==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
October 12, 1996
MELVILLE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
New York 1-1011 04-1611460
(State or Other (Commission File Number) (IRS Employer
Jurisdiction Identification
of Incorporation) No.)
One CVS Drive
Woonsocket, RI 02895
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code:
(401) 765-1500
Not Applicable
(Former Name or Former Address, if Changed
Since Last Report)
==============================================================================
Item 2. Acquisitions or Dispositions of Assets.
Introduction
On October 12, 1996 (the "Distribution Date"), Melville Corporation
("Melville") effected the distribution (the "Distribution") of 100% of the
shares of common stock, par value $.01 per share (the "Footstar Common
Stock"), of Footstar, Inc., a Delaware corporation ("Footstar"), held by
Melville to holders of Melville's common stock, par value $1.00 per share
("Melville Common Stock"). Such shares of Footstar Common Stock represented
all of the Footstar Common Stock owned by Melville and were distributed by
Melville to its shareholders of record (other than Melville Restricted
Shareholders (as defined below)) as of the close of business on October 2,
1996 (the "Record Date") on the basis of 0.2879 shares of Footstar Common
Stock for every one share of Melville Common Stock held of record on the
Record Date. Holders ("Melville Restricted Shareholders") of restricted
shares of Melville Common Stock issued under Melville stock-based compensation
plans to Melville employees who remained Melville employees after the
Distribution did not receive Footstar Common Stock in respect of such
restricted stock in the Distribution and, in lieu thereof, an adjustment to
the applicable restricted stock award is being made pursuant to the terms
of such compensation plans whereby such employees will receive additional
Melville restricted stock equivalent to the Footstar Common Stock that
would otherwise have been received in the Distribution. No consideration
was paid to Melville or Footstar by Melville shareholders for the shares of
Footstar Common Stock received in the Distribution. Immediately following
the Distribution, Melville owned no shares of Footstar Common Stock or
other securities of Footstar.
Prior to the Distribution Date, Melville contributed to
Footstar all of the outstanding shares of capital stock of, or other ownership
interests in, the subsidiaries that own or operate the Meldisco and Footaction
businesses and the Thom McAn business which is being discontinued (the
"discontinued Thom McAn business") (except for Kmart Corporation's minority
interest in the Meldisco subsidiaries), in accordance with the terms of the
Distribution Agreement, entered into as of September 24, 1996, between
Melville and Footstar. As of the Distribution, Footstar owned the Meldisco,
Footaction and discontinued Thom McAn businesses.
The Footstar Common Stock has been approved for listing on the
New York Stock Exchange under the symbol "FTS" subject to official notice of
issuance.
Background to and Reasons for the Distribution
Melville had, up to the time of the Restructuring Program
described below, been a diversified retailer operating in four business
segments: prescription drugs and health and beauty care through its CVS
business; apparel through its Bob's Stores, its Marshalls business (up to the
time of the sale of Marshalls on November 17, 1995) and its Wilson's leather
goods chain (up to the time of the sale of Wilson's on May 25, 1996); footwear
through its Meldisco, Footaction and Thom McAn businesses; and toys through
its Kay-Bee business (up to the time of the sale of Kay-Bee on May 5, 1996)
and home furnishings through its Linens 'n Things and This End Up
businesses (up to the time of the sale of This End Up on May 31, 1996).
In Melville's letter to shareholders accompanying its 1994
Annual Report, Melville informed its shareholders that it was commencing a
strategic review of its organization and operations which it expected would be
substantially completed by December 31, 1995. In early 1994, Melville began to
explore various transaction structures, and this activity was accelerated in
late 1994 and throughout 1995. In the Spring of 1995, Melville retained
Morgan Stanley & Co. Incorporated ("Morgan Stanley") as financial adviser and
certain other advisers to assist in designing, formulating and implementing
Melville's restructuring strategy and plan (including Bain & Co., as a
management consultant, and Financo, Inc. as financial adviser in connection
with the sale of Kay-Bee and This End Up and, together with Morgan Stanley,
the sale of Marshalls). In this strategic review, Melville worked with its
advisers and legal counsel and accountants in an analysis and valuation of,
among other things, the financial, market, credit, tax, accounting and
regulatory implications of alternative transactions and structures, and
Melville and its advisers examined the mix of its businesses and the role and
strategy of each in generating sales and profits, as well as each business'
market position and growth potential.
These preparatory efforts of Melville's management and advisers
culminated in the formulation and announcement in October 1995 of Melville's
comprehensive strategic restructuring program (the "Restructuring Program")
designed to achieve various strategic, profitability and growth objectives as
well as cost savings, and thereby to increase value for Melville shareholders.
The Restructuring Program included:
(i) The planned creation of independent retailing companies in
the chain drug and footwear industries. After giving effect to the
Restructuring Program, the remaining Melville (which, subject to shareholder
approval, will be renamed CVS Corporation) will be a publicly traded holding
company consisting of CVS and, initially, Linens 'n Things and Bob's.
On June 3, 1996, Melville announced a formal plan to separate
Linens 'n Things and Bob's from CVS, with Linens 'n Things and Bob's to be
classified as discontinued operations in Melville's financial statements. On
September 18, 1996 a registration statement was filed under the Securities Act
of 1933 relating to a public offering of shares of common stock of Linens 'n
Things held by Melville. Melville has publicly announced its intention to
dispose of, subject to market conditions, its entire ownership position in
Linens 'n Things by the end of 1997. No assurance can be given as to when or
whether such public offering will be consummated, as to the number or offering
price of shares to be sold therein.
Footstar constitutes the footwear company which has become
publicly traded through the Distribution.
(ii) The previously announced sale of Marshalls to The TJX
Companies, Inc., which was completed on November 17, 1995.
(iii) The previously announced sale of Kay-Bee Toys to
Consolidated Stores Corporation, which was completed on May 5, 1996.
(iv) The previously announced sale of Wilson's to an investor
group led by Wilson's management and other investors, which was completed on
May 25, 1996; and the sale of This End Up to an outside investor group which
was completed on May 31, 1996.
(v) The recording by Melville of an after-tax charge of
approximately $753.1 million in the fourth quarter of 1995 relating to the
Restructuring Program. An additional after-tax charge of approximately $148
million was recorded by Melville in the second quarter of 1996, resulting
primarily from certain actions announced by Melville on June 3, 1996 regarding
discontinued operations.
(vi) A revision of Melville's dividend policy to align the
payout with the new Melville's growth and capital needs, as well as with the
prevailing practices in each industry segment. In January 1996, Melville
announced that its quarterly dividend would be reduced to $0.11 per share from
$0.38 per share.
As described above, the Distribution constituted part of the
overall Restructuring Program. Melville had considered various alternatives
with respect to the restructuring of the entire Melville portfolio of
businesses (including its footwear operations) and concluded that the
Distribution was in the best interests of Melville, Footstar and Melville's
shareholders.
In concluding that the Distribution was in the best interests
of Melville, Footstar and Melville's shareholders, Melville considered, among
other things, that (i) the Distribution positions Melville to take full
advantage of the strategic opportunities currently presented by the ongoing
drug store industry consolidation by creating two separate public companies
which the financial markets will evaluate more effectively; (ii) the
Distribution permits Melville and Footstar to offer management incentives in a
manner that is more directly linked to the performance of their respective
businesses, thereby better aligning these incentives with the interests of
shareholders; (iii) the Distribution increases the strategic clarity of
Melville and Footstar, as each will be focused on a specific industry and will
have the decision-making power to respond quickly and decisively to evolving
conditions in its industry; (iv) the Restructuring Program should increase
overall aggregate profitability of the newly independent companies as a result
of the cost savings achieved by removing functions that had been performed by
Melville which duplicated similar functions performed by the Meldisco and
Footaction businesses; and (v) for various corporate, strategic and
contractual reasons, Footstar could not, in management's view, have been
disposed of through a third party sale.
Certain Federal Income Tax Consequences
On January 9, 1996, Melville filed an application for a ruling
with the Internal Revenue Service (the "Service") to the effect that the
proposed Distribution would qualify as tax-free to Melville and its
shareholders. During the course of the Service's consideration of the
application, from time to time it requested additional information from
Melville. On August 29, 1996, the Service made another such request which
further extended the review process for an indeterminate period. Melville
believed that it was in the best interests of Melville, Footstar and
Melville's shareholders to effect the Distribution on or about October 12,
1996. Accordingly, Melville withdrew its application and proceeded with the
Distribution on the basis of an opinion of Davis Polk & Wardwell to the effect
that the Distribution should qualify as tax-free to Melville and its
shareholders under Sections 355 and 368 of the Internal Revenue Code of 1986,
as amended (the "Code").
Assuming that the Distribution qualifies as tax-free for
federal income tax purposes:
(i) Except as described below with respect to
fractional shares, a Melville shareholder will not recognize
gain or loss as a result of the Distribution. Cash received in
lieu of a fractional share will be treated as received in
exchange for such fractional share. Gain or loss will be
recognized to the recipient shareholder to the extent of the
difference between the shareholder's basis in the fractional
share and the amount received for the fractional share.
Provided the fractional share interest is held as a capital
asset by the recipient shareholder, such gain or loss will
constitute capital gain or loss.
(ii) A Melville shareholder will apportion its tax
basis for its Melville Common Stock between such Melville
Common Stock and Footstar Common Stock received in the
Distribution in proportion to the relative fair market
values of such Melville Common Stock and Footstar Common
Stock on the Distribution Date.
(iii) A Melville shareholder's holding period for
Footstar 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 was held as a capital
asset by such shareholder as of the Distribution Date.
(iv) Except to the extent of any excess loss accounts or
deferred intercompany gains, no gain or loss will be recognized
to Melville as a result of the Distribution.
Opinions of counsel are not binding on the Service or the
courts. The Service may challenge positions taken based upon this opinion.
Davis Polk & Wardwell, however, is of the opinion that if the Service were to
assert that the Distribution did not qualify as tax-free, the Service should
not prevail in a judicial proceeding in which the issues and facts were
properly presented.
If the Distribution does not qualify as a tax-free
distribution, the fair market value of the shares of Footstar Common Stock
received by the Melville stockholders would be taxable as a dividend. In that
event, the tax basis of the shares of Footstar Common Stock held by the
Melville stockholders after the Distribution would not change and the tax
basis of the shares of Footstar Common Stock would be equal to their fair
market value on the Distribution Date. In addition, Melville would recognize
a capital gain equal to the difference between the fair market value of the
shares of Footstar Common Stock and Melville's basis in such shares.
Current Treasury regulations require each Melville shareholder
who receives Footstar 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 Footstar on
its behalf) will make available requisite information to each Melville
shareholder of record as of the Record Date.
ALL SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS
REGARDING THE PARTICULAR FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF
THE DISTRIBUTION TO THEM.
For a description of agreements pursuant to which Melville and
Footstar have provided for certain tax sharing and other tax matters, see
"Relationship Between Melville and Footstar following the Distribution--Terms
of the Tax Disaffiliation Agreement."
Relationship between Melville and Footstar Following the Distribution
This section of this Report describes certain agreements
between Melville and Footstar that govern certain of the on-going
relationships between Melville and Footstar after the Distribution and provide
for an orderly transition to the status of two separate, independent
companies. The following description of the Distribution Agreement and the Tax
Disaffiliation Agreement (collectively, the "Distribution Documents"), do not
purport to be complete and are qualified in their entirety by reference to the
Distribution Documents, which are filed as exhibits to this Current Report on
Form 8-K and are incorporated herein by reference.
The Distribution Documents were entered into in connection with
the Distribution and were, 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
Footstar after the Distribution, which will be negotiated at arm's length.
Terms of the Distribution Agreement
Melville and Footstar entered into a Distribution Agreement as
of September 24, 1996 (the "Distribution Agreement"), 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 Footstar after the Distribution and to provide for the
allocation of certain assets and liabilities between Melville and Footstar.
Contribution of Assets
Pursuant to the Distribution Agreement, prior to the
Distribution Date, Melville contributed (the "Contributions") to Footstar all
of the outstanding shares of capital stock of, or other ownership interests
in, the subsidiaries that own or operate Meldisco, Footaction and the
discontinued Thom McAn business (except for Kmart Corporation's minority
interest in the Meldisco subsidiaries).
Cross Indemnification
Footstar and Melville have indemnified one another against
certain liabilities. Footstar has indemnified Melville and its subsidiaries
(other than Footstar and its subsidiaries) (Melville and such subsidiaries
being the "Melville Group") and their respective directors, officers and
affiliates (collectively, the "Melville Indemnitees") from and against any and
all damage, loss, liability and expense incurred or suffered by any of the
Melville Indemnitees (i) arising out of or due to the failure of Footstar to
pay, perform or otherwise discharge any obligations and liabilities of
Footstar and its subsidiaries (including subsidiaries contributed pursuant to
the Contributions and including subsidiaries as of and (except where the
context clearly indicates otherwise) after the Distribution (the "Footstar
Group")) under the Distribution Agreement (including all liabilities, whenever
arising, of or relating to the Footstar Group or arising from or in connection
with the conduct of the Footstar business or the ownership or use of assets in
connection therewith) or (ii) arising out of or in connection with the
provision by the Melville Group of Services (as defined below) to the Footstar
Group pursuant to the Distribution Agreement. A subsidiary of Footstar will
indemnify each of the Melville Indemnitees against any and all damage, loss,
liability and expense arising out of or due to the failure of any Footstar
subsidiary to pay, perform or otherwise discharge its obligations under any
Guaranteed Lease (as defined below). Such indemnification obligations of
this Footstar subsidiary with respect to the Guaranteed Leases are guaranteed
by Footstar.
Melville has indemnified the Footstar Group and the respective
directors, officers and affiliates of persons in the Footstar Group
(collectively, the "Footstar Indemnitees") from and against any and all
damage, loss, liability and expense arising out of or due to the failure of
Melville to pay, perform, or otherwise discharge any obligations and
liabilities of the Melville Group under the Distribution Agreement (including
all liabilities, whenever arising, of or relating to the Melville Group or
arising from or in connection with the conduct of the businesses of the
Melville Group (other than the Footstar business) or the ownership or use of
assets in connection therewith).
Melville and Footstar have indemnified the other and the
other's affiliates and controlling persons from certain liabilities under the
securities laws in connection with Foostar's Registration Statement on Form 10
under the Securities Exchange Act of 1934 relating to the Distribution (and
the related Information Statement dated September 26, 1996) or to contribute
under certain circumstances to the amount payable by the other in respect
thereof.
None of the foregoing indemnities applies to indemnification
for tax liabilities, which are addressed in the Tax Disaffiliation Agreement
described below.
The Distribution Agreement also includes procedures for notice
and payment of indemnification claims and generally provides that the
indemnifying party may assume the defense of a claim or suit brought by a
third party. Any indemnification paid under the foregoing indemnities is to
be paid net of the amount of any insurance or other amounts that would be
payable by any third party to the indemnified party in the absence of such
indemnity and net of any tax benefit to the Indemnified Party attributable to
the relevant payment or liability, and shall be grossed up so that the
indemnified party receives 100% of the after-tax amount thereof.
Lease Guarantees
The Distribution Agreement provided that, with respect to each
real estate lease of Footstar or any of its subsidiaries that was 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 are 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 Footstar Group all assets not already owned by the Footstar Group and that
relate solely to the business of the Footstar Group (and not to that of
Melville) and Footstar will assume all liabilities associated with such assets
and (ii) Footstar will use its best efforts to transfer to the Melville Group
all assets not already owned by the Melville Group and that relate solely to
the business of the Melville Group (and not to that of the Footstar Group) and
Melville will assume all liabilities associated with such assets.
Transitional Services
Melville will provide or cause to be provided to Footstar
certain specified services for a transitional period after the Distribution.
The transitional services to be provided by Melville to Footstar are tax
services ("Tax Services") as specified in the Tax Disaffiliation Agreement (as
defined below), services relating to certain Melville health and welfare plans
("Welfare Services"), check collection services and insurance claims
administration services (collectively, the "Services"). Such Services are to
be provided in a manner generally consistent with the nature of Melville's
intercompany services and practices prior to the Distribution.
The Services are generally to be offered through the first
anniversary of the Distribution Date, with the exception of Tax Services which
are offered until December 31, 1997 and Welfare Services which are offered
until December 31, 1996.
The Distribution Agreement generally provides that the Services
are provided in exchange for payment of Melville's costs therefor, except with
respect to Tax Services for which the consideration is the provision by
Footstar of certain tax services to Melville.
Employee Benefits
The Distribution Agreement provides that generally Melville
ceases to have any liability under its employee benefit plans with respect to
employees and former employees of the Footstar Group after the Distribution,
except that (i) options and other outstanding stock based awards in respect of
Melville stock continue to operate in accordance with their terms, (ii) the
full account balances of current employees of the Footstar Group in Melville's
401(k) profit sharing plan will be transferred to a similar successor plan of
Footstar and (iii) employees of the Footstar Group are entitled to exercise
applicable distribution rights under Melville's employee stock ownership plan.
Melville Rights in the Event of Certain Third Party
Beneficial Ownership of Footstar
The Distribution Agreement generally provides that no person or
group may acquire beneficial ownership of more than 35% of the Footstar Common
Stock, unless prior to such acquisition, the acquiror has provided to Melville
a guarantee of Footstar's indemnity and other obligations under the
Distribution Agreement. In addition, if any person or group acquires such
beneficial ownership of Footstar, Melville may forthwith terminate the
provision of Services.
Access to Information; Provision of Witnesses; Confidentiality
Pursuant to the Distribution Agreement, each of Footstar and
Melville has agreed, for a reasonable period of time, to afford the other and
certain of their agents reasonable access to all records in its possession
relating to the business and affairs of the other party as reasonably
required, including, for auditing, accounting, litigation, disclosure and
reporting purposes, subject to limited exceptions. Each party will also use
reasonable efforts to make available to the other, its officers, directors,
employees and agents as witnesses, and 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,
Footstar, Melville, and their respective officers, directors, employees and
agents will hold all information in its possession concerning the other party
in strict confidence.
Transaction Expenses
Melville is generally responsible for all transaction expenses
incurred by the Melville Group or the Footstar Group in connection with the
Distribution, except that Footstar is responsible for all fees and expenses
under or in connection with its bank credit facility.
Terms of the Tax Disaffiliation Agreement
Melville and Footstar have entered into a tax disaffiliation
agreement (the "Tax Disaffiliation Agreement") that sets 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. Footstar will reimburse Melville for the portion of such taxes, if any,
relating to the retail footwear businesses (except to the extent attributable
to Bob's or Marshalls), provided, however, that with respect to any combined
and unitary state income taxes based in part on allocation percentages,
Footstar will reimburse Melville for the portion of such taxes attributable to
the retail footwear businesses' contribution to the relevant allocation
percentage. Footstar 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. Footstar will be
responsible for filing, and paying the taxes associated with, all other tax
returns relating to pre-Distribution tax periods relating solely to Footstar's
businesses. Melville, however, will be responsible for preparing all income
tax returns to be filed by Footstar for tax periods that end on or before the
Distribution Date.
In general, Footstar will indemnify Melville for taxes
relating to a pre-Distribution tax period to the extent such taxes are
attributable to the retail footwear businesses (except to the extent
attributable to Bob's or Marshalls) or, in the case of any combined and
unitary state income taxes based in part on allocation percentages, to the
extent such taxes are attributable to the retail footwear businesses'
contribution to the relevant allocation percentage and Melville will
indemnify Footstar for all other taxes relating to a pre-Distribution tax
period. The Tax Disaffiliation Agreement also provides that Melville will
generally pay to Footstar the net benefit realized by Melville relating to
Footstar's businesses from the carryback to pre-Distribution tax periods of
certain tax attributes of Footstar arising in post-Distribution tax
periods.
Pursuant to the Tax Disaffiliation Agreement, Footstar will
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 Footstar Common Stock, the sale, distribution or other
disposition of assets out of the ordinary course of business, and the
discontinuation of certain businesses, except as such transaction relates to
the discontinuation of the Thom McAn business. Footstar will generally
indemnify Melville against any tax liability resulting from Footstar's breach
of any covenant or representation contained in the Tax Disaffiliation
Agreement with respect to such transactions. In addition, Footstar and
Melville have each agreed that neither party will take any action inconsistent
with the information furnished by such party in connection with the rendering
of the legal opinion regarding the tax-free nature of the Distribution and,
until the expiration of the statute of limitations period applicable to the
taxable year in which the Distribution occurs, neither party will make or
change any accounting method, amend any tax return or take any tax position on
any tax return, change the manner in which it conducts its business, or take
(or omit to take) any other action that results in any increased tax liability
relating to a pre-Distribution tax period. Footstar and Melville have agreed
to indemnify the other for liabilities arising as a result of the breach by
Footstar or Melville, as the case may be, of the foregoing agreement.
Footstar and Melville have also agreed to indemnify the other from liabilities
under the securities laws or otherwise resulting from information furnished by
Footstar or Melville, as the case may be.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(b) Pro Forma Financial Information
Set forth hereunder is the pro forma financial
information required to be furnished by the Registrant with respect to the
transaction described in Item 2 above.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Prior to the Distribution Date, Footstar had been operating as part of
Melville. The following Unaudited Pro Forma Statement of Operations sets
forth the historical Statement of Operations of the Company for the fiscal
year ended December 31, 1995 and for the six months ended June 29, 1996 and
as adjusted for the Distribution and the related transactions and events
described in the Notes to such Unaudited Pro Forma Statements of Operations
as if the Distribution and such transactions and events had been
consummated on January 1, 1995. It should be noted that the Company's
historical Statements of Operations reflect Footstar in discontinued
operations for all periods presented. The following Unaudited Pro Forma
Balance Sheet sets forth the historical balance sheet of the Company as of
June 29, 1996, and as adjusted for the Distribution and the related
transactions and events described in the Notes to such Unaudited Pro Forma
Balance Sheet as if the Distribution and such transactions and events had
been consummated on June 29, 1996.
Management believes that the assumptions used provide a reasonable basis on
which to present such Unaudited Pro Forma Statements of Operations and
Unaudited Pro Forma Balance Sheet (collectively referred to as the
"Unaudited Pro Forma Financial Statements"). The Unaudited Pro Forma
Financial Statements should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 and Quarterly Report on Form 10-Q for the quarterly period ended
June 29, 1996. The Unaudited Pro Forma 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 and are not necessarily indicative of the
Company's future results of operations or financial condition.
<TABLE>
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
Unaudited Pro Forma Statement of Operations
For the Fiscal Year Ended December 31, 1995
(Dollars in millions, except per share amounts)
Continuing
Operations Pro Forma
Before Pro Forma Pro Forma Continuing
Melville Footstar (e) Adjustments Adjustments Operations
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 4,865.0 $ - $ 4,865.0 $ - $ 4,865.0
Cost of goods sold, buying and
warehousing costs 3,506.4 - 3,506.4 - 3,506.4
-------------------------------------------------------------------------------------
Gross margin 1,358.6 - 1,358.6 - 1,358.6
Selling, general and administrative
expenses 1,075.5 - 1,075.5 (38.0) b 1,037.5
Depreciation and amortization 71.1 - 71.1 - 71.1
Restructuring and asset impairment
charge 165.6 - 165.6 - 165.6
-------------------------------------------------------------------------------------
Total operating expenses 1,312.2 - 1,312.2 (38.0) 1,274.2
Operating profit 46.4 - 46.4 38.0 84.4
Gain on sale of securities - - - - -
Dividend income - - - - -
Interest expense, net 53.6 - 53.6 (0.9) a 53.9
1.2 c
-------------------------------------------------------------------------------------
Total other expense 53.6 - 53.6 0.3 53.9
-------------------------------------------------------------------------------------
Loss (earnings) from continuing
operations (7.2) - (7.2) 37.7 30.5
Income tax benefit (provision) 2.9 - 2.9 (15.5) d (12.6)
-------------------------------------------------------------------------------------
Net (loss) earnings from continuing
operations $ (4.3) $ - $ (4.3) $ 22.2 $ 17.9
=====================================================================================
Net (loss) earnings per share of common
stock from continuing operations $ (0.20) $ 0.01
============ ===========
Notes to Pro Forma Statement of Operations:
- -------------------------------------------
a To adjust interest expense to reflect the reduction in notes payable.
b To record the estimated reduction in corporate overhead for the period
presented attributed to the Footstar Spin-off.
c To record the incremental ESOP costs resulting from the conversion of
302,108 shares of Series One ESOP Convertible Preferred Stock related to Footstar
participants at January 1, 1995.
d To record the net change in the provision for income taxes based upon the
Pro Forma Statement of Operations.
e Melville's historical Statement of Operations reflects Footstar in
discontinued operations. As such, no adjustments appear in the indicated column in the above
table.
</TABLE>
<TABLE>
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
Unaudited Pro Forma Statement of Operations
For the Six Months Ended June 29, 1996
(Dollars in millions, except per share amounts)
<CAPTION>
Continuing
Operations Pro Forma
Before Pro Forma Pro Forma Continuing
Melville Footstar (e) Adjustments Adjustments Operations
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,621.9 $ - $ 2,621.9 $ - $ 2,621.9
Cost of goods sold, buying and
warehousing costs 1,871.4 - 1,871.4 - 1,871.4
------------------------------------------------------------------------------------
Gross margin 750.5 - 750.5 - 750.5
Selling, general and administrative
expenses 555.3 - 555.3 (11.1) b 544.2
Depreciation and amortization 39.6 - 39.6 - 39.6
Restructuring and asset impairment
charge - - - - -
------------------------------------------------------------------------------------
Total operating expenses 594.9 - 594.9 (11.1) 583.8
------------------------------------------------------------------------------------
Operating profit 155.6 - 155.6 11.1 166.7
Gain on sale of securities 76.6 - 76.6 - 76.6
Dividend income 5.4 - 5.4 - 5.4
Interest expense, net (17.5) - (17.5) 0.5 a (17.5)
(0.5) c
------------------------------------------------------------------------------------
Total other income 64.5 - 64.5 - 64.5
------------------------------------------------------------------------------------
Earnings from continuing operations 220.1 - 220.1 11.1 231.2
Income tax provision 88.7 - 88.7 4.6 d 93.3
------------------------------------------------------------------------------------
Net earnings from continuing operations $ 131.4 $ - $ 131.4 $ 6.5 $ 137.9
====================================================================================
Net earnings per share of common stock
from continuing operations $ 1.18 $ 1.24
============ ==========
Notes to Pro Forma Statement of Operations:
- ------------------------------------------
a To adjust interest expense to reflect the reduction in notes payable.
b To record the estimated reduction in corporate overhead for the period
presented attributed to the Footstar Spin-off.
c To record the incremental ESOP costs resulting from the conversion of
248,643 shares of Series One ESOP Convertible Preferred Stock related to
Footstar participants at January 1, 1995.
d To record the net change in the provision for income taxes based upon
the Pro Forma Statement of Operations.
e Melville's historical Statement of Operations reflects Footstar in
discontinued operations. As such, no adjustments appear in the indicated
column in the above table.
</TABLE>
<TABLE>
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
Unaudited Pro Forma Consolidated Balance Sheet
June 29,1996
(Dollars in millions)
<CAPTION>
Continuing
Operations Pro Forma
Before Pro Forma Pro Forma Continuing
Melville Footstar Adjustments Adjustments Operations
---------------------------------------------------------------------------------
<S> C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 82.3 $ 22.6 $ 59.7 $ 16.1 c $ 59.7
(16.1) f
Investments 101.8 - 101.8 101.8
Accounts receivable 189.9 58.0 131.9 131.9
Due from parent 626.6 (626.6) (0.3) a -
896.8 b
(269.9) c
Inventories 1,434.3 311.9 1,122.4 1,122.4
Prepaid expenses 285.6 55.7 229.9 0.7 a 230.6
---------------------------------------------------------------------------------
Total current assets 2,093.9 1,074.8 1,019.1 627.3 1,646.4
Property and equipment, net 891.9 174.0 717.9 717.9
Deferred charges and other assets 243.6 27.1 216.5 (0.4) a 216.1
Goodwill, net 174.5 29.2 145.3 145.3
---------------------------------------------------------------------------------
Total assets $3,403.9 $1,305.1 $ 2,098.8 $ 626.9 $2,725.7
=================================================================================
Liabilities
Accounts payable $ 467.8 $ 50.5 $ 417.3 $ 417.3
Accrued expenses 808.6 164.8 643.8 643.8
Notes payable 91.9 - 91.9 (16.1) f 75.8
Other current liabilities 14.8 - 14.8 14.8
---------------------------------------------------------------------------------
Total current liabilities 1,383.1 215.3 1,167.8 (16.1) 1,151.7
Long-term debt 321.4 0.1 321.3 321.3
Deferred income taxes 12.1 - 12.1 12.1
Other long-term liabilities 134.3 58.6 75.7 75.7
Minority interest in subsidiaries 41.7 41.7 - -
Redeemable preferred stock 1.3 - 1.3 1.3
Shareholders' equity
Footstar equity 989.4 (989.4) 896.8 b (0.0)
(253.8) c
346.4 d
Preferred stock 316.6 - 316.6 (13.3) e 303.3
Guaranteed ESOP obligations (309.7) - (309.7) (309.7)
Common stock 111.9 - 111.9 111.9
Capital surplus 64.2 - 64.2 1.8 e 66.0
Retained earnings 1,588.9 - 1,588.9 (346.4) d 1,242.5
Unrealized gain on investments, net 25.8 - 25.8 25.8
Cumulative translation adjustment 0.1 - 0.1 0.1
Common stock in treasury (287.8) - (287.8) 11.5 e (276.3)
---------------------------------------------------------------------------------
Total shareholders' equity 1,510.0 989.4 520.6 643.0 1,163.6
---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $3,403.9 $1,305.1 $2,098.8 $626.9 $2,725.7
=================================================================================
Notes to Pro Forma Balance Sheet:
- --------------------------------
a To reflect the transfer of net assets related to Melville sponsored
employee benefit plans to Melville.
b To reflect the transfer of retained earnings to Melville.
c To reflect the elimination of the resulting intercompany indebtedness.
d To reflect the contribution of Melville's equity investment to Footstar.
e To reflect the conversion of 248,643 shares of Series One ESOP Convertible Preference
Stock related to Footstar participants to common stock.
f To reflect a reduction in notes payable equal to the cash received in
settlement of intercompany indebtedness.
</TABLE>
(c) Exhibits.
99.1 Distribution Agreement dated as of September 24, 1996
between Melville Corporation, Footstar, Inc. and
Footaction Center, Inc.
99.2 Tax Disaffiliation Agreement dated as of September 24,
1996 between Melville Corporation and Footstar, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
MELVILLE CORPORATION
Dated: October 27, 1996 By /s/ Charles Conaway
Name: Charles Conaway
Title: Chief Financial Officer
EXHIBIT INDEX
99.1 Distribution Agreement dated as of September 24, 1996
between Melville Corporation, Footstar, Inc. and
Footaction Center, Inc.
99.2 Tax Disaffiliation Agreement dated as of September 24,
1996 between Melville Corporation and Footstar, Inc.
EXHIBIT 99.1
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT dated as of September 24, 1996 (the
"Agreement") between Melville Corporation, a New York corporation
("Melville"), Footstar, Inc., a Delaware corporation ("Footstar"), and
Footaction Center, Inc., a California corporation.
W I T N E S S E T H:
WHEREAS, Footstar is presently a wholly owned Subsidiary of
Melville;
WHEREAS, the Board of Directors of Melville has determined that it
is in the best interest of Melville, its shareholders and Footstar that all
shares of Footstar Common Stock owned by Melville be distributed pro rata to
Melville's shareholders;
WHEREAS, Melville and Footstar are concurrently herewith entering
into the Tax Disaffiliation Agreement;
WHEREAS, the parties hereto desire to set forth herein the
principal corporate transactions to be effected in connection with the
Distribution and certain other matters relating to the relationship and the
respective rights and obligations of the parties following the Distribution;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. The following terms, as used herein,
have the following meanings:
"Action" means any claim, suit, action, arbitration, inquiry,
investigation or other proceeding by or before any court, governmental or
other regulatory or administrative agency or commission or any other tribunal.
"Affiliate" means, with respect to any Person, any Person directly
or indirectly controlling, controlled by, or under common control with, such
other Person. For the purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Check Services" has the meaning set forth in Schedule 6.01(A).
"Claims Services" has the meaning set forth in Schedule 6.01(B).
"Commission" means the Securities and Exchange Commission.
"Contributed Subsidiaries" means (i) each of the corporations or
other entities that, as of the Distribution, own or operate Melville's
Meldisco, Footaction, and Thom McAn businesses, divisions or operating units,
(ii) Meldisco (Europe) Purchasing Ltd. ("MEP") and (iii) the respective
Subsidiaries (and holding companies (other than Footstar and Melville)) of the
Persons referred to in clauses (i) and (ii).
"Costs" means, with respect to Services provided hereunder, any
and all (i) costs incurred by Melville or its Affiliates in connection with or
with respect to performing the Services hereunder (including all costs and
charges referred to in the Exhibits hereto) that are consistent with the
nature of costs charged by Melville in connection with the provision by
Melville of comparable services to its Subsidiaries prior to the Distribution
(which costs in the case of Check Services will be those set forth in Schedule
6.01(A)) and (ii) incremental costs of performing or providing any Service
hereunder that are incurred as a result of or otherwise arise from any third
party consent required in connection with (x) the provision of such Service
hereunder or (y) the performance by Melville or its Affiliates of its
obligations with respect thereto.
"Distribution" means a distribution by Melville on the
Distribution Date of all Footstar Common Stock owned by it to the holders of
Melville Common Stock (other than Melville Restricted Shareholders) as of the
Record Date.
"Distribution Agent" means Mellon Shareholder Services, LLC.
"Distribution Date" means the day as of which the Distribution
shall be effected.
"Distribution Documents" means all of the agreements and other
documents entered into in connection with the Distribution as contemplated
hereby, including, without limitation, this Agreement and the Tax
Disaffiliation Agreement.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, codes, plans, permits, licenses and governmental
restrictions, whether now or hereafter in effect, relating to the environment,
the effect of the environment on human health or to emissions, discharges,
releases, manufacturing, storage, processing, distribution, use, treatment,
disposal, transportation or handling of pollutants, contaminants, petroleum or
petroleum products, chemicals or industrial, toxic, radioactive or hazardous
substances or wastes or the clean-up or other remediation thereof.
"FCI" means Footaction Center, Inc., a California corporation.
"Finally Determined" means, with respect to any Action or other
matter, that the outcome or resolution of such Action or matter has been
judicially determined by judgment or order not subject to further appeal or
discretionary review.
"Footstar Business" means (i) the businesses and operations
(including, without limitation, the footwear and footwear-related
manufacturing, purchasing, distribution and sales operations and activities)
(x) associated with the Meldisco (including Pimento), Footaction (including
Open Country and Fan Club) or Thom McAn (including BOQ, Pimento and Smart
Step) retail chains or (y) otherwise of the Footstar Group, in each case
whether conducted prior to, on or after the Distribution Date, and (ii) all
footwear and footwear-related manufacturing operations of the Melville Group
(and the respective predecessors of Persons in the Melville Group) conducted
prior to the Distribution Date; provided that "Footwear Business" shall
exclude any business or activity of Computer Development, Inc., Melville
Equipment Leasing Corporation, MC Retail, Inc., Melville Realty Company and
their direct and indirect Subsidiaries, and any business or activity related
to the Bob's Stores or Marshalls businesses.
"Footstar Common Stock" means the common stock, par value $.01 per
share, of Footstar.
"Footstar Group" means Footstar and its Subsidiaries (including
the Contributed Subsidiaries) as of (and, except where the context clearly
indicates otherwise, after) the Distribution Date (including all predecessors
to such Persons).
"Footstar Liabilities" means all (i) Liabilities of the Footstar
Group under this Agreement, (ii) except as otherwise specifically provided
herein or in the Tax Disaffiliation Agreement, other Liabilities, whether
arising before, on or after the Distribution Date, of or relating to the
Footstar Group or arising from or in connection with the conduct of the
Footstar Business or the ownership or use of assets in connection therewith,
including without limitation any Liabilities arising under or relating to
Environmental Laws, and (iii) Liabilities of the Footstar Group set forth in
Schedule 5.01 hereto. Notwithstanding the foregoing, "Footstar Liabilities"
shall exclude: (x) any Liabilities for Taxes (since such Liabilities shall be
governed by the Tax Disaffiliation Agreement) and (y) any Liabilities
specifically retained or assumed by Melville pursuant to this Agreement.
"Form 10" means the registration statement on Form 10 filed by
Footstar with the Commission on March 27, 1996 to effect the registration of
Footstar Common Stock pursuant to the 1934 Act in connection with the
Distribution, as such registration statement may be amended from time to time.
"Group" means, as the context requires, the Footstar Group or the
Melville Group.
"Guaranteed Lease" has the meaning assigned to such term in
Section 7.01.
"Indemnified Party" has the meaning set forth in Section 4.04.
"Indemnifying Party" has the meaning set forth in Section 4.04.
"Information Statement" means the information statement to be sent
to each holder of Melville Common Stock in connection with the Distribution.
"IRS" means the Internal Revenue Service.
"Lease Guarantee" has the meaning assigned to such term in Section
7.01.
"Liabilities" means any and all claims, debts, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including all costs and expenses relating thereto, and including, without
limitation, those debts, liabilities and obligations arising under this
Agreement, any law, rule, regulation, any action, order, injunction or consent
decree of any governmental agency or entity, or any award of any arbitrator of
any kind, and those arising under any agreement, commitment or undertaking.
"Losses" means, with respect to any Person, any and all damage,
loss, liability and expense incurred or suffered by such Person (including,
without limitation, reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any and all Actions or
threatened Actions).
"Melville Common Stock" means the common stock, par value $1 per
share, of Melville.
"Melville Group" means Melville and its Subsidiaries (other than
any Subsidiary or member of, or other entity in, the Footstar Group).
"Melville Liabilities" means all (i) Liabilities of the Melville
Group under this Agreement and (ii) except as otherwise specifically provided
herein or in the Tax Disaffiliation Agreement, other Liabilities, whether
arising before, on or after the Distribution Date, of or relating to the
Melville Group or arising from or in connection with the conduct of the
businesses of the Melville Group (other than the Footstar Business) or the
ownership or use of assets in connection therewith, including without
limitation any Liabilities arising under or relating to Environmental Laws.
Notwithstanding the foregoing, "Melville Liabilities" shall exclude (x) any
Liabilities for Taxes (since such Liabilities shall be governed by the Tax
Disaffiliation Agreement) and (y) any Liabilities specifically retained or
assumed by Footstar pursuant to this Agreement.
"Melville Restricted Shareholder" has the meaning that is assigned
to such term in the Form 10.
"1933 Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Person" means an individual, corporation, limited liability
company, partnership, association, trust or other entity or organization,
including a governmental or political subdivision or an agency or
instrumentality thereof.
"Record Date" means the date determined by Melville's Board of
Directors (or determined by a committee of such Board of Directors or by the
Chairman of the Board of Melville pursuant to authority delegated to such
committee or Chairman by Melville's Board of Directors) as the record date for
determining the holders of Melville Common Stock entitled to receive the
Distribution.
"Subsidiary" means, with respect to any Person, any other entity
of which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by such Person.
"Tax" means Tax as such term is defined in the Tax Disaffiliation
Agreement.
"Tax Disaffiliation Agreement" means the Tax Disaffiliation
Agreement dated as of the date hereof between Melville and Footstar.
"Third-Party Claim" has the meaning set forth in Section 4.05.
ARTICLE II
CONTRIBUTIONS TO FOOTSTAR
Section 2.01. Contribution of Contributed Subsidiaries.
Effective prior to or as of the Distribution Date, Melville shall contribute
or transfer to Footstar or to one or more wholly owned Subsidiaries of
Footstar all the outstanding shares of capital stock of, or other ownership
interests in, each of the Contributed Subsidiaries (except for the minority
interest of Kmart Corporation in Meldisco's store subsidiaries).
Section 2.02. Transfers of Certain Other Assets; Assumption of
Certain Tax Liabilities. (a) Effective prior to or as of the Distribution
Date or as soon as practicable after the Distribution Date, subject to receipt
of any necessary consents or approvals of third parties or of governmental or
regulatory agencies or authorities and subject to Section 9.05, (a) Melville
shall, or shall cause the relevant member of the Melville Group to, assign,
contribute, convey, transfer and deliver ("Transfer") to Footstar or to one or
more of Footstar's wholly owned Subsidiaries all of the right, title and
interest of Melville or such member of the Melville Group in and to all assets
held by any member of the Melville Group that relate solely to the Footstar
Business (and not to the businesses of the Melville Group) and Footstar shall
assume and take transfer of all liabilities associated with such assets, and
(b) Footstar shall, or shall cause the relevant member of the Footstar Group
to, Transfer to Melville or to one or more members of the Melville Group all
of the right, title and interest of Footstar or such member of the Footstar
Group in and to all assets held by any member of the Footstar Group that
relate solely to the businesses of the Melville Group (and not to the Footstar
Business) and Melville shall assume and take transfer of all liabilities
associated with such assets.
(b) Effective as of the time of Transfer of any asset by the
Melville Group to the Footstar Group pursuant to Section 2.02(a), the Footstar
Group shall assume all Tax liabilities attributable to such asset and the
businesses related thereto (to the extent attributable to the Footstar
Business) in respect of all periods prior to such time.
Section 2.03. Agreement Relating To Consents Necessary To
Transfer Assets. Notwithstanding anything in this Agreement to the contrary,
this Agreement shall not constitute an agreement to transfer or assign any
asset or any claim or right or any benefit arising thereunder or resulting
therefrom if an attempted assignment thereof, without the necessary consent of
a third party, would constitute a breach or other contravention thereof or in
any way adversely affect the rights of Footstar or Melville thereunder.
Footstar and Melville will, subject to Section 9.05, use their reasonable
efforts to obtain the consent of any third party or any governmental or
regulatory agency or authority, if any, required in connection with the
transfer or assignment pursuant to Section 2.02 of any such asset or any claim
or right or any benefit arising thereunder. If such required consent is not
obtained, or if an attempted assignment thereof would be ineffective or would
adversely affect the rights of the transferor thereunder so that the intended
transferee would not in fact receive all such rights, Footstar and Melville
will cooperate in a mutually agreeable arrangement under which the intended
transferee would obtain the benefits and assume the obligations thereunder in
accordance with this Agreement, including sub-contracting, sub-licensing or
sub-leasing to such transferee, or under which the transferor would enforce
for the benefit of the transferee, with the transferee assuming the
transferor's obligations, any and all rights of the transferor against a third
party thereto.
ARTICLE III
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution. (a)
Melville and Footstar shall prepare, and Footstar shall file with the
Commission, the Form 10, which shall include or incorporate by reference the
Information Statement which shall set forth appropriate disclosure concerning
Footstar and the Distribution. Melville and Footstar shall use reasonable
efforts to cause the Form 10 to become effective under the 1934 Act as soon as
practicable. After the Form 10 has become effective, Melville shall mail the
Information Statement to the holders of Melville Common Stock as of the Record
Date.
(b) Melville and Footstar shall cooperate in preparing, filing
with the Commission and causing to become effective any registration
statements or amendments thereto that are appropriate to reflect the
establishment of or amendments to any employee benefit and other plans
contemplated by this Agreement.
(c) Melville and Footstar shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement.
(d) Footstar shall prepare, file and pursue an application to
permit listing of the Footstar Common Stock on the New York Stock Exchange.
Section 3.02. Melville Board Action; Conditions Precedent to the
Distribution. Melville's Board of Directors shall, in its discretion,
establish (or delegate authority to establish) the Record Date and the
Distribution Date and any appropriate procedures in connection with the
Distribution. In no event shall the Distribution occur unless the following
conditions shall have been waived by Melville or shall have been satisfied:
(i) the Form 10 shall have become effective under the 1934 Act;
(ii) the Footstar Common Stock to be delivered in the
Distribution shall have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance;
(iii) the Board of Directors of Melville shall be satisfied that
(a) both before and after giving effect to the Distribution, Melville is
not and would not be insolvent within the meaning of Section 510 of the
Business Corporation Law of the State of New York (in that (i) the fair
value of Melville's assets would exceed its liabilities (ii) Melville
would be able to pay its liabilities as they mature and become absolute
and (iii) Melville would not have unreasonably small capital with which
to engage in its business), and (b) the Distribution will be made out of
surplus within the meaning of Section 510 of the Business Corporation
Law of the State of New York (in that Melville's net assets remaining
after the Distribution will exceed the aggregate par value of Melville's
outstanding capital stock);
(iv) Melville's Board of Directors shall have approved the
Distribution and shall not have abandoned, deferred or modified the
Distribution at any time prior to the Record Date;
(v) the contributions referred to in Section 2.01 of this
Agreement shall have been effected;
(vi) Footstar's Board of Directors, as named in the Information
Statement, shall have been elected by Melville, as sole stockholder of
Footstar, and Footstar's certificate of incorporation (the "Restated
Footstar Charter") and bylaws, in substantially the forms attached as
Exhibits A and B, respectively, hereto shall be in effect;
(vii) the Tax Disaffiliation Agreement shall have been duly
executed and delivered by the parties thereto;
(viii) Melville shall have received an opinion of counsel
satisfactory to Melville as to the tax-free nature of the Distribution;
and
(ix) a credit facility shall have been made available to Footstar
by its lenders on terms and in an amount satisfactory to Melville and
Footstar.
Section 3.03. The Distribution. Subject to the terms and
conditions set forth in this Agreement, (i) prior to the Distribution Date,
Melville shall deliver to the Distribution Agent for the benefit of holders of
record of Melville Common Stock on the Record Date, a stock certificate or
certificates, endorsed by Melville in blank, representing all of the then
outstanding shares of Footstar Common Stock owned by Melville, (ii) the
Distribution shall be effective on the Distribution Date and (iii) Melville
shall instruct the Distribution Agent to distribute, on or as soon as
practicable after the Distribution Date, to each holder of record of Melville
Common Stock (other than any Melville Restricted Shareholder) as of the Record
Date 0.2879 shares of Footstar Common Stock for each one share of Melville
Common Stock so held. Footstar agrees to provide all certificates for shares
of Footstar Common Stock that Melville shall require (after giving effect to
Section 3.04) in order to effect the Distribution.
Section 3.04. Subdivision of Footstar Common Stock to Accomplish
the Distribution. Effective upon the filing of the Restated Footstar Charter
with the Secretary of State of the State of Delaware, each share of Footstar
Common Stock then issued and outstanding shall, without any action on the part
of the holder thereof, be subdivided and converted into that number of fully
paid and non-assessable shares of Footstar Common Stock issued and outstanding
equal to the number of shares of Melville Common Stock outstanding on the
Record Date (excluding shares of restricted stock held by Melville employees
expected to remain Melville employees after the Distribution) times 0.2879
divided by the number of shares of Footstar Common Stock outstanding
immediately prior to such filing.
Section 3.05. Fractional Shares. No certificates representing
fractional shares of Footstar Common Stock will be distributed in the
Distribution. The Distribution Agent will be directed to determine the number
of whole shares and fractional shares of Footstar Common Stock allocable to
each holder of Melville Common Stock as of the Record Date. Upon the
determination by the Distribution Agent of such number of fractional shares,
as soon as practicable after the Distribution Date, the Distribution Agent,
acting on behalf of the holders thereof, shall sell such fractional shares for
cash on the open market and shall disburse the appropriate portion of the
resulting cash proceeds to each holder entitled thereto.
ARTICLE IV
INDEMNIFICATION
Section 4.01. Footstar Indemnification of the Melville Group.
(a) Subject to Section 4.03, on and after the Distribution Date, Footstar
shall indemnify, defend and hold harmless the Melville Group and the
respective directors, officers and Affiliates of each Person in the Melville
Group (the "Melville Indemnitees") from and against any and all Losses
incurred or suffered by any of the Melville Indemnitees (i) arising out of, or
due to the failure of any Person in the Footstar Group to pay, perform or
otherwise discharge, any of the Footstar Liabilities or (ii) arising out of or
in connection with the provision by the Melville Group of services to the
Footstar Group under Article VI.
(b) Subject to Section 4.03, Footstar shall indemnify, defend and
hold harmless each of the Melville Indemnitees and each Person, if any, who
controls any Melville Indemnitee within the meaning of either Section 15 of
the 1933 Act or Section 20 of the 1934 Act from and against any and all
Losses caused by any untrue statement or alleged untrue statement of a
material fact contained in the Form 10 or any amendment thereof or the
Information Statement (as amended or supplemented if Footstar shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such Losses are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information furnished to Footstar in writing by Melville expressly for use
therein.
(c) Subject to Section 4.03, on and after the Distribution Date,
FCI shall indemnify, defend and hold harmless each of the Melville Indemnitees
from and against any and all Losses incurred or suffered by any of the
Melville Indemnitees due to the failure of any Person in the Footstar Group to
pay, perform or otherwise discharge its obligations under any of the Guaranteed
Leases or otherwise arising out of or with respect to any of the Guaranteed
Leases or Lease Guarantees.
Section 4.02. Melville Indemnification of Footstar Group. (a)
Subject to Section 4.03, on and after the Distribution Date, Melville shall
indemnify, defend and hold harmless the Footstar Group and the respective
directors, officers and Affiliates of each Person in the Footstar Group (the
"Footstar Indemnitees") from and against any and all Losses incurred or
suffered by any of the Footstar Indemnitees and arising out of, or due to the
failure of any Person in the Melville Group to pay, perform or otherwise
discharge, any of the Melville Liabilities.
(b) Subject to Section 4.03, Melville shall indemnify, defend and
hold harmless each of the Footstar Indemnitees and each Person, if any, who
controls any Footstar Indemnitee within the meaning of either Section 15 of
the 1933 Act or Section 20 of the 1934 Act from and against any and all
Losses caused by any untrue statement or alleged untrue statement of a
material fact contained in the Form 10 or any amendment thereof or the
Information Statement (as amended or supplemented if Footstar shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in each case to the extent, but only to the extent, that
such Losses are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information furnished to Footstar in
writing by Melville expressly for use therein.
Section 4.03. Insurance; Third Party Obligations; Tax Benefits.
Any indemnification pursuant to Sections 4.01 or 4.02 shall be paid net of the
amount of any insurance or other amounts that would be payable by any third
party to the Indemnified Party (as defined below) in the absence of this
Agreement (irrespective of time of receipt of such insurance or other amounts)
and net of any tax benefit to the Indemnified Party attributable to the
relevant payment or Liability. It is expressly agreed that no insurer or any
other third party shall be (i) entitled to a benefit it would not be entitled
to receive in the absence of the foregoing indemnification provisions, (ii)
relieved of the responsibility to pay any claims to which it is obligated or
(iii) entitled to any subrogation rights with respect to any obligation
hereunder.
Section 4.04. Notice and Payment of Claims. If any Melville
Indemnitee or Footstar Indemnitee (the "Indemnified Party") determines that it
is or may be entitled to indemnification by any party (the "Indemnifying
Party") under Article IV (other than in connection with any Action subject to
Section 4.05), the Indemnified Party shall deliver to the Indemnifying Party a
written notice specifying, to the extent reasonably practicable, the basis for
its claim for indemnification and the amount for which the Indemnified Party
reasonably believes it is entitled to be indemnified. Within 30 days after
receipt of such notice, the Indemnifying Party shall pay the Indemnified Party
such amount in cash or other immediately available funds unless the
Indemnifying Party objects to the claim for indemnification or the amount
thereof. If the Indemnifying Party does not give the Indemnified Party
written notice objecting to such indemnity claim and setting forth the grounds
therefor within such 30-day period, the Indemnifying Party shall be deemed to
have acknowledged its liability for such claim and the Indemnified Party may
exercise any and all of its rights under applicable law to collect such amount.
In the event of such a timely objection by the Indemnifying Party, the amount,
if any, that is Finally Determined to be required to be paid by the
Indemnifying Party in respect of such indemnity claim shall be paid by the
Indemnifying Party to the Indemnified Party in cash within 15 days after such
indemnity claim has been so Finally Determined.
Section 4.05. Notice and Defense of Third-Party Claims.
Promptly following the earlier of (i) receipt of notice of the commencement by
a third party of any Action against or otherwise involving any Indemnified
Party or (ii) receipt of information from a third party alleging the existence
of a claim against an Indemnified Party, in either case, with respect to which
indemnification may be sought pursuant to this Agreement (a "Third-Party
Claim"), the Indemnified Party shall give the Indemnifying Party written
notice thereof. The failure of the Indemnified Party to give notice as
provided in this Section 4.05 shall not relieve the Indemnifying Party of its
obligations under this Agreement, except to the extent that the Indemnifying
Party is prejudiced by such failure to give notice. Within 15 days after
receipt of such notice, the Indemnifying Party may (i) by giving written
notice thereof to the Indemnified Party, acknowledge liability for such
indemnification claim and at its option elect to assume the defense of such
Third-Party Claim at its sole cost and expense or (ii) object to the claim for
indemnification set forth in the notice delivered by the Indemnified Party
pursuant to the first sentence of this Section 4.05; provided that if the
Indemnifying Party does not within such 15-day period give the Indemnified
Party written notice objecting to such indemnification claim and setting forth
the grounds therefor, the Indemnifying Party shall be deemed to have
acknowledged its liability for such indemnification claim. If the
Indemnifying Party has elected to assume the defense of a Third-Party Claim,
(x) the defense shall be conducted by counsel retained by the Indemnifying
Party and reasonably satisfactory to the Indemnified Party, provided that the
Indemnified Party shall have the right to participate in such proceedings and
to be represented by counsel of its own choosing at the Indemnified Party's
sole cost and expense; and (y) the Indemnifying Party may settle or compromise
the Third Party Claim without the prior written consent of the Indemnified
Party so long as such settlement includes an unconditional release of the
Indemnified Party from all claims that are the subject of such Third Party
Claim, provided that the Indemnifying Party may not agree to any such
settlement pursuant to which any remedy or relief, other than monetary damages
for which the Indemnifying Party shall be responsible hereunder, shall be
applied to or against the Indemnified Party, without the prior written consent
of the Indemnified Party, which consent shall not be unreasonably withheld.
If the Indemnifying Party does not assume the defense of a Third-Party Claim
for which it has acknowledged liability for indemnification hereunder, the
Indemnified Party may require the Indemnifying Party to reimburse it on a
current basis for its reasonable expenses of investigation, reasonable
attorney's fees and reasonable out-of-pocket expenses incurred in defending
against such Third-Party Claim and the Indemnifying Party shall be bound by
the result obtained with respect thereto by the Indemnified Party; provided
that the Indemnifying Party shall not be liable for any settlement effected
without its consent, which consent shall not be unreasonably withheld. The
Indemnifying Party shall pay to the Indemnified Party in cash the amount, if
any, for which the Indemnified Party is entitled to be indemnified hereunder
within 15 days after such Third Party Claim has been Finally Determined, in
the case of an indemnity claim as to which the Indemnifying Party has
acknowledged liability or, in the case of any indemnity claim as to which the
Indemnifying Party has not acknowledged liability, within 15 days after such
Indemnifying Party's objection to liability hereunder has been Finally
Determined.
Section 4.06. Contribution. If for any reason the
indemnification provided for in Section 4.01 or 4.02 is unavailable to any
Indemnified Party, or insufficient to hold it harmless, then the Indemnifying
Party shall contribute to the amount paid or payable by such Indemnified Party
as a result of such Losses in such proportion as is appropriate to reflect all
relevant equitable considerations.
Section 4.07. Non-Exclusivity of Remedies. The remedies provided
for in this Article IV are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any Indemnified Party at law or
in equity.
ARTICLE V
EMPLOYEE MATTERS
Section 5.01. Employee Matters Generally. With respect to
employee matters and employee benefits arrangements, the parties hereto agree
as set forth in Schedule 5.01.
Section 5.02. Restriction on Solicitation or Employment of
Employees. During the period commencing on the Distribution Date and ending on
the second anniversary of the Distribution Date, neither Group shall solicit
to employ or employ any management (other than in-store management) level
employee of the other Group (the "Employer Group"), unless (i) such a
management individual of an Employer Group that is proposed to be solicited
for employment or employed by the other Group shall theretofore have been, or
shall theretofore have received notice that he or she will be, involuntarily
terminated by such Employer Group or (ii) at least six months shall have
elapsed following the cessation of such management individual's employment by
such Employer Group.
ARTICLE VI
CERTAIN TRANSITIONAL SERVICES
Section 6.01. Provision of Services. On the terms and conditions
set forth in this Agreement, in order to assist in effecting an orderly
transition following the Distribution, the Melville Group will provide to or
perform for the Footstar Group and the Footstar Group will purchase from the
Melville Group (and, in the case of tax services, the Footstar Group will
provide to the Melville Group), for the transitional period specified in
Section 6.02, (A) the Check Services as provided in Schedule 6.01(A) below,
(B) claims administration services with respect to general liability insurance
as provided in Schedule 6.01(B) below, and (C) tax services ("Tax Services")
as specified in the Tax Disaffiliation Agreement ((A), (B), and (C) being the
"Services").
Section 6.02. Duration of Provision and Purchase of Services.
The Services shall be offered by the Melville Group and purchased by Footstar
through the first anniversary of the Distribution Date (except for Tax
Services, which are to be offered reciprocally by the parties through December
31, 1997), subject to the right, if any, of a party to terminate its respective
obligation to provide or purchase Services hereunder as provided in Schedule
6.01(A) or 6.01(B) or in the Tax Disaffiliation Agreement and unless the
provision of any such Service is theretofore terminated by Melville pursuant
to Section 9.02 hereof.
Section 6.03. Nature and Scope of Provision of Services. The
nature, scope and timing of provision of Services to be provided by the
Melville Group to the Footstar Group hereunder shall be substantially
consistent with the nature, scope and timing of Melville's comparable services
provided to its Subsidiaries prior to the Distribution.
Section 6.04. Charges and Payment for Services. Except with
respect to Tax Services, Footstar shall pay or reimburse Melville for all
Costs attributable to the provision or performance by Melville of Services
hereunder. Except as provided in Schedule 6.01(B) or in the Tax
Disaffiliation Agreement, (i) all Costs required to be paid or reimbursed to
Melville hereunder shall be invoiced monthly by Melville and (ii) invoiced
amounts shall be due and payable by Footstar in cash within ten (10) days from
date of receipt of such invoice therefor.
Section 6.05. Verification of Services and Costs. (a) Footstar
shall, during normal business hours and with reasonable prior notice to
Melville, have reasonable access to the properties, offices, books and records
of Melville for the purpose of observing that Services are being procured or
performed in accordance with the terms of this Agreement relevant to the
procurement or performance of such Services and to verify Cost amounts.
(b) Melville and Footstar shall, from time to time but not more
often than once each month, review the basis and amounts of Costs charged
hereunder. In the course of such review, the parties shall in good faith, (i)
establish principles for determining Costs to be charged hereunder on a
prospective basis and (ii) determine the amount of any adjustment, if any,
payable by a party to the other with respect to Costs charged and reimbursed
in respect of any preceding period.
Section 6.06. Exculpation; Force Majeure. (a) No Melville
Indemnitee shall be liable to any other Person for any Losses directly or
indirectly arising out of, relating to or in connection with the performance
or non-performance of Services hereunder, except to the extent such Losses are
attributable to the Melville Group's gross negligence or wilful misconduct.
(b) Without limiting the provisions of Section 6.06(a), the
Melville Group shall not be liable to the Footstar Group for any delay or
default in performance of Services where occasioned by any cause of any kind
or extent beyond the Melville Group's control including, by way of example,
but not limitation, any act of God, any act, regulation or law of any
government, war, civil commotion, destruction of production facilities or
materials by fire, earthquake or storm, labor disturbance, epidemic, equipment
breakdown or failure, failure to obtain any consent or approval of a third
party necessary to provide the Services, or failure of suppliers, public
utilities or common carriers ("Force Majeure"). In claiming relief hereunder
Melville shall promptly notify Footstar in writing of the Force Majeure
causing delay or default in performance, the probable extent to which it will
be unable to perform, and the actions it intends to take to remove such Force
Majeure, to the extent reasonably possible to do so. The Melville Group shall
take reasonable action within its control to alleviate the Force Majeure
causing delay or default in performance.
Section 6.07. No Transfer of Proprietary Rights. No assignment
or transfer by a Group of any right or license in or to any technology,
software, intellectual property, know-how or other proprietary right owned,
licensed or held for use by such Group shall occur or be deemed to occur by
virtue of or in connection with the provision or purchase of Services by
either Group hereunder.
ARTICLE VII
CERTAIN AGREEMENTS RELATING TO LEASES
Section 7.01. Continuity of Existing Lease Guarantees.
With respect to each real estate lease under which any Person in the Footstar
Group is a lessee or sublessee and that is in effect prior to the Distribution
and that remains in effect following the Distribution (i) without any renewal
option having been exercised or (ii) by reason of the exercise of any renewal
option provided for in the terms of such lease as in effect as of the
Distribution (collectively, the "Guaranteed Leases"), any lease guarantee of
such Guaranteed Lease provided by Melville or any of its Affiliates and in
effect as of the Distribution (a "Lease Guarantee") will remain in effect
after the Distribution for the duration of the term of such lease and any
extension thereof pursuant to the exercise of any such renewal option.
Melville and its Affiliates shall be indemnified against any Losses arising
from such Guaranteed Leases or Lease Guarantees, as provided in Section
4.01(c).
Section 7.02. No New Melville Lease Guarantees To be Furnished
After The Distribution. Except as expressly provided otherwise in Section
7.01, to the extent that any guarantee is required to be provided after the
Distribution with respect to any real estate or other lease entered into by a
Person in the Footstar Group, such guarantee shall not be furnished by any
Person in the Melville Group.
ARTICLE VIII
ACCESS TO INFORMATION
Section 8.01. Provision of Corporate Records.
Immediately prior to or as soon as practicable following the Distribution
Date, each Group shall provide to the other Group all documents, contracts,
books, records and data (including but not limited to minute books, stock
registers, stock certificates and documents of title) in its possession
relating to such other Group or such other Group's business and affairs;
provided that if any such documents, contracts, books, records or data relate
to both Groups or the business and operations of both Groups, each such Group
shall provide to the other Group true and complete copies of such documents,
contracts, books, records or data.
Section 8.02. Access to Information. From and after the
Distribution Date, each Group shall, for a reasonable period of time, afford
promptly to the other Group and its accountants, counsel and other designated
representatives reasonable access during normal business hours to all
documents, contracts, books, records, computer data and other data in such
Group's possession relating to such other Group or the business and affairs of
such other Group (other than data and information subject to an
attorney/client or other privilege), insofar as such access is reasonably
required by such other Group, including, without limitation, for audit,
accounting, litigation and disclosure and reporting purposes.
Section 8.03. Litigation Cooperation. Each Group shall use
reasonable efforts to make available to the other Group and its accountants,
counsel, and other designated representatives, upon written request, its
directors, officers, employees and representatives as witnesses, and shall
otherwise cooperate with the other Group, to the extent reasonably required in
connection with any legal, administrative or other proceedings arising out of
either Group's business and operations prior to the Distribution Date in which
the requesting party may from time to time be involved.
Section 8.04. Reimbursement. Each Group providing information or
witnesses to the other Group, or otherwise incurring any expense in connection
with cooperating, under Sections 8.01, 8.02 or 8.03 shall be entitled to
receive from the recipient thereof, upon the presentation of invoices
therefor, payment for all out-of-pocket costs and expenses as may be
reasonably incurred in providing such information, witnesses or cooperation.
Section 8.05. Retention of Records. Except as otherwise required
by law or agreed to in writing, each party shall, and shall cause the members
of its respective Group to, retain all information relating to the other
Group's business and operations in accordance with the past practice of such
party. Notwithstanding the foregoing, any party may destroy or otherwise
dispose of any such information at any time, provided that, prior to such
destruction or disposal, (i) such party shall provide not less than 90 days'
prior written notice to the other party, specifying the information proposed
to be destroyed or disposed of, and (ii) if the recipient of such notice shall
request in writing prior to the scheduled date for such destruction or
disposal that any of the information proposed to be destroyed or disposed of be
delivered to such requesting party, the party proposing the destruction or
disposal shall promptly arrange for the delivery of such of the information as
was requested at the expense of the requesting party.
Section 8.06. Confidentiality. Each party shall hold and shall
cause its directors, officers, employees, agents, consultants and advisors
("Representatives") to hold in strict confidence all information (other than
any such information relating solely to the business or affairs of such party)
concerning the other party unless (i) such party is compelled to disclose such
information by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law or (ii) such information can be shown to
have been (A) in the public domain through no fault of such party or (B)
lawfully acquired after the Distribution Date on a non-confidential basis from
other sources. Notwithstanding the foregoing, such party may disclose such
information to its Representatives so long as such Persons are informed by
such party of the confidential nature of such information and are directed by
such party to treat such information confidentially. If such party or any of
its Representatives becomes legally compelled to disclose any documents or
information subject to this Section, such party will promptly notify the other
party so that the other party may seek a protective order or other remedy or
waive such party's compliance with this Section. If no such protective order
or other remedy is obtained or waiver granted, such party will furnish only
that portion of the information which it is advised by counsel is legally
required and will exercise its reasonable efforts to obtain reliable assurance
that confidential treatment will be accorded such information. Such party
agrees to be responsible for any breach of this Section by it and its
Representatives.
Section 8.07. Inapplicability of Article VIII to Tax Matters.
Notwithstanding anything to the contrary in Article VIII, Article VIII shall
not apply with respect to information, records and other matters relating to
Taxes, all of which shall be governed by the Tax Disaffiliation Agreement.
ARTICLE IX
CERTAIN OTHER AGREEMENTS
Section 9.01. Intercompany Accounts. All intercompany
receivable, payable and loan balances in existence as of the Distribution Date
between the Melville Group and Footstar Group will be eliminated as provided
in Schedule 9.01 hereto.
Section 9.02. Certain Rights Upon a Third Party Obtaining Above a
Specified Ownership Level of Footstar Common Stock. No Person or group
(within the meaning of Section 13(d) under the 1934 Act) of Persons shall
become the beneficial owner (within the meaning of Rule 13d-3 under the 1934
Act) of more than 35% of the Footstar Common Stock unless (i) Melville shall
have received prior written notice that such Person or group proposes to
acquire beneficial ownership of more than 35% of the Footstar Common Stock and
(ii) prior to such acquisition such Person or group provides to Melville
(unless waived by Melville in writing) a guarantee, in form and substance
acceptable to Melville, of the obligations of Footstar and the Footstar Group
under this Distribution Agreement. In addition, upon any such Person or group
becoming the beneficial owner of more than 35% of the Footstar Common Stock,
Melville may, at its election, forthwith terminate its provision of any or all
of the Services under Article VI.
Section 9.03. Footstar Guarantee of Footaction Center, Inc. Lease
Indemnity. Footstar hereby unconditionally guarantees (the "Guaranty") to
Melville and the other Persons in the Melville Group (collectively, the
"Guaranteed Parties") that the payment obligations of FCI under Section
4.01(c) shall be promptly performed and complied with in full when due in
accordance with the terms thereof. Upon failure by FCI to make the payments
required to be made by it under Section 4.01(c), for whatever reason, Footstar
shall forthwith pay, within two business days of demand, the amount of the
payments not so made, by wire transfer to the account of Melville designated
to Footstar in writing for such purpose. Demand for payment hereunder shall
be made in writing signed by a duly authorized officer of any Guaranteed Party
and be given to Footstar at the address and in the manner set forth in Section
10.01. Footstar hereby agrees that its obligations under this Section 9.03
shall be unconditional, irrevocable and absolute and, without limiting the
foregoing, shall not be released, discharged or otherwise affected by, the
invalidity, irregularity or unenforceability of any provision of any
Distribution Document, the absence of any action to enforce the same, any
provision of applicable law or regulation purporting to prohibit the
performance by FCI of its obligations under Section 4.01(c), any extension,
renewal, settlement, compromise, waiver or release in respect of any
obligation of FCI under any provision of the Distribution Documents (except in
conformity therewith), any modification or amendment of or supplement to any
Distribution Document (except in conformity therewith), any change in the
corporate existence, structure or ownership of FCI, or any insolvency,
bankruptcy, reorganization or other similar proceeding affecting FCI or its
assets or any resulting release or discharge of any obligation under any
Distribution Document, any waiver or consent by any Guaranteed Party with
respect to any provisions of any Distribution Document, the recovery of any
judgment against FCI or any action to enforce the same, the existence of any
claim, set-off or other rights which Footstar may have at any time against any
Guaranteed Party, whether in connection herewith or with any unrelated
transaction (provided that nothing herein shall prevent the assertion of any
such claim, set-off or other rights by separate suit or counterclaim), or any
other circumstance which might otherwise constitute a legal or equitable
discharge or defense of Footstar. Footstar hereby waives diligence,
presentment, demand of payment (other than the demand referred to above), or
filing of claims with a court in the event of insolvency or bankruptcy of FCI,
any right to require a proceeding first against FCI, protest, notice and all
demands (other than the demand referred to above) whatsoever and covenants
that this Guaranty will not be discharged except by complete performance of
the obligations of FCI under Section 4.01(c) or of this Guaranty. If any
Guaranteed Party is required by any court or otherwise to return to Footstar
or FCI, or any receiver, trustee, assignee, liquidator, sequestrator or
similar official charged with maintaining possession or control over property
for one or more creditors acting in relation to Footstar or FCI, any amount
paid by Footstar or FCI to such Guaranteed Party, this Guaranty, to the extent
theretofore discharged, shall be reinstated in full force and effect. Footstar
hereby confirms its right of subrogation in relation to the Guaranteed Parties
in respect of any obligations guaranteed hereby, but agrees to delay the
enforceability of such right until all obligations of FCI under Section
4.01(c) have been satisfied.
Section 9.04. Intellectual Property Rights and Licences. Except
for any license to the "Open Country" trademark granted by the Footstar Group
to Bob's, Inc., neither Group shall have any right or license in or to any
technology, software, intellectual property (including any trademark, service
mark, patent or copyright), know-how or other proprietary right owned,
licensed or held for use by the other Group.
Section 9.05. Further Assurances and Consents. In addition to
the actions specifically provided for elsewhere in this Agreement, each of the
parties hereto shall use its reasonable efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by
this Agreement, including but not limited to using its reasonable efforts to
obtain any consents and approvals and to make any filings and applications
necessary or desirable in order to consummate the transactions contemplated by
this Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to
any third party from whom such consents or approvals are requested or to take
any action or omit to take any action if the taking of or the omission to take
such action would be unreasonably burdensome to the party, its Group or its
Group's business.
ARTICLE X
MISCELLANEOUS
Section 10.01. Notices. All notices and other communications to
any party hereunder shall be in writing (including telex, telecopy or similar
writing) and shall be deemed given when received addressed as follows:
If to Melville, to:
Melville Corporation
1 CVS Drive
Woonsocket, Rhode Island 02895
Telecopy: (401) 765-7887
Attention: Chief Financial Officer and
General Counsel
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: (212) 450-4800
Attention: Dennis S. Hersch
If to Footstar or FCI, to:
Footstar, Inc.
933 MacArthur Boulevard
Mahwah, New Jersey 07430
Telecopy: (201) 934-6761
Attention: Chief Financial Officer and
General Counsel
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: (212) 450-4800
Attention: Dennis S. Hersch
Any party may, by written notice so delivered to the other parties, change the
address to which delivery of any notice shall thereafter be made.
Section 10.02. Amendments; No Waivers. (a) Any provision of
this Agreement may be amended or waived if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by Melville and
Footstar, or in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights
and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
Section 10.03. Expenses. Except as specifically provided
otherwise in this Agreement or the Tax Disaffiliation Agreement (including,
without limitation, in Articles IV and VI, Sections 8.04, 8.05, 9.01, 9.03 and
10.08(c) and Schedules 5.01, 6.01(A) and 6.01(B) of this Agreement), all costs
and expenses incurred in connection with the preparation, execution and
delivery of the Distribution Documents and the consummation of the
Distribution and the other transactions contemplated hereby (including the
fees and expenses of all counsel, accountants and financial and other advisors
of both Groups in connection therewith, and all expenses in connection with
preparation, filing and printing of the Form 10 and the Information Statement)
shall be paid by Melville; provided that Footstar shall be responsible for and
pay the fees, expenses and other amounts payable to the lenders under
Footstar's credit facilities and all other fees and expenses incurred in
connection therewith (including the fees and expenses of Footstar's counsel in
connection with the preparation and negotiation of all documentation relating
to such credit facilities).
Section 10.04. Successor and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that neither party may
assign, delegate or otherwise transfer any of its rights or obligations under
this Agreement without the consent of the other parties hereto.
Section 10.05. Governing Law. This Agreement shall be construed
in accordance with and governed by the law of the State of New York, without
regard to the conflicts of laws rules of such State.
Section 10.06. Counterparts; Effectiveness. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the
same instrument. This Agreement shall become effective when each party hereto
shall have received a counterpart hereof signed by the other parties hereto.
Section 10.07. Entire Agreement. This Agreement and the other
Distribution Documents constitute the entire understanding of the parties with
respect to the subject matter hereof and thereof and supersedes all prior
agreements, understandings and negotiations, both written and oral, between
the parties with respect to the subject matter hereof and thereof. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein or in the other Distribution Documents has been made or
relied upon by any party hereto. Neither this Agreement nor any provision
hereof is intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder. To the extent that the provisions of this
Agreement are inconsistent with the provisions of any other Distribution
Document, the provisions of such other Distribution Document shall prevail.
Section 10.08. Tax Disaffiliation Agreement; Set-Off; Payment of
After-Tax Amounts. (a) Except as otherwise provided herein and not
inconsistent with the Tax Disaffiliation Agreement, this Agreement shall not
govern any Tax, and any and all claims, losses, damages, demands, costs,
expenses or liabilities relating to Taxes shall be exclusively governed by the
Tax Disaffiliation Agreement.
(b) If, at the time Footstar is required to make any payment to
Melville under this Agreement, Melville owes Footstar any amount under this
Agreement or the Tax Disaffiliation Agreement, then such amounts shall be
offset and the excess shall be paid by the party liable for such excess.
Similarly, if at the time Melville is required to make any payment to Footstar
under this Agreement, Footstar owes Melville any amount under this Agreement
or the Tax Disaffiliation Agreement, then such amounts shall be offset and the
excess shall be paid by the party liable for such excess.
(c) If any amount paid by Melville, Footstar or their respective
Post-Distribution Affiliates pursuant to Section 4.01 or 4.02 of this
Agreement results in any increased Tax liability or reduction of any Tax Asset
of any member of the Footstar Group, Footstar or its Post-Distribution
Affiliates, or the Melville Group, Melville or its Post-Distribution
Affiliates, respectively, then Melville or Footstar, as the case may be, shall
indemnify the other party and hold it harmless from any interest or penalty
attributable to such increased Tax liability or the reduction of such Tax
asset and shall pay to the other party, in addition to amounts otherwise owed,
100 percent of the After-Tax Amount. All capitalized terms used in this
Section 10.08(c) and not otherwise defined in this Agreement are used as
defined in the Tax Disaffiliation Agreement. This Section 10.08(c) shall be
subject to the dispute resolution provisions contained in Section 16 of the
Tax Disaffiliation Agreement.
Section 10.09. Jurisdiction. Any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or
in connection with, this Agreement or the transactions contemplated hereby may
be brought in the United States District Court for the Southern District of
New York or any other New York State court sitting in New York County, and
each of the parties hereby consents to the jurisdiction of such courts (and
of the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit,
action or proceeding which is brought in any such court has been brought in an
inconvenient form. Process in any such suit, action or proceeding may be
served on any party anywhere in the world, whether within or without the
jurisdiction of any such court. Without limiting the foregoing, each party
agrees that service of process on such party as provided in Section 10.01
shall be deemed effective service of process on such party.
Section 10.10. Existing Arrangements. Except as otherwise
contemplated hereby, all prior agreements and arrangements, including those
relating to goods, rights or services provided or licensed, between the
Footstar Group and the Melville Group shall be terminated effective as of the
Distribution Date, if not theretofore terminated. No such agreements or
arrangements shall be in effect after the Distribution Date unless embodied in
the Distribution Documents.
Section 10.11. Termination Prior to the Distribution. The
Melville Board of Directors may at any time prior to the Distribution abandon
the Distribution and, by notice to Footstar, terminate this Agreement (whether
or not the Melville Board of Directors has theretofore approved this Agreement
and/or the Distribution).
Section 10.12. Captions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof.
IN WITNESS WHEREOF the parties hereto have caused this
Distribution Agreement to be duly executed by their respective authorized
officers as of the date first above written.
MELVILLE CORPORATION
By /s/ Charles Conaway
Name: Charles Conaway
Title: Chief Financial Officer
FOOTSTAR, INC.
By /s/ Carlos Alberini
Name: Carlos Alberini
Title: Chief Financial Officer
FOOTACTION CENTER, INC.
By /s/ Donald V. Roach
Name: Donald V. Roach
Title: Vice President
Schedule 5.01
EMPLOYEE MATTERS
Section 1. General. Except as otherwise set forth in this Schedule
5.01, (a) Melville shall retain (i) any and all liabilities relating to or
arising out of any employee benefit or compensation arrangement (a "Plan") in
respect of any employee or former employee of Melville and any Affiliate of
Melville who is not a Transferred Employee (as hereinafter defined), and (ii)
any and all liabilities relating to or arising out of any Plan in respect of
all Transferred Employees that were incurred or are otherwise related to any
period prior to and including the Distribution Date and (b) Melville shall
have no liability relating to or arising out of any Plan in respect of
Transferred Employees to the extent that any such liability is incurred or
otherwise relates to any period after the Distribution Date.
Section 2. Employees. With respect to each individual who, as of
the Distribution Date, is employed (including persons absent from active
service by reason of Short Term Disability or Long Term Disability, as
hereinafter defined, or absence not relating to disability, whether paid or
unpaid) in the Footstar Business ("Transferred Employees"), Footstar shall
cause the employment of each Transferred Employee to be continued on the
Distribution Date, provided that nothing stated herein shall limit the right
of Footstar or any Subsidiary to terminate the employment of any Transferred
Employee following the Distribution Date or to reduce or otherwise modify the
position, responsibilities, compensation or benefits of any Transferred
Employee at any time, and provided further that an individual who is employed
as of the Distribution Date by Footstar or any of its Subsidiaries, but on
such date is absent from active service and is receiving Long Term Disability
Benefits (as hereinafter defined) shall not be considered a Transferred
Employee for purposes of the Melville Long Term Disability Plan. The employee
benefit plans and arrangements maintained by Footstar shall give full service
credit for purposes of eligibility and vesting (and in connection with any such
severance or vacation plan or policy, for purposes of determining the level of
benefit) for any service on or prior to the Distribution Date of a Transferred
Employee with Melville and its Subsidiaries. For purposes of this Agreement,
(i) "Short Term Disability" shall mean a condition with respect to which an
employee is receiving benefits, as of the Distribution Date, under either the
Melville Short Term Disability Plan or the Melville Salary Continuation Plan,
and (ii) "Long Term Disability Benefits" shall mean benefits under the
Melville Long Term Disability Plan.
Section 3. Qualified Plans. (a) Melville shall retain all
liabilities and obligations in respect to benefits accrued by Transferred
Employees under Melville's ESOP. Melville shall cause each Transferred
Employee to become 100% vested in the employee's account in Melville's ESOP as
of the Distribution Date. As soon as practicable after the Distribution Date,
Melville shall take such action as may be necessary, if any, to permit each
Transferred Employee to exercise his rights under Melville's ESOP to effect an
immediate distribution of such Transferred Employee's full account balances
under Melville's ESOP or to effect a tax-free rollover of the taxable portion
of the account balances into an eligible retirement plan (within the meaning
of Section 401(a)(31) of the Internal Revenue Code ("Code"), a "Direct
Rollover") maintained by Footstar (the "Footstar Plan") or to an individual
retirement account. Melville and Footstar shall work together in order to
facilitate any such distribution or rollover and to effect a Direct Rollover
for those participants who elect to roll over their account balances directly
into the Footstar Plan; provided that nothing contained herein shall obligate
the Footstar Plan to accept a Direct Rollover in a form other than cash.
(b) On the Distribution Date, or as soon as practicable
thereafter, Footstar shall establish or designate the Footstar Plan in order
to accommodate the Direct Rollovers described above and shall take all action
necessary, if any, to qualify the Footstar Plan under the applicable
provisions of the Code and shall make any and all filings and submissions to
the appropriate governmental authorities required to be made by it in
connection with any Direct Rollover.
(c) As soon as practicable after the Distribution Date, Footstar
shall establish or designate an individual account plan (the "Successor
Individual Account Plan"), which may be the same plan as the Footstar Plan,
for the benefit of Transferred Employees, shall take all necessary action, if
any, to qualify such plan under the applicable provisions of the Code and
shall make any and all filings and submissions to the appropriate governmental
agencies required to be made by it in connection with the transfer of assets
described below. Melville shall cause each Transferred Employee to be 100%
vested in the employee's account balance under Melville's 401(k) Profit
Sharing Plan as of the Distribution Date. No later than the date of the
transfer described herein, Footstar shall make all applicable 401(k), profit
sharing, matching contributions and qualified non-elective contributions
payable under Melville's 401(k) Profit Sharing Plan with respect to
Transferred Employees for periods on or prior to the Distribution Date and
shall be entitled to retain any applicable reserves or accruals relating
thereto. As soon as practicable following the Distribution Date, Melville
shall cause the trustee of Melville's 401(k) Profit Sharing Plan to transfer
in the form of cash or, to the extent applicable, notes representing
outstanding loans made to Transferred Employees under Melville's 401(k) Profit
Sharing Plan (or such other form as may be agreed to by Melville and Footstar)
the full account balances of Transferred Employees (and beneficiaries thereof)
under Melville's 401(k) Profit Sharing Plan (which account balances will have
been credited with appropriate earnings attributable to the period from the
Distribution Date to the date of transfer described herein), reduced by any
necessary benefit or withdrawal payments to or in respect of Transferred
Employees occurring during the period from the Distribution Date to the date
of transfer described herein, to the appropriate trustee as designed by
Footstar under the trust agreement forming a part of the Successor Individual
Account Plan, it being understood that Melville is under no obligation to
effect a distribution, payment or loan under Melville's 401(k) Profit Sharing
Plan in respect of a Transferred Employee who either requests a loan or
terminates employment after the Distribution Date but prior to the date of
transfer described herein if the required distribution, payment or loan, as
the case may be, forms have not been received by Melville prior to the last
day of the month preceding the month in which the transfer described herein
occurs. Melville and Footstar agree to take such actions and enter into such
agreements, if any, that may be necessary to effect the transfer described
herein. In consideration for the transfer of assets described herein, Footstar
shall, effective as of the date of transfer described herein, assume all of
the obligations of Melville in respect of the account balances accumulated by
Transferred Employees under Melville's 401(k) Profit Sharing Plan (exclusive
of any portion of such account balances which are paid or otherwise withdrawn
prior to the date of transfer described herein) with respect to the account
balances transferred to the Successor Individual Account Plan. Melville
hereby indemnifies Footstar, the Company and the Subsidiaries against and
agrees to hold them harmless from any liabilities or claims (including claims
for benefits or for breach of fiduciary duties, but excluding claims for
benefits to the extent of the assets transferred hereunder) relating to
Melville's 401(k) Profit Sharing Plan (or the qualified status of that Plan)
which arose prior to the transfer of assets described herein or which relate
to the operation or administration of that Plan prior to the transfer of
assets. Footstar hereby indemnifies Melville against and agrees to hold it
harmless from any liabilities or claims relating to the qualified status of
the Successor Individual Account Plan or the operation or administration of
that Plan following the transfer of assets described herein.
Section 4. Welfare Plans and Worker Compensation.
(a) Footstar and its Affiliates shall each establish or designate
welfare benefit plans, within the meaning of Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended, for the benefit of their
respective Transferred Employees (the "Replacement Welfare Plans") effective
January 1, 1997. Melville shall continue to provide services for Transferred
Employees (and eligible spouses and dependants) under its Plans which provide
medical, dental, life insurance and disability benefits for such period of
time from the Distribution Date to not later than December 31, 1996 (the
"Benefit Transition Period"). Footstar shall pay the cost of such services
during the Benefit Transition Period (including claims run out in respect of
claims incurred both before and after the Distribution Date) and shall
directly fund all medical and dental claims through a bank account set up
solely for such purposes. In addition, Footstar shall be entitled to retain
any applicable reserves or accruals relating to such benefits. Footstar and
its designated Affiliates shall retain or assume all of the obligations for
any retiree benefits under any welfare plan provided Transferred Employees
(and dependants) and retirees (and dependants) terminated while employed by
Footstar and any Affiliate or while employed in the Footstar Business prior to
the Distribution Date. Footstar and its Affiliates shall assume as of the
Distribution Date all the obligations of Melville and any of its Affiliates
for any obligation to provide coverage and benefits for Transferred Employees
and former employees of the Footstar Business and their qualified
beneficiaries under the Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985 and Section 4980B of the Code.
(b) Footstar shall be responsible for all workers compensation
claims, whether arising before or after the Distribution Date, with respect to
any employee or former employee of the Footstar Business, including, but not
limited to, any Transferred Employee. In addition, Footstar shall be entitled
to retain any applicable reserves or accruals relating thereto.
Section 5. Stock Options. Except as otherwise provided in any
agreement with a Transferred Employee, as of the Distribution Date, all
outstanding options issued to Transferred Employees to purchase Melville
Common Stock that have heretofore been granted under any employee stock option
plan of Melville and are exercisable on the Distribution Date shall be
exercisable for a period of 90 days from the Distribution Date.
Section 6. Bonus and Profit Incentive Plans. Except as otherwise
provided in any agreement with a Transferred Employee, Melville shall have no
liability for any bonus or profit incentive awards and Footstar shall be
responsible for all such awards relating to the period beginning on the
Distribution Date.
Section 7. Severance. The continued employment by Footstar and its
Affiliates of Transferred Employees after the Distribution Date shall not be
deemed a severance of employment of such Transferred Employees from Melville
for purposes of any policy, Plan, program or agreement of Melville or any of
its Subsidiaries that provides for the payment of severance, salary
continuation or similar benefits.
Section 8. Supplemental Retirement Benefits as Deferred
Compensation. Footstar and its Affiliates shall assume as of the Distribution
Date all of the obligations and liabilities of Melville and any of its
Affiliates for any Transferred Employee under the Supplemental Retirement
Plans I and II for Select Senior Management of Melville Corporation and the
Deferred Compensation Plan of Melville Corporation and Affiliated Companies,
and any reserve or accrual in respect of such Transferred Employees shall be
retained by or transferred to Footstar.
Section 9. No Third Party Beneficiaries. Neither Transferred
Employees nor any current, former or retired employee of Melville or its
affiliates shall be entitled to enforce the provisions of this Schedule 5.01
against the respective parties as third party beneficiaries thereof.
Schedule 6.01(A)
BAD DEBT COLLECTION AND PREVENTION
Services and Related Agreements
Footstar has requested that Melville provide transitional services
to Footstar pertaining to (i) check authorization, (ii) credit
transaction routing, (iii) check collection and reporting, and
(iv) bad debt collection and prevention ((i), (ii), (iii) and (iv)
collectively being the "Check Services").
On the terms and conditions set forth in this Exhibit and the
Agreement and for the Term set forth below, Melville will provide
to Footstar, and Footstar will purchase from Melville, the Check
Services with respect to the Footstar Business, including services
by Melville (i) using Melville's software system for bad debt
collection and check authorization (the "Bad Debt System") and (ii)
providing unlimited access to the negative check file with respect
to the Footstar Business only and the positive check file with
respect to all Melville businesses.
Access by Footstar to the negative check file can be continued by
Footstar only so long as Footstar continues to perform its
obligations under the ETC/SCAN Service Agreement (the "ETC
Agreement") (since Electronic Transaction Corporation ("ETC") is
the owner of the negative check file). ETC has agreed to allow
Footstar to continue to obtain services under the ETC Agreement
during the transition period, and ETC has informally advised that
such continued services will be at the same ETC rates as have
heretofore been applicable to the Footstar Business (since
Melville's original agreement with ETC covers Footstar).
Notwithstanding anything else contained in this Exhibit or the
Agreement, Melville will have no obligation to provide Footstar
with any access to the negative check file (or access at such
existing rates) if ETC does not permit Footstar such access (or
such access at such existing rates) or Footstar otherwise does not
continue to have any rights under the ETC Agreement.
Ownership of all information in the negative and positive check
file that is contributed by Footstar shall belong to Footstar and
shall be forwarded to Footstar upon its request.
Information relating to Footstar customers will be treated
confidentially so as to preserve confidentiality from, and
preclude any use by, Melville and its Affiliates, except that
Melville shall have unlimited access to Footstar's positive check
file. In addition, Footstar will have unlimited access to
Melville's positive check file, as these positive check files are
presently mutually inclusive.
Separate collection letters and telephone collection calls will be
made on Footstar bad checks.
Charges for services will be (1) $.02 per check authorization
request, (2) $.02 per credit card routing request and (3) $5.78
per returned item received.
Melville will use reasonable efforts to accommodate any required
or requested modification of Melville's Check Authorization,
Credit Routing and/or Collection Management Systems, provided that
Footstar will be responsible for all additional costs, as approved
by Footstar, associated with each such modification unless such
modification is required under the ETC Agreement and Melville
would have made such modification regardless of services related
to this Agreement.
All funds recovered or collected by Melville or its designated
Collection Agencies pursuant to the provision of services
hereunder will be deposited into a Bank of Boston recovery account
that will be opened and maintained at Footstar's expense.
Footstar may request that additional collection agencies be
approved by Melville, and Melville will give reasonable
consideration to such requests.
Footstar agrees to direct all customer inquiries, correspondence
and payments concerning returned checks to the Collections
Department, 200 Brickstone Square, P.O. Box 9031, Andover, MA
01810 or to telephone (508) 474-7200.
Term
The term for the provision and purchase of Check Services
hereunder shall be from the Distribution Date until the first
anniversary of the Distribution Date; provided that (i) Footstar
may terminate the Check Services by giving Melville 60 days'
written notice of such termination and (ii) Melville may terminate
the Check Services hereunder (x) if at any time such termination
is required (or continued provision of Check Services would result
in any penalty or other burdensome consequence or requirement
being imposed) by any federal or state regulatory agency or (y) as
provided in Section 9.02 of the Agreement.
Schedule 6.01(B)
INSURANCE CLAIMS ADMINISTRATION
Services and Related Agreements
On the terms and conditions set forth in this Exhibit and the
Agreement and for the Term set forth below, Melville will provide
to Footstar, and Footstar will purchase from Melville, claims
administration services ("Claims Services") relating to Footstar
general liability insurance claims made prior to the first
anniversary of the Distribution Date.
Melville shall maintain a special bank account (the "Claims
Account") for claims payment in connection with Claims Services.
Melville shall, on a weekly basis, render a statement to Footstar
of the amount of each claim to be paid pursuant to the provision
of Claims Services hereunder. Footstar shall, promptly upon
receipt of such statement, deposit (by wire transfer) the
aggregate amount of the claims covered by such statement into the
Claims Account. Melville shall make payment of claims by checks
drawn on the Claims Account, but shall only release such checks
once funds therefor have been so deposited by Footstar into the
Claims Account. In addition, Melville shall allow Footstar and/or
its agents reasonable access to its books and records relating to
Claims Services in order to perform claim reviews.
Within 15 days after the later of (i) the Distribution and (ii)
receipt by Footstar of an invoice therefor from Melville, Footstar
shall reimburse Melville for all claims handling charges and loss
disbursements made prior to the Distribution (whether billed or
unbilled by the Distribution Date). Additionally, at the close of
each month Melville will bill Footstar for all claims reported to
Melville the prior month. Upon termination of this Claims
Services agreement, all fees due and owed by Footstar through
termination will be paid within 15 days after the later of (x) the
termination date and (y) receipt by Footstar of an invoice
therefor from Melville.
Term
The term for the provision and purchase of Claims Services
hereunder shall be from the Distribution Date until the first
anniversary of the Distribution Date, unless theretofore
terminated by Melville as provided in Section 9.02 of the
Agreement or terminated by Footstar upon 30 days' notice to
Melville.
Upon termination, at Footstar's expense and with Melville's
co-operation, all open and outstanding claims will be copied and
moved to a third party processor of Footstar's choosing.
Additionally, Footstar will make arrangements at its expense for
moving and storing of all closed claims previously handled by the
Melville claims unit within a reasonable period of time not to
exceed 60 days.
CLAIMS RUNOUT
For a period of at least five years after the Distribution Date,
the Footstar Group will continue to have insurance coverage with
respect to claims made (i.e. claims runout) after the Distribution
Date in respect of claims or losses incurred or events occurring
prior to the Distribution Date (i) to the extent such claims or
losses are covered under Melville insurance policies under which
the Footstar Group or Footstar Business had coverage up to the
Distribution Date and (ii) on the terms in effect under such
policies at the time such pre-Distribution claims or losses were
incurred or events occurred. Notwithstanding anything else
contained herein, Melville will be liable for any deductible or
retention amounts under its directors and officers liability
insurance policies with respect to claims under such policies in
respect of individuals who were officers, directors and/or
employees of the Melville Group prior to the Distribution and
arising from acts, omissions or events occurring prior to the
Distribution.
Schedule 9.01
INTERCOMPANY ACCOUNTS
Effective January 1, 1996, Melville Corporation ("Melville") transferred the
ownership of its Meldisco and Thom McAn divisions to a newly formed
subsidiary, Mel Shoe Corporation ("Mel Shoe"). At the time of this transfer,
these divisions maintained an inter-divisional book investment balance of
$730,004,787.02 with Melville. Mel Shoe will be a subsidiary of Footstar, Inc.
("Footstar") which is scheduled to be spun off by Melville in the third
quarter of 1996.
Since its inception, Mel Shoe has borrowed funds from Melville on an
inter-company basis to finance working capital and capital expenditure
requirements. In connection with the spin-off, Footstar and Melville have
agreed that Melville would retain $643,000,000 of the $730,004,787.02
inter-divisional book investment balance and contribute the remaining
$87,004,787.02 as a capital contribution to Footstar and/or its subsidiaries
(each a "Footstar Company"). This equity contribution will be used by the
Footstar Companies to repay a portion of the outstanding loan balance to
Melville. Had this capital contribution and repayment been made on August 7,
1996, the remaining aggregate balance owing to Melville as of such date would
have been $7,058,458.03. Other than this inter-divisional book investment
retention and capital contribution, all credits and debits between Melville
and its subsidiaries (other than the Footstar Companies) (the "Melville
Companies"), on the one hand, and the Footstar Companies, on the other hand,
since January 1, 1996 have been and shall be credited to, and debited from,
this inter-company balance, which will be the only inter-company balance
between the Footstar Companies and the Melville Companies. The net of such
inter-company balance will be repayable to Melville or the Footstar Companies,
as the case may be, on or prior to the spin-off date. That is, if the Footstar
Companies are in a borrowing position with Melville as of the spin-off date,
the Footstar Companies will repay their loan to Melville. If the Footstar
Companies are in an investment position with Melville as of the spin-off date,
Melville will repay this investment to the Footstar Companies.
Based on management's forecasts, it is anticipated that sufficient cash will
be generated by the Footstar Companies prior to the scheduled September 28,
1996 spin-off date to repay any remaining loan balance due to Melville. In
the event the cash flow is not sufficient to repay any such amount, the
Footstar Companies will be required to borrow under the $425,000,000 revolving
credit facility to repay Melville.
EXHIBIT 99.2
TAX DISAFFILIATION AGREEMENT
between
MELVILLE CORPORATION,
on behalf of itself and its
Post-Distribution Affiliates
and
FOOTSTAR, INC.,
on behalf of itself and its
Post-Distribution Affiliates
Table of Contents
Page
1. Definitions.......................................................... 2
2. Federal and State Taxes--Administrative and Compliance Matters....... 10
(a) Sole Tax Sharing Agreement..................................... 10
(b) Designation of Agent........................................... 10
(c) Pre-Distribution Period Returns................................ 12
3. Consolidated Federal, Consolidated State and Unitary State Taxes --
Allocation of Taxes.................................................. 12
(a) General......................................................... 12
(b) Estimated Payments............................................. 12
(c) Payment of Taxes at Year-End................................... 13
(d) Carrybacks and Certain Other Matters............................ 16
4. Other Taxes.......................................................... 19
5. Certain Representations and Covenants................................ 20
(a) (I) Footstar Representations.................................. 20
(II) Melville Representations................................. 21
(III) Footstar and Melville Representations................... 21
(b) Footstar Covenants............................................. 21
(c) Melville Covenants.............................................. 23
(d) Exceptions..................................................... 24
6. Indemnities.......................................................... 25
(a) Footstar Indemnity............................................. 25
(b) Melville Indemnity............................................. 26
(c) Discharge of Indemnity......................................... 28
(d) Tax Benefits.................................................... 29
(e) Refunds......................................................... 30
(f) Clerical Errors................................................. 30
(g) Method of Calculation........................................... 31
7. Communication and Cooperation........................................ 32
(a) Consult and Cooperate.......................................... 32
(b) Provide Information............................................ 33
(c) Tax Attribute Matters.......................................... 34
8. Audits and Contest................................................... 34
9. Payments............................................................. 35
10. Notices.............................................................. 37
11. Costs and Expenses................................................... 37
12. Effectiveness; Termination and Survival.............................. 38
13. Section Headings..................................................... 38
14. Entire Agreement; Amendments and Waivers............................. 38
(a) Entire Agreement............................................... 38
(b) Waiver......................................................... 38
15. Governing Law and Interpretation..................................... 39
16. Dispute Resolution................................................... 39
17. Counterparts......................................................... 39
18. Assignments; Third Party Beneficiaries................................ 39
Exhibit A.................................................................. 43
Exhibit B.................................................................. 45
TAX DISAFFILIATION AGREEMENT
This Agreement is entered into as of the 24 day of September, 1996
between Melville Corporation ("Melville"), a New York corporation,
on behalf of itself and its Post-Distribution Affiliates, and Footstar, Inc.
("Footstar"), a Delaware corporation, on behalf of itself and its
Post-Distribution Affiliates.
W I T N E S S E T H:
WHEREAS, Melville and Footstar intend to enter into a Distribution
Agreement dated as of September 24, 1996 (the "Distribution Agreement"),
providing for the distribution by Melville to its shareholders of all of the
common stock of Footstar (the "Distribution");
WHEREAS, Melville and Footstar desire to set forth their agreement
on the rights and obligations of Melville, Footstar and their respective
Affiliates with respect to the handling and allocation of federal, state,
local and foreign Taxes incurred in Taxable periods beginning prior to the
Distribution Date and various other Tax matters;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties agree as follows:
1. Definitions
(a) As used in this Agreement:
"Affiliate" of any person shall mean any individual, corporation,
partnership or other entity directly or indirectly owning more than 50 percent
of, owned more than 50 percent by, or under more than 50 percent common
ownership with, such person.
"After-Tax Amount" shall mean an additional amount necessary to
reflect the hypothetical Tax consequences of the receipt or accrual of any
payment, using the maximum statutory rate (or rates, in the case of an item
that affects more than one Tax) applicable to the recipient of such payment
for the relevant year, reflecting for example, the effect of the deductions
available for interest paid or accrued and for Taxes such as state and local
income Taxes.
"Code" shall mean the Internal Revenue Code of 1986, as amended,
or any successor thereto.
"Consolidated Federal Tax" shall mean the consolidated Federal Tax
liability of the Melville Consolidated Group for any period as to which a
consolidated Federal Tax Return was or is filed by Melville, or any successor
thereto, for such group.
"Consolidated State Tax" shall mean with respect to each State,
any income or franchise Tax payable with respect to a group of at least two
corporations, other than a Unitary State Tax.
"Distribution" shall mean a distribution by Melville of all of the
common stock of Footstar to its shareholders.
"Distribution Date" shall mean the date on which the Distribution
shall be effected.
"Federal Tax" shall mean any Tax imposed under Subtitle A of the
Code and any related penalty imposed under Subtitle F of the Code.
"Final Determination" shall mean (i) with respect to Federal
Taxes, (A) a "determination" as defined in Section 1313(a) of the Code, or (B)
the date of acceptance by or on behalf of the Internal Revenue Service of Form
870-AD (or any successor form thereto), as a final resolution of Tax liability
for any Taxable period, except that a Form 870-AD (or successor form thereto)
that reserves the right of the taxpayer to file a claim for refund and/or the
right of the Internal Revenue Service to assert a further deficiency shall not
constitute a Final Determination with respect to the item or items so
reserved; (ii) with respect to Taxes other than Federal Taxes, any final
determination of liability in respect of a Tax provided for under applicable
law; (iii) any final disposition by reason of the expiration of the applicable
statute of limitations; and (iv) the payment of Tax by Melville, Footstar, or
any Affiliate of Melville or Footstar, whichever is responsible for payment of
such Tax under applicable law, with respect to any item disallowed or adjusted
by a Taxing Authority, provided that the provisions of Section 8 hereof have
been complied with, or, if such section is inapplicable, that the party
responsible under the terms of this Agreement for such Tax is notified by the
party paying such Tax that it has determined that no action should be taken to
recoup such disallowed item, and the other party agrees with such
determination.
"Footstar Group" shall mean Footstar and its Affiliates
immediately after the Distribution Date, including any predecessors thereto;
provided, however, that for purposes of this Agreement, each Related Footwear
Business for which separate accounting records were kept shall be treated for
purposes of this Agreement like a separate corporation that is a member of the
Footstar Group (including, without limitation, the BOQ, Fan Club, Open
Country, Pimento, Meldisco, Thom McAn and Smart Step activities previously
conducted by Melville); provided further, that if with respect to any
Pre-Distribution Period (or portion thereof) Melville or any of its current or
former Affiliates was involved solely in the conduct of a Related Footwear
Business (including, without limitation, Calzados Ped Regal, S.A. and Thom
McAn Manufacturing, Inc.), such member shall be treated as a member of the
Footstar Group for such Pre-Distribution Period (or portion thereof); and
provided further, that if with respect to any Pre-Distribution Period (or
portion thereof) any Affiliate of Footstar (other than MEP) was not involved
in the conduct of a Related Footwear Business (including, without limitation,
Meldisco HK Limited, during the period it was doing business as Top Gun
Company Limited, and Melville Foreign, Inc., to the extent it is the successor
to Melville Canada Specialty Retailing Inc., TEU Canada Holdings Inc., Erin
Mills TEU, Inc., Fairview TEU, Inc. or Markville Centre TEU, Inc.), such
member shall not be treated as a member of the Footstar Group for such
Pre-Distribution Period (or portion thereof). For the purpose of avoiding
ambiguity, the parties agree that (except as set forth in the last proviso
above) the Pre-Distribution Tax Liability of the Footstar Group includes the
portion of such liability attributable to the corporations (domestic or
foreign) comprising the Meldisco, Footaction (including Open Country and Fan
Club) and Thom McAn (including Smart Step) retail chains and MEP, and to any
business activity conducted by Melville or any of its Affiliates (domestic or
foreign) which is or was a Related Footwear Business.
"Melville Consolidated Group" shall mean, with respect to any
Taxable period, (i) with respect to Consolidated Federal Taxes, the affiliated
group of corporations of which Melville (or a successor) was or is the common
parent (within the meaning of Section 1504 of the Code), (ii) with respect to
Consolidated State Taxes and Unitary State Taxes, the consolidated, combined
or unitary group of which Melville (or a successor) or any of its Affiliates
was or is a member, and (iii) with respect to any Other Tax payable with
respect to a group which includes or included at least one member of the
Melville Group and at least one member of the Footstar Group, such group.
"Melville Group" shall mean, with respect to any Taxable period,
Melville, its Affiliates (including their predecessors and successors) at any
time prior to the Distribution (including, without limitation, the Non-Chain
Corporations) other than those Affiliates comprising the Footstar Group.
"MEP" shall mean Meldisco (Europe) Purchasing Ltd. and its
predecessors and successors, and current and former subsidiaries, including
but not limited to MIT Sales AG and MEP-Ventas.
"Non-Chain Corporations" shall mean Computer Development, Inc.,
Melville Equipment Leasing Corporation, MC Retail, Inc., Melville Realty
Company and their direct and indirect subsidiaries.
"Other Taxes" is defined in Section 4.
"Post-Distribution Affiliate" shall mean with regard to Melville,
any person that is or that will be an Affiliate of Melville or a successor to
Melville after the Distribution and, with regard to Footstar, any person that
is or that will be an Affiliate of Footstar or a successor to Footstar after
the Distribution.
"Post-Distribution Period" shall mean any taxable period (or
portion thereof) beginning after the close of business on the Distribution
Date.
"Pre-Distribution Period" shall mean any Taxable period ending on
or before the close of business on the Distribution Date; provided that if a
Taxable period ending after the Distribution Date contains any days which fall
prior to or on the Distribution Date, any portion of such Taxable period up to
or including the Distribution Date shall also be included in the
Pre-Distribution Period.
"Pre-Distribution Tax Liability" shall mean (i) the Consolidated
Federal Tax, and (ii) the Consolidated State Tax liability of any group that
includes at least one member of the Melville Group and at least one member of
the Footstar Group, (iii) the Unitary State Tax liability of any group which
includes at least one member of the Melville Group and at least one member of
the Footstar Group, and (iv) any Other Taxes, in each case for any
Pre-Distribution Period.
"Prime" shall mean the rate announced from time to time as "prime"
by Morgan Guaranty Trust Company as its prime rate.
"Referee" is defined in Section 16.
"Related Footwear Business" shall mean any business activity
(including but not limited to those activities related to the conduct of
manufacturing, purchasing, distribution and sales operations) associated with
the Meldisco (including Pimento), Footaction (including Open Country and Fan
Club) or Thom McAn (including BOQ, Pimento and Smart Step) retail chain which
was conducted by the Melville Group, including (but not limited to) the
activities associated with the Meldisco, Open Country, Fan Club, Smart Step
and Thom McAn chains which were conducted by Melville, and excluding any
activity conducted by the Non-Chain Corporations.
"Return" shall mean any Tax return, statement, report or form
(including estimated Tax returns and reports, extension requests and forms,
and information returns and reports) required to be filed with any Taxing
Authority.
"Tax" (and the correlative meaning, "Taxes," "Taxing" and
"Taxable") shall mean (A) any tax imposed under Subtitle A of the Code, any
net income, gross income, gross receipts, alternative or add-on minimum,
sales, use, value-added, goods and services, ad valorem, franchise, profits,
license, withholding, payroll, employment, excise, transfer, recording,
severance, stamp, occupation, premium, property, environmental, custom duty,
or other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and any penalty, addition to tax or
additional amount imposed by a Taxing Authority; (B) any liability of a member
of the Melville Group or the Footstar Group, as the case may be, for the
payment of any amounts of the type described in clause (A) for any Taxable
period resulting from the application of Treasury Regulation Section 1.1502-6
or any similar provision applicable under state, local or foreign law; and (C)
any liability of a member of the Melville Group or the Footstar Group for the
payment of any amounts described in clause (A) as a result of any express or
implied obligation to indemnify any other party.
"Tax Asset" shall mean any net operating loss, net capital loss,
investment Tax credit, foreign Tax credit, target jobs Tax credit, low income
housing credit, research and experimentation credit, charitable deduction or
any other credit or Tax attribute, including additions to basis of property,
which could reduce any Tax, including, without limitation, deductions,
credits, or alternative minimum net operating loss carryforwards related to
alternative minimum Taxes.
"Tax Packages" shall mean one or more packages of information,
including but not limited to the Corptax file and the divisional
reconciliation, that are (i) reasonably necessary for the purpose of preparing
Federal Tax, Consolidated State Tax, Unitary State Tax Returns or Other Tax
returns of the Melville Consolidated Group with respect to a Pre-Distribution
Period and (ii) completed in all material respects in accordance with the
standards that Melville has established for its subsidiaries with respect to
the relevant Pre-Distribution Period.
"Tax Proceeding" shall mean any Tax audit, dispute or proceeding
(whether administrative or judicial).
"Taxing Authority" shall mean any governmental authority (domestic
or foreign) responsible for the imposition of any Tax.
"Unitary State Tax" shall mean, with respect to each State, any
income or franchise Tax payable with respect to a group of at least two
corporations and based upon a group apportionment percentage.
(b) Any term used in this Agreement which is not defined in this
Agreement shall, to the extent the context requires, have the meaning assigned
to it in the Code or the applicable Treasury regulations thereunder and, in
the case of Consolidated State Taxes, Unitary State Taxes, and Other Taxes,
in comparable provisions of applicable law.
2. Federal and State Taxes--Administrative and Compliance
Matters.
(a) Sole Tax Sharing Agreement. The parties acknowledge that
there has not been a Final Determination of the Pre-Distribution Tax
Liability, and that certain members of the Footstar Group are includible in
the Melville Consolidated Group for the Pre-Distribution Period. This
Agreement shall constitute the sole Tax sharing agreement between Melville and
its Post-Distribution Affiliates, on one hand, and Footstar and its
Post-Distribution Affiliates, on the other hand, and, to the extent there is
any inconsistency between this Agreement and any existing Tax sharing
agreements or arrangements, written or unwritten, between Melville and its
Post-Distribution Affiliates, on one hand, and Footstar and its
Post-Distribution Affiliates, on the other hand, this Agreement shall govern.
(b) Designation of Agent. Footstar and each member of the
Footstar Group, with respect to Consolidated Federal Taxes, each hereby
irrevocably designate Melville or its successors as its agent, coordinator,
and administrator, and, with respect to Consolidated State Taxes, Unitary
State Taxes and any Other Taxes payable with respect to a group which includes
at least one member of the Melville Group and at least one member of the
Footstar Group, each hereby irrevocably authorize Melville to designate a
member of the Melville Group, or a successor of such member, as its agent,
coordinator, and administrator, for the purpose of taking any and all actions
(including the execution of waivers of applicable statutes of limitation)
necessary or incidental to the filing of any Return, any amended Return, or
any claim for refund (even where an item or Tax Asset giving rise to an
amended Return or refund claim arises in a Post-Distribution Period), credit
or offset of Tax or any other proceedings, and for the purpose of making
payments to, or collecting refunds from, any Taxing Authority, in each case
relating to any Pre-Distribution Period. Melville or the member of the
Melville Group, as the case may be, as agent, covenants to Footstar that it
shall be responsible to see that all such administrative matters relating
thereto shall be handled promptly and appropriately. Melville shall inform
and consult with Footstar prior to taking any action on behalf of, or which
will have any material impact on the Tax liability of the Footstar Group,
including, without limitation, strategies relating to waivers of any statute
of limitations period that have otherwise expired.
(c) Pre-Distribution Period Returns. Melville and its
Post-Distribution Affiliates will prepare, with the assistance of Footstar and
its Post-Distribution Affiliates, and file the Consolidated Federal Tax
Returns and the Consolidated State and Unitary State Tax Returns for all
Pre-Distribution Periods. With respect to the 1996 year, Footstar and its
Post-Distribution Affiliates shall prepare and deliver to Melville all Tax
Packages within 120 days after the Distribution Date.
3. Consolidated Federal, Consolidated State and Unitary State
Taxes -- Allocation of Taxes.
(a) General. For the 1995 and 1996 Taxable years of the Melville
Consolidated Group, Footstar shall pay, or cause to be paid, to Melville an
amount equal to (i) the Footstar Group's share of the Melville Consolidated
Group's Consolidated Federal Tax and Consolidated State Tax liability,
determined in accordance with Exhibit A to this Agreement, and (ii) the
Footstar Group's share of the Melville Consolidated Group's Unitary State Tax
liability, determined in accordance with Exhibit B to this Agreement.
(b) Estimated Payments. Promptly after Melville or any of its
Affiliates makes an estimated Tax payment with respect to the 1996 Taxable
year (other than a payment which relates solely to minimum Taxes due), whether
or not such payment is made prior to the Distribution Melville shall (i) in
good faith determine the amount of the Footstar Group's share of such
estimated Tax payment (X) in accordance with the principles of Exhibit A to
this Agreement, in the case of an estimated Tax payment in respect of the
Consolidated Federal Tax or any Consolidated State Tax liability of the
Melville Consolidated Group, and (Y) in accordance with the principles of
Exhibit B to this Agreement using 1995 apportionment factors, adjusted for
significant dispositions or transfers of assets, in the case of an estimated
Tax payment in respect of any Unitary State Tax liability of the Melville
Consolidated Group and (ii) deliver a written statement to Footstar reflecting
the determination described above. Footstar shall pay to Melville or Melville
shall pay to Footstar, as appropriate, the amount so determined in accordance
with Section 9 hereof.
(c) Payment of Taxes at Year-End.
(i) Promptly after Melville or any of its Affiliates files
an application to extend the due date of a Return for the 1995 or
1996 Taxable year, whether or not such application is filed prior
to the Distribution, Melville shall (a) in good faith determine
the estimated amount of the Footstar Group's share of the Melville
Consolidated Group's Consolidated Federal Tax or Consolidated
State Tax liability for such Return in accordance with the
principles of Exhibit A to this Agreement or, in the case of a
Unitary State Tax Return, in accordance with the principles of
Exhibit B to this Agreement using 1994 and 1995 apportionment
factors for 1995 and 1996, respectively, adjusted for significant
dispositions or transfers of assets, and (b) deliver a written
statement to Footstar reflecting the determination described
above. Footstar shall pay to Melville, or Melville shall pay to
Footstar, as appropriate, in accordance with Section 9 hereof, an
amount equal to the difference, if any, between (x) the amounts so
determined and (y) the aggregate amount of estimated installments
paid with respect to the Footstar Group's share of such Tax
liability for such year made pursuant to Section 3(b), adjusted to
take into account amounts previously paid or received by Footstar
or any Affiliate in connection with any previous extension
payments made either before or after the Distribution.
(ii) Promptly after Melville or a member of the Melville
Consolidated Group files a Consolidated Federal Tax Return,
Consolidated State Tax Return or Unitary State Tax Return, as the
case may be, for which payments are to be made under this
Agreement, whether or not such Return is filed prior to the
Distribution, Melville shall deliver to Footstar a written
statement setting forth the difference between (x) the Footstar
Group's share of the Melville Consolidated Group's Consolidated
Federal Tax, Consolidated State Tax or Unitary State Tax liability
for such Return, determined in accordance with the principles of
Exhibit A or B to this Agreement, as the case may be, and (y) the
aggregate amount of payments with respect to the Footstar Group's
share of such Tax liability for such year made pursuant to Section
3(b) or Section 3(c)(i). Footstar shall pay to Melville, or
Melville shall pay to Footstar, as appropriate, in accordance with
Section 9 hereof, an amount equal to such difference, if any.
(iii) If the determination of the Footstar Group's share of
the Melville Consolidated Group's Consolidated Federal Tax,
Consolidated State Tax or Unitary State Tax reflects a Tax Asset
that may under applicable law be used to reduce a Federal Tax,
Consolidated State Tax or Unitary State Tax liability, as the case
may be, of any member of the Melville Group for any Tax period,
Melville shall pay to Footstar the actual Tax saving produced by
such Tax Asset within 30 days of the receipt by Melville or any
Melville Affiliate of any refund, credit or other offset
attributable thereto from the relevant Taxing Authority. The
amount of any such tax saving for any tax period shall be the
amount of the reduction in Taxes payable to a Taxing Authority (or
the increase in any Tax refund) with respect to such period as
compared to the Taxes that would have been payable to a Taxing
Authority (or the Tax refund that would have been received) with
respect to such period in the absence of such Tax Asset; provided,
however, that in the event that the use in a Pre-Distribution
Period of a Tax Asset, attributable to any member of the Footstar
Group, gives rise to, or increases, any alternative minimum Tax
liability, Melville shall pay to Footstar, or Footstar shall pay
to Melville, as the case may be, an amount equal to the difference
between (i) the maximum hypothetical Tax savings that could result
from the use of such Tax Asset determined using the maximum
applicable regular tax rate in effect for such Taxable year (or,
in the case of a credit, 100 percent) and (ii) the Footstar
Group's share of the alternative minimum Tax liability or increase
in alternative minimum Tax liability, as the case may be,
determined in accordance with Exhibit A to this Agreement.
(d) Carrybacks and Certain Other Matters.
(i) Subject to the provisions of Exhibit A hereto,
Melville agrees to pay Footstar the actual benefit received by the
Melville Consolidated Group in any Tax period from the use in any
Pre-Distribution Period of any Tax Asset arising in a
Post-Distribution Period. Such benefit shall be considered equal
to the excess of the amount of Tax that would have been payable
(or of the Tax refund that would have been receivable) by the
Melville Consolidated Group in any Tax period in the absence of
such carryback over the amount of Tax actually payable (or of the
Tax refund actually receivable) by the Melville Consolidated Group
in such period; provided, however, that in the event that the use
in a Pre-Distribution Period of a Tax Asset, attributable to any
member of the Footstar Group, gives rise to, or increases, any
alternative minimum Tax liability, Melville shall pay to Footstar,
or Footstar shall pay to Melville, as the case may be, an amount
equal to the difference between (i) the maximum hypothetical Tax
savings that could result from the use of such Tax Asset
determined using the maximum applicable regular tax rate in effect
for such Taxable year and (ii) the Footstar Group's share of the
alternative minimum Tax liability or increase in alternative
minimum Tax liability, as the case may be, determined in
accordance with Exhibit A to this Agreement. Payment of the
amount of such benefit shall be made within 30 days of the receipt
by any member of the Melville Consolidated Group of any refund,
credit or other offset attributable thereto from the relevant
Taxing Authority.
(ii) If, subsequent to the payment by Melville to Footstar
of any amount referred to in Section 3(d)(i) above, there shall be
(A) a Final Determination which results in a disallowance or a
reduction of the Tax Asset so carried back or (B) a reduction in
the amount of the benefit realized by the Melville Consolidated
Group from such carryback as a result of a Final Determination or
the use by the Melville Consolidated Group of a Tax Asset of the
Melville Group, Footstar shall repay to Melville the amount which
would not have been payable to Footstar pursuant to Section 3(d)(i)
had the amount of the benefit been determined in light of such
event. In addition, Footstar shall hold Melville and each of its
Post-Distribution Affiliates harmless for any penalty or interest
payable by any member of the Melville Consolidated Group as a
result of any such event referred to in the preceding sentence.
Any amounts payable under this Section 3(d)(ii) shall be paid by
Footstar to Melville within 30 days of demand therefor. To the
extent Footstar's repayment obligation arises due to the use by the
Melville Consolidated Group of a Tax asset of a member of the
Melville Group, Footstar shall pay Melville interest on the amount
repaid to Melville from the date such amount was paid by Melville
to Footstar until such repayment at Prime.
(iii) The parties hereto acknowledge that, in connection
with the disposition or deconsolidation of certain members of the
Melville Group, Melville has entered into, and intends to enter
into, agreements similar to this Agreement (the "Melville Group
Agreements") relating to Tax matters involving such members.
Notwithstanding anything to the contrary in this Agreement, to the
extent that (i) Melville would be required under Section 3 of this
Agreement to make a payment to Footstar in respect of a Tax saving
or Tax benefit attributable to a Tax Asset of the Footstar Group
and (ii) Melville would be required under a Melville Group
Agreement or Agreements to make a similar payment to a member or
members of the Melville Group in respect of the same Tax saving or
Tax benefit, then the portion of such Tax saving or benefit
attributable to a Tax Asset of the Footstar Group shall be
calculated in accordance with Treasury Regulations Section
1502-21A and any successor thereto.
4. Other Taxes
(a) Liability for all Taxes other than Consolidated Federal
Taxes or Consolidated State or Unitary Taxes ("Other Taxes") attributable to
the Footstar Group or attributable to any lease termination payment made by a
member of the Footstar Group shall be the sole responsibility of Footstar and
its Post-Distribution Affiliates. Liability for all Other Taxes attributable
to the Melville Group (other than as provided in the preceding sentence) shall
be the sole responsibility of Melville and its Post-Distribution Affiliates.
The responsibility for preparing (with Melville's cooperation as provided in
Section 7 hereof) and filing all Returns, and for making all payments to any
Taxing Authority, relating solely to Other Taxes attributable to the Footstar
Group shall be the sole responsibility of Footstar and its Post-Distribution
Affiliates. The responsibility for preparing (with Footstar's cooperation as
provided in Section 7 hereof) and filing all other Returns, and for making all
payments to any Taxing Authority, relating to Other Taxes for any
Pre-Distribution Period shall be the sole responsibility of Melville and its
Post-Distribution Affiliates. Promptly after a payment of Other Taxes by
Melville, or any of its Post-Distribution Affiliates on one hand, or Footstar
or any of its Post-Distribution Affiliates, on the other hand, the paying
party shall notify the non-paying party of the amount of such Other Taxes, if
any, which is attributable to the non-paying party, in accordance with Section
4(c). The non-paying party shall pay to the paying party, in accordance with
Section 9 hereof, such amount.
(b) Footstar shall be entitled to all refunds and credits of
Other Taxes attributable to the Footstar Group, and Melville shall be entitled
to all refunds and credits of Other Taxes attributable to the Melville Group.
(c) The determination of whether Other Taxes are attributable to
the Melville Group, on one hand, or the Footstar Group, on the other hand,
shall be made in accordance with past practices.
(d) Notwithstanding anything to the contrary herein, all
transfer, documentary, sales, use, stamp, registration and other such Taxes
and fees (including any penalties and interest) incurred in connection with
Section 2.02 of the Distribution Agreement dated as of the date hereof among
Melville, Footstar and Footaction Center, Inc. shall be borne and paid equally
by Melville and Footstar. The party that is required by applicable law to
file any Return or make any payment with respect to any such Tax shall do so,
and the other party shall cooperate with respect thereto as necessary. The
non-paying party shall reimburse the paying party in accordance with this
Section 4(d) within 5 business days after it receives notice of the payment of
such Tax.
5. Certain Representations and Covenants.
(a) (I) Footstar Representations. Footstar and its
Post-Distribution Affiliates each represents that, as of the date hereof, and
covenants that on the Distribution Date there is no plan or intention (A) to
liquidate Footstar or to merge or consolidate Footstar with any other person
subsequent to the Distribution, (B) to sell or otherwise dispose of any asset
of Footstar or those of its Post-Distribution Affiliates subsequent to the
Distribution, except in the ordinary course of business and except with
respect to the Thom McAn chain, MEP or the distribution centers located in
Morrow, Georgia, Huntington, Indiana or Clinton, New Jersey, (C) to take any
action inconsistent with the information furnished to Davis Polk & Wardwell in
connection with its tax opinion with respect to the Distribution, (D) issue
stock of Footstar, other than pursuant to the Distribution, representing more
than 20 percent of the total combined voting power or more than 20 percent of
the total value of all classes of Footstar stock.
(II) Melville Representations. Melville and its
Post-Distribution Affiliates each represents that, as of the date hereof, and
covenants that on the Distribution Date there is no plan or intention to take
any action inconsistent with the information furnished to Davis Polk &
Wardwell in connection with its tax opinion with respect to the Distribution.
(III) Footstar and Melville Representations. Footstar and
Melville and their respective Post-Distribution Affiliates each represents
that, as of the date hereof, and covenants that on the Distribution Date
neither Footstar nor Melville and their respective Post-Distribution
Affiliates (as applicable) is aware of any present plan or intention by the
current shareholders of Melville to sell, exchange, transfer by gift, or
otherwise dispose of any of their stock in, or securities of, Melville or
Footstar subsequent to the Distribution.
(b) Footstar Covenants. Footstar covenants to Melville that (i)
during the two-year period following the Distribution Date it will not
liquidate, merge or consolidate with any other person, or sell, exchange,
distribute or otherwise dispose of its assets or those of its Post-Distribution
Affiliates, except in the ordinary course of business and except for the
disposition of assets of the Thom McAn chain or MEP, or the distribution
centers located in Morrow, Georgia, Huntington, Indiana or Clinton, New
Jersey, (ii) following the Distribution, Footstar will, for a minimum of two
years, continue the active conduct of the historic business conducted by
Footstar throughout the five year period prior to the Distribution, (iii)
other than pursuant to the Distribution during the two-year period following
the Distribution Date it will not issue stock of Footstar representing more
than 20 percent of the total combined voting power or more than 20 percent of
the total value of all classes of Footstar stock, (iv) Footstar will not, nor
will it permit any of its Post-Distribution Affiliates to, take any action
inconsistent with the information furnished to Davis Polk & Wardwell in
connection with its tax opinion with respect to the Distribution and (v)
during the period beginning on the Distribution Date and ending upon the
expiration of the statute of limitations period applicable to the Taxable year
in which the Distribution occurs (after giving effect to any extension,
mitigation or waiver thereof), Footstar will not, nor will it permit any of
its Post-Distribution Affiliates to make or change any accounting method,
amend any Tax Return or take any Tax position on any Tax Return, change the
manner in which it conducts its business, take any other action, omit to take
any action or enter into any transaction that results in any increased Tax
liability with respect to a Pre-Distribution Period, or reduction of any Tax
Asset which was created in a Pre-Distribution Period, of the Melville Group or
any member thereof without first obtaining the written consent of an authorized
representative of Melville; provided, however, that if a change in law
(including the enactment of any statute or the issuance of any proposed,
temporary or final regulations, or administrative pronouncement or judicial
decision) would have a material adverse effect on the aggregate Tax liability
of Footstar and its Post-Distribution Affiliates, then, notwithstanding
anything to the contrary in this clause (iii), Footstar shall be entitled to
take, or to permit its Post-Distribution Affiliates to take, such minimum
action as is necessary to eliminate or mitigate the effect of the change in
law. Footstar agrees to notify Melville of any action taken under the proviso
contained in the preceding sentence.
(c) Melville Covenants. Melville covenants to Footstar that (i)
it will not change its year-end for any Tax year beginning prior to January 1,
1997, (ii) it will not, nor will it permit any of its Post-Distribution
Affiliates to, take any action inconsistent with the information furnished to
Davis Polk & Wardwell in connection with its tax opinion with respect to the
Distribution and (iii) during the period beginning on the Distribution Date
and ending upon the expiration of the statute of limitations period applicable
to the Taxable year in which the Distribution occurs (after giving effect to
any extension, mitigation or waiver thereof), Melville will not, nor will it
permit any of its Post-Distribution Affiliates to make or change any
accounting method, amend any Tax Return or take any Tax position on any Tax
Return, change the manner in which it conducts its business, take any other
action, omit to take any action or enter into any transaction that results in
any increased Tax liability with respect to a Pre-Distribution Period or
reduction of any Tax Asset which was created in a Pre-Distribution Period of
the Footstar Group or any member thereof without first obtaining the written
consent of an authorized representative of Footstar; provided, however, that
if a change in law (including the enactment of any statute or the issuance of
any proposed, temporary or final regulations, or administrative pronouncement
or judicial decision) would have a material adverse effect on the aggregate
Tax liability of Melville and its Post-Distribution Affiliates, then,
notwithstanding anything to the contrary in this clause (c), Melville shall be
entitled to take, or to permit its Post-Distribution Affiliates to take, such
minimum action as is necessary to eliminate or mitigate the effect of the
change in law. Melville agrees to notify Footstar of any action taken under
the proviso contained in the preceding sentence.
(d) Footstar and Melville Covenant. The parties hereto agree to
act in good faith in complying with the terms of this Agreement.
(e) Exceptions. Notwithstanding the foregoing, Footstar and its
Post-Distribution Affiliates may take actions inconsistent with the covenants
contained in Section 5(b)(i) through (iv) above, and Melville and its
Post-Distribution Affiliates may take actions inconsistent with the covenants
contained in Section (c)(ii) above, if:
(i) Footstar or Melville, as the case may be, obtains a ruling
from the Internal Revenue Service to the effect that such actions will
not result in the Distribution being taxable to Melville or its
shareholders; or
(ii) Footstar or Melville, as the case may be, obtains an opinion
of counsel recognized as an expert in federal income tax matters and
acceptable to the other party to the same effect as in Section 5(e)(i).
6. Indemnities.
(a) Footstar Indemnity. Footstar and each corporation that is a
Post-Distribution Affiliate of Footstar will jointly and severally indemnify
Melville and its Post-Distribution Affiliates against and hold them harmless
from
(i) any Pre-Distribution Tax Liability assessed pursuant to a
Final Determination, to the extent attributable to an adjustment of any
item of income, gain, gross receipts, loss, credit, deduction or other
Tax attribute of any member of the Footstar Group;
(ii) any liability or damage resulting from a breach by Footstar or
any of its Post-Distribution Affiliates of any representation or
covenant made by Footstar herein; and
(iii) any liability or damage under the securities laws or otherwise
resulting from information furnished by Footstar in connection with the
Distribution.
For the purpose of avoiding ambiguity, the parties agree that (except as set
forth in the third proviso of the definition of "Footstar Group") Footstar and
its Post-Distribution Affiliates shall be responsible for any Tax for a
Pre-Distribution Period attributable to the corporations (domestic or foreign)
comprising the Meldisco (including Pimento), Footaction (including Open
Country and Fan Club) and Thom McAn (including BOQ, Pimento and Smart Step)
retail chains and MEP, and to any business activity conducted by Melville or
any of its Affiliates (domestic or foreign) which is or was a Related Footwear
Business.
(b) Melville Indemnity. Melville and each corporation that is a
Post-Distribution Affiliate of Melville will jointly and severally indemnify
Footstar and its Post-Distribution Affiliates against and hold them harmless
from
(i) any Pre-Distribution Tax Liability, or Tax liability
resulting from the Distribution, other than any such liabilities
described in Section 6(a);
(ii) any Tax liability allocable to a member of the Melville Group
which is a liability of the Footstar Group under clause (B) of the
definition of Tax with respect to any Pre-Distribution Period or any Tax
year of the Melville Consolidated Group which includes (but does not end
on) the Distribution Date;
(iii) any liability or damage resulting from a breach by Melville
or any of its Post-Distribution Affiliates of any representation or
covenant made by Melville herein; and
(iv) any liability or damage under the securities laws or otherwise
resulting from information furnished by Melville in connection with the
Distribution.
For the purpose of avoiding ambiguity, the parties agree that (except as set
forth in the first two provisos of the definition of "Footstar Group")
Melville and its Post-Distribution Affiliates shall be responsible for any Tax
for a Pre-Distribution Period attributable to (x) the corporations (domestic
or foreign) comprising the CVS, Bob's, Linens 'n Things, Wilsons, Kay-Bee,
Marshalls, This End Up, Prints Plus, Chess King, Foxmoor and Accessory Lady
retail chains, (y) the Non-Chain Corporations and (z) to any business activity
conducted by Melville or any of its Affiliates (domestic or foreign) which is
or was directly related to the businesses conducted by the corporations
specified in clauses (x) and (y). If a Post-Distribution Affiliate of
Melville ceases to be an Affiliate of Melville as a result of a sale of its
stock (other than one described in the immediately following sentence) to a
third party (whether or not treated as a sale of stock for Tax purposes), such
Post-Distribution Affiliate shall be released from its obligations under this
Agreement upon such sale and neither Melville nor any of its other
Post-Distribution Affiliates shall have any obligation to indemnify Footstar
or any of its Post-Distribution Affiliates under Section 6(b)(iii) for any
liability or damage attributable to actions taken after such sale by such
Post-Distribution Affiliate. If a Post-Distribution Affiliate of Melville
ceases to be an Affiliate of Melville as a result of one or more public
offerings or a distribution by Melville of its stock, at such time, if such
Post-Distribution Affiliate agrees to continue to be bound by the terms of
this Agreement, any indemnification obligation under Section 6(b)(iii)
attributable to actions taken by such Post-Distribution Affiliate after it
ceases to be an Affiliate of Melville shall be solely the liability of such
Post-Distribution Affiliate, and Footstar and its Post-Distribution Affiliates
shall have no rights against Melville or any of its other Post-Distribution
Affiliates for the payment of such obligation. It is understood by the parties
hereto that the two preceding sentences do not limit in any way the ability of
Melville or its Post-Distribution Affiliates to sell operating assets, rather
than stock, to a third party and, in the case of a sale of operating assets of
any chain other than CVS, Melville shall have no obligation to indemnify
Footstar or any of its Post-Distribution Affiliates under Section 6(b)(iii)
as a result of such an asset sale.
(c) Discharge of Indemnity. Footstar, Melville and their
respective Post-Distribution Affiliates shall discharge their obligations
under Section 6(a) and 6(b) hereof, respectively, by paying the relevant
amount within 30 days of demand therefor. After a Final Determination of an
obligation of Footstar or any of its Post-Distribution Affiliates under Section
6(a), Melville shall send a statement to Footstar showing the amount due
thereunder. After a Final Determination of an obligation of Melville or any
of its Post-Distribution Affiliates under Section 6(b), Footstar shall send a
statement to Melville showing the amount due thereunder. Calculation mechanics
relating to items described in Section 6(a)(i) are set forth in Section 3(c).
Notwithstanding the foregoing, if either Footstar, Melville or any of their
respective Post-Distribution Affiliates disputes in good faith the fact or the
amount of its obligation under Section 6(a) or Section 6(b), then no payment
of the amount in dispute shall be required until any such good faith dispute is
resolved in accordance with Section 16 hereof; provided, however, that any
amount not paid within 30 days of demand therefor shall bear interest as
provided in Section 9.
(d) Tax Benefits. If an indemnification obligation of
Melville, Footstar or any of their respective Post-Distribution Affiliates
under this Section 6 arises in respect of an adjustment that makes allowable
to Melville or its Affiliates, or Footstar or its Affiliates, respectively,
any deduction, amortization, exclusion from income or other allowance (a "Tax
Benefit") which would not, but for such adjustment, be allowable, then any
payment by Melville, Footstar or any of their respective Post-Distribution
Affiliates, as the case may be, pursuant to this Section 6 shall be an amount
equal to (X) the amount otherwise due but for this subsection (d), minus (Y)
the present value of the product of the Tax Benefit multiplied (i) by the
maximum federal or state, as the case may be, corporate tax rate in effect at
the time such Tax Benefit becomes allowable to Melville or its Affiliates, or
Footstar or its Affiliates (as the case may be) or (ii) in the case of a
credit, by 100 percent. The present value of such product shall be determined
by discounting such product from the time the Tax Benefit becomes allowable at
a rate equal to Prime.
(e) Refunds. Any refunds of Tax received by Melville or any of
its Post-Distribution Affiliates relating to a Pre-Distribution Period, to the
extent attributable to any item of income, loss, credit, deduction or other
tax attribute of any member of the Footstar Group shall be paid by Melville to
Footstar within 30 days of receipt. Any amount not paid when due shall bear
interest as provided in Section 9.
(f) Clerical Errors. If, as a result of a correction of a
clerical error made by booking any item at one member of the Melville
Consolidated Group instead of another, (i) the Pre-Distribution Tax Liability
allocable to the Footstar Group or the Melville Group, as the case may be, is
increased, (ii) the Pre-Distribution Tax Liability allocable to the other
group is decreased by an offsetting amount, and (iii) no Tax payment is
required to be made to a Taxing Authority in respect of the correction of the
clerical error, then the group referred to in clause (ii) of this Section 6(f)
shall be treated as having made a Tax payment in an amount equal to the
increased Pre-Distribution Tax Liability described in clause (i) of this
Section 6(f) and shall be entitled to indemnification therefor under this
Section 6 without regard to Section 6(d).
(g) Method of Calculation. (i) Except as otherwise provided, the
amount of any liability of Footstar and its Post-Distribution Affiliates or of
Melville and its Post-Distribution Affiliates under this Section 6 shall be
calculated pursuant to the method described in Exhibit A hereto; provided,
however, that the calculation of any party's share of Unitary State Tax shall
be calculated pursuant to the method described in Exhibit B hereto.
(ii) For purposes of this Section 6, in the case of Taxes that
are imposed on a periodic basis and are payable for a Tax period that includes
(but does not end on) the Distribution Date, the portion of such Tax related
to the portion of such Tax period ending on the Distribution Date shall (x) in
the case of any Taxes other than Taxes based upon or related to income, sales,
gross receipts, wages, capital expenditures or expenses, be deemed to be the
amount of such Tax for the entire Tax period multiplied by a fraction the
numerator of which is the number of days in the Tax period ending on the
Distribution Date and the denominator of which is the number of days in the
entire Tax period, and (y) in the case of any Tax based upon or related to
income, sales, gross receipts, wages, capital expenditures or expenses, be
deemed equal to the amount which would be payable if the relevant Tax period
ended on the Distribution Date and applying the weighted average 1996 Tax rate
for the relevant Tax applicable to the corporation subject to such Tax.
7. Communication and Cooperation.
(a) Consult and Cooperate. Footstar and Melville shall consult
and cooperate (and shall cause each of their Post-Distribution Affiliates to
cooperate) fully at such time and to the extent reasonably requested by the
other party in connection with all matters subject to this Agreement. Such
cooperation shall include, without limitation,
(i) the retention and provision on reasonable request of any and
all information including all books, records, documentation or other
information pertaining to Tax matters relating to the Melville Group and
the Footstar Group, any necessary explanations of information, and
access to personnel, until the expiration of the applicable statute of
limitation (giving effect to any extension, waiver, or mitigation
thereof);
(ii) the execution of any document that may be necessary or
helpful in connection of any required Return or in connection with any
audit, proceeding, suit or action;
(iii) reporting to the other party, on a quarterly basis, on the
status of any Tax audit relating to a Pre-Distribution Period; and
(iv) the use of the parties' best efforts to obtain any
documentation from a governmental authority or a third party that may be
necessary or helpful in connection with the foregoing.
(b) Provide Information. Melville and Footstar shall keep each
other fully informed with respect to any material development relating to the
matters subject to this Agreement. Melville shall provide to Footstar copies
of all Information Document Requests relating to a Pre-Distribution Period
issued by the Internal Revenue Service on Form 4564 or any successor thereto
and any analogous requests issued by any other Tax Authority (collectively,
"Requests"), and (to the extent practicable in light of the relevant Taxing
Authority's requirements) shall use reasonable efforts to provide copies of
the response to each Request more than two business days prior to filing such
response; provided, however, that Melville's failure to deliver a copy of a
response to a Request before such two-day period shall not relieve Footstar of
its obligations under this Agreement. Melville shall not be required to
provide Footstar with copies of the responses to any Requests unless
specifically related to the Footstar group; provided, however, Footstar shall
not be entitled to review or receive the portion of any response which does
not specifically relate to the Footstar Group.
(c) Tax Attribute Matters. Melville and Footstar shall advise
and consult with each other with respect to any proposed Tax adjustments
relating to the Melville Consolidated Group or, with respect to Other Taxes,
any group which includes at least one member of the Melville Group and at
least one member of the Footstar Group, which are the subject of an audit or
investigation, or are the subject of any proceeding or litigation, and which
may affect any Tax attribute of Melville, Footstar, the Melville Group, the
Footstar Group or any Post-Distribution Affiliate of Melville or Footstar
(including, but not limited to, basis in an asset or the amount of earnings and
profits).
8. Audits and Contest.
(a) Notwithstanding anything in this Agreement to the contrary,
Melville shall have full control over all matters relating to any Federal Tax
return filed by the Melville Consolidated Group, any Consolidated State or
Unitary State Tax Return, any Other Tax Return (other than one relating solely
to the Footstar Group), or any Tax Proceeding relating to any Tax matters of
at least one member of the Melville Group. Except as provided in Section
8(b), Melville shall have absolute discretion with respect to any decisions to
be made, or the nature of any action to be taken, with respect to any matter
described in the preceding sentence.
(b) No settlement of any Tax Proceeding relating to any matter
which would cause a payment obligation under Sections 6(a) or 6(b) shall be
accepted or entered into by or on behalf of the party entitled to receive a
payment under either Section 6(a) or Section 6(b), whichever is applicable,
unless the party ultimately responsible for such payment under either Section
6(a) or Section 6(b), whichever is applicable (the "Indemnitor"), consents
thereto in writing (which consent shall not be unreasonably withheld). If
such consent is unreasonably withheld, all expenses relating to the contest of
such matter shall be borne by the Indemnitor, and otherwise they shall be
borne equally by the Indemnitor and the indemnified party. If the Indemnitor
does not respond to the indemnified party's request for consent within 30
days, the Indemnitor will be deemed to have consented to the settlement.
(c) The indemnified party agrees to give prompt notice to the
Indemnitor of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought hereunder.
The failure of the indemnified party to give notice as provided in this
Section 8(c) shall not relieve the Indemnitor of its obligations under this
Agreement, except to the extent that the Indemnitor is materially prejudiced
by such failure to give notice.
(d) With respect to Returns relating to Other Taxes solely
attributable to the Footstar Group, Footstar and its Post-Distribution
Affiliates shall have full control over all matters relating to any Tax
Proceeding in connection therewith. Footstar and its Post-Distribution
Affiliates shall have absolute discretion with respect to any decisions to be
made, or the nature of any action to be taken, with respect to any matter
described in the preceding sentence.
9. Payments.
All payments to be made hereunder shall be made in immediately
available funds. Except as otherwise provided, all payments required to be
made pursuant to this Agreement will be due 30 days after the receipt of
notice of such payment or, where no notice is required, 30 days after the
fixing of liability or the resolution of a dispute. Payments shall be deemed
made when received. Any payment that is not made when due shall bear interest
at the rate per annum determined, from time to time, under the provision of
Section 6621(a)(2) of the Code for each day until paid; provided, however,
that, if an obligation or the amount thereof is being disputed in good faith,
any payment required after resolution of such dispute shall bear interest at
Prime until and including the thirtieth day after such resolution. If,
pursuant to a Final Determination, any amount paid by Melville, Footstar or
their respective Post-Distribution Affiliates pursuant to this Agreement
results in any increased Tax liability or reduction of any Tax Asset of any
member of the Footstar Group, Footstar or its Post-Distribution Affiliates, or
the Melville Group, Melville or its Post-Distribution Affiliates,
respectively, then Melville or Footstar, as the case may be, shall indemnify
the other party and hold it harmless from any interest or penalty attributable
to such increased Tax liability or the reduction of such Tax asset and shall
pay to the other party, in addition to amounts otherwise owed, 50 percent of
the After-Tax Amount; provided, however, that with respect to any amount paid
pursuant to Section 3(d)(ii) (other than as a result of the use by the
Melville Consolidated Group of a Tax Asset of the Melville Group), Section
6(a)(ii) or (iii) or Section 6(b)(iii) or (iv), Melville or Footstar, as the
case may be, shall pay to the other party 100 percent of the After-Tax Amount.
10. Notices.
Any notice, demand, claim, or other communication under this
Agreement shall be in writing and shall be deemed to have been given upon the
delivery or mailing thereof, as the case may be, if delivered personally or
sent by certified mail, return receipt requested, postage prepaid, to the
parties at the following addresses (or at such other address as a party may
specify by notice to the other):
If to Melville, to:
Charles Conaway
1 CVS Drive
Woonsocket, RI 02895
James E. Alward
Michael Golub
67 Millbrook Street
Worcester, MA 01606
If to Footstar, to:
Carlos Alberini
Maureen Richards
933 MacArthur Boulevard
Mahwah, NJ 07430
Joseph Couture
67 Millbrook Street
Worcester, MA 01606
11. Costs and Expenses.
Except as expressly set forth in this Agreement, each party shall
bear its own costs and expenses incurred pursuant to this Agreement. For
purposes of this Agreement, "out-of-pocket" expenses shall include reasonable
attorney fees, accountant fees and other related professional fees and
disbursements.
12. Effectiveness; Termination and Survival.
This Agreement shall become effective upon the consummation of the
Distribution. Notwithstanding anything in this Agreement to the contrary,
this Agreement shall remain in effect and its provisions shall survive for the
full period of all applicable statutes of limitation (giving effect to any
extension, waiver or mitigation thereof).
13. Section Headings.
The headings contained in this Agreement are inserted for
convenience only and shall not constitute a part hereof or in any way affect
the meaning or interpretation of this Agreement.
14. Entire Agreement; Amendments and Waivers.
(a) Entire Agreement. This Agreement and the exhibits hereto
contains the entire understanding of the parties hereto with respect to the
subject matter contained herein. No alteration, amendment, modification, or
waiver of any of the terms of this Agreement shall be valid unless made by an
instrument signed by an authorized officer of Melville and Footstar, or in the
case of a waiver, by the party against whom the waiver is to be effective.
(b) Waiver. No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver hereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any right, power or privilege.
15. Governing Law and Interpretation. This Agreement has been
made in and shall be construed and enforced in accordance with the laws of the
Commonwealth of Massachusetts.
16. Dispute Resolution. If the parties hereto are unable to
resolve any disagreement or dispute relating to this Agreement within 20 days,
such disagreement or dispute shall be resolved by a nationally recognized law
firm or accounting firm expert in Tax matters that is mutually acceptable to
the parties hereto (a "Referee"). A Referee so chosen shall resolve any such
disagreement pursuant to such procedures as it may deem advisable. Any such
resolution shall be binding on the parties hereto without further recourse.
Except as otherwise provided herein, the costs of any Referee shall be
apportioned between Melville and Footstar as determined by such Referee in such
manner as the Referee deems reasonable, taking into account the circumstances
of the dispute, the conduct of the parties and the result of the dispute.
17. Counterparts.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
18. Assignments; Third Party Beneficiaries.
Except as provided below, this Agreement shall be binding upon and shall inure
only to the benefit of the parties hereto and their respective successors and
assigns. This Agreement is not intended to benefit any person other than the
parties hereto and such successors and assigns, and no such other person shall
be a third party beneficiary hereof. If, during the period beginning on the
Distribution Date and ending upon the expiration of all statute of limitations
periods applicable to Pre-Distribution Periods, any corporation becomes an
Affiliate of either Melville or Footstar, as the case may be, then upon the
request of either Footstar or Melville, as the case may be, the other party
shall provide evidence of such Affiliate's agreement to be bound by the terms
of this Agreement. During the period beginning on the Distribution Date and
ending upon the expiration of all statute of limitations periods applicable to
Pre-Distribution Periods, no entity shall be entitled to acquire a controlling
interest in Melville or Footstar unless such entity agrees to be bound by the
terms of this Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first written above.
Melville on its own behalf and on
behalf of its Post-Distribution
Affiliates.
By: /s/ Charles Conaway
Title: Chief Financial Officer
Bob's, Inc. on its own behalf and on
behalf of the Melville Post-Distribution
Affiliates in the Bob's chain.
By: /s/ Michael Friedheim
Title: Chairman/ Chief Executive Officer
Linens 'n Things, Inc. on its own behalf and on
behalf of the Melville Post-Distribution
Affiliates in the Linens 'n Things chain.
By: /s/ Norman Axelrod
Title: Chief Executive Officer & President
Footstar on its own behalf and on
behalf of its Post-Distribution
Affiliates.
By: /s/ Carlos Alberini
Title: Chief Financial Officer
Footaction, Inc. on its own behalf and on behalf
of the Footstar Post-Distribution Affiliates in
the Footaction, Thom McAn and Meldisco chains.
By: /s/ Donald V. Roach
Title: Vice President
Exhibit A
1. The Footstar Group's share of any Pre-Distribution Consolidated Federal
or Consolidated State Tax liability shall be, with respect to such
Federal or Consolidated State Taxes, as applicable, calculated as if
Footstar were the parent of a group filing its own consolidated return
for all Pre-Distribution Periods; provided, however, that (i) income,
deductions, credits and losses shall be computed in a manner consistent
with past practices, (ii) the applicable Tax rate shall be the
appropriate maximum statutory rate in effect during the relevant year,
(iii) in no event shall the Footstar Group's share of any Consolidated
Federal or Consolidated State Tax liability exceed the amount that would
have constituted the Footstar Group's share of such liability if such
share had been calculated in accordance with the allocation principles
set forth in Treas. Reg. Section 1.1552-1(a)(2) and Treas. Reg. Section
1.1502-33(d)(2)(ii) as in effect prior to Treasury Decision 8597, except
to the extent consistent with past practice and (iv) notwithstanding
anything to the contrary in this Agreement, with respect to all
Pre-Distribution Tax Periods, Footstar and its Post-Distribution
Affiliates will be liable for all Taxes attributable to the Related
Footwear Business and MEP, calculated in accordance with past practice.
Notwithstanding anything to the contrary in this Agreement, any
deduction attributable to the exercise of an option to acquire Melville
stock by a person who is an employee of a member of the Footstar Group
at the time of such exercise shall be treated as a deduction allocable
to the member of the Footstar Group employing such person.
2. For purposes of paragraph 1 above, "Tax liability" (1) shall exclude any
liability for the payment of alternative minimum tax; and (2) shall
refer to an actual out-of-pocket payment to any Taxing Authority, after
taking into account the utilization of net operating losses and any
other Tax Assets.
3. Any alternative minimum Tax liability (and any Tax Assets attributable
to such liability) and any environmental Tax imposed under Section 59A
of the Code shall be allocated among the members of the Melville
Consolidated Group in accordance with the formulas referenced in
Proposed Treasury Regulation Section 1.1502-5(b)(6).
4. For all Pre-Distribution Periods, Melville shall have the right, in its
sole discretion, to elect (in an original or an amended return) to
deduct currently any Taxes of foreign countries and of possessions of
the United States. In the event that Melville elects not to deduct
currently such Taxes but instead to elect to take a foreign tax credit
under the provisions of Part III of Subchapter N of the Code, any
consolidated unused foreign tax credit of the Melville Consolidated
Group shall be apportioned to the members of such group pursuant to
Treas. Reg. Section 1.1502-79(d).
5. Any interest imposed in connection with any Tax liability shall be
allocated in the same manner as the underlying Tax liability, as
provided above.
6. Any penalty imposed in connection with any Tax liability shall be the
responsibility of the party whose action or inaction resulted in the
imposition of such penalty; provided, however, that if such a
determination cannot be made, the penalty shall be allocated in the same
manner as the underlying Tax liability, as provided above.
Exhibit B
1. The Footstar Group's share of any Pre-Distribution Unitary State Tax
Liability shall be, with respect to each State, the aggregate amount of
Unitary State Tax Liability of all members of the Footstar Group that
are members of the relevant Melville Consolidated Group. A member's
liability for its share of Pre-Distribution Unitary State Tax shall be
determined in accordance with paragraph 3 of this Exhibit B; provided,
however, that (i) income, deductions, credits and losses shall be
computed in a manner consistent with past practices, (ii) credits and
any minimum taxes shall be allocated to the member responsible for the
generation of such credit or taxes, and (iii) notwithstanding anything to
the contrary in this Agreement, any deduction attributable to the
exercise of an option to acquire Melville stock by a person who is an
employee of a member of the Footstar Group at the time of such exercise
shall be treated as a deduction allocable to the member of the Footstar
Group employing such person.
2. The Footstar Group's share of any Pre-Distribution Unitary State Tax
Assets shall be, with respect to each State, the aggregate amount of
Unitary State Tax Assets of all members of the Footstar Group. A
member's share of such Unitary State Tax Assets shall be determined in
accordance with paragraph 3 of this Exhibit B.
3. A member of the Footstar Group's share of any Pre-Distribution Unitary
State Tax Liability or Pre-Distribution Unitary State Tax Asset shall be
the product of (i) such Unitary State Tax Liability or Unitary State Tax
Asset, as the case may be, and (ii) the percentage of the numerator used
in determining the apportionment percentage of the Melville Consolidated
Group for such Unitary State which is attributable to such member of the
Footstar Group.
4. With respect to all Pre-Distribution Tax Periods, Footstar and its
Post-Distribution Affiliates will be liable for all Unitary State Taxes
attributable to the Retail Footwear Businesses or MEP, calculated in
accordance with past practice.
5. Any interest imposed in connection with any Tax liability shall be
allocated in the same manner as the underlying Tax liability, as
provided above.
6. Any penalty imposed in connection with any Tax liability shall be the
responsibility of the party whose action or inaction resulted in the
imposition of such penalty; provided, however, that if such a
determination cannot be made, the penalty shall be allocated in the same
manner as the underlying Tax liability, as provided above.
