UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------------- -------------------
Commission File Number 1-4626
Harvey Electronics, Inc.
(Exact name of small business issuer as specified in its charter)
New York 13-1534671
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey
(Address of principal executive offices)
201-842-0078
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
As of June 15, 1998, 3,282,833 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
Harvey Electronics, Inc.
FORM 10-QSB
INDEX
PART I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
<S> <C> <C>
Statements of Operations (Unaudited) - Twenty-six and thirteen
weeks ended May 2, 1998 and Twenty-seven and thirteen weeks
ended May 3, 1997............................................................ 3
Balance Sheets - May 2, 1998 (Unaudited) and November 1, 1997 ................. 4
Statement of Shareholders' Equity (Unaudited) - Twenty-six weeks
ended May 2, 1998 ........................................................... 6
Statements of Cash Flows (Unaudited) - Twenty-six weeks ended
May 2, 1998 and Twenty-seven weeks ended May 3, 1997 ........................ 7
Notes to Financial Statements (Unaudited) ..................................... 8
Item 2. Management's Discussion and Analysis or Plan of Operation ..................... 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K .............................................. 18
Signatures................................................................................... 18
</TABLE>
2
<PAGE>
Part I. Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Twenty-Seven Thirteen Thirteen
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
May 2, 1998 May 3, 1997 May 2, 1998 May 3, 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net sales $8,934,673 $8,192,385 $4,064,857 $3,625,365
Interest and income 37,442 43,080 21,900 34,830
-------------------------------------------------------------------------
8,972,115 8,235,465 4,086,757 3,660,195
-------------------------------------------------------------------------
Cost and expenses
Cost of sales 5,467,560 5,267,460 2,471,240 2,351,594
Selling, general and administrative expenses 3,286,195 3,369,225 1,618,674 1,599,486
Interest expense 162,690 178,426 71,390 63,701
------------------------------------------------------------------------
8,916,445 8,815,111 4,161,304 4,014,781
------------------------------------------------------------------------
Income (loss) before income taxes 55,670 (579,646) (74,547) (354,586)
Income taxes - - - -
------------------------------------------------------------------------
Net income (loss) 55,670 (579,646) (74,547) (354,586)
Preferred Stock dividend requirement (46,218) (35,240) (27,718) (17,620)
Accretion of Preferred Stock (6,000) (39,018) - (19,509)
------------------------------------------------------------------------
Net income (loss) attributable to common stock $3,452 $ (653,904) $(102,265) $ (391,715)
========================================================================
Basic and diluted earnings (loss)
per share for common stock - $(.29) $(.04) $(.17)
========================================================================
Weighted average number of common shares
outstanding during the period 2,405,889 2,257,833 2,557,271 2,257,833
========================================================================
Dividends per common share NONE NONE NONE NONE
</TABLE>
See accompanying notes.
3
<PAGE>
Harvey Electronics, Inc.
Balance Sheets (continued)
<TABLE>
<CAPTION>
May 2, November 1,
1998 1997
(Unaudited) (1)
--------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,514,756 $ 10,033
Accounts receivables, less allowance of $20,000 429,423 272,436
Certificate of deposit - 200,000
Inventories 3,656,433 3,559,778
Prepaid expenses and other current assets 176,300 109,656
-------------------------------
-------------------------------
Total current assets 5,776,912 4,151,903
Property and equipment:
Leasehold improvements 649,197 644,646
Furniture, fixtures & equipment 755,888 738,872
-------------------------------
-------------------------------
1,405,085 1,383,518
Less accumulated depreciation & amortization 290,404 179,604
-------------------------------
-------------------------------
1,114,681 1,203,914
Equipment under capital leases 3,768 15,768
Reorganization value in excess of amounts allocable to
identifiable assets, less accumulated amortization of
$99,023 - 1998 and $66,023 - 1997 1,549,440 1,582,440
Other, less accumulated amortization of $95,886 - 1998 and $40,400 -
1997 379,722 360,100
-------------------------------
Total assets $8,824,523 $ 7,314,125
===============================
</TABLE>
(1) The balance sheet as of November 1, 1997 has been derived from the
audited financial statements at that date.
See accompanying notes.
4
<PAGE>
Harvey Electronics, Inc.
Balance Sheets (continued)
<TABLE>
<CAPTION>
May 2, November 1,
1998 1997
(Unaudited) (1)
----------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity Current liabilities:
Trade accounts payable $ 1,457,270 $ 1,716,755
Accrued expenses and other current liabilities 784,362 1,157,418
Income taxes 22,530 30,400
Cumulative preferred stock dividends payable 55,413 -
Current portion of long-term liabilities 73,622 -
Current portion of capital lease obligations 2,876 32,542
--------------------------------
--------------------------------
Total current liabilities 2,396,073 2,937,115
Long-term liabilities:
Long-term debt - 2,127,851
Cumulative preferred stock dividends payable 61,284 70,479
Other liabilities 172,295 157,411
Capital lease obligations 7,329 8,583
--------------------------------
240,908 2,364,324
8 1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share;
authorized 10,000 shares; issued and outstanding 875 shares (aggregate
liquidation preference - $875,000)
- 396,037
Shareholders' equity:
8 1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share;
authorized 10,000 shares; issued and outstanding 875 shares (aggregate
liquidation preference - $875,000)
402,037 -
Common stock, par value $.01 per share; authorized
10,000,000 shares; issued and outstanding shares, 3,282,833 - 1998
and 2,257,833 - 1997 32,828 22,578
Additional paid-in capital 7,447,953 3,067,799
Deferred compensation (225,000) -
Accumulated deficit (1,470,276) (1,473,728)
--------------------------------
Total shareholders' equity 6,187,542 1,616,649
--------------------------------
================================
Total liabilities and shareholders' equity $8,824,523 $ 7,314,125
================================
</TABLE>
(1) The balance sheet as of November 1, 1997 has been derived from the
audited financial statements at that date.
See accompanying notes.
5
<PAGE>
Harvey Electronics, Inc.
Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-In Deferred Accumulated Shareholders'
Shares Amount Shares Amount Capital Compensation (Deficit) Equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1997 - - 2,257,833 $22,578 $3,067,799 - $(1,473,728) $1,616,649
Net income for the twenty-six
weeks ended May 2, 1998 - - - - - - 55,670 55,670
Transfer of Common Stock from HAC
to employees, directors and
a member of HAC - - - - 280,000 $(280,000) - -
Accretion of Preferred Stock - - - - - - (6,000) (6,000)
Reclassify Preferred Stock to
shareholders' equity upon
removal of redemption feature 875 $402,037 - - - - - 402,037
Cumulative dividends
on Preferred Stock - - - - - - (46,218) (46,218)
Amortization of deferred
compensation - - - - - 55,000 - 55,000
Record value of Common Stock
Warrants - - - - 30,000 - - 30,000
Issuance of Common Stock from the
public Offering - - 1,025,000 10,250 5,114,750 - - 5,125,000
Issuance of 2,104,500 Common Stock
Warants at $.10 each from the
public offering - - - - 210,450 - - 210,450
Expenses relating to the
public offering - - - - (1,255,046) - - (1,255,046)
----------------------------------------------------------------------------------------
Balance at May 2, 1998 875 $402,037 3,282,833 $32,828 $7,447,953 $(225,000) $(1,470,276) $6,187,542
========================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Harvey Electronics, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Twenty-seven
Weeks Ended Weeks Ended
May 2, 1998 May 3, 1997
--------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $55,670 $(579,646)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 211,285 128,500
Deferred compensation 55,000 -
Straight-line impact of rent escalations 20,884 40,238
Provision for doubtful accounts - 5,000
Miscellaneous (6,000) -
Changes in operating assets and liabilities:
Accounts receivable (156,987) 93,429
Inventories (96,655) (317,767)
Prepaid expenses and other current assets 98,019 127,930
Accounts payable (259,485) 192,572
Accrued expenses, other current liabilities and income taxes
(380,926) (85,123)
-----------------------------------
Net cash used in operating activities (459,195) (394,867)
-----------------------------------
Investing activities
Redemption of certificate of deposit 200,000 -
Purchases of property and equipment (21,567) (570,632)
Increase in other assets (7,155) (83,833)
-----------------------------------
Net cash provided by (used) in investing activities 171,278 (654,465)
-----------------------------------
Financing activities
Debtor-in-possession financing - 605,000
Proceeds from term loan - 300,000
Costs of new line of credit facility (82,177) -
Proceeds from public Offering 5,335,450 -
Public Offering costs (1,252,041) -
Net (repayments) borrowings of old revolving line of credit facility
(1,777,851) 691,496
Net proceeds from new revolving line of credit facility 2,262,306 -
Temporary repayment of new revolving line of credit facility from
proceeds of Offering (2,262,306) -
Repayment of term loan (350,000) -
Payments relating to Chapter 11 reorganization - (426,866)
Principal payments on current portion of long-term liabilities (49,821) (63,190)
Principal payments on capital lease obligations (30,920) (44,404)
-----------------------------------
Net cash provided by financing activities 1,792,640 1,062,036
------------------------------------
Increase in cash and cash equivalents 1,504,723 12,704
Cash and cash equivalents at beginning of period 10,033 3,379
------------------------------------
Cash and cash equivalents at end of period $1,514,756 $ 16,083
====================================
Supplemental cash flow information:
Taxes paid $14,000 -
Interest paid $243,000 $170,000
</TABLE>
See accompanying notes.
7
<PAGE>
Harvey Electronics, Inc.
Notes to Financial Statements
May 2, 1998
(Unaudited)
1. Basis of Presentation and Description of Business
Basis of Presentation
The accompanying unaudited financial statements of Harvey Electronics, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and with the instructions
to Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Description of Business
The Company is a specialty retailer of high quality audio/video consumer
electronics and home theater products in the Metropolitan New York area. Revenue
from retail sales is recognized at the time goods are delivered to the consumer
or, for certain installation services, when such services are performed and
accepted by the customer.
Operating results for the six-month period ended May 2, 1998 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB/A for
the year ended November 1, 1997.
2. New Revolving Line of Credit Facility
On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with Paragon Capital L.L.C. ("Paragon") whereby the Company
may borrow up to $3,300,000 based upon a lending formula (as defined) calculated
on eligible inventory.
Proceeds from Paragon were used to pay down and cancel the existing credit
facility with Congress Financial Corporation ("Congress"), reduce trade payables
and pay related costs of the refinancing. The Paragon facility provides an
improved advance rate of the Company's inventory which resulted in additional
net financing of approximately $750,000 (after expenses) compared to the
Company's previous facility with Congress. The interest rate on borrowings up to
$2,500,000 is 1% over the prime rate. The rate charged on outstanding balances
over $2,500,000 is 1.75% above the prime rate. A commitment fee of $49,500 was
paid by the Company at closing and a facility fee of three-quarters of one
percent (.75%) of the maximum credit line will be charged in each year. Monthly
maintenance charges and a termination fee also exist under the line of credit.
8
<PAGE>
2. New Revolving Line of Credit Facility (continued)
Paragon also received a warrant to purchase 125,000 shares of common stock
subject to adjustment, which is currently exercisable at a price of $5.50 per
share and expires April 3, 2001. The Company will record a charge over three
years, based upon the estimated fair value of such warrant of approximately
$24,000.
Paragon has a senior security interest in all of the Company's assets. The
line of credit facility provides Paragon with rights of acceleration upon the
occurrence of certain customary events of default including, among others, the
event of bankruptcy. The Company is restricted from paying dividends on common
stock, retiring or repurchasing its common stock and entering into additional
indebtedness (as defined). Additionally, certain financial covenants exist.
On April 7, 1998, $2,262,306 of the proceeds from the public offering (see
Note 3) were used to pay down the Paragon revolving line of credit facility. At
May 2, 1998 no borrowings were outstanding under this revolving line of credit
facility.
3. Public Offering
On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in a public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P. (the "Underwriter"), which sold
1,200,000 shares of the Company's common stock of which 1,025,000 shares were
sold by the Company and 175,000 shares were sold by Harvey Acquisition Company,
LLC ("HAC"). 2,104,500 Warrants ("Warrants") to acquire additional shares of
common stock were also sold by the Company. The net proceeds from the Offering,
approximately $4.0 million, will be used for retail store expansion and working
capital purposes.
In April 1998, the net proceeds from the Offering were used to temporarily
repay amounts borrowed under the Paragon credit facility ($2,262,306); retire
the principal ($350,000) and interest ($47,627) of a term loan; make short-term
investments in cash equivalents ($1,235,751), and the balance was used for
working capital purposes.
Each Warrant shall be exerisable for one share of common stock at 110%
($5.50 per share) of the Offering price, for a period of three years commencing
two years from the effective date of the Offering (the "Effective Date"). The
Warrants are also redeemable (at a prescribed price), at the Company's option,
two years after the Effective Date if the closing bid price of the common stock
for 20 consecutive trading days exceeds 150% of the Offering price per share.
9
<PAGE>
3. Successful Public Offering (continued)
In late November 1997, HAC transferred 85,000 shares of Common Stock to
certain employees and directors of the Company and an individual who is a
preferred shareholder and a member of HAC. Such transfer is being treated for
accounting purposes as if such shares were issued by the Company as compensation
to such persons. The Company has recorded deferred compensation equal to the
fair market value of the shares and is amortizing this balance over the two-year
period during which the shares are subject to forfeiture by the transferees. The
Company recorded stock compensation expense of $55,000 and $33,000 for the
twenty-six and thirteen weeks ended May 2, 1998, respectively.
4. Stock Option Plan and Preferred Stock
Stock Option Plan
In conjunction with the Reorganization Plan by which the Company emerged
from Chapter 11 bankruptcy, the Company's Board of Directors approved the Harvey
Electronics, Inc. Stock Option Plan ("Stock Option Plan"). The Stock Option Plan
is subject to shareholder approval and provides for the granting of up to
1,000,000 shares of incentive and non-qualified common stock options and stock
appreciation rights to certain directors, officers and key employees. On
December 5, 1997, the Company's Compensation and Stock Option Committee of the
Board of Directors approved a grant, as of the Effective Date, of 70,000
incentive stock options to many of the Company's employees to purchase the
Company's Common Stock exercisable as to one-third of such shares at an exercise
price of $5.00 per share commencing one year from the Effective Date; one-third
of such shares at an exercise price $5.50 per share commencing two years from
the Effective Date and the remaining one-third of such shares at $6.00 per share
commencing three years from the Effective Date.
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 was
estimated to be $402,037 at May 2, 1998, with an aggregate liquidation
preference of $875,000.
The Preferred Stock may be converted to Common Stock at the option of the
holder, in whole or in part, as follows: (i) the first 50% of the Preferred
Stock can be converted at $6.00 per share, and (ii) the balance is convertible
at $7.50 per share. Beginning January 1, 2001, the Preferred Stock is
convertible at the average closing price, as defined, of the Company's Common
Stock for the preceding 45 day period.
10
<PAGE>
4. Stock Option Plan and Preferred Stock (continued)
The Preferred Stock also contained a redemption feature whereby such shares
would be redeemed on December 31, 2000. In December 1997, the redemption feature
was eliminated and the holders of the Preferred Stock received 36,458 Warrants
(valued at approximately $6,000) with terms equivalent to the Warrants in the
Offering, (see Note 3). The unaudited balance sheet at May 2, 1998 has been
presented to reflect the Preferred Stock in shareholders' equity, as a result of
the removal of the redemption feature.
Accumulated Preferred Stock dividends payable of $116,697 are outstanding
and were recorded as a current liability of $55,413 and as a long-term liability
of $61,284 at May 2, 1998. Such dividends, along with the accretion of the
redeemable Preferred Stock, were recorded as a reduction of retained earnings at
May 2, 1998.
5. Statement of Financial Accounting Standards No. 128, Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earning per Share ("FASB No. 128"). FASB
No. 128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earning per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. The Company adopted
FASB No. 128 in fiscal 1998 and as a result, all earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
FASB No. 128 requirements.
11
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
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
On November 13, 1996, the Company emerged from its Chapter 11 Bankruptcy
proceeding. The Company's Reorganization Plan provided that the Company change
its fiscal year end from the Saturday closest to January 31 to the Saturday
closest to October 31. On October 26, 1996, the Company adopted Fresh Start
Reporting. The following discussion should be read in conjunction with the
Company's audited financial statements for the fifty-three weeks ended November
1, 1997 and the thirty-nine week period ended October 26, 1996, included in the
Company's annual report on Form 10-KSB/A.
Twenty-six and Thirteen Weeks Ended May 2, 1998 as Compared to Twenty-seven
and Thirteen Weeks Ended May 3, 1997
The fiscal year ended October 31, 1998 is a fifty-two week year as compared
to fifty-three weeks for the prior year.
Net Income (loss). Net income for the twenty-six weeks ended May 2, 1998
was $55,670 as compared to a net loss of $579,646 or ($.26)
per share for the twenty-seven weeks ended May 3, 1997. The net loss for the
thirteen weeks ended May 2, 1998 was reduced to $74,547 or ($.03) per share as
compared to the net loss of $354,586 or ($.16) per share for the same period
last year.
Revenues. Net sales for the twenty-six weeks ended May 2, 1998 increased
approximately 9% or $742,000 from the twenty-seven weeks ended May 3, 1997,
while same store sales for the six months ended May 2, 1998 increased 18% or
$1,193,000 from the six months ended May 3, 1997.
Net sales for the thirteen weeks ended May 2, 1998 increased approximately
12% or $439,000 from the same quarter in 1997, while comparable store sales for
the thirteen weeks increased approximately 15% or $450,000 from the same quarter
last year.
The twenty-six week period ended May 2, 1998 includes sales from three
mature stores and one new store in Greenwich, Connecticut, which opened in
January 1997. The twenty-seven week period ended May 3, 1997 included sales from
three mature stores and the Greenwich, Connecticut store for only four months.
This period also included sales from one retail store
12
<PAGE>
Twenty-six and Thirteen Weeks Ended May 2, 1998 as Compared to Twenty-seven
and Thirteen Weeks Ended May 3, 1997 (continued)
which was closed in February 1997. The increase in the Company's sales is
attributed to increases in the volume of goods and services sold and to a lesser
extent, changes in product lines. The prices of its goods have remained
relatively constant. The Company's sales continue to benefit from the successful
marketing campaign where emphasis is placed on the quality of its manufacturers'
products displayed in home vignette settings, new technologies, service and
custom installation of home theater and multi-room audio/video systems.
The Company offers to its customers who qualify a Harvey credit card which
is issued by an unrelated finance company. The Company continuously offers
consumers using the Harvey credit card 90 days interest-free financing on any
purchases. As a promotion, the Company, from time to time, offers consumers
using the Harvey credit card attractive financing alternatives of 6 or 12 month
interest-free financing on specific products. The Company pays the finance
company a fee in connection with all interest-free financing which is a
percentage on such sales. For the twenty-six and the thirteen weeks ended May 2,
1998, the cost to the Company for all interest free financing was approximately
$27,000 and $11,000, respectively.
Costs and Expenses. Total cost of sales for the twenty-six weeks ended May
2, 1998 increased 3.8% or approximately $200,000 from the twenty-seven weeks
ended May 3, 1997. Cost of sales for the second quarter of fiscal 1998 increased
5.1% or approximately $120,000 from the same period last year. This was
primarily the result of increased sales offset by improved gross profit margins.
Gross profit margin for the twenty-six weeks ended May 2, 1998 increased to
38.8% from 35.7% for the twenty-seven weeks ended May 3, 1997. Gross profit
margin for the second quarter of fiscal 1998 increased to 39.2% from 35.1% for
the same period last year.
The gross profit margin improved as a result of increased custom
installation sales which have higher gross profit margins. Additionally, an
increase was realized from merchandising changes started in fiscal 1997, where
higher margin products from new manufacturers were added and lower margin
products were eliminated. Finally, the marketing campaign for the first half of
fiscal 1998 placed less emphasis on price sensitive advertisements as compared
to the same period last year.
Selling, general and administrative expenses ("SG&A expenses") decreased
2.5% or approximately $83,000 for the twenty-six week period ended May 2, 1998
as compared to the twenty-seven weeks ended May 3, 1997. This decrease was
primarily due to a $60,000 reduction in advertising expense and a $122,000
reduction in occupancy costs. The decrease in occupancy was primarily the result
of a reduction in warehouse space beginning in fiscal 1998 and from the closing
of a retail store in February 1997. The decrease in SG&A expenses for the six
months ended May 2, 1998 was offset primarily by non-cash stock compensation
expense of $55,000 of which $33,000 was recorded in the second quarter. No
compensation expense was recorded in the prior year. SG&A expenses increased
1.2% or $19,000 for the second quarter of fiscal 1998 as compared to the second
quarter last year.
13
<PAGE>
Twenty-six and Thirteen Weeks Ended May 2, 1998 as Compared to Twenty-seven
and Thirteen Weeks Ended May 3, 1997 (continued)
Interest expense for the twenty-six week period ended May 2, 1998 deceased
8.8% or approximately $16,000 from the twenty-seven week period ended May 3,
1997. Interest expense increased 12% or $8,000 in the second quarter of fiscal
1998 as compared to the same period in 1997.
The overall decrease in interest expense for the six months ended May 2,
1998 was primarily due to the elimination of debtor-in-possession financing
which was outstanding through December 1996 of the prior year, offset by
additional interest on the term loan made available to the Company in the second
quarter of fiscal 1997. The increase in interest expense in the second quarter
of fiscal 1998 was due to additional borrowings and interest on the new
revolving line of credit facility.
14
<PAGE>
Liquidity and Capital Resources
On November 13, 1996, the Bankruptcy Court confirmed the Company's
Reorganization Plan. The effective date of the Reorganization Plan was December
26, 1996, which was within the first quarter of the prior year. Refer to the
Company's annual report on Form 10-KSB/A for further information on the
Reorganization Plan.
The Company's ratio of current assets to current liabilities was 2.41 at
May 2, 1998 as compared to 1.41 at November 1, 1997. The increase in the current
ratio at May 2, 1998 was primarily the result of the Company's net profit and
the impact of the proceeds from the successful public offering ("the Offering").
Net cash used in operating activities was approximately $459,000 for the
six months ended May 2, 1998, as the Company used a portion of the additional
financing from its new revolving line of credit facility and a portion of the
proceeds from the Offering to reduce trade payables, accrued expenses, other
current liabilities and income taxes.
Net cash provided by investing activities was approximately $171,000 for
the six months ended May 2, 1998, which related to the purchase of property,
equipment and other assets, offset by the proceeds from the redemption of a
certificate of deposit.
Financing activities resulted in an increase in net cash of approximately
$1,793,000 for the six months ended May 2, 1998. This increase was primarily the
result of the proceeds from the successful Offering and from additional net
borrowings from the new revolving line of credit facility, offset by costs
relating to the Offering and the Compan's refinancing of its previous line of
credit facility.
On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with Paragon Capital L.L.C. ("Paragon") whereby the Company
may borrow up to $3,300,000 based upon a lending formula (as defined) calculated
on eligible inventory. Proceeds from Paragon were used to pay down and cancel
the existing credit facility with Congress Financial Corporation ("Congress"),
reduce trade payables and pay related costs of the refinancing. The Paragon
facility provides an improved advance rate of the Company's inventory which
resulted in additional net financing of approximately $750,000 (after expenses)
compared to the Company's previous facility with Congress. The interest rate on
borrowings up to $2,500,000 is 1% over the prime rate. The rate charged on
outstanding balances over $2,500,000 is 1.75% above the prime rate. A commitment
fee of $49,500 was paid by the Company at closing and a facility fee of
three-quarters of one percent (.75%) of the maximum credit line will be charged
in each year. Monthly maintenance charges and a termination fee also exist under
the line of credit.
15
<PAGE>
Liquidity and Capital Resources (continued)
The maximum amount of borrowing available to the Company under this line of
credit facility is limited to formulas prescribed in the loan agreement. The
Company's maximum borrowing availability is equal to 75% of acceptable
inventory, minus the then unpaid principal balance of the loan, minus the then
aggregate of such available reserves as may have been established by Paragon,
minus the then outstanding stated amount of any letters of credit.
Pursuant to the line of credit facility, the Company must maintain certain
levels of inventory, trade accounts payable, inventory purchases, net income or
loss and minimum gross profit margins. Additionally, the Company's capital
expenditures, assuming no retail store expansion, may not exceed $125,000 for
fiscal 1998.
Paragon obtained a senior security interest in substantially all of the
Company's assets. The line of credit facility provides Paragon with rights of
acceleration upon the breach of certain financial covenants or the occurrence of
certain customary events of default including, among others, the event of
bankruptcy. The Company is also restricted from paying dividends on Common
Stock, retiring or repurchasing its Common Stock, and entering into additional
indebtedness (as defined).
Paragon also received a warrant to purchase 125,000 shares of Common Stock
subject to adjustment, which is currently exercisable at a price of $5.50 per
share and expires April 3, 2001.
At June 15, 1998, no borrowings were outstanding under the Paragon
revolving line of credit facility.
On April 7, 1998, the Company completed the Offering which was co-managed
by The Thornwater Company, L.P. (the "Underwriter"). The Underwriter sold
1,200,000 shares of the Company's common stock of which 1,025,000 shares were
sold by the Company and 175,000 shares were sold by HAC. 2,104,500 Warrants
("Warrants") to acquire additional shares of common stock were also sold by the
Company. The net proceeds from the Offering, approximately $4.0 million, will be
used for retail store expansion and working capital purposes.
In April 1998, the net proceeds from the Offering were used to temporarily
paydown the Paragon credit facility ($2,262,306); retire the principal
($350,000) and interest ($47,627) of a term loan; make short-term investments in
cash equivalents ($1,235,751), and the balance was used for working capital
purposes.
Each Warrant is exerisable for one share of common stock at 110% ($5.50 per
share) of the Offering price, for a period of three years commencing two years
from the Effective Date. The Warrants are also redeemable, at the Company's
option, two years after the Effective Date if the closing bid price of the
common stock for 20 consecutive trading days exceeds 150% of the Offering price
per share.
16
<PAGE>
Liquidity and Capital Resources (continued)
The Company's management believes that the Company's overhead structure has
the capacity to support additional stores without significant increase in cost
and personnel, and, consequently, that revenues and profit from new stores will
have a positive impact on the Company's operations. Based on such belief of the
Company's management, the Company intends to utilize the net proceeds from the
Offering to open up to five new retail stores.
The Company's management estimates that the total cost of opening a retail
store is $650,000, or $3,250,000 for the five planned stores. The estimated cost
of opening each new store includes the cost of leasehold improvements, including
design and decoration, machinery and equipment, furniture and fixtures, security
deposits, opening inventory (net of the portion to be borrowed from the
Company's lender), lease acquisition expenses, preopening expenses and
additional advertising and promotion in connection with the opening.
As an alternative to leasing and developing new stores, the Company will
consider acquiring the business of existing electronics retailers. However, the
Company has not signed any agreement regarding any such potential acquisition.
Management believes that the net proceeds from the Offering, plus cash flow
from operations and funds made available under the credit facility with Paragon,
will be sufficient to meet the Company's anticipated working capital needs and
expansion plan for the next twelve month period.
During the periods presented, the Company was not significantly impacted by
the effects of inflation or seasonality.
17
<PAGE>
PART II. OTHER INFORMATION:
Items 1 through 5 were not applicable in the quarter ended May 2, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 7, 1998, Form 8-K was filed, with related exhibits,
announcing thecompletion of the Company's Offering.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on June 15, 1998.
Harvey Electronics, Inc.
By:/s/Franklin C. Karp
---------------------------------
Franklin C. Karp
President
By:/s/Joseph J. Calabrese
---------------------------------
Joseph J. Calabrese
Executive Vice President,
Chief Financial Officer,
Treasurer & Secretary
18
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<NAME> HARVEY ELECTRONICS, INC.
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