<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HARVEY ELECTRONICS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 5731 13-1534671
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER)
</TABLE>
------------------------
205 CHUBB AVENUE
LYNDHURST, NEW JERSEY 07071
(201) 842-0078
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
FRANKLIN C. KARP, PRESIDENT
HARVEY ELECTRONICS, INC.
205 CHUBB AVENUE
LYNDHURST, NEW JERSEY 07071
(201) 842-0078
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
PAUL RUBELL, ESQ. JAY KAPLOWITZ, ESQ.
YANG CHA, ESQ. GERSTEN, SAVAGE, KAPLOWITZ & FREDERICKS, LLP
RUSKIN, MOSCOU, EVANS & FALTISCHEK, P.C. 101 EAST 52ND STREET
170 OLD COUNTRY ROAD NEW YORK, NEW YORK 10022
MINEOLA, NEW YORK 11501 (212) 752-9700
(516) 663-6500 (212) 980-5192 (FAX)
(516) 663-6643 (FAX)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS NUMBER OF SHARES PRICE PER MAXIMUM AGGREGATE
OF SECURITIES TO BE REGISTERED TO BE REGISTERED SHARE(1) OFFERING PRICE(1)
<S> <C> <C> <C>
Common Stock, $.01 par value(2) 977,500 $ 5.00 $ 4,887,500
Warrants(3) 1,495,000 $ .10 $ 149,500
Common Stock Issuable on Exercise of Warrants 1,495,000 $ 5.50 $ 8,222,500
Representative's Warrant 1 $10.00 $ 10.00
Common Stock Issuable on Exercise of Representative's
Warrant 85,000 $ 6.00 $ 510,000
Warrants Issuable on Exercise of Representative's
Warrant 130,000 $ .12 $ 15,600
Common Stock Underlying the Warrants Issuable on
Exercise of Representative's Warrant 130,000 $ 5.50 $ 715,000
Total Registration Fee............................................................................................
<CAPTION>
TITLE OF EACH CLASS AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $.01 par value(2) $1,441.81
Warrants(3) $ 44.10
Common Stock Issuable on Exercise of Warrants $2,425.64
Representative's Warrant (4)
Common Stock Issuable on Exercise of Representative's
Warrant $ 150.45
Warrants Issuable on Exercise of Representative's
Warrant $ 4.60
Common Stock Underlying the Warrants Issuable on
Exercise of Representative's Warrant $ 210.93
Total Registration Fee................................ $4,277.53
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(2) Includes 127,500 shares of Common Stock subject to the Representative's
over-allotment option.
(3) Includes 195,000 Warrants subject to the Representative's over-allotment
option.
(4) No fee due pursuant to Rule 457(g).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of such State.
SUBJECT TO COMPLETION, DATED DECEMBER , 1997
PROSPECTUS
850,000 SHARES OF COMMON STOCK AND
1,300,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
HARVEY ELECTRONICS, INC.
------------------------------
This prospectus (the 'Prospectus') relates to an offering (the 'Offering')
by Harvey Electronics, Inc., a New York corporation (the 'Company'), of 850,000
shares (the 'Shares') of common stock, par value $0.01 per share ('Common
Stock') and 1,300,000 redeemable common stock purchase warrants ('Warrants'),
through The Thornwater Company, L.P. ('Representative'), as representative of
the several underwriters ('Underwriters') named elsewhere in this Prospectus.
The Shares and Warrants (collectively, the 'Securities') are being offered and
sold separately and will be separately transferable immediately upon issuance.
Each Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price equal to 110% of the per share offering price of the
Shares, subject to adjustment in certain events, during the three-year period
commencing two years from the Effective Date as defined below, or earlier with
the consent of the Representative. The Warrants are subject to redemption by the
Company at $.10 per Warrant, at any time commencing two years (or earlier with
the consent of the Representative) from the date that the Securities and
Exchange Commission ('SEC') declares the registration statement ('Registration
Statement'), of which this Prospectus forms a part, effective (the 'Effective
Date'), and prior to their expiration, provided the closing bid price of the
Common Stock if traded on the NASDAQ SmallCap Market ('NASDAQ SmallCap') or the
OTC Electronic Bulletin Board, or the last sales price per share if listed on
the NASDAQ National Market or a national exchange, exceeds 150% of the per share
public offering price ($7.50 per share) for 20 consecutive trading days during
such three-year period. If redeemed the Warrants will be exercisable until the
close of the trading day preceding the date fixed for redemption. See
'Description of Securities -- Warrants.'
There is currently no active trading market for the Common Stock or
Warrants, and there can be no assurance that an active trading market market
will develop for the Securities in the future or that if developed, it will be
sustained. The Company has applied for the trading of the Common Stock and the
Warrants on the NASDAQ SmallCap and the Boston Stock Exchange ('BSE').
The per share public offering price of the Shares and the exercise price and
other terms of the Warrants were determined by negotiation between the Company
and the Representative and do not necessarily bear any relationship to the
Company's assets, earnings, book value, net worth, or other generally accepted
criteria of value. See 'Underwriting.'
INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION.
SEE 'RISK FACTORS' BEGINNING ON PAGE 8 AND 'DILUTION' ON PAGE 16.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share....................................... $ 5.00 $ 0.50 $ 4.50
Per Warrant..................................... $ 0.10 $ 0.01 $ 0.09
Total (3)....................................... $4,380,000.00 $ 438,000.00 $3,942,000.00
</TABLE>
(1) Does not include additional compensation to the Representative consisting of
(i) a non-accountable expense allowance equal to 3% of the aggregate
purchase price of the Securities, or $131,400 ($151,110 if the
Representative's over-allotment option is exercised in full), of which
$25,000 has been paid to date; (ii) a warrant to purchase 85,000 shares of
Common Stock at $6.00 per share and/or 130,000 Warrants at $.12 per Warrant
(the 'Representative's Warrant'); and (iii) a three-year consulting
agreement providing for fees totalling $87,600, which is payable to the
Representative in full on the closing of this Offering. For additional
information concerning further agreements between the Company and the
Underwriters, including an agreement to indemnify the Underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended ('Securities Act'), and to pay the Underwriters under
certain circumstances a warrant solicitation fee of 5% of the exercise price
of each Warrant exercised, see 'Underwriting.'
(2) Before deducting the non-accountable expense allowance, consulting fee or
other compensation payable to the Representative, and other estimated
expenses of the Offering approximating $443,000 payable by the Company.
(3) The Company and Harvey Acquisition Company, LLC ('HAC'), the selling
securityholder, have granted the Underwriters an option, exercisable for 45
days after the Effective Date to purchase up to an additional 127,500 shares
of Common Stock and/or 195,000 Warrants (the 'Over-Allotment Option'). The
first 27,500 shares of Common Stock subject to the Over-Allotment Option
will be sold by the Company, and the balance will be sold by HAC. All
Warrants subject to the Over-Allotment Option will be sold by the Company.
Securities sold under the Over-Allotment Option will be sold upon the same
terms and conditions set forth above. If the Over-Allotment Option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $5,037,000, $503,700 and
$4,083,300, respectively. See 'Underwriting.'
------------------------------
The Securities are being offered by the Underwriters, when, as and if delivered
to and accepted by them subject to certain conditions. It is expected that
certificates for the shares of Common Stock and the Warrants offered hereby will
be available for delivery on or about January ___, 1998, at the office of The
Thornwater Company, L.P., 107 A East 37th Street, New York, New York.
------------------------------
THE THORNWATER COMPANY, L.P.
December , 1997
<PAGE>
[Photo of a library vignette at Greenwich, CT location.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK OR WARRANTS TO
STABILIZE THE MARKET PRICES, PURCHASES OF THE COMMON STOCK OR WARRANTS TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY
THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE 'UNDERWRITING.'
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety. Unless
otherwise indicated, all information herein assumes (i) no exercise of the
Over-Allotment Option; (ii) no exercise of the Representative's Warrant; (iii)
no exercise of options granted or available for grant under the Company's Stock
Option Plan; (iv) no exercise of other outstanding warrants; and (v) no
conversion of outstanding Preferred Stock. See 'Description of Securities' and
'Underwriting.' The following discussion and analysis contains forward-looking
statements which involve risks and uncertainties. Factors that could cause or
contribute to such uncertainties include those discussed in 'Risk Factors.'
THE COMPANY
Harvey Electronics, Inc. is engaged in the retail sale, service and custom
installation of high quality audio, video and home theater equipment. The
equipment includes high fidelity components and systems, video cassette
recorders, digital versatile disc players, direct view and projection television
sets, audio/video furniture, digital satellite systems, conventional telephones
and related accessories. The Company has been engaged in this business in the
New York Metropolitan area for seventy years. The Company currently operates
four retail stores. The two Manhattan stores are located on Broadway at 19th
Street and on 45th Street at Fifth Avenue. The Company's other two stores are
located on Route 17 in Paramus, New Jersey and on West Putnam Avenue in
Greenwich, Connecticut.
The Company offers its customers a wide selection of high-quality consumer
audio, video and home theater products, the distribution of which is limited to
specialty retailers (generally referred to in the industry as 'esoteric
brands'). The Company is one of the country's largest retailers of 'esoteric
brands' manufactured by Bang & Olufsen, Marantz, McIntosh, Meridian, and Adcom.
The Company has sold these manufacturers' products for a number of years. The
Company believes that it benefits from strong working relationships with these
manufacturers.
The Company's stores are designed to offer an attractive and pleasing
environment and to display its products in realistic home settings commonly
known in the industry as 'lifestyle home vignettes.' Sales personnel are highly
trained professionals with extensive product knowledge. This contrasts sharply
with a more rushed atmosphere and lesser-trained personnel of mass merchants.
The Company's audio product sales represent approximately 74% of the
Company's net sales and yield gross profit margins of approximately 38%. The
Company's video product sales represent approximately 23% of the Company's net
sales and yield gross profit margins of approximately 23%. The Company also
provides custom installation of products it sells. Currently, approximately 17%
of net product sales involve custom installation. The labor portion of custom
installation presently represents approximately 3% of net sales.
The Company believes that offering custom installation helps to distinguish
it from the mass merchants. Custom installation is one example of the Company's
refocused marketing and advertising efforts which emphasize quality products and
services rather than price. The Company's target customers are affluent
consumers in the New York Metropolitan area.
The Company intends to utilize the net proceeds from this Offering to open
or acquire four additional retail stores within the next twenty four months. The
Company plans to locate these new stores in affluent suburbs similar to
Greenwich, Connecticut, such as the north shore of Long Island, New York;
Monmouth County, New Jersey; Westchester County, New York; and southern
Connecticut.
3
<PAGE>
On August 3, 1995, the Company (then known as The Harvey Group Inc. and its
subsidiaries) filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York ('Court'). This filing was the result of certain factors
including but not limited to: (i) the negative effect of a $2,138,000 judgment
entered against the Company; (ii) liabilities arising from The Harvey Group Inc.
and its discontinued food brokerage division, the payment of which significantly
reduced cash; (iii) the recession of the early 1990s coupled with a soft market
in the consumer electronics industry, all of which resulted in losses and a
shortage of cash flow; and (iv) the delisting (in June 1995) of the Company's
common stock from the American Stock Exchange, which delisting rendered a
proposed $4.2 million equity placement untenable.
On November 13, 1996, the Court confirmed the Company's Restated Modified
Amended Joint and Substantially Consolidated Plan of Reorganization (the
'Reorganization Plan'). The effective date of the Reorganization Plan was
December 26, 1996, at which time the Company emerged from its Chapter 11
reorganization.
The Company is a New York corporation organized in 1946 under the name of
Harvey Radio Company, Inc. as successor to an existing business formed in 1927.
The Company subsequently changed its name to Harvey Electronics, Inc. The
Company's principal executive offices are located at 205 Chubb Avenue,
Lyndhurst, New Jersey 07071, and its telephone number is (201) 842-0078.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED........................ 850,000 shares of Common Stock and 1,300,000 Warrants by the Company.
The Shares and the Warrants may be purchased separately and will be
transferable separately upon issuance. See 'Description of
Securities' and 'Underwriting.'
TERMS OF WARRANTS......................... Each Warrant is exercisable at an exercise price of 110% of the per
share offering price of the Shares, subject to adjustment in certain
circumstances. The Warrants are exercisable for a period of three
years commencing two years from the Effective Date (or earlier with
the consent of the Representative). The Warrants are redeemable by
the Company commencing two years from the Effective Date, or earlier
with the consent of the Representative, at $0.10 per Warrant,
provided the closing bid price per Share if traded on the NASDAQ
SmallCap or the OTC Electronic Bulletin Board, or the last sales
price per Share if listed on the NASDAQ National Market or a national
exchange, for 20 consecutive trading days exceeds $7.50 (150% of the
per share public offering price). See 'Description of
Securities -- Warrants.'
COMMON STOCK OUTSTANDING BEFORE
OFFERING................................ 2,259,368 shares
COMMON STOCK OUTSTANDING AFTER OFFERING... 3,109,368 shares(1)
WARRANTS OUTSTANDING PRIOR TO OFFERING.... 36,458 warrants(2)
WARRANTS OUTSTANDING AFTER OFFERING....... 1,336,458 warrants(1)
USE OF PROCEEDS........................... The net proceeds to the Company from the sale of the Securities are
estimated to be approximately $3,280,000 after deducting commissions
and expenses of the Offering estimated at $1,012,000 and prepaid
consulting fees of approximately $88,000. The Company intends to use
the net proceeds of this Offering to open or acquire additional
retail stores, to promote their openings, and for working capital and
general corporate purposes. See 'Use of Proceeds.'
RISK FACTORS.............................. The Securities offered hereby are speculative and involve a high
degree of risk and immediate substantial dilution and should not be
purchased by anyone who cannot afford the loss of his entire invest-
ment. See 'Risk Factors' and 'Dilution.'
<CAPTION>
PROPOSED
NASDAQ PROPOSED
SMALLCAP BSE
SYMBOL(3) SYMBOL(3)
--------- ---------
<S> <C> <C>
COMMON STOCK.............................. HOME HOM
WARRANTS.................................. HOMEW HOMW
</TABLE>
- ------------------
(1) Assumes no exercise of the Warrants and other outstanding warrants, the
Over-Allotment Option, the Representative's Warrant, stock options granted
or to be granted under the Company's stock option plan, and no conversion of
outstanding Preferred Stock.
(Footnotes continued on next page)
5
<PAGE>
(Footnotes continued from previous page)
(2) Issued to holders of Preferred Stock in December 1997 and which are
identical to the Warrants, but are not registered under the Securities Act.
(3) There is currently no active trading market for the Common Stock or the
Warrants and there can be no assurance that an active trading market for the
Common Stock or the Warrants will develop after this Offering. The Company
has applied to NASDAQ and BSE for the trading of the Common Stock and the
Warrants on the NASDAQ SmallCap and the BSE, respectively. However, there
can be no assurance that the applications will be granted, or if granted,
that either listing will be maintained. See 'Risk Factors.'
FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in the Prospectus.
On November 13, 1996, the Company emerged from its Chapter 11 Bankruptcy
proceeding. The Company's Reorganization Plan provides that the Company change
its fiscal year end from the Saturday closest to January 31 to the Saturday
closest to October 31. On October 26, 1996 (the 'Fresh Start Date') the Company
adopted Fresh Start Reporting. The Company for periods prior to the Fresh Start
Date is hereinafter occasionally referred to as the 'Predecessor,' and for the
period at or subsequent to the Fresh Start Date, is hereinafter occasionally
referred to as the 'Successor.' The following information should be read in
conjunction with the Company's audited financial statements for the fifty-two
weeks ended January 27, 1996 and the thirty-nine week period ended October 26,
1996, and the unaudited financial statements for the thirty-nine weeks ended
October 28, 1995 and the forty and thirty-nine weeks ended August 2, 1997 and
July 27, 1996, respectively, appearing elsewhere in this Prospectus.
6
<PAGE>
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED(1) FIFTY TWO WEEKS ENDED
-------------------------------------------------------- --------------------------
AUGUST 2, JULY 27, OCTOBER 26, OCTOBER 28, JANUARY 27, JANUARY 28,
1997 1996 1996 1995 1996 1995
----------- ---------- ---------- - ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales............................ $ 11,602 $ 10,930 $ 9,263 $ 11,107 $ 15,871 $ 22,814
Cost of sales........................ 7,379 7,176 6,095 7,312 10,453 15,275
----------- ----------- ----------- ----------- ----------- -----------
Gross profit......................... 4,223 3,754 3,168 3,795 5,418 7,539
Gross profit percentage.............. 36.4% 34.3% 34.2% 34.2% 34.1% 33.0%
Interest expense..................... 241 386 356 307 457 468
Selling, general and administrative
expenses........................... 4,950 4,683 4,937 5,782 7,557 8,211
Other income......................... 68 134 88 78 131 234
----------- ----------- ----------- ----------- ----------- -----------
Loss before reorganization expenses,
fresh start adjustments and
extraordinary item................. (900) (1,181) (2,037) (2,216) (2,465) (906)
Reorganization expenses.............. -- (463) (247) (520) (959) --
Fresh start adjustments.............. -- -- 1,858 -- -- --
Extraordinary gain on forgiveness of
debt............................... -- -- 5,339 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) income.................... $ (900) $ (1,644) $ 4,913 $ (2,736) $ (3,424) $ (906)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) income per share:
Loss applicable to common
shareholders before extraordinary
item(4).......................... $ (.42) $ (.52) $ (.14) $ (.86) $ (1.08) $ (.29)
Extraordinary item................. -- -- 1.69 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) income applicable to
common shareholders(4)........... $ (.42) $ (.52) $ 1.55 $ (.86) $ (1.08) $ (.29)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Weighted average number of common
shares and common stock equivalent
shares outstanding during the
period(3).......................... 2,259,368(2) 3,164,887 3,164,887 3,164,887 3,164,887 3,164,887
</TABLE>
- ------------------
(1) All nine-month periods consist of thirty-nine weeks except the nine-month
period ended August 2, 1997, which consists of forty weeks.
(2) Represents post-confirmation shares outstanding.
(3) There were no common stock equivalents for the thirty-nine weeks ended
October 26, 1996. Common Stock equivalent shares were not considered for all
other periods presented, since their inclusion would be anti-dilutive.
(4) For the forty weeks ended August 2, 1997, includes preferred stock dividend
requirements of $46,000.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
OCTOBER 26, 1996 AUGUST 2, 1997 AUGUST 2, 1997
ACTUAL ACTUAL AS ADJUSTED(1)
---------------- --------------- --------------
(AUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital...................................................... $1,436 $ 1,223 $4,533
Total assets......................................................... 7,167 7,211 10,579
Long-term liabilities including capital leases....................... 942 2,074 2,074
Total liabilities.................................................... 3,757 4,700 4,700
Total shareholders' equity........................................... 3,410 2,511 5,879
</TABLE>
- ------------------
(1) To give effect to the receipt and application of the net proceeds of the
Offering, and assumes no exercise of the Warrants and other outstanding
warrants, the Over-Allotment Option, the Representative's Warrant and stock
options granted or to be granted under the Company's stock option plan, and
no conversion of outstanding Preferred Stock.
7
<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk and immediate
substantial dilution. Each prospective investor should carefully consider the
following risk factors, in addition to other information and financial data
contained in this Prospectus, in evaluating an investment in the Securities
offered hereby.
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words 'anticipate,'
'believe,' 'estimate,' 'expect' and similar expressions as they relate to the
Company or its management, are intended to identify such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below and should be read in conjunction with, and is qualified
in its entirety by, the Company's financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Historical results are not
necessarily indicative of trends in operating results for any future period.
DEPENDENCE ON PROCEEDS OF OFFERING; CONTINUED LOSSES
The Company has operated at a loss since prior to its filing for protection
under Chapter 11 of the United States Bankruptcy Code in August 1995. Without
additional revenues and operating profit from the new stores which the Company
plans to open with the net proceeds from this Offering, it is unlikely that the
Company will be able to operate profitably. Even with the proceeds of this
Offering and the implementation of the Company's expansion plan, there can be no
assurance the Company will be able to operate profitably. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business -- Expansion.'
UNCERTAINTY AS TO GOING CONCERN IN INDEPENDENT AUDITOR'S REPORT
In connection with the audit of the Company's financial statements for the
thirty-nine weeks ended October 26, 1996, the Company has received a report from
its independent auditors that includes an explanatory paragraph describing the
uncertainty as to the ability of the Company to continue as a going concern. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Company's financial statements (and the related notes
thereto) included elsewhere in this Prospectus.
RISKS INVOLVED WITH EXPANSION PLAN
Since 1995, the Company closed five of its eight retail stores. The Company
presently has four retail stores, having opened its Greenwich, Connecticut store
in early 1997. The Company believes that it needs to open additional new stores,
and increase its revenues, to fully benefit from its overhead structure and
advertising expenditures. This expansion may cause significant strain on the
Company's management, financial, and other resources. Moreover, expansion
involves numerous risks including additional rent obligations, attracting and
training additional staff, and an increase in expenses related to the operation
of a particular store. If the Company is unable to manage growth effectively, of
which there can be no assurance, its business operating results and financial
condition will be materially adversely affected. See 'Use of Proceeds,'
'Business -- Expansion,' and 'Management.'
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company expects that cash flow from operations, together with the net
proceeds of this Offering and funds available under its revolving line of credit
facility, will meet its cash requirements for at least the 24 months following
the consummation of the Offering. However, additional financing may be required
in the event the Company incurs significant operating losses in the future or
new retail stores do not generate sufficient cash. In addition, additional
financing may be required in order to increase the number of the Company's
retail showrooms as planned by management. Because there can be no assurance
that adequate additional financing will be available on acceptable terms, if at
all, the Company may be forced to limit such planned expansion or reduce its
operations. See 'Use of Proceeds.' Any future financings that involve the sale
of the Company's equity securities may result in dilution to the then current
stockholders. See 'Dilution.'
8
<PAGE>
DEPENDENCE ON AVAILABILITY OF LEASED LOCATIONS
All of the Company's retail stores are located in leased premises. Most of
the leases will expire within five years. One lease is on a month-to-month
basis. The Company also intends to open four new retail locations by the end of
1999. There can be no assurance that the Company will be able to renew its
current leases, locate suitable locations for new stores, arrange acceptable
leases for new locations, or open new retail stores in a timely manner. The
inability of the Company to properly address those concerns may have a material
adverse effect on the Company's financial condition. See 'Business -- Expansion'
and 'Business -- Properties.'
EMERGENCE FROM BANKRUPTCY
On August 3, 1995, the Company (then known as the Harvey Group Inc. and its
subsidiaries) filed a petition for relief pursuant to Chapter 11 of the United
States Bankruptcy Code. On November 13, 1996, the Bankruptcy Court issued an
order confirming the Reorganization Plan which had been proposed by the Company.
Notwithstanding the Company's emergence from bankruptcy, there can be no
assurance that the Company's prior bankruptcy will not hamper its ability to
establish new relationships with commercial lenders, customers, landlords, and
trade creditors or adversely impact on the business prospects of the Company.
See 'Business -- Bankruptcy Proceeding and Reorganization.'
SECURED LOANS AND EXISTENCE OF LIENS ON THE COMPANY'S ASSETS
Substantially all of the Company's assets have been pledged to a financial
institution to secure certain indebtedness under a revolving line of credit
facility. In the event that the Company defaults on its obligations, including
the payment of principal and interest, the Company's indebtedness could be
accelerated and, in certain cases, the Company's assets could be subject to
foreclosure. Moreover, to the extent that the Company's assets continue to be
pledged to secure outstanding indebtedness, such assets will remain unavailable
to secure additional debt financing. Such unavailability may adversely affect
the Company's ability to borrow in the future. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
DEPENDENCE ON ECONOMIC CONDITIONS AND CONSUMER PREFERENCES
The Company's business is subject to economic cycles and changing consumer
preferences. Purchases of discretionary audio or video products tend to decline
in periods of economic uncertainty. The Company is particularly vulnerable since
the Company's products are upscale and expensive. As such, any significant
decline in general economic conditions or uncertainties regarding future
economic prospects that affect consumer spending could have a material adverse
effect on the Company's business, results of operations and financial condition.
See 'Business.'
POSSIBLE ADVERSE EFFECTS OF GEOGRAPHIC CONCENTRATION
The Company's retail stores are all located in the New York Metropolitan
area. The Company intends to continue to concentrate its retail facilities in
the same area. Accordingly, the Company is susceptible to fluctuations in its
business caused by adverse economic or market conditions in this area. See
'Business -- Properties.'
ADVERSE EFFECT CAUSED BY THE DEVELOPMENT OF TECHNOLOGY
The retail consumer electronics market is dominated by mass merchants.
Historically, mass merchants have emphasized volume by selling lower performing
products at lower prices. In contrast, specialty boutiques, including the
Company, have emphasized selling higher quality products at higher prices.
However, development of technologies, which has been extremely rapid in the
electronics industry, has substantially reduced the difference between more
expensive and less expensive products. Future technological advances may further
reduce this difference, possibly to the point at which performance and features
will be indistinguishable. Thus, there can be no assurance that the Company will
be able to continue to rely on this difference to implement its operating
strategy. See 'Business -- Products.'
9
<PAGE>
COMPETITION
The retail consumer electronics industry is extremely competitive. Although
the Company has sought to distinguish itself by emphasizing high quality
products, custom installation, and service, the Company nonetheless competes
with a number of mass merchants including, but not limited to, Circuit City,
Nobody Beats the Wiz, P.C. Richard & Son, J&R Music World, Tops Appliance City,
and a large group of boutique stores. Many of these competitors have greater
financial and management resources and marketing capabilities, including name
recognition, than the Company. Additionally, there is likely to be a significant
change in the local competitive environment because a national consumer
electronics chain has begun to open stores in the New York Metropolitan market.
In order to succeed, the Company must be able to compete effectively with
existing and new competitors for customers. There is no assurance that the
Company will be able to successfully execute its marketing strategy and compete
effectively. See 'Business -- Competition,' 'Business -- Operations,' and
'Business -- Advertising.'
IMMEDIATE AND SUBSTANTIAL DILUTION
This Offering involves an immediate and substantial dilution to investors
in the Offering. Purchasers of Shares in the Offering will incur an immediate
dilution of $3.63 per Share (73%) in the net tangible book value of their
investment from the per Share public offering price. Investors in the Offering
will pay $5.00 per Share, as compared with an average cash price of $1.23 per
Share paid by existing stockholders. See 'Dilution.'
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependent upon the abilities and
efforts of Franklin C. Karp, President, Joseph J. Calabrese, Executive Vice
President and Chief Financial Officer, and Michael Beck, Vice President of
Operations of the Company. None of these employees have an employment agreement
with the Company except Mr. Karp, who will enter into a two-year employment
agreement with the Company commencing on the Effective Date. The loss of the
services of any of these executive officers or the services of other key
management personnel could have a material adverse effect upon the Company. The
Company will seek to obtain a $3,000,000 policy of 'key man' insurance on the
life of Mr. Karp upon the consummation of this Offering. The Company does not
maintain key man life insurance with respect to any of its other executive
officers. See 'Management -- Directors and Executive Officers.'
CONTROL BY CERTAIN SHAREHOLDERS
As of the date of this Prospectus, the largest shareholder of the Company
(HAC) holds an aggregate of approximately 85% of the outstanding shares of
Common Stock. After giving effect to this Offering (excluding the exercise of
the Over-Allotment Option), HAC will hold approximately 62% of the outstanding
shares of Common Stock. In addition, a member and manager of HAC is the Chairman
of the Company's Board of Directors. Accordingly, HAC can elect all members of
the Board of Directors of the Company, control the Board, and decide any matters
on which the Company's shareholders' vote is needed. See 'Management' and
'Securities Ownership of Certain Beneficial Owners and Management.'
BROAD DISCRETION IN APPLICATION OF PROCEEDS
Approximately 21% of the net proceeds of the Offering will be applied to
working capital and used for general corporate purposes. Accordingly, management
of the Company will have broad discretion in the use of the proceeds. See 'Use
of Proceeds.'
NO DIVIDENDS ANTICIPATED
The Company has not paid dividends to the holders of its Common Stock in
the past, and does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The Company's revolving line of credit facility contains
certain restrictions on the Company's ability to pay dividends. See 'Dividend
Policy,' 'Description of Securities,' 'Capitalization' and 'Management's
Discussion and Analysis of Financial Conditions and Results of Operations.'
10
<PAGE>
POTENTIAL ANTI-TAKEOVER EFFECTS OF NEW YORK LAW
Certain provisions of New York law could delay and impede the removal of
incumbent directors and could make a merger, tender offer or proxy contest
involving the Company more difficult, even if such event could be beneficial in
the short term to the interests of the stockholders. Such provisions could limit
the price that potential investors might be willing to pay in the future for the
Company's securities.
ELIMINATION OF PERSONAL LIABILITIES OF DIRECTORS
As permitted under the New York Business Corporation Law, the Company's
certificate of incorporation provides for the elimination of the personal
liability of the directors of the Company for damages due to breaches of their
fiduciary duty as directors. As a result of the inclusion of such provision,
shareholders may be unable to recover damages against directors for actions
taken by them which constitute negligence or gross negligence or that are in
violation of their fiduciary duties. The inclusion of this provision in the
Company's certificate of incorporation may reduce the likelihood of derivative
litigation against directors and other types of shareholder litigation. See
'Management -- Limitation of Liability of Directors and Indemnification of
Directors and Officers; Directors and Officers Insurance.'
SHARES ELIGIBLE FOR FUTURE SALE
All of the 2,259,368 shares of Common Stock outstanding as of the Effective
Date were issued in connection with the Company's Reorganization Plan, in
exchange for either a claim against, or an interest in, or a claim for an
administrative expense in the Company's bankruptcy proceeding. These shares are
deemed exempted securities under Section 1145 of the United States Bankruptcy
Code and, therefore, are freely tradable. A sale of shares in significant
amounts may have substantial adverse effects on the price of the Common Stock.
HAC and each officer and director of the Company have entered into written
agreements with the Representative that they will not publicly sell an aggregate
of 1,919,191 shares of the Company's Common Stock without the prior consent of
the Representative for a period of 12 months from the Effective Date as to 25%
of such shares; for a period of 18 months from such date, as to an additional
25% of such shares; and for a period of 24 months from such date, as to the
remaining 50% of such shares.
As of the Effective Date, all holders of the Preferred Stock will have
entered into lock-up agreements with the Representative, which agreements
provide that Common Stock issued upon conversion of Preferred Stock, Warrants
owned by such holders and Common Stock exercisable upon the exercise of such
warrants will not be sold publicly for two years following the Effective Date or
one year from the conversion (whichever is longer). The lock-up will be
suspended, however, if the closing bid price of the Common Stock if traded on
the NASDAQ SmallCap or the OTC Electronic Bulletin Board or the last sales price
of the Common Stock if listed on the NASDAQ National Market or a national
exchange, exceeds $7.50 for 45 consecutive trading days.
InterEquity Capital Partners, L.P. ('InterEquity'), which holds 51,565
shares of the Common Stock, has agreed with the Representative not to publicly
sell such Shares for a period of one year following the Effective Date.
Certain directors, officers and employees of the Company, and Mr. E. H.
Arnold will agree with the Representative not to publicly sell an aggregate of
85,000 Shares for two years following the Effective Date. A sale of Securities
in significant amounts after the expiration of any lock-up agreement may have
substantial adverse effects on the market price of the Common Stock and
Warrants. See 'Description of Securities -- Shares Eligible for Future Sale.'
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
The Warrants are subject to redemption by the Company at a price of $.10
per Warrant upon certain conditions. Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
current market price when they might otherwise wish to hold the Warrants, or to
accept the redemption price, which may be substantially less than the market
value of the Warrants at the time of redemption. The holders of the Warrants
will automatically forfeit
11
<PAGE>
their rights to purchase shares of Common Stock issuable upon exercise of such
Warrants unless the Warrants are exercised before they are redeemed. The holders
of Warrants will not possess any rights as stockholders of the Company unless
and until the Warrants are exercised. See 'Description of Securities --
Warrants.'
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH EXERCISE
OF WARRANTS
The Company will be able to issue shares of its Common Stock upon exercise
of the Warrants only if there is a then current prospectus relating to the
Common Stock issuable upon the exercise of the Warrants, under an effective
registration statement filed with the Commission and only if such Common Stock
is then qualified for sale or exempt from qualification under applicable state
securities laws of the jurisdictions in which the various holders of Warrants
reside. Although the Company will use its best efforts to meet such
requirements, there can be no assurance that the Company will be able to do so.
The failure of the Company to meet such requirements may deprive the Warrants of
any value and cause the resale or other disposition of Common Stock issued upon
the exercise of the Warrants to become unlawful. See 'Description of
Securities -- Warrants.'
LACK OF EXPERIENCE OF REPRESENTATIVE
The Representative has completed one public offering of securities and was
the co-underwriter in another public offering since the commencement of its
operations. Accordingly, the Representative does not have extensive experience
as a managing underwriter of public offerings of securities. There can be no
assurance that the Representative's lack of experience will not adversely affect
the trading market for the Securities. See 'Underwriting.'
LACK OF CURRENT PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING PRICES;
POSSIBLE VOLATILITY OF SECURITIES
Although shares of the Company's Common Stock were listed and traded on the
American Stock Exchange until June 1995 and subsequently traded on the OTC
Electronic Bulletin Board until November, 1995, currently there is no public
market for the Company's Securities. Accordingly, there can be no assurance that
an active trading market for the Common Stock or Warrants will develop or, if
developed, will be sustained upon the completion of this Offering or that the
market prices of the Securities will not decline below the public offering
prices. The public offering prices of the Securities and the terms of the
Warrants have been arbitrarily determined by negotiations between the Company
and the Representative, and do not necessarily bear any relationship to the
Company's assets, book value, net earnings, net sales or other established
criteria of value, and can not be considered indicative of the actual value of
the Securities. The stock market has, from time to time, experienced extreme
price and volume fluctuations, which often have been unrelated to the operating
performance of particular companies. Economic and other external factors, as
well as period-to-period fluctuations in financial results of the Company, may
have a significant adverse impact on the market prices of the Company's
Securities. See 'Underwriting.'
POSSIBLE DELISTING OF SECURITIES; PENNY STOCK REGULATION
The Company has applied to NASDAQ and BSE for the trading of the Common
Stock and the Warrants on the NASDAQ SmallCap Market and the BSE, respectively.
If the listings are approved, the continued trading of the Common Stock and
Warrants on NASDAQ SmallCap or BSE is conditioned upon the Company meeting
certain criteria. If the Company fails to meet any of these criteria, the Common
Stock and/or the Warrants could be delisted from trading on NASDAQ SmallCap or
BSE, which delisting could materially adversely affect the trading market for
the Common Stock and/or Warrants. There can be no assurance that the Company
will meet all the criteria and its securities will not be delisted. In the event
the Common Stock or the Warrants are delisted from trading on NASDAQ SmallCap or
BSE and the trading price of the Common Stock is less than $5.00 per share,
trading in the Common Stock or Warrants would also be subject to the
requirements of Rule 15g-9 under the Securities Exchange Act of 1934, as
amended. Under such rule, a broker/dealer, who recommends such low-priced
securities to persons other than established customers and accredited investors,
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's written consent prior to the transaction. Additional
disclosure in connection with any trades involving a penny stock is also
required, including the delivery, prior to any penny stock transaction, of a
disclosure schedule
12
<PAGE>
explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of the Common Stock or
Warrants and the ability of purchasers in the Offering to sell their securities
in the secondary market. There can be no assurance that the Company's Common
Stock or Warrants will not be treated as a penny stock. See 'Underwriting.'
POSSIBLE ADVERSE IMPACT OF REPRESENTATIVE'S WARRANT
In connection with the Offering, the Company will sell to the
Representative, for nominal consideration, a Warrant ('Representative's
Warrant') exercisable for 85,000 shares of Common Stock at $6.00 per share
and/or 130,000 Public Warrants at $.12 per warrant. The Representative's Warrant
will be exercisable for a period of five years, commencing one year after the
Effective Date. The Representative's Warrant will not be redeemable by the
Company. The holders of the Representative's Warrant will have the opportunity
to profit from a rise in the market price of the Securities, if any, without
assuming the risk of ownership. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Representative's Warrant is outstanding. At any time when the holders
thereof might be expected to exercise them, the Company would probably not be
able to obtain additional capital on terms more favorable than those provided by
the Representative's Warrant. See 'Underwriting.'
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S SECURITIES
Although it has no legal obligation to do so, the Representative from time
to time may act as a market maker and otherwise effect transactions in the
Securities. Unless granted an exemption by the SEC from Regulation M under the
Securities Exchange Act of 1934 (the 'Exchange Act'), the Representative will be
prohibited from engaging in any market making activities or solicited brokerage
activities with respect to the Securities for the period from five business days
prior to any solicitation by the Representative of the exercise of Warrants
until the completion of such solicitation activity. However, under Regulation M
the foregoing five-day restriction period is reduced to one day where the
security has an average daily trading volume of at least 100,000 shares and the
public float for the issuer's equity securities is at least $25 million. In
addition, Regulation M eliminates the restrictive period where the average daily
trading volume of the security is $1 million and the public float for the
issuer's equity securities is at least $150 million. As a result, the
Representative may be unable to continue to provide a market for the Securities
during certain periods while the Warrants are exercisable. The prices and
liquidity of the Securities may be adversely affected by the cessation of the
Representative's market making activities.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 850,000 shares of the
Common Stock and 1,300,000 Warrants offered hereby, after deducting underwriting
discounts and commissions, the Representative's non-accountable expense
allowances, consulting fees, and other expenses of the Offering, are estimated
to be approximately $3,280,000. The Company expects to use approximately
$2,600,000 of such net proceeds to open or acquire new retail stores and the
balance ($680,000) for working capital to be used for general corporate
purposes.
The Company plans to open four new retail stores during the 24 months
following the Effective Date at an estimated cost of $650,000 per store, or
$2,600,000 in the aggregate. The estimated cost of opening each new store
includes the cost of leasehold improvements, including design and decoration,
machinery and equipment, furniture and fixtures, security deposits, opening
inventory (net of the portion to be borrowed from the Company's lender), lease
acquisition expenses, preopening expenses, and additional advertising and
promotion in connection with the opening. Instead of leasing and developing a
new location, the Company may acquire the business of an existing consumer
electronics retailer, although no agreements have been reached with any such
company, and no such negotiations are pending.
The amounts and timing of these expenditures may vary depending upon
numerous factors including the ability of the Company to locate suitable
premises or to enter into acceptable leases for the opening of new retail
facilities. The foregoing represents the Company's best estimate of the
allocation of the net proceeds of this Offering, based on both the expected
utilization of funds necessary to finance the Company's existing activities and
the Company's current objectives, as well as current economic conditions. The
Company may from time to time reallocate funds among the uses discussed above or
to new uses if it believes such reallocation to be in its best interests.
Prior to the opening or acquisition of new stores, the net proceeds may be
used to temporarily repay (in full or in part) the Company's outstanding
obligations under its revolving line of credit facility. Any portion not so used
will be invested in short-term money market instruments or direct U.S.
Government obligations.
Any proceeds from the exercise of the Warrants and/or the Over-Allotment
Option and any income from investments will be included in the Company's working
capital and used for general corporate purposes.
The Company expects that cash flow from operations, together with the net
proceeds of this Offering and amounts available under its revolving credit
facility, will be sufficient to meet its cash requirements for the twenty-four
month period immediately following the consummation of the Offering.
DIVIDEND POLICY
The Company has paid no cash dividends to date. Both the Company's
revolving line of credit facility with a commercial lender and Preferred Stock
contain certain restrictions as to the Company's ability to pay dividends on
Common Stock. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations.' Moreover, the Company currently intends to retain
earnings, if any, for use in the operation and expansion of its business, and
therefore, does not anticipate paying cash dividends on Common Stock in the
foreseeable future. The Board of Directors may from time to time declare and the
Company may pay dividends upon its outstanding shares of capital stock, in the
manner and upon the terms and conditions permitted by law and provided by its
Restated Certificate of Incorporation or other certificate filed pursuant to law
relating thereto. The payment of dividends is within the discretion of the Board
of Directors and will be dependent upon, among other things, earnings, capital
requirements, financing commitments and the financial condition of the Company.
Dividends on the Preferred Stock are cumulative from the day of original
issuance, whether or not earned or declared. In the event the Board of Directors
declares dividends to be paid on the Preferred Stock, the holders of the
Preferred Stock will be entitled to receive semiannual dividends at the rate
(the 'Preference Rate') of eighty five ($85) dollars per share payable in cash
on the last business day of June and December in each year. For calendar year
1997, the Company has elected to defer the dividends. The Preference Rate for
calendar year 1997 is $105 per share, which will be paid in three equal
installments with interest at the rate of 8.5% per annum on the last business
days of December 1998, 1999 and 2000. In addition, no dividend shall be paid, or
declared, or set apart for payment
14
<PAGE>
upon, and no other distribution shall at any time be declared or made in respect
of, any shares of Common Stock, other than a dividend payable solely in, or a
distribution of, Common Stock, unless full cumulative dividends of the Preferred
Stock for all past dividend periods and for the then current dividend period
have been paid or have been declared and a sum sufficient for the payment
thereof has been set apart. See 'Description of Securities.'
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 2, 1997, and as adjusted to give effect to the sale of 850,000 shares of
Common Stock at $5.00 per share and 1,300,000 Warrants at $.10 per Warrant
offered hereby and the application of the estimated net proceeds therefrom. This
table should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Prospectus and with 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
AUGUST 2, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Long term debt and capital lease obligations(2)........................................... $ 1,937 $ 1,937(3)
Stockholders' equity:
Preferred Stock, $1,000 par value, 10,000 shares
authorized, 875 shares outstanding (aggregate liquidation preference--$875,000)...... 318 318
Common Stock, $.01 par value, 10,000,000 shares authorized, 2,259,368 shares
outstanding, actual, 3,109,368 shares outstanding, as adjusted(1).................... 23 32
Additional paid-in capital.............................................................. 3,070 6,429
Accumulated deficit..................................................................... (900) (900)
Total stockholders' equity.............................................................. 2,511 5,879
----------- -----------
Total capitalization.................................................................... $ 4,448 $ 7,816
----------- -----------
----------- -----------
</TABLE>
- ------------------
(1) Assumes no exercise of the Warrants and other outstanding warrants, the
Over-Allotment Option, the Representative's Warrant, stock options granted
or to be granted under the Company's Stock Option Plan, and no conversion of
the outstanding Preferred Stock.
(2) Includes: (i) amounts due under the Company's revolving line of credit
facility ($1,509,000); (ii) amounts due under a promissory note ($350,000)
made by the Company to an individual, E. H. Arnold, who is a holder of
Preferred Stock and a member of HAC (the selling securityholder); (iii)
capital lease obligations ($54,000); and (iv) current portion of other
long-term debt ($24,000).
(3) May be temporarily repaid in full or in part with the proceeds from this
Offering until the Company opens its new retail stores. See 'Use of
Proceeds.'
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<PAGE>
DILUTION
As of August 2, 1997, the Company's net tangible book value (total tangible
assets minus the sum of total liabilities and reorganization value in excess of
amounts allocable to identifiable assets) was $896,000, or $.40 per Share.
Assuming the sale of 850,000 shares of Common Stock by the Company in this
Offering at $5.00 per share and 1,300,000 Warrants at $.10 per warrant and the
application of the estimated net proceeds therefrom as set forth in 'Use of
Proceeds,' the net tangible book value of the Company as of August 2, 1997, as
adjusted, would have been $4,264,000, or $1.37 per share of Common Stock,
representing an immediate increase in net tangible book value of $0.97 per share
to existing stockholders and an immediate dilution of $3.63 per share to
investors purchasing shares of Common Stock in this Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................................................... $5.00
Net tangible book value per share as of August 2, 1997...................................... $.40
Increase per share attributable to new investors............................................ $.97
----
Net tangible book value per share as adjusted after giving effect to the Offering........... $1.37
-----
Dilution in net tangible book value per share to new investors.............................. $3.63
-----
-----
</TABLE>
The following table sets forth, as of the Effective Date on a pro forma
basis, giving effect to this Offering, the number of shares of Common Stock
purchased from the Company, the total cash consideration paid to the Company and
the average price per share paid by the existing stockholders and the purchasers
of the Common Stock in this Offering.
<TABLE>
<CAPTION>
SHARES TOTAL
ACQUIRED CONSIDERATION PAID
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................. 2,259,368 72.7% $2,770,000 39.5% $1.23
New investors(1)...................................... 850,000 27.3% 4,250,000 60.5% $5.00
--------- ------- ---------- -------
Total................................................. 3,109,368 100% $7,020,000 100%
--------- ------- ---------- -------
--------- ------- ---------- -------
</TABLE>
- ------------------
(1) Assumes no exercise of the Warrants and other outstanding warrants, the
Over-Allotment Option, the Representative's Warrant and stock options
granted or to be granted under the Company's Stock Option Plan, and no
conversion of the outstanding Preferred Stock.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words 'anticipate,'
'believe,' 'estimate,' and 'expect' and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in 'Risk Factors' and should be read in conjunction with, and is
qualified in its entirety by, the Company's financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. Historical results are
not necessarily indicative of trends in operating results for any future period.
GENERAL
On November 13, 1996, the Company emerged from its Chapter 11 Bankruptcy
proceeding. The Company's Reorganization Plan provides that the Company change
its fiscal year end from the Saturday closest to January 31 to the Saturday
closest to October 31. On October 26, 1996, the Company adopted Fresh Start
Reporting. The following discussion should be read in conjunction with the
Company's audited financial statements for the fifty-two weeks ended January 27,
1996, the thirty-nine week period ended October 26, 1996, and the unaudited
financial statements for the thirty-nine weeks ended October 28, 1995 and the
forty and thirty-nine weeks ended August 2, 1997 and July 27, 1996,
respectively, appearing elsewhere in this Prospectus.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED(1) FIFTY-TWO WEEKS ENDED
------------------------------------------------------------- --------------------------------
AUGUST 2, JULY 27, OCTOBER 26, OCTOBER 28, JANUARY 27, JANUARY 28,
1997 1996 1996 1995 1996 1995
------------- ----------- -------------- ------------ -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $ 11,602 $ 10,930 $ 9,263 $ 11,107 $ 15,871 $ 22,814
Cost of sales.................. 7,379 7,176 6,095 7,312 10,453 15,275
------------- ----------- -------------- ----------- -------------- --------------
Gross profit................... 4,223 3,754 3,168 3,795 5,418 7,539
Gross profit percentage........ 36.4% 34.3% 34.2% 34.2% 34.1% 33.0%
Interest expense............... 241 386 356 307 457 468
Selling, general and
administrative expenses...... 4,950 4,683 4,937 5,782 7,557 8,211
Other income................... 68 134 88 78 131 234
------------- ----------- -------------- ----------- -------------- --------------
Loss before reorganization
expenses, fresh start
adjustments and extraordinary
item......................... (900) (1,181 ) (2,037) (2,216 ) (2,465) (906)
Reorganization expenses........ -- (463 ) (247) (520 ) (959) --
Fresh start adjustments........ -- -- 1,858 -- -- --
Extraordinary gain on
forgiveness of debt.......... -- -- 5,339 -- -- --
------------- ----------- -------------- ----------- -------------- --------------
Net (loss) income.............. $ (900) $ (1,644 ) $ 4,913 $ (2,736 ) $ (3,424) $ (906)
------------- ----------- -------------- ----------- -------------- --------------
------------- ----------- -------------- ----------- -------------- --------------
Net (loss) income per share:
Loss applicable to common
shareholders before
extraordinary item(4)...... $ (.42) $ (.52 ) (.14) $ (.86 ) $ (1.08) $ (.29)
Extraordinary item -- -- 1.69 -- -- --
------------- ----------- -------------- ----------- -------------- --------------
Net (loss) income applicable to
common shareholders(4)....... $ (.42) $ (.52 ) $ 1.55 $ (.86 ) $ (1.08) $ (.29)
------------- ----------- -------------- ----------- -------------- --------------
------------- ----------- -------------- ----------- -------------- --------------
Weighted average number of
common shares and common
stock equivalent shares
outstanding during the
period(3).................... 2,259,368(2) 3,164,887 3,164,887 3,164,887 3,164,887 3,164,887
</TABLE>
(Footnotes on next page)
17
<PAGE>
(Footnotes from previous page)
- ------------------
(1) All nine-month periods consist of thirty-nine weeks except the nine-month
period ended August 2, 1997, which consists of forty weeks.
(2) Represents post-confirmation shares outstanding.
(3) There were no common stock equivalents for the thirty-nine weeks ended
October 26, 1996. Common stock equivalent shares were not considered for all
other periods presented, since their inclusion would be anti-dilutive.
(4) For the forty weeks ended August 2, 1997, includes preferred stock dividend
requirements of $46,000.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
OCTOBER 26, 1996 AUGUST 2, 1997 AUGUST 2, 1997
ACTUAL ACTUAL AS ADJUSTED(1)
---------------- -------------- --------------
(AUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Working capital..................................................... $1,436 $1,223 $4,533
Total assets........................................................ 7,167 7,211 10,579
Long-term liabilities including capital leases...................... 942 2,074 2,074
Total liabilities................................................... 3,757 4,700 4,700
Total shareholders' equity.......................................... 3,410 2,511 5,879
</TABLE>
- ------------------
(1) To give effect to the receipt and application of the net proceeds of the
Offering, and assumes no exercise of the Warrants and other outstanding
warrants, the Over-Allotment Option, the Representative's Warrant and
options granted or to be granted under the Company's Stock Option Plan and
no conversion of the outstanding Preferred Stock.
FORTY WEEKS ENDED AUGUST 2, 1997 (SUCCESSOR) AS COMPARED TO THE THIRTY-NINE
WEEKS ENDED JULY 27, 1996 (PREDECESSOR)
The fiscal year ended November 1, 1997 is a fifty-three week year as
compared to fifty-two weeks for the prior year. As a result, the period ending
August 2, 1997 is a forty-week period as compared to a thirty-nine week period
for the comparable period of the prior year.
Net Loss. The net loss for the forty weeks ended August 2, 1997 was
$900,000 as compared to $1,644,000 for the thirty-nine weeks ended July 27,
1996, while the Company was in Chapter 11. Reorganization expenses relating to
the Company's Chapter 11 reorganization were $463,000 for the thirty-nine weeks
ended July 27, 1996. There were no reorganization expenses for the comparable
period ended August 2, 1997.
Revenues. Net sales for the forty weeks ended August 2, 1997 increased by
6.1% or $672,000 over the thirty-nine weeks ended July 27, 1996. Comparable
store sales for the forty weeks ended August 2, 1997 increased by 27% or
$2,126,000 over the thirty-nine weeks ended July 27, 1996. In 1996, the Company
operated in Chapter 11 and at times during the period ended July 27, 1996 did
not have adequate inventory levels. The Company believes it currently has
adequate inventory levels to support sales.
The increase in sales is due primarily to the Company's marketing campaign
where emphasis is placed on the quality of its manufacturers' products, new
technologies, service, and custom installation of home theater and multi-room
audio/video systems. The Company offers its consumers attractive financing
alternatives on purchases, without paying or incurring interest expenses for a
six or twelve month period. This credit alternative is a linchpin of the
Company's new advertising campaign. Additional direct mail promotions were
successful during the period.
Costs and Expenses. Total cost of sales for the forty weeks ended August
2, 1997 increased 2.8% or $203,000 from the thirty-nine weeks ended July 27,
1996. This was primarily the result of increased comparable store sales offset
by three store closings.
Gross profit margin for the forty week period ended August 2, 1997 was
36.4%, as compared to 34.3% for the thirty-nine weeks ended July 27, 1996. The
gross profit margin has increased as a result of the Company's marketing
campaign where product quality is emphasized rather than price. The gross margin
also increased as a result of increased sales of custom installation which has
higher gross profit margins. Additionally, an increase was realized from
merchandising changes made in late 1996 and throughout 1997, where new higher
margin products
18
<PAGE>
from new manufacturers were added and lower margin products, such as camcorders,
cellular phones, and home office equipment, were eliminated.
Selling, general and administrative expenses increased 5.7% or $267,000 for
the forty weeks ended August 2, 1997 as compared to the thirty-nine weeks ended
July 27, 1996. The forty weeks ended August 2, 1997 includes advertising
expenses of $245,000, as compared to advertising income of $37,000 for the
thirty-nine weeks ended July 27, 1996.
Additionally, the forty weeks ended August 2, 1997 includes an aggregate
amount for management fees and amortization of reorganization value in excess of
amounts allocable to identifiable assets of $81,000. The Company incurred no
expense for these items during the comparable period of the prior year. Payroll
and payroll related expenses increased 13% or $272,000 for the forty weeks ended
August 2, 1997 as compared to the thirty-nine weeks in the prior period. This
was primarily the result of hiring additional custom installation personnel. The
Company also hired a full-time Vice President of Operations in June 1996.
Interest expense decreased 37.6% or $145,000 for the forty weeks ended
August 2, 1997, as compared to the thirty-nine weeks ended July 27, 1996.
Interest expense decreased primarily from the elimination of debtor-in-
possession financing, including the loan servicing fees due to HAC in the
current period (which was converted to equity). The decrease was offset by
interest on a $350,000 loan made by E. H. Arnold, a Preferred Stockholder and
member of HAC, during February and March 1997.
THIRTY-NINE WEEKS ENDED OCTOBER 26, 1996 (PREDECESSOR) AS COMPARED TO
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995 (PREDECESSOR)
Net Income (Loss). Net income for the thirty-nine weeks ended October 26,
1996 was $4,913,000 as compared to a net loss of $2,736,000 for the comparable
period in 1995. Net income for the thirty-nine weeks ended October 26, 1996,
includes an extraordinary gain on forgiveness of debt of $5,339,000 and the
effect of certain fresh start adjustments increasing net income by $1,858,000,
relating to the Company's successful reorganization. Net reorganization expenses
relating to the Company's Chapter 11 process for the thirty-nine weeks ended
October 26, 1996 were $247,000 as compared to $520,000 for the comparable period
in 1995.
Revenues. Net sales for the thirty-nine weeks ended October 26, 1996
decreased 16.6% or $1,844,000, as compared to the same period in 1995. This
decrease primarily related to four store closings relating to the reorganization
process and the reduction of lower margin corporate sales. Comparable store
sales for the thirty-nine weeks ended October 26, 1996 remained the same as
compared to the prior period, despite the difficulty in obtaining adequate
levels of inventory, the negative effects of the Chapter 11 reorganization and
the difficult market conditions experienced throughout the consumer electronics
industry.
Cost and Expenses. Cost of sales for the thirty-nine weeks ended October
26, 1996 decreased 16.7% or $1,218,000 from the same period in 1995. This
decrease was primarily due to the store closings and reduced corporate sales as
mentioned above. Gross margins for the thirty-nine weeks ended October 26, 1996
and October 28, 1995 remained consistent at 34.2%.
Selling, general and administrative expenses for the thirty-nine weeks
ended October 26, 1996 decreased 14.6% or $845,000 as compared to the comparable
period in 1995. This decrease was due to store closings and the Company's
ongoing cost reduction program, offset by an additional $358,000 of advertising
expense incurred to reposition the Company during its reorganization process in
1996.
Interest expense for the thirty-nine weeks ended October 26, 1996 increased
15.9% or $49,000 from the comparable period in 1995. This is primarily the
result of a full year of debtor-in-possession financing from HAC. In the prior
year, as a result of the reorganization process, interest on all liabilities
subject to compromise also ceased accruing on August 3, 1995.
19
<PAGE>
FIFTY-TWO WEEKS ENDED JANUARY 26, 1996 (PREDECESSOR) AS COMPARED TO FIFTY-TWO
WEEKS ENDED JANUARY 28, 1995 (PREDECESSOR)
Net Loss. The net loss for fiscal 1996 was $3,424,000 as compared to a net
loss of $906,000 for fiscal 1995. The loss for fiscal 1996 includes
reorganization expenses of $959,000.
Revenues. Net sales for fiscal 1996 decreased 30.4% or $6,944,000 from
fiscal 1995. This decrease included two store closings relating to the
reorganization process offset by the full year of sales from the retail store
opened in fiscal 1995. Comparable store sales for fiscal 1996 decreased 27% or
$5,087,000 from fiscal 1995. This decrease was primarily due to the negative
effect of the Chapter 11 reorganization and the related inadequate inventory and
advertising, the reduction of lower margin corporate sales, adverse weather
conditions in the first and fourth quarters and from the continuing soft market
conditions experienced throughout the New York Metropolitan area.
Costs and Expenses. Cost of sales for fiscal 1996 decreased 31.6% or
$4,822,000 from fiscal 1995. This decrease is due to decreased sales as
mentioned above offset by higher gross margins experienced in fiscal 1996. Gross
profit margins in fiscal 1996 increased to 34.1% from 33% in fiscal 1995. Gross
profit margins increased for fiscal 1996 at primarily all of the retail stores
as a result of merchandising changes and additionally, as a result of reductions
of lower margin corporate sales.
Selling, general and administrative expenses for fiscal 1996 decreased 8%
or $654,000 from fiscal 1995. This decrease was also due to the store closings
in addition to the Company's ongoing cost reduction program.
Interest expense for fiscal 1996 decreased 2.4% or $11,000 from fiscal
1995. In fiscal 1996, as mentioned above, interest on all liabilities subject to
compromise ceased accruing at August 3, 1995. This reduction of interest was
offset by the increase in interest from the HAC debtor-in-possession financing
which began in October 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ratio of current assets to current liabilities was 1.47 at
August 2, 1997 as compared to 1.51 at October 26, 1996. The decrease in the
current ratio at August 2, 1997 is primarily due to the payment of amounts due
to HAC (used to build a new retail store) and an increase in accounts payable
(due to additional credit extended by the Company's vendors) offset by increased
inventory and the payment of accrued expenses relating to the Chapter 11
reorganization.
The Company's ratio of current assets to current liabilities was 1.51 at
October 26, 1996 as compared to 2.64 at January 27, 1996. The decrease in the
ratio at October 26, 1996 was primarily due to an increase in trade payables
from extended vendor credit lines; accrued expenses relating to the
reorganization process; a decrease in accounts receivable and a note receivable
from a prior officer/shareholder and offset by an increase in inventory and a
receivable of $605,000 due from HAC, which was additional debtor-in-possession
financing received after October 26, 1996 and later converted to equity in the
reorganization. Subsequent to the reorganization, E.H. Arnold, a holder of
Preferred Stock and a member of HAC, provided an additional $350,000 of
financing to the Company, which was used for working capital purposes.
On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with Paragon Capital L.L.C. ('Paragon'), pursuant to which
the Company may borrow up to $3,300,000 based upon a lending formula (as
defined), calculated on eligible inventory. Proceeds received from Paragon were
used to satisfy the balance under the credit facility with the Company's
previous lender, Congress Financial Corporation ('Congress') and for working
capital purposes. The Paragon facility provides an improved advance rate on the
Company's inventory, which resulted in additional financing of approximately
$750,000 (after expenses) above the amount previously available under the
Congress facility. The interest rate on borrowings up to $2,500,000 is 1% over
the prime rate of Norwest Bank Minnesota, National Association but in no event
less than eight (8%) percent per annum. The rate charged on outstanding balances
over $2,500,000 is 1.75% above this prime rate. As of the closing, the Company
became obligated for a commitment fee in the amount of $49,500 which was paid by
the Company at closing and a facility fee of three-quarters of one percent
(.75%) of the maximum credit line, which will be charged on each anniversary
date. Monthly maintenance charges of $2,750 and a termination fee also exist
under the facility.
20
<PAGE>
The maximum amount of borrowing available to the Company under this line is
limited to formulas prescribed in the loan agreements. The Company's maximum
borrowing availability is equal to 75% of acceptable inventory, minus the then
unpaid principal balance of the loan, minus the then aggregate of such
availability reserves as may have been established by Paragon, minus the then
outstanding stated amount of all letters of credit.
Pursuant to the credit facility, the Company must maintain certain levels
of inventory, trade accounts payable, inventory purchases, net income or loss
and minimum gross profit margins. Additionally the Company's capital
expenditures, assuming no retail store expansion, may not exceed $125,000 for
fiscal 1998.
Paragon obtained a senior security interest in substantially all of the
Company's assets. The revolving line of credit facility provides Paragon with
rights of acceleration upon the breach of certain financial covenant or the
occurrence of certain customary events of default including, among others, the
event of bankruptcy. The Company is also restricted from paying dividends on
Common Stock, retiring or repurchasing its Common Stock, and entering into
additional indebtedness (as defined).
Paragon also received a warrant to purchase 125,000 shares of Common Stock
at an exercise price of $5.50 per share subject to adjustment under certain
circumstances, which is currently exercisable and expires on April 3, 2001.
Paragon's warrant and the underlying shares have not been registered under the
Securities Act.
The amount outstanding under the Paragon revolving line of credit facility
as of December 1, 1997 is approximately $2,098,000.
Management believes that the net proceeds from the Offering, plus cash flow
from operations and funds made available under the credit facility, will be
sufficient to meet the Company's anticipated working capital needs and expansion
plan through the twenty-four month period immediately following the consummation
of this Offering.
During the periods presented, the Company was not significantly impacted by
the effects of inflation or seasonality.
21
<PAGE>
BUSINESS
SUMMARY
Harvey Electronics, Inc. is engaged in the retail sale, service and custom
installation of high quality audio, video and home theater equipment. The
equipment includes high fidelity components and systems, video cassette
recorders ('VCR'), digital versatile disc players ('DVD'), direct view and
projection television sets, audio/video furniture, digital satellite systems,
conventional telephones and related accessories. The Company has been engaged in
this business in the New York Metropolitan area for seventy years. The Company
currently operates four retail stores. The two Manhattan stores are located on
Broadway at 19th Street and on 45th Street at Fifth Avenue. Its other two stores
are located on Route 17 in Paramus, New Jersey and on West Putnam Avenue in
Greenwich, Connecticut.
The Company's stores are designed to offer an attractive and pleasing
environment and to display its products in realistic home settings commonly
known in the industry as 'lifestyle home vignettes.' Sales personnel are highly
trained professionals with extensive product knowledge. This contrasts sharply
with a more rushed atmosphere and lesser-trained personnel of mass merchants.
The Company intends to utilize the net proceeds from this Offering to open
or acquire four additional retail stores within twenty-four months. The Company
plans to locate these new stores in affluent suburbs similar to Greenwich,
Connecticut, such as the north shore of Long Island, New York; Monmouth County,
New Jersey; Westchester County, New York; and southern Connecticut.
On August 3, 1995, the Company (then known as The Harvey Group Inc. and its
subsidiaries) filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York ('Court'). This filing was the result of certain factors
including but not limited to: (i) the negative effect of a $2,138,000 judgment
entered against the Company; (ii) liabilities arising from The Harvey Group Inc.
and its discontinued food brokerage division, which remained obligations of the
Company, the payment of which significantly reduced cash; (iii) the recession of
the early 1990's coupled with a soft market in the consumer electronics
industry, all of which resulted in losses and a shortage of cash flow; and (iv)
the delisting (in June, 1995) of the Company's Common Stock from the American
Stock Exchange, which delisting rendered a proposed $4.2 million equity
placement untenable.
On November 13, 1996, the Court confirmed the Company's Reorganization
Plan. The effective date of the Reorganization Plan was December 26, 1996, at
which time the Company emerged from its Chapter 11 reorganization. At that time,
Harvey Sound, Inc., the Company's subsidiary, merged into The Harvey Group Inc.
and the name of the merged entity was changed to Harvey Electronics, Inc.
PRODUCTS
The Company offers its customers a wide selection of high-quality consumer
audio, video and home theater products, the distribution of which is limited to
specialty retailers (generally referred to in the industry as 'esoteric
brands.') The Company is one of the country's largest retailers of 'esoteric
brands' manufactured by Bang and Olufsen, Marantz, McIntosh, Meridian and Adcom,
whose products the Company has sold for a number of years. The Company believes
that it benefits from strong working relationships with these manufacturers.
By August 2, 1997, the Company's audio product sales represent
approximately 74% of the Company's net sales and yield gross profit margins of
approximately 38%. The Company's video product sales represent approximately 23%
of the Company's net sales and yield gross profit margins of approximately 23%.
The Company also provides custom installation of products it sells.
Approximately 17% of net product sales currently involve custom installation.
The labor portion of custom installation presently represents approximately 3%
of net sales. The Company also sells extended warranties on behalf of third
party providers. Sales of extended warranties which yield a gross profit margin
in excess of 50%, represent between 1% and 2% of the Company's net sales.
The following table shows, by percentage, the Company's net product sales
attributable to each of the product categories for the period indicated. Audio
components include speakers, subwoofers, receivers, amplifiers, pre-
22
<PAGE>
amplifiers, compact disc players, cassette decks, turntables and tuners. The
Company also sells digital satellite systems (DSS) which are included in the
VCR/DVD/DSS category. Accessories primarily include headphones, surge
protectors, blank audio and videotapes and projection screens. The miscellaneous
category includes conventional telephones, answering machines, radios and other
portable products.
<TABLE>
<CAPTION>
FORTY WEEKS ENDED THIRTY-NINE WEEKS ENDED FISCAL YEAR ENDED
PRODUCT CATEGORY AUGUST 2, 1997 OCTOBER 26, 1996 JANUARY 27, 1996
- ---------------------------------------------------- ----------------- ----------------------- -----------------
<S> <C> <C> <C>
Audio Components.................................... 54% 51% 53%
Mini Audio Shelf Systems............................ 6% 7% 8%
TV and Projectors................................... 15% 18% 16%
VCR/DVD/DSS......................................... 6% 5% 6%
Furniture........................................... 5% 5% 5%
Cable and Wire...................................... 5% 4% 4%
Accessories......................................... 6% 4% 3%
Extended Warranties................................. 1% 2% 2%
Miscellaneous....................................... 2% 4% 3%
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
The percentage of sales by each product category is affected by promotional
activities, consumer preferences, store displays, the development of new
products and elimination or reduction of existing products and, thus, a current
sales mix may not be indicative of the future sales mix.
The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target customers desire and can afford such products. Three
new technologies, DVD, flat screen television, and high definition television,
have recently been, or will shortly be, introduced. The DVD player provides
enhanced picture and sound quality in a format far more convenient and durable
than videotape. The flat screen television expected to be introduced in 1998
allows a 40 inch television to be only six inches from front to back. This
allows the set to be far less obtrusive and more easily integratable into the
home. High definition television, which is expected to significantly improve
picture quality, is expected to be introduced in the next year or two.
The Company intends to continue its recent emphasis on custom installation
which can extend from a single room audio/video system to an entire house with a
combined selling price of installation, labor and product from about $5,000 to
in excess of $100,000. The Company believes custom installation provides the
opportunity to bundle products and increase margins. For example, rather than
just selling a television with an approximate gross profit margin of 23%, custom
installation enables the Company to sell to the same customer speakers at a
margin exceeding 40%, accessories at a margin approximating 50% and installation
labor with margins of over 60%.
Custom installation projects frequently expand on-site, based on customers'
desires during the installation. A single room home theater, for example, during
the course of the installation can grow into a multi-room system with increased
margins.
Offering custom installation affords the Company a unique selling
opportunity not only because it may not be available at mass merchants, but also
because custom installation can generate repeat customers and customer
referrals. Due to the complexity of the installation provided by the Company,
customers generally remain with the Company, providing the opportunity to sell
upgrades to existing customers. The recent introduction of DVD players and
advanced televisions, as well as other emerging technologies, present
significant opportunities for such upgrades.
23
<PAGE>
OPERATIONS
Supplies, Purchasing and Distribution
The Company purchases its products from approximately eighty manufacturers,
ten of which accounted for approximately 57% of the Company's purchases for the
forty weeks ended August 2, 1997. These ten manufacturers are Adcom, Bang &
Olufsen, KEF, Marantz, McIntosh, Meridian, Mitsubishi, Monster Cable, Pioneer
Elite and Sony. No individual manufacturer accounted for more than 10% of the
Company's purchases for the forty weeks ended August 2, 1997, but Sony, Bang &
Olufsen, Marantz, Mitsubishi and Pioneer Elite each accounted for more than five
(5%) percent of purchases for such period.
The Company has entered into substantially identical dealer agreements with
each of Marantz America, Inc., Audio Control, Sony, Cinemapro Corporation,
Mitsubishi Electronics America, Inc., Lenbrook America, LLC (a distributor of
KEF products), Pioneer Electronics (USA), Inc., and Niles Audio Corporation,
Inc. Under each dealer agreement, the Company is authorized to sell the
manufacturer's products from specified retail locations to retail customers and
cannot sell the products by telephone or mail order. Each agreement is for a
term of a year or two, subject to renewal or extension.
Under the dealer agreement between the Company and Mitsubishi, the Company
is required to purchase an aggregate of $400,000 of equipment annually, subject
to an increase. The Company's dealer agreement with Niles Audio requires the
Company to purchase at least $300,000 of equipment per year.
The Company believes that competitive sources of supply would be available
for many of the Company's products if a current vendor ceased to supply to the
Company. However, a loss of a major source of supply of limited distribution
product could have an adverse impact on the Company. The loss of Bang & Olufsen
as a supplier to the Company would have a significant adverse effect to the
Company because of the uniqueness of Bang & Olufsen's products.
Due to the Company's strong relationships with many of its suppliers and
its volume of purchases, the Company has also been able to obtain additional
manufacturers' rebates based on volume buying levels. On occasion, the Company
has been able to negotiate favorable terms on larger purchases, such as extended
payment terms, additional cooperative advertising contributions or lower prices,
particularly on large purchases. In addition to being a member of a consumer
electronics industry buying group called Home Theater Specialists of America
(HTSA), the Company is also a member of Professional Audio Retailers Association
(PARA) and Custom Electronics Design Installation Association (CEDIA), both of
which provide the Company with additional training in sales and technology.
Purchases are received at the Company's 5,500 sq. ft. warehouse located in
Fairfield, New Jersey. Merchandise is distributed to the Company's retail stores
at least twice a week (and more frequently, if needed), using the Company's
employees and equipment.
The Company's management information system tracks current levels of sales,
inventory, purchasing and other key information and provides management with
information which facilitates merchandising, pricing, sales management and the
management of warehouse and store inventories. This system enables management to
review and analyze the performance of each of its stores and sales personnel on
a periodic basis. The central purchasing department of the Company monitors
current sales and inventory at the stores on a daily basis. In addition, the
Company currently conducts a physical inventory two times a year and between
such physical inventories it conducts monthly and daily cycle counts on selected
types of inventory. The purchasing department also establishes appropriate
levels of inventory at each store and controls the replenishment of store
inventory based on the current delivery or replenishment schedule.
The Company historically has not had material losses of inventory and does
not experience material losses due to cost and market fluctuations, overstocking
or technology. The Company's inventory turnover on an annualized basis for the
forty week period ended August 2, 1997, was approximately 3.15 times. The
Company has begun to formulate a plan with its software and service provider to
address the risks associated with the year 2000 computer
24
<PAGE>
issue as it affects the Company's management information system, the cost of
which is not expected to be significant.
Sales and Store Operations
Retail sales are primarily made for cash or by major credit cards. Revenues
are recorded by the Company when the product or service is delivered or rendered
to customers. Customer deposits are recorded as liabilities until the product is
delivered, at which time a sale is recorded and the liability for the customer
deposit is relieved.
In addition, customers who qualify can obtain longer term financing with a
Harvey credit card, which the Company makes available to its customers. The
Harvey credit card is issued by an unrelated finance company, without recourse
to the Company. The Company also periodically, as part of its promotional
activities, makes manufacturer, (i.e. Mitsubishi and Sony), sponsored financing
available to its customers. Generally, the cost of such financing is paid for by
the Company, but manufacturers periodically participate with, and contribute to
the Company in financing these promotions.
Each store is operated by a store manager and a senior sales manager. Store
managers report to a Vice President of Operations who oversees all sales and
store operations, and who is further responsible for sales training and the
hiring of all retail employees. Every company store has at least one in-home
audio/video specialist who will survey the job site at a customer's home, design
the custom installation and provide a cost estimate. Each store independently
services its custom installations through a project manager and experienced
installers employed at the store. All stores are staffed with professionally
trained salespeople and warehouse personnel. Salespeople are paid a base salary
plus commission based on gross margins.
All stores have an on-line point of sale computer system which enables the
store managers and corporate headquarters to track sales, margins, inventory
levels, customer deposits, back orders, merchandise on loan to customers,
salesperson performance and customer histories. Store managers perform sales
audit functions before reporting daily results to the main office in Lyndhurst,
New Jersey.
Services and Repairs
Products under warranty are delivered to the appropriate manufacturer for
repair. Other repairs are sent to the manufacturers or an independent repair
company. Revenues from non-warranty services are not material.
The Company offers an extended warranty contract for most of the audio,
video and other merchandise it sells which extended warranty contract provides
coverage beyond the manufacturer warranty period. Extended warranties are
provided by an unrelated insurance company on a non-recourse basis to the
Company. The Company collects the retail sales price of the extended warranty
contract from customers and remits the customer information and the cost of the
contract to the insurance company. The warranty obligation is solely the
responsibility of the insurance company.
COMPETITION
The Company competes in the New York Metropolitan area with mass merchants,
mail order houses, discount stores and numerous other consumer electronics
specialty stores. The retail electronics industry is dominated by large
retailers with massive, 'big box' retail facilities which aggressively discount
mass merchandise. These retailers operate on narrow profit margins and high
volume, driven by aggressive advertising emphasizing low prices. While
nationwide industry leaders are Circuit City and Best Buys, the New York region
has been dominated by local chains including P.C. Richard & Son, Nobody Beats
the Wiz, J&R Music World and Tops Appliance. There is likely to be a significant
change in the local environment inasmuch as one of the national chains has begun
to open stores in the New York market.
Many of the competitors sell a broader range of electronic products,
including computers, camcorder and office equipment, and many have substantially
larger sales and greater financial and other resources than the Company. The
Company competes by positioning itself as a retailer of high quality limited
distribution audio and video
25
<PAGE>
products and by offering services such as custom installations which are not
generally offered by the mass merchants.
Very few, if any, of the audio products sold by the Company, other than
radios and other portable products, are available at the mass merchants. Of the
major video products sold by the Company, generally only Sony and Mitsubishi
televisions are sold by the mass merchants.
The Company seeks to reinforce its positioning by displaying its products
in lifestyle home vignettes in an attractive and pleasing store environment and
by offering personalized service through trained sales personnel who are fully
familiar with all of the Company's products.
ADVERTISING
During the late 1980's and early 1990's, the Company introduced lesser
quality product lines to become more price competitive. This strategy placed it
in direct competition with mass merchants. This strategy sent a mixed message to
the traditional customers of the Company. Commencing in late 1995 the Company
refocused its operations by returning to its traditional marketing strategy.
The Company now uses smaller, but more frequent advertising, emphasizing
image, products, and technology in the New York Times, Wall Street Journal,
Village Voice, and New York Magazine. The Company also distributes direct mail
advertising several times a year to reach its customer database of over 100,000.
Some of the direct mail promotions are for specific manufacturers, products, or
technology, and are supported by the manufacturers.
Both the print and direct mail advertising consistently offer attractive
financing alternatives on purchases on credit without interest for six or twelve
months. The Company also maintains an Internet site on the World Wide Web, at
http://www.harveyonline.com. The site promotes the Company's manufacturers and
their products as well as the Company's retail stores and custom installation
services.
The following table shows the Company's gross advertising costs and net
advertising expense as a percentage of net sales for the periods presented. Net
advertising expense represents gross advertising cost less market development
funds, cooperative advertising and other promotional amounts received from the
manufacturers.
<TABLE>
<CAPTION>
FORTY WEEKS ENDED THIRTY-NINE WEEKS ENDED FIFTY-TWO WEEKS ENDED
AUGUST 2, 1997 OCTOBER 26, 1996 JANUARY 27, 1996
----------------- ----------------------- ---------------------
<S> <C> <C> <C>
Gross Advertising Costs........................ $ 894,000 $ 690,000 $ 673,000
Net Advertising Expenses....................... $ 245,000 $ 358,000 $ 63,000
Percentage of Net Sales........................ 2.1% 3.9% .4%
</TABLE>
As the Company repositioned itself during and after its reorganization, it
incurred additional advertising expenses for the forty weeks ended August 2,
1997 and for the thirty-nine weeks ended October 26, 1996 as compared to fiscal
year ended January 26, 1996. The Company has retained an outside advertising
agency who is paid a monthly retainer of $8,000 plus approved expenses. This
agreement expires January 23, 1998 and is expected to be extended for one year.
EXPANSION
The Company intends to utilize the net proceeds from this Offering to open
four new retail stores, expected to be in leased premises within twenty four
months following the Consummation of this Offering. The design and layout of the
new stores is expected to be similar to the Company's Greenwich, Connecticut
store, which was opened in early 1997. The Company plans to locate these new
stores in affluent suburbs similar to Greenwich, Connecticut such as the North
Shore of Long Island and Westchester County in New York, Monmouth County in New
Jersey and southern Connecticut.
The Company has preliminarily identified these general locations as
potential sites for the new stores because the demographics of these areas are
consistent with what the Company believes to be its target customer base and
because these areas are served by the media in which the Company already
advertises. By spreading the advertising costs over more stores and greater
revenues, the Company believes it will receive better value for its advertising
26
<PAGE>
expenditures. It is also believed that its overhead structure can support
additional stores without significant increase in cost or personnel. Therefore,
the revenues and profit from operating new stores should have a positive impact
on the Company's results of operations. However, expansion entails significant
risks including an increase in rent and expenses related to the operation of a
particular store. There can be no assurance that new stores, if opened, will, in
fact, generate sufficient revenue to cover the operating expenses incurred by
such stores, or contribute positively to the Company's results of operations.
Except for preliminary discussions with one landlord regarding a particular
location, the Company has not identified other specific locations for expansion
nor has it had any discussions with other prospective landlords. The Company
believes acceptable retail space is available in the areas where it intends to
expand.
As an alternative to leasing and developing new stores, the Company will
consider acquiring the business of an existing electronics retailers.
Notwithstanding, the Company is not engaged in any negotiations and has not
signed any agreement regarding any such potential acquisition.
EMPLOYEES
As of October 31, 1997, the Company employed approximately 70 full-time
employees of which 12 were management personnel, 10 were administrative
personnel, 29 were salespeople, 8 were warehouse workers and 11 were engaged in
custom installation.
The salespeople, warehouse workers, and installation staff (48 people) are
covered by a collective bargaining agreement with the Company which expires
January 1, 1998. The Company has never experienced a material work stoppage and
believes that its relationships with its employees and the union are
satisfactory.
PROPERTIES
All of the premises the Company presently occupies are leased. Management
believes that the Company's facilities are adequate and suitable for its present
business. The Company believes that adequate locations are available for its
proposed expansion.
The Company leases premises at 205 Chubb Avenue, Lyndhurst, New Jersey, a
24,400 square foot facility, which the Company uses as executive offices. The
lease expires April 30, 2001, subject to a 5 year renewal option. The warehouse
area of 19,500 square feet of the Lyndhurst facility was sublet in October 1997
for approximately $145,000 per year through April 2001. The Company currently
leases a 5,500 square foot warehouse in Fairfield, New Jersey at approximately
$40,000 per year, pursuant to a lease which expires September 2002.
The Company leases the following retail premises:
<TABLE>
<CAPTION>
EXPIRATION DATE RENEWAL APPROXIMATE SELLING CURRENT
LOCATION OF LEASE OPTIONS SQUARE FOOTAGE ANNUAL RENT
- -------------------------------------- --------------- ------- ---------------------------------- -----------
<S> <C> <C> <C> <C>
2 West 45th Street
New York, NY........................ 6/30/2005 None 7,500 $ 488,000
556 Route 17 North
Paramus, NJ......................... 6/30/2003 None 7,000 $ 238,000
888 Broadway at 19th St.
New York, NY
(within ABC Carpet & Home) ......... Month to month None 4,000 $ 180,000
19 West Putnam Ave.
Greenwich, CT....................... 9/30/2001 5 years 5,300 $ 176,000
</TABLE>
LICENSES AND INTELLECTUAL PROPERTIES
The Company owns two registered service marks 'HARVEY,' issued on March 7,
1989, and 'THE TEMPLE OF HOME THEATER,' issued on May 13, 1997. Both service
marks are registered for International Class 42, which includes retail store
services in the field of audio, video, consumer electronics, home theater
27
<PAGE>
products and custom installation of home theater products. The Company believes
that its service marks have significant value and are important in marketing the
Company's products.
BANKRUPTCY PROCEEDING AND REORGANIZATION
On August 3, 1995, the Company (then known as The Harvey Group Inc. and its
subsidiaries) filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the Bankruptcy Court for the Southern District of New York
(the 'Court'). This filing was the result of certain factors including but not
limited to: (i) the negative effect of a $2,138,000 judgment entered against the
Company; (ii) liabilities arising from The Harvey Group Inc. and its
discontinued food brokerage division, which remained as liabilities of the
Company, and the payment of which significantly reduced cash; (iii) the
recession of the early 1990's coupled with a soft market in the electronics
industry, all of which resulted in losses and a shortage of cash flow; and (iv)
the delisting (in June, 1995) of the Company's Common Stock from the American
Stock Exchange, which delisting rendered a proposed $4.2 million equity
placement untenable.
On November 13, 1996, the Court confirmed the Company's Reorganization
Plan. The effective date of the Reorganization Plan was December 26, 1996 (the
'Effective Date of Plan'), at which time the Company emerged from its Chapter 11
reorganization. At that time, Harvey Sound, Inc., the Company's subsidiary,
merged into the Harvey Group Inc., and the merged entity changed its name to
Harvey Electronics, Inc.
Pursuant to the Reorganization Plan, as of the Effective Date of Plan, all
of the shares of common and preferred stock of the Company were canceled. The
Company amended its Restated Certificate of Incorporation to authorize, for
issuance, 10,010,000 shares of capital stock as follows: (a) 10,000 shares of
8.5% Cumulative Convertible Preferred Stock with a par value of $1,000 per
share; and (b) 10,000,000 shares of Common Stock with a par value of $.01 per
share. See 'Description of Securities.'
The Reorganization Plan also provided for the distribution of the Common
Stock of the reorganized Company as follows: (a) 2,000,000 shares to Harvey
Acquisition Company, L.L.C. in satisfaction of $2,822,500 of subordinated
secured financing provided to the Company during its bankruptcy proceeding; (b)
187,841 shares to the Company's unsecured creditors in satisfaction of the
Company's pre-petition obligations owed to its unsecured creditors; (c) 19,962
shares to the Company's former shareholders; and (d) 51,565 shares to
InterEquity Capital Partners, L.P. ('InterEquity'), a pre-bankruptcy
subordinated secured creditor, in satisfaction of a Court allowed finder's fee.
Accordingly, 2,259,368 shares of Common Stock are issued and outstanding.
Prepetition amount from the subordinated secured debtholders, InterEquity
($600,000) and four individuals who purchased the indebtedness from National
Westminster Bank, USA ($275,000), were exchanged for 875 shares of Preferred
Stock, in accordance with the Reorganization Plan.
Other significant provisions of the Reorganization Plan included: (a)
changing the close of the Company's fiscal year from the Saturday nearest to
January 31 to the Saturday nearest to October 31; and (b) adoption of a stock
option plan ('Stock Option Plan'), whereby options to purchase up to 1,000,000
shares of Common Stock are authorized.
LEGAL PROCEEDINGS
Except as set forth herein, the Company believes that it is not a party to
any material legal proceedings other than those arising in the ordinary course
of business and which are fully covered by insurance. The Company maintains
general liability and commercial insurance in amounts believed to be adequate.
However, there can be no assurance that such amounts of insurance will fully
cover claims made against the Company in the future.
There are outstanding disputed tax claims of approximately $65,000 which
were made against the Company during its Chapter 11 proceeding. The Company has
provided reserves of $22,000 for such taxes, penalties and interest, which the
Company believes to be adequate. However, there can be no assurance that the
reserve will be sufficient to cover these tax claims.
28
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
<S> <C> <C>
Michael Recca................ 47 Chairman and Director
William F. Kenny, III........ 66 Director
Stewart L. Cohen............. 43 Director
Franklin C. Karp............. 43 President and Director
Joseph J. Calabrese.......... 38 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Michael A. Beck.............. 38 Vice President of Operations
Roland W. Hiemer............. 36 Director of Inventory Control
</TABLE>
- ------------------
(1) As of October 1, 1997.
Michael E. Recca became the Chairman of the Board of Directors of the
Company in November 1996. Mr. Recca has been the president of Recca & Company,
Inc., a financial consulting firm based in New York City since 1992. Mr. Recca
is also a member and one of the three managers of Harvey Acquisition Company,
LLC, which is a principal shareholder of the Company. Mr. Recca is also an
employee of Taglich Brothers, D'Amadeo, Wagner & Co., Inc., an NASD registered
broker-dealer.
William F. Kenny, III has been a director of the Company since 1975. For
the past five years Mr. Kenny has been a consultant to Meenan Oil Co., Inc. Mr.
Kenny has also served as a director of the Empire State Petroleum Association,
Petroleum Research Foundation and the East Coast Energy Council. Mr. Kenny was
also the president of the Independent Fuel Terminal Operators Association and
the Metropolitan Energy Council.
Stewart L. Cohen was elected a director of the Company in 1997. Mr. Cohen
is the Chief Executive Officer of Paragon Capital LLC, an asset-based lender
providing a revolving line of credit facility to the Company and other
retailers. Mr. Cohen is also a managing director of The Ozer Group LLC, an asset
and business restructuring firm which provides asset disposition, business
evaluation, advisory services, and asset appraisals for financial institutions
lending primarily to retail businesses. He is also the President of U.S. Dixon's
Holdings, Inc. and its non-operating subsidiaries, for which Mr. Cohen was
retained to wind down the affairs of, and pursue economic settlements for, the
company with other parties. Mr. Cohen is also a member of the Board of Advisors
of Verc Enterprises, Inc., and is a Contributing Editor to the American
Bankruptcy Institute Journal.
Franklin C. Karp has been with the Company since 1990. Before being
appointed as the Company's President in April 1996, Mr. Karp served as
Merchandise Manager and later as vice president in charge of merchandising. Mr.
Karp has been employed in various sales, purchasing and management positions in
the retail consumer electronics business in the New York Metropolitan area for
25 years.
Joseph J. Calabrese, a certified public accountant, joined the Company as
Controller in 1989. Since 1991 Mr. Calabrese has served as Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company. Mr. Calabrese was
elected Executive Vice President and a Director of the Company in 1996. Mr.
Calabrese began his career with Ernst & Young LLP in 1981 where for the eight
year period prior to his joining the Company he performed audit services with
respect to the Company.
Michael A. Beck has been Vice President of Operations of the Company since
April 1997. From June 1996 until such date he was the Company's Director of
Operations and from October 1995 until April 1996 he served as director of
operations for Sound City, a consumer electronics retailer. Mr. Beck was a store
manager for the Company from August 1989 until October 1995. Mr. Beck holds a BA
in Psychology from Merrimack College.
29
<PAGE>
Roland W. Hiemer is an executive officer of the Company and Director of
Inventory Control. Mr. Hiemer has been with the Company for seven years. He
started with the Company as a salesman and advanced to Senior Sales Manager for
the Paramus store in 1991. He was further promoted to Inventory Control Manager
in 1991. In 1997, he was promoted to Director of Inventory Control. Mr. Hiemer
holds a BA in Business Administration from Hofstra University.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company,
as well as any other compensation paid to or earned by the Chairman of the
Company, the President of the Company and those executive officers compensated
at or greater than $100,000 for services rendered to the Company in all
capacities during the three most recent fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME OF INDIVIDUAL ---------------------------- ----------------------
AND PRINCIPAL POSITION YEAR SALARY BONUS
- --------------------------------------------- ---- -------- ------
<S> <C> <C> <C> <C>
1997 $ 0 -- --
Michael Recca 1996 $ 0 -- --
Chairman(1)................................ 1995 $ 0 -- --
1997 $126,000 -- --
Franklin C. Karp 1996 $ 88,000(2) -- --
President.................................. 1995 $108,000 -- --
Joseph J. Calabrese,
Executive Vice President, 1997 $117,000 -- --
Chief Financial Officer, 1996 $ 82,000(2) -- --
Treasurer and Secretary.................... 1995 $101,000 -- --
</TABLE>
- ------------------
(1) Beginning on January 1, 1998, Mr. Recca will receive an annual salary in the
amount of $75,000 in his capacity as the Chairman of the Board of Directors
of the Company.
(2) Represents the nine month transition period ended October 26, 1996, when the
Company's fiscal year end was changed to the Saturday closest to October 31
from the Saturday closest to January 31.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation and Stock
Option Committee.
Audit Committee. The function of the Audit Committee includes making
recommendations to the Board of Directors with respect to the engagement of the
Company's independent auditors and the review of the scope and effect of the
audit engagement. William F. Kenny, III and Stewart L. Cohen are the current
members of the Audit Committee.
Compensation and Stock Option Committee. The function of the Compensation
and Stock Option Committee is to make recommendations to the Board with respect
to the compensation of management employees and to administer plans and programs
relating to stock options, pension and other retirement plans, employee
benefits, incentives, and compensation. Stewart L. Cohen and William F. Kenny,
III are the current members of the Compensation and Stock Option Committee.
SEVERANCE AGREEMENTS
The Company has entered into substantially similar severance agreements
('Severance Agreement') with each of Franklin C. Karp, Joseph J. Calabrese,
Michael A. Beck, and Roland W. Hiemer.
30
<PAGE>
Each Severance Agreement provides that in the event the Company is sold or
merged with another company, involved in a corporate reorganization, or if a
change of the current management takes place, and the party, for the foregoing
reasons, is terminated or asked to accept a position other than that of senior
officer requiring similar responsibilities to those that the party currently
performs, or if the current corporate office is moved to a new location which is
more than thirty miles from either Mineola, New York, or Lyndhurst, New Jersey,
depending on who the party is, as a result of a reorganization or change in
ownership or control, and the party declines the new position or relocation, the
Company or its successor in control will be obligated, and continue, to pay the
party at the same salary and car allowance, if any, the party had most recently
been earning, for a period of one year following termination of Mr. Karp and Mr.
Calabrese, and six months for Mr. Beck and Mr. Hiemer. In addition, the party
will be fully covered under the Company's benefit plans, including, without
limitation, the Company's medical, dental, life and disability insurance
programs, during the one-year period for Mr. Karp and Mr. Calabrese and during
the six month period for Mr. Beck and Mr. Hiemer (including family coverage for
medical and dental insurance).
In the event following any foregoing termination the party obtains
employment at a lesser compensation than the party's compensation by the
Company, the Company will pay the party the difference between the two salaries
for the remainder of the one-year or six month period, whichever is applicable,
plus continued coverage of the Company's benefit plans for the same period.
Each Severance Agreement also provides that in the event the party is
terminated for any other reasons, except conduct that is materially injurious to
the Company or conviction of any crime involving moral turpitude, the Company
will be obligated and continue to pay the party at the same salary the party has
most recently been earning, for a period of six months following termination for
Mr. Karp and Mr. Calabrese and three months for Mr. Beck and Mr. Hiemer, plus
full coverage of the Company's benefits for the same period.
EMPLOYMENT AGREEMENT
The Company will enter into a two year employment agreement with Franklin
C. Karp, the Company's President, commencing on the Effective Date. The
employment agreement provides that Mr. Karp continue as the Company's President
with the same compensation and benefits which Mr. Karp currently receives,
subject to annual adjustment to be determined and made by the Board of Directors
of the Company.
LIMITATION OF LIABILITY OF DIRECTORS; INDEMNIFICATION OF DIRECTORS AND OFFICERS;
DIRECTORS AND OFFICERS INSURANCE
The Company's certificate of incorporation provides that a director shall
not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability if a judgment or other final adjudication
adverse to him establishes that his acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled or that his acts violated Section 719 of the New York
Business Corporation Law. Any repeal or modification of what is set forth
hereinabove will not adversely affect any right or protection of a director of
the Company existing at the time of such repeal or modification with respect to
acts or omissions occurring prior to such repeal or modification. The effect of
this provision is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in certain limited situations. This provision does not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. These provisions will not alter the liability of
directors under federal securities laws.
The Company's By-Laws provide that the Company shall to the fullest extent
permitted by applicable law, as amended from time to time, indemnify any person
who is or was made, or threatened to be made, a party to any action or
proceeding, whether civil or criminal, whether involving any actual or alleged
breach of duty, neglect or error, any accountability, or any actual or alleged
misstatement, misleading statement or other act or omission and whether brought
or threatened in any court or administrative or legislative body or agency,
including any action by
31
<PAGE>
or in the right of the Corporation to procure a judgment in its favor and an
action by or in the right of any other corporation of any type or kind, domestic
or foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of the Corporation is serving or
served in any capacity at the request of the Corporation, by reason of the fact
that he, his testator or intestate, is or was a director or officer of the
Corporation, or is serving or served such other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, amounts paid in settlement, and expenses (including
attorneys' fees, cost and charges) incurred as a result of such action or
proceeding, or appeal therein, except to such person who is a director or
officer of the Company and a judgment or other final adjudication adverse to
such director or officer establishes that (i) his acts were committed in bad
faith or were the result of active and deliberate dishonest and, in either case,
were material to the cause of action so adjudicated, or (ii) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled.
Section 722 of the New York Business Corporation Law empowers a New York
corporation to indemnify any person, made, or threatened to be made, a party to
an action or proceeding other than one by or in the right of the corporation to
procure a judgment in its factor, whether civil or criminal, including an action
by or in the right of any other corporation of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of the corporation served in any
capacity at the request of the corporation, by reason of the fact that he, his
testator or intestate, was a director or officer of the corporation, or served
such other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise in any capacity, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorney's fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause to believe
that his conduct was unlawful.
In addition, Section 722 of the New York Business Corporation Law states
that a New York corporation may indemnify any person made, or threatened to be
made, a party to an action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he, his testator or intestate,
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of any other corporation of
any type of kind, domestic or foreign, of any partnership, joint venture, trust,
employee benefit plan or other enterprise, against amounts paid in settlement
and reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court on which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
The Company maintains directors and officers liability insurance.
32
<PAGE>
STOCK OPTION PLAN
In April 1997, the Company adopted a stock option plan which currently
covers 1,000,000 shares of the Common Stock. Options may be designated as either
(i) incentive stock options ('ISOs') under the Internal Revenue Code of 1986, as
amended (the 'Code') or (ii) non-qualified stock options. ISOs may be granted
under the Stock Option Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company (collectively
'Options'). In certain circumstances, the exercise of Options may have an
adverse effect on the market price of the Common Stock.
The Stock Option Plan is intended to encourage stock ownership by employees
of the Company, so that they may acquire or increase their proprietary interest
in the Company and to encourage such employees and directors to remain in the
employ of the Company and to put forth maximum efforts for the success of the
business. Options granted under the Stock Option Plan may be accompanied by
either stock appreciation rights ('SARS') or limited stock appreciation rights
(the 'Limited SARS'), or both.
The Plan is administered by the Company's Compensation and Stock Option
Committee as the Board may establish or designate (the 'Administrators'). The
Committee shall be comprised of not less than two members, and all of whom shall
be outside directors. The members of the Compensation and Stock Option Committee
are Stewart L. Cohen and William F. Kenny III, outside directors.
The Administrators, within the limitation of the Stock Option Plan, shall
have the authority to determine the types of options to be granted, whether an
Option shall be accompanied by SARS or Limited SARS, the purchase price of the
shares of Common Stock covered by each Option (the 'Option Price'), the persons
to whom, and the time or times at which, Options shall be granted, the number of
shares to be covered by each Option and the terms and provisions of the option
agreements.
The maximum aggregate number of shares of Common Stock as to which Options,
Rights and Limited Rights may be granted under the Stock Option Plan to any one
optionee during any fiscal year of the Company is 50,000.
With respect to the ISOs, in the event that the aggregate fair market
value, determined as of the date the ISO is granted, of the shares of Common
Stock with respect to which Options granted and all other option plans of the
Company, if any, become exercisable for the first time by any optionee during
any calendar year exceeds $100,000, Options granted in excess of such limit
shall constitute non-qualified stock options for all purposes. Where the
optionee of an ISO is a ten (10%) percent stockholder, the Option Price will not
be less than 110% of the fair market value of the Company's Common Stock,
determined on the date of grant, and the exercise period will not exceed five
(5) years from the date of grant of such ISO. Otherwise, the Option Price will
not be less than one hundred (100%) percent of the fair market value of the
shares of the Common Stock on the date of grant, and the exercise period will
not exceed ten (10) years from the date of grant. Options granted under the Plan
shall not be transferable other than by will or by the laws of descent and
distribution, and Options may be exercised, during the lifetime of the optionee,
only by the optionee or by his guardian or legal representative.
The Compensation and Stock Option Committee has approved the grant, as of
the Effective Date, of ISOs to purchase an aggregate of 70,000 shares of Common
Stock to certain employees of the Company. These Options will be exercisable as
to one-third of such shares at an exercise price of $5.00 per share commencing
one year from the Effective Date, as to an additional one-third of such shares
at an expercise price of $5.50 per share commencing two years from the Effective
Date; and as to an additional one-third of such shares at an exercise price of
$6.00 per share commencing three years from the Effective Date provided the
Optionee shall be employed by the Company at the time of exercise.
33
<PAGE>
SECURITIES OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of the
Prospectus and as adjusted to reflect the sale of the Securities offered hereby,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known to the
Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each executive officer and director of the Company, and (iii) all
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENTAGE
----------------------------- ------------------------
NAME AND ADDRESS OF BEFORE AFTER BEFORE AFTER
BENEFICIAL OWNER OFFERING OFFERING(2) OFFERING OFFERING(2)
- ----------------------------------------------------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C>
Harvey Acquisition Company LLC ............................ 1,915,000(3) 1,925,000(4) 84.8% 61.9%
c/o Recca & Co., Inc.
100 Wall Street, 10th Floor
New York, NY 10005
Michael Recca ............................................. 1,920,000 1)(3) 1,930,000 1)(4) 85.0% 62.1%
Recca & Co., Inc.
100 Wall Street, 10th Floor
New York, NY 10005
Stewart L. Cohen .......................................... 10,000 10,000 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
William F. Kenny, III ..................................... 8,489 8,489 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Franklin C. Karp .......................................... 15,000 15,000 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Joseph J. Calabrese ....................................... 10,702 10,702 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Michael A. Beck ........................................... 7,500 7,500 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Roland W. Hiemer .......................................... 2,500 2,500 * *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
InterEquity Capital Partners .............................. 141,565 3)(5) 131,565 4)(5) 6.0% 4.1%
220 Fifth Avenue, 10th Floor
New York, NY 10001
All Directors and Officers as group ....................... 1,974,191 1,984,191(4) 87.4% 63.8%
(7 Persons)
</TABLE>
- ------------------
* Less than 1% of outstanding shares of Common Stock.
(1) Includes Shares owned by HAC, of which Mr. Recca is a member and one of
three managers.
(2) Assumes no exercise of the Warrants and other outstanding warrants, the
Over-Allotment Option, the Representative's Warrant, stock options granted
or to be granted under the Company's Stock Option Plan, and no conversion of
the outstanding Preferred Stock.
(3) Assumes no exercise of a put option granted by HAC to InterEquity, the
exercise of which will allow InterEquity to require HAC to purchase the
51,565 Shares held by InterEquity for $70,000 prior to the Effective Date
('Put Option') and does not include the 10,000 Shares to be purchased by HAC
from InterEquity at $5.00 per Share within 10 days of the closing of the
Offering.
(4) Includes 10,000 Shares to be purchased by HAC from InterEquity at $5.00 per
Share within 10 days of the closing of the Offering, but assumes no exercise
of the Put Option. If the Over-Allotment Option were exercised in full, HAC
would own 1,825,000 Shares (or 58.7%) and all Directors and Officers as a
group would own 1,884,191 Shares (or 60.6%).
(5) Includes 90,000 Shares issuable on conversion of Preferred Stock.
34
<PAGE>
SELLING SECURITYHOLDER
In addition to the 850,000 shares of Common Stock and 1,300,000 Warrants to
be sold by the Company in the Offering, the Representative has been granted an
option (the 'Over-Allotment Option'), exercisable for a period of 45 calendar
days from the date of the closing of this Offering, to purchase from the Company
and, if necessary, from HAC at the per share public offering prices less
underwriting discounts and the non-accountable expense allowance, an aggregate
of 127,500 additional shares of Common Stock and/or an aggregate of 195,000
additional Warrants. In the event the Representative exercises the
Over-Allotment Option, the first 27,500 shares of Common Stock will be sold by
the Company, and the balance, up to 100,000 Shares, will be sold by HAC. All
warrants subject to the Over-Allotment Option will be sold by the Company.
HAC has agreed to purchase from InterEquity 10,000 Shares at $5.00 per
Share within 10 days of the closing of the Offering.
The following table sets forth certain information with respect to HAC, the
selling securityholder, in the event the Representative exercises the
Over-Allotment Option as to the Common Stock in full. The Company will not
receive any proceeds from the sale of shares by HAC.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP
OF SHARES OF COMMON OF SHARES OF COMMON
SELLING SECURITYHOLDER STOCK PRIOR TO SALE SHARES TO BE SOLD STOCK AFTER SALE
- ---------------------------------------------------------- ------------------- ----------------- -------------------
<S> <C> <C> <C>
Harvey Acquisition Company, LLC........................... 1,915,000 100,000 1,825,000(1)
</TABLE>
- ------------------
(1) Includes 10,000 Shares to be purchased by HAC from InterEquity at $5.00 per
Share within 10 days of the closing of the Offering, but assumes no exercise
of the Put Option.
35
<PAGE>
CERTAIN TRANSACTIONS
In 1995 and 1996, during the Company's bankruptcy proceeding, the Company
borrowed, in the aggregate, approximately $2,822,500 (the 'Loan') from HAC. As
of the effective date of the Company's Reorganization Plan, and pursuant to
certain provisions contained therein, HAC's claims in connection with the Loan
was satisfied by issuing HAC 2,000,000 shares of the Company's Common Stock.
Subsequently, Michael Recca was elected as a member and Chairman of the
Company's Board of Directors. In connection with the Loan, the Company paid a
$5,000 per month loan servicing fee, which was to be paid to Recca & Co. Inc.,
of which Michael Recca is the sole shareholder, through October 1996.
Subsequently, through March 1997, a $5,000 per month management fee was paid to
HAC. There was an arrearage of management fees of approximately $30,000 which
was forgiven by HAC.
Harvey E. Sampson, former director and officer of the Company and a holder
of approximately 7% of the Company's Common Stock prior to the Company's
reorganization, executed a promissory note ('Note') to the Company in the
principal amount of $153,371, payable in 6 annual payments of $25,561.83
commencing on January 1, 1997, with an annual interest rate of 6%. The Note was
delivered as payment for the purchase by Mr. Sampson of certain insurance
policies and their related cash surrender values, which were owned by the
Company. On June 15, 1995, Mr. Sampson resigned as a director and officer of the
Company, but continued to hold approximately 7% of the Company's Common Stock.
On the effective date of the Company's reorganization, Mr. Sampson became a
holder of less than 1% of the Company's Common Stock. In July 1996, Mr. Sampson,
with the agreement of the Company, satisfied the note by paying $125,000 and the
Company obtained the release of personal guaranty of the Company's indebtedness
to Congress Financial Corporation.
On February 9, 1996 the Company entered into a severance agreement with
Arthur Shulman, the then President, Chief Executive Officer and a director of
the Company. In consideration of Mr. Shulman's resignation effective February
29, 1996 from all offices and positions he held in the Company and its
subsidiaries, the Company:
(1) paid Mr. Shulman $75,000;
(2) on February 29, 1996 paid Mr. Shulman a sum equal to 3 weeks accrued
vacation pay;
(3) provided Mr. Shulman with, and paid for, all medical benefits under
COBRA for an 18-month period following the termination; and
(4) agreed to provide Mr. Shulman with all indemnification, and all
limitation of liability, existing in favor of Mr. Shulman as provided
in the Company's certificate of incorporation and by-laws for six years
from termination.
Reference is made to 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources'
regarding the Company's revolving line of credit facility with Paragon, which
the Company entered into on November 5, 1997. Stewart L. Cohen, a director of
the Company, is the Chief Executive Officer and a director of Paragon.
In February and March, 1997, Mr. E. H. Arnold ('Arnold'), a member of HAC
and a holder of Preferred Stock, loaned the Company the principal amount of
$350,000, with an interest rate of 12% per annum. This loan is due on December
31, 1998 and can be prepaid without penalty.
In November 1997, HAC transferred 85,000 shares of Common Stock to certain
employees and directors of the Company and Arnold. Such transfer is to be
treated for accounting purposes as if such shares were issued by the Company as
compensation to such persons. The Company will record compensation expense equal
to the fair market value of the shares (70% of the per share public offering
price) over a two year period, during which the shares are subject to forfeiture
by the transferees.
36
<PAGE>
DESCRIPTION OF SECURITIES
The total authorized capital stock of the Company consists of 10,000,000
shares of Common Stock with a par value of $0.01 per share ('Common Stock'), and
10,000 shares of 8.5% Cumulative Convertible Preferred Stock with a par value of
$1,000 per share ('Preferred Stock'). The following descriptions contain all
material terms and features of the securities of the Company and are qualified
in all respects by reference to the Company's certificate of incorporation and
Amended and Restated By-Laws of the Company, copies of which are filed as
exhibits to the Registration Statement to which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock with a
par value of $0.01 per share. As of the Effective Date, 2,259,368 shares are
outstanding and held of record by 365 shareholders.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. There is no cumulative voting with
respect to the election of directors, with the result that holders of more than
50% of the shares voted for the election of directors can elect all of the
directors. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors from sources legally available
therefor. In the event of liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, and after payment in full of the amount
payable in respect of the Preferred Stock, the holders of Common Stock are
entitled, to the exclusion of the holders of the Preferred Stock, to share
ratably in the assets of the Company available for distribution to stockholders
after payment of liabilities and after provision for each class of stock, if
any, having preference over the Common Stock. Holders of Common Stock have no
preemptive rights. All outstanding shares are, and all shares to be sold and
issued as contemplated hereby, will be fully paid and non-assessable and legally
issued. The Board of Directors is authorized to issue additional shares of
Common Stock within the limits authorized by the Company's charter and without
stockholder action.
WARRANTS
1,300,000 Warrants will be sold in this Offering at a public offering price
of $0.10 per Warrant. In addition, 36,548 Warrants were issued to the holders of
the Company's Preferred Stock, which are identical to the Warrants, but are not
registered under the Securities Act. Each Warrant entitles its holder to
purchase one share of Common Stock at a price of 110% of the per share public
offering price of the Common Stock, subject to adjustment in certain
circumstances. Each Warrant is exercisable for a period of three years
commencing two years from the Effective Date (or earlier with the consent of the
Representative).
The Warrants may be redeemed by the Company at $0.10 per Warrant at any
time commencing two years from the Effective Date, or earlier with the consent
of the Representative, and until their expiration, provided the closing bid
price, if listed on the NASDAQ SmallCap or the OTC Electronic Bulletin Board, or
the last sales price, if listed on the NASDAQ National Market or a national
exchange, of the Common Stock for twenty (20) consecutive trading days during
such three-year holding period, exceeds $7.50 per share. The Warrants are
exercisable until the close of the trading day preceding the date fixed for
redemption. Holders of Warrants do not have any of the rights of holders of
Common Stock. The Warrants offered herein will be sold and traded separately
from the Company's Common Stock.
No Warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Warrants under an effective registration statement filed with the
Commission and such shares have been qualified for sale or are exempt from
qualification under the securities laws of the state of residence of the holder
of such Warrants. Although the Company intends to have all shares so qualified
for sale in those states where the Securities are being offered and has
undertaken to maintain a current prospectus relating thereto until the
expiration of the Warrants, subject to the terms of the Warrant Agreement, there
can be no assurance that it will do so.
A holder of Warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the Warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
37
<PAGE>
The exercise price of the Warrants and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions, and reclassifications. No assurance can be given that the market
price of the Common Stock will exceed the exercise price of the Warrants at any
time during the exercise period.
PREFERRED STOCK
The Company's certificate of incorporation authorizes the issuance of
10,000 shares of 8.5% Cumulative Convertible Preferred Stock ('Preferred Stock')
with a par value of $1,000 per share. Prior to the date of this Prospectus, 875
shares of Preferred Stock were issued and outstanding and were held by five
holders of record.
The Preferred Stock may be issued from time to time without stockholder
approval in one or more classes or series. A holder of the Preferred Stock is
not entitled to vote except as required by law.
Dividends on the Preferred Stock are cumulative from the day of original
issuance, whether or not earned or declared. In the event the Board of Directors
declares dividends to be paid on the Preferred Stock, the holders of the
Preferred Stock will be entitled to receive semiannual dividends at the rate
(the 'Preference Rate') of eighty-five ($85) dollars per share payable in cash
on the last business day of June and December in each year. For calendar year
1997, the Company has elected to defer the dividends. The Preference Rate for
calendar year 1997 is $105 per share, which will be paid in three equal
installments with interest at the rate of 8.5% per annum on the last business
days of December 1998, 1999 and 2000. In addition, no dividend shall be paid, or
declared, or set apart for payment upon, and no other distribution shall at any
time be declared or made in respect of, any shares of Common Stock, other than a
dividend payable solely in, or a distribution of, Common Stock, unless full
cumulative dividends of the Preferred Stock for all past dividend periods and
for the then current dividend period have been paid or have been declared and a
sum sufficient for the payment thereof has been set apart.
The Preferred Stock shall be redeemable, at the Company's option, in whole
or in part, upon payment in cash of the Redemption Price in respect of the
shares so redeemed. The 'Redemption Price' per share shall be equal to the sum
of (i) One Thousand and 00/100 ($1,000.00) Dollars and (ii) all dividends
accrued and unpaid on such shares to the date of redemption. If less than all of
the outstanding Preferred Stock is to be redeemed, the redemption will be in
such amount and by such method (which need not be by lot or pro rata), and
subject to such other provisions, as may from time to time be determined by the
Board of Directors.
In the event of liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, resulting in any distribution of its assets to
its shareholders, the holders of the Preferred Stock outstanding shall be
entitled to receive in respect of each such share an amount which shall be equal
to the Redemption Price, and no more, before any payment or distribution of the
assets of the Company is made to or set apart for the holders of Common Stock.
Each share of Preferred Stock may be convertible into shares of Common
Stock at the option of the holder, in whole or in part, as follows: until
December 31, 2000, (i) 50% of the Preferred Stock will be convertible at $6.00
per share; and (ii) $7.50 per share for the balance. Commencing January 1, 2001,
the Conversion Price shall be equal to the average of the closing bid price of
the Common Stock over the 45 trading days preceding January 1, 2001 (if traded
on the NASDAQ SmallCap or the OTC Electronic Bulletin Board) or the average of
the last sales price of the Common Stock over the 45 trading days preceding
January 1, 2001 (if listed on the NASDAQ National Market or a national
exchange.)
If at any time prior to the exercise of the conversion rights afforded the
holders of the Preferred Stock, the Preferred Stock is redeemed by the Company,
in whole or in part, then the conversion right shall be deemed canceled with
respect to such redeemed stock, as of the date of such redemption.
In case of any capital reorganization or any reclassification of the Common
Stock, or in case of the consolidation or merger of the Company with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common
38
<PAGE>
Stock deliverable upon conversion of such Preferred Stock would have been
entitled upon such reorganization, reclassification, consolidation, merger, or
conveyance.
SHARES ELIGIBLE FOR FUTURE SALE
All of the 2,259,368 shares of Common Stock outstanding as of the Effective
Date were issued in connection with the Company's Reorganization Plan, in
exchange for either a claim against, or an interest in, or a claim for an
administrative expense in the Company's bankruptcy proceeding. These shares are
deemed exempted securities under Section 1145 of the United States Bankruptcy
Code and, therefore, are freely tradable. A sale of shares in significant
amounts may have substantial adverse effects on the price of the Common Stock.
HAC and each officer and director of the Company have entered into written
agreements with the Representative that they will not publicly sell an aggregate
of 1,919,191 shares of the Company's Common Stock without the prior consent of
the Representative for a period of 12 months from the Effective Date as to 25%
of such shares; for a period of 18 months from such date, as to an additional
25% of such shares; and for a period of 24 months from such date, as to the
remaining 50% of such shares.
As of the Effective Date, all holders of the Preferred Stock will have
entered into lock-up agreements with the Representative, which agreements
provide that Common Stock issued upon conversion of Preferred Stock, Warrants
owned by such holders and Common Stock exercisable upon the exercise of such
warrants will not be sold publicly for two years following the Effective Date or
one year from the conversion (whichever is longer). The lock-up will be
suspended, however, if the closing bid price of the Common Stock if traded on
the NASDAQ SmallCap or the OTC Electronic Bulletin Board or the last sales price
of the Common Stock if listed on the NASDAQ National Market or a national
exchange, exceeds $7.50 for 45 consecutive trading days.
InterEquity Capital Partners, L.P. ('InterEquity'), which holds 51,565
shares of the Common Stock, has agreed with the Representative not to publicly
sell such Shares for a period of one year following the Effective Date.
Certain directors, officers and employees of the Company, and Mr. E. H.
Arnold will agree to with the Representative not to publicly sell an aggregate
of 85,000 Shares for two years following the Effective Date. A sale of Shares in
significant amounts after the expiration of any lock-up agreement may have
substantial adverse effects on the market price of the Common Stock and
Warrants.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of Common Stock of The Harvey Group Inc., the predecessor of the
Company, were traded on the American Stock Exchange until June 16, 1995, and
were subsequently traded on the OTC Electronic Bulletin Board through November
1996 when such trading ceased as a result of the confirmation of the Company's
Reorganization Plan. Currently, there is no public trading market for the
Company's Securities.
The outstanding shares of Common Stock are currently held by 368
shareholders of record, and the Preferred Stock by 5 holders of record.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and Warrant Agent for
the Warrants is Registrar and Transfer Company, 10 Commerce Drive, Cranford, New
Jersey 07016.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, each of the Underwriters named below, for whom The Thornwater
Company, L.P. is acting as representative ('Representative'), has severally
agreed to purchase from the Company and the Company has agreed to sell to the
Underwriters, on a firm commitment basis, the respective number of shares of
Common Stock and/or Warrants set forth below opposite each such Underwriter's
name:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITER SHARES WARRANTS
--------- ---------
<S> <C> <C>
The Thornwater Company, L.P.............................................
Total................................................................... 850,000 1,300,000
--------- ---------
--------- ---------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Securities are subject to
certain conditions precedent, and that the several Underwriters will purchase
all of the Securities shown above if any of such Securities are purchased.
The Representative has advised the Company that the Underwriters propose
initially to offer the Securities directly to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers who are members in good standing with the National Association of
Securities Dealers, Inc. ('NASD') at such prices less a concession not in excess
of $ per share of Common Stock and $ per Warrant. Neither the
Underwriters nor such dealers will allow any concession to other dealers. After
the initial public offering, the public offering prices, concessions and
re-allowances may be changed.
The Company and HAC have granted to the Representative an option,
exercisable during the 45-day period after the closing date of this Offering, to
purchase from the Company and, if necessary, from HAC at the per share public
offering prices less underwriting discounts and the non-accountable expense
allowance, an aggregate of 127,500 additional shares of Common Stock and/or an
aggregate of 195,000 additional Warrants for the purpose of covering
over-allotments, if any. In the event the Representative exercise the
Over-Allotment Option, the first 27,500 shares of Common Stock will be sold by
the Company, and the balance will be sold by HAC, if necessary. All the
additional Warrants will be sold by the Company. To the extent that such option
is exercised in whole or in part, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase the number of additional Securities
proportionate to such Underwriter's initial commitment.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds of this
Offering.
In addition, subject to the rules of the NASD, the Company has agreed to
engage the Representative as warrant solicitation agent, in connection with
which it would be entitled to a 5% fee upon exercise of the Warrants. In
accordance with the NASD rules, no fee shall be paid: (i) upon the exercise
where the market price of the underlying Common Stock is lower than the exercise
price; (ii) for the exercise of Warrants held in any discretionary account;
(iii) upon the exercise of Warrants where disclosure of compensation
arrangements has not been made and documents have not been provided to customers
both as part of the original Offering and at the time of exercise; (iv) upon the
exercise of Warrants in unsolicited transactions; or (v) upon the exercise of
Warrants where such exercise is solicited by the Company. Notwithstanding the
foregoing, no fees will be paid to the Representative or any other NASD members
upon exercise of the Warrants within the first twelve months after the date of
this Prospectus. In addition, upon consent of the Representative, other NASD
members may solicit the exercise of the
40
<PAGE>
Warrants without giving up a portion of the 5% solicitation fee to the
Representative. Further, such NASD broker/dealer will receive a 5% solicitation
fee only when designated in writing by the warrantholder as the soliciting
broker.
In connection with this Offering, the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase shares of Common Stock or
Warrants in the open market following completion of the Offering to cover all or
a portion of such short position. The Underwriters may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the Underwriters may impose 'penalty bids' under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of other Underwriters,
the selling concession with respect to shares of Common Stock and Warrants that
are distributed in the Offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock and
Warrants at a level above that which might otherwise prevail in the open market.
None of the transactions described in this paragraph is required, and, if they
are undertaken they may be discontinued at any time.
Pursuant to the Underwriting Agreement, the Company has agreed that, for
three years from the effective date of the Registration Statement of which this
Prospectus is a part, the Representative may designate two persons to the
Company's Board of Directors, subject to the Company's good faith approval. In
the event the Representative elects not to exercise this right, it may designate
two persons to attend all meetings of the Board for a period of three years.
The Underwriters have informed the Company that they do not expect any
sales of shares of Common Stock or Warrants to be made to discretionary
accounts.
The Company has agreed to retain the Representative as the Company's
financial consultant for a period of 36 months from the date hereof and to pay
the Representative the amount of $87,600 for such services, all payable in
advance on the closing date of this Offering as set forth in the Underwriting
Agreement.
The Company, the Selling Securityholder and the Underwriters have agreed to
indemnify each other against, or to contribute to losses arising out of, certain
civil liabilities in connection with this Offering, including liabilities under
the Securities Act.
Prior to this Offering, there is currently no active trading market for the
Company's Securities. The initial public offering prices of the Securities and
the terms of the Warrants have been determined by negotiation between the
Company and the Representative. Factors considered in determining the per share
public offering prices of the Securities and the terms of the Warrants, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which the Company competes, an assessment of the Company's
management the prospects of the Company, its capital structure and such other
factors that were deemed relevant.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, a warrant to purchase from the
Company 85,000 shares of Common Stock and/or 130,000 Warrants (the
'Representative's Warrant'). The Representative's Warrant is initially
exercisable at a price of $6.00 per share of Common Stock and $0.12 per Warrant.
The Warrants issuable upon exercise of the Representative's Warrant are
identical to those offered to the public. The Representative's Warrant contains
anti-dilution provisions providing for adjustment of the number of warrants and
exercise price under certain circumstances. The Representative's Warrant grants
to the holders thereof certain rights of registration of the securities issuable
upon exercise of the Representative's Warrant.
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part. See 'Additional Information.'
41
<PAGE>
While certain officers of the Representative have significant experience in
corporate financing and securities underwriting, the Representative has
previously acted as an underwriter in only two 'firm commitment' underwritings
and has acted as the principal underwriter in one of such offerings.
Accordingly, there can be no assurance that the Representative's limited public
offering experience will not adversely affect the Company's offering of the
Securities and the subsequent development of a trading market in the Securities,
if any.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New York. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York, New
York.
Ruskin, Moscou, Evans & Faltischek, P.C. will receive at the closing of
this Offering a warrant to purchase 15,000 shares of Common Stock at the public
offering price, which warrant is exercisable for four years.
EXPERTS
The financial statements of the Company at October 26, 1996 and for the
thirty-nine weeks ended October 26, 1996 and for the fifty-two weeks ended
January 26, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form SB-2
(the 'Registration Statement') under the Act with respect to the Securities
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Securities offered hereby, reference is made to
the Registration Statement and such exhibits and schedules, which may be
inspected without charge at the Public Reference Section of the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at Seven World Trade Center, New York, New
York 10048. Copies of such material may also be obtained at prescribed rates
from the Public Reference Section of the SEC in Washington, D.C. 20549.
Registration Statements filed electronically through the Electronic Data
Gathering Analysis and Retrieval System are publicly available at the SEC's
website (http://www.sec.gov.) Statements contained in the Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements reported on by its independent auditors
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial statements.
42
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors................................................................................ F-2
Balance Sheet -- October 26, 1996............................................................................. F-3
Statements of Operations -- Fifty-Two Weeks Ended January 27, 1996 and Thirty-Nine Weeks
Ended October 26, 1996...................................................................................... F-4
Statements of Shareholders' (Deficit) Equity -- Fifty-Two Weeks Ended January 27, 1996 and
Thirty-Nine Weeks Ended October 26, 1996.................................................................... F-5
Statements of Cash Flows -- Fifty-Two Weeks Ended January 27, 1996 and Thirty-Nine Weeks
Ended October 26, 1996...................................................................................... F-6
Notes to the Financial Statements............................................................................. F-7
Unaudited Financial Statements
Balance Sheet -- August 2, 1997............................................................................... F-18
Statements of Operations -- Forty Weeks Ended August 2, 1997 and Thirty-Nine Weeks
Ended July 27, 1996......................................................................................... F-19
Statements of Cash Flows -- Forty Weeks Ended August 2, 1997 and Thirty-Nine Weeks
Ended July 27, 1996......................................................................................... F-20
Notes to the Unaudited Financial Statements................................................................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Harvey Electronics, Inc.
We have audited the accompanying balance sheet of Harvey Electronics, Inc.
(formerly The Harvey Group Inc. and subsidiaries) as of October 26, 1996
(Successor) and the related statements of operations, shareholders' (deficit)
equity, and cash flows for the fifty-two weeks ended January 27, 1997
(Predecessor) and the thirty-nine weeks ended October 26, 1996 (Predecessor).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harvey Electronics, Inc. at
October 26, 1996 (Successor), and the results of its operations and its cash
flows for the fifty-two weeks ended January 27, 1996 (Predecessor) and the
thirty-nine weeks ended October 26, 1996 (Predecessor), in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring losses and negative cash flows from operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are described
in Notes 1 and 5. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Melville, NY
December 4, 1997
F-2
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
BALANCE SHEET -- SUCCESSOR
OCTOBER 26, 1996
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................................. $ 3,379
Accounts receivable, less allowance of $25,000........................................................ 305,796
Inventories........................................................................................... 3,008,838
Due from Harvey Acquisition Company, LLC
(received subsequent to October 1996).............................................................. 605,000
Prepaid expenses and other current assets............................................................. 327,451
----------
Total current assets.................................................................................... 4,250,464
Property and equipment:.................................................................................
Leasehold improvements................................................................................ 155,900
Furniture, fixtures and equipment..................................................................... 598,000
----------
753,900
Certificate of deposit.................................................................................. 200,000
Equipment under capital leases.......................................................................... 115,838
Reorganization value in excess of amounts allocable to
identifiable assets................................................................................... 1,650,570
Other................................................................................................... 196,515
----------
Total assets............................................................................................ $7,167,287
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable................................................................................ $1,325,818
Accrued expenses and other current liabilities........................................................ 807,699
Obligations relating to Chapter 11 reorganization..................................................... 491,909
Income taxes.......................................................................................... 13,212
Accrued costs related to discontinued operations...................................................... 74,000
Current portion of capital lease obligations.......................................................... 102,112
----------
Total current liabilities............................................................................... 2,814,750
Long-term liabilities:
Long-term debt........................................................................................ 778,217
Other liabilities..................................................................................... 152,356
Capital lease obligations............................................................................... 11,480
Commitments and contingencies (Note 9)
Shareholders' equity
8 1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share; authorized 10,000 shares;
issued and outstanding 875 shares (aggregate liquidation preference--$875,000)..................... 318,000
Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding 2,259,368
shares............................................................................................. 22,594
Additional capital.................................................................................... 3,069,890
Accumulated deficit................................................................................... --
----------
Total shareholders' equity.............................................................................. 3,410,484
----------
Total liabilities and shareholders' equity.............................................................. $7,167,287
----------
----------
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF OPERATIONS -- PREDECESSOR
<TABLE>
<CAPTION>
52 WEEKS 39 WEEKS 39 WEEKS
ENDED ENDED ENDED
JANUARY 27, OCTOBER 26, OCTOBER 28,
1996 1996 1995
----------- ----------- --------------
(UNAUDITED)(1)
<S> <C> <C> <C>
Net sales............................................................. $15,870,752 $ 9,263,152 $ 11,107,258
Interest and other income............................................. 131,169 87,657 78,487
----------- ----------- --------------
16,001,921 9,350,809 11,185,745
----------- ----------- --------------
Cost of sales......................................................... 10,452,589 6,094,499 7,312,311
Selling, general and administrative expenses.......................... 7,557,184 4,937,316 5,782,070
Interest expense...................................................... 457,419 355,922 307,015
----------- ----------- --------------
18,467,192 11,387,737 13,401,396
----------- ----------- --------------
Loss before reorganization expenses, fresh start adjustments and
extraordinary item.................................................. (2,465,271) (2,036,928) (2,215,651)
Reorganization expenses............................................... (959,146) (497,206) (520,418)
Reorganization income -- sale of lease................................ -- 250,000 --
----------- ----------- --------------
Loss before fresh start adjustments and extraordinary item............ (3,424,417) (2,284,134) (2,736,069)
Fresh start adjustments............................................... -- 1,857,844 --
----------- ----------- --------------
Loss before extraordinary item........................................ (3,424,417) (426,290) (2,736,069)
Extraordinary gain on forgiveness of debt............................. -- 5,338,852 --
----------- ----------- --------------
Net (loss) income..................................................... $(3,424,417) $ 4,912,562 ($ 2,736,069)
----------- ----------- --------------
----------- ----------- --------------
(Loss) income per share:
Loss before extraordinary item...................................... $ (1.08) $ (.14) $ (.86)
Extraordinary item.................................................. -- 1.69 --
----------- ----------- --------------
Net (loss) income per share........................................... $ (1.08) $ 1.55 $ (.86)
----------- ----------- --------------
----------- ----------- --------------
Weighted average number of common and common equivalent shares
outstanding during the period....................................... 3,164,887 3,164,887 3,164,887
----------- ----------- --------------
----------- ----------- --------------
</TABLE>
(1) Presented for comparison purposes only.
See notes to the financial statements.
F-4
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------- ------------------------ ADDITIONAL ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCK
------ -------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1995
(Predecessor)................... 3,498,968 $ 3,498,968 $ 5,899,010 $(9,750,538) $ (865,601)
Net (loss) for the year........... (3,424,417 )
---------- ----------- ----------- ----------- ------------
Balance at January 27, 1996
(Predecessor)................... 3,498,968 3,498,968 5,899,010 (13,174,955) (865,601)
Net income for the thirty-nine
weeks ended October 26, 1996.... 4,912,562
Elimination of accumulated deficit
upon implementation of fresh
start accounting................ 8,262,393
Cancellation of common stock and
treasury shares................. (3,498,968) (3,498,968) (5,899,010) 865,601
Issuance of common stock at
reorganization value............ 2,259,368 22,594 3,069,890
Issuance of preferred stock at
reorganization value............ 875 $318,000
------ -------- ---------- ----------- ----------- ----------- ------------
Balance at October 26, 1996
(Successor)..................... 875 $318,000 2,259,368 $ 22,594 $ 3,069,890 -- --
------ -------- ---------- ----------- ----------- ----------- ------------
------ -------- ---------- ----------- ----------- ----------- ------------
<CAPTION>
TOTAL
SHAREHOLDERS'
(DEFICIT)
EQUITY
-------------
<S> <C>
Balance at January 28, 1995
(Predecessor)................... $(1,218,161)
Net (loss) for the year........... (3,424,417)
-------------
Balance at January 27, 1996
(Predecessor)................... (4,642,578)
Net income for the thirty-nine
weeks ended October 26, 1996.... 4,912,562
Elimination of accumulated deficit
upon implementation of fresh
start accounting................ 8,262,393
Cancellation of common stock and
treasury shares................. (8,532,377)
Issuance of common stock at
reorganization value............ 3,092,484
Issuance of preferred stock at
reorganization value............ 318,000
-------------
Balance at October 26, 1996
(Successor)..................... $ 3,410,484
-------------
-------------
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF CASH FLOWS -- PREDECESSOR
<TABLE>
<CAPTION>
52 WEEKS 39 WEEKS
ENDED ENDED
JANUARY 27, OCTOBER 26,
1996 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income...................................................................... $(3,424,417) $ 4,912,562
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Extraordinary gain................................................................ -- (5,338,852)
Fresh start adjustments........................................................... -- (1,857,844)
Reorganization expenses........................................................... 404,226 149,580
Depreciation and amortization..................................................... 605,355 293,278
Provision (credit) for losses on accounts receivable.............................. 5,000 (5,000)
Provisions for sales tax and warranty reserves.................................... 38,000 39,000
Provision for deferred compensation plan.......................................... 7,013 --
Payments on covenant not to compete, consulting and deferred compensation
agreements....................................................................... (19,685) --
Net payments relating to discontinued operations.................................. (106,250) --
Payments of restructured legal costs.............................................. (27,250) --
Straight-line impact of rent escalations.......................................... 3,464 1,235
Miscellaneous..................................................................... -- (22,401)
Changes in operating assets and liabilities:
Accounts receivable............................................................. 230,613 43,412
Inventories..................................................................... 803,590 (147,850)
Prepaid expenses and other current assets....................................... 31,594 (11,718)
Trade accounts payable.......................................................... 591,061 1,121,362
Accrued expenses, other current liabilities and income taxes.................... (24,761) (27,717)
----------- -----------
Net cash used in operating activities.................................................. (882,447) (850,953)
----------- -----------
INVESTING ACTIVITIES
Proceeds from note receivable from former officer/shareholder.......................... -- 125,000
Proceeds from Merkert Enterprises...................................................... 87,100 --
Purchases of property and equipment.................................................... (38,146) (64,707)
Increase in other assets............................................................... (23,793) (125,303)
----------- -----------
Net cash provided by (used in) investing activities.................................... 25,161 (65,010)
----------- -----------
FINANCING ACTIVITIES
Debtor-in-possession financing......................................................... 1,250,000 717,500
Obligations relating to Chapter 11 reorganization...................................... 160,000 279,409
Net (repayments) proceeds from revolving line of credit facility....................... (336,350) 23,547
Principal payments on long-term debt................................................... (18,379) (90,010)
Principal payments on term loan........................................................ (180,000) --
Principal payments on capital lease obligations........................................ (64,436) (39,896)
----------- -----------
Net cash provided by financing activities.............................................. 810,835 890,550
----------- -----------
Decrease in cash and cash equivalents.................................................. (46,451) (25,413)
Cash and cash equivalents at beginning of period....................................... 75,243 28,792
----------- -----------
Cash and cash equivalents at end of period............................................. $ 28,792 $ 3,379
----------- -----------
----------- -----------
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 26, 1996
NOTE 1: BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company, which emerged from
reorganization under Chapter 11 of the Bankruptcy Code after confirmation of its
Reorganization Plan on November 13, 1996, has incurred recurring losses and
negative cash flows from operations for each of the periods presented. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan in regard to these matters principally include
raising additional equity through a proposed public offering (see Note 5) and a
refinancing of the Company's existing credit facility (see Note 4). If the
Company is successful in these efforts, it will seek to utilize the net proceeds
to open or acquire additional retail facilities. If the Company is unable to
accomplish these objectives or otherwise generate sufficient levels of cash
flows from operations, the Company may not be able to continue as a going
concern. The financial statements do not include any adjustments that may result
from the possible inability of the Company to continue as a going concern.
PLAN OF REORGANIZATION
On August 3, 1995, the Company (then known as The Harvey Group Inc. and its
Subsidiaries) filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York (the 'Court'). This filing was the result of certain
negative factors including but not limited to: (i) the negative effect of a
$2,138,000 judgment entered against the Company; (ii) liabilities of The Harvey
Group Inc., including the obligations of its discontinued food brokerage
division, the payment of which significantly reduced cash; (iii) the recession
in the early 1990's coupled with the soft market in the consumer electronics
industry, all of which resulted in losses and a shortage of cash flow; and (iv)
the delisting of the Predecessor's common stock from the American Stock Exchange
in June 1995, which delisting made a proposed $4.2 million equity placement
untenable.
On November 13, 1996 (the 'Confirmation Date'), the Court confirmed the
Restated Modified Amended Joint and Substantially Consolidated Plan of
Reorganization of The Harvey Group Inc. (the 'Reorganization Plan'). The
effective date of the Reorganization Plan was December 26, 1996 (the
'Reorganization Date'), at which time The Harvey Group Inc. emerged from its
Chapter 11 reorganization and changed its name from The Harvey Group Inc. to
Harvey Electronics, Inc. The Company has given effect to the Reorganization Plan
as of October 26, 1996, the end of the accounting period nearest to the
Confirmation Date.
Prior to the Reorganization Date, all of the Company's old shares of common
and preferred stock were canceled. The Company simultaneously amended its
Certificate of Incorporation and is authorized to issue 10,010,000 shares
consisting of 10,000 shares of 8.5% Cumulative Convertible Preferred Stock (see
Note 6) with a par value of $1,000 per share (the 'Preferred Stock') and
10,000,000 shares of Common Stock with a par value of $.01 per share (the
'Common Stock').
F-7
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 1: BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)
The Reorganization Plan provided for the following:
(a) Redistribution of Common Stock
Prior to the Reorganization Date, the new shares of common stock in
Harvey Electronics, Inc. were issued as follows:
2,000,000 shares were issued to Harvey Acquisition Company, L.L.C.
('HAC') in satisfaction of the $2,822,500 of subordinated secured
financing provided to the Company during its reorganization process.
187,841 shares were issued to the Company's unsecured creditors; in
satisfaction of prepetition liabilities compromised (see below).
19,962 shares were issued to the Company's former shareholders.
InterEquity Capital Partners, L.P. ('InterEquity'), a
prereorganization subordinated secured debtholder, received 51,565
shares of Common Stock as payment in full of an allowed finders fee.
As a result of the above, 2,259,368 shares of Common Stock are issued and
outstanding.
(b) Issuance of Preferred Stock (see Note 6)
Prior to the Reorganization Date, 875 shares of the Company's
Preferred Stock were issued to the Company's prereorganization subordinated
secured debt holders in exchange for $875,000 of such debt. The
reorganization carrying value of the Preferred Stock has been estimated to
be $318,000 based on a sale of such security, independent of the Company,
for 36% of stated value. The difference between the carrying amount of the
prereorganization debt and the reorganization carrying value has been
included with the extrordinary gain on forgiveness of debt in the
accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.
(c) Convenience Claims/Miscellaneous
Convenience claims of $1,000 or less were paid in cash approximating
$20,000. The Reorganization Plan also provided for cash distributions
($452) of $1.00 to any former shareholders holding 100 or fewer shares of
old common stock.
(d) Agreement and Plan of Merger
Pursuant to the Reorganization Plan, the Company's Board of Directors
approved the Agreement and Plan of Merger effective December 26, 1996 by
and between the Company and its 100% wholly owned subsidiary, Harvey Sound,
Inc. ('Sound'), pursuant to which Sound was merged with and into the
Company.
(e) Change in Fiscal Year
The Company's Board of Directors approved an amendment to its By-Laws
to reflect the change in the Company's fiscal year from the Saturday
closest to January 31 to the Saturday closest to October 31.
F-8
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 1: BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)
(f) Stock Option Plan
The Company's Board of Directors approved the Harvey Electronics, Inc.
Stock Option Plan ('Stock Option Plan'). The Stock Option Plan provides for
the granting of options to purchase up to 1,000,000 shares of Common Stock
of the Company (see Note 6).
(g) Prepetition Liabilities Subject to Compromise
Under Chapter 11, certain claims against the Company in existence
prior to the filing of the petitions for relief under the Code were stayed
while the Company continued its operations as a debtor-in-possession.
As a result of the operational restructuring, the Company recorded net
reorganization expenses for the fifty-two weeks ended January 27, 1996 and
for the thirty-nine weeks ended October 26, 1996 of $959,146 and $247,206,
respectively. Such charges consisted of costs associated with professional
fees, severance costs and the write-off or discount of property and
equipment and certain receivables. Additionally, the Company recorded
income from the sale of a lease during the thirty-nine weeks ended October
26, 1996 in the amount of $250,000.
Liabilities subject to compromise immediately preceding the
Reorganization Plan, consisted of the following at October 26, 1996:
<TABLE>
<S> <C>
Trade payables and miscellaneous claims............................................ $2,624,000
10% Convertible subordinated debentures............................................ 732,000
11% subordinated debentures........................................................ 276,000
10% subordinated debentures........................................................ 115,000
Liabilities of discontinued operations............................................. 213,000
Legal fees......................................................................... 342,000
Deferred compensation plans........................................................ 162,000
Prepetition rents and miscellaneous................................................ 318,000
----------
$4,782,000
----------
----------
</TABLE>
The above claims were satisfied with the issuance of common stock as noted
above and the related forgiveness of debt has been recorded as an extraordinary
gain in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.
FRESH START REPORTING
The balance sheet as of October 26, 1996 has been prepared based on Fresh
Start Reporting which was adopted on the Confirmation Date and applied as of
October 26, 1996, the end of the accounting period closest to the Confirmation
Date. The Company has adopted Fresh Start Reporting in accordance with the
American Institute of Certified Public Accountants Statement of Position 90-7,
'Financial Reporting by Entities in Reorganization under the Bankruptcy Code.'
Fresh Start Reporting has resulted in changes to the balance sheet, including
valuation of assets and liabilities at fair market value and valuation of equity
based on the reorganization value of the ongoing business, and accordingly, the
financial statements for periods prior (referred to as 'Predecessor') and
subsequent (referred to as 'Successor' or 'Company') to the adoption of Fresh
Start accounting are not comparable.
F-9
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 1: BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)
The reorganization value of the Company is primarily based on the
consideration received from HAC to obtain its ownership in the Company. A
carrying value of $318,000 was assigned to the Preferred Stock (see Note 6).
Subsequent to the Reorganization Date, the Company issued an additional 51,565
shares of Common Stock to InterEquity, as authorized by the Court, for an
approved finders fee. The excess of the reorganization value over the fair value
of net assets and liabilities ($1,650,570) is reported as 'Reorganization value
in excess of amounts allocable to identifiable assets' and will be amortized
over a twenty-five year period.
The revaluation of the Company's assets and liabilities resulted in the
following Fresh Start adjustments:
<TABLE>
<S> <C>
Increase in property and equipment (based on appraisal)...................................... $ 292,236
Decrease in other assets and liabilities, net................................................ (84,962)
Reorganization value in excess of amounts allocable to identifiable assets................... 1,650,570
----------
$1,857,844
----------
----------
</TABLE>
In March 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 121, 'Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,' which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS No. 121 on
January 28, 1996. Operating losses subsequent to the Company's emergence from
Chapter 11 indicate that the reorganization value in excess of amounts allocable
to identifiable assets might be impaired. However, the Company's estimate of
undiscounted cash flows indicate that such carrying amounts are expected to be
recovered. Nonetheless, it is reasonably possible that the estimate of
undiscounted cash flows may change in the near term resulting in the need to
write-down such assets to fair value.
The statements of operations and cash flows presented herein represent the
Debtor-in-Possession operations of the Company, prior to the Reorganization
Date.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is a specialty retailer of high quality audio/video consumer
electronics and home theater products in the Metropolitan New York area. Revenue
is recognized at the time goods are delivered or services are performed.
ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements and accompanying notes. Actual
results could differ from those estimates.
F-10
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
UNAUDITED FINANCIAL STATEMENTS
The unaudited statement of operations for the thirty-nine weeks ended
October 28, 1995 is presented for comparison purposes only, and in the opinion
of management, include all adjustments (consisting of normal recurring accruals)
for the fair presentation of such financial statements.
STOCK OPTIONS
In October 1995, the FASB issued SFAS No. 123, 'Accounting for Stock-Based
Compensation.' SFAS No. 123 defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, as the Company
has elected to do, but are required to disclose in the financial statement
footnotes, pro-forma net income and per share amounts as if the Company had
applied the new method of accounting for all grants made since 1996. SFAS No.
123 also requires increased disclosures for stock-based compensation
arrangements. The Company has adopted the disclosure requirements of SFAS No.
123.
INVENTORIES
Inventories are stated at the lower of cost (average-cost method, which
approximates the first-in, first-out method) or market.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment, including equipment acquired under
capital leases, is provided for by the straight-line method over the estimated
useful lives of the related equipment. Leasehold improvements are amortized over
the lease term or estimated useful life of the improvements, whichever is
shorter.
(LOSS) INCOME PER SHARE
The (loss) income per common share for the fifty-two weeks ended January
27, 1996 and for the thirty-nine weeks ended October 26, 1996 was computed based
on the weighted average number of common shares outstanding. There were no
common stock equivalents for the thirty-nine week period ended October 26, 1996.
Common equivalent shares were not considered for the fifty-two weeks ended
January 27, 1996 since their inclusion would have been antidilutive.
In February 1997, the FASB issued SFAS No. 128, 'Earnings Per Share,' which
is effective for both interim and annual financial statements for periods ending
after December 15, 1997. At such time, the Company will be required to change
the method currently used to compute earnings per share and restate all periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options, warrants, and convertible securities will be
excluded. The impact of adopting SFAS No. 128 is not expected to be material.
F-11
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Total interest paid for the fifty-two weeks ended January 27, 1996 and for
the thirty-nine weeks ended October 26, 1996 was approximately $478,000 and
$269,000, respectively.
CONCENTRATION OF CREDIT RISK
The Company's operations consist of the retail sale, service and custom
installation of high quality audio, video and home theater equipment in the New
York Metropolitan area. The Company performs credit evaluations of its customers
financial condition and payment history but does not require collateral.
Generally, accounts receivable are due within 30 days and credit losses have
historically been immaterial.
NOTE 3: DEBTOR-IN-POSSESSION FINANCING
On October 24, 1995, in connection with the Reorganization Plan, the
Company entered into a Security Loan Agreement ('Loan Agreement') with HAC,
enabling the Company to borrow up to $1,500,000 in debtor-in-possession
financing. The Loan Agreement bore interest at 2% over the prime rate at
Citibank, N.A. and was subordinate only to the Company's primary lender,
Congress Financial Corporation ('Congress'), as evidenced by an intercreditor
agreement between HAC and Congress (see Note 4).
The proceeds ($1,500,000) received in installments from HAC coupled with
credit support from the Company's vendors and bank primarily were used to build
inventory levels. On May 6, 1996, the Company received an additional $50,000
from HAC to be used for general operating purposes. In September 1996, the Loan
Agreement was amended, enabling the Company to borrow up to $3,000,000. As a
result of the amendment, additional proceeds of $1,272,500 were received from
HAC ($605,000 of such proceeds were received subsequent to October 26, 1996),
for a total aggregating $2,822,500. The proceeds were used for capital
expenditures, to build a new retail store in Greenwich, Connecticut,
advertising, professional fees and for working capital purposes. This
debtor-in-possession financing was converted into 2,000,000 shares of the Common
Stock of the reorganized Company in accordance with the Plan of Reorganization
(see Note 1).
Under the Loan Agreement, the Company paid $5,000 per month representing a
loan servicing fee to HAC. Such amounts aggregated $20,000 and $45,000 for the
fifty-two weeks ended January 27, 1996 and for the thirty-nine weeks ended
October 26, 1996, respectively.
Subsequent to the Reorganization Date, an individual who is a member of HAC
and a holder of Preferred Stock, provided an additional $350,000 of financing to
the Company, to be used for working capital purposes. This amount is payable in
full on December 31, 1998 with interest at 12% per annum, and may be prepaid
without penalty.
NOTE 4: REVOLVING LINES OF CREDIT FACILITIES
On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with Paragon Capital L.L.C. ('Paragon') whereby the Company
may borrow up to $3,300,000 based upon a lending formula (as defined) calculated
on eligible inventory. Proceeds from Paragon were used to pay down and cancel
the existing credit facility with Congress, reduce trade payables and pay
related costs of the refinancing. The Paragon facility
F-12
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 4: REVOLVING LINES OF CREDIT FACILITIES -- (CONTINUED)
provides an improved advance rate on the Company's inventory, which resulted in
additional net financing of approximately $750,000 (after expenses) compared to
the Company's previous facility with Congress, as discussed below. The interest
rate on borrowings up to $2,500,000 is 1% over the prime rate. The rate charged
on outstanding balances over $2,500,000 is 1.75% above the prime rate. A
commitment fee of $49,500 (to be amortized over three years) was paid by the
Company at closing and a facility fee of three-quarters of one percent (.75%) of
the maximum credit line will be charged each year. Monthly maintenance charges
and a termination fee also exist under the line of credit.
Paragon also received a warrant to purchase 125,000 shares of common stock,
subject to adjustment, which is currently exercisable at a price of $5.50 per
share and expires April 3, 2001. The Company will record a charge, based upon
the estimated fair value of such warrant, over three years.
Paragon has a senior security interest in all of the Company's assets. The
line of credit facility provides Paragon with rights of acceleration upon the
occurrence of certain customary events of default including, among others, the
event of bankruptcy. The Company is restricted from paying dividends on common
stock, retiring or repurchasing its common stock and entering into additional
indebtedness (as defined). Additionally, certain financial covenants exist.
In fiscal 1995, the Company entered into a three year revolving line of
credit facility with Congress, whereby the Company could borrow up to
$3,000,000, based upon a lending formula (as defined) calculated on eligible
inventory. Amendments to the Congress revolving line of credit facility were
completed on January 7, 1997 and March 31, 1997, primarily extending the
facility through January 6, 2000, instituting a net worth covenant (as defined)
and increasing available borrowings by approximately $250,000, by amending the
lending formula (as defined). The interest rate per annum on this credit
facility was the prime rate (8.5% at October 26, 1996) plus 2%. An unused line
fee of one-quarter of one percent per annum and a prescribed early termination
fee also existed under the line of credit facility. At closing, $200,000 was
required to be placed in escrow in a certificate of deposit as additional
collateral for Congress. The Company had $778,217 outstanding under the Congress
credit facility at October 26, 1996. As mentioned above, this credit facility
was canceled and replaced by a new revolving credit facility with Paragon. As a
result, the Company paid an early termination fee of $30,000 to Congress.
Congress had a senior security interest in all of the Company's assets and
an intercreditor agreement existed between Congress and HAC (see Note 3).
NOTE 5: PROPOSED INITIAL PUBLIC OFFERING
On September 15, 1997, the Company signed a letter of intent with an
underwriter to sell common stock and warrants to purchase common stock in a
public offering (the 'Offering') . The underwriter proposes to co-manage and
underwrite an offering of 850,000 shares of the Company's common stock and
1,300,000 of warrants ('Warrants') to acquire additional shares of Common Stock.
The net proceeds from the Offering will be used for retail store expansion and
working capital purposes.
Each Warrant shall be exerisable for one share of common stock at 110% of
the public offering price, for a period of three years commencing two years from
the effective date of the Offering. The Warrants also are redeemable, (at a
prescribed price) at the Company's option, two years after the effective date of
the Offering if the closing bid price of the common stock for 20 consecutive
trading days exceeds 150% of the public offering price per share.
F-13
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 5: PROPOSED INITIAL PUBLIC OFFERING -- (CONTINUED)
At the underwriter's election, it may underwrite an additional 127,500
shares and or 195,000 Warrants if market conditions permit. The first 27,500 of
such shares would be sold by the Company and any additional shares will be sold
by HAC with the proceeds to be received by HAC.
As compensation for the Offering, the underwriters will receive a 10%
commission; a 3% non-accountable expense allowance and Warrants for 10% of the
number of shares of common stock and Warrants sold to the public. These Warrants
shall be non-exerisable for one year following the effective date and will be
exerisable thereafter for a period of five years at 120% of the initial public
offering price. Additionally, the Company has agreed to pay $87,600 at the
closing of the Offering, which represents consulting fees to the underwriters
for a three year period commencing on the effective date of the Offering. The
underwriters also will, for a period of three years, engage two designees as
advisors to the Board of Directors.
The proposed Offering is subject to certain conditions, as defined in the
letter of intent. There can be no assurance that this proposed transaction will
be completed.
In November 1997, HAC transferred 85,000 shares of Common Stock to certain
employees and directors of the Company and a member of HAC. Such transfer is to
be treated for accounting purposes as if such shares were issued by the Company
as compensation to such persons. The Company will record compensation expense
equal to the fair market value of the shares (70% of the per share public
offering price) over the two year period during which the shares are subject to
forfeiture by the transferees.
NOTE 6: STOCK OPTION PLAN AND PREFERRED STOCK
STOCK OPTION PLAN
In conjunction with the Reorganization Plan, the Company's Board of
Directors approved the Harvey Electronics, Inc. Stock Option Plan ('Stock Option
Plan'). The Stock Option Plan is subject to shareholder approval and provides
for the granting of up to 1,000,000 shares of incentive and non-qualified common
stock options and stock appreciation rights to directors, officers and
employees. There have been no options granted under the Stock Option Plan. The
Company's previous stock option plan was canceled in connection with the
Reorganization Plan.
8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company's Preferred Stock has no voting rights and is redeemable at the
option of the Company's Board of Directors in whole or in part at face value
plus any accrued dividends. The Fresh Start carrying value of the Preferred
Stock was estimated to be $318,000 at October 26, 1996.
In the event of liquidation of the Company, the holders of the Preferred
Stock shall receive preferential rights and shall be entitled to receive face
value plus any outstanding dividends, prior to any distributions to common
shareholders. The holders of the Preferred Stock shall receive a semiannual 8.5%
cumulative dividend ($85 per share annually), payable on the last business day
in June and December. The Company may and has elected to defer only the first
year's dividend at a preference rate of $105 per share annually. This amount,
plus interest at 8.5% per annum, will be payable in three equal annual
installments from December 31, 1998 through 2000.
The Preferred Stock may be converted into shares of Common Stock until
December 31, 2000 at the option of the holder, in whole or in part, as follows:
(i) the first 50% of the Preferred Stock can be converted at $6.00 per share,
and (ii) the balance is convertible at $7.50 per share. Beginning on January 1,
2001, the Preferred Stock is
F-14
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 6: STOCK OPTION PLAN AND PREFERRED STOCK -- (CONTINUED)
convertible at the average closing price, as defined, of the Company's Common
Stock for the preceding 45 day period.
The Preferred Stock also contained a redemption feature whereby each share
would be redeemed on December 31, 2000. In December 1997, the redemption feature
was eliminated and the holders of the Preferred Stock received 36,458 Warrants
with terms equivalent to the Warrants in the Offering (see Note 5).
NOTE 7: INCOME TAXES
At October 26, 1996, the Company has available net operating loss
carryforwards of approximately $13,500,000 which expire in various years through
fiscal 2012. As a result of the Company's Reorganization Plan and significant
ownership change, under Section 382 of the IRS Code, it is estimated that the
net operating loss carryforward and other tax attributes will be limited to
approximately $150,000 per year over the next fifteen years.
At October 26, 1996, a deferred tax asset of approximately $765,000 arising
primarily from the future availability of the above tax attributes has been
offset in full by a valuation allowance.
Federal, state and local income tax returns had not been filed for any
period subsequent to January 1994, as the Company was operating under Chapter 11
for such periods. All relevant tax returns were filed in December 1997. The
Company has provided estimated tax liabilities for minimum taxes, interest and
penalties for all outstanding minimum tax obligations.
NOTE 8: PENSION AND PROFIT SHARING PLAN
The Harvey Group Inc. Savings and Investment Plan (the 'Plan') includes
profit sharing, defined contribution and 401(k) provisions and is available to
all eligible employees of the Company. There were no contributions to the Plan
for the fifty-two weeks ended January 27, 1996 and for the thirty-nine weeks
ended October 26, 1996. Effective January 1, 1995, the Company's Board of
Directors temporarily elected to eliminate the employer 401(k) match on employee
contributions. Subsequent to the Effective Date, the Plan's name was amended and
changed to Harvey Electronics, Inc. Savings and Investment Plan.
F-15
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 9: COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company's financial statements reflect the accounting for equipment
leases as capital leases by recording the asset and liability for the lease
obligation. No capital lease acquisitions took place during fiscal 1996.
Additional capital leases for the thirty-nine weeks ended October 26, 1996
totaled $101,000. Future minimum rental commitments, by year and in the
aggregate, under the capital leases and noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following at
October 26, 1996:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Fiscal 1997...................................................................... $1,023,000 $114,000
Fiscal 1998...................................................................... 956,000 5,000
Fiscal 1999...................................................................... 992,000 4,000
Fiscal 2000...................................................................... 1,018,000 4,000
Fiscal 2001...................................................................... 1,027,000 2,000
Thereafter....................................................................... 2,267,000 --
---------- --------
Total minimum lease payments..................................................... $7,283,000 129,000
----------
----------
Less amount representing interest................................................ 15,000
--------
Present value of net minimum lease payments...................................... 114,000
Less current portion............................................................. 102,000
--------
$ 12,000
--------
--------
</TABLE>
Minimum rental commitments are offset by sublease income of approximately
$93,000 per annum through fiscal 2001.
In fiscal 1993, the Company entered into termination agreements with the
landlord of its previous headquarters located in Roslyn Heights, and Merkert,
the purchaser of The Boerner Company, the Company's discontinued food brokerage
division, relating to the original prime lease and sublease agreements. Pursuant
to the agreement with the landlord, the Company was released from all
obligations under the prime lease for consideration approximating $885,000. Of
this amount, approximately $661,000 had been paid by the Company through January
27, 1996. In conjunction with the termination agreements and with the consent of
the Company's secured lender, NatWest, the Company assigned the remaining
amounts to be received from Merkert to the landlord (see Note 10). Remaining
amounts due to the landlord under the assignment are included in the balance
sheet caption 'Accrued costs related to discontinued operations.'
Total rental expense for operating leases was approximately $1,507,000 and
$1,234,000, for the fifty-two weeks ended January 27, 1996 and for the
thirty-nine weeks ended October 26, 1996, respectively. Certain leases provide
for the payment of insurance, maintenance charges and taxes and contain renewal
options.
CONTINGENCIES
The Company is a defendant in certain legal actions which arose in the
normal course of business. The outcome of these legal actions, in the opinion of
management, will not have a material effect on the Company's financial position
or operations.
The Company had available standby letters of credit outstanding at October
26, 1996, aggregating $100,000.
F-16
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 26, 1996
NOTE 10: OTHER INFORMATION
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
OCTOBER 26,
1996
-----------
Salaries, severance, vacation and incentives...... $ 125,959
Accrued professional fees......................... 134,178
Customer layaways................................. 357,311
Sales tax......................................... 19,085
Prepetition rent.................................. 14,189
Other............................................. 156,977
-----------
$ 807,699
-----------
-----------
OTHER LONG-TERM LIABILITIES
OCTOBER 26,
1996
-----------
Straight-line impact of lease escalations.......... $ 75,356
Sales tax and warranty reserves.................... 77,000
-----------
$ 152,356
-----------
-----------
OTHER
In fiscal 1995, the Company's previous chief executive officer/chairman
('Officer') purchased from the Company certain life insurance policies and their
related cash surrender values ($153,371). In consideration, the Company received
a promissory note bearing interest at 6% from such Officer, which was to be
repaid in six equal installments beginning January 1, 1997. Interest and
principal payments on the note were pledged to Congress by the Company and, in
addition, the Officer provided a limited guarantee of up to $150,000 to Congress
relating to the revolving credit facility.
On July 11, 1996, as part of the reorganization, the Officer agreed to
prepay the promissory note and the Company received $125,000 (including interest
of $10,000). As a result, the $125,000 was classified as a current asset and the
discount of $38,371 on such note was recorded as an expense in the period ended
January 27, 1996. The $150,000 limited guarantee provided by the Officer was
then canceled by Congress.
The financial statement caption 'Interest and other income,' includes
$88,427 and $45,605 of interest, consulting and other income relating to
proceeds of the sale of the Boerner Division, for the fifty-two weeks ended
January 27, 1996 and the thirty-nine weeks ended October 26, 1996, respectively.
In accordance with the prepayment agreement, the remaining installment of
$74,000 (including interest of $5,670) to be received from Merkert Enterprises,
Inc. (included in the balance sheet caption, 'prepaid expenses and other current
assets') was received in January 1997.
Advertising expense for the fifty-two weeks ended January 27, 1996 and for
the thirty-nine weeks ended October 26, 1996 was approximately $63,000 and
$358,000, respectively. Prepaid advertising at October 26, 1996 was
approximately $183,000.
Interest expense relating to the HAC debtor-in-possession financing was
approximately $53,000 and $149,000 for the fifty-two weeks ended January 27,
1997 and for the thirty-nine weeks ended October 26, 1996, respectively.
Interest payable to HAC at October 26, 1996 was approximately $34,000.
F-17
<PAGE>
HARVEY ELECTRONICS, INC.
BALANCE SHEET (SUCCESSOR)
AUGUST 2, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................................................... $ 7,000
Trade receivables, less allowance of $25,000....................................................... 291,000
Inventories........................................................................................ 3,403,000
Prepaid expenses and other current assets.......................................................... 148,000
--------------
Total current assets................................................................................. 3,849,000
Property and equipment
Leasehold improvements............................................................................. 632,000
Furniture, fixtures & equipment.................................................................... 715,000
--------------
1,347,000
Less accumulated depreciation and amortization..................................................... 120,000
--------------
1,227,000
Certificate of deposit............................................................................... 200,000
Equipment under capital leases....................................................................... 88,000
Reorganization value in excess of amounts allocable to identifiable assets, less accumulated
amortization of $36,000............................................................................ 1,615,000
Other................................................................................................ 232,000
--------------
Total assets......................................................................................... $7,211,000
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable............................................................................. $1,758,000
Accrued expenses and other current liabilities..................................................... 720,000
Income taxes....................................................................................... 13,000
Obligations relating to Chapter 11 reorganization.................................................. 67,000
Current portion of long-term debt.................................................................. 24,000
Current portion of capital lease obligations....................................................... 44,000
--------------
Total current liabilities............................................................................ 2,626,000
Long-term liabilities
Long-term debt..................................................................................... 1,859,000
Other liabilities.................................................................................. 205,000
Capital lease obligations............................................................................ 10,000
Shareholders' equity
8 1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share; authorized 10,000
shares; issued and outstanding 875 shares (aggregate liquidation preference-$875,000)........... 318,000
Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding
2,259,368 shares................................................................................ 23,000
Additional capital................................................................................. 3,070,000
Accumulated deficit................................................................................ (900,000)
--------------
Total shareholders' equity........................................................................... 2,511,000
--------------
Total liabilities and shareholders' equity........................................................... $7,211,000
--------------
--------------
</TABLE>
See notes to the unaudited financial statements.
F-18
<PAGE>
HARVEY ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS
ENDED ENDED
AUGUST 2, JULY 27,
1997 1996
(SUCCESSOR) (PREDECESSOR)
------------ --------------
<S> <C> <C>
Net sales............................................................................. $ 11,602,000 $ 10,930,000
Interest and other income............................................................. 68,000 134,000
------------ --------------
11,670,000 11,064,000
------------ --------------
Cost of sales......................................................................... 7,379,000 7,176,000
Selling, general and administrative expenses.......................................... 4,950,000 4,683,000
Interest expense...................................................................... 241,000 386,000
------------ --------------
12,570,000 12,245,000
------------ --------------
Loss before reorganization expenses................................................... (900,000) (1,181,000)
Reorganization expenses............................................................... -- (463,000)
------------ --------------
Net loss.............................................................................. (900,000) (1,644,000)
Preferred Stock dividend requirement.................................................. 46,000 --
Net loss applicable to common shareholders............................................ $ (946,000) $ (1,644,000)
------------ --------------
------------ --------------
Net loss per common and common equivalent share:
Net loss applicable to common shareholders....................................... $ (.42) $ (.52)
------------ --------------
------------ --------------
Weighted average number of common shares outstanding during the period (common
equivalent shares were not included as their effect would be anti-dilutive)......... 2,259,368 3,164,887
------------ --------------
------------ --------------
</TABLE>
See notes to the unaudited financial statements.
F-19
<PAGE>
HARVEY ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS
ENDED ENDED
AUGUST 2, JULY 27,
1997 1996
(SUCCESSOR) (PREDECESSOR)
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................................. $ (900,000) $ (1,644,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Reorganization expenses............................................................. -- (124,000)
Depreciation and amortization....................................................... 363,000 344,000
Provision for losses on accounts receivable......................................... -- 5,000
Provisions for sales tax, warranty and other reserves............................... -- 20,000
Straight-line impact of rent escalations............................................ 53,000 (5,000)
Changes in operating assets and liabilities:
Accounts receivable............................................................... 15,000 201,000
Inventories....................................................................... (394,000) (498,000)
Prepaid expenses and other current assets......................................... 84,000 85,000
Accounts payable.................................................................. 432,000 384,000
Accrued expenses and other current liabilities and income taxes payable........... (88,000) 84,000
Prepetition liabilities........................................................... -- (37,000)
----------- -------------
Net cash used in operating activities.................................................... (435,000) (1,185,000)
----------- -------------
INVESTING ACTIVITIES:
Proceeds from note receivable from prior officer/shareholder............................. -- 125,000
Purchases of property and equipment...................................................... (593,000) (65,000)
Purchases of other assets................................................................ (84,000) (79,000)
----------- -------------
Net cash used in investing activities.................................................... (677,000) (19,000)
----------- -------------
FINANCING ACTIVITIES:
Proceeds from note....................................................................... 350,000 --
Debtor-in-possession financing -- HAC.................................................... 605,000 911,000
Obligations related to Chapter 11 reorganization......................................... (407,000) --
Net borrowings of revolving line of credit facility...................................... 731,000 437,000
Principal payments on insurance financing................................................ (92,000) (83,000)
Net payments on discontinued operations.................................................. -- (10,000)
Principal payments on capital lease obligations.......................................... (71,000) (30,000)
----------- -------------
Net cash provided by financing activities................................................ 1,116,000 1,225,000
----------- -------------
Increase in cash and cash equivalents.................................................... 4,000 21,000
Cash and cash equivalents at beginning of period......................................... 3,000 12,000
----------- -------------
Cash and cash equivalents at end of period............................................... $ 7,000 $ 33,000
----------- -------------
----------- -------------
</TABLE>
See notes to the unaudited financial statements.
F-20
<PAGE>
HARVEY ELECTRONICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AUGUST 2, 1997
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements are unaudited and do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
On November 13, 1996 (the 'Confirmation Date'), the United States
Bankruptcy Court confirmed the Restated Modified Amended Joint and Substantially
Consolidated Plan of Reorganization of The Harvey Group Inc. (the
'Reorganization Plan'). The effective date of the Reorganization Plan was
December 26, 1996 (the 'Reorganization Date'), at which time The Harvey Group
Inc. emerged from its Chapter 11 reorganization and changed its name from The
Harvey Group Inc. to Harvey Electronics, Inc. The Company has given effect to
the Reorganization Plan as of October 26, 1996, the end of the accounting period
nearest to the Confirmation Date. The Company, for periods prior to October 26,
1996 is referred to as the 'Predecessor,' and for periods at or subsequent to
October 26, 1996 is referred to as the 'Successor.'
For further information, refer to the financial statements and footnotes as
of and for the thirty-nine week period ended October 26, 1996 and for the
fifty-two weeks ended January 27, 1996, and Management's Discussion and Analysis
of Financial Condition and Results of Operations.
NOTE 2: INVENTORIES
Inventories have been valued based upon estimated gross profit percentages.
NOTE 3: LONG-TERM DEBT
Long-term debt consists of $1,509,000 due to the Company's former lender,
Congress Financial Corporation, and $350,000 due to a Preferred Stockholder who
is a member of Harvey Acquisition Company, LLP ('HAC'). Refer to Note 4 to the
financial statements for the thirty-nine week period ended October 26, 1996 for
additional information.
F-21
<PAGE>
[Inside back cover: Photo of retail store front at the Greenwich, CT location.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business....................................... 22
Management..................................... 29
Securities Ownership of Certain Beneficial
Owners and Management........................ 34
Selling Securityholder......................... 35
Certain Transactions........................... 36
Description of Securities...................... 37
Underwriting................................... 40
Legal Matters.................................. 42
Experts........................................ 42
Additional Information......................... 42
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
850,000 SHARES OF COMMON STOCK
AND
1,300,000
REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
OF
HARVEY ELECTRONICS, INC.
------------------
PROSPECTUS
------------------------
THE THORNWATER COMPANY, L.P.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
Registrant, in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee, the NASDAQ listing fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................................. $ 4,277.53
NASDAQ listing fee................................................................ $ 17,500.00
BSE listing fee................................................................... $ 7,500.00
NASD filing fee................................................................... $ 1,961.00
Blue Sky fees and expenses........................................................ $ 46,000.00
Printing and engraving expenses................................................... $ 80,000.00
Legal fees and expenses........................................................... $175,000.00
Accounting fees and expenses...................................................... $ 75,000.00
Transfer agent and registrar fee.................................................. $ 7,500.00
Miscellaneous..................................................................... $ 28,261.47
-----------
Total........................................................................... $443,000.00
-----------
-----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
As of December 26, 1996, the date in which the Company's Reorganization
Plan became effective, the Company issued 2,259,368 shares of the Common Stock
and 875 shares of the Preferred Stock pursuant to the Reorganization Plan as
follows: (i) 2,000,000 shares of Common Stock to HAC in satisfaction of
$2,822,500 of subordinated secured financing provided by HAC to the Company
during its bankruptcy proceeding; (ii) 187,841 shares of Common Stock to the
Company's unsecured creditors in satisfaction of the Company's pre-petition
obligations owed to its unsecured creditors; (iii) 19,962 shares to the
Company's former shareholders; and (iv) subsequent to the effective date of the
Reorganization Plan, 51,565 shares of the Common Stock to InterEquity as a
finder fee. Pursuant to the same plan 600 shares of the Preferred Stock were
issued to InterEquity to satisfy the Company's indebtedness of $600,000 to
InterEquity, and 275 shares of Preferred Stock were issued to four individuals
to satisfy an indebtedness of $275,000 to National Westminster Bank, USA, which
obligation of the Company was purchased by the four individuals from National
Westminster Bank, USA.
As of the Effective Date there are a total 2,259,368 of shares of Common
Stock and 875 shares of Preferred Stock issued and outstanding. The issuance of
all such shares were exempted from registration under the Securities Act of
1933, as amended, pursuant to section 1145 of the United States Bankruptcy Code,
since the Company's Securities were sold under a plan in exchange for claims
against, interests in, and claims for administrative expenses in the case
concerning the Company.
On November 5, 1997, the Company issued to Paragon Capital LLC ('Paragon')
a warrant to purchase up to 125,000 shares of Common Stock at $5.50 per share,
exercisable until April 3, 2001 (the 'Paragon Warrant'). The Paragon Warrant was
issued in connection with Paragon providing a revolving line of credit facility
to the Company. The registrant claims exemption for this issuance pursuant to
Section 4(2) of the Securities Act.
On December 4, 1997, the Company issued an aggregate of 36,458 warrants to
the five registered holders of the Company's Preferred Stock. Each such warrant
is identical to the Warrants being offered hereby, except that such warrants are
not registered under the Securities Act. The registrant claims exemption for
this issuance pursuant to Section 4(2) of the Securities Act.
II-1
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------------
<C> <C> <S>
*1.1 -- Underwriting Agreement
2.1.1 -- Restated Modified Amended Joint and Substantially Consolidated Plan of Reorganization of Harvey
Electronics, Inc.(1)
2.1.2 -- Order dated November 13, 1996 Confirming Plan of Reorganization(1)
3.1.1 -- Restated Certificate of Incorporation of 1967
3.1.2 -- Certificate of Amendment of the Certificate of Incorporation of 1997
3.1.3 -- Certificate of Amendment of the Certificate of Incorporation of December 1996
3.1.4 -- Certificate of Amendment of Certificate of Incorporation of July 1988
3.1.5 -- Certificate of Amendment of Certificate of Incorporation of July 1971
3.1.6 -- Certificate of Amendment of Certificate of Incorporation of February 1971
3.1.7 -- Certificate of Amendment of Certificate of Incorporation of June 1969
3.1.8 -- Certificate of Amendment of Certificate of Incorporation of September 1968
4.1 -- Sections in Certificate of Incorporation and the Amended and Restated By-Laws of Harvey Electronics,
Inc., that define the rights of the holders of shares of Common Stock, Preferred Stock and holders of
Warrants (included in Exhibit Nos. 3.1.2 and 3.1.3)
*4.2 -- Form of Common Stock Certificate
*4.3 -- Form of Redeemable Common Stock Purchase Warrant
*4.4 -- Form of Representative's Warrant
4.5 -- Form of Warrant to Holders of Preferred Stock
*5.1 -- Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
10.1.1 -- Stock Option Plan of Harvey Electronics, Inc.
*10.1.2 -- Form of Stock Option Agreement
10.2.1 -- Severance Agreement with Franklin C. Karp
10.2.2 -- Severance Agreement with Joseph J. Calabrese
10.2.3 -- Severance Agreement with Michael A. Beck
10.2.4 -- Severance Agreement with Roland W. Hiemer
*10.3 -- Employment Agreement with Franklin C. Karp
10.4.1 -- Dealer Agreement between the Company and Mitsubishi Electronics America, Inc.
10.4.2 -- Dealer Agreement between the Company and Niles Audio Corporation, Inc.
10.5.1 -- Lease between the Company and Joseph P. Day Realty Corp. (2)
10.5.2 -- Lease between the Company and Goodrich Fairfield Associates L.L.C. (2)
10.5.3 -- Lease between the Company and Sprout Development Co. (2)
10.5.4 -- Lease between the Company and Service Realty Company (2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C> <C>
10.5.5 -- Lease between the Company and 205 Associates (2)
10.5.6 -- Sublease between the Company and Fabian Formals, Inc. and Affiliate First Nighter of Canada (2)
10.6 -- Loan and Security Agreement, Master Note and Trademark Security Agreement with Paragon Capital LLC
*23.1 -- Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (contained as part of Exhibit Number 5)
23.2 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule
</TABLE>
- ------------------
* to be filed by amendment
Schedules other than the ones listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
(1) The registrant hereby incorporates by reference Exhibit A filed as part of
the registrant's Form 8-K dated November 5, 1997.
(2) Hardship exemption has been requested.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any Prospectus required by section 10(a)(3) of the
Act;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to suit information in the registration
statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the Offering of
such securities at that time shall be deemed to be the initial bona fide
Offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(4) For determining any liability under the Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement at that time as the initial bona fide Offering of
those securities.
(5) To provide to the Underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE TOWN OF
LYNDHURST, STATE OF NEW JERSEY, ON DECEMBER 12, 1997.
HARVEY ELECTRONICS, INC.
BY: /S/ FRANKLIN C. KARP
------------------------------------
FRANKLIN C. KARP, PRESIDENT
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY
AUTHORIZES EACH OF FRANKLIN C. KARP AND MICHAEL RECCA WITH FULL POWER OF
SUBSTITUTION TO EXECUTE IN THE NAME OF SUCH PERSON AND TO FILE ANY AMENDMENT OR
POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT MAKING SUCH CHANGES IN
THIS REGISTRATION STATEMENT AS THE REGISTRANT DEEMS APPROPRIATE AND APPOINTS
EACH OF FRANKLIN C. KARP AND MICHAEL RECCA WITH FULL POWER OF SUBSTITUTION,
ATTORNEY-IN-FACT TO SIGN AND TO FILE ANY AMENDMENT AND POST-EFFECTIVE AMENDMENT
TO THIS REGISTRATION STATEMENT.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ FRANKLIN C. KARP President and Director December 12, 1997
- ------------------------------------------
Franklin C. Karp
/s/ JOSEPH J. CALABRESE Executive Vice President, Chief Financial December 12, 1997
- ------------------------------------------ Officer, Treasurer, Secretary and Director
Joseph J. Calabrese
/s/ MICHAEL RECCA Chairman and Director December 12, 1997
- ------------------------------------------
Michael Recca
/s/ WILLIAM F. KENNY Director December 12, 1997
- ------------------------------------------
William F. Kenny, III
/s/ STEWART L. COHEN Director December 12, 1997
- ------------------------------------------
Stewart L. Cohen
</TABLE>
II-5
<PAGE>
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON FORM SB-2
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
VOLUME I OF
------------------------------------
HARVEY ELECTRONICS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C> <C> <C>
*1.1 -- Underwriting Agreement
2.1.1 -- Restated Modified Amended Joint and Substantially Consolidated Plan of Reorganization of Harvey
Electronics, Inc.(1)
2.1.2 -- Order dated November 13, 1996 Confirming Plan of Reorganization(1)
3.1.1 -- Restated Certificate of Incorporation of 1967
3.1.2 -- Certificate of Amendment of the Certificate of Incorporation of 1997
3.1.3 -- Certificate of Amendment of the Certificate of Incorporation of December 1996
3.1.4 -- Certificate of Amendment of Certificate of Incorporation of July 1988
3.1.5 -- Certificate of Amendment of Certificate of Incorporation of July 1971
3.1.6 -- Certificate of Amendment of Certificate of Incorporation of February 1971
3.1.7 -- Certificate of Amendment of Certificate of Incorporation of June 1969
3.1.8 -- Certificate of Amendment of Certificate of Incorporation of September 1968
4.1 -- Sections in Certificate of Incorporation and the Amended and Restated By-Laws of Harvey
Electronics, Inc., that define the rights of the holders of shares of Common Stock, Preferred
Stock and holders of Warrants (included in Exhibit Nos. 3.1.2 and 3.1.3)
*4.2 -- Form of Common Stock Certificate
*4.3 -- Form of Redeemable Common Stock Purchase Warrant
*4.4 -- Form of Representative's Warrant
4.5 -- Form of Warrant to Holders of Preferred Stock
*5.1 -- Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
10.1.1 -- Stock Option Plan of Harvey Electronics, Inc.
*10.1.2 -- Form of Stock Option Agreement
10.2.1 -- Severance Agreement with Franklin C. Karp
10.2.2 -- Severance Agreement with Joseph J. Calabrese
10.2.3 -- Severance Agreement with Michael A. Beck
10.2.4 -- Severance Agreement with Roland W. Hiemer
*10.3 -- Employment Agreement with Franklin C. Karp
10.4.1 -- Dealer Agreement between the Company and Mitsubishi Electronics America, Inc.
10.4.2 -- Dealer Agreement between the Company and Niles Audio Corporation, Inc.
10.5.1 -- Lease between the Company and Joseph P. Day Realty Corp. (2)
10.5.2 -- Lease between the Company and Goodrich Fairfield Associates L.L.C. (2)
10.5.3 -- Lease between the Company and Sprout Development Co. (2)
10.5.4 -- Lease between the Company and Service Realty Company (2)
10.5.5 -- Lease between the Company and 205 Associates (2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------------------------------------- ----
<S> <C> <C> <C>
10.5.6 -- Sublease between the Company and Fabian Formals, Inc. and Affiliate First Nighter of Canada (2)
10.6 -- Loan and Security Agreement, Master Note and Trademark Security Agreement with Paragon Capital
LLC
*23.1 -- Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (contained as part of Exhibit Number 5)
23.2 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule
</TABLE>
- ------------------
* to be filed by amendment
Schedules other than the ones listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
(1) The registrant hereby incorporates by reference Exhibit A filed as part of
the registrant's Form 8-K dated November 5, 1997.
(2) Hardship exemption has been requested.
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
HARVEY RADIO COMPANY, INC.
UNDER SECTION 807 OF THE
BUSINESS CORPORATION LAW
Pursuant to the provisions of Section 807 of the Business Corporation Law,
the undersigned hereby certify that:
1. The name of the corporation is HARVEY RADIO COMPANY, Inc.
2. The date the Certificate of Incorporation was filed by the Department of
State is January 10, 1946.
3. The Certificate of Incorporation is hereby amended to:
a. Change the location of the office of the Corporation.
b. Change the address to which the Secretary of State shall mail a
copy of process;
c. Add a provision stating the number, designation, relative rights,
preferences, and limitations to the Preferred Shares of a series of the par
value of $20 each as fixed by the Board of Directors before the issuance of
such series, under authority contained in the Certificate of Incorporation;
and
d. Renumber:
(1) Article FIFTH of the Certificate of Incorporation as Article
FOURTH;
(2) Article SIXTH of the Certificate of Incorporation as Article
FIFTH;
(3) Article EIGHTH of the Certificate of Incorporation as Article
SIXTH;
<PAGE>
(4) Article TWELFTH of the Certificate of Incorporation as Article
SEVENTH;
(5) Article THIRTEENTH of the Certificate of Incorporation as Article
EIGHTH; and
(6) Article FOURTEENTH of the Certificate of Incorporation as Article
NINTH.
4. The text of the Certificate of Incorporation as amended heretofore, is
hereby restated as amended to read as herein set forth in full:
First: The name of the Corporation shall be HARVEY RADIO COMPANY, Inc.
Second: The purposes for which it is to be formed are:
a. To buy, sell, trade in at wholesale, retail, import, export,
manufacture, rent, handle, use radio sets, cabinets and receiving
apparatus, recording and reproducing instruments and devices of any kind or
nature used in conjunction therewith, incidental or accessory thereto; and
to conduct the business of rendering service in the installation, supply of
parts, repairs and maintenance of such apparatus, instruments or
accessories.
b. To buy, sell, trade in at wholesale, retail, import, export,
manufacture, rent, handle, repair and use, acoustic devices of all sorts,
musical instruments, phonograph records, cabinets, telephone and all sound
receiving, recording, amplifying, producing, or reproducing devices,
machines, apparatus and instruments.
c. To design, patent, manufacture, buy, sell, export and import and
generally deal in _______ tools, mechanical devices, appliance and
household appliances, lamps,
2
<PAGE>
incandescent bulbs, motors, dynamos and, every other thing or device
operated, lighted, or by electricity; to manufacture and generally deal
with all the parts of and supplies for such machinery, and appliances. To
acquire all real estate and property or plants necessary to carry out the
above objective.
d. To design, manufacture, purchase or otherwise acquire, to sell or
otherwise dispose of and to generally deal in and with apparatus for the
production and transmitting of images, animate and inanimate by electrical
views for visualization at places designated from the place where such
images are primarily conceived.
e. To design, manufacture, install, purchase or otherwise acquire, to
sell or otherwise dispose and to generally deal in and with electric
transmission and receiving sets, wired and wireless, telegraph and
telephone instruments and apparatus and devices used or useful in
connection with the transmission, recording and/or reproduction of sound or
pictures, or both, wired and wireless television or otherwise.
f. To apply for, obtain, register, purchase, lease or otherwise
acquire, and to hold, use, own, operate, and introduce, and to sell,
assign, or otherwise dispose of, any trademarks, trade names, patent
inventions, improvements and processes used in connection with, or secured
under letters-patent of the United States, or elsewhere, or otherwise; and
to use, exercise, develop, grant licenses in respect of, or otherwise turn
to account any such trademarks, patents, licenses, processes, and the like,
or any such property or right.
g. To buy, sell, seal in, lease, mortgage, hold or improve real
estate, and the fixtures and personal property incidental thereto, or
connected therewith, and with that end in view, to acquire by purchase,
lease, hire or otherwise, lands, tenements or hereditaments or any
3
<PAGE>
interest therein, and to improve the same and generally to hold, manage,
deal with and improve the property of the Company, and to sell, lease,
mortgage, pledge or otherwise dispose of the lands, tenements,
hereditaments of both real and personal property of the Company.
h. To purchase, acquire, hold and dispose of the stock, bonds and
other evidences of indebtedness to any corporation, domestic or foreign,
and issue in place therefor its stock, bonds or other obligations, any
owner of any such stock, bonds or other obligations may possess and
exercise in respect thereof all the rights, powers and privileges of
individual owners or holders thereof, and to exercise any and all voting
power.
i. To make, purchase or otherwise acquire seal in and to carry out any
contracts for or in to any of the foregoing businesses that may be
necessary and lawful under the act pursuant to which this Corporation is
organized.
j. To do all and everything necessary, able and proper for the
accomplishment of any of the purposes or the attainment of any of the
objects or in furtherance of any of the powers hereinbefore set forth
either alone or in association with other corporations, firms or
individuals, and to do every other act or thing or things incidental or
appurtenant to or __growing out of or connected with the aforesaid business
owners powers or any part or parts thereof, provided the same be not
inconsistent with the laws under which this corporation is organized.
The foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Corporation, and the enjoyment
thereof, as conferred by the laws of the State of New York, upon corporations
organized under the provisions of the Stock Corporation Law.
4
<PAGE>
Third:
a. The total number of shares which the Corporation is authorized to
issue is 2,100,000, consisting of 100,000 preferred shares of the par value
of $20 per share and 2,000,000 common shares of the par value of $1 per
share.
b. (1) The preferred shares may be issued by series and each series
shall be so designated as to distinguish the shares thereof from the shares
of all series. All preferred shares shall be identical except as to the
relative rights, preferences and limitations below enumerated.
b. (2) Authority is hereby expressly granted to the Board of Directors
of the Corporation to fix subject to the provisions herein set forth before
the issuance of any shares of a particular series, the number of shares to
be included in such series, the dividend rate per annum, the redemption
price or prices, if any, and the terms and conditions of the redemption or
purchase of the shares of such series, the terms and conditions on which
such shares are convertible into common shares, if they are convertible,
and any other rights, preferences and limitations pertaining to such series
c. (3) 2,500 authorized preferred shares with the par value of $20
each, none of which has been or shall be issued in and as the first series
to be designated Preferred Shares, Series A, $20 par value. The series is
hereinafter called "Series A Preferred Shares" and shall include 2,500 of
the 100,000 Preferred Shares of the par value of $20 per share authorized
by the Certificate of Incorporation of the Corporation, designation,
relative rights and preferences of all shares of Series A Preferred Shares,
which are not already fixed by the Certificate of Incorporation shall be as
follows:
5
<PAGE>
I. DIVIDENDS
A. On and after November 2, 1972, the holders of Series A Preferred Shares
shall be eligible to receive, when and as declared by the Board of Directors of
the Corporation, out of any assets the Corporation available for dividends
pursuant to the laws of the State of New York, preferred dividends upon such
shares in cash at the rate of four and one-half percent (4 1/2%) per annum
Liquidation Preference of such shares, as set by Section II of Paragraph b(3) of
this Article THRID and no more, payable quarterly on the first day of February,
May, August and November of each year. Such dividends upon the Series A
Preferred Shares shall be cumulative from November 1, 1972 so if thereafter
dividends whether or not earned or declared for any past dividend period at the
rate of four and one-half percent (4 1/2%) per annum and not have been paid and
the full dividend thereof and the then current dividend period shall not have
been paid or declared and a sum sufficient for the payment thereof set apart,
the dividend shall be fully paid or declared and set apart, but without interest
or before any dividend shall be paid upon or declared an set part for the Common
Stock. If the aforesaid dividends are not paid in full, the right of the holders
of Series A Preferred Shares shall be subject to the rights of all holders of
shares of all series of Preferred Stock to share ratably with the payment of
dividends including accumulations if any, in accordance with the sums which
would be payable on such shares if all dividends were declared and paid in full.
B. Whenever the full dividend, whether earned or declared, upon the Series
A Preferred Shares for all past dividend periods shall have been paid if the
Corporation is not in default in respect of the dividend thereon for the then
current dividend declared or if such dividend has been declared and paid then
the sum sufficient for the payment thereof set apart and
6
<PAGE>
whenever all prior required redemptions of the Series A Preferred Shares shall
have been effected by the holders of shares of Common Stock shall be entitled to
receive, when and as declared by the Board of Directors of the Corporation, out
of any assets of the Corporation available dividends, pursuant to the laws of
the State of New York, dividends upon such shares of Common Stock in such
amounts and at such times as the Board of Directors may determine.
II. LIQUIDATION PREFERENCE:
In the event of a liquidation, dissolution, or winding up of the affairs of the
Corporation, the holders of the Series A Preferred Shares shall be entitled,
before any assets of the Corporation shall be distributed among or paid over to
the holders of the Common Stock, to be paid the following amounts per share
(referred to in this Paragraph b(3) of Article THIRD as a "Liquidation
Preference"):
Liquidation Preference
----------------------
If the Distribution Occurs Per Share
-------------------------- ---------
On or prior to May 1, 1968 $1,000.00
After May 1, 1968 and on or prior to
November 1, 1968 1,020.00
After November 1, 1968 and on or
prior to May 1, 1969 1,040.00
After May 1, 1969 and on or prior
to November 1, 1969 1,061.20
After November 1, 1969 and on or
prior to May 1, 1970 1,032.42
After May 1, 1990 and on or prior
to November 1, 1970 1,104.05
After November 1, 1970 and on or
prior to May 1, 1971 1,126.14
After May 1, 1971 and on or prior
to November 1, 1971 1,148.66
After November 1, 1971 and on or
prior to May 1, 1972 1,171.63
After May 1, 1972 and on or prior
7
<PAGE>
November 1, 1972 1,195.06
After November 1, 1972 1,218.96
The holders of Series A Preferred Shares shall also be paid in the event of
any liquidation, dissolution, or winding up of the affairs of the Corporation, a
further amount equal to the dividends unpaid and accumulated thereon to the date
of such distribution, whether earned or declared or not, and no more, before any
payment shall be made or any assets distributed to the holders of the Common
Stock. After payment to the holders of the Series A Preferred Shares of the
amount to which such holders of the Series A Preferred Shares shall have no
claim to any of the remaining assets of the Corporation. If, any such
liquidation, dissolution or winding up of the affairs of the Corporation, the
assets of the Corporation distributable among the holders of the Preferred Stock
should be insufficient to permit the payment to them of the full preferential
amounts set forth in this Article THIRD, then the entire assets of the
Corporation so to be distributed shall be distributed ratably among the holders
of the Preferred Stock in proportion to the full preferential amounts to which
they are respectively entitled.
III. REDEMPTION
A. The Corporation shall redeem, on the first day of November in each of
the years commencing 1972 through 1982, inclusive, 200 of its Series A Preferred
Shares ( or all of its Series A Preferred Shares then outstanding if less than
200), and shall redeem, on the first day of November 1983, all of its Series A
Preferred Shares then outstanding, by paying for each share thereof an amount
equal to the Liquidation Preference of such share as provided in Section II of
this Paragraph b(3) of this Article THIRD, plus a further amount equal to the
dividends unpaid and accumulated thereon to the date of such redemption, whether
earned or declared, or
8
<PAGE>
not. The obligations to redeem Series A Preferred Shares under this Paragraph A
of Section II of Paragraph b(3) of this Article THIRD shall be cumulative. Any
redemption of Series A Preferred Shares pursuant to Paragraph B of Section III
shall not apply against, and any conversion of Series A Preferred Shares
pursuant to Section VI of this Paragraph b(3) of this Article THIRD shall not be
credited towards, redemptions required to be made by this Paragraph A of Section
III.
B. In addition to the redemption requirements contained in Paragraph A of
Section III of this Article THIRD, the Corporation may, at any time after the
earlier of:
(i) the first anniversary of the effective date of any
registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, covering
shares of Common Stock into which Series A Preferred Shares were
converted, or
(ii)a four-week period during which the average market price of a
share of Common Stock, as determined by the Board of Directors of the
Corporation, has been in excess of $40.00 per share, but in any event,
not earlier than November 1, 1968, at the option of the Board of
Directors, redeem the whole or any part of the outstanding Series A
Preferred Shares by paying per share an amount equal to the then
applicable Liquidation Preference per share as set forth in Section
III, Paragraph b(3) of this Article THIRD.
C. Notice to redeem Series A Preferred Shares pursuant to the provisions of
Paragraphs A or B of Section III, Paragraph b(3) of this Article THIRD shall,
not less than thirty (30) days prior to the date upon which such shares are to
be redeemed, be mailed postage prepaid
9
<PAGE>
to each holder of shares, so to be redeemed at its address as it appears on the
books of the Corporation. In case less than all the outstanding Series A
Preferred Shares is to be redeemed, such redemption shall be apportioned in
multiples of one whole share among the holders of the outstanding Series A
Preferred Shares, as nearly as possible in proportion to their holdings as
determined by the Board of Directors.
In the event of a redemption of Series A Preferred Shares under Paragraphs
A or B of Section III of Paragraph b93) of this Article THIRD, subject to the
provisions of this Paragraph C of Section III, if on or before the redemption
date stated in such notice: (i) the funds necessary for such redemption shall
have been segregated by the Corporation so as to be and continue to be available
for payment on demand to the holders of Series A Preferred Shares so called for
redemption; or if (ii) the Corporation shall deposit as a trust fund with any
bank or trust company in good standing in the City of New York, organized under
the laws of the United States of America or the State of New York having a
capital and surplus of at least $5,000,000 according to its last published
statement of condition, a sum sufficient to redeem on the date fixed for
redemption thereof, the Series A Preferred Shares called for redemption with
irrevocable instructions and authority to the bank or trust company to pay the
redemption price of such stock to the holders thereof upon surrender of the
certificate or certificates evidencing the shares to be redeemed, then from and
after the fifty day before the date of redemption, and notwithstanding that any
certificate of Series A Preferred Shares so called for redemption shall not have
been surrendered for cancellation, the dividends thereon shall cease to accrue
from and after the date of redemption so designated and all rights with respect
to the shares so called for redemption shall forthwith after such segregation or
deposit cease and determine, except only the
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right of the holder to receive the redemption price therefor, but without
interest, upon the surrender of the certificate or certificates evidencing such
shares. Any money so deposited by the Corporation which remains unclaimed for a
period of three (3) years from the date of such deposit shall upon request of
the Corporation evidenced by a resolution of its Board of Directors, be repaid
to the Corporation and after such repayment the holders of Series A Preferred
Shares shall look only to the Corporation for payment of the redemption price of
such shares.
D. The Board of Directors of the Corporation may take any and all action
necessary to exercise the power conferred by Section 516 of the Business
Corporation Law of New York in order to redeem Series A Preferred Shares
pursuant to either the mandatory requirements of Paragraph A, or the voluntary
provisions of Paragraph B of Section III of Paragraph b(3) of this Article
THIRD.
IV. VOTING RIGHTS:
Except as otherwise provided by the laws of the State of New York or by
this Section IV, each share of Series A Preferred Shares shall entitle the
holder thereof to ten (10) votes at any meeting of the shareholders of the
Corporation. If at any time: (1) eight or more quarterly cash dividends (whether
consecutive or not) on the Series A Preferred Shares shall be in default in
whole or in part; or (2) the Corporation shall be in default in whole or in part
in effecting redemption of the Series A Preferred Shares it is required to
redeem under Paragraph A of Section III of Paragraph b(3) of this Article THIRD,
the holders of Series A Preferred Shares shall have the right, voting separately
as a class, to elect one director of the Corporation. Such voting rights may be
exercised at any annual meeting of the stockholders of the Corporation or at any
special meeting thereof called and held as herein provided, and at such
subsequent annual
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meeting thereafter or special meeting in lieu of and for the purposes thereof
until such rights are terminated as hereinafter provided. At any time when such
voting rights shall become vested in the holders of Series A Preferred Shares,
the Board of Directors or a proper officer of the Corporation shall upon written
request of the holders of record of not less than ten (10%) percent of the total
of the number of Series A Preferred Shares, addressed and delivered to any
officer of the Corporation, unless the right of the holders of Series A
Preferred Shares to elect a Director has terminated, call a special meeting of
all stockholders of the Corporation then entitled to vote for the election of
Directors to be held within twenty (20) days after the date of such written
request.
If the call for such special meeting shall not be issued within ten (10)
days after service of such request and shall not set the date for such special
meeting within twenty (20) days of such request in the manner hereinabove set
forth, then the holders of record of not less than ten (10%) percent of the
total of the number of Series A Preferred Shares may designate in writing a
holder of Series A Preferred Shares to call such special meeting and such
special meeting may be called by such person upon the notice required for an
annual meeting to be held at the place for the holdings of annual meetings of
the stockholders. Any holder of record of the Series A Preferred Shares so
designated shall have immediate access to the stock record books of the
Corporation for the purpose of causing such meeting to be called at the expense
of the Corporation pursuant to these provisions.
At any such special meeting or at any annual meeting held while the holders
of Series A Preferred Shares are entitled to elect a director as hereinabove
provided< the holders of not less than a majority of the number of Series A
Preferred Shares present in person or by
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proxy shall constitute a quorum for the election of the Director entitled to be
elected by the holders of Series A Preferred Shares, notwithstanding any
provision to the contrary contained in the By-Laws of the Corporation.
After all the dividends accrued on the Series A Preferred Shares shall have
been paid or declared and set aside for payment, and payment of the quarterly
dividend next payable thereon shall have been provided for and after the
Corporation shall have effected redemption of the shares of its Series A
Preferred Shares it is required to redeem under Paragraph A of Section III of
Paragraph b(3) of this Article THIRD, the term of office of the Director elected
by the holders of Series A Preferred Shares shall forthwith terminate and said
Director shall cease to serve as a Director and to have any rights or powers as
such, and the holders of Series A Preferred Shares, until the recurrence of any
such default or the occurrence of any other default which gives rise to rights
hereunder, shall cease to be entitled, as a class, to elect any Director.
V. PREEMPTIVE RIGHTS:
No holder of Series A Preferred Shares shall be entitled as a matter of
right to subscribe for, purchase or receive any shares of stock of the
Corporation which the Corporation may issue or sell, whether such shares of
stock be authorized by this Certificate of Incorporation or any amendment
hereto, and whether such shares of stock have never before been issued or have
been issued and reacquired by the Corporation nor shall any stockholder be
entitled as matter or right to subscribe for, purchase or receive any bonds,
debentures or other securities which the Corporation may issue or sell that
shall be convertible into or exchangeable for stock of the Corporation or to
which shall be attached or appertain any warrants or other instrument or
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instruments that shall confer upon the holder or owner of such security the
right to subscribe for, purchase or receive from the Corporation any shares of
its stock, nor shall any stockholder be entitled as a matter of right to
subscribe for, purchase or receive any right or option proposed to be issued or
sold by the Corporation which pertains in any way to the stock of the
Corporation or to any other security referred to in or contemplated by this
Section V of Article THIRD; but all such shares of stock, bonds, debentures,
other securities, rights and options may be disposed of by the Board of
Directors to such persons, firms, associations or corporations and upon such
terms as it, in its absolute discretion, shall determine. The acceptance of
stock of the Corporation shall constitute a waiver of any preemptive or
preferential right to subscribe for securities of the Corporation which, in the
absence of this provision, the acceptor would have enjoyed by virtue of his
status as a stockholder.
VI. CONVERSION OF PREFERRED SHARES:
The holders of Series A Preferred Shares shall have the right, at their
option, to convert any or all of such shares into shares of Common Stock of the
Corporation on the following terms and conditions:
A. The Series A Preferred Shares shall be convertible on two weeks' written
notice to the Corporation (the receipt of which notice may be waived by the
Corporation), at any time on and after May 1, 1968 and five (5) days prior to
the date set for redemption thereof, at the office of the Corporation, and at
such other place or places, if any, as the Board of Directors may determine,
into fully paid and non-assessable shares of Common Stock of the Corporation at
the conversion price in effect at the time of conversion determined as
hereinafter provided, each share of Series A Preferred Shares being taken at an
amount equal to its then applicable
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Liquidation Preference, as defined in Section II of Paragraph b(3) of this
Article THIRD, for the purpose of such conversion. The prices at which shares of
Common Stock shall be delivered upon conversion (herein called the "conversion
price") shall be $20.00 per share of Common Stock, provided, however, that such
conversion price shall be subject to adjustment from time to time in certain
instances as hereinafter provided.
B. Before any holder of Series A Preferred Shares shall be entitled to
convert the same into Common Stock, it shall surrender the certificate or
certificates therefor, duly endorsed, at such office as is hereinabove provided,
and shall give written notice to the Corporation at said office that it elects
to convert the same. The Corporation will, as soon as practicable thereafter,
issue and deliver at said office to such holder of shares of Series A Preferred
Shares, or to its nominee or nominees, certificates for the number of full
shares of Common Stock to which it shall be entitled as aforesaid, together with
a cash payment in lieu of any fraction of a share. Shares of Series A Preferred
Shares shall be deemed to have been converted as of the date on which such
shares shall have been surrendered to and such notice received by the
Corporation as aforesaid, and the person or persons in whose name or names any
certificate, or certificates for Common Stock shall be issuable upon such
conversion shall be deemed to have become on said date the holders or holders of
record for all purposes of the shares represented thereby.
C. In case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, or issue a stock
dividend, the conversion price shall be equitably and proportionately reduced,
and, conversely, in case the outstanding shares of Common Stock of the
Corporation shall be combined into a smaller number of shares, the conversion
price shall be proportionately increased.
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D. The Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Shares, the full number of
shares of Common Stock deliverable upon the conversion of all shares of the
Preferred Stock from time to time outstanding. The Corporation shall from time
to time, in accordance with the laws of the State of New York, increase the
authorized amount of its Common Stock if at any time the number of shares of
Common Stock remaining unissued shall not be sufficient to permit the conversion
of all of the shares of the Series A Preferred Shares at the time outstanding.
E. The Corporation will pay any and all issue and other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of the Series A Preferred Shares pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of the Series A
Preferred Shares so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the satisfaction
of the Corporation, that such tax has been paid.
F. The Corporation shall not take any action which would, pursuant to the
provisions of this Paragraph VI of this Article THIRD, reduce the conversion
price to an amount less than the par value per share, if any, of the Common
Stock into which shares of the Series A Preferred Shares are at the time
convertible.
G. In case of any capital reorganization or any reclassification of the
Common Stock, or in case of the consolidation or merger of the Corporation with
or into another
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corporation, or the conveyance of all or substantially all of the assets of the
Corporation to another corporation, each Series A Preferred Share shall
thereafter be convertible into the number of shares of stock or other securities
or property to which a holder of the number of shares of Common Stock
deliverable upon conversion of such Series A Preferred Shares would have been
entitled upon such reorganization, reclassification, consolidation, merger or
conveyance, and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
the Series A Preferred Shares, to the end that the provisions set forth herein
(including provisions with respect to changes in and other adjustments of the
conversion price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter deliverable
upon the conversion of the Series A Preferred Shares.
H. In case:
(i) the Corporation shall take a record of the holders of the Common
Stock for the purpose of entitling them to receive a dividend, or any other
distribution, payable otherwise than in cash;
(ii)the Corporation shall take a record of the holders of the Common
Stock for the purpose of entitling them to subscribe for or purchase any
shares of stock of any class or to receive any other rights;
(iii) of any capital reorganization of the Corporation,
reclassification of the capital stock of the Corporation (other than a
subdivision or combination of its outstanding shares of Common Stock),
consolidated or merger of the Corporation with or
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into another corporation, or conveyance of all or substantially all of the
assets of the Corporation to another corporation; or
(iv)of the voluntary dissolution, liquidation, or winding up of the
Corporation; then, in any such case, the Corporation shall cause to be
mailed to the holders of record of the outstanding Series A Preferred
Shares, at least ten (10) days prior to the date hereinafter specified, a
notice stating the date on which: (x) a record is to be taken for the
purpose of such dividend, distribution or rights; or (y) such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
Fourth: The office of the Corporation shall be located in Woodbury, Town of
Oyster Bay, County of Nassau, New York, and the address to which the Secretary
of State shall mail a copy of process in any action or proceeding against the
Corporation, which may be served upon him, is care of Messrs. Marshall, Bratter,
Greene, Allison & Tucker, 430 Park Avenue, New York, New York 10022.
Fifth: The duration of the Corporation shall be perpetual.
Sixth: That the directors and officers of this Corporation need not be
stockholders.
Seventh: The Secretary of State is hereby designated as the agent of the
Corporation upon whom process in any action or proceeding against it may be
served.
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Eighth: Unless otherwise determined by the Board of Directors, no holder of
stock of the Corporation of any class shall, as such holder, have any right to
purchase, or subscribe for: (a) any stock of any class now or hereafter
authorized, or any warrants, options or other instruments that shall confer upon
the holders thereof the right to subscribe for or purchase or receive from the
Corporation any stock of any class which the Corporation may issue or sell,
whether or not the same shall be exchangeable for any stock of the Corporation
of any class; or (b) any obligation which the Corporation may issue or sell that
shall be convertible into or exchangeable for any shares of the capital stock of
the Corporation of any class or to which shall be attached or appurtenant any
options, or other instruments that shall confer upon the holders of such
obligations, warrants, options or other instruments the right to subscribe for
or purchase or received from the Corporation any shares of its capital stock of
any class or classes now or hereafter authorized.
Ninth: The following provisions are inserted for the regulation and conduct
of the affairs of the Corporation; and it is expressly provided that they
intended to be in furtherance and not in limitation or exclusion of the powers
conferred by statute.
a. Meetings of the stockholders and directors of the Corporation for all
purposes may be held at its office or elsewhere in the State of New York, and
meetings of the directors may be held outside of the State of New York at such
place or places as may from time to time be designate in the By-Laws or by
resolution of the Board of Directors.
b. All corporate powers except those which by law expressly require the
consent of the stockholders shall be exercised by the Board of Directors.
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c. The Board of Directors shall have power from time to time to fix and
determined and vary the amount of the working capital of the Corporation and to
direct and determine the sue and disposition of any surplus or net profits over
and above its capital, and in its discretion, the Board of Directors may use and
apply any such surplus or accumulated profits in purchasing or acquiring bonds
or other obligations of the Corporation or shares of its own capital stock, to
such extent and in such manner and upon such terms as the Board of Directors
shall deem expedient, but any shares of such capital stock so purchased or
acquired may be resold unless such shares shall have been retired in the manner
provided by law for the purpose of decreasing the Corporation's capital.
d. No contract or other transaction between this Corporation and any other
corporation shall be affected or invalidated by the fact that any director of
this Corporation is interested in or is an officer or director, of such other
corporation and any director, individually or jointly, may be a part to, or may
be interested in, any contract or transaction of this Corporation, or in which
this Corporation is interested, and no contract or other transaction of this
Corporation with any person, firm or corporation shall be affected or
invalidated by the fact that any director of this Corporation is a party to, or
is interested in such contract, or transaction or in any way connected with such
person, firm or corporation, and every person who may become a director of this
Corporation is hereby relieved or any liability that may otherwise exist from
contracting with the corporation for the benefit of himself or any firm,
association or corporation in which he may be in any way interested.
e. Any person made a party to any action, suit or proceeding by reason of
the fact that he, his testator or intestate, is or was a director, office or
employee of the
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Corporation or of any Corporation which he served as such at the request of the
Corporation, shall be indemnified by the Corporation against the reasonable
expenses, including attorneys' fees, actually and necessarily incurred by him in
connection with the defense of such action, suit or proceeding, or in connection
with any appeal therein, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such officer, director or
employee is liable for negligence or misconduct in the performance of his
duties. Such right of indemnification shall not be deemed exclusive of any other
rights to which such director, officer or employee may be entitled apart from
this provision.
f. The Board of Directors is authorized and empowered to eliminate shares
of Common Stock which have been reacquired by the Corporation from the
authorized capital stock or number of shares of the Corporation or to restore
such shares to the status of authorized but unissued shares which may be
reissued and to cause to be executed and filed with the Secretary of State of
New York, a certificate pursuant to Section 20 of the Stock Corporation Law.
5. The amendments of the Certificate of Incorporation and the restatement
thereof were authorized and approved by the Board of Directors of the
Corporation.
IN WITNESS WHEREOF, we have hereunto subscribed this Certificate this 1st
day of November, 1967, and we affirm the statements herein contained as true
under penalties of perjury.
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Vice President
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Assistant Secretary
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CERTIFICATE OF AMENDMENT
OF THE RESTATED CERTIFICATE OF INCORPORATION
OF HARVEY ELECTRONICS, INC.
-------------------------------
Under Section 805
of the Business Corporation Law
-------------------------------
The undersigned, Franklin C. Karp and Joseph J. Calabrese, being the
President and Secretary, respectively, of Harvey Electronics, Inc., a
corporation organized and existing under the laws of the State of New York,
pursuant to Section 805 of the Business Corporation Law of New York, do hereby
certify:
1. The name of the corporation is Harvey Electronics, Inc.
2. The Certificate of Incorporation of Harvey Electronics, Inc. was filed
by the Department of State on the 10th day of January, 1946, under the name of
Harvey Radio Company, Inc. A Restated Certificate of Incorporation was filed in
the Department of State on December 8, 1967.
3. The Restated Certificate of Incorporation is hereby amended to modify
the terms, conditions, and provisions of the 8.5% cumulative convertible
preferred stock, of the par value of $1,000 per share, by (i) eliminating their
mandatory redemption and (ii) modifying their conversion privileges.
4. To effectuate the forgoing amendment Article THIRD of the Restated
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
"THIRD:
(a) The total number of shares which the Corporation is authorized to issue
is 10,010,000, consisting of 10,000 shares of eight and one-half (8.5%) percent
cumulative convertible preferred stock, of the par value of $1,000 per share
("8.5% Cumulative Convertible Preferred Stock"), and 10,000,000 common shares of
the par value of $.01 per share ("Common Stock").
<PAGE>
(b) The designation, relative rights, preferences and limitations of shares
of each class shall be as follows:
I. 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
A. DIVIDEND RIGHTS. The holders of the 8.5% Cumulative Convertible
Preferred Stock shall be entitled to receive, when and as declared by the Board
of Directors in its discretion, but only out of funds lawfully available for
dividends under the laws of the State of New York, semiannual dividends at the
rate (the "Preference Rate") of Eighty-Five and 00/100 ($85.00) Dollars per
share, and no more, payable in cash on the last business day of June and
December in each year, commencing on the last business day in June 1997. The
dividends on the 8.5% Cumulative Convertible Preferred Stock shall be cumulative
from and after the date of original issue of the 8.5% Cumulative Convertible
Preferred Stock, whether or not earned or declared. If the Corporation elects to
accrue dividends otherwise payable with respect to the 8.5% Cumulative
Convertible Preferred Stock during the period (the "First Year") commencing the
date of issuance and ending on the last business day in December 1997, the
Preference Rate for the First Year shall be increased to One Hundred Five and
00/100 ($105.00) Dollars per share and shall be payable, out of funds lawfully
available for dividends under the laws of the State of New York, in three (3)
equal installments, with interest at the rate of eight and one-half percent
(8.5%) per annum commencing January 1, 1998, on the last business day of
December 1998, December 1999 and December 2000. No dividend shall at any time be
paid or declared or set apart for payment upon, and no other distribution shall
at any time be declared or made in respect of, any shares of Common Stock, other
than a dividend payable solely in, or a distribution of, Common Stock, unless
full cumulative dividends on the 8.5% Cumulative Convertible Preferred Stock for
all past dividend periods and for the then current dividend period have been
paid or have been declared and a sum sufficient for the payment thereof has been
set apart.
B. VOTING RIGHTS. The holders of the 8.5% Cumulative Convertible Preferred
Stock shall not be entitled to vote except as required by law.
C. REDEMPTION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
(1) Redemption Price. The 8.5% Cumulative Convertible Preferred Stock shall
be redeemable in whole, or in part, as hereinafter set forth, upon payment in
cash of the Redemption Price in respect of the shares so redeemed. The
"Redemption Price" per share shall be equal to the sum of (i) One Thousand and
00/100 ($1,000.00) Dollars and (ii) all dividends accrued on such share to the
date of redemption and theretofore unpaid. Not less than ten (10) days prior
written notice shall be given to the holder or holders of record of the 8.5%
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Cumulative Convertible Preferred Stock to be redeemed, at the address as shown
in the records of the corporation. Said notice shall specify the redemption
price and the place at which, and the date, which date shall not be a legal
holiday, on which the shares called for redemption will be redeemed. Subject to
the provisions hereof, the Board of Directors shall have authority from time to
time to prescribe the manner in which the 8.5% Cumulative Convertible Preferred
Stock shall be redeemed. If notice of redemption is given as provided above, and
if on the redemption date the Corporation has set apart, in trust for the
purpose, sufficient funds for such redemption, then from and after the
redemption date, notwithstanding that any certificate for such shares has not
been surrendered for cancellation, the 8.5% Cumulative Convertible Preferred
Stock called for redemption shall be deemed to be no longer outstanding and all
rights with respect to such shares shall forthwith cease and terminate, except
only the right of the holders thereof to receive the redemption price therefor
(without interest) upon surrender of certificates for the shares called for
redemption.
(2) Voluntary Redemption of 8.5% Cumulative Convertible Preferred Stock. To
the extent permitted by law, the Corporation may at its option by resolution of
its Board of Directors redeem the 8.5% Cumulative Convertible Preferred Stock in
whole, or in part, at the Redemption Price. If less than all of the outstanding
8.5% Cumulative Convertible Preferred Stock is to be redeemed, the redemption
shall be in such amount and by such method (which need not be by lot or pro
rata), and subject to such other provisions, as may from time to time be
determined by the Board of Directors.
D. RIGHTS ON LIQUIDATION. In the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, resulting in
any distribution of its assets to its shareholders, the holders of the 8.5%
Cumulative Convertible Preferred Stock outstanding shall be entitled to receive
in respect of each such share an amount which shall be equal to the Redemption
Price, and no more, before any payment or distribution of the assets of the
Corporation is made to or set apart for the holders of Common Stock. After
payment in full of the preferential amounts required to be paid to the holders
of the 8.5% Cumulative Convertible Preferred Stock, the holders of Common Stock
shall be entitled, to the exclusion of the holders of the 8.5% Cumulative
Convertible Preferred Stock, to share in all remaining assets of the Corporation
in accordance with their respective interests. For the purpose of this Paragraph
IV, a consolidation or merger of the Corporation with any other corporation or
corporations, whether or not the Corporation continues in existence following
such consolidation or merger, shall not be deemed a liquidation, dissolution or
winding-up of the Corporation.
E. CONVERSION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK. The holders
of 8.5% Cumulative Convertible Preferred Stock shall have conversion rights as
follows:
(1) Right to Convert. The 8.5% Cumulative Convertible Preferred Stock shall
be convertible, at the option of the registered holders thereof, in whole or in
part. In
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the event of a conversion, each share of the 8.5% Cumulative Convertible
Preferred Stock shall be converted into the number of fully paid and
non-assessable shares of Common Stock of the Corporation, which is determined by
dividing $1,000 by a conversion price (the "Conversion Price") as set forth
herein. Before January 1, 2001, 50% of the shares of the 8.5% Cumulative
Convertible Preferred Stock held by each registered holder shall be convertible
at the Conversion Price of $6.00 per share and 50% of such shares held by each
registered holder shall be convertible at the Conversion Price of $7.50 per
share. Commencing January 1, 2001, each share of the 8.5% Cumulative Convertible
Preferred Stock shall be convertible into shares of Common Stock of the
Corporation at the Conversion Price equal to the average of the closing bid
price of one share of Common Stock over the 45 trading days preceding January 1,
2001, if traded on the NASDAQ SmallCap Market or the OTC Electronic Bulletin
Board, or the average of the last sales price of the Common Stock over the 45
trading days preceding January 1, 2001, if traded on the NASDAQ National Market
System or a national stock exchange.
(2) Mechanics of Conversion. Before any holder of 8.5% Cumulative
Convertible Preferred Stock shall be entitled to convert the same into Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at such office as is hereinabove provided, and shall give written
notice to the Corporation at said office that he elects to convert the same and
shall state the name or names in which he wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder of 8.5% Cumulative
Convertible Preferred Stock, or to his nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. 8.5% Cumulative Convertible Preferred Stock shall be
deemed to have been converted as of the date on which such shares shall have
been surrendered to and such notice received by the Corporation as aforesaid,
and the person or persons in whose name or names any certificate or certificates
for Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record for all purposes of the
shares represented thereby.
(3) Redemption by the Corporation Prior to Conversion. If at any time prior
to the exercise of the conversion rights afforded the holder of the 8.5%
Cumulative Convertible Preferred Stock, the 8.5% Cumulative Convertible
Preferred Stock are redeemed by the Corporation, in whole or in part, then the
conversion right as provided herein, shall be deemed canceled with respect to
such redeemed stock, as of the date of such redemption.
(4) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available, free from redemption rights, out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the 8.5% Cumulative Convertible Preferred Stock, the full number
of shares of Common Stock deliverable upon the conversion of the 8.5% Cumulative
Convertible Preferred Stock from time to time outstanding. The Corporation shall
from time to time, in accordance with the laws of the State of New York,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued shall not be sufficient to permit the
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<PAGE>
conversion of all of the 8.5% Cumulative Convertible Preferred Stock at the time
outstanding.
(5) Issue Taxes. The Corporation will pay any and all issue and other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of the 8.5% Cumulative Convertible Preferred Stock pursuant
hereto, other than those on or measured by income. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the 8.5% Cumulative Convertible Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the Corporation the
amount of any such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(6) Adjustments for Reclassification and Reorganization. In case of any
capital reorganization or any reclassification of the Common Stock, or in case
of the consolidation or merger of the Corporation with or into another
corporation, or the conveyance of all or substantially all of the assets of the
Corporation to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such 8.5% Cumulative Convertible Preferred Stock would have been
entitled upon such reorganization, reclassification, consolidation, merger or
conveyance, and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
the 8.5% Cumulative Convertible Preferred Stock, to the end that the provisions
set forth herein (including provisions with respect to changes in and other
adjustments of the conversion price) shall thereafter be applicable, as nearly
as reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the 8.5% Cumulative Convertible
Preferred Stock.
(7) Fractional Shares. No cash will be paid nor distributions of any kind
made in lieu of the conversion right. On any exercise of a conversion right, no
fractional shares of the Corporation's Common Stock will be issued, and no cash
will be paid nor distributions of any kind made in lieu of whole or fractional
shares not issued pursuant to the terms and conditions hereof.
II. COMMON STOCK.
A. Dividend Rights. Subject to the foregoing provisions with respect to the
8.5% Cumulative Convertible Preferred Stock and not otherwise, such dividends,
payable in cash, stock or otherwise, as may be determined by the Board of
Directors, may be declared and paid on the Common Stock from time to time out of
any funds lawfully available therefor, and the 8.5% Cumulative Convertible
Preferred Stock shall not be entitled to participate in such dividend.
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<PAGE>
B. Voting Rights The holders of the Common Stock shall be entitled to one
vote per share.
C. Rights on Liquidation. In the event of the liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary and after
payment in full of the amount payable in respect of the 8.5% Cumulative
Convertible Preferred Stock, as provided above, the holders of the shares of
Common Stock shall be entitled, to the exclusion of the holders of the 8.5%
Cumulative Convertible Preferred Stock, to share in all the remaining assets of
the Corporation. For the purpose of this Paragraph III, a consolidation or
merger of the Corporation with any corporation or corporations, whether or not
the Corporation continues in existence following such consolidation or merger,
shall not be deemed a liquidation, dissolution or winding-up of the Corporation.
IN WITNESS WHEREOF, the undersigned have duly made and subscribed this
certificate this ____ day of December, 1997.
--------------------------------
Franklin C. Karp, President
--------------------------------
Joseph C. Calabrese, Secretary
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<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF THE HARVEY GROUP INC.
--------------------------------
Under Sections 805 and 808
of the Business Corporation Law
--------------------------------
The undersigned, Franklin C. Karp and Joseph J. Calabrese, being the
President and Secretary, respectively, of The Harvey Group Inc., a corporation
organized and existing under the laws of the State of New York, by order of the
United States Bankruptcy Court for the Southern District of New York and
pursuant to Sections 805 and 808 of the Business Corporation Law of New York, do
hereby certify:
1. The name of the corporation is The Harvey Group Inc.
2. The Certificate of Incorporation of The Harvey Group Inc. was filed by
the Department of State on the 10th day of January, 1946, under the name of
Harvey Radio Company, Inc. A Restated Certificate of Incorporation was filed in
the Department of State on December 8, 1967.
3. The Certificate of Incorporation is hereby amended as authorized by
Sections 801 and 808 of the Business Corporation Law to effect the following
amendments: (a) to change the name of the Corporation to "Harvey Electronics,
Inc.", (b) to cancel all existing classes of common stock and preferred stock,
and (c) to authorize the issuance of a new class of common stock and a new class
of preferred stock.
4. To effectuate the foregoing amendments:
(a) Article FIRST of the Certificate is hereby amended to read in its
entirety as follows:
"FIRST: The name of the Corporation shall be Harvey Electronics, Inc."
(b) Article THIRD which provides for the issue of 5,100,000 shares,
consisting of 100,000 shares of preferred stock of the par value of $20.00 per
share and 5,000,000 shares of Common Stock of the par value of $1.00 per share,
is hereby amended to read in its entirety as follows:
"THIRD:
<PAGE>
a. The total number of shares which the Corporation is authorized to issue
is 10,010,000, consisting of 10,000 shares of eight and one-half (8.5%) percent
cumulative convertible preferred stock, of the par value of $1,000 per share
("8.5% Cumulative Convertible Preferred Stock"), and 10,000,000 common shares of
the par value of $.01 per share ("Common Stock").
b. The designation, relative rights, preferences and limitations of shares
of each class shall be as follows:
I. 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
A. DIVIDEND RIGHTS. The holders of the 8.5% Cumulative Convertible
Preferred Stock shall be entitled to receive, when and as declared by the Board
of Directors in its discretion, but only out of funds lawfully available for
dividends under the laws of the State of New York, semiannual dividends at the
rate (the "Preference Rate") of Eighty-Five and 00/100 ($85.00) Dollars per
share, and no more, payable in cash on the last business day of June and
December in each year, commencing on the last business day in June 1997. The
dividends on the 8.5% Cumulative Convertible Preferred Stock shall be cumulative
from and after the date of original issue of the 8.5% Cumulative Convertible
Preferred Stock, whether or not earned or declared. If the Corporation elects to
accrue dividends otherwise payable with respect to the 8.5% Cumulative
Convertible Preferred Stock during the period (the "First Year") commencing the
date of issuance and ending on the last business day in December 1997, the
Preference Rate for the First Year shall be increased to One Hundred Five and
00/100 ($105.00) Dollars per share and shall be payable, out of funds lawfully
available for dividends under the laws of the State of New York, in three (3)
equal installments, with interest at the rate of eight and one-half percent
(8.5%) per annum commencing January 1, 1998, on the last business day of
December 1998, December 1999 and December 2000. No dividend shall at any time be
paid or declared or set apart for payment upon, and no other distribution shall
at any time be declared or made in respect of, any shares of Common Stock, other
than a dividend payable solely in, or a distribution of, Common Stock, unless
full cumulative dividends on the 8.5% Cumulative Convertible Preferred Stock for
all past dividend periods and for the then current dividend period have been
paid or have been declared and a sum sufficient for the payment thereof has been
set apart.
B. VOTING RIGHTS. The holders of the 8.5% Cumulative Convertible Preferred
Stock shall not be entitled to vote except as required by law.
C. REDEMPTION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
(1) Redemption Price. The 8.5% Cumulative Convertible Preferred Stock shall
be redeemable in whole, or in part, as hereinafter set forth, upon
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<PAGE>
payment in cash of the Redemption Price in respect of the shares so redeemed.
The "Redemption Price" per share shall be equal to the sum of (i) One Thousand
and 00/100 ($1,000.00) Dollars and (ii) all dividends accrued on such share to
the date of redemption and theretofore unpaid. Not less than ten (10) days prior
written notice shall be given to the holder or holders of record of the 8.5%
Cumulative Convertible Preferred Stock to be redeemed, at the address as shown
in the records of the corporation. Said notice shall specify the redemption
price and the place at which, and the date, which date shall not be a legal
holiday, on which the shares called for redemption will be redeemed. Subject to
the provisions hereof, the Board of Directors shall have authority from time to
time to prescribe the manner in which the 8.5% Cumulative Convertible Preferred
Stock shall be redeemed. If notice of redemption is given as provided above, and
if on the redemption date the Corporation has set apart, in trust for the
purpose, sufficient funds for such redemption, then from and after the
redemption date, notwithstanding that any certificate for such shares has not
been surrendered for cancellation, the 8.5% Cumulative Convertible Preferred
Stock called for redemption shall be deemed to be no longer outstanding and all
rights with respect to such shares shall forthwith cease and terminate, except
only the right of the holders thereof to receive the redemption price therefor
(without interest) upon surrender of certificates for the shares called for
redemption.
(2) Mandatory Redemption of 8.5% Cumulative Convertible Preferred Stock.
The Corporation shall, on the last business day in December 2000, redeem out of
funds legally available therefor, upon payment in cash of the Redemption Price,
all such 8.5% Cumulative Convertible Preferred Stock as may then be outstanding.
(3) Voluntary Redemption of 8.5% Cumulative Convertible Preferred Stock. To
the extent permitted by law, the Corporation may at its option by resolution of
its Board of Directors redeem the 8.5% Cumulative Convertible Preferred Stock in
whole, or in part, at the Redemption Price. If less than all of the outstanding
8.5% Cumulative Convertible Preferred Stock is to be redeemed, the redemption
shall be in such amount and by such method (which need not be by lot or pro
rata), and subject to such other provisions, as may from time to time be
determined by the Board of Directors.
D. RIGHTS ON LIQUIDATION. In the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, resulting in
any distribution of its assets to its shareholders, the holders of the 8.5%
Cumulative Convertible Preferred Stock outstanding shall be entitled to receive
in respect of each such share an amount which shall be equal to the Redemption
Price, and no more, before any payment or distribution of the assets of the
Corporation is made to or set apart for the holders of Common Stock. After
payment in full of the preferential amounts required to be paid to the holders
of the 8.5% Cumulative Convertible Preferred Stock, the holders of Common Stock
shall be entitled, to the exclusion of the holders of the 8.5% Cumulative
Convertible Preferred Stock, to share in all remaining assets of the Corporation
in accordance with their respective interests. For the purpose of this Paragraph
IV, a consolidation or merger of the Corporation
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<PAGE>
with any other corporation or corporations, whether or not the Corporation
continues in existence following such consolidation or merger, shall not be
deemed a liquidation, dissolution or winding-up of the Corporation.
E. CONVERSION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK. The holders
of 8.5% Cumulative Convertible Preferred Stock shall have conversion rights as
follows:
(1) Right to Convert. The 8.5% Cumulative Convertible Preferred Stock shall
be convertible, at the option of the holder thereof, in whole or in part if any
of the following occur: (i) a public offering of the Corporation's Common Stock
("Public Offering Conversion Event"), (ii) a sale of all or substantially all of
the assets of the Corporation ("Sale of Assets Conversion Event"), or (iii) a
merger or reorganization of the Corporation with another entity which is not an
affiliate or subsidiary of the Corporation ("Merger Conversion Event"). The
right to convert the 8.5% Cumulative Convertible Preferred Stock is exercisable
(i) on any date which is within 270 days subsequent to a Public Offering
Conversion Event, or (ii) any time prior to a Sale of Assets Conversion Event or
a Merger Conversion Event, so long as the Sale of Assets Conversion Event or the
Merger Conversion Event occurs within four (4) years of the date of issuance of
the 8.5% Cumulative Convertible Preferred Stock. Notice will be given by the
Corporation to each holder at his or her address at least ten (10) days prior to
the date of an anticipated Public Offering Conversion Event, Sale of Assets
Conversion Event or Merger Conversion Event. In the event of a Public Offering
Conversion Event, each share of 8.5% Cumulative Convertible Preferred Stock
shall be convertible into the number of fully paid and non-assessable shares of
Common Stock of the Corporation which is determined by dividing $1,000 by the
per share public offering price reflected in a prospectus relating to the Public
Offering Conversion Event, and multiplying the result by two-thirds (2/3). In
the event of a Sale of Assets Conversion Event, each share of 8.5% Cumulative
Convertible Preferred Stock shall be convertible into the number of fully paid
and non-assessable shares of Common Stock of the Corporation which is determined
by dividing $1,000 by the net value received per share of common stock (not
taking into account conversion of the 8.5% Cumulative Convertible Preferred
Stock into Common Stock), where net value equals the distribution of proceeds to
the holders of the Common Stock after deduction of all expenses and liabilities,
and multiplying the result by two thirds (2/3). In the event of a Merger
Conversion Event, where non-cash property such as stock is being delivered to
the holders of the Common Stock, each share of 8.5% Cumulative Convertible
Preferred Stock shall be convertible into the number of fully paid and
non-assessable shares of Common Stock of the Corporation which is determined by
dividing $1,000 by the total value of the consideration of the merger (i.e., the
value of stock being delivered by the Company or the stock received by holders
of the Common Stock plus the value of any assumed liabilities or obligations) on
a per share basis for holders of Common Stock, and multiplying the result by
two-thirds (2/3). For example, if the per share public offering price, the net
value received per common share, or the total value of the consideration
received as a result of a merger on a per share basis, were $5.00 per share,
each Preferred Share would be convertible into 133-1/3
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<PAGE>
shares of Common Stock.
(2) Mechanics of Conversion. Before any holder of 8.5% Cumulative
Convertible Preferred Stock shall be entitled to convert the same into Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at such office as is hereinabove provided, and shall give written
notice to the Corporation at said office that he elects to convert the same and
shall state the name or names in which he wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder of 8.5% Cumulative
Convertible Preferred Stock, or to his nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. 8.5% Cumulative Convertible Preferred Stock shall be
deemed to have been converted as of the date on which such shares shall have
been surrendered to and such notice received by the Corporation as aforesaid,
and the person or persons in whose name or names any certificate or certificates
for Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record for all purposes of the
shares represented thereby.
(3) Redemption by the Corporation Prior to Conversion. If at any time prior
to the exercise of the conversion rights afforded the holder of the 8.5%
Cumulative Convertible Preferred Stock, the 8.5% Cumulative Convertible
Preferred Stock are redeemed by the Corporation, in whole or in part, then the
conversion right as provided herein, shall be deemed canceled with respect to
such redeemed stock, as of the date of such redemption, subject however, that if
within one (1) year subsequent to such redemption a Conversion Event occurs, the
rights of the holder of the 8.5% Cumulative Convertible Preferred Stock afforded
thereunder and pursuant to the terms and conditions of conversion as stated
herein, shall be deemed in full force and effect as if the aforesaid holder
still held the 8.5% Cumulative Convertible Preferred Stock and such holder shall
have the right to purchase the same number of shares of stock he would have been
entitled to had a redemption not occurred, for the amount received by such
holder pursuant to such redemption.
(4) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available, free from redemption rights, out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the 8.5% Cumulative Convertible Preferred Stock, the full number
of shares of Common Stock deliverable upon the conversion of the 8.5% Cumulative
Convertible Preferred Stock from time to time outstanding. The Corporation shall
from time to time, in accordance with the laws of the State of New York,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued shall not be sufficient to permit the
conversion of all of the 8.5% Cumulative Convertible Preferred Stock at the time
outstanding.
(5) Issue Taxes. The Corporation will pay any and all issue and other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock
-5-
<PAGE>
on conversion of the 8.5% Cumulative Convertible Preferred Stock pursuant
hereto, other than those on or measured by income. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the 8.5% Cumulative Convertible Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the Corporation the
amount of any such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(6) Adjustments for Reclassification and Reorganization. In case of any
capital reorganization or any reclassification of the Common Stock, or in case
of the consolidation or merger of the Corporation with or into another
corporation, or the conveyance of all or substantially all of the assets of the
Corporation to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such 8.5% Cumulative Convertible Preferred Stock would have been
entitled upon such reorganization, reclassification, consolidation, merger or
conveyance, and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
the 8.5% Cumulative Convertible Preferred Stock, to the end that the provisions
set forth herein (including provisions with respect to changes in and other
adjustments of the conversion price) shall thereafter be applicable, as nearly
as reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the 8.5% Cumulative Convertible
Preferred Stock.
(7) Fractional Shares. No cash will be paid nor distributions of any kind
made in lieu of the conversion right. On any exercise of a conversion right, no
fractional shares of the Corporation's Common Stock will be issued, and no cash
will be paid nor distributions of any kind made in lieu of whole or fractional
shares not issued pursuant to the terms and conditions hereof.
II. COMMON STOCK.
A. Dividend Rights. Subject to the foregoing provisions with respect to the
8.5% Cumulative Convertible Preferred Stock and not otherwise, such dividends,
payable in cash, stock or otherwise, as may be determined by the Board of
Directors, may be declared and paid on the Common Stock from time to time out of
any funds lawfully available therefor, and the 8.5% Cumulative Convertible
Preferred Stock shall not be entitled to participate in such dividend.
B. Voting Rights The holders of the Common Stock shall be entitled to one
vote per share.
C. Rights on Liquidation. In the event of the liquidation, dissolution
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<PAGE>
or winding-up of the Corporation, whether voluntary or involuntary and after
payment in full of the amount payable in respect of the 8.5% Cumulative
Convertible Preferred Stock, as provided above, the holders of the shares of
Common Stock shall be entitled, to the exclusion of the holders of the 8.5%
Cumulative Convertible Preferred Stock, to share in all the remaining assets of
the Corporation. For the purpose of this Paragraph III, a consolidation or
merger of the Corporation with any corporation or corporations, whether or not
the Corporation continues in existence following such consolidation or merger,
shall not be deemed a liquidation, dissolution or winding-up of the Corporation.
5. The number of shares issued is 5,100,000. The 5,100,000 issued shares
are hereby cancelled pursuant to the Plan of Reorganization (defined in
Paragraph 6 below) and 10,000,000 shares of Common Stock and 100,000 shares of
8.5% Cumulative Preferred Stock are authorized to be issued.
6. Provision for the making of this Certificate is contained in an order of
the United States Bankruptcy Court for the Southern District of New York
relative to the Debtor's Restated Modified Amended Joint and Substantively
Consolidated Plan of Reorganization of The Harvey Group Inc. and Harvey Sound,
Inc. dated the 6th day of November, 1996 (the "Plan" of Reorganization); such
Plan of Reorganization was duly confirmed, as provided by Chapter 11 of Title
11, United States Code, 11 U.S.C. ss.1121(a) (the "Bankruptcy Code"), and the
title of the proceeding for the reorganization of such corporations resulting in
the Plan of Reorganization and confirmation thereof is "In re: The Harvey Group
Inc. and Harvey Sound, Inc. d/b/a Harvey Electronics, Inc., Debtors," and venue
of such proceeding is in the United States Bankruptcy Court for the Southern
District of New York; and the order confirming the Plan of Reorganization was
made November 12, 1996, and duly entered on November 13, 1996, in the office of
the clerk of such court.
IN WITNESS WHEREOF, the undersigned have duly made and subscribed this
certificate this 23rd day of December, 1996.
---------------------------------
Franklin C. Karp, President
---------------------------------
Joseph C. Calabrese, Secretary
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<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
THE HARVEY GROUP INC.
Under Section 805 of the Business Corporation Law
The undersigned, being Chairman of the Board and Secretary of The Harvey
Group Inc. do hereby certify and set forth:
1. The name of the Corporation is The Harvey Group Inc.
2. The Certificate of Incorporation of The Harvey Group Inc. was filed in
the Department of State on January 10, 1946. The name under which the
Corporation was formed was Harvey Radio Company, Inc. A restated Certificate of
Incorporation was filed in the Department of State on December 8, 1967.
3. The Certificate of Incorporation of The Harvey Group Inc. is hereby
amended to add new Article TENTH which reads as follows:
"TENTH. No director shall be personally liable to the Corporation or any of
its shareholders for monetary damages for breach of duty as a director,
except for liability if a judgment or other final adjudication adverse to
him establishes that his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or that he personally
gained in fact a financial profit or other advantage to which he was not
legally entitled or that his acts violated Section 719 of the New York
Business Corporation Law. Any repeal or modification of this Article TENTH
by the shareholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of such
repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification."
<PAGE>
4. This amendment to the Certificate of Incorporation of The Harvey Group
Inc. was authorized by a vote of the Board of Directors followed by the
affirmative vote of the holders of a majority of all outstanding shares entitled
to vote thereon at a meeting of the shareholders of said corporation duly called
and held on the 12th day of July, 1988, a quorum being present.
IN WITNESS WHEREOF, we have signed this certificate on the 12th day of
July, 1988 and we affirm the statements contained herein as true under penalties
of perjury.
----------------------------------------
Harvey E. Sampson, Chairman of the Board
----------------------------------------
Dennis R. Wilson, Secretary
<PAGE>
Certificate of Amendment
of the
Certificate of Incorporation
of
THE HARVEY GROUP INC.
(Under Section 805 of the Business Corporation Law)
Pursuant to the provisions of Section 805 of the Business Corporation
Law, the undersigned hereby certify that:
1. The name of the corporation is THE HARVEY GROUP INC.
2. The Certificate of Incorporation of the Corporation was filed in the
Department of State on January 10, 1946. The name under which the Corporation
was formed was Harvey Radio Company, Inc. A Restated Certificate of
Incorporation was filed in the Department of State on December 8, 1967.
3. The Certificate of Incorporation is hereby amended by the addition of a
provision stating the number, designation, relative rights, preferences, and
limitations of four separate series of Preferred Shares of the par value of $20
per share, as fixed by the Board of Directors before the issuance of such
series, under authority contained in Paragraph (b) (2) of Article THIRD of the
Certificate of Incorporation.
4. To effectuate the foregoing amendment a new Paragraph (b) (6) is hereby
added to Article THIRD of the Certificate of Incorporation, relating to the
relative rights, preferences and limitations of Preferred Shares, to read as
follows:
(b) (6) 500 authorized Preferred Shares of the par value of $20 per share,
none of which has been issued, shall be issued in and as the thirteenth series,
to be designated Preferred Shares, Series D-1, par value $20 per share. Said
series is hereinafter called "Series D-1 Shares."
500 authorized Preferred Shares of the par value of $20 per share, none of
which has been issued, shall be issued in and as the fourteenth series, to be
designated Preferred Shares, Series D-2, par value $20 per share. Said series is
hereinafter called "Series D-2 Shares."
500 authorized preferred shares of the par value of $20 per share, none of
which has been issued, shall be issued in and as the fifteenth series, to be
designated Preferred Shares, Series D-4, par value $20 per share. Said series is
hereinafter called "Series D-4 Shares."
<PAGE>
The Series D-1 Shares, Series D-2 Shares, Series D-3 and Series D-4 Shares
are sometimes hereinafter referred to collectively as the "Series D Preferred
Shares."
The designation, relative rights, preferences, and limitations
of all shares of Series D Preferred Shares, insofar as not already fixed by the
Certificate of Incorporation, shall be as follows:
I. DIVIDENDS:
A. The holders of Series D Preferred Shares shall be entitled to receive,
when and as declared by the Board of Directors of the Corporation, out of any
assets of the Corporation available for dividends pursuant to the laws of the
State of New York, preferential dividends upon such shares in cash at the rate
of one cent ($.01) per share per annum, and no more, payable annually on the
first day of March of each year. Holders of the Series D Preferred Shares shall
not be entitled to any dividends, whether payable in cash, property, or stock,
in excess of cumulative cash dividends at such rate. Such dividends upon the
Series D Preferred Shares shall be cumulative from March 1, 1971 so that if
thereafter dividends, whether or not earned or one cent, for any past dividend
period at the rate of one cent ($.01) per annum shall not have been paid and the
full dividend thereof for the then current dividend period shall not have been
paid or declared and a sum sufficient for the payment thereof set apart, the
deficiency shall be fully paid or declared and set apart, but without interest,
before any dividend shall be paid upon or declared and set apart for the junior
stock of the Corporation (which stock for this purpose and the purposes of
Section II of this Paragraph (b) (6) shall include the Common Stock and any
other stock of the Corporation which, by its terms, is specifically made junior
in right of payment to the Series D Preferred Shares). If the aforesaid
dividends are not paid in full, the rights of the holders of Series D Preferred
Shares shall be subject to the rights of all holders of shares of all series of
Preferred Stock to share ratably in the payment of dividends including
accumulations, if any, in accordance with the sums which would be payable on
such shares if all dividends were declared and paid in full.
B. Whenever the full dividend upon the Series D Preferred Shares for all
past dividend period shall have been paid and if the Corporation is not in
default in respect of the dividend thereon for the then current dividend period,
or if such dividend has been declared and paid, or a sum sufficient for the
payment thereof set apart, and whenever all prior required redemptions of the
Series D Preferred Shares shall have been effected, the holders of shares of
junior stock of the Corporation shall be entitled to receive, when and as
declared by the Board of Directors of the Corporation, out of any assets of the
Corporation available for dividends pursuant to the laws of the State of New
York, dividends upon such shares of junior stock of the Corporation in such
amounts and at such times as the Board of Directors may determine.
II. LIQUIDATION PREFERENCE:
In the event of any liquidation, dissolution, or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the holders of the Series
D Preferred Shares shall be entitled, before any assets of the Corporation shall
be distributed among or paid over to the holders of the junior stock of the
Corporation, to be paid $1 per share, plus a further amount
<PAGE>
equal to the dividends unpaid and accumulated thereon to the date of such
distribution, whether earned or declared or not.
After payment to the holders of the Series D Preferred Shares of the amount
to which such holders are entitled as above set forth, the holders of the Series
D Preferred Shares shall have no claim to the remaining assets of the
Corporation. If upon such liquidation, dissolution or winding up of the affairs
of the Corporation, the assets of the Corporation distributable among the
holders of all outstanding series of the Preferred Stock should be insufficient
to permit the payment to them of the full preferential amounts set forth in this
Article THIRD, then the entire assets of the Corporation so to be distributed
shall be distributed ratably among the holders of all outstanding series of
Preferred Stock in proportion to the full preferential amounts to which they are
respectively entitled.
III. REDEMPTION:
A. The Corporation may redeem the Series D Preferred Shares at any time on
or after October 1, 1976, at a redemption price per share equal in each case to
the Liquidation Preference of such shares as provided in Section II of this
Paragraph (b) (6) of this Article THIRD plus a further amount equal to the
dividends unpaid and accumulated thereon to the date of such redemption, whether
earned or declared or not. All Series D Preferred Shares not previously
converted shall become immediately redeemable at $1 per share if voted against
any proposed capital reorganization or reclassification of the Common Stock,
consolidation or merger of the Corporation with or into another corporation,
conveyance of all or substantially all of the assets of the Corporation to
another corporation, or any similar event which is recommended by the Board of
Directors for the approval of shareholders of the Corporation so long as the
provisions of Paragraph E of Section V of this Paragraph (b) (6), and Section VI
of this Paragraph (b) (6), are given effect in connection with such event.
B. In the event that the International Earnings (as hereinafter defined)
for the two-year period ending May 31, 1973 are not equal to $1 in the
aggregate, the Corporation may redeem the Series D-3 Shares and Series D-4
Shares at any time on or after October 1, 1973, at a redemption price per share
equal in each case to the Liquidation Preference of such shares as provided in
Section II of this Paragraph (b) (6) of this Article THIRD plus a further amount
equal to the dividends unpaid and accumulated thereon to the date of such
redemption, whether earned or declared or not.
C. Any of the above redemption rights may be exercised upon the
Corporation's giving no less than 30 days' prior written notice of such
redemption, by registered or certified mail, to each of the holders of the
Series D Preferred Shares to be redeemed, at the last addresses of such holders
as they shall appear in the records of the Corporation. Such notice shall
specify the shares to be redeemed, the redemption price per share, the date
(hereinafter called the "Redemption Date") upon which such redemption is to be
effective and the redemption price to be paid, and the place of redemption
(which shall be the office of the Corporation in the State of New York, or, if
the Corporation makes the deposit hereinafter described, the place at which the
bank or trust company in which such deposit is made is located). Prior to any
Redemption Date, the Corporation may (but shall not be obligated to):
<PAGE>
(i) irrevocably deposit in trust with a bank or trust company in New
York having a combined capital and undivided surplus (as stated in its last
published statement of condition) of not less than $15,000,000, the entire
amount (including accumulated dividends) necessary to redeem the shares
specified in the Notice of Redemption; and
(ii) irrevocably authorize such bank or trust company to make the
funds so deposited immediately available to the holders of such shares upon
surrender thereof at such bank or trust company for payment; and in such
case, if such deposit shall have been made and notice thereof given as
above provided, the Corporation shall be deemed to have satisfied and
discharged its obligation to redeem the shares specified in such notice and
the shares called for redemption as aforesaid shall no longer be deemed to
be outstanding and the holders thereof shall have no rights except the
right to receive payment from the funds deposited therefor. Neither the
giving of notice of redemption nor the making of any such deposit shall
affect the right of the holder to convert such shares, as set forth in
Section V hereof at or prior to the close of business of the day prior to
the Redemption Date.
IV. VOTING RIGHTS:
The Series D Preferred Shares shall entitle the holders thereof to one vote
per share at any meeting of the shareholders of the Corporation.
V. CONVERSION RIGHTS:
A. The Series D Preferred Shares shall be convertible into a number of
fully paid non-assessable shares of Common Stock equal, in the aggregate, to the
number of shares of Common Stock determined in the manner provided in Paragraphs
B and C of this Section V at such times provided therein. Each such Share which
is convertible into Common Stock under any of Paragraphs B(i) through B(iv) of
this Section V may be converted into a number of shares of Common Stock equal to
1/500 of the aggregate number of such Shares into which the Shares of that
Series of Series D Preferred Shares, as a whole, shall be convertible pursuant
to each subparagraph.
B. (i) If the International Earnings for the year ending May 31, 1972 are
in excess of $200,000 the Series D-1 Shares shall be convertible, on or after
September 1, 1972, into a number of shares of Common Stock equal to the number
obtained by dividing the product of that portion of the International Earnings
(as hereinafter defined) for the year ended May 31, 1972, which is in excess of
$200,000 and the Multiplier (as hereinafter defined) by the average of the
closing prices of the Common Stock on the American Stock Exchange on each of the
trading days during the period from March 1, 1972 to and including April 30,
1972.
(ii) On or after September 1, 1973, the Series D-2 Shares shall be
convertible into a number of shares of Common Stock equal to the number obtained
by dividing the Adjusted Profits (as hereinafter defined) for the year ending
May 31, 1973 by the average of the closing prices of the Common Stock on the
American Stock Exchange on each of
<PAGE>
the trading days during the period from March 1, 1973 to and including April 30,
1973.
(iii) On or after September 1, 1974, the Series D-3 Shares shall be
convertible into a number of shares of Common Stock equal to the number obtained
by dividing the Adjusted Profits for the year ending May 31, 1974, by the
average of the closing prices of the Common Stock on the American Stock Exchange
on each of the trading days during the period from March 1, 1974 to and
including April 30, 1974.
(iv) On or after September 1, 1975, the Series D-4 Shares shall be
convertible into a number of shares of Common Stock equal to the number obtained
by dividing the Adjusted Profits for the year ending May 31, 1975 by the average
of the closing prices of the Common Stock on the American Stock Exchange on each
of the trading days during the period from March 1, 1975 to and including April
30, 1975.
C. For purposes of determining the number of shares of Common Stock into
which the Series D Shares shall be convertible, the following provisions shall
be applicable:
(i) The term "Adjusted Profits" shall mean the product of (a) the
International Earnings (as hereinafter defined) and (b) the Multiplier (as
hereinafter defined).
(ii) The term "International Earnings" shall mean the aggregate
consolidated after-tax net earnings of the following business ("Business"): (x)
the business formerly conducted by International Home Sewing Club, Ltd., a
Delaware corporation, and its several subsidiaries (hereinafter referred to in
the aggregate, when the context so requires, as "International"), however such
business may be constituted, and whether such business is operated separately or
in any combination as a division or subsidiary of the Corporation, and (y) any
business (which may be a corporation, a division or divisions of a corporation,
or nay other entity, however constituted) added to the business of International
in connection with or after its merger into International Home Sewing Club,
Ltd., a New Jersey corporation and a wholly-owned subsidiary of the Corporation,
either at the instance of Stephen Rapaport ("Rapaport") or at the instance of
the Board Directors of the Corporation, after provision for all federal, state,
county and local taxes measured by income (including excess profit taxes). For
purposes of this Certificate of Amendment, federal income taxes of the Business
shall be computed without giving effect to (a) any surtax exemption and (b) the
results of operations (including, but not limited to, tax loss carry-forwards
and tax loss carry-backs) for any year other than the year for which earnings
are being computed. Such earnings shall be computered for the periods required
in connections with computations relating to the conversion rights of any Series
D Preferred Shares. For the purposes of such computations:
(a) The amount of general and administrative expenses and interest expenses
of the Corporation that may be charged to the Business shall only be the actual
cost to the Corporation for all services undertaken and rendered specifically
for the Business including, but not limited to, charges for legal and auditing
services and the costs of life, disability, health and/or medical insurance and
other employee benefit plans of the Corporation available to the employees of
the Business, including, without limitation, the cost of a $500,000 insurance
policy on the life of Rapaport; plus the aggregate amount of $5,000 in any
fiscal year
<PAGE>
in lieu of all other charges.
(b) Bonus payments made to Rapaport pursuant to Subsections (a) and (b) of
Section 3 of that certain Employment Agreement to be entered into by and between
the Corporation and Rapaport will not be chargeable against the International
Earnings.
(c) No reserve against doubtful accounts shall be maintained for the
Business, provided, however, that accounts uncollected for six months shall be
charged off as a current expense, subject to being added to current income as,
when and if later collected.
(d) There shall be deducted an amount equal to the interest (computed at a
rate equal to tone half of one per cent above the Corporation's real cost
therefor, including the average charge to the Corporation for bank borrowings
plus the Corporation's cost of maintaining compensating balances against such
borrowings) on the aggregated unpaid balance of all monies borrowed from the
Corporation by the Business provided, however, that no deduction shall be made
for interest on working capital provided to the Business pursuant to Section
6.10 (c) of that certain Agreement and Plan of Merger dated as of June 21, 1971,
by and among the Corporation, International and certain other parties.
(e) If, on or before July 31 of any calendar year, Rapaport shall advise
the Corporation in writing that he desires that the determination of the
International Earnings for the period ending May 31 of such calendar year shall
be audited by the Corporation's independent certified public accountants, the
Corporation shall make arrangements for such an audit; provided, however, that,
concurrently with the notice to the Corporation by Rapaport, the individuals who
were stockholders of International, as of June 1, 1971, shall have furnished the
Corporation a written undertaking to pay personally any and all costs of such
determination.
(iii) The term "Multiplier" shall mean the multiplier shown on the
following table opposite the relevant year-end date:
Year
Ended Multiplier
----- ----------
May 31, 1972 1.5
May 31, 1973 1.9
May 31, 1974 2.4
May 31, 1975 2.9
D. (i) In case the Corporation shall, during any period during which the price
of the Common Stock is relevant in connection with the computation regarding the
conversion of any Series D Preferred Shares, subdivide its outstanding shares of
Common Stock into a greater number of shares, issue a stock dividend, or combine
its outstanding shares of Common Stock into a smaller number of shares, the
shares of Common Stock for purposes of Paragraphs B(i) through B(iv) shall be
equitably adjusted by multiplying the closing price on each day of the relevant
period prior to such event by a fraction the numerator of which shall be the
number of outstanding shares of Common Stock immediately prior to the occurrence
of such event and the denominator of which shall be the number of
<PAGE>
outstanding shares of Common Stock immediately after the occurrence of such
event.
(ii) If the Corporation issues a stock dividend, subdivides its outstanding
shares of Common Stock into a greater number of shares, or combines its
outstanding shares of Common Stock into a smaller number of shares after the day
in which a Series of the Series D Preferred Shares shall have become
convertible, the shares of Common Stock thereafter convertible shall be
proportionately increased in the case of such dividend or subdivision and
proportionately decreased in the case of such combination.
D. A Series D Preferred Share, the right of conversion of which into Common
Stock has matured, but has not been exercised, is hereinafter referred to as a
"Matured Series D Preferred Share." A Series D Preferred Share, the right of
conversion of which into Common Stock has not matured is hereinafter referred to
as an "Unmatured Series D Preferred Share." In the case of any consolidation or
merger of the Corporation with or into another corporation (other than a merger
in which the Corporation is the surviving corporation), or in case of any sale
or conveyance to another corporation of al or substantially all of the assets of
the Corporation for a consideration other than all cash (each such other
corporation being hereinafter referred to as the "New Corporation" and any of
the foregoing events being hereinafter referred to as a "Reorganization
Transaction"), the terms of such Reorganization Transaction shall provide:
(a) That holder of each Matured Series D Preferred Share shall, as part of
such Reorganization Transaction be entitled to receive, in exchange for each
such share, the same number of shares of stock and the same other securities or
property, if any, as such holder would have been entitled to receive had he,
immediately prior to such Reorganization Transaction, been the holder of the
number of shares of Common Stock into which such Matured Series D Preferred
Share might have then been converted, and
(b) That the holder of each Unmatured Series D Preferred Share shall, as
part of such Reorganization Transaction, be entitled to receive, in exchange for
each such share, a share of preferred stock of the New Corporation which, as a
security of the New Corporation, shall have substantially the same rights,
preference and privileges, including, without limitation, the right (if any) of
conversion thereof into common stock of the New Corporation in accordance with
the terms of this Section V, as those enjoyed by a Series D Preferred Share as a
security of the Corporation.
F. (i) If the Common Stock at any time hereinafter should not be listed for
trading on the American Stock Exchange but shall be listed for trading on (x)
the New York Stock Exchange or any other national securities exchange, reference
herein to the American Stock Exchange shall be deemed to be a reference to the
New York Stock Exchange or such other national securities exchange or (y) on two
or more national securities exchanges, reference herein to the American Stock
Exchange shall be deemed to be a reference to the principal national securities
exchange on which the Common Stock shall then be listed. If on any trading day
hereinabove referred to the Common Stock shall be listed for trading on the
American Stock Exchange but shall not be traded, reference to the closing price
of the Common
<PAGE>
Stock on such day shall be deemed to be a reference to the mean of the closing
bid and asked quotations for the Common Stock on such Exchange on such day.
(ii) If the Common Stock shall not be listed for trading on any national
securities exchange but shall be traded in the over-the-counter market, then, in
order to make the calculations hereinabove provided for in this Section V,
reference to the closing price of the Common Stock on the American Stock
Exchange on a particular day or during a particular period shall be deemed to be
a reference to the average of the highest bid and lowest asked price for the
Common Stock on such day or during such period, as furnished by a dealer,
selected by the Corporation, which is a member of the National Association of
Securities Dealers, Inc.
G. Before any holder of a convertible Series D Preferred Share shall be
entitled to convert the same into Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at an office of the
transfer agent of the Corporation, and shall give written notice to the
Corporation at said office that he elects to convert the same. The Corporation
will, promptly thereafter, issue and deliver at said office to such holder of
shares of Series D Preferred Shares, or to the nominee or nominees of such
holder, certificates for the number of full shares of Common Stock to which such
holder shall be entitled as aforesaid, together with a cash payment in lieu of
any fraction of a share determined with reference to the closing market price of
the Common Stock on the American Stock Exchange on the date of such surrender.
Shares of Series D Preferred Shares shall be deemed to have been converted as of
the date on which such Shares shall have been surrendered to an such notice
received by the Corporation as aforesaid, and the person or persons in whose
name or names any certificate or certificates for Common Stock shall be deemed
to have become on said date the holder or holders of record for all purposes of
the Shares represented thereby.
H. The Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the shares of the convertible Series D Preferred Shares, the
number of shares of Common Stock reasonably believed to be deliverable upon the
conversion of all Series D Preferred Shares from time to time outstanding. The
Corporation shall from time to time, in accordance with the laws of the State of
New York, increase the authorized amount of its Common Stock if at any time the
number of shares of authorized but unissued Common Stock shall not be sufficient
to permit the conversion of all of the shares of the Series D Preferred Shares
at the time outstanding.
I. The Corporation will pay any and all issuance and other taxes that may
be payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of the Series D Preferred Shares pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of the Series D
Preferred Shares so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the satisfaction
of the Corporation, that such tax has been paid.
J. Anything herein in this Section V to the contrary notwithstanding, in
the case of redemption of any Series D Preferred Shares the right of conversion
shall cease
<PAGE>
and terminate as to Shares called for redemption at the close of business on the
day next prior to the Redemption Date unless default shall be made in the
payment of the redemption price.
K. Upon conversion the Corporation shall make no payment or adjustment on
account of dividends accrued or in arrears on the Series D Preferred Shares
surrendered for conversion.
VI. AMENDMENT:
The Corporation may, by appropriate resolution of its Board of Directors,
and with the consent of the holders of sixty-six and two-thirds percent (66-2/3%
of any series of Series D Preferred Shares, and with or without the consent of
the holders of the Common Stock or any other Series of Preferred Stock, change
the terms of such series of Series D Preferred Shares, except that,
notwithstanding the foregoing, the Corporation shall not make any change which
would, pursuant to the provisions of Section V of Paragraph (b) (6) of this
Article THIRD, reduce the conversion price to an amount less than the par value
per share, if any, of the Common Stock into which shares of the Series D
Preferred Shares are at the time convertible.
IN WITNESS WHEREOF, we have hereunto subscribed this Certificate as of this
1st day of July, 1971, and we affirm the statements herein contained as true
under penalties of perjury.
--------------------------------
Myron S. Friedman
Vice President
--------------------------------
Bruce E. Tauner
Assistant Secretary
<PAGE>
Certificate of Amendment
of the
Certificate of Incorporation
of
THE HARVEY GROUP INC.
(Under Section 805 of the Business Corporation Law)
Pursuant to the provisions of Section 805of the Business Corporation Law,
the undersigned hereby certify that:
1. The name of the corporaiotn is THE HAVEY GORUP INC.
2. The Certificate of Incorporation of the Corporation was filed in the
Department of State of on January 10, 1946. The name under which the Corporation
was formed was Harvey Radio Company, Inc. A Restated Certificate of
Incorporation was filed in the Department of State of December 8, 1967.
3. The Certificate of Incorporation is hereby amended by the addition of a
provision stating the number, designation, relative rights, preferences, and
limitations of six separate series of Preferred Shares of the par value of $20
per share, as fixed by the Board of Directors before the issuance of such
series, under authority contained in Paragraph (b) (2) of Article THIRD of the
Certificate of Incorporation.
4. To effectuate the foregoing amendment a new Paragraph (b) (5) is hereby
added to Article THIRD of the Certificate of Incorporation, relating to the
relative rights, preferences and limitations of Preferred Shares, to read as
follows:
(b) (5) 320 authorized Preferred Shares of the par value of $20 per share,
none of which has been issued, shall be issued in and as the seventh series, to
be designated Preferred Shares, Series C-1, par value $20 per share. Said series
is hereinafter called "Series C-1 Shares."
200 authorized Preferred Shares of the par value of $20 per share, none of
which has been issued, shall be issued in and as the eighth series, to be
designated Preferred Shares, Series C-2, par value $20 per share. Said series is
hereinafter called "Series C-2 Shares."
200 authorized Preferred Shares of the par value of $20 per share, none of
which has been issues, shall be issued in and as the tenth series, to be
designated Preferred Shares, Series C-4, par value $20 per share. Said series is
hereinafter called "Series C-4 Shares."
<PAGE>
200 authorized Preferred Shares of the par value of $20 per share, none of
which has been issued, shall be issued in and as the eleventh series, to be
designated Preferred Shares, Series C-5, par value $20 per share. Said series is
hereinafter called "Series C-5 Shares."
200 authorized Preferred Shares of the par value of $20 per share, none of
which has been issued, shall be issued in and as the twelfth series, to be
designated Preferred Shares, Series C-6, par value $20 per share. Said series is
hereinafter called "Series C-6 Shares."
The Series C-1 Shares, Series C-2 Shares, C-3 Shares, Series C-4 Shares,
Series C-5 Shares, and Series C-6 Shares are sometimes hereinafter referred to
collectively as the "Series C Preferred Shares."
The designation, relative rights, preferences, and limitations of all
shares of Series C Preferred Shares, insofar as not already fixed by the
Certificate of Incorporation shall be as follows:
I. DIVIDENDS:
A. The holders of Series C Preferred Shares shall be entitled to receive,
when and as declared by the Board of Directors of the Corporation, out of any
assets of the Corporation available for dividends pursuant to the laws of the
State of New York, preferential dividends upon such shares in cash at the rate
of one cent ($.01) per share per annum, and no more, payable annually on the
first day of March of each year. Holders of the Series C Preferred Shares shall
not be entitled to any dividends, whether payable in chase, property; or stock,
in excess of cumulative cash dividends at such rate. Such dividends upon the
Series C Preferred Shares shall be cumulative from March 1, 1971 so that if
thereafter dividends, whether or not earned or declared or not, for any past
dividend period a the rate of one cent ($.01) per annum shall not have been paid
and the full dividend thereof for then current dividend period shall not have
been paid or declared and a sum sufficient for the payment thereof set apart,
but without interest, before any dividend shall be paid upon or declared and set
apart for the junior stock of the Corporation (which stock for this purpose and
the purpose of Section II of this Paragraph (b) (5) shall include the Common
Stock and any other stock of the Corporation which, by its terms; is
specifically made junior in right of payment to the Series C Preferred Shares).
If the aforesaid dividends are not paid in full, the rights of the holders of
Series C Preferred Shares shall be subject to the rights of all holders of
shares of all series of Preferred Stock to share ratably in the payment of
dividends including accumulations, if any, in accordance with the sums which
would be payable on such Shares if all dividends were declared and paid in full.
B. Whenever the full dividend upon the Series C Preferred Shares for all
past dividend periods shall have been paid and if the Corporaiton si not
indefault in respect of the dividend thereon for the then current dividend
period, or if such dividend has been declared and paid, or a sum sufficient of
the payment thereof set apart, and whenever all prior required redemptions of
the Series C Preferred Shares shall have been effected, the holders of shares of
junior stock of the Corporation shall be entitled to receive, when and as
declared by the Board of Directors of the Corporation of the, out of any assets
of the Corporation available for dividends upon such shares of junior stock of
the Corporation in such amounts and at such times as the Board of Directors may
determine.
<PAGE>
II. LIQUIDATION PREFERENCE:
In the event of any liquidation, dissolution, or winding up of the affairs
of the Corporation, whether winding up of the affairs of the Corporation,
whether voluntary or involuntary, the holders of the Series C Preferred Shares
shall be entitled, before any assets of the Corporation shall be distributed
among or paid over to the holders of the junior stock of the Corporation to be
paid an amount equal:
A. in the case of the Series C-1 Shares, to $1,000 per share until
December 31, 1972, and thereafter to $1 per share;
B. in the case of the Series C-2 Shares, Series C-3 Shares, Series C-4
Shares, Series C-5 Shares, and Series C-6 Shares, to $1 per share.
Plus in each case a further amount equal to the dividends unpaid and accumulated
theron to the date of such distribution, whether earned or declared or not.
After payment to the holders of the Series C Preferred Shares of the amount to
which such holders are entitled as above set forth, the holders of the Series C
Preferred Shares shall have no claim to the remaining assets of the Corporation.
If upon such liquidation, dissolution or winding up of the affairs of the
Corporation, the assets of the Corporation distributable among the holders of
all outstanding series of the Preferred Stock should be insufficient to permit
the payment to them of the full preferential amounts set forth in this Article
THIRD, then the entire assets of the Corporation so to be distributed shall be
distributed ratably among the holders of all outstanding series of Preferred
Stock in proportion to the full preferential amounts to which they are
respectively entitled.
III. REDEMPTION:
A. The Corporation may redeem the Series C Preferred Shares, as follows:
(i) as to the Series C- Shares, at any time on or after September 1, 1972, (ii)
as to the Series C-2 Shares, at any time on or after June 30,1972, (iii) as to
the Series C-3 Shares, at any time on or after June 30 ,1973, (iv) as to the
Series C-4 Shares, at any time on or after June 30, 1974, (v) as to Series C-5
Shares, at any time on or after June 30, 1975, and (vi) as to Series C-6 Shares,
at any time on or after June 30 , 1976, at a redemption price per share equal in
each case to the Liquidation Preference of such shares as provided in Section II
of this Paragraph (b) (5) of this Article THIRD plus a further amount equal to
the dividends unpaid and accumulated thereon to the date of such redemption,
whether earned or declared or not. All Series C Preferred Shares not previously
converted shall beomce immediately redeemable at $1 per share if voted against
any proposed capital reorganization or reclassification of the Common Stock,
consolidation or merger of the Corporation with or into another corporation,
coveyance of all oir substantially all of the assets of the Corporation to
another corporation, or any similar event which is recommended by the Board of
Directors for the approval of shareholders of the Corporation so long as the
provisions of Paragraph F of Section V of this Paragraph (b) (5), are given
effect in connection with such event.
<PAGE>
B. Any of the above redemption rights may be exercised upon the
Corporation's giving no less than 20 days' prior written notice of such
redemption, by registered or certified mail, to each of the holders of the
Series C Preferred Shares to be redeemed, at the last addresses of such holders
as they shall appear in the records of the Corporation. Such notice shall
specify the shares to be redeemed, the redemption price per share, the date
(hereinafter called the "Redemption Date") upon which such redemption is to be
effective and the redemption price to be paid, and the place of redemption
(which shall be the office of the Corporation in the State of New York, or, if
the Corporation makes the deposit hereinafter described, the place at which the
bank or trust company in which such deposit is made is located). Prior to any
Redemption Date, the Corporation may (but shall not be obligated to):
(i) irrevocably deposit in trust with a bank or trust company in New
York having combined capital and undivided surplus (as stated in its last
published statement of condition) of not less than $15,000,000, the entire
amount (including accumulated dividends) necessary to redeem the Shares
specified in the Notice of Redemption; and
(ii) irrevocably authorize such bank or trust company to make the
funds os deposited immediately available to the hlders of such Shares upon
surrender thereof at such bank or trust company for payment; and in such
case, if such deposit shallhave been made and notice thereof given as above
provided, the Corporation shall be deemed to have satisified and discharged
its obligation to redeem the Shares specified in such notice and the Shares
called for redemption as aforesaid shall no longer be deemed to be
outstanding and the holders therof shall have no rights except the right to
receive payment from the funds deposited therefor. Neither the giving of
notice of redemption nor the making of any such deposit shall affect the
right of the holder to convert such Shares, as set forth in Section V
hereof at or prior to the close of business of the day prior to the
Redemption Date.
IV. VOTING RIGHTS:
The Series C Preferred Shares shall entitle the holders thereof to one vote
per share at any meeting of the shareholders of the Corporation.
V. CONVERSION RIGHTS:
A. On or after August 1, 1972, the Series C-1 Shares shall be convertible
into a number of fully paid non-assessable shares of Common Stock equal, in the
aggregate, to the number obtained by dividing $320,000 by the average of the
closing prices of the Common Stock on the American Stock Exchange on each of the
trading days during the period from July 1, 1972 to and including july 31, 1972
but in no event shall such number be less than 20,000 or exceed 40,000
(provided, however, that if the Corporation issues a stock dividend, sub-divides
its outstanding shares of Common Stock into a greater number of shares, or
combines its outstanding shares of Common Stock in to a smaller number of shares
the minimum and maximum number of shares of Common Stock into which the Series
C-1 Shares is convertible or shall thereafter beocme convertible shall be
proportionately incresed in the case of such dividend or subdivision and
proportionately decreased in the case of such combination.) Each Sahre of the
Seires C-1 Shares which is covertible may be converted into an umber of shares
of Common
<PAGE>
Stock equal to 1/320 of the aggregate number of such Shares into which the
Series C-1 Shares, a s a whole, shall be convertible pursuant to this Paragraph
A.
B. The Series C-2 Shares, Series C-3 Shares, Series C-4 Shares, Series C-5
Shares and Series C-6 Shares shall be convertible into a number of fully paid
non-assessable shares of Common Stock equal, in the aggregate, to the number of
shares of Common Stock determined in the manner provided in Paragraphs C and D
of this Section V at such times provided therein. Each such Share which is
convertible into Common Stock under any of Paragraphs C(i) through C(v) of this
Section V may be converted into a number of shares of Common Stock equal to
1/200 of the aggregate number of such Shares into which the Shares of that
Series of Series C Preferred Shares, as a whole, shall be convertible pursuant
to each subparagraph.
C. (i) on or after June 1, 1972, the Series C-2 Shares shall be converted
into a number of shares of Common Stock equal to the number obtained by dividing
the Adjusted Profits (as hereinafter defined) for the year ending January 31,
1972 by the average of the closing prices of the Common Stock on the American
Stock Exchange on each of the trading days during the period from May 1, 1972 to
and including May 31, 1972.
(ii) on or after June 1, 1973, the Series C-3 Shares shall be converted
into a number of shares of Common Stock equal to the number obtained by dividing
the Adjusted Profits for the year ending January 31, 1973 by the average of the
closing prices of the Common Stock on the American Stock Exchange on each of the
trading days during the period from May 1, 1973 to and including May 31, 1973.
(iii) on or after June 1, 1974, the Series C-4 Shares shall be converted
into a number of shares of Common Stock equal to the number obtained by dividing
the Adjusted Profits for the year ending January 31, 1974 by the average of the
closing prices of the Common Stock on the American Stock Exchange on each of the
trading days during the period from May 1, 1974 to and including May 31, 1974.
(iv) on or after June 1, 1975, the Series C-5 Shares shall be converted
into a number of shares of Common Stock equal to the number obtained by dividing
the Adjusted Profits for the year ending January 31, 1975 by the average of the
closing prices of the Common Stock on the American Stock Exchange on each of the
trading days during the period from May 1, 1975 to and including May 31, 1975.
(v) on or after June 1, 1976, the Series C-6 Shares shall be converted into
a number of shares of Common Stock equal to the number obtained by dividing the
Adjusted Profits for the year ending January 31, 1976 by the average of the
closing prices of the Common Stock on the American Stock Exchange on each of the
trading days during the period from May 1, 1976 to and including May 31, 1976.
D. For purposes of determining the number of shares of Common Stock into
which the Series C-2 Shares, Series C-3 Shares, Series C-4 Shares, Series C-5
Shares and Series C-6 Shares shall be convertible, the following provisions
shall be applicable:
<PAGE>
(i) The term "Adjusted Profits" shall mean the product of the
multiplication of (a) the Electronics Earnings (as hereinafter defined) by
(b) the Multiplier (as hereinafter defined).
(ii) The term "Electronics Earnings" shall mean the aggregate
consolidated pre-tax net earnings of the business ("Business") of Harvey
Electronics, Inc. (a New York corporation) as the Business may be
constituted, including any corporation in which Harvey Electronics, Inc.
owns at least 80% in value of the equity securities, and whether the
Business is operated separately or in any combination as a division or
subsidiary of the Corporation, after provision for all state, county and
local taxes measured by income (including excess profit taxes) but before
provision for all federal taxes measured by income (including excess profit
taxes). Such earnings shall be computed annually when required in
connection with computations relating to the conversion rights of any
Series C Preferred Shares. For the purposes of such computations:
(a) The amount of general and aministrative expenses and interest
expenses of the Corporation that may be charged to the Business shall
only be the actual cost to the Corporation for all services undertaken
and rendered specifically for the Business including, but not limited
to, charges for legal and auditing services and the costs of life,
disability, health and/or medical insurance and other employee benefit
plans of the Corporation available to the employees of the Business;
plus the aggregate amount of $10,000 in any fiscal year in lieu of all
other charges.
(b) Capital gains, capital losses and other extraordinary items
shall not be added or deducted.
(c) No reserve against doubtful accounts shall be maintained for
the Business, provided, however, that accounts uncollected for six
months shall be charged off as a current expense, subject to being
added to current income as, when and if later collected.
(d) Costs of establishment of new businesses or operations shall
not be charged to the Business if such business or operations are
established or undertaken by specific direction of the Corporation.
(iii) The term "Multiplier" shall mean the multiplier shown on the
following table opposite the relevant Percentage Return On Investment (as
hereinafter defined):
<PAGE>
<TABLE>
<CAPTION>
Percentage Return Percentage Return
on Investment Multiplier on Investment Multiplier
- -------------------- ---------- ------------- ----------
<S> <C> <S> <C>
Less than 20% 0 Less than 51% .1033
Less than 21% .0033 Less than 52% .1066
Less than 22% .0066 Less than 53% .1100
Less than 23% .0100 Less than 54% .1133
Less than 24% .0133 Less than 55% .1166
Less than 25% .0166 Less than 56% .1200
Less than 26% .0200 Less than 57% .1233
Less than 27% .0233 Less than 58% .1266
Less than 28% .0266 Less than 59% .1300
Less than 29% .0300 Less than 60% .1333
Less than 30% .0333 Less than 61% .1366
Less than 31% .0366 Less than 62% .1400
Less than 32% .0400 Less than 63% .1433
Less than 33% .0433 Less than 64% .1466
Less than 34% .0466 Less than 65% .1500
Less than 35% .0500 Less than 66% .1533
Less than 36% .0533 Less than 67% .1566
Less than 37% .0566 Less than 68% .1600
Less than 38% .0600 Less than 69% .1633
Less than 39% .0633 Less than 70% .1666
Less than 40% .0666 Less than 71% .1700
Less than 41% .0700 Less than 72% .1733
Less than 42% .0733 Less than 73% .1766
Less than 43% .0766 Less than 74% .1800
Less than 44% .0800 Less than 75% .1833
Less than 45% .0833 Less than 76% .1866
Less than 46% .0866 Less than 77% .1900
Less than 47% .0900 Less than 78% .1933
Less than 48% .0933 Less than 79% .1966
Less than 49% .0966 79% or more .2000
Less than 50% .1000
</TABLE>
(iv) The term "Percentage Return On Investment" shall mean the
percentage determined by dividing the Electronics Earnings for any fiscal
year of the Business by the average monthly investment of the Business in
accounts receivable and inventory.
E. (i) In case the Corporation shall, during any period during which the
price of the Common Stock is relevant in connection with the computation
regarding the conversion of any Series C Preferred Shares, subdivide its
outstanding shares of Common Stock into a greater number of shares, issue a
stock dividend, or combine its outstanding shares of Common Stock into a smaller
number of shares, the determination of the average of the closing prices of the
Common Stock for purposes of Paragraphs C(i) through C(v) shall be equitably
adjusted by multiplying the closing price on each day of the relevant period
prior to such event
<PAGE>
by a fraction the numerator of which shall be the number of outstanding shares
of Common Stock immediately prior to the occurrence of such event and the
denominator of which shall be the number of outstanding shares of Common Stock
immediately after the occurrence of such event.
(iii) If the Corporation issues a stock dividend, subdivides its
outstanding shares of Common Stock into a greater number of shares, or combines
its outstanding shares of Common Stock into a smaller number of shares after the
day in which a Series of the series C Preferred Shares shall have become
convertible, the shares of Common Stock into which such Series of Series C
Preferred Shares are thereafter convertible shall be proportionately increased
in the case of such dividend or subdivision and proportionately decreased in the
case of such combination.
E. A convertible Series C Preferred Share, the right of conversion of which
into Common Stock has matured, but has not been exercised, is hereinafter
referred to as a "Matured Series C Preferred Share." A convertible Series C
Preferred Share, the right of conversion of which into Common Stock has not
matured is hereinafter referred to as an "Unmatured Series C Preferred Share."
In the case of any consolidation or merger of the Corporation with or into
another corporation (other than a merger in which the Corporation is the
surviving corporation), or in case of any sale or conveyance to another
corporation of all or substantially all of the assets of the Corporation for a
consideration other than all cash (each such other corporation being hereinafter
referred to as the "New Corporation" and any of the foregoing events being
hereinafter referred to as a "Reorganization Transaction"), the terms of such
Reorganization Transaction shall provide:
(a) That the holder of each Matured Series C Preferred Share shall, as
a part of such Reorganization Transaction, be entitled to receive, in
exchange for each such share, the same number of shares of stock and the
same other securities or property, if any, as such holder would have been
entitled to receive had he, immediately prior to such Reorganization
Transaction, been the holder of the number of shares of Common Stock into
which such Matured Series C Preferred Share might have then been converted,
and
(b) That the holder of each Unmatured Series C Preferred Share shall,
as part of such Reorganization Transaction, be entitled to receive, in
exchange for each such share, a share of preferred stock of the New
Corporation which, as a security of the New Corporation, shall have
substantially the same rights, preferences and privileges, including,
without limitation, the right (if any) of conversion thereof into common
stock of the New Corporation in accordance with the terms of this Section
V, as those enjoyed by a Series C Preferred Share as a security of the
Corporation.
G. (i) If the Common Stock at any time hereafter should not be listed for
trading on the American Stock Exchange but rather on the New York Stock
Exchange, reference herein to the American Stock Exchange shall be deemed to
mean the New York Stock Exchange. If on any trading day hereinabove referred to
the Common Stock shall be listed for trading on the American Stock Exchange or
the New York Stock Exchange but shall not be traded, reference to
<PAGE>
the closing price of the Common Stock on such day shall be deemed to mean the
average of the closing bid and asked quotations for the Common Stock on such
Exchange on such day.
(ii) If, by reason of any delisting of the Common Stock by the American
Stock Exchange or the New York Stock Exchange, it shall not be possible to make
any calculation, hereinabove in this Section V provided for, based upon the
closing price or prices of the Common Stock on such Exchange on or during a
particular day or period, then, and in such event, in making such calculation
there shall be used, in lieu of each closing price or prices, the fair value per
share of the Common Stock on or during such day or period, determined in such
manner as may be reasonable and appropriate under the circumstances.
H. Before any holder or a convertible Series C Preferred Share shall be
entitled to convert the same into Common Stock, it shall surrender the
certificate or certificates therefor, duly endorsed, at an office of the
transfer agent of the Corporation, and shall give written notice to the
Corporation at said office that it elects to convert the same. The Corporation
will, promptly thereafter, issue and deliver at said office to such holder of
shares of Series C Preferred Shares, or to the nominee or nominees of such
holder, certificates for the number of full shares of Common Stock to which such
holder shall be entitled as aforesaid, together with a cash payment in lieu of
any fraction of a share determined with reference to the closing market price of
the Common Stock on the American Stock Exchange on the date of such surrender.
Shares of Series C Preferred Shares shall be deemed to have been converted as of
the date on which such Shares shall have been surrendered to and such notice
received by the Corporation as aforesaid, and the person or persons in whose
name or names any certificate or certificates for Common Stock shall be issuable
upon such conversion shall be deemed to have become on said date the holder or
holders of record for all purposes of the Shares represented thereby.
I. The Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the shares of the convertible Series C Preferred Shares, the
number of shares of Common Stock reasonably believed to be deliverable upon the
conversion of all Series C Preferred Shares from time to time, in accordance
with the laws of the State of New York, increase the authorized amount of its
Common Stock if at any time the number of shares of authorized but unissued
Common Stock shall not be sufficient to permit the conversion of all of the
shares of the Series C Preferred Shares at the time outstanding.
J. The Corporation will pay any and all issuance and other taxes that may
be payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of the Series C Preferred Shares pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of the Series C
Preferred Shares so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the satisfaction
of the Corporation, that such tax has been paid.
<PAGE>
K. Anything herein in this Section V to the contrary notwithstanding, in
the case of redemption of any Series C Preferred Shares the right of conversion
shall cease and terminate as to Shares called for redemption at the close of
business on the day next prior to the Redemption Date unless default shall be
made in the payment of the redemption price.
L. Upon conversion, the Corporation shall make no payment or adjustment on
account of dividends accrued or in arrears on the Series C Preferred Shares
surrendered for conversion. Anything herein in this Section V to the contrary
notwithstanding, in the case of redemption of any Series C Preferred Shares the
right of conversion shall cease and terminate as to Shares called for redemption
at the close of business on the day next prior to the Redemption Date unless
default shall be made in the payment of the redemption price.
VI. AMENDMENT:
The Corporation may, by appropriate resolution of its Board of Directors,
and with the consent of the holders of sixty-six and two-thirds (66-2/3%)
percent of any series of Series C Preferred Shares, and with or without the
consent of the holders of the Common Stock or any other Series of Preferred
Stock, change the terms of such series of Series C Preferred Shares, except
that, notwithstanding the foregoing, the Corporation shall not make any change
which would, pursuant to the provisions of Section V of Paragraph (b)(5) of this
Article THIRD, reduce the conversion price to an amount less than the par value
per share, if any, of the Common Stock into which shares of the Series C
Preferred Shares are at the time convertible.
IN WITNESS WHEREOF, we have hereunto subscribed this Certificate as of this
1st day of February, 1971, and we affirm the statements herein contained as true
under penalties of perjury.
---------------------------------
HARVEY E. SAMPSON, JR., President
---------------------------------
JAMES S. THOMPSON, Asst. Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HARVEY RADIO COMPANY, INC.
Under Section 805 of the Business Corporation Law
Pursuant to the provisions of Section 805 of the Business Corporation Law,
the undersigned hereby certify that:
1. The name of the Corporation is Harvey Radio Company, Inc. (the
"Company").
2. The Certificate of Incorporation of the Company was filed in the
Department of State on the tenth day of January, 1946. A restated Certificate of
Incorporation ("Certificate") was filed in the Department of State on the eighth
day of December, 1967.
3. The Certificate is hereby amended to change the name of the Company to
"The Harvey Group Inc." and to increase the authorized capital stock of the
Company from 2,100,000 to 5,100,000 shares.
4. To effectuate the foregoing amendments:
(a) Article FIRST of the Certificate is hereby amended to read as follows:
"FIRST: The name of the corporation is THE HARVEY GROUP, INC."
(b) Paragraph a. of Article THIRD of the Certificate is hereby amended to
read as follows:
<PAGE>
"a. The total number of shares which the Corporation is authorized to
issue is 5,100,000, consisting of 100,000 preferred shares, par value $20
per share, and 5,000,000 common shares, par value $1 per share."
5. The amendment of the Certificate were duly adopted by the vote of the
holders of a majority of the outstanding shares of the Company entitled to vote
thereon.
IN WITNESS WHEREOF, we have signed this certificate on the 27th day of
1969 and we affirm the statements contained herein as true under penalties
of perjury.
--------------------------------
Daniel Jacobson, President
--------------------------------
Mryon S. Friedman, Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HARVEY RADIO COMPANY, INC.
Under Section 805 of the Business
Corporation Law
Pursuant to the provisions of Section 805 of the Business Corporation Law,
the undersigned hereby certify that:
1. The name of the corporation is HARVEY RADIO COMPANY, INC.
2. The Certificate of Incorporation of HARVEY RADIO COMPANY, INC. was filed
in the Department of State on the 10th day of January 1946. A Restated
Certificate of Incorporation was filed in the Department of State on the 8th day
of December, 1967.
3. The Certificate of Incorporation is hereby amended by the addition of a
provision stating the number, designation, relative rights, preferences, and
limitations of Preferred Shares of five separate series of the par value of $20
each as fixed by the Board of Directors, before the issuance of such series,
under authority contained in the Certificate of Incorporation.
4. To effectuate the foregoing amendment a new Paragraph (b)(4) is hereby
added to ARTICLE THIRD of the Certificate of Incorporation, relating to the
relative rights, preferences and limitations of Preferred Shares to read as
follows:
<PAGE>
(b)(4) 200 authorized Preferred Shares of the par value of $20 each, none
of which has been issued, shall be issued in and as the second series to be
designated Preferred Shares, Series B-1, par value $20 per share. Said series is
hereinafter called "Series B-1 Series."
200 authorized Preferred Shares of the par value of $20 each, none of which
has been issued, shall be issued in and as the third series to be designated
Preferred Shares, Series B-2, par value $20 per share. Said series is
hereinafter called "Series B-2 Shares."
200 authorized Preferred Shares of the par value of $20 each, none of which
has been issued, shall be issued in and as the fourth series to be designated
Preferred Shares, Series B-3, par value $20 per share. Said series is
hereinafter called "Series B-3 Shares."
200 authorized Preferred Shares of the par value of $20 each, none of which
has been issued, shall be issued in and as the fifth series to be designated
Preferred Shares, Series B-4, par value $20 per share. Said series is
hereinafter called "Series B-4 Shares."
200 authorized Preferred Shares of the par value of $20 each, none of which
has been issued, shall be issued in and as the sixth series to be designated
Preferred Shares, Series B-5, par value $20 per share. Said series is
hereinafter called "Series B-5 Shares."
The Series B-1 Shares, Series B-2 Share, Series B-3 Shares, Series B-4
Shares and Series B-5 Shares are sometimes hereinafter referred to collectively
as the "Series B Preferred Shares."
The designation, relative rights, preferences, and limitations of all
shares of Series B Preferred Shares, insofar as not already fixed by the
Certificate of Incorporation, shall be as follows:
I. DIVIDENDS:
The dividend rate of the Series B Preferred Shares shall be $10.00 per
share per annum, cumulative from the date of issue, payable semi-annually on
October 1, and March 1, in each year,
2
<PAGE>
commencing on October 1, 1968. Holders of the Series B Preferred Shares shall
not be entitled to any dividends, whether payable in cash, property, or stock,
in excess of cumulative cash dividends at such rate.
II. LIQUIDATION PREFERENCE
A. In the event of any liquidation, dissolution, or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of the
Series B Preferred Shares shall be entitled, before any assets of the
Corporation shall be distributed among or paid over to the holders of the junior
stock of the Corporation (which stock for this purpose shall include the Common
Stock and any other stock of the Corporation which, by its terms, is
specifically made junior in right of payment to the Series B Preferred Shares)
to be paid an amount equal to $200 per share, plus a further amount equal to the
dividends unpaid and accumulated thereon to the date of such distribution
whether earned or declared or not, and no more, before any payment shall be made
or any assets distributed to the holders of the junior stock. After payment to
the holders of the Series B Preferred Shares of the amount to which such holders
are entitled as above set forth, the holders of the Series B Preferred Shares
shall have no claim to the remaining assets of the Corporation. If, upon such
liquidation, dissolution or winding up of the affairs of the Corporation, the
assets of the Corporation distributable among the holders of the Preferred Stock
should be insufficient to permit the payment to them of the full preferential
amounts set forth in this ARTICLE THIRD, then the entire assets of the
Corporation so to be distributed shall be distributed ratably among the holders
of the Preferred Stock in proportion to the full preferential amounts to which
they are respectively entitled.
B. Anything in this Certificate to the contrary notwithstanding, the
provisions of the preceding Subparagraph A of Section II of Paragraph (b)(4) of
this ARTICLE THIRD shall
3
<PAGE>
not be applicable if the liquidation, dissolution or winding up of the
Corporation shall take place pursuant to, by reason of, or in connection with a
Reorganization Transaction as hereinafter defined in Section V of Paragraph
(b)(4) of this ARTICLE THIRD. In such event, the rights and privileges of the
Series B Preferred Shares, and the holders thereof, shall be governed by the
applicable provisions of the said Section V.
III. REDEMPTION
A. The Corporation may redeem the Series B Preferred Shares, as follows:
(i) as to the Series B-1 Shares, at any time on or after June 30, 1969, at a
redemption price of $200.00 per share, (ii) as to the Series B-2 Shares, at any
time on or after June 30, 1970, at a redemption price of $200.00 per share,
(iii) as to the Series B-3 Shares, at any time on or after June 30, 1971, at a
redemption price of $200.00 per share, (iv) as to the Series B-4 Shares, at any
time on or after June 30, 1972, at a redemption price of $200.00 per share, and
(v) as to the Series B-5 Shares, at any time on or after June 30, 1973, at a
redemption price of $200.00 per share, plus, in each case set forth in
subsections (i) through (v) above, a further amount equal to the dividends
unpaid and accumulated thereon to the date of such redemption, whether earned or
declared, or not. All Series B Preferred Shares not previously converted shall
become immediately redeemable at $1.00 per share if voted, pursuant to voting
rights granted by the requirement of the laws of the State of New York, against
any proposed capital reorganization or reclassification of the Common Stock,
consolidation or merger of the Corporation with or into another corporation,
conveyance of all or substantially all of the assets of the Corporation to
another corporation, or any similar event which is recommended by the Board of
Directors for the approval of shareholders by the Corporation; all provided,
however, that such right of redemption at $1 per share may not be exercised if
such reorganization, reclassification, consolidation, merger,
4
<PAGE>
conveyance, or other event would adversely affect or subordinate the holders of
the Series B Preferred Shares not converted prior thereto, or the rights of such
holders.
B. Either of the above redemption rights may be exercised upon the
Corporation's giving no less than 20 days' prior written notice of such
redemption, by registered or certified mail, to each of the holders of the Share
of the Series B Preferred Shares to be redeemed, at the last addresses of such
holders as they shall appear in the records of the Corporation. Such notice
shall specify the Shares to be redeemed, the redemption price per share, the
date (hereinafter called the Redemption Date) upon which such redemption is to
be effective and the redemption price to be paid, and the place of redemption
(which shall be the office of the Corporation in the City of New York, or, if
the Corporation makes the deposit hereinafter described, the place at which the
bank or trust company in which such deposit is made is located). Prior to any
Redemption Date, the Corporation may (but shall not be obligated to):
(i) irrevocably deposit in trust with a bank or trust company in New
York City having a combined capital and undivided surplus (as stated in its
last published balance sheet) of not less than $15,000,000, the entire
amount necessary (including accumulated dividends) to redeem the shares
specified in the Notice of Redemption; and
(ii) irrevocably authorize such bank or trust company to make the
funds so deposited immediately available to the holders of such shares upon
surrender thereof at such bank or trust company for payment; and in such
case, if such deposit shall have been made and notice thereof given as
above provided, the Corporation shall be deemed to have satisfied and
discharged its obligation to redeem the shares specified in such notice and
the shares called for redemption as aforesaid shall no longer be deemed to
be outstanding and the holders thereof shall have no rights except the
right to receive payment from the funds deposited therefor. Neither the
5
<PAGE>
giving of notice of redemption nor the making of any such deposit shall
affect the right of the holder to convert such shares, as set forth in
Section V hereof at or prior to the close of business of the day prior to
the Redemption Date.
IV. VOTING RIGHTS:
The Series B Preferred Shares shall not entitle the holders thereof to vote
at any meeting of the shareholders of the Corporation, except as otherwise
required by the laws of the State of New York.
V. CONVERSION RIGHTS:
A. The Series B Preferred Shares shall be convertible into a number of
fully paid and non-assessable shares of Common Stock equal, in the aggregate, to
the number of shares of Common Stock determined in the manner provided in
Paragraphs B and C of this Section V at such times as provided therein. Each
share of the Series B Preferred Shares which is convertible into Common Stock
under any of Paragraphs B(i) through B(v) of this Section V may be converted
into a number of shares of Common Stock equal to 1/200 of the aggregate number
of such shares into which the shares of that series of Series B Preferred
Shares, as a whole, shall be convertible pursuant to each such paragraph.
B. (i) On or after June 1, 1969, the Series B-2 Shares shall be convertible
into a number of shares of Common Stock equal to 1/6 of the number obtained by
dividing the aggregate of
(a) four times the Boerner Earnings (as hereinafter defined) up to
$300,000 for the fiscal year February 1, 1968 through January 31,
1969;
(b) five times the Boerner Earnings in excess of $300,000 and up to
$400,000 for such fiscal year;
6
<PAGE>
(c) five and on-half times the Boerner Earnings in excess of $400,000 and
up to $500,000 for such fiscal year
(d) six times the Boerner Earnings in excess or $500,000 and up to
$600,000 for such fiscal year; and
(e) seven times the Boerner Earnings in excess of $600,000 for such fiscal
year
by the mean average of the closing prices of the Common Stock on the American
Stock Exchange on each of the trading days during the period from May 1, 1969 to
and including May 31, 1969.
(ii) On or after June 1, 1970, the Series B-2 Shares shall be convertible
into a number of shares of Common Stock equal to 1/6 of the number obtained by
dividing the aggregate of:
(a) four times the mean average of the portions of the Boerner Earnings up
to $300,000 for each of the two fiscal years comprising the period
from February 1, 1968 through January 31, 1970;
(b) five times the mean average of the portions of the Boerner Earnings in
excess of $300,000 and up to $400,000 for each of the two fiscal years
comprising such period;
(c) five and one-half the mean average of the portions of the Boerner
Earnings in excess of $400,000 and up to $500,000 for each of the two
fiscal years comprising such period;
(d) six times the mean average of the portions of the Boerner Earnings in
excess of $500,000 and up to $600,000 for each of the two fiscal years
comprising such period; and
(e) seven times the mean average of the portions of the Boerner Earnings
in excess of $600,000 for each of the two fiscal years comprising such
period.
by the mean average of the closing prices of the Common Stock on the American
Stock Exchange on each of the trading days during the period from May 1, 1970 to
and including May 31, 1970.
7
<PAGE>
(iii) On or after June 1, 1971, the Series B-3 Shares shall be convertible
into a number of shares of Common Stock equal to 1/6 of the number obtained by
dividing the aggregate of:
(a) four times the mean average of the portions of the Boerner Earnings up
to $300,000 for each of the three fiscal years comprising the period
from February 1, 1968 through January 31, 1971;
(b) five times the mean average of the portions of the Boerner Earnings in
excess of $300,000 and up to $400,000 for each of the three fiscal
years comprising such period;
(c) five and one-half the mean average of the portions of the Boerner
Earnings in excess of $400,000 and up to $500,000 for each of the
three fiscal years comprising such period;
(d) six times the mean average of the portions of the Boerner Earnings in
excess of $500,000 and up to $600,000 for each of the three fiscal
years comprising such period; and
(e) seven times the mean average of the portions of the Boerner Earnings
in excess of $600,000 for each of the three fiscal years comprising
such period.
by the mean average of the closing prices of the Common Stock on the American
Stock Exchange on each of the trading days during the period from May 1, 1971 to
and including May 31, 1971.
(iv) On or after June 1, 1972, the Series B-4 Shares shall be convertible
into a number of shares of Common Stock equal to 1/6 of the number obtained by
dividing the aggregate of:
(a) four times the mean average of the portions of the Boerner Earnings up
to $300,000 for each of the four fiscal years comprising the period
from February 1, 1968 through January 31, 1972;
8
<PAGE>
(b) five times the mean average of the portions of the Boerner Earnings in
excess of $300,000 and up to $400,000 for each of the four fiscal
years comprising such period;
(c) five and one-half the mean average of the portions of the Boerner
Earnings in excess of $400,000 and up to $500,000 for each of the four
fiscal years comprising such period;
(d) six times the mean average of the portions of the Boerner Earnings in
excess of $500,000 and up to $600,000 for each of the four fiscal
years comprising such period; and
(e) seven times the mean average of the portions of the Boerner Earnings
in excess of $600,000 for each of the four fiscal years comprising
such period.
by the mean average of the closing prices of the Common Stock on the American
Stock Exchange on each of the trading days during the period from May 1, 1973 to
and including May 31, 193.
(v) On or after June 1, 1973, the Series B-5 Shares shall be convertible
into a number of shares of Common Stock equal to 1/6 of the number obtained by
dividing the aggregate of:
(a) four times the mean average of the portions of the Boerner Earnings up
to $300,000 for each of the five fiscal years comprising the period
from February 1, 1968 through January 31, 1973;
(b) five times the mean average of the portions of the Boerner Earnings in
excess of $300,000 and up to $400,000 for each of the five fiscal
years comprising such period;
(c) five and one-half the mean average of the portions of the Boerner
Earnings in excess of $400,000 and up to $500,000 for each of the five
fiscal years comprising such period;
(d) six times the mean average of the portions of the Boerner Earnings in
excess of $500,000 and up to $600,000 for each of the five fiscal
years comprising such period; and
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<PAGE>
(e) seven times the mean average of the portions of the Boerner Earnings
in excess of $600,000 for each of the five fiscal years comprising
such period.
by the mean average of the closing prices of the Common Stock on the American
Stock Exchange on each of the trading days during the period from May 1, 1973 to
and including May 31, 1973; and by subtracting from the number so obtained the
number of share of Common Stock into which the Series B Preferred Shares,
whether or not theretofore converted, were convertible pursuant to Paragraphs
B(i) through B(iv). If the number of shares of Common Stock into which the
Series B Preferred Shares were convertible pursuant to Paragraphs B(i) through
B(iv) exceeds the number of shares of Common Stock into which the Series B-5
Shares are otherwise convertible pursuant to this Paragraph B(v), the
Corporation shall not be entitled to recapture any shares of Common Stock
theretofore issued pursuant to Paragraphs B(i) through B(iv), or to in any
manner reduce, as to unconverted Series B Preferred Shares, the number of shares
of Common Stock into which any such shares were convertible pursuant to
Paragraphs B(i) through B(iv).
C. For purposes of determining the number of shares of Common Stock into
which the Series B Preferred Shares shall be convertible the following
provisions shall be applicable:
(i) The Term "Boerner Earnings" shall mean the aggregate net earnings
of the combined businesses of H. C. Boerner Company, Inc., Esco Marketing,
Inc., I.D.F. Sales Company, Inc., and Boerner-Esco Company, Inc. (the first
three of the corporations above named being New York corporations and the
last-named corporation being a Massachusetts corporation) as such
respective businesses (each of which is hereinafter referred to as a
"Boerner Business" and collectively as the "Boerner Businesses") where
constituted on February 1, 1968, or are
10
<PAGE>
constituted, or may hereafter be constituted and whether such Boerner
Businesses are operated separately or in any combination as divisions of
subsidiaries of the Corporation, after provision for all Federal, state,
county and legal taxes measured by income (including excess profit taxes).
Such net earnings shall be computed (whether such Boerner Businesses are
operated separately or in any combination as divisions or subsidiaries of
the Corporation, and shall be computed annually on the basis of fiscal
years beginning February 1 and ending January 31, the first such fiscal
year being the period from February 1, 1968 to January 31, 1968, inclusive.
For purposes of such computations:
(a) The amount of general and administrative expenses of the Corporation
that may be charged to the Boerner Businesses shall only be actual
cost to the Corporation for all services undertaken and rendered
specifically for any such Boerner Business including, but not limited
to, charges for legal and auditing services and the costs of life,
disability, health and/or medical insurance and other employee benefit
plans of the Corporation available to the employees of any Boerner
Business, provided that such services be reasonably necessary and that
the cost thereof be reasonable; plus the aggregate amount of $10,000
in any fiscal year in lieu of all other charges, except that for the
fiscal year commencing February 1, 1968 and ending January 31, 1969,
such charge shall be $5,000.
11
<PAGE>
(b) In computing the provisions to be made for taxes measured by income in
respect to Boerner Earnings, there shall be taken into account as
deductions a fair proportionate share (based upon the net operating
income of each of the subsidiaries and divisions of the Corporation)
of the surtax exemption to which the Corporation is entitled, and, for
so long as any Boerner Businesses have been, or continue to be,
operated as separate corporate entities, the entire surtax exemptions
to which they may be entitled as separate corporate entities. For
purposes of computing the amount of such taxes, the applicable rate
shall be deemed to be the income tax and excess profits tax rate then
in force.
(c) Capital gains and capital losses shall not be added or deducted.
(d) For purposes of computing taxes measured by income in respect to
Boerner Earnings, the accumulated loss from operations of Boerner-Esco
Company, Inc., as of February 1, 1968, shall be offset against any
profits of that corporation earned, or which may be earned, from and
after February 1, 1968.
(e) In computing the Boerner Earnings for each fiscal year, there shall be
deducted amounts equal to the interest (computed at a rate equal to
one-half of one percent above
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<PAGE>
the prevailing rate of interest then being charged the Corporation for
bank borrowings, but in no event more than 1-1/2% above the "prime"
bank rate then in effect in New York City) on such portion, if any, of
the aggregate unpaid balance, during such fiscal year, as is in excess
of $100,000, of all loans of money made after the date of issuance and
delivery of the Series B Preferred Shares to the first registered
owner thereof (such date being hereinafter called the "Series B
Delivery Date") made by the Corporation, or any person, firm or
corporation in common control with, or controlled by, the Corporation,
to any one or more of the Boerner Businesses, all provided, however,
that: no deduction shall be made in the event that such average
aggregate unpaid balance, during any fiscal year, is $100,000 or less,
and no deduction shall be made in respect to any loan made by any one
or more Boerner Businesses to any other one or more Boerner
Businesses. In the computation of the outstanding aggregate unpaid
balance of such loans for purposes of this subparagarph (e), only such
payment as, in the aggregate, are in excess of cumulative after-tax
earnings of the Boerner Businesses accruing after the Series B
Delivery Date shall be deemed in repayment of such loans.
13
<PAGE>
(f) No deduction shall be made for interest on the Corporation's 4.27%
Convertible Subordinated Debentures due July 1, 1983, or the notes
issued by the Corporation in connection with the acquisition of the
Boerner Businesses.
(g) No reserve against doubtful accounts shall be maintained for any
Boerner Business, provided, however, that accounts uncollected for six
months shall be charged off as a current expense, subject to being
added to current income as, when and if later collected.
(h) If any Boerner Business shares any office, plant or other facility
with another division or subsidiary of the Corporation, utilities,
rent and/or other charges relating to the shared premises shall be
apportioned on the basis of space occupied. If any Boerner Business
shares used, owned or rented personal property with any other division
or subsidiary of the Corporation, then the costs, rent and/or other
charges related to the shared personal property shall be apportioned
on the basis of time actually used.
(i) The amount of Federal income taxes based on income shall be computed
without benefit of the credit against tax otherwise permitted to the
Corporation pursuant to Section 38 of the Internal Revenue Code of
1954, as amended, except that any Boerner Business shall be entitled
to a tax
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<PAGE>
credit under such section in respect of property acquired by such
Business which qualifies therefor.
(j) The number of shares of Common Stock at any time issuable upon
conversion of the Series B Preferred Shares on the basis of the
Boerner Earnings shall be adjusted by reason of any federal audit or
procedure pertaining to any matter or transaction effected by a
Boerner Business which results in an adjustment of Boerner Earnings
for or in respect of the period which commenced on February 1, 1968
and shall end on January 31, 1973.
(k) In case the Corporation shall, during the period commending May 1 and
ending June 1 of any of the years 1969 through 1973, subdivide its
outstanding shares of Common Stock into a greater number of shares,
issue a stock dividend, or combine its outstanding shares of Common
Stock into a smaller number of shares, the determination of the
average of the closing prices of the Common Stock for purposes of
Paragraphs B(i) through B(v) shall be equitably adjusted by dividing
the closing price on each day of the relevant May 1 through June 1
period prior to such event, by a fraction the numerator of which shall
be the number of outstanding shares of Common Stock immediately prior
to the occurrence of such event and the denominator of which shall
15
<PAGE>
be the number of outstanding shares of Common Stock immediately after
the occurrence of such event.
(l) If the Corporation issues a stock dividend, subdivides its outstanding
shares of Common Stock into a greater number of shares, or combines
its outstanding shares of Common Stock into a smaller number of shares
after June 1 of any year in which a Series of the Series B Preferred
Shares shall have become convertible, the shares of Common Stock into
which such Series B Preferred Shares are thereafter convertible shall
be proportionately increased in the case of such dividend or
subdivision and proportionately decreased in the case of such
combination.
D. A Series B Preferred Share, the right of conversion of which into Common
Stock has matured, but has not been exercised, is hereinafter referred to as a
"Matured Series B Preferred Share". A Series B Preferred Share, the right of
conversion of which into Common Stock has not matured is hereinafter referred to
as an "Unmatured Series B Preferred Share". In the case of any consolidation or
merger of the Corporation with or into another corporation (other than a merger
in which the Corporation is the continuing corporation), or in case of any sale
or conveyance to another corporation of all or substantially all of the assets
of the Corporation for a consideration other than all cash (each such other
corporation being hereinafter referred to as the "New Corporation" and any of
the foregoing events being hereinafter referred to as a "Reorganization
Transaction"), the terms of such Reorganization Transaction shall include
specific provision for the assumption by the New Corporation of all of the
obligations of the Corporation
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<PAGE>
pursuant to a certain agreement dated June 20, 1968 between the Corporation and
HOWARD C. BOERNER, and
(i) If the Common Stock of the New Corporation shall then be listed upon or
admitted to trading upon the New York Stock Exchange or the American Stock
Exchange, the Reorganization Transaction shall provide:
(a) That the holder of each Matured Series B Preferred Share shall, as a
part of such Reorganization Transaction, be entitled to receive, in
exchange for each such share, the same number of shares of stock and
the same other securities or property, if any, as such holder would
have been entitled to receive had he, immediately prior to such
Reorganization Transaction, been the holder of the number of shares of
Common Stock into which such Matured Series B Preferred Share might
have then been converted, and
(b) That the holder of each Unmatured Series B Preferred Share shall, as
part of such Reorganization Transaction, be entitled to receive, in
exchange for each such share, a share of preferred stock of the new
Corporation which, as a security of the new Corporation, shall have
substantially the same rights, preferences and privileges, including,
without limitation, the right of conversation thereof into common
stock of the New Corporation in accordance with the terms
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<PAGE>
of this Section V, as those enjoyed by a Series B Preferred Share as a
security of the Corporation.
(ii) If the Common Stock of the New Corporation shall not then be listed
upon or admitted to trading upon either the New York Stock Exchange or the
American Stock Exchange, the Reorganization Transaction shall provide as
follows:
(a) That the Corporation give to each holder of Series B Preferred Shares,
no less than 30 days prior to the consummation of the Reorganization
Transaction, written notice (hereinafter called the "Company Notice")
of the terms and conditions thereof, and the date fixed for the
consummation thereof.
(b) That the holder of each Matured Series B Preferred Share shall, as a
part of such Reorganization Transaction, be entitled to receive, in
exchange for each such share, the same number of shares of stock and
the same other securities or property, if any as such holder would
have been entitled to receive had he, immediately prior to such
Reorganization Transaction, been the holder of the number of shares of
Common Stock into which such Matured Series B Preferred Share might
then have been converted.
(c) That the holder of each Unmaturerd Series B Preferred Share shall have
the options exercisable as hereinafter provided, either:
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<PAGE>
(aa) To receive, in exchange for each such share held by him, as part
of the Reorganization Transaction, a share of preferred stock of
the New Corporation which, as a security of the New Corporation,
shall have substantially the same rights, preferences and
privileges, including, without limitation, the right of
conversion thereof into common stock of the New Corporation in
accordance with the terms of this Section V as those enjoyed by a
Series B Preferred Share as a security of the Corporation, or
(bb) To receive, in exchange for all of the Unmatured Series B
Preferred Shares held by such holder, a sum (hereinafter called
"Cash Payment"), to be paid in cash to such holder by the
Corporation immediately upon the sale or exchange provided for by
the Reorganization Transaction, which Cash Payment shall be in an
amount determined as follows:
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<PAGE>
There shall first be computed the aggregate amount of the Boerner
Earnings for the fiscal years comprising the period from February
1, 1968 through the end of the fiscal year next preceding the
fiscal year in which such Reorganization Transaction takes place.
Such aggregate amount shall then be divided by the number of
fiscal years included in such period. The resulting number of
dollars is hereinafter referred to as the "Average Annual
Earnings". The portion of the Average Annual Earnings not in
excess of $300,000 shall then be multiplied by four, the portion
of the Average Annual Earnings in excess of $300,000 and up to
$400,000 shall be multiplied by five, the portion of the Average
Annual Earnings in excess of $400,000 and up to $500,000 shall be
20
<PAGE>
multiplied by five and one-half, the portion of the Average
Annual Earnings in excess of $500,000 and up to $600,000 shall be
multiplied by six, and the portion of the Average Annual Earnings
in excess of $600,000 shall be multiplied by seven. The products
of such multiplications shall then be totaled, such total being
hereinafter referred to as the "Annualized Five-Year Earnings:
There shall thereupon be subtracted from the Annualized Five-year
Earnings the sum of (aaa) the dollar value of the shares of
Common stock theretofore issued in exchange for Series B
Preferred Shares upon the conversion thereof, plus (bbb) the
dollar value of the shares of Common Stock issuable upon the
conversion of all Matured Series B. Preferred Shares. For
purposes of the computation of the dollar values
21
<PAGE>
referred to in (aaa) and (bbb) above, such values are to be based
upon the mean average of the closing prices of the Common Stock
on the American Stock Exchange on each of the trading days during
the calendar month ending three calendar months prior to the
first day of the month in which the sale or exchange provided for
by the reorganization Transaction takes place.
The remainder, if any, resulting from such subtraction shall
thereupon be multiplied by a fraction, the numerator of which
shall be the total number of Series B-5 Shares held by such
holder and the denominator of which shall be the total number of
Series B-5 Shares then issued and outstanding, and the products
of such multiplication shall be the Cash Payment.
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<PAGE>
(d) A holder of Unmatured Series B Preferred Shares may exercise
either of the options hereinabove provided in the preceding
Subsection (c) only by giving to the Corporation, no later than
20 days after the giving of the Company Notice, written notice of
his intention to exercise the same. All notices required or
permitted pursuant to this Section V shall be deemed fully made
and given upon the mailing of the same, properly addressed, via
registered or certified mail, return receipt requested. In the
event any holder of an Unmatured Series B. Preferred Share shall
fail to exercise either of the aforesaid options within the
period and in the manner above provided, it shall be conclusively
presumed that such holder duly elected to exercise such one of
the two options as was exercised by the holders of a majority of
the Unmatured Series B. Preferred Shares.
E. In the case of a sale of all or substantially all of the assets of the
Corporation for all cash, such transaction shall be deemed a Reorganization
Transaction for purposes of Paragraph B of Section II of Paragraph (b)(4) of
this ARTICLE THIRD, and
(i) the holder of each Matured Series B Preferred Share shall, as a part
of such transaction, be entitled to receive, in exchange for each such
share, the same amount of cash as such holder would have been entitled
to receive had he, immediately prior to such transaction, been the
holder of the number of shares of Common stock into
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<PAGE>
which such Matured series B Preferred Share might have been converted,
and
(ii) the holder of each Unmatured Series B Preferred Share shall, as part
of such transaction, be entitled to receive, in exchange for all of
the Unmatured Series B Preferred Shares held by such holder, a sum
(hereinafter called "Money Payment"), to be paid in cash to such
holder by the Corporation immediately upon the sale provided for by
such transaction, which Money Payment shall be in an amount determined
as follows:
There shall first be computed the aggregate amount of the Boerner
Earnings for the fiscal years comprising the period from February 1,
1968 through the end of the fiscal year next preceding the fiscal year
in which such transaction takes place. Such aggregate amount shall
then be divided by the number of fiscal years included in such period.
The resulting number of dollars is hereinafter referred to as the
"Average Annual Earnings". The portion of the Average Annual Earnings
not in excess of $300,000 shall then be multiplied by four, the
portion of the Average Annual Earnings in excess of $300,000 and up to
$400,000 shall be multiplied by five, the portion of the Average
Annual Earnings in excess of $400,000 and up to $500,000 shall be
multiplied by five and one-half, the portion of the Average Annual
Earnings in excess of $500,000 and up to $600,000 shall be multiplied
by six, and the portion of the
24
<PAGE>
Average Annual Earnings in excess of $600,000 shall be multiplied by
seven. The products of such multiplications shall then be totaled,
such total being hereinafter referred to as the "Annualized Five-Year
Earnings". There shall thereupon be subtracted from the Annualized
Five-Year Earnings the sum of (a) the dollar value of the shares of
Common Stock theretofore issued in exchange for Series B Preferred
Shares upon the conversion thereof, plus (b) the dollar value of the
shares of Common Stock issuable upon the conversion of all Matured
Series B Preferred Shares. For purposes of computation of the dollar
values referred to in (a) and (b) above, such values are to be based
upon the mean average of the closing prices of the Common Stock on the
American Stock Exchange on each of the trading days during the
calendar month ending three calendar months prior to the first day of
the month in which the sale provided for by the transaction takes
place.
The remainder, if any, resulting from such subtraction shall
thereupon be multiplied by a fraction, the numerator of which shall be
the total number of Series B-5 Shares held by such holder and the
denominator of which shall be the total number of Series B-5 Shares
then issued and outstanding, and the product of such multiplication
shall be the Money Payment.
F. If the Common Stock at any time hereafter should not be listed for
trading on the American Stock Exchange but rather on the New York Stock Exchange
reference herein to the
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American Stock Exchange shall be deemed to mean the New York Stock Exchange. If
on any trading day hereinabove referred to the Common Stock shall be listed for
trading on the American Stock Exchange or the New York Stock Exchange but shall
not be traded, reference to the closing price of the Common Stock on such day
shall be deemed to mean the average of the closing bid and asked quotations for
the Common Stock on such Exchange on such day.
G. Before any holder of Series B Preferred Shares shall be entitled to
convert the same into Common Stock, it shall surrender the certificate or
certificates therefor, duly endorsed, at an office of the transfer agent of the
Corporation, and shall give written notice to the Corporation at said office
that it elects to convert the same. The Corporation will, promptly thereafter,
issue and deliver at said office to such holder of shares of Series B Preferred
Shares, or to the nominee or nominees of such holder, certificates for the
number of full shares of Common Stock to which such holder shall be entitled as
aforesaid, together with a cash payment in lieu of any fraction of a share.
Shares of Series B Preferred Shares shall be deemed to have been converted as of
the date on which such shares shall have been surrendered to and such notice
received by the Corporation as aforesaid, and the person or persons in whose
name or names any certificate or certificates for Common Stock shall be issuable
upon such conversion shall be deemed to have become on said date the holder or
holders of record for all purposes of the shares represented thereby.
H. The Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series B Preferred Shares, the number of shares
of Common Stock deliverable upon the conversion of all Series B Preferred Shares
from time to time outstanding. The Corporation shall from time to time, in
accordance with the laws of the State of New York, increase the
26
<PAGE>
authorized amount of its Common Stock if any time the number of shares of
authorized but unissued Common Stock shall not be sufficient to permit the
conversion of all of the shares of the Series B Preferred Shares at the time
outstanding.
I. The Corporation will pay any and all issue and other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of the Series B Preferred Shares pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of the Series B
Preferred Shares so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the satisfaction
of the Corporation, that such tax has been paid.
J. The Corporation may by appropriate resolution of its Board of Directors
and with the consent of the holders of sixty-six and two-thirds (66-2/3%)
percent of the Series B Preferred Shares and with or without the consent of the
holders of the Common Stock or any other Series of Preferred Stock, change the
terms of the Series B Preferred Shares, except that, notwithstanding the
foregoing, the Corporation shall not take any which would, pursuant to the
provisions of this Section V of Paragraph (b)(4) of this ARTICLE THIRD, reduce
the conversion price to an amount less than the par value per share, if any of
the Common Stock into which shares of the Series B Preferred Shares are a the
time convertible.
K. Upon conversion the Corporation shall make no payment or adjustment on
account of dividends accrued or in arrears on the Series B Preferred Shares
surrendered for conversion, provided, however, that if the Corporation shall be
arrears in the payment of dividends on the Series B Preferred Shares surrendered
for conversion, the number of shares of Common
27
<PAGE>
Stock deliverable upon such conversion shall be equitably increased to
compensate for the amount of the dividend arrearage. Anything herein in this
Section V to the contrary notwithstanding, in the case of redemption of any
Series B Preferred Shares the right of conversion shall cease and terminate as
to shares called for redemption at the close of business on the day next prior
to the Redemption Date unless default shall be made in the payment of the
redemption price.
L. If, by reason of any delisting of the Common Stock by the American Stock
Exchange or the New York Stock Exchange, it shall not be possible to make any
calculation, hereinabove in this Section V provided for, based upon the closing
price or prices of the Common Stock on such Exchange on or during a particular
day or period, then and in such event, in making such calculation there shall be
used, in lieu of such closing price or prices, the fair value per share of the
Common Stock on or during such day or period, determined in such manner as may
be reasonable and appropriate under the circumstances."
5. The amendment of the Certificate of Incorporation was authorized and
approved by the Board of Directors of the Corporation.
IN WITNESS WHEREOF, we have hereunto subscribed this Certificate this 20th
day of September 1968, and we affirm the statements herein contained as true
under penalties of perjury.
------------------------------
Vice-President
------------------------------
Secretary
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4. To effectuate the forgoing amendment Article THIRD of the Restated
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
"THIRD:
(a) The total number of shares which the Corporation is authorized to issue
is 10,010,000, consisting of 10,000 shares of eight and one-half (8.5%) percent
cumulative convertible preferred stock, of the par value of $1,000 per share
("8.5% Cumulative Convertible Preferred Stock"), and 10,000,000 common shares of
the par value of $.01 per share ("Common Stock").
<PAGE>
(b) The designation, relative rights, preferences and limitations of shares
of each class shall be as follows:
I. 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
A. DIVIDEND RIGHTS. The holders of the 8.5% Cumulative Convertible
Preferred Stock shall be entitled to receive, when and as declared by the Board
of Directors in its discretion, but only out of funds lawfully available for
dividends under the laws of the State of New York, semiannual dividends at the
rate (the "Preference Rate") of Eighty-Five and 00/100 ($85.00) Dollars per
share, and no more, payable in cash on the last business day of June and
December in each year, commencing on the last business day in June 1997. The
dividends on the 8.5% Cumulative Convertible Preferred Stock shall be cumulative
from and after the date of original issue of the 8.5% Cumulative Convertible
Preferred Stock, whether or not earned or declared. If the Corporation elects to
accrue dividends otherwise payable with respect to the 8.5% Cumulative
Convertible Preferred Stock during the period (the "First Year") commencing the
date of issuance and ending on the last business day in December 1997, the
Preference Rate for the First Year shall be increased to One Hundred Five and
00/100 ($105.00) Dollars per share and shall be payable, out of funds lawfully
available for dividends under the laws of the State of New York, in three (3)
equal installments, with interest at the rate of eight and one-half percent
(8.5%) per annum commencing January 1, 1998, on the last business day of
December 1998, December 1999 and December 2000. No dividend shall at any time be
paid or declared or set apart for payment upon, and no other distribution shall
at any time be declared or made in respect of, any shares of Common Stock, other
than a dividend payable solely in, or a distribution of, Common Stock, unless
full cumulative dividends on the 8.5% Cumulative Convertible Preferred Stock for
all past dividend periods and for the then current dividend period have been
paid or have been declared and a sum sufficient for the payment thereof has been
set apart.
B. VOTING RIGHTS. The holders of the 8.5% Cumulative Convertible Preferred
Stock shall not be entitled to vote except as required by law.
C. REDEMPTION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
(1) Redemption Price. The 8.5% Cumulative Convertible Preferred Stock shall
be redeemable in whole, or in part, as hereinafter set forth, upon payment in
cash of the Redemption Price in respect of the shares so redeemed. The
"Redemption Price" per share shall be equal to the sum of (i) One Thousand and
00/100 ($1,000.00) Dollars and (ii) all dividends accrued on such share to the
date of redemption and theretofore unpaid. Not less than ten (10) days prior
written notice shall be given to the holder or holders of record of the 8.5%
-2-
<PAGE>
Cumulative Convertible Preferred Stock to be redeemed, at the address as shown
in the records of the corporation. Said notice shall specify the redemption
price and the place at which, and the date, which date shall not be a legal
holiday, on which the shares called for redemption will be redeemed. Subject to
the provisions hereof, the Board of Directors shall have authority from time to
time to prescribe the manner in which the 8.5% Cumulative Convertible Preferred
Stock shall be redeemed. If notice of redemption is given as provided above, and
if on the redemption date the Corporation has set apart, in trust for the
purpose, sufficient funds for such redemption, then from and after the
redemption date, notwithstanding that any certificate for such shares has not
been surrendered for cancellation, the 8.5% Cumulative Convertible Preferred
Stock called for redemption shall be deemed to be no longer outstanding and all
rights with respect to such shares shall forthwith cease and terminate, except
only the right of the holders thereof to receive the redemption price therefor
(without interest) upon surrender of certificates for the shares called for
redemption.
(2) Voluntary Redemption of 8.5% Cumulative Convertible Preferred Stock. To
the extent permitted by law, the Corporation may at its option by resolution of
its Board of Directors redeem the 8.5% Cumulative Convertible Preferred Stock in
whole, or in part, at the Redemption Price. If less than all of the outstanding
8.5% Cumulative Convertible Preferred Stock is to be redeemed, the redemption
shall be in such amount and by such method (which need not be by lot or pro
rata), and subject to such other provisions, as may from time to time be
determined by the Board of Directors.
D. RIGHTS ON LIQUIDATION. In the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, resulting in
any distribution of its assets to its shareholders, the holders of the 8.5%
Cumulative Convertible Preferred Stock outstanding shall be entitled to receive
in respect of each such share an amount which shall be equal to the Redemption
Price, and no more, before any payment or distribution of the assets of the
Corporation is made to or set apart for the holders of Common Stock. After
payment in full of the preferential amounts required to be paid to the holders
of the 8.5% Cumulative Convertible Preferred Stock, the holders of Common Stock
shall be entitled, to the exclusion of the holders of the 8.5% Cumulative
Convertible Preferred Stock, to share in all remaining assets of the Corporation
in accordance with their respective interests. For the purpose of this Paragraph
IV, a consolidation or merger of the Corporation with any other corporation or
corporations, whether or not the Corporation continues in existence following
such consolidation or merger, shall not be deemed a liquidation, dissolution or
winding-up of the Corporation.
E. CONVERSION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK. The holders
of 8.5% Cumulative Convertible Preferred Stock shall have conversion rights as
follows:
(1) Right to Convert. The 8.5% Cumulative Convertible Preferred Stock shall
be convertible, at the option of the registered holders thereof, in whole or in
part. In
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the event of a conversion, each share of the 8.5% Cumulative Convertible
Preferred Stock shall be converted into the number of fully paid and
non-assessable shares of Common Stock of the Corporation, which is determined by
dividing $1,000 by a conversion price (the "Conversion Price") as set forth
herein. Before January 1, 2001, 50% of the shares of the 8.5% Cumulative
Convertible Preferred Stock held by each registered holder shall be convertible
at the Conversion Price of $6.00 per share and 50% of such shares held by each
registered holder shall be convertible at the Conversion Price of $7.50 per
share. Commencing January 1, 2001, each share of the 8.5% Cumulative Convertible
Preferred Stock shall be convertible into shares of Common Stock of the
Corporation at the Conversion Price equal to the average of the closing bid
price of one share of Common Stock over the 45 trading days preceding January 1,
2001, if traded on the NASDAQ SmallCap Market or the OTC Electronic Bulletin
Board, or the average of the last sales price of the Common Stock over the 45
trading days preceding January 1, 2001, if traded on the NASDAQ National Market
System or a national stock exchange.
(2) Mechanics of Conversion. Before any holder of 8.5% Cumulative
Convertible Preferred Stock shall be entitled to convert the same into Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at such office as is hereinabove provided, and shall give written
notice to the Corporation at said office that he elects to convert the same and
shall state the name or names in which he wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder of 8.5% Cumulative
Convertible Preferred Stock, or to his nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. 8.5% Cumulative Convertible Preferred Stock shall be
deemed to have been converted as of the date on which such shares shall have
been surrendered to and such notice received by the Corporation as aforesaid,
and the person or persons in whose name or names any certificate or certificates
for Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record for all purposes of the
shares represented thereby.
(3) Redemption by the Corporation Prior to Conversion. If at any time prior
to the exercise of the conversion rights afforded the holder of the 8.5%
Cumulative Convertible Preferred Stock, the 8.5% Cumulative Convertible
Preferred Stock are redeemed by the Corporation, in whole or in part, then the
conversion right as provided herein, shall be deemed canceled with respect to
such redeemed stock, as of the date of such redemption.
(4) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available, free from redemption rights, out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the 8.5% Cumulative Convertible Preferred Stock, the full number
of shares of Common Stock deliverable upon the conversion of the 8.5% Cumulative
Convertible Preferred Stock from time to time outstanding. The Corporation shall
from time to time, in accordance with the laws of the State of New York,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued shall not be sufficient to permit the
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conversion of all of the 8.5% Cumulative Convertible Preferred Stock at the time
outstanding.
(5) Issue Taxes. The Corporation will pay any and all issue and other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of the 8.5% Cumulative Convertible Preferred Stock pursuant
hereto, other than those on or measured by income. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the 8.5% Cumulative Convertible Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the Corporation the
amount of any such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(6) Adjustments for Reclassification and Reorganization. In case of any
capital reorganization or any reclassification of the Common Stock, or in case
of the consolidation or merger of the Corporation with or into another
corporation, or the conveyance of all or substantially all of the assets of the
Corporation to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such 8.5% Cumulative Convertible Preferred Stock would have been
entitled upon such reorganization, reclassification, consolidation, merger or
conveyance, and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
the 8.5% Cumulative Convertible Preferred Stock, to the end that the provisions
set forth herein (including provisions with respect to changes in and other
adjustments of the conversion price) shall thereafter be applicable, as nearly
as reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the 8.5% Cumulative Convertible
Preferred Stock.
(7) Fractional Shares. No cash will be paid nor distributions of any kind
made in lieu of the conversion right. On any exercise of a conversion right, no
fractional shares of the Corporation's Common Stock will be issued, and no cash
will be paid nor distributions of any kind made in lieu of whole or fractional
shares not issued pursuant to the terms and conditions hereof.
II. COMMON STOCK.
A. Dividend Rights. Subject to the foregoing provisions with respect to the
8.5% Cumulative Convertible Preferred Stock and not otherwise, such dividends,
payable in cash, stock or otherwise, as may be determined by the Board of
Directors, may be declared and paid on the Common Stock from time to time out of
any funds lawfully available therefor, and the 8.5% Cumulative Convertible
Preferred Stock shall not be entitled to participate in such dividend.
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B. Voting Rights The holders of the Common Stock shall be entitled to one
vote per share.
C. Rights on Liquidation. In the event of the liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary and after
payment in full of the amount payable in respect of the 8.5% Cumulative
Convertible Preferred Stock, as provided above, the holders of the shares of
Common Stock shall be entitled, to the exclusion of the holders of the 8.5%
Cumulative Convertible Preferred Stock, to share in all the remaining assets of
the Corporation. For the purpose of this Paragraph III, a consolidation or
merger of the Corporation with any corporation or corporations, whether or not
the Corporation continues in existence following such consolidation or merger,
shall not be deemed a liquidation, dissolution or winding-up of the Corporation.
"THIRD:
<PAGE>
a. The total number of shares which the Corporation is authorized to issue
is 10,010,000, consisting of 10,000 shares of eight and one-half (8.5%) percent
cumulative convertible preferred stock, of the par value of $1,000 per share
("8.5% Cumulative Convertible Preferred Stock"), and 10,000,000 common shares of
the par value of $.01 per share ("Common Stock").
b. The designation, relative rights, preferences and limitations of shares
of each class shall be as follows:
I. 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
A. DIVIDEND RIGHTS. The holders of the 8.5% Cumulative Convertible
Preferred Stock shall be entitled to receive, when and as declared by the Board
of Directors in its discretion, but only out of funds lawfully available for
dividends under the laws of the State of New York, semiannual dividends at the
rate (the "Preference Rate") of Eighty-Five and 00/100 ($85.00) Dollars per
share, and no more, payable in cash on the last business day of June and
December in each year, commencing on the last business day in June 1997. The
dividends on the 8.5% Cumulative Convertible Preferred Stock shall be cumulative
from and after the date of original issue of the 8.5% Cumulative Convertible
Preferred Stock, whether or not earned or declared. If the Corporation elects to
accrue dividends otherwise payable with respect to the 8.5% Cumulative
Convertible Preferred Stock during the period (the "First Year") commencing the
date of issuance and ending on the last business day in December 1997, the
Preference Rate for the First Year shall be increased to One Hundred Five and
00/100 ($105.00) Dollars per share and shall be payable, out of funds lawfully
available for dividends under the laws of the State of New York, in three (3)
equal installments, with interest at the rate of eight and one-half percent
(8.5%) per annum commencing January 1, 1998, on the last business day of
December 1998, December 1999 and December 2000. No dividend shall at any time be
paid or declared or set apart for payment upon, and no other distribution shall
at any time be declared or made in respect of, any shares of Common Stock, other
than a dividend payable solely in, or a distribution of, Common Stock, unless
full cumulative dividends on the 8.5% Cumulative Convertible Preferred Stock for
all past dividend periods and for the then current dividend period have been
paid or have been declared and a sum sufficient for the payment thereof has been
set apart.
B. VOTING RIGHTS. The holders of the 8.5% Cumulative Convertible Preferred
Stock shall not be entitled to vote except as required by law.
C. REDEMPTION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
(1) Redemption Price. The 8.5% Cumulative Convertible Preferred Stock shall
be redeemable in whole, or in part, as hereinafter set forth, upon
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payment in cash of the Redemption Price in respect of the shares so redeemed.
The "Redemption Price" per share shall be equal to the sum of (i) One Thousand
and 00/100 ($1,000.00) Dollars and (ii) all dividends accrued on such share to
the date of redemption and theretofore unpaid. Not less than ten (10) days prior
written notice shall be given to the holder or holders of record of the 8.5%
Cumulative Convertible Preferred Stock to be redeemed, at the address as shown
in the records of the corporation. Said notice shall specify the redemption
price and the place at which, and the date, which date shall not be a legal
holiday, on which the shares called for redemption will be redeemed. Subject to
the provisions hereof, the Board of Directors shall have authority from time to
time to prescribe the manner in which the 8.5% Cumulative Convertible Preferred
Stock shall be redeemed. If notice of redemption is given as provided above, and
if on the redemption date the Corporation has set apart, in trust for the
purpose, sufficient funds for such redemption, then from and after the
redemption date, notwithstanding that any certificate for such shares has not
been surrendered for cancellation, the 8.5% Cumulative Convertible Preferred
Stock called for redemption shall be deemed to be no longer outstanding and all
rights with respect to such shares shall forthwith cease and terminate, except
only the right of the holders thereof to receive the redemption price therefor
(without interest) upon surrender of certificates for the shares called for
redemption.
(2) Mandatory Redemption of 8.5% Cumulative Convertible Preferred Stock.
The Corporation shall, on the last business day in December 2000, redeem out of
funds legally available therefor, upon payment in cash of the Redemption Price,
all such 8.5% Cumulative Convertible Preferred Stock as may then be outstanding.
(3) Voluntary Redemption of 8.5% Cumulative Convertible Preferred Stock. To
the extent permitted by law, the Corporation may at its option by resolution of
its Board of Directors redeem the 8.5% Cumulative Convertible Preferred Stock in
whole, or in part, at the Redemption Price. If less than all of the outstanding
8.5% Cumulative Convertible Preferred Stock is to be redeemed, the redemption
shall be in such amount and by such method (which need not be by lot or pro
rata), and subject to such other provisions, as may from time to time be
determined by the Board of Directors.
D. RIGHTS ON LIQUIDATION. In the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, resulting in
any distribution of its assets to its shareholders, the holders of the 8.5%
Cumulative Convertible Preferred Stock outstanding shall be entitled to receive
in respect of each such share an amount which shall be equal to the Redemption
Price, and no more, before any payment or distribution of the assets of the
Corporation is made to or set apart for the holders of Common Stock. After
payment in full of the preferential amounts required to be paid to the holders
of the 8.5% Cumulative Convertible Preferred Stock, the holders of Common Stock
shall be entitled, to the exclusion of the holders of the 8.5% Cumulative
Convertible Preferred Stock, to share in all remaining assets of the Corporation
in accordance with their respective interests. For the purpose of this Paragraph
IV, a consolidation or merger of the Corporation
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with any other corporation or corporations, whether or not the Corporation
continues in existence following such consolidation or merger, shall not be
deemed a liquidation, dissolution or winding-up of the Corporation.
E. CONVERSION OF 8.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK. The holders
of 8.5% Cumulative Convertible Preferred Stock shall have conversion rights as
follows:
(1) Right to Convert. The 8.5% Cumulative Convertible Preferred Stock shall
be convertible, at the option of the holder thereof, in whole or in part if any
of the following occur: (i) a public offering of the Corporation's Common Stock
("Public Offering Conversion Event"), (ii) a sale of all or substantially all of
the assets of the Corporation ("Sale of Assets Conversion Event"), or (iii) a
merger or reorganization of the Corporation with another entity which is not an
affiliate or subsidiary of the Corporation ("Merger Conversion Event"). The
right to convert the 8.5% Cumulative Convertible Preferred Stock is exercisable
(i) on any date which is within 270 days subsequent to a Public Offering
Conversion Event, or (ii) any time prior to a Sale of Assets Conversion Event or
a Merger Conversion Event, so long as the Sale of Assets Conversion Event or the
Merger Conversion Event occurs within four (4) years of the date of issuance of
the 8.5% Cumulative Convertible Preferred Stock. Notice will be given by the
Corporation to each holder at his or her address at least ten (10) days prior to
the date of an anticipated Public Offering Conversion Event, Sale of Assets
Conversion Event or Merger Conversion Event. In the event of a Public Offering
Conversion Event, each share of 8.5% Cumulative Convertible Preferred Stock
shall be convertible into the number of fully paid and non-assessable shares of
Common Stock of the Corporation which is determined by dividing $1,000 by the
per share public offering price reflected in a prospectus relating to the Public
Offering Conversion Event, and multiplying the result by two-thirds (2/3). In
the event of a Sale of Assets Conversion Event, each share of 8.5% Cumulative
Convertible Preferred Stock shall be convertible into the number of fully paid
and non-assessable shares of Common Stock of the Corporation which is determined
by dividing $1,000 by the net value received per share of common stock (not
taking into account conversion of the 8.5% Cumulative Convertible Preferred
Stock into Common Stock), where net value equals the distribution of proceeds to
the holders of the Common Stock after deduction of all expenses and liabilities,
and multiplying the result by two thirds (2/3). In the event of a Merger
Conversion Event, where non-cash property such as stock is being delivered to
the holders of the Common Stock, each share of 8.5% Cumulative Convertible
Preferred Stock shall be convertible into the number of fully paid and
non-assessable shares of Common Stock of the Corporation which is determined by
dividing $1,000 by the total value of the consideration of the merger (i.e., the
value of stock being delivered by the Company or the stock received by holders
of the Common Stock plus the value of any assumed liabilities or obligations) on
a per share basis for holders of Common Stock, and multiplying the result by
two-thirds (2/3). For example, if the per share public offering price, the net
value received per common share, or the total value of the consideration
received as a result of a merger on a per share basis, were $5.00 per share,
each Preferred Share would be convertible into 133-1/3
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<PAGE>
shares of Common Stock.
(2) Mechanics of Conversion. Before any holder of 8.5% Cumulative
Convertible Preferred Stock shall be entitled to convert the same into Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at such office as is hereinabove provided, and shall give written
notice to the Corporation at said office that he elects to convert the same and
shall state the name or names in which he wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder of 8.5% Cumulative
Convertible Preferred Stock, or to his nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. 8.5% Cumulative Convertible Preferred Stock shall be
deemed to have been converted as of the date on which such shares shall have
been surrendered to and such notice received by the Corporation as aforesaid,
and the person or persons in whose name or names any certificate or certificates
for Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record for all purposes of the
shares represented thereby.
(3) Redemption by the Corporation Prior to Conversion. If at any time prior
to the exercise of the conversion rights afforded the holder of the 8.5%
Cumulative Convertible Preferred Stock, the 8.5% Cumulative Convertible
Preferred Stock are redeemed by the Corporation, in whole or in part, then the
conversion right as provided herein, shall be deemed canceled with respect to
such redeemed stock, as of the date of such redemption, subject however, that if
within one (1) year subsequent to such redemption a Conversion Event occurs, the
rights of the holder of the 8.5% Cumulative Convertible Preferred Stock afforded
thereunder and pursuant to the terms and conditions of conversion as stated
herein, shall be deemed in full force and effect as if the aforesaid holder
still held the 8.5% Cumulative Convertible Preferred Stock and such holder shall
have the right to purchase the same number of shares of stock he would have been
entitled to had a redemption not occurred, for the amount received by such
holder pursuant to such redemption.
(4) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available, free from redemption rights, out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of the 8.5% Cumulative Convertible Preferred Stock, the full number
of shares of Common Stock deliverable upon the conversion of the 8.5% Cumulative
Convertible Preferred Stock from time to time outstanding. The Corporation shall
from time to time, in accordance with the laws of the State of New York,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued shall not be sufficient to permit the
conversion of all of the 8.5% Cumulative Convertible Preferred Stock at the time
outstanding.
(5) Issue Taxes. The Corporation will pay any and all issue and other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock
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<PAGE>
on conversion of the 8.5% Cumulative Convertible Preferred Stock pursuant
hereto, other than those on or measured by income. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the 8.5% Cumulative Convertible Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the Corporation the
amount of any such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(6) Adjustments for Reclassification and Reorganization. In case of any
capital reorganization or any reclassification of the Common Stock, or in case
of the consolidation or merger of the Corporation with or into another
corporation, or the conveyance of all or substantially all of the assets of the
Corporation to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such 8.5% Cumulative Convertible Preferred Stock would have been
entitled upon such reorganization, reclassification, consolidation, merger or
conveyance, and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
the 8.5% Cumulative Convertible Preferred Stock, to the end that the provisions
set forth herein (including provisions with respect to changes in and other
adjustments of the conversion price) shall thereafter be applicable, as nearly
as reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the 8.5% Cumulative Convertible
Preferred Stock.
(7) Fractional Shares. No cash will be paid nor distributions of any kind
made in lieu of the conversion right. On any exercise of a conversion right, no
fractional shares of the Corporation's Common Stock will be issued, and no cash
will be paid nor distributions of any kind made in lieu of whole or fractional
shares not issued pursuant to the terms and conditions hereof.
II. COMMON STOCK.
A. Dividend Rights. Subject to the foregoing provisions with respect to the
8.5% Cumulative Convertible Preferred Stock and not otherwise, such dividends,
payable in cash, stock or otherwise, as may be determined by the Board of
Directors, may be declared and paid on the Common Stock from time to time out of
any funds lawfully available therefor, and the 8.5% Cumulative Convertible
Preferred Stock shall not be entitled to participate in such dividend.
B. Voting Rights The holders of the Common Stock shall be entitled to one
vote per share.
C. Rights on Liquidation. In the event of the liquidation, dissolution
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or winding-up of the Corporation, whether voluntary or involuntary and after
payment in full of the amount payable in respect of the 8.5% Cumulative
Convertible Preferred Stock, as provided above, the holders of the shares of
Common Stock shall be entitled, to the exclusion of the holders of the 8.5%
Cumulative Convertible Preferred Stock, to share in all the remaining assets of
the Corporation. For the purpose of this Paragraph III, a consolidation or
merger of the Corporation with any corporation or corporations, whether or not
the Corporation continues in existence following such consolidation or merger,
shall not be deemed a liquidation, dissolution or winding-up of the Corporation.
5. The number of shares issued is 5,100,000. The 5,100,000 issued shares
are hereby cancelled pursuant to the Plan of Reorganization (defined in
Paragraph 6 below) and 10,000,000 shares of Common Stock and 100,000 shares of
8.5% Cumulative Preferred Stock are authorized to be issued.
<PAGE>
No. W-
Warrant to Purchase shares of Common Stock
HARVEY ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANTS
DECEMBER , 1997
NEITHER THE WARRANTS REPRESENTED HEREBY NOR THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THE WARRANTS HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED ('1933 ACT'), AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT
WITH RESPECT THERETO IS DECLARED EFFECTIVE UNDER SUCH ACT OR THE COMPANY
RECEIVES AN OPINION OF COUNSEL TO THE COMPANY THAT AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE.
THIS CERTIFIES THAT (hereinafter
sometimes called the 'Holder'), is entitled, upon the exercise of the warrants
represented hereby, to purchase from Harvey Electronics, Inc., a New York
corporation (the 'Company'), at the price and during the period hereinafter
specified, up to shares of the Company's common stock, $.01 par value (the
'Common Stock').
The Warrants, which are being issued in connection with a modification of
outstanding preferred stock of the Company, are subject to adjustment in
accordance with Paragraph 6 of this Certificate.
1. a. The rights represented by the Warrants shall be
exercisable for a period of three (3) years, commencing two years from the
effective date of the Company's anticipated registered public offering (the
'Exercise Period') at a purchase price of $5.50 per share (the 'Exercise
Price'), subject to adjustment in accordance with Paragraph 6. Upon the
expiration of the exercise period, the Holder shall have no right to
purchase any shares of Common Stock underlying the Warrants.
b. Notwithstanding anything herein contained to the
contrary, the Company and the Holder agree that if a redeemable common
stock purchase warrant is included in the registration statement for the
Company's proposed public offering and the terms and conditions of such
warrants are not identical to the terms and conditions of the Warrants, the
Warrants will be modified upon the closing of such proposed public offering
to conform exactly to the terms and conditions of the public warrants
offered pursuant to such Registration Statement. In such event, the Holder
will surrender this Certificate and the Company will cause to be issued
warrants in identical form to the redeemable common stock purchase warrant.
In such event however the Warrants, and the shares of the Common Stock
underlying the Warrants, will not be registered under the 1933 Act and the
warrant certificate shall bear an appropriate legend.
2. The rights represented by the Warrants may be exercised at any time
within the Exercise Period above specified, in whole or in part, by (i) the
surrender of this Certificate (with the exercise form at the end hereof
properly executed) at the principal executive office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books
of the Company); and (ii) payment to the Company of the Exercise Price then
in effect for the number of shares of Common Stock specified in the
above-mentioned exercise form together with applicable stock transfer
taxes, if any. The Warrants shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Certificate is surrendered and payment is made in
accordance with the foregoing provisions of this Paragraph 2, and the
person or persons in whose name or names the certificates for shares of
Common Stock shall be issuable upon such exercise shall become the holder
or holders of record of such shares of Common Stock at that time and date.
The certificate or certificates
<PAGE>
for the shares of Common Stock so purchased shall be delivered to such
person or persons within a reasonable time, not exceeding ten (10) days,
after the Warrants shall have been exercised.
3. Neither the Warrants nor the shares of Common Stock issuable upon
exercise hereof have been registered under the 1933 Act nor under any state
securities law and shall not be transferred, sold, assigned or hypothecated
in violation thereof. If permitted by the foregoing, any such transfer,
sale, assignment or hypothecation shall be effected by the Holder
surrendering the Warrants for cancellation at the office or agency of the
Company referred to in Paragraph 2 hereof, accompanied by an opinion of
counsel satisfactory to the Company and its counsel, stating that such
transferee is a permitted transferee under this Paragraph 3 and that such
transfer does not violate the 1933 Act or such state securities laws.
4. The Company covenants and agrees that all shares of Common Stock
which may be issued upon exercise of the Warrants will, upon issuance, be
duly and validly issued, fully paid and nonassessable. The Company further
covenants and agrees that during the Exercise Period, the Company will at
all times have authorized and reserved a sufficient number of shares of its
Common Stock solely for the purpose of issuance upon the exercise of the
Warrants.
5. The Warrants, by itself as distinguished from the Common Stock
issuable hereunder, shall not entitle the Holder to any rights, including,
without limitation, voting rights, as a stockholder of the Company.
6. The Exercise Price and Exercise Period in effect at any time and
the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the
happening of certain events as follows:
a. If the Company shall (i) declare a dividend or make a distribution
on its outstanding shares of Common Stock in shares of Common Stock, (ii)
subdivide or reclassify its outstanding shares of Common Stock into a
greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price
in effect at the time of the effective date or record date, as the case may
be, for such sale, dividend or distribution or of the effective date of
such subdivision, combination or reclassification shall be adjusted so that
it shall equal the price determined by multiplying the Exercise Price by a
fraction, the denominator of which shall be the number of shares of Common
Stock outstanding after giving effect to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action.
b. Whenever the Exercise Price payable upon exercise of the Warrants
is adjusted pursuant to Paragraph 6a. above, the number of shares of Common
Stock purchasable upon exercise of the Warrants shall simultaneously be
adjusted by multiplying the number of shares of Common Stock initially
issuable upon exercise of the Warrants by the Exercise Price in effect on
the date hereof and dividing the product so obtained by the Exercise Price,
as adjusted.
c. Notwithstanding any adjustment in the Exercise Price or the number
or kind of shares of Common Stock purchasable upon the exercise of the
Warrants, certificates for Warrants issued prior or subsequent to such
adjustment may continue to express the same price and number and kind of
shares of Common Stock as are initially issuable pursuant to the Warrants.
d. The Company may, but under no circumstances is obligated to, modify
the terms of the Warrants to provide for an earlier commencement of the
Exercise Period, or to extend the Exercise Period or to lower the Exercise
Price, at any time prior to the expiration of the Warrants.
7. In case of any consolidation of the Company with, or merger of the
Company with, or merger of the Company into, another corporation (other
than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and
deliver to the Holder a supplemental warrant agreement providing that the
Holder of the Warrants then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Warrants) to receive, upon
exercise of such Warrants, the kind and amount of shares of Common Stock
and other securities and property receivable upon such consolidation or
merger, by a holder of the number of shares of Common Stock of the Company
for which such warrants might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant
agreement shall provide for
<PAGE>
adjustments which shall be identical to the adjustments provided in Section
6 hereof. The above provision of this subsection shall similarly apply to
successive consolidations or mergers.
8. The Company shall not be required to issue certificates
representing fractions of shares of Common Stock upon the exercise of the
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock or other securities,
properties or rights as the case may be.
9. The Company shall at all times reserve and keep available out of
its authorized shares of Common Stock, such number of shares sufficient for
issuance upon the exercise of the Warrants.
10. If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any
other provision of this Agreement.
11. This Agreement shall be governed by and in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, HARVEY ELECTRONICS, INC. has caused this Certificate to
be signed by its duly authorized officer as of the date set forth on the first
page hereof.
HARVEY ELECTRONICS, INC.
By:
------------------------------------
Franklin C. Karp
President
<PAGE>
EXERCISE FORM
TO BE EXECUTED BY THE HOLDER
IN ORDER TO EXERCISE WARRANTS
The undersigned Holder hereby irrevocably elects to exercise the Warrants
and to purchase _____ shares of the Company's Common Stock issuable upon the
exercise of such Warrants, and requests that certificates for such securities
shall be issued in name of:
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
(please print or type name and address)
___________________________________________________________________________
(please insert social security or other identifying number)
and be delivered:
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
(please print or type name and address)
___________________________________________________________________________
(please insert social security or other identifying number)
and if such number of shares of Common Stock shall not be all the shares
evidenced by this Warrant Certificate, that a new warrant certificate for the
balance of such shares be registered in the name of, and delivered to, the
Holder.
_______________________________________
(Please sign here)
<PAGE>
HARVEY ELECTRONICS, INC.
STOCK OPTION PLAN
1. Purpose.
This Stock Option Plan (the "Plan") is intended to encourage stock
ownership by employees of Harvey Electronics, Inc. ("Corporation"), its
divisions and Subsidiary Corporations, so that they may acquire or increase
their proprietary interest in the Corporation, and to encourage such employees
and directors to remain in the employ of the Corporation and to put forth
maximum efforts for the success of the business. It is further intended that
options granted by the Administrators pursuant to Section 6 of this Plan shall
constitute "incentive stock options" ("Incentive Stock Options") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder ("Code"), and options granted by the Administrators
pursuant to Section 7 of this Plan shall constitute "non-qualified stock
options" ("Non-qualified Stock Options"). Options granted under the Plan
("Options") may be accompanied by either stock appreciation rights ("Rights") or
limited stock appreciation rights ("Limited Rights"), or both, as hereinafter
set forth.
2. Definitions.
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "DISABILITY" shall mean an Optionee's inability to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or that
has lasted or can be expected to last for a continuous period of not less than
twelve (12) months.
(b) "FAIR MARKET VALUE" per share as of a particular date
shall mean (i) the closing sales price per share of Common Stock on a national
securities exchange for the last preceding date on which there was a sale of
such Common Stock on such exchange, or (ii) if the shares of Common Stock are
then traded on an over-the-counter market, the average of the closing bid and
asked prices for the shares of Common Stock in such over-the-counter market for
the last preceding date on which there was a sale of such Common Stock in such
market, or (iii) if the shares of Common Stock are not then listed on a national
securities exchange or traded in an over-the-counter market, such value as the
Administrators in their discretion may determine.
(c) "PARENT CORPORATION" shall mean any corporation (other
than the Corporation) in an unbroken chain of corporations ending with the
employer corporation if, at the time of granting an Option, each of the
corporations other than the employer corporation owns stock possessing fifty
(50%) percent or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
<PAGE>
(d) "SUBSIDIARY CORPORATION" shall mean any corporation (other
than the Corporation) in an unbroken chain of corporations beginning with the
employer corporation if, at the time of granting an Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
(e) "TEN PERCENT STOCKHOLDER" shall mean an Optionee who, at
the time an Incentive Stock Option is granted, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Corporation or of its Parent or Subsidiary Corporations.
3. Administration.
The Plan shall be administered by the Board of Directors of the
Corporation (the "Board") or the Stock Option and Compensation Committee of the
Board of Directors, or such other Committee of directors as the Board may
establish or designate (each, the "Committee"). The Committee is to be composed
of not less than two members, all of whom must be "non-employee directors"
within the meaning of Rule 16b-3 ("Rule 16b-3") promulgated under Section 16 of
the Securities Exchange Act of 1934 as amended (the "Act"). Except as may
otherwise be provided in the By-Laws or resolutions of the Board, a majority of
the members of the Committee shall constitute a quorum and the acts of a
majority of the members at any meeting at which a quorum is present, and any
acts approved in writing by all members of the Committee without a meeting,
shall be the acts of the Committee. Those administering the Plan from time to
time are referred to herein as the "Administrators."
The Administrators shall have the authority in their discretion,
subject to and not inconsistent with the express provisions of the Plan, to
administer the Plan and to exercise all the powers and authorities either
specifically granted to them under the Plan or necessary or advisable in the
administration of the Plan, including, without limitation, the authority to
grant Options; to determine which Options shall constitute Incentive Stock
Options and which Options shall constitute Non-qualified Stock Options; to
determine which Options (if any) shall be accompanied by Rights or Limited
Rights; to determine the purchase price of the shares of Common Stock covered by
each Option (the "Option Price"); to determine the persons to whom, and the time
or times at which, Options shall be granted; to determine the number of shares
to be covered by each Option; to interpret the Plan; to prescribe, amend and
rescind rules and regulations relating to the Plan; to determine the terms and
provisions of the Option Agreements (which need not be identical) entered into
in connection with Options granted under the Plan; and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The Administrators may delegate or to one or more agents such administrative
duties as they may deem advisable, and the Administrators or any person to whom
they have delegated duties as aforesaid may employ one or more persons to render
advice with respect to any responsibility the Administrators or such person may
have under the Plan.
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<PAGE>
The Board may from time to time appoint additional Administrators and
substitute others. An Administrator shall be selected by the Board as chairman.
The Administrators shall hold their meetings at such times and places as they
shall deem advisable. All determinations of the Administrators shall be made by
a majority of the Administrators either present in person or participating by
conference telephone at any meeting or by written consent. The Administrators
may appoint a secretary and make such rule and regulations for the conduct of
their business as they shall deem advisable, and shall keep minutes of their
meetings.
No Administrator shall be liable for any action taken or determination
made in good faith with respect to the Plan or any Option, Right or Limited
Right granted hereunder.
4. Eligibility; Maximum Number
Options may be granted to employees (including, without limitation,
officers and directors who are employees) of the Corporation or its present or
future divisions and Subsidiary Corporations. In determining the persons to whom
Options shall be granted and the number of shares to be covered by each Option
and any accompanying Rights or Limited Rights, the Administrators shall take
into account the duties of the respective persons, their present and potential
contributions to the success of the Corporation and such other factors as the
Administrators shall deem relevant in connection with accomplishing the purpose
of the Plan. A person to whom an Option has been granted hereunder is sometimes
referred to herein as an "Optionee."
An Optionee shall be eligible to receive more than one grant of an
Option during the term of the Plan, but only on the terms and subject to the
restrictions hereinafter set forth.
The maximum aggregate number of shares of Common Stock as to which
Options, Rights and Limited Rights may be granted under the Plan to any Optionee
during any fiscal year of the Corporation is 50,000.
5. Stock
The stock subject to Options, Rights and Limited Rights hereunder shall
be shares of the Corporation's Common Stock, par value of $.01 per share
("Common Stock"). Such shares may, in whole or in part, be authorized but
unissued shares or shares that shall have been or that may be reacquired by the
Corporation. The aggregate number of shares of Common Stock as to which Options,
Rights and Limited Rights may be granted from time to time under the Plan shall
not exceed 1,000,000. The limitation established by the preceding sentence shall
be subject to adjustment as provided in Section 8(i) hereof.
In the event that any outstanding Option under the Plan for any reason
expires or is terminated without having been exercised in full or surrendered in
full in connection with the exercise of a Right or Limited Right, the shares of
Common Stock allocable to the unexercised
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<PAGE>
portion of such Option shall (unless the Plan shall have been terminated) become
available for subsequent grants of Options, Rights and Limited Rights under the
Plan.
-4-
<PAGE>
6. Incentive Stock Options.
Options granted pursuant to this Section 6 are intended to constitute
Incentive Stock Options and shall be subject to the following special terms and
conditions, in addition to the general terms and conditions specified in Section
8 hereof.
(a) VALUE OF SHARES. In the event that the aggregate Fair
Market Value (determined as of the date the Incentive Stock Option is granted)
of the shares of Common Stock with respect to which Options granted under this
Plan and all other option plans of the Corporation and any Subsidiary
Corporation become exercisable for the first time by an Optionee during any
calendar year exceeds $100,000, Options granted in excess of such limit shall
constitute Non-qualified Stock Options for all purposes.
(b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock
Option granted to a Ten Percent Stockholder, (i) the Option Price shall not be
less than one hundred ten percent (110%) of the Fair Market Value of the shares
of Common Stock of the Corporation on the date of grant of such Incentive Stock
Option, and (ii) the exercise period shall not exceed five (5) years from the
date of grant of such Incentive Stock Option.
7. Non-qualified Stock Options.
Options granted pursuant to this Section 7 are intended to constitute
Non-qualified Stock Options and shall be subject only to the general terms and
conditions specified in Section 8 hereof.
8. Terms and Conditions of Options.
Each Option granted pursuant to the Plan shall be evidenced by a
written Option Agreement between the Corporation and the Optionee, which
agreement shall comply with and be subject to the following terms and
conditions:
(a) NUMBER OF SHARES. Each Option Agreement shall state the
number of shares of Common Stock to which the Option relates.
(b) TYPE OF OPTION. Each Option Agreement shall specifically
identify the portion, if any, of the Option which constitutes an Incentive Stock
Option and the portion, if any, which constitutes a Non-qualified Stock Option.
(c) OPTION PRICE. Each Option Agreement shall state the Option
Price, which, in the case of Incentive Stock Options, shall not be less than one
hundred percent (100%) of the Fair Market Value of the shares of Common Stock of
the Corporation on the date of grant of the Option. The Option Price shall be
subject to adjustment as provided in Section 8(i) hereof. The date on which the
Administrators adopt a resolution expressly granting an Option shall be
considered the day on which such Option is granted.
-5-
<PAGE>
(d) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid
in full, at the time of exercise, in cash or in shares of Common Stock having a
Fair Market Value equal to such Option Price or in a combination of cash and
such shares, and may be effected in whole or in part (i) with monies received
from the Corporation at the time of exercise as a compensatory cash payment, or
(ii) with monies borrowed from the Corporation pursuant to repayment terms and
conditions as shall be determined from time to time by the Administrators, in
their discretion, separately with respect to each exercise of Options and each
Optionee; provided, however, that each such method and time for payment and each
such borrowing and terms and conditions of repayment shall be permitted by and
be in compliance with applicable law, and provided, further, in the event the
Option Price is paid with monies borrowed from the Corporation, such fact shall
be noted conspicuously on the certificate for such shares in accordance with
applicable law.
(e) TERM AND EXERCISE OF OPTIONS. Options shall be exercisable
over the exercise period as and at the times and upon the conditions that the
Administrators may determine, as reflected in the Option Agreement; provided,
however, that the Administrators shall have the authority to accelerate the
exercisability of any outstanding Option at such time and under such
circumstances as they, in their sole discretion, deem appropriate. The exercise
period shall be determined by the Administrators; provided, however that in the
case of an Incentive Stock Option such exercise period shall not exceed ten (10)
years from the date of grant of such Option. The exercise period shall be
subject to earlier termination as provided in Sections 8(f) and 8(g) hereof. An
Option may be exercised, as to any or all full shares of Common Stock as to
which the Option has become exercisable, by giving written notice of such
exercise to the Administrators; provided, however, that an Option may not be
exercised at any one time as to fewer than 100 shares (or such number of shares
as to which the Option is then exercisable if such number of shares is less than
100).
(f) TERMINATION. Except as provided in this Section 8(f) and
in Section 8(g) hereof, an Option may not be exercised unless the Optionee is
then in the employ of the Corporation or a division or subsidiary Corporation
thereof (or a corporation or a Parent or subsidiary Corporation of such
corporation issuing or assuming the Option in a transaction to which Section 425
(a) of the Code applies), and unless the Optionee has remained continuously so
employed since the date of grant of the Option. In the event that the employment
of an Optionee shall terminate (other than by reason of death, disability or
retirement), all Options of such Optionee that are exercisable at the time of
such termination may, unless earlier terminated in accordance with their terms,
be exercised within three (3) months after such termination; provided, however,
that if the employment of an Optionee shall terminate for cause, all Options
theretofore granted to such Optionee shall, to the extent not theretofore
exercised, terminate forthwith. Nothing in the Plan or in any Option granted
pursuant hereto shall confer upon an individual any right to continue in the
employ of the Corporation or any of its divisions or Subsidiary Corporations or
interfere in any way with the right of the Corporation or any such division or
Subsidiary Corporation to terminate such employment.
-6-
<PAGE>
(g) DEATH, DISABILITY OR RETIREMENT OF OPTIONEE. If an
Optionee shall die while employed by the Corporation or a Subsidiary
Corporation, or within three (3) months after the termination of such Optionee's
employment, other than for cause, or if the Optionee's 5 employment shall
terminate by reason of Disability or retirement, all Options theretofore granted
to such Optionee (to the extent otherwise exercisable) may, unless earlier
terminated in accordance with their terms, be exercised by the Optionee or by
the Optionee's 5 estate or by a person who acquired the right to exercise such
Option by bequest or inheritance or otherwise by reason of the death or
Disability of the Optionee, at any time within one year after the date of death,
Disability or retirement of the Optionee.
(h) NON-TRANSFERABILITY OF OPTIONS. Option granted under the
Plan shall not be transferable otherwise than by will or by the laws of descent
and distribution, and Options may be exercised, during the lifetime of the
Optionee, only by the Optionee or by his guardian or legal representative.
(i) EFFECT OF CERTAIN CHANGES.
(1) If there is any change in the number of shares of
Common Stock through the declaration of stock dividends, or through
recapitalization resulting in stock splits or reverse stock splits, or
combinations or exchanges of such shares, the number of shares of Common Stock
available for Options, Rights and Limited Rights, the number of such shares
covered by outstanding Options, Rights and Limited Rights, and the price per
share of such Options or the applicable market value of Rights or Limited
Rights, shall be proportionately adjusted by the Administrators to reflect any
increase or decrease in the number of issued shares of Common Stock; provided,
however, that any fractional shares resulting from such adjustment shall be
eliminated.
(2) In the event of the proposed dissolution or
liquidation of the Corporation, in the event of any corporate separation or
division, including, but not limited to, split-up, split-off or spin-off, or in
the event of a merger or consolidation of the Corporation with another
corporation, the Administrators may provide that the holder of each Option then
exercisable shall have the right to exercise such Option (at its then Option
Price) solely for the kind and amount of shares of stock and other securities,
property, cash or any combination thereof receivable upon such dissolution,
liquidation, or corporate separation or division, or merger or consolidation by
a holder of the number of shares of Common Stock for which such Option might
have been exercised immediately prior to such dissolution, liquidation, or
corporate separation or division, or merger of consolidation; or the
Administrators may provide, in the alternative, that each Option granted under
the Plan shall terminate as of a date to be fixed by the Administrators;
provided, however, that not less than thirty (30) days' written notice of the
date so fixed shall be given to each Optionee, who shall have the right, during
the period of thirty (30) days preceding such termination, to exercise the
Options as to all or any part of the shares of Common Stock covered thereby,
including shares as to which such Options would not otherwise be exercisable;
provided, further, that failure to provide such notice shall not invalidate or
affect the action with respect to which such notice was required.
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<PAGE>
(3) If while unexercised Options remain outstanding
under the Plan --
(A) any corporation, person or other entity
(other than the Corporation) makes a tender or exchange offer for shares of the
Corporation Common Stock pursuant to which purchases are made ("Offer"), or
(B) the stockholders of the Corporation
approve a definitive agreement to merge or consolidate the Corporation with or
into another corporation or to sell or otherwise dispose of all or substantially
all of its assets, or adopt a plan of liquidation, or
(C) the "beneficial ownership" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") of securities representing more than 30% of the combined voting
power of the Corporation is acquired by any "person" as defined in sections
13(d) and 14(d) of the Exchange Act, or
(D) during any period of two consecutive
years, individuals who at the beginning of such period were members of the Board
cease for any reason to constitute at least a majority thereof (unless the
election, or the nomination for election by the Corporation's stockholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of such period),
then from and after the date of the first purchase of Common Stock pursuant to
such Offer, or the date of any such stockholder approval or adoption, or the
date on which public announcement of the acquisition of such percentage shall
have been made, or the date on which the change in the composition of the Board
set forth above shall have occurred, whichever is applicable (the applicable
date being referred to herein as the "Acceleration Date"), all Options shall be
exercisable in full, whether or not otherwise exercisable. Following the
Acceleration Date, (a) the Administrators shall, in the case of a merger,
consolidation or sale or disposition of assets, promptly make an appropriate
adjustment to the number and class of shares of Common Stock available for
Options, and to the amount and kind of shares or other securities or property
receivable upon exercise of any outstanding Options after the effective date of
such transaction, and the price thereof, and (b) the Administrators shall cancel
all outstanding Options in exchange for a cash payment in an amount per share
subject to any such Option equal to the amount that would be payable pursuant to
Section 10(b) hereof upon exercise of a Limited Right under those circumstances,
subject to such terms and conditions as the Administrators may determine.
(4) Paragraphs (2) and (3) of this Section 8(i) shall
not apply to a merger or consolidation in which the Corporation is the surviving
corporation and shares of Common Stock are not converted into or exchanged for
stock, securities of any other corporation, cash or any other thing of value.
Notwithstanding the preceding sentence, in case of any consolidation or merger
of another corporation into the Corporation in which the Corporation is the
surviving corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common
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<PAGE>
Stock (other than a change in par value, or from par value to no par value, or
as a result of a subdivision or combination, but including any change in such
shares into two or more classes or series of shares), the Administrators may
provide that the holder of each Option then exercisable shall have the right to
exercise such Option solely for the kind and amount of shares of stock and other
securities (including those of any new direct or indirect parent of the
Corporation), property, cash or any combination thereof receivable upon such
reclassification, change, consolidation or merger by the holder of the number of
shares of Common Stock for which such Option might have been exercised.
(5) In the event of a change in the Common Stock of
the Corporation as presently constituted, which is limited to a change of all of
its authorized shares with par value into the same number of shares with a
different par value or without par value, the shares resulting from any such
change shall be deemed to be the Common Stock within the meaning of the Plan.
(6) To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments shall be made
by the Administrators, whose determination in that respect shall be final,
binding and conclusive, provided that each Incentive Stock Option granted
pursuant to this Plan shall not be adjusted in a manner that causes such option
to fail to continue to qualify as an Incentive Stock Option within the meaning
of Section 422 of the Code.
(7) Except as hereinbefore expressly provided in this
Section 8(i), the Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class or by reason of any dissolution, liquidation, merger, or consolidation
or spin-off of assets or stock of another corporation; and any issue by the
Corporation of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to the Option. The grant of an Option pursuant to the Plan shall
not affect in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structures or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or part of its business or assets.
(j) RIGHTS AS STOCKHOLDER. An Optionee or a transferee of an
Option shall have no rights as a stockholder with respect to any shares covered
by the Option until the date of the issuance of a stock certificate to him for
such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distribution of
other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 8(i) hereof.
(k) OTHER PROVISIONS. The Option Agreements authorized under
the Plan shall contain such other provisions, including, without limitation, (i)
the granting of either Rights
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<PAGE>
or Limited Rights, or both, (ii) the imposition of restrictions upon the
exercise of an Option, and (iii) in the case of an Incentive Stock Option, the
inclusion of any condition not inconsistent with such Option qualifying as an
Incentive Stock Option, as the Administrators shall deem advisable.
9. Stock Appreciation Rights.
(a) The Administrators shall have authority to grant Rights to
the holder of any Option granted under the Plan (the "Related SAR Option") with
respect to all or some of the shares of Stock covered by such Related SAR
Option. A Right may be granted either at the time of the grant of the Related
SAR Option or any time thereafter during its term (except as otherwise provided
in Section 12 hereof). Each Right shall be exercisable only if, and to the
extent that, the Related SAR Option is exercisable and, in the case of Rights
granted in respect of Incentive Stock Options, only when the Fair Market Value
per share of Common Stock exceeds the Option Price per share. Upon the exercise
of a Right, the Related SAR Option shall cease to be exercisable to the extent
of the shares of Common Stock with respect to which such Right is exercised, but
shall be considered to have been exercised to that extent for purposes of
determining the number of shares available for the grant of further Options,
Rights and Limited Rights pursuant to the Plan. Upon the exercise or termination
of a Related SAR Option, the Right with respect to such Related SAR Option shall
terminate to the extent of the shares of Common Stock with respect to which the
Related SAR Option was exercised or terminated.
(b) Upon the exercise of a Right, the holder thereof, subject
to Paragraph (e) of this Section 9, shall be entitled at the holder's election
to receive either --
(i) that number of shares of Common Stock equal to
the quotient computed by dividing the Spread (as defined in Paragraph (c)
hereof) by the Fair Market Value per share of Common stock on the date of
exercise of the Right; provided, however, that in lieu of fractional shares, the
Corporation shall pay cash equal to the same fraction of the Fair Market Value
per share of Common Stock on the date of exercise of the Right, or
(ii) an amount in cash equal to the Spread, or
(iii) a combination of cash and a number of shares
calculated as provided in clause (10 of this Paragraph (b) (after reducing the
Spread by such cash amount), plus cash in lieu of any fractional shares as above
provided.
(c) The term "Spread" as used in this Section 9 shall mean an
amount equal to the product computed by multiplying (i) the excess of (A) the
Fair Market Value per share of Common Stock on the date the Right is exercised
over (B) the Option Price per share at which the Related SAR Option is
exercisable, by (ii) the number of shares with respect to which such Right is
exercised.
[(d) Notwithstanding the provisions of this Section 9, a Right
granted to a holder who is subject to the reporting requirements of Section
16(a) of the Exchange Act may
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<PAGE>
not be exercised until the expiration of six (6) months from the date of grant
of such Right unless, prior to the expiration of such six (6) month period, the
holder of such Right ceases to be an employee of the Corporation or a division
or subsidiary Corporation thereof by reason of such holder's death or
disability.]
(e) Notwithstanding the provisions in Paragraph (b) in this
Section 9, the Administrators shall have sole discretion to consent to or
disapprove an election to receive cash in whole or in part ("Cash Election")
upon the exercise of a Right. A Cash Election and related exercise may be made
only during the period beginning on the third business day following the date of
release for publication of the quarterly and annual summary statements of sales
and earnings of the Corporation and ending on the 12th business day following
such date.
(f) A Right may be granted to an Optionee irrespective of
whether such Optionee is being granted or has been granted a Limited Right.
(g) A Right shall not be transferable except by will or by the
laws of descent and distribution. During the lifetime of an Optionee, the Right
shall be exercisable only by such Optionee or by the Optionee's guardian or
legal representative.
(h) Each Right shall be granted on such terms and conditions
not inconsistent with the Plan as the Administrators may determine.
(i) To exercise a Right, the Optionee shall (i) give written
notice thereof to the Administrators in form satisfactory to the Administrators
specifying (A) the number of shares of Common Stock with respect to which the
Right is being exercised and (B) the amount the Optionee elects to receive in
cash and shares of Common Stock with respect to the exercise of the Right, and
(ii) if requested by the Administrators, deliver the Option Agreement to the
Administrators, who shall endorse thereon a notation of such exercise and return
the Option Agreement to the Optionee. The date of exercise of a Right that is
validly exercised shall be deemed to be the date on which there shall have been
delivered the instruments referred to in the first sentence of this Paragraph
(i).
(j) The Corporation intends that this Section 9 shall comply
with the requirements of Rule 16b-3 and any future rules promulgated in
substitution therefor (the "Rule") under the Act during the term of the Plan.
Should any provision of this Section 9 not be necessary to comply with the
requirements of the Rule, the Board may amend the Plan to add to or modify the
provisions of the Plan accordingly.
10. Limited Stock Appreciation Rights.
(a) The Administrators shall have authority to grant a Limited
Right to the holder of any Option granted under the Plan (referred to herein as
the "Related LSAR Option") with respect to all or some of the shares of Common
Stock covered by such Related LSAR Option. A Limited Right may be granted either
at the time of grant of the Related LSAR Option
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<PAGE>
or any time thereafter during its term (except as otherwise provided in Section
12 hereof). A Limited right may be exercised only during the sixty-day period
beginning on an "Acceleration Date" (as defined in Section 8(i) (3) hereof).
Each Limited Right shall be exercisable only if, and to the extent that, the
Related LSAR Option is exercisable and, in the case of a Limited Right granted
in respect of an Incentive Stock Option, only when the Fair Market Value per
share of Common Stock exceeds the Option Price per share. [Notwithstanding the
provisions of the two immediately preceding sentences, no Limited Right may be
exercised until the expiration of six (6) months from the date of grant of the
Limited Right unless, prior to the expiration of such six (6) month period, the
holder of such Limited Right ceases to be an employee of the Corporation or a
division or Subsidiary Corporation thereof by reason of such holder's death or
disability.] Upon the exercise of a Limited Right, the Related LSAR Option shall
cease to be exercisable to the extent of the shares of Common stock with respect
to which such Limited Right is exercised, but shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock available for the grant of further Options, Rights and Limited
Rights pursuant to this Plan. Upon the exercise or termination of a Related LSAR
Option, the Limited Right with respect to such Related LSAR Option shall.
terminate to the extent of the shares of Common Stock with respect to which the
Related LSAR Option was exercised or terminated.
(b) Upon the exercise of a Limited Right, the holder thereof
shall receive in cash whichever or the following amounts is applicable:
(i) in the case of an exercise of Limited Rights by
reason of the occurrence of an Offer (as defined in Section 8(i) (3) (i)
hereof), an amount equal to the Offer Spread (as defined in Section 10(d)
hereof);
(ii) in the case of an exercise of Limited Rights by
reason of stockholder approval for an agreement described in Section 8(i) (3)
(ii), an amount equal to the Merger Spread (as defined in Section 10 (f) hereof)
(iii)in the case of an exercise of Limited Rights by
reason of an acquisition of Common Stock described in Section 8(i) (3) (iii), an
amount equal to the Acquisition Spread (as defined in Section 10(h) hereof); or
(iv)in the case of an exercise of Limited Rights by
reason of the change in composition of the Board of Directors described in
Section 8(i) (3) (iv), an amount equal to the Spread (as defined in Section
10(i) hereof).
Notwithstanding the foregoing provisions of this Section 10 (b), in the
case of a Limited Right granted in respect of an Incentive Stock Option, the
holder may not receive an amount in excess of the maximum amount that will
enable such option to continue to qualify as an Incentive Stock Option.
-12-
<PAGE>
(c) The term "Offer Price per Share" as used in this Section
10 shall mean, with respect to the exercise of any Limited Right by reason of
the occurrence of an Offer, the greater of (i) the highest price per share of
Common Stock paid in any Offer, which offer is in effect at any time during the
sixty-day period ending on the date on which such Limited Right is exercised, or
(ii) the highest Fair Market Value per share of the Common Stock during such
sixty-day period. Any securities or property that are part or all of the
consideration paid for shares of Common Stock in the Offer shall be valued in
determining the Offer Price per Share at the higher of (a) the valuation placed
on such securities or property by the corporation, person or other entity making
such Offer or (b) the valuation placed on such securities or property by the
Administrators.
(d) The term "Offer Spread" as used in this Section 10 shall
mean an amount equal to the product computed by multiplying (i) the excess of
(A) the Offer Price per Share over (B) the Option Price per share of Common
Stock at which the Related LSAR Option is exercisable, by (ii) the number of
shares of Common Stock with respect to which such Limited Right is being
exercised.
(e) The term "Merger Price per Share" as used in this Section
10 shall mean, with respect to the exercise of any Limited Right by reason of
stockholder approval of an agreement described in Section 8(i) (3) (ii), the
greater of (i) the fixed or formula price for the acquisition of shares of
Common Stock specified in such agreement, if such fixed or formula price is
determinable on the date on which such Limited Right is exercised, and (ii) the
highest Fair Market Value per share of Common Stock during the sixty-day period
ending on the date on which such Limited Right is exercised.
(f) The term "Merger Spread" as used in this Section 10 shall
mean an amount equal to the product computed by multiplying (i) the excess of
(A) the Merger Price per Share over (B) the Option Price per share of Common
Stock at which the Related LSAR Option is exercisable, by (ii) the number of
shares of Common Stock with respect to which such Limited Right is being
exercised.
(g) The term "Acquisition Price per Share" as used in this
Section 10 shall mean, with respect to the exercise of any Limited Right by
reason of an acquisition of Common Stock described in Section 8(i) (3) (iii),
the greater of (i) the highest price per share shown on the Statement of
Schedule 13D or amendment thereto filed by the holder of 30% or more of the
Corporation's Common Stock which gives rise to the exercise of such Limited
Right, and (ii) the highest Fair Market Value per share of Common Stock during
the sixty-day period ending on the date the Limited Right is exercised.
(h) The term "Acquisition Spread" as used in this Section 10
shall mean an amount equal to the product computed by multiplying (i) the excess
of (A) the Acquisition Price per Share over (B) the Option Price per share of
Common Stock at which the Related LSAR Option is exercisable, by (ii) the number
of shares of Common Stock with respect to which such Limited Right is being
exercised.
-13-
<PAGE>
(i) The term "Spread" as used in this Section 10 shall mean,
with respect to the exercise of any Limited Right by reason of a change in the
composition of the Board described in Section 8(i) (3) (iv), an amount equal to
the product computed by multiplying (i) the excess of (A) the highest Fair
Market Value per share of Common Stock during the sixty-day period ending on the
date the Limited Right is exercised over (B) the Option Price per share of
Common Stock with respect to which the Limited Right is being exercised.
(j) A Limited Right shall not be transferrable except by will
or by laws of descent and distribution. During the lifetime of an Optionee, the
Limited Right shall be exercisable only by such Optionee or by the Optionee's
guardian or legal representative.
(k) Each Limited Right shall be granted on such terms and
conditions not inconsistent with the Plan as the Administrators may determine.
(l) To exercise a Limited Right, the Optionee shall (i) give
written notice thereof to the Administrators in form satisfactory to the
Administrators specifying the number of shares of Common Stock with respect to
which the Limited Right is being exercised, and (ii) if requested by the
Administrators, deliver the Option Agreement to the Administrators who shall
endorse thereon a notation of such exercise and return the Option Agreement to
the Optionee. The date of exercise of a Limited Right that is validly exercised
shall be deemed to be the date on which there shall have been delivered the
instruments referred to in the first sentence of this Paragraph (1).
(m) The Corporation intends that this Section 10 shall comply
with the requirements of the Rule during the term of the Plan. Should any
provision of this Section 10 not be necessary to comply with the requirements of
the Rule or should any additional provisions be necessary for this Section 10 to
comply with the requirements of the Rule, the Board may amend the Plan to add to
or modify the provisions of the Plan accordingly.
11. Agreement by Optionee Regarding withholding Taxes.
If the Administrators shall so require, as a condition of exercise,
each Optionee shall agree that - -
(a) no later than the date of exercise of any Option, Right or
Limited Right granted hereunder, the Optionee will pay to the Corporation or
make arrangements satisfactory to the Administrators regarding payment of any
federal, state or local taxes of any kind required by law to be withheld upon
the exercise of such Option, Right or Limited Right, and
(b) the Corporation shall, to the extent permitted or required
by law, have the right to deduct federal, state and local taxes of any kind
required by law to be withheld upon the exercise of such Option, Right or
Limited Right from any payment of any kind otherwise due to the Optionee.
-14-
<PAGE>
12. Term of Plan.
Options, Rights and Limited Rights may be granted pursuant to the Plan
from time to time within a period of ten (10) years from the date the Plan is
adopted by the Board, or the date the Plan is approved by the stockholders of
the Corporation, whichever is earlier.
13. Amendment and Termination of the Plan.
The Board at any time and from time to time may suspend, terminate,
modify or amend the Plan; provided, however, that to the extent required by Rule
16b-3 or Section 162 (m), such suspension, termination, modification and
amendment shall be subject to the approval of the holders of a majority of the
Common Stock issued and outstanding. Except as provided in Section 8 hereof, no
suspension, termination, modification or amendment of the Plan may adversely
affect any Option, Right or Limited Right previously granted, unless the written
consent of the Optionee is obtained.
14. INTERPRETATION.
The Plan is designed and intended to comply with Rule 16b-3 and, to the
extent practicable, with Section 162(m) of the Code, and all provisions of the
Plan shall be construed in accordance with such design and intent.
15. Approval of Stockholders.
The Plan shall take effect upon its adoption by the Board of Directors
but shall be subject to the approval of the holders of a majority of the issued
and outstanding shares of Common Stock of the Corporation, which approval must
occur within twelve months after the date the Plan is adopted by the Board.
16. Effect of Headings.
The section and subsection headings contained herein are for
convenience only and shall not affect the construction hereof.
-15-
<PAGE>
April 3, 1997
Mr. Franklin C. Karp
10 Dogwood Avenue
Roslyn Harbor, New York 11576
This letter shall serve as notice of the following agreements between yourself
and Harvey Electronics, Inc. ("Harvey Electronics", "Harvey", or the "Company")
and supersedes all previous agreements.
In the event the Company shall be sold, merged with another company, involved in
a corporate reorganization, or if a change of the current control takes place
(in excess of 50%), and you are terminated or asked to be employed at a position
other than that of Senior Officer requiring similar responsibilities to those
that you currently perform, or if the current corporate office is moved to a new
location which is more than thirty miles from Mineola, New York, as a result of
a reorganization or change in ownership or control, and you decline this new
position or relocation, the Company or its successor in interest shall be
obligated and continue to pay you at the same salary and car allowance you had
most recently been earning, for a period of one year. Additionally, you will be
fully covered under Company's benefit plans, including without limitation, the
Company's medical, dental, life and disability insurance programs during this
one-year period (including family coverage for medical and dental insurance).
Following any termination in the preceding paragraph, should you obtain
employment at a lesser rate than your rate at Harvey (including car allowance),
the Company will pay you the differential between the two salaries for the
remainder of such one year period. Additionally, you will be fully covered under
the Company's benefit plans, including without limitation, the Company's
medical, dental, life and disability insurance programs during this one-year
period (including family coverage for medical and dental insurance).
At no time during your employment as President and Chief Executive Officer with
the Company shall your salary be reduced below its current level of $115,000 per
year plus car allowance.
Harvey Electronics
205 Chubb Avenue
Lyndhurst, NJ 07071
201.842.0078
Fax 201.842.0660
Retailers and custom installers
of the world's finest audio and video systems
<PAGE>
April 3, 1997
Page 2
Should you be terminated for reasons other than the sale, merger, corporate
reorganization or change in current control (in excess of 50%) of the Company or
other than for cause (conduct that is materially injurious to the Company or
conviction of any crime involving moral turpitude), or if you are asked to be
employed at a position lesser than a Senior Officer of the Company requiring
similar responsibilities to those that you currently perform, or the current
corporate office is moved to a new location which is more than thirty miles from
Mineola, New York and you decline this new position or relocation, the Company
shall be obligated and continue to pay you at the same salary you had most
recently been earning for a period of six months. Additionally, you will be
fully covered under the Company's benefit plans, including without limitation,
the Company's medical, dental, life and disability insurance programs during
this six-month period (including family coverage for medical and dental
insurance).
If you should die while any amounts are still due and payable, all such amounts
shall be paid to your spouse or designated beneficiary.
This agreement shall be binding on the Company's successors and assigns.
This agreement has been approved by resolution of the Company's Board of
Directors on April 3, 1997.
By:
------------------------------------
Michael Recca, Chairman of the Board
of Harvey Electronics, Inc.
------------------------------------
Franklin C. Karp
<PAGE>
April 3, 1997
Mr. Joseph J. Calabrese, Jr.
19 Webster Street
Malverne, NY 11565
This letter shall serve as notice of the following agreements between yourself
and Harvey Electronics, Inc. ("Harvey Electronics", "Harvey", or the "Company")
and supersedes all previous agreements.
In the event the Company shall be sold, merged with another company, involved in
a corporate reorganization, or if a change of the current control takes place
(in excess of 50%), and you are terminated or asked to be employed at a position
other than that of Senior Financial Officer requiring similar responsibilities
to those that you currently perform, or if the current corporate office is moved
to a new location which is more than thirty miles from Mineola, New York, as a
result of a reorganization or change in ownership or control, and you decline
this new position or relocation, the Company or its successor in interest shall
be obligated and continue to pay you at the same salary and car allowance you
had most recently been earning, for a period of one year. Additionally, you will
be fully covered under Company's benefit plans, including without limitation,
the Company's medical, dental, life and disability insurance programs during
this one-year period (including family coverage for medical and dental
insurance).
Following any termination in the preceding paragraph, should you obtain
employment at a lesser rate than your rate at Harvey (including car allowance),
the Company will pay you the differential between the two salaries for the
remainder of such one year period. Additionally, you will be fully covered under
the Company's benefit plans, including without limitation, the Company's
medical, dental, life and disability insurance programs during this one-year
period (including family coverage for medical and dental insurance).
At no time during your employment as Executive Vice President of Finance and
Chief Financial Officer with the Company shall your salary be reduced below its
current level of $109,500 per year plus car allowance.
Harvey Electronics
205 Chubb Avenue
Lyndhurst, NJ 07071
201.842.0078
Fax 201.842.0660
Retailers and custom installers
of the world's finest audio and video systems
<PAGE>
April 3, 1997
Page 2
Should you be terminated for reasons other than the sale, merger, corporate
reorganization or change in current control (in excess of 50%) of the Company or
other than for cause (conduct that is materially injurious to the Company or
conviction of any crime involving moral turpitude), or if you are asked to be
employed at a position lesser than a Senior Officer of the Company requiring
similar responsibilities to those that you currently perform, or the current
corporate office is moved to a new location which is more than thirty miles from
Mineola, New York and you decline this new position or relocation, the Company
shall be obligated and continue to pay you at the same salary you had most
recently been earning for a period of six months. Additionally, you will be
fully covered under the Company's benefit plans, including without limitation,
the Company's medical, dental, life and disability insurance programs during
this six-month period (including family coverage for medical and dental
insurance).
If you should die while any amounts are still due and payable, all such amounts
shall be paid to your spouse or designated beneficiary.
This agreement shall be binding on the Company's successors and assigns.
This agreement has been approved by resolution of the Company's Board of
Directors on April 3, 1997.
By:
------------------------------
Franklin C. Karp, President of
Harvey Electronics, Inc.
---------------------------------
Joseph J. Calabrese
<PAGE>
April 3, 1997
Mr. Michael A. Beck
58 Burnham Road
Morris Plains, New Jersey 07950
This letter shall serve as notice of the following agreements between yourself
and Harvey Electronics, Inc. ("Harvey Electronics", "Harvey", or the "Company")
and supersedes all previous agreements.
In the event the Company shall be sold, merged with another company, involved in
a corporate reorganization, or if a change of the current control takes place
(in excess of 50%), and you are terminated or asked to be employed at a
management position other than that requiring similar responsibilities to those
that you currently perform, or if the current corporate office is moved to a new
location which is more than thirty miles from Lyndhurst, New Jersey, as a result
of a reorganization or change in ownership or control, and you decline this new
position or relocation, the Company or its successor in interest shall be
obligated and continue to pay you at the same salary and car allowance you had
most recently been earning, for a period of six months. Additionally, you will
be fully covered under Company's benefit plans, including without limitation,
the Company's medical, dental, life and disability insurance programs during
this six-month period (including family coverage for medical and dental
insurance).
Following any termination in the preceding paragraph, should you obtain
employment at a lesser rate than your rate at Harvey (including car allowance),
the Company will pay you the differential between the two salaries for the
remainder of such six-month period. Additionally, you will be fully covered
under the Company's benefit plans, including without limitation, the Company's
medical, dental, life and disability insurance programs during this six-month
period (including family coverage for medical and dental insurance).
At no time during your employment as Vice President of Operations with the
Company shall your salary be reduced below its current level of $84,000 per year
plus car allowance.
Harvey Electronics
205 Chubb Avenue
Lyndhurst, NJ 07071
201.842.0078
Fax 201.842.0660
Retailers and custom installers
of the world's finest audio and video systems
<PAGE>
April 3, 1997
Page 2
Should you be terminated for reasons other than the sale, merger, corporate
reorganization or change in current control (in excess of 50%) of the Company or
other than for cause (conduct that is materially injurious to the Company or
conviction of any crime involving moral turpitude), or if you are asked to be
employed at a position lesser than a Senior Officer of the Company requiring
similar responsibilities to those that you currently perform, or the current
corporate office is moved to a new location which is more than thirty miles from
Lyndhurst, New Jersey and you decline this new position or relocation, the
Company shall be obligated and continue to pay you at the same salary you had
most recently been earning for a period of three months. Additionally, you will
be fully covered under the Company's benefit plans, including without
limitation, the Company's medical, dental, life and disability insurance
programs during this three-month period (including family coverage for medical
and dental insurance).
If you should die while any amounts are still due and payable, all such amounts
shall be paid to your spouse or designated beneficiary.
This agreement shall be binding on the Company's successors and assigns.
This agreement has been approved by resolution of the Company's Board of
Directors on April 3, 1997.
By:
------------------------------
Franklin C. Karp, President of
Harvey Electronics, Inc.
---------------------------------
Michael A. Beck
<PAGE>
April 3, 1997
Mr. Roland W. Hiemer
228 Alexandria Way
Basking Ridge, New Jersey 07592
This letter shall serve as notice of the following agreements between yourself
and Harvey Electronics, Inc. ("Harvey Electronics", "Harvey", or the "Company")
and supersedes all previous agreements.
In the event the Company shall be sold, merged with another company, involved in
a corporate reorganization, or if a change of the current control takes place
(in excess of 50%), and you are terminated or asked to be employed at a
management position other than that requiring similar responsibilities to those
that you currently perform, or if the current corporate office is moved to a new
location which is more than thirty miles from Lyndhurst, New Jersey, as a result
of a reorganization or change in ownership or control, and you decline this new
position or relocation, the Company or its successor in interest shall be
obligated and continue to pay you at the same salary and car allowance you had
most recently been earning, for a period of six months. Additionally, you will
be fully covered under Company's benefit plans, including without limitation,
the Company's medical, dental, life and disability insurance programs during
this six-month period (including family coverage for medical and dental
insurance).
Following any termination in the preceding paragraph, should you obtain
employment at a lesser rate than your rate at Harvey (including car allowance),
the Company will pay you the differential between the two salaries for the
remainder of such six-month period. Additionally, you will be fully covered
under the Company's benefit plans, including without limitation, the Company's
medical, dental, life and disability insurance programs during this six-month
period.
At no time during your employment as Director of Inventory Management with the
Company shall your salary be reduced below its current level of $60,000 per
year.
Harvey Electronics
205 Chubb Avenue
Lyndhurst, NJ 07071
201.842.0078
Fax 201.842.0660
Retailers and custom installers
of the world's finest audio and video systems
<PAGE>
December 8, 1997
Page 2
Should you be terminated for reasons other than the sale, merger, corporate
reorganization or change in current control (in excess of 50%) of the Company or
other than for cause (conduct that is materially injurious to the Company or
conviction of any crime involving moral turpitude), or if you are asked to be
employed at a position lesser than a Senior Officer of the Company requiring
similar responsibilities to those that you currently perform, or the current
corporate office is moved to a new location which is more than thirty miles from
Lyndhurst, New Jersey and you decline this new position or relocation, the
Company shall be obligated and continue to pay you at the same salary you had
most recently been earning for a period of three months. Additionally, you will
be fully covered under the Company's benefit plans, including without
limitation, the Company's medical, dental, life and disability insurance
programs during this three-month period.
If you should die while any amounts are still due and payable, all such amounts
shall be paid to your spouse or designated beneficiary.
This agreement shall be binding on the Company's successors and assigns.
This agreement has been approved by resolution of the Company's Board of
Directors on April 3, 1997.
By:
------------------------------
Franklin C. Karp, President of
Harvey Electronics, Inc.
---------------------------------
Roy W. Hiemer
<PAGE>
MITSUBISHI
MITSUBISHI ELECTRONICS AMERICA, INC.
DEALER AGREEMENT
THIS AGREEMENT is made and entered into as of the ____/____ day
of_______________, 1996, by and between Mitsubishi Electronics America, Inc., a
Delaware corporation, acting by and through its Consumer Electronics Group, with
its principal office at 6100 Atlantic Blvd., Norcross, Georgia 30071-1305
("MELA"), and
________________________________________________________________________________
(Correct Legal Name)
a_______________________________________________________________________________
(Indicate if corporation, partnership or sole proprietorship)
with its principal office at____________________________________________________
_____________________________________________________________ ("Dealer").
(City) (State) (Zip Code)
WITNESSETH:
WHEREAS, MELA distributes consumer electronics products and accessories
therefor; and
WHEREAS, Dealer desires to sell some of the aforesaid products at retail at
specified locations; and
WHEREAS, Dealer recognized and acknowledges the importance to MELA and its
trademarks and trade names of selling such products only through authorized
dealers which have or acquire specialized skills in promoting and selling such
products and are otherwise able to fully carry out the obligations of a dealer
for such products as hereinafter set forth and only at authorized retail
locations which are fully owned and controlled by Dealer and maintained and
staffed in accordance with the requirements of this Agreement.
NOW, THEREFORE, in consideration of these premises and the mutual covenants
hereinafter set forth, the parties hereby agree as follows:
1. DEFINITIONS.
(A) "Products" means only consumer electronic goods bearing the trademark
MITSUBISHI and/or such other trademarks as are owned or used by MELA.
MELA shall have no obligation to sell all the Products to Dealer. MELA
may select, within MELA's sole discretion, certain Products to be sold
only by certain dealers, which may or may not include Dealer.
(B) "Retail Locations" mean Dealer's retail stores which are fully owned
and controlled by Dealer and located under the store name(s) at the
address(es) set forth in the Schedule of Retail Locations attached
hereto as Exhibit A and as such Schedule may be amended by MELA from
time to time upon notice to Dealer, either upon approval by MELA of
Dealer's notice of its desire for such change pursuant to Section II
hereof or upon MELA's determination that
1
<PAGE>
Dealer has failed to fulfill its obligations under this Agreement with
respect to any Retail Location.
II. APPOINTMENT OF DEALER.
MELA hereby appoints Dealer and Dealer accepts appointment, on a
non-exclusive basis, to promote the retail sale of and sell the Products it
is offered by and purchases from MELA only at the Retail Locations and
otherwise in accordance with the applicable provisions of this Agreement.
Such appointment shall not constitute a grant of any specific territory or
geographical area. Dealer shall give MELA at least three (3) months notice
should it desire MELA to add any additional Retail Location and reasonable
notice should it desire to discontinue any Retail Location.
III. DEALER'S OBLIGATIONS.
(A) Dealer shall have the following obligations under this Agreement:
(1) Dealer shall use its best efforts to promote and sell the
products at retail and to maintain and promote the goodwill of
MELA.
(2) Dealer shall display and sell the Products only from the Retail
Locations and only to bona fide retail customers.
(3) Dealer shall comply with all applicable present and future
federal, state, county and local laws, ordinances and regulations
in connection with its promotion and sale of the Products.
(4) Dealer shall maintain the Retail Locations in an attractive,
clean, orderly and sanitary condition and maintain all of the
fixtures and furnishings therein in good condition and repair.
(5) Dealer shall display and demonstrate the Products in an
attractive and prominent manner and maintain adequate stocks of
and facilities for the Products.
(6) Dealer shall maintain an adequate sales force to carry out its
obligations under this Agreement and train its sales personnel in
connection with the demonstration, use and sale of the Products
so that such personnel will actively inform, advise and assist
retail customers for the Products in manners of Product use,
care, application, installation and service.
(7) Dealer shall maintain current information and records of the
identity, location and telephone numbers of authorized local
service centers with whom MELA has an agreement covering warranty
service of Products. Dealer shall provide such information to
retail customers upon request.
(8) Dealer shall designate and employee to act as Service Liaison to
MELA's Service Department and either provide service to retail
customers or direct them to authorized service centers in such
manner as to eliminate calls by customers to MELA regarding
operation, installation and service.
(9) Dealer shall make prompt payment of all invoices rendered by MELA
to Dealer in accordance with the terms thereof. Dealer shall not
make any deductions or set-offs of any kind from any payments
becoming due to MELA, unless Dealer shall have first received a
credit memorandum form MELA authorizing such deduction.
(10) Dealer shall promptly report to MELA any serious or potentially
serious charge, complaint or claim involving any Product or the
manner of offering or selling any Product.
(11) In accordance with applicable federal law pertaining to consumer
radiation protection, Dealer shall maintain for at least five (5)
years records regarding each Product sold by Dealer identifying
the model and serial number, date of sale and name and address of
the purchaser. Depending upon separate agreement with MELA's
Service Department, Dealer shall either maintain such records at
Dealer's place of business or promptly transmit them to MELA at
least monthly. Dealer shall promptly transmit to MELA all such
records whenever required by law and in the event Dealer
discontinues dealing in the Products.
(B) The following provisions shall also apply under this Agreement:
2
<PAGE>
(1) Notwithstanding the foregoing provisions of this Agreement,
Dealer may sell products to other authorized dealers who have
current dealer agreements with MELA, but only for sale at their
authorized retail locations under such agreements. Dealer shall
in no event be authorized to sell the Prod8ucts to any other
merchant(s) with the intent or for the purpose of resale.
(2) In no event shall Dealer be authorized to sell to or through mail
orders or mail order catalogs, TV shopping networks and/or
on-line services unless Dealer shall have been specifically and
expressly authorized for such sales in writing by MELA, with
MELA's sole discretion. For purposes of this provision , "mail
orders" shall include any sales resulting from advertising
published or broadcast beyond the geographical business service
areas of Dealer's Retail Locations, regardless of whether
"catalogs" are involved.
(3) To qualify for co-op advertising funds and other promotional
allowances which may be offered by MELA, Dealer shall strictly
comply with all applicable, written MELA guidelines, policies and
procedures as shall be in effect from time to time. Failure to
comply with any such guideline, policy and procedure or with any
provision of this Agreement may render Dealer ineligible to
receive all or any portion of such funds or allowances, as
determined by MELA in its discretion. no such funds or allowances
shall be earned until and unless the underlying Products are paid
for in full.
(4) Dealer represents and warrants that all of the information Dealer
provides to MELA or to any third party in connection with its
obligations under this Agreement or the purchase or sale of
Products shall be accurate and complete to the best of Dealer's
knowledge and shall not be false or misleading.
IV. DEALER'S MINIMUM PURCHASE.
(A) Dealer shall order and take delivery of Products for not less than an
aggregate of $100,000 per Retail Location annually. Dealer understands
and agrees that failing to achieve this minimum may result in the
termination of this Agreement by MELA, but achieving it does not
preclude such termination in accordance with Section V(B0 of this
Agreement.
(B) MELA may, at its sole discretion and upon thirty (30) days prior
notice to Dealer, increase such minimum annual purchase for any
succeeding year. Dealer shall notify MELA within thirty (30) days of
such notice in the event Dealer declines to purchase such minimum
amount for the succeeding year, in which case this Agreement shall
automatically expire at the end of its then current term.
(C) Nothing contained in this section shall preclude any separately
designed business plan(s) or quota(s) which may be mutually agreed
upon between Dealer and MELA based on Dealer's specific circumstances
and/or location.
V. TERM AND TERMINATION.
(A) The term of this Agreement shall become effective on the date first
above written and, unless terminated in accordance with Section V(B)
hereof, shall continue in effect until June 30, 1997, after which it
shall automatically expire; provided that MELA may extend the term of
this Agreement for successive one-year terms from July 1 to June 30,
subject to Dealer's concurrence. MELA shall give Dealer notice prior
to each expiration date if it elects to extend the Agreement.
(B) Notwithstanding anything to the contrary contained in this Agreement,
either party may terminate this Agreement, with or without cause, at
any time upon giving the other party notice, such termination to be
effective immediately upon receipt of such notice by such other party
or after any applicable minimum notice as may be required by law under
the circumstances. Grounds for cause shall include, but not be limited
to, (1) non-payment by Dealer of any indebtedness of Dealer to MELA
whether arising by virtue of this Agreement or otherwise when due or
declared due, (2) violation of Subsection III(B)(1) or (2) hereof, (3)
failure to meet or exceed the minimum purchase required under
Subsection IV(A) hereof or other mutually agreed quota(s) or business
plan(s), if applicable, (4) unethical or unlawful practices, (5) a
material change in ownership or control of Dealer or (6) the breach of
any other obligation of Dealer under this Agreement.
3
<PAGE>
(C) Upon termination of this Agreement, MELA shall have the option to
repurchase from Dealer all or any part of Dealer's inventory of
Products at the then prevailing price to Dealer or the price paid
therefor by Dealer, whichever may be the lesser (the "Repurchase
Price"), pursuant to the following procedure:
(1) within five (5) days after the effective date of termination,
Dealer shall submit to MELA a written schedule reflecting all
Products then owned by or in the Possession of Dealer, which
schedule shall identify each Product by model number and shall
indicate the quantity thereof on hand;
(2) within ten (10) days after the receipt of such schedule by MELA,
MELA shall have the right to inspect the inventory reflected on
such schedule;
(3) within twenty (20) days after completion of MELA's inspection of
such inventory or after expiration of the inspection period if no
inspection is conducted, MELA shall give notice of its election
to repurchase all or any part of such inventory;
(4) upon receipt of such notice to repurchase, Dealer shall forthwith
deliver such Products as may be specified therein to a carrier
designated by MELA; and
(5) MELA shall pay the Repurchase Price to the extent such Products
are delivered to MELA in good condition, in the original
packaging, by the issuance to Dealer of a credit corresponding to
the Repurchase Price to be applied to the deduction of any
current indebtedness of Dealer to MELA, and, if the Repurchase
Price shall exceed the indebtedness of Dealer to MELA, by payment
of such excess to Dealer within thirty (30) days after the
deliver of such Products to MELA.
(D) Immediately upon the termination of this Agreement, Dealer shall cease
to represent itself as an authorized Dealer of MELA with respect to
the Products and shall otherwise discontinue all conduct and
activities which might lead the public to believe that Dealer is
authorized by MELA to sell Products. Dealer shall cease to advertise
and shall remove all signs, posters, plaques and the like regarding
the Products and Dealer's relationship with MELA, and Dealer shall
promptly destroy, if so directed by MELA in writing, or otherwise
shall return to MELA's regional salesperson or corporate offices, all
such materials, any postage for which MELA shall reimburse Dealer upon
receipt. Notwithstanding the foregoing provisions of this subsection,
Dealer shall have the right to sell in accordance with the provisions
of this Agreement those Products which shall be in its inventory on
the date of termination and which MELA shall not repurchase pursuant
to the provisions of Subsection V(C) hereof.
(E) Termination of this Agreement _________________owing to MELA (whether
then or thereafter due to MELA) or operate to discharge any liability
that has been incurred by Dealer prior to termination or may be
incurred by Dealer after termination. Except as qualified by the
prece3ding sentence, neither party shall, by reason of the termination
of this Agreement, be liable to the other for loss of business, loss
of profits, loss of goodwill or any other losses, costs, damages or
expenses, whether direct, indirect, special, incidental, consequential
or otherwise, sustained by reason of any such termination.
VI. DEALER'S FINANCIAL CONDITION.
Dealer shall make available to MELA such statements of Dealer's financial
condition as MELA may from time to time request. MELA reserves the right at
all times, either generally or with respect to any specific purchase order
of Dealer, to vary, change or limit the amount or duration of credit to be
allowed to Dealer. MELA shall have the right at any time to require payment
for any Products on a cash-in-advance basis. Dealer shall execute and
deliver to MELA upon request such security agreements, UCC-1's and other
agreements and instruments as MELA may request to convey to MELA a security
interest in all Products purchased by Dealer from MELA, all proceeds
thereof and all receivables and contract rights arising upon the resale
thereof by Dealer.
VII. TERMS OF SALE TO DEALER.
(A) MELA shall, during the term of this Agreement, sell Products to Dealer
solely upon the terms and conditions contained in this Agreement. Any
different terms and conditions which may
4
<PAGE>
be contained in Dealer's purchase order forms or other such writings
are hereby rejected by MELA and shall not be binding upon the parties,
except as to the identification of the Products and the quantities
involved. Prices to dealer shall be in accordance with applicable
price quotations or periodic price sheets issued by MELA and shall be
F.O.B., MELA's shipping point. Prices are subject to change at any
time. Payment terms shall be in accordance with schedules issued by
MELA from time to time and may be modified by MELA on a monthly or
other periodic basis either for dealers generally or as to Dealer
individually.
(B) Title and risk of loss to all Products sold by MELA to Dealer shall
pass to Dealer upon delivery of the Products by MELA to the carrier.
Accordingly, Dealer shall have the responsibility to file any claims
with the carrier. MELA shall, without incurring any liability,
exercise its own discretion in selecting the method of shipment and
the carrier.
(C) Prices do not include, and Dealer shall bear the cost of, any taxes,
levies, duties and fees of any kind, nature or description whatsoever
applicable to the sale of any Products by MELA to dealer, and Dealer
shall forthwith pay to MELA all such sums upon demand, except for any
such taxes or other charges as to which Dealer shall provide MELA, at
the time of the submission of its purchase order to MELA,
documentation establishing exemption therefrom acceptable to MELA and
the appropriate taxing authority.
(D) Delivery dates as set forth in any purchase order or confirmation
thereof are only estimates. MELA shall in no event be liable to Dealer
for any delay or failure of delivery. Delay or failure of delivery of
any shipment shall not relieve Dealer of its obligations to accept
such shipment or any other shipment.
(E) Each shipment of Products to Dealer shall constitute a separate sale,
obligating Dealer to pay therefor, whether such shipment be in whole
or only partial fulfillment of any purchase order or confirmation
issued in connection therewith.
(F) MELA shall have the right to allocate its inventory of Products in
such manner as it may, in its sole discretion, from time to time
determine.
(G) MELA shall have the right at any time, in its sole discretion, to
reject or to decline to fill any purchase order, either in whole or in
part, placed by Dealer.
(H) MELA shall have the right, in its sole discretion, to sell exclusively
and/or to cease selling any one or more Products to any individual
dealer or category of dealers, including Dealer, at any time.
(I) MELA shall have the right, in its sole discretion, to cancel or reduce
the quantities of any Products included in any purchase order accepted
by MELA or to delay the shipment thereof if Dealer shall fail to meet
payment schedules or other credit, financial or business requirements
established by MELA.
(J) -
(K) MELA MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PRODUCTS EXCEPT AS EXPRESSLY STATED IN A WRITTEN LIMITED WARRANTY FOR
THE BENEIFT OF THE CONSUMER ACCOMPANYING THE PRODUCTS AND/OR AS
EXPRESSLY STATED IN A SEPARATE SERVICE CENTER AGREEMENT WITH DEALER.
MELA DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE PRODUCTS. UNDER NO
CIRCUMSTANCES SHALL MELA BE LIABLE TO DEALER OR ANY OTHER PERSON FOR
ANY LOSSES, COSTS, DAMAGES OR EXPENSES, WHETHER DIRECT, INDIRECT,
SPECIAL, INCIDENTAL, CONSEQUENTIAL OR OTHERWISE, SUSTAINED BY REASON
OF ANY BREACH OF ANY WARRANTY.
(L) If Dealer shall default in the payment of any indebtedness to MELA
when and as the same shall become due and payable and such default
shall continue for a period of ten (10) days, then all the liabilities
and obligations of Dealer to MELA, whether or not then due, shall at
MELA's option, without notice to Dealer, become immediately due and
payable. All past due invoices of MELA to Dealer shall bear interest
at the rate of 1 1/2% per month or the highest applicable rate
permitted by law, whichever is less, and Dealer shall also be liable
to MELA for all costs incurred, including attorney's fees and costs,
in pursuing collection of its invoices from Dealer or otherwise
enforcing any other provisions of this Agreement.
5
<PAGE>
(M) MELA confirms that product liability insurance written by an insurance
company licensed to do business in the United States in the amount of
not less than $2,000,000 combined single limit is maintained with
respect to the Products. Except to the extent of the applicable
coverage under such product liability insurance, Dealer shall have no
claim or right against MELA with respect to any suits or claims
against Dealer by any third persons resulting from the occurrence of
any event within the scope of the coverage of such insurance (without
reference to the dollar amount of coverage), and MELA shall bear no
responsibility or liability to Dealer with respect to any such suites
or claims by any third persons or any liabilities, losses, expenses or
damages incurred or suffered by Dealer as a result thereof.
(N) The Products are being sold to Dealer in the United States. If
applicable, any exporting of Products is by Dealer and not MELA.
Accordingly, Dealer shall be responsible for, at its own risk and
expense, any necessary export license or permit and nay other approval
or documentation which may be required for or in connection with the
export of the Products.
VIII. NO AGENCY.
The relationship established between MELA and Dealer by this Agreement is
that of vendor and vendee, and Dealer shall not be deemed an agent of MELA
for any purpose whatsoever. Dealer shall have no right or authority to
assume or create any liability or obligations of any kind, whether express
or implied, on behalf of MELA. Dealer shall not make any claims, warranties
or representations on behalf of MELA, except such as may be provided by
MELA or approved in writing by MELA. Dealer shall indemnify and hold
harmless MELA form and against any and all claims, actions, liabilities,
losses, costs, damages and expenses, including attorneys' fees and costs,
arising out of any breach by Dealer of the foregoing provision or of
Subsection III(B)(4) hereof.
IX. INTELLECTUAL PROPERTY RIGHTS MATTERS.
(A) Subject to the terms and conditions set forth in this Section, MELA
shall, at its own expense, defend or at its option settle any claim, suit
or proceeding brought against Dealer on the issue of infringement of any
United States patent or copyright in connection with any Product supplied
by MELA to Dealer in accordance with this Agreement. MELA agrees to pay,
subject to the limitations hereinafter set forth, any final judgment
entered against Dealer on such issue in any such claim, suit or proceeding
defended by MELA. MELA's obligations hereunder shall be subject to the
conditions that Dealer notify MELA in writing of any such claim, suit or
proceeding promptly after Dealer shall have received notice or obtained
knowledge thereof, and, at Dealer's expense, provide MELA full information
and assistance as requested by MELA in such defense. MELA reserves the
right in the event of any such claim, suit or proceeding to modify or
replace the affected Products to eliminate the alleged infringement, to
obtain al license to eliminate the alleged infringement or to give Dealer a
refund of the price of the affected Products in lieu of any other
obligations or responsibilities hereunder. MELA shall have no liability for
any infringement arising out of: (I) the combination of any Product with
any other Product whether or not furnished to Dealer by MELA; (ii) the
modification of any Product unless such modification was made by MELA; or
(iii) any information, data, service or application assistance not
furnished to Dealer by MELA. MELA shall not be liable for any costs or
expenses incurred without MELA's written authorization, and in no event
shall MELA's total liability to Dealer under, or as a result of compliance
with, this provision exceed the aggregate sum paid to MELA by Dealer for
the affected Products. The foregoing states the entire responsibility of
MELA, and the exclusive remedy of Dealer, with respect to any alleged
intellectual property right infringement or violation in connection with
the products, and MELA shall in no event be liable for loss of use or for
incidental, indirect or consequential damages, whether in contract or in
tort, by virtue of any such infringement or violation. No sale under this
Agreement shall convey any license by implication, estoppel or otherwise
under any propriety or patent rights of MELA except for the right to resell
the Products in accordance with this Agreement.
(B) Dealer shall not acquire any right to or interest in any trademark or
trade name owned or used by MELA, except the right to use such trademarks
and trade names as appear on the
6
<PAGE>
Products and on MELA's promotional materials therefor when received by
Dealer in any manner approved by MELA and shall discontinue all such use
upon the termination of this Agreement except as permitted by Section V(D)
hereof. Dealer shall not use any trademark or trade name of MELA as part of
its corporate or business name.
X. GENERAL PROVISIONS
(A) Dealer shall not assign or otherwise transfer this Agreement or any
interest in or rights under this Agreement without the prior written
consent of MELA. Any such purported assignment or transfer shall be
null, void and of no effect.
(B) Dealer shall give MELA notice of any proposed transaction affecting
the ownership of ten percent or more of Dealer's capital stock, if
Dealer shall be a corporation, the interest or any portion of the
interest of any partner, if Dealer shall be a partnership, or the
ownership of all or any part of the business, if Dealer shall be an
individual partnership.
(C) Except as hereinafter provided, all questions or controversies arising
out of or in any manner relating to this Agreement shall be submitted
to arbitration in Atlanta, Georgia according to the Commercial Rules
of the American Arbitration Association, and the award or decision
made by the arbitrator or arbitrators therein shall be binding upon
the parties. Nothing herein contained shall be construed as in any way
affecting MELA's right to institute and prosecute a lawsuit in any
court of competent jurisdiction to effect the collection of any monies
due to MELA from Dealer or to protect trademark rights.
(D) Any failure on the part of MELA to enforce at any time or for any
period of time any provision of this Agreement shall not be deemed or
construed to be a waiver of such provision or of the right of MELA
thereafter to enforce such provision or any other provision of this
Agreement.
(E) This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Georgia, except as to questions of arbitrary,
which shall be determined by the Federal Arbitration Act.
(F) This Agreement supersedes any and all prior understandings and
agreements, whether written or oral, entered into between Dealer and
MELA with respect to the subject matter of this Agreement.
(G) This Agreement represents and incorporates the entire understanding of
the parties with respect to its subject matter, and each party
acknowledges that there are no warranties, representations, covenants
or understandings of any kind, nature or description whatsoever made
by either party to the other with respect to such subject matter,
except such as are expressly contained in this Agreement.
(H) Except as otherwise provided in Section X(i) hereof, neither this
Agreement nor the exhibits hereto shall be subject to change or
modification, except by the execution of another written agreement
duly executed by the parties.
(I) If and to the extent that any provision of this Agreement or portion
thereof shall be determined by any legislature or court to be in whole
or in part invalid and unenforceable, such provision or portion
thereof shall be deemed to be surplusage and, to the extent not so
determined to be invalid or unenforceable, each provision or part of
this Agreement shall remain in full force and effect.
(J) All notices under this Agreement shall be in writing and shall be sent
by recognized overnight delivery service or registered or certified
mail, return receipt requested and with all postage prepaid, to each
party at its address set forth on the fist page hereof, in the case of
MELA to the attention of the President, Consumer Electronics Group or,
in the case of either party, to such other address as is provided by
notice given in accordance herewith.
(K) The headings to the sections of this Agreement are included merely for
convenience of reference and shall not affect the meaning of the
language included therein.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
MITSUBISHI ELECTRONICS AMERICA, INC. ---------------------------------
(Dealer)
By: By:
------------------------- ------------------------------
------------------------- ------------------------------
(Print Name and Title) (Print Name and Title)
(In the event Dealer is a corporation, only a duly authorized officer may sign
this Agreement and the title of the officer should be specified. In the event
Dealer is a partnership, only a partner may sign this Agreement, and "partner"
should be indicated as title. In the event Dealer is a sole proprietorship, this
should be indicated.)
The completed Application and Dealer Agreement shall not take effect until
approved at MELA's Consumer Electronics Group headquarters in Norcross, Georgia
and signed by an authorized officer of MELA
8
<PAGE>
1997 DEALER NILES
ANNUAL COMMITMENT AGREEMENT
This Agreement amends that certain Niles Dealer Agreement by and between Niles
Audio Corporation, Inc. ("Niles") and the dealer referred below ("Dealer"). In
the event that Dealer was, as of the date of this Agreement, a Dealer for Niles,
then (i) if this Agreement is accompanied by a Niles Dealer Agreement, this
Agreement shall only establish the Dealer's annual sales commitment or (ii) if
this Agreement is not accompanied by a Niles Dealer Agreement, this Agreement
will corroborate the new annual sales commitment and will renew the most
recently executed Niles Dealer Agreement for one (1) year. Performance
standards, product category, authorizations, and pricing programs (including
prompt payment terms) specified herein or in other documents which Niles will
publish from time to time, shall supercede all others previously acted upon. All
other terms and conditions of the Niles Dealer Agreement shall remain in effect.
Dealer Name: HARVEY ELECTRONICS* Account Number 040044
Dealer Phone: (201) 842-0078 Fax: (201)842-0660
# of Store Locations 5 attach separate sheet with address/phone/fax/contact
Sales Rep AUDIO ASSOCIATES CORPORATION Territory 104
<TABLE>
<CAPTION>
DEALER CATEGORY DEALER PERSONNEL PROGRAM
<S> <C> <C>
Audio/Video Retailer - multiple locations Accounts Payable ANN GARCIA Silver
Audio/Video Retailer - single location
Catalog Sales Sales Mike Beck Gold
Custom Installer with Showroom
Custom Installer without Showroom Installations Andy Nassar [X] Platinum
Commercial Sound Contractor
</TABLE>
<TABLE>
<CAPTION>
Authorization
Product Category (rep initials required) 1996 Sales 1997 Goal
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
SYSTEMS INTEGTATION AMPLIFIERS(TM) 8473.80 25,000
- ------------------------------------------------------------------------------------------------
LOUDSPEAKER PRODUCTS 109774.64 154,000
- ------------------------------------------------------------------------------------------------
INTELLICONTROL(TM) 20,000
- ------------------------------------------------------------------------------------------------
GENERAL PRODUCTS
- ------------------------------------------------------------------------------------------------
Automated Switchers (AUT) 1909.33 4,800
- ------------------------------------------------------------------------------------------------
Audio/Video Switchers (AVS) 334.72 1,000
- ------------------------------------------------------------------------------------------------
Convenience Outlets (CO) 4980.01 8,000
- ------------------------------------------------------------------------------------------------
Distribution Amplifiers (DA) 1607.30 3,000
- ------------------------------------------------------------------------------------------------
Infrared Products (IR) 7709.46 18,000
- ------------------------------------------------------------------------------------------------
SPS-4 (NI) 2410.10 4,000
- ------------------------------------------------------------------------------------------------
Source Switchers (SOS) 1110.51 3,000
- ------------------------------------------------------------------------------------------------
Speaker Switchers (SPS) 25588.64 39,000
- ------------------------------------------------------------------------------------------------
Volume Controls (VC) 10848.64 18,000
- ------------------------------------------------------------------------------------------------
Miscellaneous (WP, PR, etc.) 60.56 2,000
- ------------------------------------------------------------------------------------------------
TOTAL 174807.71 300,000
- ------------------------------------------------------------------------------------------------
</TABLE>
- -------------------- ---------------------- ---------------------
Dealer Signature Rep Signature Vice President Sales
- -------------------- ---------------------- ---------------------
Printed Name and Date Printed Name and Date Date
EXHIBIT "A"
Niles Audio Corporation, Inc. 12331 S.W. 130 Street o Miami, Florida 33186
o phone: 305/238-4373 o fax: 305/238-0185
WHITE COPY - Niles o YELLOW COPY - Representative o PINK COPY - Dealer
<PAGE>
1997 NILES Niles desires to create a limited network of highly
qualified dealers to become "Partners" in the continued
growth and evolution of our business. Dealers invited to
take part in this program represent the "cream of the crop"
in our business and, as our partner, these few dealers will
receive benefits not afforded to other Niles dealers.
PLATINUM NILES
PARTNERSHIP
P R O G R A M
Dealer Name Harvey Electronics Acct. No. 040044
Sales Rep Audio Associates Corp. Territory 104
WHAT'S IN IT FOR YOU?
THE BEST PRODUCTS
You'll receive the most complete line of award-winning custom installation
products available from any single manufacturer.
OUR BEST PRICE
You'll receive Gold & Platinum Column pricing, regardless of order size.
OUR BEST PAYMENT TERMS
You'll receive 4%, 30, net 46, or 4% C.O.D.
GUARANTEED REBATES
You'll receive a minimum of 5% on quarterly purchases, guaranteed, on all Niles
products. Receive up to an additional 7% more (up to 12% total) based on actual
purchases
OUR BEST FREIGHT PROGRAM
Free. To your door in 3 days or less.
OUR COMMITMENT TO PRODUCT AVAILABILITY
But just in case, you'll receive priority on any back-ordered Niles product as
soon as it becomes available.
OUR BEST DEMO PROGRAM
You'll receive free, any Niles product you wish to display with the purchase of
an additional one for back-stock.
OUR BEST PROMO DEAL
You'll receive 50% off cost, net 90 dating, for any Niles product you display in
a show-home when Niles loudspeakers are featured exclusively. You'll receive 15%
off cost, net 90 dating, for any Niles product you display in a show-home if
Niles loudspeakers are not featured exclusively.
RISK-FREE PRODUCT EVALUATION
Try any Niles product which you have not previously purchased. If you don't like
it, we'll take it back for full credit. All that we ask is that you tell us what
you didn't like about it. If you like it, pay the invoice, and order a second
one and we'll send it to you, free.
DIRECT CUSTOMER REFERALS
You'll receive referrals of customers in your area who respond to our extensive
national advertising.
AND FOR NILES?
YOUR LOYAL SUPPORT
You'll specify and install our complete line of products. We'll offer free
training and technical support to make it easier.
YOUR ACTIVE PARTICIPATION IN NEW PRODUCT DEVELOPMENT
As our active partner, we'll look to you for advice on new products or
improvements on existing ones.
<PAGE>
A MINIMUM ANNUAL PURCHASE COMMITMENT
At least $14,000 per six month period.
WE'LL BECOME YOUR PRIMARY ARCHITECTURAL SPEAKER SUPPLIER
Active purchases of at least six different models with loudspeakers comprising
40% or more of your Niles purchases.
THE FINE PRINT
All orders are subject to credit approval.o Rebates are paid in the form of a
voucher redeemable on future Niles invoices. o Vouchers must be redeemed in the
year in which they are issued; refer to published rebate schedule for purchases
required to earn additional rebates. o Rebates are not paid on Demo, Show Home
or Product Evaluation orders o Freight program is any carrier of Niles choice
which can deliver product to your location within 3 business days. o Priority
allocations do not apply to new product introductions. o C.O.D. accounts do not
get dating on Show Homes. o Performance will be reviewed June 30th and December
31st. Dealer must meet the minimum requirements by these dates or may forgo
unearned rebates o Risk free product evaluation orders will be shipped at
regular terms, payment is required within terms to claim your free product o
Niles reserves the right to modify its program at any time.
- -------------------- --------------------- -------------------------
Dealer Signature Rep Signature Vice President, Sales
- -------------------- --------------------- -------------------------
Printed Name and Date Printed Name and Date Date
Niles Audio Corporation, Inc. 12331 S.W. 130 Street o Miami, Florida 33186 o
phone: 305/238-4373 o fax: 305/238-0185
WHITE COPY - Niles o YELLOW COPY - Representative o PINK COPY - Dealer
<PAGE>
LOAN AND SECURITY AGREEMENT
BETWEEN
PARAGON CAPITAL LLC
AND
HARVEY ELECTRONICS, INC.
TABLE OF CONTENTS
ARTICLE 1 - THE REVOLVING CREDIT
1-1. Establishment of Revolving Credit
1-2. Advances in Excess of Maximum Loan Exposure
1-3. Risks of Value of Inventory
1-4. Procedures Under Revolving Credit
1-5. The Loan Account
1-6. The Master Note
1-7. Pavment of Loan Account
1-8. Interest
1-9. Fees
1-10. Lender's Discretion
1-11. Fees For L/C's
1-12. Concerning L/C's
ARTICLE 2 - GRANT OF SECURITY INTEREST
2-1. Grant of Security Interest
2-2. Extent and Duration of Security Interest
ARTICLE 3 - DEFINITIONS.
ARTICLE 4 - CONDITIONS PRECEDENT.
4-1. Corporate Due Diligence
4-2. Opinion
4-3. Additional Documents
4-4. Key Life Policies
4-5. Officers' Certificates
4-6. Representations and Warranties
4-7. Minimum Excess Availability
<PAGE>
4-8. No Event of Default
4-9. No Adverse Change
ARTICLE 5 - GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS
5-1. Pavment and Performance of Liabilities
5-2. Due Organization - Corporate Authorization - No Conflicts
5-3. Trade Names
5-4. Locations. Landlord's Waivers
5-5. Title to Assets
5-6. Indebtedness
5-7. Insurance Policies
5-8. Licenses
5-9. Leases
5-10. Requirements of Law
5-11. Maintain Properties
5-12. Pay Taxes
5-13. No Margin Stock
5-14. ERISA
5-15. Hazardous Materials
5-16. Litigation
5-17. Dividends or Investments
5-18. Loans
5-19. Protection of Assets
5-20. Line of Business
5-21. Affiliate Transactions
5-22. Executive Pay
5-23. Additional Assurances
5-24. Adequacy of Disclosure
5-25. Other Covenants
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL.
6-1. Use of Inventory Collateral
6-2. Inventory Quality
6-3. Adjustments and Allowances
6-4. Validity of Accounts
6-5. Notification to Account Debtors
ARTICLE 7 - CASH MANAGEMENT
7-1. Depository Accounts
7-2. Credit Card Receipts
7-3. The Transfer and the Funding Accounts
7-4. Proceeds and Collection of Accounts
7-5. Payment of Liabilities
-ii-
<PAGE>
7-6. The Funding Account
ARTICLE 8 - LENDER AS BORROWER'S ATTORNEY-IN-FACT
8-1. Appointment as Attorney-In-Fact
8-2. No Obligation to Act
ARTICLE 9 - FINANCIAL AND OTHER REPORTING REQUIREMENTS/FINANCIAL
COVENANTS
9-1. Maintain Records
9-2. Access to Records
9-3. Immediate Notice to Lender
9-4. Borrowing Base Certificate
9-5. Weekly Reports
9-6. Monthly Reports
9-7. Quarterly Reports
9-8. Annual Reports
9-9. Officers' Certificates
9-10. Inventories. Appraisals. and Audits
9-11. Additional Financial Information
9-12. Financial Performance Covenants
9-13. Electronic Reporting
ARTICLE 10 - EVENTS OF DEFAULT
10-1. Failure to Pay Revolving Credit
10-2. Failure To Make Other Payments
10-3. Failure to Perform Covenant or Liability (No Grace Period)
10-4. Failure to Perform Covenant or Liability (Grace Period)
10-5. Misrepresentation
10-6. Acceleration of Other Debt. Breach of Lease
10-7. Default Under Other Agreements
10-8. Casualty Loss. Non-Ordinary Course Sales
10-9. Judgment. Restraint of Business
10-10. Business Failure
10-11. Bankruptcy
10-12. Insecurity
10-13. Default by Guarantor or Related Entity
10-14. Indictment - Forfeiture
10-15. Termination of Guaranty
10-16. Challenge to Loan Documents
10-17. Executive Management
10-18. Change in Control
-iii-
<PAGE>
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT
11-1. Rights of Enforcement
11-2. Sale of Collateral
11-3. Occupation of Business Location
11-4. Grant of Nonexclusive License
11-5. Assembly of Collateral
11-6. Rights and Remedies
ARTICLE 12 - NOTICES.
12-1. Notice Addresses
12-2. Notice Given
ARTICLE 13 - TERM
13-1. Termination of Revolving Credit
13-2. Effect of Termination
13-3. Prepayment Premium
ARTICLE 14 - GENERAL
14-1. Protection of Collateral
14-2. Successors and Assigns
14-3. Severability
14-4. Amendments. Course of Dealing
14-5. Power of Attorney
14-6. Application of Proceeds
14-7. Lender's Costs and Expenses
14-8. Copies and Facsimiles
14-9. Massachusetts Law
14-10. Consent to Jurisdiction
14-11. Indemnification
14-12. Rules of Construction
14-13. Intent
14-14. Right of Set-Off
14-15. Maximum Interest Rate
14-16. Waivers
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EXHIBITS
1-6 Master Note
3 Definitions
5-2 Related Entities
5-3 Trade Names.
5-4 Locations.
5-5 Encumbrances.
5-6 Indebtedness.
5-7 Insurance Policies.
5-12 Taxes
7-1 DDA's.
7-2 Credit Card Arrangements
9-4 Borrowing Base Certificate
9-12(a) Financial Performance Covenants
9-12(b) Business Plan.
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THIS AGREEMENT is made between Paragon Capital LLC (hereinafter,
"Paragon"), a Delaware limited liability company with its principal executive
offices at Paragon Towers, 233 Needham Street, Newton, Massachusetts 02164 and
Harvey Electronics, Inc. (hereinafter, the "Borrower"), a New York corporation
with its principal executive offices at 205 Chubb Avenue, Lyndhurst, New Jersey
07071, in consideration of the mutual covenants contained herein and benefits to
be derived herefrom,
WITNESSETH:
ARTICLE 1 - THE REVOLVING CREDIT
1-1. Establishment of Revolving Credit
(a) The Lender hereby establishes a revolving line of credit (the
"Revolving Credit") in the Borrower's favor pursuant to which the Lender,
subject to, and in accordance with, the within Agreement, shall make loans and
advances and otherwise provide financial accommodations to and for the account
of the Borrower as provided herein. The amount of each advance under the
Revolving Credit shall be determined by the Lender by reference to Availability,
as determined by the Lender from time to time hereafter. All loans made by the
Lender under this Agreement, and all of the Borrower's other Liabilities to the
Lender under or pursuant to this Agreement, are payable as provided herein.
(b) The Lender hereby agrees, subject to the terms and conditions of this
Agreement, to make loans to the Borrower in an amount outstanding not to exceed
at any one time the lesser of (i) the Credit Limit, or (ii) the Borrowing Base.
(c) Availability shall be based upon Borrowing Certificates furnished as
provided in Section 9-4, below.
(d) The proceeds of borrowings under the Revolving Credit shall be used
solely in accordance with the Business Plan for working capital purposes of the
Borrower and for its Capital Expenditures, all solely to the extent permitted by
the within Agreement.
1-2. Advances in Excess of Maximum Loan Exposure. The Lender does not have
any obligation to make any loan or advance, or otherwise to provide any credit
for the benefit of the Borrower such that the outstanding principal balance of
the Loan Account exceeds Maximum Loan Exposure. The making of loans, advances,
and credits and the providing of financial accommodations in excess of Maximum
Loan Exposure is for the benefit of the Borrower and does not affect the
obligations of the Borrower hereunder; such loans, advances, credits, and
financial accommodations constitute Liabilities. The making of any such loans,
advances, and credits and the providing of financial accommodations, on any one
occasion such that Maximum Loan Exposure is exceeded shall not obligate the
Lender to make any such loans, credits, or advances or to provide any financial
<PAGE>
accommodation on any other occasion nor to permit such loans, credits, or
advances to remain outstanding.
1-3. Risks of Value of Inventory. The Lender's reference to a given asset
in connection with the making of loans, credits, and advances and the providing
of financial accommodations under the Revolving Credit and/or the monitoring of
compliance with the provisions hereof shall not be deemed a determination by the
Lender relative to the actual value of the asset in question. All risks
concerning the saleability of the Borrower's Inventory are and remain upon the
Borrower. All Collateral secures the prompt, punctual, and faithful performance
of the Liabilities whether or not relied upon by the Lender in connection with
the making of loans, credits, and advances and the providing of financial
accommodations under the Revolving Credit.
1-4. Procedures Under Revolving Credit.
(a) The Borrower may request loans and advances under the Revolving Credit,
each in an amount of not less than Ten Thousand ($10,000.00) Dollars. Each such
request shall be in such manner as may from time to time be acceptable to the
Lender.
(b) (i) The Lender, subject to the terms and conditions of the within
Agreement, will provide the Borrower with the loan so requested, if such request
is received by 12:00 Noon on a Banking Day, by the end of business on that
Banking Day; otherwise, by the end of the then next Banking Day.
(ii) The Lender may revise the time of day for requests set forth above by
which loans shall be requested, from time to time.
(c) Provided that Maximum Loan Exposure will not be exceeded (but subject,
however, to Subsection 1-4(i), below (which deals with the effect of a
Suspension Event)), a loan or advance under the Revolving Credit so requested by
the Borrower shall be made by the transfer of the proceeds of such loan or
advance to the Funding Account or as otherwise instructed by the Borrower.
(d) A loan or advance shall be deemed to have been made under the Revolving
Credit upon:
(i) The Lender's initiation of the transfer of the proceeds of such
loan or advance in accordance with the Borrower's instructions (if such
loan or advance is of funds requested by the Borrower).
(ii) The charging of the amount of such loan to the Loan Account (in
all other circumstances).
(e) There shall not be any recourse to, nor liability of, the Lender on
account of:
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(i) any delay in the making of any loan or advance requested under the
Revolving Credit;
(ii) any delay in the proceeds of any such loan or advance
constituting collected funds; or
(iii) any delay in the receipt, and/or any loss, of funds which
constitute a loan or advance under the Revolving Credit, the wire transfer
of which was properly initiated by the Lender in accordance with wire
instructions provided to the Lender by the Borrower.
(f) The Lender may rely on any request for a loan or advance or financial
accommodation which the Lender, in good faith, believes to have been made by a
person duly authorized to act on behalf of the Borrower and may decline to make
any such requested loan or advance or to provide any such financial
accommodation pending the Lender's being furnished with such documentation
concerning that person's authority to act as may be satisfactory to the Lender.
(g) A request by the Borrower for any financial accommodation under the
Revolving Credit or of the issuance of an L/C shall be irrevocable and shall
constitute certification by the Borrower that as of the date of such request,
each of the following is true and correct, unless written notice is delivered to
Lender stating otherwise:
(i) There has been no material adverse change in the Borrower's
financial condition from the most recent financial information furnished
Lender pursuant to this Agreement.
(ii) The Borrower is in compliance with, and is not then in breach of,
its covenants contained in this Agreement.
(iii) Each material representation which is made herein or in any of
the Loan Documents is then true and complete as of and as if made on the
date of such request.
(iv) No Suspension Event is then extant.
(h) The Borrower shall immediately become indebted to the Lender for the
amount of each loan under or pursuant to this Agreement when such loan is deemed
to have been made.
(i) Upon the occurrence from time to time of any Suspension Event, the
Lender may suspend the Revolving Credit immediately and shall not be obligated,
during such suspension, to make any loans or to provide any financial
accommodation hereunder.
(j) The Borrower may request that the Lender cause the issuance of L/C's
for the account of the Borrower.
(i) Each such request shall be in such manner as may from time to time
be acceptable to the Lender.
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(ii) The Lender will endeavor to cause the issuance of any L/C so
requested by the Borrower, provided that the requested L/C is in form
satisfactory to the Lender and if so issued:
(A) The aggregate Stated Amount of all L/C's then outstanding,
does not exceed Two Hundred Thousand ($200,000.00) Dollars.
(B) The expiry of the L/C is not later than the earlier of thirty
(30) days prior to the Maturity Date or the following:
(I) Standby's: One (1) year from initial issuance.
(II) Documentary's: sixty (60) days from issuance.
(C) Maximum Loan Exposure would not be exceeded.
(iii) The Borrower shall execute such documentation to apply for and
support the issuance of an L/C as may be required by the Issuer.
(iv) There shall not be any recourse to, nor liability of, the Lender
on account of:
(A) any delay or refusal by an Issuer to issue an L/C;
(B) any action or inaction of an Issuer on account of or in
respect to, any L/C;
(v) The Borrower shall reimburse the Issuer, immediately upon the
drawing under any L/C, for the amount of such drawing. In the event that
the Borrower fails to so reimburse the Issuer, the Borrower immediately
shall reimburse the Lender for the amount of such drawing. To the extent
which the Borrower fails to so reimburse the Issuer or the Lender, the
Lender, without the request of the Borrower, may advance under the
Revolving Credit any amount which the Borrower is so obligated to pay to
the Lender or the Issuer, or for which the Borrower, the Issuer, or the
Lender becomes obligated on account of, or in respect to, any L/C. Such
advance shall be made whether or not a Suspension Event is then in
existence or such advance would result in Maximum Loan Exposure's being
exceeded. Such action shall not constitute a waiver of the Lender's rights
under Section 1-7(b), below.
1-5. The Loan Account.
(a) An account ("Loan Account") shall be opened on the books of the Lender
in which Loan Account a record may be kept of all loans made under or pursuant
to this Agreement and of all payments thereon.
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<PAGE>
(b) The Lender shall also keep a record (either in the Loan Account or
elsewhere, as the Lender may from time to time elect) of all interest, fees,
service charges, costs, expenses, and other debits owed the Lender on account of
the Liabilities and of all credits against such amounts so owed.
(c) All credits against the Liabilities shall be conditional upon final
payment to the Lender of the items giving rise to such credits. The amount of
any item credited against the Liabilities which is charged back against the
Lender for any reason or is not so paid shall be a Liability and shall be added
to the Loan Account, whether or not the item so charged back or not so paid is
returned.
(d) Except as otherwise provided herein, all fees, service charges, costs,
and expenses for which the Borrower is obligated hereunder are payable on
demand. In the determination of Availability, the Lender may deem fees, service
charges, accrued interest, and other payments as having been advanced under the
Revolving Credit if such amounts are then due and payable.
(e) The Lender , without the request of the Borrower, may advance under the
Revolving Credit any interest, fee, service charge, or other payment to which
the Lender is entitled from the Borrower pursuant hereto and may charge the same
to the Loan Account notwithstanding that such amount so advanced may result in
Availability's being exceeded. The Borrower shall be advised of such advance.
Such action on the part of the Lender shall not constitute a waiver of the
Lender's rights under Section 1-7(b), below. Any amount which is added to the
principal balance of the Loan Account as provided in this Section shall bear
interest at the interest rate applicable from time to time to the unpaid
principal balance of the Loan Account.
(f) After the end of each month, Lender will render to Borrower a statement
of Borrower's Loan Account with Lender, showing all applicable credits, debits
and Liabilities. Any statement rendered by the Lender to the Borrower concerning
the Liabilities shall be considered correct and accepted by the Borrower and
shall be conclusively binding upon the Borrower unless the Borrower provides the
Lender with written objection thereto within thirty (30) days from the mailing
of such statement, which written objection shall indicate, with particularity,
the reason for such objection. The Loan Account and the Lender's books and
records concerning the loan arrangement contemplated herein and the Liabilities
shall be prima facie evidence of the items described therein.
1-6. The Master Note. The obligation to repay loans and advances under the
Revolving Credit, with interest as provided herein, shall be evidenced by a note
(the "Master Note") in the form of EXHIBIT 1-6, annexed hereto, executed by the
Borrower. Neither the original nor a copy of the Master Note shall be required,
however, to establish or prove any Liability. In the event that the Master Note
is ever lost, mutilated, or destroyed, the Borrower shall execute a replacement
thereof and deliver such replacement to the Lender and the Lender will defend
and indemnify the Borrower with respect to the execution of the replacement
Master Note.
1-7. Payment of Loan Account.
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<PAGE>
(a) The Borrower may repay all or any portion of the principal balance of
the Loan time to time until the Termination Date.
(b) The Borrower, without notice or demand from the Lender, shall pay the
Lender that amount, from time to time, which is necessary so that the principal
balance of the Loan Account does not exceed Maximum Loan Exposure.
(c) The Borrower shall repay the then entire unpaid balance of the Loan
Account and all other Liabilities on the Termination Date.
1-8. Interest.
(a) The unpaid principal balance of the Loan Account up to $2,500,000 shall
bear interest, until repaid (calculated based upon a 360-day year and actual
days elapsed), at the aggregate of Base plus one (1%) percent per annum but in
no event less than eight (8%) percent per annum or in excess of the maximum rate
permitted by applicable law. The unpaid principal balance of the Loan Account in
excess of $2,500,000 shall bear interest at the aggregate of Base plus one and
three quarters (1 :%) percent per annum.
(b) Following the occurrence of any Event of Default (and whether or not
the Lender exercises any of the Lender's rights on account of such Event of
Default), all loans and advances made under the Revolving Credit shall bear
interest, through the End Date, at a rate which is the aggregate of that
provided for in Section 1-8(a), above, plus four (4%) percent per annum.
(c) Accrued interest shall be payable:
(i) Monthly in arrears, on the first banking day of the month next
following the month during which such interest accrued.
(ii) On the Termination Date.
(iii) On the End Date.
1-9. Fees. Borrower shall pay to the Lender the following fees:
(a) Commitment Fee. On the date of execution hereof, a one time fully
earned commitment fee shall be due and payable in an amount equal to one and one
half (1.5%) percent of the Credit Limit ($49,500.00).
(b) Annual Facility Fee. On the first anniversary of the date of execution
hereof, a facility fee in an amount equal to three quarters of one (.75%)
percent of the Credit Limit which shall have been fully earned at the date of
execution hereof, shall be due and payable, and on each anniversary of the date
of execution hereof, a facility fee in an amount equal to three quarters of one
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<PAGE>
(.75%) percent of the Credit Limit, which shall have been fully earned as of the
applicable anniversary of the date of the execution hereof, shall be due and
payable.
(c) Loan Maintenance Fee. On the date of execution hereof and on each
anniversary of the date of execution hereof, a loan maintenance fee equal to one
(1%) percent of the Credit Limit. Such fee shall have been fully earned as of
the date hereof and as of each anniversary of the date of execution hereof and
shall be payable in twelve (12) monthly installments as follows: 1/12th of such
fee shall be payable as of the date hereof and on each anniversary of the date
of execution hereof, and 1/12th of such fee shall be payable on the same day of
each month hereafter until paid in full.
(d) Financial Examination, Documentation, and Appraisal Fees. Lender's
actual charges paid or incurred for each financial analysis and examination
(i.e., audits) of Borrower performed by personnel employed by Lender; Lender's
actual charges paid or incurred for each appraisal of the Collateral performed
by personnel employed by Lender; and, the actual charges paid or incurred by
Lender if it elects to employ the services of one or more third Persons to
perform such financial analysis and examinations (i.e., audits) of Borrower or
to appraise the Collateral; and, on each anniversary of the date of execution
hereof.
(e) In addition to any other right to which the Lender is then entitled on
account thereof, the Lender may assess an additional fee payable by the Borrower
on account of the accommodation, from time to time, of Lender to the Borrower's
request that the Lender depart or dispense with one or more of the
administrative provisions of the within Agreement and/or the Borrower's failure
to comply with any of such provisions.
(i) By way of non-exclusive example, the Lender may assess a fee on account
of any of the following:
(A) The Borrower's failure to pay that amount which is necessary so
that the principal balance of the Loan Account does not exceed Maximum
Permitted Exposure (as required under Section 1-7(b), above).
(B) The providing of a loan or advance under the Revolving Credit such
that Maximum Loan Exposure would be exceeded.
(C) The providing of a same Banking Day loan requested after the time
set forth in Section 1-4(b)(i), above.
(D) The Borrower's failure to provide a financial statement or report
within the applicable time-frame provided for such report under Article 9,
below.
(ii) The inclusion of the foregoing right on the part of the Lender to
assess a fee does not constitute an obligation, on the part of the Lender , to
waive any provision of the
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<PAGE>
within Agreement under any circumstances. The assessment of any such fee in any
particular circumstance shall not constitute the Lender's waiver of any breach
of the within Agreement on account of which such fee was assessed nor a course
of action on which the Borrower may rely.
(f) The Borrower shall not be entitled to any credit, rebate or repayment
of any Commitment Fee, Facility Fee, Loan Maintenance Fee, or other fee
previously earned by the Lender pursuant to this Section notwithstanding any
termination of the within Agreement or suspension or termination of the Lender's
obligation to make loans and advances hereunder.
1-10. Lender's Discretion
(a) Each reference in the Loan Documents to the exercise of discretion or
the like by the Lender shall be to that Person's exercise of its judgement, in
good faith (which shall be presumed), based upon that Person's consideration of
any such factor as the Lender, taking into account information of which that
Person then has actual knowledge, believes:
(i) Will or reasonably could be expected to affect the value of the
Collateral, the enforceability of the Lender's security and collateral
interests therein, or the amount which the Lender would likely realize
therefrom (taking into account delays which may possibly be encountered in
the Lender's realizing upon the Collateral and likely Costs of Collection).
(ii) Indicates that any report or financial information delivered to
the Lender by or on behalf of the Borrower is incomplete, inaccurate, or
misleading in any material manner or was not prepared in accordance with
the requirements of the within Agreement.
(iii) Constitutes a Suspension Event.
(b) In the exercise of such judgement, the Lender also may take into
account any of the following factors:
(i) Those included in, or tested by, the definitions of "Acceptable
Inventory", "Retail", and "Cost".
(ii) The current financial and business climate of the industry in
which the Borrower competes (having regard for the Borrower's position in
that industry).
(iii) General economic conditions which have a material effect on cost
structure.
(iv) Material changes in or to the mix of the Borrower's Inventory.
(v) Seasonality with respect to the Borrower's Inventory and patterns
of the Borrower's retail sales.
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(vi) Such other factors as the Lender determines as having a material
bearing on credit risks associated with the providing of loans and
financial accommodations to the Borrower.
(c) The burden of establishing the failure of the Lender to have acted in a
reasonable manner in such Person's exercise of discretion shall be the
Borrower's.
1-11. Fees for L/C's.
(a) Prior to the issuance of any L/C, the Borrower shall pay to the Lender
a fee for each L/C equal to the greater of (i) Two Hundred Fifty ($250.00)
Dollars, or (ii) thirty-five (35) Basis Points per month times the Stated Amount
of that L/C.
(b) In addition to the fee to be paid as provided in Subsection 1-11(a),
above, the Borrower shall pay to the Lender (or to the Issuer, if so requested
by the Lender ), on demand, all issuance, processing, negotiation, amendment,
and administrative fees and other amounts charged by the Issuer on account of,
or in respect to, any L/C.
1-12. Concerning L/C's.
(a) None of the Issuer, the Issuer's correspondents, or any advising,
negotiating, or paying bank with respect to any L/C shall be responsible in any
way for:
(i) The performance by any beneficiary under any L/C of that
beneficiary's obligations to the Borrower.
(ii) The form, sufficiency, correctness, genuineness, authority of any
person signing; falsification; or the legal effect of; any documents called
for under any L/C if (with respect to the foregoing) such documents on
their face appear to be in order.
(b) The Issuer may honor, as complying with the terms of any L/C and of any
drawing thereunder, any drafts or other documents otherwise in order, but signed
or issued by an administrator, executor, conservator, trustee in bankruptcy,
debtor in possession, assignee for the benefit of creditors, liquidator,
receiver, or other legal representative of the party authorized under such L/C
to draw or issue such drafts or other documents.
(c) Unless otherwise agreed to, in the particular instance, the Borrower
hereby authorizes any Issuer to:
(i) Select an advising bank, if any.
(ii) Select a paying bank, if any.
(iii) Select a negotiating bank.
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(d) All directions, correspondence, and funds transfers relating to any L/C
are at the risk of the Borrower. The Issuer shall have discharged the Issuer's
obligations under any L/C which, or the drawing under which, includes payment
instructions, by the initiation of the method of payment called for in, and in
accordance with, such instructions (or by any other commercially reasonable and
comparable method). Neither the Lender nor the Issuer shall have any
responsibility for any inaccuracy, interruption, error, or delay in transmission
or delivery by post, telegraph or cable, or for any inaccuracy of translation.
(e) The Lender's and the Issuer's rights, powers, privileges and immunities
specified in or arising under this Agreement are in addition to any heretofore
or at any time hereafter otherwise created or arising, whether by statute or
rule of law or contract.
(f) Except to the extent otherwise expressly provided hereunder or agreed
to in writing by the Issuer and the Borrower, the L/C will be governed by the
Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce, Publication No.500, and any subsequent
revisions thereof.
(g) If any change in any law, executive order or regulation, or any
directive of any administrative or governmental authority (whether or not having
the force of law), or in the interpretation thereof by any court or
administrative or governmental authority charged with the administration
thereof, shall either:
(i) impose, modify or deem applicable any reserve, special deposit or
similar requirements against letters of credit heretofore or hereafter
issued by any Issuer or with respect to which the Lender or any Issuer has
an obligation to lend to fund drawings under any L/C; or
(ii) impose on any Issuer any other condition or requirements relating
to any such letters of credit; and the result of any event referred to in
Section 1-12(g)(i) or 1-12(g)(ii), above, shall be to increase the cost to
any Issuer of issuing or maintaining any L/C (which increase in cost shall
be the result of such Issuer's reasonable allocation among that Issuer's
letter of credit customers of the aggregate of such cost increases
resulting from such events), then, upon demand by the Lender and delivery
by the Lender to the Borrower of a certificate of an officer of the subject
Issuer describing such change in law, executive order, regulation,
directive, or interpretation thereof, its effect on such Issuer, and the
basis for determining such increased costs and their allocation, the
Borrower shall immediately pay to the Lender , from time to time as
specified by the Lender , such amounts as shall be sufficient to compensate
such Issuer for such increased cost. Any Issuer's determination of costs
incurred under Section 1-12(g)(i) or 1-12(g)(ii), above, and the
allocation, if any, of such costs among the Borrower and other letter of
credit customers of such Issuer, if done in good faith and made on an
equitable basis and in accordance with the officer's certificate, shall be
conclusive and binding on the Borrower.
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(h) The obligations of the Borrower under the within Agreement with respect
to L/C's are absolute, unconditional, and irrevocable and shall be performed
strictly in accordance with the terms hereof under all circumstances, whatsoever
including, without limitation, the following:
(i) Any lack of validity or enforceability or restriction, restraint,
or stay in the enforcement of the within Agreement, any L/C, or any other
agreement or instrument relating thereto.
(ii) Any amendment or waiver of, or consent to the departure from, any
L/C.
(iii) The existence of any claim, set-off, defense, or other right
which the Borrower may have at any time against the beneficiary of any L/C.
(iv) Any honoring of a drawing under any L/C, which drawing possibly
could have been dishonored based upon a strict construction of the terms of
the L/C.
ARTICLE 2 - GRANT OF SECURITY INTEREST
2-1. Grant of Security Interest. To secure the Borrower's prompt, punctual,
and faithful performance of all and each of the Borrower's Liabilities, the
Borrower hereby grants to the Lender a continuing security interest in and to,
and assigns to the Lender, the following, and each item thereof, whether now
owned or now due, or in which the Borrower has an interest, or hereafter
acquired, arising, or to become due, or in which the Borrower obtains an
interest, and all products, Proceeds, substitutions, and accessions of or to any
of the following (all of which, together with any other property in which the
Lender may in the future be granted a security interest, is referred to herein
as the "Collateral"):
(a) all Inventory, including all goods, merchandise, raw materials,
goods and work in process, finished goods, and other tangible personal
property now owned or hereafter acquired and held for sale or lease or
furnished or to be furnished under contracts of service or used or consumed
in Borrower's business;
(b) all Accounts, accounts receivable, contracts, contract rights,
notes, bills, drafts, acceptances, General Intangibles (including without
limitation registered and unregistered tradenames, copyrights, customer
lists, goodwill, computer programs, computer records, computer software,
computer data, trade secrets, trademarks, patents, ledger sheets, files,
records, data processing records relating to any Accounts and all tax
refunds of every kind and nature to which Borrower is now or hereafter may
become entitled to, no matter how arising), Instruments, Documents,
Document of Title, Chattel Paper, securities, security entitlements,
security accounts, Investment Property, choses in action, and all other
debts, obligations and liabilities in whatever form, owing to Borrower from
any person, firm or corporation or any other legal entity, whether now
existing or hereafter arising, now or hereafter received by or belonging or
owing to Borrower, for goods sold by it or for services rendered by it, or
however otherwise same may have been established
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or created, all guarantees and securities therefor, all right, title and
interest of Borrower in the merchandise or services which gave rise
thereto, including the rights of reclamation and stoppage in transit, all
rights to replevy goods, and all rights of an unpaid seller of merchandise
or services;
(c) all machinery, Equipment, Fixtures and other Goods whether now
owned or hereafter acquired by the Borrower and wherever located, all
replacements and substitutions therefor or accessions thereto and all
proceeds thereof;
(d) all leasehold interests; and
(e) all proceeds and products of all of the foregoing in any form,
including, without limitation, all proceeds, refunds and premium rebates of
credit, fire or other insurance, and also including, without limitation,
rents and profits resulting from the temporary use of any of the foregoing.
2-2. Extent and Duration of Security Interest. The within grant of a
security interest is in addition to, and supplemental of, any security interest
previously granted by the Borrower to the Lender and shall continue in full
force and effect applicable to all Liabilities until all Liabilities have been
paid and/or satisfied in full and the security interest granted herein is
specifically terminated in writing by a duly authorized officer of the Lender
ARTICLE 3 - DEFINITIONS.
All capitalized terms used in this agreement which are not otherwise
defined herein or in the UCC shall have the meanings assigned to them in EXHIBIT
3, annexed hereto.
ARTICLE 4 - CONDITIONS PRECEDENT
Precedent to the effectiveness of this Agreement, the establishment of the
Revolving Credit, and the making of the first loan under the Revolving Credit,
the documents respectively described in Sections 4-1 through and including 4-5,
each in form and substance satisfactory to the Lender shall have been delivered
to the Lender , and the conditions respectively described in Sections 4-6
through and including 4-9, shall have been satisfied:
4-1. Corporate Due Diligence.
(a) A Certificate issued by the Secretary of State of New York stating that
the Borrower is a subsisting corporation.
(b) Certificates of due qualification, in good standing, issued by the
Secretary(ies) of State of each State in which the nature of the Borrower's
business conducted or assets owned could require such qualification.
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(c) A Certificate of the Borrower's secretary or clerk attesting to the due
adoption, continued effectiveness, and setting forth the texts of, each
corporate resolution adopted in connection with the establishment of the loan
arrangement contemplated by the Loan Documents and attesting to the true
signatures of each Person authorized as a signatory to any of the Loan
Documents.
4-2. Opinion. An opinion of counsel to the Borrower in form and substance
satisfactory to the Lender.
4-3. Additional Documents. Such additional instruments and documents as the
Lender or its counsel reasonably may require or request.
4-4. Key Life Policies. At such time as the Borrower obtains key man life
insurance on Franklin Karp, it shall notify Lender and shall collaterally assign
such key man life insurance policies to the Lender.
4-5. Officers' Certificates. Certificates executed by the President and the
Chief Financial Officer of the Borrower and stating that the representations and
warranties made by the Borrower to the Lender in the Loan Documents are true and
complete as of the date of such Certificate, and that no event has occurred
which is or which, solely with the giving of notice or passage of time (or both)
would be an Event of Default.
4-6. Representations and Warranties. Each of the material representations
made by or on behalf of the Borrower in this Agreement or in any of the other
Loan Documents or in any other report, statement, document, or paper provided by
and or on behalf of the Borrower shall be true and complete as of the date as of
which such representation or warranty was made.
4-7. Minimum Excess Availability. Availability, after giving effect to the
first loans and advances to be made under the Revolving Credit; any charges to
the Loan Account made in connection with the establishment of the credit
facility contemplated hereby; and L/C's to be issued at, or immediately
subsequent to, the establishment of such establishment, is not less than
Seventy-Five Thousand ($75,000.00) Dollars.
4-8. No Event of Default. No event shall have occurred, or failed to occur,
which occurrence or which failure constitutes, or which, solely with the passage
of time or the giving of notice (or both) would constitute, an Event of Default.
4-9. No Adverse Change. No event shall have occurred or failed to occur,
which occurrence or failure is or could have a materially adverse effect upon
the Borrower's financial condition, operating results, or cash flows from the
Borrower's financial condition at August 2, 1997.
No document shall be deemed delivered to the Lender until received and accepted
by the Lender at its head offices in Newton, Massachusetts. Under no
circumstances will the within Agreement take effect until executed and accepted
by the Lender at said head office.
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ARTICLE 5 - GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS
To induce the Lender to establish the loan arrangement contemplated herein
and to make loans and advances and to provide financial accommodations under the
Revolving Credit (each of which loans shall be deemed to have been made in
reliance thereupon) the Borrower, in addition to all other representations,
warranties, and covenants made by the Borrower in any other Loan Document, makes
those representations, warranties, and covenants included in the within
Agreement. If the Borrower has any dispute with any person with respect to any
Liability, the Borrower shall give the Lender notice of said dispute.
5-1. Payment and Performance of Liabilities. The Borrower shall pay each
Liability when due (or when demanded if payable on demand) and shall promptly,
punctually, and faithfully perform each other Liability.
5-2. Due Organization - Corporate Authorization - No Conflicts. (a) The
Borrower presently is and shall hereafter remain a subsisting corporation and is
and shall hereafter remain duly qualified and in good standing in every other
State in which, by reason of the nature or location of the Borrower's assets or
operation of the Borrower's business, such qualification may be necessary.
(b) Each Related Entity is listed on EXHIBIT 5-2, annexed hereto. Each
Related Entity is and shall hereafter remain a subsisting corporation in the
State in which incorporated and is and shall hereafter remain duly qualified in
which other State in which, by reason of that entity's assets or the operation
of such entity's business, such qualification may be necessary. The Borrower
shall provide the Lender with prior written notice of any entity's becoming or
ceasing to be a Related Entity.
(c) The Borrower has all requisite corporate power and authority to execute
and deliver all and singular the Loan Documents to which the Borrower is a party
and has and will hereafter retain all requisite corporate power to perform all
and singular the Liabilities.
(d) The execution and delivery by the Borrower of each Loan Document to
which it is a party; the Borrower's consummation of the transactions
contemplated by such Loan Documents (including, without limitation, the creation
of security interests by the Borrower as contemplated hereby); the Borrower's
performance under those of the Loan Documents to which it is a party; the
borrowings hereunder; and the use of the proceeds thereof:
(i) Have been duly authorized by all necessary corporate action.
(ii) Do not, and will not, contravene in any material respect any
provision of any Requirement of Law or obligation of the Borrower.
(iii) Will not result in the creation or imposition of, or the
obligation to create or impose, any Encumbrance upon any assets of the
Borrower pursuant to any Requirement of Law or obligation, except pursuant
to the Loan Documents.
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(e) The Loan Documents have been duly executed and delivered by Borrower
and are the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms, subject to
applicable bankruptcy, insolvency and other laws and rules of general
application affecting the rights and remedies of creditors.
5-3. Trade Names.
(a) EXHIBIT 5-3, annexed hereto, is a listing of:
(i) All names under which the Borrower has conducted its business
during the last ten (10) years.
(ii) All entities and/or persons with whom the Borrower ever
consolidated or merged, or from whom the Borrower ever acquired in a single
transaction or in a series of related transactions substantially all of
such entity's or person's assets.
(b) Except (i) upon not less than twenty-one (21) days prior written notice
given the Lender , and (ii) in compliance with all other provisions of the
within Agreement, the Borrower will not undertake or commit to undertake any
action such that the results of that action, if undertaken prior to the date of
this Agreement, would have been reflected on EXHIBIT 5-3.
(c) The Borrower owns and possesses, or has the right to use all patents,
industrial designs, trademarks, trade names, trade styles, brand names, service
marks, logos, copyrights, trade secrets, know-how, confidential information, and
other intellectual or proprietary property of any third Person necessary for the
Borrower's conduct of the Borrower's business.
(d) The conduct by the Borrower of the Borrower's business does not
infringe on the patents, industrial designs, trademarks, trade names, trade
styles, brand names, service marks, logos, copyrights, trade secrets, know-how,
confidential information, or other intellectual or proprietary property of any
third Person.
5-4. Locations. Landlord's Waivers.
(a) The Collateral, and the books, records, and papers of Borrower
pertaining thereto, are kept and maintained solely at the Borrower's chief
executive offices as set forth in the beginning of this Agreement and at those
locations which are listed on EXHIBIT 5-4, annexed hereto, which EXHIBIT
includes all service bureaus with which any such records are maintained and the
names and addresses of each of the Borrower's landlords. Except (i) to
accomplish sales of Inventory in the ordinary course of business or (ii) to
utilize such of the Collateral as is removed from such locations in the ordinary
course of business (such as motor vehicles), the Borrower shall not remove any
Collateral from said chief executive offices or those locations listed on
EXHIBIT 5-4.
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(b) The Borrower shall use its best efforts to obtain and deliver to the
Lender a waiver or subordination (reasonably satisfactory to the Lender) by the
landlord for each store location (excepting only 2 West 45th Street, New York,
New York, and 888 Broadway & 19th Street, New York, New York) within thirty (30)
days of the date of execution hereof.
(c) If the Borrower fails to obtain a waiver or subordination for each
store location within said thirty (30) day period, the Lender may establish an
Availability Reserve for up to ninety (90) days rent for each of the Borrower's
locations in a Landlord Lien State or in a One Turn State.
Such Availability Reserve shall be reduced or eliminated as follows (but
only if no Suspension Event is then in existence or has theretofore occurred):
(i) With respect to locations in One Turn States: one hundred twenty
(120) days after the execution of the within Agreement.
(ii) With respect to locations in Landlord Lien States: Upon the
furnishing to the Lender of a waiver or subordination (reasonably
satisfactory to the Lender by the landlord for the subject location.
Without duplication of any Availability Reserve described above, the Lender
may establish an Availability Reserve for unpaid rent.
(d) The Borrower will not:
(i) Execute, alter, modify, or amend any Lease which increases the
Borrower's financial obligations thereunder in a material respect or
modifies the term thereof.
(ii) Commit to, or open or close any location at which the Borrower
maintains, offers for sales, or stores any of the Collateral.
(e) Except as otherwise disclosed pursuant to, or permitted by, this
Section 5-4, no tangible personal property of the Borrower is in the care or
custody of any third party or stored or entrusted with a bailee or other third
party and none shall hereafter be placed under such care, custody, storage, or
entrustment.
5-5. Title to Assets.
(a) The Borrower is, and shall hereafter remain, the owner of the
Collateral free and clear of all Encumbrances with the exceptions of the
following:
(i) The security interest created herein.
(ii) Those Encumbrances (if any) listed on EXHIBIT 5-5, annexed
hereto.
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(iii) Purchase money security interests arising in the ordinary course
of business for the acquisition of equipment so long as the Indebtedness
secured thereby does not exceed the lesser of the cost for fair market
value of the equipment subject thereto and such security interest extends
to no other property.
(b) The Borrower shall separately segregate and report any property on
consignment. The Borrower shall give the Lender written notice of all
consignment arrangements now in existence and shall also give the Lender written
notice of any consignment arrangements established after the date hereof.
5-6. Indebtedness. The Borrower does not and shall not hereafter have any
Indebtedness with the exceptions of:
(a) Any Indebtedness to the Lender.
(b) The Indebtedness (if any) listed on EXHIBIT 5-6, annexed hereto.
(c) Indebtedness which in the aggregate does not exceed the sum of Two
Hundred Fifty Thousand ($250,000.00) Dollars incurred in connection with the
acquisition of equipment or Capital Leases.
5-7. Insurance Policies.
(a) EXHIBIT 5-7, annexed hereto, is a schedule of all insurance policies
owned by the Borrower or under which the Borrower is the named insured. Each of
such policies is in full force and effect. To the best of the Borrower's
knowledge, neither the issuer of any such policy nor the Borrower is in default
or violation of any such policy.
(b) The Borrower shall have and maintain at all times insurance covering
such risks, in such amounts, containing such terms, in such form, for such
periods, and written by such companies as may be reasonably satisfactory to the
Lender . The coverage reflected on EXHIBIT 5-7 presently satisfies the foregoing
requirements, it being recognized by the Borrower, however, that such
requirements may change hereafter to reflect changing circumstances. All
insurance carried by the Borrower shall provide for a minimum of twenty (20)
days' written notice of cancellation to the Lender and all such insurance which
covers the Collateral shall include an endorsement in favor of the Lender, which
endorsement shall provide that the insurance, to the extent of the Lender's
interest therein, shall not be impaired or invalidated, in whole or in part, by
reason of any act or neglect of the Borrower or by the failure of the Borrower
to comply with any warranty or condition of the policy. In the event of the
failure by the Borrower to maintain insurance as required herein, the Lender,
at its option, may obtain such insurance, provided, however, the Lender's
obtaining of such insurance shall not constitute a cure or waiver of any Event
of Default occasioned by the Borrower's failure to have maintained such
insurance. The Borrower shall furnish to the Lender certificates or other
evidence satisfactory to the Lender regarding compliance by the Borrower with
the foregoing insurance provisions.
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(c) The Borrower shall advise the Lender of each claim in excess of Ten
Thousand ($10,000.00) Dollars made by the Borrower under any policy of insurance
which covers the Collateral and will permit the Lender , at the Lender's option
in each instance, to participate in (but not control) the adjustment of each
such claim (and of all claims following the occurrence of any Suspension Event).
Upon the occurrence of any Suspension Event, the Borrower hereby appoints the
Lender as the Borrower's attorney in fact to obtain, adjust, settle, and cancel
any insurance described in this section and to endorse in favor of the Lender
any and all drafts and other instruments with respect to such insurance. The
within appointment, being coupled with an interest, is irrevocable until this
Agreement is terminated by a written instrument executed by a duly authorized
officer of the Lender. The Lender shall not be liable on account of any exercise
pursuant to said power except for any exercise in actual willful misconduct and
bad faith. The Lender may apply any proceeds of such insurance against the
Liabilities, whether or not such have matured, in such order of application as
the Lender may determine.
(d) The Borrower shall maintain at all times those type of policies of
insurance obtained by the Borrower and assigned to the Lender as required by
Section 4-4, above. The Borrower may replace such policies with policies of
similar or greater value.
5-8. Licenses. Each license, distributorship, franchise, and similar
agreement issued to, or to which the Borrower is a party is in full force and
effect. To the best of the Borrower's knowledge, no party to any such license or
agreement is in default or violation thereof. The Borrower has not received any
notice or threat of cancellation of any such license or agreement.
5-9. Leases. EXHIBIT 5-9, annexed hereto, is a schedule of all presently
effective Leases and Capital Leases. Each of such Leases and Capital Leases is
in full force and effect. To the best of the Borrower's knowledge, no party to
any such Lease or Capital Lease is in default or violation of any such Lease or
Capital Lease and the Borrower has not received any notice or threat of
cancellation of any such Lease or Capital Lease. The Borrower hereby authorizes
the Lender at any time and from time to time to contact any of the Borrower's
landlords in order to confirm the Borrower's continued compliance with the terms
and conditions of the Lease(s) between the Borrower and that landlord and to
discuss such issues, concerning the Borrower's occupancy under such Lease(s), as
the Lender may determine.
5-10. Requirements of Law. The Borrower is in compliance with, and shall
hereafter comply with and use its assets in compliance with, all Requirements of
Law. The Borrower has not received any notice of any violation of any
Requirement of Law (whether or not such violation is material), which violation
has not been cured or otherwise remedied.
5-11. Maintain Properties. The Borrower shall:
(a) Keep the Collateral in good order and repair (ordinary reasonable
wear and tear and insured casualty excepted).
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(b) Not suffer or cause the waste or destruction of any material part
of the Collateral.
(c) Not use any of the Collateral in violation of any policy of
insurance thereon.
(d) Not sell, lease, or otherwise dispose of any of the Collateral,
other than the following:
(i) The sale of Inventory in compliance with the within
Agreement.
(ii) The disposal of Equipment which is obsolete, worn out, or
damaged beyond repair, which Equipment is replaced to the extent
necessary to preserve or improve the operating efficiency of the
Borrower.
(iii) The turning over to the Lender of all Receipts as provided
herein.
5-12. Pay Taxes.
(a) The federal income tax returns of the Borrower have been audited by the
Internal Revenue Service (or closed by applicable statutes) for all fiscal years
through and including the Borrower's taxable year referenced on EXHIBIT 5-12,
annexed hereto, and all deficiencies, assessments, and other amounts asserted as
a result of such examinations have been fully paid or settled. No agreement is
extant which waives or extends any statute of limitations applicable to the
right of the Internal Revenue Service to assert a deficiency or make any other
claim for or in respect to federal income taxes. No issue has been raised in any
such examination which, by application of similar principles, reasonably could
be expected to result in the assertion of a deficiency for any fiscal year open
for examination, assessment, or claim by the Internal Revenue Service.
(b) All returns of the Borrower for state and local income, excise, sales,
and other taxes have been audited (or closed by applicable statutes) for all
fiscal years through and including the Borrower's taxable year referenced on
EXHIBIT 5-12, annexed hereto, and all deficiencies, assessments, and other
amounts asserted as a result of such examinations have been fully paid or
settled or the Borrower has made provisions for adequate reserves therefor. No
agreement is in existence which waives or extends any statute of limitations
applicable to the right of any state taxing authority to assert a deficiency or
make any other claim for or in respect to any such state taxes. No issue has
been raised in any such examination which, by application of similar principles,
reasonably could be expected to result in the assertion of a deficiency for any
fiscal year open for examination, assessment, or claim by any state or local
taxing authority.
(c) To the best of the Borrower's knowledge, except as disclosed on said
EXHIBIT 5-12, there are no examinations of or with respect to the Borrower
presently being conducted by the Internal Revenue Service or any state taxing
authority.
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(d) The Borrower has, and hereafter shall: pay, as they become due and
payable, all taxes and unemployment contributions and other charges of any kind
or nature levied, assessed or claimed against the Borrower or the Collateral by
any person or entity whose claim could result in an Encumbrance upon any asset
of the Borrower or by any governmental authority; properly exercise any trust
responsibilities imposed upon the Borrower by reason of withholding from
employees' pay; timely make all contributions and other payments as may be
required pursuant to any Employee Benefit Plan now or hereafter established by
the Borrower; and timely file all tax and other returns and other reports with
each governmental authority to whom the Borrower is obligated to so file.
(e) After the occurrence of one or more Suspension Events, at its option,
the Lender may, but shall not be obligated to, pay any taxes, unemployment
contributions, and any and all other charges levied or assessed upon the
Borrower or the Collateral by any person or entity or governmental authority,
and make any contributions or other payments on account of the Borrower's
Employee Benefit Plan as the Lender , in the Lender's discretion, may deem
necessary or desirable, to protect, maintain, preserve, collect, or realize upon
any or all of the Collateral or the value thereof or any right or remedy
pertaining thereto, provided, however, the Lender's making of any such payment
shall not constitute a cure or waiver of any Event of Default occasioned by the
Borrower's failure to have made such payment.
5-13. No Margin Stock. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulations G, U, T, and X, of the Board of Governors of
the Federal Reserve System of the United States). No part of the proceeds of any
borrowing hereunder will be used at any time to purchase or carry any such
margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock.
5-14. ERISA. Neither the Borrower nor any ERISA Affiliate ever has or
hereafter shall:
(a) Violate or fail to be in full compliance with the Borrower's
Employee Benefit Plan.
(b) Fail timely to file all reports and filings required by ERISA
to be filed by the Borrower.
(c) Engage in any "prohibited transactions" or "reportable
events" (respectively as described in ERISA).
(d) Engage in, or commit, any act such that a tax or penalty
could be imposed on account thereof pursuant to ERISA.
(e) Accumulate any material funding deficiency within the meaning
of ERISA.
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(f) Terminate any Employee Benefit Plan such that a lien could be
asserted of the Borrower on account thereof pursuant to ERISA.
(g) Be a member of, contribute to, or have any obligation under
any Employee Benefit Plan which is a multiemployer plan within the
meaning of Section 4001(a) of ERISA.
5-15. Hazardous Materials.
(a) The Borrower has never:
(i) been legally responsible for any release or threat of release
of any Hazardous Material; or
(ii) received notification of any release or threat of release of
any Hazardous Material from any site or vessel occupied or operated by
the Borrower and/or of the incurrence of any expense or loss in
connection with the assessment, containment, or removal of any release
or threat of release of any Hazardous Material from any such site or
vessel.
(b) The Borrower shall:
(i) dispose of any Hazardous Material only in compliance with all
Environmental Laws; and
(ii) not store on any site or vessel occupied or operated by the
Borrower and not transport or arrange for the transport of any
Hazardous Material, except if such storage or transport is in the
ordinary course of the Borrower's business and is in compliance with
all Environmental Laws.
(c) The Borrower shall provide the Lender with written notice upon the
Borrower's obtaining knowledge of any incurrence of any expense or loss by
any governmental authority or other Person in connection with the
assessment, containment, or removal of any Hazardous Material, for which
expense or loss the Borrower may be liable.
5-16. Litigation. There is not presently pending or threatened by or
against the Borrower any suit, action, proceeding, or investigation which, if
determined adversely to the Borrower, would have a material adverse effect upon
the Borrower's financial condition or ability to conduct its business as such
business is presently conducted or is contemplated to be conducted in the
foreseeable future.
5-17. Dividends or Investments. The Borrower shall not, without first
obtaining the Lender's prior written consent:
(a) Pay any cash dividend or make any other distribution in respect of
any class of the Borrower's capital stock, except that Borrower may pay
dividends on its preferred stock in an
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aggregate amount not to exceed One Hundred Fifteen ($115,000.00) Dollars in
any twelve (12) month period if such dividends are set forth in the
Business Plan submitted to and approved by the Lender.
(b) Own, redeem, retire, purchase, or acquire any of the Borrower's
capital stock, except that Borrower may own, redeem, retire, purchase or
acquire such stock if the same is set forth in the Business Plan submitted
to and approved by the Lender.
(c) Invest in or purchase any stock or securities or rights to
purchase any such stock or securities, of any corporation or other entity.
(d) Merge or consolidate or be merged or consolidated with or into any
other corporation or other entity.
(e) Consolidate any of the Borrower's operations with those of any
other corporation or other entity.
(f) Organize or create any Related Entity.
(g) Subordinate any debts or obligations owed to the Borrower by any
third party to any other debts owed by such third party to any other
Person.
5-18. Loans. The Borrower shall not make any loans or advances to, nor
acquire the Indebtedness of, any Person, provided, however, the foregoing does
not prohibit any of the following:
(a) Advance payments made to the Borrower's suppliers in the ordinary
course.
(b) Advances to the Borrower's officers, employees, and salespersons
with respect to reasonable expenses to be incurred by such officers,
employees, and salespersons for the benefit of the Borrower, which expenses
are properly substantiated by the person seeking such advance and properly
reimbursable by the Borrower.
5-19. Protection of Assets. After the occurrence of one or more Suspension
Events, the Lender , in the Lender's discretion, and from time to time, may
discharge any tax or Encumbrance on any of the Collateral, or take any other
action that the Lender may deem necessary or desirable to repair, insure,
maintain, preserve, collect, or realize upon any of the Collateral. The Lender
shall not have any obligation to undertake any of the foregoing and shall have
no liability on account of any action so undertaken except where there is a
specific finding in a judicial proceeding (in which the Lender has had an
opportunity to be heard), from which finding no further appeal is available,
that the Lender had acted in actual bad faith or in a grossly negligent manner.
The Borrower shall pay to the Lender , on demand, or the Lender , in its
discretion, may add to the Loan Account, all amounts paid or incurred by the
Lender pursuant to this section. The obligation of the Borrower to pay such
amounts is a Liability.
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5-20. Line of Business. The Borrower shall not engage in any business other
than the business in which it is currently engaged or a business reasonably
related thereto.
5-21. Affiliate Transactions. The Borrower shall not make any payment, nor
give any value to any Related Entity except for goods and services actually
purchased by the Borrower from, or sold by the Borrower to, such Related Entity
for a price which shall:
(a) be competitive and fully deductible as an "ordinary and necessary
business expense" and/or fully depreciable under the Internal Revenue Code
of 1986 and the Treasury Regulations, each as amended; and
(b) not differ from that which would have been charged in an arms
length transaction.
5-22. Executive Pay.
(a) The only Executive Officers of the Borrower, at the execution of the
within Agreement, are those individuals referenced in the definition of
"Executive Officers".
(b) Prior to the execution of the within Agreement, the Borrower furnished
the Lender with copies of all written Executive Agreements and outlines of the
salient features of all unwritten Executive Agreements (as amended to date) then
extant. There are no unwritten agreements or understandings between the Borrower
and any Executive Officer which relate to Executive Pay, written disclosure of
which has not been made to the Lender.
(c) The Borrower will not, unless approved by its Board of Directors:
(i) Enter into any Executive Agreement not existing at the execution
of the within Agreement.
(ii) Alter, amend, supplement, or otherwise change any Executive
Agreement.
(iii) Pay, provide, or facilitate any Executive Pay other than as
provided in an Executive Agreement or, if not covered by an Executive
Agreement, as permitted pursuant to Section 5-21, above.
5-23. Additional Assurances.
(a) The Borrower is not the owner of, nor has it any interest in, any
property or asset which, immediately upon the satisfaction of the conditions
precedent to the effectiveness of the credit facility contemplated hereby
(Article 4) will be not be subject to a perfected security interest in favor of
the Lender (subject only to those Encumbrances (if any) described on EXHIBIT
5-5, annexed hereto) to secure the Liabilities.
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(b) The Borrower will not hereafter acquire any asset or any interest in
property which is not, immediately upon such acquisition, subject to such a
perfected security interest in favor of the Lender to secure the Liabilities
(subject only to Encumbrances (if any) permitted pursuant to Section 5-5,
above).
(c) The Borrower shall execute and deliver to the Lender such instruments,
documents, and papers, and shall do all such things from time to time hereafter
as the Lender may request to carry into effect the provisions and intent of this
Agreement; to protect and perfect the Lender's security interests in the
Collateral; and to comply with all applicable statutes and laws, and facilitate
the collection of the Receivables Collateral. The Borrower shall execute all
such instruments as may be required by the Lender with respect to the
recordation and/or perfection of the security interests created herein.
(d) A carbon, photographic, or other reproduction of this Agreement or of
any financing statement or other instrument executed pursuant to this Section
5-23 shall be sufficient for filing to perfect the security interests granted
herein.
5-24. Adequacy of Disclosure.
(a) All financial statements furnished to the Lender by the Borrower have
been prepared in accordance with GAAP consistently applied and present fairly
the condition of the Borrower at the date(s) thereof and the results of
operations and cash flows for the period(s) covered. There has been no change in
the financial condition, results of operations, or cash flows of the Borrower
since the date(s) of such financial statements, other than changes in the
ordinary course of business, which changes have not been materially adverse,
either singularly or in the aggregate.
(b) The Borrower does not have any contingent obligations or obligation
under any Lease or capital lease which is not noted in the Borrower's financial
statements furnished to the Lender prior to the execution of the within
Agreement.
(c) No document, instrument, agreement, or paper now or hereafter given the
Lender by or on behalf of the Borrower or any guarantor of the Liabilities in
connection with the execution of the within Agreement by the Lender contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary in order to make the statements therein not
misleading. There is no fact known to the Borrower which has, or which, in the
foreseeable future could have, a material adverse effect on the financial
condition of the Borrower or any such guarantor which has not been disclosed in
writing to the Lender.
5-25. Other Covenants. The Borrower shall not indirectly do or cause to be
done any act which, if done directly by the Borrower, would breach any covenant
contained in this Agreement.
5-26. Warrants. Concurrently with the execution of this Agreement, Borrower
has issued to Lender warrants to acquire 110,000 shares of Borrower's common
stock at a price of $5.00 per
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share. In the event that borrower has not completed a subsequent offering of its
stock prior to May 31, 1998, the Company will grant to Lender, as additional
compensation for the credit facilities created hereby and not as collateral
security therefor, certain stock appreciation rights ("SAR") entitling Lender to
receive compensation in the event of a stock sale, asset sale or merger (each a
"Triggering Event") occurring prior to April 30, 2001 (the "End Date") in an
amount equal to five percent (5%) (the "Available Percentage") of the
consideration in excess of Three Million ($3,000,000.00) Dollars (the
"Consideration") paid or to be paid in connection with such Triggering Event. In
addition to the SAR, Lender shall have the right from time to time, exercised at
its option, to put in whole or in part at any time until the End Date the
Available Percentage to the Company (the "Put Right") representing a percentage
of the Company's earnings before interest and taxes, depreciation and
amortization ("EBITDA") pursuant to and in accordance with an appreciation
rights agreement (the "Appreciation Rights Agreement") in form and substance
satisfactory to Lender and its counsel. Finally, pursuant to the provisions of
the Appreciation Rights Agreement, in the event that the Company distributes any
dividend or other payment in respect of any issue of the Company's capital
stock, the Company shall distribute to Lender an amount (a "Deemed Dividend")
equal to five percent (5%) of the aggregate amount so distributed. Upon the
execution and delivery of such agreement to the Lender, the Lender will
surrender the warrants described above to the Borrower for cancellation.
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL.
6-1. Use of Inventory Collateral.
(a) The Borrower shall not engage in any sale of the Inventory other than
for fair consideration in the conduct of the Borrower's business in the ordinary
course and shall not engage in sales or other dispositions to creditors; sales
or other dispositions in bulk; and any use of any of the Inventory in breach of
any provision of this Agreement.
(b) No sale of Inventory shall be on consignment, approval, or under any
other circumstances such that, with the exception of the Borrower's customary
return policy applicable to the return of inventory purchased by the Borrower's
retail customers in the ordinary course, such Inventory may be returned to the
Borrower without the consent of the Lender
6-2. Inventory Quality. All Inventory now owned or hereafter acquired by
the Borrower is and will be of good and merchantable quality and free from
defects (other than defects within customary trade tolerances).
6-3. Adjustments and Allowances. The Borrower may grant such allowances or
other adjustments to the Borrower's Account Debtors (exclusive of extending the
time for payment of any Account or Account Receivable, which shall not be done
without first obtaining the Lender's prior written consent in each instance) as
the Borrower may reasonably deem to accord with sound business practice,
provided, however, the authority granted the Borrower pursuant to this Section
6-3 may be limited or terminated by the Lender at any time in the Lender's
discretion.
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6-4. Validity of Accounts.
(a) The amount of each Account shown on the books, records, and invoices of
the Borrower represented as owing by each Account Debtor is and will be the
correct amount actually owing by such Account Debtor and shall have been fully
earned by performance by the Borrower.
(b) As of the date hereof, unless otherwise disclosed to the Lender by the
Borrower, the Borrower has no knowledge of any impairment of the validity or
collectibility of any of the Accounts and shall notify the Lender of any such
fact immediately after Borrower becomes aware of any such impairment.
(c) The Borrower shall not post any bond to secure the Borrower's
performance under any agreement to which the Borrower is a party nor cause any
surety, guarantor, or other third party obligee to become liable to perform any
obligation of the Borrower (other than to the Lender) in the event of the
Borrower's failure so to perform.
6-5. Notification to Account Debtors. The Lender shall have the right at
any time following and during the continuance of a Suspension Event or an Event
of Default to notify any of the Borrower's Account Debtors to make payment
directly to the Lender and to collect all amounts due on account of the
Collateral.
ARTICLE 7 - CASH MANAGEMENT.
7-1. Depository Accounts.
(a) Annexed hereto as EXHIBIT 7-1 is a Schedule of all present DDA's, which
Schedule includes, with respect to each depository (i) the name and address of
that depository; (ii) the account number(s) of the account(s) maintained with
such depository; (iii) a contact person at such depository; and (iv) the
telephone number of the contact person.
(b) The Borrower shall deliver to the Lender, as a condition to the
effectiveness of the within Agreement:
(i) Proof of the mailing, to each depository institution with which
any DDA is maintained (other than the Funding Account or any Local DDA) of
notification (in form satisfactory to the Lender ) of the Lender's interest
in such DDA.
(ii) An agreement (in form satisfactory to the Lender ) with any
depository institution at which a Blocked Account is maintained.
(c) The Borrower will not establish any DDA hereafter (other than a Local
DDA) unless the Borrower, contemporaneous with such establishment, the Borrower
delivers to the Lender
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an agreement (in form satisfactory to the Lender) executed on behalf of the
depository with which such DDA is being established.
7-2. Credit Card Receipts.
(a) Annexed hereto as EXHIBIT 7-2, is a Schedule which describes all
arrangements to which the Borrower is a party with respect to the payment to the
Borrower of the proceeds of all credit card charges for sales by the Borrower.
(b) The Borrower shall deliver to the Lender, as a condition to the
effectiveness of the within Agreement, proof of the mailing to each of the
Borrower's credit card clearinghouses and processors of notice (in form
satisfactory to the Lender), which notice provides that, at the Lender's
option, payment of all credit card charges submitted by the Borrower to that
clearinghouse or other processor and any other amount payable to the Borrower by
such clearinghouse or other processor shall be directed to the Transfer Account.
The Borrower shall not change such direction or designation except upon and with
the prior written consent of the Lender.
7-3. The Transfer and the Funding Accounts.
(a) The following checking accounts have been or will be established (and
are so referred to herein):
(i) The Transfer Account: Established by the Lender with The Chase
Manhattan Bank, N.A.
(ii) The Funding Account: Established by the Borrower with Fleet
National Bank.
(iii) The Blocked Account: Established by the Borrower with Fleet
National Bank over which the Lender alone has the power of application or
withdrawal.
(b) The contents of the Blocked Account constitutes Collateral and Proceeds
of Collateral.
(c) The Borrower:
(i) Contemporaneous with the execution of the within Agreement, shall
provide the Lender with such agreement of the depository with which the
Blocked Account is maintained as may be satisfactory to the Lender; and
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(ii) Shall not establish any Blocked Account hereafter except upon not
less than thirty (30) days prior written notice to the Lender and the
delivery to the Lender of a similar such agreement.
(d) The Borrower shall pay all fees and charges of, and maintain such
impressed balances as may be required by the Lender or by any bank in which any
account is opened as required hereby (even if such account is opened by the
Lender).
7-4. Proceeds and Collection of Accounts.
(a) All Receipts constitute Collateral and proceeds of Collateral and shall
be held in trust by the Borrower for the Lender; shall not be commingled with
any of the Borrower's other funds; and shall be deposited and/or transferred
only to the Blocked Account.
(b) The Borrower shall cause the ACH or wire transfer to the Blocked
Account, no less frequently than daily (and whether or not there is then an
outstanding balance in the Loan Account) of:
(i) the then contents of each DDA (other than (A) any Local DDA and
(B) the Funding Account), each such transfer to be net of any minimum
balance, not to exceed Seven Hundred Fifty ($750.00) Dollars, as may be
required to be maintained in the subject DDA by the bank at which such DDA
is maintained); and
(ii) the proceeds of all credit card charges not otherwise provided
for pursuant hereto.
(c) Whether or not any Liabilities are then outstanding, the Borrower shall
cause the ACH or wire transfer to the Transfer Account, no less frequently than
daily, of then entire closing collected balance of the Blocked Account.
(d) In the event that, notwithstanding the provisions of this Section 7-4,
the Borrower receives or otherwise has dominion and control of any Receipts, or
any proceeds or collections of any Collateral, such Receipts, proceeds, and
collections shall be held in trust by the Borrower for the Lender and shall not
be commingled with any of the Borrower's other funds or deposited in any account
of the Borrower other than as instructed by the Lender.
7-5. Payment of Liabilities.
(a) On each Banking Day, the Lender shall apply, towards the Liabilities,
the then collected balance of the Transfer Account (net of fees charged, and of
such impressed balances as may be required by the bank at which the Transfer
Account is maintained), provided, however, for purposes of the calculation of
interest on the unpaid principal balance of the Loan Account, such payment shall
be deemed to have been made two (2) Banking Days after such transfer.
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(b) The Lender shall transfer to the Funding Account any surplus in the
Transfer Account remaining after the application towards the Liabilities
referred to in Section 7-5(a), above (less those amount which are to be netted
out, as provided therein) provided, however, in the event that both (i) a
Suspension Event has occurred and (ii) one or more L/C's are then outstanding,
the Lender may establish a funded reserve of up to one hundred ten (110%)
percent of the aggregate Stated Amounts of such L/C's.
7-6. The Funding Account. Except as otherwise specifically provided in, or
permitted by, the within Agreement, all checks shall be drawn by the Borrower
upon, and other disbursements made by the Borrower solely from, the Funding
Account.
ARTICLE 8 - LENDER AS BORROWER'S ATTORNEY-IN-FACT.
8-1. Appointment as Attorney-In-Fact. The Borrower hereby irrevocably
constitutes and appoints the Lender as the Borrower's true and lawful attorney,
with full power of substitution, to convert the Collateral into cash at the sole
risk, cost, and expense of the Borrower, but for the sole benefit of the Lender.
Such appointment shall become effective and shall remain in effect upon the
occurrence and continuance of a Suspension Event or an Event of Default. The
rights and powers granted the Lender by the within appointment include but are
not limited to the right and power to:
(a) Prosecute, defend, compromise, or release any action relating to
the Collateral.
(b) Sign change of address forms to change the address to which the
Borrower's mail is to be sent to such address as the Lender shall
designate; receive and open the Borrower's mail; remove any Receivables
Collateral and Proceeds of Collateral therefrom and turn over the balance
of such mail either to the Borrower or to any trustee in bankruptcy,
receiver, assignee for the benefit of creditors of the Borrower, or other
legal representative of the Borrower whom the Lender determines to be the
appropriate person to whom to so turn over such mail.
(c) Endorse the name of the Borrower in favor of the Lender upon any
and all checks, drafts, notes, acceptances, or other items or instruments;
sign and endorse the name of the Borrower on, and receive as secured party,
any of the Collateral, any invoices, schedules of Collateral, freight or
express receipts, or bills of lading, storage receipts, warehouse receipts,
or other documents of title respectively relating to the Collateral.
(d) Sign the name of the Borrower on any notice to the Borrower's
Account Debtors or verification of the Receivables Collateral; sign the
Borrower's name on any Proof of Claim in Bankruptcy against Account
Debtors, and on notices of lien, claims of mechanic's liens, or assignments
or releases of mechanic's liens securing the Accounts.
(e) Take all such action as may be necessary to obtain the payment of
any letter of credit and/or banker's acceptance of which the Borrower is a
beneficiary.
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(f) Repair, manufacture, assemble, complete, package, deliver, alter
or supply goods, if any, necessary to fulfill in whole or in part the
purchase order of any customer of the Borrower.
(g) Use, license or transfer any or all General Intangibles of the
Borrower.
(h) Sign and file or record any financing or other statements in order
to perfect or protect the Lender's security interest in the Collateral.
8-2. No Obligation to Act. The Lender shall not be obligated to do any of
the acts or to exercise any of the powers authorized by Section 8-1 herein, but
if the Lender elects to do any such act or to exercise any of such powers, it
shall not be accountable for more than it actually receives as a result of such
exercise of power, and shall not be responsible to the Borrower for any act or
omission to act except for any act or omission to act as to which there is a
final determination made in a judicial proceeding (in which proceeding the
Lender has had an opportunity to be heard) which determination includes a
specific finding that the subject act or omission to act had been grossly
negligent or in actual bad faith.
ARTICLE 9 - FINANCIAL AND OTHER REPORTING REQUIREMENTS/FINANCIAL COVENANTS.
9-1. Maintain Records. The Borrower shall:
(a) At all times, keep proper books of account, in which full, true,
and accurate entries shall be made of all of the Borrower's transactions,
all in accordance with GAAP applied consistently with prior periods to
fairly reflect the financial condition of the Borrower at the close of, and
its results of operations for, the periods in question.
(b) Timely provide the Lender with those financial reports,
statements, and schedules required by this Article 9 or otherwise, each of
which reports, statements and schedules shall be prepared, to the extent
applicable, in accordance with GAAP applied consistently with prior periods
to fairly reflect the financial condition of the Borrower at the close of,
and its results of operations for, the period(s) covered therein.
(c) At all times, keep accurate current records of the Collateral
including, without limitation, accurate current stock, cost, and sales
records of its Inventory, accurately and sufficiently itemizing and
describing the kinds, types, and quantities of Inventory and the cost and
selling prices thereof.
(d) At all times, retain independent certified public accountants who
are reasonably satisfactory to the Lender and instruct such accountants to
fully cooperate with, and be available to, the Lender to discuss the
Borrower's financial performance, financial condition, operating results,
controls, and such other matters, within the scope of the retention of such
accountants, as may be raised by the Lender.
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(e) Not change the Borrower's fiscal year.
(f) Not change the Borrower's taxpayer identification number.
9-2. Access to Records.
(a) The Borrower shall accord the Lender and the Lender's representatives
with access from time to time as the Lender and such representatives may require
to all properties owned by or over which the Borrower has control. The Lender
and the Lender's representatives shall have the right, and the Borrower will
permit the Lender and such representatives from time to time as the Lender and
such representatives may request, to examine, inspect, copy, and make extracts
from any and all of the Borrower's books, records, electronically stored data,
papers, and files. The Borrower shall make all of the Borrower's copying
facilities available to the Lender. Unless there has occurred a Suspension Event
or an Event of Default which is continuing, the Lender shall give Borrower
fourteen (14) days notice of any intended audit.
(b) The Borrower hereby authorizes the Lender and the Lender's
representatives to:
(i) Inspect, copy, duplicate, review, cause to be reduced to hard
copy, run off, draw off, and otherwise use any and all computer or
electronically stored information or data which relates to the Borrower, or
any service bureau, contractor, accountant, or other person, and directs
any such service bureau, contractor, accountant, or other person fully to
cooperate with the Lender and the Lender's representatives with respect
thereto.
(ii) Verify at any time the Collateral or any portion thereof,
including verification with Account Debtors, and/or with the Borrower's
computer billing companies, collection agencies, and accountants and to
sign the name of the Borrower on any notice to the Borrower's Account
Debtors or verification of the Collateral.
9-3. Immediate Notice to Lender.
(a) The Borrower shall provide the Lender with written notice immediately
upon its knowledge of the occurrence of any of the following events, which
written notice shall be with reasonable particularity as to the facts and
circumstances in respect of which such notice is being given:
(i) Any change in the Borrower's Executive Officers, officers,
directors, controllers or key employees.
(ii) The completion of any physical count of the Borrower's Inventory
(together with a copy of the certified results thereof).
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(iii) Any ceasing of the Borrower's making of payment, in the ordinary
course, to any of its creditors (including the ceasing of the making of
such payments on account of a dispute with the subject creditor).
(iv) Any failure by the Borrower to pay rent at any of the Borrower's
locations, which failure continues for more than twenty (20) days following
the day on which such rent first came due. If the Borrower has any dispute
with any landlord with respect to rents payable or other matters, the
Borrower shall give written notice of said dispute.
(v) Any material change in the business, operations, or financial
affairs of the Borrower.
(vi) The occurrence of any Suspension Event.
(vii) Any intention on the part of the Borrower to discharge the
Borrower's present independent accountants or any withdrawal or resignation
by such independent accountants from their acting in such capacity (as to
which, see Subsection 9-1(d)).
(viii) Any litigation which, if determined adversely to the Borrower,
might have a material adverse effect on the financial condition of the
Borrower.
(b) The Borrower shall:
(i) Provide the Lender , when so distributed, with copies of any
materials distributed to the shareholders of the Borrower (in their
capacity as such shareholders).
(ii) Add the Lender as an addressee on all mailing lists maintained by
or for the Borrower.
(iii) At the request of the Lender, from time to time, provide the
Lender with copies of all advertising (including copies of all print
advertising and duplicate tapes of all video and radio such advertising).
(iv) Provide the Lender, when received by the Borrower, with a copy of
any management letter or similar communications from any accountant of the
Borrower.
9-4. Borrowing Base Certificate. The Borrower shall provide the Lender,
daily, with a Borrowing Base Certificate (in the form of EXHIBIT 9.4 annexed
hereto, as such form may be revised from time to time by the Lender ) and shall
also provide Lender, daily, with an Average Cost Inventory Report (such report
to be in form and substance satisfactory to Lender). Such Certificate and such
Report shall be submitted to Lender on each day that Borrower requests a loan
and in all events, shall be submitted to Lender on Wednesday and Friday of each
week. Such Certificate and such Report may be sent to the Lender by facsimile
transmission, provided that the originals thereof are forwarded to the Lender on
the date of such transmission.
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9-5. Weekly Reports. Weekly, on Wednesday of each week (as of the then
immediately preceding Saturday) the Borrower shall provide the Lender with a
Flash Sales Report (Borrower format acceptable). Such reports may be sent to the
Lender by facsimile transmission, provided that the original thereof is
forwarded to the Lender on the date of such transmission.
9-6. Monthly Reports.
(a) Monthly, the Borrower shall provide the Lender with original
counterparts of (each in such form as the Lender from time to time may specify):
(i) Within Fifteen (15) days of the end of the previous month:
(A) An Average Cost Report.
(B) An Inventory on Order Report and Receivings.
(C) Summary of monthly sales and payment type report
(D) Summary of monthly receivings by vendor
(ii) Within Forty (40) days of the end of the previous month:
(A) A Statement of Gross Margin.
(B) Reconciliation of Inventory to the general ledger as of the
end of the subject month.
(C) An aging of the Borrower's accounts payable.
(D) An internally prepared financial statement of the Borrower's
financial condition at, and the results of its operations for, the
period ending with the end of the subject month, which financial
statement shall include, at a minimum, a balance sheet, income
statement (on a store specific and on a "consolidated" basis), cash
flow and comparison of same store sales for the corresponding month of
the then immediately previous year, as well as to the Business Plan.
(E) A statement of Store Activity (Borrower's format).
(F) a Rollforward of perpetual inventory.
(b) For purposes of Section 9-6(a)(i), above, the first "previous month" in
respect of which the items required by that Section shall be provided shall be
October, 1997 and for purposes of Section 9-6(a)(ii), above, the first "previous
month" in respect of which the items required by that Section shall be provided
shall be October, 1997.
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9-7. Quarterly Reports. Quarterly, within Forty Five (45) days following
the end of each of the Borrower's fiscal quarters, the Borrower shall provide
the Lender with an original counterpart of a management prepared financial
statement of the Borrower for the period from the beginning of the Borrower's
then current fiscal year through the end of the subject quarter, with
comparative information for the same period of the previous fiscal year, which
statement shall include, at a minimum, a balance sheet, income statement (on a
store specific and on a "consolidated" basis), statement of changes in
shareholders' equity, and cash flows and comparisons for the corresponding
quarter of the then immediately previous year, as well as to the Business Plan.
9-8. Annual Reports.
(a) Annually, within ninety (90) days following the end of the Borrower's
fiscal year, the Borrower shall furnish the Lender with an original signed
counterpart of the Borrower's annual financial statement, which statement shall
have been prepared by, and bearing the unqualified opinion of, the Borrower's
independent certified public accountants (i.e. said statement shall be
"certified" by such accountants). Such annual statement shall include, at a
minimum, a balance sheet, income statement, statement of changes in
shareholders' equity, cash flows and all forms which are now or may in the
future be required to be filed with the Securities and Exchange Commission.
(b) Each annual statement shall be accompanied by such accountant's
Certificate indicating that to the best knowledge of such accountant, no event
has occurred which is or which, solely with the passage of time or the giving of
notice (or both) would be, an Event of Default.
9-9. Officers' Certificates. The Borrower shall cause the Borrower's
President and Chief Financial Officer respectively to provide such Person's
Certificate with those monthly, quarterly, and annual statements to be furnished
pursuant to this Agreement, which Certificate shall:
(a) Indicate that the subject statement was prepared in accordance
with GAAP consistently applied, and presents fairly the financial condition
of the Borrower at~the close of, and the results of the Borrower's
operations and cash flows for, the period(s) covered, subject, however
(with the exception of the Certificate which accompanies such annual
statement) to usual year end adjustments.
(b) Indicate either that (i) no Suspension Event has occurred or (ii)
if such an event has occurred, its nature (in reasonable detail) and the
steps (if any) being taken or contemplated by the Borrower to be taken on
account thereof.
(c) Include calculations concerning the Borrower's compliance (or
failure to comply) at the date of the subject statement with each of the
financial performance covenants included in Section 9-12, below.
(d) Indicate that all taxes (broken down by type and taxing authority)
have or have not been paid.
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(e) Indicate that all rent and additional rent (broken down by store
location) due pursuant to any store lease have or have not been paid.
9-10. Inventories. Appraisals. and Audits.
(a) The Lender, at the expense of the Borrower, may participate in and/or
observe each physical count and/or inventory of so much of the Collateral as
consists of Inventory which is undertaken on behalf of the Borrower.
(b) Upon the Lender's request from time to time, the Borrower shall obtain,
or shall permit the Lender to obtain (in all events, at the Borrower's expense)
physical counts and/or inventories of the Collateral, conducted by such
inventory takers as are satisfactory to the Lender and following such
methodology as may be required by the Lender, each of which physical counts
and/or inventories shall be observed by the Borrower's accountants. The Lender
will require the Borrower to conduct two (2) such counts and/or inventories
during each twelve (12) month period during which the within Agreement is in
effect, but in its discretion, may undertake additional such counts or
inventories during such period.
(c) Upon the Lender's request from time to time, the Borrower shall permit
the Lender to obtain appraisals (in all events, at the Borrower's expense)
conducted by such appraisers as are satisfactory to the Lender.
(d) The Lender contemplates conducting three (3) commercial finance audits
(in each event, at the Borrower's expense in the amount of $750.00 per man day,
plus expenses) of the Borrower's books and records during any twelve (12) month
period during which the within Agreement is in effect, but in its discretion,
may undertake additional such audits during such period.
(e) The Lender from time to time (in all events, at the Borrower's expense)
may undertake "mystery shopping" (so-called) visits to all or any of the
Borrower's business premises. The Lender shall provide the Borrower with a copy
of any non-company confidential results of such mystery shopping.
9-11. Additional Financial Information.
(a) In addition to all other information required to be provided pursuant
to this Article 9, the Borrower promptly shall provide the Lender with such
other and additional information concerning the Borrower and any guarantor of
the Liabilities, the Collateral, the operation of the Borrower's business, and
the Borrower's financial condition, including original counterparts of financial
reports and statements, as the Lender may from time to time request from the
Borrower.
(b) The Borrower may provide the Lender, from time to time hereafter, with
updated Business Plans. In all events, the Borrower, no sooner than ninety (90)
nor later than sixty (60) days prior to the end of each of the Borrower's fiscal
years, shall furnish the Lender with an updated and extended Business Plan which
shall go out at least through the end of the then next fiscal year. In each
event, such updated and extended Business Plans shall be prepared pursuant to a
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methodology and shall include such assumptions as are satisfactory to the
Lender. The Lender, following the receipt of any of such Business Plans, may,
but shall not be under any obligation to, revise the financial performance
covenants included on EXHIBIT 9-12, annexed hereto.
9-12. Financial Performance Covenants. The Borrower shall observe and
comply with those financial performance covenants set forth on EXHIBIT 9-12(a),
annexed hereto, certain of which covenants are based on the Business Plan set
forth on EXHIBIT 9-12(b), annexed hereto.
9-13. Electronic Reporting. At Lender's option all information and reports
required to be substituted to Lender by Borrower shall be transmitted
electronically pursuant to an electronic transmitting reporting system and shall
be in a record layout format designated by Lender from time to time. Lender
shall not require electronic reporting if such reporting is beyond the then
capabilities of the systems maintained by the Borrower.
ARTICLE 10 - EVENTS OF DEFAULT
The occurrence of any event described in this Article 10 respectively shall
constitute an "Event of Default" herein. Upon the occurrence of any Event of
Default described in Section 10-11, any and all Liabilities shall become due and
payable without any further act on the part of the Lender. Upon the occurrence
of any other Event of Default, any and all Liabilities shall become immediately
due and payable, at the option of the Lender and without notice or demand. The
occurrence of any Event of Default shall also constitute, without notice or
demand, a default under all other agreements between the Lender and the Borrower
and instruments and papers given the Lender by the Borrower, whether such
agreements, instruments, or papers now exist or hereafter arise.
10-1. Failure to Pay Revolving Credit. The failure by the Borrower to pay
any amount when due under the Revolving Credit.
10-2. Failure To Make Other Payments. The failure by the Borrower to pay
when due (or upon demand, if payable on demand) any payment Liability other than
under the Revolving Credit.
10-3. Failure to Perform Covenant or Liability (No Grace Period). The
failure by the Borrower to promptly, punctually, faithfully and timely perform,
discharge, or comply with any covenant or Liability not otherwise described in
section 10-1 or section 10-2, above, and included in any of the following
provisions hereof:
Section Relates to:
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5-4 Location of Collateral
5-5 Title to Assets
5-6 Indebtedness
5-7 Insurance Policies
5-12(d) Pay Taxes
5-21 Affiliate Transactions
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5-23 Additional Assurances
Article 7 Cash Management
Article 9 Financial Reporting Requirements
and Financial Covenants
10-4. Failure to Perform Covenant or Liability (Grace Period). The failure
by the Borrower to promptly, punctually and faithfully perform, or observe any
term, covenant or agreement on its part to be performed or observed pursuant to
any of the provisions of this Agreement, other than those described in Sections
10-1, 10-2 or 10-3, or in any other agreement with Lender which is not remedied
within the earlier of twenty (20) days after (i) notice thereof by Lender to
Borrower, or (ii) the date Borrower was required to give notice to Lender
pursuant to Section 9-3(a)(vi) hereof.
10-5. Misrepresentation. The determination by the Lender that any
representation or warranty at any time made by the Borrower to the Lender, was
not true or complete in all material respects when given.
10-6. Acceleration of Other Debt. Breach of Lease. The occurrence of any
event such that any Indebtedness of the Borrower to any creditor other than the
Lender is accelerated or, without the consent of the Borrower, any Lease is
terminated.
10-7. Default Under Other Agreements. The occurrence of any breach or
default under any agreement between the Lender and the Borrower or instrument or
paper given the Lender by the Borrower, whether such agreement, instrument, or
paper now exists or hereafter arises (notwithstanding that the Lender may not
have exercised its rights upon default under any such other agreement,
instrument or paper).
10-8. Casualty Loss. Non-Ordinary Course Sales. The occurrence of any (a)
uninsured loss, theft, damage, or destruction of or to any material portion of
the Collateral having a fair market value in excess of Twenty Thousand
($20,000.00) Dollars, or (b) sale (other than sales in the ordinary course of
business) of any material portion of the Collateral having a fair market value
in excess of Twenty Thousand ($20,000.00) Dollars.
10-9. Judgment. Restraint of Business.
(a) The service of process upon the Lender or any Participant seeking to
attach, by trustee, mesne, or other process, any of the Borrower's funds on
deposit with, or assets of the Borrower in the possession of, the Lender or such
Participant.
(b) The entry of any judgment against the Borrower, which judgment is not
satisfied (if a money judgment) or appealed from (with execution or similar
process stayed) within thirty (30) days of its entry.
(c) The entry of any order or the imposition of any other process having
the force of law, the effect of which is to restrain in any material way the
conduct by the Borrower of its business in the ordinary course.
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10-10. Cessation of Business or Voluntary Insolvency Proceedings. The (i)
cessation of operations of Borrower's business as conducted on the date of this
Agreement; (ii) filing by Borrower of a petition or request for liquidation,
reorganization, arrangement, adjudication as a bankrupt, relief as a debtor, or
other relief under the bankruptcy, insolvency, or similar laws of the United
States of America or any state or territory thereof or any foreign jurisdiction
now or hereafter in effect; (iii) making by Borrower of a general assignment for
the benefit of creditors; (iv) consent by the Borrower to the appointment of a
receiver or trustee, including, without limitation, a "custodian," as defined in
the Bankruptcy Code, for Borrower or any of Borrower's assets; (v) making of
any, or sending of any, notice of any intended, bulk sale by Borrower; or (vi)
execution by Borrower of a consent to any other type of insolvency proceeding
(under the Bankruptcy Code or otherwise) or any formal or informal proceeding
for the dissolution or liquidation of, or settlement of, claims against or
winding up of affairs of, Borrower.
10-11. Involuntary Insolvency Proceedings. The appointment (which
appointment shall not be vacated or such petition or proceeding shall not be
dismissed with sixty (60) days after such appointment, filing or institution) of
a receiver, trustee, custodian, or officer performing similar functions,
including, without limitation, a "custodian," as defined in the Bankruptcy Code,
for Borrower or any of Borrower's assets; or the filing against Borrower of a
request or petition for liquidation, reorganization, arrangement, adjudication
as a bankrupt, or other relief under the bankruptcy, insolvency, or similar laws
of the United States of America, any state or territory thereof, or any foreign
jurisdiction now or hereafter in effect; or of any other type of insolvency
proceeding (under the Bankruptcy Code or otherwise) or any formal or informal
proceeding for the dissolution or liquidation of, settlement of claims against,
or winding up of affairs of Borrower shall be instituted against Borrower.
10-12. Insecurity. The occurrence of any event or circumstance with respect
to the Borrower such that Lender shall believe in good faith that the prospect
of payment of all or any part of the Liabilities or the performance by the
Borrower under this Agreement or any other agreement between the Lender and the
Borrower is impaired or there shall occur any material adverse change in the
business or financial condition of the Borrower.
10-13. Default by Guarantor or Related Entity. The occurrence of any of the
foregoing Events of Default with respect to any guarantor of the Liabilities, or
the occurrence of any of the foregoing Events of Default with respect to any
parent (if the Borrower is a corporation), subsidiary, or Related Entity, as if
such guarantor, parent, or Related Entity were the "Borrower" described therein.
10-14. Indictment - Forfeiture. The indictment of, or institution of any
legal process or proceeding against, the Borrower, any Executive Officer or any
guarantor of the Liabilities under any federal, state, municipal, and other
civil or criminal statute, rule, regulation, order, or other requirement having
the force of law where the relief, penalties, or remedies sought or available
include the forfeiture of any property of the Borrower and/or the imposition of
any stay or other
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order, the effect of which could be to restrain in any material way the conduct
by the Borrower of its business in the ordinary course.
10-15. Termination of Guaranty. The termination or attempted termination of
any guaranty by any guarantor of the Liabilities.
10-16. Challenge to Loan Documents.
(a) Any challenge by or on behalf of the Borrower or any guarantor of the
Liabilities to the validity of any Loan Document or the applicability or
enforceability of any Loan Document strictly in accordance with the subject Loan
Document's terms or which seeks to void, avoid, limit, or otherwise adversely
affect any security interest created by or in any Loan Document or any payment
made pursuant thereto.
(b) Any determination by any court or any other judicial or government
authority that any Loan Document is not enforceable strictly in accordance with
the subject Loan Document's terms or which voids, avoids, limits, or otherwise
adversely affects any security interest created by any Loan Document or any
payment made pursuant thereto.
10-17. Change in Board of Directors. The failure to maintain Michael Recca
or his designee as a member of the Board of Directors of Borrower.
10.18. Past Due Tax Returns. The failure to file all past due federal and
state income tax returns and pay all taxes shown as due thereon, together with
all interest and penalties prior to November 30, 1997 and to submit satisfactory
evidence of the same to the Lender by that date.
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT
In addition to all of the rights, remedies, powers, privileges, and
discretions which the Lender is provided prior to the occurrence of an Event of
Default, the Lender shall have the following rights and remedies upon the
occurrence of any Event of Default and at any time thereafter. No stay which
otherwise might be imposed pursuant to the Bankruptcy Code or otherwise shall
stay, limit, prevent, hinder, delay, restrict, or otherwise prevent the Lender's
exercise of any of such rights and remedies.
11-1. Rights of Enforcement. The Lender shall have all of the rights and
remedies of a secured party upon default under the UCC, in addition to which the
Lender shall have all and each of the following rights and remedies:
(a) To collect the Receivables Collateral with or without the taking
of possession of any of the Collateral.
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(b) To take possession of all or any portion of the Collateral.
(c) To sell, lease, or otherwise dispose of any or all of the
Collateral, in its then condition or following such preparation or
processing as the Lender deems advisable and with or without the taking of
possession of any of the Collateral.
(d) To conduct one or more going out of business sales which include
the sale or other disposition of the Collateral.
(e) To apply the Receivables Collateral or the proceeds of the
Collateral towards (but not necessarily in complete satisfaction of) the
Liabilities.
(f) To exercise all or any of the rights, remedies, powers,
privileges, and discretions under all or any of the Loan Documents.
11-2. Sale of Collateral.
(a) Any sale or other disposition of the Collateral may be at public or
private sale upon such terms and in such manner as the Lender deems advisable,
having due regard to compliance with any statute or regulation which might
affect, limit, or apply to the Lender's disposition of the Collateral.
(b) The Lender, in the exercise of the Lender's rights and remedies upon
default, may conduct one or more going out of business sales, in the Lender's
own right or by one or more agents and contractors. Such sale(s) may be
conducted upon any premises owned, leased, or occupied by the Borrower. The
Lender and any such agent or contractor, in conjunction with any such sale, may
augment the Inventory with other goods (all of which other goods shall remain
the sole property of the Lender or such agent or contractor). Any amounts
realized from the sale of such goods which constitute augmentations to the
Inventory (net of an allocable share of the costs and expenses incurred in their
disposition) shall be the sole property of the Lender or such agent or
contractor and neither the Borrower nor any Person claiming under or in right of
the Borrower shall have any interest therein.
(c) Unless the Collateral is perishable or threatens to decline speedily in
value, or is of a type customarily sold on a recognized market (in which event
the Lender shall provide the Borrower with such notice as may be practicable
under the circumstances), the Lender shall give the Borrower at least seven (7)
business days prior written notice of the date, time, and place of any proposed
public sale, and of the date after which any private sale or other disposition
of the Collateral may be made. The Borrower agrees that such written notice
shall satisfy all requirements for notice to the Borrower which are imposed
under the UCC or other applicable law with respect to the exercise of the
Lender's rights and remedies upon default.
(d) The Lender may purchase the Collateral, or any portion of it at any
sale held under this Article.
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(e) The Lender shall apply the proceeds of any exercise of the Lender's
Rights and Remedies under this Article 11 towards the Liabilities in such
manner, and with such frequency, as the Lender determines.
11-3. Occupation of Business Location. In connection with the Lender's
exercise of the Lender's rights under this Article 11, the Lender may enter
upon, occupy, and use any premises owned or occupied by the Borrower, and may
exclude the Borrower from such premises or portion thereof as may have been so
entered upon, occupied, or used by the Lender . The Lender shall not be required
to remove any of the Collateral from any such premises upon the Lender's taking
possession thereof, and may render any Collateral unusable to the Borrower. In
no event shall the Lender be liable to the Borrower for use or occupancy by the
Lender of any premises pursuant to this Article 11, nor for any charge (such as
wages for the Borrower's employees and utilities) incurred in connection with
the Lender's exercise of the Lender's Rights and Remedies.
11-4. Grant of Nonexclusive License. The Borrower hereby grants to the
Lender a royalty free nonexclusive irrevocable license to use, apply, and affix
any trademark, tradename, logo, or the like in which the Borrower now or
hereafter has rights, such license being with respect to the Lender's exercise
of the rights hereunder including, without limitation, in connection with any
completion of the manufacture of Inventory or sale or other disposition of
Inventory.
11-5. Assembly of Collateral. The Lender may require the Borrower to
assemble the Collateral and make it available to the Lender at the Borrower's
sole risk and expense at a place or places which are reasonably convenient to
both the Lender and Borrower.
11-6. Rights and Remedies. The rights, remedies, powers, privileges, and
discretions of the Lender hereunder (herein, the "Lender's Rights and Remedies")
shall be cumulative and not exclusive of any rights or remedies which it would
otherwise have. No delay or omission by the Lender in exercising or enforcing
any of the Lender's Rights and Remedies shall operate as, or constitute, a
waiver thereof. No waiver by the Lender of any Event of Default or of any
default under any other agreement shall operate as a waiver of any other default
hereunder or under any other agreement. No single or partial exercise of any of
the Lender's Rights or Remedies, and no express or implied agreement or
transaction of whatever nature entered into between the Lender and any person,
at any time, shall preclude the other or further exercise of the Lender's Rights
and Remedies. No waiver by the Lender of any of the Lender's Rights and Remedies
on any one occasion shall be deemed a waiver on any subsequent occasion, nor
shall it be deemed a continuing waiver. All of the Lender's Rights and Remedies
and all of the Lender's rights, remedies, powers, privileges, and discretions
under any other agreement or transaction are cumulative, and not alternative or
exclusive, and may be exercised by the Lender at such time or times and in such
order of preference as the Lender in its sole discretion may determine. The
Lender's Rights and Remedies may be exercised without resort or regard to any
other source of satisfaction of the Liabilities.
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11-7. Upon the happening and continuance of one or more events described in
Section 10-11, the Lender's obligation hereunder to make loans and advances
shall be cancelled immediately, automatically and without notice.
Notwithstanding the foregoing, the Lender's obligations hereunder to make loans
and advances to the Borrower shall be reinstated if, within five (5) days of the
appointment, filing or institution described in Section 10-11, the Borrower
obtains an order in form and substance satisfactory to the Lender confirming
that the security interest created pursuant to this Agreement extends to
property, proceeds, products, offsprings or profits acquired by the Borrower or
the estate of the Borrower after the commencement of such proceeding to extend
provided by this Agreement and by applicable new bankruptcy law.
ARTICLE 12 - NOTICES.
12-1. Notice Addresses. All notices, demands, and other communications made
in respect of this Agreement (other than a request for a loan or advance or
other financial accommodation under the Revolving Credit) shall be made to the
following addresses, each of which may be changed upon seven (7) days written
notice to all others given by certified mail, return receipt requested:
If to the Lender: Paragon Capital LLC
Paragon Towers
233 Needham Street
Newton, Massachusetts 02164
Attention: Andrew H. Moser, President
Phone:(617) 964-2100
Fax: (617) 964-9446
With a copy to: Joel B. Rosenthal, Esq.
Shapiro, Israel & Weiner, P.C.
100 North Washington Street
Boston, Massachusetts 02114
Phone: (617) 742-4200
Fax: (617) 742-2355
If to the Borrower: Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Attention: Joseph J. Calabrese,
Executive Vice President and
Chief Financial Officer
Phone:(201) 842-0078
Fax: (201) 842-0660
With a copy to: Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, NY 11501-4366
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Attention: Jeffrey A. Wurst, Esq.
Phone:(516) 663-6535
Fax: (516) 663-6678
12-2. Notice Given.
(a) Except as otherwise specifically provided herein, notices shall be
deemed made and correspondence received, as follows (all times being local to
the place of delivery or receipt):
(i) By mail: the sooner of when actually received or three (3) days
following deposit in the United States mail, postage prepaid.
(ii) By recognized overnight express delivery: the Banking Day
following the day when sent.
(iii) By hand: If delivered on a Banking Day after 9:00 A.M. and no
later than three (3) hours prior to the close of customary business hours
of the recipient, when delivered. Otherwise, at the opening of the then
next Banking Day.
(iv) By facsimile transmission (which must include a header indicated
the party sending such transmission): If sent on a Banking Day after 9:00
A.M. and no later than Three (3) hours prior to the close of customary
business hours of the recipient, one (1) hour after being sent. Otherwise,
at the opening of the then next Banking Day.
(b) Rejection or refusal to accept delivery and inability to deliver
because of a changed address or facsimile number for which no due notice was
given shall each be deemed receipt of the notice sent.
ARTICLE 13 - TERM.
13-1. Termination of Revolving Credit. This Agreement is, and is intended
to be, a continuing agreement and shall remain in full force and effect for an
initial term ending on the Maturity Date, and thereafter for successive
twelve-month periods, each beginning on the first day of October (commencing
October 1, 2000) of each year and ending on September 30 of the following year
(each such twelve-month period is hereinafter referred to as a "renewal term");
provided, however, that either party may terminate this Agreement as of the end
of the initial term or any subsequent renewal term by giving the other party
notice to terminate in writing at least sixty (60) days prior to the end of any
such period whereupon at the end of such period all Liabilities shall be due and
payable in full without presentation, demand, or further notice of any kind,
whether or not all or any part of the Liabilities is otherwise due and payable
pursuant to the agreement or instrument evidencing same. Lender may terminate
this Agreement immediately and without notice upon the occurrence of an Event of
Default. Notwithstanding the foregoing or anything in this Agreement or
elsewhere to the contrary, the security interest, Lender's rights and remedies
hereunder and Borrower's obligations and liabilities hereunder shall survive any
termination of this Agreement and
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shall remain in full force and effect until all of the Liabilities outstanding,
or contracted or committed for (whether or not outstanding), before the receipt
of such notice by Lender, and any extensions or renewals thereof (whether made
before or after receipt of such notice), together with interest accruing thereon
after such notice, shall be finally and irrevocably paid in full. No Collateral
shall be released or financing statement terminated until such final and
irrevocable payment in full of the Liabilities, as described in the preceding
sentence.
13-2. Effect of Termination. Upon the termination of Revolving Credit, the
Borrower shall pay the Lender (whether or not then due), in immediately
available funds, all then Liabilities including, without limitation: the entire
balance of the Loan Account; any then remaining installments of the Commitment
Fee; any then remaining balance of the Facility Fee; any accrued and unpaid Line
Fee; any Prepayment Premium and all unreimbursed costs and expenses of the
Lender for which the Borrower is responsible, and shall make such arrangements
concerning any L/C's then outstanding are reasonably satisfactory to the Lender.
Until such payment, all provisions of this Agreement, other than those contained
in Article 1 which place an obligation on the Lender to make any loans or
advances or to provide financial accommodations under the Revolving Credit or
otherwise, shall remain in full force and effect until all Liabilities shall
have been paid in full. The release by the Lender of the security interests
granted the Lender by the Borrower hereunder may be upon such conditions and
indemnifications as the Lender may require.
13-3. Prepayment Premium. If Borrower pays in full all or substantially all
of the Liabilities prior to the end of the initial term of this Agreement (or
any renewal term), other than temporarily from funds internally generated in the
ordinary course of business, at the time of such payment Borrower shall also pay
to Lender a prepayment premium of $50,000. Any tender of payment in full of the
Liabilities following an acceleration by Lender of the Liabilities pursuant to
Article 10, shall be for purposes of this section deemed to be a prepayment
requiring Borrower to pay the aforementioned prepayment premium.
Such prepayment premium shall be paid to Lender as liquidated damages for
the loss of the bargain by Lender and not as a penalty.
ARTICLE 14 - GENERAL.
14-1. Protection of Collateral. The Lender has no duty as to the collection
or protection of the Collateral beyond the safe custody of such of the
Collateral as may come into the possession of the Lender and shall have no duty
as to the preservation of rights against prior parties or any other rights
pertaining thereto. The Lender may include reference to the Borrower (and may
utilize any logo or other distinctive symbol associated with the Borrower) in
connection with any advertising, promotion, or marketing undertaken by the
Lender.
14-2. Successors and Assigns. This Agreement shall be binding upon the
Borrower and the Borrower's representatives, successors, and assigns and shall
enure to the benefit of the Lender and the Lender's successors and assigns
provided, however, no trustee or other fiduciary appointed with respect to the
Borrower shall have any rights hereunder. In the event that the Lender assigns
or
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transfers its rights under this Agreement, the assignee shall thereupon succeed
to and become vested with all rights, powers, privileges, and duties of the
Lender hereunder and the Lender shall thereupon be discharged and relieved from
its duties and obligations hereunder.
14-3. Severability. Any determination that any provision of this Agreement
or any application thereof is invalid, illegal, or unenforceable in any respect
in any instance shall not affect the validity, legality, or enforceability of
such provision in any other instance, or the validity, legality, or
enforceability of any other provision of this Agreement.
14-4. Amendments. Course of Dealing.
(a) This Agreement and the other Loan Documents incorporate all discussions
and negotiations between the Borrower and the Lender, either express or implied,
concerning the matters included herein and in such other instruments, any
custom, usage, or course of dealings to the contrary notwithstanding. No such
discussions, negotiations, custom, usage, or course of dealings shall limit,
modify, or otherwise affect the provisions thereof. No failure by the Lender to
give notice to the Borrower of the Borrower's having failed to observe and
comply with any warranty or covenant included in any Loan Document shall
constitute a waiver of such warranty or covenant or the amendment of the subject
Loan Document. No change made by the Lender in the manner by which Availability
is determined shall obligate the Lender to continue to determine Availability in
that manner.
(b) The Borrower may undertake any action otherwise prohibited hereby, and
may omit to take any action otherwise required hereby, upon and with the express
prior written consent of the Lender. No consent, modification, amendment, or
waiver of any provision of any Loan Document shall be effective unless executed
in writing by or on behalf of the party to be charged with such modification,
amendment, or waiver (and if such party is the Lender, then by a duly authorized
officer thereof). Any modification, amendment, or waiver provided by the Lender
shall be in reliance upon all representations and warranties theretofore made to
the Lender by or on behalf of the Borrower (and any guarantor, endorser, or
surety of the Liabilities) and consequently may be rescinded in the event that
any of such representations or warranties was not true and complete in all
material respects when given.
14-5. Power of Attorney. In connection with all powers of attorney included
in this Agreement, the Borrower hereby grants unto the Lender full power to do
any and all things necessary or appropriate in connection with the exercise of
such powers as fully and effectually as the Borrower might or could do, hereby
ratifying all that said attorney shall do or cause to be done by virtue of this
Agreement. No power of attorney set forth in this Agreement shall be affected by
any disability or incapacity suffered by the Borrower and each shall survive the
same. All powers conferred upon the Lender by this Agreement, being coupled with
an interest, shall be irrevocable until this Agreement is terminated by a
written instrument executed by a duly authorized officer of the Lender. Such
appointment to become effective and to remain in effect upon the occurrence and
continuance of a Suspension Event or an Event of Default.
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14-6. Application of Proceeds. The proceeds of any collection, sale, or
disposition of the Collateral, or of any other payments received hereunder,
shall be applied towards the Liabilities in such order and manner as the Lender
determines in its sole discretion. The Borrower shall remain liable for any
deficiency remaining following such application.
14-7. Lender's Costs and Expenses. The Borrower shall pay on demand all
Costs of Collection and all reasonable expenses of the Lender in connection with
the preparation, execution, and delivery of this Agreement and of any other Loan
Documents, whether now existing or hereafter arising, and all other reasonable
expenses which may be incurred by the Lender in preparing or amending this
Agreement and all other agreements, instruments, and documents related thereto,
or otherwise incurred with respect to the Liabilities, including, without
limiting the generality of the foregoing, any counsel fees or expenses incurred
in any bankruptcy or insolvency proceedings. The Borrower specifically
authorizes the Lender to pay all such fees and expenses and in the Lender's
discretion, to add such fees and expenses to the Loan Account.
14-8. Copies and Facsimiles. This Agreement and all documents which
relate thereto, which have been or may be hereinafter furnished the Lender may
be reproduced by the Lender by any photographic, microfilm, xerographic, digital
imaging, or other process, and the Lender may destroy any document so
reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made in the
regular course of business). Any facsimile which bears proof of transmission
shall be binding on the party which or on whose behalf such transmission was
initiated and likewise shall be so admissible in evidence as if the original of
such facsimile had been delivered to the party which or on whose behalf such
transmission was received.
14-9. Massachusetts Law. This Agreement and all rights and obligations
hereunder, including matters of construction, validity, and performance, shall
be governed by the laws of The Commonwealth of Massachusetts.
14-10. Consent to Jurisdiction.
(a) The Borrower agrees that any legal action, proceeding, case, or
controversy against the Borrower with respect to any Loan Document may be
brought in the Superior Court of Middlesex County, Massachusetts or in the
United States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, as the Lender may elect in the Lender's sole discretion. By
execution and delivery of this Agreement, the Borrower, for itself and in
respect of its property, accepts, submits, and consents generally and
unconditionally, to the jurisdiction of the aforesaid courts.
(b) Nothing herein shall affect the right of the Lender to bring legal
actions or proceedings in any other competent jurisdiction.
(c) The Borrower agrees that any action commenced by the Borrower asserting
any claim or counterclaim arising under or in connection with this Agreement or
any other Loan Document shall be brought solely in the Superior Court of
Middlesex County, Massachusetts or in
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the United States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, and that such Courts shall have exclusive jurisdiction with
respect to any such action.
14-11. Indemnification. The Borrower shall indemnify, defend, and hold the
Lender and any employee, officer, or agent of the Lender (each, an "Indemnified
Person") harmless of and from any claim brought or threatened against any
Indemnified Person by the Borrower, any guarantor or endorser of the
Liabilities, or any other Person (as well as from attorneys' reasonable fees and
expenses in connection therewith) on account of the relationship of the Borrower
or of any other guarantor or endorser of the Liabilities Lender (each of claims
which may be defended, compromised, settled, or pursued by the Indemnified
Person with counsel of the Lender's selection, but at the expense of the
Borrower) other than any claim as to which a final determination is made in a
judicial proceeding (in which the Lender and any other Indemnified Person has
had an opportunity to be heard), which determination includes a specific finding
that the Indemnified Person seeking indemnification had acted in a grossly
negligent manner or in actual bad faith. The within indemnification shall
survive payment of the Liabilities and/or any termination, release, or discharge
executed by the Lender in favor of the Borrower.
14-12. Right of Set-Off. Any and all deposits or other sums at any time
credited by or due to the undersigned from the Lender or from any participant (a
"Participant") with the Lender in the credit facility contemplated hereby and
any cash, securities, instruments or other property of the undersigned in the
possession of the Lender or any Participant, whether for safekeeping or
otherwise (regardless of the reason such Person had received the same) shall at
all times constitute security for all Liabilities and for any and all
obligations of the undersigned to the and any Participant, and may be applied or
set off against the Liabilities and against such obligations at any time,
whether or not such are then due and whether or not other collateral is then
available to the Lender or any Participant.
14-13. Maximum Interest Rate. Regardless of any provision of any Loan
Document, the Lender shall never be entitled to contract for, charge, receive,
collect, or apply as interest on any Liability, any amount in excess of the
maximum rate imposed by applicable law. Any payment which is made which, if
treated as interest on a Liability would result in such interest's exceeding
such maximum rate shall be held, to the extent of such excess, as additional
collateral for the Liabilities as if such excess were "Collateral."
14-14. Usury Savings Clause. It is the intention of the parties hereto to
comply strictly with applicable usury laws, if any; accordingly, notwithstanding
any provisions to the contrary in this Agreement or any other Loan Documents, in
no event shall this Agreement or such Loan Document require or permit the
payment, taking, reserving, receiving, collecting or charging of any sums
constituting interest under applicable laws which exceed the maximum amount
permitted by such laws. If any such excess interest is called for, contracted
for, charged, paid, taken, reserved, collected or received in connection with
the Liabilities or in any communication by Lender or any other person to the
Borrower or any other person, or in the event all or part of the principal of
the Liabilities or interest thereon shall be prepaid or accelerated, so that
under any of such circumstances or under any other circumstance whatsoever the
amount of interest contracted for, charged, taken, collected,
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<PAGE>
reserved, or received on the amount of principal actually outstanding from time
to time under this Agreement shall exceed the maximum amount of interest
permitted by applicable usury laws, if any, then in any such event it is agreed
as follows: (i) the provisions of this paragraph shall govern and control, (ii)
neither the Borrower nor any other person or entity now or hereafter liable for
the payment of the Liabilities shall be obligated to pay the amount of such
interest to the extent such interest is in excess of the maximum amount of
interest permitted by applicable usury laws, if any, (iii) any such excess which
is or has been received notwithstanding this paragraph shall be credited against
the then unpaid principal balance hereof or, if the Liabilities have been or
would be paid in full by such credit, refunded to the Borrower, and (iv) the
provisions of this Agreement and the other Loan Documents, and any communication
to the Borrower, shall immediately be deemed reformed and such excess interest
reduced, without the necessity of executing any other document, to the maximum
lawful rate allowed under applicable laws as now or hereafter construed by
courts having jurisdiction hereof or thereof. Without limiting the foregoing,
all calculations of the rate of interest contracted for, charged, taken,
collected, reserved, or received in connection herewith which are made for the
purpose of determining whether such rate exceeds the maximum lawful rate shall
be made to the extent permitted by applicable laws by amortizing, prorating,
allocating and spreading during the period of the full term of the Liabilities,
including all prior and subsequent renewals and extensions, all interest at any
time contracted for, charged, taken, collected, reserved or received. The terms
of this paragraph shall be deemed to be incorporated in every Loan Document and
communication relating to the Liabilities.
14-15. Waivers.
(a) The Borrower (and all guarantors, endorsers, and sureties of the
Liabilities) make each of the waivers included in Section 14-14(b), below,
knowingly, voluntarily, and intentionally, and understands that the Lender, in
entering into the financial arrangements contemplated hereby and in providing
loans and other financial accommodations to or for the account of the Borrower
as provided herein, whether not or in the future, is relying on such waivers.
(b) THE BORROWER, AND EACH SUCH GUARANTOR, ENDORSER, AND SURETY
RESPECTIVELY WAIVES THE FOLLOWING.
(i) Except as otherwise specifically required in this Agreement,
notice of non-payment, demand, presentment, protest and all forms of demand
and notice, both with respect to the Liabilities and the Collateral.
(ii) Except as otherwise specifically required in this Agreement, the
right to notice and/or hearing prior to the Lender's exercising of the
Lender's rights upon default.
(iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN
WHICH THE LENDER IS OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS
INITIATED BY OR AGAINST THE LENDER OR IN WHICH THE LENDER IS JOINED AS A
PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT
OF, ANY RELATIONSHIP AMONGST OR BETWEEN
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<PAGE>
THE BORROWER OR ANY OTHER PERSON AND THE LENDER (AND THE LENDER LIKEWISE
WAIVES THE RIGHT TO A JURY IN ANY TRIAL OF ANY SUCH CASE OR CONTROVERSY).
(iv) Any defense, counterclaim, set-off, recoupment, or other basis on
which the amount of any Liability, as stated on the books and records of
the Lender, could be reduced or claimed to be paid otherwise than in
accordance with the tenor of and written terms of such Liability.
(v) Any claim to consequential, special, or punitive damages.
14-16. Confidentiality. This Agreement and the terms hereof are
confidential, and neither the contents of this Agreement or the details of this
Agreement may be shown or disclosed by the Borrower to any bank, finance company
or other lender without the prior written consent of the Lender.
14-17. Right to Publish Notice. Lender may, at Lender's discretion and
expense, publicize or otherwise advertise by so-called "tombstone" advertising
or otherwise Lender's financing transaction with the Borrower.
Executed as a sealed instrument this 3rd day of November, 1997.
HARVEY ELECTRONICS, INC.
(BORROWER)
By:
----------------------------------
Print Name: Joseph Calabrese
Title: Executive Vice President
and Chief Financial Officer
PARAGON CAPITAL LLC
(LENDER)
By:
----------------------------------
Print Name: Andrew H. Moser
Title: President
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<PAGE>
EXHIBIT 1-6 TO LOAN AND SECURITY AGREEMENT
MASTER NOTE
(REVOLVING)
$3,300,000.00 Newton, Massachusetts
November 3, 1997
For value received, the undersigned, Harvey Electronics, Inc., a New York
corporation (the "Borrower"), hereby promises to pay on September 30, 2000 (the
"Maturity Date", unless extended as provided in Article 13-1 of the Loan
Agreement (as defined below), in which event the Maturity Date shall be the last
day of the applicable renewal term), to the order of Paragon Capital LLC, a
Delaware limited liability company (the "Lender"), at its main office in Newton,
Massachusetts, or at any other place designated at any time by the holder
hereof, in lawful money of the United States of America and in immediately
available funds, the principal sum of Three Million Three Hundred Thousand
($3,300,000.00) Dollars or, if less, the aggregate unpaid principal amount of
all advances made by the Lender to the Borrower hereunder, together with
interest on the principal amount hereunder remaining unpaid from time to time,
computed on the basis of the actual number of days elapsed and a 360-day year,
from the date hereof until this Note is fully paid at the rate from time to time
in effect under the Loan and Security Agreement of even date herewith (the "Loan
Agreement") by and between the Lender and the Borrower. The principal hereof and
interest accruing thereon shall be due and payable as provided in the Loan
Agreement. This Note may be prepaid only in accordance with the Loan Agreement.
This Note is issued pursuant, and is subject, to the Loan Agreement, which
provides, among other things, for acceleration hereof. This Note is the Master
Note referred to in the Loan Agreement.
This Note is secured, among other things, pursuant to the Loan Agreement
and may now or hereafter be secured by one or more other security agreements,
mortgages, deeds of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
This Note shall be deemed to be under seal.
HARVEY ELECTRONICS, INC.
By:
-----------------------------
<PAGE>
EXHIBIT 3
"Acceptable Inventory": Such of the Borrower's Inventory, at such
locations, and of such types, character, qualities and quantities, (net of
Inventory Reserves) as the Lender in its sole discretion from time to time
determines to be acceptable for borrowing, as to which Inventory, the Lender has
a perfected security interest which is prior and superior to all security
interests, claims, and Encumbrances.
"Accounts Receivable" include, without limitation, "accounts" as defined in
the UCC.
"ACH": Automated clearing house.
"Account Debtor": Has the meaning given that term in the UCC.
"Affiliate": With respect to any two Persons, a relationship in which (a)
one holds, directly or indirectly, not less than twenty-five (25%) percent of
the capital stock, beneficial interests, partnership interests, or other equity
interests of the other; or (b) one has, directly or indirectly, Control of the
other; or (c) not less than twenty-five (25%) percent of their respective
ownership is directly or indirectly held by the same third Person.
"Annual Facility Fee": Is defined in Section 1-9(b)(iii).
"Availability": Means that amount available for loans and advances as
calculated by the Lender based upon the lending formula set forth in Section
1.1(b).
"Availability Reserves": Such reserves as the Lender from time to time
determines in the Lender's discretion as being appropriate to reflect the
impediments to the Lender's ability to realize upon the Collateral. Without
limiting the generality of the foregoing, Availability Reserves may include (but
are not limited to) reserves based on the following:
(a) Rent (based upon 30 days' past due rent and/or whether or not
Landlord's Waiver, acceptable to the Lender, has been received by the
Lender ).
(b) In store customer credits, special customer deposits and gift
certificates, provided that the Lender shall not create an Availability
Reserve for in store customer credits and gift certificates prior to the
first (1st) anniversary date of this Agreement.
(c) Payables (based upon payables which are more than sixty (60) days
past due).
(d) The then outstanding Stated Amount of all standby L/C's.
(e) Taxes and other governmental charges, including, ad valorem,
personal property, and other taxes which may have priority over the
security interests of the Lender in the Collateral.
<PAGE>
"Bankruptcy Code": Title 11, U.S.C., as amended from time to time.
"Base": The Base Rate announced from time to time by Norwest Bank Minnesota
National Association (or any successor in interest to Norwest Bank Minnesota
National Association). In the event that said bank (or any such successor)
ceases to announce such a rate, "Base" shall refer to that rate or index
announced or published from time to time as the Lender, in good faith,
designates as the functional equivalent to said Base Rate. Any change in "Base"
shall be effective, for purposes of the calculation of interest due hereunder,
when such change is made effective generally by the bank on whose rate or index
"Base" is being set.
"Basis Point(s)": An amount which is equal to 1/100th of one (1%) percent.
For example, one and one-half (1.5%) percent equals 150 basis points.
"Borrower": Is defined in the Preamble.
"Borrowing Base": Means up to seventy-five (75%) percent of Cost of
Acceptable Inventory for the first twelve (12) months following the date hereof
and seventy-three (73%) percent of Cost of Acceptable Inventory thereof, minus
(i) the then unpaid principal balance of the Loan Account, minus (ii) the then
aggregate of such Availability Reserves as may have been established by the
Lender, minus (iii) the then outstanding Stated Amount of all L/C's.
"Banking Day": Any day other than (a) a Saturday, Sunday; (b) any day on
which banks in Boston, Massachusetts generally are not open to the general
public for the purpose of conducting commercial banking business; or (c) a day
on which the Lender is not open to the general public to conduct business.
"Blocked Account": Defined in Section 7-3.
"Business Plan": The Borrower's business plan annexed hereto as EXHIBIT
9-12(b) and any revision, amendment, or update of such business plan to which
the Lender has provided its written sign-off.
"Capital Expenditures": The expenditure of funds or the incurrence of
liabilities which may be capitalized in accordance with GAAP.
"Capital Lease": Any lease which may be capitalized in accordance with
GAAP.
"Chattel Paper": Has the meaning given that term in the UCC.
"Collateral": Is defined in Section 2-1.
"Commitment Fee": Is defined in Section 1-9(a).
<PAGE>
"Control": The direct or indirect power to direct or cause the direction of
the management and policies of another Person, whether through ownership of
voting securities, by contract, or otherwise. Included among such powers, with
respect to a corporation, are power to cause any of following: (a) the election
of a majority of its Board of Directors; (b) the issuance of additional shares
of its common stock; (c) the issuance and designation of rights and shares of
its preferred stock (if any); (d) the distribution and timing of dividends; (e)
the award of performance bonuses to its management; (f) the termination or
severance of officers or key employees; and (g) all or any similar matters.
"Cost": The calculated moving average cost of purchases, as determined from
invoices received by the Borrower, the Borrower's Stock Ledger, based upon the
Borrower's accounting practices, known to the Lender, which practices are in
effect on the date on which the within Agreement was executed. "Cost" does not
include inventory capitalization costs, but may include other charges used in
the Borrower's determination of cost of goods sold.
"Costs of Collection" includes, without limitation, all attorneys'
reasonable fees and reasonable out-of-pocket expenses incurred by the Lender's
attorneys, and all reasonable costs incurred by the Lender in the administration
of the Liabilities and/or the Loan Documents, including, without limitation,
reasonable costs and expenses associated with travel on behalf of the Lender,
which costs and expenses are directly or indirectly related to or in respect of
the Lender's: administration and management of the Liabilities; negotiation,
documentation, and amendment of any Loan Document; or efforts to preserve,
protect, collect, or enforce the Collateral, the Liabilities, and/or the
Lender's Rights and Remedies and/or any of the Lender's rights and remedies
against or in respect of any guarantor or other person liable in respect of the
Liabilities (whether or not suit is instituted in connection with such efforts).
The Costs of Collection are Liabilities, and at the Lender's option may bear
interest at the highest post-default rate which the Lender may charge the
Borrower hereunder as if such had been lent, advanced, and credited by the
Lender to, or for the benefit of, the Borrower.
"Credit Limit": Means Three Million Three Hundred Thousand ($3,300,000.00)
Dollars, minus (i) the then unpaid principal balance of the Loan Account, minus
(ii) the then aggregate of such Availability Reserves as may have been
established by the Lender, minus (iii) the then outstanding Stated Amount of all
L/C's.
"DDA": Any checking or other demand daily depository account maintained by
the Borrower.
"Employee Benefit Plan": As defined in ERISA.
"Encumbrance": Each of the following:
(a) security interest, mortgage, pledge, hypothecation, lien,
attachment, or charge of any kind (including any agreement to give any of
the foregoing); the interest of a lessor
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<PAGE>
under a Capital Lease; conditional sale or other title retention agreement;
sale of accounts receivable or chattel paper; or other arrangement pursuant
to which any Person is entitled to any preference or priority with respect
to the property or assets of another Person or the income or profits of
such other Person or which constitutes an interest in property to secure an
obligation; each of the foregoing whether consensual or non-consensual and
whether arising by way of agreement, operation of law, legal process or
otherwise.
(b) The filing of any financing statement under the UCC or comparable
law of any jurisdiction.
"End Date": The date upon which both (a) all Liabilities have been paid in
full and (b) all obligations of the Lender to make loans and advances and to
provide other financial accommodations to the Borrower hereunder shall have been
irrevocably terminated.
"Environmental Laws": (a) Any and all federal, state, local or municipal
laws, rules, orders, regulations, statutes, ordinances, codes, decrees or
requirements which regulates or relates to, or imposes any standard of conduct
or liability on account of or in respect to environmental protection matters,
including, without limitation, Hazardous Materials, as is now or hereafter in
effect; and (b) the common law relating to damage to Persons or property from
Hazardous Materials.
"ERISA": The Employee Retirement Security Act of 1974, as amended.
"ERISA Affiliate": Any Person which is under common control with the
Borrower within the meaning of Section 4001 of ERISA or is part of a group which
includes the Borrower and which would be treated as a single employer under
Section 414 of the Internal Revenue Code of 1986, as amended.
"Events of Default": Is defined in Article 10.
"Executive Agreement": Any agreement or understanding (whether or not
written) to which the Borrower is a party or by which the Borrower may be bound,
which agreement or understanding relates to Executive Pay.
"Executive Officer": Each of Franklin Karp, Joseph J. Calabrese and any
other Person who (without regard to title) is the successor to any of the
foregoing or who exercises a substantial portion of the authority being
exercised, at the execution of the within Agreement, by any of the foregoing or
a combination of the such authority of more than one of the foregoing or who
otherwise has Control of the Borrower.
"Executive Pay": All salary, bonuses, and other value directly or
indirectly provided by or on behalf of the Borrower to or for the benefit of any
Executive Officer or any Affiliate, spouse, parent, or child of any Executive
Officer.
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<PAGE>
"Facility Fee": Is defined in Section 1-9(b).
"Funding Account": Is defined in Section 7-3.
"GAAP": Principles which are consistent with those promulgated or adopted
by the Financial Accounting Standards Board and its predecessors (or successors)
in effect and applicable to that accounting period in respect of which reference
to GAAP is being made.
"General Intangibles" includes, without limitation, "general intangibles"
as defined in the UCC; and also all: rights to payment for credit extended;
deposits; amounts due to the Borrower; credit memoranda in favor of the
Borrower; warranty claims; tax refunds and abatements; insurance refunds and
premium rebates; all means and vehicles of investment or hedging, including,
without limitation, options, warrants, and futures contracts; records; customer
lists; telephone numbers; goodwill; causes of action; judgments; payments under
any settlement or other agreement; literary rights; rights to performance;
royalties; license and/or franchise fees; rights of admission; licenses;
franchises; license agreements, including all rights of the Borrower to enforce
same; permits, certificates of convenience and necessity, and similar rights
granted by any governmental authority; patents, patent applications, patents
pending, and other intellectual property; Internet addresses and domain names;
developmental ideas and concepts; proprietary processes; blueprints, drawings,
designs, diagrams, plans, reports, and charts; catalogs; manuals; technical
data; computer software programs (including the source and object codes
therefor), computer records, computer software, rights of access to computer
record service bureaus, service bureau computer contracts, and computer data;
tapes, disks, semi-conductors chips and printouts; trade secrets rights,
copyrights, mask work rights and interests, and derivative works and interests;
user, technical reference, and other manuals and materials; trade names,
trademarks, service marks, and all good will relating thereto; applications for
registration of the foregoing; and all other general intangible property of the
Borrower in the nature of intellectual property; proposals; cost estimates, and
reproductions on paper, or otherwise, of any and all concepts or ideas, and any
matter related to, or connected with, the design, development, manufacture,
sale, marketing, leasing, or use of any or all property produced, sold, or
leased, by the Borrower or credit extended or services performed, by the
Borrower, whether intended for an individual customer or the general business of
the Borrower, or used or useful in connection with research by the Borrower.
"Gross Margin": With respect to the subject accounting period for which
being calculated, the following (determined in accordance with the retail method
of accounting):
Sales (Minus) Cost of Goods Sold
--------------------------------
Sales
"Hazardous Materials": Any (a) hazardous materials, hazardous waste,
hazardous or toxic substances, petroleum products, which (as to any of the
foregoing) are defined or regulated as a hazardous material in or under any
Environmental Law and (b) oil in any physical state.
-5-
<PAGE>
"Indebtedness": All indebtedness and obligations of or assumed by any
Person on account of or in respect to any of the following:
(a) In respect of money borrowed (including any indebtedness which is
non-recourse to the credit of such Person but which is secured by an
Encumbrance on any asset of such Person) whether or not evidenced by a
promissory note, bond, debenture or other written obligation to pay money.
(b) For the payment of the purchase price of goods or services
deferred for more than sixty (60) days beyond then current trade terms
provided to such person by the supplier of such goods or services.
(c) In connection with any letter of credit or acceptance transaction
(including, without limitation, the face amount of all letters of credit
and acceptances issued for the account of such Person or reimbursement on
account of which such Person would be obligated).
(d) In connection with the sale or discount of accounts receivable or
chattel paper of such Person.
(e) On account of deposits or advances.
(f) As lessee under Capital Leases.
"Indebtedness" of any Person shall also include:
(a) Indebtedness of others secured by an Encumbrance on any asset of
such Person, whether or not such Indebtedness is assumed by such Person.
(b) Any guaranty, endorsement, suretyship or other undertaking
pursuant to which that Person may be liable on account of any obligation of
any third party.
(c) The Indebtedness of a partnership or joint venture in which such
Person is a general partner or joint venturer.
"Indemnified Person": Is defined in Section 14-11.
"Inventory Reserves": Such Reserves as may be established from time to time
by the Lender in the Lender's discretion with respect to the determination of
the saleability, at retail, of the Acceptable Inventory or which reflect such
other factors as affect the current Retail or market value of the Acceptable
Inventory. Without limiting the generality of the foregoing, Inventory Reserves
may include (but are not limited to) reserves based on the following:
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<PAGE>
(a) Obsolescence (determined based upon Inventory on hand beyond a
given number of days).
(b) Seasonality.
(c) Shrinkage reserve consistent with the prior performance and
practice of the Borrower but not less than $25,000.00.
(d) Imbalance.
(e) Change in Inventory character, composition or mix.
(f) Markdowns (both permanent and point of sale).
(g) Retail markons or markups inconsistent with prior period practice
and performance; current business plans; or advertising calendar and
planned advertising events.
(h) Trade-in merchandise.
(i) Damaged merchandise and merchandise to be returned to vendors (to
be calculated at 50% of inventory value at cost at location 145).
"Issuer": The issuer of any L/C.
"L/C": Any letter of credit, the issuance of which is procured by the
Lender for the account of the Borrower and any acceptance made on account of
such letter.
"Landlord Lien State": Any state or other jurisdiction under whose
statutory or common law the rights of a landlord in assets of that landlord's
tenant, for unpaid rent, may be senior to a perfected security interest in such
assets.
"Lease": Any lease or other agreement, no matter how styled or structured,
which the Borrower is entitled to the use or occupancy of any space.
"Lender's Rights and Remedies": Is defined in Section 11-6.
"Liabilities" (in the singular, "Liability") includes, without limitation,
all and each of the following, whether now existing or hereafter arising:
(a) Any and all direct and indirect liabilities, debts, and
obligations of the Borrower to the Lender, each of every kind, nature, and
description.
(b) Each obligation to repay any loan, advance, indebtedness, note,
obligation, overdraft, or amount now or hereafter owing by the Borrower to
the Lender (including all
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<PAGE>
future advances whether or not made pursuant to a commitment by the
Lender), whether or not any of such are liquidated, unliquidated, primary,
secondary, secured, unsecured, direct, indirect, absolute, contingent, or
of any other type, nature, or description, or by reason of any cause of
action which the Lender may hold against the Borrower.
(c) All notes and other obligations of the Borrower now or hereafter
assigned to or held by the Lender, each of every kind, nature, and
description.
(d) All interest, fees, and reasonable charges and other amounts which
may be charged by the Lender to the Borrower and/or which may be due from
the Borrower to the Lender from time to time.
(e) All reasonable costs and expenses incurred or paid by the Lender
in respect of any agreement between the Borrower and the Lender or
instrument furnished by the Borrower to the Lender (including, without
limitation, Costs of Collection, attorneys' reasonable fees, and all court
and litigation costs and expenses).
(f) Any and all covenants of the Borrower to or with the Lender and
any and all obligations of the Borrower to act or to refrain from acting in
accordance with any agreement between the Borrower and the Lender or
instrument furnished by the Borrower to the Lender.
"Loan Account": Is defined in Section 1-5.
"Loan Documents": The within Agreement, each instrument and document
executed and/or delivered as contemplated by Article 4, below, and each other
instrument or document from time to time executed and/or delivered in connection
with the arrangements contemplated hereby, as each may be amended from time to
time.
"Local DDA": A depository account maintained by the Borrower, the only
contents of which may be transfers from the Funding Account and actually used
solely (i) for petty cash purposes; or (ii) for payroll.
"Loan Maintenance Fee": Is defined in Section 1.9(c).
"Master Note": Is defined in Section 1-6.
"Maturity Date": September 30, 2000, unless extended as provided in Article
13-1, in which event the Maturity Date shall be the last day of the applicable
renewal term.
"Maximum Loan Exposure": The lesser, on any day, of the following, in each
instance determined net of the unpaid principal balance of the Loan Account on
that day: (a) the Borrowing Base, or (b) the Credit Limit.
-8-
<PAGE>
"One Turn State": Any state or other jurisdiction under whose statutory or
common law the relative priority of the rights of a landlord in assets of that
landlord's tenant, for unpaid rent, vis a vis the rights of the holder of a
perfected security interest therein is dependent upon whether such security
interest arose prior or subsequent to the subject asset's coming onto the
demised premises.
"Participant": Is defined in Section 14-14.
"Percentage Points": The number of whole (and, if indicated, fractions (or
decimal equivalents) of) integers of a percentage referred to in a financial
performance covenant which consists of a ratio. For example, if a projected
ratio were fifty (50%) percent and the actual ratio turned out to be fifty-five
and 6/10 (55.6%) percent, the variance would be 5.6 Percentage Points.
"Periodic Loan Maintenance Fee": Is defined in Section 1-9(c).
"Person": Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other enterprise or entity.
"Receipts": All cash, cash equivalents, checks, and credit card slips and
receipts as arise out of the sale of the Collateral.
"Receivables Collateral": That portion of the Collateral which consists of
the Borrower's Accounts, Accounts Receivable, contract rights, General
Intangibles, Chattel Paper, Instruments, Documents of Title, Documents,
Securities, letters of credit for the benefit of the Borrower, and bankers'
acceptances held by the Borrower, and any rights to payment.
"Related Entity":
(a) Any corporation, limited liability company, trust, partnership,
joint venture, or other enterprise which: is a parent, brother-sister,
subsidiary, or affiliate, of the Borrower; could have such enterprise's tax
returns or financial statements consolidated with the Borrower's; could be
a member of the same controlled group of corporations (within the meaning
of Section 1563(a)(1), (2) and (3) of the Internal Revenue Code of 1986, as
amended from time to time) of which the Borrower is a member; Controls or
is Controlled by the Borrower or by any Affiliate of the Borrower.
(b) Any Affiliate.
"Requirement of Law": As to any Person:
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<PAGE>
(a) (i) All statutes, rules, regulations, orders, or other
requirements having the force of law and (ii) all court orders and
injunctions, arbitrator's decisions, and/or similar rulings, in each
instance ((i) and (ii)) of or by any federal, state, municipal, and other
governmental authority, or court, tribunal, panel, or other body which has
or claims jurisdiction over such Person, or any property of such Person, or
of any other Person for whose conduct such Person would be responsible.
(b) That Person's charter, certificate of incorporation, articles of
organization, and/or other organizational documents, as applicable; and (c)
that Person's by-laws and/or other instruments which deal with corporate or
similar governance, as applicable.
"Reserves": All (if any) Availability Reserves and Inventory Reserves.
"Revolving Credit": Is defined in Section 1-1.
"Stated Amount": The maximum amount for which an L/C may be honored.
"Suspension Event": Any occurrence, circumstance, or state of facts which
(a) is an Event of Default; or (b) would become an Event of Default if any
requisite notice were given and/or any requisite period of time were to run and
such occurrence, circumstance, or state of facts were not absolutely cured
within any applicable grace period.
"Termination Date": The earliest of (a) the Maturity Date; or (b) the
occurrence of any event described in Section 10-11; or (c) the Lender's notice
to the Borrower setting the Termination Date on account of the occurrence of any
Event of Default other than as described in Section 10-11.
"Transfer Account": Is defined in Section 7-3.
"UCC": The Uniform Commercial Code as presently in effect in Massachusetts
(Mass. Gen. Laws, Ch. 106).
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EXHIBITS
The following Exhibits to the within Loan and Security Agreement are
respectively described in the section indicated. Those Exhibits in which no
information has been inserted shall be deemed to read "None".
EXHIBIT 5-2
Related Entities
EXHIBIT 5-3
Trade Names
EXHIBIT 5-4
Locations
Address Property Located At Such Address
------- --------------------------------
EXHIBIT 5-5
Encumbrances and Liens
Secured Party Payment Terms
or Mortgagee Description of Collateral and Dates of Maturity
------------ ------------------------- ---------------------
Leases
------
Description Date of Lease
Lessor of Property and Term Rental Payable
- ------ ----------- ------------- --------------
<PAGE>
EXHIBIT 5-6
Indebtedness
Creditor Principal Amount Maturity Date Monthly Payment Collateral
- -------- ---------------- ------------- --------------- ----------
Guaranties
Amount and Description
Primary Obligor of Obligation Guaranteed Beneficiary of Guaranty
- --------------- ------------------------ -----------------------
EXHIBIT 5-7
Insurance Policies
Insurance Company Type and Amount of Coverage
----------------- ---------------------------
EXHIBIT 5-12
Taxes
EXHIBIT 7-1
Demand Deposit Accounts
EXHIBIT 7-2
<PAGE>
Credit Card Arrangements
EXHIBIT 9-4 TO LOAN AND SECURITY AGREEMENT
BORROWING BASE CERTIFICATE
[To Be Prepared by Paragon for Each Specific Transaction]
<PAGE>
EXHIBIT 9-12(a) TO LOAN AND SECURITY AGREEMENT
FINANCIAL PERFORMANCE COVENANTS
FINANCIAL AND INVENTORY COVENANTS
Min/Max Inventory
For the three (3) month period ending on the last day of each month of
Borrower's fiscal year, average end of month inventory at cost shall be at least
85% of the amount set forth in the Business Plan, or an amount equal to the
number of stores actually opened and those anticipated to be open in the next
succeeding 120 days, and not more than 115% of the Business Plan; exclusive of
"opportunistic buys" (those purchases deemed extraordinary given trade terms
granted different than those typically offered to the company DOCUMENTATION
SUBJECT TO THE SOLE SATISFACTION OF THE LENDER).
Minimum Gross Margin Test
Gross Margin shall not vary from the Business Plan in any one fiscal month by
more than 4 Percentage Points or 332% for the twelve (12) month period ending on
the last day of such month.
Capital Expenditures
Capital Expenditures shall not exceed $125,000.00 on an annualized bases in
accordance with the Business Plan.
Operating Income/(Loss)
For each monthly period beginning on November 30, 1997, income from continuing
operations (excluding non-cash items and extraordinary expenses) shall not vary
from the Business Plan by (a) more than $200,000.00 for the three (3) month
period ending on the last day of the applicable month, or (b) more than
$300,000.00 for such month.
Trade Accounts Payable and Inventory Purchases
For the three (3) month period ending on the last day of each monthly period,
the ratio of trade accounts payable to end of month inventory must not be less
than .3 to 1 and inventory receipts for such period must not be less than 75% of
planned purchases set forth in the Business Plan.
<PAGE>
EXHIBIT 9-12(b) TO LOAN AND SECURITY AGREEMENT
BUSINESS PLAN
[To Be Prepared by Borrower for Each Specific Transaction]
<PAGE>
EXHIBIT 9-12(b) TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
BUSINESS PLAN
[To Be Prepared by Borrower for Each Specific Transaction]
MASTER NOTE
(REVOLVING)
$3,300,000.00 Newton, Massachusetts
November 3, 1997
For value received, the undersigned, Harvey Electronics, Inc.,
a New York corporation (the "Borrower"), hereby promises to pay on
September 30, 2000 (the "Maturity Date", unless extended as
provided in Article 13-1 of the Loan Agreement (as defined below),
in which event the Maturity Date shall be the last day of the
applicable renewal term), to the order of Paragon Capital LLC, a
Delaware limited liability company (the "Lender"), at its main
office in Newton, Massachusetts, or at any other place designated
at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal
sum of Three Million Three Hundred Thousand ($3,300,000.00) Dollars
or, if less, the aggregate unpaid principal amount of all advances
made by the Lender to the Borrower hereunder, together with
interest on the principal amount hereunder remaining unpaid from
time to time, computed on the basis of the actual number of days
elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Loan
and Security Agreement of even date herewith (the "Loan Agreement")
by and between the Lender and the Borrower. The principal hereof
and interest accruing thereon shall be due and payable as provided
in the Loan Agreement. This Note may be prepaid only in accordance
with the Loan Agreement.
This Note is issued pursuant, and is subject, to the Loan
Agreement, which provides, among other things, for acceleration
hereof. This Note is the Master Note referred to in the Loan
Agreement.
This Note is secured, among other things, pursuant to the Loan
Agreement and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or
other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection,
including attorneys' fees and legal expenses in the event this Note
is not paid when due, whether or not legal proceedings are
commenced.
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
This Note shall be deemed to be under seal.
HARVEY ELECTRONICS, INC.
By:_______________________________
Joseph J. Calabrese, Executive
Vice President
16
<PAGE>
TRADEMARK SECURITY AGREEMENT
----------------------------
THIS SECURITY AGREEMENT is entered into as of November 3, 1997, by and
between Harvey Electronics, Inc., with the previous name of The Harvey Group
Inc., a New York corporation having its principal place of business at 205 Chubb
Avenue, Lyndhurst 07071 (the "Borrower"), and Paragon Capital LLC, a Delaware
limited liability company with a usual place of business at 233 Needham Street,
Newton, Massachusetts 02164 ("Paragon").
NOW THEREFORE, in consideration of the premises, Borrower hereby agrees
with Paragon as follows:
1. Grant of Security Interest. Borrower hereby grants to Paragon a first
priority security interest in, and conditionally assigns, but does not transfer
title to Paragon, all of Borrower's right, title and interest in and to the
following (collectively, the "Collateral") to secure payment and performance of
all obligations of Borrower to Paragon whether such obligations are direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, including without limitation, those liabilities of Borrower
to Paragon pursuant to a Loan and Security Agreement dated November 3, 1997,
between Paragon and Borrower (the "Loan Agreement") (collectively, the
"Obligations").
The Collateral shall consist of the following:
(a) Each of the trademarks, and rights and interests protectible as
trademarks, which are presently, or in the future may be, owned, created,
acquired or used (whether pursuant to a license or otherwise) by Borrower, in
whole or in part, and all trademark rights with respect thereto throughout the
world, including all proceeds thereof (including license royalties and proceeds
of infringement suits), and rights to renew and extend such trademarks and
trademark rights;
(b) All of Borrower's right, title and interest, in and to the
trademarks and trademark registrations listed on Schedule A attached hereto, as
the same may be updated hereafter from time to time;
(c) All of Borrower's right, title and interest to register trademark
claims under any state or federal trademark law or regulation of any foreign
country, and to apply for, renew and extend the trademark registrations and
trademark rights, the right (without obligation) to sue or bring opposition or
cancellation proceedings in the name of Borrower or in the name of Paragon for
past, present and future infringements of the trademarks, registrations or
trademark rights and all rights (but not obligations) corresponding thereto in
the United States and any foreign country, and the associated goodwill;
(d) All general intangibles relating to the Collateral; and
(e) All proceeds of any and all of the foregoing (including, without
limitation, license royalties and proceeds of infringement suits) and, to the
extent not otherwise included, all payments under insurance, or any indemnity,
warranty or guaranty payable by reason of loss or damage to or otherwise with
respect to the Collateral.
2. Warranties and Representations. Borrower hereby warrants and represents to
Paragon the following:
(a) A true and complete schedule setting forth all federal and state
trademark registrations owned or controlled by Borrower or licensed to Borrower,
together with a summary description and
17
<PAGE>
full information in respect of the filing or issuance thereof and expiration
dates is set forth on Schedule A;
(b) Each of the trademarks and trademark registrations is valid and
enforceable, and Borrower is not presently aware of any past, present or
prospective claim by any third party that any of the trademarks are invalid or
unenforceable, or that the use of any trademarks violates the rights of any
third person, or of any basis for any such claims;
(c) Borrower is the sole and exclusive owner of the entire and
unencumbered right, title and interest in and to each of the trademarks and
trademark registrations free and clear of any liens, charges and encumbrances,
including, without limitation, pledges, assignments, licenses, shop rights and
covenants by Borrower not to sue third persons;
(d) Borrower has used and will continue to use proper statutory notice
in connection with its use of each of the trademarks;
(e) Borrower has used and will continue to use consistent standards of
high quality (which may be consistent with Borrower's past practices) in the
manufacture, sale and delivery of products and services sold or delivered under
or in connection with the trademarks, including, to the extent applicable, in
the operation and maintenance of its merchandising operations, and will continue
to maintain the validity of the trademarks;
(f) Except for the filing of financing statements with the Secretary of
State of New Jersey and the Town Clerk of Lyndhurst under the Uniform Commercial
Code and filings with the United States Patent and Trademark Office necessary to
perfect the security interests created hereunder, no authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required either for the grant by Borrower of the security
interest hereunder or for the execution, delivery or performance of this
Agreement by Borrower or for the perfection of or the exercise by Paragon of its
rights hereunder to the Collateral in the United States.
3. After-Acquired Trademark Rights. If Borrower shall obtain rights to any new
trademarks, the provisions of this Agreement shall automatically apply thereto.
Borrower shall give prompt notice in writing to Paragon with respect to any such
new trademarks or renewal or extension of any trademark registration. Borrower
shall bear any expenses incurred in connection with future applications for
trademark registration.
4. Litigation and Proceedings. Borrower shall commence and diligently prosecute
in its own name, as the real party in interest, for its own benefit, and its own
expense, such suits, administrative proceedings or other actions for
infringement or other damages as are in its reasonable business judgment
necessary to protect the Collateral. Borrower shall provide to Paragon any
information with respect thereto requested by Paragon. Paragon shall provide at
Borrower's expense all necessary cooperation in connection with any such suit,
proceeding or action, including, without limitation, joining as a necessary
party. Following Borrower's becoming aware thereof, Borrower shall notify
Paragon of the institution of, or any adverse determination in, any proceeding
in the United States Patent and Trademark Office, or any United States, state or
foreign court regarding Borrower's claim of ownership in any of such trademarks,
its right to apply for the same, or its right to keep and maintain such
trademark rights.
5. Power of Attorney. Borrower grants Paragon power of attorney, having the full
authority, and in the place of Borrower and in the name of Borrower, from time
to time in Paragon's discretion to take any action and to execute any instrument
which Paragon may deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation, as may be subject to the provisions of
the Loan Agreement, appointment shall become effective and remain in effect upon
the
18
<PAGE>
occurrence and continuation of a Suspension Event or an Event of Default, as
those terms are defined in the Loan Agreement.
(a) To endorse Borrower's name on all applications, documents, papers
and instruments necessary for Paragon to use or maintain the Collateral;
(b) To ask, demand, collect, sue for, recover, impound, receive and
give acquittance and receipts for money due or to become due under or in respect
of any of the Collateral;
(c) To file any claims or take any action or institute any proceedings
that Paragon may deem necessary or desirable for the collection of any of the
Collateral or otherwise to enforce Paragon's rights with respect to any of the
Collateral and to assign, pledge, convey or otherwise transfer title in or
dispose of the Collateral to any person.
7. Right to Inspect. Borrower grants to Paragon and its employees and agents the
right to visit Borrower's plants and facilities which manufacture, inspect or
store products sold under any of the trademarks, and to inspect the products and
quality control records relating thereto at reasonable times during regular
business hours.
8. Events of Default. Any of the following events shall be an Event of Default:
(a) Borrower fails to make any payment of principal or interest or any
other payment on any Obligation when due and payable, by acceleration or
otherwise; and
(b) the occurrence of an Event of Default as that term is defined in
the Loan Agreement.
9. Specific Remedies. Upon the occurrence of any Event of Default, as described
in the Loan Agreement:
(a) Paragon may cease advancing money or extending credit to or for the
benefit of Borrower under the Loan Agreement or under any other agreement
between Borrower and Paragon.
(b) Paragon may declare all Obligations to be due and payable
immediately, whereupon they shall immediately become due and payable without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived by Borrower;
(c) Paragon may set off against the Obligations all Collateral,
balances, credits, deposits, accounts or moneys of Borrower then or thereafter
held with Paragon, including amounts represented by certificates of deposit;
(d) Paragon may notify licensees to make royalty payments on license
agreements directly to Paragon;
(e) Paragon may sell or assign the Collateral and associated goodwill
at public or private sale for such amounts, and at such time or times as Paragon
deems advisable. Any requirement of reasonable notice of any disposition of the
Collateral shall be satisfied if such notice is sent to Borrower ten (10) days
prior to such disposition. Borrower shall be credited with the net proceeds of
such sale only when they are actually received by Paragon, and Borrower shall
continue to be liable for any deficiency remaining after the Collateral is sold
or collected;
(f) If the sale is to be a public sale, Paragon shall also give notice
of the time and place by publishing a notice one time at least ten (10) calendar
days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held; and
<PAGE>
(g) To the maximum extent permitted by applicable law, Paragon may be
the purchaser of any or all of the Collateral and associated goodwill at any
public sale and shall be entitled, for the purpose of bidding and making
settlement or payment of the purchase price for all or any portion of the
Collateral sold at any public sale, to use and apply all or any part of the
Obligations as a credit on account of the purchase price of any Collateral
payable by Paragon at such sale.
10. Governing Law. All acts and transactions hereunder and the rights and
obligations of the parties hereto shall be governed, construed and interpreted
in accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the Borrower and Paragon have caused this Agreement
to be executed by their duly authorized officers as of the date first above
written.
HARVEY ELECTRONICS, INC.
By:______________________________________
Joseph J. Calabrese, Executive Vice
President and Chief Financial Officer
PARAGON CAPITAL LLC
By:______________________________________
Andrew H. Moser, President
<PAGE>
STATE OF NEW YORK
County of November , 1997
Then personally appeared the above named, Joseph J. Calabrese,
Executive Vice President and Chief Financial Officer, and acknowledged the
foregoing instrument to be the free act and deed of Harvey Electronics, Inc.,
before me,
-----------------------------------------
Notary Public
My Commission Expires:
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss. November , 1997
Then personally appeared the above named, Andrew H. Moser, President,
and acknowledged the foregoing instrument to be the free act and deed of Paragon
Capital LLC, before me,
-----------------------------------------
Notary Public
My Commission Expires:
<PAGE>
SCHEDULE A
TO A TRADEMARK SECURITY AGREEMENT
BETWEEN HARVEY ELECTRONICS, INC. (Borrower)
AND
PARAGON CAPITAL LLC (Lender)
DATED: NOVEMBER , 1997
REGISTERED TRADEMARKS (USA)
---------------------------
Trademark Registration No. Issue Date
- --------- ---------------- ----------
HARVEY 1529043 March 7, 1989
THE TEMPLE OF HOME THEATER 2,061,476 May 13, 1997
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated December 4, 1997, in the Registration Statement (Form
SB-2) and related Prospectus of Harvey Electronics, Inc. for the registration of
850,000 shares of its common stock and 1,300,000 of its redeemable stock
purchase warrants.
ERNST & YOUNG LLP
Melville, New York
December 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> OCT-26-1996 NOV-01-1997
<PERIOD-END> OCT-26-1996 AUG-02-1997
<CASH> 3,379 7,000
<SECURITIES> 0 0
<RECEIVABLES> 305,796 291,000
<ALLOWANCES> 25,000 25,000
<INVENTORY> 3,008,838 3,403,000
<CURRENT-ASSETS> 4,250,464 3,849,000
<PP&E> 753,900 1,347,000
<DEPRECIATION> 0 120,000
<TOTAL-ASSETS> 7,167,287 7,211,000
<CURRENT-LIABILITIES> 2,814,750 2,626,000
<BONDS> 0 0
0 0
318,000 318,000
<COMMON> 22,594 23,000
<OTHER-SE> 3,069,890 2,170,000
<TOTAL-LIABILITY-AND-EQUITY> 7,167,287 7,211,000
<SALES> 9,263,152 11,602,000
<TOTAL-REVENUES> 9,350,809 11,670,000
<CGS> 6,094,499 7,379,000
<TOTAL-COSTS> 4,937,316 4,950,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 355,922 241,000
<INCOME-PRETAX> (426,290) (900,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (426,290) (900,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 5,338,852 0
<CHANGES> 0 0
<NET-INCOME> 4,912,562 (900,000)
<EPS-PRIMARY> 1.550 (.420)
<EPS-DILUTED> 0.000 0.000
</TABLE>
