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Section 2. Appointment of Agent/Liquidation Sale Laws/Approval Order .  (a) Effective upon the entry of the Approval Order, the Merchant hereby appoints the Agent, and the Agent hereby agrees to serve, as the Merchant’s exclusive agent for the limited purpose of conducting

 

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the Sale at the Stores and disposing of the Owned FF&E in the Stores in accordance with the terms and conditions of this Agreement.

 

(b)                                  On July 3, 2008 Merchant filed an expedited motion with the Bankruptcy Court, for entry of an order approving this Agreement and authorizing Merchant and Agent to conduct the Sale in accordance with the terms hereof (the “ Approval Order ”).  The Approval Order shall provide, in a form reasonably satisfactory to the Merchant and Agent, inter alia , that (i) this Agreement (and each of the transactions contemplated hereby) is approved in its entirety; (ii) Merchant and Agent shall be authorized to continue to take any and all actions as may be necessary or desirable to implement this Agreement and each of the transactions contemplated hereby; (iii) Agent shall be entitled to sell all Merchandise hereunder free and clear of all liens, claims or encumbrances thereon, with any presently existing liens encumbering all or any portion of the Merchandise or the Proceeds attaching only to the Guaranteed Amount and other amounts to be received by Merchant under this Agreement; (iv) Agent shall have the right to use the Stores and all related Store services, furniture, fixtures, equipment and other assets of Merchant as designated hereunder for the purpose of conducting the Sale, free of any interference from any entity or person subject to compliance with the Sale Guidelines and Approval Order with respect to the Assets; (v) Agent, as agent for Merchant, is authorized to conduct, advertise, post signs and otherwise promote the Sale as a “store closing,” “sale on everything,” “everything must go,” or similar themed sale, in accordance with the Sale Guidelines (as the same may be modified and approved by the Bankruptcy Court) and without compliance with the Liquidation Sale Laws, subject to compliance with the Sale Guidelines and Approval Order; provided , however , Agent shall not advertise the Sale as a “going-out-of-business sale”; (vi) Agent shall be granted a limited license and right to use until the Sale Termination Date the trade names, logos and customer lists relating to and used in connection with the operation of the Stores, solely for the purpose of advertising the Sale in accordance with the terms of this Agreement; (vii) all newspapers and other advertising media in which the Sale is advertised shall be directed to accept the Approval Order as binding and to allow Merchant and Agent to consummate the transactions provided for in this Agreement, including, without limitation, the conducting and advertising of the Sale in the manner contemplated by this Agreement; (viii) all utilities, landlords, creditors and all persons acting for or on their behalf shall not interfere with or otherwise impede the conduct of the Sale, institute any action in any court (other than in the Bankruptcy Court) or before any administrative body which in any way directly or indirectly interferes with or obstructs or otherwise impedes the conduct of the Sale; (ix) the Bankruptcy Court shall retain jurisdiction over the parties to enforce this Agreement; (x) Agent shall not be liable for any claims against the Merchant other than as expressly provided for in this Agreement; (xi) to the extent the Agent is owed the Adjustment Amount, and the Lenders received the Adjustment Amount, then the Lenders shall promptly, upon the written request of the Agent, disgorge and remit the Adjustment Amount to the Agent; and (xii) Agent shall be granted a valid, binding, enforceable and perfected security interest in the Merchandise and the Proceeds as provided for in Section 16 hereof.  Subject to the rights and limitations set forth in that certain Intercreditor Agreement, dated February 14, 2006 (as amended by that certain Joinder and Acknowledgement Agreement dated October 24, 2007, the “ Intercreditor Agreement ”), and the interim order, dated May 2, 2008, authorizing Merchant to, inter alia, obtain postpetition secured financing and use cash collateral (the “ Interim DIP Order ”, and

 

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together with any subsequent or final order approving same, the “ DIP Order ”), any Approval Order shall be in form and substance reasonably acceptable to General Electric Capital Corporation (“ GECC ”), as agent for itself and Merchant’s other secured lenders (collectively, the “ Lenders ”), the Ad Hoc Committee (the “ Ad Hoc Noteholder Committee ”) of Holders (the “ Noteholders ”) of Senior Floating Rate Notes due 2014 issued by Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc. (the “ Notes ”) and The Bank of New York (the “ Indenture Trustee ”), as collateral agent and trustee under the indenture, dated as of February 14, 2006, relating to the Notes.

 

(c)           Subject to entry of the Approval Order, Agent shall be authorized to advertise the Sale as a “store closing,” “sale on everything,” “everything must go,” or similar-themed sale, and the Approval Order shall provide that Agent shall be required to comply with applicable federal, state and local laws, regulations and ordinances, including, without limitation, all laws and regulations relating to advertising, permitting, privacy, consumer protection, occupational health and safety and the environment, together with all applicable statutes, rules, regulations and orders of, and applicable restrictions imposed by, governmental authorities (collectively, the “ Applicable General Laws ”), other than all applicable laws, rules and regulations in respect of “going out of business,” “store closing” or similar-themed sales (collectively, the “ Liquidation Sale Laws ”), provided that such Sale is conducted in accordance with the terms of this Agreement, the Sale Guidelines and Approval Order.

 

Section 3.                                             Consideration to Merchant and Agent .

 

3.1                                                          Payments to Merchant .

 

(a)                                   As a guaranty of Agent’s performance hereunder, Agent guarantees that Merchant shall receive one hundred two and six tenths of one percent (102.6%) (the “ Guaranty Percentage ”) of the aggregate Cost Value of the Merchandise included in the Sale (the “ Guaranteed Amount ”), which Guaranteed Amount shall be paid at such time and in such manner as shall hereinafter be provided

 

(b)                                  To the extent that Proceeds exceed the sum of (x) the Guaranteed Amount, (y) Expenses of the Sale and (z) five percent (5%) of the aggregate Cost Value of the Merchandise included in the Sale (the “ Agent’s Fee ”) (the sum of (x), (y) and (z), the “ Sharing Threshold ”), then all remaining Proceeds of the Sale above the Sharing Threshold shall be shared fifty percent (50%) to Merchant and fifty percent (50%) to Agent.  All amounts, if any, to be received by Merchant from Proceeds in excess of the Sharing Threshold shall be referred to as the “ Recovery Amount .”  Agent shall pay to Merchant the Guaranteed Amount and the Recovery Amount, if any, in the manner and at the times specified in Section 3.3 below.  The Guaranteed Amount and the Recovery Amount will be calculated based upon the aggregate Cost Value of the Merchandise as determined by (A) the final certified report of the Inventory Taking Service after verification and reconciliation thereof by Agent and Merchant, (B) the aggregate Cost Value of the Distribution Center Merchandise and On-Order Merchandise included in the Sale, and (C) the aggregate Cost Value of the Merchandise subject to Gross Rings, as adjusted for shrinkage per this Agreement.   To the extent that Merchant is entitled to receive a Recovery

 

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Amount from Proceeds, Agent shall pay such Recovery Amount as part of the Final Reconciliation under Section 8.7, as soon as commercially reasonable after the Sale Termination Date.

 

(c)                                   The Guaranty Percentage has been fixed based upon the aggregate Cost Value of the Merchandise, excluding Additional Nate Berkus Merchandise, Excess On-Going Store Merchandise, and Additional Wamsutta Merchandise (collectively the “ Additional Transfer Merchandise ”), and without taking into account the Global Inventory Adjustment, being not less than $55,000,000 (the “ Merchandise Threshold ”).  To the extent that the aggregate Cost Value of the Merchandise included in the Sale, without taking into account the Global Inventory Adjustment, is less than the Merchandise Threshold, the Guaranty Percentage shall be adjusted in accordance with Exhibit 3.1(c)  annexed hereto (in addition to any adjustment applicable pursuant to section 11.1(m) hereof), as and where applicable.  In lieu of the foregoing adjustment to the Guaranty Percentage, Merchant may, at its election, transfer into the Stores additional goods acceptable to Agent with respect to mix, balance, quality, pricing and margin, at Merchant’s expense, to meet the minimum threshold (the “ Transferred Goods ”) which Transferred Goods shall be included as Merchandise; provided however , within 48 hours of the completion of the Inventory Taking in the Stores and the selection of the Transferred Goods, Agent shall provide Merchant with  written notice designating the Store locations to which Merchant shall ship such Transferred Goods.  Irrespective of the achievement of the Merchandise Threshold, the Merchant may also transfer such other finished goods inventory to the Stores as Agent shall agree, and such inventory shall be deemed to be Transferred Goods for all purposes of this Agreement.

 

3.2                                  Compensation to Agent .  Subject to entry of the Approval Order:

 

(a)                                   Agent shall receive, as its compensation for services rendered to Merchant, the Agent’s Fee, plus all remaining Proceeds of the Sale after payment of the Guaranteed Amount, Expenses of the Sale, and the Recovery Amount, if any, and all other amounts payable to Merchant from Proceeds hereunder.  Pursuant to Section 15.9, the Agent shall also be entitled to receive a commission based on the net proceeds of the sale of FF&E.

 

(b)                                  All Merchandise remaining at the Sale Termination Date (the “ Remaining Merchandise ”) shall become the property of Agent, free and clear of all liens, claims and encumbrances of any kind or nature, subject to Merchant’s right to payment of the Recovery Amount, if any, and any other amount owing hereunder, and the proceeds received by Agent from the disposition, in a commercially reasonable manner, of such unsold Merchandise shall constitute Proceeds hereunder.  Notwithstanding the foregoing, Agent shall exercise commercially reasonable efforts to dispose of all of the Merchandise during the Sale Term.

 

3.3                                  Time of Payments .

 

(a)                                   On the first business day following issuance of the Approval Order (the “ Payment Date ”), Agent shall pay to Merchant an amount (the “ Initial Guaranty Payment ”) equal to ninety percent (90%) of the product of (i) the Guaranty Percentage and the estimated aggregate Cost Value of the Merchandise to be included in the Sale as reflected on Merchant’s

 

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books and records on the last business day immediately preceding the Sale Commencement Date (the “ Estimated Guaranteed Amount ”) by wire transfer to the account designated by GECC prior to the Payment Date (the “ Lenders’ Designated Account) .  The balance of the Guaranteed Amount, if any, shall be paid by Agent by wire transfer to the account designated by GECC on the earlier of (i) the second business day following the issuance of the final report of the aggregate Cost Value of the Merchandise included in the Sale by the Inventory Taking Service, after review, reconciliation and verification thereof by Agent and Merchant in consultation with Lenders, (the “ Final Inventory Report ”); provided , however , that Merchant and Agent shall exercise reasonable best efforts to reconcile the Inventory Taking within ten (10) days after its completion and (ii) the date that is thirty (30) days after the Sale Commencement Date, in which case the payment shall be of the undisputed balance of the Guaranteed Amount.  In the event that the Final Inventory Report is issued after payment of the undisputed portion of the Guaranteed Amount, or in the event that the Initial Guaranty Payment exceeds the Guaranteed Amount, the Agent or Merchant, as the case may be, shall pay to the Merchant or Agent, as the case may be, the amount (the “ Adjustment Amount ”) by which the actual Guaranteed Amount exceeds or is less than the sum of the Initial Guaranty Payment and the undisputed balance of the Guaranteed Amount actually paid as set forth above, within three (3) business days after the Final Inventory Report has been issued.   To the extent that Merchant is entitled to receive a Recovery Amount from Proceeds, Agent shall pay such Recovery Amount as part of the Final Reconciliation under Section 8.7, as soon as commercially reasonable after the Sale Termination Date.  To the extent that the Agent is owed the Adjustment Amount, and the Lenders received the Adjustment Amount, then the Lenders shall promptly, upon the written request of Agent, disgorge and remit the Adjustment Amount to Agent.

 

 (b)                               All amounts required to be paid by Agent or Merchant under any provision of this Agreement shall be made by wire transfer of immediately available funds which shall be wired by Agent or Merchant, as applicable, no later as 2:00 p.m. (Eastern Time) on the date that such payment is due; provided , however , that all of the information necessary to complete the wire transfer has been received by Agent or Merchant, as applicable, by 10:00 a.m. (Eastern Time) on the date that such payment is due.  In the event that the date on which any such payment is due is not a business day, then such payment shall be made by wire transfer on the next business day.

 

                                                3.4                                  Security .  In order to secure the Agent’s obligations under this Agreement, in respect of (x) the payment of the unpaid portion of the Guaranteed Amount and (y) Expenses of the Sale, on the Payment Date, Agent shall furnish Merchant an irrevocable standby Letter(s) of Credit naming GECC and Merchant as co-beneficiaries (the “ Beneficiaries ”) in the aggregate original face amount equal to the difference between the Estimated Guaranteed Amount and the Initial Guaranty Payment, plus three (3) weeks’ estimated Expenses that Merchant pays in the ordinary course, which shall be substantially in the form of Exhibit 3.4 hereof (collectively, the “ Letter of Credit ”).  The Letter of Credit shall have an expiration date of no earlier than sixty days after the Sale Termination Date.  Unless the parties shall have mutually agreed that they have completed the final reconciliation and verification of the Final Inventory Report under this Agreement, then, at least thirty (30) days prior to the initial or any subsequent expiration date, the Beneficiaries shall receive an amendment to the Letter of Credit solely extending (or further

 

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extending, as the case may be) the expiration date by at least sixty (60) days.  If the Beneficiaries fail to receive such amendment to the Letter of Credit no later than thirty (30) days before the expiration date, then all amounts hereunder shall become immediately due and payable and the Beneficiaries shall be permitted to draw under the Letter of Credit in payment of amounts owed and the Beneficiaries shall hold the balance of the amount drawn under the Letter of Credit as security for amounts that may become due and payable to Merchant.  At Agent’s request, the Beneficiaries shall take all actions reasonably required to reduce the amount available to be drawn under the Letter of Credit by amounts credited against the Guaranteed Amount; provided , however , that the Letter of Credit shall not be reduced below three (3) weeks of estimated Expenses of the Sale.  In the event that Agent, after receipt of five (5) days’ notice (which notice shall not be required if Agent or any member of Agent shall be a debtor under title 11, United States Code), fails to pay the Guaranteed Amount, or portion thereof, or any Expenses of the Sale when due, GECC, individually, or the Beneficiaries, collectively, may draw on the Letter of Credit in an amount equal to the unpaid, past due amount of the Guaranteed Amount or Expenses that is not the subject of a reasonable dispute.

 

Section 4.                                             Expenses of the Sale .

 

4.1                                  Expenses .  Agent shall be unconditionally responsible for all Expenses incurred in conducting the Sale during the Sale Term, which expenses shall be paid by Agent in accordance with Section 4.2 below.  As used herein, “ Expenses ” shall mean the Store-level operating expenses of the Sale which arise during the Sale Term set forth below:

 

(a)                                   all payroll and commissions, if applicable, for all Retained Employees used in conducting the Sale for actual days/hours worked during the Sale Term;

 

(b)                                  any amounts payable by Merchant for benefits for Retained Employees (including FICA, unemployment taxes, workers’ compensation and healthcare insurance, and vacation benefits that accrue during the Sale Term, but excluding Excluded Benefits) for Retained Employees used in the Sale, in an amount equal to 21.6% of the aggregate base payroll for all Retained Employees in the Stores (the “ Benefits Cap ”);

 

(c)                                   costs of all security in the Stores (to the extent customarily provided in the Stores) including, without limitation, security systems, courier and guard service, building alarm service and alarm service maintenance;

 

(d)                                  50% of the fees and costs of the Inventory Taking Service to conduct the Inventory Taking at the Stores; provided that Merchant shall be responsible for the actual payroll and related costs for the Retained Employees who work at a Store during the Inventory Taking at such Inventoried Location;

 

(e)                                   Retention Bonuses for Retained Employees, as provided for in Section 9.4 below;

 

(f)                                     [intentionally omitted]

 

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(g)                                  advertising and direct mailings relating to the Sale, and Store interior and exterior signage and banners relating to the Sale;

 

(h)                                  local and long-distance telephone expenses incurred at the Stores;

 

 

(i)                                      credit card fees, chargebacks and discounts with respect to Merchandise sold in the Sale;

 

(j)                                      bank service charges (for Store and corporate accounts), check guarantee fees, and bad check expenses to the extent attributable to the Sale;

 

(k)                                   costs for additional Supplies used at the Stores;

 

(l)                                      all fees and charges required to comply with Applicable General Laws in connection with the Sale;

 

(m)                                Store cash theft and other store cash shortfalls in the registers;

 

(n)                                  any and all costs relating to the processing, transfer and consolidation of Merchandise between and among the Stores, including delivery and freight costs, it being understood that Agent shall be responsible for coordinating such transfer of Merchandise;

 

(o)                                  housekeeping and cleaning expenses related to the Stores;

 

(p)                                  Store trash and snow removal;

 

(q)                                  on-site supervision of the Stores, including base fees and bonuses of Agent’s field personnel, travel to and from the Stores and incidental out-of-pocket and commercially reasonable travel expenses relating thereto;

 

(r)                                     postage, courier and overnight mail charges to and from or among the Stores and central office to the extent relating to the Sale;

 

(s)                                   actual Occupancy Expenses for the Stores on a per location and per diem basis in an amount equal to the per Store per diem amount set forth on Exhibit 4.1(s)  hereto;

 

(t)                                     Central Service Expenses equal to $10,000 per week;

 

(u)                                  Agent’s actual cost of capital (including Letter of Credit fees); and

 

(v)                                  Agent’s reasonable out-of-pocket costs and expenses, including but not limited to, legal fees and expenses, incurred in connection with the review of data, preparation, negotiation and execution of this Agreement, the Approval Order and any ancillary documents, in an amount not to exceed $125,000.

 

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Notwithstanding anything herein to the contrary, to the extent that any Expense listed in Section 4.1 is also included on Exhibit 4.1(s) , then Exhibit 4.1(s)  shall control, and such Expenses shall not be double counted.

 

As used herein, the following terms have the following respective meanings:

 

(i)                                      “ Central Service Expenses ” means costs and expenses for Merchant’s central administrative services necessary for the Sale, including, but not limited to, MIS services, payroll processing, cash reconciliation, inventory processing and handling and data processing and reporting.

 

(ii)                                   “ Excluded Benefits ” means benefits in excess of the Benefits Cap.

 

(iii)                                “ Occupancy Expenses ” means base rent, percentage rent, HVAC, utilities, CAM, storage costs, real estate and use taxes, merchant’s association dues and expenses, , a pro rata portion of property insurance attributable to the Merchandise subject to the Sale and a pro rata portion of comprehensive public liability insurance attributable to the Stores personal property leases (including, without limitation, point of sale equipment), cash register maintenance, building maintenance and rental for furniture, fixtures and equipment, all of the foregoing as categorized and reflected on Exhibit 4.1(s)  hereto.

 

“Expenses” shall not include: (i) Excluded Benefits; (ii) Central Service Expenses, except as provided in Section 4.1(t); (iii) Distribution Center Expenses; (iv) Occupancy Expenses (including any portion of the percentage rent obligations allocable to the sale of Merchandise during the Sale under applicable leases or occupancy agreements, except as provided in Section 4.1(s); (v) expenses of the type set forth in 4.1(a) – (u) above to the extent the same shall not have been approved in advance by Agent; and (vi) any other costs, expenses or liabilities payable by Merchant not provided for herein.

 

4.2                                  Payment of Expenses .  Effective from and after entry of the Approval Order:

 

(a)                                   Agent shall be responsible for the payment of all Expenses, whether or not there are sufficient Proceeds collected to pay such Expenses after the payment of the Guaranteed Amount.  All Expenses incurred during each week of the Sale (i.e. Sunday through Saturday) shall be paid by Agent to or on behalf of Merchant, or paid by Merchant and thereafter reimbursed by Agent as provided for herein, immediately following the weekly Sale reconciliation by Merchant and Agent pursuant to Section 8.7 below; provided , however , in the event that the actual amount of an expense is unavailable on the date of the reconciliation (such as payroll), Merchant and Agent shall agree to an estimate of such amounts, which amounts will be reconciled once the actual amount of such Expense becomes available.  Agent and/or Merchant may review or audit the Expenses at any time.

 

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(b)                                  Notwithstanding anything herein to the contrary, (i) to the extent that Proceeds are insufficient, Merchant shall not be required to fund or otherwise pay any Expenses of Sale and (ii) without limitation on Expenses that may be funded in advance by Agent at Merchant’s reasonable request, to the extent that Proceeds are insufficient, Agent shall fund, in advance, all payroll and related expenses for Retained Employees at least two (2) business days prior to the date that such payments are due by Merchant.

 

Section 5.                                             Inventory Valuation; Merchandise .

 

5.1                                  Inventory Taking .

 

(a)                                   Subject to the provisions of this paragraph, the parties have agreed to use the current book value of inventory as of the Sale Commencement Date, to determine the aggregate Cost Value of the Merchandise located in the Stores on the Sale Commencement Date in accordance with this Agreement.  In order to test the validity of the aggregate Cost Value of the Merchandise as reflected on Merchant’s current books and records, on or within five (5) days after the Sale Commencement Date (the “ Inventory Completion Date”) , Merchant and Agent shall cause to be taken an SKU physical inventory (the “ Inventory Taking ”) of the Merchandise located in fifty percent (50%) of the Stores (and 50% of the Additional Stores, to the extent Merchant exercises the Additional Stores Inclusion Option, each with a representative sampling of stores located in each district (each a “ Test Store ” and collectively, the “ Test Stores ”), which Test Stores shall be jointly selected by Merchant and Agent. (The date of the Inventory Taking at each Test Store shall be referred to as the “ Inventory Date ” for such Test Store).  Merchant and Agent shall jointly employ RGIS or another mutually acceptable inventory taking service to conduct the Inventory Taking (and, if applicable, the Additional Inventory Taking, as defined below) in accordance with procedures set forth on Exhibit 5.1 annexed hereto.

 

(b)                                  The results of the Inventory Taking at the Test Stores and the Additional Test Stores, if any (the “ Test Store Results ”) shall be used to determine any adjustment as may be required to the calculation of the aggregate Cost Value of the Merchandise located in the Stores on the Sale Commencement Date, as follows:

 

(i)                                      for purposes of calculating the aggregate Cost Value of the Merchandise at the Test Stores and Additional Test Stores, if any (collectively, the “ Inventoried Stores ”), the actual Test Store Results for the Inventoried Stores, as adjusted by Gross Rings for the period between the Sale Commencement Date and the applicable Inventory Date (the “ Gross Rings Period ”);

 

(ii)                                   for purposes of calculating the aggregate Cost Value of the Merchandise at the Stores that do not constitute Inventoried Stores (the “Non-Inventoried Stores ”), the actual Test Store Results at the Inventoried Stores, shall be compared to the “roll-forward” book value of the Merchandise at the Inventoried Stores, as of the Sale Commencement Date (i.e Gross Rings and receipts at each of the Stores during the Gross Rings Period) (the “Adjusted Book Inventory”), and an average variance shall be calculated (the “ Variance ”), and the Variance shall be applied to adjust Adjusted Book Inventory of the  Merchandise located at the Non-Inventoried Stores; provided however ; for the purposes of calculating the Variance, the

 

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Inventoried Stores having the results from the three Stores with highest and three Stores with the lowest variance percentage shall be excluded.  In the event that the initial Variance at the Inventoried Stores is greater than  six percent (6%) of the current book value of the Merchandise in the Inventoried Stores, then either Merchant or Agent shall have the right to request an Inventory Taking at additional Stores (the “ Additional Test Stores ”, to be mutually and reasonably agreed upon by the parties (the “ Additional Inventory Taking ”), to establish whether an adjustment to the Variance is required, with the costs and fees associated with the Additional Inventory Taking, to be paid by the party requesting such Additional Inventory Taking

 

(c)                                   The Agent and Merchant agree that they will, and agree to cause their respective representatives to, cooperate and assist in the preparation and the calculation of the Aggregate Cost Value of the Merchandise included in the Sale, including, without limitation, the making available to the extent necessary of books, records, work papers and personnel.

 

(d)                                  Distribution Center Merchandise and On-Order Merchandise, if any delivered to the Stores after the Sale Commencement Date, shall be counted and reconciled within five Store business days after receipt of such goods in the Stores, in accordance with the procedures set forth herein; failure to report any variance between the received shipment and the applicable shipping documents (each a “ Shipping Variance ”) within such five Store business day period shall, absent manifest error, result in such receipts being automatically confirmed as received, consistent with the applicable shipping documents.  Merchant shall have two Distribution Center business days to verify a timely reported Shipping Variance (each a “ Shipping Variance Response ”);  failure to respond to an asserted Shipping Variance within such two Distribution Center business day period shall result in such Shipping Variance being deemed valid.  If Merchant timely issues a Shipping Variance Response that disputes the asserted Shipping Variance, Merchant and Agent shall cooperate with each other to verify and resolve such dispute.  Following the Sale Commencement Date, Merchant will ship all Distribution Center Merchandise and On-Order Merchandise to the Stores in accordance with the Store allocation set forth on Exhibit 5.1(c)  annexed hereto.  For the avoidance of doubt, Merchant will ship all Distribution Center Merchandise and On-Order Merchandise to the Stores, at Merchant’s cost.

 

5.2                                  Merchandise Subject to This Agreement .

 

(a)                                   For purposes of this Agreement, “Merchandise” shall mean:  (i) all finished goods inventory (including Domestic Merchandise and Imported Merchandise) that is owned by Merchant and (x) located at the Stores as of the Sale Commencement Date, including (A) Defective Merchandise; (B) Distribution Center Merchandise received in the Stores prior to the Sale Commencement Date;  (C) Aged Merchandise; (D) the Display Merchandise, and (E) Merchandise subject to Gross Rings; (ii) Distribution Center Merchandise received in the Stores on or prior to the date that is thirty-five (35) days after the Sale Commencement Date (the “ Store Receipt Deadline ”); (iii) On-Order Merchandise and addition, Additional Nate Berkus Merchandise, any Additional Transfer Merchandise received in the Stores on or prior to the Store Receipt Deadline; and (iv) to the extent Merchant so elects in accordance with the terms hereof, Transferred Goods received prior to the Store Receipt Deadline.  Notwithstanding the foregoing, “Merchandise” shall not include: (1) goods which belong to sublessees, licensees, department

 

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lessees, or concessionaires of Merchant; (2) goods held by Merchant on memo, on consignment, or as bailee; (3) furnishings, trade fixtures, equipment and/or improvements to real property which are located in the Stores (collectively, “ FF&E ”); provided that, Agent shall be permitted to sell Owned FF&E as set forth in Section 15.9; and (4) Excluded Defective Merchandise;.

 

(b)                                  As used in this Agreement, the following terms have the respective meanings set forth below:

 

“ Additional Nate Berkus Merchandise ” means those items of Nate Berkus merchandise identified on Exhibit 5.2(b)(i)  having an aggregate cost value of no more than $750,000, that is being transferred from Merchant’s on-going retail store locations to the Stores prior to the Store Receipt Deadline; provided however items of Nate Berkus inventory previously located in the Stores shall constitute Merchandise but shall not be considered Additional Nate Berkus Merchandise.

 

“ Additional Wamsutta Merchandise ” means those items of Wamsutta merchandise identified on Exhibit 5.2(b)(ii) having an aggregate cost value of no more than $3,750,000 that  may be transferred by Merchant from its Distribution Centers to the Stores, or shipped directly to the Stores by the vendor; provided however, to the extent that Merchant seeks to substitute other Wamsutta goods not identified on Exhbit 5.2(b)(ii) for other goods identified on such Exhibt, such substitution shall be subject to Agent’s approval; provided further however items of Wamsutta inventory previously located in the Stores shall constitute Merchandise but shall not be considered Additional Wamsutta Merchandise.

 

“ Aged Merchandise ” means items of merchandise which have been discontinued by Merchant and have been offered at a point of sale discount for more than thirteen (13) consecutive months.

 

“ Defective Merchandise ” means any item of Merchandise that is defective or otherwise not saleable in the ordinary course because it is worn, scratched, broken, faded, torn, mismatched, tailored or affected by other similar defenses rendering it not first quality.  Display Merchandise shall not per se be deemed to be Defective Merchandise.

 

“ Display Merchandise ” means those items of inventory used in the ordinary course of business as displays or floor models, including inventory that has been removed from its original packaging where such items of inventory have been removed from its original packaging for the purpose of putting such item on display but not customarily sold or saleable by Merchant, which goods are not otherwise damaged or defective.  For the avoidance of doubt, Merchandise created for display and not saleable in the ordinary course of business shall not constitute Display Merchandise.

 

“ Distribution Center Merchandise ” means those items of inventory identified by SKU on Exhibit 5.2(b)(iii)  annexed hereto, that was located in Merchant’s Distribution Centers and was specifically earmarked for transfer to the Stores both prior to and after the Sale Commencement Date for purposes of inclusion in the Sale, which goods, to the extent not delivered to the Stores prior to the Sale Commencement Date, shall be delivered by Merchant to

 

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the Stores in accordance with Schedule 5.1(c)  annexed hereto on or before the date that is thirty (30) days after the Sale Commencement Date.

 

“ Domestic Merchandise ” means those items of inventory that are being delivered by a manufacturer/vendor located within the United States.

 

“ Excess On-Going Store Merchandise ” means those items of excess inventory identified on Exhibit 5.2(b)(iv)   having an aggregate cost value of no more than $2,885,000, that is being transferred by Merchant from its Distribution Centers to the Stores.

 

“ Excluded Defective Merchandise ” means those items of Defective Merchandise that are not saleable in the ordinary course because they are so damaged or defective that such inventory cannot reasonably be used for their intended purpose.  For the avoidance of doubt, electronic Display Merchandise without power cords shall constitute Excluded Defective Merchandise.

 

“ Imported Merchandise ” means items of inventory that are purchased by Merchant from a manufacturer/vendor located outside the United States and imported into the United States by Merchant.

 

                                                                                                “ On-Order Merchandise ” mean items of inventory that were ordered by Merchant in the ordinary course of business and earmark for the Stores, which inventory was not received in the Stores as of the Sale Commencement Date, but which may be received in the Store prior to the Store Receipt Deadline.

 

5.3                                  Valuation .

 

(a)                                   For purposes of this Agreement, “ Cost Value ” shall mean (i) with respect to each item of Domestic Merchandise, the last cost for the SKU for such item of Domestic Merchandise as reflected on Merchant’s inventory item master cost file (the “ Cost File ”), which amount does not include freight or any additional vendor credits; and (ii) with respect to Imported Merchandise, the landed cost for such item of Imported Merchandise as reflected in the Cost File, which amount reflects last cost for the SKU for such item of Imported Merchandise plus a damage allowance, duty rate, freight, and brokerage fee, harbor maintenance fees, drayage, brokers’ fees, insurance, commissions, processing costs and other costs directly associated with landing the product in the Distribution Centers; provided , that in no event shall the Cost Value of any Merchandise exceed the Retail Price for such item of Merchandise; provided however , any adjustment to the Cost Value as a result of the immediately preceding provisio shall not be factored into the calculation for purposes of determining whether the aggregate Cost Value of the Merchandise has satisfied the Merchandise Threshold provided for in Section 3.1(c) hereof and/or the Cost Factor providing for in Section 11.1(m) hereof.  Items of Distribution Center Merchandise, On-Order Merchandise, and Additional Transfer Merchandise  received in the Stores on or prior to the date that is fifteen (15) days after the Sale Commencement Date (excluding the Sale Commencement Date for purposes of such calculation) (the “ Interim Receipt Deadline ”), will be included in Merchandise at the applicable Cost Value for Domestic

 

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Merchandise or Imported Merchandise, as applicable (the “ Applicable Cost Value ”), for each such item; provided , however , that items of Distribution Center Merchandise, Transferred Goods and/or On-Order Merchandise received at the Stores after the Interim Receipt Deadline but prior to the Store Receipt Deadline shall be included in Merchandise at the Applicable Cost Value for each such item multiplied by the inverse of the prevailing discount on similar items of Merchandise as of the date of receipt in the Stores; provided further , that items of Distribution Center Merchandise, Transferred Goods and/or On-Order Merchandise received in the Stores after the Store Receipt Deadline shall not constitute Merchandise, shall be given no Cost Value, and shall be excluded from Merchandise, and shall, at Merchant’s option either be sold by Agent as Merchant Consignment Goods pursuant to Section 5.4 hereof, or excluded from the Sale and removed by Merchant from the Stores.  The Cost File does not account for any advertising co-op allowances or discounts associated with expedited payment terms offered by any vendor, and, further, the Applicable Cost Value of any item of Merchandise shall not be adjusted for any such amounts.

 

(b)                                  Other than Excluded Defective Merchandise, in lieu of any other adjustments to the Cost Value of Merchandise under this Agreement ( e.g. , adjustments for Defective Merchandise, clearance merchandise, mis-mates and near-mates, sample merchandise and/or Excluded Price Adjustments), the aggregate Cost Value of the Merchandise shall be adjusted ( i.e. , reduced) by means of a single global downward adjustment equal to one percent (1%)of the aggregate Cost Value of the Merchandise (the “ Global Inventory Adjustment ”).

 

(c)                                   Excluded Defective Merchandise located in the Stores shall be identified and counted during the Inventory Taking and thereafter removed from the sales floor and segregated.  Excluded Defective Merchandise included in Distribution Center Merchandise and/or On-Order Merchandise must be identified jointly by Merchant and Agent (with written notice provided to Barry Gold of Asset Disposition Advisors, LLC at barrygold@aol.com), within five (5) business days of such Distribution Center Merchandise and/or On-Order Merchandise receipt in the Stores.  Other than as identified during the Inventory Taking at a Store, or as provided for in this Section 5.3(c) with respect to Distribution Center Merchandise and/or On-Order Merchandise, no other goods can be categorized as Excluded Defective Merchandise, regardless of their condition.

 

5.4                                  Excluded Goods .  Merchant shall retain all responsibility for any goods not included as “Merchandise” hereunder.  If Merchant elects at the beginning of the Sale Term, Agent shall accept goods not included as “Merchandise” hereunder for sale as “Merchant Consignment Goods” at prices established by the Agent.  The Agent shall retain 20% of the sale price for all sales of Merchant Consignment Goods, and Merchant shall receive 80% of the receipts in respect of such sales.  Merchant shall receive its share of the receipts of sales of Merchant Consignment Goods on a weekly basis, immediately following the weekly Sale reconciliation by Merchant and Agent pursuant to Section 8.7 below.  If Merchant does not elect to have Agent sell defective or display goods merchandise not included as Merchandise, then all such items will be removed by Merchant from the Stores at its expense as soon as practicable after the Sale Commencement Date.  Except as expre