DFS gets $15 million in concessions to settle lawsuit
By Kelly Yamanouchi
Advertiser Staff Writer
The state granted about $15 million in concessions to DFS Group Ltd. in settling a dispute over $49 million in back rent covering duty-free shops around the state.
Under the agreement announced yesterday, the state will drop its lawsuit against DFS seeking the unpaid rent and charging the company with fraudulently transferring $100 million in loan repayments to its owner LVMH Moet Hennessy Louis Vuitton at a time when DFS claimed to be unable to pay its state debts.
The agreement also allows the duty-free retailer to continue operating shops at Hawai'i airports and in Waikiki through September. But the state will rebid the duty-free contract next week covering Oct. 1 to May 2006 when the current DFS agreement was due to expire.
The state also lowered DFS' current annual minimum rental guarantee to $40 million from $60 million. DFS will only need to pay a prorated $30 million for January through September. That amounts to about $15 million less than what DFS would have originally owed the state.
DFS will need to give the state an additional $285,226 for back rent covering 2002 and pay what it owes for the first half of 2003 with an interest-bearing promissory note guaranteed by DFS's owners.
"This was just about as good as the state could possibly do," said state Attorney General Mark Bennett.
He said the state took into account DFS's ability to continue operations and the possibility it would file for bankruptcy protection as it had threatened earlier this year.
If DFS filed for bankruptcy, Bennett said it would "end up costing the state a great deal of money and there would be a huge job loss and a great impact on the state."
DFS employs about 1,200 workers statewide.
Sharon Weiner, DFS Group vice president, called the settlement "a good deal all around."
"It means we stay in business, and we hope to be the winning bidder" for the new contract, she said. "There's a thousand people at our company that are very relieved to hear about this agreement."
DFS will be required to submit a bid for the new agreement, which carries an annual minimum guarantee of $40 million. The state said the minimum could be reduced further next year depending on how sales go this year.
Because the new contract is shorter than three years, Bennett said the state hopes it will attract multiple bidders.
"But it may very well turn out that DFS is the only bidder," he said. The proposals will be sought next week.
Weiner said the company would submit a bid before the Sept. 25 deadline. She would not disclose the amount the company would propose, but Bennett said he does not expect the company would submit a bid higher than $40 million.
While the settlement with the state begins to solve DFS's financial issues, Weiner said it "doesn't completely solve the problem." She said the company is still insolvent.
"We believe the outcome is a fair reflection of the current status of the duty-free business, which has been deeply affected by the decline in Asian travel to Hawai'i, resulting in continued and severe declines in our business," said Edward Brennan, chairman and chief executive of DFS Group in a statement.
A bill passed by the Legislature earlier this year would have granted airport concessionaires enough relief to break even, but Gov. Linda Lingle vetoed the measure.
Bennett said "we decided that in this case that (the bill) was not appropriate."
DFS's current agreement, which began June 1, 2001, was to expire May 31, 2006. But the company ran into trouble when the number of travelers to Hawai'i, particularly Japanese who spent heavily on duty-free goods, fell sharply following the Sept. 11 terrorist attacks.
The attorney general's office said in a statement that withdrawing the contract with DFS and rebidding it is "a drastic step," but that it was in the best interest of the state.
The state took into account such factors as the struggling travel market worldwide, significant declines in international passengers as a result of the terrorist attacks, the conflicts in Afghanistan and Iraq, and the threat of SARS in Asia.
While the state is dismissing its lawsuit against DFS for back rent and the transfer of loan payments to its owner, it can reinstate the suit if DFS defaults on its concession lease.
Talks to restructure or terminate the lease contract began in April after DFS agreed to pay the state $25 million or about half the outstanding rent that it owed.
Under terms of the agreement, the state is not providing rent relief on DFS's non-duty-free contracts at the Honolulu and Kona international airports.
