Court File No.

I, HAROLD S. STEPHEN, of the City of Mississauga in the Regional Municipality of Peel, MAKE OATH AND SAY:

1. I am the Chief Financial Officer of The T. Eaton Company Limited "Eaton’s") and thereby have personal knowledge of the matters hereinafter deposed to. Where my knowledge is stated to be on information and belief, I verily believe such information to be true.

RELIEF SOUGHT

2. Eaton's filed a Notice of Intention to make a Proposal on August 20, 1999 which, together with the supporting material, is attached as Exhibit "A". In connection with such proceedings, Eaton's requests that this Honourable Court grant, inter alia, an Order:

• Appointing Richter & Partners Inc. as interim receiver (the "Interim Receiver"), without security, of all the present and future property, assets and undertaking of Eaton's including inventory inventory proceeds and such other assets that may be required by the Interim Receiver to fulfill its mandate but excluding real property or premises owned or leased by Eaton's;
• Approving an agreement entered into by Eaton's dated as of July 29, 1999, as amended as of August 20, 1999 (collectively the "Agency Agreement"), appointing Gordon Brothers Retail Partners, LLC "Gordon Brothers"), Hilco Trading Co., Garcel, Inc. and Schottenstein/Bernstein Capital Group, LLC (collectively the "Agent") as exclusive agent for the liquidation of Eaton's inventory;
• Authorizing and directing the Interim Receiver to enter into the Agency Agreement and to perform the transactions contemplated therein; and
• Authorizing and directing the Interim Receiver to receive the Initial Payment (as defined in the Agency Agreement) from the Agent in accordance with the Agency Agreement, and to forthwith pay such Initial Payment to Retail Funding Inc. "Retail Funding") on account of amounts outstanding and owing by Eaton's to Retail Funding under an Amended and Restated Credit Agreement made as of May 21, 1999 (the "Restated Credit Agreement").

1. This motion is brought on an urgent basis to preserve the assets of Eaton's and for the purpose of concluding arrangements and continuing negotiations to maximize returns for all creditors and stakeholders in a stabilized environment. The immediate appointment of the Interim Receiver is essential as some creditors have already exercised self-help remedies in stores by seizing inventory or cash. The Interim Receiver is in the best position to ensure compliance with the stay provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, as amended (the "BIA"), and to ensure that the best interests of all stakeholders are protected. Furthermore, the appointment sought permits management of Eaton's to continue pursuing the sale of its real property, leasehold interests and other assets as an integral component of the proposal ultimately to be filed for consideration by creditors and by this Honourable Court.

FACTUAL BACKGROUND

2. Retailers throughout Canada generally experienced lower sales and margins commencing in the early 1990s. Eaton's likewise suffered a decline in its financial performance and filed for protection under the Companies Creditors Arrangement Act (the "CCAA") on February 27, 1997 seeking a stay of proceedings and an opportunity to devise a plan of compromise or arrangement for creditor approval. An Amended Restated Plan of Comprise or Arrangement was subsequently endorsed by creditors and sanctioned by this Honourable Court on September 12, 1997.

Post CCAA Operations/Lending Arrangements

3. Eaton's currently operates 64 retail stores in several locations located throughout Canada. Approximately 4,000 full-time employees and 9,500 part-time employees are involved in Eaton's operations. Eaton's also owns a warehouse and distribution centre located in Toronto, Ontario. Although certain of Eaton's real property shopping centre interests were disposed of during its CCAA restructuring, it maintains an interest in ancillary freehold an d leasehold properties. Attached as Exhibit "B" is a schedule listing the retail stores and Eaton's property related interests.
4. Effective as of the implementation date of the Plan, Eaton's established a $250 million credit facility with General Electric Capital Canada Inc. ("GECC"), Royal Bank of Canada "RBC") and Congress Financial Corporation (Canada) ("Congress") pursuant to a Credit Agreement dated October 30, 1997 (the "Credit Agreement") made among Eaton's, certain of its subsidiaries, GECC, Congress and RBC as lenders, and GECC as agent.. This operating loan facility was generally secured by all of the assets and undertaking of Eaton's including its inventory, furniture, fixtures and equipment and real property.
5. RBC subsequently assigned its participating interest in the Credit Agreement and a new lender, ABN AMRO Bank Canada "ABN"), joined the syndicate.
6. In May 1999, the maximum amount of the loan under the Credit Agreement was increased to $270 million by the addition of a $20 million Tranche B Facility provided by GECC. The revised operating loan facility was confirmed by the entering into of the Restated Credit Agreement among Eaton's, certain of its subsidiaries, GECC, ABN and Congress as lenders, and GECC as agent.
7. On July 30, 1999, the Restated Credit Agreement operating loan facility was enhanced by a financial commitment provided by Retail Funding, a related company of Gordon Brothers. Each of the parties appointed under the Agency Agreement as Agent indirectly participated in the financial commitment extended by Retail Funding to Eaton's.
8. In general terms, Retail Funding agreed to purchase a participation interest of $39.4 million in the operating loan facility. Its agreement to purchase such interest was secured by the issuance of a letter of credit. With such financial assistance in place, the existing lenders increased the availability under the operating loan by $39.4 million while maintaining the cap of $270 million. In the event of any default under the operating ]pan, the lenders were given the option of calling for payment of the participation purchase price and upon any failure to pay could call upon the Retail Funding letter of credit. The lenders would then assign their respective pro rata portions of the loan to Retail Funding. Retail Funding was also given an option to purchase the whole of the loan facility extended under the Restated Credit Agreement at par upon agreed-upon terms.
9. At the time that Eaton's agreed to the credit enhancement facility, it had virtually exhausted its operating funds and was in danger of being unable to meet certain pending obligations. The increased facilities available to Eaton's under the Restated Credit Agreement because of the Retail Funding participation allowed it to continue operations while pursuing discussions with prospective purchasers of its stores.

Financial Performance

10. The Eaton's management team aggressively implemented a new business strategy in 1998 designed to return the company to profitability. Major renovations were completed at the four flagship stores, Toronto Eaton Centre, Toronto Yorkdale, Vancouver Pacific Centre and the Montreal downtown store, resulting in the stores becoming more attractive shopping destinations and significantly increasing the setting space at each location.
11. The implementation of the new business strategy resulted in improved financial results but did not restore profitability. Consumer spending did not improve and several retailers in Canada continued to experience lower sales activities. Although businesses targeted for accelerated growth and market share generated -significantly increased sales during fiscal 1998, this increase in sales was offset by the decline in sales from those businesses which Eaton's exited from in fiscal 1998.
12. Eaton's also experienced a serious decline in gross retail sales in the fourth quarter of 1998 which traditionally represented the strongest selling period. Overall, the operating results for fiscal 1998 were extremely disappointing involving a net loss for the 52-week period ending January 30, 1999 of $72 million.
13. No material improvement in sales was achieved in the first quarter of fiscal 1999 with a net loss before discontinued operations for the 16-week period ending May 22, 1999 of $35.7 million. Eaton's poor financial performance was compounded by having to offer greater than anticipated discounts in order to sell excess inventory. Eaton's was in a negative cash flow position throughout this period of time.

SEARCH FOR STRATEGIC BUYER

14. Prior to the February 27, 1997 CCAA filing, Eaton's considered a sale of its assets or shares and entered into discussions with a number of potential strategic buyers and investors. RBC Dominion Securities Inc. was engaged and discussions were pursued with the strategic purchaser expressing the most significant interest in concluding a transaction. The interests of other possible purchasers and investors were also explored. However, these discussions did not result in a transaction, principally due to the poor financial condition of Eaton's at that time.
15. After the CCAA filing, Eaton's engaged the services of Goldman Sachs, & Co. and RBC Dominion Securities Inc. to seek out strategic purchasers or investors in Eaton's and all major potential buyers and investors were contacted. These efforts were ultimately unsuccessful and the restructuring of Eaton's under the CCAA proceeded without a strategic purchaser or investor.
16. Recently, it became evident that the continuing erosion of Eaton's financial position had to be reversed or the company would fail. After considering several options, it was determined that one or more persons interested in making a strategic investment or entering into a strategic alliance should be identified. On May 18, 1999, Eaton's announced that it was in the process of evaluating a number of strategic alternatives with a view to maximizing shareholder value and that a special advisory committee of its Board of Directors comprised of five of the non-management directors would oversee this process.
17. The Board of Directors retained ScotiaMcLeod Inc. as its financial advisor in connection with the development of the strategic alternatives. ScotiaMcLeod Inc. pursued several options, including the pursuit of additional equity investment from existing shareholders or one or more strategic investors, various alliances or cost-sharing arrangements with other department store retailers, a bid for Eaton's shares and a sale of the company's assets.
18. A due diligence room was established containing confidential information relevant to potential investors or purchasers of the shares or assets of Eaton's. A number of interested parties entered into confidentiality agreements to gain access to such information. After several months of ongoing negotiations, it became evident that the sale of Eaton's interests on a going concern basis to one or more purchasers represented the most desirable result.
19. Discussions with potential purchasers also revealed that they were not interested in acquiring a substantial amount of merchandise inventory on the purchase of the stores. Eaton's therefore approached Gordon Brothers to negotiate terms for the conducting of a "store closing" or "liquidation" sale to secure the highest returns possible on the sale of such inventory while discussions continued with prospective purchasers relating to the sale of certain of Eaton's stores and real estate.

NEGOTIATION OF AGENCY AGREEMENT

20. Gordon Brothers was identified as the ideal candidate for conducting a liquidation of inventory in conjunction with the proposed store sales because of its proven track record as an industry leader in this area, resulting in a solid reputation throughout North America. It was agreed that Gordon Brothers would involve other industry players to participate in the liquidation because of the magnitude and complexity involved. The agreement ultimately concluded for the liquidation of Eaton's inventory on July 29, 1999 (the "July 29, 1999 Agency Agreement") is attached as Exhibit "C".
21. As the July 29, 1999 Agency Agreement was negotiated in contemplation of the successful sale by Eaton's of certain of its stores, it included a condition precedent involving the sale by Eaton's of no less than 26 stores (Section 10. 1 (v)). For the purposes of this affidavit, the defined terms of the July 29, 1999 Agency Agreement have been adopted for ease of reference. In summary, this agreement also provided, inter alia, that:

• the liquidation would involve not less than 30 stores to be identified in writing by Eaton's on or before October 7, 1999 (Section 2.1);
• Eaton's was entitled to a Guaranteed Amount based on a Guaranteed Percentage with the percentage varying depending on the nature of the inventory liquidated and the course of liquidation adopted (Section 3.1);
• an Initial Payment was payable to Eaton's in partial satisfaction of the Guaranteed Amount on commencement of the sale;
• Eaton's had the option to elect the Recovery Option and receive a lower Guaranteed Amount but be entitled to share in a portion of the Proceeds in excess of the aggregate of the Guaranteed Amount, Expenses and Agent's Fee with such participation fixed at 60% of such excess Proceeds (Section 3.1 (ii));
• the Agent agreed to pay all store-level expenses and certain other expenses subject to various reasonable limitations (Section 4.1);
• irrevocable standby letters of credit were to be posted naming Eaton's as beneficiary to secure the Agent's obligation to pay those expenses borne by it under the agreement (Section 3.4);
• the sale was to commence between October 21, 1999 and November 5, 1999 with the exact date to be selected by Eaton's by October 7, 1999 (Section 6.1);
• the sale was to be completed at each store by no later than January 23, 2000 subject to a mutually agreeable extension (Section 6.1);
• the Agent's obligation to pay certain of the expenses incurred in conducting the liquidation excluded severance and termination payments for Eaton's employees (Section 4.1); and
• Eaton's was required to deliver a $3 million irrevocable standby letter of credit in favour of the Agent which the Agent was entitled to draw on at any time on or after

• November 5, 1999 if the agreement was terminated in certain circumstances (Section 17.4).

1. The July 29, 1999 Agency Agreement was the product of extensive negotiations and hard bargaining over a four-week period. Eaton's was extremely pleased with the terms because they reflected the best interests of stakeholders by providing enhanced returns in comparison to previous liquidations it had participated in.

EVENTS LEADING TO BIA FILING

Failure of Negotiations with Prospective Purchasers

2. By early July 1999, except for one potential purchaser of a significant number of the stores, all parties which had initially expressed an interest in the company's assets or shares indicated that they had no interest in or were not in a position to complete a transaction with Eaton's. Negotiations were therefore intensively pursued with the remaining potential purchaser for the sale of certain of its key stores. Commencing in late June 1999, Eaton's began discussions on a confidential basis with several of its principal landlords respecting the sale of certain of its stores to the prospective purchaser and the closing of certain of its other stores together with the attendant liquidation of merchandise inventory. Many landlords expressed a willingness to assist Eaton's in facilitating such a sale and were actively involved in their own discussions with the prospective purchaser to assist in completing the sale.
3. During the first two weeks of August 1999, final negotiations were entered into with the prospective purchaser with the expectation that a definitive agreement would be signed during the week of August 16^th which would allow the matter to be considered by shareholders at the company's annual meeting scheduled for September 29, 1999. However, on Friday, August 13, 1999, the prospective purchaser advised Eaton's that it had determined not to proceed with the transaction.
4. On August 14, 1999, the company's Board of Directors determined that Eaton's should cease accepting further shipments of merchandise inventory to reduce the risk of Eaton's not being able to pay for such merchandise. On August 16, 1999, Eaton's announced that the negotiations with the most recent prospective purchaser had broken down and that it would cease accepting further shipments of merchandise inventory until further notice.
5. Over the last ten days, Eaton's engaged in active discussions relating to a transaction including the sale of certain of its stores which were reinitiated by a former potential purchaser. However, the precipitous steps taken by certain creditors and a genuine concern that other creditors would adopt a similar course of action compelled Eaton's to seek protection under the BIA. The filing maintained the status quo for the benefit of all creditors and allowed the Eaton's management team to continue discussions with this prospective purchaser and others.

Exercise of Remedies by Creditors

6. All of these circumstances gave rise to a significant amount of uncertainty with respect to the future of Eaton's. Although many creditors remained supportive of Eaton's initiatives to sell certain of its stores, others recently elected to unilaterally exercise remedies to advance their individual positions.
7. On August 19, 1999, Tommy Hilfiger Canada Inc. ("Tommy Hilfiger") entered the Montreal Eaton's store under the authority of a Quebec: Court Order authorizing it to seize its goods and removed a significant amount of inventory. The Court Order also authorized Tommy Hilfiger to enter into other stores located in Quebec for the purpose of seizing additional goods.
8. On August 20, 1999, a bailiff entered the Eaton's store located at the Rideau Centre in Ottawa, Ontario to seize cash in satisfaction of a Default Judgment secured by Jacques Lamont Ltee in the amount of approximately $80,000. Approximately $9,500 of cash was removed from the premises.
9. These events placed Eaton's in a precarious position. Precipitous acts by other creditors would prelude the orderly liquidation of Eaton's inventory which would be extremely detrimental to the interest of the general body of creditors. Eaton's therefore closed its Quebec stores on August 20, 1999 and proceeded to file the Notice of Intention to File a Proposal.

CONTINUING DISCUSSIONS WITH THE AGENT

10. After the collapse of negotiations with prospective purchasers and the initiation of recovery proceedings by creditors, Eaton's continued discussions with the Agent to ascertain if suitable arrangements could be made for the immediate liquidation of inventory in the absence of any sale by Eaton's of its stores. The Agent was fully aware of the imminent bankruptcy proceedings and the July 29, 1999 Agency Agreement had to be amended and expanded to address the new circumstances.
11. These negotiations with the Agent resulted in an Amending Agreement concluded as of August 20, 1999 (the "Amending Agreement") which also named the proposed Interim Receiver as a party to the agreement subject to the receipt of court approval. The Amending Agreement is attached and marked as Exhibit "D".
12. In addition to naming the Interim Receiver as a party, the Amending Agreement changed or expanded upon the July 29, 1999 Agency Agreement in several respects, including, inter alia:

• the assumption by the Interim Receiver of all rights, benefits and entitlements of Eaton's, and jointly and severally with Eaton's, all liabilities and obligations of Eaton's contained in the July 29, 1999 Agency Agreement as amended (paragraph 3);
• the deletion of the pre-condition requiring that Eaton's sell 26 stores (Section 6(q)(ii));
• the election by Eaton's to exercise the Recovery Option with the liquidation to commence on August 24, 1999, or such later date as agreed, and conclude by November 30, 1999 (Sections 8 and 6(l));
• the Agent agreed that Eaton's could maintain the highest Guaranteed Percentage provided for in the July 29, 1999 Agency Agreement and could share 30% of the Proceeds in excess of the aggregate of the Guaranteed Amount, Expenses and Agent's Fee;
• the Initial Payment payable to Eaton's was fixed at $ 100 million;
• the Agent agreed to provide for the payment as an expense under the July 29, 1999 Agency Agreement of severance and termination payments to store employees with such liability limited to the aggregate amount of $7 million; and
• the Agent was permitted to purchase additional merchandise inventory of similar quality and category as its sole risk and cost with Eaton's to receive 10% of the receipts from the sale of such inventory.

1. The Amending Agreement terms are very favourable to Eaton’s and reflect the realities of bankruptcy proceedings. For example, the Agent agreed to pay as an expense $7 million of liabilities on account of severance and termination payments for employees and such payment will not reduce Eaton's recovery under the Agency Agreement. Eaton's was also granted the right to participate in the proceeds of sale of additional inventory brought in by the Agent at its own risk and cost. The negotiation of the highest Guaranteed Percentage provided for in the July 29, 1999 Agency Agreement represented tremendous value to Eaton's by maximizing the up-front share, of Eaton's proceeds and reducing the risk that the amount payable at the conclusion of the sale would not exceed the aggregate of the Guaranteed Amount, Expenses and Agent's Fee while at the same time giving Eaton's a share in any excess profits generated by the inventory liquidation. Overall, the Amending Agreement represents a fair and equitable arrangement designed to secure the highest returns on the sale of inventory.

RETAIL FUNDING PURCHASE OF LOAN POSITION

2. While negotiations were underway relating to the Amending Agreement, Retail Funding initiated negotiations for the purchase of the interests of the other lenders participating in the Restated Credit Agreement. Retail Funding was successful in such negotiations on August 20, 1999 and the transactions to complete this purchase together with the assignment of the security under the Restated Credit Agreement to Retail Funding is scheduled to be completed in advance of the hearing of this motion.
3. Retail Funding will therefore be the most significant secured lender of Eaton's and it is entirely supportive of the filing by Eaton's under the BIA and this motion for the appointment of an interim receiver. The amount payable by Eaton's under the Restated Credit Agreement as of August 20, 1999, was approximately $189,625,000.00.
4. With respect to the security assigned to Retail Funding under the Restated Credit Agreement, the main security granted by Eaton's to secure the advances to and the obligations of Eaton's under the Restated Credit Agreement consists of the inventory of Eaton's and proceeds of sale. Eaton's also granted to the lenders under the Restated Credit Agreement a general security over all of its personal property and certain mortgages and hypothecs on real property and immovables, including the two main immovable properties in the Province of Quebec.
5. General Electric Capital Inc., as agent for the lenders under the Restated Credit Agreement, retained PriceWaterhouseCoopers Inc. ("PWC") as advisors to the lenders. PWC requested and has obtained legal advice on the validity and priority of the security interests on the personal property and movable property of Eaton's for all Provinces of Canada, except Newfoundland where Eaton's does not have material assets and of the hypothecs on the two main immovable properties in the Province of Quebec. A copy of the letter of Daniel R. Dowdall of the Fraser Milner, counsel for PWC, dated August 22, 1999 together with the subject legal opinions are attached as Exhibit "E"
6. The legal opinions conclude that if Eaton's were bankrupt, the security in the personal property and movables of Eaton's and in the two main Quebec immovable properties would be valid and enforceable against a trustee in bankruptcy of Eaton's.
7. With respect to the $100 million Initial Payment payable by the Agent under the Agency Agreement, it is proposed that such funds be payable by the Interim Receiver on receipt to Retail Funding. Eaton's supports this payment because Retail Funding has a first ranking charge over these proceeds. This payment will also reduce the principal amount payable under the Restated Credit Agreement and thereby avoid unnecessary interest accruals. Finally, Eaton's does not require access to these funds to maintain necessary operations for the liquidation process.

REQUIREMENT FOR INTERIM RECEIYER

8. The appointment of the Interim Receiver is an integral aspect of the proposed liquidation of Eaton's inventory as the Interim Receiver is in the best position to ensure that the status quo is maintained while the liquidation is completed. Creditors will take comfort in such appointment and will also be precluded from taking precipitous steps inconsistent with the interest of the general body of creditors. It is also critical that the liquidation commence immediately to ensure that the inventory does not become stale as the Fall season is approaching and Eaton's has discontinued further purchases of inventory. Any delays in the commencement of the liquidation will erode the value of the inventory which will ultimately have to be sold. As a result of the past negotiations, Gordon Brothers is "ready and able" to undertake this task immediately upon the approval of the Agency Agreement by this Honourable Court. The recoveries on the liquidation are anticipated to be more than sufficient to retire amounts owing under the Restated Credit Facility. Therefore, unsecured creditors have a vested interest in the early start of the liquidation.
9. The Agency Agreement also has the potential of benefiting those creditors which have supplied goods to Eaton's as it contemplates additional purchases by the Agent to be sold during the liquidation process. I understand that several of Eaton's suppliers have significant inventories of goods which have not been delivered to Eaton's because of the closure of the Eaton's warehouse. The possibility of the Agent purchasing such goods represents an excellent opportunity for these suppliers to minimize their exposure if other buyers cannot be located in a timely manner.
10. Directing the Interim Receiver to enter into the Agency Agreement will also avoid the payment of $4.4 million in break-up fees which are secured by letters of credit and would otherwise be payable. The Agency Agreement provides for a break-up fee of $3 million being paid to the Agent if it ultimately does not sell the Eaton's inventory. Retail Funding was paid a break-up fee of $1.4 million in consideration of Retail Funding agreeing to purchase the $39.4 million participation interest in the Restated Credit Agreement operating loan facility. However, this fee is refundable if Retail Funding recovers all amounts owing to it and the Agent completes the sale of Eaton's inventory.
11. 1 remain encouraged that it is still possible for Eaton's to successfully conclude negotiations with a prospective purchaser for the sale of certain of its stores as part of the proposal is to be forwarded for creditor approval and sanction of this Honourable Court. Eaton's has significant tax losses and there is residual value in Eaton's leasehold interests. These underlying values can only be "unlocked" for the benefit of unsecured creditors on the sale of stores and the company, in conjunction with related transactions, to a third party.
12. Management of Eaton's has carefully considered all of its options. It has concluded that proceeding with the liquidation without pursuing further opportunities to sell certain of its stores and to recover $390 million in tax losses would represent a "lost opportunity" and be extremely detrimental to the interest of its creditors and other stakeholders. I have been involved in all discussions with prospective purchasers of Eaton's stores and am completely satisfied that there are compelling reasons to continue pursuit of such negotiations in these circumstances. The successful conclusion of such negotiations might also preserve the jobs of some of Eaton's employees which is a factor that management has also been mindful of throughout.
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14. This affidavit is filed in support of the appointment of an interim receiver together with directing the Interim Receiver to enter into the Agency Agreement and certain ancillary relief and not for any improper purpose.