<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>tenk.txt
<DESCRIPTION>FORM 10-K
<TEXT>
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended November 1, 2003
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 for the Transition Period from ---------- to ---------.
Commission File No. 1-4626
Harvey Electronics, Inc.
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(Name of issuer in its charter)
New York 131534671
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey 07071
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 842-0078
--------------
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
-------------------------------------------------------------------------------
(Title of Class)
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[ ]
Indicate by checkmark if disclosure of delinquent filers in response to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Exchange Act Rule 12b-2). Yes[ ] No[X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 15, 2004; Common Stock 3,324,525 shares.
As of May 2, 2003, the aggregate market value of the registrant's Common Stock
held by non-affiliates computed by reference to the price at which the stock was
sold was $3,069,539. The shares of Common Stock are currently traded on the
NASDAQ SmallCap Market under the symbols "HRVE".
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I
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<S> <C>
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
PART III
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Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
PART IV
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Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
SIGNATURES
----------
EXHIBIT INDEX
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Ex-23 Consent of BDO Seidman, LLP
Ex-23.1 Consent of Ernst and Young, LLP
Ex-31.1 Certification - President
Ex-31.2 Certification - CFO
Ex-32.1 Certification - President
Ex-32.2 Certification - CFO
</TABLE>
Part I
In this Annual Report on Form 10-K, the "Company," "Harvey", "Harvey
Electronics", "we," "us," and "our" mean Harvey Electronics, Inc.
This Annual Report on Form 10-K contains forward-looking statements regarding
Harvey's performance, strategy, plans, objectives, expectations, beliefs and
intentions. The actual outcome of the events described in these forward-looking
statements could differ materially. This report, and especially the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contains a discussion of some of the factors that could
contribute to those differences.
Item 1. Business.
General
Harvey Electronics is engaged in the retail sale, service and custom
installation of high quality audio, video and home theater equipment. The
equipment includes high fidelity components and systems, digital versatile disc
players ("DVD"), high definition television ("HDTV"), direct view projection,
plasma flat-screen, LCD flat panel and DLP television sets, audio/video
furniture, digital satellite systems, conventional telephones, service contracts
and related accessories. The Company has been engaged in this business in the
New York Metropolitan area for seventy-seven years. The Company currently
operates nine locations; seven Harvey specialty retail stores and two Bang &
Olufsen branded stores. There are two Harvey locations in Manhattan and five
suburban locations in Paramus, New Jersey; Mt. Kisco, in Westchester; Greenwich,
Connecticut; Greenvale/Roslyn, on the north shore of Long Island, and in
Eatontown, New Jersey. The Bang & Olufsen branded stores are located in Union
Square at Broadway and 21st Street, in Manhattan, and in Greenwich, Connecticut
on Greenwich Avenue.
The Company's stores are designed to offer an attractive and pleasing
environment and to display its products and custom installation services in
realistic home settings commonly known in the industry as "lifestyle home
vignettes." Sales personnel are highly trained professionals with extensive
product knowledge. This contrasts sharply with a more rushed atmosphere and
lesser-trained personnel of mass merchants.
Products
The Company offers its customers a wide selection of high-quality consumer
audio, video and home theater products, the distribution of which is limited to
specialty retailers (generally referred to in the industry as "esoteric
brands"). The Company is one of the country's largest retailers of "esoteric
brands" manufactured by Bang & Olufsen, Crestron, Lexicon, Linn, Marantz,
McIntosh, NAD, Vienna Acoustics, Sonus Faber, Krell, Loewe, Martin Logan and
Fujitsu. Many of these vendors' products have been sold by the Company for a
number of years. The Company believes that it benefits from strong working
relationships with these manufacturers. See below, for a discussion about Bang &
Olufsen.
For the fiscal year ended November 1, 2003, the Company's audio product sales
represented approximately 47% of the Company's net sales and yielded gross
profit margins of approximately 41%. The Company's video product sales
represented approximately 45% of the Company's net sales and yielded gross
profit margins of approximately 30%. The Company also provides installation
services for the products it sells. Custom installation, as commonly referred to
in the industry includes both equipment sales and labor income. Custom
installation of both equipment and related labor accounted for approximately 55%
of the Company's net sales in fiscal 2003. The labor portion of custom
installation presently represents approximately 8% of net sales, while the
equipment portion accounted for 47% of net sales. The Company also sells
extended warranties on behalf of third party providers. Sales of extended
warranties which yielded a gross profit margin in excess of 58%, represented
approximately 3% of the Company's net sales.
The following table shows, by percentage, the Company's net product sales
attributable to each of the product categories for the periods indicated. Audio
components include speakers, subwoofers, receivers, amplifiers, preamplifiers,
compact disc players, cassette decks, turntables and tuners. The Company also
sells digital satellite systems (DSS) which are included in the VCR/DVD/DSS
category. Accessories primarily include headphones, surge protectors and
projection screens. The miscellaneous category includes conventional telephones,
answering machines, radios and other portable products.
<TABLE>
<CAPTION>
November 1, October October October October
Fiscal Year Ended: 2003 26, 2002 27, 2001 28, 2000 30, 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Audio Components 29% 31% 39% 43% 49%
Mini Audio Shelf Systems 4 5 6 7 8
TV and Projectors 39 39 30 25 18
VCR/DVD/DSS 5 6 8 7 7
Furniture 5 5 5 5 5
Cable and Wire 5 5 5 5 5
Accessories 9 7 6 6 6
Extended Warranties 3 1 - 1 1
Miscellaneous 1 1 1 1 1
----------------------------------------------------------------------
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
The percentage of sales by each product category is affected by, among other
things, promotional activities, consumer preferences, store displays, the
development of new products and elimination or reduction of existing products
and, thus, a current sales mix may not be indicative of the future sales mix.
The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target customers desire and can afford such products. New
technologies, such as HDTV, plasma flat-screen, LCD flat panel and DLP
televisions were recently introduced. The plasma flat-screen or LCD flat panel
television allows a small or large screen television to be only four inches wide
from front to back. This allows the set to be far less obtrusive and more easily
integratable into the home. High definition television has significantly
improved picture quality.
The Company intends to continue its recent emphasis on custom installation
(representing 55% of net sales in fiscal 2003), which can extend from a single
room audio/video system to an entire house with a combined selling price of
installation, labor and product from about $5,000 to in excess of $100,000. The
Company believes custom installation provides the opportunity to bundle products
and increase margins. In fiscal 2004, the Company will continue to expand its
merchandising efforts of complete movie theaters in the home, in-home lighting
systems and distributed in-home cabling for the integration of computer
networks, entertainment systems and other related services. The Company will
continue to showcase the lifestyle benefits of plasma and LCD televisions
throughout the home.
Based on customers' desires, custom installation projects frequently expand
on-site. A single room home theater, for example, during the course of the
installation can grow into a multi-room system with increased margins.
Offering custom installation affords the Company a unique selling opportunity
because it may not be available at mass merchants and can generate repeat
customers and customer referrals. Due to the complexity of the installation
provided by the Company, customers generally remain with the Company, providing
the opportunity to sell upgrades to existing customers. We believe the recent
introduction of digital video products, network cabling, in-home lighting
systems, as well as other emerging technologies, present significant
opportunities for such upgrades.
Operations
Supplies, Purchasing and Distribution
The Company purchases its products from approximately eighty manufacturers, ten
of which accounted for approximately 61% of the Company's purchases for the
fiscal year ended November 1, 2003. These ten manufacturers are Bang & Olufsen,
Boston Acoustics, Fujitsu, Marantz, Monster Cable, Pioneer Elite, Runco,
Samsung, Sharp and Sony. Fujitsu and Sony each accounted for more than ten (10%)
percent of the Company's purchases for the fiscal year ended November 1, 2003,
and Bang & Olufsen, Marantz, Samsung and Sharp each accounted for more than five
(5%) percent of purchases for such period.
The Company has entered into dealer agreements with primarily all of its
vendors. Under each dealer agreement, the Company is authorized to sell the
manufacturer's products from specified retail locations to retail customers and
cannot sell the products by telephone or mail order. Each agreement is for a
term of a year or two, subject to renewal or extension.
The Company believes that competitive sources of supply would be available for
many of the Company's products if a current vendor ceased to supply to the
Company. However, a loss of a major source of supply of limited distribution
products could have an adverse impact on the Company.
Bang & Olufsen ("B&O") products have been sold by the Company since 1980. As B&O
focuses on developing B&O licensed stores ("Branded Stores") throughout the
world, its products are available only in Branded Stores.
The Company opened its first B&O Branded Store in the Union Square area of lower
Manhattan in July 1999. In October 2000, the Company opened its second B&O
Branded Store in Greenwich, Connecticut.
These Branded Stores sell highly differentiated Bang & Olufsen products,
including uniquely designed audio systems, speakers, telephones, headphones and
accessories. The stores also sell video products including LCD projectors,
HDTV's, DVD players, plasma flat-screen and LCD flat panel televisions, A/V
furniture and accessories. The store also offers professional custom
installation of multi-room audio and home theater systems.
Due to the Company's strong relationships with many of its suppliers and its
volume of purchases, the Company has also been able to obtain manufacturers'
rebates based on volume buying levels. On occasion, the Company has been able to
negotiate favorable terms, such as extended payment terms, additional
cooperative advertising contributions or lower prices, on large purchases. In
addition to being a member of a consumer electronics industry buying group
called Home Theater Specialists of America (HTSA), the Company is also a member
of Professional Audio Retailers Association (PARA) and Custom Electronics Design
Installation Association (CEDIA), both of which provide the Company with
additional training in sales and technology.
Purchases are received at the Company's 11,800 square foot warehouse located in
Fairfield, New Jersey. Merchandise is distributed to the Company's retail stores
at least twice a week (and more frequently, if needed), using the Company's
employees and transportation.
The Company's management information system tracks current levels of sales,
inventory, purchasing and other key information and provides management with
information which facilitates merchandising, pricing, sales management and the
management of warehouse and store inventories. This system enables management to
review and analyze the performance of each of its stores and sales personnel on
a periodic basis. The central purchasing department of the Company monitors
current sales and inventory at the stores on a daily basis. In addition, the
Company currently conducts a physical inventory two times a year and between
such physical inventories it conducts monthly and daily cycle counts on selected
types of inventory. The purchasing department also establishes appropriate
levels of inventory at each store and controls the replenishment of store
inventory based on the current delivery or replenishment schedule.
The Company historically has not had material losses of inventory and does not
experience material losses due to cost and market fluctuations, overstocking or
technology. The Company maintains specific and general inventory reserves
aggregating $130,000, $130,000 and $105,000, for fiscal years 2003, 2002 and
2001, respectively. The Company's inventory turnover for fiscal years 2003, 2002
and 2001 was approximately 3.4 times for all years.
Sales and Store Operations
Retail sales are primarily made for cash or by major credit cards. Revenues are
recorded by the Company when the product or service is delivered or rendered to
customers. Customer deposits are recorded as liabilities until the product is
delivered, at which time a sale is recorded and the liability for the customer
deposit is relieved.
In addition, customers who qualify can obtain longer term financing with a
Harvey credit card, which the Company makes available to its customers. The
Harvey credit cards are issued by two unrelated finance companies. All
transactions with these unrelated finance companies are without recourse to the
Company. The Company also periodically, as part of its promotional activities,
offers manufacturer sponsored financing to its customers.
Each store is operated by a store manager and a senior sales manager. Store
managers report to a Vice President of Operations who oversees all sales and
store operations, and who is further responsible for sales training and the
hiring of all retail employees. Every Company store has in-home audio/video
specialists who will survey the job site at a customer's home, design the custom
installation and provide a cost estimate. Each store independently services its
custom installations through a project manager and experienced installers
employed at the store. The Company's stores are aided by the Company's Director
of Custom Installation for more difficult and technical projects. The Vice
President of Merchandising and President of the Company determine what products
will be demonstrated and presented at each store. All stores are staffed with
professionally trained salespeople and warehouse personnel. Salespeople are paid
a base salary plus commission based on gross margins.
All stores have an on-line point of sale computer system which enables the store
managers and corporate headquarters to track sales, margins, inventory levels,
customer deposits, back orders, merchandise on loan to customers, salesperson
performance and customer histories. Store managers perform sales audit functions
before reporting daily results to the sales audit group in the main office in
Lyndhurst, New Jersey.
Services and Repairs
Products under warranty are delivered to the appropriate manufacturer for
repair. Other repairs are sent to the manufacturers or an independent repair
company. Revenues from non-warranty services are not material.
The Company offers an extended warranty contract for most of the audio, video
and other merchandise it sells, which provides coverage beyond the manufacturer
warranty period. Extended warranties are provided by an unrelated insurance
company on a non-recourse basis to the Company. The Company collects the retail
sales price of the extended warranty contract from customers and remits the
customer information and the cost of the contract to the insurance company.
Sales of extended warranty contracts have increased in fiscal 2003 and represent
approximately 3% of the Company's net sales. The warranty obligation is solely
the responsibility of the insurance company. See notes to the financial
statements for additional information on warranty sales and the presentation of
such sales in the Company's Statements of Operations.
Competition
The Company competes in the New York Metropolitan area with mass merchants, mail
order houses, discount stores and numerous other consumer electronics specialty
stores. The retail electronics industry is dominated by large retailers with
massive, "big box" retail facilities which aggressively discount merchandise.
These retailers operate on narrow profit margins and high volume, driven by
aggressive advertising emphasizing low prices. Nationwide industry leaders are
Circuit City and Best Buy. The New York region is dominated by Circuit City,
Best Buy, and local chains including P.C. Richard & Son, J&R Music World and 6th
Avenue Electronics.
Many of the competitors sell a broader range of electronic products, including
computers, camcorders and office equipment, and many have substantially larger
sales and greater financial and other resources than the Company. The Company
competes by positioning itself as a retailer of high quality limited
distribution audio and video products and, we believe, more importantly, by
offering upscale sophisticated custom installations, which are not generally
offered by all of the mass merchants.
Very few, if any, of the audio products sold by the Company, other than Bose and
certain Sony products, radios and other portable products, are available at the
mass merchants. Of the major video brands sold by the Company, generally only
Samsung, Sony and Mitsubishi televisions are sold by the mass merchants. In many
of these cases, the Company sells models which are not sold by the mass
merchants.
The Company seeks to reinforce its positioning by displaying its products and
custom installation services in customized movie theaters built within the home
and in lifestyle home vignettes in an attractive and pleasing store environment
and by offering personalized service through trained sales personnel who are
fully familiar with all of the Company's products. Additionally, we believe the
Company differentiates itself by offering programming capabilities that address
complex technological integration issues and ultimately give the consumer easy
remote control access to multiple devices.
Internet Website
In fiscal 2000, the Company launched its new website, www.harveyonline.com, to
support the continued growth of its exclusive consumer electronics and custom
home theater installation showrooms. The website was designed to extend Harvey's
extraordinary in-store experience onto the Internet as a vehicle to increase
customer traffic at the Company's retail locations. On-line sales, which are
insignificant, are available seven days a week, twenty-four hours a day, and are
a secondary goal of the website. Harvey customers can order on-line within the
Company's trading area in the metropolitan New York marketplace.
Visitors to the website are able to leave inquiries, request home theater
systems based on budget and room size, reserve equipment or schedule an in-home
or in-store consultation with a Harvey professional. Product specification,
price and warranty comparisons are also available on the site.
Advertising
The Company believes it has a strong and important brand in its marketplace. The
Company strives to promote its superior products and sophisticated services in
its advertising campaign to both men and women. In fiscal 2004, the Company will
continue to expand its efforts in its important customer relations management
program.
Currently, the Company has radio, direct mail, print advertising and the
Internet with www.harveyonline.com, the Company's website, to promote its brand.
The Company currently uses large, frequent print advertising, emphasizing image,
products, and technology in the New York Times, New York Times Magazine,
Newsday, Bergen Record, Greenwich Times, The Journal News, Asbury Park Press,
and the Gannett Suburban News. The Company also distributes direct mail
advertising several times a year to reach its significant customer database.
Certain direct mail promotions invite customers to seminars on new products, or
technology, and can be supported, in part, by the manufacturers. Radio
advertising is currently running on the two most listened to news stations on AM
radio within the Company's market.
All advertising consistently offers attractive financing alternatives on
purchases on credit without interest for an extended period of time.
The following table shows the Company's gross advertising costs and net
advertising expense as a percentage of net sales for the periods presented. Net
advertising expense represents gross advertising cost less advertising income
received from the manufacturers.
<TABLE>
<CAPTION>
November 1, October October October October
Fiscal Year Ended 2003 26, 2002 27, 2001 28, 2000 30, 1999
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<S> <C> <C> <C> <C> <C>
Gross advertising costs $2,540,000 $2,665,000 $2,864,000 $2,701,000 $1,220,000
Net advertising expenses 366,000 632,000 1,206,000 934,000 227,000
Percentage of net sales .9% 1.5% 3.3% 2.7% 1.1%
</TABLE>
Licenses and Intellectual Properties
The Company owns four registered service marks. "HARVEY ELECTRONICS," issued in
June 1982, and "Harvey", issued March 7, 1989 are currently used by the Company.
"Not Your Ordinary Electronics Store", issued in July 2002 and "The Temple of
Home Theater", issued May 13, 1997 are not used by the Company. The Company
believes that the service marks HARVEY ELECTRONICS and HARVEY have significant
value and are important in marketing the Company's products and services.
Employees
As of November 1, 2003, the Company employed approximately 147 full-time
employees of which 17 were management personnel, 13 were administrative
personnel, 57 were salespeople, 18 were warehouse workers and 42 were engaged in
custom installation.
Of the salespeople, warehouse workers, and installation staff, 97 people are
covered by a collective bargaining agreement with the Company, which expires
August 1, 2004. The Company has never experienced a work stoppage and believes
that its relationships with its employees and the union are satisfactory.
Item 2. Properties
All of the premises the Company presently occupies are leased. Management
believes that the Company's facilities are adequate and suitable for its present
business. The Company believes that adequate locations are available for future
expansion.
The Company leases approximately 3,900 square feet at 205 Chubb Avenue,
Lyndhurst, New Jersey, which the Company uses as its corporate office at
approximately $40,000 per year, including other occupancy costs. This office
space is under lease through January 2006. The Company also leases an 11,800
square foot warehouse in Fairfield, New Jersey at approximately $132,000 per
year, including other occupancy costs, pursuant to a lease which expires
November 2005.
The Company leases the following retail premises:
<TABLE>
<CAPTION>
Expiration
Date of
Current Renewal Approximate
Location Annual Lease Options Footage
------------------------------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
2 West 45th Street 6/30/2005 None 7,500
New York, NY
556 Route 17 North 6/30/2015 None 7,000
Paramus, NJ
888 Broadway 12/31/2006 None 4,000
at 19th St.
New York, NY
(within ABC Carpet & Home)
19 West Putnam Ave. 9/30/2006 5 years 5,300
Greenwich, CT
44 Glen Cove Road 8/15/2008 None 4,600
Greenvale, NY
115 Main St. 8/31/2008 None 3,500
Mt. Kisco, NY
927 Broadway 12/31/2005 5 years 1,500
New York, NY
(Bang & Olufsen Branded Store)
86 Greenwich Ave. 6/30/2005 5 years 1,500
Greenwich, CT
(Bang & Olufsen Branded Store)
57 Route 36 West 1/01/2011 10 years 6,500
Eatontown, NJ
</TABLE>
Item 3. Legal Proceedings.
Except as set forth herein, the Company believes that it is not a party to any
material asserted legal proceedings other than those arising in the ordinary
course of business and which are most likely fully covered by insurance (except
for deductible amounts). The Company maintains general liability and commercial
insurance in amounts believed to be adequate. However, there can be no assurance
that such amounts of insurance will fully cover claims made against the Company
in the future.
In January 2004, the Company agreed to satisfy certain long outstanding and
disputed tax claims ($52,000) under an amnesty program offered by the City of
New York. The tax claims related to a prior subsidiary for fiscal years 1987 and
1988. The Company satisfied the claim, in full, paying $90,000 (including
interest), under the amnesty program. The Company recorded $50,000 to Selling,
General and Administrative expenses in fiscal 2003 relating to this matter.
Prior to the settlement of this matter, the Company had recorded a liability of
$40,000 relating to this claim.
In July 2003, the Company received a notice and information request from the
Pennsylvania Department of Environmental Protection ("PADEP"). The notice stated
that PADEP considers the Company a potentially responsible party for
contamination related to a septic drain field located at a former Chem Fab
Corporation ("Chem Fab") site in Doylestown, Pennsylvania.
PADEP's notice stated that if Chem Fab was previously owned by Harvey Radio,
Inc. ("Harvey Radio") and if the Company was a successor to Harvey Radio, then
the Company could be, in part, responsible for any environmental investigation
or clean up actions necessary at this site.
Harvey Radio was the predecessor of The Harvey Group, Inc. ("Harvey Group"),
which filed for relief under Chapter 11 of the United States Bankruptcy Code in
August 1995. The Company is the surviving retail business of the Harvey Group,
which emerged from bankruptcy in December 1996. Chem Fab was a wholly-owned
subsidiary of Harvey Radio as of September 1967. The capital stock of Chem Fab
(a then wholly-owned subsidiary of Harvey Group) was sold by the Company to the
Boarhead Corporation in January 1978. The disposition of Chem Fab was prior in
time to the Company's bankruptcy petition date of August 3, 1995.
On August 29, 2003, the Company sent its response letter to PADEP. The Company's
response stated that any action by PADEP to recover any money from the Company
relating to any environmental investigation or cleanup related to Chem Fab is in
violation of the injunctions imposed by virtue of the Company's 1995 Bankruptcy
proceeding. The response letter to PADEP specifically referred to two cases with
respect to entities subject to a discharge in bankruptcy by the Southern
District of New York and the Second Circuit Court of Appeals. These cases may
support the Company's position enjoining any further action against the Company.
The Company believes PADEP's claim, even absent the bankruptcy injunction, would
be improper against the Company, as Harvey Group was a shareholder of Chem Fab
and Chem Fab's capital stock was sold in 1978, as previously stated.
The Company advised PADEP that any further action to pursue a claim against the
Company would result in the Company bringing a motion to reopen its bankruptcy
case, solely to address the PADEP claim and further, the Company would commence
contempt proceedings against PADEP. The Company is awaiting PADEP's response.
The Company has also retained special Pennsylvania environmental counsel for
advice with respect to PADEP's request for information and other matters with
respect to the claim.
Furthermore, the number of other parties that may be responsible, their ability
to share in the cost of a clean up and whether the Company's existing or prior
insurance policies provide coverage for this matter is not known. At this time,
it is impossible for the Company to determine the outcome or cost to the Company
of this matter.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the NASDAQ SmallCap Market under the
symbols "HRVE". The Company's warrants to purchase Common Stock, previously
traded under the symbol "HRVEW", expired March 30, 2003.
The outstanding shares of Common Stock are currently held by approximately 1,600
shareholders of record, and the Preferred Stock by four holders of record. The
transfer agent and registrar for the Common Stock is Registrar and Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016.
The following table indicates the quarterly high and low stock prices for fiscal
years 2003 and 2002:
High Low
----------------- ----------------
Fiscal Year 2003
----------------
February 1, 2003 $1.30 $.81
May 3, 2003 1.15 .86
August 2, 2003 1.16 .80
November 1, 2003 1.10 .80
Fiscal Year 2002
----------------
January 26, 2002 1.95 .65
April 27, 2002 1.65 1.10
July 27, 2002 1.59 .71
October 26, 2002 1.10 .65
The Company has paid no dividends on its Common Stock for the last two years.
The Company's lender restricts the payment of dividends on the Company's Common
Stock. The Company does not expect to pay dividends on Common Stock in the
future.
On October 9, 2003, the Company received notice from NASDAQ that its Common
Stock failed to maintain a minimum bid price of $1.00 over the previous 30
consecutive trading days as required by The Nasdaq SmallCap Market set forth in
NASDAQ Small Cap Market Marketplace Rule 4310(c)(4)(the "Rule") and that
pursuant to the Rule, the Company has until April 6, 2004 to regain compliance.
In the event that at anytime before April 6, 2004 the bid price of the Company's
common stock closes at $1.00 per share or more for a minimum of ten consecutive
trading days, NASDAQ staff will notify the Company in writing that the Company
complies with the Rule. If the Company does not meet this requirement and the
Company's Common Stock is delisted from the NASDAQ SmallCap Market, it could
further have an adverse effect on the Company's stock price.
Description of Securities
The total authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock with a par value of $0.01 per share ("Common Stock"), and 10,000
shares of 8.5% Cumulative Convertible Preferred Stock with a par value of $1,000
per share. The following descriptions contain all material terms and features of
the securities of the Company and are qualified in all respects by reference to
the Company's Certificate of Incorporation and Amended and Restated By-Laws of
the Company, copies of which are filed as exhibits.
Common Stock
The Company is authorized to issue 10,000,000 shares of Common Stock with a par
value of $0.01 per share. As of January 15, 2004, 3,324,525 shares are
outstanding and held by approximately 1,600 shareholders of record.
The holders of Common Stock are entitled to one vote per share on all matters to
be voted on by shareholders. There is no cumulative voting with respect to the
election of directors, with the result that holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors from sources legally available therefore. In
the event of liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, and after payment in full of the amount payable in
respect of the Preferred Stock, the holders of Common Stock are entitled, to the
exclusion of the holders of the Preferred Stock, to share ratably in the assets
of the Company available for distribution to stockholders after payment of
liabilities and after provision for each class of stock, if any, having
preference over the Common Stock. Holders of Common Stock have no preemptive
rights. All outstanding shares are, and all shares to be sold and issued as
contemplated hereby, will be fully paid and non-assessable and legally issued.
The Board of Directors is authorized to issue additional shares of Common Stock
within the limits authorized by the Company's charter and without shareholder
action.
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of 10,000
shares of 8.5% Cumulative Convertible Preferred Stock ("Preferred Stock") with a
par value of $1,000 per share. As of January 15, 2004, 827 shares of Preferred
Stock were issued and outstanding and were held by four holders of record.
The Preferred Stock may be issued from time-to-time without shareholder approval
in one or more classes or series. A holder of the Preferred Stock is not
entitled to vote except as required by law.
Dividends on the Preferred Stock are cumulative from the day of original
issuance, whether or not earned or declared. In the event the Board of Directors
declares dividends to be paid on the Preferred Stock, the holders of the
Preferred Stock will be entitled to receive semiannual dividends at the rate of
eighty-five ($85) dollars per share payable in cash on the last business day of
June and December in each year. Total Preferred Stock dividends of $70,295,
$74,151 and $107,603 were paid in fiscal years 2003, 2002 and 2001,
respectively. In addition, no dividend shall be paid, or declared, or set apart
for payment upon, and no other distribution shall at any time be declared or
made in respect of, any shares of Common Stock, other than a dividend payable
solely in, or a distribution of, Common Stock, unless full cumulative dividends
of the Preferred Stock for all past dividend periods and for the then current
dividend period have been paid or have been declared and a sum sufficient for
the payment thereof has been set apart.
The Preferred Stock shall be redeemable, at the Company's option, in whole or in
part, upon payment in cash of the Redemption Price in respect of the shares so
redeemed. The "Redemption Price" per share shall be equal to the sum of (i) One
Thousand and 00/100 ($1,000.00) Dollars and (ii) all dividends accrued and
unpaid on such shares to the date of redemption. If less than all of the
outstanding Preferred Stock is to be redeemed, the redemption will be in such
amount and by such method (which need not be by lot or pro rata), and subject to
such other provisions, as may from time to time be determined by the Board of
Directors.
In the event of liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, resulting in any distribution of its assets to its
shareholders, the holders of the Preferred Stock outstanding shall be entitled
to receive in respect of each such share an amount which shall be equal to the
Redemption Price, and no more, before any payment or distribution of the assets
of the Company is made to or set apart for the holders of Common Stock.
Commencing January 1, 2001, the conversion price of the Company's Preferred
Stock was $1.2333 and thus convertible into 670,559 shares of Common Stock,
(calculated from the closing bid price of the Common Stock over the 45 trading
days preceding January 1, 2001). 875 shares of Preferred Stock were originally
issued by the Company. In June 2002, 48 shares of Preferred Stock were converted
to 38,920 shares of the Company's Common Stock by a preferred shareholder.
If at any time prior to the exercise of the conversion rights afforded the
holders of the Preferred Stock, the Preferred Stock is redeemed by the Company,
in whole or in part, then the conversion right shall be deemed canceled with
respect to such redeemed stock, as of the date of such redemption.
In case of any capital reorganization or any reclassification of the Common
Stock, or in case of the consolidation or merger of the Company with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation, merger, or conveyance.
Item 6. Selected Financial Data (amounts in thousands, except per share and
number of stores data)
Set forth below is selected financial and operating data for each of the five
years ended November 1, 2003. The selected statement of operations and balance
sheet data for each of the five years ended November 1, 2003 have been derived
from our audited financial statements. Certain items in the fiscal 2002 and 2001
financial data have been reclassified to conform to fiscal 2003 presentation.
Amounts relating to fiscal 2000 and 1999 were not material and not reclassified.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes thereto included elsewhere in this Form
10K.
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
November 1, October 26, October 27, October 28, October 30,
2003 2002 2001 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $42,448(3) $41,326(3) $36,606(3) $ 34,355 $ 21,386
Cost of sales 25,141(3) 24,973(3) 22,471(3) 20,813 13,082
------------------------------------------------------------------------------
Gross profit 17,307 16,353 14,135 13,542 8,304
Gross profit percentage 40.8% 39.6% 38.6% 39.4% 38.8%
Interest expense 343 359 340 218 179
Selling, general and administrative expenses 16,555 15,806 15,128 12,856 9,043
Other income 73 116 83 34 72
------------------------------------------------------------------------------
Income (Loss) before income taxes 482 304 (1,250) 502 (846)
Income taxes 195 124 - 185 -
------------------------------------------------------------------------------
Net income (loss) 287 180 (1,250) 317 (846)
Preferred Stock dividend requirement (70) (72) (75) (75) (74)
------------------------------------------------------------------------------
Net income (loss) attributable to
Common Stock $217 $108 $(1,325) $242 $(920)
==== ==== ======== ==== ======
Net income (loss) per common share
applicable to common shareholders:
Basic $.07 $.03 $(.40) $.07 $(.28)
==== ==== ====== ==== ======
Diluted $.06 $.03 $(.40) $.07 $(.28)
==== ==== ====== ==== ======
Shares used in the calculation of net income
(loss) per common shares:
Basic 3,324,525 3,297,827 3,282,833 3,282,833 3,282,833
========= ========= ========= ========= =========
Diluted 3,866,415 3,907,401 3,282,833 3,346,307 3,282,833
========= ========= ========= ========= =========
Stores opened at end of period 9 9 9 8 7
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
November October October October October
1, 2003 26, 2002 27, 2001 28, 2000 30, 1999
--------------- ---------------- -------------- -------------- ------------------
Working capital
<S> <C> <C> <C> <C> <C>
(deficiency) $ 2,950 (2) $ (600)(1) $(1,416)(1) $ 747(1) $ 925(1)
Total assets 12,325 12,151 12,727 11,437 9,745
Long-term liabilities 2,968 156 160 215 251
Total liabilities 8,380(2) 8,423(2) 9,107(1) 6,590(1) 5,140(1)
Total shareholders'
equity 3,945 3,728 3,620 4,847 4,605
<FN>
(1) It is important to note that at the end of fiscal 2002, 2001, 2000 and
1999, the Company's outstanding balances on its revolving line of credit
facility ($3,119,000, 3,442,000, 1,068,000 and $1,477,603, respectively)
were classified as current liabilities, despite the long-term nature of the
Company's then outstanding credit facility. The presentation as a current
liability was in accordance with EITF 95-22, "Balance Sheet Classification
of Borrowings Outstanding under Revolving Credit Agreements that include
both a Subjective Acceleration Clause and a Lock-Box Arrangement". Working
capital was negatively impacted by the Company's significant increase in
the revolving line of credit facility in fiscal 2001, which was necessary
to fund retail store expansion and renovation.
(2) The Company entered into a new $7.5 million credit facility on November 21,
2003 and the existing credit facility was simultaneously satisfied and
terminated. As the new credit facility expires in five years and does not
include both a subjective acceleration clause and a lock box arrangement,
in accordance with EITF 95-22, the Company classified the balance
outstanding, at November 1, 2003 ($2,726,000), under the new credit
facility as a long-term liability.
(3) The Company sells extended warranty contracts for a third party provider.
The profit on extended warranty sales is considered commission at the time
of sale. As a result, the net amount earned on these sales recorded in net
sales, in accordance with Emerging Issue Task Force 99-19 ("EITF 99-19"),
"Reporting Revenue Gross as a Principal Versus Net as an Agent."
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis contains forward-looking statements which
involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements. Historical results are not necessarily indicative of trends in
operating results for any future period. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date the statement was made.
General
The following discussion should be read in conjunction with the Company's
audited financial statements for the fiscal years ended November 1, 2003,
October 26, 2002 and October 27, 2001, appearing elsewhere in this Form 10-K.
Results of Operations
Fiscal Year Ended November 1, 2003, as Compared
to Fiscal Year Ended October 26, 2002
Net Income
The Company's pre-tax income for the fifty-three weeks ended November 1, 2003,
increased 58% to $482,000 from $304,000 for the fifty-two weeks ended October
26, 2002. Net income for fiscal 2003 increased 59% to $287,000 from $180,000 for
fiscal 2002.
To supplement the Company's consolidated financial statements presented in
accordance with generally accepted accounting principles ("GAAP"), the Company
uses non-GAAP measures of Earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The Company's Management reviews these non-GAAP
measures internally to evaluate the Company's performance and manage its
operations and believes it is an important measure in evaluating the Company's
financial performance. In addition, since the Company has historically provided
non-GAAP results and guidance to the investment community, the Company believes
that the inclusion of non-GAAP financial measures provides consistent and
comparable measures to help investors understand the Company's current and
future operating results.
For fiscal 2003 EBITDA increased to $1,620,000 from $1,580,000 for fiscal 2002.
(EBITDA for fiscal 2003 is calculated as follows: pre-tax income of $482,000,
plus interest of $343,000 and depreciation and amortization of $795,000. EBITDA
for fiscal 2002 is calculated as follows: pre-tax income of $304,000 plus
interest of $359,000 and depreciation and amortization of $917,000).
Net income for fiscal year 2003 and 2002 was negatively impacted by operating
losses relating to the Company's website of $249,000 and $228,000, respectively.
The Company's pre-tax profit and EBITDA for fiscal 2003 were reduced by the
results of its second quarter, which management believes were negatively
impacted by restrained consumer spending prior to and during the Iraq war, as
well as extreme winter weather conditions in the northeast.
The Company's net income for fiscal 2003 includes net advertising expense of
$366,000 as compared to $632,000 for fiscal 2002. The Company's advertising
presence has not materially diminished as the Company's gross advertising
expenditures were $2,540,000 in fiscal 2003 as compared to $2,665,000 for fiscal
2002.
The Company recorded an income tax equivalent provision of $195,000 (40.6%
effective tax rate) in fiscal 2003 as compared to a provision of $124,000 (40.7%
effective tax rate) in fiscal 2002.
Revenues
For the year ended November 1, 2003, net sales (after the effect of a
reclassification in sales), aggregated $42,448,000, an increase of $1,122,000 or
approximately 2.7% from last year. It is important to note that the Company's
fiscal year for 2003 includes fifty-three weeks and that the first quarter of
fiscal 2003 included fourteen weeks as compared to thirteen weeks for the same
quarter last year. Comparable store sales for fiscal 2003 (again after the
effect of a reclassification in sales), increased approximately $242,000 or less
than one percent, from fiscal 2002.
The Company believes its positive sales results of fiscal 2003 compare favorably
to other reporting consumer electronics specialty retailers in the industry. The
Company also believes its overall sales results were negatively impacted by the
Iraq war and extreme weather conditions during the second quarter.
Overall net sales benefited from the continued growth of the Company's newest
Harvey store in Eatontown, New Jersey which opened in April 2001, and from the
maturation of its newest Bang & Olufsen branded store opened in Greenwich,
Connecticut in October 2000. Additionally, the Company experienced strong sales
increases in fiscal 2003, at its Harvey Greenwich, Connecticut and Paramus, New
Jersey showrooms. The Paramus retail showroom had a strong resurgence in sales
during the fourth quarter, after the stores renovation was completed. All of the
Company's retail stores had increases in their net sales for fiscal 2003 as
compared to fiscal 2002, except its Bang & Olufsen branded store in Union
Square, New York City. Management has made additional personnel changes in this
store and in fiscal 2004, to-date, the store has shown significant improvement
in sales performance.
Finally, the Company's store within ABC Carpet and Home, in lower Manhattan,
which had experienced declines in sales for the first half of fiscal 2003, had a
strong rebound in sales for the second half of the year and has also recorded
strong sales results in fiscal 2004, to date.
The Company continues to experience expanding revenues from the unabated strong
demand for its custom installation services.
The Company sells extended warranty contracts for a third party provider. The
profit on extended warranty sales is considered commission at the time of sale.
As a result, the net amount earned on these sales recorded in net sales, in
accordance with Emerging Issue Task Force 99-19 ("EITF 99-19"), "Reporting
Revenue Gross as a Principal Versus Net as an Agent."
Despite increased competition, customer demand continues to be strong for new
digital video products including plasma flat screen, LCD flat panel,
high-definition and DLP televisions and related custom home installations.
Consumers have embraced plasma and LCD flat screen technologies as well as DLP
televisions. Custom installation projects continue to increase and accounted for
approximately 55% of net sales for fiscal 2003, as compared to approximately 51%
of net sales for fiscal 2002. Custom installation sales, including both
equipment sales and labor income, increased approximately 11.2% to approximately
$23,776,000 for 2003, as compared to approximately $21,373,000 for fiscal 2002.
The Company's custom installation services yield higher gross profit margins and
stronger net profitability, as compared to normal retail store sales.
The Company believes it differentiates itself by offering sophisticated custom
installation services, including programming capabilities that address complex
technological integration issues giving its customers easy remote control
operations for a variety of functions. Management believes installations of
complete movie theaters in the home as well as distributed audio and network
cabling will continue to attract affluent customers to the Company, which should
continue to benefit sales, enhance gross margins and improve overall store
profitability.
The Company's marketing efforts remained significant for fiscal 2003, which the
Company believes, continued to drive sales. These efforts included radio,
newspaper, direct mail and catalog advertisements, and the continued promotion
of the Company's website, www.harveyonline.com. In fiscal 2004, the Company
anticipates that its advertising expenditures will not be materially reduced and
will be used primarily for radio, print and direct mail advertising. The Company
anticipates that it will continue to promote its brand and image to both men and
women using the new campaign, launched in November 2002, "Harvey. Extraordinary
in Every Way."
In fiscal 2004, the Company also will endeavor to put additional efforts and
resources into its important customer relations management initiatives.
Cost and Expenses
Total cost of goods sold for fiscal 2003 increased $167,000 or .7% from fiscal
2002. This was primarily due to an increase in sales as noted above, offset by
an increase in the gross margin.
The gross profit margin for fiscal 2003 increased to 40.8% as compared to 39.6%
for fiscal 2002.
The gross profit margin increases were achieved despite a continuing shift in
business towards video products, which generally have lower margins. Video
product sales for fiscal 2003 accounted for approximately 45% of net sales as
compared to approximately 42% of net sales in fiscal 2002, or an increase of
approximately 7%. Audio sales declined to 47% of net sales in fiscal 2003 as
compared to 50% of net sales in fiscal 2002. The reduction in margin from this
shift in product sales was offset by several factors. The new digital and flat
screen video products are sold at higher margins than analog, commodity
products. Further, the Company has been successful in bundling the sale of new
video products with the sale of higher margin home theater components, including
furniture, accessories, cable, extended warranties and custom installation
labor.
The overall increase in the gross margin for fiscal 2003 was due primarily to a
10% increase in higher margin custom installation labor income, a 224% increase
in the sale of extended warranties and a 23% increase in cable sales, which
significantly mitigated the reduction in the gross margin from the increase in
video sales.
Selling, general and administrative expenses ("SG&A expenses") increased 4.7% or
$749,000 for fiscal 2003, as compared to fiscal 2002.
Comparable, SG&A expenses for fiscal 2003 increased by approximately $527,000 or
3.3% from fiscal 2002.
Fiscal 2003 included fifty-three weeks of SG&A expenses as compared to fifty-two
weeks for fiscal 2002. Overall and comparable SG&A expenses also increased from
additional payroll and payroll related costs, insurance expense, professional
fees, occupancy costs, truck expenses and various other store-operating
expenses, offset by reduced net advertising expense, depreciation and
amortization and incentive bonuses. Additionally, the Company recorded an
expense of $50,000, relating to old outstanding tax claims for fiscal years 1987
and 1988, which was discussed above in Legal Proceedings.
The Company continues to hire additional custom installation personnel and incur
the necessary associated expense relating to the expansion of its custom
installation services.
Interest expense for fiscal 2003 decreased 4.4% or $16,000 as compared to fiscal
2002. The overall decrease was primarily due to the reduction in the Company's
credit facility.
In connection with the Company's emergence from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting requires that
the Company report an income tax equivalent provision when there is book income
and pre-reorganization net operating loss carryforwards. The requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income but instead is recorded first as
a reduction of reorganization value in excess of amounts allocable to
identifiable assets until exhausted, and thereafter as a direct addition to
paid-in capital.
For fiscal years 2003 and 2002, the income tax equivalent provisions were
$195,000 and $124,000 respectively, and the reduction of reorganization value in
excess of amounts allocable to identifiable assets also amounted to $195,000 and
$124,000, respectively. The income tax equivalent provision did not materially
affect the Company's cash.
Fiscal Year Ended October 26, 2002 as Compared
to Fiscal Year Ended October 27, 2001
Net Income
The Company's pre-tax income for the fiscal year ended October 26, 2002
significantly increased to $304,000 as compared to a pre-tax loss of $1,250,000
for the fiscal year ended October 27, 2001. Net income for fiscal 2002 increased
to $180,000 as compared to a net loss of $1,250,000 for fiscal 2001. Earnings
before interest, taxes, depreciation and amortization ("EBITDA") for fiscal 2002
also increased substantially to approximately $1,580,000 as compared to EBITDA
of approximately $79,000 for fiscal 2001. (EBITDA for fiscal 2002 is calculated
as follows: pre-tax income of $304,000 plus interest of $359,000 and
depreciation and amortization of $917,000, EBITDA for fiscal 2001 is calculated
as follows: pre-tax loss of $1,250,000 plus interest of $340,000 and
depreciation and amortization of $989,000).
Net income for fiscal 2002 was negatively impacted by operating losses of
approximately $245,000, relating primarily to the Company's website and to a
lesser extent from the Company's newest Bang & Olufsen branded store opened in
Greenwich, Connecticut in October 2000.
The Company's net loss for fiscal 2001 was materially impacted by the horrific
events of September 11, 2001, the total renovation of the Company's flagship
store on 45th Street in Manhattan and the general slowdown in retail sales,
experienced from the latter part of the third quarter of fiscal 2001, and by
approximately $650,000 relating to both pre-opening expenses ($140,000) and
operating losses ($510,000) from the Company's two new stores and the Company's
website.
The Company's net income for fiscal 2002 includes net advertising expense of
$632,000 as compared to $1,206,000 for fiscal 2001. The Company's advertising
presence has not materially diminished as the Company's gross advertising
expenditures declined to $2,665,000 in fiscal 2002 from $2,864,000 in 2001.
Cooperative advertising income in fiscal 2001 was negatively impacted from the
shortfall in revenues in the Company's fourth quarter of fiscal 2001, as
discussed above.
Results of operations for fiscal years 2002 and 2001 also included depreciation
and amortization expense of $917,000 and $989,000, respectively.
The Company recorded an income tax equivalent provision of $124,000 (40.7%
effective tax rate) in fiscal 2002. The income tax equivalent provision did not
materially affect the Company's cash. No income tax provision was recorded in
fiscal 2001 as the Company reported a net loss.
Revenues
For the year ended October 26, 2002, net sales aggregated $41,327,000 (after
reclassification to conform to fiscal 2003 presentation), an increase of
$4,720,000, or 12.9% from the prior year. Comparable store sales for fiscal 2002
increased over $2.9 million or 8% from fiscal 2001. Management believes that a
portion of the increase in the Company's overall and comparable store sales, as
compared to fiscal 2001, were impacted by the events of September 11th,
specifically sales in the fourth quarter of fiscal 2001.
Overall net sales benefited significantly from the new Eatontown, New Jersey
store opened in April 2001, which has exceeded management's expectations in
sales and store profitability. Additionally, overall and comparable store sales
for fiscal 2002 benefited from the rebound in sales of our totally renovated
flagship store on 45th Street in Midtown, Manhattan and the continued strong
sales growth of the Company's Greenvale/Roslyn, Long Island store, the store
located within ABC Carpet and Home in lower Manhattan and the Company's Bang &
Olufsen retail showroom in Greenwich, Connecticut. Finally, the Company's Harvey
stores in Mount Kisco, New York and Greenwich, Connecticut, which had
experienced declines in sales for the first six months of fiscal 2002, had also
rebounded in sales in the second half of fiscal 2002, as compared to fiscal
2001, primarily due to personnel changes and additional localized advertising
efforts, as implemented by management. However, the Company's Paramus, New
Jersey store experienced a decline in sales for fiscal 2002 as compared to
fiscal 2001. Management made additional personnel changes in this store and
completed the construction of a new in-store theater. These changes coupled with
additional planned improvements in fiscal 2003 helped to improve sales.
Customer demand continues to be strong for new digital video products including
plasma flatscreen, LCD flat panel, high-definition televisions, DVD and related
custom home installations. Consumers have embraced plasma and LCD flat screen
technologies. The Company's unit sales of these important categories have more
than doubled in fiscal 2002 as compared to fiscal 2001. Custom installation
projects continue to increase and accounted for approximately 51% of net sales
for fiscal 2002, as compared to approximately 43% of net sales for fiscal 2001.
Custom installation sales, including both equipment sales and labor income,
increased approximately 43% to $21,373,000 for fiscal 2002, as compared to
$14,924,000 for fiscal 2001. The Company's custom installation services yield
higher gross profit margins and stronger net profitability, as compared to
normal retail store sales.
We believe the Company differentiates itself by offering sophisticated custom
installation services, including programming capabilities that address complex
technological integration issues giving its customers easy remote control
operation for a variety of functions. Management believes installations of
complete movie theaters in the home as well as distributed audio, network
cabling and in-home lighting systems continued to attract affluent customers to
the Company, and continued to benefit sales, enhance gross margins and improved
overall store profitability.
The Company's marketing efforts remained significant in fiscal 2002, which we
believe continued to drive sales. In fiscal 2002, these efforts included radio,
newspaper, cable and network television, direct mail and catalog advertisements,
and the continued promotion of the Company's website. www.harveyonline.com. In
fiscal 2003, the Company's advertising expenditures were not materially reduced
and were used primarily for radio, print and direct mail advertising. The
Company continued to promote its brand and image to both men and women using the
new campaign launched in November 2002, "Harvey. Extraordinary. In Every Way."
Costs and Expenses
Total cost of goods sold for fiscal 2002 increased $2,502,000 (after
reclassification to conform to fiscal 2003 presentation) or 11.1% from fiscal
2001. This was primarily due to an increase in sales as noted above, offset by
an increase in the gross margin.
The gross profit margin for fiscal 2002 increased to 39.6% as compared to 38.6%
for fiscal 2001.
The gross profit margin increases were achieved despite a continuing shift in
business towards video products, which generally have lower margins. Video
product sales for fiscal 2002, accounted for approximately 42% of net sales as
compared to approximately 35% of net sales in fiscal 2001, or an increase of
approximately 20%. Audio sales declined to 50% of net sales in fiscal 2002 as
compared to 58% of net sales in fiscal 2001. The reduction in margin from this
shift in product sales was offset by several factors. The new digital and flat
screen video products are sold at higher margins (and higher prices) than
analog, commodity televisions. Further, the Company has been successful in
bundling the sale of new video products with the sale of higher margin audio and
home theater components, including furniture, accessories, extended warranties
and custom installation labor. Higher margin, custom installation labor income
increased by approximately 39% for fiscal 2002 as compared to fiscal 2001, which
significantly helped to mitigate the reduction in the gross margin from the
increase in video sales.
Selling, general and administrative expenses ("SG&A expenses") increased 4.5% or
$678,000 for fiscal 2002, as compared to fiscal 2001.
Comparable, SG&A expenses for fiscal 2002 increased by approximately $304,000 or
2% from fiscal 2001.
The overall increase in SG&A expenses was primarily due to the increase in costs
relating to the new Eatontown, New Jersey store, which opened in April 2001.
Overall and comparable SG&A expenses also increased from additional payroll and
payroll related costs, insurance expense, occupancy costs, credit card fees,
incentive bonuses and various other store-operating expenses, offset by reduced
net advertising expense.
The Company continues to hire additional custom installation personnel and incur
the necessary associated expenses relating to the expansion of its custom
installation services.
Interest expense for fiscal 2002 increased 5.6% or $19,000 as compared to fiscal
2001. The overall increase was primarily due to the additional borrowings from
the Company's Credit Facility in fiscal 2001, which was used to fund the
Company's retail store expansion, renovation and website, offset by a reduction
in the overall effective borrowing rate. Additionally, the increased expense is
due to amortization of warrants issued to the Company's lender and from the
amortization of the commitment fee paid by the Company to its lender, relating
to the increase and extension of the Credit Facility. Such amortization was
recorded for the entire year in fiscal 2002 as compared to only ten months in
fiscal 2001.
In connection with the Company's emergence from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting requires that
the Company report an income tax equivalent provision when there is book income
and pre-reorganization net operating loss carryforwards. This requirement
applies despite the fact that the Company's pre-reorganization net operating
loss carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction of reorganization value in excess of amounts allocable to
identifiable assets until exhausted, and thereafter as a direct addition to
paid-in capital.
For fiscal 2002, the income tax equivalent provision was $124,000 and the
reduction of reorganization value in excess of amounts allocable to identifiable
assets also amounted to $124,000. The income tax equivalent provision did not
affect the Company's cash. No income tax provision was required for fiscal 2001
due to the Company's reported net loss.
Liquidity and Capital Resources
At November 1, 2003 and October 26, 2002, the Company's ratio of current assets
to current liabilities was 1.55 and .93, respectively. The improvement in
working capital was due primarily to the refinancing of the Company's Credit
Facility which resulted in the Credit Facility being reclassified to long-term
liabilities. The Company had negative working capital of $600,000 at October 26,
2002. However, it is important to note that at October 26, 2002, the Company's
outstanding balance on its Credit Facility ($3,119,000) was classified as a
current liability, despite the long-term nature of the Company's Credit
Facility. The presentation as a current liability is in accordance with EITF
95-22 (See Note 2 to the Financial Statements for details).
The improvement in the current ratio at November 1, 2003 was also positively
impacted by the increase in the Company's pre-tax income. Other factors
primarily improving working capital, included an increase in inventory and
accounts receivable funded by the Company's credit facility, offset by an
increase in customer deposits and income taxes payable.
Net cash provided from operations for fiscal 2003 was $970,000 as compared to
$721,000 for fiscal 2002. The improvement in cash provided from operations for
fiscal 2003 was primarily due to additional pre-tax income ($178,000), increased
customer deposits and trade accounts payable, offset by a decrease in
depreciation and amortization, accrued expenses and other current liabilities
and an increase in inventory.
Net cash used in investing activities was $483,000 for fiscal 2003, as compared
to net cash used of $234,000 for fiscal 2002. Net cash used for the purchases of
property and equipment and website enhancements was $470,000 for fiscal 2003 as
compared to $237,000 for fiscal 2002. Additions for fiscal 2003 related
primarily to furniture, fixtures, computer equipment, website improvements and
leaseholds relating to store theaters and the renovation of the Company's
Paramus store.
Net cash used in financing activities was $487,000 for fiscal 2003, as compared
to $499,000 for fiscal 2002. Financing activities for fiscal 2003 included net
payments of $394,000, reducing the Credit Facility, preferred stock dividends
paid of $70,000 and principal payments on capital leases of $22,000. Financing
activities for fiscal 2002 included net payments of $323,000 reducing the Credit
Facility, preferred stock dividend payments of $74,000, payments on capital
leases of $81,000 and note payable payments of $22,000.
On November 21, 2003, the Company entered into a new five-year $7.5 million
credit facility with Whitehall Retail Finance ("Whitehall"), a division of
Whitehall Business Credit Corporation, a subsidiary of Connecticut based Webster
Bank. This new credit facility replaced the credit facility with Wells Fargo.
Under the new credit facility, the Company can borrow up to $7.5 million based
upon lending formulas calculated on eligible credit card receivables and
inventory, less certain reserves, as defined. The credit facility expires
November 21, 2008.
The interest rate on all borrowings under the new credit facility is 0.25% over
Webster Bank's prime rate (4.25% at November 1, 2003) or LIBOR plus 2.75%, at
the Company's option. The Company agreed to pay Whitehall a $25,000 commitment
fee, payable in two equal installments of $12,500, on November 21, 2003 and
November 21, 2004, respectively. Under the credit facility, the Company will
also pay Whitehall a reduced maintenance fee of $1,000 per month and an unused
line fee based on a formula, as defined in the credit facility. Simultaneously,
with the closing of the Whitehall credit facility, the Company satisfied all
outstanding amounts due to Wells Fargo, in the amount of $2,504,000, and Wells
Fargo's senior security interest in the Company's assets was terminated.
In connection with the new credit facility, the Company granted Whitehall a
senior security interest in all of the Company's assets. The credit facility
provides Whitehall with rights of acceleration upon the occurrence of certain
customary events of default. The Company is restricted from paying dividends on
its Common Stock, retiring or repurchasing its Common Stock and entering into
additional indebtedness (as defined).
Pursuant to the new credit facility, the Company cannot exceed certain advance
rates on eligible inventory and must maintain certain levels of earnings before
interest, taxes, depreciation and amortization. Additionally, the Company's
capital expenditures cannot exceed a predetermined amount.
The following is a summary of our significant contractual cash obligations for
the periods indicated that existed as of November 1, 2003 and is based on
information appearing in the Notes to the Financial Statements:
<TABLE>
<CAPTION>
2004 2005-2006 2007-2008 After 2008 Total
--------------------- -------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating leases $2,337,000 $3,548,000 $1,566,000 $3,115,000 $10,566,000
Credit Facility - - $2,726,000 - $2,726,000
--------------------- -------------- ------------- ------------- -------------- ---------------
Total contractual
cash obligations $2,337,000 $3,548,000 $4,292,000 $3,115,000 $13,292,000
--------------------- -------------- ------------- ------------- -------------- ---------------
</TABLE>
The Company has authorized 10,000 shares of 8.5% Cumulative Convertible
Preferred Stock ("Preferred Stock") with a par value of $1,000 per share. The
conversion price of the Company's preferred stock is $1.2333. 875 shares of
Preferred Stock were originally issued by the Company. In June 2002, 48 shares
of Preferred Stock were converted to 38,920 shares of the Company's Common Stock
by a preferred shareholder. At November 1, 2003, 827 shares of Preferred Stock
were issued and outstanding. The Company's remaining Preferred Stock is
convertible into 670,559 shares of Common Stock.
In fiscal 2004, the Company plans to enter into a new retail store lease for an
additional Harvey showroom in New Jersey. If the Company is successful in
locating a suitable location, the Company will finance all necessary leaseholds,
security deposits, furniture and fixtures, pre-opening costs and inventory,
expected to aggregate between $1,200,000 - $1,400,000, with its new credit
facility. The new retail store is expected to open at the end of fiscal 2004 or
early in the first quarter of 2005. The Company expects to make improvements to
certain of its Harvey retail showrooms, including the installation of a movie
theater within one of its stores. Miscellaneous purchases of equipment and other
assets for fiscal 2004 are not expected to be significant.
The Company intends to continue its advertising campaign in fiscal 2004,
primarily with print, radio and direct mail.
The Company's website gives its customers access to one of Harvey's upscale
retail showrooms or offers its customers a private, in-home consultation through
the convenience of the Internet. The anticipated costs of maintaining and
improving the website are not expected to be material for 2004.
As previously noted in Part I, Legal Proceedings, in July 2003, the Company
received a notice and information request from the Pennsylvania Department of
Environmental Protection ("PADEP"). The notice stated that PADEP considers the
Company a potentially responsible party for contamination related to a septic
drain field in Doylestown, Pennsylvania. See Part 1 above and the notes to the
Company's financial statements for details on this matter.
Management believes that cash on hand, cash flow from operations and funds made
available under the new credit facility with Whitehall, will be sufficient to
meet the Company's anticipated working capital needs for at least the next
twelve-month period.
Seasonality
Our business is subject to seasonal variations. Historically, we have realized a
quarter of our total revenue and a majority of our net income for the year
during the first fiscal quarter. Due to the importance of the holiday shopping
season, any factors negatively impacting the holiday selling season could have
an adverse effect on our revenues and our ability to generate a profit. Our
quarterly results of operations may also fluctuate significantly due to a number
of factors, including the timing of new store openings and acquisitions and
unexpected changes in volume-related rebates or changes in cooperative
advertising policies from manufacturers. In addition, operating results may be
negatively affected by increases in merchandise costs, price changes in response
to competitive factors and unfavorable local, regional or national economic
developments that result in reduced consumer spending.
Impact of Inflation
Management does not believe that inflation has had a material adverse effect on
our results of operations. However, we cannot predict accurately the effect of
inflation on future operating results.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
related disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts for revenues and expenses during
the reporting period. On an ongoing basis, Management evaluates estimates,
including those related to income taxes, inventory allowances, contingencies and
to a lesser extent, bad debts. We base our estimates on historical data, when
available, experience, and on various other assumptions that are believed to be
reasonable under the circumstances, the combined results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates.
Critical Accounting Policies
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America.
Significant accounting policies are discussed in Footnote 1 to the Financial
Statements, Item 8. Inherent in the application of many of these accounting
policies is the need for management to make estimates and judgments in the
determination of certain revenues, expenses, assets and liabilities. As such,
materially different financial results can occur as circumstances change and
additional information becomes known. The policies with the greatest potential
effect on our results of operation and financial position include:
Revenue Recognition
For the Company, net sales and operating revenues include items related to
normal business operations, including the sale of goods to customers and
custom installation revenue. Retail sales are recorded at the time of the
sale to the customer. Custom installation revenue, which is comprised of
both the sale of products and the labor in connection with the installation
of the products, are recorded in accordance with the provisions of EITF
00-21, "Revenue Arrangements with Multiple Deliverables". The revenue
related to the sale of the products is recognized when the product is
delivered to the customers. The revenue related to the labor in connection
with the installation of the products, is recorded when the service has
been performed.
Inventory
Inventory is the Company's largest asset class, comprising over 50% of the
Company's total assets. The Company's inventory consists of finished goods
held for retail sale. Purchase-based volume rebates are credited to
inventory or cost of products sold, as appropriate. The Company assesses
the market value of its inventory on a regular basis by reviewing, on an
item-by-item basis, the realizable value of its inventory; net of specific
or general lower of cost or market reserves. If it is management's judgment
that the selling price of an item must be lowered below its cost in order
for it to be sold, then the carrying value of the related inventory is
written down to realizable value. A number of factors would be taken into
consideration in assessing realizable value including the quantity on hand,
historical sales, technological advances, the existence of a replacement
product, and consumer demand and preferences. Depending on market
conditions, the actual amount received on sale could differ from
management's estimate.
As a result we have reduced our net inventory value to reflect our
estimated amount of inventory with lower of cost or market issues. Our
inventory reserve at November 1, 2003 and October 26, 2002 is $130,000 and
$130,000, respectively. It is also possible that obsolescence could become
a significant issue in the future.
Long-Lived Assets
Long-lived assets such as property, plant and equipment, goodwill, and
reorganization value are reviewed for impairment when events or changes in
circumstances indicate the carrying value of the assets may not be
recoverable. We would recognize an impairment loss when estimated future
undiscounted cash flows expected to result from the use of the asset and
its value upon disposal are less than its carrying amount. If our estimates
regarding future undiscounted cash flows or useful lives were to change, we
could be exposed to losses that are material in nature.
Cash Discounts and Coop Advertising
We receive cash discounts for timely payment of merchandise invoices and
recognize these amounts in our statement of operations as a reduction of
cost of sales.
We also receive substantial funds from our suppliers for coop advertising.
These funds are used for advertising purposes and the funds earned are
recorded net of advertising expenditures, and are included in selling,
general and administrative expenses.
Accrued expenses
The Company is constantly required to make estimates of future payments
that will be made which relate to the current accounting period. These
estimates range from things such as accrued bonuses to estimates of pending
litigation claims and income taxes. In establishing appropriate accruals,
management must make judgments regarding the amount of the disbursement
that will ultimately be incurred. In making such assessments, management
uses historical experience as well as any other special circumstances
surrounding a particular item. The actual amount paid could differ from
management's estimate.
Recent Accounting Pronouncements
Prior to fiscal 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment of FASB
Statement No. 13, and Technical Corrections," and SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The adoption of these
standards in fiscal year 2003 did not have a material effect on the Company's
financial position or result of operations.
In July 2003, the EITF issued EITF No. 00-21, "Revenue Arrangements with
Multiple Deliverables," which provides guidance on the timing and method of
revenue recognition for sales arrangements that include the delivery of more
than one product or service. EITF No. 00-21 is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF No. 00-21 did not have a material effect on the Company's
financial position or results of operations.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the
Company's financial statements set forth on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The Company changed its independent public accounting firm in fiscal 2002 from
Ernst & Young LLP to BDO Seidman, LLP. There were no disagreements between the
Company and Ernst & Young LLP.
Item 9A. Controls and Procedures
Under the supervision and with the participation of the Company's Management,
including the President and the Chief Financial Officer, the Company carried out
an evaluation of the effectiveness of the design and operation of the disclosure
controls and procedures, as defined in Rules 13a-15 and 15d-15 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that
evaluation, the Company's President and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective, as of the end of
the period covered by this Report (November 1, 2003), in ensuring that material
information relating to the Company required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, including ensuring that such material
information is accumulated and communicated to the Company's Management,
including the Company's President and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure. There were no significant
changes in the Company's internal control over financial reporting (as required
by the Exchange Act) that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Part III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Securities Exchange Act.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age (1) Position
--------------------------------- --------------- ----------------------------------------------------
<S> <C> <C>
Michael E. Recca 53 Chairman and Director
William F. Kenny, III 72 Director
Jeffrey A. Wurst 54 Director
Fredric J. Gruder 57 Director
Nicholas Marshall 71 Director
Ira J. Lamel 56 Director
Franklin C. Karp 50 President and Director
Joseph J. Calabrese 44 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Michael A. Beck 45 Vice President of Operations
Roland W. Hiemer 42 Vice President Merchandising
<FN>
(1) As of November 1, 2003.
</FN>
</TABLE>
Michael E. Recca became the Chairman of the Board of Directors of the Company in
November 1996. Mr. Recca is also a member and the sole manager of Harvey
Acquisition Company, LLC, which is a principal shareholder of the Company. Mr.
Recca was an employee of Taglich Brothers, Inc., an NASD registered
broker-dealer, through December 31, 1998. Beginning in January 2002 and
continuing through April 2002, Mr. Recca was self-employed as a financial
restructuring consultant, and in this capacity also associated with NorthStar
Capital, LLC, a joint venture with Ruskin Moscou Faltischek, P.C., the Company's
corporate counsel. Currently, Mr. Recca is a director of Sky Capital Holdings,
LTD, and of several wholly owned subsidiaries of Sky Capital Holdings and the
President of Sky Capital, LLC, a wholly owned subsidiary of Sky Capital
Holdings, LTD and an NASD broker-dealer. Mr. Recca is also a director of Sky
Venture Capital and Sky Capital Ventures, (companies affiliated with Sky Capital
Holdings, LTD) and several of their wholly or partially owned subsidiaries
Franklin C. Karp began his career in the retail consumer electronics industry
over 25 years ago, working then as a salesman for one of the most successful
chain operations in the New York metropolitan area. He held various positions in
sales management, purchasing and operations. In 1990, Mr. Karp joined Harvey as
Merchandise Manager and later as Vice President in charge of merchandising. Mr.
Karp was appointed President of Harvey in 1996.
Joseph J. Calabrese, a certified public accountant, joined the Company as
Controller in 1989. Since 1991, Mr. Calabrese has served as Vice President,
Chief Financial Officer, Treasurer and Secretary of the Company. Mr. Calabrese
was elected Executive Vice President and a Director of the Company in 1996. Mr.
Calabrese began his career with Ernst & Young LLP in 1981 where for the
eight-year period prior to his joining the Company he performed audit services
with respect to the Company.
Fredric J. Gruder, has been a director since July 1998. Since December 2001, Mr.
Gruder has been a sole practitioner in his own law firm. From July 1999 to
December 2001, Mr. Gruder was of counsel to Dorsey & Whitney LLP. From September
1996 to July 1999, he was a partner in the law firm of Gersten, Savage,
Kaplowitz & Fredericks, LLP ("Gersten"), which represented Thornwater Company,
L.P. ("Thornwater"), representative of the Company's underwriters in the
Offering. From March 1996 through September 1996, Mr. Gruder was of counsel to
Gersten, having been a sole practitioner from May 1995 through March 1996. From
March 1992 until March 1996, Mr. Gruder served as vice president and general
counsel to Sbarro, Inc., then a publicly traded corporation which owns,
operates, and franchises Italian restaurants. Prior to this time, Mr. Gruder
practiced law in New York for over twenty years, specializing in corporate
securities and retail real estate.
William F. Kenny, III has been a director of the Company since 1975. From
January 1992 to December 2000, Mr. Kenny was a consultant to Meenan Oil Co.,
Inc. Prior to 1992, Mr. Kenny was the President and Chief Executive Officer of
Meenan Oil Co., Inc. Mr. Kenny has also served as a director of the Empire State
Petroleum Association, Petroleum Research Foundation and was the President of
the East Coast Energy Council. Mr. Kenny was also the President of the
Independent Fuel Terminal Operators Association and the Metropolitan Energy
Council.
Jeffrey A. Wurst, a director since February 2000, is a Partner at the law firm
of Ruskin Moscou Faltischek, P.C. ("Ruskin"), where he chairs the firm's
Financial Services Group. Mr. Wurst began his legal career with Ruskin in 1987.
Mr. Wurst is experienced in asset based lending, factoring, commercial finance
and bankruptcy matters. Mr. Wurst graduated from the Jacob D. Fuchsburg Law
Center of Touro College in 1987 and earned his B.S. and M.A. from Hofstra
University. Mr. Wurst's law firm has been involved in the legal representation
of the Company since it reorganized under the bankruptcy laws in 1996.
Nicholas A. Marshall has been a director of the Company since May 2003. Since
1998, Mr. Marshall has worked as a consultant and trustee of a family estate.
From 1983 - 1997, Mr. Marshall served as a director of the Greater New York
Savings Bank and from 1997-1998 he was an Advisory Board member of Astoria
Federal Corporation. Mr. Marshall has over 37 years of experience in investment
banking and has held senior executive positions in several asset management
firms. Mr. Marshall has a BA degree from Yale University and an MBA from Harvard
Business School.
Ira J. Lamel was appointed to the Company's Board and Audit Committee in
November 2003. He has been the Executive Vice President and Chief Financial
Officer and Treasurer of The Hain Celestial Group, Inc. since October 1, 2001.
Mr. Lamel, a certified public accountant, was a partner at Ernst & Young LLP
where he served in various capacities from June 1973 to September 2001. Ernst &
Young LLP served as the Company's independent auditors until fiscal 2001. Mr.
Lamel directed all of Ernst & Young's services to the Company, including the
audits of our financial statements, from fiscal 1997 through fiscal 2000.
Michael A. Beck has been Vice President of Operations of the Company since April
1997. From June 1996 until such date he was the Company's Director of Operations
and from October 1995 until April 1996 he served as Director of Operations for
Sound City, a consumer electronics retailer. Mr. Beck was a store manager for
the Company from August 1989 until October 1995. Mr. Beck holds a BA in
Psychology from Merrimack College.
Roland W. Hiemer has been with the Company since 1990. He started with the
Company as a salesman and advanced to Senior Sales Manager for the Paramus store
in 1991. He was further promoted to Inventory Control Manager in 1991. In 1997,
he was promoted to Director of Inventory Control and in 2001, Mr. Hiemer was
promoted to Merchandise Manager. In January 2004, Mr. Hiemer was promoted to
Vice President of Merchandising. Mr. Hiemer holds a BA in Business
Administration from Hofstra University.
Committees of the Board of Directors
The Board of Directors has an Audit Committee and a Compensation and Stock
Option Committee.
Audit Committee. The function of the Audit Committee includes making
recommendations to the Board of Directors with respect to the engagement of the
Company's independent auditors and the review of the scope and effect of the
audit engagement. The Company's Audit Committee is governed by a written charter
approved by the Board of Directors. William F. Kenny, III, Jeffrey A. Wurst and
Fredric J. Gruder were members of the Audit Committee at the beginning of fiscal
2003. Nicholas A. Marshall and Ira J. Lamel replaced Frederic J. Gruder and
Jeffrey A. Wurst during fiscal 2003. Ira J. Lamel is the Financial Expert and
Chairman of the Audit Committee.
Compensation and Stock Option Committee. The function of the Compensation and
Stock Option Committee is to make recommendations to the Board with respect to
the compensation of management employees and to administer plans and programs
relating to stock options, pension and other retirement plans, employee
benefits, incentives, and compensation. Fredric J. Gruder, William F. Kenny, III
and Jeffrey A. Wurst were members of the Compensation and Stock Option Committee
in fiscal 2003. Nicholas A. Marshall and Ira J. Lamel were added to the
Compensation and Stock Option Committee during fiscal 2003.
Code of Ethics
The Company adopted a code of ethics applicable to its President, Chief
Financial Officer, Controller and other finance leaders, which is a "code of
ethics" as defined by applicable rules of the Securities and Exchange
Commission. This code of ethics is publicly available at the Company's website.
If the Company makes any amendments to this code of ethics other than technical,
administrative, or other non-substantive amendments, or grants any waivers,
including implicit waivers, from a provision of this code of ethics to the
Company's President, Chief Financial Officer or Controller, the Company will
disclose the nature of the amendment or waiver, its effective date and to whom
it applies in a report on Form 8-K filed with the Securities and Exchange
Commission.
Item 11. Executive Compensation.
The following table sets forth the cash compensation paid by the Company, as
well as any other compensation paid to or earned by the Chairman of the Company,
the President of the Company and those executive officers compensated at or
greater than $100,000 for services rendered to the Company in all capacities
during the three most recent fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Stock
Name of Individual Options Granted Long-Term
and Principal Position Year Salary Bonus (1) Compensation
------------------------------ --------- ----------------- ------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Michael E. Recca 2003(2) $122,000 $ - - $ -
Chairman 2002 $120,000 $ - 25,000 $ -
2001 $120,000 $ - 37,500 $ -
Franklin C. Karp 2003(2) $163,000 $ 44,000 - $ -
President 2002 $156,000 $109,000 50,000 $ -
2001 $147,000 $ 50,000 37,500 $ -
Joseph J. Calabrese 2003(2) $153,000 $ 41,000 - $ -
Executive Vice President 2002 $146,000 $ 88,000 50,000 $ -
Chief Financial Officer, 2001 $138,000 $ 40,000 37,500 $ -
Treasurer and Secretary
Michael A. Beck 2003(2) $138,000 $ 41,000 - $ -
Vice President of 2002 $131,000 $ 88,000 50,000 $ -
Operations 2001 $123,000 $ 40,000 37,500 $ -
Roland W. Hiemer 2003(2) $94,000 $17,000 - $ -
Vice President of 2002 $85,000 $9,000 30,000 $ -
Merchandising 2001 $80,000 $25,000 22,500 $ -
<FN>
(1)--See "Stock Option Plan" for related information relating to stock option
grants.
(2)--Fiscal 2003 is a fifty-three week year and, as a result, salary amounts
include fifty-three weeks of compensation.
</FN>
</TABLE>
Severance Agreements
In fiscal year 2000, the Company's Board of Directors approved and the Company
entered into substantially similar Amended and Restated Severance Agreements
(each an "Amended Severance Agreement") with each of Michael E. Recca, Franklin
C. Karp, Joseph J. Calabrese, and Michael A. Beck, executives of the Company.
Each Amended Severance Agreement provides that in the event the executive is
terminated for any reason other than for cause, as defined in the agreement, and
in the event of a change in control (as defined), such as a merger, sale or
disposition of assets, change in the constitution of the Board of Directors or
the current Chairman, the assignment to the executive of a position inconsistent
with the executive's current position or relocation of the corporate office (as
defined), or in the event of a potential change in control (as defined), or
disability (as defined), and within one hundred eighty (180) days from the day
of one of the foregoing events the executive is terminated for reasons other
than for cause or the executive terminates his employment for any reason, the
respective executive shall receive, among other things:
i. a cash amount equal to the higher of: (x) the executive's base salary prior
to termination or the event giving rise to the change in control, potential
change in control or disability, or (y) the executive's base salary prior
to the event giving rise to the executive's right to terminate his
employment for any reason;
ii. a cash payment equal to the higher of: (x) twelve (12) months of the
executive's highest monthly car allowance or monthly average travel
reimbursement in effect within the six (6) month period immediately prior
to termination or the change in control, potential change in control or
disability, not to exceed twelve thousand and 00/100 ($12,000) dollars, or
(y) twelve (12) months of the executives highest monthly car allowance or
monthly average travel reimbursement in effect within the six (6) month
period immediately prior to the date the executive terminates his
employment for any reason, not to exceed twelve thousand and 00/100
($12,000) dollars; and
iii. the maximum /highest benefits which the executive was receiving at any time
during a two-year period prior to termination, relating to health
insurance, accident insurance, long-term care, life insurance and
disability, which shall continue for one (1) year beyond the date of
termination of the executive's employment.
Roland W. Hiemer's severance agreement provides that in the event the Company is
sold or merged with another company, involved in a corporate reorganization,
among other things, and Mr. Hiemer is terminated or asked to accept a position
other than that of a senior officer requiring similar responsibilities as a
result of a reorganization or change in ownership or control, and he declines
the new position, the Company or its successor in control will be obligated, and
continue to pay him at the same salary and car allowance, if any, he had most
recently been earning, plus benefits, for a period of six months.
The severance agreement for Mr. Hiemer also provides that in the event he is
terminated for any other reasons, except conduct that is materially injurious to
the Company or conviction of any crime involving moral turpitude, the Company
will be obligated and continue to pay Mr. Hiemer at the same salary he has most
recently been earning, for a period following termination of three months plus
full coverage of the Company's benefits for the same period.
Compensation Committee Report on Executive Compensation
The Compensation and Stock Option Committee ("Compensation Committee") of the
Board of Directors establishes the Company's general compensation policies as
well as the compensation plans and specific compensation levels for executive
officers. It also administers our employee stock option plan for executive
officers.
The Compensation Committee believes that the compensation of the Company's
executive officers should be influenced by performance. Base salary levels, and
any salary increases are approved by the Compensation Committee. In fiscal 2003,
2002 and 2001, additional compensation in the form of cash bonuses and stock
options (fiscal 2002 and 2001) were made in accordance with a quarterly and
annual bonus plan, as approved by the Compensation Committee. The Compensation
Committee believes that the executive officers salaries during these years did
not exceed levels in the industry for similarly-sized businesses. For fiscal
2004, the Compensation Committee is considering a revision in the executive
bonus plan in an attempt to better reflect achievement of goals to be defined.
Severance agreements exist for all executive officers.
Prior to fiscal 2003, stock option grants have been part of the bonus plan for
executive officers. The Compensation Committee viewed these option grants as an
important component of its long-term, performance-based compensation philosophy.
Since the value of an option bears a direct relationship to the Company's stock
price, the Compensation Committee believes that options motivate executive
officers to manage the Company in a manner that will also benefit shareholders.
As such, options were granted, only if performance levels were achieved, at the
current market price. One of the principal factors considered in granting
options to an executive officer was the executive officer's ability to influence
the Company's long-term growth and profitability. As only a limited number of
options remain available for grant, no options were granted to executive
officers in fiscal 2003.
With respect to the base salary granted to Mr. Karp, the Company's President,
the Compensation Committee made a favorable assessment of the Company's actual
operating results for fiscal 2003, as compared to the Company's goals and from
the performance of Mr. Karp on various accomplishments for fiscal 2003. The
Compensation Committee also considered Mr. Karp's relative position as compared
to his peers in the industry. Based on these factors, Mr. Karp's salary was
increased to $165,000 for fiscal 2004. No stock options were granted to Mr. Karp
in fiscal 2003.
In fiscal 2003, no stock options were granted to the Company's executive
officers.
Stock Option Plan
In April 1997, the Company adopted a stock option plan, which currently covers
1,000,000 shares of the Common Stock. At November 1, 2003, options currently
outstanding aggregating 989,100 and 10,900 options are available for grant.
Options may be designated as either (i) incentive stock options ("ISOs") under
the Internal Revenue Code of 1986, as amended (the "Code") or (ii) non-qualified
stock options. ISOs may be granted under the Stock Option Plan to employees and
officers of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company (collectively "Options"). In certain circumstances, the exercise of
Options may have an adverse effect on the market price of the Common Stock. The
Stock Option Plan was approved by the Company's shareholders in fiscal 1998.
The Stock Option Plan is intended to encourage stock ownership by employees of
the Company, so that they may acquire or increase their proprietary interest in
the Company and to encourage such employees and directors to remain in the
employ of the Company and to put forth maximum efforts for the success of the
business. Options granted under the Stock Option Plan may be accompanied by
either stock appreciation rights ("SARS") or limited stock appreciation rights
(the "Limited SARS"), or both.
The Plan is administered by the Compensation Committee as the Board may
establish or designate. The members of the Compensation and Stock Option
Committee are William F. Kenny III, Jeffrey A. Wurst, Fredric J. Gruder,
Nicholas A. Marshall and Ira J. Lamel.
The Compensation and Stock Option Committee, within the limitation of the Stock
Option Plan, shall have the authority to determine the types of options to be
granted, whether an Option shall be accompanied by SARS or Limited SARS, the
purchase price of the shares of Common Stock covered by each Option (the "Option
Price"), the persons to whom, and the time or times at which, Options shall be
granted, the number of shares to be covered by each Option and the terms and
provisions of the option agreements.
The maximum aggregate number of shares of Common Stock as to which Options,
Rights and Limited Rights may be granted under the Stock Option Plan to any one
optionee during any fiscal year of the Company is 100,000, as approved and
amended by the shareholders in fiscal 2000.
With respect to the ISOs, in the event that the aggregate fair market value,
determined as of the date the ISO is granted, of the shares of Common Stock with
respect to which Options granted and all other option plans of the Company, if
any, become exercisable for the first time by any optionee during any calendar
year exceeds $100,000, Options granted in excess of such limit shall constitute
non-qualified stock options for all purposes. Where the optionee of an ISO is a
ten (10%) percent shareholder, the Option Price will not be less than 110% of
the fair market value of the Company's Common Stock, determined on the date of
grant, and the exercise period will not exceed five (5) years from the date of
grant of such ISO. Otherwise, the Option Price will not be less than one hundred
(100%) percent of the fair market value of the shares of the Common Stock on the
date of grant, and the exercise period will not exceed ten (10) years from the
date of grant. Options granted under the Plan shall not be transferable other
than by will or by the laws of descent and distribution, and Options may be
exercised, during the lifetime of the optionee, only by the optionee or by his
guardian or legal representative.
In fiscal 2003, no stock options were granted to the Company's executives or
directors.
In fiscal 2002, the Company's Compensation and Stock Option Committee approved
two grants of incentive stock options aggregating 205,000, to the Company's
officers to purchase the Company's Common Stock at exercise prices from $1.15 -
$1.35 per share. The fiscal 2002 incentive stock options are exercisable
immediately.
In fiscal 2001, the Company's Compensation and Stock Option Committee approved
three grants of incentive stock options aggregating 262,500, to the Company's
officers and outside directors, to purchase the Company's Common Stock at
exercise prices from $.8125-$1.375 per share. The fiscal 2001 incentive stock
options are exercisable immediately.
No stock options were exercised by executives or directors in fiscal 2003.
Exercise prices for options outstanding as of November 1, 2003, are as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Options Remaining
Outstanding at Exercisable at Contractual Life
Exercise Price Year End End of Year in Years
------------------------ ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
$.8125 90,000 90,000 8
$.8937 12,500 12,500 8
$.9375 90,000 90,000 8
$1.00 62,625 62,625 5
$1.0313 25,000 25,000 8
$1.15 90,000 90,000 9
$1.265 25,000 25,000 4
$1.35 90,000 90,000 9
$1.375 45,000 45,000 8
$1.50 222,500 222,500 6
$1.75 102,500 102,500 7
$1.86 57,500 57,500 7
$1.925 12,500 12,500 7
$2.00 4,975 4,975 4
$3.00 59,000 59,000 4
---------------------- ----------------------
989,100 989,100 7
====================== ======================
</TABLE>
PERFORMANCE GRAPH
The following graph shows a 60-month comparison of the cumulative total return
to shareholders for the Company, The Russell 2000 Index and a peer group of
substantially larger electronics companies. The graph assumes that the value of
investment in the Company's Common Stock and in each index was $100 on October
31, 1998, including the reinvestment of dividends, if any. The Company's fiscal
year is either a 52 or 53-week year with the fiscal year ending on the Saturday
closest to October 31. All fiscal years presented in the performance graph
include 52 weeks, except fiscal 2003, which includes 53 weeks.
[GRAPH OMITTED]
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of November 1, 2003, based on
information obtained from the persons named below, by (i) each person known to
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each executive officer and director of the Company, and (iii) all
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Name and Address of Title Amount and Nature of
Beneficial Owner of Class Beneficial Ownership Percentage
----------------------------------------------------- --------------- ------------------------ --------------
<S> <C> <C> <C>
Harvey Acquisition Company LLC ("HAC") Common 253,932 7.6%
c/o Michael E. Recca
949 Edgewood Avenue
Pelham Manor, NY 10803
Michael E. Recca Common 430,078 (1) 12.3%
949 Edgewood Avenue
Pelham Manor, NY 10803
Matthew and Alicia Larson Common 365,800 11.0%
c/o CIBC 200 Liberty Street
New York, NY 10281
Ronald I. And Joyce L. Heller Common 194,900 5.9%
74 Farview Road
Tenafly, New Jersey 07670
Jeffrey A. Wurst Common 46,050 (6) 1.4%
c/o Ruskin Moscou Faltischek P.C.
190 EAB Plaza
Uniondale, NY 11556
William F. Kenny, III Common 53,989 (2) 1.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Fredric J. Gruder Common 40,000 (2) 1.2%
775 Park Avenue
Huntington, NY 11753
Nicholas A. Marshall Common -0- -
113 Horseshoe Road
Mill Neck, N Y 11765
Ira J. Lamel Common -0- -
58 South Service Road
Melville, NY 11747
Franklin C. Karp Common 234,500 (3) 6.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Joseph J. Calabrese Common 201,702 (4) 5.7%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Michael A. Beck Common 197,500 (4) 5.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Roland W. Hiemer Common 107,500 (5) 3.1%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
All Directors and Officers as a group Common 1,311,319 (7) 30.3%
(10 Persons)
All Beneficial Owners as a group Common 1,872,019 (7) 43.2%
<FN>
(1) Includes shares owned by HAC, of which Mr. Recca is a member and the sole
manager, plus options to purchase up to 160,000 shares of the Company's
Common Stock which are exercisable at an exercise price of between
$.8937-$1.925 per share.
(2) Includes options to purchase up to 40,000 shares of the Company's Common
Stock, which is exercisable at an exercise price of between $.8125-$1.375
per share.
(3) Includes options to purchase up to 212,500 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $.8125-$.300
per share.
(4) Includes options to purchase up to 190,000 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $.8125-$3.00
per share.
(5) Includes options to purchase up to 105,000 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $.8125-$3.00
per share.
(6) Includes a warrant to purchase 15,000 shares of the Company's Common Stock,
in the name of Ruskin Moscou Faltischek, P.C., the law firm in which Mr.
Wurst is a Partner, at an exercise price of $5.00 per share. Mr. Wurst has
expressly disclaimed beneficial ownership of this warrant. Also includes
options to purchase up to 30,000 shares of the Company's Common Stock,
which is exercisable at an exercise price of between $.8125-$1.375 per
share.
(7) Includes options and warrants to purchase up to 982,500 shares of Common
Stock, which are exercisable at an exercise price of between $.8125-$5.00
per share.
</FN>
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's common stock, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission and NASDAQ. In
addition, officers, directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of such
forms received by it, and written representations from certain reporting persons
that no Forms 5 were required for those persons, the Company believes that
during the fiscal year ended November 1, 2003, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were fully satisfied, except that William F. Kenny, III filed
a Form 4 late on October 1, 2003.
Item 13. Certain Relationships and Related Transactions.
From April 1, 1998 through April 30, 2000, Mr. Recca received $7,917 per month,
representing a director's fee in the annual amount of $95,000, in his capacity
as the Chairman of the Board of Directors of the Company. Effective May 1, 2000,
Mr. Recca was placed on the Company's payroll at an annual salary of $120,000,
plus all Company sponsored benefits.
From January 2001 to April 2002, Mr. Recca had also been a principal of
NorthStar Capital, LLC which was a joint venture between certain of the partners
of Ruskin Moscou Faltischek, P.C. ("Ruskin"), the Company's corporate counsel
and Mr. Recca. Since April 2002, Mr. Recca has been a director of Sky Capital
Holdings, LTD, and of several wholly owned subsidiaries of Sky Capital Holdings,
and the President of Sky Capital, LLC, a wholly owned subsidiary of Sky Capital
Holdings, LTD and a NASD broker-dealer. Mr. Recca is also a director of Sky
Venture Capital and Sky Capital Ventures and several of their wholly or
partially owned subsidiaries.
Jeffrey A. Wurst, Director, is also a Senior Partner with Ruskin. At November 1,
2003 and October 26 2002, the Company had amounts payable to Ruskin of
approximately $49,000 and $26,000, respectively. The Company also paid legal
fees to Ruskin of $95,000, $81,000 and $64,000, in fiscal years 2003, 2002 and
2001, respectively.
Dividends paid to preferred stockholders aggregated $70,000, $74,000, and
$108,000 for fiscal years 2003, 2002 and 2001, respectively.
Item 14. Principal Accounting Fees and Services
The following represents amounts billed and amounts expected to be billed to the
Company for the professional services of BDO Seidman, LLP rendered during fiscal
years 2003 and 2002:
2003 2002
---- ----
Audit Fees $ 60,000 $ 55,000
Audit - Related Fees $ 16,050(1) $ 7,500(2)
Tax Fees $ - $ -
All Other Fees $ - $ -
------------------------ -----------------------
Total $ 76,050 $ 62,500
======================== =======================
(1) For fiscal 2003, services provided under this category consist of $8,550
for services related to a mid-year inventory observation and research
regarding the affect of a change in the Company's year-end and $7,500 for
consultation relating to accounting and SEC issues.
(2) For fiscal 2002, services provided under this category consist of $7,500
for consultation relating to accounting and SEC issues.
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a)--List of Financial Statements and Financial Statement Schedule and Exhibits:
(1) List of Financial Statements:
Balance Sheets - November 1, 2003 and October 26, 2002
Statements of Operations - Fiscal years ended November 1, 2003, October
26, 2002 and October 27, 2001
Statements of Shareholders' Equity - Fiscal years ended November 1, 2003,
October 26, 2002 and October 27, 2001
Statements of Cash Flows - Fiscal years ended November 1, 2003, October
26, 2002, and October 27, 2001
Notes to Financial Statements
(2) List of Financial Statements Schedule:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(3) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under
Commission File #333--42121:
Exhibit Number Description
3.1.1--Restated Certificate of Incorporation of 1967
3.1.2--Certificate of Amendment of the Certificate of Incorporation of 1997
3.1.3--Certificate of Amendment of the Certificate of Incorporation of December
1996
3.1.4--Certificate of Amendment of Certificate of Incorporation of July 1988
3.1.5--Certificate of Amendment of Certificate of Incorporation of July 1971
3.1.6--Certificate of Amendment of Certificate of Incorporation of February 1971
3.1.7--Certificate of Amendment of Certificate of Incorporation of June 1969
3.1.8--Certificate of Amendment of Certificate of Incorporation of September
1968
4.1--Sections in Certificate of Incorporation and the Amended and Restated
By-Laws of Harvey Electronics, Inc., that define the rights of the holders of
shares of Common Stock, Preferred Stock and holders of Warrants (included in
Exhibit Nos. 3.1.2 and 3.1.3)
4.2--Form of Common Stock Certificate
4.3--Form of Redeemable Common Stock Purchase Warrant
4.4--Form of Representative's Warrant
4.5--Form of Warrant to Holders of Preferred Stock
10.1.1--Stock Option Plan of Harvey Electronics, Inc.
10.1.2--Form of Stock Option Agreement
10.2.1--Severance Agreement with Franklin C. Karp
10.2.2--Severance Agreement with Joseph J. Calabrese
10.2.3--Severance Agreement with Michael A. Beck
10.2.4--Severance Agreement with Roland W. Hiemer
10.4.1--Dealer Agreement between the Company and Mitsubishi Electronics America,
Inc.
10.4.2--Dealer Agreement between the Company and Niles Audio Corporation, Inc.
10.5.1--Lease between the Company and Joseph P. Day Realty Corp. (2)
10.5.2--Lease between the Company and Goodrich Fairfield Associates, L.L.C. (2)
10.5.3--Lease between the Company and Sprout Development Co. (2)
10.5.4--Lease between the Company and Service Realty Company (2)
10.5.5--Lease between the Company and 205 Associates (2)
10.5.6--Sublease between the Company and Fabian Formals, Inc. and Affiliate
First Nighter of Canada (2)
10.6--Loan and Security Agreement, Master Note and Trademark Security Agreement
with Paragon Capital L.L.C.
(ii) The following exhibits are hereby incorporated by reference from Exhibit A
filed as part of the registrant's Form 8-K dated November 3, 1997:
2.1.1--Restated Modified Amended Joint and Substantially Consolidated Plan of
Reorganization of Harvey Electronics, Inc.
2.1.2--Order dated November 13, 1996 Confirming Plan of Reorganization
(iii) The following exhibits are hereby incorporated by reference from Item 7
filed as part of the registrant's Form 8-K dated April 7, 1998:
4.4--Representative's Warrant Agreement
4.5--Warrant Agent Agreement
10.1--Underwriting Agreement
10.2--Financial Advisory and Investment Banking Agreement between the Company
and The Thornwater Company, L.P.
(iv) The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 8-K dated October 12, 1998:
10.01--Bang & Olufsen America, Inc. Termination Letter dated September 7, 1998
10.02--Bang & Olufsen America, Inc. New Agreement Letter dated October 8, 1998
10.03--Agreement with Thornwater regarding termination of agreements and lock-up
amendments dated October 31, 1998
(v) The following exhibits are hereto incorporated by reference to the Company's
Form 10KSB dated October 31, 1998:
10.5.7--Lease Agreement with Martin Goldbaum and Sally Goldbaum
10.5.8--Lease Agreement with Bender Realty
10.7--Surrender of Lease with 873 Broadway Associates
10.8--Contract of Sale with Martin Goldbaum, Sally Goldbaum, the Sound Mill,
Inc. and Loriel Custom Audio Video Corp.
10.9--License Agreement with ABC Home Furnishings, Inc.
(vii) The following exhibits are hereto incorporated by reference to the
Company's Form 10KSB dated October 28, 2000:
10.2.5--Severance Agreement between the Company and Michael E. Recca
10.2.6--Amended and Restated Severance Agreement between the Company and
Franklin C. Karp
10.2.7--Amended and Restated Severance Agreement between the Company and Joseph
J. Calabrese
10.2.8--Amended and Restated Severance Agreement between the Company and Michael
A. Beck
10.5.9--Sublease Agreement between the Company and Bang & Olufsen America, Inc.
10.6--Lease Agreement between the Company and WSG Eatontown LP
10.6.1--Lease Modification Agreement between the Company and WSG Eatontown LP
10.6.2--Renewal of License Agreement with ABC Home Furnishings, Inc.
10.10--Repurchase Agreement between the Company, Bang & Olufsen America, Inc.
and Paragon Capital, L.L.C.
10.11--Addendum to Repurchase Agreement between the Company, Bang & Olufsen
America, Inc. and Paragon Capital, L.L.C.
10.12--Second Amendment to Loan and Security Agreement with Paragon Capital,
L.L.C.
10.13--Third Amendment to Loan and Security Agreement with Paragon Capital,
L.L.C.
10.14--Consulting Agreement with Mesa Partners Inc.
10.15--Addendum to Consulting Agreement with Mesa Partners, Inc.
10.16--Warrant to purchase 15,000 shares of the Company's Common Stock, issued
to Mesa Partners, Inc.
10.17--Investor relations agreement with Porter, LeVay & Rose
(viii)--The following exhibits are hereto incorporated by reference to the
Company's Form 10KSB dated October 27, 2001:
10.6.3--Modification of Lease between the Company and Service Realty Company
10.6.4--First Amendment of Lease between the Company and 205 Associates
(ix) --The following exhibits are hereto incorporated by reference to the
Company's Form 10K dated October 26, 2002:
10.6.5--Lease Extension Agreement between the Company and Sprout Development Co.
10.6.6--Second Amendment of lease between the Company and 205 Chubb Avenue, LLC
(x) --The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 8-K dated November 25,
2003:
10.18--Loan and Security Agreement by and between Harvey Electronics, Inc. and
Whitehall Retail Finance, a division of Whitehall Business Credit Corporation,
dated November 21, 2003.
10.19--Trademark Security Agreement by and between Harvey Electronics, Inc. and
Whitehall Retail Finance, a division of Whitehall Business Credit Corporation,
dated November 21, 2003.
10.20--Repurchase Agreement by and among Bang & Olufsen America, Inc., Whitehall
Retail Finance, a division of Whitehall Business Credit Corporation and Harvey
Electronics, Inc., dated November 21, 2003.
(xi) --The following exhibits are annexed hereto:
10.6.7 - Renewal of License Agreement with ABC Home Furnishings, Inc.
14.1 --Code of Ethics
23. --Consent of BDO Seidman, LLP
23.1--Consent of Ernst and Young, LLP
31.1--Certification - President
31.2--Certification - CFO
32.1--Certification - President
32.2--Certification - CFO
(b) --Reports on Form 8-K:
On October 10, 2003, the Company filed Form 8-K with the Securities and Exchange
Commission announcing it had received notice from NASDAQ that its Common Stock
failed to maintain a minimum bid price of $1.00 over the previous 30 consecutive
trading days as required by the NASDAQ SmallCap Market.
On November 25, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission, announcing the successful closing of a new $7.5 million
credit facility with Whitehall Retail Finance.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Harvey Electronics, Inc.
By: /s/ Franklin C. Karp
--------------------
Franklin C. Karp, President
Dated: January 30, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Franklin C. Karp President and Director January 30, 2004
-------------------------------------
Franklin C. Karp
/s/ Joseph J. Calabrese Executive Vice President, Chief Financial January 30, 2004
------------------------------------- Officer, Treasurer, Secretary and Director
Joseph J. Calabrese
/s/ Michael E. Recca Chairman and Director
-------------------------------------
Michael E. Recca
/s/ William F. Kenny, III Director
-------------------------------------
William F. Kenny, III
/s/ Fredric J. Gruder Director
-------------------------------------
Fredric J. Gruder
/s/ Jeffrey A. Wurst Director
-------------------------------------
Jeffrey A. Wurst
/s/ Nicholas A. Marshall Director
-------------------------------------
Nicholas A. Marshall
/s/ Ira J. Lamel Director
-------------------------------------
Ira J. Lamel
</TABLE>
<TABLE>
<CAPTION>
Item 8. Financial Statements and Supplementary Data
Harvey Electronics, Inc.
Index to Financial Statements and Supplemental Data
<S> <C>
Report of Independent Certified Public Accountants................................................. F-2
Report of Independent Auditors..................................................................... F-3
Balance Sheets--November 1, 2003 and October 26, 2002.............................................. F-4
Statements of Operations--Fiscal years ended November 1, 2003, October 26, 2002
and October 27, 2001............................................................................ F-5
Statements of Shareholders' Equity--Fiscal years ended November 1, 2003,
October 26, 2002 and October 27, 2001........................................................... F-6
Statements of Cash Flows--Fiscal years ended November 1, 2003,
October 26, 2002 and October 27, 2001........................................................... F-7
Notes to Financial Statements...................................................................... F-8-27
The following financial statement schedule of Harvey Electronics, Inc. is included as supplementary data:
Schedule II - Valuation and Qualifying Accounts.................................................... F-28
Report of Independent Certified Public Accountants................................................. F-29
</TABLE>
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Harvey Electronics, Inc.
We have audited the accompanying balance sheets of Harvey Electronics, Inc. as
of November 1, 2003 and October 26, 2002, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Harvey Electronics, Inc. as of
November 1, 2003 and October 26, 2002, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, effective October 27, 2002,
the Company adopted Statement of Financial Standards No. 142, Goodwill and Other
Intangible Assets.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Melville, New York
December 23, 2003
Report of Independent Auditors
The Board of Directors and Shareholders
Harvey Electronics, Inc.
We have audited the accompanying statements of operations, shareholders' equity
and cash flows of Harvey Electronics, Inc. for the year ended October 27, 2001.
Our audit also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 results of operations and cash flows of Harvey
Electronics, Inc. for the year ended October 27, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------
Melville, New York
December 28, 2001
<TABLE>
<CAPTION>
Harvey Electronics, Inc.
Balance Sheets
November 1, October 26,
2003 2002
--------------- -----------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $16,000 $15,990
Accounts receivable, less allowance of $20,000 and $20,000 751,293 634,663
Inventories 7,416,978 6,804,161
Prepaid expenses and other current assets 177,394 212,692
--------------- -----------------
Total current assets 8,361,665 7,667,506
--------------- -----------------
Property and equipment:
Leasehold improvements 3,640,023 3,363,928
Furniture, fixtures and equipment 2,103,964 1,941,765
Internet website 456,870 441,670
--------------- -----------------
6,200,857 5,747,363
Less accumulated depreciation and amortization 3,433,969 2,730,164
--------------- -----------------
2,766,888 3,017,199
Equipment under capital leases, less accumulated amortization
of $384,706 and $382,537 13,115 62,023
Goodwill 125,000 125,000
Reorganization value in excess of amounts allocable to identifiable
assets 791,440 986,440
Other assets, less accumulated amortization of $248,769 and
$183,794 266,498 293,297
--------------- -----------------
Total assets $12,324,606 $12,151,465
=============== =================
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $ 0 $3,119,493
Trade accounts payable 2,280,019 2,274,833
Customer deposits 1,693,263 1,484,237
Accrued expenses and other current liabilities 1,310,278 1,293,207
Income taxes 104,500 50,200
Cumulative Preferred Stock dividends payable 23,432 23,432
Current portion of capital lease obligations 0 22,420
--------------- -----------------
Total current liabilities 5,411,492 8,267,822
--------------- -----------------
Long-term liabilities:
Revolving line of credit facility 2,725,603 0
Deferred rent 242,737 155,615
--------------- -----------------
Total long-term liabilities 2,968,340 155,615
--------------- -----------------
Commitments and contingencies
Shareholders' equity:
8-1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share;
authorized 10,000 shares; issued and outstanding 827 shares (aggregate
liquidation preference--$827,000)
379,982 379,982
Common Stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 3,324,525 shares 33,245 33,245
Additional paid-in capital 7,601,305 7,601,305
Accumulated deficit (4,069,758) (4,286,504)
--------------- -----------------
Total shareholders' equity 3,944,774 3,728,028
--------------- -----------------
Total liabilities and shareholders' equity $12,324,606 $12,151,465
=============== =================
See accompanying notes to financial statements.
</TABLE>
Harvey Electronics, Inc.
Statements Of Operations
<TABLE>
<CAPTION>
Fifty-three Weeks Fifty- two Weeks Fifty- two Weeks
Ended Ended Ended
November 1, October 26, October 27,
2003 2002 2001
------------------------- --------------------- --------------------------
<S> <C> <C> <C>
Net sales $42,448,216 $41,326,577 $36,606,206
Interest and other income 72,677 116,021 82,917
------------------------- --------------------- --------------------------
42,520,893 41,442,598 36,689,123
------------------------- --------------------- --------------------------
Cost of sales 25,140,486 24,973,269 22,471,054
Selling, general and administrative expenses 16,555,451 15,806,022 15,128,410
Interest expense 342,915 358,836 339,894
------------------------- --------------------- --------------------------
42,038,852 41,138,127 37,939,358
------------------------- --------------------- --------------------------
Income (loss) before income taxes 482,041 304,471 (1,250,235)
Income taxes 195,000 124,000 0
------------------------- --------------------- --------------------------
Net income (loss) 287,041 180,471 (1,250,235)
Preferred Stock dividend requirement 70,295 72,777 74,376
------------------------- --------------------- --------------------------
Net income (loss) applicable to Common Stock $216,746 $107,694 ($1,324,611)
========================= ===================== ==========================
Net income (loss) per share applicable to common shareholders:
Basic $0.07 $0.03 ($0.40)
========================= ===================== ==========================
Diluted $0.06 $0.03 ($0.40)
========================= ===================== ==========================
Shares used in the calculation of net income (loss) per common share:
Basic 3,324,525 3,297,827 3,282,833
========================= ===================== ==========================
Diluted
3,866,415 3,907,401 3,282,833
========================= ===================== ==========================
See accompanying notes to financial statements.
</TABLE>
Harvey Electronics, Inc.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
----------------------- -------------------------
Shares Amount Shares Amount Capital Deficit Equity
--------- ------------- ------------- ----------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 28, 2000 875 $402,037 3,282,833 $32,828 $7,481,667 $(3,069,587) $ 4,846,945
Net loss for the year - - - - - (1,250,235) (1,250,235)
Recorded value of Common
Stock warrants granted - - - - 98,000 - 98,000
Preferred Stock dividend - - - - - (74,376) (74,376)
--------- ------------- ------------- ----------- -------------- ---------------- ----------------
Balance at October 27, 2001 875 402,037 3,282,833 32,828 7,579,667 (4,394,198) 3,620,334
Net income for the year - - - - - 180,471 180,471
Preferred Stock dividend - - - - - (72,777) (72,777)
Conversion of Preferred Stock
to Common Stock (48) (22,055) 38,920 389 21,666 - 0
Exercise of cash-less
Common Stock warrant - - 2,772 28 (28) - 0
--------- ------------- ------------- ----------- -------------- ---------------- ----------------
Balance at October 26, 2002 827 379,982 3,324,525 33,245 7,601,305 (4,286,504) 3,728,028
Net income for the year - - - - - 287,041 287,041
Preferred Stock dividend - - - - - (70,295) (70,295)
--------- ------------- ------------- ----------- -------------- ---------------- ----------------
Balance at November 1, 2003 827 $379,982 3,324,525 $33,245 $7,601,305 ($4,069,758) $3,944,774
========= ============= ============= =========== ============== ================ ================
See accompanying notes to financial statements.
</TABLE>
Harvey Electronics, Inc
Statements of Cash Flows
<TABLE>
<CAPTION>
Fifty Three Weeks Fifty-Two Weeks Fifty Two Weeks
Ended Ended Ended
November 1, 2003 October 26, 2002 October 27, 2001
------------------------- ----------------------- ------------------------
Operating activities
<S> <C> <C> <C>
Net income (loss) $287,041 $180,471 ($1,250,235)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 795,388 916,873 989,055
Income tax equivalent provision 195,000 124,000 -
Straight-line impact of rent escalations 87,122 955 (21,556)
Miscellaneous (24,701) (14,473) (5,464)
Changes in operating assets and liabilities:
Accounts receivable (116,630) (50,758) (105,808)
Allowance for bad debts - (5,000) -
Inventories (574,257) (17,901) (168,729)
Prepaid expenses and other current assets 42,439 1,578 (8,708)
Trade accounts payable 5,186 (659,035) (95,782)
Customer deposits 209,026 (37,923) 491,920
Accrued expenses, other current liabilities
and income taxes 64,230 282,125 (88,057)
------------------------- ----------------------- ------------------------
Net cash provided by (used in) operating activities 969,844 720,912 (263,364)
------------------------- ----------------------- ------------------------
Investing activities
Purchases of property and equipment excluding
Internet website development (454,554) (220,845) (1,661,398)
Internet website development (15,200) (16,040) (73,032)
Purchases of other assets (13,475) (9,140) (563)
Security deposits-net - 11,935 -
Note receivable-officer - - 7,500
------------------------- ----------------------- ------------------------
Net cash used in investing activities (483,229) (234,090) (1,727,493)
------------------------- ----------------------- ------------------------
Financing activities
Net (payments) proceeds from revolving credit facility (393,890) (322,527) 2,374,311
Preferred Stock dividends paid (70,295) (74,151) (107,603)
Principal payments on note payable - (21,985) (10,374)
Principal payments on capital lease obligations (22,420) (80,505) (197,514)
Commitment fee from increased revolving credit facility - - (75,000)
------------------------- ----------------------- ------------------------
Net cash (used in) provided by financing activities (486,605) (499,168) 1,983,820
------------------------- ----------------------- ------------------------
Increase (decrease) in cash and cash equivalents 10 (12,346) (7,037)
Cash and cash equivalents at beginning of year 15,990 28,336 35,373
------------------------- ----------------------- ------------------------
Cash and cash equivalents at end of year $16,000 $15,990 $28,336
========================= ======================= ========================
Supplemental cash flow information:
Interest paid $347,000 $361,000 $302,000
========================= ======================= ========================
Taxes paid $17,000 $6,000 $17,000
========================= ======================= ========================
See accompanying notes to financial statements.
</TABLE>
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company is a specialty retailer and custom installer of high quality
audio/video consumer electronics and home theater products in the Metropolitan
New York area. Operations of the Company consist solely of this single segment.
The Company's fiscal year ends the Saturday closest to October 31. The fiscal
year ended November 1, 2003 consists of 53 weeks and the fiscal years ended
October 26, 2002 and October 27, 2001 each consist of 52 weeks.
Net sales and operating results for the Company's first quarter of its fiscal
year are positively affected by a strong holiday demand.
Accounting Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the financial statements and accompanying
notes. Management bases its estimates on certain assumptions, which they believe
are reasonable in the circumstances, and does not believe that any change in
those assumptions would have a significant effect on the financial position or
results of operations. Actual results could differ from those estimates.
Revenue Recognition
For the Company, net sales and operating revenues include items related to
normal business operations, including the sale of goods to customers and custom
installation revenue. Retail sales are recorded at the time of the sale to the
customer. Custom installation revenue, which is comprised of both the sale of
products and the labor in connection with the installation of the products, are
recorded in accordance with the provisions of EITF 00-21, "Revenue Arrangements
with Multiple Deliverables". The revenue related to the sale of the products is
recognized when the product is delivered to the customers. The revenue related
to the labor in connection with the installation of the products, is recorded
when the service has been performed. The amount representing labor, for all
years presented is less than 9% of revenues, and accordingly has been included
in net sales.
In addition, the Company sells extended warranty contracts for a third party
provider. The profit on extended warranty sales is considered commission at the
time of sale. The net amount earned on these sales, which is not significant, is
recorded in net sales, in accordance with EITF 99-19, "Reporting Revenue Gross
as a Principal Versus Net as an Agent."
Long-Lived Assets
Property and equipment are stated at cost. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives of the
respective assets. Amortization of improvements to leased properties is based
upon the remaining terms of the leases or the estimated useful lives of such
improvements, whichever is shorter. The Company evaluates the periods of
amortization continually in determining whether events and circumstances warrant
revised estimates of useful lives. If estimates are changed, the unamortized
cost will be allocated to the increased or decreased number of remaining periods
in the revised lives.
When conditions indicate a need to evaluate recoverability, SFAS No. 144
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" requires that the Company (1) recognize an impairment loss only
if the carrying amount of a long-lived asset is not recoverable based on its
undiscounted future cash flows and (2) measure an impairment loss as the
difference between the carrying amount and fair value of the asset.
Store Opening Costs
Costs of a non-capital nature incurred prior to store openings are expensed as
incurred. There were no store openings in 2003 or 2002. In fiscal 2001, a store
was opened in Eatontown, NJ.
Stock-Based Compensation
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its stock-based
compensation plans and accordingly, no compensation cost has been recognized for
its stock options in the financial statements. The Company has elected not to
implement the fair value based accounting method for employee stock options
under SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected
to disclose the pro forma net income (loss) per share for employee stock option
grants made beginning in fiscal 1997 as if such method had been used to account
for stock-based compensation costs described in SFAS No. 148 "Accounting for
Stock Based Compensation-Transition and Disclosure", an amendment of SFAS No.
123.
For the purpose of determining the disclosures required by SFAS No. 123, the
fair value of the options were estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for fiscal
years 2002 and 2001: risk-free interest rate ranging from 4.44%-5.02% and
4.88%-5.47%, respectively; no dividend yield; volatility factor of the expected
market price of the Company's Common Stock of 1.00 and 0.938, respectively; and
a weighted-average expected life of the options of 9.39 years and 7 years,
respectively. F-9 Had compensation cost for stock option grants during the
fiscal years 2003, 2002 and 2001 been determined under the provisions of SFAS
No. 123, the Company's net income (loss) and earnings (loss) per share would
have been as follows:
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002 Fiscal 2001
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) as reported $216,746 $107,694 $(1,324,611)
Stock-based employee compensation expense
determined under the fair value method - (227,000) (224,000)
-------------------------------------------------------------------
Pro forma net income (loss) $216,746 $(119,306) $(1,548,611)
-------------------------------------------------------------------
Net Income (loss) per share applicable
to common stock:
Basic $.07 $ .03 $(.40)
Less compensation expense determined under
the fair value method - (.07) (.07)
Adjusted basic net income(loss) per share $.07 $(.04) $(.47)
-------------------------------------------------------------------
Net Income (loss) per share applicable
to common stock:
Diluted $.06 $.03 $(.40)
Less compensation expense determined under
the fair value method - (.07) (.07)
-------------------------------------------------------------------
Adjusted diluted net income(loss) per share
$.06 $(.04) $(.47)
-------------------------------------------------------------------
</TABLE>
Inventories
Inventories, consisting of finished goods, are stated at the lower of cost
(average-cost method, which approximates the first-in, first-out method) or
market value.
Internet Website
The Company follows the provisions of EITF 00-2, "Accounting for Website
Development Costs," which provides guidance on how an entity should account for
website development costs. In accordance with EITF 00-2, costs incurred in the
website application and infrastructure development stage relating to the
acquisition or development of software or the development of graphics for
internal use, should be accounted for under the provisions of Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" and capitalized. As such, and in accordance with
SOP 98-1, the Company capitalized approximately $15,000, $26,000, and $73,000
for fiscal years 2003, 2002 and 2001, respectively, relating to the development
of its website. These costs are being amortized on a straight-line basis over a
period of one to three years.
Income Taxes
The Company follows the liability method in accounting for income taxes as
described in SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes (see
Note 5).
Income (Loss) Per Share
Basic and diluted income (loss) per share are calculated in accordance with SFAS
No. 128, "Earnings Per Share." The basic and diluted income (loss) per common
share for the fiscal years ended November 1, 2003, October 26, 2002 and October
27, 2001 were computed based on the weighted-average number of common shares
outstanding. Common equivalent shares relating to stock options aggregating
38,970 and 88,476, were included in the weighted average number of common shares
outstanding for fiscal 2003 and 2002, respectively for the diluted earnings per
share computation. No common equivalent shares relating to stock options or
warrants were included in the weighted average number of shares outstanding for
the basic or diluted loss per share computation for fiscal year 2001 as their
effect was anti-dilutive.
Commencing January 1, 2001, the conversion price of the Company's preferred
stock was $1.2333. In June 2002, 48 shares of preferred stock were converted to
38,920 shares of the Company's Common Stock by a preferred shareholder. As a
result, 13,969 shares of Common Stock were included in the weighted average
number of common shares outstanding for the diluted earnings per share
computation for fiscal 2002. Common equivalent shares of 502,920 in fiscal 2003,
relating to the conversion of the remaining outstanding preferred stock, were
included in the weighted average number of common shares outstanding for the
diluted earnings per share calculation. Common equivalent shares (670,559 in
fiscal 2002 and 709,479 in fiscal 2001), relating to the conversion of the
remaining outstanding preferred stock, were not included in the weighted average
number of common shares outstanding of the diluted earnings per share
calculation, as their effect was antidilutive.
In June 2002, 15,000 warrants to purchase the Company's Common Stock were
exchanged for 2,772 shares of Common Stock, effected under a cash-less exercise.
As a result, 1,025 shares were included in the weighted average number of common
shares outstanding for the diluted earnings per share computation for fiscal
2002.
Options and warrants aggregating 931,637, 3,066,457 and 3,361,233, were excluded
from the computation for fiscal years 2003, 2002 and 2001, respectively, as
their effect would have been antidilutive.
Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate their fair values principally
because of the short-term nature of these items. The carrying value of
borrowings under the revolving line of credit facility approximate fair value,
due to its variable market interest rates.
Concentration of Credit Risk
The Company's operations consist of the retail sale, service and custom
installation of high quality audio, video and home theater equipment in the New
York Metropolitan area. The Company performs credit evaluations of its
customers' financial condition and payment history but does not require
collateral. Generally, accounts receivable are due within 30 days and credit
losses have historically been immaterial.
Advertising Expense
In accordance with EITF 02-16, "Accounting by a Customer for Certain
Consideration Received from a Vendor" ("EITF 02-16") which addresses how and
when to reflect consideration received from suppliers in the financial
statements, the Company's advertising expense, net of cooperative advertising
allowances, is charged to operations when the advertising takes place.
Advertising expense for the years ended November 1, 2003, October 26, 2002 and
October 27, 2001 was approximately $366,000, $632,000 and $1,206,000,
respectively. Prepaid advertising for print advertisements not run and broadcast
advertisements not aired at November 1, 2003 and October 26, 2002 was
approximately $29,000 and $29,000, respectively.
Reorganization Value and Fresh Start Reporting
The Company adopted Fresh Start Reporting in accordance with SOP 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code,"
when it emerged from a Chapter 11 proceeding on December 26, 1996. At that time,
Fresh Start Reporting resulted in changes to the balance sheet, including
valuation of assets and liabilities at fair market value, elimination of the
accumulated deficit and valuation of equity based on the reorganization value of
the ongoing business.
The reorganization value of the Company was determined based on the
consideration received from Harvey Acquisition Company LLC (HAC) to obtain its
principal ownership in the Company. A carrying value of $318,000 was assigned to
the Preferred Stock (see Note 5). Subsequent to the Reorganization Date, the
Company issued an additional 51,565 shares of Common Stock to InterEquity
Capital Partners, L.P., a pre-reorganization subordinated secured debtholder, as
authorized by the Court, for an approved finder's fee. The excess of the
reorganization value over the fair value of net assets and liabilities ($791,440
and $986,440 at November 1, 2003 and October 26, 2002, respectively) is reported
as "Reorganization value in excess of amounts allocable to identifiable assets"
and was amortized over a 25-year period, prior to the adoption of SFAS No. 142
(see below) in fiscal 2003 where no amortization was recorded. Amortization
expense of $54,000 and $60,000 was recorded for fiscal years 2002 and 2001,
respectively.
The Company follows the provisions of Financial Accounting Standards Board
Statements of Financial Accounting Standards ("SFAS") SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Under the
new standards, goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but are subject to annual impairment tests in accordance
with SFAS 142.
Effective with the adoption of SFAS No. 141 and 142 in the beginning of the
first quarter of fiscal 2003, both goodwill and the Company's other intangible
asset, reorganization value in excess of amounts allocable to identifiable
assets, are no longer amortized but are instead subject to an annual impairment
test. Other intangible assets continue to be amortized over their estimated
useful lives.
In the second quarter of fiscal 2003, the Company engaged a qualified
independent firm, to perform a valuation of the Company and to prepare the
necessary goodwill impairment analysis. After completion, this independent firm
found no impairment of the Company's goodwill and other intangible asset,
reorganization value in excess of amounts allocable to identifiable assets.
Goodwill and this other intangible asset is tested annually to identify if
impairment has occurred.
With the adoption of SFAS No. 142, the Company ceased amortization of goodwill
and reorganization value in excess of the amounts allocable to identifiable
assets as of October 27, 2002. The following table presents the effect of
adoption of SFAS No. 142 on the reported net income or loss of the Company on a
comparable basis:
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002 Fiscal 2001
----------- ----------- -----------
Net income (loss) applicable to Common
<S> <C> <C> <C>
Stock $216,746 $107,694 ($1,324,611)
Add back goodwill amortization - 60,000 60,000
----------- ----------- -----------
Adjusted net income (loss) $216,746 $167,694 ($1,264,611)
=========== =========== ===========
Diluted net income (loss) per share:
Net income (loss) $ .06 $ .03 $ (.40)
Goodwill amortization - .01 .02
----------- ----------- -----------
Adjusted diluted net income (loss)
per share $ .06 $ .04 $ (.38)
=========== =========== ===========
</TABLE>
Reclassification
Certain items in the fiscal 2002 and 2001 financial statements have been
reclassified to conform to fiscal 2003 presentation.
Recent Accounting Pronouncements
Prior to fiscal 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment of FASB
Statement No. 13, and Technical Corrections," and SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The adoption of these
standards in fiscal year 2003 did not have a material effect on the Company's
financial position or result of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which clarifies disclosure, recognition
and measurement requirements related to certain guarantees. The disclosure
requirements are effective for financial statements issued after December 15,
2002 and the recognition and measurement requirements are effective on a
prospective basis for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 had no impact on the Company's financial position and results
of operations.
In July 2003, the EITF issued EITF No. 00-21, "Revenue Arrangements with
Multiple Deliverables," which provides guidance on the timing and method of
revenue recognition for sales arrangements that include the delivery of more
than one product or service. EITF No. 00-21 is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF No. 00-21 did not have a material effect on the Company's
financial position or results of operations.
2. New Revolving Line of Credit Facility
In fiscal 1998, the Company entered into a three-year revolving line of credit
facility with Paragon Capital L.L.C., currently Wells Fargo Retail Finance
("Wells Fargo"), whereby the Company could borrow up to $3,300,000 based upon a
lending formula (as defined) calculated on eligible inventory.
In fiscal 2000, the Company entered into a Second Amendment to its revolving
line of credit facility ("Amended Agreement") with Wells Fargo. The Amended
Agreement included a three-year extension enabling the Company to borrow up to
$3,500,000 based upon a lending formula calculated on eligible inventory, as
defined. Additionally, the Amended Agreement provided for an annual facility fee
of $17,500 and maintenance fees of $1,500 per month.
In fiscal 2001, the Company entered into the Third Amendment to its revolving
line of credit facility ("Third Amended Agreement"). The Third Amended Agreement
increased the amount available under the credit facility to $7.0 million, again
based on a lending formula calculated on eligible inventory, as defined, and
extended the credit facility through November 30, 2003. The new interest rate on
all borrowings was fixed at one percent (1%) over the prime rate with a minimum
interest rate of 8%. However, effective January 1, 2002, the minimum interest
rate was reduced to 6.5% and was in effect throughout fiscal 2003. A commitment
fee of $75,000 (amortized over three years) was also paid by the Company in
fiscal 2001. Wells Fargo had a senior security interest in all of the Company's
assets. The amended line of credit facility provided Wells Fargo with rights of
acceleration upon the occurrence of certain customary events of default
including, among others, the event of bankruptcy. The line of credit facility
also contained certain financial covenants. As the credit facility was paid down
on November 21, 2003, no covenant calculations were required at November 1,
2003.
In connection with the issuance and extension of the line of credit facility,
Wells Fargo had received 225,000 warrants to purchase the Company's Common Stock
at exercise prices of between $2.00 - $5.50. These warrants expired November 21,
2003, simultaneous to the satisfaction and termination of the Wells Fargo credit
facility. In accordance with EITF 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," the Company recorded the fair value of the warrants
($75,000) in fiscal 2001 (net book value of $27,000 included in Other Assets in
the accompanying balance sheet as of October 26, 2002), which was amortized over
a three-year period.
On November 21, 2003, the Company entered into a new five-year $7.5 million
credit facility with Whitehall Retail Finance ("Whitehall"), a division of
Whitehall Business Credit Corporation, a subsidiary of Connecticut based Webster
Bank. This new credit facility replaced the line of credit facility with Wells
Fargo. Under the new credit facility, the Company can borrow up to $7.5 million
based upon lending formulas calculated on eligible credit card receivables and
inventory, less certain reserves, as defined. The Whitehall credit facility
expires November 21, 2008.
The interest rate on all borrowings under the new credit facility is 0.25% over
Webster Bank's prime rate (4.25% at November 1, 2003) or LIBOR plus 2.75%, at
the Company's option. The Company agreed to pay Whitehall a $25,000 commitment
fee, payable in two equal installments of $12,500, on November 21, 2003 and
November 21, 2004, respectively. Under the credit facility, the Company will
also pay Whitehall a reduced maintenance fee of $1,000 per month and a monthly
unused line fee, as defined in the credit facility. Simultaneously, with the
closing of the Whitehall credit facility, the Company paid all outstanding
amounts due to Wells Fargo, aggregating $2,504,000, and Wells Fargo's senior
security interest in the Company's assets was terminated.
In connection with the new credit facility, the Company granted Whitehall a
senior security interest in all of the Company's assets. The credit facility
provides Whitehall with rights of acceleration upon the occurrence of certain
customary events of default. The Company is restricted from paying dividends on
its Common Stock, retiring or repurchasing its Common Stock and entering into
additional indebtedness (as defined).
Pursuant to the new credit facility, the Company cannot exceed certain advance
rates on eligible inventory and must maintain certain monthly and quarterly
levels of earnings before interest, taxes, depreciation and amortization.
Additionally, the Company's annual capital expenditures cannot exceed a
predetermined amount.
As the new credit facility expires in five years and does not include both a
subjective acceleration clause and a lock box arrangement, in accordance with
EITF 95-22, the Company classified the balance outstanding, at November 1, 2003
($2,726,000), under the new credit facility as a long-term liability.
3. Stock-Based Compensation
Stock Option Plan
The Company's Board of Directors and shareholders approved the Harvey
Electronics, Inc. Stock Option Plan ("Stock Option Plan") in fiscal 1998. The
Stock Option Plan provides for the granting of up to 1,000,000 shares of
incentive and non-qualified Common Stock options and stock appreciation rights
to directors, officers and employees. All options are exercisable at times as
determined by the Board of Directors not to exceed ten years from the date of
grant.
Common equivalent shares relating to stock options aggregating 38,970 and 88,476
were included in the weighted average number of common shares outstanding for
the diluted earnings per share computation for fiscal years 2003 and 2002.
Common equivalent shares for fiscal 2001 were not included, as their effect was
antidilutive.
In fiscal 2003, no stock options were granted.
In fiscal 2002, the Company's Compensation and Stock Option Committee approved
two grants of incentive stock options aggregating 205,000 to the Company's
officers to purchase the Company's Common Stock at exercise prices from $1.15 -
$1.35 per share. The fiscal 2002 incentive stock options are exercisable
immediately.
In fiscal 2001, the Company's Compensation and Stock Option Committee approved
three grants of incentive stock options aggregating 262,500, to the Company's
officers and outside directors, to purchase the Company's Common Stock at
exercise prices from $.8125-$1.375 per share. The fiscal 2001 incentive stock
options are exercisable immediately.
In fiscal years 2002 and 2001, the Company granted 197,500 and 262,500 shares of
Common Stock, respectively, for issuance in connection with stock options. The
following table summarizes activity in stock options during fiscal 2003, 2002
and 2001:
<TABLE>
<CAPTION>
Weighted-
Shares Shares Under Option Average
--------------------------------
Available for Option Price Number of Exercise
Granting per Share Shares Price
--------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance at October 28, 2000 15,050 524,950 $1.68
2001 Stock option grants 262,500
Granted--November 29, 2000 (45,000) $1.375 45,000 $1.375
Granted--December 28, 2000 (102,500) $.8125-$.8937 102,500 $ .82
Granted--March 12, 2001 (115,000) $.9375-$1.0313 115,000 $ .96
Forfeited 2,175 $1.00-$3.00 (2,175) $2.13
--------------- --------------
Balance at October 27, 2001 17,225 785,275 $1.44
2002 Stock option grants 197,500
Granted - March 5, 2002 (115,000) $1.15-$1.265 115,000 $1.175
Granted - May 30, 2002 (90,000) $1.35 90,000 $1.35
Forfeited 1,175 $1.00-$2.00 (1,175) $1.574
--------------- --------------
Balance at October 26, 2002 10,900 989,100 $1.416
2003 Stock option grants - - - -
Granted - - - -
Forfeited - - - -
--------------- --------------
Balance at November 1, 2003 10,900 989,100 $1.416
====== =======
</TABLE>
At November 1, 2003, October 26, 2002 and October 27, 2001, all outstanding
options are exercisable. The weighted-average fair value of options granted
during the fiscal years ended October 26, 2002 and October 27, 2001 was $1.11
and $.76, respectively.
Exercise prices for options outstanding as of November 1, 2003, are as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Options Options Remaining
Outstanding at Exercisable at Contractual Life
Exercise Price Year End End of Year in Years
------------------------ ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
$.8125 90,000 90,000 8
$.8937 12,500 12,500 8
$.9375 90,000 90,000 8
$1.00 62,625 62,625 5
$1.0313 25,000 25,000 8
$1.15 90,000 90,000 9
$1.265 25,000 25,000 4
$1.35 90,000 90,000 9
$1.375 45,000 45,000 8
$1.50 222,500 222,500 6
$1.75 102,500 102,500 7
$1.86 57,500 57,500 7
$1.925 12,500 12,500 7
$2.00 4,975 4,975 4
$3.00 59,000 59,000 4
---------------------- ----------------------
989,100 989,100 7
====================== ======================
</TABLE>
At November 1, 2003 and October 26, 2002, the Company has reserved shares of
Common Stock for issuance under Common Stock options, warrants and preferred
stock of approximately 1,019,000 and 3,780,000, respectively.
4. 8.5% Cumulative Convertible Preferred Stock
The Company's Preferred Stock has no voting rights and is redeemable at the
option of the Company's Board of Directors, in whole or in part, at face value
plus any accrued dividends. The carrying value of the Preferred Stock is
$379,982 at November 1, 2003 and October 26, 2002.
In the event of liquidation of the Company, the holders of the Preferred Stock
shall receive preferential rights and shall be entitled to receive an aggregate
liquidation preference of $827,000 plus any outstanding dividends, prior to any
distributions to common shareholders. The holders of the Preferred Stock shall
receive a semiannual 8.5% cumulative dividend ($85 per share or $70,295
annually), payable on the last business day in June and December.
Commencing on January 1, 2001, the Preferred Stock is convertible at $1.2333 or
709,479 shares of Common Stock (calculated from the average closing price of the
Company's Common Stock for the preceding 45-day trading period). 875 shares of
Preferred Stock were originally issued by the Company. In June 2002, 48 shares
of Preferred Stock were converted to 38,920 shares of the Company's Common Stock
by a preferred shareholder. At November 1, 2003 and October 26, 2002, 827 shares
of Preferred Stock were issued and outstanding. The Company's remaining
Preferred Stock is convertible into 670,559 shares of Common Stock.
Cumulative Preferred Stock dividends payable of $23,432 are outstanding and
classified as a current liability at both November 1, 2003 and October 26, 2002.
Dividends aggregating $70,295, $72,777 and $74,376 were recorded as a charge to
accumulated deficit in fiscal years 2003, 2002 and 2001, respectively.
5. Income Taxes
Fresh Start Accounting requires the Company to report an income tax equivalent
provision when there is book taxable income and a pre-reorganization net
operating loss carryforward. This requirement applies despite the fact that the
Company's pre-reorganization net operating loss carryforward would eliminate (or
reduce) the related income tax payable. The current and future year benefit
related to the carryforward is not reflected in net income, but instead is
recorded as an adjustment to reorganization value in excess of amounts allocable
to identifiable assets. During the year ended November 1, 2003 and October 26,
2002, the Company recorded an income tax equivalent provision of $195,000 and
$124,000, respectively, and reduced Reorganization Value in Excess of Amounts
Allowable to Identifiable Assets by the same amount. There was no provision
(benefit) for income taxes during the year ended October 27, 2001. The income
tax equivalent provisions did not materially affect the Company's tax liability.
The provision for income taxes for the years ended November 1, 2003, October 26,
2002, and October 27, 2001 consists of the following:
<TABLE>
<CAPTION>
November 1, 2003 October 26, 2002 October 27, 2001
---------------- ---------------- ----------------
Current:
<S> <C> <C> <C>
Federal $ - $ - $ -
State - - -
Equivalent tax expense 195,000 124,000 -
---------------- ---------------- ----------------
195,000 124,000 -
Deferred - - -
---------------- ---------------- ----------------
$195,000 $124,000 $ -
================= ================ ================
</TABLE>
The effective income tax rate differed from the Federal statutory rate as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
November 1, 2003 October 26, 2002 October 27, 2001
------------- ------------- -------------- ----------- ------------- ----------
Amount % Amount % Amount %
------------- ------------- -------------- ----------- ------------- ----------
Federal income tax provision
<S> <C> <C> <C> <C> <C> <C>
(benefit) at statutory rate $164,000 34.0% $104,000 34.0% $(425,000) (34.0%)
State income taxes, net of Federal
benefit 33,000 6.8 23,000 7.6 (55,000) (4.4)
Nondeductible reorganization
amortization - - 18,000 5.9 20,000 1.6
Operating losses not currently
deductible - - - - 453,000 36.2
Other, net 9,000 1.9 5,000 1.6 7,000 .6
Benefit from post reorganization
temporary differences on tax
equivalent provision (11,000) (2.3) (26,000) (8.3) - -
------------- ------------- -------------- ----------- ------------- ----------
------------- ------------- -------------- ----------- ------------- ----------
$195,000 40.4% $124,000 40.8% $0 0%
======== ===== ======== ===== == ==
</TABLE>
The Company has deferred tax assets and deferred tax liabilities as presented in
the table below. The net deferred tax assets are subject to a valuation
allowance, which was approximately $1,570,000 and $1,758,000, at November 1,
2003 and October 26, 2002, respectively.
Deferred tax assets and liabilities as of November 1, 2003 and October 26, 2002,
prior to the allocation of the valuation allowance consisted of the following:
<TABLE>
<CAPTION>
November 1, October 26,
2003 2002
---------------- ----------------
<S> <C> <C>
Pre-reorganization net operating loss carryforwards $ 181,000 $ 352,000
Pre-reorganization deductible temporary differences 74,000 74,000
Pre-reorganization tax credits 53,000 53,000
Post-reorganization net operating loss carryforwards 691,000 981,000
Deferred rent 51,000 16,000
Expenses not currently deductible 4,000 -
Inventories 84,000 75,000
Depreciable assets 456,000 262,000
Tax credits 2,000 2,000
---------------- ----------------
Total deferred tax assets 1,596,000 1,815,000
---------------- ----------------
Website development costs (15,000) (50,000)
Intangible assets (11,000) (7,000)
---------------- ----------------
Total deferred tax liabilities (26,000) (57,000)
---------------- ----------------
Net 1,570,000 1,758,000
Valuation allowance 1,570,000 1,758,000
========= =========
Total $ 0 $ 0
========== =========
</TABLE>
At November 1, 2003, the Company has available net operating loss carryforwards
of approximately $2,200,000, which expire in various years through fiscal 2019.
Of this amount, approximately $500,000 relates to pre-reorganization net
operating loss carryforwards. Under section 382 of the IRS code, it is estimated
that these pre-reorganization net operating loss carryforwards and other
pre-reorganization tax attributes will be limited to approximately $150,000 per
year. A full valuation allowance has been provided on the net deferred tax asset
due to uncertainty regarding the future utilization of the deferred tax assets.
6. Pension and Profit Sharing Plan
The Company maintains the Harvey Electronics, Inc. Savings and Investment Plan
(the "Plan") which includes profit sharing, defined contribution and 401(k)
provisions and is available to all eligible employees of the Company. There were
no employer contributions to the Plan for fiscal 2003, 2002 and 2001.
7. Commitments and Contingencies
Commitments
The Company's financial statements reflect the accounting for equipment leases
as capital leases by recording the asset and the related liability for the lease
obligation. Capital lease additions of approximately $0 and $99,000 were
recorded during fiscal 2003 and 2002, respectively. The Company leases stores
and warehouse facilities under operating leases, which provide, in certain
cases, for payment of additional rentals based on a percentage of sales over a
fixed amount. Future minimum rental commitments, by year and in the aggregate,
for equipment under capital and noncancelable operating leases with initial or
remaining terms of one-year or more consisted of the following at November 1,
2003:
<TABLE>
<CAPTION>
Operating Leases Capital
Leases
--------------------- --------------------
<S> <C> <C> <C> <C>
Fiscal 2004 $ 2,337,000 $ -0-
Fiscal 2005 2,109,000 -
Fiscal 2006 1,439,000 -
Fiscal 2007 902,000 -
Fiscal 2008 663,000 -
Thereafter 3,116,000 -
--------------------
---------------------
Total minimum lease payments $ 10,566,000 -
=====================
Less amount representing interest -
--------------------
Present value of net minimum lease payments -
Less current portion -
--------------------
$ -0-
====================
</TABLE>
Total rental expense for operating leases was approximately $3,022,000,
$2,783,000 and $2,535,000 for fiscal years 2003, 2002 and 2001, respectively.
Certain leases provide for the payment of insurance, maintenance charges,
electric and taxes and contain renewal options.
Contingencies
The Company is a party in certain legal actions which arose in the normal course
of business. The outcome of these legal actions, in the opinion of management,
will not have a material effect on the Company's financial position, results of
operations or liquidity.
In July 2003, the Company received a notice and information request from the
Pennsylvania Department of Environmental Protection ("PADEP"). The notice stated
that PADEP considers the Company a potentially responsible party for
contamination related to a septic drain field located at a former Chem Fab
Corporation ("Chem Fab") site in Doylestown, Pennsylvania.
PADEP's notice stated that if Chem Fab was previously owned by Harvey Radio,
Inc. ("Harvey Radio") and if the Company was a successor to Harvey Radio, then
the Company could be, in part, responsible for any environmental investigation
or clean up actions necessary at this site.
Harvey Radio was the predecessor of The Harvey Group, Inc. ("Harvey Group"),
which filed for relief under Chapter 11 of the United States Bankruptcy Code in
August 1995. The Company is the surviving retail business of the Harvey Group,
which emerged from bankruptcy in December 1996. Chem Fab was a wholly-owned
subsidiary of Harvey Radio as of September 1967. The capital stock of Chem Fab
(a then wholly-owned subsidiary of Harvey Group) was sold by the Company to the
Boarhead Corporation in January 1978. The disposition of Chem Fab was prior in
time to the Company's bankruptcy petition date of August 3, 1995.
On August 29, 2003, the Company sent its response letter to PADEP. The Company's
response stated that any action by PADEP to recover any money from the Company
relating to any environmental investigation or cleanup related to Chem Fab is in
violation of the injunctions imposed by virtue of the Company's 1995 Bankruptcy
proceeding. The response letter to PADEP specifically referred to two cases with
respect to entities subject to a discharge in bankruptcy by the Southern
District of New York and the Second Circuit Court of Appeals. These cases may
support the Company's position enjoining any further action against the Company.
The Company believes PADEP's claim, even absent the bankruptcy injunction, would
be improper against the Company, as Harvey Group was a shareholder of Chem Fab
and Chem Fab's capital stock was sold in 1978, as previously stated.
The Company advised PADEP that any further action to pursue a claim against the
Company would result in the Company bringing a motion to reopen its bankruptcy
case, solely to address the PADEP claim and further, the Company would commence
contempt proceedings against PADEP. The Company is awaiting PADEP's response.
The Company has also retained special Pennsylvania environmental counsel for
advice with respect to PADEP's request for information and other matters with
respect to the claim.
Furthermore, the number of other parties that may be responsible, their ability
to share in the cost of a clean up and whether the Company's existing or prior
insurance policies provide coverage for this matter is not known. At this time,
it is impossible for the Company to determine the outcome or cost to the Company
relating to this matter. F-24 8. Other Information
Accrued Expenses and Other Current Liabilities
<TABLE>
<CAPTION>
November 1, October 26,
2003 2002
---------------------------- ---------------------------
<S> <C> <C>
Payroll and payroll related items $ 390,000 $ 496,000
Accrued professional fees 172,000 116,000
Sales taxes 170,000 170,000
Accrued occupancy 206,000 213,000
Accrued bonuses 267,000 167,000
Other 105,000 131,000
---------------------------- ---------------------------
$ 1,310,000 $ 1,293,000
=========== ===========
</TABLE>
Consulting Agreements
In fiscal 2001, the Company engaged Mesa Partners, Inc. ("Mesa") under a
consulting agreement. Mesa was engaged to provide consulting services relating
to the integration of computer networks, entertainment systems and other related
services. In connection with the consulting agreement with Mesa, and a related
addendum, the Company issued a warrant to purchase 15,000 shares of the
Company's Common Stock, exercisable at any time at $3.00 per share. The warrant
has a three-year term and was issued as partial compensation for services
rendered by Mesa. The fair value of the warrant of approximately $8,000 was
recorded in fiscal 2001 as the Company elected to terminate this agreement in
fiscal 2001. Additionally, as was required by the consulting agreement, Mesa was
paid a fee of $20,000 a month plus related expenses. For fiscal 2001, the
Company recorded consulting fees of approximately $70,000 relating to Mesa.
Investor Relations Advisor
In fiscal 2001, the Company engaged Porter, LeVay & Rose ("PL&R") as its
investor relations advisor. In connection with the agreement, the Company is
required to and issued a warrant to purchase 60,000 shares of the Company's
Common Stock, exercisable immediately at various exercise prices ranging from
$1.25-$2.50. The warrant's fair value of approximately $15,000 was amortized to
expense ($5,000 in fiscal 2002 and $10,000 in fiscal 2001). In June 2002, 15,000
warrants to purchase the Company's Common Stock were exchanged for 2,772 shares
of Common Stock, effected under a cash-less exercise, by PL&R. Additionally, the
Company paid PL&R a $5,000 monthly fee for its services. For the year ended
October 27, 2001, the Company recorded an investor relations expense of $54,000,
relating to PL&R. This agreement was terminated in 2001.
Union Contract
The Company is party to a collective bargaining agreement with a union which
covers certain sales, warehouse and installation employees. This agreement
expires on August 1, 2004.
Other
In January 2004, the Company agreed to satisfy certain long outstanding and
disputed tax claims ($52,000) under an amnesty program offered by the City of
New York. The tax claims related to a prior subsidiary for fiscal years 1987 and
1988. The Company satisfied the claim, in full, paying $90,000 (including
interest), under the amnesty program. The Company recorded $50,000 to Selling,
General and Administrative expenses in fiscal 2003 relating to this matter.
Prior to the settlement of this matter, the Company had recorded a liability of
$40,000 relating to this claim.
A Director of the Company also is a Senior Partner in a law firm providing the
Company with legal services. At November 1, 2003 and October 26, 2002, the
Company had $50,000 and $26,000, respectively, payable to this law firm. The
Company paid legal fees to this law firm of approximately $95,000, $81,000 and
$64,000 in fiscal years 2003, 2002 and 2001, respectively.
9. Retail Store Expansion
During fiscal year 2000, the Company entered into a ten-year lease for a new
6,500 square foot Harvey showroom in Eatontown, New Jersey. This new store
opened in April 2001. Since this time, results of operations from this new store
have been included in the Company's results of operations. Pre-opening expenses
have been included in the Company's results of operations for the year ended
October 27, 2001. This is the Company's ninth store and is the fifth opened
since its public offering, completed in April 1998.
10. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Net Income (Loss)
Applicable to Common
2003 Net Sales Gross Profit Stock Basic EPS Diluted EPS
----------------------- ---------------------- ---------------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
First quarter $13,141,796 $5,274,324 $403,069 $0.12 $0.10
Second quarter 10,000,140 3,990,992 ( 66,210) (0.02) (0.02)
Third quarter 10,068,045 4,145,463 (4,171) - -
Fourth quarter 9,238,235 3,896,951 (115,942) (0.03) (0.02)
2002
----------------------- ---------------------- ---------------------- ---------------------- ------------------ ------------------
First quarter $12,420,559 $4,880,360 $371,854 $0.11 $0.09
Second quarter 10,363,725 4,110,488 72,015 0.02 0.02
Third quarter 9,583,471 3,789,013 (98,947) (0.03) (0.03)
Fourth quarter 9,138,822 3,573,447 (237,228) (0.07) (0.07)
</TABLE>
Schedule II - Valuation and Qualifying Accounts
Harvey Electronics, Inc.
<TABLE>
<CAPTION>
----------------------------------------- ---------------------- ----------------------------------- -------------------------------
COL. A COL. B COL. C COL. D COL. E
----------------------------------------- ---------------------- ----------------------------------- -------------------------------
Description Balance at beginning Additions charged Charged to other Other changes - add Balance at
of period to costs and accounts - (deduct) - describe end of
expenses describe period
----------------------------------------- ---------------------- ----------------- ----------------- -------------------------------
Fiscal year ended November 1, 2003
Reserves and allowances
deducted from asset accounts:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $20,000 $18,646 $(18,646) (1) $20,000
Fiscal year ended October 26, 2002
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $25,000 $18,627 $(23,627) (1) $20,000
Fiscal year ended October 27, 2001
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $25,000 $25,098 $(25,098) (1) $25,000
<FN>
(1) Uncollectible accounts written off, net of recoveries.
</FN>
</TABLE>
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Harvey Electronics, Inc.
The audit referred to in our report dated December 23, 2003 relating to the
financial statements of Harvey Electronics, Inc. included the audit of the
financial statement Schedule II - Valuation and Qualifying Accounts for the
two-year period ended November 1, 2003. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Melville, New York
December 23, 2003
</TEXT>
</DOCUMENT>