United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended October 26, 2002
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 for the Transition Period from _____________ to _______________
Commission File No. 1-4626
Harvey Electronics, Inc.
(Name of issuer in its charter)
New York 131534671
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey 07071
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 842-0078
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrant
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[ X. ] No[ ]
Indicate by checkmark if disclosure of delinquent filers in response to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 2, 2003; Common Stock 3,324,525 shares.
As of January 2, 2003, the aggregate market value of the registrant's common
stock held by nonaffiliates computed by reference to the price at which the
stock was sold was $3,466,505. The shares are currently traded on the NASDAQ
SmallCap Market under the symbols "HRVE" for the Common Stock and "HRVEW" for
the Warrants to purchase Common Stock.
TABLE OF CONTENTS
PART 1
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Ex-23 Consent of BDO Seidman, LLP
Ex-23.1 Consent of Ernst and Young, LLP
Ex-99.1 Section 906 Certification - President
Ex-99.2 Section 906 Certification - CFO
Ex-99.3 Section 302 Certification - President
Ex-99.4 Section 302 Certification - CFO
Part I
In this Annual Report on Form 10-K, the "Company," "Harvey", "Harvey
Electronics", "we," "us," and "our" mean Harvey Electronics, Inc.
This Annual Report on Form 10-K contains forward-looking statements regarding
Harvey's performance, strategy, plans, objectives, expectations, beliefs and
intentions. The actual outcome of the events described in these forward-looking
statements could differ materially. This report, and especially the section
entitled "Management Discussion and Analysis of Financial Condition and Results
of Operations," contains a discussion of some of the factors that could
contribute to those differences.
In prior fiscal years, the Company had been a small business issuer, filing its
audited annual report on Form 10-KSB in accordance with Regulation S-B of the
Securities and Exchange Act of 1934, as amended. In fiscal 2002, the Company is
required to file its audited financial statements in accordance with Regulation
S-X of the Securities and Exchange Act of 1934, as amended.
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 and LCD flat panel 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-six 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.
Sale of Common Stock and Warrants in Public Offering
In fiscal 1999, the Company completed an issuance of its common stock and common
stock warrants in a public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P., which sold 1,200,000 shares of the
Company's common stock of which 1,025,000 shares were sold by the Company and
175,000 shares by Harvey Acquisition Company, LLC ("HAC"). 2,104,500 of Warrants
("Warrants") to acquire additional shares of the Company's common stock were
also sold by the Company. The net proceeds from the Offering, approximately $4.1
million, were used to open three new retail stores and for general working
capital purposes.
The net proceeds from the Offering were also used to repay temporarily the
Company's credit facility of approximately $2.3 million and to retire the
principal ($350,000) and interest ($48,000) of a term loan.
Each Warrant is exercisable for one share of common stock at 110% ($5.50 per
share) of the Offering price, through March 31, 2003. The Warrants are
redeemable (at $0.10 per warrant), at the Company's option, if the closing bid
price of the common stock for 20 consecutive trading days exceeds 150% of the
Offering price per share or $7.50.
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, Kef, 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 October 26, 2002, the Company's audio product sales
represented approximately 50% of the Company's net sales and yielded gross
profit margins of approximately 40%. The Company's video product sales
represented approximately 42% of the Company's net sales and yielded gross
profit margins of approximately 29%. 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 51%
of the Company's net sales in fiscal 2002. The labor portion of custom
installation presently represents approximately 8% of net sales, while the
equipment portion accounting for 43% 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 57%, and represented
approximately 1% 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, blank
audio and videotapes and projection screens. The miscellaneous category includes
conventional telephones, answering machines, radios and other portable products.
Fiscal Year Ended October 26, 2002 27, 2001 28, 2000 30, 1999 31, 1998
----------------------------------------------------------------------
Audio Components 31% 39% 43% 49% 52%
Mini Audio Shelf Systems 5 6 7 8 7
TV and Projectors 39 30 25 18 17
VCR/DVD/DSS 6 8 7 7 7
Furniture 5 5 5 5 4
Cable and Wire 5 5 5 5 5
Accessories 7 6 6 6 6
Extended Warranties 1 - 1 1 1
Miscellaneous 1 1 1 1 1
----------------------------------------------------------------------
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
The percentage of sales by each product category is affected by promotional
activities, consumer preferences, store displays, the development of new
products and elimination or reduction of existing products and, thus, a current
sales mix may not be indicative of the future sales mix.
The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target customers desire and can afford such products. New
technologies, such as HDTV, plasma flat-screen and LCD flat panel 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 51% of net sales in fiscal 2002), which can extend from a single
room audio/video system to an entire house with a combined selling price of
installation, labor and product from about $5,000 to in excess of $100,000. The
Company believes custom installation provides the opportunity to bundle products
and increase margins. For example, rather than just selling a television with an
approximate gross profit margin of 29%, custom installation enables the Company
to sell to the same customer speakers at a margin exceeding 40%, accessories at
a margin approximating 48% and installation labor with margins of over 69%. In
fiscal 2003, the Company will continue to expand its merchandising efforts to
include in-home lighting systems and distributed in-home cabling for the
integration of computer networks, entertainment systems and other related
services.
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. 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 63% of the Company's purchases for the
fiscal year ended October 26, 2002. These ten manufacturers are Bang & Olufsen,
Fujitsu, Loewe, Marantz, Monster Cable, Panasonic, Pioneer Elite, Runco, Sharp
and Sony. Fujitsu accounted for more than ten (10%) percent of the Company's
purchases for the fiscal year ended October 26, 2002, and Bang & Olufsen,
Marantz, Panasonic, Sharp and Sony 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 new Branded Stores sell highly differentiated Bang & Olufsen products,
including uniquely designed audio systems, speakers, telephones, headphones and
accessories. The stores will 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 additional
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 equipment.
The Company's management information system tracks current levels of sales,
inventory, purchasing and other key information and provides management with
information which facilitates merchandising, pricing, sales management and the
management of warehouse and store inventories. This system enables management to
review and analyze the performance of each of its stores and sales personnel on
a periodic basis. The central purchasing department of the Company monitors
current sales and inventory at the stores on a daily basis. In addition, the
Company currently conducts a physical inventory two times a year and between
such physical inventories it conducts monthly and daily cycle counts on selected
types of inventory. The purchasing department also establishes appropriate
levels of inventory at each store and controls the replenishment of store
inventory based on the current delivery or replenishment schedule.
The Company historically has not had material losses of inventory and does not
experience material losses due to cost and market fluctuations, overstocking or
technology. The Company maintains specific and general inventory reserves
aggregating $130,000, $105,000 and $60,000, for fiscal years 2002, 2001 and
2000, respectively. The Company's inventory turnover for fiscal years 2002, 2001
and 2000 was approximately 3.4, 3.4, and 3.6 times, respectively.
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, (i.e., Mitsubishi), 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. 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 represent approximately 1% of the Company's
net sales. The warranty obligation is solely the responsibility of the insurance
company.
Competition
The Company competes in the New York Metropolitan area with mass merchants, mail
order houses, discount stores and numerous other consumer electronics specialty
stores. The retail electronics industry is dominated by large retailers with
massive, "big box" retail facilities which aggressively discount mass
merchandise. These retailers operate on narrow profit margins and high volume,
driven by aggressive advertising emphasizing low prices. Nationwide industry
leaders are Circuit City and Best Buy. The New York region is dominated by
Circuit City, Best Buy, and local chains including P.C. Richard & Son, The Wiz,
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, 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, Panasonic 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, 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.
Website visitors can experience a video tour of a Harvey showroom and a complete
Harvey custom installation transaction from point-of-contact at the retail
showroom through the final in-home installation. 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. The Company's website was designed to further
differentiate Harvey from its competitors.
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.
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 customer database of over 70,000.
Some of the direct mail promotions are for specific manufacturers, products, or
technology, and are 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 market development
funds, cooperative advertising and other promotional amounts received from the
manufacturers.
Fiscal Year Ended October 26, 2002 27, 2001 28, 2000 30, 1999 31, 1998
---------------------------------------------------------------------------
Gross advertising costs $2,665,000 $2,864,000 $2,701,000 $1,220,000 $962,000
Net advertising expenses 632,000 1,206,000 934,000 227,000 233,000
Percentage of net sales 1.5% 3.3% 2.7% 1.1% 1.3%
The Company has retained an outside advertising agency that is paid a monthly
retainer of $17,000 plus approved expenses.
Licenses and Intellectual Properties
The Company owns two registered service marks. "HARVEY ELECTRONICS," issued in
June 1982, is registered for International Class 42, which includes retail store
services in the field of audio, video, consumer electronics, home theater
products and custom installation of home theater products. "Not Your Ordinary
Electronics Store", issued in July 2002 is registered for International Class
35, which is for advertising, business management, business administration and
office functions. The Company believes that the service mark HARVEY ELECTRONICS
has significant value and is important in marketing the Company's products and
services.
Employees
As of October 26, 2002, the Company employed approximately 157 full-time
employees of which 17 were management personnel, 16 were administrative
personnel, 63 were salespeople, 18 were warehouse workers and 43 were engaged in
custom installation.
Of the salespeople, warehouse workers, and installation staff, 107 people are
covered by a collective bargaining agreement with the Company, which expires
August 1, 2003. The Company has never experienced a material work stoppage and
believes that its relationships with its employees and the union are
satisfactory.
Item 2. Properties
All of the premises the Company presently occupies are leased. Management
believes that the Company's facilities are adequate and suitable for its present
business. The Company believes that adequate locations are available for its
proposed 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 $30,000 per year. 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 $94,000 per year, pursuant to a lease, which expires
November 2005.
The Company leases the following retail premises:
Expiration Approximate
Date of Selling
Current Renewal Square Rent
Location Annual Lease Options Footage Expense
------------------------------------- ----------------- --------------- ----------------- ---------------
2 West 45th Street 6/30/2005 None 7,500 $ 587,000
New York, NY
556 Route 17 North 6/30/2015 None 7,000 $ 294,000
Paramus, NJ
888 Broadway 12/31/2003 None 4,000 $ 473,000
at 19th St.
New York, NY
(within ABC Carpet & Home)
19 West Putnam Ave. 9/30/2006 5 years 5,300 $ 304,000
Greenwich, CT
44 Glen Cove Road 8/15/2008 None 4,600 $ 195,000
Greenvale, NY
115 Main St. 8/31/2008 None 3,500 $ 75,000
Mt. Kisco, NY
973 Broadway 12/31/2005 5 year 1,500 $ 128,000
New York, NY
(Bang & Olufsen Branded Store)
86 Greenwich Ave. 6/30/2005 5 years 1,500 $ 108,000
Greenwich, CT
(Bang & Olufsen Branded Store)
57 Route 36 West 1/01/2011 10 years 6,500 $ 184,000
Eatontown, NJ
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 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.
There are old outstanding disputed tax claims of approximately $52,000 which
were made against the Company during its Chapter 11 proceeding. The Company has
provided reserves of $40,000 for such taxes, which the Company believes to be
adequate. However, there can be no assurance that the reserve will be sufficient
to cover these tax claims.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
The Company's securities are traded on the NASDAQ SmallCap Market under the
symbols "HRVE" for the Common Stock and "HRVEW" for the Warrants to purchase
Common Stock.
The outstanding shares of Common Stock are currently held by approximately 1,600
shareholders of record, and the Preferred Stock by five holders of record. The
transfer agent and registrar for the Common Stock is Registrar and Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016.
The following table indicates the quarterly high and low stock prices for fiscal
years 2002 and 2001:
High Low
----------------- ----------------
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
Fiscal Year 2001
- ----------------
January 27, 2001 1.625 .75
April 28, 2001 1.50 .75
July 28, 2001 1.50 1.00
October 27, 2001 1.27 .55
The Company has paid no dividends on its common stock for the last two years and
does not expect to pay dividends on common stock in the future.
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 2, 2003, 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 stockholders. There is no cumulative voting with respect to the
election of directors, with the result that holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors from sources legally available 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 stockholder
action.
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of 10,000
shares of 8.5% Cumulative Convertible Preferred Stock ("Preferred Stock") with a
par value of $1,000 per share. As of January 2, 2003, 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 stockholder approval
in one or more classes or series. A holder of the Preferred Stock is not
entitled to vote except as required by law.
Dividends on the Preferred Stock are cumulative from the day of original
issuance, whether or not earned or declared. In the event the Board of Directors
declares dividends to be paid on the Preferred Stock, the holders of the
Preferred Stock will be entitled to receive semiannual dividends at the rate of
eighty-five ($85) dollars per share payable in cash on the last business day of
June and December in each year. For calendar year 1997, the Company elected to
defer payment of the dividends over a three-year period. The preference rate for
calendar year 1997 was $105 per share, with interest at the rate of 8.5% per
annum. The installments relating to the 1997 dividends have been paid in full by
the Company as of October 26, 2002. Total Preferred Stock dividends of $74,151,
$107,603 and $110,206 were paid in fiscal years 2002, 2001 and 2000,
respectively. In addition, no dividend shall be paid, or declared, or set apart
for payment upon, and no other distribution shall at any time be declared or
made in respect of, any shares of Common Stock, other than a dividend payable
solely in, or a distribution of, Common Stock, unless full cumulative dividends
of the Preferred Stock for all past dividend periods and for the then current
dividend period have been paid or have been declared and a sum sufficient for
the payment thereof has been set apart.
The Preferred Stock shall be redeemable, at the Company's option, in whole or in
part, upon payment in cash of the Redemption Price in respect of the shares so
redeemed. The "Redemption Price" per share shall be equal to the sum of (i) One
Thousand and 00/100 ($1,000.00) Dollars and (ii) all dividends accrued and
unpaid on such shares to the date of redemption. If less than all of the
outstanding Preferred Stock is to be redeemed, the redemption will be in such
amount and by such method (which need not be by lot or pro rata), and subject to
such other provisions, as may from time to time be determined by the Board of
Directors.
In the event of liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, resulting in any distribution of its assets to its
shareholders, the holders of the Preferred Stock outstanding shall be entitled
to receive in respect of each such share an amount which shall be equal to the
Redemption Price, and no more, before any payment or distribution of the assets
of the Company is made to or set apart for the holders of Common Stock.
Commencing January 1, 2001, the conversion price of the Company's Preferred
Stock was $1.2333 and thus convertible into 670,559 shares of Common Stock,
(calculated from the closing bid price of the Common Stock over the 45 trading
days preceding January 1, 2001). 875 shares of Preferred Stock were originally
issued by the Company. In June 2002, 48 shares of Preferred Stock were converted
to 38,920 shares of the Company's Common Stock by a preferred shareholder.
If at any time prior to the exercise of the conversion rights afforded the
holders of the Preferred Stock, the Preferred Stock is redeemed by the Company,
in whole or in part, then the conversion right shall be deemed canceled with
respect to such redeemed stock, as of the date of such redemption.
In case of any capital reorganization or any reclassification of the Common
Stock, or in case of the consolidation or merger of the Company with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation, merger, or conveyance.
Item 6. Selected Financial Data (amounts in thousands, except per share and
number of stores data)
Set forth below is selected financial and operating data for each of the five
years ended October 26, 2002. The selected statement of operations and balance
sheet data for each of the five years ended October 26, 2002 have been derived
from our audited financial statements. 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.
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
October 26, October 27, October 28, October 30, October 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------------------
Net sales $ 41,506 $ 36,687 $ 34,355 $ 21,386 $ 17,262
Cost of sales 25,153 22,552 20,813 13,082 10,646
---------------------------------------------------------------------------
Gross profit 16,353 14,135 13,542 8,304 6,616
Gross profit percentage 39.4% 38.5% 39.4% 38.8% 38.3%
Interest expense 359 340 218 179 224
Selling, general and administrative expenses 15,806 15,128 12,856 9,043 6,756
Other income 116 83 34 72 70
Stock compensation expense -- -- -- -- 297
Financial advisory and consulting fee to
underwriter -- -- -- -- 124
Costs associated with lease transaction -- -- -- -- 114
---------------------------------------------------------------------------
Income (Loss) before income taxes 304 (1,250) 502 (846) (829)
Income taxes 124 -- 185 -- --
---------------------------------------------------------------------------
Net income (loss) 180 (1,250) 317 (846) (829)
Accretion of Preferred Stock -- -- -- -- (6)
Preferred Stock dividend requirement (72) (75) (75) (74) (83)
---------------------------------------------------------------------------
Net income (loss) attributable to
Common Stock $ 108 $ (1,325) $ 242 $ (920) $ (918)
=========== =========== =========== =========== ===========
Net income (loss) per common share
applicable to common shareholders:
Basic $ .03 $ (.40) $ .07 $ (.28) $ (.32)
=========== =========== =========== =========== ===========
Diluted $ .03 $ (.40) $ .07 $ (.28) $ (.32)
=========== =========== =========== =========== ===========
Shares used in the calculation of net income
(loss) per common shares:
Basic 3,297,827 3,282,833 3,282,833 3,282,833 2,844,751
=========== =========== =========== =========== ===========
Diluted 3,907,401 3,282,833 3,346,307 3,282,833 2,844,751
=========== =========== =========== =========== ===========
Stores opened at end of period 9 9 8 7 6
Balance Sheet Data:
October October October October October
26, 2002 27, 2001 28, 2000 30, 1999 31, 1998
--------------- -------------- --------------- ----------------- -----------------
Working capital
(deficiency) ($600) (1) $(1,416) (1) $ 747 (1) $ 925 (1) $ 2,355 (1)
Total assets 12,151 12,727 11,437 9,745 8,389
Long-term liabilities 156 160 215 251 266
Total liabilities 8,423 (1) 9,107 (1) 6,590 (1) 5,140 (1) 2,865 (1)
Total shareholders'
equity 3,728 3,620 4,847 4,605 5,525
(1) It is important to note that at the end of the four fiscal years presented
from 1999-2002, the Company's outstanding balances on its revolving line of
credit facility ($3,119,493, $3,442,000, $1,068,000 and $1,477,603,
respectively) were classified as current liabilities, despite the long-term
nature of the Company's credit facility. At the end of fiscal 1998, no
amounts were outstanding under the credit facility. The presentation as a
current liability is in accordance with EITF 95-22 (See Note 2 to the
Financial Statements for details). Working capital was negatively impacted
by the Company's significant increase in the revolving line of credit
facility in fiscal 2001, which was necessary to fund retail store expansion
and renovation.
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 October 26, 2002,
October 27, 2001 and October 28, 2000, appearing elsewhere in this Form 10-K.
Results of Operations
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.
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.
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 net loss for fiscal 2001 was
increased by approximately $650,000 relating to both pre-opening expenses
($140,000) and operating losses ($510,000) from 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 were $2,665,000 and $2,864,000 in fiscal years 2002 and 2001,
respectively. 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. 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 $41,507,000, an
increase of $4,820,000, or 13.1% 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, which was negatively 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 has made additional personnel changes in this store and
has recently completed the construction of a new in-store theater. These changes
coupled with additional planned improvements in fiscal 2003 should, in
management's opinion, help 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.
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 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 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 will not be reduced and will
be used primarily for radio, print and direct mail advertising. The Company 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."
Costs and Expenses
Total cost of goods sold for fiscal 2002 increased $2,601,000 or 11.5% 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 39.4% as compared to 38.5%
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.
Fiscal Year Ended October 27, 2001 as Compared to Fiscal Year Ended October 28,
2000
Net Loss
The Company's net loss for the fiscal year ended October 27, 2001 was $1,250,000
as compared to a net profit of $317,000 for the fiscal year ended October 28,
2000. The net loss for fiscal 2001 included approximately $650,000 of operating
losses and pre-opening expenses for two new stores as well as the Company's
website. Operating losses of approximately $225,000 related to the Company's new
Bang & Olufsen branded store which opened in Greenwich, Connecticut in October
2000. Approximately $260,000 of operating losses related to the new website
launched in October 2000. Included in the $260,000 of operating losses is
$193,000 of amortization, as website related assets are being amortized to
expense over a period of one to three years. Pre-opening expenses, relating to
the new Eatontown, New Jersey store opened in April 2001, approximated $140,000.
Operating losses for the seven-month period Eatontown was open, approximated
$25,000.
The Company's net loss for fiscal 2001 includes net advertising expense of
$1,206,000 as compared to $934,000 for fiscal 2000. The Company's gross
advertising costs increased to $2,864,000 in fiscal 2001 from $2,701,000 in
fiscal 2000.
Results of operations for fiscal years 2001 and 2000 also included depreciation
and amortization expense of $989,000 and $647,000, respectively.
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.
The fourth quarter of fiscal 2000 included pre-operating expenses of $125,000
relating to the opening of the new Bang & Olufsen store in Greenwich and the
October 2000 launch of the Company's new website. In the fourth quarter of
fiscal 2000, the Company also recorded occupancy expense of $90,000 relating to
additional rent, which was contingent upon actual sales levels achieved for one
of the Company's retail stores. Finally, the fourth quarter of fiscal 2000
included incentive bonuses of approximately $125,000.
The Company recorded an income tax equivalent provision recorded within income
taxes, which arose from the utilization of pre-reorganization net operating
losses for fiscal 2000 of $160,000. This income tax equivalent provision did not
require the use of cash. No income tax equivalent provision was necessary for
fiscal 2001.
Revenues
For the year ended October 27, 2001, net sales approximated $36.7 million, an
increase of over $2.3 million or 6.8% from the prior year. Comparable store
sales for fiscal 2001 decreased slightly by approximately $101,000 or less than
1% from fiscal 2000.
Overall net sales increases have been achieved from a base year, fiscal 2000,
that resulted in approximately 60% increases over fiscal 1999. Fiscal 2000
increases included the maturation of several retail locations. As noted above,
the Company's comparable store sales results for fiscal 2001 were down slightly;
however, these sales were competing against very high comparable store sales
increases of 52%, from the prior year.
Overall net sales benefited primarily from the new Bang & Olufsen branded store
opened in Greenwich, Connecticut in October 2000 and, to a greater extent, from
the new Harvey showroom opened in Eatontown, New Jersey in April 2001. To date,
sales and operating profitability from the new Eatontown store have exceeded
management's expectations, while sales from the new Bang & Olufsen store for
fiscal 2001 had been slower than anticipated.
While the Company's overall sales and comparable store sales results through
June 2001 were favorable in comparison to certain other electronics retailers,
the slowing economy did have a negative impact on third quarter sales,
especially in the month of July. The decline in comparable store sales was
primarily related to slower sales from the Company's Paramus, New Jersey store
and its 45th Street store in Manhattan and from the events of September 11th.
The reduction in comparable store sales at Paramus and 45th Street was offset by
sales growth from the Company's Harvey showrooms in Greenwich, Connecticut,
Mount Kisco, New York, Greenvale, Long Island and from the retail store located
within ABC Carpet and Home in Manhattan.
The decline in sales for the Company's 45th Street flagship store in Manhattan
was largely due to the extensive renovation at this store. Subsequent to October
2001, sales have rebounded for the 45th Street store, as well as for the
Company's Bang & Olufsen branded stores.
Net sales and comparable store sales benefited from increases in custom
installation projects including both equipment sales and labor income. These
sales were stimulated by strong demand for new digital video technologies such
as plasma and LCD flat-screen, high definition and HD-ready televisions, DVD,
DSS as well as home theaters. Custom installation sales continue to increase and
accounted for approximately 41% of net sales ($14.9 million) for fiscal 2001, as
compared to only 33% ($11.4 million) for fiscal 2000.
Sales also have benefited from the Company's increased marketing efforts,
including radio, newspaper, cable and network television, direct mail and
catalog advertisements. The Company also promoted its new website,
www.harveyonline.com which was launched in October 2000 as well as the new
Harvey Eatontown and new Bang & Olufsen, Connecticut stores. The Company's
website has been successful in generating leads for the retail showrooms;
however, as expected, website sales have been insignificant. The Company expects
its website to continue to create consumer interest and increase sales leads to
its retail stores in fiscal 2002 and beyond.
Costs and Expenses
Total cost of goods sold for fiscal 2001 increased approximately $1.7 million or
8.4% from the prior fiscal year. This was primarily related to the overall
increase in net sales as noted above, offset by a small decline in the gross
profit margin.
The gross profit margin for fiscal 2001 was 38.5% as compared to 39.4% for the
prior fiscal year. The small decrease in the gross profit margin was due
primarily to the increased sale of video products, which is driving the
Company's overall business and which typically have lower gross margins than
audio products. The increase in video sales was primarily due to additional
customer demand for new digital technologies such as HDTV, DVD, DSS, plasma and
LCD flat-screen televisions. It should be noted that sales of these new products
do benefit from higher gross margins and higher overall sales prices as compared
to commodity analog televisions and VCR's. Interest in these new video products
will also cultivate larger projects including new sales of audio components,
speakers, home theater systems, furniture, accessories and custom installation
services, which all realize higher margins for the Company. For fiscal 2001, the
Company's sales of video products accounted for over 35% of its net sales as
compared to 31% in fiscal 2000.
The increase in higher margin custom installation labor income (approximately
$1.9 million in fiscal 2001 as compared to approximately $1.1 million in fiscal
2000) has helped to mitigate the reduction in the gross margin from the increase
in video sales.
Selling, general and administrative expenses ("SG&A expenses") increased 17.7%
or approximately $2.3 million for fiscal 2001, as compared to fiscal 2000.
Comparable SG&A expenses for fiscal 2001 increased approximately $945,000 or
7.4%. Comparable SG&A expenses actually decreased in the Company's fourth
quarter by $200,000 or 5.7% primarily from a reduction in payroll, bonuses and
payroll related expenses as prescribed by management. This was primarily
accomplished by a reduction in personnel and the implementation of a one-week
non-paid furlough for all Company employees, including officers and other
management employees.
The overall increase in total SG&A expense was affected by costs relating to the
new Bang & Olufsen and Eatontown stores and additionally from costs relating to
the Company's new website. Comparable SG&A expenses increased primarily from
additional payroll, commissions and payroll-related items resulting in part from
the new three-year union contract, which was completed at the end of fiscal
2000. Comparable SG&A expenses also increased from additional occupancy costs,
advertising expenditures, depreciation expense, insurance costs, consulting
fees, investor relations costs and various other store-operating expenses. The
Company also continued to hire additional custom installation personnel and
incur other associated expenses relating to the expansion of its custom
installation business. In July 2000, the Company also expanded its warehouse and
distribution facility, which increased occupancy costs and other related
expenses for all of fiscal 2001.
Interest expense for fiscal 2001 increased 56.1% or approximately $122,000 as
compared to fiscal 2000. The increase was primarily due to additional borrowings
from the Company's revolving line of credit facility to fund the Company's
retail store expansion and renovation. 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 in December
2000, relating to the increase and extension of the line of credit.
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.
As noted above, for fiscal 2000, the income tax equivalent provision was
$185,000 and the reduction of reorganization value in excess of amounts
allocable to identifiable assets amounted to $160,000. The income tax equivalent
provision did not affect the Company's cash.
Liquidity and Capital Resources
At October 26, 2002 and October 27, 2001, the Company's ratio of current assets
to current liabilities was .93 and .84, respectively. The Company had negative
working capital of $600,000 and $1,416,000 at October 26, 2002 and October 27,
2001, respectively. However, it is important to note that at October 26, 2002
and October 27, 2001, the Company's outstanding balances on its Credit Facility
($3,119,000 and $3,442,000, respectively) were classified as current
liabilities, despite the three-year term 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 increase in the Credit Facility, in fiscal 2001, was necessary to fund
retail store expansion, renovation and the Company's website. The improvement in
the current ratio at October 26, 2002 was positively impacted by the Company's
pre-tax income. Other factors primarily improving working capital, included the
reduction of the Credit Facility and accounts payable and an increase in
inventory and accounts receivable, offset by an increase in accrued expenses and
other current liabilities.
Net cash provided from operations for fiscal 2002 was $721,000 as compared to
net cash used in operations of $263,000 for fiscal 2001. The improvement in cash
provided from operations for fiscal 2002 was primarily due to additional pre-tax
income ($1,555,000), a decrease in accounts receivable ($50,000) and inventory
($151,000), an increase in accrued expenses, other current liabilities and
income taxes ($370,000), offset by a decrease in accounts payable ($563,000) and
customer deposits ($530,000).
Net cash used in investing activities was $234,000 for fiscal 2002, as compared
to net cash used of $1,727,000 for fiscal 2001. Net cash used for the purchases
of property and equipment and website enhancements was $237,000 for fiscal 2002
as compared to $1,734,000 for fiscal 2001. Additions for fiscal 2001 related
primarily to furniture, fixtures, computer equipment, website improvements and
leaseholds relating to the new store openings and for the renovation of the
Company's 45th Street store in Midtown Manhattan.
Net cash used in financing activities was $499,000 for fiscal 2002, as compared
to net cash provided from financing activities of $1,984,000 for fiscal 2001.
Financing activities for fiscal 2002 included net payments of $323,000, reducing
the Credit Facility, preferred stock dividends paid of $74,000, principal
payments on capital leases of $81,000 and note payable payments of $22,000.
Financing activities for fiscal 2001 included net borrowings of $2,374,000 from
the Credit Facility, preferred stock dividend payments of $108,000, payments on
capital leases of $198,000, note payable payments of $10,000 and a $75,000
commitment fee relating to the increase and extension of the Credit Facility.
The Company has a three-year revolving line of credit facility ("Credit
Facility") with Wells Fargo Retail Finance ("Wells Fargo"), whereby the Company
can borrow up to $7 million based upon a lending formula (as defined) calculated
on eligible inventory. The Credit Facility expires November 30, 2003. The
interest rate on all borrowings under the Credit Facility is one percent (1%)
over the prime rate with a minimum interest rate of 8%. Effective January 1,
2002, the minimum interest rate was reduced to 6.5% and will be in effect
throughout fiscal 2003. At January 2, 2003, there was approximately $1,958,000
in outstanding borrowings under the Credit Facility, with approximately
$3,911,000 available to borrow under the Credit Facility.
The maximum amount of borrowings available to the Company under this Credit
Facility is limited by formulas, as prescribed by Wells Fargo. The Company's
maximum borrowing availability is equal to 75% of eligible inventory, less
existing borrowings and certain reserves established by Wells Fargo.
Pursuant to the Credit Facility, the Company cannot exceed certain advance rates
on eligible inventory and must maintain certain levels of net income or loss and
minimum gross profit margins. Additionally, the Company's capital expenditures
cannot exceed a predetermined amount.
Wells Fargo obtained a senior security interest in substantially all of the
Company's assets. The Credit Facility provides Wells Fargo with rights of
acceleration upon the breach of certain financial covenants or the occurrence of
certain customary events of default. The Company is also restricted from paying
dividends on common stock, retiring or repurchasing its common stock, and
generally from entering into additional indebtedness (as defined).
The following is a summary of our significant contractual cash obligations for
the periods indicated that existed as of October 26, 2002 and is based on
information appearing in the Notes to the Financial Statements:
2003 2004-2005 2006-2007 After 2007 Total
- ------------------------------ -------------- --------------- --------------- --------------- ---------------
Operating leases $2,278,000 $3,875,000 $1,969,000 $3,959,000 $12,081,000
Capital lease obligations 23,000 - - - 23,000
- ------------------------------ -------------- --------------- --------------- --------------- ---------------
Total contractual cash
obligations $2,301,000 $3,875,000 $1,969,000 $3,959,000 $12,104,000
============================== ============== =============== =============== =============== ===============
The Company has 2,104,500 redeemable common stock purchase warrants ("Warrants")
outstanding from its public offering of common stock and Warrants in fiscal 1998
(the "Offering"). Each outstanding Warrant is exercisable for one share of
common stock at 110% ($5.50 per share) of the Offering price through March 31,
2003. The Warrants are also redeemable (at $.10 per Warrant), at the Company's
option, if the closing bid price of the common stock for 20 consecutive trading
days exceeds 150% of the Offering price per share of $7.50.
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 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.
In fiscal 2001, the Company entered into a ten-year lease for a new 6,500 square
foot Harvey showroom in Eatontown, New Jersey. This store opened in April 2001
and is the Company's ninth. Capital expenditures, including inventory, necessary
to operate this new retail store approximated $1,500,000.
The Company's expansion plan, if any, for fiscal 2003 has not been developed at
this time, as the economic outlook remains uncertain. The Company will, however,
make improvements to certain of its Harvey retail showrooms, including
additional renovations at its Paramus, New Jersey store and the installation of
total movie theaters within certain of its stores. Miscellaneous purchases of
equipment and other assets for fiscal 2003 are not expected to be significant.
The Company intends to continue its advertising campaign in fiscal 2003,
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 2003.
In March 2001, the Company engaged Porter, LeVay & Rose, Inc. ("PL&R") as its
investor relations' advisor. The Company's goal in engaging PL&R was to heighten
its visibility as the Company pursued its business strategy and selective
expansion. After one year, the Company's Board of Directors decided that the
services of an investor relations' advisor would currently not be needed, and as
a result, the Company discontinued the services from PL&R effective May 1, 2002.
Net sales and operating results for the Company's first quarter of its fiscal
year are positively affected by a strong holiday demand.
Management believes that cash on hand, cash flow from operations and funds made
available under the Credit Facility with Wells Fargo, will be sufficient to meet
the Company's anticipated working capital needs for at least the next
twelve-month period.
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
Revenue is recognized when merchandise is delivered to customers or, in the
case of custom installation revenue, when the service has been performed.
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. Customer installation revenue is recognized when the
installation is complete.
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
anticipated selling costs. 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.
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.
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 but unpaid wages and bonuses to
estimates of pending litigation claims. 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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the
Company's financial statements.
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 & Ernst & Young LLP.
Part III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
Name Age (1) Position
- --------------------------------- --------------- ----------------------------------------------------
Michael E. Recca 52 Chairman and Director
William F. Kenny, III 71 Director
Jeffrey A. Wurst 53 Director
Fredric J. Gruder 56 Director
Franklin C. Karp 49 President and Director
Joseph J. Calabrese 43 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Michael A. Beck 44 Vice President of Operations
Roland W. Hiemer 41 Merchandise Manager
(1) As of October 26, 2002.
Michael E. Recca became the Chairman of the Board of Directors of the Company in
November 1996. Mr. Recca is also a member and manager of Harvey Acquisition
Company, LLC, which is a principal shareholder of the Company. Mr. Recca was an
employee of Taglich Brothers, D'Amadeo, Wagner & Co., Inc., a NASD registered
broker-dealer, through December 31, 1998. From January 2001 through April 2002,
Mr. Recca was also a principal in NorthStar Capital, LLC, which was a joint
venture with Ruskin, Moscou, Evans & Faltischek, P.C., the Company's corporate
counsel. Currently, Mr. Recca is a director of Sky Holdings LTD, and the
President of Sky Capital, LLC, a NASD broker dealer.
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 has been 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.
Michael A. Beck has been Vice President of Operations of the Company since April
1997. From June 1996 until such date he was the Company's Director of Operations
and from October 1995 until April 1996 he served as Director of Operations for
Sound City, a consumer electronics retailer. Mr. Beck was a store manager for
the Company from August 1989 until October 1995. Mr. Beck holds a BA in
Psychology from Merrimack College.
Roland W. Hiemer is an executive officer of the Company and Director of
Inventory Control. Mr. Hiemer has been with the Company for eleven years. He
started with the Company as a salesman and advanced to Senior Sales Manager for
the Paramus store in 1991. He was further promoted to Inventory Control Manager
in 1991. In 1997, he was promoted to Director of Inventory Control and in 2001,
Mr. Hiemer was promoted to Merchandise Manager. 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, Fredric J. Gruder and
Jeffrey A. Wurst were the members of the Audit Committee in fiscal 2002.
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 the members of the Compensation and Stock Option
Committee in fiscal 2002.
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
Stock
Name of Individual Options Granted Long-Term
and Principal Position Year Salary Bonus (5) Compensation
- ------------------------------ --------- ----------------- ------------- ------------------- ----------------
Michael Recca 2002 $120,000 $ - 25,000 $ -
Chairman (1) 2001 $ 120,000 $ - 37,500 $ -
2000 $ 108,000 (1) $15,000 - $ -
Franklin C. Karp (2) 2002 $ 156,000 $109,000 50,000 $ -
President 2001 $ 147,000 $50,000 37,500 $ -
2000 $ 138,000 $60,000 - $ -
Joseph J. Calabrese (3) 2002 $ 146,000 $88,000 50,000 $ -
Executive Vice President 2001 $ 138,000 $40,000 37,500 $ -
Chief Financial Officer, 2000 $ 128,000 $46,000 - $ -
Treasurer and Secretary
Michael A. Beck (4) 2002 $ 131,000 $88,000 50,000 $ -
Vice President of 2001 $ 123,000 $40,000 37,500 $ -
Operations 2000 $ 113,000 $46,000 - $ -
(1)--From April 1, 1998 to April 30, 2000, Mr. Recca received an annual
director's fee of $95,000 at the rate of $7,917 per month, in his capacity
as the Chairman of the Board of Directors of the Company. Effective May 1,
2000, Mr. Recca had been placed on the Company's payroll at an annual
salary of $120,000, plus Company sponsored benefits.
(2)--At October 26, 2002, Mr. Karp's annual salary was $160,000.
(3)--At October 26, 2002, Mr. Calabrese's annual salary was $150,000.
(4)--At October 26, 2002, Mr. Beck's annual salary was $135,000.
(5)--See "Stock Option Plan" for related information relating to stock option
grants.
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, or
if a change of the current management takes place, and Mr. Hiemer, for the
foregoing reasons, is terminated or asked to accept a position other than that
of a senior officer requiring similar responsibilities to those that he
currently performs, or if the current corporate office is moved to a new
location which is more than thirty miles Lyndhurst, New Jersey, as a result of a
reorganization or change in ownership or control, and he declines the new
position or relocation, 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, for a period of six months. In addition,
he will be fully covered under the Company's benefit plans, including, without
limitation, the Company's medical, dental, life and disability insurance
programs, during the six-month period.
If, following termination of Mr. Hiemer as described in the preceding paragraph,
Mr. Hiemer obtains employment at a lesser compensation than Mr. Hiemer's
compensation by the Company, the Company will pay Mr. Hiemer the difference
between the two salaries for the remainder of the six month period, plus
continued coverage of the Company's benefit plans for the same period. 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 2002,
2001 and 2000, additional compensation in the form of cash bonuses and stock
options 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. Severance agreements exist for all
executive officers.
As previously mentioned, 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
stockholders. 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 companies long-term growth and profitability. As only a limited
number of options remain available for grant, no options are expected to be
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 2002, as compared to the Company's goals and from
the performance of Mr. Karp on various accomplishments for fiscal 2002. 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 $160,000 in fiscal 2002. During fiscal 2002, as a result of the
Company achieving its performance objectives, a total of 50,000 stock options
were also granted to Mr. Karp.
During 2002, a total of 205,000 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 October 26, 2002, 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 Compensation Committee shall be comprised of not
less than two members, and all of who shall be outside directors. The members of
the Compensation and Stock Option Committee are William F. Kenny III, Jeffrey A.
Wurst and Fredric J. Gruder, outside directors.
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 stockholder, the Option Price will not be less than 110% of
the fair market value of the Company's Common Stock, determined on the date of
grant, and the exercise period will not exceed five (5) years from the date of
grant of such ISO. Otherwise, the Option Price will not be less than one hundred
(100%) percent of the fair market value of the shares of the Common Stock on the
date of grant, and the exercise period will not exceed ten (10) years from the
date of grant. Options granted under the Plan shall not be transferable other
than by will or by the laws of descent and distribution, and Options may be
exercised, during the lifetime of the optionee, only by the optionee or by his
guardian or legal representative.
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 2000, the Company's Compensation Committee approved three grants of
incentive stock options aggregating 172,500, to the Company's officers, to
purchase the Company's common stock at exercise prices from $1.75-$1.925 per
share. The fiscal 2000 incentive stock options are exercisable immediately.
The following table sets forth information relating to the 205,000 options
granted in the fiscal year ended October 26, 2002, all of which were granted to
the named executive officers and directors:
Number of % of total options
securities granted to
underlying employees in Exercise or base Grant
Name options granted fiscal year price ($/sh) Date Value Expiration date
- -------------------------- ------------------ -------------------- --------------------- -------------------- --------------------
Michael E. Recca 25,000 12.2% 1.265 $ 21,627 03/04/2007
Franklin C. Karp 25,000 12.2% 1.150 26,209 03/04/2012
25,000 12.2% 1.350 30,767 05/29/2012
Joseph C. Calabrese Jr. 25,000 12.2% 1.150 26,209 03/04/2012
25,000 12.2% 1.350 30,767 05/29/2012
Michael A. Beck 25,000 12.2% 1.150 26,209 03/04/2012
25,000 12.2% 1.350 30,767 05/29/2012
Roland W. Hiemer 15,000 7.3% 1.150 15,725 03/04/2012
15,000 7.3% 1.350 18,460 05/29/2012
------- ------ --------
205,000 100.0% $226,740
======= ====== ========
The following table sets forth information concerning the excercise of stock
options by the named executives and directors during the Company's fiscal year
ended October 26, 2002, the number of options owned by the named executives and
directors and the value of any in-the-monry unexcercised stock options as of
October 26, 2002.
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares October 26, 2002 October 26, 2002
Acquired Value Exercisable (E)/ Exercisable (E)/
Name on Exercise Realized $ Unexercisable (U) Unexercisable (U)
- ---- ----------- ---------- ----------------- -----------------
Michael E. Recca 0 0 25,000 (E) $-0- (E)
Franklin C. Karp 0 0 50,000 (E) $-0- (E)
Joseph J. Calabrese, Jr. 0 0 50,000 (E) $-0- (E)
Michael A. Beck 0 0 50,000 (E) $-0- (E)
Roland W. Hiemer 0 0 30,000 (E) $-0- (E)
--------------------------------------------------------
Total 0 0 205,000 (E) $-0- (E)
=== === ======= ====
PERFORMANCE GRAPH
The following graph shows a 55-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 April 2,
1998 (the date the Company completed its public offering of common stock on
common stock warrants), 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.
[GRAPH OMITTED]
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of October 26, 2002, 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:
Name and Address of Title Amount and Nature of
Beneficial Owner of Class Beneficial Ownership Percentage
- ----------------------------------------------------- --------------- ------------------------ --------------
Harvey Acquisition Company LLC ("HAC") Common 253,932 7.6%
c/o Michael E. Recca
949 Edgewood Avenue
Pelham Manor, NY 10803
Michael E. Recca Common 430,078 (1) 12.3%
949 Edgewood Avenue
Pelham Manor, NY 10803
Matthew and Alicia Larson Common 304,300 9.2%
c/o CIBC 200 Liberty Street
New York, NY 10281
Bruce Goldstein, Inc. Common 242,530 7.3%
111 North Beach Road
Hoke Sound, Florida 33455
Ronald I. And Joyce L. Heller Common 194,900 5.9%
74 Farview Road
Tenafly, New Jersey 07670
Jeffrey A. Wurst Common 46,050 (6) 1.4%
c/o Ruskin Moscou Faltischek, P.C.
190 EAB Plaza
Uniondale, NY 11556
William F. Kenny, III Common 48,989 (2) 1.5%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Fredric J. Gruder Common 42,500 (2) 1.3%
775 Park Avenue
Huntington, NY 11753
Franklin C. Karp Common 234,500 (3) 6.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Joseph J. Calabrese Common 201,702 (4) 5.7%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Michael A. Beck Common 197,500 (4) 5.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Roland W. Hiemer Common 107,500 (5) 3.1%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
All Directors and Officers as a group Common 1,308,819 (7) 30.2%
(8 Persons)
All Beneficial Owners as a group Common 2,050,549 (7) 47.4%
(1) Includes shares owned by HAC, of which Mr. Recca is a member and one of
three managers, plus options to purchase up to 165,000 shares of the
Company's Common Stock which are exercisable at an exercise price of
between $.8937-$1.925 per share.
(2) Includes options to purchase up to 40,000 shares of the Company's Common
Stock, which is exercisable at an exercise price of between $.8125-$1.375
per share.
(3) Includes options to purchase up to 212,500 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $.8125-$.300
per share.
(4) Includes options to purchase up to 190,000 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $.8125-$3.00
per share.
(5) Includes options to purchase up to 105,000 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $.8125-$3.00
per share.
(6) Includes a warrant to purchase 15,000 shares of the Company's Common Stock,
in the name of Ruskin Moscou Faltischek, P.C., the law firm in which Mr.
Wurst is a Partner, at an exercise price of $5.00 per share. Mr. Wurst has
expressly disclaimed beneficial ownership of this warrant. Also includes
options to purchase up to 30,000 shares of the Company's Common Stock,
which is exercisable at an exercise price of between $.8125-$1.375 per
share.
(7) Includes options and warrants to purchase up to 982,500 shares of Common
Stock, which are exercisable at an exercise price of between $.8125-$5.00
per share.
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.
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 October 26, 2002, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were complied.
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.
In December 2000, $23,000 was paid to Recca & Co. Inc., of which Mr. Recca is
the sole shareholder. Amounts paid relate to management fees and other
miscellaneous amounts from fiscal 1998.
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 Faltischeck, P.C. ("Ruskin"), the Company's corporate counsel
and Mr. Recca. Since April 2002, Mr. Recca has been a director of Sky Holdings
LTD, and the President of Sky Capital, LLC, a NASD broker dealer.
Jeffrey A. Wurst, Director, is also a Senior Partner with Ruskin. At October 26,
2002 and October 27, 2001, the Company had amounts payable to Ruskin of
approximately $26,000 and $25,000, respectively. The Company also paid legal
fees to Ruskin of $81,000, $64,000 and $127,000, in fiscal years 2002, 2001 and
2000, respectively.
At October 28, 2000, the Company had a receivable of approximately $45,000 due
from Mr. E.H. Arnold, a member of HAC and a holder of Preferred Stock. This
amount was subsequently collected by the Company in December 2000.
Dividends paid to preferred stockholders aggregated $74,000, $108,000 and
$110,000 for fiscal years 2002, 2001 and 2000, respectively.
In fiscal 1999, the Company signed a consulting agreement with a previous member
of its underwriter. Pursuant to the terms of the two-year agreement, the
consultant received an annual fee of $75,000 for fiscal 1999. This agreement was
terminated by the Company effective February 29, 2000. In August 2000, the
consultant was again engaged by the Company, pursuant to a consulting agreement,
at $5,000 per month. At December 15, 2000, the agreement was terminated by the
Company. The consultant received fees aggregating $5,000 and $40,000 in fiscal
years 2001 and 2000, respectively.
Item 14. Controls and Procedures
The Company's President and Chief Financial Officer (its principal executive
office and principal financial officer, respectively) have concluded, based on
their evaluation as of a date within 90 days prior to the filing date of this
report, that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
filed or submitted by it under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by the Company in such reports is accumulated and communicated to
the Company's management, including the President and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.
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 - October 26, 2002 and October 27, 2001
Statements of Operations - Fiscal years ended October 26, 2002, October 27,
2001 and October 28, 2000
Statements of Shareholders' Equity - Fiscal years ended October 26, 2002,
October 27, 2001 and October 28, 2000
Statements of Cash Flows - Fiscal years ended October 26, 2002, October 27,
2001 and Octobeer 28, 2000
Notes to Financial Statements
(2) List of Financial Statements Schedule:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(3) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Commission
File #333--42121:
Exhibit Number Description
3.1.1--Restated Certificate of Incorporation of 1967
3.1.2--Certificate of Amendment of the Certificate of Incorporation of 1997
3.1.3--Certificate of Amendment of the Certificate of Incorporation of December 1996
3.1.4--Certificate of Amendment of Certificate of Incorporation of July 1988
3.1.5--Certificate of Amendment of Certificate of Incorporation of July 1971
3.1.6--Certificate of Amendment of Certificate of Incorporation of February 1971
3.1.7--Certificate of Amendment of Certificate of Incorporation of June 1969
3.1.8--Certificate of Amendment of Certificate of Incorporation of September 1968
4.1--Sections in Certificate of Incorporation and the Amended and Restated By-Laws of Harvey Electronics, Inc., that define
the rights of the holders of shares of Common Stock, Preferred Stock and holders of Warrants(included in Exhibit Nos. 3.1.2
and 3.1.3)
4.2--Form of Common Stock Certificate
4.3--Form of Redeemable Common Stock Purchase Warrant
4.4--Form of Representative's Warrant
4.5--Form of Warrant to Holders of Preferred Stock
10.1.1--Stock Option Plan of Harvey Electronics, Inc.
10.1.2--Form of Stock Option Agreement
10.2.1--Severance Agreement with Franklin C. Karp
10.2.2--Severance Agreement with Joseph J. Calabrese
10.2.3--Severance Agreement with Michael A. Beck
10.2.4--Severance Agreement with Roland W. Hiemer
10.4.1--Dealer Agreement between the Company and Mitsubishi Electronics America, Inc.
10.4.2--Dealer Agreement between the Company and Niles Audio Corporation, Inc.
10.5.1--Lease between the Company and Joseph P. Day Realty Corp. (2)
10.5.2--Lease between the Company and Goodrich Fairfield Associates, L.L.C. (2)
10.5.3--Lease between the Company and Sprout Development Co. (2)
10.5.4--Lease between the Company and Service Realty Company (2)
10.5.5--Lease between the Company and 205 Associates (2)
10.5.6--Sublease between the Company and Fabian Formals, Inc. and Affiliate First Nighter of Canada (2)
10.6--Loan and Security Agreement, Master Note and Trademark Security Agreement with Paragon Capital L.L.C.
(ii) The following exhibits are hereby incorporated by reference from Exhibit A
filed as part of the registrant's Form 8-K dated November 3, 1997:
2.1.1--Restated Modified Amended Joint and Substantially Consolidated Plan of Reorganization of Harvey Electronics, Inc.
2.1.2--Order dated November 13, 1996 Confirming Plan of Reorganization
(iii) The following exhibits are hereby incorporated by reference from Item 7
filed as part of the registrant's Form 8-K dated April 7, 1998:
4.4--Representative's Warrant Agreement
4.5--Warrant Agent Agreement
10.1--Underwriting Agreement
10.2--Financial Advisory and Investment Banking Agreement between the Company and The Thornwater Company, L.P.
(iv) The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 8-K dated October 12, 1998:
10.01--Bang & Olufsen America, Inc. Termination Letter dated September 7, 1998
10.02--Bang & Olufsen America, Inc. New Agreement Letter dated October 8, 1998
10.03--Agreement with Thornwater regarding termination of agreements and lock-up amendments dated October 31, 1998
(v) The following exhibits are hereto incorporated by reference to the Company's
Form 10KSB dated October 31, 1998:
10.5.7--Lease Agreement with Martin Goldbaum and Sally Goldbaum
10.5.8--Lease Agreement with Bender Realty
10.7--Surrender of Lease with 873 Broadway Associates
10.8--Contract of Sale with Martin Goldbaum, Sally Goldbaum, the Sound Mill, Inc. and Loriel Custom Audio Video Corp.
10.9--License Agreement with ABC Home Furnishings, Inc.
(vii) The following exhibits are hereto incorporated by reference to the
Company's Form 10KSB dated October 28, 2000:
10.2.5--Severance Agreement between the Company and Michael E. Recca
10.2.6--Amended and Restated Severance Agreement between the Company and Franklin C. Karp
10.2.7--Amended and Restated Severance Agreement between the Company and Joseph J. Calabrese
10.2.8--Amended and Restated Severance Agreement between the Company and Michael A. Beck
10.5.9--Sublease Agreement between the Company and Bang & Olufsen America, Inc.
10.6--Lease Agreement between the Company and WSG Eatontown LP
10.6.1--Lease Modification Agreement between the Company and WSG Eatontown LP
10.6.2--Renewal of License Agreement with ABC Home Furnishings, Inc.
10.10--Repurchase Agreement between the Company, Bang & Olufsen America, Inc. and Paragon Capital, L.L.C.
10.11--Addendum to Repurchase Agreement between the Company, Bang & Olufsen America, Inc. and Paragon Capital, L.L.C.
10.12--Second Amendment to Loan and Security Agreement with Paragon Capital, L.L.C.
10.13--Third Amendment to Loan and Security Agreement with Paragon Capital, L.L.C.
10.14--Consulting Agreement with Mesa Partners Inc.
10.15--Addendum to Consulting Agreement with Mesa Partners, Inc.
10.16--Warrant to purchase 15,000 shares of the Company's common stock, issued
to Mesa Partners, Inc.
10.17--Investor relations agreement with Porter, LeVay & Rose
(viii)--The following exhibits are hereto incorporated by reference to the
Company's Form 10KSB dated October 27, 2001:
10.6.3--Modification of Lease between the Company and Service Realty Company
10.6.4--First Amendment of Lease between the Company and 205 Associates
(ix) --The following exhibits are annexed hereto:
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
23. --Consent of BDO Seidman, LLP
23.1--Consent of Ernst and Young, LLP
99.1--Section 906 Certification - President
99.2--Section 906 Certification - CFO
99.3--Section 302 Certification - President
99.4--Section 302 Certification - CFO
(b) --Reports on Form 8-K:
On November 25, 2002, the Company filed Form 8-K with the Securities and
Exchange Commission, announcing compliance with NASDAQ Listing Qualifications.
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 24, 2003
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.
Signature Title Date
/s/ Franklin C. Karp President and Director January 24, 2003
- -------------------------------------
Franklin C. Karp
/s/ Joseph J. Calabrese Executive Vice President, Chief Financial January 24, 2003
- ------------------------------------- Officer, Treasurer, Secretary and Director
Joseph J. Calabrese
/s/ Michael E. Recca Chairman and Director January 24, 2003
- -------------------------------------
Michael E. Recca
/s/ William F. Kenny, III Director January 24, 2003
- -------------------------------------
William F. Kenny, III
/s/ Fredric J. Gruder Director January 24, 2003
- -------------------------------------
Fredric J. Gruder
/s/ Jeffrey A. Wurst Director January 24, 2003
- -------------------------------------
Jeffrey A. Wurst
Item 8. Financial Statements and Supplementary Data
Harvey Electronics, Inc.
Index to Financial Statements and Supplemental Data
Report of Independent Certified Public Accountants................................................. F-2
Report of Independent Auditors..................................................................... F-3
Balance Sheets--October 26, 2002 October 27, 2001.................................................. F-4
Statements of Operations--Fiscal years ended October 26,2002,
October 27, 2001 and October 28, 2000........................................................... F-5
Statements of Shareholders' Equity--Fiscal years ended October 26,2002,
October 27, 2001 and October 28, 2000........................................................... F-6
Statements of Cash Flows--Fiscal years ended October 26, 2002,
October 27, 2001 and October 28, 2000........................................................... F-7
Notes to Financial Statements...................................................................... F-8-26
The following financial statement schedule of Harvey Electronics, Inc. is included as
supplementary data:
Schedule II - Valuation and Qualifying Accounts.................................................... F-27
Report of Independent Certified Public Accountants................................................ F-28
F-1
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Harvey Electronics, Inc.
We have audited the accompanying balance sheet of Harvey Electronics, Inc. as of
October 26, 2002, and the related statements of operations, shareholders' equity
and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Harvey Electronics, Inc. at
October 26, 2002, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
s/BDO Seidman, LLP
- -----------------------------
BDO Seidman, LLP
Melville, New York
December 20, 2002
F-2
Report of Independent Auditors
The Board of Directors and Shareholders
Harvey Electronics, Inc.
We have audited the accompanying balance sheet of Harvey Electronics, Inc. as of
October 27, 2001 and the related statements of operations, shareholders' equity
and cash flows for the years ended October 27, 2001 and October 28, 2000. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Harvey Electronics, Inc. at
October 27, 2001 and the results of its operations and its cash flows for the
years ended October 27, 2001 and October 28, 2000, 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
F-3
Harvey Electronics, Inc.
Balance Sheets
October 26, October 27,
2002 2001
----------------------------------
Assets
Current assets:
Cash and cash equivalents $15,990 $28,336
Accounts receivable, less allowance of $20,000 and $25,000 634,663 578,905
Inventories 6,804,161 6,709,125
Prepaid expenses and other current assets 212,692 214,270
----------------------------------
Total current assets 7,667,506 7,530,636
Property and equipment:
Leasehold improvements 3,363,928 3,194,392
Furniture, fixtures and equipment 1,941,765 1,799,369
Internet website 441,670 415,630
----------------------------------
5,747,363 5,409,391
Less accumulated depreciation and amortization 2,730,164 1,981,683
----------------------------------
3,017,199 3,427,708
Equipment under capital leases, less accumulated amortization
of $382,537 and $377,131 62,023 119,365
Cost in excess of net assets acquired, less accumulated amortization
of $25,000 and $19,000 125,000 131,000
Reorganization value in excess of amounts allocable to identifiable
assets, less accumulated amortization of $378,023 and $324,023 986,440 1,164,440
Other assets, less accumulated amortization of $183,794 and $111,347 293,297 354,051
----------------------------------
Total assets $12,151,465 $12,727,200
==================================
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $3,119,493 $3,442,020
Trade accounts payable 2,274,833 2,823,781
Customer deposits 1,484,237 1,522,106
Accrued expenses and other current liabilities 1,293,207 1,033,136
Income taxes 50,200 28,200
Cumulative Preferred Stock dividends payable 23,432 24,792
Current portion of long-term debt - 21,985
Current portion of capital lease obligations 22,420 50,921
----------------------------------
Total current liabilities 8,267,822 8,946,941
Long-term liabilities:
Capital lease obligations - 5,265
Deferred rent 155,615 154,660
----------------------------------
155,615 159,925
Commitments and contingencies
Shareholders' equity:
8-1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share;
authorized 10,000 shares; issued and outstanding 827 and 875 shares (aggregate
liquidation preference--$827,000 and $875,000)
379,982 402,037
Common Stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 3,324,525 and 3,282,833 shares 33,245 32,828
Additional paid-in capital 7,601,305 7,579,667
Accumulated deficit (4,286,504) (4,394,198)
----------------------------------
Total shareholders' equity 3,728,028 3,620,334
----------------------------------
Total liabilities and shareholders' equity $12,151,465 $12,727,200
==================================
See notes to financial statements.
F-4
Harvey Electronics, Inc.
Statements of Operations
Fiscal Years Ended
October 26, October 27, October 28,
2002 2001 2000
-----------------------------------------------------------
Net sales $41,506,577 $36,687,206 $34,355,415
Interest and other income 116,021 82,917 33,519
-----------------------------------------------------------
41,622,598 36,770,123 34,388,934
-----------------------------------------------------------
Cost of sales 25,153,269 22,552,054 20,813,396
Selling, general and administrative expenses 15,806,022 15,128,410 12,856,155
Interest expense 358,836 339,894 217,724
-----------------------------------------------------------
41,318,127 38,020,358 33,887,275
-----------------------------------------------------------
Income (loss) before income taxes 304,471 (1,250,235) 501,659
Income taxes 124,000 - 185,000
-----------------------------------------------------------
Net income (loss) 180,471 (1,250,235) 316,659
Preferred Stock dividend requirement 72,777 74,376 74,376
-----------------------------------------------------------
Net income (loss) applicable to Common Stock $107,694 ($1,324,611) $242,283
===========================================================
Net income (loss) per share applicable to
common shareholders:
Basic $0.03 ($0.40) $0.07
===========================================================
Diluted $0.03 ($0.40) $0.07
===========================================================
Shares used in the calculation of net income
(loss) per common share:
Basic 3,297,827 3,282,833 3,282,833
===========================================================
Diluted 3,907,401 3,282,833 3,346,307
===========================================================
See notes to financial statements.
F-5
Harvey Electronics, Inc.
Statements of Shareholders' Equity
Preferred Stock Common Stock Additional Total
---------------------------------------------- Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
--------------------------------------------------------------------------------------------
Balance at October 30, 1999 875 $402,037 3,282,833 $32,828 $7,481,667 $ (3,311,870) $4,604,662
Net income for the year - - - - - 316,659 316,659
Preferred Stock dividend - - - - - (74,376) (74,376)
--------------------------------------------------------------------------------------------
Balance at October 28, 2000 875 402,037 3,282,833 32,828 7,481,667 (3,069,587) 4,846,945
Net loss for the year - - - - - (1,250,235) (1,250,235)
Recorded value of Common Stock
warrants granted - - - - 98,000 - 98,000
Preferred Stock dividend - - - - - (74,376) (74,376)
--------------------------------------------------------------------------------------------
Balance at October 27, 2001 875 402,037 3,282,833 32,828 7,579,667 (4,394,198) 3,620,334
Net income for the year - - - - - 180,471 180,471
Preferred Stock dividend - - - - - (72,777) (72,777)
Conversion of Preferred Stock
to Common Stock (48) (22,055) 38,920 389 21,666 - 0
Exercise of cash-less Common Stock
warrant - - 2,772 28 (28) - 0
--------------------------------------------------------------------------------------------
Balance at October 26, 2002 827 $379,982 3,324,525 $33,245 $7,601,305 ($4,286,504) $3,728,028
=== ========= ========= ======== =========== ============ ==========
See notes to financial statements.
F-6
Harvey Electronics, Inc.
Statements of Cash Flows
Fiscal Years Ended
October 26, October 27, October 28,
2002 2001 2000
---------------------------------------------------------------
Operating activities
Net income (loss) $180,471 ($1,250,235) $316,659
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 916,873 989,055 647,064
Income tax equivalent provision 124,000 - 160,000
Straight-line impact of rent escalations 955 (21,556) (22,867)
Consulting fees - 3,516 10,000
Miscellaneous (14,473) (8,980) (12,667)
Changes in operating assets and liabilities:
Accounts receivable (50,758) (105,808) (24,040)
Allowance for bad debts (5,000) - -
Note receivable - previous member of Underwriter - - 54,914
Inventories (17,901) (168,729) (1,341,791)
Prepaid expenses and other current assets 1,578 (8,708) 179,863
Trade accounts payable (659,035) (95,782) 976,338
Customer deposits (37,923) 491,920 374,240
Accrued expenses, other current liabilities and income taxes
income taxes 282,125 (88,057) 477,291
---------------------------------------------------------------
Net cash provided by (used in) operating activities 720,912 (263,364) 1,795,004
---------------------------------------------------------------
Investing activities
Purchases of property and equipment excluding
Internet website development (220,845) (1,661,398) (688,550)
Internet website development (16,040) (73,032) (342,598)
Purchases of other assets (9,140) (563) (53,927)
Security deposits-net 11,935 - -
Note receivable - officer - 7,500 7,500
---------------------------------------------------------------
Net cash used in investing activities (234,090) (1,727,493) (1,077,575)
---------------------------------------------------------------
Financing activities
Net (payments) proceeds from revolving credit facility (322,527) 2,374,311 (409,894)
Commitment fee from increased revolving credit facility - (75,000) -
Preferred Stock dividends paid (74,151) (107,603) (110,206)
Principal payments on note payable (21,985) (10,374) -
Principal payments on capital lease obligations (80,505) (197,514) (185,903)
---------------------------------------------------------------
Net cash (used in) provided by financing activities (499,168) 1,983,820 (706,003)
---------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (12,346) (7,037) 11,426
Cash and cash equivalents at beginning of year 28,336 35,373 23,947
---------------------------------------------------------------
Cash and cash equivalents at end of year $15,990 $28,336 $35,373
===============================================================
Supplemental cash flow information:
Interest paid $361,000 $302,000 $247,000
===============================================================
Taxes paid $6,000 $17,000 $11,000
===============================================================
See notes to financial statements.
F-7
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. Revenues from retail sales are recognized at the time goods are
delivered to the customer or, for certain installation services, when such
services are performed and accepted by the customer. The Company's fiscal year
ends the Saturday closest to October 31. The fiscal years ended October 26,
2002, October 27, 2001 and October 28, 2000 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. Actual results could differ from those estimates.
Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," when impairment
indicators are present, the Company reviews the carrying value of its assets in
determining the ultimate recoverability of their unamortized values using future
undiscounted cash flows expected to be generated by the assets. If such assets
are considered impaired, the impairment loss recognized is measured by the
amount by which the carrying amount of the asset exceeds the estimated fair
value. No such impairment exists at October 26, 2002. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less cost to
sell.
F-8
1. Description of Business and Summary of Significant Accounting Policies
(continued)
The Company evaluates the periods of amortization continually in determining
whether later 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.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
method of accounting for the issuance of stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies also are
permitted to continue to account for such transactions under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," as the Company has elected to do, but are required to disclose in
the financial statement footnotes, pro forma net income and per share amounts as
if the Company had applied the new method of accounting for all grants made
since 1996. SFAS No. 123 also requires increased disclosures for stock-based
compensation arrangements. The Company follows the disclosure requirements of
SFAS No. 123 (see Note 4).
Segment Disclosures
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosure about products and services, geographic areas, and major
customers. The Company operates in one business segment.
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.
F-9
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Depreciation and Amortization
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment, including equipment
acquired under capital leases, is calculated using the straight-line method over
the estimated useful lives of the related assets, ranging from three to ten
years. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the lease term or estimated useful
lives of the improvements.
Internet Website
The Company follows the provisions of EITF 00-2, "Accounting for Website
Development Costs", which provides guidance or 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 $26,000, $73,000 and $343,000
for fiscal years 2002, 2001 and 2000, respectively, relating to the development
of their 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 6).
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 October 26, 2002, October 27, 2001 and October
28, 2000 were computed based on the weighted-average number of common shares
outstanding. Common equivalent shares relating to stock options aggregating
88,476 were included in the weighted average number of common shares outstanding
for fiscal 2002 for the diluted earnings per share computation. No common
equivalent shares. F-10 1. Description of Business and Summary of Significant
Accounting Policies (continued) 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. For fiscal 2000, common equivalent shares relating to stock
options aggregating 63,474 were included in the weighted average number of
common shares outstanding for the diluted earnings per share computation.
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 (670,559 in fiscal 2002
and 709,479 in fiscals 2001 and 2000), 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 3,066,457, 3,361,233 and 2,240,600, were
excluded from the computation for fiscal years 2002, 2001 and 2000,
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, revolving line of credit facility, accounts payable and accrued
liabilities approximate their fair values principally because of the short-term
nature of these items.
Concentration of Credit Risk
The Company's operations consist of the retail sale, service and custom
installation of high quality audio, video and home theater equipment in the New
York Metropolitan area. The Company performs credit evaluations of its
customers' financial condition and payment history but does not require
collateral. Generally, accounts receivable are due within 30 days and credit
losses have historically been immaterial.
F-11
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Advertising Expense
In accordance with SOP 93-7, "Reporting of Advertising Costs," 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 October 26, 2002, October 27, 2001 and October 28, 2000 was approximately
$632,000, $1,206,000 and $934,000, respectively. Prepaid advertising for print
advertisements not run and broadcast advertisements not aired at October 26,
2002 and October 27, 2001 was approximately $29,000 and $53,000, 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 finders fee. The excess of the
reorganization value over the fair value of net assets and liabilities ($986,440
and $1,164,440, net of amortization at October 26, 2002 and October 27, 2001,
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). Amortization expense of $54,000,
$60,000 and $66,000 was recorded for fiscal years 2002, 2001 and 2000,
respectively.
Reclassification
Certain items in the fiscal 2001 and 2000 financial statements have been
reclassified to conform to fiscal 2002 presentation.
F-12
Recent Accounting Pronouncements
1. Description of Business and Summary of Significant Accounting Policies
(continued)
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and other intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests in
accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives. In addition, Statement 141, eliminates the
pooling-of-interest method of accounting for business combinations. The Company
will adopt SFAS No. 141 and 142 beginning in the first quarter of fiscal 2003.
During fiscal 2003, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
October 27, 2002. Management does not expect that there will be a material
effect on the Company's financial position and results of operations due to this
pronouncement. The total net amount of goodwill, including reorganization value
in excess of amounts allocable to identifiable assets at October 26, 2002 was
$1,111,440. Amortization expense of net goodwill was $60,000 for the year ended
October 26, 2002.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations. "SFAS No. 143 required the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 by the Company is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No 30, "Reporting the Results
of Operations," for a disposal of a segment of a business. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt SFAS No. 144 as of October
27, 2002, the first day of fiscal 2003, and management does not expect, the
adoption of SFAS No. 144 to have a material effect on the Company's financial
position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which requires all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of
F-13
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, " will now be used to classify those gains
and losses. The adoption of SFAS No. 145 by the Company is not expected to have
a material impact on the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associates with
Exit or Disposal Activities". SFAS No. 146 provides new guidance on the
recognition of costs associated with exit or disposal activities. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance
provided by EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). "EITF Issue No. 94-3 required recognition of
costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The impact of the adoption of SFAS No. 146 is not expected to have a
material impact on the Company's financial position and results of operations.
In December 2002,. The Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards Board ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123 ." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect on the method used on reported results. The
disclosure requirements apply to all companies for fiscal years ending after
December 15, 2002. Due to the recent release of this pronouncement, management
has not yet determined the impact it will have on the Company's financial
statements.
2. Amendments and Extension of 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 includes 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. The interest rate on borrowings up to $2.5 million was
F-14
2. Amendments and Extension of Revolving Line of Credit Facility (continued)
reduced to three quarters of 1% (.75%) over the prime rate. The rate charged on
outstanding balances over $2.5 million was also reduced to 1% above the prime
rate. Additionally, the Amended Agreement provides for an annual facility fee of
$17,500 and reduced 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 (6.5% at
October 26, 2002) with a minimum interest rate of 8%. However, effective January
1, 2002, the minimum interest rate was reduced to 6.5% and will be in effect
throughout fiscal 2003. Prepayment fees also exist under the Third Amended
Agreement. A commitment fee of $75,000 (being amortized over the three years)
was also paid by the Company in fiscal 2001. The balance outstanding under the
revolving line of credit facility at October 26, 2002 and October 27, 2001 was
$3,119,000 and $3,442,000, respectively and is presented as a current liability
in accordance with EITF 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that include both a Subjective
Acceleration clause and a Lock-Box Arrangement", since the Company's daily
receipts are used to reduce the outstanding balance under the revolving credit
facility.
Wells Fargo has a senior security interest in all of the Company's assets. The
amended line of credit facility provides Wells Fargo with rights of acceleration
upon the occurrence of certain customary events of default including, among
others, the event of bankruptcy. The Company is restricted from paying dividends
on common stock, retiring or repurchasing its common stock and entering into
additional indebtedness (as defined). The line of credit facility also contains
certain financial covenants. No covenant defaults existed at October 26, 2002.
In connection with the Third Amended Agreement, Wells Fargo received an
additional warrant to purchase 100,000 shares of the Company's common stock,
subject to adjustment, which is currently exercisable at a price of $2.00 per
share and expires November 30, 2003. Wells Fargo also received an extension of
an existing warrant to purchase 125,000 shares of common stock, subject to
adjustment, which is currently exercisable at a price of $5.50 per share and
also expires November 30, 2003. 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 and
$52,000 included in Other Assets in the accompanying balance sheets as of
October 26, 2002 and October 27, 2001, respectively), which is being amortized
over a three-year period.
F-15
3. Sale of Common Stock and Warrants in Public Offering
In April 1998, the Company completed an issuance of its common stock and common
stock warrants in a public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P. (the "Underwriter") which sold
1,200,000 shares of the Company's common stock, of which 1,025,000 shares were
sold by the Company and 175,000 shares were sold by HAC, and 2,104,500 of
Warrants ("Warrants") to acquire additional shares of the Company's common
stock. The net proceeds from the Offering, which approximated $4.1 million, were
used to temporarily repay amounts borrowed under the Wells Fargo credit facility
(approximately $2.3 million) and to retire the principal ($350,000) and interest
($48,000) of a term loan, with the balance of the proceeds used to open three
new retail stores and for general working capital purposes.
Each Warrant is exercisable for one share of common stock at 110% ($5.50 per
share) of the Offering price for a period of three-years expiring on March 31,
2003. The Warrants also are redeemable (at $.10 per warrant) at the Company's
option, through March 31, 2003 if the closing bid price of the common stock for
20 consecutive trading days exceeds 150% of the Offering price per share or
$7.50 per share.
4. 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 88,476 were
included in the weighted average number of common shares outstanding for the
diluted earnings per share computation.
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.
F-16
4. Stock-Based Compensation (continued)
In fiscal 2000, the Company's Compensation and Stock Option Committee of the
Board of Directors ("Compensation Committee") approved three grants of incentive
stock options aggregating 172,500, to the Company's officers, to purchase the
Company's common stock at exercise prices from $1.75-$1.925 per share. The
fiscal 2000 incentive stock options are exercisable immediately.
In fiscal years 2002, 2001 and 2000, the Company reserved 197,500, 262,500 and
172,500 shares of common stock, respectively, for issuance in connection with
stock options. The following table summarizes activity in stock options during
fiscal 2001 and 2000:
Weighted-
Shares Shares Under Option Average
--------------------------------
Available for Option Price Number of Exercise
Granting per Share Shares Price
--------------- ----------------- -------------- ---------------
Balance at October 30, 1999 4,600 362,900 $1.65
2000 Stock option grants 172,500
Granted--March 1, 2001 (57,500) $1.75 57,500 $1.50
Granted--July 3, 2001 (57,500) $1.86 57,500 $1.86
Granted--July 28, 2001 (57,500) $1.75-$1.925 57,500 $1.79
Forfeited 10,450 $1.00-$2.00 (10,450) $1.02
--------------- --------------
Balance at October 28, 2000 15,050 524,950 $1.68
2001 Stock option grants 262,500
Granted--November 29, 2000 (45,000) $1.375 45,000 $1.375
Granted--December 28, 2000 (102,500) $.8125-$.8937 102,500 $ .82
Granted--March 12, 2001 (115,000) $.9375-$1.0313 115,000 $ .96
Forfeited 2,175 $1.00-$3.00 (2,175) $2.13
--------------- --------------
Balance at October 27, 2001 17,225 785,275 $1.44
2002 Stock option grants 197,500
Granted - March 5, 2002 (115,000) $1.15-$1.265 115,000 $1.175
Granted - May 30, 2002 (90,000) $1.35 90,000 $1.35
Forfeited 1,175 $1.00-$2.00 (1,175) $1.574
--------------- --------------
Balance at October 26, 2002 10,900 989,100 $1.416
--------------------------- ====== =======
At October 26, 2002, October 27, 2001 and October 28, 2000, all outstanding
options are exercisable. The weighted-average fair value of options granted
during the fiscal years ended October 26, 2002, October 27, 2001 and October 28,
2000 was $1.11, $.76 and $1.43, respectively.
F-17
4. Stock-Based Compensation (continued)
Exercise prices for options outstanding as of October 26, 2002, are as follows:
Weighted-
Number of Average
Options Options Remaining
Range of Outstanding at Exercisable at Contractual Life
Exercise Price Year End End of Year in Years
- ------------------------ ---------------------- ---------------------- ----------------------
$.8125 90,000 90,000 9
$.8937 12,500 12,500 9
$.9375 90,000 90,000 9
$1.00 62,625 62,625 6
$1.0313 25,000 25,000 9
$1.15 90,000 90,000 10
$1.265 25,000 25,000 5
$1.35 90,000 90,000 10
$1.375 45,000 45,000 9
$1.50 222,500 222,500 7
$1.75 102,500 102,500 8
$1.86 57,500 57,500 8
$1.925 12,500 12,500 8
$2.00 4,975 4,975 5
$3.00 59,000 59,000 5
---------------------- ----------------------
989,100 989,100 8
====================== ======================
At October 26, 2002 and October 27, 2001, the Company has reserved shares of
common stock for issuance under common stock options, warrants and preferred
stock of approximately 3,780,000 and 3,576,000, respectively.
The alternative fair value accounting provided for under SFAS No. 123, requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's Stock Options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from
F-18
4. Stock-Based Compensation (continued)
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not provide a reliable single measure of the fair value of
its stock options.
Pro forma information regarding net (loss) income and net loss per share (basic
and diluted) is required by SFAS No. 123, which also requires that the
information be determined as if the Company had accounted for its stock options
granted under the fair value of that statement.
The fair value of these options was estimated at the date of grant using the
Black-Sholes option pricing model with the following assumptions for fiscal
years 2002, 2001 and 2000: risk-free interest rate ranging from 4.44%-5.02%,
4.88%-5.47% and 6.20%-6.36%, respectively; no dividend yield; volatility factor
of the expected market price of the Company's common stock of 1.00, 0.938 and
0.897, respectively; and a weighted-average expected life of the options of 9.39
years, 7 years and 6.57 years, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for fiscal year 2002, 2001 and 2000 are as follows:
2002 2001 2000
----------------- ----------------- ----------------
Pro forma net (loss) income $(46,000) $ (1,475,000) $ 49,000
Pro forma net loss attributable to common stock
$(119,000) $ (1,549,000) $ (25,000)
Pro forma basic and diluted loss per share $(.04) $(.47) $(.01)
5. 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, and $402,037 at October 26, 2002 and October 27, 2001, respectively.
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
F-19
5. 8.5% Cumulative Convertible Preferred Stock (continued)
8.5% cumulative dividend ($85 per share or $70,295 annually), payable on the
last business day in June and December. The Company had elected to defer the
fiscal 1997 dividends, at a preference rate of $105 per share annually ($91,875)
plus interest at 8.5% per annum over a three-year period. All installments
relating to the 1997 dividends have been paid by the Company as of October 27,
2001.
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 October 26, 2002 and October 27, 2001, 827 and
875 shares of Preferred Stock, respectively 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 and $24,792 are
outstanding and classified as a current liability at October 26, 2002 and
October 27, 2001, respectively. Dividends aggregating $72,777, $74,376 and
$74,376 were recorded as a charge to accumulated deficit in fiscal years 2002,
2001 and 2000, respectively.
6. 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 October 26, 2002, the Company
recorded an income tax equivalent provision of $124,000 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. During the year ended October 28, 2000, the income
tax equivalent provision and the associated adjustment to reorganization value
amounted to $160,000. The income tax equivalent provisions did not affect the
Company's tax liability.
F-20
6. Income Taxes (continued)
The provision for income taxes for the years ended October 26, 2002, October 27,
2001 and October 28, 2000 consists of the following:
October 26, 2002 October 27, 2001 October 28, 2000
---------------- ---------------- ----------------
Current:
Federal $ - $ - $ 13,500
State - - 11,500
Equivalent tax expense 124,000 - 160,000
-------------------------- ---------------------- ----------------------
124,000 - 185,000
Deferred - - -
-------------------------- ---------------------- ----------------------
$124,000 $ - $185,000
======== ==== ========
The effective income tax rate differed from the Federal statutory rate as
follows:
Year Ended
October 26, 2002 October 27, 2001 October 28, 2000
---------------------------------------------------------------------------
Amount % Amount % Amount %
---------------------------------------------------------------------------
Federal income tax provision
(benefit) at statutory rate $104,000 34.0% $(425,000) (34.0%) $171,000 34.0%
State income taxes, net of Federal
benefit 23,000 7.6% (55,000) (4.4) 47,400 9.5
Nondeductible reorganization
amortization 18,000 5.9% 20,000 1.6 22,400 4.5
Operating losses not currently
deductible - - 453,000 36.2 - -
Other, net 5,000 1.6% 7,000 .6 11,500 2.4
Benefit from post reorganization
temporary differences on tax
equivalent provision (26,000) (8.3%) - - (67,300) (13.4)
------------- ------------ ------------ ----------- ----------- ----------
$124,000 40.8% $0 0% $185,000 36.9%
======== ===== == == ======== =====
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 $1,758,000, $1,886,000 and $1,483,000 at
October 26, 2002, October 27, 2001 and October 28, 2000, respectively.
F-21
6. Income Taxes (continued)
Deferred tax assets and liabilities as of October 26, 2002 and October 27, 2001
prior to the allocation of the valuation allowance consisted of the following:
October 26, October 27,
2002 2001
------------- ---------------
Pre-reorganization net operating loss carryforwards $ 352,000 $ 442,000
Pre-reorganization deductible temporary differences 74,000 77,000
Pre-reorganization tax credits 53,000 53,000
Post-reorganization net operating loss carryforwards 981,000 981,000
Deferred rent 16,000 16,000
Expenses not currently deductible -- 33,000
Inventories 75,000 98,000
Depreciable assets 262,000 270,000
Tax credits 2,000 2,000
----------- -----------
Total deferred tax assets 1,815,000 1,972,000
Website development costs (50,000) (81,000)
Intangible assets (7,000) (5,000)
----------- -----------
Total deferred tax liabilities (57,000) (86,000)
Net 1,758,000 1,886,000
Valuation allowance 1,758,000 1,886,000
=========== ===========
Total $ -- $ --
=========== ===========
At October 26, 2002, the Company has available net operating loss carryforwards
of approximately $3,300,000, which expire in various years through fiscal 2021.
Of this amount, approximately $900,000 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.
7. 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 contributions to the Plan for fiscal 2002, 2001 and 2000.
F-22
8. Commitments and Contingencies
Commitments
The Company's financial statements reflect the accounting for equipment leases
as capital leases by recording the asset and the related liability for the lease
obligation. Capital lease additions of approximately $47,000, $99,000 and
$241,000 were recorded during fiscal 2002, 2001 and 2000, 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 October 26, 2002:
Operating Leases Capital
Leases
--------------------- --------------------
Fiscal 2003 $ 2,278,000 $ 23,000
Fiscal 2004 2,077,000 -
Fiscal 2005 1,798,000 -
Fiscal 2006 1,128,000 -
Fiscal 2007 841,000 -
Thereafter 3,959,000 -
--------------------
---------------------
Total minimum lease payments $ 12,081,000 23,000
=====================
Less amount representing interest 1,000
--------------------
Present value of net minimum lease payments 22,000
Less current portion 22,000
--------------------
$ -0-
====================
Total rental expense for operating leases was approximately $2,783,000,
$2,535,000 and $2,123,000 for fiscal years 2002, 2001 and 2000, 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.
F-23
9. Other Information
Accrued Expenses and Other Current Liabilities
October 26, October 27,
2002 2001
---------------------------- ---------------------------
Payroll and payroll related items $ 496,000 $ 397,000
Accrued professional fees 116,000 167,000
Sales taxes 170,000 129,000
Accrued occupancy 213,000 156,000
Accrued bonuses 167,000 66,000
Other 131,000 118,000
---------------------------- ---------------------------
$ 1,293,000 $ 1,033,000
=========== ===========
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
amortized to expense 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.
Effective fiscal 1999, the Company signed a consulting agreement with a previous
member of its underwriter. Pursuant to the terms of the two-year agreement, the
consultant received an annual fee of $75,000 in fiscal 1999. This agreement was
terminated by the Company in fiscal 2000. In the latter part of fiscal 2000, the
consultant was again engaged by the Company, pursuant to a consulting agreement,
at $5,000 per month. In fiscal 2001, the agreement was terminated by the
Company. The consultant received fees aggregating $5,000 and $40,000 in fiscal
years 2001 and 2000, respectively.
Investor Relations Advisor
On 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 will issue 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
F-24
9. Other Information (continued)
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.
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, 2003.
Fourth Quarter Adjustments
The fourth quarter of fiscal 2002 and 2000 included incentive bonuses of
approximately $73,000 and $125,000, respectively. No significant fourth quarter
bonuses were recorded in fiscal 2001.
The fourth quarter of fiscal 2000 included pre-operating expenses of $125,000
relating to the opening of the Company's Bang & Olufsen store in Greenwich, CT
and the October 2000 launch of the Company's new website. In the fourth quarter
of fiscal 2000, the Company also recorded occupancy expense of $90,000 relating
to additional rent, which was contingent upon actual sales levels achieved for
one of the Company's retail stores.
Other
A Director of the Company also is a Senior Partner in a law firm providing the
Company with legal services. At October 26, 2002 and October 27, 2001, the
Company had $26,000 and $25,000, respectively, payable to this law firm. The
Company paid legal fees to this law firm of approximately $81,000, $64,000 and
$127,000 in fiscal years 2002, 2001 and 2000, respectively.
During fiscal year 2001, $23,000 was paid to a company affiliated with the
Company's Chairman of the Board of Directors relating primarily to management
fees from fiscal 1998. Additionally, the Chairman of the Board of Directors was
also a principal in a Company, which was a joint venture with a law firm
providing legal services to the Company.
At October 27, 2001, the Company recorded a note payable to a real estate broker
of approximately $22,000 classified as a current liability.
10. 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.
F-25
11. Quarterly Financial Data (Unaudited)
Net Income (Loss)
Applicable
2002 Net Sales Gross Profit to Common Stock Basic EPS Diluted EPS
- ----------------------- ---------------------- ---------------------- ---------------------- ------------------ ------------------
First quarter $12,420,559 $4,880,360 $371,854 $0.11 $0.09
Second quarter 10,363,725 4,110,488 72,015 0.02 0.02
Third quarter 9,583,471 3,789,013 (98,947) (0.03) (0.03)
Fourth quarter 9,138,822 3,573,447 (237,228) (0.07) (0.07)
2001
- ----------------------- ---------------------- ---------------------- ---------------------- ------------------ ------------------
First quarter $11,556,469 $4,511,741 $304,005 $0.09 $0.09
Second quarter 9,131,017 3,565,729 (166,024) (0.05) (0.05)
Third quarter 8,838,309 3,369,273 (440,352) (0.13) (0.13)
Fourth quarter 7,161,411 2,688,409 (1,022,240) (0.31) (0.31)
F-26
Schedule II - Valuation and Qualifying Accounts
Harvey Electronics, Inc.
Balance at Additions Charged to Other changes -
beginning charged to costs other accounts- add (deduct) - Balance at end of
Description of period and expenses describe describe period
- ----------------------------------------- -------------------------------------------------------------------------------------
Fiscal year ended October 26, 2002
Reserves and allowances deducted from asset
accounts:
Allowance for doubtful accounts $25,000 $18,627 $(23,627) (1) $20,000
Fiscal year ended October 27, 2001
Reserves and allowances deducted from asset
accounts:
Allowance for doubtful accounts $25,000 $25,098 $(25,098) (1) $25,000
Fiscal year ended October 28, 2000
Reserves and allowances deducted from asset
accounts:
Allowance for doubtful accounts $25,000 $24,618 $(24,618) (1) $25,000
(1) Uncollectible accounts written off, net of recoveries.
F-27
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Harvey Electronics, Inc.
The audit referred to in our report dated December 20, 2002 relating to the
financial statements of Harvey Electronics, Inc. included the audit of the
financial statement Schedule II - Valuation and Qualifying Accounts for the year
ended October 26, 2002. 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 audit.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Melville, New York
December 20, 2002
F-28