As filed with the Securities and Exchange Commission on March 27, 1996
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) or 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________
FOOTWEAR GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE APPLIED FOR
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
933 MACARTHUR BOULEVARD
MAHWAH, NEW JERSEY
(Address of principal 07430
executive offices) (Zip Code)
(201) 934-2000
(Registrant's telephone number, including area code)
_______________
Securities to be registered
pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
Common Stock, par value The New York Stock Exchange,
$.01 per share Inc.
Securities to be registered
pursuant to Section 12(g) of the Act:
None
==============================================================================
Footwear Group, Inc.
Information Included In Information Statement
And Incorporated In Form 10 By Reference
Cross-Reference Sheet Between Information Statement
And Items Of Form 10
Location in
Item Information Statement
- ------ ---------------------
Item 1. Business........................... SUMMARY; CERTAIN CONSIDERATIONS;
THE DISTRIBUTION;
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS; THE BUSINESS;
COMBINED FINANCIAL STATEMENTS
Item 2. Financial Information.............. SUMMARY; CERTAIN CONSIDERATIONS;
CAPITALIZATION; UNAUDITED
PRO FORMA COMBINED FINANCIAL
INFORMATION; SELECTED
FINANCIAL DATA; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS;
COMBINED FINANCIAL STATEMENTS
Item 3. Properties......................... THE BUSINESS
Item 4. Security Ownership of Certain
Beneficial Owners and Management... SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Item 5. Directors and Executive Officers... MANAGEMENT
Item 6. Executive Compensation............. MANAGEMENT; SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Item 7. Certain Relationships and Related
Transactions....................... SUMMARY; RELATIONSHIP BETWEEN
THE COMPANY AND MELVILLE; THE
DISTRIBUTION
Item 8. Legal Proceedings.................. THE BUSINESS
Item 9. Market Price of and Dividends on
the Registrant's Common Equity
and Related Stockholder Matters.... SUMMARY; CERTAIN CONSIDERATIONS;
THE DISTRIBUTION; TRADING
MARKET; DIVIDENDS; SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT; DESCRIPTION OF
CAPITAL STOCK
Item 10. Recent Sales of Unregistered
Securities......................... NONE
Item 11. Description of Registrant's
Securities to be Registered........ CERTAIN CONSIDERATIONS;
DESCRIPTION OF CAPITAL STOCK;
CERTAIN STATUTORY, CHARTER AND
BYLAW PROVISIONS
Item 12. Indemnification of Directors and
Officers........................... LIABILITY AND INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Item 13. Financial Statements and
Supplementary Data................. SUMMARY; MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS; COMBINED
FINANCIAL STATEMENTS
Item 14. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... NONE
Item 15. Financial Statements and Exhibits
(a) Financial Statements--See Index to Combined Financial
Statements
(b) Exhibits:
Exhibit
Number DESCRIPTION
- ------- -----------
2.1 Distribution Agreement, dated as of , 1996,
between Melville Corporation ("Melville") and the Registrant.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
10.1 Master Agreement, dated as of June 9, 1995, between Kmart Corporation
and the Registrant, as amended.*
10.2 Tax Sharing Agreement, dated as of , 1996, between Melville
and the Registrant.*
10.3 1996 Incentive Compensation Plan of Registrant.*
10.4 1996 Non-Employee Director Stock Plan of Registrant.*
10.5 Form of Executive Employment Agreement.*
10.6 Supplemental Executive Retirement Plan of Registrant.*
21.1 Subsidiaries of the Registrant.*
- ---------
(*) To be filed by amendment.
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.
FOOTWEAR GROUP, INC.
/s/ Carlos E. Alberini
By: ________________________________
Name: Carlos E. Alberini
Title: Chief Financial Officer
Date: March 27, 1996
[Melville Corporation Letterhead]
, 1996
Dear Shareholder:
I am pleased to inform you that the Board of Directors of Melville
Corporation has approved a distribution to our shareholders of all the
outstanding shares of common stock of Footwear Group, Inc. ("FGI") to
holders of record of Melville common stock on , 1996. In the distribution
you will receive shares of FGI common stock for shares of Melville common
stock you hold on the record date.
The distribution of FGI 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, FGI and Melville's shareholders in light of, among other factors,
the significant overall aggregate 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.
The enclosed Information Statement explains the proposed distribution in
detail and provides important financial and other information regarding
FGI. 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 __________, 1996
INFORMATION STATEMENT
FOOTWEAR GROUP, 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 Footwear Group,
Inc., a Delaware corporation ("FGI" 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, Footaction and Thom
McAn businesses, 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" and "Relationship Between The Company and
Melville." At the time of the Distribution, the Company will own the
Meldisco, Footaction and 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 will be made to list the Company Common Stock on the
New York Stock Exchange under the symbol " ". See "Trading Market."
In reviewing this Information Statement, stockholders should carefully
consider the matters described under the section entitled "Certain
Considerations."
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...................................................
Summary........................................................
Certain Considerations.........................................
The Distribution...............................................
Relationship Between the Company and Melville..................
Trading Market.................................................
Dividends......................................................
Unaudited Pro Form Combined Financial Statements...............
Pro Forma Capitalization.......................................
Selected Historical Combined Financial Data....................
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................
The Business...................................................
Management.....................................................
Security Ownership of Certain Beneficial Owners
and Management..............................................
Description of Capital Stock...................................
Certain Statutory, Charter and Bylaw Provisions................
Independent Accountants........................................
Additional Information.........................................
Index to Combined Financial Statements.........................
[Photographs to be included on inside cover page.]
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 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 the Distribution Agent, or Melville Corporation, Corporate Secretary,
One Theall Road, Rye, New York 10580. 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
Footwear Group, Inc., 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 Footwear Group, Inc. and its subsidiaries after giving
effect to the Distribution.
The Company
FGI is a leading retailer of discount footwear, branded athletic footwear
and apparel, and moderately-priced footwear. As of December 31, 1995, the
Company operated 2,568 leased discount footwear departments in 50 states,
Puerto Rico, the U.S. Virgin Islands, Guam, the Czech Republic, Slovakia,
Mexico and Singapore through Meldisco, 439 branded athletic footwear and
apparel specialty stores in 43 states and Puerto Rico through Footaction, and
315 moderately-priced footwear stores located primarily in the eastern U.S.,
Puerto Rico and the U.S. Virgin Islands through Thom McAn.
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, the Company is the largest operator of leased footwear
departments and is one of the three largest retailers of discount footwear.
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. In 1994, the three
largest retailers of discount footwear (including the Company) had aggregate
sales of approximately $4.2 billion, representing approximately 66% of the
discount footwear segment's total unit sales.
As an operator of leased discount footwear departments, the Company
believes that it has a lower fixed cost structure than its discount footwear
competitors. 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 operating unit 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.
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 .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.
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.
Through its Thom McAn unit, the Company markets moderately-priced men's and
women's private label footwear and accessories to quality and value conscious
customers. Thom McAn's merchandising and marketing strategies are designed to
differentiate its mix of moderately-priced footwear and accessories from its
competitors in terms of quality, styling and value. Thom McAn has developed a
business relationship with Nine West whose sourcing and fashion expertise, the
Company believes, will help Thom McAn enhance the quality and styling of its
women's product offerings.
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 operating units.
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, and engaging in strategic acquisitions, as opportunities become
available. 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
and moderately-priced operating units to complement Footaction's existing
state-of-the-art facilities. 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 the end of 1996. The Company is also
developing for its discount and moderately-priced operating units 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 is
consolidating certain administrative and distribution functions. This
consolidation is expected to improve the Company's operating performance and
to reduce its operating expenses by approximately $4 million in 1996 and $12.5
million in 1997.
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, Footaction and
Thom McAn businesses. 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. The Company's 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 and the
Company 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 a distribution agent (the
"Distribution Agent") in connection with the
Distribution. The Company currently expects
that the Registrar and Transfer Agent for the
Company Common Stock will serve as the
Distribution Agent.
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 will be made to list the Company
Common Stock on the New York Stock Exchange
under the symbol " ." 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.
See "The Distribution -- Certain Federal
Income Tax Consequences" for a more detailed
description of the federal income tax
consequences of the Distribution.
Certain Considerations........ Stockholders should carefully consider the
matters discussed under the section entitled
"Certain Considerations" 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 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.
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. See "Relationship Between the
Company and Melville" and "Management --
Directors and Executive Officers."
Summary Selected Historical Combined Financial Data
Prior to the Distribution Date, the Company and its Meldisco, Footaction
and Thom McAn operating units 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 reflects 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 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. 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>
1995(1) 1994 1993 1992(1) 1991
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data: ($ in millions)
Net sales $1,827.3 $ 1,839.9 $ 1,713.1 $ 1,840.0 $1,747.4
Cost of sales 1,282.8 1,269.1 1,168.5 1,243.4 1,197.6
--------- --------- --------- --------- --------
Gross profit 544.5 570.8 544.6 596.6 549.8
Store operating, selling, general and
administrative expenses 419.3 390.1 362.4 398.7 372.5
Depreciation and amortization 26.7 25.9 20.9 22.3 19.2
--------- --------- --------- --------- --------
Operating profit before restructuring
and asset impairment charges 98.5 154.8 161.3 175.6 158.1
Restructuring and asset impairment
charges(2) 51.8 -- -- 100.9 --
--------- --------- --------- --------- --------
Operating profit 46.7 154.8 161.3 74.7 158.1
Interest income, net 37.5 26.9 20.7 22.3 35.6
Provision for income taxes 23.2 53.1 56.6 19.4 59.7
Minority interests in net income 38.4 51.9 47.3 53.8 50.4
Cumulative effect of changes in
accounting principle, net(3) 3.9 -- -- 22.1 --
--------- --------- --------- --------- --------
Net income $ 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 142.5 107.7 116.5 138.2 72.8
--------- --------- --------- --------- --------
Total current assets 1,135.9 1,182.7 1,129.7 1,169.4 1,111.7
Property and equipment, net 195.1 163.9 131.6 109.2 120.1
Total assets 1,382.8 1,384.5 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
Melville equity investment 1,013.8 1,033.1 978.2 936.8 976.4
<FN>
(1) Amounts in 1995 and 1992 reflect non-recurring special charges.
Operating profit in 1995 and 1992 excluding the effect of the non-
recurring special charges would have been $125 million in 1995 and $176
million in 1992, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Asset impairment charge in 1995 only.
(3) The charge in 1995 was for the writeoff, effective January 1, 1995, of
internally developed software costs that had previously been
capitalized. The charge in 1992 was for the adoption of Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" effective January 1, 1992.
</TABLE>
<TABLE>
<CAPTION>
Summary Selected Historical Combined Financial Data (continued)
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Other Financial and Operating Data:
Current ratio (excluding due from
parent) 2.1:1 2.7:1 3.1:1
Additions to property and equipment
($ in millions) $92.9 $56.5 $45.9
Gross square footage: (in millions)
Meldisco 8.6 9.0 8.6
Footaction 1.4 1.4 1.0
Thom McAn 1.0 1.0 1.1
Net sales: ($ in millions)
Meldisco $1,191.5 $1,280.5 $1,212.5
Footaction 423.7 332.3 262.3
Thom McAn 212.1 227.1 238.3
Present value of operating leases:
($ in millions)
Meldisco $ 28.6 $28.4 $37.4
Footaction 186.8 187.5 160.5
Thom McAn 63.7 59.1 91.3
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 39 21 69 102
Closings 19 21 21 9
Ending 459 439 439 391
Thom McAn
Beginning 315 323 337 731
Openings 1 22 6 8
Closings 55 30 20 402(1)
Ending 261 315 323 337
__________________
(1) Reflects stores designated to close in connection with 1992 restructuring.
</TABLE>
CERTAIN CONSIDERATIONS
In addition to the other information contained in this Information
Statement, stockholders should carefully review the following considerations.
Arrangement with Kmart
During the fiscal year ended December 31, 1995, Meldisco's Kmart operations
accounted for 95.7% of Meldisco's net sales. Meldisco's Kmart operations
accounted for 62.4% of the Company's combined net sales during the same
period. 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
operating unit. 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. Kmart has also announced that it intends to close 15
additional stores by the end of May 1996. Kmart store closings have a
negative effect on Meldisco's overall profitability because 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; Differing Strategies
of Operating Units; Availability of Financing
While Meldisco, Footaction and Thom McAn 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 operating units had access to financial and other support from
Melville. Following the consummation of the Distribution, the Company will no
longer be able to rely on Melville for financial support or benefit from its
relationship with Melville to obtain credit or receive favorable terms for the
purchase or sale of certain goods and services. 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 administrative 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 operating units. 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 operating performance of Thom
McAn. See "-- Operating Performance of Thom McAn."
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 $12.4 billion, respectively, in 1994, representing
compounded annual sales growth of approximately 3.8% and 2.5%, respectively.
The moderately-priced segment in which Thom McAn competes has lost market
share during the same period. 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.
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 operating units 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 operating units will be
able to maintain or improve their sales performance, market share or gross
profit levels. See "The Business -- Operating Units."
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 operating units 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 and Thom McAn contract 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 and Thom McAn currently import a significant percentage
(approximately 77% and 48%, respectively, in dollar amount) of their
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 operating units 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.
Operating Performance of Thom McAn
The operating results of Thom McAn have been declining in recent years.
Sales at Thom McAn for the fiscal year ended December 31, 1995 were $212
million, a 7% decrease from the previous year. These net sales represented
approximately 12% of the Company's 1995 combined net sales. For the fiscal
year ended December 31, 1995, Thom McAn had an operating loss before
restructuring and asset impairment charges of $29.2 million versus an
operating loss of $1.9 million in 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." 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 Thom McAn's sales, profit and return on
investment objectives.
The Company will seek to reduce Thom McAn's operating expenses to restore
operating profitability at the reduced level of sales. In this regard, the
Company is consolidating certain administrative and distribution functions of
Thom McAn with those of Meldisco, which includes the closing of Thom McAn's
existing distribution center. Thom McAn's inventory will thereafter be
distributed through Meldisco's state-of-the-art distribution facilities. The
Company will also seek to maximize the value of Thom McAn's leased real
estate, including converting Thom McAn stores to Footaction stores where
appropriate, and will continue to close certain Thom McAn stores that do not
meet its sales, profit and return on investment objectives. Nevertheless,
there can be no assurance that such improvement in operating performance will
occur or that the continued deterioration in Thom McAn's financial condition
or operating results would not have a material adverse effect on the Company
in any given period.
A number of Thom McAn store lease commitments are short-term in nature.
Scheduled store lease expirations for 1996, 1997 and 1998 are 37, 79 and
40, respectively. Sales in these stores represented 37% of Thom McAn's
1995 sales. Certain Thom McAn store leases have generally favorable
economic terms that enhance Thom McAn's operating performance. At the time
of renewal, however, these generally favorable leases may require economic
commitments or new terms that do not meet the Company's sales, profit and
return on investment objectives and, accordingly, may not be renewed.
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. Seventy-eight percent of Thom McAn stores are also
mall-based. Consequently, the ability of Footaction and Thom McAn to achieve
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, 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. 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. However, 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.
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 will apply for listing of
the Company Common Stock on the New York Stock Exchange. A condition to each
of the Company's and 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, restricting the taking of action by
written consent in lieu of a stockholders' meeting, and provisions governing
business transactions with certain 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 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 Distribution, 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 and
Wilson's leather goods chain (and through its Marshalls business up to the
time of the sale of Marshalls on November 17, 1995); footwear through its
Meldisco, Footaction and Thom McAn businesses; and toys (through its Kay-Bee
business) and home furnishings (through its Linens 'n Things and This End Up
businesses).
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 as financial adviser and certain other advisers to assist
in designing, formulating and implementing Melville's restructuring strategy
and plan. In this strategic review, 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 three independent, retailing
companies in the chain drug, footwear and toy industries. After giving
effect to the Restructuring Program, the remaining Melville (which is
expected to be renamed CVS) will be a publicly traded holding company
consisting of CVS and, initially, Linens 'n Things and Bob's. The
Company will constitute the footwear company which will become publicly
traded through the Distribution. On March 25, 1996, Melville announced
that it has entered into a definitive agreement providing for the sale
of its Kay-Bee Toys business to Consolidated Stores Corporation ("CSC")
for a purchase price of approximately $215 million in cash and a $100
million subordinated note to be issued by a subsidiary of CSC. Closing
of such sale is subject to satisfaction of certain conditions and is
currently expected to occur in May 1996.
(ii) The previously announced sale of Marshalls, which was completed
on November 17, 1995.
(iii) The planned sales of Wilsons and This End Up.
(iv) 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.
(v) 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.
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 and the Company to
achieve significant overall aggregate cost savings by removing functions
currently performed by Melville which duplicate similar functions performed by
the Meldisco, Footaction and Thom McAn businesses. These aggregate cost
savings of Melville and the Company in connection with the Distribution are
expected to exceed $30 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 three new independent companies as a
result of the cost savings described above; (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, 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 a
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.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL REFERENCE ONLY AND DOES NOT PURPORT TO COVER ALL FEDERAL INCOME TAX
CONSEQUENCES THAT MAY APPLY TO ALL CATEGORIES OF SHAREHOLDERS. 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 Thom McAn.
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) against any and all damage, loss,
liability, and expense arising out of or due to the failure of the Company
to pay, perform or otherwise discharge (i) all liabilities, whether arising
before, on, or after the Distribution Date, arising from the conduct of the
businesses of the Company or the ownership or use of assets in connection
therewith and (ii) all obligations and liabilities of the Company under,
and all liabilities assumed by the Company in, the Distribution Agreement.
A subsidiary of the Company will indemnify Melville and its subsidiaries
(other than the Company) 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 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 (i) all liabilities,
whether arising before, on, or after the Distribution Date, arising from
the conduct of the business of Melville and its affiliates (other than the
Company and its subsidiaries (the Company and its subsidiaries being
collectively referred to as the "Company Group")) or the ownership or use
of assets in connection therewith and (ii) all obligations and liabilities
of Melville and its affiliates (other than the Company Group) under, and
liabilities assumed by Melville and such affiliates in, the Distribution
Agreement.
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.
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) an
appropriate private letter ruling shall have been issued by the Internal
Revenue Service 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, after
giving effect to any changes in the assets and liabilities of Melville and the
Company as a result of the Distribution, Melville's surplus (net assets minus
capital) would be sufficient to permit (without violation of Section 510 of
the New York Business Corporation Law) the Distribution; and (vii) the Tax
Sharing Agreement shall have been duly executed and delivered by the parties
thereto.
Lease Guarantees
The Distribution Agreement provides that, with respect to each real estate
lease of FGI 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 owned by the Melville Group and that
relate solely to the business of the Melville Group (and not to that of the
Company Group), as well as certain assets relating to company owned life
insurance and other Melville-sponsored employee benefit plans.
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 return preparation and consulting, 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 return preparation and consulting which is 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
in lieu of early termination.
The Distribution Agreement provides that the Services will be provided in
exchange for fees based on Melville's costs for the Services. The Company
believes that the fees for such services would not exceed 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
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 amount of such intercompany balances and
retained earnings will be contributed to the Company's capital.
Access to Information; Provision of Witnesses; Confidentiality
Pursuant to the Distribution Agreement, each of the Company and Melville
will afford the other and certain of their agents 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, 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 (except to the extent attributable to
Bob's Stores). The Company will be reimbursed, however, for tax
attributes, such as net operating losses and foreign tax credits, when and
to the extent that they are used on a consolidated, combined or unitary
basis. The Company will be responsible for filing, and paying the taxes
associated with, all other tax returns relating to pre-Distribution tax
periods relating to the Company's businesses. Melville, however, will be
responsible for preparing all income tax returns to be filed by the Company
for tax periods that end on or before the Distribution Date.
In general, the Company will agree to indemnify Melville for taxes
relating to a pre-Distribution tax period to the extent such taxes are
attributable to the retail footwear businesses 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
(except to the extent attributable to Bob's Stores) 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.
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 will apply for listing of the Company
Common Stock on the New York Stock Exchange under the symbol " ". It
is a condition to the obligation of the Company and 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 "Certain Considerations -- 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 (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.
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 Thom McAn operating units 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 as adjusted for (i) 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 (ii) the
Distribution, such related transactions and events, and certain unusual
events including the restructuring and asset impairment charge, the change
in accounting for internally developed software costs, asset writeoffs and
certain one-time charges relating to the repositioning of the Company, as
if the Distribution and such related transactions and events had occurred
on January 1, 1995 and as if such unusual events had not occurred. The
following Unaudited Pro Forma Combined Balance Sheet sets forth the
historical combined balance sheet of the Company as of December 31, 1995,
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 December 31, 1995.
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.
Footwear Group, 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
Adjustments Pro Forma for for Distribution
for for Unusual and
Historical(1) Distribution Distribution Events Unusual Events
____________ ____________ ____________ ____________ ________________
<S> <C> <C> <C> <C> <C>
Net sales $ 1,827.3 $ 1,827.3 $ 1,827.3
Cost of sales 1,282.8 1,282.8 $ (14.6)(5) 1,268.2
----------- ---------- ----------- -------- ---------
Gross profit 544.5 544.5 14.6 559.1
Store operating, selling, general
and administrative expenses 419.3 $ (11.3)(2) 408.0 (12.0)(5) 396.0
Depreciation and amortization 26.7 26.7 26.7
Restructuring and asset
impairment charges 51.8 51.8 (51.8)(5) __
----------- ---------- ----------- -------- ---------
Operating profit 46.7 11.3 58.0 78.4 136.4
Interest income, net 37.5 (37.2)(3) .3 .3
----------- ---------- ----------- -------- ---------
Income before income taxes,
minority interests and
cumulative effect of change in
accounting principle 84.2 (25.9) 58.3 78.4 136.7
Provision for income taxes 23.2 (10.1)(4) 13.1 30.4(5) 43.5
----------- ---------- ----------- -------- ---------
Income before minority interests
and cumulative effect of
change in accounting
principle 61.0 (15.8) 45.2 48.0 93.2
Minority interests in net income 38.4 38.4 38.4
----------- ---------- ----------- -------- ---------
Income before cumulative effect
of change in accounting
principle 22.6 (15.8) 6.8 48.0 54.8
Cumulative effect of change in
accounting principle, net 3.9 3.9 (3.9)(5) __
----------- ---------- ----------- -------- ---------
Net income $ 18.7 $ (15.8) $ 2.9 $ 51.9 $ 54.8
=========== ========== =========== ======== =========
Earnings per share $ [ ] $ [ ]
=========== =========
Weighted average number of
common shares outstanding(6) [ -- ] [ -- ]
=========== =========
________________
(1) Historical amounts reflect all special charges. See "Management's
Discussion and Analysis of Financial Condition and Results
of Operations."
(2) To record the elimination of Melville expense allocations and anticipated
net reductions in overhead.
(3) To eliminate net interest income historically relating to intercompany
balances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(4) To record the net change in the provision for income taxes to reflect the
pro forma adjustments.
(5) To eliminate the effect of certain unusual events, including the
restructuring and asset impairment charges, costs relating to the
change in accounting for internally developed software, asset writeoffs
and certain one-time charges relating to the repositioning of the
Company in anticipation of the Distribution.
(6) 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>
Footwear Group, Inc.
Unaudited Pro Forma Combined Balance Sheet
December 31, 1995
($ in millions)
Adjustments Pro Forma
for for
Historical Distribution Distribution
Assets __________ ____________ ____________
Current assets:
Cash and cash equivalents $ 26.3 $ 64.0 (1)
(64.0)(1) $ 26.3
Accounts receivable, net 56.1 56.1
Due from parent and other
divisions 710.8 1.2 (2)
(712.0)(1) __
Inventories 282.6 282.6
Prepaid expenses and other
current assets 60.1 (.8)(2) 59.3
---------- ---------- --------
Total current assets 1,135.9 (711.6) 424.3
Property and equipment, net 195.1 195.1
Goodwill, net 29.6 29.6
Deferred charges and other
noncurrent assets 22.2 (.7)(2) 21.5
---------- ---------- --------
Total assets $ 1,382.8 $ (712.3) $ 670.5
========== ========== ========
Liabilities and Equity
Current liabilities:
Accounts payable $ 59.6 $ 59.6
Accrued expenses 143.9 143.9
---------- ---------- --------
Total current liabilities 203.5 203.5
Long-term debt .2 .2
Other long-term liabilities 71.5 (.3)(2) 71.2
---------- ---------- --------
Total long-term liabilities 71.7 (.3) 71.4
Minority interests in
subsidiaries 93.8 (64.0)(1) 29.8
Equity:
Melville equity investment 1,013.8 (1,013.8)(1) --
Shareholders' equity:
Common stock .3 (1) .3
Contributed capital 332.1 (1) 332.1
Retained earnings 33.2 (1) 33.2
Cumulative translation adjustment .2 (1) .2
---------- ---------- --------
Total equity 1,013.8 (648.0) 365.8
---------- ---------- --------
Total liabilities and
equity $ 1,382.8 $ (712.3) $ 670.5
========== ========== ========
________________
(1) To reflect the recapitalization of the Company prior to the
Distribution (as if the Distribution occurred on December 31, 1995),
including: (i) a transfer of retained earnings to Melville, (ii) the
forgiveness of the resulting intercompany indebtedness; (iii) a
capital contribution by Melville; and (iv) a $64 million distribution
to Kmart in respect of Kmart's minority interest in 1995 earnings of
the Meldisco Subsidiaries (as defined below) and Kmart's minority
interest in all of the undistributed retained earnings of such
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 actual amount of the capital contribution by
Melville will depend on the amount of the intercompany balance as
well as retained earnings 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.
(2) To reflect the transfer to Melville of net assets related to certain
Melville-sponsored employee benefit plans.
PRO FORMA CAPITALIZATION
Prior to the Distribution Date, the Company and its Meldisco, Footaction and
Thom McAn operating units have been operated as part of Melville. The
following table sets forth the combined capitalization of the Company as of
December 31, 1995, and as adjusted to give effect to the Distribution and the
related transactions and events described in the Notes to Unaudited Pro Forma
Combined Balance Sheet included in this Information Statement as if the
Distribution and such transactions and events had been consummated on December
31, 1995.
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 dates 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
capitalization or financial condition.
December 31, 1995
($ in millions)
----------------------------
Pro Forma
for
Historical Distribution(1)
---------- ---------------
Due from parent and other divisions $ 710.8 $ -
======== ========
Total indebtedness:
Current portion of long-term debt $ .1 $ .1
Long-term debt .2 .2
-------- --------
Total indebtedness .3 .3
-------- --------
Minority interests in subsidiaries 93.8 29.8
Equity:
Melville equity investment 1,013.8 -
Shareholders' equity:
Common stock, par value $______ per
share; ______ shares authorized;
______ shares issued and
outstanding(2) .3
Contributed capital 332.1
Retained earnings 33.2
Cumulative translation adjustment .2
-------- --------
Total equity 1,013.8 365.8
-------- --------
Total capitalization $1,107.9 $ 395.9
======== ========
Debt to capitalization(3) .03% .08%
(1) To reflect the recapitalization of the Company prior to the Distribution
(as if the Distribution occurred on December 31, 1995), including: (i) a
transfer of retained earnings to Melville, (ii) the forgiveness of the
resulting intercompany indebtedness; (iii) a capital contribution by
Melville; and (iv) a $64 million distribution to Kmart in respect of
Kmart's minority interest in 1995 earnings of the Meldisco Subsidiaries and
Kmart's minority interest in all of the undistributed retained earnings of
such 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
actual amount of the capital contribution by Melville will depend on the
amount of the intercompany balance as well as retained earnings 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."
(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 debt-to-capitalization ratio, including the
present value of future minimum rental payments under operating leases as
indebtedness and as capitalization, is 20% as of December 31, 1995 and 41%
as adjusted for the Distribution, respectively.
SELECTED HISTORICAL COMBINED FINANCIAL DATA
Prior to the Distribution Date, the Company and its Meldisco, Footaction
and Thom McAn operating units 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 reflects 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 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. 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>
1995(1) 1994 1993 1992(1) 1991
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data: ($ in millions)
Net sales $1,827.3 $1,839.9 $ 1,713.1 $ 1,840.0 $ 1,747.4
Cost of sales 1,282.8 1,269.1 1,168.5 1,243.4 1,197.6
--------- --------- --------- --------- --------
Gross profit 544.5 570.8 544.6 596.6 549.8
Store operating, selling, general and
administrative expenses 419.3 390.1 362.4 398.7 372.5
Depreciation and amortization 26.7 25.9 20.9 22.3 19.2
--------- --------- --------- --------- --------
Operating profit before restructuring
and asset impairment charges 98.5 154.8 161.3 175.6 158.1
Restructuring and asset impairment
charges(2) 51.8 -- -- 100.9 --
--------- --------- --------- --------- --------
Operating profit 46.7 154.8 161.3 74.7 158.1
Interest income, net 37.5 26.9 20.7 22.3 35.6
Provision for income taxes 23.2 53.1 56.6 19.4 59.7
Minority interests in net income 38.4 51.9 47.3 53.8 50.4
Cumulative effect of changes in
accounting principle, net(3) 3.9 -- -- 22.1 --
--------- --------- --------- --------- --------
Net income $ 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 142.5 107.7 116.5 138.2 72.8
--------- --------- --------- --------- --------
Total current assets 1,135.9 1,182.7 1,129.7 1,169.4 1,111.7
Property and equipment, net 195.1 163.9 131.6 109.2 120.1
Total assets 1,382.8 1,384.5 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
Melville equity investment 1,013.8 1,033.1 978.2 936.8 976.4
(1) Amounts in 1995 and 1992 reflect non-recurring special charges.
Operating profit in 1995 and 1992 excluding the effect of the non-
recurring special charges would have been $125 million in 1995 and $176
million in 1992, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Asset impairment charge in 1995 only.
(3) The charge in 1995 was for the writeoff, effective January 1, 1995, of
internally developed software costs that had previously been
capitalized. The charge in 1992 was for the adoption of Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" effective January 1, 1992.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
historical Combined Financial Statements and Unaudited Pro Forma Combined
Financial Statements and the Notes thereto included elsewhere in this
Information Statement. Except as otherwise indicated, all dollar amounts
herein are stated in millions.
General
Prior to the Distribution Date, Meldisco, Footaction and Thom McAn have
been operated as part of Melville. The historical financial information
presented herein reflects periods during which the Company did not operate as
an independent company, and accordingly, certain assumptions were made in
preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations or the financial condition of the
Company which would have resulted had the Company been an independent, public
company during the reporting periods, and are not necessarily indicative of
the Company's future operating results or financial condition.
Furthermore, the Company's net income 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 a pre-tax
charge of $78.4 million in the fourth quarter of 1995 in connection with
Melville's Restructuring Program.
The restructuring component of this charge was for estimated tenancy and
severance costs associated with the closing of approximately 100 stores, as
well as asset write-offs and other costs to be incurred from the strategic
decision to consolidate certain Thom McAn functions into Meldisco's operations
and outsource the data processing function. In addition, the Company recorded
an asset impairment charge due to the early adoption of Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Fixed 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. 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 income as the cumulative effect of a
change in accounting principle, net of tax.
In the absence of these non-recurring special charges, operating profit
would have been $125 million in 1995 as compared to the $46.7 million
reflected in the historical combined statement of income for such year.
Results of Operations
Net Sales
($ in millions)
1995 1994 1993
----------- ---------- ----------
Company:
Net sales $ 1,827.3 $1,839.9 $1,713.1
Net sales % change from prior year (0.7%) 7.4% (6.9%)
Same store sales % change (2.4%) 1.5% (2.5%)
Meldisco:
Net sales $ 1,191.5 $1,280.5 $1,212.5
Net sales % change from prior year (7.0%) 5.6% 1.4%
Same store sales % change (5.8%) 2.4% (2.5%)
% of combined net sales 65.2% 69.6% 70.8%
Footaction:
Net sales $423.7 $332.3 $262.3
Net sales % change from prior year 27.5% 26.7% 20.5%
Same store sales % change 13.1% 2.4% 2.7%
% of combined net sales 23.2% 18.1% 15.3%
Thom McAn:
Net sales $212.1 $227.1 $238.3
Net sales % change from prior year (6.6%) (4.7%) (44.1%)
Same store sales % change (5.1%) (4.0%) (6.7%)
% of combined net sales 11.6% 12.3% 13.9%
Combined net sales in 1995 decreased marginally below 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 growth 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 the net sales of
both Meldisco and Thom McAn resulting from decreased same store sales due to a
difficult retail environment, increased competition among department and
discount stores, and store closings affecting these operating units. During
1995, 218 stores in which Meldisco operated leased footwear departments were
closed and, in connection with Thom McAn's restructuring, 30 additional Thom
McAn stores were closed. During the fiscal year ended December 31, 1995,
Meldisco's Kmart operations accounted for 62.4% and 95.7% of the net sales of
the Company and Meldisco, respectively.
The 7.4% increase in 1994 combined net sales over the 1993 level was driven
by new store openings at Footaction, and by same store sales increases 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. The Meldisco and Footaction
1994 sales increases were offset in part by a decrease in net sales at Thom
McAn resulting from the closing of 20 stores, as well as the discontinuation
of its men's athletic and children's departments.
Costs and Expenses
(As a % of net sales)
1995 1994 1993
---------- ---------- ----------
Cost of sales 70.2% 69.0% 68.2%
Store operating, selling, general
and administrative expenses* 22.9% 21.2% 21.2%
Depreciation and amortization 1.5% 1.4% 1.2%
* Includes allocations from parent
Cost of sales increased as a percentage of combined net sales in 1995 as
compared to 1994 due to the recording of additional markdowns by Meldisco and
Thom McAn as a result of declining sales in a generally weak retail
environment, store closings and the discontinuation of certain product lines.
Despite an increase in initial markon in 1994 at both the Meldisco and
Footaction operating units, cost of sales as a percentage of net sales
increased slightly in 1994 from the 1993 level due to higher markdowns at Thom
McAn.
Store operating, selling, general and administrative expenses increased as
a percentage of net sales in 1995 primarily due to declining sales which
hindered the Company's ability to leverage its fixed costs, and due to $12.0
million of special charges recorded in connection with the Company's
restructuring and other contingencies. See "-- General" above and "Unaudited
Pro Forma Combined Financial Statements." This increase was partially offset
by improved operating leverage at Footaction.
Store operating, selling, general and administrative expenses as a
percentage of net sales remained flat in 1994 compared to 1993,
notwithstanding the negative impact on operations of new store opening
costs for 27 Footaction stores opened in the second half of 1994 and
certain other one-time costs associated with Kmart store closings and other
contingencies.
Increases in depreciation and amortization expense as a percentage of
combined net sales in 1995 and 1994 reflected the Company's increased
capital expenditures as well as the decrease in combined net sales in 1995
versus 1994.
Operating Profit
($ in millions)
1995 1994 1993
------- ------- -------
Operating profit (loss) before
restructuring and asset
impairment charges*:
Meldisco $109.4 $147.1 $148.8
Footaction 18.3 9.6 13.6
Thom McAn (29.2) (1.9) (1.1)
------ ------ ------
98.5 154.8 161.3
Restructuring and asset impairment
charges 51.8 -- --
------ ------ ------
Operating profit $ 46.7 $154.8 $161.3
====== ====== ======
Operating profit as a % of net sale 2.6% 8.4% 9.4%
* Includes special charges recorded in connection with the Company's
restructuring. Excluding these charges, operating profit in 1995 would
have been $116 million for Meldisco, $23 million for Footaction, $(14)
million for Thom McAn, and $125 million for the Company combined (or
6.8% of the Company's combined net sales).
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 $125 million as compared to $155
million in 1994. This decline resulted principally from the decrease in
operating performance of Meldisco due to a difficult retail environment and
Kmart store closings. The decline also resulted from an operating loss
sustained by Thom McAn due to the continued contraction of the chain's sales
base, coupled with increased markdowns. In 1995, the decline in operating
profit was partially offset by the improved operating performance of
Footaction driven primarily by a 13.1% same store sales increase.
Operating profit in 1994 decreased as compared to 1993 due to weak same
store sales at Thom McAn, increased markdowns in each of the operating units
and higher operating costs incurred 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 $5.0
million of one-time costs affecting Meldisco related to store closings and
other contingencies.
Liquidity and Capital Resources
($ in millions)
1995 1994 1993
------ ------ ------
Cash flows from operating
activities* $164.1 $131.4 $131.2
Capital expenditures 92.9 56.5 45.9
* Cash flows from operating activities are stated before cash outlays in
respect of minority interest of $52.2 million, $37.1 million and $53.7
million in 1995, 1994 and 1993, respectively. The cash flow amounts
include after-tax interest income amounts of approximately $27.0
million, $19.2 million and $14.3 million in 1995, 1994 and 1993,
respectively, related to intercompany accounts which will be
eliminated as of the Distribution.
The historical financial statements reflect the Company's status as a
division of Melville, with an intercompany receivable balance that generates
interest income to the Company. As of the Distribution, a significant amount
of the Company's retained earnings will be transferred to Melville, and the
intercompany balance will be credited to equity. 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 1995 earnings of such
subsidiaries and Kmart's minority interest in all of the undistributed
retained earnings of such subsidiaries with respect to prior periods. The
actual amount of the contribution to capital made in connection with the
elimination of the intercompany balances will depend on the amount of the
intercompany balances between the Company and its subsidiaries and Melville
and its subsidiaries outstanding, as well as the amount of retained earnings,
as of the Distribution. 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 45% 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 discussions 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 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. 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 in 1995 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
increased due to the deferred taxes related to the restructuring and asset
impairment charges.
Current liabilities increased due to an increase in accounts payable and
accrued expenses. The accounts payable increase resulted primarily from
improved working capital management. The increase in accrued expenses is
due to the recording of the special charges, of which approximately $22
million will be paid in cash in 1996.
Capital expenditures in 1995 were $93 million and related primarily to the
construction of two state-of-the-art distribution facilities to be used by the
Meldisco and Thom McAn operating units (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 the Meldisco and Footaction operating units 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 at the Meldisco and Footaction operating units
and to the completion of the second state-of-the-art distribution facility for
the Meldisco and Thom McAn operating units.
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, Meldisco expects to distribute to Kmart
approximately $64 million, representing Kmart's minority interest in 1995
earnings of the Meldisco Subsidiaries and Kmart's minority interest in all of
the undistributed retained earnings of such subsidiaries with respect to prior
periods. Under its arrangement with Kmart, Meldisco will continue to
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
FGI is a leading retailer of discount footwear, branded athletic footwear
and apparel, and moderately-priced footwear. As of December 31, 1995, the
Company operated 2,568 leased discount footwear departments in 50 states,
Puerto Rico, the U.S. Virgin Islands, Guam, the Czech Republic, Slovakia,
Mexico and Singapore through Meldisco, 439 branded athletic footwear and
apparel specialty stores in 43 states and Puerto Rico through Footaction, and
315 moderately-priced footwear stores located primarily in the eastern U.S.,
Puerto Rico and the U.S. Virgin Islands through Thom McAn.
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, the Company is the largest operator of leased footwear
departments and is one of the three largest retailers of discount footwear.
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. In 1994, the three
largest retailers of discount footwear (including the Company) had aggregate
sales of approximately $4.2 billion, representing approximately 66% of the
discount footwear segment's total unit sales.
As an operator of leased discount footwear departments, the Company
believes that it has a lower fixed cost structure than its discount footwear
competitors. 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 operating unit 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.
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 .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.
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.
Through its Thom McAn unit, the Company markets moderately-priced men's and
women's private label footwear and accessories to quality and value conscious
customers. Thom McAn's merchandising and marketing strategies are designed to
differentiate its mix of moderately-priced footwear and accessories from its
competitors in terms of quality, styling and value. Thom McAn has developed a
business relationship with Nine West whose sourcing and fashion expertise, the
Company believes, will help Thom McAn enhance the quality and styling of its
women's product offerings.
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 operating units.
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, and engaging in strategic
acquisitions, as opportunities become available. 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 and moderately-priced operating units to
complement Footaction's existing state-of-the-art facilities. 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 the end of 1996.
The Company is also developing for its discount and moderately-priced
operating units 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 is consolidating certain administrative and distribution functions.
This consolidation is expected to improve the Company's operating performance
and to reduce its operating expenses by approximately $4 million in 1996 and
$12.5 million in 1997.
Store Locations
The following table sets forth the location by State and country of each
of the Company's Meldisco, Footaction and Thom McAn stores as of December
31, 1995.
STATE TOTAL MELDISCO FOOTACTION THOM MCAN
- ----- ------ -------- ---------- ---------
ALABAMA 54 46 8 --
ALASKA 14 14 -- --
ARIZONA 43 39 4 --
ARKANSAS 14 14 -- --
CALIFORNIA 385 344 41 --
COLORADO 64 52 12 --
CONNECTICUT 38 17 8 13
DELAWARE 10 6 1 3
DISTRICT OF COLUMBIA -- -- -- --
FLORIDA 231 166 35 30
GEORGIA 88 76 12 --
HAWAII 12 4 -- 8
IDAHO 24 24 -- --
ILLINOIS 107 94 13 --
INDIANA 67 64 3 --
IOWA 28 27 1 --
KANSAS 23 18 5 --
KENTUCKY 47 43 4 --
LOUISIANA 47 32 14 1
MAINE 13 8 2 3
MARYLAND 61 36 12 13
MASSACHUSETTS 71 26 16 29
MICHIGAN 143 127 11 5
MINNESOTA 50 45 5 --
MISSISSIPPI 26 21 5 --
MISSOURI 40 35 5 --
MONTANA 14 13 1 --
NEBRASKA 13 11 2 --
NEVADA 28 26 2 --
NEW HAMPSHIRE 20 12 2 6
NEW JERSEY 91 46 18 27
NEW MEXICO 24 19 5 --
NEW YORK 161 78 16 67
NORTH CAROLINA 94 78 14 2
NORTH DAKOTA 8 8 -- --
OHIO 157 122 15 20
OKLAHOMA 19 13 6 --
OREGON 86 83 3 --
PENNSYLVANIA 152 118 12 22
RHODE ISLAND 10 6 1 3
SOUTH CAROLINA 43 36 7 --
SOUTH DAKOTA 12 12 -- --
TENNESSEE 64 53 11 --
TEXAS 177 100 69 8
UTAH 39 37 2 --
VERMONT 4 3 -- 1
VIRGINIA 76 54 10 12
WASHINGTON 149 138 11 --
WEST VIRGINIA 22 18 4 --
WISCONSIN 58 55 3 --
WYOMING 10 9 1 --
TOTAL U.S. STORES 3,231 2,526 432 273
PUERTO RICO 64 19 7 38
VIRGIN ISLANDS 6 2 -- 4
CZECH 6 6 -- --
SLOVAKIA 6 6 -- --
MEXICO 5 5 -- --
SINGAPORE 3 3 -- --
ENGLAND -- -- -- --
GUAM 1 1 -- --
TOTAL STORES 3,322 2,568 439 315
Operating Units
The Company's discount footwear, branded athletic footwear and apparel,
and moderately-priced footwear businesses are conducted through Meldisco,
Footaction and Thom McAn, respectively.
Discount Footwear Business
Meldisco, the leading operator of leased footwear departments, has
operated leased footwear departments in discount chains since 1961. As of
December 31, 1995, Meldisco operated leased footwear departments in 2,178
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 and has been
Kmart's exclusive operator of footwear departments since 1975. 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 65% of
the Company's net sales, and sales generated by Meldisco's Kmart operations
accounted for approximately 95.7% of Meldisco's net sales.
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 40.8% of the total footwear retail market in
1994. Meldisco's unit market share, however, decreased from 8.4% in 1991
to 7.8% in 1994. The decrease in Meldisco's unit market share resulted
primarily from the fact that its outlet base remained relatively static (up
100 doors to 2,353 over the three year period ended December 31, 1994)
during a period in which its primary competitors added outlets at a
compounded annual growth rate of 9.5%. 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 "Certain Considerations -- Arrangement 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 "Certain
Considerations -- Arrangement 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 the end of 1996, 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 December 31, 1995, Footaction operated 439 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 23% of the Company's net sales
and approximately 18% of the Company's operating profit before special
charges. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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 December 31, 1995, 17 of the
Company's 439 Footaction stores were of the large store format, 377 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
and remodel, relocate or expand 27 existing Footaction stores. For 1997
and 1998, the Company presently expects to open or convert 80 to 85
Footaction stores to the large store 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.
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 87.5%) 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
1995 1994 1993
---- ---- ----
Footwear........ 77% 80% 81%
Apparel......... 16 14 15
Accessories..... 7 6 4
---- ---- ----
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.
Moderately-priced Footwear Business
Thom McAn is a moderately-priced footwear specialty retailer, largely
mall-based, which sells men's and women's private label footwear and
accessories to quality and value conscious customers. As of December 31,
1995, Thom McAn operated 315 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. Thom McAn has been a
division of Melville since the first Thom McAn store was opened in 1922.
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. 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 Thom McAn's sales, profit and return on investment
objectives.
The operating results of Thom McAn have been declining in recent years.
Sales at Thom McAn for the fiscal year ended December 31, 1995 were $212
million, a 7% decrease from the previous year. These net sales represented
approximately 12% of the Company's 1995 combined net sales. For the fiscal
year ended December 31, 1995, Thom McAn had an operating loss before
restructuring and asset impairment charges of $29.2 million versus an
operating loss of $1.9 million in 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company will seek to reduce Thom McAn's operating expenses to restore
operating profitability at the reduced level of sales. In this regard, the
Company is consolidating certain administrative and distribution functions of
Thom McAn with those of Meldisco, which includes the closing of Thom McAn's
existing distribution center. Thom McAn inventory will thereafter be
distributed through Meldisco's state-of-the-art distribution facilities. The
Company will also seek to maximize the value of Thom McAn's leased real
estate, including converting Thom McAn stores to Footaction stores where
appropriate, and will continue to close certain Thom McAn stores that do not
meet its sales, profit and return on investment objectives.
A number of Thom McAn store lease commitments are short-term in nature.
Scheduled store lease expirations for 1996, 1997 and 1998 are 37, 79 and
40, respectively. Sales in these stores represented 37% of Thom McAn's
1995 sales. Certain Thom McAn store leases have generally favorable
economic terms that enhance Thom McAn's operating performance. At the time
of renewal, however, these generally favorable leases may require economic
commitments or new terms that do not meet the Company's sales, profit and
return on investment objectives and, accordingly, may not be renewed.
Competitive Environment -- Moderately-priced Footwear
Thom McAn competes in the moderately-priced category of the retail
footwear market, where retailers face competitive threats to market share
from rapidly expanding discount chains on the lower end and from department
stores and non-traditional channels such as mail order businesses and
apparel retailers on 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 19.1% in 1994.
Competition in the moderately-priced category also varies across
geographic and gender lines. Thom McAn believes that the women's segment
is the most competitive given women's willingness to cross-shop.
Competitive conditions vary somewhat in certain New York City boroughs and
in Puerto Rico, where Thom McAn faces additional competition from local,
independent operators as well as from major national chains. In these
regional markets, Thom McAn believes that it represents a viable
moderately-priced alternative for the quality and value conscious customer.
Merchandising -- Moderately-priced Footwear
Thom McAn's merchandising strategy is to offer an improved assortment of
higher quality products more favorably priced than those of its competition
and thus differentiate Thom McAn offerings in terms of quality, styling and
value. Thom McAn intends to differentiate itself from discounters by
raising the quality and price point of its merchandise. Branded products
made of leather will be emphasized as Thom McAn moves away from synthetics
and lower end commodity products. Thom McAn intends to focus on
its best-selling styles while filling local market needs through micro-
marketing initiatives.
As part of its strategy, Thom McAn is targeting the younger
fashion-conscious female shopper by offering an improved assortment of
fashionable women's shoes sourced through Thom McAn's relationship with Nine
West. The Company believes that Nine West's sourcing and fashion expertise
will help Thom McAn enhance the quality and styling of its women's product
offerings. Thom McAn currently expects that by the end of 1996 approximately
35% of its product offerings will be sourced through its relationship with
Nine West.
The Company believes that Thom McAn has developed a strong ethnic
customer base as indicated by the performance of stores in Puerto Rico,
Miami, and certain boroughs of New York City. In these markets, Thom McAn
believes that it represents a higher end alternative to the typical
self-service discounter. Thom McAn seeks to exploit this ethnic market
strength by developing regionalized merchandising and marketing strategies
focused on the region or market in which each store is located. This
micro-merchandising involves differences in brands, sizes, colors,
fabrication and timing or the assortment and space allocated to present
such merchandise.
Thom McAn is currently testing a new self-selection store format designed
to produce incremental sales while reducing labor costs. In the
self-selection format, inventory is moved onto the selling floor, and
customers are able to choose the appropriate size from the boxes located
underneath the displayed pair. Assistance from trained sales associates is
still available to customers preferring it.
Marketing -- Moderately-priced Footwear
Thom McAn's primary customers are women and men between the ages of 30
and 49. Thom McAn believes that customers in this age group currently
account for approximately 59% of its total sales. Thom McAn believes that
its customers are likely to have large families and be college educated,
and that many are of ethnic origin. Thom McAn seeks to retain its appeal
with its traditional customer base while continuing to target younger
fashion-conscious customers, particularly women. Thom McAn believes its
customers are sensitive to price but still desire fashion and quality and,
accordingly, seeks to provide validated fashion at a fair price with
consistent quality and service.
Thom McAn's marketing effort is designed to emphasize the quality, styling
and value of its moderately-priced footwear and accessories, and to increase
awareness of its products among younger fashion-conscious customers. Thom
McAn plans to communicate these marketing strategies through attractive,
consistent, and informative signage, hangtags and displays, together with
creative media campaigns.
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"). 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 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 operating units. 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 "Certain Considerations -- 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 the
end of 1996. A new state-of-the-art facility has been opened in Mira Loma,
California, and a second state-of-the-art facility located in Gaffney,
South Carolina, is expected to open in May 1996. 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. 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 focused on enhancing productivity
and improving inventory management and profit margins. The Company is
developing common software applications that utilize relational database
technology and client server architecture and tools. This approach has
enhanced the speed of delivery of new systems and enhancements and puts
powerful decision support tools in the hands of the users. Furthermore,
the Company believes that this strategy will in the future result in the
reduction of operating costs and productivity improvements. In an effort
to reduce capital requirements and sharpen the focus on strategic efforts,
the Company has entered into an "outsourcing" arrangement with Lockheed
Martin for the purchase, maintenance and operation of all MIS hardware.
The main thrust of application software development at Meldisco is
currently the creation of systems that support inventory pipeline
improvements. Components of this strategy include the implementation of a
state-of-the-art distribution network and a demand-driven merchandise
replenishment system. These systems are scheduled to be fully implemented
by the end of 1996. When installed, these proprietary systems are expected
to enhance the Company's long-term competitiveness. Future development
efforts scheduled for completion by the first quarter of 1997 include a
price management system designed to maximize product margins and/or
inventory sell-through by customizing pricing policies at the individual
store level, a demographic sales correlation system to support the
division's micro-marketing efforts, a store labor management system
designed to further support Meldisco's drive toward operational excellence
and a size history analysis system to optimize the inventory purchasing
function and support higher in-stock availability rates.
Information systems efforts at Footaction will focus on supporting the
needs of a rapidly growing business while maximizing the synergy with the
Company's other operating units. The system development efforts are
directed at merchandise allocation and replenishment applications, store
automation and labor management, and client server based decision
management tools. During 1996, a merchandise allocation and replenishment
system designed to optimize use of available inventory will be implemented.
The Company is in the process of installing an automated back office store
system which includes labor management and scheduling, training, and
paperless forms management. This system is designed to streamline
the non-sale related activities and reduce paperwork at the store level.
Decision support systems and tools in a client server environment are used
today to analyze data and respond rapidly to changes in the marketplace.
Thom McAn has recently implemented integrated merchandising and store
systems. This has created an information systems framework that is capable
of handling Thom McAn's business needs. In an effort to minimize operating
costs, the Company will limit further information system investments at
Thom McAn and seek to leverage information system development across the
Company's other operating divisions. The Company expects to realize
benefits by consolidating the distribution, human resources and finance
functions of Thom McAn.
To achieve substantial growth, the Company will continue to engage in
the design and implementation of information systems necessary to support
the Company's business objectives. This will be achieved by targeting
information systems expenditures in areas that will have the greatest
strategic impact for the Company. The Company plans to spend approximately
$15 million in capital expenditures for information systems in 1996.
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 December 31, 1995, Meldisco operated leased footwear departments in
2,568 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 December 31, 1995 were located in Kmart discount department
stores. These 390 leased departments were located in PayLess Thrifty Drug
Stores. Footaction has a nationwide presence, operating 439 stores in 43
states and Puerto Rico. At December 31, 1995, there were 315 Thom McAn
stores, located primarily in the Eastern U.S., Puerto Rico and the
U.S. Virgin Islands. Footaction and Thom McAn stores are primarily
located in enclosed regional and neighborhood malls.
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
December 31, 1995, 17 of the Company's 439 Footaction stores are of the
large store format, 377 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. Thom McAn stores currently average approximately 3,200 square feet
in size.
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 and Thom
McAn typically occupy their stores 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. Thom McAn's
corporate offices occupy approximately 100,000 square feet in 250,000
square feet of leased office space in Worcester, Massachusetts. It is
expected that certain Footaction and Thom McAn administrative and
distribution functions will be consolidated at the Company's headquarters.
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 the end of 1996. The
Company has recently opened a state-of-the-art distribution facility in
Mira Loma, California and expects to open a second state-of-the-art
distribution facility in Gaffney, South Carolina in May 1996. Footaction
leases distribution facilities in Dallas, Texas which will total 180,000
square feet as of the Distribution. Thom McAn currently leases a
distribution center in Brockton, Massachusetts, which will be closed during
1996.
Employees
As of December 31, 1995, the Company had approximately 17,200 employees,
including approximately 8,300 at Meldisco, 5,100 at Footaction, and 3,800 at
Thom McAn. Of Meldisco's approximately 8,300 employees, approximately 3,600
were employed full-time, and 4,700 were part-time employees. As of December
31, 1995, Footaction and Thom McAn had approximately 1,500 and 1,300 full-time
and 3,600 and 2,500 part-time employees, respectively.
Except for the Thom McAn division, none of the Company's employees are
covered by collective bargaining agreements. Thom McAn employees in the New
York City metro area, Worcester, Massachusetts and Brockton, Massachusetts
have been unionized since 1922. 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" and "Thom
McAn" 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.
MANAGEMENT
Directors and Executive Officers
The following tables set forth certain information as of , 1996,
concerning the directors (and nominees as directors) and executive officers
of the Company.
Name Age Position
- ---- --- --------
J.M. Robinson 50 Chairman of the Board 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
George S. Day 58 Director
Terry R. Lautenbach 57 Director
Bettye Martin Musham 63 Director
Kenneth S. Olshan 63 Director
M. Cabell Woodward, Jr. 67 Director
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.
Messrs. Robinson and Goldstein, currently directors of the Company,
will be directors as of the Distribution. In addition, the Company expects
that George S. Day, Terry R. Lautenbach, Bettye Martin Musham, Kenneth S.
Olshan and M. Cabell Woodward, Jr. (who are nominees as directors) will
be elected to the Company Board, and they have indicated their willingness
to serve if so elected.
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, DuPont 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 Capital Cities/ABC, Inc. and The Black & Decker
Corporation and Trustee of a management investment company sponsored by
Paine Webber.
The Company will amend its Certificate of Incorporation prior to the
Distribution to provide for a classified board of directors consisting of
seven persons. The Company Board will 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 the third class 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.
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 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 Officer
Carlos Alberini Chief Financial Officer
Maureen Richards General Counsel and Corporate Secretary
Charles Messina Chief Human Resources Officer
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 emphasizes
Company Common Stock ownership for management. Therefore, the Company plans
to introduce a long-term performance incentive plan that pays in Company
Common Stock and grants of Company stock options to management, including
those named above. In addition, stock ownership guidelines are being
introduced for certain executives.
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 summarizes the expected 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 six months 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. The
Employment Agreements also generally provide for (i) non-competition for a
period of two years 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"; (ii) other restrictive covenants including non-
disclosure, non-solicitation of employees and availability for litigation
support; (iii) participation in certain benefit plans and programs
(including pension benefits, disability and life insurance, and medical
benefits); (iv) annual and long-term incentive compensation opportunities
and participation in certain other compensation plans and programs on a
basis generally not less favorable than provided to other similarly
situated executives of the Company; and (v) deferred compensation
arrangements. Mr. Robinson's Employment Agreement provides that his
target annual incentive and long-term incentive opportunities may not be
less than and , respectively, of his base salary.
The Employment Agreements provide for certain payments and benefits upon
termination of the executive's employment in addition to payments and
benefits accrued at the date of termination or otherwise payable thereafter
under the Company's established plans and programs. If employment
terminates due to death, the executive's beneficiaries will receive (i)
twelve months of continued base salary; (ii) a pro rata cash payment of
his or her target annual incentive opportunity; (iii) immediate vesting of
restricted stock awards and payment of contingent share awards; (iv)
immediate vesting of outstanding stock options and the right to exercise
such options for one year or the remainder of the exercise period, if less;
(v) immediate vesting of outstanding awards under the Company's "Career
Equity" program and a pro rata cash payment based on interim performance
valuation; and (vi) immediate vesting of supplemental retirement benefits.
If employment terminates due to disability, the executive will receive (i)
six months of continued base salary; (ii) a pro rata cash payment of his
or her target annual incentive opportunity; (iii) immediate vesting of
restricted stock awards; (iv) continued vesting and payment of contingent
share awards as if the executive had continued in employment; (v)
continued vesting of outstanding stock options and the right to exercise
such options for the remainder of the exercise period; (vi) continued
vesting of outstanding awards under the Company's "Career Equity" program
and payment based on valuation at the end of the performance period; (vii)
immediate vesting of supplemental retirement benefits; and (viii) continued
participation in all medical and life insurance plans (or if continued
participation is not permitted, the after-tax amount needed to purchase
such coverage on an individual basis) until the earlier of age 60 or the
date the executive receives substantially equivalent benefits from a
subsequent employer. If employment terminates due to normal retirement
(after age 60) or approved early retirement (after age 55), the executive
will receive (i) a pro rata cash payment of his or her annual incentive
award based on performance valuation at the end of the year in which
termination occurs; (ii) immediate vesting of restricted stock awards;
(iii) continued vesting and payment of contingent share awards as if the
executive had continued in employment; (iv) continued vesting of
outstanding stock options and the right to exercise such options for the
remainder of the exercise period; (v) continued vesting of outstanding
awards under the Company's "Career Equity" program and payment based on
valuation at the end of the performance period; (vi) immediate vesting of
supplemental retirement benefits; and (vii) continued participation in all
medical and life insurance plans (or if continued participation is not
permitted, the after-tax amount needed to purchase such coverage on an
individual basis) until the earlier of age 60 or the date the executive
receives substantially equivalent benefits from a subsequent employer.
If employment is terminated by the Company for cause or voluntarily by
the executive without good reason, no payment will be made for severance
beyond earned but unpaid compensation. If employment is terminated by the
Company for cause, the executive will forfeit all outstanding stock options
(vested and unvested), all unearned incentive awards, all outstanding
awards under the "Career Equity" program or "Founders Stock" program
(vested and unvested), and all supplemental retirement benefits regardless
of whether such benefits previously have vested.
If employment is terminated by the Company without cause or by the
executive for good reason prior to a change in control, the executive will
receive (i) months ( months in the case of Mr. Robinson) of continued base
salary; (ii) a pro rata cash payment of his or her target annual incentive
opportunity; (iii) times ( times in the case of Mr. Robinson) his or her
target annual incentive opportunity, payable in monthly installments over
the -month severance period ( -month severance period for Mr. Robinson);
(iv) immediate vesting of restricted stock awards and payment of contingent
share awards; (v) immediate vesting of outstanding stock options and the
right to exercise such options during the -month severance period ( -month
severance period for Mr. Robinson) or the remainder of the exercise
period, if less; (vi) immediate vesting of outstanding awards under the
Company's "Career Equity" program and a pro rata payment of such awards
based on target performance; and (vii) continued participation in all
medical and life insurance plans (or if continued participation is not
permitted, the after-tax amount needed to purchase such coverage on an
individual basis) until the earlier of the end of the -month severance
period ( -month severance period for Mr. Robinson) or the date the
executive receives substantially equivalent benefits from a subsequent
employer. Following a change in control, the severance benefits otherwise
payable in monthly installments will be paid in a cash lump sum, and the
severance amounts payable to executives other than Mr. Robinson will be
increased from months to months in the event employment is terminated by
the Company without cause or by the executive for good reason within two
years following a change in control.
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, 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. With the
exception of Mr. Robinson, "good reason" is applicable only following a
change in control. "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
Footwear Group, 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. In
the event of a change in control, eligible executives then covered by the
Supplemental Retirement Plan whose employment is terminated are entitled
within the following 24-month period to receive their benefit in a lump sum
payment, the amount of which is reduced if the executive has less than ten
years of credited service and/or if the executive is less than age 60,
payable at its present value.
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.
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 shares of Company Common Stock (an "Option") will
be automatically granted to each non-employee director upon the later of
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;
(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 if
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 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 March 1, 1996 with
respect to the number of shares of Melville Common Stock beneficially owned
by (i) each person or entity known by the Company to own more than five
percent of the outstanding Melville Common Stock, (ii) each director (and
nominee as director) of the Company, (iii) each of the Named Executive
Officers of the Company and (iv) all directors and 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 Shares Owned Shares
- ------------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Directors and Named
Executive Officers(1)
J. M. Robinson 95,127 *
Carlos Alberini 1,986 *
Maureen Richards 8,650 *
Charles Messina 14,200 *
Stanley P. Goldstein 639,768(3) *
One Theall Road
Rye, NY 10580
George S. Day 0 0%
Terry R. Lautenbach 6,500 *
Bettye Martin Musham 0 0%
Kenneth S. Olshan 0 0%
M. Cabell Woodward, Jr. 12,000 *
All Directors and Officers 778,231 *
as a Group (10 persons)
Other 5% Stockholders
Investco 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
____________________
(*) Less than 1%.
(1) Except as otherwise indicated the address of each director and Named
Executive Officer is c/o Footwear Group, 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) Investco PLC ("Investco") 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, Investco
and/or subsidiaries have shared voting power, and shared dispositive
power over all shares, and Investco 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, 1929 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.
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
The Company will appoint the Registrar and Transfer Agent for the Company
Common Stock prior to the Distribution Date.
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. 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 of the Company or is or was
serving at the request of the Company as a director 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 officers, 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 December 31, 1995 and 1994................ F-2
Combined Statements of Income for the Fiscal Years 1995, 1994 and 1993.. F-3
Combined Statements of Divisional Equity for the Fiscal Years 1995,
1994 and 1993......................................................... F-4
Combined Statements of Cash Flows for the Fiscal Years 1995,
1994 and 1993......................................................... F-5
Notes to Combined Financial Statements.................................. F-6
Independent Auditors' Report
To the Board of Directors and Shareholders of
Melville Corporation:
We have audited the accompanying combined balance sheets of Footwear Group,
Inc. as of December 31, 1995 and 1994, and the related combined statements of
income, divisional equity and cash flows for each of the years in the three
years 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 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 Footwear Group,
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 years 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
FOOTWEAR GROUP, INC.
Combined Balance Sheets
December 31, 1995 and 1994
($ in millions)
ASSETS 1995 1994
---------- ----------
Current assets:
Cash and cash equivalents $ 26.3 $ 13.9
Accounts receivable, net 56.1 49.3
Due from parent and other divisions 710.8 727.7
Inventories 282.6 347.3
Prepaid expenses and other current assets 60.1 44.5
---------- ----------
Total current assets 1,135.9 1,182.7
Property and equipment, net 195.1 163.9
Goodwill, net of accumulated amortization of
$6.3 in 1995 and $3.0 in 1994 29.6 32.7
Deferred charges and other noncurrent assets 22.2 5.2
---------- ----------
Total assets $ 1,382.8 $ 1,384.5
========== ==========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable $ 59.6 $ 39.4
Accrued expenses 143.9 121.9
Federal income taxes payable -- 7.0
---------- ----------
Total current liabilities 203.5 168.3
Long-term debt .2 .2
Other long-term liabilities 71.5 74.2
Minority interests in subsidiaries 93.8 108.7
---------- ----------
Total long-term liabilities 165.5 183.1
---------- ----------
Divisional equity 1,013.8 1,033.1
---------- ----------
Total liabilities and divisional equity $ 1,382.8 $ 1,384.5
========== ==========
See accompanying notes to combined financial statements.
FOOTWEAR GROUP, INC.
Combined Statements of Income
Years Ended December 31, 1995, 1994 and 1993
($ in millions)
1995 1994 1993
--------- --------- ---------
Net sales $ 1,827.3 $ 1,839.9 $ 1,713.1
Cost of sales 1,282.8 1,269.1 1,168.5
--------- --------- ---------
Gross profit 544.5 570.8 544.6
Store operating, selling, general
and administrative expenses 419.3 390.1 362.4
Depreciation and amortization 26.7 25.9 20.9
Restructuring and asset impairment
charges 51.8 -- --
--------- --------- ---------
Operating profit 46.7 154.8 161.3
Interest income, net 37.5 26.9 20.7
--------- --------- ---------
Income before income taxes,
minority interests and
cumulative effect of
change in accounting principle 84.2 181.7 182.0
Provision for income taxes 23.2 53.1 56.6
--------- --------- ---------
Income before minority
interests and cumulative
effect of change in
accounting principle 61.0 128.6 125.4
Minority interests in net income 38.4 51.9 47.3
--------- --------- ---------
Income before cumulative
effect of change in
accounting principle 22.6 76.7 78.1
Cumulative effect of change in
accounting principle, net 3.9 -- --
--------- --------- ---------
Net income $ 18.7 $ 76.7 $ 78.1
========= ========= =========
See accompanying notes to combined financial statements.
FOOTWEAR GROUP, INC.
Combined Statements of Divisional Equity
Years Ended December 31, 1995, 1994 and 1993
($ in millions)
<TABLE>
<CAPTION>
Cumulative
Retained Contributed translation
Common stock earnings capital adjustment Total
------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1992 $ .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 (.1) -- -- -- (.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 .1 -- 10.8 -- 10.9
------------ --------- ----------- ------------ ---------
Balance as of December 31, 1994 .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 $ .1 $ 961.8 $ 51.6 $ .3 $1,013.8
============ ========= =========== ============ ==========
</TABLE>
See accompanying notes to combined financial statements.
FOOTWEAR GROUP, INC.
Combined Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993
($ in millions)
<TABLE>
<CAPTION>
1995 1994 1993
Cash flows from operating activities: ------ ------ ------
<C> <S> <S> <S>
Net income $ 18.7 $ 76.7 $ 78.1
Adjustments to reconcile net income
to net cash provided by operating activities:
Restructuring and asset impairment charges 51.8 -- --
Cumulative effect of change in accounting principle 9.5 -- --
Minority interests in net income 38.4 51.9 47.3
Depreciation and amortization 26.7 25.9 20.9
Loss on disposal of fixed assets 8.0 8.2 8.7
(Decrease) increase in deferred income taxes (16.8) (2.0) 21.0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (3.5) (9.5) 13.0
Decrease (increase) in inventories 64.7 (37.2) (9.7)
(Increase) decrease in prepaid expenses, deferred charges
and other assets (24.2) (3.4) 1.7
Increase (decrease) in accounts payable and accrued
expenses 2.2 (7.8) (9.3)
(Decrease) increase in Federal income taxes payable and
other liabilities (11.4) 28.6 (40.5)
------ ------ ------
Net cash provided by operating activities 164.1 131.4 131.2
------ ------ ------
Cash flows from investing activities:
Additions to property and equipment (92.9) (56.5) (45.9)
Acquisitions (1.5) (.4) (3.4)
------ ------ ------
Net cash used in investing activities (94.4) (56.9) (49.3)
------ ------ ------
Cash flows from financing activities:
Dividends paid to parent (38.2) (31.3) (36.7)
Dividends paid to minority interests (52.2) (37.1) (53.7)
Increase (decrease) in book overdrafts 16.4 5.6 (8.7)
Increase (decrease) in due from parent and other divisions 16.9 (21.1) 25.6
(Decrease) increase in obligations under capitalized leases (.6) 1.1 (5.6)
Recapitalization of subsidiaries by parent (1.4) 10.9 --
Other 1.8 (1.4) (.1)
------ ------ ------
Net cash used in financing activities (57.3) (73.3) (79.2)
------ ------ ------
Net increase in cash and cash equivalents 12.4 1.2 2.7
Cash and cash equivalents beginning of year 13.9 12.7 10.0
------ ------ ------
Cash and cash equivalents at end of the year $ 26.3 $ 13.9 $ 12.7
====== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
FOOTWEAR GROUP, INC.
Notes to Combined Financial Statements
(1) Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements of Footwear Group, Inc. (the "Company")
include all of the subsidiaries of the Meldisco, Thom McAn and Footaction
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
November 1, 2012 for the purpose of operating leased shoe departments
in Kmart stores.
The Parent allocates various expenses to its subsidiaries, including the
Company. A summary of the amounts allocated to the Company for the years
ended December 31 follows:
1995 1994 1993
------ ------ ------
($ in millions)
Costs of employee stock ownership plan $ 7.4 $ 5.2 $ 5.9
Administrative expenses 4.4 5.2 6.4
------ ------ ------
Total $ 11.8 $ 10.4 $12.3
====== ====== ======
Allocations to the Company are based on the Company's share of expense
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 a chain of 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."
Effective January 1, 1995, the Company changed its policy from
capitalizing internally developed software costs to expensing them as
incurred.
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.
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 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 1995, 1994 and 1993.
Postretirement Benefits
The annual cost of postretirement benefits is funded as they arise 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, approximately 100 stores are scheduled to
be closed. As a result of this plan, a pretax charge of $51.8 million was
recorded. Asset write offs included in the charge totaled $23.5 million,
while the balance will require cash outlays, primarily in 1996. In
connection with the various components of the plan, approximately 140
store employees and 130 administrative employees will be eliminated.
The significant components of the restructuring and asset impairment
charges, and the reserves remaining as of December 31, 1995 were as
follows:
($ in millions)
Recorded Remaining
-------- ---------
Lease obligations for store and office
closings and abandonment of a
warehouse facility $ 8.0 $ 7.8
Exit costs 13.4 12.9
Asset write offs related to outsourcing 12.5 --
Severance and other employee benefit vesting 7.1 7.1
-------- --------
41.0 27.8
Asset impairment charge in connection
with the adoption of SFAS No. 121 10.8 --
-------- --------
$ 51.8 $ 27.8
======== ========
The net sales and operating losses in 1995 of the stores to be closed were
approximately $15.0 million and $7.0 million, respectively.
(3) Accounts Receivable
Accounts receivable at December 31 consisted of the following:
1995 1994
------ ------
($ in millions)
Due from licensors $ 31.8 $ 27.7
Other 25.3 22.2
------ ------
57.1 49.9
Less allowance for doubtful
accounts 1.0 .6
------ ------
Total $ 56.1 $ 49.3
====== ======
(4) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at December 31 consisted of
the following:
1995 1994
------ ------
($ in millions)
Deferred income taxes $ 52.3 $ 36.9
Other 7.8 7.6
------ ------
Total $ 60.1 $ 44.5
====== ======
(5) Property and Equipment
Property and equipment at December 31 consisted of the following:
1995 1994
------- -------
($ in millions)
Land $ 7.7 $ 1.1
Buildings and improvements 55.6 20.8
Equipment and furniture 174.3 171.0
Leasehold improvements 78.3 75.7
Leased property under capital
leases 4.4 4.4
------- -------
320.3 273.0
Less accumulated depreciation
and amortization 125.2 109.1
------- -------
Property and equipment, net $195.1 $163.9
======= =======
(6) Accrued Expenses
Accrued expenses at December 31 consisted of the following:
1995 1994
------ ------
($ in millions)
Taxes other than Federal
income taxes $ 9.3 $ 13.0
Rent 29.2 45.2
Salaries and compensated absences 10.4 11.7
Restructuring reserves 24.9 8.8
Professional fees 14.1 5.0
Capital expenditures 15.3 1.9
Other 40.7 36.3
------ ------
Total $143.9 $121.9
====== ======
(7) Long-Term Debt
Long-term debt at December 31 consisted of the following:
1995 1994
------ ------
($ in millions)
National Shawmut Bank 9.5% Notes,
due 1998 $ .2 $ .2
Other .1 .1
------ ------
.3 .3
Less current installments .1 .1
------ ------
Total $ .2 $ .2
====== ======
The aggregate long-term debt maturing during each of the next three years
is as follows:
Year ($ in millions)
---- --------------
1996 $ .1
1997 .1
1998 .1
------
$ .3
======
(8) Other Long-Term Liabilities
Other long-term liabilities at December 31 consisted of the following:
1995 1994
------ ------
($ in millions)
Employee benefit costs $ 46.0 $ 43.5
Deferred income taxes 10.1 12.3
Lease obligations for closed stores 7.7 10.2
Other 7.7 8.2
------ ------
$ 71.5 $ 74.2
====== ======
(9) Divisional Equity
Divisional equity at December 31 consisted of the following:
1995
<TABLE>
<CAPTION>
($ in millions)
Meldisco Footaction Thom McAn Total
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Common stock, no par value $ .1 $ -- $ -- $ .1
Retained earnings 629.4 1.4 331.0 961.8
Contributed capital 3.4 48.2 -- 51.6
Cumulative translation adjustment .3 -- -- .3
---------- ------------ ----------- ----------
$633.2 $ 49.6 $331.0 $1,013.8
========== ============ =========== ==========
</TABLE>
1994
<TABLE>
<CAPTION>
($ in millions)
Meldisco Footaction Thom McAn Total
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Common stock, no par value $ .1 $ -- $ -- $ .1
Retained earnings 625.4 6.1 349.8 981.3
Contributed capital .3 48.2 4.5 53.0
Cumulative translation adjustment (1.3) -- -- (1.3)
---------- ------------ ----------- ----------
$624.5 $ 54.3 $354.3 $1,033.1
========== ============ =========== ==========
</TABLE>
(10) Leases
The Company leases retail stores, warehouses and office facilities under
capital leases that expire through 2002.
The Company also has noncancelable operating leases, primarily for retail
stores, which expire through 2011. The leases generally contain renewal
options for periods ranging from one to five years and require the Company
to pay costs such as real estate taxes and common area maintenance.
Contingent rentals are based on sales and profits. Net rental expense for
all operating leases for the years ended December 31, 1995, 1994 and 1993
was as follows:
1995 1994 1993
----------- ---------- -----------
($ in millions)
Minimum rentals $ 99.3 $ 90.8 $ 93.7
Contingent rentals 150.2 175.9 164.1
----------- ---------- -----------
249.5 266.7 257.8
Less sublease rentals .2 .2 .3
----------- ---------- -----------
Total $ 249.3 $ 266.5 $ 257.5
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:
Year Capital leases Operating leases
---- -------------- ----------------
($ in millions)
1996 $ .4 $ 56.8
1997 .4 52.7
1998 .4 48.5
1999 .4 41.3
2000 .1 38.2
Thereafter .1 114.0
Total $ 1.8 $ 351.5
------- ----------
Less amount representing interest .4
Present value of minimum lease
payments $ 1.4
========
Total future minimum
sublease rentals $ .5 $ 4.5
======== ===========
(11) 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 December 31 were as follows:
1995 1994
-------- -------
($ in millions)
Deferred tax assets:
Restructuring and purchase accounting reserves $ 21.2 $ 9.6
Inventories 6.8 8.0
Postretirement benefits 17.0 19.6
Other 9.4 2.7
-------- -------
Total deferred tax assets 54.4 39.9
-------- -------
Deferred tax liabilities:
Property and equipment 10.1 12.3
Other 2.1 3.0
-------- -------
Total deferred tax liabilities 12.2 15.3
-------- -------
Net deferred tax assets $ 42.2 $ 24.6
======== =======
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:
1995 1994 1993
--------- --------- ---------
($ in millions)
Federal $ 15.9 $ 43.5 $ 44.9
State 7.3 9.6 11.7
--------- --------- ---------
Total $ 23.2 $ 53.1 $ 56.6
========= ========= =========
Reconciliations of the effective tax rates to the U.S. statutory income
tax rate are as follows:
1995 1994 1993
---- ---- ----
(Percent of pre-tax earnings)
Effective tax rate 27.5% 29.2% 31.1%
State income taxes, net of Federal
tax benefit (5.6) (3.4) (4.0)
51% owned subsidiaries excluded from the
Parent's consolidated Federal income
tax return 16.9 9.6 8.4
Other (3.8) (0.4) (0.5)
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
==== ==== ====
The provision for income taxes includes a net deferred tax benefit of
$19.0 million in 1995 and net deferred tax charges of $11.4 million and
$16.3 million in 1994 and 1993, respectively.
(12) Supplemental Cash Flow Information
Cash payments for income taxes and interest for the years ended December
31, 1995, 1994 and 1993 were as follows:
1995 1994 1993
------ ------ ------
($ in millions)
Income taxes $ 52.8 $ 40.6 $ 52.1
====== ====== ======
Interest (net of amounts capitalized) $ .3 $ .6 $ .2
====== ====== ======
(13) Related Party Transactions
Postretirement Benefits
The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.
The weighted average discount rate used to determine the accumulated
postretirement benefit obligation ("APBO") was 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:
1995 1994
------ ------
($ in millions)
Retirees $ 13.0 $ 11.2
Fully eligible active plan participants 1.3 1.9
Not fully eligible active plan participants 12.5 7.9
------ ------
APBO 26.8 21.0
Unrecognized prior service cost 11.6 12.5
Unrecognized net gain 7.5 7.3
------ ------
Accrued postretirement benefit cost $ 45.9 $ 40.8
====== ======
Effective December 1992, the Company amended these plans to terminate
certain benefits, resulting in a prior service gain of $14.8 million to be
amortized over 13 years. The Company's net periodic cost for the years
ended December 31, 1995, 1994 and 1993 was as follows:
1995 1994 1993
-------- -------- --------
($ in millions)
Interest expense $ 1.8 $ 1.7 $ 1.9
Service cost (net of prior service gain
amortization) (.5) (.3) (.4)
Amortization of gains (.3) -- --
-------- -------- --------
$ 1.0 $ 1.4 $ 1.5
======== ======== ========
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 up to the maximum limits allowed by Internal Revenue Code
Section 401(k). Under the 401(k) component, the Parent matches a portion
of the employee's contribution under a predetermined formula based on the
level of contribution and years of vesting. The Parent charges to its
divisions the portion of the expense related to these contributions based
on the proportionate share of qualifying compensation at the Company to
the total of all such compensation for all plan participants.
Contributions to the plan by the Company for both profit sharing and
matching of employee contributions were approximately $2.9 million, $2.6
million and $3.4 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
cost allocated to the Company for the years ended December 31, 1995, 1994
and 1993 was $4.4 million, $5.2 million and $6.4 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. This amounted to $1.3 million, $1.2 million and $1.0
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 $37.2 million, $27.1 million and $20.7 million in 1995,
1994 and 1993, respectively.
(14) 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.
(15) 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 $7.0 million for the estimated liability related to this
matter between 1981 and 1988.
In December 1994, the GATT Uruguay Round Agreements Act contained
provisions which effectively ended the Brazil countervailing duty.
Accordingly, the Company reversed the entire accrual which is reflected in
the 1994 combined statement of income.
(16) Summary of Quarterly Results (Unaudited)
Summary quarterly data for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------- ------------- ------------- ------------- ----------
($ in millions)
<S> <C> <C> <C> <C> <C>
Net sales
1995................. $ 367.3 $ 478.0 $ 462.8 $ 519.2 $ 1,827.3
1994................. 380.2 443.5 490.7 525.5 1,839.9
Gross profit
1995................. 98.0 148.5 141.6 156.4 544.5
1994................. 103.1 143.2 152.1 172.4 570.8
Net income (loss) before
cumulative effect of
change in accounting
principle
1995................. 1.6 21.3 18.3 (18.6) 22.6
1994................. 1.6 18.9 20.0 36.2 76.7
Net income (loss)
1995................. (2.3) 21.3 18.3 (18.6) 18.7
1994................. 1.6 18.9 20.0 36.2 76.7
</TABLE>
