SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1997
Commission File Number 0-20984
HAHN AUTOMOTIVE WAREHOUSE, INC.
NEW YORK 16-0467030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
415 West Main Street Rochester, New York 14608
(Address of principal executive offices)(Zip Code)
(716) 235-1595
(Registrant's telephone number, including area code)
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
1
Number of shares outstanding of the registrant's common stock,
par value $.01 per share, on August 13, 1997; 4,745,014.
HAHN AUTOMOTIVE WAREHOUSE, INC.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - June 30, 1997 and
September 30, 1996
Condensed Consolidated Statements
of Income - for the nine months and three months
ended June 30, 1997 and June 30, 1996
Condensed Consolidated Statements
of Cash Flows - for the nine months
ended June 30, 1997 and June 30, 1996
Notes to Condensed Consolidated
Financial Statements
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 3. Default Upon Senior Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
2
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<CAPTION>
HAHN AUTOMOTIVE WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands except share data)
6/30/97 9/30/96
ASSETS Unaudited Restated
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Current Assets:
Cash $479 $79
Accounts Receivable:
Trade, net of allowance for doubtful 21,829 17,052
accounts
Inventory 42,410 41,636
Other Current Assets 503 844
Total Current Assets 65,221 59,611
Net Assets of Discontinued Operations 10,700 29,268
Property, Equipment, and Leasehold 5,395 5,609
Improvements, net
Other Assets 12,025 3,332
Total Assets $93,341 $97,820
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt
and capital lease obligations $3,249 $3,376
Current portion - Notes Payable- 2,357 2,560
Officers and Affiliates
Accounts Payable 12,877 12,980
Compensation Related Liabilities 1,695 1,665
Other Accrued Expenses 9,259 2,847
Total Current Liabilities 29,437 23,428
Long-term Debt 51,954 40,443
Capital Lease Obligations 294 450
Total Liabilities 81,685 64,321
Shareholders' Equity:
Common Stock (par value $.01 per share;
authorized
20,000,000 shares; issued and
outstanding
4,562,513 and 4,745,014 respectively) 47 46
Additional Paid-in Capital 25,975 24,607
3
Retained Earnings (deficit) (14,366) 8,846
Total Shareholders' Equity 11,656 33,499
Total Liabilities and Shareholders' $93,341 $97,820
Equity
</TABLE>
<TABLE>
<CAPTION>
HAHN AUTOMOTIVE WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands except share and per share data)
(Unaudited)
For the 9 For the 3
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Restated Restated
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Net Sales $105,422 $102,393 $37,920 $39,441
Cost of Products Sold 65,580 63,155 23,871 24,844
Gross Profit 39,842 39,238 14,049 14,597
Selling, General
Administrative 33,942 31,611 12,114 11,158
Expense
Depreciation and 1,280 1,347 433 435
Amortization
Income from Operations 4,620 6,280 1,502 3,004
Interest Expense (3,526) (3,326) (1,281) (1,142)
Interest and Service 341 318 107 74
Charge Income
Income from Continuing
Operations
Before Taxes 1,435 3,272 328 1,936
Income Taxes 550 1,250 125 740
Income from Continuing 885 2,022 203 1,196
Operations
Loss from Discontinued
Operations:
Write-down of
Investment in
Subsidiary, Net of (18,789) (18,789)
Tax
4
Loss from Discontinued
Operations,
Net of Tax (3,937) (1,246) (1,851) (212)
Total Loss from
Discontinued
Operations (22,726) (20,640)
Net Income (Loss) ($21,841) $776 ($20,437) $984
Income from Continuing
Operations
Per Share $0.19 $0.42 $0.04 $0.25
Loss from Discontinued
Operations
Per Share (4.79) (0.26) (4.35) (0.04)
Net Income Per Share ($4.60) $0.16 ($4.31) $0.21
Weighted Shares 4,745,014 4,745,014 4,745,014 4,745,014
Outstanding
</TABLE>
<TABLE>
<CAPTION>
HAHN AUTOMOTIVE WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands except per share data)
(Unaudited)
9 Mo. Ended 9 Mo. Ended
6/30/97 6/30/96
<S> <C> <C>
Cash Flows from Operating Activities:
Income from Continuing Operations $885 $2,756
Items to Reconcile Net Income to Net
Cash Used
in Operating Activities:
Depreciation and Amortization 1,240 1,347
Provision for Doubtful Accounts 458 489
Loss from Discontinued
Operations
Before Non-Cash Items (3,103) (947)
Changes in Assets and Liabilities:
Trade Receivables (5,235) (4,151)
Inventory (774) (3,967)
Other Assets (1,572) 669
5
Accounts Payable and Other Accruals (161) 4,449
Net Assets of Discontinued (1,457) (4,173)
Operations
Net Cash Used in Operating Activities (9,719) (3,528)
Cash Flows from Investing Activities:
Additions to PP&E, net
Continuing Operations (1,026) (842)
Discontinued Operations 0 (306)
Net Cash Used in Investing (1,026) (1,148)
Activities
Cash Flows from Financing Activities:
Net Borrowings Under Line of Credit 12,069 6,654
Proceeds from Long-term Debt and 1,908 538
Demand Notes
Proceeds from Notes-payable - 0 2,150
Officers and Affiliates
Payment of Long-term Debt and Demand (2,425) (3,720)
Notes
Payment of Notes Payable - Officers (203) (567)
and Affiliates
Payment of Capital Lease Obligations (325) (377)
Net Cash Provided By Financing 11,024 4,678
Activities
Net Increase in Cash 279 2
Cash at Beginning of Period 79 76
Cash at End of Period 358 78
</TABLE>
HAHN AUTOMOTIVE WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed interim consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. As a result of its bankruptcy filing, the Company's
AUTOWORKS, Inc. subsidiary (see note 2) has been deconsolidated.
The interim financial statements reflect all adjustments which
are, in the opinion of management, necessary to fairly present
such information. Although the Company believes that the
disclosures included on the face of the interim consolidated
6
financial statements and in the other footnotes herein are
adequate to make the information presented not misleading,
certain information and footnote disclosures, including
significant accounting policies, normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations. Certain amounts in the prior
period's consolidated financial statements have been reclassified
to conform to the current period's basis of presentation. It is
suggested that all condensed consolidated financial statements
contained herein be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual
Report for the fiscal year ended September 30, 1996 on Form 10-K,
filed with the Securities and Exchange Commission, Washington,
D.C. 20549. This information may be obtained through the web
site of the Securities and Exchange Commission, EDGAR Filing
section at http://www.sec.gov.
Operating results for the nine month period ended June 30, 1997
are not necessarily indicative of the results that may be
expected for the entire fiscal year.
2. Discontinued Operations
In the third quarter of fiscal 1997, the Company made the
decision to exit its retail business. On July 24, 1997, the
Company's retail subsidiary, AUTOWORKS, Inc. ("AUTOWORKS"), filed
for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court in the
Western District of New York to assure orderly administration of
AUTOWORKS' assets and liabilities. Under Chapter 11, AUTOWORKS
will operate as a debtor-in-possession while its assets are sold
or liquidated, and its debts restructured. As a result, the
Company has deconsolidated, and classified as a discontinued
operation, the AUTOWORKS' subsidiary. The consolidated financial
statements presented herein (including all prior periods'
statements which have been restated) reflect all discontinued
operations separately from continuing operations.
The Company has recorded a provision of $22.7 million in the
third quarter of fiscal 1997, for the loss expected on the
divestment of the AUTOWORKS retail business classified as
discontinued operations in the third quarter of fiscal 1997.
This provision includes year-to-date operating losses of this
business and the write-down of assets to their net realizable
value (net of estimated current and projected future tax
benefits). The Company has also accrued $6.5 million as a
reserve for estimated liability on obligations for which the
Company is jointly liable with AUTOWORKS (excluding the Credit
Facility Agreement discussed in Note 5 below).
At June 30, 1997, the assets and liabilities of AUTOWORKS are
summarized as follows:
7
Assets
Cash $676
Inventory 14,950
Building and Fixtures 850
Other Assets 240
Total Assets $16,716
Liabilities
Current Liabilities $20,369
Due to Affiliates 45,487
Total Liabilities $65,856
Liabilities Exceeding Assets $49,140
Operating results of AUTOWORKS for the nine months ended June 30,
1997 are as follows:
Net Sales $51,054
Gross Margin 22,771
Loss from Discontinued Operations:
Loss from Operations (6,152)
Write-down of Assets to Net Realizable Value (27,402)
Charge for Estimated Future Operating Losses (6,855)
Total Loss from Discontinued Operations ($40,409)
3. Acquisitions
On October 14, 1996, the Company acquired the assets of Nu-Way
Auto Parts, Inc. ("Nu-Way") for $2.7 million, of which $600,000
was paid in cash and the balance with deferred payments. The
$600,000 in cash was funded with borrowings under the Company's
revolving line of credit. Nu-Way's four Rochester, New York
locations have been integrated into the Company's Direct
Distribution (two-step) Division. Nu-Way's operating results
have been included in the Company's results of operation from the
date of acquisition forward.
On May 1, 1997, the Company acquired the assets of Finn of
Canandaigua, Inc. ("Finn") for $831,000 of which $450,000 was
paid in cash and the balance in deferred payments. The $450,000
in cash was funded with borrowings under the Company's revolving
line of credit. Finn was previously a customer of the Rochester
Distribution Center. Finn has been integrated with the Company's
jobbing stores within the three-step division. Finn's operating
results have been included in the Company's results of operations
from the date of acquisition forward.
4. Stockholders' Equity
8
On March 14, 1997, the Board of Directors declared a 4% stock
dividend on the Company's common stock, distributable May 1, 1997
to shareholders of record as of April 10, 1997. Accordingly,
amounts equal to the fair market value of the additional shares
issued have been charged to retained earnings and credited to
common stock and additional paid-in capital at March 31, 1997.
Earnings per share and weighted average shares outstanding have
been presented as if the stock dividend had occurred at the
beginning of fiscal year 1996.
5. Debt (in thousands)
Long-term debt consists of the following:
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<CAPTION>
Restated
6/30/97 9/30/96
<S> <C> <C>
Revolving Line of 48,069 36,000
Credit
Senior Secured Notes 4,250 6,400
Other Long-term Debt 2,611 978
Less Current (2,976) (2,935)
Maturities
Total $51,954 $40,443
</TABLE>
The Company's revolving line of credit is provided pursuant to a
Credit Facility Agreement, dated June 26, 1996, among the Company
and its wholly-owned subsidiaries and a banking syndicate. As
described in Note 2 above, on July 24, 1997, the Company's wholly-
owned subsidiary, AUTOWORKS, filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. This filing
resulted in a default under the Credit Facility Agreement. As of
the end of the fiscal 1997 third quarter, the Company failed to
meet certain financial covenants under the Credit Facility
Agreement resulting in additional defaults under the Credit
Facility Agreement. The Company together with its wholly-owned
subsidiaries and the banking syndicate have entered into a
Waiver, Modification and Third Amendment to the Credit Facility
Agreement and Forbearance Agreement dated as of July 24, 1997
(the "Forbearance Agreement"), pursuant to which, among other
things, the banking syndicate agreed to forbear from exercising
their rights and remedies through November 30, 1997 in the
absence of another default, all as more fully described in the
"Liquidity and Capital Resources" section appearing in Part I,
Item 2 of this Form 10-Q.
The Senior Secured Notes are outstanding pursuant to a certain
Note Agreement, dated December 15, 1989, ("Note Agreement")
9
between the Company and Massachusetts Mutual Life Insurance
Company ("Mass Mutual") (which provides for a pre-default
interest rate of 10.25% per annum). Borrowings outstanding
pursuant to both the Credit Facility Agreement and the Senior
Secured Notes are secured by substantially all of the assets of
the Company and its wholly-owned subsidiaries on a pari passu
basis pursuant to an Intercreditor Agreement.
The Company defaulted on the Senior Secured Notes as a result of
the bankruptcy of AUTOWORKS and cross-default provisions
triggered by defaults under the Credit Facility Agreement. The
Company and Mass Mutual have executed a Sixth Amendment to Note
Agreement, dated as of August 14, 1997, ("the Sixth Amendment")
pursuant to which Mass Mutual has agreed to forbear from
exercising its rights and remedies on the terms and conditions
set forth therein until November 30, 1997, so long as no other
defaults occur. On that date, all amounts outstanding under the
Senior Secured Notes will become due and payable. The Sixth
Amendment is more fully described in the "Liquidity and Capital
Resources" section appearing in Part I, Item 2 of this Form 10-Q.
The Company is obligated under Subordinated Notes, dated February
1, 1996 (executed June 26, 1996 in favor of its Chief Executive
Officer and President), in the aggregate original principal
amount of $2.2 million. Interest accrues on the Subordinated
Notes at the rate of 12% per annum and is payable monthly.
Commencing on January 1, 1997, the Subordinated Notes require
monthly principal payments with possible mandatory prepayments if
the Company's net income exceeds certain stated amounts. Final
principal and interest payments are due February 1, 2001.
However, as a result of the defaults under the Credit Facility
Agreement described above, under the Subordination Agreement
between the Company and its Chief Executive Officer and
President, as modified by the Forbearance Agreement, the Company
is permitted to make interest only payments on the Subordinated
Notes (so long as no other event of default occurs).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Hahn Automotive Warehouse, Inc. (the "Company") operates its
business both through the Company and its wholly-owned
subsidiary, Meisenzahl Auto Parts, Inc. Unless otherwise
indicated, the discussion herein refers to the financial
condition and results of operation of the Company on a
consolidated basis.
The discussions set forth in this Form 10-Q may contain forward-
looking comments. Such comments are based upon the information
currently available to management of the Company and
10
management's perception thereof as of the date of this report.
Actual results of the Company's operations could materially
differ from those indicated in the forward-looking comments.
The difference could be caused by a number of factors
including, but not limited to, those discussed under the
heading "Important Information Regarding Forward-Looking
Statements" in the Company's Annual Report on Form 10-K, dated
December 26, 1996, Current Report on Form 8-K, filed July 25,
1997, and Current Report on Form 8-K, filed August 11, 1997
(all of which have been filed with the United States Securities
and Exchange Commission (the "Commission") and are incorporated
herein), and the Company's press releases. Additional risk and
uncertainties that should be considered include the Company's
ability to operate within the financial covenants contained in
its credit facilities, as modified by the Forbearance
Agreement, described below, and ultimately to refinance or
replace its bank debt and the Senior Secured Notes referred to
below with a permanent credit facility which provides adequate
liquidity for the Company's operating and capital needs. That
Annual Report and those Current Reports may be obtained by
contacting the Commission's public reference operations or
through the Commission's worldwide web site at
http://www.sec.gov, EDGAR Filing section. Readers are strongly
encouraged to obtain and consider the factors listed in that
Annual Report, Current Reports and this Quarterly Report any
amendments or modifications thereof when evaluating any forward-
looking comments concerning the Company.
Recent Events
On October 14, 1996 and on May 1, 1997, respectively the
Company acquired the assets of Nu-Way Auto Parts, Inc. ("Nu-
Way") and Finn of Canandaigua, Inc. ("Finn"), respectively.
For further description, see Note 3 -- "Acquisitions" under
Notes to Condensed Consolidated Financial Statements" included
elsewhere herein.
During the Company's third fiscal quarter, the Company
determined to exit the automotive parts retail business and to
cease supporting the continuing operating losses of its wholly-
owned subsidiary, AUTOWORKS, Inc. ("AUTOWORKS"). As previously
reported in the Company's Current Report on Form 8-K, filed
July 25, 1997, on July 24, 1997, AUTOWORKS filed for
reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States District Bankruptcy Court in the
Western District of New York to assure orderly administration
of AUTOWORKS' assets and liabilities. As a result, the Company
has deconsolidated AUTOWORKS and classified it as a
discontinued operation in the Company's financial statements
and all previous periods have been restated to reflect this
treatment; references herein to previous period figures are to
the restated figures. In connection with this treatment, the
Company recorded a one-time charge of $22.7 million during the
third quarter. This
11
charge includes a $27.4 million write-down of assets to net
realizable value and $6.1 million for year-to-date net
operating losses, all of which is reduced by estimated present
and projected future tax benefits. In addition, the Company
has accrued $6.5 million as a reserve for estimated liability
on obligations for which the Company is jointly liable with
AUTOWORKS (excluding the Credit Facility Agreement referred to
below). For a further description see Note 2 -- "Discontinued
Operations" under the Notes to the Condensed Consolidated
Financial Statements included elsewhere herein.
AUTOWORKS has entered into a consensual cash collateral
arrangement with the banking syndicate which provided a
revolving line of credit to the Company and its wholly-owned
subsidiaries, including AUTOWORKS. This arrangement has been
preliminarily approved by the Bankruptcy Court with a final
hearing scheduled for August 20, 1997. The Company and its
wholly-owned subsidiaries have agreed in the Forbearance
Agreement with the Company's banking syndicate described below
that AUTOWORKS will not be allowed to make any further
borrowings under the revolving line of credit and that neither
the Company nor any of its subsidiaries will provide any future
funding to AUTOWORKS. Going forward, AUTOWORKS' sole source of
funding will be from cash flows from its own operations.
On August 5, 1997, AUTOWORKS entered into a definitive
agreement with Schottenstein Bernstein Capital Group, LLC,
HILCO, LLC and Great American Group, Inc. to act as AUTOWORKS'
sole and exclusive agent to sell all of the merchandise meeting
certain defined standards and located at its retail stores and
the Moraine, Ohio distribution center. A copy of the agreement
is filed as an exhibit hereto and incorporated herein. Under
the agreement, AUTOWORKS is guaranteed 42.5% of the cost price
(as defined therein) of all merchandise meeting certain defined
standards and located in its stores and the Moraine warehouse
(which the Company estimates will yield approximately $10.7
million). The agreement is subject to approval by the
Bankruptcy Court; a motion has been filed with the Court
requesting such approval and a return date has been set for
August 15, 1997.
Results of Operations - three months ended June 30, 1997
compared to three months ended June 30, 1996.
The Company's net sales from continuing operations for the
third quarter of fiscal 1997 (ended June 30, 1997), decreased
$1.5 million, or 3.9% from net sales of continuing operations
for the same quarter of the last fiscal year (ended June 30,
1996). In comparison to the previous fiscal year and on a same
store or warehouse basis, for the current quarter, Advantage
Auto Stores' net sales decreased 10.3%, and Distribution
Centers net sales declined 8.1%. Both declines were due to
increased competition and below normal Spring temperatures
which generally had a
12
negative impact on the automotive parts aftermarket during this
period. Direct Distribution Centers' net sales improved 3.6%
on a comparable location basis. With Nu-Way sales included,
the Direct Distribution Centers showed a 40.6% increase in net
sales. As a percentage of net sales from continuing
operations, Distribution Centers contributed 48.2%, Advantage
Auto Stores contributed 37.0%, and the Direct Distribution
Centers contributed 14.8%.
Gross profit from continuing operations decreased $548,000 to
$14.0 million for the current quarter from $14.6 million in the
third quarter of the prior fiscal year. The decrease in gross
profit dollars is a direct result of the decrease in net sales
from continuing operations. Gross profit margin expressed as a
percentage of net sales from continuing operations remained
constant at 37.0% compared to the same period in fiscal 1996.
Selling, general and administrative expense of continuing
operations increased in the current quarter by $956,000
compared to the same period in fiscal 1996. This increase
resulted primarily from the Nu-Way acquisition. As a
percentage of net sales from continuing operations, expenses
increased to 32.0% compared to 28.3% for the same quarter last
year. This percentage increase is primarily due to the
Company's decrease in Distribution Centers and Advantage Auto
Stores net sales without a corresponding decrease in expenses,
and the addition of the four Nu-Way locations.
Depreciation and amortization from continuing operations
decreased $2,000 in the quarter ended June 30, 1997, to
$433,000 from $435,000 for the same period of the prior fiscal
year. This slight drop is primarily due to the Company's
increased use of operating leases in replacement of capital
expenditures and was offset by the Nu-Way and Finn
acquisitions.
During the third quarter, interest expense increased $139,000
to $1.28 million. This increase is due to slightly higher
average outstanding borrowings and the Nu-Way and Finn
acquisitions.
As a result of the factors discussed above, the Company had net
income from continuing operations of $203,000 or $.04 per share
for the current period compared to $1.2 million or $.25 per
share for the same quarter of last fiscal year. Further, as a
result of the $22.7 million charge related to the AUTOWORKS
business recorded by the Company during the current quarter,
the Company had a net loss of $20.4 million for the quarter
compared to net income of $984,000 for the same quarter in the
previous year.
Results of Operations - nine months ended June 30, 1997, compared
to nine months ended June 30, 1996.
13
Net sales from continuing operations increased $3.0 million, or
3.0% from $102.4 million for nine months ended June 30, 1996 to
$105.4 million for the corresponding nine months of fiscal 1997.
This increase is the result of the strong performance by the
Distribution Centers and the Direct Distribution Centers, offset
in part by a decrease in net sales by the Advantage Auto Stores
jobber division. During the current fiscal year, expressed as a
percentage of net sales from continuing operations, Distribution
Centers contributed 48.6%, Advantage Auto Stores 37.3% and Direct
Distribution Centers 14.1%.
Year-to-date gross profit from continuing operations increased by
$604,000 or 1.5% to $39.8 million, over the same period last
year. As a percentage of net sales from continuing operations,
gross profit declined to 37.8% from 38.3% in the comparable
period of fiscal 1996. The gross margin rate decrease is
primarily due to decline in Advantage Auto Stores sales as a
percentage of the Company's net sales from continuing operations.
Selling, general and administrative expense from continuing
operations increased to $33.9 million for the current nine
months, an increase of $2.3 million over the same period last
year. This increase is primarily the result of the Nu-Way
acquisition. As a percentage of net sales from continuing
operations, selling, general and administrative expense increased
to 32.2% of net sales from continuing operations compared to
30.9% for the same period in fiscal 1996. This percentage
increase is mainly due to the Nu-Way acquisition and the decrease
in the Advantage Auto Stores net sales.
Depreciation and amortization from continuing operations
decreased $67,000 in the current fiscal year as compared to the
same nine month period of the previous fiscal year. This
decrease is the result of increased usage of leasing for
replacement assets and was offset by the Nu-Way and Finn
acquisitions.
Interest expense increased $200,000 to $3.5 million from $3.3
million for the same nine month period or the previous fiscal
year. This increase resulted from the Nu-Way and Finn
acquisitions and slightly higher average borrowings on the
Company's revolving line of credit.
As a result of the factors discussed above, the Company had net
income from continuing operations of $885,000 or $.19 per share
for fiscal 1997's first nine months compared to $2.0 million or
$.42 per share for the same period during the last fiscal year.
Further, as a result of the $22.7 million charge related to the
AUTOWORKS business recorded by the Company during the fiscal 1997
third quarter, the Company had a net loss of $21.8 million for
the current nine month period compared to net income of $776,000
for same period of the previous fiscal year.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirement has historically been to
fund working capital needs to support growing sales and
operations. As a result of the bankruptcy filing by AUTOWORKS,
the Company will have additional cash requirements to meet
certain obligations for which the Company has joint liability
with AUTOWORKS (other than those under the Credit Facility
Agreement referred to below). The Company estimates that these
obligations total approximately $6.5 million and has recorded a
reserve for this amount. The Company believes that this
reserve is adequate for such liabilities; however, this
determination involves various estimates and subjective
judgments concerning, among other things, the expected
performance of the discontinued operation. There can be no
assurance that the actual amount of the expenses attributable
to these liabilities will not differ from those ultimately
incurred by the Company.
For the nine months ended June 30, 1997, income from continuing
operations before non-cash items, including depreciation,
amortization and bad debt reserves, dropped by 43.8% for the
current year compared to the same period last year. During the
first nine months of fiscal 1997, working capital from
continuing operations decreased $400,000. This decrease was
due to a $6.3 million increase in accounts payable and accrued
expenses. This increase was partially offset by a $5.6 million
increase in inventory and accounts receivable as a result of
the Nu-Way and Finn acquisitions and normal seasonal increases.
For the first nine months of the current fiscal year, net cash
used by operating activities increased by $6.2 million over the
same period last year due primarily to the decrease in working
capital, lower income from continuing operations and increased
losses at AUTOWORKS.
During the nine months ended June 30, 1997, the Company
invested in continuing operations $1.0 million in capital
expenditures, which included the Nu-Way and Finn acquisitions
and the replacement or enhancement of other fixed assets. The
Company has no plans to open or acquire any new locations
during the remainder of the current fiscal year.
Financing activities for the first nine months of this fiscal
year generated net proceeds of $11.0 million. These funds
generally reflect net borrowings under the Company's revolving
credit line that were used to fund the Nu-Way and Finn
acquisitions, seasonal increases in accounts receivable and to
fund AUTOWORKS operating losses and related expenses. During
the third quarter, the Company made a $2.2 million payment on
its Senior Secured Notes held by Massachusetts Mutual Life
Insurance Company ("Mass Mutual") and regular monthly payments
on all other financing notes.
AUTOWORKS' July 24, 1997 filing of a petition for
reorganization under the Bankruptcy Code described above
resulted in a default
15
under the Company's Credit Facility Agreement with its banking
syndicate. The Company further defaulted under the Credit
Facility Agreement on June 30, 1997 by failing to meet certain
financial covenants tested on that date. The borrowings
outstanding under the Credit Facility Agreement and the
Company's obligations under the Senior Secured Notes are
collateralized on a pari passu basis generally by all of the
assets of the Company and its wholly-owned subsidiaries
pursuant to an Intercreditor Agreement.
The Company together with its wholly-owned subsidiaries and
their banking syndicate entered into a Waiver, Modification and
Third Amendment to the Credit Facility Agreement and
Forbearance Agreement dated as of July 24, 1997 (the
"Forbearance Agreement"), a copy of which is filed as an
exhibit herewith and incorporated by reference herein. Under
the Forbearance Agreement, the banking syndicate agreed to
forbear from exercising their rights and remedies under the
Credit Facility Agreement on the terms and conditions set forth
therein until October 31, 1997 in the absence of another
default. On that date, all amounts outstanding under the
Credit Facility Agreement will become due and payable. Until
the Credit Facility Agreement's maturity date, interest only
payments are due on the first day of each month. If borrowings
outstanding pursuant to the Credit Facility Agreement have not
been refinanced by October 31, 1997, the Company is obligated
to pay the banking syndicate a $100,000 forbearance fee.
The Forbearance Agreement also amended and modified the Credit
Facility Agreement's interest rate and the Company's borrowing
availability thereunder. In particular, the interest rate on
outstanding borrowings was changed to the agent bank's prime
rate plus fifty (50) basis points from August 11, 1997 to
September 30, 1997, seventy-five (75) basis points from October
1, 1997 to October 31, 1997 and two hundred and fifty (250)
basis points from November 1, 1997 to November 30, 1997. In
terms of borrowing availability, the bank group's total
commitment was reduced from the (a) lesser of $50.0 million or
the borrowing base availability (reduced by the Senior Secured
Notes' outstanding principal amount) to (b) (i) $49.0 million
less (ii) the greater of $10.75 million or the amount received
by the banking syndicate from the sale of the AUTOWORKS
inventory (the "Reduction Amount") (reduced by the Senior
Secured Notes outstanding principal amount). Until the earlier
of the liquidation of all of the AUTOWORKS assets securing
borrowings outstanding under the Credit Facility Agreement, or
the end of the forbearance period, for purposes of calculating
the Company's borrowing availability, the aggregate principal
amount outstanding under the Credit Facility Agreement is
treated as if reduced by the Reduction Amount. The Forbearance
Agreement also expanded the borrowing base by increasing the
advance rates to 80% on Eligible Accounts (as defined in the
Credit Facility Agreement), 60% on Eligible Inventory (as
16
defined in the Credit Agreement) and the lesser of $1.5 million
or 20% on fixed assets. All AUTOWORKS assets are excluded from
the borrowing base calculation. The Forbearance Agreement also
modified and added to certain of the Credit Facility
Agreement's financial and reporting covenants. In particular,
the Forbearance Agreement removed the requirement that the
Company maintain 110% collateral coverage, waived compliance
with the current minimum fixed charge and maximum funded debt
ratios during the forbearance period and modified the Company's
cash flow (i.e., EBITDA) covenant to take into account the
discontinuance of AUTOWORKS' operations and the related charges
described above. The Forbearance Agreement also added new
monthly financial covenants that require the Company to
maintain certain accounts receivable, accounts payable and
inventory turns and working capital cash cycles.
The Company has also defaulted on the Company's Senior Secured
Notes held by Mass Mutual (which currently have an outstanding
principal balance of $4.2 million) as a result of AUTOWORKS'
bankruptcy filing and cross-default provisions which were
triggered by the Company's failure to meet certain financial
covenants under the Credit Facility Agreement as of June 30,
1997. The Company and Mass Mutual have executed a Sixth
Amendment to Note Agreement, dated as of July 24, 1997, (the
"Sixth Amendment"), a copy of which is filed herewith as an
exhibit and incorporated herein. Under the Sixth Amendment,
Mass Mutual has agreed to forbear from exercising its rights
and remedies on the terms and conditions set forth therein
until November 30, 1997 so long as no other defaults occur. On
that date, all amounts outstanding under the Senior Secured
Notes will become due and payable. The Sixth Amendment has
also modified certain provisions of the Note Agreement affected
by the AUTOWORKS bankruptcy filing.
The Company further defaulted under its Subordinated Notes
dated February 1, 1996 (executed June 26, 1996) in favor of its
Chief Executive Officer and President, in the aggregate
original principal amount of $2.2 million as a result of cross-
default provisions that were triggered by the Credit Facility
Agreement. However, as a result of the defaults under the
Credit Facility Agreement described above, under the
Subordination Agreement between the Company and its Chief
Executive Officer and President, as modified by the Forbearance
Agreement, the Company is permitted to make interest only
payments on the Subordinated Notes so long as no future event
of default occurs. Further, under the Subordination Agreement,
the Company's Chief Executive Officer and President are
prohibited from taking any actions to enforce the Company's
obligations to them.
As of July 31, 1997, the Company had outstanding borrowings of
$46.0 million, leaving available borrowings of $3.0 million
under the Credit Facility Agreement, as amended, if and to the
17
extent the Company has a sufficient borrowing base. Interest
on the outstanding borrowings currently accrue generally at the
rate of 7.9% per annum. The Company believes that its existing
cash, funds provided by operations (including payment terms
from vendors) and borrowing capacity under the Credit Facility
Agreement will be sufficient to fund operations through October
31, 1997. The Company does not expect to generate sufficient
cash flow from operations to fund the repayment of borrowings
due under the Credit Facility Agreement and the Senior Secured
Notes upon their acceleration or maturity. Accordingly, the
Company is currently exploring various refinancing alternatives
and has received refinancing proposals from several potential
lenders which are under review. There is no assurance that any
such financing will be available or, if available, will be
available on acceptable terms. In the event that the Company
cannot refinance or obtain a further extension of the maturity
dates on its Credit Facility Agreement and the Senior Secured
Notes, the banking syndicate and Mass Mutual may take action to
call the Company's debt to them which would result in such long-
term debt being classified as current maturities. Such actions
would also result in a severe liquidity problem for the Company
and could lead to litigation, the inability to transact
business and/or foreclosure actions against the Company's
assets.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 2 - "Recent Events" regarding the filing by
the Company's wholly-owned subsidiary, AUTOWORKS, of a petition
for reorganization under Chapter 11 of the United States
Bankruptcy Code.
Item 3. Defaults Upon Senior Securities.
See Part I, Item 2 -- "Liquidity and Capital Resources"
regarding defaults under (a) the Credit Facility Agreement,
dated June 24, 1996, among the Company and its wholly-owned
subsidiaries and the banking syndicate named therein, (b) the
Note Agreement, dated December 15, 1989, between the Company
and Mass Mutual, pursuant to which the Company issued its
Senior Secured Notes and (c) the Company's Subordinated Notes,
dated February 1, 1996, held by the Company's Chief Executive
Officer and President.
Item 5. Other Information.
AUTOWORKS has entered into a definitive agreement, pursuant to
which all of its merchandise and inventory would be sold. See
Part I, Item 2 -- "Management Discussion and Analysis" above.
During June 1997, Gordon E. Forth resigned as a director of the
Company as he deemed it appropriate due to the representation
of
18
AUTOWORKS by the law firm where he is a partner. Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Waiver, Modification and Third Amendment to the
Credit Facility Agreement and Forbearance Agreement, dated
as of July 24, 1997 among the Company and its wholly-owned
subsidiaries and the banks named therein.
10.2 - Letter Agreement, dated August 5, 1997, between
Schottenstein Bernstein Capital Group, LLC, HLCO Trading
Company, Inc. and Garcel, Inc. d/b/a Great American Asset
Management, as joint venturers, and AUTOWORKS, Inc.
10.3 - Sixth Amendment to Note Agreement dated as of July
24, 1997 between the Company and Massachusetts Mutual Life
Insurance Company.
Exhibit 27 - Selected financial information as required for
Edgar electronic filing for the nine months ended June 30,
1996.
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, the Company filed
(a) a Current Report on Form 8-K, filed July 25, 1997 reporting
the Company's exit from the AUTOWORKS retail business and the
filing by AUTOWORKS of a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code; and (b) a
further Current Report on Form 8-K, filed August 11, 1997,
containing (i) the Company's Pro Forma Consolidated Balance Sheet
at March 31, 1997 and Pro Forma Consolidated Statement of
Operations for the six months then ended and (ii) Pro Forma
Consolidated Balance Sheet at September 30, 1996 and Pro forma
Consolidated Statement of Operations for the fiscal year then
ended, in each case reflecting the effects of the Company's
classification of the AUTOWORKS business as a discontinued
operation.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
HAHN AUTOMOTIVE WAREHOUSE, INC.
(Registrant)
By: s//Mike Futerman
Mike Futerman
Chief Executive Officer
19
By: s//Eli N. Futerman
Eli N. Futerman
President
By: s//Albert J. Van Erp
Albert J. Van Erp
Vice President - Finance
Dated: August 14, 1997
EXHIBIT 10.1
WAIVER, MODIFICATION AND THIRD AMENDMENT
TO THE CREDIT FACILITY AGREEMENT
AND FORBEARANCE AGREEMENT
THIS WAIVER, MODIFICATION AND THIRD AMENDMENT TO THE CREDIT
FACILITY AGREEMENT AND FORBEARANCE AGREEMENT ("Agreement") is
entered into as of July 24, 1997, by and among HAHN AUTOMOTIVE
WAREHOUSE, INC., a New York corporation with offices at 415 West
Main Street, Rochester, New York 14608 ("Hahn"), AUTO WORKS,
INC., a Michigan corporation with offices at 415 West Main
Street, Rochester, New York 14608 ("Auto Works"), MEISENZAHL AUTO
PARTS, INC., a New York Corporation with offices at 415 West Main
Street, Rochester, New York 14608 ("Meisenzahl"), FLEET BANK, a
bank and trust company formed under the laws of the State of New
York with offices at One East Avenue, Rochester, New York 14638
("Agent"), as administrative agent for the "Banks" described
below, and each of the "Banks" described below.
BACKGROUND
Hahn, Meisenzahl and Auto Works (collectively, "Borrower")
and Banks are parties to a Credit Facility Agreement dated as of
June 26, 1996, (as amended, supplemented or otherwise modified
from time to time, the "Loan Agreement") pursuant to which Banks
provided Borrowers with certain financial accommodations.
There are various Events of Default now existing and
continuing under the Loan Agreement ("Designated Defaults") by
reason of which Banks have the full legal right to exercise their
remedies under the Loan Agreement. Borrowers have requested that
Banks forbear for a period of time from exercising their rights
and remedies under the Loan Agreement. Banks are prepared to
establish a period of forbearance on the terms and conditions set
forth below.
20
Auto Works a Borrower under the Loan Agreement has filed a
voluntary petition for reorganization under Chapter 11 of title
11 of the United States Code ("Bankruptcy Code") in the United
States Bankruptcy Court for the Western District of New York on
July 24, 1997. Auto Works will continue to be liable to Lender
for all Obligations as of the date of its bankruptcy filing under
the terms of the Loan Agreement but will not be permitted to
request or receive advances under the Revolving Line. Auto Works
and Banks have entered into a consensual cash collateral
arrangement.
AGREEMENT
In consideration of the foregoing and of the mutual promises
and covenants herein contained, it is agreed as follows:
1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the Loan
Agreement.
2. Amendment to the Loan Agreement. Subject to the
satisfaction of the conditions precedent set forth in Section 15
hereof, the Loan Agreement is hereby amended as follows:
2.1 Section 1.1 of the Loan Agreement is amended as
follows:
(a) the definition of "Applicable Base Rate Margin"
shall remain the same through August 11, 1997 at which point it
shall be modified and amended by deleting the definition set
forth therein and inserting the following "shall mean from August
11, 1997 to September 30, 1997 fifty (50) basis points, from
October 1, 1997 to October 31, 1997 seventy-five (75) basis
points and from November 1, 1997 to November 30, 1997 two hundred
and fifty (250) basis points";
(b) the definition of "Applicable Libor Margin" and
the second full paragraph of Section 2.3 are hereby deleted in
their entirety as of August 11, 1997;
(c) the definition of "Collateral Coverage" shall be
amended in its entirety as follows:
"(i) "Collateral Coverage" shall mean eighty
percent (80%) of Eligible Accounts plus (ii) sixty percent (60%)
of Eligible Inventory plus (iii) the lesser of $1,500,000 or
twenty percent (20%) of fixed assets (exclusive of fixed assets
of Auto Works), net of depreciation, all as shown on the
applicable Reconciliation Report;"
(d) the definition of Eligible Accounts is hereby
amended by inserting the following new sentence at the end
of such definition: "In no event shall Eligible Accounts include
accounts receivable of Auto Works;
21
(e) the definition of Eligible Inventory is hereby amended by
inserting the following new sentence a the end of such
definition: In no event shall Eligible Inventory include
inventory of Auto Works;
(f) the definition of "Eligible Subsidiaries" is
hereby amended by deleting all references to Auto Works; and
(g) the definition of "Proportionate Share" is hereby
amended by changing "$47,500,000" (which was previously amended
by the Second Amendment to $50,000,000) to "$49,000,000" and
inserting after such number the following:
"(reduced by the net proceeds actually received by
the Banks as a result of any sale of property of Auto Works
outside the ordinary course of business and which constitutes
collateral of the Banks)"
(h) the following definition is added to Section 1.1:
"Reduction Amount" shall mean at any time the
greater of (1) $10,750,000 or (2) the aggregate net proceeds
actually received by the Banks as a result of the sale of
substantially all of the Inventory of Auto Works."
2.2 Section 2.1 of the Loan Agreement is amended by (I)
changing all numeric and written references to $47,500,000 to
$49,000,000 and (ii) inserting the following language after the
first full sentence: "The aggregate maximum amount available for
working capital purposes shall be reduced on a permanent basis by
the Reduction Amount"; and the following language after
$49,000,000 in clause (i):", as reduced as provided in the
preceding sentence".
2.3 Section 2.4 of the Loan Agreement is amended by
inserting the following language after the first sentence of the
second paragraph:
"Borrower shall be limited each week to giving the
Agent only one notice of request for an advance."
2.4 Section 2.6 of the Loan Agreement is amended by
inserting the following language after the first full sentence of
the second paragraph: "However, until the earlier of the
liquidation of all of the Auto Works Collateral or the end of the
Forbearance Period, for the purpose of this calculation and for
purposes of determining Borrower's loan availability, the
aggregate principal amount outstanding shall be treated as if
reduced by the difference between the Reduction Amount and the
aggregate net proceeds actually received by the Banks as a result
of the sale of substantially all of the Inventory of Auto Works
in determining the repayment duties and availability of the
Borrower."
22
2.5 Section 2.7 of the Loan Agreement is amended by
deleting "June 26, 1999" and inserting "November 30, 1997" in its
place.
22
2.6 The second sentence of Section 4.1 is amended by
deleting the existing sentence and inserting in its place
At no time shall Letters of Credit be issued that would
cause Letter of Credit Liabilities in the aggregate then
outstanding to exceed $3,825,000, or when aggregated with
outstanding amounts under the Revolving Line Notes and the Swing
Line Note, to exceed the lesser of (i) $49,000,000 as reduced
pursuant to Section 2.1 hereof and (ii) the then Collateral
Coverage less Mass Mutual Debt.
2.7 Section 7.6 is amended by adding the following sentence
at the end of the Section: "Provided, however, that Banks and
Borrower agree that the bankruptcy filing of Auto Works shall not
be deemed a Material Adverse Change hereunder."
2.8 Section 9.6 is amended by adding the following language
before the word "cause" at the beginning of the Section "Except
for the bankruptcy filing of Auto Works", and all others
references to Auto Works shall be stricken from Section 9.6.
2.9 Section 10.2 (c) shall be amended to add the following
phrase after the word "Subsidiary" "provided that Hahn,
Meisenzahl and any Eligible Subsidiary shall not be permitted to
allow any additional Debt to exist with Auto Works after the date
hereof."
2.10 Section 10.3(d) shall be amended to add the following
phrase after the word "Subsidiaries" "provided that Hahn,
Meisenzahl or any Eligible Subsidiaries shall not permit any
further loans or advances to be made to Auto Works after the date
hereof."
2.11 Section 10.4 shall be amended to delete all references
to "Auto Works".
2.12 Section 10.8 shall be amended by inserting the
following sentence at the end of this section: "Nothing
contained in this section shall prohibit the liquidation or other
financial restructuring of Auto Works in its pending bankruptcy
proceeding.
2.13 Article 11 is hereby amended as follows:
(a) The second full paragraph of Article 11 shall be
amended by adding the following language after "Borrower" on the
last line: ", excluding Auto Works,";
23
(b) Section 11.6 shall be modified by (i) reducing the
Collateral Coverage requirement from 110% to 100% and inserting
the words "minus the Reduction Amount" after the words "under the
Revolving Line."
(c) a new Section 11.7 is added as follows:
"11.7 Minimum EBITDA. Maintain minimum EBITDA
for the month ending (i) July 31, 1997 of $1,035,000, (ii) August
31, 1997 of $660,000, (iii) September 30, 1997 of $835,000, (iv)
October 31, 1997 of $585,000 and (iv) November 30, 1997 of
$635,000."
(d) a new Section 11.8 is added as follows:
"11.8 Activity Ratios. Maintain:
(a) accounts receivable turnover for (i) the
months of July, August and September of 1997 of not
longer than 49 days, (ii) the months of October and November of
1997 of not longer than 51 days;
(b) accounts payable turnover for each of
the months of July, August, September, October and November of
1997 of not less than 47 days;
(c) inventory turnover for (i) July of 1997
of no longer than 176 days, (ii) August of 1997 of no longer than
191 days, (iii) September of 1997 of no longer than 184 days,
(iv) October of 1997 of no longer than 180 days, and (v) November
of 1997 of no longer than 188 days; and
(d) a working capital cash cycle for (i)
July of 1997 of not longer than 178 days, (ii) August of 1997 of
not longer than 193 days,(iii) September of 1997 of not longer
than 186 days, (iv) October of 1997 of not longer than 184 days,
and (v) November of 1997 of not longer than 192 days."
2.14 The Banks hereby waive compliance by Borrower during
the Forbearance Period with Sections 11.1, 11.2, 11.3, and 11.4
of the Loan Agreement.
3. Acknowledgment. Borrowers acknowledge that the Designated
Defaults have occurred and exist as of the date hereof, that any
and all cure periods set forth in the Loan Agreement have
expired, and that Borrowers are presently unconditionally
obligated to pay all of its liabilities to Banks, all without
defense, setoff or counterclaim of any kind or nature whatsoever.
24
4. Outstanding Obligations. Borrowers hereby affirm and
acknowledge that (i) as of July 25, 1997, there is presently
outstanding Obligations in the aggregate principal amount of $,
together with accrued interest thereon and costs and expenses
(collectively, the "Amount") and (ii) the Amount is due and owing
without defense, setoff or counterclaim of any kind or nature
whatsoever. It is the expectation of the Borrowers and
Banks that the Amount will be reduced as provided in Section
2.1 as a result of the liquidation of the assets of Auto Works.
5. Forbearance. During the period commencing on the date
hereof and ending on the earlier to occur of (i) November 30,
1997 or (ii) the date of any Forbearance Default (as hereinafter
defined) (the "Forbearance Period"), Banks will forbear from the
exercise of their rights and remedies under Section 13.2 of the
Loan Agreement or as otherwise provided by law with respect to
the Designated Defaults. Such forbearance shall not derogate
from Banks' rights to collect, receive and/or apply proceeds of
Collateral to the Obligations as may be specifically provided for
in the Loan Agreement.
5A. Establishment of a Lockbox Account, Dominion Account.
All proceeds of collateral of the Banks shall, at the direction
of Agent, be deposited by Borrower into a lockbox account,
dominion account or such other Blocked Account ("Blocked
Accounts") as Agent may require pursuant to an arrangement with
such bank as may be selected by Borrower and be acceptable to
Agent. Borrower shall issue to any such bank, an irrevocable
letter of instruction directing said bank to transfer such funds
so deposited to Agent, either to any account maintained by Agent
at said bank or by wire transfer to appropriate account(s) of
Agent. All funds deposited in such Blocked Account shall
immediately become the property of Agent and Borrower shall
obtain the agreement by such bank to waive any offset rights
against the funds so deposited. Agent assumes no responsibility
for such Blocked Account arrangement, including without
limitation, any claim of accord and satisfaction or release with
respect to deposits accepted by any bank thereunder.
Alternatively, Agent may establish depository accounts
("Depository Accounts") in the name of Agent at a bank or banks
for the deposit of such funds and Borrower shall deposit all
proceeds of Collateral or cause same to be deposited, in kind, in
such Depository Accounts of Agent in lieu of depositing same to
the Blocked Accounts.
6. Representations and Warranties. Borrowers hereby
represent and warrant as follows:
25
(a) This Agreement, the Loan Agreement and all other
documents executed in connection therewith, as amended, modified,
restated or supplemented from time to time, (collectively, the
"Documents") are and shall continue to be legal, valid and
binding obligations of Borrowers and are enforceable against
Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Agreement, Borrowers hereby
reaffirm all covenants, representations and warranties made in
the Documents and acknowledge that all such covenants,
representations and warranties shall be deemed to have been
remade and are true and correct as of the effective date of this
Agreement except to the extent that such covenants,
representations and warranties are affected by the bankruptcy or
liquidation of Auto Works.
(c) Borrowers have the corporate power, and have been
duly authorized by all requisite corporate action, to execute and
deliver this Agreement and to perform their obligations
hereunder. This Agreement has been duly executed and delivered
by Borrowers.
(d) Borrowers' execution, delivery and performance of
this Agreement does not and will not (i) violate any law, rule,
regulation or court order to which Borrowers are subject, (ii)
conflict with or result in a breach of Borrowers' Articles of
Incorporation or By-laws or any agreement or instrument to which
Borrowers are a party or by which their properties are bound, or
(iii) result in the creation or imposition of any lien, security
interest or encumbrance on any property of Borrowers, whether now
owned or hereafter acquired, other than liens in favor of Banks.
(e) Borrowers have no defense, counterclaim or setoff
with respect to the Loan Agreement and the other Documents.
(f) The Designated Defaults are the only Events of
Default existing under the Loan Agreement as of the date hereof.
(g) The recitals set forth in the Background paragraph
above are truthful and accurate and are an operative part of this
Agreement.
(h) Banks has and will continue to have a valid first
priority lien and security interest in all Collateral, and
Borrowers expressly reaffirm all security interests and liens
granted to Banks pursuant to the Loan Agreement and the other
Documents.
7. Covenants of Borrowers. During the Forbearance Period,
Borrowers shall:
26
(a) deliver a Borrowing Base Certificate on Tuesday of
each week by 10:00 a.m., a form of which is annexed hereto as
Exhibit "A" and, if requested by Agent, formal written
assignments of all of their Accounts on a weekly basis thereafter
with copies of applicable invoices or related invoice registers;
(b) retain a management consultant acceptable to the Banks to
provide financial and managerial assistance to the Borrowers by
August 15, 1997; Borrower shall provide the Banks with a copy of
the proposed letter of engagement from the management consultant
setting forth the scope and nature of its retention;
(c) provide a rolling eight week cash sources and use
statement initially projected to September 30, 1997 and updated
every four weeks thereafter;
(d) provide on a monthly basis an accounts payable
report to enable the Borrower and Agent to develop an accounts
payable aging as well as a report detailing any reconciliations
made to the general ledgers of any Borrower;
(e) provide on a monthly basis an accounts receivable
aging together with a report detailing any reconciliations made
to the general ledger of any Borrower;
(f) provide no later than twenty (20) days after the
end of each month (a) consolidated Projections of Borrowers for
the ensuing three (3) month period (inclusive of the month in
which such Projections are delivered) including but not limited
income statements, balance sheet and cash flow statements and (b)
monthly calculation of payable turns, receivable turns and
inventory turns;
(g) provide on Monday of each week verifications
satisfactory to Agent, that all payroll tax payments have been
made and are current as of Friday of the immediately preceding
week;
(h) provide no later than fifteen (15) days after the
end of each month Covenant Compliance Certificates as required by
Section 9.1 of the Loan Agreement;
(i) all reporting required to be submitted pursuant to
this Section shall be presented on a period to date, year to date
and actual versus projected basis;
(j) cooperate and assist any consultant engaged by
Agent, including but not limited to Gordon Brothers with respect
to Borrowers' business operations, including without limitation
providing full and unlimited access to Borrowers' premises, books
and records for such purpose to such consultant, it being Agent's
intent to engage such consultant, and Borrowers hereby agree that
Agent may charge Borrowers' account with the reasonable costs and
expenses of such consultant's services, which shall be
Obligations of Borrowers to Banks; and
27
(k) not make any payments of principal on the
Promissory Note dated February 1, 1996 in the amount of
$1,650,000 between Hahn and Michael Futerman as well as the
Promissory Note dated January 24, 1996 in the amount of $500,000
between Hahn and Eli Futerman (collectively the "Subordinated
Notes") but regular interest payments may be made on the
Subordinated Notes until a Forbearance Default has occurred at
which time all such payments shall immediately cease.
8. Forbearance Defaults. Except for the bankruptcy filing
of Auto Works, each of the following shall constitute a
Forbearance Default:
(a) the existence of any Event of Default (other than
a Designated Default) under the Documents;
(b) Borrowers shall fail to keep or perform any of the
terms, obligations, covenants or agreements contained herein;
(c) any representation or warranty of Borrowers herein
shall be false, misleading or incorrect in any respect;
(d) the occurrence of a materially adverse change, as
determined by Banks in their sole and absolute discretion (in
light of Borrower's projections) in the aggregate value of the
Collateral securing all of its obligations.
9. Rights and Remedies. Upon the occurrence of a
Forbearance Default, at the option of the Agent, all Obligations
shall be immediately due and payable, and in addition, Banks
shall be immediately entitled to charge the default interest rate
as set forth in Section 5.3 of the Loan Agreement and enforce all
of its rights and remedies under the Loan Agreement.
10. Waiver. Borrowers waive and affirmatively agree not to
allege or otherwise pursue any or all defenses, affirmative
defenses, counterclaims, claims, causes of action, setoffs or
other rights that they may have to contest (a) any Designated
Defaults which could be declared by Banks; (b) any provision of
the Documents or this Agreement; (c) the security interest of
Banks in any property, whether real or personal, tangible or
intangible, or any right or other interest, now or hereafter
arising in connection with the Collateral; or (d) the conduct of
Agent and Banks in administering the financing arrangements
between Borrowers, Agent and Banks.
11. Release. Borrowers hereby release, remise, acquit and
forever discharge Agent and Banks as well as Agent's and Banks'
employees, agents, representatives, consultants, attorneys,
fiduciaries, officers, directors, partners, predecessors,
successors and assigns, subsidiary corporations, parent
corporations, and related corporate divisions (all of the
foregoing hereinafter called the "Released Parties"), from any
and all actions and causes of action, judgments, executions,
suits, debts, claims, demands, liabilities, obligations, damages
and expenses of any and every character, known or unknown, direct
and/or indirect, at law or in equity, of whatsoever kind or
nature, for or because of any matter or things done, omitted or
suffered to be done by any of the Released Parties prior to and
including the date of execution hereof, and in any way directly
or indirectly arising out
28
of or in any way connected to this Agreement or the
Documents (all of the foregoing hereinafter called the "Released
Matters"). Borrowers acknowledge that the agreements in this
Section are intended to be in full satisfaction of all or any
alleged injuries or damages arising in connection with the
Released Matters.
12. Effect and Construction of Agreement. Except as
expressly provided herein, the Documents shall remain in full
force and effect in accordance with their respective terms, and
this Agreement shall not be construed to:
(a) impair the validity, perfection or priority of any
lien or security interest securing the Obligations;
(b) waive or impair any rights, powers or remedies of
Agent or the Banks under, or constitute a waiver of, any
provision of the Documents upon termination of the Forbearance
Period; or (c) constitute an agreement by Agent or the Banks or
require Agent or the Banks to extend the Forbearance Period,
grant additional forbearance periods, or extend the term of the
Loan Agreement or the time for payment of any of the Obligations.
13. Conflicts. In the event of any express conflict
between the terms of this Agreement and any of the Documents,
this Agreement shall govern.
14. Presumptions. Borrowers acknowledge that they have
consulted with and been advised by their counsel and such other
experts and advisors as they have deemed necessary in connection
with the negotiation, execution and delivery of this Agreement
and have participated in the drafting hereof. Therefore, this
Agreement shall be construed without regard to any presumption or
rule requiring that it be construed against any one party causing
this Agreement or any part hereof to be drafted.
15. Conditions of Effectiveness. This Agreement shall
become effective upon satisfaction of the following conditions
precedent: (i) Agent and Banks shall have received four (4)
copies of this Agreement executed by Borrowers, (ii) personal
guarantee of Michael Futerman in form and substance acceptable to
the Banks in the amount of $500,000 secured by a pledge of
$1,000,000 in Hahn stock owned by Michael Futerman, (iii)
personal guarantee of Eli Futerman in form and substance
satisfactory to the Banks, in the amount of $50,000 secured by a
pledge of $100,000 in Hahn stock owned by Eli Futerman, (iv) a
consensual cash collateral order has been entered in the Auto
Works bankruptcy, (v) consent by The Massachusetts Mutual Life
Insurance Co. to execution and delivery of this Agreement, and
(vi) such other certificates, instruments, documents, agreements
and opinions of counsel as may be required by Agent or the Banks
or their counsel, each of which shall be in form and substance
satisfactory to Agent or the Banks and their counsel.
29
16. Expenses.
(a) Borrowers shall pay all costs, fees and expenses of
Agent and Banks (including the costs, fees and expenses of Agent
and Banks counsel, consultants and appraisers) incurred by the
Agent or the Banks in connection with the negotiation,
preparation, administration and enforcement of this Agreement
subject to Agent's and/or Banks' submission of said invoices to
Borrower.
(b) Borrower shall be responsible to pay a forbearance
fee of $100,000; the forbearance fee shall be fully earned by the
Banks upon execution of this Agreement but is not due until
November 30, 1997. If the Obligations are fully repaid by
November 30, 1997 this forbearance fee will be waived by the
Banks.
17. Entire Agreement. This Agreement sets forth the entire
agreement among the parties hereto with respect to the subject
matter hereof. Borrowers have not relied on any agreements,
representations, or warranties of Banks, except as specifically
set forth herein. Any promises, representations, warranties or
guarantees not herein contained and hereinafter made shall have
no force and effect unless in writing, signed by each party
hereto. Borrowers acknowledge that they are not relying upon
oral representations or statements inconsistent with the terms
and provisions of this Agreement.
18. Further Assurance. Borrowers shall execute such other
and further documents and instruments as Agent or the Banks may
reasonably request to implement the provisions of this Agreement,
including without limitation any documents which may be necessary
to perfect Agent or the Banks' liens and/or security interests in
Borrower's property, including without limitation financing
statements, applications for notations of lien and/or security
interests on certificates of title with respect to the Equipment,
including without limitation titled motor vehicles, and similar
documents.
19. Benefit of Agreement. This Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties hereto
and their respective permitted successors and assigns as set
forth in the Loan Agreement. No other person or entity shall be
entitled to claim any right or benefit hereunder, including,
without limitation, any third-party beneficiary of this
Agreement. Banks' agreement to forbear from enforcing certain of
its remedies does not in any manner limit Borrowers' obligations
to comply with, and Banks' right to insist upon compliance with,
each and every one of the terms of the Loan Agreement except as
specifically modified herein.
30
20. Severability. The provisions of this Agreement are
intended to be severable. If any provisions of this Agreement
shall be held invalid or unenforceable in whole or in part in any
jurisdiction, such provision shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or enforceability
without in any manner affecting the validity or enforceability of
such provision in any other jurisdiction or the remaining
provisions of this Agreement in any jurisdiction.
21. Governing Law, Jurisdiction, Venue. This Agreement
shall be governed by and construed in accordance with the laws of
the State of New York applied to contracts to be performed wholly
within the State of New York. Any judicial proceeding brought by
or against Borrowers with respect to this Agreement or any
related agreement may be brought in any court of competent
jurisdiction in the State of New York, County of Monroe, United
States of America, and, by execution and delivery of this
Agreement, Borrowers accept for itself and in connection with its
properties, generally and unconditionally, the non-exclusive
jurisdiction of the aforesaid courts, and irrevocably agrees to
be bound by any judgment rendered thereby in connection with this
Agreement. Nothing herein shall affect the right to serve
process in any manner permitted by law or shall limit the right
of Banks to bring proceedings against Borrowers in the courts of
any other jurisdiction. Borrowers waive any objection to
jurisdiction and venue of any action instituted hereunder and
shall not assert any defense based on lack of jurisdiction or
venue or based upon forum non conveniens. Any judicial
proceeding by Borrowers against Agent and Banks involving,
directly or indirectly, any matter or claim in any way arising
out of, related to or connected with this Agreement or any
related agreement, shall be brought only in a federal or state
court located in the County of Monroe, State of New York.
22. Intentionally Omitted.
23. Counterparts; Telecopied Signatures. This Agreement
may be executed in one or more counterparts, each of which shall
be deemed an original and all of which taken together shall
constitute one and the same agreement. Any signature delivered
by a party by facsimile transmission shall be deemed to be an
original signature hereto.
24. Survival. All representations, warranties, covenants,
agreements, undertakings, waivers and releases of Borrowers
contained herein shall survive the termination of the Forbearance
Period and payment in full of the Obligations under the Loan
Agreement.
25. Amendment. No amendment, modification, rescission, waiver
or release of any provision of this agreement shall be effective
unless the same shall be in writing
31
and signed by the parties hereto.
26. Headings. Section headings in this Agreement are
included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
IN WITNESS WHEREOF, this Agreement has been duly executed as
of the day and year first written above.
HAHN AUTOMOTIVE WAREHOUSE, INC.
By:
Name:
Title:
MEISENZAHL AUTO PARTS, INC.
By:
Name:
Title:
AUTO WORKS, INC.
By:
Name:
Title:
FLEET BANK as Agent and a Bank
By:
Name:
Title:
THE CHASE MANHATTAN BANK
By:
Name:
Title:
MANUFACTURERS AND TRADERS TRUST COMPANY
By:
Name:
Title:
32
THE SUMITOMO BANK, LTD.
By:
Name:
Title:
Agreed and Consented to
The Massachusetts Mutual
Life Insurance Co.
By:
Name:
Title:
EXHIBIT 10.2
SCHOTTENSTEIN BERNSTEIN CAPITAL GROUP, LLC
HILCO TRADING CO., INC, AND GARCEL INC., d/b/a GREAT AMERICAN
ASSET MANAGEMENT
1010 Northern Boulevard, Suite 330
Great Neck, New York 11021
August 14, 1997
Daniel J. Chessin
Executive Vice President
Auto Works, Inc.
415 West Main Street
Rochester, New York 14608
Dear Daniel:
Upon execution by Auto Works, Inc., debtor and debtor in
possession ("Merchant"), this letter shall serve as the agreement
(the "Agreement") between Merchant and joint venture comprised of
Schottenstein Bernstein Capital Group, LLC, Hilco Trading Co.,
Inc., and Garcel Inc., d/b/a Great American Asset Management,
jointly and severally (collectively the "Agent") for Agent to act
as Merchant's sole and exclusive agent to sell all of the
merchandise (the "Merchandise") in Merchant's stores and the
distribution center listed on Exhibit A attached (including such
distribution center, the "Stores" and individually a "Store") by
means of promotional, "Store Closing, Total Liquidation, Going
Out of Business," or similar sale (the "Sale"). After the date
hereof, Stores shall only be closed by mutual agreement of Agent
and Merchant. In consideration of the mutual promises and
covenants contained herein and other good and valuable
consideration, Merchant and Agent agree as follows:
33
1. AGENCY. Merchant appoints Agent its exclusive agent for
the purpose of conducting the Sale of the Merchandise located at
the Stores. Merchant shall be responsible, with Agent's
assistance, for securing any required licenses and permits and
complying with any "going-out-of-business" laws, rules,
ordinances and regulations not superseded by order of the United
States Bankruptcy Court with appropriate jurisdiction (the
"Approval Order") referred to in Section 28. Merchant shall pay
any fees and expenses incurred and post any bonds required in
connection with such licenses and permits.
2. INVENTORY. (a) As soon as practicable after the Approval
Order, Merchant and Agent shall cause to be taken an SKU physical
inventory of the Merchandise in the Stores (the "Inventory
Count"), which Inventory Count and certification by the Inventory
Service shall be completed within fourteen (14) days after the
date of the Approval Order. The date that the Inventory Count is
taken in each Store shall be referred to as to each Store as the
"Inventory Date". The Inventory Count shall be taken by RGIS or
another independent inventory service, in any case approved by
both Merchant and Agent (the "Inventory Service"), the costs of
which shall be shared equally by the parties. Each Store shall
be closed during the Inventory Count and during the Inventory
Count, neither Merchant nor Agent shall enter such Store without
each having a representative present. The Merchandise shall be
valued on the basis of Cost Price (as defined below).
(b) From the Start Date until the Inventory Count
is taken in each Store, Agent and Merchant shall jointly keep a
strict count of gross register receipts less applicable sales tax
("Gross Rings") and cash reports of sales within each Store. The
register receipts shall show for each item sold the retail price
of such item and the store wide or other discount granted by
Agent in connection with such sales. All such records and
reports shall be made available to Agent and Merchant during
regular business hours upon reasonable notice. All Merchandise
sold during such period shall be valued for purposes of the
Guaranteed Return at the Cost Price (as defined below).
(c) Agent shall at Merchant's option accept returns of goods in
accordance with Merchant's normal return policies, which shall be
included in the Merchandise and valued at 42.5% (or other
percentage provided in Section 5(b) or agreed upon pursuant to
Section 3) of its Cost Price, less the percentage of the store
wide discount then prevailing in the Stores (but without discount
for returns within the first ten (10) days after the Start Date)
(the "Return Credit"). Merchant shall reimburse Agent for its
refund or credit in accepting such returns less the Return
Credit. Merchant shall have no responsibility whatsoever for any
returns of Merchandise sold on or after the Start Date.
34
3. COST PRICE. The term Cost Price herein shall mean the
aggregate of the line item unit cost prices (including core
charges) as set forth in Merchant's files of the respective items
of all the Merchandise. Merchandise shall include all goods
owned by Merchant and located at the Stores on the Start Date,
except: (i) core goods; and (ii) furniture, fixtures, equipment
and improvements to realty located in the Stores. Merchant and
Agent shall agree upon a price for damaged, display, clearance
and out-of-season goods.
4. SALE TERM. The Sale shall start the day after the Approval
Order is obtained and shall end no later than the close of
business at each Store the seventy-second (72nd) day from the
first Saturday occurring on or after the Start Date (except with
respect to the distribution center, with respect to which the
Sale shall end the ninetieth (90th) day from the Start Date)
unless extended by agreement of the parties (the "End Date").
Agent may terminate the Sale prior to the End Date at any Store
in its discretion by providing written notice thereof to Merchant
at least fourteen (14) days prior to any such early termination
date (or seven (7) days during the last twenty-one (21) days
prior to the End Date). At the conclusion of the Sale, Agent
agrees to leave the Stores in "broom clean" condition, except
that the remaining Supplies (as defined in Section 10 hereof)
shall be left in the Stores, and to leave the Stores in the same
condition as on the Start Date, ordinary wear and tear excepted.
5. GUARANTEE. (a) Agent hereby guarantees to Merchant
that Merchant shall receive an aggregate amount from the Proceeds
(as defined in this Section) equal to forty-two and one half
percent (42.5%) percent of the Cost Price (the "Guaranteed
Return"). Agent shall advance eighty-five percent (85%) of the
Guaranteed Return as estimated based on the Merchant's invoice
unit cost as carried on the Merchant's books on the Start Date,
and as a condition to commencement of the Sale, within one (1)
business day after the date of the Approval Order and the
remainder of the Guaranteed Return within one (1) business day of
the certification of the Cost Price by the Inventory Service.
All payments to Merchant pursuant to the preceding sentence shall
be made by wire transfer and shall be nonrefundable. Agent's
advance of the Guaranteed Return shall be recovered without
interest solely from the Proceeds of the Sale of the Merchandise
and the proceeds of insurance, if any, for loss or damage to the
Merchandise, or robbery of cash to the extent of insurance
coverage of Agent or Merchant (collectively, the "Proceeds"), and
Merchant shall have no obligation if such Proceeds are
insufficient for that purpose. Any Merchandise remaining at the
end of the Sale shall be the sole property of the Agent.
35
(b) If the Cost Price of the Merchandise is
less than $23,250,000, the Guaranteed Return shall be reduced by
one-quarter percent (.25%) of the Cost Price from the forty-two
and one-half percent (42.5%) thereof set forth above, and by an
additional one-quarter percent (.25%) for each additional full
Five Hundred Thousand Dollars ($500,000) reduction increment
thereafter.
6. SALE CONDUCT. Agent shall conduct the Sale in the name of
Merchant in the manner in which Agent in its discretion
reasonably deems fit, including, but not limited to, advertising,
pricing of Merchandise, number and type of personnel, Store
hours, Store maintenance and security, but in all events in
accordance with all applicable laws, ordinances and regulations
(to the extent not superseded by the Approval Order). Agent may
advertise the Sale as a "Store Closing, Total Liquidation, Going
Out of Business" or similar type sale and may use Merchant's
contract advertising rates, if available. Agent may use
Merchant's employees to the extent Agent deems feasible, and
Agent may select and schedule the number and type of Merchant's
employees required for the Sale, however, Merchant's employees
shall at all times remain employees of Merchant. On and after
the Start Date, Agent shall, as an Expense of Sale, as
hereinafter defined, pay to Merchant by wire transfer received by
Merchant within twenty-four (24) hours of invoice by Merchant,
the gross wage payroll paid to Merchant's employees used in the
Stores by the Agent during the Sale plus (a) the related payroll
taxes (including FICA and Unemployment), and (b) health care
insurance benefits (subsections (a) and (b) collectively, the
"Benefits") not in excess of thirteen percent (13%) of said gross
payroll (the "Fringe Benefit Cap"). Any amounts in excess of the
Fringe Benefit Cap shall be at Merchant's Expense, as hereinafter
defined. Merchant and Agent acknowledge and agree, that (i)
nothing herein nor any of Agent's actions taken in respect hereto
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, vacation, pension, withdrawal,
severance pay, vacation pay, sick leave or pay, maternity leave
or pay, Worker Adjustment Retraining Act ("WARN") claims (if any)
and other termination type claims and obligations; and (ii)
Merchant hereby indemnifies Agent in respect to any claims
asserted by any of Merchant's employees, except as to claims
arising out of the negligence or wrongful act or omission of
Agent, and Merchant is solely and specifically responsible for
all of Merchant's obligations under any collective bargaining
agreements and any purported oral service contracts.
7. EXPENSES OF SALE.Agent shall collect all Proceeds and,
within twenty-four (24) hours after presentation of an invoice
therefor (to be provided no more than weekly), shall pay all
"Expenses of Sale." Expenses of Sale shall be (i) the actual
gross wage payroll paid to Merchant's employees used in the
Stores and in the transfer of Merchandise between the stores by
36
the Agent during the Sale plus the actual cost of the Benefits
for such employees not to exceed the Fringe Benefit Cap; (ii) all
advertising expenses; (iii) all signage for the Sale; (iv)
security in the Stores; (v) bank card fees and chargebacks; (vi)
telephone charges for the Stores in excess of base charges; (vii)
Agent's supervision expenses; (viii) occupancy expenses for each
Store during the Sale on a per diem basis of $1,600.00 per Store
per day (except with respect to the distribution center which
shall be $4,050 per day), (ix) cost of transferring inventory
between the Stores (including transfers prior to the Start Date
at the Agent's request) at Merchant's freight rate of 1.115 cents
per mile, (x) postage, armored car and courier and (xi) any other
expenses directly attributable to the Sale authorized by Agent.
8. MERCHANT'S EXPENSES. During the Sale, Merchant shall be
responsible for payment of the following items none of which
shall be deemed an Expense of Sale: (i) all occupancy expenses in
excess of the occupancy expenses to be paid by Agent pursuant to
Paragraph 7 above; (ii) any Benefits in excess of the Fringe
Benefit Cap; (iii) all other employee benefits, including but not
limited to union dues, termination pay, pension benefits,
severance pay, vacation pay, sick leave or pay, maternity leave
or pay and WARN claims (if any); (iv) major maintenance; (v)
central administration services and (vi) any other costs or
expenses that are not an Expense of Sale (except to the extent
incurred by or at the direction of Agent).
9. TAXES. Agent shall collect all sales, excise and gross
receipts taxes (and not income taxes) (collectively the "Sales
Taxes") payable to any taxing authority having jurisdiction,
which taxes shall be added to the sales price and be paid by the
customer at the time Merchandise is purchased. Agent shall
immediately forward all Sales Taxes to Merchant and Merchant
shall file all necessary tax returns, reports and forms for Sales
Taxes. Merchant shall indemnify and hold Agent harmless from and
against any and all costs (including, but not limited to,
reasonable attorneys' fees), assessments, fines or penalties
which Agent may incur as a direct or indirect consequence of the
failure by Merchant to pay Sales Taxes (that have been forwarded
from Agent to Merchant on a timely basis) to the proper taxing
authorities and/or the failure by Merchant to promptly file with
taxing authorities any and all returns, reports and other
documents required by applicable law to be filed or delivered to
such taxing authorities.
10. SUPPLIES. Agent shall have the right to use in connection
with the Sale, without any charge, all signs and promotional
materials, and supplies, including, but not limited to, bags,
boxes, twine, paper and similar sales materials ("Supplies"),
located at the Stores on the Start Date. Agent shall have no
obligation to account to Merchant for any of the Supplies used
during the Sale, but all Supplies remaining in the Stores on
37
the End Date shall be left on the premises and remain Merchant's
property. Should additional Supplies be required in any of the
Stores during the Sale, Agent shall obtain such additional
supplies at Agent's expense (at Merchant's contract rate, if
available). Merchant covenants and warrants that it has not and
will not remove any Supplies from the Stores in contemplation of
this Agreement and has continued to ship supplies to the Stores
in the ordinary course of business.
11. CREDIT CARDS, GIFT CERTIFICATES AND RETURNS. All sales
shall be for cash or upon bank credit cards (excluding private
label cards). During the Sale, all bank credit card sales shall
be through Merchant's bank credit card system. All bank card
fees including chargebacks in connection with the Sale shall be
an Expense of Sale. All sales shall be advertised, "FINAL," and
all sales receipts shall be marked "FINAL." Agent shall accept
Merchant's unexpired gift certificates during the Sale. Gift
Certificates shall be treated as cash and the Merchant shall pay
to Agent the amount thereof redeemed, which shall be added to
Proceeds.
12. MERCHANT'S WARRANTIES. Merchant hereby warrants and
represents:
a. Merchant is a corporation, duly and validly
existing and in good standing under the laws of the State of
Michigan. Merchant is and during the Sale will be authorized and
duly qualified as a foreign corporation to do business and is in
good standing in all jurisdictions in which the Stores are
located.
b. Subject to entry of the Approval Order, (i)
this Agreement and all other documents executed by Merchant in
accordance with this Agreement are the valid and binding
obligations of Merchant enforceable in accordance with their
terms; (ii) Merchant has taken all necessary corporate action
required to authorize the execution, performance and delivery of
this Agreement and the related documents; (iii) no court order or
decree of any federal, state or local government authority, or
other action known to Merchant, is in effect which will or may
prevent or impair consummation of the transactions contemplated
by this Agreement; and (iv) the consent of any person or entity,
including any landlord, is not required with respect to the
obligations on the Merchant's part contemplated herein;
c. Subject to entry of the Approval Order, Agent shall be
entitled to sell the Merchandise and retain all Proceeds
therefrom, subject to section 5, free and clear of all liens,
mortgages, pledges, charges, encumbrances, equities or claims
whatsoever.
d. Merchant shall not ship new goods into the
Stores without Agent's consent (except for shipments of Auto
Works goods only from the distribution center to stores) nor
raise any prices of the Merchandise in contemplation of the Sale.
The Stores shall be operated in the ordinary course from the date
hereof until the Start Date (subject to the understanding that
the inventory of the Stores has not been replenished in the
ordinary course of business).
e. Subject to entry of the Approval Order, no
actions or proceedings have been instituted against Merchant or
have been threatened, preventing or which may prevent the
consummation of the transactions contemplated by this Agreement.
Merchant is current on all accounts payable accruing after the
filing of Merchant's bankruptcy, due and owing to parties whose
cooperation is necessary for operation of the Sale, including but
not limited to landlords, newspapers and utilities.
f. Merchant represents and warrants that it will
not prior to or during the Sale grant any lien or encumbrance on
the Merchandise or the Proceeds which would conflict with the
provisions of this Agreement.
g. Subject to entry of the Approval Order, there
is no outstanding order, judgment, injunction award or decree of
any court, governmental or regulatory body or arbitration
tribunal by which the Merchant or the Merchandise is bound which
would materially interfere with the transactions herein, and
there shall be no action, suit, claim, legal, administrative or
arbitral proceedings (whether or not the defense thereof or
liabilities in respect thereof are covered by insurance) against
the Merchant or the Merchandise which would, if determined
adversely to the Merchant, be likely to have a material adverse
effect upon the transactions contemplated hereby, nor are there
any facts which are likely to give rise to any such action, suit,
claim or legal, administrative or arbitral proceeding or
investigation.
h. During the Sale Term, Agent shall be
permitted to pass on all applicable manufacturers warranties to
customers.
i. The historical margins on the Merchant's
sales for the periods covered by the Merchant's ADM-068
Jobber/Sales Analysis report provided to Agent are as represented
in such report.
j. Merchant represents and warrants that it has
not raised any prices in contemplation of the Inventory Count.
k. The Merchandise shall have an aggregate Cost
Price value of no less than twenty million dollars ($20,000,000).
l. There shall be a minimum of eighty-two (82)
Stores, excluding the distribution center.
13. AGENT'S WARRANTIES. Agent hereby warrants and represents:
a. Schottenstein Bernstein Capital Group, LLC is a
limited liability company, duly and validly existing and in good
standing under the laws of the State of Delaware, and is, and
during the Sale will be, authorized and duly qualified to do
business in each jurisdiction where the failure to so qualify
would have a material adverse effect on its ability to perform
hereunder.
b. Hilco Trading Company, Inc., is a corporation,
duly and validly existing and in good standing under the laws of
the State of Illinois and is, and during the Sale will be,
authorized and duly qualified to do business in each jurisdiction
where the failure to so qualify would have a material adverse
effect on its ability to perform hereunder.
b. Garcel Inc., d/b/a Great American Asset
Management, is a corporation, duly and validly existing and in
good standing under the laws of the State of California and is,
and during the Sale will be, authorized and duly qualified to do
business in each jurisdiction where the failure to so qualify
would have a material adverse effect on its ability to perform
hereunder.
d. (i) This Agreement and all other documents
executed by Agent in accordance with this Agreement are the valid
and binding obligations of Agent enforceable in accordance with
their terms; (ii) Agent has taken all necessary action required
to authorize the execution, performance and delivery of this
Agreement and the related documents; (iii) no court order or
decree of any federal, state or local government authority, or
other action known to Agent, is in effect which will or may
prevent or impair consummation of the transactions contemplated
by this Agreement; and (iv) the consent of any person or entity,
is not required with respect to the transactions contemplated
herein.
e. There is no outstanding order, judgment,
injunction award or decree of any court, governmental or
regulatory body or arbitration tribunal by which the Agent is
bound which would materially interfere with the transactions
herein, and there is no action, suit, claim, legal,
administrative or arbitral proceedings (whether or not the
defense thereof or liabilities in respect thereof are covered by
insurance) pending or threatened against the Agent which would,
if determined adversely to the Agent, be likely to have a
material adverse effect upon the transactions contemplated
hereby, nor are there any facts which are likely to give rise to
any such action, suit, claim or legal, administrative or arbitral
proceeding or investigation.
14. NON COMPETE. During the Sale, neither Merchant nor any
affiliate of Merchant shall run a store closing, liquidation or
similar sale in competition with the Sale at any store trading
under the Auto Works name within the advertising area of any of
the Stores without the prior written approval of Agent.
15. INSURANCE. a. Merchant at its expense shall continue
until the End Date, in such amounts as Merchant currently has in
effect, all of Merchant's liability insurance policies, including
but not limited to, comprehensive public liability policies
covering injuries to persons and property in or in connection
with Merchant's operation of the Stores and, from and after the
acceptance by Merchant of this Agreement, shall cause Agent to be
named as additional insured, as its interests may appear, with
respect to all such policies. On or before the Start Date,
Merchant shall deliver to Agent certificates evidencing such
insurance policies, setting forth the duration thereof and the
naming of Agent as an additional insured, as its interests may
appear, in accordance with the provisions hereof, all in form
reasonably satisfactory to Agent. In the event that Merchant is
self insured or has deductibles or retentions in excess of Fifty
Thousand Dollars ($50,000), Agent shall be permitted to obtain
for Merchant's account insurance to cover such self insurance
amount or deductible, the cost of which shall be billed to and
paid by Merchant. Merchant shall be responsible for the payment
of all deductibles, retentions or self-insured amounts under such
policies except in the event liability arises by reason of the
negligence or wrongful act or omission of Agent or Agent's
independent contractors. Merchant's liability policy shall be
primary, except in the event of liability arising by reason of
the negligence or wrongful act or omission of Agent or Agent's
independent contractors.
b. Merchant at its expense shall provide fire,
theft and extended coverage casualty insurance on the Merchandise
in a total amount at least equal to the cost value thereof. From
and after the Start Date, said coverage will contain a loss
payable clause in Agent's favor. In the event of a loss to the
Merchandise included in the Inventory Count occurring on or after
the Start Date, the proceeds of such insurance attributable to
the Merchandise shall be paid to Agent and such proceeds shall be
included as part of the Proceeds. On or before the Start Date,
Merchant shall deliver to Agent certificates evidencing such
insurance policies, setting forth the duration thereof and the
naming of Agent as a loss payee in accordance with the provisions
hereof, all in form reasonably acceptable to Agent. In the event
that Merchant is self insured or has deductibles in excess of
Fifty Thousand Dollars ($50,000), Agent shall be permitted to
obtain for Merchant's account insurance to cover such self
insurance amount or deductible, the cost of which shall be billed
to and paid by Merchant. Merchant shall be responsible for the
payment of all deductibles or self-insured amounts under such
policies except in the event liability arises by reason of the
negligence or wrongful act or omission of Agent or Agent's
independent contractors.
c. Merchant shall at all times during the Sale
maintain in full force and effect Worker's Compensation Insurance
in compliance with all statutory requirements.
d. During the performance and length of this
Agreement, Agent will maintain workers compensation, commercial
general liability and automobile liability insurance and will
name Merchant as an additional insured on all such policies, and
will, prior to the Start Date, furnish the Merchant with
certificates showing that such insurance is in effect.
16. PEACEFUL POSSESSION AND USE OF MERCHANT'S ASSETS. Merchant
agrees during the Sale to grant and provide Agent peaceful and
quiet possession of the Stores and to take no action relating to
the Stores which would disturb such possession, including,
without limitation, any action to modify or terminate any
existing ADT or similar security system or cash register
maintenance agreements or remove any of the furniture, fixtures
or equipment from the Stores. Merchant agrees to maintain in
operation at the expense of Merchant for the benefit of Agent (i)
the point of sale equipment in the Stores during the period of
the Sale and (ii) the management information systems during the
period of the Sale and for a period of ten (10) days after the
End Date. Merchant shall maintain all mechanical systems and
equipment in the Stores. Agent shall have the right to use,
solely for lawful purposes in furtherance of the Sale, Merchant's
property located at or used in connection with the Stores and
warehouse in the ordinary course of business, including without
limitation, trade names, trademarks, customer lists, credit card
equipment, supplies and services, tax identification numbers,
computer systems, central office services and subject to the
above right to remove furniture, fixtures and equipment. From
the Start Date until such time as Agent notifies Merchant that
Agent has established bank accounts for receipt of the Proceeds,
the Proceeds (including all bank card deposits) shall be
deposited in Merchant's accounts in trust for Agent and
transferred daily by wire to Agent with Agent paying to Merchant
all costs of wiring the funds.
17. INDEMNIFICATION. Agent and Merchant each agree to
indemnify and defend and hold harmless the other from any and all
demands, claims, actions or causes of action, assessments,
losses, damages, liabilities, costs and expenses, including,
without limitation, interest, penalties and reasonable attorneys'
fees, costs and expenses, asserted against, resulting to or
imposed upon Merchant or Agent, directly or indirectly, by reason
of or resulting from either (i) material breach or failure to
comply with any of the agreements, covenants, representations or
warranties contained in this Agreement, or (ii) any negligent or
wrongful act or omission of either or their respective
employees.
18. DEFAULT. a. For the purposes of this Agreement, an "Event
of Default" shall be deemed to have occurred:
(1) upon the failure by Merchant or Agent to
perform promptly and fully any material obligation or covenant
hereunder or any material obligation or covenant in any document
delivered pursuant hereto or any collateral agreement to this
Agreement after having received five (5) days' prior written
notice, except in the case of a nonmonetary default which is
incapable of being cured within such notice period and as to
which the defaulting party diligently proceeds to cure said
default and (a) the party in default has taken all steps
necessary to commence to cure such default within such notice
period and (b) such failure to cure, in the case of a default by
Merchant, will not adversely affect, in any material way, Agent's
ability to conduct the Sale in the manner contemplated herein or
in the case of a default by the Agent, the Merchant's practical
realization of the benefits to be conferred upon it by this
Agreement;
(2) if any of the warranties or
representations made by Merchant or Agent herein proves to be
untrue or false in a material way;
(3) if any breach of this Agreement by
Merchant results in the Agent being unable to conduct or complete
the Sale at any Store as contemplated herein; or
(4) if any breach of this Agreement by Agent
adversely affects the Merchant's realization of the benefits to
be conferred upon it by this Agreement.
b. In the event of the occurrence of an
Event of Default resulting from any act or omission of Merchant
which prevents Agent from conducting or completing the Sale at
any Store as provided by this Agreement, Agent may, at its
option, either (i) proceed with the Sale at the Store location(s)
affected or (ii) require Merchant, at Merchant's expense, to move
the Merchandise to another reasonably proximate Store designated
by Agent, or (iii) notify Merchant as to the termination of the
Sale as to the particular Store location, in which event, the
remaining Merchandise in such Store shall be returned to Merchant
and Merchant shall reimburse to Agent the portion of the
Guaranteed Return attributable to such Merchandise, and
commencing with the fifth (5th) Store for which the Sale has been
terminated as a result of a Merchant Event of Default, Merchant
shall within two (2) business days pay Agent an amount equal to
an amount as liquidated damages equal to two percent (2%) of the
Cost Price of the remaining Merchandise in such Store. Merchant
acknowledges that Agent would be irreparably injured in the event
of any failure by Merchant to promptly and fully perform any
obligation hereunder if such failure directly or indirectly
interferes with the conduct by Agent of the Sale, and hereby
consents, in the event of any such failure or in the event that
any such failure is threatened or appears imminent, to the entry
of an injunction specifically enforcing the terms of this
Agreement.
c. No right or remedy granted in or
pursuant to this Agreement shall be exclusive of any other right
or remedy so granted or otherwise available. Every such right or
remedy shall be cumulative and shall be in addition to every
other right or remedy so granted or existing at law or in equity
or by statute, or created, granted or existing pursuant to any
agreement to which Agent and/or Merchant is or may hereafter
become a party.
19. ADDITIONAL MERCHANDISE. If permitted by applicable law (as
same may be modified by the Approval Order), Agent shall have the
right to include in the Sale additional merchandise ("Additional
Merchandise") having an aggregate original retail price of up to
$5,000,000, which Additional Merchandise shall be similar in
quality and type as Merchandise presently located in the Stores.
Agent agrees to pay Merchant a commission relative to the sale of
Additional Merchandise in an amount equal to 10% of sale of
Additional Merchandise (net of all Sales Taxes relative to such
sales).
20. JURISDICTION. This Agreement shall be governed and
construed in accordance with the laws of the State of New York
without regard to the conflicts of laws principles thereof except
where governed by the provisions of the United States Bankruptcy
Code.
21. ENTIRE AGREEMENT. This Agreement contains the entire
agreement of the parties with respect to these transactions 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.
22. MODIFICATIONS. This Agreement may not be modified except in
a writing executed by each of the parties.
23. ASSIGNMENT. Except as specifically provided in this
Section, or upon written consent of the parties hereto, this
Agreement shall not inure to the benefit of, or, shall not be
assignable to, any person or entity other than Merchant and
Agent. All of the terms and provisions of this Agreement shall
be binding upon, inure to the benefit of, and be enforceable by
the successors in interest of the respective parties hereto,
including any trustee appointed in Merchant's bankruptcy case.
24. NOTICES. All notices under this Agreement shall be sent by
hand, by recognized overnight courier service or by certified
mail, return receipt requested to: (a) Merchant at the address
listed on the first page hereof, to the attention of Daniel J.
Chessin with a copy to Paul S. Groschadl, Esq., Woods, Oviatt,
Gilman, Sturman & Clarke LLP, 44 Exchange Street, Rochester, New
York 14614; (b) Agent, at the address listed on the first page
hereof to the attention of Scott Bernstein, Esq., with a copy to
James Weisman, Esq., 310 Grant Street, Suite
420, Pittsburgh, Pa, 15219.
25. 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 one and the same instrument.
Such execution may be by facsimile. Any party signing via
facsimile shall forward an original hard copy of such signature
to the other party, but the failure to send said original
signature shall not affect the enforceability of this Agreement
against such party, the parties hereto agreeing that a facsimile
signature may be treated as an original signature hereunder.
26. BID PROCEDURE. In consideration of Agent conducting its due
diligence and entering into this Agreement, which serves as a
base by which other offers may be measured, in the event this
Agreement is subject to higher and better offers by way of a
bidding process (a) all bidders must agree to be bound by all of
the terms and conditions of this Agreement, except as modified by
price; (b) all bidders must provide comparable assurance of their
ability to perform their obligations under this Agreement; (c)
the initial bid must be for an increase in the Guaranteed Return
of at least one-half of one percent (.5%) with successive bids
thereafter for an increase in the Guaranteed Return of at least
one-fourth of one percent (.25%) over the previous bid; and (d)
Merchant agrees that if Agent is not the successful bidder,
Merchant shall reimburse Agent for reasonable, actual direct out
of pocket expenses, including reasonable attorneys' fees, in
connection with this Agreement in an amount not to exceed
$20,000; provided, however, that clauses (a) through (d) shall
apply only to bids by liquidators acting as agent of Merchant,
and shall not apply to any other bids, including, without
limitation, bids by parties contemplating the continuation of the
Merchant's business.
27. CONFIDENTIALITY. Agent acknowledges that in the course of
its dealings with Merchant it will become privy to material non-
public information about Merchant and its parent, Hahn Automotive
Warehouse, Inc. (a corporation whose stock is publicly traded)
and its affiliates. Agent agrees to hold all such material non-
public information in strict confidence.
28. CONDITIONS PRECEDENT. This Agreement shall be subject to
the approval of the Bankruptcy Court having jurisdiction over
Merchant's bankruptcy proceeding by an order of such court
approving this Agreement in its entirety (the "Approval Order").
The Approval Order shall provide that: (a) this Agreement is in
the best interests of Merchant, Merchant's estate, creditors and
other parties in interest; (b) this Agreement (and each of the
transactions contemplated hereby) is approved in its entirety;
(c) Merchant and Agent shall be authorized to take any and all
actions as may be necessary and desirable to implement this
Agreement and each of the transactions contemplated hereby; (d)
Agent shall be entitled to all sums due Agent hereunder free and
clear of all liens, claims or encumbrances and all liens and
encumbrances shall be transferred to fund created upon payment of
Guaranteed Return with the same priority and effect; (e) Agent
shall have the right to use the Stores and all furniture,
fixtures and equipment in the Stores for the purpose of the Sale
free of any interference from any person; (f) Agent, as agent for
Merchant, is authorized to conduct the Sale as going out of
business, liquidation or similar type sale ("GOB Sale"); (g)
Agent is authorized to post signs, advertise and otherwise
promote the Sale as a GOB Sale without further consent of any
third person; (h) each and every federal, state or local agency,
department or governmental authority (collectively "Governmental
Authority") and all newspapers and other advertising media shall
be directed to accept the Approval Order as binding to consummate
the transactions provided for in the Agreement, including,
without limitation, the conducting and advertising of the Sale as
a GOB Sale, and no further approval, license or permit of any
Governmental Authority shall be required; (I) all utilities,
landlords, creditors and all persons acting for or on their
behalf are restrained and enjoined from interfering with or
otherwise impeding the conduct of the Sale, instituting any
action in any court (other than the Bankruptcy Court) or before
any administrative body which may in any way directly or
indirectly interfere with or obstruct or impede the conduct of
the Sale or to take any action which in any way interferes with
Agent's receipt of the sums due Agent pursuant to this Agreement;
(j) the Bankruptcy Court shall retain jurisdiction over the
parties to enforce this Agreement; (k) Agent shall not be liable
for any claims against the Merchant and Agent shall have no
successorship liabilities whatsoever; (l) Agent shall be entitled
to the protection of sections 363 (m) and 364 (e) of the
Bankruptcy Code in the event that the Approval Order is reversed
or modified on appeal; and (m) Agent's claims hereunder shall be
entitled to priority under section 507 (a) (1) of the Bankruptcy
Code. In the event the Approval Order is not entered by the
close of business on August 29, 1997, Agent or Merchant shall
have the right to terminate this Agreement.
29. Furniture, Fixtures and Equipment. Agent will sell, on
behalf of Merchant, all of the furniture, fixtures and equipment
("FF&E") in the Stores during the Sale Term at a commission of
fifteen percent (15%) of the sales price. Merchant shall
reimburse Agent for the reasonable actual expenses incurred by
Agent in advertising the sale of the FF&E, up to a maximum
reimbursement of $5,000.00. Any sale of FF&E by the Agent is
subject to the prior written approval of Merchant. All FF&E must
be sold and removed by Agent from each Store prior to the date on
which the Sale is terminated for such Store.
Please acknowledge your acceptance hereof by signing a copy and
returning it to us.
Very truly yours,
The Joint Venture Comprised of:
SCHOTTENSTEIN BERNSTEIN CAPITAL GROUP, LLC
HILCO TRADING CO., INC AND GARCEL, INC. d/b/a
GREAT AMERICAN ASSET MANAGEMENT
By:
Its:
ACCEPTED THIS DAY OF
, 19 .
By:
Title:
EXHIBIT A
LIST OF STORES
EXHIBIT 27
Selected financial information as required for Edgar
electronic filing for the six months ended June 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 479
<SECURITIES> 0
<RECEIVABLES> 21,829
<ALLOWANCES> 0
<INVENTORY> 42,410
<CURRENT-ASSETS> 65,221
<PP&E> 5,395
<DEPRECIATION> 0
<TOTAL-ASSETS> 93,341
<CURRENT-LIABILITIES> 31,587
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 11,656
<TOTAL-LIABILITY-AND-EQUITY> 93,341
<SALES> 105,422
<TOTAL-REVENUES> 105,422
<CGS> 65,580
<TOTAL-COSTS> 35,222
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,526
<INCOME-PRETAX> 1,435
<INCOME-TAX> 550
<INCOME-CONTINUING> 885
<DISCONTINUED> 22,726
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,841)
<EPS-PRIMARY> (4.60)
<EPS-DILUTED> (4.60)
</TABLE>
