.01; provided that, if any such loan or loans (or portions thereof)
are combined or subdivided pursuant to a Notice of Interest Rate Election, the
term "Committed Loan" shall refer to the combined principal amount resulting
from such combination or to each of the separate principal amounts resulting
from such subdivision, as the case may be.
"Company" means Footstar, Inc., a Delaware corporation, and
its successors.
"Consolidated Adjusted Income" means, with respect to the
Company and its Consolidated Subsidiaries for any period, the consolidated
income from continuing operations before minority interests of the Company and
its Consolidated Subsidiaries for such period, adjusted to deduct any
extraordinary losses (other than non-cash losses), and to add any
extraordinary gains (other than non-cash gains), deducted or added in
determining Consolidated Net Income for such period.
"Consolidated EBITDAR" means, with respect to the Company
and its Consolidated Subsidiaries for any period, the sum (without
duplication) of (a) Consolidated Adjusted Income for such period, (b) interest
expenses deducted in determining Consolidated Adjusted Income for such period,
(c) Federal, state and local income taxes (or other taxes in the nature of
income taxes) deducted in determining Consolidated Adjusted Income for such
period, (d) depreciation and amortization deducted in determining Consolidated
Adjusted Income for such period, and (e) rental expenses deducted in
determining Consolidated Adjusted Income for such period. For purposes of
Section 6.03, the Consolidated EBITDAR of a Subsidiary shall be determined
based on the foregoing, but only with respect to such Subsidiary and its
consolidated subsidiaries.
"Consolidated Net Income" means, for any period, the
consolidated net income (or loss) of the Company and its Consolidated
Subsidiaries for such period, after minority interests.
"Consolidated Net Interest Expense" means with respect to
the Company and the Consolidated Subsidiaries, for any period, (a) interest
expense deducted in determining Consolidated Adjusted Income for such period
(excluding any portion of interest expense representing amortization of
financing costs paid in a previous period), minus (b) interest income included
in determining Consolidated Adjusted Income for such period (excluding any
portion of interest income representing accruals of amounts received in a
previous period).
"Consolidated Subsidiary" means at any date any Subsidiary
or other entity the accounts of which would be consolidated with those of the
Company in its consolidated financial statements if such statements were
prepared as of such date.
"Consolidated Tangible Net Worth" means at any date the
consolidated stockholders' equity of the Company (adjusted to eliminate the
effect on such stockholders' equity of the Excluded Charges) less its
consolidated Intangible Assets, all determined as of such date. For the
purposes of this definition "Intangible Assets" means the amount (to the
extent reflected in determining such stockholders' equity) of (i) all
write-ups (other than write-ups of assets of a going concern business made
within twelve months after the acquisition of such business) subsequent to the
Effective Date in the book value of any asset owned by the Company or a
Consolidated Subsidiary, (ii) all Investments in unconsolidated Subsidiaries
and all equity investments in Persons which are not Subsidiaries, and (iii)
all unamortized debt discount and expense, unamortized deferred charges,
goodwill, purchase price premium, patents, trademarks, service marks, trade
names, copyrights, organization or developmental expenses and other intangible
assets.
"Consolidated Total Capitalization" means at any date the
sum of (a) Consolidated Total Debt at such date and (b) the consolidated
stockholders' equity of the Company at such date adjusted (i) to exclude all
write-ups (other than write-ups of assets of a going concern business made
within twelve months after the acquisition of such business) subsequent to the
Effective Date in the book value of any asset owned by the Company or a
Consolidated Subsidiary and (ii) to eliminate the effect on such stockholders'
equity of the Excluded Charges.
"Consolidated Total Debt" means at any date the sum of (i)
the Debt of the Company and its Consolidated Subsidiaries, determined on a
consolidated basis at such date, plus (ii) an amount equal to six times the
minimum rental expense in respect of operating leases of the Company and its
Consolidated Subsidiaries for the fiscal year ended on such date (or, if such
date is not the last day of a fiscal year, then for the most recent fiscal
year ended prior to such date), plus, without duplication, (iii) an amount
equal to six times the minimum rental expense in respect of operating leases
of any Person other than the Company or a Consolidated Subsidiary, for the
same fiscal year used for purposes of clause (ii) above, to the extent such
rentals were Guaranteed or assumed by the Company or a Consolidated
Subsidiary, or in respect of which the Company or any Consolidated Subsidiary
was contingently or otherwise liable.
"Debt" of any Person means at any date, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v)
all Debt secured by a Lien on any asset of such Person, whether or not such
Debt is otherwise an obligation of such Person, and (vi) all Debt of others
Guaranteed by such Person.
"Debt Coverage Ratio" means, at any time, the ratio of (i)
Consolidated Total Debt at such time to (ii) Consolidated EBITDAR for the most
recent Calculation Period.
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Distribution Agreement" means the Distribution Agreement to
be entered into among Melville, Footaction Center, Inc., and the Company,
relating to the distribution by Melville to the holders of its common stock of
the Company's common stock.
"Documentary Letter of Credit Fee Rate" has the meaning set
forth in Section 2.17(f).
"Dollar Amount" means (i) in relation to any Money Market
Borrowing denominated in an Alternative Currency, the amount designated by the
applicable Borrower as the Dollar amount of such Money Market Borrowing in the
related Notice of Money Market Borrowing, subject to Section 2.03(h) and (ii)
in relation to any Letter of Credit that provides for payment of any drawing
thereunder in an Alternative Currency, the amount determined as provided in
Section 2.17(l).
"Dollars" and the sign "$" mean lawful money of the United
States of America.
"Domestic Business Day" means any day except a Saturday,
Sunday or other day on which commercial banks in New York City are authorized
or required by law to close.
"Domestic Lending Office" means, as to each Bank, its office
located at its address set forth in its Administrative Questionnaire (or
identified in its Administrative Questionnaire as its Domestic Lending Office)
or such other office as such Bank may hereafter designate as its Domestic
Lending Office by notice to the Company and the Agent; provided that any Bank
may so designate separate Domestic Lending Offices for its Base Rate Loans, on
the one hand, and its CD Loans, on the other hand, in which case all
references herein to the Domestic Lending Office of such Bank shall be deemed
to refer to either or both of such offices, as the context may require.
"Domestic Loans" means CD Loans or Base Rate Loans or both.
"Domestic Reserve Percentage" has meaning set forth in
Section 2.08(b).
"Effective Date" means the date this Agreement becomes
effective in accordance with Section 3.01.
"Election to Participate" means an Election to Participate
substantially in the form of Exhibit H hereto.
"Election to Terminate" means an Election to Terminate
substantially in the form of Exhibit I hereto.
"Eligible Subsidiary" means any Wholly-Owned Consolidated
Subsidiary (or, with the consent of the Required Banks, any other Subsidiary)
as to which an Election to Participate shall have been delivered to the Agent
and as to which an Election to Terminate shall not have been delivered to the
Agent.
"Environmental Laws" means any and all Federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements with
Governmental Authorities or other governmental restrictions binding upon the
Company or any of the Subsidiaries, as applicable, relating to the environment
or to emissions, discharges or releases of pollutants, contaminants, petroleum
or petroleum products, chemicals or industrial, toxic or hazardous substances
or wastes into the environment including, without limitation, ambient air,
surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes or
the clean-up or other remediation thereof.
"Equivalent Amount" means, in connection with the
determination of the amount of a Money Market Loan to be made in any
Alternative Currency in relation to the Dollar Amount of such Loan, the amount
of such Alternative Currency converted from such Dollar Amount at the spot
buying rate of the Bank that is to make such Loan (based on the London
interbank market rate then prevailing) for Dollars against such Alternative
Currency as of approximately 9:00 A.M. (New York City time) three
Euro-Currency Business Days before such date.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, or any successor statute.
"ERISA Group" means the Company, any Subsidiary and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which, together with the
Company or any Subsidiary, are treated as a single employer under Section 414
of the Internal Revenue Code.
"Euro-Currency Business Day" means any Domestic Business Day
on which commercial banks are open for international business (including
dealings in Dollar deposits) in London, and, where funds are to be paid or made
available in an Alternative Currency, on which commercial banks are open for
domestic and international business (including dealings in deposits in such
Alternative Currency) in both London and the place where such funds are paid
or made available.
"Euro-Currency Lending Office" means, as to each Bank, its
office, branch or affiliate located at its address set forth in its
Administrative Questionnaire (or identified in its Administrative
Questionnaire as its Euro-Currency Lending Office) or such other office,
branch or affiliate of such Bank as it may hereafter designate as its
Euro-Currency Lending Office by notice to the Company and the Agent.
"Euro-Currency Loan" means at any time a Committed Loan
outstanding hereunder which bears interest at such time at a rate based on the
London Interbank Offered Rate pursuant to a Notice of Committed Borrowing or
Notice of Interest Rate Election.
"Euro-Currency Margin" has the meaning set forth in Section
2.08(c).
"Euro-Currency Reference Banks" means the principal London
offices of The Bank of New York, The First National Bank of Boston and Morgan
Guaranty Trust Company of New York.
"Euro-Currency Reserve Percentage" means, for any day, that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank
of the Federal Reserve System in New York City with deposits exceeding five
billion dollars in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which
the interest rate on Euro-Currency Loans is determined or any category of
extensions of credit or other assets which includes loans by a non-United
States office of any Bank to United States residents).
"Event of Default" has the meaning set forth in Section 6.01.
"Excluded Charges" means after-tax, non-recurring charges of
the Company and its Consolidated Subsidiaries during the fiscal year ending
December 31, 1996, not exceeding $53,000,000 on a consolidated basis.
"Exempt Subsidiary" means (i) any Wholly-Owned Consolidated
Subsidiary, (ii) any other Subsidiary that is a Subsidiary as of the Effective
Date and (iii) any Subsidiary which is a Meldisco Corporation (as defined in
the Kmart Agreement) and all the capital stock of which is owned, directly or
indirectly, by the Company and Kmart Corporation.
"Facility Fee Rate" has the meaning set forth in Section
2.09(a).
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on
such day, as published by the Federal Reserve Bank of New York on the Domestic
Business Day next succeeding such day, provided that (i) if such day is not a
Domestic Business Day, the Federal Funds Rate for such day shall be such rate
on such transactions on the next preceding Domestic Business Day as so
published on the next succeeding Domestic Business Day, and (ii) if no such
rate is so published on such next succeeding Domestic Business Day, the
Federal Funds Rate for such day shall be the average rate quoted to Morgan
Guaranty Trust Company of New York on such day on such transactions as
determined by the Agent.
"Financing Transactions" means the execution and delivery of
the Loan Documents and the performance of the transactions contemplated by the
Loan Documents, including the borrowing of the Loans and the issuance of
Letters of Credit.
"Fixed Charge Coverage Ratio" means, for any period, the
ratio of (i) Consolidated EBITDAR for such period minus Capital Expenditures
for such period, to (ii) the sum of Consolidated Net Interest Expense for such
period and minimum rental expense deducted in determining Consolidated Net
Income for such period.
"Fixed Rate Loans" means Euro-Currency Loans or CD Loans or
Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the
Base Rate for the reason stated in Section 8.01) or any combination of the
foregoing.
"Foreign Borrower" means an Eligible Subsidiary organized
under the laws of a jurisdiction outside the United States.
"Governmental Authority" means any federal, state, local or
foreign government or political subdivision or any court or governmental
agency, authority, instrumentality or regulatory body.
"Guarantee" by any Person means any obligation, contingent
or otherwise, of such Person directly or indirectly guaranteeing any Debt or
other obligation of any other Person and, without limiting the generality of
the foregoing, any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation (whether arising by
virtue of partnership arrangements, by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part), provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantee Agreement" means a Guarantee Agreement among the
Agent and the Guarantors substantially in the form of Exhibit E.
"Guarantor" means each Person that is or becomes party to
the Guarantee Agreement as a Guarantor and their respective successors.
"Information Statement" means the Information Statement of
the Company contained in Amendment No. 4 to the Company's Form 10 Registration
Statement as filed with the Securities and Exchange Commission on July 23,
1996.
"Initial Guarantors" means the Company, Melville Foreign,
Inc., Footaction Center, Inc., Mel Shoe Corporation, Miles Shoes Meldisco
Lakewood Colorado, Inc., Rosedale Open Country, Inc., Mall of America Fan
Club, Inc., and Meldisco H.C., Inc.
"Initial Pricing Period" means the period commencing on the
Effective Date and ending six months thereafter.
"Interest Period" means: (1) with respect to each
Euro-Currency Loan, the period commencing on the date specified in the
applicable Notice of Borrowing or Notice of Interest Rate Election and ending
one, two, three or six months thereafter, as the applicable Borrower may elect
in such Notice of Borrowing or Notice of Interest Rate Election; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Currency Business Day shall be extended to the
next succeeding Euro-Currency Business Day unless such
Euro-Currency Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding
Euro-Currency Business Day;
(b) any Interest Period which begins on the last
Euro-Currency Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall, subject to clause
(c) below, end on the last Euro-Currency Business Day of a
calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(2) with respect to each CD Loan, the period commencing on
the date specified in the applicable Notice of Borrowing or Notice of Interest
Rate Election and ending 30, 60, 90 or 180 days thereafter, as the applicable
Borrower may elect in such Notice of Borrowing or Notice of Interest Rate
Election; provided that:
(a) subject to clause (b) below, any Interest Period which
would otherwise end on a day which is not a Euro-Currency Business
Day shall be extended to the next succeeding Euro-Currency
Business Day; and
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(3) with respect to each Base Rate Borrowing, the period
commencing on the date of such Borrowing and ending 30 days thereafter;
provided that:
(a) subject to clause (b) below, any Interest Period which
would otherwise end on a day which is not a Euro-Currency Business
Day shall be extended to the next succeeding Euro-Currency
Business Day; and
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(4) with respect to each Money Market LIBOR Loan, the
period commencing on the date of Borrowing specified in the applicable Money
Market Quote Request and ending such whole number of months thereafter as the
applicable Borrower may elect in accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Currency Business Day shall be extended to the
next succeeding Euro-Currency Business Day unless such
Euro-Currency Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding
Euro-Currency Business Day;
(b) any Interest Period which begins on the last
Euro-Currency Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall, subject to clause
(c) below, end on the last Euro-Currency Business Day of a
calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(5) with respect to each Money Market Absolute Rate Loan,
the period commencing on the date of Borrowing specified in the applicable
Money Market Quote Request and ending such number of days thereafter (but not
less than 7 days) as the applicable Borrower may elect in accordance with
Section 2.03; provided that:
(a) subject to clause (b) below, any Interest Period which
would otherwise end on a day which is not a Euro-Currency Business
Day shall be extended to the next succeeding Euro-Currency
Business Day; and
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(6) with respect to each Swingline Loan, the period
commencing on the date of such Loan and ending such number of days thereafter
(but not exceeding 14 days) as the applicable Borrower may elect in accordance
with Section 2.04; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Currency Business Day shall be extended to the
next succeeding Euro-Currency Business Day; and
(b) any Interest Period which would otherwise and after the
Termination Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, or any successor statute.
"Investment" means any investment in any Person, whether by
means of share purchase, capital contribution, loan, time deposit or otherwise.
"Issuing Bank" means (i) The Bank of New York and (ii) any
other Bank that shall enter into an Issuing Bank Agreement as provided in
Section 2.17(m), in each case in their respective capacities as the issuers of
Letters of Credit, and their respective successors in such capacity.
"Issuing Bank Agreement" has the meaning set forth in
Section 2.17(m).
"Kmart Agreement" means the Master Agreement dated as of
June 9, 1995, between Kmart Corporation, Kmart Properties, Inc. and the
Company (as successor to Melville), as amended by the Agreement dated as of
March 25, 1996, among Kmart Corporation, Melville, Kmart Properties, Inc. and
the Company.
"Letter of Credit" means any letter of credit issued
pursuant to Section 2.17.
"Letter of Credit Disbursement" means a payment or
disbursement made by an Issuing Bank pursuant to a Letter of Credit.
"Letter of Credit Exposure" means at any time the sum of (i)
the aggregate undrawn amount of all outstanding Letters of Credit plus (ii)
the aggregate amount of all Letter of Credit Disbursements not yet reimbursed
by the Borrowers as provided in Section 2.17. The Letter of Credit Exposure
shall be expressed in Dollars, determined as provided in Section 2.17(l) in
the case of any amount thereof denominated in an Alternative Currency. The
Letter of Credit Exposure of any Bank at any time shall mean its Applicable
Percentage of the aggregate Letter of Credit Exposure at such time.
"Letter of Credit Sublimit Amount" means the lesser of
$400,000,000 and the amount of the Total Commitments.
"Level I Pricing Period" means any period (other than the
Initial Pricing Period) during which the Company's Fixed Charge Coverage Ratio
for the most recent Calculation Period is 3.0 or greater. Any such period
shall commence on (and include) the date of delivery to the Agent of financial
statements demonstrating that such period has commenced and shall terminate on
(and exclude) the date of delivery to the Agent of financial statements
demonstrating that such period has terminated.
"Level II Pricing Period" means any period (other than the
Initial Pricing Period) during which the Company's Fixed Charge Coverage Ratio
for the most recent Calculation Period is 2.4 or greater but less than 3.0.
Any such period shall commence on (and include) the date of delivery to the
Agent of financial statements demonstrating that such period has commenced and
shall terminate on (and exclude) the date of delivery to the Agent of
financial statements demonstrating that such period has terminated.
"Level III Pricing Period" means (i) the Initial Pricing
Period and (ii) any other period during which the Company's Fixed Charge
Coverage Ratio for the most recent Calculation Period is 2.25 or greater but
less than 2.4. Any such period referred to in clause (ii) above shall
commence on (and include) the date of delivery to the Agent of financial
statements demonstrating that such period has commenced and shall terminate on
(and exclude) the date of delivery to the Agent of financial statements
demonstrating that such period has terminated.
"Level IV Pricing Period" means any period (other than the
Initial Pricing Period) during which the Company's Fixed Charge Coverage Ratio
for the most recent Calculation Period is 2.0 or greater but less than 2.25.
Any such period shall commence on (and include) the date of delivery to the
Agent of financial statements demonstrating that such period has commenced and
shall terminate on (and exclude) the date of delivery to the Agent of
financial statements demonstrating that such period has terminated.
"Level V Pricing Period" means any period that is neither
the Initial Pricing Period nor a Level I Pricing Period, a Level II Pricing
Period, a Level III Pricing Period or a Level IV Pricing Period.
"Leverage Ratio" means, at any time, the ratio of (i)
Consolidated Total Debt at such time to (ii) Consolidated Total Capitalization
at such time.
"LIBOR Auction" means a solicitation of Money Market Quotes
setting forth Money Market Margins based on the London Interbank Offered Rate
pursuant to Section 2.03.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind, or any other
type of preferential arrangement that has the practical effect of a security
interest, in respect of such asset. For the purposes of this Agreement, the
Company or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"Loan" means a Domestic Loan, a Euro-Currency Loan, a
Swingline Loan or a Money Market Loan and "Loans" means any combination of the
foregoing.
"Loan Documents" means this Agreement, the Guarantee
Agreement, the Notes, any Election to Participate and any Issuing Bank
Agreement.
"Loan Sublimit Amount" means the lesser of $200,000,000 and
the amount of the Total Commitments.
"London Interbank Offered Rate" has the meaning set forth in
Section 2.08(c).
"Margin Stock" has the meaning given to such term under
Regulation U.
"Material Adverse Effect" means (i) a materially adverse
effect on the business, operations or financial condition of the Company and
its Consolidated Subsidiaries considered as a whole, (ii) material impairment
of the ability of the Company or any Subsidiary to perform any of its
obligations under any Loan Document to which it is or will be a party, or
(iii) material impairment of the rights of or benefits available to the Agent
or the Banks under any Loan Document.
"Material Debt" means Debt (other than the Notes) of the
Company and/or one or more of its Subsidiaries, arising in one or more related
or unrelated transactions, in an aggregate principal amount equal to or
exceeding $20,000,000.
"Material Plan" means at any time a Plan or Plans having
aggregate Unfunded Liabilities in excess of $20,000,000.
"Material Subsidiary" means a Subsidiary of the Company
that, as of the time of determination of whether such Subsidiary is a
"Material Subsidiary", accounted on a consolidated basis for 10% or more of
the total sales of the Company and its Consolidated Subsidiaries for the most
recent Calculation Period or accounted on a consolidated basis for 10% or
more of the total assets of the Company and its Consolidated Subsidiaries
as of the most recent date for which a consolidated balance sheet of the
Company has been delivered to the Agent pursuant to Section 5.01(a) or (b).
"Melville" means Melville Corporation, a New York
corporation, and its successors.
"Money Market Absolute Rate" has the meaning set forth in
Section 2.03(d).
"Money Market Absolute Rate Loan" means a loan made or to be
made by a Bank pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its
Domestic Lending Office or such other office, branch or affiliate of such Bank
as it may hereafter designate as its Money Market Lending Office by notice to
the Company and the Agent; provided that any Bank may from time to time by
notice to the Company and the Agent designate separate Money Market Lending
Offices for its Money Market LIBOR Loans, on the one hand, and its Money
Market Absolute Rate Loans, on the other hand, in which case all references
herein to the Money Market Lending Office of such Bank shall be deemed to
refer to either or both of such offices, as the context may require.
"Money Market LIBOR Loan" means a loan made or to be made by
a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at
the Base Rate for the reason stated in Section 8.01).
"Money Market Loan" means a Money Market LIBOR Loan or a
Money Market Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in Section
2.03(d).
"Money Market Quote" means an offer by a Bank to make a
Money Market Loan in accordance with Section 2.03.
"Money Market Quote Request" means a request by a Borrower
to the Banks to make Money Market Loans in accordance with Section 2.03(b).
"Multiemployer Plan" means at any time an employee pension
benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any
member of the ERISA Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions,
including for these purposes any Person which ceased to be a member of the
ERISA Group during such five year period.
"Note" means a promissory note of a Borrower substantially
in the form of Exhibit A hereto, evidencing the obligation of such Borrower to
repay Loans made to it, and "Notes" means any or all of such promissory notes
issued hereunder.
"Notice of Borrowing" means a Notice of Committed Borrowing
(as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined
in Section 2.03(f)).
"Notice of Interest Rate Election" has the meaning set forth
in Section 2.07.
"Obligations" has the meaning set forth in the Guarantee
Agreement.
"Parent" means, with respect to any Bank, any Person
controlling such Bank.
"Participant" has the meaning set forth in Section 9.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership,
an association, a trust or any other entity or organization, including a
Governmental Authority.
"Plan" means at any time an employee pension benefit plan
(other than a Multiemployer Plan) which is covered by Title IV of ERISA or
subject to the minimum funding standards under Section 412 of the Internal
Revenue Code and either (i) is maintained, or contributed to, by any member of
the ERISA Group for employees of any member of the ERISA Group or (ii) has at
any time within the preceding five years been maintained, or contributed to,
by any Person which was at such time a member of the ERISA Group for employees
of any Person which was at such time a member of the ERISA Group.
"Pricing Period" means a Level I Pricing Period, a Level II
Pricing Period, a Level III Pricing Period, a Level IV Pricing Period, or a
Level V Pricing Period.
"Prime Rate" means the rate of interest publicly announced
by Morgan Guaranty Trust Company of New York in New York City from time to
time as its Prime Rate.
"Reference Banks" means the CD Reference Banks or the
Euro-Currency Reference Banks, as the context may require, and "Reference
Bank" means any one of such Reference Banks.
"Regulation U" means Regulation U of the Board of Governors
of the Federal Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least 51%
of the aggregate amount of the Commitments or, if the Commitments shall have
been terminated, Banks with Committed Exposure and Money Market Loans
aggregating at least 51% of the sum of the Committed Exposure and the
aggregate unpaid principal amount of the Money Market Loans at such time.
"Restricted Payment" means (i) any dividend or other
distribution on any shares of the capital stock of the Company or any
Subsidiary (except dividends payable solely in shares of its capital stock) or
(ii) any payment on account of the purchase, redemption, retirement or
acquisition of (a) any shares of the capital stock of the Company or any
Subsidiary or (b) any option, warrant or other right to acquire shares of the
capital stock of the Company or any Subsidiary.
"Revolving Credit Period" means the period from and
including the Effective Date to but excluding the Termination Date.
"Spin-Off Transactions" means the transactions contemplated
by the Information Statement and the Distribution Agreement to occur on or
before the date of distribution by Melville to the holders of its common stock
of the Company's common stock, including without limitation (i) the
contribution by Melville and its subsidiaries (other than the Company and its
Subsidiaries) to the Company and its Subsidiaries of properties and other
assets (including, without limitation, the capital stock of certain
corporations that will become Subsidiaries as a result of such contribution)
as contemplated by the Information Statement and the Distribution Agreement,
(ii) the capitalization of the Company and its Subsidiaries as contemplated by
the Information Statement and the Distribution Agreement (including, without
limitation, the elimination of intercompany balances between Melville and its
subsidiaries, on the one hand, and the Company and its Subsidiaries, on the
other hand) and (iii) the distribution by Melville of the common stock of the
Company to the holders of Melville's common stock.
"Stand-by Letter of Credit Fee Rate" has the meaning set
forth in Section 2.17(f).
"Subsidiary" means any corporation or other entity now
existing or hereafter formed of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at the time directly or
indirectly owned by the Company.
"Swingline Exposure" means at any time the aggregate
principal amount of all Swingline Loans outstanding at such time. The
Swingline Exposure of any Bank at any time shall mean its Applicable
Percentage of the Swingline Exposure at such time.
"Swingline Lender" means Morgan Guaranty Trust Company of
New York, in its capacity as lender of Swingline Loans hereunder, and its
successors in such capacity.
"Swingline Loan" means a loan made by the Swingline Lender
pursuant to Section 2.04.
"Tax Agreement" means the Tax Disaffiliation Agreement to be
entered into between Melville and the Company in connection with the Spin-Off
Transactions.
"Temporary Cash Investment" means any Investment in (i)
direct obligations of the United States or any agency thereof, or obligations
guaranteed by the United States or any agency thereof, (ii) commercial paper
rated at least A-1 by Standard & Poor's, a division of The McGraw-Hill
Companies, and P-1 by Moody's Investors Service, Inc., (iii) time deposits
with, including certificates of deposit issued by, any office located in the
United States of any bank or trust company which is organized under the laws of
the United States or any state thereof and has capital, surplus and undivided
profits aggregating at least $500,000,000 or (iv) repurchase agreements with
respect to securities described in clause (i) above entered into with an
office of a bank or trust company meeting the criteria specified in clause
(iii) above; provided in each case that such Investment matures within one
year from the date of acquisition thereof by the Company or a Subsidiary or, in
the case of Section 2.17(k), the Agent.
"Termination Date" means the third anniversary of the
Effective Date, or, if such day is not a Euro-Currency Business Day, the next
succeeding Euro-Currency Business Day, unless such Euro-Currency Business Day
falls in another calendar month, in which case the Termination Date shall be
the next preceding Euro-Currency Business Day.
"Total Commitments" means at any time the sum of the Banks'
Commitments at such time.
"Transactions" means the Financing Transactions and the
Spin-Off Transactions.
"Transaction Documents" means (i) the Distribution Agreement
and the Tax Agreement and (ii) any other contracts and agreements between the
Company or any Subsidiary, on the one hand, and Melville or any subsidiary
thereof (other than the Company and its Subsidiaries), on the other hand, in
effect on the Effective Date (other than any such contracts and agreements
relating solely to the purchase or sale of inventory or services in the
ordinary course of business on terms no less favorable to the Company and its
Subsidiaries than they would obtain in a comparable arm's length transaction).
"Type" has the meaning set forth in Section 1.03.
"Unfunded Liabilities" means, with respect to any Plan at
any time, the amount (if any) by which (i) the value of all benefit
liabilities under such Plan, determined on a plan termination basis using the
assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA,
exceeds (ii) the fair market value of all Plan assets allocable to such
liabilities under Title IV of ERISA (excluding any accrued but unpaid
contributions), all determined as of the then most recent valuation date for
such Plan, but only to the extent that such excess represents a potential
liability of a member of the ERISA Group to the PBGC or any other Person under
Title IV of ERISA.
"United States" means the United States of America,
including the States and the District of Columbia, but excluding its
territories and possessions.
"Wholly-Owned Consolidated Subsidiary" means any
Consolidated Subsidiary all of the shares of capital stock or other ownership
interests of which (except directors' qualifying shares) are at the time
directly or indirectly owned by the Company.
SECTION 1.02. Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with United States generally accepted accounting principles as in
effect from time to time, applied on a basis consistent (except for changes
concurred in by the Company's independent public accountants) with the most
recent audited consolidated financial statements of the Company and its
Consolidated Subsidiaries delivered to the Banks; provided that, if the
Company notifies the Agent that the Company wishes to amend the calculation of
the Company's Fixed Charge Coverage Ratio for purposes of determining Pricing
Periods or to amend any covenant in Article V, in either case to eliminate the
effect of any change in generally accepted accounting principles on the
operation of such calculation or covenant (or if the Agent notifies the
Company that the Required Banks wish to amend any such calculation or covenant
for such purpose), then such calculation or the Company's compliance with such
covenant, as the case may be, shall be determined on the basis of generally
accepted accounting principles in effect immediately before the relevant change
in generally accepted accounting principles became effective, until either
such notice is withdrawn or such calculation or covenant is amended in a
manner satisfactory to the Company and the Required Banks.
SECTION 1.03. Types of Borrowings. Borrowings and Loans
hereunder are distinguished by "Type". The Type of a Loan refers to whether
such Loan is a Base Rate Loan, a CD Loan, a Euro-Currency Loan, a Swingline
Loan, a Money Market LIBOR Loan, or a Money Market Absolute Rate Loan. The
term "Borrowing" denotes the aggregation of Loans of one or more Banks to be
made to a single Borrower pursuant to Article II on a single date and for a
single Interest Period. Borrowings are classified for purposes of this
Agreement either by reference to the pricing of Loans comprising such
Borrowing (e.g., a "Euro-Currency Borrowing" is a Borrowing comprised of
Euro-Currency Loans) or by reference to the provisions of Article II under
which participation therein is determined (i.e., a "Committed Borrowing" is a
Borrowing under Section 2.01 in which all Banks participate in proportion to
their Commitments, a "Money Market Borrowing" is a Borrowing under Section 2.03
in which the Bank participants are determined on the basis of their bids and a
Swingline Borrowing is a Borrowing of a Swingline Loan).
ARTICLE II
The Credits
SECTION 2.01. Commitments to Lend. (a) Committed Loans.
During the Revolving Credit Period each Bank severally agrees, on the terms
and conditions set forth in this Agreement, to lend to the Company or any
Eligible Subsidiary from time to time amounts that will not result in (i) such
Bank's Committed Exposure at any time exceeding its Commitment, (ii) the
aggregate principal amount of all outstanding Loans at any time exceeding the
Loan Sublimit Amount or (iii) the sum of the Letter of Credit Exposure and the
aggregate principal amount of all outstanding Loans at any time exceeding the
Total Commitments. Within the foregoing limits, a Borrower may borrow under
this subsection, repay, or to the extent permitted by Section 2.12, prepay
Committed Loans and reborrow at any time during the Revolving Credit Period
under this subsection (a). All Committed Loans shall be made in Dollars.
(b) Borrowings Ratable. Each Borrowing under this Section
2.01 shall be made from the Banks ratably in proportion to their respective
Commitments.
SECTION 2.02. Notice of Committed Borrowings. A Borrower
shall give the Agent notice (a "Notice of Committed Borrowing") not later than
11:00 A.M. (New York City time) on the date (a) of any Base Rate Borrowing,
(b) two Domestic Business Days before any CD Borrowing, and (c) three
Euro-Currency Business Days before any Euro-Currency Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Domestic Borrowing or a
Euro-Currency Business Day in the case of a Euro-Currency
Borrowing;
(ii) the aggregate amount of such Borrowing, which shall be
$5,000,000 or a larger multiple of $1,000,000 (except that any
Committed Borrowing may be in an aggregate amount equal to the
lesser of (A) the excess of the Total Commitments over the sum of
the aggregate principal amount of all outstanding Loans and the
Letter of Credit Exposure and (B) the excess of the Loan Sublimit
Amount over the aggregate principal amount of all outstanding
Loans);
(iii) whether the Loans comprising such Borrowing are to be
Base Rate Loans, CD Loans or Euro-Currency Loans; and
(iv) in the case of a CD Borrowing or Euro-Currency Borrowing,
the duration of the Interest Period applicable thereto, subject to
the provisions of the definition of Interest Period.
SECTION 2.03. Money Market Borrowings.
(a) The Money Market Option. In addition to Committed
Borrowings pursuant to Section 2.01, any Borrower may, as set forth in this
Section, request the Banks from time to time during the Revolving Credit
Period to make offers to make Money Market Loans to such Borrower. The Banks
may, but shall have no obligation to, make such offers and the Borrower may,
but shall have no obligation to, accept any such offers in the manner set
forth in this Section.
(b) Money Market Quote Request. When a Borrower wishes to
request offers to make Money Market Loans under this Section, it shall
transmit to the Agent by telex or facsimile transmission a Money Market Quote
Request substantially in the form of Exhibit B hereto so as to be received no
later than 11:00 A.M. (New York City time) (x) four Euro-Currency Business
Days prior to the date of Borrowing proposed therein, in the case of a LIBOR
Auction for Money Market Loans to be made in Dollars, (y) one Domestic
Business Day prior to the date of Borrowing proposed therein, in the case of
an Absolute Rate Auction for Money Market Loans to be made in Dollars or (z)
six Euro-Currency Business Days prior to the date of Borrowing proposed
therein, in the case of a LIBOR Auction or Absolute Rate Auction for Money
Market Loans to be made in an Alternative Currency in accordance with
subsection (h) of this Section (or, in any case, such other time or date as
the Company and the Agent shall have mutually agreed upon and shall have
notified to the Banks not later than the date of the Money Market Quote
Request for the first LIBOR Auction or Absolute Rate Auction for which such
change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a
Euro-Currency Business Day in the case of a LIBOR Auction or a
Domestic Business Day in the case of an Absolute Rate Auction
(unless such Absolute Rate Auction relates to Money Market Loans
to be made in an Alternative Currency, in which case a
Euro-Currency Business Day),
(ii) the aggregate amount of such Borrowing (expressed in
Dollars), which shall be $5,000,000 or a larger multiple of
$1,000,000,
(iii) the currency in which the proposed Borrowing is to be
made, which shall be Dollars or, subject to subsection (h) of this
Section, an Alternative Currency,
(iv) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest Period, and
(v) whether the Money Market Quotes requested are to set
forth a Money Market Margin or a Money Market Absolute Rate.
A Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon
receipt of a Money Market Quote Request, the Agent shall send to the Banks by
telex or facsimile transmission an Invitation for Money Market Quotes
substantially in the form of Exhibit C hereto, which shall constitute an
invitation by the applicable Borrower to each Bank to submit Money Market
Quotes offering to make the Money Market Loans to which such Money Market
Quote Request relates in accordance with this Section.
(d) Submission and Contents of Money Market Quotes. (i)
Each Bank may submit a Money Market Quote containing an offer or offers to
make Money Market Loans in response to any Invitation for Money Market Quotes.
Each Money Market Quote must comply with the requirements of this subsection
(d) and must be submitted to the Agent by telex or facsimile transmission at
its offices specified in or pursuant to Section 9.01 not later than (x) 10:00
A.M. (New York City time) on the third Euro-Currency Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction for Money Market
Loans to be made in Dollars, (y) 10:00 A.M. (New York City time) on the
proposed date of Borrowing, in the case of an Absolute Rate Auction for Money
Market Loans to be made in Dollars or (z) 10:00 A.M. (New York City time) on
the fifth Euro-Currency Business Day prior to the proposed date of Borrowing,
in the case of a LIBOR Auction or Absolute Rate Auction for Money Market Loans
to be made in an Alternative Currency (or, in any case, such other time or
date as the Company and the Agent shall have mutually agreed and shall have
notified to the Banks not later than the date of the Money Market Quote
Request for the first LIBOR Auction or Absolute Rate Auction for which such
change is to be effective); provided that Money Market Quotes submitted by the
Agent (or any affiliate of the Agent) in the capacity of a Bank may be
submitted, and may only be submitted, if the Agent or such affiliate notifies
the applicable Borrower of the terms of the offer or offers contained therein
not later than fifteen minutes prior to the latest time that Money Market
Quotes may be submitted by other Banks as provided above. Subject to Articles
III and VI, any Money Market Quote so made shall be irrevocable except with
the written consent of the Agent given on the instructions of the applicable
Borrower.
(ii) Each Money Market Quote shall be in substantially the
form of Exhibit D hereto and shall in any case
specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which
each such offer is being made (expressed in Dollars), which
principal amount (x) may be greater than or less than the
Commitment of the quoting Bank, (y) must be $1,000,000 or a larger
multiple thereof and (z) may not exceed the principal amount of
Money Market Loans for which offers were requested,
(C) the currency of the Money Market Loan for which each
such offer is being made,
(D) in the case of a LIBOR Auction, the margin above or
below the applicable London Interbank Offered Rate (the "Money
Market Margin") offered for each such Money Market Loan, expressed
as a percentage (rounded to the nearest 1/10,000th of 1%) to be
added to or subtracted from such base rate,
(E) in the case of an Absolute Rate Auction, the rate of
interest per annum (rounded to the nearest 1/10,000th of 1%) (the
"Money Market Absolute Rate") offered for each such Money Market
Loan, and
(F) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto
or does not specify all of the information required by subsection
(d)(ii);
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly notify
the applicable Borrower of the terms (x) of any Money Market Quote submitted
by a Bank that is in accordance with subsection (d) and (y) of any Money
Market Quote that amends, modifies or is otherwise inconsistent with a
previous Money Market Quote submitted by such Bank with respect to the same
Money Market Quote Request. Any such subsequent Money Market Quote shall be
disregarded by the Agent unless such subsequent Money Market Quote is submitted
solely to correct a manifest error in such former Money Market Quote. The
Agent's notice to the applicable Borrower shall specify (A) the aggregate
principal amount of Money Market Loans for which offers have been received for
each Interest Period specified in the related Money Market Quote Request, (B)
the respective principal amounts and Money Market Margins or Money Market
Absolute Rates, as the case may be, so offered and (C) if applicable,
limitations on the aggregate principal amount of Money Market Loans for which
offers in any single Money Market Quote for any Interest Period may be
accepted.
(f) Acceptance and Notice by Borrower. Not later than
11:00 A.M. (New York City time) on (x) the third Euro-Currency Business Day
prior to the proposed date of Borrowing, in the case of a LIBOR Auction for
Money Market Loans to be made in Dollars, (y) the proposed date of Borrowing,
in the case of an Absolute Rate Auction for Money Market Loans to be made in
Dollars or (z) the fifth Euro-Currency Business Day prior to the proposed date
of Borrowing, in the case of a LIBOR Auction or Absolute Rate Auction for
Money Market Loans to be made in an Alternative Currency (or, in any case,
such other time or date as the Company and the Agent shall have mutually
agreed upon and shall have notified to the Banks not later than the date of
the Money Market Quote Request for the first LIBOR Auction or Absolute Rate
Auction for which such change is to be effective), the applicable Borrower
shall notify the Agent of its acceptance or non-acceptance of the offers so
notified to it pursuant to subsection (e). In the case of acceptance, such
notice (a "Notice of Money Market Borrowing") shall specify the aggregate
principal amount of offers for each Interest Period that are accepted,
expressed in Dollars. The applicable Borrower may accept any Money Market
Quote for any Interest Period in whole or in part; provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in, and
the currency thereof must be the currency set forth in, the
related Money Market Quote Request,
(ii) the principal amount of each Money Market Borrowing must
be $5,000,000 or a larger multiple of $1,000,000,
(iii) acceptance of offers may only be made on the basis of
ascending Money Market Margins or Money Market Absolute Rates, as
the case may be, and
(iv) a Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the
requirements of this Agreement.
(g) Allocation by Agent. If offers are made by two or more
Banks with the same Money Market Margins or Money Market Absolute Rates, as
the case may be, for a greater aggregate principal amount than the amount in
respect of which such offers are accepted for the related Interest Period, the
principal amount of Money Market Loans in respect of which such offers are
accepted shall be allocated by the Agent among such Banks as nearly as
possible (in multiples of such number, not greater than $1,000,000, as the
Agent may deem appropriate) in proportion to the aggregate principal amounts
of such offers. Determinations by the Agent of the pro rata amounts of Money
Market Loans shall be conclusive in the absence of manifest error.
(h) Money Market Loans in an Alternative Currency. Any
Borrower may request Money Market Loans in an Alternative Currency subject to
the terms and conditions of this subsection (h), in addition to the other
conditions applicable to such Loans hereunder. Any request for Money Market
Loans in an Alternative Currency shall be subject to the following conditions:
(i) after giving effect to any Money Market Borrowing in an
Alternative Currency, the aggregate Dollar Amount of all
outstanding Money Market Loans and Letter of Credit Exposure
denominated in Alternative Currencies shall not exceed
$50,000,000, and
(ii) if there shall occur at or prior to 10:00 A.M. (New York
City time) on the date of any Money Market Borrowing to be
denominated in an Alternative Currency any change in national or
international financial, political or economic conditions or
currency exchange rates or exchange controls which would, in the
reasonable opinion of any Bank that shall have offered to make any
Money Market Loan in connection with such Borrowing, make it
impracticable for such Bank's Loan to be denominated in such
Alternative Currency, then such Bank may by notice to the
applicable Borrower and the Agent withdraw its offer to make such
Loan.
Any Money Market Loan which is to be made in an Alternative
Currency in accordance with this subsection (h) shall be advanced in the
Equivalent Amount of the Dollar Amount thereof and shall be repaid or prepaid
in such Alternative Currency in the amount borrowed. Interest payable on any
Loan denominated in an Alternative Currency shall be paid in such Alternative
Currency.
For purposes of determining whether the aggregate principal
amount of Loans outstanding hereunder exceeds any applicable limitation
expressed in Dollars, each Money Market Loan denominated in an Alternative
Currency shall be deemed to be in a principal amount equal to the Dollar
Amount thereof. The Dollar Amount of any Money Market Loan with an Interest
Period exceeding six months in duration shall be adjusted on each date that
would have been the last day of an Interest Period for such Loan if such Loan
had successive Interest Periods of six months duration. Each such adjustment
shall be made by the Bank holding such Loan by determining the amount in
Dollars that would be required in order to result in an Equivalent Amount in
the applicable Alternative Currency equal to the principal amount of the
applicable Loan outstanding on the date of the adjustment, and the amount in
Dollars so determined shall be the Dollar Amount of such Loan unless and until
another adjustment is required hereby. Each Bank that makes a Money Market
Loan denominated in an Alternative Currency agrees to determine any such
adjustments if and when required to be made pursuant to this paragraph and to
notify the Company and the Agent of each such adjustment promptly upon making
such determination.
SECTION 2.04. Swingline Loans. (a) During the Revolving
Credit Period the Swingline Lender agrees, on the terms and conditions set
forth in this Agreement, to lend to any Borrower from time to time amounts
that will not result in (i) the aggregate principal amount of outstanding
Swingline Loans at any time exceeding $25,000,000, (ii) the aggregate
principal amount of all outstanding Loans at any time exceeding the Loan
Sublimit Amount or (iii) the sum of the Letter of Credit Exposure and the
aggregate principal amount of all outstanding Loans at any time exceeding the
Total Commitments. All Swingline Loans shall be made in Dollars.
(b) In order to request a Swingline Loan, a Borrower shall
notify the Agent of such request not later than 1:00 P.M. (New York City time)
on the day of a proposed Swingline Loan, specifying the proposed date (which
shall be a Domestic Business Day) and amount of the requested Swingline Loan
(which shall be $1,000,000 or a larger multiple of $500,000) and the duration
of the Interest Period applicable thereto, subject to the definition of
Interest Period. The Agent will promptly advise the Swingline Lender of any
such notice received from a Borrower. The Swingline Lender shall make each
Swingline Loan available to the applicable Borrower by means of a credit to
the general deposit account of the Company with the Swingline Lender by 2:00
P.M. (New York City time) on the requested date of such Swingline Loan (and if
the applicable Borrower is an Eligible Subsidiary, the Company shall make such
funds available to such Borrower).
(c) The Swingline Lender may by written notice given to the
Banks not later than 10:00 A.M., New York City time, on any Domestic Business
Day require the Banks to acquire participations on such Business Day in all or
a portion of the Swingline Loans outstanding. Such notice shall specify the
aggregate amount of Swingline Loans in which the Banks will acquire
participations. In furtherance of the foregoing, each Bank hereby absolutely
and unconditionally agrees, upon receipt of notice as provided above, to pay
to the Agent, for the account of the Swingline Lender, such Bank's Applicable
Percentage of such Swingline Loan or Loans. Each Bank acknowledges and agrees
that its obligation to acquire participations in Swingline Loans pursuant to
this paragraph is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the occurrence and continuance of a Default
or reduction or termination of the Commitments, and that each such payment
shall be made without any offset, abatement, withholding or reduction
whatsoever; provided, however, that a Bank shall not be required to acquire a
participation in a Swingline Loan pursuant to this paragraph if (i) a Default
shall have occurred and was continuing at the time such Swingline Loan was
made and (ii) such Bank shall have notified the Swingline Lender in writing,
not less than one Domestic Business Day before such Swingline Loan was made,
that such Default has occurred and that such Bank will not participate in any
Swingline Loans made while such Default is continuing. Each Bank shall comply
with its obligation under this paragraph by wire transfer of immediately
available funds, in the same manner as provided in Section 2.05 with respect
to Loans made by such Bank (and Section 2.05 shall apply, mutatis mutandis, to
the payment obligations of the Banks). The Agent shall notify the Company of
any participations in any Swingline Loan acquired pursuant to this paragraph.
Any amounts received by the Swingline Lender from any Borrower (or other party
on behalf of any Borrower) in respect of a Swingline Loan after receipt by the
Swingline Lender of the proceeds of a sale of participations therein shall be
promptly remitted to the Agent; any such amounts received by the Agent shall be
promptly remitted by the Agent to the Banks that shall have made their
payments pursuant to this paragraph and to the Swingline Lender, as their
interests may appear. The purchase of participations in a Swingline Loan
pursuant to this paragraph shall not relieve the applicable Borrower of any
default in the payment thereof.
SECTION 2.05. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify
each Bank of the contents thereof and of such Bank's share (if any) of such
Borrowing and such Notice of Borrowing shall not thereafter be revocable by the
applicable Borrower.
(b) Not later than 12:00 Noon (New York City time) on the
date of each Borrowing, each Bank participating therein shall make available
its share of such Borrowing, in Federal or other funds immediately available
in New York City, to the Agent at its address specified in or pursuant to
Section 9.01 or, subject to the provisions of Section 2.03(h), if such
Borrowing is to be made in an Alternative Currency, make available the
Equivalent Amount of such Alternative Currency on that day (in such funds as
may then be customary for the settlement of international transactions in the
Alternative Currency) to the account of the Agent at such place as shall have
been notified by the Agent to the Banks by not less than five Domestic Business
Days' notice. Unless the Agent determines that any applicable condition
specified in Article III has not been satisfied, the Agent will make the funds
so received from the Banks available to the Company at the Agent's aforesaid
address (and if the applicable Borrower is an Eligible Subsidiary, the Company
shall make such funds available to such Borrower).
(c) If an Issuing Bank has not received from the relevant
Borrower a payment required by Section 2.17(g) to be made to such Issuing Bank
by 1:00 P.M. (New York City time) on the date on which such payment is due, as
provided in Section 2.17(g), such Issuing Bank shall promptly notify the Agent
thereof (and, if the unreimbursed Letter of Credit Disbursement was made in an
Alternative Currency, the Dollar Amount thereof) and, promptly following
receipt of such notice, the Agent will notify each Bank of the Letter of
Credit Disbursement and such Bank's Applicable Percentage of such Letter of
Credit Disbursement. Not later than 4:00 P.M. (New York City time) on such
date, each Bank shall make available such Bank's Applicable Percentage of such
Letter of Credit Disbursement (in Dollars, in the amount determined as
provided in Section 2.17(l) if such Letter of Credit Disbursement was made in
an Alternative Currency), in Federal or other funds immediately available in
New York City, to the Agent at its address specified in or pursuant to Section
9.01, and the Agent will promptly make such funds available to such Issuing
Bank. Thereafter, any payments made by the applicable Borrower in respect of
such Letter of Credit Disbursement shall be paid to the Agent in Dollars (and
such Issuing Bank shall promptly remit such payments to the Agent if received
by such Issuing Bank) and the Agent will promptly remit to each Bank that
shall have made such funds available its Applicable Percentage of any amounts
subsequently received by the Agent from such Issuing Bank or the applicable
Borrower in respect of such Letter of Credit Disbursement (excluding interest
for the account of such Issuing Bank for the period prior to the date that
such Bank shall have made such funds available).
(d) If any Bank (including the Swingline Lender) makes a
new Loan to a Borrower hereunder on a day on which such Borrower is to repay
all or any part of an outstanding Loan denominated in the same currency from
such Bank, such Bank shall apply the proceeds of its new Loan to make such
repayment and only an amount equal to the difference (if any) between the
amount being borrowed and the amount being repaid shall be made available by
such Bank to the Agent as provided in subsection (c) of this Section, or
remitted by such Borrower to the Agent as provided in Section 2.13, as the
case may be.
(e) Unless the Agent shall have received notice from a Bank
prior to the date of any Borrowing, or prior to the time of any required
payment by such Bank in respect of a Letter of Credit Disbursement, that such
Bank will not make available to the Agent such Bank's share of such Borrowing
or payment, the Agent may assume that such Bank has made such share available
to the Agent on the date of such Borrowing or payment in accordance with
subsection (b) or (c), as applicable, of this Section 2.05 and the Agent may,
in reliance upon such assumption, make available to the applicable Borrower or
the applicable Issuing Bank, as the case may be, on such date a corresponding
amount. If and to the extent that such Bank shall not have so made such share
available to the Agent, such Bank and such Borrower severally agree to repay
to the Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available by
the Agent until the date such amount is repaid to the Agent, at (i) in the
case of a Borrower, a rate per annum equal to the higher of the Federal Funds
Rate and the interest rate applicable thereto pursuant to Section 2.08 or
Section 2.17(g), as applicable, and (ii) in the case of such Bank, the Federal
Funds Rate. In the case of a Borrowing, if such Bank shall repay to the Agent
such corresponding amount, such amount so repaid shall constitute such Bank's
Loan included in such Borrowing for purposes of this Agreement.
SECTION 2.06. Notes. (a) The Loans of each Bank to each
Borrower shall be evidenced by a single Note of such Borrower payable to the
order of such Bank for the account of its Applicable Lending Office.
(b) Each Bank may, by notice to a Borrower and the Agent,
request that its Loans to such Borrower of a particular Type be evidenced by a
separate Note of such Borrower. Each such Note shall be in substantially the
form of Exhibit A hereto with appropriate modifications to reflect the fact
that it evidences solely Loans of the relevant Type. Each reference in this
Agreement to the "Note" of such Bank shall be deemed to refer to and include
any or all of such Notes, as the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section
3.01(b) or 3.03(a), the Agent shall forward such Note to such Bank. Each Bank
shall record the date, amount, Type and maturity of each Loan made by it to
each Borrower and the date and amount of each payment of principal made by
such Borrower with respect thereto and, in the case of Money Market Loans
denominated in an Alternative Currency, the currency, amount and Dollar Amount
of such Loans, and may, in connection with any transfer of any of its Notes,
endorse on the schedule forming a part thereof appropriate notations to
evidence the foregoing information with respect to each such Loan of such
Borrower then outstanding; provided that (and each Borrower understands and
agrees that) the failure of any Bank to make any such recordation or
endorsement shall not affect the obligations of any Borrower hereunder or
under the Notes. Each Bank is hereby irrevocably authorized by each Borrower
so to endorse its Note and to attach to and make a part of its Note a
continuation of any such schedule as and when required.
SECTION 2.07. Interest Rate Elections. (a) The initial
Type of Loans comprising each Committed Borrowing, and the duration of the
initial Interest Period applicable thereto if they are initially CD Loans or
Euro-Currency Loans, shall be as specified in the applicable Notice of
Borrowing. Thereafter, the relevant Borrower may from time to time elect to
change or continue the Type of, or the duration of the Interest Period
applicable to, the Loans included in any Committed Borrowing (excluding
overdue Loans and subject in each case to the provisions of the definition of
Interest Period and Article VIII), as follows:
(i) if such Loans are Base Rate Loans, such Borrower may
elect to designate such Loans as CD Loans or Euro-Currency Loans,
may elect to continue such Loans as Base Rate Loans for an
additional Interest Period, or may elect to designate such Loans
as any combination of Base Rate Loans, CD Loans and Euro-Currency
Loans;
(ii) if such Loans are CD Loans, such Borrower may elect to
designate such Loans as Base Rate Loans or Euro-Currency Loans,
may elect to continue such Loans as CD Loans for an additional
Interest Period, or may elect to designate such Loans as any
combination of Base Rate Loans, CD Loans and Euro-Currency Loans;
and
(iii) if such Loans are Euro-Currency Loans, such Borrower may
elect to designate such Loans as Base Rate Loans or CD Loans, may
elect to continue such Loans as Euro-Currency Loans for an
additional Interest Period, or may elect to designate such Loans
as any combination of Base Rate Loans, CD Loans and Euro-Currency
Loans.
Notwithstanding the foregoing, no Borrower may elect an Interest Period for CD
Loans or Euro-Currency Loans unless the aggregate outstanding principal amount
of CD Loans or Euro-Currency Loans (including any such CD Loans or
Euro-Currency Loans made pursuant to Section 2.01 on the date that such
Interest Period is to begin) to which such Interest Period will apply is
$5,000,000 or any larger multiple of $1,000,000.
(b) Any election permitted by subsection (a) of this
Section may become effective on any Euro-Currency Business Day specified by
the applicable Borrower (the "Election Date"); provided that, with respect to
any outstanding CD Loan or Euro-Currency Loan, the applicable Borrower may not
specify an Election Date that is other than the last day of the Interest
Period therefor. Each such election shall be made by the applicable Borrower
by delivering a notice (a "Notice of Interest Rate Election") to the Agent not
later than 11:00 A.M. (New York City time) on (x) the Election Date, if all
the resulting Loans will be Base Rate Loans, (y) the date two Domestic
Business Days before the Election Date, if the resulting Loans will include CD
Loans but not Euro-Currency Loans, and (z) the date three Euro-Currency
Business Days before the Election Date, if the resulting Loans will include
Euro-Currency Loans. Each Notice of Interest Rate Election shall specify with
respect to the outstanding Loans to which such notice applies:
(i) the Election Date;
(ii) if the Type of Loan is to be changed, the new Type of Loan
and, if such new Type is a CD Loan or Euro-Currency Loan, the
duration of the new Interest Period applicable thereto;
(iii) if such Loans are CD Loans or Euro-Currency Loans and the
Type of such Loans is to be continued for an additional or
different Interest Period, the duration of such additional or
different Interest Period; and
(iv) if such Loans are to be designated as a combination of
Base Rate Loans, CD Loans or Euro-Currency Loans, the information
specified in clauses (i) through (iii) above as to each resulting
Borrowing and the aggregate amount of each such Borrowing.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period and the last
sentence of subsection (a) of this Section.
(c) Upon receipt of a Notice of Interest Rate Election, the
Agent shall promptly notify each Bank of the contents thereof and of such
Bank's share of such Borrowing and such notice shall not thereafter be
revocable by the applicable Borrower.
(d) If a Borrower (i) fails to deliver a timely Notice of
Interest Rate Election to the Agent electing to continue or change the Type
of, or the duration of the Interest Period applicable to, the Loans included
in any Committed Borrowing as provided in this Section and (ii) has not
theretofore delivered a notice of prepayment relating to such Committed Loans,
then such Borrower shall be deemed to have given the Agent a Notice of
Interest Rate Election electing to change the Type of such Loans to (or
continue the Type thereof as) Base Rate Loans, with an Interest Period
commencing on the last day of the then current Interest Period.
SECTION 2.08. Interest Rates. (a) Each Base Rate Loan
shall bear interest on the outstanding principal amount thereof, for each day
from the date such Loan is made until it becomes due or is converted to a Loan
of another Type, at a rate per annum equal to the Base Rate for such day.
Such interest shall be payable for each Interest Period on the last day
thereof and, with respect to the principal amount of any Base Rate Loan
converted to a CD Loan or a Euro-Currency Loan, on the date such Base Rate
Loan is so converted. Any overdue principal of or interest on any Base Rate
Loan shall bear interest, payable on demand, for each day until paid at a rate
per annum equal to the sum of 2% plus the rate otherwise applicable to such
Base Rate Loan for such day.
(b) Each CD Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the CD Margin for such day
plus the Adjusted CD Rate applicable to such Interest Period; provided that if
any CD Loan or any portion thereof shall, as a result of clause (2)(b) of the
definition of Interest Period, have an Interest Period of less than 30 days,
such portion shall bear interest during such Interest Period at the rate
applicable to Base Rate Loans during such period. Such interest shall be
payable for each Interest Period on the last day thereof and, if such Interest
Period is longer than 90 days, at intervals of 90 days after the first day
thereof. Any overdue principal of or interest on any CD Loan shall bear
interest, payable on demand, for each day until paid at a rate per annum equal
to the sum of 2% plus the higher of (i) the sum of the applicable CD Margin
for such day plus the Adjusted CD Rate applicable to such Loan on the date
such payment was due and (ii) the rate applicable to Base Rate Loans for
such day.
"CD Margin" applicable to any CD Loan outstanding on any
day means:
(i) if such day falls within a Level I Pricing Period,
then 0.625%;
(ii) if such day falls within a Level II Pricing Period,
then 0.6875%;
(iii) if such day falls within a Level III Pricing Period,
then 0.8125%;
(iv) if such day falls within a Level IV Pricing Period,
then 0.875%; or
(v) if such day falls within a Level V Pricing Period,
then 1.000%.
The "Adjusted CD Rate" applicable to any Interest Period
means a rate per annum determined pursuant to the following formula:
[ CDBR ] _*/
ACDR = [ --------] +AR
[1.00 - DRP]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
__________
_*/ The amount in brackets being rounded upwards, if necessary, to the
next higher 1/100 of 1%.
The "CD Base Rate" applicable to any Interest Period is the
rate of interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum
bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable)
on the first day of such Interest Period by two or more New York certificate
of deposit dealers of recognized standing for the purchase at face value from
each CD Reference Bank of its certificates of deposit in an amount comparable
to the unpaid principal amount of the CD Loan of such CD Reference Bank to
which such Interest Period applies and having a maturity comparable to such
Interest Period.
"Domestic Reserve Percentage" means for any day that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement (including without
limitation any basic, supplemental or emergency reserves) for a member bank of
the Federal Reserve System in New York City with deposits exceeding five
billion dollars in respect of new non-personal time deposits in dollars in New
York City having a maturity comparable to the related Interest Period and in
an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted
automatically on and as of the effective date of any change in the Domestic
Reserve Percentage.
"Assessment Rate" means for any day the annual assessment
rate in effect on such day which is payable by a member of the Bank Insurance
Fund classified as adequately capitalized and within supervisory subgroup "A"
(or a comparable successor assessment risk classification) within the meaning
of 12 C.F.R. Section 327.3(d) (or any successor provision) to the Federal
Deposit Insurance Corporation (or any successor) for such Corporation's (or
such successor's) insuring time deposits at offices of such institution in the
United States. The Adjusted CD Rate shall be adjusted automatically on and as
of the effective date of any change in the Assessment Rate.
(c) Each Euro-Currency Loan shall bear interest on the
outstanding principal amount thereof, for each day during each Interest Period
applicable thereto, at a rate per annum equal to the sum of the Euro-Currency
Margin for such day plus the London Interbank Offered Rate applicable to such
Interest Period. Such interest shall be payable for each Interest Period on
the last day thereof and, if such Interest Period is longer than three months,
at intervals of three months after the first day thereof.
"Euro-Currency Margin" applicable to any Euro-Currency Loan
outstanding on any day means:
(i) if such day falls within a Level I Pricing Period, then
0.500%;
(ii) if such day falls within a Level II Pricing Period,
then 0.5625%;
(iii) if such day falls within a Level III Pricing Period,
then 0.6875%;
(iv) if such day falls within a Level IV Pricing Period,
then 0.750%; or
(v) if such day falls within a Level V Pricing Period,
then 0.875%;
The "London Interbank Offered Rate" applicable to any
Interest Period means the average (rounded upwards, if necessary, to the next
higher 1/16 of 1%) of the respective rates per annum at which deposits in
Dollars or, in the case of any Money Market LIBOR Loan denominated in an
Alternative Currency, the relevant Alternative Currency are offered to each of
the Euro-Currency Reference Banks in the London interbank market at
approximately 11:00 A.M. (London time) two Euro-Currency Business Days before
the first day of such Interest Period in an amount approximately equal to the
principal amount of the Euro-Currency Loan of such Euro-Currency Reference
Bank to which such Interest Period is to apply (or, in the case of any Money
Market LIBOR Loan, the principal amount of the Euro-Currency Loan that would be
made by such Euro-Currency Reference Bank if the relevant Money Market
Borrowing had been made as a Committed Borrowing) and for a period of time
comparable to such Interest Period.
(d) Any overdue principal of or interest on any
Euro-Currency Loan shall bear interest, payable on demand, for each day from
and including the date payment thereof was due to but excluding the date of
actual payment, at a rate per annum equal to the sum of 2% plus the higher of
(i) the sum of the Euro-Currency Margin for such day plus the London Interbank
Offered Rate applicable to such Loan on the date such payment was due and (ii)
the Euro-Currency Margin for such day plus the average (rounded upwards, if
necessary, to the next higher 1/16 of 1%) of the respective rates per annum at
which one-day (or, if such amount due remains unpaid more than three
Euro-Currency Business Days, then for such other period of time not longer
than three months as the Agent may select) deposits in Dollars or in the
relevant Alternative Currency in an amount approximately equal to such overdue
payment due to each of the Euro-Currency Reference Banks are offered to such
Euro-Currency Reference Bank in the London interbank market for the applicable
period determined as provided above (or, if the circumstances described in
clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to
the sum of 2% plus the rate applicable to Base Rate Loans for such day).
(e) Subject to Section 8.01, each Money Market LIBOR Loan
shall bear interest on the outstanding principal amount thereof, for the
Interest Period applicable thereto, at a rate per annum equal to the sum of
the London Interbank Offered Rate for such Interest Period (determined in
accordance with Section 2.08(c) as if each Reference Bank were to participate
in the related Money Market LIBOR Borrowing ratably in proportion to its
Commitment) plus (or minus) the Money Market Margin quoted by the Bank making
such Loan in accordance with Section 2.03. Each Money Market Absolute Rate
Loan shall bear interest on the outstanding principal amount thereof, for the
Interest Period applicable thereto, at a rate per annum equal to the Money
Market Absolute Rate quoted by the Bank making such Loan in accordance with
Section 2.03. Such interest shall be payable for each Interest Period on the
last day thereof and, if such Interest Period is longer than three months, at
intervals of three months after the first day thereof. Any overdue principal
of or interest on any Money Market Loan shall bear interest, payable on
demand, for each day until paid at a rate per annum equal to the sum of 2%
plus the Base Rate for such day.
(f) Each Swingline Loan shall bear interest on the
outstanding principal amount thereof, for each day during the Interest Period
applicable thereto, at such rate per annum as shall be agreed to in writing by
the applicable Borrower and the Swingline Lender with respect to such
Swingline Loan or, if no such agreement shall be made, at a rate per annum
equal to the Base Rate for such day. Such interest shall be payable for each
Interest Period on the last day thereof. Any overdue principal of or interest
on any Swingline Loan shall bear interest, payable on demand, for each day
until paid at a rate per annum equal to the sum of 2% plus the higher of (i)
the rate of interest applicable to such Swingline Loan prior to default and
(ii) the Base Rate for such day.
(g) The Agent shall determine each interest rate applicable
to the Loans hereunder. The Agent shall give prompt notice to the applicable
Borrower and the Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(h) Each Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated by this Section. If any
Reference Bank does not furnish a timely quotation, the Agent shall determine
the relevant interest rate on the basis of the quotation or quotations
furnished by the remaining Reference Bank(s) or, if none of such quotations is
available on a timely basis, the provisions of Section 8.01 shall apply.
SECTION 2.09. Fees. (a) Facility Fee. The Company shall
pay to the Agent for the account of the Banks ratably a facility fee at the
applicable per annum Facility Fee Rate. Such facility fee shall accrue (i)
from and including the Effective Date (or, if earlier, October 1 1996) to but
excluding the date on which the Commitments expire or terminate, on the daily
actual amount of the Total Commitments (whether used or unused) and (ii) from
and including the date on which the Commitments expire or terminate to but
excluding the date on which there ceases to be any Committed Exposure, on the
daily average aggregate amount of the total Committed Exposure of the Banks.
"Facility Fee Rate" applicable on any day means:
(i) if such day falls within a Level I Pricing Period,
then 0.250%;
(ii) if such day falls within a Level II Pricing Period,
then 0.3125%;
(iii) if such day falls within a Level III Pricing Period,
then 0.3125%;
(iv) if such day falls within a Level IV Pricing Period,
then 0.375%; or
(v) if such day falls within a Level V Pricing Period,
then 0.500%.
(b) Payments. Accrued fees under this Section shall be
payable quarterly in arrears on (i) the last day of March, June, September and
December in each year, commencing on the first such date that occurs on or
after the Effective Date, (ii) the date on which the Commitments expire or
terminate and (iii) if any Committed Exposure remains after the date on which
the Commitments expire or terminate, the date on which there ceases to be any
Committed Exposure. The Agent shall determine the amount of accrued fees
payable hereunder on each payment date and notify the Company thereof.
SECTION 2.10. Termination or Reduction of Commitments. (a)
During the Revolving Credit Period, the Company may, upon at least three
Domestic Business Days' notice to the Agent, terminate at any time, or
proportionately reduce from time to time by an aggregate amount of $10,000,000
or any larger multiple of $1,000,000, the aggregate amount of the Commitments
in excess of the sum of the Letter of Credit Exposure and the aggregate
outstanding principal amount of the Loans.
(b) The Commitments shall terminate on the Termination Date.
SECTION 2.11. Maturity of Loans. (a) The Committed Loans
of each Bank shall mature, and the principal amount thereof shall be due and
payable, together with accrued interest thereon, on the Termination Date.
(b) Each Money Market Loan and Swingline Loan shall mature,
and the principal amount thereof shall be due and payable, together with
accrued interest thereon, on the last day of the Interest Period applicable to
such Loan.
SECTION 2.12. Prepayments. (a) Subject to subsection (d)
of this Section and Section 2.14, a Borrower may, upon at least one Domestic
Business Day's notice (or, in the case of a Committed Borrowing of Fixed Rate
Loans, two Domestic Business Days' notice) to the Agent, prepay any Committed
Borrowing (or any Money Market Borrowing bearing interest at the Base Rate
pursuant to Section 8.01) of such Borrower in whole at any time, or from time
to time in part in amounts aggregating $5,000,000 or any larger multiple of
$1,000,000, by paying the principal amount to be prepaid together with accrued
interest thereon to the date of prepayment. Each such optional prepayment
shall be applied to prepay ratably the Loans of the several Banks included in
such Borrowing.
(b) A Borrower may, upon notice to the Agent prior to 12:00
Noon (New York City time) on the date of prepayment (which shall be a Domestic
Business Day), prepay any Swingline Loan of such Borrower in whole at any
time, or from time to time in part in amounts aggregating $1,000,000 or any
multiple of $500,000 in excess thereof, by paying the principal amount to be
prepaid together with accrued interest thereon to the date of prepayment.
(c) If at any time, as a result of an adjustment to the
Dollar Amount of any outstanding Money Market Loan or Letter of Credit
Exposure denominated in an Alternative Currency or otherwise, (i) the
aggregate principal amount of all outstanding Loans exceeds the Loan Sublimit
Amount or (ii) the sum of the Letter of Credit Exposure and the aggregate
principal amount of all outstanding Loans exceeds the Total Commitments, the
Borrowers shall prepay Swingline Loans or Committed Loans in a principal
amount sufficient to eliminate such excess. If such prepayments shall not be
sufficient to eliminate any such excess referred to in clause (ii) above, then
Section 2.17(k) shall apply.
(d) No Borrower may prepay all or any portion of the
principal amount of any Money Market Loan (other than a Money Market Loan
bearing interest at the Base Rate pursuant to Section 8.01) without the prior
written consent of the Bank holding such Money Market Loan.
(e) Upon receipt of a notice of prepayment pursuant to this
Section, the Agent shall promptly notify each Bank (or, in the case of a
Swingline Loan, the Swingline Lender) of the contents thereof and of such
Bank's ratable share of such prepayment and such notice shall not thereafter
be revocable by the applicable Borrower.
SECTION 2.13. General Provisions as to Payments. (a)
Except as otherwise expressly provided herein, all payments to be made by any
Borrower hereunder or under the Notes in Dollars shall be made not later than
1:00 P.M. (New York City time) on the date when due, in Federal or other funds
immediately available in New York City, to the Agent at its address referred
to in Section 9.01. The Agent will promptly distribute to each Bank its
ratable share of each such payment received by the Agent for the account of the
Banks.
(b) All payments to be made by any Borrower hereunder or
under the Notes in an Alternative Currency pursuant to Section 2.03(h) or
2.17(l) shall be made in such Alternative Currency in such funds as may then
be customary for the settlement of international transactions in such
Alternative Currency for the account of the Agent (or, in the case of payments
to an Issuing Bank pursuant to Section 2.17(l), for the account of an Issuing
Bank), at such time and at such place as shall have been notified by the Agent
(or, in the case of such payments to an Issuing Bank, by such Issuing Bank) to
such Borrower and the applicable Banks by not less than four Euro-Currency
Business Days' notice. The Agent will promptly cause any such payments for
the account of any Bank to be distributed to the Bank entitled thereto in like
funds.
(c) Whenever any payment of principal of, or interest on,
the Domestic Loans or any Money Market Absolute Rate Loans denominated in
Dollars or of fees shall be due on a day which is not a Domestic Business Day,
the date for payment thereof shall be extended to the next succeeding Domestic
Business Day. Whenever any payment of principal of, or interest on, the
Euro-Currency Loans or any Money Market Absolute Rate Loans denominated in an
Alternative Currency or Money Market LIBOR Loans shall be due on a day which
is not a Euro-Currency Business day, the date for payment thereof shall be
extended to the next succeeding Euro-Currency Business Day, unless such
Euro-Currency Business Day falls in another calendar month, in which case the
date for payment thereof shall be the next preceding Euro-Currency Business
Day. If the date for any payment of principal is extended by operation of law
or otherwise, interest thereon shall be payable for such extended time.
(d) Unless the Agent shall have received notice from the
relevant Borrower prior to the date on which any payment is due to the Banks
hereunder that such Borrower will not make such payment in full, the Agent may
assume that such Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such due date an amount equal to the amount then
due such Bank. If and to the extent that such Borrower shall not have so made
such payment, each Bank shall repay to the Agent forthwith on demand such
amount distributed to such Bank, together with interest thereon, for each day
from the date such amount is distributed to such Bank until the date such Bank
repays such amount to the Agent, at the Federal Funds Rate.
(e) All payments hereunder shall be made in Dollars except
as expressly provided in Sections 2.03(h) and 2.17(l).
SECTION 2.14. Funding Losses. If any Borrower makes any
payment of principal with respect to any Fixed Rate Loan (pursuant to Article
II, VI or VIII or otherwise) on any day other than the last day of the
Interest Period applicable thereto, or the end of an applicable period fixed
pursuant to Section 2.08(d), or if any Borrower fails to borrow any Fixed Rate
Loans (excluding a failure to borrow in a specified Alternative Currency due
to the occurrence of any change in conditions described in Section 2.03(h))
after notice has been given to any Bank in accordance with Section 2.05(a) or
to change or continue the Type of, or the duration of the Interest Period
applicable to, any Fixed Rate Loans after notice has been given to any Bank in
accordance with Section 2.07(c), such Borrower shall reimburse each Bank
within 15 days after demand for any resulting loss or expense incurred by it
(or by an existing or prospective Participant in the related Loan) including
(without limitation) any loss incurred in obtaining, liquidating or employing
deposits from third parties, but excluding loss of margin for the period after
any such payment or failure to borrow; provided that such Bank shall have
delivered to the applicable Borrower a certificate as to the amount of such
loss or expense, which certificate shall be conclusive in the absence of
manifest error. For purposes of this Section, any Swingline Loan bearing
interest at a fixed rate shall be deemed to be a Fixed Rate Loan.
SECTION 2.15. Computation of Interest and Fees. Interest
based on the Prime Rate hereunder shall be computed on the basis of a year of
365 days (or 366 days in a leap year) and paid for the actual number of days
elapsed (including the first day but excluding the last day). All other
interest and fees shall be computed on the basis of a year of 360 days and
paid for the actual number of days elapsed (including the first day but
excluding the last day).
SECTION 2.16. Judgment Currency. If for the purposes of
obtaining judgment in any court it is necessary to convert a sum due from any
Borrower hereunder or under any of the Notes in the currency expressed to be
payable herein or under the Notes (the "specified currency") into another
currency, the parties hereto agree, to the fullest extent that they may
effectively do so, that the rate of exchange used shall be that at which in
accordance with normal banking procedures the Agent could purchase the
specified currency with such other currency at the Agent's New York office on
the Euro-Currency Business Day preceding that on which final judgment is
given. The obligations of each Borrower in respect of any sum due to any Bank
or the Agent hereunder or under any Note shall, notwithstanding any judgment
in a currency other than the specified currency, be discharged only to the
extent that on the Euro-Currency Business Day following receipt by such Bank
or the Agent (as the case may be) of any sum adjudged to be so due in such
other currency such Bank or the Agent (as the case may be) may in accordance
with normal banking procedures purchase the specified currency with such other
currency; if the amount of the specified currency so purchased is less than
the sum originally due to such Bank or the Agent, as the case may be, in the
specified currency, the Borrower that is liable for the relevant payment
agrees, to the fullest extent that it may effectively do so, as a separate
obligation and notwithstanding any such judgment, to indemnify such Bank or
the Agent, as the case may be, against such loss, and if the amount of the
specified currency so purchased exceeds (a) the sum originally due to any Bank
or the Agent, as the case may be, in the specified currency and (b) any
amounts shared with other Banks as a result of allocations of such excess as a
disproportionate payment to such Bank under Section 9.04, such Bank or the
Agent, as the case may be, agrees to remit such excess to such Borrower.
SECTION 2.17. Letters of Credit. (a) Any Borrower may
request the issuance of Letters of Credit by any Issuing Bank, in a form
reasonably acceptable to the Agent and such Issuing Bank, appropriately
completed, for the account of such Borrower, at any time and from time to time
during the Revolving Credit Period; provided that any Letter of Credit shall
be issued only if, and each request by any Borrower for the issuance of any
Letter of Credit shall be deemed a representation and warranty of the Company
and such Borrower that, immediately following the issuance of any such Letter
of Credit, (i) the Letter of Credit Exposure shall not exceed the Letter of
Credit Sublimit Amount, (ii) the sum of the Letter of Credit Exposure and the
aggregate principal amount of all outstanding Loans shall not exceed the Total
Commitments and (iii) if such Letter of Credit provides for the payment of
drawings in an Alternative Currency, the aggregate Dollar Amount of all
outstanding Money Market Loans and Letter of Credit Exposure denominated in
Alternative Currencies shall not exceed $50,000,000.
(b) Each Letter of Credit shall provide for payment of all
drawings thereunder in Dollars or, subject to Section 2.17(l), an Alternative
Currency.
(c) Each issuance of any Letter of Credit shall be made on
such prior notice from the applicable Borrower to the applicable Issuing Bank
as shall be acceptable to such Issuing Bank specifying the date of issuance,
the date on which such Letter of Credit is to expire (which shall not be later
than the earlier of (i) the date that is one Domestic Business Day prior to
the Termination Date or, if such Letter of Credit is issued to a beneficiary
outside the United States, the date that is five Domestic Business Days prior
to the Termination Date, and (ii) subject to renewal, the date one year after
the date of such Letter of Credit), the amount and currency of such Letter of
Credit, the name and address of the beneficiary of such Letter of Credit,
whether such Letter of Credit is a documentary or stand-by Letter of Credit,
the purpose of such Letter of Credit, and such other information as may be
necessary or desirable to complete such Letter of Credit. Each Issuing Bank
will give the Agent prompt notice of the issuance and amount of each Letter of
Credit issued by it, the currency thereof (and, if such currency is an
Alternative Currency, the Dollar Amount thereof) and the expiration of such
Letter of Credit. Each Issuing Bank will give the Agent and the Company (i)
daily notice of the aggregate amount available to be drawn under all
outstanding Letters of Credit issued by it, (ii) a quarterly summary
indicating, on a daily basis during such quarter, the issuance of any Letter
of Credit issued by it and the amount thereof, the expiration of any such
Letter of Credit and any payment on drafts presented under such Letters of
Credit and (iii) in the case of Letters of Credit denominated in an
Alternative Currency, periodic notice of the Dollar Amount thereof as
contemplated by Section 2.17(l).
(d) Each Issuing Bank that issues a Letter of Credit, by
the issuance of such Letter of Credit and without any further action on the
part of such Issuing Bank or the Banks in respect thereof, hereby grants to
each Bank, and each Bank hereby acquires from such Issuing Bank, a
participation in such Letter of Credit equal to such Bank's Applicable
Percentage of the aggregate amount available to be drawn under such Letter of
Credit, effective upon the issuance of such Letter of Credit. In
consideration and in furtherance of the foregoing, each Bank hereby absolutely
and unconditionally agrees to pay to the Agent, on behalf of such Issuing
Bank, in accordance with Section 2.05(c) and, if applicable subsection (l) of
this Section, such Bank's Applicable Percentage of each Letter of Credit
Disbursement made by such Issuing Bank and not reimbursed by the relevant
Borrower when due in accordance with subsection (g) of this Section; provided
that the Banks shall not be obligated to make any such payment with respect to
any wrongful Letter of Credit Disbursement made as a result of the gross
negligence or wilful misconduct of such Issuing Bank.
(e) Each Bank acknowledges and agrees that its obligation
to acquire participations pursuant to subsection (d) above in respect of
Letters of Credit is absolute and unconditional and shall not be affected by
any circumstance whatsoever, including the occurrence and continuance of a
Default, and that each such payment shall be made without any offset,
abatement, withholding or reduction whatsoever (subject only to the proviso in
subsection (d) above).
(f) During the Revolving Credit Period, the Company shall
pay (i) to the Agent for each day from and including the Effective Date to but
excluding the last day of the Revolving Credit Period for the account of the
Banks ratably (A) a fee at the per annum Stand-by Letter of Credit Fee Rate
for such day on the aggregate undrawn amount at the end of such day of
outstanding Letters of Credit that are in the nature of stand-by Letters of
Credit and (B) a fee at the per annum Documentary Letter of Credit Fee Rate
for such day on the aggregate undrawn amount at the end of such day of all
other outstanding Letters of Credit and (ii) to each Issuing Bank for each day
from and including the Effective Date to but excluding the last day of the
Revolving Credit Period, for the account of such Issuing Bank, a fee at the
rate of 0.125% per annum on the amount available to be drawn on each
outstanding Letter of Credit issued by such Issuing Bank. Accrued fees under
this subsection shall be calculated by the Agent (in the case of fees payable
pursuant to clause (i) above) or the applicable Issuing Bank (in the case of
fees payable to it pursuant to clause (ii) above) and shall be payable
quarterly on the last day of March, June, September and December in each year
(commencing on the last day of September, 1996) and on the Termination Date
(or any earlier date on which the Commitments are terminated). The Agent (in
the case of fees payable pursuant to clause (i) above) or the applicable
Issuing Bank (in the case of fees payable to it pursuant to clause (ii) above)
will notify the Company of the amount of accrued fees payable hereunder on
each payment date. In addition to the foregoing, the relevant Borrower shall
pay directly to each Issuing Bank, for its account, such Issuing Bank's
customary processing and documentation fees in connection with the issuance or
amendment of or payment on any Letter of Credit, payable within 15 days after
demand therefor by such Issuing Bank.
"Stand-by Letter of Credit Fee Rate" as of any day means (i)
if such day falls within a Level I Pricing Period, 0.500%; (ii) if such day
falls within a Level II Pricing Period, 0.5625; (iii) if such day falls within
a Level III Pricing Period, 0.6875; (iv) if such day falls within a Level IV
Pricing Period, 0.750%; or (v) if such day falls within a Level V Pricing
Period, 0.875%.
"Documentary Letter of Credit Fee Rate" as of any day means
(i) if such day falls within a Level I Pricing Period, 0.300%; (ii) if such
day falls within a Level II Pricing Period, 0.3625; (iii) if such day falls
within a Level III Pricing Period, 0.4875; (iv) if such day falls within a
Level IV Pricing Period, 0.600; or (v) if such day falls within a Level V
Pricing Period, 0.725%.
(g) If an Issuing Bank shall pay any draft presented under
a Letter of Credit, the applicable Borrower shall pay directly to such Issuing
Bank an amount equal to the amount of such draft before 2:00 P.M. (New York
City time), on the day on which such Issuing Bank shall have notified the
Company (as provided in subsection (j) below) that payment of such draft will
be made; provided that, if the Company shall not have received notice of such
draft before 10:00 A.M. (New York City time) on the date that payment of such
draft is made, then such payment may be made by such Borrower to such Issuing
Bank on the Domestic Business Day immediately following the date of receipt by
the Company of notice of such draft, together with interest (at a rate per
annum equal to the sum of the Euro-Currency Margin at the time plus the rate
determined by such Issuing Bank to be equal to the rate per annum at which
deposits in the same currency as such draft are then being offered to such
Issuing Bank in the London interbank market for a period of one month) on the
amount of such draft from and including the date such draft was paid by such
Issuing Bank to but excluding such next Domestic Business Day. If any
Borrower shall fail to pay any amount required to be paid by it under this
subsection when due, such unpaid amount shall bear interest, for each day from
and including the due date to but excluding the date of payment, at a rate per
annum equal to the interest rate applicable to overdue Base Rate Loans.
(h) Each Borrower's obligation to reimburse Letter of
Credit Disbursements as provided in subsection (g) above shall be absolute,
unconditional and irrevocable and shall be performed strictly in accordance
with the terms of this Agreement under any and all circumstances whatsoever,
and irrespective of:
(i) any lack of validity or enforceability of any Letter of
Credit or any Loan Document;
(ii) the existence of any claim, setoff, defense or other right
which any Borrower, any Subsidiary or any other Person may at any
time have against the beneficiary under any Letter of Credit, any
Issuing Bank, the Agent or any Bank or any other Person in
connection with this Agreement, any other Loan Document or any
other related or unrelated agreement or transaction;
(iii) any draft or other document presented under a Letter of
Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate
in any respect;
(iv) payment by any Issuing Bank under a Letter of Credit
against presentation of a draft or other document which does not
comply with the terms of such Letter of Credit, subject to
subsection (i) below; and
(v) any other act or omission or delay of any kind or any
other circumstance or event whatsoever, whether or not similar to
any of the foregoing and whether or not foreseeable, that might,
but for the provisions of this subsection (h), constitute a legal
or equitable discharge of any Borrower's obligations hereunder.
(i) None of the Banks (including any Issuing Bank) nor the
Agent nor any of their officers or directors or employees or agents shall be
liable or responsible by reason of or in connection with (and the Company shall
indemnify and hold harmless each of the Banks, the Issuing Banks, the Agent
and their officers, directors, employees and agents from and against any and
all liabilities, losses, damages, costs and expenses, including, without
limitation, reasonable fees and disbursements of counsel, arising by reason of
or in connection with) the execution and delivery or transfer of or payment or
failure to pay under any Letter of Credit, including without limitation any of
the circumstances enumerated in subsection (h) above, as well as (i) any
error, omission, interruption or delay in transmission or delivery of any
messages, by mail, cable, telegraph, telex or otherwise, (ii) any error in
interpretation of technical terms, (iii) any loss or delay in the transmission
of any document required in order to make a drawing under a Letter of Credit,
or (iv) any consequences arising from causes beyond the control of any Issuing
Bank, including without limitation any government acts, or any other
circumstances whatsoever in making or failing to make payment under any Letter
of Credit; provided that the Company shall not be required to indemnify any
Issuing Bank for any claims, damages, losses, liabilities, costs or expenses,
and a Borrower shall have a claim for direct (but not consequential) damage
suffered by it, to the extent found by a court of competent jurisdiction to
have been caused by (x) the wilful misconduct or gross negligence of an
Issuing Bank in determining whether a request presented under any Letter of
Credit issued by it complied with the terms of such Letter of Credit or (y) an
Issuing Bank's failure to pay under any Letter of Credit issued by it after
the presentation to it of a request strictly complying with the terms and
conditions of such Letter of Credit. Nothing in this subsection (i) is
intended to limit the obligations of any Borrower under any other provision of
this Agreement. To the extent the Company does not indemnify an Issuing Bank
as required by this subsection, the Banks agree to do so ratably in accordance
with their Commitments. It is expressly understood and agreed that, for
purposes of determining whether a wrongful payment under a Letter of Credit
resulted from an Issuing Bank's gross negligence or wilful misconduct, such
Issuing Bank may accept documents that appear on their face to be in order,
without responsibility for further investigation, regardless of any notice or
information to the contrary and, in making any payment under any Letter of
Credit (A) an Issuing Bank's exclusive reliance on the documents presented to
it under such Letter of Credit as to any and all matters set forth therein,
including reliance on the amount of any draft presented under such Letter of
Credit, whether or not the amount due to the beneficiary thereunder equals the
amount of such draft and whether or not any document presented pursuant to
such Letter of Credit proves to be insufficient in any material respect, if
such document on its face appears to be in order, and whether or not any other
statement or any other document presented pursuant to such Letter of Credit
proves to be forged or invalid or any statement therein proves to be
inaccurate or untrue in any respect whatsoever and (B) any noncompliance in
any immaterial respect of the documents presented under such Letter of
Credit with the terms thereof shall, in each case, be deemed not to
constitute wilful misconduct or gross negligence of such Issuing Bank.
(j) Each Issuing Bank shall, promptly following its receipt
thereof, examine all documents purporting to represent a demand for payment
under a Letter of Credit issued by it. Such Issuing Bank shall as promptly as
possible give telephonic notification, confirmed by telex or telecopy, to the
Agent, the Company and the applicable Borrower of such demand for payment and
whether such Issuing Bank has made or will make a Letter of Credit
Disbursement thereunder, provided that the failure to give such notice
shall not relieve any Borrower of its obligation to reimburse any such
Letter of Credit Disbursement in accordance with this Section. The Agent
shall promptly give each Bank notice thereof.
(k) If at any time, as a result of an adjustment to the
Dollar Amount of any outstanding Letter of Credit Exposure or Money Market
Loan denominated in an Alternative Currency or otherwise, (i) the Letter of
Credit Exposure exceeds the Letter of Credit Sublimit Amount or (ii) after
giving effect to any prepayment of Loans required to be made pursuant to
Section 2.12(c), the sum of the Letter of Credit Exposure and the aggregate
principal amount of all outstanding Loans exceeds the Total Commitments, then
the Company shall provide cash collateral in respect of the Letter of Credit
Exposure as provided below in an amount equal to such excess; provided that,
solely for purposes of determining whether the Company is in compliance with
the foregoing requirements of this subsection (k), each of the Letter of
Credit Sublimit Amount and the Total Commitments shall be deemed to be
increased by the amount of any cash collateral then held by the Agent pursuant
to this subsection (k). In the event that the Company is required pursuant to
the terms of this Agreement to provide cash collateral in respect of the
Letter of Credit Exposure, the Company shall deposit in an account with the
Agent, for the benefit of the Banks (including the Issuing Banks), an amount
in cash equal to (x) in the case of a deposit required pursuant to the first
sentence of this subsection (k), the amount specified therein, or (y) in the
case of a deposit required as a result of an Event of Default, the entire
Letter of Credit Exposure. Such deposit shall be held by the Agent as
collateral for the payment and performance of the Obligations. The Agent
shall have exclusive dominion and control, including the exclusive right of
withdrawal, over such account. Other than any interest earned on the
investment of such deposits in Temporary Cash Investments, which investments
shall be made at the option and sole but reasonable discretion of the Agent,
such deposits shall not bear interest. Interest or profits, if any, on such
investments shall accumulate in such account. Moneys in such account shall
automatically be applied by the Agent to reimburse the Issuing Banks for
Letter of Credit Disbursements and, if the maturity of the Loans has been
accelerated, to satisfy the Obligations. If the Company is required to
provide an amount of cash collateral hereunder pursuant to the first sentence
of this subsection (k), the Agent shall return such amount (to the extent not
applied as aforesaid) to the Company, from time to time, to the extent that
doing so would not give rise to an obligation on the part of the Company to
provide additional cash collateral pursuant to such sentence. If the Company
is required to provide an amount of cash collateral hereunder as a result of
an Event of Default, such amount (to the extent not applied as aforesaid) shall
be returned to the Company within three Domestic Business days after all
Events of Default have been cured or waived, and if prior to such return the
amount of the Letter of Credit Exposure is reduced, any excess of the amount
deposited (to the extent not applied as aforesaid and disregarding interest or
profits on investments) over the reduced amount of the Letter of Credit
Exposure shall be returned to the Company promptly after such reduction gives
rise to such excess. Notwithstanding the foregoing, if any Obligation payable
by any Borrower hereunder is due and payable but remains unpaid at the time
that the Agent would otherwise be required to return any amount of cash
collateral to the Company hereunder, the Agent may retain such cash collateral
and apply the amounts retained to the payment of such unpaid Obligation.
(l) Any Borrower may request the issuance of a Letter of
Credit providing for the payment of drawings in an Alternative Currency
subject to the terms and conditions of this subsection (l), in addition to the
other conditions applicable to the issuance of Letters of Credit hereunder.
The issuance of any such Letter of Credit shall be subject to the approval of
the Issuing Bank that is requested to issue such Letter of Credit. If any
such Letter of Credit is issued, the following provisions shall apply:
(i) For purposes of determining the Letter of Credit
Exposure and for purposes of calculating fees payable under
Section 2.17(f), the amount of such Letter of Credit and of any
unreimbursed Letter of Credit Disbursements in respect thereof
shall be deemed to be, as of any date of determination, the Dollar
Amount thereof at such date. The initial Dollar Amount of any
such Letter of Credit shall be determined by the Issuing Bank that
shall have issued such Letter of Credit on the date of issuance
thereof and adjusted from time to time thereafter as provided
below. The Dollar Amount of each such Letter of Credit outstanding
shall be adjusted by the Issuing Bank that shall have issued such
Letter of Credit on the 15th day and the last day of each calendar
month (or, if any such day is not a Euro-Currency Business Day, on
the next succeeding day that is a Euro-Currency Business Day).
If a Letter of Credit Disbursement is made under any such Letter
of Credit, the Dollar Amount of such Letter of Credit Disbursement
shall be determined by the Issuing Bank that shall have issued
such Letter of Credit on the date that such Letter of Credit
Disbursement is made. Each Issuing Bank shall make each such
determination to be made by it by calculating the amount in
Dollars that would be required in order for such Issuing Bank to
purchase an amount of the applicable Alternative Currency equal to
the amount of the relevant Letter of Credit or unreimbursed Letter
of Credit Disbursement, as the case may be, on the date of
determination at such Issuing Bank's spot buying rate for Dollars
against such Alternative Currency as of approximately 9:00 a.m.
(New York City time) on such date of determination. Each Issuing
Bank shall notify the Agent and the Company promptly of each such
Dollar Amount determined by it, on the date that such
determination is required to be made.
(ii) Subject to paragraph (iv) below, the obligation of the
applicable Borrower to reimburse any Issuing Bank for any Letter
of Credit Disbursement under any such Letter of Credit, and to pay
interest thereon, shall be payable only in the Alternative
Currency in which such Letter of Credit Disbursement is made, and
shall not be discharged by paying an amount in Dollars or any
other currency; provided that an Issuing Bank may agree, in its
sole discretion, to accept reimbursement in another currency, but
any such agreement shall not affect the obligations of the Banks
or the relevant Borrower under paragraphs (iii) and (iv) below if
such reimbursement is not actually made to such Issuing Bank when
due.
(iii) The obligations of each Bank under Sections 2.05(c)
and 2.17(d) to pay its Applicable Percentage of any unreimbursed
Letter of Credit Disbursement under any such Letter of Credit
shall be payable only in Dollars and shall be in an amount equal
to such Applicable Percentage of the Dollar Amount of such
unreimbursed Letter of Credit Disbursement determined as provided
in clause (i) above. Under no circumstances shall the provisions
hereof permitting the issuance of Letters of Credit in an
Alternative Currency be construed, by implication or otherwise, as
imposing any obligation upon any Bank to make any Loan or other
payment under any Loan Document, or to accept any payment from the
Borrowers in respect of any Obligations, in any currency other
than Dollars, it being understood that the parties intend all
Obligations to be denominated and payable only in Dollars except
as expressly provided in paragraph (ii) above and in Section
2.03(h).
(iv) If and to the extent that any Bank pays its Applicable
Percentage of any unreimbursed Letter of Credit Disbursement under
any such Letter of Credit, then, notwithstanding paragraph (ii)
above, the obligation of the applicable Borrower to reimburse the
portion of such Letter of Credit Disbursement funded by such Bank
shall be converted to, and shall be payable only in, Dollars (in
an amount equal to the Dollar amount funded by such Bank as
provided above) and shall not be discharged by paying an amount in
any other currency. Interest accrued on such unreimbursed Letter
of Credit Disbursement to and excluding the date of such payment
by such Bank shall be for the account of the applicable Issuing
Bank and be payable in the applicable Alternative Currency, but
interest thereafter shall accrue on the Dollar amount owed to such
Bank and shall be payable in Dollars.
(m) The Company, the Agent and any Bank that is willing to
be an Issuing Bank hereunder may agree that such Bank shall be an Issuing Bank
by the execution and delivery of an agreement substantially in the form of
Exhibit K (an "Issuing Bank Agreement"). The Agent shall notify the Banks of
the identity of any Issuing Bank appointed pursuant to this subsection (m).
The Company also may terminate the status of any Issuing Bank as an Issuing
Bank hereunder at any time by at least three Domestic Business Days' prior
notice to such Issuing Bank and the Agent, and the Agent shall thereupon
notify the Banks of such termination; provided that such termination shall
operate only to relieve such Issuing Bank of its obligation to issue Letters of
Credit hereunder and shall not affect such Issuing Bank's status as an Issuing
Bank or its rights and obligations hereunder with respect to any Letters of
Credit previously issued by it.
SECTION 2.18. Regulation D Compensation. For each day for
which a Bank is required to maintain reserves in respect of either (a)
"Eurocurrency Liabilities" (as defined in all regulations of the Board of
Governors of the Federal Reserve System) or (b) any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Currency Loans is determined or any category of extensions of credit or
other assets which includes loans by a non-United States office of any Bank to
United States residents, such Bank may require any Borrower to pay,
contemporaneously with each payment of interest on the Euro-Currency Loans by
such Borrower, additional interest on the related Euro-Currency Loans of such
Bank at a rate per annum determined by such Bank up to but not exceeding the
excess of (i) (A) the applicable London Interbank Offered Rate divided by (B)
one minus the Euro-Currency Reserve Percentage over (ii) the applicable London
Interbank Offered Rate. Any Bank wishing to require payment of such
additional interest (x) shall so notify the relevant Borrower and the Agent,
in which case such additional interest on the Euro-Currency Loans of such Bank
shall be payable to such Bank at the place indicated in such notice
commencing five Euro-Currency Business Days after the giving of such notice
and (y) shall notify the Borrower at least five Euro-Currency Business Days
prior to each date on which interest is payable on the Euro-Currency Loans of
the amount then due to such Bank under this Section.
SECTION 2.19. Eligible Subsidiaries. The Company may from
time to time cause any Wholly-Owned Consolidated Subsidiary (or, with the
consent of the Required Banks, any other Subsidiary) to become eligible to
borrow under Sections 2.01, 2.03 and 2.04 or to have Letters of Credit issued
for its account under Section 2.17 by delivering to the Agent an Election to
Participate with respect to such Subsidiary. The eligibility of any such
Subsidiary to borrow or to have Letters of Credit issued for its account under
said Sections shall terminate when the Agent receives a Notice of Termination
with respect to such Subsidiary. Each Election to Participate delivered to
the Agent shall be duly executed on behalf of the relevant Subsidiary and the
Company, and each Election to Terminate delivered to the Agent shall be duly
executed on behalf of the Company, in such number of copies as the Agent may
request. The delivery of an Election to Terminate shall not affect any
obligation of the relevant Subsidiary theretofore incurred. The Agent shall
promptly give notice to the Banks and the Issuing Bank of its receipt of any
Election to Participate or Election to Terminate.
ARTICLE III
Conditions
SECTION 3.01. Effectiveness. The obligation of the Banks
to make Loans and of the Issuing Banks to issue Letters of Credit under this
Agreement shall become effective on the date that each of the following
conditions shall have been satisfied (or waived in accordance with Section
9.05):
(a) receipt by the Agent of counterparts hereof signed by
each of the parties hereto (or, in the case of any party as to
which an executed counterpart shall not have been received,
receipt by the Agent in form satisfactory to it of telegraphic,
telex or other written confirmation from such party of execution
of a counterpart hereof by such party);
(b) receipt by the Agent for the account of each Bank of a
duly executed Note of the Company dated on or before the Effective
Date complying with the provisions of Section 2.06;
(c) receipt by the Agent of counterparts of the Guarantee
Agreement, duly executed by the Initial Guarantors;
(d) receipt by the Agent of a certificate signed by the
chief financial officer, treasurer or controller of the Company,
dated the Effective Date, to the effect that (i) no Default has
occurred and is continuing as of the Effective Date, and (ii) the
representations and warranties of the Company set forth in Article
IV hereof are true in all material respects on, and as of, the
Effective Date;
(e) to the extent not received prior to the date of
execution and delivery of this Agreement, receipt by the Banks of
true and complete copies of the Information Statement and the
Transaction Documents and reasonable satisfaction of the Banks
with the form, terms and provisions of the Transaction Documents;
(f) receipt by the Banks of satisfactory evidence that the
Spin-Off Transactions have been (or on the Effective Date are
being) consummated as set forth in the Information Statement and
the Distribution Agreement;
(g) receipt by the Banks of satisfactory evidence that
Melville and the Company shall have obtained all consents and
approvals of, and shall have made all filings and registrations
with, any Governmental Authority required in order to consummate
the Transactions, in each case without the imposition of any
condition which, in the reasonable judgment of the Required Banks,
could have a Material Adverse Effect;
(h) receipt by the Agent of a certificate signed by an
executive officer of Melville to the effect that the Spin-Off
Transactions have been (or on the Effective Date are being)
consummated as set forth in the Information Statement and the
Distribution Agreement;
(i) receipt by the Agent of all fees and other compensation
payable to the Agent and the Banks on or prior to the Effective
Date pursuant to their agreements with the Company, including
reimbursement of all reasonable out-of-pocket expenses of the Agent
payable by the Company in accordance with this Agreement for which
invoices have been presented;
(j) receipt by the Agent of (i) an opinion of Marc G.
Schuback, Esq., counsel for the Company, substantially in the form
of Exhibit F-1 hereto, and (ii) an opinion of Davis Polk &
Wardwell, counsel for the Company, substantially in the form of
Exhibit F-2 hereto, and in each case covering such additional
matters relating to the Transactions as the Required Banks may
reasonably request;
(k) receipt by the Agent of an opinion of Cravath, Swaine &
Moore, special counsel for the Agent, substantially in the form of
Exhibit G hereto and covering such additional matters relating to
the transactions contemplated hereby as the Required Banks may
reasonably request; and
(l) receipt by the Agent of all documents and certificates
it may reasonably request relating to the existence of the Company
and the Initial Guarantors, the corporate authority for and the
validity of this Agreement and the other Loan Documents, the
accuracy of the representations and warranties contained in this
Agreement and the other Loan Documents on the Effective Date, the
Transactions and any other matters relevant hereto or thereto, all
in form and substance satisfactory to the Agent;
provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later
than October 31, 1996. The Agent shall promptly notify the Company and the
Banks of the Effective Date, and such notice shall be conclusive and binding
on all parties hereto.
SECTION 3.02. Each Credit Event. The obligation of any
Bank to make a Loan on the occasion of any Borrowing and of any Issuing Bank
to issue any Letter of Credit is subject to the satisfaction of the following
conditions:
(a) receipt by the Agent of a Notice of Borrowing as
required by Section 2.02 or 2.03, receipt by the Swingline Lender
of a notice requesting a Swingline Loan as required by Section
2.04 or receipt by the applicable Issuing Bank of a notice
requesting issuance of a Letter of Credit as required by Section
2.17(c), as applicable;
(b) the fact that, immediately after such Borrowing or the
issuance of such Letter of Credit, (i) the sum of the aggregate
principal amount of all outstanding Loans and the Letter of Credit
Exposure shall not exceed the Total Commitments, (ii) the
aggregate principal amount of all outstanding Loans shall not
exceed the Loan Sublimit Amount, and (iii) the Letter of Credit
Exposure shall not exceed the Letter of Credit Sublimit Amount;
(c) the fact that, immediately before and after such
Borrowing or the issuance of such Letter of Credit, no Default
shall have occurred and be continuing; and
(d) the fact that the representations and warranties of the
Company (and, if other than the Company, the relevant Borrower)
contained in this Agreement and the other Loan Documents shall be
true on and as of the date of such Borrowing or issuance of such
Letter of Credit.
Each Borrowing hereunder and the issuance of each Letter of Credit hereunder
shall be deemed to be a representation and warranty by the Company and the
relevant Borrower on the date of such Borrowing or issuance as to the facts
specified in clauses (b), (c) and (d) of this Section.
SECTION 3.03. Borrowings by Eligible Subsidiaries; Letters
of Credit for Eligible Subsidiaries. The obligation of any Bank to make a
Loan to any Eligible Subsidiary and of any Issuing Bank to issue any Letter of
Credit for the account of any Eligible Subsidiary are subject to the
satisfaction of the following further conditions:
(a) in the case of a Loan, receipt by the Agent for the
account of such Bank of a duly executed Note of such Eligible
Subsidiary, dated on or before the date of the first Loan to such
Subsidiary and complying with the provisions of Section 2.06;
(b) receipt by the Agent of one or more opinions of counsel
for such Eligible Subsidiary reasonably acceptable to the Agent,
which taken together cover the matters set forth in Exhibit J
hereto; and
(c) receipt by the Agent of all documents which it may
reasonably request relating to the existence of such Eligible
Subsidiary, the corporate authority for and the validity of the
Election to Participate of such Eligible Subsidiary, this
Agreement and the Notes of such Eligible Subsidiary, and any other
matters relevant thereto, all in form and substance reasonably
satisfactory to the Agent.
ARTICLE IV
Representations and Warranties
The Company represents and warrants that:
SECTION 4.01. Corporate Existence and Power. The Company
is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware, and has all corporate powers and all
material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each of the
Borrowers and the Guarantors of each Loan Document to which it is or is to be
a party and the Financing Transactions, and to the extent involving any
Borrower or any Guarantor, the Spin-Off Transactions, are within its corporate
powers, have been duly authorized by all necessary corporate action, require
no action by or in respect of, or filing with, any Governmental Authority or
official thereof (other than such as have been duly taken or made) and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or by-laws of any Borrower
or any Guarantor or of any indenture, agreement, judgment, injunction, order,
decree or other instrument binding upon any Borrower or any Guarantor or
result in the creation or imposition of any Lien on any asset of the Company
or any Subsidiary, except for any contraventions or defaults under such
indentures, agreements, judgments, injunctions, orders, decrees or other
instruments or the creation or imposition of any such Liens that, individually
or in the aggregate, would not reasonably be expected to have a Material
Adverse Effect.
SECTION 4.03. Binding Effect. This Agreement constitutes a
valid and binding agreement of each of the Borrowers, and the other Loan
Documents to which any Borrower or any of the Guarantors is a party, when
executed and delivered in accordance with this Agreement, will constitute
valid and binding agreements and obligations of each of the Borrowers and the
Guarantors that is a party thereto, in each case enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally and equitable principles of general
applicability.
SECTION 4.04. Financial Information. (a) The combined
balance sheets of the Company as of December 31, 1995 and the related combined
statements of operations, divisional equity and cash flows for the fiscal year
then ended, reported on by KPMG Peat Marwick LLP and set forth in the
Information Statement, a copy of which has been delivered to each of the
Banks, fairly present in all material respects, in conformity with generally
accepted accounting principles, the financial position of the Company as of
such date and its results of operations and cash flows for such fiscal year.
(b) The unaudited combined balance sheet of the Company as
of March 30, 1996, and the related combined statements of operations,
divisional equity and cash flows for the fiscal period then ended, set forth
in the Information Statement, a copy of which has been delivered to each of
the Banks, fairly present in all material respects, in conformity with
generally accounting principles applied on a basis consistent with the
financial statements referred to in subsection (a) of this Section, the
financial position of the Company as of such date and its results of
operations and cash flows for such fiscal period (subject to normal year-end
adjustments).
(c) The unaudited pro-forma combined balance sheet of the
Company dated as of March 30, 1996, and the related unaudited pro forma
combined statements of income for the fiscal year ended December 31, 1995, and
the fiscal quarter ended March 30, 1996, set forth in the Information
Statement, have been derived from the historical financial statements as of
such date and for such periods referred to in subsections (a) and (b) of this
Section adjusted to give effect to the Transactions on the basis described
therein. Such pro-forma combined financial statements present fairly, on a
pro-forma basis, the consolidated financial position of the Company as of the
date thereof and its consolidated income for such periods, assuming that the
adjustments specified therein had occurred as described therein, subject, in
the case of such pro forma financial statements as of and for the period ended
March 30, 1996, to normal year-end adjustments.
(d) Except for the public announcement by Melville dated
June 3, 1996, a copy of which has been delivered to each of the Banks, since
March 30, 1996, there has been no material adverse change in the business,
operations or financial condition of the Company and its Consolidated
Subsidiaries, considered as a whole.
SECTION 4.05. Litigation. There is no (i) injunction,
stay, decree or order of any Governmental Authority or (ii) action, suit or
proceeding pending against, or to the knowledge of the Company threatened
against or affecting, the Company or any Subsidiary before any Governmental
Authority or official thereof in which there is a reasonable probability of an
adverse decision which would reasonably be expected to have a Material Adverse
Effect or which in any manner draws into question the validity of this
Agreement or any other Loan Document.
SECTION 4.06. Compliance with ERISA. Except to the extent
that all such failures to fulfill any such obligations or comply with any such
provisions would not reasonably be expected to have a Material Adverse Effect,
each member of the ERISA Group has fulfilled its obligations under the minimum
funding standards of ERISA and the Internal Revenue Code with respect to each
Plan and is in compliance in all material respects with the presently
applicable provisions of ERISA and the Internal Revenue Code with respect to
each Plan. Except to the extent that all such waivers, failures and
liabilities would not reasonably be expected to have a Material Adverse
Effect, no member of the ERISA Group has (i) sought a waiver of the minimum
funding standard under Section 412 of the Internal Revenue Code in respect of
any Plan, (ii) failed to make any contribution or payment to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement, or made any
amendment to any Plan or Benefit Arrangement, which has resulted or could
result in the imposition of a Lien or the posting of a bond or other security
under ERISA or the Internal Revenue Code or (iii) incurred any liability under
Title IV of ERISA other than a liability to the PBGC for premiums under
Section 4007 of ERISA.
SECTION 4.07. Environmental Matters. The Company and its
Subsidiaries have complied in all respects with all Federal, state, local and
other statutes, ordinances, orders, judgments, rulings and regulations
relating to environmental pollution or to environmental regulation or control,
except to the extent failure to so comply would not reasonably be expected to
have a Material Adverse Effect. Neither the Company nor any Subsidiary has
received notice of any failure so to comply which alone or together with any
other such failure would reasonably be expected to result in a Material
Adverse Effect. The facilities of the Company and its Subsidiaries do not
manage or handle any hazardous wastes, hazardous substances, hazardous
materials, toxic substances or toxic pollutants, as those terms are used in
the Resource Conservation and Recovery Act, the Comprehensive Environmental
Response Compensation and Liability Act, the Superfund Amendments and
Reauthorization Act of 1986, the Hazardous Materials Transportation Act, the
Toxic Substance Control Act, the Clean Air Act or the Clean Water Act, in
violation thereof or in violation of any regulations promulgated pursuant
thereto or of any other applicable law where such violation would reasonably
be expected to result, individually or together with other violations, in a
Material Adverse Effect.
SECTION 4.08. Taxes. (a) The Company and its Subsidiaries
have filed or there has otherwise been filed all United States Federal income
tax returns and all other material tax returns which are required to be filed
by them and have paid or there has otherwise been paid all taxes shown to be
due on such returns or pursuant to any assessment received the Company or any
Subsidiary, except where the same is being or will be contested in good faith
by appropriate proceedings. The charges, accruals and reserves on the books
of the Company and the Subsidiaries in respect of taxes or other governmental
charges are, in the opinion of the Company, adequate.
(b) Except as disclosed in its Election to Participate,
there are no Taxes or Other Taxes (as defined in Section 8.04(a)) imposed on
(by withholding or otherwise) any payment to be made by any Eligible
Subsidiary pursuant hereto or on its Notes, or is imposed on or by virtue of
the execution, delivery or enforcement of its Election to Participate or of
its Notes.
SECTION 4.09. Subsidiaries. Each of the Eligible
Subsidiaries and the Guarantors is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and, to the extent that the failure to do so would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect, has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as
now conducted. Each of the Company's other corporate Subsidiaries is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation, and has all corporate powers and
all governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted, except to the extent that all failures
to comply with the foregoing would not reasonably be expected to have, in the
aggregate, a Material Adverse Effect. Each Eligible Subsidiary is a
Wholly-Owned Consolidated Subsidiary (unless otherwise approved by the
Required Banks).
SECTION 4.10. Not an Investment Company. Neither any
Borrower nor any Guarantor is an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
SECTION 4.11. Full Disclosure. All information heretofore
furnished in writing by Melville, the Company or any Subsidiary to the Agent
or any Bank for purposes of or in connection with this Agreement, any other
Loan Document or the Transactions was, and all such information hereafter
furnished in writing by the Company or any Subsidiary to the Agent or any Bank
will be, in each case considered as a whole, true and accurate in all material
respects on the date as of which such information is stated or certified. The
Company has disclosed to the Banks in writing any and all facts which
materially and adversely affect or may affect (to the extent that the Company
can now reasonably foresee), the business, operations or financial
condition of the Company and its Consolidated Subsidiaries, considered as a
whole, or the ability of the Company to perform its obligations hereunder
or under any other Loan Document.
SECTION 4.12. Compliance with Laws and Agreements. Neither
the Company nor any Subsidiary is in violation of any law, rule or regulation,
or in default with respect to any judgment, writ, injunction or decree
applicable to it of any Governmental Authority, where such violation or
default (individually or in the aggregate) would reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any Subsidiary
is in default in any manner under any provision of any indenture or other
agreement or instrument evidencing Debt, or any other agreement or instrument
to which it is a party or by which it or any of its properties or assets are
or may be bound, where such default (individually or in the aggregate) would
reasonably be expected to result in a Material Adverse Effect.
SECTION 4.13. Governmental Approvals. As of the Effective
Date, all material consents and approvals of, and material filings and
registrations with, and all other material actions in respect of, all
Governmental Authorities or any other Person required in order to consummate
the Transactions shall have been obtained, given, filed or taken and shall be
in full force and effect.
ARTICLE V
Covenants
The Company agrees that, so long as any Bank has any
Commitment or any Loan or Letter of Credit Disbursement or accrued interest
thereon remains unpaid or any Letter of Credit remains outstanding:
SECTION 5.01. Information. The Company will deliver to
each of the Banks:
(a) as soon as available and in any event within 90 days
after the end of each fiscal year of the Company, a consolidated
balance sheet of the Company and its Consolidated Subsidiaries as
of the end of such fiscal year and the related consolidated
statements of operations, stockholders' equity and cash flows for
such fiscal year, setting forth in each case in comparative form
the figures for the previous fiscal year, all reported on by KPMG
Peat Marwick LLP or other independent public accountants of
nationally recognized standing;
(b) as soon as available and in any event within 45 days
after the end of each of the first three quarters of each fiscal
year of the Company, a consolidated balance sheet of the Company
and its Consolidated Subsidiaries as of the end of such quarter
and the related consolidated statements of operations,
stockholders' equity and cash flows for such quarter and for the
portion of the Company's fiscal year ended at the end of such
quarter, setting forth in each case in comparative form the
figures for the corresponding quarter and the corresponding
portion of the Company's previous fiscal year, all certified
(subject to normal year-end adjustments) as to fairness of
presentation, generally accepted accounting principles and
consistency by the chief financial officer or chief accounting
officer of the Company;
(c) simultaneously with the delivery of each set of
financial statements referred to in clauses (a) and (b) above, a
certificate of the chief financial officer or the chief accounting
officer of the Company (i) setting forth in reasonable detail the
calculations required to establish whether the Company was in
compliance with the requirements of Sections 5.09, 5.10, 5.11,
5.17, 5.18, 5.19 and 5.20 of this Agreement on the date of such
financial statements, (ii) setting forth in reasonable detail the
calculations required to establish the Company's Fixed Charge
Coverage Ratio for the Calculation Period ended on the date of the
most recent balance sheet included in such financial statements,
(iii) stating whether any Default exists hereunder on the date of
such certificate and, if any Default then exists, setting forth
the details thereof and the action which the Company is taking or
proposes to take with respect thereto, (iv) stating whether, since
the date of the most recent financial statements previously
delivered pursuant to this Section, there has been any material
change in the generally accepted accounting principles applied in
the preparation of such statements, and, if so, describing such
change and (v) stating whether there is any Material Subsidiary
that is not a Guarantor;
(d) simultaneously with the delivery of each set of
financial statements referred to in clause (a) above, a statement
of the firm of independent public accountants which reported on
such statements as to (i) whether anything has come to their
attention to cause them to believe that any Default existed on the
date of such statements and (ii) confirming the calculations set
forth in the officer's certificate delivered simultaneously
therewith pursuant to clause (c) above; provided that the
foregoing shall not be construed to require that such accountants
conduct any investigation outside the regular course of their
audit;
(e) within five days after the chief executive officer,
president or any financial officer of the Company obtains
knowledge of any Default, if such Default is then continuing, a
certificate of the chief financial officer or the chief accounting
officer of the Company setting forth the details thereof and the
action which the Company is taking or proposes to take with
respect thereto;
(f) promptly upon the mailing thereof to the shareholders of
the Company generally, copies of all financial statements, reports
and proxy statements so mailed;
(g) promptly upon the filing thereof, copies of all
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and reports
on Forms 10-K, 10-Q and 8-K (or their equivalents) which the
Company shall have filed with the Securities and Exchange
Commission;
(h) if and when any member of the ERISA Group (i) gives or
is required to give notice to the PBGC of any "reportable event"
(as defined in Section 4043 of ERISA) with respect to any Plan
which might constitute grounds for a termination of such Plan
under Title IV of ERISA, or knows that the plan administrator of
any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event
given or required to be given to the PBGC; (ii) receives notice of
complete or partial withdrawal liability under Title IV of ERISA
or notice that any Multiemployer Plan is in reorganization, is
insolvent or has been terminated, a copy of such notice; (iii)
receives notice from the PBGC under Title IV of ERISA of an intent
to terminate, impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or appoint a trustee to
administer any Plan, a copy of such notice; (iv) applies for a
waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code, a copy of such application; (v) gives
notice of intent to terminate any Plan under Section 4041(c) of
ERISA, a copy of such notice and other information filed with the
PBGC; (vi) gives notice of withdrawal from any Plan pursuant to
Section 4063 of ERISA, a copy of such notice; or (vii) fails to
make any payment or contribution to any Plan or Multiemployer Plan
or in respect of any Benefit Arrangement or makes any amendment to
any Plan or Benefit Arrangement which has resulted or could
reasonably be expected to result in the imposition of a Lien or
the posting of a bond or other security, a certificate of the
chief financial officer or the chief accounting officer of the
Company setting forth details as to such occurrence and action,
if any, which the Company or applicable member of the ERISA Group
is required or proposes to take; and
(i) from time to time such additional information regarding
the financial position or business of the Company and the
Subsidiaries as the Agent, at the request of any Bank, may
reasonably request.
SECTION 5.02. Payment of Obligations. The Company will pay
and discharge, and will cause each of its Subsidiaries to pay and discharge,
at or before maturity, all their respective material obligations and
liabilities, including, without limitation, tax liabilities, except where the
same may be contested in good faith by appropriate proceedings, and will
maintain, and will cause each Subsidiary to maintain, in accordance with
generally accepted accounting principles, appropriate reserves for the accrual
of any of the same.
SECTION 5.03. Maintenance of Property; Insurance. (a) The
Company will keep, and will cause each of its Subsidiaries to keep, all
property necessary in its business in good working order and condition,
ordinary wear and tear excepted.
(b) The Company will maintain, and will cause each of its
Subsidiaries to maintain, insurance in such amounts and against such risks as
is customary for companies in the same or similar businesses, in each case with
financially sound and reputable insurers.
SECTION 5.04. Conduct of Business and Maintenance of
Existence. The Company will continue, and will cause each of its Subsidiaries
to continue, to engage in business of the same general type as now conducted
by the Company and its Subsidiaries, and will preserve, renew and keep in full
force and effect, and will cause each of its Subsidiaries to preserve, renew
and keep in full force and effect, their respective corporate existence and
their respective rights, privileges and franchises necessary or desirable in
the normal conduct of business; provided that nothing in this Section 5.04
shall prohibit (i) any merger of any Subsidiary of the Company permitted by
Section 5.11(a) or (ii) the termination of the corporate existence of any
Subsidiary if the Company in good faith determines that such termination is in
the best interest of the Company and is not materially disadvantageous to the
Banks.
SECTION 5.05. Compliance with Laws. The Company will
comply, and cause each of its Subsidiaries to comply, in all material respects
with all applicable laws, ordinances, rules, regulations, and requirements of
any Governmental Authority (including, without limitation, Environmental Laws
and ERISA and the rules and regulations thereunder) except where the necessity
of compliance therewith is contested in good faith by appropriate proceedings.
SECTION 5.06. Inspection of Property, Books and Records.
The Company will keep, and will cause each of its Subsidiaries to keep, proper
books of record and account in which full, true and correct entries shall be
made of all dealings and transactions in relation to its business and
activities. The Company will permit, and will cause each of its Subsidiaries
to permit, representatives of any Bank at such Bank's expense to visit and
inspect any of their respective properties, to examine and make abstracts from
any of their respective books and records and to discuss their respective
affairs, finances and accounts with their respective officers and independent
public accountants as often as may reasonably be desired; provided that the
exercise by any Bank of its rights under this sentence shall require
reasonable prior notice to the Company and shall be conducted during normal
business hours in a reasonable manner so as not to disrupt the normal conduct
of the Company's business.
SECTION 5.07. Additional Guarantors. If at any time after
the Effective Date any Subsidiary (other than (a) a Guarantor or (b) any
Subsidiary organized outside the United States that does not Guarantee any
Indebtedness of the Company) is or becomes a Material Subsidiary, the Company,
within 45 days of such Subsidiary becoming a Material Subsidiary, will cause
such Subsidiary to become a Guarantor pursuant to the Guarantee Agreement.
SECTION 5.08. Amendment of Certain Documents. The
Company will not permit any amendment or modification to be made to, or any
waiver of its rights or the rights of any Subsidiary under, any Transaction
Document or the Kmart Agreement unless such amendment, modification or waiver
does not materially adversely affect the Company or the Banks, as determined
in good faith by the Company.
SECTION 5.09. Investments. Neither the Company nor any of
its Subsidiaries will make or acquire any Investment in any Person other than:
(a) Investments by the Company and its Subsidiaries in the
Company and its Subsidiaries;
(b) Temporary Cash Investments;
(c) loans made by the Meldisco Corporations (as defined in
the Kmart Agreement) to Kmart Corporation, in an aggregate amount
up to 49% of the cash balances of the Meldisco Corporations
exceeding $1,000,000 as required by the Kmart Agreement;
(d) Investments that constitute acquisitions permitted by
Section 5.11(c); and
(e) any Investment by the Company not otherwise permitted by
the foregoing clauses of this Section if, immediately after such
Investment is made or acquired, the aggregate net book value of
all Investments permitted by this clause (e) does not exceed 10%
of the Company's Consolidated Tangible Net Worth.
SECTION 5.10 Negative Pledge. Neither the Company nor any
of its Subsidiaries will create, assume or suffer to exist any Lien on any
asset now owned or hereafter acquired by it, except the following:
(a) Liens existing on the date of this Agreement identified
on Schedule 5.10 securing the obligations identified on such
Schedule;
(b) any Lien existing on any asset of any corporation at the
time such corporation becomes a Subsidiary and not created in
contemplation of such event;
(c) any Lien on any asset securing Debt incurred or assumed
for the purpose of financing all or any part of the cost of
acquiring such asset; provided that such Lien attaches to such
asset concurrently with or within 180 days after the acquisition
thereof;
(d) any Lien on any asset of any corporation existing at the
time such corporation is merged or consolidated with or into the
Company or a Subsidiary and not created in contemplation of such
event;
(e) any Lien existing on any asset prior to the acquisition
thereof by the Company or a Subsidiary and not created in
contemplation of such acquisition;
(f) any Lien arising out of the refinancing, extension,
renewal or refunding of any Debt secured by any Lien permitted by
any of the foregoing clauses of this Section; provided that such
Debt is not increased (except for the capitalization of interest)
and is not secured by any additional assets;
(g) Liens for taxes not delinquent or being contested in
good faith and by appropriate proceedings;
(h) deposits or pledges to secure obligations under workers'
compensation, social security or similar laws, or under
unemployment insurance;
(i) mechanics', workers', materialmen's, warehousemen's,
lessor's or other like Liens arising in the ordinary course of
business with respect to obligations which are not due or which
are being contested in good faith;
(j) Liens arising in the ordinary course of its business
which (i) do not secure Debt or any monetary obligation and (ii)
do not in the aggregate materially detract from the value of its
assets or materially impair the use thereof in the operation of
its business; and
(k) Liens not otherwise permitted by the foregoing clauses
of this Section securing Debt or other monetary obligations of the
Company or any Subsidiary in an aggregate principal amount at any
time outstanding not to exceed 10% of the Company's Consolidated
Tangible Net Worth.
SECTION 5.11. Consolidations, Mergers, Acquisitions and
Sales of Assets. (a) Neither the Company nor any of its Subsidiaries will
consolidate or merge with or into any other Person, except that if, after
giving effect thereto, no Default shall have occurred and be continuing, (i)
any Subsidiary of the Company may be merged into the Company if the Company is
the surviving corporation and (ii) any Subsidiary of the Company may merge
with any other corporation (other than the Company) if the surviving
corporation is a Subsidiary.
(b) Neither the Company nor any of its Subsidiaries will
sell, lease or otherwise transfer any asset, except (i) pursuant to the
Transaction Documents, (ii) in the ordinary course of business, (iii) sales of
the two distribution centers of the Company located at Clinton, New Jersey,
and Huntington, Indiana, (iv) transfers made as Investments permitted by
Section 5.09 or Restricted Payments permitted by Section 5.15 and (v) other
transfers provided that the aggregate fair market value of all assets
transferred in reliance upon this clause (v) shall not exceed (A) during the
period from the Effective Date through the end of the fiscal quarter ending
June 30, 1997, an amount equal to 10% of the Company's Consolidated Tangible
Net Worth as of the Effective Date and (B) during any period of four
consecutive fiscal quarters ending on June 30 of any year after June 30, 1997,
an amount equal to the sum of (1) 10% of the Company's Consolidated Tangible
Net Worth as of the beginning of such fiscal period plus (2) the lesser of (x)
10% of the Company's Consolidated Tangible Net Worth as of the beginning of
the immediately preceding period for which compliance with this clause (v) was
required, and (y) the excess, if any, of the maximum aggregate fair market
value of assets that would have been permitted to have been transferred in
reliance upon this clause (v) during such immediately preceding period over
the aggregate fair market value of all assets transferred in reliance upon
this clause (v) during such immediately preceding period.
(c) Neither the Company nor any of its Subsidiaries will,
directly or indirectly (including, without limitation, by merger or
consolidation), acquire any assets constituting a going concern business, or
any capital stock or other ownership interests in any Person that prior to
such acquisition was not an Exempt Subsidiary, unless (i) after giving effect
to such acquisition the aggregate Acquisition Consideration for all such
acquisitions during the Revolving Credit Period shall not exceed the sum of
(A) $50,000,000, plus (B) 50% of the amount, if any, of Cash Flow for the
period from the Effective Date through and including the most recent date for
which financial statements have been delivered pursuant to Section 5.01(a) or
(b), and (ii) in the case of any such acquisition involving Acquisition
Consideration exceeding $20,000,000, the Company delivers to the Banks a
certificate (together with schedules providing the calculations to support
such certificate) to the effect that the Company would have been in
compliance with Sections 5.18, 5.19 and 5.20 for the most recent
Calculation Period and as of the last day thereof if such acquisition had
been consummated at the beginning of such Calculation Period.
SECTION 5.12. Use of Proceeds and Letters of Credit. The
proceeds of the Loans will be used for general corporate purposes of the
Company and its Subsidiaries. Letters of Credit will be issued only as
documentary Letters of Credit and used only to support obligations of the
Company and its Subsidiaries related to the purchase of inventory in the
ordinary course of business, except that standby Letters of Credit may be
issued and used to support other obligations of the Company and its
Subsidiaries, provided that the Letter of Credit Exposure in respect of such
standby Letters of Credit shall not exceed $40,000,000 at any time. None of
such proceeds of the Loans will be used, directly or indirectly, for the
purpose, whether immediate, incidental or ultimate, of buying or carrying any
Margin Stock.
SECTION 5.13. Transactions with Affiliates. The Company
will not, nor will it permit any of its Subsidiaries to, directly or
indirectly, enter into any transaction, including any purchase, sale, lease or
exchange of property or rendering of services, with or for the benefit of any
Affiliate, other than (a) any such transaction expressly permitted by this
Agreement (including any Investment in an Affiliate expressly permitted under
Section 5.09), (b) performance of the Transaction Documents, (c) any such
transactions where each of the parties thereto is either the Company or a
Subsidiary or (d) any transaction entered into by the Company or any
Subsidiary which is (i) otherwise permitted under this Agreement, (ii) in the
ordinary course of business of such entity's business and (iii) upon fair and
reasonable terms no less favorable to such entity than it would obtain in a
comparable arm's-length transaction with a Person not an Affiliate.
SECTION 5.14. Restrictions Affecting Subsidiaries. The
Company will not create, incur, permit or suffer to exist any agreement or
other arrangement that prohibits, restricts or imposes any condition upon the
ability or right of any Subsidiary to pay dividends or other distributions
with respect to any shares of its capital stock or to make or repay loans or
advances to the Company or any other Subsidiary; provided that (a) the
foregoing shall not apply to restrictions or conditions imposed by law, (b)
the foregoing shall not apply to restrictions and conditions existing on the
Effective Date that are identified in Schedule 5.14 and (c) the foregoing
shall not apply to normal financial covenants entered into by a Subsidiary in
connection with the incurrence of Debt of such Subsidiary otherwise permitted
under this Agreement provided that such financial covenants, at the time
entered into, could not reasonably be expected to impair any Subsidiary's
ability to pay normal dividends in the amounts and at the times that the
Company would have expected such Subsidiary to be able to pay in the ordinary
course.
SECTION 5.15. Restricted Payments. Neither the Company nor
any of its Subsidiaries will declare or make, or agree to declare or make, any
Restricted Payment, other than (a) Restricted Payments made solely to the
Company or a Subsidiary or (b) Restricted Payments made by any Subsidiary
ratably with respect to shares of its capital stock.
SECTION 5.16. Letters of Credit. The Company will not
permit the sum of the aggregate undrawn amount of all letters of credit for
which the Company or any Subsidiary is liable as account party or otherwise to
reimburse drawings thereunder (other than Letters of Credit hereunder), plus
the aggregate amount of unreimbursed drawings thereunder, to exceed
$40,000,000 at any time.
SECTION 5.17. Subsidiary Debt. The Company will not permit
any Subsidiary to create, assume or otherwise be or become liable with respect
to any Debt, except:
(a) Debt of the Eligible Subsidiaries in respect of their
Loans;
(b) Debt of the Guarantors in respect of the Guarantees
under the Guarantee Agreement;
(c) Debt owed by any Subsidiary to the Company or to another
Subsidiary; and
(d) Debt of Subsidiaries not otherwise permitted by the
foregoing clauses of this Section in an aggregate principal amount
at any time outstanding not to exceed 10% of the Company's
Consolidated Tangible Net Worth.
SECTION 5.18. Leverage Ratio. The Leverage Ratio will not
exceed (a) 0.65 to 1.0 at any time during the period from and including the
Effective Date to and including December 31, 1997, (b) 0.62 to 1.0 at any time
during the period from and including January 1, 1998, to and including
December 31, 1998, or (c) 0.60 to 1.0 at any time after December 31, 1998.
SECTION 5.19. Debt Coverage Ratio. The Debt Coverage Ratio
will not exceed 2.5 to 1.0 at any time.
SECTION 5.20. Fixed Charge Coverage Ratio. The Fixed
Charge Coverage Ratio will not be less than (a) 2.0 to 1.0 for any Calculation
Period ending during the period from and including the Effective Date to and
including December 31, 1998, or (b) 2.25 to 1.0 for any Calculation Period
ending after December 31, 1998.
ARTICLE VI
Defaults
SECTION 6.01. Events of Default. If one or more of the
following events ("Events of Default") shall have occurred and be continuing:
(a) (i) any Borrower shall fail to pay when due any
principal on any Loan or any reimbursement obligation in respect
of a Letter of Credit Disbursement or (ii) any Borrower shall fail
to pay interest on any Loan, any fees or any other amount payable
hereunder or under any other Loan Document within five days of the
time such amount is due;
(b) the Company shall fail to observe or perform any
covenant contained in Section 5.01(e) or any of Sections 5.08 to
5.20, inclusive;
(c) any Borrower shall fail to observe or perform any
covenant or agreement contained in any Loan Document (other than
those covered by clause (a) or (b) above) for 30 days after
written notice thereof has been given to the Company by the Agent
at the request of any Bank;
(d) any representation, warranty, certification or statement
made by Melville or any Borrower in this Agreement or any other
Loan Document or in any certificate, financial statement or other
document delivered pursuant to this Agreement or any other Loan
Document shall prove to have been incorrect in any material
respect when made (or deemed made);
(e) the Company or any Subsidiary shall fail to make any
payment in respect of any Material Debt when due or within any
applicable grace period;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Material Debt or enables (or,
with the giving of notice or lapse of time or both, would enable)
the holder of such Debt or any Person acting on such holder's
behalf to accelerate the maturity thereof or, under circumstances
in the nature of a default, to require the prepayment or
repurchase thereof prior to the maturity thereof;
(g) the Company or, subject to Section 6.03, any Subsidiary
shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official
of it or any substantial part of its property, or shall consent to
any such relief or to the appointment of or taking possession by
any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as
they become due, or shall take any corporate action to authorize
any of the foregoing;
(h) an involuntary case or other proceeding shall be
commenced against the Company or, subject to Section 6.03, any
Subsidiary seeking liquidation, reorganization or other relief
with respect to it or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property,
and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Company or, subject to Section
6.03, any Subsidiary under the federal bankruptcy laws as now or
hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $20,000,000 which it
shall have become liable to pay under Title IV of ERISA; or notice
of intent to terminate a Material Plan shall be filed under Title
IV of ERISA by any member of the ERISA Group, any plan
administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate,
to impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or to cause a trustee to be appointed to
administer any Material Plan; or a condition shall exist by reason
of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or there
shall occur a complete or partial withdrawal from, or a default,
within the meaning of Section 4219(c)(5) of ERISA, with respect
to, one or more Multiemployer Plans which could cause one or more
members of the ERISA Group to incur a current payment obligation
in excess of $20,000,000;
(j) one or more judgments or orders for the payment of money
in an aggregate amount in excess of $20,000,000 shall be rendered
against the Company or, subject to Section 6.03, any Subsidiary or
a combination thereof and shall continue unsatisfied and unstayed
for a period of 30 days, or any action shall be legally taken by a
judgment creditor to levy upon assets or properties of the Company
or, subject to Section 6.03, any Subsidiary to enforce any such
judgment;
(k) a Change of Control shall occur; or
(l) the Guarantee of any Guarantor under the Guarantee
Agreement shall cease to be, or shall be asserted by such
Guarantor not to be, a valid and binding obligation of such
Guarantor, except as expressly contemplated by the Guarantee
Agreement;
then, and in every such event, the Agent shall (i) if requested by Banks
having more than 50% in aggregate amount of the Commitments, by notice to the
Company terminate the Commitments and they shall thereupon terminate, (ii) if
requested by Banks holding Notes evidencing more than 50% in aggregate
principal amount of the Loans, by notice to the Company declare the Notes of
all Borrowers (together with accrued interest thereon) to be, and the Notes
(together with accrued interest thereon) shall thereupon become, immediately
due and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by each Borrower, (iii) if requested by
Banks having more than 50% of the Letter of Credit Exposure, require cash
collateral as contemplated by Section 2.17(k) in an amount not exceeding the
Letter of Credit Exposure or (iv) any combination of the foregoing; provided
that in the case of any of the Events of Default specified in clause (g) or
(h) above with respect to the Company, without any notice to any Borrower or
any other act by the Agent or the Banks, (i) the Commitments shall thereupon
terminate, (ii) the Notes of all Borrowers (together with accrued interest
thereon) shall become immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by each
Borrower and (iii) the Company shall be required to provide, immediately, cash
collateral as contemplated by Section 2.17(k) in an amount equal to the Letter
of Credit Exposure; and provided further that if any Event of Default
specified in clause (g) or (h) above occurs with respect to any Eligible
Subsidiary, then, without any notice to such Eligible Subsidiary or any other
act by the Agent or the Banks, (i) the eligibility of such Eligible Subsidiary
to borrow or to have Letters of Credit issued for its account hereunder shall
thereupon terminate, (ii) the Notes of such Eligible Subsidiary (together with
accrued interest thereon) shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by each Eligible Subsidiary and (iii) the Company shall be
required to provide, immediately, cash collateral as contemplated by Section
2.17(k) in an amount equal to the Letter of Credit Exposure with respect to
all Letters of Credit issued for the account of such Eligible Subsidiary.
SECTION 6.02. Default. The Agent shall give notice to the
Company under Section 6.01(c) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
SECTION 6.03. Exclusion of Immaterial Subsidiaries. Solely
for purposes of determining whether a Default has occurred under clause (g),
(h) or (j) of Section 6.01, any reference in any such clause to any
"Subsidiary" shall be deemed not to include any Subsidiary affected by any
event or circumstance referred to in any such clause that (a) is not an
Eligible Subsidiary or a Guarantor, (b) is not a Material Subsidiary
(determined for this purpose as though each reference to "10%" in the
definition of Material Subsidiary were a reference to "5%") and (c) did not,
for the most recent Calculation Period, have Consolidated EBITDAR in an amount
exceeding 5% of the Company's Consolidated EBITDAR for such period; provided
that (i) if it is necessary to exclude more than one Subsidiary from clause
(g), (h) or (j) of Section 6.01 pursuant to this Section in order to avoid a
Default thereunder, all excluded Subsidiaries shall be considered to be a
single consolidated Subsidiary for purposes of determining whether the
conditions specified in clauses (b) and (c) above are satisfied and (ii) a
Subsidiary shall not be excluded from clauses (g), (h) and (j) of Section 6.01
if such Subsidiary holds rights under any long-term contracts for the purchase
of inventory accounting for more than 5% of the total inventory purchased by
the Company and its Subsidiaries during the most recent Calculation Period.
ARTICLE VII
The Agent
SECTION 7.01. Appointment and Authorization. Each Bank
irrevocably appoints and authorizes the Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Agent by the terms hereof or thereof,
together with all such powers as are reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust
Company of New York shall have the same rights and powers under this Agreement
as any other Bank and may exercise or refrain from exercising the same as
though it were not the Agent, and Morgan Guaranty Trust Company of New York
and its affiliates may accept deposits from, lend money to, and generally
engage in any kind of business with the Company or any Subsidiary or Affiliate
of the Company as if it were not the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations of the
Agent under this Agreement or any other Loan Documents are only those
expressly set forth herein or therein. Without limiting the generality of the
foregoing, the Agent shall not be required to take any action with respect to
any Default, except as expressly provided in Article VI.
SECTION 7.04. Consultation with Experts. The
Agent may consult with legal counsel (who may be counsel for the Company),
independent public accountants and other experts selected by it and shall not
be liable for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts.
SECTION 7.05. Liability of Agent. Neither the Agent nor
any of its directors, officers, agents, or employees shall be liable for any
action taken or not taken by it in connection herewith (i) with the consent or
at the request of the Required Banks or (ii) in the absence of its own gross
negligence or willful misconduct. Neither the Agent nor any of its directors,
officers, agents or employees shall be responsible for or have any duty to
ascertain, inquire into or verify (i) any statement, warranty or
representation made in connection with this Agreement or any other Loan
Document or any borrowing hereunder; (ii) the performance or observance of any
of the covenants or agreements of the Company or the Eligible Subsidiaries;
(iii) the satisfaction of any condition specified in Article III, except
receipt of items required to be delivered to the Agent; or (iv) the validity,
effectiveness or genuineness of this Agreement, the other Loan Documents or
any other instrument or writing furnished in connection herewith or therewith.
The Agent shall not incur any liability by acting in reliance upon any notice,
consent, certificate, statement, or other writing (which may be a bank wire,
telex or similar writing) believed by it in good faith to be genuine or to be
signed by the proper party or parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in
accordance with its Commitment, indemnify the Agent (to the extent not
reimbursed by the Borrowers) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from the Agent's gross negligence or willful misconduct) that the Agent
may suffer or incur in connection with this Agreement or any other Loan
Document or any action taken or omitted by the Agent hereunder or thereunder.
If a Bank makes any indemnification payment to the Agent pursuant to this
Section and thereafter the Agent receives payment from any Borrower in respect
of the same indemnified amount, the Agent shall reimburse such Bank to the
extent of its ratable share of such payment received by the Agent.
SECTION 7.07. Credit Decision. Each Bank acknowledges that
it has, independently and without reliance upon the Agent or any other Bank,
and based on such documents and information as it has deemed appropriate, made
its own credit analysis and decision to enter into this Agreement. Each Bank
also acknowledges that it will, independently and without reliance upon the
Agent or any other Bank, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking any action under this Agreement.
SECTION 7.08. Successor Agent. The Agent may resign at any
time by giving written notice thereof to the Banks and the Company. Upon any
such resignation, the Required Banks shall have the right to appoint a
successor Agent approved by the Company (such approval not to be unreasonably
withheld); provided that no approval of the Company shall be necessary if an
Event of Default has occurred and is continuing. If no successor Agent shall
have been so appointed by the Required Banks and, if required, approved by the
Company and shall have accepted such appointment, within 30 days after the
retiring Agent gives notice of resignation, then the retiring Agent may, on
behalf of the Banks, appoint a successor Agent, which shall be a commercial
bank organized or licensed under the laws of the United States of America or
of any State thereof and having a combined capital and surplus of at least
$50,000,000. Upon the acceptance of its appointment as Agent by a successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all the rights and duties of the retiring Agent, and the retiring Agent shall
be discharged from its duties and obligations. After any retiring Agent's
resignation hereunder as Agent, the provisions of this Article shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Agent.
SECTION 7.09. Agent's Fees. The Company shall pay to the
Agent for its own account fees in the amounts and at the times previously
agreed upon between the Company and the Agent.
SECTION 7.10. Sub-Agents; Issuing Banks; Swingline Lender.
The Agent may perform any of its obligations and exercise any of its rights
under the Loan Documents by or through sub-agents. The provisions of this
Article VII shall inure to the benefit of any sub-agent of the Agent, each
Issuing Bank and the Swingline Lender in the same manner and to the same
extent as they inure to the benefit of the Agent.
ARTICLE VIII
Change in Circumstances
SECTION 8.01. Basis for Determining Interest Rate
Inadequate or Unfair. If on or prior to the first day of any Interest Period
for any Fixed Rate Borrowing:
(a) the Agent is advised by the Reference Banks that
deposits in the applicable currency (in the applicable amounts)
are not being offered to the Reference Banks in the relevant
market for such Interest Period; or
(b) Banks having 50% or more of the aggregate amount of the
Commitments advise the Agent that the Adjusted CD Rate or the
London Interbank Offered Rate, as the case may be, as determined
by the Agent will not adequately and fairly reflect the cost to
such Banks of funding their CD Loans or Euro-Currency Loans, as
the case may be, for such Interest Period,
the Agent shall forthwith give notice thereof to the Company and the Banks,
whereupon until the Agent notifies the Company that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make CD Loans or Euro-Currency Loans, as the case may be, or to convert
outstanding Committed Loans into CD Loans or Euro-Currency Loans, as the case
may be, shall be suspended, (ii) each outstanding Committed Loan shall be
converted into a Base Rate Loan on the last day of the then current Interest
Period applicable thereto, and (iii) unless the applicable Borrower notifies
the Agent at least two Domestic Business Days before the date of any Fixed
Rate Borrowing for which a Notice of Borrowing has previously been given that
it elects not to borrow on such date, (x) if such Borrowing is a CD Borrowing
or a Euro-Currency Borrowing, as the case may be, such Borrowing shall instead
be made as a Base Rate Borrowing and (y) if such Borrowing is a Money Market
LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall
bear interest for each day from and including the first day to but excluding
the last day of the Interest Period applicable thereto at the Base Rate for
such day.
SECTION 8.02. Illegality. If, on or after the date of this
Agreement, the adoption of any applicable law, rule or regulation, or any
change therein, or any change in the interpretation or administration thereof
by any governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by any Bank (or
its Euro-Currency Lending Office) with any request or directive (whether or
not having the force of law) of any such authority, central bank or comparable
agency shall make it unlawful or impossible for any Bank (or its Euro-Currency
Lending Office) to make, maintain or fund its Euro-Currency Loans and such
Bank shall so notify the Agent, the Agent shall forthwith give notice thereof
to the other Banks and the Company, whereupon until such Bank notifies the
Company and the Agent that the circumstances giving rise to such suspension no
longer exist, the obligation of such Bank to make Euro-Currency Loans to any
Borrower shall be suspended. Before giving any notice to the Agent pursuant
to this Section, such Bank shall designate a different Euro-Currency Lending
Office if such designation will avoid the need for giving such notice and will
not, in the judgment of such Bank, be otherwise disadvantageous to such Bank.
If such Bank shall determine that it may not lawfully continue to maintain and
fund any of its outstanding Euro-Currency Loans to any Borrower to maturity
and shall so specify in such notice, such Borrower shall immediately prepay in
full the then outstanding principal amount of each such Euro-Currency Loan,
together with accrued interest thereon. Concurrently with prepaying each such
Euro-Currency Loan, such Borrower shall borrow a Base Rate Loan in an equal
principal amount from such Bank (on which interest and principal shall be
payable contemporaneously with the related Euro-Currency Loans of the other
Banks), and such Bank shall make such a Base Rate Loan.
SECTION 8.03. Increased Cost and Reduced Return. (a) If
on or after (x) the date hereof, in the case of any Committed Loan or any
obligation to make Committed Loans,or (y) the date of any related Money Market
Quote, in the case of any Money Market Loan, the adoption of any applicable
law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Applicable Lending Office) with any request or directive (whether or not
having the force of law) of any such governmental authority, central bank or
comparable agency shall impose, modify or deem applicable any reserve, special
deposit, insurance assessment or similar requirement (including, without
limitation, any such requirement imposed by the Board of Governors of the
Federal Reserve System, but excluding (i) with respect to any Euro-Currency
Loan, any such requirement with respect to which such Bank is entitled to
compensation during the relevant Interest Period under Section 2.18 and (ii)
with respect to any CD Loan, any such requirement reflected in the applicable
Domestic Reserve Percentage or Assessment Rate) against assets of, deposits
with or for the account of, or credit extended by, any Bank (or its Applicable
Lending Office) or shall impose on any Bank (or its Applicable Lending Office)
or on the United States market for certificates of deposit or the London
interbank market any other condition affecting its Fixed Rate Loans or its
obligation to make such Fixed Rate Loans and the result of any of the
foregoing is to increase the cost to such Bank (or its Applicable Lending
Office) of making or maintaining any Fixed Rate Loan to any Borrower, or to
reduce the amount of any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its Notes with
respect thereto, by an amount reasonably deemed by such Bank to be material,
then, within 15 days after demand by such Bank setting forth the circumstances
giving rise to such demand and a calculation of the amount or amounts demanded
(with a copy to the Agent), such Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.
(b) If any Bank shall have determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding
capital adequacy, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency,
has or would have the effect of reducing the rate of return on capital of such
Bank (or its Parent) as a consequence of such Bank's obligations hereunder to
a level below that which such Bank (or its Parent) could have achieved but for
such adoption, change, request or directive (taking into consideration its
policies with respect to capital adequacy) by an amount deemed by such Bank to
be material, then from time to time, within 15 days after demand by such Bank
(with a copy to the Agent), the Company shall pay to such Bank such additional
amount or amounts as will compensate such Bank (or its Parent) for such
reduction.
(c) Each Bank will promptly notify the Company and the
Agent of any event of which it has knowledge, occurring after the date hereof,
which will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this Section and setting
forth the additional amount or amounts to be paid to it hereunder shall be
conclusive in the absence of manifest error. In determining such amount, such
Bank may use any reasonable averaging and attribution methods.
(d) The provisions of this Section also shall inure to the
benefit of each Issuing Bank in its capacity as such.
SECTION 8.04. Taxes. (a) For purposes of this Section
8.04(a), the following terms have the following meanings:
"Taxes" means any and all present or future taxes, duties,
levies, imposts, deductions, charges or withholdings with respect
to any payment by any Borrower pursuant to this Agreement or under
any Note, and all liabilities with respect thereto, including any
taxes, duties, levies, imposts, deductions, charges or
withholdings with respect to any payment by a Borrower other than
the Company that would not have been imposed on a payment by the
Company, but excluding (i) in the case of each Bank, each Issuing
Bank and the Agent, taxes imposed on its income, and franchise or
similar taxes imposed on it, by a jurisdiction under the laws of
which such Bank, such Issuing Bank or the Agent (as the case may
be), is organized or in which its principal executive office is
located or, in the case of each Bank, in which its Applicable
Lending Office is located, (ii) in the case of each Bank, each
Issuing Bank and the Agent, taxes imposed solely by reason of such
Bank, such Issuing Bank or the Agent (as the case may be) doing
business in the jurisdiction imposing such tax, other than as a
result of this Agreement or any Note or any transaction
contemplated hereby (including the negotiation of any of the
foregoing) and (iii) in the case of each Bank, any withholding tax
imposed on such payments but only at a rate equal to the United
States withholding tax that such Bank is (or would be) subject to
on such payments by the Company at the time such Bank first
becomes a party to this Agreement.
"Other Taxes" means any present or future stamp or
documentary taxes and any other excise or property taxes, or
similar charges or levies, which arise from any payment made
pursuant to this Agreement or under any Notes or from the
execution or delivery of, or otherwise with respect to, this
Agreement or any Note.
(b) Any and all payments by any Borrower to or for the
account of any Bank, any Issuing Bank or the Agent hereunder or under any Note
shall be made without deduction for any Taxes or Other Taxes; provided that,
if such Borrower shall be required by law to deduct any Taxes or Other Taxes
from any such payments, (i) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this Section) such Bank, such Issuing Bank or
the Agent (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (ii) such Borrower shall make
such deductions, (iii) such Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with applicable
law and (iv) such Borrower shall furnish to the Agent, at its address referred
to in Section 9.01, the original or a certified copy of a receipt evidencing
payment thereof.
(c) Each Borrower agrees to indemnify each Bank, each
Issuing Bank and the Agent for the full amount of Taxes or Other Taxes
(including, without limitation, any Taxes or Other Taxes imposed or asserted
on amounts payable under this Section) paid by such Bank, such Issuing Bank or
the Agent (as the case may be) and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto. This
indemnification shall be paid within 15 days after such Bank, such Issuing
Bank or the Agent (as the case may be) makes demand therefor. After any Bank,
any Issuing Bank or the Agent (as the case may be) learns of the imposition of
Taxes or Other Taxes, such Bank, Issuing Bank and the Agent (as the case may
be) will act in good faith promptly to notify the relevant Borrower of its
obligations hereunder.
(d) Each Bank organized under the laws of a jurisdiction
outside the United States (or, in the case of a Foreign Borrower, outside such
Foreign Borrower's jurisdiction of organization), on or prior to the date of
its execution and delivery of this Agreement in the case of each Bank listed
on the signature pages hereof and on or prior to the date on which it becomes
a Bank in the case of each other Bank, and from time to time thereafter if
requested in writing by the Company or the relevant Borrower (but only so long
as such Bank remains lawfully able to do so), shall provide the Company or the
relevant Borrower and the Agent with the appropriate form or forms (including
any forms required to replace forms previously provided because of a change in
a Bank's place of organization, principal office or Applicable Lending Office,
or in the event that any forms are no longer valid because of their expiration
or a change in law or regulations, other appropriate evidence of exemption or
reduction as reasonably requested by the relevant Borrower), certifying that
such Bank is entitled to benefits under an income tax treaty to which the
United States (or, in the case of a Foreign Borrower, such Foreign Borrower's
jurisdiction of organization) is a party which exempts the Bank from
withholding tax imposed by the United States (or in the case of a Foreign
Borrower, such Foreign Borrower's jurisdiction of organization) or reduces the
rate of withholding tax (if any) on payments of interest for the account of
such Bank or certifying that the income receivable pursuant to this Agreement
is otherwise not subject to such withholding tax; provided that no Bank shall
be required to provide any form or forms required by this paragraph for or on
account of a Foreign Borrower unless and until the Company supplies the
relevant form or forms to such Bank and requests that such Bank complete and
sign such form or forms.
(e) For any period with respect to which a Bank has failed
to provide the Company or the Agent with the appropriate form as required by
Section 8.04(d) (unless such failure is due to (i) a change in treaty, law or
regulation occurring subsequent to the date on which such form originally was
required to be provided or (ii) in the case of a form for or on account of a
Foreign Borrower, the failure of the Company to request such form in accordance
with the proviso to Section 8.04(d)), such Bank shall not be entitled to
indemnification under Section 8.04(b) or (c) with respect to the withholding
taxes that would not have been imposed if such form had been provided;
provided that if a Bank, which is otherwise exempt from or subject to a
reduced rate of withholding tax, becomes subject to Taxes because of its
failure to deliver a form required hereunder, the relevant Borrower shall take
such steps as such Bank shall reasonably request to assist such Bank to
recover such Taxes.
(f) If any Borrower is required to pay additional amounts
to or for the account of any Bank pursuant to this Section, then such Bank
will change the jurisdiction of its Applicable Lending Office if such change
(i) will eliminate or reduce any such additional payment which may thereafter
accrue and (ii) in the judgment of such Bank, is not otherwise disadvantageous
to such Bank.
(g) If a Bank, an Issuing Bank or the Agent shall receive a
refund (including any offset or credit) from a taxation authority (as a result
of any error in the imposition of Taxes or Other Taxes by such taxation
authority) of any Taxes or Other Taxes paid by any Borrower pursuant to
Section 8.04(b) or (c), such Bank, Issuing Bank or the Agent (as the case may
be) shall promptly pay to the relevant Borrower the amount so received, with
interest received from the taxation authority with respect to such refund.
SECTION 8.05. Base Rate Loans Substituted for Affected
Fixed Rate Loans. If (i) the obligation of any Bank to make CD Loans or
Euro-Currency Loans to any Borrower has been suspended pursuant to Section
8.02 or (ii) any Bank has demanded compensation from the Company or any other
Borrower under Section 8.03 or 8.04 with respect to its CD Loans or
Euro-Currency Loans and the Company shall, by at least five Euro-Currency
Business Days' prior notice to such Bank through the Agent, have elected that
the provisions of this Section shall apply to such Bank, then, unless and
until such Bank notifies the Company that the circumstances giving rise to
such suspension or demand for compensation no longer apply:
(a) all Loans which would otherwise be made by such Bank as
CD Loans or Euro-Currency Loans shall be made instead as Base Rate
Loans (on which interest and principal shall be payable
contemporaneously with the related Fixed Rate Loans of the other
Banks), and
(b) after each of its CD Loans or Euro-Currency Loans has
been repaid, all payments of principal which would otherwise be
applied to repay such Fixed Rate Loans shall be applied to repay
its Base Rate Loans instead.
SECTION 8.06. Other Costs. If the cost to any Bank or any
Issuing Bank of making or maintaining any Loan to, or issuing or participating
in any Letter of Credit for the account of, an Eligible Subsidiary is
increased, or the amount of any sum received or receivable by any Bank (or its
Applicable Lending Office) or any Issuing Bank is reduced by an amount deemed
by such Bank or such Issuing Bank to be material, by reason of the fact that
such Eligible Subsidiary is incorporated in, or conducts business in, a
jurisdiction outside the United States, such Eligible Subsidiary shall
indemnify such Bank for such increased cost or reduction within 15 days after
demand by such Bank setting forth the circumstances giving rise to such demand
and the calculation of the amount or amounts demanded (with a copy to the
Company and the Agent). A certificate of such Bank claiming compensation
under this Section and setting forth the additional amount or amounts to be
paid to it hereunder shall be conclusive in the absence of manifest error.
SECTION 8.07. Substitution of Bank. If (i) the obligation
of any Bank to make or maintain Euro-Currency Loans has been suspended
pursuant to Section 8.02 or (ii) any Bank has demanded compensation under
Section 8.03 or is receiving increased payments or indemnification payments
under Section 8.04 or 8.06, the Company shall have the right to seek a bank or
banks ("Substitute Banks"), which may be one or more of the Banks or one or
more other banks satisfactory to the Agent, to purchase all (but not less than
all) the Notes and the participations in the Letter of Credit Exposure of such
Bank (the "Affected Bank") and, if the Company locates a Substitute Bank, the
Affected Bank shall, upon payment to it of the purchase price agreed between
it and the Substitute Bank (or, failing such agreement, a purchase price in
the amount of the outstanding principal amount of its Loans and accrued
interest thereon to the date of payment plus the Affected Bank's Applicable
Percentage of all unreimbursed Letter of Credit Disbursements) plus any amount
(other than principal and interest) then due to it or accrued for its account
hereunder, assign all its rights and obligations under this Agreement and the
Notes to the Substitute Bank, and the Substitute Bank shall assume such rights
and obligations, whereupon the Substitute Bank shall be a Bank party to this
Agreement and shall have all the rights and obligations of a Bank. Any
assignment by an Affected Bank pursuant to this Section shall be treated as a
prepayment of the Affected Bank's Fixed Rate Loans for purposes of Section
2.14.
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including bank
wire, telex, facsimile transmission or similar writing) and shall be given to
such party: (x) in the case of any Borrower, any Issuing Bank, the Swingline
Lender or the Agent, at its address or its telecopy or telex number set forth
on the signature pages hereof (or, in the case of an Eligible Subsidiary, in
its Election to Participate or, in the case of any Issuing Bank, in its
Issuing Bank Agreement), (y) in the case of any Bank, at its address or its
telecopy or telex number set forth in its Administrative Questionnaire, or (z)
in the case of any party, such other address or other telecopy or telex number
as such party may hereafter specify for the purpose by notice to the Agent and
the Company. Each such notice, request or other communication shall be
effective (i) if given by telecopy or telex, when such telecopy or telex is
transmitted to the telecopy or telex number specified in this Section and the
appropriate confirmation of receipt or answerback is received, (ii) if given
by mail, 72 hours after such communication is deposited in the mails with
first class postage prepaid, addressed as aforesaid or (iii) if given by any
other means, when delivered at the address specified in this Section; provided
that notices to the Agent under Article II or Article VIII shall not be
effective until received.
SECTION 9.02. No Waivers. No failure or delay by the
Agent, any Issuing Bank or any Bank in exercising any right, power or
privilege hereunder or under any other Loan Document shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and
not exclusive of any rights or remedies provided by law.
SECTION 9.03. Expenses; Indemnification. (a) The Company
shall pay (i) all reasonable out-of-pocket expenses of the Agent and (in the
case of expenses relating to any Letter of Credit) each Issuing Bank,
including fees and disbursements of special counsel for the Agent, in
connection with the preparation and administration of this Agreement and the
other Loan Documents, any waiver or consent hereunder or thereunder or any
amendment hereof or thereof or any Default or alleged Default hereunder and
(ii) if an Event of Default occurs, all reasonable out-of-pocket expenses
incurred by the Agent, each Issuing Bank and each Bank, including reasonable
fees and disbursements of counsel, in connection with such Event of Default
and collection, bankruptcy, insolvency and other enforcement proceedings
resulting therefrom.
(b) The Company agrees to indemnify the Agent, each Issuing
Bank and each Bank, their respective affiliates and the respective directors,
officers, agents and employees of the foregoing (each an "Indemnitee") and
hold each such Indemnitee harmless from and against any and all liabilities,
losses, damages, costs and expenses of any kind (including any of the
foregoing with respect to Environmental Laws applicable to the Company or any
Subsidiary), including, without limitation, the reasonable fees and
disbursements of counsel, which may be actually incurred by such Indemnitee in
connection with any investigative, administrative or judicial proceeding
(whether or not such Indemnitee shall be designated a party thereto) brought
or threatened relating to or arising out of the Loan Documents or any actual
or proposed use of proceeds of Loans or Letters of Credit hereunder; provided
that no Indemnitee shall have the right to be indemnified hereunder for its
own gross negligence or willful misconduct as determined by a court of
competent jurisdiction.
SECTION 9.04. Sharing of Setoffs. Each Bank agrees that
if it shall, by exercising any right of setoff or counterclaim or otherwise,
receive payment of a proportion of the aggregate amount of its claims in
respect of Letter of Credit Disbursements and principal and interest due with
respect to any Note held by it which is greater than the proportion received
by any other Bank in respect of the aggregate amount of claims in respect of
Letter of Credit Disbursements and principal and interest due with respect to
any Note held by such other Bank, the Bank receiving such proportionately
greater payment shall purchase such participations in the claims in respect of
Letter of Credit Disbursements and Notes held by the other Banks, and such
other adjustments shall be made, as may be required so that all such payments
of claims in respect of Letter of Credit Disbursements and of principal and
interest with respect to the Notes held by the Banks shall be shared by the
Banks pro rata; provided that nothing in this Section shall impair the right
of any Bank to exercise any right of setoff or counterclaim it may have and to
apply the amount subject to such exercise to the payment of indebtedness of a
Borrower other than its indebtedness under the Loan Documents. Each Borrower
agrees, to the fullest extent it may effectively do so under applicable law,
that any holder of a participation in a claim in respect of a Letter of Credit
Disbursement or in a Note, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of setoff or counterclaim and other rights
with respect to such participation as fully as if such holder of a
participation were a direct creditor of the Borrower in the amount of such
participation.
SECTION 9.05. Amendments and Waivers. Any provision of
this Agreement or any other Loan Document may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by, or approved
in writing by, the Company and the Required Banks (and, if the rights or
duties of the Agent, any Issuing Bank or the Swingline Lender are affected
thereby, by the Agent or such Issuing Bank or the Swingline Lender, as the
case may be); provided that no such amendment or waiver shall, unless signed
by, or approved in writing by, all the Banks, (i) increase or decrease the
Commitment of any Bank (except for a ratable decrease in the Commitments of
all Banks) or subject any Bank to any additional obligation, (ii) reduce the
principal of or rate of interest on any Loan or any claim for reimbursement of
a Letter of Credit Disbursement or any fees hereunder, (iii) postpone the date
fixed for any payment of principal of or interest on any Loan or for any
reimbursement of a Letter of Credit Disbursement or for payment of any fees
hereunder or for any reduction or termination of any Commitment, (iv) change
the percentage of the Commitments or of the aggregate unpaid principal amount
of the Notes, or the number of Banks, which shall be required for the Banks or
any of them to take any action under this Section or any other provision of
this Agreement, (v) change the ratable treatment of the Banks under any
provision of this Agreement that provides for such ratable treatment, or (vi)
release any Guarantor from its Guarantee under the Guarantee Agreement, except
as contemplated by Section 7 of the Guarantee Agreement and except that a
Guarantor that is a Subsidiary but is not a Material Subsidiary at the time of
the proposed release may be released from its Guarantee under the Guarantee
Agreement with the written consent or approval of the Required Banks.
SECTION 9.06. Successors and Assigns. (a) The provisions
of this Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and assigns, except that no
Borrower may assign or otherwise transfer any of its rights under this
Agreement without the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or
other institutions (each a "Participant") participating interests in its
Commitment or any or all of its Loans or its participations in Letters of
Credit. In the event of any such grant by a Bank of a participating interest
to a Participant, whether or not upon notice to the Borrowers and the Agent,
such Bank shall remain responsible for the performance of its obligations
hereunder, and the Borrowers and the Agent shall continue to deal solely and
directly with such Bank in connection with such Bank's rights and obligations
under this Agreement. Any agreement pursuant to which any Bank may grant such
a participating interest shall provide that such Bank shall retain the sole
right and responsibility to enforce the obligations of each Borrower hereunder
including, without limitation, the right to approve any amendment,
modification or waiver of any provision of this Agreement or any other Loan
Document; provided that such participation agreement may provide that such
Bank will not agree to any modification, amendment or waiver described in
clause (i), (ii), (iii) or (iv) (but, in the case of clause (iv), only to the
extent such modification, amendment or waiver would affect any requirement of
approval by all Banks of the matters referred to in such clauses (i), (ii) and
(iii)) of Section 9.05 without the consent of the Participant. The Borrowers
agree that each Participant shall, to the extent provided in its participation
agreement, be entitled to the benefits of Article VIII with respect to its
participating interest. An assignment or other transfer which is not
permitted by subsection (c) or (d) below shall be given effect for purposes of
this Agreement only to the extent of a participating interest granted in
accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or
other institutions (each an "Assignee") all, or a proportionate part of all,
of its rights and obligations under this Agreement and the Notes, and such
Assignee shall assume such rights and obligations, pursuant to an instrument
executed by such Assignee and such transferor Bank, with (and subject to) the
subscribed consent of the Company, the Agent, each Issuing Bank and the
Swingline Lender (which consents shall not be unreasonably withheld or
delayed); provided that if an Assignee is another Bank or an affiliate of any
Bank, no such consent shall be required; and provided further that each
assignment shall be in a minimum amount of $5,000,000 or, if less, the balance
of the transferor Bank's Commitment. Upon execution and delivery of such
instrument (including by the Company, the Agent, each Issuing Bank and the
Swingline Lender, if their consent is required as provided above) and payment
by such Assignee to such transferor Bank of an amount equal to the purchase
price agreed between such transferor Bank and such Assignee, such Assignee
shall be a Bank party to this Agreement and shall have all the rights and
obligations of a Bank with a Commitment as set forth in such instrument of
assumption, and the transferor Bank shall be released from its obligations
hereunder to a corresponding extent, and no further consent or action by any
party shall be required. Upon the consummation of any assignment pursuant to
this subsection (c), the transferor Bank, the Agent and the Borrowers shall
make appropriate arrangements so that, if required, a new Note for each
Borrower is issued to the Assignee. In connection with any such assignment,
the transferor Bank shall pay to the Agent an administrative fee for
processing such assignment in the amount of $2,500. If the Assignee is not
incorporated under the laws of the United States of America or a state
thereof, it shall, prior to the first date on which interest or fees are
payable hereunder for its account, deliver to the Company and the Agent
certification as to exemption from deduction or withholding of any United
States federal income taxes in accordance with Section 8.04.
(d) Any Bank may at any time assign all or any portion of
its rights under this Agreement and its Note to a Federal Reserve Bank. No
such assignment shall release the transferor Bank from its obligations
hereunder.
(e) No Assignee, Participant or other transferee of any
Bank's rights shall be entitled to receive any greater payment under Section
8.03 or 8.04 than such Bank would have been entitled to receive with respect
to the rights transferred, unless such transfer is made with the Company's
prior written consent or by reason of the provisions of Section 8.02, 8.03 or
8.04 requiring such Bank to designate a different Applicable Lending Office
under certain circumstances or at a time when the circumstances giving rise to
such greater payment did not exist.
SECTION 9.07. Collateral. Each of the Banks represents to
the Agent and each of the other Banks that it in good faith is not relying
upon any Margin Stock as collateral in the extension or maintenance of the
credit provided for in this Agreement.
SECTION 9.08. Governing Law; Submission to Jurisdiction.
This Agreement and each Note shall be governed by and construed in accordance
with the laws of the State of New York. Each Borrower hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement or the transactions contemplated hereby. Each Borrower irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum.
SECTION 9.09. Counterparts; Integration. This Agreement
may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS,
THE AGENT, THE ISSUING BANKS AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 9.11. Confidentiality. Each of the Agent, the
Issuing Banks and the Banks agrees to maintain the confidentiality of the
Information (as defined below), except that Information may be disclosed (a)
to its and its Affiliates' directors, officers, employees and agents,
including accountants, legal counsel and other advisors (it being understood
that the Persons to whom such disclosure is made will be informed of the
confidential nature of such Information and instructed to keep such Information
confidential), (b) to the extent requested by any regulatory authority, (c) to
the extent otherwise required by applicable laws and regulations or by any
subpoena or similar legal process, (d) to any other party to this Agreement,
(e) in connection with the exercise of any remedies hereunder or any suit,
action or proceeding relating to this Agreement or the enforcement of rights
hereunder, (f) subject to an agreement containing provisions substantially the
same as those of this Section, to any Assignee of or Participant in, or any
prospective Assignee of or Participant in, any of its rights or obligations
under this Agreement, (g) with the consent of the Company or (h) to the extent
such Information (i) becomes publicly available other than as a result of a
breach of this Section or (ii) becomes available to the Agent, any Issuing
Bank or any Bank on a nonconfidential basis from a source other than the
Company or any Subsidiary. For the purposes of this Section, "Information"
means all information received in writing from the Company or any Subsidiary
relating to the Company or any Subsidiary or their businesses, other than any
such information that is available to the Agent, any Issuing Bank or any Bank
on a nonconfidential basis prior to disclosure by the Company or any
Subsidiary; provided that, in the case of non-financial information received
from the Company or any Subsidiary after the date hereof, such information is
clearly identified at the time of delivery as confidential. Any Person
required to maintain the confidentiality of Information as provided in this
Section shall be considered to have complied with its obligation to do so if
such Person has exercised the same degree of care
to maintain the confidentiality of such Information as such Person would
accord to its own confidential information.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of
the day and year first above written.
FOOTSTAR, INC.,
By /s/ Carlos Alberini
---------------------------------
Title: Chief Financial Officer
933 MacArthur Boulevard
Mahwah, NJ 07430
Attention of: Carlos Alberini
Telecopy Number: 201-934-6761
Commitments
___________
$42,000,000 MORGAN GUARANTY TRUST COMPANY OF
NEW YORK,
By /s/ Adam J. Silver
-------------------------------
Title: Associate
$35,000,000 THE FIRST NATIONAL BANK OF BOSTON,
By /s/ Judith C.E. Kelly
-------------------------------
Title: Vice President
$35,000,000 THE BANK OF NEW YORK,
By /s/ Howard F. Bascomb
-------------------------------
Title: Vice President
$27,500,000 BANK OF AMERICA NT&SA,
By /s/ Dale Robert Mason
-------------------------------
Title: Vice President
$27,500,000 CIBC INC.,
By /s/ Paul T. LaHiff
------------------------------
Title: Authorized Signatory
$27,500,000 CORESTATES BANK, N.A.,
By /s/ John A. Ginter
------------------------------
Title: Commercial Officer
$27,500,000 CREDIT LYONNAIS, NEW YORK BRANCH,
By /s/ Mary E. Collier
------------------------------
Title: Vice President
$18,000,000 THE ASAHI BANK, LTD.,
By /s/ Junichi Yamada
------------------------------
Title: Sr. Deputy General Mgr.
$18,000,000 CREDIT SUISSE,
By /s/ Kristina Catlin
------------------------------
Title: Associate
By /s/ Edward E. Barr
------------------------------
Title: Associate
$18,000,000 FIRST BANK NATIONAL ASSOCIATION,
By /s/ Mark R. Olmon
------------------------------
Title: Vice President
$18,000,000 FLEET NATIONAL BANK,
By /s/ Kathleen A. Dimock
-------------------------------
Title: Assistant Vice President
$18,000,000 NATIONAL AUSTRALIA BANK, LTD,
NEW YORK BRANCH,
By /s/ R. Adams Perry, III
-------------------------------
Title: Assistant Vice President
By /s/ Heather A. Cottam
-------------------------------
Title: Assistant Vice President
$18,000,000 THE NIPPON CREDIT BANK, LTD.,
By /s/ Clifford Abramsky
-------------------------------
Title:
$18,000,000 PNC BANK, NATIONAL ASSOCIATION,
By /s/ M. Lynn Conover
-------------------------------
Title: Vice President
$18,000,000 THE SAKURA BANK, LIMITED,
By /s/ Koji Suzuki
-------------------------------
Title: Vice Pres. & Manager
$18,000,000 STANDARD CHARTERED BANK,
By /s/ Stephen H. Wahl
------------------------------
Title: Vice President
$18,000,000 THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH,
By /s/ Yukimi Konno
-------------------------------
Title:
$18,000,000 UNION BANK, A DIVISION OF UNION
BANK OF CALIFORNIA, N.A.,
By /s/ Dana Cox
-------------------------------
Title: Vice President
$5,000,000 THE HOKURIKU BANK, LTD,
By /s/ Tadashi Ohata
------------------------------
Title: Deputy General Manager
____________
Total
Commitments
$425,000,000
============
THE BANK OF NEW YORK,
as Issuing Bank,
By /s/ Howard F. Bascomb
------------------------------
Title: Vice President
101 Barclay Street
New York, NY 10286
Attention of: Karl W. Anderson
Telecopy Number: 212-815-3311
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Administrative Agent and as Swingline
Lender,
By /s/ Adam J. Silver
-------------------------------
Title: Associate
60 Wall Street
New York, NY 10260
Attention of: Adam Silver
Telecopy number: 212-648-5018
EXHIBIT 21.1
SUBSIDIARIES OF FOOTSTAR, INC.
As of the Distribution Date, the registrant will be the direct
parent corporation of Footaction Center, Inc., a California corporation
which will own all of the outstanding shares of Footaction, Inc., a Texas
corporation which will own all of the outstanding shares of Rosedale Open
Country, Inc., a Minnesota corporation; Meldisco H.C., Inc., a Minnesota
corporation; Melville Mexico, H.C., Inc. a Minnesota corporation;
Melville Altmex H.C., Inc. a Minnesota corporation and Melville Foreign,
Inc. a Minnesota corporation.
Rosedale Open Country, Inc. will own all of the outstanding shares
of Mall of America Fan Club, Inc. and Apache-Minnesota Thom McAn, Inc.
Mall of America Fan Club, Inc. owns all of the outstanding shares of
approximately 320 corporations which operate specialty retail stores under
the Footaction tradename located in the United States, selling brand name
athletic footwear and related apparel for men, women and children.
Apache-Minnesota Thom McAn, Inc. owns all of the outstanding shares
of Pheasant Thom McAn, Inc., which owns all the outstanding shares of
approximately 560 corporations formed to operate specialty retail stores under
the Thom McAn or BOQ tradenames located in the United States, Puerto Rico or
the U.S. Virgin Islands selling men's and women's footwear.
Meldisco H.C., Inc. owns all of the outstanding shares of Miles Shoes
Meldisco Lakewood, Colorado, Inc., which owns 51% of the capital stock of
approximately 2,435 corporations and 100% of the common stock of approximately
1,015 corporations which were formed to operate leased footwear departments in
Kmart or Pay Less Drug Stores all located in the United States, Puerto Rico,
the U.S. Virgin Islands or Guam.
Melville Mexico H.C., Inc., a Minnesota corporation, Melville Altmex
H.C., Inc., a Minnesota corporation and Melville Foreign, Inc., a Minnesota
corporation directly or indirectly own all of the outstanding shares of
approximately 15 foreign subsidiaries involved in the registrants operations
in Mexico, Singapore, the Czech Republic and Slovakia.
Several of the subsidiaries referred to in this Exhibit have not yet
opened their stores for business, and several no longer operate any stores.
All of the subsidiaries referred to herein are included in the consolidated
financial statements of the registrant.
The names of other subsidiaries are omitted as, considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
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<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> JUN-29-1996 DEC-31-1995
<CASH> 22600 26300
<SECURITIES> 0 0
<RECEIVABLES> 58500 57100
<ALLOWANCES> 500 1000
<INVENTORY> 311900 282600
<CURRENT-ASSETS> 1074800 1114300
<PP&E> 317500 320300
<DEPRECIATION> 143500 125200
<TOTAL-ASSETS> 1305100 1372700
<CURRENT-LIABILITIES> 215300 203500
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 989400 1013800
<TOTAL-LIABILITY-AND-EQUITY> 1305100 1372700
<SALES> 755900 1615200
<TOTAL-REVENUES> 755900 1615200
<CGS> 524200 1124500
<TOTAL-COSTS> 524200 1124500
<OTHER-EXPENSES> 182200 386700
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (9300) 0
<INCOME-PRETAX> 58800 125100
<INCOME-TAX> 18800 37300
<INCOME-CONTINUING> 28300 49400
<DISCONTINUED> (52800) (26800)
<EXTRAORDINARY> 0 0
<CHANGES> 0 (3900)
<NET-INCOME> (24500) 18700
<EPS-PRIMARY> 0 0
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