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

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