<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1998
REGISTRATION NO. 333-42121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
</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 AMOUNT OF
OF SECURITIES TO BE REGISTERED TO BE REGISTERED SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value(2) 1,092,500 $ 5.00 $ 5,462,500 $1,655.30
Warrants(3) 1,667,500 $ .10 $ 166,750 $ 50.53
Common Stock Issuable on
Exercise of Warrants 1,667,500 $ 5.50 $ 9,171,250 $2,779.17
Representative's Warrant 1 $10.00 $ 10.00 (4)
Common Stock Issuable on
Exercise of Representative's
Warrant 95,000 $ 6.75 $ 641,250 $ 194.32
Warrants Issuable on Exercise
of Representative's Warrant 145,000 $ .135 $ 19,575 $ 5.93
Common Stock Underlying the
Warrants Issuable on Exercise
of Representative's Warrant 145,000 $7.425 $ 1,076,625 $ 326.25
Total Registration Fee.................................................................... $5,011.50
Previously paid........................................................................... $4,277.53
Due on filing............................................................................. $ 733.97
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(2) Includes 142,500 shares of Common Stock subject to the Representative's
over-allotment option.
(3) Includes 217,500 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 FEBRUARY 19, 1998
PROSPECTUS
[LOGO]
950,000 Shares of Common Stock and
1,450,000 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 950,000
shares (the 'Shares') of common stock, par value $0.01 per share ('Common
Stock') and 1,450,000 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
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 7 AND 'DILUTION' ON PAGE 15.
------------------------------
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)........................................................... $4,895,000.00 $ 489,500.00 $4,405,500.00
</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 $146,850 ($168,877.50 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 95,000 shares of
Common Stock at $6.75 per share and/or 145,000 Warrants at $.135 per Warrant
(the 'Representative's Warrant') exercisable during the four year period
commencing one year from the Effective Date. Each warrant is identical to
the Warrants except the price to purchase one share is $7.425; and (iii) a
three-year consulting agreement providing for fees totalling $97,900, which
is payable to the Representative in full on the closing of this Offering.
For additional information concerning additional terms of the
Representative's Warrant and 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 142,500 shares
of Common Stock and/or 217,500 Warrants (the 'Over-Allotment Option'). The
first 42,500 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 $5,629,250, $562,925 and
$4,616,325, 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 March ___, 1998, at the office of The
Thornwater Company, L.P., 107 A East 37th Street, New York, New York.
------------------------------
THE THORNWATER COMPANY, L.P.
March , 1998
<PAGE>
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, based on information provided by each vendor, 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........................ 950,000 shares of Common Stock and 1,450,000 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................................ 2,257,833 shares
COMMON STOCK OUTSTANDING AFTER OFFERING... 3,207,833 shares(1)
WARRANTS OUTSTANDING PRIOR TO OFFERING.... 36,458 warrants(2)
WARRANTS OUTSTANDING AFTER OFFERING....... 1,486,458 warrants(1)
USE OF PROCEEDS........................... The net proceeds to the Company from the sale of the Securities are
estimated to be approximately $3,718,000 after deducting commissions
and expenses of the Offering estimated at $1,079,000 and prepaid
consulting fees of approximately $98,000. 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.'
</TABLE>
<TABLE>
<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.
(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.'
5
<PAGE>
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-three
weeks ended November 1, 1997 and the thirty-nine week period ended October 26,
1996, appearing elsewhere in this Prospectus.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
POST
BANKRUPTCY PRE BANKRUPTCY
----------- ----------------------------------------------
FIFTY-THREE FIFTY-TWO THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
NOVEMBER 1, OCTOBER 26, OCTOBER 26, OCTOBER 28,
1997 1996 1996 1995
----------- ------------ -------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales..................................................... $ 15,398 $ 14,025 $ 9,263 $ 11,107
Cost of sales................................................. 9,765 9,230 6,095 7,312
----------- ------------ ------- ------------
Gross profit.................................................. 5,633 4,796 3,168 3,795
Gross profit percentage....................................... 36.6% 34.2% 34.2% 34.2%
Interest expense.............................................. 325 506 356 307
Selling, general and administrative expenses.................. 6,706 6,473 4,937 5,782
Other income.................................................. 73 96 88 78
----------- ------------ ------- ------------
Loss before reorganization expenses, fresh start adjustments
and extraordinary item...................................... (1,325) (2,087) (2,037) (2,216)
Reorganization expenses, net.................................. -- (885) (247) (520)
Fresh start adjustments....................................... -- 1,858 1,858 --
Extraordinary gain on forgiveness of debt..................... -- 5,339 5,339 --
----------- ------------ ------- ------------
Net (loss) income............................................. (1,325) 4,225 4,913 (2,736)
Accretion of Preferred Stock.................................. (78) -- -- --
Preferred Stock dividend requirement.......................... (71) -- -- --
----------- ------------ ------- ------------
Net (loss) income attributable to Common Stock................ $ (1,474) $ 4,225 $ 4,913 $ (2,736)
----------- ------------ ------- ------------
----------- ------------ ------- ------------
Net (loss) per common share................................... $ (.65)
-----------
-----------
Weighted average number of common shares and common stock
equivalent shares outstanding during the period (1)......... 2,257,833
</TABLE>
- ------------------
(1) Common stock equivalent shares were not considered, since their inclusion
would be anti-dilutive.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
UNAUDITED ACTUAL
AS ADJUSTED --------------------------
NOVEMBER 1, NOVEMBER 1, OCTOBER 26,
1997(1) 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital.............................................................. $ 4,963 $ 1,215 $ 1,436
Total assets................................................................. 11,130 7,314 7,167
Long-term liabilities including capital leases............................... 2,364 2,364 942
Total liabilities and temporary equity....................................... 5,301 5,697 3,757
Total shareholders' equity................................................... 5,828 1,617 3,410
</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. Also reflects the Company's
Preferred Stock in stockholders' equity as though the removal of a Preferred
Stock redemption feature, which occurred in December 1997, had taken place
on November 1, 1997.
6
<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. For the
fifty-three weeks ended November 1, 1997, the Company had a net loss of
$1,325,212 and as at such date, had an accumulated deficit of $1,473,728.
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
fifty-three weeks ended November 1, 1997, 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.
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.'
RISKS INVOLVED WITH EXPANSION PLAN AND POSSIBLE UNSPECIFIED ACQUISITIONS
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.
7
<PAGE>
Instead of leasing and developing new locations, the Company may acquire
the business of an existing consumer electronics retailer, although no
agreements have been reached with any such company and no negotiations are
pending. As a result, investors in this Offering will not have an opportunity to
evaluate the specific merits or risks, or vote upon, any potential acquisition.
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.'
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.'
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.'
8
<PAGE>
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.'
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 Circuit City 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 $3.68 per Share (74%) 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 60% 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.'
9
<PAGE>
BROAD DISCRETION OF MANAGEMENT IN APPLICATION OF PROCEEDS
Approximately 30% of the net proceeds of the Offering will be applied to
working capital and used for general corporate purposes. In addition, management
may from time to time reallocate funds among the uses discussed in 'Use of
Proceeds' or to new uses if it believes such reallocation to be in the Company's
best interests. Accordingly, management of the Company will have broad
discretion in the use of the proceeds. See 'Use of Proceeds.'
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.'
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.'
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 2,257,833 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
10
<PAGE>
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 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 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.'
11
<PAGE>
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. Existing
NASDAQ SmallCap maintenance criteria require, among other things, that an issuer
have net tangible assets of $2 million (or alternatively net income of $500,000
in two of the most recent three fiscal years, or a market capitalization of $35
million) and that the listed security has a minimum bid price of $1.00. In the
event the Common Stock or the Warrants are delisted from trading on NASDAQ
SmallCap and 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 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 95,000 shares of Common Stock at $6.75 per share
and/or 145,000 warrants at $.135 per warrant; each such warrant is identical to
the Warrant except the purchase price for one Share is $7.425. The
Representative's Warrant will be exercisable for a period of four 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.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 950,000 shares of the
Common Stock and 1,450,000 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 $3,718,000. The Company expects to use the net proceeds as
follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
DOLLAR AMOUNT PERCENTAGE
------------- -----------
<S> <C> <C>
Opening of four new retail stores(1)........... $ 2,600,000 70%
Working Capital and general corporate
purposes(2).................................. 1,118,000 30%
------------- ---
$ 3,718,000 100%
------------- ---
------------- ---
</TABLE>
- ------------------
(1) 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.
(2) Possible working capital uses include inventory, advertising and other
ongoing selling, general and administrative expenses, to be determined by
the Company's executive officers based upon their assessment of the
Company's needs.
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 paydown (in full or in part) the Company's outstanding obligations under
its revolving line of credit facility which permits repayment and reborrowing of
funds from time to time. It is the Company's intention to re-borrow any portion
of the credit facility which is paid down as the Company requires the funds. 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
13
<PAGE>
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 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
November 1, 1997, and as adjusted to give effect to (a) the sale of 950,000
shares of Common Stock at $5.00 per share, 1,450,000 Warrants at $.10 per
Warrant offered hereby and the application of the estimated net proceeds
therefrom, and (b) the Company's Preferred Stock in stockholders' equity as
though the removal of a Preferred Stock redemption feature, which occurred in
December 1997, had taken place on November 1, 1997. 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>
NOVEMBER 1, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, temporary equity and capital lease obligations............................ $ 2,635(2) $ 2,239(3)
Stockholders' equity:
Preferred Stock, $1,000 par value, 10,000 shares
authorized, 875 shares outstanding (aggregate liquidation preference--$875,000)....... -- 396
Common Stock, $.01 par value, 10,000,000 shares authorized, 2,257,833 shares
outstanding, actual, 3,207,833 shares outstanding, as adjusted(1)..................... 23 32
Additional paid-in capital.............................................................. 3,068 6,874
Accumulated deficit..................................................................... (1,474) (1,474)
----------- -----------
Total stockholders' equity.............................................................. 1,617 5,828
----------- -----------
Total capitalization.................................................................... $ 4,252 $ 8,067
----------- -----------
----------- -----------
</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.
(2) Includes: (i) amounts due under the Company's revolving line of credit
facility ($1,778,000); (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 ($41,000); (iv) cumulative Preferred Stock
dividends payable ($70,000); and (v) Preferred Stock presented as temporary
equity ($396,000).
(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.'
14
<PAGE>
DILUTION
As of November 1, 1997, on a pro-forma basis to reflect the Company's
Preferred Stock in stockholders' equity ('pro forma November 1, 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 $430,000 or $.19 per Share. Assuming the sale of
950,000 shares of Common Stock by the Company in this Offering at $5.00 per
share and 1,450,000 Warrants at $.10 per warrant and after deducting
underwriting discounts, non-accountable expense allowance and other estimated
offering costs, the net tangible book value of the Company as of pro forma
November 1, 1997, as adjusted, would have been $4,246,000, or $1.32 per share of
Common Stock, representing an immediate increase in net tangible book value of
$1.13 per share to existing stockholders and an immediate dilution of $3.68 per
share (74%) 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 pro forma November 1, 1997......................... $ .19
Increase per share attributable to new investors........................................... 1.13
-----
Net tangible book value per share as adjusted after giving effect to the Offering.......... 1.32
-----
Dilution in net tangible book value per share to new investors............................. $3.68
-----
-----
</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................................. 2,257,833 70.4% $2,770,000 36.8% $1.23
New investors(1)...................................... 950,000 29.6% 4,750,000 63.2% $5.00
--------- ------- ---------- -------
Total................................................. 3,207,833 100.0% $7,520,000 100.0%
--------- ------- ---------- -------
--------- ------- ---------- -------
</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.
15
<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-three weeks ended November
1, 1997 and the thirty-nine week period ended October 26, 1996, appearing
elsewhere herein. The unaudited financial information for the fifty-two week
period ended October 26, 1996 and the thirty-nine weeks ended October 28, 1995
is presented for comparison purposes only.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
POST
BANKRUPTCY PRE BANKRUPTCY
----------- -----------------------------------------
FIFTY-THREE FIFTY-TWO THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
NOVEMBER 1, OCTOBER 26, OCTOBER 26, OCTOBER 28,
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................................... $ 15,398 $14,025 $ 9,263 $11,107
Cost of sales............................................... 9,765 9,230 6,095 7,312
----------- ----------- ----------- -----------
Gross profit................................................ 5,633 4,796 3,168 3,795
Gross profit percentage..................................... 36.6% 34.2% 34.2% 34.2%
Interest expense............................................ 325 506 356 307
Selling, general and administrative expenses................ 6,706 6,473 4,937 5,782
Other income................................................ 73 96 88 78
----------- ----------- ----------- -----------
Loss before reorganization expenses, fresh start adjustments
and extraordinary item.................................... (1,325) (2,087) (2,037) (2,216)
Reorganization expenses, net................................ -- (885) (247) (520)
Fresh start adjustments..................................... -- 1,858 1,858 --
Extraordinary gain on forgiveness of debt................... -- 5,339 5,339 --
----------- ----------- ----------- -----------
Net (loss) income........................................... (1,325) 4,225 4,913 (2,736)
Accretion of Preferred Stock................................ (78) -- -- --
Preferred Stock dividend requirement........................ (71) -- -- --
----------- ----------- ----------- -----------
Net (loss) income attributable to Common Stock.............. $ (1,474) $ 4,225 $ 4,913 $(2,736)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net (loss) per common share................................. $ (.65)
-----------
-----------
Weighted average number of common shares and common stock
equivalent shares outstanding during the period (1)....... 2,257,833
</TABLE>
- ------------------
(1) Common stock equivalent shares were not considered, since their inclusion
would be anti-dilutive.
16
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
UNAUDITED ACTUAL
AS ADJUSTED ---------------------------
NOVEMBER 1, NOVEMBER 1, OCTOBER 26,
1997(1) 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital........................................................... $ 4,963 $1,215 $ 1,436
Total assets.............................................................. 11,130 7,314 7,167
Long-term liabilities including capital leases............................ 2,364 2,364 942
Total liabilities and temporary equity.................................... 5,301 5,697 3,757
Total shareholders' equity................................................ 5,828 1,617 3,410
</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. Also reflects the Company's
Preferred Stock in stockholders' equity as though the removal of a Preferred
Stock redemption feature, which occurred in December 1997, had taken place
on November 1, 1997.
FIFTY-THREE WEEKS ENDED NOVEMBER 1, 1997 (SUCCESSOR) AS COMPARED TO THE
FIFTY-TWO WEEKS ENDED OCTOBER 26, 1996 (UNAUDITED--PREDECESSOR)
The fiscal year ended November 1, 1997 is a fifty-three week year as
compared to fifty-two weeks for the prior year.
Net (Loss) Income. The net loss for the fifty-three weeks ended November
1, 1997 was $1,325,000 as compared to net income of $4,225,000 for the fifty-two
weeks ended October 26, 1996. Net income for the fifty-two 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 relating to the company's
successful reorganization increasing net income by $1,858,000. Net
reorganization expenses relating to the Company's Chapter 11 process for the
fifty-two weeks ended October 26, 1996 were $885,000. There were no
reorganization expenses for the fifty-three weeks ended November 1, 1997.
Revenues. Net sales for the fifty-three weeks ended November 1, 1997
increased 9.8% or $1,373,000 over the fifty-two weeks ended October 26, 1996,
despite 1996 consisting of revenues from five established stores as compared to
1997 revenues, which consisted of only three established stores and the new
store in Greenwich, Connecticut, which opened in January 1997. Comparable store
sales for the fifty-three weeks ended November 1, 1997 increased by 26.7% or
$2,786,000 as compared to the fifty-two weeks ended October 26, 1996. The
increase in the Company's revenues is attributable to increases in the volume of
goods and services sold, and to a lesser extent, changes in product lines. The
prices of its goods and services have remained relatively constant. In 1996, the
Company operated in Chapter 11 and at times during the year did not have
adequate inventory levels. The Company believes it currently has adequate
inventory levels to support sales.
Management believes that the increase in sales in fiscal 1997 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 customers who qualify, a Harvey credit card which is issued by an
unrelated finance company. The Company continuously offers consumers using the
Harvey credit card 90 days interest-free financing on any purchases. As a
promotion, the Company, from time to time, offers consumers using the Harvey
credit card attractive financing alternatives of 6 or 12 month interest-free
financing on specific products. The Company pays the finance company a fee in
connection with the interest-free financing. For the five-month period ended
November 1, 1997, the estimated cost to the Company, net of contributions to the
Company made by manufacturers, for the 6 or 12 month financing was approximately
$30,000. Additional direct mail promotions were also successful during the
period.
Costs and Expenses. Total cost of sales for the fifty-three weeks ended
November 1, 1997 increased 5.8% or $535,000 from the fifty-two weeks ended
October 26, 1996. This was primarily the result of increased comparable store
sales offset by store closings.
17
<PAGE>
Gross profit margin for the fifty-three weeks ended November 1, 1997 was
36.6%, as compared to 34.2% for the fifty-two weeks ended October 26, 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 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 3.6% or $233,000 for
the fifty-three weeks ended November 1, 1997 as compared to the fifty-two weeks
ended October 26, 1996. Comparable store selling, general and administrative
expenses increased 12.2% or $631,000 for the fifty-three weeks ended November 1,
1997 as compared to the fifty-two weeks ended October 26, 1996. The fifty-three
weeks ended November 1, 1997 includes net advertising expenses of $401,000, as
compared to $221,000 for the fifty-two weeks ended October 26, 1996.
Additionally, the fifty-three weeks ended November 1, 1997 includes an aggregate
amount for management fees and amortization of reorganization value in excess of
amounts allocable to identifiable assets of $96,000. The Company incurred no
expense for these items during the fifty-two weeks ended October 26, 1996.
Payroll and payroll related expenses increased 15.2% or $418,000 for the
fifty-three weeks ended November 1, 1997 as compared to the fifty-two weeks
ended October 26, 1996. This was primarily the result of additional commissions
and incentives on increased sales and gross margins and the hiring of additional
sales, warehouse and custom installation personnel. The Company also hired a
full-time Vice President of Operations in June 1996.
Interest expense decreased 35.8% or $181,000 for the fifty-three weeks
ended November 1, 1997, as compared to the fifty-two weeks ended October 26,
1996. Interest expense decreased primarily from the reduction 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.
18
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
On November 13, 1996, the Court confirmed the Reorganization Plan
('Confirming Date'). The effective date of the Reorganization Plan was December
26, 1996. Prior to the effective date of the Reorganization Plan
('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 1/2% Cumulative Convertible Preferred Stock with a par value of
$1,000 per share and 10,000,000 shares of Common Stock with a par value of $.01
per share.
The Reorganization Plan provided for the redistribution of Common Stock as
follows:
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 HAC in satisfaction of the $2,822,500 of
subordinated secured financing provided to the Company during its reorganization
process.
186,306 shares were issued to the Company's unsecured creditors in
satisfaction of prepetition liabilities compromised.
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.
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 extraordinary gain on forgiveness of
debt in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.
Convenience claims of $1,000 or less were paid in cash approximately
$20,000. The Reorganization Plan also provided for cash distribution ($452) of
$1.00 to any former shareholders holding 100 or fewer shares of the Company's
old common stock.
As a result of the operational restructuring, the Company recorded
reorganization expenses for the thirty-nine weeks ended October 26, 1996 of
$497,206. Such charges consisted of costs associated with professional fees, and
the write-off of property, equipment, other assets 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 ($4,782,000), 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.
The balance sheet as of October 26, 1996 was 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.' The Company
adopted Fresh Start reporting because the holders of existing voting shares
immediately before filing and confirmation of the plan received less than 50% of
the voting shares of the emerging entity and its reorganization value was less
than its postpetition liabilities and allowed claims. Fresh Start Reporting
19
<PAGE>
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 and subsequent to the adoption of Fresh Start
accounting are not comparable.
The reorganization value of the Company was determined 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. 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 ($1,582,440 at November 1, 1997) is reported as 'Reorganization
value in excess of amounts allocable to identifiable assets'. See Note 1 to the
financial statements for further information.
The Company's ratio of current assets to current liabilities was 1.41 at
November 1, 1997 as compared to 1.51 at October 26, 1996. The decrease in the
current ratio at November 1, 1997 is primarily due to the net cash used in
operating activities as a result of the Company's net loss for the year,
partially offset by working capital provided by the Company's line of credit
facility.
Since its reorganization, despite higher levels of sales and improved
gross margins, the Company experienced a net use of cash from operating
activities of $550,000 for the fifty-three weeks ended November 1, 1997 as
compared to $572,000 for the thirty-nine weeks ended October 26, 1996.
Investing activities resulted in a net use of cash of $663,000 for the
fifty-three weeks ended November 1, 1997 as compared to a net use of cash of
$65,000 for the thirty-nine weeks ended October 26, 1996. The increase in cash
used for 1997 was primarily due to the purchases of property and equipment
relating to the opening of the new store in Greenwich, Connecticut.
Financing activities resulted in an increase in net cash of $1,220,000 for
the fifty-three weeks ended November 1, 1997 as compared to an increase of
$891,000 for the thirty-nine weeks ended October 26, 1996. This increase was
primarily the result of additional net borrowings from the revolving line of
credit facility and a note from a preferred stockholder and member of HAC,
offset by increased payments of Chapter 11 obligations.
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, a commitment
fee in the amount of $49,500 was paid by the Company. A facility fee of
three-quarters of one percent (.75%) of the maximum credit line will be charged
on each anniversary date. Monthly maintenance charges of $2,750 and a
termination fee also exist under the facility.
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
20
<PAGE>
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 January 28, 1998 is approximately $1,954,000.
The Company's management believes that the Company's overhead structure
has the capacity to support additional stores without significant increase in
cost and personnel, and, consequently, the revenues and profit from new stores
will have a positive impact on the Company's operations. Based on such belief of
the Company's management, the Company intends to utilize the net proceeds from
the proposed Offering to open four new retail stores.
The Company's management estimates that the total cost of opening a retail
store is $650,000, or $2,600,000 for the four planned stores. 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 lenders), lease acquisition expenses, pre-opening expenses and
additional advertising and promotion in connection with the opening.
As an alternative to leasing and developing new stores, the Company will
consider acquiring the business of existing electronics retailers.
Notwithstanding, the Company is not engaged in any negotiations and has not
signed any agreement regarding any such potential acquisition.
Management believes that the net proceeds from the proposed 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, based on information provided to it by each vendor, 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.
For the fifty-three weeks ended November 1, 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.
22
<PAGE>
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-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>
FIFTY-THREE WEEKS ENDED THIRTY-NINE WEEKS ENDED
PRODUCT CATEGORY NOVEMBER 1, 1997 OCTOBER 26, 1996
- ------------------------------------------------------------------ ----------------------- -----------------------
<S> <C> <C>
Audio Components.................................................. 53% 51%
Mini Audio Shelf Systems.......................................... 6% 7%
TV and Projectors................................................. 16% 18%
VCR/DVD/DSS....................................................... 6% 5%
Furniture......................................................... 4% 5%
Cable and Wire.................................................... 5% 4%
Accessories....................................................... 6% 4%
Extended Warranties............................................... 1% 2%
Miscellaneous..................................................... 3% 4%
--- ---
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 56% of the Company's purchases for the
fifty-three weeks ended November 1, 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 fifty-three weeks ended November 1, 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., NAD Electronics of America, Lenbrook
America, LLC (a distributor of KEF products), Pioneer Electronics (USA), Inc.,
Bang & Olufsen of America, 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's
dealer agreement with Bang & Olufsen requires the Company to purchase $160,000
of equipment annually.
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 for the fifty-three week period
ended November 1, 1997, was approximately 2.9 times. The Company has begun to
formulate a plan
24
<PAGE>
with its software and service provider to address the risks associated with the
year 2000 computer 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), 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. Sales of extended warranty contracts
represent between 1% and 2% of the Company's net sales. 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 Circuit City has begun to open
stores in the New York market. The Company believes that it is the largest
retailer of 'esoteric brands' in the New York metropolitan area.
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>
FIFTY-THREE WEEKS ENDED THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 1997 OCTOBER 26, 1996
----------------------- -----------------------
<S> <C> <C>
Gross Advertising Costs........................................... $ 1,048,000 $ 690,000
Net Advertising Expenses.......................................... $ 401,000 $ 358,000
Percentage of Net Sales........................................... 2.6% 3.9%
</TABLE>
As the Company repositioned itself during and after its reorganization, it
incurred additional advertising costs for the fifty-three weeks ended November
1, 1997 as compared to the thirty-nine weeks ended October 26, 1996. The Company
has retained an outside advertising agency who is paid a monthly retainer of
$9,000 plus approved expenses. This agreement expires January 31, 1999.
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
expenditures. It is also believed that its overhead structure can support
additional stores without significant increase
26
<PAGE>
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 November 1, 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 expired
January 31, 1998. The Company is currently negotiating an extension to this
agreement. 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 1/2% 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)
186,306 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, 2,257,833 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 $30,000 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............. 44 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 January 1, 1998.
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.
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<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 April 1, 1998, Mr. Recca will receive an annual salary in the
amount of $95,000 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% 60.0%
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% 60.2%
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% 4.0%
220 Fifth Avenue, 10th Floor
New York, NY 10001
All Directors and Officers as a group ..................... 1,974,191 1,984,191(4) 87.4% 61.9%
(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 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 56.1%) and all Directors and Officers as a
group would own 1,884,191 Shares (or 58.0%).
(5) Includes 90,000 Shares issuable on conversion of Preferred Stock.
34
<PAGE>
SELLING SECURITYHOLDER
In addition to the 950,000 shares of Common Stock and 1,450,000 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 142,500 additional shares of Common Stock and/or an aggregate of 217,500
additional Warrants. In the event the Representative exercises the
Over-Allotment Option, the first 42,500 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 April 1997, a $5,000 per month management fee to Recca &
Co., Inc. was accrued. For fiscal 1998 Recca & Co., Inc. will receive a $40,000
management consulting fee.
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.
In the future the Company will present all proposed transactions between
the Company and its officers, directors or 5% shareholders, and their affiliates
to the Board of Directors for its consideration and approval. Any such
transaction, including forgiveness of loans, will require approval by a majority
of the disinterested directors and such transactions will be on terms no less
favorable than those available to disinterested third parties.
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, 2,257,833 shares are
outstanding and held of record by 364 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
1,450,000 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.
37
<PAGE>
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.
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.
38
<PAGE>
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 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 2,257,833 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 has entered into a written agreement with the Representative that it
will not publicly sell an aggregate of 1,925,000 (assuming the Put Option is not
exercised) 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 364
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................................................................... 950,000 1,450,000
--------- ---------
--------- ---------
</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 142,500 additional shares of Common Stock and/or an
aggregate of 217,500 additional Warrants for the purpose of covering
over-allotments, if any. In the event the Representative exercise the
Over-Allotment Option, the first 42,500 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 Warrants without giving up a portion of
the 5% solicitation fee to the Representative. Further, such NASD
40
<PAGE>
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 one person 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
one person 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 exercisable for four years
commencing one year from the Effective Date, to purchase from the Company 95,000
shares of Common Stock and/or 145,000 Warrants (the 'Representative's Warrant').
The Representative's Warrant is initially exercisable at a price of $6.75 per
share of Common Stock and $0.135 per warrant. The warrants issuable upon
exercise of the Representative's Warrant are identical to those offered to the
public, except that the price to purchase a Share is $7.425. The
Representative's Warrant contains anti-dilution provisions providing for
adjustment of the number of warrants and exercise price under certain
circumstances. The holder of a majority of the Representative's Warrant or the
securities underlying the Representative's Warrant if the Representative's
Warrant has been fully exercised, will have the right, at anytime commencing on
the first anniversary and expiring on the fifth anniverary of the Effective
Date, to have the Company prepare and file with the SEC, on one occasion, a
registration statement on Form SB-2, S-1 or other appropriate form, and such
other documents, including a prospectus, so as to permit a public offering and
sale, for a period of nine (9) months, of the securities underlying the
Representative's Warrant by such holders and any other holders of the
Representative's Warrant and/or securities underlying the Representative's
Warrant.
41
<PAGE>
In the event the Company files a registration statement with the SEC under
the Securities Act of 1933, as amended (other than in connection with a merger
or other business combination transaction or pursuant to a Form S-8
registration) during the period commencing on the first anniversary and expiring
on the fifth anniversary of the Effective Date, the holder of Representative's
Warrant or securities underlying the Representative's Warrant may require the
Company to include securities underlying the Representative's Warrant in such
registration statement provided that the Company shall have the right to elect
not to file such proposed registration statement, or to withdraw the same after
the filing but prior to the effective date thereof.
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.'
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 November 1, 1997 and for the
fifty-three weeks ended November 1, 1997 and the thirty-nine weeks ended October
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--November 1, 1997............................................................................... F-3
Statements of Operations--Fifty-Three Weeks Ended November 1, 1997 and Thirty-Nine Weeks Ended October 26,
1996........................................................................................................ F-4
Statements of Shareholders' Equity--Fifty-Three Weeks Ended November 1, 1997 and Thirty-Nine Weeks Ended
October 26, 1996............................................................................................ F-5
Statements of Cash Flows--Fifty-Three Weeks Ended November 1, 1997 and Thirty-Nine Weeks Ended October 26,
1996........................................................................................................ F-6
Notes to Financial Statements................................................................................. F-7
</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 November 1, 1997 and the
related statements of operations, shareholders' equity, and cash flows for the
fifty-three weeks ended November 1, 1997 (Successor) 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
November 1, 1997, and the results of its operations and its cash flows for
fifty-three weeks ended November 1, 1997 (Successor) 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
January 9, 1998
F-2
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
BALANCE SHEET
NOVEMBER 1, 1997
<TABLE>
<CAPTION>
PRO FORMA
UNAUDITED
(SEE NOTE
ACTUAL 6)
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 10,033 $ 10,033
Accounts receivable, less allowance of $20,000.......................................... 272,436 272,436
Certificate of deposit.................................................................. 200,000 200,000
Inventories............................................................................. 3,559,778 3,559,778
Prepaid expenses and other current assets............................................... 109,656 109,656
---------- ----------
Total current assets...................................................................... 4,151,903 4,151,903
Property and equipment:...................................................................
Leasehold improvements.................................................................. 644,646 644,646
Furniture, fixtures and equipment....................................................... 738,872 738,872
---------- ----------
1,383,518 1,383,518
Less accumulated depreciation and amortization.......................................... 179,604 179,604
---------- ----------
1,203,914 1,203,914
Equipment under capital leases............................................................ 15,768 15,768
Reorganization value in excess of amounts allocable to identifiable assets, less
accumulated amortization of $68,130..................................................... 1,582,440 1,582,440
Other, less accumulated amortization of $51,832........................................... 360,100 360,100
---------- ----------
Total assets.............................................................................. $7,314,125 $7,314,125
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................................................. $1,716,755 $1,716,755
Accrued expenses and other current liabilities.......................................... 1,139,918 1,139,918
Obligations relating to Chapter 11 reorganization....................................... 17,500 17,500
Income taxes............................................................................ 30,400 30,400
Current portion of capital lease obligations............................................ 32,542 32,542
---------- ----------
Total current liabilities................................................................. 2,937,115 2,937,115
Long-term liabilities:
Long-term debt.......................................................................... 2,127,851 2,127,851
Cumulative Preferred Stock dividends payable............................................ 70,479 70,479
Other liabilities....................................................................... 157,411 157,411
Capital lease obligations............................................................... 8,583 8,583
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)................................................................ 396,037 --
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)................................................................ -- 396,037
Common Stock, par value $.01 per share; authorized 10,000,000 shares; issued and
outstanding 2,257,833 shares......................................................... 22,578 22,578
Additional paid-in capital.............................................................. 3,067,799 3,067,799
Accumulated deficit..................................................................... (1,473,728) (1,473,728)
---------- ----------
Total shareholders' equity................................................................ 1,616,649 2,012,686
---------- ----------
Total liabilities and shareholders' equity................................................ $7,314,125 $7,314,125
---------- ----------
---------- ----------
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------- -----------------------------
FIFTY-THREE THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
NOVEMBER 1, OCTOBER 26, OCTOBER 28,
1997 1996 1995
----------- ----------- --------------
(UNAUDITED)(1)
<S> <C> <C> <C>
Net sales............................................................. $15,398,290 $ 9,263,152 $ 11,107,258
Interest and other income............................................. 72,652 87,657 78,487
----------- ----------- --------------
15,470,942 9,350,809 11,185,745
----------- ----------- --------------
Cost of sales......................................................... 9,764,755 6,094,499 7,312,311
Selling, general and administrative expenses.......................... 6,706,180 4,937,316 5,782,070
Interest expense...................................................... 325,219 355,922 307,015
----------- ----------- --------------
16,796,154 11,387,737 13,401,396
----------- ----------- --------------
Loss before reorganization expenses, fresh start adjustments and
extraordinary item.................................................. (1,325,212) (2,036,928) (2,215,651)
Reorganization expenses............................................... -- (497,206) (520,418)
Reorganization income--sale of lease.................................. -- 250,000 --
----------- ----------- --------------
Loss before fresh start adjustments and extraordinary item............ (1,325,212) (2,284,134) (2,736,069)
Fresh start adjustments............................................... -- 1,857,844 --
----------- ----------- --------------
Loss before extraordinary item........................................ (1,325,212) (426,290) (2,736,069)
Extraordinary gain on forgiveness of debt............................. -- 5,338,852 --
----------- ----------- --------------
Net (loss) income..................................................... (1,325,212) 4,912,562 (2,736,069)
Preferred Stock dividend requirement.................................. (70,479) -- --
Accretion of Preferred Stock.......................................... (78,037) -- --
----------- ----------- --------------
Net (loss) income attributable to Common Stock........................ $(1,473,728) $ 4,912,562 $ (2,736,069)
----------- ----------- --------------
----------- ----------- --------------
Net (loss) per common share........................................... $ (.65)
-----------
-----------
Weighted average number of common and common equivalent shares
outstanding during the period....................................... 2,257,833
-----------
-----------
</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' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
----------------- ------------------------ ADDITIONAL ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCK EQUITY
------ -------- ---------- ----------- ----------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 27,
1996 (Predecessor)..... 3,498,968 $ 3,498,968 $ 5,899,010 $(13,174,955) $(865,601) $(4,642,578)
Net income for the
thirty-nine weeks ended
October 26, 1996....... -- -- -- -- -- 4,912,562 -- 4,912,562
Elimination of
accumulated deficit
upon implementation of
fresh start
accounting............. -- -- -- -- -- 8,262,393 -- 8,262,393
Cancellation of Common
Stock and treasury
shares................. -- -- (3,498,968) (3,498,968) (5,899,010) -- 865,601 (8,532,377)
Issuance of common stock
at reorganization
value.................. -- -- 2,257,833 22,578 3,067,799 -- -- 3,090,377
------ -------- ---------- ----------- ----------- ------------ --------- -------------
Balance at October 26,
1996 (Successor)....... -- -- 2,257,833 22,578 3,067,799 -- -- 3,090,377
Net (loss) for the
year................... -- -- -- -- -- (1,325,212) -- (1,325,212)
Cumulative dividends on
Preferred Stock........ -- -- -- -- -- (70,479) -- (70,479)
Accretion of Preferred
Stock.................. -- -- -- -- -- (78,037) -- (78,037)
------ -------- ---------- ----------- ----------- ------------ --------- -------------
Balance at November 1,
1997 (Successor)....... -- -- 2,257,833 $ 22,578 $ 3,067,799 $ (1,473,728) $ -- $ 1,616,649
------ -------- ---------- ----------- ----------- ------------ --------- -------------
------ -------- ---------- ----------- ----------- ------------ --------- -------------
Pro forma balance
(unaudited) at November
1, 1997................ 875 $396,037 2,257,833 $ 22,578 $ 3,067,799 $ (1,473,728) $ -- $ 2,012,686
------ -------- ---------- ----------- ----------- ------------ --------- -------------
------ -------- ---------- ----------- ----------- ------------ --------- -------------
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ------------
FIFTY-THREE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
NOVEMBER 1, OCTOBER 26,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................................................ $(1,325,212) $ 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....................................................... -- 428,989
Depreciation and amortization................................................. 371,434 293,278
Credit for losses on accounts receivable...................................... (5,000) (5,000)
Provisions for sales tax and warranty reserves................................ -- 39,000
Write-off of other assets..................................................... 32,164 --
Straight-line impact of rent escalations...................................... 61,055 1,235
Miscellaneous................................................................. (10,000) (22,401)
Changes in operating assets and liabilities:
Accounts receivable........................................................... 38,360 43,412
Inventories................................................................... (550,940) (147,850)
Prepaid expenses and other current assets..................................... 143,795 (11,718)
Trade accounts payable........................................................ 390,937 1,121,362
Accrued expenses, other current liabilities and income taxes.................. 303,407 (27,717)
------------ ------------
Net cash used in operating activities.............................................. (550,000) (571,544)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from note receivable from former officer/shareholder.................... -- 125,000
Net book value of deletions...................................................... 37,254 --
Purchases of property and equipment.............................................. (629,618) (64,707)
Increase in other assets......................................................... (70,879) (125,303)
------------ ------------
Net cash used in investing activities.............................................. (663,243) (65,010)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from note payable....................................................... 350,000 --
Public offering costs............................................................ (126,665) --
Costs relating to refinancing.................................................... (67,532) --
Debtor-in-possession financing................................................... 605,000 717,500
Payments relating to Chapter 11 reorganization................................... (456,913) --
Net proceeds from revolving line of credit facility.............................. 999,634 23,547
Principal payments on long-term debt............................................. -- (90,010)
Principal payments on capital lease obligations.................................. (83,627) (39,896)
------------ ------------
Net cash provided by financing activities.......................................... 1,219,897 611,141
------------ ------------
Increase (decrease) in cash and cash equivalents................................... 6,654 (25,413)
Cash and cash equivalents at beginning of period................................... 3,379 28,792
------------ ------------
Cash and cash equivalents at end of period......................................... $ 10,033 $ 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
NOVEMBER 1, 1997
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 plans 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 the proposed Offering, 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
Subsidiaries or 'Predecessor') 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 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').
The Reorganization Plan provided for the following:
a. Redistribution of Common Stock
F-7
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
1. BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)
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.
186,306 shares were issued to the Company's unsecured creditors;
in satisfaction of prepetition liabilities compromised.
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, 2,257,833 shares of Common Stock were issued on the
Effective date.
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 extraordinary 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. 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.
F-8
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
1. BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)
As a result of the operational restructuring, the Company recorded
reorganization expenses for the thirty-nine weeks ended October 26, 1996 of $
$497,206. Such charges consisted of costs associated with professional fees, and
the write-off of property, equipment, other assets 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 ($4,782,000), 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
Fresh Start Reporting was adopted on the Confirmation Date and applied as
of October 26, 1996, the end of the accounting period closest to the
Confirmation Date. Results of operations and balance sheet differences between
such dates were insignificant. 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.' The Company adopted fresh-start reporting because the holders
of existing voting shares immediately before filing and confirmation of the plan
received less than 50% of the voting shares of the emerging entity and its
reorganization value is less than its postpetition liabilities and allowed
claims.
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.
The reorganization value of the Company was determined 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 ($1,582,440 at November 1, 1997) is reported as
'Reorganization value in excess of amounts allocable to identifiable assets' and
is being amortized over a twenty-five year period. Amortization expense of
$68,130 was recorded for fiscal year 1997.
The revaluation of the Company's assets and liabilities resulted in the
following Fresh Start adjustments for the thirty-nine weeks ended October 26,
1996:
<TABLE>
<S> <C>
Increase in property and equipment (based on appraisal)...................................... $ 292,236
Decrease in other assets..................................................................... (32,462)
Increase in other liabilities................................................................ (52,500)
Reorganization value in excess of amounts allocable to identifiable assets................... 1,650,570
----------
$1,857,844
----------
----------
</TABLE>
The accumulated deficit of $8,262,393 at October 26, 1996, which included
the effects of the Fresh Start adjustments, was reclassified to additional paid
in capital.
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
F-9
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
1. BASIS OF PRESENTATION, PLAN OF REORGANIZATION AND FRESH START
REPORTING -- (CONTINUED)
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. 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.
The statements of operations and cash flows presented for the thirty-nine
weeks ended October 26, 1996 represent the Debtor-in-Possession operations of
the Company, prior to the Reorganization Date.
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
from retail sales is recognized at the time goods are delivered to the customer
or, for certain installation services, when such services are performed and
accepted by the customer.
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.
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)
necessary 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.
F-10
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (average-cost method, which
approximates the first-in, first-out method) or market.
INVESTMENTS
The Company has classified its investment in a certificate of deposit as
available-for-sale. The certificate of deposit is stated at cost, which
approximates fair value. In January 1998, the certificate of deposit was
redeemed. There were no unrealized gains or losses on this investment for the
periods presented.
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, ranging from three to ten years.
Leasehold improvements are amortized over the lease term or estimated useful
life of the improvements, whichever is shorter.
LOSS PER SHARE
The loss per common share for the fifty-three weeks ended November 1, 1997
was computed based on the weighted average number of common shares outstanding.
Common equivalent shares were not considered for the fifty-three weeks ended
November 1, 1997 since their inclusion would have been antidilutive. Income
(loss) per share is not presented for the pre-bankruptcy periods because such
amounts are not comparable to the post-bankruptcy period.
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.
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-three weeks ended November 1, 1997 and
for the thirty-nine weeks ended October 26, 1996 was approximately $282,000 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.
F-11
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
ADVERTISING EXPENSE
Advertising expense, net of cooperative advertising allowances, is charged
to operations when the advertising takes place. Advertising expense for the
fifty-three weeks ended November 1, 1997 and for the thirty-nine weeks ended
October 26, 1996 was approximately $401,000 and $358,000, respectively. Prepaid
advertising for print advertisements not run at November 1, 1997 and October 26,
1996 was approximately $15,000 and $183,000, respectively.
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 during fiscal 1997), 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 $45,000 for the thirty-nine
weeks ended October 26, 1996.
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. Interest expense and amount payable to this member of HAC was
$28,000 as of and for the year ended November 1, 1997.
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 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.
F-12
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
4. REVOLVING LINES OF CREDIT FACILITIES -- (CONTINUED)
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 over three
years, beginning with the first quarter of fiscal 1998, based upon the estimated
fair value of such warrant.
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 $1,777,851 outstanding under the
Congress credit facility at November 1, 1997. 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.
5. PROPOSED 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 950,000 shares of the Company's common stock and
1,450,000 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 exercisable 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.
At the underwriter's election, it may underwrite an additional 142,500
shares and or 217,500 Warrants if market conditions permit. The first 42,500 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.
The 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.
Subsequent to November 1, 1997, HAC transferred 85,000 shares of Common
Stock to certain employees and directors of the Company and an individual who is
a preferred shareholder 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 over the two-year period during which the shares are
subject to forfeiture by the transferees.
F-13
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
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. The Company's previous stock option plan was canceled in connection
with the Reorganization Plan. On December 5, 1997, the Company's Compensation
and Stock Option Committee of the Board of Directors approved a grant, as of the
effective date of the Offering, of 70,000 incentive stock options to many of the
Company's employees to purchase the Company's Common Stock exercisable as to
one-third of such shares at an exercise price of $5.00 per share commencing one
year from the effective date; one-third of such shares at an exercise price of
$5.50 per share commencing two years from the effective date and the remaining
one-third of such shares at $6.00 per share commencing three years from the
effective date.
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 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). The pro
forma balance sheet (unaudited) at November 1, 1997 has been presented to
reflect the Preferred Stock in stockholder's equity as though the removal of the
redemption feature had taken place on such date.
Accumulated Preferred Stock dividends payable of $70,479 are outstanding
and were recorded as a long-term liability at November 1, 1997. Such dividends,
along with the accretion on the redeemable Preferred Stock, were recorded as a
reduction of retained earnings at November 1, 1997.
7. INCOME TAXES
At November 1, 1997, the Company has available net operating loss
carryforwards of approximately $9,400,000 which expire in various years through
fiscal 2012. Of this amount, approximately $8,100,000 relates to
F-14
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
7. INCOME TAXES -- (CONTINUED)
pre-reorganization net operating loss carryforwards. 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 pre-reorganization net operating
loss carryforward and other pre-reorganization tax attributes will be limited to
approximately $150,000 per year over the next fifteen years.
At October 26, 1996 and November 1, 1997, the Company had deferred tax
assets of approximately $765,000 and $1,207,000, respectively, arising primarily
from the future availability of the above tax attributes. Such amounts have been
offset in full by a valuation allowance in each year.
Future benefits realized, if any, from pre-reorganization net operating
loss carryforwards would first reduce reorganization value in excess of amounts
allocable to identifiable assets until exhausted and thereafter be reported as a
direct addition to paid in capital.
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-three weeks ended November 1, 1997 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.
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. Additional capital leases for the fifty-three weeks ended November
1, 1997 total $11,000. 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
November 1, 1997:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- -------
<S> <C> <C>
Fiscal 1998....................................................................... $ 956,000 $35,000
Fiscal 1999....................................................................... 992,000 4,000
Fiscal 2000....................................................................... 1,018,000 4,000
Fiscal 2001....................................................................... 1,027,000 2,000
Fiscal 2002....................................................................... 989,00 --
Thereafter........................................................................ 2,348,000 --
---------- -------
Total minimum lease payments...................................................... $7,330,000 45,000
----------
----------
Less amount representing interest................................................. 4,000
-------
Present value of net minimum lease payments....................................... 41,000
Less current portion.............................................................. 32,000
-------
$ 9,000
-------
-------
</TABLE>
F-15
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Minimum rental commitments are offset by sublease income of approximately
$93,000 per annum through fiscal 2001.
Total rental expense for operating leases was approximately $1,517,000 and
$1,234,000, for the fifty-three weeks ended November 1, 1997 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.
The Company is obligated under annual or biannual agreements with certain
of its vendors to attain certain minimum levels of inventory purchases,
aggregating approximately $900,000 per year over the next two years.
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 November
1, 1997, aggregating $100,000.
10. OTHER INFORMATION
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
NOVEMBER 1,
1997
-----------
<S> <C>
Payroll and payroll related items.................................................. $ 144,074
Accrued professional fees.......................................................... 403,213
Customer layaways.................................................................. 298,704
Accrued interest................................................................... 99,855
Sales taxes........................................................................ 77,297
Other.............................................................................. 116,775
-----------
$ 1,139,918
-----------
-----------
</TABLE>
OTHER LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
NOVEMBER 1,
1997
-----------
<S> <C>
Straight-line impact of lease escalations.......................................... $ 136,411
-----------
Other.............................................................................. 21,000
-----------
$ 157,411
-----------
-----------
</TABLE>
OTHER
The financial statement caption 'Interest and other income' for the
thirty-nine weeks ended October 26, 1996, includes $45,605 of interest and other
income relating to proceeds of a division of the Predecessor in a previous year.
F-16
<PAGE>
HARVEY ELECTRONICS, INC.
(FORMERLY THE HARVEY GROUP INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 1, 1997
10. OTHER INFORMATION -- (CONTINUED)
Interest expense relating to the HAC debtor-in-possession financing was
approximately $35,000 and $149,000 for the fifty-three weeks ended November 1,
1997 and for the thirty-nine weeks ended October 26, 1996, respectively.
Interest payable to HAC at November 1, 1997 was approximately $66,000.
Management fees of $30,000 relating to a Company affiliated with the
Company's Chairman, were expensed for the fifty-three weeks ended November 1,
1997. Approximately $24,000 of loan servicing fees and other miscellaneous
amounts were payable to this Company at November 1, 1997.
F-17
<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................................... 7
Use of Proceeds................................ 13
Dividend Policy................................ 13
Capitalization................................. 14
Dilution....................................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 16
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.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
[LOGO]
950,000 SHARES OF COMMON STOCK
AND
1,450,000
REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
OF
HARVEY ELECTRONICS, INC.
------------------------
PROSPECTUS
------------------------
THE THORNWATER COMPANY, L.P.
, 1998
------------------------------------------------------
------------------------------------------------------
<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.............................................................. $ 5,011.50
NASDAQ listing fee................................................................ $ 10,000.00
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..................................................................... $ 35,027.50
-----------
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 2,257,833 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) 186,306 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 2,257,833 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
- ---------- ------------------------------------------------------------------------------------------------------------
<S> <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 Warrant Agent Agreement
**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
*10.1.3 -- Form of Representative's Warrant 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.
*10.4.3 -- Dealer Agreement between the Company and Bang & Olufsen of America, Inc.
*10.4.4 -- Dealer Agreement between the Company and NAD Electronics of America
**10.5.1 -- Lease between the Company and Joseph P. Day Realty Corp.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
**10.5.2 -- Lease between the Company and Goodrich Fairfield Associates L.L.C.
**10.5.3 -- Lease between the Company and Sprout Development Co.
**10.5.4 -- Lease between the Company and Service Realty Company
**10.5.5 -- Lease between the Company and 205 Associates
**10.5.6 -- Sublease between the Company and Fabian Formals, Inc. and Affiliate First Nighter of Canada
**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>
- ------------------
* Filed herewith.
** Previously filed.
*** 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.
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 AMENDMENT NO. 1 TO
THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN
THE TOWN OF LYNDHURST, STATE OF NEW JERSEY, ON FEBRUARY 19, 1998.
HARVEY ELECTRONICS, INC.
BY: /s/ FRANKLIN C. KARP
----------------------------------
FRANKLIN C. KARP, PRESIDENT
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------------- ---------------------
<S> <C> <C>
/s/ FRANKLIN C. KARP President and Director February 19, 1998
- ------------------------------------------
Franklin C. Karp
/s/ JOSEPH J. CALABRESE Executive Vice President, Chief Financial February 19, 1998
- ------------------------------------------ Officer, Treasurer, Secretary and Director
Joseph J. Calabrese
/s/ MICHAEL RECCA Chairman and Director February 19, 1998
- ------------------------------------------
Michael Recca
/s/ WILLIAM F. KENNY III Director February 19, 1998
- ------------------------------------------
William F. Kenny, III
/s/ STEWART L. COHEN Director February 19, 1998
- ------------------------------------------
Stewart L. Cohen
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------------ -----------
<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 Warrant Agent Agreement
**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
*10.1.3 -- Form of Representative's Warrant 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.
*10.4.3 -- Dealer Agreement between the Company and Bang & Olufsen of America, Inc.
*10.4.4 -- Dealer Agreement between the Company and NAD Electronics of America
**10.5.1 -- Lease between the Company and Joseph P. Day Realty Corp.
**10.5.2 -- Lease between the Company and Goodrich Fairfield Associates L.L.C.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------------ -----------
<S> <C> <C> <C>
**10.5.3 -- Lease between the Company and Sprout Development Co.
**10.5.4 -- Lease between the Company and Service Realty Company
**10.5.5 -- Lease between the Company and 205 Associates
**10.5.6 -- Sublease between the Company and Fabian Formals, Inc. and Affiliate First Nighter of
Canada
**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>
- ------------------
* Filed herewith.
** Previously filed.
*** 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.
<PAGE>
HARVEY ELECTRONICS, INC.
950,000 Shares of Common Stock
and
1,450,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
___________, 1998
The Thornwater Company, L.P.
107A East 37th Street
New York, New York 10016
Gentlemen:
Harvey Electronics, Inc., a corporation organized under the laws of
the State of New York (the "Company"), hereby confirms its agreement with The
Thornwater Company, L.P. ("Thornwater"), as representative (the
"Representative") of the several underwriters listed on Schedule 1 annexed
hereto (the "Underwriters"), as set forth below.
The Company proposes to issue and sell to the Underwriters an
aggregate of (i) 950,000 shares (the "Firm Shares") of the Company's common
stock, no par value (the "Common Stock"), and (ii) 1,450,000 redeemable
warrants to purchase Common Stock (the "Firm Warrants"). In addition, for the
sole purpose of covering over-allotments from the sale of the Firm Shares and
the Firm Warrants, (A) the Company proposes to grant to the Underwriters an
option to purchase (i) an additional 42,500 shares of Common Stock (the
"Company Option Shares") and/or (ii) an additional 217,500 redeemable warrants
to purchase Common Stock (the "Option Warrants", and together with the Company
Option Shares, the "Company Option Securities") and (B) Harvey Acquisition
Company , LLC (the "Selling Shareholder") proposes to grant to the
Underwriters an option to purchase 100,000 shares of Common Stock (the
"Selling Shareholder Option Shares," and together with the Company Option
Shares, the "Option Shares"), all as provided in section 2(c) of this
agreement (the "Agreement"). The Firm Shares and the Option Shares are
collectively referred to herein as the "Shares." The Firm Warrants and the
Option Warrants are collectively referred to herein as the "Warrants." Any
shares of Common Stock issuable upon the exercise of any Warrants are referred
to herein as "Warrant Shares." The Firm Shares and the Firm Warrants are
collectively referred to herein as the "Firm Securities;" the Option Shares
and the Option Warrants are collectively referred to herein as the "Option
Securities;" and the Firm Securities, the Option Securities and the Warrant
Shares are collectively referred to herein as the "Securities."
Pursuant to an agreement to be entered into among the Company, the
Underwriter and Registrar and Transfer Company (the "Warrant Agreement"), each
Warrant will be exercisable during the period commencing on the second
anniversary of the effective date of the Registration
<PAGE>
Statement (as hereinafter defined) (the "Effective Date") and expiring on the
fifth anniversary thereof, subject to redemption by the Company (as described
below), at an initial exercise price (subject to adjustment as set forth in
the Warrant Agreement) of $_____ per share (110% of public offering price per
share). The Warrants will be redeemable at a price of $.10 per Warrant,
commencing on the second anniversary of the Effective Date (or earlier with
the consent of the Representative) and prior to their expiration, upon not
less than 30 days prior written notice to the holders of the Warrants,
provided that the closing bid price of the Common Stock as reported on the
Nasdaq SmallCap Market if traded thereon, or if not traded thereon, the
closing sale price if listed on the Nasdaq National Market or a national or
regional securities exchange (or other reporting system that provides last
sales prices), shall have been at least $_____ per share (150% of public
offering price per shares), subject to adjustment, for 20 consecutive trading
days ending three days prior to the date on which the Company gives notice of
redemption, subject to the right of the holder to exercise such Warrants prior
to redemption.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) A registration statement on Form SB-2 (File No.
333-42121), with respect to the Securities and the Representative's Warrant
Securities (as hereinafter defined), including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Act "), and one or more amendments to that registration statement may
have been so filed. Copies of such registration statement and of each
amendment heretofore filed by the Company with the Commission have been
delivered to the Underwriters. After the execution of this Agreement, the
Company will file with the Commission either (i) if the registration
statement, as it may have been amended, has been declared by the Commission to
be effective under the Act, a prospectus in the form most recently included in
that registration statement (or, if an amendment thereto shall have been
filed, in such amendment), with such changes or insertions as are required by
Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have
been provided to and approved by the Underwriters prior to the execution of
this Agreement, or (ii) if that registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the
Act, an amendment to that registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by
the Underwriters prior to the execution of this Agreement. The Company also
may file a related registration statement with the Commission pursuant to Rule
462(b) under the Act for purposes of registering certain additional
Securities, which registration statement shall become effective upon filing
with the Commission (the "Rule 462(b) Registration Statement"). As used in
this Agreement, the term "Registration Statement" means that registration
statement, as amended at the time it was or is declared effective, and any
amendment thereto that was or is thereafter declared effective, including all
financial schedules and exhibits thereto and any information omitted therefrom
pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined), together with any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with the Registration Statement (including the prospectus subject to
completion, if any, included in the Registration Statement at the time it was
or is declared effective); and the term "Prospectus" means the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act or, if
2
<PAGE>
no prospectus is so filed pursuant to Rule 424(b), the prospectus included in
the Registration Statement. The Company has caused to be delivered to the
Underwriters copies of each Preliminary Prospectus and has consented to the
use of those copies for the purposes permitted by the Act. If the Company has
elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has
not been declared effective, then (i) the Company has filed a Rule 462(b)
Registration Statement in compliance with and that is effective upon filing
pursuant to Rule 462(b) and has received confirmation of its receipt and (ii)
the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act
or the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When each Preliminary
Prospectus and each amendment and each supplement thereto was filed with the
Commission it (i) contained all statements required to be stated therein, in
accordance with, and complied with the requirements of, the Act and the rules
and regulations of the Commission thereunder and (ii) did not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When the
Registration Statement was or is declared effective, it (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus
and each amendment or supplement thereto is filed with the Commission pursuant
to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not
required so to be filed, when the Registration Statement containing such
Prospectus or amendment or supplement thereto was or is declared effective)
and on the Firm Closing Date and any Option Closing Date (as each such term is
hereinafter defined), the Prospectus, as amended or supplemented at any such
time, (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply with the requirements
of, the Act and the rules and regulations of the Commission thereunder and
(ii) did not or will not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The foregoing provisions of this paragraph (b) do not apply to
statements or omissions made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by
the Underwriters specifically for use therein.
(c) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of New
York, and is duly qualified or authorized to transact business as a foreign
corporation and is in good standing in each jurisdiction where the ownership
or leasing of its property or the conduct of its business requires such
qualification or authorization.
(d) The Company has full corporate power and authority, and
all necessary material authorizations, approvals, orders, licenses,
certificates and permits of and from all
3
<PAGE>
governmental regulatory authorities, to own or lease its property and conduct
its business as now being conducted and as proposed to be conducted as
described in the Registration Statement and the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(e) The Company does not own, directly or indirectly, an
interest in any corporation, partnership, limited liability company, joint
venture, trust or other business entity.
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus). All of the issued
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights. There
are no outstanding options, warrants or other rights granted by the Company to
purchase shares of its Common Stock or other securities, other than as
described in the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus). The Shares and the Warrant Shares have
been duly authorized, and the Warrant Shares have been duly reserved for
issuance, by all necessary corporate action on the part of the Company and,
when the Shares are issued and delivered to and paid for by the Underwriter
pursuant to this Agreement and the Warrant Shares are issued and delivered to
and paid for by the holders of Warrants upon exercise of the Warrants in
accordance with the terms thereof, the Shares and the Warrant Shares will be
validly issued, fully paid, nonassessable and free of preemptive rights and
will conform to the description thereof in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). No
holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Securities, and no
person is entitled to have securities registered by the Company under the
Registration Statement or otherwise under the Act other than as described in
the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(g) The capital stock of the Company conforms to the
description thereof contained in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been
effected pursuant to an exemption from the registration requirements of the
Act. Except as previously disclosed in writing to the Representative, no
compensation was paid to or on behalf of any member of the National
Association of Securities Dealers, Inc. ("NASD"), or any affiliate or employee
thereof, in connection with any such issuance.
(i) The financial statements of the Company included in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the
financial position of the Company as of the dates indicated and the results of
operations of the Company for the periods specified. Such financial statements
have been prepared in accordance with accounting principles generally accepted
in effect in the United States of America, consistently applied, except to the
extent that certain footnote disclosures regarding unaudited interim periods
may have been omitted in accordance with the applicable rules of the
Commission under the Securities Exchange Act of 1934, as
4
<PAGE>
amended (the "1934 Act"). The financial data set forth under the caption
"Summary Financial Information" in the Prospectus (and, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) fairly present, on
the basis stated in the Prospectus (or such Preliminary Prospectus), the
information included therein.
(j) Ernst & Young LLP, who have audited certain financial
statements of the Company and delivered their report with respect to the
financial statements included in the Registration Statement and the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants with respect to the Company as
required by the Act and the applicable rules and regulations thereunder.
(k) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (and, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), (i) except as
otherwise contemplated therein, there has been no material adverse change in
the business, operations, condition (financial or otherwise), earnings or
prospects of the Company, whether or not arising in the ordinary course of
business, (ii) except as otherwise stated therein, there have been no
transactions entered into by the Company and no commitments made by the
Company that, individually or in the aggregate, are material with respect to
the Company, (iii) there has not been any change in the capital stock or
indebtedness of the Company, and (iv) there has been no dividend or
distribution of any kind declared, paid or made by the Company in respect of
any class of its capital stock.
(l) The Company has full corporate power and authority to
enter into and perform its obligations under this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement (as hereinafter defined).
The execution and delivery of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement have been duly authorized by all necessary
corporate action on the part of the Company and this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement have each been duly
executed and delivered by the Company and each is a valid and binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium and other
similar laws affecting creditors' rights generally and by general principles
of equity (regardless of whether enforcement is considered in a proceeding in
equity or at law), and except as rights to indemnity and contribution under
this Agreement may be limited by applicable law. The issuance, offering and
sale by the Company to the Underwriters of the Securities pursuant to this
Agreement or the Representative's Securities pursuant to the Representative's
Warrant Agreement, the compliance by the Company with the provisions of this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement,
and the consummation of the other transactions contemplated by this Agreement,
the Warrant Agreement and the Representative's Warrant Agreement do not (i)
require the consent, approval, authorization, registration or qualification of
or with any court or governmental or regulatory authority, except such as have
been obtained or may be required under state securities or blue sky laws and,
if the registration statement filed with respect to the Securities (as
amended) is not effective under the Act as of the time of execution hereof,
such as may be required (and shall be obtained as provided in this Agreement)
under the Act, or (ii) conflict with or result in a breach or violation of, or
constitute a default under, any material contract, indenture, mortgage, deed of
5
<PAGE>
trust, loan agreement, note, lease or other material agreement or instrument
to which the Company is a party or by which the Company or any of its property
is bound or subject, or the certificate of incorporation or by-laws of the
Company, or any statute or any rule, regulation, judgment, decree or order of
any court or other governmental or regulatory authority or any arbitrator
applicable to the Company.
(m) No legal or governmental proceedings are pending to
which the Company is a party or to which the property of the Company is
subject, and no such proceedings have been threatened against the Company or
with respect to any of its property, except such as are described in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). No contract or other document is required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein (and, if
the Prospectus is not in existence, in the most recent Preliminary Prospectus)
or filed as required.
(n) The Company is not in (i) violation of its certificate
of incorporation, by-laws or other governing documents, (ii) violation in any
material respect of any law, statute, regulation, ordinance, rule, order,
judgment or decree of any court or any governmental or regulatory authority
applicable to it, or (iii) default in any material respect in the performance
or observance of any obligation, agreement, covenant or condition contained in
any material contract, indenture, mortgage, deed of trust, loan agreement,
note, lease or other material agreement or instrument to which it is a party
or by which it or any of its property may be bound or subject, and no event
has occurred which with notice or lapse of time or both would constitute such
a default.
(o) The Company currently own or possess adequate rights to
use all intellectual property, including all trademarks, service marks, trade
names, copyrights, inventions, know-how, trade secrets, proprietary
technologies, processes and substances, or applications or licenses therefor,
that are described in the Prospectus (and if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and any other rights or
interests in items of intellectual property as are necessary for the conduct
of the business now conducted or proposed to be conducted by them as described
in the Prospectus (or, such Preliminary Prospectus), and, except as disclosed
in the Prospectus (and such Preliminary Prospectus), the Company is not aware
of the granting of any patent rights to, or the filing of applications
therefor by, others, nor is the Company aware of, nor has the Company received
notice of, infringement of or conflict with asserted rights of others with
respect to any of the foregoing. All such intellectual property rights and
interests are (i) valid and enforceable and (ii) to the best knowledge of the
Company, not being infringed by any third parties.
(p) The Company possesses adequate licenses, orders,
authorizations, approvals, certificates or permits issued by the appropriate
federal, state or foreign regulatory agencies or bodies necessary to conduct
its business as described in the Registration Statement and the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and, except as disclosed in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no pending or, to the best knowledge of the
6
<PAGE>
Company, threatened, proceedings relating to the revocation or modification of
any such license, order, authorization, approval, certificate or permit.
(q) The Company has good and marketable title to all of the
properties and assets reflected in the Company's financial statements or as
described in the Registration Statement and the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind,
except those reflected in such financial statements or as described in the
Registration Statement and the Prospectus (and such Preliminary Prospectus).
Except as disclosed in the Prospectus, the Company occupies its leased
properties under valid and enforceable leases conforming to the description
thereof set forth in the Registration Statement and the Prospectus (and such
Preliminary Prospectus).
(r) The Company is not and does not intend to conduct its
business in a manner in which it would be an "investment company" as defined
in Section 3(a) of the Investment Company Act of 1940 (the "Investment Company
Act").
(s) The Company has obtained and delivered to the
Representative the agreements (the "Lock-up Agreements") with the officers,
directors and other security holders owning or having rights to acquire shares
of Common Stock or preferred stock to the effect that, among other things,
each such person (i) will not, commencing on the Effective Date and continuing
for the period set forth in Schedule 2, directly or indirectly, publicly sell,
offer or contract to sell or grant any option to purchase, transfer, assign or
pledge, or otherwise encumber, or dispose of any shares of Common Stock or
preferred stock or any securities convertible into or exercisable for Common
Stock or preferred stock now or hereafter owned by such person without the
prior written consent of the Representative and that the purchaser or
transferee in any private sale agrees to be bound by the Lock Up Agreement,
and (ii) will comply with any additional restriction or condition on the
disposition of such Common Stock or preferred stock which may be required to
qualify the offering of the Securities in any state in accordance with the
blue sky or securities laws of such state.
(t) No labor dispute with the employees of the Company
exists, is threatened or, to the best of the Company's knowledge, is imminent
that could result in a material adverse change in the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(u) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which it is engaged; the
Company has not been refused any insurance coverage sought or applied for; and
the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition (financial or otherwise), business, prospects, net worth or results
of operations of the Company, except as described in or contemplated by the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
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(v) The Representative's Warrant (as hereinafter defined)
will conform to the description thereof in the Registration Statement and in
the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and, when sold to and paid for by the Representative
in accordance with the Representative's Warrant Agreement, will have been duly
authorized and validly issued and will constitute valid and binding
obligations of the Company entitled to the benefits of the Representative's
Warrant Agreement. The shares of Common Stock issuable upon exercise of the
Representative's Warrant and the Warrants issuable upon exercise thereof (the
"Representative's Warrant Shares") have been duly authorized and reserved for
issuance upon exercise of the Representative's Warrant and the Warrants
issuable upon exercise thereof by all necessary corporate action on the part
of the Company and, when issued and delivered and paid for upon such exercise
in accordance with the terms of the Representative's Warrant Agreement, the
Representative's Warrant, and the Warrants issuable upon exercise thereof,
respectively, will be validly issued, fully paid, nonassessable and free of
preemptive rights and will conform to the description thereof in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(w) No person has acted as a finder in connection with, or
is entitled to any commission, fee or other compensation or payment for
services as a finder for or for originating, or introducing the parties to,
the transactions contemplated herein and the Company will indemnify the
Underwriter with respect to any claim for finder's fees in connection
herewith. Except as set forth in the Registration Statement and the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), the Company has no management or financial consulting agreement
with anyone. No promoter, officer, director or stockholder of the Company is,
directly or indirectly, affiliated or associated with an NASD member and no
securities of the Company have been acquired by an NASD member, except as
previously disclosed in writing to the Representative.
(x) The Company has filed all federal, state, local and
foreign tax returns which are required to be filed through the date hereof, or
has received extensions thereof, and has paid all taxes shown on such returns
and all assessments received by it to the extent that the same are material
and have become due.
(y) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the Company
has, directly or indirectly: used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity; made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties
or campaigns from corporate funds; violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback, or other unlawful payment. No transaction has
occurred between or among the Company and any of its officers or directors or
any affiliates of any such officer or director, that is required to be
described in and is not described in the Registration Statement and the
Prospectus.
(z) Neither the Company nor any of its officers, directors
or affiliates (as defined in the Regulations), has taken or will take,
directly or indirectly, prior to the completion
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<PAGE>
of the Offering, any action designed to stabilize or manipulate the price of
any security of the Company, or which has caused or resulted in, or which
might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of the Company, to
facilitate the sale or resale of any of the Securities or the Option
Securities.
2. Purchase, Sale and Delivery of the Securities and the
Underwriter's Warrants.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to each
Underwriter, and each Underwriter agrees to purchase from the Company,
severally and not jointly, the number of Firm Shares as set forth opposite its
name on Schedule 1 annexed hereto, at a purchase price of $4.50 per share
and the Firm Warrants at a purchase price of $.09 per Warrant.
(b) Certificates in definitive form for the Firm Securities
that the Underwriters have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Underwriters request upon notice to the Company at least 48 hours prior to the
Firm Closing Date, shall be delivered by or on behalf of the Company to the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase prices therefor by certified or official bank check or checks drawn
upon or by a New York Clearing House bank and payable in next-day funds to the
order of the Company. Such delivery of and payment for the Firm Securities
shall be made at the offices of Counsel for the Underwriters, 101 East 52nd
Street, New York, New York at 9:30 A.M., New York City time on ___________,
1998, or at such other place, time or date as the Underwriters and the Company
may agree upon, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date. The Company will make such certificates
for the Firm Securities available for checking and packaging by the
Underwriters, at such offices as may be designated by the Representative, at
least 24 hours prior to the Firm Closing Date. In lieu of physical delivery,
the closing may occur by "DTC" delivery.
(c) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as
contemplated by the Prospectus, the Company hereby grants to the Underwriter
an option to purchase any or all of the Company Option Securities and the
Selling Shareholder hereby grants the Underwriters an option to purchase the
Selling Shareholder Option Shares, which options are exercisable by the
Representative on behalf of and for the account of the Underwriters. The
purchase price to be paid for any of the Option Securities shall be the same
price per share or Warrant as the price per share or Warrant for the Firm
Securities set forth above in paragraph (a) of this section 2. The option
granted hereby may be exercised as to all or any part of the Option Securities
from time to time within 45 calendar days after the Firm Closing Date. The
Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representative may from
time to time exercise the option granted hereby on behalf of the Underwriters
by giving notice in writing or by telephone (confirmed in writing) to the
Company and the Selling Shareholder (in the case of the Selling Shareholder
Option Shares) setting forth the aggregate number of Option Securities as to
which the Underwriters are then exercising the option and the date and time
for delivery of and payment for such Option Securities. Any such date of
delivery
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<PAGE>
shall be determined by the Underwriters but shall not be earlier than two
business days or later than three business days after such exercise of the
option and, in any event, shall not be earlier than the Firm Closing Date. The
time and date set forth in such notice, or such other time on such other date
as the Representative and the Company may agree upon, is herein called the
"Option Closing Date" with respect to such Option Securities. Upon exercise of
the option as provided herein, the Company and/or the Selling Shareholder
shall become obligated to sell to the Underwriters, and, subject to the terms
and conditions herein set forth, each Underwriter shall become obligated to
purchase from the Company and the Selling Shareholder, the Option Securities
as to which the Underwriter is then exercising its option. If the option is
exercised as to all or any portion of the Option Securities, certificates in
definitive form for such Option Securities, and payment therefor, shall be
delivered on the related Option Closing Date in the manner, and upon the terms
and conditions, set forth in paragraph (b) of this section 2, except that
reference therein to the Firm Securities and the Firm Closing Date shall be
deemed, for purposes of this paragraph (c), to refer to such Option Securities
and Option Closing Date, respectively. To the extent such option is exercised
as to the Option Shares, it is understood and agreed that the first 27,500
shares as to which it is exercised shall be sold by the Company and any
additional shares as to which it is exercised will be sold by the Selling
Shareholder.
(d) On the Firm Closing Date, the Company will further issue
and sell to the Representative or, at the direction of the Representative, to
bona fide officers of the Underwriters, for an aggregate purchase price of
$10, warrants to purchase Common Stock and redeemable warrants to purchase
Common Stock (the "Representative's Warrant") entitling the holders thereof to
purchase an aggregate of 95,000 shares of Common Stock and/or 145,000
redeemable warrants to purchase Common Stock for a period of four years, such
period to commence on the first anniversary of the Effective Date. The
Representative's Warrant shall be exercisable at a price equal to 135% of
the initial public offering price of the Common Stock and Warrants,
respectively, and shall contain terms and provisions more fully described
herein below and as set forth more particularly in the warrant agreement
relating to the Representative's Warrant to be executed by the Company on the
Effective Date (the "Representative's Warrant Agreement"), including, but not
limited to, (i) customary anti-dilution provisions in the event of stock
dividends, split mergers, sales of all or substantially all of the Company's
assets, sales of stock below then prevailing market or exercise prices and
other events, and (ii) prohibitions of mergers, consolidations or other
reorganizations of or by the Company or the taking by the Company of other
action during the five-year period following the Effective Date unless
adequate provision is made to preserve, in substance, the rights and powers
incidental to the Representative's Warrant. As provided in the
Representative's Warrant Agreement, the Representative may designate that the
Representative's Warrant be issued in varying amounts directly to bona fide
officers of the Underwriters. As further provided, no sale, transfer,
assignment, pledge or hypothecation of the Representative's Warrant shall be
made for a period of 12 months from the Effective Date, except (i) by
operation of law or reorganization of the Company, or (ii) to the Underwriters
and bona fide partners, officers of the Underwriters and selling group
members. The shares of Common Stock issuable upon exercise of the
Representative's Warrant and the warrants issuable upon exercise thereof are
referred to herein as the "Representative's Warrant Shares"; and the
Representative's Warrant, the warrants issuable upon exercise thereof, and the
Representative's Warrant Shares are collectively referred to herein as the
"Representative's Securities."
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<PAGE>
3. Offering by the Underwriters. The Underwriters propose to offer
the Firm Securities for sale to the public upon the terms set forth in the
Prospectus (the "Offering").
4. Covenants of the Company. The Company covenants and agrees with
the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, to become effective as promptly as possible. If required, the
Company will file the Prospectus and any amendment or supplement thereto with
the Commission in the manner and within the time period required by Rule
424(b) under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) will not file with the Commission any prospectus or amendment referred to
in the first sentence of section (a) (i) hereof, any amendment or supplement
to such prospectus or any amendment to the Registration Statement as to which
the Underwriters shall not previously have been advised and furnished with a
copy for a reasonable period of time prior to the proposed filing and as to
which filing the Underwriters shall not have given their consent. The Company
will prepare and file with the Commission, in accordance with the rules and
regulations of the Commission, promptly upon request by the Underwriters or
counsel to the Underwriters, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary or advisable
in connection with the distribution of the Securities by the Underwriters, and
will use its best efforts to cause any such amendment to the Registration
Statement to be declared effective by the Commission as promptly as possible.
The Company will advise the Underwriters, promptly after receiving notice
thereof, of the time when the Registration Statement or any amendment thereto
has been filed or declared effective or the Prospectus or any amendment or
supplement thereto has been filed and will provide evidence satisfactory to
the Underwriters of each such filing or effectiveness.
(b) The Company will advise the Underwriters, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the
suspension of the qualification of any Securities for offering or sale in any
jurisdiction, (iii) the institution, threat or contemplation of any proceeding
for any such purpose or (iv) any request made by the Commission for amending
the Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its best efforts to prevent
the issuance of any such stop order and, if any such stop order is issued, to
obtain the withdrawal thereof as promptly as possible.
(c) The Company will, in cooperation with counsel to the
Underwriters, arrange for the qualification of the Securities for offering and
sale under the blue sky or securities laws of such jurisdictions as the
Underwriters may designate and will continue such
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<PAGE>
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities.
(d) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if for any other
reason it is necessary at any time to amend or supplement the Prospectus to
comply with the Act or the rules or regulations of the Commission thereunder,
the Company will promptly notify the Underwriters thereof and, subject to
section 4(a) hereof, will prepare and file with the Commission, at the
Company's expense, an amendment to the Registration Statement or an amendment
or supplement to the Prospectus that corrects such statement or omission or
effects such compliance.
(e) So long as any Warrants are outstanding, the Company
shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act and
without any lapse of time between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then amended, to be
delivered to each holder of record of a Warrant and to furnish to the
Underwriters and any dealer as many copies of each such Prospectus as the
Underwriters or dealer may reasonably request. The Company shall not call for
redemption of the Warrants unless a registration statement covering the
securities underlying the Warrants has been declared effective by the
Commission and remains current at least until the date fixed for redemption.
In addition, for so long as any Warrant is outstanding, the Company will
promptly notify the Underwriters of any material change in the business,
financial condition or prospects of the Company. So long as any of the
Warrants remain outstanding, the Company will timely deliver and supply to its
Warrant Agent sufficient copies of the Company's current Prospectus, as will
enable such Warrant agent to deliver a copy of such Prospectus to any Warrant
or other holder where such Prospectus delivery is by law required to be made.
(f) The Company will, without charge, provide to the
Underwriters and to counsel for the Underwriters (i) as many signed copies of
the registration statement originally filed with respect to the Securities and
each amendment thereto (in each case including exhibits thereto) as the
Underwriters may reasonably request, (ii) as many conformed copies of such
registration statement and each amendment thereto (in each case without
exhibits thereto) as the Underwriters may reasonably request and (iii) so long
as a prospectus relating to the Securities is required to be delivered under
the Act, as many copies of each Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto as the Underwriters may reasonably
request.
(g) The Company, as soon as practicable, will make generally
available to its security holders and to the Underwriters an earnings
statement of the Company that satisfies the provisions of section 11 (a) of
the Act and Rule 158 thereunder.
(h) The Company will reserve and keep available for issuance
that maximum number of authorized but unissued shares of Common Stock which
are issuable upon exercise of
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<PAGE>
the Warrants and the Representative's Warrant (including the underlying
securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of
the Securities as set forth under "Use of Proceeds" in the Prospectus.
(j) The Company will not, without the prior written consent
of the Representative, directly or indirectly offer, agree to sell, sell,
grant any option to purchase or otherwise dispose (or announce any offer,
agreement to sell, sales grant of any option to purchase or other disposition)
of any shares of Common Stock, preferred stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock or preferred
stock for a period of 36 months after the Effective Date, except (i) the
Shares and Warrants issued pursuant to this Agreement, (ii) the Warrant Shares
issuable upon exercise of the Warrants, (iii) the Warrants, (iv) the
Representative's Warrant Shares and Warrants issuable upon the exercise of the
Representative's Warrant, and (v) shares of Common Stock issuable upon the
exercise of options granted and to be granted under the Company's Stock Option
Plan as in effect as of the date hereof. The Company also will not for a
period of 36 months following the Effective Date, without the prior written
consent of the Representative, (i) issue or sell any of its securities
pursuant to Regulation S promulgated under the Act or (ii) file a registration
on Form S-8 for the sale of securities by a person other than an employee of
the Company or a Subsidiary.
(k) Prior to the Closing Date or the Option Closing Date (if
any), the Company will not, directly or indirectly, without prior written
consent of the Representative, issue any press release or other public
announcement or hold any press conference with respect to the Company or its
activities with respect to the Offering (other than trade releases issued in
the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations).
(l) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance upon
Rule 430A under the Act, then immediately following the execution of this
Agreement, the Company will prepare, and file or transmit for filing with the
Commission in accordance with Rule 430A and Rule 424(b) under the Act, copies
of the Prospectus including the information omitted in reliance on Rule 430A,
or, if required by such Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Prospectus), containing all
information so omitted.
(m) The Company will cause the Securities to be included in
The Nasdaq Small Cap Market and the Boston Stock Exchange on the Effective
Date and to maintain such listings thereafter. The Company will file with The
Nasdaq Small Cap Market and the Boston Stock Exchange all documents and
notices that are required by companies with securities that are traded on The
Nasdaq Small Cap Market and the Boston Stock Exchange.
(n) During the period of five years from the Firm Closing
Date, the Company will, as promptly as possible, not to exceed 135 days, after
each annual fiscal period render and distribute reports to its stockholders
which will include audited statements of its operations and changes of
financial position during such period and its audited balance sheet as of the
end of
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<PAGE>
such period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion and shall timely file all reports
required to be filed under the securities laws, including Form SR.
(o) During a period of three years commencing with the Firm
Closing Date, the Company will furnish to the Representative, at the Company's
expense, copies of all periodic and special reports furnished to stockholders
of the Company and of all information, documents and reports filed with the
Commission.
(p) The Company has appointed Registrar and Transfer Company
as transfer agent for the Common Stock and warrant agent for the Warrants,
subject to the Closing. The Company will not change or terminate such
appointment for a period of three years from the Firm Closing Date without
first obtaining the written consent of the Representative. For a period of
three years after the Effective Date, the Company shall cause the transfer
agent and warrant agent to deliver promptly to the Underwriters a duplicate
copy of the daily transfer sheets relating to trading of the Securities. The
Company shall also provide to the Representative, on a weekly basis, copies of
the DTC special securities positions listing report.
(q) During the period of 180 days after the date of this
Agreement, the Company will not at any time, directly or indirectly, take any
action designed to or that will constitute, or that might reasonably be
expected to cause or result in, the stabilization of the price of the Common
Stock or the Warrants to facilitate the sale or resale of any of the
Securities.
(r) The Company will not take any action to facilitate the
sale of any shares of Common Stock pursuant to Rule 144 under the Act if any
such sale would violate any of the terms of the Lock-up Agreements.
(s) Prior to the 120th day after the Firm Closing Date, the
Company will provide the Underwriters and their designees with six bound
volumes of the transaction documents relating to the Registration Statement
and the closing(s) hereunder, in form and substance reasonably satisfactory to
the Representative.
(t) The Company shall consult with the Representative prior
to the distribution to third parties of any financial information news
releases or other publicity regarding the Company, its business, or any terms
of this offering and the Underwriters will consult with the Company prior to
the issuance of any research report or recommendation concerning the Company's
securities. Copies of all documents that the Company or its public relations
firm intend to distribute will be provided to the Representative for review
prior to such distribution.
(u) The Company and the Underwriters will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent the Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriters will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
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<PAGE>
(v) The Company will, for a period of no less than three
years commencing immediately after the Effective Date, engage one designee of
the Representative as an advisor (the "Advisor") to the Company's Board of
Directors, who shall attend meetings of the Board, receive all notices and
other correspondence and communications sent by the Company to its Board of
Directors and receive compensation equal to that of other non-officer
directors; provided, that in lieu of the Representative's right to designate
the Advisor, the Representative shall have the right during such three-year
period, in its sole discretion, to designate one person for election as a
director of the Company and the Company, and Selling Shareholder will utilize
their respective best efforts (including in the case of Selling Shareholder,
voting all shares owned by it in favor thereof) to obtain the election of such
person, who shall be entitled to receive the same compensation, expense
reimbursements and other benefits as set forth above. In addition, such
Advisor shall be entitled to receive reimbursement for all costs incurred in
attending such meetings including, but not limited to, food, lodging and
transportation. The Company, during said three-year period, shall schedule no
less than four formal meetings (at least one of which shall be "in person" and
the others may be held telephonically) of its Board of Directors in each such
year at which meetings such Advisor shall be permitted to attend (in person,
for each meeting held "in person") as set forth herein; said meetings shall be
held quarterly each year and advance notice of such meetings identical to the
notice given to directors shall be given to the Advisor. The Company and its
principal stockholders shall, during such three year period, give the
Representative timely prior written notice of any proposed acquisitions,
mergers, reorganizations or other similar transactions. The Company shall
indemnify and hold the Representative and such Advisor or director harmless
against any and all claims, actions, damages, costs and expenses, and
judgments arising solely out of the attendance and participation of such
Advisor or director at any such meeting described herein, and, if the Company
maintains a liability insurance policy affording coverage for the acts of its
officers and directors, it shall, if possible, include such Advisor or
director as an insured under such policy.
(w) The Company shall first submit to the Representative
certificates representing the Securities for approval prior to printing, and
shall, as promptly as possible, after filing the Registration Statement with
the Commission, obtain CUSIP numbers for the Securities.
(x) The Company shall engage the Underwriters' counsel to
provide the Underwriters, at the closing of any sale of Securities hereunder
and thereafter on request, with an opinion, setting forth those states in
which the Common Stock and Warrants may be traded in non-issuer transactions
under the blue sky or securities laws of the 50 states. The Company shall pay
such counsel a one-time fee of $12,500 for such opinions at the closing of the
sale of the Firm Securities.
(y) The Company will prepare and file a registration
statement with the Commission pursuant to section 12 of the 1934 Act, and will
use its best efforts to have such registration statement declared effective by
the Commission on an accelerated basis on the day after the Effective Date.
For this purpose the Company shall prepare and file with the Commission a
General Form of Registration of Securities (Form 8-A or Form 10).
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(z) For so long as the Securities are registered under the
1934 Act, the Company will hold an annual meeting of stockholders for the
election of directors within 180 days after the end of each of the Company's
fiscal years and within 135 days after the end of each of the Company's fiscal
years will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed
prior thereto. Such financial statements shall be those required by Rule 14a-3
under the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(aa) Prior to the Effective Date, the Company shall obtain
key-man life insurance in the minimum amount of $3,000,000 on Franklin Karp on
such terms and conditions as are reasonably satisfactory to the
Representative, assuming such coverage is available on commercially reasonable
terms.
(bb) The Company shall retain the Representative as a
financial advisors at an annual fee of $______ [2% of the gross proceeds] for
a 36-month period commencing on the Closing Date. The entire fee of shall be
payable on the Closing Date.
(cc) The Company will engage a financial public relations
firm reasonably satisfactory to the Representative on or before the Firm
Closing Date, and continuously engage such firm, or a substitute firm
reasonably acceptable to the Representative, for a period of twelve (12)
months following the Firm Closing Date.
(dd) The Company will take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions or
other equivalent manual and to maintain its listing therein for a period of
five (5) years from the Effective Date.
(ee) On or prior to the Effective Date, the Company will
give written instructions to the transfer agent for the Common Stock directing
said transfer agent to place stop-order restrictions against, and appropriate
legends advising of the Lock-up Agreements on, the certificates representing
the securities of the Company owned by the persons who have entered into the
Lock-up Agreements.
4A. Representations, Warranties and Agreements of the Selling
Shareholder. The Selling Shareholder represents and warrants to, and agrees
with, the Underwriters as follows:
(a) On the Effective Date, and at all times subsequent
thereto up to and on each Option Closing Date (i) all information with respect
to Selling Shareholder contained in the Registration Statement does not and
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading, and (ii) all information with respect to Selling Shareholder
contained in the Prospectus, as amended or supplemented, does not and will not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties contained in this subsection 4A (a)
only apply to statements or omissions made in reliance upon and in conformity
with information furnished to the Company
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or the Underwriters, by or on behalf of Selling Shareholder, specifically for
inclusion in Registration Statement or the Prospectus.
(b) Selling Shareholder has duly authorized, executed and
delivered on ___________, 1998 the Irrevocable Power of Attorney, Custody
Agreement (the "Custody Agreement") with the Company, as custodian (the
"Custodian"), __________, as attorneys-in-fact (the "Attorneys-in-Fact"), and,
such Custody Agreement constitutes the valid, legal and binding agreement of
Selling Shareholder, enforceable in accordance with its terms; Selling
Shareholder has pursuant to the Custody Agreement, duly authorized each and
all of the Attorneys-in-Fact to execute and deliver this Agreement on behalf
of Selling Shareholder, and otherwise to act, and to execute documents and
instruments, on behalf of Selling Shareholder in connection with the
transactions contemplated by this Agreement, and the Attorneys-in-Fact and the
Custodian are each duly authorized by Selling Shareholder under the Custody
Agreement to deliver the Shares to be sold by Selling Shareholder pursuant to
the Agreement, and to accept payment therefor. When executed and delivered by
one or more of the Attorneys-in-Fact on behalf of Selling Shareholder in
accordance with the Custody Agreement and this Agreement will have been duly
authorized, executed and delivered on behalf of Selling Shareholder.
(c) No consent, approval, authorization or order of any
court, government, governmental agency or body or financial institution,
domestic or foreign (other than under the Securities Act and state securities
or blue sky laws), is required for the consummation by Selling Shareholder of
the transactions contemplated in this Agreement or the Custody Agreement,
including, without limitation, the sale of the Shares to the Underwriters, as
contemplated herein or therein (other than those that have been obtained and
are in full force and effect).
(d) The execution and delivery of this Agreement and the
Custody Agreement, and the consummation of the transactions contemplated
herein and therein, including, without limitation, the sale of the Shares by
the Underwriters, as contemplated herein or therein, will not (i) result in a
breach by Selling Shareholder of, or constitute a default by Selling
Shareholder under, any agreement or instrument or any decree, judgement or
order to which Selling Shareholder is a party or by which Selling Shareholder
is bound or the properties of Selling Shareholder are subject or (ii) violate
any provision of the certificate of organization, operating agreemetn, or
comparable governing documents of Selling Shareholder or any law, rule or
regulation, domestic or foreign, applicable to Selling Shareholder or to which
its properties are subject.
(e) Selling Shareholder has, and will on each Option Closing
Date have, good and marketable title to the Shares to be sold by Selling
Shareholder pursuant to this Agreement, free and clear of any pledge, lien,
security interest, charge, claim, equity or encumbrance of any kind, or
restriction on voting or other rights as a shareholder of any nature, other
than pursuant to this Agreement and the Custody Agreement; Selling Shareholder
has full right, power and authority to sell, transfer and deliver the Shares,
pursuant to this Agreement; upon delivery of such Shares and payment of the
purchase price therefor as contemplated in this Agreement each Underwriter
will receive good and marketable title to the Shares purchased by it from
Selling Shareholder, free and clear of any pledge, lien, security interest,
charge, claim, equity or
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encumbrance of any kind or of any restriction on transfer or voting or other
rights as a shareholder of any nature.
(f) Certificates for the Shares to be sold by Selling
Shareholder pursuant to this Agreement in suitable form for transfer by
delivery or accompanied by duly executed instruments of transfer or
assignment, executed in blank, have been placed in custody with the Custodian
pursuant to the Custody Agreement for purpose of effecting delivery, in
accordance with the Custody Agreement and this Agreement.
(g) Selling Shareholder hereby agrees that for the period of
specified below from the Effective Date (the "Lock-Up-Period"), Selling
Shareholder will not, without prior written consent of the Representative
directly or indirectly, offer, sell or grant any option to purchase, transfer
or otherwise dispose of or contract to dispose of (or announce any offer,
sale, grant of any option to purchase, or other disposition of), for value or
otherwise, any shares of Common Stock, options or warrants to purchase Common
Stock, or any securities convertible into or exchangeable for Common Stock,
owned directly by such person or with respect to which such person has the
power of disposition, other than the sale of the Shares under this Agreement.
As to 25% of such Securities, the Lock-Up Period shall be 12 months with
respect to an additional 25% of such securities, the Lock-Up Period should be
18 months and with respect to 50% of such securities this Lock-Up Period
should be 24 months.
(h) Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or that might be reasonably
expected to, violate Regulation M under the 1934 Act, or cause or result in
stabilization or manipulation of the price of the Common Stock; and Selling
Shareholder has not distributed and will not distribute any prospectus or
other offering material in connection with the offering and sale of the
Shares.
(i) Selling Shareholder is duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization, with
all necessary power and authority to execute, deliver and perform the Custody
Agreement and this Agreement and to sell and deliver the Shares to the
Underwriters in accordance with this Agreement, and upon execution and
delivery thereof by one or more of the Attorneys-in-Fact, such agreements will
be duly executed and delivered and enforceable against Selling Shareholder in
accordance with their respective terms.
5. Expenses
(a) The Company shall pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is
terminated pursuant to section 10 hereof, including all costs and expenses
incident to (i) the preparation, printing and filing or other production of
documents with respect to the transactions, including any costs of printing
the registration statement originally filed with respect to the Securities and
any amendment thereto, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement, the selected dealer agreement
and the other agreements and documents governing the underwriting arrangements
and any blue sky memoranda, (ii) all reasonable and necessary arrangements
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relating to the delivery to the Underwriters of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants
and any other experts or advisors retained by the Company, (iv) the
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's, warrant agent's and
registrar's fees or any transfer or other taxes payable thereon, (v) the
qualification of the Securities under state blue sky or securities laws,
including filing fees and fees and disbursements of counsel for the
Underwriters relating thereto (such counsel fees shall be $35,000, of which
$12,500 shall be due and payable upon the commencement of blue sky filing,
together with the related filing fees) and any fees and disbursements of local
counsel, if any, retained for such purpose, (vi) the filing fees of the
Commission and the NASD relating to the Securities, (vii) the inclusion of the
Securities on The Nasdaq SmallCap Market, the Boston Stock Exchange and in the
Standard and Poor's Corporation Descriptions Manual, (viii) any "road shows"
or other meetings with prospective investors in the Securities, including
transportation, accommodation, meal, conference room, audio-visual
presentation and similar expenses of the Underwriters or their representatives
or designees (other than as shall have been specifically approved by the
Underwriters to be paid for by the Underwriters) and (ix) the publication of
"tombstone advertisements" in newspapers or other publications selected by the
Representative, and the manufacture of prospectus memorabilia. In addition to
the foregoing, the Company shall reimburse the Representative for its expenses
on the basis of a non-accountable expense allowance in the amount of 3.00% of
the gross offering proceeds to be received by the Company, $25,000 of which
has been paid by the Company to the Representative. The Representative hereby
acknowledges receipt of such $25,000, which shall be credited against the
non-accountable expense allowance to be paid by the Company. The unpaid
portion of the expense allowance, based on the gross proceeds from the sale of
the Firm Securities, shall be deducted from the funds to be paid by the
Representative in payment for the Firm Securities, pursuant to section 2 of
this Agreement, on the Firm Closing Date. To the extent any Option Securities
are sold, any remaining non-accountable expense allowance based on the gross
proceeds from the sale of the Option Securities shall be deducted from the
funds to be paid by the Representative in payment for the Option Securities,
pursuant to section 2 of this Agreement, on the Option Closing Date. The
Company warrants, represents and agrees that all such payments and
reimbursements will be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement,
if the offering of the Securities contemplated hereby is terminated for any
reason, the Company agrees that, in addition to the Company paying its own
expenses as described in subparagraph (a) above, (i) the Company shall
reimburse the Representative only for its actual accountable out-of-pocket
expenses (in addition to blue sky legal fees and expenses referred to in
subparagraph (a) above), and (ii) the Representative shall be entitled to
retain the non-accountable expense allowance paid by the Company pursuant to
subparagraph (a) above; provided, however, that the amount retained pursuant
to this clause (ii) shall not exceed the Representative's expenses on an
accountable basis to the date of such cancellation and that all unaccounted
for amounts shall be refunded to the Company. Such expenses shall include, but
are not to be limited to, fees for the services and time of counsel for the
Underwriters to the extent not covered by clause (i) above, plus any
additional expenses and fees, including, but not limited to, travel expenses,
postage expenses, duplication expenses, long-distance telephone expenses, and
other expenses incurred by the Representative in connection with the proposed
offering. If the amount of the Representative's actual accountable
out-of-pocket expenses is less than $25,000, then the
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Representative shall promptly repay the Company the difference between the
$25,000 advanced by the Company and the Representative's actual accountable
out-of-pocket expenses.
6. Warrant Solicitation Fee. The Company agrees to pay any
Underwriter a fee of five percent (5%) of the aggregate exercise price of the
Warrants if (i) the market price of the Common Stock is not less than the
exercise price of the Warrants on the date of exercise; (ii) the exercise of
the Warrants is solicited by such Underwriter at such time as it is a member
of the NASD and such Underwriter is designated in writing by the holder of the
Warrants as the NASD member soliciting the exercise; (iii) the Warrants are
not held in a discretionary account; (iv) the disclosure of compensation
arrangements is made both at the time of the Offering and at the time of the
exercise; and (v) the solicitation of the Warrant exercise is not in violation
of Regulation M promulgated under the 1934 Act. The Company agrees not to
solicit the exercise of any Warrant other than through the Representative
and/or other Underwriter and will not authorize any other dealer to engage in
such solicitation without the prior written consent of the Representative
which will not be unreasonably withheld. The Warrant solicitation fee will not
be paid in a non-solicited transaction. Any request for exercise will be
presumed to be unsolicited unless the customer states in writing that a
transaction was solicited and designates in writing that the Underwriter
solicited the exercise. No Warrant solicitation by the Representative will
occur for a period of 12 months after the Effective Date.
7. Conditions of the Underwriters' Obligations. The obligations of
the Underwriters to purchase and pay for the Firm Shares shall be subject, in
the Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company and the Selling Shareholder contained herein as of
the date hereof and as of the Firm Closing Date as if made on and as of the
Firm Closing Date, to the accuracy of the statements of the Company's officers
made pursuant to the provisions hereof, to the performance by the Company of
its covenants and agreements hereunder and to the following additional
conditions:
(a) If the registration statement, as heretofore amended,
has not been declared effective as of the time of execution hereof, the
registration statement, as heretofore amended or as amended by an amendment
thereto to be filed prior to the Firm Closing Date, shall have been declared
effective not later than 5:30 P.M., New York City time, on the date on which
the amendment to such registration statement containing information regarding
the initial public offering price of the Securities has been filed with the
Commission, or such later time and date as shall have been consented to by the
Underwriters; if required, the Prospectus and any amendment or supplement
thereto shall have been filed with the Commission in the manner and within the
time period required by Rule 424(b) under the Act, no stop order suspending
the effectiveness of the Registration Statement shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or, to
the knowledge of the Company or the Underwriters, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Underwriters shall have received an opinion, dated
the Firm Closing Date, of Ruskin, Moscow, Evans & Faltishek, P.C., counsel to
the Company, to the effect that:
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(1) the Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its organization and is duly qualified to transact business as
a foreign corporation and is in good standing under the laws of each other
jurisdiction in which its ownership or leasing of any properties or the
conduct of its business requires such qualification, except where the failure
to so qualify would not have a materially adverse effect upon the Company;
(2) the Company has full corporate power and
authority to own or lease its property and conduct its business as now being
conducted and as proposed to be conducted, as described in the Registration
Statement and the Prospectus, and the Company has full corporate power and
authority to enter into this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement and to carry out all the terms and
provisions hereof and thereof to be carried out by it;
(3) to the knowledge of such counsel, there are no
outstanding options, warrants or other rights granted by the Company to
purchase shares of its Common Stock, preferred stock or other securities other
than as described in the Prospectus; the Shares have been duly authorized and
the Warrant Shares and the Representative's Warrant Shares have been duly
reserved for issuance by all necessary corporate action on the part of the
Company and, the Shares when issued and delivered to and paid for by the
Underwriters, pursuant to this Agreement, the Warrant Shares when issued upon
payment of the exercise price specified in the Warrants, the Representative's
Warrant when issued and delivered and paid for in accordance with this
Agreement and the Representative's Warrant Agreement by the Underwriters and
the Warrant Shares when issued upon payment of the exercise price specified in
the Representative's Warrant, will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the
description thereof in the Prospectus; to the knowledge of such counsel, no
holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Shares, the Warrant
Shares or the Representative's Warrant Shares; and to the knowledge of such
counsel, no person is entitled to have securities registered by the Company
under the Registration Statement or otherwise under the Act other than as
described in the Prospectus;
(4) the execution and delivery of this Agreement,
the Warrant Agreement, the Representative's Warrant Agreement and the
Financial Advisory and Investment Banking Agreement have been duly authorized
by all necessary corporate action on the part of the Company and this
Agreement, the Warrant Agreement, the Representative's Warrant Agreement and
the Financial Advisory and Investment Banking Agreement have been duly
executed and delivered by the Company, and each is a valid and binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar laws
affecting creditors' rights generally and to general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or
at law) and except as rights to indemnity and contribution under this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement
may be limited by applicable securities laws and the public policy underlying
such laws;
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<PAGE>
(5) the Representative's Warrant conform to the
description thereof in the Registration Statement and in the Prospectus and
are duly authorized and upon payment of the purchase price therefore specified
in Section 2(d) of this Agreement are validly issued and constitute valid and
binding obligations of the Company entitled to the benefits of the
Representative's Warrant Agreement; and the certificates representing the
Securities are in due and proper form under law;
(6) the statements set forth in the Prospectus
under the caption "Description of Securities" insofar as those statements
purport to summarize the terms of the capital stock and warrants of the
Company, provide a fair summary of such terms; the statements set forth in the
Prospectus describing statutes and regulations and the descriptions of the
consequences to the Company under such statutes and regulations are fair
summaries of the information set forth therein and are accurate in all
material respects; the statements in the Prospectus, insofar as those
statements constitute summaries of the contracts, instruments, leases or
licenses referred to therein, constitute a fair summary of those contracts,
instruments, leases or licenses and include all material terms thereof, as
applicable;
(7) none of (A) the execution and delivery of this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement,
(B) the issuance, offering and sale by the Company to the Underwriters of the
Securities pursuant to this Agreement and the Representative's Warrant
Securities pursuant to the Representative's Warrant Agreement, nor (C) the
compliance by the Company with the other provisions of this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement and the
consummation of the transactions contemplated hereby and thereby, (1) requires
the consent, approval, authorization, registration or qualification of or with
any court or governmental authority known to us, except such as have been
obtained and such as may be required under state blue sky or securities laws,
(2) conflicts with or results in a breach or violation of, or constitutes a
default under, any material contract, indenture, mortgage, deed of trust, loan
agreement, note, lease or other material agreement or instrument known to such
counsel to which the Company is a party or by which the Company or any of its
property is bound or subject, or the certificate of incorporation or by-laws
of the Company, or any material statute or any judgment, decree, order, rule
or regulation of any court or other governmental or regulatory authority known
to us applicable to the Company, or (3) subjects the Company or investors in
the Securities to any tax imposed by Canada or any political subdivision
thereof.
(8) to the knowledge of such counsel, (A) no legal
or governmental proceedings are pending to which the Company is a party or to
which the property of the Company is subject except those arising on the
ordinary course of business and fully covered by insurance and (B) no contract
or other document is required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement that
is not described therein or filed as required;
(9) the Company possesses adequate licenses,
orders, authorizations, approvals, certificates or permits issued by the
appropriate federal, state or local regulatory agencies or bodies necessary to
conduct its business as described in the Registration Statement and the
Prospectus, and, to the knowledge of such counsel, there are no pending or
threatened
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<PAGE>
proceedings relating to the revocation or modification of any such license,
order, authorization, approval, certificate or permit, except as disclosed in
the Registration Statement and the Prospectus;
(10) The Company is not in violation or breach of,
or in default with respect to, any term of its certificate of incorporation or
by-laws, and to the knowledge of such counsel, the Company is not in (i)
violation in any material respect of any law, statute, regulation, ordinance,
rule, order, judgment or decree of any court or any governmental or regulatory
authority applicable to it, or (ii) default in any material respect in the
performance or observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, deed of trust, loan
agreement, note, lease or other material agreement or instrument to which it
is a party or by which it or any of its property may be bound or subject, and
no event has occurred which with notice, lapse of time or both would
constitute such a default;
(11) the Shares have been approved for inclusion on
The Nasdaq SmallCap Market and the Boston Stock Exchange;
(12) to the knowledge of such counsel, neither the
Company is not in default in any material respect in the performance or
observance of any obligation, agreement, covenant or condition contained in
any material contract, indenture, mortgage, deed of trust, loan agreement,
note, lease or other material agreement or instrument to which it is a party
or by which it or any of its property may be bound or subject, and no event
has occurred which with notice, lapse of time or both would constitute such a
default;
(13) the statements in the Prospectus under the
caption "Description of Securities" in the Prospectus, insofar as such
statements purport to summarize the terms of the capital stock and warrants of
the Company, provide a fair summary of such terms; and the statements in the
Prospectus, insofar as those statements constitute matters of law or legal
conclusions, or summaries of the contracts, agreement instruments, leases or
licenses referred to therein, constitute a fair summary of those matters,
legal conclusions, contracts, agreement instruments, leases or licenses and
include all material terms thereof as applicable;
(14) the Registration Statement is effective under
the Act; any required filing of the Prospectus pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration Statement
or any amendment thereto has been issued, and no proceedings for that purpose
have been instituted or threatened or, to the best knowledge of such counsel,
are contemplated by the Commission;
(15) the registration statement originally filed
with respect to the Securities and each amendment thereto and the Prospectus
(in each case, other than the financial statements and schedules and other
financial and statistical information contained therein, as to which such
counsel need express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules and regulations of
the Commission thereunder; and
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(16) the Company is not an "investment company" as
defined in Section 3(a) of the Investment Company Act and, if the Company
conducts its business as set forth in the Prospectus, it will not become an
"investment company" and will not be required to register under the Investment
Company Act; and
(d) On each Option Closing Date on which the Selling
Shareholder is selling Shares of Common Stock, the Underwriters shall have
received the opinion, dated the Option Closing Date, of [insert name of
counsel for the Selling Shareholder] in its capacity as counsel for the
Selling Shareholder, to the effect set forth below:
(i) Selling Shareholder has full legal right power
and authority to enter into this Agreement and to sell, assign, transfer
and deliver in the manner provided herein the Option Shares sold by Selling
Shareholder; this Agreement has been duly executed and delivered by Selling
Shareholder; and this Agreement, assuming due authorization, execution and
delivery by each other party thereto and further assuming it is a valid and
binding agreement of each of the Underwriters, is a valid and binding
agreement of Selling Shareholder, enforceable against Selling Shareholder in
accordance with the terms (except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws now or hereafter in
effect relating to or affecting creditors' rights generally and by general
principles of equity relating to the availability of remedies and except as
rights to indemnity and contribution may be limited by applicable securities
laws and the public policy underlying such laws);
(ii) None of the execution, delivery or performance
of this Agreement, the Power of Attorney and the Custody Agreement by
Selling Shareholder and the consummation by Selling Shareholder of the
transactions herein and therein contemplated, conflict with or result in a
breach of, or default under, any indenture, mortgage, deed of trust, voting
trust agreement, shareholders agreement, note agreement or other agreement or
other instrument known to such counsel to which Selling Shareholder is a party
or by which Selling Shareholder is bound or to which any of the property of
any of the Selling Shareholder is subject, or the charter or by-laws of any of
the Selling Shareholder and nothing has come to such counsel's attention which
causes such counsel to believe that such actions will result in any violation
of any law, rule, administrative regulation or court decree applicable to
Selling Shareholder (other than state or provincial securities or blue sky
laws or regulations, as to which such counsel need not express any opinion);
(iii) A Power of Attorney and the Custody Agreement
have been duly executed and delivered by Selling Shareholder and, assuming
the due authorization, execution and delivery of the Custody Agreement by the
other parties thereto, each constitutes the valid and binding agreement of
Selling Shareholder enforceable in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general principles of equity relating to the
availability of remedies and except rights to indemnity or contribution may be
limited by applicable securities laws and the public policy underlying such
laws;
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(iv) Upon the delivery of the Option Shares to be
sold hereunder by the Selling Shareholder and payment therefor in accordance
with the terms of this Agreement and assuming that each of the Underwriters
which has severally purchased such Option Shares acquires such Option Shares
without notice of any adverse claim (within the meaning of the Uniform
Commercial Code) such Underwriters will have acquired all of the rights of
Selling Shareholder to the Option Shares sold by Selling Shareholder
hereunder, and in addition will have acquired title to such Option Shares free
and clear of any adverse claim; and
Each such counsel also shall state in its opinion that it
has participated in the preparation of the Registration Statement and the
Prospectus and that nothing has come to its attention that has caused it to
believe that the Registration Statement, at the time it became effective
(including the information deemed to be a part of the Registration Statement
at the time of effectiveness pursuant to Rule 430A(b), if applicable),
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or as
of the Firm Closing Date, contained an untrue statement of material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials, copies of which
certificates will be provided to the Underwriters, and, as to matters of the
laws of certain jurisdictions, on the opinions of other counsel to the
Company, which opinions shall also be delivered to the Underwriters, in form
and substance acceptable to the Underwriters, if such other counsel expressly
authorize such reliance and counsel to the Company expressly states in their
opinion that such counsel's and the Underwriters' reliance upon such opinion
is justified.
(e). A. At the time this Agreement is executed, the
Representative shall have received a letter, dated such date, addressed to the
Underwriters in form and substance satisfactory (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
in all respects to the Representative and Representative's counsel, from Ernst
& Young LLP:
i. confirming that they are independent certified
public accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
ii. stating that it is their opinion that the
financial statements of the Company included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations thereunder and that the
Representative may rely upon the opinion of Ernst & Young LLP with respect to
the financial statements included in the Registration Statement;
iii. stating that, on the basis of a limited review
which included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the boards
of directors of the Company, consultations with officers and other employees
of the
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Company responsible for financial and accounting matters and other specified
procedures and inquiries (which, as to the interim financial statements
included in the Registration Statement, shall constitute a review as described
in SAS No. 71, Interim Financial Statements), nothing has come to their
attention which would lead them to believe that (A) the unaudited financial
statements of the Company included in the Registration Statement do not comply
as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles applied
on a basis substantially consistent with that of the audited financial
statements of the Company included in the Registration Statement, or (B) at a
specified date not more than five (5) days prior to the Effective Date, there
has been any change in the capital stock or long-term debt of the Company, or
any decrease in the stockholders' equity or net current assets or net assets
of the Company as compared with amounts shown in the November 1, 1997 balance
sheet included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or decrease, and (C) during
the period from November 2, 1997 to a specified date not more than five (5)
days prior to the Effective Date, there was any decrease (increase) in net
revenues, net income (loss) or in net earnings (loss) per common share of the
Company, in each case as compared with the corresponding period beginning,
_________, 1996, other than as set forth in or contemplated by the
Registration Statement, or, if there was any such decrease, setting forth the
amount of such decrease (increase);
iv. setting forth, at a date not later than five
(5) days prior to the Effective Date, the amount of liabilities of the
Company;
v. stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and found them
to be in agreement;
vi. statements as to such other matters incident to
the transaction contemplated hereby as the Representative may request.
B. At the Closing Date and each Option Closing
Date, if any, the Representative shall have received from Ernst & Young LLP a
letter, dated as of the Closing Date or the Option Closing Date, as the case
may be, to the effect that they reaffirm that statements made in the letter
furnished pursuant to subsection A. of this Section 7(e), except that the
specified date referred to shall be a date not more than five (5) days prior
to the Closing Date or the Option Closing Date, as the case may be, and, if
the Company has elected to rely on Rule 430A of the Rules and Regulations, to
the further effect that they have carried out procedures as specified in
clause (v) of subsection A of this Section 7(e) with respect to certain
amounts, percentages and financial information as specified by the
Representative and deemed to be a part of the Registration Statement pursuant
to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
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<PAGE>
(f) The representations and warranties of the Company
contained in this Agreement shall be true and correct as if made on and as of
the Firm Closing Date; the Registration Statement shall not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein necessary to make the statements therein not misleading, and
the Prospectus, as amended or supplemented as of the Firm Closing Date, shall
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading; and the
Company shall have performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date.
(g) No stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or
contemplated by the Commission.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall not have been any material adverse change, or any development involving
a prospective material adverse change, in the business, operations, condition
(financial or otherwise), earnings or prospects of the Company, except in each
case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto).
(i) The Underwriters shall have received a certificate,
dated the Firm Closing Date, of the Chief Executive Officer and the Secretary
of the Company to the effect set forth in subparagraphs (f) through (h) above.
(j) The Common Stock and Warrants shall be qualified in such
jurisdictions as the Underwriters may reasonably request pursuant to section
4(c), and each such qualification shall be in effect and not subject to any
stop order or other proceeding on the Firm Closing Date.
(k) The Company shall have executed and delivered to the
Underwriters the Representative's Warrant Agreement and a certificate or
certificates evidencing the Representative's Warrant, in each case in a form
acceptable to the Underwriters.
(l) The Underwriters shall have received Lock-up Agreements
executed by the persons listed on Schedule 3 annexed hereto.
(m) The Underwriters shall have received on each Closing
Date a certificate from Selling Shareholder on such Closing Date to the affect
that, and the Underwriters shall be satisfied that, the representations and
warranties of Selling Shareholder contained in this Agreement are true and
correct as if made on and as of such Closing Date, and that Selling
Shareholder has complied with all agreements and satisfied all conditions on
its part to be complied with or satisfied at or prior to such Closing Date.
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<PAGE>
(n) The Selling Shareholder shall have delivered to the
Underwriters on or prior to the date hereof a fully executed Custody
Agreement. Selling Shareholder shall also agree and consent to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of shares held by Selling Shareholder, except in compliance with the
Custody Agreement and this Agreement.
(o) On or before the Firm Closing Date, the Underwriters and
counsel for the Underwriters shall have received such further certificates,
documents, letters or other information as they may have reasonably requested
from the Company, the Selling Shareholder, and other security holders of the
Company.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and
counsel for the Underwriters. The Company shall furnish to the Underwriters
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Underwriters and counsel for the Underwriters shall
reasonably request.
The obligation of the Underwriters to purchase and pay for any Option
Securities shall be subject, in its discretion, to each of the foregoing
conditions to purchase the Firm Securities, except that all references to the
Firm Securities and the Firm Closing Date shall be deemed to refer to such
Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Underwriters, Selling Shareholder and each person, if any, who controls the
Underwriters or Selling Shareholder within the meaning of section 15 of the
Act or section 20 of the 1934 Act against any losses, claims, damages, or
liabilities, joint or several, to which the Underwriters, Selling Shareholder
or such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon:
(1) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other document, or
any amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the Blue Sky or
securities laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"), or
(2) the omission or alleged omission to state in
such Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse, as incurred, the
Underwriters and such controlling person for any legal or other expenses
reasonably incurred by the Underwriters or such controlling person in
connection with
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<PAGE>
investigating, defending against or appearing as a third-party witness in
connection with any loss, claim, damage, liability, action, investigation,
litigation or proceeding; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in such registration
statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Application in reliance upon
and in conformity with written information furnished to the Company by the
Underwriters or Selling Shareholder, as the case may be, specifically for use
therein. This indemnity agreement will be in addition to any liability which
the Company may otherwise have. The Company will not, without the prior
written consent of the Underwriters, Selling Shareholder or controlling
person, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not the Underwriters or
any person who controls the Underwriters or Selling Shareholder within the
meaning of section 15 of the Act or section 20 of the 1934 Act is a party to
such claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of the Underwriters or Selling
Shareholder and each such controlling person from all liability arising out of
such claim, action, suit or proceeding.
(b) Selling Shareholder agrees to indemnify and hold
harmless the Company, each director of the Company and each officer of the
Company who signed the Registration Statement, the Underwriters and each
person, if any, who controls the Company or the Underwriters within the
meaning of section 15 of the Act or section 20 of the 1934 Act against any
losses, claims, damages, liabilities, joint or several, to which the Company,
such director or officer of the Company, the Underwriters or such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(1) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other document, or
any amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the Blue Sky or
securities laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"), or
(2) the omission or alleged omission to state in
such Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse, as incurred, the
Underwriters and such controlling person for any legal or other expenses
reasonably incurred by the Underwriters or such controlling person in
connection with investigating, defending against or appearing as a third-party
witness in connection with any loss, claim, damage, liability, action,
investigation, litigation or proceeding, in each case to the extent, but only
to the extent that any such loss, claim, damage or liability arises out of or
is based upon any untrue statement or alleged untrue statement or omission or
alleged omission
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<PAGE>
was made in reliance upon and in conformity with written information furnished
to the Company or the Underwriters by the Selling Shareholder specifically for
use therein. This indemnity agreement will be in addition to any liability
which the Selling Shareholder may otherwise have. The Selling Shareholder will
not, without the prior written consent of the Company and the Underwriters,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not the Company or the
Underwriters or any person who controls the Company or the Underwriters within
the meaning of section 15 of the Act or section 20 of the 1934 Act is a party
to such claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of the Company, the Underwriters
and each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(c) The Underwriters will indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement, Selling Shareholder, and each person, if any, who
controls the Company or Selling Shareholder within the meaning of section 15
of the Act or section 20 of the Exchange Act against, any losses, claims,
damages or liabilities to which the Company or any such director, officer,
Selling Shareholder or controlling person may become subject under the Act or
otherwise, but only insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application, or
(ii) the omission or the alleged omission to state therein a material fact
required to be stated in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application, or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company by the Underwriters specifically for use therein; and, subject
to the limitation set forth immediately preceding this clause, will reimburse,
as incurred, any legal or other expenses reasonably incurred by the Company or
any such director, officer, Selling Shareholder or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or any action in respect thereof. This indemnity agreement will be
in addition to any liability which the Underwriters may otherwise have.
(d) Promptly after receipt by an indemnified party under
this section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this section 8, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this section 8. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified
30
<PAGE>
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be one or more legal defenses available to
it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not
have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and
approval by such indemnified party of counsel appointed to defend such action,
the indemnifying party will not be liable to such indemnified party under this
section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
or (ii) the indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party. After such
notice from the indemnifying party to such indemnified party, the indemnifying
party will not be liable for the costs and expenses of any settlement of such
action effected by such indemnified party without the consent of the
indemnifying party.
(e) In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this section 8 is unavailable or
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof). The relative benefits received by the Company on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by
the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and the
other equitable considerations appropriate in the circumstances. The Company
and the Underwriters agree that it would not be equitable if the amount of
such contribution were determined by pro rata or per capita allocation or by
any other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Underwriters
shall not be obligated to make contributions hereunder that in the aggregate
exceed the total public offering price of the Securities purchased by the
Underwriters under this Agreement, less the aggregate amount of
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<PAGE>
any damages that the Underwriters has otherwise been required to pay in
respect of the same or any substantially similar claim, and no person guilty
of fraudulent misrepresentation (within the meaning of section 11 (f) of the
Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. For purposes of this paragraph (d), each
person, if any, who controls an Underwriters within the meaning of section 15
of the Act or section 20 of the 1934 Act shall have the same rights to
contribution as the Underwriters, and each director of the Company, each
officer of the Company who signed the Registration Statement and each person,
if any, who controls the Company within the meaning of section 15 of the Act
or section 20 of the 1934 Act, shall have the same rights to contribution as
the Company.
9. Substitution of Underwriters.
If any Underwriter shall for any reason not permitted hereunder
cancel its obligations to purchase the Firm Securities hereunder, or shall
fail to take up and pay for the number of Firm Securities set forth opposite
names in Schedule 1 hereto upon tender of such Firm Securities in accordance
with the terms hereof, then:
(a) If the aggregate number of Firm Securities which such
Underwriter or Underwriters agreed but failed to purchase does not exceed 10%
of the total number of Firm Securities, the other Underwriter shall be
obligated to purchase the Firm Securities which such defaulting Underwriter
agreed but failed to purchase.
(b) If any Underwriter so defaults and the agreed number of
Firm Securities with respect to which such default or defaults occurs is more
than 10% of the total number of Firm Securities, the remaining Underwriter
shall have the right to take up and pay for the Firm Securities which the
defaulting Underwriter agreed but failed to purchase. If such remaining
Underwriter does not, at the Firm Closing Date, take up and pay for the Firm
Securities which the defaulting Underwriter agreed but failed to purchase, the
time for delivery of the Firm Securities shall be extended to the next
business day to allow the remaining Underwriter the privilege of substituting
within twenty-four hours (including nonbusiness hours) another underwriter or
underwriters satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid, within such twenty-four
hour period, the time of delivery of the Firm Securities may, at the option of
the Company, be again extended to the next following business day, if
necessary, to allow the Company the privilege of finding within twenty-four
hours (including nonbusiness hours) another underwriter or underwriters to
purchase the Firm Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriter or substituted Underwriters to take up the Firm Securities of the
defaulting Underwriter as provided in this section, (i) the Company or the
underwriter shall have the right to postpone the time of delivery for a period
of not more than seven business days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or
in any other document or arrangements, and the Company agrees promptly to file
any amendments to the Registration Statement or supplements to the Prospectus
which may thereby be made necessary, and (ii) the respective numbers of Firm
Securities to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of the underwriting obligation for
all purposes of this agreement.
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<PAGE>
If in the event of a default by any Underwriter and the remaining
Underwriter shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to
seek another underwriter or underwriters for such Firm Securities as
aforesaid, then this Agreement shall terminate.
If, following exercise of the option provided in Section 3(c) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option Securities at the Option Closing
Date, or shall fail to take up and pay for the number of Option Securities,
which it became obligated to purchase at the Option Closing Date upon tender
of such Option Securities in accordance with the terms hereof, then the
remaining Underwriters or substituted Underwriters may take up and pay for the
Option Units of the defaulting Underwriters in the manner provided in Section
9(b) hereof. If the remaining Underwriters or substituted Underwriters shall
not take up and pay for all such Option Securities, the Underwriters shall be
entitled to purchase the number of Option Securities for which there is no
default or, at their election, the option shall terminate, the exercise
thereof shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of
termination, there shall be no liability on the part of any non-defaulting
Underwriter to the Company, provided that the provisions of this Section 9
shall not in any event affect the liability of any defaulting Underwriter to
the Company arising out of such default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, any of its
officers or directors and the Underwriter set forth in this Agreement or made
by or on behalf of them, respectively, pursuant to this Agreement shall remain
in full force and effect, regardless of (i) any investigation made by or on
behalf of the Company, any of its officers or directors, the Underwriter or
any controlling person referred to in section 8 hereof and (ii) delivery of
and payment for the Securities. The respective agreements, covenants,
indemnities and other statements set forth in sections 5 and 8 hereof shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Underwriter by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and
satisfy all conditions on its part to be performed or satisfied under Section
7 hereunder at or prior thereto or if at or prior to the Firm Closing Date or
such Option Closing Date, respectively:
(1) the Company sustains a loss by reason of
explosion, fire, flood, accident or other calamity, which, in the opinion of
the Underwriter, substantially affects the
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<PAGE>
value of the properties of the Company or which materially interferes with the
operation of the business of the Company regardless of whether such loss shall
have been insured; there shall have been any material adverse change, or any
development involving a prospective material adverse change (including,
without limitation, a change in management or control of the Company), in the
business, operations, condition (financial or otherwise), earnings or
prospects of the Company, except in each case as described in or contemplated
by the Prospectus (exclusive of any amendment or supplement thereto);
(2) any action, suit or proceeding shall be
threatened, instituted or pending, at law or in equity, against the Company,
by any person or by any federal, state, foreign or other governmental or
regulatory commission, board or agency wherein any unfavorable result or
decision could materially adversely affect the business, operations, condition
(financial or otherwise), earnings or prospects of the Company;
(3) trading in the Common Stock or Warrants shall
have been suspended by the Commission, the NASD or on Nasdaq, or trading in
securities generally on the New York Stock Exchange shall have been suspended
or minimum or maximum prices shall have been established on either such
exchange or quotation system;
(4) a banking moratorium shall have been declared
by New York or United States authorities;
(5) there shall have been (A) an outbreak of
hostilities between the United States and any foreign power (or, in the case
of any ongoing hostilities, a material escalation thereof), (B) an outbreak of
any other insurrection or armed conflict involving the United States or (C)
any other calamity or crisis or material change in financial, political or
economic conditions, having an effect on the financial markets that, in any
case referred to in this clause (5), in the sole judgment of the Underwriter
makes it impracticable or inadvisable to proceed with the public offering or
the delivery of the Securities as contemplated by the Registration Statement;
(6) termination of this Agreement pursuant to this
section 10 shall be without liability of any party to any other party, except
as provided in section 5(b) and section 8 hereof.
12. Information Supplied by the Underwriter. The statements set forth
in the first paragraph on page __ , in the first (as to the underwriting
commitment of each Underwriter) and ________ paragraphs under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent
such statements relate to the Underwriter) constitute the only information
furnished by the Underwriter to the Company for the purposes of section 8(b)
hereof. The Underwriter confirms that such statements (to such extent) are
correct.
13. Notices. All notice hereunder to or upon either party hereto
shall be deemed to have been duly given for all purposes if in writing and (i)
delivered in person or by messenger or an overnight courier service against
receipt, or (ii) send by certified or registered mail, postage paid, return
receipt requested, or (iii) sent by telegram, facsimile, telex or similar
means,
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<PAGE>
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company: Harvey Electronics, Inc.
205 Chubb Avenue
Lyndenhurst, New Jersey 07071
Attn: Franklin Karp
Fax: (201) 842-0660
To the Representative: The Thornwater Company, L.P. and
107A East 37th Street
New York, New York 10016
Attn: Managing Director - Corporate Finance Department
Fax: (212) 696-4008
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this
section. The date of giving of any such notice shall be, in the case of clause
(i), the date of the receipt; in the case of clause (ii), five business days
after such notice or demand is sent; and, in the case of clause (iii), the
business day next following the date such notice is sent.
14. Amendment. Except as otherwise provided herein, no amendment of
this Agreement shall be valid or effective, unless in writing and signed by or
on behalf of the parties hereto.
15. Waiver. No course of dealing or omission or delay on the part of
either party hereto in asserting or exercising any right hereunder shall
constitute or operate as a waiver of any such right. No waiver of any
provision hereof shall be effective, unless in writing and signed by or on
behalf of the party to be charged therewith. No waiver shall be deemed a
continuing waiver or waiver in respect of any other or subsequent breach or
default, unless expressly so stated in writing.
16. Applicable Law. This agreement shall be governed by, and
interpreted and enforced in accordance with, the laws of the State of New York
without regard to principles of choice of law or conflict of laws.
17. Jurisdiction. Each of the parties hereto hereby irrevocably
consents and submits to the exclusive jurisdiction of the Supreme Court of the
State of New York and the United States District Court for the Southern
District of New York in connection with any suit, action or other proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby, waives any objection to venue in the County of New York, State of New
York, or such District and agrees that service of any summons, complaint,
notice or other process relating to such suit, action or other proceeding may
be effected in the manner provided by clause (ii) of Section 12.
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<PAGE>
18. Remedies. In the event of any actual or prospective breach or
default by either party hereto, the other party shall be entitled to equitable
relief, including remedies in the nature of rescission, injunction and
specific performance. All remedies hereunder are cumulative and not exclusive,
and nothing herein shall be deemed to prohibit or limit either party from
pursuing any other remedy or relief available at law or in equity for such
actual or prospective breach or default, including the recovery of damages.
19. Attorneys' Fees. The prevailing party in any suit, action or
other proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby, shall be entitled to recover its costs and
reasonable attorneys' fees.
20. Severability. The provisions hereof are severable and in the
event that any provision of this Agreement shall be determined to be invalid
or unenforceable in any respect by a court of competent jurisdiction, the
remaining provisions hereof shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect, and any invalid or
unenforceable provision shall be deemed, without further action on the part of
the parties hereto, amended and limited to the extent necessary to render the
same valid and enforceable.
21. Counterparts. This agreement may be executed in counterparts,
each of which shall be deemed an original and which together shall constitute
one and the same agreement.
22. Successors. This agreement shall inure to the benefit of and be
binding upon the Underwriter, the Company and their respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons
and for the benefit of no other person except that (i) the indemnities of the
Company contained in section 8 of this Agreement shall also be for the benefit
of any person or persons who control any Underwriter within the meaning of
section 15 of the Act or section 20 of the Exchange Act and (ii) the
indemnities of the Underwriter contained in section 8 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons
who control the Company within the meaning of section 15 of the Act or section
20 of the Exchange Act. No purchaser of Securities from the Underwriter shall
be deemed a successor because of such purchase.
23. Titles and Captions. The titles and captions of the articles and
sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
24. Grammatical Conventions. Whenever the context so requires, each
pronoun or verb used herein shall be construed in the singular or the plural
sense and each capitalized term defined herein and each pronoun used herein
shall be construed in the masculine, feminine or neuter sense.
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<PAGE>
25. References. The terms "herein," "hereto," "hereof," "hereby," and
"hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
26. Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes
any prior agreement, commitment or arrangement relating thereto.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and
the Underwriter.
Very truly yours,
HARVEY ELECTRONICS, INC.
By:
Name: Michael Recca
Title: Chariman
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
THE THORNWATER COMPANY, L.P.
as representative of the several underwriters listed
on Schedule l annexed hereto
By:
Name: Thomas D. O'Rourke
Title: Chief Executive Officer
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Schedule 1
Number of
Underwriter Number of Shares Redeemable Warrants
- ----------- ---------------- -------------------
The Thornwater Company, L.P.
---------
Total 950,000 1,450,000
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SCHEDULE 2
<TABLE>
<CAPTION>
SHAREHOLDER LOCK UP PERIOD
<S> <C>
Harvey Acquisition Company LLC 12 months as to 25%, 18 months as to an additional 25%
and 24 months as to balance
Officers and directors 24 months
Preferred stock holders, including warrants and Two years or one year from conversion,
stock underlying warrants and preferred stock whichever is longer, subject to suspension if
common stock trades at or above $7.50 for 45
consecutive trading days.
Paragon Capital 24 months
InterEquity Partners 12 months
Ruskin, Moscou, Evans & Falitschek 24 months
</TABLE>
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AGREEMENT, dated this ____ day of _______ 1998 by and between HARVEY
ELECTRONICS, INC., a New York corporation (the "Company"), and REGISTRAR AND
TRANSFER COMPANY, as Warrant Agent (the "Warrant Agent").
WHEREAS, in connection with (i) the offering to the public of up to
950,000 shares of Common Stock, par value $.01 per share of the Company ("Common
Stock"), and up to 1,450,000 redeemable warrants each warrant entitling the
holder thereof to purchase one share of Common Stock ("Redeemable Warrants"; the
shares of Common Stock and Redeemable Warrants sometimes collectively referred
to as the "Securities"); (ii) the over-allotment option to purchase up to
142,500 shares of Common Stock from the Company as to 42,500 such shares and a
selling shareholder as to 100,000 of such shares and/or 217,500 Redeemable
Warrants (the "Over-allotment Option"); and (iii) the sale to The Thornwater
Company, L.P. ("Representative"), as representative of the several underwriters
(individually "Underwriter" and collectively "Underwriters"), its successors and
assigns of a warrant (the "Representative's Warrant") to purchase up to 95,000
shares of Common Stock and/or 145,000 Redeemable Warrants, being identical to
the Securities being sold to the public except the price to purchase one share
of commone stock shall be $7.425 (the warrants issuable upon the exercise of the
Representative's Warrant are referred to as the "Common Stock Warrants"), the
Company will issue up to 1,667,500 Redeemable Warrants and may issue up to
145,000 Common Stock Warrants (subject to increase as provided in the
Representative's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Redeemable Warrants and the Common Stock Warrants
(collectively, the "Warrants"); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer and exchange of certificates representing the
Warrants and the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the
Underwriters, the holders of certificates representing the
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Warrants and the Warrant Agent, the parties hereto agree as follows:
SECTION 1. Definitions
-----------
Capitalized terms used herein and not otherwise defined shall
have the meaning given thereto in the Underwriting Agreement. As used herein,
the following terms shall have the following meanings, unless the context shall
other-wise require:
(a) "Common Stock" shall mean the common stock of the
Company, par value $.01 per share.
(b) "Corporate Office" shall mean the office of the
Warrant Agent (or its successor) at which at any particular time its principal
business shall be administered, which office is located on the date hereof at
_____________________________.
(c) "Exercise Date" shall mean, subject to the
provisions of Section 5(b) hereof, as to any Warrant, the date on which the
Warrant Agent shall have received both (i) the Warrant Certificate representing
such Warrant, with the exercise form thereon duly executed by the Registered
Holder hereof with such Registered Holder's signature guaranteed, and (ii)
payment in cash or by bank or cashier's check made payable to the Warrant Agent
for the account of the Company, of the amount in lawful money of the United
States of America equal to the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean
_____________, 2000, or such earlier date as to which the Representative shall
have consented, provided if the Representative shall have consented to an
earlier Initial Warrant Redemption Date the Initial Warrant Exercise Date shall
be the same as the Initial Warrant Redemption Date.
(e) "Initial Warrant Redemption Date" shall mean
__________, 2000 or such earlier date as to which the Representative shall have
consented.
(f) "Purchase Price" shall mean, subject to
modification and adjustment as provided in Section 8, _____ per share of Common
Stock as to the Redeemable Warrants or $7.425 per share of Common Stock, as to
the Common Stock Warrants.
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(g) "Registered Holder" shall mean the person in
whose name any certificate representing the Warrants shall be registered on the
books maintained by the Warrant Agent pursuant to Section 6.
(h) "Subsidiary" or "Subsidiaries" shall mean any
corporation or corporations, as the case may be, of which stock having ordinary
power to elect a majority of the Board of Directors of such corporation
(regardless of whether or not at the time stock of any other class or classes of
such corporation shall have or may have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned by the Company
or by one or more Subsidiaries, or by the Company and one or more Subsidiaries.
(i) "Transfer Agent" shall mean Registrar and
Transfer Company, or its authorized successor.
(j) "Underwriting Agreement" shall mean the
underwriting agreement dated as of __________, 1998 between the Company and
Representative, relating to the purchase for resale to the public of the
Securities.
(k) "Representative's Warrant Agreement" shall mean
the agreement dated as of __________, 1998 between the Company and
Representative relating to and governing the terms and provisions of the
Representative's Warrants.
(l) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.
(m) "Warrant Expiration Date" shall mean, unless the
Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:00
p.m. (Eastern time) on ____________ __, 2003 or, if such date shall in the State
of New York be a holiday or a day on which banks are authorized to close, than
5:00 p.m. (Eastern time) on the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the
Registered Holder of the Warrant Certificate representing such Warrant to
purchase at the Purchase Price therefor from the Initial Warrant Exercise Date
until the Warrant Expiration Date
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one share of Common Stock upon the exercise thereof, subject to modification and
adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant
Certificates representing 1,450,000 Redeemable Warrants to purchase up to an
aggregate of 1,450,000 shares of Common Stock (subject to modification and
adjustment as provided in Section 8) shall be executed by the Company and
delivered to the Warrant Agent.
(c) Upon exercise of the Over-allotment Option, in
whole or in part as to the Redeemable Warrants, and payment of the applicable
sums, Warrant Certificates representing up to 195,000 Redeemable Warrants to
purchase up to an aggregate of 195,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8) shall be executed by the
Company and delivered to the Warrant Agent.
(d) Upon exercise of the Representative's Warrant as
to the Common Stock Warrants as provided therein, and payment of the applicable
exercise price, Warrant Certificates representing 145,000 Common Stock Warrants
to purchase up to an aggregate of up to 145,000 shares of Common Stock (subject
to modification and adjustment as provided in Section 8 hereof and in the
Underwriter's Warrant Agreement), shall be executed by the Company and delivered
to the Warrant Agent.
(e) From time to time, up to the Warrant Expiration
Date, as the case may be, the Warrant Agent shall countersign and deliver
Warrant Certificates in required denominations of one or whole number multiples
thereof to the person entitled thereto in connection with any transfer or
exchange permitted under this Agreement. Except as provided in Section 7 hereof,
no Warrant Certificates shall be issued except (i) Warrant Certificates
initially issued hereunder, (ii) Warrant Certificates issued upon any transfer
or exchange of Warrants, (iii) Warrant Certificates issued in replacement of
lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7,
(iv) Warrant Certificates issued upon exercise of the Representative's Warrants
(including Common Stock Warrants in excess of 145,000 Representative's Warrants
issued as a result of the anti-dilution provisions contained in the
Underwriter's Warrant Agreement), and (v) at the option of the Company, Warrant
Certificates in such form as may be approved by its Board of Directors, to
reflect any adjustment or change in the Purchase Price, the number of shares of
Common
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<PAGE>
Stock purchasable upon exercise of the Warrants or the Redemption Price therefor
made pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
------------------------------------------
(a)The Warrant Certificates shall be substantially in
the form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates). Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, President or any Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary,
by manual signatures or by facsimile signatures printed thereon, and shall have
imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall
be manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the warrant Certificates shall cease to be such officer of
the Company before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company.
SECTION 4. Exercise.
---------
(a) Warrants may be exercised commencing at any time
on or after the Initial Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
(including the provisions set forth in Sections 5 and 9 hereof) and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date, provided that
the Warrant Certificate
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<PAGE>
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof with such Registered Holder's signature guaranteed,
together with payment in cash or by bank or cashier's check made payable to the
order of the Company, of an amount in lawful money, of the United States of
America equal to the applicable Purchase Price, has been received in good funds
by the Warrant Agent. The person entitled to receive the securities deliverable
upon such exercise shall be treated for all purposes as the holder of such
securities as of the close of business on the Exercise Date. As soon as
practicable on or after the Exercise Date and in any event within five business
days after such date, the Warrant Agent on behalf of the Company shall cause to
be issued to the person or persons entitled to receive the same a Common Stock
certificate or certificates for the shares of Common Stock deliverable upon such
exercise, and the Warrant Agent shall deliver the same to the person or persons
entitled thereto. Upon the exercise of Warrants, the Warrant Agent shall
promptly notify the Company in writing of such fact and of the number of
securities delivered upon such exercise and, subject to subsection (b) below,
shall cause all payments of an amount in cash or by check made payable to the
order of the Company, equal to the Purchase Price, to be deposited promptly in
the Company's bank account.
(b) At any time upon the exercise of Warrants after
one year and one day from the date hereof, (i) the Market Price (as hereinafter
defined) of the Company's Common Stock is equal to or greater than the Purchase
Price, (ii) the exercise of the Warrant is solicited by an Underwriter at such
time as such Underwriter is a member of the National Association of Securities
Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a discretionary
account, (iv) disclosure of the compensation arrangement is made in documents
provided to the holders of the Warrants, and (v) the solicitation of the Warrant
is not in violation of Regulation M promulgated under the Securities Exchange
Act of 1934, then the soliciting Underwriter shall be entitled to receive from
the Company upon exercise of each of the Warrants so exercised, a fee of five
percent (5%) of the aggregate price of the Warrants so exercised (the "Exercise
Fee"). Within five (5) days after the end of each month, commencing in _______
1999, the Warrant Agent will notify the Representative of each Warrant
Certificate which has been properly completed for exercise by holders of
Warrants during the last month. The Warrant Agent will provide the
Representative with such information, in connection with the exercise of each
Warrant, as the
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Representative shall reasonably request. The Company hereby authorizes and
instructs the Warrant Agent to deliver to the soliciting Underwriters, if known
to the Warrant Agent, or to the Representative if not so known, the Exercise Fee
promptly after receipt by the Warrant Agent from the Company of a check payable
to the order of the appropriate Underwriter in the amount of the Exercise Fee.
The Warrant Agent shall not issue the shares of Common Stock issuable upon
exercise of the Warrants until receipt and forwarding of such check, provided
that no check need be issued unless the amount thereof is at least $1,000
(including Exercise Fees previously earned, but not paid by reason of the
application of this provision). In the event that an Exercise Fee is paid to an
Underwriter with respect to a Warrant which was not properly completed for
exercise or in respect of which such Underwriter is not entitled to an Exercise
Fee, such Underwriter will return such Exercise Fee to the Warrant Agent which
shall forthwith return such fee to the Company. The Representative and the
Company may at any time after ____________ ___, 1999, and during business hours,
examine the records of the Warrant Agent, including its ledger of original
Warrant Certificates returned to the Warrant Agent upon exercise of warrants.
Notwithstanding any provision to the contrary, the provisions of this Section
4(b) may not be modified, amended or deleted without the prior consent of the
Representative.
(c) The Company shall not be obligated to issue any
fractional share interests or fractional warrant interests upon the exercise of
any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash in
lieu of fractional interests. Any fractional interest shall be eliminated.
(d) Anything in this Section 4 notwithstanding, no
Warrant will be exercisable unless at the time of exercise the Company has filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended (the "Act") covering the shares of Common
Stock issuable upon exercise of such Warrant and such shares have been so
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of such Warrant.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
------------------------------------------------------
(a) The Company covenants that it will at all times
reserve and keep available out of its authorized Common
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Stock, solely for the purpose of issuance upon exercise of warrants, such number
of shares of Common Stock as shall then be issuable upon the exercise of all
outstanding Warrants. The Company covenants that all shares of Common Stock
which shall be issuable upon exercise of the Warrants shall, at the time of
delivery thereof, be duly and validly issued and fully paid and nonassessable
and free from all preemptive or similar rights, taxes, liens and charges with
respect to the issuance thereof, and that upon issuance such shares shall be
listed on each securities exchange, if any, on which the other shares of
outstanding Common Stock of the Company are then listed.
(b) The Company covenants that, so long as any
unexpired Warrants remain outstanding, the Company will file such post-effective
amendments to the registration statement, Form SB-2, Registration No. 333-42121
(the "Registration Statement"), filed pursuant to the Act with respect to the
Warrants (or other appropriate registration statements or post-effective
amendment or supplements) as may be necessary to permit it to deliver to each
person exercising a Warrant, a prospectus meeting the requirements of Section
10(a)(3) of the Act and otherwise complying therewith, and will deliver such a
prospectus to each such person. To the extent that during any period it is not
reasonably likely that the Warrants will be exercised, due to market price or
otherwise, the Company need not file such a post-effective amendment during such
period. The Company will use its reasonable efforts to obtain appropriate
approvals or registrations under state "blue sky" securities laws; provided the
Company shall not be required to qualify to do business as a foreign corporation
or file a general consent to the services of process in any such jurisdiction.
With respect to any such securities, however, Warrants may not be exercised by,
or shares of Common Stock issued to, any Registered Holder in any state in which
such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed with respect to
the issuance of Warrants, or the issuance or delivery of any shares of Common
Stock upon exercise of the Warrants; provided, however, that if shares of Common
Stock are to be delivered in a name other than the name of the Registered Holder
of the Warrant Certificate representing any Warrant being exercised, then no
such delivery shall be made unless the person requesting the same has paid to
the Warrant Agent the amount of transfer taxes or charges incident thereto, if
any.
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(d) The Warrant Agent is hereby irrevocably
authorized as the Transfer Agent to requisition from time to time certificates
representing shares of Common Stock or other securities required upon exercise
of the Warrants, and the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
--------------------------------------
(a) Warrant Certificates may be exchanged for other
Warrant Certificates representing an equal aggregate number of Warrants or may
be transferred in whole or in part. Warrant Certificates to be so exchanged
shall be surrendered to the Warrant Agent at its Corporate Office, and, upon
satisfaction of the terms and conditions hereof, the Company shall execute and
the Warrant's Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office,
books in which, subject to such reasonable regulations as it may prescribe, it
shall register Warrant Certificates and the transfer thereof. Upon due
presentment for registration of transfer of any Warrant Certificate at such
office, the Company shall execute and the Warrant Agent shall issue and deliver
to the transferee or transferees a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants.
(c) With respect to any Warrant Certificates
presented for registration of transfer, or for exchange or exercise, the
subscription or exercise form, as the case may be, on the reverse thereof shall
be duly endorsed or be accompanied by a written instrument or instruments of
transfer and subscription, in form satisfactory to the Company and the Warrant
Agent, duly executed by the Registered Holder thereof with such Registered
Holder's signature guaranteed.
(d) A service charge may be imposed by the Warrant
Agent for any exchange, registration or transfer of Warrant Certificates.
However, the Company may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith.
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(e) All Warrant Certificates surrendered for exercise
or for exchange shall be promptly canceled by the Warrant Agent.
(f) Prior to due presentment for registration or
transfer thereof, the Company and the Warrant Agent may deem and treat the
Registered Holder of any Warrant Certificate as the absolute owner thereof of
each Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary.
SECTION 7. Loss or Mutilation.
-------------------
Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation) upon
surrender and cancellation thereof, the Company shall execute and the Warrant
Agent shall countersign and deliver in lieu thereof a new Warrant Certificate
representing an equal aggregate number of Warrants. Applicants for a substitute
Warrant Certificate shall also comply with such other reasonable regulations and
pay such other reasonable costs and expenses as the Warrant Agent may impose.
SECTION 8. Adjustment of Purchase Price and reasonable charges as the Warrant
------------------------------------------------------------------
Agent may prescribe.
- --------------------
(a) Except as hereinafter provided, in the
event the Company shall, at any time or from time to time after the date hereof,
sell any shares of Common Stock for a consideration per share less than the
closing bid price of the Common Stock as reported on NASDAQ, if traded on the
OTC Electronic Bulletin Board or NASDAQ Small Cap Market or the last sales
price, if listed on NASDAQ National Market or a national exchange, in either
case, on the trading date next preceding such sale (the "Market Price"), or
issue any shares of Common Stock as a stock dividend to the holders of Common
Stock, or subdivide or combine the outstanding shares of Common Stock into a
greater or lesser number of shares (any such sale, issuance, subdivision or
combination being herein called a "Change of Shares"), then, and thereafter
immediately before the date of such sale or the record date for each Change of
Shares, the Purchase Price for the shares of Common Stock
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issuable upon exercise of the Warrants (whether or not the same shall be issued
and outstanding) in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent to the nearest
cent) determined by dividing (1) the product of (a) the Purchase Price in effect
immediately before such Change of Shares and (b) the sum of (i) the total number
of shares of Common Stock outstanding immediately prior to such Change of
Shares, and (ii) the number of shares determined by dividing (A) the aggregate
consideration, if any, received by the Company upon such sale, issuance,
subdivision or combination, by (B) the Market Price; by (2) the total number of
shares of Common Stock outstanding immediately after such Change of Shares,
however, that in no event shall the Purchase Price be adjusted pursuant too this
computation to an amount in excess of the Purchase Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock, as provided by Section 8(h) hereof.
(b) For the purposes of any adjustment to be made in
accordance with this Section 8(a) the following provisions shall be applicable:
(A) In case of the issuance or sale of
shares of Common Stock (or of other securities deemed
hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor
deemed to have been received by the Company shall be (i) the
subscription price (before deducting any commissions or any
expenses incurred in connection therewith), if shares of
Common Stock are offered by the Company for subscription, or
(ii) the public offering price (before deducting therefrom any
compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or
others performing similar services, or any expenses incurred
in connection therewith), if such securities are sold to
underwriters or dealers for public offering without a
subscription offering, or (iii) the gross amount of cash
actually received by the Company for such securities, in any
other case.
(B) In case of the issuance or sale
(otherwise than as a dividend or other distribution on any
stock of the Company, and otherwise than on
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the exercise of options, rights or warrants or the conversion
or exchange of convertible or exchangeable securities) of
shares of Common Stock (or of other securities deemed
hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other
than cash, the amount of the consideration therefor other than
cash deemed to have been received by the Company shall be the
value of such consideration as determined in good faith by the
Board of Directors of the Company.
(C) Shares of Common Stock issuable by way
of dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the
opening of business on the day following the record date for
the determination of shareholders entitled to receive such
dividend or other distribution and shall be deemed to have
been issued without consideration.
(D) The reclassification of securities of
the Company other than shares of Common Stock into securities
including shares of Common Stock shall be deemed to involve
the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close
of business on the date fixed for the determination of
security holders entitled to receive such shares, and the
value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of
this Section 8(a).
(E) The number of shares of Common Stock at
any one time outstanding shall be deemed to include the
aggregate maximum number of shares issuable (subject to
readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the
conversion or exchange of convertible or exchangeable
securities.
(ii) Upon each adjustment of the Purchase Price pursuant to
this Section 8, the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be the number derived by multiplying the number
of shares of Common Stock purchasable immediately prior to such adjustment by
the Purchase Price in effect prior to such adjustment and
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dividing the product so obtained by the applicable adjusted Purchase Price.
(c) In case the Company shall at any time
after the date hereof issue options, rights or warrants to subscribe for shares
of Common Stock, or issue any securities convertible into or exchangeable for
shares of Common Stock, for a consideration per share (determined as provided in
Section 8(a) and as provided below) less than the Market Price, (including the
issuance of any such securities without consideration such as by way of dividend
or other distribution), the Purchase Price for the Warrants (whether or not the
same shall be issued and outstanding) in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, as the case may be, shall be reduced to a price
determined by making the computation in accordance with the provisions of
Section 8(a) hereof, provided that:
(A) The aggregate maximum number of shares of Common
Stock issuable or that may become issuable under such options, rights or
warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; provided, however, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (A) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which options, warrants and/or rights shall have expired,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities
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(assuming conversion or exchange in full even if not then currently convertible
or exchangeable in full) shall be deemed to be issued and outstanding at the
time of issuance of such securities, for a consideration equal to the
consideration received by the Company for such securities, plus the minimum
consideration, if any, receivable by the Company upon the conversion or exchange
thereof; provided, however, that upon the expiration or other termination of the
right to convert or exchange such convertible or exchangeable securities
(whether by reason of redemption or otherwise), the number of shares of Common
Stock deemed to be issued and outstanding pursuant to this subsection (B) (and
for the purposes of subsection (E) of Section 8(a) hereof) shall be reduced by
the number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the exercise price
per share provided for in any of the options, rights or warrants referred to in
subsection (A) of this section 8(c), or in the price per share or ratio at which
the securities referred to in subsection (3) of this Section 8(c) are
convertible or exchangeable and if a change in the Purchase Price has not
occured by reason of the event giving rise to the change in the price per share
of such other options, rights, warrants or convertible or exchangeable
securities, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(d) In case of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of the Warrants (other
than a change in par value, or from par value to no par value, or from no par
value to par value or as a result of subdivision or combination), or in case of
any
14
<PAGE>
consolidation or merger of the Company with or into another corporation
(other than a merger with a subsidiary in which merger the Company is the
continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants) or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and the Company shall forthwith file at the Corporate Office of the
Warrant Agent a statement signed by its President or a Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary
evidencing such provision. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 8(a) and (b). The above provisions of this
Section 8(d) shall similarly apply to successive reclassifications and changes
of shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(e) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock purchasable upon exercise
of the Warrants, the Warrant Certificates theretofore and thereafter issued
shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(e) hereof, continue to express the Purchase
Price per share and the number of shares purchasable thereunder as the Purchase
Price per share and the number of shares purchasable thereunder were expressed
in the Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Purchase Price
pursuant to this Section 8, the Company will promptly prepare a certificate
signed by the Chairman or President, and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary, of the Company setting
forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of
15
<PAGE>
Common Stock purchasable upon exercise of each Warrant, after such adjustment,
and (iii) a brief statement of the facts accounting for such adjustment. The
Company will promptly file such certificate with the Warrant Agent and cause a
brief summary thereof to be sent by ordinary first class mail to each Registered
Holder at his last address as it shall appear on the registry books of the
Warrant Agent. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity thereof. The affidavit of an officer
of the Warrant Agent or the Secretary or an Assistant Secretary of the Company
that such notice has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(g) No adjustment of the Purchase Price shall be made
as a result of or in connection with (A) the issuance or sale of the
Representative's Warrant or the Securities underlying the Representative's
Warrant, (B) the issuance or sale of the securities pursuant to the Initial
Public Offering, including the Option Securities and the securities underlying
the Securities, (C) the issuance or sale of shares of Common Stock pursuant to
options, warrants, stock purchase agreements and convertible or exchangeable
securities outstanding or in effect on the date hereof, or (D) the issuance or
sale of shares of Common Stock if the amount of said adjustment shall be less
than $.02 for one share of Common Stock, provided, however, that in such case,
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried forward,
to at least $.02 for one share of Common Stock. In addition, Registered Holders
shall not be entitled to cash dividends paid by the Company prior to the
exercise of any Warrant or Warrants held by them.
(h) Subdivision and Combination. In case the Company
shall at any time issue any shares of Common Stock in connection with a stock
dividend in shares of Common Stock or subdivide or combine the outstanding
shares of Common Stock, the Purchase Price shall forthwith be proportionately
decreased in the case of a stock dividend or a subdivision or increased in the
case combination.
SECTION 9. Redemption.
-----------
(a) Commencing on the Initial Warrant Redemption
Date, the Company may, on thirty (30) days prior
16
<PAGE>
written notice redeem all the Redeemable Warrants at $.10 per Redeemable
Warrant, provided, however, that before any such call for redemption of Warrants
can take place, the (A) average closing bid price for the Common Stock in the
over-the-counter market as reported by the NASD Automated Quotation System or
(B) the average closing sale price on the primary exchange on which the Common
Stock is traded, if the Common Stock is traded on a national securities
exchange, shall have for twenty (20) consecutive trading days ending on the 3rd
day prior to the notice of redemption exceeded 150% of the Purchase Price
(initially $____ per share of Common Stock) (subject to adjustment in the event
of any stock splits or other similar events as provided in Section 8 hereof).
All Redeemable Warrants must be redeemed if any are redeemed.
(b) In the event the Company exercises its
right to redeem all of the Redeemable Warrants, it shall give or cause to be
given notice to the Registered Holders of the Redeemable Warrants, by mailing to
such Registered Holders a notice of redemption, first class, postage prepaid,
within 30 calendar days of the aforementioned twenty (20) consecutive trading
days and not later than the twentieth (20th) day before the date fixed for
redemption, at their last address as shall appear on the records of the Warrant
Agent. Any notice mailed in the manner provided herein shall be conclusively
presumed to have been duly given whether or not the Registered Holder receives
such notice. At the time of the mailing to the Registered Holders of the
Warrants of the notice of redemption, the Company shall deliver or cause to be
delivered to the Representative a similar notice telephonically and confirmed in
writing together with a list of the Registered Holders (including their
respective addresses and number of Warrants beneficially owned) to whom such
notice of redemption has been or will be given.
(c) The notice of redemption shall specify
(i) the redemption price, (ii) the date fixed for redemption, (iii) the place
where the Warrant Certificate shall be delivered and the redemption price shall
be paid, and (iv) that the right to exercise the Warrant shall terminate at 5:00
p.m. (New York time) on the business day immediately preceding the date fixed
for redemption. The date fixed for the redemption of the Warrants shall be the
Redemption Date. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such redemption
except as to a Registered Holder (a) to whom notice was not mailed or (b) whose
notice was defective. An affidavit of the
17
<PAGE>
Warrant Agent or the Secretary or Assistant Secretary of the Company that notice
of redemption has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(d) Any right to exercise a warrant shall
terminate at 5:00 p.m. (New York time) on the business day immediately preceding
the Redemption Date. The redemption price payable to the Registered Holders
shall be mailed to such persons at their addresses of record.
SECTION 10. Concerning the Warrant Agent.
-----------------------------
(a) The Warrant Agent acts hereunder as agent and in
a ministerial capacity for the Company and the Representative, and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall
not, by issuing and delivering Warrant Certificates or by any other act
hereunder, be deemed to make any representations as to the validity or value or
authorization of the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
(b) The Warrant Agent shall not at any time be under
any duty or responsibility to any holder of Warrant Certificates to make or
cause to be made any adjustment of the Purchase Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustment, or with respect to the nature or extent of any such adjustment, when
made, or with respect to the method employed in making the same, it shall not
(i) be liable for any recital or statement of fact contained herein or for any
action taken, suffered or omitted by it in reliance on any Warrant Certificate
or other document or instrument believed by it in good faith to be genuine and
to have been signed or presented by the proper party or parties, (ii) be
responsible for any failure on the part of the Company to comply with any of its
covenants and obligations contained in this Agreement or in any Warrant
Certificate, or (iii) be liable for any act or omission in connection with this
Agreement except for its own gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with
counsel satisfactory to it (who may be counsel for the Company) and shall incur
no liability or responsibility for any
18
<PAGE>
action taken, suffered or omitted by it in good faith in accordance with the
opinion or advice of such counsel.
(d) Any notice, statement, instruction, request,
direction, order or demand of the Company shall be sufficiently evidenced by an
instrument signed by the Chairman of the Board of Directors, Vice-Chairman or
Secretary (unless other evidence in respect thereof is herein specifically
prescribed). The Warrant Agent shall not be liable for any action taken,
suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent
reasonable compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; the Company further agrees to indemnify the
Warrant Agent and save it harmless against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
Agent's gross negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be
discharged from all further duties and liabilities hereunder (except liabilities
arising as a result of the Warrant Agent's own negligence or willful
misconduct), after giving 30 days prior written notice to the Company. At least
15 days prior to the date such resignation is to become effective, the Warrant
Agent shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation the Company shall appoint in writing a new warrant agent. If
the Company shall fail to make such appointment within a period of 30 days after
it has been notified in writing of such resignation by the resigning Warrant
Agent, then the Registered Holder of any Warrant Certificate may apply to any
court of competent jurisdiction for the appointment of a new warrant agent. Any
new warrant agent, whether appointed by the Company or by such a court, shall be
a bank or trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000 or a stock
transfer company doing business in New York, New York. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if
19
<PAGE>
it had been originally named herein as the warrant agent, without any further
assurance, conveyance, act or deed; but if for any reason it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act or
deed, the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the resigning Warrant Agent. Not later
than the effective date of any such appointment the Company shall file notice
thereof with the resigning Warrant Agent and shall forthwith cause a copy of
such notice to be mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant
Agent or any new warrant agent may be converted or merged, any corporation
resulting from any consolidation to which the Warrant Agent or any new warrant
agent shall be a party, or any corporation succeeding to the corporate trust
business of the Warrant Agent or any new warrant agent shall be a successor
warrant agent under this Agreement without any further act, provided that such
corporation is eligible for appointment as successor to the Warrant Agent under
the provisions of the preceding paragraph. Any such successor warrant agent
shall promptly cause notice of its succession as warrant agent to be mailed to
the Company and to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and
affiliates, and any of its or their officers or directors, may buy and hold or
sell Warrants or other securities of the Company and otherwise deal with the
Company in the same manner and to the same extent and with like effect as though
it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a
period of two years from the date of exercise any Warrant Certificate received
by it upon such exercise, marked to indicate its cancellation thereof in
accordance with Section 6(e) hereof.
SECTION 12. Modification of Agreement
-------------------------
The Warrant Agent and the Company may by supplemental
agreement make any changes or corrections in this Agreement without the approval
of any holders of Warrants (i) that they shall deem appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or manifest
mistake or
20
<PAGE>
error herein contained; (ii) that they may deem necessary or desirable and which
shall not adversely affect the interests of the holders of warrant certificates;
or (iii) which may be required by law; provided, however, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect except
with the consent in writing of the Registered Holders representing not less than
50% of the Warrants then outstanding; provided, further, that no change in the
number of the securities purchasable upon the exercise of any Warrant, or the
Purchase Price therefor, shall be, made without the consent in writing of the
Registered Holder of the Warrant Certificate, other than such changes as are
specifically permitted or prescribed by this Agreement as originally executed.
In addition, this Agreement may not be modified, amended or supplemented without
the prior written consent of the Representative, other than (i) to cure any
ambiguity or to correct any provision which is inconsistent or which is a
manifest mistake or error; (ii) to make any such change that is necessary or
desirable and which shall not adversely affect the interests of the
Representative; or (iii) except as may be required by-law.
SECTION 13. Notices.
--------
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or five
days after mailed first-class postage prepaid, or upon receipt when sent by
facsimile, with confirmation received, if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company at 205 Chubb Avenue
Lyndhurst, New Jersey 07071, Attention: Chairman, or at such other address as
may have been furnished to the Warrant Agent in writing by the Company; and if
to the Warrant Agent, at its Corporate Office. Copies of any notice delivered
pursuant to this Agreement shall be delivered to The Thornwater Company, L.P.,
107A East 37th Street, New York, New York 10016, Attention: President, or at
such other addresses as may have been furnished to the Company and the Warrant
Agent in writing.
SECTION 14. Governing Law.
--------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
21
<PAGE>
SECTION 15. Binding Effect.
---------------
This Agreement shall be binding upon and inure to the benefit
of the Company, the Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them. Except
as hereinafter stated, nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim or to
impose upon any other person any duty, liability or obligation. The
Representative is, and shall at all times irrevocably be deemed to be, a
third-party beneficiary of this Agreement, with full power, authority and
standing to enforce the rights granted to it hereunder. In the event of any
conflict relating to the Representative's Warrant between the terms hereof and
the terms of the Underwriter's Warrant Agreement, the terms of the Underwriter's
Warrant Agreement shall prevail.
SECTION 16. Counterparts.
--------------
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
HARVEY ELECTRONICS, INC.
By: ____________________________
Michael Recca, Chairman
[SEAL]
REGISTRAR AND TRANSFER COMPANY
By: ____________________________
[SEAL]
22
<PAGE>
Exhibit A
---------
No. HEW________ VOID AFTER 5:00 P M on _____, 2001
_________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
HARVEY ELECTRONICS, INC.
NO. _______ CUSIP: 776378101
THIS CERTIFIES THAT, FOR VALUE RECEIVED _____________________ or registered
assigns (the "Registered Holder") is the owner of the number of Redeemable
Warrants (the "Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and the Warrant Agreement (as hereinafter defined), one fully
paid and non-assessable share of Common Stock, $.01 par value, of Harvey
Electronics, Inc., a New York corporation (the "Company"), at any time from
__________ __, 2000 and prior to the Expiration Date (as hereinafter defined)
upon the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the corporate office
of Registrar and Transfer Company, as Warrant Agent, or its successor (the
"Warrant Agent"), accompanied by payment of $____ per share, subject to
adjustment (the "Purchase Price"), in lawful-money of the United States of
America in cash or by check made payable to the Warrant Agent for the account of
the Company.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
_______, 1998, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price and the number of
23
<PAGE>
shares of Common Stock subject to purchase upon the exercise of each Warrant
represented hereby are subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional interests will be issued. In the
case of the exercise of less than all the warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York
time) on __________ __, 2003. If such date shall in the State of New York be a
holiday or a day on which the banks are authorized to close, then the Expiration
Date shall mean 5:00 P.M. (New York time) the next following day which in the
State of New York is not a holiday or a day on which banks are authorized to
close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration statement under
the Securities Act of 1933, as amended (the "Act"), with respect to such
securities is effective or an exemption thereunder is available. The Company has
covenanted and agreed that, if required by the Act, and unless during any period
it is not reasonably likely that the Warrants will be exercised, it will file a
registration statement under the Act, use its best efforts to cause the same to
become effective, keep such registration statement current, if required under
the Act, while any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Warrant. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of any
tax or other charge imposed in connection therewith or incident
24
<PAGE>
thereto, for registration or transfer of this Warrant Certificate at such
office, a new Warrant Certificate or Warrant Certificates representing an equal
aggregate number of Warrants will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a shareholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this
Warrant may be redeemed at the option of the Company, at a redemption price of
$.10 per Warrant, at any time commencing after ___________ __, 2000 provided
that (i) the average closing bid price for the Common Stock in the
over-the-counter market as reported by the National Association of Securities
Dealers Automated Quotation System, or (ii) the average closing sale price on
the primary exchange on which the Common Stock is traded, if the Common Stock is
traded on a national securities exchange, or (iii) the average closing sale
price on NASDAQ, if the Common Stock is quoted on NASDAQ, shall have for twenty
(20) consecutive trading days ending on the third (3rd) day prior to the Notice
of Redemption, as defined below, exceeded 150% of the exercise price (initially
$____ per share) of the Redeemable Warrants (subject to adjustment in the event
of any stock splits or other similar events). Notice of redemption (the "Notice
of Redemption") shall be given not later than the twentieth day before the date
fixed for redemption, all as provided in the Warrant Agreement. On and after the
date fixed for redemption, the Registered Holder shall have no rights with
respect to this Warrant except to receive the $.10 per Warrant upon surrender of
this Certificate.
Under certain circumstances, The Thornwater Company, L.P., its
successors and assigns shall be entitled to receive an aggregate of five percent
(5%) of the Purchase Price of the Warrants represented hereby.
Prior to due presentment for registration or transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Warrant-represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly
25
<PAGE>
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not, valid unless countersigned by
the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: __________, 1998
HARVEY ELECTRONICS, INC.
By: _______________________
SEAL Name: Michael Recca
Title: Chairman
By: _______________________
Name: Joseph J. Calabrese
Title: Secretary
COUNTERSIGNED:
REGISTRAR AND TRANSFER COMPANY
as Warrant Agent
By: ________________________
Authorized Officer
SUBSCRIPTION FORM
-----------------
To Be Executed by the Registered Holder in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably
elects to exercise ______________ Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Warrants, and requests that certificates for such securities shall be issued in
name of
26
<PAGE>
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
---------------------------------------
---------------------------------------
---------------------------------------
(please print or type name and address)
and be delivered to:
---------------------------------------
---------------------------------------
---------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
27
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by
The Thornwater Company, L.P. [ ]
2. The exercise of this Warrant was solicited by
-------------------------------------. [ ]
3. If the exercise of this Warrant was not solicited, please check
the following box. [ ]
X
----------------------------------
Dated: _____________, 199__
----------------------------------
----------------------------------
Address
----------------------------
Social Security or Taxpayer
Identification Number
----------------------------
Signature Guaranteed
----------------------------
<PAGE>
ASSIGNMENT
----------
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ______________________________,
hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
--------------------------------------
--------------------------------------
--------------------------------------
(please print or type name and address)
_______________________________________________________ of the Warrants
represented by this Warrant Certificate, and hereby irrevocably constitutes and
appoints
- ------------------------------------
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated: ___________________, 199____ X______________________
Signature Guaranteed
----------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE MEDALLION
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE, WHO IS A MEMBER OF THE
MEDALLION PROGRAM.
<PAGE>
RUSKIN, MOSCOU, EVANS & FALTISCHEK, P.C.
170 Old Country Road
Mineola, New York 11501
(516) 663-6600
February 18, 1998
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Re: Harvey Electronics, Inc.
Dear Sir or Madam:
We have acted as counsel to Harvey Electronics, Inc., a New
York corporation (the "Company"), in connection with its filing of a
Registration Statement (Registration No. 333-42121) (the "Registration
Statement") on Form SB-2 with respect to (i) 950,000 shares (the "Common
Shares") of Common Stock, $.01 par value of the Company, (ii) 1,450,000 shares
of Redeemable Common Stock Purchase Warrants (the "Warrants") to a group of
underwriters represented by The Thornwater Company, L.P. (the "Representative");
and (iii) 142,500 additional Common Shares and 217,500 additional Warrants to be
issued and sold upon exercise of an over-allotment option (the "Over-Allotment
Option") granted to the Representative. In the event the Representative
exercises the Over-Allotment Option, all the additional Warrants will be sold by
the Company and, as to the Common Shares, the first 42,500 Common Shares will be
sold by the Company, and the balance of 100,000 Common Shares will be sold by
the Selling Shareholder. Unless otherwise defined herein, all capitalized terms
used herein and not expressly defined shall have the meaning given to them in
the Registration Statement.
As counsel to the Company, we have examined the Certificate of
Incorporation, as restated and amended to date, and By-Laws, as amended to date,
and other corporate records of the Company, and have made such other
investigations as we have deemed necessary in connection with the opinion
hereinafter set forth.
In making the aforesaid examinations, we have assumed the
genuineness of all signatures and the conformity to original documents of all
copies furnished to us.
<PAGE>
February 18, 1998
Page 2
Based solely upon and subject to the foregoing, we are of the
opinion that the Common Shares and Warrants have been duly and validly
authorized and, when issued and paid for, will be duly and validly issued, fully
paid, and non-assessable.
We hereby consent to the filing of this opinion as an exhibit
to the aforesaid Registration Statement and to the reference to our firm under
the caption "Legal Matters" in the Prospectus constituting a part of said
Registration Statement.
Very truly yours,
/s/
-------------------------
RUSKIN, MOSCOU, EVANS
& FALTISCHEK, P.C.
PR/sk
<PAGE>
STOCK OPTION AGREEMENT
(Nonstatutory Stock Option)
THIS AGREEMENT made as of _________________ between The Harvey
Electronics, Inc., a New York corporation (hereinafter called the "Company"),
and ____________(hereinafter called the "Optionee"), an employee of the Company.
W I T N E S S E T H:
WHEREAS, the 1998 Stock Option Plan (hereinafter called the "Plan") was
approved by the stockholders of the Company at the adjourned 1988 Annual Meeting
of Shareholders of the Company; and
WHEREAS, the Plan is administered by the Stock Option and Compensation
Committee of the Board of Directors (the "Committee");
WHEREAS, the Committee has determined that the Optionee is eligible to receive a
grant of an option under the Plan and that the Optionee shall be granted the
option hereinafter set forth upon the terms and conditions hereinafter
contained; and
WHEREAS, THE Fair Market Value (as defined in the Plan) on the date of
grant of this option of each share of the Company's common stock, par value
$0.01 per share, is _________.
NOW THEREFORE, in consideration of the premises and the agreements
contained herein, the Company and the Optionee hereby agree as follows:
1. The Company hereby grants to the Optionee the option (the "Option")
to purchase all or part of an aggregate of __________ shares of Common Stock at
a purchase price of $____ per share, subject to the terms and conditions of this
Agreement and the Plan, the terms of which are incorporated herein by reference.
The Option is not intended to qualify as an incentive stock option under Section
422A of the Internal Revenue Code of 1986, as amended. The Option shall
terminate entirely at the close of business on ___________. Subject to the
foregoing, the Option may be exercised as to not more than ___________ percent
of the shares covered thereby on or after __________; as to not more than
________ percent of such shares on or after _________; and as to all such shares
on or after ___________ and until the expiration of the Option, less in each
case the number of shares previously purchased hereunder.
2. The Option is not transferable by the Optionee otherwise than by
will or the laws of descent and distribution, and is exercisable, during the
lifetime of the Optionee, only by the Optionee or by his/her guardian or legal
representative.
3. Except as set forth in this paragraph 3 and in paragraph 4, the Option may
not be exercised unless the Optionee is then in the employ of the Company or a
division or subsidiary thereof, and unless the Optionee has remained
continuously so employed since the date of grant of this Option. In the event
that the employment of the Optionee shall terminate (other than by
<PAGE>
reason of death, disability or retirement), all Options of such Optionee that
are exercisable at the time of such termination; provided, however, that if the
employment of the Optionee shall terminate for cause, all Options theretofore
granted to the Optionee shall, to the extent not theretofore exercised,
terminate forthwith.
4. If the Optionee shall die while employed by the Company or a
subsidiary thereof, or within (3) months after the termination of the Optionee's
employment other than for cause, or if the Optionee's employment shall terminate
by reason of Disability (as defined in the Plan) or retirement, all Options
theretofore granted to the 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 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.
5. The Option may be exercisable only by written notice to the
Secretary of the Company as provided in paragraph 10 hereof. Such notice, which
shall be substantially in the form of Exhibit A hereto, shall state the election
to exercise the Option, the manner of payment of the option price and the number
of shares in respect of which it is being exercised and shall be signed by the
Optionee. The certificate or certificates of the shares as to which the Option
shall have been exercised will be registered only in the name of the person
exercising the Option. In the event the Option becomes exercisable by another
person or persons upon death of the Optionee, the notice of exercise shall be
accompanied by appropriate proof of the right to exercise the Option. The Option
may not be exercised at any one time as to fewer than 100 shares of Common Stock
(or such number of shares as to which the Option is then exercisable if such
number is less than 100).
6. At the time of exercise of the Option and prior to the delivery of such
shares, the Optionee shall pay in cash to the Company the aggregate option price
of all shares purchased pursuant to an exercise of the Option. All payments
shall be made by check payable to the order of the Company. In lieu of making
payment in cash for the aggregate option price of shares purchased pursuant to
the exercise of the Option, the Optionee may make such payment (i) by delivery
to the Company of Common Stock owned by the Optionee having a Fair Market Value
(as defined in the Plan) at least equal to the aggregate option price or (ii)
partly in cash and partly by delivery of Common Stock. If the Fair Market Value
of Common so delivered exceeds the aggregate option price (or part thereof), the
Company will pay to the Optionee in cash an amount equal to the Fair Market
Value of the fractional portion of any share of Common Stock so delivered and
not applied by the Company in payment of the option price and a certificate for
any whole shares of Common Stock not required to be applied by the Company in
payment of the option price. In addition, the Option Price may be effected in
whole or in part with monies borrowed from the Company pursuant to repayment
terms and conditions as shall be determined from time to time by the Committee,
in its 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 or 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 Company, such fact shall be
noted conspicuously on the certificate for shares in accordance with applicable
law. The Optionee shall not have any of the rights of a
2
<PAGE>
stockholder of the Company with respect to the shares delivered upon any
exercise of the Option unless and until certificates representing such shares
shall have been delivered to the Optionee.
7. The Optionee agrees that any resale of the shares received upon any
exercise of the Option shall be made in compliance with the registration
requirements of the Securities Act of 1933 as amended or an applicable exemption
therefrom and to promptly provide the Company with such representations,
certificates and other assurances of compliance with such registration
requirements as the Company shall from time to time reasonably request. If the
Optionee is an "affiliate" of the Company within the meaning of Rule 144 under
such Act, the Optionee agrees that any resale of the shares received upon any
exercise of the Option shall be made in compliance with the registration
requirements of such Act or an applicable exemption therefrom, including without
limitation the exemption provided by Rule 144.
8. The provisions of Section 8(i) of the Plan are hereby incorporated
by reference and in the event of certain changes set forth in Section 8(i) of
the Plan, the Committee shall make the appropriate adjustments to the Options
consistent with the terms of such Section 8(i).
9. The Committee shall have final authority to interpret and construe
the Plan and this Agreement and to make any and all determinations under them,
and its decision shall be binding and conclusive upon the Optionee and/her legal
representative in respect of any questions arising under the Plan or this
Agreement.
10. Any notice to be given to the Company shall be addressed to the
Secretary of the Company at 205 Chubb Avenue, Lyndhurst, New Jersey 07071 and
any notice to be given to the Optionee shall be addressed to him at his
residence as it may appear on the records of the Company or at such other
address as either party may hereafter designate in writing to the other.
11. The Agreement shall be binding upon and inure to the benefit of the
parties hereto and any successors to the business of the Company, but this
Agreement shall not be assignable by the Optionee.
12. The Company and Optionee agree that the Company shall, to the
extent permitted or required bylaw, have the right to deduct federal, state and
local taxes of any kind required by law to be withheld upon the exercise of this
Option from any payment of any kind otherwise due to the Optionee.
3
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date and year first above written.
HARVEY ELECTRONICS, INC.
BY
NAME:
TITLE:
<PAGE>
HARVEY ELECTRONICS, INC.
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT is made and entered into as of the _____
day of ________, 199_, by and between Harvey Electronics, Inc., a New York
corporation (the "Corporation") and ___________ (the "Optionee").
WHEREAS, the Optionee is a valued employee, director or consultant of
the Corporation; and
WHEREAS, the Corporation considers it desirable and in its best
interests that Optionee be given an opportunity to acquire a proprietary option
to purchase shares of Common Stock of the Corporation, par value $.01 per share
(the "Common Shares"), in accordance with the provisions of the Corporation's
Stock Option Plan (the "Plan").
NOW, THEREFORE, for good and valuable consideration paid by the
Optionee to the Corporation, the adequacy of which is hereby acknowledged, and
the mutual covenants hereinafter set forth, the parties agree as follows:
1. Grant of Option. The Corporation hereby grants to the Optionee the
right and option (hereinafter the "Incentive Option") to purchase all or any
part of an aggregate of ___________ (___) Common Shares (subject to adjustment
as provided in Paragraph 6 hereof), on the terms and conditions set forth and in
the Plan, which is incorporated herein by reference. The Optionee acknowledges
receipt of a copy of the Plan.
2. Purchase Price. The purchase price of the Common Shares covered by
the Incentive Option shall be $______ per share (subject to adjustment as
provided in Paragraph 6 hereof).
<PAGE>
3. Term of the Option. The Incentive Option shall be exercisable as to
___ shares commencing one year from the date hereof, an additional ___ shares
commencing two years from the date hereof and an additional ___ shares
commencing three years from the date hereof. The Incentive Option granted hereby
shall expire at the __________ anniversary of the date hereof, unless earlier
terminated as hereinafter set forth.
4. Method of Exercising Option. The Optionee may exercise the Incentive
Option in whole or in part (to the extent that it is exercisable in accordance
with its terms) by giving written notice to the Corporation, specifying therein
the number of Common Shares which he then elects to purchase, together with the
tender of the full purchase price of the Common Shares covered by the Incentive
Option (in cash or certified check payable to the order of the Corporation or by
delivery of shares of the Corporation's Common Stock).
As soon as practicable after receipt by the Corporation of such notice
and of payment in full of the Incentive Option price of all the Common Shares
with respect to which the Incentive Option has been exercised, a certificate or
certificates representing such Common Shares shall be issued in the name of the
Optionee and shall be delivered to the Optionee. All Common Shares shall be
issued only upon receipt by the Corporation of the Optionee's representation
that the shares are purchased for investment and not with a view toward
distribution thereof.
5. Availability of Shares. The Corporation, during the term of this
Incentive Option, at all times shall keep available the number of shares of
common stock required to satisfy the Incentive Option.
-2-
<PAGE>
The Corporation shall utilize its best efforts to comply with the
requirements of each regulatory commission or agency having jurisdiction in
order to issue and sell the Common Shares to satisfy the Incentive Option;
provided, however, that the Corporation shall not be required to register the
Common Shares issuable on exercise of the Incentive Option under the Securities
Act of 1933, as amended. Such compliance will be a condition precedent to the
right to exercise the Incentive Option. The inability of the Corporation to
effect such compliance with any such regulatory commission or agency which
counsel for the Corporation deems necessary for the lawful issuance and sale of
the Common Shares to satisfy this Incentive Option shall relieve the Corporation
from any liability for failure to issue and sell the Common Shares to satisfy
the Incentive Option for such period of time as such compliance is not
effectuated.
6. Adjustments. If prior to the exercise of any option granted
hereunder the Corporation shall have effected one or more stock split-ups, stock
dividends, or other increases or reductions of the number of shares of its
common stock outstanding without receiving compensation therefor in money,
services or property, the number of Common Shares subject to the option hereby
granted shall (a) if a net increase shall have been effected in the number of
outstanding shares of the Corporation's Common Shares, be proportionately
increased and the cash consideration payable per Common Share shall be
proportionately reduced; and (b) if a net reduction shall have been effected in
the number of outstanding shares of the Corporation's Common Shares, be
proportionately reduced and the cash consideration payable per Common Share be
proportionately increased.
-3-
<PAGE>
7. Restrictions. The holder of this Incentive Option, by acceptance
hereof, represents and warrants as follows:
(a) This Incentive Option and the right to purchase common
stock hereunder is personal to the holder and shall not be transferred to any
other person, other than by will or the laws of descent and distribution.
(b) The holder hereof has been advised and understands that
the Incentive Option has been issued in reliance upon exemptions from
registration under the Securities Act and applicable state statutes; the
Incentive Option and the Common Shares issuable upon exercise of the Incentive
Option have not been registered under the Securities Act or applicable state
statutes and must be held and may not be sold, transferred, or otherwise
disposed of for value unless they are subsequently registered under the
Securities Act or an exemption from such registration is available; except as
set forth herein, the Corporation is under no obligation to register the
Incentive Option or the Common Shares underlying such Incentive Option under the
Securities Act or applicable state statutes; in the absence of such
registration, the sale of the Incentive Option or the Common Shares may be
practicably impossible; the Corporation's registrar and transfer agent will
maintain stop-transfer instructions against registration or transfer of the
Incentive Option and the Common Shares and any certificate issued upon exercise
of the Incentive Option representing the Common Shares will bear on its face a
legend in substantially the following form restricting the sale of the Common
Shares:
-4-
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND ARE "RESTRICTED SECURITIES" WITHIN THE
MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE 144 IN THE
ABSENCE OF EFFECTIVE REGISTRATION OR OTHER COMPLIANCE UNDER
THE SECURITIES ACT.
(c) Within the two-year period immediately following the date
the Incentive Option has been exercised and the Common Shares fully paid for,
the Corporation may refuse to transfer the Common Shares unless the holder
thereof provides an opinion of legal counsel reasonably satisfactory to the
Corporation or a "no action" letter or interpretive response from the staff of
the Securities and Exchange Commission to the effect that the transfer is
proper; further, unless such opinion letter or response states that the Common
Shares are free of any restrictions under the Securities Act, the Corporation
may refuse to transfer the Common Shares to any transferee who does not furnish
in writing to the Corporation the same representations and agree to the same
conditions with respect to such Common Shares as are set forth herein.
Notwithstanding any of the foregoing, the Corporation may refuse to transfer the
Common Shares if any circumstances are present reasonably indicating that the
transferee's representations are not accurate.
(d) After two years but prior to the third anniversary from
the date the incentive Option has been exercised and the Common Shares fully
paid for, the Corporation may refuse to transfer the Common Shares unless the
holder either (i) meets the requirements of Subparagraph (b) above; or (ii)
sells such Common Shares in accordance with Rule 144 and
-5-
<PAGE>
furnishes to the Corporation written assurances of compliance therewith in the
form of a copy of the Notice of Form 144 and appropriate letters of compliance
from the holder of such Common Shares and the securities broker-dealer to or
through which such Common Shares are being sold. No opinion of counsel for the
holder of the Common Shares shall be required respecting sales in reliance on
Rule 144 pursuant to Clause (ii) of this Subparagraph (d).
(e) After three years from the date of the Incentive Option
has been exercised and the Common Shares fully paid for, the Corporation shall,
upon the written request of any persons who have held the Common Shares for
three years (excluding any tolling period provided for by Rule 144) and who is
not, and has not been during the preceding three months, an affiliate of the
Corporation, re-issue to such holder in such names and denominations as the
holder shall request, one or more certificates for the Common Shares without any
restriction whatsoever on their further transfer and cancel any and all stop
transfer instructions regarding such Common Shares on the books and records of
the Corporation.
8. Shareholder's Rights. This Incentive Option is non-transferable by
the Optionee, except in the event of the Optionee's death as provided in
Paragraph 9(a) hereof and during the Optionee's lifetime is exercisable only by
the Optionee. On any attempt to transfer or otherwise dispose of this Incentive
Option other than pursuant to the terms hereof or the terms of the Plan, this
Incentive Option shall immediately become null and void. The Optionee shall have
no rights as a shareholder with respect to Common Shares underlying Incentive
Option until payment of the Incentive Option price and delivery to the Optionee
of the Common Shares as provided herein.
-6-
<PAGE>
9. Termination of Option. Except as otherwise stated herein, the
Incentive Option to the extent not heretofore exercised shall terminate upon the
first of the following dates to occur:
(a) In the event of the Optionee's death, the Optionee's
executors or administrators may exercise, within twelve (12) months following
the date of the Optionee's death, the Incentive Option as to all or part of such
number of shares which the Optionee was entitled to purchase at the time of his
death, as determined in accordance with Paragraph 3 hereof, not theretofore
exercised during the Optionee's lifetime.
(b) On the date of the termination of the Optionee's
employment for cause or on the date the Optionee voluntarily quits his
employment.
(c) The expiration of three months after the date on which the
Optionee's employment by the Corporation is terminated not for cause (except if
such termination be by reason of death or permanent and total disability).
(d) The expiration of twelve (12) months after the date on
which the Optionee's employment by the Corporation is terminated, if such
termination occurs by reason of the Optionee's permanent and total disability.
(e) ____________, the _____ anniversary of this Agreement.
10. Validity and Construction. The validity and construction of this
Incentive Option shall be governed by the laws of the State of New York. Such
construction is vested in the board and its construction shall be final and
conclusive.
-7-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Option
Agreement to be executed by its proper corporate officers thereunto duly
authorized.
HARVEY ELECTRONICS, INC.
By:
------------------------------
Mike Recca, Chairman
---------------------------------
Optionee
-8-
<PAGE>
HARVEY ELECTRONICS, INC.
AND
THE THORNWATER COMPANY, L.P.
REPRESENTATIVE'S
WARRANT AGREEMENT
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of ________ __,
1998 by and between HARVEY ELECTRONICS, INC., (the "Company") and THE THORNWATER
COMPANY, L.P. ("Representative" or "Thornwater") individually
("Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative 95,000
warrants (each a "Representative's Stock Warrant") each to purchase a share of
the Company's common stock, par value $.01 per share (the "Common Stock") and/or
145,000 warrants (each a "Representative's Underlying Warrant") each to purchase
a redeemable Common Stock purchase warrant (the "Redeemable Warrant") each
Redeemable Warrant exercisable to purchase one share of Common Stock.
WHEREAS, the Representative has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated ________, 1998, by and between
the Representative and the Company, to act as the Representative in connection
with the Company's proposed initial public offering (the "Initial Public
Offering") of 950,000 shares of Common Stock and 1,450,000 redeemable warrants
(the "Offering Securities"); and
WHEREAS, the Representative's Stock Warrants and Representative's
Underlying Warrants to be issued pursuant to this Agreement (collectively,
"Representative's Warrant") will be issued on Closing Date I (as such term is
defined in the Underwriting Agreement) by the Company to the Representative in
consideration for, and as part of, the Representatives' compensation in
connection with the Representatives acting as the Representatives pursuant to
the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of Ten Dollars ($10.00), the agreements herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Grant. The Holder (as defined in Section 3 below) is hereby granted
the right to purchase, at any time from ________, 1999 until 5:00 p.m., New York
time, _________ 2004, an aggregate
2
<PAGE>
of up 95,000 shares of Common Stock and/or 145,000 Redeemable Warrant, at an
initial purchase price (subject to adjustment as provided in Section 8 hereof)
of $6.75 per share of Common Stock and $.135 per Redeemable Warrant, subject to
the terms and conditions of this Agreement. The securities issuable upon
exercise of the Representative's Warrant are sometimes referred to herein as the
"Representative's Securities." The Representative's Warrant shall be identical
to the redeemable warrants included in the Offering Securities, except the
purchase price for one share of Common Stock upon exercise of the warrant
provided in the Representative's Securities shall be $7.425.
2. Warrant Certificates. The warrant certificate (the "Representative's
Warrant Certificate") to be delivered pursuant to this Agreement shall be in the
form set forth in Exhibit A attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Representative's Warrant.
(a) The Representative's Warrant is exercisable during the term set
forth in Section 1 hereof payable by certified or cashier's check or money order
in lawful money of the United States. Upon surrender of an Representative's
Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Purchase Price (as hereinafter defined) for the
Representative's Securities (and such other amounts, if any, arising pursuant to
Section 4 hereof) at the Company's principal office currently located at 205
Chubb Avenue, Lyndhurst, New Jersey 07071, the registered holder of an
Representative's Warrant Certificate ("Holder" or "Holders") shall be entitled
to receive a certificate or certificates for the Representative's Securities so
purchased. The purchase rights represented by each Representative's Warrant
Certificate are exercisable at the option of the Holder or Holders thereof, in
whole or in part as to Representative's Securities. The Representative's Warrant
may be exercised to purchase all or any part of the Representative's Securities
represented thereby. In the case of the purchase of less than all the
Representative's Securities purchasable on the exercise of the Representative's
Warrant represented by an Representative's Warrant Certificate, the Company
shall cancel the Representative's Warrant Certificate represented thereby upon
the surrender thereof and shall execute and deliver a new Representative's
Warrant Certificate of like tenor for the balance of the Representative's
Securities purchasable thereunder.
3
<PAGE>
(b) In lieu of the payment of cash upon exercise of the
Representative's Warrant as provided in Section 3(a), the Holder may exercise
the Representative's Warrant by surrendering the Warrant Certificate at the
principal office of the Company, accompanied by a notice stating (i) the
Holder's intent to effect such exercise by an exchange, (ii) whether Common
Stock, Redeemable Warrants or a combination (stating the ratio of each) are to
be issued upon the exchange, (iii) whether Representative's Stock Warrants,
Representative's Underlying Warrants or a combination (stating the ratio) are to
be surrendered in connection with the exchange, and (iv) the date on which the
Holder requests that such exchange is to occur. The Purchase Price for the
Representative's Securities to be acquired in the exchange shall be paid by the
surrender as indicated in the notice, of Representative's Stock Warrants or
Representative's Underlying Warrants, or a combination, having a "Value", as
defined below, equal to the Purchase Price. "Value" as to each Representative's
Stock Warrant shall mean the difference between the "Market Price", as
hereinafter defined, of a share of Common Stock and the then Purchase Price for
a share of Common Stock hereunder and as to each Representative's Underlying
Warrant shall mean the difference between the Market Price of the Redeemable
Warrant and the then Purchase Price of a Redeemable Warrant hereunder.
By way of example of the application of the formula, assume that the
Market Price of the Common Stock is $8.00, the Purchase Price of the
Representative's Stock Warrant is $6.00, the Market Price of a Redeemable
Warrant is $2.24 and the Purchase Price of the Representative's Underlying
Warrant is $.12. On such assumptions, the Value of a Representative's Stock
Warrant is $2.00 ($8.00-$6.00) and therefore for each three Representative's
Stock Warrant surrendered, the Holder could acquire one share of Common Stock in
the exchange; and the Value of a Representative's Underlying Warrant is $2.12
and for each 57 Representative's Underlying Warrants surrendered, the Holder
could acquire 1,000 Redeemable Warrants. Notwithstanding the example, the Holder
shall not be limited to exchanging Representative's Stock Warrants for Common
Stock or Representative's Underlying Warrants for Redeemable Warrants.
The Warrant Exchange shall take place on the date specified in the
notice or if the date the notice is received by the Company is later than the
date specified in the notice, on the date the notice is received by the Company.
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<PAGE>
In the event the Redeemable Warrant as to which the Representative's Warrant may
be exercised is not identical to the Redeemable Warrant sold in the Initial
Public Offering, the Representative's Underlying Warrants shall not be able to
be surrendered as provided herein, but the right to exchange shall be limited to
the exchange of Representative's Stock Warrants for Common Stock or Redeemable
Warrants.
4. Issuance of Certificates. Upon the exercise of the Representative's
Warrant and payment of the Purchase Price therefor, the issuance of certificates
representing the Representative's Securities or other securities, properties or
rights underlying such Representative's Warrant, shall be made forthwith (and in
any event within five (5) business days thereafter) without further charge to
the Holder thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Representative's Warrant Certificates and the certificates representing the
Representative's Securities or other securities, property or rights (if such
property or rights are represented by certificates) shall be executed on behalf
of the Company by the manual or facsimile signature of the then present Chairman
or Vice Chairman of the Board of Directors or President or Vice President of the
Company, attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the
Company. The Representative's Warrant Certificates shall be dated the date of
issuance thereof by the Company upon initial issuance, transfer or exchange.
5. Restriction On Transfer of Representative's Warrant. The Holder of
an Representative's Warrant Certificate (and its Permitted Transferee, as
defined below), by its acceptance thereof, covenants and agrees that the
Representative's Warrant may be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, until _______, 1999 (one year
following the effective date of the Initial
5
<PAGE>
Public Offering), only to officers and partners of the Representatives, or any
Initial Public Offering selling group member and their respective officers and
partners, ("Permitted Transferees"). Thereafter the Representative's Warrant may
be transferred, assigned, hypothecated or otherwise disposed of in compliance
with applicable law.
6
<PAGE>
6. Purchase Price.
(a) Initial and Adjusted Purchase Price. Except as
otherwise provided in Section 8 hereof, the initial purchase price of the
Representative's Securities shall be $6.75 per share of Common Stock and $.135
per Redeemable Warrant. The adjusted purchase price shall be the price which
shall result from time to time from any and all adjustments of the initial
purchase price in accordance with the provisions of Section 8 hereof.
(b) Purchase Price. The term "Purchase Price" herein
shall mean the initial purchase price or the adjusted purchase price, depending
upon the context.
7. Registration Rights.
(a) Registration Under the Securities Act of 1933 as
amended ("Act"). The Representative's Warrant may have not been registered under
the Act. The Representative's Warrant Certificates may bear the following
legend:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act"), and may not be offered
for sale or sold except pursuant to (i) an effective registration statement
under the Act, or (ii) an opinion of counsel, if such opinion and counsel shall
be reasonably satisfactory to counsel to the issuer, that an exemption from
registration under the Act is available".
(b) Demand Registration. (1) At any time commencing on the
first anniversary of and expiring on the fifth anniversary of the effective date
of the Company's Registration Statement relating to the Initial Public Offering
(the "Effective Date"), the Holders of a Majority (as hereinafter defined) in
interest of the Representative's Warrant, or the Majority in interest of the
Representative's Securities (assuming the exercise of all of the
Representative's Warrant) shall have the right, exercisable by written notice to
the Company, to have the Company prepare and file with the U.S. Securities and
Exchange Commission (the "Commission"), on one (1) occasion, a registration
statement on Form SB-2, S-1 or other appropriate form, and such other documents,
including a prospectus, as may be necessary in the opinion of both counsel for
the Company and counsel for the Holders, in order to comply with the provisions
of the Act, so as to permit a public offering and sale, for a period of nine (9)
months, of the Representative's Securities by such Holders and any other Holders
of the Representative's Warrant and/or
7
<PAGE>
the Representative's Securities who notify the Company within fifteen
(15) business days after receipt of the notice described in Section 7(b)(2). The
Holders of the Representative's Warrant may demand registration prior to
exercising the Representative's Warrant, and may pay such exercise price from
the proceeds of such public offering.
(2) The Company covenants and agrees to give written notice of any
registration request under this Section 7(b) by any Holders to all other
registered Holders of the Representative's Warrant and the Representative's
Securities within ten (10) calendar days from the date of the receipt of any
such registration request.
(3) For purposes of this Agreement, the term "Majority" in reference to
the Holders of the Representative's Warrant or Representative's Securities,
shall mean in excess of fifty percent (50%) of the then outstanding
Representative's Warrant or Representative's Securities that (i) are not held by
the Company, an affiliate, officer, creditor, employee or agent thereof or any
of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith, or (ii) have not been resold to the public
pursuant to a registration statement filed with the Commission under the Act.
(c) Piggyback Registration. (1) If, at any time within the
period commencing on the first anniversary and expiring on the sixth anniversary
of the Effective Date, the Company should file a registration statement with the
Commission under the Act (other than in connection with a merger or other
business combination transaction or pursuant to Form S-8), it will give written
notice at least twenty (20) calendar days prior to the filing of each such
registration statement to the Representative and to all other Holders of the
Representative's Warrant and/or the Representative's Securities of its intention
to do so. If an Representative or other Holders of the Representative's Warrant
and/or the Representative's Securities notify the Company within fifteen (15)
calendar days after receipt of any such notice of its or their desire to include
any Representative's Securities in such proposed registration statement, the
Company shall afford the Representative and such Holders of the Representative's
Warrant and/or Representative's Securities the opportunity to have any such
Representative's Securities registered under such registration statement.
Notwithstanding the provisions of this Section 7(c)(1) and the provisions of
Section 7(d), the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7(c)(1) (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration
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statement, or to withdraw the same after the filing but prior to the effective
date thereof.
(2) If the managing underwriter of an offering to
which the above piggyback rights apply, in good faith and for valid business
reasons, objects to such rights, such objection shall preclude such inclusion.
(d) Covenants of the Company With Respect to
Registration. In connection with any registrations under Sections 7(b) and 7(c)
hereof, the Company covenants and agrees as follows:
(1) The Company shall use its best efforts to
file a registration statement within thirty (30) calendar days of receipt of any
demand therefor pursuant to Section 7(b); provided, however, that the Company
shall not be required to produce audited or unaudited financial statements for
any period prior to the date such financial statements are required to be filed
in a report on Form 10-K or Form 10-Q, as the case may be. The Company shall use
its best efforts to have any registration statement declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell
Representative's Securities such number of prospectuses as shall reasonably be
requested.
(2) The Company shall pay all costs (excluding
fees and expenses of Holders' counsel and any underwriting discounts or selling
fees, expenses or commissions), fees and expenses in connection with any
registration statement filed pursuant to Sections 7(b) and 7(c) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses.
(3) The Company will use its best efforts to
qualify or register the Representative's Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holders, provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(4) The Company shall indemnify the Holders of
the Representative's Securities to be sold pursuant to any registration
statement and each person, if any, who controls such Holders within the meaning
of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934
(the "Exchange Act"), against all loss, claim, damage, expense or liability
(including
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<PAGE>
all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement, but only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify the
Representative contained in Section 8 of the Underwriting Agreement.
(5) The Holders of the Representative's
Securities to be sold pursuant to a registration statement, and their successors
and assigns, shall indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or
expense or liability to which they may become subject under the Act, the
Exchange Act or otherwise, arising from information furnished by or on behalf of
such Holders, or their successors or assigns, for specific inclusion in such
registration statement to the same extent and with the same effect as the
provisions contained in Section 8 of the Underwriting Agreement pursuant to
which the Representative has agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be
construed as requiring the Holders to exercise their Representative's Warrant
prior to the initial filing of any registration statement or the effectiveness
thereof, provided that such Holders have made arrangements reasonably
satisfactory to the Company to pay the exercise price from the proceeds of such
offering.
(7) The Company shall furnish to each
Representative for the offering, if any, such documents as such Representative
may reasonably require.
(8) The Company shall as soon as practicable
after the effective date of the registration statement, and in any event within
15 months thereafter, make "generally available to its security holders" (within
the meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(9) The Company shall deliver promptly to each
Holder participating in the offering requesting the correspondence described
below and any managing Representative copies of all correspondence between the
Commission and the Company, its counsel or auditors with respect to the
registration
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statement and permit each Holder and Representative to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
shall reasonably request.
(10) The Company shall enter into an underwriting
agreement with the managing underwriter selected for such underwriting by
Holders holding a Majority of the Representative's Securities requested to be
included in such underwriting, provided, however that such managing underwriter
shall be reasonably acceptable to the Company, except that in connection with an
offering for which the Holders have piggyback rights, the Company shall have the
sole right to select the managing underwriter or underwriters. Such underwriting
agreement shall be satisfactory in form and substance to the Company, a Majority
of such Holders (in respect of a registration under Section 7(b) only) and such
managing underwriter, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Representative's Securities.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
8. Adjustments to Purchase Price and Number of
Securities.
(a) Computation of Adjusted Purchase Price. Except as
hereinafter provided, in case the Company shall at any time after the date
hereof issue or sell any shares of Common Stock (other than the issuances
referred to in Section 8(g) hereof), including shares held in the Company's
treasury, for a consideration per share less than the "Market Price" (as defined
in Section 8(a)(6) hereof) per share of Common Stock on the date immediately
prior to the issuance or sale of such shares, or without consideration, then
forthwith upon any such issuance or sale, the Purchase Price of the Common Stock
shall (until another such issuance or sale) be reduced to the price (calculated
to the nearest full cent) determined by dividing (1) the product of (a)
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the Purchase Price in effect immediately before such issuance or sale and (b)
the sum of (i) the total number of shares of Common Stock outstanding
immediately prior to such issuance or sale, and (ii) the number of shares
determined by dividing (A) the aggregate consideration, if any, received by the
Company upon such sale or issuance, by (B) the Market Price, and by (2) the
total number of shares of Common Stock outstanding immediately after such
issuance or sale provided, however, that in no event shall the Purchase Price be
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock, as provided by Section 8(c)
hereof.
For the purposes of this Section 8, the term "Purchase Price"
shall mean the Purchase Price of the Common Stock forming a part of the
Representative's Securities set forth in Section 6 hereof, as adjusted from time
to time pursuant to the provisions of this Section 8.
For the purposes of any computation to be made in accordance
with this Section 8(a), the following provisions shall be applicable:
(1) In case of the issuance or sale of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares of
Common Stock) for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the amount of cash
received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if such
securities shall be sold to Representatives or dealers for public offering
without a subscription offering, the initial public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by Representatives or dealers or others
performing similar services, or any expenses incurred in connection therewith.
(2) In case of the issuance or sale (otherwise than as a dividend or
other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash shall be deemed to be the
value of such consideration as determined in good faith by the Board of
Directors of the Company.
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(3) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of stockholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(4) The reclassification of securities of the Company other than shares
of Common Stock into securities including shares of Common Stock shall be deemed
to involve the issuance of such shares of Common Stock for a consideration other
than cash immediately prior to the close of business on the date fixed for the
determination of security holders entitled to receive such shares, and the value
of the consideration allocable to such shares of Common Stock shall be
determined as provided in Section 8(a)(2).
(5) The number of shares of Common Stock at any one time outstanding
shall include the aggregate number of shares of Common Stock issued or issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise of
options, rights or warrants and upon the conversion or exchange of convertible
or exchangeable securities.
(6) As used herein in the phrase "Market Price" at any date shall be
deemed to be the last reported sale price, or, in the case no such reported sale
takes place on such day, the average of the last reported sales prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average closing bid price as furnished by the
NASD through the NASD Automated Quotation System ("NASDAQ") or similar
organization if NASDAQ is no longer reporting such information, or if the Common
Stock is not quoted on NASDAQ, as determined in good faith by resolution of the
Board of Directors of the Company, based on the best information available to
it.
(b) Options, Rights, Warrant and Convertible and
Exchangeable Securities. Except in the case of the Company issuing rights to
subscribe for shares of Common Stock distributed to all the stockholders of the
Company and Holders of Representative's Warrant pursuant to Section 8(i) hereof,
if the Company shall at any time after the date hereof issue options, rights or
warrants to purchase shares of Common Stock, or issue any securities convertible
into or exchangeable for shares of Common Stock (other
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<PAGE>
than the issuances referred to in Section 8(g) hereof), (i) for a consideration
per share less than the Market Price (including the issuance thereof without
consideration such as by way of dividend or other distribution), or (ii) without
consideration, the Purchase Price in effect immediately prior to the issuance of
such options, rights or warrants, or such convertible or exchangeable
securities, as the case may be, shall be reduced to a price determined by making
a computation in accordance with the provisions of Section 8(a) hereof, provided
that:
(1) The aggregate maximum number of shares of
Common Stock issuable or that may become issuable under such options, rights or
warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, and for a consideration
equal to the minimum purchase price per share provided for in such options,
rights or warrants at the time of issuance, plus the consideration (determined
in the same manner as consideration received on the issue or sale of shares in
accordance with the terms of the Representative's Warrant), if any, received by
the Company for such options, rights or warrants; provided, however, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this Section 8(b)(1) (and for
the purposes of Section 8(a)(5) hereof) shall be reduced by such number of
shares as to which options, warrants and/or rights shall have expired or
terminated unexercised, and such number of shares shall no longer be deemed to
be issued and outstanding, and the Purchase Price then in effect shall forthwith
be readjusted and thereafter be the price which it would have been had
adjustment been made on the basis of the issuance only of shares actually issued
or issuable upon the exercise of those options, rights or warrants as to which
the exercise rights shall not be expired or terminated unexercised.
(2) The aggregate maximum number of shares of
Common Stock issuable upon conversion or exchange of any convertible or
exchangeable securities (assuming conversion or exchange in full even if not
then currently convertible or exchangeable in full) shall be deemed to be issued
and outstanding at the time of issuance of such securities, and for a
consideration equal to the consideration (determined in the same manner as
consideration received on the issue or sale of shares of Common Stock in
accordance with the terms of the Representative's Warrant) received by the
Company for such securities, plus the
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minimum consideration, if any, receivable by the Company upon the conversion or
exchange thereof; provided, however, that upon the expiration or other
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason or redemption or otherwise), the number of shares
deemed to be issued and outstanding pursuant to this Section 8(b)(2) (and for
the purpose of Section 8(a)(5) hereof) shall be reduced by such number of shares
as to which the conversion or exchange rights shall have expired or terminated
unexercised, and such number of shares shall no longer be deemed to be issued
and outstanding and the Purchase Price then in effect shall forthwith be
readjusted and thereafter be the price which it would have been had adjustment
been made on the basis of the issuance only of the shares actually issued or
issuable upon the conversion or exchange of those convertible or exchangeable
securities as to which the conversion or exchange rights shall not have expired
or terminated unexercised.
(3) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
Section 8(b)(1), or in the price per share at which the securities referred to
in Section 8(b)(2) are convertible or exchangeable, and if a change in the
Purchase Price has not occurred by reason of the event giving rise to the change
in the price per share of such other options, rights, warrants, or convertible
or exchangeable securities, such options, rights or warrants or conversion or
exchange rights, as the case may be, to the extent not theretofore exercised,
the shall be deemed to have expired or terminated on the date when such price
change became effective in respect of shares not theretofore issued pursuant to
the exercise or conversion or exchange thereof, and the Company shall be deemed
to have issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
(c) Subdivision and Combination. In case the
Company shall at any time issue any shares of Common Stock in connection with a
stock dividend in shares of Common Stock or subdivide or combine the outstanding
shares of Common Stock, the Purchase Price shall forthwith be proportionately
decreased in the case of a stock dividend or a subdivision or increased in the
case of combination.
(d) Adjustment in Number of Securities. Upon each
adjustment of the Purchase Price pursuant to the provisions of
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this Section 8, the number of Representative's Securities issuable upon the
exercise of the Representative's Warrant shall be adjusted to the nearest whole
share by multiplying a number equal to the Purchase Price in effect immediately
prior to such adjustment by the number of Representative's Securities issuable
upon exercise of the Representative's Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Purchase Price.
(e) Definition of Common Stock. For the purpose
of this Agreement, the term "Common Stock" shall mean the class of stock
designated as Common Stock in the Certificate of Incorporation, of the Company
as it may be amended as of the date hereof.
(f) Reclassification, Merger or Consolidation.
The Company will not merge, reorganize or take any other action which would
terminate the Representative's Warrant without first making adequate provision
for the Representative's Warrant. In case of any reclassification or change of
the outstanding shares of Common Stock issuable upon exercise of the Warrants
(other than a change in par value to no par value, or from nor par value to par
value, or as a result of a subdivision or combination), or 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 in
which the Company is the continuing corporation and which does not result in any
reclassification or change of the outstanding Common Stock except a change as a
result of a subdivision or combination of such shares or a change in par value,
as aforesaid), or in the case of a sale or conveyance to another corporation or
other entity of the property of the Company as an entirety or substantially as
an entirety, the Holders of each Representative's Warrant then outstanding or to
be outstanding shall have the right thereafter (until the expiration of such
Representative's Warrant) to purchase, upon exercise of such Representative's
Warrant, the kind and number of shares of stock and other securities and
property receivable upon such reclassification, change, consolidation, merger,
sale or conveyance as if the Holders were the owner of the shares of Common
Stock underlying the Representative's Warrant immediately prior to any such
events at a price equal to the product of (x) the number of shares issuable upon
exercise of the Representative's Warrant and (y) the Purchase Price in effect
immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance, as if such Holders had exercised the
Representative's Warrant. In the event of a consolidation, merger, sale or
conveyance of property, the
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corporation formed by such consolidation or merger, or acquiring such property,
shall execute and deliver to the Holders a supplemental Representative's warrant
agreement to such effect. Such supplemental Representative's warrant agreement
shall provide for adjustments which shall be identical to the adjustment
provided for in this Section 8. The provisions of this Section 8(f) shall
similarly apply to successive consolidations or mergers.
(g) No Adjustment of Purchase Price in Certain
Cases. No adjustment of the Purchase Price shall be made:
(1) Upon the issuance or sale of (i) the
Representative's Warrant or the securities underlying the Representative's
Warrant, (ii) the securities sold pursuant to the Initial Public Offering,
including the securities underlying the Redeemable Warrant sold as part of the
Initial Public Offering (including those sold upon exercise of the
Representative's over-allotment option), or (iii) the shares issuable pursuant
to the options, warrants, rights, stock purchase agreements or convertible or
exchangeable securities outstanding or in effect on the date hereof as described
in the prospectus relating to the Initial Public Offering.
(2) If the amount of said adjustments shall
aggregate less than two ($.02) cents for one (1) share of Common Stock;
provided, however, that in such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall aggregate at least two ($.02) cents for one
(1) share of Common Stock. In addition, Registered Holders shall not be entitled
to cash dividends paid by the Company prior to the exercise of any Warrant or
Warrants held by them.
9. Exchange and Replacement of Warrant Certificates. Each
Representative's Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holders at the principal executive office of
the Company, for a new Representative's Warrant Certificate of like tenor and
date representing in the aggregate the right to purchase the same number of
Representative's Securities in such denominations as shall be designated by the
Holders thereof at the time of such surrender.
10. Loss, Theft etc. of Certificates Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Representative's Warrant
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Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Representative's Warrant Certificates, if mutilated, the Company will make
and deliver a new Representative's Warrant Certificate of like tenor, in lieu
thereof.
11. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
and/or Redeemable Warrant upon the exercise of the Representative's Warrant, nor
shall it be required to issue scrip or pay cash in lieu of fractional interests;
provided, however, that if a Holder exercises all Representative's Warrant held
of record by such Holder the fractional interests shall be eliminated by
rounding any fraction to the nearest whole number of shares of Common Stock or
other securities, properties or rights. Notwithstanding the foregoing, in no
event shall the Company be required to issue scrip, cash on fractional shares of
Common Stock upon the exercise of an odd number of Redeemable Warrant, it being
the understanding that Redeemable Warrant may only be exercised in pairs.
12. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Representative's
Warrant, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof and the exercise of the
Redeemable Warrant. The Company covenants and agrees that, upon exercise of
Representative's Warrant and payment of the Purchase Price therefor, all the
shares of Common Stock and other securities issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any stockholder. As long as the Representative's Warrant
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock to be listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock issued to the public in connection herewith
may then be listed or quoted.
13. Notices to Representative's Warrant Holders. Nothing
contained in this Agreement shall be construed as conferring upon the Holders
the right to vote or to consent or to receive notice as a stockholder in respect
of any meetings of stockholders for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the
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Representative's Warrant and their exercise, any of the following events shall
occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an entirety
shall be proposed; then, in any one or more of said events, the Company shall
give written notice of such event at least fifteen (15) calendar days prior to
the date fixed as a record date or the date of closing the transfer books for
the determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not affect
the validity of any action taken in connection with the declaration or payment
of any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
14. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or five days after being mailed by registered or
certified mail, return receipt requested:
If to the registered Holders of the Representative's Warrant, to the address of
such Holders as shown on the books of the Company; or
(b) If to the Company to 205 Chubb Avenue, Lyndhurst,
New Jersey 07071 or to such other address as the
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Company may designate by notice to the Holders, with a courtesy copy to Paul
Rubell, Esq., Ruskin, Moscow, Evans & Faltishek P.C. 170 Old Country Road,
Mineola, New York
15. Supplements and Amendments. The Company and the Representative
may from time to time supplement or amend this Agreement without the approval of
any Holders of Representative's Warrant Certificates (other than the
Representative) in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provision in regard to matters or
questions arising hereunder which the Company and the Representative may deem
necessary or desirable and which the Company and the Representative deem shall
not adversely affect the interests of the Holders of Representative's Warrant
Certificates.
16. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the
Representative, the Holders and their respective successors and assigns
hereunder.
17. Termination. This Agreement shall terminate at the close of
business on _________ 2004. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on the expiration of any applicable statue of limitations.
18. Governing Law; Submission to Jurisdiction. This Agreement and
each Representative's Warrant Certificate issued hereunder shall be deemed to be
a contract made under the laws of the State of New York and for all purposes
shall be construed in accordance with the laws of said state without giving
effect to the rules of said state governing the conflicts of laws.
19. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement, to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and thereof. This Agreement may not be modified or amended
except by a writing duly signed by the Company and the Holders of a Majority in
Interest of the Representative's Securities (for this purpose, treating all then
outstanding Representative's Warrant as if they had been exercised).
20. Severability. 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.
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21. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holders of the Representative's Warrant
Certificates or Representative's Securities any legal or equitable right, remedy
or claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Representative and any other Holders of
the Representative's Warrant Certificates or Representative's Securities.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
24. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company, the Representative and their respective successors
and assigns and the Holders from time to time of the Representative's Warrant
Certificates or any of them.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
HARVEY ELECTRONICS, INC.
By:______________________________
Michael Recca, Chairman
THE THORNWATER COMPANY, L.P., for
itself and as Representative of the
Several Underwriters listed on
Schedule A
By:_______________________________
Name: Frank Terzo
Title: President
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Schedule A
to
Representative's Warrant Agreement
Between
Harvey Electronics, Inc.
and
The Thornwater Company, L.P.
Representative
The Thornwater Company, L.P.
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HARVEY ELECTRONICS, INC.
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"), AND MAY NOT BE OFFERED FOR SALE OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR
(ii) AN OPINION OF COUNSEL, IF SUCH OPINION AND COUNSEL SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
THE ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING _________ 1997 THROUGH
5:00 P.M., NEW YORK TIME ON _________ 2004
Warrant covering 95,000 shares of Common
Stock and/or 145,000 Redeemable Warrant
No. UW-1
This Warrant Certificate certifies that The Thornwater Company
L.P. or registered assigns, is the registered holder of Warrant to purchase
initially, at any time from _________ 1999, until 5:00 p.m., New York time on
_________ 2004 (the "Expiration Date"), up to 95,000 shares of Common Stock,
$.01 par value (the
<PAGE>
"Common Stock") of Harvey Electronics, Inc. ("Company")
and/or 145,000 Redeemable Common Stock Purchase Warrant ("Redeemable Warrant")
exercisable to purchase one share of Common Stock at $_____ per share(the
"Common Stock Warrant"), at a purchase price of $______ per shares of Common
Stock and $______ per Redeemable Warrant (the "Purchase Price"), upon the
surrender of this Warrant Certificate and payment of the applicable Purchase
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the Representative's Warrant Agreement, dated as of
_________ 1998, by and between the Company and The Thornwater Company, L.P. (the
"Warrant Agreement"). Payment of the Purchase Price shall be made by certified
or cashier's check or money order payable to the order of the Company.
No Warrant may be exercised after 5:00 p.m., New York time, on
the Expiration Date, at which time all Warrant evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrant evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrant issued pursuant to the Warrant Agreement
between the Company and the Representative, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrant.
The Warrant Agreement provides that upon the occurrence of
certain events the Purchase Price and the type and/or number of the Company's
securities issuable upon the exercise of this Warrant, may, subject to certain
conditions, be adjusted. In such event, the Company will, at the request of the
holder, issue a new Warrant Certificate evidencing the adjustment in the
Purchase Price and the number and/or type of securities issuable upon the
exercise of the Warrant; provided, however, that the failure of the Company to
issue such new Warrant Certificates shall not in any way change, alter, or
otherwise impair, the rights of the holder as set forth in the Warrant
Agreement.
25
<PAGE>
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrant shall be issued to the transferee(s) in
exchange as provided herein, without any charge except for any tax or other
governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrant evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrant.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this
certificate this ____ day of _____________ , 1998.
HARVEY ELECTRONICS, INC.
By:_____________________________
Michael Recca,
26
<PAGE>
Chairman
ATTEST:
By:_________________________
Name: Joseph J. Calabrese
Title: Secretary
27
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED___________________________
hereby sells, assigns and transfers unto _____________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _____________________
Attorney, to transfer the within Warrant Certificate on the books of Harvey
Electronics, Inc., with full power of substitution.
Dated:
Signature_____________________
(Signature must conform in all respects to
the name of holder as specified on the face of the Warrant Certificate.)
[Signature guarantee] ________________________________
(Insert Social Security or Other
Identifying Number of Holders)
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase ______ shares of Common Stock and/or
______Redeemable Warrant and herewith tenders in payment for such securities a
certified or cashier's check or money order payable to the order of Harvey
Electronics, Inc. in the amount of $______, all in accordance with the terms
hereof. The undersigned requests that certificates for such securities be
registered in the name of ___________________________ whose address is
_____________________ and that such certificates be delivered to
_____________________________________ whose address is
______________________________________________________________.
Dated:
Signature_______________________
(Signature must conform in all respects to
the name of holder as specified on the face of the Warrant Certificate.)
(Insert Social Security or
Other
Identifying Number of Holders)
[Signature guarantee]
29
<PAGE>
DEALER AGREEMENT
This Agreement made this ____ day of ________, 19__, between Bang &
Olufsen of America, Inc., a Delaware corporation (hereinafter referred to as
"BOA") and Harvey Electronics, Inc. whose principal place of business is
______________________New Jersey (hereinafter referred to as "Dealer"). In
consideration of the mutual promises herein contained, the parties hereto agree
as follows:
1. Appointment of Dealer
BOA, as the exclusive distributor in the United States
of high quality audio and video products produced by Bank & Olufsen A/S of
Denmark and its subsidiaries and affiliates (hereinafter collectively referred
to as "B&OA/S") and products sold under the trademark "Bank & Olufsen(R)
(hereinafter referred to as the "Products"), hereby designates Dealer as one of
its authorized retail dealers for the Products in the United States. Dealer
hereby accepts such appointment under the terms and conditions herein set forth,
and as described in Exhibit A hereto, which is made a part of this Agreement.
2. Dealer's Responsibilities
A. Dealer agrees to purchase the Products from BOA and
to sell the Products to retail customers through a retail sales program
developed by the Dealer and intended to promote the unique design and technical
qualities of the Products. Dealer specifically further agrees to fulfill its
responsibilities provided for in Exhibit A in addition to its other
responsibilities provided for in Exhibit A in addition to its other
responsibilities provided for herein.
In order to provide the degree of marketing efficiency
necessary to successfully implement BOA's limited distribution system for the
Products, Dealer agrees not to,
<PAGE>
directly or indirectly, sell or permit the sale of Products from a retail
location other than those identified in Exhibit A, without specific written
authority from BOA to sell the Products at such other retail location. In
recognition of the unique nature of the Products and the critical importance of
assuring their proper presentation and demonstration Dealer agrees to not sell
the Products directly or indirectly to any person other than a retail customer
or another duly authorized BOA dealer. Dealer further agrees to not sell the
Products in connection with any telephone or mail order solicitation, and agrees
to engage in reasonable effort to provide each retail customer with an in-person
demonstration of the Products. BOA reserves the right to increase or decrease
the number of authorized BOA dealers in any area at any time.
B. Advertising and Promotion. Dealer agrees to
maintain an advertising program for the Products consistent with their
outstanding reputation for high technical quality and unique design features.
Dealer agrees to utilize promotional materials prepared by BOA as part of its
promotion and advertising program for the Products.
C. Personnel and Training. The parties acknowledge
that the proper presentation of the Products requires a greater understanding of
their features than is necessary for conventional competitive products.
Therefore, Dealer agrees to maintain a staff of competent sales personnel who
are thoroughly familiar with the features and technical advantages of the
Products, and who can properly and competently demonstrate and explain such
attributes to consumers, and to participate in training programs established by
BOA in accordance with their terms as they exist from time to time.
D. Product Display. Dealer agrees to display, in
working order and in good condition, all Products. Dealer may be required to
display pursuant to this Agreement and to adhere to all other display
requirements established by BOA.
<PAGE>
E. Consumer Relations. Dealer agrees to conduct its
operations at all times in such manner as will promote good consumer relations.
Dealer agrees to properly represent the Products and not make, directly or
indirectly, any false, misleading, or disparaging representations, including
advertisements, to any consumer or other person with respect to BOA, B&O A/S, or
the Products.
F. Records and Reports. Dealer agrees, when
requested by BOA, to provide periodically to BOA complete and accurate
information regarding Dealer's sales and inventories of the Products, Dealer's
financial position, and such other information as may be specified by BOA.
Dealer shall forward promptly to BOA any information which may come to Dealer's
attention concerning complaints or claims with respect to the Products.
G. Product Service. If Dealer and BOA have agreed
that Dealer shall provide service for the Products, Dealer shall provide
reasonable consumer satisfaction in servicing Products. As to any BOA Product
not serviced by Dealer, Dealer shall assist each consumer seeking service
therefor by directing the consumer to the closest independent service centers
for BOA Products and providing the consumer with the BOA "800" service telephone
number.
H. Compliance with Laws. Dealer agrees to conduct
its business at all times in strict compliance with all applicable federal,
state and local laws and regulations. Dealer in its retail sales program shall
at no time engage in any unfair or unethical trade practices such as "bait and
switch" advertising, and shall make no false or misleading representations with
regard to B&O A/S, and BOA, or any affiliate of either, or the Products. Dealer
shall make no warranties or representations to customers or to the trade with
respect to the Products except such as may be approved in writing by BOA. Dealer
shall indemnify and hold B&O A/S and
<PAGE>
BOA harmless from all liability for damages and/or costs caused by Dealer's
violation of this paragraph or any of the terms of this Agreement.
3. BOA's Responsibilities
A. Product Changes. BOA may change the design,
models, and features of the Products or their parts, its service policies or may
discontinue any or all of the Products, without notice to Dealer and without
incurring any liability whatsoever to Dealer.
B. Sales Literature. BOA agrees to make available to
Dealer all current sales literature and specification sheets for the Products.
BOA reserves the right to make reasonable charge to Dealer in connection with
the furnishing of such materials.
C. Warranty Service. BOA agrees to maintain a system of
authorized warranty service stations for the Products which will service any
eligible warranty claim
D. Trademarks, Trade Names, etc. BOA agrees to permit
Dealer to use B&O A/S and BOA trademarks, trade names or copyrighted materials
in the Dealer's retail sales program for the sole purpose of advertising and
promoting the sale of the Products. Dealer shall use said trademarks, trade
names and copyrighted materials only in store displays, newspaper, magazine,
radio and television and other advertising material. Dealer agrees not to use
or cause of the use of, B&O A/S or BOA trademarks, trade names or copyrighted
materials in violation of this Agreement or in any other unlawful manner in
advertising or otherwise, or in any manner which shall directly or indirectly
tend to lessen the value and goodwill of such trademarks, trade names and
copyrights. Nothing contained herein shall give to Dealer any interest in such
trademarks, trade names and copyrights, and Dealer's right to use such
materials shall terminate immediately upon the termination of this Agreement.
<PAGE>
4. Purchase of the Products
A. General Terms and Conditions. BOA agrees to sell
the Products to Dealer, who agrees to purchase the Products from BOA in
accordance with the terms and conditions set forth herein. BOA reserves the
right to change any terms or conditions, including but not by way of limitation,
price and payment terms, at any time.
B. Orders. All orders from Dealer are subject to
acceptance by BOA at its principal office in Mount Prospect, Illinois, or
wherever subsequently relocated. BOA shall have the right to cancel any orders
placed by Dealer or refuse or delay the shipment thereof if Dealer shall fail to
keep its account current or to meet payment schedules or other credit or
financial requirements established by BOA, or, if in BOA's sole opinion Dealer's
credit shall become impaired, or Dealer has otherwise violated the terms and
conditions of this Agreement. BOA expressly reserves the right to change credit
or financial requirements for dealers at any time. The cancellation of such
orders or the withholding of shipments by BOA shall not be construed as
termination or breach of this Agreement by BOA. BOA will otherwise use its
reasonable efforts to make deliveries within a reasonable time in accordance
with orders accepted from Dealer, but it shall not be liable to Dealer for any
damages, consequential or otherwise, for any error in the filling of orders, or
for failure to deliver or delay in delivery. In the event of BOA's inability to
supply the total demands made by its dealers for the Products, for any reason,
BOA shall have the right to apportion the available Products among any or all of
its dealers in such manner and make delivery at such times as it may deem
appropriate.
C. Prices and Terms.
i. The Products shall be sold to Dealer at
prices and terms established by BOA and in effect at the time of acceptance of
each of Dealer's orders. BOA shall have the
<PAGE>
right to reduce or increase prices to Dealer at any time without notice to
Dealer. When a new price schedule is issued by BOA, it shall automatically
supersede all prior schedules on and after its effective date.
ii. Prices of the Products shall not include
taxes of any nature, however denominated. If BOA requests, Dealer shall provide
BOA with tax exemption certificates acceptable to appropriate taxing
authorities, or, if Dealer is unable to produce such certificates, Dealer shall
pay BOA in full for any taxes upon being invoiced for them by BOA.
5. Miscellaneous
A. Dealer Not an Agent. This Agreement does not in
any way create the relationship of principal and agent between Dealer and BOA
and in no circumstances shall Dealer, its agents or employees be considered the
agents of BOA. Dealer shall not act or attempt to act or represent itself
directly or by implication as agent of BOA or B&O A/S, or in any manner assume
or create or attempt to assume or create any obligation or make any contract,
agreement, representation or warranty on behalf or in the name of BOA or B&O
A/S, except those previously authorized in writing by BOA. Dealer shall
indemnify and hold BOA harmless from any cost or liability caused by an
unauthorized act by Dealer, its agents or employees.
B. Agreement Not a Franchise Agreement. This
Agreement does not in any way create a franchise relationship between Dealer and
BOA and in no circumstances shall Dealer be considered a franchisee of BOA.
Dealer acknowledges that no front-end, conditional or other investment fee is
due or owing from Dealer to BOA under this Agreement or any other written or
oral agreement except payments for the purchase of Products.
C. Force Majeure. BOA still shall not be responsible
for or liable for failure to perform any part of this
<PAGE>
Agreement or for any delay in the performance of any part of this Agreement,
directly or indirectly resulting from or contributed by any foreign or domestic
embargoes, acts of God, or the public enemy, the adoption or enactment of any
law, ordinance, regulation, ruling or order directly or indirectly interfering
with the production or delivery hereunder, or wars, fires, floods, explosions,
strikes, factory shut down, work stoppages, slow-downs or other difference with
workmen, shortages of fuel, power, materials or labor, or delay in or lack of
the usual means of transportation, action taken to carry out the intent or
purpose of any law or administrative regulation having the effect of law,
compliance with any request by a governmental agency or official thereof,
extraordinary currency devaluations, taxes, or customs duties or other similar
charges or assessments, or other events or contingencies beyond the reasonable
control of BOA.
D. Duration of Agreement
(i) The term of this Agreement shall be for a
period beginning on the date of this Agreement and continuing through
May 31, ____ ("Initial Term").
(ii) In its sole discretion, BOA may offer to
Dealer one or more renewal terms for the Agreement. Any agreement for a
renewal term must be in writing, signed by both BOA and Dealer.
(iii) This Agreement and all rights provided
hereunder may be terminated prior to the expiration of the Initial Term
or any renewal term in accordance with the provisions of this Agreement.
E. Termination.
(i) Without prejudice to any remedy either
party may have for breach or non-performance of this Agreement, upon the
occurrence of any of the following events BOA
<PAGE>
may terminate this Agreement at any time during its Initial Term or any
renewal term, to take effect immediately.
(a) If Dealer breaches the provisions
of paragraph 2 (A) or 2 (H), or commits any other action or omission
which in BOA's sole judgment adversely affects the interest of BOA in
promoting the marketing of its Products;
(b) If Dealer fails to make any
payment when due under this Agreement; (c) If Dealer fails to meet its
Product Service obligations under paragraph 2 (G), including but not
limited to providing reasonable consumer satisfaction in servicing
Products, and properly assisting any consumer who desires service for a
BOA Product regardless of where the Product was purchased;
(d) If Dealer fails to satisfy its
obligation to meet its minimum purchase requirement as specified in
Exhibit A;
(e) If Dealer fails to adhere to all
display requirements, including but not limited to having on display, in
working order and in good condition, all Products required by BOA under
this Agreement to be on display;
(f) If Dealer fails to present
Products competently and in accordance with BOA's standards;
(g) If Dealer makes any assignment or
transfer or any purported or deemed assignment or transfer, in violation
of this Agreement;
(h) If Dealer is dissolved,
liquidated, or a receiver is appointed for Dealer;
<PAGE>
(i) Upon the bankruptcy or insolvency
of Dealer, or any assignment or composition of it for the benefit of
creditors; or if a written warrant of attachment or any similar process
is issued by any court against all or any substantial portion of
Dealer's property or assets, and the writ, warrant of attachment, or
similar process is not released or bonded within fifteen (15) days of
the entry or levy; or
(j) If Dealer is in default under any
other of its obligations under this Agreement.
(ii) This Agreement may be terminated by either
party hereto at any time during its Initial Term or any renewal term
without cause upon the giving of thirty (30) days prior notice.
(iii) Before the actual date of termination of
the Agreement, BOA in its sole discretion may reject any orders for
Products placed by Dealer and delay shipment of, or cancel, any
unshipped orders from Dealer. Both parties may waive any claim for
compensation in connection with such rejection and cancellation. Neither
BOA nor Dealer shall be liable to the other because of the termination
of this Agreement, for compensation, or reimbursement, or damages for
loss of prospective profits on anticipated sales or on account of
expenditures, investments, leases, or any type of commitments made in
connection with the business of either of them.
F. Responsibilities Upon Termination
(i) Continuing Responsibilities. Upon the
termination of this Agreement, Dealer shall no longer be an authorized
BOA dealer for the Products and Dealer shall immediately pay all amounts
owed to BOA on the effective date of termination whether or not
otherwise due.
<PAGE>
(ii) Discontinuance of Use of Trademarks, Trade
Names, etc. Upon termination, Dealer shall (1) discontinue forthwith any
and all use of the trademarks, trade names and copyrighted material of
BOA or B&O A/S including such use in advertising, (2) forthwith remove
and return to BOA, or in the alternative, at BOA's option remove and
destroy, any and all signs designating Dealer as an authorized dealer
for the Products or which include any trademark, trade name or
copyrighted materials of BOA, (3) forthwith notify and instruct
publications and other who may list or publish Dealer's name as an
authorized BOA dealer, including telephone directories, yellow pages,
and other business directories, to discontinue such listing of Dealer as
an authorized BOA Dealer, and (4) return to BOA all promotional
literature and material, including point of purchase materials and
displays, provided to Dealer by BOA.
(iii) Repurchase Option. Upon termination of this
Agreement, BOA shall have the option to repurchase from Dealer any or all new,
current Products in Dealer's inventory at the net invoice prices at which such
Products were originally purchased by Dealer from BOA, less any discounts and
allowances which BOA may have given to Dealer for such Products and reasonable
costs for handling and processing. Dealer shall promptly provide to BOA an
inventory list of the Products and allow a representative of BOA to inspect the
same. This option may be exercised by written notice to Dealer within thirty
(30) days after the effective date of termination or the date BOA receives a
list of Dealer's inventory of the Products, whichever is later; and promptly
upon the receipt of such notice, Dealer agrees to deliver such repurchased
Products to BOA in their original packages.
G. Entire Agreement, Etc.
(i) This Agreement is the entire agreement
between the parties hereto in connection with the subject matter hereof and
supercedes all prior agreements if any. Any
<PAGE>
waiver, amendment or modification of this Agreement, to be effective, must be in
writing and signed by the parties hereto. There are no oral or implied
agreements, and no oral or implied warranties between the parties. If any
provision of this Agreement shall be held invalid, the remaining provisions
hereof shall continue to be binding upon the parties. Dealer shall be
responsible for all reasonable attorney's fees and costs incurred by BOA in
connection with the enforcement of this Agreement, whether by suit or otherwise.
(ii) It is expressly agreed that no
stipulation, conditions or statements contained in any purchase order or similar
form which may be submitted by Dealer shall be binding upon BOA even though
orders given on such forms are accepted or filled by BOA. The terms and
conditions stated on BOA's invoices and/or acceptances of such Dealer orders
together with the terms and conditions stated herein, which shall be
incorporated therein by reference, shall control and, if no terms and conditions
appear thereon, then the terms of this Agreement shall be deemed controlling.
(iii) The waiver by BOA of any one default of
this Agreement shall not waive subsequent defaults.
H. Assignment. The relationship created between BOA
and Dealer is personal in nature. BOA, in entering into this Agreement, has
relied upon the continued ownership and active participation of certain
individuals in the operations of Dealer. For purposes of this Agreement, any
change in ownership or active management shall be deemed a transfer which
requires the prior consent of BOA. This Agreement shall automatically terminate
upon any such purported transfer unless Dealer shall have given written notice
to BOA, together with all information required by BOA to make a decision, and
any information specifically requested thereby, at least thirty (30) days prior
thereto, and shall have received the written
<PAGE>
consent of BOA to such transfer within fifteen (15) days after BOA's receipt of
Dealer's notice. BOA shall not be subject to the application of any standard of
reasonableness or materiality in granting or withholding such consent. Dealer's
continuing responsibilities as set forth in paragraph 5 (F) shall apply should
the Agreement be terminated hereunder.
I. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois.
J. Notices. Notices given pursuant to the terms of
this Agreement shall be in writing and shall be served personally or by
certified or registered mail, addressed to Dealer, at the address first set
forth in this Agreement, and to BOA, at: Bank & Olufsen of America, Inc., 1150
Feehanville Drive, Mt. Prospect, Illinois 60056, Attention: President. The
addresses for such notices may be changed from time to time by written notice.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate the day and year first above mentioned.
Bank & Olufsen of America, Inc.
By: ________________________________________________
President Date
DEALER: _____________________________________________
By: ________________________________________________
Title: _____________________________________________
<PAGE>
[Bang & Olufsen logo] Bang & Olufsen of America, Inc.
1200 Business Center _______
Mount Prospect, Illinois 600__
Phone: (847) 299-9380
Fax: (847) 699-____
April 30, 1997
Mr. Franklin Karp
Harvey Electronics
205 Chubb Avenue
Lyndhurst, NJ 07071
Dear Mr. Karp:
As you may know, the dealer Agreement between Bang & Olufsen of America, Inc.
and Harvey Electronics is due to expire on May 31, 1997, as this marks the end
of our fiscal year.
This letter is to inform you that Bang & Olufsen would like to renew its Dealer
Agreement with you for the period June 1, 1997 to May 31, 1998.
To confirm the renewal of the Dealer Agreement, including the new Exhibit A,
please sign the enclosed copy of this letter and fill out all requested
information on both copies of the Exhibit A. It is extremely important that you
return these three signed documents, no later than June 30, 1997, if you wish to
continue as an authorized Bang & Olufsen dealer.
We are looking forward to you continuing as one of our valued dealers. If you
have any questions, please don't hesitate to call me.
Sincerely,
Dean A. Miller
President
I agree to the renewal of my Bang & Olufsen Dealer Agreement for the period and
on the terms stated above.
DEALER Harvey Electronics
By:
--------------------------
Title:
--------------------------
Owner or Corporate Officer
<PAGE>
BANG & OLUFSEN AMERICA, INC.
DEALER AGREEMENT
EXHIBIT A
JUNE 1, 1997 - MAY 31, 1998
BOA DESIGNATES
-------------------------------------------------------------
("Dealer") as one of its authorized dealers, subject to the terms and conditions
set forth in the Dealer Agreement, and those terms and conditions set forth on
this Exhibit A.
1. DEALER AGREES:
A. To display at each authorized retail location identified in No. 3,
at least the following Bang & Olufsen products:
1. Four of the five current Audio Systems:
o BeoSound 2000
o BeoSound 2300 with BeoLab 2500 Loudspeakers
o BeoSound 4000 with BeoLab 6000 Loudspeakers
o BeoSound 9000 with BeoLab 8000 Loudspeakers
o BeoCenter 9300 with BeoLab Penta Loudspeakers
2. Three of Five BeoLab/BeoVox Speaker Systems to be displayed in
a BeoLink Environment:
o BeoLab 4000
o BeoLab 3500
o BeoLab 2000
o BeoVox CX 100
o BeoVox CX50
3. Two of Five BeoCom Telephones
o BeoCom 1401
o BeoCom 1600
o BeoCom 2000
o BeoCom2400
o BeoTalk 1401
B. To display said products in an appropriate environment to be
approved by Bang & Olufsen.
C. To purchase a minimum of $40,000 per authorized retail outlet in
this fiscal year.
D. That the next to the last sentence in the second paragraph of
paragraph 2A of the Dealer Agreement is amended to read as
follows:
Dealer further agrees to not sell the Products in connection
with any telephone, Internet or mail order solicitation, and
agrees to engage in reasonable efforts to provide each retail
customer with an in-person demonstration of the Products.
E. To send a minimum of one salesperson per authorized location to
Bang & Olufsen's corporate office for training in this fiscal
year.
2. BOA AGREES:
A. To sell Products to the Dealer at prices stated in Bang &
Olufsen's "Dealer Price List" which produce these approximate
margins, based upon the suggested retail prices for the Products:
Audio 40 points
Loudspeakers 45 points
<PAGE>
B. To provide Dealer with marketing support in accordance with the
current marketing support program that BOA, in its discretion, may
establish from time to time.
3. LOCATIONS: Dealer is authorized to sell Products only from the
following retail locations. Please attach a separate p
age for additional locations.
Street Address City State Zip
- -------------- ---- ----- ---
- -------------- ------------------ ----- --------
- -------------- ------------------ ----- --------
- -------------- ------------------ ----- --------
- -------------- ------------------ ----- --------
- -------------- ------------------ ----- --------
IN WITNESS WHEREOF, the parties hereto have caused this Exhibit A to Dealer
Agreement to be executed in duplicate for the period June 1, 1997 to May 31,
1998.
BANG & OLUFSEN AMERICA, INC. DEALER:
By: By:
---------------------------- ----------------------------------
Title:
----------------------------
(Owner or Corporate Officer)
Date:
----------------------------
<PAGE>
This agreement made as of the 1st day of October, 1997, by and between NAD
Electronics of America, a division of Lenbrook America, L.L.C., a Delaware
L.L.C. qualified in Massachusetts having our principal place of business at 1600
Providence Highway, Walpole, Massachusetts, USA (hereinafter referred to as "NAD
Electronics") and:
Legal Name: __________________________________________________________________
(hereinafter referred to as "Dealer").
DBA (Trademark): _____________________________________________________________
Principal Address: ___________________________________________________________
Retail Premises: _____________________________________________________________
(For additional locations please complete Schedule A)
Telephone: _______________________ Fax: ___________________
Federal EIN# _____________________
1. APPOINTMENT OF DEALER:
The Company hereby appoints the Dealer, and the Dealer hereby accepts
such appointment as a retail dealer, upon the terms and conditions
hereinafter set forth, for, NAD Products as indicated on the attached
Schedules.
2. DEALER RESPONSIBILITIES:
(a) The Dealer shall devote best efforts to the retail sale of NAD
Products.
(b) The Dealer shall maintain a reasonable inventory of NAD Products
and adequate facilities for the storage and maintenance thereof.
(c) The Dealer shall provide adequate facilities for the purpose of
displaying and demonstrating the Products. If, in the opinion of
the NAD Electronics, such facilities detract from or interfere
with the demonstrated performance of the Products, NAD Electronics
shall have the right to require the Dealer to alter such
facilities.
(d) The Dealer shall maintain a complete record of its sales of the
Products, including date of sale, name and model number of the
Products sold, and the name and address of each purchaser, and
shall furnish such information to NAD Electronics within a
reasonable time after it is requested.
(e) The Dealer shall provide a local warranty service center for the
servicing of Products which shall be either a facility at the
dealer's office or a service facility operated by a third party.
No service facility shall be used unless NAD Electronics has
approved the use of said service facility in writing.
(f) The Dealer shall immediately notify NAD Electronics in writing of
any claims for freight related damages to any Product of which the
Dealer has knowledge.
(g) The Dealer shall employ a reasonable number of sales personnel
who, in the opinion of NAD Electronics, are (I) knowledgeable and
experienced with respect to sound reproduction in general, (II)
familiar with the NAD Products and (III) able to demonstrate the
working and uses of NAD Products to the consuming public.
<PAGE>
(h) If, in the opinion of NAD Electronics it is necessary, the Dealer
shall maintain a training program for its sales personnel in
connection with the demonstration, use and sale of NAD Products.
(i) The Dealer shall comply with all policies and programs of NAD
Electronics which may be issued at any time in connection with the
demonstration and sale of NAD Products.
(j) The Dealer shall purchase and display at all times during the term
of this agreement, in all its locations the NAD Electronics'
Products detailed on the Schedules which are attached to and made
part of this Agreement.
(k) The Dealer must purchase a minimum of $20,000 in NAD Products, non
inclusive of parts, during the course of this Agreement to
maintain status as an authorized NAD Electronics Dealer.
(l) The Dealer must initially purchase a representative sampling of
NAD products.
3. PRICES AND TERMS:
NAD Electronics shall sell Products to the Dealer at the prices
specified in the attached Current Dealer Price Sheet (Schedule "B"), with
respect to the Products, as such schedule is in effect at the date of the
Dealer's order for such Products. All Prices shall be F.O.B. point of shipment
by NAD Electronics. Title and risk of loss or damage to the Products shall pass
to the Dealer upon delivery of such Products to the carrier at such warehouse.
NAD Electronics may amend such price schedule at any time by notice to the
Dealer specifying the effective date of the price change (which date may be the
date of such notice). NAD Electronics shall have no liability to the dealer in
connection with the Dealers inventory of unsold Products as the effective date
of such amendment. Price amendments shall apply to all Products shipped
subsequent to the effective dates of the amendment, unless otherwise allowed by
NAD Electronics. There shall be no co-operative advertising arrangements between
NAD Electronics and the Dealer except as agreed in writing by the parties.
4. DELIVERY OF PRODUCTS:
(a) All Orders for Products placed by the Dealer with NAD Electronics
and accepted by NAD Electronics shall be filled as soon as
practicable. Not withstanding the foregoing, however, delivery
dates as set forth in any purchase order for confirmation thereof
shall be deemed to be estimated only, and NAD Electronics shall
not be liable for any losses or damages, direct, or indirect,
special, consequential, incidental or otherwise, that may arise
out of any failure or delay in the delivery of any NAD Products
resulting from any cause or reason whatsoever, whether or not
caused by NAD Electronics.
(b) NAD Electronics shall have the right, at any time to effect
changes in, or to discontinue the manufacture of, any of its
products, as well as any component parts thereof or accessories
thereto, without incurring any liability to the Dealer.
(c) NAD Electronics shall have the right to allocate among its dealers
inventory with respect to any product as it may, in its sole
discretion, from time to time determine.
(d) NAD Electronics has the right (I) t refuse to accept any order
placed by the Dealer, (II0 cancel any purchase order previously
placed by the Dealer or (III) refuse or delay shipment of Products
pursuant to any such purchase order, in each case immediately upon
the breach by the Dealer to meet any payment schedules, credit or
other financial requirement which may, from time to time, be
established by NAD Electronics.
2
<PAGE>
5. RESTRICTIONS ON SALES BY THE DEALER:
(a) The Dealer shall not offer Products for sale except at the retail
location set forth previously or, if applicable, at additional
retail locations set forth in Schedule "A" which shall be attached
and made part of this Agreement or from such other locations as
may be approved in advance by NAD Electronics in writing.
(b) The Dealer shall refrain from any mail order telephone order
techniques in the marketing or sale of NAD Products.
(c) The Dealer shall not sell the Products other than to retail
customers, except that the Dealer may sell Products to other
authorized Dealers provided that NAD Electronics has given its
prior consent to any such sales.
(d) The Dealer shall refrain from any Internet marketing unless
approved by NAD Electronics in writing.
6. TERMINATION:
(a) This Agreement shall become effective upon execution by both NAD
Electronics and the Dealer and shall continue in full force and
effect until December 31, 1998, on which date this Agreement shall
terminate unless extended in writing by both parties hereto.
(b) This Agreement may also be terminated at any other time upon not
less than 30 days written notice by one party hereto to the other,
in which event this Agreement shall terminate on the date set
forth in such notice.
(c) This Agreement shall terminate forthwith in the event that either
party shall become insolvent, or enter into liquidation or
receivership or any procedure for the settlement of debts,
including voluntary or involuntary bankruptcy proceedings.
(d) NAD Electronics shall have the right to terminate this agreement
at any time in the event of a breach of this Agreement by the
Dealer and the failure of the Dealer to cure such breach within 30
days after notice thereof from NAD Electronics, provided, however,
that this Agreement shall be terminated immediately, upon notice
from NAD Electronics to the Dealer, in the event that (I) the
Dealer presents checks or other forms of payment which are
returned to NAD Electronics for lack of sufficient funds or
dishonored for any other reason, (II) The Dealer fails to meet any
payment schedule, credit or other financial requirements which may
from time to time be established by NAD Electronics, or (III) the
Dealer shall commit any breach of the provisions of Section 5 of
this Agreement, including without limitation any sale of Products
by the Dealer other than to retail customers without consent of
NAD Electronics.
(e) No termination of this Agreement shall release either party from
any financial obligation that may be accrued or owed to other
party (whether then or thereafter due to such other party) as of
the termination date. Notwithstanding the foregoing, neither party
shall be liable to the other party solely by reason of the
termination of this Agreement for any expenditures, investments,
commitments or any losses or damages of any kind, whether direct,
indirect, special consequential, incidental or otherwise,
sustained by reason of such termination. NAD Electronics shall not
be required to fill pending orders if this agreement is terminated
by reasons of a breach by the Dealer.
3
<PAGE>
7. WARRANTY:
NAD Electronics' sole warranty and representation to the Dealer with
respect to any Products shall be set forth in the warranty card included with
such Product. In the event any Products are not as warranted to the Dealer, then
NAD Electronics' sole obligation shall be to repair or replace, at its option,
such defective Products, as more particularly set forth in such warranty cards.
In no event and under no circumstances shall NAD Electronics be liable to the
Dealer or to any other individual or entity for any indirect, special,
consequential or incidental losses or damages including, without limitation,
lost profits. EXCEPT AS EXPRESSLY SET FORTH OR REFERRED TO IN THIS AGREEMENT,
NAD ELECTRONICS MAKES NO WARRANTIES TO THE DEALER, EITHER EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LMITATION, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
8. REPURCHASE OPTION:
The Dealer hereby grants to NAD Electronics an option, exercisable by
notice given at any time within 30 days following any termination of this
Agreement, to repurchase from the Dealer all or any party of the Dealers
inventory of Products, at the prices set forth in the prevailing dealer price
schedule for the price paid therefore by the Dealer, whichever shall be the
lesser. Payment of the repurchase price shall be made by NAD Electronics to the
Dealer, whichever shall be the lesser. Payment of the repurchase price shall be
made by NAD Electronics either by (I) the issuance to the Dealer of a credit
equal to the repurchase price, to be applied to the reduction of the
indebtedness of the Dealer then owing NAD Electronics, or (II) if the repurchase
price shall exceed the then current indebtedness of the Dealer to NAD
Electronics, by payment of such excess to the Dealer within 20 days after the
receipt by NAD Electronics returned Products.
9. CONDUCT AND RELATIONSHIP OF DEALER:
(a) The Dealer shall make no warranties or representations with
respect to any of the Products, except as such may be expressly
approved in writing by NAD Electronics, and shall at no time
engage in any trade practices with respect to NAD Electronics any
of the Products which, in the opinion of NAD Electronics may be
deemed to be unfair trade practices.
(b) The Dealer is authorized to hold itself to the public as an
"authorized Dealer" for NAD Electronics in order to promote the
sale of NAD Products and is authorized to use any trademarks,
slogans, labels, and designs owned by NAD Electronics and used by
it in connection with advertising, displaying and otherwise
promoting the sale of the Products under the rules and regulations
laid down from to time by NAD Electronics. It is understood and
agreed that all right, title and interest in and to said
trademarks, tradenames, slogans, labels, and designs, and the
goodwill pertaining thereto, are reserved by and shall at all
times vest and remain in NAD Electronics, and the Dealer will not
contest the validity of the slogans, labels and designs. Upon the
termination of this Agreement for any reason the Dealer shall
immediately cease to represent itself as a NAD Electronics Dealer,
shall otherwise desist from all conduct or representations which,
in the opinion of NAD Electronics, might imply or indicate that
the Dealer is authorized by NAD Electronics to sell the Products
and shall have no rights whatsoever to any use of the trademarks,
tradenames, slogans, labels and design.
10. INDEMNIFICATION:
The Dealer agrees to indemnify NAD Electronics and to hold it harmless
from and against any and all liability, damage or expense (including costs and
attorney's fees) arising out of or relating to the acts or omissions of the
Dealer, its employees or agents, in connection with the duties of the Dealer
under this Agreement, or incurred by NAD Electronics in enforcing any provision
of this Agreement.
4
<PAGE>
11. NON-ASSIGNABILITY:
No right or interest of the Dealer hereunder arising out of this
Agreement may be assigned or otherwise transferred, whether by operation of law
or otherwise, without the prior written consent of NAD Electronics, and no
delegation of any obligation owed by the Dealer hereunder shall be made without
prior written consent of NAD Electronics. Any such attempted assignment, other
transfer or delegation shall be void for all purposes.
12. NOTICES:
All notices and other communications required or permitted hereunder
shall be in writing and shall be deemed to have been given or made when
personally delivered or sent by certified mail, return receipt requested,
postage prepaid, to the addressee thereof at its address set forth on Page 1 of
this Agreement, or such other address as either party may hereafter communicate
to the other party hereto in like manner.
13. SEVERABILITY:
The invalidity or unenforceability of any provisions of this Agreement
shall not effect the validity or enforceability of the remaining provisions
hereof, but this Agreement shall be construed as if not containing the
provisions held invalid or unenforceable in the jurisdiction in which so held,
and the remaining provisions of this agreement shall remain in full force and
effect.
14. CONSTRUCTION:
The validity, construction and performance of this Agreement
shall be governed by the law of the Commonwealth of Massachusetts in
the United States of America. Any controversy, dispute or claim arising
out of or relating to this Agreement or the breach of it shall be
settled by binding arbitration, to be conducted in English in the
Commonwealth of Massachusetts, United States of America in accordance
with the UNCITRAL Arbitration Rules in effect on the date of this
contract. The appointing authority shall be the American Arbitration
Association. The case shall be administered by the American Arbitration
Association in accordance with its "Procedures for the Cases under the
UNCITRAL Arbitration Rules." The award of the arbitrators shall be final
and biding on the parties, and judgment thereon may be entered in any
court having jurisdiction thereof.
15. MISCELLANEOUS:
(a) Except for co-operative advertising agreements, if any, entered
into as contemplated in section 3, this Agreement contains the
entire understanding of the parties with respect to its subject
matter and no amendment or waiver of any provision hereof shall be
valid unless in writing, signed by each of the parties hereto.
(b) This Agreement supersedes any and all prior agreements, whether
written or oral, entered into between the Dealer and NAD
Electronics with respect to the subject matter hereof, except that
nothing herein contained shall be construed as intended to relieve
or release either party from any obligation which such party may
owe to the other pursuant to any such prior Agreement.
(c) No waiver by either party of any breach hereof shall be deemed a
waiver of any preceding or succeeding the breach. No failure by
either party to exercise any right or privilege hereunder shall be
deemed a waiver of such parties right to exercise the sale or any
other right or privilege hereunder to any subsequent time to
times.
If there is any conflict between the terms and conditions of this
Agreement and the terms and conditions of any purchase order given by the
Dealer and accepted by NAD Electronics or of any confirmation of any purchase
5
<PAGE>
order given by NAD Electronics, then in such event, the terms
and conditions of this agreement shall prevail and shall be conclusively binding
upon both the Dealer and NAD Electronics.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.
NAD ELECTRONICS: DEALER:
NAD Electronics of America
A Division of Lenbrook America, L.L.C. _________________________________
LEGAL NAME (Please Type or Print)
________________________ _________________________________
Robert A. Brown BY (Authorized Signature)
President
_________________________________
TITLE
DATE: __________________ DATE: ___________________________
WITNESS:
_________________________________
NAD REPRESENTATIVE (Please Type
or Print)
______________________________ _________________________________
Gregory R. Stidsen BY: (Signature)
Director of Sales and Marketing
_________________________________
TITLE (Please Type of Print)
DATE: _______________________ DATE: ___________________________
o If the Dealer is a corporation, indicate the office of the person signing the
Agreement on behalf of the corporation. If the Dealer is a partnership, the
same should be signed by a partner, who should indicate by use of the word
"Partner". If the Dealer is a proprietorship, the same should be indicated by
use of the title "Sole Proprietor".
6
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' and to the
use of our report dated January 9, 1998, in Amendment No. 1 to the Registration
Statement (Form SB-2 No. 333-42121) and related Prospectus of Harvey
Electronics, Inc. for the registration of 950,000 shares of its common stock and
1,450,000 of its redeemable common stock purchase warrants.
/s/ ERNST & YOUNG LLP
Melville, New York
February 17, 1998
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