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.
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.
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.
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:
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5.
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.
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.
Balance Sheet Data:
Item 7.
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:
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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
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.
Item 9.
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.
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.
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:
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.
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
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:
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.
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:
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.
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.
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.
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
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
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.
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
Harvey Electronics, Inc. Statements Of Operations
Harvey Electronics, Inc. Statement of Shareholders' Equity
Harvey Electronics, Inc Statements of Cash Flows
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. 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:
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:
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:
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:
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:
The effective income tax rate differed from the Federal statutory rate as follows:
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:
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:
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. 8. Other Information
Accrued Expenses and Other Current Liabilities
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)
Schedule II - Valuation and Qualifying Accounts
Harvey Electronics, Inc.
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