TOPS APPLIANCE CITY INC, 10-K, 1999-03-29

TOPS APPLIANCE CITY INC
10-K, 1999-03-29
HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES

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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 29, 1998
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 offices) (Zip Code)

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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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 26, 1999, and
reported by the National Quotation Bureau, Inc. was $3,296,319. 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 26, 1999,
was 15,305,537 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: 93
Exhibit List: Page 36

Documents Incorporated by Reference: (a) Proxy Statement for 1999 Annual Meeting
<PAGE>

TABLE OF CONTENTS

ITEM PAGE

1. Business............................................................. 3

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.............................................................. 10

6. Selected Financial Data.............................................. 11

7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12

8. Financial Statements and Supplementary Data.......................... 17

9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................. 35

10. Directors and Executive Officers of the Registrant................... 35

11. Executive Compensation............................................... 35

12. Security Ownership of Certain Beneficial Ownership and Management.... 35

13. Certain Relationships and Related Transactions....................... 35

14. Exhibits, Financial Statement Schedule and Reports on Form 8-K....... 36

<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, serving a customer base within the
Greater New York Metropolitan Area. The Company operates nine retail megastores,
ranging in size from 20,000 to 120,000 square feet, in heavily populated
locations within 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 12.0% and 9.2% of its net sales and service revenues in fiscal
1998 and fiscal 1997, respectively. Additionally, Tops offers a full selection
of its products and services over the Internet, through a web site, electronics.
net, as further described below.

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, DVDs, camcorders, room air
conditioners, personal 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 variety of offers, including a 45 day best price guarantee
and a $500 best price challenge.

The Company experienced a comparable sales improvement of 4.5% in fiscal
1998 compared to fiscal 1997, the first such increase since fiscal 1992.

In fiscal 1997, the Company contracted with The Kitchen Place Inc. ("TKP"),
a provider of kitchen cabinetry, countertops and related hardware. TKP sells
its' products within designated areas of several of the Company's stores, and
offers design and installation services. Tops incurs no expense from this
arrangement, and receives a commission on each TKP order placed. During fiscal
1998, the Company expanded the Kitchen Place concept to four stores and
operated, from May through July, six room air conditioner outlets in Manhattan
and Brooklyn.

In October, 1998, the Company launched Electronics.Net LLC, a joint venture
with Cybershop Holding Corp. ("Cybershop"), in which the Company maintains a 49%
interest. Electronics.Net LLC is engaged in the business of selling high volume
electronics, computers and appliance merchandise through the use of web-based
electronic commerce.

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 industry and marketplace. Tops offers a $500
pre-sale best price challenge, which encourages the consumer to shop at the
Company's stores in order to ensure receiving the lowest available price. The
Company also offers a 45 day best price guarantee, which provides the consumer
with price protection following the sale.

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

3
<PAGE>

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 staffs its stores with technically trained customer service
representatives 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 radio, television and billboard advertising. In addition,
Tops operates a direct mail program to 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:

4
<PAGE>

CATEGORY PRODUCTS PRINCIPAL BRAND NAMES
<S> <C> <C>

Major Appliances Refrigerators, Amana, Frigidaire, General Electric, Hotpoint,
Dishwashers, Jenn-Air, KitchenAid, Magic Chef, Maytag
Washers/Dryers Roper, Sub Zero, Westinghouse, Whirlpool

Televisions Daewoo, Hitachi, JVC, Panasonic,
Philips, Proscan, Quasar, RCA, Samsung,
Sharp, Sony, Toshiba, Zenith

Video VCRs, DVD Hitachi, JVC, Panasonic, Philips
Camcorders RCA, Samsung, Sony, Toshiba, Zenith

Ranges/ Ranges, General Electric, Jenn-Air, Magic Chef, Panasonic,
Microwaves Cooktops, Sharp, Tappan, Thermador, Viking, Whirlpool
Range Hoods,
Microwaves

Air Conditioners Carrier, Emerson, Fedders, Friedrich,
General Electric, Goldstar, Quasar, Samsung,
Sharp, Whirlpool

Audio Stereo Systems, Aiwa, Bose, Denon, Infinity, JBL, JVC, Kenwood, Klipsch, Mission,
Components and Onkyo, Pioneer, RCA, Sony ES, Technics,
Speakers Yamaha

Electronics Cameras, Walkman AT&T, Bushnell, Canon, Fuji, General Electric,
Radar Detectors, Hitachi, JVC, Kenwood, Magnavox, Minolta, Nikon,
Portable Radios, Olympus, Panasonic, RCA, Samsung, Sony,
Audio and Car Yashica
Alarms, Telephones,
Cellular Phones

Home Office Computers, Brother, Canon, Compaq,
Products Printers, Fax Epson, Hewlett Packard,
Machines, IBM, Lexmark, Sharp, Sony, Toshiba
Wordprocessors,
Typewriters,
Copiers

Vacuums,Seasonal Vacuum Cleaners, Black and Decker, Braun, Corningware,
Items/Housewares Humidifiers, Cuisinart, Eureka, Farberware,
Fans, General Electric, Holmes, Hoover,
Space Heaters, Pfaltzgraff, Sharp, Sunbeam, T-Fal,
Small Electrical Weber, Westinghouse
Appliances
(coffee makers,
blenders, etc.),
Barbecue Grills,
Cookware,
Dinnerware

</TABLE>

5
<PAGE>

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 1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>

Major Appliances (Refrigerators,
Washers, Dryers) ......................... 21.4% 20.8% 19.1%
Ranges/Microwaves/Dishwashers .............. 13.4 13.5 12.4
Air Conditioners ........................... 7.2 10.2 8.9
Vacuums/Seasonal Items/Housewares .......... 5.3 4.7 4.5
----- ----- -----

Subtotal ................................ 47.3 49.2 44.9

Televisions ................................ 14.7 14.6 14.5
Video/Projection Televisions ............... 11.2 11.3 12.1
Audio ...................................... 6.9 6.5 6.8
Home Office and Other
Consumer Electronics ..................... 15.6 13.8 16.1
----- ----- -----

Subtotal ................................ 48.4 46.2 49.5

Extended Service Plans and
Miscellaneous Income ..................... 4.3 4.6 5.6
----- ----- -----

100.0% 100.0% 100.0%
====== ====== ======

</TABLE>

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 1998, two vendors each accounted for more than 10% of the Company's
purchases. Tops purchases over 70% of its products from the 15 vendors shown in
the following chart.

6
<PAGE>

Top 15 Vendors

Aiwa G.E. / Hot Point Sharp
Compaq JVC Sony
Fedders Maytag / Magic Chef Thomson / RCA
Friedrich Packard Bell Whirlpool /Kitchen Aid
Frigidaire Panasonic Zenith

The Company's merchandise purchasing is managed through its buying and
merchandising group, consisting of the Chief Executive 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,
product selection and customer service features, such as home delivery.
Advertisements are placed in 8 to 14 regional newspapers weekly and on radio,
television, 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 direct mail to its private label credit card
holders and to other selected groups.

Tops employs a six-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 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, the Company's proprietary credit card program had been
administered by General Electric Credit Corporation ("GECC"), through an
arrangement with Monogram Bank of Georgia. This agreement with GECC expired on
January 7, 1999 and was not renewed. With the pending expiration in January 1999
GECC, during fiscal 1998, limited the types of financing programs that Tops was
able to

7
<PAGE>

offer to the cardholders. As a result of the limited financing offers,
sales on the Tops credit card dropped from 24.8% of total sales in fiscal 1997
to 15.5% of total sales in fiscal 1998.

Tops entered into a five year agreement with Household Retail Systems Inc.
("HRSI") to offer a Tops credit card to its' customers. Tops began to offer its
customers the new Tops credit card on January 8, 1999.

1996 1997 1998

Tops Credit Card .......................... 25.4% 24.8% 15.5%
Visa, MasterCard, American
Express, Discover ......................... 48.3% 47.6% 54.4%
Cash, Check, Debit Card, Other ............ 26.3% 27.6% 30.1%

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 nine 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 12.0% and 9.2% of the Company's net sales and service revenues in
fiscal 1998 and fiscal 1997, respectively. 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.

8
<PAGE>

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.

Year 2000 Compliance

The Company expects to complete its year 2000 remediation by October 1999.
However, the Company's ability to execute its plan in a timely manner may be
adversely affected by a variety of factors, some of which are beyond the
Company's control including turnover of key employees, availability and
continuity of consultants and the potential for unforeseen implementation
problems. The Company's business could be interrupted if the year 2000 plan is
not implemented in a timely manner, if the Company's vendors, service providers
or other third parties are not year 2000 ready or if the Company's contingency
plans are not successful. Based on current available information, and although
no assurance can be given, the Company does not believe that any such
interruptions are likely to have a material adverse effect on the Company's
results of operation, liquidity or financial condition.

Expansion Strategy

The Company continues to evaluate expansion plans in existing markets
within the Greater New York Metropolitan Area. The Company has plans for a tenth
store in Brooklyn, New York, which it intends to open in fiscal 1999. 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.

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 consumer
electronics, music and appliances, entered the New Jersey/New York marketplace
during fiscal 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.

9
<PAGE>

Employees

As of December 29, 1998, the Company had approximately 750 full time and
275 part-time employees. The Company also employs additional part-time
salespersons and cashiers during peak selling 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.

ITEM 2. Properties

The Company operates nine 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 store leases, including all options to renew, expire between
2008 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 a tenth store.

Date Approximate Approximate
Location Opened Sq. Footage(1) Selling Space(2)
- ------------------- ---------------- -------------- ----------------
<S> <C> <C> <C>

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
Hawthorne, NY October, 1992 63,935 48,935
Union, NJ November, 1993 54,920 44,320
Queens, NY August, 1994 77,000 43,826
Manhattan, NY August, 1998 22,000 17,500
Manhattan, NY October, 1998 22,800 17,000

</TABLE>

(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 fiscal 1998.

10
<PAGE>

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 29, 1998
First Quarter 2 9/16 15/16
Second Quarter 6 7/16 1 7/8
Third Quarter 4 1/2 2
Fourth Quarter 4 9/16 2

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

On March 26, 1999, the closing sale price of the Common Stock as reported
on the NASDAQ National Market System was $1.375 per share. On December 29, 1998,
there were approximately 563 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 27, 1994, December 26, 1995, December 31, 1996, December 30, 1997 and
December 29, 1998. 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."

11
<PAGE>

Year Ended Year Ended Year Ended Year Ended Year Ended
Statement of Operating Data: 12/27/94 12/26/95 12/31/96 12/30/97 12/29/98
------------ ----------- ----------- ----------- -----------

Net sales and service revenues . $ 462,494 $ 422,197 $ 317,437 $ 293,924 $ 290,359
Cost of sales .................. 350,881 324,079 250,117 229,073 226,642
------- ------- -------- -------- --------

Gross profit ................... 111,613 98,118 67,320 64,851 63,717
Selling, general and adminis-
trative expenses ............. 107,317 96,859 82,461 65,712 59,485
------- ------- -------- -------- --------

Income (loss) from operations .. 4,296 1,259 (15,141) (861) 4,232
Interest Expense ............... 3,934 4,478 6,240 6,264 6,282
Equity in loss on joint venture 0 0 0 0 385
------- ------- -------- -------- --------

Income (loss) before income
taxes and extraordinary item ... 362 (3,219) (21,381) (7,125) (2,435)
Provision (benefit) for
income taxes ................. 145 (1,288) (2,000) 0 0
------- ------- -------- -------- --------

Income (loss) before
extraordinary item ........... 217 (1,931) (19,381) (7,125) (2,435)
Extraordinary item-gain
on debt extinguishment ....... 0 0 0 8,482 1,309
------- ------- -------- -------- --------

Net income (loss) .............. $ 217 $ (1,931) $ (19,381) $ 1,357 $ (1,126)
======= ======== ======== ======== =========

Income (loss) per common share
before extraordinary item .... $ 0.03 $ (0.27) $ (2.66) $ (0.98) $ (0.26)
Gain per common share on
extraordinary item ........... 0 0 0 1.16 0.14
------- ------- -------- -------- --------

Net income (loss) per
common share ................. $ 0.03 $ (0.27) $ (2.66) $ 0.18 $ (0.12)
======= ======== ======== ========= ==========

Weighted Average Common
Shares Outstanding ........... 7,252,990 7,277,229 7,277,229 7,294,901 9,491,593
========= ========= ========= ========= =========

</TABLE>

<PAGE>

Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec. 27, Dec. 26, Dec. 31, Dec. 30, Dec. 29,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>

Operating Data (at period end) (unaudited):
Number of stores open ..................... 8 8 8 7 9
Inventory turns (a) ....................... 5.7x 5.4x 4.3x 4.2x 4.2x
Square feet of retail selling space ....... 332,032 332,032 332,032 285,556 320,056
Average retail sales per store open
entire year .............................. $ 56,456 $ 47,010 $ 34,777 $ 33,931 $ 34,793
Percentage increase (decrease) in
comparable sales ......................... (14.1%) (20.1%) (26.4%) (3.6%) 4.5%
Retail sales per weighted average
square foot of selling space ............. $ 1,377 $ 1,133 $ 842 $ 832 $ 847

Balance Sheet Data:
Inventory ................................. $ 61,289 $ 59,847 $ 56,184 $ 53,895 $ 62,060
Working Capital ........................... 25,132 32,112 14,785 16,894 16,370
Total Assets .............................. 121,076 113,552 101,020 94,850 106,213
Long-Term Debt and Capital Lease,
net of current portion .................. 40,689 49,201 48,944 47,623 36,382
Other long-term liabilities ............... 5,110 4,512 3,933 2,559 2,910
Shareholders' Equity ...................... 21,952 20,099 750 2,118 13,582

</TABLE>

(a) 1998 reflects the annualization of data related to the two stores opened
during the year.

ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The Company's fiscal year ends on the last Tuesday of December. Fiscal 1996
contains 53 weeks, and fiscal 1997 and fiscal 1998 contain 52 weeks.

Results of Operations

Year Ended December 29, 1998 Compared to the Year Ended December 30, 1997.

Net sales and service revenues for fiscal 1998 decreased 1.2% to
$290,359,000 from $293,924,000 for fiscal 1997. The prior year's results
included 10 months of sales from the Westbury, New York store which the Company
closed in October 1997. The fiscal 1998 results include sales from Tops' 5th
Avenue and 14th Street stores in New York City, which opened in August 1998 and
November 1998, respectively. Total comparable sales increased 4.5% compared to a
3.6% decrease in fiscal 1997.

Gross revenues from the sale of product protection plans for fiscal 1998
decreased 5.6% to $12,993,000 from $13,768,000 for fiscal 1997. Incremental
costs related to these sales totaled $5,711,000 and $5,912,000, respectively,
for the comparable periods. These product protection plans are non-cancelable.

12
<PAGE>

Gross margin as a percentage of net sales and service revenues for fiscal
1998 was 21.9% compared to 22.1% for fiscal 1997. Gross margins in the
commercial division decreased to 8.2% from 9.7% for the comparable period. Gross
margins in the commercial division tend to be lower than gross margins on retail
sales.

Selling, general and administrative expenses for fiscal 1998 decreased 9.5%
to $59,485,000 from $65,712,000 in fiscal 1997. This net decrease was due to the
closing of Tops' Westbury, New York store in October 1997 combined with other
cost cutting initiatives. These cost reduction efforts were partially offset by
the selling expenses associated with the two new Manhattan stores which were
opened in August 1998 and November 1998. Included in selling, general and
administrative expense for fiscal 1997 was $1,500,000 related to the closing of
the Company's Westbury, New York store.

Income from operations improved to $4,232,000 in fiscal 1998 compared to a
loss of $861,000 in fiscal 1997.

Interest expense in fiscal 1998 increased marginally to $6,282,000 compared
to $6,264,000 in fiscal 1997. Lower interest on the 6 1/2% Convertible
Subordinated Debentures was offset by the net interest expense increase
associated with the capitalization of the Queens store lease.

The Company did not record an income tax provision or benefit in either
fiscal 1998 or fiscal 1997.

The Company's net loss before extraordinary items for fiscal 1998 was
$2,435,000 ($0.26 per share) compared to a net loss of $7,125,000 ($0.98 per
share) for fiscal 1997.

During fiscal 1998 the Company recorded an extraordinary gain totaling
$1,309,000 relating to the repurchase of $3,000,000 of Tops 6 1/2% Convertible
Subordinated Debentures. During fiscal 1997 the Company recorded extraordinary
gains totaling $8,482,000 relating to the exchange and repurchase of a portion
of Tops 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 fiscal 1997
$1,320,000 face value of the Original Debentures for a purchase price of
$525,550.

The Company's net loss for fiscal 1998, after the extraordinary gain on the
early extinguishment of debt, was $1,126,000 ($0.12 per share) compared to net
income for fiscal 1997, after the extraordinary gain on the early extinguishment
of debt, of $1,357,000 ($0.18 per share).

Year ended December 30, 1997 Compared to the Year Ended December 31, 1996.

Net sales and service revenues for fiscal 1997 decreased 7.4% to
$293,924,000 from $317,437,000 for fiscal 1996. Net sales and service revenues
for fiscal 1997 included 52 weeks versus 53 weeks in fiscal 1996. Fiscal 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 fiscal 1997
increased 0.5% to $13,768,000 from $13,705,000 for fiscal 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 fiscal
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

13
<PAGE>

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 fiscal 1997 decreased
20.3% to $65,712,000 from $82,461,000 for fiscal 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
fiscal 1997 compared to a loss from operations of $15,141,000 for fiscal 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. Fiscal 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 fiscal 1997 compared
to an income tax benefit at an effective rate of 9.4% or $2,000,000 for fiscal
1996.

The Company's net loss before extraordinary items for fiscal 1997 was
$7,125,000 ($0.98 per share) compared to a net loss of $19,381,000 ($2.66 per
share) for fiscal 1996.

During fiscal 1997 the Company recorded extraordinary gains 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 for fiscal 1997, 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 fiscal 1996.

In November 1997, the Company entered into a sale and leaseback of its
Queens, New York store. The Company received $14.5 million in gross proceeds and
paid off an outstanding mortgage on the property of $9.0 million.

Seasonality

Sales levels are generally highest in the fourth quarter as a result of
increased demand for consumer electronics during the holiday 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 1998 severely impacted room air
conditioner sales. Room air conditioner sales were approximately 14% lower in
fiscal 1998 compared to fiscal 1997.

The Company experiences a build up of inventory and accounts payable during
the second quarter due to the purchase of room air conditioners in anticipation
of the May through August selling season and the fourth quarter in anticipation
of the holiday season.

14
<PAGE>

Year 2000 Compliance

The Company has initiated a program to prepare the Company's computer
systems and applications for the year 2000. This is necessary because computer
programs have been written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process normal business transactions. In addition, many of the Company's
vendors and service providers are also faced with similar issues related to the
year 2000.

In connection with the Company's programs related to year 2000, management
has assessed the Company's information systems, including its hardware and
software systems and embedded systems contained in the Company's stores,
distribution facilities and corporate headquarters. Based on the findings of
this assessment, the Company has commenced a plan to upgrade or replace the
Company's hardware or software for year 2000 readiness as well as to assess the
year 2000 readiness of the Company's vendors and service providers. In addition,
the Company's management is currently formulating contingency plans, which, in
the event that the Company is unable to fully achieve year 2000 readiness in a
timely manner, or any of the Company's vendors or service providers fails to
achieve year 2000 readiness, may be implemented to minimize the risks of
interruptions to the Company's business.

Based on its assessment to date of the year 2000 readiness of the Company's
vendors, service providers and other third parties on which the Company relies
for business operations, the Company believes that its principal vendors,
service providers and other third parties are taking action for year 2000
compliance. However, the Company has limited ability to test and control such
third parties' year 2000 readiness, and the Company cannot provide assurance
that failure of such third parties to address the year 2000 issue will not cause
an interruption of the Company's business.

The Company has committed significant resources in connection with
resolving its year 2000 issues. The Company expects that the principal costs
will be those associated with the replacement and testing of its computer
applications, all of which are expected to be replaced over the next year. The
Company estimates that the total external costs associated with implementing
year 2000 readiness will be approximately $3.0 million, consisting of system
replacement costs of $1.0 million, equipment replacement of $1.0 million and
consulting costs of $1.0 million. During fiscal 1998, the Company incurred
$300,000 of expenditures (mostly payroll-related) associated with year 2000
readiness. The Company anticipates that it will incur the remaining costs
ratably over the 10 month period beginning January 1, 1999. The Company will
finance $2.2 million of the cost of its year 2000 remediation through a new
credit facility with the balance funded by income generated from operations.

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 fiscal 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

15
<PAGE>

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 to shares of common stock of
the Company at a conversion price of $1.75. During fiscal 1998, $7,590,000 of
the "New Debentures" were converted to shares of Tops Appliance City common
stock, resulting in a significant improvement in shareholder's equity and a
corresponding reduction to long-term debt. The New Debentures rank pari passu
with the Original Debentures in respect to principal and interest.

During fiscal 1998, the Company entered into a series of transactions for
the repurchase of Original Debentures outstanding. The Company purchased
$3,000,000 face value of the Original Debentures for a purchase price of
$1,650,000.

At December 29, 1998, the Company had working capital of $16.4 million, a
decrease of $0.5 million from December 30, 1997. The primary changes in working
capital components during the year were increases of $7.2 million in short-term
borrowings, $8.2 million in inventory, and $5.8 million in accounts payable and
a decrease of $2.1 million in accrued liabilities and customer deposits.

The Company increases its inventory levels during the second quarter of
each year in anticipation of room air conditioner sales from May through August
and during the fourth quarter in anticipation of the holiday 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 two floor-
planning companies which in the aggregate at any one time provide financing for
approximately 10% 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. Due to the Company's improved operating performance during fiscal 1997
and fiscal 1998, many trade vendors have begun extending more favorable credit
terms to the company.

The Company has a $40 million secured revolving credit facility expiring
October 28, 2001, 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.

The Company continues to evaluate expansion plans in existing markets
within the Greater New York Metropolitan Area. During fiscal 1995, the Company
obtained an option to purchase property which will be the site of the tenth
store, expected to open in fiscal 1999. 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 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 $1.0 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 preceding 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.

16
<PAGE>

ITEM 8. Financial Statements and Supplementary Data

Tops Appliance City, Inc.

Consolidated Financial Statements
As of December 29, 1998 And December 30, 1997
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

17
<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 29, 1998 and December 30, 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These consolidated financial statements and
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tops Appliance
City, Inc. as of December 29, 1998 and December 30, 1997 and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been submitted to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.

Arthur Andersen LLP

Roseland, New Jersey
March 1, 1999

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Shareholders and Board of Directors of Tops Appliance City, Inc.

We have audited the accompanying consolidated statement of operations,
shareholders' equity and cash flows of Tops Appliance City, Inc. (the Company)
for the year ended December 31, 1996. Our audit 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 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 results of operations and cash flows
of Tops Appliance City, Inc. for the year ended December 31, 1996, 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 a whole, presents fairly in all material respects the
information set forth therein.

The accompanying financial statements and schedule 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 and schedule 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
1999

<PAGE>

TOPS APPLIANCE CITY, INC.
CONSOLIDATED BALANCE SHEETS --
DECEMBER 29, 1998 AND DECEMBER 30, 1997
(dollars in thousands)

ASSETS 1998 1997
-------- ---------
<S> <C> <C>

CURRENT ASSETS:
Cash and cash equivalents ............................... $ 2,672 $ 2,368
Accounts receivable, net of allowance for doubtful
accounts of $187 and $303 in 1998 and 1997, respectively 1,849 1,101
Merchandise inventory ................................... 62,060 53,895
Prepaid expenses and other current assets ............... 3,128 2,080
------- -------

Total current assets ............................ 69,709 59,444

PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, NET ..................................... 29,883 29,936

DEFERRED TAXES .......................................... 2,958 2,940

OTHER ASSETS ............................................ 3,663 2,530
------- -------

Total assets ..................................... $ 106,213 $ 94,850
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term borrowings ................................... $ 30,718 $ 23,558
Current portion of obligation under capital lease ....... 124 110
Accounts payable ........................................ 12,309 6,551
Accrued liabilities and taxes payable ................... 3,994 5,115
Customer deposits ....................................... 3,236 4,276
Deferred taxes .......................................... 2,958 2,940
------- -------

Total current liabilities .......................... 53,339 42,550

OBLIGATION UNDER CAPITAL LEASE,
NET OF CURRENT PORTION ................................ 15,979 16,630

LONG-TERM DEBT .......................................... 20,403 30,993

DEFERRED RENT ........................................... 2,188 1,801

OTHER LIABILITIES ....................................... 722 758

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; 13,731,921 and 7,294,901
shares issued and outstanding in 1998 and 1997,
respectively --- ---

Paid-in capital ......................................... 37,396 24,806
Accumulated deficit ..................................... (23,814) (22,688)
------- -------

Total shareholders' equity ......................... 13,582 2,118
------- -------
Total liabilities and shareholders' equity ......... $ 106,213 $ 94,850
======= =======

</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

20
<PAGE>

TOPS APPLIANCE CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 29, 1998, DECEMBER 30, 1997 AND DECEMBER 31, 1996
(dollars in thousands, except per share data)

1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>

NET SALES AND SERVICE REVENUES ............ $ 290,359 $ 293,924 $ 317,437

COST OF SALES ............................. 226,642 229,073 250,117
------- ------- -------

Gross profit ..................... 63,717 64,851 67,320

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................. 59,485 65,712 82,461
------- ------- -------

Income (loss) from operations ..... 4,232 (861) (15,141)

INTEREST EXPENSE .......................... 6,282 6,264 6,240
Equity in loss of joint venture ......... 385 0 0
------- ------- -------

Loss before benefit for income
taxes and extraordinary item ...... (2,435) (7,125) (21,381)

BENEFIT FOR INCOME TAXES .................. 0 0 (2,000)
------- ------- -------

Loss before extraordinary item ............ (2,435) (7,125) (19,381)

EXTRAORDINARY ITEM - Gain on debt
extinguishment, net ..................... 1,309 8,482 0
------- ------- -------

Net income (loss) ................. $ (1,126) $ 1,357 $ (19,381)
======= ======= =======

LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM ...................... $ (0.26) $ (0.98) $ (2.66)

INCOME PER COMMON SHARE APPLICABLE TO
EXTRAORDINARY ITEM ...................... 0.14 1.16 0
------- ------- -------

Basic and diluted net income (loss)
per common share .................. $ (0.12) $ 0.18 $ (2.66)
======== ======= ========

WEIGHTED AVERAGE SHARES OUTSTANDING ....... 9,491,593 7,294,901 7,277,229
========= ========= =========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

21
<PAGE>

TOPS APPLIANCE CITY, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 29, 1998,
DECEMBER 30, 1997 AND DECEMBER 31, 1996

(dollars in thousands)

Shares of Paid-In Accumulated
Common Stock Capital Deficit Total
------------ --------- ------------ -----------

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

Net loss ........................... -- -- (1,126) (1,126)
Shares issued - Employee Stock
Purchase Plan ................... 13,754 22 -- 22
Shares issued - Employee Awards .... 3,750 14 -- 14

Shares issued - Options exercised . 15,225 22 -- 22

Shares issued - Debt conversion .... 4,337,143 7,492 -- 7,492

Shares issued - Sale of common stock 2,067,148 5,040 -- 5,040
--------- -------- --------- --------

BALANCE, December 29, 1998 ......... 13,731,921 $ 37,396 $ (23,814) $ 13,582
========== ========== ========== ==========

</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

22
<PAGE>

TOPS APPLIANCE CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 29, 1998,
DECEMBER 30, 1997 AND DECEMBER 31, 1996

(dollars in thousands)

1998 1997 1996
---- ---- ----
<S> <C> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) ............................ $ (1,126) $ 1,357 $(19,381)
Adjustments to reconcile net income (loss)
to net cash used in operating activities-
Depreciation and amortization ............ 4,575 4,897 5,897
Deferred rent ............................ 387 (1,378) 387
Extraordinary gain on debt extinguishment (1,309) (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)
Changes in assets and liabilities-
Accounts receivable .................. (748) 254 97
Inventory ............................ (8,165) 2,289 3,663
Prepaid expenses and other
current assets ..................... (1,048) 412 (228)
Deferred taxes ....................... -- -- (236)
Accounts payable ..................... 3,342 (1,215) (3,204)
Accrued liabilities and taxes payable (1,121) (2,851) (1,631)
Customer deposits .................... (1,040) 166 180
Other assets ......................... (1,481) 769 (1,595)
Other liabilities .................... (36) 4 (111)
------- ------- -------

Net cash used in operating activities (7,770) (2,222) (16,235)
------- ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures, net ............. (4,174) (635) (1,148)
Net proceeds from sale of assets
relating to sale and leaseback ....... -- 13,772 --
------- ------- -------

Net cash provided by (used in)
investing activities .............. (4,174) 13,137 (1,148)

------- ------- -------
23
<PAGE>

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Exercise of Stock Option ....... 22 -- --
Proceeds from Employee Stock Purchase Plan ... 36 11 32
Cash overdrafts .............................. 2,416 (1,860) (358)
Short-term borrowings ........................ 7,175 1,654 13,004
Proceeds from issuance of additional equity .. 5,040 -- --
Long-term debt repayments .................... (2,441) (9,717) (655)
Related party payments ....................... -- (782) (782)
------- ------- -------

Net cash provided by (used in)
financing activities ................ 12,248 (10,694) 11,241
------- ------- -------

Increase (decrease) in cash and
cash equivalents .................... 304 221 (6,142)

CASH AND CASH EQUIVALENTS, beginning of year . 2,368 2,147 8,289
------- ------- -------

CASH AND CASH EQUIVALENTS, end of year ....... $ 2,672 $ 2,368 $ 2,147
======= ======= =======

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid ................................ $ 5,976 $ 6,087 $ 5,939
Income taxes paid ............................ 14 8 30
======= ======= =======

NON CASH TRANSACTIONS:
Capital lease obligation incurred ............ -- $ 16,820 --
Debenture Exchange ........................... $ 7,590 -- --

</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.
24

<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 nine megastores, five of which are located in New Jersey and four
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 fiscal 1997 and fiscal 1998, management of the Company 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 fiscal 1998, the
Company obtained an increase in the amounts available under its secured credit
facility (Note 5), along with an infusion of $5.0 million to shareholders'
equity, resulting from the purchase of 2.1 million additional shares by Bay
Harbour Management, L.C.

Management of the Company believes that these initiatives, together
with the results of operations for fiscal 1999, 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.

<PAGE>

Fair Value of Financial Instruments-

The carrying value of the Company's financial instruments, excluding the
subordinated debentures (see Note 5), approximates fair value.

Consolidation-

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary as well as its investment in a joint venture
(Note 3). All significant intercompany accounts and transactions have been
eliminated.

The Company's 49% ownership in its joint venture with Cybershop Holding
Corp. is accounted for following the equity method of accounting since the
Company does not have majority ownership or control of this entity. Accordingly,
the Company records its proportionate share of the earnings or loss of this
joint venture as more fully described in Note 3.

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 or the terms of related leases of the respective
assets which range from 3 to 25 years.

Deferred Financing Costs-

Included in other assets is $809,000 and $1,157,000 at December 29, 1998
and December 30, 1997, respectively, of costs associated with obtaining the debt
discussed in Note 5. 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. Deferred financing costs
associated with debt that is either extinguished or converted are accounted for
in a manner similar to the associated debt.

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, costs associated with
the opening of new stores are being amortized in the year incurred. During
fiscal 1998, $312,000 of preopening costs were incurred and expensed and there
were no capitalized preopening costs as of December 29, 1998.

Commencing in fiscal 1999, the Company will be required to adopt Statement
of Position 98-5 "Reporting the Costs of Start-Up Activities," which requires
that pre-opening and other start-up costs be expensed as incurred. The adoption
of this new standard would not have affected any of the results for the periods
presented and is not expected to have a material effect on the financial
statements in future periods.

Accounts Payable-

Included in accounts payable is a cash overdraft balance of $4,595,000 and
$2,180,000 at December 29, 1998 and December 30, 1997, respectively.

Revenue Recognition-

Merchandise Sales-

<PAGE>

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 29, December 30, December 31,
1998 1997 1996
------------ ------------ ------------

Revenues $ 12,993,000 $13,768,000 $13,705,000
Cost of sales 5,711,000 5,912,000 5,830,000

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 ($995,000), $864,000 and $5,981,000 for fiscal
1998, fiscal 1997 and fiscal 1996, 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 fiscal

<PAGE>

1996. The Company assesses impairment at the individual store level and
believes that no impairment of long-lived assets has occurred as of December 29,
1998 and December 30, 1997.

New Accounting Standards-

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133 is effective for fiscal years beginning after June 15, 1999 with early
adoption permitted. The Company does not currently engage in hedging activities
nor has purchased derivative instruments and does not expect that the adoption
of SFAS 133 will have a material impact on its financial statements.

Fiscal Year-

The Company's fiscal year ends on the last Tuesday of December. Fiscal 1996
contains 53 weeks, and fiscal 1997 and fiscal 1998 contain 52 weeks.

Reclassification-

Certain December 30, 1997 and December 31, 1996 balances have been
reclassified to conform to the December 29, 1998 presentation.

(3) JOINT VENTURE

On June 14, 1998, the Company entered into a joint venture with Cybershop
Holding Corp. ("Cybershop") to form Electronics.Net LLC. The Company accounts
for its 49% interest in Electronics.Net LLC under the equity method of
accounting. The Company and Cybershop are required to share in the funding of
cash flow deficits of Electronics.Net LLC. Electronics.Net LLC is engaged in the
business of selling high volume electronics, computers and appliance merchandise
through the use of web-based electronic commerce. The financial statements of
the joint venture were not material in relation to the financial statements of
Tops Appliance City, Inc.

In connection with the formation of Electronics.Net LLC, the Company
entered a supply agreement with Electronics.Net LLC whereby the Company will be
the sole supplier of Electronics.Net LLC.

(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:

Property, equipment and leasehold improvements and related depreciation
periods consist of the following-

December 29, 1998 December 30, 1997
----------------- -----------------
<S> <C> <C>

Land and buildings (25 years) .................. $16,815,000 $16,820,000
Computer equipment and purchased
software (5 years) ........................... 12,755,000 11,978,000
Transportation equipment (5 years) ............. 747,000 746,000
Furniture, fixtures and store
equipment (5 years) .......................... 10,399,000 9,599,000
Warehouse equipment (5 years) .................. 2,357,000 2,324,000
Leasehold improvements (3 to 25 years) ......... 21,392,000 18,823,000
----------- -----------

64,465,000 60,290,000

Less-Accumulated depreciation .................. 34,582,000 30,354,000
----------- -----------
$29,883,000 $29,936,000
=========== ===========

</TABLE>

28
<PAGE>

Depreciation expense was $4,228,000, $4,529,000 and $4,906,000 for fiscal
1998, fiscal 1997 and fiscal 1996 respectively.

(5) DEBT AND CAPITAL LEASES:

Short-Term Debt-

The Company currently utilizes a $40 million secured credit facility
expiring October 28, 2001. 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. As of December 29,
1998 and December 30, 1997, $30,718,000 and $23,558,000, respectively was
outstanding under this credit facility. Additional borrowings available at
December 29, 1998 were $4,482,000.

Long-Term Debt-

Long-term debt consists of the following-

December 29, 1998 December 30, 1997
----------------- -----------------

Convertible Subordinated
Original Debentures (A) ............... $20,305,000 $23,305,000
Convertible Subordinated
New Debentures (B) .................... 97,500 7,687,500
----------- -----------

Total long-term debt ..................... $20,402,500 $30,992,500
=========== ===========

(A) The $20,305,000 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 55% of face value, based on the limited
transactions for these instruments, including those described below.

Throughout the course of fiscal 1998, the Company entered into a series of
transactions for the repurchase of Original Debentures outstanding. The Company
purchased $3,000,000 face value of the Original Debentures for a purchase price
of $1,650,000. Net of related expenses, these transactions generated an
extraordinary gain of $1,309,000 during the fiscal year ending December 29,
1998.

(B) The $97,500 of 6 1/2% Convertible Subordinated Debentures due 2003.
Interest is paid semi-annually on February 28 and August 31. The New Debentures
rank pari passu with the original Debentures in respect to principal and
interest, and are convertible into common stock at a conversion

<PAGE>

price of $1.75 per share. No quoted market price is available for the New
Debentures, however, the Company believes their carrying cost approximates fair
market value at December 29, 1998.

During fiscal 1998, $7,590,000 of face amount of these Debentures were
converted into 4,337,143 shares of the Company's common stock.

Principal payments required under long-term debt obligations for years
subsequent to December 29, 1998 are as follows-

1999 $ 0
2000 0
2001 0
2002 0
2003 20,402,500

Obligation Under Capital Lease-

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. 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. This lease has been accounted for as a capital lease with the building
and initial capital lease obligation reflected at the fair market value of the
property on the date of lease inception. The minimum future obligations under
the lease have been discounted based upon the implicit lease rate of 12.3%

Principal payments required under capital lease obligations for years subsequent
to December 29, 1998 are as follows-

1999 $ 124,000
2000 140,500
2001 158,800
2002 179,400
2003 202,800
Thereafter 15,297,500

(6) COMMITMENTS AND CONTINGENCIES:

Leases-

Other than the Queens, New York store described in Note 5, 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.

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 and current shareholder. 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 29, December 30, December 31,
1998 1997 1996
------------ ------------ ------------
Rentals under-
Related party leases ......... $1,979,000 $1,979,000 $1,848,000
Other leases ................. 4,786,000 5,298,000 5,660,000
----------- ------------ ------------

$6,765,000 $7,277,000 $7,508,000
=========== ============ ============

<PAGE>

Minimum annual rental payments under operating leases in fiscal years
subsequent to December 29, 1998 are as follows-

1999 $ 7,189,000
2000 7,407,000
2001 8,037,000
2002 6,278,000
2003 6,281,000
Thereafter 37,961,000

Employment Contracts-

The Company presently has employment contracts with three officers which
commit the Company to various salary and fringe benefit obligations through
fiscal 2000 (as specified in the individual agreements). The aggregate salary
obligation under these agreements is $595,000 and $465,000 for the fiscal years
1999 and 2000, respectively.

Financing-

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 29, 1998 and December 30, 1997, the Company had standby letters
of credit of $2,236,000 and $785,000, respectively.

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.

Common Stock-

In connection with the sale of common stock to Bay Harbour Management, L.C.
(Note 1), the Company is required to either issue additional shares or refund a
portion of the proceeds from this issuance in the event that the Company's stock
price declines in value, as defined in the agreement.

(7) 401(K) SALARY SAVINGS PLAN:

The Company maintains a defined contribution 401(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 2-1/2% of the total annual compensation paid to plan participants and may
contribute additional amounts on a discretionary basis. Effective January 1997,
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, and to pay various expenses associated with
administering the plan.

The Company's contributions to the plan were as follows-

1998 $214,000
1997 290,000
1996 632,000

31
<PAGE>

(8) STOCK OPTION AND STOCK PURCHASE PLANS:

The Company maintains two stock option plans under which both incentive and
non-qualified options may be granted (the "Plans"). A total of 1,200,000 shares
of common stock are reserved for issuance, in the aggregate, under the Plans. In
addition, the Company has granted non-qualified stock options to certain
individuals that are not covered by the Plans. 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 generally vest over a three year period, and are exercisable over
the ten year period commencing on the date of issuance.

Stock option transactions for the periods indicated were as follows-

1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Number Average Number Average Number Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>

Options outstanding at
beginning of year .... 1,156,700 $ 2.46 1,110,300 $ 2.97 796,700 $ 5.49
Granted .............. 268,500 $ 3.71 297,000 $ 1.15 1,041,300 $ 2.35
Canceled ............. (41,468) $ 2.10 (250,600) $ 3.14 (727,700) $ 4.84
Exercised ............ (15,225) $ 1.43 0 -- 0 --
---------- -------- --------- -------- --------- ---------
Options outstanding at
end of year .......... 1,368,507 $ 2.73 1,156,700 $ 2.46 1,110,300 $ 2.97
========== ======== ========= ======== ========== =========

</TABLE>

The following table summarizes information regarding options outstanding at
December 29, 1998

Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------- ------------------------------------------

Exercise Outstanding at Weighted Average Remaining Weighted Average Exercisable at Weighted Avg
Prices December 29, 1998 Contractual Life Exercise Price December 29, 1998 Exercise Price
- ------------ ----------------- -------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>

$1.06-1.44 318,340 8.7 $1.19 131,113 $ 1.24
$2.38-2.63 690,667 7.0 2.39 570,445 2.39
$3.00-4.13 249,500 9.2 3.67 0 -
$6.25-6.88 110,000 0.9 6.81 110,000 6.81
- ---------- --------- --- ----- ------- ------
$1.06-6.88 1,368,507 7.3 $2.73 811,558 $ 2.80
========== ========= === ===== ======= ======

</TABLE>

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-

32
<PAGE>

Net income (loss)-
As reported ($1,126,000) $1,357,000 ($19,381,000)
Pro forma (1,907,000) 720,000 (19,864,000)

Pro forma net income
(loss) per share-
As reported ($0.12) $0.18 ($2.66)
Pro forma ($0.20) 0.10 (2.72)

</TABLE>

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 fiscal years 1998, 1997 and 1996 were $2.50, $0.85 and
$1.68, 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-

1998 1997 1996
---- ---- ----

Risk-free interest rate 5.4% 6.0% 6.6%
Expected life, in years 5 5 5
Expected volatility 92% 91% 67%
Expected dividend yield 0.0% 0.0% 0.0%

The Company has also 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 fiscal 1998 and fiscal 1997, common stock
totaling 13,754 and 13,622 shares, respectively, were issued under the Plan.

(9) INCOME TAXES:

Deferred income taxes at December 29, 1998 and December 30, 1997 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-

1998 1997
---- ----

Current deferred tax assets-
Inventory $349,000 $301,000
Accrued liabilities 130,000 129,000
Other 168,000 223,000
Valuation allowance (485,000) (481,000)
--------- ---------

Total current deferred tax assets 162,000 172,000

Current deferred tax liabilities-
Vendor allowances 2,686,000 2,545,000
Other 434,000 567,000
-------- --------

Total current deferred tax
liabilities 3,120,000 3,112,000
--------- ---------

Net current deferred tax
liabilities $ 2,958,000 $2,940,000
============ ==========

33
<PAGE>

Long-term deferred tax assets-
Federal and state loss
carryforwards $ 6,997,000 $6,941,000
Alternative minimum tax and
job credit carryforward 592,000 593,000
Rent 978,000 805,000
Depreciation 2,919,000 2,502,000
Warranty 323,000 348,000
Valuation allowance (8,848,000) (8,244,000)
--------- ----------

Total long-term deferred tax
assets 2,961,000 2,945,000

Long-term deferred tax liabilities -
Other 3,000 5,000
----------- -------------

Net long-term deferred tax assets $ 2,958,000 $2,940,000
=========== ==========

At December 29, 1998, the Company has a Federal net operating loss
carryforward of approximately $16,480,000 of which the majority expires in 2010.

Components of the benefit for income taxes (before extraordinary item) are
as follows-

1998 1997 1996
----------- ----------- -------------

Current-
Federal .............. $ 0 $ 0 ($1,778,000)
State ................ 0 0 14,000
----------- ----------- ------------
0 0 (1,764,000)
Deferred-
Federal .............. 0 0 (236,000)
State ................ 0 0 0
----------- ----------- ------------

0 0 (236,000)
----------- ----------- ------------
Benefit for income taxes $ 0 $ 0 ($2,000,000)
=========== =========== ============

A reconciliation of the effective tax rate to the Federal statutory rate is
as follows-

1998 1997 1996
----------- ----------- -------------

Federal statutory rate .......... (34.0%) (34.0%) (34.0%)
State income taxes, net of
Federal income tax benefit .... -- -- --
Increase in valuation allowance
attributable to Federal net
operating loss carryforward not
recognized .................... 34.0 34.0 26.0
Other ........................... -- -- (1.4)
----------- ----------- ------------

Effective tax rate .............. 0% 0% (9.4%)
========== =========== ============

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.

34
<PAGE>

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 of opinion that would be rendered in Registrant's financial statements or
any matter that was the subject of disagreement with Ernst & Young.

The Company did not experience any changes in and/or disagreements with its
accountants during the 1998 fiscal year.

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 1999 annual meeting of
shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 1999.

ITEM 11. Executive Compensation

ITEM 12. Security Ownership of Certain Beneficial Ownership and Management

ITEM 13. Certain Relationships and Related Transactions

35
<PAGE>

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 29, 1998 and
December 30, 1997............................................................4

Consolidated Statements of Operations for years
ended December 29, 1998, December 30, 1997, and
December 31, 1996............................................................5

Consolidated Statements of Shareholders' Equity..............................6

Consolidated Statements of Cash Flows for years
ended December 29, 1998, December 30, 1997 and
December 31, 1996............................................................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.

Exhibit Number Description of Document

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)

36
<PAGE>

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, L.P., 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 Omitted

10.12 Omitted

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 of 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 Omitted

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 (incorporated 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.

10.31 Addendum to Management Agreement dated November 20, 1997 between
Tops Appliance City, Inc. and Robert Gross.

10.32 Addendum to Management Agreement dated October 15, 1997 between
Tops Appliance City, Inc. and Richard Jones.

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.

10.34 Debenture Exchange Agreement dated August 20, 1997, effective
September 1, 1997 between Tops Appliance City, Inc. and BEA Associates.

10.35 First Amendment to Lease dated November 5, 1997 between Tops
Appliance Realty, Inc. and Tops Appliance City, Inc.

10.36 Second Amendment to Lease dated November 5, 1997 between Tops
Appliance Realty, Inc. and Tops Appliance City, Inc.

10.37 Conversion Agreement, dated May 8, 1998, between Tops Appliance
City, Inc.and Robert D. Carl

10.38 Letter Agreement between Bay Harbour Management, L.L.C. and Tops
Appliance City, Inc. dated July 16, 1998

10.39 Share Purchase Agreement, dated July 16,1998, between Bay
Harbour Management, L.C. and Tops Appliance City, Inc.

10.40 Addendum to Management Agreement dated December 1, 1998 between
Tops Appliance City, Inc. and Richard Jones - page 42

10.41 Addendum to Management Agreement dated December 1, 1998 between
Tops Appliance City, Inc. and Thomas L. Zambelli - page 43

10.42 Merchant Agreement dated December 8, 1998 between Tops Appliance
City, Inc. and Household Bank N.A. - page 44

38
<PAGE>

22 List of Subsidiaries of the Registrant

24.1 Consent of Arthur Andersen LLP.

24.2 Consent of Ernst & Young LLP.

(b) Reports on Form 8-K

None

<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/ Richard L. Jones
-----------------------------
RICHARD L. JONES
Chief Executive Officer

BY: /s/ Thomas L. Zambelli
-----------------------------
THOMAS L. ZAMBELLI
Chief Accounting Officer
Dated: March 29, 1999

39
<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/ Richard L. Jones
________________________ Co-Chairman of the Board, March 29, 1999
RICHARD L. JONES Chief Executive Officer

/s/ Thomas L. Zambelli
________________________ Exec. Vice President, March 29, 1999
THOMAS L. ZAMBELLI Chief Accounting Officer
Director

/s/ Robert G. Gross
________________________
ROBERT G. GROSS Director March 29, 1999

/s/ Anthony L. Formica
________________________
ANTHONY L. FORMICA Director March 29, 1999

/s/ John H. Hollands
________________________
JOHN H. HOLLANDS Director March 29, 1999

/s/ Douglas P. Teitelbaum
________________________ Co-Chairman of the Board March 29, 1999
DOUGLAS P. TEITELBAUM

/s/ Steven A. Van Dyke
________________________
STEVEN A. VAN DYKE Director March 29, 1999

/s/ Walter A. Jones
________________________
WALTER A. JONES Director March 29, 1999

<PAGE>

SCHEDULE II
TOPS APPLIANCE CITY, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED DECEMBER 29, 1998, DECEMBER 30, 1997 AND
DECEMBER 31, 1996

Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
----------- --------- --------- --------- ---------

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
-------- -------- -------- --------

Year ended December 29, 1998 --
Allowance for doubtful accounts ... $303,000 $180,000 $296,000 $187,000
-------- -------- -------- --------

41
<PAGE>
EXHIBIT 10.40

SECOND 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
Executive Officer to Executive's existing titles of President and Chief
Operating Officer.

2. Section 4 of the Agreement is amended to extend the term of the
Agreement to December 31, 2000.

3. Section 5 of the Agreement is amended to provide that effective January
1, 1999 Executive's Base Salary shall be Two Hundred Seventy Five Thousand and
no/00 ($275,000.00) 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 thirty thousand (30,000)
shares of the Company's Common Stock, which options will vest and become
exercisable in the following amount on the following date, provided that the
Executive is then employed by the Company:

Date No. of Shares

December 31, 2000 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 December 1, 1998.

4. Section 18 of the Agreement is added to provide as follows: In the event
of a "change in control" of the Company, Executive shall be entitled to a bonus
payment equal to one and one-half times his base compensation as in effect
immediately prior to the change in control. Such bonus shall be paid within
sixty (60) days of the change in control. For purposes of this Section, a
"change in control" shall occur if more than fifty percent (50%) of the
Company's outstanding stock is transferred in a single transaction or series of
transactions in consert with each other including a sale of all, or
substantially all, of the assets of the Company.

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 ______
day of _______________, 1998.

TOPS APPLIANCE CITY, INC.

_______________________ By: /s/
Rick Jones _________________________________________

<PAGE>

EXHIBIT 10.41

SECOND 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, 2000.

2. Section 5 of the Agreement is amended to provide that effective January
1, 2000, Executive's Base Salary shall be One Hundred Ninety Thousand and no/00
($190,000.00) 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 twenty thousand (20,000)
shares of the Company's Common Stock, which options will vest and become
exercisable in the following amount on the following date, provided that the
Executive is then employed by the Company:

Date No. of Shares

December 31, 2000 20,000

4. Section 17 of the Agreement is added to provide as follows: In the
event of a "change in control" of the Company, Executive shall be entitled to a
bonus payment equal to one and one-half times his base compensation as in effect
immediately prior to the change in control. Such bonus shall be paid within
sixty (60) days of the change in control. For purposes of this Section, a
"change in control" shall occur if more than fifty percent (50%) of the
Company's outstanding stock is transferred in a single transaction or series of
transactions in consert with each other including a sale of all, or
substantially all, of the assets of the Company.

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
______ day of _______________, 1998.

TOPS APPLIANCE CITY, INC.

_______________________ By: /s/
Thomas Zambelli _________________________________

<PAGE>

EXHIBIT 10.41

Merchant Agreement

BANK: Household Bank (SB), N.A. MERCHANT: Tops Appliance City, Inc.
1111 Town Center Drive 45 Brunswick Ave.
Las Vegas, Nevada 89134 Edison, NJ 08818
Facsimile No. (732) 248-2731

This Merchant Agreement ("Agreement") is made and entered into as of the
day of December, 1998 ("Effective Date"), by and between Household Bank (SB),
N.A. (herein "Household") and Tops Appliance City, Inc., a New Jersey
corporation (herein "Merchant"). In consideration of the mutual promises,
covenants, and agreements set forth below and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Merchant and Household agree as follows:

Section 1. Definitions. In addition to the words and phrases defined above
and elsewhere in this Agreement, the following words and phrases shall have the
following meanings:

a. "Account" means an account resulting from the issuance of a Card. An
Account may have more than one Card issued for it. Each Account shall be owned
by, and deemed to be the property of, Household.

b. "Affiliate" means any entity that is owned by, owns or is under common
control with Household or Merchant or its ultimate parent.

c. "Applicable Law" means collectively or individually any applicable law,
rule, regulation or judicial, governmental or administrative order, decree,
ruling, opinion or interpretation.

d. "Authorization" means permission from Household to make a Card Sale.

e. "Authorization Center" means the facility designated by Household as the
facility at which Card Sales are authorized.

f. "Business Day" means any day except Saturday or Sunday or a day on which
banks are closed in the State of Nevada.

g. "Card" means the private label credit card issued by Household for the
Program.

h. "Cardholder" means (i) the person in whose name an Account is opened,
and (ii) any other authorized users of the Account and Card.

i. "Card Sale" means any sale of Goods that Merchant makes to a Cardholder
pursuant to this Agreement that is charged to an Account.

j. "Chargeback" means the return to Merchant and reimbursement to Household
of a Sales Slip or Card Sale for which Merchant was previously paid.

k. "Credit Slip" means evidence of a credit in a paper or electronic form
for Goods purchased from Merchant.

l. "Goods" means the products described in Section 2 below, certain
warranties expressly authorized by Household, and related services sold by
Merchant in the ordinary course of Merchant's business to consumers for
individual, family, personal or household use.

m. "LIBOR" shall mean the daily average of the one (1) year London
Interbank Offered Rate as published by Bloomberg Financial Markets. For purposes
of this Agreement "Base LIBOR" shall be 5.00%.

n. "MONTH" means a calendar month unless used in connection with a Credit
Promotion.

o. "Operating Instructions" means the Regulatory Guidelines and operating
instructions and/or procedures designated by Household and provided to Merchant
from time to time concerning the Program. Household shall provide Merchant with
reasonable written notice of any changes to the Operating Instructions.

p. "Program" means the private label revolving credit card program
associated with Merchant whereby Accounts will be established and maintained by
Household, Cards issued by Household to qualified consumers purchasing
Merchant's Goods, and Card Sales funded all pursuant to the terms of this
Agreement.

q. "Program Year" means any consecutive twelve (12) month period commencing
with the first day of funding of any Accounts after the Effective Date and each
subsequent twelve (12) month period.

r. "Sales Slip" means evidence of a Card Sale in paper or electronic form
for Goods purchased from Merchant.

s. "Terminal" means an electronic terminal or computer capable of
communicating by means of an on-line or dial-up electronic link with an
Authorization Center.

Section 2. Scope and Purpose. Merchant engages in the sale of appliances,
consumer electronics and other related products and related services including
extended warranties ("Goods") and Merchant desires to make financing available
to consumers purchasing Goods and services from Merchant and to participate in
the Program in accordance with the terms and conditions set forth in this
Agreement. Household, a credit card bank in the business of providing revolving
credit financing pursuant to a credit card, has agreed to provide such financing
under the Program to individual qualified consumers purchasing Merchant's Goods
pursuant to the terms and conditions set forth in this Agreement.

<PAGE>

a. Forms and Cards. Household will provide to Merchant standard
application/agreements, Sales Slips, Credit Slips, and other forms from time to
time for use by Merchant in the Program, which documents may be changed from
time to time by Household. Merchant shall be charged a fee for nonstandard forms
requested by Merchant. The design and content of Cards and billing statements
shall be mutually agreed upon by Household and Merchant. The terms and
conditions of Accounts and application/agreements shall be determined by
Household and are subject to change by Household from time to time.

b. Credit Review: Ownership of Accounts. All completed applications for
Accounts submitted by Merchant to Household whether mailed, telephoned or
otherwise electronically transmitted will be processed and approved or declined
in accordance with such credit criteria and procedures established from time to
time by Household, with Household having and retaining all rights to reject or
accept such applications. Household will only accept applications for revolving
credit pursuant to the credit card it issues for individual, personal, family or
household use. Household or its Affiliates shall own the Accounts, including the
Cardholder names and addresses associated with the Accounts, and shall bear the
credit risk for such Accounts. Except as otherwise provided in this Agreement,
Merchant acknowledges and agrees that it shall have no ownership interest in the
Accounts. Upon Merchant's request, Household will provide Merchant with mailing
lists of Cardholder names and addresses and available credit lines for purposes
of soliciting additional purchases. Household shall not be obligated to take any
action under an Account, including making future advances or credit available to
Cardholders. Household shall not be obligated to accept applications for a Card
or to approve any Card Sale for consumers that do not have their principal
residence and billing address in the Continental United States.

c. Card Promotions, Services and Enhancements. Household and Merchant may
from time to time mutually agree to offer to existing or potential Cardholders
special credit promotions, additional services and/or enhancements. These
services shall include, but not be limited to, performing an initial marketing
audit related to the Program, assisting Merchant in creating a credit marketing
plan, with creative design and development of point of sale materials and such
other services as become available or as Household offers to other merchants.
The terms of such promotions, services and enhancements shall be mutually agreed
upon by Household and Merchant and are subject to change upon mutual agreement
of the parties or discontinuance by Household upon notice to Merchant. In
consideration of Household's providing special credit promotions and to
compensate Household for such promotions, Merchant agrees to pay to Household
for the period agreed upon by Household and Merchant such rates, discounts and
amounts as may be agreed upon by Household and Merchant. Household may deduct
amounts owed to it hereunder from amounts owed to Merchant under this Agreement.

Section 3. Fees, Discounts. Charges, Rates and Funding.

a. Consumer Rate. The annual percentage rate ("APR") to be charged on
purchases with the Card shall be a variable APR of the Prime Rate plus 14.4
percentage points, or plus 16.4 percentage points for the default APR
("Spread"). The Prime Rate shall be determined based upon the highest Prime Rate
published in The Wall Street Journal "Money Rates" on the first Tuesday of
January, April, July and October, and will take effect on the first day of the
billing cycle for February, May, August and November. The APR shall not be lower
than 22.9% during the Initial Term of this Agreement. The APR shall not exceed
the maximum interest rate allowable by Applicable Law, rule, regulation or
statute and shall be subject to change from time to time by Household upon
notice to Merchant. The initial APR shall be 22.9%

b. Merchant. Merchant agrees to pay Household the following nonrefundable
fees, charges and discounts (some of which are more fully described in this
Agreement): (i) "Discount": 0% of the amount of each non-credit promotion Sales
Slip accepted and funded by Household. (ii) "Credit Promotion Discount Fee":
Household shall make certain deferred payment and/or deferred interest credit
promotions ("Credit Promotionsn) available to Merchant. Each Sales Slip
generated pursuant to each Credit Promotion shall be subject to a Credit
Promotion discount fee ("Discount Fee") as set forth herein. During the term of
this Agreement, the percentage of total annual dollar volume of Card Sales
generated by the 12 Month Same as Cash With Payments Credit Promotion ("12 Month
SAC Volume") shall not exceed ten percent (10%) of the 12 month average dollar
volume of promotional and non promotional Card Sales ("12 Month SAC Volume
Maximum") during each Program Year. The initial Credit Promotion Discount Fees
shall be as follows:

<PAGE>

Credit Promotion Discount Fee 12 Month SAC Maximum
- ---------------- ------------ --------------------

Non Promotional Card Sales 0.00% N/A
90 Day Same as Cash/Without Payments 0.85% N/A
6 Month Same as Cash/With Payments 3.50% N/A
6 Month Same as Cash/Without Payments 3.90% N/A
12 Month Same as Cash/With Payments 7.50% 10%

The Credit Promotion Discount Fees set forth in this Subsection 3b (ii)
shall be reviewed and adjusted under the following circumstances: (A) in
accordance with any increase or decrease in Base LIBOR as set forth below; (B)
in the event Household determines that the 12 Month SAC Volume Maximum exceeded
10% for any Program Year during the term of this Agreement as set forth in
Schedule A below; (C) in accordance with the provisions of Section 6 b (vi) if
Household determines that Fraud Losses (as defined in Section 6 b (vi)) will
exceed the percentage set forth therein during the term of this Agreement.

Any adjustment in the Discount Fees based upon changes in Base LIBOR shall
be made semiannually during each Program Year on January 1st and July 1st (the
Adjustment Dates), and shall be the difference, if any, in the LIBOR determined
as of the Adjustment Date (Current LIBOR) from Base LIBOR ("LIBOR Spread"). The
Current LIBOR shall be determined by the average LIBOR for the Month prior to
the applicable Adjustment Date. The new Discount Fee shall be effective as to
all promotional volume accepted and funded by Household for the next six Months
starting after the applicable Adjustment Date. The Credit Promotion Discount Fee
shall be determined by adding or subtracting the LIBOR Spread to or from the
initial Discount Fee for each Credit Promotion. For example, if the Current
LIBOR on January 1st is 5.13% for that Adjustment Date, the Discount Fee for a
"12 Month Same As Cash With Payments" promotion would be calculated as follows:
5.13% (Current LIBOR) minus 5.00% ("Base LIBOR") = .13% (LIBOR Spread). 7.50%
(12 Month SAC With Payments Initial Discount Fee) + .13% (LIBOR Spread) = 7.63%
(New Discount Fee for 12 Month SAC With Payments). Provided, however, the
maximum decrease in the Discount Fee for any Credit Promotion as a result of any
decrease in the Current LIBOR below Base LIBOR shall be 20 basis points.

Any change in the Discount Fee for 12 Month SAC promotions based upon
Merchant exceeding the 12 Month SAC Volume Maximum shall be determined at the
end of each Program Year as set forth in Schedule A below. Household will charge
Merchant the additional Discount Fee set forth below on the aggregate dollar
amount of the 12 Month SAC Volume for that Program Year. Household shall bill
Merchant for the additional Discount Fee within 30 days of the end of such
Program Year and Merchant shall pay Household the additional Discount Fee within
30 days of billing.

Schedule A
<TABLE>
<CAPTION>

12 Month SAC Volume as a % of Total Card Sale Volume Additional Discount Fee
- ---------------------------------------------------- -----------------------
<S> <C> <C>

.01% to10% .00%
10.01% to 25% .40%
25.01% to 50% .70%
50.01% to 75% .95%
75.01% to 100% 1.15%

</TABLE>

(iii) "Convenience Usage Charge": 0% of all finance charges that would
otherwise be paid by the Cardholder but for the payment in full of the
outstanding Account balance during any grace period or promotional period and
which have not been previously paid to Household as a discount. (Under the
Program, Household may permit Cardholders to pay the entire outstanding balance
due without finance charges during any applicable grace period or promotional
period).

(iv) "Returned Merchandise Charge": 0% of the accrued finance charges on
Accounts with respect to Goods that are returned and a credit is not applied
prior to the end of the billing cycle period in which the Card Sale was made.

(v) "Start-up Fee": $0.00.

(vi) "Forms Fee": $0.00.

(vii) "Application Fee": $0.00 per Cardholder application presented to
Household under the Program.

<PAGE>

The rate, fees, discounts and charges described above in this Section 3 are
subject to change by Household in accordance with the terms and conditions as
set forth in this Section 3 upon prior written notice to Merchant. In the event
Household discontinues all Credit Promotions, Merchant shall have the option to
terminate this Agreement prior to the end of the Initial Term or any Renewal
Term upon ninety (90) days prior written notice to Household.

c. Acceptance, Offset & Funding. Subject to the terms, conditions,
warranties and representations in this Agreement and provided that Merchant has
satisfied all of the conditions set forth in this Agreement, including, without
limitation, Sections 4, 5, and 7, Household agrees to pay to Merchant the amount
of each valid and authorized Sales Slip presented to Household during the term
of this Agreement, less the amount of the fees, charges, and discounts described
above in this Section 3, outstanding Account balances for Sales Slips subject to
Chargeback, reimbursements, refunds, customer credits and any other amounts owed
to Household by Merchant under this Agreement. Household may also offset or
recoup said amounts from future amounts owed to Merchant under this Agreement.
Any amounts owed by Merchant to Household which cannot be paid by the aforesaid
means shall be due and payable by Merchant on demand. Any payment made by
Household to Merchant shall not be final but shall be subject to subsequent
review and verification by Household and Merchant. Merchant shall electronically
submit Sales Slips to Household for funding Monday through Friday. Transmissions
received prior to 7:30 a.m. Central Time shall be funded by Household the same
Business Day. Household's liability to Merchant with respect to the funding or
processing of any Card Sale, Sales Slip or Credit Slip shall not exceed the
amount on the Sales Slip or Credit Slip in connection with such transaction. In
no event shall Household be liable for any incidental or consequential damages
or for failure to fund transactions on the next Business Day. Funding of Sales
Slips by Household to Merchant shall be made by wire transfer.

Section 4. Merchant Responsibilities Concerning Consumer Transactions.
Merchant covenants and agrees that Merchant shall:

a. Honor all valid Cards without discrimination, when properly presented by
Cardholders for payment of Goods.

b. Not require, through an increase in price or otherwise, any Cardholder
to pay any surcharge at the time of sale or pay any part of any charge imposed
by Household on Merchant.

c. Not establish minimum or maximum charge amounts without Household's
prior written approval.

d. Prominently display at each of its locations, if appropriate,
advertising and promotional materials relating to the Card, including without
limitation take-one applications for the Card and use or display such materials
in accordance with any specifications provided by Household. Such materials
shall be used only for the purpose of soliciting accounts for the Program. Any
solicitation, written material, advertising or the like relating to the Program
or the products offered pursuant to the Program shall be prepared or furnished
by Household or shall receive Household's prior written approval. Household will
charge Merchant and Merchant agrees to pay the actual and reasonable costs for
any such advertising and promotional materials as may be requested by Merchant.
Any such materials shall not be used by Merchant following termination of this
Agreement.

e. Use only the form of, or modes of transmission for,
application/agreements, Sales Slips and Credit Slips as are provided by
Household, and not use any application/agreements, Sales Slips, and Credit Slips
provided by Household other than in connection with an application for a Card or
a Card transaction.

f. With respect to applications for a Card:

(i) make sure all information requested on the application is complete and
legible;

(ii) obtain the signature on the application of all persons whose name will
appear on the Account or will be responsible for the Account;

(iii) give the applicant the initial disclosures at the time of signing the
application/agreement prior to the first transaction under the Account;

(iv) verify the identification of the individual(s) applying for the
Account, which verification may include obtaining driver's license and social
security numbers;

(v) provide all information required by Household from time to time for
approval of applications by telephone or other electronic transmission and
legibly insert the Account number on the application in the designated area; and

(vi) send the actual original approved signed application to Household at
Household's address on page one above or such other address designated by
Household within fifteen (15) Business Days of approval of the application by
Household.

g. With respect to Sales Slips:

(i) Enter legibly on a single Sales Slip prior to obtaining the
Cardholder's signature (1) a description of all Goods purchased in the same
transaction in detail suffficient to identify the transaction; (2) the date of
the transaction; (3) the Authorization number; and (4) the entire amount due for
the transaction (including any applicable taxes);

<PAGE>

(ii) REQUEST AUTHORIZATION FROM HOUSEHOLD'S AUTHORIZATION CENTER UNDER ALL
CIRCUMSTANCES. (Household may refuse to accept or fund any Sales Slip that is
presented to Household for payment more than one hundred twenty (120) days after
the date of Authorization of the Card Sale). Merchant agrees not to divide a
single transaction between two or more Sales Slips or between a Household Sales
Slip and a sales slip for another credit provider who could validly claim a
security interest in the Goods. If Authorization is granted, legibly enter the
Authorization number in the designated area on the Sales Slip. If Authorization
is denied, do not complete the transaction and follow any instructions from the
Authorization Center. Merchant shall use reasonable efforts, by reasonable and
peaceful means, to retain or recover a Card:

(a) if Merchant is advised to retain the Card in response to an
Authorization request; or

(b) if Merchant has reasonable grounds to believe that the Card is
counterfeit, fraudulent, or stolen. The obligation to retain or recover a Card
imposed by this Section does not authorize a breach of the peace or any injury
to persons or property, and Merchant will hold Household harmless from any claim
arising from any injury to person or property or other breach of the peace.

(iii) if applicable, imprint legibly on the Sales Slip the embossed legends
from the Card and from Merchant's imprinter plate or if the transaction is to be
completed electronically or otherwise without a Card imprint, then enter legibly
on the Sales Slip sufficient information to identify the Cardholder and
Merchant, including at least, Merchant's name and address, and Cardholder's
name, Account number.

(iv) check the effective date, if any, on the Card;

(v) obtain the signature of the Cardholder on the Sales Slip, and compare
the signature on the Sales Slip with the signature panel of the Card and if
identification is uncertain or if Merchant otherwise questions the validity of
the Card, contact Household's Authorization Center for instructions;

(vi) IDENTIFICATION OF THE CARDHOLDER IS THE RESPONSIBILITY OF MERCHANT;

(vii) not present the Sales Slip to Household for funding until all Goods
are delivered (if delivery is to be more than ten (10) days from the date of
sale) and all the services are performed to the Cardholder's reasonable
satisfaction. If the Card Sale is canceled or the Goods or services canceled or
returned in accordance with the Merchant's reasonable and posted or published
merchandise return policy as established from time to time by Merchant, the
Sales Slip is subject to Chargeback;

(viii) enter the Card Sale into the Terminal; and

(ix) deliver a true and completed copy of the Sales Slip to the Cardholder
at the time of the Card Sale.

h. Credit Slips. If Goods are returned, any Card Sale or services are
terminated or canceled, or Merchant allows any price adjustment, then Merchant
shall not make any cash refund, but shall complete and deliver promptly to
Household a Credit Slip evidencing the refund or adjustment and deliver to the
Cardholder a true and complete copy of the Credit Slip at the time the refund or
adjustment is made. Merchant shall date each Credit Slip and include thereon a
brief description of the Goods returned, services terminated or canceled, refund
or adjustment made, the date of the original Card Sale, Cardholder's name,
address and Account number, and the date and amount of the credit, all in
sufficient detail to identify the transaction. Merchant shall imprint or legibly
reproduce on each Credit Slip the embossed legends from the Card and from
Merchant's imprinter plate. The amount of the Credit Slip cannot exceed the
amount of the original transaction as reflected on the Sales Slip. Merchant
shall issue Credit Slips only in connection with previous bona fide Card Sales
and only as permitted hereunder.

i Not receive any payments from a Cardholder for charges included on any
Sales Slip resulting from the use of any Card, nor receive any payments from a
Cardholder to prepare and present a Credit Slip for the purpose of effecting a
credit to the Cardholder's Account.

j. Cardholder Complaints. Merchant shall within ten (10) Business Days of
receipt provide Household with a copy of any written complaint from any
Cardholder concerning his/her Account.

k. Satisfy all other requirements designated in any Operating Instructions
or as may be required from time to time by Household upon reasonable notice to
Merchant. In the event there is any inconsistency between any Operating
Instructions and this Agreement, this Agreement shall govern unless otherwise
expressly indicated by Household in any Operating Instructions.

Section 5. Representations and Warranties.

a. Merchant represents and warrants to Household as of the Effective Date
and throughout the term of this Agreement the following:

(i) That each Card Sale will arise out of a bona fide sale of Goods and/or
services by Merchant and will not involve the use of the Card for any other
purpose.

(ii) That to the best of Merchant's knowledge each Card Sale will be to a
consumer for personal, family, or household purposes.

<PAGE>

(iii) That Cardholder applications will be available to the public (i)
without regard to race, color, religion, national origin, sex, marital status,
or age (provided the applicant has the capacity to enter into a binding
contract) and (ii) not in any manner which would discriminate against an
applicant or discourage an applicant from applying for the Card.

(iv) That it has full corporate or other power and authority to enter into
this Agreement; that all corporate or other action required under any
organization documents to make this Agreement binding and valid upon Merchant
according to its terms has been taken; and that this Agreement is and will be
binding, valid and enforceable upon Merchant according to its terms.

(v) Neither (A) the execution, delivery and performance of this Agreement,
nor (B) the consummation of the transactions contemplated hereby will constitute
a violation of law or a violation or default by Merchant under its articles of
incorporation, bylaws or any organization documents, or any material agreement
or contract and no authorization of any governmental authority is required in
connection with the performance by Merchant of its obligations hereunder.

(vi) That dates after December 31, 1999 will be properly recognized and
date related calculations will be correctly made in the operation of computer
systems and functions material to the operation of the Program, and that
Merchant has undertaken procedures to address Year 2000 ("Y2K") computer issues.

(vii) Merchant has and will retain all licenses required by local or state
law to conduct its business and to perform its obligations under this Agreement.

(viii) Any Card Sale subject to rescission has not been rescinded.

b. Household represents and warrants to Merchant as of the Effective Date
and throughout the term of this Agreement the following:

(i) That it has full corporate or other power and authority to enter into
this Agreement; that all corporate or other action required under any
organization documents to make this Agreement binding and valid upon Household
according to its terms has been taken; and that this Agreement is and will be
binding, valid and enforceable upon Household according to its terms.

(ii) Neither (A) the execution, delivery and performance of this Agreement,
nor (B) the consummation of the transactions contemplated hereby will constitute
a violation of law or a violation or default by Household under its bylaws or
organization documents, or any material agreement or contract and no
authorization of any governmental authority is required in connection with the
performance by Household of its obligation hereunder.

(iii) That dates after December 31, 1999 will be properly recognized and
date related calculations will be correctly made in the operation of computer
systems and functions material to the operation of the Program, and that
Household has undertaken procedures to address Year 2000 ("Y2K") computer issues
as set forth in Exhibit 1 attached hereto.

Section 6. Chargebacks to Merchant. Merchant agrees as follows:

a. Chargebacks. Any Sales Slip or Card Sale is subject to Chargeback under
any one or more of the following circumstances, and thereupon the provisions of
Section 6.c. below shall apply:

(i) The application or any information on the application or the Sales Slip
or any required information on the Sales Slip (such as the account number,
description of Merchant or Goods purchased, transaction amount or date) is
illegible or incomplete, or the Sales Slip or application is not executed by the
Cardholder; or Authorization is not obtained from Household's Authorization
Center, or a valid Authorization number is not correct, in any material respect,
and legibly written or recorded on the Sales Slip; or the Sales Slip is a
duplicate of an item previously paid, or the price of the Goods or services
shown on the Sales Slip differs from the amount shown on the Cardholder's copy
of the Sales Slip;

(ii) Household reasonably determines that (1) Merchant has breached or
failed to satisfy, any material term, condition, covenant, warranty, or other
provision of this Agreement, including, without limitation, Sections 4 and 5
above, or of the Operating Instructions, in connection with a Sales Slip, Card
Sale or the transaction to which it relates, or an application for a Card or the
opening of an Account; or (2) the Sales Slip, application/agreement or Card Sale
is fraudulent or is subject to any bona fide claim of illegality, cancellation,
rescission, avoidance or offset for any reason whatsoever, including, without
limitation, negligence, fraud, misrepresentation, or dishonesty on the part of
the customer (except as provided in Section 6b.) or Merchant or its agents,
employees, licensees, or franchisees, or that the related transaction is not a
bona fide transaction in Merchant's ordinary course of business;

(iii) the Cardholder, in good faith, disputes or denies the Card Sale or
other Card transaction, the execution of the Sales Slip or
application/agreement, or the delivery, quality, or performance of the goods,
services or warranties purchased, or the Cardholder has not authorized the Card
Sale, or alleges in good faith that

<PAGE>

a credit adjustment was requested and refused or that a credit adjustment
was issued by Merchant but not posted to the Account in violation of Merchant's
disclosed policy or Applicable Law; or

(iv) Merchant fails to deliver to Household the Sales Slip, Credit Slip,
application or other records of the Card transaction within the times required
in this Agreement and such failure to deliver in any way impairs Household's
ability to meet its obligations under Applicable Law (including its obligations
under the Fair Credit Billing Act) or otherwise to respond to questions,
disputes, complaints, lawsuits, counterclaims or claims concerning Accounts or
requests from Cardholders, or to enforce any rights Household may have against a
Cardholder, including, without limitation, litigation by or against Household,
collection efforts and bankruptcy proceedings.

b. Fraud Chargeback Exception. Notwithstanding anything to the contrary in
this Section 6, Household and Merchant agree that where Merchant follows the
procedures and provides the information set forth below, an application, Card
Sale, Sales Slip or other Card transaction reasonably determined by Household to
be the result of customer fraud ("Fraud Chargeback") shall not be subject to
Chargeback under this Section 6 if the following conditions have been met by
Merchant: (i) For applications, Merchant shall provide verification of the
applicant's identify and current address by (1) witnessing the signature on the
application of each person whose name will appear on the Account or who will be
responsible for the Account; and (2) obtaining a copy of one of the following:
an unexpired in state driver's license containing the applicant's photo (except
no photo required on New Jersey driver's license) and current residence as
listed on the application, or a current in-state identification card containing
the applicant's photo and current residence as listed on the application, or a
valid US Government issued military identification, or a valid United States
Passport containing the applicant's photo and reviewing such identification to
ensure that the applicant substantially resembles the person described thereon;
and (3) reviewing an unexpired major credit card (e.g. American Express, VISA,
MasterCard, Sears, Discover or major department store or oil company credit
card) and comparing the signature on such credit card with the signature on the
application and/or Sales Slip; and (4) recording on the application where
designated the drivers license number or the card type, account number (where
permissible) and expiration date of such credit card identification.

(ii) If the address on the photo identification does not match the address
on the application, Merchant must obtain a photocopy of other identification
showing the applicant's current address such as a utility bill, bank statement
or car registration.

(iii) Within fifteen (15) Business Days of receipt of Household's request,
or such earlier time as may be required by Household, Merchant shall provide to
Household a copy of the identification described in 6b(i) and (ii) above to meet
its obligations under Applicable Law or otherwise to respond to questions,
disputes, inquiries, investigations, complaints, lawsuits, counterclaims or
other claims concerning Accounts or requests from Cardholders or to enforce any
rights Household may have against a Cardholder. (iv) For add on sales after the
initial Card Sale, Merchant shall compare and verify the signature on the Card
with the signature on the Sales Slip and also swipe the Card or take an
impression of the Card; provided, however, if a Cardholder does not have his/her
Card at the time of the purchase, Merchant will be required to provide
verification of the Cardholder's identity by (1) witnessing the signature on the
Sales Slip of the person signing the Sales Slip; and (2) obtaining a copy of one
of the following: an unexpired in-state driver's license containing the
Cardholder's photo (except no photo required on New Jersey driver's license) or
a valid U.S. Government issued military identification containing the
Cardholder's photo or a valid United States Passport containing the Cardholder's
photo and reviewing such identification to ensure that the Cardholder
substantially resembles the person described thereon; and (3) reviewing an
unexpired major credit card (e.g. American Express, Visa, MasterCard, Sears,
Discover or major department store or oil company credit card) and comparing the
signature on such credit card with the signature on the Sales Slip; and (4)
recording on the Sales Slip the driver's license number or credit card account
number (where permissible) and expiration date of such credit card
identification. (v) In the event Merchant fails to comply with the foregoing
provisions with respect to any application to open an Account, any Card Sale or
Sales Slip for which Household reasonably determined the transaction to be the
result of customer fraud, Household reserves the right to Chargeback such
Account, Card Sale or Sales Slip under the terms set forth herein. (vi)
Household shall review the amount of Fraud Chargebacks after each six Months
this Agreement is in effect. In the event losses to Household resulting from
Fraud Chargebacks ("Fraud Losses") exceed .25% (on an annualized basis) of the
average receivables outstanding, Household may adjust the Discount Fees set
forth in Section 3 b (iii) above. The increase in the Discount Fees under this
subsection shall be one basis point for each basis point increase in Fraud
Losses above .25% and shall be in effect for the next six Months. Any subsequent
decease in Fraud Losses from, the preceding

review shall result in a similar one for one decrease in the Discount Fee
down to .25% and shall be in effect for the next six Months. c. Resolution and
Payment. Merchant is required to resolve any dispute or other of the
circumstances described above in (a) of this Section 6 to Household's reasonable
satisfaction within fifteen (15) days of notice of Chargeback or Merchant shall
pay to Household the full amount of each such Sales Slip or Card Sale subject to
Chargeback or the portion thereof designated by Household, as the case may be,
plus the finance charges thereon, any attorney fees incurred by Household, and
other fees and charges provided for in the Cardholder agreement not otherwise
recovered by Household. Upon Chargeback to Merchant of a Sales Slip or Card
Sale, Merchant shall bear all liability and risk of loss or right of recovery
associated with such Sales Slip or Account, or the applicable portion thereof,
without warranty by, or recourse or liability to, Household. Household may
deduct amounts owed to Household under this Section from any amounts owed to
Merchant under this Agreement. d. The terms and provisions of this Section 6
shall survive the termination of this Agreement.

Section 7. Tape or Electronic Transmission & Records. Data, records and
information shall be transmitted and maintained as described below.

a. Transmission of Data. In lieu of forwarding paper Sales Slips and Credit
Slips to Household, Merchant shall transmit to Household, by electronic
transmission or other form of transmission designated by Household all data
required by this Agreement to appear on Sales Slips and Credit Slips. All data
transmitted shall be in a medium, form and format designated by Household and
shall be presorted according to Household's instructions. Any errors in such
data or in its transmission shall be the sole responsibility of Merchant. The
means of transmission indicated above in this Section shall be the exclusive
means utilized by Merchant for the transmission of Sales Slip or Credit Slip
transaction data to Household.

b. Receipt of Transmission. Upon successful receipt of any transmission,
Household shall accept such transmission and pay Merchant in accordance with
this Agreement, subject to subsequent review and verification by Household and
to all other rights of Household and obligations of Merchant as set forth in
this Agreement. If data transmission is by tape, Merchant agrees to deliver upon
demand by Household a duplicate tape of any prior tape transmission, if such
demand is made within forty-five (45) days of the original transmission.

c. Records. Merchant shall maintain the actual paper Sales Slips, Credit
Slips, and other records pertaining to any transaction covered by this Agreement
for such time and in such manner as Household or any law or regulation may
require, but in no event less than two (2) years after the date Merchant
presents each transaction data to Household, and Merchant shall make and retain
for at least seven (7) years legible copies of both sides of such actual paper
Sales Slips, Credit Slips or other transaction records. Within fifteen (15)
days, or such earlier time as may be required by Household, of receipt of
Household's request, Merchant shall provide to Household the actual paper Sales
Slips, Credit Slips or other transaction records, any other documentary evidence
available to Merchant and reasonably requested by Household to meet its
obligations under law (including its obligations under the Fair Credit Billing
act) or otherwise to respond to questions, complaints, lawsuits, counterclaims
or claims concerning Accounts or requests from Cardholders, or to enforce any
rights Household may have against a Cardholder, including, without limitation,
litigation by or against Household, collection efforts and bankruptcy
proceedings, or for any other reason. In the event Merchant fails to comply in
any respect with the provisions of this Section, Household may process a
Chargeback for each Card Sale involved pursuant to Section 6 above.

Promptly upon termination of this Agreement or upon the request of
Household, Merchant will provide Household with all original and microfilm
copies of documents required to be retained under this Agreement.

Section 8. Payments by Cardholder and Endorsement. Merchant agrees that
Household has the sole right to receive payments on any Sales Slip or Card Sale
funded by Household. Unless specifically authorized in writing by Household,
Merchant agrees not to make any collections on any such Sales Slip or Card Sale.
Merchant agrees to hold in trust for Household any payment received by Merchant
of all or part of the amount of any such Sales Slip or Card Sale and to deliver
promptly the same in kind to Household as soon as received together with the
Cardholder's name, Account number, and any correspondence accompanying the
payment and deliver same promptly within five (5) days of receipt by Merchant.
Merchant agrees that Merchant shall be deemed to have endorsed any Sales Slip,
Credit Slip, or Cardholder payments by check, money order, or other instrument
made payable to Merchant that a Cardholder presents to Household in Household's
favor, and Merchant hereby authorizes Household to supply such necessary
endorsements on behalf of Merchant.

Section 9. Merchant Credit Information. Household may annually review
Merchant's financial stability. To assist Household in doing this and upon
Household's request, Merchant shall deliver to Household no later than 120 days
after the end of each fiscal year, an audited financial statement including,
without limitation, all footnotes, and supporting materials with sufficient
detail to accurately portray the financial condition of Merchant. Merchant
warrants and

<PAGE>

represents that its credit application and financial statements
submitted to Household by or on behalf of Merchant are true and accurate and
Merchant agrees to supply such additional credit information as Household may
reasonably request from time to time. Any information provided by Merchant
pursuant to this Section 9 shall be subject to the confidentiality provisions of
Section 19 below. Merchant understands that Household may verify the information
on any financial statement or other information provided by Merchant and, from
time to time, may seek credit and other information concerning Merchant from
others and may provide financial and other information regarding the portfolio
to its Affiliates or to others for purposes of its asset securitizations and
sales.

Section 10. Merchant Business Practices. Merchant agrees to provide
adequate services in connection with each Card Sale pursuant to standard customs
and trade practices and any applicable manufacturer's warranty service provided
by Merchant and to provide such repairs, service and replacements and take such
other corrective action as may be required by law or any applicable warranty.

Section 11. Cardholder Account Information. Merchant shall not sell,
purchase, provide, or exchange Account information in the form of
imprinted Sales Slips, carbon copies of imprinted Sales Slips, mailing lists,
tapes or other media obtained by reason of a Card transaction to any third Party
other than to Merchant's agents for the purpose of assisting Merchant in its
business with Household or pursuant to a government request.

Section 12. Change in Ownership. Merchant agrees to send Household written
notice of any change in Merchant's name or location, any material change in
ownership of Merchant's business or any change in Sales Slip or Credit Slip
information concerning Merchant.

Section 13. Indemnification.

a. Indemnification by Merchant. Merchant shall be liable to and shall
indemnify and hold harmless Household and its Affiliates and their respective
officers, employees, agents and directors from any losses, damages, claims or
complaints incurred by Household or any Affiliate of Household or their
respective officers, employees, agents and directors arising out of: (i)
Merchant's failure to comply with this Agreement or any of the Operating
Instructions; (ii) any claim, dispute, complaint or setoff made by a Cardholder
in good faith with respect to anything done or not done by Merchant in
connection with Card Sales or credits; (iii) anything done or not done by
Merchant in connection with the furnishing of any goods, warranties or services
purchased by Cardholders; (iv) the death or injury to any person or the loss,
destruction or damage to any property arising out of the design, manufacture or
furnishing by Merchant of any goods, warranties or services purchased by
Cardholders; (v) any claim or complaint of a third party or governmental agency
made in good faith in connection with Merchant's advertisements and promotions
relating to the Card which have not been reviewed or approved by Household; (vi)
any illegal or improper conduct of Merchant or its employees or agents in
connection with any of the transactions contemplated by this Agreement; and
(vii) any claim or complaint by a consumer or governmental agency made in good
faith that Merchant has violated the Equal Credit Opportunity Act, Truth in
Lending Act, or any other related Applicable Laws and regulations. Household may
deduct any amounts incurred by Household under this Section from any amounts
owed Merchant under this Agreement.

b. Indemnification by Household. Household shall be liable to and shall
indemnify and hold harmless Merchant and its subsidiaries or affiliates and
their respective officers, employees, agents and directors from any losses,
damages, claims or complaints incurred by Merchant or any parent, subsidiary or
affiliate of Merchant or their respective officers, employees, agents and
directors arising out of (i) Household's failure to comply with this Agreement
or any of the Operating Instructions; (ii) any claim, dispute or complaint by a
Cardholder made in good faith resulting from anything done or not done by
Household in connection with such Cardholder's Account; (iii) any illegal or
improper conduct of Household, or its employees or agents with respect to the
Card, a Card Sale, an Account or any other matters relating to the Program; (iv)
any claim, dispute, complaint or set off by a consumer or governmental agency
made in good faith resulting from a violation by Household, with respect to the
application/agreement, of the Equal Credit Opportunity Act, Truth in Lending Act
or any other related Applicable Laws and regulations; and (v) any claim, dispute
or complaint of any third party or governmental agency made in good faith in
connection with advertisements and promotions prepared by Household relating to
the Card. Notwithstanding the foregoing, the indemnification by Household shall
not apply to any claim or complaint relating to the failure of Merchant to
resolve a billing inquiry or dispute with a Cardholder made in good faith
relating to Goods or services purchased on the Card where such failure was not
caused by Household.

c. Notice of Claim & Survival. In the event that Household or Merchant
shall receive any claim or demand or be subject to any suit or proceeding of
which a claim may be made against the other under this Section, the indemnified
party shall give prompt written notice thereof to the indemnifying party and the
indemnifying party will be entitled to participate in the settlement or defense
thereof with counsel satisfactory to indemnified party at the indemnifying
party's expense. In any case, the indemnifying party and the indemnified party
shall cooperate

<PAGE>

(at no cost to the indemnified party) in the settlement or
defense of any such claim, demand, suit, or proceeding. The terms of this
Section 13 shall survive the termination of this Agreement.

Section 14. Nonwaiver. Merchant's liability under this Agreement,
including, without limitation, its liability under Section 6 above, shall not be
affected by any settlement, extension, forbearance, or variation in terms that
Household may grant in connection with any Sales Slip or Account or by the
discharge or release of the obligations of the Cardholder(s) or any other person
by operation of law or otherwise. Merchant hereby waives any failure or delay on
Household's part in asserting or enforcing any right that Household may have at
any time under this Agreement or under any Account.

Section 15. Term and Termination.

a. Term. This Agreement shall be effective as of the Effective Date when
executed by authorized officers of each of the parties and shall remain in
effect for five (5) years ("Initial Term") and shall thereafter be renewed for
successive one year terms (the "Renewal Term(s)") unless and until terminated as
provided herein. The termination of this Agreement shall not affect the rights
and obligations of the parties with respect to transactions and occurrences
which take place prior to the effective date of termination, except as otherwise
provided herein.

b. Termination. This Agreement may be terminated:

(i) By Household or Merchant at the end of the Initial Term or the end of
any Renewal Term upon not less than one hundred eighty (180) days prior written
notice to the other prior to the end of the Initial Term or the Renewal Term; or

(ii) by Merchant upon ninety (90) days prior written notice pursuant to
Section 3 herein, if Household discontinues all the Credit Promotions; or

(iii) by Household or Merchant upon written notice to the other in the
event the other party shall elect to wind up or dissolve its operation or is
wound up and dissolved; becomes insolvent or repeatedly fails to pay its debts
as they become due; makes an assignment for the benefit of creditors; files a
voluntary petition in bankruptcy, or for reorganization or is adjudicated as
bankrupt or insolvent; or has a liquidator or trustee appointed over its
affairs; or

(iv) by Household or Merchant upon ninety (90) days written notice to the
other (a) if there occurs any material change in ownership of Household or
Merchant or if a material adverse change occurs in either parties' financial
condition as determined by the other party in such party's reasonable business
judgment and such party is not provided with reasonable assurances that the
other party's financial condition will improve substantially in the near term;
or (b) if either party suspends or goes out of business or substantially reduces
its business operations or sends a notice of a proposed bulk sale of all or part
of its business; or (c) in the event either party materially breaches its
obligations or any warranty or representation under this Agreement or in any
Operating Instructions and fails to correct such default within thirty (30) days
after written notice thereof from the other party; or (d) if either party has
reasonable cause to believe that the other party will not be able to perform its
obligations under this Agreement; or (iv) by Household upon written notice (a)
if Household has reasonable cause to believe that Merchant, its agents or
employees have engaged in any fraudulent activity in connection with any of the
transactions contemplated by this Agreement; or (b) if Household receives a
disproportionate number of Cardholder inquiries, disputes, or complaints. For
purposes of this subsection b (iv) (b) a "disproportionate number" shall exist
when and if the average number of Cardholder inquiries, disputes and complaints
received by Household each month over any six (6) month period equals or exceeds
15% of the total number of active debit and credit balance Accounts (Household
to notify Merchant after 3 months); or (c) if in Household's reasonable legal
judgment, any Applicable Law requires that this Agreement or either party's
rights or obligations hereunder be amended, modified, waived or suspended in any
material respect, including, without limitation, the amount of finance charges
or fees that may be charged or collected or the consumer rate that may be
charged on purchases with the Card.

c. Duties and Rights Upon Termination. Upon termination of this Agreement,
Merchant will promptly submit to Household all Card Sales, Sales Slips, Credit
Slips and other transaction documents or data made through the date of
termination. Household is not liable to Merchant for any direct or consequential
damages that Merchant may suffer as a result of Household's termination of this
Agreement. In the event this Agreement is terminated for any reason or notice of
termination is given by either party, Household may take such other reasonable
actions including but not limited to establishing and maintaining a reserve from
payments otherwise payable to Merchant to protect Household's rights under this
Agreement and to cover Chargebacks, fraud, customer disputes, warranties and
other amounts owing to Household (the "Reserve"). The amount of the Reserve
shall be equal to 110% of the amount of Chargebacks to the Merchant during the
most recent 12 month period and shall commence on the date of receipt of notice
of termination. The Reserve shall be maintained by Household for two (2) years
from the date of termination. Any unused portion of the Reserve shall be
returned to Merchant

<PAGE>

its successors or assigns at that end of two year period with interest. The
provisions of this subsection shall survive the termination of this Agreement.

d. Purchase Requirement. Upon termination of this Agreement, Merchant shall
purchase or arrange to purchase by a third party, the Accounts, without recourse
to Household and without representations or warranty, express or implied. The
purchase price shall be 100% of the full amount of all the outstanding Account
balances, plus accrued interest from the last billing cycle through the date of
sale less any unamortized Discount Fee on Credit Promotions. The purchase to
occur not later than ninety (90) days after the effective date of termination of
the Agreement and to be under such terms and conditions as are reasonably
acceptable to Merchant and Household. In any event beginning on the effective
date of termination of this Agreement, Merchant shall pay Household on a monthly
basis, within ten (10) days cf Household's request, a liquidation fee in the
amount of $3.75 per active Account per month, (i) until such time as the
purchase is complete and Household is paid the purchase price in full, or (ii)
if no purchase occurs, until such time as the outstanding Account
balances/receivables are liquidated and paid in full.

Section 16. Status of the Parties. In performing their responsibilities
pursuant to this Agreement, Household and Merchant are in the position of
independent contractors, and in no circumstances shall either party be deemed to
be the agent or employee of the other. This Agreement is not intended to create,
nor does it create and shall not be construed to create, a relationship of
principal and agent, partner or joint venturer or an association for profit
between Household or Merchant. Any amounts ever owing by Merchant pursuant to
this Agreement represent contractual obligations only and are not a loan or
debt.

Section 17. Force Majeure. Neither party to this Agreement shall be liable
to the other by reason of any failure in performance of this Agreement in
accordance with its terms if such failure arises out of a cause beyond the
control and without the fault or negligence of such party. Such causes may
include but are not limited to acts of God, of the public enemy or of civil or
military authority, unavailability of energy resources, system or communication
failure, delay in transportation, fires, strikes, riots or war. In the event of
any force majeure occurrence, the disabled party shall use its best efforts to
meet its obligations as set forth in this Agreement.

Section 18. Limited License. Merchant hereby authorizes Household for
purposes of this Agreement to use Merchant's name, logo, registered trademarks
and service marks (if any) and any other proprietary designations ("Proprietary
Materials") on the Cards, applications, periodic statements, billing statements,
collection letters or documents, promotional or advertising materials and
otherwise in connection with the Program, subject to Merchant's periodic
reasonable review of such use and to such reasonable specifications of Merchant.
Merchant represents and warrants that it has obtained appropriate federal and/or
state trademark registrations to protect its interest in the use and ownership
of the Proprietary Materials. Merchant shall, indemnify, defend and hold
Household harmless from any loss, damage, expense or liability arising from any
claims of alleged infringement of the Proprietary Materials (including
reasonable attorneys' fees and costs). Merchant may not use any name or service
mark of Household or any of its Affiliates in any manner without the prior
written consent of Household.

Section 19. Confidentiality. Merchant will keep confidential and not
disclose to any person or entity (except to employees, officers, partners or
directors of Merchant who are engaged in the implementation and execution of the
Program) all information, software, systems and data, that Merchant receives
from Household or from any other source, relating to the Program and matters
which are subject to the terms of this Agreement, including, but not limited to,
Cardholder names and addresses or other Account information, and shall use, or
cause to be used, such information solely for the purposes of the performance of
Merchant's obligations under the terms of this Agreement. Household will keep
confidential and not disclose to any person or entity (except employees,
officers, agents or directors of Household, its subsidiaries or affiliates who
are engaged in the implementation and execution of the Program) any information
that Household receives from Merchant which is designated confidential by
Merchant. All financial statements, business plans, sales results and similar
information provided to Household by Merchant are hereby deemed to be
confidential. In the event Household sells or assigns the Accounts or any
portion of the Accounts under the Program or Merchant purchases or arranges the
purchase of the Accounts by a third party pursuant to Section 15.d. above,
Household or Merchant may disclose any information under this provision
reasonably necessary or required to effectuate such sale, assignment or
purchase. The provisions of this Section 19 shall survive the termination of
this Agreement.

Section 20. Additional Products & Services. Household and/or any of its
Affiliates may at any time, whether during or after the term of this Agreement
and whether the Accounts are owned by Household, solicit Cardholders for any
other credit cards or other types of accounts or financial or insurance services
or products offered by Household and/or any of its Affiliates. Household shall
not directly solicit Cardholders for any products sold by Merchant or sell the
cardholder list to another consumer electronics or appliances retailer.

<PAGE>

Section 21. Notices. All notices required or permitted by this Agreement
shall be in writing and shall be sent to the respective parties as follows: if
to Household, to the Attention of President, (with a copy to the Attention of
General Counsel, HRS USA Law Department, 2700 Sanders Road, Prospect Heights,
Illinois 60070); if to Merchant, to the Attention of Chief Financial Officer at
their respective addresses set forth on page one of this Agreement or such other
addresses as each party may designate to the other by notice hereunder. Said
notices shall be deemed to be received when sent to the above addresses (i) upon
three (3) Business Days after deposit in the U.S. first class mail with postage
prepaid, (ii) upon personal delivery, or (iii) upon receipt by telex, facsimile,
or overnight express courier service or mail.

Section 22. Amendments and Supplementary Documents. Household may amend
this Agreement upon ten (10) days' prior written notice to Merchant if such
modification is reasonably determined by Household to be required by any state
or federal law, rule, regulation, governmental or judicial order, opinion,
interpretation or decision; provided, however, Merchant may terminate this
Agreement upon ninety (90) days prior written notice to Household if such
modification or amendment results in a material adverse change in the financial
expectations of Merchant under this Agreement; provided further, however,
Merchant waives the right to terminate this Agreement under this Section 22 if
such notice is not provided to Household within sixty (60) days after receiving
notice from Household of a modification or amendment. Reference herein to "this
Agreement" shall include any schedules, appendices, exhibits, and amendments
hereto. Any amendment or modification to this Agreement must be in writing and
signed by a duly authorized officer of Household and Merchant to be effective
and binding upon the parties; no oral amendments or modifications shall be
binding upon the parties.

Section 23. Assignment. This Agreement is binding upon the parties and
their successors and to Household assigns. Notwithstanding, Merchant may not
assign this Agreement without the prior written consent of Household; any
purported assignment without such consent shall be void. Household may without
Merchant's consent assign this Agreement or any of the rights or obligations
hereunder only to any Affiliate of Household at any time. In the event of such
assignment, the assignee shall have the same rights and remedies as Household
under this Agreement.

Section 24. Nonwaiver and Extensions. Neither party shall by any act,
delay, omission, or otherwise be deemed to have waived any rights or remedies
hereunder. Either party's failure to enforce any of its rights under this
Agreement shall not affect any other right of such party or the same right in
any other instance.

Section 25. Rights of Persons Not a Party. This Agreement shall not create
any rights on the part of any person or entity not a party hereto, whether as a
third party beneficiary or otherwise.

Section 26. Section Headings. The headings of the sections of this
Agreement are for reference only, are not a substantive part of this Agreement
and are not to be used to affect the validity, construction or interpretation of
this Agreement or any of its provisions.

Section 27. Integrations. This Agreement contains the entire agreement
between the parties. There are merged herein all prior oral or written
agreements, amendments, representations, promises and conditions in connection
with the subject matter hereof. Any representations, warranties, promises or
conditions not expressly incorporated herein shall not be binding on the
parties.

Section 28. Governing Law/Severability. This Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois. If any
provision of this Agreement is contrary to Applicable Law, such provision shall
be deemed ineffective without invalidating the remaining provisions hereof.

(THIS SPACE LEFT BLANK INTENTIONALLY.)

<PAGE>

Section 29. JURISDICTION. ANY SUIT, COUNTERCLAIM, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT MUST BE BROUGHT BY MERCHANT IN THE
COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS; AND THE MERCHANT HEREBY IRREVOCABLY SUBMITS TO
THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND ANY APPELLATE COURTS THEREOF FOR
THE PURPOSE OF ANY SUCH SUIT, COUNTERCLAIM, ACTION, PROCEEDING OR JUDGMENT (IT
BEING UNDERSTOOD THAT SUCH CONSENT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS
WAIVES ANY RIGHT TO SUBMIT ANY DISPUTES HEREUNDER TO ANY COURTS OTHER THAN THOSE
ABOVE).

Section 30. WAIVER OF JURY TRIAL. HOUSEHOLD AND MERCHANT HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION,
SUIT, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY
RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY
IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM
ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY
SUCH ACTION, SUIT, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND
NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT FOR HOUSEHOLD AND
MERCHANT ENTERING INTO THIS AGREEMENT.

IN WITNESS WHEREOF, Household and Merchant have caused their duly
authorized representatives to execute this Merchant Agreement as of the date set
forth above.

BANK: MERCHANT:

HOUSEHOLD BANK (SB), N.A. TOPS APPLIANCE CITY, INC.

By:________________________________ By:/s/Thomas L. Zambelli
________________________________

Print Name:_________________________ Print Name: Thomas L. Zambelli

Title:______________________________ Title: EVP-CFO

ATTESTED OR WITNESSED

By: /s/ Wayme F. Sloneker

Print Name:Wayme F. Sloneker

Title: Corporate Customer Finane Mgr.
Merchant's Federal Tax ID #: 22-3174554

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-29-1998 DEC-29-1998
<PERIOD-END> DEC-29-1998 DEC-29-1998
<CASH> 2,672 2,672
<SECURITIES> 0 0
<RECEIVABLES> 1,849 1,849
<ALLOWANCES> 0 0
<INVENTORY> 62,060 62,060
<CURRENT-ASSETS> 69,709 69,709
<PP&E> 29,883 29,883
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 106,213 106,213
<CURRENT-LIABILITIES> 53,339 53,339
<BONDS> 20,403 20,403
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 13,582 13,582
<TOTAL-LIABILITY-AND-EQUITY> 106,213 106,213
<SALES> 290,359 80,790
<TOTAL-REVENUES> 290,359 80,790
<CGS> 226,642 63,207
<TOTAL-COSTS> 226,642 63,207
<OTHER-EXPENSES> 59,485 15,635
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,282 1,741
<INCOME-PRETAX> (2,435) (178)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,435) (178)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 1,309 0
<CHANGES> 0 0
<NET-INCOME> (1,126) (178)
<EPS-PRIMARY> (0.12) (0.01)
<EPS-DILUTED> (0.12) (0.01)

</TABLE>