===============================================================================
As filed with the Securities and Exchange Commission on June 17, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOOTSTAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3439443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
933 MACARTHUR BOULEVARD
MAHWAH, NEW JERSEY
(Address of Principal 07430
executive offices) (Zip Code)
(201) 934-2000
(Registrant's telephone number, including area code)
Securities to be registered
pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Common Stock, par value $.01 per share The New York Stock Exchange, Inc.
Securities to be registered
pursuant to Section 12(g) of the Act:
None
===============================================================================
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.(***)
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.
/s/ Carlos Alberini
By:
-------------------------------
Name: Carlos Alberini
Title: Chief Financial Officer
Date: June 17, 1996
- -----------------
(*)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 June 17, 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......................................................................19
Dividends...................................................................20
Unaudited Pro Forma Combined Financial
Statements..................................................................21
Pro Forma
Capitalization..............................................................25
Selected Historical Combined Financial
Data........................................................................26
Management's Discussion and Analysis of Financial Condition and
Results of
Operations..................................................................27
The
Business....................................................................32
Management..................................................................45
Security Ownership of Certain Beneficial Owners
and
Management..................................................................57
Description of Capital
Stock.......................................................................58
Certain Statutory, Charter and Bylaw
Provisions..................................................................59
Independent
Auditors....................................................................61
Additional
Information.................................................................62
Index to Combined Financial
Statements.................................................................F-i
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, Arthur V. Richards, Corporate Secretary, One
Theall Road, Rye, New York 10580. The Distribution Agent's telephone number is
(800) 851-9677. Melville's telephone number is (914) 925-4000. 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 of Thom McAn's most favorable
store sites to Footaction stores (as 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 which is expected to improve the
Company's operating performance and to reduce its operating expenses by
approximately $4 million in 1997.
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 of Thom McAn's most favorable store
sites to Footaction stores and by selling or closing the remaining Thom McAn
stores (the "McAn Plan"). The Company currently expects to have exited the Thom
McAn business within 12 months. Accordingly, the Company is treating its Thom
McAn segment as discontinued operations and, in connection with its McAn Plan,
will record a pre-tax charge of approximately $90 million in the second
quarter of 1996. For additional information on the McAn Plan, 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 the Company 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. 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 Sharing
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 Year Ended
---------------------- -----------------------
1996 1995 1995(1) 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data: ($ in millions)
Net sales...................................... $336.9 $325.8 $1,615.2 $1,612.8
Cost of sales.................................. 243.3 235.6 1,124.5 1,117.8
Gross profit................................... 93.6 90.2 490.7 495.0
Store operating, selling, general and
administrative expenses...................... 83.7 79.8 343.0 319.6
Depreciation and amortization.................. 5.7 5.5 20.0 18.7
Restructuring and asset impairment
charges...................................... -- -- 23.7 --
Operating profit............................... 4.2 4.9 104.0 156.7
Interest income, net........................... 5.3 5.5 21.1 15.4
Provision for income taxes..................... 3.2 2.8 37.3 49.5
Minority interests in net income............... 0.2 2.0 38.4 51.9
(Loss) earnings from discontinued
operations, net.............................. (1.0) (6.6) (29.4) 6.0
Cumulative effect of changes in accounting
principle, net(2)............................ -- 1.3 1.3 --
Net income (loss).............................. $5.1 $(2.3) $18.7 $76.7
Balance Sheet Data: ($ in millions)
Current assets:
Due from parent and other divisions.......... $653.8 $641.4 $710.8 $727.7
Inventories.................................. 326.5 392.8 282.6 347.3
Other........................................ 104.5 94.7 120.9 115.7
Total current assets........................... 1,084.8 1,128.9 1,114.3 1,190.7
Property and equipment, net.................... 192.6 157.6 195.1 163.9
Total assets................................... 1,341.1 1,331.0 1,372.7 1,392.5
Current liabilities............................ 168.1 141.0 203.5 168.3
Minority interests in subsidiaries............. 94.1 110.7 93.8 108.7
Melville equity investment..................... 1,018.9 1,019.4 1,013.8 1,033.1
Fiscal Years Ended
------------------------------------------------------------------------
1993 1992 1991
---- ---- ----
Statement of Operations Data: ($ in millions)
Net sales...................................... $1,474.8 $1,413.8 $1,279.2
Cost of sales.................................. 1,011.7 1,087.6 894.9
Gross profit................................... 463.1 326.2 384.3
Store operating, selling, general and
administrative expenses...................... 287.0 150.6 233.6
Depreciation and amortization.................. 13.7 10.5 6.4
Restructuring and asset impairment
charges...................................... -- -- --
Operating profit............................... 162.4 165.1 144.3
Interest income, net........................... 11.7 12.5 20.3
Provision for income taxes..................... 53.7 54.8 47.9
Minority interests in net income............... 47.3 53.8 50.4
(Loss) earnings from discontinued
operations, net.............................. 5.0 (59.2) 17.3
Cumulative effect of changes in accounting
principle, net(2)............................ -- 8.1 --
Net income (loss).............................. $78.1 $1.7 $83.6
Balance Sheet Data: ($ in millions)
Current assets:
Due from parent and other divisions.......... $706.1 $731.8 $696.4
Inventories.................................. 307.1 299.4 342.5
Other........................................ 116.5 138.2 72.8
Total current assets........................... 1,129.7 1,169.4 1,111.7
Property and equipment, net.................... 133.0 110.7 122.0
Total assets................................... 1,301.6 1,320.5 1,275.5
Current liabilities............................ 135.1 159.1 171.6
Minority interests in subsidiaries............. 93.9 100.2 105.3
Melville equity investment..................... 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 $139 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) The charge in 1995 was for the writeoff, effective January 1, 1995, of
internally developed software costs that had previously been
capitalized. The charge) in 1992 was for the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1, 1992.
</TABLE>
Summary Selected Historical Combined Financial Data (continued)
<TABLE>
<CAPTION>
First Quarter Ended Fiscal Years Ended
--------------------- ----------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C>
Other Financial and Operating Data:
Current ratio (excluding due from
parent and other divisions)............. 2.6:1 3.5:1 2.0:1 2.7:1 3.1:1
Additions to property and equipment
($ 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 $28.6 $28.6 $28.4 $37.4
Footaction.............................. 180.5 (1) 186.8 186.8 187.5 160.5
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>
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(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.
RISK FACTORS
In addition to the other information contained in this
Information Statement, stockholders should carefully review the following
considerations.
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. 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 expects to 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," and
"Combined Financial Statements."
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 at the discretion of the Company's Board of Directors (the "Company
Board"). The declaration of dividends and the amount thereof will depend on a
number of factors, including the Company's financial condition, capital
requirements, funds from operations, future business prospects 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 Sharing
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 Sharing 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
$24 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 , 1996 (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
The following is a summary of the material federal income tax
consequences of the Distribution to Melville and its shareholders. Prior to
the Distribution, Melville expects to receive a ruling from the Internal
Revenue Service to the effect that 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"), and accordingly, for federal
income tax purposes:
(i)Except as described below with respect to fractional shares,
a Melville shareholder will not recognize gain or loss as a result of the
Distribution. Cash received in lieu of a fractional share will be treated as
received in 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.
(ii)A Melville shareholder will apportion its tax basis for its
Melville Common Stock between such Melville Common Stock and Company Common
Stock received in the Distribution in proportion to the relative fair market
values of such Melville Common Stock and Company Common Stock on the
Distribution Date.
(iii)A Melville shareholder's holding period for the Company
Common Stock received in the Distribution will include the period during which
such shareholder held the Melville Common Stock with respect to which the
Distribution was made, provided that such Melville Common Stock is held as a
capital asset by such shareholder as of the Distribution Date.
(iv)Except to the extent of any excess loss accounts or deferred
intercompany gains, no gain or loss will be recognized to Melville as a result
of the Distribution.
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 Sharing
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 Sharing 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 Sharing 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 Sharing
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,
(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 Record Date; and (x) a dividend of Company Common Stock shall
have been made such that the number of shares of such stock held by Melville
will equal the number necessary to be distributed to Melville shareholders.
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 Sharing
Agreement (as defined below), check collection and risk management services
(the "Services"). Such Services are to be provided in a manner generally
consistent with the nature of Melville's services and practices prior to the
Distribution.
The Services are to be offered through December 31, 1996, with
the exception of Tax Services which are to be offered until December 31, 1997.
If a third party becomes the beneficial owner of more than 20% of the
outstanding Company Common Stock, Melville may either terminate its provision
of the Services or require that such third party guarantee the obligations of
the Company Group under the Distribution Agreement and the Tax Sharing
Agreement in lieu of early termination of Services.
The Distribution Agreement provides that the Services will be
provided in exchange for fees based on Melville's usual and customary charges
for the Services. 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 its best 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.
Terms of the Tax Sharing Agreement
Prior to the Distribution, Melville and the Company will enter
into a tax sharing agreement (the "Tax Sharing 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 foregoing reimbursement obligations of the Company and Melville may be
eliminated in connection with the elimination of intercompany balances (as
described in Note 1 to the Company's Unaudited Pro Forma Combined Balance
Sheet). 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 imposed as a result of an audit adjustment and 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 Sharing
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 Sharing 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
Sharing Agreement with respect to such transactions.
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 Registration Statement 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 to finance the 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 at the discretion of the Company Board. The declaration of
dividends and the amount thereof will depend on a number of factors, including
the Company's financial condition, capital requirements, funds from
operations, future business prospects 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 Statement of
Income as if the Distribution and such transactions and events had been
consummated on January 1, 1995 and January 1, 1996, respectively. 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 period, 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).............. [ ]
- ----------------
(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
====
(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, as well as asset writeoffs
and certain one-time charges related to the repositioning of the
Company, 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 1996, pro
forma income from continuing operations would have been $56.0 million
and earnings per share would have been $x.xx.
(8) The weighted average number of common shares outstanding reflects the
Distribution ratio times the number of shares of Melville Common Stock
outstanding on the Record Date.
</TABLE>
Footstar, Inc.
Unaudited Pro Forma Combined Statement of Income
Quarter Ended March 30, 1996
($ 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 $ 2.2
and administrative expenses................ 83.7 (1) 85.9
Depreciation and amortization............... 5.7 5.7
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
Income from continuing operations........... $6.1 $(4.6) $1.5
Earnings per share.......................... $[ ]
Weighted average number of
common shares outstanding(4)............... [ ]
- ----------
(1) To record the elimination of Melville expense allocations and the
anticipated net increase in overhead. This increase consists of the
following:
Elimination of Melville expense allocations$ (1.3)
Back office expense reductions...... (1.0)
(2.3)
Stand alone overhead costs.......... 4.5
Net increase..................... $ 2.2
(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.
</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.. 27.0 (0.7)(2) 26.3
Total current assets................. 1,084.8 (654.5) 430.3
Property and equipment, net................... 192.6 192.6
Goodwill, net................................. 29.4 29.4
Deferred charges and other noncurrent assets.. 34.3 (0.1)(2) 34.2
Total assets......................... $1,341.1 $(654.6) $686.5
Liabilities and Equity
Current liabilities:
Accounts payable........................... $66.7 $66.7
Accrued expenses........................... 101.4 101.4
Total current liabilities............ 168.1 168.1
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................. 1,018.9 (896.8)(1a)
(122.1)(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........................ 70.1 (1c) 70.1
Cumulative translation adjustment........ 0.0 0.3( 1c) 0.3
Total equity......................... 1,018.9 (604.3) 414.6
Total liabilities and equity......... $1,341.1 $(654.6) $686.5
(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.
</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>
Due from parent and other divisions $ 653.8 $ --
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 1,018.9 --
Shareholders' equity:
Common stock, par value $__ per share; _ shares
authorized; _ shares issued and outstanding(2) 0.1
Contributed capital 344.1
Retained earnings 70.1
Cumulative translation adjustment $ 0.3
Total equity 1,018.9 414.6
Total capitalization $1,113.3 $ 459.0
Debt to capitalization(3) .03% .07%
- -------------
(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 $122.1 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 $232 million, as indebtedness and as
capitalization, is 17% as of March 30, 1996 and 34% as adjusted for the
Distribution.
</TABLE>
SELECTED HISTORICAL COMBINED FINANCIAL DATA
Prior to the Distribution Date, the Company and its Meldisco,
Footaction and discontinued Thom McAn segments have been operated as part of
Melville. The table below sets forth selected historical combined financial
data for the Company. The historical financial data presented below reflect
periods during which the Company did not operate as an independent company
and, accordingly, certain assumptions were made in preparing such financial
data. Therefore, such data may not reflect the results of operations or the
financial condition which would have resulted if the Company had operated
as a separate, independent company during such periods, and are not
necessarily indicative of the Company's future results of operation or
financial condition.
The following selected historical combined financial data of
the Company for the years ended December 31, 1995, 1994 and 1993 and as of
December 31, 1995 and 1994 and as of and for the first quarter ended March 30,
1996 and April 1, 1995 are derived from and should be read in conjunction with
the Company's historical Combined Financial Statements and the Notes thereto
included elsewhere in this Information Statement and include all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation of the results for the unaudited periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Combined Financial Statements." Earnings per share data are presented
elsewhere in this Information Statement on a pro forma basis only. See
"Unaudited Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
First Quarter Ended
--------------------
1996 1995
---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: ($ in millions)
Net sales..................................... $336.9 $325.8
Cost of sales................................. 243.3 235.6
Gross profit.................................. 93.6 90.2
Store operating, selling, general and
administrative expenses..................... 83.7 79.8
Depreciation and amortization................. 5.7 5.5
Restructuring and asset impairment
charges..................................... -- --
Operating profit.............................. 4.2 4.9
Interest income, net.......................... 5.3 5.5
Provision for income taxes.................... 3.2 2.8
Minority interests in net income.............. 0.2 2.0
(Loss) earnings from discontinued
operations, net............................. (1.0) (6.6)
Cumulative effect of changes in accounting
principle, net(2)........................... -- 1.3
Net income (loss)............................. $5.1 $(2.3)
Balance Sheet Data: ($ in millions)
Current assets:
Due from parent and other divisions......... $653.8 $641.4
Inventories................................. 326.5 392.8
Other....................................... 104.5 94.7
Total current assets.......................... 1,084.8 1,128.9
Property and equipment, net................... 192.6 157.6
Total assets.................................. 1,341.1 1,331.0
Current liabilities........................... 168.1 141.0
Minority interests in subsidiaries............ 94.1 110.7
Fiscal Years Ended
-----------------------------------------------------------------------
1995(1) 1994 1993 1992 1991
Statement of Operations Data: ($ in millions) ---- ---- ---- ---- ----
(continued)
Net sales..................................... $1,615.2 $1,612.8 $1,474.8 $1,413.8 $1,279.2
Cost of sales................................. 1,124.5 1,117.8 1,011.7 1,087.6 894.9
Gross profit.................................. 490.7 495.0 463.1 326.2 384.3
Store operating, selling, general and
administrative expenses..................... 343.0 319.6 287.0 150.6 233.6
Depreciation and amortization................. 20.0 18.7 13.7 10.5 6.4
Restructuring and asset impairment
charges..................................... 23.7 -- -- -- --
Operating profit.............................. 104.0 156.7 162.4 165.1 144.3
Interest income, net.......................... 21.1 15.4 11.7 12.5 20.3
Provision for income taxes.................... 37.3 49.5 53.7 54.8 47.9
Minority interests in net income.............. 38.4 51.9 47.3 53.8 50.4
(Loss) earnings from discontinued
operations, net............................. (29.4) 6.0 5.0 (59.2) 17.3
Cumulative effect of changes in accounting
principle, net(2)........................... 1.3 -- -- 8.1 --
Net income (loss)............................. $18.7 $76.7 $78.1 $1.7 $83.6
Balance Sheet Data: ($ in millions)
Current assets:
Due from parent and other divisions......... $710.8 $727.7 $706.1 $731.8 $696.4
Inventories................................. 282.6 347.3 307.1 299.4 342.5
Other....................................... 120.9 115.7 116.5 138.2 72.8
Total current assets.......................... 1,114.3 1,190.7 1,129.7 1,169.4 1,111.7
Property and equipment, net................... 195.1 163.9 133.0 110.7 122.0
Total assets.................................. 1,372.7 1,392.5 1,301.6 1,320.5 1,275.5
Current liabilities........................... 203.5 168.3 135.1 159.1 171.6
Minority interests in subsidiaries............ 93.8 108.7 93.9 100.2 105.3
- -------------------
(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.
</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. 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 $104.0 million reflected in the historical combined
statement of operations for such year.
In 1995, the Company also changed its policy to expense
internally developed software costs that were previously capitalized. Such
amount was recorded on the historical combined statement of operations as the
cumulative effect of a change in accounting principle.
Results of Operations
Net Sales
<TABLE>
<CAPTION>
($ in millions) First Quarter Ended Fiscal Years Ended
------------------- ---------------------------------------
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>
(As a % of net sales) First Quarter Ended Fiscal Years Ended
------------------- --------------------------
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%
_____________
* Includes allocations from parent
</TABLE>
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%
________
* Includes special charges recorded in connection with the Company's restructuring. Excluding these charges, operating profit
for the fiscal year ended 1995 would have been $116 million for Meldisco, $23 million for Footaction, and $139 million for
the Company combined (or 8.6% of the Company's combined net sales).
</TABLE>
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 $5 million of one-time costs recognized by Meldisco related to
store closings and other contingencies.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
($ 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
* 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.
</TABLE>
The historical financial statements reflect the Company's
status as a division of Melville, with an intercompany receivable balance that
generates interest income to the Company. As of the Distribution, a
significant amount of the Company's retained earnings will be transferred to
Melville, and the intercompany balance will be eliminated as described in the
Notes under "Pro Forma Capitalization." As a result of this recapitalization
and elimination of the intercompany balance, the Company will no longer
generate such interest income from Melville. In addition, as further discussed
below, the Meldisco Subsidiaries 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. The Company is in
discussion with prospective lenders regarding a credit facility that will
permit borrowings in an amount sufficient to meet its working capital
requirements and to fund trade letters of credit. The Company expects to
have such a credit facility in place as of the Distribution. 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.
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 shareholders in the foreseeable future. See
"Dividends."
Prior to the Distribution and 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."
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 its costs structure is predominantly comprised of
variable costs as compared to other discount footwear competitors which
generally own or lease real estate and are subject to fixed non-cancellable
terms. 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 of Thom McAn's most favorable
store sites to Footaction stores (as 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 which is expected to improve the Company's operating
performance and to reduce its operating expenses by approximately $4 million
in 1997.
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 this
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 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, 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 of Thom McAn's most favorable store sites to Footaction stores, and
by pursuing the sale of or by closing the remaining Thom McAn stores. The
Company currently expects to have exited the Thom McAn business within 12
months. Accordingly, the Company is treating its Thom McAn segment as
discontinued operations and, in connection with its McAn Plan, will record a
pretax charge to income of approximately $90 million in the second quarter of
1996.
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 held thereafter, 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 40 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 58 Director (Class III)
Terry R. Lautenbach 57 Director (Class II)
Bettye Martin Musham 63 Director (Class III)
Kenneth S. Olshan 63 Director (Class III)
M. Cabell Woodward, Jr. 67 Director (Class II)
J.M. Robinson will be the Chairman and Chief Executive Officer
of the Company as of the Distribution. Mr. Robinson has been President and
Chief Executive Officer of the Meldisco division of Melville Corporation since
June 1988. Prior to joining Meldisco, Mr. Robinson was President of Melville
Corporation's Smart Step division (1987-1988).
Carlos E. Alberini will be the Chief Financial Officer of the
Company as of the Distribution. Mr. Alberini is currently a Vice President and
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 and 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 employee 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 May 31, 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
<FN>
<F1>
- ----------
(*) 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 March 22, 1996 and were
exercisable within 60 days thereafter: Mr. Robinson, 73,667
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.
</TABLE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company
is based upon the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and its Amended and Restated Bylaws (the
"Bylaws") which are to be in effect as of the Distribution, and by applicable
provisions of law. The following description is qualified in its entirety by
reference to such Certificate of Incorporation and Bylaws, which are filed as
exhibits to the Form 10.
The Company's Certificate of Incorporation authorizes the
issuance of 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 or special meeting of stockholders, or to bring business before an
annual or special 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 an annual or special meeting only such business may be
conducted as has been brought before the meeting 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 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 or special 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 or special 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. This
indemnification provision may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter
stockholders or the Company from bringing a lawsuit against directors of the
Company for breach of their fiduciary duties as directors. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission.
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 with the Commission a Registration
Statement on Form 10 (the "Registration Statement," which term shall include
any amendments or supplements thereto) 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 Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. For additional
information, reference is made to the Registration Statement 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 Registration Statement 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.
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
<S> <C> <C> <C> <C>
Assets
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........... 27.0 27.9 38.5 52.5
Total current assets.................... 1,084.8 1,128.9 1,114.3 1,190.7
Property and equipment, net........................... 192.6 157.6 195.1 163.9
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............................ $1,341.1 $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.................................... 101.4 76.1 143.9 121.9
Federal income taxes payable........................ -- -- -- 7.0
Total current liabilities............... 168.1 141.0 203.5 168.3
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..................................... 1,018.9 1,019.4 1,013.8 1,033.1
Total liabilities and divisional equity.......... $1,341.1 $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>
<S> <C> <C> <C> <C> <C>
(Unaudited) (Audited)
First Quarter Ended Years Ended
1996 1995 1995 1994 1993
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) (6.6) (29.4) 6.0 5.0
Income (loss) before cumulative effect of
change in accounting principle.............. 5.1 (1.0) 20.0 76.7 78.1
Cumulative effect of change in accounting principle,
net............................................ -- 1.3 1.3 -- --
Net income (loss).............................. $5.1 $(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>
<S> <C> <C> <C> <C> <C>
Cumulative
Common Retained Contributed translation
stock earnings capital adjustment Total
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 income......................... -- 5.1 -- -- 5.1
Balance as of March 30, 1996....... $0.1 $966.9 $51.6 $0.3 $1,018.9
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Combined Statements of Divisional Equity
Years Ended December 31, 1995, 1994 and 1993
(Audited)
($ in millions)
<TABLE>
<S> <C> <C> <C> <C> <C>
Cumulative
Common Retained Contributed translation
stock earnings capital adjustment Total
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>
<S> <C> <C> <C> <C> <C>
(Unaudited) (Audited)
First Quarter Ended Years Ended
1996 1995 1995 1994 1993
Cash flows from operating activities:
Net income (loss)..................................... $5.1 $(2.3) $18.7 $76.7 $78.1
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
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... 8.9 (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 $12.7
</TABLE>
See accompanying notes to combined financial statements.
FOOTSTAR, INC.
Notes to Combined Financial Statements
(1)Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements of Footstar, Inc. (the "Company") include all
of the subsidiaries of the Meldisco, Footaction and Thom McAn divisions
controlled directly or indirectly by Melville Corporation ("Melville" or the
"Parent"). All interdivisional balances and transactions between the entities
have been eliminated.
The minority interests represent the 49% participation of Kmart Corporation
("Kmart") in the ownership of substantially all retail subsidiaries of Meldisco
formed or to be formed from July 1967 until July 1, 2012 for the purpose of
operating leased shoe departments in Kmart stores.
The Parent allocates various costs to its subsidiaries, including the Company.
A summary of the amounts allocated to the Company for the fiscal years ended
is as follows:
<TABLE>
<S> <C> <C> <C>
(Audited)
Fiscal Years Ended
December 31,
1995 1994 1993
($ 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
</TABLE>
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.
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 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 $19.9 million, while the balance will require cash outlays, primarily
in 1996. In connection with the various components of the plan, approximately
40 store employees will be eliminated.
The significant components of the restructuring and asset impairment charges,
and the reserves remaining as of December 31, 1995 and March 30, 1996,
relating to continuing operations, were as follows:
<TABLE>
<S> <C> <C> <C>
Recorded Remaining
December 31, March 30,
1995 1996
(Audited) (Audited) (Unaudited)
($ in millions)
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 will record a pre-tax charge of approximately $90.0 million in the
second quarter of 1996. Accordingly, the results of operations for the Thom
McAn segment have been classified as discontinued operations for all periods
presented in the combined statements of operations.
(3), Continued
Discontinued operations accounted for 27.9% of total assets and 13.9% of total
liabilities as of December 31, 1995. The following table summarizes the
operating results of the discontinued operations for the first quarters and
fiscal years presented:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
First Quarter Ended Fiscal Years Ended
March 30, April 1, December 31,
1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C>
($ in millions)
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 $3.2 million
related to the adoption of SFAS No. 121.
(4) Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
($ in millions)
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 $49.3
</TABLE>
(5) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
($ in millions)
<S> <C> <C> <C> <C>
Deferred income taxes. $20.2 $21.5 $30.7 $44.9
Other................. 6.8 6.4 7.8 7.6
Total.......... $27.0 $27.9 $38.5 $52.5
</TABLE>
(6)Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
($ 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...... 109.8 113.0 125.2 109.1
Property and equipment, net.................. $192.6 $157.6 $195.1 $163.9
</TABLE>
(7) Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
($ in millions)
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
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 .................................. $101.4 $76.1 $143.9 $121.9
</TABLE>
(8)Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
($ in millions)
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 $0.2
</TABLE>
The aggregate long-term debt maturing during each of the next three
years is as follows:
<TABLE>
<S> <C>
(Audited)
Year ($ in millions)
---- -----------
1996 $0.1
1997 0.1
1998 0.1
-----------
$0.3
</TABLE>
(9)Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994
($ in millions)
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 $82.2
</TABLE>
(10)Divisional Equity
Divisional equity consisted of the following:
<TABLE>
<S> <C> <C> <C> <C>
March 30, 1996 (Unaudited)
Meldisco Footaction Thom McAn Total
($ in millions)
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 633.0 3.8 330.1 966.9
Contributed capital.......... 3.4 48.2 -- 51.6
Cumulative translation
adjustment................ 0.3 -- -- 0.3
$636.8 $52.0 $330.1 $1,018.9
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
April 1, 1995 (Unaudited)
Meldisco Footaction Thom McAn Total
($ in millions)
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 $1,019.4
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 (Audited)
Meldisco Footaction Thom McAn Total
($ in millions)
<S> <C> <C> <C> <C>
Common stock, no par value... $0.1 $ -- $ -- $0.1
Retained earnings............ 629.4 1.4 331.0 961.8
Contributed capital.......... 3.4 48.2 -- 51.6
Cumulative translation
adjustment................ 0.3 -- -- 0.3
$633.2 $49.6 $331.0 $1,013.8
</TABLE>
(10),Continued
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1994 (Audited)
Meldisco Footaction Thom McAn Total
($ in millions)
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 $1.4 million.
(11)Leases
The Company leases retail stores, warehouses and office facilities under
capital leases that expire through 2002.
The Company also has noncancelable operating leases, primarily for retail
stores, which expire through 2011. The leases generally contain renewal
options for periods ranging from one to five years and require the Company to
pay costs such as real estate taxes and common area maintenance. Contingent
rentals are based on sales and profits. Net rental expense for all operating
leases for the years ended December 31, 1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
(Audited)
1995 1994 1993
($ in millions)
<S> <C> <C> <C>
Minimum rentals.......... $80.0 $70.6 $61.7
Contingent rentals....... 149.6 174.7 162.2
Total.............. $229.6 $245.3 $223.9
</TABLE>
(11),Continued
At December 31, 1995, the future minimum lease payments under capital leases,
rental payments under operating leases and future minimum sublease rentals
excluding lease obligations for closed stores were as follows:
<TABLE>
<S> <C> <C>
(Audited)
Year Capital leases Operating leases
($ in millions)
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:
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................. 45.3 39.7 54.4 39.9
Deferred tax liabilities:
Property and equipment........................... 10.1 12.2 10.1 12.3
Other............................................ 2.1 3.0 2.1 3.0
Total deferred tax liabilities............ 12.2 15.2 12.2 15.3
Net deferred tax assets................... $33.1 $24.5 $42.2 $24.6
</TABLE>
(12),Continued
Based on the Company's historical and current pre-tax earnings, management
believes it is more likely than not that the Company will realize the net
deferred tax assets.
The provision for income taxes is composed of the following:
<TABLE>
<S> <C> <C> <C> <C> <C>
(Unaudited) (Audited)
March 30, April 1, December 31,
1996 1995 1995 1994 1993
($ 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
</TABLE>
Reconciliations of the effective tax rates to the U.S. statutory income tax
rate are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
(Unaudited) (Audited)
March 30, April 1,
1996 1995 1995 1994 1993
(Percent of pre-tax earnings)
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 $3.6 million for 1995, 1994 and 1993, respectively.
(13) Supplemental Cash Flow Information
Cash payments for income taxes and interest for the years ended December 31,
1995, 1994 and 1993 were as follows:
<TABLE>
<S> <C> <C> <C>
(Audited)
1995 1994 1993
($ in millions)
Income taxes........................... $52.8 $40.6 $52.1
Interest (net of amounts capitalized).. $0.3 $0.6 $0.2
</TABLE>
(14)Related Party Transactions
Postretirement Benefits
The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.
The weighted average discount rates used to determine the accumulated
postretirement benefit obligation ("APBO") were 6.89% and 8.67% at December 31,
1995 and 1994, respectively. The following table reflects the Company's accrued
postretirement benefit costs as of December 31:
<TABLE>
<CAPTION>
(Audited)
1995 1994
($ in millions)
<S> <C> <C>
Retirees.................................. $13.0 $11.2
Fully eligible active plan participants... 1.3 1.9
Not fully eligible active plan participants 12.5 7.9
APBO...................................... 26.8 21.0
Unrecognized prior service cost........... 11.6 12.5
Unrecognized net gain..................... 7.5 7.3
Accrued postretirement benefit cost....... $45.9 $40.8
</TABLE>
Effective December 1992, the Company amended these plans to terminate certain
benefits, resulting in a prior service gain of $14.8 million to be amortized
over 13 years. The Company's net periodic cost, inclusive of discontinued
operations, for the years ended December 31, 1995, 1994 and 1993 was as
follows:
<TABLE>
<S> <C> <C> <C>
(Audited)
1995 1994 1993
($ in millions)
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 $7.0 million for
the estimated liability related to this matter between 1981 and 1988.
In December 1994, the GATT Uruguay Round Agreements Act contained provisions
which effectively ended the Brazil countervailing duty. Accordingly, the
Company reversed the entire accrual which is reflected in the 1994 combined
statement of operations.
(17)Meldisco's Relationship with Kmart
During the quarter ended March 30, 1996 and the fiscal year ended December 31,
1995, Meldisco's Kmart operations represented 96.2% and 95.7%, respectively,
of Meldisco's net sales. These operations represented 64.8% and 70.6%,
respectively, of the Company's combined net sales during the same periods. The
business relationship between Meldisco and Kmart is very significant to the
Company and the loss of Meldisco's Kmart operations would have a material
adverse effect on the Company.
The Company's arrangement with Kmart is governed by a Master Agreement
effective as of July 1, 1995 and amended as of March 25, 1996. The Master
Agreement grants to each Meldisco subsidiary the non-transferable exclusive
right and license to operate a footwear department in the applicable Kmart
store. The initial term of the Master Agreement expires July 1, 2012 and is
renewable thereafter for 15 year terms, unless earlier terminated as provided
in the Master Agreement.
(18) Segment Information
The company is a retailer conducting business through retail stores in two
business segments: Meldisco in discount footwear and Footaction in branded
athletic footwear and apparel. Information about operations for each of these
segments is summarized as follows:
<TABLE>
<CAPTION>
(Audited)
December 31,
1995 1994 1993
($ in millions)
<S> <C> <C> <C>
Meldisco
Net sales.................................................... $1,191.5 $1,280.5 $1,212.5
Operating profit(1).......................................... 99.5 147.1 148.8
Identifiable assets at December 31........................... 870.4 864.4 778.1
Depreciation and amortization................................ 4.6 5.9 4.8
Additions to property and equipment.......................... 75.2 14.1 6.4
Footaction
Net sales.................................................... 423.7 332.3 262.3
Operating profit(1).......................................... 4.5 9.6 13.6
Identifiable assets at December 31........................... 119.3 107.2 72.2
Depreciation and amortization................................ 15.4 12.8 8.9
Additions to property and equipment.......................... 13.2 32.4 32.1
Combined
Net sales.................................................... 1,615.2 1,612.8 1,474.8
Operating profit(1).......................................... 104.0 156.7 162.4
Interest income, net......................................... 21.1 15.4 11.7
Earnings before income taxes and minority interests.......... $125.1 $172.1 $174.1
Identifiable assets at December 31............................. $989.7 $971.6 $850.3
Assets of discontinued operations.............................. 383.0 420.9 451.3
Total assets at December 31.................................... $1,372.7 $1,392.5 $1,301.6
Depreciation and amortization.................................. $20.0 $18.7 $13.7
Additions to property and equipment............................ $88.4 $46.5 $38.5
Additions of discontinued operations to
property and equipment....................................... 4.5 12.8 7.4
Total additions to property and equipment...................... $92.9 $59.3 $45.9
</TABLE>
Operating profit is defined as total revenues less operating expenses.
Identifiable assets include those assets directly related to each segment's
operations.
(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 $139 million for the Company combined.
(19)Summary of Quarterly Results
Summary quarterly data for 1995 and 1994 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
(Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
($ in millions)
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............. (1.0) 21.3 18.3 (18.6) 20.0
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 21.1
SUBSIDIARIES OF FOOTSTAR, INC.
As of the Distribution Date, the registrant will be the direct parent
corporation of Footaction Center, Inc., a California corporation; Meldisco
H.C., Inc., a Minnesota corporation; Melville Mexico, H.C., Inc. a Minnesota
corporation; Melville Altmex H.C., Inc. a Minnesota corporation and Melville
Foreign, Inc. a Minnesota corporation.
Footaction Center, Inc. a California corporation owns all of the
outstanding shares of Rosedale Open Country, Inc., which owns all of the
outstanding shares of Mall of America Fan Club, Inc. Mall of America Fan Club,
Inc. owns all of the outstanding shares of Footaction, Inc., a Texas
corporation and approximately 320 corporations which operate specialty retail
stores under the Footaction tradename located in the United States, selling
brand name athletic footwear and related apparel for men, women and children.
Footaction Center, Inc. a California corporation, also owns all of
the outstanding shares of Thom McAn Center, Inc. a New Hampshire corporation,
which indirectly through wholly owned subsidiaries owns all the outstanding
shares of approximately 558 corporations formed to operate specialty retail
stores under the Thom McAn or BOQ tradenames located in the United States,
Puerto Rico or the U.S. Virgin Islands selling men's and women's footwear.
Meldisco H.C., Inc. owns all of the outstanding shares of Miles Shoes
Meldisco Lakewood, Colorado, Inc., which owns all of the outstanding shares of
Mel Shoe Corporation, a New York corporation and 51% of the capital stock,
except for approximately 1,014 subsidiaries in which it owns 100% of all of
the capital stock, of approximately 3,448 subsidiaries which were formed to
operate leased footwear departments in Kmart or Pay Less Drug Stores all
located in the United States or Puerto Rico.
Melville Mexico H.C., Inc., a Minnesota corporation, Melville Altmex
H.C., Inc., a Minnesota corporation and Melville Foreign, Inc., a Minnesota
corporation directly or indirectly own all of the outstanding shares of
approximately 15 foreign subsidiaries involved in the registrants operations
in Mexico, Singapore, the Czech Republic and Slovakia.
Several of the subsidiaries referred to in this Exhibit have not yet
opened their stores for business, and several no longer operate any stores.
All of the subsidiaries referred to herein are included in the consolidated
financial statements of the registrant.
The names of other subsidiaries are omitted as, considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
