EXHIBIT 10.1
Agreement re: Settlement of Kmart Assumption and Conversion Issues
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Footstar, Inc., as debtor-in-possession ("Footstar"), and Kmart
Corporation ("Kmart"), by their signatures below, hereby agree to be bound by
the following agreement with respect to the assumption, interpretation and
amendment of the Master Agreement, dated as of June 9, 1995, between them. The
parties acknowledge and agree that this Agreement shall be subject to the
approval of the United States Bankruptcy Court for the Southern District of New
York and of the boards of directors of the respective parties. The parties
anticipate that a more formal agreement based upon this Agreement will be
developed and submitted to the Bankruptcy Court. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to them in the Master
Agreement.
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CURE The cure amount will be fixed at $45 million
(inclusive of all claims of Kmart, including,
without limitation, capital, retained earnings,
and retained deficit of all stores that were no
longer in operation as of January 1, 2005 and any
dividend/excess fee), to be paid upon entry of the
order approving the settlement described herein
(the "Approval Date").
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APPROVAL DATE The Approval Date shall occur no later than
September 1, 2005.
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TRIAL DATE The parties will jointly notify the Court on
Tuesday, July 5, 2005 that the trial will not
proceed on July 18, 2005. In the event either
party does not obtain board approval of this
Agreement by July 8, 2005, the parties will
jointly request from the Court the first available
trial date after August 8, 2005. In the event the
Court declines to approve the final agreement
reflecting this Agreement (the "Disapproval
Date"), the parties will jointly seek the first
available trial date that is at least thirty (30)
days after the Disapproval Date.
If the Approval Date does not occur by September
1, 2005 and the parties do not mutually agree to
extend such date (the "Expiration Date"), the
parties will seek the first available trial date
that is at least 30 days after the Expiration
Date.
All appellate proceedings between the parties
shall be adjourned consistent with the foregoing
schedule.
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CONSOLIDA-TION OF STORE The Meldisco subsidiaries will be consolidated.
SUBSIDIARIES
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ELIMINATION OF EQUITY
INTERESTS Kmart's equity interests in the Meldisco
subsidiaries will be eliminated effective as of
January 2, 2005. The Meldisco subsidiaries shall
be wholly owned by Footstar, and Kmart will not
share in the profits or losses of these
subsidiaries from and after that date. Kmart will
no longer have the right to borrow against
profits. Kmart will have no claim or right to
return of capital, nor any obligation in respect
of a capital deficiency, for stores in existence
as of the Approval Date (the "Existing Stores").
Notwithstanding the foregoing, Kmart shall have
one claim (each a "Capital Claim") against
Footstar in respect of each of the Existing Stores
that is operating as of the Approval Date (1) in
an amount equal to $11,000 per store. The Capital
Claim relating to each Existing Store shall be due
and payable upon the closing or conversion of such
Existing Store; provided, however, that Capital
Claims not yet due and payable as of the time a
Termination Event (as defined below) occurs or at
the time a Buy-Out (as defined below) occurs shall
be waived in their entirety upon the occurrence of
such Termination Event or Buy-Out. Kmart shall
have the right to offset amounts due and owing in
respect of the Capital Claims against the Weekly
Sales Remittance.
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(1) For avoidance of doubt, there shall be no Capital Claim in respect of
stores that have closed or have commenced conversion prior to the Approval
Date.
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FEES Retain Miscellaneous Expense Fee ("MEF") but fix
MEF at $23,500 per store per year; MEF payable in
monthly installments of $1,958.33 per store by
deduction from Weekly Sales Remittance.
Eliminate all other fees and replace with a single
fee (the "Adjusted License Fee") equal to 14.625%
of Gross Sales. The Adjusted License Fee shall be
withheld from each Weekly Sales Remittance.
Kmart may deduct and withhold the Adjusted License
Fee from its Weekly Sales Remittance to Meldisco.
In addition, on or prior to the Approval Date, the
parties will calculate the difference between (a)
the Adjusted License Fee, as the same would have
been calculated if in effect from January 2, 2005
until the Reference Date (as defined below), and
(b) the amount Footstar actually paid to Kmart
through Kmart's deductions from the Weekly Sales
Remittance (other than deductions in respect of
the MEF) from January 2, 2005 through the date of
the last Weekly Sales Remittance on or prior to
the Approval Date (the "Reference Date"). If the
amount Footstar actually paid is less than the
Adjusted License Fee, as the same would have been
calculated if in effect from January 2, 2005 until
the Approval Date, Footstar shall pay the
difference on the Approval Date. If the amount
Footstar actually paid is greater than the
Adjusted License Fee, as the same would have been
calculated if in effect from January 2, 2005 until
the Approval Date, Footstar shall be entitled to
offset the difference against the cure amount
payable on the Approval Date.
Kmart's audit and books and records inspection
rights will be limited to those records related to
inventory values in connection with any purchase
of inventory.
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TERMINATION RIGHTS The performance standards will be replaced by a
minimum sales test (the "Sales Test"), whereby
either Kmart or Footstar shall have the right to
terminate the Master Agreement in the event that
Gross Sales (as defined in the Master Agreement)
fall below $550 million/year (the "Sales
Threshold"); provided, however, that the Sales
Threshold shall be reduced by $400,000 for each
store that is closed or converted after the
Approval Date. The Sales Test shall be calculated
quarterly and measured by sales in the 4 quarters
immediately preceding the date of calculation.
In addition, Footstar shall have the unilateral
right to terminate the Master Agreement in the
event that either a) the number of Kmart stores
falls below 900, or b) Gross Sales fall below $450
million calculated quarterly and measured by sales
in the four quarters immediately preceding the
date of calculation.
In the event the Master Agreement is terminated
under any of the foregoing termination provisions
(such event, a "Termination Event"), Footstar will
vacate the remaining stores within 7 days. The
date that Footstar actually vacates the stores
subsequent to termination shall be the
"Termination Date".
In the event the Master Agreement is terminated
under any of such termination provisions,
(i) provided that (w) Footstar shall provide to
Kmart a complete set of pricing files for the
prior 6-month period, (x) Footstar shall not have,
in the 90 days prior to the Termination Date,
purchased or transferred any goods into or out of
inventory, other than in the ordinary course, or
marked up any inventory, (y) the inventory mix at
each store as of the date of termination shall be
comparable to the average mix at such store during
the same time period for the prior three years and
shall reflect ordinary course practice, and (z)
all inventory markdowns shall have been taken in
the ordinary course (and the pricing files shall
reflect such markdowns), Kmart shall purchase all
Shoemart inventory (including inventory that is on
order but excluding damaged, unsaleable and
Seasonal inventory) from Footstar at the Book
Value of such inventory as of the Termination
Date;
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(ii) at Kmart's sole option, the parties shall
enter into a transition services agreement for up
to 6 months during which time Footstar will assist
in the operation of the footwear business for
which Kmart shall pay to Footstar a service fee in
an amount that will cover all costs of providing
such services;
(iii) Footstar will otherwise lend such reasonable
assistance as requested by Kmart to assist in the
transition of the footwear business to Kmart; and
(iv) with respect to any stores in which a
footwear department shall continue to be operated
by Kmart (or an affiliate) following the
Termination Date and in which the footwear
department will be staffed by persons not already
employees of Kmart (or an affiliate) prior to the
Termination Date, Kmart shall consider the
employees of Footstar prior to the Termination
Date in the staffing of such footwear department
in a manner consistent with the consideration that
Sears gives to Kmart employees upon the conversion
of a Kmart store to Sears Essentials.
As used herein, "Seasonal" means that Kmart shall
not be required to purchase inventory more than
four months post-season.
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LIMITATION ON STORE
DISPOSITIONS As used herein, the term "Disposition" shall mean,
with respect to any Kmart store: (i) the sale to a
third party of such store; (ii) the closing of
such store for any reason, including, without
limitation, if the lease at such store expires
and/or is not renewed for any reason; (iii) the
conversion of such store to any nameplate or
format that results in the loss of the right of
Footstar to operate a footwear department in such
store (see "Extent of License," below) including,
without limitation, by way of sale, merger, or
business combination. The terms "Dispose" and
"Disposed" shall have corollary meanings.
Footstar will vacate stores that shall be Disposed
of by Kmart within 7 days after receipt of notice
(the "Vacate Date") of the applicable Disposition.
Provided that (x) Footstar shall not have, in the
90 days prior to the Vacate Date, purchased or
transferred any goods into or out of inventory of
the applicable store(s), other than in the
ordinary course, or marked up any such inventory,
(y) the inventory mix of the Disposed of store(s)
as of the Vacate Date shall reflect ordinary
course practice, and (z) all inventory markdowns
at the Disposed of store(s) shall have been taken
in the ordinary course, Kmart shall, on the Vacate
Date, purchase all inventory at such Disposed of
store(s), other than damaged, unsaleable and
Seasonal inventory, from Footstar for an amount
equal to the Book Value of such inventory (such
purchase, the "Inventory Buyout").
Kmart will agree not to Dispose of more than 85
existing Kmart stores in 2005, 150 existing Kmart
stores in 2006, and 160 Kmart stores per calendar
year in 2007 and 2008; provided, that Kmart will
be permitted to exceed such numbers of
Dispositions in any year subsequent to 2005 to the
extent that the actual number of Dispositions in
the years prior is less than the number of
Dispositions permitted in such years; provided,
further, that Kmart will not Dispose of more than
550 stores in the aggregate during the remaining
term of the Master Agreement. Notwithstanding any
of the foregoing limitations, Kmart will be
permitted to Dispose of any number of stores at
any time to the extent that it pays to Footstar,
in addition to the proceeds of the Inventory
Buyout, the Stipulated Loss Value of the
incremental stores Disposed of above the annual or
aggregate numbers permitted herein; the payment of
such Stipulated Loss Value shall be nonrefundable,
regardless of the number of Dispositions that take
place in subsequent periods. For the avoidance of
doubt, stores as to which the Stipulated Loss
Value is paid shall not be considered in the
calculation of the 550 store limitation.
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For purposes hereof, the "Stipulated Loss Value"
of a store shall mean an amount equal to $100,000
in 2005, $60,000 in 2006, $40,000 in 2007, and
$20,000 in 2008. The Stipulated Loss Value shall
not be payable in the event the agreements are
terminated in accordance with the above-referenced
termination rights.
With respect to any stores Disposed of and in
which a footwear department shall continue to be
operated by Kmart (or an affiliate) following the
date of Disposition and in which the footwear
department will be staffed by persons not already
employees of Kmart (or an affiliate) prior to the
date of Disposition, Kmart shall consider the
employees of Footstar prior to the date of
Disposition in the staffing of such footwear
department in a manner consistent with the
consideration that Sears gives to Kmart employees
upon the conversion of a Kmart store to Sears
Essentials.
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BUY-OUT On and as of December 31, 2008, Kmart shall
purchase the inventory in all remaining Existing
Stores (including inventory that is on order but
excluding damaged, unsaleable and Seasonal
inventory) from Footstar for an amount equal to
the Book Value of such inventory (the "Buy-Out")
as of such date, which shall become immediately
due and payable; provided, that (w) Footstar shall
provide to Kmart a complete set of pricing files
for the prior 6-month period, (x) Footstar shall
not have, (i) at any time prior to the Buy-Out,
purchased or transferred any goods into inventory
in contemplation of the Buy-Out, other than in the
ordinary course, (ii) purchased inventory for or
otherwise stocked any store at a level
disproportionately greater than the average level
of such store at the same time period for the
prior three years, or (iii) prior to the Buy-Out,
marked up any inventory, (y) the inventory mix at
each store as of the date of termination shall be
comparable to the average mix at such store during
the same time period for the prior three years and
shall reflect ordinary course practice, and (z)
all inventory markdowns shall have been taken in
the ordinary course (and the pricing files shall
reflect such markdowns),
Footstar will vacate the remaining stores and the
Master Agreement shall be terminated in its
entirety (other than those sections relating to
indemnities and choice of law) within 7 days of
the Buy-Out.
Upon the occurrence of the Buy-Out, with respect
to any stores in which a footwear department shall
continue to be operated by Kmart (or an affiliate)
following December 31, 2008, Kmart shall consider
the employees of Footstar prior to December 31,
2008 in the staffing of such footwear department.
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GENERAL PROVISIONS WITH
RESPECT TO KMART INVENTORY
PURCHASES With respect to any purchase of inventory by
Kmart, Kmart and Footstar shall each have the
right to require an actual physical count and
determination of the quantity of such inventory
and the qualification (e.g., damaged) of such
inventory for purchase, such count and
determination to be performed by RGIS or any other
mutually acceptable third party and paid for
equally by the parties.
As used herein with respect to inventory, the term
"Book Value" shall mean the book value of such
inventory calculated in accordance with GAAP,
applied on a consistent basis, but excluding
Footstar distribution and delivery costs.
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EXTENT OF LICENSE Footstar will acknowledge and agree that, subject
to the terms hereof, the Master Agreement does not
apply to any store, whether owned, leased, or
operated by Kmart, Sears, Xxxxxxx and Co. or any
affiliate of either, to the extent such store
(with the exception of the pharmacy) is operated
under any nameplate, whether now existing or
hereafter created, other than a nameplate
incorporating the xxxx "Kmart" in whole or in
part. Without limitation, Footstar will stipulate
that stores operated under the nameplates "Sears,"
"Sears Grand" and "Sears Essentials" are not
subject to the Master Agreement so long as the
Kmart service xxxx is not used therein (other than
with respect to the pharmacy and, as to the
pharmacy, only until the applicable Sears entity
obtains its own license).
Kmart will acknowledge that the expiration,
renewal or renegotiation of an existing lease will
be without prejudice to the right of Footstar to
remain in a continuing Kmart-branded store.
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STAFFING Footstar shall spend a minimum of 10% of Gross
Sales on staffing for the stores; provided, that
in no event shall the staffing in any store fall
below 40 hours per week.
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ADVERTISING Kmart shall allocate at least 52 square tab
weekend Roto pages per year to Footstar products.
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RULES AND REGULATIONS Rules and regulations under the Master Agreement
will not be modified in a manner inconsistent with
this term sheet; provided, that the Master
Agreement shall, to the extent not modified
hereby, remain in full force and effect, including
without limitation section 13.1.
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MUTUAL RELEASE Kmart agrees that the payments as set forth herein
are in full and complete satisfaction of any and
all claims Kmart has under the Master Agreement
through the date of assumption of the Master
Agreement. Each party agrees to release the other
party and its officers, directors, employees, and
professionals (and the officers, directors,
employees, and professionals of each party's
subsidiaries and affiliates) from any claims or
causes of action.
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COOPERATION The parties agree to cooperate in seeking prompt
approval of the Bankruptcy Court of the
transaction contemplated herein. Kmart agrees not
to object or otherwise interfere in Footstar's
disclosure statement approval process and
Footstar's plan of reorganization confirmation
process provided the foregoing is consistent with
the terms herein.
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In witness whereof, the parties have executed this Agreement on this
2nd day of July, 2005.
FOOTSTAR, INC.
/s/ Xxxx X. Xxxxxxx
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Xxxx X. Xxxxxxx
KMART CORPORATION
/s/ Xxxxxxx X. Xxxxxxx
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Xxxxxxx X. Xxxxxxx
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