==============================================================================
As filed with the Securities and Exchange Commission on July 23, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
AMENDMENT NO. 4
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
Incorporation or organization) Identification No.)
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; 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 12. Indemnification of
Directors and Officers... 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 Distribution Agreement, dated as of , 1996, between
Melville Corporation ("Melville") 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 Tax Sharing Agreement, dated as of , 1996, 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 Supplemental Executive Retirement Plan of Registrant.*
21.1 Subsidiaries of the Registrant.**
- ---------------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.
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: July 23, 1996
EXHIBIT INDEX
Exhibit
Number DESCRIPTION
------- -----------
2.1 Distribution Agreement, dated as of , 1996, between
Melville Corporation ("Melville") 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 Tax Sharing Agreement, dated as of , 1996, 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 Supplemental Executive Retirement Plan of Registrant.*
21.1 Subsidiaries of the Registrant.**
- ---------------
(*) To be filed by amendment.
** Previously filed.
*** Filed herewith.
==============================================================================
[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 , 1996. In the distribution, you will receive
share(s) of FTS common stock for each shares of Melville common stock you
hold on the record date.
Footstar will combine Melville's footwear businesses which principally 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
significant overall cost savings expected to be achieved and the expected
resultant increase in overall profitability of the separate companies, the
increased strategic clarity of the companies, the ability of the financial
markets to evaluate the companies more effectively, and 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.
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 July 23, 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 as of the close of business on ,
1996 (the "Record Date") on the basis of shares of Company Common Stock for
every shares of Melville Common Stock held of record on the Record Date.
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 , 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 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. Application has been made to list the Company Common
Stock on the New York Stock Exchange under the symbol "FTS." 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........................... 16
Trading Market.......................................................... 20
Dividends............................................................... 21
Unaudited Pro Forma Combined Financial Statements....................... 22
Pro Forma Capitalization................................................ 26
Selected Historical Combined Financial Data............................. 27
Managements Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 28
Description of Credit Facility..........................................
The Business............................................................ 34
Management.............................................................. 47
Security Ownership of Certain Beneficial Owners and Management.......... 59
Description of Capital Stock............................................ 60
Certain Statutory, Charter and Bylaw Provisions......................... 61
Independent Auditors.................................................... 63
Additional Information.................................................. 64
Index to Combined Financial Statements.................................. F-1
INTRODUCTION
On , 1996, the Board of Directors of Melville declared a
dividend payable to holders of record of Melville Common Stock at the close of
business on , 1996 (the "Record Date") of shares of Company Common
Stock for every shares of Melville Common Stock owned of record on the
Record Date. 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. 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, Corporate Secretary, 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 or their investment in the Company 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 March 30, 1996, the Company operated
2,570 leased discount footwear departments in 50 states, Puerto Rico, the U.S.
Virgin Islands, Guam, the Czech Republic, Slovakia, Mexico and Singapore
through Meldisco and 431 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 one
of the three largest retailers 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 quarter of 1996 were $110
million compared to $83 million for the first quarter of 1995, an increase of
32.3%. Same store sales growth for the first quarter of 1996 and 1995 was
31.2% and 8.9%, 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, expanding 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. The Company has also developed and recently
implemented initiatives designed to allow store associates to focus
increased attention on customer service. In connection with the
Distribution, the Company will be consolidating certain administrative and
other functions. For information on the pro forma effect of the
Distribution on the Company's store operating, sales, general and
administrative expenses, see Note 3 and Note 1 of the Unaudited Pro Forma
Combined Statements of Income for the Year Ended December 31, 1995 and the
quarter ended March 30, 1996, respectively.
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
determined to exit the Thom McAn business by converting 80 to 100 Thom McAn
stores to Footaction stores (which are the most suitable locations for
conversion in light of Footaction's real estate, store profile and market
requirements) 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. 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. 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. A
principal factor considered by Melville in
reaching such conclusion was that the
Distribution will enable Melville to achieve
significant overall aggregate cost savings.
Melville also considered, among other
things, 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 the ability of Melville
and the Company to offer management
incentives that are more directly linked to
the performance of the respective businesses.
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
, 1996, it is estimated that
approximately 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 stockholders of record,
although some of the shares may be
registered in nominee names representing an
additional number of stockholders.
Distribution Ratio............... shares of Company Common Stock for every
shares of Melville Common Stock held by
Melville shareholders of record on the
Record Date.
Record Date...................... , 1996 (close of business)
Distribution Date................ , 1996 (close of business).
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............... Prior to the Distribution Date, the Company
will appoint Chase Mellon Shareholder
Services, LLC to serve as Distribution Agent
in connection with the Distribution.
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.
Application has been made to list the
Company Common Stock on the New York Stock
Exchange under the symbol "FTS." See
"Trading Market."
Tax Consequences................. Melville has filed an application for a
private letter ruling from the Internal
Revenue Service to the effect that the
Distribution will qualify as a tax-free
distribution for federal income tax
purposes. It is a condition precedent to
Melville's obligation to consummate the
Distribution that Melville receive (i) a
private letter ruling from the Internal
Revenue Service or (ii) an opinion of
counsel satisfactory to Melville, in either
case relating to the tax-free nature of the
Distribution for federal income tax
purposes. Such opinion of counsel, if
obtained, would not be 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.......... 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.
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 and as of
December 31, 1995 and 1994 and as of and for the first quarter ended March 30,
1996 and April 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>
First Quarter Ended Fiscal Years Ended
------------------- ------------------------------------------------------------
1996 1995 1995(1) 1994 1993 1992 1991
------- ------ --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
($ in millions)
Net sales.............. $336.9 $325.8 $1,615.2 $1,612.8 $1,474.8 1,413.8 $1,279.2
Cost of sales.......... 243.3 235.6 1,124.5 1,117.8 1,011.7 971.5 894.9
------- ------ --------- -------- --------- ------- ---------
Gross profit........... 93.6 90.2 490.7 495.0 463.1 442.3 384.3
Store operating,
selling,
general and
administrative
expenses............. 83.7 79.8 343.0 319.6 287.0 266.7 233.6
Depreciation and
amortization......... 5.7 5.5 20.0 18.7 13.7 10.5 6.4
Restructuring
and asset
impairment
charges.............. -- -- 23.7 -- -- -- --
------- ------ --------- -------- --------- ------- ---------
Operating profit....... 4.2 4.9 104.0 156.7 162.4 165.1 144.3
Interest income, net... 5.3 5.5 21.1 15.4 11.7 12.5 20.3
Provision for
income taxes......... 3.2 2.8 37.3 49.5 53.7 54.8 47.9
Minority interests
in net income........ 0.2 2.0 38.4 51.9 47.3 53.8 50.4
(Loss) earnings from
discontinued
operations, net...... (1.0) (4.0) (26.8) 6.0 5.0 (45.2) 17.3
Loss on disposal of
discontinued
operations, net...... (53.6) -- -- -- -- -- --
------- ------ --------- -------- --------- ------- ---------
Cumulative effect
of changes in
accounting
principle, net(2).... -- 3.9 3.9 -- -- 22.1 --
------- ------ --------- -------- --------- ------- ---------
Net (loss) income...... $(48.5) $(2.3) $18.7 $76.7 $78.1 $1.7 $83.6
======= ====== ========= ======== ========= ======= =========
Balance Sheet Data:
($ in millions)
Current assets:
Due from parent
and other
divisions........... $653.8 $641.4 $710.8 $727.7 $706.1 $731.8 $696.4
Inventories.......... 326.5 392.8 282.6 347.3 307.1 299.4 342.5
Other................ 135.9 94.7 120.9 115.7 116.5 138.2 72.8
------- ------ --------- -------- --------- ------- ---------
Total current
assets.............. 1,116.2 1,128.9 1,114.3 1,190.7 1,129.7 1,169.4 1,111.7
Property and
equipment, net....... 165.6 157.6 195.1 163.9 133.0 110.7 122.0
Total assets........... 1,345.5 1,331.0 1,372.7 1,392.5 1,301.6 1,320.5 1,275.5
Current liabilities.... 226.1 141.0 203.5 168.3 135.1 159.1 171.6
Minority interests
in subsidiaries...... 94.1 110.7 93.8 108.7 93.9 100.2 105.3
Melville equity
investment.......... 965.3 1,019.4 1,013.8 1,033.1 978.2 936.8 976.4
</TABLE>
- -------------------
(1) Amounts in 1995 also reflect certain non-recurring special charges.
Operating profit in 1995 excluding the effect of these charges would
have been $139 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) The charge in 1995 was for the writeoff, effective January 1, 1995, of
internally developed software costs that had previously been
capitalized. The charge in 1992 was for the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1,
1992.
Summary Selected Historical Combined Financial Data (continued)
<TABLE>
<CAPTION>
First Quarter Ended Fiscal Years Ended
---------------------------------------- ---------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
Other Financial and Operating Data:
<S> <C> <C> <C> <C> <C>
Current ratio (excluding due from
parent and other divisions)........................ 2.0:1 3.5:1 2.0:1 2.7:1 3.1:1
Additions to property and equipment
($ in millions).................................... $10.5 $12.4 $92.9 $59.3 $45.9
Gross square footage: (in millions)
Meldisco........................................... 8.5 8.8 8.6 9.0 8.6
Footaction......................................... 1.4 1.4 1.4 1.4 1.0
Net sales: ($ in millions)
Meldisco........................................... $226.8 $242.6 $1,191.5 $1,280.5 $1,212.5
Footaction......................................... 110.1 83.2 423.7 332.3 262.3
Present value of operating leases:
($ in millions)
Meldisco........................................... $28.3 $27.4 $28.6 $28.4 $37.4
Footaction......................................... 180.5(1) 180.3 186.8 187.5 160.5
Store openings and closings: 1996
(number of stores) (Projected)
------------
Meldisco
Beginning...................... 2,568 2,778 2,771 2,623
Openings....................... 32 29 159 257
Closings....................... 15 239 152 109
Ending......................... 2,585 2,568 2,778 2,771
Footaction
Beginning...................... 439 439 391 298
Openings....................... 64(2) 21 69 102
Closings....................... 19 21 21 9
Ending......................... 484 439 439 391
</TABLE>
- --------------------
(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 25 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.
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 accompanying 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 quarter ended March 30, 1996 and the fiscal year
ended December 31, 1995, Meldisco's Kmart operations accounted for 96.2% and
95.7%, respectively, of Meldisco's net sales. Meldisco's Kmart operations
accounted for 64.8% 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 have a negative effect on Meldisco's
overall profitability because, on an annualized basis, Meldisco operates at a
profit in essentially every Kmart store. 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 will have in place, as of the Distribution, a
credit facility 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. 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 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 has applied for
listing of the Company Common Stock on the New York Stock Exchange. A
condition to Melville's obligation to consummate the Distribution is that the
Company Common Stock to be issued in the Distribution shall have been approved
for listing on the New York Stock Exchange. 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, 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, the issuance or
redemption 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 significant cost savings as well as various strategic,
profitability and growth objectives, 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 will be 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, a principal factor
considered by Melville was that the Distribution will enable Melville to
achieve significant overall aggregate cost savings by removing functions
currently performed by Melville which duplicate similar functions performed
by the Meldisco and Footaction businesses. These aggregate cost savings of
Melville in connection with the Distribution are expected to be approximately
$22 million on an annual basis.
In concluding that the Distribution is in the best interests of
Melville, the Company and Melville's shareholders, Melville also considered,
among other things, that (i) the Restructuring Program should significantly
increase overall aggregate profitability of the newly independent companies as
a result of the cost savings described above with respect to Melville and
execution of the McAn Plan with respect to the Company; (ii) 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; (iii)
the Distribution is intended, by separating the two companies, to permit the
financial markets to evaluate both Melville and the Company more effectively,
since the financial performance of each will be more easily understood; (iv)
after giving effect to the Restructuring Program, the Company's financial
strength should be enhanced as a result of savings from the elimination of
duplicate functions and execution of the McAn Plan, which will strengthen the
financial performance of the new companies (including the Company) ; (v) the
Distribution would permit Melville and the Company to offer management
incentives in a manner that is more directly linked to the performance of its
respective businesses, thereby better aligning these incentives with the
interests of shareholders; and (vi) 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 ,
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 on , 1996 (the "Record Date"). The Distribution will be
made on the basis of shares of Company Common Stock for every shares
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 ,
1996, approximately 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
Prior to the Distribution, Melville expects to receive a ruling
from the Internal Revenue Service to the effect that, for federal income tax
purposes:
(i) The Distribution will 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").
(ii) 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 redemption of 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.
(iii) 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.
(iv) 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.
(v) 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.
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.
Cross Indemnification
The Company and Melville have agreed to indemnify one another
against certain liabilities. The Company has agreed to indemnify Melville and
its affiliates (other than the Company) 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 Melville or its affiliates of Services
(as defined below) to the Company or its affiliates 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 and its affiliates
(other than Melville) and their respective directors, officers and affiliates
(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
Melville and its affiliates (other than the Company 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 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.
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 appropriate private letter ruling issued by the
Internal Revenue Service or an opinion of counsel satisfactory to Melville, in
either case 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 (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).
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) , 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.
The Distribution Agreement 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 would 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 to
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 and the net
amounts of such intercompany balances and retained earnings will be
contributed to the Company's capital or distributed by the Company as a
dividend, as appropriate. 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 the Notes under "Pro Forma
Capitalization."
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 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 to the Internal
Revenue Service by such party in connection with 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 has applied for listing of
the Company Common Stock on the New York Stock Exchange under the symbol
"FTS." It is a condition to the obligation of Melville to consummate the
Distribution that the Company Common Stock to be issued in the Distribution
shall have been approved for listing on the New York Stock Exchange, subject
to official notice of issuance. See "Relationship Between the Company and
Melville--Terms of the Distribution Agreement."
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, and may include the directors and principal
executive officers of the Company as well as any principal stockholder of
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 ______ shares of Company Common Stock, and
_______ shares of restricted Company Common Stock, will be outstanding
immediately following the Distribution, which options and restricted stock
will be granted pursuant to the Company's 1996 Incentive Compensation Plan and
the 1996 Non-Employee Director Stock Plan. Shares of Company Common Stock
issued upon exercise of such options and such shares of restricted stock will
be registered on Form S-8 under the Securities Act and will, therefore, be
freely transferable, except by affiliates as described above. Except for the
shares of Company Common Stock distributed in the Distribution and such stock
options and shares of restricted stock, 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 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 quarter ended March 30, 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 March 30, 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 March 30, 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(7)
------------- ------------ --------------
<S> <C> <C> <C>
Net sales.................................... $1,615.2 $ (7.4)(2) $1,607.8
Cost of sales................................ 1,124.5 (5.3)(2) 1,119.2
------------- ------------- -------------
Gross profit................................. 490.7 (2.1) 488.6
Store operating, selling, general
and administrative expenses................. 343.0 (2.5)(2)
8.6 (3) 349.1
Depreciation and amortization................ 20.0 (0.3)(2) 19.7
Restructuring and asset
impairment charges.......................... 23.7 (16.2)(4) 7.5
------------- ------------- -------------
Operating profit............................. 104.0 8.3 112.3
Interest income, net......................... 21.1 (20.9)(5) $ 0.2
------------- ------------- -------------
Income from continuing operations before
income taxes and minority interests......... 125.1 (12.6) 112.5
Provision for income taxes................... 37.3 (4.9)(6) 32.4
------------- ------------- -------------
Income from continuing operations before
minority interests.......................... 87.8 (7.7) 80.1
Minority interests in net income............. 38.4 38.4
------------- ------------- -------------
Income from continuing operations............ $49.4 $(7.7) $41.7
============= ============= =============
Earnings per share........................... $[ ]
Weighted average number of
common shares outstanding(8)................ [ ]
<FN>
- -----------------
(1) Historical amounts reflect all special charges. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(2) To reflect the impact of 18 store closings assuming the closings
occurred on January 1, 1995. The pro forma impact was determined using
the actual results of operations for these stores.
(3) 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)
Back office expense reductions...... (4.0)
-------
(9.4)
Stand-alone overhead costs.......... 18.0
-------
Net increase.................. $ 8.6
=======
The Melville expense allocations
consist of the following:
Cost of Employee Stock.............. $ 3.6
Ownership Plan
Corporate administrative costs...... 1.8
-------
$ 5.4
=======
The back office expense reductions relate to payroll and benefit cost
savings due to headcount reductions. 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.
(4) To adjust for the impact of restructuring charges related to the
Distribution. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
(5) 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.
(6) 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.
(7) Adjusting for the asset impairment charge (amounting to $4.7 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 $55.4 million, and earnings per share would have been $x.xx.
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 $56.0 million and
earnings per share would have been $x.xx.
(8) The weighted average number of common shares outstanding reflects the
Distribution ratio times the number of shares of Melville Common Stock
outstanding on the Record Date.
</FN>
</TABLE>
Footstar, Inc.
Unaudited Pro Forma Combined Statement of Income
Quarter Ended March 30, 1996
($ 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.................................... $336.9 $336.9
Cost of sales................................ 243.3 243.3
------------- ------------ --------------
Gross profit................................. 93.6 93.6
Store operating, selling, general $
and administrative expenses................. 83.7 2.2 (1) 85.9
5.7 5.7
------------- ------------ --------------
Depreciation and amortization................
Operating profit............................. 4.2 (2.2) 2.0
Interest income, net......................... 5.3 (5.3)(2) 0.0
------------- ------------ --------------
Income from continuing operations
before
income taxes and minority interests......... 9.5 (7.5) 2.0
Provision for income taxes................... 3.2 (2.9)(3) 0.3
------------- ------------ --------------
Income from continuing operations
before
minority interests.......................... 6.3 (4.6) 1.7
Minority interests in net income............. 0.2 0.2
------------- ------------ --------------
$6.1 $(4.6) $1.5
Income from continuing operations............ ============= ============ ==============
$[ ]
Earnings per share........................... ==============
Weighted average number of [ ]
common shares outstanding(4)................ ==============
<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 $ (1.3)
Back office expense reductions...... (1.0)
-------
(2.3)
Stand-alone overhead costs.......... 4.5
=======
Net increase..................... $ 2.2
The Melville expense allocations
consist of the following:
Cost of Employee Stock Ownership Plan $ 0.9
Corporate administrative costs...... 0.4
-------
$ 1.3
The back office expense reductions relate to payroll and benefit cost
savings due to headcount reductions. 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 the
Distribution ratio times the number of shares of Melville Common Stock
outstanding on the Record Date.
</FN>
</TABLE>
Footstar, Inc.
Unaudited Pro Forma Combined Balance Sheet
March 30, 1996
($ in millions)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
------------- ------------ ------------
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $24.9 $ 50.0 (1c)
(50.0)(1d) $24.9
Accounts receivable, net.......................... 52.6 52.6
Due from parent and other divisions............... 653.8 (896.8)(1a)
242.5 (1b)
0.5 (2) --
Inventories....................................... 326.5 326.5
Prepaid expenses and other current assets......... 58.4 (0.7)(2) 57.7
------------- ------------ --------------
Total current assets........................ 1,116.2 (654.5) 461.7
Property and equipment, net.......................... 165.6 165.6
Goodwill, net........................................ 29.4 29.4
Deferred charges and other noncurrent assets......... 34.3 (0.1)(2) 34.2
------------- ------------ --------------
$1,345.5 $(654.6) $690.9
Total assets................................ ============= ============ ==============
Liabilities and Equity
Current liabilities:
Accounts payable.................................. $66.7 $66.7
Accrued expenses.................................. 159.4 159.4
------------- ------------ --------------
Total current liabilities................... 226.1 226.1
Long-term debt....................................... 0.2 0.2
Other long-term liabilities.......................... 59.8 (0.3)(2) 59.5
------------- ------------ --------------
Total long-term liabilities................. 60.0 (0.3) 59.7
Minority interests in subsidiaries................... 94.1 (50.0)(1d) 44.1
Equity:
Melville equity investment........................ 965.3 (896.8)(1a)
(68.5)(1c) --
Shareholders' equity:
Common stock.................................... 0.1 (1c) 0.1
Contributed capital............................. 242.5 (1b)
50.0 (1c)
51.6 (1c) 344.1
Retained earnings............................... 16.5 (1c) 16.5
Cumulative translation adjustment............... 0.3 (1c) 0.3
------------- ------------ --------------
Total equity................................ 965.3 (604.3) 361.0
------------- ------------ --------------
$1,345.5 $(654.6) $690.9
============= ============ ==============
Total liabilities and equity................
<FN>
- -----------------
(1) To reflect the recapitalization of the Company prior to the
Distribution (as if the Distribution occurred on March 30, 1996),
including: (a) a transfer of retained earnings to Melville, (b) the
elimination of the resulting intercompany indebtedness, (c) a capital
contribution by Melville of cash and Melville's equity investment in the
Company, and (d) a $50 million distribution to Kmart in respect of
Kmart's minority interest in all of the undistributed retained earnings
of the Meldisco Subsidiaries (as defined below) with respect to prior
periods. The Company intends to eliminate intercompany balances between
the Company and its subsidiaries and Melville and its subsidiaries
outstanding as of the Distribution. The table above assumes, for
illustrative purposes, elimination of the intercompany balance through a
Melville capital contribution. The actual amount of the capital
contribution by Melville or the dividend by the Company, as the case may
be, 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 well as
retained earnings, in each case 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.
</FN>
</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 March 30, 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 March 30, 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.
<TABLE>
<CAPTION>
March 30, 1996
($ in millions)
-----------------------------------------------
Pro Forma
for
Historical Distribution(1)
---------- ---------------
<S> <C> <C>
$653.8 $ --
Due from parent and other divisions ========== ===============
Total indebtedness:
Current portion of long-term debt $ 0.1 $ 0.1
Long-term debt $ 0.2 $ 0.2
---------- ---------------
Total indebtedness $ 0.3 $ 0.3
---------- ---------------
Minority interests in subsidiaries 94.1 44.1
Equity:
Melville equity investment 965.3 --
Shareholders' equity:
Common stock, par value $__ per share; _ shares
authorized; _ shares issued and outstanding(2) 0.1
Contributed capital 344.1
Retained earnings 16.5
Cumulative translation adjustment $ 0.3
---------- ---------------
Total equity 965.3 361.0
---------- ---------------
$1,059.7 $ 405.4
Total capitalization ========== ===============
Debt to capitalization(3) .03% .07%
<FN>
- -----------------
(1) To reflect the recapitalization of the Company prior to the
Distribution (as if the Distribution occurred on March 30, 1996),
including:(a) a transfer of retained earnings to Melville of $896.8
million, (b) the elimination of the resulting intercompany indebtedness
of $242.5 million, (c) a capital contribution by Melville of $50
million in cash, and $68.5 million representing Melville's equity
investment in the Company, and (d) a $50 million distribution to Kmart
in respect of Kmart's minority interest in all of the undistributed
retained earnings of the Meldisco Subsidiaries with respect to prior
periods. The Company intends to eliminate intercompany balances
between the Company and its subsidiaries and Melville and its
subsidiaries outstanding as of the Distribution. The table above
assumes, for illustrative purposes, elimination of the intercompany
balance through a Melville capital contribution. The actual amount of
the capital contribution by Melville or the dividend by the Company, as
the case may be, 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 well as retained earnings, in each case 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) Assumptions regarding the number of shares of Company Common Stock may
not reflect the actual number thereof as of the Distribution Date.
(3) Debt-to-capitalization has been computed by dividing total
indebtedness by total capitalization. The foregoing calculation
assumes no external short-term borrowings in connection with the
elimination of intercompany balances. See Note 1 above. The debt-to-
capitalization ratio, including the present value of future minimum
rental payments under operating leases, amounting to approximately $232
million, as indebtedness and as capitalization, is 19% as of March 30,
1996 and 36% as adjusted for the Distribution.
</FN>
</TABLE>
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 and as of
December 31, 1995 and 1994 and as of and for the first quarter ended March 30,
1996 and April 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>
First Quarter Ended Fiscal Years Ended
-------------------- -------------------------------------------------------
1996 1995 1995(1) 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
($ in millions)
Net sales.................................. $336.9 $325.8 $1,615.2 $1,612.8 $1,474.8 $1,413.8 $1,279.2
Cost of sales.............................. 243.3 235.6 1,124.5 1,117.8 1,011.7 971.5 894.9
-------- -------- -------- -------- -------- -------- --------
Gross profit............................... 93.6 90.2 490.7 495.0 463.1 442.3 384.3
Store operating, selling, general and
administrative expenses.................. 83.7 79.8 343.0 319.6 287.0 266.7 233.6
Depreciation and amortization.............. 5.7 5.5 20.0 18.7 13.7 10.5 6.4
Restructuring and asset impairment
charges.................................. -- -- 23.7 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating profit........................... 4.2 4.9 104.0 156.7 162.4 165.1 144.3
Interest income, net....................... 5.3 5.5 21.1 15.4 11.7 12.5 20.3
Provision for income taxes................. 3.2 2.8 37.3 49.5 53.7 54.8 47.9
Minority interests in net income........... 0.2 2.0 38.4 51.9 47.3 53.8 50.4
(Loss) earnings from discontinued
operations, net.......................... (1.0) (4.0) (26.8) 6.0 5.0 (45.2) 17.3
Loss on disposal of discontinued
operations, net.......................... (53.6) -- -- -- -- -- --
Cumulative effect of changes in accounting
principle, net(2)........................ -- 3.9 3.9 -- -- 22.1 --
-------- -------- -------- -------- -------- -------- --------
$(48.5) $(2.3) $18.7 $76.7 $78.1 $1.7 $83.6
Net (loss) income..........................======== ======== ======== ======== ======== ======== ========
Balance Sheet Data: ($ in millions)
Current assets:
Due from parent and other divisions...... $653.8 $641.4 $710.8 $727.7 $706.1 $731.8 $696.4
Inventories.............................. 326.5 392.8 282.6 347.3 307.1 299.4 342.5
Other.................................... 135.9 94.7 120.9 115.7 116.5 138.2 72.8
-------- -------- -------- -------- -------- -------- --------
Total current assets....................... 1,116.2 1,128.9 1,114.3 1,190.7 1,129.7 1,169.4 1,111.7
Property and equipment, net................ 165.6 157.6 195.1 163.9 133.0 110.7 122.0
Total assets............................... 1,345.5 1,331.0 1,372.7 1,392.5 1,301.6 1,320.5 1,275.5
Current liabilities........................ 226.1 141.0 203.5 168.3 135.1 159.1 171.6
Minority interests in subsidiaries......... 94.1 110.7 93.8 108.7 93.9 100.2 105.3
Melville equity investment................. 965.3 1,019.4 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 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.
</FN>
</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. 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 million in the first quarter of 1996. See "The
Business--Discontinuation of Thom McAn Segment." 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.
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 $104.0 million reflected in the historical combined
statement of operations for such year.
In 1995, the Company also changed its policy to expense
internally developed software costs that were previously capitalized. Such
amount was recorded on the historical combined statement of operations as the
cumulative effect of a change in accounting principle.
Results of Operations
Net Sales
<TABLE>
<CAPTION>
First Quarter Ended Fiscal Years Ended
($ in millions) ---------------------------- ----------------------------------------
1996 1995 1995 1994 1993
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Company:
Net sales......................... $336.9 $325.8 $1,615.2 $1,612.8 $1,474.8
Net sales % change from prior year 3.4% (1.1%) 0.1% 9.4% 4.3%
Same store sales % change......... 4.7% (4.5%) (2.1%) 2.4% (1.8%)
Meldisco:
Net sales......................... $226.8 $242.6 $1,191.5 $1,280.5 $1,212.5
Net sales % change from prior year (6.5%) (8.3%) (7.0%) 5.6% 1.4%
Same store sales % change......... (4.2%) (7.7%) (5.8%) 2.4% (2.5%)
% of combined net sales........... 67.3% 74.5% 73.8% 79.4% 82.2%
Footaction:
Net sales......................... $110.1 $83.2 $423.7 $332.3 $262.3
Net sales % change from prior year 32.3% 28.2% 27.5% 26.7% 20.5%
Same store sales % change......... 31.2% 8.9% 13.1% 2.4% 2.7%
% of combined net sales........... 32.7% 25.5% 26.2% 20.6% 17.8%
</TABLE>
First Quarter
Net sales for the first quarter ended March 30, 1996, which
benefitted from the earlier timing of the Easter and Palm Sunday selling
periods and had one less selling day than the first quarter of 1995, increased
3.4% over the prior year's comparable period. Driven by the continued success
of its new merchandising strategy, better in-stock positions and increased
consumer demand for athletic footwear and branded apparel, Footaction's net
sales increased 32.3% over the prior year's first quarter. This increase was
offset by decreased sales at the Meldisco division due to unseasonably cool
temperatures throughout the country and increased competition among discount
and department stores.
Fiscal Year
Combined net sales in 1995 increased marginally 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>
First Quarter Ended Fiscal Years Ended
(As a % of net sales) ---------------------------- ---------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cost of sales......................... 72.2% 72.3% 69.6% 69.3% 68.6%
Store operating, selling, general
and administrative expenses*.......... 24.8% 24.5% 21.2% 19.8% 19.5%
Depreciation and amortization......... 1.7% 1.7% 1.2% 1.2% 0.9%
</TABLE>
- ----------=
* Includes allocations from parent
Cost of Sales
First Quarter
Positive sales results at Footaction enabled this segment to
successfully leverage its fixed operating costs while significant reductions
were noted in store shrinkage and promotional markdowns. As a result of these
favorable cost improvements, cost of sales as a percentage of sales for the
first quarter of 1996 decreased slightly from the prior year despite higher
promotional markdowns taken at Meldisco to clear out slow selling merchandise.
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. 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
First Quarter
Store operating, selling, general and administrative expenses
as a percentage of net sales for the first quarter of 1996 increased from the
1995 first quarter due to declining sales 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 expenses
as a percentage of net sales increased in 1994 as compared to 1993 due to the
recognition of $5 million of one-time costs at Meldisco related to Kmart store
closings and other contingencies.
Operating Profit
<TABLE>
<CAPTION>
($ in millions)
First Quarter Ended Fiscal Years Ended
--------------------------- ---------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating (loss) profit before restructuring
and asset impairment charges*:
Meldisco.................................... $(0.8) $6.2 $109.4 $147.1 $148.8
Footaction.................................. 5.0 (1.3) 18.3 9.6 13.6
--------- --------- --------- --------- ---------
4.2 4.9 127.7 156.7 162.4
Restructuring and asset impairment charges........... -- -- 23.7 -- --
--------- --------- --------- --------- ---------
Operating profit..................................... $4.2 $4.9 $104.0 $156.7 $162.4
========= ========= ========= ========= =========
Operating profit as a % of net sales................. 1.2% 1.5% 6.4% 9.7% 11.0%
</TABLE>
- --------------------
* 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).
First Quarter
Operating profit for the first quarter of 1996 was 14.3% below
the 1995 first quarter due to weak same store sales at Meldisco as well as the
impact of the 218 Kmart store closings which were excluded from the 1996
quarter's profits while only 141 were closed in the first quarter of 1995. A
same store sales increase of 31.2% at Footaction as well as the timing of the
Easter and Palm Sunday selling periods which were in the first quarter of
1996, but in the second quarter of 1995, offset the disappointing results at
Meldisco.
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 $5 million of one-time costs recognized by Meldisco related to
store closings and other contingencies.
Liquidity and Capital Resources
<TABLE>
($ in millions)
First Quarter Ended Fiscal Years Ended
--------------------------- ---------------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash flows (used in) provided by
operating activities*................ ($33.4) ($66.2) $165.3 $136.2 $126.0
Capital expenditures.................... 10.5 12.4 92.9 59.3 45.9
</TABLE>
- ------------------
* 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 $5.9 million and $8.6 million for the first quarters 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.
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 will make 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. The actual amount of the
capital contribution by Melville or the dividend by the Company, as the case
may be, 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 well as retained
earnings, in each case as of the Distribution Date. 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. For a description of the Company's
working capital credit facility to be in effect as of the Distribution, see
"Description of Credit Facility." 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 such 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 million. Such
expected cash outlays relate principally to lease settlement and severance
costs.
Current assets decreased during the first quarter of 1996 as
compared to 1995 due to the success of a planned reduction in inventory levels
which was offset slightly by a higher intercompany account balance with
Melville. Current assets decreased in 1995 as compared to 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, 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 quarter of
1996 as compared to the first quarter of 1995 and for the year ended 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. During the first
quarter of 1996 $1.6 million was paid.
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 expected to be completed in 1996). The balance of such 1995 capital
expenditures related to strategic management information systems at Meldisco
and Footaction and to the opening, remodeling, relocation or expansion of
Footaction stores. The Company plans to spend approximately $55 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 to the
completion of the second state-of-the art distribution facility for Meldisco.
During the first quarter of 1996 the Company spent approximately $10.5 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 in "Description of Credit Facility" below 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 $50 million,
representing Kmart's minority interest in all of the undistributed retained
earnings of the Meldisco Subsidiaries with respect to pre-1995 periods. Such
distribution has been funded by a capital contribution 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 or the dividend by the
Company 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.
As of the Distribution, the Company will have in place an
unsecured credit facility (the "Credit Facility") 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. 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 (as defined in the Credit
Facility), 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 rate 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 rate 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, investments,
subsidiary debt, 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 require the Company to maintain the
following financial ratios (which, in each case, become more stringent over
time): a ratio of total debt to total capitalization; a ratio of total debt to
EBITDAR; and a ratio of EBITDAR to total fixed changes, 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 March 30, 1996, the Company operated
2,570 leased discount footwear departments in 50 states, Puerto Rico, the U.S.
Virgin Islands, Guam, the Czech Republic, Slovakia, Mexico and Singapore
through Meldisco and 431 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 one
of the three largest retailers 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. 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 quarter of 1996 were $110
million compared to $83 million for the first quarter of 1995, an increase of
32.3%. Same store sales growth for the first quarter of 1996 and 1995 was
31.2% and 8.9%, 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, expanding 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. The Company has also developed
and recently implemented initiatives designed to allow store associates to
focus increased attention on customer service. In connection with the
Distribution, the Company will be consolidating certain administrative and
other functions. For information on the pro forma effect of the Distribution
on the Company's store operating, sales, general and administrative expenses,
see Note 3 and Note 1 of the Unaudited Pro Forma Combined Statements of Income
for the Year Ended December 31, 1995 and the quarter ended March 30, 1996,
respectively.
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 March
30, 1996.
STATE TOTAL MELDISCO FOOTACTION
- ----- ----- -------- -----------
ALABAMA 54 46 8
ALASKA 14 14 --
ARIZONA 43 39 4
ARKANSAS 14 14 --
CALIFORNIA 383 343 40
COLORADO 64 52 12
CONNECTICUT 26 18 8
DELAWARE 7 6 1
DISTRICT OF COLUMBIA -- -- --
FLORIDA 201 166 35
GEORGIA 85 75 10
HAWAII 4 4 --
IDAHO 24 24 --
ILLINOIS 107 94 13
INDIANA 67 64 3
IOWA 29 28 1
KANSAS 22 18 4
KENTUCKY 47 43 4
LOUISIANA 46 32 14
MAINE 10 8 2
MARYLAND 48 36 12
MASSACHUSETTS 43 27 16
MICHIGAN 138 127 11
MINNESOTA 49 45 4
MISSISSIPPI 25 21 4
MISSOURI 40 35 5
MONTANA 14 13 1
NEBRASKA 13 11 2
NEVADA 28 26 2
NEW HAMPSHIRE 14 12 2
NEW JERSEY 65 47 18
NEW MEXICO 24 19 5
NEW YORK 93 78 15
NORTH CAROLINA 92 78 14
NORTH DAKOTA 8 8 --
OHIO 136 122 14
OKLAHOMA 19 13 6
OREGON 86 83 3
PENNSYLVANIA 131 118 13
RHODE ISLAND 7 6 1
SOUTH CAROLINA 44 37 7
SOUTH DAKOTA 12 12 --
TENNESSEE 64 53 11
TEXAS 169 99 70
UTAH 39 37 2
VERMONT 3 3 --
VIRGINIA 63 54 9
WASHINGTON 148 138 10
WEST VIRGINIA 23 19 4
WISCONSIN 58 55 3
WYOMING 10 9 1
TOTAL U.S. STORES 2,953 2,529 424
PUERTO RICO 26 19 7
VIRGIN ISLANDS 2 2 --
CZECH 6 6 --
SLOVAKIA 6 6 --
MEXICO 4 4 --
SINGAPORE 3 3 --
ENGLAND -- -- --
GUAM 1 1 --
TOTAL STORES 3,001 2,570 431
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
March 30, 1996, Meldisco operated leased footwear departments in 2,180 Kmart
department stores and in 390 PayLess Drug Stores and Thrifty Drug Stores
(collectively, "PayLess Thrifty Drug Stores"). 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 95.7% of Meldisco's net sales. For the first
quarter of 1996, Meldisco's net sales of approximately $227 million accounted
for approximately 67% of the Company's net sales. Sales generated by
Meldisco's Kmart operations accounted for approximately 96.2% 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 scheduled for introduction 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 March 30, 1996, Footaction operated 431 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 32.3% in the first quarter of 1996 to $110 million
from $83 million in the first quarter of 1995. For the first quarter of
1996, Footaction accounted for approximately 33% of the Company's net sales
and contributed an operating profit of approximately $5 million.
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 March 30, 1996, 28 of the
Company's 431 Footaction stores were of the large store format, 358 stores
were of the traditional store format and 45 stores were of the superstore
format. During 1996, the Company expects to open 39 new Footaction stores,
convert 25 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 41%) 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
March 30, April 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. A 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 March 30, 1996, Meldisco operated leased footwear
departments in 2,570 stores. Collectively, these leased departments are
located in all 50 states, Guam, Puerto Rico, the U.S. Virgin Islands, the
Czech Republic, Slovakia, Mexico, and Singapore. All but 390 of the leased
departments operated at March 30, 1996 were located in Kmart discount
department stores. These 390 leased departments were located in PayLess
Thrifty Drug Stores. Footaction has a nationwide presence, operating 431
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
March 30, 1996, 28 of the Company's 431 Footaction stores are of the large
store format, 358 are of the traditional store format and 45 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 28,000
square feet of leased office space in Dallas, Texas. Footaction will have
relocated its corporate offices to an approximately 50,000 square foot
facility in Irving, Texas prior to the Distribution. 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 March 30, 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 March 30, 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 March 30, 1996, Thom McAn
operated 285 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, the Company has determined to exit the Thom McAn business by converting
80 to 100 Thom McAn stores to Footaction stores (which are the most suitable
locations for conversion in light of Footaction's real estate, store profile
and market requirements), 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. 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 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
Maureen Richards 39 General Counsel and Corporate Secretary
Charles Messina 53 Chief Human Resources Officer
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 is currently a Vice President (and from
February, 1996 to July 10, 1996 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.
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.
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.
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; (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 felony conviction that results in material damage to the
Company or materially impairs the value of the executive's services to the
Company, or willful acts or gross negligence that are demonstrably and
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
Effective on 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 million, plus % 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 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 $ 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 $
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 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 30 trading days
after the Distribution. 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 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 June 30, 1996 (or
March 1, 1996 in the case of 5% stockholders) 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 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 95,127 *
Carlos E. Alberini 1,986 *
Charles Messina 14,200 *
Maureen Richards 8,650 *
Stanley P. Goldstein 638,618(3) *
One Theall Road
Rye, NY 10580
George S. Day 0 0%
Terry R. Lautenbach 7,800 *
Bettye Martin Musham 0 0%
Kenneth S. Olshan 0 0%
M. Cabell Woodward, Jr. 12,000 *
All Directors and Officers
as a Group (10 persons) 778,231 *
Other 5% Stockholders
Invesco PLC(4) 11,579,606 11.0%
1315 Peachtree St., N.E.
Suite 500
Atlanta, GA 30309
Putnam Investments, Inc.(5) 6,802,100 6.5%
One Post Office Square
Boston, MA 02109
</TABLE>
- ----------------
(*) Less than 1%.
(1) Except as otherwise indicated 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 June 30, 1996 and were
exercisable within 60 days thereafter: Mr. Robinson, 66,847
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. Since Messrs. Robinson and
Messina and Ms. Richards will no longer be employees of
Melville following the Distribution, they will have 90 days to
exercise these outstanding options.
(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) Invesco PLC ("Invesco") filed a statement with the Commission
dated February 2, 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
(11,579,606 shares) . According to the statement, Invesco
and/or subsidiaries have shared voting power, and shared
dispositive power over all shares, and Invesco 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) A Schedule 13G dated January 29, 1996 was filed with the
Commission on behalf of Putnam Investments, Inc. and its
parent corporation, Marsh & McLennan Companies, Inc.
(collectively "Putnam") , disclosing beneficial ownership of
more than 5% of the Melville Common Stock (6,802,100 shares) .
According to the statement, Putnam has shared voting power
over 40,950 shares and shared dispositive power over 6,802,100
shares of Melville Common Stock. These shares were acquired
for investment purposes and not to change or influence the
control of Melville.
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 shares of Company Common Stock, par value $.01 per share, and
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 and the
distribution ratio of shares of Company Common Stock for every shares
of Melville Common Stock, it is anticipated that there will be approximately
shares of Company Common Stock outstanding upon consummation of the
Distribution.
The shares of the Company Common Stock distributed in the
Distribution will be 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 March 30, 1996, April 1, 1995,
December 31, 1995 and December 31, 1994............................... F-2
Combined Statements of Operations for the First Quarter 1996 and 1995
and the Fiscal Years 1995, 1994 and 1993.............................. F-3
Combined Statements of Divisional Equity for the First Quarter 1996
and 1995.............................................................. F-4
Combined Statements of Divisional Equity for the Fiscal Years 1995,
1994 and 1993......................................................... F-5
Combined Statements of Cash Flows for the First Quarter 1996 and 1995
and the Fiscal Years 1995, 1994 and 1993.............................. F-6
Notes to Combined Financial Statements.................................. F-7
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.
/s/ 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
March 30, 1996, April 1, 1995,
December 31, 1995 and December 31, 1994
($ in millions)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
----------------------------- ------------------------
March 30, April 1, December 31,
1996 1995 1995 1994
------------- ------------ ---------- ----------
Assets
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $24.9 $15.3 $26.3 $13.9
Accounts receivable, net............................ 52.6 51.5 56.1 49.3
Due from parent and other divisions................. 653.8 641.4 710.8 727.7
Inventories......................................... 326.5 392.8 282.6 347.3
Prepaid expenses and other current assets........... 58.4 27.9 38.5 52.5
------------- ------------ ---------- ----------
Total current assets.................... 1,116.2 1,128.9 1,114.3 1,190.7
Property and equipment, net........................... 165.6 157.6 195.1 163.9
Goodwill, net of accumulated amortization of $3.6
at March 30, 1996, $3.0 at April 1, 1995, $3.4
at December 31, 1995 and $2.8 at
December 31, 1994................................... 29.4 32.5 29.6 32.7
Deferred charges and other noncurrent assets.......... 34.3 12.0 33.7 5.2
------------- ------------ ---------- ----------
Total assets............................ $1,345.5 $1,331.0 $1,372.7 $1,392.5
============= ============ ========== ==========
Liabilities and Divisional Equity
Current liabilities:
Accounts payable.................................... $66.7 $64.9 $59.6 $39.4
Accrued expenses.................................... 159.4 76.1 143.9 121.9
Federal income taxes payable........................ -- -- -- 7.0
------------- ------------ ---------- ----------
Total current liabilities............... 226.1 141.0 203.5 168.3
------------- ------------ ---------- ----------
Long-term debt........................................ 0.2 0.2 0.2 0.2
Other long-term liabilities........................... 59.8 59.7 61.4 82.2
Minority interests in subsidiaries.................... 94.1 110.7 93.8 108.7
------------- ------------ ---------- ----------
Total long-term liabilities............. 154.1 170.6 155.4 191.1
------------- ------------ ---------- ----------
Divisional equity..................................... 965.3 1,019.4 1,013.8 1,033.1
------------- ------------ ---------- ----------
Total liabilities and divisional equity.......... $1,345.5 $1,331.0 $1,372.7 $1,392.5
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Operations
First Quarters Ended March 30, 1996 and April 1, 1995 and
Years Ended December 31, 1995, 1994 and 1993
($ in millions)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
---------------------------- ---------------------------------
First Quarter Ended Years Ended
1996 1995 1995 1994 1993
------------ ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales........................................... $336.9 $325.8 $1,615.2 $1,612.8 $1,474.8
Cost of sales....................................... 243.3 235.6 1,124.5 1,117.8 1,011.7
------------ ----------- --------- -------- --------
Gross profit................................... 93.6 90.2 490.7 495.0 463.1
Store operating, selling, general and
administrative expenses.......................... 83.7 79.8 343.0 319.6 287.0
Depreciation and amortization....................... 5.7 5.5 20.0 18.7 13.7
Restructuring and asset impairment charges.......... -- -- 23.7 -- --
------------ ----------- --------- -------- --------
Operating profit............................... 4.2 4.9 104.0 156.7 162.4
Interest income, net................................ 5.3 5.5 21.1 15.4 11.7
------------ ----------- --------- -------- --------
Income from continuing operations before
income taxes, minority interests and
cumulative effect of change in
accounting principle........................ 9.5 10.4 125.1 172.1 174.1
Provision for income taxes.......................... 3.2 2.8 37.3 49.5 53.7
------------ ----------- --------- -------- --------
Income from continuing operations before
minority interests and cumulative effect
of change in accounting principle........... 6.3 7.6 87.8 122.6 120.4
Minority interests in net income.................... 0.2 2.0 38.4 51.9 47.3
------------ ----------- --------- -------- --------
Income from continuing operations before
cumulative effect of change in
accounting principle........................ 6.1 5.6 49.4 70.7 73.1
(Loss) earnings from discontinued operations, net
of income taxes of ($0.2), ($2.4),
($14.1), $3.6 and $2.9 .......................... (1.0) (4.0) (26.8) 6.0 5.0
Loss on disposal of discontinued operations,
net of income taxes of ($31.4)................... (53.6) -- -- -- --
------------ ----------- --------- -------- --------
(Loss) income before cumulative effect of
change in accounting principle.............. (48.5) 1.6 22.6 76.7 78.1
Cumulative effect of change in accounting principle,
net............................................ -- 3.9 3.9 -- --
------------ ----------- --------- -------- --------
Net (loss) income.............................. $(48.5) $(2.3) $18.7 $76.7 $78.1
============ =========== ========= ======== ========
Pro forma net income assuming retroactive
application of accounting change............ $73.6 $77.5
======== ========
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Divisional Equity
First Quarters Ended March 30, 1996 and April 1, 1995
(Unaudited)
($ 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 loss........................... -- (2.3) -- -- (2.3)
Dividends paid to parent........... -- (9.1) -- -- (9.1)
Translation adjustment............. -- -- -- (2.3) (2.3)
---------- ------------ ---------------- ---------------- ----------
Balance as of April 1, 1995........ $0.1 $969.9 $53.0 $ (3.6) $1,019.4
========== ============ ================ ================ ==========
Balance as of December 31, 1995.... $0.1 $961.8 $51.6 $0.3 $1,013.8
Net loss........................... -- (48.5) -- -- (48.5)
---------- ------------ ---------------- ---------------- ----------
Balance as of March 30, 1996....... $0.1 $913.3 $51.6 $0.3 $965.3
========== ============ ================ ================ ==========
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Divisional Equity
Years Ended December 31, 1995, 1994 and 1993
(Audited)
($ 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
---------- ------------ --------------- --------------- ----------
Balance as of December 31, 1995....... $0.1 $961.8 $51.6 $0.3 $1,013.8
========== ============ =============== =============== ==========
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Cash Flows
First Quarters Ended March 30, 1996 and April 1, 1995 and
Years Ended December 31, 1995, 1994 and 1993
($ in millions)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
---------------------------- -------------------------------
First Quarter Ended Years Ended
1996 1995 1995 1994 1993
------------ ----------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income..................................... $ (48.5) $(2.3) $18.7 $76.7 $78.1
Adjustments to reconcile net (loss) income to net cash
(used in) 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................. 0.2 2.0 38.4 51.9 47.3
Depreciation and amortization.................... 7.3 7.3 26.7 25.9 20.9
Loss on disposal of fixed assets................. 0.6 1.2 7.6 7.9 11.0
Deferred income taxes and other non-cash items... (22.5) (0.5) (17.5) 12.2 11.9
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 9.5 (0.2) (3.5) (9.5) 13.0
(Increase) decrease in inventories............. (43.9) (45.5) 64.7 (40.2) (6.7)
Decrease (increase) in prepaid expenses,
deferred charges and other assets........... 1.8 (2.5) (19.2) 1.1 4.2
Decrease in accounts payable
and accrued expenses........................ (15.3) (24.0) (2.6) (12.0) (41.4)
(Decrease) increase in federal income
taxes payable and other liabilities......... (7.6) (11.2) (9.3) 22.2 (12.3)
------------ ----------- ------- --------- -------
Net cash (used in) provided by
operating activities................... (33.4) (66.2) 165.3 136.2 126.0
------------ ----------- ------- --------- -------
Cash flows from investing activities:
Additions to property and equipment................... (10.5) (12.4) (92.9) (59.3) (45.9)
Acquisitions, net of cash acquired.................... -- -- (1.5) (0.4) (3.4)
Proceeds from the sale or disposal of
property and equipment............................. 3.4 -- -- -- --
------------ ----------- ------- --------- -------
Net cash used in investing
activities............................. (7.1) (12.4) (94.4) (59.7) (49.3)
------------ ----------- ------- --------- -------
Cash flows from financing activities:
Dividends paid to parent.............................. -- (9.1) (38.2) (31.3) (36.7)
Dividends paid to minority interests.................. -- -- (53.3) (38.1) (54.6)
(Decrease) increase in book overdrafts................ (17.8) 5.1 16.4 6.4 (8.7)
Decrease (increase) in due from parent and
other divisions.................................... 56.9 86.3 16.6 (21.7) 25.6
Recapitalization of subsidiaries by parent............ -- -- (1.4) 10.9 (0.1)
Other................................................. -- (2.3) 1.4 (1.5) 0.5
------------ ----------- ------- --------- -------
Net cash provided by (used in)
financing activities................... 39.1 80.0 (58.5) (75.3) (74.0)
------------ ----------- ------- --------- -------
Net (decrease) increase in cash
and cash equivalents................... (1.4) 1.4 12.4 1.2 2.7
Cash and cash equivalents beginning of period........... 26.3 13.9 13.9 12.7 10.0
------------ ----------- ------- --------- -------
Cash and cash equivalents end of period................. $24.9 $15.3 $26.3 $13.9 $12.7
============ =========== ======= ========= =======
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Notes to Combined Financial Statements
(1) Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements of Footstar, Inc. (the "Company") include
all of the subsidiaries of the Meldisco, Footaction and Thom McAn divisions
controlled directly or indirectly by Melville Corporation ("Melville" or the
"Parent"). All interdivisional balances and transactions between the entities
have been eliminated.
The minority interests represent the 49% participation of Kmart Corporation
("Kmart") in the ownership of substantially all retail subsidiaries of
Meldisco formed or to be formed from July 1967 until July 1, 2012 for the
purpose of operating leased shoe departments in Kmart stores.
The Parent allocates various costs to its subsidiaries, including the Company.
A summary of the amounts allocated to the Company for the fiscal years ended
is as follows:
(Audited)
-------------------------------
Fiscal Years Ended
December 31,
1995 1994 1993
------ ------- --------
($ in millions)
Costs of Employee Stock Ownership Plan. $5.4 $3.8 $4.1
Administrative costs................... 3.1 3.7 3.3
------ ------- --------
Total............................ $8.5 $7.5 $7.4
====== ======= ========
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 $8.6 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 first
quarter ended March 30, 1996.
(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.
(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.
(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 $19.9 million, while the balance will require cash outlays, primarily
in 1996. In connection with the various components of the plan, approximately
40 store employees will be eliminated.
The significant components of the restructuring and asset impairment charges,
and the reserves remaining as of December 31, 1995 and March 30, 1996,
relating to continuing operations, were as follows:
<TABLE>
<CAPTION>
Recorded Remaining
------------- -----------------------------------
December 31, March 30,
1995 1996
---------------- ----------------
(Audited) (Audited) (Unaudited)
($ in millions)
<S> <C> <C> <C>
Lease obligations and fixed asset write-offs for store
closings.............................................. $ 3.8 $ 3.6 $ 2.1
Asset write-offs related to outsourcing..................... 12.2 -- --
Severance and other employee benefit vesting................ 0.2 0.2 0.1
------------- ---------------- ----------------
16.2 3.8 2.2
Asset impairment charge in connection
with the adoption of SFAS No. 121..................... 7.5 -- --
------------- ---------------- ----------------
$ 23.7 $ 3.8 $ 2.2
============= ================ ================
</TABLE>
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 $85.0 million
in the first quarter of 1996. Accordingly, the results of operations for
the Thom McAn segment have been classified as discontinued operations for
all periods presented in the combined statements of operations.
(3) Continued
Discontinued operations accounted for 27.9% of total assets and 3.3% of
total liabilities as of December 31, 1995. The assets consist principally
of a due from parent, inventory and property and equipment. The following
table summarizes the operating results of the discontinued operations for
the first quarters and fiscal years presented:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
First Quarter Ended Fiscal Years Ended
---------------------------------- -----------------------------------------
March 30, April 1, December 31,
1996 1995 1995 1994 1993
-------------- ------------------- ------------- ------------- ----------
($ in millions)
<S> <C> <C> <C> <C> <C>
Net sales............ $38.9 $41.5 $212.0 $227.1 $238.3
Operating loss....... (5.1) (10.4) (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 $3.2 million
related to the adoption of SFAS No. 121.
The significant components of the restructuring and asset impairment charges,
and the reserves remaining as of December 31, 1995 and March 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Recorded Remaining
-------------- --------------------------------
December 31, March 30,
1995 1996
-------------- ---------------
(Audited) (Audited) (Unaudited)
($ 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 $14.8
Asset write-offs related to outsourcing............................. 0.3 -- --
Severance and other employee benefit vesting........................ 6.9 6.9 5.7
--------------- -------------- ---------------
24.8 24.5 20.5
Asset impairment charge in connection with the adoption of SFAS
No. 121............................................................ 3.2 -- --
--------------- -------------- ---------------
$28.0 $24.5 $20.5
=============== ============== ===============
</TABLE>
(4) Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
------------ ------------- --------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Due from licensors........................... $28.2 $28.5 $31.8 $27.7
Other........................................ 25.1 23.7 25.3 22.2
------------ ------------ --------- --------
53.3 52.2 57.1 49.9
Less allowance for doubtful accounts......... 0.7 0.7 1.0 0.6
------------ ------------ --------- --------
Total................................. $52.6 $51.5 $56.1 $49.3
============ ============ ========= ========
</TABLE>
(5) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
---------- ---------- ---------- ---------
($ in millions)
Deferred income taxes. $51.6 $21.5 $30.7 $44.9
Other................. 6.8 6.4 7.8 7.6
---------- ---------- ---------- ---------
Total.... $58.4 $27.9 $38.5 $52.5
========== ========== ========== =========
(6) Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
------------- ------------ ----------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Land................................................ $7.4 $6.1 $7.7 $1.1
Buildings and improvements.......................... 49.6 20.8 55.6 20.8
Equipment and furniture............................. 168.9 162.5 174.3 171.0
Leasehold improvements.............................. 72.1 76.8 78.3 75.7
Leased property under capital leases................ 4.4 4.4 4.4 4.4
------------- ------------ ----------- ---------
302.4 270.6 320.3 273.0
Less accumulated depreciation and amortization...... 136.8 113.0 125.2 109.1
------------- ------------ ----------- ---------
Property and equipment, net............ $165.6 $157.6 $195.1 $163.9
============= ============ =========== =========
</TABLE>
(7) Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
------------- ------------ ----------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Taxes other than federal income taxes......... $5.4 $12.7 $9.3 $13.0
Rent.......................................... 14.2 9.3 29.2 45.2
Salaries and compensated absences............. 15.8 5.2 10.4 11.7
Reserve for loss on disposal of
discontinued operations.............. 58.0 -- -- --
Restructuring reserves........................ 10.7 11.7 24.9 8.8
Professional fees............................. 1.2 3.9 14.1 5.0
Capital expenditures.......................... 10.3 1.4 15.3 1.9
Other......................................... 43.8 31.9 40.7 36.3
------------- ------------ ----------- ---------
Total............................... $159.4 $76.1 $143.9 $121.9
============= ============ =========== =========
</TABLE>
(8) Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
------------- ------------ ----------- ---------
($ 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
------------- ------------ ----------- ---------
Total................................ $0.2 $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)
March 30, April 1, December 31,
1996 1995 1995 1994
------------- ------------ ----------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Employee benefit costs...................... $47.0 $44.8 $46.0 $43.5
Deferred income taxes....................... -- -- -- 20.3
Lease obligations for closed stores......... 5.7 2.4 7.7 10.2
Other....................................... 7.1 12.5 7.7 8.2
------------- ------------ ----------- ---------
$59.8 $59.7 $61.4 $82.2
============= ============ =========== =========
</TABLE>
(10) Divisional Equity
Divisional equity consisted of the following:
<TABLE>
March 30, 1996
<CAPTION>
(Unaudited)
Meldisco Footaction Thom McAn Total
------------ -------------- --------------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 633.0 3.8 276.5 913.3
Contributed capital.......... 3.4 48.2 -- 51.6
Cumulative translation
adjustment................ 0.3 -- -- 0.3
------------ -------------- --------------- ---------
$636.8 $52.0 $276.5 $965.3
============ ============== =============== =========
</TABLE>
<TABLE>
April 1, 1995
<CAPTION>
(Unaudited)
Meldisco Footaction Thom McAn Total
------------ ------------ ------------- ----------
($ in millions)
<S> <C> <C> <C> <C>
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 623.6 3.8 342.5 969.9
Contributed capital.......... 0.3 48.2 4.5 53.0
Cumulative translation
adjustment................ (3.6) -- -- (3.6)
------------ ------------ ------------- ----------
$620.4 $52.0 $347.0 $1,019.4
============ ============ ============= ==========
</TABLE>
<TABLE>
December 31, 1995
<CAPTION>
(Audited)
Meldisco Footaction Thom McAn Total
------------ ------------ ------------- ----------
($ 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 $1,013.8
============ ============ ============= ==========
</TABLE>
(10) Continued
<TABLE>
December 31, 1994
<CAPTION>
(Audited)
Meldisco Footaction Thom McAn Total
------------ ------------ ------------- ----------
($ 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
------ ------ ------
Total........ $229.6 $245.3 $223.9
====== ====== ======
(11) Continued
At December 31, 1995, the future minimum lease payments under capital leases,
rental payments under operating leases and future minimum sublease rentals
excluding lease obligations for closed stores were as follows:
<TABLE>
<CAPTION>
(Audited)
Year Capital leases Operating leases
- ---- ------------------ --------------------
($ 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
Thereafter............................................... 0.1 114.0
------------------ --------------------
Total.................................... $1.8 $351.5
====================
Less amount representing interest............... 0.4
------------------
Present value of minimum lease payments......... $1.4
==================
Total future minimum sublease rentals.... $0.5 $4.5
================== ====================
</TABLE>
(12) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of the first quarter
and the fiscal years were as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
------------- ------------- ------------- -------------
($ in millions)
<S> <C> <C> <C> <C>
Deferred tax assets:
Loss on disposal of discontinued operations reserves $31.4 $ -- $ -- $ --
Restructuring and purchase accounting reserves. 12.2 9.4 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............... 76.7 39.7 54.4 39.9
------------- ------------- ------------- -------------
Deferred tax liabilities:
Property and equipment......................... 10.1 12.2 10.1 12.3
2.1 3.0
Other.......................................... 2.1 3.0
------------- ------------- ------------- -------------
Total deferred tax liabilities.......... 12.2 15.2 12.2 15.3
------------- ------------- ------------- -------------
Net deferred tax assets................. $64.5 $24.5 $42.2 $24.6
============= ============= ============= =============
</TABLE>
(12) Continued
Based on the Company's historical and current pre-tax earnings, management
believes it is more likely than not that the Company will realize the net
deferred tax assets.
The provision for income taxes is composed of the following:
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994 1993
------------ ----------- ------- ------- -------
($ in millions)
Federal.. $2.8 $2.3 $29.6 $40.0 $44.2
State.... 0.4 0.5 7.7 9.5 9.5
------------ ----------- ------- ------- -------
Total $3.2 $2.8 $37.3 $49.5 $53.7
============ =========== ======= ======= =======
Reconciliations of the effective tax rates to the U.S. statutory income tax
rate are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1,
1996 1995 1995 1994 1993
------------- ------------ -------- -------- --------
(Percent of pre-tax earnings)
<S> <C> <C> <C> <C> <C>
Effective tax rate................................. 33.7% 26.9% 29.8% 28.7% 30.8%
State income taxes, net of federal tax benefit..... (2.8) (2.9) (4.0) (3.6) (3.6)
51% owned subsidiaries excluded from the Parent's
consolidated federal income tax return.... 3.4 9.0 11.4 10.1 8.8
Other.............................................. 0.7 2.0 (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 $3.6 million for 1995, 1994 and 1993, respectively.
(13) Supplemental Cash Flow Information
Cash payments for income taxes and interest for the years ended December 31,
1995, 1994 and 1993 were as follows:
(Audited)
1995 1994 1993
------ ------ ------
($ in millions)
Income taxes........................... $52.8 $40.6 $52.1
====== ====== ======
Interest (net of amounts capitalized).. $0.3 $0.6 $0.2
====== ====== ======
(14) Related Party Transactions
Postretirement Benefits
The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.
The weighted average discount rates used to determine the accumulated
postretirement benefit obligation ("APBO") were 6.89% and 8.67% at December
31, 1995 and 1994, respectively. The following table reflects the Company's
accrued postretirement benefit costs as of December 31:
(Audited)
1995 1994
------- --------
($ in millions)
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
======= ========
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 yearsof 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 $7.0 million for
the estimated liability related to this matter between 1981 and 1988.
In December 1994, the GATT Uruguay Round Agreements Act contained provisions
which effectively ended the Brazil countervailing duty. Accordingly, the
Company reversed the entire accrual which is reflected in the 1994 combined
statement of operations.
(17) Meldisco's Relationship with Kmart
During the quarter ended March 30, 1996 and the fiscal year ended December 31,
1995, Meldisco's Kmart operations represented 96.2% and 95.7%, respectively,
of Meldisco's net sales. These operations represented 64.8% and 70.6%,
respectively, of the Company's combined net sales during the same periods. The
business relationship between Meldisco and Kmart is very significant to the
Company and the loss of Meldisco's Kmart operations would have a material
adverse effect on the Company.
The Company's arrangement with Kmart is governed by a Master Agreement
effective as of July 1, 1995 and amended as of March 25, 1996. The Master
Agreement grants to each Meldisco subsidiary the non-transferable exclusive
right and license to operate a footwear department in the applicable Kmart
store. The initial term of the Master Agreement expires July 1, 2012 and is
renewable thereafter for 15 year terms, unless earlier terminated as provided
in the Master Agreement.
(18) Segment Information
The company is a retailer conducting business through retail stores in two
business segments: Meldisco in discount footwear and Footaction in branded
athletic footwear and apparel. Information about operations for each of these
segments is summarized as follows:
(Audited)
December 31,
---------------------------
1995 1994 1993
---- ---- ----
($ in millions)
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
======= ======= =======
- -----------------------
(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 $139 million for the Company combined.
Operating profit is defined as total revenues less operating expenses.
Identifiable assets include those assets directly related to each segment's
operations.
(19) Summary of Quarterly Results
Summary quarterly data for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
(Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- -----
($ in millions)
<S> <C> <C> <C> <C> <C>
Net sales
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
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
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
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
1995............. (2.3) 21.3 18.3 (18.6) 18.7
1994............. 1.6 18.9 20.0 36.2 76.7
</TABLE>
EXHIBIT 10.1
Blank space in this Exhibit surrounded by brackets ("[ ]") indicates
confidential material that has been omitted from this Exhibit and that is the
subject of a Confidential Treatment Application and that has been filed
separately with the Securities and Exchange Commission.
EXECUTION COPY
MASTER AGREEMENT
This Master Agreement ("Agreement") is made and entered into as of
June 9, 1995 and effective as of July 1, 1995 (the "Effective Date") by and
between KMART CORPORATION, a corporation organized and existing under the laws
of the State of Michigan with a principal address at 3100 West Big Beaver
Road, Troy, Michigan 48084 ("Kmart" or "Licensor") and MELVILLE CORPORATION, a
corporation organized and existing under the laws of the State of New York
with a principal address at One Theall Road, Rye, New York 10580 ("Melville").
All capitalized terms used herein which are not otherwise defined, shall have
the meaning set forth in Article II.
WHEREAS, Kmart or its licensees operate large discount stores
under the trade names and service marks KMART and SUPER KMART CENTER in the
United States of America and its territories and possessions, Canada, Puerto
Rico, Australia, New Zealand, the Czech Republic, Slovakia, Mexico and
Singapore;
WHEREAS, under a certain License Agreement dated October 30, 1991
by and between Kmart and Kmart Properties, Inc., a corporation organized and
existing under the laws of the State of Michigan with a principal address at
3250 West Big Beaver Road, Suite 226, Troy, Michigan 48084 ("KPI"), KPI has
granted to Kmart the exclusive right, license and privilege to use the Marks
in the Territory, including the right to sublicense use of the Marks within
the Territory, subject to KPI's written consent and control;
WHEREAS, Kmart and Melville have entered into a series of
agreements governing the formation and capitalization of Meldisco Corporations
which operate Footwear Departments within Stores in the Territory, all as more
specifically described in Exhibit A (collectively, the "Melville Agreements");
WHEREAS, pursuant to the Melville Agreements, Kmart has entered
into license agreements with Meldisco Corporations granting them the right
to operate Footwear Departments in the Stores in the Territory and with the
consent of KPI, to use the Marks in the advertising and promotion of such
Footwear Departments (collectively, the "Meldisco License Agreements");
WHEREAS, the parties desire that the Meldisco Corporations
continue to operate Footwear Departments in Stores in the Territory;
NOW THEREFORE, in consideration of the mutual promises,
undertakings and covenants herein, and for other valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree:
ARTICLE I
PURPOSES OF THE AGREEMENT
1.1 Purpose. The purpose of this Agreement is to establish uniform
terms and conditions and uniform procedures for the operation of Footwear
Departments in the Stores in the Territory. This Agreement supersedes the
Melville Agreements and the same are hereby terminated as of the Effective
Date hereof. This Agreement also modifies the terms and conditions of all
Meldisco License Agreements which are in force and effect as of the Effective
Date, and establishes a new standard form of Meldisco License Agreement for
use and execution upon and after the Effective Date. Any terms and conditions
in any existing Meldisco License Agreement which conflict with the terms and
conditions hereof shall be null and void and of no further force and effect.
The standard form of Meldisco License Agreement to be executed by Licensor and
each Meldisco Corporation that will operate a Footwear Department, from the
Effective Date forward is attached and incorporated herein as Exhibit B.
1.2 Structure. Except as set forth below, each Footwear Department
licensed under this Agreement shall be operated by a separate Meldisco
Corporation, 51% of the stock of which shall be owned by Melville directly or
by another corporation in which Melville has a direct or indirect majority
stock ownership interest (a "Melville Group Member") and 49% of the stock of
which shall be owned by Licensor directly or by another corporation in which
Licensor has a direct or indirect majority stock ownership interest. In
connection with the issuance of the stock of each such Meldisco Corporation,
the parties shall execute a Shareholders' Agreement in the form of Exhibit C,
attached and incorporated herein. As an exception to this structure, the
Meldisco Corporations, identified in Exhibit D, attached and incorporated
herein, shall be wholly-owned by Melville or a Melville Group Member. If any
of these Meldisco Corporations is operating within a Store which is closed and
relocated nearby, the successor Store shall be operated by a wholly-owned
Meldisco Corporation as well, provided that the total number thereof shall not
exceed the total number identified on Exhibit D.
ARTICLE II
TERMS AND DEFINITIONS
For purposes of this Agreement and all Meldisco License Agreements, the
following terms shall have the meanings expressed after each term:
"Business Day" shall mean a day, excepting Saturday, upon which banks
in Detroit are open for business.
"Dividends" shall have the meaning set forth in Article 6.1(b)(v).
"Excluded Footwear" shall mean:
(a) sports shoes with cleat attachments affixed
to the soles or bowling shoes, ice
skates, roller skates, in-line skates,
football shoes, golf shoes and track
shoes (not including non-cleated running
or jogging shoes or shoes with cleat
attachments molded to the soles or to the
shoes);
(b) waders and hip boots;
(c) ski boots;
(d) all knit and crib booties (sizes 0-5);
(e) slipper socks without licensed character
designs;
(f) slippers and/or slipper socks which are
packaged, attached to and sold as a unit
with sleepwear or robes; and
(g) waterproofing preparations for athletic,
hunting, fishing and recreational
footwear and sold in Licensor's sporting
goods departments.
"Fees" shall mean collectively the "[ ] Fee," [ ]
"[ ] Fee," [ ], "Employee Discount Fee,"
and "[ ] Fee" as further defined in Article 6.1(b),
together with all other fees or payments due Licensor
hereunder.
"Footwear shall mean the area within Store(s) in the Territory
Department(s)" designated by Licensor where Licensees shall conduct
retail sales of Licensed Footwear.
"Gross Sales" when used with respect to Licensees, shall mean the
total revenues generated by retail sales by Licensees
of Licensed Footwear in the Footwear Departments, and
when used with respect to Licensor shall mean the
total revenues generated by retail sales in the
subject departments in the Stores, in either case,
whether for cash, credit or deferred payment, without
diminution for credit losses, except that the
following shall be excluded in calculating Gross
Sales: (a) the amounts allowed for goods subsequently
returned for refund or credit; and (b) sales, use or
excise taxes passed on to the customer, excluding,
without limitation, any withholding taxes.
"Licensed Footwear" shall mean any footwear except Excluded Footwear and
shall also mean shoe care items (including, without
limitation, laces, polishes, waxes, oils, dyes,
brushes, daubers, shoe trees, shoe cleaning and
waterproofing preparations, heel plates or taps and
gift kits containing any of the foregoing) which
Licensees are permitted hereunder to sell in the
Footwear Departments.
"Licensee(s)" shall mean Meldisco Corporation(s) formed for the
purpose of operating a Footwear Department(s) in
Store(s).
"Licensor" shall mean Kmart Corporation.
"Marks" shall mean the trademarks and service marks KMART and
SUPER KMART CENTER, in block letters or design format,
and any service mark adopted in the future that
incorporates the mark KMART in whole or in part,
together with registrations therefor, all as more
specifically described in Exhibit E, attached and
incorporated herein.
"Materials" shall mean interior store signs, print and broadcast
advertising pieces, store employee manuals and
employee uniforms and badges on or in connection with
which Licensee(s) may use the Marks as permitted
hereunder.
"Meldisco" shall mean the Meldisco division of Melville.
"Meldisco shall mean the corporation(s) owned jointly by
Corporation(s)" Melville, or a Melville Group Member, and Licensor to
operate the Footwear Department(s), or in the case of
the companies set forth in Exhibit D, the
corporation(s) wholly-owned by Melville or a Melville
Group Member, and formed for the same purpose.
"Meldisco License shall have the meaning set forth in the preamble to
Agreement(s)" this Agreement.
"Performance shall mean either of the following aggregate
Standards" performance standards:
(a) [ ] Performance Standard.
Licensees [ ] of all Footwear Departments
in the aggregate shall for any [ ] of
Licensor's [ ] fiscal years equal at least
either
(1) [ ] of Licensor's [ ]
in Stores with Footwear Departments
(other than footwear) during the same time
period of [ ] of all Stores with
Footwear Departments in the aggregate, or
(2) [ ] of Licensor's [ ]
during the same period in all Stores with
Footwear Departments in the aggregate,
[ ]. Licensor shall make
available to Melville or its designated
certified public accountant any and all
records reasonably necessary to the
verification of such sales.
(b) [ ] Performance Standard. The
total [ ] as a percentage of [ ]
all Footwear Departments in the aggregate for any
[ ] fiscal years either
(1) shall not [ ] previous
year at a rate which is [ ]
in Licensor's [ ] from all
Stores with Footwear Departments in the
aggregate for Licensor's corresponding
fiscal year, or
(2) shall [ ] of
Licensees [ ] all Footwear
Departments in the aggregate for said
year. For purposes of this standard (i)
Licensor's corresponding fiscal year shall
be that year [ ] (ii) any
Store open less than the full applicable
fiscal year, and the Footwear Department
in such Store shall be excluded, and
(iii) any Footwear Department [ ],
shall be excluded. Licensor's [ ]
from all Stores shall not [ ].
All figures will be expressed as a
percentage of [ ] measured to the
nearest [ ] and shall be
calculated using U.S. generally
accepted accounting principles
consistently applied; [ ].
"Services" shall mean each Licensee's services relating to the
operation of the applicable Footwear Department,
including, stocking, supplying and processing returns
of Licensed Footwear.
"Store(s)" shall mean discount retail outlet(s) consisting
(currently) of approximately 30,000 to 120,000 square
feet of gross indoor floor space operated by Licensor
under the service mark KMART (or some other service
mark incorporating KMART in whole or in part or under
which the Stores are operated) and primarily devoted
to the sale of a broad assortment of general
merchandise, or a discount retail outlet consisting
(currently) of approximately 120,000 to 250,000
square feet of gross indoor floor space operated by
Licensor under the service mark SUPER KMART CENTER (or
some other service mark incorporating KMART in whole
or in part or under which the Stores are operated) and
devoted to the sale of a broad assortment of general
merchandise as well as a broad assortment of fresh
foods and grocery products.
"Term" shall mean the period commencing on the Effective Date
and continuing until this Agreement expires or is
terminated as set forth in Article 4.
"Territory" shall mean the United States of America, its
territories and possessions, including Puerto Rico,
Guam and the U.S. Virgin Islands (the "U.S.A.").
"Weekly Sales shall have the meaning set forth in Article 6.2.
Remittance"
ARTICLE III
LICENSE
3.1 Grant of License.
Licensor grants to each Licensee and each Licensee accepts from
Licensor, for the Term and any renewal Term only, upon the terms and
conditions specified herein, the non-transferable exclusive right and license
in the Territory only, to operate a Footwear Department in the applicable
Store, and the non-transferable and non-exclusive right to use the Marks on
and in connection with the operation of the applicable Footwear Department and
on and in connection with authorized Materials only, if and only if, such use
complies with the terms and conditions of this Agreement, including, without
limitation, Licensor's quality standards as set forth herein and the
authorization and approval process set forth below. All use of the Marks by
Licensee as permitted hereunder shall conform to the requirements of Exhibit E
and to the quality control requirements of the License Agreement between
Licensor and KPI. Licensor shall be entitled to change Exhibit E by giving
Meldisco not less than 30 days advance written notice of any such change;
however, to the extent any Licensee cannot reasonably change any use of the
Marks on authorized Materials by the end of such 30 day period, Licensor shall
reasonably extend such date until any such Licensee(s) can comply with such
new requirements. Licensor may notify Meldisco in writing of any uses of the
Marks by any Licensee(s) which are not in accordance with Exhibit E and
Licensee(s) shall promptly make any required change. No other, further or
different license is granted or implied and no assignment of any right or
interest in the Marks is made or intended herein. In particular, no license
is granted to permit any third party to use the Marks, and each Licensee may
only use the Marks on or in connection with the Materials. Licensor and KPI
represent, warrant and agree that Licensor is and shall be authorized to grant
each Licensee such right to use the Marks during the Term and any renewal Term
of this Agreement.
3.2 Certain Restrictions. The parties acknowledge that the success of
each Footwear Department is dependent upon, among other things, the applicable
Licensee's compliance with common standards hereinafter referred to as "Rules
and Regulations" for the conduct of the business (set forth in Exhibit F,
attached and incorporated herein), as established from time to time by
Licensor.
3.3 Other Merchandise and Activities. Each Licensee shall have the
right to sell only the Licensed Footwear specified in this Agreement, and
shall sell or furnish no other merchandise or services without the prior
written permission of Licensor's headquarters. Each Licensee shall promptly
remove from sale any merchandise not within the definition of "Licensed
Footwear" contained in this Agreement. Each Licensee shall retain title to
Licensee's merchandise until sale. Licensor shall not be responsible for any
loss or damage to any of Licensee's merchandise, including while it is on
Store premises or in transit to or from Store premises or otherwise. Further,
no Licensee shall conduct promotions (philanthropic or otherwise) in the
Stores or which require the use of Licensor's resources or the services of
Licensor's employees without obtaining Licensor's prior written approval.
3.4 Marking, Samples and Inspection.
(a) Licensee agrees that on each item of Materials which use the Marks
it shall mark such Materials in a manner complying with the provisions of
Exhibit E.
(b) In advance of the first purchase or production by Meldisco and/or
any Licensee of each type of Material or the first use, publication or
broadcast by Meldisco and/or any Licensee of each particular item of Material
on or in connection with which any Mark is used, whichever is earlier,
Meldisco and/or the applicable Licensee shall furnish to Licensor for its
approval a sample thereof, including the trademark or copyright notice thereon
and any other label or marking. Licensor shall use its best efforts to
communicate its approval or disapproval as soon as practicable after receiving
any such sample. In no event, however, shall Licensee use the Material until
written approval of the subject sample is granted by Licensor. Meldisco
and/or each applicable Licensee specifically agrees to amend to the
satisfaction of Licensor any Material which is not approved by Licensor. A
further sample shall be provided to Licensor for its approval if any
subsequent change is made in any approved Material.
(c) To assure compliance with KPI's and Licensor's standards and
instructions relating to any Licensed Footwear and/or Materials bearing the
Marks, Licensor, at its expense, directly or through representatives, may
inspect the Footwear Departments in Stores and may inspect and/or test such
Licensed Footwear and Materials from time to time. Further, KPI and/or
Licensor may periodically request from Licensee samples of such Licensed
Footwear and/or Materials. Licensee shall cooperate and aid Licensor in
making such inspections or tests and in furnishing such samples.
3.5 Authority. Each Licensee shall conduct its sales exclusively and
solely on the designated Footwear Department premises of the Stores. Neither
Melville, Meldisco nor any Licensee shall pledge, incur any obligation or
liability, hire any employees, nor purchase any merchandise or services in or
under the name of the Licensor or KPI, it being understood that no party to
this Agreement or any Meldisco License Agreement shall act as the agent,
servant or employer of the other party.
3.6 No Challenge. Licensor represents and warrants that it or KPI has
the exclusive right, title and interest in and to the Marks in the Territory
and has the right to license the Marks to Melville, Meldisco and Licensees as
provided in this Agreement. Based on such representation and warranty,
Melville, Meldisco and each Licensee respectively acknowledge the exclusive
right, title and interest of Licensor and KPI in and to the Marks Melville,
Meldisco and each Licensee respectively agree not to attack or impair or
challenge said right, title or interest or any of Licensor's or KPI's
registrations therefor, nor assist anyone else in doing so; and each Licensee
agrees not to apply to register the Marks or any confusingly similar service
marks, trademarks, trade names, trade dress, copyrights, industrial models or
designs, or any derivations thereof, during the Term or forever thereafter,
anywhere in the world. Any and all use of and goodwill associated with the
Marks shall inure to the benefit of Licensor and KPI.
3.7 Business Planning. Meldisco and Licensor shall meet and consult
with each other at least once each Fiscal Year in good faith to discuss the
annual business plan for the operation of the Footwear Departments. Meldisco
shall at such time present its annual business plan to Licensor. Among
others, one goal of such consultations shall be to discuss increasing the
amount of name brand footwear being sold in the Footwear Departments.
Licensor shall share those aspects of its own business plan for the operation
of the Stores which affect or interact with the operation of the Footwear
Departments.
ARTICLE IV
TERM AND TERMINATION
4.1 Term.
(a) This Agreement shall remain in effect for a Term of seventeen years
commencing as of the Effective Date and expiring July 1, 2012, unless earlier
terminated as set forth herein. All current and future Meldisco License
Agreements shall be coterminous with this Agreement. Article 4.2(b) and (c)
below set forth the procedure for winding down and ceasing all Footwear
Department operations if this Agreement expires or is terminated as set forth
herein.
(b) This Agreement and any existing Meldisco License Agreement
(collectively called the "Agreements" in this Article 4.1(b)) shall be
renewed, terminated or extended at the end of the Term, or any subsequent
renewal Term(s), as applicable, according to the following:
(1) 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 either renew the Agreements ("Renewal Notice") or to
terminate the Agreements ("Termination Notice") at the end of the
applicable Term or renewal Term.
(2) If either party gives Renewal Notice to the other, the
Agreements shall renew for a 15 year renewal Term commencing on the day
following the end of the applicable Term or renewal Term, unless, within
60 days of receipt of Renewal Notice, the receiving party responds with
written notice of its intent to terminate the Agreements (in which
latter case the Agreements shall terminate at the end of the applicable
Term or renewal Term).
(3) If either party gives Termination Notice to the other, the
Agreements shall terminate at the end of the applicable Term or Renewal
Term.
(4) 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 4 years following either
party's written notice to the other of its intent to terminate.
4.2 Termination.
(a) During the Term and any renewal Term, this Agreement and the
Meldisco License Agreements may only be terminated:
(i) upon 6 months written notice by Licensor to Meldisco, with
respect to any Store(s) with a Footwear Department which ceases
to operate and be open for business to the public, provided,
however, that as to any such Store(s) in relation to which
Licensor has not made a determination or is otherwise not yet
aware at least six months prior to the time such Store(s) shall
cease to operate and be open for business, then upon such notice
as soon thereafter as is reasonably practical but in no event
less than 60 days ;
(ii) upon 30 days written notice by Licensor or Meldisco to the
other, with respect to any affected Store, in the event any
Footwear Department premises become unfit for use and occupancy
by reason of material damage or destruction, or as a result of
condemnation;
(iii) upon written notice and subject to Article 4.2(b) below,
if the other party shall fail to make any material payments when
due or to deliver any material accounting reports as required
hereunder or in the event of a material breach or material
failure of any covenant, representation or warranty of the other
party set forth herein, including, without limitation, any
Licensee's material failure to follow Licensor's instructions
regarding the nature and quality of the Services or Materials
and/or appropriate use of the Marks, or material failure to
comply with the Rules and Regulations established by Licensor
for the conduct of the business within the applicable Store(s);
provided, however, the party charged with the breach or failure
shall have the opportunity to cure said breach or failure within
60 days of receipt of written notice from the charging party
(the "Notice Period"). For purposes of this paragraph any
material breach or material failure by Licensee shall mean by
all Licensees when viewed as a group. If the breach or failure
is not cured to the satisfaction of the charging party within
the Notice Period, the charging party shall be entitled to
exercise any remedies it may have hereunder or under applicable
law, including but not limited to termination of this Agreement,
provided, however, that if such material breach or failure is
capable of being cured but is only incapable, by reason of its
nature, of being cured within the Notice Period, the charging
party shall delay exercising such remedies so long as the party
charged with the breach shall have begun in good faith to cure
such breach within the Notice Period and shall thereafter
proceed diligently to complete the cure of the breach and such
breach shall be cured within a reasonable time period; but in no
event shall such time period be longer than 180 days from the
date of first notice to the party charged with such breach;
(iv) upon 30 days written notice by one party to the other, if
Licensor or Melville shall fail to pay its debts or obligations
when due, or shall make any assignment for the benefit of
creditors, or shall file, or have passed any resolution for its
voluntary liquidation, or have filed against it any petition for
protection or relief from creditors or any petition in
bankruptcy, or be adjudicated bankrupt or insolvent, or if any
receiver or judicial manager is appointed for its business or
property (provided such resolution is not rescinded or such
proceeding or petition is not dismissed during the cure period
described in Article 4.2(a)(iii) above);
(v) at the option of the non-selling or non-transferring party,
upon 30 days written notice by one party to the other, 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 to
an affiliated group under common control; or
(vi) upon written notice and subject to Article 4.2(c) below,
in the event that the Licensees fail to achieve the Performance
Standards.
(b) If this Agreement is terminated with respect to any Store(s) under
Article 4.2(a)(i) or (ii), or Article 5.1, the applicable Licensee(s) shall
remove all fixtures, furnishings, equipment or other property belonging to
Licensee(s) and surrender occupancy and possession of the applicable Footwear
Department premises in the same condition as received, ordinary wear and tear
excepted, by the date specified in the written notice of termination. Any
Licensee's property remaining on any such premises after the date specified in
the written notice of termination, through no fault of Licensor, shall become
the property of Licensor. Meldisco shall reimburse Licensor for the
reasonable cost of removal or disposal of such property within 30 days of
receipt of an invoice setting forth such charges, and shall pay Licensor all
Fees accruing hereunder or under any Meldisco License Agreements through such
termination date.
(c) If this Agreement is terminated under Article 4.2(a)(iii) (subject
to applicable cure provisions) or (vi), all Licensees shall remove all
fixtures, furnishings, equipment or other property belonging to Licensees and
surrender occupancy and possession of all Footwear Department premises in the
same condition as received, ordinary wear and tear excepted, within one year
of receipt of notice of the applicable notice of termination, or with respect
to Article 4.2(a)(iii), upon expiration of the applicable cure period,
whichever is later. Any Licensee's property remaining on any such premises
one year after such termination, through no fault of Licensor, shall become
the property of Licensor. Meldisco shall reimburse Licensor for the
reasonable cost of removal or disposal of such property within 30 days of
receipt of an invoice setting forth such charges and shall pay Licensor all
Fees accruing hereunder or under the Meldisco License Agreements through such
termination date.
(d) If this Agreement is terminated under Article 4.2(a)(iv) or (v) or
upon expiration of the Term or any renewal Term hereof, all Licensees shall
remove all fixtures, furnishings, equipment or other property belonging to
Licensees and surrender occupancy and possession of all Footwear Department
premises in the same condition as received, ordinary wear and tear excepted.
Any Licensee's property remaining on any such premises 30 days after such
termination or expiration, through no fault of Licensor, shall become the
property of Licensor. Meldisco shall reimburse Licensor for the reasonable
cost of removal or disposal of such property within 30 days of receipt of an
invoice setting forth such charges, and shall pay Licensor all Fees accruing
hereunder or under the Meldisco License Agreements through such expiration or
termination date.
ARTICLE V
FOOTWEAR DEPARTMENTS
5.1 Footwear Departments. The area to be occupied by each Licensee
within each Store shall be defined by computer aided drawings produced by
Licensor's Store Planning Department. Licensor may at any time and from time
to time change the location and size of a Footwear Department within a
Store, in which event, Licensor shall pay all cost and expense of moving the
Footwear Department, and applicable Fees shall be adjusted to reflect any
change in the size of the Footwear Department as appropriate. Should any
Licensee not consent to the relocation or change in size of any such Footwear
Department, it may terminate the Meldisco License Agreement as to such
Footwear Department by immediately giving Licensor written notice of its
intention so to do. Termination shall become effective 30 days after Licensor
receives such written notice unless the Licensee and Licensor otherwise
mutually agree upon a location or size.
ARTICLE VI
FEES
6.1 Fees.
(a) All Fees and other amounts due and owing from one party to the
other hereunder or under any Meldisco License Agreement shall be paid in U.S
Dollars in immediately available funds and shall be calculated and reported on
a per Footwear Department basis. Fees provided for herein shall first accrue
with respect to a given Footwear Department as of the date when a given Store
is open for sales to the public. Within 60 days after the end of Meldisco's
fiscal year, Meldisco shall furnish a sworn statement setting forth the Gross
Sales for all Footwear Departments for such fiscal year and the [ ]
of all Footwear Departments for purposes of determining whether the
Performance Standards have been met.
(b) Each Licensee shall pay Fees at the following rates and upon the
following terms and conditions during the Term and any renewal Term:
(i) [ ] Fees and [ ] Fees. Each [ ]
during the Term and any renewal Term with respect to each
Footwear Department, in consideration of the license granted to
each Licensee hereunder, each Licensee shall pay "[ ]
Fees" to Licensor at the rate of [ ] of the Gross Sales in
each Footwear Department made during the preceding week.
[ ]. Licensor shall be responsible for
remitting a portion of such [ ] Fees in an
amount equal to at least [ ] to KPI. During
each of Licensor's fiscal years during the Term and any renewal
Terms, the fiscal year total of each Licensee's [ ]
Fees payments to Licensor shall be [ ]
Fee" [ ] of [ ] of the total
floor space comprising the Footwear Department on the last day
of such fiscal year. Within [ ] following the last day of
each of Licensor's fiscal years during the Term and any renewal
Term, Licensor shall compute and notify Meldisco of the amount
of [ ] due, if any, from any Licensee, and
any such Licensee shall pay such amount in full within [ ]
of receipt of such notice.
(a) The parties acknowledge that a portion of the [ ]
Fees in an amount equal to [ ] is
intended as Licensee's share of advertising costs for the
Footwear Departments. Licensor agrees that the amount
expended for advertising the Footwear Departments shall bear
a reasonable relation to the amounts contributed by the
Licensee as part of the [ ] Fee. In the event such
advertising expenditure becomes impractical or
inappropriate, the [ ] Fees shall be adjusted as
agreed in writing by the parties to reflect the advertising
needs of the Footwear Departments.
(ii) [ ] Fee. Once each fiscal year during the Term and
any renewal term, Licensee shall pay an "[ ] Fee" to
Licensor. All figures for computing the [ ] Fee shall
conform with and be based on each Licensees' internal records
for reporting to management consistently applied (and such
method of reporting is not to be changed for purposes of this
Agreement): [ ]. The [ ] Fee for each fiscal year
shall be due and payable within [ ] following the final
close of each Licensee's books for the fiscal year or, in any
event, within 90 days following the end of its fiscal year (it
being understood that each Licensee shall make every effort to
pay such [ ] Fee within [ ] following the end of
its fiscal year). Each Licensee shall furnish a [ ]
at the close of each fiscal year and Licensor shall have the
right to examine each Licensee's books and records supporting
such statements, as further described below in Article VII.
(a) The [ ] Fee for each Licensee which is a Meldisco
Corporation wholly-owned by Melville, or a Melville Group
Member, (as identified in Exhibit D) shall be equal to
[ ] for each fiscal year.
(b) The [ ] Fee for each Licensee which is a Meldisco
Corporation jointly owned by Melville or a Melville Group
Member and Licensor, shall be equal to [ ].
(iii) [ ] Fees. A "[ ]
Fee" based upon [ ] of each Footwear
Department shall be [ ] from the
applicable [ ] made in the [ ]
each of Licensor's accounting periods, to defray the actual
cost of [ ] used "in common" and of [ ] used
within the Footwear Department, [ ].
The amount of such [ ] Fee shall be equitably adjusted,
not more often than once per year, and not retroactively, in
accordance with the formula set forth in Exhibit G. The
[ ] Fee for each Footwear Department effective,
on a pro-rated basis, as of the Effective Date, shall be as
follows:
[
]
(iv) Employee Discount Fee. Each week Licensor shall deduct
from the Weekly Sales Remittance for each Footwear Department an
"Employee Discount Fee" representing an estimate of the 10%
employee discount given to Meldisco employees on their purchases
in the Stores, computed according to the following formula:
[ ]
(v) Dividends. Once each fiscal year during the Term and any
renewal Term,
under the same procedures as set forth for the [ ] Fee
above in Article 6.1(b)(ii) above, each Licensee which is a
Meldisco Corporation owned jointly by Melville or a Melville
Group Member and Licensor shall issue and pay Dividends to
Licensor in an amount that shall be determined by multiplying
Licensor's percentage ownership in such corporation [
].
(vi) [ ] Fee. Once each fiscal year during the Term and
any renewal Term, to reimburse Licensor for the cost of
[ ] in the Footwear Department of each
new Store which has its first grand opening and in which such
[ ] in such fiscal year, each Licensee
shall owe, [ ]. This amount may be equitably
adjusted on an annual, prospective basis to reflect increases
or decreases in Licensor's costs of [ ].
6.2 Weekly Sales Remittance and Fee Statements. Once each week
Licensor shall furnish to Licensee a "Statement of Fees" with respect to each
Footwear Department in each Store. Such Statement shall set forth the
applicable Fees and any deductions or set-offs taken by Licensor as set forth
herein. Such Statement of Fees may be based on estimates at the time of
opening of each Store, provided that Licensor shall, as promptly as possible
thereafter, furnish a corrected Statement of Fees, which shall retroactively
replace the estimated Statement of Fees. As of the date of this Agreement,
Licensor's "week" for accounting purposes (called the "accounting week" in
this subsection) begins on Thursday and ends on Wednesday. Beginning on the
Effective Date, Licensor shall remit to Meldisco, as agent for each Licensee,
its Weekly Sales Remittance which shall mean the cash sales receipts for the
Footwear Departments for each accounting week less the deductions set forth
below, on the Wednesday immediately following the last day of each accounting
week. Beginning on the fifth anniversary date of this Agreement, Licensor
shall remit the Weekly Sales Remittance by the Monday immediately following
the last day of each accounting week. Beginning on the tenth anniversary date
of this Agreement, Licensor shall make all reasonable efforts to remit the
Weekly Sales Remittance by the Friday immediately following the last day of
each accounting week. If Licensor changes its accounting week, the aforesaid
schedule shall be adjusted so that Licensee receives all such remittances
within the same number of days following the end of Licensor's accounting
week. Licensor shall deduct from each such Weekly Sales Remittance the [
] Fees, [ ] Fee, Employee Discount Fee and [ ] Fee
and any other charges (other than [ ] Fees) and advances incurred by
Licensor on behalf of the Licensees, as may be due at the time of such
remittances.
ARTICLE VII
BOOKS AND AUDITS
7.1. Books. Meldisco shall keep full, true and accurate books of
account containing all particulars which may be necessary for the purpose of
disclosing and determining the computation of the Fees due and payable to
Licensor hereunder or under any Meldisco License Agreement. Such books of
account shall be kept at Meldisco's principal place of business and maintained
by Meldisco, as agent for each Licensee, for a period of at least three years
following the end of the subject year during the Term and any renewal Term and
after termination of this Agreement. All of the information within such books
and records which is relevant for purposes of determining the computation and
amount of the Fees shall be available for inspection by Licensor or its
designated certified public accountant, including, without limitation, the
cost of goods sold in the Footwear Departments and the costs of landing and
distributing such goods.
7.2 Audits. During the Term and any renewal Term and for a period of
one year after termination of this Agreement, Licensor or its designated
independent certified public accountant, upon reasonable notice to Meldisco
and during normal business hours, may audit all profit and loss statements and
other statements of account, records and reports provided for in this
Agreement at least once each fiscal year. Meldisco shall make available to
Licensor or said certified public accountant for the purposes of this
paragraph any and all records reasonably necessary to the verification of such
reports. Any error(s) discovered by such audit shall be corrected by Meldisco
within ten (10) business days after having been notified of such error. The
expense of any and all such audits and verification shall be borne by Licensor.
ARTICLE VIII
TAXES
8.1 Taxes. Each Licensee shall pay all occupational fees, taxes,
licenses and permits required in connection with or incident to its operation
of the applicable Footwear Department, and shall pay all taxes levied on its
personal property, payrolls or income.
ARTICLE IX
FOOTWEAR DEPARTMENT EMPLOYEES
9.1 Employer Action. Personnel working in each Footwear Department
shall be employees of each Licensee and each Licensee shall exercise control
over such employees, including hiring, firing, promoting, determining wages
and work procedures and the like ("Employer Action"), which control shall be
at each Licensee's direction subject to (i) any applicable employment or union
contracts, (ii) Licensor's Rules and Regulations and (iii) applicable laws.
Each Licensee shall be responsible for all Employer Actions and shall
reimburse, indemnify, defend and hold Licensor and its subsidiaries and
affiliates and their respective officers, directors and employees harmless
from and against any and all loss, damage, cost, expense or penalty, or any
claim or action therefor, arising out of any such Employer Action.
ARTICLE X
FURNITURE AND FIXTURES
10.1 Furniture and Fixtures. Licensor shall provide and install at its
initial expense (and shall maintain and update) all shelving, counters,
display cases and other trade fixtures which shall be agreed upon by Meldisco,
as agent for each Licensee, and Licensor as necessary for the proper conduct
of the Footwear Departments by the Licensee in the Stores. Each Licensee may
furnish and install at its expense in the applicable Footwear Department such
other furniture, furnishings and equipment as it may desire, subject to the
prior written approval of Licensor. No electrical equipment may be installed
or maintained by any Licensee which may interfere with the operation of
radios, televisions or other appliances or communications or security systems
sold or in use in the Stores and Licensee shall promptly correct or remove
the cause of such interference at its expense. Licensee agrees to submit for
prior approval by Licensor all proposed signs and sign fixtures. Licensee
agrees to follow Licensor's instructions as to such signs and sign fixtures.
ARTICLE XI
ADVERTISING
11.1 Advertising. Licensor shall have the sole and exclusive control
over all advertising and promotions relating to all business conducted on the
Store premises, including on and in connection with the Footwear Departments.
Neither Meldisco nor any Licensee may engage in advertising or promotional
activity of any Footwear Department or any business conducted on Store
premises without the prior review and written approval of Licensor's
headquarters. The License Fees shall include a fee for advertising as
provided for in Article 6.1(b)(i)(a) above.
ARTICLE XII
CASH REGISTERS, UTILITIES AND TELEPHONE
12.1 Cash Registers. Licensor shall provide at its expense all cash
registers necessary for the operation of each Store and all cash in registers
shall be at the risk of Licensor. Licensor shall permit Licensee and/or
Meldisco, upon reasonable notice and during normal business hours, to take
readings for a Licensee from such registers.
12.2 Utilities. Licensor shall provide at its expense utilities
consisting of light, heat, power, gas, water and air conditioning as it may
deem necessary, but shall not be responsible for any loss or damage of any
nature resulting from the interruption or failure of such utilities.
12.3 Telephones. Licensor shall provide at its expense telephone
service and facilities for incoming calls under the general business listing
of "Kmart Store No. _____" or the like. No Licensee shall maintain any
separate voice telephone lines or telephone listings.
ARTICLE XIII
RULES AND REGULATIONS
13.1 Rules and Regulations. Licensor shall from time to time, for the
benefit of the common enterprise, establish, amend, modify or revise uniform
Rules and Regulations consistent with this Agreement which shall govern but
not be limited to the following subjects: order and appearance of the Store,
methods for handling of cash and cash registers, credit, will-call and layaway
sales, payments made by Licensor for account of Licensees, refunds, pricing
policies, inventory requirements, disposal of old merchandise, overlap in
merchandise carried by various licensees, products liability insurance,
receiving of merchandise and store security. Licensor agrees to furnish
Meldisco with a written copy of such Rules and Regulations and each Licensee
agrees that it and its employees and agents shall comply with such Rules and
Regulations. The current version of the Rules and Regulations is set forth at
Exhibit F.
ARTICLE XIV
CONFIDENTIAL INFORMATION
14.1 Confidential Information. Meldisco and each Licensee acknowledges
that in the course of performing this Agreement and the Meldisco License
Agreements, each may learn and Licensor may disclose to each of them certain
confidential information and data concerning sales within Stores, new
locations of Stores or relating to business plans or retailing and
merchandising strategies for Stores as a whole or for departments within the
Stores including [ ], "Departmental Sales by
Stores Size Report", "Flash Sales Reports" and "Customer Traffic Reports",
which information and data is not in the public domain or otherwise available
from third parties except on a confidential basis (collectively, the
"Confidential Information"). Licensor acknowledges that as a result of, or in
connection with this Agreement, it may learn and Licensee or Melville may
disclose to Licensor certain Confidential Information. During the Term, any
renewal Term and for a period of three years thereafter, neither Licensor,
any Licensee nor Meldisco shall disclose any of the other parties' Confidential
Information to third parties or to affiliate, subsidiary or parent companies
or their respective officers, directors, employees or representatives, except
as mutually agreed upon in writing by Meldisco and Licensor's headquarters.
Further, all Confidential Information shall remain the sole and exclusive
property of the party from whom it has emanated.
ARTICLE XV
INDEMNIFICATION
15.1 General; Insurance. Meldisco and/or Licensee shall reimburse,
indemnify, defend and hold harmless Licensor and its subsidiaries and
affiliates and their respective officers, directors and employees, from and
against any and all damage, loss, cost, expense or penalty, or any claim or
action therefor, by or on behalf of any person, arising out of the performance
or failure to perform under this Agreement or any Meldisco License Agreement
by any Licensee, Meldisco Corporation, Meldisco or Melville, including, but
not limited to, personal injury and death claims, false labeling or failure to
correctly label any merchandise under any statutory obligation or rules and
regulations having the force of law, and all claims of employees or agents of
any Licensee, Meldisco Corporation, Meldisco or Melville whether for injury,
death, compensation, social security, pension, unemployment compensation, etc.
Licensor agrees to obtain and keep in force appropriate insurance for
Licensee and Licensor for liabilities for personal injuries (including death)
and property damage arising out of or relating to the use of the Footwear
Department premises with limits of not less than $5,000,000 for injury to one
person and $5,000,000 for injury to more than one person and not less than
$5,000,000 for property damage, and at Licensor's option Licensor may self
insure all or any portion of these limits. Each Licensee agrees to maintain
appropriate workers' compensation and employer's liability insurance as
required by all applicable federal, state or other laws, and, at Licensor's
option, to name Licensor as an "alternate employer" on such policies.
Melville agrees to obtain and keep in force appropriate insurance for claims
against Licensor, Licensees and Meldisco for personal injury (including death)
and property damage arising out of or relating to the goods and services
provided pursuant to this Agreement and any Meldisco License Agreement (other
than for liabilities for which Licensor has agreed to insure in this Section
15.1), with the same limits and self insurance options as agreed to above by
Licensor. Licensee or Licensor, as the case may be, shall provide evidence of
all of the aforesaid insurance at the request of the other party, and shall
name the other party as an additional insured on such policies.
15.2 Intellectual Property Indemnification. Meldisco and/or Licensee
shall reimburse, indemnify, defend and hold harmless Licensor and its
subsidiaries and affiliates and their respective officers, directors and
employees from and against all third-party claims asserted against Licensor
alleging that any Licensed Footwear, Services, trade fixtures, furnishings,
merchandise, advertisements or promotions furnished by Meldisco or any
Licensee under this Agreement infringe any patent, copyright, trademark, trade
dress, design or other proprietary right or constitute a misuse of any trade
secret information or violate any third party contractual right, and shall
pay all losses, costs, attorneys fees, expenses, settlement payments, fines and
damages arising in connection with any such claims. Licensor agrees to timely
advise Meldisco of any such lawsuit, claim or proceeding and to cooperate with
Meldisco and/or Licensee in the defense or settlement of such lawsuit, claim
or proceeding. Meldisco and/or Licensee shall keep Licensor advised at all
times concerning the handling of such matters and shall furnish for
Licensor's prior review and approval all proposed settlement, release or
similar documents or agreements disposing of a given matter if such matter
involves Licensor or affects its interests.
ARTICLE XVI
NO ASSIGNMENT OR SUBLICENSE
16.1 No Assignment or Sublicense. Neither party shall assign or
sublicense its rights and/or duties under this Agreement without the prior
written consent of the other party given at the other party's sole option,
except that either party may assign its rights, but not its duties under this
Agreement to a subsidiary or affiliate which is and shall remain wholly
controlled by or under common control with such party, upon written notice to
the other party. Any other attempted assignment or sublicense shall be void.
ARTICLE XVII
MISCELLANEOUS
17.1 Maintenance of Premises and Security Service. Licensor shall
maintain and provide janitor service at its cost for the Footwear Departments.
Each Licensee shall be responsible for janitor service in any storage area
occupied by it under this Agreement. Licensor may from time to time provide
such security service as it may deem necessary.
17.2 Credit Sales. Licensor may provide credit facilities consisting
of credit card, debit card or deferred payment plans for the sale of
Licensees' goods. No Licensee may install or promote its own credit card,
debit card or deferred payment plans without prior written approval of
Licensor's headquarters.
17.3 Memberships in Trade Organizations and Charitable Contributions.
Licensor shall establish common standards for participation in trade
organizations and charitable contributions.
17.4 Risk of Loss, Damage, Destruction or Disappearance of Property.
The risk of loss, damage, destruction or disappearance of any property on the
Store premises, as between Licensor and any Licensee, shall be exclusively
that of the party having title to such property. Further, each Licensee
relieves Licensor, and Licensor relieves each Licensee, of liability for any
loss caused by fire or explosion arising out of any act of omission or
commission, negligent or otherwise, of the agents, servants or employees of
the other party.
17.5 Rights and Remedies. The rights and remedies given herein are not
exclusive, but are cumulative, and are in addition to all rights and remedies
allowed by law, except that neither party shall be liable to the other party
for incidental, consequential, punitive or exemplary damages arising in
connection with this Agreement or the performance, omission of performance or
termination hereof, even if the said party has been advised of the possibility
of such damages and without regard to the nature of the claim or the
underlying theory or cause of action (whether in contract, tort or otherwise).
17.6 Independent Contractor. Neither party is nor shall be the agent
of the other party in any matter. Each party is and at all times shall be an
independent contractor in the performance of this Agreement, and neither
party is authorized to bind the other party to any agreement or contract, in
any manner, with any third party. The parties do not intend this Agreement to
constitute a joint venture, partnership or lease and nothing herein shall be
construed to create such a relationship. Subject to the provisions hereof,
this Agreement shall bind the successors and permitted assigns of the parties.
17.7 CHOICE OF MICHIGAN LAW AND FORUM. THIS AGREEMENT AND ALL MELDISCO
LICENSE AGREEMENTS, AND ALL ASPECTS OF THE BUSINESS RELATIONSHIP BETWEEN
LICENSOR AND MELVILLE, MELDISCO AND EACH LICENSEE SHALL BE DEEMED TO HAVE BEEN
EXECUTED AND DELIVERED IN TROY, MICHIGAN, AND SHALL BE CONSTRUED, INTERPRETED
AND ENFORCED UNDER AND IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
MICHIGAN. MELVILLE, MELDISCO AND EACH LICENSEE AGREES TO EXERCISE ANY RIGHT
OR REMEDY IN CONNECTION WITH THIS AGREEMENT AND ANY MELDISCO LICENSE
AGREEMENTS, OR OTHERWISE ARISING OUT OF SAID BUSINESS RELATIONSHIP(S),
EXCLUSIVELY IN, AND HEREBY SUBMITS TO THE JURISDICTION OF, THE STATE OF
MICHIGAN COURTS OF OAKLAND COUNTY, MICHIGAN OR THE UNITED STATES DISTRICT
COURT AT DETROIT, MICHIGAN.
17.8 Waiver. Silence, acquiescence or inaction shall not be deemed a
waiver of any right. A waiver shall only be effective if it is in writing and
signed by an authorized officer of the party to be charged. Any such waiver
shall not be construed as a continuing waiver or as a waiver of any other
breach of a same or similar nature.
17.9 Severability. In the event that any part or portion of this
Agreement shall be deemed to be invalid or illegal, then such invalid or
illegal portion shall, so far as possible, not affect the validity or legality
of the remainder of this Agreement. Further, the parties agree that they
shall attempt to arrive at a modification of any illegal or invalid part so as
to render the same legal and valid and within the keeping of the original
tenor and spirit of the Agreement.
17.10 Entire and Exclusive Agreement. This Agreement, the Exhibits
hereto and the Meldisco License Agreements shall constitute the entire
exclusive agreement between the parties with respect to operation of the
Footwear Departments and use and licensing of the Licensed Property in the
Territory, and shall supersede all prior negotiations, understandings and
agreements, if any, between the parties, whether oral or written. Except as
otherwise provided herein, this Agreement may only be amended or modified by
written instrument signed by authorized officers of the parties.
17.11 Headings for Convenience Only. The headings, titles or captions
used in this Agreement are provided solely for the convenience of the parties
and shall not be considered relevant in any construction of this Agreement or
be interpreted to define, expand or limit the provisions of this Agreement.
17.12 Authority. Each party represents, covenants and warrants that it
has the full legal right, power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated herein.
17.13 Notices. Any notices should be delivered by certified mail
return receipt request or a nationally recognized overnight delivery service
and addressed if to Melville, Meldisco or any Licensee to:
President
Meldisco, division of Melville Corporation
933 MacArthur Boulevard
Mahwah, New Jersey 07430
and
President
Melville Corporation
One Theall Road
Rye, New York 10580
and if to Licensor to: General Counsel
Kmart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084
IN WITNESS WHEREOF, the parties by their duly authorized officers set
their hands as follows:
Melville Corporation Kmart Corporation
By: /s/ J.M. Robinson By: /s/ Kenneth W. Watson
------------------------- -------------------------
J.M. Robinson Kenneth W. Watson
Title: Vice President Title: Executive Vice
President, Marketing
and Product Development
Date: June 9, 1995 Date: June 9, 1995
Kmart Properties, Inc., with
respect to Article 3.1
By: /s/ Gerald T. Tschura
-------------------------
Gerald T. Tschura
Title: Vice President, Treasurer
and Legal Counsel
Date: June 9, 1995
EXHIBIT A
The following "Melville Agreements" were each entered into by and between S.S.
Kresge Company and Melville Shoe Corporation:
1. Agreement dated December 14, 1966.
2. Agreement dated as of December 14, 1966 and entered into by separate
agreement on June 30, 1967 and July 5, 1967.
3. Agreement dated as of July 1, 1967.
4. Agreement dated as of January 1, 1971.
5. Letter Agreements dated January 26 and February 26, 1973.
6. Agreement dated as of January 1, 1975.
The following Agreements were each entered into by and between K mart
Corporation (now known as Kmart Corporation) and Melville Corporation:
7. Agreement dated as of January 1, 1979.
8. Agreement dated as of January 1, 1984.
9. Agreement dated as of August 20, 1984.
10. Letter Agreements dated October 25, 1989, January 30, 1992,
December 22, 1993, December 12, 1994, February 8, 1995,
April 27, 1995 and May 31, 1995.
EXHIBIT B
MELDISCO
LICENSE AGREEMENT
This License Agreement made and entered into by and between the Kmart
Corporation, a Michigan Corporation, as Licensor and ________________________,
a _____________________ corporation, as Licensee. All capitalized terms used
herein which are not defined herein shall have the meaning set forth in the
"Master License Agreement" as defined below.
WHEREAS, Licensor and Melville Corporation have entered into an agreement made
and dated as of June 9, 1995 with respect to the operation of Footwear
Departments in certain Stores (the "Master License Agreement");
WHEREAS, Licensor is the owner of the retail store operated under its
servicemark of Kmart or Super Kmart Center located at ________________________
(the "Store");
WHEREAS, Licensee desires to operate, a Footwear Department in the Store;
NOW THEREFORE, in consideration of the mutual promises, undertakings and
covenants herein, and subject to all the terms, provisions and conditions of
the Master License Agreement, which is incorporated into this Agreement by
reference, Licensor hereby grants Licensee an exclusive License to operate a
Footwear Department in the Store with respect to the sale of Licensed Footwear
for a period commencing __________________and ending coterminous with the
Master License Agreement. Licensee is granted the privilege, free of fees but
subject to all other terms of this Agreement, to enter the premises prior to
the term hereof for accepting freight and preparing for the Store opening.
Licensee Licensor
Kmart Corporation,
a Michigan Corporation
By:_________________________ By:_______________________________
Attest: ____________________ Attest: __________________________
Date: ______________________ Date: ____________________________
EXHIBIT C
SHAREHOLDERS AGREEMENT
AGREEMENT dated , 199_, among
_________________________________, Inc. (the "Corporation"), a
____________________corporation, and the undersigned corporations which
constitute or will constitute all of the shareholders of the Corporation (the
"Shareholders"), Miles Shoes Meldisco Lakewood, Colorado, Inc., ("Meldisco"),
a Colorado corporation and Kmart Corporation ("Kmart"), a Michigan corporation.
W I T N E S S E T H :
1. Meldisco has purchased or will purchase ______shares of Common
Stock of the Corporation, and Kmart has purchased or will purchase
_______shares of Common Stock of the Corporation. The Corporation has not
issued, and without the consent of both Shareholders of the Corporation will
not issue, any capital stock other than such shares.
2. The number of directors of the Corporation will be four.
Meldisco will be entitled to elect three such directors and Kmart will be
entitled to elect one. Any vacancies occurring in the board of directors of
the Corporation will be filed in accordance with this principle.
3. Kmart has entered or will enter into a License Agreement with
the Corporation.
4. Meldisco will not transfer its shares of Common Stock of the
Corporation during the term of the license or any renewal thereof except with
Kmart's permission, and Kmart shall not transfer it shares of Common Stock of
the Corporation during the term of the license or any renewal thereof except
to a wholly owned subsidiary (in which Kmart shall at all times continue to
own all stock); and such transfer to Kmart shall in no way result in transfer
of Kmart's duties to the subsidiary corporation.
5. Upon termination of the license or cessation of the operation of
the shoe department by the Corporation, the Corporation shall be liquidated.
6. Each stock certificate of the Corporation shall contain on its
face a statement to the effect that transfer of the share or shares
represented thereby is subject to the restriction contained in paragraph 4 of
this agreement.
7. The Corporation shall furnish to each Shareholder a profit and
loss statement and a balance sheet at the close of each fiscal year and each
Shareholder shall have the right to examine the books and records supporting
such statement.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the day and year first above written.
___________________________, INC.
Miles Shoes Meldisco
Lakewood, Colorado, Inc.
By ______________________________
Kmart Corporation
By _______________________________
EXHIBIT D
The 30 Meldisco subsidiaries whose stock is wholly-owned by Melville:
Kmart Store No. Address
- --------------- -------
4016 Church Street Extension, Greenville SC
4040 4002 South Dort, Flint MI
4053 6025 South Blvd, Charlotte NC
4062 3311 Riverside Dr, Danville VA
4065 200 Capital Ave SW, Battle Creek MI
4066 3001 E Michigan Ave, Jackson MI
4075 400 E Six Forks Rd, Raleigh NC
4083 3083 Miller Rd, Flint MI
4084 2312 Wards Rd, Lynchburg VA
4090 1801 Hydraulic Rd, Charlottesville WV
4091 4001 N Euclid Ave, Bay City MI
4096 3235 Holland Rd, Saginaw MI
4099 6105 N Saginaw Rd, Mt Morris MI
4110 2300 N Main St, High Point NC
4112 1001 Patton Ave, Asheville NC
4118 3175 Alpine Ave NW, Walker MI
4125 155 28th St SW, Wyoming MI
4136 2100 Carlisle Ave NE, Albuquerque NM
4137 2701 Freedom Drive, Charlotte NC
4148 7925 Indianapolis Blvd, Hammond IN
4150 528 W Plank Rd, Altoona PA
4154 320 S Lincoln Way, Aurora IL
4158 3810 University Ave, Waterloo IA
4166 5928 5956 Central Ave W, Toledo OH
4168 2830 Navarre Rd, Oregon OH
4171 4200 W Kellogg, Wichita KS
4174 8600 E Kellogg, Wichita KS
4176 2055 Walden Ave, Cheektowaga NY
4188 1701 W 4th Ave, Charleston WV
4202 2100 Wade Hampton Blvd, Greenville SC
EXHIBIT E
1. The Marks are:
KMART
SUPER KMART CENTER
2. In using the Marks, Licensee shall affix or display the appropriate
trademark ([Registered], [Trademark], [SM]) or copyright notice ([Copyright])
according to Licensor's instructions from time to time.
EXHIBIT F
RULES and REGULATIONS
RESTRICTIONS ON THE USE OF THE REGISTERED SERVICE MARK "Kmart". Retail
services offered the consumer under the registered service mark of "Kmart"
must be under uniform operating conditions established by Kmart Corporation
and equally applicable to all who operate under the mark in order to preserve
the legal rights of Kmart Corporation as the registered owner of the mark, and
to afford appropriate legal protection to the Licensee. The limited license
granted herein requires that all sales to the public be offered exclusively
under the service mark of "Kmart", and prohibits the use of the mark in any
other manner.
OTHER USES PROHIBITED. The use of "Kmart" by a licensee in conjunction with
bank accounts, checks, or on order forms, purchase orders or contracts with
manufacturers, vendors, or suppliers, or with governmental agencies, or public
utilities is prohibited by the terms of this license Agreement.
INCORPORATION. The adoption of "Kmart", or any simulation thereof in any
corporate name is prohibited.
ASSUMED NAME STATUTES. If the registration under any assumed name statute is
required, such registration shall clearly indicate that operations under the
"Kmart" name are subject to and by virtue of a license Agreement with the
Kmart Corporation, the registered owner of the mark.
ADVERTISING AND DISPLAY SIGNS. The use in advertising logotype or display
signs or in any other manner of other service names, service marks, or service
insignia, alone, or in conjunction with the service trademark "Kmart", is in
derogation of the requirement that all sales to the public be exclusively
under the mark "Kmart" and is prohibited by the terms of this Agreement.
USE OF THE REGISTERED TRADEMARK "Kmart" ON PRODUCTS. "Kmart" is also the
registered trademark of Kmart Corporation applying to all products. The
limited license granted herein is solely for the use of the registered mark
"Kmart" in conjunction with retail services, and the unauthorized application
of the registered trademark "Kmart" to products is in violation of this
agreement. Upon application by the Licensee, consideration will be given to
the granting of a license for the use of "Kmart" on specified products, under
terms which will preserve the legal rights of Kmart Corporation as the
registered owner of the mark. The standard form of such license agreement
requires an application from the "Kmart" Licensee showing the description of
the goods, the quality specifications, quality control procedures to be used,
advance submission of all labels, packages and display cards, identification
of manufacturer, and certain undertakings on the part of both the Licensee and
his manufacturer or supplier. Decision as to the granting of such application
will be made by the Quality Control Committee of the Licensor.
TELEPHONES. All listed telephones, including coin telephones, will be
contracted for by the Licensor. Telephone bills, including Yellow Page
Directory, shall be submitted to each Licensee for approval and payment.
Telephone Directory Listings Shall Be As Follows:
Kmart DISCOUNT STORES DIVISION of Kmart Corporation 925-7005
Kmart STORE NO. 4036
455 Riverview Dr.
Appliance Dept. 455 Riverview Dr. 925-7005
Auto supplies, Tires &
Auto Service Center 455 Riverview Dr. 925-7005
Camera Dept. 455 Riverview Dr. 925-7005
Food Market 455 Riverview Dr. 925-2376
Home Improvement Dept. 455 Riverview Dr. 926-9428
Jewelry Dept. 455 Riverview Dr. 925-7005
Ladies' Wearing Apparel 455 Riverview Dr. 925-3572
Men's and Boy's Furnishings 455 Riverview Dr. 925-7005
Shoe Dept. 455 Riverview Dr. 926-7947
Sporting Goods 455 Riverview Dr. 925-7005
Yellow Page Listing Shall Be As Follows:
Kmart DISCOUNT STORE
DIVISION OF KMART CORPORATION
Use this space for store numbers, address and
description of merchandise and/or service available
from such a Department such as:
Appliance Department
Auto Supplies and Auto Service
Camera Department, etc.
These Departments must be named exactly as they are in
the standard telephone listing.
EMPLOYMENT. All hiring and terminations, so far as they apply to each
Licensee, will be under the supervision of the Licensee's manager.
The Kmart personnel supervisor will take applications of persons desiring
employment. Upon request, these applications will be made available to
Licensee's manager.
Neither Licensor nor Licensee will hire an employee or former employee of the
other without first checking with Licensor or Licensee.
Purses and Extra Clothing. Purses and extra clothing of employees shall be
kept as directed by the Licensor. Under no circumstances are purses to be
kept at the Licensee's department.
Employee Purchases. All store purchases by employees, including all
Licensee's employees, must be taken unsealed to a supervisor designated by the
Licensor. Such purchases will be sealed with the register tape and be
available to be detached by the person who approves packages taken from the
store. Employees packages are not permitted to be kept at the department.
Refunds, Complaints. All refunds except tires, batteries and similar
merchandise involving performance guarantees, are to be made at the Kmart
Service Desk. Complaints are to be cleared through the Kmart Service Desk.
Any disputes over refunds or complaints shall be resolved by Licensor.
Shoplifting. Persons suspected of shoplifting shall only be questioned or
apprehended by the Store Security Officer or the Licensor's Store Manager.
Lost Articles. Customer's change left at the counter should be turned over to
the Licensor's cashier with the employee's name, date, amount of money
tendered, and quantity of merchandise purchased. If money is not called for
within two days, the cashier will report the money as a licensee receipt.
Money or valuables found by a customer or store employee are to be held in the
office for a period of sixty days, after which, if they have not been claimed,
they will be returned to the person finding them.
Smoking. Smoking in the department, or anywhere on the sales floor, except in
the cafeteria or in the employee's lounge, is prohibited. Employees smoking
in the stockroom area will be dismissed.
Greetings of Customers. Each customer shall receive a "Friendly" or "Cheery"
greeting and close all sales with "Thank You for Shopping at Kmart".
Supplies. Licensor will furnish, at its expense, wrapping supplies, paper,
bags, twine, and forms which shall be used by all Licensees for the conduct of
the business pertaining to cash transactions, refunds, layaways, will-calls,
credit and reports to Licensor. The Licensee shall furnish at its expense
such other special boxes or wrappings as they believe necessary or desirable
to enhance the salability or the security of their merchandise.
Signs. Licensee shall purchase all signs for display and promotional selling,
including string tags, senso labels, clips and other signs as may be required,
from Licensor at cost of production and material.
PRICE MARKING. Licensee shall individually price all merchandise and also
identify it by the color and key number assigned Licensee's department.
Licensee shall supply pricing material for automated merchandise replacement
systems which shall bear the identifying color assigned to the department.
Storage. Licensee shall observe the following practices regarding storage
area:
A. Keep clean.
B. Lock and have lights out when not in use.
C. Permit no condition to exist which might create a fire
hazard.
D. Enforce "no smoking".
E. Check for hazards at the close of each day.
Incoming - Outgoing Merchandise. Licensee shall be responsible for receiving
its merchandise unless Licensor performs this service at Licensee's expense.
All incoming and outgoing merchandise shall be under the supervision of
Licensor.
Freight Door. The freight door shall be close except during receipt of
merchandise under the supervision of Licensor.
Emergency Exits. Licensee shall observe the following practices regarding
emergency exits:
A. Keep closed at all times except in emergencies.
B. Not used for receipt or removal of merchandise unless under
supervision of Licensor.
C. Unauthorized use shall be cause for dismissal.
D. No emergency exit is to be padlocked while the store is open
for business.
General Operation of Store. Licensee agrees to do the following:
A. Keep open for business and operate its department during
hours established by Licensor.
B. Not permit its department to be closed for any period
without Licensor's written consent.
C. Not permit the continuance of a labor dispute involving its
department which materially affects the sales or threatens
the operation of other Licensees or Licensor.
D. Licensee must take the necessary action to prevent its
department from being unattended during store hours. All
sales personnel shall be on duty at all times during the
period from 7:00 P.M. to 10:00 P.M.
E. Licensee must promptly remove all cardboard and other
residue from unpacked merchandise, from entire area occupied
by the Licensee.
F. To maintain clean, attractive, well-filled displays of its
merchandise, in adequate assortments, in sufficient depth,
in suitable price range, and competitive in price with the
same or similar goods offered for sale in the trading area.
G. Discontinue the sale of any merchandise or service which
Licensor shall deem not within the agreed classification.
H. In addition to being competitive in its trading area, not to
offer any merchandise for sale at normal suggested list
prices without the express permission of Licensor.
I. Not to make a fair trade agreement affecting any item sold
in the department.
J. To offer first-quality merchandise, including branded
merchandise where possible. Carry no seconds, irregulars or
inferior items. Top value, close-out merchandise offering
special promotional possibility is permitted.
K. The height of displays from the floor level shall not be in
excess of 36" adjacent to windows; 48" in the midway; 48"
adjoining the food market; and 54" at all other locations.
Advertising and Promotion by Licensor. Licensee shall work closely with
Licensor in planning sufficiently in advance for a coordinated advertising
program based on budget to make available in sufficient depth and suitability,
merchandise which will produce maximum sales. Licensee shall plan suitable
display of such advertised merchandise.
Separate Advertising by Licensee. Where permitted by the License Agreement,
independent advertising by the Licensee shall conform to the following
requirements:
a) The use of the approved Kmart logo, preferably at the top of
each advertisement.
b) The use of the Kmart advertising format, which consists of
the interchangeable unit space system, and printers type
face as may be specified from time to time by the Licensor,
and
c) The ethical standard of advertising established by the
Licensor.
The Licensee shall provide the Licensor, at least two months, and preferably
six months, in advance of such advertising, their planned outline of their
proposed advertising and promotional program in order to provide maximum
coordination between the advertising programs of Licensee and Licensor.
Sales Meetings. Licensee's manager and key personnel shall attend meetings to
discuss operating procedures, formulate plans, review results and other
pertinent information necessary for the successful operation of the business.
Licensee's employees shall attend briefing and training sessions to
familiarize themselves with store policies and regulations pertaining to the
conduct of the business in their department as well as the entire operation.
Aisle Space. Licensee shall not obstruct or alter space, or revamp or remove
fixtures, as provided in the layout of licensed area, without approval of the
Licensor.
Fire Rules. Licensee shall not permit any condition to exist that will create
a fire hazard.
Payments for Licensee. Licensor will provide the necessary cash for payroll
and limited local payment upon receipt of a properly prepared voucher signed
by Licensee or his designated employee. Deductions will be made from weekly
settlements.
Licensee's Inventory. Licensee will be charged for any additional expense
incurred by the Licensor resulting from inventorying by the Licensee during
the inventory period.
Employee Cars. Cars of employees will be parked in such a manner that
customers will have the preferred parking space in front of the store.
Licensor's Manager will designate area.
For Departments with Cash Registers Operated by Licensee. Without exception,
all cash registers will be provided by the Licensor and all receipts are to be
recorded thereon.
All cash register readings shall be made by the Licensor. No register repairs
or reading adjustments shall be made except by the Licensor.
All sales must be registered before wrapping or bagging the merchandise.
a. Cash sales. Wrapping or bagging must be sealed shut with
the register receipt tape.
b. Charge sales. Credit losses arising from failure to follow
the Licensor's local store rules governing the extension of
credit will result in a charge-back to Licensee.
c. Layaway sales. Unless otherwise approved, layaway sales are
to be processed only through the Licensor's layaway
instructions in force at the store.
All register errors must be voided and a new tape produced. The error tape
must be signed by two responsible employees and placed in the money drawer.
Money Handling -
a. All necessary change funds will be provided by the Licensor.
b. All monies received are to be registered and placed in the
till immediately.
c. Checks accepted by Licensee are to be stamped with an
endorsement stamp and identified as to accepting Licensee
before placing in register. All checks accepted by the
Licensee are the responsibility of the Licensee.
d. Shortages on registers operated by Licensee will be their
responsibility.
e. Register overages will be treated as sales of Licensee.
f. No money shall be taken from the register for Licensee's use
or for use of Licensee's employees. All local cash
requirements of Licensee will be handled through the
Licensor's office cashier.
g. No money is to be left in the register during hours when
store is closed. At the close of each business day all
cash, checks, and OK'd error tapes are to be delivered to
the Licensor.
EXHIBIT G
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