SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 30, 1997
Commission File No. 0-20498
TOPS APPLIANCE CITY, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3174554
(State of Incorporation) (I.R.S. Employer ID No.)
45 Brunswick Avenue, Edison, NJ 08818
(Address of principal executive (Zip Code)
offices)
Registrant's phone number, including area code: (732) 248-2850
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:Common Stock, No
Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (of for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The aggregate market value of Common Stock held by non-affiliates based
upon the average price of such stock as quoted on NASDAQ for March 27, 1998, and
reported by the National Quotation Bureau, Inc. was 5,112,006. Shares of
Common Stock held by each officer and director, and each person who owns 5% of
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates.
Registrant's Common Stock (no par value) outstanding at March 27, 1998,
was 7,294,901 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not, to the best of the
Registrant's knowledge, be contained in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
Total Number of Pages: 103
Exhibit List: Page 21
Documents Incorporated by Reference: (a) Proxy Statement for
1998 Annual Meeting
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
1. Business.................................................... 1
2. Properties..................................................10
3. Legal Proceedings...........................................10
4. Submission of Matters to a Vote of Security Holders.........10
5. Market for the Registrant's Common Stock and Related
Stockholder Matters.........................................11
6. Selected Financial Data.....................................12
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............13
8. Financial Statements and Supplementary Data.................18
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................18
10. Directors and Executive Officers of the Registrant..........19
11. Executive Compensation......................................19
12. Security Ownership of Certain Beneficial Ownership
and Management..............................................19
13. Certain Relationships and Related Transactions..............19
14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K.....................................20
<PAGE>
PART I
ITEM 1. Business
General
Tops Appliance City, Inc. ("Tops" or the "Company") is a leading retailer
of home appliances and consumer electronics in New Jersey and New York, serving
a customer base within the Greater New York Metropolitan Area. The Company
operates seven retail megastores, ranging in size from 43,000 to 120,000 square
feet, in heavily populated locations in New Jersey and New York. The Company
also operates a commercial division, selling to small independent retailers,
builders and landlords, corporate buying groups, major corporations and
municipalities, which accounted for approximately 9.2% and 10.9% of its net
sales and service revenues in fiscal 1997 and fiscal 1996.
Tops' stores display a broad selection of high quality, nationally
recognized brand names in each of its product categories. The Company's primary
products include major appliances, such as refrigerators, washers and dryers,
electronics including televisions, VCRs, camcorders, room air conditioners,
consumer electronics, home and car audio equipment, home office products, small
electronic appliances, and other related products such as vacuum cleaners,
seasonal goods, housewares, related accessories and extended service plans. The
Company maintains a knowledgeable, well- trained sales force which builds and
reinforces customer confidence in Tops' value-driven merchandising strategy. As
part of that strategy, the Company offers a number of customer services, such as
home delivery and removal of old appliances. Tops emphasizes competitive pricing
in its advertising and guarantees the lowest price on its products through a 45
day, best price guarantee.
The Company has experienced comparable store sales declines of 3.6% and
26.4% for 1997 and 1996. These declines were mostly attributable to the
continuing weak retail environment in the appliance and electronic industry and
increased competition. This competitive environment has put pressure on gross
margins as retailers focus on maintaining market share. In addition, the recent
demand for consumer electronics has decreased due to the lack of new products
brought to market. Research also indicates that high consumer debt levels have
also reduced consumer spending on nonessential items. The fiscal periods ending
December 30, 1997 and December 31, 1996 were also severely impacted by the
unseasonably cooler weather in the northeast during the summer months which
affected sales of room air conditioners. Substantial price deflation in Video
and Home Office products also contributed to the sales dollar decline.
During 1997, the Company expanded the Kitchen Place to three stores and
introduced the Dial-A-Mattress leased department to six stores. The Company also
opened four seasonal room air conditioner outlets in Manhattan during the summer
months. The Company has been pleased with the results from these three concepts.
The Company continues to put forward several initiatives to offset the
impact on operating results of the declining sales. Payroll and payroll related
expenses have been reduced as well as many other operating expenses including
net advertising, credit card processing, occupancy and corporate overhead. The
Company instituted a 45 day, best price guarantee during the fourth quarter of
1995. It appears to have been widely accepted by our customers and recent trends
indicate a leveling off of same store sales declines.
Business Strategy
Tops' business strategy is to be the dominant retailer of home appliances
and consumer electronics in each of its markets by developing customer loyalty
through a marketing program that emphasizes price, service and selection.
Management believes that the Company's strong sales and customer loyalty are a
result of Tops' pricing, customer service and relations, product selection,
advertising strategy, store environment, store locations and the quality and
experience of its personnel.
Pricing. The Company's policy is to offer its products at low prices in
each of its markets. The Company monitors prices at competing stores on a daily
basis and adjusts its prices as necessary to adhere to its "everyday best price"
strategy. The Company believes that a "sale" oriented marketing strategy is
still necessary in this competitive category and marketplace. The Company offers
a 45 day, best price guarantee.
Customer Service and Relations. The Company is committed to a high level of
service for its customers, providing both value and responsiveness. Included
among the services it offers are home delivery and removal of old appliances,
cartons and packaging. The Company also offers a liberal return and exchange
policy. Tops maintains a staff of customer service representatives who answer
telephone inquiries six (6) days per week regarding product use, delivery,
service, warranties and other customer concerns. The Company also has customer
service representatives present in each store who deal with the same types of
questions and an "electronic hospital" staffed during store hours by trained
technical advisors who are responsible for free instructional assistance,
product analysis and customer service.
Product Selection. Tops offers a broad range of high quality, nationally
recognized brand names within each product category and at all price points,
with greater inventory depth at the middle to higher price level than most
retailers. The Company's stores display in excess of 5,000 products and maintain
over 9,000 products in inventory. The Company offers the full line of models
from each of its vendors in all of the Company's major product categories. The
Company's policy is to maintain all products in stock for immediate availability
to the customer.
Advertising. The Company utilizes an advertising strategy that stresses the
offering of nationally recognized brands at significant savings. The Company
generally advertises weekly in 8 to 14 regional and local newspapers, and
supplements this with television, radio and billboard advertising. In addition,
Tops operates a direct mail program to approximately 310,000 Tops charge card
customers. The Company also uses a variety of promotional sales and sales events
to increase traffic in its stores.
Store Environment. Tops' in-store environment seeks to create an atmosphere
of excitement through the intensity of its visual merchandising, sales
promotion, signage and layout, and the quality, value and variety of product
assortment. The stores have an open, clean, bright, exciting atmosphere, with
disciplined product presentation, attractive in-store displays and efficient
check-out procedures, designed to create a friendly, convenient shopping
experience. Tops' sales force is given extensive and ongoing training to provide
customers with knowledgeable, prompt and courteous assistance.
Store Locations. The Company's strategy is to locate its stores in heavily
populated areas that are easily accessible from major highways and have adequate
parking for high sales volume.
Personnel Development. The Company devotes significant resources to
training its employees, both to ensure basic selling skills and product
knowledge and to enhance customer relations. The Company emphasizes promoting
employees from within the organization. This policy, combined with above-average
compensation, comprised of salary, commission and incentives for its sales
force, has produced loyal, motivated employees with a low turnover record. The
Company believes that its employees are among the most qualified and experienced
in its industry.
Products
The Company's stores stock over 9,000 home appliance and consumer
electronic products. The Company sells brand-name products, offering its
customers a large selection of styles and price points in each of its product
categories. The Company sells no private label or house brands. The Company
displays in excess of 5,000 products in its stores, in the following categories:
<TABLE>
<CAPTION>
CATEGORY PRODUCTS PRINCIPAL BRAND NAMES
<S> <C> <C>
Major Appliances Refrigerators, Amana, Admiral, Frigidaire, General
Dishwashers, Electric, Hotpoint, Jenn-Air,
Washers/Dryers KitchenAid, Magic Chef, Maytag, Roper,
Sub Zero, Viking, Westinghouse, Whirlpool
Televisions Daewoo, Hitachi, JVC, Panasonic, Proscan,
Quasar, RCA, Samsung,Sharp, Quasar, Sony,
Zenith
Video VCRs,DVD Hitachi, JVC, Panasonic,
Camcorders RCA, Samsung, Sony, Zenith
Ranges/
Microwaves Ranges, General Electric, Jenn-Air,
Cooktops, Magic Chef, Panasonic, Sharp,
Range Hoods, Tappan, Thermador, Viking,
Microwaves Whirlpool
Air Conditioners Carrier, Emerson, Fedders, Friedrich,
General Electric, Samsung, Whirlpool,
Quasar
Audio Stereo Systems, Aiwa, Bose, Infinity,
Components and JBL, JVC, Kenwood, Onkyo, Pioneer,
Speakers RCA, Sony ES, Technics, Yamaha
Electronics Cameras, Walkman AT&T, Alpine, Blaupunkt, Canon,
Radar Detectors, General Electric, Hitachi, JVC,
Portable Radios, Kenwood, Magnavox, Minolta,
Audio and Car Olympus, Panasonic, RCA, Sony,
Alarms, Telephones, Yashica,
Cellular Phones
Home Office Computers, Brother, Canon,
Products Printers, Fax Compaq, Epson, Hewlett Packard,
Machines, IBM, Lexmark, Sharp, Packard Bell
Wordprocessors,
Typewriters,
Copiers
Vacuums,Seasonal Vacuum Cleaners, Black and Decker, Braun,
Items/Housewares Humidifiers, Cuisinart, Eureka,
Fans, General Electric, Hoover,
Space Heaters, Krups, Sanyo, Sharp, Sunbeam,
Small Electrical Thermos, Weber, Westinghouse
Appliances
(coffee makers,
blenders, etc.),
Barbecue Grills
</TABLE>
The Company tailors its product mix to meet the needs of its
customers by regularly evaluating sales and profit performance for each of its
products through its computerized perpetual inventory system. Product mix by
category has remained relatively stable over the past five years. Management
believes that this stability makes the Company less vulnerable to short term
product trends and changing economic conditions. The following chart
demonstrates the percentage of retail and commercial sales represented by each
of the Company's product categories during the past three years:
Percent of Total Sales
Product Category 1995 1996 1997
Major Appliances (Refrigerators,
Washers, Dryers)........................ 20.5% 21.4% 20.8%
Ranges/Microwaves/Dishwashers............. 12.4 13.4 13.5
Air Conditioners.......................... 12.0 7.2 10.2
Vacuums/Seasonal Items/Housewares......... 5.0 5.3 4.7
---- ----- -----
Subtotal............................... 49.9 47.3 49.2
Televisions............................... 14.4 14.7 14.6
Video/Projection Televisions.............. 10.8 11.2 11.3
Audio..................................... 7.3 6.9 6.5
Home Office and Other
Consumer Electronics.................... 13.2 15.6 13.8
---- ----- -----
Subtotal............................... 45.7 48.4 46.2
Extended Service Plans and
Miscellaneous Income.................... 4.4 4.3 4.6
----- ----- -----
100.0% 100.0% 100.0%
Extended Service Plans
The Company offers extended service plans for most categories of
its retail products. The extended service plans cover services or time periods
not covered by the manufacturer's warranty on such products and are
non-cancelable. These plans are administered for the Company by Warrantech
Corporation, an unaffiliated third party, which performs the repair services
required by the plans through factory authorized service centers. Warrantech is
required by its agreement with the Company to maintain insurance to protect the
Company in the event that Warrantech fails to fulfill its obligations under the
extended service plans. The Company sells the extended service plans to
Warrantech on a non-recourse basis. In 1990, the Company began offering
customers who purchase five-year extended service plans vouchers entitling them
to certain store discounts, subject to certain restrictions, if the customer
does not utilize the extended service contract during the five-year term. The
Company has established a reserve on its balance sheet to cover the potential
cost of honoring these vouchers. Gross margins from the sale of extended service
plans are higher than gross margins from the sale of the Company's other
products.
Purchasing
The Company offers a broad range of name brands within each
product category at all price points, with a greater inventory depth at the
middle to higher price level than most retailers. Because Tops purchases
complete product lines in large volumes, with an emphasis on middle to higher
priced models, the Company is able to obtain quality products at competitive
prices and discretionary advertising subsidies from vendors to promote the sale
of their products. Although certain vendors are significant to the Company's
business because of their name recognition, the Company does not believe that
its business is dependent upon any one vendor or particular group of vendors.
In fiscal 1997, four vendors each accounted for more than 10% of the Company's
purchases. Tops purchases over 80% of its products from the 15 vendors shown in
the following chart.
Top 15 Vendors
Aiwa G.E. / Hot Point Sharp
Carrier Hitachi Sony
Compaq JVC Thomson / RCA
Fedders Maytag / Magic Chef Whirlpool / Kitchen Aid
Frigidaire Panasonic Zenith
The Company's merchandise purchasing is managed through its
buying and merchandising group, consisting of the Senior Vice President/Chief
Operating Officer and a staff of eight buyers. Each buyer is responsible for
purchasing products within specified product categories. Within each category,
the buyer is responsible for choosing the product mix, insuring product
availability based upon the rate of sale, and negotiating prices, payment terms
and other vendor support items. The buyers are also responsible for analyzing
potential new business.
The Company generally orders inventory one month in advance of
delivery dates, but provides key vendors with 120 day rolling forecasts to
ensure availability of important items.
Advertising
The Company uses a "price and item" approach in its advertising,
stressing the offering of nationally recognized brands at significant savings.
The emphasis of the Company's advertising is to stress the Company's low prices
as well as its customer service features, such as home delivery, disposal of old
appliances and removal of cartons and packaging. Advertisements are placed in 8
to 14 regional newspapers weekly and on television, radio and billboards. The
Company also uses a circular program showing a broader selection of advertised
products. Advertisements are complemented by in-store signage highlighting
brand-name products and values. The Company's advertising strategy includes a
series of special events, and private sales throughout the year to generate
traffic and to maintain a sense of shopping excitement. Tops also employs a
monthly direct mailing to its credit card holders and to other selected groups.
Tops employs a five-person staff to coordinate its advertising
and develop promotional strategies. Certain manufacturers provide the Company
with various discretionary funding subsidies to promote the sale of their
products.
Customer Service and Relations
Tops places a strong emphasis on customer service and relations
as part of its business strategy. The Company offers a number of services such
as home delivery, removal and disposal of old appliances and packaging of
delivered products. The Company emphasizes the quality of its sales force,
devoting significant resources to training, and is committed to having
sufficient sales people available at all times to service all customers in a
store.
The Company maintains a staff of customer service
representatives who respond to customer calls six days per week. The customer
service representatives are trained to answer questions regarding product use,
delivery, service, warranties and other customer concerns. Tops has regular
contacts at each of its vendors who enable Tops to respond promptly to specific
product questions.
Customer Credit
Tops' customers may pay for their purchases with the Tops
proprietary credit card, Visa, Master Card, American Express, Discover, cash,
check or debit card. The Company periodically offers extended payment term
financing programs which are often sponsored by manufacturers.
Since 1987, when the Company initiated its own proprietary
credit card, the Company has increased the number of its credit card accounts to
in excess of 310,000. As of December 30, 1997, approximately 30% of Tops' credit
card holders had outstanding balances. The Company has made a significant
investment in its credit card program since Tops credit card holders generally
constitute its most loyal and active customers. As part of its growth strategy,
the Company intends to increase the number of Tops credit card holders while
maintaining existing credit standards. No assurances can be given that the
Company will be able to accomplish this goal. In addition, the Company believes
that its credit card is a particularly productive tool for targeted marketing
and presents an excellent opportunity to analyze and better understand its
customers' shopping patterns and trends.
Purchases made with a Tops credit card involve lower costs to
the Company than other credit cards, with no greater risk to the Company. The
following table summarizes the percentage of total retail sales generated by
type of payment for the fiscal years 1995, 1996 and 1997.
1995 1996 1997
Tops Credit Card................... 25.3% 25.4% 24.8%
Visa, MasterCard, American
Express, Discover................ 50.3% 48.3% 47.6%
Cash, Check, Debit Card, Other..... 24.4% 26.3% 27.6%
The Company's credit card program is administered by Monogram
Credit Card Bank of Georgia, a subsidiary of General Electric Capital
Corporation ("GE Capital"). The Account Financing Agreement between the Company
and GE Capital requires GE Capital to purchase Tops' customer accounts
receivable on a non-recourse basis. GE Capital pays Tops a monthly fee based
upon total average receivable balances of the Tops portfolio. Tops pays GE
Capital monthly for all finance charge reversals incurred by Tops customers.
Additionally, GE Capital offers insurance and other products to
Tops' credit card customers and distributes a portion of the income derived from
the marketing of such products to Tops.
Warehousing and Distribution
The Company operates a 350,000 square foot warehouse and
distribution center at its Edison, New Jersey headquarters, from which it serves
all seven of its stores. The center has three subdivisions, devoted to
receiving, storage and home delivery, respectively. The Company believes this
facility has the capacity to service existing stores and commercial operations
and at least 3 additional stores. The facility is leased from the Company's
former Chairman, who remains a principal shareholder. See Item 13 - Certain
Relationships and Related Transactions.
The Company purchases in bulk and utilizes distribution
personnel and systems to transfer merchandise to store locations and to manage
the quantities moved into and out of the warehouse. The distribution system
supports the Company's advertising strategy by prioritizing and processing
needed merchandise through the distribution center. Store inventory levels are
reviewed and adjusted constantly toward calculated targets in most product
categories.
Tops makes approximately 3,500 product deliveries per week, to
customers' homes from its distribution center, using trucks owned by independent
owner-operators and administered by Merchants Home Delivery Service
("Merchants") and Westbury Terminals, Inc. of Georgia ("WTI"). The Company uses
a computerized delivery system to coordinate routing and increase efficiencies.
In addition, the Company makes deliveries to its stores every day to support
inventories of items that customers can take with them. The Company pays only
for completed deliveries and, at a lower rate, for certain uncompleted
deliveries. The Company's agreements provide that Merchants and WTI assume the
risk of loss for merchandise upon taking delivery from the Company. The Company
has also contracted with WTI for the transportation of merchandise between its
distribution center and store locations.
Commercial Sales Division
The Company operates a commercial sales division which accounted
for approximately 9.2% and 10.9% of the Company's net sales and service revenues
in fiscal 1997 and 1996. The commercial operations are made up of five
categories: (i) sales to small independent retailers; (ii) telemarketing sales
through several corporate benefit buying clubs in which the Company
participates; (iii) sales to builders and landlords; (iv) sales to major
corporations for their various gift and incentive programs, and (v) sales to
exporters. These sales are generally made at lower gross margins than the
Company's retail sales, but are made with less operating expense to the Company.
Management Information and Control Systems
The Company has placed substantial emphasis on its management
information and control systems. Control of the Company's merchandising
activities is maintained by a sophisticated set of on-line systems, including a
point-of-sale and sales reporting system. These systems are completely
integrated and track merchandise from order through sale. They are used to
compare actual to planned results and to highlight areas requiring management
attention.
All operational data is fully integrated with the Company's
financial systems. The inventory information in the systems is verified through
a program of cycle counting and testing.
The Company upgrades its management information and control
systems on an on-going basis. The Company believes that the systems it has
implemented are an important factor in enabling it to achieve its goal of
superior execution in all aspects of the Company's operations and that its
existing computer systems are fully capable of further technical enhancements
with minimal conversion effort.
Year 2000 Compliance
The Company continues to assess the impact of the Year 2000 on its systems
and operations. The Year 2000 issue exists because many computer applications
currently use two-digit date fields to designate a year. As the century
date occurs, date sensitive systems may not properly recognize and process the
year 2000. During fiscal 1997, the Company has utilized its existing
management information systems and applications personnel to evaluate systems
Year 2000 issues, and expects to continue to utilize internal resources
during fiscal 1998 and 1999.
Expansion Strategy
The Company continues to evaluate expansion plans in existing markets
within the Greater New York Metropolitan Area. The Company has plans for an
eighth store in Brooklyn, New York, which it intends to open in 1998. The
Company has also announced its intention to open a ninth store in 1998. The
availability of financial resources may limit the Company's expansion plans, and
no assurances can be given that the Company will expand.
In evaluating store locations, the Company considers a number of
criteria, including proximity to its existing stores and the size, strength and
merchandising philosophy of potential competitors. In selecting a site,
the Company searches for buildings which are between 35,000 - 60,000 square feet
with ample customer parking areas to support high sales volumes. The Company
also considers local demographics, traffic patterns and overall retail activity.
Although the Company seeks locations that are conveniently reached and highly
visible from major highways, the stores need not be located in the most
important retail location in the particular market.
In October 1997, the company closed its store located in Westbury, New York. The
store's marginal performance was severely exacerbated by the costs to advertise
for this single location. The Company is not contemplating the closing of any
additional stores.
Competitors
The Company operates in a highly competitive marketplace. The
Company faces competition for customers from traditional department stores,
discount stores, warehouse clubs and other specialty retailers. Some of these
competitors are units of large national or regional chains that may have greater
financial and other resources than the Company. Circuit City, a national
retailer of consumers electronics, music and appliances, entered the New
Jersey/New York marketplace during 1997. Although most of the Company's
competitors have more stores than the Company, the stores are generally smaller
and the Company believes that they produce lower sales than the Company on a per
store basis.
Competition within the Company's industry is based upon breadth
of product selection, product quality, customer service and price. The Company
believes that it is comparable with or superior to all of its competitors in
each of these categories.
Employees
As of December 30, 1997, the Company had approximately 732 full
time and 325 part-time employees. The Company also employs additional part-time
salespersons and cashiers during peak periods. None of the Company's employees
are represented by a labor union. The Company believes that relationships with
its employees are good.
Service Marks
The service mark TOPS and a Tops logo used in the Company's
print advertising, have been registered by the Company in the U.S. Patent and
Trademark Office. The Company believes that these marks have acquired
substantial goodwill and reputation and broad consumer recognition as marks of
the Company within its market area and that their continued use is important to
the development of its business.
Reorganization
The Company was reorganized (the "Reorganization") in August, 1992 as two
New Jersey corporations in connection with the Company's initial public
offering. Prior to that, the Company had operated as a Delaware Limited
Partnership ("Tops LP"). The limited partners of Tops LP contributed their
partnership interest and shares, respectively, to a newly formed corporation in
exchange for that corporation's common stock. This corporation changed its
name to Tops Appliance City, Inc. and became the sole shareholder of the former
corporate general partner, which owned all of the Company's assets and traded as
Tops Appliance City, Inc. In March, 1993, these two corporations were merged,
and the successor is Tops Appliance City, Inc. In 1995, the Company formed two
subsidiaries in connection with a mortgage loan on its Queens, New York
property. During 1997, one subsidiary was sold in connection with the sale and
leaseback of the property. All references in this report to Tops or the Company
refer to the prior limited partnership or the corporate entities on a
consolidated basis, where appropriate.
ITEM 2. Properties
The Company operates seven stores in heavily populated areas in
New Jersey and New York, all of which are leased by the Company. The Company's
Edison store and its office and distribution center, also located in Edison, are
leased from the Company's former Chairman. See "Item 13. Certain Relationships
and Related Transactions." The Company purchased land and a building for its
newest store in Queens, New York, which the Company opened in August 1994.
During 1997, the company completed a sale and leaseback transaction for the
Queens location. The store leases, including all options to renew, expire
between 2010 and 2042. The following chart sets forth certain information
regarding the store leases. The Company also has an option to purchase property
in Brooklyn, New York for an eighth store.
Date Approximate Approximate
Location Opened Sq. Footage(1) Selling Space(2)
Edison, NJ............. June, 1979 45,059 33,940
Secaucus, NJ........... December, 1986 120,360 44,928
East Hanover, NJ....... April, 1989 65,600 38,407
Lakewood, NJ........... May, 1990 50,500 31,200
Westchester County, NY. October, 1992 63,935 48,935
Union, NJ.............. November, 1993 54,920 44,320
Queens, NY............. August, 1994 77,000 43,826
(1) Includes mezzanine area.
(2) Selling space is total square footage less the Company's estimate of store
space not used for selling merchandise.
ITEM 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of security
holders in the fourth quarter of 1997.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded under the symbol "TOPS" on
the NASDAQ National Market System.
The following table sets forth, for the fiscal quarters
indicated, the high and low sale prices for the Company's Common Stock on the
NASDAQ National Market System. NASDAQ National Market System quotations are
based on actual transactions and not bid prices.
Prices
High Low
Year Ended December 30, 1997
First Quarter................. 1 5/8 13/16
Second Quarter................ 1 9/32 3/4
Third Quarter................. 1 19/32 15/16
Fourth Quarter................ 1 7/16 1
Year Ended December 31, 1996
First Quarter................. 3 1/4 2 1/4
Second Quarter................ 2 7/8 1 3/4
Third Quarter................. 2 1/8 7/8
Fourth Quarter................ 2 1
On March 27, 1998, the closing sale price of the Common Stock as
reported on the NASDAQ National Market System was [$1.00] per share. On December
30, 1997, there were approximately 582 holders of record of the Company's Common
Stock.
The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
Any decision made by the Company to declare dividends in the future will depend
upon the Company's future earnings, capital requirements, financial condition
and other factors deemed relevant by its Board of Directors.
ITEM 6. Selected Financial Data
Selected financial data is set forth below as of and for the
years ended December 28, 1993, December 27, 1994, December 26, 1995, December
31, 1996 and December 30, 1997. The selected financial data should be read in
conjunction with the financial statements, related notes and other information
included herein and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Statement of Operating Data: 12/28/93 12/27/94 12/26/95 12/31/96 12/31/97
__________ __________ _________ __________ __________
<S> <C> <C> <C> <C> <C>
Net sales and service revenues.. $ 411,947 $ 462,494 $ 422,197 $317,437 $293,924
Cost of sales................... 312,392 350,881 324,079 250,117 229,073
--------- --------- --------- -------- --------
Gross profit.................... 99,555 111,613 98,118 67,320 64,851
Selling, general and adminis-
trative expenses.............. 90,328 107,317 96,859 82,461 65,712
--------- --------- --------- -------- --------
Income (loss) from operations.. 9,227 4,296 1,259 (15,141) (861)
Interest Expense................ 1,451 3,934 4,478 6,240 6,264
--------- --------- --------- -------- --------
Income (loss) before
income taxes and extraordinary
item 7,776 362 (3,219) (21,381) (7,125)
Provision (benefit) for
income taxes.................. 3,111 145 (1,288) (2,000) ---
--------- --------- --------- -------- --------
Income (loss) before
extraordinary item ........... $ 4,665 $ 217 $ (1,931) ($19,381) $ (7,125)
Extraordinary item-gain
on debt extinguishment........ 8,482
--------- --------- --------- --------- ---------
Net income (loss) .............. $ 4,665 $ 217 $ (1,931) ($19,381) $ 1,357
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per common share
before extraordinary item..... $ 0.65 $ 0.03 $ (0.27) $ (2.66) $ (0.98)
Gain per common share on
extraordinary item............ 1.16
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Net income (loss) per
common share.................. 0.65 0.03 (0.27) (2.66) (0.18)
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Weighted Average Common
Shares Outstanding............ 7,200,042 7,252,990 7,277,229 7,277.229 7,294,901
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec. 28, Dec. 27, Dec. 26, Dec. 31, Dec. 30,
1993 1994 1995 1996 1997
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Data (at period end) (unaudited):
Number of stores open ..................... 7 8 8 8 7
Inventory turns ........................... 5.5x 5.7x 5.4x 4.3x 4.2x
Square feet of retail selling space ....... 288,206 332,032 332,032 332,032 285,556
Average retail sales per store open
entire year .............................. $ 64,615 $ 56,456 $ 47,010 $ 34,777 $ 33,931
Percentage increase (decrease) in
comparable store sales ................... (3.6)% (14.1%) (20.1%) (26.4%) (3.6%)
Retail sales per weighted average
square foot of selling space ............. $ 1,637 $ 1,377 $ 1,133 $ 842 $ 832
Balance Sheet Data:
Inventory ................................. $ 61,934 $ 61,289 $ 59,847 $ 56,184 $ 53,895
Working Capital ........................... 35,909 25,132 32,112 14,785 17,004
Total Assets .............................. 127,422 121,076 113,552 101,020 78,110
Long-term debt, net of current
portion ................................. 41,611 40,689 49,201 48,944 30,993
Other long-term liabilities ............... 5,410 5,110 4,512 3,933 2,559
Shareholders' Equity ...................... 21,517 21,952 20,099 750 2,118
</TABLE>
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Year ended December 30, 1997 Compared to the Year Ended December 31, 1996.
Net sales and service revenues for 1997 decreased 7.4% to $293,924,000
from $317,437,000 for 1996. Net sales and service revenues for 1997 included 52
weeks versus 53 weeks in 1996. 1997 also included only 10 months of sales from
the Westbury, Long Island store which the Company closed in October 1997. This
decrease is also attributable to the highly competitive and continuing weak
retail environment in the appliance and consumer electronics industry. The lack
of new products in the market, high consumer debt levels, retail price
deflation in selected categories and an unseasonably cooler summer which
affected room air conditioner sales also contributed to the decrease. Total
comparable store sales decreased 3.6% for the period compared to a decrease of
26.4% for the same period last year. Sales from the commercial division
decreased 8.2% or $2,844,000.
Gross revenues from the sale of product protection plans for 1997
increased 0.5% to $13,768,000 from $13,705,000 for 1996. Incremental costs
related to these sales totaled $5,912,000 and $5,830,000 respectively, for the
comparable periods. These product protection plans are non-cancelable.
Gross margin as a percentage of net sales and service revenues for 1997
increased to 22.1% from 21.2% last year. This increase was due in part to the
company's focus on higher margin merchandise and product protection plans. Gross
margins in the commercial sales division increased to 9.7% from 9.1% for the
comparable period. Gross margins in the commercial sales division tend to be
lower than gross margins on retail sales.
Selling, general and administrative expenses for 1997 decreased 20.3% to
$65,712,000 from $82,461,000 for 1996. This net decrease was achieved primarily
by reducing payroll and related expenses, net advertising, reduced net variable
selling expenses and other cost cutting measures. Selling, general and
administrative expenses as a percentage of net sales and service revenues
decreased to 22.4% from 26.0% for the comparable periods. This decrease was due
to the reduced level of expenses.
Included in selling, general and administrative expenses is $1,500,000
of costs related to the closing of the Company's Westbury, Long Island store in
October 1997. The marginal operating performance of this store was severely
exacerbated by the costs to advertise for this single location. The Company's
income from operations before store closing costs improved to $639,000 for 1997
compared to a loss from operations of $15,141,000 for 1996.
Interest expense increased slightly to $6,264,000 from $6,240,000 for
the comparable periods. This was caused by higher average borrowings and related
interest expense on the revolving credit facility offset by lower interest on
the 6-1/2% Convertible Subordinated Debentures during the year. 1996 included
the write-off of $630,000 of capitalized loan fees relating to the Company's
previous revolving credit facility.
The Company did not record an income tax provision for 1997 compared to
an income tax benefit at an effective rate of 9.4% or $2,000,000 for 1996.
The Company's net loss before extraordinary items for 1997 was
$7,125,000 ($0.98 per share) compared to a net loss of $19,381,000 ($2.66 per
share) for 1996.
During 1997 the Company recorded extraordinary items totaling
$8,482,000 relating to the exchange and repurchase of a portion of 6-1/2%
Convertible Subordinated Debentures with a conversion price of $22.25 for
$7,687,500 in New 6-1/2% Convertible Subordinated Debentures with a conversion
price of $1.75. The Company also repurchased during the year $1,320,000 face
value of the Original Debentures for a purchase price of $525,550.
The Company's net income after the extraordinary gain on the early
extinguishment of debt was $1,357,000 ($0.18 per share) compared to a net loss
of $19,381,000 ($2.66) per share for 1996.
Year Ended December 31, 1996 Compared to the Year Ended December 26, 1995
The Auditor's Report on the accompanying financial statements states that
such financial statements have been prepared assuming that the Company will
continue as a going concern. The Company incurred a significant loss in 1996
which has significantly decreased its working capital and stockholders' equity.
The auditors have stated in their report that this condition raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of the assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty. Management believes that cost reductions already implemented
combined with the leveling off of comparable store sales declines and a normal
air conditioning selling season will reduce losses in the future, and along with
the continuation of its current credit facility, will enable the Company to have
sufficient cash flow to continue its operations.
Net sales and service revenues for 1996 decreased $104,760,000 or 24.8%
to $317,437,000 from $422,197,000. This decrease is attributable to the highly
competitive and continuing slow retail environment in the Northeast. Room air
conditioner sales declines, due to unseasonably cooler weather during the summer
season, also contributed to the decrease. Room air conditioner sales in 1996
were approximately 54.2% less than in 1995. Total comparable store sales were
26.4% lower than last year. Substantial price deflation in Video and Home Office
products also contributed to the decline. Sales in the commercial division
decreased $10,599,000 or 23.5%.
Gross revenues from the sale of product protection plans for 1996
decreased 35.9% to $13,705,000 from $21,368,000. Incremental costs related to
these sales totaled $5,830,000 and $8,996,000 respectively, for the comparable
periods. These product protection plans are non-cancelable.
Gross profit for 1996 decreased $30,798,000 or 31.4%. The decrease is
attributable to the decrease in merchandise sales and higher margined product
protection plans resulting in a decrease in margins to 21.0% from 23.1% last
year. This decrease was due in part to lower sales of higher margined room air
conditioners due to the unseasonably cooler weather and gross margin pressure
caused by the generally weak retailing environment in a highly promotional metro
New York/New Jersey marketplace. Gross margins in the commercial sales division
increased to 9.1% from 8.6% for the comparable periods. Gross margins in the
commercial sales division tend to be lower than gross margins on retail sales.
Selling, general and administrative expenses for 1996 decreased
$14,398,000 or 14.9% to $82,461,000 from $96,859,000 for 1995. This net decrease
was achieved primarily by reducing payroll and related expenses, net
advertising, other cost-cutting measures, reduced costs associated with the
Company's private label credit card program and reduced net variable selling
expenses, partially offset by higher net delivery costs and data processing
expenses. Selling, general and administrative expenses as a percentage of net
sales and service revenues increased to 26.0% from 22.9% for the comparable
periods. This increase was due to the decreased sales levels.
Interest expense increased to $6,240,000 from $4,478,000 for the
comparable periods as a result of interest in 1996 on the Queens mortgage, which
was entered into in July 1995, higher average borrowings and the write-off of
$630,000 of capitalized loan fees associated with the Company's revolving credit
facility which was replaced in October 1996 with a new revolving credit facility
with more favorable terms to the Company.
The Company recorded a tax benefit at an effective rate of 9.4% or
$2,000,000 in 1996 compared to a tax benefit at an effective rate of 40% or
$1,288,000 in 1995. [See Note 10 of Financial Statements.]
The Company's net loss for 1996 was $19,381,000 ($2.66 per share)
compared to a net loss of $1,931,000 ($.27 per share) for 1995.
Seasonality
Sales levels are generally highest in the fourth quarter as a
result of increased demand for consumer electronics during the Christmas season
and higher during either the second or third quarter, depending on weather
conditions, as a result of demand for room air conditioners during the summer
months. The unseasonably cooler weather during the summer of 1996 severely
impacted room air conditioner sales. Room air conditioner sales were
approximately 54.2% less in 1996 compared to 1995. Additionally, the first
quarter of 1996 was impacted by inclement weather.
The Company experiences a build up of inventory and accounts payable during
the first and second quarters due to the purchase of room air conditioners in
anticipation of the May through August selling season and the third and fourth
quarters in anticipation of the holiday season.
Liquidity and Capital Resources
In the past, the Company has relied primarily upon net cash from
operations, a revolving credit facility with institutional lenders, trade credit
from vendors and inventory floor plan financing to fund its operations and
growth.
During 1993, the Company issued $40,000,000 Convertible Subordinated
Debentures due 2003 at an annual interest rate of 6 1/2%. Interest is payable
semi-annually. The net proceeds were used to fund new store openings, repay
certain indebtedness and for general corporate purposes. On September 1, 1997,
the Company exchanged $15,375,000 of the $40,000,000 original par value 6-1/2%
Convertible Bonds due 2003 (the "Original Debentures" into $7,687,500 6-1/2%
Convertible Subordinated Debentures due 2003 (the "New Debentures"). The New
Debentures are convertible in shares of common stock of the Company (but not
prior to February 1999) at a conversion price of $1.75. The New Debentures rank
pari passu with the Original Debentures in respect to principal and interest.
During the fourth quarter of 1997, the Company entered into a series of
transactions for the repurchase of Original Debentures outstanding. The Company
purchased $1,320,000 face value of the Original Debentures for a purchase price
of $525,550.
In July 1995, the Company obtained a $9,200,000 ten year loan secured by a
mortgage on the Queens property. This mortgage had a fixed interest rate of
8.75%. On November 5, 1997, the Company entered into a sale and leaseback
agreement relating to this property. The sales price was $14,500,000. Part of
the proceeds of the sale were utilized to eliminate the outstanding mortgage.
The Company simultaneously entered into a lease agreement for the property with
an initial term expiring on October 31, 2022. The lease also contains two 10
year renewal options. This sale and leaseback transaction improved working
capital by approximately $6.2 million.
At December 30, 1997, the Company had working capital of $17.0 million, a
increase of $2.2 million from December 31, 1996. This increase in working
capital resulted primarily from the sale and leaseback of the Queens, New York
property. The changes in working capital components during the year were an
increase of $1.7 million in short-term borrowings, and decreases in inventory of
$2.3 million, accounts payable of $3.1 million and accrued liabilities and
taxes of $3.6 million.
The Company increases its inventory levels during the first and second
quarters of each year in anticipation of room air conditioner sales from May
through August and during the third and fourth quarters in anticipation of the
Christmas season. Short-term trade credit represents a significant source of
financing for inventory. Trade credit arises from the willingness of the
Company's vendors to grant extended payment terms for inventory purchases and is
financed either by the vendor or by third-party floor planning sources. The
Company currently utilizes three floor- planning companies which in the
aggregate at any one time provide financing for approximately 20% of the
Company's inventory purchases. Payment terms vary from 15 to 150 days, depending
upon the inventory product. The Company typically grants the floor planning
companies a security interest in those products financed together with the
proceeds from the sales of such products. Due to the significant loss incurred
by the Company during 1996, certain vendors have reduced the credit terms
previously extended to the Company. In most cases, the Company was able to
negotiate additional cash discounts relating to the reduced credit terms. Due to
the Company's improved operating performance during 1997, many trade vendors
have begun extending more favorable credit terms to the company.
The Company has a $35 million secured revolving credit facility
expiring October 28, 1999, which bears interest at the bank's base rate plus 1%
or, for a portion of the loan, LIBOR plus 3%. All of the Company's unencumbered
cash, equipment, inventory and accounts receivable are pledged as collateral for
the new facility.
The Company continues to evaluate expansion plans in existing markets
within the Greater New York Metropolitan Area. During 1995, the Company obtained
an option to purchase property which will be the site of the eighth store. It is
expected to open in 1998. The Company has also announced plans to open a ninth
store in 1998. The availability of financial resources may limit the Company's
expansion plans, and no assurances can be given that the Company will expand.
The Company believes that its borrowings under available credit
facilities, short term trade credit from vendors and inventory floor plan
arrangements combined with the impact on operating results of the cost
reductions already implemented, the leveling off of comparable store sales
declines and a normal room air conditioning selling season will be sufficient to
fund the Company's operations and its anticipated capital expenditures,
excluding new stores, of $1 million. No assurances can be given that such cost
reductions will produce the desired result.
This Annual Report on Form 10-K may contain forward-looking
information about the Company. The following factors, and others, may cause the
Company's actual results to differ from those set forth in any forward-looking
statements made by the Company. Accordingly, there can be no assurances that any
future results will be achieved.
ITEM 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial information
required in this item are incorporated by reference from the Company's Annual
Report.
Tops Appliance City, Inc.
Consolidated Financial Statements
As of December 30, 1997 And December 31, 1996
Together With
Reports of Independent Public Accountants
TOPS APPLIANCE CITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Tops Appliance City, Inc.:
We have audited the accompanying consolidated balance sheet of Tops
Appliance City, Inc. (the Company) as of December 30, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tops Appliance
City, Inc. as of December 30, 1997 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
February 18, 1998
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Shareholders and Board of Directors of
Tops Appliance City, Inc.
We have audited the accompanying consolidated balance sheet of Tops
Appliance City, Inc. (the Company) as of December 31, 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period then ended. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
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 consolidated financial position of Tops Appliance
City, Inc. at December 31, 1996 and the consolidated results of its operations
and its cash flows in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as whole, presents fairly in
all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Tops
Appliance City, Inc. will continue as a going concern. As more fully described
in Note 1, the Company has incurred a significant loss in 1996, which has
significantly decreased its working capital and shareholders' equity. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Ernst & Young LLP
MetroPark, New Jersey
April 15, 1997
<PAGE>
TOPS APPLIANCE CITY, INC.
CONSOLIDATED BALANCE SHEETS -- DECEMBER 30, 1997 AND DECEMBER 31, 1996
(dollars in thousands)
ASSETS 1997 1996
------ ------ -------
CURRENT ASSETS:
Cash and cash equivalents $ 2,368 $ 2,147
Accounts receivable, net of allowance for
doubtful accounts of $303 and $268 in
1997 and 1996, respectively 1,101 1,355
Merchandise inventory 53,895 56,184
Prepaid expenses and other current assets 2,080 2,492
------- --------
Total current assets 59,444 62,178
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, NET 13,196 31,858
DEFERRED TAXES 2,940 2,758
OTHER ASSETS 2,530 4,226
------- --------
Total assets $ 78,110 $ 101,020
------- --------
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 23,558 $ 21,904
Current portion of long-term debt --- 247
Accounts payable 6,551 9,626
Accrued liabilities and taxes payable 5,115 8,748
Customer deposits 4,276 4,110
Deferred taxes 2,940 2,758
-------- --------
Total current liabilities 42,440 47,393
LONG-TERM DEBT, NET OF CURRENT PORTION 30,993 48,944
DEFERRED RENT 1,801 3,179
OTHER LIABILITIES 758 754
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 20,000,000
shares authorized; none issued or outstanding --- ---
Common stock, no par value, 30,000,000
shares authorized; 7,294,901 and 7,277,229
shares issued and outstanding in 1997 and 1996,
respectively --- ---
Paid-in capital 24,806 24,795
Accumulated deficit (22,688) (24,045)
-------- --------
Total shareholders' equity 2,118 750
-------- --------
Total liabilities and
shareholders' equity $78,110 $101,020
-------- --------
-------- --------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
TOPS APPLIANCE CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 30, 1997, DECEMBER 31, 1996 AND DECEMBER 26, 1995
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
NET SALES AND SERVICE REVENUES $293,924 $317,437 $422,197
COST OF SALES 229,073 250,117 324,079
---------- ---------- --------
Gross profit 64,851 67,320 98,118
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 65,712 82,461 96,859
---------- ---------- --------
Income (loss) from operations (861) (15,141) 1,259
INTEREST EXPENSE 6,264 6,240 4,478
---------- ---------- --------
Loss before benefit for income
taxes and extraordinary item (7,125) (21,381) (3,219)
BENEFIT FOR INCOME TAXES --- (2,000) (1,288)
---------- ---------- --------
Loss before extraordinary item (7,125) (19,381) (1,931)
EXTRAORDINARY ITEM - Gain on debt
extinguishment 8,482 --- ---
---------- ---------- --------
Net income (loss) $ 1,357 ($19,381) ($1,931)
---------- ---------- --------
---------- ---------- --------
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM ($0.98) ($2.66) ($0.27)
INCOME PER COMMON SHARE APPLICABLE TO
EXTRAORDINARY ITEM 1.16 --- ---
--------- --------- --------
Basic and diluted net income (loss)
per common share $0.18 ($2.66) ($0.27)
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,294,901 7,277,229 7,252,990
--------- --------- ---------
--------- --------- ---------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
TOPS APPLIANCE CITY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 30, 1997,
DECEMBER 31, 1996 AND DECEMBER 26, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Shares of Paid-In Accumulated
Common Stock Capital Deficit Total
------------ ------- ----------- -----
<S> <C> <C> <C> <C>
BALANCE, December 27, 1994 7,232,690 $24,685 ($2,733) $21,952
Net loss - - (1,931) (1,931)
Shares issued -
Employee Stock Purchase Plan 20,300 78 - 78
--------- --------- --------- ---------
BALANCE, December 26, 1995 7,252,990 24,763 (4,664) 20,099
Net loss - - (19,381) (19,381)
Shares issued - Employee Stock
Purchase Plan 24,239 32 - 32
--------- --------- --------- ---------
BALANCE, December 31, 1996 7,277,229 $24,795 (24,045) 750
Net income - - 1,357 1,357
Shares issued - Employee Stock
Purchase Plan 13,622 11 - 11
Shares issued - Employee Awards 4,050 - - -
--------- -------- -------- --------
BALANCE, December 30, 1997 7,294,901 $24,806 ($22,688) $2,118
--------- -------- -------- --------
--------- -------- -------- --------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
TOPS APPLIANCE CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 30, 1997,
DECEMBER 31, 1996 AND DECEMBER 26, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,357 ($19,381) ($1,931)
Adjustments to reconcile net income (loss)
to net cash used in operating activities-
Depreciation and amortization 4,897 5,897 6,081
Deferred rent (1,378) 387 494
Extraordinary gain on debt extinguishment (8,482) - -
Write-off of fixed assets relating to
store closing 1,628 - -
Gain on sale of assets relating to sale
and leaseback (72) - -
Amortization of deferred income - (73) (216)
Changes in assets and liabilities-
Accounts receivable 254 97 201
Inventory 2,289 3,663 1,442
Prepaid expenses and other
current assets 412 (228) (314)
Deferred taxes - (236) (1,006)
Accounts payable (1,215) (3,204) (5,995)
Accrued liabilities and taxes payable (2,851) (1,631) (376)
Customer deposits 166 180 (1,716)
Other assets 769 (1,595) (2,008)
Other liabilities 4 (111) (94)
------- -------- --------
Net cash used in operating activities (2,222) (16,235) (5,438)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (635) (1,148) (2,111)
Net proceeds from sale of assets
relating to sale and leaseback 13,772 - -
-------- -------- --------
Net cash provided by (used in)
investing activities 13,137 (1,148) (2,111)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from Employee Stock
Purchase Plan 11 32 78
Cash overdrafts (1,860) (358) (3,773)
Short-term borrowings 1,654 13,004 (700)
Proceeds from long-term borrowings - - 9,200
Long-term debt repayments (9,717) (655) (894)
Related party payments (782) (782) (782)
-------- --------- --------
Net cash (used in) provided by
financing activities (10,694) 11,241 3,129
-------- --------- --------
Increase (decrease) in cash and
cash equivalents 221 (6,142) (4,420)
-------- --------- --------
CASH AND CASH EQUIVALENTS, beginning of year 2,147 8,289 12,709
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $2,368 $2,147 $8,289
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $6,087 $5,939 $4,265
Income taxes paid 8 30 196
------- ------- --------
------- ------- --------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
TOPS APPLIANCE CITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Tops Appliance City, Inc. (the "Company") is a publicly held retailer of
major household appliances, audio/video electronic goods and home office
products with seven megastores, five of which are located in New Jersey and two
in New York. The Company may be subject to sales fluctuations due to increased
competition, consumer spending levels and weather conditions, as a result of
demand for air conditioners during the summer months and the ability of
customers to travel to stores during the winter months.
The Report of Independent Public Accountants on the consolidated financial
statements for the year ended December 31, 1996 included an explanatory
paragraph regarding the Company's ability to continue as a going concern. This
opinion was based, among other things, upon the Company's significant operating
loss during that period, which caused a decline in working capital and
stockholders' equity.
During 1997 and continuing into 1998, management of the Company has
instituted several changes that have improved the Company's financial condition
and its results of operations. These changes include a reduction in the level of
long-term debt and operating expenses, the sale of certain real estate property
to provide additional operating funds, closure of an unprofitable store as well
as re-established and improved trade credit. In addition, in 1998, the Company
obtained an increase in the amounts available under its secured credit facility
(Note 4).
Management of the Company believes that these initiatives, together with
the results of operations for 1998, will provide sufficient resources to fund
the Company's operations for the coming year.
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Cash Equivalents-
The Company considers all highly-liquid securities with an original
maturity less than three months to be cash equivalents.
Concentrations of Credit-
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of temporary cash
investments. The Company places its temporary cash investments in high credit
quality financial instruments in accordance with debt agreements. At times such
investments may be in excess of the FDIC insurance limit.
Use of Estimates-
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments-
The carrying value of the Company's financial instruments, excluding the
subordinated debentures (see Note 4), approximates fair value.
Consolidation-
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Merchandise Inventory-
Merchandise inventory is stated at the lower of cost or market. Cost is
determined under the first-in, first-out (FIFO) method.
Property, Equipment and Leasehold Improvements-
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation. Depreciation is computed on a straight-line basis over
the estimated useful lives of the respective assets which range from 3 to 30
years.
Deferred Financing Costs-
Included in other assets is $1,157,000 and $1,463,000 at December 30, 1997
and December 31, 1996, respectively, of costs associated with obtaining the debt
discussed in Note 4. The deferred costs associated with the convertible
subordinated debentures and the revolving credit facility are being amortized
over periods ranging from three to ten years.
Preopening Costs-
Prior to January 1, 1997, it was the Company's policy to capitalize costs
(primarily personnel and training costs) associated with the opening of new
stores and amortize them on a straight-line basis over the twelve month period
following the store opening. Effective January 1, 1997, preopening store costs
are being expensed in the year incurred. During the periods presented, there
were no preopening costs incurred or expensed.
Accounts Payable-
Included in accounts payable is a cash overdraft balance of $2,180,000 and
$4,040,000 at December 30, 1997 and December 31, 1996, respectively.
Revenue Recognition-
Merchandise Sales-
Revenue is recognized upon receipt of the merchandise by the customer. The
Company provides appropriate allowances for sales returns and uncollectible
accounts based upon reviews of sales and credit history.
Product Protection Plans-
The Company purchases product protection plans on a non-recourse basis from
a third party who performs the obligations of the Company under its protection
plans through factory authorized service centers. The third party is required to
maintain insurance, with the Company named as insured, guaranteeing performance
of the third party's obligation to the Company. The difference between the sales
price of the Company's protection plan and the purchase price of the third party
protection plan is recognized as revenue at the time of sale, since the Company
has substantially completed what it must do to be entitled to the benefits
represented by the revenue and it is remote that any future costs will be
incurred with respect to such contracts. The revenues and related costs
associated with the sale of product protection plans are as follows-
December 30, December 31, December 26,
1997 1996 1995
Revenues $13,768,000 $13,705,000 $21,368,000
Cost of sales 5,912,000 5,830,000 8,996,000
Selling, General and Administrative Expenses-
Included in selling, general and administrative expenses are advertising
costs which are charged to operations as incurred. Advertising expense, net of
reimbursements from vendors, was $864,000, $5,981,000 and $7,294,000 for 1997,
1996 and 1995, respectively.
Net Income (Loss) Per Share-
Effective for the year ended December 30, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." The adoption of SFAS No. 128 requires the presentation of Basic Earnings
per Share and Diluted Earnings per Share. Basic Earnings per Share is based on
the average number of common shares outstanding per year. Diluted Earnings per
Share is based on the average number of common shares outstanding during the
year plus the common share equivalents, if any, related to outstanding stock
options and deferred contingent common stock awards. The adoption of SFAS No.
128 had no effect on previously reported earnings per share and there was no
difference between basic and diluted earnings per share for all periods
presented.
Stock Based Compensation-
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. As permitted by FASB Statement No. 123, "Accounting and Disclosure of
Stock Based Compensation", the Company has elected to account for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, recognizes no compensation expense for the stock
option grants. The Company has adopted the pro forma disclosure-only option
under Statement No. 123.
Long-Lived Assets-
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996. The Company assesses impairment at the
individual store level and believes that no impairment of long-lived assets has
occurred as of December 30, 1997 and December 31, 1996.
New Accounting Standards-
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements and requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt SFAS
No. 130 during the first quarter of fiscal 1998. The adoption of this
pronouncement is expected to have no impact on the Company's financial position
or results of operations. SFAS 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 issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 131 is
required to be adopted for the Company's 1998 year-end financial statements. The
Company is currently evaluating the impact, if any, of the adoption of this
pronouncement on the Company's existing disclosures.
Fiscal Year-
The Company's fiscal year ends on the last Tuesday of December. Fiscal 1996
contains 53 weeks, and fiscal 1997 and fiscal 1995 contain 52 weeks.
Reclassification-
Certain December 31, 1996 and December 26, 1995 balances have been
reclassified to conform to the December 30, 1997 presentation.
(3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Property, equipment and leasehold improvements and related depreciation
periods consist of the following-
December 30, 1997 December 31, 1996
----------------- -----------------
Land and buildings (30 years) (A) $13,970,000
Computer equipment and purchased
software (5 years) $11,978,000 11,364,000
Transportation equipment (5 years) 746,000 869,000
Furniture, fixtures and store
equipment (5 years) 9,599,000 9,579,000
Warehouse equipment (5 years) 2,324,000 2,324,000
Leasehold improvements (3 to 25 years) 18,823,000 21,047,000
---------- ----------
43,470,000 59,153,000
Less- Accumulated depreciation 30,274,000 27,295,000
---------- ----------
$13,196,000 $31,858,000
---------- ----------
---------- ----------
(A) During 1997 the Company completed a sale and leaseback transaction
involving its only owned store. This transaction resulted in a gain of
approximately $72,000.
Depreciation expense was $4,529,000, $4,906,000 and $5,015,000 for 1997,
1996 and 1995, respectively.
(4) DEBT:
Short-Term Debt-
The Company currently utilizes a $35 million secured credit facility
expiring October 28, 1999. The revolver bears interest at the bank's base rate
plus 1% or, for a portion of the loan, LIBOR plus 3%. Borrowings are based on
65% of eligible inventory, as defined, and amounts available under the agreement
may be reduced to reflect availability reserves, based on certain conditions as
determined by the lender. In addition, a material adverse change in the
Company's consolidated financial condition may be deemed an event of default
under the agreement. All of the Company's unencumbered cash, equipment,
inventory and accounts receivable are pledged as collateral for the new
facility. As of December 30, 1997 and December 31, 1996, $23,558,000 and
$21,904,000, respectively was outstanding under this credit facility. Additional
borrowings available at December 30, 1997 were $5,153,000.
Long-Term Debt-
Long-term debt consists of the following-
December 30, December 31,
1997 1996
------------ ------------
Convertible Subordinated
Original Debentures (A) $23,305,000 $40,000,000
Convertible Subordinated New
Debentures (B) 7,687,500 -
Equipment Financing Loans (C) - 146,000
Mortgage Payable (D) - 9,045,000
----------- ----------
30,992,500 49,191,000
Less current portion - 247,000
----------- ----------
Total long-term debt,
net of current portion $30,992,500 $48,944,000
------------ -----------
(A) The $23,305,000 of 6-1/2% Convertible Subordinated Debentures due 2003
(the "Original Debentures"). Interest is paid semi-annually on February 28 and
August 31. The Original Debentures are convertible into common stock of the
Company at a conversion price of $22.25 per share, subject to adjustment in
certain circumstances. The Original Debentures are redeemable, in whole or in
part, for cash at any time on or after November 30, 1996 at the option of the
Company, at a redemption price beginning at 103.25% and thereafter declining
ratably to par plus accrued interest to the date of redemption. No quoted market
price is available for the Original Debentures, however, the Company estimates
the fair value is approximately 40% of face value, based on the limited
transactions for these instruments, including those described below.
On September 1, 1997, the Company exchanged $15,375,000 of the $40,000,000
6-1/2% Convertible Subordinated Debentures due 2003 for $7,687,500 of 6-1/2%
Convertible Subordinated Debentures due 2003 (the "New Debentures"). The New
Debentures rank pari passu with the Original Debentures in respect to principal
and interest but have a substantially lower conversion price (see (B)). This
transaction generated an extraordinary gain of $7,687,500 during the fiscal year
ended December 30, 1997, based upon the difference between the face value of the
Original Debentures exchanged and the face value of the New Debentures issued.
During the fourth quarter of 1997, the Company entered into a series of
transactions for the repurchase of Original Debentures outstanding. The Company
purchased $1,320,000 face value of the Original Debentures for a purchase price
of $525,550. These transactions generated an extraordinary gain of $794,450
during the fiscal year ending December 30, 1997.
(B) The $7,687,500 of 6-1/2% Convertible Subordinated Debentures due 2003.
Interest is paid semi-annually on February 28 and August 31. The New Debentures
are convertible into common stock (but not prior to February 1999) at a
conversion price of $1.75 per share. No quoted market price is available for the
New Debentures, however based upon the recent issuance of these securities, the
Company believes their carrying cost approximates fair market value at December
30, 1997.
(C) The Equipment financing loans were paid in full during 1997. The loans
were payable in 48 monthly installments of principal and interest through
October 28, 1997. The interest rates varied between 8.5% and 8.75%. The loans
were secured by certain fixed assets. The carrying value of the loans
approximated fair value due to their short-term maturities.
(D) On November 5, 1997, the Company entered into a sale and leaseback
agreement relating to the Queens, New York store which was previously owned by
the Company. The sales price was $14,500,000. Part of the proceeds of the sale
were utilized to eliminate the outstanding mortgage on the property. The Company
simultaneously entered into a lease agreement for the property with an initial
term expiring on October 31, 2022. The lease also contains two 10 year renewal
periods at the Company's option.
The 8.75% fixed rate mortgage loan on the Queens property was eliminated
when the Company completed the sale and leaseback transaction in November 1997.
Interest and principal were payable in equal monthly installments of $76,000 to
July 2005 at which time the remaining principal was due.
Principal payments required under long-term debt obligations for years
subsequent to December 30, 1997 are as follows-
1998 $ -
1999 -
2000 -
2001 -
2002 -
Thereafter 30,992,500
(5) COMMITMENTS AND CONTINGENCIES:
The Company's retail stores, distribution center and office space are
leased under operating leases. The leases have initial remaining terms of three
to twenty-five years with renewal options from five to thirty years. Most of the
leases are net, requiring additional payments for real estate taxes, maintenance
and insurance.
During 1995, the Company obtained an option to purchase property which will
be the site of another store which is expected to open during 1998.
One of the Company's stores and the distribution center/corporate office
are leased from a proprietorship affiliated with the former Chairman of the
Board. These rentals are included in the related party amounts in the table
below.
Rental expense charged to operations under the leases described above, all
of which are classified as operating leases, are summarized below-
Year Ended
----------------------------------------------
December 30, December 31, December 26,
1997 1996 1995
------------ ------------ ------------
Rentals under-
Related party leases $1,979,000 $1,848,000 $1,836,000
Other leases 5,635,000 5,660,000 5,323,000
---------- ---------- ----------
$7,614,000 $7,508,000 $7,159,000
---------- ---------- ----------
---------- ---------- ----------
Minimum annual rental payments under operating leases in fiscal years
subsequent to December 30, 1997 are as follows-
1998 $8,157,000
1999 7,644,000
2000 7,542,000
2001 7,446,000
2002 4,617,000
Thereafter 60,772,000
The Company presently has employment contracts with five officers which
commit the Company to various salary and fringe benefit obligations through 2000
(as specified in the individual agreements). The aggregate salary obligation
under these agreements is $936,000, $700,000 and $125,000 for the years ending
1998 through 2000, respectively.
In connection with the floor plan financing for certain inventory
purchases, such floor planners have a security interest in the inventory
purchased through such floor planning arrangements.
At December 30, 1997 and December 31, 1996, the Company had standby letters
of credit of $785,000.
(6) 401(K) SALARY SAVINGS PLAN:
The Company maintains a defined contribution 40l(k) plan which allows
eligible employees to defer a portion of their income through contributions to
the plan. Under the terms of the plan, the Company contributes an amount equal
to 2-l/2% of the total annual compensation paid to plan participants and may
contribute additional amounts on a discretionary basis. Effective January 1997,
the Plan was modified whereby the Company contributes 25% of the participant's
contribution up to 10% of that participant's annual compensation. Plan
forfeitures are utilized to fund the Company's contribution requirements.
The Company's contributions to the plan were as follows-
1997 $290,000
1996 632,000
1995 856,000
(7) LITIGATION:
The Company is involved in litigation, both as plaintiff and defendant,
incidental to the conduct of its business. It is the opinion of management,
after consultation with its counsel, that the outcome of such litigation will
not have a material adverse effect on the Company's financial condition or the
results of its operations.
(8) STOCK OPTION PLANS:
The Company offers two incentive stock option plans (the "Plans"). In
addition, non-qualified stock options have been issued that are not covered by
the Plans. A total of 1,200,000 shares of common stock are reserved for issuance
under the incentive stock option plans and 570,000 shares of common stock are
reserved for issuance relating to nonqualified stock options. The exercise price
of stock options granted may not be less than 100% (110% in the case of
incentive stock options granted to owners of more than 10% of the total combined
voting power of all classes of stock of the Company) of the fair market value at
the time of grant. Options are generally exercisable over a three year period.
Stock option transactions for the periods indicated were as follows-
Number of Shares
----------------------------------------
1997 1996 1995
------------- ------------ -----------
Options outstanding at
beginning of year
($1.44 to $6.88) 1,110,300 796,700 600,000
Granted ($1.00 to $5.00) 297,000 1,041,300 385,000
Canceled ($2.38 to $6.25) (250,600) (727,700) (188,300)
------------- ------------ -----------
Options outstanding at end of year 1,156,700 1,110,300 796,700
------------- ------------ -----------
------------- ------------ -----------
The Company applies "Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date, consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, the Company's net income and
earnings per share would have been as follows-
1997 1996 1995
----------- ----------- ----------
Net income (loss)-
As reported $1,357,000 ($19,381,000) ($1,931,000)
Pro forma 720,000 (19,864,000) (2,093,000)
Pro forma net income
(loss) per share-
As reported $0.18 ($2.66) ($0.27)
Pro forma 0.10 (2.72) (0.28)
These pro forma amounts may not be representative of future disclosures
because the estimated fair value of stock options is amortized over the vesting
period, and additional options may be granted in future years.
Using the Black-Scholes option valuation model, the estimated fair values
of options granted during 1997, 1996 and 1995 were $0.85, $1.68 and $3.14,
respectively. The Black-Scholes model was developed for use in estimating the
fair value of traded options which have no vesting restrictions. In addition,
such models require the use of subjective assumptions, including expected stock
price volatility. In management's opinion, such valuation models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Principal assumptions used in applying the Black-Scholes model were as
follows-
1997 1996 1995
------- ------- -------
Risk-free interest rate 6.0% 6.6% 6.0%
Expected life, in years 5 5 5
Expected volatility 91 % 67 % 67 %
Expected dividend yield 0.0% 0.0% 0.0%
(9) STOCK PURCHASE PLAN:
The Company has established an Employee Stock Purchase Plan (the "Plan"). A
total of 200,000 shares of common stock are reserved for issuance under the
Plan. The Plan enables participating employees to purchase the Company's common
stock through payroll deductions at a value equal to 85% of the market value of
the common stock on the first or last day of the offering period, whichever is
lower. During 1997 and 1996, common stock totaling 13,622 and 24,239 shares,
respectively, were issued under the Plan.
(10) INCOME TAXES:
Deferred income taxes at December 30, 1997 and December 31, 1996 reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows-
1997 1996
---------- ---------
Current deferred tax assets-
Compensation not currently deductible $ - $313,000
Inventory 301,000 376,000
Accrued liabilities 129,000 152,000
Other 223,000 324,000
Valuation allowance (481,000) (885,000)
---------- ---------
Total current deferred tax assets 172,000 280,000
Current deferred tax liabilities-
Vendor allowances 2,545,000 2,899,000
Other 567,000 139,000
--------- ---------
Total current deferred tax liabilities 3,112,000 3,038,000
--------- ---------
Net current deferred tax liabilities $2,940,000 $2,758,000
--------- ---------
--------- ---------
Long-term deferred tax assets-
Federal and state loss carryforwards $6,941,000 $7,150,000
Alternative minimum tax and job credit
carryforward 593,000 604,000
Compensation not currently deductible - 37,000
Rent 805,000 1,266,000
Depreciation 2,502,000 1,992,000
Warranty 348,000 343,000
Valuation allowance (8,244,000) (8,629,000)
--------- ---------
Total long-term deferred tax assets 2,945,000 2,763,000
Long-term deferred tax liabilities - Other 5,000 5,000
--------- ---------
Net long-term deferred tax assets $2,940,000 $2,758,000
--------- ---------
--------- ---------
At December 30, 1997, the Company has a Federal net operating loss
carryforward of approximately $16,570,000 of which the majority expires in 2010.
Components of the benefit for income taxes (before extraordinary item) are
as follows-
1997 1996 1995
-------- -------- ---------
Current-
Federal $ - ($1,778,000) ($298,000)
State - 14,000 16,000
-------- --------- ----------
- (1,764,000) (282,000)
Deferred-
Federal - (236,000) (752,000)
State - - (254,000)
--------- --------- ----------
- (236,000) (1,006,000)
--------- --------- ----------
Benefit for income taxes $ - ($2,000,000) ($1,288,000)
--------- --------- ---------
--------- --------- ---------
A reconciliation of the effective tax rate to the Federal statutory rate is
as follows-
1997 1996 1995
--------- ---------- ----------
Federal statutory rate (34.0%) (34.0%) (34.0%)
State income taxes, net of
Federal income tax benefit - - (4.9)
Increase in valuation allowance
attributable to Federal net
operating loss carryforward not
recognized 34.0 26.0 -
Other - (1.4) (1.1)
--------- ---------- ----------
Effective tax rate 0% (9.4%) (40.0%)
--------- ---------- ----------
--------- ---------- ----------
In addition, the tax provision attributable to the gain on debt
extinguishment has been offset by a reduction in the valuation allowance
attributable to net operating losses incurred in prior periods.
<PAGE>
SCHEDULE II
TOPS APPLIANCE CITY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 30, 1997, DECEMBER 31, 1996 AND DECEMBER 26, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period and Expenses Deductions of Period
----------- ---------- ------------ ---------- ---------
Year ended December 26, 1995 --
Allowance for doubtful accounts $263,000 $240,000 $130,000 $373,000
-------- -------- -------- --------
Year ended December 31, 1996 --
Allowance for doubtful accounts $373,000 $360,000 $465,000 $268,000
-------- -------- -------- --------
Year ended December 30, 1997 --
Allowance for doubtful accounts $268,000 $180,000 $145,000 $303,000
-------- -------- -------- --------
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Registrant has engaged Arthur Andersen LLP as its independent certifying
accountant effective August 28, 1997 replacing Ernst & Young, its prior
independent certifying accountant, as of the same date. The change in
independent certifying accountant was approved by the Board of Directors of
Registrant.
The reports of Ernst & Young respecting Registrant for fiscal years 1995
and 1996 contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or application of
accounting principles, except that Ernst & Young qualified its 1996 report as to
registrant's ability to continue as a going concern. During fiscal years 1995
and 1996 and the subsequent period thereto prior to the dismissal of Ernst &
Young, there were no disagreements between Registrant and Ernst & Young on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
During fiscal years 1995 and 1996 and the subsequent period thereto prior
to engaging Arthur Andersen LLP, the Registrant had no discussions with Arthur
Andersen LLP regarding either the application of an accounting principle, the
type or opinion that would be rendered in Registrant's financial statements or
any matter that was the subject of disagreement with Ernst & Young.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required in response to this item is
incorporated by reference from the Registrant's proxy statement for its 1998
annual meeting of shareholders to be filed with the Securities and Exchange
Commission on or before April 29, 1998.
ITEM 11. Executive Compensation
The information required in response to this item is
incorporated by reference from the Registrant's proxy statement for its 1998
annual meeting of shareholders to be filed with the Securities and Exchange
Commission on or before April 29, 1998.
ITEM 12. Security Ownership of Certain Beneficial Ownership and Management
The information required in response to this item is
incorporated by reference from the Registrant's proxy statement for its 1998
annual meeting of shareholders to be filed with the Securities and Exchange
Commission on or before April 29, 1998.
ITEM 13. Certain Relationships and Related Transactions
The information required in response to this item is incorporated by
reference from the Registrant's proxy statement for its 1998 annual meeting of
shareholders to be filed with the Securities and Exchange Commission on or
before April 29, 1998.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Reports of Independent Public Accountants.....................12
Consolidated Balance Sheets as of December 30, 1997 and
December 31, 1996..............................................4
Consolidated Statements of Operations for years
ended December 30, 1997, December 31, 1996, and
December 26, 1995.............................................5
Consolidated Statements of Shareholders' Equity................6
Consolidated Statements of Cash Flows for years
ended December 30, 1997, December 31, 1996 and
December 26, 1995.............................................7
Notes to Consolidated Financial Statements.....................8
(a)(2) Financial Statement Schedule
The following are included in Part II, Item 8:
Schedule II- Valuation and Qualifying
Accounts and Reserves.......................................S-2
(a)(3) Exhibits
Except where noted, all exhibits are incorporated by reference from the
Registrant's registration statement on Form S-1 as filed with the Securities and
Exchange Commission on June 3, 1992, and amendments thereto, Registration No.
33-48326.
<TABLE>
<CAPTION>
Exhibit Number Description of Document
<S> <C> <C>
3.1 The Registrant's Certificate of Incorporation
3.2 The Registrant's By-Laws
4 Specimen of stock certificate for shares of
common stock
4.2 Indenture dated as of November 30, 1993 between
Tops Appliance City, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation (incorporated by
reference from Form S-3 filed February 10, 1994)
4.3 Registration Rights Agreement dated as of November
30, 1993 between Tops Appliance City, Inc. and
Donaldson, Lufkin & Jenrette Securities
Corporation (incorporated by reference from Form
S-3 filed February 10, 1993)
10.1 Security Agreement dated April 27, 1992 between
Maytag Financial Service Corp. and Tops
Appliance City, L.P.
10.2 Security Agreement dated January 19, 1989 between
General Electric Capital Corporation and Tops
Appliance City, L.P.
10.3 Security Agreement dated January 15, 1990 between
Tops Appliance City, L.P. and WCI Acceptance
Corporation
10.4 Floor Plan Inventory Security Agreement dated
March 19, 1990 between Tops Appliance City,
L.P. and Carrier Distribution Credit Corporation
10.5 Lease dated March 3, 1984 between Leslie S. Turchin
and Tops Appliance City, L.P., as amended (1745
Route 27, Edison, New Jersey)
10.6 Lease dated October 11, 1985 between Leslie S.
Turchin and Tops Appliance City, L.P. (45
Brunswick Avenue, Edison, New Jersey)
10.7 Lease Dated May 21, 1986 between Mack Edison Co.
and Tops Appliance City, L.P., as amended
10.8 Lease dated May 21, 1986 between Mack Industries
and Tops Appliance City, Inc., as amended
10.9 Lease dated April 27, 1988 between Castle Ridge
Shopping Plaza Associates and Tops Appliance City, L.P.
10.10 Lease dated June 2, 1989 between Sudler Town and
Country Limited Partnership and Tops Appliance
City, L.P.
10.11 Management Agreement dated November 30, 1988
between Tops Appliance City, L.P. and Leslie S.
Turchin, as amended
10.12 Management Agreement dated January 1, 1989 between
Tops Appliance City, L.P. and Philip M. Schmidt,
as amended
10.13 Form of Equipment Loan Agreement between Tops
Appliance City, L.P. and Bell Atlantic Mobile
Systems, Inc.
10.14 Form of Hardware/Software License Agreement
between Tops Appliance City, L.P. and Bell
Atlantic Mobile Systems, Inc.
10.15 Delivery Agreement dated January 30, 1992 between
Tops Appliance City, L.P. and Merchants Home
Delivery Service, Inc.
10.16 Form of Amended and Restated Section 401(k) Plan
dated July 29, 1988
10.17 Summary Plan and Description Amended and Restated
401(k) Plan dated January 1, 1988
10.18 Form of Executive and Deferred Compensation Plan
10.19 Form of Premium Conversion Plan
10.20 Form of Stock Option Plan
10.21 Extended Service Agreement dated October 19, 1987
between Warrantech Corporation and Tops Appliance
City, Inc.
10.22 Extended Service Agreement dated April 29, 1988
between Warrentech Corporation and Tops
Appliance City, Inc.
10.23 Account Financing Agreement dated December 30,
1986 between General Electric Capital Corporation
and Tops Appliance City, L.P.
10.24 Lease dated July 7, 1992 between New
York Medical College and Tops
Appliance City, L.P.
10.25 Third Amendment to Management Agreement between
Tops Appliance City, Inc. and Leslie S. Turchin
dated December 16, 1992 (incorporated by reference
from 8-K filed January 11, 1993).
10.26 Lease dated February 11, 1993 between Tops
Appliance City, Inc. and Jerry Spiegel and Jesco
Co. (incorporated by reference from 8-K filed
April 6, 1993.)
10.27 Lease dated May 1993 between Tops Appliance City,
Inc. and Lester Robbins, Trustee (incorporated by
reference from 8-K filed June 11, 1993).
10.28 Management Agreement dated July 31, 1995 between
Tops Appliance City, Inc. and Rick Jones (incorpo-
rated by reference from Annual Report on Form 10-K
for year ending December 26, 1995.
10.29 Management Agreement dated May 31, 1995 between
Tops Appliance City, Inc. and Robert Gross
(incorporated by reference from
Annual Report on Form 10-K for year
ending December 26, 1995.)
10.30 Addendum to Management Agreement dated October
15, 1997 between Tops Appliance City, Inc. and
Thomas L. Zambelli - Page 26.
10.31 Addendum to Management Agreement dated November
20, 1997 between Tops Appliance City, Inc. and
Robert Gross - Page 28.
10.32 Addendum to Management Agreement dated October
15, 1997 between Tops Appliance City, Inc. and
Richard Jones - Page 31.
10.33 Stock Purchase Agreement dated November 5, 1997
by and between SSP, L.L.C., Tops Appliance City
of New York, Inc. and Tops Appliance City, Inc.
- Page 33.
10.34 Debenture Exchange Agreement dated August 20,
1997, effective September 1, 1997 between Tops
Appliance City, Inc. and BEA Associates - Page
35.
22 List of Subsidiaries of the Registrant- Page
108.
24.1 Consent of Arthur Andersen L.L.P. - Page 109.
24.2 Consent of Ernst & Young LLP - Page 110.
</TABLE>
(b) Reports on Form 8-K
Form 8-K filed February 6, 1997 with respect to Leslie S. Turchin's
resignation as the Registrant's Chairman of the Board of Directors. Robert G.
Gross was immediately elected as Chairman of the Board of Directors. The
Registrant also announced that Richard L. Jones was named Chief Operating
Officer in addition to his duties as Senior Vice President and General
Merchandise Manager.
Form 8-K filed August 27, 1997 with respect to the Registrant's entering
into a Debenture Exchange Agreement with BEA Associates for $15,375,000 of the
Registrant's 6 1/2% Convertible Debentures due 2003 (the "Original Debentures")
for $7,687,500 of the Registrant's 6 1/2% Convertible Debenture due 2003 (the
"New Debentures"). The New Debentures are convertible into shares of the
Registrant at a conversion price of $1.75 per share.
Form 8-K filed September 4, 1997 with respect to the completion of the
Debenture Exchange Agreement with BEA Associates effective September 1, 1997.
Form 8-K filed September 4, 1997 with respect to the Registrant's engaging
Arthur Andersen LLP as it's new independent certifying accountant effective
August 28, 1997 replacing Ernst & Young.
Form 8-K filed December 29, 1997 with respect to the Registrant's sale of
the stock of a wholly owned subsidiary which owned certain real estate in
Queens, New York.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TOPS APPLIANCE CITY, INC.
BY: /s/ Robert G. Gross
------------------------
ROBERT G. GROSS
Chief Executive Officer
BY: /s/ Thomas L. Zambelli
-----------------------
THOMAS L. ZAMBELLI
Chief Accounting Officer
Dated: March 30, 1998
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ Robert G. Gross Chairman of the Board, March 30, 1998
ROBERT G. GROSS Chief Executive Officer
/s/ Thomas L. Zambelli Senior Vice President, March 30, 1998
THOMAS L. ZAMBELLI Chief Accounting Officer
/s/ Leslie S. Turchin Director March 30, 1998
LESLIE S. TURCHIN
/s/ Anthony L. Formica Director March 30, 1998
ANTHONY L. FORMICA
/s/ John H. Holland Director March 30, 1998
JOHN H. HOLLAND
<PAGE>
Exhibit 10.30
FIRST ADDENDUM TO MANAGEMENT AGREEMENT ENTERED INTO
AS OF THE 3RD DAY OF SEPTEMBER, 1996 ("AGREEMENT")
BETWEEN THOMAS ZAMBELLI ("EXECUTIVE") AND
TOPS APPLIANCE CITY, INC. ("COMPANY")
WHEREAS, Tops Appliance City, Inc. and Thomas Zambelli entered into the
above-referenced Agreement, and
WHEREAS, Company and Executive desire to amend such Agreement,
In consideration of One ($1.00) Dollar and other good and valuable
consideration, it is agreed as follows:
1. Section 4 of the Agreement is amended to extend the term of the
Agreement to December 31, 1999.
2. Section 5 of the Agreement is amended to provide that effective
January 1, 1998, Executive's Base Salary shall be One Hundred Seventy-Five
Thousand and no/00 ($175,000.00) Dollars per annum.
3. Section 6(b) of the Agreement is amended to cause the Company to
grant to the Executive options to purchase an additional fifty thousand (50,000)
shares of the Company's Common Stock, which options will vest and become
exercisable in the following amounts on the following dates, provided that the
Executive is then employed by the Company:
Date No. of Shares
December 31, 1998 25,000
December 31, 1999 25,000
Such options shall be granted pursuant to a separate agreement to be executed
and delivered simultaneously with this Addendum, will be non-qualified and will
have an exercise price per share equal to the closing price of the Company's
Common Stock on October 15, 1997.
4. Section 7(a) of the Agreement is amended to provide that effective
January 1, 1998, Executive shall receive three (3) weeks of paid vacation during
each calendar year.
5. Except as otherwise provided for herein, the Agreement shall remain
in effect as it was prior to the execution of this Addendum. To the extent of
any inconsistency between the Agreement and this Addendum, the provisions of
this Addendum shall control.
6. This Addendum is binding on the successors and assigns of the
parties hereto.
In WITNESS WHEREOF, the parties have set their hands and seals this
15th day of October, 1997.
TOPS APPLIANCE CITY, INC.
/s/ Thomas Zambelli By: /s/ Robert Gross
- -------------------------------- ----------------------------
Thomas Zambelli Robert Gross,
Chief Executive Officer
<PAGE>
Exhibit 10.31
FIRST ADDENDUM TO MANAGEMENT AGREEMENT ENTERED
INTO AS OF THE 19TH DAY OF MAY, 1995
BETWEEN ROBERT GROSS AND
TOPS APPLIANCE CITY, INC.
WHEREAS, Tops Appliance City, Inc. (the "Company") and Robert Gross (the
"Executive") entered into the above-referenced Agreement (the "Agreement"), and
WHEREAS, Company and Executive desire to amend such Agreement,
In consideration of One ($1.00) Dollar and other good and valuable
consideration, it is agreed as follows:
1. Section 2 of the Agreement is amended to add the title of Chairman
to Executive's existing title of Chief Executive Officer.
2. Section 6(c) of the Agreement is amended to cause the Company to
grant to the Executive options to purchase an additional one hundred thousand
(100,000) shares of the Company's Common Stock, which options will vest and
become exercisable in the following amounts on the follow dates, provided that
the Executive is then employed by the Company.
Date No. of Shares
June 1, 1998 33,333
June 1, 1999 33,333
June 1, 2000 33,334
Such options shall be granted pursuant to a separate agreement to be executed
and delivered simultaneously with this Addendum, will be non-qualified and will
have an exercise price of $1 1/16 per share.
Notwithstanding anything to the contrary above, any outstanding stock
options granted under the Agreement shall immediately vest upon the termination,
or nonrenewal, of the Agreement by Company for reasons other than those which
would constitute "cause" under the Agreement.
3. Section 6(d) of the Agreement is deleted in its entirety and
replaced with a new Section 6(d) to provide as follows:
"Change of Control prior to June 1, 2000. If in a single
transaction or as a result of a series of transactions occurring in
concert with each other, the control of the Company shall change, and
subsequent to such change in control, the Employee terminates this
Agreement for "Good Reason" (as such term is hereinafter defined) or
this Agreement is not renewed upon expiration of its term and the
Company is without "cause" (as such term is defined in the Agreement)
to terminate the Agreement, the Company will pay to Executive One
Million Dollars ($1,000,000) in addition to all other amounts
otherwise payable to Executive under this Agreement.
For purposes of this provision, a "change in control" shall occur
if more than fifty percent (50%) of the Company's outstanding common
stock is transferred in a single transaction or series of transactions
in concert with each other or if substantially all of the assets of
the Company are sold in a single transaction or series of transactions
in concert with each other. In determining whether more than fifty
percent (50%) of the Company's outstanding common stock has been
transferred, transfers by Executive shall be disregarded.
For purposes of this provision, "Good Reason" shall include any
substantial diminution in the duties, Base Salary, responsibilities or
authority or a change in title of the Executive.
The amount payable under this paragraph shall be paid in a single
payment within sixty (60) days of the date on which Executive becomes
entitled to the payment as a result of the termination or expiration
of the Agreement. Notwithstanding the foregoing, the amount otherwise
payable under this Section 6(d) shall not be paid if $1,000,000 was
previously paid to Executive under Section 6(f) hereof.
4. The Agreement is amended to add a new Section 6(f) to provide as
follows:
Acquisition prior to June 1, 2000. If the Company acquires a
wholesale or retail appliance or consumer electronics business during
the term of this Agreement and (i) the average closing price of the
Company's common stock for the ten trading (10) days prior to June 1,
2000 is not less than $1.75 per share (which price represents a 40%
increase over the $1.25 per share closing price of the Company's
common stock on November 10, 1997); and (ii) on June 1, 2000, (x) the
Company is still operating in the same ordinary course of business as
it was on the date of the acquisition and (y) is not the subject of
any voluntary or involuntary bankruptcy, insolvency or reorganization
proceeding for the benefit of its creditors; the Company will pay to
Executive One Million Dollars ($1,000,000) in addition to all other
amounts, if any, otherwise payable to Executive under this Agreement.
The amount payable under this provision shall be paid in a single
payment on or before September 1, 2000. Notwithstanding the foregoing, the
amount otherwise payable under this Section 6(f) shall not be paid if $1,000,000
was previously paid to Executive under Section 6(d) hereof.
5. Except as otherwise provided for herein, the Agreement shall remain
in effect as it was prior to the execution of this Addendum. However, to the
extent of any inconsistency between the Agreement and this Addendum, the
provisions of this Addendum shall control.
6. This Addendum is binding on the successors and assigns of the
parties hereto.
In WITNESS WHEREOF, the parties have set their hands and seals this
20th day of November, 1997.
TOPS APPLIANCE CITY, INC.
/s/ Robert Gross
- ------------------------------ By: /s/ Thomas Zambelli
Robert Gross -------------------------
Thomas Zambelli
<PAGE>
Exhibit 10.32
FIRST ADDENDUM TO MANAGEMENT AGREEMENT ENTERED
INTO AS OF THE 31ST DAY OF JULY, 1995 ("AGREEMENT")
BETWEEN RICK JONES ("EXECUTIVE")
AND TOPS APPLIANCE CITY, INC. ("COMPANY")
WHEREAS, Tops Appliance City, Inc. and Rick Jones entered into
the above-referenced Agreement, and
WHEREAS, Company and Executive desire to amend such Agreement,
In consideration of One ($1.00) Dollar and other good and valuable
consideration, it is agreed as follows:
1. Section 2 of the Agreement is amended to add the title of Chief
Operating Officer to Executive's existing titles of Senior Vice President and
General Merchandising Manager.
2. Section 4 of the Agreement is amended to extend the term of the
Agreement to December 31, 1999.
3. Section 6(a) of the Agreement is amended to provide that for the
fiscal years commencing January 1998 and thereafter, the bonus shall in no event
exceed 50% (rather than 33%) of the Base Salary.
4. Section 6(b) of the Agreement is amended to cause the Company to
grant to the Executive options to purchase an additional thirty thousand
(30,000) shares of the Company's Common Stock, which options will vest and
become exercisable in the following amount on the follow date, provided that the
Executive is then employed by the Company.
Date No. of Shares
December 31, 1999 30,000
Such options shall be granted pursuant to a separate agreement to be executed
and delivered simultaneously with this Addendum, will be non-qualified and will
have an exercise price per share equal to the closing price of the Company's
Common Stock on October 15, 1997.
5. Except as otherwise provided for herein, the Agreement shall remain
in effect as it was prior to the execution of this Addendum. However, to the
extent of any inconsistency between the Agreement and this Addendum, the
provisions of this Addendum shall control.
6. This Addendum is binding on the successors and assigns of the
parties hereto.
In WITNESS WHEREOF, the parties have set their hands and seals this
15th day of October, 1997.
TOPS APPLIANCE CITY, INC.
/s/ Rick Jones By: /s/ Robert Gross
- ----------------------------- ---------------------------
Rick Jones Robert Gross,
Chief Executive Officer
<PAGE>
Exhibit 10.33
STOCK PURCHASE AGREEMENT
AGREEMENT made this 5th day of November, 1997, by and between SSP,
L.L.C., a New York limited liability company having an address at 437 Madison
Avenue, New York, New York ("Buyer"), and Tops Appliance City of New York, Inc.,
a New York corporation having an address at c/o Tops Appliance City, Inc., 45
Brunswick Avenue, CN14, Edison, New Jersey 08818-1907 ("Shareholder"), and Tops
Appliance City, Inc., 45 Brunswick Avenue, CN14, Edison, New Jersey 08818-1907
("TAC").
WHEREAS, the Shareholder is the owner of ten (10) shares of common
stock, par value $.01 per share (the "Shares") of Tops Appliance Realty, Inc., a
New York corporation ("Corporation"), which constitutes all of the issued and
outstanding shares of capital stock of the Corporation as of the date hereof;
and
WHEREAS, TAC is the sole shareholder of the Shareholder; and
WHEREAS, the Shareholder desires to sell to Buyer, and Buyer desires to
acquire from the Shareholder, the Shares upon the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements recited
herein, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.01. Purchase and Sale. Subject to the terms and conditions of this
Agreement, and in reliance on the representations and warranties set forth
herein, on the Closing Date, as defined herein, the Shareholder will sell,
transfer and deliver to Buyer, and Buyer shall acquire from the Shareholder, all
of the Shares, free and clear of all liens, pledges, encumbrances, charges, and
claims thereon. One or more certificates evidencing the Shares shall be either
duly endorsed in blank or accompanied by appropriate stock powers endorsed in
blank. Such certificates shall also be accompanied by evidence satisfactory to
Buyer of the Shareholder's payment of any applicable transfer taxes.
1.02. Purchase Price. In consideration of the sale, transfer, and
delivery of the Shares by the Shareholder to Buyer, on the Closing Date, Buyer
shall deliver to the Shareholder the sum of Fourteen Million Five Hundred
Thousand Dollars ($14,500,000.00) less the amount of the outstanding balance on
the Closing Date of the Corporation's mortgage to LaSalle National Bank, as
Trustee for the Registered Holders of Chase Commercial Securities Corp.,
Commercial Mortgage Pass-Through Certificates, Series 1996-1, as assignee of
Chemical Bank ("Lender"), pursuant to a Promissory Note, a Mortgage and Security
Agreement, and an Assignment of Leases and Rents, all dated July 28, 1995
(collectively, the "Mortgage"), payable by wire transfer on the Closing Date,
and subject to adjustments as described in Paragraph 1.03 hereof. Shareholder
estimates that the outstanding balance of the Mortgage as of November 1, 1997
(and prior to receipt by Lender of Shareholder's November mortgage payment) is
Eight Million Nine Hundred Fifty-Six Thousand Ninety-Four ($8,956,094) Dollars.
<PAGE>
1.03. Adjustments to Purchase Price. Shareholder shall receive a credit
effective as of the Closing Date for a sum equal to the amount of all escrows
and accumulated interest thereon held by Lender under the Tenant Improvement
Leasing Commission and Debt Service Reserve and Security Agreement dated July
28, 1995 (the "Tenant Improvement Escrow"). In addition to the foregoing, on the
Closing Date, Shareholder and Buyer shall apportion effective as of the Closing
Date, rent and any other applicable items.
1.04. Right to Tax Refund; Right to Proceeds of Other Escrows.
Notwithstanding anything to the contrary in this Agreement, Shareholder or its
designee shall be entitled to receive from the Corporation within ten (10) days
of receipt by the Corporation:
(a) A payment equal to the amount of any refund or credit resulting
from any tax certiorari proceeding which is received subsequent to the Closing
and which is attributable to any period(s), including any portions of a fiscal
year, prior to the Closing. Any payment due to Shareholder hereunder shall be
adjusted to reflect the fees or expenses which may have been incurred by the
Corporation or its designee in such proceeding.
(b) A payment equal to the amount of any release of funds theretofore
held by Lender pursuant to the Replacement Reserve and Security Agreement dated
July 29, 1995, or under any other escrow held by Lender, including without
limitation any escrow held for the payment of real estate taxes under the
Mortgage, and all interest payable by the Lender with respect to any such
escrow, but excluding the escrow and accrued interest held by Lender under the
Tenant Improvement Escrow. Such payment shall be made no later than the earlier
of (i) August 1, 2005, or (ii) any refinancing of the Mortgage.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE SHAREHOLDER
The Shareholder and TAC make the following representations and
warranties to Buyer.
2.01. Valid Corporate Existence; Qualification. The Corporation is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New York. The Corporation has all requisite corporate power and
authority to carry on its business as now conducted and to own its assets. The
Corporation does not conduct business in any State other than New York, and is
neither qualified to conduct business or in good standing as a foreign
corporation in any jurisdiction other than the State of New York, and there has
not been any claim by any other jurisdiction to the effect that the Corporation
is required to qualify or otherwise be authorized to do business as a foreign
corporation therein. The copies of the Corporation's Certificate of
Incorporation and By-Laws (both certified by the Corporation's secretary), as
amended to date, which have been delivered to Buyer, are true and complete
copies of those documents as now in effect. The minute books of the Corporation
contain accurate records of all material meetings of its Board of Directors,
Executive Committee of the Board, if any, and shareholders since its
incorporation, and accurately reflect all transactions authorized therein.
-2-
<PAGE>
2.02. Capitalization. The authorized capital stock of the Corporation
consists of 200 shares of Common Stock, $.01 par value, of which ten (10) shares
of Common Stock are issued and outstanding. All of such issued and outstanding
shares of Common Stock are duly authorized and validly issued and outstanding,
fully paid and nonassessable. There are no (i) subscriptions, options, warrants,
rights or calls or other commitments or agreements to which the Corporation or
the Shareholder is a party or by which either of them is bound, which call for
or restrict in any manner the issuance, transfer, sale or other disposition,
redemption or repurchase of the Common Stock of the Corporation, or (ii) voting
trust agreements or other contracts, agreements, arrangements, commitments,
proxies or understandings to which the Corporation or the Shareholder is a party
or to which either of them is bound which restrict or otherwise relate to the
voting or dividend rights of the Common Stock of the Corporation. There are no
outstanding securities of the Corporation convertible or exchangeable, actually
or contingently, into shares of Common Stock or any other securities of the
Corporation. All of the shares of Common Stock issued and outstanding as of the
date of this Agreement, and as of the Closing Date, are and will be held of
record and beneficially solely by the Shareholder.
2.03. Subsidiaries. The Corporation does not directly or indirectly own
any capital stock of or other equity interests in any other corporation,
partnership, limited liability company, or other business entity.
2.04. Corporate Authority; Binding Nature of Agreement. The Shareholder
is a corporation duly organized, validly existing and in good standing under the
laws of the State of New York. The Shareholder has the corporate power to enter
into this Agreement and to carry out its obligations hereunder. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by the Board of Directors of the
Shareholder and no other corporate proceedings on the part of the Corporation or
the Shareholder are necessary to authorize the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Shareholder and
constitutes the valid and binding obligation of the Shareholder and is
enforceable in accordance with its terms. The execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated hereby
and compliance with the terms hereof will not (a) conflict with, or result in
any violation of, (i) any provision of the Certificate of Incorporation or
By-Laws of the Shareholder or (ii) any judgment, injunction, order or decree, or
statute, law, ordinance, rule or regulation applicable to the Shareholder or the
Corporation or the property or assets of the Shareholder or the Corporation, or
(b) except as set forth in Schedule 2.04, violate or conflict with or result in
a breach under, or require any consent or approval to be obtained from any party
to, any agreement, instrument or document to which the Shareholder or the
Corporation is subject or by which any of their respective properties may be
bound. Except as set forth in Schedule 2.04, no consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required to be obtained or made by or
with respect to the Shareholder or the Corporation in connection with the
execution and delivery of this Agreement or the consummation by the Shareholder
of the transactions contemplated hereby.
-3-
<PAGE>
2.05. Title to Shares. The Shareholder is, and will at the Closing be,
the sole record and beneficial owner of the Shares, free and clear of all manner
of liens, charges, encumbrances, and claims. The Shareholder now has, and at the
Closing will have, good and marketable title to all of the Shares, and has, and
at the Closing will have, the absolute and unqualified right to sell, transfer
and deliver the Shares to Buyer. The delivery of the Shares to Buyer at the
Closing pursuant to the provisions of this Agreement will transfer valid title
thereto, free and clear of all manner of liens, charges, encumbrances and
claims.
2.06. Financial Statements, etc. Except as set forth on Schedule 2.06:
(a) the books of accounts of the Corporation fairly reflect the income,
expenses, assets, liabilities and cash flows of the Corporation in all material
respects. Schedule 2.06(b) sets forth (i) the balance sheets of the Corporation
as of December 31, 1996 (the "Balance Sheet Date") and December 31, 1995, and
the Corporation's statements of operations and cash flows for the fiscal years
ended December 31, 1996 and December 31, 1995, together with the notes to such
financial statements (collectively, the "Financial Statements"). The Financial
Statements fairly present the financial position of the Corporation as of the
said dates and the results of its operations for such fiscal years and, except
as set forth therein or in Schedule 2.06 (a) were prepared in conformity with
generally accepted accounting principles consistently applied throughout the
periods covered thereby. The Financial Statements have been prepared by the
Corporation.
2.07. Liabilities. As at the Balance Sheet Date, the Corporation and
the Shareholder had no material debts, liabilities or obligations, contingent or
absolute, other than those debts, liabilities and obligations reflected or
reserved against in the Corporation's balance sheet as at the Balance Sheet Date
or as set forth on Schedule 2.07.
2.08. Absence of Changes or Events. Except as set forth in Schedule
2.08, since the Balance Sheet Date, the business of the Corporation has been
conducted in the ordinary course consistent with past practice and there has not
been any material adverse change in the financial condition, results of
operations, assets, business, operations or prospects of the Corporation.
Without limiting the generality or effect of the foregoing, except as disclosed
in Schedule 2.08, the Corporation has not since the Balance Sheet Date:
(a) incurred or agreed to incur any obligation or liability,
absolute, accrued, contingent or otherwise, whether due or to become due, except
(i) current liabilities incurred in the ordinary course of business in amounts
consistent with past practice, none of which could, individually or in the
aggregate, have a material adverse effect on the financial condition, results of
operations, assets, business, operations or prospects of the Corporation and
(ii) the obligations contemplated by this Agreement;
(b) redeemed or otherwise acquired, or agreed to redeem or
otherwise acquire, any of its shares of capital stock or issued any capital
stock or any option, warrant or right relating thereto;
-4-
<PAGE>
(c) declared or made, or agreed to declare or make, any
payment of dividends or other distributions to the Shareholder, whether or not
upon or in respect of any shares of its capital stock.
(d) sold, leased or otherwise disposed of, or agreed to sell,
lease or otherwise dispose of, any of its assets, or amended, cancelled or
compromised or agreed to amend, cancel or compromise any debt or claim of the
Corporation, or waived or released, or agreed to waive or release, any other
right of material value to the Corporation;
(e) suffered any damage, destruction or loss (whether or not
covered by insurance and regardless of the cause thereof), any of which could,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations, assets, business, operations or
prospects of the Corporation;
(f) agreed to acquire any capital stock or other securities of
any corporation or any equity interest in any business enterprise;
(g) made any change in any accounting methods or practices
other than such change as may have been required by generally accepted
accounting principles;
(h) made any expenditure or commitment in excess of an
aggregate amount of $2,500 for additions to property, plant or equipment or
other capital expenditures;
(i) entered into any agreement, arrangement or transaction
with any of the Corporation's officers, directors or shareholders, or any
Affiliates thereof;
(j) made any payment on indebtedness for borrowed money owed
by the Corporation to any person, except for scheduled mandatory payments of
principal and interest accrued thereon in accordance with the terms of such
indebtedness;
(k) made any payment to the Shareholder or any Affiliate
thereof, except that the Corporation regularly makes cash dividend payments to
the Shareholder; or
(l) made any agreement or understanding to take any of the
actions specified in paragraphs (a) through (k) above.
2.09 Taxes. (a) Except as set forth on Schedule 2.09:
(i) The Corporation has timely filed all tax returns
that it was required to file (including estimated tax returns), such tax
returns were correct and complete in all respects, and all taxes owed by the
Corporation (whether or not shown on any tax return) have been timely paid.
(ii) A claim has never been made by an authority in a
jurisdiction where the Corporation has never filed tax returns that the
Corporation is or may be subject to taxation by that jurisdiction. Schedule
2.09(a)(ii) hereto lists all of the jurisdictions in which the
-5-
<PAGE>
Corporation has ever done business, been authorized to do business, owned or
leased property, had employees or customers, employed capital, or solicited or
made sales.
(iii) The Balance Sheet reflects an adequate reserve
for all taxes payable
by the Corporation accrued through the date of such Balance Sheet. All
deficiencies for any taxes that have been proposed, asserted, or assessed
against the Corporation have been fully paid, or are fully reflected as a
liability in such Balance Sheet, or are being contested and an adequate reserve
therefor has been established and is fully reflected in such Balance Sheet.
(iv) No deficiency for any taxes has been proposed,
asserted, or assessed
with respect to the Corporation, no audit or other examination of the tax
returns of the Corporation is currently in progress, and, to Shareholder's
knowledge, no facts exist that constitute grounds for the assessment of any
additional taxes with respect to the Corporation.
(v) There are no liens for taxes (other than for
current taxes not yet due
and payable) on the assets of the Corporation or the Shares.
(vi) The federal, state, local and foreign income
tax returns of the Corporation have been examined by and settled with the
Internal Revenue Service and other applicable taxing authorities, or the
statutes of limitations with respect to such years have expired, for all years
through 1992.
(vii) The Corporation is not currently the
beneficiary of any extension of time within which to file any Tax Returns.
(viii) The Corporation is not a party to, and is not
bound by, any agreement providing for the allocation or sharing of taxes.
(ix) INTENTIONALLY OMITTED
(x) There has been no waiver or extension of the
statute of limitations for
the assessment of any tax for any taxable year.
(xi) The Corporation has not filed a consent pursuant
to, or agreed to the
application of, Section 341(f) of the Internal Revenue Code of 1986, as amended
(the "Code").
(xii) The Corporation has not made any payments, is
not obligated to make
any payments, and is not a party to any agreement that could obligate it to make
any payments, the deductibility of which would be disallowed (in whole or in
part) under Section 280G of the Code.
(xiii) The Shareholder is not a foreign person within
the meaning of, and
no tax is required to be withheld as a result of the transfer contemplated by
this Agreement pursuant to, Section 1445 or any other provision of the Code or
of any other state, local or foreign laws.
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(xiv) Schedule 2.09(a)(xiv) hereto sets forth the
Corporation's adjusted
basis in its assets for federal income tax purposes.
(xv) The Corporation has disclosed on its federal
income tax returns all
positions taken therein that could give rise to a substantial understatement of
federal income tax within the meaning of Section 6662 of the Code.
(xvi) All taxes that are required by law to be
withheld or collected by the
Corporation have been duly withheld or collected and, to the extent required,
have been timely paid to the proper governmental entity or properly and timely
deposited as required by applicable law.
(xvii) The Corporation has neither executed nor
entered into any closing
agreement pursuant to Section 7121 of the Code, or any predecessor provision
thereof, or any similar provision of state or local law.
(xviii) None of the assets owned by the Corporation
is property that is
required to be treated as owned by any other person pursuant to Section
168(f)(8) of the Internal Revenue Code of 1954, as amended, as in effect
immediately prior to the enactment of the Tax Reform Act of 1986, or is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(xix) The consummation of the transactions
contemplated by this
Agreement will not result in any taxes being imposed by the United States, any
state or political subdivision thereof, or any foreign country on the
stockholders of the Corporation as a result of the Buyer's acquisition of any
interest in real property, other than realty transfer taxes which will be due
and payable to the State of New York and the City of New York.
(b) For purposes of this Agreement,
(i) the term "tax" (including, with correlative
meaning, the terms "taxes" and "taxable") means all federal, state, local,
and foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, alternative minimum, gains,
transfer, documentary, stamp, and other taxes, duties, or assessments of any
nature whatsoever, together with all interest, penalties, and additions imposed
with respect to such amounts.
(ii) the term "tax returns" means all returns,
reports, statements, forms,
or other documents or information required to be filed with a taxing authority
with respect to the taxes of the Corporation.
(c) For purposes of this Section 2.09, the term "Corporation"
means the Corporation and each corporation with which the Corporation has filed,
or was required to file, United States Federal, state, local, or foreign tax
returns on a consolidated, combined, or unitary basis, after the date of
incorporation of Tops Appliance Realty, Inc.
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2.10. Ownership of Assets. Except as set forth in Schedule 2.10, the
Corporation owns outright, and has good and marketable title to its assets,
properties and business (including all assets reflected in the Financial
Statements, except personal property which may have been disposed of in the
ordinary course of business since the Balance Sheet Date), free and clear of all
liens, mortgages, pledges, conditional sales agreements, restrictions on
transfer or other encumbrances or changes. Such assets as are owned or leased by
the Corporation are, in the reasonable business judgment of the Shareholder,
sufficient to permit the Corporation to conduct its business as now conducted.
The Corporation owns no patents, copyrights, trademarks, trade names and other
similar intangible assets, other than its own corporate name. Except as set
forth in Schedule 2.10, the Corporation is not a party to or bound by any
license or agreement requiring the payment to any person, firm or corporation of
any royalty. The Corporation is not infringing upon any patent, copyright, trade
name or trademark or otherwise is violating the rights of any third party with
respect thereto, and no proceedings have been instituted or, to the knowledge of
the Corporation, after reasonable inquiry, are threatened and no claim has been
received by the Corporation or the Shareholder alleging any such violation.
2.11. Litigation, Compliance with Law. Except as set forth in Schedule
2.11, there are no pending or, to the knowledge of the Shareholder, after
reasonable inquiry, threatened, and since the Corporation's incorporation there
have not existed, any actions, suits, proceedings or governmental investigations
relating to the Corporation or to any of its properties, assets or businesses or
any orders, injunctions, awards or decrees outstanding against the Corporation
or against or relating to any of its properties, assets or businesses; and the
Shareholder, after reasonable inquiry, is not aware of any basis for any such
action, suit, proceeding, governmental investigation, order, injunction or
decree, except fire and building inspections and related orders resulting from
routine property inspections by fire and building code enforcement officers, as
to which orders compliance has been accomplished in all material respects.
Except as set forth in Schedule 2.11, the Corporation has operated, and
currently is operating, its business in compliance in all material respects with
all applicable statutes, laws, regulations, ordinances, orders, injunctions,
decrees, awards and other requirements of any governmental bodies, courts and
arbitrators relating to its properties, assets or business.
2.12. Real Property. (a) The Corporation has good, valid, freely
assignable (subject to the approval of Lender) and marketable fee simple title
in and to the real property (including all improvements thereon) commonly known
as 49-15 through 49-21 Northern Boulevard, 32-49 49th Street, and 50-01 Northern
Boulevard, Section 4, Block 735, Lots 1 and 53, and Section 4, Block 748, Lot 8,
in Long Island City, County of Queens, State of New York (the "Owned Property"),
free and clear of all liens, mortgages, or encumbrances of any nature
whatsoever, except the Mortgage, and with the other exceptions to title set
forth in Schedule B to Title Policy No. 33 0105 107 00000865, Title No. 9506 105
00165, issued by Title Associates Inc. on or about May 9, 1995, a copy of which
is attached as Schedule 2.12.
(b) Except as set forth in Schedule 2.12(b), the Corporation has good title
to the leasehold estate in the real property commonly known as 49-02 Newtown
Road, 49-16 Newtown Road, and 32-43 49th Street, Section 4, Block 735, Lots 19,
22, 33 and part of 38, in Long Island City, County of Queens, State of New York
(the "Leased Property"), free and clear of all liens and mortgages, of any
nature whatsoever, pursuant to an Agreement of
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Lease dated October 20, 1993 and amended by (i) Addendum to Lease dated January
1994, and (ii) letter from Herbert New to Allen Ravin dated March 19, 1995, and
amended and restated in their entirety by a certain Amended and Restated
Agreement of Lease dated July 14, 1995, effective as of October 20, 1993, all
between Local 807 Labor-Management Pension Fund, Local 807 Labor-Management
Health Fund, 32-43 49th Street Holding Corp. (collectively, the "Landlord") and
TAC as lessee (collectively, the "Lease"), and assigned by TAC to the
Shareholder and thereafter to the Corporation, by Assignment and Assumption of
Lease dated July 28, 1995 by and between TAC and the Corporation (as confirmed
by Confirmatory Agreement dated October 21, 1997, by and among TAC, the
Shareholder and the Corporation), and thereafter subleased to TAC by Agreement
of Sublease dated July 28, 1995. The Lease and each assignment and sublease
relating to the Leased Property are now in full force and effect, have not been
amended or modified, and no default thereunder by the Corporation or the
Landlord currently exists, nor does there exist any condition which, with the
passing of time and/or the giving of notice, would constitute a default
thereunder by the Corporation or the Landlord. Except as set forth on Schedule
2.12(b), no consent to the transactions contemplated by this Agreement is
required to be obtained from the Landlord.
(c) No condemnation or expropriation proceeding is pending or, to the
knowledge of the Shareholder, threatened which could affect the ownership or use
by the Corporation of any of the Owned Property or the Leased Property. To
Shareholder's knowledge, none of the buildings, structures, improvements or
appurtenances (or any equipment therein) located on any such property, nor the
operation or maintenance thereof, violates any restrictive covenant or any
provision of any federal, state, county or municipal law, ordinance, rule or
regulation, in any material respect. Except as set forth on Schedule 2.12(c),
without limiting the generality of the foregoing, to Shareholder's knowledge:
(i) no material alteration, repair, improvement or other work has been ordered,
directed or requested in writing to be done or performed to or in respect of the
Owned Property or the Leased Property or to any of the plumbing, heating,
elevating, water, drainage or electrical systems, fixtures or works by any
municipal, county, state or other competent governmental authority, which
alteration, repair, improvement or other work has not been completed, and there
has been no written or, to the knowledge of the Shareholder, oral notification
given to the Shareholder of any such outstanding work being ordered, directed or
requested, other than those that have been complied with; (ii) all accounts for
work and services performed and materials placed or furnished upon or in respect
of the Owned Property and the Leased Property have been fully paid and
satisfied, and no person is entitled to claim a lien under the New York Lien Law
or similar legislation against such property or any part thereof, other than
current accounts in respect of which the payment due date has not yet passed;
(iii) there are no material amounts owing by the Corporation in respect of the
Owned Property or the Leased Property to any municipal corporation or to any
other corporation or commission owning or operating a public utility for water,
gas, electrical power or energy, steam or hot water, or for the use thereof,
other than current accounts in respect of which the payment is not more than
thirty (30) days past due; and (iv) the Owned Property and the Leased Property
are fully serviced and have adequate access to public roads, and there are no
outstanding levies, charges or fees assessed against such property by any public
authority (including development or improvement levies, charges or fees).
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(d) Other than the Owned Property and the Leased Property, the Corporation
does not own, lease, occupy or operate, and has not previously owned, leased,
occupied or operated, any real property.
The Corporation has heretofore delivered to Buyer true, correct and
complete copies of all deeds, mortgages, deeds of trust, certificates of
occupancy, title insurance policies, title reports, surveys and similar
documents (including all amendments thereof) in the possession of the
Corporation relating to the Owned Property and the Leased Property.
2.13. Agreements and Obligations; Performance. Except as listed and
described in Schedule 2.13 (the "Listed Agreements"), the Corporation is not a
party to, or bound by any: (i) written or oral contract, agreement, arrangement,
commitment, understanding or obligation which involves aggregate payments or
receipts in excess of $5,000; (ii) contract, agreement, arrangement,
commitments, understanding or obligation which cannot be cancelled on thirty
(30) days or less notice without penalty or premium or any continuing obligation
or liability; (iii) written or oral contractual obligation or contractual
liability of any kind to the Shareholder or to any entity in which the
Shareholder has an interest; (iv) written or oral contract, agreement,
arrangement, commitment or understanding with any customer or any officer,
employee, shareholder, director, representative or agent thereof for the
repurchase of products, sharing of fees, the rebating of charges to such
customer, bribes, kickbacks from such customer or other similar arrangements;
(v) contract for the purchase or sale of any materials, products or supplies
which contains, or which commits or will commit the Corporation for a fixed
term; (vi) contract of employment with any officer or employee; (vii) deferred
compensation, bonus or incentive plan or agreement; (viii) management or
consulting agreement; (ix) lease for real or personal property, other than the
Lease; (x) license or royalty agreement; (xi) union or other collective
bargaining agreement; (xii) agreement, arrangement, instrument, commitment or
understanding relating to or evidencing indebtedness for borrowed money; (xiii)
contract which, by its terms, requires the consent of any party thereto to the
consummation of the transactions contemplated hereby, other than the Lender;
(xiv) contract containing covenants limiting the freedom of the Corporation to
engage or compete in any line or business or with any person in property, assets
or any geographical area; (xv) lease or other contract or agreement under which
the Corporation is a lessor or sublessor of any real property owned or leased by
the Corporation; (xvi) lease or other contract or agreement under which the
Corporation is lessee of, or holds or uses, any machinery, equipment, vehicle or
other personal property owned by a third party; (xvii) contract or agreement
under which the Corporation has directly or indirectly guaranteed liabilities or
obligations of others (other than endorsements of checks for the purpose of
collection in the ordinary course of business); (xviii) mortgage, pledge,
security agreement, deed of trust or other document granting a lien, other than
the Mortgage and related Uniform Commercial Code filings; (xix) contract or
agreement relating to clean-up, abatement or other actions in connection with
environmental liabilities or obligations; (xx) contract or agreement granting to
any person a first-refusal, first-offer or similar preferential right to
purchase or acquire any asset or assets of the Corporation; (xxi) contract
relating to the acquisition or sale of any business; or (xxii) other contract,
agreement, commitment or understanding which materially affects any of its
properties, assets or business, whether directly or indirectly, or which was
entered into other than in the ordinary course of business, or the loss or
cancellation of which could have a
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material adverse effect on the properties, assets, business, operations,
financial condition or prospects of the Corporation.
Except as disclosed on Schedule 2.13, each Listed Agreement is a valid
and binding obligation of the Corporation and, to the knowledge of the
Shareholder, the other parties thereto and is in full force and effect in
accordance with its terms. Except as set forth on Schedule 2.13, the Corporation
has performed all material obligations required to be performed by it to date
under the Listed Agreements and is not (with or without the lapse of time or the
giving of notice, or both) in breach or default thereunder and, to the knowledge
of Seller, no other party to any of the Listed Agreements is (with or without
the lapse of time or the giving of notice, or both) in breach or default in any
material respect thereunder.
2.14. Permits and Licenses. Schedule 2.14 sets forth all permits,
licenses, orders, franchises and approvals from all federal, state, local and
foreign governmental regulatory bodies held by the Corporation. To Shareholder's
knowledge, the Corporation has all permits, licenses, orders and approvals of
all federal, state, local and foreign governmental or regulatory bodies required
of it to carry on its business as presently conducted; all such permits,
licenses, orders, franchises and approvals are in full force and effect, and to
the knowledge of the Shareholder, no suspension, modification, revocation or
cancellation of any of such permits, licenses, etc. is threatened or will result
from the consummation of the transaction contemplated by this Agreement; and, to
Shareholder's knowledge, the Corporation is in compliance in all material
respects with all requirements, standards and procedures of the federal, state,
local and foreign governmental bodies which have issued such permits, licenses,
orders, franchises and approvals.
2.15. Banking Arrangements. Schedule 2.15 sets forth the name of each
bank in or with which the Corporation has an account, credit line or safety
deposit box, and a description of each such account, credit line or safety
deposit box including the names of all persons currently authorized to draw
thereon or having access thereto.
2.16. Employee Matters. The Corporation has not at any time engaged any
employees or paid any salary or wages to any person. The Corporation is not now
and never has been a party to, or bound by, any (i) collective bargaining
agreement or (ii) any Employee Benefit Plan.
For purposes of this Agreement: (i) "Employee Benefit Plan" means any
ERISA Plan and any other written pension, profit sharing, retirement, bonus,
deferred compensation, stock option, stock purchase, severance pay or insurance
plan for officers or employees, which currently is, or at any time was,
established, maintained, contributed to or legally obligated to be contributed
to (A) by the Corporation or (B) solely with respect to potential liability of
and through any current or former ERISA Affiliate arising or continuing in
respect of such plan under Section 302 or Title IV of ERISA or Section 412 of
the Code while such entity was an ERISA Affiliate, by such current or former
ERISA Affiliate; (ii) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time; (iii) "ERISA Affiliate" means any
corporation or trade or business that is a member of any group of organizations
(A) described in Section 414(b) or (c) of the Code and the regulations issued
thereunder of which the Corporation is a member and (B) solely with respect to
potential liability under Section 302 (c)(II) of ERISA or Section 412(c)(II) of
the Code or the lien created under Section 302(f) of
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ERISA or Section 412(h) of the Code, described in Section 414(m) or (o) of the
Code and the regulations issued thereunder of which the Corporation is a member;
(iv) "ERISA Multi- employer Plan" means a multi-employer plan as defined in
Section 3(37) of ERISA to which the Corporation or any ERISA Affiliate has or in
the past had an obligation to contribute; (v) "ERISA Pension Plan" means an
employee pension benefit plan as defined in Section 3(2) of ERISA; (vi) "ERISA
Plan" means an ERISA Pension Plan or an ERISA Welfare Plan; and (vii) ERISA
Welfare Plan" means an employee welfare benefit plan as defined in Section 3(1)
of ERISA.
2.17. Brokers. Neither the Shareholder nor the Corporation has employed
or dealt with any broker or other intermediary with respect to this Agreement
and the transactions contemplated hereby other than Bernard Financial Group,
LLC, whose fee in the amount of One Hundred Fifty Thousand ($150,000.00) Dollars
will be paid by Shareholder pursuant to the terms of a separate agreement. The
Shareholder agrees to indemnify the Corporation and the Buyer and its affiliates
and representatives against, and to hold the Corporation and the Buyer and its
affiliates and representatives harmless from, any claim for brokerage or similar
commission or other compensation which may be made against the Buyer or its
representatives or the Corporation by any third party in connection with the
transactions contemplated hereby, which claim is based upon any action by the
Corporation or the Shareholder or any of their respective representatives.
2.18. Environmental. (a) To the best of Shareholder's knowledge, the
Corporation is operating and has at all times operated the business and
properties which it owns or operates in compliance with all Environmental Laws.
The Corporation has not received (i) any written or verbal notice or claim that
it may be liable as a result of or in connection with any Constituent of Concern
on, from, or under the Owned Property or Leased Property; (ii) any letter or
request for information under the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. ss.9601, et seq.) or comparable state
laws regarding the Owned Property or Leased Property; or (iii) any written or
verbal notice or claim that the Owned Property or Leased Property is the subject
of investigation of any governmental entity for violation of an Environmental
Law. The Corporation does not store, use, treat or dispose of Constituents of
Concern on, under or within the Owned Property or Leased Property in a manner
that has given, or is reasonably expected to give, rise to a liability under any
Environmental Law.
The Corporation has not filed with any government agency any notice or
report of a Release of a Constituent of Concern on or from the Owned Property or
Leased Property. All aboveground and underground storage tanks on and under the
Owned Property or Leased Property are registered and in compliance with 40
C.F.R. Part 280 et seq., 6 NYCRR Part 612, 613 and 614, and Title 3, Chapter 21
of the Rules of the City of New York. To the best of Shareholder's knowledge,
all aboveground and underground storage tanks that have been abandoned or
removed from the Owned Property or Leased Property were abandoned or removed in
compliance with applicable Environmental Laws. There is no friable asbestos
containing material, as defined in Title 15, Section 1-02 of the Rules of the
City of New York, on the Owned Property or the Leased Property.
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For purposes of this Agreement: (i) "Environmental Laws" means all
federal and applicable state and local statutes, ordinances, orders, rules,
regulations, principles of common law (including without limitation laws
relating to nuisance, trespass and negligence), and written and published
policies or decrees, as the same are in effect as of the Closing Date, relating
to (A) environmental matters, including, without limitation, those relating to
fines, injunctions, penalties, damages, contribution, cost recovery
compensation, losses or injuries resulting from the Release or threatened
Release of Constituents of Concern, (B) the generation, use, storage, treatment,
transportation, or disposal of Constituents of Concern, or (C) occupational
safety and health, industrial hygiene, land use or the protection of human,
plant or animal health or welfare, in any manner applicable to the Corporation,
including, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. ss.9601 et seq.), the Hazardous
Materials Transportation Act (49 U.S.C. ss.1801 et seq.), the Solid Waste
Disposal and Resource Conservation and Recovery Acts (42 U.S.C. ss.6901 et
seq.), the Federal Water Pollution Control Act (33 U.S.C. ss.1251 et seq.), the
Safe Drinking Water Act (42 U.S.C. ss.300f et seq.), the Clean Air Act (42
U.S.C. ss.7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss.2601 et
seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss. 136
et seq.), the Occupational Safety and Health Act (29 U.S.C. ss.651 et seq.), the
Oil Pollution Control Act (33 U.S.C. ss.2701 et seq.), and the Emergency
Planning and Community Right-to-Know Act (42 U.S.C. ss.11001 et seq.), each as
amended or supplemented on or prior to the Closing Date, and any analogous local
or state statutes and any regulations promulgated pursuant thereto; (ii)
"Environmental Liabilities" means any losses, damages, out-of-pocket costs and
expenses arising under any Environmental Law (including liabilities to any third
parties arising thereunder) to the extent due to operations or conditions, prior
to the Closing Date, of the Owned Property or the Leased Property; (iii)
"Constituent of Concern" means any substance: (A) the use, storage, treatment,
or Release of which requires a permit or other authorization from any federal or
applicable state or local authority; or (B) which is defined as a "hazardous
waste," "hazardous substance," "hazardous material," "oil," "toxic substance,"
"pollutant," "petroleum" or "contaminant" under any federal or applicable state
or local law; and (iv) "Release" has the same meaning as that provided for the
same term at 42 U.S.C. ss.9601.
2.19 Insurance. The Corporation's tenant, TAC, maintains for itself
and/or on behalf of and for the benefit of the Corporation policies of fire and
casualty, liability and other forms of insurance in such amounts, with such
deductibles and against such risks and losses as are set forth on Schedule 2.20,
together with the terms thereof and all deductible amounts. The Corporation has
not received any notice of termination with respect to any insurance policies
since January 1, 1995.
2.20 Suppliers. Set forth on Schedule 2.21 are the names of all
suppliers from which the Corporation ordered, purchased or leased materials,
supplies, merchandise, equipment or other goods with an aggregate purchase price
of $5,000 or more or annual lease payments of $5,000 or more during the
twelve-month period ended December 31, 1996 or with an aggregate purchase price
of $2,000 or more or aggregate lease payments of $2,000 or more during the
three-month period ended March 31, 1997 and the approximate amount for which
each supplier invoiced the Corporation during such period (each such supplier, a
"Significant Supplier"). Except as set forth on Schedule 2.21, the Corporation
has not received any written notice, or, to the knowledge of the Shareholder,
other notice that any such Significant Supplier will not sell
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or lease materials, supplies, merchandise, equipment and any other goods to the
Buyer at any time after the Closing Date on terms and conditions similar to
those imposed on current sales to the Corporation, subject to general and
customary price increases.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the following representations and warranties to the
Shareholder, each of which shall be deemed material, and the Shareholder, in
executing this Agreement, has relied and will rely on the correctness and
completeness of such representations and warranties:
3.01. Organization. Buyer is a limited liability company, duly
organized, validly existing and in good standing under the laws of the State of
New York. Buyer has all requisite limited liability company power to carry on
its business as now conducted and to own its assets.
3.02. Consents. All requisite consents of governmental and other
regulatory agencies, foreign or domestic, and of other parties required to be
received by or on the part of Buyer to enable Buyer to enter into and perform
its obligations under this Agreement in all material respects have been, or
prior to the Closing will have been, obtained.
3.03. Authority; Binding Nature of Agreement. Buyer has the limited
liability company power to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by its members and managers and no other limited liability company proceedings
on the part of Buyer are necessary to authorize the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
3.04. No Breach. The execution and delivery of this Agreement by Buyer
and the consummation of the transactions contemplated hereby will not violate
any provision of the Certificate of Formation or Operating Agreement of Buyer or
any judgment, order, injunction, decree or award against, or binding upon, Buyer
or upon its properties or assets.
3.05. Authority for and Binding Nature of Agreement. This Agreement has
been duly executed and delivered by Buyer and is valid and binding upon Buyer in
accordance with its terms.
3.06. Brokers. Buyer has not engaged, consented to, or authorized any
broker, finder, investment banker or third party to act on its behalf, directly
or indirectly, as a broker or finder in connection with the transactions
contemplated by this Agreement, other than WF Realty, whose fee in the amount of
One Million ($1,000,000.00) Dollars will be paid by Buyer pursuant to the terms
of a separate agreement. Buyer agrees to indemnify the Shareholder, TAC, and/or
any of their respective affiliates and representatives against, and to hold them
harmless from, any claim for brokerage or similar commission or other
compensation which may be made against the Shareholder, TAC, and/or any of their
respective affiliates and representatives by any
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third party in connection with the transactions contemplated hereby, which claim
is based upon any action by Buyer or any of its representatives.
3.07. Financial Capacity. Buyer will have available at the Closing
financing in an amount sufficient to close the transactions contemplated
hereunder.
ARTICLE IV
PRE-CLOSING COVENANTS
The Corporation and the Shareholder, jointly and severally, hereby
covenant and agree that, from and after the date hereof, and until the Closing
or earlier termination of this Agreement:
4.01. Access. (a) The Shareholder will, and will cause the Corporation
to, afford to the managers, attorneys, accountants and other authorized
representatives of Buyer free and full access, during regular business hours and
upon reasonable notice, to the books, records, and Owned and Leased Properties
of the Corporation (including, without limitation, the work papers prepared by
the Corporation's auditors) and to the employees, attorneys, accountants and
other authorized representatives of the Corporation and the Shareholder so that
Buyer may have full opportunity to make such review, examination and
investigation as it may desire of the Corporation's business and affairs. Buyer
will be permitted to make extracts from or to make copies of such books and
records as may be reasonably necessary. Buyer shall indemnify, defend and hold
the Corporation harmless from and against any claim for damages or personal
injury suffered by any person entering into or upon the Owned or Leased Property
for the purpose of conducting any investigation or survey on behalf of Buyer.
(b) Prior to the Closing Date, Buyer shall be permitted to conduct, or
cause to be conducted, at its sole cost and expense, structural and
environmental audit/surveys of the Owned and Leased Property. If such
environmental audit/survey with respect to the Owned and Leased Property shall
reveal any potential environmental concerns to Buyer, Buyer may conduct, or
cause to be conducted, on-site soil and ground water testing. To the extent
practicable, all such environmental audits and surveys shall be conducted in a
manner which will not disrupt the business of the Corporation or any tenant on
the property.
(c) Information obtained by Buyer or any of its representatives pursuant to
this Agreement shall be held in strictest confidence and shall not be revealed
to any third party, except to the extent required by law, without the prior
written approval of the Corporation in each instance.
4.02. Conduct of Business. The Corporation shall conduct its business in
the ordinary and usual course consistent with past practice and make no material
change in its policies without the prior written consent of Buyer, which shall
not be unreasonably withheld or delayed.
4.03. Liabilities. The Corporation shall not incur any obligation or
liability, absolute or contingent, except for those incurred in the ordinary and
usual course of its business
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consistent with past practice; nor shall it pay any obligation or liability
other than: (i) regularly scheduled payments or maturities of the debts,
liabilities, and obligations set forth in the Balance Sheet; (ii) regularly
scheduled payments or maturities of the debts, liabilities and obligations
arising after the Balance Sheet Date in the ordinary course of its business
consistent with past practice; and (iii) regularly scheduled payments or
maturities of the debts, liabilities and obligations under the contracts,
agreements, arrangements, documents and instruments listed, described or
contained in this Agreement or in the Schedules annexed to this Agreement.
4.04. Preservation of Business. The Shareholder will use its best
efforts to preserve the Corporation's business organization intact.
4.05. No Breach. The Shareholder will (i) use its best efforts to
assure that all of the representations and warranties contained herein are true
in all material respects as of the Closing as if repeated at and as of such
time, and that no material breach or default shall occur with respect to any of
the covenants, representations or warranties contained herein that has not been
cured by the Closing; (ii) not voluntarily take any action or do anything which
will cause a breach of or default respecting such covenants, representations or
warranties; and (iii) promptly notify Buyer of any event or fact which
represents or is likely to cause such a breach or default.
4.06 Satisfaction of Conditions. Without limiting the generality or
effect of any other provision hereof, prior to the Closing, the Shareholder and
Buyer will each use their best efforts with due diligence and in good faith to
satisfy promptly all conditions required hereby to be satisfied by each of them
prior to the consummation of the transactions contemplated hereby.
4.07 Acquisition Proposals. During the period (the "Pre-Closing
Period") between the date hereof and the earliest to occur of (a) the Closing
and (b) the termination of this Agreement, the Shareholder will not, and will
cause officers, partners, directors, employees, agents, legal or financial
advisors or other representatives not to, solicit, initiate or consider any
proposals or offers from any person or entity relating to, or enter into (or
continue) any discussions, or deliver any information, concerning, any
acquisition or purchase of all or a material amount of the assets of, or any
securities of, or any merger, consolidation or other business combination with,
the Corporation (any such transaction, a "Competitive Transaction"). During the
Pre-Closing Period, the Shareholder will promptly notify the Buyer in the event
of any proposal or offer in respect of a Competitive Transaction.
4.08 Transfer Taxes. The Shareholder shall be liable for, and shall
timely pay, any and all transfer, documentary and stamp taxes that may result
from, or be incurred in connection with, this Agreement, to the extent that the
primary obligation to pay such tax is imposed by law on Shareholder. The
Shareholder shall, at its own expense, properly complete, sign, and timely file
any and all required tax returns with respect to such taxes and, if required by
applicable law, the Buyer will join in the execution of any such tax returns.
4.09 Other Tax Matters.
(a) INTENTIONALLY OMITTED
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(b) Liability for Taxes and Related Matters.
(i) Shareholder's Liability for Taxes. The Shareholder shall be liable
for and shall indemnify the Buyer for all taxes (including without limitation
any obligation to contribute to the payment of a tax determined on a
consolidated, combined or unitary basis with respect to a group of corporations
that includes or included the Corporation) imposed on the Corporation or for
which the Corporation may otherwise be liable (1) for any taxable year or period
that ends on or before the Closing Date or (2) with respect to any taxable year
or period beginning before and ending after the Closing Date, the portion of
such taxable year or period ending on and including the Closing Date. Except as
set forth in clause (iii) of this Section 4.09(b), the Shareholder shall be
entitled to any refund of taxes of the Corporation attributable to such periods.
(ii) Taxes for Short Taxable Year. Each of the Shareholder and the
Buyer shall close the taxable period of the Corporation as of the close of
business on the Closing Date, unless such action is prohibited by law. In any
case where applicable law prohibits the Corporation from closing its taxable
year on the Closing Date then, for purposes of clause (i) of this Section
4.09(b), the determination of the taxes of the Corporation for the portion of
the year or period ending on, and the portion of the year or period beginning
after, the Closing Date shall be determined on the basis of an interim closing
of the books as of the close of business on the Closing Date, except that
exemptions, allowances or deductions that are calculated on an annual basis,
such as the deduction for depreciation, shall be ratably apportioned on a time
basis.
(iii) Carryforwards of Losses. The Buyer is free to cause the
Corporation to elect, where permitted by law, to carry forward any net operating
loss, net capital loss, charitable contribution or other item arising before or
after the Closing Date that would, absent such election, be carried back to a
taxable period of the Corporation ending on or before the Closing Date. The
Buyer shall be entitled to any refund of income taxes paid by the Corporation
before the Closing Date, to the extent that such refund is attributable to
losses or deductions of the Corporation that accrue after the Closing Date.
(c) Assistance and Cooperation. After the Closing Date, the Shareholder
shall:
(i) assist (and cause its affiliates and subsidiaries to assist) the
Buyer and its affiliates in preparing any tax returns or reports that the Buyer
and its affiliates are responsible for preparing and filing;
(ii) cooperate fully in preparing for any audits of, or disputes with
taxing authorities regarding, any tax returns of the Corporation; and
(iii) make available to the Buyer, the Buyer's affiliates and to any
taxing authority as reasonably requested all information, records and documents
relating to taxes of the Corporation.
(d) Transfer Taxes. Notwithstanding any other provision of this
Agreement to the contrary, the Shareholder shall be liable for, and shall timely
pay' any and all transfer, documentary and stamp taxes that may result from, or
be incurred in connection with, the
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transactions contemplated by this Agreement, including without limitation the
New York State real estate transfer tax and the New York City real property
transfer tax, to the extent that the primary obligation to pay such tax is
imposed by law on the Shareholder. The Shareholder shall, at its own expense,
properly complete, sign, and timely file any and all required tax returns with
respect to such taxes and, if required by applicable law, the Buyer will join in
the execution of any such tax returns.
(e) Survival of Obligations. The obligations of the parties set forth
in this Section 4.09 shall be unconditional and absolute and shall remain in
effect until the date sixty (60) days after the expiration of the relevant
statute of limitations applicable to the taxes at issue.
4.10 Other Shareholder Obligations. The Shareholder shall be liable
for, and shall pay at the Closing, (i) the fees, costs and expenses of Dames &
Moore in connection with their limited Phase II environmental site assessment
and the related report dated August 27, 1997, up to the amount of $25,000, and
(ii) one-half (1/2) the Consent Fee payable to the Lender referred to in the
letter agreement dated the date hereof (the "Lender Consent") between the Lender
and the Corporation and joined in by Buyer.
ARTICLE V
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER TO CLOSE
The obligations of Buyer to enter into and complete the Closing is
subject to the fulfillment, prior to or on the Closing Date, of each of the
following conditions, any one or more of which may be waived by Buyer (except
when the fulfillment of such condition is a requirement of law):
5.01. Representations and Warranties. All representations and
warranties of the Shareholder contained in this Agreement and in any written
statement (including financial statements), exhibit, certificate, schedule or
other document delivered pursuant hereto or in connection with the transactions
contemplated hereby shall be true and correct in all material respects as at the
Closing Date, as if made at the Closing and as of the Closing Date.
5.02. Covenants. The Shareholder shall have performed and complied in
all material respects with all covenants and agreements required by this
Agreement to be performed or complied with by it prior to or at the Closing.
5.03. No Action. No action, suit, proceeding or investigation shall
have been instituted and be continuing before a court or before or by a
governmental body or agency, or have been threatened and be unresolved by any
governmental body or agency, to restrain or to prevent or to obtain damages in
respect of, the carrying out of the transactions contemplated hereby, or which
might materially affect the right of the Buyer to own the Shares or to operate
or control the assets, properties and business of the Corporation after the
Closing Date.
5.04. Consents, Licenses and Permits. The Corporation, the Shareholder
and Buyer shall have each obtained all consents, licenses and permits of third
parties necessary for the performance by each of them of all of their respective
obligations under this Agreement, and
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such other consents, if any, to prevent (i) the Lease or any other material
agreement between the Corporation and any third party from terminating, or (ii)
any material indebtedness of the Corporation (other than the Mortgage) from
becoming due or being subject to becoming due with the passage of time or on
notice as a result of the performance of this Agreement, any other provisions of
this Agreement to the contrary notwithstanding.
5.05. No Material Adverse Change. There shall have been no materially
adverse change at the Closing Date in the financial consolidation, results of
operations, business, assets and properties, or prospects of the Corporation
since the Balance Sheet Date.
5.06. Resignations. All members of the Board of Directors of the
Corporation and all officers of the Corporation shall execute and deliver their
resignations as of the Closing Date.
5.07. Amendment of Lease. Effective as of the Closing Date, the lease
between the Corporation, as Landlord, and TAC, as tenant, dated July 28, 1995
(the "Tops Operating Lease") shall be amended substantially as set forth in
Exhibit 5.07 (the "Amendment").
5.08. Lender Consent to Continuance of Mortgage. Effective as of the
Closing Date, the Mortgage and all related obligations of the Corporation to the
Lender shall remain in place pursuant to the Lender Consent.
5.09. INTENIONALLY OMITTED
5.10. Certain Records. Buyer shall have received the Corporation's
original minute books, stock certificate and corporate record books (including
unissued stock certificates and all cancelled stock certificates), Certificate
of Incorporation and By-Laws and all amendments thereto (the "Corporate
Documents").
5.11. Certification. Buyer shall have received a certification from the
Shareholder under Section 1445(b)(2) of the Code and the rules and regulations
thereunder, in a form reasonably acceptable to Buyer, stating the Shareholder's
taxpayer identification number and that the Shareholder is not a foreign person
(the "Section 1445(b)(2) Certificate").
5.12. Transfer Taxes. Buyer shall have received, properly completed,
all required transfer, stamp and other similar tax returns duly executed by the
Shareholder in a form reasonably acceptable to Buyer (collectively, the
"Transfer Tax Returns"), together with evidence reasonably satisfactory to Buyer
that the Shareholder has paid all transfer, stamp and other similar taxes due or
becoming due in connection with the transactions contemplated hereby.
5.13. Due Diligence Review. Buyer shall be satisfied, in its sole
discretion, with the results of its due diligence investigation of the
Corporation, the Owned Property and the Leased Property.
5.14. Resolutions of the Board of Directors. Buyer shall have received
from the Shareholder a certified copy of the resolutions of the Board of
Directors of the Shareholder
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approving this Agreement and authorizing the consummation of the transactions
contemplated hereby (the "Shareholder Board Resolutions").
5.15. Delivery of Stock Certificates. There will be delivered to Buyer
by the Shareholder certificates representing the Shares, duly endorsed in blank
for transfer or accompanied by duly executed stock powers endorsed in blank to
the Buyer (the "Share Certificates").
ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATION OF
THE SHAREHOLDER TO CLOSE
The obligation of Shareholder to enter into and complete the Closing is
subject to the fulfillment, prior to or on the Closing Date, of each of the
following conditions, any one or more of which may be waived by the Shareholder
(except when the fulfillment of such condition is a requirement of law).
6.01. Representations and Warranties. All representations and
warranties of Buyer contained in this Agreement and in any written statement,
schedule or other document delivered pursuant hereto or in connection with the
transactions contemplated hereby shall be true and correct in all material
respects as at the Closing Date, as if made at the Closing and as of the Closing
Date.
6.02. Covenants. Buyer shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it prior to or at the Closing.
6.03. No Actions. No action, suit, proceedings, or investigation shall have
been instituted, and be continuing, before a court or before or by a
governmental body or agency, or have been threatened, and be unresolved, by any
governmental body or agency to restrain or prevent, or obtain damages in respect
of, the carrying out of the transactions contemplated hereby.
6.04. Amendment of Lease. Effective as of the Closing Date, the Tops
Operating Lease shall be executed.
6.05. Lender Consent to Continuance of Mortgage. Effective as of the
Closing Date, the Mortgage and all related obligations of the Corporation to the
Lender shall remain in place pursuant to the Lender Consent.
6.06. Transfer Taxes. The Buyer will have received properly completed
transfer, documentary and stamp tax returns that may be required as a result of
the transactions contemplated by this Agreement duly executed by the Shareholder
in a form reasonably acceptable to the Buyer, together with evidence reasonably
satisfactory to the Buyer that the
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Shareholder shall have paid all transfer, documentary and stamp taxes due or
becoming due in connection with the transactions contemplated hereby.
ARTICLE VII
CLOSING
7.01. Location. The Closing provided for herein shall take place at the
office of Jones, Day, Reavis & Pogue at 10:00 o'clock a.m. on November 5, 1997,
or at such other time and place as may be mutually agreed to by the parties
hereto. Such date is referred to in this Agreement as the "Closing Date."
7.02. Items to be Delivered by the Shareholder. At the Closing, the
Shareholder will deliver or cause to be delivered to Buyer:
(a) the Share Certificates;
(b) the Directors and Officers Resignation;
(c) the Amendment;
(d) the Lender Consent;
(e) INTENTIONALLY OMITTD;
(f) the Corporate Documents;
(g) the Section 1445(b)(2) Certificate;
(h) the Transfer Tax Returns;
(i) the Shareholder Board Resolutions;
(j) such other certified resolutions, documents and
certificates as are required to be delivered by the Shareholder pursuant to the
provisions of this Agreement and such other agreements, documents or instruments
as are customary for the consummation of the transactions contemplated hereby.
7.03. Items to be Delivered by Buyer. At the Closing, Buyer will
deliver or cause to be delivered to the Shareholder:
(a) A wire transfer of funds in the amount of the Purchase
Price set forth in Section 1.02 hereof subject to all adjustments as set forth
in Section 1.03 hereof;
(b) Such other certified resolutions, documents and
certificates as are required to be delivered by Buyer pursuant to the provisions
of this Agreement.
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ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
8.01. Survival. The parties hereto agree that none of their respective
representations, warranties, covenants and agreements contained in this
Agreement shall survive the Closing, except that (i) the representations and
warranties contained in Section(s) 2.01, 2.03, 2.04, 2.06, 2.07, 2.08, 2.10,
2.11, 2.12, 2.13, 2.14, 2.15, 2.16, 2.17, 2.18, 2.19 and 2.20, shall survive the
Closing for a period of one (1) year; (ii) the representations and warranties
contained in Sections 2.02 and 2.05 will survive the Closing for five years:
(iii) the representations and warranties contained in Section 2.09 will survive
until the date 60 days after the expiration of the applicable statute of
limitations; and (iv) the covenants and agreements in Section 1.04 will survive
indefinitely.
8.02. Indemnification by Shareholder. TAC agrees to save, defend and
indemnify Buyer, its officers, directors, employees, agents and representatives
(the "Indemnified Parties") against and hold them harmless from any and all
liabilities, losses, claims, demands, obligations, damages, deficiencies, costs
or expenses of every kind, nature and description, fixed or contingent
(including, without limitation, counsel fees and expenses in connection with any
action, claim or proceeding relating to such liabilities) arising out of (i) any
transaction or event commencing or occurring on or prior to the Closing Date
relating to the Corporation or its properties or business, which is not fully
disclosed or provided for in the Balance Sheet, this Agreement or the several
schedules and exhibits hereto, including, without limitation, any tax
liabilities to the extent not so reflected or reserved against the Balance
Sheet; (ii) a breach by the Shareholder or TAC of any representations or
warranties contained in Article II; (iii) environmental damages, response costs
(including response costs under CERCLA or any comparable state, local or foreign
law), remediation expenses and disbursements resulting from or arising out of
any action, suit or administrative proceeding brought by any person or entity or
governmental authority and any settlement or compromise thereof, provided,
however, that such damages and costs relate to Constituents of Concern which
were discharged onto the Owned Property or Leased Property by the Corporation
prior to the Closing Date; and (iv) any liability for transfer taxes in
connection with the transaction contemplated by this Agreement.
8.03. Defense of Claims. Buyer agrees to give written notice to TAC
with reasonable promptness of any claim asserted against an Indemnified Party in
respect of which TAC may be liable under this Agreement (a "Third Party Claim"),
which notification shall be accompanied by a written statement setting forth the
basis of such claim and the manner of calculation thereof. The giving of such
written notice shall be a condition precedent to any liability of TAC hereunder.
TAC shall have the right to defend any such claim at its own expense and with
counsel of its choice and Buyer may participate in such defense, if it so
chooses, with its own counsel and at its own expense; provided that TAC will be
liable for the fees and expenses of counsel employed by the Buyer or any other
Indemnified Party for any period during which TAC has not assumed the defense of
the Third Party Claim whether or not TAC ultimately chooses to defend such Third
Party Claim. The parties hereto will cooperate in the defense of any Third Party
Claim whether or not TAC chooses to defend such Third Party Claim. Neither the
Indemnified Party nor TAC will admit any liability with respect to, or settle,
compromise
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or discharge, any such Third Party Claim without the prior written consent of
the other, with consent will not be unreasonably withheld.
8.04. Certain Limitations. The liability of TAC for claims under this
Agreement shall be limited by the following:
(a) no claim for indemnification shall be asserted by Buyer
under this Article VIII until the aggregate amount of all losses relating to
this Agreement exceeds $100,000, and then only to the extent that such losses
exceed $100,000.
(b) the amount of losses otherwise recoverable by Buyer under
this Article VIII shall be reduced by the amount of insurance proceeds actually
received and self-insured retentions applied by Buyer with respect to such
losses.
(c) recovery against TAC under this Article VIII shall in no
event exceed the Purchase Price.
(d) the liability of TAC to Buyer under this Article VIII
shall be limited to the time period for the survival of the applicable
representations and warranties under Section 8.01, except for any losses with
respect to which the Buyer has given TAC written notice prior to such date.
8.05. Indemnification by Buyer. The Buyer agrees to save, defend and
indemnify the Shareholder and TAC, its officers, directors, employees, agents
and representatives (the "Buyer Indemnified Parties") against and hold them
harmless from any and all liabilities, losses, claims, demands, obligations,
damages, deficiencies, costs or expenses of every kind, nature and description,
fixed or contingent (including, without limitation, counsel fees and expenses in
connection with any action, claim or proceeding relating to such liabilities)
arising out of (i) any transaction or event commencing or occurring subsequent
to the Closing Date relating to the Corporation or its properties or business;
(ii) a breach by the Buyer of any obligation to the Lender, its successors or
assigns pursuant to the Mortgage or any agreement executed and delivered to the
Lender in connection therewith; (iii) any claim against TAC by LaSalle (as
hereafter defined), its successors or assigns, pursuant to that certain
Reaffirmation of Environmental Indemnity Agreement and Consent of Indemnitors
(other than any claim in respect of which TAC is obligated to indemnify the
Buyer pursuant to Section 8.02(iii)), or that certain Reaffirmation of Guaranty
of Payment and Consent of Indemnitor, both dated the date hereof, by and between
the Corporation and TAC and LaSalle National Bank, as Trustee for the Registered
Holders of Chase Commercial Securities Corp., Commercial Mortgage Pass-Through
Certificates, Series 1996-1 ("LaSalle"), or the Environmental Indemnity
Agreement or Guaranty referred to therein.
8.06. Defense of Claims. The affected Buyer Indemnified Party agrees to
give written notice to the Buyer with reasonable promptness of any claim
asserted against any Buyer Indemnified Party in respect of which the Buyer may
be liable under Section 8.05 of this Agreement (a "Seller Claim"), which
notification shall be accompanied by a written statement setting forth the basis
of such claim and the manner of calculation thereof. The giving of such
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written notice shall be a condition precedent to any liability of the Buyer
hereunder. The Buyer shall have the right to defend any such claim at its own
expense and with counsel of its choice and the Buyer Indemnified Party may
participate in such defense, if it so chooses, with its own counsel and at its
own expense; provided that the Buyer will be liable for the fees and expenses of
counsel employed by the Buyer Indemnified Party for any period during which the
Buyer has not assumed the defense of the Seller Claim whether or not the Buyer
ultimately chooses to defend such Seller Claim. The parties hereto will
cooperate in the defense of any Seller Claim whether or not the Buyer chooses to
defend such Seller Claim. Neither the Buyer Indemnified Party nor the Buyer will
admit any liability with respect to, or settle, compromise or discharge, any
such Seller Claim without the prior written consent of the other, which consent
will not be unreasonably withheld.
8.07. Rights Without Prejudice. The rights of Buyer and any Buyer
Indemnified Party under this Article VIII are without prejudice to any other
rights or remedies that it or they may have by reason of this Agreement or as
otherwise provided by law. The rights of Shareholder and any Buyer Indemnified
Party under this Article VIII are without prejudice to any other rights or
remedies that it or they may have by reason of this Agreement or as otherwise
provided by law.
ARTICLE IX
WAIVER
9.01. Waiver. Any condition to the performance of the Shareholder or
Buyer which legally may be waived on or prior to the Closing Date may be waived
at any time by the party entitled to the benefit thereof by action taken or
authorized by an instrument in writing executed by the relevant party or
parties. The failure of any party at any time or times to require performance of
any provision hereof shall in no manner affect the right of such party at a
later time to enforce the same. No waiver by any party of the breach of any
term, covenant, representation or warranty contained in this Agreement as a
condition to such party's obligations hereunder shall release or affect any
liability resulting from such breach, and no waiver of any nature, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such condition or of any
breach of any other term, covenant, representation or warranty of this
Agreement.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.01. Expenses. Each of the parties hereto shall bear its own expenses
in connection herewith.
10.02. Confidential Information. Each party agrees that such party and
its representatives will hold in strict confidence all information and documents
received from the other parties and, if the transactions herein contemplated
shall not be consummated, each party will continue to hold such information and
documents in strict confidence and will return to such other party all such
documents (including the documents annexed to this Agreement) then in such
receiving party's possession without retaining copies thereof; provided,
however, that each
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party's obligations under this Section 10.02 to maintain such confidentiality
shall not apply to any information or documents that are in the public domain at
the time furnished by the other or that become in the public domain thereafter
through any means other than as a result of any act of the receiving party or of
its agents, officers, directors or shareholders which constitutes a breach of
this Agreement, or that are required by applicable law to be disclosed.
10.03. Modification, Termination or Waiver. This Agreement may be
amended, modified, superseded or terminated, and any of the terms, covenants,
representations, warranties or conditions hereof may be waived, but only by a
written instrument executed by the party waiving compliance. The failure of any
party at any time or times to require performance of any provision hereof shall
in no manner affect the right of such party at a later time to enforce the same.
10.04. Publicity. The Shareholder on one hand, and Buyer on the other
hand, each agrees not to disclose to any person or entity or to make any public
statement of the transactions proposed by this Agreement without the prior
written consent of the other party hereto, except any such disclosure required
by law. Notwithstanding the preceding sentence, the Corporation, the Shareholder
and Buyer understand that certain disclosures regarding the transactions
contemplated by this Agreement must be made to parties whose consent or approval
may be required in connection with the transactions contemplated by this
Agreement, and to the attorneys, accountants and other professional advisors of
the parties hereto, and that such disclosures may be made without any prior
written consent.
10.05. Notices. Any notice or other communication required or which may
be given hereunder shall be in writing and either be delivered personally or by
reputable overnight delivery service, or be mailed, certified or registered
mail, postage prepaid, as follows:
If to the Shareholder, to: the addresses above written
With a copy to:
Joseph M. Oriolo, Esq.
Greenbaum, Rowe, Smith, Ravin, Davis & Himmel
99 Wood Ave. South
Iselin, NJ 08830
and if to Buyer, to: the address above written, attention James Stomber,
Esq.
The parties may change the persons and addresses to which the notices
or other communications are to be sent to it by giving written notice of any
such change in the manner provided herein for giving notice.
10.06. Binding Effect and Assignment. This Agreement shall be binding
upon and inure to the benefit of the successors and assigns of the parties
hereto; provided, however, that no assignment of any rights or delegation of any
obligations provided for herein may be made by any party without the express
consent of the other party.
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10.07. Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof.
10.08. Exhibits and Schedules. All Exhibits and Schedules annexed hereto
and the documents and instruments referred to herein or required to be delivered
simultaneously herewith or at the Closing are expressly made a part of this
Agreement as fully as though completely set forth herein, and all references to
this Agreement herein or in any of such Exhibits, Schedules, documents or
instruments shall be deemed to refer to and include all such Exhibits,
Schedules, documents and instruments.
10.09. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within that state, excluding the choice of law
rules thereof.
10.10. Choice of Forum; Consent to Service of Process and Jurisdiction. Any
suit, action or proceeding brought in connection with this Agreement or any
document executed in connection herewith may be brought solely in the courts of
the State of New York located in New York County, or in the United States courts
for the Southern District of New York and all parties to this Agreement hereby
submit to the exclusive jurisdiction of such courts for the purpose of any such
suit, action or proceeding. Each party hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any suit, action or
proceeding brought in such courts and hereby further irrevocably waives any
claim that any such suit, action or proceeding brought in any such court has
been brought in any inconvenient forum.
EACH PARTY HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT BY EITHER PARTY HERETO
AGAINST THE OTHER PARTY HERETO.
10.11. No Third Party Beneficiaries. Except as specifically set forth
or referred to herein, nothing herein is intended or shall be construed to
confer upon any person or entity other than the parties hereto and their
successors or assigns, any rights or remedies under or by reason of this
Agreement.
10.12. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provision, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
10.13. Specific Performance. The Shareholder acknowledges that money
damages would not be a sufficient remedy for any breach by it of this Agreement
and agrees that Buyer shall be entitled to specific performance and injunctive
relief as remedies for any breach by the Shareholder.
10.14. Remedies Cumulative. Except as otherwise provided herein, the
remedies provided herein shall be cumulative and shall not preclude the
assertion by any party hereto of any other rights or the seeking of any other
remedies against any other party hereto.
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10.15. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original, but which together shall constitute
one and the same instrument.
10.16. Section Headings. The section headings contained in this Agreement
are inserted for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement.
WITNESS the execution of this Agreement as of the date first above
written.
SHAREHOLDER:
TOPS APPLIANCE CITY OF
NEW YORK, INC.
Attest:
/s/Alexander Burlotos /s/Thomas Zambelli
___________________________ By:________________________________
Alexander Burlotos, Assistant Secretary Thomas Zambelli, Vice President
BUYER:
Witness:
SSP, L.L.C.
/s/James F. Stomber /s/Steven C. Witkoff
___________________________________ By:________________________________
James F. Stomber, Counsel Steven C. Witkoff, Managing Member
TAC:
TOPS APPLIANCE CITY, INC.
Attest:
/s/ Alexander Burlotos /s/ Thomas Zambelli
___________________________________ By:________________________________
Alexander Burlotos, Assistant Secretary Thomas Zambelli,
Senior Vice President
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TOPS APPLIANCE REALTY, INC.
STOCK PURCHASE AGREEMENT
LIST OF SCHEDULES
<TABLE>
<S> <C>
Schedule 2.04 Agreements Breached by Execution of Stock Purchase
Agreement; Consents
Schedule 2.06 Exceptions to GAAP preparation
Schedule 2.06(b) Attach copies of Balance Sheets
Schedule 2.07 Debts, Liabilities and Obligations not on Balance Sheet of
the Company
Schedule 2.08 Adverse Developments
Schedule 2.09 Taxes
Schedule 2.09(a)(ii) List of Jurisdictions
Schedule 2.09(a)(xiv) Adjusted Basis in Assets
Schedule 2.10 Liens and Licensing Agreements
Schedule 2.11 Pending Litigation
Schedule 2.12 Attach copy of Title Policy
Schedule 2.12(b) Landlord Consent
Schedule 2.12(c) Improvements to Owned Property
Schedule 2.13 Listed Agreements
Schedule 2.14 Permits and Licenses
Schedule 2.15 Banking Arrangements
Schedule 2.20 Insurance Policies
Schedule 2.21 Suppliers
</TABLE>
<PAGE>
TOPS APPLIANCE REALTY, INC.
STOCK PURCHASE AGREEMENT
November 5, 1997
<PAGE>
Schedule 2.04
Consents
NONE, except consent of Lender is required.
<PAGE>
Schedule 2.06
Exceptions to GAAP preparation
NONE
<PAGE>
Schedule 2.06(b)
Balance Sheets
See attached.
<PAGE>
Schedule 2.07
Debts, Liabilities and Obligations
not on Balance Sheet of the Company
NONE
<PAGE>
Schedule 2.08
Adverse Developments
NONE, except that from time to time, the Corporation has distributed dividends
to the Shareholder in amounts equal to or less than net operating profits of the
Corporation during the fiscal period immediately preceding such distribution.
<PAGE>
Schedule 2.09
Taxes
TAC is currently undergoing sales and use tax audits by the States of New Jersey
and New York. TAC may have executed waivers of applicable statutes of
limitations with respect to such audits.
<PAGE>
Schedule 2.09(a)(ii)
Jurisdictions
New York State
<PAGE>
Schedule 2.09(a)(xiv)
Adjusted Basis in Assets
See attached.
<PAGE>
Schedule 2.10
Liens and Licensing Agreements
NONE, except the Mortgage from Lender and exceptions to title policy (see
Schedule 2.12).
<PAGE>
Schedule 2.11
Pending Litigation
NONE
<PAGE>
Schedule 2.12
Copy of Title Policy
See attached.
<PAGE>
Schedule 2.12(b)
Landlord Consent
The Leased Property is subject to the Mortgage and the Lender's consent is
required.
<PAGE>
Schedule 2.12(c)
Improvements to Owned Property
NONE
<PAGE>
Schedule 2.13
Listed Agreements
NONE, except the Mortgage and the following additional agreements with the
Lender, all dated July 28, 1995 (or otherwise as noted):
Environmental Indemnity Agreement
Assignment of Permits and Contracts with Respect to the Property
Replacement Reserve and Security Agreement
Tenant Improvement, Leasing Commission and Debt Service Reserve and Security
Agreement Post-Closing Undertaking Letter Commitment Letter relating to the
above indebtedness, dated April 26, 1995, as amended May 19, 1995, June 1, 1995,
June 8, 1995, June 19, 1995, and June 27, 1995.
<PAGE>
Schedule 2.14
Permits and Licenses
1. Certificates of Occupancy
2. Business License for Electronics Store*
3. Business License as Electronic Home Appliance Dealer*
*Held by Tops Appliance City, Inc., as Tenant
<PAGE>
Schedule 2.15
Banking Arrangements
<TABLE>
<S> <C> <C>
Financial Authorized
Institution Type Persons
Chase Manhattan Bank Investment Acct.
Acct. #1130171
Chase Manhattan Bank Money Market Acct.
Acct. #006-991912
Summit Bank Money Market Business Robert Gross
(Checking) Philip Schmidt
Acct. #093709452 Richard Jones
Sandy Belli
Chase Manhattan Mortgage Loan
</TABLE>
<PAGE>
Schedule 2.20
Insurance Policies
<TABLE>
<S> <C> <C> <C>
Insurance Type of Expiration
Company Insurance Date Deductible
Liberty Mutual General Liability 9/03/97 $0
Liberty Mutual Property 10/11/97 $25,000
Liberty Mutual Boiler and Machinery 10/11/97 $25,000
New Jersey Manufacturers Workers compensation 9/03/97 $0
</TABLE>
<PAGE>
Schedule 2.21
Suppliers
NONE
<PAGE>
Exhibit 5.07
FIRST AMENDMENT TO LEASE
This is a First Amendment ("FIRST AMENDMENT") dated November 5, 1997, to
Lease (the "Lease") dated July 28, 1995 between Tops Appliance Realty, Inc.
("Landlord") and Tops Appliance City, Inc. ("Tenant").
1. ARTICLE 3 of the Lease shall be deleted in its entirety and the
following paragraph shall be substituted in its place:
ARTICLE 3. TERM
3.1 The term of the Lease (the "Initial Term") shall commence
on the date of this First Amendment (hereinafter called the
"Commencement Date") and shall end at noon of the last day of
the calendar month preceding the twenty-fifth anniversary of
the Commencement Date, which ending date is hereinafter called
the "Expiration Date", or shall end on such earlier date upon
which said term may expire or be cancelled or terminated
pursuant to any of the terms or covenants of this Lease or
pursuant to law.
3.2 Provided Tenant shall not then be in default of this
Lease, Tenant shall have the option, exercisable by giving
notice to the Landlord not less than six months before the end
of the Initial Term, to extend the term of this Lease for a
further period of ten years following the end of the Initial
Term (herein referred to as the "First Option Term") at the
base rent set forth in Schedule A below, attached hereto and
made a part hereof, and otherwise upon the same terms,
covenants and conditions set forth herein. Each rent increase
shall take effect on November 1 of each year during the
Initial Term, the First Option Term and the Second Option
Term.
3.3 Provided Tenant shall not then be in default of this
Lease, and shall have exercised the option provided in
Paragraph 3.2 of this Article, Tenant shall have the further
option, exercisable by giving notice to the Landlord not less
than six months before the end of the First Option Term, to
extend the term of this Lease for a further period of ten
years following the end of the First Option Term (herein
referred to as the "Second Option Term") at the base rent set
forth in Schedule A below, attached hereto and made a part
hereof, and otherwise upon the same terms, covenants and
conditions set forth herein.
3.4 Unless the context otherwise requires, all references
herein to the term of this Lease shall mean the Initial Term,
as extended as provided herein.
2. Paragraph 4.1(a) shall be deleted in its entirety and the following
paragraph shall be substituted in its place:
-1-
<PAGE>
(a) Fixed annual rental shall be payable as follows in equal
monthly installments in advance on the first day of each and
every month during the term of this Lease, in the amount set
forth for each year on Schedule A, attached hereto and made a
part hereof.
3. The last sentence of Paragraph 17.1 of the Lease shall be deleted in
its entirety and the following sentence shall be substituted in its place:
Landlord agrees to obtain for the benefit of Tenant a
non-disturbance agreement in form and substance reasonably
satisfactory to Tenant from each mortgagee of Landlord.
4. The following Article 34 shall be added to the Lease:
ARTICLE 34. SECURITY DEPOSIT
Tenant shall deposit with The Witkoff Group LLC in
escrow the sum of Five Hundred Thousand ($500,000) Dollars
(the "Security Deposit") as security for the faithful
performance of Tenant's obligations hereunder. If Tenant fails
to pay rent payable hereunder, or otherwise defaults with
respect to any provision of this Lease after notice and
expiration of any applicable grace periods, Landlord may at
its option use, apply and retain all or any portion of the
Security Deposit (i) to remedy Tenant's defaults in the
payment of rent pursuant to the terms hereof, (ii) to repair
any damage to the Premises, (iii) to clean and otherwise
maintain the Premises, or (iv) to compensate Landlord for any
other loss or damage which Landlord may suffer thereby.
Notwithstanding anything to the contrary above,
Landlord agrees that the Security Deposit or any portion
thereof which is being held by Landlord or its counsel, shall
yield interest for the benefit of Tenant (provided Tenant is
not then in default) at the rate of interest earned by
Landlord with respect thereto, less one percent (1%) per
annum. Provided Tenant is not then in default, 20% of the
Security Deposit and all accrued interest thereon shall be
returned to Tenant commencing on the second annual anniversary
date of this Lease and continuing on each of the following
four annual anniversary dates.
5. The following Article 35 shall be added to the Lease:
Tenant shall pay Landlord the sum of FIFTY THOUSAND
DOLLARS ($50,000.00) per annum in quarterly installments of
TWELVE THOUSAND FIVE HUNDRED DOLLARS ($12,500.00) each
quarter, until the earlier of (a) August 1, 2005, or (ii) that
certain date when Landlord's note and mortgage, each dated
July 28, 1995, with Chase Manhattan Bank (successor to
Chemical Bank), is satisfied and/or refinanced (the "Fee
Termination Date"). The first quarterly payment shall be made
on April 1, 1998, which payment shall cover the period of
January 1, 1998 through March 31, 1998, and thereafter the
quarterly payments shall be made on April 1st, July 1st,
October 1st and January 1st of
-2-
<PAGE>
each year until the Fee Termination Date. Additionally, on
January 1, 1998, Tenant shall pay Landlord a prorated fee for
the period commencing November 5, 1997 until December 31,
1997, in the amount of SEVEN THOUSAND SIX HUNDRED EIGHT
DOLLARS ($7,608.00).
6. Paragraph 4.1(b), Lines 5 through 7 of the Lease shall be amended so
that the words "and any Landlord Mortgagee (as defined in Section 17.1 hereof)"
shall be deleted. Additionally, the third sentence of Paragraph 10.1, which
states, "Tenant further agrees to undertake and perform any and all repairs if,
when and as required by, and to the satisfaction of, any Landlord Mortgagee (as
defined in Section 17.1 hereof)." shall be deleted in its entirety. The
foregoing two Lease modifications in this Paragraph 6 of the Amendment shall
only become effective upon the earlier of (i) August 1, 2005, or (ii) the Fee
Termination Date, as defined in Paragraph 5 above.
7. Except as modified herein, the Lease shall remain in full force and
effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this First
Amendment to Lease as of the date set forth below.
ATTEST: TOPS APPLIANCE REALTY, INC.
_______________________________ By:___________________________
Lee Feld, Secretary Steven C. Witkoff, President
ATTEST: TOPS APPLIANCE CITY, INC.
________________________________ By:___________________________
Alexander Burlotos, Asst. Secretary Thomas L. Zambelli,
Sr. Vice President
Dated: November 5, 1997
-3-
<PAGE>
SCHEDULE A
Year Annual Rent Monthly Rent
1 2,170,000.00 180,833.33
2 2,170,000.00 180,833.33
3 2,170,000.00 180,833.33
4 2,170,000.00 180,833.33
5 2,170,000.00 180,833.33
6 2,213,400.00 184,450.00
7 2,257,668.00 188,139.00
8 2,302,821.36 191,901.78
9 2,348,877.79 195,739.82
10 2,395,855.34 199,654.61
11 2,443,772.45 203,647.70
12 2,492,647.90 207,720.66
13 2,542,500.86 211,875.07
14 2,593,350.87 216,112.57
15 2,645,217.89 220,434.82
16 2,698,122.25 224,843.52
17 2,752,084.69 229,340.39
18 2,807,126.39 233,927.20
19 2,863,268.92 238,605.74
20 2,920,534.29 243,377.86
21 2,978,944.98 248,245.42
22 3,038,523.88 253,210.32
23 3,099,294.36 258,274.53
24 3,161,280.24 263,440.02
25 3,224,505.85 268,708.82
First Option Term:
- ---------------------------------------------------------------
26 3,288,995.97 274,083.00
27 3,354,775.89 279,564.66
28 3,421,871.40 285,155.95
29 3,490,308.83 290,859.07
30 3,560,115.01 296,676.25
31 3,631,317.31 302,609.78
32 3,703,943.65 308,661.97
33 3,778,022.53 314,835.21
34 3,853,582.98 321,131.91
35 3,930,654.64 327,554.55
-4-
<PAGE>
Second Option Term:
- ---------------------------------------------------------------
36 4,009,267.73 334,105.64
37 4,089,453.08 340,787.76
38 4,171,242.15 347,603.51
39 4,254,666.99 354,555.58
40 4,339,760.33 361,646.69
41 4,426,555.54 368,879.63
42 4,515,086.65 376,257.22
43 4,605,388.38 383,782.36
44 4,697,496.15 391,458.01
45 4,791,446.07 399,287.17
-5-
<PAGE>
Exhibit 10.34
DEBENTURE EXCHANGE AGREEMENT
Debenture Exchange Agreement dated as of August 20, 1997, by
and between Tops Appliance City, Inc., a New Jersey corporation ("Tops"), having
an address at 45 Brunswick Avenue, CN 14, Edison, New Jersey 08818 and BEA
ASSOCIATES, a New York partnership ("BEA"), having an address at 153 East 53rd
Street, New York, New York 10022.
WHEREAS, pursuant to an indenture (the "Indenture") dated as
of November 30, 1993 by and between Tops and Midlantic National Bank as Trustee,
Tops issued $40,000,000 in principal amount of its 6 1/2 Convertible
Subordinated Debentures due 2003 (the "Debentures"); and
WHEREAS, BEA, on behalf of itself and the accounts it manages,
is the registered and beneficial owner of $15,375,000 in principal amount of the
Debentures (the "BEA Debentures"); and
WHEREAS, BEA has agreed to exchange the BEA Debentures for a
new debenture (the "New Debenture") having the terms and conditions set forth in
this Agreement, all on the terms and conditions set forth in this Agreement; and
WHEREAS, Tops has agreed to issue the New Debentures to BEA in
exchange for the BEA Debentures, all on terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants contained herein, Tops and BEA agree as follows:
1. Effective September 1, 1997 (the "Effective Date"), BEA
will sell, transfer and assign all of its right, title and
<PAGE>
interest in and to the BEA Debentures to Tops in exchange for the consideration
set forth in paragraph 2 of this Agreement. BEA will deliver to Tops
certificate(s) representing the BEA Debentures along with bond powers or similar
transfer instrument, duly endorsed for transfer, or take such other steps as may
be reasonably appropriate and necessary in order to effect the transfer and
assignment of the BEA Debentures to Tops.
2. In consideration of the purchase of the BEA Debentures from
BEA, on the Effective Date, Tops will issue and deliver to BEA a certificate or
certificates representing New Debentures in the principal amount of Seven
Million Six Hundred Eighty Seven Thousand Five Hundred and No/00 ($7,687,500.00)
Dollars. The New Indenture shall be in form of Exhibit A attached to this
Agreement.
3. The New Debentures will be freely tradeable and have the
same terms and conditions as the Debentures, including without limitation the
same interest rate and interest payment dates, subject to the following
exceptions:
a. The conversion price of the New Debentures will
be One and 75/00 Dollars ($1.75) per share of Tops common stock; provided that
the New Debentures may not be converted to common stock prior to February 28,
1999; and provided further that if, upon conversion BEA owns 12.5% of the
outstanding common stock of Tops, it shall have the right to designate one
director, and if BEA owns 25% of such outstanding stock, it shall have the right
to
-2-
<PAGE>
designate two directors; and
b. The New Debentures will rank pari passu with the
Debentures in respect of the payment of principal and interest; and
c. Tops will have no right to effect an optional
redemption of the New Debentures; and
d. In the event a third party offers to purchase
all of the common stock of Tops or the securities held by BEA at a price in
excess of $1.75 per share and Tops' Board of Directors rejects such an offer,
BEA may convert its New Debentures and sell to such third party, subject to a
right of first refusal in favor of Tops for thirty (30) days.
4. On or before October 31, 1997, Tops will prepare, execute
and file with the Securities and Exchange Commission a registration statement on
Form S-3 or such other form as Tops may be qualified to use for the purpose of
registering the New Debentures and the common stock of Tops issuable upon
conversion of the New Debentures under the Securities Act of 1933, as amended
(the "Act"), and will thereafter cause such registration statement to become
effective under the Act.
5. Tops hereby represents to BEA that the execution, delivery
and performance of this Agreement has been duly authorized by all necessary and
appropriate corporate action by Tops, that this Agreement constitutes the legal
and binding obligation of Tops, enforceable against Tops in accordance with its
terms, and that the New Debentures have been duly authorized and will be
-3-
<PAGE>
validly issued by Tops and will constitute the valid and binding obligation of
Tops in accordance with their terms.
6. BEA represents to Tops that the execution, delivery and
performance of this Agreement has been duly authorized and approved by all
necessary corporate action on the part of BEA and that this Agreement
constitutes the binding obligation of BEA, enforceable against BEA in accordance
with its terms.
7. The parties acknowledge that, if required, Tops will take
all appropriate action to offer to all other holders of Debentures the right to
receive New Debentures on the same terms and conditions as applied to BEA
pursuant to this Agreement. Such action will be taken in accordance with all
requirements of the Indenture, the Act and any other agreement, statute, law or
regulation binding upon or applicable to Tops. Tops agrees that it will provide
to any such holder terms no more favorable to such holder than the terms
applicable to BEA and the New Debentures under this Agreement. To the extent
necessary or appropriate, if Tops issues additional New Debentures pursuant to
an indenture or other agreement, BEA agrees to execute (if applicable) and be
bound by the terms of such indenture or agreement, provided that such terms are
no more burdensome or detrimental to BEA than the terms of this Agreement.
8. This Agreement constitutes the entire agreement between
Tops and BEA relating to the subject matter hereof, shall be binding upon and
inure to the benefit of the parties hereto and
-4-
<PAGE>
their respective successors and assigns; may be amended only in writing signed
by the parties hereto, and shall be governed by the laws of the State of New
Jersey, excluding the conflicts law provisions of such state.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered as of the date first written above.
TOPS APPLIANCE CITY, INC.
/s/Robert Gross
BY:________________________
Robert Gross
NAME:______________________
Chairman/CEO
TITLE:_____________________
BEA ASSOCIATES
/s/Todd M. Rice
BY:________________________
Todd M. Rice
NAME:______________________
Senior Vice President
TITLE:_____________________
-5-
<PAGE>
EXHIBIT A
TOPS APPLIANCE CITY, INC.
6 1/2% Convertible Subordinated Debenture Due 2003
CUSIP #
$_______________________
TOPS APPLIANCE CITY, INC.
promises to pay to ___________________________________, or its registered
assigns, the principal sum of _____________________
____________________________________ (or greater or lesser amount as indicated
on the Schedule of Exchanges of Definitive Securities on the reverse hereof)
Dollars on November 30, 2003, and to pay interest thereon as provided on the
reverse hereof until the principal hereof is paid or duly provided for.
Interest Payment Dates: February 28 and August 31.
Record Dates: February 15 and August 15.
The provisions on the back of this certificate are incorporated as if
set forth on the face hereof.
IN WITNESS WHEREOF, TOPS APPLIANCE CITY, INC. has caused this
instrument to be duly signed.
Authenticated: TOPS APPLIANCE CITY, INC.
First National Bank of
Chicago, as Registrar By:_________________________
Philip M. Schmidt
President
By:__________________________
Authorized Officer
Dated:_______________________ By:_________________________
Thomas L. Zambelli
Chief Financial Officer
-6-
<PAGE>
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Tops Appliance City of New York, Inc.
<PAGE>
Exhibit 24.1
CONSENT OF INDEPENDENT AUDITORS
To Tops Appliance City, Inc.:
As indepenedent public accountants, we hereby consent to the incorporation
by reference of our report dated February 18, 1998, included in this Form 10-K,
into Tops Appliance City, Inc.'s previously filed Registration Statements on
Form S-8 No. 33-54180 pertaining to the Section 401(k) Salary Savings Plan and
Trust of Tops Appliance City, Inc. and on Form S-8 No. 33-68508 pertaining to
the Tops Appliance City, Inc. Employee Stock Purchase Plan.
Arthur Andersen L.L.P.
Roseland, New Jersey
March 30, 1998
<PAGE>
Exhibit 24.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(1) Form S-8 No. 33-54180, pertaining to the Section 401(k) Salary Savings Plan
and Trust of TOPS Appliance City, Inc. and (2) Form S-8 No. 33-68508, pertaining
to the TOPS Appliance City, Inc. Employee Stock Purchase Plan, of our report
dated April 15, 1997 with respect to the consolidated financial statements and
schedule of TOPS Appliance City, Inc. included in the Annual Report (Form 10-K),
for the year ended December 30, 1997.
ERNST & YOUNG LLP
MetroPark, New Jersey
March 24, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-30-1997
<PERIOD-END> DEC-30-1997
<CASH> 2,368
<SECURITIES> 0
<RECEIVABLES> 1,101
<ALLOWANCES> 0
<INVENTORY> 53,895
<CURRENT-ASSETS> 59,444
<PP&E> 13,196
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,110
<CURRENT-LIABILITIES> 42,440
<BONDS> 30,993
0
0
<COMMON> 0
<OTHER-SE> 2,118
<TOTAL-LIABILITY-AND-EQUITY> 78,110
<SALES> 293,924
<TOTAL-REVENUES> 293,924
<CGS> 229,073
<TOTAL-COSTS> 229,073
<OTHER-EXPENSES> 65,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,264
<INCOME-PRETAX> (7,125)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 8,482
<CHANGES> 0
<NET-INCOME> 1,357
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
