UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
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 January 31, 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 (I.R.S. Employer Identification No.)
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 [ ] No
[X]
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 March 11, 1998, 2,257,833 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>
PART I. Financial Information
Item 1. Financial Statements: Page no.
<S> <C>
Statements of Operations (Unaudited) - Thirteen weeks ended January 31,
1998 and Fourteen weeks ended February 1, 1997 ................................... 3
Balance Sheets - January 31, 1998 (Unaudited) and November 1, 1997 .... 4
Statements of Shareholders' Equity (Unaudited) - Thirteen weeks ended
January 31, 1998 ................................................................. 6
Statements of Cash Flows (Unaudited) - Thirteen weeks ended January 31,
1998 and Fourteen weeks ended February 1, 1998 ................................... 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 ................................................... 17
Signatures ....................................................................................... 17
</TABLE>
2
<PAGE>
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Fourteen Weeks
Ended Ended
January 31, February 1,
1998 1997
-------------------------------------------------
<S> <C> <C>
Revenues
Net sales $4,869,816 $4,567,020
Interest and other income 15,542 8,250
----------------------------------------
4,885,358 4,575,270
----------------------------------------
Cost and expenses
Cost of sales 2,996,320 2,915,865
Selling, general and administrative expenses 1,667,521 1,769,739
Interest expense 91,300 114,725
----------------------------------------
4,755,141 4,800,329
----------------------------------------
Income (loss) before income taxes 130,217 (225,059)
Income taxes - -
----------------------------------------
Net income (loss) 130,217 (225,059)
Preferred Stock dividend requirement (18,500) (17,620)
Accretion of Preferred Stock (6,000) (19,509)
----------------------------------------
Net income (loss) attributable to common stock $105,717 $ (262,188)
========================================
Basic and diluted earnings (loss) per share $.05 $(.12)
========================================
Weighted average number of common shares
outstanding during the period 2,257,833 2,257,833
========================================
Dividends per common share NONE NONE
</TABLE>
See accompanying notes.
3
<PAGE>
Harvey Electronics, Inc.
Balance Sheets
<TABLE>
<CAPTION>
January 31, November 1,
1998 1997
(Unaudited) (Note)
-----------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 63,742 $ 10,033
Accounts receivables, less allowance of $20,000 408,498 272,436
Certificate of deposit - 200,000
Inventories 3,524,725 3,559,778
Prepaid expenses and other current assets 160,618 109,656
-----------------------------------------------
Total current assets 4,157,583 4,151,903
Property and equipment:
Leasehold improvements 646,211 644,646
Furniture, fixtures & equipment 751,778 738,872
-----------------------------------------------
1,397,989 1,383,518
Less accumulated depreciation & amortization 237,504 179,604
-----------------------------------------------
1,160,485 1,203,914
Equipment under capital leases 9,768 15,768
Reorganization value in excess of amounts allocable to
identifiable assets, less accumulated amortization of
$82,523 - 1998 and $66,023 - 1997 1,565,940 1,582,440
Other, less accumulated amortization of $68,011 - 1998 and $40,400 - 1997
532,705 360,100
-----------------------------------------------
Total assets $ 7,426,481 $ 7,314,125
===============================================
</TABLE>
Note: 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>
January 31, November 1,
1998 1997
(Unaudited) (Note)
-----------------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity Current liabilities:
Trade accounts payable $ 1,547,887 $ 1,716,755
Accrued expenses and other current liabilities 938,710 1,139,918
Obligations relating to Chapter 11 reorganization 17,500 17,500
Income taxes 16,619 30,400
Current portion of long-term liabilities 85,943 -
Current portion of capital lease obligations 22,958 32,542
------------------------------------------------
Total current liabilities 2,629,617 2,937,115
Long-term liabilities:
Long-term debt 2,355,538 2,127,851
Cumulative dividends payable 88,979 70,479
Other liabilities 167,853 157,411
Capital lease obligations 8,091 8,583
------------------------------------------------
2,620,461 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 2,257,833
shares 22,578 22,578
Additional paid-in capital 3,377,799 3,067,799
Deferred compensation (258,000) -
Accumulated deficit (1,368,011) (1,473,728)
------------------------------------------------
Total shareholders' equity 2,176,403 1,616,649
------------------------------------------------
Total liabilities and shareholders' equity $ 7,426,481 $ 7,314,125
================================================
</TABLE>
Note: 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
<TABLE>
<CAPTION>
Additional Total
Prefered 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 thirteen weeks
ended January 31, 1998 - - - - - - 130,217 130,217
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 - - - - - - (18,500) (18,500)
Amortization of deferred
compensation - - - - - 22,000 - 22,000
Record value of Common Stock
Warrants - - - - 30,000 - - 30,000
---------------------------------------------------------------------------------------------
Balance at January 31, 1998 875 $402,037 2,257,833 $22,578 $3,377,799 $(258,000) $(1,368,011) $2,176,403
=============================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Harvey Electronics, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Fourteen Weeks
Ended Ended
January 31, 1998 February 1, 1997
---------------------------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 130,217 $ (225,059)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 108,011 57,329
Deferred compensation 22,000 -
Straight-line impact of rent escalations 10,442 26,796
Changes in operating assets and liabilities:
Accounts receivable (136,062) (10,562)
Inventories 35,053 (540,837)
Prepaid expenses and other current assets 34,981 89,830
Accounts payable (168,868) (7,564)
Accrued expenses, other current liabilities and income taxes
(214,989) 19,860
---------------------------------------------------
Net cash used in operating activities (179,215) (590,207)
---------------------------------------------------
Investing activities
Certificate of deposit 200,000 -
Purchases of property and equipment (14,471) (516,522)
Increase in other assets (2,500) (70,044)
---------------------------------------------------
Net cash provided by (used) in investing activities 183,029 (586,566)
---------------------------------------------------
Financing activities
Debtor-in-possession financing - 605,000
Costs of new line of credit facility (82,178) -
Proposed initial public offering costs (85,538) -
Net (repayments) borrowings of old revolving line
of credit facility (1,777,851) 889,550
Net proceeds from new revolving line of credit facility 2,005,538 -
Payments relating to Chapter 11 reorganization - (294,269)
Principal payments on capital lease obligations (10,076) (21,772)
----------------------------------------------------
Net cash provided by financing activities 49,895 1,178,509
----------------------------------------------------
Increase in cash and cash equivalents 53,709 1,736
Cash and cash equivalents at beginning of period 10,033 3,379
----------------------------------------------------
Cash and cash equivalents at end of period $ 63,742 $ 5,115
====================================================
Supplemental cash flow information
Tax payments $13,000 -
Interest payments $81,000 $112,000
</TABLE>
7
See accompanying notes.
<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.
The accompanying financial statements have also been prepared assuming that
the Company will continue as a going concern. The Company, which emerged from
reorganization under Chapter 11 of the Bankruptcy Code after confirmation of its
reorganization plan (the "Reorganization Plan") on November 13, 1996, had
incurred recurring losses and negative cash flows from operations through
November 1, 1997. Management's plan in regard to these matters principally
include raising additional equity through a proposed public offering (see Note
3) and a refinancing of the Company's existing credit facility (see Note 2). If
the Company is successful in the proposed Offering, it will seek to utilize the
net proceeds to open or acquire additional retail facilities and for working
capital purposes. Despite net income in the first quarter of fiscal 1998,
management can not predict whether this trend will continue, or whether the
proposed public offering will be consummated, and therefore whether the Company
will be able to continue as a going concern. The financial statements do not
include any adjustments that may result from the possible inability of the
Company to continue as a going concern.
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 three-month period ended January 31, 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 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.
8
<PAGE>
Harvey Electronics, Inc.
Notes to Financial Statements
January 31, 1998
(Unaudited)
2. New Revolving Line of Credit Facility (continued)
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.
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.
3. Proposed Public Offering
On September 15, 1997, the Company signed a letter of intent with an
underwriter to sell common stock and warrants to purchase common stock in a
public offering (the "Offering") . The underwriter proposes to co-manage and
underwrite an offering of 1,200,000 shares of the Company's common stock and
1,830,000 of warrants ("Warrants") to acquire additional shares of Common Stock.
1,025,000 shares would be sold by the Company and 175,000 shares would be sold
by Harvey Acquisition Company, LLC ("HAC"), the selling majority shareholder,
with the proceeds to be received by HAC. The net proceeds from the proposed
Offering will be used for the expansion or acquisition of additional retail
stores and for working capital purposes.
Each Warrant shall be exerisable for one share of common stock at 110% of
the public offering price, for a period of three years commencing two years from
the effective date of the Offering. The Warrants are also redeemable, (at a
prescribed price) at the Company's option, two years after the effective date of
the Offering if the closing bid price of the common stock for 20 consecutive
trading days exceeds 150% of the public offering price per share.
9
<PAGE>
Harvey Electronics, Inc.
Notes to Financial Statements
January 31, 1998
(Unaudited)
3. Proposed Public Offering (continued)
At the underwriter's election, it may underwrite an additional 180,000
shares and or 274,500 Warrants if market conditions permit. The common shares
would be sold by HAC, with the net proceeds to be received by HAC.
The Offering is subject to certain conditions, as defined in the letter of
intent. There can be no assurance that this proposed transaction will be
completed.
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 to be 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 will amortize 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 $22,000 for the thirteen weeks
ended January 31, 1998.
4. Stock Option Plan and Preferred Stock
Stock Option Plan
In conjunction with the Reorganization Plan, 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 the Offering, 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 January 31, 1998, with an aggregate liquidation
preference of $875,000.
The Preferred Stock may be converted 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)
10
<PAGE>
Harvey Electronics, Inc.
Notes to Financial Statements
January 31, 1998
(Unaudited)
4. Stock Option Plan and Preferred Stock (continued)
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.
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 January 31, 1998 has been
presented to reflect the Preferred Stock in shareholder's equity, as a result of
the removal of the redemption feature.
Accumulated Preferred Stock dividends payable of $88,979 are outstanding
and were recorded as a long-term liability at January 31, 1998. Such dividends,
along with the accretion of the redeemable Preferred Stock, were recorded as a
reduction of retained earnings at January 31, 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 the first quarter of 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.
6. Inventories
Inventories have been valued based upon gross profit percentages applied to
sales.
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 closed 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.
Thirteen Weeks Ended January 31, 1998 as Compared to Fourteen Weeks Ended
February 1, 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 thirteen weeks ended January 31, 1998
was $130,217 as compared to a net loss of $225,059 for the fourteen weeks ended
February 1, 1997.
Revenues. Net Sales for the thirteen weeks ended January 31, 1998 increased
6.6% or $303,000 over the fourteen weeks ended February 1, 1997. Comparable
store sales for the first quarter ended January 31, 1998 increased 20.9% or
$742,000 from the same period last year. The first quarter ended January 31,
1998 includes sales from three mature stores and the new store in Greenwich,
Connecticut, which opened in January 1997. The same quarter last year included
sales from four mature stores and the Greenwich, Connecticut store for only one
month. One retail store 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, new technologies, service and custom installation of
home theater and multi-room audio/video systems.
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,
12
<PAGE>
Thirteen Weeks Ended January 31, 1998 as Compared to Fourteen Weeks Ended
February 1, 1997 (continued)
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 thirteen
weeks ended January 31, 1998, the cost to the Company, net of contributions to
the Company made by manufacturers, for the 6 or 12 month financing was
approximately $12,000.
Costs and Expenses. Total cost of sales for the thirteen weeks ended
January 31, 1998 increased 2.8% or $80,000 from the fourteen weeks ended
February 1, 1997. This was primarily the result of increased sales, offset by
improved gross profit margins.
Gross profit margin for the first quarter ended January 31, 1998 was 38.5%
as compared to 36.2% for the same quarter 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 quarter in fiscal 1998 placed less emphasis on
price sensitive advertisements as compared to the same quarter last year.
Selling, general and administrative expenses for the thirteen weeks ended
January 31, 1998 decreased 5.8% or $102,000 as compared to the fourteen weeks
ended February 1, 1997. Comparable store selling, general and administrative
expenses for the first quarter decreased approximately 1.6% or $23,000 as
compared to the same quarter last year. The thirteen weeks ended January 31,
1998 includes net advertising expense of $43,000 as compared to $75,000 for the
fourteen weeks ended February 1, 1997. Additionally, occupancy costs for the
thirteen weeks ended January 31, 1998 decreased 19.6% or $83,000. This 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 thirteen weeks
ended January 31, 1998 also includes non-cash stock compensation expense of
$22,000. No stock compensation expense was recorded in the fourteen weeks ended
February 1, 1997.
Interest expense for the thirteen weeks ended January 31, 1998 decreased
20.4% or $23,000 as compared to the fourteen weeks ended February 1, 1997. This
decrease was primarily due to the elimination of debtor-in-possession financing
which was outstanding through December 1996 of the prior year's quarter, offset
by additional interest on the revolving line of credit facility and the term
loan from a preferred stockholder and member of HAC. This term loan was made
available to the Company in the second quarter of fiscal 1997.
Liquidity and Capital Resources
On November 13, 1996, the Court confirmed the 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 for further information on the Reorganization Plan.
13
<PAGE>
Liquidity and Capital Resources (continued)
The Company's ratio of current assets to current liabilities was 1.58 at
January 31, 1998 as compared to 1.41 at November 1, 1997. The increase in the
current ratio at January 31, 1998 was primarily the result of the Company's net
profit.
Net cash provided by investing activities was approximately $183,000 for
the thirteen weeks ended January 31, 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
$50,000 for the thirteen weeks ended January 31, 1998. This increase was
primarily the result of additional net borrowings from the new revolving line of
credit facility, offset by costs relating to the Company's refinancing of its
previous line of credit facility and from proposed offering costs approximating
$86,000.
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. The Company also paid an early termination fee of $30,000 to
Congress.
The maximum amount of borrowing available to the Company under this line 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
availability reserves as may have been established by Paragon, minus the then
outstanding stated amount of any letters of credit.
Pursuant to the 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 revolving 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
14
<PAGE>
Liquidity and Capital Resources (continued)
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.
The amount outstanding under the Paragon revolving line of credit facility
as of March 6, 1998 is approximately $2,191,000.
On September 15, 1997, the Company signed a letter of intent with an
underwriter to sell common stock and warrants to purchase common stock in a
public offering (the "Offering") . The underwriter proposes to co-manage and
underwrite an offering of 1,200,000 shares of the Company's common stock and
1,830,000 of warrants ("Warrants") to acquire additional shares of Common Stock.
1,025,000 shares would be sold by the Company and 175,000 shares would be sold
by Harvey Acquisition Company, LLC ("HAC"), the selling majority shareholder,
with the proceeds to be received by HAC. The net proceeds from the proposed
Offering will be used for the expansion or acquisition of additional retail
stores and for working capital purposes.
At the underwriter's election, it may underwrite an additional 180,000
shares and or 274,500 Warrants if market conditions permit. The common shares
would be sold by HAC with the proceeds to be received by HAC.
The Offering is subject to certain conditions, as defined in the letter of
intent. There can be no assurance that this proposed transaction will be
completed (see Note 3 to the financial statements for additional information).
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, the 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
proposed Offering to open four 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.
Notwithstanding, the Company is not engaged in any negotiations and has not
signed any agreement regarding any such potential acquisition.
15
<PAGE>
Liquidity and Capital Resources (continued)
Despite net income in the first quarter of fiscal 1998, management can not
predict whether this trend will continue, or whether the proposed public
offering will be consummated, and therefore whether the Company will be able to
continue as a going concern. However, management believes that the net proceeds
from the proposed Offering, plus cash flow from operations and funds made
available under the credit facility, 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 seasonally.
16
<PAGE>
PART II. OTHER INFORMATION:
Items 1 through 5 were not applicable in the quarter ended January 31,
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
No reports on Form 8-K were filed during the first quarter of fiscal 1998.
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 March 11, 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
17
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<NAME> HARVEY ELECTRONICS, INC.
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