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 August 1, 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 of incorporation (I.R.S. Employer Identification
or organization) No.)
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 September 11, 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
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements:
Statements of Operations (Unaudited) - Thirty-nine and thirteen
weeks ended August 1, 1998 and Forty and thirteen weeks ended
August 2, 1997 ........................................................... 3
Balance Sheets - August 1, 1998 (Unaudited) and November 1, 1997 ........... 4
Statement of Shareholders' Equity (Unaudited) - Thirty-nine weeks
ended August 1, 1998 ..................................................... 6
Statements of Cash Flows (Unaudited) - Thirty-nine weeks ended
August 1, 1998 and Forty weeks ended August 2, 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>
Thirty-Nine Forty Thirteen Thirteen
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Net sales $13,142,136 $11,602,202 $4,207,463 $3,409,817
Interest and other income 54,493 68,318 17,051 25,238
-------------- ------------- ------------ ------------
13,196,629 11,670,520 4,224,514 3,435,055
-------------- ------------- ------------ ------------
Cost and expenses
Cost of sales 8,128,629 7,378,937 2,661,069 2,111,477
Selling, general and administrative expenses 4,977,971 4,951,068 1,691,776 1,581,843
Interest expense 181,990 240,683 19,300 62,257
-------------- ------------- ------------ ------------
13,288,590 12,570,688 4,372,145 3,755,577
-------------- ------------- ------------ ------------
Loss) before income taxes (91,961) (900,168) (147,631) (320,522)
Income taxes - - - -
------------- ------------- ------------ ------------
Net (loss) (91,961) (900,168) (147,631) (320,522)
Preferred Stock dividend requirement (64,812) (52,860) (18,594) (17,620)
Accretion of Preferred Stock (6,000) (58,527) - (19,509)
------------- ------------- ------------ ------------
Net (loss) attributable to common stock $(162,773) $(1,011,555) $ (166,225) $ (357,651)
============= ============= ============ ============
Basic and diluted (loss) per share
for common stock $(.06) $(.45) $(.05) $(.16)
============= ============= ============ ============
Weighted average number of common shares
outstanding during the period 2,694,965 2,257,833 3,282,833 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>
August 1, November 1,
1998 1997
(Unaudited) (1)
--------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,166,483 $ 10,033
Accounts receivables, less allowance of $20,000 419,739 272,436
Certificate of deposit - 200,000
Inventories 3,565,219 3,559,778
Prepaid expenses and other current assets 328,867 109,656
--------------------------------------------
--------------------------------------------
Total current assets 5,480,308 4,151,903
Property and equipment:
Leasehold improvements 650,821 644,646
Furniture, fixtures & equipment 780,670 738,872
--------------------------------------------
--------------------------------------------
1,431,491 1,383,518
Less accumulated depreciation & amortization 331,537 179,604
--------------------------------------------
--------------------------------------------
1,099,954 1,203,914
Equipment under capital leases - 15,768
Reorganization value in excess of amounts allocable to
identifiable assets, less accumulated amortization of
$115,523 - 1998 and $66,023 - 1997 1,532,940 1,582,440
Other, less accumulated amortization of $125,492 - 1998 and
$40,400 - 1997 389,918 360,100
--------------------------------------------
Total assets $8,503,120 $ 7,314,125
============================================
(1) The balance sheet as of November 1, 1997 has been derived from the audited financial statements at that date.
</TABLE>
See accompanying notes.
4
<PAGE>
Harvey Electronics, Inc.
Balance Sheets (continued)
<TABLE>
<CAPTION>
August 1, November 1,
1998 1997
(Unaudited) (1)
--------------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity Current liabilities:
Trade accounts payable $ 1,374,325 $ 1,716,755
Accrued expenses and other current liabilities 737,925 1,157,418
Income taxes 21,885 30,400
Cumulative preferred stock dividends payable 36,823 -
Current portion of long-term liabilities 32,300 -
Current portion of capital lease obligations 2,913 32,542
---------------------------------------------
---------------------------------------------
Total current liabilities 2,206,171 2,937,115
Long-term liabilities:
Long-term debt - 2,127,851
Cumulative preferred stock dividends payable 61,586 70,479
Other liabilities 183,144 157,411
Capital lease obligations 7,067 8,583
---------------------------------------------
251,797 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 7,438,788 3,067,799
Deferred compensation (192,000) -
Accumulated deficit (1,636,501) (1,473,728)
---------------------------------------------
Total shareholders' equity 6,045,152 1,616,649
---------------------------------------------
=============================================
Total liabilities and shareholders' equity $8,503,120 $ 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 loss for the thirty-nine weeks ended
August 1, 1998 - - - - - - (91,961) (91,961)
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 - - - - - - (64,812) (64,812)
Amortization of deferred compensation - - - - - 88,000 - 88,000
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 - - - - (1,264,211) - - (1,264,211)
-----------------------------------------------------------------------------------------
Balance at August 1, 1998 875 $402,037 3,282,833 $32,828 $7,438,788 $(192,000) $(1,636,501) $6,045,152
=========================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Harvey Electronics, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Forty
Weeks Ended Weeks Ended
August 1, 1998 August 2, 1997
-----------------------------------------------------
<S> <C> <C>
Operating activities
Net (loss) $ (91,961) $ (900,168)
Adjustments to reconcile net (loss) to net cash used in operating
activities:
Depreciation and amortization 302,293 363,321
Deferred compensation 88,000 -
Straight-line impact of rent escalations 31,733 52,680
Miscellaneous (6,000) -
Changes in operating assets and liabilities:
Accounts receivable (147,303) 14,913
Inventories (5,441) (394,217)
Prepaid expenses and other current assets (54,548) 84,842
Accounts payable (342,430) 432,386
Accrued expenses, other current liabilities and income taxes
(428,008) (88,976)
-------------- -------------
-------------- -------------
Net cash used in operating activities (653,665) (435,219)
-------------- -------------
Investing activities
Redemption of certificate of deposit 200,000 -
Purchases of property and equipment (47,973) (593,100)
Increase in other assets (46,958) (83,533)
--------------- -------------
Net cash provided by (used) in investing activities 105,069 (676,633)
---------------- -------------
---------------- -------------
Financing activities
Debtor-in-possession financing - 605,000
Proceeds from term loan - 350,000
Costs of new line of credit facility (82,177) -
Proceeds from public Offering 5,335,450 -
Public Offering costs (1,261,206) -
Net (repayments) borrowings of old revolving line of credit facility
(1,777,851) 731,166
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) -
Preferred Stock dividends paid (36,882) -
Payments relating to Chapter 11 reorganization - (407,571)
Principal payments on current portion of long-term liabilities (91,143) (92,423)
Principal payments on capital lease obligations (31,145) (70,941)
--------------- -------------
Net cash provided by financing activities 1,705,046 1,115,231
--------------- -------------
Increase in cash and cash equivalents 1,156,450 3,379
Cash and cash equivalents at beginning of period 10,033 3,473
--------------- -------------
=============== =============
Cash and cash equivalents at end of period $ 1,166,483 $ 6,852
=============== =============
Supplemental cash flow information:
Taxes paid $15,000 -
Interest paid $261,000 $234,000
</TABLE>
See accompanying notes.
7
<PAGE>
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 nine-month period ended August 1, 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 is recording 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
August 1, 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, is being used for retail store expansion (see Note
5) 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 $88,000 and $33,000 for the
thirty-nine and thirteen weeks ended August 1, 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 and shareholders
approved the Harvey Electronics, Inc. Stock Option Plan ("Stock Option Plan").
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 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 August 1, 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 August 1, 1998 has been
presented to reflect the Preferred Stock in shareholder" equity, as a result of
the removal of the redemption feature.
Accumulated Preferred Stock dividends payable of $98,409 are outstanding
and were recorded as a current liability of $36,823 and as a long-term liability
of $61,586 at August 1, 1998. Dividends, due at June 30, 1998, aggregating
$36,882 were paid in July 1998. Such dividends ($64,812), along with the
accretion of the redeemable Preferred Stock ($6,000), were recorded as a
reduction of retained earnings at August 1, 1998.
5. New Retail Stores
On July 2, 1998, as a part of its expansion plan, the Company entered into
a definitive contract with the Sound Mill, Inc. and its subsidiary, Loriel
Custom Audio Video Corporation (the "Sound Mill"), to acquire certain assets and
business of the Sound Mill for a purchase price of $210,000 in cash. The
purchase price will be allocated as follows: $50,000 for leasehold improvements,
equipment, vehicles and tools and $160,000 for goodwill. The Company also signed
a ten year lease with a five year option for the 3,100 square foot retail store
with the principals of the Sound Mill. Located in Mount Kisco, in northern
Westchester County, New York, the Sound Mill has been engaged in the retail sale
and custom installation of specialty high-end audio/video products for
twenty-nine years. The closing for the Sound Mill took place on August 14, 1998.
On August 11, 1998, the Company signed a ten year lease with a five year
option to open a new 4,600 square foot retail showroom in Greenvale, on the
north shore of Long Island, New York. This new retail store, expected to open in
October 1998, will give the Company a total of six stores in the Metropolitan
New York area.
6. 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.
Thirty-nine and Thirteen Weeks Ended August 1, 1998 as Compared to Forty
and Thirteen Weeks Ended August 2, 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 (loss). The net loss for the thirty-nine weeks ended August 1, 1998 was
reduced to $91,961 ($.03 per share) as compared to a net loss of $900,168 ($.40
per share) for the forty weeks ended August 2, 1997. The net loss for the
thirteen weeks ended August 1, 1998 was reduced to $147,631 ($.04 per share) as
compared to the net loss of $320,522 ($.14 per share) for the same period last
year.
Revenues. For the thirty-nine weeks ended August 1, 1998, the Company's net
sales aggregated $13,142,000 and increased approximately $1,540,000 or 13.3%
over the forty weeks ended August 2, 1997. For the thirteen weeks ended August
1, 1998, net sales aggregated $4,207,000 and increased approximately $798,000 or
23.4% from the same period in 1997.
Comparable store sales increased 18% and 18.2% for the nine and three month
periods ended August 1, 1998, respectively, as compared to the same periods in
1997.
12
<PAGE>
Thirty-nine and Thirteen Weeks Ended August 1, 1998 as Compared to Forty
and Thirteen Weeks Ended August 2, 1997 (continued)
The thirty-nine week period ended August 2, 1998 includes sales from three
mature stores and one new store in Greenwich, Connecticut, which opened in
January 1997. The forty week period ended August 2, 1997 included sales from
three mature stores and the Greenwich, Connecticut store for only seven months.
This period also included sales from one retail store which was closed in
February 1997. The increase in the Company's sales is attributed to increases in
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. Custom installation services
continue to expand and account for approximately 23% of net sales for the nine
months ended August 1, 1998 as compared to approximately 19% for the same period
last year.
As part of its successful marketing plan, the Company offers 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 thirty-nine
and thirteen weeks ended August 1, 1998, the cost to the Company for all
interest-free financing was approximately $35,000 and $8,000, respectively.
Costs and Expenses. Total cost of sales for the thirty-nine weeks ended
August 1, 1998 increased 10.2% or approximately $750,000 from the forty weeks
ended August 2, 1997. Cost of sales for the third quarter of fiscal 1998
increased 26% or approximately $550,000 from the same period last year. Cost of
sales increased for the nine months ended August 1, 1998 primarily from
increased sales offset by an overall improvement in gross profit margins. Cost
of sales increased for the third quarter primarily from increased sales and
additionally from lower gross profit margins realized from a promotional event
not run in the third quarter of 1997.
Gross profit margin for the thirty-nine weeks ended August 1, 1998
increased to 38.1% from 36.4% for the forty weeks ended August 2, 1997. Gross
profit margin for the third quarter of fiscal 1998 decreased to 36.8% from 38.1%
for the same period last year.
The gross profit margin improved, for the nine months ended August 1, 1998,
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
13
<PAGE>
Thirty-nine and Thirteen Weeks Ended August 1, 1998 as Compared to Forty
and Thirteen Weeks Ended August 2, 1997 (continued)
marketing campaign for the first half of fiscal 1998 placed less emphasis
on price sensitive advertisements as compared to the same period last year,
while the third quarter of 1998 placed more emphasis on price sensitive
advertisements as compared to the same quarter in 1997.
Selling, general and administrative expenses ("SG&A expenses") increased
less than 1% or approximately $27,000 for the thirty-nine week period ended
August 1, 1998 as compared to the forty weeks ended August 2, 1997. SG&A
expenses increased 6.9% or approximately $110,000 for the third quarter of
fiscal 1998 as compared to the same period last year.
The increase in SG&A expenses for the nine and three months ended August 1,
1998 was primarily due to general increases in payroll and payroll related
items, professional expenses, stock compensation expense and various store
operating expenses as a result of increased sales. These increases were
partially offset by reduced advertising and 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.
Interest expense for the thirty-nine week period ended August 1, 1998
decreased 24.4% or approximately $59,000 from the forty week period ended August
2, 1997. Interest expense decreased 69% or $43,000 in the third quarter of
fiscal 1998 as compared to the same period in 1997.
The decrease in interest expense for the nine and three months ended August
1, 1998 was primarily due to the elimination of debtor-in-possession financing
which was outstanding through December 1996 of the prior year, and the reduction
of interest relating to the new revolving line of credit facility and term loan
which were paid down in April 1998 using the net proceeds from the Offering.
This decrease was offset by additional interest on the term loan, which was made
available to the Company in the second quarter of fiscal 1997.
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 2.48 at
August 1, 1998 as compared to 1.41 at November 1, 1997. The increase in the
current ratio at August 1, 1998 was primarily the result of the impact of the
net proceeds from the Company's successful public offering ("the Offering"),
offset by the Company's net loss.
Net cash used in operating activities was approximately $654,000 for the
nine months ended August 1, 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 $105,000 for
the nine months ended August 1, 1998, which related to the proceeds from the
redemption of a certificate of deposit, offset by the purchase of property and
equipment as well as other assets.
Financing activities resulted in an increase in net cash of approximately
$1,705,000 for the nine months ended August 1, 1998. This increase was primarily
the result of the net proceeds from the successful Offering partially offset by,
among other items, the repayment of amounts borrowed under its previous line of
credit facility and repayment of a $350,000 term loan.
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
aggregate of any 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 new 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 September 11, 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, is
being 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, of which two new stores have been
accomplished to date, as disclosed below.
The Company's management estimates that the total cost of opening a retail
store is approximately $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 other existing electronics retailers.
On July 2, 1998, as a part of its expansion plan, the Company entered into
a definitive contract with the Sound Mill, Inc. and its subsidiary, Loriel
Custom Audio Video Corporation (the "Sound Mill"), to acquire certain assets and
business of the Sound Mill for a purchase price of $210,000 in cash. The
purchase price will be allocated as follows: $50,000 for leasehold improvements,
equipment, vehicles and tools and $160,000 for goodwill. The Company also signed
a ten year lease with a five year option for the 3,100 square foot retail store
with the principals of the Sound Mill. Located in Mount Kisco, in northern
Westchester County, New York, the Sound Mill has been engaged in the retail sale
and custom installation of specialty high-end audio/video products for
twenty-nine years. The closing took place on August 14, 1998. This store will be
partially renovated with capital expenditures expected to approximate $100,000,
and will reopen for business in October 1998. Inventory levels of approximately
$350,000 are projected for this store and will be obtained primarily from
existing levels of stock.
On August 11, 1998, the Company signed a ten year lease with a five year
option to open a new 4,600 square foot retail showroom in Greenvale, on the
north shore of Long Island, New York. This new retail store, expected to open in
October 1998, will give the Company a total of six stores in the Metropolitan
New York area. Capital expenditures are projected to aggregate between $350,000
- - $400,000. Inventory levels of approximately $500,000 are projected for this
store and will be substantially financed from the credit facility.
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, 2, 3 and 5 were not applicable in the quarter ended August 1,
1998.
Item 4. Submission of Matters to a Vote of Security Holders
On July 23, 1998 the Company's shareholders at an Annual Meeting (i)
elected Franklin C. Karp (2,987,183 shares in favor, 24,245 shares against),
Joseph J. Calabrese (2,989,183 shares in favor, 22,245 shares against), Michael
E. Recca (2,987,145 shares in favor, 24,343 shares against), Fredric J. Gruder
(2,989,085 shares in favor, 22,343 shares against), Stewart L. Cohen (2,989,123
in favor, 22,305 shares against) and William F. Kenny (2,898,123 shares in
favor, 22,305 shares against) as directors of the Company; (ii) approved the
appointment of Ernst & Young LLP as the Company's independent auditors for the
year ending October 31, 1998 (2,994,661 shares in favor, 15,264 shares against);
and (iii) ratified the Company's Stock Option Plan (1,993,234 shares in favor,
70,441 shares against).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of fiscal 1998.
<PAGE>
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 September 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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