United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For the fiscal year ended October 31, 1998
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934 for the Transition Period from _____________ to _______________
Commission File No. 1-4626
Harvey Electronics, Inc.
(Name of small business issuer in its charter)
New York 131534671
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey 07071
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 842-0078
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrant
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
State issuer's revenues for its most recent fiscal year. $17,262,082
State the number of shares outstanding of each of the issuer's classes of
common equity, as of January 8, 1999. 3,282,833
As of January 8, 1999, the aggregate market value of the registrant's
common stock held by non-affiliates computed by reference to the price at which
the stock was sold was $2,206,713. The shares are currently traded on the NASDAQ
SmallCap Market under the symbols "HRVE" for the Common Stock and "HRVEW" for
the Warrants to purchase Common Stock.
<PAGE>
Part I
Item 1. Description of Business.
General
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,
projection and plasma flat-screen 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-one years. The Company currently operates six retail stores. The two
Manhattan stores are located on Broadway at 19th Street and on 45th Street at
Fifth Avenue. The Company's newest stores opened during November 1998 on Glen
Cove Road in Greenvale, Long Island and Main Street in Mount Kisco, Westchester
County, New York. 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.
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, 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 $4.1 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.
<PAGE>
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. ("HAC") 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.
Prepetition amounts 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 end 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.
Sale of Common Stock and Warrants in Public Offering
On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in a public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P. (the "Representative"), which sold
1,200,000 shares of the Company's common stock of which 1,025,000 shares were
sold by the Company and 175,000 shares by HAC. 2,104,500 of Warrants
("Warrants") to acquire additional shares of the Company's common stock were
also sold by the Company. The net proceeds from the Offering, approximately $4.1
million, are being used for retail store expansion and general working capital
purposes.
The net proceeds from the Offering were used to repay temporarily the
Company's credit facility ($2,262,306); retire the principal ($350,000) and
interest ($47,627) of a term loan, and for retail store expansion and general
working capital purposes.
Each Warrant is exercisable for one share of common stock at 110% ($5.50
per share) of the Offering price, for a period of three years commencing March
31, 2000. The Warrants are redeemable (at $0.10 per warrant), at the Company's
option commencing March 31, 2000 if the closing bid price of the common stock
for 20 consecutive trading days exceeds 150% of the Offering price per share.
<PAGE>
In late November 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 has been treated for
accounting purposes as if such shares were issued by the Company as compensation
to such persons. The Company recorded a deferred compensation charge equal to
the fair market value of the shares ($297,500) and was amortizing this balance
over a two-year forfeiture period. However, in October 1998, HAC removed this
two-year forfeiture provision and the Company accelerated its charge to stock
compensation expense. As a result, $297,500 was recorded to expense for fiscal
1998, of which $209,500 was recorded in the fourth quarter.
As compensation for the Offering, the underwriters received a 10%
commission; a 3% non-accountable expense allowance and Warrants for 10% of the
number of shares of common stock and Warrants sold to the public. These Warrants
are non-exercisable for one year following the Effective Date and are
exercisable thereafter for a period of five years at 120% of the Offering price.
At closing, the Company paid the Representative $123,660, representing the
prepayment of a three-year financial advisory and consulting agreement. As of
October 31, 1998, this financial advisory and consulting agreement was mutually
terminated. Additionally, the Representative agreed to modify the lock-up
arrangement with respect to shares owned by the Company's majority shareholder,
HAC, and members of management. The termination of the lock-up has been
accelerated to January 1, 1999. As a result, the Company in the fourth quarter
of fiscal 1998, accelerated the amortization of the prepaid three-year financial
advisory and consulting fee paid to the Representative and recorded a charge to
operations of $123,660 for fiscal 1998, of which approximately $110,000 was
recorded in the fourth quarter of fiscal 1998.
Products
The Company offers its customers a wide selection of high-quality consumer
audio, video and home theater products, the distribution of which is limited to
specialty retailers (generally referred to in the industry as "esoteric
brands.") The Company is one of the country's largest retailers of "esoteric
brands" manufactured by Bang and Olufsen, Marantz, McIntosh, Meridian and Adcom,
whose products the Company has sold for a number of years. The Company believes
that it benefits from strong working relationships with these manufacturers. See
page 6, below, for a discussion about Bang & Olufsen.
For the fifty-two weeks ended October 31, 1998, the Company's audio product
sales represented approximately 72% of the Company's net sales and yielded gross
profit margins of approximately 40%. The Company's video product sales
represented approximately 25% of the Company's net sales and yielded gross
profit margins of approximately 26%. The Company also provides custom
installation of products it sells. Approximately 23% 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 1% of
the Company's net sales.
<PAGE>
The following table shows, by percentage, the Company's net product sales
attributable to each of the product categories for the periods indicated. Audio
components include speakers, subwoofers, receivers, amplifiers, preamplifiers,
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.
Fifty-Two Weeks Fifty-Three
Ended October Weeks Ended
31, 1998 November 1, 1997
------------------ ------------------
Audio Components 52% 53%
Mini Audio Shelf Systems 7 6
TV and Projectors 17 16
VCR/DVD/DSS 7 6
Furniture 4 4
Cable and Wire 5 5
Accessories 6 6
Extended Warranties 1 1
Miscellaneous 1 3
================== ==================
100% 100%
================== ==================
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, plasma flat-screen television, and high definition
television, have recently been introduced. The DVD player provides enhanced
picture and sound quality in a format far more convenient and durable than
videotape. The plasma flat-screen television 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 will
significantly improve picture quality.
The Company intends to continue its recent emphasis on custom installation
(currently representing 26% of net sales) 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 26%, 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 45%.
<PAGE>
Based on customers' desires, custom installation projects frequently expand
on-site. 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.
Operations
Supplies, Purchasing and Distribution
The Company purchases its products from approximately eighty manufacturers,
ten of which accounted for approximately 53% of the Company's purchases for the
fifty-two weeks ended October 31, 1998. These ten manufacturers are Adcom, Bang
& Olufsen, KEF, Marantz, McIntosh, Meridian, Mitsubishi, Pioneer Elite,
Sharpvision and Sony. No individual manufacturer accounted for more than 10% of
the Company's purchases for the year ended October 31, 1998, but Sony, Bang &
Olufsen, Marantz, and Pioneer Elite each accounted for more than five (5%)
percent of purchases for such period.
The Company has entered into substantially identical dealer agreements with
each of Marantz America, Inc., Audio Control, Sony, Cinemapro Corporation,
Mitsubishi Electronics America, Inc., Lenbrook America, LLC (a distributor of
KEF products), Pioneer Electronics (USA), Inc., NAD Electronics of America, and
Niles Audio Corporation, Inc. Under each dealer agreement, the Company is
authorized to sell the manufacturer's products from specified retail locations
to retail customers and cannot sell the products by telephone or mail order.
Each agreement is for a term of a year or two, subject to renewal or extension.
Under the dealer agreement between the Company and Mitsubishi, the Company
is required to purchase an aggregate of $400,000 of equipment annually, subject
to an increase. The Company's dealer agreement with Niles Audio requires the
Company to purchase at least $300,000 of equipment per year.
The Company believes that competitive sources of supply would be available
for many of the Company's products if a current vendor ceased to supply to the
Company. However, a loss of a major source of supply of limited distribution
product could have an adverse impact on the Company.
<PAGE>
The Company has sold the product line of a key vendor, Bang & Olufsen,
since 1980. The line represented approximately $1,176,000 (6.8%) of the
Company's net sales for the fifty-two weeks ended October 31, 1998. The
Company's relationship with Bang & Olufsen has changed. The Company believes
that its new relationship with Bang & Olufsen represents a positive step for the
Company's growth, although no assurance can be given. Management's belief is
based on its ability to open Bang & Olufsen Branded Stores near its existing
Harvey locations, together with the elimination of competition with respect to
Bang & Olufsen products from other retailers. Bang & Olufsen has notified the
Company that it will now focus on developing Bang & Olufsen licensed stores
("Branded Stores") throughout the world, of which there are currently more than
250 stores worldwide. Bang & Olufsen has, accordingly, canceled its dealer
agreement with the Company and all other retailers effective May 31, 1999. After
this date, Bang & Olufsen products will only be available in Branded Stores.
The Company received a commitment from Bang & Olufsen allowing the Company
to open Branded Stores in Manhattan, Long Island and Connecticut. Pursuant to
this commitment, the Company must complete construction of these locations at
various dates through November 1999. Bang & Olufsen has authorized the Company
to open up to five Branded Stores, but no assurance can be given about the
number of Branded Stores that the Company will open.
On January 7, 1999, as part of its expansion plan in the New York region,
the Company signed a lease and a related Prime Site Marketing Agreement to open
a new 1,500 square foot Bang & Olufsen Branded Store in the Union Square area in
lower Manhattan. The Company plans to open this new store prior to April 1,
1999.
This Branded Store will be the first of two stores the Company plans to
open in Manhattan in 1999. The new store will sell highly differentiated Bang &
Olufsen products, including uniquely designed audio systems, speakers,
telephones, headphones and accessories. The store will also sell video products
including LCD projectors, DVD players and plasma flat-screen televisions, and
A/V furniture and accessories. The store will also offer professional custom
installation of multi-room audio and home theater systems.
This new store will be the Company's seventh, and will be the third store
opened within the twelve months of its successful public offering, completed in
April 1998.
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.
<PAGE>
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-two week period
ended October 31, 1998, was approximately 2.9 times.
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.
<PAGE>
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 1% 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. Nationwide
industry leaders are Circuit City and Best Buys. The New York region is
dominated by Circuit City and local chains including P.C. Richard & Son, The
Wiz, J&R Music World and Tops Appliance.
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 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.
<PAGE>
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, New York Magazine,
Greenwich Magazine, Newsday and the Westchester Gannett. The Company also
distributes direct mail advertising several times a year to reach its customer
database of over 70,000. 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
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.
Fifty-Two Weeks Fifty-Three Weeks
Ended October 31, Ended November 1,
1998 1997
-------------------- --------------------
Gross advertising costs $962,000 $1,048,000
Net advertising expenses 233,000 401,000
Percentage of net sales 1.3% 2.6%
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, however, the Company intends to renew this agreement for one
year.
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
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.
<PAGE>
Employees
As of October 31, 1998, the Company employed approximately 86 full-time
employees of which 15 were management personnel, 10 were administrative
personnel, 32 were salespeople, 12 were warehouse workers and 17 were engaged in
custom installation.
The salespeople, warehouse workers, and installation staff (61 people) are
covered by a collective bargaining agreement with the Company which expires
August 1, 2000. The Company has never experienced a material work stoppage and
believes that its relationships with its employees and the union are
satisfactory.
Item 2. Description of 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.
<PAGE>
The Company leases the following retail premises:
<TABLE>
<CAPTION>
Expiration Date
of Current Approximate
Location Annual Lease Renewal Options Selling Square
Footage Rent
- ---------------------------------------- ------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
2 West 45th Street 6/30/2005 None 7,500 $ 498,000
New York, NY
556 Route 17 North 6/30/2003 None 7,000 $ 239,000
Paramus, NJ
888 Broadway 1/1/2001 None 4,000 $ 300,000
at 19th St.
New York, NY
(within ABC Carpet & Home)
19 West Putnam Ave. 9/30/2001 5 years 5,300 $ 205,000
Greenwich, CT
44 Glen Cove Road 8/15/2009 None 4,600 $ 138,000
Greenvale, NY
115 Main St. 8/31/2008 None 3,100 $ 72,000
Mt. Kisco, NY
973 Broadway 12/31/2005 5 year 1,500 $ 104,000
New York, NY
(Bang & Olufsen Branded Store)
</TABLE>
Item 3. 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.
<PAGE>
There are outstanding disputed tax claims of approximately $50,000 which
were made against the Company during its Chapter 11 proceeding. The Company has
provided reserves of $10,000 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.
Item 4. Submission of Matters to a Vote of Security Holders.
On July 23, 1998, the Company's shareholders at an Annual Meeting (i)
elected Franklin C. Karp (2,987,183 shares in favor, 24,245 shares against),
Joseph J. Calabrese (2,989,183 shares in favor, 22,245 shares against), Michael
E. Recca (2,987,145 shares in favor, 24,343 shares against), Fredric J. Gruder
(2,989,085 shares in favor, 22,343 shares against), Stewart L. Cohen (2,989,123
in favor, 22,305 shares against) and William F. Kenny III (2,898,123 shares in
favor, 22,305 shares against) as directors of the Company; (ii) approved the
appointment of Ernst & Young LLP as the Company's independent auditors for the
year ending October 31, 1998 (2,994,661 shares in favor, 15,264 shares against);
and (iii) ratified the Company's Stock Option Plan (1,993,234 shares in favor,
70,441 shares against).
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's securities are traded on the NASDAQ SmallCap Market under the
symbols "HRVE" for the Common Stock and "HRVEW" for the Warrants to purchase
Common Stock
The outstanding shares of Common Stock are currently held by approximately 1,600
shareholders of record, and the Preferred Stock by five holders of record. The
transfer agent and registrar for the Common Stock is Registrar and Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016
The following table indicates the quarterly high and low stock prices for fiscal
year 1998:
Quarter Ended High Low
- ------------------------- ----------------- ----------------
January 31, 1998 N/A N/A
May 2, 1998 $6.00 $2.00
August 1, 1998 $4.50 $1.625
October 31, 1998 $2.625 $ .625
The Company has paid no dividends on its common stock for the last two years and
does not expect to pay dividends in the future.
<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.
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 January 8, 1999, 3,282,833 shares are
outstanding and held by approximately 1,600 shareholders of record.
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.
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. As of January 8, 1999, 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 elected to defer payment of 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. Preferred Stock dividends of $36,882 were
paid in fiscal 1998. 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.
<PAGE>
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 at any time prior to the exercise of the conversion rights afforded the
holders of the Preferred Stock, the Preferred Stock is redeemed by the Company,
in whole or in part, then the conversion right shall be deemed canceled with
respect to such redeemed stock, as of the date of such redemption.
In case of any capital reorganization or any reclassification of the Common
Stock, or in case of the consolidation or merger of the Company with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation, merger, or conveyance.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
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.
General
The following discussion should be read in conjunction with the Company's
audited financial statements for the fifty-two weeks ended October 31, 1998 and
the fifty-three weeks ended November 1, 1997, appearing elsewhere in this Form
10-KSB. The unaudited financial information for the fifty-two week period ended
October 26, 1996 is presented for comparison purposes only.
<PAGE>
Statements of Operations Data:
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
October 31, November 1, October 26,
1998 1997 1996
---------------- ----------------- -----------------
(Unaudited) (1)
(In thousands, except share data)
<S> <C> <C> <C>
Net sales $ 17,262 $ 15,398 $ 14,025
Cost of sales 10,646 9,765 9,230
Gross profit 6,616 5,633 4,796
---------------- ----------------- -----------------
Gross profit percentage 38.3% 36.6% 34.2%
Interest expense 224 325 506
Selling, general and administrative expenses 6,756 6,706 6,473
Other income 70 73 96
Stock compensation expense 297 - -
Financial advisory and consulting fee to Underwriter 124 - -
Costs associated with lease transaction 114 - -
---------------- ----------------- -----------------
Loss before reorganization expenses, fresh start
adjustments and extraordinary item (829) (1,325) (2,087)
Reorganization expenses, net - - (885)
Fresh start adjustments - - 1,858
Extraordinary gain on forgiveness of debt - - 5,339
---------------- ----------------- -----------------
Net (loss) income (829) (1,325) 4,225
Accretion of Preferred Stock (6) (78) -
Preferred Stock dividend requirement (83) (71) -
================ ================= =================
Net (loss) income attributable to Common Stock $ (918) $ (1,474) $ 4,225
================ ================= =================
Basic and diluted net (loss) applicable to common
shareholders $(.32) $(.65)
================ =================
Basic and diluted weighted average outstanding
during the year 2,844,751 2,257,833
================ =================
(1) Presented for comparison purposes only.
</TABLE>
<PAGE>
Balance Sheet Data:
October 31, 1998 November 1,
1997 (1)
------------------ ------------------
Working capital $2,355 $1,215
Total assets 8,389 7,314
Long-term liabilities 266 2,364
Total liabilities 2,865 5,301
Total shareholders' equity 5,525 2,013
(1)--The balance sheet information at November 1, 1997 is presented to
reflect 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-Two Weeks Ended October 31, 1998 as Compared to Fifty-Three Weeks
Ended November 1, 1997
The fiscal year ended October 31, 1998 is a fifty-two week year as compared
to fifty-three weeks for the prior year.
Net Loss
The net loss for the fifty-two weeks ended October 31, 1998 was reduced to
$828,871 as compared to a net loss of $1,325,212 for the fifty-three weeks ended
November 1, 1997. The net loss for fiscal 1998 included non-cash stock
compensation expense of $297,500 and various costs associated with the surrender
of a real estate lease of $113,782. Additionally, fiscal 1998 includes an
expense of $123,660 representing three years of financial advisory and
consulting fees pre-paid to the underwriter at the closing of the Company's
successful public offering. These fees, which were to be amortized over three
years, were fully charged to expense in fiscal 1998 as a result of the early
termination of the Financial Advisory and Consulting Agreement between the
Company and its underwriter. Such charges to operations during fiscal 1998
aggregated $534,942 or approximately $.19 per share. Excluding these charges,
the Company's loss was $293,929 for fiscal 1998, as compared to a loss of
$1,325,212 for fiscal 1997.
Revenues
Net sales for the fifty-two weeks ended October 31, 1998 increased
approximately $1,864,000 or 12.1% over the fifty-three weeks ended November 1,
1997. Comparable store sales for fiscal 1998 increased approximately 15.8% as
compared to fiscal 1997.
Fiscal 1998 includes sales from three mature stores and one new store
opened in Greenwich, Connecticut in January 1997. Also included in fiscal 1998
sales is approximately one month of sales relating to the newly acquired Mount
Kisco store, prior to its renovation in November 1998. Fiscal 1997 includes
sales from three mature stores and the Greenwich, Connecticut store for only ten
months. Fiscal 1997 also includes three months of sales from one retail store
which was closed in February 1997.
<PAGE>
The increase in the Company's net sales is attributed to increases in
volume of goods and services sold and to a lesser extent, changes in product
lines. The prices of its goods have remained relatively constant. The Company's
sales continue to benefit from the successful marketing campaign where emphasis
is placed on the quality of its manufacturers' products displayed in home
vignette settings, new technologies, service and custom installation of home
theater and multi-room audio/video systems. In fiscal 1998, this marketing
campaign included radio advertising for the latter part of the year and
additional direct mail activities during the year. Custom installation services
also continue to expand and account for approximately 26% of net sales for 1998,
as compared to approximately 20% for fiscal 1997.
As part of its successful marketing plan, the Company offers its customers
who qualify a Harvey credit card which is issued by an unrelated financial
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 months interest-free financing on specific
products. The Company pays the finance company a fee in connection with all
interest-free financing which is a percentage of such sales. For fiscal 1998 and
1997, the cost to the Company for all interest-free financing was approximately
$44,000 and $34,000, respectively.
Costs and Expenses
Total cost of sales for the fifty-two weeks ended October 31, 1998
increased approximately $882,000 or 9.0% from the fifty-three weeks ended
November 1, 1997. This was primarily the result of increased comparable store
sales offset by the one store closed in February 1997, and by the overall
improvement of gross profit margins.
Gross profit margin for the fifty-two weeks ended October 31, 1998 was
38.3% as compared to 36.6% for the fifty-three weeks ended November 1, 1997.
The gross profit margin improved in fiscal 1998 as compared to fiscal 1997
as a result of increased custom installation sales which have higher gross
profit margins. Additionally, an increase was realized from merchandising
changes started in fiscal 1997. The Company added higher margin products to its
product line from new manufacturers and eliminated lower margin products. The
marketing campaign for fiscal 1998 also placed less emphasis on price sensitive
advertisements as compared to fiscal 1997. Finally, the Company maximized its
prompt payment purchase discounts from its vendors, while further reducing its
inventory losses from shrinkage, which was already substantially below industry
average.
<PAGE>
Selling, general and administrative expenses ("SG&A expense") increased
less than 1% or approximately $50,000 for the fifty-two weeks ended October 31,
1998 as compared to the fifty-three weeks ended November 1, 1997.
The increase in SG&A expenses for fiscal 1998 as compared to fiscal 1997
was primarily due to a general increase in payroll and payroll related items,
professional expenses, and various store operating expenses as a result of
increased sales. These increases were partially offset by reduced advertising
and occupancy costs. The decrease in occupancy was primarily the result of a
reduction in warehouse space beginning in fiscal 1998 and from the closing of a
retail store in February 1998.
Interest expense decreased approximately $102,000 or 31.2% for the
fifty-two weeks ended October 31, 1998 as compared to the fifty-three weeks
ended November 1, 1997.
The decrease in interest expense for fiscal 1998 as compared to fiscal 1997
was primarily due to the elimination of debtor-in-possession financing which was
outstanding through December 1996, and the reduction of interest paid to the
Company's lender, subsequent to the paydown of the credit facility in April 1998
using part of the net proceeds from the public offering.
Fifty-Three Weeks Ended November 1, 1997 as Compared to the Fifty-Two Weeks
Ended October 26, 1996 (Unaudited--Operations Prior to Reorganization)
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. 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 was
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
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.
<PAGE>
The increase in sales in fiscal 1997 was due primarily to the Company's
marketing campaign where emphasis was placed on the quality of its
manufacturers' products, new technologies, service, and custom installation of
home theater and multi-room audio/video systems. The Company offers its
consumers attractive financing alternatives on purchases, without paying or
incurring interest expenses for a six or twelve-month period. 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. The substantial use of such financing alternatives
began in June 1997. The total amount of additional fees paid by the Company for
the five month period ended November 1, 1997 was approximately $34,000. This
credit alternative is a linchpin of the Company's new advertising campaign.
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.
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 increased as a result of the Company's marketing campaign
where product quality was 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.
<PAGE>
Liquidity and Capital Resources
On November 13, 1996, the Bankruptcy Court confirmed the Reorganization
Plan ("Confirmation Date"). The effective date of the Reorganization Plan was
December 26, 1996 (the "Reorganization Date"). For information regarding the
Reorganization Plan, reference is made to Item 1, above, and the notes to
financial statements.
The Company's ratio of current assets to current liabilities was 1.91, or
approximately $2,355,000, at October 31, 1998, as compared to 1.41, or
approximately $1,215,000, at November 1, 1997. The increase in the current ratio
at October 31, 1998 was primarily the result of the impact of the net proceeds
from the Company's successful public offering offset by the Company's net loss.
Net cash used in operating activities was approximately $1,229,000 for
fiscal 1998 as compared to a net use of $550,000 for fiscal 1997, as the Company
used its revolving line of credit facility and a portion of the proceeds from
the public offering to reduce trade payables, accrued expenses, other current
liabilities and income taxes, and to fund an increase in accounts receivable and
prepaid expenses and other current assets. This use of cash was offset by the
reduction in the Company's net loss.
Net cash used in investing activities was approximately $504,000 for fiscal
1998 as compared to approximately $663,000 used for fiscal 1997. The decrease
was primarily due to the redemption of a certificate of deposit in fiscal 1998.
Financing activities provided net cash of approximately $1,944,000 for
fiscal 1998 as compared to net cash provided of approximately $1,220,000 for
fiscal 1997. The increase was primarily due to the net proceeds from the public
offering offset by, among other items, the temporary repayment of the Company's
revolving line of credit facility with Paragon Capital LLC ("Paragon") and the
repayment of a term loan.
On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with 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 Financial Corporation ("Congress"), reduce trade payables
and pay related costs of the refinancing. The Paragon facility provides an
improved advance rate of 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. The interest rate on borrowings up to
$2,500,000 is 1% in excess of the rate of interest announced publicly by Norwest
Bank, Minnesota, National Association, from time to time as its "prime rate"
(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 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 in each year. Monthly maintenance charges
and a termination fee also exist under the line of credit. At January 8, 1999,
there are no outstanding borrowings under the Paragon revolving line of credit
facility.
<PAGE>
The maximum amount of borrowing available to the Company under this line is
limited to formulas prescribed in the loan agreements. The Company's maximum
borrowing availability is equal to 75% of acceptable inventory, minus the then
unpaid principal balance of the loan, minus the then aggregate of such
availability reserves as may have been established by Paragon, minus the then
outstanding stated amount of all letters of credit.
Pursuant to the credit facility the Company must maintain certain levels of
inventory, trade accounts payable, inventory purchases, net income or loss and
minimum gross profit margins. Additionally, the Company's capital expenditures,
assuming no retail store expansion, could not exceed $125,000 for fiscal 1998.
Paragon obtained a senior security interest in substantially all of the
Company's assets. The revolving line of credit facility provides Paragon with
rights of acceleration upon the breach of certain financial covenant or the
occurrence of certain customary events of default including, among others, the
event of bankruptcy. The Company is also restricted from paying dividends on
Common Stock, retiring or repurchasing its Common Stock, and entering into
additional indebtedness (as defined).
Paragon also received a warrant to purchase 125,000 shares of Common Stock
at an exercise price of $5.50 per share subject to adjustment under certain
circumstances, which is currently exercisable and expires on April 3, 2001.
Paragon's warrant and the underlying shares have not been registered under the
Securities Act.
On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in the Offering. The Offering was co-managed by The
Thornwater Company, L.P., which sold 1,200,000 shares of the Company's common
stock of which 1,025,000 shares were sold by the Company and 175,000 shares were
sold by HAC. 2,104,500 Warrants to acquire additional shares of the Company's
common stock were also sold by the Company. The net proceeds from the Offering,
approximately $4.1 million, are being used for retail store expansion and
general working capital purposes.
In April 1998, the net proceeds from the Offering were used to repay
temporarily the Company's credit facility $(2,262,306); retire the principal
$(350,000) and interest $(47,627) of a term loan and for retail store expansion
and general working capital purposes.
Each Warrant is exercisable for one share of common stock at 110% ($5.50
per share) of the Offering price, for a period of three years commencing March
31, 2000. The Warrants are also redeemable (at $.10 per Warrant), at the
Company's option, commencing March 31, 2000 if the closing bid price of the
common stock for 20 consecutive trading days exceeds 150% of the Offering price
per share.
<PAGE>
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, that revenues and profit from new stores will
have a positive impact on the Company's operations. The Company intends to
utilize the remaining net proceeds from the Offering and its credit facility to
open additional retail stores.
In July 1998, as a part of its expansion plan, the Company acquired the
business of the Sound Mill, Inc. and its subsidiary, Loriel Custom Audio Video
Corporation (the "Sound Mill"), to acquire certain assets and business of the
Sound Mill for a purchase price of $200,000 (as adjusted) in cash. The purchase
price was allocated as follows: $50,000 for leasehold improvements, equipment,
vehicles and tools and $150,000 for cost in excess of net assets acquired. The
Company also signed a ten-year lease with an additional five-year option for the
3,100 square foot retail store with the principals of the Sound Mill. Located in
Mount Kisco, in northern Westchester County, New York, the Sound Mill has been
engaged in the retail sale and custom installation of specialty high-end
audio/video products for twenty-nine years. This store was renovated at a cost
of approximately $125,000 and re-opened in November 1998. Inventory of
approximately $350,000 was obtained for the opening of this store through vendor
credit and cash.
On August 11, 1998, the Company signed a ten year lease with a five year
option to open a new 4,600 square foot retail showroom in Greenvale, on the
north shore of Long Island, New York. This new retail store, opened in November
1998, and became the Company's sixth store in the Metropolitan New York area.
Capital expenditures for this store approximated $400,000 through January 1999.
Inventory of approximately $475,000 was obtained for this store, and was
substantially financed through vendor credit and cash.
The Company seeks to open an additional Company store in New Jersey within
the next eighteen months, if the appropriate location can be obtained. The
Company estimates that the total cost of opening this Company retail store is
approximately $650,000. The estimated cost of opening this 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.
As Bang & Olufsen focuses on developing Bang & Olufsen licensed branded
stores throughout the world, it has canceled its dealer agreement with the
Company and all other retailers effective May 31, 1999. After this date, Bang &
Olufsen products will only be available in Branded Stores.
The Company received a commitment from Bang & Olufsen allowing the Company
to open Branded Stores in Manhattan, Long Island and Connecticut. Pursuant to
this commitment, the Company must complete construction of these locations at
various dates through November 1999. No assurance can be given about the number
of Branded Stores that the Company will open.
<PAGE>
The Company believes that its new relationship with Bang & Olufsen
represents a positive step for the Company's growth, although no assurance can
be given. Management's belief is based on its ability to open Bang & Olufsen
Branded Stores near its existing Harvey locations, together with the elimination
of competition on Bang & Olufsen products from other retailers. Capital
expenditures necessary for each 1,500 square foot store, including inventory,
should approximate $300,000.
On January 7, 1999, as part of its expansion plan in the New York region,
the Company signed a lease and a related Prime Site Marketing Agreement to open
a new 1,500 square foot Bang & Olufsen Branded Store in the Union Square area in
lower Manhattan. The Company plans to open this new store prior to May 1, 1999.
This Branded Store will be the first of two stores the Company plans to
open in Manhattan in 1999. The new store will sell highly differentiated Bang &
Olufsen products, including uniquely designed audio systems, speakers,
telephones, headphones and accessories. The store will also sell video products
including LCD projectors, DVD players and plasma flat-screen televisions, and
A/V furniture and accessories. The store will also offer professional custom
installation of multi-room audio and home theater systems.
This new store will be the Company's seventh, and will be the third store
opened within the twelve months of its successful public offering, completed in
April 1998.
Management believes that the balance of the Offering, cash flow from
operations and funds made available under the credit facility with Paragon, will
be sufficient to meet the Company's anticipated working capital needs and
expansion plan for the next twelve month period.
During the periods presented, the Company was not significantly impacted by
the effects of inflation or seasonally.
Year 2000 Modifications
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
<PAGE>
Based on recent assessments, the Company determined that it will be
required to modify significant portions of its software so that those systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with modifications of its existing software, the Year 2000 Issue
can be mitigated. As a result, the Company has formulated a plan with its
software and service provider, called Rescue 2000, to make all modifications to
twelve operating modules in its software systems. As of December 31, 1998, 50%
of the module modifications have been completed. No modifications have been
implemented or tested. Implementation and testing is expected to be completed by
May 1999. However, if such modifications are not made, or are not completed
timely, the Year 2000 Issue could have a material impact on the operations of
the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. As of January
20, 1999, the Company has fully completed its assessment of all systems that
could be significantly affected by the Year 2000. The completed assessment
indicated that most of the Company's significant information technology systems
could be affected, particularly the general ledger, billing, and inventory
systems. The Company does not believe that the Year 2000 presents a material
exposure as it relates to the Company's products. To date, the Company is not
aware of any external agent with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity, or capital resources, except the
bank that processes the payment of the Company's credit card sales. The Company
has requested from its bank an assessment of the extent of the bank's Year 2000
compliance. In the event the bank is not Year 2000 compliant in a timely manner,
the Company is prepared to change banks. However, the Company has no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely fashion could
materially and adversely impact the Company.
The Company will utilize its external software and service provider to
reprogram, test and implement the software for the Year 2000 modification, the
cost of which is not expected to be significant. The Company will evaluate the
status of completion of Year 2000 modifications in April 1999 and will undertake
all remaining necessary steps to seek to ensure its systems are Year 2000
compliant. In the event the Company is unable to resolve its Year 2000
modifications in a timely fashion, the business of the Company may be materially
and adversely impacted.
Item 7. Financial Statements.
The information required by this item is incorporated by reference to the
Company's financial statements.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age (1) Position
- -------------------------------- --------------- ---------------------------------------------------
<S> <C> <C>
Michael E. Recca 48 Chairman and Director
William F. Kenny, III 67 Director
Stewart L. Cohen 44 Director
Fredric J. Gruder 52 Director
Franklin C. Karp 44 President and Director
Joseph J. Calabrese 39 Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and Director
Michael A. Beck 39 Vice President of Operations
Roland W. Hiemer 37 Director of Inventory Control
</TABLE>
(1) As of October 31, 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 was an employee
of Taglich Brothers, D'Amadeo, Wagner & Co., Inc., a NASD registered
broker-dealer, through December 31, 1998.
William F. Kenny, III has been a director of the Company since 1975. For
the past six 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 is President of 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 "Responsible Officer" of Folger
Adams, a company in Chapter 11, where Mr. Cohen's responsibilities include the
administration of all funds and disbursements subject to the Folger Adams Plan
of Confirmation. 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.
<PAGE>
Fredric J. Gruder, a director since July 1998, has, since September 1996,
been a partner in the New York law firm of Gersten, Savage and Kaplowitz
("Gersten"), which represented Thornwater Company, L.P. ("Thornwater"),
Representative of the Company's underwriters in the Offering. Gersten may
represent Thornwater in future legal matters. From March 1996 through September
1996, Mr. Gruder was of counsel to Gersten, having been a sole practitioner from
May 1995 through March 1996. From March 1992 until March 1996, Mr. Gruder served
as vice president and general counsel to Sbarro, Inc., a publicly traded
corporation which owns, operates, and franchises Italian restaurants. Prior to
this time, Mr. Gruder practiced law in New York for over twenty years,
specializing in corporate securities and retail real estate.
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
26 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.
Roland W. Hiemer is an executive officer of the Company and Director of
Inventory Control. Mr. Hiemer has been with the Company for eight 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.
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.
Item 10. 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>
Name of Individual Stock Long-Term
and Principal Position Year Salary Bonus Compensation Compensation
- ---------------------------- ---------- ---------------- ------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Michael E. Recca 1998 $ 55,000 (1) $ - $ - $ -
Chairman 1997 $ - $ - $ $ -
1996 $ - $ - $ - $ -
Franklin C. Karp 1998 $ 125,000 $ 15,000 $ 10,313 (3) $ -
President 1997 $ 126,000 $ - $ - $ -
1996 $ 88,000 (2) $ - $ - $ -
Joseph J. Calabrese 1998 $ 116,000 $ 10,000 $ 6,875 (3) $ -
Executive Vice President 1997 $ 117,000 $ - $ - $ -
Chief Financial Officer, 1996 $ 82,000 (2) $ - $ - $ -
Treasurer and Secretary
</TABLE>
<PAGE>
(1)--Effective April 1, 1998, Mr. Recca has been receiving $7,917 per
month, representing an annual directors fee in the annual 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.
(3)--Represents stock compensation at fair market value from common stock
received from HAC, on October 12, 1998.
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.
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, Mr.
Calabrese, and Mr. Beck and six months for 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, Mr. Calabrese and Mr. Beck
and during the six-month period for 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, Mr. Calabrese and Mr. Beck and three months for Mr. Hiemer, plus full
coverage of the Company's benefits for the same period.
<PAGE>
Employment Agreement
On April 3, 1998, the Company entered into a two-year employment agreement
with Franklin C. Karp, the Company's President. 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.
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.
<PAGE>
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 originally exercisable at various
exercise prices between $5.00 and $6.00, over a three-year period from the
effective date. On October 28, 1998, the Company's Compensation and Stock Option
Committee of the Board of Directors amended and reduced the exercise price of
such incentive stock options to $3.00 for officers and middle management, and
$2.00 for other employees. These options remain exercisable over three years
(33-1/3% per year). Additionally, on the said date, the Compensation and Stock
Option Committee granted 75,000 new incentive stock options to purchase the
Company's Common Stock to employees and directors, with an exercise price of
$1.00. These options are also exercisable over three years (33-1/3% per year)
except for those options granted to Messrs. Cohen, Kenny and Gruder, whose
options vest as follows: (i) 50% immediately; (ii) 25% on October 28, 1999; and
(iii) 25% on October 28, 2000.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of October 31, 1998, based on
information obtained from the persons named below, 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:
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Beneficial
Beneficial Owner Ownership Percentage
- ----------------------------------------------------- ---------------------------------- ------------------
<S> <C> <C>
Harvey Acquisition Company LLC 1,750,000 (3) 53.3%
949 Edgewood Avenue
Pelham Manor, NY 10803
Michael E. Recca 1,758,333 (1)(5) 53.6%
949 Edgewood Avenue
Pelham Manor, NY 10803
Stewart L. Cohen 15,000(2) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
William F. Kenny, III 13,489(2) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Fredric J. Gruder 7,500(2) *
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, NY 10022
Franklin C. Karp 23,333(4) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Joseph J. Calabrese 14,035(5) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Michael A. Beck 10,833(5) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Roland W. Hiemer 4,167(6) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
All Directors and Officers as group 1,846,690 56.3%
(8 Persons)
</TABLE>
<PAGE>
* 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) Includes an option to purchase up to 5,000 shares of the Company's
Common Stock, which is exercisable at an exercise price of $1.00 per share.
(3) 2,000,000 shares of the Company's Common Stock were originally issued
to HAC in satisfaction of the $2,822,500 of subordinated secured financing
provided to the Company during its reorganization process. As a result of the
Company's public offering (the "Public Offering") of 1,200,000 shares of Common
Stock and 1,830,000 Warrants to purchase Common Stock, completed April 7, 1998,
175,000 shares of Common Stock were sold by HAC. In late November 1997, 85,000
shares of Common Stock were transferred by HAC to certain employees of the
Company (see "Certain Transactions", below, for details). Additionally, HAC
purchased 10,000 shares of Common Stock from InterEquity Capital Partners, L.P.
("InterEquity"), a prereorganization subordinated secured debtholder, after the
closing of the Public Offering.
(4) Includes an option to purchase up to 8,333 shares of the Company's
Common Stock, which is exercisable at an exercise price of $3.00 per share.
(5) Includes an option to purchase up to 3,333 shares of the Company's
Common Stock, which is exercisable at an exercise price of $3.00 per share.
(6) Includes an option to purchase up to 1,666 shares of the Company's
Common Stock, which is exercisable at an exercise price of $3.00 per share.
Item 12. Certain Relationships and Related 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
were 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. Interest expense relating to the HAC
debtor-in-possession financing was approximately $149,000 for the fifty-three
weeks ended November 1, 1997. Interest paid to HAC in fiscal 1998 was
approximately $66,000. 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. In fiscal 1998, the Company recorded $40,000 in management consulting
fees, of which $23,000 is payable at October 31, 1998.
Effective April 1, 1998, Mr. Recca has been receiving $7,917 per month,
representing an annual director's fee in the annual amount of $95,000, in his
capacity as the Chairman of the Board of Directors of the Company.
Reference is made to "Management's Discussion and Analysis or Plan of
Operation--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. On April 9, 1998, this loan
was repaid with interest ($48,000) and without prepayment 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. In fiscal 1998, the Company recorded $297,500 as
stock compensation expense (see Note 4 to the Financial Statements).
On April 7, 1998, HAC reimbursed the Company $70,000 of the estimated
expenses of $475,000 in the Offering in addition to the underwriting discounts
and commissions and non-accountable expense allowance related to the Shares sold
by it in the Offering. 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.
On October 31, 1998, the Company received a promissory note from a previous
member of its underwriter, in lieu of an outstanding trade receivable for
$73,321. Payments, including interest at 9% per annum are due to the Company as
follows; twelve monthly payments of $940 and a balloon payment of $68,430 due
October 31, 1999. As a result, the amount due to the Company has been presented
as a short-term "note receivable" at October 31, 1998.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a)--The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Commission File
#333-42121:
Exhibit Number Description
3.1.1--Restated Certificate of Incorporation of 1967
3.1.2--Certificate of Amendment of the Certificate of Incorporation of 1997
3.1.3--Certificate of Amendment of the Certificate of Incorporation of
December 1996
3.1.4--Certificate of Amendment of Certificate of Incorporation of July
1988
3.1.5--Certificate of Amendment of Certificate of Incorporation of July
1971
3.1.6--Certificate of Amendment of Certificate of Incorporation of February
1971
3.1.7--Certificate of Amendment of Certificate of Incorporation of June
1969
3.1.8--Certificate of Amendment of Certificate of Incorporation of
September 1968
4.1--Sections in Certificate of Incorporation and the Amended and Restated
By-Laws of Harvey Electronics, Inc., that define the rights of the holders of
shares of Common Stock, Preferred Stock and holders of Warrants(included in
Exhibit Nos. 3.1.2 and 3.1.3)
4.2--Form of Common Stock Certificate
4.3--Form of Redeemable Common Stock Purchase Warrant
4.4--Form of Representative's Warrant
4.5--Form of Warrant to Holders of Preferred Stock
10.1.1--Stock Option Plan of Harvey Electronics, Inc.
10.1.2--Form of Stock Option Agreement
10.2.1--Severance Agreement with Franklin C. Karp
10.2.2--Severance Agreement with Joseph J. Calabrese
<PAGE>
10.2.3--Severance Agreement with Michael A. Beck
10.2.4--Severance Agreement with Roland W. Hiemer
10.3--Employment Agreement with Franklin C. Karp
10.4.1--Dealer Agreement between the Company and Mitsubishi Electronics
America, Inc.
10.4.2--Dealer Agreement between the Company and Niles Audio Corporation,
Inc.
10.5.1--Lease between the Company and Joseph P. Day Realty Corp. (2)
10.5.2--Lease between the Company and Goodrich Fairfield Associates, L.L.C.
(2)
10.5.3--Lease between the Company and Sprout Development Co. (2)
10.5.4--Lease between the Company and Service Realty Company (2)
10.5.5--Lease between the Company and 205 Associates (2)
10.5.6--Sublease between the Company and Fabian Formals, Inc. and Affiliate
First Nighter of Canada (2)
10.6--Loan and Security Agreement, Master Note and Trademark Security
Agreement with Paragon Capital LLC
(ii) The following exhibits are hereby incorporated by reference from
Exhibit A filed as part of the registrant's Form 8-K dated November 3, 1997:
Exhibit Number Description
2.1.1--Restated Modified Amended Joint and Substantially Consolidated Plan
of Reorganization of Harvey Electronics, Inc.
2.1.2--Order dated November 13, 1996 Confirming Plan of Reorganization
(iii) The following exhibits are hereby incorporated by reference from Item
7 filed as part of the registrant's Form 8-K dated April 7, 1998:
Exhibit Number Description
4.4--Representative's Warrant Agreement
4.5--Warrant Agent Agreement
10.1--Underwriting Agreement
10.2--Financial Advisory and Investment Banking Agreement between the
Company and The Thornwater Company, L.P.
<PAGE>
(iv) The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 8-K dated October 12, 1998:
10.01--Bang & Olufsen America, Inc. Termination Letter dated September 7,
1998
10.02--Bang & Olufsen America, Inc. New Agreement Letter dated October 8,
1998
10.03--Agreement with Thornwater regarding termination of agreements and
lock-up amendments dated October 31, 1998
(v) The following exhibits are annexed hereto:
10.5.7 Lease Agreement with Martin Goldbaum and Sally Goldbaum
10.5.8 Lease Agreement with Bender Realty*
10.7 Surrender of Lease with 873 Broadway Associates
10.8 Contract of Sale with Martin Goldbaum, Sally Goldbaum, the Sound Mill,
Inc. and Loriel Custom Audio Video Corp.
10.9 License Agreement with ABC Home Furnishings, Inc.
27.1--Financial Data Schedule
- -----------------------
* To be filed
<PAGE>
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated November 3, 1997, which
reported events under Items 1, 3, 5, 7 and 8. The Company filed a Report on Form
8-K dated April 7, 1998, which reported the completion of the Company's
Offering.
The Company filed a Report on Form 8-K dated October 12, 1998, which
reported events relating to the cancellation of the Financial Advisory and
Investment Banking Agreement with its underwriter as well as the change in the
Company's expansion plan regarding Bang & Olufsen Branded Stores.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Harvey Electronics, Inc.
By /s/Franklin C. Karp
----------------------------------
Franklin C. Karp, President
Dated: January 28, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------- ------------------------------------------------- ----------------------
<S> <C> <C>
/s/ Franklin C. Karp President and Director January 28, 1999
- ----------------------------------
Franklin C. Karp
/s/ Joseph J. Calabrese Executive Vice President, Chief Financial January 28, 1999
- ---------------------------------- Officer, Treasurer, Secretary and Director
Joseph J. Calabrese
/s/ Michael E. Recca Chairman and Director January 28, 1999
- ----------------------------------
Michael E. Recca
/s/ William F. Kenny, III Director January 28, 1999
- ----------------------------------
William F. Kenny, III
/s/ Stewart L. Cohen Director January 28, 1999
- ----------------------------------
Stewart L. Cohen
/s/ Fredric J. Gruder Director January 28, 1999
- ----------------------------------
Fredric J. Gruder
</TABLE>
<PAGE>
Item 7. Financial Statements.
Harvey Electronics, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors..................................................................... F-2
Balance Sheet--October 31, 1998.................................................................... F-3
Statements of Operations--Fifty-Two Weeks ended October 31,
1998 and Fifty-Three Weeks Ended November 1, 1997............................................... F-4
Statements of Shareholders' Equity--Fifty-Two Weeks ended October 31,
1998 and Fifty-Three Weeks Ended November 1, 1997............................................... F-5
Statements of Cash Flows--Fifty-Two Weeks ended October 31,
1998 and Fifty-Three Weeks Ended November 1, 1997 .............................................. F-6
Notes to Financial Statements...................................................................... F-7
</TABLE>
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Harvey Electronics, Inc.
We have audited the accompanying balance sheet of Harvey Electronics, Inc.
as of October 31, 1998 and the related statements of operations, shareholders'
equity, and cash flows for the fifty-two weeks ended October 31, 1998 and the
fifty-three weeks ended November 1, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harvey Electronics, Inc. at
October 31, 1998, and the results of its operations and its cash flows for the
fifty-two weeks ended October 31, 1998 and the fifty-three weeks ended November
1, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
-------------------------------
Ernst & Young LLP
Melville, NY
January 7, 1999
<PAGE>
Harvey Electronics, Inc.
Balance Sheet
October 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 221,444
Accounts receivable, less allowance of $25,000 365,635
Note receivable 73,321
Inventories 4,014,936
Prepaid expenses and other current assets 278,270
-------------------
Total current assets 4,953,606
Property and equipment:
Leasehold improvements 973,162
Furniture, fixtures and equipment 842,375
-------------------
1,815,537
Less accumulated depreciation and amortization 408,711
-------------------
1,406,826
Equipment under capital leases 10,599
Cost in excess of net assets acquired, less accumulated amortization of $1,000 149,000
Reorganization value in excess of amounts allocable to identifiable
assets, less accumulated amortization of $132,023 1,516,440
Other assets, less accumulated amortization of $155,390 352,788
===================
Total assets $ 8,389,259
===================
Liabilities and shareholders' equity Current liabilities:
Trade accounts payable $ 1,577,126
Accrued expenses and other current liabilities 931,211
Income taxes 24,900
Cumulative Preferred Stock dividends payable 61,925
Current portion of capital lease obligations 3,352
-------------------
Total current liabilities 2,598,514
Long-term liabilities:
Cumulative Preferred Stock dividends payable 61,556
Other liabilities 198,922
Capital lease obligations 5,710
Commitments and contingencies
Shareholders' equity:
8-1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share;
authorized 10,000 shares; issued 875 shares (aggregate liquidation
preference--$875,000) 402,037
Common Stock, par value $.01 per share; authorized 10,000,000 shares;
issued 3,282,833 shares 32,828
Additional paid-in capital 7,481,667
Accumulated deficit (2,391,975)
-------------------
Total shareholders' equity 5,524,557
===================
Total liabilities and shareholders' equity $ 8,389,259
===================
</TABLE>
See notes to financial statements.
<PAGE>
Harvey Electronics, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Weeks
Weeks Ended October Ended November 1,
31, 1997
1998
---------------------- --------------------
<S> <C> <C>
Net sales $ 17,262,082 $ 15,398,290
Interest and other income 70,364 72,652
---------------------- --------------------
17,332,446 15,470,942
---------------------- --------------------
Cost of sales 10,646,491 9,764,755
Selling, general and administrative expenses 6,756,254 6,706,180
Stock compensation expense (Note 4) 297,500 -
Financial advisory and consulting fee to Underwriter (Note 4) 123,660 -
Costs associated with lease transaction (Note 10) 113,782 -
Interest expense 223,630 325,219
---------------------- --------------------
18,161,317 16,796,154
---------------------- --------------------
Net loss (828,871) (1,325,212)
Preferred Stock dividend requirement (83,376) (70,479)
Accretion of Preferred Stock (6,000) (78,037)
---------------------- --------------------
Net loss attributable to Common Stock $ (918,247) (1,473,728)
====================== ====================
Basic and diluted net loss per common share $(.32) $(.65)
====================== ====================
Basic and diluted weighted average shares outstanding
during the year
2,844,751 2,257,833
====================== ====================
</TABLE>
See notes to financial statements.
<PAGE>
Harvey Electronics, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-in Deferred Accumulated Shareholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
- ------------------------------------------------ ------------- ------------- ------------- ------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 26, 1996 - - 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 - - 2,257,833 22,578 3,067,799 - (1,473,728) 1,616,649
Net loss for the year - - - - - - (828,871) (828,871)
Transfer of Common Stock from HAC to
employees, directors and a member of HAC - - - - 297,500 (297,500) - -
Accretion of Preferred Stock - - - - - - (6,000) (6,000)
Reclassify Preferred Stock to shareholders'
equity upon removal of redemption feature 875 $ 402,037 - - - - - 402,037
Cumulative dividends on Preferred Stock - - - - - - (83,376) (83,376)
Deferred compensation earned - - - - - 297,500 - 297,500
Record value of Common Stock Warrants granted - - - - 30,000 - - 30,000
Proceeds from public offering of common stock - - 1,025,000 10,250 5,114,750 - - 5,125,000
Proceeds from issuance of 2,104,500 common
stock warrants in public offering - - - - 210,450 - - 210,450
Expenses of public offering of common stock
and warrants - - - - (1,238,832) - - (1,238,832)
======= ======= ========= ========= ========== ========= ========== ===========
Balance at October 31, 1998 875 $ 402,037 3,282,833 $ 32,828 $ 7,481,667 - $ (2,391,975) $ 5,524,557
======= ======= ========= ========= ========== ========= ========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
Harvey Electronics, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three
Weeks Ended Weeks Ended
October 31, November 1,
1998 1997
-------------------- --------------------
<S> <C> <C>
Operating activities
Net loss $ (828,871) $ (1,325,212)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock compensation expense 297,500 -
Depreciation and amortization 412,401 371,434
Provision (credit) for losses on accounts receivable 5,000 (5,000)
Warranty reserve credit (6,000) -
Write-off of other assets - 32,164
Straight-line impact of rent escalations 47,511 61,055
Miscellaneous 6,508 (10,000)
Changes in operating assets and liabilities:
Accounts receivable (98,199) 38,360
Note receivable (73,321) -
Inventories (451,158) (550,940)
Prepaid expenses and other current assets (168,614) 143,795
Trade accounts payable (139,629) 390,937
Accrued expenses, other current liabilities and income taxes (231,707) 303,407
-------------------- --------------------
Net cash used in operating activities (1,228,579) (550,000)
Investing activities:
Redemption of certificate of deposit 200,000 -
Net book value of deletions - 37,254
Amount due under lease surrender agreement (70,236) -
Purchases of property and equipment (382,019) (629,618)
Acquisition of business (200,000) -
Purchase of other assets (52,065) (70,879)
-------------------- --------------------
Net cash used in investing activities (504,320) (663,243)
-------------------- --------------------
Financing activities:
Proceeds from public offering of common stock and warrants 5,335,450 -
Public offering costs (1,112,167) (126,665)
Proceeds from new revolving credit facility 2,262,306 -
Temporary repayment of new revolving credit facility from
proceeds of offering (2,262,306) -
Costs relating to refinancing (82,177) (67,532)
(Repayment) proceeds from note payable (350,000) 350,000
Debtor-in-possession financing - 605,000
Payments relating to Chapter 11 reorganization - (456,913)
Net (payments) proceeds from old revolving line of credit facility (1,777,851) 999,634
Preferred Stock dividends paid (36,882) -
Principal payments on capital lease obligations (32,063) (83,627)
-------------------- --------------------
Net cash provided by financing activities 1,944,310 1,219,897
-------------------- --------------------
Increase in cash and cash equivalents 211,411 6,654
Cash and cash equivalents at beginning of year 10,033 3,379
==================== ====================
Cash and cash equivalents at end of year $ 221,444 $ 10,033
==================== ====================
Supplement cash flow information:
Interest paid $ 288,000 $ 282,000
==================== ====================
Taxes paid $ 15,000 $ -
==================== ====================
</TABLE>
See notes to financial statements.
<PAGE>
Harvey Electronics, Inc.
Notes to Financial Statements
October 31, 1998
1. Business Description and 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.
Long-Lived Assets
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 the Company adopted effective in Fiscal 1996. SFAS No. 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. 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.
Stock Based Compensation
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
<PAGE>
Harvey Electronics, Inc.
Notes to Financial Statements (continued)
1. Business Description and Summary of Significant Accounting Policies
(continued)
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 (see Note 6).
Segment Disclosures
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual Financial Statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 31, 1997, and
therefore, the Company will adopt the new requirements in Fiscal 1999.
Management has not completed its review of SFAS No. 131, but does not anticipate
that the adoption of this statement will have a significant impact on the
Company.
Inventories
Inventories are stated at the lower of cost (average-cost method, which
approximates the first-in, first-out method) or market.
<PAGE>
1. Business Description and Summary of Significant Accounting Policies
(continued)
Depreciation and Amortization
Property and Equipment are stated at cost less accumulated 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.
Income Taxes
The financial statements have been prepared in conformity with SFAS No.
109, "Accounting for Income Taxes." This statement requires the use of the
liability method in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes (see Note 6).
Loss Per Share
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings per share amounts
for all periods have been presented and conform to the SFAS No. 128
requirements.
<PAGE>
1. Business Description and Summary of Significant Accounting Policies
(continued)
The basic loss per common share for the fifty-two weeks ended October 31,
1998 and the fifty-three weeks ended November 1, 1997 was computed based on the
weighted average number of common shares outstanding. Common equivalent shares
of approximately 131,250, relating to the conversion of Preferred Stock, for
fiscal 1998 and 1997, were not considered since their inclusion would have been
antidilutive.
Statement of Cash Flows
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The book values of cash and cash equivalents, accounts and notes
receivable, accounts payable and accrued liabilities approximate their fair
values principally because of the short term nature of these items.
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.
Advertising Expense
Advertising expense, net of cooperative advertising allowances, is charged
to operations when the advertising takes place. Advertising expense for the
fifty-two weeks ended October 31, 1998 and the fifty-three weeks ended November
1, 1997 was approximately $233,000 and $401,000, respectively. Prepaid
advertising for print advertisements not run at October 31, 1998 and November 1,
1997 was approximately $75,000 and $15,000, respectively.
<PAGE>
2. Plan of Reorganization and Fresh Start Reporting
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 5) 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").
<PAGE>
2. Plan of Reorganization and Fresh Start Reporting (continued)
The Reorganization Plan provided for the following:
a. Redistribution of Common Stock
Prior to the Reorganization Date, the new shares of common stock in Harvey
Electronics, Inc. were issued as follows:
2,000,000 shares were issued to Harvey Acquisition Company, L.L.C. ("HAC")
in satisfaction of the $2,822,500 of subordinated secured financing provided to
the Company during its reorganization process.
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 5)
Prior to the Reorganization Date, 875 shares of the Company's Preferred
Stock were issued to the Company's pre-reorganization 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.
<PAGE>
2. Plan of Reorganization and Fresh Start Reporting (continued)
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 5). The Stock Option Plan was approved by the shareholders in
fiscal 1998.
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.
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 was recorded as an extraordinary gain
in the 1996 fiscal period.
<PAGE>
2. Plan of Reorganization and Fresh Start Reporting (continued)
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, elimination
of the accumulated deficit through October 26, 1996 and valuation of equity
based on the reorganization value of the ongoing business.
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 5).
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 ($1,516,440 at October 31, 1998) 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
approximately $66,000 was recorded for fiscal years 1998 and 1997.
3. 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 Financial Corporation ("Congress"),
reduce trade payables and pay related costs of the refinancing. The interest
rate on borrowings up to $2,500,000 is 1% over the prime rate
<PAGE>
3. Revolving Lines of Credit Facilities (continued)
(8% at October 31, 1998). The rate charged on outstanding balances over
$2,500,000 is 1.75% above the prime rate. A commitment fee of $49,500 (being
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 an early termination fee also
exist under the line of credit.
Paragon also received a warrant to purchase 125,000 shares of common stock,
subject to adjustment, which is currently exercisable at a price of $5.50 per
share and expires April 3, 2001. The Company is amortizing the value of the
warrants over a three-year period, based upon the estimated fair value of such
warrant of approximately $24,000.
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.
The Paragon credit facility replaced the Company's previously existing
$3,000,000 revolving line of credit with Congress. The Congress line of credit
required a $200,000 certificate of deposit as security during the term of the
line of credit; such certificate of deposit was released upon termination of the
line of credit and redeemed by the Company.
Subsequent to the Reorganization Date, an individual who is a member of HAC
and holder of Preferred Stock, issued to the Company a $350,000 term loan, to be
used for working capital purposes. This term loan with interest of approximately
$48,000 was repaid in April 1998, with the proceeds of the public offering (see
Note 4). Interest expense relating to such term loan was approximately $20,000
and $28,000 for fiscal years 1998 and 1997, respectively.
4. Sale of Common Stock and Warrants in Public Offering
On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in a public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P. (the "Underwriter") which sold
1,200,000 shares of the Company's common stock, of which 1,025,000 shares were
sold by the Company and 175,000 shares were sold by HAC, and 2,104,500 of
<PAGE>
4. Sale of Common Stock and Warrants in Public Offering (continued)
Warrants ("Warrants") to acquire additional shares of the Company's common
stock. The net proceeds from the Offering, which approximated $4.1 million, were
used to temporarily repay amounts borrowed under the Paragon credit facility
($2,262,306) and to retire the principal ($350,000) and interest ($47,627) of a
term loan, with the balance of the proceeds to be used for retail store
expansion and general working capital purposes.
Each Warrant is exercisable for one share of common stock at 110% ($5.50
per share) of the Offering price for a period of three years commencing March
31, 2000, two years from the effective date of the Offering. The Warrants also
are redeemable (at a prescribed price) at the Company's option, beginning March
31, 2000 if the closing bid price of the common stock for 20 consecutive trading
days exceeds 150% of the Offering price per share.
At closing, the Company paid the Underwriter $123,660, representing the
prepayment of a three-year financial advisory and consulting agreement which was
to be amortized over the life of the agreement. As of October 31, 1998, this
financial advisory and consulting agreement was mutually terminated.
Additionally, the Underwriter agreed to modify the lock-up arrangement with
respect to shares owned by the Company's majority shareholder, HAC, and members
of management. The termination of the lock-up has been accelerated to January 1,
1999. As a result, the Company in the fourth quarter of fiscal 1998, accelerated
the amortization of the prepaid three-year financial advisory and consulting fee
paid to the Underwriter and recorded a charge to operations of $123,660 for
fiscal 1998, of which approximately $110,000 was charged in the fourth quarter
of fiscal 1998.
In November 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 has been accounted for as if such
shares were issued by the Company as compensation to such persons. The Company
recorded deferred stock compensation expense equal to the fair market value of
the shares ($297,500) which was to be amortized over a two-year forfeiture
period. However, in October 1998, HAC removed the two-year forfeiture provision
and the Company accelerated the amortization of the deferred compensation
expense. As a result, $297,500 of stock compensation expense was charged to
operations during fiscal 1998, of which $209,500 was charged in the fourth
quarter of fiscal 1998.
<PAGE>
5. Stock Based Compensation Plan and Preferred Stock
Stock Option Plan
In conjunction with the Reorganization Plan, the Company's Board of
Directors and shareholders approved the Harvey Electronics, Inc. Stock Option
Plan ("Stock Option Plan") in fiscal 1998. The Stock Option Plan 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. All options are exercisable at times as determined by the Board of
Directors not to exceed ten years from the date of grant. 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 ("Compensation Committee") approved a grant, as of the
effective date of the Offering, of 70,000 incentive stock options to certain
employees to purchase the Company's common stock originally exercisable at
various exercise prices between $5.00-$6.00, over a three-year vesting period
from the effective date. On October 28, 1998, the Company's Compensation
Committee reissued the 70,000 incentive stock options with an exercise price of
$3.00 for officers and middle management, and $2.00 for other employees. Such
options remain exercisable over a three-year vesting period (33-1/3% per year).
Simultaneously, the Compensation Committee granted 75,000 incentive stock
options to certain employees and directors, with an exercise price of $1.00.
These options are also exercisable over a three-year vesting period (33-1/3% per
year), except for Messrs. Cohen, Kenny and Gruder, whose options vest as
follows: (i) 50% immediately; (ii) 25% on October 28, 1999; and (iii) 25% on
October 28, 2000.
In fiscal 1998, the Company reserved 145,000 shares of common stock for
issuance in connection with stock options. The weighted average remaining
contractual life of the options outstanding is three years. The following table
summarizes activity in stock options during fiscal 1998:
<PAGE>
<TABLE>
<CAPTION>
Weighted
Shares Shares Under Option Average
---------------------------------
Available for Option Price Number of Exercise Price
Granting per Share Shares
--------------- ---------------- ---------------- -- ----------------
<S> <C> <C> <C> <C>
Balance at November 1, 1997 - -
1998 stock option grant 145,000 -
Granted--December 5, 1998 (70,000) $2.00-$3.00 70,000 $2.86
Forfeited 3,200 $2.00 (3,200) $2.00
Granted--October 28, 1998 (75,000) $1.00 75,000 $1.00
=============== ================
Balance at October 31, 1998 3,200 141,800 $1.89
=============== ================
</TABLE>
<PAGE>
5. Stock Based Compensation Plan and Preferred Stock (continued)
Of the options outstanding at October 31, 1998, a total of 15,000 were
exercisable. The weighted average fair value of options granted during the
fiscal year ended October 31, 1998 was $1.61.
Exercise prices for options outstanding as of October 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Number of Options
Outstanding at Year Options Exercisable
End at End of Year Range of Exercise
Price
- ----------------------- ---------------------- ----------------------
<S> <C> <C>
75,000 15,000 $1.00
6,800 - $2.00
60,000 - $3.00
======================= ====================== ======================
141,800 15,000 $1.00-$3.00
======================= ====================== ======================
</TABLE>
The alternative fair value accounting provided for under SFAS No. 123,
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's Stock Options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its stock options.
Pro forma information regarding net loss and net loss per share (basic and
diluted) is required by SFAS No. 123, which also requires that the information
be determined as if the Company had accounted for its stock options granted
under the fair value of that statement.
<PAGE>
5. Stock Based Compensation Plan and Preferred Stock (continued)
The fair value of these options was estimated at the date of grant using
the Black-Sholes option pricing model with the following assumptions for the
fiscal year ended October 31, 1998: risk-free interest rate of 6.5%; no dividend
yield; volatility factors of the expected market price of the Company's common
stock of 1.489; and a weighted average expected life of the options of 3.0
years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for fiscal year 1998 is as follows (pro forma information
for fiscal 1997 is not required as no stock options were granted or
outstanding):
Pro forma net loss $ (880,000)
------------------
Pro forma net loss attributable to common stock $ (969,000)
------------------
Pro forma basic and diluted loss per share $ (.34)
==================
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 carrying value of the Preferred Stock was
estimated to be $402,037 at October 31, 1998.
In the event of liquidation of the Company, the holders of the Preferred
Stock shall receive preferential rights and shall be entitled to receive a
aggregate liquidation preference of $875,000 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,
<PAGE>
5. Stock Based Compensation Plan and Preferred Stock (continued)
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
to purchase shares of common stock (valued at approximately $6,000) with terms
equivalent to the Warrants granted during the Offering (see Note 4). The balance
sheet at October 31, 1998 has been presented to reflect the Preferred Stock as
part of shareholders' equity, as a result of the eliminated redemption feature.
Cumulative Preferred Stock dividends payable of $123,481 are outstanding
and classified between current ($61,925), and long-term ($61,556) liabilities at
October 31, 1998. Such dividends, along with the accretion on the redeemable
Preferred Stock ($6,000), were recorded as a reduction of retained earnings at
October 31, 1998.
6. Income Taxes
At October 31, 1998, the Company has available net operating loss
carryforwards of approximately $2,900,000 which expire in various years through
fiscal 2013. Of this amount, approximately $2,250,000 relates to
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 31, 1998 and November 1, 1997, the Company had net deferred tax
assets of approximately $1,400,000 and $1,207,000, respectively, arising
primarily from the future availability of the above tax attributes. Such amount
has been offset in full by a valuation allowance.
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.
<PAGE>
7. Pension and Profit Sharing Plan
The Harvey Group Inc. Savings and Investment Plan (the "Plan") includes
profit sharing, defined contribution and 401(k) provisions and is available to
all eligible employees of the Company. There were no contributions to the Plan
for the fifty-two weeks ended October 31, 1998 and the fifty-three weeks ended
November 1, 1997. 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 of the offering, the Plan's name
was amended and changed to Harvey Electronics, Inc. Savings and Investment Plan.
8. Commitments and Contingencies
Commitments
The Company's financial statements reflect the accounting for equipment
leases as capital leases by recording the asset and the related liability for
the lease obligation. No additional capital leases were recorded during fiscal
1998 and approximately $11,000 of such leases were recorded in fiscal 1997.
Future minimum rental commitments, by year and in the aggregate, under the
capital leases and noncancelable operating leases with initial or remaining
terms of one year or more consisted of the following at October 31, 1998.
<TABLE>
<CAPTION>
Operating Leases Capital
Leases
-------------------- --------------------
<S> <C> <C>
Fiscal 1999 $ 1,608,000 $ 5,000
Fiscal 2000 1,701,000 4,000
Fiscal 2001 1,471,000 2,000
Fiscal 2002 1,380,000 -
Fiscal 2003 1,290,000 -
Thereafter 3,212,000 -
--------------------
====================
Total minimum lease payments $ 10,662,000 11,000
====================
Less amount representing interest 2,000
--------------------
Present value of net minimum lease payments 9,000
Less current portion 3,000
====================
$ 6,000
====================
</TABLE>
<PAGE>
8. Commitments and Contingencies (continued)
Minimum rental commitments are offset by certain sublease agreements which
earn sublease income of approximately $93,000 per annum through fiscal 2001.
Total rental expense for operating leases was approximately $1,376,000 and
$1,517,000, for the fifty-two weeks ended October 31, 1998 and the fifty-three
weeks ended November 1, 1997, 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 the subject of or a party to 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.
Included in prepaid and other current assets at October 31, 1998 is a $50,000
certificate of deposit which is held as collateral under an outstanding $50,000
letter of credit.
9. Other Information
Accrued Expenses and Other Current Liabilities
October 31,
1998
--------------------
Payroll and payroll related items $192,825
Accrued professional fees 149,516
Customer layaways 373,735
Accrued interest 35,133
Sales taxes 93,208
Other 86,794
====================
$931,211
====================
<PAGE>
9. Other Information (continued)
Other Long-Term Liabilities
October 31,
1998
--------------------
Straight-line impact of lease escalations $183,922
Other 15,000
====================
$198,922
====================
Note Receivable
On October 31, 1998, the Company received a promissory note from a previous
member of its Underwriter, in lieu of an outstanding trade receivable for
$73,321. Payments, including interest at 9% per annum are due to the Company as
follows: twelve equal payments of $940 commencing October 31, 1998 through
October 31, 1999 and a balloon payment of $68,430, due October 31, 1999. As a
result, the monthly amount due to the Company has been presented as a short-term
"note receivable" at October 31, 1998.
Other
Interest expense relating to the HAC debtor-in-possession financing was
approximately $35,000 for the fifty-three weeks ended November 1, 1997. The
debtor-in-possession financing amounted to $2,822,000 at the Reorganization date
when such financing was converted to 2,000,000 shares of the Company's common
stock. Interest expense relating to fiscal 1997 and paid to HAC during fiscal
1998 was approximately $66,000.
Management fees of $40,000 and $30,000 relating to a Company affiliated
with the Company's Chairman, were expensed for the fifty-two and fifty-three
weeks ended October 31, 1998 and November 1, 1997, respectively. Approximately
$23,000 of management fees and other miscellaneous amounts were payable to this
Company at October 31, 1998.
<PAGE>
9. Other Information (continued)
Beginning April 1, 1998, an annual director's fee of $95,000 will be
payable to the Company's Chairman of the Board of Directors. The Chairman
received $55,000 during fiscal 1998.
10. Costs Associated With Lease Transaction
On June 29, 1998, the Company entered into a lease assumption agreement for
approximately 5,000 square feet of retail space in lower Manhattan, purchased
existing leasehold improvements for approximately $125,000 and paid a security
deposit of approximately $15,000. Such space was to be used to relocate the
Company's existing retail store within ABC Carpet and Home, also located in
lower Manhattan, as the landlord was initially unwilling to extend the company's
existing lease agreement.
In September 1998, the Company entered into an agreement to extend its
existing retail store lease located within ABC Carpet and Home. As a result, the
Company entered into a lease surrender agreement to terminate the lease
assumption agreement for the replacement retail space with a realty company.
In conjunction with the lease surrender agreement, the Company will receive
payments aggregating $125,000 in three installments as follows: $50,000 payment
received in December, 1998; $40,000 payment due December 22, 1999 and a $35,000
payment due December 22, 2000. In addition, the security deposit will be
returned to the Company prior to January 31, 1999. The Company recorded the
present value ($120,236) of such payments and classified $50,000 in "prepaid
expenses and other current assets" and $70,236 in "Other Assets" at October 31,
1998. In the fourth quarter of fiscal 1998, the Company recorded all related
lease payments, real estate commissions, legal fees and the discount on the
present value of the lease surrender agreement payments, aggregating $113,782 to
"Costs Associated with Lease Transaction."
<PAGE>
11. Retail Store Acquisition and Expansion
On July 2, 1998, as a part of its expansion plan, the Company entered into
a definitive contract with Sound Mill, Inc. and its subsidiary, Loriel Custom
Audio Video Corporation (the "Sound Mill"), a retailer and custom installer of
specialty high-end audio/video products for twenty-nine years with one store
located in Mt. Kisco, in Northern Westchester County, New York, to acquire
certain assets and business of the Sound Mill for a purchase price of $200,000
(as adjusted) in cash. The acquisition was accounted for as a purchase. The
purchase price was allocated to the assets acquired based upon the fair values
on the date of acquisition as follows: $50,000 for leasehold improvements,
equipment, vehicles and tools and $150,000 for cost in excess of net assets
acquired which is being amortized over a twenty-five-year period. The Company
also signed a ten-year lease with a five-year renewal option for the 3,100
square foot retail store operated by the Sound Mill. This property is owned by
the former principals of the Sound Mill. The results of operations for the Sound
Mill was included in the Company's operations from the date of acquisition and
was not considered material during fiscal 1998 as the Company renovated the
store for a November 1998 grand re-opening. Had the acquisition been made during
fiscal 1997, unaudited pro forma sales, net loss and basic and diluted loss per
share would not have been considered material for the fifty-three weeks ended
November 1, 1997.
On August 11, 1998, the Company signed a ten-year lease with a five-year
renewal option for its new 4,600 square foot retail showroom in Greenvale, on
the north shore of Long Island, New York. This new retail store opened in
November 1998 and was not included in the Company's results of operations during
fiscal 1998.
12. Subsequent Event
Bang & Olufsen products have been sold by the Company since 1980, and the
line represented approximately $1,176,000, or 6.8% of the Company's net sales
for the fifty-two week period ended October 31, 1998. Bang & Olufsen has decided
that it will now focus on developing Bang & Olufsen licensed stores ("Branded
Stores") throughout the world. Bang & Olufsen has, accordingly, canceled its
dealer agreement with the Company and all other retailers effective May 31,
1999. After this date, Bang & Olufsen products will be available only in Branded
Stores.
<PAGE>
12. Subsequent Event (continued)
As a result, the Company received a commitment from Bang & Olufsen allowing
the Company to open Branded Stores in Manhattan, Long Island and Connecticut.
Pursuant to this commitment, the Company must complete construction of these
locations at various dates through November 1999. Bang & Olufsen has authorized
the Company to open up to five Branded Stores.
On January 7, 1999, as part of its expansion plan in the New York region,
the Company signed a lease and a related Prime Site Marketing Agreement to open
a new 1,500 square foot Bang & Olufsen branded store in Union Square area, in
lower Manhattan. The Company plans to open this new store prior to May 1, 1999,
which will be the Company's seventh, and will be the third opened within the
twelve months of its successful public offering completed in April 1998.
MARTIN GOLDBAUM and SALLY GOLDBAUM, Landlords,
Lease Agreement
- with -
HARVEY ELECTRONICS, Inc., Tenant.
115 East Main Street
Mount Kisco, New York 10549
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Article Subject Page
1. Definitions and Terms 2
2. Demising Clause 5
3. Term and Possession 5
4. Rent and Additional Rent 6
5. Prepaid Rent 9
6. Permitted Uses and Prohibited
Uses 10
7. Services Supplied by Lessor 12
8. Subletting and Assignment 13
9. Quiet Possession, Subordination
and Attornment 15
10. Landlord's Reserved Rights 17
11. Alterations and Improvements 18
12. Repairs and Replacements 21
13. Destruction or Damage 22
14. Eminent Domain 24
15. Holding Over 26
16. Surrender of Possession 26
17. Default and Remedies 28
18. Insurance and Waiver of Claims 31
19. Taxes on Lessee's Property and
Lease Taxes 34
20. Estoppel Certificates 35
20(A). Renewal Rights
21. Miscellaneous 37
22. Right of First Refusal 42
23. Post-Closing Obligations Under
Contract of Sale 44
Signature page 45
Acknowledgements 46
</TABLE>
<PAGE>
Article 1
Definitions and Terms
As used in this Lease, the following terms shall have the following
meanings:
1.1 Landlord or Lessor shall have the same meaning, and shall mean MARTIN
GOLDBAUM and SALLY GOLDBAUM, whose address is 49 The Terrace, Katonah, New York
10538, and their successors and assigns.
1.2 Tenant or Lessee shall have the same meaning, and shall mean HARVEY
ELECTRONICS, Inc., a New York corporation having an office at 205 Chubb Avenue,
Lyndhurst, New Jersey 07071, and its permitted assigns.
1.3 Date of this Lease shall mean August 1, 1998.
1.4 Commencement Date or Commencement of the Term shall have the same
meaning, and shall mean August 1, 1998.
1.5 Expiration Date or Expiration of the Term shall have the same meaning,
and shall mean July 31, 2003.
1.6 Term or Term of this Lease shall have the same meaning, and shall mean
a period of five (5) years, beginning on the Commencement Date, and ending on
the Expiration Date, unless sooner terminated.
1.7 Rent Start Date shall mean October 1, 1998.
1.8 Building shall mean the land and building located at 115 East Main
Street, Mount Kisco, New York 10709.
1.9 Permitted Use shall mean the operation of a retail electronics,
accessories, audio equipment and video equipment sales, installation and service
business, and no other use whatsoever.
<PAGE>
1.10. Annual Base Rent shall mean the sums set forth below for the
respective periods set forth below, as adjusted in accordance with the terms of
this Lease:
Period Annual Base Rent
10/1/98-7/31/99 $ 66,666.67
8/1/99-7/31/00 82,800.00
8/1/00-7/31/01 85,700.00
8/1/01-7/31/02 88,700.00
8/1/02-7/31/03 91,800.00
8/1/03-7/31/04 95,000.00
8/1/04-7131/05 98,300.00
8/1/05-7/31/06 101,700.00
8/1/06-7/31/07 105,300.00
8/1/07-7/31/08 109,000.00
1.11 Monthly Base Rent shall mean the Annual Base Rent divided by "12";
except that for the period 10/1/98-7/31/99, the Monthly Base Rent shall be $
6,666.67.
1.12 Rent shall mean the Annual Base Rent, plus all items of Additional
Rent required to be paid under this Lease.
1.13 Security Deposit shall be the sum of $ 6,666.67; and any additions to
such amount made during the Term.
1.14 Premises or Leased Premises shall have the same meaning, and shall
mean the premises described on Schedule "A".
1.15 Lessee's Proportionate Share shall mean 68.80%.
1.16 Real Estate Taxes shall mean ad valorem taxes imposed by any
municipality, government or bureau) department or division of any government,
and payable by Lessor, upon the land and improvements comprising the land and
Building, including assessments for public betterments, and sewer rents, water
frontage charges, vault taxes, and other similar impositions and assessments;
and any taxes imposed as a substitute, replacement or supplement to presently
imposed Real Estate Taxes. Real Estate Taxes shall not include income taxes
payable by Lessor.
<PAGE>
1.17 Increased Real Estate Taxes shall mean the increase, if any, in Real
Estate Taxes over Real Estate Taxes in effect as of May 15, 1998.
1.18 Public Liability Insurance Limits shall mean $2,000,000. Combined
Single Limit.
1.19 Lease shall mean this Lease; the rights and obligations of the Lessor
and of the Lessee under this Lease, and of their respective successors; all
riders and amendments to this Lease; and all permitted modifications, extensions
and alterations to this Lease.
1.20 Lease Year shall mean a successive period of twelve calendar months,
commencing on the Commencement Date, or on the anniversary of the Commencement
Date.
Article 2
Demising Clause
2.1 Lessor, for and in consideration of the Lessee's payment of Rent, and
performance of the other terms and conditions of this Lease on the part of
Lessee to be performed, does hereby lease the Premises to Lessee; and Lessee
does hereby lease the Premises from Lessor, upon the terms and conditions set
forth in this Lease.
Article 3
Term and Possession
3.1 Term: The Term of this Lease shall begin on the Commencement Date, and
shall end on the Expiration Date, unless sooner terminated. Lessee shall be
entitled to possession of the Premises on the Commencement Date, subject to the
provisions of this Lease, and shall surrender possession of the Premises to
Lessor as of the close of business on the Expiration Date.
3.2 Occupancy Prior to Commencement Date: If Lessee, with the Lessor's
prior written consent, occupies the Premises, or any part of the Premises, prior
to the Commencement Date, then the Term shall also include the period from the
date of occupancy to the Commencement Date. In no event shall Lessee occupy the
Premises prior to the Commencement Date without the prior written consent of
Lessor.
<PAGE>
3.3. Delays in Delivery of Possession: Lessor represents to the Lessee that
as of the Commencement Date, the prior tenant and occupant of the premises has
surrendered possession of the Premises, and its lease has been terminated; and
that the prior tenant and occupant has waived all of its rights of occupancy of
the Premises.
3.4 Acceptance of Occupancy: The Lessee accepts occupancy of the Premises
"as is", without any representation or warranty by the Lessor as to the physical
condition of the Premises. The Lessor represents that the Premises may lawfully
be used for a retail sales and service business, and that the applicable
Certificate of Occupancy for the Premises permits such use, and that no further
or amended Certificate of Occupancy is required in order for the Lessee to
conduct its business for the Permitted Use at the Premises. However, the Lessor
makes no further representations or warranties regarding the Premises; and the
Lessee accepts the Premises 13as is" and without representations or warranties
as to the condition thereof.
Article 4
Rent
4.1 Annual Base Rent: Lessee shall pay the Annual Base Rent to Lessor, at
such place or address as Lessor may from time to time designate by Notice, in
monthly installments, in advance, on or before the tenth (10th) day of each
month during the Term. Until further Notice, Lessee shall pay Rent at the
address set forth in Paragraph 1.1 of this Lease. Rent shall be paid without
demand, and without set-off or deduction whatsoever. Lessee shall pay Rent for
the first month of the Term on the Rent Start Date. Rent for any partial month
shall be prorated on the basis of thirty days to the month; and shall be paid on
the first day of any such partial period.
4.2 Adjustment to Annual Base Rent: [Intentionally deleted.]
4.3 Electricity: The Premises shall be separately metered for water,
electrical usage and gas (pursuant to the Workletter annexed to this Lease), and
Lessee shall pay for Lessee's electric, water and gas consumption directly to
the supplier of such utilities, and not to Lessor.
4.4 Real Estate Taxes: In addition to Annual Base Rent, Lessee shall pay to
Lessor, as Additional Rent, Lessee's Proportionate Share of Increased Real
Estate Taxes, prorated as may be appropriate for any partial fiscal tax year.
<PAGE>
a) Real Estate Taxes shall include the amounts, if any, incurred by Lessor
as and for reasonable and necessary legal fees and other costs to contest the
amount of, or validity of, any Real Estate Taxes, in any calendar year;
inclusive of annual or other periodic payments to legal counsel to compensate
such legal counsel for counsel's efforts in maintaining or lowering Real Estate
Taxes, provided the fee for such legal services is contingent upon a tax
reduction, and/or such fee is payable out of tax savings.
b) Real Estate Taxes attributable to any calendar year shall be Real Estate
Taxes payable during such calendar year, notwithstanding that Real Estate Taxes
may have been assessed for a year other than the calendar year in which they are
payable.
c) As soon as reasonably feasible after Real Estate Taxes have been
determined, Lessor will furnish Lessee with a statement showing the then
currently applicable Real Estate Taxes, and Lessee's Proportionate Share of Real
Estate Taxes. Within thirty days after delivery of such statement, but in no
event prior to the due date for such tax, Lessee shall pay to Lessor the amount
so billed on such statement, as Additional Rent.
d) Lessor represents and warrants to Lessee that as of the Commencement
Date, there are no special assessments levied against the Building; and to the
knowledge, information and belief of Lessor, none are pending or threatened.
4.5 Administrative Charges, Late Fees, Attorneys' Fees: Installments of
Rent are due promptly, without demand, in advance on the first day of each
calendar month during the Term; or, if due within a period stated in this Lease
after the furnishing of a statement or Notice by Lessor, then within such period
of time. A per diem administrative charge of $25.00 shall be charged to Lessee
if Rent or Additional Rent is not received by Lessor, in full, on or before the
fifteenth (15th) day after the due date for such payment, but not in excess of
$275.00 in any calendar month. If Lessor is required to retain legal counsel to
enforce any of the rights and remedies granted to Lessor under this Lease,
Lessee shall reimburse Lessor, upon request, the reasonable and necessary fees,
costs and expenses of legal counsel so incurred by Lessor. The Administrative
Fee, Late Charge and obligation to reimburse legal fees, all as provided in this
Paragraph 4.6, shall survive the termination of this Lease, and shall all be
collectible by Lessor as Additional Rent.
<PAGE>
4.6 Independent Covenants: Except as otherwise expressly set forth in this
lease, the Lessee's obligations under this Lease to pay Rent and Additional
Rent, and to perform the other obligations on the part of Lessee to be
performed, are independent and severable covenants from any obligations of the
Lessor under this Lease; and (except as otherwise expressly set forth in this
Lease) the Lessee shall not assert in any action or proceeding instituted by
Lessor against Lessee a counterclaim or claim for offset based upon the Lessor's
failure to perform any of the Lessor's obligations under this Lease.
Article 5
Prepaid Rent
5.1 Concurrently with the execution of this Lease by Lessee, Lessee has
deposited with Lessor the Security Deposit as Prepaid Rent, to be held by Lessor
to guarantee the full and timely performance by Lessee of its obligations under
this Lease, including (without limitation) the obligation to pay Rent and
Additional Rent. Lessor is not required to maintain the Prepaid Rent in a
segregated account, and may commingle the Prepaid Rent Deposit with other
receipts of Rent from the Building. The Prepaid Rent shall not bear or accrue
interest. If Lessee fails to perform any of the obligations on the part of
Lessee to be performed under this Lease, including (without limitation) the
obligation to pay each installment of Rent and Additional Rent when due, the
Lessor may, but shall not be required to, apply the whole or any part of the
Prepaid Rent to cure such default. If any portion, or all, of the Prepaid Rent
is so applied, Lessee shall, within five days after receipt of Notice itemizing
the amount and purpose(s) of such application, and demand therefor, deposit with
Lessor an amount sufficient to restore the Prepaid Rent to its original amount.
Failure to do so by Lessee shall be deemed a breach of this Lease. The
obligation of Lessee to do so shall be deemed an obligation on the part of
Lessee to pay Additional Rent, and may be so enforced by Lessor. If Lessee has
complied with all of the Lessee's obligations under this Lease, including
(without limitation) Lessee's obligations to pay all items of Rent and
Additional Rent, then the amount of the Prepaid Rent may be applied to the final
installments of Monthly Rent at the end of the Term of this Lease. Lessor may
decline to apply any portion, or all, of the Prepaid Rent until such time as all
amounts due from Lessee under this Lease have been paid in full, including
amounts which may become due by reason of lagging computations of Lessee's Share
of Operating Expenses and Real Estate Taxes. In the event of transfer of
ownership of the Building, Lessor may assign to or credit the new owner(s) with
the amount of the Prepaid Rent. Upon Notice from the new owner(s) to Lessee of
such assignment, transfer or credit, Lessee shall look solely to the new
owner(s) for application of of the Prepaid Rent; and the Lessor named in this
Lease shall be relieved of all liability with respect to the Prepaid Rent.
<PAGE>
Article 6
Permitted Use, Compliance with Laws, Restricted Uses
6.1 Lessee shall use and occupy the Premises only for the Permitted Use,
and for no other use. Lessee and all persons permitted by Lessee to come upon
the Premises shall comply with all laws, ordinances, regulations and with any
rules and regulations promulgated by Lessor regarding the use of the Building
and of the Premises, including all laws, ordinances and regulations relating to
the installation or display of signs on the Building or in or about the
Premises. Any such rules and regulations shall apply to all occupants of the
Building on a non-discriminatory basis. Lessor shall have no liability to Lessee
for non-observance of any such rules and regulations by any other tenant or
occupant of the Building; nor for a breach by any other tenant or occupant of
the Building of any of the terms of such tenant's or occupant's lease. Lessee
shall not make or permit to be made any use of the Premises which is forbidden
by any applicable law, ordinance, statute or governmental regulation; nor use or
permit the use of any portion of the Premises for any activity which will
increase the existing rate of casualty and liability insurance on the Building,
~r on any part of the Building; nor shall Lessee sell, nor permit to be sold,
kept or used in or about the Premises, any substance or article which may be
prohibited or restricted under standard fire insurance policies. Lessee, at its
own expense, shall comply with all requirements pertaining to the operation of
its business on the premises, including requirements of any insurance
organization or company necessary for the maintenance of casualty and liability
insurance covering the Building and the Premises at standard premiums.
6.2. Certificate of Occupancy: As of the Commencement Date, the Lessor
represents and warrants to the Lessee that a valid, permanent Certificate of
Occupancy is in effect covering the Premises) authorizing the use of the
Premises for the Permitted Use; and that such Certificate of Occupancy has not
been revoked. As of the Commencement Date, the Lessor represents and warrants
that there are no building violations of record in the Department of Buildings
of the municipality in which the Premises are located. Except for work to be
done in and about the Premises by the Lessee (for which building permits and a
sign permit may be required prior to the commencement of any such work or the
installation of any signs), Lessor represents and warrants that no additional
permits or approvals by any municipal authority is required for the Lessee to
commence doing business in the Premises in accordance with the terms and
conditions of this Lease.
<PAGE>
Article 7
Services
7.1 This Lease is a "net" Lease, and the Lessor shall not provide any
Services to the Lessee at the Premises except for those expressly set forth in
this Lease. The Lessee shall provide, at Lessee's sole cost and expense,
interior repairs, maintenance and cleaning of the Premises (including window
washing), as required. The Lessor will provide, at the Lessor's cost and
expense, maintenance, repair and replacement, as required, to the exterior
portions and structural elements of the Building (including roof, driveway and
rear parking area), and to the heating, air conditioning, electrical and
plumbing systems servicing the Premises, both within and outside the interior
demising walls of the Premises. As of the Commencement Date, the plumbing,
heating, electrical and cooling systems in the Building and in the Premises will
be in working order.
Article 8
Subletting and Assignment
8.1 Subletting and Assignment Prohibited: Lessee shall not assign,
mortgage, pledge or otherwise transfer (whether voluntarily, involuntarily by
operation of law, or otherwise) this Lease; nor shall Lessee sublet any portion
of the Premises; without the prior written consent of Lessor in each instance,
which consent shall not be unreasonably withheld. Any such assignment, mortgage,
pledge, encumbrance or other transfer, or any such subletting, without the
written consent of Lessor shall be absolutely void and of no effect whatsoever,
and shall constitute a breach of this Lease.
a) If Lessee desires to assign this Lease, or to sublet any portion of the
Premises, Lessee shall furnish Lessor with a Notice specifying:
i) The name and address of the proposed assignee or subtenant; and such
other information as Lessor may reasonably request regarding the proposed
assignee's or subtenant's financial responsibility and standing; and
ii) the terms and conditions of the proposed assignment or subletting.
<PAGE>
b) Lessor shall not in any event be obligated to consent to any such
proposed assignment or subletting unless:
i) the proposed assignee or subtenant is of a financial standing reasonably
satisfactory to Lessor;
ii) the proposed assignee or subtenant, or the proposed use of the premises
by the proposed assignee or subtenant, is not in conflict with or does not
violate the applicable building and zoning codes, and is consistent with the
permitted uses under the Certificate of Occupancy then in effect for the
Building;
iii) any obligation of the proposed subtenant or assignee to pay to the
Lessee any consideration for the purchase of the Lessee's business, or for the
purchase of the leasehold, or to otherwise make periodic installments to or for
the benefit of the Lessee, shall be subordinated to the proposed subtenant's or
assignee's obligation to pay Rent under this Lease;
iv) Lessee shall have then fully complied with all of the terms and
conditions of this Lease on the part of Lessee to be performed; and shall have
been in full compliance with such terms and conditions as of the effective date
of the proposed assignment or sublease;
v) Lessee shall reimburse Lessor for all reasonable costs and expenses that
may be incurred by Lessor in connection with the proposed assignment or
subletting, including (without limitation) the reasonable costs of making
investigations as to the acceptability of a proposed assignee or subtenant, and
the reasonable legal expenses incurred in connection with the granting of any
requested consent to the assignment or sublease;
c) Any subletting pursuant to this Lease shall be subject to all of the
terms and conditions of this Lease. Notwithstanding any such assignment or
subletting, and the acceptance of Rent and Additional Rent by the Lessor from
any such assignee or sublessee, Lessee shall remain fully liable for the payment
of all Rent and Additional Rent provided in this Lease, and for the performance
of all of the obligations of the Lessee contained in this Lease.
<PAGE>
d) Lessor shall be furnished with a duplicate original counterpart of any
instrument of assignment or sublease made by Lessee with respect to the
Premises, bearing the original signatures of the parties to be bound thereunder.
Article 9
Quiet Possession, Subordination, Attornment
9.1 Provided Lessee has fully performed all of the terms and conditions of
this Lease on the part of Lessee to be performed, Lessee shall peaceably and
quietly enjoy the use and occupation of the Premises throughout the Term,
without hindrance or molestation by anyone claiming through or under Lessor;
subject, however, to the terms and conditions of this Lease.
9.2 This Lease, and the rights of Lessee under this Lease, is subject and
subordinate:
a) to all present and future financial encumbrances on the Building, or on
any portion of the Building, including (without limitation) all mortgages, deeds
of trust, or trust deeds in the nature of mortgages, and other similar
encumbrances;
b) to all present or future ground leases of the land underlying the
Building;
c) to all modifications, extensions and replacements thereof;
d) to all such instruments which may affect the Building and adjacent
property;
e) to any spreaders or consolidations of any such financial instruments.
9.3 In confirmation of such subordination, Lessee shall promptly upon
request execute and deliver to Lessor any instrument which the Lessor, or the
holder of any such financial encumbrance, or the lessor of any ground lease to
which this Lease is subordinate, may reasonably request to evidence such
subordination. If Lessee shall fail to so execute and deliver such instrument,
Lessor is hereby irrevocably authorized to execute and to deliver such
instrument in the name of Lessee as Lessee's agent for such limited purpose.
9.3.1 Disturbance Agreement. The Lessor shall use the Lessor's best efforts
to obtain from the holder of any mortgage placed as a lien upon the Building an
agreement providing, in effect, that such holder will recognize this Lease and
Lessee's rights under this Lease, and will not disturb Lessee's tenancy under
this Lease for so long as Lessee complies with all of the obligations under this
Lease on the part of Lessee to be performed, notwithstanding any breach under
the terms of such mortgage, or in the event of a foreclosure of such mortgage.
This Lease, and Lessee's rights and obligations under this Lease shall remain
unaffected if, after using the Lessor's best efforts to obtain such an agreement
from such mortgage holder, such an agreement can not ~e obtained (or if such
mortgage holder refuses to consent to any such agreement)
<PAGE>
9.4 If the holder of any financial encumbrance or the lessor of any ground
lease affecting the Building shall succeed to the rights of Lessor under this
Lease, whether through possession or foreclosure action, or delivery of a new
lease or deed, then at the request of such party so succeeding to Lessor's
rights (referred to as "Successor Landlord") and upon such Successor Landlord's
written agreement to accept Lessee's attornment, Lessee shall attorn to and
recognize such Successor Landlord as Lessee's landlord under this Lease, and
shall promptly execute and deliver any instrument which such Successor Landlord
may reasonably request to evidence such attornment, provided such Successor
Landlord shall consent, as a condition of such attornment, that the Lessee's
rights under this Lease shall not be disturbed, terminated nor otherwise
adversely affected as a result of such attornment for so long as Lessee performs
all of the terms, covenants and conditions of this Lease on the part of the
Lessee to be performed. Upon such attornment, this Lease shall continue in full
force and effect as, or as if it were, a direct lease between the Successor
Landlord and Lessee upon all of the terms and conditions set forth in this
Lease; except that the Successor Landlord shall not:
a) be liable for any previous act or omission of Lessor under this Lease;
b) be subject to any offset, not expressly provided for in this Lease,
which shall have theretofore accrued to Lessee against Lessor;
c) be bound by any previous modification of this Lease, not expressly
provided for in this Lease or otherwise reduced to a written instrument signed
by the parties; nor by any previous prepayment of more than one month's Rent,
unless such modification or prepayment shall have been expressly approved in
writing by the Successor Landlord.
<PAGE>
Article 10
Lessor's Reserved Rights
10.1 Lessor reserves the following rights:
a) to display "for rent" signs in and about the Premises during the last
four months of the Term;
b) during the last twelve months of the Term, to show the Premises to
prospective tenants;
c) to inspect the Premises, upon reasonable prior notice to Lessee and
(except for emergencies) at reasonable times; and to enter the Premises, without
prior notice, in the event of an emergency;
Article 11
Alterations and Improvements
11.1 Condition of Premises: Other than as provided in this Lease, Lessor
has not made any representations as to the condition of the Premises or of the
Building.
11.2 Delays in Completion of Alterations: [Intentionally deleted.]
11.3 Changes After Commencement Date: Lessee shall not, without the prior
written consent of Lessor in each instance (which consent shall not unreasonably
be withheld), make any material or structural alterations, improvements or
additions to the Premises (referred to as a "Change"). If Lessor consents to a
Change, Lessor may impose such conditions with respect to such consent that are
reasonably necessary or appropriate with respect to such proposed Change
(including, without limitation, the condition that additional insurance be
obtained by Lessee) as Lessor deems appropriate.
a) The work necessary to make the Change shall be done at Lessee's sole
cost and expense by employees or contractors approved by Lessor. Lessee shall
pay promptly, when due, the cost of all such work, which shall be done in a
workmanlike manner, and consistent with Building standards.
<PAGE>
b) Upon completion of such work, Lessee shall deliver to Lessor waivers of
all liens for labor, services and materials relating to the work in a form
satisfactory to Lessor. If the performance of such work gives rise to a lien,
then Lessor may (but shall not be required to) pay and satisfy such lien; and
the amount so expended by Lessor shall be reimbursed by Lessee to Lessor
promptly, upon request, as Additional Rent.
c) Lessee shall defend and hold Lessor and the Building harmless from all
costs, damages, liens and expenses related to the work. Lessee shall not be
deemed to be the agent of Lessor in connection with the work, nor in connection
with any other matter arising out of this Lease.
d) In the performance of the work, Lessee shall ensure that all
requirements of insurance carriers are complied with.
e) Upon the expiration of the Term, any Change shall become the property ~f
the Lessor; and, unless Lessor requests otherwise, shall be relinquished to the
Lessor in good condition, ordinary wear and tear from normal use excepted. At
the election of the Lessee, the Lessee at its sole cost and expense may remove
its personal property and trade fixtures which constitute the Change, and
restore the area from which such property has been removed to the condition
which existed immediately prior to the Change, ordinary wear and tear from
normal use excepted. As a condition to the Lessor's consent to any Change,
Lessor may require that the Premises be restored upon the expiration of the
Term, at the expense of Lessee, to the condition which existed immediately prior
to the Change.
Article 12
Repairs and Replacements
12.1 Lessee's Obligation to Repair; Lessee's Obligation to Maintain:
Subject to the rights and obligations set forth in Article 7 of this Lease, at
its expense, Lessor will maintain and keep the exterior and structural portions
of the Building, all utility service lines, pipes and plumbing servicing the
Premises, and all public areas of the Building, in good condition. Lessee, at
its expense, shall keep the Premises in a safe and tenantable condition, and in
good order, repair and appearance. If Lessee fails to do so, Lessor may (but
shall not be required to) restore the Premises to a safe and tenantable
condition; and Lessee shall pay the cost thereof, upon request, as Additional
Rent.
<PAGE>
Article 13
Destruction or Damage
13.1 Destruction or Damage: Restoration: If the Building or the Premises
are partially or totally damaged or destroyed by fire or other casualty, whether
or not the damage or destruction shall have resulted from the fault or neglect
of Lessee or its employees, agents, visitors or guests, and if this Lease shall
not have been terminated as provided in this Article 13, Lessor shall repair the
damage and restore and rebuild the Building and/or the Premises, out of and to
the extent of the proceeds of any policy of casualty insurance payable to
Lessor, with reasonable dispatch after receipt of such proceeds. In no event,
however, shall Lessor be required to repair or to replace any of Lessee's
property; nor shall Lessee be relieved of liability or responsibility for damage
or destruction resulting from the fault or neglect of Lessee (or of its
employees, agents, visitors or guests) if the insurance policies carried by
Lessee under this Lease do not contain a waiver of the right of subrogation.
13.2 Partial Damage: Abatement of Rent: If the Building or the Premises are
partially damaged or partially destroyed by fire or other casualty, Rent shall
be abated to the extent that:
a) the Premises shall have been rendered untenantable, and for the period
from the date of such damage or destruction to the date that the damage or
destruction shall have been substantially repaired or restored; and
b) the Lessor shall have received compensation, in lieu of Rent, from any
rent interruption or business interruption insurance carrier.
13.3 Total Damage or Destruction, Termination of Lease: If the Building or
the Premises shall be totally damaged or destroyed by fire or other casualty, or
if the Building shall be so damaged or destroyed by fire or other casualty as to
require a reasonably estimated expenditure of more than 50% of the full
insurable value of the Building immediately prior to the casualty in order to
restore the same, then in either such case, Lessor may terminate this Lease by
giving Lessee Notice to such effect within 30 days after the date of the
casualty. In case of any damage or destruction mentioned in this Paragraph.
13.3 Lessee may terminate this Lease upon Notice to Lessor, if Lessor has
not substantially completed the making of the required repairs, and
substantially restored and rebuilt the Building and the Premises within ninety
(90) days from the date of the casualty, or within such period after such date
(not exceeding an additional thirty (30) days) as shall equal the aggregate
period Lessor may have been delayed in doing so by adjustment of insurance,
labor troubles, governmental controls, or other causes reasonably beyond the
control of Lessor; and such termination shall be effective upon the expiration
of thirty days after the date of such Notice.
<PAGE>
13.4 No Claim for Consequential Damages: No damages, compensation or claim
shall be payable by Lessor for inconvenience, loss of business or annoyance
arising from any repair or restoration of any portion of the Premises or of the
Building, unless such claims are covered by Lesssor's casualty insurance
coverage.
Article 14
Eminent Domain
14.1 Whole or Partial Taking: If the whole of the Premises shall be
lawfully condemned or taken in any manner for any public or quasi-public use,
this Lease and the term and estate hereby granted shall forthwith cease and
terminate as of the date of vesting of title. If only a part of the Premises
shall be so condemned or taken, then, effective as of the date of vesting of
title, the Rent shall abate in proportion to the area so taken, and Lessee's
Proportionate Share shall be similarly proportionately reduced. However, if such
partial taking shall materially and adversely affect the conduct of Lessee's
business at the Premises, then the Lessee may, upon not less than thirty (30)
days' Notice, terminate this Lease.
14.2 Partial Taking, Election to Terminate: If only a part of the Building
shall be so condemned or taken, then Lessor (whether or not the Premises be
affected) may, at Lessor's option, if a material portion of the Building is so
taken (such option to be elected, if at all, in a commercially reasonable
manner):
a) terminate this Lease, and the term and estate hereby granted shall cease
and terminate as of the date of such vesting of title, upon Notice to Lessee
given within sixty days following the date upon which Lessor shall have received
notice of vesting of title; or
<PAGE>
b) if such condemnation or taking shall be of a substantial part of the
Premises, or of a substantial part of the means of access thereto, so that, as a
result of such taking, reasonable access to the Building is no longer available
Lessee may, at Lessee's election, by Notice to Lessor delivered within thirty
days following the date on which Lessee shall have received notice of vesting of
title, terminate this Lease, and the term and estate hereby granted shall cease
and terminate as of the date of such vesting of title; or
c) if neither Lessor nor Lessee shall elect to terminate this Lease in the
manner set forth in this Paragraph 14.2, this Lease shall be and remain
unaffected by such condemnation or taking, except that the rent shall be abated
to the extent provided in this Article 14.
d) If only a part of the Premises shall be so condemned or taken, and this
Lease with respect to the part not taken is not terminated as provided in this
Article 14, Lessor shall, with reasonable dispatch, and out of the condemnation
award, restore the remaining portion of the Premises as nearly as practicable to
the same condition as existed prior to the condemnation or taking.
e) The entire condemnation award derived from any such condemnation or
taking shall belong to the Lessor, and no portion of such award shall belong to
Lessee, regardless of the manner in which such award shall have been computed or
allocated; unless the condemning authority shall have made an award separate
from the Lessor's award, and payable t6 the Lessee in compensation for the
taking of Lessee's interest in the leasehold.
Article 15
Holding Over
15.1 Effect of Holding Over After Expiration of Term: If Lessee retains
possession of the Premises, or any part of the Premises, after the expiration of
the Term, or after any extension of the Term, whether the Term ends on the
Expiration Date or at any other time, Lessee shall pay to Lessor for the use and
occupation of the Premises (or of the part of the Premises so occupied) at the
rate of 200% of the rate payable for the month immediately prior to the holding
over, computed on a per month basis, for each month or part of a month (without
reduction for partial month) that Lessee remains in possession. Such payment
shall not be construed as the creation of a new lease between Lessor and Lessee,
nor as a renewal or extension of this Lease; but shall be deemed liquidated
damages to Lessor for Lessee's holding over after the expiration of the term;
and shall in no way impair the Lessor's right to seek possession of the Premises
by legal proceedings.
<PAGE>
Article 16
Surrender of Possession
16.1 At the Expiration Date or other termination of the Term, Lessee shall
immediately surrender the Premises to Lessor in good repair and condition,
ordinary wear and tear from normal use excepted; and further excepting damage
from fire or other casualty for which Lessee is not liable. Lessee shall at its
expense remove its furniture and equipment from the Premises, and shall repair
all damage to the Premises or to the Building occasioned by such removal; or pay
to Lessor the cost of such repair if Lessee fails to make such repairs promptly
upon removal. Lessee shall leave the Premises in "broom clean" condition. Any
personal property which Lessee does not remove from the Premises shall be deemed
abandoned by Lessee; and Lessee shall be deemed to have conveyed the same to
Lessor. Lessor may dispose of the same without incurring any obligation to the
Lessee to account for such property; and Lessee hereby waives any and all claims
against Lessor for damages or for other compensation with respect to such
property. If Lessor incurs any expense to dispose of such abandoned property,
Lessee shall reimburse Lessor for the expenses so incurred, upon request, as
Additional Rent.
Article 17
Default and Remedies
17.1 Acts of Default: The following shall be deemed a default by Lessee of
its obligations under this Lease:
a) failure to pay any installment of Rent or Additional Rent within fifteen
(15) days of the due date for each installment of Rent;
b) failure to observe or to perform any obligation on the part of Lessee to
be performed under this Lease, other than the payment of Rent or Additional
Rent, and such failure shall persist for fifteen days after delivery of Notice
to cure;
<PAGE>
c) failure to remove or to cure a hazardous condition immediately upon
Notice to cure or to remove the same;
d) the levy or execution upon the interest of Lessee under this Lease or in
the Premises;
e) abandonment of the Premises;
f) the filing by or against Lessee of a petition in bankruptcy; and such
petition not having been dismissed within thirty days of its filing;
g) the institution of any proceeding by or against the Lessee whereby the
Lessee seeks relief from creditors; or in which Lessee seeks to make a general
assignment for the benefit of creditors; or seeks a composition with its
creditors; or in the event of an appointment of a receiver of Lessee; and such
proceeding or appointment shall not have been vacated or dismissed within thirty
days of the date of filing or appointment; or then, in any one or more such
events, Lessor may treat the occurrence as a breach of this Lease, provided
that:
x) if such default is a monetary default, then Lessee shall upon five days
Notice to cure, fully cure the same; and
y) if such default is other than a monetary default, then Lessee shall upon
ten days Notice to cure, fully cure the same, or within such period of time take
all reasonable a necessary steps to cure the same and diligently pursue the cure
of such default as expeditiously as reasonably possible; and
z) in either event, if Lessee shall have complied with the provisions of
"x" or "y" (whichever is applicable) , Lessee shall not be deemed in default of
its obligations under this Lease; otherwise, Lessee shall be deemed to be in
default of its obligations under this Lease, and the Lessor may, without further
notice or demand of any kind to Lessee, or to any other person, exercise any one
or more of the following remedies in the manner provided by law. In no event,
however, shall Lessor be required to furnish Lessee with Notice of a monetary
default more than two times in any calendar year.
<PAGE>
i) Lessor may (after the expiration of any applicable grace period or
period to cure) terminate this Lease, in which event Lessor may immediately take
possession of the Premises and prepare the same for reletting, and to relet the
same, in a commercially reasonable manner and on commercially reasonable terms,
to any other lessee of Lessor's choosing. Lessor shall use its best efforts to
re-let the Premises in a commercially reasonable manner. The costs and expenses
of preparing the Premises for reletting (including, without limitation,
reasonable brokers' commissions, advertising expenses and fix-up expenses) shall
remain the liability of the Lessee. In the event the Premises are relet to
another Lessee at a rent less than the amount of Rent and Additional Rent
reserved in this Lease, then the Lessee shall remain liable to the Lessor for
the difference between the Rent and Additional Rent the Lessor would have
received, had the Lessee complied with its obligations to the Lessor under this
Lease, and the rent (inclusive of any "additional rent") which the Lessor
actually receives from such other lessee.
ii) Lessor may terminate Lessee 5 right to possession, and may repossess
the Premises by forceable entry, summary proceeding, or by any other lawful
process, by taking peaceful possession or otherwise without terminating this
Lease, in which event Lessor may, but shall be under no obligation to, relet the
Premises for the account of Lessee, for such rent and upon such terms as may be
commercially reasonable. For the purpose of such reletting, Lessor is authorized
to decorate, repair, remodel or alter the Premises. If Lessor shall fail to
relet the Premises, Lessee shall pay to Lessor the Rent and Additional Rent
reserved in this Lease for the balance of the Term. If the Premises are relet,
and a sufficient sum shall not be realized from such reletting after payment of
the costs and expenses of all decoration, repairs, remodeling, alterations,
brokers, and legal counsel thereby incurred, to satisfy the Rent and Additional
Rent provided in this Lease, Lessee shall pay the same upon request. No suit or
recovery of any portion due Lessor shall be any defense to any subsequent suit,
action or proceeding brought for any other amount not previously reduced to
judgment in favor of Lessor.
l7.1.1 Waiver of Landlord's Lien. Notwithstanding any provision of this
Lease to the contrary, the Lessor does hereby waive any claim to a lien with
respect to the Lessee's inventory which may now or hereafter be placed in or
about the Premises, whether such claim may arise as a result of the Lessee's
uncured default(s) under this Lease, or otherwise. The Lessor consents that the
Lessee's inventory may be encumbered with a lien, security interest or other
encumbrance in favor of any lender or secured party; and further consents that
any such lien, security interest or other encumbrance with respect to such
inventory shall be prior in right, and senior to, any claim of Lessor under this
Lease. Lessor shall, at Lessee's request, execute and deliver an appropriate
lien waiver required by any secured lender of the Lessee, which lien waiver
shall reflect the provisions of this Lease.
17.2 No Waiver by Implication: No waiver of any default of Lessee shall be
implied from any omission by Lessor to take any action on account of a default
if such default persists or shall be repeated; and no express waiver shall
affect any default other than the default specified in the express waiver, and
only then for the time and to the extent therein stated. No failure on the part
of Lessor to exercise any right or remedy granted under this Lease, or the
failure of Lessor to insist upon strict compliance with the terms of this Lease,
shall be construed as a waiver of the Lessor's right to exercise such right or
remedy, or to demand strict compliance. No course of conduct, nor any custom or
practice of the parties shall be construed as a waiver or modification of any of
the provisions of this Lease.
Article 18
Insurance and Waiver of Recovery
18.1 Compliance with Insurance Requirements: Lessee shall not violate, or
permit the violation of, any condition imposed by the standard fire insurance
policy then issued for buildings comparable to the Building; and shall not do,
or permit anything to be done, or keep or permit anything to be kept in the
Premises which would subject Lessor to any liability or responsibility for
personal injury or death or property damage, or which would increase the fire or
other casualty insurance rates on the Building over the rate which would
18.4 If, by reason of the failure of Lessee to comply with the terms of
this Lease, the rate of fire or other casualty insurance on the Building or on
any of Lessor's property in the Building shall be higher than it otherwise would
be, Lessee shall reimburse Lessor upon request, for that part of the excess
premiums for such insurance coverages.
18.5 Insurance Coverage Limits: Lessee shall provide on or before the
Commencement Date, and shall maintain in full force and effect during the Term
of this Lease, for the benefit of Lessor and of Lessee:
a) a general liability insurance policy protecting the Lessor and the
Lessee against any liability whatsoever, occasioned by any occurrence on or
about the Premises or any appurtenances thereto, in the amount of the Public
Liability Insurance Limits.
<PAGE>
b) a casualty insurance policy protecting the Lessor and Lessee, and
providing for coverage against loss or damage to Lessee's improvements and trade
fixtures for not less than the full replacement value thereof (provided,
however, that Lessor shall maintain casualty insurance on the Building and
Premises, excluding Lessee's improvements and trade fixtures).
c) business interruption or rent interruption insurance coverage providing
for the payment to the Lessor, in the event of a covered loss, installments on a
monthly basis of not less than the then-current Annual Rent provided for in this
Lease (such installments, if any so paid to Lessor, shall be credited against,
and offset from, the Rent otherwise payable by Lessee under this Lease).
Such policy or policies shall be written by a reputable and solvent
insurance company satisfactory to Lessor, and authorized to conduct business in
the State of New York. Such policy may be carried under a blanket policy
covering the Premises and other locations of Lessee, if any. Such policy shall
provide that not less than ten (10) days prior to its termination or
cancellation, whether for non-payment of premiums or for any other reason,
Lessor shall be notified in writing of such termination or cancellation.
Lessee's failure to provide and to keep in full force and effect such insurance
coverage shall be deemed to be a material default under this Lease entitling
Lessor to exercise any or all of the remedies provided in this Lease in the
event of default.
18.6 Limitation of Lessor's Liability: Except as otherwise expressly set
forth in this Lease to the contrary, the Lessor's obligations and covenants
under this Lease may be enforced and satisfied solely out of Lessor's interest
in the Building; and under no circumstances shall any claim or demand be
asserted against, nor enforced or collected from, any personal assets of the
individual comprising the Lessor, other than his interest in the Building; and
all claims and demands which may be asserted against any member, partner,
stockholder, manager, officer or director of Lessor, in their personal capacity,
is hereby waived.
Article 19
Taxes on Lessee's Property and Lease Taxes
19.1 Taxes on Lessee's Property: Lessee shall be solely liable for, and
shall pay before delinquency, all taxes levied against any personal property or
trade fixtures placed by Lessee in the Premises. If any such taxes on Lessee's
personal property or trade fixtures are levied against the Lessor or against
Lessor's property, or if the assessed value of the Building is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Lessee, and if Lessor, after Notice to Lessee, pays such taxes based
upon such increased assessments (which Lessor shall have the right but not the
obligation to do, regardless of the validity thereof, but only under proper
protest if request by Lessee), Lessee shall upon request repay to Lessor the
taxes so levied against and paid by Lessor, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event,
at Lessee's sole cost and expense, Lessee shall have the right, in the name of
the Lessor and with Lessor's cooperation, to bring suit in any court of
competent jurisdiction to recover the amount of any such taxes so paid under
protest, and any amounts so recovered shall belong to Lessee.
<PAGE>
19.2 Lease Taxes: If any government or governmental agency or department
levies a tax measured by or based, in whole or in part, upon the value or amount
of rent, which tax is payable pursuant to the relevant law, ordinance or state
by Lessee (either directly by Lessee or indirectly by Lessor as collector for
the taxing authority), then Lessee shall pay the tax in accordance with any such
ordinance or statute, or shall reimburse Lessor therefor. This Paragraph shall
not be construed so as to apply to Federal, State and municipal income taxes
payable by Lessor upon its gross income.
Article 20
Estoppel Certificate
20.1 Execution and Delivery of Estoppel Certificates: Lessee shall, within
ten days after written request from Lessor, execute and deliver to Lessor or to
a person designated by Lessor a certificate in form satisfactory to Lessor
stating: a) that this lease is unmodified and in full force and effect (or, if
there has been a modification, that the same is in full force and effect as so
modified, and stating the nature of the modification); b) certifying the dates
to which Rent and Additional Rent have been paid; c) stating the amount of the
Prepaid Rent; and d) stating whether or not, to the best knowledge of the
Lessee, the Lessor has complied with the terms and conditions of this Lease on
the part of Lessor to be performed (or, if such is not the case, stating in what
particular Lessor has not so complied). It is mutually acknowledged that any
such certificate delivered pursuant to this Article 20 may be relied upon by
others with whom the Lessor may be dealing. If Lessee shall fail to so execute
and deliver such certificate within the time required by this Article 20, then
Lessee does hereby irrevocably appoint Lessor as the agent and attorney-in-fact
of the Lessee, for the limited purpose of executing and delivery such
certificate in the name of Lessee and on Lessee's behalf.
Article 20(A)
Renewal Rights
20(A).1 Renewal Rights: Provided the Lessee, at the time of the exercise by
the Lessee of any option to renew, has then fully complied with all of the
obligations in this Lease on the part of the Lessee to perform (including,
without limitation, the obligation to pay Rent and Additional Rent when due),
and is not in default of its obligations under this Lease, then Lessee may renew
this Lease for an additional term ("the Renewal Term") of five (5) years, to
commence on the fifth (5th) anniversary of the Commencement Date, and to expire
on the fifth (5th) anniversary of the Expiration Date, as follows:
(a) Not later than 120 days prior to the Expiration Date, Lessee shall
serve Lessor with Notice to the effect that Lessee elects to renew the term of
this Lease for the Renewal Term. Timely service of such Notice is of the essence
to the Lessee's exercise of the renewal rights granted hereunder.
(b) Upon the service of such Notice, this Lease shall be deemed renewed for
the Renewal Term, upon the same terms and conditions set forth in this Lease;
except that nothing in this Lease shall be construed as a right further to renew
the term of this Lease upon the expiration of the Renewal Term.
(c) The failure of the Lessee to serve the Notice described in this Article
in a timely manner shall be deemed an election by the Lessee not to renew the
term of this Lease for the Renewal Term; and this Lease shall thereupon expire
on the Expiration Date (unless sooner terminated).
(d) The Rent payable during the Renewal Term (if exercised) shall be as set
forth in Article 1 of this Lease.
<PAGE>
Article 21
Miscellaneous Provisions
21.1 Legal Fees: (a) Lessee shall pay upon request all of Lessor's costs
and expenses, including the reasonable fees and disbursements of legal counsel,
incurred in enforcing Lessee's obligations under this Lease. The obligation of
Lessee under this Paragraph 21.1 shall be deemed Additional Rent.
(b) If, in any action or proceeding, it shall be adjudged that Lessor has
failed to perform any of its obligations under this Lease toward Lessee, as a
result of any claim or counterclaim brought by Lessee against Lessor, then
Lessor shall pay to Lessee the reasonable fees and disbursements of legal
counsel so incurred by Lessee.
21.2 Notices: All Notices under this Lease shall be in writing, and shall
be delivered via Certified Mail, Return Receipt Requested, or via Federal
Express, Express Mail, or via any other reputable overnight delivery service
which provides written evidence of delivery; and such Notice shall be deemed
delivered upon receipt by the addressee, or refusal by the addressee. Such
Notice shall be addressed to the party to whom such notice is directed at the
address shown in Article 1, or at such other or additional addresses as either
party may designate by Notice.
21.3 Lessor's Right to Transfer or Assign Interest in Lease: Except as
otherwise expressly set forth in this Lease to the contrary, without the prior
consent of Lessee, and without prior Notice to Lessee, Lessor may transfer its
interest in the Building and/or in this Lease subject to the terms and
conditions of this Lease; and, after Notice of such transfer to Lessee, and the
assumption of the Lessor's obligations under this Lease by the transferee,
Lessor shall be released from all liability under this Lease, except as to prior
acts of default (if any) by Lessor, and Lessee shall look solely to such
transferee for the performance of Lessor's obligations hereunder. Lessor may
assign its interest in this Lease to any lender as collateral security for any
loan; but such a collateral assignment shall not release Lessor from its
obligations under this Lease; and Lessee shall look solely to Lessor, and not to
any such lender, for the performance of Lessor's obligations under this Lease.
21.4 Applicable Law; Unenforceable Provisions: This Lease shall be governed
in all respects by the laws of the State of New York. If any provision of this
Lease, or the application thereof to any person or under any circumstances,
shall to any extent be invalid or unenforceable, the remainder of this Lease, or
the application of the offending provisions to persons or under circumstances
other than those as to whom or which it is held invalid or unenforceable, shall
not be affected thereby; and every provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
<PAGE>
21.5 Entire Agreement; No Other Representations: This Lease, and the
Exhibits annexed to this Lease, represents the entire agreement between Lessor
and Lessee. There are no verbal representations, warranties, promises or
statements, except to the extent that the same are expressly set forth in this
Lease, or in any other written agreement which may be made between the parties
concurrently with the execution and delivery of this Lease, upon which either
has relied in entering this Lease. This Lease may not be modified by any verbal
agreement, course of conduct, practice or custom; but only by a written
instrument signed by the party to be bound thereby.
21.6 Ejustem Generis: The rule of ejustem generis shall not be applicable
to limit any general statement set forth in this Lease which general statement
is followed by or refers to an enumeration of specific matters, to matters
similar to the matters specifically mentioned.
21.7 Brokers: If a Broker is named in Article 1, then Lessee represents and
warrants to Lessor that Lessee has not dealt with any real estate agent or
broker other than the Broker in connection with this Lease, or in connection
with Lessee's introduction to the Premises or to the Building. If any broker
(other than the Broker, if one is named in Article 1) claims that it was
instrumental in introducing the Building or the Premises to the attention of
Lessee; or was the procuring cause of this Lease; or was otherwise entitled to a
commission as a result of this Lease, then Lessee shall indemnify Lessor against
and hold Lessor harmless from any such claim, including the reasonable and
necessary costs and expenses of legal counsel incurred by Lessor in defending
any such claim.
21.8 Unilateral Termination: Any purported unilateral of this Lease by
Lessee shall not be binding upon Lessor, unless accepted by Lessor in writing.
Tender or delivery to Lessor of the keys to the Premises, or tender of
possession of the Premises, shall not constitute a termination of Lessee's
obligations under this Lease, unless acknowledged by Lessor in writing that such
tender or delivery shall constitute a termination of this Lease.
21.9 Relationship of Landlord and Tenant: Nothing contained in this Lease,
a no course of conduct between Lessor and Lessee, shall be construed as evidence
of any relationship between the parties except as landlord and tenant. Neither
Lessor nor Lessee shall assume any obligation to any third party whereby the
other is or may be liable, unless the parties so agree in a writing signed by
the party sought to be bound thereby.
<PAGE>
21.10 Binding Effect of Lease: Unless and until this Lease is signed by or
on behalf of Lessor and a counterpart bearing an original signature of Lessor or
of Lessor's duly authorized agent is delivered to Lessee, this Lease shall be
deemed an executory offer to lease the Premises, which offer shall be subject to
withdrawal at any time prior to acceptance by Lessor. Acceptance shall be
evidenced by Lessor's signature, or the signature of Lessor's duly authorized
agent, to this Lease. The acceptance of rent, or a "deposit" against rent, or a
"binder" by any person shall not constitute acceptance by Lessor of this
executory offer. After this Lease has been fully signed by the parties, and a
counterpart has been delivered to Lessee, this Lease shall be binding upon, and
shall inure to the benefit of, the parties1 respective successors and assigns.
21.11 [Paragraph 21.11 is intentionally deleted.]
21.12 Modification Required by Lenders: If a lender holding a mortgage or
deed of trust affecting any portion of the Building requires, as a condition of
any existing or future mortgage loan or secured loan, the repayment of which is
secured by a financial encumbrance upon the Building, that certain modifications
be made to this Lease, which modifications will not require Lessee to pay any
additional amounts, nor affect the Term of this Lease, nor affect the conduct of
Lessee's business upon the Premises, nor otherwise materially change the rights
or obligations of Lessee under this Lease, Lessee shall, upon request, execute
and deliver such instruments, without charge, to Lessor.
21.13 Payments Applied at Lessor's Discretion: Lessor shall have the right
to apply payments received from Lessee, regardless of Lessee's designation of
such payments, to satisfy obligations of Lessee in such order and in such
amounts as Lessor, in its sole discretion, may elect.
21.14 Limitations to Lessor's Liability: Except for the gross negligence of
the Lessor, Lessor and/or its agents and/or employees shall have no liability
for any loss or damage to property entrusted to employees or agents of Lessor;
nor for loss or damage to any property by theft or otherwise. Lessor and/or its
employees and agents shall not be liable for interference with the light or
other incorporeal hereditaments.
21.15 Notice of Lessor's Default: If Lessor is in default of any of its
obligations under this Lease, or if Lessee deems Lessor to be in default, Lessee
shall advise Lessor by Notice of the nature of the default within ten days after
Lessee has knowledge or actual notice of the act or occurrence which c6nstitutes
the default, and shall afford Lessor a reasonable opportunity to cure.
<PAGE>
21.16 Waiver of Trial by Jury: In any action or proceeding brought by
Lessor to enforce any right or remedy under this Lease, or to enforce Tenant's
obligations under this Lease, Lessee shall and hereby does waive trial by jury.
21.17 Authorized Signatures: If Lessee is a corporation or partnership,
Lessee represents and warrants to Lessor that the person signing on behalf of
Lessee is duly authorized by such corporation or partnership to sign on its
behalf; and that the signature of such person is, in the case of a corporation,
duly authorized by resolution of its board of directors; and, in either case, is
binding upon the entity constituting the Lessee.
21.18 Captions: The captions preceding any Article or Paragraph of this
Lease shall not be deemed to be a material part of the Lease, nor shall they be
deemed to control the meaning or content of any material provision; and are for
convenience only.
21.19 Personal Property, Fixtures: All fixtures located upon the Premises
as of the date of this Lease constitutes the sole property of the Lessor. The
Lessee may use such property, without additional rent or charge, during the Term
of this Lease; however, no such property shall be encumbered, transferred,
disposed of or sold by Lessee during the Term. At the end of the Term, all such
property shall be returned to the Lessor in substantially the same condition as
exists on the date of this Lease, reasonable wear and tear from normal
commercial use excepted. Repairs, maintenance and (if required) replacement of
fixtures shall be at the sole cost and expense of the Lessee; and any items of
personal property so replaced shall become the property of the Lessor, and
returned to the Lessor at the end of the Term of this Lease.
Article 22
Right of First Refusal
22.1 (a) If at any time during the Term of this Lease, or during the
Renewal Term, the Lessor elects to sell the Land and/or Building in which the
Premises are located to any third party, prior to accepting unconditionally any
offer from a third party, the Lessor shall first offer to sell the Land and/or
Building to Lessee upon the same terms and conditions, by written Notice. A copy
of any written offer or conditional contract of sale shall be furnished to the
Lessee (but the Lessor may conceal the identity of the offeror from Lessee).
Lessee shall have a period of fifteen (15) days from the time of delivery of the
Lessor's Notice to elect (or not) the Lessee's Right of First Refusal. Failure
to make a timely response by Notice to the Lessor's Notice shall be deemed to be
an election on the part of the Lessee not to exercise the Right of First Refusal
hereby granted.
<PAGE>
(b) If Lessee elects to exercise its Right of First Refusal hereby granted,
the Lessee shall enter a formal contract of sale with the Lessor, providing for
the same price, terms and conditions as the original offeror, and providing for
the conveyance by the Lessor of marketable title to the Land and Building not
later than ninety (90) days following the date of such contract, free and clear
of all objectionable encumbrances.
(c) The Lessee's exercise of the Right of First Refusal shall be
conditioned and contingent upon the Lessee's having complied (at the time of
such exercise) with all of the Lessee's obligations under this Lease on the part
of the Lessee to be performed, including the obligation to pay Rent and
Additional Rent; and upon there then being no uncured defaults or breaches by
the Lessee of any of its obligations under this Lease.
(d) The Right of First Refusal hereby granted shall not be exercisable, and
shall not apply, in the event of a no-consideration transfer or
less-than-market-value transfer by any individual Lessor to any spouse of such
person, or to any child or issue, nor to any trust for the benefit of any one or
more of them; nor in the event of a transfer by operation of law to any heir or
distributee of the Lessor or to any joint owner with right of survivorship; nor
in the event of a transfer of any interest in the Land and Building under the
will of any individual Lessor.
Article 23
Post-Closing Obligations under Contract of Sale
(a) Simultaneously with this Lease, the Lessor, as Individual Sellers, and
the Lessee (or the Guarantor of the Lessee, if any) have entered a certain
Contract of Sale for the sale of certain assets of the business known as "The
Sound Mill", which business was formerly conducted by the Individual Sellers at
the Premises, upon the terms and conditions set forth in said Contract of Sale
(the "Contract"). The Contract provides, inter alia, for certain post-closing
obligations of the Seller, including without limitation Seller's post-closing
agreements under paragraphs First, Ninth (b)(iii), Ninth (c), Tenth (a), Tenth
(b), Eleventh (c) and Sixteenth (b) of the Contract. In connection therewith,
the Seller has agreed to indemnify, defend and hold Purchaser harmless from and
against all lost, cost, expense (including reasonable attorneys' fees) and
damage incurred by Purchaser as a result of Seller's failure to perform any of
Seller's post-Closing obligations, representations or warranties under the
Contract.
<PAGE>
(b) Further, in connection therewith, the Lessor represents and warrants ~6
the Lessee that there is only one (1) mortgage currently encumbering the
Premises in the approximately principal balance of $88,000.00 (which is paid to
date) and that the Premises are otherwise owned by Martin Goldbaum and Sally
Goldbaum in fee simple title, free and clear of all liens and encumbrances.
Lessors agree that for a period of two (2) years from the Commencement Date, the
Lessors will not convey title to or re-mortgage the existing mortgage or
otherwise incurese the total mortgage balance encumbering the Premises. In the
event of the Seller's failure to perform any of the Seller's post-Closing
obligations referenced in paragraph Nineteenth (a) of the Contract, the Lessee
shall have the right to offset the Purchaser's loss, cost, expense or damage
against the Rent. It is mutually acknowledged by Lessor and Lessee that this
provision is part of the express consideration for the making of the Contract
and of this Lease. At Lessee's option, Lessee may record a memorandum of this
Lease.
(c) Capitalized nouns which are not specifically defined in this Lease
shall have the same meaning as in the Contract.
IN WITNESS WHEREOF, this Lease has been signed as of the date stated in
Article 1.
LANDLORD: TENANT:
Harvey Electronics, Inc.
______________________________ By:____________________
Martin Goldbaum
______________________________
Sally Goldbaum
<PAGE>
State of New York )
County of Westchester ) ss.:
On , 1998, before me, a Notary Public of the State of New York, personally
appeared MARTIN GOLDBAUM and SALLY GOLDBAUM, persons known to me, who did each
acknowledge to me that each signed the foregoing instrument as his/her free act
and deed.
____________________________________
Notary Public
State of New York )
County of Westchester ) ss.:
On , 1998, before me, a Notary Public of the State of New York, personally
appeared , a person known to me, who resides at , and is the of HARVEY
ELECTRONICS, Inc., the corporation which executed the foregoing instrument; that
he knows the seal of said corporation, that the seal was affixed by order of the
Board of Directors of said corporation, and that he signed his name, as an
officer thereof, pursuant to authority granted to him by the Board of Directors
of said corporation.
____________________________________
Notary Public
SURRENDER OF LEASE
AGREEMENT dated the 22nd day of December, 1998, by and between 873 BROADWAY
ASSOCIATES, having an office c/o Williams Real Estate Co. Inc., 380 Madison
Avenue, New York, New York (hereinafter referred to as "Landlord"), and HARVEY
ELECTRONICS, INC., a New Jersey corporation having an office at 205 Chubb
Avenue, Lyndhurst, New Jersey 07071 (hereinafter referred to as "Tenant").
W I T N E S S E T H:
WHEREAS, by agreement of lease dated as of November, 1992, Landlord leased
to Reliable Broadway, Inc., a New York corporation, those certain premises known
as Store No. 2 and Basement No. 2 (the "Premises") in the building known as 873
Broadway, New York, New York (the "Building");
WHEREAS, such lease was assigned, by Assignment of Lease dated June 26,
1996, to Room Plus Furniture, Inc., Tenant's predecessor in interest
(hereinafter, "Tenant's Predecessor") (such assignment shall hereinafter be
referred to as the "First Assignment");
WHEREAS, such lease, as assigned, was further assigned to Tenant by
Assignment of Lease (herein, the "Second Assignment") dated June 29, 1998 (such
lease, as assigned and together with any modifications, amendments and
extensions thereof, if any, shall hereinafter be collectively referred to as the
"Lease");
WHEREAS, Tenant is now desirous of cancelling the Lease and surrendering
possession of the Premises;
WHEREAS, Landlord is willing to accept a surrender of the Premises upon the
terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, it is mutually agreed as follows:
1. The Lease is hereby cancelled as of the date hereof (hereinafter
referred to as the "Cancellation Date") with the same force and effect as if
said date were initially set forth in the Lease as the termination date thereof.
2. Tenant covenants and agrees that it will, on or before the Cancellation
Date, surrender possession of the Premises to Landlord, broom clean and in
accordance with the Lease provisions. Tenant hereby gives, grants and surrenders
unto the Landlord, its successors and assigns, the Premises and all of its
right, title and interest therein, TO HAVE AND TO HOLD unto Landlord, its
successors and assigns, effective as of the day following the Cancellation Date.
<PAGE>
3. Tenant hereby covenants that it has not done or suffered anything to be
done whereby said Premises have been encumbered in any way whatsoever, nor shall
the Premises be in any way encumbered on the day Tenant surrenders possession
thereof to Landlord.
4. Tenant warrants, covenants and agrees, at its sole cost and expense, to
the extent reasonably practicable, fully and promptly cooperate with Landlord in
any action, proceeding or endeavor of Landlord to recover any moneys and/or
damages from Tenant's Predecessor including, without limitation, damages due
from Tenant's Predecessor arising out of the First Assignment. Such cooperation
shall include, without limitation, serving as a witness and/or providing
testimony (at depositions, in court, or otherwise), and promptly providing those
documents requested by Landlord.
5. Tenant hereby assigns to Landlord all its rights, claims and interests
arising out of the Lease. Tenant hereby releases Landlord, its successors and
assigns, from any and all claims and obligations under the Lease. Provided
Tenant complies with the provisions hereof, including, without limitation,
Paragraph 4, Landlord hereby releases Tenant from any and all claims of Landlord
for any payments due Landlord in connection with the Second Assignment.
6. Landlord has simultaneously herewith delivered to Tenant a check in the
amount of $39,748.00 (which amount represents the sum of $50,000.00 less rent
due under the Lease through 12/31/1998 or $12,752.00 plus a rent credit equal to
$2,500.00), and agrees to deliver a check in the amount of $40,000.00 on the
first anniversary of the date hereof, and a check in the amount of $35,000.00 on
the second anniversary of the date hereof as consideration for Tenant's
agreement to surrender the Premises and comply with the other provisions of this
agreement including, without limitation, Paragraphs 4 and 5 hereof.
7. Provided Tenant fully and faithfully complies with all the terms,
covenants and conditions of this Agreement, the security, or any balance
thereof, on deposit with Landlord under the Lease, shall be returned to Tenant
within thirty (30) days after the Cancellation Date
8. Tenant agrees to be responsible for all charges for utilities consumed
at the Premises to and including the Cancellation Date, as more particularly set
forth in the Lease. The obligation of Tenant in respect of such charges shall
survive the cancellation of the Lease.
9. Tenant acknowledges that this Agreement is being offered to Tenant for
signature by the managing agent of the building, solely in its capacity as such
agent, and is subject to Landlord's acceptance and approval. Tenant further
acknowledges that it has affixed its signature hereto with the understanding
that nothing herein contained shall in any way bind Landlord or its agent until
such time as this Agreement has been executed by Landlord and a fully executed
copy delivered to Tenant.
10. Tenant agrees that it shall solely be liable for, and warrants,
covenants and agrees to pay, any and all taxes (including, without limitation,
transfer taxes) due to any governmental authority arising out of this
transaction, all costs, expenses, fees, fines, penalties, or damages that may be
imposed on Landlord or Tenant by reason of Tenant's failure to comply therewith,
and shall, at Tenant's sole cost and expense, defend, indemnify and hold
Landlord harmless from and against any and all liabilities, obligations,
damages, penalties, claims, costs and expenses, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant of this
Paragraph 10. In case any action or proceeding is brought against Landlord by
reason of any such claim, Tenant, upon written notice from Landlord, will, at
Tenant's expense, resist or defend such action or proceeding by counsel approved
by Landlord in writing, such approval not to be unreasonably withheld.
11. This Agreement may not be changed, modified or cancelled orally, and
shall inure to the benefit of and be binding upon the parties hereto, their
successors, legal representatives and assigns.
IN WITNESS WHEREOF, the parties have hereunder to set their hands and seals
as of the day and year first above written.
Witness for Landlord: 873 BROADWAY ASSOCIATES
By: /s/Martin Meyer
------------------------------
Name: Martin Meyer
Its: Agent
Witness for Tenant: HARVEY ELECTRONICS, INC.
/s/Joseph J. Calabrese By: /s/Franklin C. Karp
- ---------------------------- ------------------------------
Joseph J. Calabrese Name: Franklin C. Karp
Executive Vice President Its: President
and Chief Financial Officer
Harvey Electronics
CONTRACT OF SALE
MARTIN GOLDBAUM SALLY GOLDBAUM, The SOUND MILL, Inc. and
LORIEL CUSTOM AUDIO VIDEO CORP., as Sellers,
with -
HARVEY ELECTRONICS, Inc., Purchaser
This AGREEMENT is made as of July 2, 1998 among MARTIN GOLDBAUM, and SALLY
GOLDBAUM, individually, and as officers and directors of The SOUND MILL, Inc., a
New York corporation authorized to transact business in the State of New York,
and of LORIEL CUSTOM AUDIO VIDEO CORP., a Connecticut corporation authorized to
transact business in the State of New York and in the State of Connecticut, all
of whom have a place of business at 115 East Main Street, Mount Kisco, New York
10549 (collectively, and jointly and severally, "Seller"); and HARVEY
ELECTRONICS, Inc., a corporation authorized to transact business in the State of
New York, having offices at 205 Chubb Avenue, Lyndhurst, New Jersey 07071
("Purchaser" or "Buyer").
WHEREAS, the Seller owns and conducts a retail business for the sale,
installation and servicing of audio and video equipment under the trade name
"The Sound Mill" at 115 East Main Street, Mount Kisco, New York (the "Business"
and the "Premises", respectively); and
WHEREAS, the Purchaser wishes to purchase, upon the terms and conditions of
this Agreement, certain of the assets of the Business listed on Schedule "A"
(including Schedules A-1 through A-2 attached to this Agreement (the "Assets"),
subject to the terms and conditions of this Agreement; and
WHEREAS, the individual Sellers are the owners of all the issued and
outstanding stock of The Sound Mill, Inc. and Loriel Custom Audio Video Corp.
WHEREAS, the Purchaser desires to purchase the Assets set forth in this
Agreement, and to lease the Premises from the Seller, upon the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, the parties agree as follows:
FIRST: Upon the terms and conditions set forth in this Agreement, the
Seller will sell, and the Purchaser will purchase, free and clear of all liens
or encumbrances the Assets of the Seller located at the Premises; excepting,
however: (a) all cash on hand and in bank accounts of the Seller as of the date
of Closing; b) accounts receivable of the Seller as of the date of Closing
(inclusive of any loans receivable by the Seller from any officer, director or
employee of The Sound Mill or from any other person) . In no event is Purchaser
assuming any liabilities of Seller existing as of the date of Closing or
thereafter. Seller agrees to indemnify and hold harmless Purchaser from and
against such liabilities for a period of two (2) years subsequent to Closing.
<PAGE>
SECOND: (a) The Purchase Price is Two Hundred Ten Thousand ($210,000.00)
Dollars for the Assets of the Seller, allocated as follows, and payable in the
manner set forth in this Agreement:
Furnishings, fixtures, vehicles and equipment: $ 50,000.00
Franchises, trade name and good will: $ 160,000.00
(b) At the Closing, the parties shall complete and execute Internal Revenue
Code Asset Acquisition Statements under Section 1060 of the Internal Revenue
Code consistent with the allocation set forth above; and each covenants and
agrees to file the appropriate tax forms with their respective Federal Income
Tax Returns for their respective tax periods consistent with such statements.
THIRD: The inventory and spare parts of the Seller will be disposed of in
the following manner:
i) Promptly following the execution of this Agreement by the Purchaser and
the Seller, the Purchaser and Seller will, jointly, inspect the Seller's
inventory and spare parts at the Premises; and the Purchaser shall advise the
Seller of which items of inventory or parts the Purchaser desires to purchase
from the Seller and the prices offered by Purchaser for such items, and which
items the Purchasers does not wish to purchase from the Seller. Between the date
of this Agreement and the Closing, as to those items of inventory or spare parts
which the Purchaser does not purchase from the Seller, the Seller shall have the
privilege of disposing in any manner the Seller deems fit, whether at retail,
wholesale or otherwise. However, in no event shall Seller conduct any "going out
of business" or similar sale at the Premises. Prior to Closing, those items of
spare parts and inventory which the Purchaser does not purchase from the Seller
shall be removed from the Premises by the Seller.
ii) With respect to the items to be purchased by Purchaser, an inventory
shall be conducted by the Seller and the Purchaser not more than forty-eight
hours prior to the time of Closing. Seller agrees not to dispose of any such
items between the date hereof and the time of Closing. At the Closing, the
Purchaser will pay to the Seller the Purchase Price (as determined above) by
certified check, bank check or wire transfer.
FOURTH: The Purchase Price, as determined as set forth above, shall be paid
as follows:
i) Upon the execution of this Agreement, the sum of Twenty Thousand
($20,000.00) Dollars, to be held in escrow by the attorney for the Seller in an
interest-bearing account at Chase Manhattan Bank, N.A., 711 North Bedford Road,
Bedford Hills, New York, until the Closing.
<PAGE>
ii) At the Closing, the sum of One Hundred Ninety Thousand ($190,000.00)
Dollars, plus the agreed value of the inventory and parts, if any, to be
purchase by the Purchaser from the Seller, by bank check, certified check or
wire transfer to the order of the Seller.
FIFTH: This Agreement may not be assigned by the Purchaser or Seller. The
Purchaser may designate a nominee to take title to the assets to be sold under
this Agreement; however, any such designation of a nominee shall not relieve
Purchaser of its obligations under this Agreement. In the event of the
designation by the Purchaser of a nominee, the name and address of such nominee
shall be furnished, in writing, to the Seller's attorney not less than ten (10)
business days prior to the Closing.
SIXTH: At the Closing, the Seller will grant to the Purchaser a lease of
the Premises presently occupied by the Seller for the operation of the Business
(the "Lease"), substantially in the form of the proposed Lease annexed to this
Agreement as Schedule "B". The Purchaser may designate a nominee to be the
Lessee under the Lease; however, in the event of such designation, the Purchaser
named in this Agreement shall execute and deliver to the Seller, at the Closing,
a Guarantee whereby the Purchaser named in this Agreement shall unconditionally
guarantee the full payment and performance by the Lessee of all of the Lessee's
obligations under the Lease. Such Guarantee shall be in a form reasonably
acceptable to Seller's attorney. In the event of such designation of a nominee,
the name and address of such nominee shall be furnished, in writing, to Seller's
attorney not less than ten (10) business days prior to the Closing.
SEVENTH: All Notices under this Agreement, or under any instrument to be
delivered at the Closing, shall be in writing, and shall be served upon the
person to whom such Notice is directed at the respective address shown on the
first page of this Agreement, with an additional copy thereof addressed to such
recipient's legal counsel. Counsel for the Seller is: Kenneth Karpel, Esq., P.O.
Box 388, Pawling, New York 12564-0388. Counsel for the Buyer is: Richard H.
Kaplan, Esq., Rubin, Kaplan & Associates, P.C., 501 Hoes Lane, Suite 100,
Piscataway, New Jersey 08854-5000. Any address to which a Notice is to be sent
may be changed, provided Notice of such change is given in accordance with the
provision of this Article SEVENTH.
EIGHTH: The Closing shall be held at a time and place mutually agreeable to
the parties on or about August 1, 1998.
NINTH: (a) If the Seller has accounts receivable a the time of Closing
which are not fully collected by the Seller, such accounts receivable shall
remain the property of the Seller. The Seller shall deliver to the Purchaser at
Closing a schedule of the Seller's accounts receivable. Purchaser shall have no
obligation to collect the Seller's accounts receivable on the Seller's behalf,
and the Seller shall collect the Seller's accounts receivable which are unpaid
as of the date of Closing. If, however, any such accounts receivable are
received by, or paid to, the Purchaser on and after the date of Closing,
Purchaser will accept the same as the agent of the Seller, in trust, and will
promptly remit to the Seller the amounts so received, if any. Seller reserves
the right to direct that accounts receivable outstanding as of the date of
Closing be remitted to an address other than to the address of the Business.
(b) As of the Closing, the Seller's work-in progress shall be adjusted as
between the Seller and the Purchaser as follows:
<PAGE>
With respect to each such work in progress:
i) As of the close of business on the day of Closing, the value of all
labor, equipment, materials and services actually delivered or provided to the
Seller's customers and billed for, shall be deemed accounts receivable of the
Seller and the Seller shall be entitled to retain such receivable when paid,
following the Closing. In no event, however, shall any equipment and/or
materials delivered or provided to the Seller's customers as of such date be
included in "inventory" to be paid for by Purchaser pursuant to the provision of
Article "THIRD" of this Agreement.
ii) On and after the day following the Closing, the value of all labor,
equipment, materials and services then and thereafter delivered or provided by
Purchaser shall be deemed accounts receivable of the Purchaser; and Purchaser
shall be entitled to bill for such labor, equipment, materials and services, and
to retain such receivables when paid, following the Closing.
iii) Upon the execution of this Agreement by the parties, the Seller shall
provide to the Purchaser a schedule of the Seller's work in progress including a
description of each project and the status thereof, copies of all contracts,
invoices and purchase orders and all other material documentation, and a
statement as to whether or not each such project shall be completed on or before
Closing; which schedule shall be updated and such updated schedule shall be
provided to the Seller as of the date Closing. With respect to each such work in
progress which Seller intends to complete prior to Closing, such work in
progress shall be excluded from the Assets being purchased hereunder and shall
be included in Seller's accounts receivable retained by Seller. Seller shall be
solely responsible for completion thereof prior to Closing. With respect to each
such work in progress which Seller does not intend to complete prior to Closing,
Purchaser shall have the option to either assume or reject such work in
progress. If Purchaser rejects such work in progress, then Seller shall be
solely responsible for completion thereof post-Closing, in which event such work
in progress shall be excluded from the Assets purchased hereunder, and shall be
included in Seller's accounts receivables retained by Seller. If Purchaser
assumes such work in progress, then such work in progress shall be governed by
paragraph Ninth (d) below and shall be assigned to and assumed by Purchaser at
Closing pursuant to said paragraph Ninth (c) below.
(c) At the Closing, and subject to the adjustments set forth in this
Agreement, the Seller shall assign to the Purchaser all outstanding and
unperformed work in progress which Purchaser elects to assume under paragraph
Ninth (b) (iii) above; and (to the extent assignable) all franchise and/or
dealer agreements with manufacturers and/or distributors which Purchaser elects
to assume (as set forth on Schedule A) . If such agreements are not assignable
without the prior consent of the party(ies) with whom such agreements have been
made, then the Seller will use the Seller's best efforts in good faith to obtain
such consent; but the failure to obtain such consent, or the refusal of consent,
shall not be a condition of Closing; nor shall such failure to obtain consent or
refusal to consent to the assignment of such agreements result in any abatement
of the Purchase Price payable at the Closing. However, if such consent is not
obtained, then at Purchaser's option such agreement shall be deemed rejected and
shall be Seller's sole responsibility post-Closing. The Purchaser shall
affirmatively assume to perform all such contracts and agreements so assigned on
and after the date of Closing. The Purchaser shall be entitled to bill for and
to collect (subject to the adjustments and allocations set forth in this
Agreement) the proceeds of such assumed agreements from the customers of the
Business. Purchaser shall, and does hereby agree to, indemnify and hold the
Seller harmless from any and all claims in connection with post-Closing work
assumed by the Purchaser. Seller shall, and does hereby agree to, indemnify and
hold Purchaser harmless from any and all claims in connection with any
pre-Closing work performed by Seller and any post-Closing work not assumed by
Purchaser.
<PAGE>
(d) Seller shall, prior to Closing, pay all wages, salaries, employee
benefits, employment taxes and employment insurance premiums with respect to
employees and/or independent contractors of the Seller, which are due and owing
for any period prior to Closing. At Purchaser's option (and without obligation
to do so), Purchaser may offer employment to any or all of Seller's employees or
independent contractors, as of the Closing.
(e) At the Closing, the Seller shall be entitled to a credit (to be added
to the balance of the Purchase Price due at Closing) equivalent to one half of
the prepaid portion of the Yellow Pages advertisement placed by the Seller for
the period computed from the Closing and ending February, 1999. If any portion
of the cost of such advertisement is payable after the Closing (for example, as
a surcharge shown on a telephone bill), then the Purchaser agrees to assume such
charge, and to pay such charge for the period from the Closing through February,
1999. In the latter event, the Purchaser shall be entitled to a credit (to be
deducted from the balance of the Purchase Price due at Closing) equivalent to
one half of such charges for the period from the date of Closing through
February, 1999. Prior to Closing, Seller shall provide to Purchaser appropriate
documentation showing the contract terms, prepaid amount and unpaid amount
sufficient for Purchaser to verify the appropriate closing adjustment.
TENTH: (a) At the Closing, the Seller will deliver to the Purchaser a bill
of sale covering all of the Assets included in this sale, together with an
affidavit of the Seller certifying that all of the creditors of the Seller
(except for tax obligations specified in paragraph Eleventh (c) below) have been
either paid in full, or will be paid in full promptly after the Closing out of
the proceeds of the sale. Such affidavit shall specify the name, address and
amount for all creditors to be paid out of the Closing proceeds, and Seller
shall provide at Closing appropriate documentation evidencing such payments.
After the Closing, the Seller will indemnify the Purchaser and agree to hold the
Purchaser harmless from and against any claims against the Purchaser or the
Assets asserted by any creditors of Seller.
(b) At the Closing, and subject to the adjustments set forth in this
Agreement, the Seller represents and warrants that all salaries, wages and other
compensation of the Seller's employees or independent contractors hired by the
Seller shall have been fully paid as of the close of business of the date of
Closing, inclusive of all withholdings from employees' compensation and
employer's contributions for Social Security benefits, workers' compensation
insurance, and unemployment Insurance required under any applicable law to be
paid by employers with respect to such salaries, wages and/or other
compensation. If such withholdings from earnings or employer's contributions can
not reasonably be calculated as of the date of Closing, or if such matters are
customarily calculated and/or paid at the end of a period following the date of
Closing, the Seller shall promptly calculate and/or pay the same as of the end
of such period. The Seller hereby agrees to indemnify the Purchaser against, and
to hold the Purchaser harmless from, any claims or liability with respect to any
of the matters enumerated in this paragraph "(b)", including any interest or
penalties assessed thereon by reason of the Seller's failure to pay any of the
same in the timely manner. This provision shall survive the Closing. Nothing
contained in this Agreement, however, shall be construed as any obligation on
the part of the Seller to pay, nor to hold the Purchaser harmless from, nor to
indemnify the Purchaser against, any claim for salaries, wages or other
compensation of Purchaser's employees and/or independent contracts; nor any of
the Sellers' former employees or former independent contractors who become the
employees or independent contracts of the Purchaser, for any period on and after
the date of Closing.
<PAGE>
ELEVENTH: (a) Within ten (10) days prior to Closing (or such shorter time
as shall be required by New York or Connecticut law), Seller will execute the
appropriate Bulk Sales Tax Notice and Return or similar document required by
law, and submit such return to the appropriate taxing authorities.
(b) At least fifteen (15) days prior to the Closing, the Seller will
furnish the Purchaser with the required affidavit of creditors, which shall
include a list (signed and sworn to by Seller) of Seller's existing trade
creditors with the amounts owed to each and also the names and addresses of all
persons or firms who are known to Seller to assert claims against Seller,
whether disputed or not, liquidated or unliquidated. Such Affidavit and list
shall be revised as necessary so as to be accurate and complete as of the date
of Closing. The parties shall execute and deliver such other and further
documents, notices and statements as may be required or appropriate in order to
comply with the laws of the State of New York and Connecticut relating to bulk
sales.
(c) Seller shall provide the Purchaser with all information necessary or
appropriate in order to notify the New York State Department of Taxation and
Finance and the State of Connecticut Department of Revenue Services of the
nature of the transaction(s) contemplated hereby; and the parties agree that the
withholding in escrow of the sum of Sixty Thousand ($60,000.00) Dollars by
Seller's attorney shall be sufficient escrow pending the issuance of the Sales
Tax clearance letter (or its equivalent) by each of the above taxing
authorities. Seller represents and warrants that Seller has not transacted
business in any states other than New York and Connecticut. Said sum shall be
held by the attorney for the Seller, as Escrow Agent, pending the issuance of a
Sales Tax clearance letter from the State of New York and the State of
Connecticut showing no unpaid Sales Tax liability of the Seller for any period
in either jurisdiction. If either Sales Tax clearance letter shows an unpaid
Sales Tax liability of the Seller, then the Escrow Agent shall use any portion
of the escrowed funds to satisfy the same. If both Sales Tax clearance letters
show no unpaid Sales Tax liability of the Seller, then the Escrow Agent shall
release said funds to the Seller, together with any interest actually earned
thereon. Until such Sales Tax clearance letters are obtained, Seller shall
indemnify and defend Purchaser from any such tax liability of Seller which is
imposed upon Purchaser or the Assets post-Closing.
(d) At the Closing, the Purchaser will pay the New York State Sales Tax on
that portion of the Purchase Price allocated to the non-exempt taxable chattels,
fixtures, equipment and machinery of the Assets to be sold under this Agreement.
Purchaser shall prepare, execute and deliver at Closing the New York State Sales
Tax Return. In the event the New York State Department of Taxation and Finance,
or other taxing authority, shall determine that the allocated value of the
non-exempt chattels, fixtures, equipment and machinery subject to Sales Tax is
in excess of the allocation made in this Agreement, then the Purchaser shall pay
the Sales Tax on such excess, if any. The Seller shall not be required to pay
such Sales Tax, nor the tax on such excess if so determined; however, if the
Seller does pay any such Sales Tax, then the Purchaser shall reimburse the
Seller fur the amount so paid, upon ten (10) days' written Notice and request
for the same. The Purchaser shall have the right to contest any such assessment
or re-assessment. This provision shall survive the Closing.
<PAGE>
(e) As of the date of Closing, the Seller will furnish the Purchaser with a
letter signed by the accountant then regularly servicing the books of the Seller
to the effect, in substance, that to the knowledge, information and belief of
such accountant and after review of all sales tax returns of Seller for the past
three (3) years, all Sales Tax returns of the Seller for all periods prior to
the period in which the Closing shall occur have been duly filed with all taxing
authorities, and all Sales Taxes shown to be due on such returns have been fully
paid, with interest and penalties (if applicable), and that to the knowledge of
such accountant the sales reflected in such returns accurately reflect the sales
of Seller for the periods covered thereby. Such letter shall further state, in
substance, that to the knowledge, information and belief of such accountant, no
Sales Tax return so filed for any such prior period has been audited or subject
to review by any taxing authority (or, if audited or subject to reviews such
audit and/or review has been closed, and any additional tax found to be due,
together with interest and penalties, if any, has been fully paid); and, in
substance, that to the knowledge, information and belief of such accountant, no
such audit or review is as of the date of Closing actually threatened or
pending.
TWELFTH: Following the Closing, the Seller agrees that none of them,
without the Purchaser's prior written consent, will engage (either directly or
indirectly, excepting only as a less than five (5%) percent passive investor in
a publicly traded company) in the operation of an audio and video equipment
servicing, installation and/or sales business for a period of five (5) years
following the date of Closing within a radius of thirty (30) miles from the
Premises. The foregoing restrictive covenant shall not apply in the event of a
breach by the Purchaser of Purchaser's obligations under the Lease, as a result
of which breach the Seller shall have elected to retake possession of the
Premises. No portion of the Purchase Price shall be deemed to be allocated to
the restrictive covenant set forth in this Article "TWELFTH".
THIRTEENTH: All of the parties to this Agreement mutually acknowledge and
represent to the others that no broker was involved in the introduction of the
Purchaser to the Seller, nor in the negotiation of this Agreement, nor was
otherwise the procuring cause of the transactions contemplated by this
Agreement. This provision shall survive the Closing.
<PAGE>
FOURTEENTH: The Seller represents, warrants and acknowledges that, as of
the date of this Agreement and as of the date of Closing:
i) Seller is the owner of the Assets included in this sale, and that at the
Closing, such Assets will be free and clear of all liens and encumbrances,
except as otherwise expressly set forth in this Agreement.
ii) Schedule "A" (along with other applicable provisions of this Agreement)
contains a true and complete list of all of the Assets to be sold to Purchaser
hereunder; and title to which will be conveyed to Purchaser at the Closing,
subject to the conditions of this Agreement.
iii) The Seller has paid, or will pay out of the proceeds of the sale, any
and all fees, taxes or other charges levied, assessed or imposed upon any of the
Assets of the Seller in the operation of the Business which, by the terms of
this Agreement or by law are the Seller's obligation to pay, except as otherwise
expressly set forth in this Agreement.
iv) There are no lawsuits or governmental proceedings pending, or to the
knowledge of the Seller threatened, against the Seller which might materially
affect the financial condition, the Business or the Assets of the Seller, or
which might adversely affect the ability of the Seller to consummate the
transactions contemplated by this Agreement. The consummation of the transaction
contemplated by this Agreement are not in violation of the terms of any
agreement, judgment or order to which the Seller is a party or under which the
Seller is or may be bound.
v) There are no written contracts of employment between Seller and any
officer or other employee or contractor of the Seller; and all oral contracts of
employment are terminable at will, or on not more than thirty days' prior
notice.
vi) The Seller has no pension, bonus, insurance, profit sharing, deferred
Compensation or retirement plans for its employees which might impose any
Obligation or liability upon the Purchaser.
vii) The Seller is not in default of any mortgage affecting the Premises or
the land and building in which the Premises are located.
viii) The Seller will not, between the date of this Agreement and the date
of Closing:
a) Conduct the Business in any manner other than in the regular and
ordinary course;
b) Enter into any transaction other than in the regular and ordinary course
of business;
c) Make no commitments or contracts (other than this Agreement), nor incur
any liability, extending beyond sixty days;
d) Make no purchase of inventory for which Purchaser might be liable, or
which Purchaser might be required to purchase from Seller, except in the regular
and ordinary course of business;
<PAGE>
e) Knowingly violate the terms of any license or franchise agreement
related to the operation of the Business;
f) Increase the salaries of any of Seller's employees.
ix) Except as otherwise requested by Purchaser, the Seller will use its
best efforts to preserve the Business, to keep available for the Purchaser the
services of present employees which Purchaser may elect to hire; to preserve for
the Purchaser the records of the Business; and to preserve for the Purchaser the
good will of Seller's customers and others having business relations with it.
However, the ability of Purchaser to hire Seller's present employees or
customers is not and shall not be a condition of Closing, nor shall the
inability to hire any such employees and/or customers relieve any of the parties
of their obligations to consummate the transaction(s) contemplated by this
Agreement and by the Lease.
x) There are no accrued benefits for vacation pay, vacation time, personal
leave or sick leave in favor of any employee of the Seller, except as otherwise
set forth on the Schedules annexed to this Agreement. The Seller is not party
to, nor subject to, any union or collective bargaining contract.
y) The consummation of the transactions contemplated by this Agreement has
been duly authorized by Seller as Seller's duly authorized act and deed.
FIFTEENTH: The Purchaser represents, warrants and acknowledges that as of
the date of this Agreement, and as of the date of Closing:
a) The Purchaser is and will be a corporation duly organized under the laws
of the State of its organization; is in good standing in the State of its
organization and in the State of New York; and is duly authorized regularly to
transact business in the State of New York.
b) The Purchaser is and will be authorized to enter and to consummate the
transactions contemplated by this Agreement and by the Lease, and that all
necessary action to authorize the execution of this Agreement and the Lease, and
to consummate the transactions so contemplated have been taken; and that this
Agreement and the Lease constitutes and will constitute, when executed, a valid
and binding obligation upon the Purchaser, and enforceable in accordance with
their respective terms.
<PAGE>
c) That there are no claims pending, nor any material litigation pending,
nor (to the knowledge of the Purchaser) threatened against the Purchaser which
may prevent the Purchaser from entering this Agreement, the Lease, and
consummating the transactions contemplated thereby.
d) The Purchaser's entering into this Agreement and the Lease is not and
will not be in violation of the terms of any agreement, order, judgment or
governmental rule or regulation binding upon the Purchaser; nor will the
consummation of the transactions contemplated hereby result in any violation or
breach of any such agreement, order, judgment or governmental rule or
regulation.
e) All of the representations and warranties of the Purchaser are true as
of the date of execution of this Agreement; and shall be true as of the date of
Closing. SIXTEENTH: (a) Following the Closing, the Seller shall permit its
warranty and service records to remain with the Purchaser. The Purchaser will
safeguard such records until two (2) years from the date of Closing, at which
time, the Seller shall either remove such records from the Premises, or
Purchaser shall be permitted to abandon and discard the same.
(b) Any labor which has been performed by the Seller prior to the Closing
which is subject to a guarantee or warranty of the Seller which extends beyond
the date of Closing shall remain the sole obligation and liability of the
Seller. Seller represents and warrants that it has guaranteed to its customers
of home installations that, for a period of two (2) years from the date of
completion of such installation, the labor so provided by the Seller to such
customers is guaranteed; and that in the event that additional labor is required
to remedy any defective labor previously provided, such additional labor would
be provided to such customers at no charge. At the Closing, the Seller will
provide the Purchaser with a list of all such customers. In the event any such
claim is made by any such customer, and additional labor is required to be
provided to such customer, then: i) Martin Goldbaum shall be notified of such
claim, and he shall have the obligation to resolve such claim in an amicable
manner with such customer; and ii) if such claim can not be amicably resolved
without the expenditure of additional labor to remedy the same, Seller shall
perform the work required to resolve such claim. If Seller fails to do so, and
if Purchaser thereafter does so (without obligation), the Purchaser's cost of
such labor shall be borne by Seller. Seller hereby agrees to indemnify the
Purchaser for the cost of the same. This provision shall survive the Closing
until the expiration of all such guarantees.
SEVENTEENTH: (a) The Purchaser has relied upon no representation made by
Seller, nor by any representative or agent of the Seller, which is not expressly
set forth in this Agreement, which Agreement fully sets forth the parties'
respective understandings and expectations. This Agreement is made by the
parties after a full examination by the Purchaser of the Business, of the
Seller's books and records, and of the physical condition of the assets included
in this sale. Purchaser is relying upon no warranty, express or implied,
relating to the merchantability of any of the assets included in this sale,
except as otherwise set forth in this Agreement. The parties mutually
acknowledge to each other that each has had the benefit of independent financial
and legal counsel in the negotiation and consummation of this Agreement and of
the transactions contemplated by this Agreement.
<PAGE>
(b) On and after the Closing, and subject to the terms and conditions of
this Agreement, the Purchaser shall, and does hereby agree to, indemnify, defend
and hold the Seller harmless from and against any and all claims, liabilities
and/or obligations which may accrue with respect to the Purchaser's actions on
and after the date of Closing, except those obligations which, by the terms of
this Agreement, are to remain the obligations of the Seller following the
Closing. This provision shall survive the Closing.
(c) On and after the Closing, and subject to the terms and conditions of
this Agreement, the Seller shall, and does hereby agree to, indemnify, defend
and hold the Purchaser harmless from and against any and all claims, liabilities
and/or obligations (except those obligations which, by the terms of this
Agreement, are to be assumed by the Purchaser) of whatever kind or nature
arising out of the Seller's operation of the Business prior to the Closing. This
provision shall survive the Closing.
(d) In the event that the Seller shall fail to perform any of the Seller's
obligations which, by the terms of this Agreement, are to be performed by the
Seller following the Closing, or which obligations are to survive the Closing,
then the Purchaser shall deliver a Notice to the Seller setting forth in
reasonable detail the nature of the Seller's failure to so perform. If, within
ten (10) days from the delivery of such Notice, the Seller has not performed
such obligation or (if full performance is not reasonably capable of full
performance within such ten-day period) the Seller has not promptly taken all
reasonable steps to commence such performance and to complete such performance
in a reasonable time thereafter, then the Purchaser may (but shall not be
required to) complete such performance on the Seller's behalf in a commercially
reasonable manner. In such latter case, the Seller shall upon written request
(given by Notice) reimburse the Purchaser for the reasonable and necessary costs
and expenses so incurred by the Purchaser. Nothing contained in this paragraph
(d) shall preclude the Seller from challenging, in good faith, the propriety of
such cost and expense so incurred by the Purchaser (and so offset from the
Rent); and if there be a final judicial determination that the reason for such
cost and expense, or the amount thereof, or any portion thereof, was not
incurred by the Purchaser as a consequence of the Seller's failure to perform
the Seller's obligations following the Closing, then the Purchaser shall
reimburse the Seller the amount(s) so paid by the Seller or so offset against
the Rent. This provision shall survive the Closing.
EIGHTEENTH: (a) This Agreement may not be modified verbally. Any
modification of this Agreement, in order to be binding, shall be in writing, and
signed by the party to be charged with any such modification. This Agreement
shall be binding upon the parties, and upon their permitted assignees, their
legal representatives and successors. Any noun or pronoun contained in this
Agreement shall be deemed to include the masculine, feminine or neuter genders;
or the singular or plural, as the context may require.
(b) This Agreement shall be construed and enforced in accordance with the
laws of the State of New York. The parties agree to submit to the jurisdiction
of the Supreme Court of the State of New York, County of Westchester, in
connection with any dispute arising out of this Agreement. This provision shall
survive the Closing.
<PAGE>
(c) This Agreement may be executed in multiple counterparts, each one of
which shall be deemed an original. By affixing their respective signatures
below, the parties mutually acknowledge that any person signing on behalf of a
corporation has been duly authorized to so sign by the Board of Directors of
such corporation; and that such signature shall fully and effectively bind such
corporation to the obligations contained in this Agreement.
NINETEENTH: (a) In connection with this Agreement, Seller has agreed to
certain post-closing obligations, including without limitation Seller's
post-closing agreements under paragraphs First, Ninth (b) (iii), Ninth (c),
Tenth (a), Tenth (b), Eleventh (c), and Sixteenth (b) and has made certain
representations and warranties which shall survive Closing hereunder. In
connection therewith, Seller agrees to indemnify, defend and hold Purchaser
harmless from and against all loss, cost, expense (including reasonable
attorneys fees) and damage incurred by Purchaser as a result of Seller's failure
to perform any of Seller's post-Closing obligations, representations or
warranties hereunder.
b) At the Closing hereunder, Martin Goldoaum and Sally Goldbaum shall enter
into the Lease for the Premises with Purchaser as set forth on attached Schedule
UBU. Seller has represented and warranted to Purchaser that there is only one
(1) mortgage currently encumbering the Premises in the approximate principal
balance of $79,000 (which is paid up to date) and that the Premises are
otherwise owned by Martin Goldbaum and Sally Goldbaum in fee simple title free
and clear of all liens and encumbrances. Seller has further agreed that for a
period of two (2) years after the Closing Seller will not convey title to or
re-mortgage the existing mortgage or otherwise increase the total mortgage
balance encumbering the Premises. In the event of Seller's failure to perform
any of Seller's post-Closing obligations referenced in paragraph Nineteenth (a)
above, Purchaser shall have the right to offset Purchaser's loss, cost, expense
or damage against the rent payable under the Lease. It is agreed that this
provision is part of the express consideration for the making of this Agreement.
The foregoing provision shall be expressly included in the Lease.
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
set forth above.
The Sound Mill, Inc.
The undersigned Escrow Agent
agrees to be bound by the By: /s/ Martin Goldbaum
provisions of Articles "FOURTH" -------------------------
(i) and "ELEVENTH (c)" of the Martin Goldbaum, President
foregoing Agreement:
/s/Martin Goldbaum
/s/Kenneth N. Karpel -------------------------
- ------------------------- Martin Goldbaum, individually
Kenneth N. Karpel, Esq.
/s/Sally Goldbaum
-----------------------
Sally Goldbaum, individually
Loriel Custom Audio Video Corp.
By: /s/Martin Goldbaum
-------------------------
Martin Goldbaum, President
Harvey Electronics, Inc.
By: /s/Franklin C. Karp
-------------------------
Franklin C. Karp, President
<PAGE>
Schedule "A-1"
1) Furnishings, fixtures. vehicles, equipment included in the sale:
(All located at 115 East Main Street, Mount Kisco, New York, "As Is")
Shelving, sales counter, carpeting
Built-in equipment racks, sales literature racks
Napco Alarm System
Halo track lighting
Switchers: M&I, Switchcraft, Audio Authority, M&K
Bang & Olaffson "Wall"
Panasonic Telephone System
Computer System
Calculators, cash register, cash drawer
Fire extinguishers
Fax Machine
Shredder
Copier
Office desks, file cabinets, chairs and furnishings
Water Cooler
Refrigerator
Electrolux vacuum cleaner
Steel warehouse shelving
2 Large handtrucks (refrigerator size)
2 Standard size handtrucks
2 Furniture dollies
4 six foot fiberglass ladders
1 eight foot fiberglass ladder
1 twenty eight foot fiberglass ladder
1 Milwaukee Saws-All
1 Shop Vac
Extension cords
Solder stations
1995 Chevy Van with deluxe shelving system
1996 Chevy Van with deluxe shelving system
Repair shop equipment listed on Schedule A-2
Installation tools listed on Schedule A-3
Supplies
<PAGE>
2) Inventory and spare parts included in the sale:
as determined by paragraph Third
3) Work in progress/contract rights included in the sale:
as determined in paragraph Third
4) Intangibles and Miscellaneous included in the sale:
All rights to trade name "The Sound Mill" Existing telephone # (914)
241-1230
Existing telephone # (914) 241-1230
Customer list (which will be provided on computer disk along with computer
system)
All computer software used in connection with the Business
All existing franchises (subject to Buyer's right to reject any franchise
after reviewing the terms of the existing franchise agreement)
<PAGE>
Schedule A - 2
Sound Technology 1OOOA FM Alignment Generator
Sound Technology 1700B Distortion Analyzer
Hewlett Packard 5315B Frequency Counter
Leader Laser Power Meter
Heathkit Audio Generator
Sencore VC 63 VCR Test Accessory
Sencore NT 64 NTSC Adapter
Sencore VA 62 Video Analyzer
Sencore SC 61 Scope
Sencore PR 57 Variable Isolation Transformer
Mitsubishi ctv-2 Substitute Control Panel
2 Soldering stations
Telematic Focus Adapter
1 Vise
<PAGE>
Schedule "B"
(Annex copy of Lease as Exhibit to Agreement)
LICENSE AGREEMENT
This License Agreement ("Agreement") is entered into as of the day of
September 30, 1998 between ABC HOME FURNISHINGS, INC., a New York corporation
having its principal office at 888 Broadway, New York, New York 10003
("LICENSOR") and HARVEY ELECTRONICS, INC. a New York corporation having its
principal office at Lyndhurst, New Jersey ("LICENSEE") Sometimes LICENSOR and
LICENSEE are referred to in this Agreement individually as a "party" and
collectively as the "parties."
The parties agree to the following:
A. LICENSOR operates a store more commonly known as ABC CARPET & HOME (the
"Store") on premises referred to as 888 Broadway, New York, New York (the
"Building")
B. LICENSEE desires the privilege and a license to operate an electronics
department within the Store under the terms, covenants, and conditions set forth
in this Agreement (the "Department")
C. LICENSOR is willing to grant LICENSEE such privilege and license but
only upon the terms, covenants, and conditions set forth in this Agreement.
In consideration of the mutual promises contained in this Agreement,
LICENSOR and LICENSEE agree as follows:
1. Grant of License. LICENSOR hereby grants to LICENSEE and LICENSEE
accepts the privilege to conduct and operate the Department in the Store and
other areas designated by LICENSOR for the display and retail sale of
audio/video, home theater, audio-visual furniture and the custom installation of
such furniture and equipment, consumer electronics and electronic accessories
(including audio/video furniture) and for no other purposes. It is anticipated
that the name of the licensed Department will be "HARVEY ELECTRONICS" or a name
substantially similar thereto. In no event may LICENSEE sell any other items
without the prior written consent of LICENSOR, which consent may be withheld at
the sole discretion of LICENSOR for any reason whatsoever. LICENSEE accepts this
Agreement subject and subordinate to any underlying lease, mortgage, deed of
trust, or other lien or encumbrance presently existing on the Store or hereafter
placed upon the Store. To the best of LICENSOR's knowledge, no permission,
approval, or consent by third parties or governmental authorities is required in
order for LICENSOR to enter into this Agreement.
2. Licensed Space. LICENSEE will initially occupy an area on the upper
mezzanine of the first floor of the Store consisting of approximately 4,500
square feet of lockable, useable space, inclusive of selling and display space
(the "Licensed Space"). The Licensed Space will be initially located in an area
of the Store that LICENSEE has been occupying up to the date of the execution of
this Agreement. The license of the Licensed Space includes all appurtenances and
existing means of access to and from, and all ways over the adjoining and
surrounding area of the Store and other public spaces immediately adjoining and
contiguous to the Licensed Space, and rights appurtenant to or used in
connection with the Licensed Space, including the use of all common areas, so
long as such use is consistent with LICENSEE's use of the Licensed Space in
accordance with the terms of this Agreement. In addition to the approximately
4,500 square feet of store space on the upper mezzanine level, LICENSOR will
make available to LICENSEE approximately 500 square feet of lockable storage
space in the sub-basement of the Building. All references in this Agreement to
the Licensed Space will include both the approximately 4,500 square feet of
store space on the upper mezzanine level and the approximately 500 square feet
of lockable storage space in the sub-basement of the Building. LICENSEE
acknowledges that from time to time LICENSOR may need to increase or decrease
the size of the Licensed Space and LICENSEE consents to such adjustments, so
long as if the amount of square footage in the upper mezzanine level area is
reduced by 10% or more, LICENSOR will be obligated to reduce the amount of base
license fees that LICENSEE pays LICENSOR hereunder proportionately. If LICENSOR
needs to decrease the size of the Licensed Space by more than 20%, LICENSOR must
first notify LICENSEE to determine whether LICENSEE will consent to such an
adjustment. If LICENSEE refuses to consent, LICENSOR will have the right not to
proceed with such a reduction in the Licensed Space by more than 20% and this
Agreement will continue in force and effect. On the other hand, if LICENSOR
insists on proceeding with the reduction of more than 20% in spite of LICENSEE's
refusal to consent, LICENSEE will have an option for a period of thirty days
immediately following receipt of written notice from LICENSOR that the Licensed
Space is going to be reduced by more than 20% to terminate this Agreement upon
one hundred and eighty days prior written notice, which notice must be sent
within such thirty day option period.
<PAGE>
3. Term. The term of this Agreement (the "Term") will commence on September
1, 1998 (the "Commencement Date") and will continue until January 1, 2001.
Thereafter, this Agreement will continue in full force and effect under the same
terms and conditions until terminated by either party upon not less than one
hundred and eighty days' notice to the other party.
4. Collection of Sales Proceeds. LICENSEE will collect one hundred percent
(100%) of its gross sales proceeds derived from the Licensed Space and will be
responsible for paying all (i) applicable sales and excise taxes, (ii) credit
card and charge card charges, (iii) check approval verifications costs, (iv)
shipping and handling charges and (v) costs related customers' returns and
refunds, and (vi) the amount of license fees payable by LICENSEE to LICENSOR
hereunder. The term "gross sales," as used in this Agreement, means the total
amount in dollars derived by LICENSEE from all paid-in-full (i.e., finalized and
delivered) sales of merchandise and services originating from LICENSEE's sales
from the Licensed Space, regardless of whether the customer's order is filled by
shipment or delivery from or at the Licensed Space, or delivered from any other
place. In determining whether a sale has been finalized and license fees are
payable in accordance with the provisions of this Agreement, no deduction will
be made for any part or parts (or the whole) of the sales that are uncollected
or uncollectible. Notwithstanding anything contained in this Agreement to the
contrary, LICENSOR agrees that LICENSEE will not be required to include in its
computation of gross sales any amounts LICENSEE charges for in-store repairs and
maintenance of goods sold by LICENSEE, but LICENSEE will be required to disclose
on its financial statements all repair service income from the Licensed Space.
a. Sale and Excise Taxes. LICENSEE will have the right to deduct from gross
sales any amounts collected by LICENSEE and paid out for any sales taxes or
excise taxes imposed by any duly constituted government authority. LICENSEE
agrees to promptly pay all applicable sales taxes and excise taxes as and when
due.
b. Credit Card Charges. LICENSEE may deduct from gross sales any amounts
collected and paid out for any applicable credit card and charge card charges.
LICENSEE will also have the right to deduct its cost of check approval
verifications. Credit card and charge card charges are agreed to be calculated
at two percent (2%) of LICENSEE's credit card and charge card sales from the
Licensed Space. To be deductible, all credit card, charge card, and check
approval verifications must be through LICENSOR's regular business processes. As
used in this Agreement, references to "credit cards" will also apply to debit
cards and similar types of cards.
c. Shipping and Handling Charges, Returns and Refunds. LICENSEE may deduct
from gross sales all shipping and handling charges to customers and the cost of
customers' returns and refunds. LICENSEE may make all refunds thereof either in
cash, by check, or credit slips through LICENSEE's register and LICENSEE will
maintain appropriate records of such transactions.
<PAGE>
d. License Fees Payable. Beginning on the commencement date of the term of
this Agreement, LICENSEE shall pay LICENSOR a base license fee of $25,000 per
month, payable on the fifteenth day of each month, to cover all net sales up to
and including $3,000,000 per year. Each month LICENSEE will cause to be
generated a business report in a form reasonably acceptable to LICENSOR relating
to the sales by LICENSEE from the Licensed Space. The report will state the
amount of paid-in-full (i.e., finalized and delivered) net sales during the
month on which royalties are being paid, and will provide such additional
information as the parties may reasonably request and agree upon. Each report
will be certified as true by a duly authorized agent or officer of LICENSEE.
Said reports will indicate the total net sales for each monthly period and such
other pertinent information as LICENSEE may reasonably request. As used in this
Agreement, the term "net sales" means LICENSEE's gross sales less all permitted
deductions pursuant to this Section 4. Additionally, LICENSEE shall pay LICENSOR
11% of LICENSEE's net sales in excess of $3,000,000 but less than $4,000,000 per
year and shall pay LICENSOR 12% of LICENSEE's net sales in excess of $4,000,000.
LICENSEE shall pay LICENSOR such additional license fees annually each year
within sixty days of the end of LICENSOR's fiscal year end. LICENSEE also agrees
to provide LICENSOR with LICENSEE's audited financial statements (including
LICENSEE's calculation of gross sales and net sales) and a copy of each 10-K
filed with the SEC within one hundred and five days after the end of each fiscal
year that occurs during the term of this Agreement. If at any time during the
term of this Agreement, LICENSEE's net sales are less than $2,100,000 of
annualized sales (calculated for any nine month period based on actual sales and
extrapolated for twelve months), LICENSEE will have an option for a period of
thirty days immediately following the nine month time period when such
occurrence first happens to terminate this Agreement upon one hundred and eighty
days prior written notice to LICENSOR.
5. Maintenance of Sales Records.
a. LICENSEE will provide, and at all times use and keep in good operating
order and condition, such systems of recording sales as LICENSOR, from time to
time, reasonably designates that will record sales on sequentially numbered and
daily dated invoices. LICENSEE covenants and agrees to preserve said daily dated
invoices for not less than one year after the end of the fiscal year of LICENSOR
to which they relate. LICENSEE further agrees that a duplicate copy of the
sequentially numbered invoice describing the items purchased and showing the
amount of the sale will be delivered to each customer for and at the time of
each sale. LICENSEE will record or cause to be recorded on LICENSEE's registers
all sales made by or in the Department or originating therefrom or attributable
thereto, regardless of whether for cash or other valuable consideration by means
of invoices as aforesaid, at the time of the sale.
b. LICENSEE's failure to comply with the terms of this provision will be an
event of default and will constitute cause for LICENSOR' 5 immediate termination
of this Agreement if LICENSEE fails to cure such event of default within two
business days of the date the event of default first occurs and record on such
registers all sales for the period of time LICENSEE was not in compliance with
the terms of this Agreement. Notwithstanding anything to the contrary contained
in this Agreement, if LICENSEE is in violation or breach of any of the terms of
this Agreement and LICENSOR has sent written notice to LICENSEE regarding each
violation or breach two or more times within a consecutive three hundred and
sixty-five day period, regardless of whether such violations or breaches are
timely cured, such violations or breaches will, at LICENSOR's election, be
deemed deliberate and not curable on the second occasion thereof.
c. LICENSEE further covenants and agrees to record sales and other
transactions from. LICENSEE's sales from the Licensed Space in permanent books
of account, in accordance with good accounting methods and practices. All
invoice records and book records must be maintained at the Licensed Space and
LICENSOR will have right to audit, examine, copy, and make abstracts of the same
at any time upon reasonable prior notice to LICENSEE. If a discrepancy of more
than two percent (2%) in underreporting of sales is determined as a result of
such audit or examination, LICENSEE will not only pay LICENSOR the amount of the
shortfall, plus interest at fifteen percent (15%) from the date the original
amounts were due and payable, but will also reimburse LICENSOR for the cost of
the audit or examination.
<PAGE>
6. Operation of Licensed Space. LICENSEE shall keep the Department open for
the regular transaction of business, with adequate inventory in stock, and
staffed with an adequate number of trained personnel during such days of the
week as LICENSOR from time to time reasonably determines. Such business hours
for the operation of LICENSEE's business will generally be the same as those of
the Store. LICENSEE shall at all times have a competent manager in charge of the
Department who shall devote his or her entire business time and attention to the
conduct of the business thereof. Persistent understaffing of the Department will
constitute grounds for termination of this Agreement (within LICENSOR's
discretion). LICENSEE agrees that all merchandise exhibited in the Licensed
Space will be consistent with LICENSEE's past practices within the Licensed
Space. LICENSOR, by signing this Agreement, acknowledges that the merchandise
"mix" in the Licensed Space as of September 1, 1998 was acceptable to LICENSOR.
7. LICENSEE's Operational Expenses. Except as otherwise specifically
provided for in this Agreement, LICENSEE shall bear and promptly pay and
discharge all expenses and obligations in connection with the operation of its
business, including, but not limited to, (i) the purchase of all fixtures,
merchandise, materials, and supplies in the Licensed Space, (ii) the
compensation of its employees plus benefits, taxes, licenses, and permit fees
payable to public authorities, (iii) commission expenses paid to LICENSOR's
employees (in the amount of 2.5%) that are generated from the sale of LICENSEE's
goods and inventory, (iv) all other expenses regardless whether similar to the
foregoing that are incurred by either party in connection with the operation of
the Department, (v) its proportionate share of the agreed-upon cost of any
cooperative advertising (including direct mail) with LICENSOR at the
then-applicable rate paid by LICENSOR, and (iv) all shipping and handling
charges other than in connection with customer returns. LICENSEE is likewise
entitled to be paid commissions on sales of LICENSOR' s goods and inventory by
LICENSEE's employees and LICENSOR agrees to credit LICENSEE for such amounts
against the commission expenses that are payable to LICENSOR for sales of
LICENSEE's goods and inventory by LICENSOR's employees. With regard to
LICENSOR's personal shoppers, LICENSOR agrees to use commercially reasonable
efforts to encourage such personal shoppers to promote the sale of LICENSEE's
furniture, fixtures, merchandise, and other goods and services.
8. LICENSEE's Employees. With regard to all LICENSEE's sales in the
Licensed Space, LICENSEE agrees to be solely responsible for providing adequate
accounting, record keeping, shipping, and receiving personnel for LICENSEE's
benefit. LICENSEE agrees to have each of its employees who work in the Licensed
Space sign an acknowledgement form at the time of hire stating that the employee
is aware of the fact that he or she is an employee of LICENSEE and not LICENSOR.
LICENSEE agrees to allow LICENSOR to review such acknowledgement forms at any
time during the Term or within five years after the end of the Term and LICENSEE
agrees to keep the original of such acknowledgement forms for a period of at
least five years after the end of the Term. LICENSEE agrees to assume all
responsibility and liability for all persons it employs. Nothing contained in
this Agreement will be deemed, either directly or indirectly, to construe
LICENSOR as the master or employer of any of LICENSEE's managers or employees,
agents or servants and in the event of a dispute regarding the construction of
this Agreement, it will be interpreted in a manner consistent therewith.
9. Keys; Access. LICENSEE will not be entitled to any keys or other means
of access to the Building, but will be entitled to have keys to the Licensed
Space but only on the condition that LICENSEE furnishes LICENSOR with at least
one key to the Licensed Space. In the event of an emergency, either a senior
manager or a general manager of LICENSOR will have the right to enter the
Licensed Space without LICENSEE's consent and without prior notice. In all other
instances, LICENSOR agrees to provide LICENSEE with prior notice of the need to
access the Licensed Space.
<PAGE>
10. Merchandising, Pricing, and other Policies. All merchandising policies,
including, but not limited to pricing structure, grades, standards, and
qualities of merchandise and inventory of LICENSEE are subject to the approval
of LICENSOR, which consent will not be unreasonably withheld. It is agreed that
the pricing structure of such merchandise to be sold in the Licensed Space will
be priced at no higher than that of LICENSEE's existing store merchandise in
LICENSEE's other stores in Manhattan and will be consistent with LICENSEE's past
practices regarding its pricing, presentation, and mix of merchandise. LICENSEE
will not be permitted to sell any items not covered by the description in this
Agreement in the Licensed Space without the prior written consent of LICENSOR.
Additionally, LICENSEE shall conform to all the general business policies,
practices, and procedures of LICENSOR, as same may from time to time during the
Term be amended or modified by LICENSOR.
11. Advertising. All advertising by LICENSEE pertaining to its licensed
business hereunder in any form whatsoever during the Term must be consistent
with prior practices within the Store and will be subject to the approval and
discretion of LICENSOR, and LICENSEE agrees not to engage in any advertising
without LICENSOR's written consent. To the extent that LICENSOR incurs any
agreed-upon cooperative advertising expenses for the benefit of the Store and
all the Licensees, LICENSEE agrees that LICENSOR will bill LICENSEE for its
share of such advertising expenses and direct mail expenses and LICENSEE agrees
to pay any such amounts owed within ten days of the date of receipt of an
invoice. LICENSOR agrees that LICENSEE will have the right during the term of
this Agreement to use the name "Harvey Inside ABC Home" in LICENSEE's
advertising. Moreover, to the extent that such action does not present a problem
with LICENSOR's other licensees, LICENSOR agrees to use commercially reasonable
efforts to list LICENSEE's name among LICENSOR's store names except in image
advertisements and linens advertisements.
12. Customer Complaints. LICENSEE covenants and agrees to promptly and
satisfactorily resolve any customer complaints relative to business transactions
conducted during day-to-day operation of LICENSEE's business in the Licensed
Space within fourteen days of LICENSEE receipt of same. Failure by LICENSEE to
satisfactorily resolve customer complaints and make to customers proper
allowances will constitute cause to terminate this Agreement. Satisfactory
resolution of complaints and customer allowances will be determined within the
reasonable discretion of LICENSOR. LICENSEE agrees to indemnify and hold
LICENSOR harmless for all customer related problems, complaints, and/or
discrepancies of any sort or description, including replacement or repair of any
product purchased from the Licensed Space.
13. Utilities. At its expense, LICENSOR will provide lighting, air
conditioning, and heat during normal business hours for the Department when, and
to the extent, in LICENSOR's reasonable judgment, necessary, but at least to the
extent provided for the rest of the Store. LICENSEE agrees that, at its own cost
and expense, it shall install and maintain a telephone for the purpose of making
outside telephone calls. LICENSOR agrees to provide to LICENSEE a separate
telephone extension for the purposes of identifying all of LICENSEE's outgoing
telephone calls made from the Licensed Space. LICENSOR agrees to provide a
telephone through the Store's main switchboard for incoming LICENSEE telephone
calls, with the initial installation costs to be incurred by LICENSEE. LICENSEE
agrees to pay for all telephone calls identified by its telephone extension
number. LICENSOR agrees to pay all real estate taxes on the Building during the
term of this Agreement and all charges for water used in the Building.
<PAGE>
14. Insurance Coverages.
a. LICENSEE shall procure and obtain commercial general liability insurance
coverage and products liability insurance from insurance companies or carriers
approved by LICENSOR of not less than one million dollars ($1,000,000) combined
single limit. Such coverage must include bodily injury, broad form property
damage, premises/operations, owner's protective coverage, blanket contractual
liability, products liability, and completed operations liability. Such
insurance must be obtained from companies and through brokers approved by and
acceptable to LICENSOR that are licensed to sell insurance in the State of New
York.
b. Such insurance policies must further provide that copies of cancellation
or termination notices will be sent to LICENSOR no later than thirty days prior
to cancellation, modification, or termination. Such language on the certificate
of insurance will read as follows: "If any of the above-referenced insurance
policies are canceled before the expiration date thereof or non-renewed, or if
the coverage of such policies is changed, the issuing company shall provide the
additional insured with at least thirty days' prior written notice thereof."
LICENSEE also agrees to deliver a copy of each insurance policy and all
endorsements required in this Agreement to LICENSOR on the Commencement Date or
within thirty days of the date of this Agreement, whichever is sooner, and
annually thereafter during the Term, within at least thirty days of the renewal
of such insurance coverage.
c. Duplicate copies of the policies will be delivered to LICENSEE and
LICENSOR within thirty days of the date of the execution of this Agreement or
within five business days of the date of LICENSEE's occupying the Licensed
Space, whichever is sooner, and annually thereafter within five business days of
the date such coverages are renewed.
d. LICENSOR, Jerome Weinrib and his wife, Norma Weinrib, and Evan Cole and
his wife, Paulette Cole, must be listed as additional named insureds on
LICENSEE's liability insurance coverages and as loss co-payees on LICENSEE's
casualty insurance coverages, as their interests may appear.
e. To the extent permitted by state law, LICENSEE agrees to have its
insurers on any insurance coverages that LICENSEE is required to maintain under
the terms of this Agreement waive subrogation rights and provide proof of same
to LICENSOR in the form of a written notation on the certificate of insurance.
Likewise, to the extent permitted by state law, LICENSOR agrees to have its
insurers on any insurance coverages that LICENSOR is required to maintain under
the terms of this Agreement waive subrogation rights with respect to both
property damage and personal injury and provide proof of same to LICENSEE in the
form of a written notation on the certificate of insurance.
f. To the extent any claims are paid on LICENSEE's insurance during a
policy year, LICENSEE agrees to immediately reinstate the minimum amount of
coverage so that the minimum amount of insurance coverage required in this
Agreement is in force at all times during the Term. The amount of the minimum
coverage to be maintained at all times during the Term is for an annual
aggregate amount. Accordingly, to the extent that a claim is paid on the
insurance policy at any time that reduces the amount of the annual aggregate,
LICENSEE agrees to immediately purchase additional coverage to maintain the
annual aggregate at the minimum limit throughout the remainder of the policy
year and provide LICENSOR with proof of having purchased such additional
coverage.
<PAGE>
g. All policies of insurance provided for in this Agreement must be issued
by insurance companies that have had a general policyholders' rating for the
five consecutive years immediately preceding and including the year the coverage
is written of not less than "A+" and with a financial rating of not less than
"A," as rated in the most current edition of A.M. Best Company's Insurance
Reports.
h. Each insurance policy required under the terms of this Agreement to be
maintained by LICENSEE will state that it is: (i) primary coverage as respects
any claims, losses, or liabilities arising out of LICENSEE's use of the Licensed
Space; (ii) non-contributing; (iii) not supplemental to, nor in excess of,
coverage that LICENSOR may carry or that may be available to LICENSOR; and (iv)
that any insurance coverage carried by LICENSOR will be excess insurance.
i. No insurance required by this Agreement to be maintained by LICENSEE
will be subject to more than a $10,000 deductible limit or self-insurance amount
without LICENSOR's prior written approval.
j. Any insurance policy required of LICENSEE under this Agreement may be
furnished by LICENSEE under a blanket policy carried by LICENSEE, but only if
such blanket policy contains an "Aggregate Limit per Location" endorsement that
guarantees a minimum limit available for the coverage provided to LICENSOR equal
to the insurance amounts required in this Agreement for the Licensed Space.
k. LICENSEE agrees that all insurance coverages provided for pursuant to
this Agreement will be on an "occurrence" basis and not on a "claims made"
basis.
1. LICENSEE agrees that, if LICENSEE does not keep the required insurance
coverages in force during the Term, LICENSOR will have the right, in addition to
all other rights set out in this Agreement, but not the obligation, at any time
and from time to time, and without notice, to procure the required insurance
coverages and pay the premiums for the insurance, and that such premiums will be
repaid by LICENSEE to LICENSOR, as additional royalty, immediately upon demand
by LICENSOR. LICENSEE shall pay LICENSOR the cost of all such insurance premiums
incurred by LICENSOR, together with interest thereon at the rate of ten percent
(10%) per annum, along with any additional costs and expenses incurred by
LICENSOR in connection therewith, without prejudice to any other rights and
remedies of LICENSOR under this Agreement. LICENSEE also agrees that LICENSOR
has the right to offset the amount of any premiums paid for by LICENSOR on
LICENSEE's behalf under this provision against any amounts owed by LICENSOR to
LICENSEE. It is expressly understood that procurement by LICENSOR of any such
insurance coverage will not be deemed to waive or release the default of
LICENSEE, or the right of LICENSOR, at LICENSOR's option, to recover possession
of the Licensed Space by reason of such default as provided in this Agreement.
LICENSEE covenants and agrees to pay LICENSOR all damages that LICENSOR may have
sustained by reason of the failure of LICENSEE to obtain and maintain such
insurance coverage, it being expressly declared that the damages of LICENSOR
will not be limited to the amount of premiums paid by LICENSOR thereon.
<PAGE>
m. LICENSOR, its agents, and employees make no representations that the
limits of liability specified to be carried by LICENSEE pursuant to this
Agreement are adequate to protect LICENSEE. If LICENSEE believes that any of
such insurance coverage is inadequate, LICENSEE will obtain, at LICENSEE's sole
cost and expense, such additional insurance coverage as LICENSEE deems adequate.
LICENSEE acknowledges that the limits of insurance required in this Agreement
will not, however, limit the liability of LICENSEE either in tort or contract
under the terms of this Agreement with respect to LICENSEE's negligence and any
such damage or harm proximately caused thereby, it being expressly agreed that
none of the requirements contained in this Agreement as to the types, limits, or
LICENSOR' 5 approval of insurance coverage to be maintained by LICENSEE is
intended to and will not in any manner limit, qualify, or quantify the
liabilities and obligations assumed by LICENSEE under this Agreement or
otherwise provided by law.
n. LICENSOR represents to LICENSEE that LICENSOR maintains and will
maintain during the Term adequate insurance coverage to protect against
LICENSOR's risks associated with the performance of this Agreement and will
maintain adequate casualty insurance coverage on the Building during the Term.
15. Independent Status. LICENSEE shall conduct its business solely for its
own account and at its own risk, and LICENSOR will have no ownership or the
right, title, or interest in or liability with respect to the business thereof,
or (except as otherwise specifically provided in this Agreement with regard to
LICENSEE's obligations to pay commissions) in the receipts, proceeds, or losses
thereof, nor will LICENSOR be deemed to be a partner, joint venturer, or
principal of LICENSEE.
16. Credit. LICENSEE will have no right or power to pledge LICENSOR's
credit or to incur any obligations or make any commitments that will be binding
upon LICENSOR, without LICENSOR's express written consent, it being the intent
of this Agreement that the Department will constitute an independent and
separate business, belonging in its entirety to LICENSEE, notwithstanding the
fact that the Store and the departments thereof, including the Department, may
be advertised as though it is a single establishment under LICENSOR's ownership,
management, or otherwise. In the event of a dispute, this Agreement with be
construed to preserve LICENSEE's independent operation as a stand alone
business.
17. Compliance with Laws. LICENSEE agrees at all times and at its own cost
and expense to comply with all laws, ordinances, rules, and regulations of any
applicable governmental agency or public authority with respect to or affecting
(i) its use and occupancy of the Licensed Space, (ii) its hiring of employees
(including all Immigration laws), and (iii) LICENSEE's business or the conduct
thereof. Likewise, LICENSOR agrees to comply with all laws, ordinances, rules,
and regulations of any applicable governmental agency or public authority with
respect to or affecting (i) its use and occupancy of the Building, (ii) its
hiring of employees (including all Immigration laws), and (iii) LICENSOR's
business or the conduct thereof. Each party hereby agrees to defend and
indemnify the other party and save it harmless from any and all losses, damages,
liability, costs, or expenses resulting from any violation of any of the
foregoing by the non-complying party regardless whether such violations
originated before or after the date of this Agreement. LICENSEE will not be
responsible for interior or structural alterations that are required as a result
of any laws that are enacted subsequent to the date of this Agreement or changes
in law that occur after the date of this Agreement.
<PAGE>
18. LICENSEE's Furniture, Fixtures, and Equipment. All plans for installing
fixtures and signs in the Licensed Space must be submitted to LICENSOR for its
prior written consent, which consent will not be unreasonably withheld. LICENSEE
shall, at its own cost and expense, purchase and install its furniture,
fixtures, and equipment to be used by it in the Licensed Space. Such furniture,
fixtures, and equipment may be located only within the Licensed Space and must
be substantially similar to LICENSEE's existing store(s) located in Manhattan.
Title to such furniture, fixtures, and equipment will be and remain in LICENSEE
at all times and LICENSEE will be totally responsible for the care and
maintenance thereof. Upon the termination of this Agreement, LICENSEE shall at
its own cost and expense remove all such furniture, fixtures, and equipment and
repair any damage to the Store that might be occasioned by such removal.
LICENSEE agrees to pay any and all personal property taxes on its furniture,
fixtures, equipment, and inventory in the Licensed Space and keep such items
fully insured at all times during the Term.
19. Alterations and Improvements.
a. LICENSEE may not make any alterations or installations in or about the
Licensed Space or the Store without LICENSOR's prior written consent, which
LICENSOR agrees not to unreasonably withhold, delay, or deny. However, if
LICENSOR deems it necessary to retain architectural or engineering supervision
for the purpose of determining the structural soundness of any request made by
LICENSEE for remodeling or rebuilding, LICENSEE agrees to pay the cost thereof.
LICENSOR will be given a reasonable amount of time to review and approve the
contractor and the plans and specifications for the work proposed by LICENSEE,
which time will not be less than sixty days. If LICENSOR approves the contractor
and such alterations or improvements, LICENSEE agrees that the alterations and
improvements shall be performed by LICENSEE in a first-class and professional
manner, in compliance with all municipal codes, federal regulations, and
applicable building standards.
b. LICENSEE agrees that any such work will be performed so as not to
adversely affect the structure, safety, systems, or services of the Store and
that all such work will comply with all building, safety, fire, and other codes
and governmental requirements as well as all insurance requirements.
Furthermore, LICENSEE agrees that all such work will be performed in a way that
will not adversely impact, interfere with, or disrupt either LICENSOR or any
other licensee in the Store and that LICENSOR will have the right to require
LICENSEE to take reasonable steps to minimize such disruptions and to keep the
construction work area free of dust and accumulation of debris and the hallways
and passageways open and passable at all times.
c. On completion of any such work, LICENSEE shall provide LICENSOR with a
complete set of "as built" plans (to 1/8th inch scale), copies of all
construction contracts, and proof of payment for all labor and materials.
<PAGE>
20. Maintenance and Repair of the Licensed Space.
a. No rights have been granted to LICENSEE, except as set forth in this
Agreement, with respect to the outside walls, roof, doors, or windows of the
Store, and LICENSEE may not use them for any purpose whatsoever. LICENSEE will
not deface or damage any part of the Licensed Space or the Store. LICENSEE shall
take care to maintain the Licensed Space and any space that is immediately
adjacent thereto in the same condition in which the Licensed Space was
originally delivered to LICENSEE, reasonable wear and tear excepted.
b. LICENSEE shall, at its own cost and expense, promptly make all repairs
to either the Licensed Space or the property of LICENSOR or other licensees or
tenants of the Store that may be required because of the negligence or misuse
thereof by LICENSEE, its agents, servants, employees, visitors, or customers.
LICENSOR will, at its own cost and expense, promptly make all repairs to the
property of LICENSEE that may be required by the gross negligence or intentional
acts of LICENSOR, its agents, servants, employees, visitors, or customers.
c. LICENSOR represents to LICENSEE that the Building is in a good state of
repair taking into account the age of the Building, wear and tear excepted, and
that LICENSOR will keep the Building in as good a condition as existed on the
commencement of LICENSEE' 5 occupancy of the Licensed Space, reasonable wear and
tear excepted, during the term of this Agreement so that LICENSEE's customers
will have access to the Licensed Space.
21. Release and Indemnification.
a. Except for the willful acts of LICENSOR or the acts of gross negligence
by LICENSOR, its agents, servants, and/or employees, LICENSOR will not be under
any responsibility or liability for the safeguarding of LICENSEE's furniture,
fixtures, equipment, or inventory. LICENSEE hereby indemnifies LICENSOR and
covenants to hold it harmless from any and all liability, costs, charges, and
expenses of any kind, sort, or description arising directly or indirectly from
LICENSEE's breach of this Agreement or from LICENSEE's occupancy of the Licensed
Space, and from any liability, costs, charges, and expenses resulting from any
injury to person or damage to property occurring in the Licensed Space or in
connection with LICENSEE's use thereof, except for acts of gross negligence or
willful misconduct by LICENSOR, its agents, servants, and/or employees.
b. LICENSOR hereby agrees to indemnify LICENSEE from any and all liability,
costs, charges, or expenses of any kind, sort, or description arising directly
or indirectly from LICENSOR's breach of this Agreement or from LICENSOR's or
LICENSOR's willful acts or the acts of gross negligence by LICENSOR, its agents,
servants, and/or employees.
c. LICENSOR WILL NOT BE LIABLE, AND LICENSEE WAIVES ALL CLAIMS, FOR INJURY
TO OR DEATH OF PERSONS OR DAMAGE TO OR LOSS OF PROPERTY SUSTAINED BY LICENSEE OR
ITS INVITEES OR GUESTS RESULTING FROM THE IMPROVEMENTS OR ANY PART THEREOF OR
ANY OF LICENSOR'S EQUIPMENT OR APPURTENANCES BEING OUT OF REPAIR FOR WHICH
LICENSEE WAS RESPONSIBLE FOR REPAIRING, OR RESULTING DIRECTLY OR INDIRECTLY FROM
ANY ACT OR NEGLIGENCE OF LICENSEE OR ANY OCCUPANT OF THE BUILDING OR OF ANY
OTHER PERSON, OR FROM ANY OTHER CAUSE WHATSOEVER EXCEPT THE GROSS NEGLIGENCE OF
LICENSOR, INCLUDING WITHOUT LIMITATION SUCH CLAIMS FOR DAMAGE RESULTING FROM:
(i) equipment functioning improperly; (ii) LICENSOR's failure to keep the
Licensed Space repaired; (iii) injury done or occasioned by wind; (iv) any
defect in or failure of plumbing, heating, or air conditioning equipment,
electrical wiring, or installation thereof, gas, water, or steam pipes, stairs,
balconies, porches, railings, or sidewalks; (v) broken glass; the backing up of
any sewer pipe or downspout; the bursting, leaking, or running of any tank, tub,
wash stand, toilet, waste pipe, drain, or any other pipe or tank in, on, or
about the Licensed Space; the escape of steam or hot water; (vi) the falling of
any fixture, plaster, or stucco; and (vii) water, snow, or ice being on or
coming through the roof or any skylight, trap door, stairs, walks, or any other
place on or near the Licensed Space, the Store, or otherwise.
<PAGE>
22. Representations. LICENSOR represents to LICENSEE that this Agreement
and the grant of the license hereunder will not conflict with or violate the
terms of any lease or other licensing arrangement relating to the Store within
which the Licensed Space is located. LICENSOR represents that it has proper
authority and has obtained all necessary consents to license the Licensed Space.
23. Relocation.
a. Notwithstanding the above, LICENSOR reserves the right, in its sole
discretion, to change the Licensed Space, or any part or parts thereof, to other
areas located in the Store, upon thirty days' prior written notice to LICENSEE
by LICENSOR, which notice will include the date on which LICENSEE will be
required to relocate and a description of the space to which LICENSEE will be
relocated. Such subsequent space will have the same or substantially the same
square footage and configuration within the Store as the previous Licensed Space
and LICENSOR agrees to use commercially reasonably efforts to provide LICENSEE
with substantially equivalent space as the Licensed Space.
b. LICENSOR will pay all out-of-pocket costs and expenses of relocating
LICENSEE (including the cost of preparing such reasonably comparable Licensed
Space for occupancy), provided LICENSEE furnishes to LICENSOR invoices,
receipts, or other evidence reasonably satisfactory to LICENSOR relating to such
out-of-pocket expenses. In the event of such relocation, such alternative space
will for all purposes be deemed the "Licensed Space" hereunder and this
Agreement will continue in full force and effect without any change in the other
terms or conditions of this Agreement and without any increase in the amount of
royalties. Upon LICENSEE's receipt of said notice of relocation, LICENSEE will
have the option for a period of five business days from and after the date of
receipt of such notice to elect to either cancel this Agreement or to cause all
of its furniture, fixtures, equipment, and inventory to be moved to the new
Licensed Space as designated in such notice, to be effected on or before the
effective date of such relocation.
c. For the purposes of this Section 23, "comparable space" means (i) as to
the retail space, a segregated, lockable, and windowed space (i.e., windows into
the main showroom area) and having at least the same or substantially the same
square footage and configuration as the initial retail Space, including the same
number of acoustically segregated sound rooms; and (ii) as to the storage space
in the sub-basement, a space having access to the initial or replacement retail
space (as the case may be) substantially equivalent to or better than the access
from the initial storage space to the initial Licensed Space and having at least
the same or substantially the same square footage as the initial storage space.
d. If LICENSOR needs to relocate LICENSEE to other licensed space, LICENSOR
must first notify LICENSEE to determine whether LICENSEE will consent to such a
relocation. If LICENSEE refuses to consent to the relocation, LICENSOR will have
the right not to proceed with such relocation and this Agreement will continue
in force and effect. On the other hand, if LICENSOR insists on proceeding with
the relocation in spite of LICENSEE's refusal to consent, LICENSEE will have an
option for a period of thirty days immediately following receipt of written
notice from LICENSOR that LICENSOR plans to proceed with the relocation to
terminate this Agreement upon one hundred eighty days' prior written notice,
which notice must be sent within such thirty day option period.
<PAGE>
24. Assignment and Subletting. This Agreement may not be assigned in whole
or part, or the Licensed Space sublet in any manner whatsoever, by LICENSEE
without the prior written consent of LICENSOR, which consent may be withheld for
any reason whatsoever, and any attempts to do so will, at LICENSOR's election,
be void and of no force and effect.
25. Interruption of Service; Fire and Other Casualty; Condemnation;
Termination of License.
a. Except for acts of gross negligence by LICENSOR, LICENSOR will not be
liable to LICENSEE in any manner whatsoever for any interruption, failure, or
discontinuance of any service, facility, or supply that LICENSOR is required or
has undertaken to furnish to LICENSEE, or of the use by LICENSEE of the Licensed
Space. LICENSEE will not be entitled to any reimbursement, compensation,
damages, abatement, or royalties or other relief for any such interruption or
failure, discontinuance, or suspension of any such service, facility, or supply
or in the use of the Licensed Space.
b. If the Licensed Space is damaged by fire or other casualty, LICENSOR
will not be liable for any loss, damage, or interruption of business that
LICENSEE suffers by reason thereof.
If during the Term, the Licensed Space (i) is substantially damaged or
destroyed by fire, wind, or other casualty, (ii) are substantially damaged or
destroyed by the negligence, gross negligence, or intentional tort of LICENSEE
or any person in or about the Licensed Space with LICENSEE'S express or implied
consent, or (iii) if any mortgagee of LICENSOR requires that the insurance
proceeds payable as a result of a casualty be applied to the payment of the
mortgage debt or in the event of any material, uninsured loss to the Licensed
Space, then LICENSOR may elect, by written notice to LICENSEE sent no later than
sixty days from the date of the occurrence of the casualty loss, to terminate
this Agreement and the license fees will be abated for the unexpired portion of
this Agreement, effective as of the date of the casualty loss. Additionally, if
there is an early termination of this Agreement under this Section 25 because of
substantial damage to the Licensed Space or because the insurance proceeds are
required to be applied to the mortgage debt, both parties will automatically be
released from all further liability under this Agreement except as to matters of
liability that will have accrued and remain unsatisfied as of the date of such
termination and LICENSOR will have the right to retain all insurance proceeds it
collects. If LICENSOR elects not to terminate this Agreement, as provided for in
this Agreement, the provisions hereinafter stated will apply.
<PAGE>
c. If, during the Term, the Licensed Space is damaged by fire, wind, or
other casualty, but not to such an extent that rebuilding and repairs cannot be
completed within a reasonable period of time from the date of the casualty
damage, LICENSOR will, at LICENSOR's sole option, have the right to elect to
rebuild or repair the improvements located on the Licensed Space to
substantially the same condition that the improvements existed prior to such
damage or to terminate this Agreement by written notification to LICENSEE,
whereupon all rights and obligations under this Agreement will cease, except for
any outstanding obligations or indemnities assumed by LICENSEE under this
Agreement. LICENSOR will have sixty days from the date of receipt of written
notification from LICENSEE of the occurrence of the damage to make such election
and written notification of LICENSOR's decision on whether to restore and
reconstruct the Building situated on the Licensed Space will be communicated in
writing to LICENSEE within sixty days of the date of LICENSOR's receipt of
LICENSEE's notice of the occurrence of the damage.
(1) If LICENSOR elects to rebuild or repair the Building following a
casualty loss, the license fees payable under this Agreement will be adjusted
equitably by LICENSOR and LICENSEE from the date of the damage through the end
of the reconstruction period to reflect the diminished value of the Licensed
Space and the diminished value of the portion of the Building that was not
damaged. But, notwithstanding anything contained in this Agreement to the
contrary, LICENSOR will not be required to expend more for such repairs and
rebuilding than the net insurance proceeds actually received as a result of such
casualty that are allocable to the Licensed Space after any payment required to
be paid to the mortgagee under any mortgage. If LICENSOR elects to rebuild or
repair the Building following a casualty loss at any time within a period of one
year following the casualty loss, LICENSEE will have the right to continue to
occupy the Licensed Space for the balance of the Term on the same terms and
conditions set out in this Agreement.
(2) If LICENSOR elects not to rebuild or repair the Licensed Space, this
Agreement will terminate, except for any outstanding obligations or indemnities
assumed by LICENSEE, under this Agreement and the license fees will be abated
for the unexpired portion of this Agreement, effective as of the date set out in
the notice from LICENSOR to LICENSEE following the occurrence of the damage.
Additionally, if there is an early termination of this Agreement under the terms
of this section either because of substantial or partial dama9e or because the
insurance proceeds are required to be applied to the mortgage debt, both parties
will automatically be released from all further liability under this Agreement
except as to any outstanding obligations and matters of liability that will have
accrued and remain unsatisfied as of the date of such termination, including
claims of each party against the other for trade accounts (if any) , payments of
license fees, reimbursements, indemnification, and obligations arising under any
promissory notes or security agreements.
<PAGE>
d. If the Store is condemned by any public authority, sold under threat of
taking by eminent domain, or if the lease under which LICENSOR occupies the
Store is canceled, non-renewed, or terminated by any reason whatsoever, then
this Agreement will, at LICENSOR's option, be canceled and terminated as of the
date of such condemnation, sale, or termination without the necessity of any
prior notice to LICENSEE. By signing this Agreement, LICENSEE acknowledges that
the Store is located on leased premises and that this Agreement is subject to
the terms and conditions of such lease agreement for the Store.
e. If LICENSEE's ability to occupy the Licensed Space is completely
interrupted or totally discontinued for a period of more than seven business
days, LICENSEE may cancel this Agreement by written notice to LICENSOR.
26. Liens. LICENSEE may not suffer or permit any UCC filing or lien to
exist on the Store, the Licensed Space, or any of the furniture, fixtures,
signs, equipment, goods, and inventory located in the Licensed Space that would
in any way limit or restrict LICENSEE from complying with the terms of this
Agreement and being able to sell LICENSEE's goods and inventory in the ordinary
course of business. If any such UCC filing or lien is filed on LICENSEE's
furniture, fixtures, signs, equipment, goods, and inventory that unduly
restricts LICENSEE from complying with the terms of this Agreement and being
able to sell LICENSEE's goods and inventory in the ordinary course of business,
LICENSEE shall promptly discharge the same at LICENSEE's sole cost and expense
and LICENSEE agrees to indemnify and hold LICENSOR harmless regarding any UCC
filings that conflict with this Agreement. Notwithstanding the above, LICENSOR
agrees that LICENSEE will have the right to pledge its furniture, fixtures,
signs, equipment, goods, and inventory located in the Licensed Space to
LICENSEE's commercial lenders and LICENSOR agrees to waive any landlord's or
other liens that it might have on LICENSEE's furniture, fixtures, signs,
equipment, goods, and inventory located in the Licensed Premises.
27. Default by LICENSEE.
a. If LICENSEE allows the license fees payable hereunder to be in arrears
more than ten days after the due date thereof, LICENSOR may, at its option,
without notice to LICENSEE, terminate this Agreement; or in the alternative,
LICENSOR may enter upon the Licensed Space by picking or changing locks if
necessary and take possession of the Licensed Space, without terminating this
Agreement, and expel or remove all persons and property therefrom, without being
(a) deemed guilty of any manner of trespass, (b) liable for prosecution, or (c)
liable on any claim for damages therefor, and re-let the Licensed Space or any
part thereof, for all or any part of the remainder of the term of this
Agreement, or any renewal thereof, to a party satisfactory to LICENSOR, and at
such monthly license fees as LICENSOR may with reasonable diligence be able to
secure. If LICENSOR is unable to find another licensee for the Licensed Space
after reasonable efforts to do so, or if such license fees are less than the
license fees LICENSEE was obligated to pay under this Agreement, or any renewal
thereof, then LICENSEE shall pay to LICENSOR the amount of such deficiency plus
the expense of locating a new licensee without limitation, brokers' fees
incurred by LICENSOR in connection with finding a new licensee for the whole or
any part of the Licensed Space and all reasonable expenses incurred by LICENSOR
in enforcing LICENSOR's remedies, including reasonable attorneys' fees,
renovation expenses, and broker's commissions. However, notwithstanding anything
contained in this Agreement to the contrary, in event of default, such as
bankruptcy or insolvency, will not be deemed "cured" or being diligently
prosecuted while the bankruptcy proceeding is pending. If LICENSEE remains in
default under any other condition of this Agreement for a period of thirty days
after the date of receipt of written notice from LICENSOR, or if any other
person than LICENSEE secures possession of the Licensed Space, or any part
thereof, by reason of any receivership of LICENSEE, bankruptcy proceedings
involving LICENSEE, or other operation of law in any manner whatsoever, LICENSOR
may, at its option, without notice to LICENSEE, terminate this Agreement or
exercise any of the other remedies listed above in this Section 27.
<PAGE>
b. LICENSEE agrees that LICENSOR shall be entitled to the benefits of all
provisions of law respecting the speedy recovery of land and tenements held over
by LICENSEE, including proceedings for forcible entry and detainer. LICENSOR and
its agents shall not be subject to prosecution or liability as a result of said
entry or repossession, and LICENSEE shall compensate LICENSOR for its reasonable
expenses of making such entry and repossession.
c. Notwithstanding anything to the contrary herein contained, if LICENSEE
is default under the terms of this Agreement five or more times within a one
hundred and eighty day period, regardless of whether such events of default are
timely cured, such defaults will be deemed deliberate and not curable on the
last occasion thereof, thereby giving LICENSOR the immediate right to have
recourse to all LICENSOR's remedies hereunder.
d. The remedies of LICENSOR hereunder shall be deemed cumulative and no
remedy of LICENSOR, whether exercised by LICENSOR or not, shall be deemed to be
an exclusion of any other.
28. Default by LICENSOR. No default by LICENSOR hereunder shall constitute
an eviction or disturbance of LICENSEE's use and possession of the Licensed
Space or render LICENSOR liable for damages or entitle LICENSEE to be relieved
from any of LICENSEE's obligations hereunder (including the obligation to pay
the license fee) or grant LICENSEE any right of deduction, abatement, set-off,
or recoupment or entitle LICENSEE to take any action whatsoever with regard to
the Licensed Space or LICENSOR until twenty days after LICENSEE has given
LICENSOR written notice specifically setting forth such default by LICENSOR, and
LICENSOR has failed to cure such default within said twenty-day period, or in
the event such default cannot reasonably be cured within said twenty-day period
then within an additional reasonable period of time so long as LICENSOR has
commenced curative action within said twenty-day period and thereafter is
diligently attempting to cure such default. In the event that LICENSOR fails to
cure such default within said twenty-day period, or within said additional
reasonable period of time, LICENSE shall have the right to proceed to cure such
default and deduct the cost of curing same, plus interest thereon at the rate of
ten percent (10%) per annum, from the next succeeding licensee fee
installment(s) owed by LICENSEE to LICENSOR hereunder.
<PAGE>
29. Waiver of Default. No waiver by the parties of any default or breach of
any term, condition, or covenant of this Agreement shall be deemed to be a
waiver of any other breach of the same or other term, condition, or covenant
contained herein, nor shall any custom or practice which may grow up between the
parties in the administration of the terms hereof be construed to waive or
lessen the right of LICENSOR to insist upon the performance by LICENSEE in
strict accordance with the terms hereof. No provision of this Agreement may
under any circumstances be deemed to have been waived by either party here to
unless such waiver is in writing and signed by the party charged with such
waiver. LICENSEE agrees that the receipt by LICENSOR of the license fee, even
with the knowledge of the breach of any covenant or condition of this Agreement
by LICENSEE, shall not be deemed to be a waiver of such breach and no provision
of this Agreement shall be deemed to have been waived by LICENSOR unless such
waiver be in writing, and signed by LICENSOR.
30. Security Deposit. If LICENSEE defaults under any of the terms or
conditions of this Agreement more than two times during any twelve consecutive
months during the term of this Agreement, LICENSEE agrees, that in addition to
curing such event of default, it shall pay LICENSOR a security deposit equal to
$25,000 ("Security Deposit"), which will be held by LICENSOR without interest as
security for the full and faithful performance by LICENSEE of LICENSEE's
covenants and obligations under this Agreement, it being expressly understood
that such deposit is not an advance payment of license fees or a measure of
LICENSOR's damages if LICENSEE defaults again. Following the payment of the
Security Deposit, upon the occurrence of any event of default by LICENSEE,
LICENSOR may, from time to time, without prejudice to any other remedy provided
in this Agreement or by law, use the Security Deposit to the extent necessary to
make good any arrearages of payment owed by LICENSEE to LICENSOR or any amount
as to which LICENSEE is in default or for any other damage, injury, expense, or
liability caused to LICENSOR by such event of default, regardless whether such
damages or deficiency accrue before or after termination of this Agreement.
Following any such application of the Security Deposit, LICENSEE agrees to pay
to LICENSOR on demand the amount so applied in order to restore the Security
Deposit to its original amount and LICENSEE's failure to do so within ten days
of the date of demand will be, at LICENSOR's election, a material default under
this Agreement. If LICENSEE is not in default of this Agreement upon the
termination of this Agreement, LICENSOR agrees to return any remaining balance
of such Security Deposit to LICENSEE within thirty days of the date of the
termination of this Agreement. LICENSOR's deduction of any amounts owed by
LICENSEE to LICENSOR from the Security Deposit will in no event release LICENSEE
from being in default under the terms of this Agreement. LICENSOR will not be
required to keep this Security Deposit separate from its general funds. LICENSEE
agrees that it will not assign or encumber, or attempt to assign or encumber,
the monies deposited under this Agreement as security, and that LICENSOR and its
successors and assigns will not be bound by any such actual or attempted
assignment or encumbrance. If LICENSEE cures the event of default that triggered
the obligation to put up the $25,000 Security Deposit and is not then in
default, LICENSOR agrees to refund the $25,000 amount put as a Security Deposit
within ten days of the date of LICENSEE's request.
<PAGE>
31. Termination of Agreement. Either party will have the right to terminate
this Agreement at any time, upon twenty-one days' prior notice in writing to the
other party mailed or sent by national overnight courier service for next day
delivery to the other party's principal offices, upon the occurrence of any one
of the following events:
a. If either party is declared insolvent or bankrupt, or makes an
assignment for the benefit of creditors, or if a receiver is appointed or any
proceedings are initiated involving LICENSEE or LICENSOR pursuant to the United
States Bankruptcy Code or any amendment thereof.
b. If either party materially defaults in the substantial performance of
any provision of this Agreement or if LICENSEE fails to conform to the general
business policies, practices, or procedures of LICENSOR, as same may from time
to time during the Term be amended or modified by LICENSOR, and such default is
not cured within ten business days after receipt of a written demand. If such
default cannot be cured reasonably within said ten business day period then the
defaulting party will have an additional reasonable period of time so long as
the defaulting party has commenced curative action within said ten business day
period and thereafter diligently attempts to cure such default.
c. Additionally, at the election of LICENSOR, LICENSOR will have the right
to terminate this Agreement at any time, upon twenty-one days' prior notice in
writing to LICENSEE mailed or sent by national overnight courier service for
next day delivery to LICENSEE's principal offices, if the business of LICENSEE
is sold, leased, or for any reason passes from the actual possession or control
of LICENSEE, or if LICENSEE's ownership interest (excluding the ownership
interests of Harvey Acquisition Company, L.L.C.) undergoes a fifty percent (50%)
or more change during the Term. Upon the occurrence of such an event, LICENSEE
must notify LICENSOR immediately thereof. So long as LICENSEE's stock is
registered pursuant to the Securities Act of 1933 and such stock is regularly
traded on a national exchange, a fifty percent (50%) of more change in the
ownership of LICENSEE that occurs solely through the open trading of such stock
on a national exchange will not be deemed to be a violation of this Agreement.
32. Surrender of Licensed Space. Upon the expiration or other termination
of the Term, LICENSEE shall quit and surrender the Licensed Space to LICENSOR
broom clean, in good order and condition, ordinary wear and tear and acts of
neg1igu~nce by LICENSOR excepted. All fixtures, furniture, equipment, and
inventory of LICENSEE must be promptly removed from the Licensed Space
immediately thereafter at the sole cost and expense of LICENSEE. No act or thing
done by LICENSOR or LICENSOR's agents during the Term will be deemed an
acceptance of a surrender of the Licensed Space and no agreement to accept such
surrender will be valid unless it is in writing and signed by LICENSOR. LICENSEE
shall notify LICENSOR in writing at least thirty days prior to vacating the
Licensed Space to arrange a mutually convenient time to meet LICENSOR for a
joint inspection of the Licensed Space prior to vacating. To the extent that
LICENSEE fails to comply with this provision of the Agreement and LICENSOR
incurs any expense in bringing the Licensed Space up to compliance with this
provision, LICENSEE agrees to pay to LICENSOR all such costs, including lost
royalties and penalties because of a delay in being able to turn the Licensed
Space over to a new licensee during the period of time necessary to clean the
Licensed Space. Any cost or expense incurred by LICENSOR as a result of
LICENSEE's delay in surrendering the Licensed Space, including lost royalties
and penalties, or involving the restoration of the Licensed Space to the
standards set forth in this Agreement, will be paid by LICENSEE to LICENSOR
immediately upon demand.
<PAGE>
33. Right to Use Name. If LICENSEE ceases to be licensed by LICENSOR for
any reason, LICENSEE will not thereafter use or permit the use of the name
"HARVEY ELECTRONICS at ABC", or any combination with the word "ABC" in the name
or trademark of any corporation, partnership, or other business in which
LICENSEE is associated in any capacity, directly or indirectly. LICENSEE
covenants that it will not use, after the end of the Term, the name "ABC" in any
manner, shape, or form, in any business or employment, nor the designation
"Formerly with ABC" or any similar designation.
34. Non-Competition, Non-Interference, and Non-Solicitation Agreement.
During the Term LICENSEE may compete with LICENSOR in the retail sales of the
goods described in this Agreement, but only so long as any stores owned or
operated by LICENSEE as Harvey Electronics within the areas bounded by 34th
Street on the North, Houston Street on the South, the East River on the East,
and the Hudson River on the West, are not expanded or enlarged by more than 110%
of the size of such stores on the date of the execution of this Agreement and so
long as LICENSEE does not open any new Harvey Electronics stores or commence
operations of any new electronics stores as Harvey Electronics on Manhattan,
within the area bounded by 34th Street on the North, Houston Street on the
South, the East River on the East, and the Hudson River on the West, either on
its own account or as a partner or joint venturer, or as an agent or salesman
for any person or entity, or otherwise.
a. Furthermore, LICENSEE agrees that it will not, either during the term of
the Agreement and for a period of one year immediately following the expiration
or termination of the Agreement, for any reason whatsoever, either directly or
indirectly, interfere with LICENSOR's business or operations and will not
solicit for hire or hire any of LICENSOR's employees or otherwise interfere with
or disrupt either the employment relationship between LICENSOR and any of its
employees, or the relationship between LICENSOR and any of its vendors,
supplies, or contractors. Likewise, LICENSOR agrees that it will not, either
during the term of the Agreement and for a period of one year immediately
following the expiration or termination of the Agreement for any reason
whatsoever, either directly or indirectly, interfere with LICENSEE's business or
operations and will not solicit for hire or hire any of LICENSEE's employees or
otherwise interfere with or disrupt either the employment relationship between
LICENSEE and any of its employees or the relationship between LICENSEE and any
of its vendors, suppliers, or contractors.
b. LICENSEE agrees that a breach or violation of these covenants not to
compete by LICENSEE will entitle LICENSOR, as a matter of right to an injunction
issued by any court of competent jurisdiction, restraining any further or
continued violation of these covenants. Such right to an injunction will be
cumulative and in addition to, and not in lieu of, any other remedies to which
LICENSOR may show itself justly entitled. These covenants on the part of
LICENSEE will be construed as an agreement independent of any other provision of
this Agreement, and the existence of any claim or cause of action of LICENSEE
against LICENSOR, whether predicated on this Agreement or otherwise, will not
constitute a defense to the enforcement by LICENSOR of these covenants.
<PAGE>
c. If LICENSEE violates these restrictive covenants and LICENSOR brings
legal action for injunctive or other relief, LICENSOR will not, as a result of
the time involved in obtaining the relief, be deprived of the benefit of the
full one year period of the restrictive covenants. Accordingly, the restrictive
covenants and the covenants and agreements not to solicit or interfere will be
deemed to have a duration of one year as specified above, computed from the date
the relief is granted, but reduced by the time between the period when the
covenants or restrictions began to run and the date of the first violation of
the covenants or restrictions by LICENSEE.
d. The parties agree that this covenant is reasonable in both time and
scope. However, if any court determines that the duration or geographical limit
of any restriction contained in this covenant not to compete or the
non-solicitation provision is unenforceable, it is the intention of the parties
that the restrictive covenants set forth in this Agreement will not thereby be
terminated but will be deemed amended to the extent required to render it valid
and enforceable, such amendment to apply only with respect to the operation of
this covenant not to compete or the non-solicitation provision and the
jurisdiction of the court that has made the adjudication.
e. The parties expressly recognize and agree that the restraints imposed in
this Agreement (i) are reasonable both as to time and scope of activity to be
restrained; (ii) are reasonably necessary to the business relationship of the
parties and to protect their legitimate interests; and (iii) are not oppressive.
The parties also recognize that the failure by LICENSEE to observe and comply
with the covenants and agreements set out in this Agreement will cause
irreparable harm to LICENSOR; that it is and will continue to be difficult to
ascertain the degree of harm and damage to LICENSOR as a result of the violation
of these restraints, that the consideration paid and received by each party for
entering into these covenants and agreements is fair, and that the covenants and
agreements and their enforcement will not deprive either party of an ability to
operate their business. Each party further expressly acknowledges that it has
been encouraged to and has consulted or has had the opportunity to consult with
independent counsel and has reviewed and considered the terms of this Agreement
prior to executing this Agreement.
f. The parties recognize that the covenants and agreements of each party
under this Agreement are special, unique, and of extraordinary character.
Accordingly, it is the intention of the parties that, in addition to any other
rights and remedies that either party may have in the event of a breach of the
terms and conditions of this Agreement by the other party, the non-breaching
party will be entitled to demand and obtain specific performance, including,
without limitation, temporary and permanent injunctive relief, and all other
appropriate equitable relief against the breaching party in order to enforce
against the breaching party or in order to prevent any breach or any threatened
breach by a party of the covenants and agreements contained in this Agreement.
Additionally, the parties agree that if any covenant or condition contained in
this Agreement is held to be unenforceable, such covenant or agreement will be
reformed to the extent necessary to make such covenant or agreement enforceable,
and such covenant or agreement, as reformed, will be subject to the enforcement
provisions of this Agreement.
<PAGE>
35. Jurisdiction. Notwithstanding the fact that one or both of the parties
is now or may become a resident or citizen of a different country or state, this
Agreement is to be interpreted in accordance with the laws of the State of New
York.
36. Jurisdiction and Service of Process. Each party hereby irrevocably
submits to the jurisdiction of the courts of the state of New York and of any
federal court located in such state in connection with any action or proceeding
arising out of or relating to this Agreement, and each party hereby irrevocably
agrees that all claims in respect of such action or proceeding may be heard and
determined in such state or federal court. Each party hereby irrevocably
consents to the service of any and all process in any such action or proceeding
by the mailing or the sending by national overnight courier service for next day
delivery of copies of such process to the party at its address as specified in
Section 40. Each party agrees that a final judgment in any such action or
proceeding will be conclusive and may be enforced in other jurisdictions by suit
on the judgment or in any other manner provided by law. Each party further
waives any objection to venue in such state and any objection to an action or
proceeding in such state on the basis of forum non conveniens. Each party
further agrees that any action or proceeding brought against such party may be
brought only in a court of the state of New York or in a federal court located
in such state. Each party waives any right it may have to a jury trial.
37. Merger. All understandings and agreements heretofore entered into
between the parties regarding the subject matter of this Agreement are hereby
merged into this Agreement, which alone fully and completely expresses their
agreement with respect to the subject matter of this Agreement, and this
Agreement has been entered into after full investigation by all parties, and
neither party is relying upon any statements or representations by the other
party not embodied in this Agreement. This Agreement may not be modified, except
by an instrument in writing signed by the parties.
38. Non-Waiver.
a. The failure of either party to seek redress for violation of, or to
insist upon the strict performance of any covenant or condition of, this
Agreement or of any of the provisions set forth or hereafter adopted by said
party will not prevent a subsequent act that would have originally constituted a
violation from having all the force and effect of any original violation. The
receipt by LICENSOR of royalties with knowledge of the breach of any covenant
will not be deemed to have been waived by LICENSOR unless such waiver is in
writing and signed by LICENSOR.
b. No payment by LICENSEE or receipt by LICENSOR of a lesser amount of
royalties stipulated in this Agreement will be deemed to be other than on
account of the earliest stipulated royalties, nor will any endorsement or
statement of any check or any letter accompanying any check or payment as
royalties be deemed in accord and satisfaction, and LICENSOR may accept such
check or payment without prejudice to LICENSOR's right to recover the balance of
such royalties or pursue any other remedy provided in this Agreement.
39. Attorneys' Fees and Costs. If any action at law or in equity is
necessary to enforce or construe this Agreement, the prevailing party will be
entitled to recover from the non-prevailing party reasonable attorneys' fees,
costs, and other disbursements reasonably incurred in such action in addition to
all other relief to which the prevailing party may be entitled.
<PAGE>
40. Notice. Any notice required in this Agreement must be sent either by
national overnight courier service for next day delivery or by certified mail,
return receipt requested, postage prepaid, and such notice will take effect when
actually received or five business days after the date it is postmarked by the
United States Postal Service, whichever is sooner. The address of each party is
as follows:
LICENSOR LICENSEE
ABC Home Furnishings, Inc. Harvey Electronics, Inc.
38 E. 19th Street, 8th Floor 205 Chubb Avenue
New York, New York 10003 Lyndhurst, New Jersey 07071
Attn: Comptroller Attn: Franklin C. Karp
with copy to:
J. Walker Holland Richard H. Kaplan
Tracy & Holland, L.L.P. Rubin, Kaplan & Associates, P.C.
306 West 7th Str. - Ste. 500 501 Hoes Lane
Fort Worth, Texas 76102-4982 Piscataway, New Jersey 08854
From time to time either party may designate another address within the
forty-eight contiguous states of the United States of America for all purposes
of this Agreement or add additional addresses by giving the other party not less
than thirty days' advance written notice, in accordance with the provisions of
this Agreement, of such change of address.
41. Recourse Limitation. The obligations incurred by LICENSOR under and
with respect to this Agreement do not and will not constitute personal
obligations, and do not and will not involve any personal liability on its part,
or on the part of any officer, director, or shareholder of LICENSOR. Likewise,
the obligations incurred by LICENSEE under and with respect to this Agreement do
not and will not constitute personal obligations, and do not and will not
involve any personal liability on its part, or on the part of any officer,
director, or shareholder of LICENSEE. LICENSEE specifically agrees to look
solely to LICENSOR's interest in the Building in the recovery of any judgment
from LICENSOR, it being agreed that LICENSOR will never be personally liable for
any such judgment.
42. Legal Construction. If any one or more of the provisions contained in
this Agreement is for any reason held to be invalid, illegal, or unenforceable
under present or future laws effective during the Term in any respect, and the
basis of the bargain between the parties is not destroyed or rendered
ineffective thereby, such invalidity, illegality, or unenforceability, to the
extent possible, will not affect any other provision of this Agreement.
Moreover, so far as is reasonable and possible, effect will be given to the
intent manifested by the portion held invalid, illegal, or unenforceable. It is
further the intention of the parties that if any provision of this Agreement is
capable of two constructions, one of which would render the provision invalid,
illegal, or unenforceable and the other of which would render the provision
valid, legal, or enforceable, then the provision will have the meaning that
renders it valid, legal, or enforceable.
<PAGE>
43. General Pules of Construction. This Agreement will not be strictly
construed either for or against either LICENSOR or LICENSEE, but this Agreement
will be interpreted in accordance with the general tenor of the language of this
Agreement in an effort to reach an equitable result. No remedy or election given
by any provision in this Agreement will be deemed exclusive unless so indicated,
but each will, wherever possible, be cumulative with all other remedies in law
or equity. The parties acknowledge that this Agreement has been freely
negotiated by both parties and that each party (and its counsel, if any) has had
the opportunity to review and revise this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party will not be employed in the interpretation of this Agreement or
any amendments or exhibits to this Agreement.
44. Captions. The headings and captions contained in this Agreement are
inserted for convenience of reference only, and are not to be deemed a part of
or to be used in construing this Agreement. The captions in no way define,
describe, amplify, or limit the scope or the intent of this Agreement or any of
the provisions of this Agreement. All references in this Agreement to sections
or subsections thereof refer to the corresponding section or subsection of this
Agreement unless specific reference is made to such sections or subsections of
another document.
45. Counterparts. This Agreement may be signed in multiple counterparts,
each of which will be an original and all such counterparts together will
represent but one and the same instrument; but in making proof of this Agreement
it will not be necessary to produce or account for more than one such
counterpart. The counterpart signed and held by LICENSOR will control in the
event of any dispute or in any cases of differences between the counterparts.
This Agreement becomes effective when one or more of the counterparts has been
signed by each of the parties and delivered to the other party.
46. Force Majeure. Neither LICENSOR nor LICENSEE will be required to
perform any term, condition, or covenant in this Agreement so long as such
performance is delayed or prevented by force majeure, which means acts of God,
strikes, material or labor restrictions by any governmental authority,
insurrections, war, court orders, civil riot, floods, requisition or order of
any governmental body or authority, and any other cause not reasonably within
the control of either LICENSOR or LICENSEE and that either LICENSOR or LICENSEE,
by the exercise of reasonable diligence, is unable, either wholly or in part, to
prevent or overcome. However, nothing in this Section 46 will relieve LICENSEE
of its responsibility to pay, on a timely basis, all monetary obligations owed
to LICENSOR, as set out in this Agreement, or its responsibility to provide the
insurance coverages required in this Agreement.
47. Time is of the Essence. In all instances where LICENSEE is required
under this Agreement to pay any amount or do any act at a particular indicated
time or within any indicated period of time, it is understood that time is of
the essence. All performance dates, time schedules, and conditions precedent to
exercising any right will be strictly adhered to without delay except where
otherwise expressly provided. In computing any period of time by days as
provided in this Agreement, the date of the act, event, or default from which
the designated period of time begins to run will not be included. The last day
of the period so computed will be included unless the last day of any time
period stated in this Agreement falls on either a Saturday or Sunday or falls on
a legal holiday recognized by the United States Postal Service, then the
duration of such time period will be extended so that it ends on the next
succeeding day that is not a Saturday, Sunday, legal holiday recognized by the
United States Postal Service.
<PAGE>
48. Survival. LICENSOR and LICENSEE expressly agree that (i) all of
LICENSEE's obligations hereunder that have not been fully performed, (ii) all of
LICENSEE's warranties, representations, covenants, and indemnity provisions
contained in this Agreement, and (iii) all provisions of this Agreement that
contemplate performance by LICENSEE after the expiration or early termination of
this Agreement, will survive either the termination of this Agreement for any
reason, the surrender or return of possession of the Licensed Space by LICENSEE,
or the loss of LICENSEE's right of possession for any reason set out in this
Agreement.
49. Business Day. As used in this Agreement, the term "business day" means
any day of the week, Monday through Friday, that is not recognized by the United
States Postal Service as a national holiday and on which national banks are open
for business.
50. Expiration. LICENSEE's right to sign this Agreement will be
automatically revoked unless LICENSEE signs this Agreement and delivers same to
LICENSOR at its address set out in this Agreement on or before 5:00 p.m. CST on
October ___, 1998.
LICENSOR: ABC HOME FURNISHINGS, INC.
By: /s/ Evan Cole
--------------------------------
Evan Cole - President
LICENSEE: HARVEY ELECTRONICS, INC.
By: /s/ Franklin C. Karp
-------------------------------
Franklin C. Karp
Title: President
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