United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended October 30, 2004
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
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Securities registered under Section 12(b) of
the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[ X. ] No[ ]
Indicate by checkmark if disclosure of delinquent filers in response to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer as defined
in Exchange Act Rule 12b-2). Yes[ ] No[X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 10, 2005; Common Stock 3,508,584 shares.
As of May 1, 2004, the aggregate market value of the registrant's Common Stock
held by non-affiliates computed by reference to the price at which the stock was
sold was $3,430,000. The shares of Common Stock are currently traded on the
NASDAQ SmallCap Market under the symbols "HRVE".
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
Item 9A. Disclosure Controls and Procedures
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. Principal Accountant's Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedule
SIGNATURES
EXHIBIT INDEX
Ex-23 Consent of Independent Registered Public Accounting Firm
Ex-31.1 Certification - Chief Executive Officer/President
Ex-31.2 Certification - Chief Financial Officer
Ex-32.1 Certification - Chief Executive Officer/President
Ex-32.2 Certification - Chief Financial Officer
Part I
In this Annual Report on Form 10-K, the "Company," "Harvey", "Harvey
Electronics", "we," "us," and "our" mean Harvey Electronics, Inc.
This Annual Report on Form 10-K contains forward-looking statements regarding
Harvey's performance, strategy, plans, objectives, expectations, beliefs and
intentions. The actual outcome of the events described in these forward-looking
statements could differ materially. This report, and especially the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contains a discussion of some of the factors that could
contribute to those differences.
Item 1. Business.
General
Harvey Electronics is engaged in the retail sale, service and custom
installation of high quality audio, video and home theater equipment. The
equipment includes high fidelity components and systems, digital versatile disc
players ("DVD"), digital video recorders ("DVR"), high definition television
("HDTV"), plasma flat-screen, LCD flat panel and DLP television sets, integrated
remote controls, audio/video furniture, digital satellite systems, conventional
telephones, MP3 players, service contracts and related accessories. The Company
has been engaged in this business in the New York Metropolitan area for
seventy-eight 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, New York; Greenwich, Connecticut;
Greenvale/Roslyn, on the north shore of Long Island, New York 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 newest Harvey Showroom in Bridgewater, New
Jersey is under construction and is expected to open in the spring of 2005.
Additionally, the Company expects to relocate its Bang & Olufsen branded store
in Greenwich, Connecticut in the spring of 2005. This store will be consolidated
under a store-within-a-store concept, with the Company's Harvey Greenwich
location, one block away.
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.
In October 2004, the Company launched its new service initiative called "Harvey
on Demand". The Company believes it can expand its service niche in offering
custom labor and other accessories for both Harvey customers and customers that
have purchased products elsewhere, specifically on the internet or from mass
merchants. The Company is marketing this new service group and is offering a
forty-eight hour response time to address the needs of a qualified customer at
an additional labor cost. The Company plans to expand this initiative in fiscal
2005.
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, Marantz, McIntosh, NAD, Vienna
Acoustics, Sonus Faber, Krell, Boston Acoustics, 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.
For the fiscal year ended October 30, 2004, the Company's audio product sales
represented approximately 45% of the Company's net sales and yielded gross
profit margins of approximately 42%. The Company's video product sales
represented approximately 47% of the Company's net sales and yielded gross
profit margins of approximately 31%. 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 59%
of the Company's net sales in fiscal 2004. The labor portion of custom
installation presently represents approximately 8% of net sales. The Company
also sells extended warranties on behalf of third party providers. Sales of
extended warranties yield higher gross profit margins and represented
approximately 3% of the Company's overall net sales.
The following table shows, by percentage, the Company's net product sales
(excluding labor income) attributable to each of the product categories for the
periods indicated. Audio components include speakers, subwoofers, receivers,
amplifiers, preamplifiers, compact disc players, turntables and tuners. The
Company also sells digital satellite systems (DSS) which are included in the
VCR/DVD/DSS category. Accessories primarily include integrated remote controls,
headphones, surge protectors and projection screens. The miscellaneous category
includes conventional telephones, MP3 players, radios and other portable
products.
October November October October October
Fiscal Year Ended: 30, 2004 1, 2003 26, 2002 27, 2001 28, 2000
-----------------------------------------------------------------------
Audio Components 24% 29% 31% 39% 43%
Mini Audio Shelf Systems 3 4 5 6 7
TV and Projectors 41 39 39 30 25
VCR/DVD/DSS 5 5 6 8 7
Furniture 4 5 5 5 5
Cable and Wire 6 5 5 5 5
Accessories 11 9 7 6 6
Extended Warranties 4 3 1 - 1
Miscellaneous 2 1 1 1 1
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100% 100% 100% 100% 100%
==== ==== ==== ==== ====
The percentage of sales by each product category is affected by, among other
things, promotional activities, consumer preferences, store displays, the
development of new products and elimination or reduction of existing products
and, thus, a current sales mix may not be indicative of the future sales mix.
The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target customers desire and can afford such products. Newer
technologies, such as HDTV, plasma flat-screen, LCD flat panel and DLP
televisions are strongly desired by the Company's customers. 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 59% of net sales in fiscal 2004), which can extend from a single
room audio/video system to an entire house with a combined selling price of
installation, labor and product from about $5,000 to in excess of $100,000. The
Company believes custom installation provides the opportunity to bundle products
and increase margins. In fiscal 2005, the Company will continue to expand its
merchandising efforts of complete movie theaters in the home, in-home lighting
systems and distributed in-home cabling for the integration of computer
networks, entertainment systems and other related services. The Company will
continue to showcase the lifestyle benefits of flat panel televisions.
Based on customers' desires, custom installation projects frequently expand
on-site. A single room home theater, for example, during the course of the
installation can grow into a multi-room system with increased margins.
Offering custom installation affords the Company a unique selling opportunity
because it may not be available at mass merchants and can generate repeat
customers and customer referrals. Due to the complexity of the installation
provided by the Company, customers generally remain with the Company, providing
the opportunity to sell upgrades to existing customers. We believe the recent
introduction of digital video products, network cabling, in-home lighting
systems, as well as other emerging satellite and internet 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 30, 2004. These ten manufacturers are Bang & Olufsen,
Boston Acoustics, Crestron, Fujitsu, Marantz, Monster Cable, Pioneer Elite,
Samsung, Sharp and Sony. Fujitsu accounted for more than ten (10%) percent of
the Company's purchases for fiscal 2004, and Bang & Olufsen, Marantz, Pioneer
Elite, Samsung, 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
focused on developing B&O licensed stores ("Branded Stores") throughout the
world, its products become available only in Branded Stores. Currently, the
Company operates two B&O Branded Stores. These Branded Stores sell highly
differentiated Bang & Olufsen products, including uniquely designed audio
systems, speakers, telephones, headphones and accessories. The stores also sell
video products including LCD projectors, HDTV's, DVD players, plasma flat-screen
and LCD flat panel televisions, A/V furniture and accessories. These stores also
offer professional custom installation of multi-room audio and home theater
systems. The Company has elected not to renew its lease which expires in April
2005, and to relocate its Bang & Olufsen branded store in Greenwich, Connecticut
in the spring of 2005. The Company anticipates that this Bang & Olufsen retail
operation will be moved and consolidated with the Company's Harvey Greenwich
location, one block away. This store-within-a-store concept approved by Bang &
Olufsen, will present Bang & Olufsen products in a unique and separate showcase
within the Harvey store. The Company believes it will retain a significant
portion of the Bang & Olufsen store's revenue while significantly reducing the
overhead costs associated with this store.
Due to the Company's strong relationships with many of its suppliers and its
volume of purchases, the Company has also been able to obtain manufacturers'
rebates based on volume buying levels. With many vendors, the Company has been
able to negotiate favorable terms, such as extended payment terms, additional
cooperative advertising contributions or lower prices, on large purchases. In
addition to being a member of a consumer electronics industry buying group
called Home Theater Specialists of America (HTSA), the Company is also a member
of Professional Audio Retailers Association (PARA) and Custom Electronics Design
Installation Association (CEDIA), both of which provide the Company with
additional training in sales and technology.
Purchases are received at the Company's 11,800 square foot warehouse located in
Fairfield, New Jersey. Merchandise is distributed to the Company's retail stores
at least twice a week (and more frequently, if needed), using the Company's
employees and transportation.
The Company's management information system tracks current levels of sales,
inventory, purchasing and other key information and provides management with
information which facilitates merchandising, pricing, sales management and the
management of warehouse and store inventories. This system enables management to
review and analyze the performance of each of its stores and sales personnel on
a periodic basis. The central purchasing department of the Company monitors
current sales and inventory at the stores on a daily basis. In addition, the
Company currently conducts a physical inventory two times a year and between
such physical inventories it conducts monthly and daily cycle counts on selected
types of inventory. The purchasing department also establishes appropriate
levels of inventory at each store and controls the replenishment of store
inventory based on the current delivery or replenishment schedule.
The Company historically has not had material losses of inventory and does not
experience material losses due to cost and market fluctuations, overstocking or
changes in technology. The Company maintains specific and general inventory
reserves aggregating $130,000, $130,000 and $130,000, for fiscal years 2004,
2003 and 2002, respectively. The Company's inventory turnover for fiscal years
2004, 2003 and 2002 was approximately 3.2, 3.4 and 3.4 times for fiscal years
2004, 2003 and 2002, 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 an unrelated finance company. All transactions
with this unrelated finance company are without recourse to the Company. The
Company also periodically, as part of its promotional activities, offers
manufacturer sponsored financing to its customers.
Each store is operated by a store manager and a senior sales manager. Store
managers report to a Vice President of Operations who oversees all sales and
store operations, and who is further responsible for sales training and the
hiring of all retail employees. Every Company store has in-home audio/video
specialists who will survey the job site at a customer's home, design the custom
installation and provide a cost estimate. Each store independently services its
custom installations through a project manager and experienced installers
employed at the store. The Company's stores are aided by the Company's Director
of Custom Installation and additionally, a highly-specialized programmer for
more difficult and technical projects. The Vice President of Merchandising and
President of the Company determine what products will be demonstrated and
presented at each store. All stores are staffed with professionally trained
salespeople and warehouse personnel. Salespeople are paid a base salary plus
commission based on gross margins.
All stores have an on-line point of sale computer system which enables the store
managers and corporate headquarters to track sales, margins, inventory levels,
customer deposits, back orders, merchandise on loan to customers, salesperson
performance and customer histories. The Company's computer system is expected to
be replaced by the Company, effective February 2006. 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 warranty
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 this company.
Sales of extended warranty contracts have increased in fiscal 2004 and
represented approximately 3% of the Company's net sales. The warranty obligation
is solely the responsibility of the warranty insurance company. See notes to the
financial statements for additional information on warranty sales and the
presentation of such sales in the Company's Statements of Operations.
Competition
The Company competes in the New York Metropolitan area with mass merchants, mail
order houses, discount stores and numerous other consumer electronics specialty
stores. The retail electronics industry is dominated by large retailers with
massive, "big box" retail facilities which aggressively discount merchandise.
These retailers operate on narrow profit margins and high volume, driven by
aggressive advertising emphasizing low prices. Nationwide industry leaders are
Circuit City and Best Buy. The New York region is dominated by Circuit City,
Best Buy, and local chains including P.C. Richard & Son, J&R Music World, 6th
Avenue Electronics and Electronics Expo.
Many of the competitors sell a broader range of electronic products, including
computers, camcorders and office equipment, and many have substantially larger
sales and greater financial and other resources than the Company. The Company
competes by positioning itself as a retailer of high quality limited
distribution audio and video products and, we believe, more importantly, by
offering upscale sophisticated custom installations, which are not generally
offered by all of the mass merchants.
Very few, if any, of the audio products sold by the Company, other than Bose and
certain Sony products, radios and other portable products, are available at the
mass merchants. Of the major video brands sold by the Company, generally only
Samsung, Sony, LG and Sharp 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 higher-end
products and custom installation services in customized movie theaters built
within the home and in lifestyle home vignettes in an attractive and pleasing
store environment and by offering personalized service through trained sales
personnel who are fully familiar with all of the Company's products.
Additionally, we believe the Company differentiates itself by offering
programming capabilities that address complex technological integration issues
and ultimately give the consumer easy remote control access to multiple devices.
Internet Website
In fiscal 2000, the Company launched its website, www.harveyonline.com, to
support the continued growth of its exclusive consumer electronics and custom
home theater installation showrooms. The website was designed to extend Harvey's
extraordinary in-store experience onto the Internet as a vehicle to increase
customer traffic at the Company's retail locations. On-line sales, which are
insignificant, are available seven days a week, twenty-four hours a day, and are
a secondary goal of the website. Harvey customers can order on-line within the
Company's trading area in the metropolitan New York marketplace.
Visitors to the website are able to leave inquiries, request home theater
systems based on budget and room size, reserve equipment or schedule an in-home
or in-store consultation with a Harvey professional. Current promotions, special
product offerings, product specification, price and warranty comparisons are
also available on the site.
Advertising
The Company believes it has a strong and important brand in its marketplace. The
Company strives to promote its superior products and sophisticated services in
its advertising campaign to both men and women. In fiscal 2005, the Company will
continue to expand its efforts in its important customer relations management
program.
Currently, the Company has radio, direct mail, print advertising and the
Internet with www.harveyonline.com, the Company's website, to promote its brand.
The Company currently uses large, frequent print advertising, emphasizing image,
products, and technology in the New York Times, New York Times Magazine,
Newsday, Bergen Record, Greenwich Times, The Journal News and the Asbury Park
Press. The Company also uses the Wall Street Journal for certain Bang & Olufsen
advertising. The Company distributes direct mail advertising and specific e-mail
broadcasts several times a year to reach its significant customer database.
Direct mail promotions can invite customers to seminars on new products, or
technology, and can be supported, in part, by the manufacturers. Radio
advertising is currently running on the two most listened to news stations on AM
radio within the Company's market.
All advertising consistently offers attractive financing alternatives on
purchases on credit without interest for an extended period of time.
The following table shows the Company's gross advertising costs and net
advertising expense as a percentage of net sales for the periods presented. Net
advertising expense represents gross advertising cost less advertising income
received from the manufacturers.
October November October October October
Fiscal Year Ended 30,2004 1,2003 26, 2002 27, 2001 28, 2000
----------------------------------------------------------------------------
Gross advertising costs $2,700,000 $2,540,000 $2,665,000 $2,864,000 $2,701,000
Net advertising expenses 470,000 366,000 632,000 1,206,000 934,000
Percentage of net sales 1.1% .9% 1.5% 3.3% 2.7%
Licenses and Intellectual Properties
The Company owns four registered service marks. "HARVEY ELECTRONICS," issued in
June 1982, and "Harvey", issued March 7, 1989 are currently used by the Company.
The Company believes that the service marks HARVEY ELECTRONICS and HARVEY have
significant value and are important in marketing the Company's products and
services.
Employees
As of October 30, 2004, the Company employed approximately 153 full-time
employees of which 18 were management personnel, 14 were administrative
personnel, 52 were salespeople, 19 were warehouse workers and truck drivers and
50 were engaged in custom installation.
Of the salespeople, warehouse workers, truck drivers and installation staff, 103
people are covered by a collective bargaining agreement with the Company, which
expires August 1, 2005. The Company has never experienced a work stoppage and
believes that its relationships with its employees and the union are
satisfactory.
Item 2. Properties
All of the premises the Company presently occupies are leased. Management
believes that the Company's facilities are adequate and suitable for its present
business. The Company believes that adequate locations are available for future
expansion.
The Company leases approximately 3,900 square feet at 205 Chubb Avenue,
Lyndhurst, New Jersey, which the Company uses as its corporate office at
approximately $40,000 per year, including other occupancy costs. This office
space is under lease through January 2006. The Company also leases an 11,800
square foot warehouse in Fairfield, New Jersey at approximately $132,000 per
year, including other occupancy costs, pursuant to a lease which expires
November 2005.
The Company leases the following retail premises:
Expiration Date Approximate
of Current Selling Square
Annual Lease Renewal Footage
Location Options
--------------------------------------------- --------------- ----------------
2 West 45th Street 06/30/2015 None 7,500
New York, NY
556 Route 17 North 06/30/2015 None 7,000
Paramus, NJ
888 Broadway 12/31/2006 None 4,000
at 19th St.
New York, NY
(within ABC Carpet
& Home)
19 West Putnam Ave. 09/30/2006 5 years 5,300
Greenwich, CT
44 Glen Cove Road 08/15/2008 None 4,600
Greenvale, NY
115 Main St. 08/31/2008 None 3,500
Mt. Kisco, NY
927 Broadway 12/31/2005 5 years 1,500
New York, NY
(Bang & Olufsen
Branded Store)
86 Greenwich Ave. 04/05/2005 5 years 1,500
Greenwich, CT
(Bang & Olufsen
Branded Store) (1)
57 Route 36 West 01/01/2011 10 years 6,500
Eatontown, NJ
762 Route 202 South 05/01/2015 10 years 4,500
Bridgewater, N J 08807
(to open Spring 2005)
(1) The Company plans to move its Bang & Olufsen branded store and
consolidate its retail operations into a store-within-a-store concept with its
Harvey Store in Greenwich, Connecticut in the spring of 2005.
Item 3. Legal Proceedings.
Except as set forth herein, the Company believes that it is not a party to any
material asserted legal proceedings other than those arising in the ordinary
course of business and which are most likely fully covered by insurance (except
for deductible amounts). The Company maintains general liability and commercial
insurance in amounts believed to be adequate. However, there can be no assurance
that such amounts of insurance will fully cover claims made against the Company
in the future.
In July 2003, the Company received a notice and information request from the
Pennsylvania Department of Environmental Protection ("PADEP"). The notice stated
that PADEP considers the Company a potentially responsible party for
contamination related to a septic drain field located at a former Chem Fab
Corporation ("Chem Fab") site in Doylestown, Pennsylvania.
PADEP's notice stated that if Chem Fab was previously owned by Harvey Radio,
Inc. ("Harvey Radio") and if the Company was a successor to Harvey Radio, then
the Company could be, in part, responsible for any environmental investigation
or clean up actions necessary at this site.
Harvey Radio was the predecessor of The Harvey Group, Inc. ("Harvey Group"),
which filed for relief under Chapter 11 of the United States Bankruptcy Code in
August 1995. The Company is the surviving retail business of the Harvey Group,
which emerged from bankruptcy in December 1996. Chem Fab was a wholly-owned
subsidiary of Harvey Radio as of September 1967. The capital stock of Chem Fab
(a then wholly-owned subsidiary of Harvey Group) was sold by the Company to the
Boarhead Corporation in January 1978. The disposition of Chem Fab was prior in
time to the Company's bankruptcy petition date of August 3, 1995.
In August 2003, the Company sent its response letter to PADEP. The Company's
response stated that any action by PADEP to recover any money from the Company
relating to any environmental investigation or cleanup related to Chem Fab is in
violation of the injunctions imposed by virtue of the Company's 1995 Bankruptcy
proceeding. The response letter to PADEP specifically referred to two cases with
respect to entities subject to a discharge in bankruptcy by the Southern
District of New York and the Second Circuit Court of Appeals. These cases may
support the Company's position enjoining any further action against the Company.
The Company believes PADEP's claim, even absent the bankruptcy injunction, would
be improper against the Company, as Harvey Group was a shareholder of Chem Fab
and Chem Fab's capital stock was sold in 1978, as previously stated.
The Company advised PADEP that any further action to pursue a claim against the
Company would result in the Company bringing a motion to reopen its bankruptcy
case, solely to address the PADEP claim and further, the Company would commence
contempt proceedings against PADEP. To date, the Company has not received a
response from PADEP.
The Company has also retained special environmental counsel for advice with
respect to PADEP's request for information and other matters with respect to the
claim.
Furthermore, the number of other parties that may be responsible, their ability
to share in the cost of a clean up and whether the Company's existing or prior
insurance policies provide coverage for this matter is not known. At this time,
it is impossible for the Company to determine the outcome or cost to the Company
of this matter.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the NASDAQ SmallCap Market under the
symbol "HRVE".
On October 30, 2004, the outstanding shares of Common Stock are held by
approximately 1,200 shareholders of record, and the Preferred Stock by four
holders of record. The transfer agent and registrar for the Common Stock is
Registrar and Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016.
The following table indicates the quarterly high and low stock prices for fiscal
years 2004 and 2003:
High Low
----------------- ----------------
Fiscal Year 2004
- ----------------
January 31, 2004 $1.04 $.83
May 1, 2004 1.75 .98
July 31, 2004 1.54 1.00
October 30, 2004 1.38 .98
Fiscal Year 2003
- ----------------
February 1, 2003 $1.30 $.81
May 3, 2003 1.15 .86
August 2, 2003 1.16 .80
November 1, 2003 1.10 .80
The Company has paid no dividends on its Common Stock for the last two years.
The Company's lender restricts the payment of dividends on the Company's Common
Stock. The Company does not expect to pay dividends on Common Stock in the
future.
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 10, 2005, 3,508,584 shares are
outstanding and held by approximately 1,200 shareholders of record.
The holders of Common Stock are entitled to one vote per share on all matters to
be voted on by shareholders. There is no cumulative voting with respect to the
election of directors, with the result that holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors from sources legally available therefore. In
the event of liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, and after payment in full of the amount payable in
respect of the Preferred Stock, the holders of Common Stock are entitled, to the
exclusion of the holders of the Preferred Stock, to share ratably in the assets
of the Company available for distribution to stockholders after payment of
liabilities and after provision for each class of stock, if any, having
preference over the Common Stock. Holders of Common Stock have no preemptive
rights. All outstanding shares are, and all shares to be sold and issued as
contemplated hereby, will be fully paid and non-assessable and legally issued.
The Board of Directors is authorized to issue additional shares of Common Stock
within the limits authorized by the Company's charter and without shareholder
action.
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of 10,000
shares of 8.5% Cumulative Convertible Preferred Stock ("Preferred Stock") with a
par value of $1,000 per share. At October 30, 2004, the Company's Preferred
Stock was held by four holders of record aggregating 827 shares. In December
2004, three holders of record of the Preferred Stock converted their 227 shares
into 184,059 shares of the Company's Common Stock. As of January 10, 2005, 600
shares of Preferred Stock were issued and outstanding and were held by one
holder of record.
The Preferred Stock may be issued from time-to-time without shareholder approval
in one or more classes or series. A holder of the Preferred Stock is not
entitled to vote except as required by law.
Dividends on the Preferred Stock are cumulative from the day of original
issuance, whether or not earned or declared. In the event the Board of Directors
declares dividends to be paid on the Preferred Stock, the holders of the
Preferred Stock will be entitled to receive semiannual dividends at the rate of
eighty-five ($85) dollars per share payable in cash on the last business day of
June and December in each year. Total Preferred Stock dividends of $70,295,
$70,295 and $74,151 were paid in fiscal years 2004, 2003 and 2002, 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. At January 10, 2005, the Preferred Stock is convertible into
486,500 shares of Common Stock.
875 shares of Preferred Stock were originally issued by the Company. In fiscal
2002, 48 shares of Preferred Stock were converted to 38,920 shares of the
Company's Common Stock. In December 2004, 227 shares of Preferred Stock were
converted to 184,059 shares of the Company's Common Stock by three preferred
shareholders.
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 30, 2004. The selected statement of operations and balance
sheet data for each of the five years ended October 30, 2004 have been derived
from our audited financial statements. Certain items in the fiscal 2002 and 2001
financial data have been reclassified to conform to fiscal 2003 presentation.
Amounts relating to fiscal 2000 were not material and not reclassified. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes thereto included elsewhere in this Form
10K.
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended November Ended October Ended Ended
October 30, 1, 2003 26, 2002 October 27, October 28,
2004 2001 2000
-------------------------------------------------------------------------------
Net sales $43,145(3) $42,448(3) $41,326(3) $36,606(3) $ 34,355
Cost of sales 25,394 25,141 24,973 22,471 20,813
-------------------------------------------------------------------------------
Gross profit 17,751 17,307 16,353 14,135 13,542
Gross profit percentage 41.1% 40.8% 39.6% 38.6% 39.4%
Interest expense 175 343 359 340 218
Selling, general and administrative expenses 16,993 16,555 15,806 15,128 12,856
Provision for impairment of long-lived assets 144 -- -- -- --
Other income 53 73 116 83 34
-------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) 492 482 304 (1,250) 502
Income taxes (benefit) (782)(4) 195 124 - 185
-------------------------------------------------------------------------------
Net income (loss) 1,274 287 180 (1,250) 317
Preferred Stock dividend requirement (70) (70) (72) (75) (75)
-------------------------------------------------------------------------------
Net income (loss) attributable to
Common Stock $1,204 $217 $108 $(1,325) $242
====== ==== ==== ======== ====
Net income (loss) per common share applicable to common shareholders:
Basic $.36 $.07 $.03 $(.40) $.07
==== ==== ==== ====== ====
Diluted $.30 $.06 $.03 $(.40) $.07
==== ==== ==== ====== ====
Shares used in the calculation of net income (loss) per common shares:
Basic 3,324,525 3,324,525 3,297,827 3,282,833 3,282,833
========= ========= ========= ========= =========
Diluted 4,033,492 3,866,415 3,907,401 3,282,833 3,346,307
========= ========= ========= ========= =========
Stores opened at end of period 9 9 9 9 8
Balance Sheet Data:
October November October October October
30, 2004 1, 2003 26, 2002 27, 2001 28, 2000
---------------- ---------------- ---------------- ------------- --------------
Working capital (deficiency) $3,172(2) $2,950 (2) $(600) (1) $(1,416) (1) $ 747(1)
Total assets 12,799(4) 12,325 12,151 12,727 11,437
Long-term liabilities 2,109(2) 2,968(2) 156 160 215
Total liabilities 7,629(2) 8,380(2) 8,423(1) 9,107 (1) 6,590 (1)
Total shareholders' equity 5,170(4) 3,945 3,728 3,620 4,847
(1) It is important to note that at the end of fiscal 2002, 2001 and 2000,
the Company's outstanding balances on its revolving line of credit
facility ($3,119,000, $3,442,000, and $1,068,000, respectively) were
classified as current liabilities, despite the long-term nature of the
Company's then outstanding credit facility. The presentation as a
current liability was in accordance with EITF 95-22, "Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit
Agreements that include both a Subjective Acceleration Clause and a
Lock-Box Arrangement". Working capital was negatively impacted by the
Company's significant increase in the revolving line of credit facility
in fiscal 2001, which was necessary to fund retail store expansion and
renovation.
(2) The Company entered into a new $7.5 million credit facility on November
21, 2003 and the existing credit facility was simultaneously paid off
and terminated. As the new credit facility expires in five years and
does not include both a subjective acceleration clause and a lock box
arrangement, in accordance with EITF 95-22, the Company classified the
balance outstanding, at October 30, 2004 ($1,825,000) and November 1,
2003 ($2,726,000), under the new credit facility as a long-term
liability.
(3) The Company sells extended warranty contracts for a third party
provider. The profit on extended warranty sales is considered commission
at the time of sale. As a result, the net amount earned on these sales
is recorded in net sales, in accordance with Emerging Issue Task Force
99-19 ("EITF 99-19"), "Reporting Revenue Gross as a Principal Versus Net
as an Agent."
(4) At October 30, 2004, the Company reassessed the valuation allowance
previously established against its net deferred tax assets. Based on the
Company's earnings history and projected future taxable income, the
Company determined that it is more likely than not that a portion of its
deferred tax assets would be realized and recorded an income tax benefit
of approximately $977,000 and a reduction of reorganization value of
approximately $373,000.
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 30, 2004,
November 1, 2003 and October 26, 2002, appearing elsewhere in this Form 10-K. It
should be noted that fiscal 2003 was a fifty-three week year, as compared to
fifty-two weeks for fiscal 2004 and 2002.
To supplement the Company's financial statements presented in accordance with
generally accepted accounting principles ("GAAP"), the Company uses non-GAAP
measures of Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"). The Company's Management reviews these non-GAAP measures internally
to evaluate the Company's performance and manage its operations and believes it
is an important measure in evaluating the Company's financial performance. In
addition, since the Company has historically provided non-GAAP results and
guidance to the investment community, the Company believes that the inclusion of
non-GAAP financial measures provides consistent and comparable measures to help
investors understand the Company's current and future operating results.
Results of Operations
Fiscal Year Ended October 30, 2004, as Compared
to Fiscal Year Ended November 1, 2003
Net Income
The Company's pre-tax income for the fifty-two weeks ended October 30, 2004,
increased 2% to $492,000 from $482,000 for the fifty-three weeks ended November
1, 2003. Net income for fiscal 2004 increased to $1,274,000 from $287,000 for
fiscal 2003. In the fourth quarter of fiscal 2004, the Company reassessed the
valuation allowance previously established against its net deferred tax assets.
Based on the Company's earnings history and projected future taxable income, the
Company recorded a portion of its deferred tax assets, recognizing an income tax
benefit of $977,000 in the fourth quarter of fiscal 2004.
In fiscal 2004, EBITDA was $1,350,000, as compared to EBITDA of $1,620,000 for
fiscal 2003. (EBITDA for fiscal 2004 was calculated as follows: pre-tax income
of $492,000 plus interest of $175,000 and depreciation and amortization of
$683,000. EBITDA for fiscal 2003 was calculated as follows: pre-tax income of
$482,000, plus interest of $343,000 and depreciation and amortization of
$795,000).
Net income and EBITDA for fiscal year 2004 were negatively impacted by the
provision for impairment of long-lived assets aggregating $144,000, recorded in
the fourth quarter, relating to the relocation of the Company's Bang & Olufsen
branded store in Greenwich, Connecticut. This store is expected to be moved and
consolidated with the Company's Harvey Greenwich location as discussed below.
Net income and EBITDA for fiscal 2004 were also negatively impacted by $133,000,
relating to the Company's estimate of unclaimed property due to certain States.
Net income for fiscal 2004 and 2003 were reduced by operating losses relating to
the Company's website of approximately $140,000 and $249,000, respectively.
The Company's net income for fiscal 2004 included net advertising expense of
$470,000, as compared to $366,000 for fiscal 2003. The Company's gross
advertising expenditures in fiscal 2004 increased 6.3% to approximately
$2,700,000 from $2,540,000 in fiscal 2003.
The Company recorded an income tax provision of $195,000 in both fiscal 2004 and
2003. The 2004 income tax provision was offset by the income tax benefit of
$977,000, as discussed above.
Management believes that the results for the second quarter of fiscal 2003 were
negatively impacted by the Iraq war.
Revenues
For the fifty-two weeks ended October 30, 2004, net sales increased to
$43,145,000, or a 1.5% increase over the fifty-three weeks ended November 1,
2003. It is important to note that fiscal 2003 was a fifty-three week year, as
the first quarter of fiscal 2003 included fourteen weeks. As a result,
comparable store sales for the fifty-two weeks ended October 30, 2004 increased
approximately $1,641,000 or 4.0% from the same period last year. The Company
believes these sales results are positive and gratifying in light of reported
difficulties by other reporting consumer electronics retailers similar to
Harvey.
Overall net sales benefited by the strong sales growth of the Company's Harvey
stores in Mount Kisco, New York, Greenvale, Long Island, and its store within
ABC Carpet and Home in lower Manhattan. Additionally, the Company's Bang &
Olufsen branded store in lower Manhattan experienced a strong 35% increase in
sales for fiscal 2004 as compared to fiscal 2003.
These strong sales results offset disappointing results for the Company's Harvey
store and its Bang & Olufsen branded store, both in Greenwich, Connecticut. As
menioned above, the Company has elected not to renew its lease which expires in
April 2005, and to relocate its Bang & Olufsen branded store in Greenwich,
Connecticut in the spring of 2005. The Company anticipates that this Bang &
Olufsen retail operation will be moved and consolidated with the Company's
Harvey Greenwich location, one block away. This store-within-a-store concept
approved by Bang & Olufsen, will present Bang & Olufsen products in a unique and
separate showcase within the Harvey store. The Company believes it will retain a
significant portion of the Bang & Olufsen store's revenue while significantly
reducing the overhead costs associated with this store.
The Company believes it continues to benefit from expanding revenues as a result
of unabated strong demand for its custom installation services. Additionally,
despite increased competition, customer demand continues to be strong for
digital video products including plasma flat screen, LCD flat panel,
high-definition and DLP televisions, integrated remote controls and related
custom home installations. Custom installation projects continue to increase and
accounted for 59% of net sales for fiscal 2004 as compared to approximately 56%
of net sales for the same period last year. Custom installation sales, including
both equipment sales and labor income, increased approximately 7.7% to $25.6
million for fiscal 2004, as compared to $23.8 million for the same period last
year. The Company's custom installation services yield higher gross profit
margins and stronger net profitability, as compared to normal retail store
sales.
The Company believes it differentiates itself by offering sophisticated custom
installation services, including programming capabilities that address complex
technological integration issues giving its customers easy remote control
operations for a variety of functions. Management believes installations of
dedicated theater rooms and lighting systems in the home, as well as distributed
audio and network cabling will continue to attract affluent customers to the
Company. The theater room will be the forefront of the smart home, for the
desired integration of all electronics, lighting, security and networking within
the home. These offerings should continue to benefit sales, enhance gross
margins and improve overall store profitability.
In October 2004, the Company launched its new service initiative called "Harvey
on Demand". The Company believes it can expand its service niche in offering
custom labor and other accessories for both Harvey customers and customers that
have purchased products elsewhere, specifically on the internet or from mass
merchants. The Company is marketing this new service group and is offering a
forty-eight hour response time to address the needs of a qualified customer at
an additional labor cost. The Company plans to expand this initiative in fiscal
2005.
The Company sells extended warranty contracts through a third-party provider. In
fiscal 2004, sales of extended warranty contracts have increased 8.6% as
compared to fiscal 2003, and represented approximately 3% of net sales. The
profit on extended warranty sales is considered commission at the time of sale.
As a result, the net amount earned on these sales is recorded in net sales, in
accordance with Emerging Issue Task Force 99-19 ("EITF 99-19"), "Reporting
Revenue Gross as a Principal Versus Net as an Agent."
The Company's marketing efforts increased in fiscal 2004, which the Company
believes continued to drive sales. These efforts included radio, newspaper and
direct mail advertisements, and the continued promotion of the Company's
website, www.harveyonline.com. For fiscal 2005, the Company anticipates that its
advertising expenditures will not be materially reduced and will be used
primarily for radio, print and direct mail advertising. The Company anticipates
that it will continue to promote its brand and image to both men and women using
its campaign, "Harvey. Extraordinary in Every Way". The Company expects to make
certain improvements to its website in the first half of fiscal 2005.
Also, in 2005, the Company plans to put additional efforts and resources into
its important customer relations management initiatives and plans to be more
aggressive with direct mail and specific e-mail to its customers.
Cost and Expenses
Total cost of goods sold for fiscal 2004 increased $253,000 or 1% from fiscal
2003. 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 2004 increased to 41.1% as compared to 40.8%
for fiscal 2003.
The gross profit margin for fiscal 2004 improved despite an overall reduction in
sales of higher margin audio products and from competitive pressures on video
products. Management believes the consumer electronics industry is generally
suffering a decline in gross margin from this shift in business, additional
competitive pricing as well as falling prices in certain video categories.
Management believes falling prices on video categories will continue into fiscal
2005 and beyond. The Company is concentrating its efforts in reviving its higher
margin audio business by better demonstrating audio products to its customers
and successfully bundling more audio components with its video sales. This has
recently been successful for the Company. In the second, third and fourth
quarters of fiscal 2004, the Company's audio business has increased, compared to
the same quarters last year.
Additionally, the overall improvement in the gross profit margin for fiscal 2004
was due to the following factors: The new digital and flat screen video products
are sold at higher margins than analog products; analog video products have
almost been eliminated entirely from the Company's product mix in fiscal 2004;
and further, the Company has been successful with the sales of higher margin
labor income, furniture, accessories, cable and extended warranties.
Selling, general and administrative expenses ("SG&A expenses") increased 2.7% or
$438,000 for fiscal 2004, as compared to fiscal 2003.
Comparable SG&A expenses for fiscal 2004 increased approximately $614,000 or
3.8% as compared to fiscal 2003. Comparable SG&A expenses increased from
additional payroll and payroll related costs, occupancy costs, advertising
expense, truck expenses and various other general and store operating expenses,
offset by a decrease in depreciation and amortization, communications expense
and professional fees.
The Company plans to continue to hire additional custom installation personnel
and incur the necessary associated expenses relating to the expansion of its
custom installation services. Management believes these services differentiate
Harvey and are vital to the Company's business plan.
Interest expense for fiscal 2004 decreased by approximately $168,000 or 49% from
fiscal 2003. This was primarily due to reduced borrowings and lower costs
relating to the new credit facility.
In connection with the Company's emergence from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting requires that
the Company report an income tax equivalent provision when there is book income
and pre-organization net operating loss carryforwards. This requirement applies
despite the fact that the Company's pre-organization 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.
In fiscal years 2004, 2003 and 2002, the income tax equivalent provisions were
$135,000, $195,000 and $124,000, respectively. All such provisions reduced
reorganization value in excess of amounts allocable to identifiable assets. The
income tax equivalent provisions did not materially affect the Company's cash.
In fiscal 2004, the income tax provision was offset by the income tax benefit of
$977,000, as discussed above.
Results of Operations
Fiscal Year Ended November 1, 2003, as Compared
to Fiscal Year Ended October 26, 2002
Net Income
The Company's pre-tax income for the fifty-three weeks ended November 1, 2003,
increased 58% to $482,000 from $304,000 for the fifty-two weeks ended October
26, 2002. Net income for fiscal 2003 increased 59% to $287,000 from $180,000 for
fiscal 2002.
For fiscal 2003 EBITDA increased to $1,620,000 from $1,580,000 for fiscal 2002.
(EBITDA for fiscal 2003 is calculated as follows: pre-tax income of $482,000,
plus interest of $343,000 and depreciation and amortization of $795,000. EBITDA
for fiscal 2002 is calculated as follows: pre-tax income of $304,000 plus
interest of $359,000 and depreciation and amortization of $917,000).
Net income for fiscal year 2003 and 2002 was negatively impacted by operating
losses relating to the Company's website of $249,000 and $228,000, respectively.
The Company's pre-tax profit and EBITDA for fiscal 2003 were reduced by the
results of its second quarter, which management believes were negatively
impacted by restrained consumer spending prior to and during the Iraq war, as
well as extreme winter weather conditions in the northeast.
The Company's net income for fiscal 2003 includes net advertising expense of
$366,000 as compared to $632,000 for fiscal 2002. The Company's advertising
presence has not materially diminished as the Company's gross advertising
expenditures were $2,540,000 in fiscal 2003 as compared to $2,665,000 for fiscal
2002.
The Company recorded an income tax equivalent provision of $195,000 (40.6%
effective tax rate) in fiscal 2003 as compared to a provision of $124,000 (40.7%
effective tax rate) in fiscal 2002.
Revenues
For the year ended November 1, 2003, net sales aggregated $42,448,000, an
increase of $1,122,000 or approximately 2.7% from last year. It is important to
note that the Company's fiscal year for 2003 includes fifty-three weeks and that
the first quarter of fiscal 2003 included fourteen weeks as compared to thirteen
weeks for the same quarter last year. Comparable store sales for fiscal 2003
increased approximately $242,000 or less than one percent, from fiscal 2002.
The Company believes its positive sales results of fiscal 2003 compare favorably
to other reporting consumer electronics specialty retailers in the industry. The
Company also believes its overall sales results were negatively impacted by the
Iraq war and extreme weather conditions during the second quarter.
Overall net sales benefited from the continued growth of the Company's newest
Harvey store in Eatontown, New Jersey which opened in April 2001, and from the
continuing maturation of its Bang & Olufsen branded store opened in Greenwich,
Connecticut in October 2000. Additionally, the Company experienced strong sales
increases in fiscal 2003, at its Harvey Greenwich, Connecticut and Paramus, New
Jersey showrooms. The Paramus retail showroom had a strong resurgence in sales
during the fourth quarter, after the stores renovation was completed. All of the
Company's retail stores had increases in their net sales for fiscal 2003 as
compared to fiscal 2002, except its Bang & Olufsen branded store in Union
Square, New York City. Management has made additional personnel changes in this
store and in fiscal 2004, to-date, the store has shown significant improvement
in sales performance.
Finally, the Company's store within ABC Carpet and Home, in lower Manhattan,
which had experienced declines in sales for the first half of fiscal 2003, had a
strong rebound in sales for the second half of the year and has also recorded
strong sales results in fiscal 2004, to date.
The Company continues to experience expanding revenues from the unabated strong
demand for its custom installation services.
The Company sells extended warranty contracts for a third party provider. The
profit on extended warranty sales is considered commission at the time of sale.
As a result, the net amount earned on these sales is recorded in net sales, in
accordance with Emerging Issue Task Force 99-19 ("EITF 99-19"), "Reporting
Revenue Gross as a Principal Versus Net as an Agent."
Despite increased competition, customer demand continues to be strong for new
digital video products including plasma flat screen, LCD flat panel,
high-definition and DLP televisions and related custom home installations.
Consumers have embraced plasma and LCD flat screen technologies as well as DLP
televisions. Custom installation projects continue to increase and accounted for
approximately 55% of net sales for fiscal 2003, as compared to approximately 51%
of net sales for fiscal 2002. Custom installation sales, including both
equipment sales and labor income, increased approximately 11.2% to approximately
$23,776,000 for 2003, as compared to approximately $21,373,000 for fiscal 2002.
The Company's custom installation services yield higher gross profit margins and
stronger net profitability, as compared to normal retail store sales.
The Company believes it differentiates itself by offering sophisticated custom
installation services, including programming capabilities that address complex
technological integration issues giving its customers easy remote control
operations for a variety of functions. Management believes installations of
complete movie theaters in the home as well as distributed audio and network
cabling will continue to attract affluent customers to the Company, which should
continue to benefit sales, enhance gross margins and improve overall store
profitability.
The Company's marketing efforts remained significant for fiscal 2003, which the
Company believes, continued to drive sales. These efforts included radio,
newspaper, direct mail and catalog advertisements, and the continued promotion
of the Company's website, www.harveyonline.com.
Cost and Expenses
Total cost of goods sold for fiscal 2003 increased $167,000 or .7% from fiscal
2002. This was primarily due to an increase in sales as noted above, offset by
an increase in the gross margin.
The gross profit margin for fiscal 2003 increased to 40.8% as compared to 39.6%
for fiscal 2002.
The gross profit margin increases were achieved despite a continuing shift in
business towards video products, which generally have lower margins. Video
product sales for fiscal 2003 accounted for approximately 45% of net sales as
compared to approximately 42% of net sales in fiscal 2002, or an increase of
approximately 7%. Audio sales declined to 47% of net sales in fiscal 2003 as
compared to 50% of net sales in fiscal 2002. The reduction in margin from this
shift in product sales was offset by several factors. The new digital and flat
screen video products are sold at higher margins than analog, commodity
products. Further, the Company has been successful in bundling the sale of new
video products with the sale of higher margin home theater components, including
furniture, accessories, cable, extended warranties and custom installation
labor.
The overall increase in the gross margin for fiscal 2003 was due primarily to a
10% increase in higher margin custom installation labor income, a 224% increase
in the sale of extended warranties and a 23% increase in cable sales, which
significantly mitigated the reduction in the gross margin from the increase in
video sales.
Selling, general and administrative expenses ("SG&A expenses") increased 4.7% or
$749,000 for fiscal 2003, as compared to fiscal 2002.
Comparable, SG&A expenses for fiscal 2003 increased by approximately $527,000 or
3.3% from fiscal 2002.
Fiscal 2003 included fifty-three weeks of SG&A expenses as compared to fifty-two
weeks for fiscal 2002. Overall and comparable SG&A expenses also increased from
additional payroll and payroll related costs, insurance expense, professional
fees, occupancy costs, truck expenses and various other store-operating
expenses, offset by reduced net advertising expense, depreciation and
amortization and incentive bonuses. Additionally, the Company recorded an
expense of $50,000, relating to old outstanding tax claims for fiscal years 1987
and 1988.
Interest expense for fiscal 2003 decreased 4.4% or $16,000 as compared to fiscal
2002. The overall decrease was primarily due to the reduction in the Company's
credit facility.
In connection with the Company's emergence from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting requires that
the Company report an income tax equivalent provision when there is book income
and pre-reorganization net operating loss carryforwards. The requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income but instead is recorded first as
a reduction of reorganization value in excess of amounts allocable to
identifiable assets until exhausted, and thereafter as a direct addition to
paid-in capital.
For fiscal years 2003 and 2002, the income tax equivalent provisions were
$195,000 and $124,000 respectively, and the reduction of reorganization value in
excess of amounts allocable to identifiable assets also amounted to $195,000 and
$124,000, respectively. The income tax equivalent provision did not materially
affect the Company's cash.
Liquidity and Capital Resources
At October 30, 2004 and at November 1, 2003, the Company's ratio of current
assets to current liabilities was 1.57 and 1.55, respectively.
Net cash provided from operations for fiscal 2004 was $1,381,000 as compared to
$970,000 for fiscal 2003. The improvement in cash provided from operations for
fiscal 2004 was primarily due to net income, increased customer deposits and a
decrease in inventory, offset by a decrease in accounts payable. In fiscal 2005,
Management plans to refine and reduce its inventory mix and will attempt to turn
its inventory at a faster rate.
Net cash used in investing activities was $364,000 for fiscal 2004, as compared
to net cash used of $483,000 for fiscal 2003. Net cash used for the purchases of
property and equipment was $331,000 for fiscal 2004 as compared to $455,000 for
fiscal 2003. Additions for fiscal 2004 related primarily to furniture, fixtures,
computer equipment and leaseholds.
Net cash used in financing activities was $1,017,000 for fiscal 2004, as
compared to $487,000 for fiscal 2003. Financing activities for fiscal 2004
included net payments of $900,000, reducing the credit facility, preferred stock
dividends paid of $70,000 and commitment and deferred legal fees relating to the
new credit facility of $68,000. The Company also received $21,000 in fiscal
2004, representing the return of short-swing profits from a shareholder owning
more than 5% of the Company's Common Stock. Financing activities for fiscal 2003
included net payments of $394,000 reducing the credit facility, preferred stock
dividend payments of $70,000 and payments on capital leases of $22,000.
In November 2003, the Company entered into a new five-year $7.5 million credit
facility with Webster Business Credit Corporation ("Webster"), a subsidiary of
Connecticut based Webster Bank. This new credit facility replaced the credit
facility with Wells Fargo. Under the new credit facility, the Company can borrow
up to $7.5 million based upon lending formulas calculated on eligible credit
card receivables and inventory, less certain reserves, as defined. The credit
facility expires November 21, 2008.
The interest rate on all borrowings under the new credit facility is 0.25% over
Webster Bank's prime rate (4.75% at October 30, 2004) or LIBOR plus 2.75%, at
the Company's option. The Company agreed to pay Webster a $25,000 commitment
fee, payable in two equal installments of $12,500, on November 21, 2003 and
November 21, 2004, respectively. Under the credit facility, the Company will
also pay Webster a reduced maintenance fee of $1,000 per month and an unused
line fee based on a formula, as defined in the credit facility. Simultaneously,
with the closing of the Webster credit facility, the Company paid off all
outstanding amounts due to Wells Fargo, in the amount of $2,504,000, and Wells
Fargo's senior security interest in the Company's assets was terminated.
In connection with the new credit facility, the Company granted Webster a senior
security interest in all of the Company's assets. The credit facility provides
Webster with rights of acceleration upon the occurrence of certain customary
events of default. The Company is restricted from paying dividends on its Common
Stock, retiring or repurchasing its Common Stock and entering into additional
indebtedness (as defined).
Pursuant to the new credit facility, the Company cannot exceed certain advance
rates on eligible inventory and must maintain certain levels of earnings before
interest, taxes, depreciation and amortization. Additionally, the Company's
capital expenditures cannot exceed a predetermined amount. The Company was in
compliance with all covenants at October 30, 2004.
At January 20, 2005, there was approximately $1,607,000 in outstanding
borrowings under the credit facility, with approximately $3,674,000 available to
borrow under this credit facility.
The following is a summary of our significant contractual cash obligations for
the periods indicated that existed as of October 30, 2004 and is based on
information appearing in the Notes to the Financial Statements:
2005 2006-2007 2008-2009 After 2009 Total
- --------------------- -------------- ------------- ------------- -------------- ---------------
Operating leases $2,461,000 $4,061,000 $3,452,000 $8,510,000 $18,484,000
Credit Facility - - $1,825,000 - $1,825,000
- --------------------- -------------- ------------- ------------- -------------- ---------------
Total contractual $2,461,000 $4,061,000 $5,277,000 $8,510,000 $20,309,000
cash obligations
- --------------------- -------------- ------------- ------------- -------------- ---------------
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 30, 2004, 827 shares of Preferred Stock
were issued and outstanding and were convertible into 670,559 shares of Common
Stock. In December 2004, 227 shares of Preferred Stock were converted to 184,059
shares of the Company's Common Stock by three preferred shareholders. As a
result, 600 shares of Preferred Stock are currently outstanding and convertible
into 486,500 shares of Common Stock.
The Company's newest 4,500 square foot Harvey retail showroom in Bridgewater,
New Jersey is under construction. The Company will finance all necessary
leaseholds, furniture and fixtures, pre-opening costs and inventory, expected to
aggregate between $1,000,000 - $1,200,000, with its new credit facility. The new
retail store is expected to open in the spring of 2005. In fiscal 2005, the
Company expects to make improvements to certain of its Harvey retail showrooms,
including the installation of a movie theater within one of its stores.
Additionally, for fiscal 2005, miscellaneous purchases of computer and phone
equipment and other assets are expected to approximate between $600,000 -
$700,000, financed using the Company's credit facility or other long-term
financing as approved by Webster.
The Company intends to continue its advertising campaign in fiscal 2005,
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 2005.
In fiscal 2004, the Company amended and extended the lease for its flagship
store in Midtown Manhattan. This lease amendment will increase the Company's
occupancy costs in fiscal 2005 but to a greater extent beginning in fiscal 2006.
The increase in rent expense for this store, beginning in fiscal 2006 is
expected to approximate $200,000 per year.
As previously noted in Part I, Legal Proceedings, in July 2003, the Company
received a notice and information request from the Pennsylvania Department of
Environmental Protection ("PADEP"). The notice stated that PADEP considers the
Company a potentially responsible party for contamination related to a septic
drain field in Doylestown, Pennsylvania. See Part 1 above and the notes to the
Company's financial statements for details on this matter.
During the Company's fiscal year ending October 29, 2005, the Company expects to
continue with implementation of the required provisions of the Sarbanes-Oxley
Act of 2002. In connection with this effort, Management believes that expenses
related to implementation of the required provisions of the Act may be in the
range of $150,000 to $250,000.
Management believes that cash on hand, cash flow from operations and funds made
available under the new credit facility with Webster, will be sufficient to meet
the Company's anticipated working capital needs for at least the next
twelve-month period.
Seasonality
The Company's business is subject to seasonal variations. Historically, the
Company has realized a slight increase in its total revenue and a majority of
its net income for the year during the first fiscal quarter. Due to the
importance of the holiday shopping season, any factors negatively impacting the
holiday selling season could have an adverse effect on the Company's revenues
and its ability to generate a profit. The Company's quarterly results of
operations may also fluctuate significantly due to a number of factors,
including the timing of new store openings and acquisitions and unexpected
changes in volume-related rebates or changes in cooperative advertising policies
from manufacturers. In addition, operating results may be negatively affected by
increases in merchandise costs, price changes in response to competitive factors
and unfavorable local, regional or national economic developments that result in
reduced consumer spending.
Impact of Inflation
Management does not believe that inflation has had a material adverse effect on
our results of operations. However, we cannot predict accurately the effect of
inflation on future operating results.
Critical Accounting Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon its financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and related disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts for revenues and expenses during
the reporting period. On an ongoing basis, Management evaluates estimates,
including those related to income taxes, inventory allowances, contingencies and
to a lesser extent, bad debts. The Company bases its estimates on historical
data, when available, experience, and on various other assumptions that are
believed to be reasonable under the circumstances, the combined results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates.
Critical Accounting Policies
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America.
Significant accounting policies are discussed in Footnote 1 to the Financial
Statements, Item 8. Inherent in the application of many of these accounting
policies is the need for management to make estimates and judgments in the
determination of certain revenues, expenses, assets and liabilities. As such,
materially different financial results can occur as circumstances change and
additional information becomes known. The policies with the greatest potential
effect on our results of operation and financial position include:
Revenue Recognition
Net sales include the sale of goods to customers and custom installation
revenue. Retail sales are recorded at the time of sale to the customer.
Custom installation revenue, which is comprised of both the sale of
products and the labor in connection with the installation of the
products, are recorded in accordance with the provisions of EITF 00-21,
"Revenue Arrangements with Multiple Deliverables". The revenue related
to the sale of the products is recognized when the product is delivered
to the customers. The revenue related to the labor in connection with
the installation of the products, is recorded when the service has been
substantially completed.
In addition, the Company sells extended warranty contracts for a third
party provider. The profit on extended warranty sales is considered
commission at the time of sale. The net amount earned on these sales,
which is not significant, is recorded in net sales, in accordance with
EITF 99-19, "Reporting Revenue Gross as a Principal Versus Net as an
Agent."
Inventory
Inventory is the Company's largest asset class, comprising over 62% of
the Company's total assets. The Company's inventory consists of finished
goods held for retail sale. Purchase-based volume rebates are credited
to inventory or cost of products sold, as appropriate. The Company
assesses the market value of its inventory on a regular basis by
reviewing, on an item-by-item basis, the realizable value of its
inventory; net of specific or general lower of cost or market reserves.
If it is management's judgment that the selling price of an item must be
lowered below its cost in order for it to be sold, then the carrying
value of the related inventory is written down to estimated realizable
sales value. A number of factors would be taken into consideration in
assessing realizable value including the quantity on hand, historical
sales, technological advances, the existence of a replacement product,
and consumer demand and preferences. Depending on market conditions, the
actual amount received on sale could differ from management's estimate.
As a result we have reduced our net inventory value to reflect our
estimated amount of inventory with lower of cost or market issues. Our
inventory reserve at October 30, 2004 and November 1, 2003 is $130,000
and $130,000, respectively.
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. The Company recognizes 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
the Company's estimates regarding future undiscounted cash flows or
useful lives were to change, we could be exposed to losses that are
material in nature. In fiscal 2004, the Company provided a provision for
the impairment of long-lived assets aggregating $144,000, relating to
the relocation of its Bang & Olufsen branded store in Greenwich,
Connecticut.
Cash Discounts and Cooperative Advertising
The Company receives cash discounts for timely payment of merchandise
invoices and recognizes these amounts in its statement of operations as
a reduction of cost of sales.
The Company also receives substantial funds from its suppliers for
cooperative advertising. These funds are used for advertising purposes
and the funds earned are recorded net of advertising expenditures, and
are included in selling, general and administrative expenses.
Accrued expenses
The Company is constantly required to make estimates of future payments
that will be made which relate to the current accounting period. These
estimates range from things such as accrued bonuses to estimates of
pending litigation claims and income taxes. In establishing appropriate
accruals, management must make judgments regarding the amount of the
disbursement that will ultimately be incurred. In making such
assessments, management uses historical experience as well as any other
special circumstances surrounding a particular item. The actual amount
paid could differ from management's estimate.
Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005 (i.e., fourth quarter 2005 for the
Company). All public companies must use either the modified prospective or the
modified retrospective transition method. Early adoption of this Statement for
interim or annual periods for which financial statements or interim reports have
not been issued is encouraged. The Company has not yet evaluated the impact of
adoption of this pronouncement which must be adopted in the fourth quarter of
fiscal year 2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," ("SFAS 151") which clarifies the types of costs that
should be expensed rather than capitalized as inventory. This statement also
clarifies the circumstances under which fixed overhead costs associated with
operating facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005 and the Company will adopt this standard in its fourth quarter of
fiscal 2005. The Company has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the
Company's financial statements set forth on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
Item 9A. Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's Management,
including the Chief Executive Officer/President and the Chief Financial Officer,
the Company carried out an evaluation of the effectiveness of the design and
operation of the disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon that evaluation, the Company's Chief Executive
Officer/President and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, as of the end of the period
covered by this Report (October 30, 2004), in ensuring that material information
relating to the Company required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, including ensuring that such material information
is accumulated and communicated to the Company's Management, including the
Company's Chief Executive Officer/President and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
During the Company's fiscal year ending October 29, 2005, the Company expects to
continue with implementation of the required provisions of the Sarbanes-Oxley
Act of 2002. In connection with this effort, Management believes that expenses
related to implementation of the required provisions of the Act may be in the
range of $150,000 to $250,000. There were no significant changes in the
Company's internal control over financial reporting (as required by the Exchange
Act) that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
Part III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Securities Exchange Act.
The directors and executive officers of the Company are as follows:
Name Age (1) Position
- --------------------------------- --------------- ------------------------------
Michael E. Recca 54 Chairman and Director
William F. Kenny, III 73 Director
Jeffrey A. Wurst 55 Director
Fredric J. Gruder 58 Director
Nicholas A. Marshall 72 Director
Ira J. Lamel 57 Director
Franklin C. Karp 51 Chief Executive Officer,
President and Director
Joseph J. Calabrese 45 Executive Vice President,
Chief Financial Officer,
Treasurer, Secretary and
Director
Michael A. Beck 46 Vice President of Operations
Roland W. Hiemer 43 Vice President Merchandising
(1) As of October 30, 2004.
Michael E. Recca became the Chairman of the Board of Directors of the Company in
November 1996. Mr. Recca is also a member and the sole manager of Harvey
Acquisition Company, LLC, which is a principal shareholder of the Company. Mr.
Recca was an employee of Taglich Brothers, Inc., an NASD registered
broker-dealer, through December 31, 1998. Beginning in January 2002 and
continuing through April 2002, Mr. Recca was self-employed as a financial
restructuring consultant, and in this capacity also associated with NorthStar
Capital, LLC, a joint venture with Ruskin Moscou Faltischek, P.C., the Company's
corporate counsel. Currently, Mr. Recca is an officer and director of Sky
Capital Holdings, LTD, and of several wholly owned subsidiaries of Sky Capital
Holdings and the President of Sky Capital, LLC, a wholly owned subsidiary of Sky
Capital Holdings, LTD and an NASD broker-dealer. Mr. Recca is also an officer
and a director of Sky Capital Enterprises and of Sky Capital Ventures,
(companies affiliated with Sky Capital Holdings, LTD) and several of their
wholly or partially owned subsidiaries, including Global Secure Holdings, Ltd.,
and its wholly owned subsidiaries.
Franklin C. Karp began his career in the retail consumer electronics industry
over 25 years ago, working then as a salesman for one of the most successful
chain operations in the New York metropolitan area. He held various positions in
sales management, purchasing and operations. In 1990, Mr. Karp joined Harvey as
Merchandise Manager and later as Vice President in charge of merchandising. Mr.
Karp was appointed President of Harvey in 1996 and Chief Executive Officer in
2004.
Joseph J. Calabrese, a certified public accountant, joined the Company as
Controller in 1989. Since 1991, Mr. Calabrese has served as Vice President,
Chief Financial Officer, Treasurer and Secretary of the Company. Mr. Calabrese
was elected Executive Vice President and a Director of the Company in 1996. Mr.
Calabrese began his career with Ernst & Young LLP in 1981 where for the
eight-year period prior to his joining the Company he performed audit services
with respect to the Company.
Fredric J. Gruder, has been a director since July 1998. Since December 2001, Mr.
Gruder has been a sole practitioner in his own law firm. From July 1999 to
December 2001, Mr. Gruder was of counsel to Dorsey & Whitney LLP. From September
1996 to July 1999, he was a partner in the law firm of Gersten, Savage,
Kaplowitz & Fredericks, LLP ("Gersten"), which represented Thornwater Company,
L.P. ("Thornwater"), representative of the Company's underwriters in the
Offering. From March 1996 through September 1996, Mr. Gruder was of counsel to
Gersten, having been a sole practitioner from May 1995 through March 1996. From
March 1992 until March 1996, Mr. Gruder served as vice president and general
counsel to Sbarro, Inc., then a publicly traded corporation which owns,
operates, and franchises Italian restaurants. Prior to this time, Mr. Gruder
practiced law in New York for over twenty years, specializing in corporate
securities and retail real estate.
William F. Kenny, III has been a director of the Company since 1975. From
January 1992 to December 2000, Mr. Kenny was a consultant to Meenan Oil Co.,
Inc. Prior to 1992, Mr. Kenny was the President and Chief Executive Officer of
Meenan Oil Co., Inc. Mr. Kenny has also served as a director of the Empire State
Petroleum Association, Petroleum Research Foundation and was the President of
the East Coast Energy Council. Mr. Kenny was also the President of the
Independent Fuel Terminal Operators Association and the Metropolitan Energy
Council.
Jeffrey A. Wurst, a director since February 2000, is a Partner at the law firm
of Ruskin Moscou Faltischek, P.C. ("Ruskin"), where he chairs the firm's
Financial Services Group. Mr. Wurst began his legal career with Ruskin in 1987.
Mr. Wurst is experienced in asset based lending, factoring, commercial finance
and bankruptcy matters. Mr. Wurst graduated from the Jacob D. Fuchsburg Law
Center of Touro College in 1987 and earned his B.S. and M.A. from Hofstra
University. Mr. Wurst's law firm has been involved in the legal representation
of the Company since it reorganized under the bankruptcy laws in 1996.
Nicholas A. Marshall has been a director of the Company since May 2003. Since
1998, Mr. Marshall has worked as a consultant and trustee of a family estate.
From 1983 - 1997, Mr. Marshall served as a director of the Greater New York
Savings Bank and from 1997-1998 he was an Advisory Board member of Astoria
Federal Corporation. Mr. Marshall has over 37 years of experience in investment
banking and has held senior executive positions in several asset management
firms. Mr. Marshall has a BA degree from Yale University and an MBA from Harvard
Business School.
Ira J. Lamel was appointed to the Company's Board and Audit Committee in
November 2003. He has been the Executive Vice President and Chief Financial
Officer and Treasurer of The Hain Celestial Group, Inc. since October 1, 2001.
Mr. Lamel, a certified public accountant, was a partner at Ernst & Young LLP
where he served in various capacities from June 1973 to September 2001. Ernst &
Young LLP served as the Company's independent auditors until fiscal 2001. Mr.
Lamel directed all of Ernst & Young's services to the Company, including the
audits of our financial statements, from fiscal 1997 through fiscal 2000. Mr.
Lamel serves as a director of Excel Technologies, Inc.
Michael A. Beck has been Vice President of Operations of the Company since April
1997. From June 1996 until such date he was the Company's Director of Operations
and from October 1995 until April 1996 he served as Director of Operations for
Sound City, a consumer electronics retailer. Mr. Beck was a store manager for
the Company from August 1989 until October 1995. Mr. Beck holds a BA in
Psychology from Merrimack College.
Roland W. Hiemer has been with the Company since 1990. He started with the
Company as a salesman and advanced to Senior Sales Manager for the Paramus store
in 1991. He was further promoted to Inventory Control Manager in 1991. In 1997,
he was promoted to Director of Inventory Control and in 2001, Mr. Hiemer was
promoted to Merchandise Manager. In January 2004, Mr. Hiemer was promoted to
Vice President of Merchandising. Mr. Hiemer holds a BA in Business
Administration from Hofstra University.
Committees of the Board of Directors
The Board of Directors has an Audit Committee and a Compensation and Stock
Option Committee.
Compensation and Stock Option Committee. The function of the
Compensation and Stock Option Committee ("Compensation 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, Jeffrey A. Wurst, Nicholas A. Marshall and Ira J. Lamel
were members of the Compensation Committee during fiscal 2004.
Audit Committee. In fiscal 2004, William F. Kenny, III, Nicholas A.
Marshall and Ira J. Lamel served on the Audit Committee. Each of the
current Audit Committee members meets the independence criteria
prescribed by the rules of the SEC for audit committee membership and
is an "independent director" as defined in NASD Rule 4200(a)(15). Each
Audit Committee member meets the NASD's financial knowledge
requirements, and Ira J. Lamel, designated by the Board of Directors as
the "audit committee financial expert" under the SEC rules, meets the
NASD's professional experience requirements as well. The Audit
Committee is governed by, and operates pursuant to, a written charter
approved by the Board of Directors. Such charter complies with the
applicable provisions of the Sarbanes-Oxley Act of 2002 and related
rules of the SEC and NASD. As more fully described in the charter, the
Audit Committee is responsible for overseeing the accounting and
financial reporting processes and the audits of the financial
statements of the Company.
Affirmative Determinations Regarding Director Independence
The Board of Directors has determined each of the following directors to be an
"Independent Director" as such term is defined in Marketplace rules 4200(a)(15)
of the National Association of Securities Dealers (the "NASD"):
Fredric J. Gruder
William F. Kenny, III
Jeffrey A. Wurst
Nicholas A. Marshall
Ira J. Lamel
As provided by Rule 4350(c)(2) of the NASD, the Independent Directors will
regularly schedule "Executive Sessions" whereby the Independent Directors will
hold meetings with only the Independent Directors present.
Code of Ethics
The Company adopted a code of ethics applicable to its Chief Executive
Officer/President, Chief Financial Officer and Controller, which is a "code of
ethics" as defined by applicable rules of the Securities and Exchange
Commission. This code of ethics is publicly available at the Company's website,
www.harveyonline.com. If the Company makes any amendments to this code of ethics
other than technical, administrative, or other non-substantive amendments, or
grants any waivers, including implicit waivers, from a provision of this code of
ethics to the Company's Chief Executive Officer/President, Chief Financial
Officer or Controller, the Company will disclose the nature of the amendment or
waiver, its effective date and to whom it applies in a report on Form 8-K filed
with the Securities and Exchange Commission. The Company also has a third-party
anonymous ethics and compliance hotline available to all employees and is
reportable by phone or by website, www.reportit.net.
Directors' Compensation
In fiscal 2004, each of the Company's outside directors received a $1,000
monthly retainer.
No options to purchase the Company's Common Stock were granted to the outside
directors in fiscal 2004.
Policy for Nomination of Directors
In fiscal 2004, the Company established a resolution outlining its policy on the
nomination of directors, under the Standards of the NASDAQ Smallcap Market.
Director nominees shall be recommended by a majority of the directors who are
independent. The independent directors will only consider nominees that have
requisite industry or financial experience.
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 Chief Executive Officer/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 (1) Compensation
- ------------------------------ --------- ----------------- ------------- ------------------- ----------------
Michael E. Recca 2004 $112,000 $ - - $ -
Chairman 2003(2) $122,000 $ - - $ -
2002 $120,000 $ - 25,000 $ -
Franklin C. Karp 2004 $165,000 $ 75,000 - $ -
Chief Executive Officer 2003(2) $163,000 $ 44,000 - $ -
& President 2002 $156,000 $109,000 50,000 $ -
Joseph J. Calabrese 2004 $156,000 $ 71,000 - $ -
Executive Vice President 2003(2) $153,000 $ 41,000 - $ -
Chief Financial Officer, 2002 $146,000 $ 88,000 50,000 $ -
Treasurer and Secretary
Michael A. Beck 2004 $140,000 $ 70,000 - $ -
Vice President of 2003(2) $138,000 $ 41,000
Operations 2002 $131,000 $ 88,000 50,000 $ -
Roland W. Hiemer 2004 $95,000 $35,000 - $ -
Vice President of 2003(2) $94,000 $17,000 - $ -
Merchandising 2002 $85,000 $ 9,000 30,000 $ -
(1)--See "Stock Option Plan" for related information relating to stock option
grants.
(2)--Fiscal 2003 is a fifty-three week year and, as a result, salary amounts
include fifty-three weeks of compensation.
Severance Agreements
In fiscal year 2000, the Company's Board of Directors approved and the Company
entered into substantially similar Amended and Restated Severance Agreements
(each an "Amended Severance Agreement") with each of Michael E. Recca, Franklin
C. Karp, Joseph J. Calabrese, and Michael A. Beck, executives of the Company.
Each Amended Severance Agreement provides that in the event the executive is
terminated for any reason other than for cause, as defined in the agreement, and
in the event of a change in control (as defined), such as a merger, sale or
disposition of assets, change in the constitution of the Board of Directors or
the current Chairman, the assignment to the executive of a position inconsistent
with the executive's current position or relocation of the corporate office (as
defined), or in the event of a potential change in control (as defined), or
disability (as defined), and within one hundred eighty (180) days from the day
of one of the foregoing events the executive is terminated for reasons other
than for cause or the executive terminates his employment for any reason, the
respective executive shall receive, among other things:
i. a cash amount equal to the higher of: (x) the executive's base salary
prior to termination or the event giving rise to the change in control,
potential change in control or disability, or (y) the executive's base
salary prior to the event giving rise to the executive's right to
terminate his employment for any reason;
ii. a cash payment equal to the higher of: (x) twelve (12) months of the
executive's highest monthly car allowance or monthly average travel
reimbursement in effect within the six (6) month period immediately
prior to termination or the change in control, potential change in
control or disability, not to exceed twelve thousand and 00/100
($12,000) dollars, or (y) twelve (12) months of the executives highest
monthly car allowance or monthly average travel reimbursement in effect
within the six (6) month period immediately prior to the date the
executive terminates his employment for any reason, not to exceed
twelve thousand and 00/100 ($12,000) dollars; and
iii. the maximum /highest benefits which the executive was receiving at any
time during a two-year period prior to termination, relating to health
insurance, accident insurance, long-term care, life insurance and
disability, which shall continue for one (1) year beyond the date of
termination of the executive's employment.
Roland W. Hiemer's severance agreement provides that in the event the Company is
sold or merged with another company, involved in a corporate reorganization,
among other things, and Mr. Hiemer is terminated or asked to accept a position
other than that of a senior officer requiring similar responsibilities as a
result of a reorganization or change in ownership or control, and he declines
the new position, the Company or its successor in control will be obligated, and
continue to pay him at the same salary and car allowance, if any, he had most
recently been earning, plus benefits, for a period of six months.
The severance agreement for Mr. Hiemer also provides that in the event he is
terminated for any other reasons, except conduct that is materially injurious to
the Company or conviction of any crime involving moral turpitude, the Company
will be obligated and continue to pay Mr. Hiemer at the same salary he has most
recently been earning, for a period following termination of three months plus
full coverage of the Company's benefits for the same period.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors establishes the Company's
general compensation policies as well as the compensation plans and specific
compensation levels for executive officers. It also administers our employee
stock option plan for executive officers.
The Compensation Committee believes that the compensation of the Company's
executive officers should be influenced by performance. Base salary levels, and
any salary increases are approved by the Compensation Committee. In fiscal 2003
and 2002, additional compensation in the form of cash bonuses were made in
accordance with a quarterly and annual bonus plan, as approved by the
Compensation Committee. In fiscal 2002, stock options were also made in
accordance with the 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.
In fiscal 2004, the Company's executive officers (excluding the Chairman)
received a new bonus plan, as approved by the Compensation Committee. Under the
new plan, seventy percent (70%) of the new annual bonus potential is based on
financial performance and the achievement of the Company's quarterly budgets.
The remaining thirty percent (30%) is an annual bonus based on the achievement
of specific Company goals.
As previously mentioned, stock option grants, prior to 2003, 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 Company's long-term growth and
profitability. In fiscal 2004, no options were granted to the Company's
executive officers as only a limited number of options remain available for
grant. No options are expected be granted to executive officers in fiscal 2005.
With respect to the base salary granted to Mr. Karp, the Company's Chief
Executive Officer and President, the Compensation Committee made a favorable
assessment of the Company's actual operating results for fiscal 2003, as
compared to the Company's goals and from the performance of Mr. Karp on various
accomplishments for fiscal 2003. The Compensation Committee also considered Mr.
Karp's relative position as compared to his peers in the industry. Based on
these factors, Mr. Karp's salary was $165,000 in fiscal 2004 and was increased
to $170,000 for fiscal 2005. No stock options were granted to Mr. Karp in fiscal
2004.
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 30, 2004, options currently
outstanding aggregate 989,100 and options available for grant aggregate 10,900.
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 and Stock Option Committee, within the limitation of the Stock
Option Plan, shall have the authority to determine the types of options to be
granted, whether an Option shall be accompanied by SARS or Limited SARS, the
purchase price of the shares of Common Stock covered by each Option (the "Option
Price"), the persons to whom, and the time or times at which, Options shall be
granted, the number of shares to be covered by each Option and the terms and
provisions of the option agreements.
The maximum aggregate number of shares of Common Stock as to which Options,
Rights and Limited Rights may be granted under the Stock Option Plan to any one
optionee during any fiscal year of the Company is 100,000, as approved and
amended by the shareholders in fiscal 2000.
With respect to the ISOs, in the event that the aggregate fair market value,
determined as of the date the ISO is granted, of the shares of Common Stock with
respect to which Options granted and all other option plans of the Company, if
any, become exercisable for the first time by any optionee during any calendar
year exceeds $100,000, Options granted in excess of such limit shall constitute
non-qualified stock options for all purposes. Where the optionee of an ISO is a
ten (10%) percent shareholder, the Option Price will not be less than 110% of
the fair market value of the Company's Common Stock, determined on the date of
grant, and the exercise period will not exceed five (5) years from the date of
grant of such ISO. Otherwise, the Option Price will not be less than one hundred
(100%) percent of the fair market value of the shares of the Common Stock on the
date of grant, and the exercise period will not exceed ten (10) years from the
date of grant. Options granted under the Plan shall not be transferable other
than by will or by the laws of descent and distribution, and Options may be
exercised, during the lifetime of the optionee, only by the optionee or by his
guardian or legal representative.
In fiscal 2004, no stock options were granted to the Company's executives or
directors.
No stock options were exercised by executives or directors in fiscal 2004.
Exercise prices for options outstanding as of October 30, 2004, are as follows:
Weighted-
Average
Remaining
Number of Contractual
Options Options Exercisable Life in
Outstanding at at End of Year Years
Exercise Price Year End
- ------------------------ ---------------------- ---------------------- ---------
$.8125 90,000 90,000 7
$.8937 12,500 12,500 7
$.9375 90,000 90,000 7
$1.00 62,625 62,625 4
$1.0313 25,000 25,000 7
$1.15 90,000 90,000 8
$1.265 25,000 25,000 3
$1.35 90,000 90,000 8
$1.375 45,000 45,000 7
$1.50 222,500 222,500 5
$1.75 102,500 102,500 6
$1.86 57,500 57,500 6
$1.925 12,500 12,500 6
$2.00 4,975 4,975 3
$3.00 59,000 59,000 3
---------------------- ----------------------
989,100 989,100 6
====================== ======================
PERFORMANCE GRAPH
The following graph shows a five year comparison of the cumulative total return
to shareholders for the Company, The Russell 2000 Index and a peer group of
substantially larger electronics companies. The graph assumes that the value of
investment in the Company's Common Stock and in each index was $100 on October
31, 1999, including the reinvestment of dividends, if any. The Company's fiscal
year is either a 52 or 53-week year with the fiscal year ending on the Saturday
closest to October 31. All fiscal years presented in the performance graph
include 52 weeks, except fiscal 2003, which includes 53 weeks.[GRAPHIC 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 30, 2004, 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
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 54,589 (2) 1.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Fredric J. Gruder Common 40,000 (2) 1.2%
775 Park Avenue
Huntington, NY 11753
Nicholas A. Marshall Common -0- -
113 Horseshoe Road
Mill Neck, N Y 11765
Name and Address of Title Amount and Nature of
Beneficial Owner of Class Beneficial Ownership Percentage
- ------------------------------------------ ------------------------ ------------
Ira J. Lamel Common -0- -
58 South Service Road
Melville, NY 11747
Franklin C. Karp Common 234,500 (3) 6.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Joseph J. Calabrese Common 201,702 (4) 5.7%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Michael A. Beck Common 197,500 (4) 5.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
Roland W. Hiemer Common 107,500 (5) 3.1%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071
All Directors and Officers
as a group Common 1,311,919 (7) 30.3%
(10 Persons)
All Beneficial Owners
as a group Common 1,506,819 (7) 34.8%
(1) Includes shares owned by HAC, of which Mr. Recca is a member and the sole
manager, plus options to purchase up to 160,000 shares of the Company's
Common Stock which are exercisable at an exercise price of between
$.8937-$1.925 per share.
(2) Includes options to purchase up to 40,000 shares of the Company's Common
Stock, which is exercisable at an exercise price of between $.8125-$1.375
per share.
(3) Includes options to purchase up to 212,500 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $.8125-$3.00
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. In
addition, officers, directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of such
forms received by it, and written representations from certain reporting persons
that no Forms 5 were required for those persons, the Company believes that
during the fiscal year ended October 30, 2004, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were fully satisfied.
Item 13. Certain Relationships and Related Transactions.
From January 2001 to April 2002, Mr. Recca had also been a principal of
NorthStar Capital, LLC which was a joint venture between certain of the partners
of Ruskin Moscou Faltischek, P.C. ("Ruskin"), the Company's corporate counsel
and Mr. Recca. Since April 2002, Mr. Recca has been a director of Sky Capital
Holdings, LTD, and of several wholly owned subsidiaries of Sky Capital Holdings,
and the President of Sky Capital, LLC, a wholly owned subsidiary of Sky Capital
Holdings, LTD and a NASD broker-dealer. Mr. Recca is also a director of Sky
Venture Capital and Sky Capital Ventures and several of their wholly or
partially owned subsidiaries.
Jeffrey A. Wurst, Director, is also a Senior Partner with Ruskin. At October 30,
2004 and November 1, 2003, the Company had amounts payable to Ruskin of
approximately $39,000 and $50,000, respectively. The Company also paid legal
fees to Ruskin of $103,000, $95,000 and $81,000, in fiscal years 2004, 2003 and
2002, respectively.
Dividends paid to preferred stockholders aggregated $70,000, $70,000 and $74,000
for fiscal years 2004, 2003 and 2002, respectively.
Item 14. Principal Accountant's Fees and Services
The following represents amounts billed and amounts expected to be billed to the
Company for the professional services of BDO Seidman, LLP rendered during fiscal
years 2004 and 2003:
2004 2003
---- ----
Audit Fees $70,000 $60,000
Audit - Related Fees $5,000(1) $16,050(2)
Tax Fees $ - $ -
All Other Fees $ - $ -
------------------------ ------------------------
Total $75,000(3) $76,050(3)
========== ==========
(1)For fiscal 2004, $5,000 related to consultations on accounting and SEC
matters.
(2)For fiscal 2003, services provided under this category consist of $8,550 for
services related to a mid-year inventory observation and research regarding
the effect of a change in the Company's year-end and $7,500 for
consultations relating to accounting and SEC matters.
(3)All fees for the years presented were approved by the Company's Audit
Committee.
Item 15. Exhibits and Financial Statement Schedule
(a)--List of Financial Statements and Financial Statement Schedule and Exhibits:
(1) List of Financial Statements:
Balance Sheets - October 30, 2004 and November 1, 2003
Statements of Operations - Fiscal years ended October 30, 2004, November
1, 2003 and October 26, 2002
Statements of Shareholders' Equity - Fiscal years ended October 30, 2004,
November 1, 2003 and October 26, 2002
Statements of Cash Flows - Fiscal years ended October 30, 2004, November
1, 2003 and October 26, 2002
Notes to Financial Statements
(2) List of Financial Statements Schedule:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(3) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under
Commission File #333--42121:
Exhibit Number Description
3.1.1--Restated Certificate of Incorporation of 1967
3.1.2--Certificate of Amendment of the Certificate of Incorporation of 1997
3.1.3--Certificate of Amendment of the Certificate of Incorporation of December
1996
3.1.4--Certificate of Amendment of Certificate of Incorporation of July 1988
3.1.5--Certificate of Amendment of Certificate of Incorporation of July 1971
3.1.6--Certificate of Amendment of Certificate of Incorporation of February 1971
3.1.7--Certificate of Amendment of Certificate of Incorporation of June 1969
3.1.8--Certificate of Amendment of Certificate of Incorporation of September
1968
4.1--Sections in Certificate of Incorporation and the Amended and Restated
By-Laws of Harvey Electronics, Inc., that define the rights of the holders of
shares of Common Stock, Preferred Stock and holders of Warrants (included in
Exhibit Nos. 3.1.2 and 3.1.3)
4.2--Form of Common Stock Certificate
4.3--Form of Redeemable Common Stock Purchase Warrant
4.4--Form of Representative's Warrant
4.5--Form of Warrant to Holders of Preferred Stock
10.1.1--Stock Option Plan of Harvey Electronics, Inc.
10.1.2--Form of Stock Option Agreement
10.2.1--Severance Agreement with Franklin C. Karp
10.2.2--Severance Agreement with Joseph J. Calabrese
10.2.3--Severance Agreement with Michael A. Beck
10.2.4--Severance Agreement with Roland W. Hiemer
10.4.1--Dealer Agreement between the Company and Mitsubishi Electronics America,
Inc.
10.4.2--Dealer Agreement between the Company and Niles Audio Corporation, Inc.
10.5.1--Lease between the Company and Joseph P. Day Realty Corp. (2)
10.5.2--Lease between the Company and Goodrich Fairfield Associates, L.L.C. (2)
10.5.3--Lease between the Company and Sprout Development Co. (2)
10.5.4--Lease between the Company and Service Realty Company (2)
10.5.5--Lease between the Company and 205 Associates (2)
10.5.6--Sublease between the Company and Fabian Formals, Inc. and Affiliate
First Nighter of Canada (2)
10.6--Loan and Security Agreement, Master Note and Trademark Security Agreement
with Paragon Capital L.L.C.
(ii) The following exhibits are hereby incorporated by reference from Exhibit A
filed as part of the registrant's Form 8-K dated November 3, 1997:
2.1.1--Restated Modified Amended Joint and Substantially Consolidated Plan of
Reorganization of Harvey Electronics, Inc.
2.1.2--Order dated November 13, 1996 Confirming Plan of Reorganization
(iii) The following exhibits are hereby incorporated by reference from Item 7
filed as part of the registrant's Form 8-K dated April 7, 1998:
4.4--Representative's Warrant Agreement
4.5--Warrant Agent Agreement
10.1--Underwriting Agreement
10.2--Financial Advisory and Investment Banking Agreement between the Company
and The Thornwater Company, L.P.
(iv) The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 8-K dated October 12, 1998:
10.01--Bang & Olufsen America, Inc. Termination Letter dated September 7, 1998
10.02--Bang & Olufsen America, Inc. New Agreement Letter dated October 8, 1998
10.03--Agreement with Thornwater regarding termination of agreements and lock-up
amendments dated October 31, 1998
(v) The following exhibits are hereto incorporated by reference to the Company's
Form 10KSB dated October 31, 1998:
10.5.7--Lease Agreement with Martin Goldbaum and Sally Goldbaum
10.5.8--Lease Agreement with Bender Realty
10.7--Surrender of Lease with 873 Broadway Associates
10.8--Contract of Sale with Martin Goldbaum, Sally Goldbaum, the Sound Mill,
Inc. and Loriel Custom Audio Video Corp.
10.9--License Agreement with ABC Home Furnishings, Inc.
(vii) The following exhibits are hereto incorporated by reference to the
Company's Form 10KSB dated October 28, 2000:
10.2.5--Severance Agreement between the Company and Michael E. Recca
10.2.6--Amended and Restated Severance Agreement between the Company and
Franklin C. Karp
10.2.7--Amended and Restated Severance Agreement between the Company and Joseph
J. Calabrese
10.2.8--Amended and Restated Severance Agreement between the Company and Michael
A. Beck
10.5.9--Sublease Agreement between the Company and Bang & Olufsen America, Inc.
10.6--Lease Agreement between the Company and WSG Eatontown LP
10.6.1--Lease Modification Agreement between the Company and WSG Eatontown LP
10.6.2--Renewal of License Agreement with ABC Home Furnishings, Inc.
10.10--Repurchase Agreement between the Company, Bang & Olufsen America, Inc.
and Paragon Capital, L.L.C.
10.11--Addendum to Repurchase Agreement between the Company, Bang & Olufsen
America, Inc. and Paragon Capital, L.L.C.
10.12--Second Amendment to Loan and Security Agreement with Paragon Capital,
L.L.C.
10.13--Third Amendment to Loan and Security Agreement with Paragon Capital,
L.L.C.
10.14--Consulting Agreement with Mesa Partners Inc.
10.15--Addendum to Consulting Agreement with Mesa Partners, Inc.
10.16--Warrant to purchase 15,000 shares of the Company's Common Stock, issued
to Mesa Partners, Inc.
10.17--Investor relations agreement with Porter, LeVay & Rose
(viii)--The following exhibits are hereto incorporated by reference to the
Company's Form 10KSB dated October 27, 2001:
10.6.3--Modification of Lease between the Company and Service Realty Company
10.6.4--First Amendment of Lease between the Company and 205 Associates
(ix) --The following exhibits are hereto incorporated by reference to the
Company's Form 10K dated October 26, 2002:
10.6.5--Lease Extension Agreement between the Company and Sprout Development Co.
10.6.6--Second Amendment of lease between the Company and 205 Chubb Avenue, LLC
(x) --The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 8-K dated November 25,
2003:
10.18--Loan and Security Agreement by and between Harvey Electronics, Inc. and
Whitehall Retail Finance, (currently Webster Business Credit), a subsidiary of
Webster Bank, dated November 21, 2003.
10.19--Trademark Security Agreement by and between Harvey Electronics, Inc. and
Whitehall Retail Finance, (currently Webster Business Credit), a subsidiary of
Webster Bank, dated November 21, 2003.
10.20--Repurchase Agreement by and among Bang & Olufsen America, Inc., Whitehall
Retail Finance, (currently Webster Business Credit) a subsidiary of Webster Bank
and Harvey Electronics, Inc., dated November 21, 2003.
(xi) --The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 10-K dated November 1,
2003:
10.6.7 --Renewal of License Agreement with ABC Home Furnishings, Inc.
(xii) --The following exhibit is hereby incorporated by reference to the
corresponding exhibit filed with the Company's Form 8-K dated May 6, 2004:
10.6.7 --Lease Agreement between Harvey Electronics, Inc. and 724 R202
Associates, L.L.C. dated May 3, 2004.
(xiii) --The following exhibit is hereby incorporated by reference to the
corresponding exhibit filed with the Company's Form 8-K dated May 19, 2004:
10.6.8 --Lease Modification Agreement and Extension Agreement between Joseph P.
Day Realty and Harvey Electronics, Inc. dated May 7, 2004.
(xvi) --The following exhibits are annexed hereto:
10.6.9 --Second Amendment of the Lease between Harvey Electronics, Inc. and
Martin Goldbaum and Sally Goldbaum dated December 1, 2004.
23. --Consent of BDO Seidman, LLP
31.1--Certification - Chief Executive Officer/President
31.2--Certification - Chief Financial Officer
32.1--Certification - Chief Executive Officer/President
32.2--Certification - Chief Financial Officer
(b) --Reports on Form 8-K:
None filed in the fourth quarter of fiscal 2004.
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 28, 2005
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
- ------------------------------------------------------------------------------
Chief Executive Office,
President and Director January 28, 2005
/s/ Franklin C. Karp
- --------------------------
Franklin C. Karp
Executive Vice President,
/s/ Joseph J. Calabrese Chief Financial, Officer, Treasurer,
- -------------------------- Secretary and Director January 28, 2005
Joseph J. Calabrese
/s/ Michael E. Recca Chairman and Director
- --------------------------
Michael E. Recca
/s/ William F. Kenny, III Director
- --------------------------
William F. Kenny, III
/s/ Fredric J. Gruder Director
- --------------------------
Fredric J. Gruder
/s/ Jeffrey A. Wurst Director
- --------------------------
Jeffrey A. Wurst
/s/ Nicholas A. Marshall Director
- --------------------------
Nicholas A. Marshall
/s/ Ira J. Lamel Director
- --------------------------
Ira J. Lamel
Item 8. Financial Statements and Supplementary Data
Harvey Electronics, Inc.
Index to Financial Statements and Supplemental Data
Report of Independent Registered Public Accounting Firm.................. F-2
Balance Sheets--October 30, 2004 and November 1, 2003..................... F-3
Statements of Operations--Fiscal years ended October 30, 2004,
November 1, 2003 and October 26, 2002.................................... F-4
Statements of Shareholders' Equity--Fiscal years ended October 30, 2004,
November 1, 2003 and October 26, 2002................................... F-5
Statements of Cash Flows--Fiscal years ended October 30, 2004,
November 1, 2003 and October 26, 2002.................................... F-6
Notes to Financial Statements...........................................F-7-F-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 Registered Public Accounting Firm.................. F-28
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Harvey Electronics, Inc.
Lyndhurst, New Jersey
We have audited the accompanying balance sheets of Harvey Electronics, Inc. as
of October 30, 2004 and November 1, 2003, and the related statements of
operations, shareholders' equity and cash flows for the years ended October 30,
2004, November 1, 2003 and October 26, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. as of
October 30, 2004 and November 1, 2003, and the results of its operations and its
cash flows for the years ended October 30, 2004, November 1, 2003 and October
26, 2002, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the financial statements, effective October 27, 2002,
the Company adopted Statement of Financial Standards No. 142, Goodwill and Other
Intangible Assets.
s/BDO Seidman, LLP
- ------------------
BDO Seidman, LLP
Melville, New York
January 10, 2005
Harvey Electronics, Inc.
Balance Sheets
October 30, 2004 November1,2003
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $15,990 $16,000
Accounts receivable, less allowance of $20,000 and $20,000 898,088 751,293
Inventories 7,287,564 7,416,978
Prepaid expenses and other current assets 189,669 177,394
Deferred taxes 301,000 -
----------------- -----------------
Total current assets 8,692,311 8,361,665
----------------- -----------------
Property and equipment:
Leasehold improvements 3,459,826 3,640,023
Furniture, fixtures and equipment 2,355,549 2,103,964
Internet website 456,870 456,870
----------------- -----------------
6,272,245 6,200,857
Less accumulated depreciation and amortization 3,960,341 3,433,969
----------------- -----------------
2,311,904 2,766,888
Equipment under capital leases, less accumulated amortization
of $391,549 and $384,706 6,272 13,115
Deferred taxes 1,049,000 -
Goodwill 125,000 125,000
Reorganization value in excess of amounts allocable to
identifiable assets 283,440 791,440
Other assets, less accumulated amortization of $273,398 and $248,769 330,736 266,498
----------------- -----------------
Total assets $12,798,663 $12,324,606
================= =================
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $2,066,014 $2,280,019
Customer deposits 1,955,440 1,693,263
Accrued expenses and other current liabilities 1,425,988 1,310,278
Income taxes payable 48,800 104,500
Cumulative Preferred Stock dividends payable 23,432 23,432
----------------- -----------------
Total current liabilities 5,519,674 5,411,492
----------------- -----------------
Long-term liabilities:
Revolving line of credit facility 1,825,320 2,725,603
Deferred rent 283,891 242,737
----------------- -----------------
Total long-term liabilities 2,109,211 2,968,340
----------------- -----------------
Commitments and contingencies
Shareholders' equity:
8-1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share;
authorized 10,000 shares; issued and outstanding 827 shares (aggregate
liquidation preference--$827,000)
379,982 379,982
Common Stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 3,324,525 shares 33,245 33,245
Additional paid-in capital 7,622,704 7,601,305
Accumulated deficit (2,866,153) (4,069,758)
---------------- -----------------
Total shareholders' equity 5,169,778 3,944,774
---------------- -----------------
Total liabilities and shareholders' equity $12,798,663 $12,324,606
================ =================
See accompanying summary of accounting polices and notes to financial
statements.
Harvey Electronics, Inc.
Statements Of Operations
Fifty-two Weeks Fifty-three Weeks Fifty- two Weeks
Ended Ended Ended
October 30, November 1, October 26,
2004 2003 2002
---------------------- ------------------------ --------------------
Net sales $43,145,073 $42,448,216 $41,326,577
Other income 53,422 72,677 116,021
---------------------- ------------------------ --------------------
43,198,495 42,520,893 41,442,598
---------------------- ------------------------ --------------------
Cost of sales 25,393,702 25,140,486 24,973,269
Selling, general and administrative expenses 16,993,776 16,555,451 15,806,022
Interest expense 175,025 342,915 358,836
Provision for impairment of long-lived assets 144,092 - -
---------------------- ------------------------ --------------------
42,706,595 42,038,852 41,138,127
---------------------- ------------------------ --------------------
Income before income taxes (benefit) 491,900 482,041 304,471
Income taxes (benefit) (782,000) 195,000 124,000
---------------------- ------------------------ --------------------
Net income 1,273,900 287,041 180,471
Preferred Stock dividend requirement 70,295 70,295 72,777
---------------------- ------------------------ --------------------
Net income applicable to Common Stock $1,203,605 $216,746 $107,694
====================== ======================== ====================
Net income per share applicable to common shareholders:
Basic $0.36 $0.07 $0.03
====================== ======================== ====================
Diluted $0.30 $0.06 $0.03
====================== ======================== ====================
Shares used in the calculation of net income per common share:
Basic 3,324,525 3,324,525 3,297,827
===================== ======================= ====================
Diluted 4,033,492 3,866,415 3,907,401
===================== ======================= ====================
See accompanying summary of accounting policies and notes to financial
statements.
Harvey Electronics, Inc.
Statement of Shareholders' Equity
Preferred Stock Common Stock Additional Total
---------------------- ---------------------------- Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ----------- ---------------- ----------- ------------- ----------------- ------------------
Balance at October 27, 2001 875 $402,037 3,282,833 $32,828 $7,579,667 ($4,394,198) $3,620,334
Net income for the year - - - - - 180,471 180,471
Preferred Stock dividend - - - - - (72,777) (72,777)
Conversion of Preferred Stock
to Common Stock (48) (22,055) 38,920 389 21,666 - 0
Exercise of cash-less Common
Stock warrant - - 2,772 28 (28) - 0
---------- ----------- ---------------- ----------- ------------- ----------------- ------------------
Balance at October 26, 2002 827 379,982 3,324,525 33,245 7,601,305 (4,286,504) 3,728,028
Net income for the year - - - - - 287,041 287,041
Preferred Stock dividend - - - - - (70,295) (70,295)
---------- ----------- ---------------- ----------- ------------- ----------------- ------------------
Balance at November 1, 2003 827 379,982 3,324,525 33,245 7,601,305 (4,069,758) 3,944,774
Net income for the year - - - - - 1,273,900 1,273,900
Preferred Stock dividend - - - - - (70,295) (70,295)
Return of a shareholder's
profits from short-swing trades - - - - 21,399 - 21,399
---------- ----------- ---------------- ----------- ------------- ----------------- ------------------
Balance at October 30, 2004 827 $379,982 3,324,525 $33,245 $7,622,704 $(2,866,153) $ 5,169,778
========== =========== ================ =========== ============= ================= ==================
See accompanying summary of accounting policies and notes to financial
statements.
Harvey Electronics, Inc
Statements of Cash Flows
Fifty-two Weeks Fifty-three Weeks Fifty- two Weeks
Ended Ended Ended
October 30, November 1, October 26,
2004 2003 2002
-------------------- ------------------- -------------------
Operating activities
Net income $1,273,900 $287,041 $180,471
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 683,420 795,388 916,873
Provision for impairment of long-lived assets 144,092 - -
Income tax equivalent provision 135,000 195,000 124,000
Reduction of reorganization value in excess of
amounts
allocable to identifiable assets 373,000 - -
Straight-line impact of rent escalations 41,154 87,122 955
Deferred tax assets (1,350,000) - -
Miscellaneous 11,741 (24,701) (14,473)
Changes in operating assets and liabilities:
Accounts receivable (146,795) (116,630) (50,758)
Allowance for bad debts - - (5,000)
Inventories 129,414 (574,257) (17,901)
Prepaid expenses and other current assets (5,762) 42,439 1,578
Trade accounts payable (214,005) 5,186 (659,035)
Customer deposits 262,177 209,026 (37,923)
Accrued expenses, other current liabilities
and income taxes 43,497 64,230 282,125
-------------------- ------------------- -------------------
Net cash provided by operating activities 1,380,833 969,844 720,912
-------------------- ------------------- -------------------
Investing activities
Purchases of property and equipment excluding
Internet website development (331,056) (454,554) (220,845)
Internet website development 0 (15,200) (16,040)
Purchases of other assets (3,949) (13,475) (9,140)
Security deposits-net (28,955) - 11,935
-------------------- ------------------- -------------------
Net cash used in investing activities (363,960) (483,229) (234,090)
-------------------- ------------------- -------------------
Financing activities
Net (payments) of revolving credit facility (900,283) (393,890) (322,527)
Preferred Stock dividends paid (70,295) (70,295) (74,151)
Principal payments on note payable - - (21,985)
Principal payments on capital lease obligations - (22,420) (80,505)
Proceeds from shareholder short-swing profits 21,399 - -
Fees paid in connection with new credit facility (67,704) - -
-------------------- ------------------- -------------------
Net cash used in financing activities (1,016,883) (486,605) (499,168)
-------------------- ------------------- -------------------
(Decrease) increase in cash and cash equivalents (10) 10 (12,346)
Cash and cash equivalents at beginning of year 16,000 15,990 28,336
-------------------- ------------------- -------------------
Cash and cash equivalents at end of year $15,990 $16,000 $15,990
==================== =================== ===================
Supplemental cash flow information:
Interest paid $210,000 $347,000 $361,000
==================== =================== ===================
Taxes paid $137,000 $17,000 $6,000
==================== =================== ===================
See accompanying summary of accounting policies and notes to financial statements.
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company is a specialty retailer and custom installer of high quality
audio/video consumer electronics and home theater products in the Metropolitan
New York area. Operations of the Company consist solely of this single segment.
The Company's fiscal year ends the Saturday closest to October 31. The fiscal
year ended November 1, 2003 consisted of 53 weeks and the fiscal years ended
October 30, 2004 and October 26, 2002 each consisted of 52 weeks.
Net sales and operating results for the Company's first quarter of its fiscal
year are positively affected by generally stronger demand for the Company's
products during the holiday selling season.
Accounting Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the financial statements and accompanying
notes. Management bases its estimates on certain assumptions, which they believe
are reasonable in the circumstances, and does not believe that any change in
those assumptions would have a significant affect on the financial position or
results of operations. Actual results could differ from those estimates.
Revenue Recognition
Net sales include the sale of goods to customers and custom installation
revenue. Retail sales are recorded at the time of the sale to the customer.
Custom installation revenue, which is comprised of both the sale of products and
the labor in connection with the installation of the products, are recorded in
accordance with the provisions of EITF 00-21, "Revenue Arrangements with
Multiple Deliverables". The revenue related to the sale of the products is
recognized when the product is delivered to the customers. The revenue related
to the labor in connection with the installation of the products, is recorded
when the service has been performed. The amount representing labor for all years
presented, is less than 9% of revenues, and accordingly has been included in Net
Sales.
In addition, the Company sells extended warranty contracts for a third party
provider. The profit on extended warranty sales is considered commission at the
time of sale. The net amount earned on these sales, which is not significant, is
recorded in net sales, in accordance with EITF 99-19, "Reporting Revenue Gross
as a Principal Versus Net as an Agent."
Long-Lived Assets
Property and equipment are stated at cost. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives of the
respective assets. Amortization of improvements to leased properties is based
upon the remaining terms of the leases or the estimated useful lives of such
improvements, whichever is shorter. The Company evaluates the periods of
amortization continually in determining whether events and circumstances warrant
revised estimates of useful lives. If estimates are changed, the unamortized
cost will be allocated to the increased or decreased number of remaining periods
in the revised lives.
When conditions indicate a need to evaluate recoverability, SFAS No. 144
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" requires that the Company (1) recognize an impairment loss only
if the carrying amount of a long-lived asset is not recoverable based on its
undiscounted future cash flows and (2) measure an impairment loss as the
difference between the carrying amount and fair value of the asset. In the
fourth quarter of fiscal 2004, the Company recorded a provision for impairment
of long-lived assets aggregating $144,000, relating to the planned relocation of
a retail store. See Note 8 to the financial statements.
Store Opening Costs
Costs of a non-capital nature incurred prior to store openings are expensed as
incurred. There were no store openings in 2004, 2003 or 2002.
Stock-Based Compensation
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its stock-based
compensation plans and accordingly, no compensation cost has been recognized for
its stock options in the financial statements. The Company has elected not to
implement the fair value based accounting method for employee stock options
under SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected
to disclose the pro forma net income (loss) per share for employee stock option
grants made beginning in fiscal 1997 as if such method had been used to account
for stock-based compensation costs described in SFAS No. 148 "Accounting for
Stock Based Compensation-Transition and Disclosure", an amendment of SFAS No.
123.
For the purpose of determining the disclosures required by SFAS No. 123, the
fair value of the options were estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for fiscal
year 2002: risk-free interest rate ranging from 4.44%-5.02%; no dividend yield;
volatility factor of the expected market price of the Company's Common Stock of
1.00; and a weighted-average expected life of the options of 9.39 years.
Had compensation cost for stock option grants during the fiscal years 2004, 2003
and 2002 been determined under the provisions of SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would have been as follows:
Fiscal 2004 Fiscal 2003 Fiscal 2002
----------- ----------- -----------
Net income applicable to common stock $1,203,605 $216,746 $107,694
Stock-based employee compensation expense
determined under the fair value method - -
(227,000)
-------------------------------------------------------------------
Pro forma net income (loss) $1,203,605 $216,746 $(119,306)
-------------------------------------------------------------------
Net income (loss) per share applicable to common stock:
Basic $.36 $.07 $.03
Less compensation expense determined under
the fair value method
- - (.07)
-------------------------------------------------------------------
Adjusted basic net income (loss) per share
$.36 $.07 $(.04)
-------------------------------------------------------------------
Net income (loss) per share applicable to common stock:
Diluted $.30 $.06 $.03
Less compensation expense determined under
the fair value method - - (.07)
-------------------------------------------------------------------
Adjusted diluted net income (loss) per share
$.30 $.06 $(.04)
-------------------------------------------------------------------
Inventories
Inventories, consisting of finished goods, are stated at the lower of cost
(average-cost method, which approximates the first-in, first-out method) or
market value.
Internet Website
The Company follows the provisions of EITF 00-2, "Accounting for Website
Development Costs," which provides guidance on how an entity should account for
website development costs. In accordance with EITF 00-2, costs incurred in the
website application and infrastructure development stage relating to the
acquisition or development of software or the development of graphics for
internal use, should be accounted for under the provisions of Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" and capitalized. As such, and in accordance with
SOP 98-1, the Company capitalized approximately -0- and $15,000 for fiscal years
2004 and 2003, respectively, relating to the development of its website. These
costs are being amortized on a straight-line basis over a period of one to three
years.
Income Taxes
The Company follows the liability method in accounting for income taxes as
described in SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes (see
Note 5).
Income Per Share
Basic and diluted income per share are calculated in accordance with SFAS No.
128, "Earnings Per Share." The basic and diluted income per common share for the
fiscal years ended October 30, 2004, November 1, 2003 and October 26, 2002 were
computed based on the weighted-average number of common shares outstanding.
Common equivalent shares relating to stock options aggregating 38,407, 38,970
and 88,476, were included in the weighted average number of common shares
outstanding for fiscal 2004, 2003 and 2002, respectively 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 of 670,560 and
502,920 in fiscal 2004 and 2003, relating to the conversion of the remaining
outstanding preferred stock, were included in the weighted average number of
common shares outstanding for the diluted earnings per share calculation. Common
equivalent shares (670,559 in fiscal 2002), 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, affected under a cashless 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 674,828, 931,637 and 3,066,457, were excluded
from the computation for fiscal years 2004, 2003 and 2002, respectively, as
their effect would have been antidilutive.
Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate their fair values principally
because of the short-term nature of these items. The carrying value of
borrowings under the revolving line of credit facility approximate fair value,
due to its variable market interest rates.
Concentration of Credit Risk
The Company's operations consist of the retail sale, service and custom
installation of high quality audio, video and home theater equipment in the New
York Metropolitan area. The Company performs credit evaluations of its
customers' financial condition and payment history but does not require
collateral. Generally, accounts receivable are due within 30 days and credit
losses have historically been immaterial.
Advertising Expense
In accordance with EITF 02-16, "Accounting by a Customer for Certain
Consideration Received from a Vendor" ("EITF 02-16") which addresses how and
when to reflect consideration received from suppliers in the financial
statements, the Company's advertising expense, net of cooperative advertising
allowances, is charged to operations when the advertising takes place.
Advertising expense for the years ended October 30, 2004, November 1, 2003 and
October 26, 2002 was approximately $470,000, $366,000 and $632,000,
respectively. Prepaid advertising for print advertisements not run and broadcast
advertisements not aired at October 30, 2004 and November 1, 2003 was
approximately $3,000 and $29,000, respectively.
Reorganization Value and Fresh Start Reporting
The Company adopted Fresh Start Reporting in accordance with SOP 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code,"
when it emerged from a Chapter 11 proceeding on December 26, 1996. At that time,
Fresh Start Reporting resulted in changes to the balance sheet, including
valuation of assets and liabilities at fair market value, elimination of the
accumulated deficit and valuation of equity based on the reorganization value of
the ongoing business.
The reorganization value of the Company was determined based on the
consideration received from Harvey Acquisition Company LLC (HAC) to obtain its
principal ownership in the Company. A carrying value of $318,000 was assigned to
the Preferred Stock (see Note 5). Subsequent to the Reorganization Date, the
Company issued an additional 51,565 shares of Common Stock to InterEquity
Capital Partners, L.P., a pre-reorganization subordinated secured debtholder, as
authorized by the Court, for an approved finder's fee. The excess of the
reorganization value over the fair value of net assets and liabilities ($283,000
and $791,000 October 30, 2004 and November 1, 2003, respectively) is reported as
"Reorganization value in excess of amounts allocable to identifiable assets" and
was amortized over a 25-year period, prior to the adoption of SFAS No. 142 (see
below) in fiscal 2003, where no amortization was recorded in fiscal 2004 and
2003. Amortization expense of $54,000 was recorded for fiscal year 2002.
The Company follows the provisions of Financial Accounting Standards Board
Statements of Financial Accounting Standards ("SFAS") SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Under the
new standards, goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but are subject to annual impairment tests in accordance
with SFAS 142.
Effective with the adoption of SFAS No. 141 and 142 in the beginning of the
first quarter of fiscal 2003, both goodwill and the Company's other intangible
asset, reorganization value in excess of amounts allocable to identifiable
assets, are no longer amortized but are instead subject to an annual impairment
test. Other intangible assets continue to be amortized over their estimated
useful lives.
In the second quarter of fiscal 2004 and 2003, the Company engaged a qualified
independent firm, to perform a valuation of the Company and to prepare the
necessary goodwill impairment analysis. After completion, this independent firm
found no impairment of the Company's goodwill and other intangible asset,
reorganization value in excess of amounts allocable to identifiable assets.
Goodwill and this other intangible asset is tested annually to identify if
impairment has occurred.
With the adoption of SFAS No. 142, the Company ceased amortization of goodwill
and reorganization value in excess of the amounts allocable to identifiable
assets as of October 27, 2002. The following table presents the effect of
adoption of SFAS No. 142 on the reported net income of the Company on a
comparable basis:
Fiscal 2004 Fiscal 2003 Fiscal 2002
----------- ----------- -----------
Net income applicable to Common Stock $1,203,605 $216,746 $107,694
Add back goodwill amortization - - 54,000
-----------------------------------------
Adjusted net income $1,203,605 $216,746 $161,694
=========================================
Diluted net income per share:
Net income $ .30 $ .06 $.03
Goodwill amortization - - .01
-----------------------------------------
Adjusted diluted net income
per share $ .30 $ .06 $ .04
=========================================
Reclassification
Certain items in the fiscal 2002 financial statements had been reclassified to
conform to fiscal 2004 presentation.
Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005 (i.e., fourth quarter 2005 for the
Company). All public companies must use either the modified prospective or the
modified retrospective transition method. Early adoption of this Statement for
interim or annual periods for which financial statements or interim reports have
not been issued is encouraged. The Company has not yet evaluated the impact of
adoption of this pronouncement which must be adopted in the fourth quarter of
fiscal year 2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," ("SFAS 151") which clarifies the types of costs that
should be expensed rather than capitalized as inventory. This statement also
clarifies the circumstances under which fixed overhead costs associated with
operating facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005 and the Company will adopt this standard in its fourth quarter of
fiscal 2005. The Company has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
2. New Revolving Line of Credit Facility
In fiscal 1998, the Company entered into a three-year revolving line of credit
facility with Paragon Capital L.L.C., currently Wells Fargo Retail Finance
("Wells Fargo"), whereby the Company could borrow up to $3,300,000 based upon a
lending formula (as defined) calculated on eligible inventory.
In fiscal 2000, the Company entered into a Second Amendment to its revolving
line of credit facility ("Amended Agreement") with Wells Fargo. The Amended
Agreement included a three-year extension enabling the Company to borrow up to
$3,500,000 based upon a lending formula calculated on eligible inventory, as
defined.
In fiscal 2001, the Company entered into the Third Amendment to its revolving
line of credit facility ("Third Amended Agreement"). The Third Amended Agreement
increased the amount available under the credit facility to $7.0 million, again
based on a lending formula calculated on eligible inventory, as defined, and
extended the credit facility through November 30, 2003. The new interest rate on
all borrowings was fixed at one percent (1%) over the prime rate with a minimum
interest rate of 8%. However, effective January 1, 2002, the minimum interest
rate was reduced to 6.5% and was in effect throughout fiscal 2003. A commitment
fee of $75,000 (amortized over three years) was also paid by the Company in
fiscal 2001. Wells Fargo had a senior security interest in all of the Company's
assets.
In connection with the issuance and extension of the line of credit facility,
Wells Fargo had received 225,000 warrants to purchase the Company's Common Stock
at exercise prices of between $2.00 - $5.50. These warrants expired November 21,
2003, simultaneous to the satisfaction and termination of the Wells Fargo credit
facility.
On November 21, 2003, the Company entered into a new five-year $7.5 million
credit facility with Webster Business Credit Corporation ("Webster"), a
subsidiary of Connecticut based Webster Bank. This new credit facility replaced
the line of credit facility with Wells Fargo. Under the new credit facility, the
Company can borrow up to $7.5 million based upon lending formulas calculated on
eligible credit card receivables and inventory, less certain reserves, as
defined. The Webster credit facility expires November 21, 2008.
The interest rate on all borrowings under the new credit facility is 0.25% over
Webster Bank's prime rate (4.75% at October 30, 2004) or LIBOR plus 2.75%, at
the Company's option. The Company agreed to pay Webster a $25,000 commitment
fee, payable in two equal installments of $12,500, on November 21, 2003 and
November 21, 2004, respectively. Under the credit facility, the Company will
also pay Webster a reduced maintenance fee of $1,000 per month and a monthly
unused line fee, as defined in the credit facility. Simultaneously, with the
closing of the Webster credit facility, the Company paid all outstanding amounts
due to Wells Fargo, aggregating $2,504,000, and Wells Fargo's senior security
interest in the Company's assets was terminated.
In connection with the new credit facility, the Company granted Webster a senior
security interest in all of the Company's assets. The credit facility provides
Webster with rights of acceleration upon the occurrence of certain customary
events of default. The Company is restricted from paying dividends on its Common
Stock, retiring or repurchasing its Common Stock and entering into additional
indebtedness (as defined).
Pursuant to the new credit facility, the Company cannot exceed certain advance
rates on eligible inventory and must maintain certain monthly and quarterly
levels of earnings before interest, taxes, depreciation and amortization.
Additionally, the Company's annual capital expenditures cannot exceed a
predetermined amount. The Company was in compliance with all covenants at
October 30, 2004.
As the new credit facility expires in five years and does not include both a
subjective acceleration clause and a lock box arrangement, in accordance with
EITF 95-22, the Company classified the balance outstanding, at October 30, 2004
($1,825,000) and November 1, 2003 ($2,726,000), under the new credit facility as
a long-term liability.
3. Stock-Based Compensation
Stock Option Plan
The Company's Board of Directors and shareholders approved the Harvey
Electronics, Inc. Stock Option Plan ("Stock Option Plan") in fiscal 1998. The
Stock Option Plan provides for the granting of up to 1,000,000 shares of
incentive and non-qualified Common Stock options and stock appreciation rights
to directors, officers and employees. All options are exercisable at times as
determined by the Board of Directors not to exceed ten years from the date of
grant.
Common equivalent shares relating to stock options aggregating 38,407, 38,970
and 88,476 were included in the weighted average number of common shares
outstanding for the diluted earnings per share computation for fiscal years
2004, 2003 and 2002.
In fiscal 2004 and 2003, no stock options were granted.
In fiscal 2002, the Company's Compensation and Stock Option Committee approved
two grants of incentive stock options aggregating 205,000 to the Company's
officers to purchase the Company's Common Stock at exercise prices from $1.15 -
$1.35 per share. The fiscal 2002 incentive stock options are exercisable
immediately.
In fiscal years 2002, the Company granted 197,500 shares of Common Stock for
issuance in connection with stock options. The following table summarizes
activity in stock options during fiscal 2004, 2003 and 2002:
Shares Under Option Weighted-
Shares -------------------------------- Average
Available for Option Price Number of Exercise
Granting per Share Shares Price
--------------- ----------------- -------------- ---------------
Balance at October 27, 2001 17,225 785,275 $1.44
2002 Stock option grants 197,500
Granted - March 5, 2002 (115,000) $1.15-$1.265 115,000 $1.175
Granted - May 30, 2002 (90,000) $1.35 90,000 $1.35
Forfeited 1,175 $1.00-$2.00 (1,175) $1.574
--------------- --------------
Balance at October 26, 2002 10,900 989,100 $1.416
2003 Stock option grants - - - -
Granted - - - -
Forfeited - - - -
--------------- --------------
Balance at November 1, 2003 10,900 989,100 $1.416
2004 Stock Option Grants - - - -
Granted - - - -
Forfeited - - - -
--------------- --------------
Balance at October 30, 2004 10,900 989,100 $1.416
====== =======
At October 30, 2004, November 1, 2003 and October 26, 2002, all outstanding
options are exercisable. The weighted-average fair value of options granted
during the fiscal year ended October 26, 2002 was $1.11.
Exercise prices for options outstanding as of October 30, 2004, are as follows:
Weighted-Average
Number of Options Remaining
Outstanding at Year Options Exercisable Contractual Life in
Range of End at End of Year Years
Exercise Price
- ------------------- ---------------------- ---------------------- --------------
$.8125 90,000 90,000 7
$.8937 12,500 12,500 7
$.9375 90,000 90,000 7
$1.00 62,625 62,625 4
$1.0313 25,000 25,000 7
$1.15 90,000 90,000 8
$1.265 25,000 25,000 3
$1.35 90,000 90,000 8
$1.375 45,000 45,000 7
$1.50 222,500 222,500 5
$1.75 102,500 102,500 6
$1.86 57,500 57,500 6
$1.925 12,500 12,500 6
$2.00 4,975 4,975 3
$3.00 59,000 59,000 3
---------------------- ----------------------
989,100 989,100 6
====================== ======================
At October 30, 2004 and November 1, 2003, the Company has reserved shares of
Common Stock for issuance under Common Stock options, warrants and preferred
stock of approximately 1,004,000 and 1,019,000, respectively.
4. 8.5% Cumulative Convertible Preferred Stock
The Company's Preferred Stock has no voting rights and is redeemable at the
option of the Company's Board of Directors, in whole or in part, at face value
plus any accrued dividends. The carrying value of the Preferred Stock is
$379,982 at October 30, 2004 and November 1, 2003.
In the event of liquidation of the Company, the holders of the Preferred Stock
shall receive preferential rights and shall be entitled to receive an aggregate
liquidation preference of $827,000 plus any outstanding dividends, prior to any
distributions to common shareholders. The holders of the Preferred Stock shall
receive a semiannual 8.5% cumulative dividend ($85 per share or $70,295
annually), payable on the last business day in June and December.
Commencing on January 1, 2001, the Preferred Stock is convertible at $1.2333
(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 30, 2004 and November 1, 2003, 827 shares of Preferred Stock were issued
and outstanding. At October 30, 2004, the Company's Preferred Stock is
convertible into 670,559 shares of Common Stock. In December 2004, 227 shares of
Preferred Stock were converted to 184,059 shares of the Company's Common Stock
by three preferred shareholders. As a result, 600 shares of Preferred Stock are
outstanding and convertible into 486,500 shares of Common Stock, at January 20,
2005.
Cumulative Preferred Stock dividends payable of $23,432 are outstanding and
classified as a current liability at both October 30, 2004 and November 1, 2003.
Dividends aggregating $70,000, $70,000 and $73,000 were recorded as a charge to
accumulated deficit in fiscal years 2004, 2003 and 2002, respectively.
5. Income Taxes
Fresh Start Accounting requires the Company to report an income tax equivalent
provision when there is book taxable income and a pre-reorganization net
operating loss carryforward. This requirement applies despite the fact that the
Company's pre-reorganization net operating loss carryforward would eliminate (or
reduce) the related income tax payable. The current and future year benefit
related to the carryforward is not reflected in net income, but instead is
recorded as an adjustment to reorganization value in excess of amounts allocable
to identifiable assets. During the year ended October 30, 2004, November 1, 2003
and October 26, 2002, the Company recorded an income tax equivalent provision of
$135,000, $195,000 and $124,000, respectively, and reduced Reorganization Value
in Excess of Amounts Allowable to Identifiable Assets by the same amount. The
income tax equivalent provisions did not materially affect the Company's tax
liability.
In the fourth quarter of fiscal 2004, the Company reassessed the valuation
allowance previously established against its net deferred tax assets. Based on
the Company's earnings history and projected future taxable income, the Company
determined that it is more likely than not that a portion of its deferred tax
assets would be realized. Accordingly, the Company removed $1,518,000 of the
valuation allowance from its deferred tax assets. In conjunction therewith, the
Company also recognized an income tax benefit of approximately $977,000 and a
reduction of reorganization value of approximately $373,000.
The provision for income taxes (benefits) for the years ended October 30, 2004,
November 1, 2003 and October 26, 2002 consists of the following:
October 30, 2004 November 1, 2003 October 26, 2002
---------------- ---------------- ----------------
Current:
Federal $ 25,000 $ - $ -
State 35,000 - -
Equivalent tax expense 135,000 195,000 124,000
----------------------------------------------------------
195,000 195,000 124,000
Deferred (benefit) (977,000) - -
----------------------------------------------------------
($782,000) $195,000 $124,000
==========================================================
The effective income tax rate differed from the Federal statutory rate as
follows:
Year Ended Year Ended Year Ended
October 30, 2004 November 1, 2003 October 26, 2002
------------- ------------- -------------- ------------- ------------- ------------
Amount % Amount % Amount %
------------- ------------- -------------- ------------- ------------- ------------
Federal income tax provision
(benefit) at statutory rate $ 167,000 34.0% $164,000 34.0% $104,000 34.0%
State income taxes, net of Federal
benefit 52,000 10.6% 33,000 6.8 23,000 7.6
Nondeductible reorganization
amortization - - - - 18,000 5.9
Valuation allowance (977,000) (198.6%) - - - -
Other, net (24,000) (4.9%) 9,000 1.9 5,000 1.6
Benefit from post reorganization
temporary differences on tax
equivalent provision - - (11,000) (2.3) (26,000) (8.3)
------------- ------------- -------------- ------------- ------------- ------------
($ 782,000) (158.9%) $195,000 40.4% $124,000 40.8%
============ ======== ======== ===== ======== =====
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 $474,000 and $1,992,000, at October 30, 2004
and November 1, 2003, respectively.
Deferred tax assets and liabilities as of October 30, 2004 and November 1, 2003
consisted of the following:
October 30, November 1,
2004 2003
-------------- -------------
Pre-reorganization net operating loss carryforwards 495,000 603,000
Pre-reorganization deductible temporary differences 47,000 74,000
Pre-reorganization tax credits 53,000 53,000
Post-reorganization net operating loss carryforwards 393,000 691,000
Deferred rent 95,000 51,000
Expenses not currently deductible 69,000 4,000
Inventories 90,000 84,000
Depreciable assets 564,000 456,000
Tax credits 37,000 2,000
-------------- -------------
Total deferred tax assets 1,843,000 2,018,000
-------------- -------------
Website development costs (4,000) (15,000)
Intangible assets (15,000) (11,000)
-------------- -------------
Total deferred tax liabilities (19,000) (26,000)
-------------- -------------
Net 1,824,000 1,992,000
Valuation allowance (474,000) (1,992,000)
--------- -----------
Total 1,350,000 0
========== ==========
At October 30, 2004, the Company has available net operating loss carryforwards
of approximately $2,200,000 which expire in various years through fiscal 2019.
Of this amount, approximately $1,200,000 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.
6. Pension and Profit Sharing Plan
The Company maintains the Harvey Electronics, Inc. Savings and Investment Plan
(the "Plan") which includes profit sharing, defined contribution and 401(k)
provisions and is available to all eligible employees of the Company. There were
no employer contributions to the Plan for fiscal 2004, 2003 and 2002.
7. Commitments and Contingencies
Commitments
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 non-cancelable operating leases with initial or
remaining terms of one-year or more consisted of the following at October 30,
2004:
Operating Leases
---------------------
Fiscal 2005 $ 2,461,000
Fiscal 2006 2,279,000
Fiscal 2007 1,782,000
Fiscal 2008 1,757,000
Fiscal 2009 1,695,000
Thereafter 8,510,000
---------------------
Total minimum lease payments $ 18,484,000
=====================
Total rental expense for operating leases was approximately $3,097,000,
$3,022,000 and $2,783,000 for fiscal years 2004, 2003 and 2002, respectively.
Certain leases provide for the payment of insurance, maintenance charges,
electric and taxes and contain renewal options.
Contingencies
The Company is a party in certain legal actions which arose in the normal course
of business. The outcome of these legal actions, in the opinion of management,
will not have a material effect on the Company's financial position, results of
operations or liquidity.
In July 2003, the Company received a notice and information request from the
Pennsylvania Department of Environmental Protection ("PADEP"). The notice stated
that PADEP considers the Company a potentially responsible party for
contamination related to a septic drain field located at a former Chem Fab
Corporation ("Chem Fab") site in Doylestown, Pennsylvania.
PADEP's notice stated that if Chem Fab was previously owned by Harvey Radio,
Inc. ("Harvey Radio") and if the Company was a successor to Harvey Radio, then
the Company could be, in part, responsible for any environmental investigation
or clean up actions necessary at this site.
Harvey Radio was the predecessor of The Harvey Group, Inc. ("Harvey Group"),
which filed for relief under Chapter 11 of the United States Bankruptcy Code in
August 1995. The Company is the surviving retail business of the Harvey Group,
which emerged from bankruptcy in December 1996. Chem Fab was a wholly-owned
subsidiary of Harvey Radio as of September 1967. The capital stock of Chem Fab
(a then wholly-owned subsidiary of Harvey Group) was sold by the Company to the
Boarhead Corporation in January 1978. The disposition of Chem Fab was prior in
time to the Company's bankruptcy petition date of August 3, 1995.
On August 29, 2003, the Company sent its response letter to PADEP. The Company's
response stated that any action by PADEP to recover any money from the Company
relating to any environmental investigation or cleanup related to Chem Fab is in
violation of the injunctions imposed by virtue of the Company's 1995 Bankruptcy
proceeding. The response letter to PADEP specifically referred to two cases with
respect to entities subject to a discharge in bankruptcy by the Southern
District of New York and the Second Circuit Court of Appeals. These cases may
support the Company's position enjoining any further action against the Company.
The Company believes PADEP's claim, even absent the bankruptcy injunction, would
be improper against the Company, as Harvey Group was a shareholder of Chem Fab
and Chem Fab's capital stock was sold in 1978, as previously stated.
The Company advised PADEP that any further action to pursue a claim against the
Company would result in the Company bringing a motion to reopen its bankruptcy
case, solely to address the PADEP claim and further, the Company would commence
contempt proceedings against PADEP. To date, the Company has not received a
response from PADEP.
The Company has also retained special environmental counsel for advice with
respect to PADEP's request for information and other matters with respect to the
claim.
Furthermore, the number of other parties that may be responsible, their ability
to share in the cost of a clean up and whether the Company's existing or prior
insurance policies provide coverage for this matter is not known. At this time,
it is impossible for the Company to determine the outcome or cost to the Company
relating to this matter.
8. Other Information
Accrued Expenses and Other Current Liabilities
October 30, November 1,
2004 2003
--------------------- ----------------------
Payroll and payroll related items $ 394,000 $ 390,000
Accrued professional fees 139,000 172,000
Sales taxes 165,000 170,000
Accrued occupancy 249,000 206,000
Accrued bonuses 248,000 267,000
Accrued Unclaimed Property 132,000 -
Other 99,000 105,000
--------------------- ----------------------
$ 1,426,000 $ 1,310,000
=========== ===========
Fourth Quarter Adjustments
In the fourth quarter of fiscal 2004, the Company recorded a provision for
impairment of long-lived assets aggregating $144,000 relating to the planned
relocation of one of its retail locations. This amount was presented separately
on the Statement of Operations for the year ended October 30, 2004.
In the fourth quarter of fiscal 2004, the Company reassessed the valuation
allowance previously established against its net deferred tax assets. Based on
the Company's earnings history and projected future taxable income, the Company
determined that it is more likely than not that a portion of its deferred tax
assets would be realized. Accordingly, the Company recorded a deferred tax asset
in the amount of $1,350,000, which resulted in the recognition of an income tax
benefit of approximately $977,000 and a reduction of reorganization value of
approximately $373,000.
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, 2005.
State Tax Examinations
In November 2004, the Company received notification from the State of New
Jersey, stating that the Company's income tax and sales and use tax returns
would be subject to audit. Additionally, in fiscal 2004, the Company received
notification from the State of Connecticut stating that the Company's sales and
use tax returns would be subject to audit. It is too early to determine the
outcome, if any, of these examinations.
Other
In fiscal 2004, the Company received $21,000 from a shareholder owning 5% of the
Company's Common Stock, representing the return of short-swing profits. The
Company recorded this amount received to additional paid-in capital.
In fiscal 2004, the Company recorded $133,000, relating to the Company's
estimate of unclaimed property due to certain states. This expense is included
in selling, general and administrative expenses for fiscal 2004.
In January 2004, the Company agreed to satisfy certain long outstanding and
disputed tax claims under an amnesty program offered by the City of New York.
The tax claims related to a prior subsidiary for fiscal years 1987 and 1988. The
Company satisfied the claim, in full, paying $90,000 (including interest), under
the amnesty program. The Company recorded $50,000 to selling, general and
administrative expenses in fiscal 2003 relating to this matter. Prior to the
settlement of this matter, the Company had recorded a liability of $40,000
relating to this claim.
A Director of the Company also is a Senior Partner in a law firm providing the
Company with legal services. At October 30, 2004 and November 1, 2003, the
Company had $39,000 and $50,000, respectively, payable to this law firm. The
Company paid legal fees to this law firm of approximately $103,000, $95,000 and
$81,000 in fiscal years 2004, 2003 and 2002, respectively.
9. Retail Store Expansion
In fiscal year 2004, the Company entered into a ten-year lease for a new Harvey
showroom in Bridgewater, New Jersey. This new store is expected to open in the
spring of 2005.
10. Quarterly Financial Data (Unaudited)
Net Income (Loss)
Applicable to Common
2004 Net Sales Gross Profit Stock Basic EPS Diluted EPS
- ----------------------- ---------------------- ---------------------- ---------------------- ------------------ ------------------
First quarter $12,395,892 $4,995,398 $332,714 $0.10 $0.08
Second quarter 10,346,078 4,368,046 67,516 0.02 0.02
Third quarter 10,042,783 4,153,900 72,706 0.02 0.02
Fourth quarter 10,360,320 4,234,027 730,669(1) 0.22 0.18
2003
- ----------------------- ---------------------- ---------------------- ---------------------- ------------------ ------------------
First quarter $13,041,583 $5,274,324 $403,069 $0.12 $0.10
Second quarter 9,863,894 4,003,598 ( 66,210) (0.02) (0.02)
Third quarter 9,905,657 4,132,857 (4,172) - -
Fourth quarter 9,664,082 3,896,952 (115,941) (0.03) (0.02)
(1)See Note 8 relating to fourth quarter adjustments.
Schedule II - Valuation and Qualifying Accounts
Harvey Electronics, Inc.
- -------------------------------------------------------------------------------------------------- ---------------------- ----------
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------------------------- ---------------------- ----------
Description Balance at Additions charged to Charged to other Other changes - add Balance at
beginning of costs and expenses accounts - describe (deduct) - describe end of
period period
- ----------------------------------------------------------------------------- -------------------- ---------------------- ----------
Fiscal year ended October
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $20,000 $27,640 $(27,640) (1) $20,000
Fiscal year ended November 1, 2003
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $20,000 $18,646 $(18,646) (1) $20,000
Fiscal year ended October 26, 2002
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $25,000 $18,627 $(23,627) (1) $20,000
(1) Uncollectible accounts written off, net of recoveries.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Harvey Electronics, Inc.
Lyndhurst, New Jersey
The audits referred to in our report dated January 10, 2005 relating to the
financial statements of Harvey Electronics, Inc., which is included in Item 8 of
this Form 10-K, included the audit of the financial statement Schedule II -
Valuation and Qualifying Accounts for the three year period ended October 30,
2004. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Melville, New York
January 10, 2005