<PAGE>
PRELIMINARY
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
____________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-17540
MONTGOMERY WARD HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3571585
(State of incorporation) (I.R.S. Employer Identification No.)
Montgomery Ward Plaza, Chicago, Illinois 60671
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/467-2000
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
------ -----
As of November 10, 1997 the Registrant had 18,322,247 shares of Class A Common
Stock and 25,000,000 shares of Class B Common Stock outstanding.
<PAGE>
Montgomery Ward Holding Corp.
For the Quarter Ended September 27, 1997
Index to Quarterly Report on Form 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information.
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income. 3
Consolidated Balance Sheets. 4
Consolidated Statements of Cash Flows. 5
Notes to Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
Part II - Other Information. 18
</TABLE>
2
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the 13-week For the 39-week
Periods Ended Periods Ended
----------------------- -----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(In millions, except per share amounts) 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Net sales, including leased and licensed department sales $ 947 $ 1,376 $ 3,217 $ 3,984
Direct response marketing revenues, including insurance 214 191 638 553
--------- --------- --------- ---------
Total revenues 1,161 1,567 3,855 4,537
--------- --------- --------- ---------
Costs and expenses
Cost of goods sold, including net occupancy and
buying expense (Note 10) 805 1,105 2,872 3,224
Operating, selling, general and administrative expenses, including
benefits and losses of direct response operations (Note 6) 533 482 1,645 1,330
Interest expense 17 28 103 75
--------- --------- --------- ---------
Total costs and expenses 1,355 1,615 4,620 4,629
--------- --------- --------- ---------
Loss before reorganization costs and income taxes (194) (48) (765) (92)
Reorganization costs (Note 4) 582 - 582 -
--------- --------- --------- ---------
Loss before income taxes (776) (48) (1,347) (92)
Income tax benefit (161) (19) (375) (37)
--------- --------- --------- ---------
Net loss (615) (29) (972) (55)
Preferred stock dividend requirements (Note 7) - 3 8 9
--------- --------- --------- ---------
Net loss applicable to common shareholders $ (615) $ (32) $ (980) $ (64)
========= ========= ========= =========
Net loss per common share (Note 5)
Class A $ (17.17) $ (.80) $ (27.37) $ (1.58)
Class B (11.99) (.70) (19.12) (1.38)
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 27, December 28,
1997 1996
------------- ------------
(In millions) (Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 238 $ 32
Short-term investments 1 3
Investments of insurance operations 306 317
------------- ------------
Total cash and investments 545 352
Trade and other accounts receivable 262 213
Accounts and notes receivable from affiliates 16 13
------------- ------------
Total Receivables 278 226
Merchandise inventories 1,147 1,545
Prepaid pension cost 365 351
Properties, plant and equipment, net of accumulated
depreciation and amortization 1,199 1,308
Direct response and insurance acquisition costs 575 603
Other assets 368 494
Deferred income taxes 320 -
------------- ------------
Total Assets $4,797 $4,879
============= ============
Liabilities
Short-term debt $ 102 $1,028
Trade accounts payable 463 1,585
Federal income taxes payable - 4
Accrued liabilities and other obligations 760 1,228
Insurance policy claim reserves 237 227
Long-term debt 73 87
Obligations under capital leases - 60
Deferred income taxes - 52
Liabilities subject to compromise (Note 3) 3,499 -
------------- ------------
Total Liabilities 5,134 4,271
Commitments and Contingent Liabilities (Note 8)
Redeemable Preferred Stock (Note 7) 212 175
Shareholders' Equity (deficit)
Common stock 1 1
Capital in excess of par value 53 53
Retained earnings (deficit) (471) 509
Unrealized gain on marketable equity securities 7 9
Less: treasury stock, at cost (139) (139)
------------- ------------
Total shareholders' equity (deficit) (549) 433
------------- ------------
Total Liabilities and Shareholders' Equity $4,797 $4,879
============= ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the 39-week
Periods Ended
----------------------------------------
September 27, September 28,
(In millions) 1997 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(972) $ (55)
Adjustments to reconcile net loss to net cash used for
operating activities:
Provision for disposition of assets of Lechmere, Inc. 280 -
Provision for closing of Montgomery Ward and Electric
Avenue & More stores 260 -
Net receipts of cash relating to disposition of assets of
Lechmere, Inc. and closing of Electric Avenue & More 104 -
stores
Depreciation and goodwill amortization 96 100
Amortization of direct response and insurance
acquisition costs 184 147
Deferred income taxes (375) (5)
Provision for loss on sale of interest in ValueVision
International, Inc. common stock 23 -
Gain on sale of assets - (3)
Changes in operating assets and liabilities:
Trade and other accounts receivable (49) (52)
Accounts and notes receivable from affiliates (3) (10)
Merchandise inventories 254 (20)
Prepaid pension cost (13) (3)
Federal income taxes payable - (37)
Direct response and insurance acquisition costs (156) (208)
Other assets 6 (21)
Trade accounts payable 219 (300)
Federal income taxes payable, net - (6)
Accrued liabilities and other obligations (33) (120)
Insurance policy claim reserves 10 1
------------------ ------------------
Net cash used for operating activities (165) (592)
------------------ ------------------
Cash flows used for investing activities:
Purchase of short-term investments (311) (19)
Sale of short-term investments 313 31
Purchase of investments of insurance operations (517) (495)
Sale of investments of insurance operations 528 521
Capital expenditures (42) (55)
Disposition of properties, plants and equipment, net 5 12
Investment in Merchant Partners - (7)
Acquisition of Amoco Enterprises - (100)
------------------ ------------------
Net cash used for investing activities $ (24) $(112)
------------------ ------------------
</TABLE>
5
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the 39-Week
Periods Ended
------------------------------
September 27, September 28,
(In millions) 1997 1996
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings, net $409 $635
Payments of long-term debt (5) (6)
Payments of obligations under capital leases (5) (5)
Cash dividends paid (4) (6)
Proceeds from issuance of long-term debt - 102
Proceeds from issuance of common stock - 3
Purchase of treasury stock, at cost - (14)
---- ----
Net cash provided by financing activities 395 709
---- ----
Increase in cash and cash equivalents 206 5
Cash and cash equivalents at beginning of period 32 37
---- ----
Cash and cash equivalents at end of period $238 $ 42
==== ====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ - $ 2
Interest 69 81
Non-cash investing activity:
Change in unrealized gain on marketable equity securities $(2) $(4)
Non-cash financing activities:
Notes issued for purchase of treasury stock $ - $ 6
Preferred stock issued as financing fee 35 -
Increase in liquidation value of preferred stock 2 -
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are unaudited. The
consolidated financial statements reflect all adjustments (consisting only
of normal recurring accruals) which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented. The consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
filed with the Securities and Exchange Commission in the 1996 Annual Report
on Form 10-K of Montgomery Ward Holding Corp. ("MW Holding" or, together
with its subsidiaries, the "Company"). Capitalized terms not otherwise
defined herein have the meaning ascribed to such terms in the 1996 Annual
Report on Form 10-K. Certain prior period amounts have been reclassified to
be comparable with the current period presentation.
2. Reorganization
At the close of business on July 7, 1997 (the "Petition Date"), MW Holding
and certain of its U.S. subsidiaries filed petitions for reorganization
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware. These related proceedings are being
jointly administered under the caption "In re Montgomery Ward Holding Corp.,
a Delaware corporation, et. al.", Case No. 97-1409 (PJW). The following U.S.
subsidiaries were not included in the bankruptcy filings: Signature
Financial/Marketing, Inc. and its direct and indirect subsidiaries
("Signature"), which are engaged in direct response marketing (including
insurance); Marinco Insurance U.S.A., Inc. ("Marinco"); and Montgomery Ward
Foundation.
After a long period of negotiation, MW Holding's subsidiary, Montgomery Ward
& Co., Incorporated ("Montgomery Ward"), was unable to reach an out-of-court
settlement with its lenders. Accordingly, bankruptcy petitions were filed in
order to obtain an opportunity to reorganize and begin implementing the
Company's strategies while working to restructure its indebtedness. Pursuant
to the Post-Petition Loan and Guaranty Agreement dated July 8, 1997, among
Montgomery Ward and Lechmere, Inc. ("Lechmere"), as borrowers; MW Holding
and other debtor subsidiaries of MW Holding, as guarantors; General Electric
Capital Corporation ("GE Capital"), as agent and lender; and various
lenders, as amended (the "DIP Facility"), the lenders have agreed to provide
up to $1 billion in post-petition financing to Montgomery Ward.
The Company expects to reorganize its affairs under the protection of
Chapter 11 and to propose a Chapter 11 plan of reorganization for itself and
the other filing subsidiaries, including Montgomery Ward.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
stayed and other contractual obligations may not be enforced against the
Company. In addition, the Company may reject executory contracts and lease
obligations. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. If the
Company is able to successfully reorganize, substantially all unsecured
liabilities as of the petition date would be subject to settlement under a
plan of reorganization to be voted upon by all impaired classes of creditors
and equity security holders and approved by the Bankruptcy Court.
7
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Reorganization (continued)
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. However,
as a result of the Chapter 11 filing and circumstances relating to this
event, including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is
subject to significant uncertainty. While under the protection of Chapter
11, the Company may sell or otherwise dispose of assets, and liquidate or
settle liabilities, for amounts other than those reflected in the financial
statements. Further, a plan of reorganization could materially change the
amounts reported in the financial statements, which do not give effect to
all adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. The appropriateness
of using the going concern basis is dependent upon, among other things,
confirmation of a plan of reorganization, future profitable operations, the
ability to comply with the terms of the DIP Facility and the ability to
generate sufficient cash from operations and financing arrangements to meet
obligations.
3. Liabilities Subject to Compromise
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All
amounts below may be subject to future adjustment depending on Bankruptcy
Court action, further developments with respect to disputed claims,
determination as to the value of any collateral securing claims, or other
events. Additional claims may arise resulting from rejection of additional
executory contracts or unexpired leases by the Company.
<TABLE>
<CAPTION>
(In millions) September 27,
1997
-------------
<S> <C>
Short-term debt $1,335
Long-term debt 9
Obligations under capital leases 55
Accounts payable 1,341
Postretirement benefit accruals 145
Lease rejection claims 90
Other liabilities 524
------
$3,499
======
</TABLE>
The Company has $83 million of liabilities due Signature and Marinco which
have been eliminated in consolidation but are subject to compromise.
All of the Company's short-term debt is in default of the terms of the
applicable loan agreements, with the exception of the credit agreement
between Signature and various lenders. Subject to the entry of an order by
the Bankruptcy Court, the Company has obtained a waiver of the defaults
under the Signature Credit Agreement and an extension of the maturity date
to January 31, 1998.
8
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Liabilities Subject to Compromise (continued)
As a result of the bankruptcy filing, no principal or interest payments will
be made on any pre-petition debt without Bankruptcy Court approval or until
a reorganization plan defining the repayment terms has been approved.
Contractual interest expense not recorded on certain pre-petition debt
totaled $26 million for the 13-week and 39-week periods ended September 27,
1997.
4. Reorganization Costs
Reorganization costs recorded in the third quarter of fiscal 1997 consisted
of the following (in millions):
<TABLE>
<S> <C>
Loss on disposition of assets of Lechmere $280
Montgomery Ward and Electric Avenue &
More store closings 260
Other 36
Professional fees 8
Interest income (2)
----
$582
====
</TABLE>
On August 14, 1997, the Bankruptcy Court approved a motion filed by
Montgomery Ward to exit its non-core specialty retail store businesses -
Lechmere, Home Image by Lechmere and Electric Avenue & More. The exit
involved the closing of 44 stores. The closings are expected to generate
positive cash flows and reduce future operating losses. The Company recorded
a pre-tax charge of $280 million associated with the closing of Lechmere and
$55 million associated with the exit of Electric Avenue & More, which
included losses and costs associated with liquidation of assets, rejection
of leases, severance payments and other.
On October 17, 1997, Montgomery Ward filed a motion with the Bankruptcy
Court to close 48 underperforming stores. The closings are expected to
generate positive cash flows and reduce future operating losses. The Company
recorded a pre-tax charge of $205 million associated with the closing of
these stores, which includes losses and costs associated with the
liquidation of assets, lease rejection claims, severance payments and other.
On November 7, 1997, the Bankruptcy Court approved the closing of these
stores.
9
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Net Loss Per Common Share
Net loss per common share is computed as follows:
<TABLE>
<CAPTION>
For the 13-Week For the 13-Week
Periods Ended Periods Ended
(In millions, except share and per September 27, 1997 September 28, 1996
share amounts) Class A Class B Class A Class B
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss applicable to common
shareholders $ (315) $ (300) $ (15) $ (17)
Weighted average number of common
shares outstanding 18,322,247 25,000,000 19,230,539 25,000,000
Net loss per share $ (17.17) $ (11.99) $ (.80) $ (.70)
For the 39-Week For the 39-Week
Periods Ended Periods Ended
(In millions, except share and per September 27, 1997 September 28, 1996
share amounts) Class A Class B Class A Class B
---------- ---------- ---------- ----------
Net loss applicable to common
shareholders $ (502) $ (478) $ (30) $ (34)
Weighted average number of common
shares outstanding 18,322,247 25,000,000 19,269,681 25,000,000
Net loss per share $ (27.37) $ (19.12) $ (1.58) $ (1.38)
</TABLE>
At its annual meeting on May 29, 1997, the stockholders of the Company
authorized an additional 10,000,000 shares of Class A Common Stock, Series
3, $.01 par value. None of the additional shares have been issued.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will
be determined and presented in the financial statements. Adoption of this
statement by the Company will not have a material impact on earnings per
share.
6. Insurance, Benefits and Losses
Operating, selling, general and administrative expenses include benefits and
losses related to direct response marketing operations of $38 million and
$41 million for the 13-week periods ended September 27, 1997 and September
28, 1996, respectively, and $109 million and $115 million for the 39-week
periods then ended, respectively.
10
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Preferred Stock
On March 4, 1997, GE Capital, Montgomery Ward and Lechmere amended the
Program Agreement under which GE Capital provides funds to Montgomery Ward
and Lechmere to pay manufacturers and distributors of goods purchased by
Montgomery Ward and Lechmere. In exchange for a $150 million increase in the
maximum amount of funds GE Capital agreed to provide, MW Holding agreed to
issue shares of a new series of Preferred Stock having a liquidation value
of $21 million. On April 1, 1997, GE Capital further increased its funding
under the Program Agreement by $100 million and the Board of Directors of MW
Holding agreed to issue additional shares of the new series of Preferred
Stock.
At its Annual Meeting held on May 29, 1997, the stockholders of MW Holding
approved an amendment to its Certificate of Incorporation authorizing the
issuance of up to 25,000 shares of preferred stock. The amendment allows
future issuances of preferred stock by action of the Board of Directors
without the need for further action by the stockholders. The Board of
Directors designated 1,000 shares of the newly authorized preferred stock to
be Series C Preferred Stock, and MW Holding issued 352 shares of the Series
C Preferred Stock to GE Capital in full payment of the obligations described
above.
All of the Series C Preferred Stock is redeemable on September 30, 2002 at a
redemption price of $100,000 per share (the "Liquidation Value") plus unpaid
accrued dividends. Dividends are payable quarterly at a rate per annum equal
to 15%, with the first payment based on the number of days from and
including March 4, 1997. If for any reason the full dividend on any payment
date is not paid in cash on such date, the unpaid amount thereof will
automatically, without further action, be deemed added to the Liquidation
Value. MW Holding did not pay the dividend due June 30, 1997.
MW Holding also did not pay dividends due on June 30, 1997, on its Senior
Preferred Stock. The redemption provisions of the Series C and Senior
Preferred Stock have been stayed by the Chapter 11 proceedings. No further
dividends will be declared or paid on the Series C or Senior Preferred Stock
prior to the approval of a plan of reorganization.
8. Commitments and Contingent Liabilities
MW Holding, Montgomery Ward and its subsidiaries are engaged in various
litigation and have a number of unresolved claims. While the amounts claimed
are substantial and the ultimate liability with respect to such litigation
and claims cannot be determined at this time, management is of the opinion
that such liability, to the extent not provided for through insurance or
otherwise, is not likely to have a material impact on the financial
condition and the results of operations of the Company. As discussed in Note
2, the claims and litigation relating to pre-petition periods have been
stayed as a result of the Chapter 11 filing.
11
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Commitments and Contingent Liabilities (continued)
On April 29, 1997 the Company, Montgomery Ward and Lechmere, were served
with a complaint, purporting to represent a nationwide class, filed by
certain bankrupt credit card holders of Montgomery Ward and Lechmere credit
cards. The complaint alleged that the Company, Montgomery Ward and Lechmere
benefited from the actions taken by Hurley State Bank ("Hurley"), Lechmere's
previous credit card provider, and Montgomery Ward Credit Corporation
("MWCC") and Monogram Credit Card Bank of Georgia ("Monogram"), (both of
which are affiliates of GE Capital), Montgomery Ward's and Lechmere's
current credit card providers, in that the recoveries received from the
bankrupt credit card holders, allegedly in violation of the bankruptcy laws
dealing with reaffirmations ultimately reduced Montgomery Ward's and
Lechmere's loss sharing obligations. Management believes that the
indemnification obligations contained in its various agreements with Hurley
and with MWCC and Monogram will relieve Lechmere, Montgomery Ward and the
Company of material financial obligations related to the acts alleged in the
complaint. All material actions pending against the Company, Montgomery Ward
and Lechmere in the litigation, have been stayed.
9. Customer Credit Agreements
Montgomery Ward entered into a Bank Credit Card Program Agreement ("Card
Agreement") effective April 1, 1996 with Monogram and an Account-Related
Agreement ("Account-Related Agreement" and, collectively with the Card
Agreement, the "Agreements") effective April 1, 1996 with MWCC pursuant to
which Monogram and MWCC (collectively referred to as the "Montgomery Ward
Credit Companies"), both of which are affiliates of GE Capital, make
payments to Montgomery Ward as to the receivables generated by sales to
customers of Montgomery Ward, its affiliates and licensees who utilize the
Montgomery Ward private label credit card, and pursuant to which Agreements
the Montgomery Ward Credit Companies provide services to Montgomery Ward.
Under the Agreements, Monogram has the exclusive right to operate the
Montgomery Ward private label credit card system and the obligation to pay
to Montgomery Ward the face amount of Monogram's receivables generated by
the Montgomery Ward private label credit card system, up to $7 billion
outstanding at any time.
If Montgomery Ward desires to receive payment for receivables generated by
the Montgomery Ward private label credit card system at any time when
Montgomery Ward Credit Companies own $7 billion or more of such receivables
and do not desire to finance additional receivables, alternative
arrangements, such as the sale of receivables to banks or other financial
institutions, would be required unless Monogram agrees to fund the excess.
The Bankruptcy Court has approved the interim assumption of the Agreements.
A hearing has been set for November 24, 1997, regarding a motion filed by
Monogram and MWCC regarding its proposed terms for the assumption of the
Agreements. The performance of the respective obligations of MWCC and
Monogram under the Agreements has been guaranteed by GE Capital.
10. Inventory
The Company changed its method of valuing inventory in 1996 from the retail
inventory, Last-In, First-Out (LIFO) method to the retail inventory, First-
In, First-Out (FIFO) method. This change reduced cost of goods sold by $10
million and $28 million for the 13-week and 39-week periods ended September
28, 1996 and reduced the net loss by $6 million and $17 million for the 13-
week and 39-week periods ended September 28, 1996.
12
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of results of operations for the
Company compares the third quarter of 1997 to the third quarter of 1996, as
well as the first nine months of 1997 to the first nine months of 1996. All
dollar amounts referred to in this discussion are in millions, and all
income and expense items are shown before income taxes, unless specifically
stated otherwise.
The Company's business is seasonal, with approximately one-third of the
sales traditionally occurring in the fourth quarter. Accordingly, the
results of operations for the quarter and the first nine months are not
necessarily indicative of the results for the entire year.
Forward-Looking Statements
Information included in this Report on Form 10-Q may constitute forward-
looking statements that involve a number of risks and uncertainties. From
time to time, information provided by the Company or statements made by its
employees may contain other forward-looking statements. Factors that could
cause actual results to differ materially from the forward-looking
statements include but are not limited to: Bankruptcy Court actions or
proceedings related to the bankruptcy, general economic conditions including
inflation, consumer debt levels, trade restrictions and interest rate
fluctuations; competitive factors including pricing pressures, technological
developments and products offered by competitors; inventory risks due to
changes in market demand or the Company's business strategies; and changes
in effective tax rates.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Results of Operations
Third Quarter 1997 Compared with Third Quarter 1996
Due to Montgomery Ward's inability to reach an out-of-court settlement with
its lenders, petitions for reorganization under Chapter 11 of the Bankruptcy
Code were filed at the close of business on July 7, 1997. The Company's
performance reflected difficult competitive conditions and financial
pressures resulting in a third quarter 1997 loss before reorganization costs
and income taxes of $194 as compared to third quarter 1996 pretax loss of
$48 million, as restated (see Note 10). 1997 reorganization costs were $582
(see Note 4).
Consolidated total revenues (net sales and direct response marketing
revenues, including insurance) were $1,161, compared with $1,567 in the
third quarter 1996, decreasing by $406, or 26%. Net sales decreased $429, or
31%. Lechmere and Electric Avenue & More sales declined $154 million from
the third quarter 1996 due primarily to the closing of those stores
effective August 1997 (see Note 4). 1997 sales results also reflect the
Company's decision to exit its personal computer product offerings. 1996
sales for this category were $53. In addition, the Company's management
believes that merchandise shipment interruptions as a result of the
bankruptcy filing and the decline in percentage-off offers to the Montgomery
Ward credit cardholders (3 in 1997 versus 8 in 1996) resulted in a portion
of the sales decline. All Montgomery Ward store product categories also
experienced sales decreases ranging from 11% to 32%. The $23, or 12%
increase in direct response marketing revenues was primarily due to
increased clubs' memberships.
13
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Third Quarter 1997 Compared with Third Quarter 1996 (continued)
Gross margin (net sales less cost of goods sold) dollars were $142, a
decrease of $129, or 48%, from the third quarter 1996. This decrease was due
to the gross margin impact of the decreased sales of $97, and a decrease in
the margin rate on sales of $38, offset by decreased occupancy and other
margin-related expenses of $6. Third quarter margin rates were unfavorably
impacted by the Chapter 11 filing. As certain of the Company's vendors
halted shipments for portions of the third quarter, a higher mix of third
quarter sales represented sales of clearance versus regular price
merchandise.
Operating, selling, general and administrative expenses increased $51, or
11%, from the third quarter 1996. The increase is primarily due to increased
bad debt expense of $44; increased amortization and other direct marketing-
related expenses of Signature of $24; and decreased product service income
of $18; offset by lower Lechmere expenses of $32 and all other decreases of
$3.
Net interest expense decreased $11, or 39%, from the prior year. The Company
has stopped accruing interest on its short-term debt in connection with the
Chapter 11 filing.
The income tax benefit was $161 for the third quarter of 1997 as compared to
a benefit of $19 for the third quarter of 1996. The 1997 income tax benefit
reflects an increase in the Company's net operating loss (NOL) carryforward
of $271, offset by a valuation allowance of $110. Management believes that
the NOL carryforward will be realized through the sales of appreciated
assets; however, a valuation reserve has been recognized because it is
more likely than not that some portion will not be realized.
First Nine Months of 1997 Compared with Nine Months of 1996
As discussed under "Third Quarter 1997 Compared With Third Quarter 1996",
the Company's performance during the first nine months of 1997 reflected
difficult competitive and financial conditions. The Company reported a loss
before reorganization costs and income taxes of $765 for the third quarter
1997 year-to-date period as compared to a pre-tax loss of $92, as restated
(see Note 10) for the comparable 1996 period. 1997 reorganization costs were
$582 (see Note 4).
Consolidated total revenues were $3,855, compared with $4,537 for the third
quarter 1996 year-to-date period, decreasing by $682, or 15%. Net sales
decreased $767, or 19%. All product categories experienced sales decreases,
ranging from 9% to 22%. The sales decreases reflect the closing of the
Lechmere and Electric Avenue & More stores, as well as the Company's
decision to exit its personal computer product offerings. Direct response
marketing revenues increased $85, or 15%, due to increased clubs'
memberships.
Gross margin dollars were $345, a decrease of $415, or 55%. The decrease was
due to the gross margin impact of the sales decrease of $161, the decrease
in the margin rate on sales of $249, and increased buying and other expenses
of $5. The margin rate for the 1997 year-to-date period has been
significantly impacted by sales of discontinued merchandise during the first
six months, as well as the unfavorable impact of the Chapter 11 filing as
discussed under "Third Quarter 1997 Compared with Third Quarter 1996."
Operating, selling and general and administrative expenses increased $315,
or 24%, from the third quarter year-to-date period of 1996. The increase was
due to increased amortization and other direct-marketing related costs of
Signature of $91; increased bad debt expense of $45; write-downs of
investments and other unrealizable assets of $45; decreased product service
income of $43; increased severance and payroll related costs of $33;
increased promotional expenses of $17; and all other increased expenses of
$41.
14
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
First Nine Months of 1997 Compared with Nine Months of 1996 (continued)
Net interest expense increased $28, or 37%, from the prior year. The
increase is due to increased borrowings (including borrowings under vendor
financing programs) and an increase in the weighted average borrowing rate
for the first two quarters of 1997. The second quarter year-to-date increase
was partially offset by the third quarter decrease as discussed in "Third
Quarter 1997 Compared to Third Quarter 1996."
The income tax benefit was $375 as compared to a benefit of $37 for 1996.
See "Third Quarter 1997 Compared with Third Quarter 1996" for a discussion
of management's determination of the benefit recorded and the related
valuation allowance provided during the third quarter of 1997.
Discussion of Financial Condition
As discussed in Note 2 to the Consolidated Financial Statements, due to the
inability of Montgomery Ward to negotiate an out of court settlement with
its lenders, MW Holding and certain of its subsidiaries have filed petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Court. As a
result of the Chapter 11 filing the Company and those subsidiaries have
ceased making certain debt, interest, trade payable and other liability
payments that arose prior to the Chapter 11 filing. Payments related to
these liabilities are deferred, in most cases, until a plan for
reorganization is confirmed by the Bankruptcy Court.
Net cash used in the Company's operating activities totaled $165 compared to
$592 for the third quarter year-to-date period of 1996, a decrease of $427.
The lower cash usage is summarized as follows:
<TABLE>
<S> <C>
Cash impact of larger operating loss $(672)
Net cash received from facility closings 104
Lower cash required for inventory and
accounts payable 793
Lower expenditures for direct response and
insurance acquisition costs 52
All other cash from operations 150
-----
$ 427
=====
</TABLE>
As shown above, cash required for inventory was significantly reduced in
1997. This was primarily due to an inventory reduction program and better
receipts management. Cash required for accounts payable was also reduced
significantly, primarily as a result of the Chapter 11 filing.
Net cash used in the Company's investing activities totaled $24 in the third
quarter 1997, compared to net cash used of $112 in the third quarter 1996.
The net cash used in 1996 included Signature's acquisition of the Amoco
Motor Club.
Net cash provided by financing activities totaled $395 for the third quarter
1997, compared to $709 for the third quarter 1996. The Company had borrowed
to the full extent of its financing facilities by the end of the second
quarter of 1997. Due to the favorable cash impact of the reduction in
payments allowed by the Chapter 11 filing, no borrowings were required under
the Company's post-petition financing facilities in the third quarter of
1997.
Montgomery Ward is the only subsidiary of the Company and, therefore,
Montgomery Ward and its subsidiaries are the Company's sole source of
funds.
15
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Discussion of Financial Condition (continued)
As previously discussed in Note 2, Montgomery Ward entered into the DIP
Facility on July 8, 1997, which was approved by the Bankruptcy Court on July
31, 1997. Under the DIP Facility, the lenders have agreed to provide a
revolving credit and letter of credit facility, the maximum amount of which
is based on the book value of eligible inventory (as defined in the DIP
Facility), the fair market value of eligible real property (as defined in
the DIP Facility) and the earnings of Signature. In no case may borrowings
exceed $1,000. Total borrowings outstanding were $125 at October 25, 1997.
Under the DIP Facility, Montgomery Ward may select among several interest
rate options, all of which are based on market rates plus a margin. A
commitment fee is payable based on the unused amount of the facility. The
facility expires on July 7, 1999, or earlier in the case of an event of
default.
The Company is currently in default of the terms of each of the Long-Term
Credit Agreement, the Short-Term Credit Agreement and the Note Purchase
Agreements and no future amounts may be drawn thereunder. The Company was in
default of the Seasonal Credit Agreement, which was terminated as a result
of the Chapter 11 filings. There were no borrowings outstanding under this
agreement. These agreements are more fully discussed in the Company's annual
report on Form 10-K for the fiscal year ended December 28, 1996 and the
Company's quarterly report on Form 10-Q for quarterly periods ended March
29, 1997 and June 28, 1997.
Subject to the entry of an order by the Bankruptcy Court, Signature has
obtained a waiver of the defaults under the Signature Credit Agreement and
an extension of the maturity date to January 31, 1998. It is the intention
of the management of Signature to refinance the facility with a new lender
group prior to its amended expiration date. The Signature Credit Agreement
is more fully discussed in the Company's annual report on Form 10-K for the
fiscal year ended December 28, 1996 and the Company's quarterly report on
Form 10-Q for quarterly periods ended March 29, 1997 and June 28, 1997.
In 1997, Montgomery Ward had facilities available under vendor financing
programs (which are reflected in liabilities subject to compromise) which
totaled $725. At June 28, 1997, these facilities were principally drawn.
These facilities are no longer available due to the Chapter 11 filing.
The Company intends to improve its financial condition and reduce its
dependence on borrowing by slowing expansion, controlling expenses, closing
certain unprofitable stores and completing its inventory reduction program.
Management has reevaluated the Company's merchandising, marketing, store
operations and real estate strategies, and is in the early stages toward
implementing the new strategy. The implementation phase is expected to last
between twelve and eighteen months.
On August 14, 1997, the Bankruptcy Court approved a motion filed by
Montgomery Ward to exit its non-core specialty retail store businesses -
Lechmere, Home Image by Lechmere and Electric Avenue & More. The exit
involves the closing of 44 stores. The closings are expected to generate
positive cash flows and reduce future operating losses. The Company recorded
a pre-tax charge of $335 associated with the exit of these businesses, which
included losses and costs associated with liquidation of assets, rejection
of leases, severance payments and other.
16
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Discussion of Financial Condition (continued)
On October 17, 1997, Montgomery Ward filed a motion with the Bankruptcy
Court to close 48 underperforming stores. The closings are expected to
generate positive cash flows and reduce future operating losses. The Company
recorded a pre-tax charge of $205 associated with the closing of these
stores, which includes losses and costs associated with the liquidation of
assets, lease rejection claims, severance payments and other. On November 7,
1997, the Bankruptcy Court approved the closing of these stores.
Future cash is also expected to continue to be provided by ongoing
operations, receipt of payment for credit sales under the agreements with
Montgomery Ward Credit Companies, liquidation of merchandise and other
assets of the non-core retail specialty businesses and borrowings under the
DIP Facility.
As discussed in Note 2 to the Consolidated Financial Statements, the
accompanying financial statements have been prepared on a going concern
basis. The appropriateness of using the going concern basis is dependent
upon, among other things, confirmation of a plan of reorganization, future
profitable operations, the ability to comply with the terms of the DIP
Facility and the ability to generate sufficient cash from operations and
financing arrangements to meet obligations.
17
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Part II - Other Information.
Item 1. Legal Proceedings.
At the close of business on July 7, 1997, Montgomery Ward Holding Corp. and
certain of its U.S. subsidiaries filed petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware. These related proceedings are being jointly
administered under the caption "In re Montgomery Ward Holding Corp., a
Delaware corporation, et. al.", Case No. 97-1409 (PJW). The following U.S.
subsidiaries were not included in the bankruptcy filings: Signature
Financial/Marketing, Inc. and its direct and indirect subsidiaries, which
are engaged in direct response marketing (including insurance); Marinco
Insurance U.S.A., Inc.; and Montgomery Ward Foundation.
MW Holding, Montgomery Ward and its subsidiaries are engaged in various
litigation and have a number of unresolved claims. While the amounts claimed
are substantial and the ultimate liability with respect to such litigation
and claims cannot be determined at this time, management is of the opinion
that such liability, to the extent not provided for through insurance or
otherwise, is not likely to have a material impact on the financial
condition and the results of operations of the Company. The claims and
litigations have been stayed as a result of the Chapter 11 filing.
On April 29, 1997, MW Holding, Montgomery Ward and Lechmere, were served
with a complaint, purporting to represent a nationwide class, filed by
certain bankrupt credit card holders of Montgomery Ward and Lechmere credit
cards. The complaint alleged that MW Holding, Montgomery Ward and Lechmere,
benefited from the actions taken by Hurley, Lechmere's previous credit card
provider, and MWCC and Monogram (both of which are affiliates of GE
Capital), Montgomery Ward's and Lechmere's current credit card providers, in
that the recoveries received from the bankrupt credit card holders,
allegedly were in violation of the bankruptcy laws dealing with
reaffirmations ultimately reduced Montgomery Ward's and Lechmere's loss
sharing obligations. Hurley, MWCC and Monogram took all actions related to
bankruptcy reaffirmations.
Management believes that the indemnification obligations contained in its
various agreements with Hurley, MWCC and Monogram will relieve Lechmere,
Montgomery Ward and the Company of material financial obligations related to
the acts alleged in the complaint. All material actions pending against the
Company, Montgomery Ward and Lechmere in the litigation, have been stayed.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
The Company's Certificate of Incorporation provides that the holders of
shares of Senior Preferred Stock of the Company are entitled to receive,
before any dividends may be declared or paid upon or set aside for the
Common Stock, cash dividends in quarterly payments on the last business day
of March, June, September and December. The Company did not make any
dividend payment with respect to the Senior Preferred Stock on June 30,
1997. The holder of all 1,750 outstanding shares of the Senior Preferred
Stock would have been entitled to receive $3,066,875 in such dividend on
such date. Such amount also represents the total arrearage on the payment of
dividends on the Senior Preferred Stock as of the date of filing of this
report.
The redemption provisions of the Senior Preferred Stock have been stayed by
the Chapter 11 proceedings. No further dividends will be declared or paid
prior to the approval of a plan of reorganization.
18
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Part II - Other Information (continued)
Item 3. Defaults Upon Senior Securities (continued)
The Company's Certificate of Incorporation provides that the holders of
shares of Series C Preferred Stock of the Company are entitled to receive,
before any dividends may be declared or paid upon or set aside for the
Common Stock, cash dividends in quarterly payments on the last business day
of March, June, September and December. If for any reason the full dividend
on any payment date is not paid in cash on such date, the unpaid amount
thereof will be automatically, without further action, be deemed added to
the Liquidation Value. The Company did not make any dividend payment with
respect to the Series C Preferred Stock on June 30, 1997. The holder of all
352 shares would have been entitled to receive $1,726,154 in such dividend
on such date. This amount was added to the Liquidation Value.
The redemption provisions of the Series C Preferred Stock have been stayed
by the Chapter 11 proceedings. No further dividends will be declared or paid
prior to the approval of a plan of reorganization.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits.
10.(i)(G)(2) Waiver to Post-Petition Loan and Guaranty Agreement
among Montgomery Ward & Co., as borrower; Montgomery
Ward Holding Corp. and other debtor subsidiaries of
Montgomery Ward Holding Corp., as guarantors; General
Electric Capital Corporation, as agent and lender; and
various lenders dated as of August 12, 1997.
10.(i)(G)(3) Waiver to Post-Petition Loan and Guaranty Agreement
among Montgomery Ward & Co., as borrower; Montgomery
Ward Holding Corp. and other debtor subsidiaries of
Montgomery Ward Holding Corp., as guarantors; General
Electric Capital Corporation, as agent and lender; and
various lenders dated as of September 24, 1997.
10.(i)(N) Asset Purchase, License & Agency Agreement for the
Purchase of Certain Assets of Lechmere, Inc. & Co., and
Montgomery Ward Incorporated, by Schottenstein
Bernstein Capital Group LLC dated August 14, 1997.
10.(i)(O) Agency Agreement between Schottenstein Bernstein
Capital Group LLC and Montgomery Ward & Co.,
Incorporated, as of August 14, 1997.
27. Financial Data Schedule.
19
<PAGE>
MONTGOMERY WARD HOLDING CORP.
Part II - Other Information (continued)
Item 6. Exhibits and reports on Form 8-K (continued)
(b) Reports on Form 8-K.
On July 22, 1997, the Company filed a Form 8-K with respect to the
filing of a petition for reorganization under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District
of Delaware, commencing a proceeding captioned "In re Montgomery Ward
Holding Corp., a Delaware Corporation, et. al.", Case No. 97-1409
(PJW).
20
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
REGISTRANT MONTGOMERY WARD HOLDING CORP.
BY /s/ Thomas J. Paup
----------------------------------------
NAME AND TITLE Thomas J. Paup, Executive Vice President
and Chief Financial Officer
DATE: November 17, 1997
21
<PAGE>
WAIVER TO
POST-PETITION LOAN AND GUARANTY AGREEMENT
WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT, dated effective
as of August 12, 1997 (this "Waiver"), among MONTGOMERY WARD & CO.,
------
INCORPORATED, an Illinois corporation and a debtor and debtor in possession
("Borrower Representative"), MONTGOMERY WARD HOLDING CORP., a Delaware
-----------------------
corporation and a debtor and debtor in possession ("Parent" or "Guarantor"), as
---------
Guarantor, the other Guarantors signatory hereto (together with Parent and the
Borrower Representative, the "Credit Parties"), GENERAL ELECTRIC CAPITAL
--------------
CORPORATION, a New York corporation (in its individual capacity, "GE Capital"),
----------
for itself, as Lender, and as Agent (the "Agent") for Lenders, and the other
-----
Lenders signatory hereto.
RECITALS
--------
WHEREAS, the Borrower Representative, the Guarantors, the Lenders and
the Agent are parties to that certain Post-Petition Loan and Guaranty Agreement,
dated as of July 8, 1997 (as amended by the terms of the Waiver and First
Amendment to Post-Petition Loan and Guaranty Agreement and as further amended,
supplemented or modified, the "Loan Agreement"). The Borrower Representative
--------------
and the Guarantors have requested that the Lenders agree to waive, for the
limited purposes set forth herein, certain provisions of the Loan Agreement. The
Borrower Representative, the Guarantors, the Lenders and the Agent have agreed,
upon the terms and conditions specified herein, to waive such provisions as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained and for other good and valuable consideration,
the receipt and sufficiency of which are acknowledged, the parties hereto agree
as follows:
SECTION 1. Defined Terms and Interpretation.
--------------------------------
(a) The capitalized terms used herein which are defined in the Loan
Agreement, shall have the respective meanings assigned to them in the Loan
Agreement except as otherwise provided herein or unless the context otherwise
requires.
(b) Section headings in this Waiver are included herein for
convenience of reference only and shall not constitute a part of this Waiver for
any other purpose.
(c) No provision in this Waiver shall be interpreted or construed
against any Person because that Person or its legal representative drafted such
provision
SECTION 2. Waiver In Connection With Liquidation Sales. As of the
-------------------------------------------
date of this Waiver, Lenders hereby agree to waive the provisions of Section 6.3
of the Loan Agreement, for the limited purpose and solely in connection with,
the granting by Lechmere or the Borrower Representative of any Lien in favor of
any Person acting as a liquidation
1
<PAGE>
agent of such Credit Party in connection with the liquidation or sale of
substantially all the assets of Lechmere or the assets and properties used in
connection with the business conducted by Borrower Representative under the name
"Electric Avenue and More" pursuant to a valid and enforceable order of the
Bankruptcy Court; provided that any such Lien shall not extend to any assets or
properties other than those being liquidated or sold and shall only secure the
fees and obligations owed to such Person by such Credit Party.
SECTION 3. Representations and Warranties True; No Default or Event
--------------------------------------------------------
of Default. The Credit Parties represent and warrant to the Agent and the
- ----------
Lenders that on the date of and after giving effect to the execution and
delivery of this Waiver (a) the representations and warranties set forth in the
Loan Agreement are true and correct in all material respects on the date hereof
as though made on and as of such date (unless any such representation or
warranty expressly relates to an earlier date); and (b) neither any Default nor
Event of Default has occurred and is continuing as of the date hereof.
SECTION 4. Reference to this Waiver and Effect on Loan Documents.
-----------------------------------------------------
(a) From and after the date hereof, each reference in the Loan
Agreement (including in any Exhibit thereto) to "this Agreement," "hereunder,"
"herein" or words of like import shall mean and be a reference to the Loan
Agreement, as affected hereby.
(b) From and after the date of this Waiver, each reference in the
Loan Documents to the Loan Agreement shall mean and be a reference to the Loan
Agreement, as affected hereby.
(c) The Loan Agreement, the Notes and the other Loan Documents, as
affected hereby, shall remain in full force and effect and the Loan Documents
are hereby ratified and confirmed in all respects.
(d) The effectiveness of the waiver evidenced by Section 2 hereof,
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Lenders or the Agent under the Loan Agreement, or
constitute a waiver of any other provision of the Loan Agreement or any other
Loan Document.
SECTION 5. Governing Law; Binding Effect. In all respects, including
-----------------------------
all matters of construction, validity and performance, this Waiver shall be
governed by, and construed and enforced in accordance with, the internal laws of
the State of New York (without regard to conflict of law provisions) and any
applicable laws of the United States of America, and shall be binding upon the
parties hereto and their respective successors and permitted assigns.
SECTION 6. Execution in Counterparts. This Waiver may be executed in
-------------------------
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
2
<PAGE>
SECTION 7. Consent of Guarantors. By their execution and delivery of
---------------------
this Waiver, each Guarantor hereby consents to all of the terms and provisions
of this Waiver and ratifies and confirms that each of the Loan Documents to
which it is a party remains in full force and effect and enforceable in
accordance with their respective terms.
3
<PAGE>
IN WITNESS WHEREOF, this Waiver has been duly executed as of the date first
written above.
BORROWER:
MONTGOMERY WARD & CO.,
INCORPORATED
By: /s/ Douglas V. Gathany
---------------------------------------
Name: Douglas V. Gathany
Title: Treasurer
GUARANTORS:
LECHMERE, INC.
By: /s/ Douglas V. Gathany
---------------------------------------
Name: Douglas V. Gathany
Title: Treasurer
AMERICAN DELIVERY SERVICE COMPANY
By: /s/ Philip D.Delk
---------------------------------------
Name: Philip D. Delk
Title: Vice President, Secretary and
Assistant Treasurer
CONTINENTAL TRANSPORTATION, INC.
By: /s/ Philip D. Delk
---------------------------------------
Name: Philip D. Delk
Title: Vice President and Assistant
Secretary
JRI DISTRIBUTING, INC.
STANDARD T CHEMICAL COMPANY, INC.
WFL REALTY, INC.
By: /s/ Philip D.Delk
---------------------------------------
Name: Philip D. Delk
Title: Vice President and Secretary
M-W PRESTRESS, INC.
MW DIRECT GENERAL, INC.
4
<PAGE>
MW DIRECT LIMITED, INC.
By: /s/ Philip D.Delk
---------------------------------------
Name: Philip D. Delk
Title: Secretary
MONTGOMERY WARD
INTERNATIONAL, INC.
MPI, INC.
By: /s/ Philip D.Delk
---------------------------------------
Name: Philip D. Delk
Title: Assistant Secretary
BARRETWARD PROPERTIES CO., INC.
BRANDYWINE DC, INC.
BRANDYWINE PROPERTIES, INC.
BRETTWARD PROPERTIES CO., INC.
FIRST MONT CORPORATION
FOURTH WYCOMBE PROPERTIES, INC.
GABEWARD PROPERTIES CORPORATION
GARDEN GROVE DEVELOPMENT
CORPORATION HUGA REALTY INC.
JOSHWARD PROPERTIES CORPORATION
LECHMERE DEVELOPMENT CORPORATION
M-W FAIRFAX PROPERTIES, INC.
M-W PROPERTIES CORPORATION
M-W RESTAURANTS REALTY CORPORATION
MARCOR HOUSING SYSTEMS, INC.
MARYWARD PROPERTIES CORPORATION
MF NEVADA INVESTMENTS, INC.
MICHAELWARD PROPERTIES CO., INC.
MONTGOMERY WARD DEVELOPMENT CORPORATION
MONTGOMERY WARD LAND CORPORATION
MONTGOMERY WARD PROPERTIES CORPORATION
5
<PAGE>
MONTGOMERY WARD REALTY CORPORATION
MW LAND CORPORATION
NATIONAL HOMEFINDING SERVICE, INC.
998 MONROE CORPORATION
PAULWARD PROPERTIES CO., INC.
ROBERTWARD PROPERTIES CORPORATION
SACWARD PROPERTIES, INC.
SECOND MONT CORPORATION
7TH & CARROLL CORPORATION
SEVENTH MONT CORPORATION
618 CORPORATION
619 CORPORATION
THE 535 CORPORATION
THIRD WYCOMBE PROPERTIES, INC.
2825 DEVELOPMENT CORPORATION
2825 REALTY CORPORATION
UNIVERSITY AVENUE MARKETPLACE, INC.
WFL DEVELOPMENT CORPORATION
WYCOMBE PROPERTIES, INC.
By: /s/ G. Tad Morgan
------------------------------------------
Name: G. Tad Morgan
Title: Vice President and Secretary
GOODE FURNITURE COMPANIES, INC.
MONTGOMERY WARD SECURITIES, INC.
R M P DEVELOPMENT CORPORATION
By: /s/ G. Tad Morgan
-----------------------------------------
Name: G. Tad Morgan
Title: Secretary
MONTGOMERY WARD HOLDING CORP.
By: /s/ G. Tad Morgan
-----------------------------------------
Name: G. Tad Morgan
Title: Assistant Secretary
6
<PAGE>
JEFFERSON STORES, INC.
By: /s/ G. Tad Morgan
------------------------------------
Name: G. Tad Morgan
Title: Vice President and Treasurer
AGENT AND AS LENDER
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ James C. Ungari
------------------------------------
Name: James C. Ungari
Title: Its Authorized Signatory
LENDERS:
THE CHASE MANHATTAN BANK CORPORATION
By: /s/ William Repko
------------------------------------
Name: William Repko
Title: Managing Director
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Thomas Sullivan
------------------------------------
Name: Thomas Sullivan
Title: Vice President
CITIBANK, N.A.
By: /s/ Claudia Slacik
------------------------------------
Name: Claudia Slacik
Title: Vice President
CITICORP USA, INC.
By: /s/ John Abate
------------------------------------
Name: John Abate
Title: Vice President
7
<PAGE>
GBFC, INC.
By: /s/ Michael L. Pizette
----------------------------------
Name: Michael L. Pizette
Title: Vice President
GOLDMAN SACHS CREDIT
PARTNERS L.P.
By: /s/ Stephen McGuiness
----------------------------------
Name: Stephen McGuiness
Title: Vice President
HELLER FINANCIAL, INC.
By: /s/ John Buff
----------------------------------
Name: John Buff
Title: Vice President
JACKSON NATIONAL LIFE
INSURANCE COMPANY
By: PPM FINANCE, INC.
Its Attorney-in-fact
By: /s/ Jeffrey Podwika
----------------------------------
Name: Jeffrey Podwika
Title: Vice President
8
<PAGE>
WAIVER TO
POST-PETITION LOAN AND GUARANTY AGREEMENT
WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT, dated September 24,
1997 (this "Waiver"), among MONTGOMERY WARD & CO., INCORPORATED, an Illinois
------
corporation and a debtor and debtor in possession ("Borrower Representative"),
-----------------------
MONTGOMERY WARD HOLDING CORP., a Delaware corporation and a debtor and debtor in
possession ("Parent" or "Guarantor"), as Guarantor, the other Guarantors
---------
signatory hereto (together with Parent and the Borrower Representative, the
"Credit Parties"), GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation
- ---------------
(in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent
----------
(the "Agent") for Lenders, and the other Lenders signatory hereto.
-----
RECITALS
--------
WHEREAS, the Borrower Representative, the Guarantors, the Lenders and
the Agent are parties to that certain Post-Petition Loan and Guaranty Agreement,
dated as of July 8, 1997 (as amended by the terms of the Waiver and First
Amendment to Post-Petition Loan and Guaranty Agreement dated July 30, 1997 and
the Waiver to Post-Petition Loan and Guaranty Agreement dated effective as of
August 12, 1997 and as further amended, supplemented or modified, the "Loan
----
Agreement"). The Borrower Representative and the Guarantors have requested that
- ---------
the Lenders agree to waive, for the limited purposes set forth herein, certain
provisions of the Loan Agreement. The Borrower Representative, the Guarantors,
the Lenders and the Agent have agreed, upon the terms and conditions specified
herein, to waive such provisions as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained and for other good and valuable consideration,
the receipt and sufficiency of which are acknowledged, the parties hereto agree
as follows:
SECTION 1. Defined Terms and Interpretation.
--------------------------------
(a) The capitalized terms used herein which are defined in the Loan
Agreement, shall have the respective meanings assigned to them in the Loan
Agreement except as otherwise provided herein or unless the context otherwise
requires.
(b) Section headings in this Waiver are included herein for
convenience of reference only and shall not constitute a part of this Waiver for
any other purpose.
(c) No provision in this Waiver shall be interpreted or construed
against any Person because that Person or its legal representative drafted such
provision
SECTION 2. Waiver. Lenders hereby agree to waive the following:
------
1
<PAGE>
(a) the provisions of Section 8.1(b) of the Loan Agreement, for the
limited purpose and solely in connection with, honoring consignment agreements
entered into prior to the Petition Date in accordance with an order of the
Bankruptcy Court, substantially in the form of Exhibit "B" to the Motion of
Debtors and Debtors in Possession for an Order Authorizing Them to Implement A
Consigned Jewelry Program, dated September 23, 1997; and
(b) the provisions of Section 8.1(b) of the Loan Agreement, for the
limited purpose and solely in connection with, the payment of severance claims
in accordance with Section IV.A. of that certain Order and Findings of Fact and
Conclusions of Law (a) Authorizing Montgomery Ward & Co., Incorporated and
Lechmere, Inc. to Sell Assets Pursuant to a Purchase Agreement, (B) Authorizing
the Closing of All Lechmere and Home Image Stores, (C) Permitting the Purchaser
to Conduct Store Closing Sales, (D) Approving Certain Lease Assumption and
Rejection Procedures and (E) Permitting the Debtors to Pay Severance Claims,
dated August 14, 1997.
SECTION 3. Representations and Warranties True; No Default or Event
--------------------------------------------------------
of Default. The Credit Parties represent and warrant to the Agent and the
- ----------
Lenders that on the date of and after giving effect to the execution and
delivery of this Waiver (a) the representations and warranties set forth in the
Loan Agreement are true and correct in all material respects on the date hereof
as though made on and as of such date (unless any such representation or
warranty expressly relates to an earlier date); and (b) neither any Default nor
Event of Default has occurred and is continuing as of the date hereof.
SECTION 4. Reference to this Waiver and Effect on Loan Documents.
-----------------------------------------------------
(a) From and after the date hereof, each reference in the Loan
Agreement (including in any Exhibit thereto) to "this Agreement," "hereunder,"
"herein" or words of like import shall mean and be a reference to the Loan
Agreement, as affected hereby.
(b) From and after the date of this Waiver, each reference in the
Loan Documents to the Loan Agreement shall mean and be a reference to the Loan
Agreement, as affected hereby.
(c) The Loan Agreement, the Notes and the other Loan Documents, as
affected hereby, shall remain in full force and effect and the Loan Documents
are hereby ratified and confirmed in all respects.
(d) The effectiveness of the waiver evidenced by Section 2 hereof,
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Lenders or the Agent under the Loan Agreement, or
constitute a waiver of any other provision of the Loan Agreement or any other
Loan Document.
SECTION 5. Effectiveness. This Waiver shall become effective upon
-------------
receipt by the Agent of executed counterparts of this Waiver from the requisite
number of Lenders that comprise the Requisite Lenders.
2
<PAGE>
SECTION 6. Governing Law; Binding Effect. In all respects,
-----------------------------
including all matters of construction, validity and performance, this Waiver
shall be governed by, and construed and enforced in accordance with, the
internal laws of the State of New York (without regard to conflict of law
provisions) and any applicable laws of the United States of America, and shall
be binding upon the parties hereto and their respective successors and permitted
assigns.
SECTION 7. Execution in Counterparts. This Waiver may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
SECTION 8. Consent of Guarantors. By their execution and delivery
---------------------
of this Waiver, each Guarantor hereby consents to all of the terms and
provisions of this waiver and ratifies and confirms that each of the Loan
Documents to which it is a party remains in full force and effect and
enforceable in accordance with their respective terms.
IN WITNESS WHEREOF, this Waiver has been duly executed as of the date first
written above.
BORROWER:
MONTGOMERY WARD & CO., INCORPORATED
By: /s/ Douglas V. Gathany
-----------------------------------------
Name: Douglas V. Gathany
Title: Vice President and Treasurer
GUARANTORS:
LECHMERE, INC.
By: /s/ Douglas V. Gathany
-----------------------------------------
Name: Douglas V. Gathany
Title: Assistant Treasurer
AMERICAN DELIVERY SERVICE COMPANY
By: /s/ Philip D.Delk
-----------------------------------------
Name: Philip D. Delk
Title: Vice President, Secretary and
Assistant Treasurer
CONTINENTAL TRANSPORTATION, INC.
3
<PAGE>
By: /s/ Philip D. Delk
-----------------------------------------
Name: Philip D. Delk
Title: Vice President and Assistant
Treasurer
JRI DISTRIBUTING, INC.
STANDARD T CHEMICAL COMPANY, INC.
WFL REALTY, INC.
By: /s/ Philip D.Delk
-----------------------------------------
Name: Philip D. Delk
Title: Vice President and Secretary
M-W PRESTRESS, INC.
MW DIRECT GENERAL, INC.
MW DIRECT LIMITED, INC.
By: /s/ Philip D.Delk
-----------------------------------------
Name: Philip D. Delk
Title: Secretary
MONTGOMERY WARD INTERNATIONAL, INC.
MPI, INC.
By: /s/ Philip D.Delk
-----------------------------------------
Name: Philip D. Delk
Title: Assistant Secretary
BARRETWARD PROPERTIES CO., INC.
BRANDYWINE DC, INC.
BRANDYWINE PROPERTIES, INC.
BRETTWARD PROPERTIES CO., INC.
FIRST MONT CORPORATION
FOURTH WYCOMBE PROPERTIES, INC.
GABEWARD PROPERTIES CORPORATION
GARDEN GROVE DEVELOPMENT CORPORATION
HUGA REALTY INC.
JOSHWARD PROPERTIES CORPORATION
LECHMERE DEVELOPMENT CORPORATION
M-W FAIRFAX PROPERTIES, INC.
M-W PROPERTIES CORPORATION
4
<PAGE>
M-W RESTAURANTS REALTY CORPORATION
MARCOR HOUSING SYSTEMS, INC.
MARYWARD PROPERTIES CORPORATION
MF NEVADA INVESTMENTS, INC.
MICHAELWARD PROPERTIES CO., INC.
MONTGOMERY WARD DEVELOPMENT CORPORATION
MONTGOMERY WARD LAND CORPORATION
MONTGOMERY WARD PROPERTIES CORPORATION
MONTGOMERY WARD REALTY CORPORATION
MW LAND CORPORATION
NATIONAL HOMEFINDING SERVICE, INC.
998 MONROE CORPORATION
PAULWARD PROPERTIES CO., INC.
ROBERTWARD PROPERTIES CORPORATION
SACWARD PROPERTIES, INC.
SECOND MONT CORPORATION
7TH & CARROLL CORPORATION
SEVENTH MONT CORPORATION
618 CORPORATION
619 CORPORATION
THE 535 CORPORATION
THIRD WYCOMBE PROPERTIES, INC.
2825 DEVELOPMENT CORPORATION
2825 REALTY CORPORATION
UNIVERSITY AVENUE MARKETPLACE, INC.
WFL DEVELOPMENT CORPORATION
WYCOMBE PROPERTIES, INC.
By: /s/ G. Tad Morgan
-----------------------------------------
Name: G. Tad Morgan
Title: Vice President and Secretary
GOODE FURNITURE COMPANIES, INC.
MONTGOMERY WARD SECURITIES, INC.
R M P DEVELOPMENT CORPORATION
By: /s/ G. Tad Morgan
-----------------------------------------
Name: G. Tad Morgan
Title: Secretary
5
<PAGE>
MONTGOMERY WARD HOLDING CORP.
By: /s/ G. Tad Morgan
--------------------------------------
Name: G. Tad Morgan
Title: Assistant Secretary
JEFFERSON STORES, INC.
By: /s/ G. Tad Morgan
--------------------------------------
Name: G. Tad Morgan
Title: Vice President and Treasurer
AGENT AND AS LENDER
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ James C. Ungari
--------------------------------------
Name: James C. Ungari
Title: Its Authorized Signatory
LENDERS:
THE CHASE MANHATTAN BANK
By: /s/ William Repko
--------------------------------------
Name: William Repko
Title: Managing Director
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Thomas Sullivan
--------------------------------------
Name: Thomas Sullivan
Title: Vice President
CITIBANK, N.A.
By: /s/ John Abate
--------------------------------------
Name: John Abate
Title: Attorney-in-fact
CITICORP USA, INC.
/s/ Claudia Slacik
--------------------------------------
Name: Claudia Slacik
Title: Vice President
6
<PAGE>
BANKBOSTON RETAIL FINANCE INC.
(f/k/a GBFC, INC.)
By: /s/ Michael L. Pizette
--------------------------------------
Name: Michael L. Pizette
Title: Director/Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ John Urban
--------------------------------------
Name: John Urban
Title: Authorized Signatory
HELLER FINANCIAL, INC.
By: /s/ Tara Hopkins
--------------------------------------
Name: Tara Hopkins
Title: Assistant Vice President
JACKSON NATIONAL LIFE INSURANCE COMPANY
By: PPM FINANCE, INC.
Its: Attorney-in-fact
By: /s/ Jeffrey Podwika
--------------------------------------
Name: Jeffrey Podwika
Title: Vice President
7
<PAGE>
________________________________________________________________________________
________________________________________________________________________________
ASSET PURCHASE, LICENSE & AGENCY AGREEMENT
for
THE PURCHASE OF
CERTAIN ASSETS OF
LECHMERE, INC.
AND
MONTGOMERY WARD & CO., INCORPORATED
by
SCHOTTENSTEIN BERNSTEIN CAPITAL GROUP LLC
August 14, 1997
________________________________________________________________________________
________________________________________________________________________________
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 CERTAIN DEFINITIONS.................................................................... 5
ARTICLE 2 THE TRANSACTIONS....................................................................... 9
2.1 ........................................................................................... 9
Purchase and Sale of Purchased Assets.......................................................... 9
-------------------------------------
2.2 No Assumption of Liabilities........................................................... 12
----------------------------
2.3 Purchase Price......................................................................... 14
--------------
2.4 Closing Inventory...................................................................... 14
-----------------
2.5 PostClosing Payment.................................................................... 15
-------------------
2.6 Additional Inventory................................................................... 16
--------------------
2.7 Parent Covenant........................................................................ 16
---------------
ARTICLE 3 THE CLOSING............................................................................ 16
3.1 Time and Place of Closing.............................................................. 16
-------------------------
3.2 Deliveries by Debtors.................................................................. 17
---------------------
3.3 Deliveries by Purchaser................................................................ 17
-----------------------
3.4 Real Estate............................................................................ 18
-----------
ARTICLE 4 CONDITIONS TO THE DEBTORS' OBLIGATIONS................................................. 18
4.1 Representations, Warranties and Covenants.............................................. 18
-----------------------------------------
4.2 No Injunction.......................................................................... 18
-------------
4.3 Legal Opinion.......................................................................... 18
-------------
4.4 Certificates and Other Documents....................................................... 18
--------------------------------
4.5 Sale Order............................................................................. 18
----------
ARTICLE 5 CONDITIONS TO PURCHASER'S OBLIGATIONS.................................................. 19
5.1 Representations, Warranties and Covenants.............................................. 19
-----------------------------------------
5.2 Intentionally Omitted 5.3 ............................................................. 19
5.4 No Injunction.......................................................................... 19
-------------
5.5 Good Standing Certificates............................................................. 19
--------------------------
5.6 Licenses and Permits................................................................... 19
--------------------
5.7 Title Insurance and Surveys............................................................ 20
---------------------------
5.8 Intentionally Deleted 5.9.............................................................. 20
5.10 Certificates and Other Documents....................................................... 20
--------------------------------
5.11 Notice of Sale; Order Limiting Notice.................................................. 20
-------------------------------------
5.12 Material Adverse Change................................................................ 21
-----------------------
5.13 Board Approval......................................................................... 21
--------------
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF DEBTORS.............................................. 21
6.1 Due Incorporation, Etc................................................................. 21
----------------------
6.2 Subsidiaries........................................................................... 22
------------
6.3 Authorization, No Conflicts, Etc....................................................... 22
--------------------------------
6.4 Consents and Approvals................................................................. 23
----------------------
6.5 Absence of Violations.................................................................. 23
---------------------
6.6 Licenses and Permits................................................................... 24
--------------------
6.7 Inventories............................................................................ 24
-----------
6.8 Insurance.............................................................................. 25
---------
6.9 Assets................................................................................. 25
------
6.10 Real Properties........................................................................ 26
---------------
6.11 Tangible Personal Property............................................................. 26
--------------------------
6.12 [Intentionally omitted]................................................................ 27
6.13 Disclosure............................................................................. 27
----------
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
6.14 Closing Date........................................................................... 27
------------
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................ 27
7.1 Due Incorporation, Etc................................................................. 27
----------------------
7.2 Authorization, No Conflicts, Etc....................................................... 27
--------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
7.3 Closing Date........................................................................... 28
------------
ARTICLE 8 COVENANTS PRIOR TO CLOSING............................................................. 28
8.1 Affirmative and Negative Covenants Pending Closing..................................... 28
--------------------------------------------------
8.2 Investigation by Purchaser............................................................. 30
--------------------------
8.3 Consents and Further Actions........................................................... 30
----------------------------
ARTICLE 9 COVENANTS AFTER CLOSING................................................................ 30
9.1 Store Closing Sales.................................................................... 30
-------------------
9.1A-1. Proceeds............................................................................... 33
--------
9.1A-2. Deposit of Proceeds.................................................................... 33
-------------------
9.1A-3. Credit Card Proceeds................................................................... 34
--------------------
9.1A-4........................................................................................... 34
9.2 Services............................................................................... 34
--------
9.3 Payments by the Purchaser.............................................................. 36
-------------------------
9.4 Further Transfers and Assurances....................................................... 37
-------------------------------
9.5 Communications......................................................................... 37
--------------
9.6 Taxes; Recording Charges; Escrow Fee; Rent Proration................................... 38
----------------------------------------------------
9.7 License of Excluded Proprietary Rights................................................. 38
--------------------------------------
9.8 Agent.................................................................................. 38
-----
9.9 Access to Documents.................................................................... 38
-------------------
9.10 Insurance.............................................................................. 38
---------
ARTICLE 10 INTENTIONALLY DELETED ARTICLE 11 LEASES/REAL ESTATE................................... 39
11.1 Lease Assignment Election.............................................................. 39
-------------------------
11.2 Rejected Leases........................................................................ 40
---------------
11.3 Costs and Expenses..................................................................... 40
------------------
11.4 Master Lease........................................................................... 41
------------
11.5 ....................................................................................... 41
11.6 Communications......................................................................... 41
--------------
11.7 Sale of Leases......................................................................... 42
--------------
11.8 Real Estate............................................................................ 42
-----------
ARTICLE 12 INDEMNIFICATION....................................................................... 42
12.1 Indemnification........................................................................ 42
---------------
12.2 Mutual Assistance and Records.......................................................... 43
-----------------------------
ARTICLE 13 MISCELLANEOUS......................................................................... 43
13.1 Termination............................................................................ 43
-----------
13.2 Survival of Representations and Warranties............................................. 44
------------------------------------------
13.3 Equitable Remedies..................................................................... 45
------------------
13.4 Assignment............................................................................. 45
----------
13.5 Notices................................................................................ 45
-------
13.6 Expenses............................................................................... 47
--------
13.7 Public Announcements................................................................... 47
--------------------
13.8 Entire Agreement....................................................................... 47
----------------
13.9 Waiver................................................................................. 47
------
13.10 Amendment.............................................................................. 48
---------
13.11 Counterparts........................................................................... 48
------------
13.12 Invalid Provisions..................................................................... 48
------------------
13.13 Headings, Gender, Etc.................................................................. 48
---------------------
13.14 Choice of Law.......................................................................... 48
-------------
13.15 No Third Party Beneficiary............................................................. 48
--------------------------
13.16 ....................................................................................... 49
</TABLE>
-3-
<PAGE>
CERTAIN SCHEDULES
-----------------
Schedule 6.2 -- Subsidiaries
Schedule 6.3 -- Authorization, No Conflicts, Etc.
Schedule 6.4 -- Consents and Approvals
Schedule 6.5 -- Absence of Violations
Schedule 6.6 -- Licenses and Permits
Schedule 6.8 -- Insurance
Schedule 6.10 -- Real Properties
Schedule 6.11 -- Tangible Personal Property
EXHIBITS
--------
Exhibit 1 -- Stores and Warehouse
Exhibit 1-A -- Lease Guaranty
Exhibit 2.1 (a) -- Parent Leases
Exhibit 2.1(b) -- Excluded Assets
Exhibit 2.4 -- Inventory Procedures and Store Merchandise Condition
Report
Exhibit 5.3 -- Sale Order
Exhibit 9.2 -- Services
-4-
<PAGE>
ASSET PURCHASE, LICENSE & AGENCY AGREEMENT
------------------------------------------
ASSET PURCHASE, LICENSE & AGENCY AGREEMENT ("Agreement"), dated as of
August 14, 1997, by and between Lechmere, Inc., a Massachusetts corporation (the
"Company"), Montgomery Ward & Co., Incorporated, an Illinois corporation
("Parent"), each a debtor and debtor-in-possession operating under Chapter 11 of
the Bankruptcy Code (collectively, the "Debtors") and Schottenstein Bernstein
Capital Group LLC, a Delaware limited liability company ("Purchaser").
RECITALS
--------
The Debtors filed for protection from their creditors under Chapter 11
of the Bankruptcy Code (as defined below) on July 7, 1997. The Debtors' Chapter
11 case is currently pending before the United States Bankruptcy Court for the
District of Delaware (the "Court") in In re Montgomery Ward Holding Corp., a
-----------------------------------
Delaware corporation, Case No. 97-1409 (PJW), et al (the "Bankruptcy Case").
---------------
Purchaser desires to purchase, and the Debtors desire to sell, the
Purchased Assets (as defined below) upon the terms and subject to the conditions
set forth in this Agreement. Debtors desire to retain the Purchaser as its
agent to conduct store closing sales at the Stores (as defined herein) on the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and in reliance upon the representations and
warranties contained herein, the parties hereto covenant and agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the
following designated meanings:
"Additional Inventory" has the meaning set forth in Section 2.6
--------------------
hereof.
"Affiliate" of another Person means any Person that directly, or
---------
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with such other Person, but not including, in the case
of the Debtors, any shareholders of Montgomery Ward Holding Corp.
"Agreement" means this Asset Purchase, License & Agency Agreement,
---------
including the exhibits and the schedules attached hereto.
"Assigned Leases" has the meaning set forth in Section 11.1 hereof.
---------------
-5-
<PAGE>
"Authorized Officer" of any Person means the chairman of the board,
------------------
the resident, any vice-president or any secretary of such Person.
"Bankruptcy Case" has the meaning set forth in the recitals hereof.
---------------
"Bankruptcy Code" means Title 11 and applicable portions of Titles 18
---------------
and 28 of the United States Code, as amended from time to time.
"Closing" has the meaning set forth in Section 3.1 hereof.
-------
"Closing Date" has the meaning set forth in Section 3.1 hereof.
------------
"Closing Merchandise Inventory" has the meaning set forth in Section
-----------------------------
2.5(a) hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company" has the meaning set forth in the first paragraph of this
-------
Agreement.
"Cost Value" has the meaning set forth in Section 2.4(b) hereof.
----------
"Deemed Rejection Date" has the meaning set forth in Section 11.1
---------------------
hereof.
"Defective Merchandise" means any item of merchandise that is damaged,
---------------------
defective or otherwise not salable in the ordinary course.
"Defective Merchandise Amount" means the amount payable as the
----------------------------
purchase price for the Defective Merchandise as agreed to by Purchaser and the
Company.
"Excluded Assets" has the meaning set forth in Section 2.1 (b) hereof.
---------------
"Excluded Liabilities" has the meaning set forth in Section 2.2(b)
--------------------
hereof.
"Final Order" shall mean an order of the Court which (a) has not been
-----------
reversed or stayed and as to which the time to appeal has expired and as to
which no appeal or petition for review, rehearing or certiorari is pending; or
(b) with respect to which any appeal has been finally decided and no further
appeal or petition for certiorari can be taken or granted.
"Financed Store Fixtures" means Store Fixtures and equipment located
-----------------------
at the Stores under the heading "Financed Store Fixtures" set forth on Exhibit
-------
1.
- -
"Gross Rings" has the meaning set forth in Section 2.4(c) hereof.
-----------
"Home Image Business" means the business conducted under the name
-------------------
"Home
-6-
<PAGE>
Image."
"Initial Settlement Date" has the meaning set forth in Section 2.5
-----------------------
hereof.
"Inventory Date" has the meaning set forth in Section 2.4(a) hereof.
--------------
"Inventory Taking" has the meaning set forth in Section 2.4(a) hereof.
----------------
"Layaway, Repair, and Special Order Merchandise" means all items of
----------------------------------------------
merchandise held by the Company on layaway or for repair, or customer-specific
special orders, in each case pursuant to binding agreements, invoices or other
legal documentation, where (A) the documentation is clear as to the name,
address, telephone number, date of last payment and balance due from the
customer, and (B) the goods subject to layaway are fully described in the
documentation.
"Lease Assignment Order" has the meaning set forth in Section 11.1
----------------------
hereof.
"Lease Guaranty" shall mean the Guaranty between Purchaser and Company
--------------
substantially in the form attached hereto as Exhibit 1-A.
"Leases" means the leasehold interest of the Debtors in the Stores and
------
Warehouses under the heading "Leased Stores and Warehouses" on Exhibit 1.
---------
"Liens" has the meaning set forth in Section 6.10 hereof.
-----
"Master Lease" means the Indenture of Lease dated October 30, 1989, by
------------
and between Lechmere Realty Limited Partnership and the Company, with respect to
certain stores located in the Northeastern United States including amendments
one through six.
"Master Lease Deemed Rejection Date" has the meaning set forth in
----------------------------------
Section 11.4.
"Master Lease Premises" has the meaning set forth in Section 11.4
---------------------
hereof
"Merchandise" means all merchandise located at the Stores or in the
-----------
Warehouses or in transit between the Stores and the Warehouses, including: (a)
Layaway, Repair and Special Order Merchandise; and (b) Defective Merchandise.
Notwithstanding the foregoing, "Merchandise" shall not include: (i) goods which
belong to sublessees, licensees or concessionaires of the Debtors; (ii) goods
held by the Debtors on memo, on consignment, or as bailee; and (iii)
furnishings, trade fixtures and improvements to real property which are located
in the Stores or the Warehouse.
"Notice of Disagreement" has the meaning set forth in Section 2.5(a)
----------------------
hereof.
"Person" means any natural person, corporation, general partnership,
------
limited partnership, limited liability partnership, limited liability company,
trust, union, association, court, agency, government, tribunal, instrumentality,
or other entity or authority.
-7-
<PAGE>
"Post-Closing Payment" has the meaning set forth in Section 2.3
--------------------
hereof.
"Proceeds" shall have the meaning set forth in Section 9.1A-1 hereof.
--------
"Proprietary Rights" means all patents, patent applications, patent
------------------
disclosures and inventions (whether or not patentable and whether or not reduced
to practice); all trademarks, service marks, trade names, trade dress logos and
corporate names (including "Lechmere" and "Home Image" or derivatives thereof);
all registered and unregistered statutory and common law copyrights; all
registrations, applications and renewals for any of the foregoing; all trade
secrets, confidential information, ideas, formulae, compositions, know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, improvements, proposals,
technical and computer data, financial, business and marketing plans, and
customer and supplier lists and related information; all license agreements and
sublicense agreements to and from third parties relating to any of the
foregoing; all other proprietary rights (including, without limitation, all
computer software and documentation); and all copies and tangible embodiments of
the foregoing (in whatever form or medium), in each case including, without
limitation, the items set forth on the Schedule 6.12 attached hereto, all
income, royalties, damages and payments due at Closing or thereafter with
respect thereto and all other rights thereunder (including, without limitation,
damages and payments for past, present or future infringements or
misappropriations thereof, the right to sue and recover for past, present or
future infringements or misappropriations thereof); all rights to use all of the
foregoing forever and all other rights in, to, and under the foregoing in all
countries; all goodwill related to the foregoing.
"Purchase Orders" means all commitments and orders for the purchase
---------------
and sale of Merchandise and supplies.
"Purchase Price" has the meaning set forth in Section 2.3 hereof.
--------------
"Purchased Assets" has the meaning set forth in Section 2.l(a)
----------------
hereof.
"Real Estate" means those Warehouses and Stores under the heading
-----------
"Owned Stores and Warehouses" on Exhibit 1.
---------
"Retained Employee" has the meaning set forth in Section 9.2(e)
-----------------
hereof.
"Returned Merchandise" has the meaning set forth in Section 9.1 (g)
--------------------
hereof.
"Saleable Inventory" means all Merchandise that is first quality
------------------
inventory and all Merchandise located at the Stores (but not the Warehouses)
that is less than first quality inventory but that is on the selling floor and
is salable in the ordinary course, including samples and displays that are not
Defective Merchandise.
"Sale Commencement Date" has the meaning set forth in Section 9.1(b)
----------------------
hereof.
-8-
<PAGE>
"Sale Term" has the meaning set forth in Section 9.1(b) hereof.
---------
"Sale Termination Date" has the meaning set forth in Section 9.1(b)
---------------------
hereof.
"Sales Taxes" means all sales, excise, gross receipts and other taxes
-----------
attributable to sales of Merchandise payable to any taxing authority having
jurisdiction.
"Sale Order" has the meaning set forth in Section 5.3 hereof.
----------
"Services" has the meaning set forth in Section 9.2 hereof.
--------
"Store Closing Sales" has the meaning set forth in Section 9.1 hereof.
-------------------
"Store Fixtures" has the meaning set forth in Section 2.1(a) hereof.
--------------
"Stores" means the retail stores of the Company and the Parent set
------
forth on Exhibit 1.
---------
"Survey" has the meaning given to such term in Section 5.7(b) hereof.
------
"Tax"or "Taxes" shall mean any federal, state, local or foreign
--- -----
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, property, windfall, profits, environmental, customs,
capital stock, franchise, employees' income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative or add-on minimum or
other similar tax, governmental fee, governmental assessment or governmental
charge of any kind whatsoever, including interest, penalty or addition thereto,
whether disputed or not.
"Title Insurer" has the meaning set forth in Section 5.7(a) hereof.
-------------
"Warehouses" means the merchandise storage facilities of the Company
----------
and Parent set forth on Exhibit 1.
---------
ARTICLE 2
THE TRANSACTIONS
2.1 Purchase and Sale of Purchased Assets.
-------------------------------------
(a) Purchased Assets. On the terms and subject to the conditions
----------------
contained in this Agreement, on the Closing Date, Purchaser shall purchase from
the Debtors, and the Debtors shall sell, convey, assign, transfer and deliver to
Purchaser, free and clear of all Liens, all of the Debtors' right, title and
interest in, to and under the following assets, properties, rights, titles and
interests of every kind and nature owned by the Debtors as of the Closing Date,
in each case, which are used in, useful for or otherwise associated with the
ownership and operation of the
-9-
<PAGE>
stores and the Warehouses, whether tangible, intangible, real or personal and
wherever located and by whomever possessed, but excluding all Excluded Assets
(the "Purchased Assets"); it being understood that with respect to Parent the
following shall apply only to the extent such assets, properties, rights, titles
or interests are located at the Stores or the Warehouses or to the extent such
assets, properties, rights, titles or interests are related to a Lease set forth
on Exhibit 2.1(a):
(i) The right to the Proceeds from the sale of all Merchandise
and on-order inventory, which Proceeds shall be free and clear of any Liens;
(ii) the right to control the disposition of the Leases in
accordance with Article 9;
(iii) all interests in the Real Estate (including, without
limitation, land, buildings and improvements thereon, fixtures and easements,
licenses, rights of way, permits, and other appurtenants thereto, including
rights in and to public streets, whether or not vacated) and all escrow accounts
and warranties relating to the Real Estate provided, however, that (x) the
Debtors shall automatically, and without the necessity of any other or further
act or instrument or Court approval, transfer and convey the Real Estate (or
cause the same to be transferred and conveyed) to Purchaser upon the one hundred
eightieth (180th) day following the Closing Date, or (y) subject to Section
11.8, the Debtors shall transfer and convey the Real Estate (or cause the same
to be transferred and conveyed) to Purchaser or any one or more nominees,
assignees or designees of Purchaser promptly following (and in no event later
than two (2) business days thereafter) the delivery of written notice by
Purchaser, at any time and from time to time, requesting that the Real Estate or
any portion thereof be transferred and conveyed to Purchaser or its nominee,
assignee or designee, and in the case of (x) and (y), without the imposition or
payment of any transfer taxes of any kind or nature, which transfer taxes are
exempt pursuant to section 1146(c) of the Bankruptcy Code; it hereby being
understood and agreed by Purchaser that Purchaser shall be responsible for all
costs associated with the Real Estate after the Closing Date;
(iv) all equipment, tools, furniture, furnishings, trade
fixtures, trucks and other vehicles, spare parts and supplies, computers and all
related equipment, telephones and all related equipment and all other tangible
personal property (other than Financed Store Fixtures);
(v) all claims, deposits (whether held on behalf of any Person
by the Debtors or made by the Debtors with any Person), prepayments (excluding
prepaid rent and paper account), warranties, refunds (other than income tax
refunds), causes of action, rights of recovery, rights of set-off and rights of
recoupment of every kind and nature, other than those relating exclusively to
Excluded Assets or Excluded Liabilities and those described in Section
2.1(b)(ii);
(vi) tax, insurance and other escrow accounts relating to the
Real Estate and Leases;
-10-
<PAGE>
(vii) all permits, licenses, franchises, orders, registrations,
certificates, variances, approvals and similar rights obtained from governments
and governmental agencies, and all data and records pertaining thereto;
(viii) all insurance, warranty and condemnation proceeds received
after the Closing Date with respect to damage, non-conformance of or loss to the
Purchased Assets (excluding insurance proceeds from credit insurance policies);
(ix) all rights under insurance policies to the extent related
to or payable in connection with any of the Purchased Assets (excluding
insurance proceeds from credit insurance policies);
(x) all rights to receive mail and other communications
addressed to the Company and relating to the Purchased Assets other than
privileged communications;
(xi) Purchaser's rights under Section 11.1;
(xii) all supplies, including, without limitation, boxes, bags,
paper, twine, and similar sales materials located at the Stores and Warehouses;
(xiii) all manufacturers and third party warranties or guarantees
in respect of any item of property falling within the scope of the Purchased
Assets and all indemnification rights against third parties related to the
Purchased Assets, to the extent legally transferable; and
(xiv) all of Debtors' other assets located on or around the
premises of, used in, or necessary to the unimpaired continual operation of, or
related to, the Stores or the Warehouses it hereby being understood and agreed
that the Purchased Assets together with the other rights granted Purchaser under
this Agreement shall enable Purchaser to conduct business in the Stores and the
Warehouses as contemplated by this Agreement, and to the extent that the right
to use any of the Excluded Assets or any other asset which is necessary to the
operation of the Stores and the Warehouses as contemplated by this Agreement,
such right is hereby granted to Purchaser until the conclusion of the Sale Term.
(b) Excluded Assets. Notwithstanding the foregoing, the following
---------------
assets are expressly excluded from the purchase and sale contemplated hereby
(the "Excluded Assets") and, as such, are not included in the Purchased Assets:
---------------
(i) all cash and cash equivalents (other than escrow accounts
set forth in Section 2.l(a)(vii)) and accounts receivable;
(ii) all causes of action and claims (A) under (S)544-550 of
the Bankruptcy Code, (B) against vendors and third party suppliers (except
warranty claims) and (c) not relating to the Purchased Assets or the Leases;
-11-
<PAGE>
(iii) the Company's minute books, stockholder and stock transfer
records and corporate seal;
(iv) any right to receive mail and other communications
addressed to the Debtors relating exclusively to the Excluded Assets or the
Excluded Liabilities;
(v) any assets relating to any program, plan, policy or
arrangement (whether or not terminated) (A) which is or has been maintained,
established, or offered by the Debtors, (B) to which the Debtors contribute or
has contributed, (C) to which the Debtors have or have had any obligation to
contribute, or (D) to which the Debtors have or had any liability or potential
liability, and under which current or former employees, retirees, individual
contractors of the Debtors or its predecessors (or their spouses, dependents or
other beneficiaries) may receive benefits or have received benefits;
(vi) all contracts, agreements and arrangements except that to
the extent that the rights granted to the Debtors under any contract, agreement
or arrangement are necessary or useful in connection with the conduct of the
Store Closing Sales, then Purchaser shall be granted and afforded such rights
for the duration of the Sale Term;
(vii) any other assets (or portion thereof) which the Purchaser
elects in its sole discretion not to purchase hereunder, by delivering written
notice to the Debtors at any time prior to the Closing Date;
(viii) all Proprietary Rights;
(ix) the Financed Store Fixtures;
(x) all books, ledgers, files, documents, correspondence and
business records necessary for the operation of the Stores and the Warehouses or
related to the Purchased Assets except such books, ledgers, files, documents,
correspondence or business records related solely to the Real Estate;
(xi) all stock of subsidiaries of the Company, if any; and
(xii) all assets listed on Exhibit 2.l(b).
2.2 No Assumption of Liabilities. Purchaser will not assume or in any way
----------------------------
be responsible for any liabilities or obligations of the Debtors, including any
liabilities or obligations whatsoever related to the ownership or operation of
the Stores, the Warehouses and/or the Purchased Assets at any time, whether
prior to, on or after the Closing Date except in connection with any Assigned
Leases assigned to Purchaser or its nominees, assignees or designees in
accordance with Section 11.1. Nothing in this Section 2.2 shall limit
Purchaser's obligations to make payments to the Debtors as set forth in Sections
9.3 and 11.2.
-12-
<PAGE>
(a) Excluded Liabilities. Notwithstanding anything to the contrary
--------------------
contained in this Agreement and regardless of whether such liability is
disclosed herein or on any schedule hereto, Purchaser will not assume or be
liable for any liabilities or obligations of the Debtors not described in
Section 2.2(a) hereof (the "Excluded Liabilities"), including, without
- -------------- --------------------
limitation, the following liabilities and obligations of the Company:
(i) liabilities or obligations for any contracts, agreements,
leases or other arrangements except to the extent Purchaser or its nominees,
assignees or designees is an assignee of an Assigned Lease;
(ii) liabilities or obligations for accounts payable, accrued
liabilities or indebtedness (including indebtedness to Parent), or any
undisclosed or contingent liabilities;
(iii) liabilities or obligations under Purchase Orders;
(iv) liabilities or obligations with respect to all Taxes,
including without limitation, all Taxes of the Debtors relating to the ownership
or operation of the Stores and/or the Purchased Assets on or prior to the
Closing Date and all Taxes arising out of or relating to any of the transactions
contemplated hereby;
(v) liabilities of the Debtors for costs and expenses incurred
in connection with this Agreement and the consummation of the transactions
contemplated hereby;
(vi) liabilities or obligations of the Debtors under this
Agreement or the agreements contemplated hereby;
(vii) liabilities or obligations arising out of or relating to
the Excluded Assets;
(viii) liabilities or obligations for any claims (whenever made)
or proceedings arising out of, relating to, resulting from or caused by any
products manufactured, serviced, distributed or sold by the Debtors or any of
its Affiliates (or any predecessor) at any time on or prior to the Closing Date;
(ix) liabilities or obligations for any claims (whenever made)
arising out of, relating to, resulting from or caused by any transaction,
status, event, condition, occurrence or situation existing, arising or occurring
(A) in connection with the ownership or operation of the Stores, the Warehouses
and/or the Purchased Assets on or prior to the Closing Date or (B) in connection
with the Debtors or any of their affiliates' businesses or activities at any
time prior to, on or after the Closing Date; or
(x) any liabilities or obligations (including but not limited
to any claim of any governmental agency, any trustee, any fiduciary, any plan
administrator, any other person dealing with any employee benefit or other plan,
any employee or any beneficiary and without
-13-
<PAGE>
regard to whether such liability or obligation arises prior to, on or after the
Closing Date or results from an event, prior to, on or after the Closing Date)
including in connection with provision of the Services which relate to (A) any
program, plan, policy or arrangement (whether or not terminated) (i) which is or
has been maintained, established, or offered by the Company or Parent, (ii) to
which the Company or Parent contributes or has contributed, (iii) to which the
Company or Parent has or has had any obligation to contribute or (iv) to which
the Company or Parent has or has had any liability or potential liability, and
under which current or former employees, retirees, individual contractors (or
their spouses, dependents or other beneficiaries) of the Company or its
predecessors may receive benefits or have received benefits, (B) any Tax,
penalty, assessment, fine or other liability relating to any such program, plan
or policy, which may result as a violation of law, including any violation of
the Code, ERISA or any proposed, temporary or final regulation thereunder, (c)
any liability, including any potential or actual liability, relating to any
failure to comply with the requirements of the Code and/or ERISA with respect to
the foregoing or (D) any other payments to Debtors' employees.
2.3 Purchase Price. The aggregate purchase price for all of the Purchased
--------------
Assets (the "Purchase Price"), shall be 81.6% of the Cost Value of all Saleable
--------------
Inventory included in the Closing Merchandise Inventory (determined in
accordance with Sections 2.4 and 2.5 below), plus the Defective Merchandise
Amount, plus $16,400,000. Subject to the conditions set forth herein,
$100,000,000 shall be payable by Purchaser at Closing by wire transfer of
immediately available funds to the account designated by the Debtors no later
than five days prior to the Closing Date for such purpose. An amount equal to
the Purchase Price less $100,000,000 (the "Post-Closing Payment") shall be paid
--------------------
as provided in Section 2.5(b). The Purchase Price payable hereunder shall be
subject to prorations as provided in Section 9.6.
2.4 Closing Inventory.
-----------------
(a) Inventory Taking. As soon as practicable after the Sale
----------------
Commencement Date, the Purchaser and the Debtors shall jointly take a retail and
SKU inventory of the Saleable Inventory located at each Store and Warehouse in
accordance with the inventory procedures set forth on Exhibit 2.4 hereto to
-----------
obtain the cost of the Saleable Inventory located thereat (the "Inventory
---------
Taking") (the date of the Inventory Taking at each Store or Warehouse being the
"Inventory Date" for such Store or Warehouse). Purchaser and the Debtors shall
--------------
jointly employ RGIS or another mutually acceptable inventory taking service to
conduct the Inventory Taking. Purchaser and the Debtors shall each be
responsible for 50% of the costs and fees of such inventory taking service.
Except as provided in the immediately preceding sentence, the Purchaser and the
Debtors shall each bear their respective costs and expenses relative to the
Inventory Taking. Once the Inventory Taking commences in any Store or Warehouse
and until the completion of the Inventory Taking in such Store or Warehouse,
neither Debtors nor Purchaser shall enter such Store or Warehouse without each
having a representative present; provided, however, that until the completion of
the Inventory Taking, Debtors and Purchaser shall each be entitled to enter any
Store or Warehouse at any time after providing notice to the other party in the
event of an emergency at such Store or Warehouse. Following the completion of
the Inventory Taking in each Store or Warehouse, Debtors shall not enter any
Store or Warehouse, except (i) during ordinary Store/Warehouse hours upon notice
to the managers of
-14-
<PAGE>
such Store or Warehouse, or (ii) after providing notice to Purchaser in the
event of an emergency at such Store or Warehouse. The Purchaser and the Debtors
shall each have representatives present during the Inventory Taking, and shall
each have the right to review and verify the listing and tabulation of the
inventory taking service. During the Inventory Taking, Purchaser and the Debtors
shall work in good faith to agree on the Defective Merchandise Amount. The
parties agree that during the conduct of the Inventory Taking at each Store such
Store shall be closed to the public and no sales or other transactions shall be
conducted.
(b) Valuation. For purposes of this Agreement, "Cost Value" shall
--------- ----------
mean, with respect to each item of Saleable Inventory, the Debtors' cost
therefor as provided in that certain Store Merchandise Condition Report for the
end of month/July, 1997 included as Exhibit 2.4 hereof, except for Layaway,
-----------
Repair and Special Order Merchandise, where "Cost Value" shall mean the Cost
----------
Value as described above less amounts received by the Debtors from customers
prior to Closing.
(c) Gross Rings. In the event that sales occur at any Store prior to
-----------
the completion of the Inventory Taking at such Store, then for the period from
and including the Closing Date until the Inventory Date for such Store,
Purchaser or Debtors, as the case may be, shall keep a strict count of units of
Merchandise sold (by SKU, if possible) ("Gross Rings"). All such records and
-----------
reports shall be made available to Purchaser and the Company during regular
business hours upon reasonable notice.
2.5 Post-Closing Payment.
--------------------
(a) Within 10 business days after the delivery of the certified
inventory report by the inventory service, Debtors shall deliver to Purchasers a
statement of the aggregate amount of the Cost Value of all Saleable Inventory
included in the Inventory Taking determined in accordance with Section 2.4 plus
----
the Cost Value of all Saleable Inventory subject to Gross Rings at each Store
between the Closing Date and the Inventory Date at such Store (the "Closing
-------
Merchandise Inventory"), together with Debtors' good faith determination of the
- ---------------------
Post-Closing Payment. During the period immediately following the Purchaser's
receipt of such Closing Merchandise Inventory and until the Post-Closing Payment
is finally determined pursuant to this Section 2.5, the representatives and
agents designated by the Purchaser shall be permitted to review Debtors' books
and records and working papers related to the preparation of the Closing
Merchandise Inventory and determination of the Post-Closing Payment. The
Closing Merchandise Inventory and Debtors' determination of the Post-Closing
Payment shall become final and binding upon the parties five days after the
Purchaser's receipt thereof (the "Initial Settlement Date"), unless the
-----------------------
Purchaser gives written notice to Debtors of its disagreement ("Notice of
---------
Disagreement") prior to such date. Any Notice of Disagreement shall specify in
- ------------
reasonable detail the nature of any disagreement so asserted. If a timely
Notice of Disagreement is received by Debtors, then the Closing Merchandise
Inventory and the determination of the Post-Closing Payment (as revised in
accordance with clause (i) or (ii) below) shall become final and binding upon
the parties on the earliest of (i) the date the parties hereto resolve in
writing any differences they have with respect to the matters specified in the
Notice of Disagreement or (ii) the date all matters in dispute are finally
resolved in writing by the Court. During the 10 days
-15-
<PAGE>
following delivery of a Notice of Disagreement, Debtors and the Purchaser shall
seek in good faith to resolve in writing any differences which they may have
with respect to the matters specified in the Notice of Disagreement. During such
period, a representative appointed by the Debtors shall be permitted to review
the Purchaser's working papers relating to the Notice of Disagreement. At the
end of such 10-day period, Purchaser and the Debtors shall submit to the Court
for review and resolution all matters which remain in dispute which were
included in the Notice of Disagreement, and the Court shall make a final
determination of Closing Merchandise Inventory and the Post-Closing Payment. The
Closing Merchandise Inventory and the Post-Closing Payment as determined in
accordance with this Section 2.5 shall become final and binding on the parties
on the date the Court delivers its final resolution to the parties. Purchaser
and the Debtors shall each bear their own fees and expenses in connection with
the Court's resolution.
(b) Within two business days after the Initial Settlement Date, the
Purchaser shall pay the Debtors by wire transfer of immediately available funds
to the account designated for such purposes by the Debtors any portion of the
Post-Closing Payment that is not subject to the Notice of Disagreement.
Purchaser shall pay the Debtors any disputed portions of the Post-Closing
Payment by wire transfer of immediately available funds to the account
designated for such purposes by the Debtors as soon as practicable after
resolution of such dispute, but no later than 2 business days after such
resolution.
2.6 Additional Inventory. (a) Within 21 days after the Closing Date, the
--------------------
Purchaser shall deliver to the Company a statement setting out any Merchandise
ordered by the Debtors prior to the Closing Date and received by Purchaser
within 14 days after the Closing Date and not included in the Inventory Taking
(the "First Phase Additional Inventory"). With such statement, Purchaser shall
--------------------------------
include a check in an amount equal to 81.6% of the Cost Value for all First
Phase Additional Inventory.
(b) Within 40 days after the Closing Date, Purchaser shall deliver to
the Company a statement setting out any Merchandise ordered by the Debtors prior
to the Closing Date and received by Purchaser during the period commencing 15
days after the Closing Date and ending 30 days after the Closing Date and not
included in the Inventory Taking (the "Second Phase Additional Inventory").
---------------------------------
With such statement, Purchaser shall include a check in an amount equal to 81.6%
of the Cost Value for all Second Phase Additional Inventory times the complement
of the then prevailing Store Closing sale discount.
2.7 Parent Covenant. Parent hereby agrees that it shall cause the Company
---------------
to perform all of its agreements, covenants and other obligations under this
Agreement and the other agreements and instruments contemplated hereby and
thereby.
ARTICLE 3
THE CLOSING
3.1 Time and Place of Closing. The consummation of the transactions
-------------------------
provided for in
-16-
<PAGE>
this Agreement (the "Closing") shall take place at the offices of Battle Fowler
-------
LLP, 75 East 55th Street, New York, New York 10022 as soon as practicable after
the Sale Order is issued (the date of the Closing, the "Closing Date"), but,
------------
subject to satisfaction of all the conditions to Closing set forth in Article 5,
in no event later than 3:00 p.m. New York time August 15, 1997. The sale of the
Real Estate shall be closed through escrow with the Title Insurer in accordance
with the general provisions of the usual form of escrow agreement used in
similar transactions by the Title Insurer with special provisions inserted as
may be required to conform with this Agreement; provided, however, that the Real
Estate shall be delivered out of escrow by the Title Insurer as provided in
section 2.1(a)(iii).
3.2 Deliveries by Debtors. At the Closing, the Debtors shall deliver to
---------------------
Purchaser the following:
(a) The special warranty deeds, warranty bills of sale, assignments
and other instruments for the due transfer of the Purchased Assets to Purchaser,
free and clear of all Liens, each in form and substance reasonably satisfactory
to Purchaser; provided, however, that the instruments to effectuate the transfer
of the Real Estate to Purchaser or its nominees, assignees or designees shall be
deposited in escrow with the Title Insurer, who shall be instructed to deliver
such instruments out of escrow as and when set forth in section 2.1(a)(iii); and
provided, further, however, that all of the documents and instruments referred
to in this section 3.2(a) shall be reasonably acceptable to Purchaser.
(b) The certificate contemplated by Article 5 hereof; and
(c) All other documents, instruments and writings required to be
delivered by the Debtors at or prior to the Closing Date pursuant to this
Agreement or otherwise required, or reasonably requested by Purchaser, in
connection herewith; it hereby being understood and agreed that all such
documents, instruments and writings shall be reasonably acceptable to Purchaser.
3.3 Deliveries by Purchaser. At the Closing, Purchaser shall deliver the
-----------------------
following:
(a) the sum of $100,000,000 (subject to prorations as provided in
Section 9.6) as described in Section 2.3;
(b) the certificate contemplated by Article 6 hereof;
(c) all other documents, instruments and writings required to be
delivered by Purchaser at or prior to the Closing Date pursuant to this
Agreement or otherwise required, or reasonably requested by the Debtors, in
connection herewith; and
(d) the Lease Guaranty; and
(e) the letter of credit to be delivered pursuant to the Lease
Guaranty; provided, however, that such letter of credit may be delivered by
Purchaser up to one week
-17-
<PAGE>
following the Closing.
3.4 Real Estate. Purchaser shall have the right to take possession of all
-----------
real property which constitute Purchased Assets immediately upon the Closing.
ARTICLE 4
CONDITIONS TO THE DEBTORS' OBLIGATIONS
The Debtors' obligations to consummate the transactions contemplated
by this Agreement are subject, in the Debtors' discretion, to the satisfaction
at or prior to the Closing Date of each of the following conditions.
4.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of Purchaser contained in this Agreement shall be true and correct at
and as of the Closing Date as if such representations and warranties were made
at and as of the Closing Date and Purchaser shall have performed all agreements
and covenants required by this Agreement to be performed by it prior to or at
the Closing Date. On the Closing Date, there shall be delivered to the Company
a certificate (dated as of the Closing Date and signed by an Authorized Officer
of Purchaser) as to the matters set forth in this Section 4.1.
4.2 No Injunction. No injunction,. stay or restraining order shall be in
-------------
effect prohibiting the consummation of the transactions contemplated by this
Agreement.
4.3 Legal Opinion. Purchaser shall have furnished the Debtors with an
-------------
opinion of counsel dated as of the Closing Date that Purchaser is a limited
liability company in good standing in the State of Delaware and that execution
of this Agreement has been duly authorized by the Purchaser's members.
4.4 Certificates and Other Documents. Purchaser shall have furnished the
--------------------------------
Debtors with (a) such certificates of an Authorized Officer of Purchaser to
evidence compliance with the conditions set forth in this Article 4 as may be
reasonably requested by the Debtors, (b) each of the deliveries required under
Section 3.3 above and (c) all other documents and certificates reasonably
requested by the Debtors.
4.5 Sale Order. On or before August 15, 1997, the Court shall have
----------
entered an order approving the sale of the Purchased Assets to Purchaser
pursuant to the terms of this Agreement and pursuant to Sections 363 and 365 and
1146(c) of the Bankruptcy Code.
Each of the preceding conditions shall be satisfied in the sole
discretion of the Company and may be waived only if such waiver is set forth in
a writing executed by the Company, which may be done without further order of
the Court and without notice to any other entity.
-18-
<PAGE>
ARTICLE 5
CONDITIONS TO PURCHASER'S OBLIGATIONS
Purchaser's obligation to consummate the transactions contemplated by
this Agreement is subject, in the discretion of Purchaser, to the satisfaction
at or prior to the Closing Date of each of the following conditions.
5.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of the Debtors contained in this Agreement shall be true and correct
at and as of the Closing Date as if such representations and warranties were
made at and as of the Closing Date and the Debtors shall have performed all
agreements and covenants required by this Agreement to be performed by each of
them prior to or at the Closing Date. On the Closing Date, there shall be
delivered to Purchaser a certificate (dated as of the Closing Date and signed by
an Authorized Officer of each of the Company and Parent) as to the matters set
forth in this Section 5.1.
5.2 Intentionally Omitted.
5.3 Sale Order. On or before August 15, 1997, the Court shall have
----------
entered an order pursuant to Sections 105, 363 and 365 and 1146(c) of the
Bankruptcy Code substantially in the form of the order attached hereto as
Exhibit 5.3 with such changes as shall be satisfactory to the Purchaser in its
- -----------
sole discretion (the "Sale Order"). Purchaser shall be entitled to, and is not
----------
waiving, the protection of section 363(m) of the Bankruptcy Code, the mootness
doctrine or any similar statute or body of law if the Closing occurs in the
absence of the Sale Order having become a Final Order.
5.4 No Injunction. No suit, action or other proceeding, or injunction or
-------------
final judgment relating thereto, shall be threatened or pending before any court
or governmental or regulatory official, body or authority in which it is sought
to restrain or prohibit or to obtain damages or other relief in connection with
the transactions contemplated hereby, or that would have a material adverse
effect on the business, financial condition, operating results, assets,
operations or business prospects of the Company or materially adversely affect
the right of Purchaser to own the Purchased Assets, and no investigation that
would result in any such suit, action or proceeding shall be pending or
threatened.
5.5 Good Standing Certificates. The Company shall have furnished to
--------------------------
Purchaser certificates as to the good standing of the Company in its
jurisdiction of incorporation and in each jurisdiction in which it conducts
business, in each case certified by the Secretary of State of the applicable
jurisdiction; provided, however, no such certificate shall be necessary so long
as the failure to so furnish would not impair or impede the ability of Purchaser
to conduct Store Closing Sales at any Store located in a state for which the
Debtors fail to provide such certificate. Parent shall have furnished to
Purchaser a certificate as to the good standing of Parent in its jurisdiction of
incorporation certified by the Secretary of State of such jurisdiction.
5.6 Licenses and Permits. All licenses, permits and authorizations that
--------------------
are required
-19-
<PAGE>
by Purchaser to own and operate the Stores, the Warehouses and the Purchased
Assets will have been transferred to or obtained by (or, if not required at
Closing, applied for by) Purchaser on terms and conditions no less favorable to
Purchaser than they are to the Debtors to the extent transferable by Debtors or
ordered by the Court.
5.7 Title Insurance and Surveys.
---------------------------
(a) Upon the transfer or conveyance to Purchaser or its nominee,
assignee or designee of any parcel of owned Real Estate included in the
Purchased Assets, the Company shall deliver to Purchaser an ALTA Form B - 1987
Owner's Policy of Title Insurance (or equivalent policy reasonably acceptable
Purchaser if the owned real property is located in a state in which an ALTA Form
B - 1987 Owner's Policy of Title Insurance is not customarily issued), issued by
Chicago Title Insurance Corporation (the "Title Insurer"), in an amount equal to
the fair market value of such real property (including all improvements located
thereon) reasonably determined by Purchaser, insuring title to such real
property to be in Purchaser as of the Closing, subject only to liens for current
Taxes not yet delinquent and such other matters described in Schedule 6.10 and
such other title exceptions caused by, through or under Purchaser. The costs
and expenses of each of the title insurance policies to be delivered hereunder
shall be borne by Purchaser.
(b) With respect to each parcel of real property as to which a title
insurance policy is to be issued at the Closing, the Debtors shall have
delivered to Purchaser a current survey of such real property, prepared by a
licensed surveyor and conforming to current ALTA standards for land title
surveys, disclosing the location of all improvements, easements, party walls,
sidewalks, roadways, utility lines and other matters customarily shown on such
surveys, and affirmatively showing access to public streets and roads (the
"Survey") Purchaser hereby acknowledges receipt of a Survey with respect to
------
each parcel of real property that is a part of the Real Estate and that such
Survey is acceptable to Purchaser.
5.8 Intentionally Deleted.
5.9 Leases. Purchaser shall have been furnished with complete and
------
accurate copies of all Leases, including all amendments thereto, certified by an
Authorized Officer of the applicable Debtor.
5.10 Certificates and Other Documents. Purchaser shall have been furnished
--------------------------------
with (a) such certificates of Parent's and the Company's officers to evidence
compliance with the conditions set forth in this Article 5 as may be reasonably
requested by Purchaser, (b) each of the deliveries required under Section 3.2
above, and (c) all other documents and certificates reasonably requested by
Purchaser, including without limitation, certified copies of the resolutions of
the Company's and Parent's boards of directors approving the transactions
contemplated by this Agreement.
5.11 Notice of Sale; Order Limiting Notice. No later than August 6, 1997,
-------------------------------------
(a) the Debtors shall have served written notice of the time, date and location
of the hearing on approval
-20-
<PAGE>
of the Sale Order and the deadline and other requirements for the filing of
objections to the motion seeking entry of the Sale Order to (i) each known
creditor of the Debtors holding or asserting a lien against the Purchased
Assets, including, without limitation, the persons and entities appearing on the
results of the Debtors' tax, lien and judgment searches conducted on behalf of
the Debtors; (ii) each known creditor or party in interest holding or asserting
of record an interest in the Real Estate, including, without limitation, the
person and entities appearing on the title searches conducted on behalf of the
Debtors; (iii) each of the potential bidders with respect to the Purchased
Assets; (iv) each party that has filed a notice of appearance or requested
service in the Bankruptcy Case; (v) counsel to the Committee; (vi) counsel to
Purchaser; and (vii) the Office of the United States Trustee; and (b) the Court
shall have entered an order (i) providing that the foregoing notice (as to the
manner, the amount of notice and the list of the recipients thereof) is adequate
and sufficient under the circumstances of the Bankruptcy Case and satisfies the
provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and
the due process requirements of the United States Constitution; and (ii)
reducing, pursuant to Rule 9006 of the Federal Rules of Bankruptcy Procedure,
the requisite notice period on the Debtors' motion seeking entry of the Sale
Order to the period commencing the date the Debtors serve such notice though and
including August 14, 1997.
5.12 Material Adverse Change. From August 6, 1997, there shall have been
-----------------------
no material adverse change in any of the Purchased Assets or the Leases,
business, financial condition, results of operation or prospects of the business
conducted at the Stores.
5.13 Board Approval. The approval by the Debtors' respective boards of
--------------
directors for the transactions contemplated hereby shall not have been revoked,
amended or varied.
Each of the preceding conditions shall be satisfied in the sole
discretion of Purchaser and may be waived only if such waiver is set forth in a
writing executed by Purchaser.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF DEBTORS
The Company and Parent hereby represent and warrant to Purchaser as
follows:
6.1 Due Incorporation, Etc.
-----------------------
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Massachusetts. The Company
has all requisite corporate power and authority to own and operate its business
as it is presently being conducted and to own and lease the properties and
assets owned or leased by it. The Company is duly licensed and qualified to do
business and is in good standing in each jurisdiction in which the properties
owned or leased or the operation of its business makes such licensing or
qualification to do business necessary except where the failure to be so
qualified would not have a material adverse effect on the transactions
contemplated by this Agreement.
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(b) Parent is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Illinois. Parent has all
requisite corporate power and authority to own and operate its business as it is
presently being conducted and to own and lease the properties and assets owned
or leased by it. Parent is duly licensed and qualified to do business and is in
good standing in each jurisdiction in which the properties owned or leased or
the operation of its business makes such licensing or qualification to do
business necessary except where the failure to be so qualified would not have a
material adverse effect on the transactions contemplated by this Agreement.
6.2 Subsidiaries. Except as set forth on Schedule 6.2 hereto, the Company
------------
does not own any stock, partnership interest, joint venture interest or other
security or interest in any other Person.
6.3 Authorization, No Conflicts, Etc. Subject to and as contemplated by
---------------------------------
the Sale Order:
(a) The Company has full power and authority to execute and deliver
this Agreement, and all other agreements and instruments contemplated hereby or
thereby to which the Company is a party, to perform its obligations hereunder
and thereunder and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by the Company of this
Agreement, the other agreements and instruments contemplated hereby and thereby
and the transactions contemplated hereby and thereby have been duly and validly
authorized by the Company and no other corporate act or proceeding on the part
of the Company, its Board of Directors or its stockholders is necessary to
authorize the execution, delivery or performance by the Company of this
Agreement, or any other agreement or instrument contemplated hereby or thereby
or the consummation of the transactions contemplated hereby or thereby. This
Agreement, as of the Closing, the other agreements and instruments contemplated
hereby or thereby to which the Company is a party will have been duly executed
and delivered by the Company and will constitute the valid and binding
agreements of the Company, enforceable against the Company in accordance with
their terms. Except as set forth in Schedule 6.3 hereto, the execution,
delivery and performance of this Agreement, and the other agreements
contemplated hereby or thereby and the consummation of the transactions
contemplated hereby and thereby by the Company will not: (i) violate any
provisions of law applicable to the Company; (ii) with or without the giving of
notice and/or the passage of time, conflict with, result in the breach of any
provision of, give any third party the right to terminate or to accelerate any
obligation under, or result in the creation of any Lien on the Purchased Assets
under, the Certificate of Incorporation or Bylaws of the Company or any
instrument, license, agreement, lease arrangement, indenture, mortgage, loan
agreement, commitment or order to which the Company is a party. or by which any
of its assets or properties are bound; or (iii) constitute a violation of any
order, judgment or decree to which the Company or any of its Affiliates which
are party hereto or thereto, is a party or by which any of its assets or
properties are bound.
(b) Parent has full power and authority to execute and deliver this
Agreement and all other agreements and instruments contemplated hereby or
thereby to which Parent is a party, to perform its obligations hereunder and
thereunder and to consummate the transactions
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<PAGE>
contemplated hereby and thereby. The execution, delivery and performance by
Parent of this Agreement, the other agreements and instruments contemplated
hereby and thereby and the transactions contemplated hereby and thereby have
been duly and validly authorized by Parent and no other corporate act or
proceeding on the part of Parent, its Board of Directors or its stockholders is
necessary to authorize the execution, delivery or performance by Parent of this
Agreement, or any other agreement or instrument contemplated hereby or thereby
or the consummation of the transactions contemplated hereby or thereby. This
Agreement has been duly executed and delivered by Parent and constitutes the
valid and binding agreement of Parent, enforceable against Parent in accordance
with its terms, as of the Closing, the other agreements and instruments
contemplated hereby or thereby to which Parent is a party will have been duly
executed and delivered by Parent and will constitute the valid and binding
agreements of Parent, enforceable against Parent in accordance with their terms.
Except as set forth in Schedule 6.3 hereto, neither the execution, delivery or
performance of this Agreement, and the other documents contemplated hereby or
thereby to which Parent is a party, nor the consummation of the transactions
contemplated hereby and thereby, will (i) conflict with or result in a breach of
any of the provisions of, (ii) constitute a default under, (iii) result in the
violation of, (iv) give any third party the right to terminate or to accelerate
any obligation under, (v) result in the creation of any Lien on the Purchased
Assets under, or (vi) require any authorization, consent, approval, execution or
other action by or notice of any court or other governmental body, under the
provisions of Parent's certificate of incorporation or bylaws or any indenture,
mortgage, lease, loan agreement or other agreement or instrument to which Parent
is bound or affected, or any statute, regulation, rule, judgment, order, decree
or other restriction of any government, governmental agency or court to which
Parent is subject.
6.4 Consents and Approvals. Other than the Sale Order and Final Orders
----------------------
relating to Lease Assignments, the execution and delivery by the Debtors of this
Agreement and the other agreements and instruments contemplated hereby and
thereby does not, and compliance by the Debtors with the terms hereof and
thereof and consummation of the transactions contemplated hereby and thereby
will not, require Purchaser, the Debtors to obtain any authorization, consent,
approval, exemption or action of, or make any filing with or give any notice to,
any court or administrative or governmental body or any other Person pursuant to
the Certificate of Incorporation or Bylaws of the Debtors or any law, statute,
rule, regulation, agreement, permit, license, instrument, order, judgment or
decree to which the Debtors or any of their assets is subject, except as
disclosed in Schedule 6.4 hereto or except as would not have a material adverse
effect on the transactions contemplated by this Agreement.
6.5 Absence of Violations. Except as disclosed in Schedule 6.5 hereto or
---------------------
except as would not have a material adverse effect on the transactions
contemplated by this Agreement, the Debtors are not in violation of its
Certificate of Incorporation or Bylaws, or in violation (or with or without
notice or lapse of time or both would be in violation), in any way with any term
or provision of (a) any law, statute, ordinance, rule, regulation, order, writ,
judgment, injunction, permit or decree applicable to the Debtors or any of its
assets, operations or properties or (b) any agreement, lease, or other document
by which it or any of them or any of its assets or properties is bound.
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6.6 Licenses and Permits. Except as indicated on Schedule 6.6 or except
--------------------
as would not have a material adverse effect on the transactions contemplated by
this Agreement, the Debtors own or possess all right, title and interest in and
to all permits, licenses, certificates, approvals and other authorizations of
federal, state and local governments or other similar rights (collectively, the
"Licenses") that are necessary to own and operate the Stores, the Warehouses
--------
and/or Purchased Assets, including, without limitation, all Licenses required
under any federal, state or local law relating to public health and safety,
employee health and safety, pollution or protection of the environment. The
Debtors are in compliance with the terms and conditions of such Licenses and has
received no notices that it is in violation of any of the terms or conditions of
such Licenses. The Debtors have taken all necessary action to maintain such
Licenses. No loss or expiration of any such License is threatened, pending or
reasonably foreseeable other than expiration in accordance with the terms
thereof.
6.7 Inventories.
-----------
(a) The Debtors own and will own at all times prior to the Closing
good and marketable title to all of the Merchandise included in the Purchased
Assets and other Purchased Assets, free and clear of all Liens, other than Liens
that, pursuant to the Sale Order, will attach only to the proceeds of the sale
of the Purchased Assets pursuant to this Agreement.
(b) The Cost Value of the Saleable Inventory included in the
Purchased Assets shall be at least $140 million at Closing.
(c) Since July 1, 1997 and through the Closing Date, all normal
course permanent markdowns on Merchandise located at the Stores will have been
taken on a basis consistent with the Company's customary practices and policies.
(d) The Debtors have not since July 1, 1997, and shall not up to the
Closing Date, marked up or raised the price of any items of Merchandise, or
removed or altered any tickets or any indicia of clearance merchandise, except
in the ordinary course of business.
(e) Since July 1, 1997 and through the Closing Date, the Debtors
shall have ticketed or marked all items of inventory received at the Stores
prior to the Closing Date in a manner consistent with similar inventory located
at the Stores and in accordance with the Debtors' customary practices and
policies relative to pricing and marking inventory. The ticketed price of all
items of inventory do not include Sales Taxes.
(f) Since July 1, 1997, all point of sale activity at the Stores has
occurred and will occur up to the Closing Date in the ordinary course of
business.
(g) The Debtors have not since July 1, 1997 and shall not up to the
Closing Date purchase or transfer to or from the Stores any inventory outside
the ordinary course, including, without limitation, transfers in anticipation of
the Store Closing Sales or the Inventory Taking. The Debtors have not and shall
not move inventory or Merchandise to or from the Stores so as to alter the
inventory mix, quantities or categories, except in the ordinary course.
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<PAGE>
(h) Supplies (e.g. boxes, bags, twine) have not been since July 1,
1997, and shall not be prior to the Closing Date, transferred by Parent from the
Company or between or from the Stores, so as to alter the mix or quantity of
supplies at the Stores from that existing on July 1, 1997, other than in the
ordinary course of business. '
(i) The Debtors have maintained their pricing files in the ordinary
course of business, and prices charged to the public for Merchandise (whether
in-Store, by advertisement or otherwise) are the same in all material respects
as set forth in such pricing files for the periods indicated therein. All
pricing files and records, which include the Merchandise Condition Report, since
April, 1997 relative to the Merchandise have been made available to Purchaser.
All such pricing files and records are true and accurate in all material
respects as to the actual cost to Debtors for purchasing the goods referred to
therein and as to the selling price to the public for such goods as of the dates
and for the periods indicated therein.
(j) To the best of the Debtors' knowledge, all Merchandise is in
compliance with all applicable federal, state or local product safety laws,
rules and standards. The Debtors have provided Purchaser with their historic
policies and practices regarding product recalls prior to the Inventory Taking.
(k) Since July 1, 1997, through the Closing Date, Debtors have not
taken any actions the result of which is to materially increase the cost of
operating the Store Closing Sales, including, without limitation, increasing
salaries or other amounts payable to employees.
(l) With respect to the Purchased Assets or the Leases, as of the
date of hereof, the Debtors are current in the payment of all post-petition
rent, telephone, utilities, taxes, insurance and advertising liabilities.
6.8 Insurance. The insurance coverage for the Company is customary for
---------
well-insured businesses of similar size engaged in similar lines of business.
Except as set forth on Schedule 6.8 hereto, to the knowledge of the Company and
Parent, all insurance policies which cover the Company prior to Closing Date
will continue to provide coverage after the Closing Date in amounts with
deductibles consistent with those currently in effect for all occurrences
(regardless of when the claim is made) prior to the Closing Date.
6.9 Assets. To the knowledge of the Debtors, the Purchased Assets are in
------
good working condition, subject to ordinary wear and tear resulting from
continued operations in the ordinary course of business, have been properly
maintained, are suitable for their present and intended uses and, in the case of
any improvements, are structurally sound, and there is no defect in any of the
Purchased Assets which individually or in the aggregate reasonably could have a
material adverse effect on the use, condition, value, or operations of its
business.
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<PAGE>
6.10 Real Properties.
---------------
(a) Schedule 6.10 hereto identifies all stores and warehouses used in
the conduct of the Lechmere and Home Image businesses.
(b) Except as set forth in Schedule 6.10, each Debtor has (i)(A) with
respect to the Real Estate, good and indefeasible fee simple title to such
properties, free and clear of all liens, leases, security interests, charges,
restrictions and encumbrances, including, without limitation, encumbrances
relating to financial arrangements (including, without limitation, guarantees,
pledges, collateral assignments and other similar arrangements) (collectively
"Liens"), except for Liens if any, for real property taxes not yet due and
- ------
payable and Liens which, individually or in the aggregate, do not materially
detract from the value, or interfere with the present or intended use, of the
property subject thereto and (B) with respect to such real properties leased by
it, valid and subsiding leases for the term set forth with respect to each such
lease on Schedule 6.10 and (ii) all easements and rights, including but not
limited to easements for power lines, water lines, sewers and roadways,
necessary to conduct the business conducted on such properties. There are no
leases, subleases, licenses, concessions or other agreements, written or oral,
granting to any person the right of use or occupancy of the Real Estate or any
portion thereof and, other than the right of Purchaser pursuant to this
Agreement, there are no outstanding options or rights of first refusal to
purchase any such properties or any portion thereof or interest therein.
(c) Schedule 6.10 identifies all leases (including all amendments
thereto). Complete and correct copies of all leases referred to in Schedule
6.10 have been delivered to or made available for inspection by Purchaser and
none of such leases or policies have been modified in any material respect
except to the extent that such modifications are disclosed by the copies
delivered to or made available for inspection by Purchaser.
(d) Except as otherwise disclosed in Schedule 6.10 hereto or as a
result of the filing of the Bankruptcy Case, to the best of the Company's and
Parent's knowledge, neither the Company, nor any other party thereto, is in
material default or breach of any leases identified on Schedule 6.10, no fact or
circumstance exists which, with the passage of time or the giving of notice,
could become a material default or breach of any such lease and all such leases
shall remain in full force and effect notwithstanding the transactions
contemplated hereby.
(e) All such real properties have access to public roads.
(f) To the knowledge of the Debtors, all Stores and Warehouses,
including buildings and improvements located thereon conform in all material
respects to all applicable subdivision, building code, health, safety and zoning
ordinances, and other laws, regulations and requirements relating to the use and
operation thereof.
6.11 Tangible Personal Property. Except as set forth on Schedule 6.11
--------------------------
hereto: (a) the Debtors have and as of the Closing will have good and
marketable title to all of the items of tangible personal property included in
the Purchased Assets and the other Purchased Assets; and
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<PAGE>
(b) all such tangible personal property together with the other Purchased Assets
is owned free and clear of any Liens, other than Liens that, pursuant to the
Sale Order, will attach only to the proceeds of the sale of the Purchased Assets
pursuant to this Agreement, including without limitation, Liens in connection
with financial arrangements such as guarantees, pledges, collateral assignments
and other similar arrangements. The Purchased Assets, together with the Excluded
Assets, constitute all of the assets used by the Debtors in the conduct of its
business at the Stores and Warehouses.
6.12 [Intentionally omitted]
6.13 Disclosure. No representation or warranty of the Company or Parent
----------
contained in this Agreement nor any schedule, attachment or exhibit hereto, and
no statement contained herein or in any certificate or document furnished to
Purchaser pursuant to the transactions contemplated hereby, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein not misleading. There
is no fact or condition known to the Company or Parent which has not been
disclosed to Purchaser and which materially affects adversely, or could
reasonably be expected to materially affect adversely, the financial condition,
operating results, assets, supplier relations or business prospects of the
Company or the Purchased Assets.
6.14 Closing Date. The representations and warranties of the Company and
------------
Parent contained in this Article 6 and elsewhere in this Agreement and all
information contained in any exhibit, schedule or attachment hereto or in any
writing delivered by, or on behalf of, the Company or Parent to Purchaser will
be true and correct in all material respects on the Closing Date as though then
made.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Debtors as follows:
7.1 Due Incorporation, Etc. Purchaser is a limited liability company duly
-----------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
7.2 Authorization, No Conflicts, Etc. Purchaser has all requisite
---------------------------------
corporate power and authority to enter into this Agreement and the other
agreements and instruments contemplated hereby and thereby to which it is a
party and to carry out the transactions contemplated hereby and thereby. The
execution, delivery and performance of this Agreement the other agreements and
instruments contemplated hereby and thereby and the consummation of the
transactions contemplated hereby and thereby by Purchaser have been or prior to
the Closing will be duly authorized by all requisite corporate action of
Purchaser. This Agreement has been duly executed and delivered by Purchaser and
constitutes the valid and binding obligations of Purchaser, enforceable against
it in accordance with its terms. As of the Closing Date, the other agreements
contemplated hereby and thereby to which Purchaser is a party will have been
duly
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<PAGE>
executed and delivered by Purchaser and will constitute the valid and binding
obligations of Purchaser, enforceable against Purchaser in accordance with their
terms. The execution, delivery or performance of this Agreement and the other
documents contemplated hereby to which Purchaser is a party, and the
consummation of the transactions contemplated hereby and thereby, will not (i)
conflict with or result in a breach of any of the provisions of, (ii) constitute
a default under, (iii) result in the violation of, (iv) give any third party the
right to terminate or to accelerate any obligation under, or (v) require any
authorization, consent, approval, execution or other action by or notice of any
court or other governmental body, under the provisions of Purchaser's
Certificate of Incorporation or Bylaws or any indenture, mortgage, lease, loan
agreement or other agreement or instrument to which Purchaser is bound or
affected, or any statute, regulation, rule, judgment, order, decree or other
restriction of any government, governmental agency or court to which Purchaser
is subject.
7.3 Closing Date. The representations and warranties of Purchaser
------------
contained in this Article 7 and elsewhere in this Agreement and all information
contained in any exhibit, schedule or attachment hereto or in any writing
delivered by, or on behalf of, Purchaser to the Debtors will be true and correct
in all material respects on the Closing Date as though then made.
ARTICLE 8
COVENANTS PRIOR TO CLOSING
8.1 Affirmative and Negative Covenants Pending Closing. Except as
--------------------------------------------------
expressly set forth below, during the period from August 6, 1997 to the Closing
Date, the Company and the Parent covenant and agree that they each shall, unless
otherwise agreed with Purchaser:
(a) Affirmative Covenants Pending Closing.
-------------------------------------
(i) Preservation of Personnel. Use commercially reasonable
-------------------------
efforts to preserve intact and keep available the services of the Debtors'
present employees usually employed at the Stores and Warehouses;
(ii) Insurance. Use commercially reasonable efforts to keep in
---------
effect all insurance policies described in Section 6.8 and other customary
casualty, public liability, product liability, worker's compensation and
other insurance policies through the Closing Date, in coverage amounts not
less than those in effect at the date of this Agreement;
(iii) Preservation and Advancement of the Business; Maintenance
---------------------------------------------------------
of Properties, Contracts. Continuously operate the business conducted at
------------------------
the Stores during normal operating hours, keep its properties intact,
perform its agreements and obligations, pay its post-petition payables
promptly as they become due (without extension) in accordance with the
terms thereof, maintain all of its physical properties in good repair and
operating condition, subject only to ordinary wear and tear, and in
accordance with the terms and provisions of the Leases;
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<PAGE>
(iv) Ordinary Course of Business. Except with respect to
---------------------------
replenishment which Purchaser acknowledges has not occurred and will not
occur in the ordinary course, operate the business conducted at the Stores
and Warehouses solely in the ordinary course and in the normal, usual and
customary manner. Without limiting the foregoing:
(A) no prices have been or will be raised and no pricing
files altered since July 1, 1997, other than prices for items put on
and taken off sale in the ordinary course of business;
(B) all ticketing, including ticketing of on-order
inventory received, has been and will be done in accordance with
Debtors customary ticketing practices;
(C) all normal course hard markdowns have been and will
be taken consistent with customary practices, including, without
limitation, markdowns on defective and unsalable inventory;
(D) Debtors have not and shall not transfer to or from
the Stores and Warehouses any inventory outside the ordinary course of
business, including, without limitation, transfers in anticipation of
the Store Closing Sales or the inventory taking. No movement of
inventory to or from the Stores and Warehouses so as to alter
inventory mixes, quantities or categories, except in the ordinary
course has occurred or will occur from and after July 1, 1997;
(E) no sales or in-store promotions (including POS
promotions) to the public have been or will be promoted or advertised,
except for the Debtors' historic and customary promotions for all of
their locations.
(b) Negative Covenants Pending Closing. Except as expressly set forth
----------------------------------
below, the Company and the Parent each shall not, without the consent of
Purchaser:
(i) Disposition of Assets. Sell or transfer, or mortgage,
---------------------
pledge or create or permit to be created any Lien on any of the Purchased
Assets other than the sale
of
inventory in the ordinary course of business consistent with past practice;
(ii) Contracts. Reject any contract relating to the Purchased
---------
Assets or the Stores or seek or obtain an order approving such rejection in
which the reference date of the rejection is prior to the final day of the
Store Closing Sale at the Store at which the Purchased Assets are situated.
(iii) Leases. Renew or amend Leases, enter into leases or grant
------
or terminate any other interests in the Stores; or
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(iv) Disclosures. Take any action which would require
-----------
disclosure under Section 6.13 hereof.
(v) Inventory Level. Have less than $140 million of Saleable
---------------
Inventory at Cost Value.
(vi) Encumbrances. Encumber, sublease or otherwise grant any
------------
rights with respect to the Real Estate and Leases.
8.2 Investigation by Purchaser. The Debtors shall allow Purchaser and its
--------------------------
representatives and financing sources, during regular business hours, to make
such investigation of the business, properties, employees, auditors, books and
records of the Company and the Parent to the extent such investigation relates
to the Stores or Purchased Assets, and to conduct such examination of the
financial condition of the Company, as Purchaser deems necessary or advisable to
familiarize itself with such business, properties, books, records, financial
condition and other matters, including with respect to all operating and
environmental matters. The Debtors shall cooperate in providing all information
reasonably requested by Purchaser relating to the Purchased Assets, the Leases
or the transactions contemplated hereby, including with respect to insurance and
Licenses.
8.3 Consents and Further Actions. Subject to the terms and conditions
----------------------------
herein provided, Parent, the Company and Purchaser covenant and agree to use
their best efforts to take, or cause to be taken, all action, or do, or cause to
be done, all things, necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including all closing conditions to be satisfied.
ARTICLE 9
COVENANTS AFTER CLOSING
9.1 Store Closing Sales.
-------------------
(a) Debtors hereby grant and convey to the Purchaser an irrevocable
nonexclusive license to occupy and operate the Stores as Debtors' agent, for the
purpose of conducting store closing sales or other sales (the "Store Closing
-------------
Sales") in accordance with the provisions of this Section 9.1.
- -----
(b) The Store Closing Sales shall commence after the Closing (the
time of such commencement, the "Sale Commencement Date"). The Store Closing
----------------------
Sales shall terminate no later than twelve (12) complete weeks after the Closing
Date or as may be extended by Purchaser on a Store by Store basis (including for
purposes of calculation the Sale Commencement Date) (the "Sale Termination
----------------
Date"). "Sale Term" shall mean the period between the Sale Commencement Date and
- ---- ---------
Sale Termination Date at each respective Store. Purchaser may, at its sole
discretion, terminate the Store Closing Sales at any Store prior to the Sale
Termination Date; provided, however, that in no event may the Store Closing
-------- -------
Sales at any of
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<PAGE>
the Stores be conducted after the Sale Termination Date unless mutually agreed
by Debtors and Purchaser in writing and in such event no further Court approval
or order or notice to third parties is required. Purchaser's representatives,
supervisors and employees shall have the right to enter any Store and the use of
one office in the Debtors' corporate offices during normal business hours on or
after the date hereof to prepare for the Store Closing Sales, and the Debtors
shall cooperate reasonably with Purchaser in such preparation.
(c) Purchaser shall conduct the Store Closing Sales under the name of
"Lechmere" and "Home Image" and derivatives thereof and, subject to the Sale
Order, shall have the right to conduct the Store Closing Sales in the manner
which Purchaser deems appropriate, including by advertising, posting signs or
otherwise promoting the Store Closing Sales as a "store closing" or a "going out
of business" or similar type sale without further consent of any person
notwithstanding the terms of any Lease that purport to restrict the conduct of
such Store Closing Sales. In addition to any other rights granted to Purchaser
hereunder and subject to entry of the Sale Order, in conducting the Sales, the
Purchaser, in the exercise of its sole discretion, shall have the right:
(i) to establish and implement advertising, signage, and promotion
programs consistent with the "store closing" or "going out of
business" theme (including without limitation, by means of media
advertising, banners, A-frame, and similar interior and exterior
signs);
(ii) to establish sale prices and Store hours;
(iii) to use without charge during the Sale Term all furniture,
fixtures and equipment in the Stores and Warehouses, motor
vehicles, advertising materials, bank accounts, Store-level
customer lists and mailing lists, computer hardware and
software, intangible assets (including Company's name, logo and
tax identification numbers), Store keys, case keys, security
codes and safe and lock combinations required to gain access to
and operate the Stores, and any other assets of Company located
at the Stores or the Warehouses (whether owned, leased, or
licensed);
(iv) to transfer Merchandise between Stores and/or between the
Stores, the Warehouses and other stores of Merchant and its
affiliates; and
(v) to use (i) Company's central office facilities, central and
administrative services and personnel to process payroll,
perform MIS services and cash reconciliation, and provide other
central office services necessary for the Sale, and (ii) one
office located at Company's central office facility.
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<PAGE>
(d) The Sale Order shall provide that each and every federal, state
or local agency, department or governmental authority with regulatory authority
over the Store Closing Sales and all newspapers and other advertising media in
which the Store Closing Sales are advertised shall be directed to accept the
Sale Order as binding and to allow the Debtors and Purchaser to consummate the
transactions provided for in this Agreement, including, without limitation, the
conducting and advertising of the Store Closing Sales in the manner contemplated
by this Agreement, that no further approval, license or permit of any
governmental authority shall be required, and that all utilities, landlords,
creditors and all persons acting for or on their behalf shall not interfere with
or otherwise impede the conduct of the Store Closing Sales, institute any action
in any court (other than in the Court) or before any administrative body or any
other tribunal of any kind or type which in any way directly or indirectly
interferes with or obstructs or impedes the conduct of the Store Closing Sales.
(e) Debtors shall notify all customers having Layaway, Repair, and
Special Order Merchandise as disclosed to Purchaser in writing prior to the Sale
Commencement Date (the "Layaway Items") that they have seven (7) days from the
-------------
Sale Commencement Date (the "Layaway Pick-Up Date") to pick up and pay in full
--------------------
or pay off all amounts due and owing for the Layaway Items. Any amounts paid
for such Layaway Items on or before the close of business in the Stores on the
Layaway Pick-Up Date shall be the sole account of Purchaser.
(f) Debtors hereby agree that Debtors shall take no action relating
to the Stores which would disturb Purchaser's peaceful and quiet possession
thereof pursuant to the license granted in Section 9.1.
(g) During the Sale Term, Purchaser shall accept returns of goods
sold by the Debtors from the Stores prior to the Sale Commencement Date
("Returned Merchandise"), provided such goods are accompanied by the original
--------------------
Store receipt and such return is otherwise in accordance with the applicable
return policy for such Store in effect prior to the Sale Commencement Date. The
Debtors shall reimburse Purchaser in cash for the amount of any store credit or
refund given to any customer in respect of Returned Merchandise. To the extent
that Returned Merchandise is salable as first quality inventory, it shall be
included in Merchandise and for purposes of calculation of the Guaranteed
Amount, shall be valued at the Cost Value applicable to such item multiplied by
the compliment of the prevailing Sale discount at the time of the return. If the
Returned Merchandise constitutes Defective Merchandise, it shall be included in
Merchandise and assigned a Cost Value in accordance with the applicable
provisions of Section 2.4 above. Subject to the Debtors' reimbursement to
Purchaser of the amount of any store credit or refund granted for any Returned
Merchandise, the aggregate Cost Value of the Merchandise shall be increased by
the Cost Value of any Returned Merchandise included in Merchandise (determined
in accordance with this paragraph 9.l(b)), and the Guaranteed Amount shall be
adjusted accordingly. Any Returned Merchandise which is not included in
Merchandise shall be disposed of by Purchaser in accordance with instructions
received from the Debtors or, in the absence of such instructions, returned to
the Debtors at the end of the Sale Term. Any increases in the Guaranteed Amount
and any reimbursements due to Purchaser as result of Returned Merchandise shall
be accounted for and paid by Purchaser and/or the Debtors, as applicable, as
soon as practicable.
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<PAGE>
(h) Purchaser hereby agrees to accept gift certificates issued by the
Debtors prior to the Closing Date, and the Debtors agree to reimburse Purchaser
for the full amount of any such gift certificates accepted promptly upon receipt
of a statement from Purchaser detailing such gift certificates.
(i) To the extent practicable and otherwise permitted by applicable
law, Purchaser shall sell service contracts in appliances, stain protection in
furniture and product replacement warranties on behalf of and in the name of the
Debtors in other areas at the discretion of the Debtors. All proceeds of such
sales, less a sales commission of 10% to which Purchaser shall be entitled,
shall accrue for the benefit of the Debtors; provided that the Debtors reimburse
--------
Purchaser for all costs and expenses incurred by or on behalf of the Debtors in
connection with such sales. In no event shall Purchaser have any liabilities
under any such warranties or contracts.
(j) During the Sale Term, Purchaser shall have the nonexclusive right
to the quiet, peaceful and uninterrupted use of the Stores for the Store Closing
Sales and to the reasonable use of all utilities necessary for the Store Closing
Sales including, without limitation, gas, electricity and water, and all
leasehold improvements. Nothing contained in this paragraph (j) is intended to,
nor shall it constitute, Purchaser's election or direction to assume or assign
any lease under Section 11.1 or otherwise. The Debtors shall not, throughout
the Sale Term, take any actions the result of which is to materially increase
the cost to Purchaser of operating the Store Closing Sales, including, without
limitation, increasing salaries or other amounts payable to employees.
(k) At the end of the Sale Term in each Store and, in any event, not
later than the Sale Termination Date applicable thereto, Purchaser shall leave
each Store in "broom clean" condition and shall repair damage to the premises
caused by removal, if any, of the Store Fixtures by Purchaser or actions of
Purchaser, ordinary wear and tear excluded; provided however, Purchaser shall
-------- -------
not be obligated to leave in broom clean condition any Store that is the subject
of an Assigned Lease.
(l) Except as otherwise contemplated in this Agreement or the Sale
Order, including in connection with the conduct of the Store Closing Sales,
Purchaser will comply with applicable law.
9.1A-1. Proceeds. For purposes of this Section 9.1A, "Proceeds" shall
-------- --------
mean the aggregate of: (a) the total amount (in dollars) of all sales of
Merchandise under this Agreement, exclusive of (i) Sales Taxes, (ii) credit card
and bankcard fees and chargebacks, and (iii) returns, allowances and customer
credits; and (b) all proceeds of Merchant's insurance for loss or damage to
Merchandise or loss of cash arising from events occurring during the Sale Term.
Purchaser shall be entitled to retain, as its sole and exclusive property, all
Proceeds, free and clear of Liens.
9.1A-2. Deposit of Proceeds. All cash Proceeds shall be deposited by
-------------------
Purchaser in agency accounts established by Purchaser (the "Accounts").
--------
Purchaser may, in its discretion,
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<PAGE>
designate new or existing accounts of Purchaser or Company as the Accounts,
provided that such accounts are dedicated solely to the deposit of Proceeds and
the disbursement of amounts payable by Purchaser hereunder. Purchaser shall
exercise sole signatory authority and control with respect to the Accounts.
Company shall promptly upon Purchaser's request execute and deliver all
necessary documents to open and maintain the Accounts. To the extent that
Purchaser shall elect to use existing accounts of Company as the Accounts, (i)
commencing on the first business day following the Sale Commencement Date, and
on each business day thereafter, Company shall pay to Purchaser by wire funds
transfer all collected funds constituting Proceeds deposited in such Accounts,
and (ii) upon request, Company shall deliver to Purchaser copies of all bank
statements and other information relating to such Accounts. Company shall not be
responsible for and Purchaser shall pay as an expense hereunder, all bank fees
and charges, including wire transfer charges, related to the Accounts, whether
received during or after the Sale Term.
9.1A-3. Credit Card Proceeds. Purchaser shall have the right (but not the
--------------------
obligation) to use Company's credit card facilities (including Company's credit
card terminals and processor(s), credit card processor coding, merchant
identification number(s) and existing bank accounts) for credit card Proceeds.
In the event that Purchaser elects so to use Company's credit card facilities,
Company shall process credit card transactions on behalf of Purchaser and for
Purchaser's account, applying customary practices and procedures. Without
limiting the foregoing, Company shall cooperate with Purchaser to down-load data
from all credit card terminals each day during the Sale Term and to effect
settlement with Company's credit card processor(s), and shall take such other
actions necessary to process credit card transactions on behalf of Company under
Purchaser's merchant identification number(s). All credit card Proceeds will
constitute the property of the Purchaser and shall be held by Company in trust
for Purchaser. Company shall deposit all credit card Proceeds into a designated
account and shall transfer such Proceeds to Purchaser daily (on the date
received by Company if received prior to 12:00 noon, or otherwise within one
business day) by wire transfer of immediately available funds. At Purchaser's
request, Company shall cooperate with Purchaser to establish merchant
identification numbers under Purchaser's name to enable Purchaser to process all
credit card Proceeds for Purchaser's account. Company shall not be responsible
for and Purchaser shall pay as an expense hereunder, all credit card fees,
charges, and chargebacks related to the sale, whether received during or after
the Sale Term. Notwithstanding anything to the contrary contained in this
Section 9.1A-3, Purchaser shall not have the right to use Company's private
label charge cards.
9.1A-4. The Sale Order shall grant Purchaser a first priority security
interest in the Merchandise to secure the payment of the Proceeds to Purchaser
and such first priority security interest shall be effective without the
necessity of filing or recording any instrument or UCC statement.
9.2 Services.
--------
(a) (i) For the period of the Sale Term the Debtors shall, or shall
cause their affiliates to, provide to the Purchaser and its subsidiaries
services necessary for the Purchaser to conduct the Store Closing Sales and
liquidate the Purchased Assets, including without limitation those services
described on Exhibit 9.2 (the "Services"), as may be requested by the Purchaser
----------- --------
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<PAGE>
from time to time upon reasonable notice. In providing the Services, each
Debtor, as it deems necessary or appropriate in its sole discretion, may (x) use
such personnel of such Debtor or its affiliates, and (y) employ the services of
third parties to the extent such third party services can be effectively
utilized to provide similar services or are reasonably necessary for the
efficient performance of any of such services.
(ii) If the Purchaser would like Debtors to provide any
services relating to the business in addition to the Services, the Purchaser
shall so notify Debtors and during the five days following the receipt of such
notice Debtors and the Purchaser will mutually discuss the matter and negotiate
in good faith with a view toward the provision of such services.
(iii) Unless otherwise agreed by the parties hereto, the nature
and scope of the Services shall be essentially identical to the nature and scope
of the tasks involved in operating the Stores and the Warehouses prior to the
Closing, with such variance as is reasonably related to the Store Closing Sales
as conducted by the Purchaser. Unless otherwise agreed by the parties hereto,
the nature and scope of Services shall be essentially identical to the services
the Parent provided to the Company during the period prior to Closing to the
extent the Parent continues to perform such services with respect to its own
internal organization; provided that Debtors may not terminate, or reduce in any
--------
material respect the amount or scope of, the Services hereunder pursuant to the
foregoing sentence without giving reasonable advance written notice to the
Purchaser.
(b) Limited Warranty. Debtors will provide the Services hereunder in
----------------
good faith, with the care and diligence that they exercise in the performance of
such services for their operations and affiliates. The Purchaser hereby
acknowledges that Debtors do not regularly provide to third parties services
such as the Services as part of their business and that, except as set forth in
this subsection (iii), Debtors do not otherwise warrant or assume any
responsibility for their Services. The warranty stated above is in lieu of and
exclusive of all other representations and warranties of any kind whatsoever.
(c) Transition. At any time during the term of this Agreement, the
----------
Purchaser may request Debtors to discontinue performing all or any portion of
the Services upon 10 days' prior notice or as otherwise provided on Exhibit 9.2.
-----------
(d) Performance Remedy. In the event Debtors fail to provide a
------------------
Service hereunder, or the quality of a Service is not in accordance with Section
9.2(a)(iii) above, the Purchaser will give Debtors prompt written notice
thereof. Debtors will then have a reasonable period of time to cure the
defective Service. If after such period Debtors have failed to cure the
defective Service, in addition to any other remedy available to the Purchaser,
the Purchaser may seek an alternative provider for such Service and Debtors
shall promptly discontinue performing such Service at the written request of the
Purchaser.
(e) Staffing. As part of the Services, (i) Purchaser may use the
--------
Debtors' employees in the conduct of the Store Closing Sales to the extent
Purchaser in its sole discretion deems expedient, and Purchaser may select and
schedule the number and type of the Debtors'
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<PAGE>
employees required to perform such Services. Such staffing shall in any case be
reasonable staffing for the provision of the Services, including, but not
limited to, stocking, merchandising, maintenance and sales staff and
supervisors, professionals, or otherwise. Purchaser shall identify any such
employees to be used in connection with the provision of the Services (each such
employee, a "Retained Employee") prior to the Sale Commencement Date. Purchaser
-----------------
will have no responsibility whatsoever with respect to the Retained Employees
other than to pay the fees for the Services to the Debtors in accordance with
Section 9.3 hereof and nothing contained in this Agreement and none of
Purchaser's actions taken in respect of the Store Closing Sales shall be deemed
to constitute an assumption by Purchaser of any of the Debtors' obligations
relating to any of the Debtors' employees including, without limitation, Worker
Adjustment Retraining Notification Act ("WARN Act") claims and other termination
type claims and obligations, or any other amounts required to be paid by statute
or law; nor shall Purchaser become liable under any collective bargaining or
employment agreement or be deemed a joint or successor employer with respect to
such employees. Without limiting the generality of the foregoing, it is
expressly acknowledged that all Retained Employees providing Services at or with
respect to the Stores and the Warehouses remain under the sole management
control of the Debtors, subject to the Purchaser's directions to the Debtors as
provided herein, and that the Debtors are providing the Services in its capacity
as an independent contractor.
(ii) Purchaser may in its discretion stop using any Retained
Employee at any time during the Store Closing Sales. In the event Purchaser
desires to cease using any Retained Employee, Purchaser will use all reasonable
efforts to notify the Debtors at least five (5) days prior thereto, except if
such termination is "for cause" (such as dishonesty, fraud or breach of employee
duties), in which event no prior notice to the Debtors shall be required,
provided Purchaser shall notify the Debtors as soon as practicable thereafter.
- --------
From and after the date of this Agreement and until the Sale Termination Date,
the Debtors shall not transfer or dismiss employees of the Stores except "for
cause" without Purchaser's prior consent.
(f) Independent Contractors. The Debtors are acting as independent
-----------------------
contractors in providing the Services. Nothing in this Agreement is intended or
shall be deemed to constitute a partnership, agency, franchise or joint venture
relationship between the Debtors and Purchaser, except in connection with the
Store Closing Sales, where Purchaser is acting as Debtor's agent. Debtors shall
not incur any debts or make any commitments for the Purchaser, except to the
extent, if at all, specifically provided herein. Nothing in this Agreement
shall constitute or deem the Purchaser to be an employer of the Debtors'
employees used to carry out the Services.
(g) Information Assistance. Each party will provide to the other
----------------------
party, free of any charge or cost, any information, data, or documents
reasonably required for reporting or compliance obligations with any
governmental entity, agency, or authority; provided that the provision of such
--------
information, data and documents does not result in any undue burden or expense
to the providing party.
9.3 Payments by the Purchaser.
-------------------------
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<PAGE>
(a) Fees. From the date the Store Closing Sales begin up to and
----
including, for each Store, the date the Store Closing Sales conclude at each
such Store, the Purchaser shall reimburse the Debtors for all direct Store level
third party out of pocket costs and expenses incurred in connection with the
Store Closing Sales at such Store, the operation of the Warehouses (to the
extent utilized by Purchaser) and provision of the Services, including base
rent, percentage rent, utilities, common area maintenance and real estate taxes
accrued during the Store Closing Sales at such Store, payroll costs and benefits
(not to exceed 15% of gross payroll) for Store level employees and Warehouse
level employees actually accruing during the term of the Store Closing Sales at
such Store or Warehouse, as applicable, insurance, armored car services, bank
fees and charge backs, telephone expenses, trash collection, security costs and
advertising and promotional expenses. Purchaser may, in its sole discretion,
make any payment required by this Section 9.3(a) directly to a third party
vendor; provided such payment is made in a timely manner. Subject to Section
11.2, notwithstanding anything else herein the Purchaser's obligations pursuant
to this Section 9.3(a) are Store specific, and cease at each Store upon the end
of the Sale Term in each Store. The Purchaser shall pay the Debtors out-of-
pocket cost and expenses for information management services, payroll processing
and similar services included in the Services, provided that the Purchaser shall
not be liable to pay the Debtors more than $20,000 per week for all such out-of-
pocket costs and expenses for such Services.
(b) Payment of Charges. Debtors shall invoice the Purchaser for all
------------------
amounts due under this Section 9.3 weekly. Payments shall be due five (5)
business days from the date of receipt of the invoice. The Purchaser and its
agents and representatives shall have the right to examine any and all books and
records as it reasonably requests in order to confirm and verify the amount of
any invoice pursuant to this Section 9.3 and Debtors shall cooperate in any
reasonable manner in such examination as the Purchaser shall request.
(c) Disputed Charges; Claims. In the event the Purchaser disputes any
------------------------
charges invoiced by Debtors pursuant to this Agreement, the Purchaser shall
deliver a written statement describing the dispute to Debtors within 5 days
following receipt of the disputed invoice. The statement shall provide a
sufficiently detailed description of the disputed items. Fees not so disputed
shall be deemed accepted. If the parties cannot resolve the dispute in a
mutually satisfactory manner, the dispute shall be submitted within 30 days from
the date of notice, to the Court for resolution. The Purchaser and the Debtors
shall each bear their own costs and expenses in connection with such resolution
by the Court.
9.4 Further Transfers and Assurances. Parent and the Company will, and
--------------------------------
will cause their Affiliates to, execute and deliver such further instruments of
conveyance and transfer and take such additional action as Purchaser may
reasonably request to effect, consummate, confirm or evidence the transfer to
Purchaser of the Purchased Assets. Parent and the Company will execute such
documents as may be necessary to assist Purchaser in preserving or perfecting
its rights in the Purchased Assets.
9.5 Communications. All mail and other communications relating to the
--------------
Purchased Assets and the Leases received by the Company or Parent at any time
after the Closing Date shall be promptly turned over to Purchaser. All mail and
other communications relating to the
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<PAGE>
Excluded Assets or the Excluded Liabilities or the Company received by Purchaser
at any time after the Closing shall be promptly turned over to the Company..
9.6 Taxes; Recording Charges; Escrow Fee; Rent Proration. All Taxes
----------------------------------------------------
relating to Real Estate due and payable after the Closing which relate to
periods prior to the Closing shall be the responsibility of the Debtors and
shall be prorated at Closing. All transfer, documentary, sales, use, stamp,
registration, conveyance, income, gains, value added or other Taxes and fees
arising out of the sale of the Purchased Assets or otherwise incurred in
connection with this Agreement or the consummation of the transactions
contemplated hereby and all charges for or in connection with the recording of
any document or instrument contemplated hereby shall be the responsibility of
the Debtors when due. The Debtors will, at their expense, file all necessary
Tax returns and other documentation in connection with the Taxes and fees
encompassed in this Section 9.6. The Debtors and Purchaser shall each pay one
half of the escrow fee charged by the Title Insurer. Purchaser shall pay to the
Debtors an amount equal to the rent and all third-party out of pocket recurring
charges incident to the Leases for the period commencing on the Closing Date and
ending on August 31, 1997. At the Debtors' request, Purchaser will provide to
the Debtors at the Closing a certificate which sets forth the Purchase Price
allocated to the Real Estate; provided that in no event shall such allocation
exceed $15,000,000 in the aggregate.
9.7 License of Excluded Proprietary Rights. The Debtors hereby grant to
--------------------------------------
Purchaser a license to use all Proprietary Rights which are used in, useful for
or otherwise associated with the ownership and operation of the Purchased
Assets, the Stores and the Leases, including the use of the names "Lechmere" and
"Home Image" in connection with the Store Closing Sales, from the Closing Date
through the date which is 300 days after the Closing Date.
9.8 Agent. The Purchaser agrees to act as the Debtor's agent, and the
-----
Debtors hereby appoints the Purchaser their agent until the end of the Store
Closing Sales.
9.9 Access to Documents. For a period of 5 years from the Closing Date
-------------------
the Debtors shall permit the Purchaser reasonable access during normal business
hours, at no cost to the Purchaser, to all books, ledgers, files, documents,
correspondence and business records necessary for the operation of the Stores
and the Warehouses or related to the Purchased Assets, including, without
limitation, all telephone numbers, related sales and billing information,
manuals, files (including sales, billing, service and accounting information)
software, brochures and sales and marketing materials and all lists and records
pertaining to customers, suppliers and distributors.
9.10 Insurance. To the extent requested by Purchaser, the Debtors shall
---------
name Purchaser and/or its nominee(s) as an additional insured on their insurance
policies to the extent such policies relate to the Purchased Assets and the
Leases. Purchaser shall name Debtors as an additional insured on Purchaser's
general liability policies and Purchaser will not cancel such insurance policies
without Debtors' prior written consent. Without the prior written consent of
Purchaser, the Debtors will not cancel any insurance policy (i) relating to the
Real Estate prior to 30 days after the Closing Date or (ii) relating to a Lease
until the earlier of the Deemed Rejection Date with respect to such Lease or the
date of the Lease Assignment Order with respect to such Lease. Purchaser shall
be named as an additional insured on any insurance relating to the Real
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<PAGE>
Estate and the proceeds from any casualty or condemnation in whole or in part
relating to the Real Estate shall be subject to the terms and provisions of
Section 11.8. The cost of such insurance shall be borne by Purchaser.
ARTICLE 10
INTENTIONALLY DELETED
ARTICLE 11
LEASES/REAL ESTATE
11.1 Lease Assignment Election. Purchaser shall have the right to
-------------------------
designate at any time from time to time for a period of 270 days after the Sale
Order is entered (hereinafter, the "Election Period") which of the Leases it
---------------
desires to acquire or to cause any one or more of its nominees, assignees or
designees to acquire (subject to the Court's issuance of an order (a "Lease
Assignment Order") in form and substance reasonably acceptable to Purchaser
authorizing and approving Debtors' assumption and assignment to Purchaser or its
nominee, assignee or designee a Lease Assignment Order). During the Election
Period, Purchaser shall have the right, which right may be exercised at any time
and from time to time in its sole and absolute discretion, to request in writing
that Debtors, under section 365 of the Bankruptcy Code, seek authority to
assume and assign to Purchaser or a third party designated by Purchaser any or
all of the Leases at no additional cost or expense to Purchaser other than cure
amounts required under Section 365(b) of the Bankruptcy Code. As soon as
practicable, but no later than three business days following Debtors' receipt of
a written request from Purchaser, at any time and from time to time within the
Election Period, seeking the assumption and assignment of any Lease to Purchaser
or a third party designated by Purchaser, Debtors shall use their best efforts
to obtain entry of a Final Order of the Bankruptcy Court approving the
assumption of the Leases identified in writing by Purchaser and the assignment
of such Leases to Purchaser or a third party as designated in such request
(each, an "Assigned Lease"). The term "best efforts" as used in this section
shall require Debtors to act as reasonably requested by Purchaser, provided
however, that such term shall not require Debtors to pay any funds or cure any
amounts or assume any claims but shall require Debtors to pay fees, costs and
expenses of its counsel in connection with the prosecution of any motion seeking
the entry of any such Final Order. Purchaser shall be entitled to keep and
retain, at no additional fee, cost or expense to Purchaser of any nature (except
for cure amounts, if any required under Section 365(b) of the Bankruptcy Code)
as its sole and exclusive property, and free and clear of any and all Liens
(other than those caused directly by Purchaser), any and all proceeds generated
by or resulting from the assignment or subletting of any one or more Leases to
any one or more third parties. Purchaser shall pay any and all cure amounts
required under section 365(b) of the Bankruptcy Code in respect of the Leases it
elects to require Debtors to assume and assign to Purchaser or any third party.
11.2 Rejected Leases. From and after the Closing, Debtors shall not
---------------
extend, reject or
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<PAGE>
otherwise terminate (or assume and assign to a third party or reject, without
Purchaser's prior written consent) any of the Leases until the earliest to occur
of (i) ten (10) days following the delivery by Purchaser to the Debtors of
written notice indicating that Purchaser waives its right to require Debtors to
assume and assign to it or a third party any one or more of the Leases specified
therein and that such Lease is to be rejected (a "Rejected Lease"), (ii) the
entry of an order by the Bankruptcy Court approving the assumption and
assignment of any such Lease to Purchaser or a third party designated by
Purchaser, and (iii) the conclusion of the Election Period. Upon the occurrence
of any of the events specified in (i), (ii) and (iii) of the preceding sentence,
(A) Purchaser shall have no further obligation or liability of any nature for
any amounts payable to the lessor under the applicable Lease or for any costs
associated with the Store or Warehouse to which the Lease relates, and (B)
Debtors shall be solely responsible for all amounts payable or other obligations
or liabilities that may be owed to the lessor under or in connection with such
applicable Lease, including, without limitation, any damages resulting from the
rejection of such Leases under section 365 of the Bankruptcy Code or otherwise
(subject only to the provisions of the Lease Guaranty), and for all costs
associated with the Stores to which such Leases relate. Promptly following (and
in no event later than two days thereafter) the delivery, at any time and from
time to time of the notice set forth in (i) of the first sentence of this
Section 11.2, Debtors shall seek the entry of an order approving the rejection
of the Leases identified in the notice.
11.3 Costs and Expenses. With respect to each Lease, without duplication
------------------
of amounts payable under Section 9.3, the Purchaser shall bear all third party
out of pocket recurring charges incident to such Lease from the Closing Date up
to and including (i) in the case of an Assigned Lease, the date of the related
Lease Assignment Order and (ii) in the case of a Rejected Lease, the earlier of
(x) the date that the Debtors are relieved of liability under such Lease or (y)
the Deemed Rejection Date, but not earlier than ten days from the date Purchaser
gives a designation that it wishes such Lease to be a Rejected Lease under
Section 11.2. Purchaser may, in its sole discretion, make any payment required
by this Section 11.3 directly to a third party vendor; provided such payment is
made in a timely manner. Nothing shall be deemed to require Purchaser or any
Affiliate to make any material repairs or capital expenditures with respect to
any Stores subject to any Lease and Purchaser may not compel the Debtors to make
any such material repair or capital expenditure.
11.4 Master Lease. (a) Subject to entry of the Sale Order with the
------------
provisions set forth in Section 11.4(b) hereof, notwithstanding anything
contained in this Agreement to the contrary, the Company acknowledges that the
Master Lease is a single lease for the entire premises described therein (the
"Master Lease Premises") and is not severable or divisible into separate leases
- ----------------------
for separate locations or subsets of locations within the Master Lease Premises.
Pursuant to the Sale Order, the Company hereby rejects the Master Lease pursuant
to Section 365 of the Bankruptcy Code, effective at the conclusion of the last
of the Store Closing Sales in the Master Lease Premises (the "Master Lease
------------
Deemed Rejection Date"). The Company acknowledges its obligation to (i) pay all
- ---------------------
postpetition rent and to perform all other postpetition obligations under the
Master Lease subject to the Bankruptcy Code and the Sale Order through the
Master Lease Deemed Rejection Date, subject to Purchaser's obligation to
reimburse the Company for its third party out-of-pocket recurring charges
incident to the Master Lease
-40-
<PAGE>
Premises from the Closing Date up to and including the Master Lease Deemed
Rejection Date as provided in Section 11.3, and (ii) surrender possession of the
Master Lease Premises to Lechmere Realty Limited Partnership or its designee
within 15 days after the Master Lease Deemed Rejection Date.
(b) The Sale Order shall provide that subject to and immediately and
automatically upon (i) entry of the Sale Order approving this Agreement
(including the provisions of the foregoing paragraph), (ii) the performance of
all of the Company's material monetary obligations under the Master Lease from
the Sale Commencement Date (excluding real estate taxes for periods occurring
prior to the petition date, as to which all parties reserve their rights
hereunder) up to and including the Master Lease Deemed Rejection Date and (iii)
Lechmere Realty Limited Partnership's obtaining possession of the Master Lease
Premises, then any and all Claims (as defined in Section 101(5) of the
Bankruptcy Code) of Lechmere Realty Limited Partnership (the lessor under the
Master Lease) against the Company, any affiliate or guarantor of the Company
arising from the rejection of the Master Lease under Section 502(b)(6) of the
Bankruptcy Code or otherwise shall be waived in full without the necessity of
any other or further action on the part Lechmere Realty Limited Partnership or
any other person, party or entity.
(c) The Company shall assign to the lessor under the Master Lease, and the
Lessor under the Master Lease shall assume the obligations from and arising
after the Master Lease Deemed Rejection date, all of the Company's right, title,
and interest as sublandlord under the Sublease with Filene's Basement, Inc.
referenced in item 10 of the list of leases in Schedule 6.10(c) hereto. Such
assignment and assumption shall be effective immediately prior to the Master
Lease Deemed Rejection Date.
11.5 Prosecution, Defense and Settlement of Rejection Claims; Mediation.
------------------------------------------------------------------
The prosecution, defense and settlement of any and all rejection claims filed
with respect to the Leases shall be controlled solely by Purchaser, acting
reasonably. Except as provided below, any such prosecution, defense or
settlement shall be preformed by Debtors at Debtors' expense. To enable
Purchaser to control effectively the prosecution, defense and settlement of such
rejection claims, Debtors shall regularly (and in any event no less frequently
than weekly) keep Purchaser apprised of the status of the litigation of any such
claims and any settlement discussions relating thereto. In addition, Debtors
shall deliver to Purchaser a monthly listing of the allowed rejection claims.
If Debtors believe that Purchaser is not acting reasonably with respect to
Purchaser's request regarding the prosecution, defense or settlement of any
rejection claim relating to any Lease (including the expenditure of legal or
other professional fees in connection with such prosecution, defense or
settlement), then Debtors must promptly after such request is given and in no
event later than two business days thereafter, either proceed with such
prosecution, defense or settlement in accordance with Purchaser's request or
submit the issue of the reasonableness of the request regarding such
prosecution, defense or settlement (and the expenditure of such legal and other
professional fees) to the Bankruptcy Court for prompt determination.
11.6 Communications. Until the earlier of the Deemed Rejection Date of the
--------------
Lease or the date of issuance of the Lease Assignment Order with respect to any
respect to any Lease (1)
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<PAGE>
the Debtors shall not, without the prior written consent of Purchaser, and
shall, if and to the extent directed by Purchaser, (a) renew or amend such
Lease, (b) encumber, sub-lease or otherwise grant any rights with respect to
such Lease or (c) communicate with the lessor under such Lease, (2) the Debtors
shall refer any communications from any such lessor to Purchasers promptly after
receipt thereof and (3) the Debtors shall not negotiate or communicate with any
third party with respect to any such Lease.
11.7 Sale of Leases. Purchaser shall have the right to market the Leases
--------------
in the manner which Purchaser deems appropriate notwithstanding the terms of any
such Lease that purports to restrict such activities, including, without
limitation, with respect to the erection of visible signs on the premises and
access to the premises for the purpose of showing the property.
11.8 Real Estate. If and to the extent that the gross value generated from
-----------
the sale or lease of the Real Estate exceeds the aggregate of the sum of (a) $15
million and (b) the fees, costs and expenses of the Purchaser and its Affiliates
incident to the Real Estate, including, without limitation, the fees, costs and
expenses of, leasing and selling the Real Estate, then, and in such event, such
excess proceeds shall be split (i) 10% to Purchaser and (ii) 90% to the Debtors,
provided however, in the event Purchaser receives a bona fide offer to sell or
lease all or any portion of the Real Estate, Purchaser shall submit the offer to
the Debtors for approval, and if Debtors do not approve the offer within ten
(10) business days, then Debtors shall pay the carrying costs for all or such
portion, as the case may be, of the Real Estate described in the offer for a
period of six (6) months and Debtors shall have the right to sell or lease all
or such portion, as the case may be, of the Real Estate at its sole discretion
within such six (6) month period; provided, however, that if the Debtors have an
agreement with a bona fide purchaser for all or any portion, as the case may be,
of the Real Estate and Debtors are continuing to pay the carrying costs for all
or such portion, as the case may be, of the Real Estate, then Debtors shall
continue to have the right to sell or lease all or such portion, as the case may
be, of the Real Estate until such agreement is terminated or consummated.
Notwithstanding the foregoing, if the Debtors sell or lease all or any portion,
as the case may be, of the Real Estate during such six (6) month period
described above, for less than the offer submitted to Debtors by Purchaser for
such real property, Debtors shall pay the amount which is less than such offer
to Purchaser. If Debtors do not sell or lease such real property within the six
(6) month period described above, Purchaser shall again have the right to sell
or lease such property and Purchaser shall pay the carrying costs from the end
of such six (6) month period until such time as such property is sold or leased
by another offer is submitted by Purchaser and rejected by Debtors. If the
right to sell or lease the Real Estate reverts to the Purchaser, then Debtors
shall have no approval rights, but Purchaser hereby agrees to use commercially
reasonable efforts with respect to the sale of such Real Estate.
ARTICLE 12
INDEMNIFICATION
12.1 Indemnification.
---------------
(a) By the Company and Parent. In addition to all rights and
-------------------------
remedies otherwise available to Purchaser at law or in equity, the Company and
Parent shall pay on behalf
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of, and indemnify, save and hold harmless Purchaser and its employees,
representatives, officers, directors, stockholders and agents from and against
any and all costs, losses, liabilities, damages, deficiencies, claims and
expenses, including without limitation, interest, penalties, reasonable
attorneys' fees and all amounts paid in investigation, defense or settlement of
any of the foregoing, which any such party may suffer, sustain or become subject
to in connection with or arising out of or resulting from or incident to (i) any
breach or inaccuracy of any representation or warranty made by the Debtors made
in or pursuant to this Agreement, (ii) any breach or failure to perform any
covenant or other agreement made by the Debtors in or pursuant to this
Agreement, and (iii) the performance or non-performance of the Services.
(b) By Purchaser. In addition to all rights and remedies otherwise
------------
available to the Company or Parent at law or in equity, Purchaser shall
indemnify and save and hold harmless the Company, Parent and their respective
employees, representatives, officers, directors, stockholders and agents from
and against any and all costs, losses, liabilities, damages, deficiencies,
claims and expenses, including, without limitation, interest, penalties,
reasonable attorneys' fees and all amounts paid in investigation, defense or
settlement of any of the foregoing, which any such party may suffer, sustain or
become subject to in connection with or arising out of or resulting from or
incident to (i) any breach or inaccuracy of any representation or warranty made
by Purchaser in or pursuant to this Agreement, and (ii) any breach or failure to
perform any covenant or other agreement made by Purchaser in or pursuant to this
Agreement.
(c) Time Limitations. No party shall be liable to indemnify and hold
----------------
harmless any other party for any cost, loss, liability, damage, deficiency,
claim or expense pursuant to this Section 12.1 unless the claim or situation
which has given rise to or ultimately gives rise to such cost, loss, liability,
damage, deficiency, claim or expense shall have been asserted to the
indemnifying party prior to the date which is 300 days after the Closing Date.
12.2 Mutual Assistance and Records. Purchaser and the Debtors agree that
-----------------------------
they will mutually cooperate in the expeditious filing of all notices, reports
and other filings with any governmental authority required to be submitted
jointly in connection with the execution and delivery of this Agreement, the
other agreements contemplated hereby and the consummation of the transactions
contemplated hereby or thereby. Subsequent to the Closing, Purchaser and the
Debtors, at their own cost, will assist each other (including by the retention
of records and the provision of access to relevant records) in the preparation
of their respective Tax returns and the filing and execution of Tax elections,
if required, as well as in the defense of any audits or litigation that may
ensue as a result of the filing thereof, to the extent that such assistance is
reasonably requested.
ARTICLE 13
MISCELLANEOUS
13.1 Termination.
-----------
(a) This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time, but not later than the Closing Date:
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(i) by mutual consent of Purchaser, the Company and Parent;
(ii) by Purchaser or the Debtors if the Closing Date is not on
or prior to August 15, 1997, provided, that a party will not be entitled to
terminate this Agreement pursuant to this subsection (ii) if that party or
its Affiliates are in breach of the Agreement or has failed to satisfy any
condition to Closing in Articles 4 and 5 hereof that such party or its
Affiliates was required to satisfy and provided further that, in the event
the Closing Date is not on or prior to August 15, 1997 as a result of an
injunction being entered against the transaction, the Debtors may terminate
no earlier than August 23, 1997;
(iii) by Purchaser at any time up to and including the Closing
Date if there has been, occurred or arisen a material adverse change in any
of the Purchased Assets, business, financial condition, results of
operation or prospects of the business conducted at the Stores other than
replenishment which Purchaser acknowledges has not occurred in the ordinary
course of business;
(iv) by Purchaser if there has been a material misrepresentation
or breach of warranty or covenant set forth in this Agreement by the
Company or Parent;
(v) by Parent or the Company if there has been a material
misrepresentation or breach of warranty or covenant set forth in this
Agreement by Purchaser;
(vi) by Purchaser if the Court shall not have entered the Sale
Order on or before August 15, 1997; or
(vii) automatically if an order is entered by the Court
approving a transaction with respect to the Purchased Assets or the Leases
other than the transactions contemplated by this Agreement.
(b) In the event of the termination of this Agreement as above
provided, this Agreement shall forthwith become void and no party shall have any
liability hereunder, including any liability for damages, except pursuant to
Sections 13.6 (with respect to each party bearing its own expenses) and 13.7
(with respect to public announcements), the provisions of which shall survive
any termination of this Agreement, and except for any willful breach by any
party hereto of such party's representations, warranties or covenants which
shall also survive the termination of this Agreement. In the event that a
condition precedent to its obligation is not met, nothing contained herein shall
be deemed to require any party to terminate this Agreement rather than to waive
(without further Court order or notice to any third party) such condition
precedent and proceed with the Closing.
13.2 Survival of Representations and Warranties. Each and every
------------------------------------------
representation, warranty, covenant and agreement contained in this Agreement or
any Schedule hereto, or any
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<PAGE>
certificate, document or other instrument delivered by the parties in connection
herewith, shall, survive the Closing Date and the consummation of the
transactions contemplated hereby notwithstanding any investigation or inquiries
made by or conducted on behalf of any party hereto.
13.3 Equitable Remedies. The parties hereto acknowledge that the Company
------------------
and the Purchased Assets are unique and that irreparable damage would result if
this Agreement is not specifically enforced and that, therefore, the rights and
obligations of the parties under this Agreement may be enforced by a decree of
specific performance issued by a court of competent jurisdiction and appropriate
equitable relief may be applied for and granted in connection therewith. Such
remedies shall, however, not be exclusive and shall be in addition to any other
remedies which any party may have under this Agreement or otherwise.
13.4 Assignment.
----------
(a) This Agreement will inure to the benefit of and be binding upon
the successors and assigns of each of the parties hereto and their respective
successors and assigns, except as provided in subsections (b) and (c) below.
(b) Neither the Company nor Parent may assign any of its duties or
obligations hereunder without the prior written consent of Purchaser, which
consent shall not be unreasonably withheld.
(c) Purchaser may not assign any of its rights, duties or obligations
hereunder in whole or in part without the Company's consent (which consent shall
not be unreasonably withheld) except Purchaser may assign its rights, duties
and/or obligations hereunder in whole or in part (without the Company's
consent), (i) to its Affiliates or wholly-owned subsidiaries, and in such event
the Debtors shall be obligated to convey all or part of the Purchased Assets to
such assignee and to the extent so directed by Purchaser, and (ii) to lending
institutions for the purpose of obtaining financing for the transactions
contemplated hereby and (iii) with respect to the Real Estate, and assignee or
designee at the Closing; provided that no such assignment shall (i) relieve
Purchaser of its obligations hereunder or (ii) relieve the signatories to the
Lease Guaranty dated as of the date hereof and attached hereto of their
obligations under such Lease Guaranty.
13.5 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed to have been duly given if delivered personally or
mailed, by certified or registered mail, return receipt requested, first class
postage prepaid, or by Federal Express or some other reputable overnight
carrier, to the parties at the following addresses:
If to Parent or the Company, addressed to:
Montgomery Ward & Co., Incorporated
Montgomery Ward Corporate Offices
Montgomery Ward Plaza
Chicago, IL 60671
Attention: Spencer H. Heine, Esq.
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<PAGE>
With copies (which shall not
constitute notice hereunder) to:
Jones, Day Reavis & Pogue
77 W. Wacker Drive, Suite 3500
Chicago, IL 60601-1692
Attention: David S. Kurtz, Esq.
Altheimer & Gray
10 South Wacker, Suite 4000
Chicago, IL 60606
Attention: Corey Light
If to Purchaser, addressed to:
Schottenstein Bernstein Capital Group, LLC
1010 Northern Boulevard - Suite 330
Great Neck, New York 10021
and
Schottenstein Bernstein Capital Group, LLC
1800 Moler Road
Columbus, Ohio 43207
Atten: Legal Department
and
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<PAGE>
AEW Capital Management L.P.
225 Franklin Street
Boston, MA 02110
Atten: J. Grant Monahon, Esq.
With copies (which shall not
constitute notice hereunder) to:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Atten: Lawrence Mittman, Esq.
Atten: Madlyn Gleich Primoff, Esq.
and
Hill and Barlow
One International Place
Boston, MA 02110
Atten: Charles C. Ames, Esq.
or to such other place and with such other copies as any party may designate by
written notice to the other party.
13.6 Expenses. Except as otherwise provided in this Agreement, each party
--------
hereto shall pay its own expenses, including attorneys', accountants' and
brokerage fees, in connection with this Agreement, the performance of its
obligations hereunder and the consummation of the transactions contemplated
hereby.
13.7 Public Announcements. No press release or other public statement with
--------------------
respect to this Agreement or the transactions contemplated hereby shall be
issued by any party without that party having consulted with and obtained the
consent of the other parties, which consent shall not be unreasonably withheld.
13.8 Entire Agreement. This Agreement supersedes all prior discussions and
----------------
agreements between the parties with respect to the subject matter hereof, and
this Agreement, including the schedules and exhibits hereto, and other documents
to be delivered in connection herewith (together with such confidentiality
letter), contains the sole and entire agreement between the parties hereto with
respect to the subject matter hereof.
13.9 Waiver. Any term or condition of this Agreement may be waived at any
------
time by the party which is entitled to the benefit thereof. To be effective,
each such waiver shall be in writing, shall specifically refer to this Agreement
and the term or condition being waived, and shall be executed by an Authorized
Officer of such party. A waiver on one occasion shall not be
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<PAGE>
deemed to be a waiver of the same or any other breach on a future occasion. A
waiver hereunder shall be effective without an order of the Court, or notice to
the Court or any third party, in relation to such waiver.
13.10 Amendment. This Agreement may be modified or amended only in a
---------
writing duly executed by or on behalf of each of the parties hereto.
13.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.12 Invalid Provisions. If any provision of this Agreement is held to
------------------
be illegal, invalid, or unenforceable under any present or future law, rule, or
regulation, such provision shall be fully severable and this Agreement shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof. The remaining provisions of this Agreement
shall remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance here from. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision, there shall be
added automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible. To the extent of any inconsistencies between the
Sale Order with this Agreement, the Sale Order shall control.
13.13 Headings, Gender, Etc. The headings used in this Agreement have
----------------------
been inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement. Unless the context of this
Agreement otherwise requires, (a) words of any gender shall be deemed to include
each other gender, (b) words using the singular or plural number shall also
include the plural or singular number, respectively, (c) references to "hereof,"
"herein," "hereby" and similar terms shall refer to this entire Agreement, and
(d) each reference to the Company shall be a reference to any of its
subsidiaries and predecessors and each representation, warranty, covenant and
other agreement made herein with respect to the Company shall be deemed made
with respect to all such subsidiaries and predecessors. The language used in
this Agreement shall be deemed to the language chosen by the parties hereto to
express their mutual intent and no rule of strict construction shall be applied
against any Person.
13.14 Choice of Law. This Agreement shall be construed, interpreted and
-------------
the rights of the parties determined in accordance with the laws of the State of
New York without regard to conflicts of laws principles thereof, except with
respect to matters of law concerning the internal corporate affairs of any
corporation which is a party to or the subject of this Agreement, and as to
those matters the law of the jurisdiction of incorporation of such corporation
shall govern.
13.15 No Third Party Beneficiary. Nothing herein expressed or implied is
--------------------------
intended or shall be construed to confer upon or give to any person, firm or
corporation, other than the parties hereto and their respective permitted
successors and assigns, any rights or remedies under or by reason of this
Agreement, other than the Company and the Persons entitled to indemnification
under Section 9.2.
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<PAGE>
13.16 Retention of Jurisdiction. The Bankruptcy Court shall retain
-------------------------
jurisdiction with respect to any matter, issue, claim or controversy arising out
of or resulting from this Agreement or any of the transactions contemplated
hereby or associated herewith, including without limitation any matter, issue,
claim or controversy relating to Purchaser's right to have received the
Purchased Assets free and clear of any and all Liens.
* * * * *
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed as of the day and year first above written.
SCHOTTENSTEIN BERNSTEIN CAPITAL GROUP LLC
By: /s/ David Bernstein
----------------------------------------------
Name: David Bernstein
Title: President and Chief Operating
Officer
LECHMERE, INC., Debtor and Debtor-in-
Possession
By: /s/ Spencer H. Heine
----------------------------------------------
Name: Spencer H. Heine
Title: President
MONTGOMERY WARD & CO.,
INCORPORATED, Debtor and
Debtor-in-Possession
By:/s/ Spencer H. Heine
----------------------------------------------
Name: Spencer H. Heine
Title: Executive Vice President and General
Counsel and President, MW Properties
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<PAGE>
EXHIBIT 5 .3
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<PAGE>
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE: :
: JOINTLY ADMINISTERED
MONTGOMERY WARD HOLDING CORP., : CASE NO. 97-1409 (PJW)
A DELAWARE CORPORATION, ET AL., :
-- --
: CHAPTER 11
DEBTORS. : HEARING: AUGUST 14, 1997 3:30 P.M.
ORDER AND FINDINGS OF FACT AND CONCLUSIONS OF LAW
(A) AUTHORIZING MONTGOMERY WARD & CO.,
INCORPORATED AND LECHMERE, INC. TO SELL ASSETS
PURSUANT TO A PURCHASE AGREEMENT,/1/ (B) AUTHORIZING THE
CLOSING OF ALL LECHMERE AND HOME IMAGE STORES,
(C) PERMITTING THE PURCHASER TO CONDUCT STORE CLOSING SALES,
(D) APPROVING CERTAIN LEASE ASSUMPTION AND REJECTION PROCEDURES
AND (E) PERMITTING THE DEBTORS TO PAY SEVERANCE CLAIMS/2/
------------------------------------------------------
This matter is before the Court on the Motion of Debtors and Debtors
in Possession for an Order (a) Authorizing Montgomery Ward & Co., Incorporated
and Lechmere, Inc. to Sell Assets Pursuant to a Letter Agreement, (b)
Authorizing the', Closing of all Lechmere and Home Image Stores, (c) Permitting
the Buyer to Conduct Store Closing Sales, (d) Approving Certain Lease Assumption
and Rejection Procedures and (e) Permitting the Debtors to Pay Severance Claims
(the "Sale Motion,"), filed by the above-captioned debtors and debtors in
___________________________________
/1/ Capitalized terms used but not otherwise defined herein shall have the
meanings given to them in the Asset Purchase, License and Agency Agreement dated
as of August 6, 1997 among Lechmere, Inc., Montgomery Ward Co., Incorporated and
MWL Acquisition L.L.C. (the "Purchase Agreement," a copy of which is attached
hereto as Exhibit A)
/2/ The Findings of Fact and Conclusions of Law contained herein constitute
the findings of fact and conclusions of law required to be entered by this Court
with respect to the Motion pursuant to Rule 52 of the Federal Rules of Civil
Procedure, as made applicable herein by Rules 7052 and 9014 of the Federal Rules
of Bankruptcy Procedure.
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<PAGE>
possession (collectively, the "Debtors"), on August 1, 1997. The Court having
reviewed the Motion and having heard the statements of counsel in support of the
relief requested therein at a hearing before the Court on August 13, 1997 (the
"Sale Hearing"); all parties in interest having been heard, or having had the
opportunity to be heard at the Sale Hearing, regarding approval of the Purchase
Agreement, and the transactions contemplated thereby (the "Transactions"), and
the Court having received evidence in support of approval of the Purchase
Agreement; and it appearing from the certificates of service and publication
dated August ___, 1997 (the "Certificates") filed with the Clerk of the Court
that sufficient notice and publication of the Motion and the relief granted by
this Order have been provided; and it further appearing that no other or further
notice hereof is required; and after due deliberation and good and sufficient
cause appearing therefor, this Court hereby makes the following Findings of Fact
and Conclusions of Law:
I. THE COURT HEREBY ENTERS THE FOLLOWING FINDINGS OF FACT/3/:
A. BASIS FOR SECTION 363 SALE
--------------------------
1. Time is of the essence in consummating the sale of the Purchased
Assets. Accordingly, to maximize the value Of the Acquired
Assets, it is essential that the sale of the Purchased Assets
occur within the time constraints set forth in the Purchase
Agreement and the Sale Motion.
________________________
/3/ The Court's statements from the bench setting forth additional
Findings of Fact and Conclusions of Law in open Court at the Sale Hearing on the
Motion are expressly incorporated by reference into this Order.
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<PAGE>
B. NOTICE OF SALE OF THE PURCHASED ASSETS
--------------------------------------
2. Written notice of the Sale Hearing in accordance with the Court's
Order entered on August 6, 1997 (the "Sale Notice Order") as
described in the Affidavit of Service of Notice of the', Sale
Hearing and Sale filed by the Debtors on August ___, 1997 with
this Court, was transmitted to (i) each known creditor of the
Debtors holding or asserting a lien against the Purchased Assets;
(ii) each known creditor or party in interest holding or
asserting of record an interest in the Real Estate; (iii) each of
the potential bidders with respect to the sale of the Purchased
Assets; (iv) each party that has filed a notice of appearance or
requested service herein; (v) counsel to the official committee
of unsecured creditors; (vi) counsel to the Debtors' debtor- in-
possession lenders, (vii) counsel to MWL Acquisition L.L.C. (the
"Purchaser"); (viii) the Office of the United States Trustee, and
(ix) the other persons and entities listed in the Certificates by
a copy of the notice in substantially the form attached hereto as
Exhibit B.
3. Notice was also published in the Wall Street Journal, National
Edition, the New York Times, the Chicago Tribune and the Boston
Globe on August 8, 1997 as described in the Certificates.
4. The Notice was adequate and sufficient under the circumstances of
these Chapter 11 cases and this proceeding and complied with the
various applicable requirements of the Bankruptcy Code, the
Federal Rules of Bankruptcy Procedure and the procedural due
process requirements of the United States Constitution. As
described in the Sale Motion, over the last
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<PAGE>
year, the deteriorating performance of Lechmere, Inc.
("Lechmere") has placed a significant cash drain on the Debtors'
businesses and there is no reasonable prospect of Lechmere
achieving profitability. These circumstances constitute good
cause pursuant to Rule 9006(c) of the Federal Rules of Bankruptcy
Procedure to reduce the twenty day notice period prescribed by
Rule 2002 of the Federal Rules of Bankruptcy Procedure.
C. GOOD FAITH OF PURCHASER
-----------------------
5. Purchaser is purchasing the Purchased Assets in good faith and is
a good faith purchaser within the meaning of 11 U.S.C. (S)363(m),
and is therefore entitled to the protection of that provision,
and otherwise has proceeded in good faith in all respects in
connection with this proceeding and the Transactions in that:
(a) Purchaser recognized that the ',Debtors were free to deal
with any other party interested in acquiring the Purchased
Assets;
(b) Purchaser agreed to provisions in the Letter Agreement dated
July 30,1997 approved in this Court's Order dated August 6,
1997 regarding competitive bidding procedures (the "Bid
----
Procedures Order") which would enable the Debtors to accept
----------
a higher and better offer for the Purchased Assets at the
Sale Heating;
(c) Purchaser in no way induced or caused the Chapter 11 filing
of any of the Debtors;
(d) All payments to be made by Purchaser and other agreements or
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arrangements entered into by Purchaser in connection with
the Transactions have been disclosed;
(e) Purchaser has not violated 11 U.S.C. (S)363(n) by any action
or inaction; and,
(f) The negotiation and execution Of the Purchase Agreement, the
Letter Agreement and all other aspects of the Transactions
were in goodfaith.
D. COMPETING OFFERS
----------------
6. [No competing offers were submitted pursuant to the competitive
bidding procedures set forth in the Bid Procedures Order.]
[Although competing offers were submitted, Purchaser's offer was
higher and better than any such offers.]
E. APPROVAL OF MOTION
------------------
7. Purchaser is a third-party purchaser unrelated to the Debtors.
8. The purchase terms, as set forth in the Purchase Agreement, are
fair and reasonable under the circumstances of the Bankruptcy
Cases and this proceeding. [No objections to the Motion were
filed, [except for the objections of ___________ and, ___________
which were either withdrawn or overruled, no objections to the
Motion were filed.]
9. The Motion should be approved as it is in the best interests of
the Debtors' prepetition and post-petition creditors, the Debtors
and other parties in interest. The Purchase Agreement represents
a fair and reasonable offer to purchase the Purchased Assets
under the circumstances of the Bankruptcy
-55-
<PAGE>
Cases and this proceeding.
F. PURCHASER IS NOT A MERE CONTINUATION OF ANY OF THE DEBTORS
----------------------------------------------------------
10. The following findings of fact relate to the conclusions of law
set forth in paragraph 11 of Section II(D) below:
(a) Purchaser is not hiring any Of the Debtors' employees after
the Closing. The Transactions contemplate that the Debtors
will make certain employees available to the Purchaser for
purposes of necessary services in connection with the
contemplated "going out of business" sales.
(b) No common identity of incorporators, officers, directors or
material stockholders exists among Purchaser and the
Debtors.
(c) Purchaser is not purchasing the Excluded Assets, including,
without limitation, the Debtors' respective names, cash or
cash equivalents (other than certain deposits); accounts
receivable and causes of action under Sections 544-550 of
the Bankruptcy Code or not relating to the Purchased Assets
or the Leases; the FF&E, contracts and leases not expressly
assumed by the Purchaser or the Debtors' Trailers.
G. CLOSING SALES
11. The business strategy and means of effecting such strategy set
forth in the Motion is based upon the sound business judgment of
the Debtors; and the implementation of that strategy as set forth
in the Motion is reasonable, necessary and in the best interest
of the Debtors' estates.
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<PAGE>
H. MISCELLANEOUS
-------------
12. To the extent any Findings of Facts set forth in Section I,
Paragraphs 1 - 11 and all sub-parts thereto, herein constitute a
Conclusion of Law, the Court so concludes.
II. CONCLUSIONS OF LAW
------------------
The Court hereby enters the following Conclusions of Law:
A. JURISDICTION, FINAL ORDER AND STATUTORY PREDICATES
--------------------------------------------------
1. The Court has jurisdiction to hear and determine the Sale Motion
and to grant the relief requested in the Sale Motion pursuant to
28 U.S.C. (S)(S) 157(b)(1) and 1334(b).
2. This Order constitutes a final and appealable order within the
meaning of 28 U.S.C. (S) 158(a). To any extent necessary under
Bankruptcy Rule 9014 and Rule 54(b) of the Federal Rules of Civil
Procedure, as made applicable by Rule 7054 of the Federal Rules
of Bankruptcy Procedure, the Court expressly finds that there is
no just reason for delay in the implementation of this Order, and
expressly directs entry of judgment as set forth herein.
3. This proceeding is a "core proceeding" within the meaning of 28
U.S.C. (S)157(b)(2)(a), (n) and (o).
4. The statutory predicates for the Motion are Sections 363(b), 365,
102(1) and 105(a) of the Bankruptcy Code and Rules 2002(a)(2),
6004(a), (b), (c)
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<PAGE>
and (e), 6006(a) and (c), 9014, and 9019(a) of the Federal Rules
of Bankruptcy Procedure.
5. The proposed sale of the Purchased, Assets constitutes a sale of
property of the Debtors' estates outside the ordinary course of
business within the meaning of Section 363(b) of the Bankruptcy
Code.
B. SECTION 363 SALE
----------------
6. The Debtors are authorized to sell property of their respective
estates, pursuant to 11 U.S.C. (S)363(b), free and clear of the
Liens (as defined in Paragraph C of the decretal portion .of this
Order on p. 11) if the applicable provisions of 11 U.S.C.
(S)363(f) have been satisfied.
7. The provisions of Section 363(f) of the Bankruptcy Code have been
satisfied.
8. [No creditor holding or asserting a superpriority claim, lien or
security interest against the Purchased Assets has objected to
the Motion.]
9. Given all of the circumstances of the Bankruptcy Cases and the
adequacy and fair value of the purchase price under the Purchase
Agreement, the proposed sale of the Purchased Assets to Purchaser
constitutes a reasonable and sound exercise of the Debtors'
business judgment and should be approved.
C. RETENTION OF JURISDICTION
-------------------------
10. It is necessary and appropriate for the Court to retain
jurisdiction to, inter alia, interpret and enforce the terms and
--
provisions of this Order and the Purchase Agreement and to
adjudicate, if necessary, any and all disputes
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<PAGE>
concerning any right, title, (alleged),property interest,
including ownership claims, relating to the Purchased Assets and
the proceeds thereof, as well as the extent, validity and
priority of all Liens relating to the Purchased Assets.
D. NO SUCCESSOR LIABILITY
----------------------
11. Purchaser does not constitute a successor to any of the Debtors
or their respective estates.
(a) The Transactions do not amount to a consolidation, merger
and/or de facto merger of Purchaser and the Debtors or
-- -----
their respective estates.
(b) Purchaser is not merely a continuation of the Debtors or
their respective estates, there is not substantial
continuity among Purchaser and the Debtors, and there is no
continuity of enterprise among the Debtors and Purchaser.
(c) The Transactions are not being entered into fraudulently.
The sale approved hereunder has been properly noticed and
all aspects thereof have been adequately disclosed.
(d) Purchaser is not hiring any of the individuals employed by
the Debtors.
(e) Purchaser is not holding itself out to the public,
suppliers, customers, creditors (whether prepetition or
post-petition), employees or governmental entities, agencies
or authorities as a continuation of the Debtors.
-59-
<PAGE>
E. MISCELLANEOUS
-------------
12. To the extent any Conclusion of Law set forth in Section II,
Paragraphs 1-11 herein constitutes a Finding of Fact, this Court
so finds.
BASED ON THE FOREGOING FINDINGS OF FACT, AND CONCLUSIONS OF LAW, IT IS
HEREBY ORDERED, ADJUDGED AND DECREED, EFFECTIVE IMMEDIATELY, AS FOLLOWS:
II. SALE OF PURCHASED ASSETS
------------------------
A. The relief requested in the Motion is granted. The Purchase Agreement,
the Transactions and the Sale are hereby approved in all respects.
B. The Debtors are authorized and directed to take any and all actions
necessary or appropriate to (i) consummate the sale of the Purchased
Assets to Purchaser and the Closing of the Transactions in accordance
with the Motion, the Purchase Agreement and this Order; and (ii)
perform, consummate, implement and close fully the Purchase Agreement
together with all additional instruments and documents that may be
reasonably necessary or desirable to implement the Purchase Agreement.
The Debtors' permits, licenses, franchises, orders, registrations,
certificates, variances, approvals and other similar rights obtained
from Governmental Authorities shall be deemed transferred to Purchaser
upon the Closing, without further Order of this Court.
C. Upon the Closing, the Purchased Assets shall be transferred, sold and
delivered to Purchaser free and clear of all encumbrances,
obligations, liabilities, contractual commitments, claims, including,
without limitation, any theory of successor liability, de facto
-- -----
merger, or substantial continuity, whether based in law or equity,
-60-
<PAGE>
employee benefit obligations, (including, without limitation, under
ERISA, any security interest, mortgage, lien, charge against or
interest in property, adverse claim, claim of possession, right of
way, license, easement or restriction of any kind, including, but not
limited to, any restriction on the use, voting, transfer, receipt of
income or other exercise of any attributes of ownership or any option
to purchase, option, charge, retention agreement which is intended as
security or other matters (hereinafter collectively referred to as
"Liens") of any person or entity (other than the Assumed Liabilities
and the post-closing liabilities under the Assigned Contracts,
pursuant to the express terms of the Purchase Agreement), that
encumber or relate to or purport to encumber or relate to the
Purchased Assets.
D. Purchaser is not a successor to any of the Debtors or their respective
estates by reason of any theory of law or equity and Purchaser shall
not assume or in any way be responsible for any liability or
obligation of the Debtors and/or their respective estates, except as
otherwise expressly provided in the Purchase Agreement.
E. Effective on the date of entry of this Order, all entities, including,
but not limited to, the Debtors (and/or their respective successors,
including any trustees thereof), creditors, employees, former
employees and shareholders, administrative agencies, governmental
departments, secretaries of state, federal, state and local officials,
maintaining any authority relating to Environmental, Health and Safety
Laws, and their respective successors or assigns, shall be permanently
and forever barred, restrained and enjoined from commencing or
continuing in any manner
-61-
<PAGE>
any action or other proceeding of any kind against Purchaser as
alleged successor or otherwise with respect to any Liens arising out
of or related to the Transactions. For purposes of this Order,
"Environmental, Health, and Safety Laws" shall mean all federal,
state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and
administrative orders and determinations, all contractual obligations
and all common law concerning public health and safety, worker health
and safety, and pollution or protection of the environment, including
without limitation all those relating to the presence, use,
production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge,
release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes;, chemical substances or mixtures,
pesticides, pollutants, contaminants, toxic chemicals, petroleum
products or byproducts, asbestos, polychlorinated biphenyls, noise or
radiation, each as amended and as now or hereafter in effect.
F. The terms and provisions of the Purchase Agreement, together with the
terms and provisions of this Order, shall be binding in all respects
upon, the Debtors, any trustees thereof, their respective estates,
their creditors and the Debtors' shareholders, all entities and third
parties, administrative agencies, governmental departments,
secretaries of state, federal, state and local officials, maintaining
any authority relating to Environmental, Health and Safety Laws, and
their respective successors or assigns, including, but not limited to
all non-Debtor parties to the Leases which may be assigned to
Purchaser or other entities under the Purchase Agreement and persons
asserting a Lien against or interest in the Debtors' estates
-62-
<PAGE>
or any of the Purchased Assets to be sold and assigned to Purchaser,
irrespective of any action commenced which contests the Debtors'
authority to sell and assign the Purchased Assets or which seeks to
enjoin the Transactions and/or assignment.
G. All entities holding Liens of any kind and nature be and hereby are
barred from asserting such Liens against Purchaser and/or the
Purchased Assets and, effective upon the transfer of the Purchased
Assets to Purchaser at the Closing, the Liens shall attach to the
proceeds of the sale with the same force, validity, priority and
effect, if any, as the Liens formerly had against the Purchased
Assets.
H. This Order: (a) is and shall be effective as a determination that,
upon Closing, all Liens existing as to the Purchased Assets conveyed
to Purchaser have been and hereby are adjudged and declared to be
unconditionally released, discharged and terminated, and (b) shall be
binding upon and govern the acts of all entities, including, all
filing agents, filing officers, title agents, title companies,
recorders of mortgages, recorders of deeds, registrars of deeds,
administrative agencies or units, governmental departments or units,
secretaries of state, federal, state and local officials and all other
persons and entities who may be required by operation of law, the
duties of their office, or contract, to accept, file, register or
otherwise record or release any documents or instruments, or who may
be required to report or insure any title or state of title in or to
any of the Purchased Assets conveyed to Purchaser. All Liens of record
as of the date of this Order shall be forthwith removed and stricken
as against the Purchased Assets. All such Entities described above in
this Paragraph H are authorized and specifically directed to strike
all such recorded Liens against the Purchased Assets from their
records, official and
-63-
<PAGE>
otherwise.
I. If any person or entity which has filed statements or other documents
or agreements evidencing Liens on, or interests in, the Purchased
Assets shall not have delivered to the Debtors prior to the Closing,
in proper form for filing and executed by the appropriate parties,
termination statements, instruments of satisfaction, releases of liens
and easements, and any other documents necessary for the purpose of
documenting the release of all Liens which the person or entity has or
may assert with respect to the Purchased Assets, the Debtor is hereby
authorized and directed to execute and file such statements,
instruments, releases and other documents on behalf of such person or
entity with respect to the Purchased Assets.
J. Any and all Purchased Assets in the possession or control of any
person or entity, including, without limitation, any former vendor,
supplier or employee of any of the Debtors (a) shall be transferred to
Purchaser free and clear of the Liens and (b) shall be delivered at
the Closing to Purchaser at that parties' sole cost and expense at ,
unless, pursuant to the Purchase Agreement, such person, entity,
vendor, supplier or employee may retain temporary possession or
control of any of such Purchased Assets, in which case the possession
of such item shall be delivered to Purchaser at such time as is
designated by Purchaser.
K. Nothing contained in any order of any type or find entered in the
Bankruptcy Cases, any subsequent chapter 7 case into which such
Bankruptcy Cases may be converted derogate from the provisions of the
Purchase Agreement or the terms of this Order. To the extent any
provisions of this Order conflict with the terms
-64-
<PAGE>
and conditions of the Purchase Agreement, this Order shall govern and
control. The Order shall be binding upon and enforceable against,
among others, the Debtors, their estates and any and all Chapter 7 and
Chapter 11 Trustees thereof.
L. In the event the Debtors make the election described in Section 11.9
of the Purchase Agreement, the Debtors are hereby authorized to
deliver the Financed Store Fixtures to the Purchaser, free and clear
of all Liens, and, without further Court Order, to use the purchase
price paid by Purchaser under the Purchase Agreement to so deliver
such Financed Store Fixtures.
III. STORE CLOSING SALES
-------------------
A. The Debtors be, and hereby are authorized and empowered to close up to
all of the Stores to implement its strategy set forth in the Motion
and to maximize the value of the assets to be sold in connection with
such Store closings.
B. Purchaser, on behalf of the Debtors, is hereby authorized and
empowered to conduct going out of business sales and similar sales
(collectively, the "Store Closing Sales") on the terms and conditions
set forth in the Purchase Agreement. Without limiting the generality
of the foregoing, Purchaser shall be, and hereby is, authorized to
conduct the Store Closing Sales in the name of the Debtors and to
establish and implement advertising, signage and promotional programs
consistent and the "store closing" or "going out of business" theme
(including, without limitation, by means of media advertising,
banners, A-frame and similar interior and exterior signs).
C. Pursuant to Section 363(f) of the Bankruptcy Code, all Merchandise to
be sold by Purchaser at the GOB Sales shall be sold free and clear of
any and all Liens, if
-65-
<PAGE>
any, with such Liens to attach to the Purchase Price paid under the
Purchase Agreement.
D. The Debtors and Purchaser are hereby authorized and empowered to
transfer inventory, equipment, furniture and fixtures to and from the
stores to be closed in accordance with the terms of the Purchase
Agreement, including, without limitation, to, from and between the
Stores, the Warehouses, any of Parent's Electric Avenue & More stores
the going out of business sales for which Purchaser is acting as
liquidation agent and any other stores and warehouses of Debtors'
affiliates.
E. All persons and entities of every nature and description, including
but not limited to landlords, utility companies, governmental
agencies, sheriffs, marshals or other public officers, creditors and
all those acting for or on their behalf, be, and they hereby are,
jointly and severally restrained and enjoined from (a) in any way
interfering with or otherwise impeding the conduct of the Store
Closing Sales at the Stores and the maintenance of Merchandise,
equipment, furniture and fixtures thereat, (b) instituting any action
or proceeding in any court or other administrative body having as its
objective the obtaining of an order or judgment which might in any way
directly or indirectly obstruct or otherwise interfere with or impair
the conduct of the Store Closing Sales thereat, and (c) taking any
action that interferes with or impedes Purchaser's receipt of all sums
due in accordance with the terms of the Purchase Agreement; provided,
--------
however, that nothing set forth in this paragraph shall be deemed to
-------
preclude parties in interest from appearing before this Court and
being heard on matters not adjudicated herein.
-66-
<PAGE>
F. Purchaser be, and hereby is, authorized to conduct the Store Closing
Sales and take all actions related thereto or arising in connection
therewith, without complying with federal, state or local laws, rules,
statutes, ordinances, licensing requirements and procedures of any
kind or nature.
G. Purchaser be, and hereby is, authorized to conduct the Store Closing
Sales and take all actions related thereto or arising in connection
therewith, notwithstanding any provision in any lease or other
document or instrument that purports to limit, restrict or modify such
actions, and Section 365(d)(3) of the Bankruptcy Code does not
preclude the relief granted in this paragraph.
H. The Debtors and Purchaser and their respective officers, employees and
agents be, and they hereby are, authorized to execute such documents
and to do such acts as are necessary or desirable to carry out the
Store Closing Sales and related actions authorized herein.
I. The Debtors and its officers, employees and agents shall not be
required to obtain the approval of any federal, state or local
governmental agency, department or other authority (each a
"Governmental Authority"), any landlord or any other third parties to
close the Stores; and Purchaser and its officers, employees and agents
shall not be required (a) to obtain the approval of any Governmental
Authority, any landlord or any other third parties to conduct the
Store Closing Sales and to take the related actions authorized herein
or (b) to execute, obtain or file releases, termination statements,
assignments, consents or other instruments to effect, consummate and
implement the provisions hereof.
IV. UNEXPIRED LEASES
----------------
-67-
<PAGE>
A. Pursuant to the Purchase Agreement, Purchaser is hereby granted the
authority to direct the Debtors to dispose of the leases covering the
Stores (the "Leases") as described in the Purchase Agreement and shall
have the option for 270 days after the Closing Date to direct the
applicable Debtor to assume and assign or reject such Leases.
B. The time by which the Debtor may elect to assume or reject the Leases,
pursuant to Section 365 of the Bankruptcy Code, is hereby extended to
__________,1998 (300 days after the Closing Date), subject to
Purchaser's right to direct the applicable Debtor to assume and assign
or reject any and all of such Leases prior to such date.
C. From and after the Closing Date to and including __________ ___, 1998,
Purchaser shall have the right to market the Leases in the manner it
deems reasonably necessary to maximize the value of such Leases for
the benefit of Purchaser and the Debtors' estates.
V. SEVERANCE PAY
-------------
A. The Debtors shall be, and hereby are, permitted to pay severance
claims in accordance with the plan set forth in the Motion.
VI. MISCELLANEOUS
-------------
A. This Court retains jurisdiction, even after the closing of the Chapter
11 cases, to:
(1) Interpret, implement and enforce the terms and provisions of this
Order (including the injunctive relief provided in this Order)
and the terms of the Purchase Agreement, all amendments thereto
and any waivers and
-68-
<PAGE>
consents thereunder and of each of the agreements executed in
connection therewith;
(2) Protect Purchaser, or any of the Purchased Assets, against any of
the Liens;
(3) Compel compliance with the Purchase Agreement and delivery of all
Purchased Assets to Purchaser;
(4) Resolve any disputes arising under or related to the Purchase
Agreement or the Transactions, Purchaser's peaceful use and
enjoyment of the Purchased Assets;
(5) Adjudicate all issues concerning (alleged) pre-Closing Liens, the
Leases and any other (alleged) interest(s) in and to the
Purchased Assets, including the extent, validity, enforceability,
priority and nature of all such (alleged) Liens, the Leases and
any other (alleged) interest(s);
(6) Adjudicate any and all issues and/or disputes relating to the
Debtors' right, title or interest in the Purchased Assets and the
proceeds thereof, the Motion and/or the Purchase Agreement; and
(7) Re-open the Bankruptcy Cases to enforce the provisions of this
Order.
B. No bulk sales law or any similar law of any state or other
jurisdiction shall apply in any way to the Transactions.
C. Pursuant to Section 1146(c) of the Bankruptcy Code, no transfer, stamp
or similar tax shall apply to the Transactions.
D. The failure specifically to include any particular provisions of the
Purchase Agreement in this Order shall not diminish or impair the
efficacy of such
-69-
<PAGE>
provision, it being the intent of the Court that the Purchase
Agreement and each and every provision, term, and condition thereof be
authorized and approved in its entirety.
E. Purchaser may consummate the Transactions at any time after entry of
this Order by waiving any and all closing conditions set forth in the
Purchase Agreement that have not been satisfied and by proceeding to
close the Transactions without any notice to the Court, any pre- or
post-petition creditor of the Debtors and/or any other party in
interest.
F. This Order and the judgment Order entered contemporaneously in
connection herewith shall be effective immediately upon entry pursuant
to Rule 7062 and 9014 of the Federal Rules of Bankruptcy Procedure,
and no automatic stay of execution, pursuant to Rule 62(a) of the
Federal Rules of Civil Procedure, applies with respect to this Order
and/or the Judgment Order entered in connection herewith.
G. Pursuant to Rule 58 of the Federal Rules of Civil Procedure, as made
applicable herein by Rule 9021 of the Federal Rules of Bankruptcy
Procedure, a separate document in the form of a Judgment Order shall
be entered contemporaneously herewith approving the Sale Motion.
Dated: Wilmington, Delaware
August 14, 1997
By: /s/ Peter J. Walsh
-------------------------------------
Name: Peter J. Walsh
Title: United States Bankruptcy Judge
-70-
<PAGE>
AGENCY AGREEMENT
DATED AS OF
AUGUST 14, 1997
BETWEEN
SCHOTTENSTEIN BERNSTEIN CAPITAL
GROUP LLC AS AGENT
AND
MONTGOMERY WARD & CO., INCORPORATED,
AS MERCHANT
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1. Defined Terms................................................. 4
- --------- -------------
Section 2. Appointment of Agent; Bankruptcy Court Approval............... 6
- --------- -----------------------------------------------
Section 3. Consideration to Merchant and Agent........................... 7
- --------- -----------------------------------
3.1 Payments to Merchant.............................................. 7
--------------------
3.2 Compensation to Agent............................................. 7
---------------------
3.3 Time of Payments.................................................. 8
----------------
Section 4. Expenses of the Sale.......................................... 8
- --------- --------------------
4.1 Expenses........................................................... 8
--------
4.2 Payment of Expenses............................................... 10
-------------------
Section 5. Inventory Valuation; Merchandise.............................. 10
- --------- --------------------------------
5.1 Inventory Taking.................................................. 10
----------------
5.2 Valuation......................................................... 10
---------
5.3 Gross Rings....................................................... 10
-----------
5.4 Post-Closing Payment.............................................. 10
--------------------
5.5 Additional Inventory.............................................. 11
--------------------
5.6 Merchandise Subject to this Agreement............................. 12
-------------------------------------
Excluded Goods............................................................. 12
--------------
Section 6. Sale Term..................................................... 13
- --------- ---------
6.1 Term.............................................................. 13
----
6.2 Vacating the Stores............................................... 13
-------------------
Section 7. Sale Proceeds................................................. 13
- --------- -------------
7.1 Proceeds.......................................................... 13
--------
7.2 Deposit of proceeds............................................... 14
-------------------
7.3 Credit Card Proceeds.............................................. 14
--------------------
Section 8 Conduct of the Sale........................................... 14
- --------- -------------------
8.1 Rights of Agent................................................... 14
---------------
8.2 Terms of Sales to Customers....................................... 15
---------------------------
8.3 Sales Taxes....................................................... 15
-----------
8.4 Supplies.......................................................... 16
--------
8.5 Returns of Merchandise............................................ 16
----------------------
8.6 Layaway, Repair and Special Order Merchandise..................... 17
---------------------------------------------
8.7 Sale Reconciliation............................................... 17
-------------------
8.8 Service Contracts................................................. 17
-----------------
8.9 Force Majeure..................................................... 17
-------------
Section 9. Employee Matters.............................................. 18
- --------- ----------------
9.1 Merchant's Employees.............................................. 18
--------------------
9.2 Termination of Employees.......................................... 18
------------------------
9.3 Payroll Matters................................................... 19
---------------
9.4 Employee Retention Bonuses........................................ 19
--------------------------
Section 10. Conditions Precedent.......................................... 19
- ---------- --------------------
Section 11. Representations, Warranties and Covenants..................... 19
- ---------- -----------------------------------------
11.1 Merchant Representations, Warranties and Covenants................ 19
--------------------------------------------------
11.2 Agent Representations and Warranties.............................. 23
------------------------------------
Section 12. Insurance..................................................... 24
- ---------- ---------
12.1 Merchant's Liability Insurance.................................... 24
------------------------------
12.2 Merchant's Casualty Insurance..................................... 24
-----------------------------
12.3 Agent's Insurance................................................. 25
-----------------
12.4 Worker's Compensation Insurance................................... 25
-------------------------------
12.5 Risk of Loss...................................................... 25
------------
Section 13. Indemnification............................................... 26
- ---------- ---------------
13.1. Merchant Indemnification.......................................... 26
------------------------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
13.2 Agent Indemnification............................................... 27
---------------------
Section 14. Defaults....................................................... 27
- ---------- --------
Section 15. Sale of FF&E................................................... 28
- ---------- ------------
15.1 Sale for Commission................................................. 28
-------------------
15.2 Guaranteed Return................................................... 28
---------------------
Section 16. Claims under certain Leases.................................... 28
- ---------- ---------------------------
16.1 Agent Services...................................................... 28
--------------
16.2 Agent Compensation.................................................. 29
------------------
Section 17. Bidding Procedures............................................. 29
- ---------- ------------------
17.1 Procedure/timing.................................................... 29
----------------
17.2 Break-Up Fee; Bid Procedures...................................... 29
----------------------------
Section 18. Security Interest.............................................. 30
- ---------- -----------------
Section 19. Miscellaneous.................................................. 30
- ---------- -------------
19.1 Notices............................................................. 30
-------
19.2 Governing Law..................................................... 31
-------------
19.3 Termination....................................................... 31
-----------
19.4 Entire Agreement.................................................. 31
----------------
19.5 Amendments........................................................ 31
----------
19.6 No Waiver......................................................... 31
---------
19.7 Successors and Assigns............................................ 31
----------------------
19.9 Execution in Counterparts......................................... 32
-------------------------
19.10 Section Headings.................................................... 32
--------------
19.11 Survival.......................................................... 32
--------
</TABLE>
3
<PAGE>
AGENCY AGREEMENT
----------------
This Agency Agreement is made as of this 14th day of August, 1997, by and
between Schottenstein Bernstein Capital Group LLC, a Delaware limited liability
company (the "Agent"), and Montgomery Ward & Co., Incorporated, an Illinois
-----
corporation, and debtor and debtor in possession ("Merchant") in a case pending
--------
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court").
----------------
R E C I T A L S
- - - - - - - -
WHEREAS, the Merchant is a debtor and debtor in possession under Chapter 11
of the United States Bankruptcy Code, 11 U.S.C. sections 101-1330 (as amended,
the "Bankruptcy Code"); and
---------------
WHEREAS, the Merchant desires that the Agent act as the Merchant's
exclusive agent for the limited purpose of selling all of the Merchandise (as
hereinafter defined) located in Merchant's 11 Electric Avenue & More retail
store location(s) listed on Exhibit 1 attached hereto (each individually a
---------
"Store," and collectively the "Stores"), by means of a promotional store closing
----- -----
or similar sale (as further described below, each individually a "Sale" and
----
collectively, the "Sales").
-----
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Agent and the Merchant hereby
agree as follows:
Section 1. Defined Terms. The terms set forth below are defined in the
--------- -------------
referenced sections of this Agreement:
<TABLE>
<CAPTION>
Defined Term Section Reference
------------ -----------------
<S> <C>
Additional Inventory Section 5.5
Additional Inventory Amount Section 5.5(b)
Agency Accounts Section 7.2
Agency Documents Section 11.1(b)
Agent Preamble
Agent Claim Section 12.5
Agent Indemnified Parties Section 13.1
Approval Order Section 2
Auction Section 17.1
Bankruptcy Code Recitals
Bankruptcy Court Preamble
Benefits Cap Section 4.1(b)
</TABLE>
4
<PAGE>
Defined Term Section Reference
------------ -----------------
Break-Up Fee Section 17.2
Central Service Expenses Section 4.1
Closing Merchandise Inventory Section 5.4
Cost Value Section 5.2
Defective Merchandise Section 5.2(b)
Defective Merchandise Amount Section 3.1(a)
DIP Lender Consent Section 11.1(b)
Display Merchandise Section 5.6(b)
Entry Section 3.3
Estimated Guaranteed Amount Section 3.3
Excluded Benefits Section 4.1
Expenses Section 4.1
FF&E Section 5.2(a)
Gross Rings Section 5.3
Guaranteed Amount Section 3.1(a)
Initial Settlement Date Section 5.4
Inventory Date Section 5.1
Inventory Taking Section 5.1
Layaway Pick-up Date Section 8.6
Layaway, Repair and
Special Order Merchandise Section 5.6(b)
Lease(s) Section 16.1
Leasehold Liability Section 16.1
Liens Section 2
Merchandise Section 5.2(a)
Merchandise Threshold Section 3.1(b)
Merchant Preamble
Motion Section 17.1
Notice of Disagreement Section 5.4
Occupancy Expenses Section 4.1
Proceeds Section 7.1
Retail Value Section 3.1(c)
Retained Employee Section 9.1
Retention Bonus Section 9.4
Returned Merchandise Section 8.5
Sale Recitals
Saleable Inventory Section 5.6(b)
Sale Commencement Date Section 6.1
Sale Term Section 6.1
Sale Termination Date Section 6.1
Sales Taxes Section 8.3
Second Phase Additional Inventory Section 5.5(b)
Store(s) Recitals
Supplies Section 8.4
5
<PAGE>
Warehouses Section 5.6(a)
WARN Act Section 9.1
Section 2. Appointment of Agent; Bankruptcy Court Approval. The Merchant
--------- -----------------------------------------------
hereby appoints the Agent, and the Agent hereby agrees to serve, as the
Merchant's exclusive agent for the limited purpose of conducting the Sales in
accordance with the terms and conditions of this Agreement. Merchant's and
Agent's obligations hereunder are subject to approval of the Bankruptcy Court
and shall be of no force and effect in the event that this Agreement is not so
approved. As soon a s practicable after Merchant's execution of this Agreement,
Merchant shall seek Bankruptcy Court approval of an order approving this
Agreement in its entirety in a form satisfactory to the Agent (the "Approval
--------
Order"). The Approval Order shall provide, among other things, that: (i) this
- -----
Agreement is in the best interests of Merchant, Merchant's estate, creditors and
other parties in interest; (ii) this Agreement (and each of the transactions
contemplated hereby) is approved in its entirety; (iii) Merchant and Agent shall
be authorized to take any and all actions as may be necessary or desirable to
implement this Agreement and each of the transactions contemplated hereby; (iv)
Agent shall be entitled to sell all Merchandise hereunder free and clear of all
liens, claims, encumbrances or interests (collectively, "Liens") thereon; any
-----
presently existing Liens encumbering all or any portion of the Merchandise or
the Proceeds attaching only to the Guaranteed Amount and amounts reimbursed to
Merchant on account of Expenses; (v) Agent shall have the right to use the
Stores and all related Store services, furniture, fixtures, equipment and other
assets of Merchant as designated hereunder for the purpose of conducting the
Sales, free of any interference from any entity or person; (vi) Agent, as agent
for Merchant, is authorized to conduct Store "going out of business" or similar
type sales under the name "Electric Avenue & More" and derivatives thereof and,
subject to the Approval Order, shall have the right to conduct such Sales in the
manner in which Agent deems appropriate, including by advertising, posting signs
or otherwise promoting the Sales as "store closing," "going out of business" or
similar type sales without further consent of any person notwithstanding the
terms of any lease that purport to restrict the conduct of such Sale; (vii)
Agent shall be granted a limited license and right to use until the Sale
Termination Date the trade names, logos and customer lists relating to and used
in connection with the operation of the Stores, solely for the purpose of
advertising the Sales in accordance with the terms of this Agreement; (viii)
each and every federal, state or local agency, department or governmental
authority with regulatory authority "Governmental Authorities") over the Sales
------------------------
shall be directed to accept the Approval Order as binding and to allow Merchant
and Agent to consummate the transactions provided for in this Agreement,
including, without limitation, the conducting and advertising of the Sales in
the manner contemplated by this Agreement, and no further approval, license or
permit of any Governmental Authority shall be required; (ix) all utilities,
landlords, creditors and all persons acting for or on their behalf shall not
interfere with or otherwise impede the conduct of the Sales, institute any
action in any court (other than in the Bankruptcy Court) or before any
administrative body which in any way directly or indirectly interferes with or
obstructs or impedes the conduct of the Sales; (x) the Bankruptcy Court shall
retain jurisdiction over
6
<PAGE>
the parties to enforce this Agreement; (xi) Agent shall not be liable for any
claims against the Merchant other than as expressly provided for in this
Agreement, and Agent shall have no successorship liabilities whatsoever (whether
by statute, common law or otherwise); and (xii) Agent and sales of Merchandise
shall be protected by Section 363(m) of the Bankruptcy Code in the event that
the Approval Order is reversed or modified on appeal.
Section 3. Consideration to Merchant and Agent.
--------- -----------------------------------
3.1. Payments to Merchant
--------------------
(a) As a guaranty of Agent's performance hereunder, Merchant
shall receive from Agent the sum of 77% of the aggregate Cost Value of the
Saleable Inventory included in the Closing Merchandise Inventory (determined in
accordance with section 5.4 below), plus (ii) the amount payable for the
Defective Merchandise as agreed to by Agent and Merchant (the "Defective
---------
Merchandise Amount") plus (iii) the Additional Inventory Amount (the amounts
- ------------------
payable under clauses (i), (ii), and (iii) are collectively referred to herein
as the "Guaranteed Amount"); provided, however, that Agent shall have no
----------------- -------- -------
obligation hereunder to pay any amount to Merchant with respect to Defective
Merchandise for which Merchant and Agent are unable to agree upon a Cost Value
(as adjusted for the applicable prevailing discount price) or Merchandise
received at the Stores on or after the 30th day after the Sale Commencement
Date.
(b) The Guaranteed Amount has been calculated and agreed upon
based upon Merchant's representation that the aggregate Retail Value of the
Merchandise as of the Sale Commencement Date will not be less than $45 million
(the "Merchandise Threshold"), that all such Merchandise will conform to
---------------------
Merchant's representations and warranties contained herein, and that no
representations, warranties or covenants of Merchant hereunder have been
breached. Merchant and Agent agree that in the event that the final report of
the inventory taking service described in Section 5.1 below indicates that the
Retail Value of Merchandise is less than the Merchandise Threshold, then the
percentage on which the Guaranteed Amount is based shall be reduced by .25% for
every $1,000,000 the aggregate Merchandise Retail Value is less than $45
million; provided, however, under no circumstances will the aggregate Retail
-------- -------
Value of the Merchandise be less than $33,000,000.
(c) For purposes of this Agreement, "Retail Value" with respect to
------------
any Merchandise shall mean the database regular selling price or SKU price per
unit for such Merchandise.
3.2 Compensation to Agent. Agent shall receive as its compensation
---------------------
for services rendered to Merchant hereunder all remaining Proceeds after payment
of Expenses, the Guaranteed Amount and any other amounts payable to Merchant
from Proceeds free and clear of any and all liens, claims, rights, interests and
encumbrances
7
<PAGE>
hereunder. All Merchandise remaining at the conclusion of the Sales shall
become the property of Agent, free and clear of all Liens of any kind or nature.
3.3 Time of Payments. The Agent shall pay to Merchant 75% of the
----------------
Estimated Guaranteed Amount on the later of the Sale Commencement Date and one
business day after entry by the Clerk of the Bankruptcy Court ("Entry") of the
-----
Approval Order. Thereafter, within two (2) business days after the Initial
Settlement Date, Agent shall pay to Merchant any portion of the of the Post-
Closing Payment that is not subject to the Notice of Disagreement. Agent shall
pay to Merchant any kisputed portions of the Post-Closing Payment as soon as
practicable after resolution of such dispute in accordance with Section 5.4
below.
"Estimated Guaranteed Amount" shall mean 75% of the net book value of the
---------------------------
Merchandise at cost as of the Sale Commencement Date as reflected in the
Merchant's books and records in the ordinary course of business and in
accordance with past custom and practice.
All payments by Merchant to Agent hereunder shall be by wire transfer of
immediately available funds. Merchant agrees that any amounts due by Agent to
Merchant pursuant to this Section 3 may in Agent's discretion be offset by the
amount of credit card Proceeds processed by Merchant for Agent's account (if
any) which have not, as of the applicable date of payment by Agent to Merchant
been transferred by Merchant to Agent in accordance with Section 7.3 hereof.
Section 4. Expenses of the Sale.
--------- --------------------
4.1. Expenses. Agent shall be responsible for all Expenses incurred
--------
in conducting the Sales. As used herein, "Expenses" shall mean the following
--------
direct Store-level third party out-of-pocket costs and expenses incurred in
connection with the Sales at the Stores which arise during the Sale Term at the
Stores on a per diem, per Store basis:
(a) base payroll actually accruing during the Sale Term for
Retained Employees for actual days/hours worked in the conduct of the Sales;
(b) amounts actually accruing during the Sale Term in respect
of FICA, unemployment taxes, worker's compensation and benefits for Retained
Employees, in an amount not to exceed 12% of base payroll for each Retained
Employee (the "Benefits Cap");
------------
(c) 50% of the fees and costs of the inventory taking service
to conduct the Inventory Taking;
(d) Agent's Sale supervisors' fees and travel costs;
(e) advertising and promotional costs (at Merchant's contract
8
<PAGE>
rates, if available) and in-Store signage expenses;
(f) telephone expenses incurred in the conduct of the Sales;
(g) credit card and bank card fees and discounts (at
Merchant's customary rates) and chargebacks;
(h) costs of security personnel in the Stores; trash
collection and armored car services;
(i) a pro-rata portion of Merchant's casualty insurance
premiums attributable to the Merchandise;
(j) net delivery charges to customers, provided that Merchant
continue to provide delivery services consistent with past custom and practice;
(k) Retention Bonuses as described in Section 9.4 below; and
(l) Occupancy Expenses, limited on a per diem per Store basis
and limited to those amounts for each category as shown in Exhibit 4.1(l)
--------------
attached hereto.
"Expenses" shall not include: (i) Excluded Benefits; (ii) Central Service
Expenses; (iii) all costs associated with the transfer of on order Merchandise
from Merchant's distribution centers to the Stores; and (iv) any other costs,
expenses or liabilities payable by Merchant and not the responsibility of Agent
hereunder, all of which shall be paid by Merchant promptly when due for and
during the Sale Term.
As used herein, the following terms have the following respective meanings:
"Central Service Expenses" means costs and expenses for Merchant's central
------------------------
administrative services necessary for the Sales, including, but not limited to,
MIS services, POS administration, payroll processing, sales audit, cash
reconciliation, and data processing and reporting.
"Excluded Benefits" means vacation days or vacation pay, sick days or sick
-----------------
leave, maternity leave or other leaves of absence, termination or severance pay,
union dues, pension benefits, ERISA coverage and similar contributions, and, to
the extent in excess of the Benefits Cap, payroll taxes, worker's compensation
and health insurance benefits.
"Occupancy Expenses" means base rent, percentage rent on the sales that
------------------
shall have accrued during the Sale Term, (if any), HVAC, utilities, CAM, real
estate taxes, Merchant's association dues and charges, building insurance
relating to the Stores, trash and snow removal, cash register maintenance, alarm
service and alarm
9
<PAGE>
system maintenance, and building maintenance.
4.2. Payment of Expenses. All Expenses incurred during each week of
-------------------
the Sales (i.e., Sunday through Saturday) shall be paid by Agent to or on behalf
of Merchant, or offset from credit card Proceeds held by Merchant and not
applied pursuant to Section 7.3 below, immediately following the weekly Sale
reconciliation by Merchant and Agent pursuant to Section 8.7 below, based upon
invoices and other documentation reasonably satisfactory to Agent.
Section 5. Inventory Valuation; Merchandise.
--------------------------------
5.1. Inventory Taking. As soon as practicable after the Sale
----------------
Commencement Date, the Agent and the Merchant shall jointly take a retail and
SKU inventory of the Saleable Inventory located at each Store and Warehouse in
accordance with the inventory procedures set forth on Exhibit 5.1 hereto to
-----------
obtain the cost of the Saleable Inventory located thereat (the "Inventory
---------
Taking") (the date of the Inventory Taking at each Store or Warehouse being the
- ------
"Inventory Date" for such Store or Warehouse). Agent and the Merchant shall
--------------
jointly employ RGIS or another mutually acceptable inventory taking service to
conduct the Inventory Taking. Agent and the Merchant shall each be responsible
for 50% of the costs and fees of such inventory taking service. Except as
provided in the immediately preceding sentence, the Agent and the Merchant shall
each bear their respective costs and expenses relative to the Inventory Taking.
The Agent and the Merchant shall each have representatives present during the
Inventory Taking, and shall each have the right to review and verify the listing
and tabulation of the inventory taking service. During the Inventory Taking,
Agent and Merchant shall work in good faith to agree on the Defective
Merchandise Amount. The parties agree that during the conduct of the Inventory
Taking at each Store, such Store shall be closed to the public and no sales or
other transactions shall be conducted.
5.2 Valuation. For purposes of this Agreement, "Cost Value" shall
--------- ----------
mean, with respect to each item of Saleable Inventory, the Merchant's cost
therefor as previously provided to Agent in that certain Store Merchandise
Condition Report for the end of month/July, 1997, except for Layaway, Repair and
Special Order Merchandise, where "Cost Value" shall the Cost Value as described
----------
above less amounts received by the Merchant from customers prior to Entry of the
Approval Order.
5.3 Gross Rings. In the event that sales occur at any Store prior
-----------
to the completion of the Inventory Taking at such Store, then for the period
from the Sale Commencement Date until the Inventory Date for such Store, Agent
or Merchant, as the case may be, shall keep a strict count of uits of
Merchandise sold (by SKU, if possible) ("Gross Rings"). All register receipts
-----------
and other records and reports shall be made available to Agent and the Merchant
during regular business hours upon reasonable notice.
5.4 Post-Closing Payment. Within 10 days after the last Inventory
--------------------
10
<PAGE>
Date, Merchant shall deliver to Agent a statement of the aggregate amount of
the Cost Value of all Saleable Inventory included in the Inventory Taking
determined in accordance with Sections 5.1, 5.2 and 5.3 plus the Cost Value of
----
all Saleable Inventory subject to Gross Rings at each Store between the Sale
Commencement Date and the Inventory Date at such Store (the "Closing Merchandise
-------------------
Inventory"), together with Merchant's good faith determination of the Post-
- ---------
Closing Payment. During the period immediately following the Agent's receipt of
such Closing Merchandise Inventory and until the Post-Closing Payment is finally
determined pursuant to this Section 5.4, the representatives and agents
designated by Agent shall be permitted to review Merchant's books and records
and working papers related to the preparation of the Closing Merchandise
Inventory and determination of the Post-Closing Payment. The Closing Merchandise
Inventory and Merchant's determination of the Post-Closing Payment shall become
final and binding upon the parties five days after Agent's receipt thereof (the
"Initial Settlement Date"), unless Agent gives written notice to Merchant of its
-----------------------
disagreement ("Notice of Disagreement") prior to such date. Any Notice of
----------------------
Disagreement shall specify in reasonable detail the nature of any disagreement
so asserted. If a timely Notice of Disagreement is received by Merchant, then
the Closing Merchandise Inventory and the determination of the Post-Closing
Payment (as revised in accordance with clause (i) or (ii) below) shall become
final and binding upon the parties on the earliest of (i) the date the parties
hereto resolve in writing any differences they have with respect to the matters
specified in the Notice of Disagreement or (ii) the date all matters in dispute
are finally resolved in writing by the Bankruptcy Court. During the 10 days
following delivery of a Notice of Disagreement, Agent and the Merchant shall
seek in good faith to resolve in writing any differences which they may have
with respect to the matters specified in the Notice of Disagreement. During such
period, a representative appointed by Merchant shall be permitted to review the
Agent's working papers relating to the Notice of Disagreement. At the end of
such 10-day period, Agent and the Merchant shall submit to the Bankruptcy Court
for review and resolution all matters which remain in dispute which were
included in the Notice of Disagreement, and the Bankruptcy Court shall make a
final determination of Closing Merchandise Inventory and the Post-Closing
Payment in accordance with the guidelines and procedures set forth in this
Agreement. The Closing Merchandise Inventory and the Post-Closing Payment as
determined in accordance with this Section 5.4 shall become final and binding on
the parties on the date the Bankruptcy Court delivers its final resolution to
the parties. Agent and Merchant shall each bear their own fees and expenses in
connection with the Bankruptcy Court's resolution.
5.5 Additional Inventory. (a) Within 21 days after the Sale of the
--------------------
Commencement Date, the Agent shall deliver to the Merchant a statement setting
out any Merchandise ordered by the Merchant prior to the Sale Commencement Date
and received by Agent within 14 days after the Sale Commencement Date and not
included in the Inventory Taking (the "First Phase Additional Inventory"). With
--------------------------------
such statement, Agent shall include a check in an amount equal to 75% of the
Cost Value for all First Phase Additional Inventory.
11
<PAGE>
(b) Within 40 days after the Sale Commencement Date, Agent shall
deliver to Merchant a statement setting out any Merchandise ordered by Merchant
prior to the Sale Commencement Date and received by Agent during the period
commencing 15 days after the Sale Commencement Date and ending 30 days after the
Sale Commencement Date and not included in the Inventory Taking (the "Second
------
Phase Additional Inventory"). With such statement, Agent shall include a check
- --------------------------
in an amount equal to 75% of the Cost Value for all Second Phase Additional
Inventory times the complement of the then prevailing Sale discount. The First
Phase Additional Inventory and the Second Phase Additional Inventory are
collectively referred to herein as the "Additional Inventory").
--------------------
5.6. Merchandise Subject to this Agreement.
-------------------------------------
(a) For purposes of this Agreement, "Merchandise" shall mean:
-----------
(i) all merchandise located at the Stores or in the merchandise storage
facilities of Merchant set forth on underlying Exhibit 5.6(a) hereto (the
-------------
"Warehouses") or in transit between the Stores and the Warehouses, including,
----------
(i) Saleable Inventory, (ii) Layaway, Repair and Special Order Merchandise and
(iii) Defective Merchandise. Notwithstanding the foregoing, "Merchandise" shall
not include: (1) goods which belong to sublessees, licensees or concessionaires
of Merchant; (2) goods held by Merchant on memo, on consignment, or as bailee;
(3) furnishings, trade fixtures, equipment and improvements to real property
which are located in the Stores (collectively, "FF&E"); or (4) Defective
----
Merchandise for which Merchant and Agent cannot agree upon a Cost Value.
(b) As used in this Agreement the following terms have the
respective meanings set forth below:
"Defective Merchandise" means any item of Merchandise that is
---------------------
damaged, defective or otherwise not salable in the ordinary course.
"Layaway, Repair, and Special Order Merchandise" means all items
----------------------------------------------
of Merchandise held by the Company on layaway or for repair, or customer-
specific special orders, in each case pursuant to binding agreements, invoices
or other legal documentation, where (A) the documentation is clear as to the
name, address, telephone number, date of last payment and balance due from the
customer, and (B) the goods subject to layaway are fully described in the
documentation.
5.7. Excluded Goods. Merchant shall retain all
--------------
responsibility for any goods not included as "Merchandise" hereunder, including
without limitation, Defective Merchandise for which the Agent and Merchant are
unable to agree upon a Cost Value.
"Saleable Inventory" means all Merchandise that is first
------------------
quality inventory and all Merchandise located at the Stores (but not the
Warehouses) that is
12
<PAGE>
less than first quality inventory but that is on the selling floor and is
saleable in the ordinary course, including samples and displays that are not
Defective Merchandise.
Section 6. Sale Term.
--------- ---------
6.1. Term. Subject to satisfaction of the conditions precedent set
----
forth in Section 13 hereof, the Sale shall commence after Entry of the Approval
Order (such date with respect to each Store being the "Sale Commencement Date").
----------------------
The Sale shall terminate at each Store by no later than 12 complete weeks after
the Sale Commencement Date (including, for purposes of calculation, the Sale
Commencement Date), or as may be extended by Agent on a Store by Store basis
(the "Sale Termination Date"). "Sale Term" shall mean the period between the
--------------------- ---------
Sale Commencement Date and the Sale Termination Date at each respective Store.
Agent may, in its sole discretion, terminate the Sale at any Store prior to the
Sale Termination Date; provided, however, that in no event may the Sale at any
-------- -------
of the Stores be conducted after the Sale Termination Date unless mutually
agreed by Merchant and Agent in writing and in such event no additional
Bankruptcy Court approval or order or notice to third parties is required.
Agent's representatives, supervisors and employees shall have the right to enter
any Store and the use of one office in the Merchant's corporate offices during
normal business hours on or after the date hereof to prepare for the Sales, and
the Merchant shall cooperate reasonably with Agent in such preparation.
6.2. Vacating the Stores. Subject to any right granted to Agent to
-------------------
sell or dispose of the FF&E pursuant to Section 15 below, at the end of the Sale
Term in each Store and, in any event, not later than the Sale Termination Date
applicable thereto, Agent agrees to leave each Store in "broom clean" condition
and shall repair damage to the premises caused by removal, if any, of the FF&E
by Agent or actions of Agent, ordinary wear and tear excluding. Subject to any
right granted to Agent to sell or dispose of the FF&E pursuant to Section 15
below, Agent shall vacate the Stores on or before the Sale Termination Date, at
which time Agent shall surrender and deliver the Store premises and Store keys
to Merchant. Subject to any right granted to Agent to sell or dispose of the
FF&E pursuant to Section 15 below, all assets of Merchant used by Agent in the
conduct of the Sale (e.g. FF&E, Supplies, etc.) shall be returned by Agent to
Merchant at the end of the Sale Term to the extent the same have not been
consumed in the conduct of the Sale or have not been otherwise disposed of
through no fault of the Agent.
Section 7. Sale Proceeds.
--------- -------------
7.1. Proceeds. For purposes of this Agreement, "Proceeds" shall mean
--------
the aggregate of: (a) the total amount (in dollars) of all sales of Merchandise
made under this Agreement, exclusive of (i) Sales Taxes, (ii) credit card and
bankcard fees and chargebacks, and (iii) returns, allowances and customer
credits; and (b) all proceeds of Merchant's insurance for loss or damage to
Merchandise or loss of cash
13
<PAGE>
arising from events occurring during the Sale Term.
7.2. Deposit of Proceeds. All cash Proceeds shall be deposited by
-------------------
Agent in agency accounts established by Agent (the "Agency Accounts"). Agent
---------------
may, in its discretion, designate new or existing accounts of Agent or Merchant
as the Agency Accounts, provided that such accounts are dedicated solely to the
deposit of Proceeds and the disbursement of amounts payable by Agent hereunder.
Agent shall exercise sole signatory authority and control with respect to the
Agency Accounts. Merchant shall promptly upon Agent's request execute and
deliver all necessary documents to open and maintain the Agency Accounts. To the
extent that Agent shall elect to use existing accounts of Merchant as the Agency
Accounts, (i) commencing on the first business day following the Sale
Commencement Date, and on each business day thereafter, Merchant shall pay to
Agent by wire funds transfer all collected funds constituting Proceeds deposited
in such accounts, and (ii) upon request, Merchant shall deliver to Agent copies
of all bank statements and other information relating to such accounts. Merchant
shall not be responsible for and Agent shall pay as an Expense hereunder, all
bank fee and charges, including wire transfer charges, related to the Agency
Accounts, whether received during or after the Sale Term.
7.3. Credit Card Proceeds. Agent shall have the right (but not the
--------------------
obligation) to use Merchant's credit card facilities (including Merchant's
credit card terminals and processor(s), credit card processor coding, merchant
identification number(s) and existing bank accounts) for credit card Proceeds.
In the event that Agent elects so to use Merchant's credit card facilities,
Merchant shall process credit card transactions on behalf of Agent and for
Agent's account, applying customary practices and procedures. Without limiting
the foregoing, Merchant shall cooperate with Agent to down-load data from all
credit card terminals each day during the Sale Term and to effect settlement
with Merchant's credit card processor(s), and shall take such other actions
necessary to process credit card transactions on behalf of Agent under
Merchant's merchant identification number(s). All credit card Proceeds will
constitute the property of the Agent and shall be held by Merchant in trust for
Agent. Merchant shall deposit all credit card Proceeds into a designated account
and shall transfer such Proceeds to Agent daily (on the date received by
Merchant if received prior to 12:00 noon, or otherwise within one business day)
by wire transfer of immediately available funds. At Agent's request, Merchant
shall cooperate with Agent to establish merchant identification numbers under
Agent's name to enable Agent to process all credit card Proceeds for Agent's
account. Merchant shall not be responsible for and Agent shall pay as an Expense
hereunder, all credit card fees, charges, and chargebacks related to the Sale,
whether received during or after the Sale Term. Notwithstanding anything to the
contrary contained in this Section 7.3, Agent shall not have the right to use
Merchant's private label charge cards.
Section 8. Conduct of the Sale.
--------- -------------------
8.1. Rights of Agent. The Agent shall be permitted to conduct the
---------------
Sales
14
<PAGE>
as a "store closing" or "going out of business" or similar sales throughout the
Sale Term. The Agent shall conduct the Sales in the name of and on behalf of the
Merchant in a commercially reasonable manner and in compliance with the terms of
this Agreement and the Approval Order. In addition to any other rights granted
to Agent hereunder and subject to Entry of the Approval Order, in conducting the
Sales, the Agent, in the exercise of its sole discretion, shall have the right:
(a) to establish and implement advertising, signage, and
promotion programs consistent with the "store closing" or "going out of
business" theme (including, without limitation, by means of media advertising,
banners, A-frame, and similar interior and exterior signs);
(b) to establish Sale prices and Store hours;
(c) to use without charge during the Sale Term all FF&E, motor
vehicles, advertising materials, bank accounts, Store-level customer lists and
mailing lists, computer hardware and software, Supplies, intangible assets
(including Merchant's name, logo and tax identification numbers), Store keys,
case keys, security codes, and safe and lock combinations required to gain
access to and operate the Stores, and any other assets of Merchant located at
the Stores or the Warehouses (whether owned, leased, or licensed);
(d) to transfer Merchandise between Stores and/or between the
Stores, the Warehouses and the other stores of Merchant and its affiliates; and
(e) to use (i) Merchant's central office facilities, central and
administrative services and personnel to process payroll, perform MIS services
and cash reconciliation, and provide other central office services necessary for
the Sales, and (ii) one office located at Merchant's central office facility.
8.2. Terms of Sales to Customers. All sales of Merchandise will be
---------------------------
"final sales" and "as is," and all advertisements and sales receipts will
reflect the same. Agent shall not warrant the Merchandise in any manner, but
will, to the extent legally permissible, pass on all manufacturer's warranties
to customers. All sales will be made only for cash, and by bank credit cards
currently accepted by Merchant, but excluding Merchant's private label charge
cards. Agent shall at Merchant's request accept Merchant gift certificates,
Store credits, due bills, rain checks, discount cards and other promotional
items providing the customer with an additional discount on Store Merchandise
which have been issued by Merchant prior to the Sale Commencement Date, provided
that Merchant agrees to reimburse Agent in cash for the face amount of any such
items within five (5) days after Agent's request therefor.
8.3. Sales Taxes. During the Sale Term, all sales, excise, gross
-----------
receipts and other taxes attributable to sales of Merchandise (other than taxes
on income) payable to any taxing authority having jurisdiction (collectively,
"Sales Taxes") shall be
-----------
15
<PAGE>
added to the sales price of Merchandise and collected by Agent at the time of
sale. The Agent shall draw checks on the Agency Accounts payable to the
applicable taxing authorities in the amount so collected, which shall be
delivered together with accompanying schedules to Merchant on a timely basis for
payment of taxes when due. Merchant shall promptly pay all Sales Taxes and file
all applicable reports and documents required by the applicable taxing
authorities. Merchant will be given access to the computation of gross receipts
for verification of all such tax collections.
8.4. Supplies. Agent shall have the right to use, without charge, all
--------
existing supplies located at the Stores and the Warehouse, including, without
limitation, boxes, bags, paper, twine and similar sales materials (collectively,
"Supplies"). In the event that additional Supplies are required in any of the
--------
Stores during the Sale, Merchant agrees to promptly provide the same to Agent,
if available, for which Agent shall reimburse Merchant at Merchant's cost
therefor. Merchant does not warrant that the existing Supplies in the Stores as
of the Sale Commencement Date are adequate for the purposes of the Sale.
Supplies have not been since July 1, 1997, and shall not be prior to the Sale
Commencement Date, transferred by Merchant between or among the Stores,
Merchant's other locations not subject to the Sale and/or the Warehouses, so as
to alter the mix or quantity of Supplies at the Stores from that existing on
such date, other than in the ordinary course of business.
8.5. Returns of Merchandise. During the Sale Term the Agent shall
----------------------
accept returns of goods sold by Merchant from the Stores prior to the Sale
Commencement Date ("Returned Merchandise"), provided such goods are accompanied
--------------------
by the original Store receipt and such return is otherwise in accordance with
the applicable return policy for such Store in effect prior to the Sale
Commencement Date. Merchant shall reimburse Agent in cash for the amount of any
store credit or refund given to any customer in respect of Returned Merchandise.
To the extent that Returned Merchandise is saleable as first quality inventory,
it shall be included in Merchandise and for purposes of calculation of the
Guaranteed Amount, shall be valued at the Cost Value applicable to such item
multiplied by the compliment of the prevailing Sale discount at the time of the
return. If the Returned Merchandise constitutes Defective Merchandise, it shall
be included in Merchandise and assigned a Cost Value in accordance with the
applicable provisions of Section 3.1 above. Subject to Merchant's reimbursement
to Agent of the amount of any store credit or refund granted for any Returned
Merchandise, the aggregate Cost Value of the Merchandise shall be increased by
the Cost Value of any Returned Merchandise included in Merchandise (determined
in accordance with this Section 8.5), and the Guaranteed Amount shall be
adjusted accordingly. Any Returned Merchandise which is not included in
Merchandise shall be disposed of by Agent in accordance with instructions
received from Merchant or, in the absence of such instructions, returned to
Merchant at the end of the Sale Term. Any increases in the Guaranteed Amount and
any reimbursements due to Agent as result of Returned Merchandise shall be
accounted for and paid by Agent and/or Merchant, as applicable, immediately
following the weekly Sale reconciliation pursuant to Section 8.7 hereof.
16
<PAGE>
8.6. Layaway, Repair and Special Order Merchandise. Promptly after the
---------------------------------------------
execution of this Agreement, Merchant shall notify each customer for which
Merchant holds Layaway, Repair and Special Order Merchandise of the Sale and
request such customers to pick up and pay for the applicable item(s) within 7
days of the Sale Commencement Date (the "Layaway Pick-up Date"). Any amounts
--------------------
paid for Layaway, Repair and Special Order Merchandise on or before the close of
business on the Layaway Pick-up Date shall be for the sole account of Merchant.
Subject to applicable law, any Layaway, Repair and Special Order Merchandise
unclaimed by customers by the Layaway Pick-up Date shall be included in
Merchandise and the Guaranteed Amount shall be adjusted to account for such
items in the manner prescribed for Returned Merchandise in Section 8.5 above.
Prior to the Layaway Pick-up Date, Agent shall administer all Layaway, Repair
and Special Order Merchandise in accordance with the documents and agreements
relating thereto, provisions of applicable law, and Merchant's historic policies
provided to Agent in writing. In the event that Agent is required to issue
refunds to customers in respect of Layaway, Repair and Special Order
Merchandise, Merchant shall reimburse Agent in cash for all such amounts. At the
end of the Sale Term, Agent shall transfer responsibility for any remaining
items of Layaway, Repair and Special Order Merchandise back to Merchant after
appropriate and legally required communications to customers and reconciliation
between Agent and Merchant. All payments by Agent and Merchant required under
this Section 8.6 shall be made immediately following the weekly Sale
reconciliation by Agent and Merchant pursuant to Section 8.7 hereof.
8.7. Sale Reconciliation. On each weekday agreed upon by the parties
-------------------
during the Sale Term, commencing on the second such weekday after the Sale
Commencement Date, Agent and Merchant shall cooperate to reconcile Expenses,
receipts of onorder Merchandise, Warehouse Merchandise and Returned Merchandise
at the Stores (including quantities and Cost Value thereof), Gross Rings, and
such other Sale-related items as either party shall reasonably request, in each
case for the prior week or partial week (i.e., Sunday through Saturday), all
pursuant to procedures agreed upon by Merchant and Agent.
8.8 Service Contracts. To the extent practicable and otherwise
-----------------
permitted by applicable law, Agent shall continue to sell service contracts in
appliances, stain protection in furniture and product replacement warranties on
behalf of Merchant in other areas at the discretion of Merchant. All proceeds of
such sales, less a sales commission of 10% to which Agent shall be entitled,
shall accrue for the benefit of Merchant; provided that Merchant reimburses
Agent for all costs and expenses incurred by or on behalf of Merchant in
connection with such sales.
8.9. Force Majeure. If any casualty or act of God prevents or
-------------
substantially inhibits the conduct of business in the ordinary course at any
Store, such Store and the Merchandise located at such Store shall, in Agent's
discretion, be eliminated from the Sale and considered to be deleted from this
Agreement as of the
17
<PAGE>
date of such event, and Agent and Merchant shall have no further rights or
obligations hereunder with respect thereto; provided, however, that (i) the
-------- -------
proceeds of any insurance attributable to such Merchandise shall constitute
Proceeds hereunder, and (ii) the Guaranteed Amount shall be reduced to account
for any Merchandise eliminated from the Sale which is not the subject of
insurance proceeds, and Merchant shall reimburse Agent for the amount the
Guaranteed Amount is so reduced prior to the end of the Sale Term.
8.10 Merchant Services. Throughout the Sale Term, Merchant shall
-----------------
provide to Agent, at no cost to Agent, such central administrative services as
are necessary for the Sales, including, without limitation, MIS services, POS
administration, payroll processing, sales audit, cash reconciliation and data
processing and reporting.
Section 9. Employee Matters.
--------- ----------------
9.1. Merchant's Employees. Agent may use Merchant's employees in the
--------------------
conduct of the Sales to the extent Agent in its sole discretion deems expedient,
and Agent may select and schedule the number and type of Merchant's employees
required for the Sales. Agent shall identify any such employees to be used in
connection with the Sales (each such employee, a "Retained Employee") prior to
-----------------
the Sale Commencement Date. Retained Employees shall at all times remain
employees of Merchant, and shall not be considered or deemed to be employees of
Agent. Merchant and Agent agree that except to the extent that wages and
benefits of Retained Employees constitute Expenses hereunder, nothing contained
in this Agreement and none of Agent's actions taken in respect of the Sale shall
be deemed to constitute an assumption by Agent of any of Merchant's obligations
relating to any of Merchant's employees including, without limitation, Excluded
Benefits, Worker Adjustment Retraining Notification Act ("WARN Act") claims and
--------
other termination type claims and obligations, or any other amounts required to
be paid by statute or law; nor shall Agent become liable under any collective
bargaining or employment agreement or be deemed a joint or successor employer
with respect to such employees. Merchant shall not, without Agent's prior
written consent, raise the salary or wages or increase the benefits for, or pay
any bonuses or make any other extraordinary payments to, any of its employees
prior to the Sale Termination Date. Agent shall comply in the conduct of the
Sales with all of Merchant's employee rules, regulations, guidelines and
policies which have been provided to Agent in writing prior to the date of this
Agreement.
9.2. Termination of Employees. Agent may in its discretion stop using
------------------------
any Retained Employee at any time during the Sales. In the event of termination
of any Retained Employee, Agent will use all reasonable efforts to notify
Merchant at least five (5) days prior thereto, except for termination "for
cause" (such as dishonesty, fraud or breach of employee duties), in which event
no prior notice to Merchant shall be required, provided Agent shall notify
Merchant as soon as practicable after such termination. From and after the date
of this Agreement and until the Sale Termination
18
<PAGE>
Date, Merchant shall not transfer or dismiss employees of the Stores except "for
cause" without Agent's prior consent.
9.3. Payroll Matters. During the Sale Term Merchant shall process
---------------
the base payroll for all Retained Employees. Each weekday agreed upon by the
parties during the Sale Term the Agent shall transfer from the Agency Accounts
to Merchant's payroll accounts an amount equal to the base payroll for Retained
Employees plus related payroll taxes, worker's compensation and benefits for
such week which constitute Expenses hereunder. Merchant has provided to Agent a
true and accurate description of Merchant's base payroll, related payroll taxes,
worker's compensation and employee benefits and Merchant represents that such
description is true and accurate as of the date hereof.
9.4. Employee Retention Bonuses. In Agent's sole discretion Proceeds
--------------------------
may be used to pay, as an Expense, retention bonuses ("Retention Bonuses")
-----------------
(which bonuses shall be inclusive of payroll taxes but as to which no benefits
shall be payable) to Retained Employees who do not voluntarily leave employment
and are not terminated "for cause." Such Retention Bonuses shall be payable
within thirty (30) days after the Sale Termination Date, and shall be processed
through Merchant's payroll system.
Section 10. Conditions Precedent. The willingness of Agent and Merchant to
---------- --------------------
enter into the transactions contemplated under this Agreement are directly
conditioned upon the satisfaction of the following conditions at the time or
during the time periods indicated, unless specifically waived in writing by the
applicable party:
(a) Merchant shall have obtained the Approval Order by August
13, 1997, and the Approval Order shall not have been stayed nor shall an
application for a stay of the Approval Order be pending.
(b) All representations and warranties of Merchant and Agent
hereunder shall be true and correct in all material respects and no Event of
Default shall have occurred at and as of the date hereof and as of the Sale
Commencement Date.
Section 11. Representations, Warranties and Covenants.
---------- -----------------------------------------
11.1 Merchant Representations, Warranties and Covenants. Merchant
--------------------------------------------------
hereby represents, warrants and covenants in favor of Agent as follows:
(a) Merchant: (i) is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation;
(ii) has all requisite corporate power and authority to own, lease and operate
its assets and properties and to carry on its business as presently conducted;
and (iii) is and during the Sale Term will continue to be, duly authorized and
qualified as a foreign corporation to do business and in good standing in each
jurisdiction where the nature of its business or properties
19
<PAGE>
requires such qualification, including all jurisdictions in which the Stores are
located, except where the failure to be in good standing would not impair or
impede the ability of Agent to conduct Sales at any Store located in a state for
which Merchant is not in good standing. Merchant shall have furnished to Agent a
certificate as to the good standing of Merchant in its jurisdiction of
incorporation certified by the Secretary of State of such jurisdiction.
(b) Subject to the issuance of the Approval Order: (i) the
Merchant has the right, power and authority to execute and deliver this
Agreement and each other document and agreement contemplated hereby
(collectively, together with this Agreement, the "Agency Documents") and to
----------------
perform fully its obligations thereunder; (ii) except for any consent of the
Merchant's post-petition lenders required under Merchant's current debtor-in-
possession financing facility documents (the "DIP Lender Consent") and the
------------------
Bankruptcy Court order approving such documents, Merchant has taken all
necessary actions required to authorize the execution, delivery and performance
of the Agency Documents, and no further consent or approval is required for
Merchant to enter into and deliver the Agency Documents, to perform its
obligations thereunder, and to consummate the Sale; (iii) each of the Agency
Documents has been duly executed and delivered by Merchant and constitutes the
legal, valid and binding obligation of Merchant enforceable in accordance with
its terms; (iv) no court order or decree of any federal, state or local
governmental authority or regulatory body is in effect that would prevent or
impair, or is required for the Merchant's consummation of, the transactions
contemplated by this Agreement, and, except for any required DIP Lender Consent,
no consent of any third party which has not been obtained is required therefor;
and (v) no contract or other agreement to which the Merchant is a party or by
which the Merchant is otherwise bound will prevent or impair the consummation of
the Sale and the other transactions contemplated by this Agreement.
(c) Merchant owns and will own at all times during the Sale Term,
good and marketable title to all of the Merchandise free and clear of all Liens
of any nature except for presently existing Liens which, in accordance with the
Approval Order, shall attach only to the Guaranteed Amount, amounts reimbursed
to Merchant on account of Expenses and any and all other amounts paid by Agent
to Merchant hereunder.
(d) No suit, action or other proceeding , or injunction or final
judgment relating thereto, shall be threatened or pending before any court or
governmental or regulatory official, body or authority in which it is sought to
restrain or prohibit or to obtain damages or other relief in connection with the
transactions contemplated hereby, or that would have a material adverse effect
on the business, financial condition, operating results, assets, operations or
business prospects of the Merchant or materially adversely affect the rights of
Agent under this Agreement, and no investigation that would result in any such
suit, action or proceeding shall be pending or threatened.
20
<PAGE>
(e) Merchant owns and will own at all times prior to the Sale
Commencement Date good and marketable title to all of the Merchandise, free and
clear of all Liens, other than Liens that, pursuant to the Approval Order, will
attach only to the Guaranteed Amount, amounts reimbursed to Merchant on account
of Expenses and any and all other amounts paid by Agent to Merchant hereunder.
(f) Since July 1, 1997 and through the Sale Commencement Date,
all normal course permanent markdowns on Merchandise located at the Stores will
have been taken on a basis consistent with Merchant's customary practices and
policies.
(g) Merchant has not since July 1, 1997, and shall not up to the
Sale Commencement Date, marked up or raised the price of any items of
Merchandise, or removed or altered any tickets or any indicia of clearance
merchandise, except in the ordinary course of business.
(h) Since July 1, 1997 and through the Sale Commencement Date,
Agent shall have ticketed or marked all items of inventory received at the
Stores prior to the Sale Commencement Date in a manner consistent with similar
inventory located at the Stores and in accordance with Merchant's customary
practices and policies relative to pricing and marking inventory. The ticketed
price of all items of inventory do not include Sales Taxes.
(i) Since July 1, 1997, all point of sale activity at the Stores
has occurred and will occur up to the Sale Commencement Date in the ordinary
course of business.
(j) Merchant has not since July 1, 1997 and shall not up to the
Sale Commencement Date purchase or transfer to or from the Stores any inventory
outside the ordinary course, including, without limitation, transfers in
anticipation of the Sales or of the Inventory Taking. Merchant has not and shall
not move inventory or Merchandise to or from the Stores so as to alter the
inventory mix, quantities or categories, except in the ordinary course.
(k) No prices have been or will be raised and no pricing files
altered since July 1, 1997, other than prices for items put on and taken off
sale in the ordinary course of business.
(l) Supplies (e.g. boxes, bags, twine) have not been since July
1, 1997, and shall not be prior to the Sale Commencement Date, transferred by
Merchant between or from the Stores, so as to alter the mix or quantity of
supplies at the Stores from that existing on July 1, 1997, other than in the
ordinary course of business.
(m) Merchant has maintained its pricing files in the ordinary
course of business, and prices charged to the public for Merchandise
(whether in-Store,
21
<PAGE>
by advertisement or otherwise) are the same in all material respects as set
forth in such pricing files for the periods indicated therein. All pricing files
and records since July 1, 1997, which included the Merchandise Condition Report,
since April 1997 relative to the Merchandise have been made available to Agent.
All such pricing files and records are true and accurate in all material
respects as to the actual cost to Merchant for purchasing the goods referred to
therein and as to the selling price to the public for such goods as of the dates
and for the periods indicated therein.
(n) As of the Sale Commencement Date, goods constituting
Merchandise located at the Stores shall be no less than $33 million at Retail
Value.
(o) Merchant covenants to continue to operate the Stores from the
date of this Agreement to the Sale Commencement Date, in each case (i) selling
inventory during such period at customary prices, (ii) not promoting or
advertising any sales or in-store promotions (including POS promotions) to the
public (except for Merchant's historic and customary promotions for all of its
locations, (iii) not returning inventory to vendors and not transferring
inventory or supplies between or among Stores and the Warehouses, except as
permitted under Section 8.4 above, and (iv) not making any management personnel
moves or changes at the Stores without Agent's prior written consent (which
consent will not be unreasonably withheld).
(p) To the best of Merchant's knowledge, all Merchandise is in
compliance with all applicable federal, state or local product safety laws,
rules and standards. Merchant shall provide Agent with its historic policies and
practices regarding product recalls prior to the taking of the inventory at the
Stores.
(q) Throughout the Sale Term, the Agent shall have the right to
the unencumbered use and occupancy of, and peaceful and quiet possession of,
each of the Stores, the assets currently located at the Stores, and the
utilities and other services provided at the Stores. Merchant shall throughout
the Sale Term maintain in good working order, condition and repair, at its sole
expense, all cash registers, heating systems, air conditioning systems,
elevators, escalators, Store alarm systems, and all other mechanical devices
used in the ordinary course of operation of the Stores.
(r) Merchant has paid and will continue to pay throughout the
Sale Term, all post-petition (i) obligations in respect of self-insured or
Merchant funded employee benefit programs for employees, including health and
medical benefits and insurance and all proper claims made or to be made in
accordance with such programs, (ii) casualty, liability, worker's compensation
and other insurance premiums, (iii) utilities provided to the stores, and (iv)
applicable taxes. Merchant has provided Agent with a true and accurate
description of Merchant's severance benefits for which Retained Employees will
be eligible at the conclusion of the Sale. Following the conclusion of the Sale,
Merchant shall pay all such severance benefits to applicable Retained Employees
in the ordinary course.
22
<PAGE>
(s) Merchant has not and shall not throughout the Sale Term take
any actions the result of which is to materially increase the cost of operating
the Sales, including, without limitation, increasing salaries or other amounts
payable to employees.
(t) As of the date of this Agreement, Merchant is current in the
payment of all post-petition telephone, utilities, taxes, insurance and
advertising liabilities. Merchant agrees that in the event that Agent receives
notice that any such post-petition liability is overdue or unpaid, or Agent is
unable to advertise the Sales with any newspapers, magazines, radio or
television stations or other media providers which target or serve the market
areas of the Stores or is unable to obtain Merchant's contract rate with any
such provider as a result of the Merchant's failure to pay its outstanding post-
petition balances with such providers, Merchant shall immediately pay such
applicable balances in full.
(u) Upon Agent's written request during the Sale Term, Merchant
will make available to Agent all on-order files, style runs, open-to-buy
reports, sales, reports, purchase journals, markdown calendars, POS calendars,
pricing files, advertising schedules and promotion circulars up to the Sale
Commencement Date.
11.2 Agent Representations and Warranties. The Agent hereby
------------------------------------
represents, warrants and covenants in favor of the Merchant as follows:
(a) The Agent: (i) is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware;
(ii) has all requisite corporate power and authority to consummate the
transactions contemplated hereby; and (iii) is and during the Sale Term will
continue to be, duly authorized and qualified as a foreign corporation to do
business and in good standing in each jurisdiction where the nature of its
business or properties requires such qualification.
(b) The Agent has the right, power and authority to execute and
deliver each of the Agency Documents to which it is a party and to perform fully
its obligations thereunder. Agent has taken all necessary actions required to
authorize the execution, delivery, and performance of the Agency Documents, and
no further consent or approval is required on the part of the Agent for Agent to
enter into and deliver the Agency Documents and to perform its obligations
thereunder. Each of the Agency Documents has been duly executed and delivered by
the Agent and constitutes the legal, valid and binding obligation of the Agent
enforceable in accordance with its terms. No court order or decree of any
federal, state or local governmental authority or regulatory body is in effect
that would prevent or impair or is required for the Agent's consummation of the
transactions contemplated by this Agreement, and no consent of any third party
which has not been obtained is required therefor. No contract or other agreement
to which the Agent is a party or by which the Agent is otherwise bound will
prevent or impair the consummation of the transactions contemplated by this
Agreement.
23
<PAGE>
(c) No action, arbitration, suit, notice, or legal,
administrative or other proceeding before any court or governmental body has
been instituted by or against the Agent, or has been settled or resolved, or to
Agent's knowledge, has been threatened against or affects Agent, which questions
the validity of this Agreement or any action taken or to be taken by the Agent
in connection with this Agreement, or which if adversely determined, would have
a material adverse effect upon the Agent's ability to perform its obligations
under this Agreement.
Section 12. Insurance.
---------- ---------
12.1 Merchant's Liability Insurance. Merchant shall continue at its
------------------------------
cost and expense until the Sale Termination Date, in such amounts as it
currently has in effect, all of its liability insurance policies including, but
not limited to, products liability, comprehensive public liability, auto
liability and umbrella liability insurance, covering injuries to persons and
property in, or in connection with Merchant's operation of the Stores, and shall
cause Agent to be named an additional named insured with respect to all such
policies. Merchant has provided Agent with true and accurate copies of all such
policies. Prior to the Sale Commencement Date, Merchant shall deliver to Agent
certificates evidencing such insurance setting forth the duration thereof and
naming Agent as an additional named insured, in form reasonably satisfactory to
Agent. All such policies shall require at least thirty (30) days prior notice to
Agent of cancellation, non-renewal or material change. In the event of a claim
under any such policies Merchant shall be responsible for the payment of all
deductibles, retentions or self-insured amounts thereunder, unless it is
determined that liability arose by reason of the wrongful acts or omissions or
negligence of Agent, or Agent's employees, independent contractors or agents
(other than Merchant's employees).
12.2 Merchant's Casualty Insurance. Merchant will provide throughout
-----------------------------
the Sale Term, at Agent's cost as an Expense hereunder, fire, flood, theft and
extended coverage casualty insurance covering the Merchandise in a total amount
equal to no less than the retail value thereof. Merchant has provided Agent with
true and accurate copies of all such policies. From and after the date of this
Agreement until the Sale Termination Date, all such policies will name Agent as
loss payee. In the event of a loss to the Merchandise on or after the date of
this Agreement, the proceeds of such insurance attributable to the Merchandise
plus any self insurance amounts and the amount of any deductible (which amounts
shall be paid by Merchant), shall constitute Proceeds hereunder and shall be
paid to Agent. In the event of such a loss Agent shall have the sole right to
adjust the loss with the insurer. Prior to the Sale Commencement Date, Merchant
shall deliver to Agent certificates evidencing such insurance setting forth the
duration thereof and naming the Agent as loss payee, in form and substance
reasonably satisfactory to Agent. All such policies shall require at least
thirty (30) days prior notice to the Agent of cancellation, non-renewal or
material change. Merchant shall not make any change in the amount of any
deductibles or self insurance amounts prior to the Sale Termination Date without
Agent's prior written consent.
24
<PAGE>
12.3 Agent's Insurance. Agent shall maintain at Agent's cost and
-----------------
expense throughout the Sale Term, in such amounts as it currently has in effect,
comprehensive public liability and automobile liability insurance policies
covering injuries to persons and property in or in connection with Agent's
agency at the Stores, and shall cause Merchant to be named an additional insured
with respect to such policies. Agent has provided Merchant with true and
accurate copies of all such policies. Prior to the Sale Commencement Date, Agent
shall deliver to Merchant certificates evidencing such insurance policies
setting forth the duration thereof and naming Merchant as an additional insured,
in form and substance reasonably satisfactory to Merchant. In the event of a
claim under any such policies Agent shall be responsible for the payment of all
deductibles, retentions or self-insured amounts thereunder, unless it is
determined that liability arose by reason of the wrongful acts or omissions or
negligence of Merchant or Merchant's employees, independent contractors or
agents (other than Agent or Agent's employees, agents or independent
contractors).
12.4 Worker's Compensation Insurance. Merchant shall at all times
-------------------------------
during the Sale Term maintain in full force and effect worker's compensation
insurance (including employer liability insurance) covering all Retained
Employees in compliance with all statutory requirements. Prior to the Sale
Commencement Date, Merchant shall deliver to Agent a certificate of Merchant's
insurance broker or carrier evidencing such insurance.
12.5 Risk of Loss. Without limiting any other provision of this
------------
Agreement, Merchant acknowledges that Agent is conducting the Sale on behalf of
Merchant solely in the capacity of an agent, and that in such capacity (i) Agent
shall not be deemed to be in possession or control of the Stores or the assets
located therein or associated therewith, or of Merchant's employees located at
the Stores, and (ii) except as expressly provided in this Agreement, Agent does
not assume any of Merchant's obligations or liabilities with respect to any of
the foregoing. Merchant and Agent agree that Merchant shall bear all
responsibility for liability claims of customers, employees and other persons
arising from events occurring at the Stores during and after the Sale Term,
except to the extent any such claim arises directly from the acts or omissions
of Agent, or its supervisors or employees located at the Stores (an "Agent
Claim"). In the event of any such liability claim other than an Agent Claim,
Merchant shall administer such claim and shall present such claim to Merchant's
liability insurance carrier in accordance with Merchant's historic policies and
procedures, and shall provide a copy of the initial documentation relating to
such claim to Agent, as follows:
Agent Hilco Great American Group
5 Revere Drive
Suite 206
Northbrook, Illinois 60062
Attn.: Benjamin L. Nortman
25
<PAGE>
And
Gordon Brothers Companies
500 North Michigan Avenue
Suite 1460
Chicago, Illinois 60611
Attn.: Cory Lipoff
To the extent that Merchant and Agent agree that a claim constitutes an Agent
Claim, Agent shall administer such claim and shall present such claim to its
liability insurance carrier, and shall provide a copy of the initial
documentation relating to such claim to Merchant, as follows:
Merchant: Montgomery Ward & Co., Incorporated
Montgomery Ward Corporate Offices
Montgomery Ward Plaza
Chicago, Illinois 60671
Attn.: Spencer H. Heine, Esq.
In the event that Merchant and Agent cannot agree whether a claim constitutes an
Agent Claim, each party shall present the claim to its own liability insurance
carrier, and a copy of the initial claim documentation shall be delivered to the
other party to the foregoing address.
Section 13. Indemnification
---------------
13.1. Merchant Indemnification. Merchant shall indemnify and hold
------------------------
Agent and its officers, directors, employees, agents and independent contractors
(collectively, "Agent Indemnified Parties") harmless from and against all
claims, demands, penalties, losses, liability or damage, including, without
limitation, reasonable attorneys' fees and expenses, directly or indirectly
asserted against, resulting from, or related to:
(i) Merchant's material breach of or failure to comply with any of
its agreements, covenants, representations or warranties
contained in any Agency Document;
(ii) any failure of Merchant to pay to its employees any wages,
salaries or benefits due to such employees during the Sale
Term;
(iii) subject to Agent's compliance with its obligations under
Section 8.3
26
<PAGE>
hereof, any failure by Merchant to pay any Sales Taxes to the
proper taxing authorities or to properly file with any taxing
authorities any reports or documents required by applicable
law to be filed in respect thereof;
(iv) any consumer warranty or products liability claims relating to
Merchandise
(v) any liability or other claims asserted by customers, any of
Merchant's employees, or any other person against any Agent
Indemnified Party (including, without limitation, claims by
employees arising under collective bargaining agreements,
worker's compensation or under the WARN Act), except for Agent
Claims; and
(vi) the gross negligence or willful misconduct of Merchant or any
of its officers, directors, employees, agents or
representatives.
13.2 Agent Indemnification. Agent shall indemnify and hold Merchant
---------------------
and its officers, directors, employees, agents and representatives harmless from
and against all claims, demands, penalties, losses, liability or damage,
including, without limitation, reasonable attorneys' fees and expenses, directly
or indirectly asserted against, resulting from, or related to:
(i) Agent's material breach of or failure to comply with any of
its agreements, covenants, representations or warranties
contained in any Agency Document;
(ii) any harassment or any other unlawful, tortious or otherwise
actionable treatment of any employees or agents of Merchant by
Agent or any of its representatives;
(iii) any claims by any party engaged by Agent as an employee or
independent contractor arising out of such employment;
(iv) any Agent Claims; and
(v) the gross negligence or willful misconduct of Agent or any of
its officer, directors, employees agents or representatives.
Section 14. Defaults. The following shall constitute "Events of Default"
---------- --------
hereunder:
(a) Merchant's or Agent's failure to perform any of their
respective material obligations hereunder, which failure shall continue uncured
seven
27
<PAGE>
(7) days after written notice thereof to the defaulting party; or
(b) Any representation or warranty made by Merchant or Agent
proves untrue in any material respect as of the date made; or
(c) A Sale is terminated at a Store for any reason other than
(i) an Event of Default by Agent, or (ii) any other breach or action by Agent
not authorized hereunder, or (iii) an event administered pursuant to Section 8.7
above.
In the event of an Event of Default, any party's damages or entitlement to
equitable relief shall be determined by the Bankruptcy Court.
Section 15. Sale of FF&E.
---------- ------------
15.1. Sale for Commission. If requested by in writing by Merchant
-------------------
after Entry of the Approval Order, Agent shall advertise in the context of
advertising for the Sale that items of FF&E at the Stores are for sale, and
shall contact and solicit known purchasers and dealers of furniture and
fixtures. Merchant shall notify Agent in writing if any such FF&E are to be
excluded from sale and/or if terms and conditions of sale are to be set or
restricted in any manner. In consideration of providing such services, Agent
shall retain twenty percent (20%) of receipts (net of Sales Taxes and expenses)
from all sales or other dispositions of FF&E. In addition, Merchant shall
reimburse Agent for Agent's reasonable out of pocket expenses incurred in
connection with the liquidation of FF&E which have been previously approved by
Merchant, including, without limitation, costs of commissions and advertising.
Agent shall have no liability to Merchant for its failure to sell any or all of
the FF&E.
15.2 Guaranteed Return. In the event that Merchant elects the
-----------------
option set forth in Section 15.1 above, but does not provide Agent with the
written request within the time period specified in Section 15.1 above,
following Agent's full inspection of the FF&E (whether located in the Stores,
stockrooms, Warehouses or offices or otherwise), Agent will provide Merchant,
with a written offer to sell the FF&E with a guaranteed return to Merchant
specified therein.
Section 16. Claims Under Certain Leases.
---------- ---------------------------
16.1 Agent Services. At Merchant's option, Merchant may provide
--------------
Agent written notice of its intent to implement a process designed to minimize
Merchant's obligations and liabilities to lessors under Store leases (each a
"Lease" and collectively, the "Leases"), including, without limitation, pursuant
----- ------
to Section 502(b)(6) of the Bankruptcy Code (collectively, the "Leasehold
---------
Liability") and, to the extent practical, to realize any value associated with
- ---------
each Lease. From and after its receipt of such written notice, and upon
subsequent Bankruptcy Court order approving the arrangement, Agent, on an
exclusive basis, shall negotiate on behalf of Merchant with the lessors under
the Leases, redevelop Stores if and as applicable and market Stores
28
<PAGE>
to potential occupants and users thereof.
16.2 Agent Compensation. In consideration for providing the
------------------
services described in Section 16.1 above, Agent shall be entitled to receive
from Merchant such compensation upon which the Agent and Merchant shall mutually
agree, subject to entry of a subsequent Bankruptcy Court order approving same.
Agent and Merchant shall negotiate in good faith to determine the appropriate
compensation to be paid hereunder based on a sharing formula for reductions of
the Leasehold Liability and any and all proceeds procured in connection with the
assignment or other disposition of the Leases pursuant to Section 365 of the
Bankruptcy Code or otherwise.
Section 17. Bidding Procedures.
---------- ------------------
17.1. Procedure/timing. On or before August 14, 1997, Merchant shall
----------------
pursue entry of an order (in form and substance satisfactory to Agent) approving
that portion of the Motion For Entry of an Order (A) Authorizing Closing of the
Stores and "going out of business" Sales and (B) Approving Retention of
Liquidator and Related Agency Agreement (the "Motion") that seeks approval of
------
the transactions contemplated hereby on terms and conditions consistent with
those set forth herein. Merchant shall require competing bids to be submitted in
writing no later than 9:00 a.m. EST on the date that is one business day prior
to the hearing on the Motion. In the event that Merchant has so received one or
more competing bids in accordance with Section 17.2, then on the day prior to
the hearing on the Motion, Merchant shall conduct an auction with respect to the
rights granted hereunder (the "Auction").
-------
17.2. Break-Up Fee; Bid Procedures.
----------------------------
(a) Merchant shall be immediately obligated to pay a $50,000
break-up fee to Agent (the "Break-Up Fee") (i) in the event the (A) Agent is not
------------
the successful bidder at the Auction; (B) another person or persons or entity or
entities is or are the successful bidder at the Auction for the grant of the
agency arrangements contemplated hereby; and (C) such successful bidder and
Merchant consummate such agency transaction; or (ii) in the event the
transactions contemplated hereby are not consummated because of Agent's
termination of this Agreement in accordance with the terms hereof or the failure
to satisfy any of the conditions to Agent's obligations hereunder set forth in
Section 10 above.
(b) Merchant shall require procedures for the submission of
competing bids including, without limitation, a provision that any initial
competing bids (each an "Initial Competing Bid") and the successful competing
---------------------
bid must be at least 2% higher (in cash) than the bid proposed in hereby and
otherwise be on substantially the same terms and conditions as those set forth
in this Agreement. Such procedures shall also provide that Merchant and the
Bankruptcy Court consider the economic impact of the Merchant's obligation to
pay the Break-Up Fee in determining whether a competitive bid is higher and
better for Merchant and its estate than any bid submitted by Agent.
29
<PAGE>
Section 18. Security Interest. In consideration of the Agent's payment of
---------- -----------------
the Guaranteed Amount, Expenses and the provision of services hereunder to
Merchant, contemporaneous with the payment of the initial portion of the
Guaranteed Amount to Merchant pursuant to Section 3.3 above, the Merchant hereby
grants to Agent a first priority security interest in and lien upon the
Merchandise and the Proceeds to secure all obligations of Merchant to Agent
hereunder. Merchant shall execute all such documents and take all such other
actions as are reasonably required to perfect and maintain such security
interest as a valid and perfected first priority security interest.
Section 19. Miscellaneous.
---------- -------------
19.1 Notices. All notices and communications provided for pursuant
-------
to this Agreement shall be in writing, and sent by hand, by facsimile, or by
Federal Express or other recognized overnight delivery service, as follows:
If to the Agent: Schottenstein Bernstein Capital Group, LLC
1010 Northern Boulevard, Suite 330
Great Neck, New York 10021
and
Schottenstein Bernstein Capital Group, LLC
1800 Moler Road
Columbus, Ohio 43207
Attn: Legal Department
With copies to:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attn: Lawrence Wittman, Esq.
Attn: Madlyn Gleich Primoff, Esq.
If to the Merchant: Montgomery Ward & Co., Incorporated
Montgomery Ward Corporate Offices
Montgomery Ward Plaza
Chicago, IL 60671
Attn: Spencer H. Heine, Esq.
Telecopy No. (312 ) 467-3064
with copies to: Jones, Day, Reavis & Pogue
30
<PAGE>
77 West Wacker Drive, Suite 3500
Chicago, IL 60601-1692
Attn: David S. Kurtz, Esq.
Telecopy No. (312) 782-8585
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, IL 60606
Attn: Corey Light
Telecopy No. (312) 715-4800
19.2. Governing Law. This Agreement shall be governed and construed
-------------
in accordance with the laws of the State of Illinois without regard to conflicts
of laws principles thereof, except where governed by the Bankruptcy Code.
19.3. Termination. This Agreement shall remain in full force and
-----------
effect until the first to occur of: (i) receipt by Merchant of written notice
from Agent that any of the conditions specified in Section 10 hereof have not
been satisfied within 14 days of the anticipated Sale Commencement Date set
forth in Section 6.1; or (ii) the expiration of the Sale Term and completion and
certification by Merchant and Agent of the final Sale reconciliation pursuant to
Section 8.7 above. Notwithstanding the foregoing, the representations and
warranties of Merchant and Agent contained herein and the provisions of Section
13 above shall survive the termination of this Agreement pursuant to this
Section 19.3.
19.4. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties hereto with respect to the transactions contemplated hereby
and supersedes and cancels all prior agreements, including, but not limited to,
all proposals, letters of intent or representations, written or oral, with
respect thereto. To the extent any provision of the Approval Order is
inconsistent with this Agreement, the provisions of the Approval Order shall
govern and control.
19.5. Amendments. This Agreement may not be modified except in a
----------
written instrument executed by each of the parties hereto.
19.6. No Waiver. No consent or waiver by any party, express or
---------
implied, to or of any breach or default by the other in the performance of its
obligations hereunder shall be deemed or construed to be consent or waiver to or
of any other breach or default in the performance by such other party of the
same or any other obligation of such party. Failure on the part of any party to
complain of any act or failure to act by the other party or to declare the other
in default, irrespective of how long such failure continues, shall not
constitute a waiver by such party of its rights hereunder.
19.7. Successors and Assigns. This Agreement shall inure to the
----------------------
benefit
31
<PAGE>
of and be binding upon Agent and Merchant, and their respective successors and
assigns; provided, however, that this Agreement may not be assigned by Merchant
or Agent to any party without the prior written consent of the other.
19.8 Completion of Exhibits. On or prior to August 11, 1997,
----------------------
Merchant shall deliver all Exhibits hereto in completed form which were not
delivered to Agent on the date hereof. Upon completion, such Exhibits shall be
deemed incorporated into this Agreement for all purposes as of the date hereof.
19.9 Execution in Counterparts. This Agreement may be executed in
-------------------------
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute but one agreement. This Agreement may be
executed by facsimile, and such facsimile signature shall be treated as an
original signature hereunder.
19.10 Section Headings. The headings of sections of this Agreement
----------------
are inserted for convenience only and shall not be considered for the purpose
of determining the meaning or legal effect of any provisions hereof.
19.11 Survival. All representations, warranties, covenants and
--------
agreements made by the parties hereto shall be considered to have been relied
upon by the parties and shall survive the execution, delivery and performance of
this Agreement.
IN WITNESS WHEREOF, the Agent and Merchant hereby execute this
Agreement by their duly authorized representatives as a sealed instrument as of
the day and year first written above.
SCHOTTENSTEIN BERSTEIN CAPITAL GROUP LLC
By: /s/ David Bernstein
---------------------------------------
Name: David Bernstein
Title: President and Chief Operating
Officer
MONTGOMERY WARD & CO., INCORPORATED
By: /s/ Spencer H. Heine
---------------------------------------
Name: Spencer H. Heine
Title: Executive Vice President
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 238
<SECURITIES> 307
<RECEIVABLES> 278
<ALLOWANCES> 0
<INVENTORY> 1,147
<CURRENT-ASSETS> 0
<PP&E> 2,070
<DEPRECIATION> (871)
<TOTAL-ASSETS> 4,797
<CURRENT-LIABILITIES> 0
<BONDS> 0
212
0
<COMMON> 1
<OTHER-SE> (549)
<TOTAL-LIABILITY-AND-EQUITY> 4,797
<SALES> 3,217
<TOTAL-REVENUES> 3,855
<CGS> 2,872
<TOTAL-COSTS> 2,872
<OTHER-EXPENSES> 1,645
<LOSS-PROVISION> 582
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> (1,347)
<INCOME-TAX> (375)
<INCOME-CONTINUING> (972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (972)
<EPS-PRIMARY> (27.37)
<EPS-DILUTED> (27.37)
</TABLE>
