Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

  x    Annual   Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
          For   the fiscal year ended January 28, 2006

 

or

 

  ¨    Transition   Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
          For   the Transition period from                        to                       

 

Commission File No. 1-11084

 

KOHL’S CORPORATION

(Exact name of registrant as specified in its charter)

WISCONSIN   39-1630919

(State or other jurisdiction of

  (I.R.S. Employer Identification No.)

incorporation or organization)

   
N56 W17000 Ridgewood Drive,   53051
Menomonee Falls, Wisconsin   (Zip Code)

(Address of principal executive offices)

   

 

Registrant’s telephone number, including area code (262) 703-7000

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered

Common Stock, $.01 Par Value

  New York Stock Exchange

 
Securities registered pursuant to Section 12(g) of the Act:   NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes     X        No             .

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes                  No     X    .

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X        No             .

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one): Large accelerated filer     X     Accelerated filer              Non-accelerated filer             

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes                  No     X    .

 

At July 29, 2005, the aggregate market value of the voting stock of the Registrant held by stockholders who were not affiliates of the Registrant was approximately $19,405,000,000 (based upon the closing price of Registrant’s Common Stock on the New York Stock Exchange on such date). At March 1, 2006, the Registrant had issued and outstanding an aggregate of 345,475,525 shares of its Common Stock.

 

Documents Incorporated by Reference:

 

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on April 26, 2006 are incorporated into Part III.


PART I

 

Item 1. Business

 

Overview

 

The Company operates family-oriented, specialty department stores that feature quality, exclusive and national brand merchandise priced to provide value to customers. The Company’s stores sell moderately priced apparel, footwear, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl’s offers a convenient shopping experience through easily accessible locations, well laid out stores, central checkout and good in-stock position which allows the customer to get in and out quickly. Kohl’s stores have fewer departments than traditional, full-line department stores but offer customers dominant assortments of merchandise displayed in complete selections of styles, colors and sizes. Central to the Company’s pricing strategy and overall profitability is a culture focused on maintaining a low cost structure. Critical elements of this low cost structure are the Company’s unique store format, lean staffing levels, sophisticated management information systems and operating efficiencies resulting from centralized buying, advertising and distribution. As of January 28, 2006, the Company operated 732 stores in 41 states. In March 2006, the Company opened nine additional stores and currently operates 741 stores.

 

As used herein, the terms “Company” and “Kohl’s” refer to Kohl’s Corporation, its consolidated subsidiaries and predecessors. The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal 2005 ended on January 28, 2006, and was a 52 week year. The Company was organized in 1988 and is a Wisconsin corporation.

 

Expansion

 

The Company’s expansion strategy is designed to achieve profitable growth. Since 1992, the Company has expanded from 79 stores located in the Midwest to a current total of 741 stores with a presence in six regions of the country: the Midwest, Mid-Atlantic, Northeast, South Central, Southeast and Southwest.

 

          Number of Stores

          At Fiscal Year End

   As of March
2006


Region


  

States


   1992

   1997

   2002

   2005

  

Midwest

   IA, IL, IN, MI, MN, ND, NE, OH, SD, WI    79    136    196    243    244

Mid-Atlantic

   DE, MD, PA, VA, WV    —      28    57    77    79

Northeast

   CT, MA, ME, NH, NJ, NY, RI, VT    —      4    77    117    117

South Central

   AR, KS, MO, OK, TX    —      8    67    93    95

Southeast

   AL, FL, GA, KY, MS, NC, SC, TN    —      6    49    85    87

Southwest

   AZ, CA, CO, NV, UT    —      —      11    117    119
         
  
  
  
  

Total

   79    182    457    732    741
         
  
  
  
  

 

In support of its geographic expansion, the Company has focused on providing the solid infrastructure needed to ensure consistent execution. Kohl’s proactively invests in distribution capacity and regional management to facilitate the growth in new and existing markets. The Company’s central merchandising organization tailors merchandise assortments to reflect regional climates and preferences. Management information systems support the Company’s low cost culture by enhancing productivity and providing the information needed to make key merchandising decisions.

 

The Kohl’s concept has proven to be transferable to markets across the country. New market entries are supported by extensive advertising and promotions designed to introduce new customers to the Kohl’s concept of brands, value and convenience. Additionally, the Company has been successful in acquiring, refurbishing and operating locations previously operated by other retailers. Of the 732 stores the Company operated as of January 28, 2006, 184 are take-over locations, which facilitated the entry into several markets including Chicago, Detroit, Minneapolis, Columbus, Boston, Philadelphia, St. Louis, the New York region and Hartford/New Haven.

 

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Once a new market is established, the Company adds additional fill-in stores to further strengthen market share and enhance profitability. As of January 28, 2006, the Company operated stores in the following large and intermediate sized markets:

 

    

Number of stores

January 28, 2006


       

Number of stores

January 28, 2006


Greater New York metropolitan area

   52    Cleveland/Akron    17

Chicago

   43    Denver    15

Los Angeles

   35    Indianapolis    14

Greater Philadelphia metropolitan area

   32    San Francisco    14

Dallas/Fort Worth

   23    Phoenix    13

Milwaukee

   21    Houston    12

Boston

   21    Hartford/New Haven    12

Minneapolis/St. Paul

Atlanta

   20
19
  

St. Louis

Columbus

   11
10

Detroit

   19    Sacramento    9

Washington DC

   18          

 

In fiscal 2005, Kohl’s successfully opened 95 new stores, significantly increasing its presence in the Southwest region with an additional 13 stores. The Company entered the Buffalo, NY market with three stores; the Orlando, FL market with six stores and the Jacksonville, FL market with three stores. In addition, the Company added 22 stores in the Midwest region, 13 stores in the South Central region, 12 stores in the Southeast region, 12 stores in the Mid-Atlantic region and 11 stores in the Northeast region.

 

Management believes there is substantial opportunity for further growth and intends to open approximately 80-85 new stores in fiscal 2006, with 17 stores opening during the first quarter including its initial entry into the Pacific Northwest in the Portland, OR market. The Company expects to open the remainder of its stores in the third quarter of fiscal 2006 with plans to enter the Seattle, WA market. The remaining stores will be opened in existing markets and spread across all regions of the country.

 

Management believes the transferability of the Kohl’s retailing strategy, the Company’s experience in acquiring and converting pre-existing stores and in building new stores, combined with the Company’s substantial investment in management information systems, centralized distribution and headquarters functions provide a solid foundation for further expansion.

 

Merchandising

 

Kohl’s stores feature moderately priced, exclusive and national brand merchandise, which provide value to customers. Kohl’s merchandise is targeted to appeal to middle-income customers shopping for their families and homes. The Company’s stores generally carry a consistent merchandise assortment with some differences attributable to regional preferences. The Company’s stores emphasize apparel, accessories and footwear for women, men, and children, soft home products, such as towels, sheets and pillows, and housewares.

 

Convenience

 

Convenience is another important cornerstone of Kohl’s business model. At Kohl’s, convenience begins before the customer enters the store, with a neighborhood location close to home. Other aspects of convenience include easily accessible entry, knowledgeable and friendly associates, wide aisles, a functional store layout, shopping carts/strollers and fast, centralized checkouts. The physical store layout coupled with the Company’s focus on strong in-stock position in color and size are aimed at providing a convenient shopping experience for an increasingly time starved customer. In addition, Kohl’s offers on-line shopping on the Company’s website. Designed as an added service for customers who prefer to shop from their homes, the website offers key items, best selling family apparel and home merchandise. The site is designed to provide an easy-to-navigate, on-line shopping environment that complements the Company’s in-store focus on convenience.

 

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Distribution

 

The Company receives substantially all of its merchandise at eight distribution centers, with the balance delivered directly to the stores by vendors or their distributors. The distribution centers ship merchandise to each store by contract carrier several times a week.

 

The following table summarizes key information about each distribution center.

 

Location


   Fiscal
Year
Opened


   Square
Footage


  

States Serviced


   Approximate
Store
Capacity


Menomonee Falls, Wisconsin

   1981    530,000    Illinois, Wisconsin    90

Findlay, Ohio

   1994    780,000    Ohio, Michigan, Indiana, Kentucky, West Virginia    120

Winchester, Virginia

   1997    420,000    Pennsylvania, North Carolina, Virginia, Maryland, Delaware    100

Blue Springs, Missouri

   1999    540,000    Minnesota, Colorado, Missouri, Iowa, Kansas, Nebraska, North Dakota, South Dakota    100

Corsicana, Texas

   2001    540,000    Texas, Oklahoma, Arkansas, Mississippi    110

Mamakating, New York

   2002    605,000    New York, New Jersey, Massachusetts, Connecticut, New Hampshire, Rhode Island, Maine, Vermont    100

San Bernardino, California

   2002    575,000    California, Arizona, Nevada, Utah    110

Macon, Georgia

   2005    560,000    Alabama, Tennessee, Georgia, South Carolina, Florida    125

 

The Company opened its eighth distribution center in Macon, Georgia in the spring of 2005 to support the Company’s growth in the Southeast region. The Company plans to open its ninth distribution center in Patterson, California in the spring of 2006 to support the Company’s growth in the Pacific Northwest and Southwest.

 

The Company operates a 500,000 square foot fulfillment center in Monroe, Ohio that services the Company’s e-commerce business.

 

Employees

 

As of January 28, 2006, the Company employed approximately 107,000 associates, including approximately 17,000 full-time and 90,000 part-time associates. The number of associates varies during the year, peaking during the back-to-school and holiday seasons. None of the Company’s associates are represented by a collective bargaining unit. The Company believes its relations with its associates are very good.

 

Competition

 

The retail industry is highly competitive. Management considers quality, value, merchandise mix, service and convenience to be the most significant competitive factors in the industry. The Company’s primary competitors are traditional department stores, upscale mass merchandisers and specialty stores. The Company’s specific competitors vary from market to market.

 

Merchandise Vendors

 

The Company purchases merchandise from many suppliers, none of which accounted for more than 5% of the Company’s net purchases during fiscal 2005. The Company has no long-term purchase commitments or

 

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arrangements with any of its suppliers, and believes that it is not dependent on any one supplier. The Company continues to have good working relationships with its suppliers.

 

Seasonality

 

The Company’s business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the last half of each fiscal year, which includes the back-to-school (August—September) and holiday (November—December) seasons. Approximately 15% and 30% of sales typically occur during the back-to-school and holiday seasons, respectively. Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of revenues and costs associated with the opening of new stores.

 

Trademarks and Service Marks

 

The name “Kohl’s,” written in its distinctive block style, is a registered service mark of a wholly-owned subsidiary of the Company, and the Company considers this mark and the accompanying name recognition to be valuable to its business. This subsidiary has approximately 85 additional registered trademarks, trade names and service marks, most of which are used in the Company’s private label program.

 

Available Information

 

The Company’s internet website is www.kohls.com. Through the “Investor Relations-Financial Links-SEC Filings” portion of this website, the Company makes available, free of charge, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material has been filed with, or furnished to, the Securities and Exchange Commission (SEC). The Company has also posted on its website, under the caption “Investor Relations-Corporate Governance,” the Company’s Corporate Governance Guidelines; Charters of its Board of Directors’ Audit Committee, Compensation Committee and Governance & Nominating Committee; and the Code of Ethical Standards and Responsibility that applies to all of the Company’s associates and, to the extent practicable, members of the Company’s Board of Directors. Any amendment to or waiver from the provisions of the Code of Ethical Standards and Responsibility that are applicable to the Company’s Chief Executive Officer, Chief Financial Officer or other key Finance associates will be disclosed on the “Corporate Governance” portion of the website. Information contained on the Company’s website is not part of this Annual Report on Form 10-K.

 

The above-referenced materials will also be provided without charge to any shareholder submitting a written request to the Company’s Investor Relations Department at N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051.

 

Item 1A.  Risk Factors

 

Forward Looking Statements

 

This report contains statements that may constitute forward-looking statements within the meaning of the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Those statements relate to developments, results, conditions or other events the Company expects or anticipates will occur in the future. The Company intends words such as “believes,” “anticipates,” “ plans,” “expects” and similar expressions to identify forward-looking statements. Without limiting the foregoing, these statements may relate to future outlook, revenues, earnings, store openings, planned capital expenditures, market conditions, new strategies and the competitive environment. Forward-looking statements are based on management’s then current views and assumptions and, as a result, are subject to certain risks and uncertainties

 

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that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the following important risk factors that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward looking statements relate to the date initially made, and the Company undertakes no obligation to update them. An investment in the Company’s common stock or other securities carries certain risks. Investors should carefully consider the risks described below and other risks which may be disclosed from time to time in the Company’s filings with the SEC before investing in the Company’s securities.

 

General Economic Conditions

 

General economic factors that are beyond the Company’s control impact the Company’s forecasts and actual performance. These factors include interest rates; recession; inflation; deflation; consumer credit availability; consumer debt levels; energy costs; tax rates and policy; unemployment trends; the threat or possibility of war, terrorism or other global or national unrest; political or financial instability; and other matters that influence consumer confidence and spending. Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency and magnitude. Changes in the economic climate could adversely affect the Company’s performance.

 

Competitive Pressures

 

The retail business is highly competitive. The Company competes for customers, associates, locations, merchandise, services and other important aspects of its business with many other local, regional and national retailers. Those competitors, some of which have a greater market presence than the Company, include traditional store-based retailers, internet and catalog businesses and other forms of retail commerce. Unanticipated changes in the pricing and other practices of those competitors may adversely affect the Company’s performance.

 

Consumer Demand

 

The Company’s business is dependent on the Company’s ability to anticipate fluctuations in consumer demand for a wide variety of merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions could create inventory imbalances and adversely affect the Company’s performance and long term relationships with its customers.

 

Credit Card Operations

 

The Company’s credit card operations facilitate sales in our stores and generate additional revenue from fees related to extending credit. The Company’s ability to extend credit to its customers depends on many factors including compliance with federal and state banking and consumer protection laws, any of which may change from time to time. Changes in credit card use, payment patterns and default rates may result from a variety of economic, legal, social and other factors that we cannot control or predict with certainty. Changes that adversely impact the Company’s ability to extend credit and collect payments could negatively affect our results. In addition, the Company’s finance charge revenue is subject to changes in state legislation regarding interest rates.

 

Weather conditions

 

Because a significant portion of the Company’s business is apparel and subject to weather conditions in its markets, its operating results may be unexpectedly and adversely affected. Frequent or unusually heavy snow, ice or rain storms or extended periods of unseasonable temperatures in its markets could adversely affect the Company’s performance.

 

Seasonality

 

The Company’s business is subject to seasonal influences, with a major portion of sales and income historically realized during the second half of the fiscal year, which includes the back-to-school and holiday

 

6


seasons. This seasonality causes the Company’s operating results to vary considerably from quarter to quarter and could materially adversely affect the market price of its securities.

 

Merchandise Sourcing

 

The merchandise sold by the Company is sourced from a wide variety of domestic and international vendors. All of the Company’s vendors must comply with applicable laws and the Company’s required standards of conduct. The Company’s ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult with respect to goods sourced outside the United States. Political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade, and the ability to access suitable merchandise on acceptable terms are beyond the Company’s control and could adversely impact the Company’s performance.

 

Labor Conditions

 

The Company’s performance is dependent on attracting and retaining a large and growing number of quality associates. Many of those associates are in entry level or part time positions with historically high rates of turnover. The Company’s ability to meet the Company’s labor needs while controlling the Company’s costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. Changes that adversely impact the Company’s ability to attract and retain quality associates could adversely affect the Company’s performance.

 

New Store Growth

 

The Company’s plan to continue to increase the number of its stores will depend in part upon the availability of existing retail stores or store sites on acceptable terms. Increases in real estate, construction and development costs could limit the Company’s growth opportunities and affect its return on investment. There can be no assurance that such stores or sites will be available to the Company for purchase or lease, or that they will be available on terms acceptable to the Company. If the Company is unable to grow its retail business, the Company’s financial performance could be adversely affected.

 

New Markets

 

The Company’s growth strategy is dependent upon the Company’s ability to successfully execute the Company’s retailing concept in new markets and geographic regions. If the Company is unable to successfully execute its retail concept in these new markets and regions, or if consumers are not receptive to the Company’s concept in these markets or regions, the Company’s financial performance could be adversely affected.

 

Regulatory and Litigation Developments

 

Various aspects of the Company’s operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Additionally, the Company is regularly involved in various litigation matters that arise in the ordinary course of its business. Litigation or regulatory developments could adversely affect the Company’s business operations and financial performance.

 

Information Systems

 

The efficient operation of our business is dependent on our information systems. In particular, the Company relies on its information systems to effectively manage sales, distribution, merchandise planning and allocation functions. The Company possesses offsite recovery capabilities for its information systems. The failure of the Company’s information systems to perform as designed could disrupt its business and harm sales and profitability.

 

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Other Factors

 

The foregoing list of risk factors is not exclusive. Other factors and unanticipated events could adversely affect the Company. The Company does not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made.

 

Item 1B.  Unresolved Staff Comments

 

Not Applicable.

 

Item 2.  Properties

 

As of January 28, 2006, the Company operated 732 stores in 41 states. The Company owned 231 stores, owned 147 stores with ground leases and leased 354 stores. The Company’s typical lease has an initial term of 20-25 years plus two to eight renewal options for consecutive five or ten-year extension terms.

 

Substantially all of the Company’s leases provide for a minimum annual rent that is fixed or adjusts to set levels during the lease term, including renewals. Approximately 29% of the leases provide for additional rent based on a percentage of sales to be paid when designated sales levels are achieved.

 

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The Company’s stores are located in strip shopping centers (533), community and regional malls (55) and as free standing units (144). Of the Company’s stores, 676 are one-story facilities and 56 are multi-story facilities.

 

     Number of
Stores at
January 28,
2006


   Retail
Square
Footage


California

   72    5,740,702

Illinois

   53    4,184,477

Texas

   54    4,172,316

Ohio

   46    3,532,901

New York

   37    2,944,343

Michigan

   36    2,732,700

Wisconsin

   36    2,669,597

Pennsylvania

   35    2,642,825

New Jersey

   30    2,324,566

Indiana

   29    2,193,134

Minnesota

   23    1,800,688

Georgia

   21    1,619,367

Massachusetts

   20    1,609,625

North Carolina

   21    1,581,991

Virginia

   20    1,538,128

Colorado

   18    1,406,655

Missouri

   18    1,397,129

Connecticut

   17    1,294,181

Arizona

   16    1,259,379

Maryland

   15    1,167,933

Tennessee

   12    914,974

Florida

   10    793,915

Iowa

   11    774,882

Kentucky

   10    769,451

Oklahoma

   8    615,478

Kansas

   7    516,320

Utah

   6    472,359

Arkansas

   6    466,310

New Hampshire

   6    461,538

Nevada

   5    393,975

South Carolina

   5    386,640

Nebraska

   5    345,874

Delaware

   4    326,406

Maine

   4    315,859

Alabama

   4    310,325

West Virginia

   3    225,003

South Dakota

   2    168,930

North Dakota

   2    164,792

Mississippi

   2    157,047

Rhode Island

   2    154,815

Vermont

   1    77,302
    
  

Total

   732    56,624,832
    
  

 

The Company owns its distribution centers in Menomonee Falls, Wisconsin; Findlay, Ohio; Winchester, Virginia; Blue Springs, Missouri; Mamakating, New York; San Bernardino, California and Macon, Georgia. The Company also owns its corporate headquarters in Menomonee Falls, Wisconsin and the e-commerce fulfillment center in Monroe, Ohio. The Company leases the distribution center in Corsicana, Texas.

 

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Item 3.  Legal Proceedings

 

The Company and its subsidiaries are not currently parties to any material legal proceedings, but are subject to certain legal proceedings and claims from time to time that are incidental to their ordinary course of business. The Company will record a liability related to its legal proceedings and claims when it has determined that it is probable that the Company will be obligated to pay and the related amount can be reasonably estimated, and it will disclose the related facts in the footnotes to its financial statements, if material. If the Company determines that an obligation is reasonably possible, the Company will if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of the Company’s security holders during the last quarter of fiscal 2005.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a) Market information

 

The Common Stock has been traded on the New York Stock Exchange since May 19, 1992, under the symbol “KSS.” The prices in the table set forth below indicate the high and low prices of the Common Stock for each quarter in fiscal 2005 and 2004.

 

     Price Range

     High

   Low

Fiscal 2005

             

First Quarter

   $ 53.86    $ 45.26

Second Quarter

     58.90      46.50

Third Quarter

     57.44      43.63

Fourth Quarter

     50.96      42.78

Fiscal 2004

             

First Quarter

   $ 54.10    $ 39.59

Second Quarter

     48.83      40.10

Third Quarter

     52.86      43.70

Fourth Quarter

     53.24      45.40

 

(b) Holders

 

At March 1, 2006, there were 5,973 record holders of the Common Stock.

 

(c) Dividends

 

The Company has never paid a cash dividend and has no current plans to pay dividends on its Common Stock. The payment of future dividends, if any, will be determined by the Board of Directors in light of existing business conditions, including the Company’s earnings, financial condition and requirements, restrictions in financing agreements and other factors deemed relevant by the Board of Directors.

 

(d) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

During the fiscal year ended January 28, 2006, the Company did not sell any equity securities which were not registered under the Securities Act or repurchase any of its equity securities. On March 6, 2006, the Company announced that its Board of Directors authorized a $2.0 billion repurchase program, to be completed over the next two to three years.

 

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Item 6.   Selected Consolidated Financial Data

 

The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of the Company and related notes included elsewhere in this document. The selected consolidated financial data, except for the operating data, has been derived from the audited consolidated financial statements of the Company, which have been audited by Ernst & Young LLP, independent registered public accounting firm, and have been restated to reflect share-based payment adjustments discussed in Note 2, “Restatement of Financial Statements,” to the consolidated financial statements.

 

     Fiscal Year Ended

 
     January 28,
2006


   

January 29,

2005
(Restated)


    January 31,
2004
(Restated)


   

February 1,
2003

(Restated)


    February 2,
2002
(Restated)


 
     (Dollars in Thousands, Except Per Share and Per Square Foot Data)  

Statement of Operations Data:

                                        

Net sales

   $ 13,402,217     $ 11,700,619     $ 10,282,094     $ 9,120,287     $ 7,488,654  

Cost of merchandise sold

     8,639,278       7,586,992       6,887,033       5,981,219       4,923,527  
    


 


 


 


 


Gross margin

     4,762,939       4,113,627       3,395,061       3,139,068       2,565,127  

Selling, general and administrative expenses

     2,963,472       2,582,996       2,157,030       1,882,889       1,583,489  

Depreciation and amortization

     338,916       288,173       239,558       193,497       158,417  

Preopening expenses

     44,370       49,131       47,029       41,198       33,360  
    


 


 


 


 


Operating income

     1,416,181       1,193,327       951,444       1,021,484       789,861  

Interest expense, net

     70,391       62,452       72,931       56,009       50,111  
    


 


 


 


 


Income before income taxes

     1,345,790       1,130,875       878,513       965,475       739,750  

Provision for income taxes

     503,830       427,474       332,050       364,950       281,327  
    


 


 


 


 


Net income

   $ 841,960     $ 703,401     $ 546,463     $ 600,525     $ 458,423  
    


 


 


 


 


Net income per share :

                                        

Basic

   $ 2.45     $ 2.06     $ 1.61     $ 1.78     $ 1.37  

Diluted

   $ 2.43     $ 2.04     $ 1.59     $ 1.75     $ 1.35  

Operating Data:

                                        

Comparable store sales growth (a)

     3.4 %     0.3 %     (1.6 %)     5.3 %     6.8 %

Net sales per selling square foot (b)

   $ 252     $ 255     $ 268     $ 284     $ 283  

Total square feet of selling space (in thousands; end of period)

     56,625       49,201       41,447       34,507       28,576  

Number of stores open (end of period)

     732       637       542       457       382  

Balance Sheet Data (end of period):

                                        

Working capital

   $ 2,519,597     $ 2,187,379     $ 1,902,280     $ 1,776,029     $ 1,584,103  

Property and equipment, net

     4,543,832       3,987,945       3,316,486       2,734,228       2,196,490  

Total assets

     9,153,038       7,979,299       6,690,750       6,310,636       4,926,582  

Long-term debt and capital leases

     1,046,104       1,103,441       1,075,973       1,058,784       1,095,420  

Shareholders’ equity

     5,957,338       5,033,898       4,211,523       3,531,726       2,803,133  

(a)   Comparable store sales growth for each period is based on sales of stores (including relocated or expanded stores) open throughout the full period and throughout the full prior period. Fiscal 2001 comparable store sales growth compares the 52 weeks of fiscal 2001 to the 52 weeks ended January 27, 2001.
(b)   Net sales per selling square foot is calculated using net sales of stores that have been open for the full year divided by their square footage of selling space.

 

11


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Summary

 

Kohl’s mission is to be the leading family-focused, value-oriented, specialty department store offering quality, exclusive and national brand merchandise to the customer in an environment that is convenient, friendly and exciting.

 

Kohl’s operates from coast to coast, having grown from 76 stores in six states at the time of its initial public offering (IPO) in 1992 to 732 stores in 41 states at January 28, 2006. In fiscal 2005, the Company continued its expansion with entries into the Buffalo, NY; Orlando, FL; and Jacksonville, FL markets.

 

Kohl’s concentrates on profitable expansion. The Company’s future growth plans are to increase its presence in all of the regions it currently serves and to expand into new markets. The Company plans to add approximately 500 stores over the next five years. The Company opened 95 stores in fiscal 2005. In fiscal 2006, the Company plans to open approximately 80-85 new stores with continual expansion in Florida, and entry into the Pacific Northwest with stores opening in Washington and Oregon. The store expansion involves all three of the Company’s prototypes: suburban, small, and urban, with the primary vehicle remaining the suburban prototype. The Company’s disciplined approach to new store selection ensures that new store locations achieve an appropriate return on investment.

 

The Company’s capital structure is well positioned to continue to support its expansion plans. Internally generated cash flows will continue to be the primary source of the funding required for future growth. In addition, the Company has long-term debt ratings of A3 by Moody’s, BBB+ by Standard & Poor’s and A by Fitch.

 

The Company’s revenues are generated through sales from existing stores and through sales from new stores opened as a result of its expansion program. In order to increase sales productivity in existing stores and attract new customers, the Company strives to add freshness in its assortments through the addition of new and exclusive brands and extension of existing brands into new classifications. The Company also continues to invest in updating its stores with a goal of remodeling stores approximately every 8-10 years.

 

Critical to the Company’s successful growth is the infrastructure that has been developed and refined since becoming a public company in 1992. Over the past five years, sales have grown at a compound annual growth rate (CAGR) of approximately 17% and net income has grown at a CAGR of approximately 20%. This growth was achieved through a combination of comparable store sales increases, square footage growth, gross margin expansion and selling, general and administrative (S,G&A) expense control.

 

Fiscal 2005 was a solid year from an earnings and operational perspective. The Company earned $842 million in net income, an increase of 19.7% over last year. The Company’s net sales increased 14.5% while comparable store sales increased 3.4%. In fiscal 2005, the Company achieved the highest gross margin rate in its history. The Company’s S,G&A expenses increased 14.7% over fiscal 2004 which was in line with the Company’s square footage growth of 15.1%.

 

The Company’s earnings guidance for fiscal 2006 is to achieve net income growth of 13% to 18%, assuming a comparable store sales increase of 2% to 4% and total sales growth of 12% to 14%. The Company expects to leverage S,G&A expenses with an approximately 2% comparable store sales increase in fiscal 2006. In order to achieve this guidance, the Company will continue to focus on the following initiatives:

 

    Merchandise content

 

    Inventory management

 

12


    In-store shopping experience

 

    Differentiation in marketing

 

The Company progressed on these initiatives in fiscal 2005. The merchandise content was broadened by adding new national, exclusive and private brands. The Company continued its focus on inventory management and increased its effectiveness of being in-stock by flowing goods more frequently and closer to the time of sale. The shopping experience is where everything the Company does comes together. The Company organized departments by lifestyle for ease of shopping, differentiated special sizes, added graphics that highlight key trends and presented merchandise to give customers ideas on how to create their own looks. These initiatives not only make it easier to shop, but also more exciting.

 

In 2006, the Company is focused on continuing to introduce new brands and extend successful brands into additional areas of the store to build awareness with its existing customers and drive more frequent trips as well as gain new customers. In order to achieve this goal, the Company will continue to use a fully integrated marketing approach using circulars, direct mail, radio, magazines, internet and television to brand Kohl’s. The Company’s marketing strategies will continue to evolve as it seeks new and exciting ways to reach its customers.

 

The Company’s long-term goal remains to increase net income approximately 15%-20% annually through a combination of new store and comparable store sales growth, slight increase annually in the gross margin rate, and modest S,G&A expense leverage on the increasing sales base.

 

Restatement of Financial Statements

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004) (SFAS No. 123R), “Share Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

 

The Company adopted SFAS No. 123R on January 30, 2005 requiring the Company to recognize expense related to the fair value of its employee stock option awards. The Company adopted the “modified retrospective” method, which requires the prior period financial statements be restated under the provisions of SFAS No. 123R to recognize compensation cost in the amounts previously reported in the pro forma footnote disclosures.

 

As a result of adopting SFAS No. 123R, the Company’s income before income taxes for the years ended January 28, 2006, January 29, 2005 and January 31, 2004 are $40.4 million, $43.4 million and $55.4 million lower, respectively, than if it had continued to account for the share-based compensation under APB No. 25.

 

Prior to adoption of SFAS No. 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires that cash flows resulting from the tax deductions in excess of the compensation costs recognized for those options be presented as financing cash flows.

 

See Note 2, “Restatement of Financial Statements,” to the consolidated financial statements for a summary of the effects of these changes on the Company’s Consolidated Balance Sheets as of January 29, 2005, as well as on the Company’s Consolidated Statements of Income and Cash Flows for fiscal years 2004 and 2003. The accompanying Management’s Discussion and Analysis gives effect to these changes.

 

The discussion and analysis below further explains the Company’s results of operations for fiscal 2005.

 

13


Results of Operations

 

The Company’s net income was $842.0 million in fiscal 2005 compared to $703.4 million in fiscal 2004, an increase of $138.6 million or 19.7%. Fiscal 2004 net income increased 28.7% over fiscal 2003 net income of $546.5 million.

 

Components of net income.    The following table sets forth statement of operations data as a percentage of net sales for each of the last three fiscal years:

 

     Fiscal Year

 
     2005

    2004
(Restated)


    2003
(Restated)


 

Net sales

   100.0 %   100.0 %   100.0 %

Cost of merchandise sold

   64.5     64.8     67.0  
    

 

 

Gross margin

   35.5     35.2     33.0  

Selling, general and administrative expenses

   22.1     22.1     21.0  

Depreciation and amortization

   2.5     2.5     2.3  

Preopening expenses

   0.3     0.4     0.4  
    

 

 

Operating income

   10.6     10.2     9.3  

Interest expense, net

   0.6     0.5     0.8  
    

 

 

Income before income taxes

   10.0     9.7     8.5  

Provision for income taxes

   3.7     3.7     3.2  
    

 

 

Net income

   6.3 %   6.0 %   5.3 %
    

 

 

 

Net sales.    Net sales, number of stores, sales growth, net sales per selling square foot and comparable store base for the last three fiscal years were as follows:

 

     Fiscal Year

 
     2005

    2004

    2003

 

Net sales (in thousands)

   $ 13,402,217     $ 11,700,619     $ 10,282,094  

Number of stores open (end of period)

     732       637       542  

Sales growth—all stores

     14.5 %     13.8 %     12.7 %

Sales growth—comparable stores (a)

     3.4 %     0.3 %     (1.6 )%

Net sales per selling square foot (b)

   $ 252     $ 255     $ 268  

Comparable store base

     542       457       382  

(a)   Comparable store sales growth for each period is based on sales of stores (including relocated or expanded stores) open throughout the full period and throughout the full prior period.
(b)   Net sales per selling square foot is calculated using net sales of stores that have been open for the full year divided by their square footage of selling space.

 

Net sales increased $1,701.6 million, or 14.5%, from $11,700.6 million in fiscal 2004 to $13,402.2 million in fiscal 2005. Net sales increased $1,336.4 million due to the opening of 95 new stores in fiscal 2005 and to the inclusion of a full year of operating results for the 95 stores opened in fiscal 2004. Comparable store sales increased $365.2 million, or 3.4%, in fiscal 2005. The number of transactions increased 1.2% and the average transaction value increased 2.2% in comparable stores. All areas of the business had positive sales results with the Men’s and Accessories businesses having the strongest sales performance. All regions had positive comparable sales increases. The Southwest region had the strongest comparable store sales performance.

 

Net sales increased $1,418.5 million, or 13.8%, from $10,282.1 million in fiscal 2003 to $11,700.6 million in fiscal 2004. Net sales increased $1,395.1 million due to the opening of 95 new stores in fiscal 2004 and to the inclusion of a full year of operating results for the 85 stores opened in fiscal 2003. Comparable store sales increased $23.4 million, or 0.3%, in fiscal 2004.

 

14


The Company’s merchandise mix is reflected in the table below:

 

       Fiscal Year

 
       2005

    2004

    2003

 

Women’s

     32.6 %   32.5 %   32.1 %

Men’s

     18.6 %   18.5 %   19.0 %

Home

     18.4 %   18.5 %   18.4 %

Children’s

     13.0 %   13.4 %   13.5 %

Accessories

     9.2 %   9.0 %   8.7 %

Footwear

     8.2 %   8.1 %   8.3 %

 

Gross margin.    The Company’s gross margin as a percent of net sales was 35.5% for fiscal 2005 compared to 35.2% for fiscal 2004. Gross margin increased $649.3 million from $4,113.6 million in fiscal 2004 to $4,762.9 million in fiscal 2005. Gross margin increased $459.0 million due to the opening of 95 new stores in fiscal 2005 and to the inclusion of a full year of operating results for the 95 stores opened in fiscal 2004. The comparable store gross margin increase of $190.3 million was a result of improved gross margin on clearance sales, better merchandise content and improved inventory flow. The merchandise category that was the largest contributor to the gross margin rate increase was Women’s.

 

Gross margin increased $718.5 million from $3,395.1 million in fiscal 2003 to $4,113.6 million in fiscal 2004. Gross margin increased $501.5 million due to the opening of 95 new stores in fiscal 2004 and to the inclusion of a full year of operating results for the 85 stores opened in fiscal 2003. Comparable store gross margin increased $217.0 million due mainly to lower level of clearance sales, improved gross margin on the clearance sales and the adoption of Emerging Issues Task Force (“EITF”) No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor,” in fiscal 2004. The largest contributor to the gross margin rate increase was Women’s.

 

Selling, general and administrative expenses.    S,G&A expenses include all direct store expenses such as payroll, occupancy and store supplies and all costs associated with the Company’s distribution centers, advertising and corporate functions, but exclude depreciation and amortization. S,G&A expenses increased $380.5 million, or 14.7%, to $2,963.5 million in fiscal 2005 compared to $2,583.0 million in fiscal 2004. S,G&A expenses as a percent of net sales was 22.1% in both fiscal 2005 and fiscal 2004. Store operating expenses increased 15.5%, which is consistent with the Company’s square footage growth of 15.1%. The Company leveraged distribution expenses due to the increased productivity on a units per hour basis. The Company also leveraged credit expenses which were offset by increased corporate expenses as a percent of net sales.

 

S,G&A expenses increased $426.0 million, or 19.7%, to $2,583.0 million in fiscal 2004 compared to $2,157.0 million in fiscal 2003. S,G&A expenses as a percent of net sales increased from 21.0% in fiscal 2003 to 22.1% in fiscal 2004, an increase of 110 basis points. Store operating expenses increased 18.5%, which is consistent with the Company’s square footage growth of 18.7%. Advertising expenses increased 85 basis points primarily due to the adoption of EITF 02-16 (see Note 1 to the consolidated financial statements for further discussion), which had an unfavorable impact of approximately 60 basis points. These increases were offset by a 12 basis point reduction in corporate expenses, a 10 basis point reduction in distribution expenses and a 10 basis point reduction in credit operations.

 

Depreciation and amortization.    The total amount of depreciation and amortization increased from fiscal 2004 to fiscal 2005 due to the addition of new stores and the mix of owned compared to leased stores. Depreciation and amortization as a percentage of net sales was 2.5% for both fiscal 2005 and 2004 and was 2.3% for fiscal 2003.

 

Preopening expenses.    Preopening expenses are expensed as incurred and relate to the costs incurred prior to new store openings which includes advertising, hiring, and training costs for new employees, processing and transporting initial merchandise and rent expense. The average cost per store fluctuates based on the mix of stores opened in new markets compared to fill-in markets, with new markets being more expensive. The average

 

15


cost to open the 95 new stores in fiscal 2005 was $481,000, the average cost to open the 95 new stores in fiscal 2004 was $540,000 and the average cost to open the 85 new stores in fiscal 2003 was $592,000. The decrease in the average cost to open a store in fiscal 2005 was due to the mix of stores opened in new markets compared to fill-in markets as well as entries made into less expensive markets.

 

Interest expense.    Net interest expense increased $7.9 million from $62.5 million in fiscal 2004 to $70.4 million in fiscal 2005. Of the increase, $6.0 million is attributed to decreased capitalized interest due to less capital spending. Net interest expense in fiscal 2004 decreased $10.4 million from $72.9 million in fiscal 2003 to $62.5 million. The decrease was a result of writing off $6.1 million in deferred financing fees related to the redemption of the Company’s Liquid Yield Option Subordinated Notes (LYONs) in the second quarter of fiscal 2003. The remaining decrease is primarily attributable to the redemption of the 2.75% LYONs during the second quarter of fiscal 2003.

 

Income taxes.    The Company’s effective tax rate was 37.4% in fiscal 2005 and was 37.8% in both fiscal 2004 and in fiscal 2003. The decrease in the fiscal 2005 effective tax rate was a result of a tax adjustment of $4.9 million due to the favorable resolution of certain state tax matters.

 

Inflation

 

The Company does not believe that inflation has had a material effect on the results of operations during the periods presented. However, there can be no assurance that the Company’s business will not be affected by inflation in the future.

 

Liquidity and Capital Resources

 

The Company’s primary ongoing cash requirements are for capital expenditures in connection with the expansion and remodeling programs, seasonal and new store inventory purchases, and the growth in credit card accounts receivable. The Company’s primary sources of funds for its business activities are cash flow provided by operations and short-term trade credit.

 

Operating activities.    Cash flow provided by operations was $881.7 million in fiscal 2005 compared to $937.1 million in fiscal 2004, a $55.4 million decrease. The primary sources of cash flow provided by operations were net income before depreciation and amortization and a $125.3 million increase in accounts payable, as discussed below. The primary uses of cash flow were a $290.6 million increase in merchandise inventories and a $262.4 million increase in the accounts receivable portfolio, as discussed below. Short-term trade credit, in the form of extended payment terms for inventory purchases, represents a significant source of financing for merchandise inventories. Seasonal cash needs are met by financing secured by proprietary accounts receivable and lines of credit available under its revolving credit facilities. The Company’s working capital and inventory levels typically build throughout the fall, peaking during the holiday selling season.

 

Key financial ratios that provide certain measures of the Company’s liquidity are as follows:

 

     January 28,
2006


    January 29,
2005
(Restated)


    January 31,
2004
(Restated)


 
     ($ In Thousands)  

Working capital

   $ 2,519,597     $ 2,187,379     $ 1,902,280  

Current ratio

     2.44:1       2.50:1       2.69:1  

Debt / capitalization

     16.2 %     18.0 %     20.5 %

Earnings to fixed charges

     6.35       5.83       4.90  

 

The decrease in the Company’s current ratio in fiscal 2005 is due to accounts payable increasing at a higher rate than inventory and the increase of $100.0 million in the current portion of long-term debt. The decrease in the Company’s current ratio in fiscal 2004 from fiscal 2003 is also due to accounts payable increasing at a higher rate than inventory. The improvement in the debt / capitalization percentage and earnings to fixed charges ratio in fiscal 2005 was due to an increase in retained earnings as a result of growth in net income in fiscal 2005 over fiscal 2004 of 19.7%.

 

The Company’s accounts receivable at January 28, 2006 increased $262.4 million, or 18.9%, over the January 29, 2005 balance. The increase is primarily due to a 18.6% increase in proprietary credit card sales and a decrease in payment rates. Net write-offs increased to 1.0% of Kohl’s charge sales in fiscal 2005 from 0.9% in fiscal 2004. The Company’s incremental bad debt expense related to the revised bankruptcy legislation, effective

 

16


October 17, 2005, was $3.2 million. The Company believes write-offs of delinquent accounts were accelerated due to the bankruptcy legislation. As a result, the allowance for doubtful accounts was reduced to 1.6% of gross accounts receivable in fiscal 2005 from 1.7% in fiscal 2004. The Company’s credit card program supports earnings growth by driving sales through promotional events and through the growth in the proprietary credit card financial performance. The following table summarizes information related to Kohl’s proprietary credit card receivables:

 

     January 28,
2006


    January 29,
2005


    January 31,
2004


 
     ($ In Thousands)  

Gross accounts receivable

   $ 1,678,400     $ 1,414,289     $ 1,172,678  

Allowance for doubtful accounts

   $ 26,335     $ 24,657     $ 22,521  

Allowance as a % of gross accounts receivable

     1.6 %     1.7 %     1.9 %

Accounts receivable turnover (rolling 4 quarters) *

     3.8x       3.8x       3.6x  

Proprietary credit card share

     40.6 %     39.2 %     36.0 %

Accounts over 60 days past due

     2.4 %     2.5 %     2.7 %

* Credit card sales divided by average quarterly gross accounts receivable

 

 

At January 28, 2006, the Company’s merchandise inventories increased $290.6 million, an increase of 14.9% from the January 29, 2005, balance of $1,947.0 million. On an average store basis, the inventory at January 28, 2006, was flat to January 29, 2005. Accounts payable increased $125.3 million to $830.0 million at January 28, 2006, from the January 28, 2005, balance primarily due to an increase in stores and the execution of flowing goods closer to the point of sale.

 

Investing activities.    Capital expenditures include costs for new store openings, store remodels, distribution center openings, the expansion of the corporate office and other base capital needs. The Company’s capital expenditures, including favorable lease rights, were $799.4 million during fiscal 2005, $889.6 million during fiscal 2004 and $831.6 million during fiscal 2003. The Company opened 95 new stores in fiscal 2005. In addition, the Company continued to make capital investments for information systems, distribution capacity and other infrastructure to support the Company’s growth. The decrease in capital spending was a result of opening 17 stores during the first quarter of fiscal 2006 compared to 32 stores during the first quarter of fiscal 2005.

 

The Company plans to open approximately 80-85 new stores in fiscal 2006. Total capital expenditures for fiscal 2006 are currently expected to be in the range of $1.0 billion. Capital expenditures include costs for new store openings, store remodels, the construction of a distribution center in Patterson, CA and other base capital needs. The amount of capital expenditures fluctuate as a result of the timing of new store capital spending, the mix of owned, leased and acquired stores, the number of stores remodeled and the timing of opening distribution centers. The Company does not anticipate that its planned expansion will be limited by any restrictive covenants in its financing agreements. The Company’s capital structure is well positioned to support its expansion plans. The Company anticipates that internally generated cash flows will be the primary source of funding for future growth.

 

Financing activities.    The Company anticipates that it will be able to satisfy its working capital requirements, planned capital expenditures and debt service requirements with available cash and short-term investments, proceeds from cash flows from operations, short-term trade credit, financing secured by its proprietary credit card accounts receivable, seasonal borrowings under its revolving credit facilities and other sources of financing. The Company expects to generate adequate cash flows from operating activities to sustain current levels of operations. The Company maintains favorable banking relationships and anticipates that the necessary credit agreements will be extended or new agreements will be entered into in order to provide future borrowing requirements as needed.

 

17


The Company maintains the following credit ratings:

 

     Credit Ratings

     Moody’s

   Standard
& Poor’s


   Fitch

Long-term debt

   A3    BBB+    A

 

The Company has an agreement with Preferred Receivables Funding Corporation and JPMorgan Chase, as agent, under which the Company periodically sells, generally with recourse, an undivided interest in the revolving pool of its private label credit card receivables up to a maximum of $225 million. The agreement runs through December 14, 2006, and is renewable for one year intervals at the Company’s request and the investor’s option. No receivables were sold as of January 28, 2006, or January 29, 2005. For financial reporting purposes, receivables sold are treated as secured borrowings.

 

The Company has an unsecured revolving bank credit facility totaling $532 million. In addition, the Company also has two demand notes with availability totaling $50 million. Depending on the type of advance under these facilities, amounts borrowed bear interest at competitive bid rates; the LIBOR plus a margin, based on the Company’s long-term unsecured debt rating; or the agent bank’s base rate.

 

Outlook

 

The Company’s earnings guidance for fiscal 2006 is to achieve net income growth of 13% to 18%, based upon a comparable store sales increase of 2% to 4% and total sales growth of 12% to 14%. The Company will attain this goal by introducing new brands and extending successful brands into additional areas of the store. The Company will also focus on improved receipt flow to improve transitions and lower clearance levels. Finally, the Company will continue to invest in both direct mail and broadcast media to support the new brand launches and to build sales momentum throughout the year.

 

The Company will achieve its net income increase through a combination of new store and comparable store sales growth, improvement in gross margin rate and the assumption of S,G&A expense leverage at a 2% comparable sales increase.

 

Contractual Obligations

 

The Company has aggregate contractual obligations of $13,448.5 million related to debt repayments, capital leases, operating leases, royalties and purchase obligations as follows:

 

    Fiscal Year

    2006

  2007

  2008

  2009

  2010

  Thereafter

  Total

    (In Thousands)

Long-term debt (a)

  $ 162,547   $ 59,144   $ 59,104   $ 58,775   $ 58,775   $ 1,751,175   $ 2,149,520

Capital leases (a)

    19,286     19,761     19,939     18,467     15,871     189,555     282,879

Operating leases

    340,540     340,648     335,598     331,704     329,643     6,404,148     8,082,281

Royalties

    7,221     13,462     15,250     17,731     20,969     1,688     76,321

Purchase obligations (b)

    2,520,248     —       —       —       —       —       2,520,248

Other (c)

    156,457     26,352     12,149     7,593     7,361     127,304     337,216
   

 

 

 

 

 

 

Total

  $ 3,206,299   $ 459,367   $ 442,040   $ 434,270   $ 432,619   $ 8,473,870   $ 13,448,465
   

 

 

 

 

 

 


(a)   Annual commitments on long-term debt and capital leases are inclusive of related interest costs which total $1,152.8 million and $125.6 million, respectively.
(b)   The Company’s purchase obligations consist mainly of purchase orders for merchandise. Amounts committed under open purchase orders for merchandise are cancelable without penalty prior to a date that precedes the vendors scheduled shipment date.
(c)   The other category above includes commitments for stores to be opened in fiscal 2006 and 2007 and employment contracts.

 

18


The Company also has outstanding letters of credit and stand-by letters of credit that total approximately $33.2 million at January 28, 2006. If certain conditions were met under these arrangements, the Company would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience, the Company does not expect to make any significant payments. Therefore, they have been excluded from the preceding table.

 

Off-Balance Sheet Arrangements

 

The Company has not provided any financial guarantees as of January 28, 2006.

 

The Company has not created, and is not party to, any special-purpose or off balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.

 

Critical Accounting Policies and Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts. A discussion of the more significant estimates follows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.

 

Allowance for Doubtful Accounts

 

The Company records an allowance for doubtful accounts as an estimate of the accounts receivable balance that may not be collected. The Company evaluates the collectibility of accounts receivable based on the aging of accounts, historical write off experience and specific review for potential bad debts. Delinquent accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. For all other accounts, the Company recognizes reserves for bad debts based on the length of time the accounts are past due and the anticipated future write-offs based on historical experience.

 

Factors that would cause this allowance to increase primarily relate to increased customer bankruptcies or other difficulties that make further collection unlikely. Conversely, improved write-off experience and aging of receivables would result in a decrease in the provision.

 

Retail Inventory Method and Inventory Valuation

 

The Company values its inventory at the lower of cost or market with cost determined on the first-in, first-out (FIFO) basis using the retail inventory method (RIM). Under RIM, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of the retail inventory method will result in inventories being valued at the lower of cost or market as markdowns are currently taken as a reduction of the retail value of inventories.

 

Based on a review of historical clearance markdowns, current business trends, expected vendor funding and discontinued merchandise categories, an adjustment to inventory is recorded to reflect additional markdowns which are estimated to be necessary to liquidate existing clearance inventories and reduce inventories to the lower of cost or market. Management believes that the Company’s inventory valuation approximates the net realizable value of clearance inventory and results in carrying inventory at the lower of cost or market.

 

19


Vendor Allowances

 

The Company records vendor allowances and discounts in the income statement when the purpose for which those monies were designated is fulfilled. Allowances provided by vendors generally relate to profitability of inventory recently sold and, accordingly, are reflected as reductions to cost of merchandise sold as negotiated. Vendor allowances received for advertising or fixture programs reduce the Company’s expense or expenditure for the related advertising or fixture program when appropriate. Vendors allowances will fluctuate based on the amount of promotional and clearance markdowns necessary to liquidate the inventory. See Note 1 to the consolidated financial statements, “Business and Summary of Accounting Policies.”

 

Insurance Reserve Estimates

 

The Company uses a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by its associates. The Company determines the estimates for the liabilities associated with these risks by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. A change in claims frequency and severity of claims from historical experience as well as changes in state statutes and the mix of states in which the Company operates could result in a change to the required reserve levels. Under its workers’ compensation and general liability insurance policies, the Company retains the initial risk of $500,000 and $250,000, respectively, per occurrence. The Company also has a lifetime medical payment limit of $1.5 million.

 

Impairment of Assets and Closed Store Reserves

 

The Company has a significant investment in property and equipment and favorable lease rights. The related depreciation and amortization is computed using estimated useful lives of up to 50 years. The Company reviews whether indicators of impairment of long-lived assets held for use (including favorable lease rights) are present annually or whenever an event, such as decisions to close a store, indicate the carrying value of the asset may not be recoverable. The Company has historically not experienced any significant impairment of long-lived assets or closed store reserves. Decisions to close a store can also result in accelerated depreciation over the revised useful life. If the store is leased, a reserve is set up for the discounted difference between the rent and the expected sublease rental income when the location is no longer in use. A significant change in cash flows, market valuation, demand for real estate or other factors, could result in an increase or decrease in the reserve requirement or impairment charge.

 

Income Taxes

 

The Company pays income taxes based on tax statutes, regulations and case law of the various jurisdictions in which it operates. At any one time, multiple tax years are subject to audit by the various taxing authorities. The Company’s effective income tax rate was 37.4% in fiscal 2005 and 37.8% in fiscal 2004 and 2003. The effective rate is impacted by changes in law, location of new stores, level of earnings and the result of tax audits.

 

Operating Leases

 

The Company leases retail stores under operating leases. Many lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The Company uses a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the building for initial setup of fixtures and merchandise.

 

New Accounting Pronouncements

 

In November 2004, the FASB issued SFAS No. 151, “ Inventory Costs, an Amendment of Accounting Research Bulletin No. 43, Chapter 4.” SFAS No. 151 amends the guidance in ARB No. 43 on inventory pricing and clarifies that abnormal idle facility expense, freight, handling costs and spoilage are to be treated as current

 

20


period expenses and not a cost of inventory. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect this statement to have an impact on net earnings, cash flows or financial position upon adoption.

 

In March 2005, the FASB issued Interpretation No. 47 (FIN 47) to clarify the guidance included in SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. If amounts cannot be reasonably estimated, certain disclosures are required about the unrecognized asset retirement obligations. FIN 47 was adopted by the Company in fiscal 2005. Adoption of this statement did not have a material impact on the Company’s consolidated financial position.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which establishes retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

 

In June 2005, the Emerging Issues Task Force (EITF) released No. 05-6, “Determining the Amortization Period for Leasehold Improvements,” was issued. It provides guidance on determining amortization periods for leasehold improvements purchased after lease inception or acquired in a business combination. Leasehold improvements acquired in a business combination should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition. Leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. Effective for leasehold improvements purchased or acquired in reporting periods beginning after June 29, 2005. The adoption of this guidance did not have an impact on the Company’s net earnings, cash flows or financial position.

 

In October 2005, the FASB issued FASB Staff Position FAS 123 (R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)” (FSP 123(R)-2). SFAS No. 123 (R) (FAS No. 123R) requires companies to estimate the fair value of share based payment awards when the award has been granted. One of the criteria for determining that an award has been granted is that the employer and its employees have a mutual understanding of the key terms and conditions of the award. Under FSP 123 (R)-2, a mutual understanding is assumed to exist on the date the award is approved by the Board of Directors and the key terms and conditions of the award are expected to be communicated to the individual within a relatively short time period from the date of approval. This FSP 123 (R)-2 is applicable upon initial adoption of SFAS No. 123 (R) or for companies who have already adopted SFAS No. 123R, the first reporting period after the FSP is posted to the FASB website. As required, the Company applied the guidance in FSP 123 (R)-2 beginning October 2005. The adoption of this guidance did not have a material impact on the Company’s net earnings, cash flows or financial position.

 

In October 2005, the FASB issued FASB Staff Position FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (FSP 13-1). FSP 13-1 requires that rental costs associated with ground or building operating leases that are incurred during the construction period be recognized as rental expense. FSP 13-1 is applicable for the first reporting period after December 15, 2005. The Company has historically capitalized rental costs incurred during a construction period and the adoption of this guidance is expected to negatively impact net income per diluted share by approximately $0.03 in fiscal 2006.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s primary exposure to market risk consists of changes in interest rates or borrowings. At January 28, 2006, the Company’s long-term debt, excluding capital leases, was $996.7 million, all of which is fixed rate debt.

 

Long-term fixed rate debt is utilized as a primary source of capital. When these debt instruments mature, the Company may refinance such debt at then existing market interest rates, which may be more or less than interest

 

21


rates on the maturing debt. If interest rates on the existing fixed rate debt outstanding at January 28, 2006 and January 29, 2005 changed by 100 basis points, the Company’s annual interest expense would change by $10.0 million in each respective year.

 

During fiscal 2005, average borrowings under the Company’s variable rate revolving credit facilities and its short-term financing of its proprietary accounts receivable were $79.0 million and $76.1 million at January 28, 2006 and January 29, 2005, respectively. If interest rates on the average fiscal 2005 and fiscal 2004 variable rate debt changed by 100 basis points, the Company’s annual interest expense would change by $790,000 and $761,000, respectively, assuming comparable borrowing levels.

 

During fiscal 2005 and fiscal 2004, the Company did not enter into any derivative financial instruments.

 

Item 8.  Financial Statements and Supplementary Data

 

The financial statements are included in this report beginning on page F-3.

 

Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosures

 

None

 

Item 9A.  Controls and Procedures

 

(a) Evaluation of Disclosure and Procedures

 

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (the “Evaluation”) as of the last day of the period covered by this Report. Based upon the Evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, alerting them to material information required to be disclosed in the Company’s periodic reports filed with the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

(b) Management Report on Internal Control over Financial Reporting

 

The management of Kohl’s Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Kohl’s Corporation’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

 

All internal control systems, no matter how well designed, have inherit limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Kohl’s Corporation management assessed the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of January 28, 2006, the Company’s internal control over financial reporting is effective based on those criteria.

 

Kohl’s Corporation’s independent registered public accounting firm, Ernst & Young LLP, issued an audit report on our assessment of the Company’s internal control over financial reporting. This report appears on the following page.

 

(c) Changes in Internal Control over Financial Reporting

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls during the last fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

22


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

Kohl’s Corporation

 

We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that Kohl’s Corporation maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Kohl’s Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Kohl’s Corporation maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Kohl’s Corporation maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Kohl’s Corporation as of January 28, 2006 and January 29, 2005, and the related consolidated statements of net income, changes in shareholders’ equity and cash flows for each of the three years in the period ended January 28, 2006 and our report dated March 3, 2006 expressed an unqualified opinion thereon.

 

ERNST & YOUNG LLP

 

Milwaukee, Wisconsin

March 3, 2006

 

23


PART III

 

Item 9B.  Other Information

 

None

 

Item 10.  Directors and Executive Officers of Registrant

 

The information set forth under “Election of Directors” on pages 1-3, under “Board of Directors’ Meetings, Attendance and Compensation” on pages 3-4, under “Corporate Governance Guidelines and Code of Ethics” on page 6 under “Committees of the Board of Directors” on pages 4-6 and under “Section 16(a) Beneficial Ownership Reporting Compliance” on page 12 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 26, 2006 is incorporated herein by reference.

 

The executive officers of the Company as of March 1, 2006 are as follows:

 

Name


   Age

  

Position


R. Lawrence Montgomery

   57    Chairman, Chief Executive Officer and Director

Kevin Mansell

   53    President and Director

Arlene Meier

   53    Chief Operating Officer, Treasurer and Director

Wesley S. McDonald

   43    Executive Vice President—Chief Financial Officer

 

Mr. Montgomery was elected Chairman of the Board in February 2003. He was promoted to Chief Executive Officer in February 1999. He was appointed to the Board of Directors in 1994 and served as Vice Chairman from March 1996 to November 2000. Mr. Montgomery served as Executive Vice President of Stores from February 1993 to February 1996 after joining the Company as Senior Vice President—Director of Stores in 1988. Mr. Montgomery has 35 years of experience in the retail industry.

 

Mr. Mansell has served as President and Director since February 1999. Mr. Mansell served as Executive Vice President—General Merchandise Manager from 1987 to 1998. Mr. Mansell joined the Company as a Divisional Merchandise Manager in 1982, and has 31 years of experience in the retail industry.

 

Ms. Meier has served as Chief Operating Officer since November 2000. Ms. Meier served as Executive Vice President—Chief Financial Officer from October 1994 to November 2000 and was appointed to the Board of Directors in March 2000. Ms. Meier joined the Company as Vice President—Controller in 1989. Ms. Meier has 30 years of experience in the retail industry.

 

Mr. McDonald has served as Executive Vice President—Chief Financial Officer since August 2003. Prior to joining the Company, Mr. McDonald held the position of Vice President—Chief Financial Officer at Abercrombie & Fitch from 2000 to 2003. Additionally, Mr. McDonald had served for 12 years in various executive positions at Target Corporation. Mr. McDonald has 18 years of experience in the retail industry.

 

Item 11.  Executive Compensation

 

The information set forth under “Executive Compensation” on pages 10-14, “Compensation Committee Interlocks and Insider Participation” on page 6 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 26, 2006 is incorporated herein by reference. A description of the Company’s compensation of directors as set forth under “Board of Directors Meetings, Attendance and Compensation” on page 4 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 26, 2006 is incorporated herein by reference.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information set forth under “Beneficial Ownership of Shares” on pages 8-9 and under “Equity Compensation Plan Information” on page 12 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 26, 2006 is incorporated herein by reference.

 

24


Item 13.  Certain Relationships and Related Transactions

 

The information set forth under “Other Transactions” on pages 6-7 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 26, 2006 is incorporated herein by reference.

 

Item 14.  Principal Accountant Fees and Services

 

The information set forth under “Fees Paid to Ernst & Young LLP” on page 20 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 26, 2006 is incorporated herein by reference.

 

PART IV

 

Item 15.  Exhibits and Financial Statement Schedules

 

(a) Documents filed as part of this report:

 

1. Consolidated Financial Statements:

 

See “Index to Consolidated Financial Statements and Schedule of Kohl’s Corporation” on page F-1, the Report of Independent Registered Public Accounting Firm on page F-2 and the Consolidated Financial Statements and Schedule on pages F-3 to F-24, all of which are incorporated herein by reference.

 

2. Financial Statement Schedule:

 

See “Index to Consolidated Financial Statements and Schedule of Kohl’s Corporation” on page F-1 and the “Financial Statement Schedule” on page F-24, all of which are incorporated herein by reference.

 

3. Exhibits:

 

See “Exhibit Index” of this Form 10-K, which is incorporated herein by reference.

 

The Exhibit Index has been omitted from this printed shareholder report. Shareholders may obtain the Exhibit Index without charge by calling Kohl’s investor relations at 262-703-1440 or by accessing the Company’s website at www.kohls.com, selecting “Investor Relations,” then “Financial Links,” then “SEC Filings.”

 

25


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND SCHEDULE OF KOHL’S CORPORATION

 

     Page

Consolidated Financial Statements

    

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets

   F-3

Consolidated Statements of Income

   F-4

Consolidated Statement of Changes in Shareholders’ Equity

   F-5

Consolidated Statements of Cash Flows

   F-6

Notes to Consolidated Financial Statements

   F-7

Financial Statement Schedule

    

Schedule II—Valuation and Qualifying Accounts

   F-24

 

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

Kohl’s Corporation

 

We have audited the accompanying consolidated balance sheets of Kohl’s Corporation and subsidiaries (the Company) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended January 28, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kohl’s Corporation at January 28, 2006 and January 29, 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 28, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 2 of the consolidated financial statements, in 2005 the Company changed its method of accounting for share-based payments.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Kohl’s Corporation’s internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2006, expressed an unqualified opinion thereon.

 

ERNST & YOUNG LLP

 

Milwaukee, Wisconsin

March 3, 2006

 

F-2


KOHL’S CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Data)

 

     January 28,
2006


   January 29,
2005
(Restated)


ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 126,839    $ 116,717

Short-term investments

     160,077      88,767

Accounts receivable trade, net of allowance for doubtful accounts of $26,335 and $24,657, respectively

     1,652,065      1,389,632

Merchandise inventories

     2,237,568      1,946,977

Deferred income taxes

     23,677      54,050

Other

     65,826      47,294
    

  

Total current assets

     4,266,052      3,643,437

Property and equipment, net

     4,543,832      3,987,945

Favorable lease rights, net

     212,380      224,903

Goodwill

     9,338      9,338

Other assets

     121,436      113,676
    

  

Total assets

   $ 9,153,038    $ 7,979,299
    

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 829,971    $ 704,655

Accrued liabilities

     641,635      570,757

Income taxes payable

     166,908      177,182

Current portion of long-term debt and capital leases

     107,941      3,464
    

  

Total current liabilities

     1,746,455      1,456,058

Long-term debt and capital leases

     1,046,104      1,103,441

Deferred income taxes

     217,801      229,381

Other long-term liabilities

     185,340      156,521

Shareholders’ equity:

             

Common stock-$.01 par value, 800,000 shares authorized, 345,088 and 343,345 shares issued and outstanding, respectively

     3,450      3,433

Paid-in capital

     1,583,035      1,501,572

Retained earnings

     4,370,853      3,528,893
    

  

Total shareholders’ equity

     5,957,338      5,033,898
    

  

Total liabilities and shareholders’ equity

   $ 9,153,038    $ 7,979,299
    

  

 

See accompanying notes

 

F-3


KOHL’S CORPORATION

 

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

 

     Fiscal Year Ended

 
     January 28,
2006


    January 29,
2005
(Restated)


    January 31,
2004
(Restated)


 

Net sales

   $ 13,402,217     $ 11,700,619     $ 10,282,094  

Cost of merchandise sold

     8,639,278       7,586,992       6,887,033  
    


 


 


Gross margin

     4,762,939       4,113,627       3,395,061  

Operating expenses:

                        

Selling, general and administrative

     2,963,472       2,582,996       2,157,030  

Depreciation and amortization

     338,916       288,173       239,558  

Preopening expenses

     44,370       49,131       47,029  
    


 


 


Total operating expenses

     3,346,758       2,920,300       2,443,617  
    


 


 


Operating income

     1,416,181       1,193,327       951,444  

Other expense (income):

                        

Interest expense

     72,086       64,761       76,371  

Interest income

     (1,695 )     (2,309 )     (3,440 )
    


 


 


Income before income taxes

     1,345,790       1,130,875       878,513  

Provision for income taxes

     503,830       427,474       332,050  
    


 


 


Net income

   $ 841,960     $ 703,401     $ 546,463  
    


 


 


Net income per share:

                        

Basic

   $ 2.45     $ 2.06     $ 1.61  

Diluted

   $ 2.43     $ 2.04     $ 1.59  

 

 

See accompanying notes

 

F-4


KOHL’S CORPORATION

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In Thousands)

 

     Common Stock

   Paid-In
Capital


   Retained
Earnings


    Total
Shareholders’
Equity


     Shares

   Amount

       

Balance at February 1, 2003 (previously reported)

   337,322    $ 3,373    $ 1,082,277    $ 2,393,692     $ 3,479,342

Cumulative effect of restatement on prior years (see Note 2)

   —        —        167,047      (114,663 )     52,384
    
  

  

  


 

Balance at February 1, 2003 (as restated, see Note 2)

   337,322      3,373      1,249,324      2,279,029       3,531,726

Exercise of stock options

   2,819      28      46,229      —         46,257

Income tax benefit from exercise of stock options

   —        —        31,719      —         31,719

Share-based compensation expense

   —        —        55,358      —         55,358

Net income

   —        —        —        546,463       546,463
    
  

  

  


 

Balance at January 31, 2004 (as restated, see Note 2)

   340,141      3,401      1,382,630      2,825,492       4,211,523

Exercise of stock options

   3,204      32      47,062      —         47,094

Income tax benefit from exercise of stock options

   —        —        28,505      —         28,505

Share-based compensation expense

   —        —        43,375      —         43,375

Net income

   —        —        —        703,401       703,401
    
  

  

  


 

Balance at January 29, 2005 (as restated, see Note 2)

   343,345      3,433      1,501,572      3,528,893       5,033,898

Exercise of stock options

   1,743      17      22,841      —         22,858

Income tax benefit from exercise of stock options

   —        —        14,458      —         14,458

Share-based compensation expense

   —        —        40,639      —         40,639

Unearned compensation amortization

   —        —        3,525      —         3,525

Net income

   —        —        —        841,960       841,960
    
  

  

  


 

Balance at January 28, 2006

   345,088    $ 3,450    $ 1,583,035    $ 4,370,853     $ 5,957,338
    
  

  

  


 

 

 

See accompanying notes

 

F-5


KOHL’S CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

     Fiscal Year Ended

 
     January 28,
2006


    January 29,
2005
(Restated)


    January 31,
2004
(Restated)


 

Operating activities

                        

Net income

   $ 841,960     $ 703,401     $ 546,463  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation and amortization

     339,608       288,892       246,594  

Share-based compensation

     43,941       43,375       55,358  

Excess tax benefits from share-based compensation

     (14,458 )     (10,563 )     (14,797 )

Deferred income taxes

     18,793       78,274       54,629  

Amortization of debt discount

     218       216       3,576  

Changes in operating assets and liabilities:

                        

Accounts receivable trade, net

     (262,433 )     (239,475 )     (159,347 )

Merchandise inventories

     (290,591 )     (339,987 )     20,006  

Other current and long-term assets

     (19,594 )     19,188       (27,180 )

Accounts payable

     125,316       172,056       (118,132 )

Accrued and other long-term liabilities

     94,747       151,558       107,471  

Income taxes

     4,184       70,160       25,023  
    


 


 


Net cash provided by operating activities

     881,691       937,095       739,664  

Investing activities

                        

Acquisition of property and equipment and favorable lease rights

     (799,417 )     (889,598 )     (831,599 )

Net (purchases) sales of short-term investments

     (71,310 )     (54,482 )     441,706  

Acquisition of software and other

     (33,056 )     (33,411 )     (25,624 )
    


 


 


Net cash used in investing activities

     (903,783 )     (977,491 )     (415,517 )

Financing activities

                        

Excess tax benefits from share-based compensation

     14,458       10,563       14,797  

Payments of convertible and other long-term debt

     (5,102 )     (13,292 )     (362,538 )

Net proceeds from issuance of common shares

     22,858       47,094       46,257  
    


 


 


Net cash provided by (used in) financing activities

     32,214       44,365       (301,484 )
    


 


 


Net increase in cash and cash equivalents

     10,122       3,969       22,663  

Cash and cash equivalents at beginning of year

     116,717       112,748       90,085  
    


 


 


Cash and cash equivalents at end of year

   $ 126,839     $ 116,717     $ 112,748  
    


 


 


 

See accompanying notes

 

F-6


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Business and Summary of Accounting Policies

 

Business

 

As of January 28, 2006, Kohl’s Corporation (the Company) operated 732 family oriented, specialty department stores located in 41 states that feature exclusive and national brand apparel, footwear, accessories, soft home products and housewares targeted to middle-income customers.

 

Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Accounting Period

 

The Company’s fiscal year end is the Saturday closest to January 31. The financial statements reflect the results of operations and cash flows for the fiscal years ended January 28, 2006 (fiscal 2005), January 29, 2005 (fiscal 2004) and January 31, 2004 (fiscal 2003). Fiscal 2005, 2004 and 2003 each include 52 weeks.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Reclassifications

 

Certain reclassifications have been made to prior years’ financial statements to conform to the fiscal 2005 presentation.

 

Cash Equivalents

 

Cash equivalents represent money market funds and are stated at cost, which approximates fair value.

 

Short-term Investments

 

Short-term investments consist primarily of municipal auction rate securities and are stated at cost, which approximates market value. Short-term investments are classified as available-for-sale securities and are highly liquid. These securities generally have a put option feature that allows the Company to liquidate the investments at par.

 

Accounts Receivable Trade, Net

 

The Company evaluates the collectibility of accounts receivable based on a combination of factors, including aging and historical trends. Delinquent accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. For all other accounts, the Company recognizes reserves for bad debts based on the length of time the accounts are past due and the anticipated future write-offs based on historical experience.

 

F-7


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.    Business and Summary of Accounting Policies (continued)

 

Merchandise Inventories

 

Merchandise inventories are valued at the lower of cost or market. The Company changed its method of accounting for inventory from the last in, first out method (LIFO) to the first in, first out method (FIFO) during fiscal 2005. The Company believes that adopting the FIFO method provides more transparent financial reporting and is consistent with the Company’s changing business environment with respect to the sourcing of goods and the nature of its inventory. The cumulative effect of the change was a $2.4 million increase to gross margin recorded in the quarter ended July 30, 2005. Because the accounting change was not material to the Company’s financial statements for any of the years presented, no retroactive restatement of prior years’ financial statements was made. At January 29, 2005, inventories would have been $2,415,000 higher if they would have been valued using the FIFO method.

 

Property and Equipment

 

Property and equipment is carried at cost and generally depreciated on a straight-line basis over the estimated useful lives of the assets. Property rights under capital leases and improvements to leased property are amortized on a straight-line basis over the term of the lease or useful life of the asset, whichever is less. The annual provisions for depreciation and amortization have been principally computed using the following ranges of useful lives:

 

Buildings and improvements

   8-40 years

Store fixtures and equipment

   3-15 years

Property under capital leases

   5-40 years

 

Construction in progress includes land and improvements for locations not yet opened and for the expansion and remodeling of existing locations in process at the end of each fiscal year.

 

Capitalized Software

 

The Company capitalizes purchased and internally developed software and amortizes such costs on a straight-line basis over 3 to 5 years depending on the estimated life of the software. Capitalized software is included in other long-term assets.

 

Capitalized Interest

 

The Company capitalizes interest on the acquisition and construction of new locations and expansion of existing locations and depreciates that amount over the lives of the related assets. The total interest capitalized was $7,297,000, $13,297,000 and $9,861,000 in fiscal 2005, 2004 and 2003, respectively.

 

Favorable Lease Rights

 

Favorable lease rights are generally amortized on a straight-line basis over the remaining base lease term plus certain options with a maximum of 50 years. Accumulated amortization was $71,537,000 at January 28, 2006 and $59,014,000 at January 29, 2005. Amortization begins when the respective stores are opened. Amortization expense was $12,523,000, $10,288,000 and $9,115,000 for the years ended January 28, 2006, January 29, 2005 and January 31, 2004, respectively. The estimated amortization expense for the current favorable lease right assets for the next five years is expected to be approximately $12,000,000 in 2006, $10,900,000 in 2007, $10,800,000 in 2008 and 2009 and $10,300,000 in 2010.

 

F-8


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.    Business and Summary of Accounting Policies (continued)

 

Long-Lived Assets

 

The Company annually considers whether indicators of impairment of long-lived assets held for use (including favorable lease rights) are present and, if such indicators are present, determines whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. The Company evaluated the ongoing value of its property and equipment and other long-lived assets as of January 28, 2006, and January 29, 2005, and determined that there was no significant impact on the Company’s results of operations.

 

Goodwill

 

The Company completed its annual goodwill impairment tests for fiscal 2005, 2004 and 2003 and determined there was no impairment of existing goodwill. The remaining goodwill balance is $9.3 million as of January 28, 2006 and January 29, 2005.

 

Long-term Liabilities

 

The major components of other long-term liabilities consist of the following:

 

     January 28,
2006


   January 29,
2005


     (In Thousands)

Property related liabilities

   $ 143,896    $ 120,065

Deferred compensation

     27,552      25,967

Other long-term liabilities

     13,892      10,489
    

  

     $ 185,340    $ 156,521
    

  

 

Comprehensive Income

 

Net income for all years presented is the same as comprehensive income.

 

Revenue Recognition

 

Revenue from sales of the Company’s merchandise at its stores is recognized at the time of sale, net of any returns. E-Commerce sales are recorded upon the shipment of merchandise.

 

Vendor Allowances

 

In November 2002, the Emerging Issues Task Force (“EITF”) released No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor,” applicable to fiscal years beginning after December 15, 2002 and is effective for contracts entered into after December 31, 2002. The adoption of EITF No. 02-16 did not have a material impact on net income in fiscal 2003, as the Company entered into substantially all of its fiscal 2003 vendor contracts prior to December 31, 2002. Because substantially all new vendor contracts for new store advertising had been put in place for fiscal 2004, the Company adopted the provisions of EITF No. 02-16 and accounted for these allowances as a reduction of inventory and cost of merchandise sold in fiscal 2004. This change in accounting reduced fiscal year 2004 diluted net income per share by approximately $0.03 per diluted share with the majority of the impact on net income occurring during the first and third quarters of fiscal 2004 in conjunction with the Company’s new store openings and build in inventory. This change in accounting did not impact the Company’s cash flow or the amount of contributions received from the Company’s vendors.

 

F-9


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.    Business and Summary of Accounting Policies (continued)

 

Advertising

 

Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Total advertising costs, net of cooperative advertising agreements, were $594,446,000, $521,033,000 and $373,956,000 in fiscal 2005, 2004 and 2003, respectively. Television and radio broadcast and newspaper circulars make up the majority of the advertising costs all three years. The majority of the increase in total advertising costs in fiscal 2004 was due to the change in accounting for vendor allowances discussed above.

 

Preopening Costs

 

Preopening expenses, which are expensed as incurred, relate to the costs associated with new store openings, including advertising, hiring and training costs for new employees, processing and transporting initial merchandise and step rent expenses.

 

Income Taxes

 

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes.

 

Net Income Per Share

 

The information required to compute basic and diluted net income per share is as follows:

 

     Fiscal Year

     2005

   2004
(Restated)


   2003
(Restated)


     (In Thousands)

Numerator for basic net income per share—net income

   $ 841,960    $ 703,401    $ 546,463

Interest expense related to convertible notes, net of tax

     —        —        2,090
    

  

  

Numerator for diluted net income per share

   $ 841,960    $ 703,401    $ 548,553
    

  

  

Denominator for basic net income per share—weighted average shares

     344,172      341,724      339,199

Impact of dilutive employee stock options (a)

     2,600      3,049      4,263

Shares issued upon assumed conversion of convertible notes

     —        —        1,445
    

  

  

Denominator for diluted net income per share

     346,772      344,773      344,907
    

  

  


(a)   In fiscal 2005, 2004 and 2003, 6,428,000, 7,527,000 and 4,919,000 options, respectively, were not included in the net income per share calculation as the impact of such options was antidilutive.

 

Stock Options

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004) (SFAS No. 123R), “Share Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

 

F-10


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.    Business and Summary of Accounting Policies (continued)

 

Effective January 30, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123R using the “modified retrospective” method, which requires the prior period financial statements to be restated to recognize compensation cost in the amounts previously reported in the pro forma footnote disclosures. See Note 2 for the effect of the adoption on the fiscal 2004 and 2003 results.

 

As of January 28, 2006, the Company had three long-term compensation plans. Information related to the outstanding stock options and nonvested stock are disclosed in Note 9.

 

New Accounting Pronouncements

 

In November 2004, the FASB issued SFAS No. 151, “ Inventory Costs, an Amendment of Accounting Research Bulletin No. 43, Chapter 4.” SFAS No. 151 amends the guidance in ARB No. 43 on inventory pricing and clarifies that abnormal idle facility expense, freight, handling costs and spoilage are to be treated as current period expenses and not a cost of inventory. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect this statement to have an impact on net earnings, cash flows or financial position upon adoption.

 

In March 2005, the FASB issued Interpretation No. 47 (FIN 47) to clarify the guidance included in SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. If amounts cannot be reasonably estimated, certain disclosures are required about the unrecognized asset retirement obligations. FIN 47 was adopted by the Company in fiscal 2005. Adoption of this statement did not have a material impact on the Company’s consolidated financial position.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which establishes retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

 

In June 2005, EITF No. 05-6, “Determining the Amortization Period for Leasehold Improvements,” was issued. It provides guidance on determining amortization periods for leasehold improvements purchased after lease inception or acquired in a business combination. Leasehold improvements acquired in a business combination should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition. Leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. This statement is effective for leasehold improvements purchased or acquired in reporting periods beginning after June 29, 2005. The adoption of this guidance did not have an impact on the Company’s earnings, cash flows or financial position.

 

In October 2005, the FASB issued FASB Staff Position FAS 123 (R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)” (FSP 123(R)-2). SFAS No. 123 R requires companies to estimate the fair value of share based payment awards when the award has been granted. One of the criteria for determining that an award has been granted is that the employer and its employees have a mutual understanding of the key terms and conditions of the award. Under FSP 123 (R)-2, a mutual understanding is assumed to exist on the date the award is approved by the Board of Directors and key terms and conditions of the

 

F-11


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.    Business and Summary of Accounting Policies (continued)

 

award are expected to be communicated to the individual within a relatively short time period from the date of approval. This FSP 123 (R)-2 is applicable upon initial adoption of SFAS No. 123R or for companies who have already adopted SFAS No. 123 R, the first reporting period after the FSP is posted to the FASB website. As required, the Company applied the guidance in FSP 123 (R)-2 beginning October 2005. The adoption of this guidance did not have a material impact on the Company’s net earnings, cash flows or financial position.

 

In October 2005, the FASB issued FASB Staff Position FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (FSP 13-1). FSP 13-1 requires that rental costs associated with ground or building operating leases that are incurred during the construction period be recognized as rental expense. FSP 13-1 is applicable for the first reporting period after December 15, 2005. The Company has historically capitalized rental costs incurred during a construction period and the adoption of this guidance is expected to negatively impact net income per diluted share by approximately $0.03 in fiscal 2006.

 

2.    Restatement of Financial Statements

 

Effective January 30, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123R using the “modified retrospective” method, which requires the prior period financial statements to be restated to recognize compensation cost in the amounts previously reported in the pro forma footnotes.

 

Below is a summary of the effects of the restatement on the Company’s consolidated balance sheet as of January 29, 2005, as well as the effects of these changes on the Company’s consolidated statements of income and consolidated statements of cash flows for fiscal years 2004 and 2003. The cumulative effect of the restatement relating to fiscal years 1995 through 2002 is an increase in paid-in capital of $167.0 million, an increase in deferred income taxes of $52.3 million and an increase in selling, general and administrative expenses (S,G&A) of $185.9 million. As a result, retained earnings at January 31, 2004 decreased by $114.7 million.

 

     Consolidated Balance Sheets

     As previously
reported


   Adjustments

    As restated

     (In Thousands)

January 29, 2005


               

Deferred income taxes

   $ 296,551    $ (67,170 )   $ 229,381

Paid-in capital

     1,258,326      243,246       1,501,572

Retained earnings

     3,704,969      (176,076 )     3,528,893
     Consolidated Statement of Income

     As previously
reported


   Adjustments

    As restated

     (In Thousands, Except per Share Data)

Fiscal year ended January 29, 2005


               

Selling, general and administrative expenses

   $ 2,539,621    $ 43,375     $ 2,582,996

Operating income

     1,236,702      (43,375 )     1,193,327

Income before income taxes

     1,174,250      (43,375 )     1,130,875

Provision for income taxes

     443,870      (16,396 )     427,474

Net income

     730,380      (26,979 )     703,401

Net income per share:

                     

Basic

   $ 2.14    $ (0.08 )   $ 2.06

Diluted

   $ 2.12    $ (0.08 )   $ 2.04

 

F-12


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.    Restatement of Financial Statements (continued)

 

     Consolidated Statement of Income

 
     As previously
reported


    Adjustments

    As restated

 
     (In Thousands, Except per Share Data)  

Fiscal year ended January 31, 2004


                  

Selling, general and administrative expenses

   $ 2,101,672     $ 55,358     $ 2,157,030  

Operating income

     1,006,802       (55,358 )     951,444  

Income before income taxes

     933,871       (55,358 )     878,513  

Provision for income taxes

     352,974       (20,924 )     332,050  

Net income

     580,897       (34,434 )     546,463  

Net income per share:

                        

Basic

   $ 1.71     $ (0.10 )   $ 1.61  

Diluted

   $ 1.69     $ (0.10 )   $ 1.59  
     Consolidated Statement of Cash Flows

 
     As previously
reported


    Adjustments

    As restated

 
     (In Thousands)  

Fiscal year ended January 29, 2005


                  

Net income

   $ 730,380     $ (26,979 )   $ 703,401  

Share-based compensation

     —         43,375       43,375  

Excess tax benefits from share-based compensation

     —         (10,563 )     (10,563 )

Deferred income taxes

     82,430       (4,156 )     78,274  

Income taxes

     82,400       (12,240 )     70,160  

Net cash provided by operating activities

     947,658       (10,563 )     937,095  

Excess tax benefits from share-based compensation

     —         10,563       10,563  

Net cash provided by financing activities

     33,802       10,563       44,365  
     Consolidated Statement of Cash Flows

 
     As previously
reported


    Adjustments

    As restated

 
     (In Thousands)  

Fiscal year ended January 31, 2004


                  

Net income

   $ 580,897     $ (34,434 )   $ 546,463  

Share-based compensation

     —         55,358       55,358  

Excess tax benefits from share-based compensation

     —         (14,797 )     (14,797 )

Deferred income taxes

     65,259       (10,630 )     54,629  

Income taxes

     35,317       (10,294 )     25,023  

Net cash provided by operating activities

     754,461       (14,797 )     739,664  

Excess tax benefits from share-based compensation

     —         14,797       14,797  

Net cash used in financing activities

     (316,281 )     14,797       (301,484 )

 

See Note 11 for the impact of the restatement on fiscal 2004 quarterly information.

 

F-13


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

3.    Selected Balance Sheet Information

 

Property and equipment consist of the following:

 

     January 28,
2006


   January 29,
2005


     (In Thousands)

Land

   $ 576,688    $ 469,851

Buildings and improvements

     3,389,373      2,819,162

Store fixtures and equipment

     1,461,997      1,218,858

Property under capital leases

     172,260      120,240

Construction in progress

     185,213      345,040
    

  

Total property and equipment

     5,785,531      4,973,151

Less accumulated depreciation

     1,241,699      985,206
    

  

     $ 4,543,832    $ 3,987,945
    

  

 

Depreciation expense for property and equipment, including property under capital leases, totaled $295,187,000, $249,839,000 and $207,053,000 for fiscal 2005, 2004 and 2003, respectively.

 

Accrued liabilities consist of the following:

 

     January 28,
2006


   January 29,
2005


     (In Thousands)

Payroll and related fringe benefits

   $ 112,508    $ 72,521

Sales, property and use taxes

     126,709      121,620

Various liabilities to customers

     164,857      124,325

Accrued construction costs

     113,775      140,243

Other accruals

     123,786      112,048
    

  

     $ 641,635    $ 570,757
    

  

 

The various liabilities to customers include gift cards and merchandise return cards that have been issued but not presented for redemption.

 

4.    Accounts Receivable Financing

 

The Company has an agreement with Preferred Receivables Funding Corporation (PREFCO) and JP Morgan Chase, as agent, under which the Company periodically sells, generally with recourse, an undivided interest in the revolving pool of its private label credit card receivables up to a maximum of $225 million. The agreement runs through December 14, 2006, and is renewable for one year intervals at the Company’s request and the investor’s option. No receivables were sold as of January 28, 2006, or January 29, 2005. For financial reporting purposes, receivables sold are treated as secured borrowings.

 

The cost of the current financing program is based on PREFCO’s commercial paper rate, approximately 4.3% and 2.5% at January 28, 2006 and January 29, 2005, respectively, plus certain fees. The agreement is secured by interests in the receivables and contains covenants which require the Company to maintain a minimum portfolio quality and meet certain financial tests (see discussion of financial covenants in Note 5). As of January 28, 2006, the Company was in compliance with all financial tests. The average amount of borrowings during fiscal 2005 was $55.2 million at a weighted average interest rate of 3.8%. The Company reached its highest short-term borrowing level for the year of $225.0 million during October and November 2005.

 

F-14


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.    Accounts Receivable Financing (continued)

 

Revenues from the Company’s credit program, net of operating expenses, are summarized in the following table:

 

     Fiscal Year

     2005

   2004

   2003

     (In Thousands)

Finance charges and other income

   $ 260,966    $ 214,772    $ 182,525

Operating expenses:

                    

Provision for doubtful accounts

     53,505      44,641      43,945

Other credit and collection expenses

     74,205      64,397      53,936
    

  

  

Total operating expenses

     127,710      109,038      97,881
    

  

  

Net revenue of credit program included in selling, general and administrative expenses

   $ 133,256    $ 105,734    $ 84,644
    

  

  

 

5.    Debt

 

Long-term debt consists of the following:

 

Maturing


   Weighted Average
Effective Rate


    January 28,
2006


    January 29,
2005


 
     ($ in Thousands)  

Notes and debentures:

                      

Senior debt (a)

                      

2006

   6.70 %   $ 100,000     $ 100,000  

2011

   6.59 %     400,000       400,000  

2029

   7.36 %     200,000       200,000  

2033

   6.05 %     300,000       300,000  
          


 


Total notes and debentures

   6.59 %     1,000,000       1,000,000  

Capital lease obligations

           157,316       110,256  

Unamortized debt discount

           (4,388 )     (4,606 )

Other

           1,117       1,255  

Less current portion

           (107,941 )     (3,464 )
          


 


Long-term debt and capital leases

         $ 1,046,104     $ 1,103,441  
          


 



(a)   Non-callable and unsecured notes and debentures.

 

Using discounted cash flow analyses based upon the Company’s current incremental borrowing rates for similar types of borrowing arrangements, the Company estimates the fair value of long-term debt, including current portion and excluding capital leases, to be approximately $1,036.0 million at January 28, 2006 and $1,124.4 million at January 29, 2005.

 

The Company has an unsecured revolving bank credit facility totaling $532 million. In addition, the Company has two demand notes with availability totaling $50 million. Depending on the type of advance under these facilities, amounts borrowed bear interest at competitive bid rates; the LIBOR plus a margin, based on the Company’s long-term unsecured debt rating; or the agent bank’s base rate. No amounts were outstanding on these facilities as of January 28, 2006 and January 29, 2005. Borrowings can fluctuate significantly during the

 

F-15


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.    Debt (continued)

 

year due to seasonal financing needs. The average amount of borrowings during fiscal 2005 was $23.8 million at a weighted average interest rate of 4.0%. The Company reached its highest short-term borrowing level for the year of $171.0 million on November 3, 2005.

 

The various debt agreements contain certain covenants that limit, among other things, additional indebtedness, as well as requiring the Company to meet certain financial tests including a minimum coverage ratio of 2.5:1.0 and a maximum leverage ratio of 0.65:1.0. The coverage ratio is basically defined as net income before interest, taxes, depreciation, amortization and rent expense to rent plus net interest and the leverage ratio is defined as included indebtedness to capitalization. As of January 28, 2006, the Company was in compliance with all financial covenants of the debt agreements. The Company achieved a coverage ratio of 5.18:1.0 and a leverage ratio of 0.16:1.0.

 

The Company also has outstanding letters of credit and stand-by letters of credit that total approximately $33.2 million and $42.5 million at January 28, 2006 and January 29, 2005, respectively.

 

Interest payments, net of amounts capitalized, were $73,228,000, $63,750,000 and $67,785,000 in fiscal 2005, 2004 and 2003, respectively.

 

Annual maturities of long-term debt, excluding capital lease obligations, for the next five years are: $100,420,000 in 2006; $368,000 in 2007; $329,000 in 2008; $0 in 2009 and 2010.

 

6.    Commitments

 

The Company leases certain property and equipment. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The lease term commences on the earlier of the date when the Company becomes legally obligated for the rent payments or, in the case of buildings, the date when the Company takes possession of the building for initial setup of fixtures and merchandise. Rent expense charged to operations was $343,594,000, $308,608,000 and $262,574,000 in fiscal 2005, 2004 and 2003, respectively. Rent expense includes contingent rents, based on sales, of $3,689,000, $3,432,000 and $3,265,000 in fiscal 2005, 2004 and 2003, respectively. In addition, many of the store leases obligate the Company to pay real estate taxes, insurance and maintenance costs. These items are not included in the rent expenses listed above. Many store leases include multiple renewal options, exercisable at the Company’s option, that generally range from two additional five-year periods to eight ten-year periods.

 

Property under capital leases consists of the following:

 

     January 28,
2006


    January 29,
2005


 
     (In Thousands)  

Buildings and improvements

   $ 156,976     $ 118,014  

Equipment

     15,284       2,225  

Less accumulated amortization

     (29,256 )     (21,621 )
    


 


     $ 143,004     $ 98,618  
    


 


 

Amortization expense related to capital leases totaled $7,635,000, $4,833,000 and $3,226,000 for fiscal 2005, 2004 and 2003, respectively.

 

F-16


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6.    Commitments (continued)

 

Future minimum lease payments at January 28, 2006, are as follows:

 

     Capital
Leases


   Operating
Leases


     (In Thousands)

Fiscal Year:

             

2006

   $ 19,286    $ 340,540

2007

     19,761      340,648

2008

     19,939      335,598

2009

     18,467      331,704

2010

     15,871      329,643

Thereafter

     189,555      6,404,148
    

  

       282,879    $ 8,082,281
           

Less amount representing interest

     125,563       
    

      

Present value of minimum lease payments

   $ 157,316       
    

      

 

Included in the operating lease schedule above is $618.9 million of minimum lease payments for stores that will open in fiscal 2006 and 2007. The operating lease schedule includes $2,477.4 million for option periods on leases with cancelable options where failure to exercise such options would result in the recognition of accelerated depreciation expense of the related assets.

 

The Company recorded capital leases totaling $52.0 million and $31.4 million during fiscal 2005 and 2004, respectively.

 

In addition, as of January 28, 2006, the Company had entered into commitments totaling approximately $292.8 million related to stores to be opened in fiscal 2006 and fiscal 2007.

 

7.    Benefit Plans

 

The Company has an Employee Stock Ownership Plan (ESOP) for the benefit of its associates other than executive officers. Contributions are made at the discretion of the Board of Directors. The Company recorded expenses of $14,733,000, $12,583,000 and $10,053,000 in fiscal 2005, 2004 and 2003, respectively. Shares of Company common stock held by the ESOP are included as shares outstanding for purposes of the net income per share computations.

 

The Company also has a defined contribution savings plan covering all full-time and certain part-time associates which provides for monthly employer contributions based on a percentage of qualifying contributions made by participating associates. The participants direct their contributions and/or their account balances among any of the Plan’s eleven investment alternatives. Total expense, net of forfeitures, was $4,055,000, $3,743,000 and $3,979,000 in fiscal 2005, 2004 and 2003, respectively.

 

The Company also made defined annual contributions to the savings plan on the behalf of all qualifying full-time and part-time associates based on a percentage of qualifying payroll earnings. The participants direct these contributions and/or their account balances among any of the Plan’s eleven investment alternatives. The total contribution expense was $10,919,000, $9,712,000 and $8,420,000 in fiscal 2005, 2004 and 2003, respectively.

 

F-17


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.    Benefit Plans (continued)

 

The Company also has a non-qualified deferred compensation plan offered to a group of executives which provides for pre-tax compensation deferrals up to 100% of salary and/or bonus. Deferrals and credited investment returns are 100% vested. The expense for fiscal 2005, 2004 and 2003 was immaterial.

 

8.    Income Taxes

 

Deferred income taxes consist of the following:

 

     January 28,
2006


  

January 29,
2005

(Restated)


     (In Thousands)

Deferred tax liabilities:

             

Property and equipment

   $ 368,532    $ 361,695

Deferred tax assets:

             

Merchandise inventories

     5,143      34,320

Accrued and other liabilities

     120,273      110,562

Accrued step rent liability

     48,992      41,482
    

  

       174,408      186,364
    

  

Net deferred tax liability

   $ 194,124    $ 175,331
    

  

 

The components of the provision for income taxes are as follows:

 

     Fiscal Year

     2005

   2004
(Restated)


   2003
(Restated)


     (In Thousands)

Current federal

   $ 436,509    $ 308,766    $ 249,114

Current state

     48,528      40,434      28,307

Deferred federal

Deferred state

    
 
16,996
1,797
    
 
70,246
8,028
    
 
49,508
5,121
    

  

  

     $ 503,830    $ 427,474    $ 332,050
    

  

  

 

The provision for income taxes differs from the amount that would be provided by applying the statutory U.S. corporate tax rate due to the following items:

 

     Fiscal Year

 
     2005

    2004

    2003

 

Provision at statutory rate

     35.0 %     35.0 %     35.0 %

State income taxes, net of federal tax benefit

     2.6       3.0       2.9  

Other

     (0.2 )     (0.2 )     (0.1 )
    


 


 


Provision for income taxes

     37.4 %     37.8 %     37.8 %
    


 


 


Amounts paid for income taxes (in thousands)

   $ 481,711     $ 279,547     $ 253,552  
    


 


 


 

The change in the fiscal 2005 effective tax rate was due to a tax adjustment of $4.9 million due to the favorable resolution of certain state tax matters.

 

F-18


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

9.    Preferred and Common Stock

 

The Company’s authorized capital stock consists of 800,000,000 shares of $0.01 par value common stock and 10,000,000 shares of $0.01 par value preferred stock.

 

The Company’s 1994 and 2003 Long-Term Compensation Plans provide for the granting of various forms of equity-based awards, including nonvested stock and options to purchase shares of the Company’s common stock, to officers and key employees. The 1997 Stock Option Plan for Outside Directors provides for granting of equity-based awards to outside directors.

 

The following table presents the number of options and nonvested stock initially authorized and available to grant under each of the plans:

 

     1994 Plan

   1997 Plan

   2003 Plan

   Total

Options and nonvested stock initially authorized

   24,000,000    400,000    15,000,000    39,400,000

Options and nonvested stock available for grant:

                   

January 29, 2005

   —      267,000    14,208,750    14,475,750

January 28, 2006

   —      244,500    11,514,544    11,759,044

 

The majority of options granted vest in four equal annual installments. Remaining options granted vest in five to ten year increments. The nonvested stock granted vests in three equal installments over three years. Options and nonvested stock that are surrendered or terminated without issuance of shares are available for future grants.

 

Annual awards of stock options to eligible associates are made in the first quarter of the subsequent fiscal year. All awards to outside directors during fiscal 2003, 2004 and 2005 were granted under the 1997 plan.

 

The fair value of each option award is estimated using a Black-Scholes option valuation model that requires the Company to develop estimates for assumptions used in the model. The Black-Scholes option valuation model uses the following assumptions: expected volatility, expected life of the option, risk-free interest rate and dividend yield. The Black-Scholes model was used to estimate the fair value of options at grant date based on the following assumptions:

 

     Fiscal Year

 
     2005

    2004

    2003

 

Dividend yield

     0 %     0 %     0 %

Volatility

     0.342       0.339       0.339  

Risk-free interest rate

     3.8 %     3.5 %     3.5 %

Expected life in years

     6.5       6.2       6.0  

Weighted average fair value at grant date

   $ 20.16     $ 19.16     $ 20.49  

 

The expected volatility assumption used by the Company is based on the historical volatility of the Company’s stock. The Company uses historical data to estimate the expected term of the option and the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the life of the option is based on a blend of U.S. Treasury bond rates. The dividend yield represents the expected dividends on the Company stock for the expected term of the option.

 

SFAS No. 123R requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest. Prior to adoption of SFAS No. 123 R, the Company accounted for forfeitures as they occurred as permitted under previous accounting standards. The cumulative effect of adopting the change in estimating forfeitures is not material to the Company’s financial statements for the year ended January 28, 2006.

 

F-19


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9.    Preferred and Common Stock (continued)

 

The following table summarizes the Company’s stock option activity from February 1, 2003 through January 28, 2006:

 

    

Number

of Options


    Weighted
Average
Exercise
Price


Balance at February 1, 2003

   18,909,268     $ 31.70

Granted

   2,919,739       51.71

Surrendered

   (1,094,219 )     56.78

Exercised

   (2,818,879 )     16.41
    

 

Balance at January 31, 2004

   17,915,909       35.85

Granted

   2,177,589       47.84

Surrendered

   (1,726,688 )     47.67

Exercised

   (3,203,495 )     14.66
    

 

Balance at January 29, 2005

   15,163,315       40.70

Granted

   2,788,486       47.95

Surrendered

   (631,765 )     55.45

Exercised

   (1,517,967 )     15.37
    

 

Balance at January 28, 2006

   15,802,069     $ 43.82
    

 

 

The aggregate intrinsic value of the options outstanding at January 28, 2006 was $112.7 million and the intrinsic value of the options exercisable at January 28, 2006 was $108.4 million.

 

As of January 28, 2006, there was $85.2 million of unrecognized compensation cost related to stock options granted under the plans. The cost is expected to be recognized over a weighted average period of 2.0 years. The total compensation cost recognized related to options during the years ended January 28, 2006, January 29, 2005 and January 31, 2004 was $40.4 million, $43.4 million and $55.4 million, respectively. These amounts were expensed and included in selling, general and administrative (SG&A) expenses in the accompanying Consolidated Statements of Income.

 

Options exercisable at:

 

     Shares

   Weighted
Average
Exercise
Price


January 28, 2006

   9,856,271    $ 40.31

January 29, 2005

   9,816,584    $ 35.26

January 31, 2004

   12,012,527    $ 29.23

 

F-20


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9.    Preferred and Common Stock (continued)

 

Additional information related to options outstanding at January 28, 2006, segregated by grant price range, is summarized below:

 

     Exercise Price Range

     $7.14 to
$24.76


   $24.77 to
$42.38


   $42.39 to
$49.56


  

$49.57 to

$60.00


   $60.01 to
$77.62


Options outstanding

     2,539,120      3,393,633      3,441,033      3,169,788      3,258,495

Weighted average exercise price of options outstanding

   $ 13.41    $ 34.06    $ 47.35    $ 51.91    $ 66.10

Weighted average remaining contractual life of options outstanding (years)

     3.9      8.8      13.7      12.3      10.7

Options exercisable

     2,459,120      3,114,429      333,126      1,306,375      2,643,221

Weighted average exercise price of options exercisable

   $ 13.61    $ 33.55    $ 48.62    $ 52.14    $ 66.21

Weighted average remaining contractual life of options exercisable (years)

     4.1      8.5      13.0      11.4      10.5

 

The aggregate intrinsic value of the options exercised during the years ended January 28, 2006, January 29, 2005 and January 31, 2004 was $55.0 million, $107.8 million and $111.1 million, respectively.

 

The Company has awarded shares of nonvested common stock to eligible key employees. All awards have restriction periods tied primarily to employment and/or service. The awards vest over three years. The awards are expensed on a straight-line basis over the vesting period. The Company’s nonvested stock activity during the year ended January 28, 2006 was as follows:

 

Nonvested Stock


   Shares

    Weighted-
Average
Grant
Date Fair
Value


(In thousands except per share)

            

Granted during 2004 and Nonvested at January 29, 2005

   100     $ 49.27

Granted

   137       48.47

Vested

   (33 )     49.27

Forfeited

   —         —  
    

 

Nonvested at January 28, 2006

   204     $ 48.82
    

 

 

There was $7.9 million and $4.8 million of unearned compensation cost related to the nonvested stock granted under the plans as of January 28, 2006 and January 29, 2005, respectively. The cost is expected to be recognized over a weighted-average period of 2.1 years. Total compensation expense recognized related to nonvested stock during the years ended January 28, 2006 and January 29, 2005 was $3.5 million and $0.1 million, respectively. There was no nonvested stock granted as of January 31, 2004.

 

10.    Contingencies

 

The Company and its subsidiaries are not currently parties to any material legal proceedings, but are subject to certain legal proceedings and claims from time to time that are incidental to their ordinary course of business. The Company will record a liability related to its legal proceedings and claims when it has determined that it is probable that the Company will be obligated to pay and the related amount can be reasonably estimated, and it will disclose the related facts in the footnotes to its financial statements, if material. If the Company determines that an obligation is reasonably possible, the Company will if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made.

 

F-21


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

11.    Quarterly Financial Information (Unaudited)

 

Financial Information

 

     Fiscal Year 2005

     First

   Second

   Third

   Fourth

   Total

     (In Thousands, Except Per Share Data)

Net sales

   $ 2,742,838    $ 2,888,078    $ 3,119,360    $ 4,651,941    $ 13,402,217

Gross margin

     983,200      1,068,585      1,132,594      1,578,560      4,762,939

Net income

     124,734      187,186      155,127      374,913      841,960

Basic shares

     343,526      344,066      344,441      344,656      344,172

Basic net income per share

   $ 0.36    $ 0.54    $ 0.45    $ 1.09    $ 2.45

Diluted shares

     345,906      346,772      346,778      346,590      346,772

Diluted net income per share

   $ 0.36    $ 0.54    $ 0.45    $ 1.08    $ 2.43

 

     Fiscal Year 2004 (Restated)

     First

   Second

   Third

   Fourth

   Total

     (In Thousands, Except Per Share Data)

Net sales

   $ 2,380,173    $ 2,497,858    $ 2,743,882    $ 4,078,706    $ 11,700,619

Gross margin

     847,437      910,049      985,551      1,370,590      4,113,627

Net income:

                                  

As previously reported

     110,783      153,727      140,933      324,937      730,380

As restated

     103,084      146,900      134,591      318,826      703,401

Basic shares

     340,434      341,030      342,312      343,160      341,724

Basic net income per share:

                                  

As previously reported

   $ 0.33    $ 0.45    $ 0.41    $ 0.95    $ 2.14

As restated

   $ 0.30    $ 0.43    $ 0.39    $ 0.93    $ 2.06

Diluted shares

     343,858      344,195      344,896      345,678      344,773

Diluted net income per share:

                                  

As previously reported

   $ 0.32    $ 0.45    $ 0.41    $ 0.94    $ 2.12

As restated

   $ 0.30    $ 0.43    $ 0.39    $ 0.92    $ 2.04

 

Due to changes in stock prices during the year and timing of issuance of shares, the cumulative total of quarterly net income per share amounts may not equal the net income per share for the year.

 

12.    Related Party

 

A director of the Company is also a shareholder of a law firm which performs legal services for the Company.

 

The Company entered into an agreement with Blackhawk Marketing Services, Inc. (Blackhawk), in which Blackhawk distributes the Company’s prepaid gift cards for sale in various retail outlets across the country. In return for its services, Blackhawk receives a fee, which is calculated as a percentage of the gift card sales volume. Blackhawk is a wholly-owned subsidiary of Safeway Stores, Inc. (Safeway) and a director of the Company is also Chairman, President and Chief Executive Officer of Safeway. The agreement between the Company and Blackhawk was entered into in the ordinary course of the Company’s business.

 

F-22


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

13.    Subsequent Event (Unaudited)

 

On March 6, 2006, the Company entered into a definitive agreement to sell its private label credit card accounts and outstanding balances associated with the accounts to JPMorgan Chase & Co. (Chase). The total purchase price is comprised of face value of the receivable balance, estimated at $1.5 billion at the time of closing. The Company currently has no securitization liabilities and expects to receive the entire purchase price in cash. In addition, the Company entered into a multi-year agreement in which it will maintain its current credit operations and will continue to handle all customer service functions and will continue to be responsible for all advertising and marketing related to its credit card customers. In return, the Company is to receive on-going payments related to the profitability of the portfolio. The transaction is subject to customary regulatory review and closing conditions. In addition, the Company’s board of directors has authorized a $2.0 billion share repurchase program, which it expects to complete over the next two to three years.

 

F-23


KOHL’S CORPORATION

 

SCHEDULE II

 

Valuation and Qualifying Accounts

 

     Fiscal Year Ended

 
     January 28,
2006


    January 29,
2005


    January 31,
2004


 
     (In Thousands)  

Accounts Receivable—Allowances:

                        

Balance at Beginning of Year

   $ 24,657     $ 22,521     $ 20,880  

Charged to Costs and Expenses

     53,505       44,641       43,945  

Deductions—Bad Debts Written off, Net of Recoveries and Other Allowances

     (51,827 )     (42,505 )     (42,304 )
    


 


 


Balance at End of Year

   $ 26,335     $ 24,657     $ 22,521  
    


 


 


 

F-24


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Kohl’s Corporation

By:  

 

/S/    R. LAWRENCE MONTGOMERY

 

   

R. Lawrence Montgomery

   

Chairman, Chief Executive Officer and Director

   

(Principal Executive Officer)

 

Dated: March 17, 2006

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

/S/    R. LAWRENCE MONTGOMERY

 

      

/S/    WILLIAM S. KELLOGG

 

R. Lawrence Montgomery

Chairman, Chief Executive Officer and Director

(Principal Executive Officer)

      

William S. Kellogg

Director

/S/    KEVIN MANSELL

 

      

/S/    ARLENE MEIER

 

Kevin Mansell

President and Director

      

Arlene Meier

Chief Operating Officer, Treasurer and Director

/S/    JAY H. BAKER

 

        

Jay H. Baker

Director

      

Steven A. Burd

Director

          

Wayne Embry

Director

      

James D. Ericson

Director

/S/    JOHN F. HERMA

 

      

/S/    FRANK SICA

 

John F. Herma

Director

      

Frank Sica

Director

        

/S/    PETER M. SOMMERHAUSER

 

Stephen E. Watson

Director

      

Peter M. Sommerhauser

Director

/S/    R. ELTON WHITE

 

      

/S/    WESLEY S. MCDONALD

 

R. Elton White

Director

      

Wesley S. McDonald

Executive Vice President, Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Dated: March 17, 2006


EXHIBIT INDEX

 

Exhibit
Number
 

Description

3.1   Articles of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999.
3.2   Bylaws of the Company, incorporated herein by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2000.
4.1   Five-Year Credit Agreement dated as of July 10, 2002 among the Company, the lenders party thereto, Bank One, NA, as Syndication Agent, U.S. Bank, National Association, Wachovia Bank, National Association and Fleet National Bank, as Co-Documentation Agents, and The Bank of New York as Issuing Bank, Swing Line Lender and Administrative Agent, incorporated herein by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2002.
4.2  

Certain other long-term debt is described in Note 5 of the Notes to Consolidated Financial Statements. The Company agrees to furnish to the Commission, upon request, copies of any instruments defining the

rights of holders of any such long-term debt described in Note 5 and not filed herewith.

10.1   Purchase and Sale Agreement dated as of March 5, 2006, by and between Kohl’s Department Stores, Inc., and Chase Bank USA, National Association.
10.2   Private Label Credit Card Program Agreement dated as of March 5, 2006, by and between Kohl’s Department Stores, Inc., and Chase Bank USA, National Association.
10.3   Amended and Restated Executive Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003.*
10.4   Kohl’s Corporation 2005 Deferred Compensation Plan, as amended and restated effective January 1, 2005.*
10.5   Summary of Executive Medical Plan, incorporated herein by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.*
10.6   Summary of Executive Life and Accidental Death and Dismemberment Plans, incorporated herein by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.*
10.7   Summary of Executive Bonus Plan, incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated February 23, 2005.*
10.8   1992 Long Term Compensation Plan, incorporated herein by reference to Exhibit 10.13 of the Company’s registration statement on Form S-1 (File No. 33-46883).*
10.9   1994 Long-Term Compensation Plan, incorporated herein by reference to Exhibit 10.15 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 1996.*
10.10   2003 Long-Term Compensation Plan, incorporated herein by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003.*
10.11   Form of Executive Stock Option Award, incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated February 23, 2005. *


10.12   1997 Stock Option Plan for Outside Directors, incorporated herein by reference to Exhibit 4.4 of the Company’s registration statement on Form S-8 (File No. 333-26409), filed on May 2, 1997.*
10.13   Form of Outside Director Stock Option Award, incorporated herein by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.*
10.14   Employment Agreement between the Company and William S. Kellogg dated April 30, 1992, incorporated herein by reference to Exhibit 10.6 of the Company’s registration statement on Form S-1 (File No. 33-46883).*
10.15   Employment Agreement between the Company and Jay H. Baker dated April 30, 1992, incorporated herein by reference to Exhibit 10.7 of the Company’s registration statement on Form S-1 (File No. 33-46883).*
10.16   Employment Agreement between the Company and John F. Herma dated April 30, 1992, incorporated herein by reference to Exhibit 10.8 of the Company’s registration statement on Form S-1 (File No. 33-46883).*
10.17   Employment Agreement between the Company and R. Lawrence Montgomery, incorporated herein by reference to Exhibit 10.4 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1998.*
10.18   Employment Agreement between the Company and Kevin Mansell, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 1999.*
10.19   Amended and Restated Agreements dated December 10, 1998 between the Company and Mr. Montgomery, incorporated herein by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the Fiscal year ended January 30, 1999.*
10.20   Amended and Restated Agreements dated December 10, 1998 between the Company and Mr. Mansell, incorporated herein by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 1999.*
10.21   First Amendment to Employment Agreement between the Company and Mr. Montgomery, dated November 15, 2000, incorporated herein by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001. *
10.22   Employment Agreement between the Company and Arlene Meier dated November 15, 2000, incorporated herein by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001. *
10.23   Amendment to Employment Agreement between the Company and Mr. Kellogg, dated January 31, 2004, incorporated herein by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. *
10.24   Amendment to Employment Agreement between the Company and Mr. Baker, dated January 31, 2004, incorporated herein by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. *
10.25   Amendment to Employment Agreement between the Company and Mr. Herma, dated January 31, 2004, incorporated herein by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. *
10.26   Second Amendment to Employment Agreement between the Company and Mr. Montgomery, dated January 31, 2004, incorporated herein by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. *


10.27   Amendment to Employment Agreement between the Company and Mr. Mansell, dated January 31, 2004, incorporated herein by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. *
10.28   Amendment to Employment Agreement between the Company and Ms. Meier, dated January 31, 2004, incorporated herein by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. *
10.29   Form of Executive Employment Agreement, incorporated herein by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.*
10.30   Form of Restricted Stock Agreement, incorporated herein by reference to Exhibit 10.31 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.*
10.31   Summary of Outside Director Compensation, incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 29, 2005.*
21.1   Subsidiaries of the Registrant.
23.1   Consent of Ernst & Young LLP.
31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* A management contract or compensatory plan or arrangement.
Purchase and Sale Agreement

Exhibit 10.1

EXECUTION COPY


PURCHASE AND SALE AGREEMENT

By and Between

KOHL’S DEPARTMENT STORES, INC.

And

CHASE BANK USA, NATIONAL ASSOCIATION

Dated as of March 5, 2006

 



TABLE OF CONTENTS

 

         Page
ARTICLE I DEFINITIONS    1
  SECTION 1.1 Definitions of Certain Terms    1
  SECTION 1.2 Interpretation    9
ARTICLE II PURCHASE, SALE AND ASSUMPTION    10
  SECTION 2.1 Purchase and Sale of Assets    10
  SECTION 2.2 Assumption of Liabilities    11
  SECTION 2.3 Excluded Liabilities    11
  SECTION 2.4 Purchase Price; Purchase Price Adjustment    11
  SECTION 2.5 Allocation of Purchase Price    12
  SECTION 2.6 Third-Party Consents.    12
  SECTION 2.7 Intention of the Parties    13
ARTICLE III CLOSING; ASSIGNMENT    13
  SECTION 3.1 The Closing    13
ARTICLE IV REPRESENTATIONS OF THE PARTIES    14
  SECTION 4.1 Representations of the Seller    14
  SECTION 4.2 Representations of the Purchaser    17
  SECTION 4.3 No Other Representations or Warranties    19
ARTICLE V COVENANTS    19
  SECTION 5.1 Conduct of Business    19
  SECTION 5.2 Certain Changes    20
  SECTION 5.3 Access and Confidentiality.    21
  SECTION 5.4 Reasonable Efforts; Other Filings    21
  SECTION 5.5 Additional Instruments    22
  SECTION 5.6 Non-Solicitation    23
  SECTION 5.7 Notice to Cardholders    23
  SECTION 5.8 Post-Closing Access    23
  SECTION 5.9 Cooperation in Actions    23
  SECTION 5.10 Preservation of Books and Records    24
  SECTION 5.11 Bulk Sales Law    24

 

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ARTICLE VI TAX AND EMPLOYEE MATTERS

   24
  SECTION 6.1 Taxes    24
  SECTION 6.2 Employees    25
ARTICLE VII CONDITIONS    26
  SECTION 7.1 Conditions to Each Party’s Obligations to Effect the Purchase and Assumption    26
  SECTION 7.2 Conditions to Obligations of the Purchaser    26
  SECTION 7.3 Conditions to Obligations of the Seller    27
ARTICLE VIII TERMINATION    27
  SECTION 8.1 Termination    27
  SECTION 8.2 Effect of Termination    28
ARTICLE IX SURVIVAL; INDEMNIFICATION    28
  SECTION 9.1 Survival    28
  SECTION 9.2 Indemnification by the Seller    29
  SECTION 9.3 Indemnification by the Purchaser    30
  SECTION 9.4 Notice, Settlements and Other Matters    30
ARTICLE X MISCELLANEOUS    32
  SECTION 10.1 Notices    32
  SECTION 10.2 Expenses    33
  SECTION 10.3 Successors and Assigns    33
  SECTION 10.4 Entire Agreement; Amendment; Waiver    33
  SECTION 10.5 Counterparts    34
  SECTION 10.6 Governing Law    34
  SECTION 10.7 Waiver of Jury Trial and Venue    34
  SECTION 10.8 Severability    34
  SECTION 10.9 Public Announcement    34
  SECTION 10.10 Third-Party Beneficiaries    34
  SECTION 10.11 Credit Bureau Reporting    34
  SECTION 10.12 Further Assurances    34

 

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SCHEDULES AND EXHIBITS

 

Schedule 1.1   Parties with Knowledge
Schedule 1.2   Master File Layout
Schedule 2.4   Form of Estimated Closing Statement and Final Closing Statement
Schedule 4.1(c)   Third Party Consents Required for Closing
Schedule 4.1(f)   Write-Off Policy
Schedule 4.1(i)   Assigned Contracts
Schedule 4.1(l)   Forms of Cardholder Agreements
Schedule 5.2(d)   Sales, Leases, and Disposals
Schedule 9.2   Indemnification Matters
Exhibit A   Form of Program Agreement
Exhibit B   Form of Instrument of Assignment and Assumption

 

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PURCHASE AND SALE AGREEMENT

THIS PURCHASE AND SALE AGREEMENT is dated as of March 5, 2006 (the “Agreement”) and is by and between KOHL’S DEPARTMENT STORES, INC., a Delaware corporation (the “Seller”), and CHASE BANK USA, NATIONAL ASSOCIATION, a national bank (the “Purchaser”).

RECITALS

WHEREAS, the Seller is, among other things, (i) engaged in the business of selling merchandise through retail stores and by other means, and (ii) directly and indirectly engaged in the Business (as hereinafter defined);

WHEREAS, pursuant to this Agreement, the Seller desires to sell to the Purchaser, and the Purchaser desires to purchase from the Seller, certain assets used in the Business pursuant to the terms contained and in the manner described herein and in the Ancillary Agreements (as hereinafter defined);

WHEREAS, on the date hereof, the Seller and the Purchaser are entering into a Program Agreement (the “Program Agreement”) in the form attached hereto as Exhibit A, that is to become effective as of the Closing under this Agreement, and that provides for, among other things, the issuance of proprietary credit cards of the Seller, the issuance of existing and new credit-related products to be developed with the Purchaser, the processing and servicing of the related accounts, and the conduct of related marketing activities, all as more fully set forth therein; and

WHEREAS, concurrently with the Closing under this Agreement, the Seller and the Purchaser desire to enter into other agreements in connection with the transactions contemplated hereby, all as more fully set forth herein.

NOW, THEREFORE, in consideration of the premises, and of the mutual representations and agreements contained in this Agreement, the parties agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.1 Definitions of Certain Terms. In this Agreement, the following terms are used with the meanings assigned below:

Account” means, as of the Cut-Off Time, any account identified by name and account number under which a purchase or credit transaction may be or has been made by a Cardholder by means of a Credit Card, which is recorded as an Account on the Master File and for which an Account Agreement is in effect as of the Closing Date, including any world-wide accounts.


Accountant” has the meaning given thereto in Section 2.4(c).

Account Agreement” means an agreement (including related disclosure) between the Seller or its Affiliates and a Person or Persons under which Accounts are established and pursuant to which Credit Cards are issued to or on behalf of such Person or Persons, as such agreement may be amended, modified or otherwise changed from time to time (including pursuant to change of terms notices).

Accrued Interest” means the aggregate amount of all finance charges that were accrued and earned, but not posted on the Accounts as of the Cut-Off Time.

Acquired Assets” means all right, title and interest of the Seller and its Affiliates in and to the following credit assets and properties, except to the extent they constitute Excluded Assets:

(1) the Accounts and the Gross Receivables accrued as of the Cut-Off Time related to the Accounts;

(2) the applications for Accounts pending and solicitations for Accounts outstanding;

(3) the Account Agreements, the Cardholder List and the Master File;

(4) the Assigned Contracts;

(5) the Books and Records, subject to Section 5.10, and subject to the Seller’s right to retain a copy of the Books and Records for use in connection with servicing the Accounts;

(6) the Credit Cards; and

(7) rights, claims, credits, causes of action and rights of set-off against third parties relating principally to any Acquired Assets or Assumed Liabilities.

Action” means any claim, action, complaint, investigation, petition, suit or other proceeding, whether civil, criminal or administrative, in law or in equity, or before any arbitrator or Governmental Authority.

Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person. For purposes of this definition, “control” of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise.

Agreement” has the meaning given thereto in the Preamble.

 

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Allocation Statement” has the meaning given thereto in Section 2.5(a).

Ancillary Agreements” means the Program Agreement and the Instrument of Assignment and Assumption.

Applicable Order” means, with respect to any Person, a judgment, injunction, writ, decree or order of any Governmental Authority, in each case legally binding on that Person or on any of its property.

Assigned Contracts” means the Contracts listed on Schedule 4.1(i), and specifically excludes any contracts relating to servicing of the Accounts and any intercompany Contracts between the Seller and any of its Affiliates.

Assumed Liabilities” mean the following Liabilities of the Seller and its Affiliates, except to the extent they constitute Excluded Liabilities:

(1) all obligations to Cardholders from and after the Closing Date in respect of Accounts to perform under Account Agreements, including payment of credit balances as of the Cut-Off Time;

(2) all fees, normal operating assessments and other charges relating to the Accounts that are incurred or accrue on or after the Closing Date;

(3) all obligations of the Seller arising under the Assigned Contracts from and after the Closing Date;

(4) all Liabilities for Taxes relating to the Acquired Assets to the extent set forth in Sections 6.1(d) and 6.1(e).

Books and Records” means books, records, original documents, files and papers maintained by or for the Seller, whether in hard copy or electronic format, in each case to the extent within the Seller’s control and/or possession and primarily used with respect to the Acquired Assets, other than any relating principally to the Excluded Assets and other than Tax returns or Tax workpapers.

Business” means the proprietary Credit Card business of the Seller relating to the Accounts, including the extension of credit to Cardholders, the servicing of the Accounts, billings, collections, processing of Account transactions and the administration of the Accounts and Gross Receivables.

Business Day” means any day other than a Saturday, a Sunday or a day on which banks located in Wisconsin or New York generally are required or authorized by law or executive order to close.

Cardholder” means a Person or Persons to whom a Credit Card is or has been issued and in whose name(s) an Account, in connection with which the Credit Card may be used, has been established pursuant to an Account Agreement.

 

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Cardholder List” means a list of the names, addresses, telephone numbers, taxpayer identification numbers, social security numbers and e-mail addresses of all Cardholders as of the Cut-Off Time if and to the extent such information is within the possession or control of the Seller or its Affiliates.

Closing” has the meaning set forth in Section 3.1(a).

Closing Date” has the meaning set forth in Section 3.1(a).

Code” means the Internal Revenue Code of 1986, as amended.

Confidentiality Agreement” means that certain Confidentiality Agreement dated October 17, 2005, by and between the Seller and the Purchaser.

Constituent Documents” means the articles of association, articles of incorporation, certificate of incorporation, by-laws and/or other organizational documents, as appropriate, of any Person.

Contract” means, with respect to any Person, any agreement, undertaking, contract, indenture, deed of trust or other instrument, document or agreement by which that Person, or any amount of its properties, is bound and/or subject.

Credit Card” means a proprietary card that may be used by the related Cardholder to purchase goods and/or services from the Seller or other Persons authorized by the Seller through open-end revolving credit, commonly known as credit, store or Kohl’s charge card, commonly referred to as “Kohl’s Charge.”

Cut-Off Time” means 11:59 PM Pacific time on the date immediately preceding the Closing Date.

Deductible Amount” has the meaning given thereto on Schedule 9.2.

De Minimis Claim Amount” has the meaning given thereto on Schedule 9.2.

Disclosure Schedule” means, with respect to the Seller or the Purchaser, a schedule delivered to the other party on or before the date of this Agreement setting forth, among other things, items the disclosure of which is required under this Agreement either in response to an express disclosure requirement contained in a provision of this Agreement or as an exception to one or more of the representations or covenants contained in this Agreement; provided, however, that, unless the terms of the applicable representation provide otherwise, the mere inclusion of an item in a Disclosure Schedule as an exception to a representation will not be considered an admission by the disclosing party that such item (or any non-disclosed item or information of comparable or greater significance) represents a material exception or fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect with respect to the disclosing party or the Acquired Assets.

Eligible Receivables” means all Gross Receivables other than receivables under Written-Off Accounts.

 

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Estimated Closing Statement” means a statement prepared by the Seller substantially in the form of Schedule 2.4, showing in reasonable detail the calculation of the Estimated Purchase Price, based on data available as of the close of business on the fifth Business Day preceding the Closing Date.

Estimated Purchase Price” means the amount payable by the Purchaser on the Closing Date in accordance with the Estimated Closing Statement.

Exchange Act” has the meaning given thereto in Section 4.1(e).

Excluded Assets” means the assets of the Seller and its Affiliates not being acquired by the Purchaser hereunder, including the following:

(1) cash and cash equivalents on hand and cash and cash equivalents in bank accounts maintained by the Seller or any of its Affiliates;

(2) insurance policies maintained by or for the benefit of the Seller and all claims accrued thereunder, and all amounts for insurance billed with respect to Accounts prior to the Closing;

(3) Intellectual Property Rights other than rights to the Cardholder List or the Master File and other than any Intellectual Property Rights explicitly licensed or otherwise granted to the Purchaser under any Ancillary Agreement;

(4) assets of the Seller or any of its Affiliates sold or otherwise disposed of, or otherwise becoming no longer a part of the Acquired Assets, without violation of this Agreement during the period prior to the Closing Date;

(5) assets relating to the Seller’s employee benefit agreements, plans or other arrangements;

(6) rights, claims, credits, causes of action, or rights of set-off against third parties not relating principally to the Acquired Assets or which relate principally to an Excluded Liability;

(7) all licenses, permits or other authorizations of any Governmental Authorities held or used by the Seller;

(8) interests in real property;

(9) Personal Property of the Seller;

(10) all right, title and interest of the Seller in and to any and all other assets and properties, of any kind whatsoever, that are not primarily used in connection with the Acquired Assets as of the Closing Date;

 

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(11) all customer data relating to customers of the Seller and its Affiliates (whether or not duplicated in the Cardholder List, the Master File and the Books and Records (all of which constitute Acquired Assets));

(12) prepaid Taxes, Tax payments due from any of the Seller’s Affiliates, and entitlements to refunds, credits, offsets or other benefits for overpayment of Taxes relating to any period (or portion thereof) prior to the Closing Date;

(13) Loan loss reserves;

(14) Intercompany Contracts between the Seller and any of its Affiliates;

(15) The Scoring Models;

(16) Any gift card, debit card, or other stored-value card, and any program related thereto;

(17) All Written-Off Accounts; and

(18) All rights, privileges, and benefits of acting as servicer of the Accounts or any account created in the future, including all servicing fees and other compensation payable to the servicer with respect to all periods from and after the Closing.

Excluded Liabilities” means Liabilities of the Seller (or any of its respective predecessors) and its Affiliates, other than the Assumed Liabilities, of any kind whatsoever, whether presently in existence or arising hereafter, including:

(1) Except as provided in Sections 6.1(d) and (e), (A) all Liabilities for Taxes with respect to the Business or the Acquired Assets for any period (or portion thereof) prior to the Closing Date and (B) all Liabilities for Taxes with respect to the Business or the Acquired Assets that accrue on the Closing Date in connection with the sale of the Acquired Assets;

(2) Liabilities that result from an act, or failure to act, by the Seller or any of its Affiliates prior to the Closing Date that relate to any claims by any current, former or putative employee thereof, whether or not such claims are brought prior to, on or after the Closing Date, and Liabilities relating to employee benefits (including any accrued vacation benefits) or compensation arrangements existing prior to the Closing Date;

(3) Any Liability principally related to an Excluded Asset; and

(4) Any Liability of the Seller (or any of its Affiliates) relating to or arising from the operation of the Business at or prior to the Cut-Off Time or from any facts, circumstances or events existing or occurring at or prior to the Cut-Off Time.

Federal Funds Rate” means the offered rate as reported in The Wall Street Journal in the “Money Rates” section for reserves traded among commercial banks for overnight use in amounts of one million dollars or more or, if no such rate is published for a day, the rate published for the preceding Business Day.

 

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Final Closing Statement” means a statement prepared by the Seller, substantially in the form of Schedule 2.4, showing in reasonable detail the Seller’s calculation of the Purchase Price, based on the Accounts and the Acquired Assets as of the Cut-Off Time.

GAAP” means generally accepted accounting principles as in effect in the United States.

Governmental Authority” means any domestic or foreign governmental, regulatory or self-regulatory authority, agency, court, tribunal, commission or other governmental, regulatory or self-regulatory entity exercising legislative, judicial, regulatory or administrative functions.

Gross Receivables” means all amounts owing (after deduction of credit balances scheduled as of the Cut-Off Time and unapplied cash) to the Seller from Cardholders with respect to Accounts (including outstanding loans, cash advances and other extensions of credit; billed or posted but unbilled finance charges and late charges; Accrued Interest; and any other fees, charges and interest assessed on the Accounts) as of the Cut-Off Time (or, solely with respect to the Estimated Closing Statement, as of the close of business on the fifth Business Day preceding the Closing Date).

HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Indemnified Party” has the meaning given thereto in Section 9.4(a).

Indemnifying Party” has the meaning given thereto in Section 9.4(a).

Indemnity Cap Amount” has the meaning given thereto on Schedule 9.2.

Instrument of Assignment and Assumption” means the Instrument of Assignment and Assumption in the form attached as Exhibit B, to be entered into at Closing.

Intellectual Property Right” means any intellectual property right, including any trademark, service mark or other source indicator, invention, patent, copyright, trade secret, know-how, and any registration or application for registration of any of the foregoing.

Knowledge” means, with respect to the Seller, the actual knowledge of the officers of the Seller who are listed on Schedule 1.1, and, with respect to the Purchaser, the actual knowledge of the officers of the Purchaser who are listed on Schedule 1.1.

Liability” means any debt, liability, commitment or obligation, of any kind whatsoever, whether due or to become due, known or unknown, accrued or fixed, absolute or contingent, or otherwise.

Lien” means, with respect to any property, any lien, security interest, mortgage, pledge, charge or encumbrance, whether consensual or statutory, relating to that property, including the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such property.

 

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Losses” has the meaning given thereto in Section 9.2.

Master File” means the master file maintained by the Seller and the Service Provider with respect to the Accounts, including the information listed on Schedule 1.2.

Material Adverse Effect” means:

(a) With respect to the Acquired Assets, a material adverse change in, or a material adverse effect upon, the Acquired Assets taken as a whole, excluding any effect or change attributable to or resulting from (i) events, conditions or occurrences in economic, business or financial conditions generally effecting the credit card services, consumer credit business, or banking industry, to the extent such that such events, conditions or occurrences do not disproportionately effect the Acquired Assets, (ii) financial market conditions, including interest rates or changes therein, (iii) changes in Requirements of Law, GAAP or regulatory accounting principles after the date hereof, (iv) any action, omission, change, effect, circumstance or condition contemplated by this Agreement, or attributable to the signing and announcement of this Agreement or the transactions contemplated by this Agreement and the Ancillary Agreements, or (v) any actions or omissions required by the terms of this Agreement or the Ancillary Agreements; and

(b) With respect to the Seller or the Purchaser, a material impairment of the ability of the relevant Person or Persons to perform its or their material obligations under this Agreement.

Permissible Liens” means (a) with respect to those Acquired Assets that are Personal Property, restrictions or imperfections of title that do not materially detract from the value or impair the use of any Acquired Asset and (b) Liens for taxes, assessments and other governmental charges or levies not yet due or which are being contested in good faith by appropriate action.

Person” means any individual, corporation, business trust, partnership, association, limited liability company or similar organization, or any Governmental Authority.

Personal Property” means the tangible assets of the Seller.

Program Agreement” has the meaning given thereto in the Recitals.

Purchase and Assumption” has the meaning given thereto in Section 3.1(a).

Purchaser” has the meaning given thereto in the Preamble.

Purchase Price” means the purchase price payable in accordance with the Final Closing Statement, as finally determined in accordance with Section 2.4.

Purchaser Indemnified Parties” has the meaning given thereto in Section 9.2.

 

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Requirement of Law” means all federal, state and local laws, statutes, regulations, written regulatory guidance, orders or directives, opinions and interpretations of any Governmental Authority as may be amended and in effect from time to time, including: (i) the Truth in Lending Act and Regulation Z; (ii) the Equal Credit Opportunity Act and Regulation B; (iii) the Fair Debt Collection Practices Act; (iv) the Fair Credit Reporting Act; (v) the Gramm-Leach-Bliley Act and its implementing regulations; and (vi) the Federal Trade Commission Act.

Schedule” shall mean any Disclosure Schedule hereto.

SEC” has the meaning given thereto in Section 4.1(e).

SEC Documents” has the meaning given thereto in Section 4.1(e).

Securities Act” shall have the meaning given thereto in Section 4.1(e).

Seller “ has the meaning given thereto in the Preamble.

Seller Indemnified Parties” has the meaning given thereto in Section 9.3.

Scoring Models” means the customer underwriting scorecard and the customer behavioral scorecard developed on behalf of the Seller relating to the Accounts.

Service Provider” means any data processing service provider used by the Seller in connection with the Accounts.

Tax Return” means any return, declaration, report or similar statement required to be filed with respect to any Taxes (including any attached schedules) including any information return, claim for refund, amended return and declaration of estimated Tax.

Taxes” means (A) any income, alternative or add-on minimum tax, gross receipts, sales, use, transfer, gains, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Authority responsible for the imposition of any such tax (domestic or foreign), and (B) any Liability of the Seller for the payment of any amounts of the type described in clause (A) above as a result of being a member of an affiliated, consolidated, combined or unitary group for any period.

Written-Off Accounts” means all Accounts that (i) have been charged-off or written-off as of the Cut-Off Time, or (ii) are eligible for charge off or write-off as of the Cut-Off Time in accordance with the write-off policy attached hereto as Schedule 4.1(f).

SECTION 1.2 Interpretation. (a) In this Agreement, unless the context otherwise requires, references to:

(i) the Preamble or the Recitals, Sections, Exhibits, or Schedules refer to the Preamble or a Recital or Section of, or Exhibit or Schedule to, this Agreement;

 

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(ii) any Contract (including this Agreement) refer to the Contract as amended, modified, supplemented or replaced from time to time;

(iii) any statute or regulation refer to the statute or regulation as amended, modified, supplemented or replaced from time to time (and, in the case of statutes, include any rules and regulations promulgated under the statute) and to any section of any statute or regulation include any successor to the section;

(iv) any Governmental Authority includes any successor to the Governmental Authority;

(v) this Agreement refers to this Agreement, the Schedules, the Disclosure Schedule and the Exhibits hereto; and

(vi) any Schedule refer to a Disclosure Schedule.

(b) The table of contents and headings contained in this Agreement are for reference purposes only and do not limit or otherwise effect any of the provisions of this Agreement.

(c) Whenever the word “include,” “includes” or “including” is used in this Agreement, it will be deemed to be followed by the words “without limitation.”

(d) Any time period specified herein, including the period during or after which a payment is due, shall be deemed to exclude the day on which the period commences and include the day on which the period ends.

(e) This Agreement is the product of negotiation by the parties having the assistance of counsel and other advisers. It is the intention of the parties that this Agreement not be construed more strictly with regard to one party than with regard to the other.

ARTICLE II

PURCHASE, SALE AND ASSUMPTION

SECTION 2.1 Purchase and Sale of Assets. On the terms and subject to the conditions of this Agreement, at the time of the Closing, and effective from and after the Closing Date, the Seller shall sell, convey and assign (or cause its Subsidiaries to sell, convey and assign) to the Purchaser, free and clear of all Liens, except Permissible Liens, the Acquired Assets, and the Purchaser agrees to purchase all such Acquired Assets.

 

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SECTION 2.2 Assumption of Liabilities. On the terms and subject to the conditions set forth in this Agreement, from and after the Closing Date, the Purchaser agrees to assume, pay, defend, discharge and perform as and when due the Assumed Liabilities.

SECTION 2.3 Excluded Liabilities. Notwithstanding any provision in this Agreement or any other writing to the contrary, the Purchaser is assuming only the Assumed Liabilities and not any Excluded Liabilities. The Excluded Liabilities will be retained by the Seller.

SECTION 2.4 Purchase Price; Purchase Price Adjustment. (a) On the second Business Day before the Closing, the Seller will deliver to the Purchaser the Estimated Closing Statement reflecting the Seller’s calculation of the Estimated Purchase Price to be paid by the Purchaser at the Closing.

(b) Within 60 Business Days after the Closing, the Seller will deliver to the Purchaser (i) the Final Closing Statement (A) prepared in accordance with the Seller’s normal operating procedures in effect as of the Cut-Off Time, and (B) based on the information in the Master File and the other Acquired Assets as of the Cut-Off Time and (ii) copies of the Master File as of the Cut-Off Time and all material working papers relating to the Final Closing Statement.

(c) The Purchaser shall, within 30 Business Days after receipt of the Final Closing Statement, advise the Seller in writing and in reasonable detail of any inaccuracies it believes are reflected in the Final Closing Statement. In the event no such objection to the Final Closing Statement is delivered to the Seller within such time period, the Final Closing Statement, as delivered to the Purchaser, shall be final and binding upon the parties. In the event the Purchaser delivers such an objection, the Seller and the Purchaser shall attempt in good faith to resolve any differences. In the event all differences are not resolved within 30 Business Days following delivery to the Seller of any objections, then the issues remaining unresolved shall be determined by an independent nationally-recognized public accounting firm mutually acceptable to the Seller and the Purchaser (the “Accountant”). The Accountant shall resolve all disputed items in accordance with the provisions of this Agreement. In making its determination, the Accountant may only consider those items and amounts as to which the Purchaser and the Seller have disagreed within the time periods and the permitted grounds specified. The Accountant’s determination will be conclusive and binding on the Purchaser and the Seller absent manifest error. The fees of the Accountant will be shared by the Purchaser and the Seller in proportion to the relative differences between their respective calculations of the Purchase Price and the amount determined by the Accountant.

(d) If the Estimated Purchase Price exceeds the Purchase Price, then the Seller shall, within five Business Days after the Purchase Price has been finally determined pursuant to Section 2.4(c), pay such excess amount to the Purchaser, together with interest on such excess amount for the period from and including the Closing Date to but excluding the date of such payment at a rate per annum equal to the Federal Funds Rate. If the Estimated Purchase Price is less than the Purchase Price, then the Purchaser shall, within five Business Days after the Purchase Price has been finally determined pursuant to Section 2.4(c), pay such deficiency to the Seller, together with interest on such deficiency for the period from and including the Closing Date to but excluding the date of such payment at a rate per annum equal to the Federal Funds

 

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Rate. Each party to this Agreement will make available to the other party, and to the Accountant, its and its accountant’s work papers, schedules and other supporting data as may be reasonably requested by such party to enable it to verify the amounts set forth in the Final Closing Statement.

SECTION 2.5 Allocation of Purchase Price. (a) The Seller shall prepare an allocation of the Purchase Price (as determined for federal income tax purposes) among the Acquired Assets (the “Allocation Statement”) and, within 90 days after the Closing Date, shall deliver to the Purchaser a copy of the Allocation Statement, together with any appropriate supporting documentation. The Purchaser and the Seller shall endeavor in good faith to agree on the Allocation Statement. If the Purchaser and the Seller have not agreed on the Allocation Statement within 30 days after delivery of the Allocation Statement by the Seller to the Purchaser, each of the Purchaser and the Seller may use its own allocation. The Seller will consult with the Purchaser regarding the preparation of the Allocation Statement and will respond to any reasonable request or inquiry of the Purchaser in connection therewith. The Allocation Statement shall be prepared in accordance with Section 1060 of the Code and the rules and regulations promulgated thereunder.

(b) The Purchaser and the Seller shall report the allocation of the total consideration among the Acquired Assets in a manner consistent with the Allocation Statement and shall act in accordance with the Allocation Statement in the preparation and filing of all Tax Returns (including filing Form 8594 with their respective Federal income tax returns for the taxable year that includes the Closing Date and any other forms or statements required by the Code, Treasury regulations, the Internal Revenue Service or any applicable state or local taxing authority) and in the course of any Tax audit, Tax review or Tax litigation relating thereto; provided, however, that neither the Seller nor the Purchaser will be obligated to litigate any challenge to such allocation of the Purchase Price by a Governmental Authority.

(c) The Purchaser and the Seller will promptly inform each other of any challenge by any Governmental Authority to any allocation made pursuant to this Section 2.5 and shall consult with and keep each other informed with respect to the status of, and any discussion, proposal or submission with respect to, such challenge.

SECTION 2.6 Third-Party Consents.

(a) To the extent that any consent needed to assign to the Purchaser any Assigned Contract has not been obtained on or prior to the Closing Date, this Agreement and any document delivered pursuant hereto will not constitute an assignment or attempted assignment thereof if such assignment or attempted assignment would constitute a material breach of such Assigned Contract or would give rise to a valid right of termination thereof. If any such third-party consent will not be obtained on or prior to the Closing Date, then the applicable Contract shall be withheld from sale pursuant to this Agreement and the parties shall enter into an agreement reasonably acceptable to the Purchaser and the Seller to provide for the transfer thereto of all the economic rights and benefits related to such Contract.

(b) The Seller and the Purchaser will use commercially reasonable efforts (which for purposes of this Section 2.6 shall not require any payment of money by the Seller or

 

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the Purchaser, except as agreed between them in writing) to seek any required consents to the assignment of the Assigned Contracts that have not been obtained as of the Closing Date, and promptly upon receipt of such consents will effect such assignments.

SECTION 2.7 Intention of the Parties. The Seller and the Purchaser intend that the transfer of the Acquired Assets by the Seller to the Purchaser pursuant to this Agreement be a sale of the ownership interest in such assets to the Purchaser and that, following such sale, the Acquired Assets shall not be part of the Seller’s estate in the event of the filing of a bankruptcy petition by or against the Seller under any bankruptcy law. The Seller and the Purchaser intend to treat such transfer as a sale for accounting and tax purposes. In the event that, notwithstanding the intent of the Seller and the Purchaser, the transfer contemplated hereby is held not to be a sale, this Agreement shall constitute a security agreement under applicable law, and the Seller hereby grants to the Purchaser a first priority continuing security interest in and to all of the Seller’s right, title and interest now owned or hereafter arising in, to and under the Acquired Assets.

ARTICLE III

CLOSING; ASSIGNMENT

SECTION 3.1 The Closing. (a) The closing (the “Closing”) of the purchase and sale of the Acquired Assets and assumption of the Assumed Liabilities hereunder (collectively, the “Purchase and Assumption”) will take place at the offices of Sidley Austin LLP, 1787 7th Avenue, New York, New York, on the second Business Day after the last of the conditions set forth in Sections 7.1, 7.2 and 7.3 (other than conditions relating solely to the delivery of documents to be dated the Closing Date) has been satisfied or waived in accordance with the terms of this Agreement or at such other place or on such other date as the parties hereto jointly designate in writing (the “Closing Date”).

(b) At the Closing, the Seller and the Purchaser will deliver or cause to be delivered to each other the Instrument of Assignment and Assumption in substantially the form set forth in Exhibit B and, if necessary, such other instruments as are necessary or appropriate to reflect any alternative arrangements described in Section 2.6, appropriately executed by the Seller and the Purchaser.

(c) At the Closing, the Purchaser will pay the Estimated Purchase Price by initiating a wire transfer of immediately available funds (in U.S. dollars) prior to 11:00 a.m. Eastern time on the Closing Date to an account or accounts specified by the Seller at least one Business Day prior to the Closing Date.

(d) All of the actions described in subsections (b) and (c) of this Section 3.1 shall be deemed to occur simultaneously.

 

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ARTICLE IV

REPRESENTATIONS OF THE PARTIES

SECTION 4.1 Representations of the Seller. The Seller represents to the Purchaser as follows:

(a) Corporate Existence. The Seller (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation, and (ii) is duly licensed or qualified to do business as a corporation and is in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted or proposed to be conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary to perform its obligations required hereunder except to the extent that its non-compliance would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller.

(b) Capacity; Authorization; Validity. The Seller has all necessary corporate power and authority to (i) own the Acquired Assets and to carry on the Business as currently conducted, (ii) execute and enter into this Agreement and each of the Ancillary Agreements, and (iii) perform the obligations required of the Seller hereunder and under each of the Ancillary Agreements. The execution and delivery by the Seller of this Agreement and each of the Ancillary Agreements, and the consummation by the Seller of the transactions specified herein have been duly and validly authorized and approved by all necessary corporate action of the Seller. This Agreement (i) has been duly executed and delivered by the Seller, (ii) constitutes the valid and legally binding obligation of the Seller, and (iii) is enforceable against the Seller in accordance with its terms (subject to applicable bankruptcy, insolvency, reorganization, receivership or other laws effecting the rights of creditors generally and by general equity principles including those respecting the availability of specific performance).

(c) Governmental and Third-Party Consents. Except as set forth on Schedule 4.1(c), the Seller has all necessary licenses, permits, consents and approvals from or by, and has made all necessary notices to, any Governmental Authority having jurisdiction, or any other third party, in connection with the execution, delivery or performance of this Agreement and the Ancillary Agreements by the Seller or the consummation by the Seller of the transactions contemplated by this Agreement and the Ancillary Agreements, except to the extent that the failure to obtain such licenses, permits, consents or approvals or to provide such notices would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller.

(d) Conflicts; Defaults; Etc. The execution, delivery and performance of this Agreement and the Ancillary Agreements by the Seller, its compliance with the terms hereof and thereof, and its consummation of the transactions specified herein and therein do not, and (subject to obtaining the governmental and third-party consents referred to in Section 4.1(c)) the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements will not, (i) conflict with, violate, result in the breach of, constitute an event which would, or with the lapse of time or action by a third party or both would, result in a default under, or accelerate the performance required by, the terms of any Contract to which the Seller is a party or by which it is bound, or by which the Seller’s assets are bound; (ii) conflict with or

 

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violate the Constituent Documents of the Seller; (iii) violate any Requirements of Law or conflict with, or require any consent or approval under any Applicable Order, permit or license, to which the Seller is a party or by which it is bound or effected; (iv) require the consent or approval of any other party to any Contract to which the Seller is a party or by which it is bound; or (v) require any filing with, notice to, consent or approval of, or any other action to be taken with respect to, any Governmental Authority, except any filings required under the HSR Act; except in each case described in clause (i), (iii), (iv) or (v) of this Section 4.1(d), for any conflict, violation, breach, default, termination, or cancellation that would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller.

(e) SEC Reports. The Seller has filed with the Securities and Exchange Commission (the “SEC”) all forms, reports and other documents (including all prospectuses and registration statements) required to be filed by it with respect to all periods commencing on or after January 1, 2002 (the “SEC Documents”). As of their respective filing dates (or effective dates, in the case of prospectuses and registration statements), the SEC Documents complied in all material respects with the requirements of the Securities Act of 1933 (the “Securities Act) or the Securities Exchange Act of 1934 (the “Exchange Act”), as applicable, and the rules and regulations of the SEC promulgated thereunder.

(f) Absence of Certain Changes.

(i) Between November 1, 2005 and the date hereof, the Business has been conducted in the ordinary course and there has not been any change in the financial condition or results of operations of the Business that has had or would reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller.

(ii) Set forth on Schedule 4.1(f) hereto is a true and complete copy of the write-off policy of the Seller as in effect on November 1, 2005. Since that date, (A) the Accounts and Gross Receivables have been underwritten, established, administered, serviced, collected, terminated and charged-off in the ordinary course consistent with the Seller’s past practice, and (B) the Seller has not materially amended, modified or supplemented or otherwise made any material changes to the policies and procedures as in effect on such date.

(g) Title to Properties; Encumbrances. The Seller has good title to or a valid leasehold interest in, or is licensed or otherwise entitled to use, all of the Acquired Assets (other than the Accounts to which Section 4.1(1) applies), free and clear of all Liens other than Permissible Liens.

(h) Litigation. No Action is pending or, to Seller’s Knowledge, threatened against the Seller or its Affiliates with respect to the Business or the Acquired Assets, at law, in equity or otherwise, before any Governmental Authority or before any arbitrator or panel of arbitrators, to which the Seller is a party, which, if adversely determined, would reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller. There is no outstanding judgment, order, decree, or award that would reasonably be expected to have such a Material Adverse Effect. To the Seller’s Knowledge, there has been no adverse finding of any audit, investigation, or inspection of any Governmental Authority concerning or Business within the past two years that would reasonably be expected to have such a Material Adverse Effect.

 

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(i) Contracts. Except to the extent that any of the following would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller, each Assigned Contract is a valid, legally binding agreement of the Seller, enforceable against Seller in accordance with its terms, and neither the Seller nor, to the Seller’s Knowledge, any other party thereto is in default under the terms of any such Contract. Schedule 4.1(i) sets forth a complete list of the Assigned Contracts.

(j) Books and Records. All of the Seller’s Books and Records are in all material respects complete and correct and are maintained in accordance with all Requirements of Law.

(k) Compliance with Laws. Except to the extent that the following would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller:

(i) the Seller is in compliance with all Requirements of Law relating to the Business and the Acquired Assets; and

(ii) the Seller is not subject to any capital plan or supervisory agreement, order or memorandum between any of them and any Governmental Authority.

(l) Account Agreements; Accounts; Gross Receivables. Except to the extent that any of the following would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets or the Seller:

(i) The Seller is the sole owner of and has good title to the Accounts and the Gross Receivables. This Agreement shall, following the Closing Date, and subject to the filing of appropriate financing statements and all required continuations, amendments and replacements thereof, vest in the Purchaser all right, title and interest of the Seller in and to the Accounts and the Gross Receivables, free and clear of all Liens other than Permissible Liens.

(ii) Each Account Agreement (other than any Account Agreement with respect to any Written-Off Account) is a valid and legally binding obligation of each obligor thereunder, including any co-signer, guarantor or surety, in the full amount thereof set forth in the Master File or the Books and Records, and is enforceable against such obligors in accordance with its terms, subject to (A) claims and defenses on disputed card transactions asserted by a Cardholder as indicated on the Master File or the Books and Records, (B) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or effecting creditors’ rights generally and the effect of general equitable principles, and (C) the Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended. Representative forms of Cardholder Agreements are set forth in Schedule 4.1(1), and those forms contain all material terms of the Cardholder Agreements as in effect as of the date of this Agreement; provided, however, that

 

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no representation or warranty is hereby given as to the capacity, authority or any other factor relating to the identity or status of the obligor that may effect the enforceability of the Account Agreements to which it is party.

(iii) Each Gross Receivable is not subject to offset, refund, recoupment, reversal, adjustment or any claim or defense by any Person (other than claims or defenses on disputed card transactions and refunds of credit balances, as indicated on the Master File).

(iv) Other than the Written-Off Accounts, each Account complies in all material respects with the applicable Account Agreement.

(v) All Account applications have been taken and evaluated and applicants notified in a manner that complied with all applicable Requirements of Law.

(vi) All Accounts have been solicited, originated, maintained and serviced in all material respects in compliance with all applicable Requirements of Law.

(vii) All disclosures made in connection with the Accounts complied in all material respects with all applicable Requirements of Law.

(m) No Brokers or Finders. The Assumed Liabilities do not include, and the Seller is solely responsible for and shall pay, any Liability incurred by it for any financial advisory fees, brokerage fees, commissions or finder’s fees directly or indirectly in connection with this Agreement or the transactions contemplated hereby or by the Ancillary Agreements.

(n) Accuracy of Information. The information contained in the Master File, the Books and Records, and the Cardholder List delivered to the Purchaser prior to the date hereof was, and the information contained in the Master File, the Cardholder List and the Books and Records delivered to the Purchaser on the Closing Date will be, complete and accurate in all material respects as of the date of delivery and the Cut-Off Time, respectively.

SECTION 4.2 Representations of the Purchaser. The Purchaser represents to the Seller as follows:

(a) Corporate Existence. The Purchaser (i) is a national bank organized, validly existing, and in good standing under the laws of the United States; and (ii) is duly licensed or qualified to do business as a banking corporation and is in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted or proposed to be conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary to perform its obligations hereunder, except to the extent that its non-compliance would not reasonably be expected to have a Material Adverse Effect on the Purchaser or on the Acquired Assets following the Closing Date.

(b) Capacity; Authorization; Validity. The Purchaser has all necessary power and authority to (i) execute and enter into this Agreement and each of the Ancillary Agreements,

 

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and (ii) perform the obligations required of the Purchaser hereunder and under each of the Ancillary Agreements. The execution and delivery by the Purchaser of this Agreement and each of the Ancillary Agreements, and the consummation by the Purchaser of the transactions specified herein, have been duly and validly authorized and approved by all necessary corporate action of the Purchaser. This Agreement (i) has been duly executed and delivered by the Purchaser, (ii) constitutes the valid and legally binding obligation of the Purchaser, and (iii) is enforceable against the Purchaser in accordance with its terms (subject to applicable bankruptcy, insolvency, reorganization, receivership or other laws effecting the rights of creditors generally and financial institutions in particular and by general equity principles including those respecting the availability of specific performance).

(c) Governmental and Third-Party Consents. The Purchaser has all necessary licenses, permits, consents, and approvals from or by, and has made all necessary notices to, any Governmental Authority having jurisdiction or any third party, in connection with the execution, delivery or performance of this Agreement and the Ancillary Agreements by the Purchaser and the consummation by the Purchaser of the transactions contemplated by this Agreement and the Ancillary Agreements, except to the extent that the failure to obtain such licenses, permits, consents, or approvals or to provide such notices would not reasonably be expected to have a Material Adverse Effect on the Purchaser or on the Acquired Assets following the Closing Date.

(d) Conflicts; Defaults; Etc. The execution, delivery and performance of this Agreement and the Ancillary Agreements by the Purchaser, its compliance with the terms hereof and thereof, and its consummation of the transactions specified herein and therein do not and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements will not (i) conflict with, violate, result in the breach of, constitute an event which would, or with the lapse of time or action by a third party or both would, result in a default under, or accelerate the performance required by, the terms of any Contract to which the Purchaser is a party or by which it is bound; (ii) conflict with or violate the Constituent Documents of the Purchaser; (iii) violate any Requirement of Law or conflict with, or require any consent or approval under any Applicable Order, permit or license, to which the Purchaser is a party or by which it is bound or effected; (iv) require the consent or approval of any other party to any Contract to which the Purchaser is a party or by which it is bound; or (v) require any filing with, notice to, consent or approval of, or any other action to be taken with respect to, any Governmental Authority, except any filings required under the HSR Act; and except in each case described in clause (i), (iii), (iv) or (v) of this Section 4.2(d), for any conflict, violation, breach, default, termination, or cancellation that would not reasonably be expected to have a Material Adverse Effect on the Purchaser or on the Acquired Assets following the Closing Date.

(e) Absence of Certain Changes. Since November 1, 2005, there has not been any change in the financial condition or results of operations of the Purchaser that has had or would reasonably be expected to have a Material Adverse Effect on the Purchaser or on the Acquired Assets following the Closing Date.

(f) Compliance with Laws. Except to the extent that the following would not reasonably be expected to have a Material Adverse Effect on the Purchaser or on the Acquired Assets following the Closing Date:

(i) the Purchaser is in compliance with all Requirements of Law relating to its credit card business; and

 

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(ii) the Purchaser is not subject to any capital plan or supervisory agreement, order or memorandum between it and any Governmental Authority.

(g) Financing. The Purchaser has sufficient cash, available lines of credit or other sources of immediately available funds to enable it to pay the Estimated Purchase Price as required by Section 3.1(c) and to timely pay any other amounts to be paid by it under this Agreement. The Purchaser is not subject to any capital plan or supervisory agreement, order or memorandum between it and any Governmental Authority with jurisdiction over it that could reasonably be expected to effect its ability to consummate the purchase of the Acquired Assets from the Seller and fulfill its obligations under this Agreement and the Ancillary Agreements.

(h) Litigation. No Action is pending or, to the Purchaser’s Knowledge, threatened against the Purchaser or its Affiliates with respect to any of their respective assets, at law, in equity or otherwise, before any Governmental Authority or before any arbitrator or panel of arbitrators, to which the Purchaser is a party, which, if adversely determined, would reasonably be expected to have a Material Adverse Effect on the Purchaser or on the Acquired Assets following the Closing Date. There is no outstanding judgment, order, decree, or award that would reasonably be expected to have such a Material Adverse Effect. To the Purchaser’s Knowledge, there has been no adverse finding of any audit, investigation, or inspection of any Governmental Authority concerning the Purchaser’s credit card business within the past two years that would reasonably be expected to have such a Material Adverse Effect.

(i) No Brokers or Finders. Any Liability incurred by the Purchaser or its Affiliates for any financial advisory fees, brokerage fees, commissions or finder’s fees directly or indirectly in connection with this Agreement or the transactions contemplated hereby or by the Ancillary Agreements will be borne by the Purchaser.

SECTION 4.3 No Other Representations or Warranties. Except as expressly set forth in this Article IV and Article VI or in any of the Ancillary Agreements, neither the Seller nor the Purchaser has made or make any other express or implied representations, or any express or implied warranty, either written or oral, with respect to the Acquired Assets, the Assumed Liabilities or the Seller, the Business or the Purchaser, respectively.

ARTICLE V

COVENANTS

SECTION 5.1 Conduct of Business. (a) Except as otherwise contemplated hereby or by the Ancillary Agreements, and except for transactions in the ordinary course of business, until the Closing Date, the Seller will use its commercially reasonable efforts to preserve intact the business organizations and relationships with third parties relating to the Business, to keep available the services of required employees of the Business and to preserve beneficial relationships with customers in connection with the Business, following substantially the same material practices and standards, including collection practices and accounting practices for charge-offs and reserves, as in effect on November 1, 2005.

 

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(b) Except as otherwise contemplated hereby or by the Ancillary Agreements, and except for transactions in the ordinary course of business, until the Closing Date, the Purchaser will use its commercially reasonable efforts to preserve intact the business organizations and relationships with third parties relating to its credit card business, to keep available the services of required employees of its credit card business and to preserve beneficial relationships with customers in connection with its credit card business, following substantially the same material practices and standards, including collection practices and accounting practices for charge-offs and reserves, as in effect on the date hereof.

SECTION 5.2 Certain Changes. Without limiting Section 5.1, and except as otherwise contemplated hereby or by the Ancillary Agreements or required by applicable Requirements of Law, from the date hereof until the Closing Date, without the prior written consent of the Purchaser (which consent shall not be unreasonably withheld or delayed), the Seller will not:

(a) Enter into, terminate, or amend any Contract except in the ordinary course of business consistent with past practice and only to the extent such entry or amendment would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets;

(b) Acquire, except in the course of collection, a material amount of assets from any other Person or all or substantially all of the business or assets of any Person if such business or assets would constitute Acquired Assets;

(c) Change in any material respect its credit and underwriting, posting, collection, charge-off or operating policies and procedures (or the manner of application thereof) with respect to the Business as in effect on November 1, 2005;

(d) Sell, lease or otherwise dispose of any of the Acquired Assets except (i) in the ordinary course of business consistent with past practice and in transactions that individually or in the aggregate with all such other dispositions would not reasonably be expected to have a Material Adverse Effect on the Seller or the Acquired Assets or (ii) pursuant to the terms of Contracts or commitments existing as of the date hereof, or (iii) as disclosed by Seller on Schedule 5.2(d);

(e) Change any of the Cardholder Agreements; or

(f) Engage in any transaction or incur any obligation or liability with respect to the Acquired Assets, except in the ordinary course consistent with past practice;

(g) Impair or encumber the Purchaser’s rights in the Acquired Assets or the ability of the Purchaser to collect the Acquired Assets, other than Permitted Liens and Liens that will be removed on or before the Closing Date; or

(h) Agree with any Person or otherwise commit to do any of the foregoing.

 

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SECTION 5.3 Access and Confidentiality.

(a) Until the Closing Date, upon reasonable prior notice and subject to applicable Requirements of Law relating to the exchange of information, the Seller will permit the Purchaser and its authorized representatives to have reasonable access, during regular business hours for purposes consistent with this Agreement (including reasonable access to the servicing reports, systems and procedures of the Seller), to the personnel (including the Employees), properties and financial Books and Records, to the extent that such access does not interfere with the business of the Seller; provided, however, that the Purchaser and such representatives comply with the confidentiality obligations contained herein and in the Confidentiality Agreement; and provided, further that the foregoing shall not (i) require the Seller to permit any inspection, or to disclose any information, that in its reasonable judgment would result in the disclosure of any trade secrets of third parties or trade secrets of the Seller or its Affiliates unrelated to the Business or violate any obligations of the Seller to any third party with respect to confidentiality if the Seller shall have used commercially reasonable efforts to obtain the consent of such third party to such inspection or disclosure, or (ii) require any disclosure by the Seller that could, as a result of such disclosure, have the effect of causing the waiver of any attorney-client privilege.

(b) If this Agreement is terminated, the Purchaser, at its own expense, will promptly deliver (without retaining any copies) to the Seller or (at the Seller’s option) confirm in writing to the Seller that it has completely destroyed, all information furnished to the Purchaser or its representatives by the Seller or any of its agents, employees or representatives in connection with this Agreement, whether so obtained before or after the execution hereof, and all analyses, compilations, forecasts, studies or other documents prepared by the Purchaser or its representatives that contain or reflect any such information. The Purchaser will cause any information so obtained to be kept confidential and will not use, or permit the use of, such information in its business or in any other manner or for any other purpose except as contemplated by this Agreement.

(c) In addition to the confidentiality arrangements contained herein, all information provided or obtained in connection with the transactions contemplated by this Agreement and by the Ancillary Agreements (including pursuant to Section 5.3(a)) will be held by each party in accordance with the Confidentiality Agreement. In the event of a conflict or inconsistency between the terms of this Agreement and the Confidentiality Agreement, the terms of this Agreement will govern; and in the event of a conflict or inconsistency between the terms of this Agreement and the Program Agreement, the terms of the Program Agreement will govern.

(d) Each party and its Affiliates shall be entitled to specific performance of the foregoing provisions of this Section 5.3 and the provisions of the Confidentiality Agreement, in addition to any other remedies that they may have at law or in equity.

SECTION 5.4 Reasonable Efforts; Other Filings. (a) Subject to the terms and conditions of this Agreement, the Purchaser and the Seller will use commercially reasonable efforts to take, or cause to be taken, all actions and will do, or cause to be done, all things necessary, proper or advisable under applicable Requirements of Law, so as to permit consummation of the Purchase and Assumption as promptly as reasonably practicable and otherwise to enable consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, and will cooperate fully to that end.

 

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(b) Without limiting Section 5.4(a), the Seller and the Purchaser will use commercially reasonable efforts to prepare all documentation, to effect all filings and to obtain all permits, consents, approvals and authorizations of all Governmental Authorities necessary to consummate the transactions contemplated by this Agreement and the Ancillary Agreements, including taking any action necessary to defend vigorously, lift, mitigate or rescind the effect of any litigation or administrative proceeding involving any Governmental Authority adversely effecting the transactions contemplated by this Agreement or this Agreement, including promptly appealing any adverse court or administrative decision. The Seller and the Purchaser shall consult with the other with respect to the obtaining of such permits, consents, approvals and authorizations and to keep the other apprised of the status thereof. Subject to appropriate confidentiality protections, the Seller and the Purchaser shall each furnish to the other such necessary information and reasonable assistance as such parties may request in connection with the foregoing and shall each provide counsel for the other party with copies of all filings made by such party, and all correspondence between such party (and its advisors) with any Governmental Authority and any other information supplied by such party and such party’s Affiliates to a Governmental Authority in connection with this Agreement and the transactions contemplated hereby. Each party shall, subject to applicable Requirements of Law, permit counsel for the other party to review in advance any such proposed written communication to any Governmental Authority.

(c) Without limiting the foregoing, the Seller and the Purchaser will use commercially reasonable efforts to obtain all consents and approvals required pursuant to Article VII in time to permit the Closing Date to occur on or before April 15, 2006 or, if the Closing Date has not occurred, as promptly thereafter after April 15, 2006 as reasonably practicable. Each of the Seller and the Purchaser further agrees, without any request or demand by the other, to complete all filings required pursuant to Article VII no later than 10 Business Days from the execution and delivery of this Agreement and to prosecute actively all such filings and pursue the receipt of any related consent or approval.

(d) The Purchaser will promptly notify the Seller in writing, and the Seller will promptly notify the Purchaser in writing, upon (i) becoming aware of any order or decree or any complaint praying for an order or decree restraining or enjoining the execution of this Agreement or the Ancillary Agreements or the consummation of the transactions contemplated hereunder and thereunder, or (ii) receiving any notice from any Governmental Authority of its intention to (A) institute an Action to restrain or enjoin the execution of this Agreement or the Ancillary Agreements or the consummation of the transactions contemplated hereunder and thereunder, or (B) nullify or render ineffective this Agreement or the Ancillary Agreements if such transactions are consummated.

(e) The filing fees under the HSR Act shall be borne by the Purchaser.

SECTION 5.5 Additional Instruments. At the reasonable request of the Seller or the Purchaser at or after the Closing, the Person receiving such request will promptly execute and deliver, or cause to be executed and delivered, to the requesting party such assignments, bills of

 

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sale, assumption agreements, consents and other similar instruments in addition to those specifically required by this Agreement, in form and substance satisfactory to the requesting party, as may be reasonably necessary to carry out or implement any provision of this Agreement or any Ancillary Agreement.

SECTION 5.6 Non-Solicitation. The Purchaser shall not recruit, solicit for employment, or hire any employees of the Seller or its Affiliates during the period between the date of this Agreement and the Closing Date, and thereafter in accordance with the Program Agreement. The Seller and its Affiliates shall be entitled to specific performance of such provisions in addition to any other remedies that they may have at law or in equity.

SECTION 5.7 Notice to Cardholders. From and after the date of this Agreement and until the Closing, the Purchaser and its Affiliates shall not communicate with the Cardholders (whether by mail, by telephone or otherwise) without the prior written consent of the Seller.

SECTION 5.8 Post-Closing Access. Upon reasonable prior notice, subject to applicable Requirements of Law relating to the exchange of information, and to the extent such access does not interfere with the business of the Purchaser, the Purchaser will permit the Seller, its Affiliates and their representatives reasonable access (including the right to copy), without charge, during normal business hours, to the Acquired Assets, the Books and Records conveyed hereunder, and any third party who maintains or controls any of the foregoing for the Purchaser or its Subsidiaries, all as may be reasonably requested by the Seller or any Affiliate in order to enable the Seller to (i) perform any covenants required to be performed under this Agreement and the Ancillary Agreements after the Closing Date by them; (ii) permit the preparation of any Tax Return or other document required to be filed with any Governmental Authority; (iii) respond to any Action by any Governmental Authority or any other Person, including any Cardholder with respect to matters that may constitute Excluded Liabilities; and (iv) permit the processing of or response to any claim made under this Agreement or the Ancillary Agreements, and the Purchaser shall reasonably cooperate with the Seller and any such Affiliates, if requested, in connection with the foregoing; provided, however that the foregoing shall not (a) require the Purchaser to permit any inspection, or to disclose any information, that in its reasonable judgment would result in the disclosure of any trade secrets of third parties or trade secrets of the Purchaser or its Affiliates unrelated to the Acquired Assets or violate any obligations of the Purchaser to any third party with respect to confidentiality if the Purchaser shall have used commercially reasonable efforts to obtain the consent of such third party to such inspection or disclosure, or (b) require any disclosure by the Purchaser that could, as a result of such disclosure, have the effect of causing the waiver of any attorney-client privilege.

SECTION 5.9 Cooperation in Actions. (a) The Purchaser agrees to take commercially reasonable actions necessary to make employees who are then employed by the Purchaser and knowledgeable with respect to any matter in question available to the Seller and its representatives after the Closing Date with respect to any Action to which the Seller is or becomes a party or is otherwise involved with regard to the Business, commenced after the Closing Date. The Purchaser agrees to use commercially reasonable efforts to provide that any such employees who terminate their employment with the Purchaser or any of its Affiliates and enter into termination agreements or similar agreements, arrangements or understandings, will be obligated to continue to assist the Seller in the investigation, evaluation or defense of any such

 

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matters, whether as consultants, expert witnesses, or otherwise. The Seller will reimburse the Purchaser for reasonable out-of-pocket expenses incurred by the Purchaser in connection with requests by the Seller pursuant to this Section 5.9 (excluding salary and fringe benefits paid to such employees and related direct or indirect overhead).

(b) The Seller and the Purchaser shall cooperate, to the extent reasonably requested by the other, in the handling and disposition of any Actions, whether or not listed on the Disclosure Schedules and whether or not pending or threatened prior to the Closing, that arise out of or are related to any event or occurrence with respect to the Business prior to the Closing; provided, however, that the party ultimately responsible for discharging such Action shall have the authority to take such actions as it deems necessary or advisable, in its sole discretion, to discharge such Action, subject, however, to the provisions of this Agreement.

(c) The Seller shall be entitled to keep copies of all filings relating to Actions, correspondence, Books and Records, the Cardholder List, the Master File, and other documentation of any kind that the Seller reasonably determines are necessary or desirable in connection with its handling and disposition of Actions.

SECTION 5.10 Preservation of Books and Records. The Purchaser shall preserve and keep the Cardholder List, the Master File, all Books and Records of the Acquired Assets and all information transferred by the Seller to the Purchaser relating to the accounting, business, financial and Tax affairs of the Acquired Assets in existence on the Closing Date or that come into existence after the Closing Date but relate to the Acquired Assets prior to the Closing Date for a period of seven years thereafter, or for any longer period (i) as may be required by any federal, state, local or foreign governmental body or agency, (ii) as may be reasonably necessary with respect to the prosecution or defense of any audit or other Action that is then pending or threatened, or (iii) that is equivalent to the period established by any applicable statute of limitations (or any extension or waiver thereof) with respect to matters pertaining to Taxes. For a period of four years following the seven year period specified above, if the Purchaser wishes to destroy such records, the Purchaser shall first provide the Seller the opportunity to take possession of the same. The Purchaser shall further afford the Seller reasonable access during normal business hours and upon reasonable notice to the Books and Records in order for the Seller to perform its duties and obligations as servicer of the Accounts.

SECTION 5.11 Bulk Sales Law. The Purchaser hereby acknowledges that the Seller does not intend to comply, in connection with the transactions contemplated hereby, with the provisions of any applicable bulk sale or similar Requirement of Law.

ARTICLE VI

TAX AND EMPLOYEE MATTERS

SECTION 6.1 Taxes. (a) The Seller hereby represents and warrants to the Purchaser that the Seller has timely filed all Tax Returns relating to the Business or the Acquired Assets that it was required to file on or before the date hereof (taking into account all applicable extensions), and has timely paid all Taxes shown thereon as due and owing. There are no Liens with respect to Taxes upon any of the Acquired Assets other than with respect to Taxes not yet due and payable or that are being contested in good faith by appropriate action.

 

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(b) At the requesting party’s expense, the parties hereto shall furnish or cause to be furnished to each other, promptly upon reasonable request, any information and assistance relating to the Acquired Assets or the Business as the requesting party deems reasonably necessary in connection with the filing of any Tax Returns, the preparation for any audit by any taxing authority, the response to any inquiry by a taxing authority, the mailing or filing of any notice and the prosecution or defense of any claim, suit or proceeding relating to any Tax Returns or any other filing required to be made with any Taxing authority or any other matter related to Taxes. The Seller and the Purchaser will cooperate with each other in the conduct of any audit or other proceeding related to Taxes involving the Acquired Assets or the Business prior to the Closing Date.

(c) Notwithstanding anything in this Agreement to the contrary, all Tax Returns filed by the Seller for periods ending on or before the Closing Date shall remain the property of the Seller.

(d) Notwithstanding anything in this Agreement to the contrary, all excise, sales, use, transfer, documentary, stamp or similar Taxes that are payable or that arise as a result of the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements and any recording or filing fees with respect thereto will be borne equally by the Seller and by the Purchaser, and such Taxes shall not be considered Excluded Liabilities.

(e) For all purposes of this Agreement, all property and ad valorem Tax liabilities with respect to the Acquired Assets for taxable periods that begin on or before the Closing Date and end after the Closing Date shall be allocated to the Seller, on the one hand, and to the Purchaser, on the other hand, on a per diem basis. For Tax Returns with respect to such property and ad valorem Taxes that are due on or prior to the Closing Date, the Seller will file or cause to be filed such Tax Returns. For Tax Returns with respect to such property and ad valorem Taxes that are due after the Closing Date, the Purchaser will file or cause to be filed such Tax Returns. The non-filing party shall promptly remit to the party filing such property or ad valorem Tax Returns the portion of such Taxes allocated to such non-filing party.

(f) The Purchaser shall, if the Seller so requests and at the Seller’s expense (for reasonable out-of-pocket costs and expenses), cooperate with the Seller to file for and obtain any Tax refund that relates to any period prior to the Closing Date.

SECTION 6.2 Employees. All employees of the Seller and any of its Affiliates involved with the Business shall remain with the Seller and the Purchaser shall have no obligations with respect thereto.

 

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ARTICLE VII

CONDITIONS

SECTION 7.1 Conditions to Each Party’s Obligations to Effect the Purchase and Assumption. The respective obligations of the Seller and the Purchaser to effect the Purchase and Assumption are subject to the fulfillment or written waiver, at or prior to the Closing Date, of the following conditions:

(a) Governmental and Regulatory Approvals. (i) The HSR waiting period shall have expired or have been earlier terminated, and (ii) all other authorizations of, filings and registrations with, and notifications to, all Governmental Authorities required to effect the transactions contemplated by this Agreement shall have been obtained or made and shall be in full force and effect and all waiting periods required by applicable Requirements of Law in connection therewith shall have expired or been terminated except to the extent that the failure to obtain any such other approvals or authorizations would not reasonably be expected to have a Material Adverse Effect on the Acquired Assets, the Purchaser or the Seller.

(b) Third Party Consents. The consents and approvals of third Persons set forth in Schedule 4.1(c) shall have been obtained and shall be in full force and effect.

(c) No Injunction or Prohibition. No Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, by-law, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and prohibits or makes illegal consummation of the transactions contemplated by this Agreement or any of the Ancillary Agreements.

(d) Program Agreement. The Program Agreement shall have been duly executed and delivered by the other party thereto.

(e) Instrument of Assignment and Assumption. The Instrument of Assignment and Assumption shall have been duly executed and delivered by the other party thereto.

(f) Financing Statements. The Purchaser shall have prepared and delivered and the Seller shall have executed UCC-1 financing statements to be filed by the Purchaser in the Offices of the Secretaries of State of those states necessary to perfect the sale of the Gross Receivables purchased pursuant to the terms and conditions hereof.

SECTION 7.2 Conditions to Obligations of the Purchaser. The obligations of the Purchaser to effect the Purchase and Assumption are subject to the fulfillment or written waiver, at or prior to the Closing Date, of the following additional conditions:

(a) Performance of Obligations. The Seller shall have performed in all material respects all of its covenants and agreements set forth in this Agreement, to the extent required at or prior to the Closing Date.

(b) Representations. The representations of the Seller set forth in this Agreement shall be true and correct as of (i) the date of this Agreement, and (ii) the Closing

 

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Date, except that representations that by their terms speak as of the date of this Agreement or some other date shall be true and correct only as of such date (in each case, without giving any effect to any qualifications or limitations as to materiality or Material Adverse Effect contained therein), except to the extent that any failure to be so true and correct has not had, or would not reasonably be expected to have, a Material Adverse Effect on the Seller or the Acquired Assets.

(c) Certificate. The Purchaser shall have received a certificate signed on the Seller’s behalf by an executive officer of the Seller, dated the Closing Date, to the effect that the conditions set forth in Sections 7.2(a) and 7.2(b) have been satisfied.

SECTION 7.3 Conditions to Obligations of the Seller. The obligations of the Seller to effect the Purchase and Assumption are subject to the fulfillment or waiver in writing, at or prior to the Closing Date, of the following additional conditions:

(a) Performance of Obligations. The Purchaser shall have performed in all material respects all of its covenants and agreements set forth in this Agreement, to the extent required at or prior to the Closing Date.

(b) Representations. The representations of the Purchaser set forth in this Agreement shall be true and correct as of (i) the date of this Agreement, and (ii) the Closing Date, except that any representations that by their terms speak as of the date of this Agreement or some other date shall be true and correct only as of such date (in each case, without giving any effect to any qualifications or limitations as to materiality or Material Adverse Effect contained therein), except to the extent that any failure to be so true and correct has not had, or would not reasonably be expected to have, a Material Adverse Effect on the Purchaser or the Acquired Assets.

(c) Certificate. The Seller shall have received a certificate signed on the Purchaser’s behalf by an executive officer of the Purchaser, dated the Closing Date, to the effect that the conditions set forth in Sections 7.3(a) and 7.3(b) have been satisfied.

ARTICLE VIII

TERMINATION

SECTION 8.1 Termination. This Agreement may be terminated and the transactions contemplated by this Agreement and the Ancillary Agreements may be abandoned at any time before the Closing Date only:

(a) By the written consent of each of the parties hereto;

(b) By the Seller or the Purchaser if (i) any approval of a Governmental Authority, the lack of which would result in the failure to satisfy the condition set forth in Section 7.1(a), has been denied by the Governmental Authority, and (ii) in each case such party has no opportunity to cure the fault giving rise to such denial, including through reapplication or appeal;

 

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(c) By the Seller or the Purchaser if (i) any permanent injunction or Action by any Governmental Authority of competent jurisdiction prohibiting consummation of the transactions contemplated by this Agreement or the Ancillary Agreements becomes final and nonappealable, (ii) any law or regulation makes consummation of the transactions contemplated by this Agreement or the Ancillary Agreements illegal or otherwise prohibited, or (iii) consummation of the transactions contemplated by this Agreement or the Ancillary Agreements would violate any nonappealable final order, decree or judgment of any Governmental Authority having competent jurisdiction;

(d) By the Seller or the Purchaser if the transactions contemplated by this Agreement and the Ancillary Agreements are not consummated by June 1, 2006; provided, however, that neither the Seller nor the Purchaser may terminate this Agreement pursuant to this Section 8.1(d) if its (or one of its Affiliate’s) breach of any representation, warranty or covenant contained herein has been the cause of or resulted in the failure to consummate such transactions by such date; provided, however, that if the failure to consummate the transactions contemplated hereby by such date is caused by a delay in satisfying the conditions referenced in Section 7.1(a), no party shall have the right to terminate this Agreement pursuant to this Section 8.1(d) until the date that is three months after such date; or

(e) By the Seller or the Purchaser in the event of a breach or default in the performance by the other party of any representation, warranty, covenant or agreement hereunder, which breach or default (i) would, individually or in the aggregate with all other uncured breaches and defaults of such other party, constitute grounds for the conditions set forth in Section 7.2(a) or (b) or Section 7.3(a) or (b), as the case may be, not to be satisfied at the Closing Date, and (ii) has not been, or cannot be, cured within 30 days after written notice, describing such breach or default in reasonable detail, is given by the terminating party to the breaching or defaulting party.

SECTION 8.2 Effect of Termination. If this Agreement is terminated in accordance with the terms of this Agreement, no party hereto (or any of its Affiliates, directors, officers, representatives or agents) will have any Liability or further obligation to any other party to this Agreement, except for (i) obligations that survive termination as expressly provided for in Section 9.1, Section 5.3 and Article X, and (ii) liabilities or obligations arising out of or related to any knowing, willful or intentional breach of this Agreement prior to such termination.

ARTICLE IX

SURVIVAL; INDEMNIFICATION

SECTION 9.1 Survival. (a) The representations or warranties of the parties in this Agreement will survive the Closing until the date that is 12 months after the Closing; provided, however, that the representations and warranties set forth in the following provisions will survive until the expiration of the applicable statute of limitations (including any extensions thereof): Section 4.1(g), Section 4.1(l)(i), and Section 6.1(a).

(b) No agreement or covenant in this Agreement will survive the Closing Date, other than the covenants in any agreement or covenant that by their terms survive for a

 

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period after the Closing; provided, however, that the agreements and covenants set forth in the following provisions will survive until the expiration of the applicable statute of limitations (including any extensions thereof): Sections 6.1(b)-(f), Section 8.2, and this Article IX. In addition, the last sentence of Section 2.5(a) will survive until the expiration of the applicable statute of limitations (including any extensions thereof).

(c) No claim for indemnification pursuant to this Article IX for breach of any representation, warranty or covenant may be brought after the date on which such representation, warranty or covenant no longer survives; provided, however, that if any reasonably specific indemnification claim is validly made prior to the termination of the applicable survival period, the indemnifying party’s obligation hereunder with respect to such indemnification claim shall survive until such claim has been finally resolved.

(d) If a Purchaser employee listed on Schedule 1.1 determines prior to Closing that the Seller is in breach of any of the Seller’s representations or warranties contained herein, or of any of the Seller’s covenants contained herein that are to be performed by the Seller at or prior to Closing, and that such breach would have a Material Adverse Effect on the Acquired Assets, the Purchaser shall notify the Seller of the same as promptly as reasonably practicable. However, no such notice shall constitute a waiver of any claim by the Purchaser, and if the Seller has Knowledge of such breach, Purchaser shall be relieved of its notice obligation under this Section.

SECTION 9.2 Indemnification by the Seller. The Seller agrees to indemnify the Purchaser and each of its Affiliates and their respective officers, directors and employers (collectively, the “Purchaser Indemnified Parties”) against, and agrees to hold each of them harmless from, any and all damage, loss, liability, expense, judgment, settlement, claim, cost or penalty (including reasonable expenses of investigation and reasonable attorneys’ fees and expenses in connection with any Action and enforcement of any rights of indemnification against any Indemnifying Party or with respect to any appeal) (collectively, “Losses”) incurred or suffered by the Purchaser Indemnified Parties arising out of or resulting from, without duplication, (i) any breach of a representation or warranty of the Seller contained in this Agreement or in any certificate delivered by the Seller pursuant to this Agreement, (ii) any breach of an agreement or covenant made by the Seller in this Agreement, (iii) any failure of the Seller or any of its Affiliates to comply with any applicable “bulk sales” or similar Requirement of Law in connection with the consummation of the transactions contemplated hereby, or (iv) any Excluded Liability. Notwithstanding the foregoing, the Purchaser Indemnified Parties will not be entitled to indemnity pursuant to clause (i) of this Section 9.2: (x) in respect of any individual Action or individual claim, fact or occurrence or any series of related Actions, claims, facts or occurrences (including any class action), until Losses in respect of such individual or related Actions, claims, facts or occurrences are greater than the De Minimis Claim Amount; or (y) for any Losses, until the aggregate amount of all such Losses incurred or suffered by the Purchaser Indemnified Parties exceeds the Deductible Amount, in which case the Purchaser Indemnified Parties be entitled to indemnification for the full amount of such Losses in excess of such threshold; provided, however, that in no event will the Purchaser Indemnified Parties be entitled to indemnity for Losses pursuant to clause (i) of this Section 9.2 to the extent that the amount of Losses, in the aggregate, incurred or suffered by the Purchaser Indemnified Parties exceeds the Indemnity Cap Amount, except with respect to Losses arising from the breach of Section 4.1(g), Section 4.1(l)(i), or Section 6.1.

 

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SECTION 9.3 Indemnification by the Purchaser. The Purchaser agrees to indemnify the Seller and each of its Affiliates and their respective officers, directors and employers (collectively, the “Seller Indemnified Parties”) against, and agree to hold each of them harmless from, any and all Losses incurred or suffered by the Seller Indemnified Parties arising out of or resulting from without duplication, (i) any breach of a representation or warranty of the Purchaser contained in this Agreement or in any certificate delivered by the Purchaser pursuant to this Agreement, (ii) any breach of an agreement or covenant made by the Purchaser in this Agreement, (iii) any Assumed Liability, or (iv) the operation of the Acquired Assets from and after the Closing. Notwithstanding the foregoing, the Seller Indemnified Parties will not be entitled to indemnity pursuant to clause (i) of this Section 9.3: (x) in respect of any individual Action or individual claim, fact or occurrence or any series of related Actions, claims, facts or occurrences (including any class action), until Losses in respect of such individual or related Actions, claims, facts or occurrences are greater than the De Minimis Claim Amount; or (y) for any Losses, until the aggregate amount of all such Losses incurred or suffered by the Seller Indemnified Parties exceeds the Deductible Amount, in which case the Seller Indemnified Parties shall be entitled to indemnification for the full amount of Losses in excess of such threshold; provided, however, that in no event will the Seller Indemnified Parties be entitled to indemnity for Losses pursuant to clause (i) of this Section 9.3 to the extent that the amount of such Losses, in the aggregate, incurred or suffered by the Seller Indemnified Parties exceeds the Indemnity Cap Amount, except with respect to Losses arising from the breach of Section 6.1.

SECTION 9.4 Notice, Settlements and Other Matters. (a) A party seeking indemnification pursuant to Section 9.2 or Section 9.3 (the “Indemnified Party”) must give prompt written notice to the party from whom such indemnification is sought (the “Indemnifying Party”) of the assertion or commencement of any Action, in respect of which indemnity may be sought hereunder specifying in reasonable detail the individual items of such Losses including the amount, the date each such item was paid, or properly accrued or arose, and the specific details of the breach of representation, warranty or covenant or other claim or matter to which such item is related. Notwithstanding the foregoing, the failure of the Indemnified Party to furnish the written notice referred to in the preceding sentence in a prompt manner shall not effect its right to indemnification to the extent the Indemnifying Party’s right to defend the matter is not materially prejudiced by such failure to give prompt notice. In the event that any third party Action is made against the Indemnified Party and the Indemnified Party notifies the Indemnifying Party of the commencement thereof, the Indemnifying Party may elect at any time to negotiate a settlement or a compromise of such Action or to defend such Action, in each case at its sole cost and expense (subject to the limitations set forth in Section 9.2, if the Seller is the Indemnifying Party, or Section 9.3, if the Purchaser is the Indemnifying Party) and with its own counsel. If, within 30 days of receipt from an Indemnified Party of the notice referred to above the Indemnifying Party (i) advises the Indemnified Party in writing that it will not elect to defend, settle or otherwise compromise or pay such Action, or (ii) fails to make such an election in writing within such time-frame, the Indemnified Party may (subject to the Indemnifying Party’s continuing right of election in the preceding sentence), at its option, defend, settle, compromise or pay such Action; provided, however, that any such settlement or compromise shall be permitted hereunder only with the written consent of the Indemnifying Party. Unless

 

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and until the Indemnifying Party makes an election in accordance with this Section to defend, settle, compromise or pay such Action, all of the Indemnified Party’s reasonable costs arising out of the defense, settlement, compromise or payment thereof will be Losses subject to indemnification by the Indemnifying Party (subject to the provisions and limitations of Section 9.2 and Section 9.3, as applicable). Each Indemnified Party shall make available to the Indemnifying Party all information reasonably available to such Indemnified Party relating to such Action. If the Indemnifying Party elects to defend any such Action, the Indemnified Party may participate in such defense with counsel of its choice at the Indemnified Party’s sole cost and expense. If the Indemnifying Party elects to assume the defense of (or otherwise elects to negotiate, settle or compromise) any Action as described above, the Indemnified Party will reimburse the Indemnifying Party for all costs and expenses incurred by the Indemnifying Party in connection with such defense to the extent such costs and expenses do not total an amount indemnifiable pursuant to Section 9.2 or Section 9.3, as applicable.

(b) The Indemnified Party will have the right to reject any settlement approved by the Indemnifying Party if the Indemnified Party is not fully and unconditionally released from any Liability resulting from that Action. The Indemnified Party will not have the right to settle any third party Action without the written consent of the Indemnifying Party if the Indemnifying Party is contesting such Action in good faith and has assumed the defense of such Action from the Indemnified Party or if the period for determining whether or not to assume the defense of such Action from the Indemnified Party has not expired.

(c) In calculating the amount of any Losses of an Indemnified Party under this Article IX, there will be subtracted from such amount the amount of any (i) insurance proceeds (net of Taxes actually incurred), and other than proceeds received through self-insurance or insurance provided by Affiliates of such Indemnified Party) actually received by the Indemnified Party with respect to such Losses, and (ii) third-party payments actually received by the Indemnified Party with respect to such Losses. In the event that the Indemnifying Party reimburses the Indemnified Party for any Losses prior to the occurrence of any events contemplated by clauses (i) or (ii) of this Section 9.4(c), the Indemnified Party will remit to the Indemnifying Party any such amounts that the Indemnified Party subsequently receives or realizes with respect to such Losses. Upon the payment in full of any claim hereunder, the Indemnifying Party will be subrogated to the rights of the Indemnified Party against any Person with respect to the subject matter of such claim and any amount paid by the Indemnifying Party under this Article IX. The Indemnified Party shall cooperate with the Indemnifying Party in the assertion by the Indemnifying Party of any such claim against such other Persons.

(d) Without limitation of their respective rights and obligations as set forth elsewhere in this Article IX, and subject to the procedures for indemnification claims set forth in this Article IX, the Indemnified Party will act in good faith, will use commercially reasonable efforts to mitigate any Losses, will use similar discretion in the use of personnel and the incurring of expenses as the Indemnifying Party would use if they were engaged and acting entirely at their own cost and for their own account, and will consult regularly with the Indemnifying Party regarding the conduct of any Actions or the taking of any action for which indemnification may be sought. In the event that an Indemnified Party shall fail to make such commercially reasonable efforts to mitigate any such Losses, then notwithstanding anything else to the contrary contained herein, neither the Seller nor the Purchaser, as the case may be, shall be required to indemnify any Indemnified Party for that portion of any Losses that could reasonably be expected to have been avoided if the Indemnified Party had made such efforts.

 

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(e) The Seller and the Purchaser agree to treat and report all indemnity payments as additional adjustments to the amount of the total consideration paid for the Acquired Assets for all Tax purposes unless required by applicable Requirements of Law.

(f) For purposes of this Article IX, all representations and warranties continued in this Agreement shall be read to exclude any materiality or “Material Adverse Effect” qualifiers appearing therein.

(g) Notwithstanding anything to the contrary contained herein, the indemnification provided for herein shall not cover, and in no event shall any party hereto be liable for, any indirect damages, including consequential, incidental, exemplary or special damages, or punitive damages.

(h) After the Closing Date, other than as provided in Section 2.4 and except with respect to claims based on fraud and/or claims seeking equitable remedies, this Article IX will constitute the Seller’s and the Purchaser’s exclusive remedy for any of the matters addressed herein or other claim arising out of or relating to this Agreement.

ARTICLE X

MISCELLANEOUS

SECTION 10.1 Notices. All notices and other communications by the Purchaser or the Seller hereunder will be in writing to the other party and will be deemed to have been duly given when delivered in person, when received via facsimile or overnight courier, or when posted by United States registered or certified mail, with postage prepaid, addressed as follows:

if to the Purchaser to:

Chase Bank USA, N.A.

3 Christina Center

201 North Walnut Street

Wilmington, DE 19801

Attention: Chief Executive Officer

Facsimile: (212) 230-8881

with a copy to:

Chase Bank USA, N.A.

3 Christina Center

201 North Walnut Street

Wilmington, DE 19801

Attention: General Counsel Chase Card Services

Facsimile: (212) 230-8881

 

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if to the Seller to:

Kohl’s Department Stores, Inc.

N56 W17000 Ridgewood Drive

Menomonee Falls, WI 53051

Attention: Chief Operating Officer

Facsimile: (262) 703-6796

with a copy to:

Kohl’s Department Stores, Inc.

N56 W17000 Ridgewood Drive

Menomonee Falls, WI 53051

Attention: General Counsel

Facsimile: (262) 703-7274

Notices and other communications may also be sent to such other address or addresses as the Purchaser or the Seller may from time to time designate by notice as provided herein, except that notices of change of address will be effective only upon receipt.

SECTION 10.2 Expenses. (a) Except as otherwise provided herein, all legal and any other third-party costs and expenses incurred in connection herewith and the transactions contemplated by this Agreement and the Ancillary Agreements will be paid by the party incurring such expenses, except that all fees or other amounts payable to any Governmental Authority in connection with any consent or approval required by Article VII shall be paid by the Purchaser.

(b) Collection efforts and related expenses on all Accounts made or incurred by the Seller prior to the Closing Date will be the responsibility of the Seller, and all monies collected thereon prior to the Closing Date (and all monies collected on Written-Off Accounts prior to the Closing Date) shall be retained by the Seller.

SECTION 10.3 Successors and Assigns. This Agreement will be binding upon and will inure to the benefit of the parties and their respective successors and permitted assigns. This Agreement and the rights and obligations hereunder may not be assigned by any party to any Person without the prior written consent of the other party hereto, and any purported assignment without such consent shall be void.

SECTION 10.4 Entire Agreement; Amendment; Waiver. This Agreement and the Ancillary Agreements, including the Exhibits and Schedules hereto and thereto, embody the entire agreement of the parties hereto with respect to the subject matter hereof and supersede all prior agreements with respect thereto, other than the Confidentiality Agreement. No representation, warranty, inducement, promise, understanding or condition not set forth in this Agreement (or the other documents referred to in the preceding sentence) has been made or relied on by any party in entering into this Agreement. This Agreement may be amended, and any provision hereof waived, but only in a writing signed by the parties hereto.

 

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SECTION 10.5 Counterparts. This Agreement may be executed in two or more counterparts any of which may be delivered by facsimile transmission and all of which will together constitute one and the same instrument.

SECTION 10.6 Governing Law. This Agreement and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by and construed in accordance with the laws of the State of New York, without regard to internal principles of conflict of laws, and applicable federal law.

SECTION 10.7 Waiver of Jury Trial and Venue. The parties hereto waive all right to trial by jury in any action or proceeding to enforce or defend any rights under this Agreement. Any lawsuit brought by either party against the other shall be brought in the United States District Court for the Eastern District of Wisconsin in Milwaukee, Wisconsin.

SECTION 10.8 Severability. In case any one or more of the provisions contained herein is found by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions contained herein will not in any way be effected or impaired thereby.

SECTION 10.9 Public Announcement. Except for any notice that is required by law or regulation, each of the Purchaser and the Seller agrees that it will not issue a press release or make any other public statement with respect to the transactions contemplated by this Agreement or the Ancillary Agreements without the prior written consent of the other party, which consent will not be unreasonably withheld or delayed. Each of the Purchaser and the Seller, agrees to notify and consult with the other at least one Business Day in advance of filing any notice required by law or regulation.

SECTION 10.10 Third-Party Beneficiaries. Nothing in this Agreement, expressed or implied, will confer on any Person, other than the parties hereto and their respective successors and permitted assign, any rights, remedies, obligations or liabilities; provided that the provisions of Article IX will inure to the benefit of the Indemnified Parties.

SECTION 10.11 Credit Bureau Reporting. Upon the Closing, with the cooperation of the Purchaser, the Seller will notify the three major credit reporting bureaus that the designation on all Accounts purchased hereunder shall reflect that such Accounts have been transferred.

SECTION 10.12 Further Assurances. Each of the parties hereto shall, whenever and as often as reasonably requested to do so by the other party hereto, execute, acknowledge and deliver any and all such other and further acts, assignments, endorsements, transfers and any instruments of further assurance, approvals and consents as are necessary or proper in order to complete, ensure and perfect (i) the Purchase and Assumption contemplated hereby, and (ii) the consummation of the other transactions contemplated hereby.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, this Agreement has been executed on behalf of each of the parties hereto as of the day and year first above written.

 

KOHL’S DEPARTMENT STORES, INC.
By:  

/s/ Arlene Meier

Name:  

Arlene Meier

Title:  

Chief Operating Officer

CHASE BANK USA, NATIONAL

ASSOCIATION

By:  

/s/ David Hoyt

Name:  

David Hoyt

Title:  

Senior Vice President

 

Signature Page to Purchase and Sale Agreement

Private Label Credit Card Program Agreement

Exhibit 10.2

EXECUTION COPY

PRIVATE LABEL CREDIT CARD PROGRAM AGREEMENT

by and between

KOHL’S DEPARTMENT STORES, INC.

and

CHASE BANK USA, NATIONAL ASSOCIATION

March 5, 2006


TABLE OF CONTENTS

 

ARTICLE 1 DEFINITIONS    1
     1.1    Generally.    1
     1.2    Miscellaneous.    8
ARTICLE 2 ESTABLISHMENT OF THE PROGRAM    8
     2.1    Generally.    8
     2.2    Credit Program.    8
     2.3    Account Terms.    8
     2.4    Conversion of Purchased Accounts.    9
     2.5    Exclusivity.    9
     2.6    Non-Solicitation.    9
ARTICLE 3 PROGRAM MANAGEMENT    10
     3.1    Program Objectives.    10
     3.2    Program Managers; Program Team.    10
     3.3    Management Committee.    11
     3.4    Functions of the Management Committee.    11
     3.5    Management Committee Meetings.    12
ARTICLE 4 PROGRAM OPERATION    12
     4.1    Operating Procedures; Operation of the Program.    12
     4.2    Certain Responsibilities of Kohl’s.    12
     4.3    Certain Responsibilities of Bank.    13
     4.4    Ownership of Accounts.    14
     4.5    Documents Developed and Used in Connection with the Program.    15
     4.6    Risk Management/Credit Standards.    15
     4.7    Exception Accounts.    15
     4.8    Program Website.    16
     4.9    Sales Taxes.    16
     4.10    Systems.    16
ARTICLE 5 MARKETING OF THE PROGRAM    16
     5.1    Kohl’s Responsibility to Market the Program.    16
     5.2    Bank’s Responsibility to Market the Program.    17
     5.3    Communications with Cardholders.    17
     5.4    Access to Bank Marketing Resources.    18
     5.5    Club Plans.    18
ARTICLE 6 CARDHOLDER AND CUSTOMER INFORMATION    18
     6.1    Customer Information.    18
     6.2    Qualified Kohl’s Customer List.    19
     6.3    Cardholder Data.    20
     6.4    Kohl’s Shopper Data.    20
     6.5    Data Security.    20
ARTICLE 7 OPERATING STANDARDS    22
     7.1    Reports.    22

 

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     7.2    Servicing.    22
     7.3    Customer Service.    22
     7.4    Transfer of Servicing to Bank.    23
     7.5    Access.    23
     7.6    Disaster Recovery Plans.    23
     7.7    Sarbanes-Oxley Compliance.    23
ARTICLE 8 MERCHANT SERVICES    24
     8.1    Transmittal and Authorization of Charge Transaction Data.    24
     8.2    POS Terminals.    24
     8.3    In-Store Payments.    24
     8.4    Settlement Procedures.    25
     8.5    Returns of Kohl’s Goods and/or Services.    25
     8.6    No Merchant Discount.    25
ARTICLE 9 PROGRAM ECONOMICS    26
     9.1    Monthly Statement to Kohl’s.    26
     9.2    Compensation.    26
ARTICLE 10 LICENSING OF TRADEMARKS; INTELLECTUAL PROPERTY    26
     10.1    The Kohl’s Licensed Marks.    26
     10.2    The Bank Licensed Marks.    28
     10.3    Ownership of Intellectual Property.    29
ARTICLE 11 REPRESENTATIONS, WARRANTIES AND COVENANTS    30
     11.1    General Representations and Warranties of Kohl’s.    30
     11.2    General Representations and Warranties of Bank.    32
     11.3    General Covenants of Kohl’s.    34
     11.4    General Covenants of Bank.    35
ARTICLE 12 CONFIDENTIALITY    37
     12.1    General Confidentiality.    37
     12.2    Use and Disclosure of Confidential Information    38
     12.3    Unauthorized Use or Disclosure of Confidential Information    38
     12.4    Return or Destruction of Confidential Information    39
ARTICLE 13 RETAIL PORTFOLIO ACQUISITIONS AND DISPOSITIONS    39
     13.1    Retail Portfolio Acquisition.    39
     13.2    Retail Portfolio Disposition.    39
ARTICLE 14 EVENTS OF DEFAULT; RIGHTS AND REMEDIES    39
     14.1    Events of Default.    39
     14.2    Defaults by Bank.    40
     14.3    Defaults by Kohl’s.    41
     14.4    Remedies for Events of Default.    41
ARTICLE 15 TERM/TERMINATION    42
     15.1    Term.    42
     15.2    Termination by Kohl’s Prior to the End of the Initial Term or a Renewal Term.    42
     15.3    Termination by Bank Prior to the End of the Initial Term or Renewal Term.    42

 

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ARTICLE 16 EFFECTS OF TERMINATION    42
     16.1    General Effects.    42
     16.2    Kohl’s Option to Purchase the Program Assets.    42
     16.3    Rights of Bank if Purchase Option not Exercised.    43
ARTICLE 17 INDEMNIFICATION    43
     17.1    Kohl’s Indemnification of Bank.    43
     17.2    Bank’s Indemnification of Kohl’s.    44
     17.3    Procedures.    45
     17.4    Notice and Additional Rights and Limitations.    46
ARTICLE 18 MISCELLANEOUS    46
     18.1    Precautionary Security Interest.    47
     18.2    Securitization; Participation.    47
     18.3    Assignment.    47
     18.4    Sale or Transfer of Accounts.    47
     18.5    Subcontracting.    47
     18.6    Amendment.    48
     18.7    Non-Waiver.    48
     18.8    Severability.    48
     18.9    Waiver of Jury Trial.    48
     18.10    Governing Law.    48
     18.11    Captions.    48
     18.12    Notices.    48
     18.13    Further Assurances.    49
     18.14    No Joint Venture.    49
     18.15    Press Releases.    49
     18.16    No Set-Off.    50
     18.17    Conflict of Interest.    50
     18.18    Third Parties.    50
     18.19    Force Majeure.    50
     18.20    Entire Agreement.    50
     18.21    Binding Effect; Effectiveness.    51
     18.22    Counterparts/Facsimiles.    51
     18.23    Survival.    51

 

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This Private Label Credit Card Program Agreement is made as of the 5th day of March, 2006, by and between KOHL’S DEPARTMENT STORES, INC. (“Kohl’s”), a Delaware corporation with its principal offices at Menomonee Falls, Wisconsin, and Chase Bank USA, National Association (“Bank”), a national bank with an office at 3 Christina Center 201 North Walnut Street Wilmington, DE, 19801.

W I T N E S S E T H:

WHEREAS, Bank has established programs to extend private label card credit to qualified customers for the purchase of goods and services;

WHEREAS, Kohl’s is engaged, among other activities, in operating retail department stores and a Private Label Credit Card Business;

WHEREAS, concurrently with the execution of this Agreement, Bank and Kohl’s are entering into a purchase and sale agreement (the “Purchase Agreement”) pursuant to which Bank shall purchase Kohl’s Private Label Credit Card Business, including certain credit card accounts and associated receivables (“Purchased Accounts”);

WHEREAS, it is a condition precedent to the obligations of Kohl’s under the Purchase Agreement that Kohl’s and Bank enter into this Agreement;

WHEREAS, Kohl’s has requested that Bank establish a program pursuant to which Bank shall issue Private Label Credit Cards, which shall be accepted only by Kohl’s Channels; and

WHEREAS, the parties agree that the goodwill associated with the “Kohl’s” mark contemplated for use hereunder is of substantial value which is dependent upon the maintenance of high quality services and appropriate use of the mark pursuant to this Agreement;

NOW, THEREFORE, in consideration of the terms, conditions and mutual covenants contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Kohl’s and Bank agree as follows:

ARTICLE 1

DEFINITIONS

 

1.1 Generally.

The following terms shall have the following meanings when used in this Agreement:

Account” means a Private Label Credit Card-accessed open-end credit account established in favor of a Cardholder, pursuant to which such Cardholder may finance the purchase of Goods and/or Services from Kohl’s Channels, subject to the terms of a Credit Card Agreement. The term Account includes Purchased Accounts.

 

1


Account Documentation” means, with respect to an Account, any and all documentation relating to that Account, including Credit Card Documentation, checks or other forms of payment with respect to an Account, credit bureau reports (to the extent not prohibited from transfer by contract with the credit bureau), adverse action notices, change in terms notices, other notices, correspondence, memoranda, documents, stubs, instruments, certificates, agreements, magnetic tapes, disks, hard copy formats or other computer-readable data transmissions, any microfilm, electronic or other copy of any of the foregoing, and any other written, electronic or other records or materials of whatever form or nature, whether tangible or intangible, including information arising from or relating or pertaining to any of the foregoing to the extent related to the Program; provided that Account Documentation shall not include Kohl’s register tapes, invoices, sales or shipping slips, delivery and other receipts or other indicia of the sale of Goods and/or Services.

Account Terms” has the meaning set forth in Section 2.3.

Accrued Interest” means the aggregate amount of all finance charges that were accrued and earned, but not posted on the Accounts as of the end of the month or other relevant time period.

Acquisition Price” has the meaning set forth in Schedule 1.1.

Affiliate” means, with respect to any Person, each Person that controls, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise.

Agreement” means this Private Label Credit Card Program Agreement, together with all of its schedules and exhibits, and, if modified, altered, supplemented, amended and/or restated, as the same may be so modified, altered, supplemented, amended and/or restated from time to time.

Applicable Law” means all applicable federal, state and local laws, statutes, regulations, written regulatory guidance, orders or directives, opinions and interpretations of any Governmental Authority, as may be amended and in effect from time to time during the Term of this Agreement, including: (i) the Truth in Lending Act and Regulation Z; (ii) the Equal Credit Opportunity Act and Regulation B; (iii) the Fair Debt Collection Practices Act; (iv) the Fair Credit Reporting Act; (v) the Gramm-Leach-Bliley Act and its implementing regulations (“GLBA”); (vii) the USA PATRIOT Act and its implementing regulations; and (vii) the Federal Trade Commission Act.

Bank” has the meaning set forth on page 1.

Bank Event of Default” means the occurrence of any one of the events listed in Section 14.2 hereof or an Event of Default of Bank.

 

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Bank Licensed Marks” means the trademarks, tradenames, service marks, logos and other proprietary designations of Bank listed on Schedule B and licensed to Kohl’s under Section 10.2.

Bank Nominees” shall have the meaning set forth in Section 3.3.