-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UKXQIU6aqeNFJB4Qo5m64p2EILriDaYneLnVdppESdke4kKx4C20awT5hYVN/V/X iwHLK2rKZhWSPzJbG+Zd9g== 0000950131-97-006880.txt : 19971118 0000950131-97-006880.hdr.sgml : 19971118 ACCESSION NUMBER: 0000950131-97-006880 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971117 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONTGOMERY WARD HOLDING CORP CENTRAL INDEX KEY: 0000836974 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 363571585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17540 FILM NUMBER: 97722592 BUSINESS ADDRESS: STREET 1: ONE MONTGOMERY WARD PLZ CITY: CHICAGO STATE: IL ZIP: 60671 BUSINESS PHONE: 3124672000 10-Q 1 FORM 10-Q PRELIMINARY =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 ____________ FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997 OR --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-17540 MONTGOMERY WARD HOLDING CORP. (Exact name of registrant as specified in its charter) Delaware 36-3571585 (State of incorporation) (I.R.S. Employer Identification No.) Montgomery Ward Plaza, Chicago, Illinois 60671 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 312/467-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- As of November 10, 1997 the Registrant had 18,322,247 shares of Class A Common Stock and 25,000,000 shares of Class B Common Stock outstanding. Montgomery Ward Holding Corp. For the Quarter Ended September 27, 1997 Index to Quarterly Report on Form 10-Q
Page Part I - Financial Information. Item 1. Financial Statements (Unaudited). Consolidated Statements of Income. 3 Consolidated Balance Sheets. 4 Consolidated Statements of Cash Flows. 5 Notes to Consolidated Financial Statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13 Part II - Other Information. 18
2 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the 13-week For the 39-week Periods Ended Periods Ended ----------------------- ----------------------- Sept. 27, Sept. 28, Sept. 27, Sept. 28, (In millions, except per share amounts) 1997 1996 1997 1996 --------- --------- --------- --------- Revenues Net sales, including leased and licensed department sales $ 947 $ 1,376 $ 3,217 $ 3,984 Direct response marketing revenues, including insurance 214 191 638 553 --------- --------- --------- --------- Total revenues 1,161 1,567 3,855 4,537 --------- --------- --------- --------- Costs and expenses Cost of goods sold, including net occupancy and buying expense (Note 10) 805 1,105 2,872 3,224 Operating, selling, general and administrative expenses, including benefits and losses of direct response operations (Note 6) 533 482 1,645 1,330 Interest expense 17 28 103 75 --------- --------- --------- --------- Total costs and expenses 1,355 1,615 4,620 4,629 --------- --------- --------- --------- Loss before reorganization costs and income taxes (194) (48) (765) (92) Reorganization costs (Note 4) 582 - 582 - --------- --------- --------- --------- Loss before income taxes (776) (48) (1,347) (92) Income tax benefit (161) (19) (375) (37) --------- --------- --------- --------- Net loss (615) (29) (972) (55) Preferred stock dividend requirements (Note 7) - 3 8 9 --------- --------- --------- --------- Net loss applicable to common shareholders $ (615) $ (32) $ (980) $ (64) ========= ========= ========= ========= Net loss per common share (Note 5) Class A $ (17.17) $ (.80) $ (27.37) $ (1.58) Class B (11.99) (.70) (19.12) (1.38)
See notes to consolidated financial statements. 3 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED BALANCE SHEETS
September 27, December 28, 1997 1996 ------------- ------------ (In millions) (Unaudited) Assets Cash and cash equivalents $ 238 $ 32 Short-term investments 1 3 Investments of insurance operations 306 317 ------------- ------------ Total cash and investments 545 352 Trade and other accounts receivable 262 213 Accounts and notes receivable from affiliates 16 13 ------------- ------------ Total Receivables 278 226 Merchandise inventories 1,147 1,545 Prepaid pension cost 365 351 Properties, plant and equipment, net of accumulated depreciation and amortization 1,199 1,308 Direct response and insurance acquisition costs 575 603 Other assets 368 494 Deferred income taxes 320 - ------------- ------------ Total Assets $4,797 $4,879 ============= ============ Liabilities Short-term debt $ 102 $1,028 Trade accounts payable 463 1,585 Federal income taxes payable - 4 Accrued liabilities and other obligations 760 1,228 Insurance policy claim reserves 237 227 Long-term debt 73 87 Obligations under capital leases - 60 Deferred income taxes - 52 Liabilities subject to compromise (Note 3) 3,499 - ------------- ------------ Total Liabilities 5,134 4,271 Commitments and Contingent Liabilities (Note 8) Redeemable Preferred Stock (Note 7) 212 175 Shareholders' Equity (deficit) Common stock 1 1 Capital in excess of par value 53 53 Retained earnings (deficit) (471) 509 Unrealized gain on marketable equity securities 7 9 Less: treasury stock, at cost (139) (139) ------------- ------------ Total shareholders' equity (deficit) (549) 433 ------------- ------------ Total Liabilities and Shareholders' Equity $4,797 $4,879 ============= ============
See notes to consolidated financial statements. 4 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the 39-week Periods Ended ---------------------------------------- September 27, September 28, (In millions) 1997 1996 ------------------ ------------------ Cash flows from operating activities: Net loss $(972) $ (55) Adjustments to reconcile net loss to net cash used for operating activities: Provision for disposition of assets of Lechmere, Inc. 280 - Provision for closing of Montgomery Ward and Electric Avenue & More stores 260 - Net receipts of cash relating to disposition of assets of Lechmere, Inc. and closing of Electric Avenue & More 104 - stores Depreciation and goodwill amortization 96 100 Amortization of direct response and insurance acquisition costs 184 147 Deferred income taxes (375) (5) Provision for loss on sale of interest in ValueVision International, Inc. common stock 23 - Gain on sale of assets - (3) Changes in operating assets and liabilities: Trade and other accounts receivable (49) (52) Accounts and notes receivable from affiliates (3) (10) Merchandise inventories 254 (20) Prepaid pension cost (13) (3) Federal income taxes payable - (37) Direct response and insurance acquisition costs (156) (208) Other assets 6 (21) Trade accounts payable 219 (300) Federal income taxes payable, net - (6) Accrued liabilities and other obligations (33) (120) Insurance policy claim reserves 10 1 ------------------ ------------------ Net cash used for operating activities (165) (592) ------------------ ------------------ Cash flows used for investing activities: Purchase of short-term investments (311) (19) Sale of short-term investments 313 31 Purchase of investments of insurance operations (517) (495) Sale of investments of insurance operations 528 521 Capital expenditures (42) (55) Disposition of properties, plants and equipment, net 5 12 Investment in Merchant Partners - (7) Acquisition of Amoco Enterprises - (100) ------------------ ------------------ Net cash used for investing activities $ (24) $(112) ------------------ ------------------
5 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the 39-Week Periods Ended ------------------------------ September 27, September 28, (In millions) 1997 1996 ------------- ------------- Cash flows from financing activities: Proceeds from short-term borrowings, net $409 $635 Payments of long-term debt (5) (6) Payments of obligations under capital leases (5) (5) Cash dividends paid (4) (6) Proceeds from issuance of long-term debt - 102 Proceeds from issuance of common stock - 3 Purchase of treasury stock, at cost - (14) ---- ---- Net cash provided by financing activities 395 709 ---- ---- Increase in cash and cash equivalents 206 5 Cash and cash equivalents at beginning of period 32 37 ---- ---- Cash and cash equivalents at end of period $238 $ 42 ==== ==== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ - $ 2 Interest 69 81 Non-cash investing activity: Change in unrealized gain on marketable equity securities $(2) $(4) Non-cash financing activities: Notes issued for purchase of treasury stock $ - $ 6 Preferred stock issued as financing fee 35 - Increase in liquidation value of preferred stock 2 -
See notes to consolidated financial statements. 6 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies Basis of Presentation The accompanying consolidated financial statements are unaudited. The consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the 1996 Annual Report on Form 10-K of Montgomery Ward Holding Corp. ("MW Holding" or, together with its subsidiaries, the "Company"). Capitalized terms not otherwise defined herein have the meaning ascribed to such terms in the 1996 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to be comparable with the current period presentation. 2. Reorganization At the close of business on July 7, 1997 (the "Petition Date"), MW Holding and certain of its U.S. subsidiaries filed petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. These related proceedings are being jointly administered under the caption "In re Montgomery Ward Holding Corp., a Delaware corporation, et. al.", Case No. 97-1409 (PJW). The following U.S. subsidiaries were not included in the bankruptcy filings: Signature Financial/Marketing, Inc. and its direct and indirect subsidiaries ("Signature"), which are engaged in direct response marketing (including insurance); Marinco Insurance U.S.A., Inc. ("Marinco"); and Montgomery Ward Foundation. After a long period of negotiation, MW Holding's subsidiary, Montgomery Ward & Co., Incorporated ("Montgomery Ward"), was unable to reach an out-of-court settlement with its lenders. Accordingly, bankruptcy petitions were filed in order to obtain an opportunity to reorganize and begin implementing the Company's strategies while working to restructure its indebtedness. Pursuant to the Post-Petition Loan and Guaranty Agreement dated July 8, 1997, among Montgomery Ward and Lechmere, Inc. ("Lechmere"), as borrowers; MW Holding and other debtor subsidiaries of MW Holding, as guarantors; General Electric Capital Corporation ("GE Capital"), as agent and lender; and various lenders, as amended (the "DIP Facility"), the lenders have agreed to provide up to $1 billion in post-petition financing to Montgomery Ward. The Company expects to reorganize its affairs under the protection of Chapter 11 and to propose a Chapter 11 plan of reorganization for itself and the other filing subsidiaries, including Montgomery Ward. Under the Bankruptcy Code, actions to collect pre-petition indebtedness are stayed and other contractual obligations may not be enforced against the Company. In addition, the Company may reject executory contracts and lease obligations. Parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the reorganization process. If the Company is able to successfully reorganize, substantially all unsecured liabilities as of the petition date would be subject to settlement under a plan of reorganization to be voted upon by all impaired classes of creditors and equity security holders and approved by the Bankruptcy Court. 7 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Reorganization (continued) The accompanying financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing and circumstances relating to this event, including the Company's leveraged financial structure and losses from operations, such realization of assets and liquidation of liabilities is subject to significant uncertainty. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Further, a plan of reorganization could materially change the amounts reported in the financial statements, which do not give effect to all adjustments of the carrying value of assets or liabilities that might be necessary as a consequence of a plan of reorganization. The appropriateness of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the DIP Facility and the ability to generate sufficient cash from operations and financing arrangements to meet obligations. 3. Liabilities Subject to Compromise The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims, determination as to the value of any collateral securing claims, or other events. Additional claims may arise resulting from rejection of additional executory contracts or unexpired leases by the Company.
(In millions) September 27, 1997 ------------- Short-term debt $1,335 Long-term debt 9 Obligations under capital leases 55 Accounts payable 1,341 Postretirement benefit accruals 145 Lease rejection claims 90 Other liabilities 524 ------ $3,499 ======
The Company has $83 million of liabilities due Signature and Marinco which have been eliminated in consolidation but are subject to compromise. All of the Company's short-term debt is in default of the terms of the applicable loan agreements, with the exception of the credit agreement between Signature and various lenders. Subject to the entry of an order by the Bankruptcy Court, the Company has obtained a waiver of the defaults under the Signature Credit Agreement and an extension of the maturity date to January 31, 1998. 8 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Liabilities Subject to Compromise (continued) As a result of the bankruptcy filing, no principal or interest payments will be made on any pre-petition debt without Bankruptcy Court approval or until a reorganization plan defining the repayment terms has been approved. Contractual interest expense not recorded on certain pre-petition debt totaled $26 million for the 13-week and 39-week periods ended September 27, 1997. 4. Reorganization Costs Reorganization costs recorded in the third quarter of fiscal 1997 consisted of the following (in millions): Loss on disposition of assets of Lechmere $280 Montgomery Ward and Electric Avenue & More store closings 260 Other 36 Professional fees 8 Interest income (2) ---- $582 ====
On August 14, 1997, the Bankruptcy Court approved a motion filed by Montgomery Ward to exit its non-core specialty retail store businesses - Lechmere, Home Image by Lechmere and Electric Avenue & More. The exit involved the closing of 44 stores. The closings are expected to generate positive cash flows and reduce future operating losses. The Company recorded a pre-tax charge of $280 million associated with the closing of Lechmere and $55 million associated with the exit of Electric Avenue & More, which included losses and costs associated with liquidation of assets, rejection of leases, severance payments and other. On October 17, 1997, Montgomery Ward filed a motion with the Bankruptcy Court to close 48 underperforming stores. The closings are expected to generate positive cash flows and reduce future operating losses. The Company recorded a pre-tax charge of $205 million associated with the closing of these stores, which includes losses and costs associated with the liquidation of assets, lease rejection claims, severance payments and other. On November 7, 1997, the Bankruptcy Court approved the closing of these stores. 9 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Net Loss Per Common Share Net loss per common share is computed as follows:
For the 13-Week For the 13-Week Periods Ended Periods Ended (In millions, except share and per September 27, 1997 September 28, 1996 share amounts) Class A Class B Class A Class B ---------- ---------- ---------- ---------- Net loss applicable to common shareholders $ (315) $ (300) $ (15) $ (17) Weighted average number of common shares outstanding 18,322,247 25,000,000 19,230,539 25,000,000 Net loss per share $ (17.17) $ (11.99) $ (.80) $ (.70) For the 39-Week For the 39-Week Periods Ended Periods Ended (In millions, except share and per September 27, 1997 September 28, 1996 share amounts) Class A Class B Class A Class B ---------- ---------- ---------- ---------- Net loss applicable to common shareholders $ (502) $ (478) $ (30) $ (34) Weighted average number of common shares outstanding 18,322,247 25,000,000 19,269,681 25,000,000 Net loss per share $ (27.37) $ (19.12) $ (1.58) $ (1.38)
At its annual meeting on May 29, 1997, the stockholders of the Company authorized an additional 10,000,000 shares of Class A Common Stock, Series 3, $.01 par value. None of the additional shares have been issued. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The statement is effective for financial statements for periods ending after December 15, 1997, and changes the method in which earnings per share will be determined and presented in the financial statements. Adoption of this statement by the Company will not have a material impact on earnings per share. 6. Insurance, Benefits and Losses Operating, selling, general and administrative expenses include benefits and losses related to direct response marketing operations of $38 million and $41 million for the 13-week periods ended September 27, 1997 and September 28, 1996, respectively, and $109 million and $115 million for the 39-week periods then ended, respectively. 10 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Preferred Stock On March 4, 1997, GE Capital, Montgomery Ward and Lechmere amended the Program Agreement under which GE Capital provides funds to Montgomery Ward and Lechmere to pay manufacturers and distributors of goods purchased by Montgomery Ward and Lechmere. In exchange for a $150 million increase in the maximum amount of funds GE Capital agreed to provide, MW Holding agreed to issue shares of a new series of Preferred Stock having a liquidation value of $21 million. On April 1, 1997, GE Capital further increased its funding under the Program Agreement by $100 million and the Board of Directors of MW Holding agreed to issue additional shares of the new series of Preferred Stock. At its Annual Meeting held on May 29, 1997, the stockholders of MW Holding approved an amendment to its Certificate of Incorporation authorizing the issuance of up to 25,000 shares of preferred stock. The amendment allows future issuances of preferred stock by action of the Board of Directors without the need for further action by the stockholders. The Board of Directors designated 1,000 shares of the newly authorized preferred stock to be Series C Preferred Stock, and MW Holding issued 352 shares of the Series C Preferred Stock to GE Capital in full payment of the obligations described above. All of the Series C Preferred Stock is redeemable on September 30, 2002 at a redemption price of $100,000 per share (the "Liquidation Value") plus unpaid accrued dividends. Dividends are payable quarterly at a rate per annum equal to 15%, with the first payment based on the number of days from and including March 4, 1997. If for any reason the full dividend on any payment date is not paid in cash on such date, the unpaid amount thereof will automatically, without further action, be deemed added to the Liquidation Value. MW Holding did not pay the dividend due June 30, 1997. MW Holding also did not pay dividends due on June 30, 1997, on its Senior Preferred Stock. The redemption provisions of the Series C and Senior Preferred Stock have been stayed by the Chapter 11 proceedings. No further dividends will be declared or paid on the Series C or Senior Preferred Stock prior to the approval of a plan of reorganization. 8. Commitments and Contingent Liabilities MW Holding, Montgomery Ward and its subsidiaries are engaged in various litigation and have a number of unresolved claims. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, management is of the opinion that such liability, to the extent not provided for through insurance or otherwise, is not likely to have a material impact on the financial condition and the results of operations of the Company. As discussed in Note 2, the claims and litigation relating to pre-petition periods have been stayed as a result of the Chapter 11 filing. 11 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Commitments and Contingent Liabilities (continued) On April 29, 1997 the Company, Montgomery Ward and Lechmere, were served with a complaint, purporting to represent a nationwide class, filed by certain bankrupt credit card holders of Montgomery Ward and Lechmere credit cards. The complaint alleged that the Company, Montgomery Ward and Lechmere benefited from the actions taken by Hurley State Bank ("Hurley"), Lechmere's previous credit card provider, and Montgomery Ward Credit Corporation ("MWCC") and Monogram Credit Card Bank of Georgia ("Monogram"), (both of which are affiliates of GE Capital), Montgomery Ward's and Lechmere's current credit card providers, in that the recoveries received from the bankrupt credit card holders, allegedly in violation of the bankruptcy laws dealing with reaffirmations ultimately reduced Montgomery Ward's and Lechmere's loss sharing obligations. Management believes that the indemnification obligations contained in its various agreements with Hurley and with MWCC and Monogram will relieve Lechmere, Montgomery Ward and the Company of material financial obligations related to the acts alleged in the complaint. All material actions pending against the Company, Montgomery Ward and Lechmere in the litigation, have been stayed. 9. Customer Credit Agreements Montgomery Ward entered into a Bank Credit Card Program Agreement ("Card Agreement") effective April 1, 1996 with Monogram and an Account-Related Agreement ("Account-Related Agreement" and, collectively with the Card Agreement, the "Agreements") effective April 1, 1996 with MWCC pursuant to which Monogram and MWCC (collectively referred to as the "Montgomery Ward Credit Companies"), both of which are affiliates of GE Capital, make payments to Montgomery Ward as to the receivables generated by sales to customers of Montgomery Ward, its affiliates and licensees who utilize the Montgomery Ward private label credit card, and pursuant to which Agreements the Montgomery Ward Credit Companies provide services to Montgomery Ward. Under the Agreements, Monogram has the exclusive right to operate the Montgomery Ward private label credit card system and the obligation to pay to Montgomery Ward the face amount of Monogram's receivables generated by the Montgomery Ward private label credit card system, up to $7 billion outstanding at any time. If Montgomery Ward desires to receive payment for receivables generated by the Montgomery Ward private label credit card system at any time when Montgomery Ward Credit Companies own $7 billion or more of such receivables and do not desire to finance additional receivables, alternative arrangements, such as the sale of receivables to banks or other financial institutions, would be required unless Monogram agrees to fund the excess. The Bankruptcy Court has approved the interim assumption of the Agreements. A hearing has been set for November 24, 1997, regarding a motion filed by Monogram and MWCC regarding its proposed terms for the assumption of the Agreements. The performance of the respective obligations of MWCC and Monogram under the Agreements has been guaranteed by GE Capital. 10. Inventory The Company changed its method of valuing inventory in 1996 from the retail inventory, Last-In, First-Out (LIFO) method to the retail inventory, First- In, First-Out (FIFO) method. This change reduced cost of goods sold by $10 million and $28 million for the 13-week and 39-week periods ended September 28, 1996 and reduced the net loss by $6 million and $17 million for the 13- week and 39-week periods ended September 28, 1996. 12 MONTGOMERY WARD HOLDING CORP. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of results of operations for the Company compares the third quarter of 1997 to the third quarter of 1996, as well as the first nine months of 1997 to the first nine months of 1996. All dollar amounts referred to in this discussion are in millions, and all income and expense items are shown before income taxes, unless specifically stated otherwise. The Company's business is seasonal, with approximately one-third of the sales traditionally occurring in the fourth quarter. Accordingly, the results of operations for the quarter and the first nine months are not necessarily indicative of the results for the entire year. Forward-Looking Statements Information included in this Report on Form 10-Q may constitute forward- looking statements that involve a number of risks and uncertainties. From time to time, information provided by the Company or statements made by its employees may contain other forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements include but are not limited to: Bankruptcy Court actions or proceedings related to the bankruptcy, general economic conditions including inflation, consumer debt levels, trade restrictions and interest rate fluctuations; competitive factors including pricing pressures, technological developments and products offered by competitors; inventory risks due to changes in market demand or the Company's business strategies; and changes in effective tax rates. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Results of Operations Third Quarter 1997 Compared with Third Quarter 1996 Due to Montgomery Ward's inability to reach an out-of-court settlement with its lenders, petitions for reorganization under Chapter 11 of the Bankruptcy Code were filed at the close of business on July 7, 1997. The Company's performance reflected difficult competitive conditions and financial pressures resulting in a third quarter 1997 loss before reorganization costs and income taxes of $194 as compared to third quarter 1996 pretax loss of $48 million, as restated (see Note 10). 1997 reorganization costs were $582 (see Note 4). Consolidated total revenues (net sales and direct response marketing revenues, including insurance) were $1,161, compared with $1,567 in the third quarter 1996, decreasing by $406, or 26%. Net sales decreased $429, or 31%. Lechmere and Electric Avenue & More sales declined $154 million from the third quarter 1996 due primarily to the closing of those stores effective August 1997 (see Note 4). 1997 sales results also reflect the Company's decision to exit its personal computer product offerings. 1996 sales for this category were $53. In addition, the Company's management believes that merchandise shipment interruptions as a result of the bankruptcy filing and the decline in percentage-off offers to the Montgomery Ward credit cardholders (3 in 1997 versus 8 in 1996) resulted in a portion of the sales decline. All Montgomery Ward store product categories also experienced sales decreases ranging from 11% to 32%. The $23, or 12% increase in direct response marketing revenues was primarily due to increased clubs' memberships. 13 MONTGOMERY WARD HOLDING CORP. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Third Quarter 1997 Compared with Third Quarter 1996 (continued) Gross margin (net sales less cost of goods sold) dollars were $142, a decrease of $129, or 48%, from the third quarter 1996. This decrease was due to the gross margin impact of the decreased sales of $97, and a decrease in the margin rate on sales of $38, offset by decreased occupancy and other margin-related expenses of $6. Third quarter margin rates were unfavorably impacted by the Chapter 11 filing. As certain of the Company's vendors halted shipments for portions of the third quarter, a higher mix of third quarter sales represented sales of clearance versus regular price merchandise. Operating, selling, general and administrative expenses increased $51, or 11%, from the third quarter 1996. The increase is primarily due to increased bad debt expense of $44; increased amortization and other direct marketing- related expenses of Signature of $24; and decreased product service income of $18; offset by lower Lechmere expenses of $32 and all other decreases of $3. Net interest expense decreased $11, or 39%, from the prior year. The Company has stopped accruing interest on its short-term debt in connection with the Chapter 11 filing. The income tax benefit was $161 for the third quarter of 1997 as compared to a benefit of $19 for the third quarter of 1996. The 1997 income tax benefit reflects an increase in the Company's net operating loss (NOL) carryforward of $271, offset by a valuation allowance of $110. Management believes that the NOL carryforward will be realized through the sales of appreciated assets; however, a valuation reserve has been recognized because it is more likely than not that some portion will not be realized. First Nine Months of 1997 Compared with Nine Months of 1996 As discussed under "Third Quarter 1997 Compared With Third Quarter 1996", the Company's performance during the first nine months of 1997 reflected difficult competitive and financial conditions. The Company reported a loss before reorganization costs and income taxes of $765 for the third quarter 1997 year-to-date period as compared to a pre-tax loss of $92, as restated (see Note 10) for the comparable 1996 period. 1997 reorganization costs were $582 (see Note 4). Consolidated total revenues were $3,855, compared with $4,537 for the third quarter 1996 year-to-date period, decreasing by $682, or 15%. Net sales decreased $767, or 19%. All product categories experienced sales decreases, ranging from 9% to 22%. The sales decreases reflect the closing of the Lechmere and Electric Avenue & More stores, as well as the Company's decision to exit its personal computer product offerings. Direct response marketing revenues increased $85, or 15%, due to increased clubs' memberships. Gross margin dollars were $345, a decrease of $415, or 55%. The decrease was due to the gross margin impact of the sales decrease of $161, the decrease in the margin rate on sales of $249, and increased buying and other expenses of $5. The margin rate for the 1997 year-to-date period has been significantly impacted by sales of discontinued merchandise during the first six months, as well as the unfavorable impact of the Chapter 11 filing as discussed under "Third Quarter 1997 Compared with Third Quarter 1996." Operating, selling and general and administrative expenses increased $315, or 24%, from the third quarter year-to-date period of 1996. The increase was due to increased amortization and other direct-marketing related costs of Signature of $91; increased bad debt expense of $45; write-downs of investments and other unrealizable assets of $45; decreased product service income of $43; increased severance and payroll related costs of $33; increased promotional expenses of $17; and all other increased expenses of $41. 14 MONTGOMERY WARD HOLDING CORP. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) First Nine Months of 1997 Compared with Nine Months of 1996 (continued) Net interest expense increased $28, or 37%, from the prior year. The increase is due to increased borrowings (including borrowings under vendor financing programs) and an increase in the weighted average borrowing rate for the first two quarters of 1997. The second quarter year-to-date increase was partially offset by the third quarter decrease as discussed in "Third Quarter 1997 Compared to Third Quarter 1996." The income tax benefit was $375 as compared to a benefit of $37 for 1996. See "Third Quarter 1997 Compared with Third Quarter 1996" for a discussion of management's determination of the benefit recorded and the related valuation allowance provided during the third quarter of 1997. Discussion of Financial Condition As discussed in Note 2 to the Consolidated Financial Statements, due to the inability of Montgomery Ward to negotiate an out of court settlement with its lenders, MW Holding and certain of its subsidiaries have filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Court. As a result of the Chapter 11 filing the Company and those subsidiaries have ceased making certain debt, interest, trade payable and other liability payments that arose prior to the Chapter 11 filing. Payments related to these liabilities are deferred, in most cases, until a plan for reorganization is confirmed by the Bankruptcy Court. Net cash used in the Company's operating activities totaled $165 compared to $592 for the third quarter year-to-date period of 1996, a decrease of $427. The lower cash usage is summarized as follows: Cash impact of larger operating loss $(672) Net cash received from facility closings 104 Lower cash required for inventory and accounts payable 793 Lower expenditures for direct response and insurance acquisition costs 52 All other cash from operations 150 ----- $ 427 =====
As shown above, cash required for inventory was significantly reduced in 1997. This was primarily due to an inventory reduction program and better receipts management. Cash required for accounts payable was also reduced significantly, primarily as a result of the Chapter 11 filing. Net cash used in the Company's investing activities totaled $24 in the third quarter 1997, compared to net cash used of $112 in the third quarter 1996. The net cash used in 1996 included Signature's acquisition of the Amoco Motor Club. Net cash provided by financing activities totaled $395 for the third quarter 1997, compared to $709 for the third quarter 1996. The Company had borrowed to the full extent of its financing facilities by the end of the second quarter of 1997. Due to the favorable cash impact of the reduction in payments allowed by the Chapter 11 filing, no borrowings were required under the Company's post-petition financing facilities in the third quarter of 1997. Montgomery Ward is the only subsidiary of the Company and, therefore, Montgomery Ward and its subsidiaries are the Company's sole source of funds. 15 MONTGOMERY WARD HOLDING CORP. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discussion of Financial Condition (continued) As previously discussed in Note 2, Montgomery Ward entered into the DIP Facility on July 8, 1997, which was approved by the Bankruptcy Court on July 31, 1997. Under the DIP Facility, the lenders have agreed to provide a revolving credit and letter of credit facility, the maximum amount of which is based on the book value of eligible inventory (as defined in the DIP Facility), the fair market value of eligible real property (as defined in the DIP Facility) and the earnings of Signature. In no case may borrowings exceed $1,000. Total borrowings outstanding were $125 at October 25, 1997. Under the DIP Facility, Montgomery Ward may select among several interest rate options, all of which are based on market rates plus a margin. A commitment fee is payable based on the unused amount of the facility. The facility expires on July 7, 1999, or earlier in the case of an event of default. The Company is currently in default of the terms of each of the Long-Term Credit Agreement, the Short-Term Credit Agreement and the Note Purchase Agreements and no future amounts may be drawn thereunder. The Company was in default of the Seasonal Credit Agreement, which was terminated as a result of the Chapter 11 filings. There were no borrowings outstanding under this agreement. These agreements are more fully discussed in the Company's annual report on Form 10-K for the fiscal year ended December 28, 1996 and the Company's quarterly report on Form 10-Q for quarterly periods ended March 29, 1997 and June 28, 1997. Subject to the entry of an order by the Bankruptcy Court, Signature has obtained a waiver of the defaults under the Signature Credit Agreement and an extension of the maturity date to January 31, 1998. It is the intention of the management of Signature to refinance the facility with a new lender group prior to its amended expiration date. The Signature Credit Agreement is more fully discussed in the Company's annual report on Form 10-K for the fiscal year ended December 28, 1996 and the Company's quarterly report on Form 10-Q for quarterly periods ended March 29, 1997 and June 28, 1997. In 1997, Montgomery Ward had facilities available under vendor financing programs (which are reflected in liabilities subject to compromise) which totaled $725. At June 28, 1997, these facilities were principally drawn. These facilities are no longer available due to the Chapter 11 filing. The Company intends to improve its financial condition and reduce its dependence on borrowing by slowing expansion, controlling expenses, closing certain unprofitable stores and completing its inventory reduction program. Management has reevaluated the Company's merchandising, marketing, store operations and real estate strategies, and is in the early stages toward implementing the new strategy. The implementation phase is expected to last between twelve and eighteen months. On August 14, 1997, the Bankruptcy Court approved a motion filed by Montgomery Ward to exit its non-core specialty retail store businesses - Lechmere, Home Image by Lechmere and Electric Avenue & More. The exit involves the closing of 44 stores. The closings are expected to generate positive cash flows and reduce future operating losses. The Company recorded a pre-tax charge of $335 associated with the exit of these businesses, which included losses and costs associated with liquidation of assets, rejection of leases, severance payments and other. 16 MONTGOMERY WARD HOLDING CORP. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discussion of Financial Condition (continued) On October 17, 1997, Montgomery Ward filed a motion with the Bankruptcy Court to close 48 underperforming stores. The closings are expected to generate positive cash flows and reduce future operating losses. The Company recorded a pre-tax charge of $205 associated with the closing of these stores, which includes losses and costs associated with the liquidation of assets, lease rejection claims, severance payments and other. On November 7, 1997, the Bankruptcy Court approved the closing of these stores. Future cash is also expected to continue to be provided by ongoing operations, receipt of payment for credit sales under the agreements with Montgomery Ward Credit Companies, liquidation of merchandise and other assets of the non-core retail specialty businesses and borrowings under the DIP Facility. As discussed in Note 2 to the Consolidated Financial Statements, the accompanying financial statements have been prepared on a going concern basis. The appropriateness of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the DIP Facility and the ability to generate sufficient cash from operations and financing arrangements to meet obligations. 17 MONTGOMERY WARD HOLDING CORP. Part II - Other Information. Item 1. Legal Proceedings. At the close of business on July 7, 1997, Montgomery Ward Holding Corp. and certain of its U.S. subsidiaries filed petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. These related proceedings are being jointly administered under the caption "In re Montgomery Ward Holding Corp., a Delaware corporation, et. al.", Case No. 97-1409 (PJW). The following U.S. subsidiaries were not included in the bankruptcy filings: Signature Financial/Marketing, Inc. and its direct and indirect subsidiaries, which are engaged in direct response marketing (including insurance); Marinco Insurance U.S.A., Inc.; and Montgomery Ward Foundation. MW Holding, Montgomery Ward and its subsidiaries are engaged in various litigation and have a number of unresolved claims. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, management is of the opinion that such liability, to the extent not provided for through insurance or otherwise, is not likely to have a material impact on the financial condition and the results of operations of the Company. The claims and litigations have been stayed as a result of the Chapter 11 filing. On April 29, 1997, MW Holding, Montgomery Ward and Lechmere, were served with a complaint, purporting to represent a nationwide class, filed by certain bankrupt credit card holders of Montgomery Ward and Lechmere credit cards. The complaint alleged that MW Holding, Montgomery Ward and Lechmere, benefited from the actions taken by Hurley, Lechmere's previous credit card provider, and MWCC and Monogram (both of which are affiliates of GE Capital), Montgomery Ward's and Lechmere's current credit card providers, in that the recoveries received from the bankrupt credit card holders, allegedly were in violation of the bankruptcy laws dealing with reaffirmations ultimately reduced Montgomery Ward's and Lechmere's loss sharing obligations. Hurley, MWCC and Monogram took all actions related to bankruptcy reaffirmations. Management believes that the indemnification obligations contained in its various agreements with Hurley, MWCC and Monogram will relieve Lechmere, Montgomery Ward and the Company of material financial obligations related to the acts alleged in the complaint. All material actions pending against the Company, Montgomery Ward and Lechmere in the litigation, have been stayed. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. The Company's Certificate of Incorporation provides that the holders of shares of Senior Preferred Stock of the Company are entitled to receive, before any dividends may be declared or paid upon or set aside for the Common Stock, cash dividends in quarterly payments on the last business day of March, June, September and December. The Company did not make any dividend payment with respect to the Senior Preferred Stock on June 30, 1997. The holder of all 1,750 outstanding shares of the Senior Preferred Stock would have been entitled to receive $3,066,875 in such dividend on such date. Such amount also represents the total arrearage on the payment of dividends on the Senior Preferred Stock as of the date of filing of this report. The redemption provisions of the Senior Preferred Stock have been stayed by the Chapter 11 proceedings. No further dividends will be declared or paid prior to the approval of a plan of reorganization. 18 MONTGOMERY WARD HOLDING CORP. Part II - Other Information (continued) Item 3. Defaults Upon Senior Securities (continued) The Company's Certificate of Incorporation provides that the holders of shares of Series C Preferred Stock of the Company are entitled to receive, before any dividends may be declared or paid upon or set aside for the Common Stock, cash dividends in quarterly payments on the last business day of March, June, September and December. If for any reason the full dividend on any payment date is not paid in cash on such date, the unpaid amount thereof will be automatically, without further action, be deemed added to the Liquidation Value. The Company did not make any dividend payment with respect to the Series C Preferred Stock on June 30, 1997. The holder of all 352 shares would have been entitled to receive $1,726,154 in such dividend on such date. This amount was added to the Liquidation Value. The redemption provisions of the Series C Preferred Stock have been stayed by the Chapter 11 proceedings. No further dividends will be declared or paid prior to the approval of a plan of reorganization. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits. 10.(i)(G)(2) Waiver to Post-Petition Loan and Guaranty Agreement among Montgomery Ward & Co., as borrower; Montgomery Ward Holding Corp. and other debtor subsidiaries of Montgomery Ward Holding Corp., as guarantors; General Electric Capital Corporation, as agent and lender; and various lenders dated as of August 12, 1997. 10.(i)(G)(3) Waiver to Post-Petition Loan and Guaranty Agreement among Montgomery Ward & Co., as borrower; Montgomery Ward Holding Corp. and other debtor subsidiaries of Montgomery Ward Holding Corp., as guarantors; General Electric Capital Corporation, as agent and lender; and various lenders dated as of September 24, 1997. 10.(i)(N) Asset Purchase, License & Agency Agreement for the Purchase of Certain Assets of Lechmere, Inc. & Co., and Montgomery Ward Incorporated, by Schottenstein Bernstein Capital Group LLC dated August 14, 1997. 10.(i)(O) Agency Agreement between Schottenstein Bernstein Capital Group LLC and Montgomery Ward & Co., Incorporated, as of August 14, 1997. 27. Financial Data Schedule. 19 MONTGOMERY WARD HOLDING CORP. Part II - Other Information (continued) Item 6. Exhibits and reports on Form 8-K (continued) (b) Reports on Form 8-K. On July 22, 1997, the Company filed a Form 8-K with respect to the filing of a petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware, commencing a proceeding captioned "In re Montgomery Ward Holding Corp., a Delaware Corporation, et. al.", Case No. 97-1409 (PJW). 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGISTRANT MONTGOMERY WARD HOLDING CORP. BY /s/ Thomas J. Paup ---------------------------------------- NAME AND TITLE Thomas J. Paup, Executive Vice President and Chief Financial Officer DATE: November 17, 1997 21 EX-10.(I)(G)(2) 2 WAIVER TO POST PETITION LOAN AS OF AUGUST 12, 1997 WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT, dated effective as of August 12, 1997 (this "Waiver"), among MONTGOMERY WARD & CO., ------ INCORPORATED, an Illinois corporation and a debtor and debtor in possession ("Borrower Representative"), MONTGOMERY WARD HOLDING CORP., a Delaware ----------------------- corporation and a debtor and debtor in possession ("Parent" or "Guarantor"), as --------- Guarantor, the other Guarantors signatory hereto (together with Parent and the Borrower Representative, the "Credit Parties"), GENERAL ELECTRIC CAPITAL -------------- CORPORATION, a New York corporation (in its individual capacity, "GE Capital"), ---------- for itself, as Lender, and as Agent (the "Agent") for Lenders, and the other ----- Lenders signatory hereto. RECITALS -------- WHEREAS, the Borrower Representative, the Guarantors, the Lenders and the Agent are parties to that certain Post-Petition Loan and Guaranty Agreement, dated as of July 8, 1997 (as amended by the terms of the Waiver and First Amendment to Post-Petition Loan and Guaranty Agreement and as further amended, supplemented or modified, the "Loan Agreement"). The Borrower Representative -------------- and the Guarantors have requested that the Lenders agree to waive, for the limited purposes set forth herein, certain provisions of the Loan Agreement. The Borrower Representative, the Guarantors, the Lenders and the Agent have agreed, upon the terms and conditions specified herein, to waive such provisions as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto agree as follows: SECTION 1. Defined Terms and Interpretation. -------------------------------- (a) The capitalized terms used herein which are defined in the Loan Agreement, shall have the respective meanings assigned to them in the Loan Agreement except as otherwise provided herein or unless the context otherwise requires. (b) Section headings in this Waiver are included herein for convenience of reference only and shall not constitute a part of this Waiver for any other purpose. (c) No provision in this Waiver shall be interpreted or construed against any Person because that Person or its legal representative drafted such provision SECTION 2. Waiver In Connection With Liquidation Sales. As of the ------------------------------------------- date of this Waiver, Lenders hereby agree to waive the provisions of Section 6.3 of the Loan Agreement, for the limited purpose and solely in connection with, the granting by Lechmere or the Borrower Representative of any Lien in favor of any Person acting as a liquidation 1 agent of such Credit Party in connection with the liquidation or sale of substantially all the assets of Lechmere or the assets and properties used in connection with the business conducted by Borrower Representative under the name "Electric Avenue and More" pursuant to a valid and enforceable order of the Bankruptcy Court; provided that any such Lien shall not extend to any assets or properties other than those being liquidated or sold and shall only secure the fees and obligations owed to such Person by such Credit Party. SECTION 3. Representations and Warranties True; No Default or Event -------------------------------------------------------- of Default. The Credit Parties represent and warrant to the Agent and the - ---------- Lenders that on the date of and after giving effect to the execution and delivery of this Waiver (a) the representations and warranties set forth in the Loan Agreement are true and correct in all material respects on the date hereof as though made on and as of such date (unless any such representation or warranty expressly relates to an earlier date); and (b) neither any Default nor Event of Default has occurred and is continuing as of the date hereof. SECTION 4. Reference to this Waiver and Effect on Loan Documents. ----------------------------------------------------- (a) From and after the date hereof, each reference in the Loan Agreement (including in any Exhibit thereto) to "this Agreement," "hereunder," "herein" or words of like import shall mean and be a reference to the Loan Agreement, as affected hereby. (b) From and after the date of this Waiver, each reference in the Loan Documents to the Loan Agreement shall mean and be a reference to the Loan Agreement, as affected hereby. (c) The Loan Agreement, the Notes and the other Loan Documents, as affected hereby, shall remain in full force and effect and the Loan Documents are hereby ratified and confirmed in all respects. (d) The effectiveness of the waiver evidenced by Section 2 hereof, shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lenders or the Agent under the Loan Agreement, or constitute a waiver of any other provision of the Loan Agreement or any other Loan Document. SECTION 5. Governing Law; Binding Effect. In all respects, including ----------------------------- all matters of construction, validity and performance, this Waiver shall be governed by, and construed and enforced in accordance with, the internal laws of the State of New York (without regard to conflict of law provisions) and any applicable laws of the United States of America, and shall be binding upon the parties hereto and their respective successors and permitted assigns. SECTION 6. Execution in Counterparts. This Waiver may be executed in ------------------------- any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 2 SECTION 7. Consent of Guarantors. By their execution and delivery of --------------------- this Waiver, each Guarantor hereby consents to all of the terms and provisions of this Waiver and ratifies and confirms that each of the Loan Documents to which it is a party remains in full force and effect and enforceable in accordance with their respective terms. 3 IN WITNESS WHEREOF, this Waiver has been duly executed as of the date first written above. BORROWER: MONTGOMERY WARD & CO., INCORPORATED By: /s/ Douglas V. Gathany --------------------------------------- Name: Douglas V. Gathany Title: Treasurer GUARANTORS: LECHMERE, INC. By: /s/ Douglas V. Gathany --------------------------------------- Name: Douglas V. Gathany Title: Treasurer AMERICAN DELIVERY SERVICE COMPANY By: /s/ Philip D.Delk --------------------------------------- Name: Philip D. Delk Title: Vice President, Secretary and Assistant Treasurer CONTINENTAL TRANSPORTATION, INC. By: /s/ Philip D. Delk --------------------------------------- Name: Philip D. Delk Title: Vice President and Assistant Secretary JRI DISTRIBUTING, INC. STANDARD T CHEMICAL COMPANY, INC. WFL REALTY, INC. By: /s/ Philip D.Delk --------------------------------------- Name: Philip D. Delk Title: Vice President and Secretary M-W PRESTRESS, INC. MW DIRECT GENERAL, INC. 4 MW DIRECT LIMITED, INC. By: /s/ Philip D.Delk --------------------------------------- Name: Philip D. Delk Title: Secretary MONTGOMERY WARD INTERNATIONAL, INC. MPI, INC. By: /s/ Philip D.Delk --------------------------------------- Name: Philip D. Delk Title: Assistant Secretary BARRETWARD PROPERTIES CO., INC. BRANDYWINE DC, INC. BRANDYWINE PROPERTIES, INC. BRETTWARD PROPERTIES CO., INC. FIRST MONT CORPORATION FOURTH WYCOMBE PROPERTIES, INC. GABEWARD PROPERTIES CORPORATION GARDEN GROVE DEVELOPMENT CORPORATION HUGA REALTY INC. JOSHWARD PROPERTIES CORPORATION LECHMERE DEVELOPMENT CORPORATION M-W FAIRFAX PROPERTIES, INC. M-W PROPERTIES CORPORATION M-W RESTAURANTS REALTY CORPORATION MARCOR HOUSING SYSTEMS, INC. MARYWARD PROPERTIES CORPORATION MF NEVADA INVESTMENTS, INC. MICHAELWARD PROPERTIES CO., INC. MONTGOMERY WARD DEVELOPMENT CORPORATION MONTGOMERY WARD LAND CORPORATION MONTGOMERY WARD PROPERTIES CORPORATION 5 MONTGOMERY WARD REALTY CORPORATION MW LAND CORPORATION NATIONAL HOMEFINDING SERVICE, INC. 998 MONROE CORPORATION PAULWARD PROPERTIES CO., INC. ROBERTWARD PROPERTIES CORPORATION SACWARD PROPERTIES, INC. SECOND MONT CORPORATION 7TH & CARROLL CORPORATION SEVENTH MONT CORPORATION 618 CORPORATION 619 CORPORATION THE 535 CORPORATION THIRD WYCOMBE PROPERTIES, INC. 2825 DEVELOPMENT CORPORATION 2825 REALTY CORPORATION UNIVERSITY AVENUE MARKETPLACE, INC. WFL DEVELOPMENT CORPORATION WYCOMBE PROPERTIES, INC. By: /s/ G. Tad Morgan ------------------------------------------ Name: G. Tad Morgan Title: Vice President and Secretary GOODE FURNITURE COMPANIES, INC. MONTGOMERY WARD SECURITIES, INC. R M P DEVELOPMENT CORPORATION By: /s/ G. Tad Morgan ----------------------------------------- Name: G. Tad Morgan Title: Secretary MONTGOMERY WARD HOLDING CORP. By: /s/ G. Tad Morgan ----------------------------------------- Name: G. Tad Morgan Title: Assistant Secretary 6 JEFFERSON STORES, INC. By: /s/ G. Tad Morgan ------------------------------------ Name: G. Tad Morgan Title: Vice President and Treasurer AGENT AND AS LENDER GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ James C. Ungari ------------------------------------ Name: James C. Ungari Title: Its Authorized Signatory LENDERS: THE CHASE MANHATTAN BANK CORPORATION By: /s/ William Repko ------------------------------------ Name: William Repko Title: Managing Director BANKAMERICA BUSINESS CREDIT, INC. By: /s/ Thomas Sullivan ------------------------------------ Name: Thomas Sullivan Title: Vice President CITIBANK, N.A. By: /s/ Claudia Slacik ------------------------------------ Name: Claudia Slacik Title: Vice President CITICORP USA, INC. By: /s/ John Abate ------------------------------------ Name: John Abate Title: Vice President 7 GBFC, INC. By: /s/ Michael L. Pizette ---------------------------------- Name: Michael L. Pizette Title: Vice President GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/ Stephen McGuiness ---------------------------------- Name: Stephen McGuiness Title: Vice President HELLER FINANCIAL, INC. By: /s/ John Buff ---------------------------------- Name: John Buff Title: Vice President JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM FINANCE, INC. Its Attorney-in-fact By: /s/ Jeffrey Podwika ---------------------------------- Name: Jeffrey Podwika Title: Vice President 8 EX-10.(I)(G)(3) 3 WAIVER TO POST PETITION LOAN AS OF SEPT. 24, 1997 WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT, dated September 24, 1997 (this "Waiver"), among MONTGOMERY WARD & CO., INCORPORATED, an Illinois ------ corporation and a debtor and debtor in possession ("Borrower Representative"), ----------------------- MONTGOMERY WARD HOLDING CORP., a Delaware corporation and a debtor and debtor in possession ("Parent" or "Guarantor"), as Guarantor, the other Guarantors --------- signatory hereto (together with Parent and the Borrower Representative, the "Credit Parties"), GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation - --------------- (in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent ---------- (the "Agent") for Lenders, and the other Lenders signatory hereto. ----- RECITALS -------- WHEREAS, the Borrower Representative, the Guarantors, the Lenders and the Agent are parties to that certain Post-Petition Loan and Guaranty Agreement, dated as of July 8, 1997 (as amended by the terms of the Waiver and First Amendment to Post-Petition Loan and Guaranty Agreement dated July 30, 1997 and the Waiver to Post-Petition Loan and Guaranty Agreement dated effective as of August 12, 1997 and as further amended, supplemented or modified, the "Loan ---- Agreement"). The Borrower Representative and the Guarantors have requested that - --------- the Lenders agree to waive, for the limited purposes set forth herein, certain provisions of the Loan Agreement. The Borrower Representative, the Guarantors, the Lenders and the Agent have agreed, upon the terms and conditions specified herein, to waive such provisions as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto agree as follows: SECTION 1. Defined Terms and Interpretation. -------------------------------- (a) The capitalized terms used herein which are defined in the Loan Agreement, shall have the respective meanings assigned to them in the Loan Agreement except as otherwise provided herein or unless the context otherwise requires. (b) Section headings in this Waiver are included herein for convenience of reference only and shall not constitute a part of this Waiver for any other purpose. (c) No provision in this Waiver shall be interpreted or construed against any Person because that Person or its legal representative drafted such provision SECTION 2. Waiver. Lenders hereby agree to waive the following: ------ 1 (a) the provisions of Section 8.1(b) of the Loan Agreement, for the limited purpose and solely in connection with, honoring consignment agreements entered into prior to the Petition Date in accordance with an order of the Bankruptcy Court, substantially in the form of Exhibit "B" to the Motion of Debtors and Debtors in Possession for an Order Authorizing Them to Implement A Consigned Jewelry Program, dated September 23, 1997; and (b) the provisions of Section 8.1(b) of the Loan Agreement, for the limited purpose and solely in connection with, the payment of severance claims in accordance with Section IV.A. of that certain Order and Findings of Fact and Conclusions of Law (a) Authorizing Montgomery Ward & Co., Incorporated and Lechmere, Inc. to Sell Assets Pursuant to a Purchase Agreement, (B) Authorizing the Closing of All Lechmere and Home Image Stores, (C) Permitting the Purchaser to Conduct Store Closing Sales, (D) Approving Certain Lease Assumption and Rejection Procedures and (E) Permitting the Debtors to Pay Severance Claims, dated August 14, 1997. SECTION 3. Representations and Warranties True; No Default or Event -------------------------------------------------------- of Default. The Credit Parties represent and warrant to the Agent and the - ---------- Lenders that on the date of and after giving effect to the execution and delivery of this Waiver (a) the representations and warranties set forth in the Loan Agreement are true and correct in all material respects on the date hereof as though made on and as of such date (unless any such representation or warranty expressly relates to an earlier date); and (b) neither any Default nor Event of Default has occurred and is continuing as of the date hereof. SECTION 4. Reference to this Waiver and Effect on Loan Documents. ----------------------------------------------------- (a) From and after the date hereof, each reference in the Loan Agreement (including in any Exhibit thereto) to "this Agreement," "hereunder," "herein" or words of like import shall mean and be a reference to the Loan Agreement, as affected hereby. (b) From and after the date of this Waiver, each reference in the Loan Documents to the Loan Agreement shall mean and be a reference to the Loan Agreement, as affected hereby. (c) The Loan Agreement, the Notes and the other Loan Documents, as affected hereby, shall remain in full force and effect and the Loan Documents are hereby ratified and confirmed in all respects. (d) The effectiveness of the waiver evidenced by Section 2 hereof, shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lenders or the Agent under the Loan Agreement, or constitute a waiver of any other provision of the Loan Agreement or any other Loan Document. SECTION 5. Effectiveness. This Waiver shall become effective upon ------------- receipt by the Agent of executed counterparts of this Waiver from the requisite number of Lenders that comprise the Requisite Lenders. 2 SECTION 6. Governing Law; Binding Effect. In all respects, ----------------------------- including all matters of construction, validity and performance, this Waiver shall be governed by, and construed and enforced in accordance with, the internal laws of the State of New York (without regard to conflict of law provisions) and any applicable laws of the United States of America, and shall be binding upon the parties hereto and their respective successors and permitted assigns. SECTION 7. Execution in Counterparts. This Waiver may be executed ------------------------- in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 8. Consent of Guarantors. By their execution and delivery --------------------- of this Waiver, each Guarantor hereby consents to all of the terms and provisions of this waiver and ratifies and confirms that each of the Loan Documents to which it is a party remains in full force and effect and enforceable in accordance with their respective terms. IN WITNESS WHEREOF, this Waiver has been duly executed as of the date first written above. BORROWER: MONTGOMERY WARD & CO., INCORPORATED By: /s/ Douglas V. Gathany ----------------------------------------- Name: Douglas V. Gathany Title: Vice President and Treasurer GUARANTORS: LECHMERE, INC. By: /s/ Douglas V. Gathany ----------------------------------------- Name: Douglas V. Gathany Title: Assistant Treasurer AMERICAN DELIVERY SERVICE COMPANY By: /s/ Philip D.Delk ----------------------------------------- Name: Philip D. Delk Title: Vice President, Secretary and Assistant Treasurer CONTINENTAL TRANSPORTATION, INC. 3 By: /s/ Philip D. Delk ----------------------------------------- Name: Philip D. Delk Title: Vice President and Assistant Treasurer JRI DISTRIBUTING, INC. STANDARD T CHEMICAL COMPANY, INC. WFL REALTY, INC. By: /s/ Philip D.Delk ----------------------------------------- Name: Philip D. Delk Title: Vice President and Secretary M-W PRESTRESS, INC. MW DIRECT GENERAL, INC. MW DIRECT LIMITED, INC. By: /s/ Philip D.Delk ----------------------------------------- Name: Philip D. Delk Title: Secretary MONTGOMERY WARD INTERNATIONAL, INC. MPI, INC. By: /s/ Philip D.Delk ----------------------------------------- Name: Philip D. Delk Title: Assistant Secretary BARRETWARD PROPERTIES CO., INC. BRANDYWINE DC, INC. BRANDYWINE PROPERTIES, INC. BRETTWARD PROPERTIES CO., INC. FIRST MONT CORPORATION FOURTH WYCOMBE PROPERTIES, INC. GABEWARD PROPERTIES CORPORATION GARDEN GROVE DEVELOPMENT CORPORATION HUGA REALTY INC. JOSHWARD PROPERTIES CORPORATION LECHMERE DEVELOPMENT CORPORATION M-W FAIRFAX PROPERTIES, INC. M-W PROPERTIES CORPORATION 4 M-W RESTAURANTS REALTY CORPORATION MARCOR HOUSING SYSTEMS, INC. MARYWARD PROPERTIES CORPORATION MF NEVADA INVESTMENTS, INC. MICHAELWARD PROPERTIES CO., INC. MONTGOMERY WARD DEVELOPMENT CORPORATION MONTGOMERY WARD LAND CORPORATION MONTGOMERY WARD PROPERTIES CORPORATION MONTGOMERY WARD REALTY CORPORATION MW LAND CORPORATION NATIONAL HOMEFINDING SERVICE, INC. 998 MONROE CORPORATION PAULWARD PROPERTIES CO., INC. ROBERTWARD PROPERTIES CORPORATION SACWARD PROPERTIES, INC. SECOND MONT CORPORATION 7TH & CARROLL CORPORATION SEVENTH MONT CORPORATION 618 CORPORATION 619 CORPORATION THE 535 CORPORATION THIRD WYCOMBE PROPERTIES, INC. 2825 DEVELOPMENT CORPORATION 2825 REALTY CORPORATION UNIVERSITY AVENUE MARKETPLACE, INC. WFL DEVELOPMENT CORPORATION WYCOMBE PROPERTIES, INC. By: /s/ G. Tad Morgan ----------------------------------------- Name: G. Tad Morgan Title: Vice President and Secretary GOODE FURNITURE COMPANIES, INC. MONTGOMERY WARD SECURITIES, INC. R M P DEVELOPMENT CORPORATION By: /s/ G. Tad Morgan ----------------------------------------- Name: G. Tad Morgan Title: Secretary 5 MONTGOMERY WARD HOLDING CORP. By: /s/ G. Tad Morgan -------------------------------------- Name: G. Tad Morgan Title: Assistant Secretary JEFFERSON STORES, INC. By: /s/ G. Tad Morgan -------------------------------------- Name: G. Tad Morgan Title: Vice President and Treasurer AGENT AND AS LENDER GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ James C. Ungari -------------------------------------- Name: James C. Ungari Title: Its Authorized Signatory LENDERS: THE CHASE MANHATTAN BANK By: /s/ William Repko -------------------------------------- Name: William Repko Title: Managing Director BANKAMERICA BUSINESS CREDIT, INC. By: /s/ Thomas Sullivan -------------------------------------- Name: Thomas Sullivan Title: Vice President CITIBANK, N.A. By: /s/ John Abate -------------------------------------- Name: John Abate Title: Attorney-in-fact CITICORP USA, INC. /s/ Claudia Slacik -------------------------------------- Name: Claudia Slacik Title: Vice President 6 BANKBOSTON RETAIL FINANCE INC. (f/k/a GBFC, INC.) By: /s/ Michael L. Pizette -------------------------------------- Name: Michael L. Pizette Title: Director/Vice President GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/ John Urban -------------------------------------- Name: John Urban Title: Authorized Signatory HELLER FINANCIAL, INC. By: /s/ Tara Hopkins -------------------------------------- Name: Tara Hopkins Title: Assistant Vice President JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM FINANCE, INC. Its: Attorney-in-fact By: /s/ Jeffrey Podwika -------------------------------------- Name: Jeffrey Podwika Title: Vice President 7 EX-10.(I)(N) 4 ASSET PURCHASE, LICENSE & AGENCY AGREEMENT, DATED 8-14-97 ________________________________________________________________________________ ________________________________________________________________________________ ASSET PURCHASE, LICENSE & AGENCY AGREEMENT for THE PURCHASE OF CERTAIN ASSETS OF LECHMERE, INC. AND MONTGOMERY WARD & CO., INCORPORATED by SCHOTTENSTEIN BERNSTEIN CAPITAL GROUP LLC August 14, 1997 ________________________________________________________________________________ ________________________________________________________________________________ -1- TABLE OF CONTENTS
PAGE ARTICLE 1 CERTAIN DEFINITIONS.................................................................... 5 ARTICLE 2 THE TRANSACTIONS....................................................................... 9 2.1 ........................................................................................... 9 Purchase and Sale of Purchased Assets.......................................................... 9 ------------------------------------- 2.2 No Assumption of Liabilities........................................................... 12 ---------------------------- 2.3 Purchase Price......................................................................... 14 -------------- 2.4 Closing Inventory...................................................................... 14 ----------------- 2.5 PostClosing Payment.................................................................... 15 ------------------- 2.6 Additional Inventory................................................................... 16 -------------------- 2.7 Parent Covenant........................................................................ 16 --------------- ARTICLE 3 THE CLOSING............................................................................ 16 3.1 Time and Place of Closing.............................................................. 16 ------------------------- 3.2 Deliveries by Debtors.................................................................. 17 --------------------- 3.3 Deliveries by Purchaser................................................................ 17 ----------------------- 3.4 Real Estate............................................................................ 18 ----------- ARTICLE 4 CONDITIONS TO THE DEBTORS' OBLIGATIONS................................................. 18 4.1 Representations, Warranties and Covenants.............................................. 18 ----------------------------------------- 4.2 No Injunction.......................................................................... 18 ------------- 4.3 Legal Opinion.......................................................................... 18 ------------- 4.4 Certificates and Other Documents....................................................... 18 -------------------------------- 4.5 Sale Order............................................................................. 18 ---------- ARTICLE 5 CONDITIONS TO PURCHASER'S OBLIGATIONS.................................................. 19 5.1 Representations, Warranties and Covenants.............................................. 19 ----------------------------------------- 5.2 Intentionally Omitted 5.3 ............................................................. 19 5.4 No Injunction.......................................................................... 19 ------------- 5.5 Good Standing Certificates............................................................. 19 -------------------------- 5.6 Licenses and Permits................................................................... 19 -------------------- 5.7 Title Insurance and Surveys............................................................ 20 --------------------------- 5.8 Intentionally Deleted 5.9.............................................................. 20 5.10 Certificates and Other Documents....................................................... 20 -------------------------------- 5.11 Notice of Sale; Order Limiting Notice.................................................. 20 ------------------------------------- 5.12 Material Adverse Change................................................................ 21 ----------------------- 5.13 Board Approval......................................................................... 21 -------------- ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF DEBTORS.............................................. 21 6.1 Due Incorporation, Etc................................................................. 21 ---------------------- 6.2 Subsidiaries........................................................................... 22 ------------ 6.3 Authorization, No Conflicts, Etc....................................................... 22 -------------------------------- 6.4 Consents and Approvals................................................................. 23 ---------------------- 6.5 Absence of Violations.................................................................. 23 --------------------- 6.6 Licenses and Permits................................................................... 24 -------------------- 6.7 Inventories............................................................................ 24 ----------- 6.8 Insurance.............................................................................. 25 --------- 6.9 Assets................................................................................. 25 ------ 6.10 Real Properties........................................................................ 26 --------------- 6.11 Tangible Personal Property............................................................. 26 -------------------------- 6.12 [Intentionally omitted]................................................................ 27 6.13 Disclosure............................................................................. 27 ----------
TABLE OF CONTENTS
6.14 Closing Date........................................................................... 27 ------------ ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................ 27 7.1 Due Incorporation, Etc................................................................. 27 ---------------------- 7.2 Authorization, No Conflicts, Etc....................................................... 27 --------------------------------
2 7.3 Closing Date........................................................................... 28 ------------ ARTICLE 8 COVENANTS PRIOR TO CLOSING............................................................. 28 8.1 Affirmative and Negative Covenants Pending Closing..................................... 28 -------------------------------------------------- 8.2 Investigation by Purchaser............................................................. 30 -------------------------- 8.3 Consents and Further Actions........................................................... 30 ---------------------------- ARTICLE 9 COVENANTS AFTER CLOSING................................................................ 30 9.1 Store Closing Sales.................................................................... 30 ------------------- 9.1A-1. Proceeds............................................................................... 33 -------- 9.1A-2. Deposit of Proceeds.................................................................... 33 ------------------- 9.1A-3. Credit Card Proceeds................................................................... 34 -------------------- 9.1A-4........................................................................................... 34 9.2 Services............................................................................... 34 -------- 9.3 Payments by the Purchaser.............................................................. 36 ------------------------- 9.4 Further Transfers and Assurances....................................................... 37 ------------------------------- 9.5 Communications......................................................................... 37 -------------- 9.6 Taxes; Recording Charges; Escrow Fee; Rent Proration................................... 38 ---------------------------------------------------- 9.7 License of Excluded Proprietary Rights................................................. 38 -------------------------------------- 9.8 Agent.................................................................................. 38 ----- 9.9 Access to Documents.................................................................... 38 ------------------- 9.10 Insurance.............................................................................. 38 --------- ARTICLE 10 INTENTIONALLY DELETED ARTICLE 11 LEASES/REAL ESTATE................................... 39 11.1 Lease Assignment Election.............................................................. 39 ------------------------- 11.2 Rejected Leases........................................................................ 40 --------------- 11.3 Costs and Expenses..................................................................... 40 ------------------ 11.4 Master Lease........................................................................... 41 ------------ 11.5 ....................................................................................... 41 11.6 Communications......................................................................... 41 -------------- 11.7 Sale of Leases......................................................................... 42 -------------- 11.8 Real Estate............................................................................ 42 ----------- ARTICLE 12 INDEMNIFICATION....................................................................... 42 12.1 Indemnification........................................................................ 42 --------------- 12.2 Mutual Assistance and Records.......................................................... 43 ----------------------------- ARTICLE 13 MISCELLANEOUS......................................................................... 43 13.1 Termination............................................................................ 43 ----------- 13.2 Survival of Representations and Warranties............................................. 44 ------------------------------------------ 13.3 Equitable Remedies..................................................................... 45 ------------------ 13.4 Assignment............................................................................. 45 ---------- 13.5 Notices................................................................................ 45 ------- 13.6 Expenses............................................................................... 47 -------- 13.7 Public Announcements................................................................... 47 -------------------- 13.8 Entire Agreement....................................................................... 47 ---------------- 13.9 Waiver................................................................................. 47 ------ 13.10 Amendment.............................................................................. 48 --------- 13.11 Counterparts........................................................................... 48 ------------ 13.12 Invalid Provisions..................................................................... 48 ------------------ 13.13 Headings, Gender, Etc.................................................................. 48 --------------------- 13.14 Choice of Law.......................................................................... 48 ------------- 13.15 No Third Party Beneficiary............................................................. 48 -------------------------- 13.16 ....................................................................................... 49
-3- CERTAIN SCHEDULES ----------------- Schedule 6.2 -- Subsidiaries Schedule 6.3 -- Authorization, No Conflicts, Etc. Schedule 6.4 -- Consents and Approvals Schedule 6.5 -- Absence of Violations Schedule 6.6 -- Licenses and Permits Schedule 6.8 -- Insurance Schedule 6.10 -- Real Properties Schedule 6.11 -- Tangible Personal Property EXHIBITS -------- Exhibit 1 -- Stores and Warehouse Exhibit 1-A -- Lease Guaranty Exhibit 2.1 (a) -- Parent Leases Exhibit 2.1(b) -- Excluded Assets Exhibit 2.4 -- Inventory Procedures and Store Merchandise Condition Report Exhibit 5.3 -- Sale Order Exhibit 9.2 -- Services -4- ASSET PURCHASE, LICENSE & AGENCY AGREEMENT ------------------------------------------ ASSET PURCHASE, LICENSE & AGENCY AGREEMENT ("Agreement"), dated as of August 14, 1997, by and between Lechmere, Inc., a Massachusetts corporation (the "Company"), Montgomery Ward & Co., Incorporated, an Illinois corporation ("Parent"), each a debtor and debtor-in-possession operating under Chapter 11 of the Bankruptcy Code (collectively, the "Debtors") and Schottenstein Bernstein Capital Group LLC, a Delaware limited liability company ("Purchaser"). RECITALS -------- The Debtors filed for protection from their creditors under Chapter 11 of the Bankruptcy Code (as defined below) on July 7, 1997. The Debtors' Chapter 11 case is currently pending before the United States Bankruptcy Court for the District of Delaware (the "Court") in In re Montgomery Ward Holding Corp., a ----------------------------------- Delaware corporation, Case No. 97-1409 (PJW), et al (the "Bankruptcy Case"). --------------- Purchaser desires to purchase, and the Debtors desire to sell, the Purchased Assets (as defined below) upon the terms and subject to the conditions set forth in this Agreement. Debtors desire to retain the Purchaser as its agent to conduct store closing sales at the Stores (as defined herein) on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and in reliance upon the representations and warranties contained herein, the parties hereto covenant and agree as follows: ARTICLE 1 CERTAIN DEFINITIONS As used in this Agreement, the following terms shall have the following designated meanings: "Additional Inventory" has the meaning set forth in Section 2.6 -------------------- hereof. "Affiliate" of another Person means any Person that directly, or --------- indirectly through one or more intermediaries, controls or is controlled by or is under common control with such other Person, but not including, in the case of the Debtors, any shareholders of Montgomery Ward Holding Corp. "Agreement" means this Asset Purchase, License & Agency Agreement, --------- including the exhibits and the schedules attached hereto. "Assigned Leases" has the meaning set forth in Section 11.1 hereof. --------------- -5- "Authorized Officer" of any Person means the chairman of the board, ------------------ the resident, any vice-president or any secretary of such Person. "Bankruptcy Case" has the meaning set forth in the recitals hereof. --------------- "Bankruptcy Code" means Title 11 and applicable portions of Titles 18 --------------- and 28 of the United States Code, as amended from time to time. "Closing" has the meaning set forth in Section 3.1 hereof. ------- "Closing Date" has the meaning set forth in Section 3.1 hereof. ------------ "Closing Merchandise Inventory" has the meaning set forth in Section ----------------------------- 2.5(a) hereof. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Company" has the meaning set forth in the first paragraph of this ------- Agreement. "Cost Value" has the meaning set forth in Section 2.4(b) hereof. ---------- "Deemed Rejection Date" has the meaning set forth in Section 11.1 --------------------- hereof. "Defective Merchandise" means any item of merchandise that is damaged, --------------------- defective or otherwise not salable in the ordinary course. "Defective Merchandise Amount" means the amount payable as the ---------------------------- purchase price for the Defective Merchandise as agreed to by Purchaser and the Company. "Excluded Assets" has the meaning set forth in Section 2.1 (b) hereof. --------------- "Excluded Liabilities" has the meaning set forth in Section 2.2(b) -------------------- hereof. "Final Order" shall mean an order of the Court which (a) has not been ----------- reversed or stayed and as to which the time to appeal has expired and as to which no appeal or petition for review, rehearing or certiorari is pending; or (b) with respect to which any appeal has been finally decided and no further appeal or petition for certiorari can be taken or granted. "Financed Store Fixtures" means Store Fixtures and equipment located ----------------------- at the Stores under the heading "Financed Store Fixtures" set forth on Exhibit ------- 1. - - "Gross Rings" has the meaning set forth in Section 2.4(c) hereof. ----------- "Home Image Business" means the business conducted under the name ------------------- "Home -6- Image." "Initial Settlement Date" has the meaning set forth in Section 2.5 ----------------------- hereof. "Inventory Date" has the meaning set forth in Section 2.4(a) hereof. -------------- "Inventory Taking" has the meaning set forth in Section 2.4(a) hereof. ---------------- "Layaway, Repair, and Special Order Merchandise" means all items of ---------------------------------------------- merchandise held by the Company on layaway or for repair, or customer-specific special orders, in each case pursuant to binding agreements, invoices or other legal documentation, where (A) the documentation is clear as to the name, address, telephone number, date of last payment and balance due from the customer, and (B) the goods subject to layaway are fully described in the documentation. "Lease Assignment Order" has the meaning set forth in Section 11.1 ---------------------- hereof. "Lease Guaranty" shall mean the Guaranty between Purchaser and Company -------------- substantially in the form attached hereto as Exhibit 1-A. "Leases" means the leasehold interest of the Debtors in the Stores and ------ Warehouses under the heading "Leased Stores and Warehouses" on Exhibit 1. --------- "Liens" has the meaning set forth in Section 6.10 hereof. ----- "Master Lease" means the Indenture of Lease dated October 30, 1989, by ------------ and between Lechmere Realty Limited Partnership and the Company, with respect to certain stores located in the Northeastern United States including amendments one through six. "Master Lease Deemed Rejection Date" has the meaning set forth in ---------------------------------- Section 11.4. "Master Lease Premises" has the meaning set forth in Section 11.4 --------------------- hereof "Merchandise" means all merchandise located at the Stores or in the ----------- Warehouses or in transit between the Stores and the Warehouses, including: (a) Layaway, Repair and Special Order Merchandise; and (b) Defective Merchandise. Notwithstanding the foregoing, "Merchandise" shall not include: (i) goods which belong to sublessees, licensees or concessionaires of the Debtors; (ii) goods held by the Debtors on memo, on consignment, or as bailee; and (iii) furnishings, trade fixtures and improvements to real property which are located in the Stores or the Warehouse. "Notice of Disagreement" has the meaning set forth in Section 2.5(a) ---------------------- hereof. "Person" means any natural person, corporation, general partnership, ------ limited partnership, limited liability partnership, limited liability company, trust, union, association, court, agency, government, tribunal, instrumentality, or other entity or authority. -7- "Post-Closing Payment" has the meaning set forth in Section 2.3 -------------------- hereof. "Proceeds" shall have the meaning set forth in Section 9.1A-1 hereof. -------- "Proprietary Rights" means all patents, patent applications, patent ------------------ disclosures and inventions (whether or not patentable and whether or not reduced to practice); all trademarks, service marks, trade names, trade dress logos and corporate names (including "Lechmere" and "Home Image" or derivatives thereof); all registered and unregistered statutory and common law copyrights; all registrations, applications and renewals for any of the foregoing; all trade secrets, confidential information, ideas, formulae, compositions, know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, improvements, proposals, technical and computer data, financial, business and marketing plans, and customer and supplier lists and related information; all license agreements and sublicense agreements to and from third parties relating to any of the foregoing; all other proprietary rights (including, without limitation, all computer software and documentation); and all copies and tangible embodiments of the foregoing (in whatever form or medium), in each case including, without limitation, the items set forth on the Schedule 6.12 attached hereto, all income, royalties, damages and payments due at Closing or thereafter with respect thereto and all other rights thereunder (including, without limitation, damages and payments for past, present or future infringements or misappropriations thereof, the right to sue and recover for past, present or future infringements or misappropriations thereof); all rights to use all of the foregoing forever and all other rights in, to, and under the foregoing in all countries; all goodwill related to the foregoing. "Purchase Orders" means all commitments and orders for the purchase --------------- and sale of Merchandise and supplies. "Purchase Price" has the meaning set forth in Section 2.3 hereof. -------------- "Purchased Assets" has the meaning set forth in Section 2.l(a) ---------------- hereof. "Real Estate" means those Warehouses and Stores under the heading ----------- "Owned Stores and Warehouses" on Exhibit 1. --------- "Retained Employee" has the meaning set forth in Section 9.2(e) ----------------- hereof. "Returned Merchandise" has the meaning set forth in Section 9.1 (g) -------------------- hereof. "Saleable Inventory" means all Merchandise that is first quality ------------------ inventory and all Merchandise located at the Stores (but not the Warehouses) that is less than first quality inventory but that is on the selling floor and is salable in the ordinary course, including samples and displays that are not Defective Merchandise. "Sale Commencement Date" has the meaning set forth in Section 9.1(b) ---------------------- hereof. -8- "Sale Term" has the meaning set forth in Section 9.1(b) hereof. --------- "Sale Termination Date" has the meaning set forth in Section 9.1(b) --------------------- hereof. "Sales Taxes" means all sales, excise, gross receipts and other taxes ----------- attributable to sales of Merchandise payable to any taxing authority having jurisdiction. "Sale Order" has the meaning set forth in Section 5.3 hereof. ---------- "Services" has the meaning set forth in Section 9.2 hereof. -------- "Store Closing Sales" has the meaning set forth in Section 9.1 hereof. ------------------- "Store Fixtures" has the meaning set forth in Section 2.1(a) hereof. -------------- "Stores" means the retail stores of the Company and the Parent set ------ forth on Exhibit 1. --------- "Survey" has the meaning given to such term in Section 5.7(b) hereof. ------ "Tax"or "Taxes" shall mean any federal, state, local or foreign --- ----- income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall, profits, environmental, customs, capital stock, franchise, employees' income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative or add-on minimum or other similar tax, governmental fee, governmental assessment or governmental charge of any kind whatsoever, including interest, penalty or addition thereto, whether disputed or not. "Title Insurer" has the meaning set forth in Section 5.7(a) hereof. ------------- "Warehouses" means the merchandise storage facilities of the Company ---------- and Parent set forth on Exhibit 1. --------- ARTICLE 2 THE TRANSACTIONS 2.1 Purchase and Sale of Purchased Assets. ------------------------------------- (a) Purchased Assets. On the terms and subject to the conditions ---------------- contained in this Agreement, on the Closing Date, Purchaser shall purchase from the Debtors, and the Debtors shall sell, convey, assign, transfer and deliver to Purchaser, free and clear of all Liens, all of the Debtors' right, title and interest in, to and under the following assets, properties, rights, titles and interests of every kind and nature owned by the Debtors as of the Closing Date, in each case, which are used in, useful for or otherwise associated with the ownership and operation of the -9- stores and the Warehouses, whether tangible, intangible, real or personal and wherever located and by whomever possessed, but excluding all Excluded Assets (the "Purchased Assets"); it being understood that with respect to Parent the following shall apply only to the extent such assets, properties, rights, titles or interests are located at the Stores or the Warehouses or to the extent such assets, properties, rights, titles or interests are related to a Lease set forth on Exhibit 2.1(a): (i) The right to the Proceeds from the sale of all Merchandise and on-order inventory, which Proceeds shall be free and clear of any Liens; (ii) the right to control the disposition of the Leases in accordance with Article 9; (iii) all interests in the Real Estate (including, without limitation, land, buildings and improvements thereon, fixtures and easements, licenses, rights of way, permits, and other appurtenants thereto, including rights in and to public streets, whether or not vacated) and all escrow accounts and warranties relating to the Real Estate provided, however, that (x) the Debtors shall automatically, and without the necessity of any other or further act or instrument or Court approval, transfer and convey the Real Estate (or cause the same to be transferred and conveyed) to Purchaser upon the one hundred eightieth (180th) day following the Closing Date, or (y) subject to Section 11.8, the Debtors shall transfer and convey the Real Estate (or cause the same to be transferred and conveyed) to Purchaser or any one or more nominees, assignees or designees of Purchaser promptly following (and in no event later than two (2) business days thereafter) the delivery of written notice by Purchaser, at any time and from time to time, requesting that the Real Estate or any portion thereof be transferred and conveyed to Purchaser or its nominee, assignee or designee, and in the case of (x) and (y), without the imposition or payment of any transfer taxes of any kind or nature, which transfer taxes are exempt pursuant to section 1146(c) of the Bankruptcy Code; it hereby being understood and agreed by Purchaser that Purchaser shall be responsible for all costs associated with the Real Estate after the Closing Date; (iv) all equipment, tools, furniture, furnishings, trade fixtures, trucks and other vehicles, spare parts and supplies, computers and all related equipment, telephones and all related equipment and all other tangible personal property (other than Financed Store Fixtures); (v) all claims, deposits (whether held on behalf of any Person by the Debtors or made by the Debtors with any Person), prepayments (excluding prepaid rent and paper account), warranties, refunds (other than income tax refunds), causes of action, rights of recovery, rights of set-off and rights of recoupment of every kind and nature, other than those relating exclusively to Excluded Assets or Excluded Liabilities and those described in Section 2.1(b)(ii); (vi) tax, insurance and other escrow accounts relating to the Real Estate and Leases; -10- (vii) all permits, licenses, franchises, orders, registrations, certificates, variances, approvals and similar rights obtained from governments and governmental agencies, and all data and records pertaining thereto; (viii) all insurance, warranty and condemnation proceeds received after the Closing Date with respect to damage, non-conformance of or loss to the Purchased Assets (excluding insurance proceeds from credit insurance policies); (ix) all rights under insurance policies to the extent related to or payable in connection with any of the Purchased Assets (excluding insurance proceeds from credit insurance policies); (x) all rights to receive mail and other communications addressed to the Company and relating to the Purchased Assets other than privileged communications; (xi) Purchaser's rights under Section 11.1; (xii) all supplies, including, without limitation, boxes, bags, paper, twine, and similar sales materials located at the Stores and Warehouses; (xiii) all manufacturers and third party warranties or guarantees in respect of any item of property falling within the scope of the Purchased Assets and all indemnification rights against third parties related to the Purchased Assets, to the extent legally transferable; and (xiv) all of Debtors' other assets located on or around the premises of, used in, or necessary to the unimpaired continual operation of, or related to, the Stores or the Warehouses it hereby being understood and agreed that the Purchased Assets together with the other rights granted Purchaser under this Agreement shall enable Purchaser to conduct business in the Stores and the Warehouses as contemplated by this Agreement, and to the extent that the right to use any of the Excluded Assets or any other asset which is necessary to the operation of the Stores and the Warehouses as contemplated by this Agreement, such right is hereby granted to Purchaser until the conclusion of the Sale Term. (b) Excluded Assets. Notwithstanding the foregoing, the following --------------- assets are expressly excluded from the purchase and sale contemplated hereby (the "Excluded Assets") and, as such, are not included in the Purchased Assets: --------------- (i) all cash and cash equivalents (other than escrow accounts set forth in Section 2.l(a)(vii)) and accounts receivable; (ii) all causes of action and claims (A) under (S)544-550 of the Bankruptcy Code, (B) against vendors and third party suppliers (except warranty claims) and (c) not relating to the Purchased Assets or the Leases; -11- (iii) the Company's minute books, stockholder and stock transfer records and corporate seal; (iv) any right to receive mail and other communications addressed to the Debtors relating exclusively to the Excluded Assets or the Excluded Liabilities; (v) any assets relating to any program, plan, policy or arrangement (whether or not terminated) (A) which is or has been maintained, established, or offered by the Debtors, (B) to which the Debtors contribute or has contributed, (C) to which the Debtors have or have had any obligation to contribute, or (D) to which the Debtors have or had any liability or potential liability, and under which current or former employees, retirees, individual contractors of the Debtors or its predecessors (or their spouses, dependents or other beneficiaries) may receive benefits or have received benefits; (vi) all contracts, agreements and arrangements except that to the extent that the rights granted to the Debtors under any contract, agreement or arrangement are necessary or useful in connection with the conduct of the Store Closing Sales, then Purchaser shall be granted and afforded such rights for the duration of the Sale Term; (vii) any other assets (or portion thereof) which the Purchaser elects in its sole discretion not to purchase hereunder, by delivering written notice to the Debtors at any time prior to the Closing Date; (viii) all Proprietary Rights; (ix) the Financed Store Fixtures; (x) all books, ledgers, files, documents, correspondence and business records necessary for the operation of the Stores and the Warehouses or related to the Purchased Assets except such books, ledgers, files, documents, correspondence or business records related solely to the Real Estate; (xi) all stock of subsidiaries of the Company, if any; and (xii) all assets listed on Exhibit 2.l(b). 2.2 No Assumption of Liabilities. Purchaser will not assume or in any way ---------------------------- be responsible for any liabilities or obligations of the Debtors, including any liabilities or obligations whatsoever related to the ownership or operation of the Stores, the Warehouses and/or the Purchased Assets at any time, whether prior to, on or after the Closing Date except in connection with any Assigned Leases assigned to Purchaser or its nominees, assignees or designees in accordance with Section 11.1. Nothing in this Section 2.2 shall limit Purchaser's obligations to make payments to the Debtors as set forth in Sections 9.3 and 11.2. -12- (a) Excluded Liabilities. Notwithstanding anything to the contrary -------------------- contained in this Agreement and regardless of whether such liability is disclosed herein or on any schedule hereto, Purchaser will not assume or be liable for any liabilities or obligations of the Debtors not described in Section 2.2(a) hereof (the "Excluded Liabilities"), including, without - -------------- -------------------- limitation, the following liabilities and obligations of the Company: (i) liabilities or obligations for any contracts, agreements, leases or other arrangements except to the extent Purchaser or its nominees, assignees or designees is an assignee of an Assigned Lease; (ii) liabilities or obligations for accounts payable, accrued liabilities or indebtedness (including indebtedness to Parent), or any undisclosed or contingent liabilities; (iii) liabilities or obligations under Purchase Orders; (iv) liabilities or obligations with respect to all Taxes, including without limitation, all Taxes of the Debtors relating to the ownership or operation of the Stores and/or the Purchased Assets on or prior to the Closing Date and all Taxes arising out of or relating to any of the transactions contemplated hereby; (v) liabilities of the Debtors for costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby; (vi) liabilities or obligations of the Debtors under this Agreement or the agreements contemplated hereby; (vii) liabilities or obligations arising out of or relating to the Excluded Assets; (viii) liabilities or obligations for any claims (whenever made) or proceedings arising out of, relating to, resulting from or caused by any products manufactured, serviced, distributed or sold by the Debtors or any of its Affiliates (or any predecessor) at any time on or prior to the Closing Date; (ix) liabilities or obligations for any claims (whenever made) arising out of, relating to, resulting from or caused by any transaction, status, event, condition, occurrence or situation existing, arising or occurring (A) in connection with the ownership or operation of the Stores, the Warehouses and/or the Purchased Assets on or prior to the Closing Date or (B) in connection with the Debtors or any of their affiliates' businesses or activities at any time prior to, on or after the Closing Date; or (x) any liabilities or obligations (including but not limited to any claim of any governmental agency, any trustee, any fiduciary, any plan administrator, any other person dealing with any employee benefit or other plan, any employee or any beneficiary and without -13- regard to whether such liability or obligation arises prior to, on or after the Closing Date or results from an event, prior to, on or after the Closing Date) including in connection with provision of the Services which relate to (A) any program, plan, policy or arrangement (whether or not terminated) (i) which is or has been maintained, established, or offered by the Company or Parent, (ii) to which the Company or Parent contributes or has contributed, (iii) to which the Company or Parent has or has had any obligation to contribute or (iv) to which the Company or Parent has or has had any liability or potential liability, and under which current or former employees, retirees, individual contractors (or their spouses, dependents or other beneficiaries) of the Company or its predecessors may receive benefits or have received benefits, (B) any Tax, penalty, assessment, fine or other liability relating to any such program, plan or policy, which may result as a violation of law, including any violation of the Code, ERISA or any proposed, temporary or final regulation thereunder, (c) any liability, including any potential or actual liability, relating to any failure to comply with the requirements of the Code and/or ERISA with respect to the foregoing or (D) any other payments to Debtors' employees. 2.3 Purchase Price. The aggregate purchase price for all of the Purchased -------------- Assets (the "Purchase Price"), shall be 81.6% of the Cost Value of all Saleable -------------- Inventory included in the Closing Merchandise Inventory (determined in accordance with Sections 2.4 and 2.5 below), plus the Defective Merchandise Amount, plus $16,400,000. Subject to the conditions set forth herein, $100,000,000 shall be payable by Purchaser at Closing by wire transfer of immediately available funds to the account designated by the Debtors no later than five days prior to the Closing Date for such purpose. An amount equal to the Purchase Price less $100,000,000 (the "Post-Closing Payment") shall be paid -------------------- as provided in Section 2.5(b). The Purchase Price payable hereunder shall be subject to prorations as provided in Section 9.6. 2.4 Closing Inventory. ----------------- (a) Inventory Taking. As soon as practicable after the Sale ---------------- Commencement Date, the Purchaser and the Debtors shall jointly take a retail and SKU inventory of the Saleable Inventory located at each Store and Warehouse in accordance with the inventory procedures set forth on Exhibit 2.4 hereto to ----------- obtain the cost of the Saleable Inventory located thereat (the "Inventory --------- Taking") (the date of the Inventory Taking at each Store or Warehouse being the "Inventory Date" for such Store or Warehouse). Purchaser and the Debtors shall -------------- jointly employ RGIS or another mutually acceptable inventory taking service to conduct the Inventory Taking. Purchaser and the Debtors shall each be responsible for 50% of the costs and fees of such inventory taking service. Except as provided in the immediately preceding sentence, the Purchaser and the Debtors shall each bear their respective costs and expenses relative to the Inventory Taking. Once the Inventory Taking commences in any Store or Warehouse and until the completion of the Inventory Taking in such Store or Warehouse, neither Debtors nor Purchaser shall enter such Store or Warehouse without each having a representative present; provided, however, that until the completion of the Inventory Taking, Debtors and Purchaser shall each be entitled to enter any Store or Warehouse at any time after providing notice to the other party in the event of an emergency at such Store or Warehouse. Following the completion of the Inventory Taking in each Store or Warehouse, Debtors shall not enter any Store or Warehouse, except (i) during ordinary Store/Warehouse hours upon notice to the managers of -14- such Store or Warehouse, or (ii) after providing notice to Purchaser in the event of an emergency at such Store or Warehouse. The Purchaser and the Debtors shall each have representatives present during the Inventory Taking, and shall each have the right to review and verify the listing and tabulation of the inventory taking service. During the Inventory Taking, Purchaser and the Debtors shall work in good faith to agree on the Defective Merchandise Amount. The parties agree that during the conduct of the Inventory Taking at each Store such Store shall be closed to the public and no sales or other transactions shall be conducted. (b) Valuation. For purposes of this Agreement, "Cost Value" shall --------- ---------- mean, with respect to each item of Saleable Inventory, the Debtors' cost therefor as provided in that certain Store Merchandise Condition Report for the end of month/July, 1997 included as Exhibit 2.4 hereof, except for Layaway, ----------- Repair and Special Order Merchandise, where "Cost Value" shall mean the Cost ---------- Value as described above less amounts received by the Debtors from customers prior to Closing. (c) Gross Rings. In the event that sales occur at any Store prior to ----------- the completion of the Inventory Taking at such Store, then for the period from and including the Closing Date until the Inventory Date for such Store, Purchaser or Debtors, as the case may be, shall keep a strict count of units of Merchandise sold (by SKU, if possible) ("Gross Rings"). All such records and ----------- reports shall be made available to Purchaser and the Company during regular business hours upon reasonable notice. 2.5 Post-Closing Payment. -------------------- (a) Within 10 business days after the delivery of the certified inventory report by the inventory service, Debtors shall deliver to Purchasers a statement of the aggregate amount of the Cost Value of all Saleable Inventory included in the Inventory Taking determined in accordance with Section 2.4 plus ---- the Cost Value of all Saleable Inventory subject to Gross Rings at each Store between the Closing Date and the Inventory Date at such Store (the "Closing ------- Merchandise Inventory"), together with Debtors' good faith determination of the - --------------------- Post-Closing Payment. During the period immediately following the Purchaser's receipt of such Closing Merchandise Inventory and until the Post-Closing Payment is finally determined pursuant to this Section 2.5, the representatives and agents designated by the Purchaser shall be permitted to review Debtors' books and records and working papers related to the preparation of the Closing Merchandise Inventory and determination of the Post-Closing Payment. The Closing Merchandise Inventory and Debtors' determination of the Post-Closing Payment shall become final and binding upon the parties five days after the Purchaser's receipt thereof (the "Initial Settlement Date"), unless the ----------------------- Purchaser gives written notice to Debtors of its disagreement ("Notice of --------- Disagreement") prior to such date. Any Notice of Disagreement shall specify in - ------------ reasonable detail the nature of any disagreement so asserted. If a timely Notice of Disagreement is received by Debtors, then the Closing Merchandise Inventory and the determination of the Post-Closing Payment (as revised in accordance with clause (i) or (ii) below) shall become final and binding upon the parties on the earliest of (i) the date the parties hereto resolve in writing any differences they have with respect to the matters specified in the Notice of Disagreement or (ii) the date all matters in dispute are finally resolved in writing by the Court. During the 10 days -15- following delivery of a Notice of Disagreement, Debtors and the Purchaser shall seek in good faith to resolve in writing any differences which they may have with respect to the matters specified in the Notice of Disagreement. During such period, a representative appointed by the Debtors shall be permitted to review the Purchaser's working papers relating to the Notice of Disagreement. At the end of such 10-day period, Purchaser and the Debtors shall submit to the Court for review and resolution all matters which remain in dispute which were included in the Notice of Disagreement, and the Court shall make a final determination of Closing Merchandise Inventory and the Post-Closing Payment. The Closing Merchandise Inventory and the Post-Closing Payment as determined in accordance with this Section 2.5 shall become final and binding on the parties on the date the Court delivers its final resolution to the parties. Purchaser and the Debtors shall each bear their own fees and expenses in connection with the Court's resolution. (b) Within two business days after the Initial Settlement Date, the Purchaser shall pay the Debtors by wire transfer of immediately available funds to the account designated for such purposes by the Debtors any portion of the Post-Closing Payment that is not subject to the Notice of Disagreement. Purchaser shall pay the Debtors any disputed portions of the Post-Closing Payment by wire transfer of immediately available funds to the account designated for such purposes by the Debtors as soon as practicable after resolution of such dispute, but no later than 2 business days after such resolution. 2.6 Additional Inventory. (a) Within 21 days after the Closing Date, the -------------------- Purchaser shall deliver to the Company a statement setting out any Merchandise ordered by the Debtors prior to the Closing Date and received by Purchaser within 14 days after the Closing Date and not included in the Inventory Taking (the "First Phase Additional Inventory"). With such statement, Purchaser shall -------------------------------- include a check in an amount equal to 81.6% of the Cost Value for all First Phase Additional Inventory. (b) Within 40 days after the Closing Date, Purchaser shall deliver to the Company a statement setting out any Merchandise ordered by the Debtors prior to the Closing Date and received by Purchaser during the period commencing 15 days after the Closing Date and ending 30 days after the Closing Date and not included in the Inventory Taking (the "Second Phase Additional Inventory"). --------------------------------- With such statement, Purchaser shall include a check in an amount equal to 81.6% of the Cost Value for all Second Phase Additional Inventory times the complement of the then prevailing Store Closing sale discount. 2.7 Parent Covenant. Parent hereby agrees that it shall cause the Company --------------- to perform all of its agreements, covenants and other obligations under this Agreement and the other agreements and instruments contemplated hereby and thereby. ARTICLE 3 THE CLOSING 3.1 Time and Place of Closing. The consummation of the transactions ------------------------- provided for in -16- this Agreement (the "Closing") shall take place at the offices of Battle Fowler ------- LLP, 75 East 55th Street, New York, New York 10022 as soon as practicable after the Sale Order is issued (the date of the Closing, the "Closing Date"), but, ------------ subject to satisfaction of all the conditions to Closing set forth in Article 5, in no event later than 3:00 p.m. New York time August 15, 1997. The sale of the Real Estate shall be closed through escrow with the Title Insurer in accordance with the general provisions of the usual form of escrow agreement used in similar transactions by the Title Insurer with special provisions inserted as may be required to conform with this Agreement; provided, however, that the Real Estate shall be delivered out of escrow by the Title Insurer as provided in section 2.1(a)(iii). 3.2 Deliveries by Debtors. At the Closing, the Debtors shall deliver to --------------------- Purchaser the following: (a) The special warranty deeds, warranty bills of sale, assignments and other instruments for the due transfer of the Purchased Assets to Purchaser, free and clear of all Liens, each in form and substance reasonably satisfactory to Purchaser; provided, however, that the instruments to effectuate the transfer of the Real Estate to Purchaser or its nominees, assignees or designees shall be deposited in escrow with the Title Insurer, who shall be instructed to deliver such instruments out of escrow as and when set forth in section 2.1(a)(iii); and provided, further, however, that all of the documents and instruments referred to in this section 3.2(a) shall be reasonably acceptable to Purchaser. (b) The certificate contemplated by Article 5 hereof; and (c) All other documents, instruments and writings required to be delivered by the Debtors at or prior to the Closing Date pursuant to this Agreement or otherwise required, or reasonably requested by Purchaser, in connection herewith; it hereby being understood and agreed that all such documents, instruments and writings shall be reasonably acceptable to Purchaser. 3.3 Deliveries by Purchaser. At the Closing, Purchaser shall deliver the ----------------------- following: (a) the sum of $100,000,000 (subject to prorations as provided in Section 9.6) as described in Section 2.3; (b) the certificate contemplated by Article 6 hereof; (c) all other documents, instruments and writings required to be delivered by Purchaser at or prior to the Closing Date pursuant to this Agreement or otherwise required, or reasonably requested by the Debtors, in connection herewith; and (d) the Lease Guaranty; and (e) the letter of credit to be delivered pursuant to the Lease Guaranty; provided, however, that such letter of credit may be delivered by Purchaser up to one week -17- following the Closing. 3.4 Real Estate. Purchaser shall have the right to take possession of all ----------- real property which constitute Purchased Assets immediately upon the Closing. ARTICLE 4 CONDITIONS TO THE DEBTORS' OBLIGATIONS The Debtors' obligations to consummate the transactions contemplated by this Agreement are subject, in the Debtors' discretion, to the satisfaction at or prior to the Closing Date of each of the following conditions. 4.1 Representations, Warranties and Covenants. All representations and ----------------------------------------- warranties of Purchaser contained in this Agreement shall be true and correct at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date and Purchaser shall have performed all agreements and covenants required by this Agreement to be performed by it prior to or at the Closing Date. On the Closing Date, there shall be delivered to the Company a certificate (dated as of the Closing Date and signed by an Authorized Officer of Purchaser) as to the matters set forth in this Section 4.1. 4.2 No Injunction. No injunction,. stay or restraining order shall be in ------------- effect prohibiting the consummation of the transactions contemplated by this Agreement. 4.3 Legal Opinion. Purchaser shall have furnished the Debtors with an ------------- opinion of counsel dated as of the Closing Date that Purchaser is a limited liability company in good standing in the State of Delaware and that execution of this Agreement has been duly authorized by the Purchaser's members. 4.4 Certificates and Other Documents. Purchaser shall have furnished the -------------------------------- Debtors with (a) such certificates of an Authorized Officer of Purchaser to evidence compliance with the conditions set forth in this Article 4 as may be reasonably requested by the Debtors, (b) each of the deliveries required under Section 3.3 above and (c) all other documents and certificates reasonably requested by the Debtors. 4.5 Sale Order. On or before August 15, 1997, the Court shall have ---------- entered an order approving the sale of the Purchased Assets to Purchaser pursuant to the terms of this Agreement and pursuant to Sections 363 and 365 and 1146(c) of the Bankruptcy Code. Each of the preceding conditions shall be satisfied in the sole discretion of the Company and may be waived only if such waiver is set forth in a writing executed by the Company, which may be done without further order of the Court and without notice to any other entity. -18- ARTICLE 5 CONDITIONS TO PURCHASER'S OBLIGATIONS Purchaser's obligation to consummate the transactions contemplated by this Agreement is subject, in the discretion of Purchaser, to the satisfaction at or prior to the Closing Date of each of the following conditions. 5.1 Representations, Warranties and Covenants. All representations and ----------------------------------------- warranties of the Debtors contained in this Agreement shall be true and correct at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date and the Debtors shall have performed all agreements and covenants required by this Agreement to be performed by each of them prior to or at the Closing Date. On the Closing Date, there shall be delivered to Purchaser a certificate (dated as of the Closing Date and signed by an Authorized Officer of each of the Company and Parent) as to the matters set forth in this Section 5.1. 5.2 Intentionally Omitted. 5.3 Sale Order. On or before August 15, 1997, the Court shall have ---------- entered an order pursuant to Sections 105, 363 and 365 and 1146(c) of the Bankruptcy Code substantially in the form of the order attached hereto as Exhibit 5.3 with such changes as shall be satisfactory to the Purchaser in its - ----------- sole discretion (the "Sale Order"). Purchaser shall be entitled to, and is not ---------- waiving, the protection of section 363(m) of the Bankruptcy Code, the mootness doctrine or any similar statute or body of law if the Closing occurs in the absence of the Sale Order having become a Final Order. 5.4 No Injunction. No suit, action or other proceeding, or injunction or ------------- final judgment relating thereto, shall be threatened or pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with the transactions contemplated hereby, or that would have a material adverse effect on the business, financial condition, operating results, assets, operations or business prospects of the Company or materially adversely affect the right of Purchaser to own the Purchased Assets, and no investigation that would result in any such suit, action or proceeding shall be pending or threatened. 5.5 Good Standing Certificates. The Company shall have furnished to -------------------------- Purchaser certificates as to the good standing of the Company in its jurisdiction of incorporation and in each jurisdiction in which it conducts business, in each case certified by the Secretary of State of the applicable jurisdiction; provided, however, no such certificate shall be necessary so long as the failure to so furnish would not impair or impede the ability of Purchaser to conduct Store Closing Sales at any Store located in a state for which the Debtors fail to provide such certificate. Parent shall have furnished to Purchaser a certificate as to the good standing of Parent in its jurisdiction of incorporation certified by the Secretary of State of such jurisdiction. 5.6 Licenses and Permits. All licenses, permits and authorizations that -------------------- are required -19- by Purchaser to own and operate the Stores, the Warehouses and the Purchased Assets will have been transferred to or obtained by (or, if not required at Closing, applied for by) Purchaser on terms and conditions no less favorable to Purchaser than they are to the Debtors to the extent transferable by Debtors or ordered by the Court. 5.7 Title Insurance and Surveys. --------------------------- (a) Upon the transfer or conveyance to Purchaser or its nominee, assignee or designee of any parcel of owned Real Estate included in the Purchased Assets, the Company shall deliver to Purchaser an ALTA Form B - 1987 Owner's Policy of Title Insurance (or equivalent policy reasonably acceptable Purchaser if the owned real property is located in a state in which an ALTA Form B - 1987 Owner's Policy of Title Insurance is not customarily issued), issued by Chicago Title Insurance Corporation (the "Title Insurer"), in an amount equal to the fair market value of such real property (including all improvements located thereon) reasonably determined by Purchaser, insuring title to such real property to be in Purchaser as of the Closing, subject only to liens for current Taxes not yet delinquent and such other matters described in Schedule 6.10 and such other title exceptions caused by, through or under Purchaser. The costs and expenses of each of the title insurance policies to be delivered hereunder shall be borne by Purchaser. (b) With respect to each parcel of real property as to which a title insurance policy is to be issued at the Closing, the Debtors shall have delivered to Purchaser a current survey of such real property, prepared by a licensed surveyor and conforming to current ALTA standards for land title surveys, disclosing the location of all improvements, easements, party walls, sidewalks, roadways, utility lines and other matters customarily shown on such surveys, and affirmatively showing access to public streets and roads (the "Survey") Purchaser hereby acknowledges receipt of a Survey with respect to ------ each parcel of real property that is a part of the Real Estate and that such Survey is acceptable to Purchaser. 5.8 Intentionally Deleted. 5.9 Leases. Purchaser shall have been furnished with complete and ------ accurate copies of all Leases, including all amendments thereto, certified by an Authorized Officer of the applicable Debtor. 5.10 Certificates and Other Documents. Purchaser shall have been furnished -------------------------------- with (a) such certificates of Parent's and the Company's officers to evidence compliance with the conditions set forth in this Article 5 as may be reasonably requested by Purchaser, (b) each of the deliveries required under Section 3.2 above, and (c) all other documents and certificates reasonably requested by Purchaser, including without limitation, certified copies of the resolutions of the Company's and Parent's boards of directors approving the transactions contemplated by this Agreement. 5.11 Notice of Sale; Order Limiting Notice. No later than August 6, 1997, ------------------------------------- (a) the Debtors shall have served written notice of the time, date and location of the hearing on approval -20- of the Sale Order and the deadline and other requirements for the filing of objections to the motion seeking entry of the Sale Order to (i) each known creditor of the Debtors holding or asserting a lien against the Purchased Assets, including, without limitation, the persons and entities appearing on the results of the Debtors' tax, lien and judgment searches conducted on behalf of the Debtors; (ii) each known creditor or party in interest holding or asserting of record an interest in the Real Estate, including, without limitation, the person and entities appearing on the title searches conducted on behalf of the Debtors; (iii) each of the potential bidders with respect to the Purchased Assets; (iv) each party that has filed a notice of appearance or requested service in the Bankruptcy Case; (v) counsel to the Committee; (vi) counsel to Purchaser; and (vii) the Office of the United States Trustee; and (b) the Court shall have entered an order (i) providing that the foregoing notice (as to the manner, the amount of notice and the list of the recipients thereof) is adequate and sufficient under the circumstances of the Bankruptcy Case and satisfies the provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the due process requirements of the United States Constitution; and (ii) reducing, pursuant to Rule 9006 of the Federal Rules of Bankruptcy Procedure, the requisite notice period on the Debtors' motion seeking entry of the Sale Order to the period commencing the date the Debtors serve such notice though and including August 14, 1997. 5.12 Material Adverse Change. From August 6, 1997, there shall have been ----------------------- no material adverse change in any of the Purchased Assets or the Leases, business, financial condition, results of operation or prospects of the business conducted at the Stores. 5.13 Board Approval. The approval by the Debtors' respective boards of -------------- directors for the transactions contemplated hereby shall not have been revoked, amended or varied. Each of the preceding conditions shall be satisfied in the sole discretion of Purchaser and may be waived only if such waiver is set forth in a writing executed by Purchaser. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF DEBTORS The Company and Parent hereby represent and warrant to Purchaser as follows: 6.1 Due Incorporation, Etc. ----------------------- (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Massachusetts. The Company has all requisite corporate power and authority to own and operate its business as it is presently being conducted and to own and lease the properties and assets owned or leased by it. The Company is duly licensed and qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased or the operation of its business makes such licensing or qualification to do business necessary except where the failure to be so qualified would not have a material adverse effect on the transactions contemplated by this Agreement. -21- (b) Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Illinois. Parent has all requisite corporate power and authority to own and operate its business as it is presently being conducted and to own and lease the properties and assets owned or leased by it. Parent is duly licensed and qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased or the operation of its business makes such licensing or qualification to do business necessary except where the failure to be so qualified would not have a material adverse effect on the transactions contemplated by this Agreement. 6.2 Subsidiaries. Except as set forth on Schedule 6.2 hereto, the Company ------------ does not own any stock, partnership interest, joint venture interest or other security or interest in any other Person. 6.3 Authorization, No Conflicts, Etc. Subject to and as contemplated by --------------------------------- the Sale Order: (a) The Company has full power and authority to execute and deliver this Agreement, and all other agreements and instruments contemplated hereby or thereby to which the Company is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Company of this Agreement, the other agreements and instruments contemplated hereby and thereby and the transactions contemplated hereby and thereby have been duly and validly authorized by the Company and no other corporate act or proceeding on the part of the Company, its Board of Directors or its stockholders is necessary to authorize the execution, delivery or performance by the Company of this Agreement, or any other agreement or instrument contemplated hereby or thereby or the consummation of the transactions contemplated hereby or thereby. This Agreement, as of the Closing, the other agreements and instruments contemplated hereby or thereby to which the Company is a party will have been duly executed and delivered by the Company and will constitute the valid and binding agreements of the Company, enforceable against the Company in accordance with their terms. Except as set forth in Schedule 6.3 hereto, the execution, delivery and performance of this Agreement, and the other agreements contemplated hereby or thereby and the consummation of the transactions contemplated hereby and thereby by the Company will not: (i) violate any provisions of law applicable to the Company; (ii) with or without the giving of notice and/or the passage of time, conflict with, result in the breach of any provision of, give any third party the right to terminate or to accelerate any obligation under, or result in the creation of any Lien on the Purchased Assets under, the Certificate of Incorporation or Bylaws of the Company or any instrument, license, agreement, lease arrangement, indenture, mortgage, loan agreement, commitment or order to which the Company is a party. or by which any of its assets or properties are bound; or (iii) constitute a violation of any order, judgment or decree to which the Company or any of its Affiliates which are party hereto or thereto, is a party or by which any of its assets or properties are bound. (b) Parent has full power and authority to execute and deliver this Agreement and all other agreements and instruments contemplated hereby or thereby to which Parent is a party, to perform its obligations hereunder and thereunder and to consummate the transactions -22- contemplated hereby and thereby. The execution, delivery and performance by Parent of this Agreement, the other agreements and instruments contemplated hereby and thereby and the transactions contemplated hereby and thereby have been duly and validly authorized by Parent and no other corporate act or proceeding on the part of Parent, its Board of Directors or its stockholders is necessary to authorize the execution, delivery or performance by Parent of this Agreement, or any other agreement or instrument contemplated hereby or thereby or the consummation of the transactions contemplated hereby or thereby. This Agreement has been duly executed and delivered by Parent and constitutes the valid and binding agreement of Parent, enforceable against Parent in accordance with its terms, as of the Closing, the other agreements and instruments contemplated hereby or thereby to which Parent is a party will have been duly executed and delivered by Parent and will constitute the valid and binding agreements of Parent, enforceable against Parent in accordance with their terms. Except as set forth in Schedule 6.3 hereto, neither the execution, delivery or performance of this Agreement, and the other documents contemplated hereby or thereby to which Parent is a party, nor the consummation of the transactions contemplated hereby and thereby, will (i) conflict with or result in a breach of any of the provisions of, (ii) constitute a default under, (iii) result in the violation of, (iv) give any third party the right to terminate or to accelerate any obligation under, (v) result in the creation of any Lien on the Purchased Assets under, or (vi) require any authorization, consent, approval, execution or other action by or notice of any court or other governmental body, under the provisions of Parent's certificate of incorporation or bylaws or any indenture, mortgage, lease, loan agreement or other agreement or instrument to which Parent is bound or affected, or any statute, regulation, rule, judgment, order, decree or other restriction of any government, governmental agency or court to which Parent is subject. 6.4 Consents and Approvals. Other than the Sale Order and Final Orders ---------------------- relating to Lease Assignments, the execution and delivery by the Debtors of this Agreement and the other agreements and instruments contemplated hereby and thereby does not, and compliance by the Debtors with the terms hereof and thereof and consummation of the transactions contemplated hereby and thereby will not, require Purchaser, the Debtors to obtain any authorization, consent, approval, exemption or action of, or make any filing with or give any notice to, any court or administrative or governmental body or any other Person pursuant to the Certificate of Incorporation or Bylaws of the Debtors or any law, statute, rule, regulation, agreement, permit, license, instrument, order, judgment or decree to which the Debtors or any of their assets is subject, except as disclosed in Schedule 6.4 hereto or except as would not have a material adverse effect on the transactions contemplated by this Agreement. 6.5 Absence of Violations. Except as disclosed in Schedule 6.5 hereto or --------------------- except as would not have a material adverse effect on the transactions contemplated by this Agreement, the Debtors are not in violation of its Certificate of Incorporation or Bylaws, or in violation (or with or without notice or lapse of time or both would be in violation), in any way with any term or provision of (a) any law, statute, ordinance, rule, regulation, order, writ, judgment, injunction, permit or decree applicable to the Debtors or any of its assets, operations or properties or (b) any agreement, lease, or other document by which it or any of them or any of its assets or properties is bound. -23- 6.6 Licenses and Permits. Except as indicated on Schedule 6.6 or except -------------------- as would not have a material adverse effect on the transactions contemplated by this Agreement, the Debtors own or possess all right, title and interest in and to all permits, licenses, certificates, approvals and other authorizations of federal, state and local governments or other similar rights (collectively, the "Licenses") that are necessary to own and operate the Stores, the Warehouses -------- and/or Purchased Assets, including, without limitation, all Licenses required under any federal, state or local law relating to public health and safety, employee health and safety, pollution or protection of the environment. The Debtors are in compliance with the terms and conditions of such Licenses and has received no notices that it is in violation of any of the terms or conditions of such Licenses. The Debtors have taken all necessary action to maintain such Licenses. No loss or expiration of any such License is threatened, pending or reasonably foreseeable other than expiration in accordance with the terms thereof. 6.7 Inventories. ----------- (a) The Debtors own and will own at all times prior to the Closing good and marketable title to all of the Merchandise included in the Purchased Assets and other Purchased Assets, free and clear of all Liens, other than Liens that, pursuant to the Sale Order, will attach only to the proceeds of the sale of the Purchased Assets pursuant to this Agreement. (b) The Cost Value of the Saleable Inventory included in the Purchased Assets shall be at least $140 million at Closing. (c) Since July 1, 1997 and through the Closing Date, all normal course permanent markdowns on Merchandise located at the Stores will have been taken on a basis consistent with the Company's customary practices and policies. (d) The Debtors have not since July 1, 1997, and shall not up to the Closing Date, marked up or raised the price of any items of Merchandise, or removed or altered any tickets or any indicia of clearance merchandise, except in the ordinary course of business. (e) Since July 1, 1997 and through the Closing Date, the Debtors shall have ticketed or marked all items of inventory received at the Stores prior to the Closing Date in a manner consistent with similar inventory located at the Stores and in accordance with the Debtors' customary practices and policies relative to pricing and marking inventory. The ticketed price of all items of inventory do not include Sales Taxes. (f) Since July 1, 1997, all point of sale activity at the Stores has occurred and will occur up to the Closing Date in the ordinary course of business. (g) The Debtors have not since July 1, 1997 and shall not up to the Closing Date purchase or transfer to or from the Stores any inventory outside the ordinary course, including, without limitation, transfers in anticipation of the Store Closing Sales or the Inventory Taking. The Debtors have not and shall not move inventory or Merchandise to or from the Stores so as to alter the inventory mix, quantities or categories, except in the ordinary course. -24- (h) Supplies (e.g. boxes, bags, twine) have not been since July 1, 1997, and shall not be prior to the Closing Date, transferred by Parent from the Company or between or from the Stores, so as to alter the mix or quantity of supplies at the Stores from that existing on July 1, 1997, other than in the ordinary course of business. ' (i) The Debtors have maintained their pricing files in the ordinary course of business, and prices charged to the public for Merchandise (whether in-Store, by advertisement or otherwise) are the same in all material respects as set forth in such pricing files for the periods indicated therein. All pricing files and records, which include the Merchandise Condition Report, since April, 1997 relative to the Merchandise have been made available to Purchaser. All such pricing files and records are true and accurate in all material respects as to the actual cost to Debtors for purchasing the goods referred to therein and as to the selling price to the public for such goods as of the dates and for the periods indicated therein. (j) To the best of the Debtors' knowledge, all Merchandise is in compliance with all applicable federal, state or local product safety laws, rules and standards. The Debtors have provided Purchaser with their historic policies and practices regarding product recalls prior to the Inventory Taking. (k) Since July 1, 1997, through the Closing Date, Debtors have not taken any actions the result of which is to materially increase the cost of operating the Store Closing Sales, including, without limitation, increasing salaries or other amounts payable to employees. (l) With respect to the Purchased Assets or the Leases, as of the date of hereof, the Debtors are current in the payment of all post-petition rent, telephone, utilities, taxes, insurance and advertising liabilities. 6.8 Insurance. The insurance coverage for the Company is customary for --------- well-insured businesses of similar size engaged in similar lines of business. Except as set forth on Schedule 6.8 hereto, to the knowledge of the Company and Parent, all insurance policies which cover the Company prior to Closing Date will continue to provide coverage after the Closing Date in amounts with deductibles consistent with those currently in effect for all occurrences (regardless of when the claim is made) prior to the Closing Date. 6.9 Assets. To the knowledge of the Debtors, the Purchased Assets are in ------ good working condition, subject to ordinary wear and tear resulting from continued operations in the ordinary course of business, have been properly maintained, are suitable for their present and intended uses and, in the case of any improvements, are structurally sound, and there is no defect in any of the Purchased Assets which individually or in the aggregate reasonably could have a material adverse effect on the use, condition, value, or operations of its business. -25- 6.10 Real Properties. --------------- (a) Schedule 6.10 hereto identifies all stores and warehouses used in the conduct of the Lechmere and Home Image businesses. (b) Except as set forth in Schedule 6.10, each Debtor has (i)(A) with respect to the Real Estate, good and indefeasible fee simple title to such properties, free and clear of all liens, leases, security interests, charges, restrictions and encumbrances, including, without limitation, encumbrances relating to financial arrangements (including, without limitation, guarantees, pledges, collateral assignments and other similar arrangements) (collectively "Liens"), except for Liens if any, for real property taxes not yet due and - ------ payable and Liens which, individually or in the aggregate, do not materially detract from the value, or interfere with the present or intended use, of the property subject thereto and (B) with respect to such real properties leased by it, valid and subsiding leases for the term set forth with respect to each such lease on Schedule 6.10 and (ii) all easements and rights, including but not limited to easements for power lines, water lines, sewers and roadways, necessary to conduct the business conducted on such properties. There are no leases, subleases, licenses, concessions or other agreements, written or oral, granting to any person the right of use or occupancy of the Real Estate or any portion thereof and, other than the right of Purchaser pursuant to this Agreement, there are no outstanding options or rights of first refusal to purchase any such properties or any portion thereof or interest therein. (c) Schedule 6.10 identifies all leases (including all amendments thereto). Complete and correct copies of all leases referred to in Schedule 6.10 have been delivered to or made available for inspection by Purchaser and none of such leases or policies have been modified in any material respect except to the extent that such modifications are disclosed by the copies delivered to or made available for inspection by Purchaser. (d) Except as otherwise disclosed in Schedule 6.10 hereto or as a result of the filing of the Bankruptcy Case, to the best of the Company's and Parent's knowledge, neither the Company, nor any other party thereto, is in material default or breach of any leases identified on Schedule 6.10, no fact or circumstance exists which, with the passage of time or the giving of notice, could become a material default or breach of any such lease and all such leases shall remain in full force and effect notwithstanding the transactions contemplated hereby. (e) All such real properties have access to public roads. (f) To the knowledge of the Debtors, all Stores and Warehouses, including buildings and improvements located thereon conform in all material respects to all applicable subdivision, building code, health, safety and zoning ordinances, and other laws, regulations and requirements relating to the use and operation thereof. 6.11 Tangible Personal Property. Except as set forth on Schedule 6.11 -------------------------- hereto: (a) the Debtors have and as of the Closing will have good and marketable title to all of the items of tangible personal property included in the Purchased Assets and the other Purchased Assets; and -26- (b) all such tangible personal property together with the other Purchased Assets is owned free and clear of any Liens, other than Liens that, pursuant to the Sale Order, will attach only to the proceeds of the sale of the Purchased Assets pursuant to this Agreement, including without limitation, Liens in connection with financial arrangements such as guarantees, pledges, collateral assignments and other similar arrangements. The Purchased Assets, together with the Excluded Assets, constitute all of the assets used by the Debtors in the conduct of its business at the Stores and Warehouses. 6.12 [Intentionally omitted] 6.13 Disclosure. No representation or warranty of the Company or Parent ---------- contained in this Agreement nor any schedule, attachment or exhibit hereto, and no statement contained herein or in any certificate or document furnished to Purchaser pursuant to the transactions contemplated hereby, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact or condition known to the Company or Parent which has not been disclosed to Purchaser and which materially affects adversely, or could reasonably be expected to materially affect adversely, the financial condition, operating results, assets, supplier relations or business prospects of the Company or the Purchased Assets. 6.14 Closing Date. The representations and warranties of the Company and ------------ Parent contained in this Article 6 and elsewhere in this Agreement and all information contained in any exhibit, schedule or attachment hereto or in any writing delivered by, or on behalf of, the Company or Parent to Purchaser will be true and correct in all material respects on the Closing Date as though then made. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to the Debtors as follows: 7.1 Due Incorporation, Etc. Purchaser is a limited liability company duly ----------------------- organized, validly existing and in good standing under the laws of the State of Delaware. 7.2 Authorization, No Conflicts, Etc. Purchaser has all requisite --------------------------------- corporate power and authority to enter into this Agreement and the other agreements and instruments contemplated hereby and thereby to which it is a party and to carry out the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement the other agreements and instruments contemplated hereby and thereby and the consummation of the transactions contemplated hereby and thereby by Purchaser have been or prior to the Closing will be duly authorized by all requisite corporate action of Purchaser. This Agreement has been duly executed and delivered by Purchaser and constitutes the valid and binding obligations of Purchaser, enforceable against it in accordance with its terms. As of the Closing Date, the other agreements contemplated hereby and thereby to which Purchaser is a party will have been duly -27- executed and delivered by Purchaser and will constitute the valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their terms. The execution, delivery or performance of this Agreement and the other documents contemplated hereby to which Purchaser is a party, and the consummation of the transactions contemplated hereby and thereby, will not (i) conflict with or result in a breach of any of the provisions of, (ii) constitute a default under, (iii) result in the violation of, (iv) give any third party the right to terminate or to accelerate any obligation under, or (v) require any authorization, consent, approval, execution or other action by or notice of any court or other governmental body, under the provisions of Purchaser's Certificate of Incorporation or Bylaws or any indenture, mortgage, lease, loan agreement or other agreement or instrument to which Purchaser is bound or affected, or any statute, regulation, rule, judgment, order, decree or other restriction of any government, governmental agency or court to which Purchaser is subject. 7.3 Closing Date. The representations and warranties of Purchaser ------------ contained in this Article 7 and elsewhere in this Agreement and all information contained in any exhibit, schedule or attachment hereto or in any writing delivered by, or on behalf of, Purchaser to the Debtors will be true and correct in all material respects on the Closing Date as though then made. ARTICLE 8 COVENANTS PRIOR TO CLOSING 8.1 Affirmative and Negative Covenants Pending Closing. Except as -------------------------------------------------- expressly set forth below, during the period from August 6, 1997 to the Closing Date, the Company and the Parent covenant and agree that they each shall, unless otherwise agreed with Purchaser: (a) Affirmative Covenants Pending Closing. ------------------------------------- (i) Preservation of Personnel. Use commercially reasonable ------------------------- efforts to preserve intact and keep available the services of the Debtors' present employees usually employed at the Stores and Warehouses; (ii) Insurance. Use commercially reasonable efforts to keep in --------- effect all insurance policies described in Section 6.8 and other customary casualty, public liability, product liability, worker's compensation and other insurance policies through the Closing Date, in coverage amounts not less than those in effect at the date of this Agreement; (iii) Preservation and Advancement of the Business; Maintenance --------------------------------------------------------- of Properties, Contracts. Continuously operate the business conducted at ------------------------ the Stores during normal operating hours, keep its properties intact, perform its agreements and obligations, pay its post-petition payables promptly as they become due (without extension) in accordance with the terms thereof, maintain all of its physical properties in good repair and operating condition, subject only to ordinary wear and tear, and in accordance with the terms and provisions of the Leases; -28- (iv) Ordinary Course of Business. Except with respect to --------------------------- replenishment which Purchaser acknowledges has not occurred and will not occur in the ordinary course, operate the business conducted at the Stores and Warehouses solely in the ordinary course and in the normal, usual and customary manner. Without limiting the foregoing: (A) no prices have been or will be raised and no pricing files altered since July 1, 1997, other than prices for items put on and taken off sale in the ordinary course of business; (B) all ticketing, including ticketing of on-order inventory received, has been and will be done in accordance with Debtors customary ticketing practices; (C) all normal course hard markdowns have been and will be taken consistent with customary practices, including, without limitation, markdowns on defective and unsalable inventory; (D) Debtors have not and shall not transfer to or from the Stores and Warehouses any inventory outside the ordinary course of business, including, without limitation, transfers in anticipation of the Store Closing Sales or the inventory taking. No movement of inventory to or from the Stores and Warehouses so as to alter inventory mixes, quantities or categories, except in the ordinary course has occurred or will occur from and after July 1, 1997; (E) no sales or in-store promotions (including POS promotions) to the public have been or will be promoted or advertised, except for the Debtors' historic and customary promotions for all of their locations. (b) Negative Covenants Pending Closing. Except as expressly set forth ---------------------------------- below, the Company and the Parent each shall not, without the consent of Purchaser: (i) Disposition of Assets. Sell or transfer, or mortgage, --------------------- pledge or create or permit to be created any Lien on any of the Purchased Assets other than the sale of inventory in the ordinary course of business consistent with past practice; (ii) Contracts. Reject any contract relating to the Purchased --------- Assets or the Stores or seek or obtain an order approving such rejection in which the reference date of the rejection is prior to the final day of the Store Closing Sale at the Store at which the Purchased Assets are situated. (iii) Leases. Renew or amend Leases, enter into leases or grant ------ or terminate any other interests in the Stores; or -29- (iv) Disclosures. Take any action which would require ----------- disclosure under Section 6.13 hereof. (v) Inventory Level. Have less than $140 million of Saleable --------------- Inventory at Cost Value. (vi) Encumbrances. Encumber, sublease or otherwise grant any ------------ rights with respect to the Real Estate and Leases. 8.2 Investigation by Purchaser. The Debtors shall allow Purchaser and its -------------------------- representatives and financing sources, during regular business hours, to make such investigation of the business, properties, employees, auditors, books and records of the Company and the Parent to the extent such investigation relates to the Stores or Purchased Assets, and to conduct such examination of the financial condition of the Company, as Purchaser deems necessary or advisable to familiarize itself with such business, properties, books, records, financial condition and other matters, including with respect to all operating and environmental matters. The Debtors shall cooperate in providing all information reasonably requested by Purchaser relating to the Purchased Assets, the Leases or the transactions contemplated hereby, including with respect to insurance and Licenses. 8.3 Consents and Further Actions. Subject to the terms and conditions ---------------------------- herein provided, Parent, the Company and Purchaser covenant and agree to use their best efforts to take, or cause to be taken, all action, or do, or cause to be done, all things, necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including all closing conditions to be satisfied. ARTICLE 9 COVENANTS AFTER CLOSING 9.1 Store Closing Sales. ------------------- (a) Debtors hereby grant and convey to the Purchaser an irrevocable nonexclusive license to occupy and operate the Stores as Debtors' agent, for the purpose of conducting store closing sales or other sales (the "Store Closing ------------- Sales") in accordance with the provisions of this Section 9.1. - ----- (b) The Store Closing Sales shall commence after the Closing (the time of such commencement, the "Sale Commencement Date"). The Store Closing ---------------------- Sales shall terminate no later than twelve (12) complete weeks after the Closing Date or as may be extended by Purchaser on a Store by Store basis (including for purposes of calculation the Sale Commencement Date) (the "Sale Termination ---------------- Date"). "Sale Term" shall mean the period between the Sale Commencement Date and - ---- --------- Sale Termination Date at each respective Store. Purchaser may, at its sole discretion, terminate the Store Closing Sales at any Store prior to the Sale Termination Date; provided, however, that in no event may the Store Closing -------- ------- Sales at any of -30- the Stores be conducted after the Sale Termination Date unless mutually agreed by Debtors and Purchaser in writing and in such event no further Court approval or order or notice to third parties is required. Purchaser's representatives, supervisors and employees shall have the right to enter any Store and the use of one office in the Debtors' corporate offices during normal business hours on or after the date hereof to prepare for the Store Closing Sales, and the Debtors shall cooperate reasonably with Purchaser in such preparation. (c) Purchaser shall conduct the Store Closing Sales under the name of "Lechmere" and "Home Image" and derivatives thereof and, subject to the Sale Order, shall have the right to conduct the Store Closing Sales in the manner which Purchaser deems appropriate, including by advertising, posting signs or otherwise promoting the Store Closing Sales as a "store closing" or a "going out of business" or similar type sale without further consent of any person notwithstanding the terms of any Lease that purport to restrict the conduct of such Store Closing Sales. In addition to any other rights granted to Purchaser hereunder and subject to entry of the Sale Order, in conducting the Sales, the Purchaser, in the exercise of its sole discretion, shall have the right: (i) to establish and implement advertising, signage, and promotion programs consistent with the "store closing" or "going out of business" theme (including without limitation, by means of media advertising, banners, A-frame, and similar interior and exterior signs); (ii) to establish sale prices and Store hours; (iii) to use without charge during the Sale Term all furniture, fixtures and equipment in the Stores and Warehouses, motor vehicles, advertising materials, bank accounts, Store-level customer lists and mailing lists, computer hardware and software, intangible assets (including Company's name, logo and tax identification numbers), Store keys, case keys, security codes and safe and lock combinations required to gain access to and operate the Stores, and any other assets of Company located at the Stores or the Warehouses (whether owned, leased, or licensed); (iv) to transfer Merchandise between Stores and/or between the Stores, the Warehouses and other stores of Merchant and its affiliates; and (v) to use (i) Company's central office facilities, central and administrative services and personnel to process payroll, perform MIS services and cash reconciliation, and provide other central office services necessary for the Sale, and (ii) one office located at Company's central office facility. -31- (d) The Sale Order shall provide that each and every federal, state or local agency, department or governmental authority with regulatory authority over the Store Closing Sales and all newspapers and other advertising media in which the Store Closing Sales are advertised shall be directed to accept the Sale Order as binding and to allow the Debtors and Purchaser to consummate the transactions provided for in this Agreement, including, without limitation, the conducting and advertising of the Store Closing Sales in the manner contemplated by this Agreement, that no further approval, license or permit of any governmental authority shall be required, and that all utilities, landlords, creditors and all persons acting for or on their behalf shall not interfere with or otherwise impede the conduct of the Store Closing Sales, institute any action in any court (other than in the Court) or before any administrative body or any other tribunal of any kind or type which in any way directly or indirectly interferes with or obstructs or impedes the conduct of the Store Closing Sales. (e) Debtors shall notify all customers having Layaway, Repair, and Special Order Merchandise as disclosed to Purchaser in writing prior to the Sale Commencement Date (the "Layaway Items") that they have seven (7) days from the ------------- Sale Commencement Date (the "Layaway Pick-Up Date") to pick up and pay in full -------------------- or pay off all amounts due and owing for the Layaway Items. Any amounts paid for such Layaway Items on or before the close of business in the Stores on the Layaway Pick-Up Date shall be the sole account of Purchaser. (f) Debtors hereby agree that Debtors shall take no action relating to the Stores which would disturb Purchaser's peaceful and quiet possession thereof pursuant to the license granted in Section 9.1. (g) During the Sale Term, Purchaser shall accept returns of goods sold by the Debtors from the Stores prior to the Sale Commencement Date ("Returned Merchandise"), provided such goods are accompanied by the original -------------------- Store receipt and such return is otherwise in accordance with the applicable return policy for such Store in effect prior to the Sale Commencement Date. The Debtors shall reimburse Purchaser in cash for the amount of any store credit or refund given to any customer in respect of Returned Merchandise. To the extent that Returned Merchandise is salable as first quality inventory, it shall be included in Merchandise and for purposes of calculation of the Guaranteed Amount, shall be valued at the Cost Value applicable to such item multiplied by the compliment of the prevailing Sale discount at the time of the return. If the Returned Merchandise constitutes Defective Merchandise, it shall be included in Merchandise and assigned a Cost Value in accordance with the applicable provisions of Section 2.4 above. Subject to the Debtors' reimbursement to Purchaser of the amount of any store credit or refund granted for any Returned Merchandise, the aggregate Cost Value of the Merchandise shall be increased by the Cost Value of any Returned Merchandise included in Merchandise (determined in accordance with this paragraph 9.l(b)), and the Guaranteed Amount shall be adjusted accordingly. Any Returned Merchandise which is not included in Merchandise shall be disposed of by Purchaser in accordance with instructions received from the Debtors or, in the absence of such instructions, returned to the Debtors at the end of the Sale Term. Any increases in the Guaranteed Amount and any reimbursements due to Purchaser as result of Returned Merchandise shall be accounted for and paid by Purchaser and/or the Debtors, as applicable, as soon as practicable. -32- (h) Purchaser hereby agrees to accept gift certificates issued by the Debtors prior to the Closing Date, and the Debtors agree to reimburse Purchaser for the full amount of any such gift certificates accepted promptly upon receipt of a statement from Purchaser detailing such gift certificates. (i) To the extent practicable and otherwise permitted by applicable law, Purchaser shall sell service contracts in appliances, stain protection in furniture and product replacement warranties on behalf of and in the name of the Debtors in other areas at the discretion of the Debtors. All proceeds of such sales, less a sales commission of 10% to which Purchaser shall be entitled, shall accrue for the benefit of the Debtors; provided that the Debtors reimburse -------- Purchaser for all costs and expenses incurred by or on behalf of the Debtors in connection with such sales. In no event shall Purchaser have any liabilities under any such warranties or contracts. (j) During the Sale Term, Purchaser shall have the nonexclusive right to the quiet, peaceful and uninterrupted use of the Stores for the Store Closing Sales and to the reasonable use of all utilities necessary for the Store Closing Sales including, without limitation, gas, electricity and water, and all leasehold improvements. Nothing contained in this paragraph (j) is intended to, nor shall it constitute, Purchaser's election or direction to assume or assign any lease under Section 11.1 or otherwise. The Debtors shall not, throughout the Sale Term, take any actions the result of which is to materially increase the cost to Purchaser of operating the Store Closing Sales, including, without limitation, increasing salaries or other amounts payable to employees. (k) At the end of the Sale Term in each Store and, in any event, not later than the Sale Termination Date applicable thereto, Purchaser shall leave each Store in "broom clean" condition and shall repair damage to the premises caused by removal, if any, of the Store Fixtures by Purchaser or actions of Purchaser, ordinary wear and tear excluded; provided however, Purchaser shall -------- ------- not be obligated to leave in broom clean condition any Store that is the subject of an Assigned Lease. (l) Except as otherwise contemplated in this Agreement or the Sale Order, including in connection with the conduct of the Store Closing Sales, Purchaser will comply with applicable law. 9.1A-1. Proceeds. For purposes of this Section 9.1A, "Proceeds" shall -------- -------- mean the aggregate of: (a) the total amount (in dollars) of all sales of Merchandise under this Agreement, exclusive of (i) Sales Taxes, (ii) credit card and bankcard fees and chargebacks, and (iii) returns, allowances and customer credits; and (b) all proceeds of Merchant's insurance for loss or damage to Merchandise or loss of cash arising from events occurring during the Sale Term. Purchaser shall be entitled to retain, as its sole and exclusive property, all Proceeds, free and clear of Liens. 9.1A-2. Deposit of Proceeds. All cash Proceeds shall be deposited by ------------------- Purchaser in agency accounts established by Purchaser (the "Accounts"). -------- Purchaser may, in its discretion, -33- designate new or existing accounts of Purchaser or Company as the Accounts, provided that such accounts are dedicated solely to the deposit of Proceeds and the disbursement of amounts payable by Purchaser hereunder. Purchaser shall exercise sole signatory authority and control with respect to the Accounts. Company shall promptly upon Purchaser's request execute and deliver all necessary documents to open and maintain the Accounts. To the extent that Purchaser shall elect to use existing accounts of Company as the Accounts, (i) commencing on the first business day following the Sale Commencement Date, and on each business day thereafter, Company shall pay to Purchaser by wire funds transfer all collected funds constituting Proceeds deposited in such Accounts, and (ii) upon request, Company shall deliver to Purchaser copies of all bank statements and other information relating to such Accounts. Company shall not be responsible for and Purchaser shall pay as an expense hereunder, all bank fees and charges, including wire transfer charges, related to the Accounts, whether received during or after the Sale Term. 9.1A-3. Credit Card Proceeds. Purchaser shall have the right (but not the -------------------- obligation) to use Company's credit card facilities (including Company's credit card terminals and processor(s), credit card processor coding, merchant identification number(s) and existing bank accounts) for credit card Proceeds. In the event that Purchaser elects so to use Company's credit card facilities, Company shall process credit card transactions on behalf of Purchaser and for Purchaser's account, applying customary practices and procedures. Without limiting the foregoing, Company shall cooperate with Purchaser to down-load data from all credit card terminals each day during the Sale Term and to effect settlement with Company's credit card processor(s), and shall take such other actions necessary to process credit card transactions on behalf of Company under Purchaser's merchant identification number(s). All credit card Proceeds will constitute the property of the Purchaser and shall be held by Company in trust for Purchaser. Company shall deposit all credit card Proceeds into a designated account and shall transfer such Proceeds to Purchaser daily (on the date received by Company if received prior to 12:00 noon, or otherwise within one business day) by wire transfer of immediately available funds. At Purchaser's request, Company shall cooperate with Purchaser to establish merchant identification numbers under Purchaser's name to enable Purchaser to process all credit card Proceeds for Purchaser's account. Company shall not be responsible for and Purchaser shall pay as an expense hereunder, all credit card fees, charges, and chargebacks related to the sale, whether received during or after the Sale Term. Notwithstanding anything to the contrary contained in this Section 9.1A-3, Purchaser shall not have the right to use Company's private label charge cards. 9.1A-4. The Sale Order shall grant Purchaser a first priority security interest in the Merchandise to secure the payment of the Proceeds to Purchaser and such first priority security interest shall be effective without the necessity of filing or recording any instrument or UCC statement. 9.2 Services. -------- (a) (i) For the period of the Sale Term the Debtors shall, or shall cause their affiliates to, provide to the Purchaser and its subsidiaries services necessary for the Purchaser to conduct the Store Closing Sales and liquidate the Purchased Assets, including without limitation those services described on Exhibit 9.2 (the "Services"), as may be requested by the Purchaser ----------- -------- -34- from time to time upon reasonable notice. In providing the Services, each Debtor, as it deems necessary or appropriate in its sole discretion, may (x) use such personnel of such Debtor or its affiliates, and (y) employ the services of third parties to the extent such third party services can be effectively utilized to provide similar services or are reasonably necessary for the efficient performance of any of such services. (ii) If the Purchaser would like Debtors to provide any services relating to the business in addition to the Services, the Purchaser shall so notify Debtors and during the five days following the receipt of such notice Debtors and the Purchaser will mutually discuss the matter and negotiate in good faith with a view toward the provision of such services. (iii) Unless otherwise agreed by the parties hereto, the nature and scope of the Services shall be essentially identical to the nature and scope of the tasks involved in operating the Stores and the Warehouses prior to the Closing, with such variance as is reasonably related to the Store Closing Sales as conducted by the Purchaser. Unless otherwise agreed by the parties hereto, the nature and scope of Services shall be essentially identical to the services the Parent provided to the Company during the period prior to Closing to the extent the Parent continues to perform such services with respect to its own internal organization; provided that Debtors may not terminate, or reduce in any -------- material respect the amount or scope of, the Services hereunder pursuant to the foregoing sentence without giving reasonable advance written notice to the Purchaser. (b) Limited Warranty. Debtors will provide the Services hereunder in ---------------- good faith, with the care and diligence that they exercise in the performance of such services for their operations and affiliates. The Purchaser hereby acknowledges that Debtors do not regularly provide to third parties services such as the Services as part of their business and that, except as set forth in this subsection (iii), Debtors do not otherwise warrant or assume any responsibility for their Services. The warranty stated above is in lieu of and exclusive of all other representations and warranties of any kind whatsoever. (c) Transition. At any time during the term of this Agreement, the ---------- Purchaser may request Debtors to discontinue performing all or any portion of the Services upon 10 days' prior notice or as otherwise provided on Exhibit 9.2. ----------- (d) Performance Remedy. In the event Debtors fail to provide a ------------------ Service hereunder, or the quality of a Service is not in accordance with Section 9.2(a)(iii) above, the Purchaser will give Debtors prompt written notice thereof. Debtors will then have a reasonable period of time to cure the defective Service. If after such period Debtors have failed to cure the defective Service, in addition to any other remedy available to the Purchaser, the Purchaser may seek an alternative provider for such Service and Debtors shall promptly discontinue performing such Service at the written request of the Purchaser. (e) Staffing. As part of the Services, (i) Purchaser may use the -------- Debtors' employees in the conduct of the Store Closing Sales to the extent Purchaser in its sole discretion deems expedient, and Purchaser may select and schedule the number and type of the Debtors' -35- employees required to perform such Services. Such staffing shall in any case be reasonable staffing for the provision of the Services, including, but not limited to, stocking, merchandising, maintenance and sales staff and supervisors, professionals, or otherwise. Purchaser shall identify any such employees to be used in connection with the provision of the Services (each such employee, a "Retained Employee") prior to the Sale Commencement Date. Purchaser ----------------- will have no responsibility whatsoever with respect to the Retained Employees other than to pay the fees for the Services to the Debtors in accordance with Section 9.3 hereof and nothing contained in this Agreement and none of Purchaser's actions taken in respect of the Store Closing Sales shall be deemed to constitute an assumption by Purchaser of any of the Debtors' obligations relating to any of the Debtors' employees including, without limitation, Worker Adjustment Retraining Notification Act ("WARN Act") claims and other termination type claims and obligations, or any other amounts required to be paid by statute or law; nor shall Purchaser become liable under any collective bargaining or employment agreement or be deemed a joint or successor employer with respect to such employees. Without limiting the generality of the foregoing, it is expressly acknowledged that all Retained Employees providing Services at or with respect to the Stores and the Warehouses remain under the sole management control of the Debtors, subject to the Purchaser's directions to the Debtors as provided herein, and that the Debtors are providing the Services in its capacity as an independent contractor. (ii) Purchaser may in its discretion stop using any Retained Employee at any time during the Store Closing Sales. In the event Purchaser desires to cease using any Retained Employee, Purchaser will use all reasonable efforts to notify the Debtors at least five (5) days prior thereto, except if such termination is "for cause" (such as dishonesty, fraud or breach of employee duties), in which event no prior notice to the Debtors shall be required, provided Purchaser shall notify the Debtors as soon as practicable thereafter. - -------- From and after the date of this Agreement and until the Sale Termination Date, the Debtors shall not transfer or dismiss employees of the Stores except "for cause" without Purchaser's prior consent. (f) Independent Contractors. The Debtors are acting as independent ----------------------- contractors in providing the Services. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, franchise or joint venture relationship between the Debtors and Purchaser, except in connection with the Store Closing Sales, where Purchaser is acting as Debtor's agent. Debtors shall not incur any debts or make any commitments for the Purchaser, except to the extent, if at all, specifically provided herein. Nothing in this Agreement shall constitute or deem the Purchaser to be an employer of the Debtors' employees used to carry out the Services. (g) Information Assistance. Each party will provide to the other ---------------------- party, free of any charge or cost, any information, data, or documents reasonably required for reporting or compliance obligations with any governmental entity, agency, or authority; provided that the provision of such -------- information, data and documents does not result in any undue burden or expense to the providing party. 9.3 Payments by the Purchaser. ------------------------- -36- (a) Fees. From the date the Store Closing Sales begin up to and ---- including, for each Store, the date the Store Closing Sales conclude at each such Store, the Purchaser shall reimburse the Debtors for all direct Store level third party out of pocket costs and expenses incurred in connection with the Store Closing Sales at such Store, the operation of the Warehouses (to the extent utilized by Purchaser) and provision of the Services, including base rent, percentage rent, utilities, common area maintenance and real estate taxes accrued during the Store Closing Sales at such Store, payroll costs and benefits (not to exceed 15% of gross payroll) for Store level employees and Warehouse level employees actually accruing during the term of the Store Closing Sales at such Store or Warehouse, as applicable, insurance, armored car services, bank fees and charge backs, telephone expenses, trash collection, security costs and advertising and promotional expenses. Purchaser may, in its sole discretion, make any payment required by this Section 9.3(a) directly to a third party vendor; provided such payment is made in a timely manner. Subject to Section 11.2, notwithstanding anything else herein the Purchaser's obligations pursuant to this Section 9.3(a) are Store specific, and cease at each Store upon the end of the Sale Term in each Store. The Purchaser shall pay the Debtors out-of- pocket cost and expenses for information management services, payroll processing and similar services included in the Services, provided that the Purchaser shall not be liable to pay the Debtors more than $20,000 per week for all such out-of- pocket costs and expenses for such Services. (b) Payment of Charges. Debtors shall invoice the Purchaser for all ------------------ amounts due under this Section 9.3 weekly. Payments shall be due five (5) business days from the date of receipt of the invoice. The Purchaser and its agents and representatives shall have the right to examine any and all books and records as it reasonably requests in order to confirm and verify the amount of any invoice pursuant to this Section 9.3 and Debtors shall cooperate in any reasonable manner in such examination as the Purchaser shall request. (c) Disputed Charges; Claims. In the event the Purchaser disputes any ------------------------ charges invoiced by Debtors pursuant to this Agreement, the Purchaser shall deliver a written statement describing the dispute to Debtors within 5 days following receipt of the disputed invoice. The statement shall provide a sufficiently detailed description of the disputed items. Fees not so disputed shall be deemed accepted. If the parties cannot resolve the dispute in a mutually satisfactory manner, the dispute shall be submitted within 30 days from the date of notice, to the Court for resolution. The Purchaser and the Debtors shall each bear their own costs and expenses in connection with such resolution by the Court. 9.4 Further Transfers and Assurances. Parent and the Company will, and -------------------------------- will cause their Affiliates to, execute and deliver such further instruments of conveyance and transfer and take such additional action as Purchaser may reasonably request to effect, consummate, confirm or evidence the transfer to Purchaser of the Purchased Assets. Parent and the Company will execute such documents as may be necessary to assist Purchaser in preserving or perfecting its rights in the Purchased Assets. 9.5 Communications. All mail and other communications relating to the -------------- Purchased Assets and the Leases received by the Company or Parent at any time after the Closing Date shall be promptly turned over to Purchaser. All mail and other communications relating to the -37- Excluded Assets or the Excluded Liabilities or the Company received by Purchaser at any time after the Closing shall be promptly turned over to the Company.. 9.6 Taxes; Recording Charges; Escrow Fee; Rent Proration. All Taxes ---------------------------------------------------- relating to Real Estate due and payable after the Closing which relate to periods prior to the Closing shall be the responsibility of the Debtors and shall be prorated at Closing. All transfer, documentary, sales, use, stamp, registration, conveyance, income, gains, value added or other Taxes and fees arising out of the sale of the Purchased Assets or otherwise incurred in connection with this Agreement or the consummation of the transactions contemplated hereby and all charges for or in connection with the recording of any document or instrument contemplated hereby shall be the responsibility of the Debtors when due. The Debtors will, at their expense, file all necessary Tax returns and other documentation in connection with the Taxes and fees encompassed in this Section 9.6. The Debtors and Purchaser shall each pay one half of the escrow fee charged by the Title Insurer. Purchaser shall pay to the Debtors an amount equal to the rent and all third-party out of pocket recurring charges incident to the Leases for the period commencing on the Closing Date and ending on August 31, 1997. At the Debtors' request, Purchaser will provide to the Debtors at the Closing a certificate which sets forth the Purchase Price allocated to the Real Estate; provided that in no event shall such allocation exceed $15,000,000 in the aggregate. 9.7 License of Excluded Proprietary Rights. The Debtors hereby grant to -------------------------------------- Purchaser a license to use all Proprietary Rights which are used in, useful for or otherwise associated with the ownership and operation of the Purchased Assets, the Stores and the Leases, including the use of the names "Lechmere" and "Home Image" in connection with the Store Closing Sales, from the Closing Date through the date which is 300 days after the Closing Date. 9.8 Agent. The Purchaser agrees to act as the Debtor's agent, and the ----- Debtors hereby appoints the Purchaser their agent until the end of the Store Closing Sales. 9.9 Access to Documents. For a period of 5 years from the Closing Date ------------------- the Debtors shall permit the Purchaser reasonable access during normal business hours, at no cost to the Purchaser, to all books, ledgers, files, documents, correspondence and business records necessary for the operation of the Stores and the Warehouses or related to the Purchased Assets, including, without limitation, all telephone numbers, related sales and billing information, manuals, files (including sales, billing, service and accounting information) software, brochures and sales and marketing materials and all lists and records pertaining to customers, suppliers and distributors. 9.10 Insurance. To the extent requested by Purchaser, the Debtors shall --------- name Purchaser and/or its nominee(s) as an additional insured on their insurance policies to the extent such policies relate to the Purchased Assets and the Leases. Purchaser shall name Debtors as an additional insured on Purchaser's general liability policies and Purchaser will not cancel such insurance policies without Debtors' prior written consent. Without the prior written consent of Purchaser, the Debtors will not cancel any insurance policy (i) relating to the Real Estate prior to 30 days after the Closing Date or (ii) relating to a Lease until the earlier of the Deemed Rejection Date with respect to such Lease or the date of the Lease Assignment Order with respect to such Lease. Purchaser shall be named as an additional insured on any insurance relating to the Real -38- Estate and the proceeds from any casualty or condemnation in whole or in part relating to the Real Estate shall be subject to the terms and provisions of Section 11.8. The cost of such insurance shall be borne by Purchaser. ARTICLE 10 INTENTIONALLY DELETED ARTICLE 11 LEASES/REAL ESTATE 11.1 Lease Assignment Election. Purchaser shall have the right to ------------------------- designate at any time from time to time for a period of 270 days after the Sale Order is entered (hereinafter, the "Election Period") which of the Leases it --------------- desires to acquire or to cause any one or more of its nominees, assignees or designees to acquire (subject to the Court's issuance of an order (a "Lease Assignment Order") in form and substance reasonably acceptable to Purchaser authorizing and approving Debtors' assumption and assignment to Purchaser or its nominee, assignee or designee a Lease Assignment Order). During the Election Period, Purchaser shall have the right, which right may be exercised at any time and from time to time in its sole and absolute discretion, to request in writing that Debtors, under section 365 of the Bankruptcy Code, seek authority to assume and assign to Purchaser or a third party designated by Purchaser any or all of the Leases at no additional cost or expense to Purchaser other than cure amounts required under Section 365(b) of the Bankruptcy Code. As soon as practicable, but no later than three business days following Debtors' receipt of a written request from Purchaser, at any time and from time to time within the Election Period, seeking the assumption and assignment of any Lease to Purchaser or a third party designated by Purchaser, Debtors shall use their best efforts to obtain entry of a Final Order of the Bankruptcy Court approving the assumption of the Leases identified in writing by Purchaser and the assignment of such Leases to Purchaser or a third party as designated in such request (each, an "Assigned Lease"). The term "best efforts" as used in this section shall require Debtors to act as reasonably requested by Purchaser, provided however, that such term shall not require Debtors to pay any funds or cure any amounts or assume any claims but shall require Debtors to pay fees, costs and expenses of its counsel in connection with the prosecution of any motion seeking the entry of any such Final Order. Purchaser shall be entitled to keep and retain, at no additional fee, cost or expense to Purchaser of any nature (except for cure amounts, if any required under Section 365(b) of the Bankruptcy Code) as its sole and exclusive property, and free and clear of any and all Liens (other than those caused directly by Purchaser), any and all proceeds generated by or resulting from the assignment or subletting of any one or more Leases to any one or more third parties. Purchaser shall pay any and all cure amounts required under section 365(b) of the Bankruptcy Code in respect of the Leases it elects to require Debtors to assume and assign to Purchaser or any third party. 11.2 Rejected Leases. From and after the Closing, Debtors shall not --------------- extend, reject or -39- otherwise terminate (or assume and assign to a third party or reject, without Purchaser's prior written consent) any of the Leases until the earliest to occur of (i) ten (10) days following the delivery by Purchaser to the Debtors of written notice indicating that Purchaser waives its right to require Debtors to assume and assign to it or a third party any one or more of the Leases specified therein and that such Lease is to be rejected (a "Rejected Lease"), (ii) the entry of an order by the Bankruptcy Court approving the assumption and assignment of any such Lease to Purchaser or a third party designated by Purchaser, and (iii) the conclusion of the Election Period. Upon the occurrence of any of the events specified in (i), (ii) and (iii) of the preceding sentence, (A) Purchaser shall have no further obligation or liability of any nature for any amounts payable to the lessor under the applicable Lease or for any costs associated with the Store or Warehouse to which the Lease relates, and (B) Debtors shall be solely responsible for all amounts payable or other obligations or liabilities that may be owed to the lessor under or in connection with such applicable Lease, including, without limitation, any damages resulting from the rejection of such Leases under section 365 of the Bankruptcy Code or otherwise (subject only to the provisions of the Lease Guaranty), and for all costs associated with the Stores to which such Leases relate. Promptly following (and in no event later than two days thereafter) the delivery, at any time and from time to time of the notice set forth in (i) of the first sentence of this Section 11.2, Debtors shall seek the entry of an order approving the rejection of the Leases identified in the notice. 11.3 Costs and Expenses. With respect to each Lease, without duplication ------------------ of amounts payable under Section 9.3, the Purchaser shall bear all third party out of pocket recurring charges incident to such Lease from the Closing Date up to and including (i) in the case of an Assigned Lease, the date of the related Lease Assignment Order and (ii) in the case of a Rejected Lease, the earlier of (x) the date that the Debtors are relieved of liability under such Lease or (y) the Deemed Rejection Date, but not earlier than ten days from the date Purchaser gives a designation that it wishes such Lease to be a Rejected Lease under Section 11.2. Purchaser may, in its sole discretion, make any payment required by this Section 11.3 directly to a third party vendor; provided such payment is made in a timely manner. Nothing shall be deemed to require Purchaser or any Affiliate to make any material repairs or capital expenditures with respect to any Stores subject to any Lease and Purchaser may not compel the Debtors to make any such material repair or capital expenditure. 11.4 Master Lease. (a) Subject to entry of the Sale Order with the ------------ provisions set forth in Section 11.4(b) hereof, notwithstanding anything contained in this Agreement to the contrary, the Company acknowledges that the Master Lease is a single lease for the entire premises described therein (the "Master Lease Premises") and is not severable or divisible into separate leases - ---------------------- for separate locations or subsets of locations within the Master Lease Premises. Pursuant to the Sale Order, the Company hereby rejects the Master Lease pursuant to Section 365 of the Bankruptcy Code, effective at the conclusion of the last of the Store Closing Sales in the Master Lease Premises (the "Master Lease ------------ Deemed Rejection Date"). The Company acknowledges its obligation to (i) pay all - --------------------- postpetition rent and to perform all other postpetition obligations under the Master Lease subject to the Bankruptcy Code and the Sale Order through the Master Lease Deemed Rejection Date, subject to Purchaser's obligation to reimburse the Company for its third party out-of-pocket recurring charges incident to the Master Lease -40- Premises from the Closing Date up to and including the Master Lease Deemed Rejection Date as provided in Section 11.3, and (ii) surrender possession of the Master Lease Premises to Lechmere Realty Limited Partnership or its designee within 15 days after the Master Lease Deemed Rejection Date. (b) The Sale Order shall provide that subject to and immediately and automatically upon (i) entry of the Sale Order approving this Agreement (including the provisions of the foregoing paragraph), (ii) the performance of all of the Company's material monetary obligations under the Master Lease from the Sale Commencement Date (excluding real estate taxes for periods occurring prior to the petition date, as to which all parties reserve their rights hereunder) up to and including the Master Lease Deemed Rejection Date and (iii) Lechmere Realty Limited Partnership's obtaining possession of the Master Lease Premises, then any and all Claims (as defined in Section 101(5) of the Bankruptcy Code) of Lechmere Realty Limited Partnership (the lessor under the Master Lease) against the Company, any affiliate or guarantor of the Company arising from the rejection of the Master Lease under Section 502(b)(6) of the Bankruptcy Code or otherwise shall be waived in full without the necessity of any other or further action on the part Lechmere Realty Limited Partnership or any other person, party or entity. (c) The Company shall assign to the lessor under the Master Lease, and the Lessor under the Master Lease shall assume the obligations from and arising after the Master Lease Deemed Rejection date, all of the Company's right, title, and interest as sublandlord under the Sublease with Filene's Basement, Inc. referenced in item 10 of the list of leases in Schedule 6.10(c) hereto. Such assignment and assumption shall be effective immediately prior to the Master Lease Deemed Rejection Date. 11.5 Prosecution, Defense and Settlement of Rejection Claims; Mediation. ------------------------------------------------------------------ The prosecution, defense and settlement of any and all rejection claims filed with respect to the Leases shall be controlled solely by Purchaser, acting reasonably. Except as provided below, any such prosecution, defense or settlement shall be preformed by Debtors at Debtors' expense. To enable Purchaser to control effectively the prosecution, defense and settlement of such rejection claims, Debtors shall regularly (and in any event no less frequently than weekly) keep Purchaser apprised of the status of the litigation of any such claims and any settlement discussions relating thereto. In addition, Debtors shall deliver to Purchaser a monthly listing of the allowed rejection claims. If Debtors believe that Purchaser is not acting reasonably with respect to Purchaser's request regarding the prosecution, defense or settlement of any rejection claim relating to any Lease (including the expenditure of legal or other professional fees in connection with such prosecution, defense or settlement), then Debtors must promptly after such request is given and in no event later than two business days thereafter, either proceed with such prosecution, defense or settlement in accordance with Purchaser's request or submit the issue of the reasonableness of the request regarding such prosecution, defense or settlement (and the expenditure of such legal and other professional fees) to the Bankruptcy Court for prompt determination. 11.6 Communications. Until the earlier of the Deemed Rejection Date of the -------------- Lease or the date of issuance of the Lease Assignment Order with respect to any respect to any Lease (1) -41- the Debtors shall not, without the prior written consent of Purchaser, and shall, if and to the extent directed by Purchaser, (a) renew or amend such Lease, (b) encumber, sub-lease or otherwise grant any rights with respect to such Lease or (c) communicate with the lessor under such Lease, (2) the Debtors shall refer any communications from any such lessor to Purchasers promptly after receipt thereof and (3) the Debtors shall not negotiate or communicate with any third party with respect to any such Lease. 11.7 Sale of Leases. Purchaser shall have the right to market the Leases -------------- in the manner which Purchaser deems appropriate notwithstanding the terms of any such Lease that purports to restrict such activities, including, without limitation, with respect to the erection of visible signs on the premises and access to the premises for the purpose of showing the property. 11.8 Real Estate. If and to the extent that the gross value generated from ----------- the sale or lease of the Real Estate exceeds the aggregate of the sum of (a) $15 million and (b) the fees, costs and expenses of the Purchaser and its Affiliates incident to the Real Estate, including, without limitation, the fees, costs and expenses of, leasing and selling the Real Estate, then, and in such event, such excess proceeds shall be split (i) 10% to Purchaser and (ii) 90% to the Debtors, provided however, in the event Purchaser receives a bona fide offer to sell or lease all or any portion of the Real Estate, Purchaser shall submit the offer to the Debtors for approval, and if Debtors do not approve the offer within ten (10) business days, then Debtors shall pay the carrying costs for all or such portion, as the case may be, of the Real Estate described in the offer for a period of six (6) months and Debtors shall have the right to sell or lease all or such portion, as the case may be, of the Real Estate at its sole discretion within such six (6) month period; provided, however, that if the Debtors have an agreement with a bona fide purchaser for all or any portion, as the case may be, of the Real Estate and Debtors are continuing to pay the carrying costs for all or such portion, as the case may be, of the Real Estate, then Debtors shall continue to have the right to sell or lease all or such portion, as the case may be, of the Real Estate until such agreement is terminated or consummated. Notwithstanding the foregoing, if the Debtors sell or lease all or any portion, as the case may be, of the Real Estate during such six (6) month period described above, for less than the offer submitted to Debtors by Purchaser for such real property, Debtors shall pay the amount which is less than such offer to Purchaser. If Debtors do not sell or lease such real property within the six (6) month period described above, Purchaser shall again have the right to sell or lease such property and Purchaser shall pay the carrying costs from the end of such six (6) month period until such time as such property is sold or leased by another offer is submitted by Purchaser and rejected by Debtors. If the right to sell or lease the Real Estate reverts to the Purchaser, then Debtors shall have no approval rights, but Purchaser hereby agrees to use commercially reasonable efforts with respect to the sale of such Real Estate. ARTICLE 12 INDEMNIFICATION 12.1 Indemnification. --------------- (a) By the Company and Parent. In addition to all rights and ------------------------- remedies otherwise available to Purchaser at law or in equity, the Company and Parent shall pay on behalf -42- of, and indemnify, save and hold harmless Purchaser and its employees, representatives, officers, directors, stockholders and agents from and against any and all costs, losses, liabilities, damages, deficiencies, claims and expenses, including without limitation, interest, penalties, reasonable attorneys' fees and all amounts paid in investigation, defense or settlement of any of the foregoing, which any such party may suffer, sustain or become subject to in connection with or arising out of or resulting from or incident to (i) any breach or inaccuracy of any representation or warranty made by the Debtors made in or pursuant to this Agreement, (ii) any breach or failure to perform any covenant or other agreement made by the Debtors in or pursuant to this Agreement, and (iii) the performance or non-performance of the Services. (b) By Purchaser. In addition to all rights and remedies otherwise ------------ available to the Company or Parent at law or in equity, Purchaser shall indemnify and save and hold harmless the Company, Parent and their respective employees, representatives, officers, directors, stockholders and agents from and against any and all costs, losses, liabilities, damages, deficiencies, claims and expenses, including, without limitation, interest, penalties, reasonable attorneys' fees and all amounts paid in investigation, defense or settlement of any of the foregoing, which any such party may suffer, sustain or become subject to in connection with or arising out of or resulting from or incident to (i) any breach or inaccuracy of any representation or warranty made by Purchaser in or pursuant to this Agreement, and (ii) any breach or failure to perform any covenant or other agreement made by Purchaser in or pursuant to this Agreement. (c) Time Limitations. No party shall be liable to indemnify and hold ---------------- harmless any other party for any cost, loss, liability, damage, deficiency, claim or expense pursuant to this Section 12.1 unless the claim or situation which has given rise to or ultimately gives rise to such cost, loss, liability, damage, deficiency, claim or expense shall have been asserted to the indemnifying party prior to the date which is 300 days after the Closing Date. 12.2 Mutual Assistance and Records. Purchaser and the Debtors agree that ----------------------------- they will mutually cooperate in the expeditious filing of all notices, reports and other filings with any governmental authority required to be submitted jointly in connection with the execution and delivery of this Agreement, the other agreements contemplated hereby and the consummation of the transactions contemplated hereby or thereby. Subsequent to the Closing, Purchaser and the Debtors, at their own cost, will assist each other (including by the retention of records and the provision of access to relevant records) in the preparation of their respective Tax returns and the filing and execution of Tax elections, if required, as well as in the defense of any audits or litigation that may ensue as a result of the filing thereof, to the extent that such assistance is reasonably requested. ARTICLE 13 MISCELLANEOUS 13.1 Termination. ----------- (a) This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time, but not later than the Closing Date: -43- (i) by mutual consent of Purchaser, the Company and Parent; (ii) by Purchaser or the Debtors if the Closing Date is not on or prior to August 15, 1997, provided, that a party will not be entitled to terminate this Agreement pursuant to this subsection (ii) if that party or its Affiliates are in breach of the Agreement or has failed to satisfy any condition to Closing in Articles 4 and 5 hereof that such party or its Affiliates was required to satisfy and provided further that, in the event the Closing Date is not on or prior to August 15, 1997 as a result of an injunction being entered against the transaction, the Debtors may terminate no earlier than August 23, 1997; (iii) by Purchaser at any time up to and including the Closing Date if there has been, occurred or arisen a material adverse change in any of the Purchased Assets, business, financial condition, results of operation or prospects of the business conducted at the Stores other than replenishment which Purchaser acknowledges has not occurred in the ordinary course of business; (iv) by Purchaser if there has been a material misrepresentation or breach of warranty or covenant set forth in this Agreement by the Company or Parent; (v) by Parent or the Company if there has been a material misrepresentation or breach of warranty or covenant set forth in this Agreement by Purchaser; (vi) by Purchaser if the Court shall not have entered the Sale Order on or before August 15, 1997; or (vii) automatically if an order is entered by the Court approving a transaction with respect to the Purchased Assets or the Leases other than the transactions contemplated by this Agreement. (b) In the event of the termination of this Agreement as above provided, this Agreement shall forthwith become void and no party shall have any liability hereunder, including any liability for damages, except pursuant to Sections 13.6 (with respect to each party bearing its own expenses) and 13.7 (with respect to public announcements), the provisions of which shall survive any termination of this Agreement, and except for any willful breach by any party hereto of such party's representations, warranties or covenants which shall also survive the termination of this Agreement. In the event that a condition precedent to its obligation is not met, nothing contained herein shall be deemed to require any party to terminate this Agreement rather than to waive (without further Court order or notice to any third party) such condition precedent and proceed with the Closing. 13.2 Survival of Representations and Warranties. Each and every ------------------------------------------ representation, warranty, covenant and agreement contained in this Agreement or any Schedule hereto, or any -44- certificate, document or other instrument delivered by the parties in connection herewith, shall, survive the Closing Date and the consummation of the transactions contemplated hereby notwithstanding any investigation or inquiries made by or conducted on behalf of any party hereto. 13.3 Equitable Remedies. The parties hereto acknowledge that the Company ------------------ and the Purchased Assets are unique and that irreparable damage would result if this Agreement is not specifically enforced and that, therefore, the rights and obligations of the parties under this Agreement may be enforced by a decree of specific performance issued by a court of competent jurisdiction and appropriate equitable relief may be applied for and granted in connection therewith. Such remedies shall, however, not be exclusive and shall be in addition to any other remedies which any party may have under this Agreement or otherwise. 13.4 Assignment. ---------- (a) This Agreement will inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto and their respective successors and assigns, except as provided in subsections (b) and (c) below. (b) Neither the Company nor Parent may assign any of its duties or obligations hereunder without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. (c) Purchaser may not assign any of its rights, duties or obligations hereunder in whole or in part without the Company's consent (which consent shall not be unreasonably withheld) except Purchaser may assign its rights, duties and/or obligations hereunder in whole or in part (without the Company's consent), (i) to its Affiliates or wholly-owned subsidiaries, and in such event the Debtors shall be obligated to convey all or part of the Purchased Assets to such assignee and to the extent so directed by Purchaser, and (ii) to lending institutions for the purpose of obtaining financing for the transactions contemplated hereby and (iii) with respect to the Real Estate, and assignee or designee at the Closing; provided that no such assignment shall (i) relieve Purchaser of its obligations hereunder or (ii) relieve the signatories to the Lease Guaranty dated as of the date hereof and attached hereto of their obligations under such Lease Guaranty. 13.5 Notices. All notices and other communications hereunder shall be in ------- writing and shall be deemed to have been duly given if delivered personally or mailed, by certified or registered mail, return receipt requested, first class postage prepaid, or by Federal Express or some other reputable overnight carrier, to the parties at the following addresses: If to Parent or the Company, addressed to: Montgomery Ward & Co., Incorporated Montgomery Ward Corporate Offices Montgomery Ward Plaza Chicago, IL 60671 Attention: Spencer H. Heine, Esq. -45- With copies (which shall not constitute notice hereunder) to: Jones, Day Reavis & Pogue 77 W. Wacker Drive, Suite 3500 Chicago, IL 60601-1692 Attention: David S. Kurtz, Esq. Altheimer & Gray 10 South Wacker, Suite 4000 Chicago, IL 60606 Attention: Corey Light If to Purchaser, addressed to: Schottenstein Bernstein Capital Group, LLC 1010 Northern Boulevard - Suite 330 Great Neck, New York 10021 and Schottenstein Bernstein Capital Group, LLC 1800 Moler Road Columbus, Ohio 43207 Atten: Legal Department and -46- AEW Capital Management L.P. 225 Franklin Street Boston, MA 02110 Atten: J. Grant Monahon, Esq. With copies (which shall not constitute notice hereunder) to: Battle Fowler LLP 75 East 55th Street New York, New York 10022 Atten: Lawrence Mittman, Esq. Atten: Madlyn Gleich Primoff, Esq. and Hill and Barlow One International Place Boston, MA 02110 Atten: Charles C. Ames, Esq. or to such other place and with such other copies as any party may designate by written notice to the other party. 13.6 Expenses. Except as otherwise provided in this Agreement, each party -------- hereto shall pay its own expenses, including attorneys', accountants' and brokerage fees, in connection with this Agreement, the performance of its obligations hereunder and the consummation of the transactions contemplated hereby. 13.7 Public Announcements. No press release or other public statement with -------------------- respect to this Agreement or the transactions contemplated hereby shall be issued by any party without that party having consulted with and obtained the consent of the other parties, which consent shall not be unreasonably withheld. 13.8 Entire Agreement. This Agreement supersedes all prior discussions and ---------------- agreements between the parties with respect to the subject matter hereof, and this Agreement, including the schedules and exhibits hereto, and other documents to be delivered in connection herewith (together with such confidentiality letter), contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 13.9 Waiver. Any term or condition of this Agreement may be waived at any ------ time by the party which is entitled to the benefit thereof. To be effective, each such waiver shall be in writing, shall specifically refer to this Agreement and the term or condition being waived, and shall be executed by an Authorized Officer of such party. A waiver on one occasion shall not be -47- deemed to be a waiver of the same or any other breach on a future occasion. A waiver hereunder shall be effective without an order of the Court, or notice to the Court or any third party, in relation to such waiver. 13.10 Amendment. This Agreement may be modified or amended only in a --------- writing duly executed by or on behalf of each of the parties hereto. 13.11 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.12 Invalid Provisions. If any provision of this Agreement is held to ------------------ be illegal, invalid, or unenforceable under any present or future law, rule, or regulation, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof. The remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance here from. Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a legal, valid, and enforceable provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible. To the extent of any inconsistencies between the Sale Order with this Agreement, the Sale Order shall control. 13.13 Headings, Gender, Etc. The headings used in this Agreement have ---------------------- been inserted for convenience and do not constitute matter to be construed or interpreted in connection with this Agreement. Unless the context of this Agreement otherwise requires, (a) words of any gender shall be deemed to include each other gender, (b) words using the singular or plural number shall also include the plural or singular number, respectively, (c) references to "hereof," "herein," "hereby" and similar terms shall refer to this entire Agreement, and (d) each reference to the Company shall be a reference to any of its subsidiaries and predecessors and each representation, warranty, covenant and other agreement made herein with respect to the Company shall be deemed made with respect to all such subsidiaries and predecessors. The language used in this Agreement shall be deemed to the language chosen by the parties hereto to express their mutual intent and no rule of strict construction shall be applied against any Person. 13.14 Choice of Law. This Agreement shall be construed, interpreted and ------------- the rights of the parties determined in accordance with the laws of the State of New York without regard to conflicts of laws principles thereof, except with respect to matters of law concerning the internal corporate affairs of any corporation which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction of incorporation of such corporation shall govern. 13.15 No Third Party Beneficiary. Nothing herein expressed or implied is -------------------------- intended or shall be construed to confer upon or give to any person, firm or corporation, other than the parties hereto and their respective permitted successors and assigns, any rights or remedies under or by reason of this Agreement, other than the Company and the Persons entitled to indemnification under Section 9.2. -48- 13.16 Retention of Jurisdiction. The Bankruptcy Court shall retain ------------------------- jurisdiction with respect to any matter, issue, claim or controversy arising out of or resulting from this Agreement or any of the transactions contemplated hereby or associated herewith, including without limitation any matter, issue, claim or controversy relating to Purchaser's right to have received the Purchased Assets free and clear of any and all Liens. * * * * * IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed as of the day and year first above written. SCHOTTENSTEIN BERNSTEIN CAPITAL GROUP LLC By: /s/ David Bernstein ---------------------------------------------- Name: David Bernstein Title: President and Chief Operating Officer LECHMERE, INC., Debtor and Debtor-in- Possession By: /s/ Spencer H. Heine ---------------------------------------------- Name: Spencer H. Heine Title: President MONTGOMERY WARD & CO., INCORPORATED, Debtor and Debtor-in-Possession By:/s/ Spencer H. Heine ---------------------------------------------- Name: Spencer H. Heine Title: Executive Vice President and General Counsel and President, MW Properties -49- EXHIBIT 5 .3 -50- UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE IN RE: : : JOINTLY ADMINISTERED MONTGOMERY WARD HOLDING CORP., : CASE NO. 97-1409 (PJW) A DELAWARE CORPORATION, ET AL., : -- -- : CHAPTER 11 DEBTORS. : HEARING: AUGUST 14, 1997 3:30 P.M. ORDER AND FINDINGS OF FACT AND CONCLUSIONS OF LAW (A) AUTHORIZING MONTGOMERY WARD & CO., INCORPORATED AND LECHMERE, INC. TO SELL ASSETS PURSUANT TO A PURCHASE AGREEMENT,/1/ (B) AUTHORIZING THE CLOSING OF ALL LECHMERE AND HOME IMAGE STORES, (C) PERMITTING THE PURCHASER TO CONDUCT STORE CLOSING SALES, (D) APPROVING CERTAIN LEASE ASSUMPTION AND REJECTION PROCEDURES AND (E) PERMITTING THE DEBTORS TO PAY SEVERANCE CLAIMS/2/ ------------------------------------------------------ This matter is before the Court on the Motion of Debtors and Debtors in Possession for an Order (a) Authorizing Montgomery Ward & Co., Incorporated and Lechmere, Inc. to Sell Assets Pursuant to a Letter Agreement, (b) Authorizing the', Closing of all Lechmere and Home Image Stores, (c) Permitting the Buyer to Conduct Store Closing Sales, (d) Approving Certain Lease Assumption and Rejection Procedures and (e) Permitting the Debtors to Pay Severance Claims (the "Sale Motion,"), filed by the above-captioned debtors and debtors in ___________________________________ /1/ Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Asset Purchase, License and Agency Agreement dated as of August 6, 1997 among Lechmere, Inc., Montgomery Ward Co., Incorporated and MWL Acquisition L.L.C. (the "Purchase Agreement," a copy of which is attached hereto as Exhibit A) /2/ The Findings of Fact and Conclusions of Law contained herein constitute the findings of fact and conclusions of law required to be entered by this Court with respect to the Motion pursuant to Rule 52 of the Federal Rules of Civil Procedure, as made applicable herein by Rules 7052 and 9014 of the Federal Rules of Bankruptcy Procedure. -51- possession (collectively, the "Debtors"), on August 1, 1997. The Court having reviewed the Motion and having heard the statements of counsel in support of the relief requested therein at a hearing before the Court on August 13, 1997 (the "Sale Hearing"); all parties in interest having been heard, or having had the opportunity to be heard at the Sale Hearing, regarding approval of the Purchase Agreement, and the transactions contemplated thereby (the "Transactions"), and the Court having received evidence in support of approval of the Purchase Agreement; and it appearing from the certificates of service and publication dated August ___, 1997 (the "Certificates") filed with the Clerk of the Court that sufficient notice and publication of the Motion and the relief granted by this Order have been provided; and it further appearing that no other or further notice hereof is required; and after due deliberation and good and sufficient cause appearing therefor, this Court hereby makes the following Findings of Fact and Conclusions of Law: I. THE COURT HEREBY ENTERS THE FOLLOWING FINDINGS OF FACT/3/: A. BASIS FOR SECTION 363 SALE -------------------------- 1. Time is of the essence in consummating the sale of the Purchased Assets. Accordingly, to maximize the value Of the Acquired Assets, it is essential that the sale of the Purchased Assets occur within the time constraints set forth in the Purchase Agreement and the Sale Motion. ________________________ /3/ The Court's statements from the bench setting forth additional Findings of Fact and Conclusions of Law in open Court at the Sale Hearing on the Motion are expressly incorporated by reference into this Order. -52- B. NOTICE OF SALE OF THE PURCHASED ASSETS -------------------------------------- 2. Written notice of the Sale Hearing in accordance with the Court's Order entered on August 6, 1997 (the "Sale Notice Order") as described in the Affidavit of Service of Notice of the', Sale Hearing and Sale filed by the Debtors on August ___, 1997 with this Court, was transmitted to (i) each known creditor of the Debtors holding or asserting a lien against the Purchased Assets; (ii) each known creditor or party in interest holding or asserting of record an interest in the Real Estate; (iii) each of the potential bidders with respect to the sale of the Purchased Assets; (iv) each party that has filed a notice of appearance or requested service herein; (v) counsel to the official committee of unsecured creditors; (vi) counsel to the Debtors' debtor- in- possession lenders, (vii) counsel to MWL Acquisition L.L.C. (the "Purchaser"); (viii) the Office of the United States Trustee, and (ix) the other persons and entities listed in the Certificates by a copy of the notice in substantially the form attached hereto as Exhibit B. 3. Notice was also published in the Wall Street Journal, National Edition, the New York Times, the Chicago Tribune and the Boston Globe on August 8, 1997 as described in the Certificates. 4. The Notice was adequate and sufficient under the circumstances of these Chapter 11 cases and this proceeding and complied with the various applicable requirements of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the procedural due process requirements of the United States Constitution. As described in the Sale Motion, over the last -53- year, the deteriorating performance of Lechmere, Inc. ("Lechmere") has placed a significant cash drain on the Debtors' businesses and there is no reasonable prospect of Lechmere achieving profitability. These circumstances constitute good cause pursuant to Rule 9006(c) of the Federal Rules of Bankruptcy Procedure to reduce the twenty day notice period prescribed by Rule 2002 of the Federal Rules of Bankruptcy Procedure. C. GOOD FAITH OF PURCHASER ----------------------- 5. Purchaser is purchasing the Purchased Assets in good faith and is a good faith purchaser within the meaning of 11 U.S.C. (S)363(m), and is therefore entitled to the protection of that provision, and otherwise has proceeded in good faith in all respects in connection with this proceeding and the Transactions in that: (a) Purchaser recognized that the ',Debtors were free to deal with any other party interested in acquiring the Purchased Assets; (b) Purchaser agreed to provisions in the Letter Agreement dated July 30,1997 approved in this Court's Order dated August 6, 1997 regarding competitive bidding procedures (the "Bid ---- Procedures Order") which would enable the Debtors to accept ---------- a higher and better offer for the Purchased Assets at the Sale Heating; (c) Purchaser in no way induced or caused the Chapter 11 filing of any of the Debtors; (d) All payments to be made by Purchaser and other agreements or -54- arrangements entered into by Purchaser in connection with the Transactions have been disclosed; (e) Purchaser has not violated 11 U.S.C. (S)363(n) by any action or inaction; and, (f) The negotiation and execution Of the Purchase Agreement, the Letter Agreement and all other aspects of the Transactions were in goodfaith. D. COMPETING OFFERS ---------------- 6. [No competing offers were submitted pursuant to the competitive bidding procedures set forth in the Bid Procedures Order.] [Although competing offers were submitted, Purchaser's offer was higher and better than any such offers.] E. APPROVAL OF MOTION ------------------ 7. Purchaser is a third-party purchaser unrelated to the Debtors. 8. The purchase terms, as set forth in the Purchase Agreement, are fair and reasonable under the circumstances of the Bankruptcy Cases and this proceeding. [No objections to the Motion were filed, [except for the objections of ___________ and, ___________ which were either withdrawn or overruled, no objections to the Motion were filed.] 9. The Motion should be approved as it is in the best interests of the Debtors' prepetition and post-petition creditors, the Debtors and other parties in interest. The Purchase Agreement represents a fair and reasonable offer to purchase the Purchased Assets under the circumstances of the Bankruptcy -55- Cases and this proceeding. F. PURCHASER IS NOT A MERE CONTINUATION OF ANY OF THE DEBTORS ---------------------------------------------------------- 10. The following findings of fact relate to the conclusions of law set forth in paragraph 11 of Section II(D) below: (a) Purchaser is not hiring any Of the Debtors' employees after the Closing. The Transactions contemplate that the Debtors will make certain employees available to the Purchaser for purposes of necessary services in connection with the contemplated "going out of business" sales. (b) No common identity of incorporators, officers, directors or material stockholders exists among Purchaser and the Debtors. (c) Purchaser is not purchasing the Excluded Assets, including, without limitation, the Debtors' respective names, cash or cash equivalents (other than certain deposits); accounts receivable and causes of action under Sections 544-550 of the Bankruptcy Code or not relating to the Purchased Assets or the Leases; the FF&E, contracts and leases not expressly assumed by the Purchaser or the Debtors' Trailers. G. CLOSING SALES 11. The business strategy and means of effecting such strategy set forth in the Motion is based upon the sound business judgment of the Debtors; and the implementation of that strategy as set forth in the Motion is reasonable, necessary and in the best interest of the Debtors' estates. -56- H. MISCELLANEOUS ------------- 12. To the extent any Findings of Facts set forth in Section I, Paragraphs 1 - 11 and all sub-parts thereto, herein constitute a Conclusion of Law, the Court so concludes. II. CONCLUSIONS OF LAW ------------------ The Court hereby enters the following Conclusions of Law: A. JURISDICTION, FINAL ORDER AND STATUTORY PREDICATES -------------------------------------------------- 1. The Court has jurisdiction to hear and determine the Sale Motion and to grant the relief requested in the Sale Motion pursuant to 28 U.S.C. (S)(S) 157(b)(1) and 1334(b). 2. This Order constitutes a final and appealable order within the meaning of 28 U.S.C. (S) 158(a). To any extent necessary under Bankruptcy Rule 9014 and Rule 54(b) of the Federal Rules of Civil Procedure, as made applicable by Rule 7054 of the Federal Rules of Bankruptcy Procedure, the Court expressly finds that there is no just reason for delay in the implementation of this Order, and expressly directs entry of judgment as set forth herein. 3. This proceeding is a "core proceeding" within the meaning of 28 U.S.C. (S)157(b)(2)(a), (n) and (o). 4. The statutory predicates for the Motion are Sections 363(b), 365, 102(1) and 105(a) of the Bankruptcy Code and Rules 2002(a)(2), 6004(a), (b), (c) -57- and (e), 6006(a) and (c), 9014, and 9019(a) of the Federal Rules of Bankruptcy Procedure. 5. The proposed sale of the Purchased, Assets constitutes a sale of property of the Debtors' estates outside the ordinary course of business within the meaning of Section 363(b) of the Bankruptcy Code. B. SECTION 363 SALE ---------------- 6. The Debtors are authorized to sell property of their respective estates, pursuant to 11 U.S.C. (S)363(b), free and clear of the Liens (as defined in Paragraph C of the decretal portion .of this Order on p. 11) if the applicable provisions of 11 U.S.C. (S)363(f) have been satisfied. 7. The provisions of Section 363(f) of the Bankruptcy Code have been satisfied. 8. [No creditor holding or asserting a superpriority claim, lien or security interest against the Purchased Assets has objected to the Motion.] 9. Given all of the circumstances of the Bankruptcy Cases and the adequacy and fair value of the purchase price under the Purchase Agreement, the proposed sale of the Purchased Assets to Purchaser constitutes a reasonable and sound exercise of the Debtors' business judgment and should be approved. C. RETENTION OF JURISDICTION ------------------------- 10. It is necessary and appropriate for the Court to retain jurisdiction to, inter alia, interpret and enforce the terms and -- provisions of this Order and the Purchase Agreement and to adjudicate, if necessary, any and all disputes -58- concerning any right, title, (alleged),property interest, including ownership claims, relating to the Purchased Assets and the proceeds thereof, as well as the extent, validity and priority of all Liens relating to the Purchased Assets. D. NO SUCCESSOR LIABILITY ---------------------- 11. Purchaser does not constitute a successor to any of the Debtors or their respective estates. (a) The Transactions do not amount to a consolidation, merger and/or de facto merger of Purchaser and the Debtors or -- ----- their respective estates. (b) Purchaser is not merely a continuation of the Debtors or their respective estates, there is not substantial continuity among Purchaser and the Debtors, and there is no continuity of enterprise among the Debtors and Purchaser. (c) The Transactions are not being entered into fraudulently. The sale approved hereunder has been properly noticed and all aspects thereof have been adequately disclosed. (d) Purchaser is not hiring any of the individuals employed by the Debtors. (e) Purchaser is not holding itself out to the public, suppliers, customers, creditors (whether prepetition or post-petition), employees or governmental entities, agencies or authorities as a continuation of the Debtors. -59- E. MISCELLANEOUS ------------- 12. To the extent any Conclusion of Law set forth in Section II, Paragraphs 1-11 herein constitutes a Finding of Fact, this Court so finds. BASED ON THE FOREGOING FINDINGS OF FACT, AND CONCLUSIONS OF LAW, IT IS HEREBY ORDERED, ADJUDGED AND DECREED, EFFECTIVE IMMEDIATELY, AS FOLLOWS: II. SALE OF PURCHASED ASSETS ------------------------ A. The relief requested in the Motion is granted. The Purchase Agreement, the Transactions and the Sale are hereby approved in all respects. B. The Debtors are authorized and directed to take any and all actions necessary or appropriate to (i) consummate the sale of the Purchased Assets to Purchaser and the Closing of the Transactions in accordance with the Motion, the Purchase Agreement and this Order; and (ii) perform, consummate, implement and close fully the Purchase Agreement together with all additional instruments and documents that may be reasonably necessary or desirable to implement the Purchase Agreement. The Debtors' permits, licenses, franchises, orders, registrations, certificates, variances, approvals and other similar rights obtained from Governmental Authorities shall be deemed transferred to Purchaser upon the Closing, without further Order of this Court. C. Upon the Closing, the Purchased Assets shall be transferred, sold and delivered to Purchaser free and clear of all encumbrances, obligations, liabilities, contractual commitments, claims, including, without limitation, any theory of successor liability, de facto -- ----- merger, or substantial continuity, whether based in law or equity, -60- employee benefit obligations, (including, without limitation, under ERISA, any security interest, mortgage, lien, charge against or interest in property, adverse claim, claim of possession, right of way, license, easement or restriction of any kind, including, but not limited to, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership or any option to purchase, option, charge, retention agreement which is intended as security or other matters (hereinafter collectively referred to as "Liens") of any person or entity (other than the Assumed Liabilities and the post-closing liabilities under the Assigned Contracts, pursuant to the express terms of the Purchase Agreement), that encumber or relate to or purport to encumber or relate to the Purchased Assets. D. Purchaser is not a successor to any of the Debtors or their respective estates by reason of any theory of law or equity and Purchaser shall not assume or in any way be responsible for any liability or obligation of the Debtors and/or their respective estates, except as otherwise expressly provided in the Purchase Agreement. E. Effective on the date of entry of this Order, all entities, including, but not limited to, the Debtors (and/or their respective successors, including any trustees thereof), creditors, employees, former employees and shareholders, administrative agencies, governmental departments, secretaries of state, federal, state and local officials, maintaining any authority relating to Environmental, Health and Safety Laws, and their respective successors or assigns, shall be permanently and forever barred, restrained and enjoined from commencing or continuing in any manner -61- any action or other proceeding of any kind against Purchaser as alleged successor or otherwise with respect to any Liens arising out of or related to the Transactions. For purposes of this Order, "Environmental, Health, and Safety Laws" shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes;, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now or hereafter in effect. F. The terms and provisions of the Purchase Agreement, together with the terms and provisions of this Order, shall be binding in all respects upon, the Debtors, any trustees thereof, their respective estates, their creditors and the Debtors' shareholders, all entities and third parties, administrative agencies, governmental departments, secretaries of state, federal, state and local officials, maintaining any authority relating to Environmental, Health and Safety Laws, and their respective successors or assigns, including, but not limited to all non-Debtor parties to the Leases which may be assigned to Purchaser or other entities under the Purchase Agreement and persons asserting a Lien against or interest in the Debtors' estates -62- or any of the Purchased Assets to be sold and assigned to Purchaser, irrespective of any action commenced which contests the Debtors' authority to sell and assign the Purchased Assets or which seeks to enjoin the Transactions and/or assignment. G. All entities holding Liens of any kind and nature be and hereby are barred from asserting such Liens against Purchaser and/or the Purchased Assets and, effective upon the transfer of the Purchased Assets to Purchaser at the Closing, the Liens shall attach to the proceeds of the sale with the same force, validity, priority and effect, if any, as the Liens formerly had against the Purchased Assets. H. This Order: (a) is and shall be effective as a determination that, upon Closing, all Liens existing as to the Purchased Assets conveyed to Purchaser have been and hereby are adjudged and declared to be unconditionally released, discharged and terminated, and (b) shall be binding upon and govern the acts of all entities, including, all filing agents, filing officers, title agents, title companies, recorders of mortgages, recorders of deeds, registrars of deeds, administrative agencies or units, governmental departments or units, secretaries of state, federal, state and local officials and all other persons and entities who may be required by operation of law, the duties of their office, or contract, to accept, file, register or otherwise record or release any documents or instruments, or who may be required to report or insure any title or state of title in or to any of the Purchased Assets conveyed to Purchaser. All Liens of record as of the date of this Order shall be forthwith removed and stricken as against the Purchased Assets. All such Entities described above in this Paragraph H are authorized and specifically directed to strike all such recorded Liens against the Purchased Assets from their records, official and -63- otherwise. I. If any person or entity which has filed statements or other documents or agreements evidencing Liens on, or interests in, the Purchased Assets shall not have delivered to the Debtors prior to the Closing, in proper form for filing and executed by the appropriate parties, termination statements, instruments of satisfaction, releases of liens and easements, and any other documents necessary for the purpose of documenting the release of all Liens which the person or entity has or may assert with respect to the Purchased Assets, the Debtor is hereby authorized and directed to execute and file such statements, instruments, releases and other documents on behalf of such person or entity with respect to the Purchased Assets. J. Any and all Purchased Assets in the possession or control of any person or entity, including, without limitation, any former vendor, supplier or employee of any of the Debtors (a) shall be transferred to Purchaser free and clear of the Liens and (b) shall be delivered at the Closing to Purchaser at that parties' sole cost and expense at , unless, pursuant to the Purchase Agreement, such person, entity, vendor, supplier or employee may retain temporary possession or control of any of such Purchased Assets, in which case the possession of such item shall be delivered to Purchaser at such time as is designated by Purchaser. K. Nothing contained in any order of any type or find entered in the Bankruptcy Cases, any subsequent chapter 7 case into which such Bankruptcy Cases may be converted derogate from the provisions of the Purchase Agreement or the terms of this Order. To the extent any provisions of this Order conflict with the terms -64- and conditions of the Purchase Agreement, this Order shall govern and control. The Order shall be binding upon and enforceable against, among others, the Debtors, their estates and any and all Chapter 7 and Chapter 11 Trustees thereof. L. In the event the Debtors make the election described in Section 11.9 of the Purchase Agreement, the Debtors are hereby authorized to deliver the Financed Store Fixtures to the Purchaser, free and clear of all Liens, and, without further Court Order, to use the purchase price paid by Purchaser under the Purchase Agreement to so deliver such Financed Store Fixtures. III. STORE CLOSING SALES ------------------- A. The Debtors be, and hereby are authorized and empowered to close up to all of the Stores to implement its strategy set forth in the Motion and to maximize the value of the assets to be sold in connection with such Store closings. B. Purchaser, on behalf of the Debtors, is hereby authorized and empowered to conduct going out of business sales and similar sales (collectively, the "Store Closing Sales") on the terms and conditions set forth in the Purchase Agreement. Without limiting the generality of the foregoing, Purchaser shall be, and hereby is, authorized to conduct the Store Closing Sales in the name of the Debtors and to establish and implement advertising, signage and promotional programs consistent and the "store closing" or "going out of business" theme (including, without limitation, by means of media advertising, banners, A-frame and similar interior and exterior signs). C. Pursuant to Section 363(f) of the Bankruptcy Code, all Merchandise to be sold by Purchaser at the GOB Sales shall be sold free and clear of any and all Liens, if -65- any, with such Liens to attach to the Purchase Price paid under the Purchase Agreement. D. The Debtors and Purchaser are hereby authorized and empowered to transfer inventory, equipment, furniture and fixtures to and from the stores to be closed in accordance with the terms of the Purchase Agreement, including, without limitation, to, from and between the Stores, the Warehouses, any of Parent's Electric Avenue & More stores the going out of business sales for which Purchaser is acting as liquidation agent and any other stores and warehouses of Debtors' affiliates. E. All persons and entities of every nature and description, including but not limited to landlords, utility companies, governmental agencies, sheriffs, marshals or other public officers, creditors and all those acting for or on their behalf, be, and they hereby are, jointly and severally restrained and enjoined from (a) in any way interfering with or otherwise impeding the conduct of the Store Closing Sales at the Stores and the maintenance of Merchandise, equipment, furniture and fixtures thereat, (b) instituting any action or proceeding in any court or other administrative body having as its objective the obtaining of an order or judgment which might in any way directly or indirectly obstruct or otherwise interfere with or impair the conduct of the Store Closing Sales thereat, and (c) taking any action that interferes with or impedes Purchaser's receipt of all sums due in accordance with the terms of the Purchase Agreement; provided, -------- however, that nothing set forth in this paragraph shall be deemed to ------- preclude parties in interest from appearing before this Court and being heard on matters not adjudicated herein. -66- F. Purchaser be, and hereby is, authorized to conduct the Store Closing Sales and take all actions related thereto or arising in connection therewith, without complying with federal, state or local laws, rules, statutes, ordinances, licensing requirements and procedures of any kind or nature. G. Purchaser be, and hereby is, authorized to conduct the Store Closing Sales and take all actions related thereto or arising in connection therewith, notwithstanding any provision in any lease or other document or instrument that purports to limit, restrict or modify such actions, and Section 365(d)(3) of the Bankruptcy Code does not preclude the relief granted in this paragraph. H. The Debtors and Purchaser and their respective officers, employees and agents be, and they hereby are, authorized to execute such documents and to do such acts as are necessary or desirable to carry out the Store Closing Sales and related actions authorized herein. I. The Debtors and its officers, employees and agents shall not be required to obtain the approval of any federal, state or local governmental agency, department or other authority (each a "Governmental Authority"), any landlord or any other third parties to close the Stores; and Purchaser and its officers, employees and agents shall not be required (a) to obtain the approval of any Governmental Authority, any landlord or any other third parties to conduct the Store Closing Sales and to take the related actions authorized herein or (b) to execute, obtain or file releases, termination statements, assignments, consents or other instruments to effect, consummate and implement the provisions hereof. IV. UNEXPIRED LEASES ---------------- -67- A. Pursuant to the Purchase Agreement, Purchaser is hereby granted the authority to direct the Debtors to dispose of the leases covering the Stores (the "Leases") as described in the Purchase Agreement and shall have the option for 270 days after the Closing Date to direct the applicable Debtor to assume and assign or reject such Leases. B. The time by which the Debtor may elect to assume or reject the Leases, pursuant to Section 365 of the Bankruptcy Code, is hereby extended to __________,1998 (300 days after the Closing Date), subject to Purchaser's right to direct the applicable Debtor to assume and assign or reject any and all of such Leases prior to such date. C. From and after the Closing Date to and including __________ ___, 1998, Purchaser shall have the right to market the Leases in the manner it deems reasonably necessary to maximize the value of such Leases for the benefit of Purchaser and the Debtors' estates. V. SEVERANCE PAY ------------- A. The Debtors shall be, and hereby are, permitted to pay severance claims in accordance with the plan set forth in the Motion. VI. MISCELLANEOUS ------------- A. This Court retains jurisdiction, even after the closing of the Chapter 11 cases, to: (1) Interpret, implement and enforce the terms and provisions of this Order (including the injunctive relief provided in this Order) and the terms of the Purchase Agreement, all amendments thereto and any waivers and -68- consents thereunder and of each of the agreements executed in connection therewith; (2) Protect Purchaser, or any of the Purchased Assets, against any of the Liens; (3) Compel compliance with the Purchase Agreement and delivery of all Purchased Assets to Purchaser; (4) Resolve any disputes arising under or related to the Purchase Agreement or the Transactions, Purchaser's peaceful use and enjoyment of the Purchased Assets; (5) Adjudicate all issues concerning (alleged) pre-Closing Liens, the Leases and any other (alleged) interest(s) in and to the Purchased Assets, including the extent, validity, enforceability, priority and nature of all such (alleged) Liens, the Leases and any other (alleged) interest(s); (6) Adjudicate any and all issues and/or disputes relating to the Debtors' right, title or interest in the Purchased Assets and the proceeds thereof, the Motion and/or the Purchase Agreement; and (7) Re-open the Bankruptcy Cases to enforce the provisions of this Order. B. No bulk sales law or any similar law of any state or other jurisdiction shall apply in any way to the Transactions. C. Pursuant to Section 1146(c) of the Bankruptcy Code, no transfer, stamp or similar tax shall apply to the Transactions. D. The failure specifically to include any particular provisions of the Purchase Agreement in this Order shall not diminish or impair the efficacy of such -69- provision, it being the intent of the Court that the Purchase Agreement and each and every provision, term, and condition thereof be authorized and approved in its entirety. E. Purchaser may consummate the Transactions at any time after entry of this Order by waiving any and all closing conditions set forth in the Purchase Agreement that have not been satisfied and by proceeding to close the Transactions without any notice to the Court, any pre- or post-petition creditor of the Debtors and/or any other party in interest. F. This Order and the judgment Order entered contemporaneously in connection herewith shall be effective immediately upon entry pursuant to Rule 7062 and 9014 of the Federal Rules of Bankruptcy Procedure, and no automatic stay of execution, pursuant to Rule 62(a) of the Federal Rules of Civil Procedure, applies with respect to this Order and/or the Judgment Order entered in connection herewith. G. Pursuant to Rule 58 of the Federal Rules of Civil Procedure, as made applicable herein by Rule 9021 of the Federal Rules of Bankruptcy Procedure, a separate document in the form of a Judgment Order shall be entered contemporaneously herewith approving the Sale Motion. Dated: Wilmington, Delaware August 14, 1997 By: /s/ Peter J. Walsh ------------------------------------- Name: Peter J. Walsh Title: United States Bankruptcy Judge -70- EX-10.(I)(O) 5 AGENCY AGREEMENT AS OF AUGUST 14, 1997 AGENCY AGREEMENT DATED AS OF AUGUST 14, 1997 BETWEEN SCHOTTENSTEIN BERNSTEIN CAPITAL GROUP LLC AS AGENT AND MONTGOMERY WARD & CO., INCORPORATED, AS MERCHANT 1 TABLE OF CONTENTS Section 1. Defined Terms................................................. 4 - --------- ------------- Section 2. Appointment of Agent; Bankruptcy Court Approval............... 6 - --------- ----------------------------------------------- Section 3. Consideration to Merchant and Agent........................... 7 - --------- ----------------------------------- 3.1 Payments to Merchant.............................................. 7 -------------------- 3.2 Compensation to Agent............................................. 7 --------------------- 3.3 Time of Payments.................................................. 8 ---------------- Section 4. Expenses of the Sale.......................................... 8 - --------- -------------------- 4.1 Expenses........................................................... 8 -------- 4.2 Payment of Expenses............................................... 10 ------------------- Section 5. Inventory Valuation; Merchandise.............................. 10 - --------- -------------------------------- 5.1 Inventory Taking.................................................. 10 ---------------- 5.2 Valuation......................................................... 10 --------- 5.3 Gross Rings....................................................... 10 ----------- 5.4 Post-Closing Payment.............................................. 10 -------------------- 5.5 Additional Inventory.............................................. 11 -------------------- 5.6 Merchandise Subject to this Agreement............................. 12 ------------------------------------- Excluded Goods............................................................. 12 -------------- Section 6. Sale Term..................................................... 13 - --------- --------- 6.1 Term.............................................................. 13 ---- 6.2 Vacating the Stores............................................... 13 ------------------- Section 7. Sale Proceeds................................................. 13 - --------- ------------- 7.1 Proceeds.......................................................... 13 -------- 7.2 Deposit of proceeds............................................... 14 ------------------- 7.3 Credit Card Proceeds.............................................. 14 -------------------- Section 8 Conduct of the Sale........................................... 14 - --------- ------------------- 8.1 Rights of Agent................................................... 14 --------------- 8.2 Terms of Sales to Customers....................................... 15 --------------------------- 8.3 Sales Taxes....................................................... 15 ----------- 8.4 Supplies.......................................................... 16 -------- 8.5 Returns of Merchandise............................................ 16 ---------------------- 8.6 Layaway, Repair and Special Order Merchandise..................... 17 --------------------------------------------- 8.7 Sale Reconciliation............................................... 17 ------------------- 8.8 Service Contracts................................................. 17 ----------------- 8.9 Force Majeure..................................................... 17 ------------- Section 9. Employee Matters.............................................. 18 - --------- ---------------- 9.1 Merchant's Employees.............................................. 18 -------------------- 9.2 Termination of Employees.......................................... 18 ------------------------ 9.3 Payroll Matters................................................... 19 --------------- 9.4 Employee Retention Bonuses........................................ 19 -------------------------- Section 10. Conditions Precedent.......................................... 19 - ---------- -------------------- Section 11. Representations, Warranties and Covenants..................... 19 - ---------- ----------------------------------------- 11.1 Merchant Representations, Warranties and Covenants................ 19 -------------------------------------------------- 11.2 Agent Representations and Warranties.............................. 23 ------------------------------------ Section 12. Insurance..................................................... 24 - ---------- --------- 12.1 Merchant's Liability Insurance.................................... 24 ------------------------------ 12.2 Merchant's Casualty Insurance..................................... 24 ----------------------------- 12.3 Agent's Insurance................................................. 25 ----------------- 12.4 Worker's Compensation Insurance................................... 25 ------------------------------- 12.5 Risk of Loss...................................................... 25 ------------ Section 13. Indemnification............................................... 26 - ---------- --------------- 13.1. Merchant Indemnification.......................................... 26 ------------------------
2 13.2 Agent Indemnification............................................... 27 --------------------- Section 14. Defaults....................................................... 27 - ---------- -------- Section 15. Sale of FF&E................................................... 28 - ---------- ------------ 15.1 Sale for Commission................................................. 28 ------------------- 15.2 Guaranteed Return................................................... 28 --------------------- Section 16. Claims under certain Leases.................................... 28 - ---------- --------------------------- 16.1 Agent Services...................................................... 28 -------------- 16.2 Agent Compensation.................................................. 29 ------------------ Section 17. Bidding Procedures............................................. 29 - ---------- ------------------ 17.1 Procedure/timing.................................................... 29 ---------------- 17.2 Break-Up Fee; Bid Procedures...................................... 29 ---------------------------- Section 18. Security Interest.............................................. 30 - ---------- ----------------- Section 19. Miscellaneous.................................................. 30 - ---------- ------------- 19.1 Notices............................................................. 30 ------- 19.2 Governing Law..................................................... 31 ------------- 19.3 Termination....................................................... 31 ----------- 19.4 Entire Agreement.................................................. 31 ---------------- 19.5 Amendments........................................................ 31 ---------- 19.6 No Waiver......................................................... 31 --------- 19.7 Successors and Assigns............................................ 31 ---------------------- 19.9 Execution in Counterparts......................................... 32 ------------------------- 19.10 Section Headings.................................................... 32 -------------- 19.11 Survival.......................................................... 32 --------
3 AGENCY AGREEMENT ---------------- This Agency Agreement is made as of this 14th day of August, 1997, by and between Schottenstein Bernstein Capital Group LLC, a Delaware limited liability company (the "Agent"), and Montgomery Ward & Co., Incorporated, an Illinois ----- corporation, and debtor and debtor in possession ("Merchant") in a case pending -------- in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). ---------------- R E C I T A L S - - - - - - - - WHEREAS, the Merchant is a debtor and debtor in possession under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. sections 101-1330 (as amended, the "Bankruptcy Code"); and --------------- WHEREAS, the Merchant desires that the Agent act as the Merchant's exclusive agent for the limited purpose of selling all of the Merchandise (as hereinafter defined) located in Merchant's 11 Electric Avenue & More retail store location(s) listed on Exhibit 1 attached hereto (each individually a --------- "Store," and collectively the "Stores"), by means of a promotional store closing ----- ----- or similar sale (as further described below, each individually a "Sale" and ---- collectively, the "Sales"). ----- NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Agent and the Merchant hereby agree as follows: Section 1. Defined Terms. The terms set forth below are defined in the --------- ------------- referenced sections of this Agreement:
Defined Term Section Reference ------------ ----------------- Additional Inventory Section 5.5 Additional Inventory Amount Section 5.5(b) Agency Accounts Section 7.2 Agency Documents Section 11.1(b) Agent Preamble Agent Claim Section 12.5 Agent Indemnified Parties Section 13.1 Approval Order Section 2 Auction Section 17.1 Bankruptcy Code Recitals Bankruptcy Court Preamble Benefits Cap Section 4.1(b)
4 Defined Term Section Reference ------------ ----------------- Break-Up Fee Section 17.2 Central Service Expenses Section 4.1 Closing Merchandise Inventory Section 5.4 Cost Value Section 5.2 Defective Merchandise Section 5.2(b) Defective Merchandise Amount Section 3.1(a) DIP Lender Consent Section 11.1(b) Display Merchandise Section 5.6(b) Entry Section 3.3 Estimated Guaranteed Amount Section 3.3 Excluded Benefits Section 4.1 Expenses Section 4.1 FF&E Section 5.2(a) Gross Rings Section 5.3 Guaranteed Amount Section 3.1(a) Initial Settlement Date Section 5.4 Inventory Date Section 5.1 Inventory Taking Section 5.1 Layaway Pick-up Date Section 8.6 Layaway, Repair and Special Order Merchandise Section 5.6(b) Lease(s) Section 16.1 Leasehold Liability Section 16.1 Liens Section 2 Merchandise Section 5.2(a) Merchandise Threshold Section 3.1(b) Merchant Preamble Motion Section 17.1 Notice of Disagreement Section 5.4 Occupancy Expenses Section 4.1 Proceeds Section 7.1 Retail Value Section 3.1(c) Retained Employee Section 9.1 Retention Bonus Section 9.4 Returned Merchandise Section 8.5 Sale Recitals Saleable Inventory Section 5.6(b) Sale Commencement Date Section 6.1 Sale Term Section 6.1 Sale Termination Date Section 6.1 Sales Taxes Section 8.3 Second Phase Additional Inventory Section 5.5(b) Store(s) Recitals Supplies Section 8.4 5 Warehouses Section 5.6(a) WARN Act Section 9.1 Section 2. Appointment of Agent; Bankruptcy Court Approval. The Merchant --------- ----------------------------------------------- hereby appoints the Agent, and the Agent hereby agrees to serve, as the Merchant's exclusive agent for the limited purpose of conducting the Sales in accordance with the terms and conditions of this Agreement. Merchant's and Agent's obligations hereunder are subject to approval of the Bankruptcy Court and shall be of no force and effect in the event that this Agreement is not so approved. As soon a s practicable after Merchant's execution of this Agreement, Merchant shall seek Bankruptcy Court approval of an order approving this Agreement in its entirety in a form satisfactory to the Agent (the "Approval -------- Order"). The Approval Order shall provide, among other things, that: (i) this - ----- Agreement is in the best interests of Merchant, Merchant's estate, creditors and other parties in interest; (ii) this Agreement (and each of the transactions contemplated hereby) is approved in its entirety; (iii) Merchant and Agent shall be authorized to take any and all actions as may be necessary or desirable to implement this Agreement and each of the transactions contemplated hereby; (iv) Agent shall be entitled to sell all Merchandise hereunder free and clear of all liens, claims, encumbrances or interests (collectively, "Liens") thereon; any ----- presently existing Liens encumbering all or any portion of the Merchandise or the Proceeds attaching only to the Guaranteed Amount and amounts reimbursed to Merchant on account of Expenses; (v) Agent shall have the right to use the Stores and all related Store services, furniture, fixtures, equipment and other assets of Merchant as designated hereunder for the purpose of conducting the Sales, free of any interference from any entity or person; (vi) Agent, as agent for Merchant, is authorized to conduct Store "going out of business" or similar type sales under the name "Electric Avenue & More" and derivatives thereof and, subject to the Approval Order, shall have the right to conduct such Sales in the manner in which Agent deems appropriate, including by advertising, posting signs or otherwise promoting the Sales as "store closing," "going out of business" or similar type sales without further consent of any person notwithstanding the terms of any lease that purport to restrict the conduct of such Sale; (vii) Agent shall be granted a limited license and right to use until the Sale Termination Date the trade names, logos and customer lists relating to and used in connection with the operation of the Stores, solely for the purpose of advertising the Sales in accordance with the terms of this Agreement; (viii) each and every federal, state or local agency, department or governmental authority with regulatory authority "Governmental Authorities") over the Sales ------------------------ shall be directed to accept the Approval Order as binding and to allow Merchant and Agent to consummate the transactions provided for in this Agreement, including, without limitation, the conducting and advertising of the Sales in the manner contemplated by this Agreement, and no further approval, license or permit of any Governmental Authority shall be required; (ix) all utilities, landlords, creditors and all persons acting for or on their behalf shall not interfere with or otherwise impede the conduct of the Sales, institute any action in any court (other than in the Bankruptcy Court) or before any administrative body which in any way directly or indirectly interferes with or obstructs or impedes the conduct of the Sales; (x) the Bankruptcy Court shall retain jurisdiction over 6 the parties to enforce this Agreement; (xi) Agent shall not be liable for any claims against the Merchant other than as expressly provided for in this Agreement, and Agent shall have no successorship liabilities whatsoever (whether by statute, common law or otherwise); and (xii) Agent and sales of Merchandise shall be protected by Section 363(m) of the Bankruptcy Code in the event that the Approval Order is reversed or modified on appeal. Section 3. Consideration to Merchant and Agent. --------- ----------------------------------- 3.1. Payments to Merchant -------------------- (a) As a guaranty of Agent's performance hereunder, Merchant shall receive from Agent the sum of 77% of the aggregate Cost Value of the Saleable Inventory included in the Closing Merchandise Inventory (determined in accordance with section 5.4 below), plus (ii) the amount payable for the Defective Merchandise as agreed to by Agent and Merchant (the "Defective --------- Merchandise Amount") plus (iii) the Additional Inventory Amount (the amounts - ------------------ payable under clauses (i), (ii), and (iii) are collectively referred to herein as the "Guaranteed Amount"); provided, however, that Agent shall have no ----------------- -------- ------- obligation hereunder to pay any amount to Merchant with respect to Defective Merchandise for which Merchant and Agent are unable to agree upon a Cost Value (as adjusted for the applicable prevailing discount price) or Merchandise received at the Stores on or after the 30th day after the Sale Commencement Date. (b) The Guaranteed Amount has been calculated and agreed upon based upon Merchant's representation that the aggregate Retail Value of the Merchandise as of the Sale Commencement Date will not be less than $45 million (the "Merchandise Threshold"), that all such Merchandise will conform to --------------------- Merchant's representations and warranties contained herein, and that no representations, warranties or covenants of Merchant hereunder have been breached. Merchant and Agent agree that in the event that the final report of the inventory taking service described in Section 5.1 below indicates that the Retail Value of Merchandise is less than the Merchandise Threshold, then the percentage on which the Guaranteed Amount is based shall be reduced by .25% for every $1,000,000 the aggregate Merchandise Retail Value is less than $45 million; provided, however, under no circumstances will the aggregate Retail -------- ------- Value of the Merchandise be less than $33,000,000. (c) For purposes of this Agreement, "Retail Value" with respect to ------------ any Merchandise shall mean the database regular selling price or SKU price per unit for such Merchandise. 3.2 Compensation to Agent. Agent shall receive as its compensation --------------------- for services rendered to Merchant hereunder all remaining Proceeds after payment of Expenses, the Guaranteed Amount and any other amounts payable to Merchant from Proceeds free and clear of any and all liens, claims, rights, interests and encumbrances 7 hereunder. All Merchandise remaining at the conclusion of the Sales shall become the property of Agent, free and clear of all Liens of any kind or nature. 3.3 Time of Payments. The Agent shall pay to Merchant 75% of the ---------------- Estimated Guaranteed Amount on the later of the Sale Commencement Date and one business day after entry by the Clerk of the Bankruptcy Court ("Entry") of the ----- Approval Order. Thereafter, within two (2) business days after the Initial Settlement Date, Agent shall pay to Merchant any portion of the of the Post- Closing Payment that is not subject to the Notice of Disagreement. Agent shall pay to Merchant any kisputed portions of the Post-Closing Payment as soon as practicable after resolution of such dispute in accordance with Section 5.4 below. "Estimated Guaranteed Amount" shall mean 75% of the net book value of the --------------------------- Merchandise at cost as of the Sale Commencement Date as reflected in the Merchant's books and records in the ordinary course of business and in accordance with past custom and practice. All payments by Merchant to Agent hereunder shall be by wire transfer of immediately available funds. Merchant agrees that any amounts due by Agent to Merchant pursuant to this Section 3 may in Agent's discretion be offset by the amount of credit card Proceeds processed by Merchant for Agent's account (if any) which have not, as of the applicable date of payment by Agent to Merchant been transferred by Merchant to Agent in accordance with Section 7.3 hereof. Section 4. Expenses of the Sale. --------- -------------------- 4.1. Expenses. Agent shall be responsible for all Expenses incurred -------- in conducting the Sales. As used herein, "Expenses" shall mean the following -------- direct Store-level third party out-of-pocket costs and expenses incurred in connection with the Sales at the Stores which arise during the Sale Term at the Stores on a per diem, per Store basis: (a) base payroll actually accruing during the Sale Term for Retained Employees for actual days/hours worked in the conduct of the Sales; (b) amounts actually accruing during the Sale Term in respect of FICA, unemployment taxes, worker's compensation and benefits for Retained Employees, in an amount not to exceed 12% of base payroll for each Retained Employee (the "Benefits Cap"); ------------ (c) 50% of the fees and costs of the inventory taking service to conduct the Inventory Taking; (d) Agent's Sale supervisors' fees and travel costs; (e) advertising and promotional costs (at Merchant's contract 8 rates, if available) and in-Store signage expenses; (f) telephone expenses incurred in the conduct of the Sales; (g) credit card and bank card fees and discounts (at Merchant's customary rates) and chargebacks; (h) costs of security personnel in the Stores; trash collection and armored car services; (i) a pro-rata portion of Merchant's casualty insurance premiums attributable to the Merchandise; (j) net delivery charges to customers, provided that Merchant continue to provide delivery services consistent with past custom and practice; (k) Retention Bonuses as described in Section 9.4 below; and (l) Occupancy Expenses, limited on a per diem per Store basis and limited to those amounts for each category as shown in Exhibit 4.1(l) -------------- attached hereto. "Expenses" shall not include: (i) Excluded Benefits; (ii) Central Service Expenses; (iii) all costs associated with the transfer of on order Merchandise from Merchant's distribution centers to the Stores; and (iv) any other costs, expenses or liabilities payable by Merchant and not the responsibility of Agent hereunder, all of which shall be paid by Merchant promptly when due for and during the Sale Term. As used herein, the following terms have the following respective meanings: "Central Service Expenses" means costs and expenses for Merchant's central ------------------------ administrative services necessary for the Sales, including, but not limited to, MIS services, POS administration, payroll processing, sales audit, cash reconciliation, and data processing and reporting. "Excluded Benefits" means vacation days or vacation pay, sick days or sick ----------------- leave, maternity leave or other leaves of absence, termination or severance pay, union dues, pension benefits, ERISA coverage and similar contributions, and, to the extent in excess of the Benefits Cap, payroll taxes, worker's compensation and health insurance benefits. "Occupancy Expenses" means base rent, percentage rent on the sales that ------------------ shall have accrued during the Sale Term, (if any), HVAC, utilities, CAM, real estate taxes, Merchant's association dues and charges, building insurance relating to the Stores, trash and snow removal, cash register maintenance, alarm service and alarm 9 system maintenance, and building maintenance. 4.2. Payment of Expenses. All Expenses incurred during each week of ------------------- the Sales (i.e., Sunday through Saturday) shall be paid by Agent to or on behalf of Merchant, or offset from credit card Proceeds held by Merchant and not applied pursuant to Section 7.3 below, immediately following the weekly Sale reconciliation by Merchant and Agent pursuant to Section 8.7 below, based upon invoices and other documentation reasonably satisfactory to Agent. Section 5. Inventory Valuation; Merchandise. -------------------------------- 5.1. Inventory Taking. As soon as practicable after the Sale ---------------- Commencement Date, the Agent and the Merchant shall jointly take a retail and SKU inventory of the Saleable Inventory located at each Store and Warehouse in accordance with the inventory procedures set forth on Exhibit 5.1 hereto to ----------- obtain the cost of the Saleable Inventory located thereat (the "Inventory --------- Taking") (the date of the Inventory Taking at each Store or Warehouse being the - ------ "Inventory Date" for such Store or Warehouse). Agent and the Merchant shall -------------- jointly employ RGIS or another mutually acceptable inventory taking service to conduct the Inventory Taking. Agent and the Merchant shall each be responsible for 50% of the costs and fees of such inventory taking service. Except as provided in the immediately preceding sentence, the Agent and the Merchant shall each bear their respective costs and expenses relative to the Inventory Taking. The Agent and the Merchant shall each have representatives present during the Inventory Taking, and shall each have the right to review and verify the listing and tabulation of the inventory taking service. During the Inventory Taking, Agent and Merchant shall work in good faith to agree on the Defective Merchandise Amount. The parties agree that during the conduct of the Inventory Taking at each Store, such Store shall be closed to the public and no sales or other transactions shall be conducted. 5.2 Valuation. For purposes of this Agreement, "Cost Value" shall --------- ---------- mean, with respect to each item of Saleable Inventory, the Merchant's cost therefor as previously provided to Agent in that certain Store Merchandise Condition Report for the end of month/July, 1997, except for Layaway, Repair and Special Order Merchandise, where "Cost Value" shall the Cost Value as described ---------- above less amounts received by the Merchant from customers prior to Entry of the Approval Order. 5.3 Gross Rings. In the event that sales occur at any Store prior ----------- to the completion of the Inventory Taking at such Store, then for the period from the Sale Commencement Date until the Inventory Date for such Store, Agent or Merchant, as the case may be, shall keep a strict count of uits of Merchandise sold (by SKU, if possible) ("Gross Rings"). All register receipts ----------- and other records and reports shall be made available to Agent and the Merchant during regular business hours upon reasonable notice. 5.4 Post-Closing Payment. Within 10 days after the last Inventory -------------------- 10 Date, Merchant shall deliver to Agent a statement of the aggregate amount of the Cost Value of all Saleable Inventory included in the Inventory Taking determined in accordance with Sections 5.1, 5.2 and 5.3 plus the Cost Value of ---- all Saleable Inventory subject to Gross Rings at each Store between the Sale Commencement Date and the Inventory Date at such Store (the "Closing Merchandise ------------------- Inventory"), together with Merchant's good faith determination of the Post- - --------- Closing Payment. During the period immediately following the Agent's receipt of such Closing Merchandise Inventory and until the Post-Closing Payment is finally determined pursuant to this Section 5.4, the representatives and agents designated by Agent shall be permitted to review Merchant's books and records and working papers related to the preparation of the Closing Merchandise Inventory and determination of the Post-Closing Payment. The Closing Merchandise Inventory and Merchant's determination of the Post-Closing Payment shall become final and binding upon the parties five days after Agent's receipt thereof (the "Initial Settlement Date"), unless Agent gives written notice to Merchant of its ----------------------- disagreement ("Notice of Disagreement") prior to such date. Any Notice of ---------------------- Disagreement shall specify in reasonable detail the nature of any disagreement so asserted. If a timely Notice of Disagreement is received by Merchant, then the Closing Merchandise Inventory and the determination of the Post-Closing Payment (as revised in accordance with clause (i) or (ii) below) shall become final and binding upon the parties on the earliest of (i) the date the parties hereto resolve in writing any differences they have with respect to the matters specified in the Notice of Disagreement or (ii) the date all matters in dispute are finally resolved in writing by the Bankruptcy Court. During the 10 days following delivery of a Notice of Disagreement, Agent and the Merchant shall seek in good faith to resolve in writing any differences which they may have with respect to the matters specified in the Notice of Disagreement. During such period, a representative appointed by Merchant shall be permitted to review the Agent's working papers relating to the Notice of Disagreement. At the end of such 10-day period, Agent and the Merchant shall submit to the Bankruptcy Court for review and resolution all matters which remain in dispute which were included in the Notice of Disagreement, and the Bankruptcy Court shall make a final determination of Closing Merchandise Inventory and the Post-Closing Payment in accordance with the guidelines and procedures set forth in this Agreement. The Closing Merchandise Inventory and the Post-Closing Payment as determined in accordance with this Section 5.4 shall become final and binding on the parties on the date the Bankruptcy Court delivers its final resolution to the parties. Agent and Merchant shall each bear their own fees and expenses in connection with the Bankruptcy Court's resolution. 5.5 Additional Inventory. (a) Within 21 days after the Sale of the -------------------- Commencement Date, the Agent shall deliver to the Merchant a statement setting out any Merchandise ordered by the Merchant prior to the Sale Commencement Date and received by Agent within 14 days after the Sale Commencement Date and not included in the Inventory Taking (the "First Phase Additional Inventory"). With -------------------------------- such statement, Agent shall include a check in an amount equal to 75% of the Cost Value for all First Phase Additional Inventory. 11 (b) Within 40 days after the Sale Commencement Date, Agent shall deliver to Merchant a statement setting out any Merchandise ordered by Merchant prior to the Sale Commencement Date and received by Agent during the period commencing 15 days after the Sale Commencement Date and ending 30 days after the Sale Commencement Date and not included in the Inventory Taking (the "Second ------ Phase Additional Inventory"). With such statement, Agent shall include a check - -------------------------- in an amount equal to 75% of the Cost Value for all Second Phase Additional Inventory times the complement of the then prevailing Sale discount. The First Phase Additional Inventory and the Second Phase Additional Inventory are collectively referred to herein as the "Additional Inventory"). -------------------- 5.6. Merchandise Subject to this Agreement. ------------------------------------- (a) For purposes of this Agreement, "Merchandise" shall mean: ----------- (i) all merchandise located at the Stores or in the merchandise storage facilities of Merchant set forth on underlying Exhibit 5.6(a) hereto (the ------------- "Warehouses") or in transit between the Stores and the Warehouses, including, ---------- (i) Saleable Inventory, (ii) Layaway, Repair and Special Order Merchandise and (iii) Defective Merchandise. Notwithstanding the foregoing, "Merchandise" shall not include: (1) goods which belong to sublessees, licensees or concessionaires of Merchant; (2) goods held by Merchant on memo, on consignment, or as bailee; (3) furnishings, trade fixtures, equipment and improvements to real property which are located in the Stores (collectively, "FF&E"); or (4) Defective ---- Merchandise for which Merchant and Agent cannot agree upon a Cost Value. (b) As used in this Agreement the following terms have the respective meanings set forth below: "Defective Merchandise" means any item of Merchandise that is --------------------- damaged, defective or otherwise not salable in the ordinary course. "Layaway, Repair, and Special Order Merchandise" means all items ---------------------------------------------- of Merchandise held by the Company on layaway or for repair, or customer- specific special orders, in each case pursuant to binding agreements, invoices or other legal documentation, where (A) the documentation is clear as to the name, address, telephone number, date of last payment and balance due from the customer, and (B) the goods subject to layaway are fully described in the documentation. 5.7. Excluded Goods. Merchant shall retain all -------------- responsibility for any goods not included as "Merchandise" hereunder, including without limitation, Defective Merchandise for which the Agent and Merchant are unable to agree upon a Cost Value. "Saleable Inventory" means all Merchandise that is first ------------------ quality inventory and all Merchandise located at the Stores (but not the Warehouses) that is 12 less than first quality inventory but that is on the selling floor and is saleable in the ordinary course, including samples and displays that are not Defective Merchandise. Section 6. Sale Term. --------- --------- 6.1. Term. Subject to satisfaction of the conditions precedent set ---- forth in Section 13 hereof, the Sale shall commence after Entry of the Approval Order (such date with respect to each Store being the "Sale Commencement Date"). ---------------------- The Sale shall terminate at each Store by no later than 12 complete weeks after the Sale Commencement Date (including, for purposes of calculation, the Sale Commencement Date), or as may be extended by Agent on a Store by Store basis (the "Sale Termination Date"). "Sale Term" shall mean the period between the --------------------- --------- Sale Commencement Date and the Sale Termination Date at each respective Store. Agent may, in its sole discretion, terminate the Sale at any Store prior to the Sale Termination Date; provided, however, that in no event may the Sale at any -------- ------- of the Stores be conducted after the Sale Termination Date unless mutually agreed by Merchant and Agent in writing and in such event no additional Bankruptcy Court approval or order or notice to third parties is required. Agent's representatives, supervisors and employees shall have the right to enter any Store and the use of one office in the Merchant's corporate offices during normal business hours on or after the date hereof to prepare for the Sales, and the Merchant shall cooperate reasonably with Agent in such preparation. 6.2. Vacating the Stores. Subject to any right granted to Agent to ------------------- sell or dispose of the FF&E pursuant to Section 15 below, at the end of the Sale Term in each Store and, in any event, not later than the Sale Termination Date applicable thereto, Agent agrees to leave each Store in "broom clean" condition and shall repair damage to the premises caused by removal, if any, of the FF&E by Agent or actions of Agent, ordinary wear and tear excluding. Subject to any right granted to Agent to sell or dispose of the FF&E pursuant to Section 15 below, Agent shall vacate the Stores on or before the Sale Termination Date, at which time Agent shall surrender and deliver the Store premises and Store keys to Merchant. Subject to any right granted to Agent to sell or dispose of the FF&E pursuant to Section 15 below, all assets of Merchant used by Agent in the conduct of the Sale (e.g. FF&E, Supplies, etc.) shall be returned by Agent to Merchant at the end of the Sale Term to the extent the same have not been consumed in the conduct of the Sale or have not been otherwise disposed of through no fault of the Agent. Section 7. Sale Proceeds. --------- ------------- 7.1. Proceeds. For purposes of this Agreement, "Proceeds" shall mean -------- the aggregate of: (a) the total amount (in dollars) of all sales of Merchandise made under this Agreement, exclusive of (i) Sales Taxes, (ii) credit card and bankcard fees and chargebacks, and (iii) returns, allowances and customer credits; and (b) all proceeds of Merchant's insurance for loss or damage to Merchandise or loss of cash 13 arising from events occurring during the Sale Term. 7.2. Deposit of Proceeds. All cash Proceeds shall be deposited by ------------------- Agent in agency accounts established by Agent (the "Agency Accounts"). Agent --------------- may, in its discretion, designate new or existing accounts of Agent or Merchant as the Agency Accounts, provided that such accounts are dedicated solely to the deposit of Proceeds and the disbursement of amounts payable by Agent hereunder. Agent shall exercise sole signatory authority and control with respect to the Agency Accounts. Merchant shall promptly upon Agent's request execute and deliver all necessary documents to open and maintain the Agency Accounts. To the extent that Agent shall elect to use existing accounts of Merchant as the Agency Accounts, (i) commencing on the first business day following the Sale Commencement Date, and on each business day thereafter, Merchant shall pay to Agent by wire funds transfer all collected funds constituting Proceeds deposited in such accounts, and (ii) upon request, Merchant shall deliver to Agent copies of all bank statements and other information relating to such accounts. Merchant shall not be responsible for and Agent shall pay as an Expense hereunder, all bank fee and charges, including wire transfer charges, related to the Agency Accounts, whether received during or after the Sale Term. 7.3. Credit Card Proceeds. Agent shall have the right (but not the -------------------- obligation) to use Merchant's credit card facilities (including Merchant's credit card terminals and processor(s), credit card processor coding, merchant identification number(s) and existing bank accounts) for credit card Proceeds. In the event that Agent elects so to use Merchant's credit card facilities, Merchant shall process credit card transactions on behalf of Agent and for Agent's account, applying customary practices and procedures. Without limiting the foregoing, Merchant shall cooperate with Agent to down-load data from all credit card terminals each day during the Sale Term and to effect settlement with Merchant's credit card processor(s), and shall take such other actions necessary to process credit card transactions on behalf of Agent under Merchant's merchant identification number(s). All credit card Proceeds will constitute the property of the Agent and shall be held by Merchant in trust for Agent. Merchant shall deposit all credit card Proceeds into a designated account and shall transfer such Proceeds to Agent daily (on the date received by Merchant if received prior to 12:00 noon, or otherwise within one business day) by wire transfer of immediately available funds. At Agent's request, Merchant shall cooperate with Agent to establish merchant identification numbers under Agent's name to enable Agent to process all credit card Proceeds for Agent's account. Merchant shall not be responsible for and Agent shall pay as an Expense hereunder, all credit card fees, charges, and chargebacks related to the Sale, whether received during or after the Sale Term. Notwithstanding anything to the contrary contained in this Section 7.3, Agent shall not have the right to use Merchant's private label charge cards. Section 8. Conduct of the Sale. --------- ------------------- 8.1. Rights of Agent. The Agent shall be permitted to conduct the --------------- Sales 14 as a "store closing" or "going out of business" or similar sales throughout the Sale Term. The Agent shall conduct the Sales in the name of and on behalf of the Merchant in a commercially reasonable manner and in compliance with the terms of this Agreement and the Approval Order. In addition to any other rights granted to Agent hereunder and subject to Entry of the Approval Order, in conducting the Sales, the Agent, in the exercise of its sole discretion, shall have the right: (a) to establish and implement advertising, signage, and promotion programs consistent with the "store closing" or "going out of business" theme (including, without limitation, by means of media advertising, banners, A-frame, and similar interior and exterior signs); (b) to establish Sale prices and Store hours; (c) to use without charge during the Sale Term all FF&E, motor vehicles, advertising materials, bank accounts, Store-level customer lists and mailing lists, computer hardware and software, Supplies, intangible assets (including Merchant's name, logo and tax identification numbers), Store keys, case keys, security codes, and safe and lock combinations required to gain access to and operate the Stores, and any other assets of Merchant located at the Stores or the Warehouses (whether owned, leased, or licensed); (d) to transfer Merchandise between Stores and/or between the Stores, the Warehouses and the other stores of Merchant and its affiliates; and (e) to use (i) Merchant's central office facilities, central and administrative services and personnel to process payroll, perform MIS services and cash reconciliation, and provide other central office services necessary for the Sales, and (ii) one office located at Merchant's central office facility. 8.2. Terms of Sales to Customers. All sales of Merchandise will be --------------------------- "final sales" and "as is," and all advertisements and sales receipts will reflect the same. Agent shall not warrant the Merchandise in any manner, but will, to the extent legally permissible, pass on all manufacturer's warranties to customers. All sales will be made only for cash, and by bank credit cards currently accepted by Merchant, but excluding Merchant's private label charge cards. Agent shall at Merchant's request accept Merchant gift certificates, Store credits, due bills, rain checks, discount cards and other promotional items providing the customer with an additional discount on Store Merchandise which have been issued by Merchant prior to the Sale Commencement Date, provided that Merchant agrees to reimburse Agent in cash for the face amount of any such items within five (5) days after Agent's request therefor. 8.3. Sales Taxes. During the Sale Term, all sales, excise, gross ----------- receipts and other taxes attributable to sales of Merchandise (other than taxes on income) payable to any taxing authority having jurisdiction (collectively, "Sales Taxes") shall be ----------- 15 added to the sales price of Merchandise and collected by Agent at the time of sale. The Agent shall draw checks on the Agency Accounts payable to the applicable taxing authorities in the amount so collected, which shall be delivered together with accompanying schedules to Merchant on a timely basis for payment of taxes when due. Merchant shall promptly pay all Sales Taxes and file all applicable reports and documents required by the applicable taxing authorities. Merchant will be given access to the computation of gross receipts for verification of all such tax collections. 8.4. Supplies. Agent shall have the right to use, without charge, all -------- existing supplies located at the Stores and the Warehouse, including, without limitation, boxes, bags, paper, twine and similar sales materials (collectively, "Supplies"). In the event that additional Supplies are required in any of the -------- Stores during the Sale, Merchant agrees to promptly provide the same to Agent, if available, for which Agent shall reimburse Merchant at Merchant's cost therefor. Merchant does not warrant that the existing Supplies in the Stores as of the Sale Commencement Date are adequate for the purposes of the Sale. Supplies have not been since July 1, 1997, and shall not be prior to the Sale Commencement Date, transferred by Merchant between or among the Stores, Merchant's other locations not subject to the Sale and/or the Warehouses, so as to alter the mix or quantity of Supplies at the Stores from that existing on such date, other than in the ordinary course of business. 8.5. Returns of Merchandise. During the Sale Term the Agent shall ---------------------- accept returns of goods sold by Merchant from the Stores prior to the Sale Commencement Date ("Returned Merchandise"), provided such goods are accompanied -------------------- by the original Store receipt and such return is otherwise in accordance with the applicable return policy for such Store in effect prior to the Sale Commencement Date. Merchant shall reimburse Agent in cash for the amount of any store credit or refund given to any customer in respect of Returned Merchandise. To the extent that Returned Merchandise is saleable as first quality inventory, it shall be included in Merchandise and for purposes of calculation of the Guaranteed Amount, shall be valued at the Cost Value applicable to such item multiplied by the compliment of the prevailing Sale discount at the time of the return. If the Returned Merchandise constitutes Defective Merchandise, it shall be included in Merchandise and assigned a Cost Value in accordance with the applicable provisions of Section 3.1 above. Subject to Merchant's reimbursement to Agent of the amount of any store credit or refund granted for any Returned Merchandise, the aggregate Cost Value of the Merchandise shall be increased by the Cost Value of any Returned Merchandise included in Merchandise (determined in accordance with this Section 8.5), and the Guaranteed Amount shall be adjusted accordingly. Any Returned Merchandise which is not included in Merchandise shall be disposed of by Agent in accordance with instructions received from Merchant or, in the absence of such instructions, returned to Merchant at the end of the Sale Term. Any increases in the Guaranteed Amount and any reimbursements due to Agent as result of Returned Merchandise shall be accounted for and paid by Agent and/or Merchant, as applicable, immediately following the weekly Sale reconciliation pursuant to Section 8.7 hereof. 16 8.6. Layaway, Repair and Special Order Merchandise. Promptly after the --------------------------------------------- execution of this Agreement, Merchant shall notify each customer for which Merchant holds Layaway, Repair and Special Order Merchandise of the Sale and request such customers to pick up and pay for the applicable item(s) within 7 days of the Sale Commencement Date (the "Layaway Pick-up Date"). Any amounts -------------------- paid for Layaway, Repair and Special Order Merchandise on or before the close of business on the Layaway Pick-up Date shall be for the sole account of Merchant. Subject to applicable law, any Layaway, Repair and Special Order Merchandise unclaimed by customers by the Layaway Pick-up Date shall be included in Merchandise and the Guaranteed Amount shall be adjusted to account for such items in the manner prescribed for Returned Merchandise in Section 8.5 above. Prior to the Layaway Pick-up Date, Agent shall administer all Layaway, Repair and Special Order Merchandise in accordance with the documents and agreements relating thereto, provisions of applicable law, and Merchant's historic policies provided to Agent in writing. In the event that Agent is required to issue refunds to customers in respect of Layaway, Repair and Special Order Merchandise, Merchant shall reimburse Agent in cash for all such amounts. At the end of the Sale Term, Agent shall transfer responsibility for any remaining items of Layaway, Repair and Special Order Merchandise back to Merchant after appropriate and legally required communications to customers and reconciliation between Agent and Merchant. All payments by Agent and Merchant required under this Section 8.6 shall be made immediately following the weekly Sale reconciliation by Agent and Merchant pursuant to Section 8.7 hereof. 8.7. Sale Reconciliation. On each weekday agreed upon by the parties ------------------- during the Sale Term, commencing on the second such weekday after the Sale Commencement Date, Agent and Merchant shall cooperate to reconcile Expenses, receipts of onorder Merchandise, Warehouse Merchandise and Returned Merchandise at the Stores (including quantities and Cost Value thereof), Gross Rings, and such other Sale-related items as either party shall reasonably request, in each case for the prior week or partial week (i.e., Sunday through Saturday), all pursuant to procedures agreed upon by Merchant and Agent. 8.8 Service Contracts. To the extent practicable and otherwise ----------------- permitted by applicable law, Agent shall continue to sell service contracts in appliances, stain protection in furniture and product replacement warranties on behalf of Merchant in other areas at the discretion of Merchant. All proceeds of such sales, less a sales commission of 10% to which Agent shall be entitled, shall accrue for the benefit of Merchant; provided that Merchant reimburses Agent for all costs and expenses incurred by or on behalf of Merchant in connection with such sales. 8.9. Force Majeure. If any casualty or act of God prevents or ------------- substantially inhibits the conduct of business in the ordinary course at any Store, such Store and the Merchandise located at such Store shall, in Agent's discretion, be eliminated from the Sale and considered to be deleted from this Agreement as of the 17 date of such event, and Agent and Merchant shall have no further rights or obligations hereunder with respect thereto; provided, however, that (i) the -------- ------- proceeds of any insurance attributable to such Merchandise shall constitute Proceeds hereunder, and (ii) the Guaranteed Amount shall be reduced to account for any Merchandise eliminated from the Sale which is not the subject of insurance proceeds, and Merchant shall reimburse Agent for the amount the Guaranteed Amount is so reduced prior to the end of the Sale Term. 8.10 Merchant Services. Throughout the Sale Term, Merchant shall ----------------- provide to Agent, at no cost to Agent, such central administrative services as are necessary for the Sales, including, without limitation, MIS services, POS administration, payroll processing, sales audit, cash reconciliation and data processing and reporting. Section 9. Employee Matters. --------- ---------------- 9.1. Merchant's Employees. Agent may use Merchant's employees in the -------------------- conduct of the Sales to the extent Agent in its sole discretion deems expedient, and Agent may select and schedule the number and type of Merchant's employees required for the Sales. Agent shall identify any such employees to be used in connection with the Sales (each such employee, a "Retained Employee") prior to ----------------- the Sale Commencement Date. Retained Employees shall at all times remain employees of Merchant, and shall not be considered or deemed to be employees of Agent. Merchant and Agent agree that except to the extent that wages and benefits of Retained Employees constitute Expenses hereunder, nothing contained in this Agreement and none of Agent's actions taken in respect of the Sale shall be deemed to constitute an assumption by Agent of any of Merchant's obligations relating to any of Merchant's employees including, without limitation, Excluded Benefits, Worker Adjustment Retraining Notification Act ("WARN Act") claims and -------- other termination type claims and obligations, or any other amounts required to be paid by statute or law; nor shall Agent become liable under any collective bargaining or employment agreement or be deemed a joint or successor employer with respect to such employees. Merchant shall not, without Agent's prior written consent, raise the salary or wages or increase the benefits for, or pay any bonuses or make any other extraordinary payments to, any of its employees prior to the Sale Termination Date. Agent shall comply in the conduct of the Sales with all of Merchant's employee rules, regulations, guidelines and policies which have been provided to Agent in writing prior to the date of this Agreement. 9.2. Termination of Employees. Agent may in its discretion stop using ------------------------ any Retained Employee at any time during the Sales. In the event of termination of any Retained Employee, Agent will use all reasonable efforts to notify Merchant at least five (5) days prior thereto, except for termination "for cause" (such as dishonesty, fraud or breach of employee duties), in which event no prior notice to Merchant shall be required, provided Agent shall notify Merchant as soon as practicable after such termination. From and after the date of this Agreement and until the Sale Termination 18 Date, Merchant shall not transfer or dismiss employees of the Stores except "for cause" without Agent's prior consent. 9.3. Payroll Matters. During the Sale Term Merchant shall process --------------- the base payroll for all Retained Employees. Each weekday agreed upon by the parties during the Sale Term the Agent shall transfer from the Agency Accounts to Merchant's payroll accounts an amount equal to the base payroll for Retained Employees plus related payroll taxes, worker's compensation and benefits for such week which constitute Expenses hereunder. Merchant has provided to Agent a true and accurate description of Merchant's base payroll, related payroll taxes, worker's compensation and employee benefits and Merchant represents that such description is true and accurate as of the date hereof. 9.4. Employee Retention Bonuses. In Agent's sole discretion Proceeds -------------------------- may be used to pay, as an Expense, retention bonuses ("Retention Bonuses") ----------------- (which bonuses shall be inclusive of payroll taxes but as to which no benefits shall be payable) to Retained Employees who do not voluntarily leave employment and are not terminated "for cause." Such Retention Bonuses shall be payable within thirty (30) days after the Sale Termination Date, and shall be processed through Merchant's payroll system. Section 10. Conditions Precedent. The willingness of Agent and Merchant to ---------- -------------------- enter into the transactions contemplated under this Agreement are directly conditioned upon the satisfaction of the following conditions at the time or during the time periods indicated, unless specifically waived in writing by the applicable party: (a) Merchant shall have obtained the Approval Order by August 13, 1997, and the Approval Order shall not have been stayed nor shall an application for a stay of the Approval Order be pending. (b) All representations and warranties of Merchant and Agent hereunder shall be true and correct in all material respects and no Event of Default shall have occurred at and as of the date hereof and as of the Sale Commencement Date. Section 11. Representations, Warranties and Covenants. ---------- ----------------------------------------- 11.1 Merchant Representations, Warranties and Covenants. Merchant -------------------------------------------------- hereby represents, warrants and covenants in favor of Agent as follows: (a) Merchant: (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation; (ii) has all requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as presently conducted; and (iii) is and during the Sale Term will continue to be, duly authorized and qualified as a foreign corporation to do business and in good standing in each jurisdiction where the nature of its business or properties 19 requires such qualification, including all jurisdictions in which the Stores are located, except where the failure to be in good standing would not impair or impede the ability of Agent to conduct Sales at any Store located in a state for which Merchant is not in good standing. Merchant shall have furnished to Agent a certificate as to the good standing of Merchant in its jurisdiction of incorporation certified by the Secretary of State of such jurisdiction. (b) Subject to the issuance of the Approval Order: (i) the Merchant has the right, power and authority to execute and deliver this Agreement and each other document and agreement contemplated hereby (collectively, together with this Agreement, the "Agency Documents") and to ---------------- perform fully its obligations thereunder; (ii) except for any consent of the Merchant's post-petition lenders required under Merchant's current debtor-in- possession financing facility documents (the "DIP Lender Consent") and the ------------------ Bankruptcy Court order approving such documents, Merchant has taken all necessary actions required to authorize the execution, delivery and performance of the Agency Documents, and no further consent or approval is required for Merchant to enter into and deliver the Agency Documents, to perform its obligations thereunder, and to consummate the Sale; (iii) each of the Agency Documents has been duly executed and delivered by Merchant and constitutes the legal, valid and binding obligation of Merchant enforceable in accordance with its terms; (iv) no court order or decree of any federal, state or local governmental authority or regulatory body is in effect that would prevent or impair, or is required for the Merchant's consummation of, the transactions contemplated by this Agreement, and, except for any required DIP Lender Consent, no consent of any third party which has not been obtained is required therefor; and (v) no contract or other agreement to which the Merchant is a party or by which the Merchant is otherwise bound will prevent or impair the consummation of the Sale and the other transactions contemplated by this Agreement. (c) Merchant owns and will own at all times during the Sale Term, good and marketable title to all of the Merchandise free and clear of all Liens of any nature except for presently existing Liens which, in accordance with the Approval Order, shall attach only to the Guaranteed Amount, amounts reimbursed to Merchant on account of Expenses and any and all other amounts paid by Agent to Merchant hereunder. (d) No suit, action or other proceeding , or injunction or final judgment relating thereto, shall be threatened or pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with the transactions contemplated hereby, or that would have a material adverse effect on the business, financial condition, operating results, assets, operations or business prospects of the Merchant or materially adversely affect the rights of Agent under this Agreement, and no investigation that would result in any such suit, action or proceeding shall be pending or threatened. 20 (e) Merchant owns and will own at all times prior to the Sale Commencement Date good and marketable title to all of the Merchandise, free and clear of all Liens, other than Liens that, pursuant to the Approval Order, will attach only to the Guaranteed Amount, amounts reimbursed to Merchant on account of Expenses and any and all other amounts paid by Agent to Merchant hereunder. (f) Since July 1, 1997 and through the Sale Commencement Date, all normal course permanent markdowns on Merchandise located at the Stores will have been taken on a basis consistent with Merchant's customary practices and policies. (g) Merchant has not since July 1, 1997, and shall not up to the Sale Commencement Date, marked up or raised the price of any items of Merchandise, or removed or altered any tickets or any indicia of clearance merchandise, except in the ordinary course of business. (h) Since July 1, 1997 and through the Sale Commencement Date, Agent shall have ticketed or marked all items of inventory received at the Stores prior to the Sale Commencement Date in a manner consistent with similar inventory located at the Stores and in accordance with Merchant's customary practices and policies relative to pricing and marking inventory. The ticketed price of all items of inventory do not include Sales Taxes. (i) Since July 1, 1997, all point of sale activity at the Stores has occurred and will occur up to the Sale Commencement Date in the ordinary course of business. (j) Merchant has not since July 1, 1997 and shall not up to the Sale Commencement Date purchase or transfer to or from the Stores any inventory outside the ordinary course, including, without limitation, transfers in anticipation of the Sales or of the Inventory Taking. Merchant has not and shall not move inventory or Merchandise to or from the Stores so as to alter the inventory mix, quantities or categories, except in the ordinary course. (k) No prices have been or will be raised and no pricing files altered since July 1, 1997, other than prices for items put on and taken off sale in the ordinary course of business. (l) Supplies (e.g. boxes, bags, twine) have not been since July 1, 1997, and shall not be prior to the Sale Commencement Date, transferred by Merchant between or from the Stores, so as to alter the mix or quantity of supplies at the Stores from that existing on July 1, 1997, other than in the ordinary course of business. (m) Merchant has maintained its pricing files in the ordinary course of business, and prices charged to the public for Merchandise (whether in-Store, 21 by advertisement or otherwise) are the same in all material respects as set forth in such pricing files for the periods indicated therein. All pricing files and records since July 1, 1997, which included the Merchandise Condition Report, since April 1997 relative to the Merchandise have been made available to Agent. All such pricing files and records are true and accurate in all material respects as to the actual cost to Merchant for purchasing the goods referred to therein and as to the selling price to the public for such goods as of the dates and for the periods indicated therein. (n) As of the Sale Commencement Date, goods constituting Merchandise located at the Stores shall be no less than $33 million at Retail Value. (o) Merchant covenants to continue to operate the Stores from the date of this Agreement to the Sale Commencement Date, in each case (i) selling inventory during such period at customary prices, (ii) not promoting or advertising any sales or in-store promotions (including POS promotions) to the public (except for Merchant's historic and customary promotions for all of its locations, (iii) not returning inventory to vendors and not transferring inventory or supplies between or among Stores and the Warehouses, except as permitted under Section 8.4 above, and (iv) not making any management personnel moves or changes at the Stores without Agent's prior written consent (which consent will not be unreasonably withheld). (p) To the best of Merchant's knowledge, all Merchandise is in compliance with all applicable federal, state or local product safety laws, rules and standards. Merchant shall provide Agent with its historic policies and practices regarding product recalls prior to the taking of the inventory at the Stores. (q) Throughout the Sale Term, the Agent shall have the right to the unencumbered use and occupancy of, and peaceful and quiet possession of, each of the Stores, the assets currently located at the Stores, and the utilities and other services provided at the Stores. Merchant shall throughout the Sale Term maintain in good working order, condition and repair, at its sole expense, all cash registers, heating systems, air conditioning systems, elevators, escalators, Store alarm systems, and all other mechanical devices used in the ordinary course of operation of the Stores. (r) Merchant has paid and will continue to pay throughout the Sale Term, all post-petition (i) obligations in respect of self-insured or Merchant funded employee benefit programs for employees, including health and medical benefits and insurance and all proper claims made or to be made in accordance with such programs, (ii) casualty, liability, worker's compensation and other insurance premiums, (iii) utilities provided to the stores, and (iv) applicable taxes. Merchant has provided Agent with a true and accurate description of Merchant's severance benefits for which Retained Employees will be eligible at the conclusion of the Sale. Following the conclusion of the Sale, Merchant shall pay all such severance benefits to applicable Retained Employees in the ordinary course. 22 (s) Merchant has not and shall not throughout the Sale Term take any actions the result of which is to materially increase the cost of operating the Sales, including, without limitation, increasing salaries or other amounts payable to employees. (t) As of the date of this Agreement, Merchant is current in the payment of all post-petition telephone, utilities, taxes, insurance and advertising liabilities. Merchant agrees that in the event that Agent receives notice that any such post-petition liability is overdue or unpaid, or Agent is unable to advertise the Sales with any newspapers, magazines, radio or television stations or other media providers which target or serve the market areas of the Stores or is unable to obtain Merchant's contract rate with any such provider as a result of the Merchant's failure to pay its outstanding post- petition balances with such providers, Merchant shall immediately pay such applicable balances in full. (u) Upon Agent's written request during the Sale Term, Merchant will make available to Agent all on-order files, style runs, open-to-buy reports, sales, reports, purchase journals, markdown calendars, POS calendars, pricing files, advertising schedules and promotion circulars up to the Sale Commencement Date. 11.2 Agent Representations and Warranties. The Agent hereby ------------------------------------ represents, warrants and covenants in favor of the Merchant as follows: (a) The Agent: (i) is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) has all requisite corporate power and authority to consummate the transactions contemplated hereby; and (iii) is and during the Sale Term will continue to be, duly authorized and qualified as a foreign corporation to do business and in good standing in each jurisdiction where the nature of its business or properties requires such qualification. (b) The Agent has the right, power and authority to execute and deliver each of the Agency Documents to which it is a party and to perform fully its obligations thereunder. Agent has taken all necessary actions required to authorize the execution, delivery, and performance of the Agency Documents, and no further consent or approval is required on the part of the Agent for Agent to enter into and deliver the Agency Documents and to perform its obligations thereunder. Each of the Agency Documents has been duly executed and delivered by the Agent and constitutes the legal, valid and binding obligation of the Agent enforceable in accordance with its terms. No court order or decree of any federal, state or local governmental authority or regulatory body is in effect that would prevent or impair or is required for the Agent's consummation of the transactions contemplated by this Agreement, and no consent of any third party which has not been obtained is required therefor. No contract or other agreement to which the Agent is a party or by which the Agent is otherwise bound will prevent or impair the consummation of the transactions contemplated by this Agreement. 23 (c) No action, arbitration, suit, notice, or legal, administrative or other proceeding before any court or governmental body has been instituted by or against the Agent, or has been settled or resolved, or to Agent's knowledge, has been threatened against or affects Agent, which questions the validity of this Agreement or any action taken or to be taken by the Agent in connection with this Agreement, or which if adversely determined, would have a material adverse effect upon the Agent's ability to perform its obligations under this Agreement. Section 12. Insurance. ---------- --------- 12.1 Merchant's Liability Insurance. Merchant shall continue at its ------------------------------ cost and expense until the Sale Termination Date, in such amounts as it currently has in effect, all of its liability insurance policies including, but not limited to, products liability, comprehensive public liability, auto liability and umbrella liability insurance, covering injuries to persons and property in, or in connection with Merchant's operation of the Stores, and shall cause Agent to be named an additional named insured with respect to all such policies. Merchant has provided Agent with true and accurate copies of all such policies. Prior to the Sale Commencement Date, Merchant shall deliver to Agent certificates evidencing such insurance setting forth the duration thereof and naming Agent as an additional named insured, in form reasonably satisfactory to Agent. All such policies shall require at least thirty (30) days prior notice to Agent of cancellation, non-renewal or material change. In the event of a claim under any such policies Merchant shall be responsible for the payment of all deductibles, retentions or self-insured amounts thereunder, unless it is determined that liability arose by reason of the wrongful acts or omissions or negligence of Agent, or Agent's employees, independent contractors or agents (other than Merchant's employees). 12.2 Merchant's Casualty Insurance. Merchant will provide throughout ----------------------------- the Sale Term, at Agent's cost as an Expense hereunder, fire, flood, theft and extended coverage casualty insurance covering the Merchandise in a total amount equal to no less than the retail value thereof. Merchant has provided Agent with true and accurate copies of all such policies. From and after the date of this Agreement until the Sale Termination Date, all such policies will name Agent as loss payee. In the event of a loss to the Merchandise on or after the date of this Agreement, the proceeds of such insurance attributable to the Merchandise plus any self insurance amounts and the amount of any deductible (which amounts shall be paid by Merchant), shall constitute Proceeds hereunder and shall be paid to Agent. In the event of such a loss Agent shall have the sole right to adjust the loss with the insurer. Prior to the Sale Commencement Date, Merchant shall deliver to Agent certificates evidencing such insurance setting forth the duration thereof and naming the Agent as loss payee, in form and substance reasonably satisfactory to Agent. All such policies shall require at least thirty (30) days prior notice to the Agent of cancellation, non-renewal or material change. Merchant shall not make any change in the amount of any deductibles or self insurance amounts prior to the Sale Termination Date without Agent's prior written consent. 24 12.3 Agent's Insurance. Agent shall maintain at Agent's cost and ----------------- expense throughout the Sale Term, in such amounts as it currently has in effect, comprehensive public liability and automobile liability insurance policies covering injuries to persons and property in or in connection with Agent's agency at the Stores, and shall cause Merchant to be named an additional insured with respect to such policies. Agent has provided Merchant with true and accurate copies of all such policies. Prior to the Sale Commencement Date, Agent shall deliver to Merchant certificates evidencing such insurance policies setting forth the duration thereof and naming Merchant as an additional insured, in form and substance reasonably satisfactory to Merchant. In the event of a claim under any such policies Agent shall be responsible for the payment of all deductibles, retentions or self-insured amounts thereunder, unless it is determined that liability arose by reason of the wrongful acts or omissions or negligence of Merchant or Merchant's employees, independent contractors or agents (other than Agent or Agent's employees, agents or independent contractors). 12.4 Worker's Compensation Insurance. Merchant shall at all times ------------------------------- during the Sale Term maintain in full force and effect worker's compensation insurance (including employer liability insurance) covering all Retained Employees in compliance with all statutory requirements. Prior to the Sale Commencement Date, Merchant shall deliver to Agent a certificate of Merchant's insurance broker or carrier evidencing such insurance. 12.5 Risk of Loss. Without limiting any other provision of this ------------ Agreement, Merchant acknowledges that Agent is conducting the Sale on behalf of Merchant solely in the capacity of an agent, and that in such capacity (i) Agent shall not be deemed to be in possession or control of the Stores or the assets located therein or associated therewith, or of Merchant's employees located at the Stores, and (ii) except as expressly provided in this Agreement, Agent does not assume any of Merchant's obligations or liabilities with respect to any of the foregoing. Merchant and Agent agree that Merchant shall bear all responsibility for liability claims of customers, employees and other persons arising from events occurring at the Stores during and after the Sale Term, except to the extent any such claim arises directly from the acts or omissions of Agent, or its supervisors or employees located at the Stores (an "Agent Claim"). In the event of any such liability claim other than an Agent Claim, Merchant shall administer such claim and shall present such claim to Merchant's liability insurance carrier in accordance with Merchant's historic policies and procedures, and shall provide a copy of the initial documentation relating to such claim to Agent, as follows: Agent Hilco Great American Group 5 Revere Drive Suite 206 Northbrook, Illinois 60062 Attn.: Benjamin L. Nortman 25 And Gordon Brothers Companies 500 North Michigan Avenue Suite 1460 Chicago, Illinois 60611 Attn.: Cory Lipoff To the extent that Merchant and Agent agree that a claim constitutes an Agent Claim, Agent shall administer such claim and shall present such claim to its liability insurance carrier, and shall provide a copy of the initial documentation relating to such claim to Merchant, as follows: Merchant: Montgomery Ward & Co., Incorporated Montgomery Ward Corporate Offices Montgomery Ward Plaza Chicago, Illinois 60671 Attn.: Spencer H. Heine, Esq. In the event that Merchant and Agent cannot agree whether a claim constitutes an Agent Claim, each party shall present the claim to its own liability insurance carrier, and a copy of the initial claim documentation shall be delivered to the other party to the foregoing address. Section 13. Indemnification --------------- 13.1. Merchant Indemnification. Merchant shall indemnify and hold ------------------------ Agent and its officers, directors, employees, agents and independent contractors (collectively, "Agent Indemnified Parties") harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from, or related to: (i) Merchant's material breach of or failure to comply with any of its agreements, covenants, representations or warranties contained in any Agency Document; (ii) any failure of Merchant to pay to its employees any wages, salaries or benefits due to such employees during the Sale Term; (iii) subject to Agent's compliance with its obligations under Section 8.3 26 hereof, any failure by Merchant to pay any Sales Taxes to the proper taxing authorities or to properly file with any taxing authorities any reports or documents required by applicable law to be filed in respect thereof; (iv) any consumer warranty or products liability claims relating to Merchandise (v) any liability or other claims asserted by customers, any of Merchant's employees, or any other person against any Agent Indemnified Party (including, without limitation, claims by employees arising under collective bargaining agreements, worker's compensation or under the WARN Act), except for Agent Claims; and (vi) the gross negligence or willful misconduct of Merchant or any of its officers, directors, employees, agents or representatives. 13.2 Agent Indemnification. Agent shall indemnify and hold Merchant --------------------- and its officers, directors, employees, agents and representatives harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from, or related to: (i) Agent's material breach of or failure to comply with any of its agreements, covenants, representations or warranties contained in any Agency Document; (ii) any harassment or any other unlawful, tortious or otherwise actionable treatment of any employees or agents of Merchant by Agent or any of its representatives; (iii) any claims by any party engaged by Agent as an employee or independent contractor arising out of such employment; (iv) any Agent Claims; and (v) the gross negligence or willful misconduct of Agent or any of its officer, directors, employees agents or representatives. Section 14. Defaults. The following shall constitute "Events of Default" ---------- -------- hereunder: (a) Merchant's or Agent's failure to perform any of their respective material obligations hereunder, which failure shall continue uncured seven 27 (7) days after written notice thereof to the defaulting party; or (b) Any representation or warranty made by Merchant or Agent proves untrue in any material respect as of the date made; or (c) A Sale is terminated at a Store for any reason other than (i) an Event of Default by Agent, or (ii) any other breach or action by Agent not authorized hereunder, or (iii) an event administered pursuant to Section 8.7 above. In the event of an Event of Default, any party's damages or entitlement to equitable relief shall be determined by the Bankruptcy Court. Section 15. Sale of FF&E. ---------- ------------ 15.1. Sale for Commission. If requested by in writing by Merchant ------------------- after Entry of the Approval Order, Agent shall advertise in the context of advertising for the Sale that items of FF&E at the Stores are for sale, and shall contact and solicit known purchasers and dealers of furniture and fixtures. Merchant shall notify Agent in writing if any such FF&E are to be excluded from sale and/or if terms and conditions of sale are to be set or restricted in any manner. In consideration of providing such services, Agent shall retain twenty percent (20%) of receipts (net of Sales Taxes and expenses) from all sales or other dispositions of FF&E. In addition, Merchant shall reimburse Agent for Agent's reasonable out of pocket expenses incurred in connection with the liquidation of FF&E which have been previously approved by Merchant, including, without limitation, costs of commissions and advertising. Agent shall have no liability to Merchant for its failure to sell any or all of the FF&E. 15.2 Guaranteed Return. In the event that Merchant elects the ----------------- option set forth in Section 15.1 above, but does not provide Agent with the written request within the time period specified in Section 15.1 above, following Agent's full inspection of the FF&E (whether located in the Stores, stockrooms, Warehouses or offices or otherwise), Agent will provide Merchant, with a written offer to sell the FF&E with a guaranteed return to Merchant specified therein. Section 16. Claims Under Certain Leases. ---------- --------------------------- 16.1 Agent Services. At Merchant's option, Merchant may provide -------------- Agent written notice of its intent to implement a process designed to minimize Merchant's obligations and liabilities to lessors under Store leases (each a "Lease" and collectively, the "Leases"), including, without limitation, pursuant ----- ------ to Section 502(b)(6) of the Bankruptcy Code (collectively, the "Leasehold --------- Liability") and, to the extent practical, to realize any value associated with - --------- each Lease. From and after its receipt of such written notice, and upon subsequent Bankruptcy Court order approving the arrangement, Agent, on an exclusive basis, shall negotiate on behalf of Merchant with the lessors under the Leases, redevelop Stores if and as applicable and market Stores 28 to potential occupants and users thereof. 16.2 Agent Compensation. In consideration for providing the ------------------ services described in Section 16.1 above, Agent shall be entitled to receive from Merchant such compensation upon which the Agent and Merchant shall mutually agree, subject to entry of a subsequent Bankruptcy Court order approving same. Agent and Merchant shall negotiate in good faith to determine the appropriate compensation to be paid hereunder based on a sharing formula for reductions of the Leasehold Liability and any and all proceeds procured in connection with the assignment or other disposition of the Leases pursuant to Section 365 of the Bankruptcy Code or otherwise. Section 17. Bidding Procedures. ---------- ------------------ 17.1. Procedure/timing. On or before August 14, 1997, Merchant shall ---------------- pursue entry of an order (in form and substance satisfactory to Agent) approving that portion of the Motion For Entry of an Order (A) Authorizing Closing of the Stores and "going out of business" Sales and (B) Approving Retention of Liquidator and Related Agency Agreement (the "Motion") that seeks approval of ------ the transactions contemplated hereby on terms and conditions consistent with those set forth herein. Merchant shall require competing bids to be submitted in writing no later than 9:00 a.m. EST on the date that is one business day prior to the hearing on the Motion. In the event that Merchant has so received one or more competing bids in accordance with Section 17.2, then on the day prior to the hearing on the Motion, Merchant shall conduct an auction with respect to the rights granted hereunder (the "Auction"). ------- 17.2. Break-Up Fee; Bid Procedures. ---------------------------- (a) Merchant shall be immediately obligated to pay a $50,000 break-up fee to Agent (the "Break-Up Fee") (i) in the event the (A) Agent is not ------------ the successful bidder at the Auction; (B) another person or persons or entity or entities is or are the successful bidder at the Auction for the grant of the agency arrangements contemplated hereby; and (C) such successful bidder and Merchant consummate such agency transaction; or (ii) in the event the transactions contemplated hereby are not consummated because of Agent's termination of this Agreement in accordance with the terms hereof or the failure to satisfy any of the conditions to Agent's obligations hereunder set forth in Section 10 above. (b) Merchant shall require procedures for the submission of competing bids including, without limitation, a provision that any initial competing bids (each an "Initial Competing Bid") and the successful competing --------------------- bid must be at least 2% higher (in cash) than the bid proposed in hereby and otherwise be on substantially the same terms and conditions as those set forth in this Agreement. Such procedures shall also provide that Merchant and the Bankruptcy Court consider the economic impact of the Merchant's obligation to pay the Break-Up Fee in determining whether a competitive bid is higher and better for Merchant and its estate than any bid submitted by Agent. 29 Section 18. Security Interest. In consideration of the Agent's payment of ---------- ----------------- the Guaranteed Amount, Expenses and the provision of services hereunder to Merchant, contemporaneous with the payment of the initial portion of the Guaranteed Amount to Merchant pursuant to Section 3.3 above, the Merchant hereby grants to Agent a first priority security interest in and lien upon the Merchandise and the Proceeds to secure all obligations of Merchant to Agent hereunder. Merchant shall execute all such documents and take all such other actions as are reasonably required to perfect and maintain such security interest as a valid and perfected first priority security interest. Section 19. Miscellaneous. ---------- ------------- 19.1 Notices. All notices and communications provided for pursuant ------- to this Agreement shall be in writing, and sent by hand, by facsimile, or by Federal Express or other recognized overnight delivery service, as follows: If to the Agent: Schottenstein Bernstein Capital Group, LLC 1010 Northern Boulevard, Suite 330 Great Neck, New York 10021 and Schottenstein Bernstein Capital Group, LLC 1800 Moler Road Columbus, Ohio 43207 Attn: Legal Department With copies to: Battle Fowler LLP 75 East 55th Street New York, New York 10022 Attn: Lawrence Wittman, Esq. Attn: Madlyn Gleich Primoff, Esq. If to the Merchant: Montgomery Ward & Co., Incorporated Montgomery Ward Corporate Offices Montgomery Ward Plaza Chicago, IL 60671 Attn: Spencer H. Heine, Esq. Telecopy No. (312 ) 467-3064 with copies to: Jones, Day, Reavis & Pogue 30 77 West Wacker Drive, Suite 3500 Chicago, IL 60601-1692 Attn: David S. Kurtz, Esq. Telecopy No. (312) 782-8585 Altheimer & Gray 10 South Wacker Drive, Suite 4000 Chicago, IL 60606 Attn: Corey Light Telecopy No. (312) 715-4800 19.2. Governing Law. This Agreement shall be governed and construed ------------- in accordance with the laws of the State of Illinois without regard to conflicts of laws principles thereof, except where governed by the Bankruptcy Code. 19.3. Termination. This Agreement shall remain in full force and ----------- effect until the first to occur of: (i) receipt by Merchant of written notice from Agent that any of the conditions specified in Section 10 hereof have not been satisfied within 14 days of the anticipated Sale Commencement Date set forth in Section 6.1; or (ii) the expiration of the Sale Term and completion and certification by Merchant and Agent of the final Sale reconciliation pursuant to Section 8.7 above. Notwithstanding the foregoing, the representations and warranties of Merchant and Agent contained herein and the provisions of Section 13 above shall survive the termination of this Agreement pursuant to this Section 19.3. 19.4. Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties hereto with respect to the transactions contemplated hereby and supersedes and cancels all prior agreements, including, but not limited to, all proposals, letters of intent or representations, written or oral, with respect thereto. To the extent any provision of the Approval Order is inconsistent with this Agreement, the provisions of the Approval Order shall govern and control. 19.5. Amendments. This Agreement may not be modified except in a ---------- written instrument executed by each of the parties hereto. 19.6. No Waiver. No consent or waiver by any party, express or --------- implied, to or of any breach or default by the other in the performance of its obligations hereunder shall be deemed or construed to be consent or waiver to or of any other breach or default in the performance by such other party of the same or any other obligation of such party. Failure on the part of any party to complain of any act or failure to act by the other party or to declare the other in default, irrespective of how long such failure continues, shall not constitute a waiver by such party of its rights hereunder. 19.7. Successors and Assigns. This Agreement shall inure to the ---------------------- benefit 31 of and be binding upon Agent and Merchant, and their respective successors and assigns; provided, however, that this Agreement may not be assigned by Merchant or Agent to any party without the prior written consent of the other. 19.8 Completion of Exhibits. On or prior to August 11, 1997, ---------------------- Merchant shall deliver all Exhibits hereto in completed form which were not delivered to Agent on the date hereof. Upon completion, such Exhibits shall be deemed incorporated into this Agreement for all purposes as of the date hereof. 19.9 Execution in Counterparts. This Agreement may be executed in ------------------------- two or more counterparts, each of which shall be deemed an original but all of which together shall constitute but one agreement. This Agreement may be executed by facsimile, and such facsimile signature shall be treated as an original signature hereunder. 19.10 Section Headings. The headings of sections of this Agreement ---------------- are inserted for convenience only and shall not be considered for the purpose of determining the meaning or legal effect of any provisions hereof. 19.11 Survival. All representations, warranties, covenants and -------- agreements made by the parties hereto shall be considered to have been relied upon by the parties and shall survive the execution, delivery and performance of this Agreement. IN WITNESS WHEREOF, the Agent and Merchant hereby execute this Agreement by their duly authorized representatives as a sealed instrument as of the day and year first written above. SCHOTTENSTEIN BERSTEIN CAPITAL GROUP LLC By: /s/ David Bernstein --------------------------------------- Name: David Bernstein Title: President and Chief Operating Officer MONTGOMERY WARD & CO., INCORPORATED By: /s/ Spencer H. Heine --------------------------------------- Name: Spencer H. Heine Title: Executive Vice President 32 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000,000 OTHER DEC-28-1996 DEC-29-1996 SEP-27-1997 238 307 278 0 1,147 0 2,070 (871) 4,797 0 0 212 0 1 (549) 4,797 3,217 3,855 2,872 2,872 1,645 582 103 (1,347) (375) (972) 0 0 0 (972) (27.37) (27.37)
-----END PRIVACY-ENHANCED MESSAGE-----